Ten Money Mistakes You Should Avoid - Financial Compass
I recently read a book written for advisors to help them recognize problems clients have with their money habits. The book is called Retirementology by Dr. Greg Salsbury. It is very useful for advisors to list and categorize these behaviors even though you have seen all of these many times before. For investors it is helpful to know them especially if they are personally familiar.
1). Layering: The undesirable behavior here is to charge it, thinking only about how low the monthly payments are. Perhaps it is like charging all the hotel expenses to your room number. How about buying things with no money down and delayed payments. If you are postponing payments because it’s easier or you don’t have the money right now…this is a dangerous habit.
2). Mental money files: Do you find yourself segregating money by how you think about it? It doesn’t have to be a real account with a label. It might be that you have emergency, fun, or bill money sort of tucked away. This can lead to some poor management like carrying expensive credit card balances while money lingers in a money market because of its “label”.
3). The “house money effect”: It seems like gamblers will take far more risks if they are playing with their winnings or house money. Similarly when people receive money from an inheritance or other wind fall, they often see it as money to gamble or spend and not invest carefully. If you earn it, money is treated with more respect.
4). Procrastination: Do you find yourself making excuses for not taking sensible actions? Not starting or putting off the 401K enrollment because you like having more in your paycheck is all too common. Who hasn’t hesitated to buy life insurance? This usually involves pleasure now versus security in the future. In your heart you know the right choice but procrastinate anyway.
5). Myopic loss aversion: People hate losing more than they like winning. This affect is especially prevalent after experiencing a significant recent loss or perhaps seeing a friend or relative make a big mistake. While controlling losses is very important, it should not be the primary concern for longer term investments like retirement. The shorter the time given to measure results, likely the more myopic. Undue caution can often make reaching your goals virtually impossible due to inadequate returns. Letting one’s emotions rule when investing is never a good situation.
6). Overconfidence: How many people readily admit to being a below average driver? How about below average intelligence? Today with the internet, everyone is bombarded with information. It doesn’t necessarily make you a good investor. It’s knowing what is relevant, accurate and significant for your situation, that is the hard part. I never look at the business channels on T.V. during the day. I think it ruins your longer term perspective. Anyone can get the news, few people know what to do with it.
7). Herding: Speaking of T.V. … just because some taking head or analyst says something is a good idea and everyone is buying is not reason to take action. It is clear that most investors are most enthusiastic at the top and scared stiff at the bottom. It is equally logical that great value is rarely found when it is popular or seen in advertisements. On the contrary, value is usually discovered under a trash heap away from publicity and popularity.
8). Attachment bias: I have seen many instances where a client might inherit stock in a particular company perhaps from Dad for example. They refuse to sell it because Dad held it forever or worked there and loved that company. Decisions are made regardless of the fact that there might be way too much money in one company (think Enron). Equally overlooked might be a poor business outlook for Amalgamated Buggy Whip Co.
9). Familiarity Bias: Investors often will just buy stocks in the company they pass everyday on the way to work or that makes their favorite soup. Well you get the idea. No homework or investigation and lots of ignorance about any alternatives. If there is any success with this it is just pure luck. You can imagine what the results will likely be when you consistently rely on luck alone.
10). Number numbness: Some advisors overwhelm clients with too much information. People who are not knowledgeable in a given area cannot absorb effectually mountains of minutia. I don’t know anyone who actually reads an entire prospectus. Buried in meaningless data, people just surrender and figure they are not really going to understand. The more information, the more confused. My attitude about this is, if I can’t get comfortable pretty quick, its history. If I can’t explain relevant terms in simple language - it’s out! Sometimes the more complicated and the thicker the prospectus, the worse the deal.
Well you might be saying I know all that stuff but even so it’s a struggle. Keep your mind in focus and on the right track.
P.S. There are twice the number of bulls than bears on stocks. Sounds like “herding” to me. I still believe that this is a very high risk investment environment where income should work best.
Donald Hutchinson lives in Milford. Questions may be addressed by calling 203-301-0133.
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