0:00:00 - Speaker 1
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Securities offered through registered representatives of Cambridge Investment Research Inc. A broker-dealer member, finra, sipc Advisory Services through Cambridge Investment Research Advisors Inc. A registered investment advisor Cambridge and Greenway Wealth Advisory are not affiliated.

0:00:20 - Speaker 2
It's time to dive into some insider secrets of investing and retirement planning To make your retirement as smart and as elegant as possible. This is Money Chic with Sherry Rash. Hey everybody, welcome into another edition of the podcast. Thanks for hanging out with Sherry and I here on Money Chic, women and Retirement. And, of course, once again, sherry is joining me to talk investing, finance and retirement. And this week we're going to talk about money biases. Do you have one and how much could it be costing you in your lifestyle and in your retirement choices, sherry? How you doing.

0:00:53 - Speaker 3
Doing great. How are you?

0:00:55 - Speaker 2
Hanging in there. You and I were just chit-chatting a little bit. We're taping this now in the beginning of February. January is over. It was not a good month for me and a lot of people I know. I've been sick for a couple of weeks. Seems like everybody's been sick. The market was even not so good in the month of January as well.

0:01:12 - Speaker 3
It was definitely a rough ride, and I also learned the other day that February 1st is when most New Year's resolutions are abandoned, oh, okay. So maybe, if you found that you abandoned your resolutions when you're listening to this, go back and look at our previous podcast and get yourself re-energized again with some financial resolutions. There you go, yeah, I like that.

0:01:35 - Speaker 2
Yeah, it's definitely. I didn't realize it was the first. I thought it would be sooner than that. I would figure people would give up on them within a couple of weeks, but okay.

0:01:44 - Speaker 3
I've seen the 19th of January, but usually they last about 31 days. Is when it's done, thrown in the towel, and isn't it something about 30 days?

0:01:52 - Speaker 2
is a habit or something like that. Isn't there something?

0:01:55 - Speaker 3
It takes three weeks to make a habit. Three weeks to make a habit. Okay, there you go. I'm still struggling with mine, so no one's perfect.

0:02:01 - Speaker 2
No one's perfect, that's right. Well, like we said, the market obviously had a very rocky January actually the worst month since March of 2020, according to WashingtonPostcom and Baronscom and so people get a little nervous when it starts to get really choppy and volatile. So we've got this article kind of talking a little bit about money biases and how that kind of can affect some of those things. So I thought we would share this a little bit this week and we'll put a link to the article on the show notes. It's a recent study from Morningstar, which Morningstar is a pretty reputable place where there's a lot of information and study on financial analysis and things of that nature. So I thought we could kind of go through this kind of share some takeaways, share your thoughts on some of the stuff in the article and, of course again, folks can read along if they'd like to as well or just listen whatever they want to go with.

So it sounds good. Sounds good, okay. So a couple of key points here from this article is ways to maybe get back under control, right, if you do have some money biases and, let's be honest, everybody has a bias about something. It's just part of being human. So some of the key points were is that everybody has different attitudes about money. No shock there, right? We all have different ways of thinking and viewing it, and even within our own household, right, sherry? I'm sure you look at things one way, your husband another. I know my wife and I are that way. Another key takeaway was new behavioral financial studies found in this Morningstar report that 98% of respondents exhibited at least one or more of the financial biases that could be costing the money. So why don't you do us a favor, why don't you tell us the four biases and just kind of break them down a little bit for us?

0:03:34 - Speaker 3
Absolutely. So I'll go through the four biases. But I think it's also important to reflect on what. If you do have one of these biases or more of these biases, why do you think that is? Sometimes it's just our personality If we tend to worry, maybe we lean a little bit more frugal. But it may also be something from your childhood. So think about what was your first money memory. If you grew up in a household where parents were arguing about money, or money always seemed tight, that may affect your relationship with money today. Or if money was never talked about because it's taboo to talk about money, that may lean towards you not having confidence in your decisions. So once you identify which of these biases apply to you and 98% of respondents did say did have one or more of these biases, so it's pretty likely that one of these will ring true Think about why.

So the first bias is present bias. So that's just a tendency to go for immediate rewards over long-term goals, so instant gratification, so it makes you feel good right in that moment or satisfies an emotion right in that moment. The second bias is base rate neglect, so that's judging the probability of something happening based on new information while ignoring original assumptions. So, using January as an example, investors in general in 2020, 2021, they behave themselves. We solve volatility in March of 2020, but we stayed, invested, maybe invested some more if the markets were down and we were not letting our emotions get in the way. So we were using our knowledge to stay the course.

