- Your Mind vs. Your Money 0:00
- Your Money Script 10:52
- Confirmation Bias Risks 19:54
- FOMO & Financial Regret 28:00
- The Real Value of an Adviser 34:50
Your Mind vs. Your Money: How Emotions Quietly Derail Retirement
On this week’s Best of Simply Money podcast, Bob and Brian tackle the invisible force that can quietly wreck your retirement plan—your own mind. From action bias to overconfidence, scarcity to status quo traps, they unpack the psychological pitfalls that can sabotage even the best investment strategy.
Learn why your childhood money lessons still echo in your financial decisions today, how FOMO can lead to costly mistakes, and why behavioral coaching may be your greatest financial asset.
If you’ve built a solid nest egg but still feel anxious—or if you're tempted to chase trends like AI stocks—this conversation is a must-listen.
Download and rate our podcast here.
Bob: Tonight, an entire show dedicated to the one thing that impacts your financial future more than anything else, your mind. You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Tonight, we're going to start with some emotional traps that can quietly sabotage your success. And these emotional traps seem to impact people more and more the larger your retirement nest egg starts to become. And if you recognize even one of these traps in yourself, it could save yourself hundreds of thousands of dollars. Brian, let's get into it.
Brian: Yeah. So, picture this. You've done everything right. You've built your pile of money. You've saved aggressively. You've done all the right things. You've checked all the boxes, but you still have that voice in the back of your head saying, "There's not enough, there's not enough, there's not enough." That's kind of where we all start. We start with this notion of scarcity. I don't have enough. I don't have enough. And the comparison I use with people when we're sitting down doing a financial plan is to say, hey, look at this pile of money you've grown now that you're in your late 50s, early 60s, whatever age. Now, think back. If you were told at 25 that you'd have this much money at this age, what would you have thought back then? And the answer is always, oh, my gosh, I thought I'd be in fat city. You know, I never thought I'd have this much money. Yet here we sit, worrying that there's just plain not enough. So, let's talk about those psychological hurdles that come in there.
Bob: Well, and that sense of scarcity, and I'll just be open about this, that's kind of how I was raised. And we can get into that if you want to. But it was always like, you want money, you got to go earn it. And there's never going to be enough. There's never going to be enough. It's that quasi West Side Green Hills mentality. You know, having a paper route when you're nine years old, and just working, working, working. That's kind of how I was raised. And it tends to feed into this next bias that we want to talk about, and that's action bias. And this is the idea that when things go wrong, anything goes wrong that will upset that giant nest egg we've worked so hard to build, you know, say the market drops 10% or so in a week, our instinct is we got to do something. We got to go into protection mode.
And for some of our clients, especially those used to running a business or managing big teams, doing nothing or inaction feels like failure because, let's face it, the thing that made us successful to a large extent is we were the problem solving people. Right? If something went wrong, our job was to fix it, fix it today, check the box, and move on. And it doesn't work that way. We can't fix the global economy in an afternoon, Brian.
Brian: Yeah, psychologically. This is really the same thing as, you know, sometimes when you're driving somewhere and you realize that, hey, I can get off the highway and take the back roads, and it's going to take longer. But at least I'll be moving rather than sitting on the highway. It doesn't help you in the long run. It doesn't help you at all to have taken that step. But in financial planning, it actually hurts you, like you said. So, we need to need to think of this in terms of, for example, with the market drops. Just think of in terms of this is something I should anticipate and I should be...I should know how to deal with it versus taking action to actually do something different in response to it.
Bob: Yeah. The market doesn't respond to hustle. It doesn't care if we try harder. And that's why, sometimes, the smartest move when you peel it all back is do nothing at all. And that's sometimes very hard for all of us to comprehend and grasp. Let's switch into another bias and, you know, kind of flipping the script here a little bit, over confidence. You know, we can get very overconfident in our ability to handle things or manage the market or manage our portfolio.
Brian: Yeah. Lots of people feel like, you know what, I've always been willing to put in that much more effort than the next guy. And that's how I got the job. And that's how I've done this and raised my family and so forth. I put that extra effort in. So, if I just do a little bit more internet research, I will find that one method, that one investment management philosophy that has all upside and no downside. Nobody says this. But this is...nobody says it that way. But this is sort of in the back of all of our minds, that I can control more than the next guy because I am willing to put more work in. And again, that works in 90% of the things you run across in life, but not in financial planning. Financial planning and investing is all about managing. It's 90% managing your emotions and 10% actually doing things with your investment.
Bob: And this is a good time to point out. There's an independent firm out there called Dowbar. Most people have never heard of this unless you're in our industry. But Dowbar basically just tracks investor behavior versus the markets. And it really tracks how decisions that are made by self-directed investors versus investors that have a good financial advisor working for them. What are the results? And these numbers, Brian, I've been in this industry over three decades now, and these numbers have never changed. The average investor out there underperforms the market. You know, a benchmark apples to apples market return by several percentage points per year. And it's 100% because of their behavior and the decisions they make with this overconfidence in thinking they can outsmart the market. Two to 3% a year is a big number, and you compound that over 20, 30, 40, 50 years, we're talking about real money.
Brian: Yeah. Another analogy I like to use to help people understand this is whether you're working with a financial advisor or if you're doing your own thing, that person or you are the weatherman. It is not the weatherman's job to stop the rain. It is the weatherman's job to give you a heads up on what might be coming and how you might want to prepare for it. If you take that mentality with financial planning and stop trying to prevent the "failure" of a down market...and a lot of people think of it that way. When the market comes down, I did something wrong. I must have failed somewhere. I will find that point of failure and never make that mistake again. And lo and behold, two, three, four years later, it happens again because we're focused on the wrong thing. So, be a weatherman. Tell people or tell yourself how to how to deal with it, not try to prevent it.
Bob: Yeah. Another one that crops up often is this...we'll call control illusion. This is another trap. Again, especially with people that are used to running things, controlling things, whether that's a business or a family, or you're a high-level executive that manages people, you are used to controlling the outcome. And we got to remind people all the time, you could control your planning. You could control your own behavior, but you can't control inflation, the Fed or global markets. And that illusion of control that we all sometimes walk around with, that can lead to micromanaging your investments or jumping in and out of things and trends in the short term. And that's one of the things that significantly harms returns.
Brian: Yeah. I think one of the concrete pieces of advice we can give people here is, by control, we mean...we're talking about controlling, again, your behavior. So, a way you can mechanically do that is make sure that the dollars you might need in the short run, a year, maybe it's 24 months or whatever, if you know you've got a certain pile of cash you need because you're spending it down or just pay the bills or you've got a big thing you got to do to the house, college tuition, so on and so forth, carve that out and make sure that the market doesn't touch it. That makes it okay for the stuff that you can't control to impact your longer-term investment.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Let's get into another trap that we see sometimes, and that's one that we will call status quo bias. Brian, you talked about this with an actual case example here earlier this week. Talk about what status quo bias can do to negatively impact our sense of enjoying our retirement.
Brian: Status quo bias is the notion that it ain't broke, so, why fix it, which most of the time is usually good advice. However, when we make this big transition into retirement, we all tend to hide behind this notion of scarcity. That's where we start. There isn't enough, isn't enough. I got to save, I got to save, I got to save. And then eventually, the light will eventually go on. Maybe you've done a financial plan or you put the pieces together, and you realize, you know what, there is enough. I can be done with that.
The big hurdle hiding behind the notion of scarcity is that unwillingness to start to spend down the nest egg. It is amazing to me. I just had this conversation yesterday with somebody who just had no idea what the money machine that they had built for 30, 40 years, there's no concept of what that could spit out for them. So, for example, a million dollars can easily spit out $40,000 a year in terms of income. Two million dollars is $80,000. You created somebody else with a job in your household that brings in income. People have a hugely difficult time getting over that hurdle of spending the nuts that I've been saving for the winter.
Bob: All right. And then another emotional trap we want to call out here and address is what we'll call the herd mentality. It's common. We don't see it too, too often with our clients that come in, but we all feel this. You know, our golf buddy brags about, you know, the big profit they made in NVIDIA stock or Bitcoin, or you got a coworker that moved all their money to cash one day before the market went down 4%.
Brian: And still talks about it to this day.
