The Hidden Money Traps That Could Derail Your Retirement
If you're spending a lot of your day scrolling on social media or glued to cable news, you might feel like your emotions are running a little high right now.
Major life transitions can also cause our feelings to spike, whether we're getting ready to send a kid to college or thinking about retiring.
But while letting your feelings in is just part of being human, letting too much emotion seep into your financial decision-making can be catastrophic for your long-term security.
On today's show, we discuss financial biases that we all should be on the lookout for as we try to manage both our emotions and our money.
1. Loss Aversion
Experts in behavioral science have found that people experience twice as much negative emotion over a loss as they do positivity over an equal gain. So, if $100 falls out of your pocket and you lose it, you're going to feel twice as upset about that as you would feel happy about finding $100 on the street.
In my experience, those positive and negative feelings multiply considerably when you add a couple of zeros and start talking about life savings and investment accounts! For approximately three out of every four years, the markets are up and investors of all shapes and sizes feel good. But that one down year can feel like it's going on forever, even if the markets are experiencing perfectly normal corrections and losses that will be recouped in short order. That's when recency bias can set in -- we expect things that are happening right now to keep happening, even if that's not the likeliest scenario.
2. Confirmation Bias
If you're already feeling unsettled about your money, binging social media and cable news can make you feel even worse. That's because we tend to search for reinforcement of what we already believe. A person who's convinced that the markets are in freefall isn't going to Google, "Is this market downturn normal?" They're going to google things like "Why are the markets so terrible?" and "Are we headed for a recession?" That's probably just going to lead them to clickbait, which will make them more worried about the economy, which will only lead to more googling, more bad clicks, and more worry.
3. A Ulysses Pact
In "The Odyssey," Ulysses instructed his crew members to put beeswax in their ears as they sailed past the island of the sirens so that they wouldn't be tempted to follow their song to death. But Ulysses wanted to hear the sirens singing. So instead of plugging his own ears, he had his men tie him to the ship's mast and ordered them to keep him bound, no matter what, until they were safely away.
So, would this pact make Ulysses a good investor or a bad investor?
On the one hand, committing to a plan, no matter what, and learning to ignore the "siren call" of quick fixes and get-rich-quick schemes can help us weather volatility and stay on course.
But while a strong financial plan can act as a guardrail, good investors and advisors never completely block out what's happening in the world or operate on autopilot. Even as you're making automatic contributions every month to your retirement accounts, you might be adjusting other areas, such as your monthly budget, so that your comprehensive plan keeps working.
4. Nudging
Financial influences ("finfluencers") on social media rack up clicks, likes, subscribers -- and advertising dollars -- by packaging money advice in eye-catching and easily digestible videos. And as you see those clicks skyrocketing, you might be tempted to follow their advice just because thousands of other people are watching too.
In other words, you're being "nudged" towards following the crowd, and right past any questions you might have about the quality of the advice you're hearing or the qualifications of the person delivering it.
5. The Endowment Effect
Ownership can create a bias that places more value on something just because it's ours. This distorted view of what things are actually worth can keep us locked in the past when we should be preparing for the future.
For example, imagine an investor who's managing their own portfolio. If they buy an individual stock and that stock goes down, they may decide to wait until that stock rises back to even before considering a sale, putting the endowment effect ahead of market realities. Or, if that stock is in a company or industry that the investor feels they have some expertise around, they may be overconfident in their ability to "predict" future returns.
Maybe that stock goes back up, maybe it doesn't. But in the meantime, that investor could be overlooking better investment options going forward, such as tax-loss harvesting and rebalancing.
6. Hyperbolic Discounting
People tend to choose short-term rewards over long-term rewards. During their working and earning years, folks might struggle to save and invest for retirement because they'd rather buy a bigger house or take extra vacations right now.
But in retirement, money-conscious seniors can become so used to saving and accumulating wealth in the present that they struggle to spend and enjoy themselves. In this case, the short-term reward of having money is overvalued against the long-term reward of using that money to make their Golden Years more rewarding.
Fiduciary Advisor Bias
OK, I just made this one up.
But I truly believe that working with a professional who always puts your interests first is the best way to keep your feelings around money in the proper perspective as you’re meeting short-term needs and progressing towards long-term goals. Let my team at Keen Wealth help you overcome your biases, work through your concerns, and feel more confident in your financial planning.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on 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 Forbes, 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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