In the first two weeks of the year we have had a market "freak out" based on issues most people don't understand outside of reading the headlines; "it's a shoot first, ask questions second" mentality. But if you look closely at the fundamentals, China is not in a position to "blow up" the global economy, oil is not in a position to "blow up" the global economy, the US is not headed for a recession (barring an enormous and unforeseen shock), corporate earnings should fair much better in 2016 than 2015 assuming a flat dollar and as of today, stock market valuations look cheap in absolute terms and very cheap relative to alternatives (bonds, cash, inflation). In many respects, in times like these, 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’s should be no surprise when financial security remains elusive.
When it comes to finances and investment decisions, many people are 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 finances. Understanding these behavioral mistakes and how to avoid them is crucial to achieving financial security.
How many of these behavioral mistakes have you made?
Following the herd
In 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. Almost invariably, this leads to buying near the top of the market or selling near the bottom.
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.
Procrastination, typically brought on by the inability to make a decision, is one of the primary causes of financial distress.
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.
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.
Studies indicate that people who have well-defined goals, a clear purpose in life, 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. All too soon people will forget about China and Oil and those who capitulated to the headlines will find themselves in much a worse position than those who were prepared.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets