Are These 3 Emotions Ruining Your Retirement Prospects?
We'd all like to retire -- and maybe even do it a little bit early. However, there are some things that can derail a retirement plan. You know that some financial decisions, like raiding your retirement funds to pay for your child's college, can be quite detrimental. But there are emotional items that can cause problems as well. The investing site Market Riders mentions that there are 3 emotions that can ruin your retirement prospects:
- Recency: In psychology, this is an effect that is related to overweighting what has happened in the recent past. The financial crisis and stock market crash had people thinking that investing in stocks was a bad idea and too risky. Just before the tech bubble burst, the recency effect has people piling in to certain investments because they had done well within a relatively short time period. It seems only practical to assume that, this time, it isn't an investment bubble, and that things will just keep rolling along. It's important to create a long-term investing plan, define your goals, and do your best to stick with what is likely to help you reach them.
- Overconfidence: Another issue is overconfidence. In most cases, this represents overconfidence in our abilities to pick the right stocks. We see a small measure of success, and then believe that we can identify the winners. A disciplined approach to investing, and less reliance on your ability to pick individual stocks, can help you avoid falling into this trap.
- Loss Aversion: No one likes to lose. However, it is part of the ups and downs of the market. Unfortunately psychologists tell us that the pain of a loss is greater than the pleasure derived from a gain. In order to prevent loss aversion from leading to decisions made in fear, you need to have a long-term plan for your retirement account, and an asset allocation that helps you bounce back from certain losses.
