Obstacles to Financial SuccessSubmitted by MD Wendell Wealth Partner on August 2nd, 2016
By Mark Wendell
In many respects, people can be their own worst enemies in their quest for financial security. When you consider that our lives are nothing more than a culmination of the decisions we make each day, if we tend to make more bad decisions than good decisions, or worse, if we can’t make decisions at all, it shouldn’t be a surprise when financial security remains elusive.
When it comes to finances and investment decisions, many people are simply not wired to be able to make decisions dispassionately, without emotions clouding their reasoning; and that’s when people tend to make the most behavioral mistakes with their financial decisions. Understanding these behavioral mistakes and how to avoid them is crucial to achieving financial security.
How many of these behavioral mistakes have you made?
- Impulse purchases – We’re all prone to an impulse purchase now and then, but for some people, it’s more of pattern than a one-off indulgence; and when these purchases add to debt, the damage is compounded. Paying the debt on yesterday’s pleasures with today’s income is self-defeating.
- Using bonuses or salary increases to add to lifestyle and not savings – When people lack a goal, or a vision or a purpose, they are more likely to want more lifestyle than savings. You will thank yourself later by putting a portion of your increased compensation away for retirement.
- Trying to pick the winners – When investing, do you spend your time looking for the top performing mutual funds in hopes of jumping on the train to riches? Very rarely does a top performing mutual fund repeat its winning performance. A long term strategic approach to investing usually eliminates the temptation of trying to outsmart the market.
- Following the herd – While investing, many people have a fear of being left behind, which is why the human tendency is to follow the herd in times of stock market exuberance or panic. Invariably, this leads to buying near the top of the market, or selling near the bottom, or getting out of the market entirely due to the stress of watching our portfolio value move around. Then too often, we add insult to injury by being too fearful to invest again. To diminish this temptation, having a professional involved with our investments to guide us through our highs and lows may help smooth out our emotional and impulsive nature
- Procrastinating – Procrastination, typically brought on by the inability to make a decision, is one of the primary causes of financial distress. This distress is a reason people procrastinate further and is usually due to their inability to perceive the importance of placing financial matters high on their daily priority to-do list with a resulting consequence of “never get’in nut’in done”.
- Trying to avoid risk – Many of the behavioral mistakes people make is a result of their lack of understanding of the role risk plays in investing. Without risk, there are no returns; and, without returns, achieving financial security is almost impossible. If you think you are avoiding risk by avoiding the stock market, you are actually inviting other, more corrosive forms of risk, such as inflation risk, longevity risk, and interest rate risk. While it is important to consider how you feel with a specified degree of risk, or account value fluctuation, it is equally important to think about the investment alternatives that would provide realistic returns that you desire. Likewise, the tradeoff between investment income and risk must be taken into account to be sure your monthly cash flow needs are addressed. Therefore, first and foremost, your investment objectives must be considered; and remember that a well diversified, occasionally rebalanced long term investment plan is of paramount importance. Careful consideration of your investment strategy that takes into account your calibrated risk-adjusted-return should be the overriding theme from the outset.
These common, costly behavioral mistakes typically result from a lack of planning, with no clear vision or purpose to guide decisions. Instead, decisions become reflexive responses to emotions that are allowed to dominate our thought process in the absence of the discipline, logic and reasoning that a well-conceived plan can engender. Taking care to avoid the self-defeating and insidious Big-I’s is absolutely vital to your financial success: Impulsiveness, Indolence, Insolence, Indifference, Incompetence, and Improvidence.
Studies indicate that people who have well-defined goals, a clear purpose in life, an ear to professional guidance, and a thoughtfully prepared plan in place, are better able to check their emotions and muster the necessary discipline to follow their plan. In doing so, they are more likely to avoid many of the behavioral mistakes that can cost them their financial security.