As human beings, we can often react to events or experiences in an instinctual rather than logical or practical way. It is in our very nature and can, in many cases, not be avoided. That being said, having awareness of our natural behaviors towards experiences can help protect us from the consequences of acting on our emotions. Behavioral Finance emerged I the 1970’s with research from Nobel Laureate Daniel Kahneman and it is a “relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economic theory in order to propose explanations as to why people might make irrational financial decisions.”[i] In this article we identify some common behavioral biases that many investors possess in the effort to bring awareness of how your perceptions can affect your investment choices.
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It can be confusing when government bureaucrats and the media offer wildly different perspectives on the intent and ramifications of a new controversial policy. This was plainly evident in December regarding the issue of net neutrality.
According to the Federal Communications Commission (FCC), the new “Restoring Internet Freedom Order”1 is meant to:
- Reverse the previous “heavy-handed utility-style regulation of broadband internet access service, which imposed substantial costs on the entire internet ecosystem” in order to “protect consumers at far less cost to investment than the prior rigid and wide-ranging utility rules”
- Restore the “longstanding, bipartisan light-touch regulatory framework that has fostered rapid internet growth, openness and freedom for nearly 20 years”
- Restore “a favorable climate for network investment,” which is the “key to closing the digital divide, spurring competition and innovation that benefits consumers”2
If we look at society and societal norms, a lot of weight is given to success when it comes to defining happiness. If we see a person who is successful, it is often assumed that they are happy. On an existential level we should consider what it all means. In reality, we actually have no idea whether or not that person is either happy or successful; for a couple of reasons: First of all, we can only measure someone else’s success or happiness by what we know about them. Secondly, and more importantly, we can only measure someone else’s success or happiness by how we define success and happiness. There is really no way of knowing whether their measures are even similar to our own.
It is on this concept that we are then able to shift our focus to identifying our own unique definition of success and happiness. Once we identify those things, then we can work on building a plan and setting the goals to achieve them.
When it comes to financial success, the same case can be made as above. Identifying what financial success is, is different for everyone. The following are considerations to make when developing your own unique financial success plan.
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The difference between downsizing and rightsizing is not just linguistics and semantics, the difference really is that downsizing is more reactive, and rightsizing indicates a proactive approach to organizing your lifestyle and finances when you retire or when your children leave home to start their adult lives.
Rightsizing is a concept and phrase that companies coined in the 1990’s when they were reducing the number of employees in their workforce through careful planning and organizing of tasks, skills, and outcomes. When it comes to planning for your empty-nest, a proactive approach to transitioning from a home you’ve lived in for years and considering what is included in the rightsizing approach can help facilitate a positive outcome for the long term, both emotionally and financially.
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There are many different approaches to investing in the stock market, but most fall under two categories: exclusive and inclusive. Exclusive means conducting thorough research on prospective companies and investing in a portfolio of select, thoroughly vetted securities. One of the advantages of this approach is that if an investor’s research pans out, he could have quite a cache of high-performing “winners.”
An unfortunate disadvantage is that most big “winners” in the market have at some point suffered declines of up to 50, 60 or even 90 percent on their way to success. That type of risk can be difficult for the average investor to stomach.
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Numbers guide much of our daily lives. From the price of a gallon of gas at the tank to the cost of our morning coffee as we scurry off to another day of work, numbers are solidly submerged in our collective consciousness. Numbers are absolute. Even though the cost of a gallon or milk may go up or go down, what the numbers involved mean stay static and absolute. Prices may fluctuate, but a dollar is still four quarters, ten dimes, twenty nickles or one hundred pennies (as unwieldy and impractical counting all of them out at the coffee shop cash register might be). Numbers are logical and predictable. Three times seven will always add up to twenty-one (a number that has much significance at the blackjack table and equal importance for college students looking to embrace their new-found adulthood with a pint or two at the local watering hole). Numbers are practical and unemotional. Numbers know no sympathy – just ask anyone who has ever gotten a costly ticket for exceeding a posted speed limit. Numbers are a lot of things but one thing they are certainly not: numbers are not people.
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Artificial intelligence (AI) is rapidly changing the way businesses build products and even provide customer service. We now have automated virtual assistants and “chatbots” answering customer service calls. We even have self-driving cars being tested for pizza delivery.
