Success Starts With Smarter Choices

Many of us would do well to work at improving specific facets of our lives. One way to do this is to commit ourselves to making better/smarter choices in certain areas. And money is a great place to start.

Focus on long-term goals

One human tendency is to judge the effectiveness of our retirement savings strategies by looking at performances on one,-two, or three-year horizons. We do this because we are wired to be more sensitive to short-term losses than to long-term goals.

This is why much of the financial services industry and media encourage a short-term focus for an audience with a long-term horizon. This is akin to looking through the wrong end of a telescope. The thing you should be focusing on looks even farther away.

The result of this short-term mindset is that investors end up following the herd and seeking safety when opportunities are plentiful and seeking risk when opportunities are few. The smarter thing is to maintain a level of discipline amid the noise.

Focus on return and risk

Another human tendency — and one allied to our built-in loss aversion — is to be suckers for the supposedly “free” or discounted offer. Like Homer Simpson, a zero price tag makes us fall for pitches selling us stuff that is neither necessary nor good for us.

In the world of investment, it’s this tendency that makes people gravitate to strategies that headline high returns without mentioning the risk, or that conveniently bury fees, commissions and other costs. Regret lies on the other side of those decisions.

A smarter choice is to focus on return and risk. They’re related. Focusing exclusively on return can lead to rude awakenings when risk shows up. Focusing exclusively on risk can lead to disappointment when returns are delivered.

Hindsight isn’t always 20/20

A third tendency among humans is to succumb to what behavioral scientists call “hindsight bias.” Essentially, this is our habit of viewing events as more predictable than they really were. Call it the “I saw it coming” syndrome.

There is a fair bit of this around at the moment, with plenty of “experts” saying the sovereign risk crisis was completely predictable. This is strange, because the overwhelming consensus among institutional investors a year ago was that fixed income would underperform in 2011. The crisis may have been predictable, but the market reaction wasn’t.

The consequence of hindsight bias for investors is they tend to be forever rewriting history and forever seeking to interpret performance based on what they know now rather than what they knew a year or more before.

A smarter choice is to accept there will always be a level of uncertainty. The future is unknowable. All we can do as investors is ensure the risks we take are related to an expected return, that we diversify around those risks as much as possible and that we exercise a level of discipline amid the noise.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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