Monday’s (April 6, 2020) Wall Street Journal included its quarterly “Investing in Funds & ETFs,” and it featured a piece titled, “Here’s Why Some Investors Panic; And Here’s How to Make Sure You Don’t,” by Shlomo Benartzi, a behavioral economist.
Behavioral economics is mash-up of psychology and economics that tries to look at economics through the lens of how people actually act. That’s in contrast to traditional economics which assumes that, as a whole, people respond rationally; they don’t.
It’s widely believed that investment decisions made rashly and/or emotionally can be very damaging to one’s financial health and retirement readiness. Dr. Bernarzi suggests a three-question quiz that lets you know yourself better so that you’re better armed to not panic.
Question 1: In normal times, how often to do you evaluate the performance of your investments?
- Less frequently
Give yourself points equal to the item number.
Question 2: When you set a goal, how likely are you to stick to it?
- My track record isn’t very good on this
- Occasionally I drop a goal
- I don’t change goals very often
- Once set, it stays
Again, give yourself points equal to the item number
Question 3: Do you have any apps that let you check how your investments are doing?
- Yes, but I only downloaded it and never use it
By now, you know the routine.
Tally up your score. If it’s six or less, you’re a panic waiting to happen. Seven or more, you should be good. If it’s 11 or more, you can stop reading if you haven’t already.
So now what?
Depending on the severity of your condition, consider the following.
In the article, Dr. Bernartzi suggests three things you can do. First, “zoom out,” or look at a different performance metric. Specifically, he suggests looking at the change in the projected retirement income on your 401(k) statement. Look at the drop in that, instead of the drop in prices. Second, consider reframing the price decline as a sale. You probably love to get to the store and see your favorite items are on sale. Consider investments the same way. Third, he suggests using his 1-2-3 approach. Work 1 year longer; save 2% more per year; and reduce retirement spending by 3% per year.
A few years ago, I wrote a blog post titled, “Tie Yourself to the Mast,” which suggested other ways you can protect yourself from yourself. You can read it here.