Effective Financial Planning: Is Your Own Personal Bias Interfering?

July 13, 2016 · Written By Aaron Dayton, CFP®

We invite you to consider the following questions about your own personal finances:

  • Are you overly optimistic about your personal finances?
  • Are you patently underspending, based on your assets?
  • Do you shy away from international investments and emerging markets?
  • Do you constantly compare your portfolio against your brother’s?

Whether you realize it or not, you have certain biases in regards to financial planning decisions—particularly investment decisions.

Some financial advisors automatically adapt to these biases, allowing clients to feel comfortable while avoiding any friction in the relationship.  Others will attempt to moderate misassumptions or reactionary changes that don’t make sense in the long run.

Behavioral finance researchers are still exploring this emerging area of psychology/economics, looking at why people sometimes lean toward financial decisions that aren’t in their own best interest.  Meanwhile, this post offers some suggestions on how to openly address financial fears and biases together with your partners in wealth management.

Embrace Financial Counseling, Not Just Financial Planning

We all have a unique relationship with money.  We all see the market from a different perspective.  A good personal financial advisor can play the role of a counselor—helping you understand your needs and concerns—whether it’s your attitude toward debt or leaving large trusts to your children.

For some, these attitudes are rooted in family history, like a Depression-era mentality that compels people to save no matter what.  Many seniors from the Traditionalist generation are still saving money well into retirement.  They have more than enough stashed away for their kids, nieces, nephews, endowments to their colleges… and yet, they struggle to pull the trigger on purchases for themselves.

Others create a financial agenda that’s diametrically opposed to what their parents did. Maybe, for example, your dad was such a diligent saver he never got to enjoy a five-star vacation or a luxury car.  And maybe you vowed your kids would have a very different experience.

A solid team of wealth advisors will help clients create a personalized balance—pointing you toward better financial security and optimal spending.  They will take the time to understand your goals, values, and expectations; your spending habits; your career plans; your tolerance for risk; and all the other things that color your financial outlook.

Keep Feelings at the Forefront

Many personal financial advisors, especially those working for national financial planning firms, will only address behavioral finance issues once or twice.  For the couple that’s living beyond their means, a corporate financial advisor might mention budgeting one time—especially if he or she is met with an unreceptive audience.

At JFS, we have local fiduciary investment advisors to keep hard numbers in front of clients, and to have difficult conversations when necessary.  If you’re overspending or taking on too much risk, we want to revisit that concern.  We want to encourage an open dialogue with your spouse (if he or she isn’t already involved) and a reexamination of your family’s goals.

We also want to get behavioral reads on a regular basis.  People’s feelings toward money can change over time.  Sometimes when planning for retirement, for example, people want to err on the side of extreme conservativism—thinking they can’t afford for their accounts to go down in value.  It’s our job to map how far their investment horizons extend, and offer candid comparisons on fixed annuities or guaranteed streams of income.  In many cases, these clients can still tolerate some market volatility, and should continue to leverage the growth component they need to offset against inflation.

Learn to Think About Your Long-Term Investment Strategy

There’s nothing wrong with following financial news, as long as you can separate the helpful information from the hype.  Unfortunately, negative stories sell.  You might remember the summer of 2013, when Europe’s sovereign debt issues were plastered all over the media, with warnings of global economic market collapse—even though Greece’s economy is smaller than that of Vermont…

Some clients understandably get nervous after a market downturn, or in response to bold headlines.  Right away, they want to rethink their margin of safety and implement an ultra-conservative strategy (even when it makes more sense to wait until the market comes back).  On the flipside, some investors glom onto trends they discover online or intercept from colleagues.

Financial advisors are prepared to recognize these biases for what they are.  Advisors can illustrate that although risk and return are correlated, you don’t have to give up all returns when reducing risk.  The right advisor will also welcome your input while giving you the confidence to ignore short-term drama, and focus on big-picture economic news that unfolds over time.

Bottom line: the way you manage your accounts shouldn’t be reactionary.  And you never want to make financial moves out of fear.

Don’t Conflate Complexity with Performance

One of the most common personal financial planning biases we hear (indirectly) is the idea that complexity equals sophistication—and better returns.  Some clients expect to see a lot of activity going on, even when investing in mutual funds, in a buy-and-hold strategy.  (In the past they may have worked with a broker dealer who bought and sold all the time, because that’s how he made money.)  Or else, they want to see investments layered out across 15 different mutual funds.

But outward activity is not an indication of performance. A lot goes on behind the scenes in a passive, index-traded portfolio.  (A mutual fund can hold 5,000 stocks. You won’t see the six trades that happened today.)  Don’t equate lack of activity with good or bad investment performance.  Meanwhile, buying undervalued companies and holding onto them for years is often a smart play.  Ultimately, simpler strategies provide more clarity over time.

Rethink Your Definition of Investing and Investments

When you’re laser focused on investment returns, it’s easy to lose sight of intangibles: relaxation, happiness, family.  A trusted personal wealth advisor will remind you that there are many different ways to invest. In fact, depending on your needs, it might make sense to invest in things that bring subjective value to your life—returns that don’t come from the stock market.

That could mean organizing a cruise with your extended family.  It could mean building a great room onto your home, to accommodate a growing generation of grandchildren.  As opposed to putting money into an investment account that someone will receive after you’re gone, these choices allow you to enjoy the experience of giving.  (And in the case of a home renovation, the investment will likely make your house more valuable, too.)


Overconfidence, representativeness, conservativism, regret aversion: these behavioral finance biases can affect even the savviest of investors, not to mention individuals and families seeking personal financial services.  If you recognize any of these biases in yourself, or if you think conflicting attitudes may be affecting your personal financial plans, feel free to contact our team for a neutral perspective.