Oh, Behave! Behavioral Finance and Retirement: Investment Management


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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
  • Investing is a crapshoot. That’s why we diversify, in essence, diversification is an act of humility. When you diversify you are admitting that you don’t know what will happen.
  • Put a premium on optionality. As life unfolds you need to have the ability to make changes to your plans.
  • Don’t white-knuckle it. If you can’t sleep during volatile times then you are taking too much risk.
  • Listen to differing points of view. Cultivate a knowledge base with diverse opinions.
  • Redirect your energy. Once you identify your cognitive biases, set up systems to redirect your natural tendencies.
  • Consistently receive feedback from others with different points of view. Be careful to cultivate diverse opinions.
  • Force yourself to consider the opposite case of any decision you make. Learn to see an issue more fully from both sides.
  • Use personal benchmarking to compare your finances to a set standard. This will allow you to look inward at what matters to you personally
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.

  • [1:20] What is heuristic?
  • [3:45] Managing behavior is the most significant risk you have to your finances
  • [7:04] Be nimble as life unfolds
  • [12:36] Create personal benchmarks
  • [14:23] How I manage behavioral risk with clients as well as with myself
  • [21:41] What is the Rock Retirement Club?
  • [22:35] Do we make rational decisions?
  • [34:02] Practice your decision-making framework
Resources Mentioned In This Episode

My article on Kitces.com

Rock Retirement Club

Roger’s YouTube Channel - Roger That

BOOK - Rock Retirement by Roger Whitney

Work with Roger

Roger’s Retirement Learning Center

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