This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
It’s human nature to have ingrained, psychological biases, but part of being a good investor involves acknowledging that bias. Read the article from U.S. News & World Report below.READ THE ARTICLE
Check yourself: When you understand where your bias lies, you can better protect your hard-earned dollars from impulsive investment decisions during emotionally charged moments. This article highlights three main biases to be aware of, as well as how to combat them:
📌Overconfidence bias: This can cause investors to underestimate risk due to creating a narrative based on what actually happened, versus what could have happened. To combat, ensure you maintain a broad, diversified portfolio and expand your time horizon to reap the benefits of long-term compounding.
📌Loss aversion: As the article states, this is “The tendency to experience financial losses twice as acutely as equivalent financial gains.” It’s the reason many investors end up selling low and buying high, and one of the most difficult biases to rectify. As a result, maintaining a certain amount of liquid cash can help act as a buffer in preventing you from selling out at the worst time.📌
Confirmation bias: This bias can affect you in many areas of life beyond investing. In this instance, it means you build your own opinion around a certain financial subject, then seek out information that supports that opinion, while discarding anything else that challenges or disputes it. To combat, deliberately seek information from a wide range of sources and diverse viewpoints to get the full scope of facts.
Stay aligned: At Howard Bailey, our planning process is designed to assist in combating these biases, which we see as the main threat to your financial success. You need a framework to revisit during times of emotional distress, and if it isn’t the Retire With Purpose Framework™, it better be something to keep you grounded.