These quantum leaps in technological advances present both opportunities and challenges. For example, the way we have adopted online financial transactions over the past 10 to 15 years has made everything from banking and paying bills to applying for a mortgage so much more convenient. However, as the recent Equifax security breach impacting more than 145 million people demonstrates, housing that much data in one central location creates a single-entry point for would-be hackers.3
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Disasters can strike with little notice. Some are the product of mother nature, such as Hurricanes Harvey, Irma, Jose, and Maria. Others, like the recent Equifax breach, are man-made. While these two disasters may seem to have little in common, what they do share is the personal and financial devastation that they left in their wake. The hurricanes devastated many peoples home and lives. In Hurricane Harvey alone – early estimates found that 230,000 homes were damaged and almost 13,000 of them were destroyed. The physical damage inflicted by Harvey was enormous, but the emotional fallout for all those directly impacted is harder to quantify. Losing your home, possessions, and peace-of-mind is an unfathomable experience. While homes can be repaired and rebuilt, items such as old family photos and heirlooms are priceless and irreplaceable. The Equifax breach impacted the personal data of over 4.6 million consumers, leaving those affected fearing fraud and identity theft. Dire concerns about the health of your financial future can produce much anxiety, which only adds to the stress of a recent disaster. Both disasters left millions feeling afraid and vulnerable. Although it is always difficult to minimize burden and increase feelings of confidence and security after a disaster, being proactive and putting an emergency readiness plan into place before one strikes is invaluable when you are putting the pieces back together after a disaster hits home.
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By 2030, it’s estimated that 20 percent of the U.S. population will be over age 65.1 That means a fifth of all Americans will be on the fringe of retirement or already retired, a milestone that’s generally perceived to come late in life. But consider this, there are approximately 8,000 days in today’s average retirement. That’s approximately the same number of days from:
- Birth to college graduation
- College graduation to mid-life crisis
- Mid-life crisis to retirement
Eight thousand days translates to about 22 years. That may seem long for retirement, but it’s actually quite common these days: Retire at 65 and live to 87; retire at 70 and live to 92; retire at 80 and live to 102. More people are doing this all the time.
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Working for a startup can be a very stressful enterprise. While it may seem glamorous to those toiling away at a traditional 9 to 5 grind, the reality is a bit starker. Disregard whatever preconceived notions you may have about quitting your job and building something from scratch – this won’t be like working for Facebook or Google. They are well-defined, carefully manicured corporate cultures that defied the odds and did the near impossible: spread their wings and somehow managed to survive and thrive. The reality is that most start-ups don’t make it.
Pull back the rose-colored curtain and look past the casual dress code, impromptu afternoon ping pong tournaments and well-earned after work liquid libations bought on the company credit card. What lies beyond are 16-hour work days and a dizzying array of multitasking hats (which might not necessarily be your style, size or color, but boy-oh-boy you better find a way to make them fit if you want to survive). Along with the demanding work, frantic pace, ever-shifting job duties and overall trial by fire that are hallmarks of life inside a startup, there lie the possibilities of freedom and independence (should the enterprise succeed). These same goals of financial freedom and independence are at the heart of retirement planning goals and expectations.
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Consider an Annuity Even When the Market’s Humming
Perhaps you are familiar with an annuity. The basic premise is that you convert a lump sum of money into a stream of income. Unlike an investment, once you commit a fixed amount of money to the insurance company, that company is contractually obligated to provide you a minimum level of income with the option to continue receiving it as long as you live. All guarantees are backed by the financial strength of the issuing insurance company.
Tech Trends
There are different formulas for launching highly successful companies. First, create a product that solves a problem that no one knew they had — for instance, how online search engines replaced encyclopedias. Then, there are ideas that help solve problems that plague millions of people.
Back pain, for example. Not only do approximately eight in 10 adults experience low-back pain at some point in their lifetime, but it’s also the most common cause of job-related disability.
One individual who suffered severe back pain while sitting at work all day decided to invent a new kind of desk. This desk would allow him to stand while he worked, alleviating his back pain. This man was a co-founder of VARIDESK, a new type of office furniture manufacturer. But this new company didn’t just enter the office supply industry; it introduced a new sales model that was key to its rampant success: Selling online direct to consumers.
Retirement Planning Challenges
In 1985, only 10 percent of people aged 65 and older were either in the workforce or job hunting. Today, that share has doubled, for a couple of reasons. First, fewer 65-year-olds have enough money to retire. Second, the number of people in this demographic with a college degree has more than doubled (53 percent today vs. 25 percent in 1985).
Boosting Financial Literacy is a Top Priority
Financial literacy has always been a challenge. However, now that much of the burden of retirement income has shifted to employees instead of employers, it is all the more important that we begin teaching the principles of saving and investing to people as early as possible.
Stock Buybacks Explained
When the 2017 Tax Cuts and Jobs Act reduced the corporate tax rate from 35 percent to 21 percent, the hope was companies would spend their influx of money on expansion and increased jobs and wages. Instead, public companies’ most popular way to spend the excess capital has been to buy back their own stock.