Don't pull out of the market. Ups and downs happen, but then January happened and maybe it just was too much. So you kind of abandoned what you've known for all of these years and pulled out of the market or went more conservative. So that's base rate neglect. So overselling, overbuying on the whims of bad and good news, yeah, the third bias is overconfident. So putting too much weight in your own abilities to make good financial decisions.

0:06:07 - Speaker 2
That's probably a really common one right now, Sherry, because we're going to basically a 12-year bull run. You can say what you want. There's been some dips and some downturns, but we have not had a prolonged bear market since 0809. Right so it's easy to kind of everybody's a genius when the market's going up.

0:06:23 - Speaker 3
Everyone is really happy with their 401k IRA performance and account values. And right, everyone's pretty much done well. So that definitely can lead to some overconfidence, which then might make the base rate neglect even worse or even more profound. If we've had this confidence and then things start to be a little bit shaky and we overreact that way, and then the last bias is loss aversion, so people who are overly fearful of losing money. So the thought of losing money affects them more than the positive making gains, the positive emotion of making gains.

0:07:08 - Speaker 2
So yeah, january being down 5%. To some people 5% is massive, others it's not Right Exactly.

0:07:16 - Speaker 3
I had a client actually call me and say my account nose dived and I'm like oh my.

0:07:22 - Speaker 2
God this is why I look at it.

0:07:23 - Speaker 3
And it was down about 5%.

0:07:27 - Speaker 2
So they can't handle the stress there are some things happening with their risk tolerance Right Exactly.

0:07:31 - Speaker 1
Exactly.

0:07:33 - Speaker 2
Alright, so that makes a lot of sense. So those are the four biases the present bias, the base rate, neglect, the overconfidence and the loss of version. And again, as according to the study, 98% of us exhibit at least one or more of these. Now, a second takeaway from this, sherry, was that the lower level of money bias that you have, so let's say you maybe only have one right or maybe none, although not hardly anybody had none, if 98% at least one but the lower the level of money bias, the better your overall financial health Right.

0:08:04 - Speaker 3
So the research showed that people who had low levels of present bias and again, that's the immediate, we need immediate rewards we're three times as likely to spend less than their income. So that's pretty interesting. I would actually think that that's the opposite, but I guess they like to see the money in their bank account, or like to see the money that they're saving, so they get some more gratification from that than the spending. And these same people were also seven times more likely to plan ahead for their future.

0:08:39 - Speaker 2
That's really encouraging.

0:08:41 - Speaker 3
It is encouraging. I was pleasantly surprised by that one.

0:08:45 - Speaker 2
Great as a financial professional. I bet you were. You were like all right, people are starting to listen, that's right.

0:08:51 - Speaker 3
Also, those that had high levels of base rate neglect and overconfidence actually had lower savings and checking balances. So those that are overconfident when it comes to their own abilities had less saved and cash available.

0:09:11 - Speaker 2
Which we would have definitely saw at the beginning of the pandemic, right? Obviously, 19 was a great year in the market, great year for investing. It was up, you know quite a bit Well, and so was 20 at the end of the day, but when 20, you know when it happened in March, and everything's closing up and things are dropping, there's a lot of people who didn't have an emergency fund, who, you know, struggled right, exactly.

0:09:32 - Speaker 3
Exactly, and it could also be overconfidence in earning ability. So, hey, it's okay if I let my checking account go down, because I know I'm just going to make more of it soon and maybe that day.

0:09:44 - Speaker 2
And that course that got maybe altered, maybe by the pandemic as well. So yeah, Exactly, exactly.

0:09:50 - Speaker 3
And then, lastly, those with loss aversion had lower 401k balances, again, not surprising. If you're more focused on not losing money versus making money, your allocation is going to be much more conservative than maybe it should be based on your age and time horizon.

0:10:10 - Speaker 2
That makes sense. I mean, maybe they're pumping. Those types of folks are putting it more in a traditional savings where we're basically losing money safely right, you've got it in the money market or even just a regular old traditional savings account, versus adding to your 401k, which, while that is a way to save for retirement, it is typically based on some sort of index or whatnot. So therefore you're feeling like, hey, I just can't take that level of stress, so all right Really interesting stuff.

So lowered levels of money bias equal better financial health. Takeaway number three overall, again from the article, and if you'd like to check out the article again, check out the show notes. We'll have it posted there as well. So basically, there's a solution build a money life, sherry, that fits within your priorities and I know that probably rings really true for you, because that's a lot of what you talk about.

0:10:57 - Speaker 3
Exactly so. When I'm working with a especially a financial planning client, I help them create what's called a financial mission statement. Businesses have mission statements. It's what guides most decisions, or what your focus is when you're working for a company or running a company. But your finances should be no different. Your family, your household finances should have a mission, and whether that's to finance education, to pay for our kids' education, to retire, to leave a legacy, to be able to travel, whatever it is, it doesn't matter. That's the lens through which you view your money. So when you're making financial decisions, although your bias may pull you in one direction or another, you then think of your mission and does this financial decision fit with my family's mission? And if it doesn't, then you should probably reconsider that decision that you're about to make. So Morningstar calls it building a money life, I call it having a financial mission statement.

