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Social Security Spousal Benefit Calculation Before FRA
10 months ago
Showing posts with label Behavioral Finance. Show all posts
Showing posts with label Behavioral Finance. Show all posts
Investing - Why Overpriced May Be Better Than Inexpensive
Are you the type of individual who recognizes you shouldn't trade stocks, mutual funds and ETFs frequently, but simply can't seem to stop? Or are you a financial advisor who trades more often than you would like to? Let me propose an unorthodox solution to provide some negative reinforcement each time you trade.
This is a solution I don't believe many financial advisors would endorse and certainly one I would not use from a pure dollars-and-cents perspective. This is a solution that should only be considered if you have trouble minimizing your trading addiction.
If you are a frequent trader, you are likely using a discount broker who offers trades at very low fees or even no fee in some cases. There is no instant disincentive to trading frequently. When you want to trade, you can do so without giving much pause to the cost of your action.
My solution is the following. Move your investment accounts to an old-fashioned brokerage that charges an arm and a leg for each trade. Instead of looking for the least expensive trading solution, select the most expensive institution that makes the hit you take on each trade as painful as possible. Use this painful, expensive trading expense to make you take pause and think through your trading decision more fully. Allow this pause to give you the time to allow emotion to ebb from your decision-making. Take the time to consider why you think something has changed from your original purchase.
Making good financial decisions is almost entirely about recognizing when our decision-making process runs astray, then putting in place mechanisms and processes to short-circuit those processes. Making trading excessively expensive is one example of doing this and may be a large enough barrier to minimize your trading habit effectively.
Financial Wellness Is About Understanding Your Financial Behaviors
I thought for today's blog post I would try something a bit different. I have become increasingly convinced that financial wellness is entirely a matter of understanding one's financial behaviors and strengths, then creating a boundaries and systems to help make well-informed financial decisions.
So for my blog post today, I'd like to challenge each of my readers to take the following steps:
First, recall a time when you made a financial decision which you recall fondly and makes you feel pride. Really let the memory and feelings fill you. Re-experience that moment.
Next, think about what led to that decision and what was in place that allowed you to make that decision. What were the circumstances. What types of boundaries had you set for yourself. Take a moment to really consider what had freed you to make that decision.
Finally, commit to allowing yourself to make financial decisions in this manner more regularly. Put in place the same circumstances that allowed you to make that initial financial decision that brought you pride.
Financial wellness is all about allowing yourself to make good financial decisions more frequently. This requires deep consideration about your financial behaviors and patterns, then creating boundaries and processes that allow you to make good decisions more frequently.
For me, this meant using primarily cash for day to day spending and forcing myself to physically go to the bank when choosing to spend extra money. The act of having to drive to the bank has often been enough to give me pause about a financial decision and make me consider more fully how much I valued the purchase I wanted to make.
What types of systems would help you make better financial decisions? Give it a try and commit to a financial behavior change. Commit it to paper, or as a comment below. Often telling others your plans can create a stronger commitment to the plan.
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Photo by: qthomasbower
Poor Financial Decisions & Money Regret
We've all made poor financial decisions. You have, I have, and every other person out there has. What's more, each of us will continue to make poor financial decisions from time to time, regardless of how knowledgeable we are about finances. Last week, I discussed the money taboo in our society. Today I am going to discuss poor financial decisions and shame around those decision that are exacerbated by that taboo.
Making a poor financial decision is nothing to feel shame about. All of us act emotionally at times and make financial decisions colored by emotion. This can lead to bad results. Allowing the money taboo to prevent you from seeking help can create far more negative consequences than the initial poor decision, however. The period following a poor financial decision is exactly the time to seek advice from others; whether that be a financial professional, a parent, or a friend.
If you find yourself in a position where you have made a poor financial decision that is large enough that you need to make another decision about how to deal with it, don't go it alone. Seek help. Speak with a friend. Call a financial advisor. Talk to someone close to you. You will likely feel some embarrassment admitting your initial poor decision, but that is a small price to pay to prevent long-term severe financial damage.
Your asking for advice will also help others. They will see you as an example of someone willing to discuss their mistakes and talk about money openly. This may make them more willing to seek help when the time comes that they make a poor financial decision.
Regretting a financial decision is not harmful, but allowing the money taboo to prevent you from seeking help can be very harmful. The money taboo in our society impacts us in many ways. Exploiting our money regret is one of the most powerful.
