Our Biggest Financial Challenges are often Self-Inflicted
In many respects, people can be their own worst enemies when it comes to their financial security. We all know every action causes a reaction and this is certainly the case with how your finances are personally managed. 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.