In the investment world there is a research firm named Dalbar. They’ve done tons of research on what has come to be called “investor behavior.” If you have an investment account, you’re the type of person Dalbar has researched.
Economist always wonder why investors aren’t rational about their investments. They act as if the world is rational and humans make rational decisions. If you pay any attention to people around you, you know this isn’t true.
One of the most dangerous activities you can do is what’s called confirmation bias. This means that whatever has happened in the recent past will continue in the future.
I’m always amazed when people come and ask me to help them with investment management. They almost always forget the first part of the equation. The first step is having a financial plan in place.
Financial planning doesn’t give you a final answer.
It’s just about impossible to not know that you should be putting money away. You might want to save for retirement or you might need to have money put away for your child’s education. You might even just need a rainy day fund to help you get through if an emergency should happen.
Different goals should have different strategies.
For decades the normal retirement age was 65 years old. It’s what we’ve traditionally used for social security and it’s when you become eligible for Medicare. Both are signals that it’s time for you to think about retiring if not actually moving to retirement.
Retire to what?
We all love to watch our investments when we’re winning (meaning making money). We even act mostly rationally when we’re winning.
The problem comes in when we’re losing or not getting returns we think we should. This is when our behavior can cause us real problems.
I’ve recently had the pleasure to meet Dick Wagoner, a sage in the financial planning industry. Dick talks about clients living in a micro-economy but planners want to work with them in a macro sense.
I agree with this idea. Our clients do live in a micro-economy. When their investment accounts go down because of a bear market, they are often affected.