Over the years, I have made several mistakes and had a few biases which made me make incorrect investment choices. I am sure you would have had similar experiences in your financial management journey. I am listing down a few of these for you to make your own determination on what level of maturity you are and take necessary corrective actions or avoid pitfalls in the future. Depending on the financial advisor you speak with, they would drive you to make few of these errors as they would benefit from your mistake. Be careful and have ask a few more questions to the advisors and to yourself before you take a final decision.
More Money in Short Term Deposits or Bank Accounts
This is the most common trait that I have observed in several individuals that I have consulted. Their bank accounts will have a balance of $50,000 for months at a stretch. As I had covered earlier, this habit will result in depletion of your investments as the interest earned from them is way lesser than the inflation. The value of your money reduces, and you get a false sense of security when you look at your bank balance. When I dive deeper to understand the rationale behind such a decision, they come up with one of the below excuses:
Waiting for the right opportunity
They are waiting for the stock exchange or a particular stock to come down to a level where they can invest. If this event does not occur in a month or two then you need to set more realistic goals. If you know that the event you are waiting for is not going to happen anytime soon, invest the money in an instrument that is liquid and would give you higher returns than a Checking or Savings account and you can at least get an appreciation closer to the inflation.
This is only justified in exceptional circumstances where you know that other asset classes will yield negative returns and you have done your analysis to determine that “cash is king”. Few examples are… during the dot com bubble burst, the housing crisis, the south east Asian financial crisis and the more recent corona pandemic.
Do not know what to do!
Ignorance may be a bliss in a few cases. This is not true when it comes to personal finances. Still worse situation is when you have knowledge and do not act. If you have not invested your monies and planned your personal finances, the right day is today and a better day was yesterday, but you cannot travel back in time to go there. I will be outlining a set of easy do it yourself steps and ideas that you can implement right away and get going.
This is my safety net
As mentioned earlier, most of us would like to keep about 3-6 months of our mandatory expenses in liquid investments. While this is a good strategy to adopt, there are ways and means to create a low leveraged safety net so you can divert the excess funds to a higher yield Medium term investment. You may earn enough from the investment that you would have the necessary money to address the financial crises just from the interest you earn from such an investment. So, a $20,000 invested in a 5% returns instrument will give you $1,000 after a year compared to return of $1 if “invested” in Savings account. The choice is yours and it is very apparent what the choice should be.
There is nothing wrong with it
Denial is one of the other reasons why people do not invest. It is said that half knowledge is dangerous, and this is especially true in such cases. Such clients are influenced by other biases that I will cover later in this section. All I can do to such people is to offer my condolence.
Inertia
It does not have time is another common excuse that I hear from a few of my clients. I am busy with work, busy with home, busy trying to balance my life. Such clients do not realize that the same time is acting against their money and they are missing a valuable opportunity. For beginners, this would seem like a steep climb. But once you are aware of your financial situation, and this becomes a habit then you will be able to easily get motivated to do this on a regular basis; especially when you see that your money is growing.
Past Experiences
All of us have taken wrong investment decisions and have lost money. This fear should not stop you from not doing what is right. You would rather take learnings from your past event and ensure you do not fall in the trap again. This should not prevent you from planning and executing a sound personal finance strategy.
Influence (trusted circle, marketing men)
This is one of the more common biases that I observe in my clients. These usually get introduced when receive advise from a trusted friend or family member or when you interact with someone who is good at telling you to think in a certain way. Well, irrespective of who that is, they have succeeded in brainwashing you to such an extent that you would not operate from your rationale. The best way to get rid of it is if you do a lot of reading with an open mind and determine the facts for yourself. Unfortunately, this process will involve unlearning what we have herd and doing additional research and challenge the “trusted advisors”. This makes it more fatal than ignorance as with such a bias, you would take a wrong decision rather than not taking a decision.
Lack of Objective/ Mission
It is important to know where you are headed and then do course correction along the journey as circumstances change. If you do not know your goal, then you are likely to end up with incorrect investments and it will result in earning lower returns or end up losing money.
I am not referring to any events that would force you to reconsider and reprioritize as they cannot be predicted in advance, but you can make corrective actions only after they occur. I am referring to the planned events that you ignored completely or took impulsive decisions that put you in a financial disarray.
Financial Services Professional Biases
We are being bombarded with conflicting messages from several sources. One group may tell you that buying insurance is a waste of money whereas the other set may tell you that investing in stock markets will erode your net worth. One of them is correct, or maybe both are wrong. Depending on whom you speak with and the context in which they present the content may result in misinterpretation and will result in you firming up your beliefs.
Herd Mentality
This is another form of bias that can easily influence an incorrect decision. Call it peer pressure or follow the leader or call it by any other name, this bias may result in an incorrect decision. A decision that may be correct for an individual may not be right for you. For example, if your annual income is $100,000 and you buy a home valued at $1,000,000 just because your boss (who earns $300,000) bought a home for a similar value. If you had done your homework prior to the purchase, you would have decided in no time that you cannot afford it.
