Check out yesterday’s Getting Going column, which talks about behavioral finance and it’s impact on investors’ decisions. The article is good but what I really like is the box inside the article that highlights four destructive behaviors:
Recency – Thinking what happened last year will happen again THIS year. Remember that things tend to revert to the mean (average) over the long term. I remember during the internet bubble people assumed the 20% returns would continue indefinitely.
Procrastination – Putting things off because they seem so far away. I know from experience how fast time goes by.
Loss Aversion – People don’t like to lose money, no matter how far away retirement is. In reality, market declines are the best thing that can happen for someone routinely saving money in a 401(k).
Self-Control Issues – For some it is much easier to spend than save. Self-control is one of the most important ingredients of any success.
Just understanding that these behaviors exist can go a long way in helping people overcome them.