Are Your Biases Giving You Bad Investment Advice?
The financial markets seem to be celebrating as U.S. politics have begun to settle down and COVID-19 vaccinations have started to speed up.
Last week, the Dow Jones Industrial Average crested above 31,000, setting a new record. As our friend Greg Valliere recently pointed out, the prospect of the country reopening aided by increased deficit spending in Washington could get the economy roaring in the second half of 2021.
Wall Street seems to share Greg's cautious optimism, as does my team at Keen Wealth. But when the markets approach record highs or record lows, many investors let their financial biases get the better of them. Here's what three common biases might be telling you about the markets right now, and why you're better off following the course you and your advisor have set out.
1. "This is never going to stop!"
We tend to place a little extra importance on things that have just happened. In finance, this Recency Bias can convince folks that current market conditions are never going to change. Believing a bull run is going to last forever, Recency investors might overleverage themselves grabbing more of a “hot” stock. Or, when the market hits a rough patch, they might lose long-term confidence in their investments and try to get out of the markets all together.
We've all just lived through an example of how Recency Bias can distort one's investing perspective. This time last year, anyone who thought that the markets were going to stay strong forever had that bias shattered by COVID-19. And, at the other end of Recency, folks who panicked in the early days of the pandemic and pulled too much money out of their investments could be missing out on significant gains right now.
When you pull a rubber band in one direction and then let go, it snaps back. The markets tend to work in the same way. Eventually, highs and lows tend to revert to the mean, where wealth compounds and builds steadily over time.
2. "See? I KNEW I was right!"
Despite the wealth of diverse information at our fingertips, we tend to return again and again to a handful of favored news sources. Not surprisingly, those sources usually have the same points of view that we do on topics that are important to us. Our relationships also reinforce this Confirmation Bias as, naturally, our closest friends and family tend to share the same backgrounds and values that we do. And so, when we're confronted with a complicated issue, we turn to this trusted circle, which confirms what we already know, and, more importantly, what we already believed. Investors who succumb to Confirmation Bias are often so overconfident that they dismiss any information that doesn't fit with their certainty about the markets.
It's hard to break this cycle: Confirmation Bias is comforting, while nonconforming data can be upsetting.
From a financial perspective, one benefit of working with a fiduciary advisor is that, by law, we are obligated to advise our clients on what is in their best interests. That means, in some cases, it is literally my job to give clients information that their biases, hopes, goals, and concerns might be preventing them from seeking out.
Yes, some of those conversations can be challenging. But at Keen Wealth we pride ourselves on doing what’s best for our clients. And, in our experience, when folks examine financial decisions from every angle, they typically arrive at the best decisions.
3. “All of this must mean something important!”
There’s one other reason that Confirmation Bias can be so hard to shake: our select news sources often act as a de facto filter for the incredible amount of information we’re bombarded with every day.
And still, for most of us, that filter isn’t nearly enough.
From social media to cable news, from email newsletters to notifications from apps, we are challenged nearly every moment of every day to cut through the noise and zero in on information that’s trustworthy, accurate, and relevant. When we’re in the middle of a particularly dramatic news cycle, that can be darn near impossible.
That’s when our filters tend to go soft and let in some Information Bias. Rather than trying to sort good info from bad, we try to take it all in at once. Reputable journalism shares screen space with click bait, and we try to apply lessons from both to our opinions and our planning decisions. Short-term market movements rattle our phones, and we start contemplating moves that could hurt our long-term prospects.
Again, this is why working with a financial advisor who’s operating under the fiduciary standard can be so beneficial. Educating our clients so that they feel like they’re really in control of their financial decisions is one of our most important values at Keen Wealth. Clients tells us that our podcasts, blogs, and webinars have helped them avoid information overload during the pandemic and maintain focus on their long-term financial goals.
Moreover, because our planning process is focused on the people we work with, not just their numbers, we know where our clients are coming from and where they want to go. Combining that personal perspective with our comprehensive planning strategies helps clients see their biases, push past them, and stay on course for a successful retirement.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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