Let’s Get Real About Money : Self sabotaging financial behavior
by Rachna Bijlani, CFP®
June 28, 2019
There’s an old saying in Hindi, “Apne pair par kulhadi marna”, which translated in English means, ‘Taking an axe to your own foot’. Sounds stupid, right? Why would anyone in their sane mind want to self-sabotage? And yet, there are times when we fall prey to our lack of knowledge, fear, over confidence and other cognitive biases and act in a way that can be self-destructive. When it comes to money, we all want to make prudent decisions that will improve our financial situation. But there are times when we subconsciously say or do things that can potentially have an adverse effect on our lives. At the risk of sounding like a cynical old man (For the record, I love cynical old men!), here’s a list of things that make me irate when I hear them, because from my experience and knowledge, I can see that the person saying these things is being self-destructive.
1. I don’t have the time for Financial Planning
A simple mathematical calculation can illustrate the benefits of starting financial planning early and the power of compounding. I’m sure we’ve all seen such data several times and yet we keep procrastinating. Some of us might end up having a longer work life than we’d hoped for or might have to cut our expenses or give up on certain financial goals only because we failed to plan. Consider this; from booking airline tickets, making hotel reservations, calculating expenses, shopping, planning meals and activities; it takes us several weeks to plan a month-long vacation. Our retirement is going to be the longest vacation of our lives, spanning over several decades and yet, we don’t feel the rush to start planning for it. I am all for living in the present, but I am also aware that my present actions have the power to change my future. The greatest benefit that comes from financial planning is the confidence that with clear direction, we can accomplish our financial goals. Find the time to take a closer look at your current financial situation, clearly define and prioritize your financial goals and have a solid plan in place to accomplish those goals.
2. My child’s education is my number one financial goal
My husband and I have only one child who recently turned twelve and it goes without saying that she is our world. She is extremely smart and everyone who knows her will agree that she has the potential to end up in a top tier college. As parents, we do want her to realize her full potential and have started saving for her college education. However, paying for college is never going to take priority over saving for our own retirement. We will do college tours with her, cover as much educational expenses as we can, but before that, we've started saving for our retirement, decided where we would like to live when we retire, the kind of lifestyle we’d like to have and the associated expenses that would come with that lifestyle. No bank is going to lend you money to cover your expenses in retirement so unless you want to end up living in your child’s basement in your older age, it is imperative that you give precedence to retirement planning over planning for your child’s education.
3. I only plan on living up to age 70 (or any other number)
When confronted with the unpleasant fact that their savings won’t last them through their retirement, a lot of people say that they only plan on living up to a certain age hence they don’t need to worry about running out of money. Sure, it’s meant to be a joke and I am totally fine with you saying it, as long as you have a plan to fall back on in case you live to be a hundred years old.
4. I will start investing when the time is right
People have an innate need to find organization in the world by creating explanations that allow us to believe that events are predictable. This is called Hindsight Bias. Some investors might believe that a past stock market crash was predictable and obvious and hence the next crash will be obvious and predictable too. This makes them feel that they will be more efficient this time and they decide to wait until the time is right to enter the market. Although there are economic indicators that can help us navigate the markets, it is virtually impossible to time the markets perfectly, unless of course you have a crystal ball! Make an investment plan based on your financial goals, risk tolerance and liquidity needs and invest accordingly. Review the plan often and make changes to your portfolio as and when necessary. Sitting on the sidelines and waiting for the right time to invest is seldom an effective long-term strategy.
5. The stock market has been performing well for a while now, so it’s only a matter of time till it crashes
The Gambler's Fallacy is the mistaken belief that if something happens more frequently than normal during a given period, it will happen less frequently in the future (or vice versa). When watching successive coin flips, if heads is the result successively, one might believe there is a better probability of betting on tails. However, since each coin flip is a separate event, the odds of getting heads or tails remain 50% each time. Similarly, if the stock market has been posting gains for an extended period of time, people might predict that it’s time for the market to take a hit. Decisions made on this criterion alone may be less than optimal; do your research at a fundamental level and study the factors affecting economic cycles rather than basing your decision on gambler’s fallacy.
6. I want to buy this stock because my neighbor/friend/colleague recommended it
Would you take medication that your friend’s physician prescribed him or would you rather see a physician, get a diagnosis for your symptoms and follow the course of action that the physician recommends for your specific condition? Your investment strategy should be based on your personal financial goals and should be in lines with your risk tolerance. Just because a specific stock might be a good buy for someone, doesn’t necessarily mean that it’s good for you too. Another bias that comes into play in this situation is the Confirmation Bias. Upon getting a stock recommendation, you might look it up on your iPhone and read a few positive articles about the company which might confirm that your friend’s recommendation is a good idea. However, due to confirmation bias, you might fail to take a closer look and selective thinking might lead to an incomplete picture, masking potential problems with the stock or with the company. Before making any investment, research thoroughly and make sure that it is in lines with your investment strategy.
Unlike a rational, number crunching automaton, most of us are “normal” people with emotions and cognitive biases. Being aware of how these biases can manipulate our decisions is the first step towards becoming a prudent investor. I hope my compilation will help you make conscious money decisions that are in your best interest. I believe that as a Financial Advisor, the most important value proposition that I can bring to my client is Objectivity, which means making recommendations devoid of perception or emotions. Since I am incapable of concealing my nerdiness and because I recently visited the newly built Star Wars section in Disneyland, I would like to end this article by saying, “May the Force be with you and help you make smart financial decisions!”