“The way to gain a good reputation is to endeavor to be what you desire to appear.” -Socrates
I’m continuing my (well-received — thank you!) series on hidden financial mistakes this week. But first a few reminders for you:
1) “Extension friends” (that means the ones who filed for one in April, or earlier): we’re coming down to the wire to get those forms submitted, so if my office has been working with you on this, and we’re waiting for something from you … be a pal, and help us help YOU get it all in asap!
2) Tax planning opportunities running dry? No, I’m not saying that we cannot help you prepare yourself for the upcoming season … but what I *am* saying is that now that we’re in October, the clockity-clock is ticking. So, if you want to reduce your 2011 tax bill, let’s have a chat: (818) 435-2321. There is bound to be something worthwhile we can do for you.
Now. About those financial mistakes I’ve seen over the years … a couple more for you. This hasn’t been an exhaustive list, but I do hope it’s been helpful.
“Real World” Personal Strategy
More Hidden Financial Mistakes … And How To Fix Them
As I wrote last week, you pay your bills on time. You try to save as much as you can. You even follow the advice which you read in books and hear on the radio about how to keep your finances in check.
But perhaps you’re still not getting ahead.
Well, sometimes, it’s the unchallenged assumptions about how we’re handling our money which rise up and hurt us.
So, in the course of working with clients, I’ve identified some mistakes I see (as well as ones I’ve made myself!), which can be fixed. Last week, I gave you two:
Hidden Mistake #1: Inappropriate Mental Accounting
Hidden Mistake #2: Manipulative Price Anchoring
Now here are the rest…
Hidden Mistake #3: Loss Aversion Costing You
Definition: Our consistent tendency to avoid loss, rather than acquiring gain.
Typical Example: An investor is more likely to sell a stock which has increased in value, rather than selling stock that decreased. Over time, her investment portfolio is made up of investments that have decreased.
Cure: Don’t think of selling a stock for less than you paid for it as being a loss. It can actually work as a gain for two reasons:
* Tax deduction (which can really help!)
* The other side of opportunity cost: opportunity GAINED (i.e. you can better utilize that money elsewhere)
So, don’t check your portfolio so often. If you don’t know you’ve lost money, you don’t experience the pain. (And riding the roller-coaster of your portfolio’s value is a waste of emotional space.)
Since stock prices go up in the long-run, the longer you go without looking at your portfolio, the greater chance of seeing a gain.
Sometimes taking that loss really is the best thing you can do.
Hidden Mistake #4: Following the Herd
Definition: The tendency for us to want to do the same thing as a large group of others, with no thought to whether that action is rational or irrational.
Typical Example #1: Buying when prices are high because everyone else is.
Typical Example #2: Selling when prices are low because everyone else is.
Cure: Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful.”
Keep this in mind when making your next financial decision. If everyone is telling you to buy this or buy that (i.e. gold, silver, real estate) do the opposite.
In the financial investment world, if it’s too good to be true, it usually is.
Write up an investment policy statement or contract.
Include factors such as:
* Investment objective
* Investment goals
* Desired asset allocation and diversification
* Summary of your risk tolerance
* Rebalancing schedule
Before making any changes, consult with this contract.
You can also take advantage of this inherent tendency to do what’s approved by others to affect positive behavior. For example, let’s say you trying to pay off debt. Tell your 3 closest friends, make an informal contract, sign your name at the bottom, and then email it to them. The pain you would incur from breaking that contract is high relative to the pain of breaking your behavior if you went about it alone.
Don’t forget — we’re only a phone call or email away, and our consistent question for you is this: “What more could we do for you to help?”
To You and Your Family’s Peace of Mind!