We know how to avoid mistakes that derail your financial plans;
We know what critical behaviors are needed for financial progress;
We know where to focus in order to change your trajectory
Last week we discussed how to avoid mistakes as a crucial component of moving towards your financial goals. This week, we want to look at what critical behaviors are needed in order to accomplish these long-term goals.
Where Are Your Blind Spots?
We strongly believe that one of the most valuable things we do for clients is coaching them to continue working their long-term plan through all market cycles. Financial lives are often hurt by reacting to short-term events or market variability. We counsel clients to become “permanent investors” instead of trying to hop in and out of the markets. Famed Fidelity Magellan Fund manager Peter Lynch put it this way, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves”.
We help clients understand the cognitive tendencies in financial decision-making and highlight some of the behaviors to avoid. These include overconfidence, loss aversion, hindsight bias, confirmation bias and many others. These cognitive biases easily devolve into financial decision blind spots and can unravel long-term planning goals.
Are You On The Right Track?
Classical economics assumes that individuals assess risk and make financial decisions rationally. However, research done over the past couple decades has demonstrated that perception of risk is deeply impacted by complex psychological and cognitive processes.
At the core of every financial choice lies the expectation that you will receive something of value in return. If you make an investment, the decision is made expecting that over some period of time, you will be rewarded. Of course, risk of loss is part of the decision matrix as well. In this vein, risk should mean the possibility of permanent loss, not temporary price variability or volatility. Understanding this distinction is perhaps the most critical behavior required to move positively towards your long-term financial goals.
Along with recognizing the difference between loss and volatility, appreciating the inputs that you can control is another critical behavior. You can control how much you spend, how much you save, your timeframe and your allocation (between stocks and bonds). You cannot control the broad economy, taxes, inflation rates, politics or random events. Spending precious mental energy and time trying to manipulate any of those factors diverts your attention from the long-term planning goals that you are trying to attain.
Are You Willing…
Last on this list but certainly not least, it is absolutely critical that you are willing to learn. Individuals who are learners are also willing to make changes as needed. Life can be complicated and dynamic. It is crucial that you have the openness to learn and the willingness to adjust. These critical behaviors will help separate you from most investors who bounce around in the financial ocean without much direction. Ready to take the first step? Ready for a real conversation?