Why do so many people make bad decisions when it comes to money and investing? Sometimes it feels as though we’re destined to do exactly the wrong financial things at the wrong time—making decisions based on emotions and instincts rather than evidence and facts.
Our individual behavioral biases, or the unconscious influence of our life experiences, are to blame. Many of these behaviors seem almost hard-wired into our DNA from days when following the herd and avoiding the unknown could be the difference between life and death. When it comes to financial matters, however, these same biases can slow your progress towards a secure financial future.
By understanding your personal biases, you’ll be better able to avoid making emotional financial decisions that could undo all your efforts to provide for you and your family down the road.
Don’t give in to the latest trends
How many stories have you seen about athletes getting into trouble for being in the wrong place at the wrong time with the wrong people? The same can hold true when it comes to managing your money.
Herding bias is the tendency we have (especially when younger) to follow the crowd financially, even when it’s not in our best interest.
One recent example of this is the rise and rapid fall of crypto currency prices. During most of 2017, you would have needed to live in a cave not to hear all the talk about bitcoin. Newscasts were filled with stories of everyday people who had become overnight millionaires as the currency’s price soared from $2,000 to nearly $20,000. Even knowing that currency speculation is risky, people jumped on the bandwagon. Sure enough, by early December 2018, the price had tumbled below $4,000—a loss of around 70%.
It’s the people who are willing to stand alone and go against the grain that very often come out on top.
Remember that you’re not invincible
All your life, you’ve succeeded at the highest levels to make it this far. It’s only natural for you to expect continued success in the future. Confidence is the fuel that drives you; it’s the thing that separates the greats from everyone else. Whatever the odds, you’ll overcome them.
For athletes, optimism and overconfidence are a winning formula. But for investors, it can leave you without a chair when the music stops.
Optimism/overconfidence bias describes our tendency to estimate higher-than-average odds of good things happening to us and lower-than-average odds of bad things happening.
It’s one of the reasons advisors have a tough time convincing athletes to plan for the possibility of a career-ending injury or to put money aside today for future medical costs. While you may feel invincible, you’re not.
Don’t make the all-too-common mistake of putting off planning for the future thinking you have years of high earnings ahead of you!
Hopefully, you do, and a long career will give you the financial freedom to do whatever you want in life. But make sure you use the first few years of your career to build a strong foundation that will sustain you after your playing days are over.
Think like a coach
What is it about the likes of Gregg Popovich or Bill Belichick that make them such successful coaches year in and year out?
- They identify the individual strengths of each player on their team and put those players in the best possible position to succeed; and
- They coach their players not to try and do everything, but rather to focus on a few key responsibilities and trust that those around them will do their jobs as well.
It’s the same approach you should apply to managing your financial life. Rather than relying on one individual to do everything, assemble a team of specialists:
- A trusted attorney/agent to focus on negotiating your contracts
- A trusted financial advisor to manage your wealth
- A trusted accountant to handle your taxes
- Perhaps even a trusted marketing organization to help generate other revenue from appearances and endorsements
Encourage that team to work together and communicate regularly with each other and with you.
At SunTrust, instilling financial confidence is at the core of our wealth management approach. The professional athletes we work with have benefited greatly from this depth of coordinated, specialized expertise. We believe it’s a winning formula that, coupled with a clear understanding of some of the key behavioral biases that often cause young athletes to stumble, will set you up for long-term financial health.