This week, I’m talking about behavioral finance to help you understand how your psychology and biases influence your money decisions. 

Today, I’m talking about why most of you listening are pretty terrible at making decisions with your money. I don’t say that to insult you. It’s just the reality...

If you are even remotely like the average investor, and statistically speaking, you are...then you are a terrible investor. Why? Because you get in and out of the stock market at all the wrong times. 

The research company, Dalbar, has been analyzing investor behavior for the last 25 years and here’s what they found: 

During the 20-year period from 1998-2018, the stock market made a 5.6% average annual return. Pretty good when you consider that that return include the bursting of the tech bubble in the early 2000s, and the worst recession and stock market drop since the Great Depression in 2008-2009. Stocks still made 5.6% a year. Over that same 20-year time period bonds made 4.5% a year. Do you want to know what the average investor made? 

1.9%. 1.9%! Not even enough to keep pace with inflation. Behavioral finance concepts, specifically what I discussed yesterday, which is that we make most of our decisions based on our strongest internal feeling - that’s why most investors don’t have the kind of returns that are necessary for growing wealth over time. 

Investors make emotional decisions based primarily on fear and greed, and getting in and out of the market at all the wrong times. 

You don’t even need to go back more than a few months to see this in action. Many investors and a few of my own clients were so frightened about the impact of the pandemic on their portfolio that they had to go to cash. It’s hard to stay invested and keep the long-term view in focus when predictions are dire and the Dow is dropping by 1000+ points day after day. 

The point of today’s tip is that behavioral finance matters big time for your retirement, because if you only make 1.9% a year on your investment portfolio, that’s not going to provide the kind of life and lifestyle in retirement that you’re hoping for! 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.