The High Cost of Bad Financial Decisions

There is a good reason why money frustrates so many people. It frequently works in ways that are simply unnatural for our hunter-gatherer brains to grasp.

Most wealth is accumulated slowly, over long periods of time. Yet our brains overwhelmingly respond to short-term stimuli. We instinctively discount the wisdom of history (if we are even aware of it) and rely on our immediate experience. Witness our obsession with ticker feeds and day-trading, despite overwhelming evidence that such activities range from meaningless to downright destructive of wealth.

Long-term financial success is also as much a matter of risk management as it is of return prowess. After all, a billion dollars multiplied by zero is… zero. Yet we are drawn to the promise of return and tend to ignore the downside possibilities. Why? Because most human brains deal more naturally with material things – like the numbers on a scoreboard or on a “bottom line” – rather than they do with abstractions like probabilities and risk profiles – at least until the house burns down, or the market crashes, or the SPAC goes belly up. This is why there are so many rags-to-riches-to-rags stories. The risk-taking behavior that can earn you outsized returns is the very same behavior that can cause you to lose everything. In other words, getting rich and staying rich require very different behaviors.

Perhaps most importantly of all, humans are inherently social creatures. We are drawn to decisions about money that are social rather than objective and personal. Our sense of reality is often what others tell us it is. So, if our esteemed friend or a trusted family member is doing it – whatever “it” is – that feels like a good financial decision to make. And thus are both financial bubbles and panics born. Afterwards, we may feel duped or embarrassed, but while we’re experiencing them we’re confident that investing in the latest cryptocurrency, or following a hot financial influencer, or buying that next property is the right thing to do.

In contrast, most successful financial decision-making is long-term and patient, is risk-aware, and is objectively focused on your specific needs and circumstances. And that’s why a good financial advisor isn’t just someone who knows about asset allocation. She’s also someone who can help you consistently make, and then implement, good financial decisions. The decision that kept you from losing $25k early in your career, compounded over 50 years, is going to be worth a lot more than a few extra basis points of return on your stock portfolio[i].

If you’d like to explore how to make better financial decisions for yourself and your loved ones, give us a call.

[i] A recent Vanguard study suggested that working with a good financial advisor can also add up to 300 basis points (3%) annually, or even more, to the average investor’s long-term portfolio returns.

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