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Sherman Wealth has long been advocates of promoting financial literacy and empowering our world to become more educated on how to manage all aspects of their financial lives. We want to highlight an interesting article we saw on www.evidenceinvestor.com, discussing several reasons why “high flying professionals fail at investing”. This piece highlights the lack of financial literacy in our country, regardless of occupation or socio-economic upbringing. According to the article, “the best investors often times aren’t those with the highest IQs or who’ve read the most books, it isn’t knowledge, but SELF-knowledge, that really sets them apart,”
Often, high-earning professionals think they are saving enough but countless financial complexities exist within a professional services career track. Biases or mental errors are some of the biggest things standing in the way of financial success, mainly because they’re not easy to recognize in ourselves. Additionally, people are naturally resistant to change and most people are hesitant to pay small costs even for big gains.
Failure to rebalance is also something that many people struggle with. People are reluctant to take action to rebalance a portfolio. It’s too much fun to let winners run. It’s also psychologically difficult to sell winners to buy losers. But failure to rebalance quickly causes the client to be dangerously exposed to a downward turn in the markets.
People also tend to overestimate the significance of recent events and irrationally discount longer-term trends. Those of us over a certain age remember Black Monday on October 19th, 1987. The stock market lost a quarter of its value in a single day. That spooked a lot of people – and many got out of the market right after. Looking back at it now, Black Monday barely registers as a blip on the graph. This is an example of recency bias. Recent losses play havoc on our emotions and cause us to lose perspective. The long-term trend of the stock market makes any single day’s volatility look insignificant in comparison, so when we look back at a single day like Black Monday on a chart, we wonder how we could have panicked. Furthermore, given the current climate with COVID-19, it’s important to consider this idea, as people may have panicked back in March, selling assets in their portfolio, instead of holding onto them as the economy recovers. While it often seems natural to panic during an economic downturn, it’s important to remember that these dips recover naturally over time.
These are just a few examples of how society and perception can lead us to make poor financial decisions. Given the current climate we are living in today, it is crucial to make sure you fully understand the decisions you make within your portfolio and that they are long-term, strategic moves. With a lack of financial literacy amongst all career fields and economic classes in our society, we realize the importance of being financially educated and would love to help you to make smarter decisions.