This week, I’m talking about behavioral finance. An incredibly important topic when it comes to your money and your retirement, yet at the same time it’s something that few people really, truly understand. Essentially, behavioral finance looks at how your psychology, your emotions, and your biases impact your decisions and your behavior when it comes to your money.
I’m just going to level with you here. If you are even remotely like the average investor, and statistically speaking, you are...then you are a terrible investor. Why? Because you get in and out of the stock market at all the wrong times.
The research company, Dalbar, has been analyzing investor behavior for the last 25 years and here’s what they found:
During the 20-year period from 1998-2018, the stock market made a 5.6% average annual return. Pretty good when you consider that that return include the bursting of the tech bubble in the early 2000s, and the worst recession and stock market drop since the Great Depression in 2008-2009. Stocks still made 5.6% a year. Over that same 20-year time period bonds made 4.5% a year. Do you want to know what the average investor made?
1.9%. 1.9%! Not even enough to keep pace with inflation. Behavioral finance concepts are the primary reason why. Investors make emotional decisions based primarily on fear and greed, and getting in and out of the market at all the wrong times.
The point of today’s tip is that behavioral finance matters big time for your retirement, because if you only make 1.9% a year on your investment portfolio, that aint going to cut it! You could have thrown a dart and picked the most mediocre investment for the last 20 years, and stubbornly held on, and you still would have probably done better than 1.9%.
And the more you understand and accept that your own psychology, biases, and shortcomings are influencing your decisions, the better equipped you’ll be to actually make better decisions.
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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