Neuroscientists attribute our emotions to the way our brains evolved to process information. The emotional or instinctual part of the brain, which governs primal instincts such as fear and greed evolved first. The reflective system which enables people to analyze and negotiate developed later. These two systems govern human decision making but they don't always work seamlessly together. In fact emotions, frequently lead investors to make decisions that run counter to their own best interests. Sarah J. Halpin, CERTIFIED FINANCIAL PLANNER™ and Associate Vice President-Investments with The Danforth Group of Wells Fargo Advisors is here with some tips to help us guard against potential mental minefields when investing for retirement.
Heads I win. Tails It's Chance -- When someone succeeds - whether in choosing the quicker line at the grocery store or selecting a particular time to buy or sell their investments, they tend to chalk up the success to their own skill. But, when they pick the slowest line or, buy before the market slumps, they attribute those results to bad luck. Be aware of the risks of bias and over confidence when it comes to your ability to market time retirement investing decisions. Consider working out a strategy in advance and use a disciplined process so that you are investing systematically and using automatic rebalancing to rebalance back to the target asset allocation or mix of investments that best fits your retirement plan objectives, investment time horizon and risk tolerance.
Media Circus -A recent behavioral finance study asked participants to read a series of news stories about depressing and anxiety provoking or uplifting, feel good topics. Next participants were asked to estimate the number of people who die as a result of traffic accidents and homicide. The people who read the depressing and anxiety provoking stories gave significantly higher death estimates then those who read the uplifting stories. Be aware of the influence of news and information sources on your emotions. Be honest with yourself about your true comfort level with risk and assess your risk tolerance regularly. Refer back to your investment plan. If need be, stress test scenarios and revise your plan so that you're comfortable that it can help withstand a potential tough financial market or a potential financial hardship.
Bias Towards Action - People tend to favor doing something over doing nothing. A study found that in a penalty kick situation soccer goalies dove to one side of the net or the other 94% of the time - despite the fact that they had a much greater chance of blocking the shot if they stayed in the center of the goal for as long as possible. If you are concerned about making impulsive decisions, consider using a checklist to help you make logical rather than emotional decisions. A checklist of just three simple questions will help you engage your reflective system. You may end up going through with the decision but in the meantime you have helped defuse the emotional influence on the decision.
Our emotional reactions are much harder to control. Building self awareness and learning more about yourself and how you make decisions about money and investing can help. As Warren Buffett once said, "The most important quality for an investor is temperament, not intellect."
Source: "The Behavior Gap" by Carl Richards
" Why Smart People Make Big Money Mistakes" by Gary Belsky and Thomas Gilovich
The information provided is general in nature and may not apply to your personal investment situation. Individuals should consult with their chosen financial professional before making any decisions. Investment products and services are offered through Wells Fargo Advisors, LLC member SIPC. Neither Wells Fargo Advisors nor its financial professionals are legal or tax advisors.