The other day I was in a hotel room watching CNN on a business trip. A well-known public figure came on with a paid message touting "the coming collapse." Repeating words like "crisis," "bubble" and "crash," the implication was clear: You need to scrap your current investment strategy, whatever it is, and hunker down with an entirely new one.
I won't judge the merits of this particular claim, but I will say that it's one example among many cognitive errors people habitually make because of how their brains are wired. I'll discuss five of these erroneous beliefs, how they can hurt your financial future and how to overcome them.
1. The future will be very different from the past
Human beings are conditioned to focus on dramatic risks, even if they're small—a cognitive bias called "neglect of probability." It's a natural byproduct of evolution. Those who banked extra food in anticipation of a harsh winter were more likely to survive even when the weather turned out to be mild.
Financial crashes are real, and there are some indications that in modern times they've become more frequent—think of tech stocks, real estate and the financial industry just between 2000 and 2008. But they're still rare in the scheme of things, and your investing should never rely on them. As Nobel Prize-winning economist Paul Samuelson put it succinctly back in 1966: "Wall Street indexes have predicted nine of the last five recessions!"
2. Someone else has all the answers
In some ways, managing personal finances is more complicated than ever. There are new financial instruments coming out every day. And unlike previous generations, most of us can’t rely on a pension plan to do the investing for us. That's why it's tempting to outsource financial decision making, whether to your spouse, an accountant, the HR manager at your company, a friendly face at your bank, a wealth guru or even a newspaper columnist. Unfortunately, this leads to diffusion of responsibility, and that can contribute to poor or even disastrous decisions. No one else will put your financial interests first or give them the attention that you will. At the very least, run your cousin's hot stock tips by a disinterested party before you make any hair-trigger choices.
3. You can get rich quick with one weird trick
There's a lot of money to be made in marketing shortcuts to financial freedom. The flavors of the month change: It might be borrowing to become a landlord, founding a "passive income" Internet business, buying gold, trading currency, mining Bitcoin or retiring to Chiang Mai, Thailand. I'm not saying these ideas have no potential wealth-building strategies, but they are not one-size-fits-all. And in most cases those recommending them will not be left holding the bag if they don't work out; you will.
4. Today's splurge is an exception to the rule
Most of us have long-term spending and savings goals. And most of us have a friend whose birthday is coming up, a destination wedding to attend or tough days at work that would be improved by eating out at a restaurant. Splurges are fine, but they are more frequent than people generally realize, so it's important to build them into your saving plan.
5. I can deal with it tomorrow
Confession time: I left serious tax break money on the table this year by failing to file for my FSA childcare benefits in time. Procrastination is a widespread psychological response to tasks that are tedious or that make people anxious, and financial planning falls into both those categories. How to beat it? Break a task down into steps; write them down, publicly commit to them and start today.
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