Investors want to be protected from bad, destructive things but often place themselves squarely in harm’s way. Reliance upon so-called “industry experts” and conflicted, sales-oriented “advisors” focused on pushing expensive but emotionally satisfying products is arguably the single most destructive element.
Regardless of your level of education or station in life, human emotions constantly are waging a battle with your plans for the future by directing your gaze toward distractions of the day. UK advisor, Andy Hart says investors need to “look out the window, not stare at the screen.” Yes indeed.
Many of our human emotional tendencies were designed for survival but not for making investment decisions. Duke University Neuroscientist, Dan Ariely, says there is no specific part of the brain dedicated to financial decision making…and unfortunately it shows!
If we think of human emotions as preferences instead of biases that can be a giant step forward in acknowledging their existence. Just willing emotions not to exist doesn’t make it so. It’s almost impossible to sustain the discipline needed to avoid emotionally charged financial missteps without help.
We spend a lot of time trying to protect clients from allowing fallible human emotions to push them into the dangerous outer margins of the financial markets. You know, the place where “optimize” and “maximize” live. These investments on the dangerous edges can blow up in your face. Understand this, if your financial planning consists only of “pedal to the metal” investments, you have a very high likelihood of failure.
Retirement on the Horizon
Particularly for investors with retirement on the horizon, financial planning should address the level of investment risk that’s appropriate and the specific future objectives that govern this planning. Above all else, financial planning benefits evaporate if you can’t stick to the plan in the face of the inevitable temporary downturns.
An appropriate investment philosophy is one that is governed by your true financial picture within the framework of long-term market history. An operating investment philosophy isn’t to be confused with a market or economic outlook. Our philosophy is girded by evidence while market outlooks are brief and transitory. One is valuable while the other is not.
Recognizing the role of behavior and emotions in your financial choices is the first step. Start there. Ready for a real conversation?
What I’m Reading:
Infinite Jest by David Foster Wallace- I had never heard of Wallace until a couple years ago when I listened to part of his Commencement Address at Kenyon College Class of 2005. That speech , titled This is Water provides a glimpse of the narrative skills Wallace employed in his writing. Infinite Jest, one of his early novels (1996) is creative, unconventional, and a serious workout for the brain. A few pages at a time and you’re whipped! Listen to This is Water first.