Why You Should Fight the Money Taboo
Are you willing to talk to others about money questions or difficulties you have? Do you find yourself ashamed by your financial situation? It is my belief that money is the one great taboo in our society. And I believe that this taboo is a cause of many financial problems.This afternoon I am going to be meeting with many people to discuss financial issues they have and provide whatever advice I can in a very unusual situation. I will only be meeting with each person or couple for a few minutes and a part of the expectation of me is to get beyond that taboo to discover financial issues. My advice is being offered at no cost to these individuals and it is a great opportunity for them to begin setting a course to improve their financial well-being.
Unfortunately, much of the time I have with each individual will be spent trying to get them to open up about any financial issues they may have. And I feel certain that I am often unable to reach the people with the greatest difficulties because of the shame they feel about their situations.
So I sit here wondering this morning how different might many of our financial situations be if we were comfortable speaking about and seeking help with our finances. How much more full might our lives be if we stopped secretly worrying about our money and instead got help and dealt with our money issues? How much more time would we have to pursue fun and joy versus thinking about our finances?
I plan to explore money taboo more in future posts. Now I have to prepare to break through that taboo in order to help people.
A Little Secret About Stocks
Money invested in stocks is not spendable money
What I mean is that, barring true emergencies, you should never look to the value you have in stock investments as money available to support your lifestyle and spending now. You also should not see that money as available for next year or even five years from now. Money invested in stocks is money to be used well down the road...that's why stocks are long-term investments. Stock investments should be allocated for spending 10 or more years down the road. I would even argue for a number greater than 10 as a starting point. Stocks are volatile. Over the long-run, the expectation is that you will be rewarded for accepting that volatility and risk. That means you cannot expect to use that money until you have reached the long-run!
As you approach the need to use some money invested in stocks, that money should move to other investments. Very near term spending should be held in cash or cash-equivalents (money market funds, short-term CDs, etc...) For spending a bit farther out, look to other investments such as bonds and long-term CDs.
Once you have understood this secret and truly believe it, dealing with the volatility we have seen over the past couple years and poor performance over the past decade becomes more palatable. The short- and mid-term stock volatility can be painful to watch; but if you have followed this secret, the impact on your financial well-being should be minimized.
So, let me give you the secret one more time: money invested in stocks is not spendable money.
Your Financial Advisor Is Human
I don't make many guarantees, but I am going to guarantee you one thing with absolute certainty. This guarantee has tremendous impact on the investment advice you receive from an advisor.
Many financial advisors and investment advisors I have met with seem to believe they are not human. It seems that they believe they are able to make financial decision purely based on rational factors and unaffected by emotion. They are under the impression that they do not fall prey to the same snap reactions when there is a major stock market drop that their clients do. They are wrong.
Financial advisors and investment advisors are human. They experience emotions and react to those emotions just like other humans. Fear and panic cloud rational decision-making for an advisor no differently than for anyone else. These emotions can lead to poor decision and mistakes being made on behalf of clients. You may even have heard your advisor tell you they just had a gut feeling about some investment, either to buy or sell. A gut feeling is not rational, it's emotional. Advisors are also human and therefore prone to make similar errors to other humans.
Your advisor may choose to sell investments at poor times because they watch the markets collapsing. They may become wrapped up in the mania of a strong bull market and buy something as prices are rapidly increasing. They are human and subject to making these same mistakes, particularly if the advisor believes in actively managing your investments.
This emotion is not a bad thing, however. If they were not humans, good financial advisors could not empathize with their clients and could not have genuine interesting and truly care about their clients' well being. You want your advisor to be human, to have emotions and to understand your emotions. It can lead to a deeper and more trusting relationship between you and your advisor.
What is important is that you recognize that your advisor is human and that they can make the same errors you do. Good advisors realize this fact and put in place systems to help prevent them from acting on emotion; they may believe in a passive investment approach which does not react to market movements, they may have a multi-person process to make portfolio changes, or they may employ some other mechanism.
You, as a client, can your advisor recognize their own emotions as well. During the market collapse in the second half of 2008, I worked with a client who would call me almost daily asking if he should make any portfolio changes to some mutual funds we did not manage for him. Each day there was a major market movement (and there were many) he called to discuss, but he clearly had made up his mind before the call. It dawned on me after several calls that he was not really asking for our advice, but was instead gauging our emotions and making sure we were not making drastic changes to his portfolio based on those emotions. He would finish each call by telling me he was happy we were not changing anything and asked that I call him first should we decide to do so.
You can do the same with your advisor. Call and bring up your fear. Listen to your advisor's response and determine if they are trying to make decisions while under the influence of strong emotions. If you think they are, call them on it. Ask them to write out their rationale for their decisions and the impact those have on your long-term financial well-being in an email and send it to you. This will force them to think more rationally and may impact the decision they are making. You are in this together. The advisor should be trying to help you recognize your emotions and the influence this has on your decision-making, and you need to do so on return. You are both humans.
