Presented by Mark
Phillips on April 13, 2016
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’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 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.
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.
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.
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.
Procrastinating –
Procrastination, typically brought on by the inability to make a decision, is
one of the primary causes of financial distress.
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.
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.
*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. This material was
developed and produced by Advisor Websites to provide information on a topic
that may be of interest. Copyright 2014-2016 Advisor Websites.
