ABCs of Behavioral Biases (A to F)
Four self-inflicted biases that knock a number of investors off-course are anchoring, blind spot, confirmation and familiarity bias.
Nobody wants to make investment mistakes. And yet, we are human. Mistakes happen. Let’s talk about how to minimize the ones that matter the most, and make the most of the ones that remain.
First, let’s define what we are talking about:
Investment mistakes happen when you make bad decisions, regardless of whether the outcome is good or bad.
Bad decisions are the ones a rational investor would not make. For example:
These common investment mistakes share a recurring theme. By making wise decisions about that which you can control, you can best prepare for that which you cannot.
Consider auto insurance as an analogy with similar controllable choices and random risks. From hailstorms to hit-and-runs, misfortunes happen. They are not your fault; they are not your mistake. But you insure against them anyway, since they can still generate a substantial loss.
You also do all you can to minimize your “at fault” errors. You do not drive while impaired. You keep your vehicle in safe repair. You observe traffic laws. None of these sound decisions guarantee success, but they appreciably increase the odds you will remain accident-free.
As an investor, you can take a similar approach:
Mistake-free investing does not guarantee success. Rather, it improves your odds for happy outcomes, while softening the blow if misfortune strikes.
It is worth noting, even if you make all the right investment decisions for all the right reasons, random misfortune can still strike. If it does, it would be a mistake to decide your prudent investment strategy was to blame. It would be an even worse mistake to abandon that strategy because you have encountered the equivalent of a market hit-and-run. This would be like dropping your insurance coverage because it did not prevent the accident to begin with.
“I’ve failed over and over and over again in my life. And that is why I succeed.” – Michael Jordan
As just about any star athlete will tell you, the path to success is paved with errors. The same can be said about investing. The occasional misguided decision may even be good for you as an investor, especially if it is made when the stakes are smaller and time is on your side.
The point is, if you have made investment mistakes in the past, do not beat yourself up over them, or make more mistakes trying to “fix” the past (such as deciding you will never invest again after being burned by the market). Often, your best move is to identify which investment mistakes were involved, embrace the lessons learned, and give yourself permission to move on.
Admittedly, if you made an investment that did not pay off as you hoped for, it may be hard to know just what went wrong. Was it you, the whims of the market, or both?
Among our chief roles as a financial advisor is to help you sort out investment errors from market misfortunes, so you can move forward with greater resolve. Sometimes, this means adjusting your portfolio to reflect evolving personal financial goals or targets. Often, it means convincing you to stay the course with your already solid plan. Either way, your future is not yet written. Reach out to us today if we can help you make the most of your next steps.
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With all the uncertainty and volatility in today’s economy, the time is now to take a thorough look at your finances. To accurately plan for your financial future, you must first know where you currently stand. For these reasons, our Success Team at Impact Advisors Group is offering a free financial assessment for both individuals and business owners. Request yours today!
This post was written and first distributed by Wendy J. Cook.
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Four self-inflicted biases that knock a number of investors off-course are anchoring, blind spot, confirmation and familiarity bias.
Legendary economist Benjamin Graham once stated that ‘your own behavioral biases are often the greatest threat to your financial well-being.’
If you file tax returns separately AND are separated from your partner, colleges consider you a two-household family.
Take some time to map out how to pay for all four years before your student gets the bill for freshman year.