Now, to tell you my guarantee. I guarantee your advisor is human. No matter what they tell you regarding their ability to work rationally and logically, they are human and subject to the same errors that you might make. They need to understand the importance this has and you need to as well. Advisors cannot and will not be perfect. They will make mistakes. But by working closely with clients in an open and trusting manner, many of these mistakes can be avoided.
All Financial Advice Is Wrong - Upset The Industry Series Part 3
Over the past couple blog posts I have spent considerable time attacking the "investment performance" value-proposition many financial advisors offer their clients. In part 3 of my Upset the Industry Series, I am going to discuss where this investment focus comes from along with an insurance focus many financial advisors employ and why I fundamentally believe this needs to change to truly help you as a client. As always, my writing in this series remains a stream-of-consciousness exercise and barely edited.
I believe the focus on investments and insurance in the financial advisory world stems from the history of the industry. Financial advisors and planners evolved out of the insurance and investment world, as a group of stock brokers and insurance salesmen recognized the need to help their clients more fully than simply selling them insurance and investment products. As the financial advisory industry grew, more people bought into the concept of helping clients with more of their financial lives by adding a discussion about goals, taxation, cash flow and estate planning. Ultimately, however, many of these people entered their careers working for insurance and investment firms where their compensation was largely based on the sale of insurance and investment products. This early training in insurance and investments created a memory in financial advisors that these two pieces were more important than other items.
I additionally believe that the focus is created because it is easier to sell insurance and investment products than other elements of the financial planning process. Fear can be used to sell insurance. Greed can be used to sell investments. But selling budgeting services is far more difficult. Convincing someone that there is great power in discussing their deepest goals and crafting a path to reach those seems a bit airy and impractical. So the focus has remained on the easy sale, despite their relative unimportance.
Investments and insurance do have an important place in the financial planning process. Both play a role in helping clients reach their goals and dreams. But they are certainly not the most important elements and do not warrant the significantly overweighted focus they receive in the financial advisory world. In the long-run, poor investment decisions can hurt your financial well-being tremendously, but the likelihood that good investment decisions increase your financial well-being is very low. Insurance plays an important role to transfer some risk you are not willing to bear yourself, but the best result with insurance is that you waste the premiums paid and never need the insurance. Both are important, but neither really moves you forward.
There are elements which do call for a greater focus in the financial planning process. Having a deep understanding of your values and goals leads to planning which you are committed to and want to achieve. Without understanding your values and goals, the financial advice you receive will be wrong. Focusing on how you spend your money and whether your spending matches your values can tremendously improve you financial well-being. The greatest investment ideas will have little impact if you are unable to save money to place in these investments. Understanding your relationship with money (and you do have a relationship with money) will help you understand your financial decision-making process better and allow you to make well-informed decisions in the future. These are the areas where financial advisors should be focusing. They are not sexy and do not offer the hope of becoming wealthy overnight, but they have meaningful and controllable impact on your financial well-being.
As long as investments and insurance remain the primary focus of the financial advisory world, the financial advice you receive will remain wrong. That advice simply cannot be correct without really knowing you. How could anyone offer an appropriate investment portfolio without understanding what you hope to achieve and what type of risk you are willing to accept? They can't! How can insurance products be recommended without knowing what risks you are comfortable living with and which you want to pay money to pass to an insurance company? They can't! If you are offered investment or insurance products without the advisor getting to know you deeply, you are being offered products based on assumptions the advisor is making about you. The most likely investment assumption is that you want to have the highest return possible at any cost. The most likely insurance assumption is that you want to purchase as much insurance and transfer as much risk as you can afford.This may be true for you, but I submit that a financial advisor should know this with certainty before making the assumption. Assumptions have a habit of proving incorrect in the long-run.
All financial advice is wrong.
It bears mentioning that there are already financial advisors who are moving in this direction. They are a part of a movement known as financial life planning. Advisors in this movement are committed to getting to know your values and goals deeply, then helping you craft a path to reach those goals while respecting your values. A couple resources for locating one of these advisors include the Kinder Institute of Life Planning and Money Quotient.
The Simple Dollar - The Mythology of Spending and Mental Anchors
Here is a great article describing very relevant problems in the process of trying to become financially aware. This is definitely worth sharing and reading. Anchoring not only happens in product prices (as described in the article), but is also a well-studied problem with investment management, even for professionals.
I plan to write in the near future about the impact of these types of subconscious mechanisms on financial planners and investment advisors. For today, recognize that even professionals are human. If there are mental financial "errors" you make, feel certain that financial professionals often make the exact same errors.
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