Wed, 24 June 2020
Do you think your own behavior affects your retirement investment management? If you said no, you may want to think again. The most significant risk to your finances is not market volatility or inflation, it’s your own behavior. Over the past several episodes we have explored how our own cognitive biases affect our financial choices and this episode continues that journey. On this episode, you will learn what you can do to make better decisions to ultimately protect your money from its own worst enemy: yourself.
What is heuristic?
A heuristic is a psychological term for a mental shortcut that allows an individual to make a decision, pass judgment, or solve a problem quickly with minimal mental effort. Our brain constantly uses so much energy that it always looks for shortcuts. Renowned behavioral finance expert, Dr. Dan Crosby, calls this bumper sticker thinking. The 4% rule is a good example of a heuristic used in retirement planning. We need to learn to work around our mental shortcuts and truly think things through.
Behavioral risk is the most significant risk to your finances
In finance, there are many kinds of risks. We often worry about volatile markets or inflation. We use diversification to help us lessen the market risk but we often ignore the greatest risk to our finances. The biggest risk to your financial security in retirement is your own behavior. If you can’t control your investment behavior especially during challenging times then your retirement portfolio will suffer. Listen in to learn how to manage your cognitive biases and set yourself up for financial success in retirement.
Tips for managing investment behavior
How I manage behavioral risk with clients
When I work with my clients I have to help them manage their own behavioral risks. I do this by considering process, strategy, and tactics. Consider what you want your life to look like. What is important to you?
Before making any decision, slow down and ask yourself some questions. If you slow down and center yourself you can think through any decision. Think about the decision from all sides. What does success look like? What does failure look like? What are some alternatives that you can consider? Listen to this episode of Retirement Answer Man to hear how you can manage your own behavioral risks.
OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN
WHAT DOES THAT MEAN?
PRACTICAL PLANNING SEGMENT
COACH’S CORNER WITH B.W.
TODAY’S SMART SPRINT SEGMENT
Resources Mentioned In This Episode
Roger’s YouTube Channel - Roger That
BOOK - Rock Retirement by Roger Whitney
Roger’s Retirement Learning Center