0:12:06 - Speaker 2
Gotcha, and so I think if you're looking at some of that they give some examples of, I think, about when the market was doing the heavy crashing Sherry with the pandemic. They have what's called the circuit breakers. Right, it's only allowed to fall so far. These circuit breakers kind of kick into place. Well, morningstar's authors called it like a speed bump, maybe putting speed bumps into your decision making process to maybe slow that down, and they gave some examples as well as things that maybe kind of help us with our emotional reactions.

0:12:36 - Speaker 3
Yeah, so an example could be waiting three days to make an important decision to make sure your emotions or impulses are not driving that decision.

0:12:45 - Speaker 2
Yeah, it's a good idea on Monday, it might be a good idea on Friday, right.

0:12:49 - Speaker 3
Exactly, Exactly, or I. You can even use that when you're out shopping. If I'm in a store and I see something I really like, trying to keep my impulse under control and say you know, if I'm thinking about this item three days from now, I'm going to go back and buy it, but if I don't, then I really didn't need it or want it to begin with. It was more of a impulse purchase. So I think that you can have that kind of rule really with anything. When it comes to something as simple as buying something in a store or waiting to make important decisions, I think also there's a little saying out there don't make any decisions when you're hungry or tired.

0:13:29 - Speaker 2
We don't even know to go to the store when we're starving right.

0:13:31 - Speaker 3
That's right. Yeah, don't go grocery shopping when you're hungry. You're going to buy a lot more, so I think it's a good rule of thumb, just for life.

0:13:38 - Speaker 2
Yeah, definitely. And so they had some things like selling a stock after a 10% gain. Do you agree with something like that? It's kind of a random number and I'm not giving advice, but just kind of basically saying this is a suggestion, saying hey, if this thing is up and performing well at a certain point, maybe you consider peeling some of those earnings off the table.

0:13:57 - Speaker 3
I think it depends on your bias. If you have that overconfidence bias, then maybe that's a good idea. Or even conversely, if you have that loss aversion bias, that having a rule like that may be a good idea. I think it depends on your personality and what works for you. Everyone's brain works differently and invests in a different way, so that could work if your biases say that that's appropriate.

0:14:26 - Speaker 2
Yeah, definitely. So the overall kind of looking inward I guess thought of this, sherry, was that which money bias do you have and how do you kind of work on that and do you see these amongst your clients and do you kind of help work through that? Maybe it's not that term, money bias, but in general do you kind of agree with this overall article?

0:14:47 - Speaker 3
Absolutely. Everyone has a different money personality. Everyone thinks about money differently, investing differently, and as an advisor you really need to understand that. So asking appropriate questions, picking up on cues or comments that are made, to try to pinpoint what some of their pain points or biases are as soon as possible, because then that will help only make our relationship client advisor relationship stronger, because I know what makes them tick in a good or bad way and also how to shape conversations with them for the future.

0:15:22 - Speaker 2
Yeah, definitely. So when we're wrapping this whole thing up here, ask yourself folks, what kind of money bias might you have, is it costing you and how can you kind of improve from there? And I think there's certainly some good tips that Sherry has already shared with us here today on the podcast, as well as, if you'd like to check out that article as well. So any final thoughts before we go, sherry, I would definitely think about your money personality.

0:15:44 - Speaker 3
It's probably not something you think about too often. You may just label yourself oh I'm frugal or I'm a spender. Think about why there was something that happened or some experience or memory that you have that helped shape why you are the way you are with money. So really take a moment and pause and reflect on it.

0:16:00 - Speaker 2
That's a great point and thanks so much for listening to the podcast this week. Folks, we always appreciate your time. Don't forget to subscribe to us if you haven't done so yet or consider doing so, maybe sharing with someone who might also enjoy the show as well. Money, chic, women and Retirement you can find it on whatever podcasting app you like to use Apple, google, spotify, so on and so forth. Just type in Money, chic, women and Retirement in the search box or make it easy on yourself and just stop by Sherry's website, greenwaywealthadvisorycom. That is greenwaywealthadvisorycom. A lot of good tools, tips and resources to be found there. Sherry's the financial advisor and money coach, of course, at Greenway Wealth Advisory. Sherry, thanks for hanging out with me this week. I appreciate you. I hope you have a lovely week.

0:16:41 - Speaker 3
You too Thanks.

0:16:42 - Speaker 2
We'll catch you next time right here on the podcast Money, Chic, Women and Retirement with Sherry Rash.