SMART INVESTING IN 2021 AND BEYONDBy Mary Lynne Dahl, Certified Financial Planner ™
November 15, 2020
(SitNews) Ketchikan, Alaska - As 2020 comes to a close, many investors are thinking about investing for their own futures. This is an important priority, with or without elections, pandemics and global uncertainties. In fact, it is more important as a result of those things, so let’s talk about it.
What determines how well you will do with your investments over time? One thing that impacts your success or lack of it is the degree of bias you have about money and investing. We all do have our own views, which are influenced by our biases, on everything. Our various opinions inform our decisions, especially about money and other very personal subjects, so we make many financial choices based on one or more biases we have about money. What are those biases and how do they affect our investment decisions? The following are 10 biases that are common to money and investments.
01. Loss aversion bias: being overly conservative, fear of all risks
02. Confirmation bias: seeking data and/or proof to support our existing views
03. Regret aversion: fear of repeating a prior mistake
04. Overconfidence/greed bias: belief in our own superior abilities to perform and achieve unrealistic profits or gains
05. Anchoring bias: fixating on a specific data point and missing the big picture
06. Herding bias: following the crowd and/or hot investment trends
07. Framing bias: decisions made based on a sales pitch
08. Media bias: decisions made based on the hype and noise in the media
09. Selective memory bias: choosing to recall only those events or actions that reinforce our decisions
10. Status quo bias: being stuck in the current situation regardless of how effective or successful it is or is not, sometimes due to procrastination.
During my 35 years as a certified financial planner, I can say without question that bias #1 and bias #4 have been the most common roadblocks to good financial choices. Fear and greed have done the most damage to more people than anything else I have seen in my practice.
Lately, however, a lot of people are having a hard time making sound investment decisions because of bias #8, media hype. There is just so much in the news currently, all of which can be framed as a sales pitch, which is bias #7. We as people are easily influenced by carefully designed marketing and sales pitches to buy/spend our money, but not always in ways that improve our own financial well-being.
What can a smart person do to protect herself or himself against making bad financial decisions? Can you become more competent to choose wisely and be a savvy investor? Can you, in fact, influence yourself to be a better investor?
The answer is, yes you can. You absolutely can become far more competent, make better choices and be pretty darn smart with your investments. It is like baking a cake. Once you have the right ingredients, follow the instructions and keep an eye on that cake as it bakes. Do not deviate from the recipe, at least not until you are truly expert, and then only carefully. Becoming expert will take time, probably years.
The recipe for becoming a savvy investor includes 2 key ingredients, discipline and time. Time is not difficult, if you have it. You start your investment plan and continue it until you reach your goal. For most people, the goal is retirement, so the time frame is all of your working years.
Discipline, however, takes more work. If you have ever started a diet or exercise plan, you already know what I am going to say. Sticking to the plan is hard, but we both know you will not reach the goal if you lack discipline.
Financial success requires a unique kind of discipline as well as the commitment to stick with it through ups and downs. You already know that “markets go up and down”, but can you resist reacting to those ups and downs? Does a steep drop in the market trigger your fear alert? If you are disciplined and serious about investment success, it should not. It is, instead, a potential opportunity to put more money in the market, not pull out in fear.
This kind of discipline requires that an investor place a lock on his or her emotions. It is hard to do, frankly. Your emotions can torpedo your best strategy if you let it, but if you can control your greed and fear about the risks associated with investing, you can acquire the discipline of a savvy, successful investor, over time. It does take time.
Another important element to successful investing is learning how to research the risk and quality of any investment choices available to you. If you are in a retirement plan at work and get to choose how to invest your contributions, your best resource for looking at risk and quality is an independent, unbiased report card on those investment choices. One that I have used for decades is the Morningstar Report Card. Most public libraries have it, or you can subscribe to it if you wish.
Research reports will tell you how a fund is rated for quality over 3, 5 and 10 years. It will categorize each fund according to what sector of the world economy it invests in and what countries are included. It will tell you the type of investments in the fund, such as stocks or bonds. It will tell you whether the fund charges a sales “load” for your purchase of shares. I always choose a “no load” fund rather than pay a sales fee to a broker who recommends the fund. There are plenty of “no load” funds out there, so this is easy and absolutely the savvy way to invest.
The research should also give you a list of top 10 investments in the fund, details about whether it pays dividends or not, a track record of how well it has or has not performed over time and a rating for low, medium or high risk associated with the fund. Finally, it should tell you what the expense ratio is of the fund(s) you are looking at. The expense ratio tells you how efficiently the fund is managed; the lower the ratio, the more efficiently the fund is managed.
Discipline and time are keys to becoming good at making investment decisions. Some people find it overwhelming and those folks should get unbiased, professional advice from a certified financial planner who can supply the discipline needed to achieve success. Others will not need much professional help and may even enjoy the challenges of investing. Either way, as we head into 2021, year-end is the time to do a review, and an analysis of whether your money is working as hard as you are. This is an important priority for smart investing in 2021 and beyond. Give it your best effort!
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