Bias plays a part in many of the decisions we make each day but are you letting these predispositions influence your investments? Let’s look at four of the biases that affect your finances and explain how they can limit your ability to maximize your retirement savings.
Want to save time? Click the timestamps below to jump ahead to specific spots in the episode.
What You’ll Learn:
Think about the way you invest. Likely you’re imagining the time and energy spent to research your options and the level head you use to make the proper decisions.
That’s the perception.
The reality is we all let bias influence our decision-making when it comes to our money. Whether we dislike something so strongly that we’d never considering investing or we’ve become so loyal to a company or product that we limit ourselves from opening up to other opportunities.
There are all types of biases that impact us every day but four really rise to the top when we look at the world of investing. On this episode of Money Wisdom, Joel Johnson will identify the four biases and explain the ways in which they can harm our portfolio. It’s not just about decisions that lose us money but also about bias that keeps us from growing as much as we could.
Here are the four we’ll be discussing on this show:
- Confirmation bias
- Loss-aversion bias
- Familiarity bias
- Self-attribution bias
It’s likely that you’ve let one of these influence you at some point but our hopes are today’s episode will help bring awareness and prevent you from allowing bias to determine your investing strategy.
Before we get into our bias conversation, we’ll open up the mailbag and take three listener questions. These can be sent in through our website and you’re welcome to share anything on your mind.
Today we have three different retirement topics that we thought were great to address. The first comes from a listener who now realizes they’ll have much more money than they’ll be able to spend so they want help on what to do with it. While Joel will answer that, we’ll also emphasize the importance of planning so that you get the chance to enjoy your money throughout retirement without the worry of going broke.
The second question deals with insurance policies that cover funeral costs. Is this a good idea and what other options are available if someone wants to earmark money for final expenses so that their family doesn’t have to worry about it?
And finally, we have a listener that’s having success with a side business. Congratulations on seeing your hard work pay off! They are considering any early retirement from their full-time job and keeping the side business going. What should they be considering before making this major decision?
It’s another packed episode of the podcast so let’s get started. Check out the timestamps below to skip around to different topics. Thanks for listening!
[0:19] – Mailbag question #1: At the age of 79 and retired for 10 years, I think I finally have peace of mind that we won’t run out of money. Now I think we’ll have a million or more that we’ll never spend and we don’t have kids to pass it onto. Should we just start spending a lot to make up for all the years of savings?
[1:46] – Is this a great example of why planning is so crucial? You don’t want to have any regrets.
[3:08] – Mailbag question #2: I’ve been approached about buying an insurance policy that would cover all of my cemetery and funeral home costs when I die. I’ll have more than enough for these expenses, but I like the idea of my kids knowing there’s money already earmarked for these costs. Is this a good purchase?
[5:07] – Mailbag question #3: I’m 54 and planned to retire in my mid-60s. Recently I’ve had a lot of success with my side business. I think I can sustain myself just doing this if I focused on it full-time. What do I need to consider if I semi-retire early and do this instead?
[8:46] – First investing bias: Confirmation bias. This puts you at risk of investing in something that isn’t as good as you believe.
[12:19] – Loss-aversion bias, what does this mean for your finances?
[13:25] – There’s this big misnomer that wealthy people can afford to lose more money but they actually take a more conservative approach.
[14:16] – Familiarity bias doesn’t force you to get out of your comfort zone and find better investments.
[16:11] – The last one is self-attribution bias. What is this all about?
“You begin to look for information that confirms your bias and pretty soon you’re so far down the road from an investment standpoint that you can’t see the other side of things, which is where people really get hurt.”– Joel Johnson, Money Wisdom Podcast
3 Related Items & Resources:
- How Does Upbringing Affect Your Relationship With Money?
- Will You Avoid These Retirement Catastrophes?
- Are You Sabotaging Your Own Retirement?
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Thank you for listening!