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Knowing Your Tendencies and Avoiding Potential Pitfalls

Posted on May 28th, 2015

We live in an age where there are nearly limitless sources of investment data, news, and insights. Using all this “information” can be like watering houseplants with a fire hose–messy and unproductive. So, just as plants only absorb the water they need, people develop mental models as a way of coping with this information excess.

Investors develop rules about which sources they trust and don’t trust, but that only narrows the scope of information to take in. It’s easy enough (and smart) to put message boards into the “don’t trust” pile. But even reputable outlets like the Wall Street Journal, Fortune, or Forbes provide more information than is actionable for personal financial planning. So investors often develop their own financial planning framework to help them organize and act on information. Examples include:

● building a portfolio of stocks with a heavy allocation to companies, industries, and markets which the investor is most familiar (including that of their employer);
● equally allocating a portfolio to all available choices, particularly in company-sponsored 401(k) plans; and
● preparing retirement-needs analyses based on ranges of possible investment returns (including good and bad), and then becoming comfortable that the optimistic outcomes are most likely.

These approaches can be comfortable, but like an old home they require careful maintenance or they can create unacceptable levels of risk. CFP® professionals such as myself at Trisperity Advisors in Katy, Texas can help investors identify a variety of potentially risky biases and tendencies. These include:

● a tendency to notice only certain types of information (selective exposure),
● the habit of discounting or ignoring information that conflicts with existing beliefs (selective perception); or
● an inclination to remember and consider only information that confirms existing beliefs (selective retention).

Individuals, families and businesses across 12 states and 5 countries have found it helpful to work with me, Craig Narum, CFP® of Trisperity Advisors. My clients have found working with an independent financial advisor to be an effective way to objectively evaluate the soundness of a framework and ensure it remains appropriate based for a given willingness and ability to assume risk.

So, to which of these biases are you most susceptible? Schedule a consultation today and let’s talk about it. Together, we can take an objective view of your current financial status and goals, identify potential problem areas, and recommend appropriate options.

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