5 Critical Retirement Investing Mistakes to Avoid
Overconfidence and inertia are two ways people go wrong
(This article appeared previously on MarketWatch.com) You might not be able to teach an old dog new tricks, but you might be able to train your brain into doing right by your money.
And that’s especially important for retirees who, according to the editors of a soon-to-be published book about investor behavior, reveal many mental mistakes and emotional issues that influence their decision-making processes.Train Your Brain
“Although retirees cannot avoid all behavioral mistakes, people can reduce their effects,” wrote H. Kent Baker, professor at the Kogod School of Business at American University in Washington, D.C. and Victor Ricciardi, an assistant professor at Goucher College in Baltimore.(MORE: 7 Secrets of Highly Effective Retirement Savers)
This requires, Baker and Ricciardi said in an e-mail, understanding one’s psychological mistakes and emotions and resisting the tendency to engage in such behaviors."Retirees, with the advice of a financial planner, should develop and follow a disciplined investment strategy, assess their level of risk tolerance, establish an appropriate asset allocation strategy and rebalance portfolios at least once a year," said Baker and Ricciardi, the editors of Investor Behavior: The Psychology of Financial Planning and Investing.
So, from Baker and Ricciardi’s vantage point, what are the most important things that retirees and those saving for retirement need to know about investor behavior?(MORE: The 10 Worst Money Moves for the New Year)
Overconfidence vs. Status Quo
Some investors often exhibit overconfident behavior resulting in overtrading of their portfolios, say Baker and Ricciardi, the latter of whom is also the coordinator of Behavioral and Experimental Research for the Social Science Research Network.
Other retirees suffer from inertia and under-manage their investments.
“A compromise would be to create a solid approach between these two biases,” they wrote.
Trust and Control
Retirees need to create a balance between trust and control in the relationship between themselves and their financial planner, wrote Baker and Ricciardi. “Retirees who place too much trust in financial experts or relinquish control about financial decisions can suffer. The Bernie Madoff scandal is an example,” they said.
Yet, retirees who lack trust or are overly controlling are unlikely to accept the advice of a financial planner, they added.