Bob: And they want to brag about it by the coffee machine. Yeah, we've all been there. And then we get enough exposure to that kind of stuff. And we start questioning our own plan. Well, wow, I'm not doing anything. My plan is just static and sitting there. I got to do something, do something. And let's face it. The financial media does not help either. There's always a new, hot trend, a scary headline. I mean, they're just constantly peppering us with reasons to be fearful or greedy or both in the same segment of the same show.
Brian: You know, Bob, when I was a kid, one of the first exposures I had to investments in stocks and things like that — this would have been in the '80s, I'm dating myself a little bit here — was when my dad and his brothers, my uncles, and some of their friends would all kind of pass around their latest stockbroker who gave them a tip that worked out. And it took me a while to figure this out. But by the time I entered the career, I realized that there had been, like, three, four, five of these guys who got hot one time and gave everybody a hot stock tip, and that he was the guy for a while or the lady or whatever. And then it would all kind of fade away. And it was never good for more than one or two. And there's nothing wrong with the advice these people are giving. But it's the wrong approach to make investment decisions based off of one good turnout.
Bob: Here's the Allworth advice. Wealth amplifies your options, your choices, but it also amplifies your mistakes if you allow emotion to take over. What did you learn from your parents about money? We'll look at the impact that may be having on your behavior, coming up next. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Hey. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. You can listen the following morning during your commute, or at the gym, or taking your walk around the neighborhood. And if you think your friends or family could use some financial advice, tell them about us as well. Search "Simply Money" right there on the iHeart app or wherever you find your podcasts.
Straight ahead at 6:43, the hidden force that could steer your portfolio in the wrong direction. All right, Brian, we talk a lot about financial planning, tax strategies, and investment allocation. But what if the most important part of your financial life was something that happened decades ago at your kitchen table growing up?
Brian: The money script is what we call this. We've all had some understanding of financial success and/or failure ingrained in us from an early age. Very rarely, it seems, do families actually talk about this. Clients always frequently say that this is not a topic. We didn't talk about money. It was taboo. You just didn't discuss it because you didn't want to compare yourselves to other people or show the dirty laundry or any of that stuff. It's not very often at all that somebody will say that they had a plan from kind of the beginning.
So, you know, for me personally, I remember my first exposure to all this was sitting in front of my dad's Apple IIc at the time. And I was...my job was to program in some fancy calculator or something that he got out of "Money" magazine. And that was the very first time I remember paying attention to what dad was doing. And why are you putting money? Why are we doing this? Why are not outside playing baseball? Well, he was planning for the future more so than I think a lot of his peers were at the time because he kind of could see on the horizon that they needed to have a little better plan. But that's where mine came from. A lot of people just don't have anything in their background. And that's how we get younger people that make messes of themselves in early years.
Bob: But how did that money script growing up impact how you think about money today?
Brian: Obviously, Bob, I came to a conclusion of where I...you know what? I don't think I want to work for the rest of my life. So, I may as well get into helping people figure out how not to work for the rest of their lives, because by the time it's my turn, I'm going to be really gosh darn good at it.
Bob: Sounds like you made a good choice. All right.
Brian: I did.
Bob: Well, I'll share mine. I mean, mine is a story of scarcity. And it was all well-intentioned. I mean, I'm the first of three kids in our family, you know, the first child. So, the parents are usually pretty buttoned up and strict and, you know, by the book with the oldest child. And I vividly remember sitting at the kitchen table. I'm nine years old, Brian. And my parents are looking across the dinner table from me and saying, "All right. You're nine years old now. You're not getting an allowance again, ever. You want a candy bar? You want to go to the movies? You want to go, you know, do whatever, you got to go earn that money." So, there we go. I'm out having two or three paper routes, and I'm starting to think every day, this all depends on me. I got to make the money. I got to work. And that has really stuck with me, you know, until today. And there's always that voice in the back of my head saying, it's not enough. It's not enough. It's not enough. The only person that's going to take care of you is you. And that can lead to some interesting behavior.
Brian: You know, funny you mentioned paper route. That was also my first experience with earning money and blowing it. So, I had a paper route up and down Jessup Road that had three candy stores on it. There was Whistles Deli, Supreme Nut and Candy, and something else. I didn't bring home a dime from that job.
Bob: So, you had literally spent the whole thing before...
Brian: I would go get my money and then spend it on candy before I got back home.
Bob: My middle son would love hanging out with you.
Brian: I've gotten better. I don't do this anymore.
Bob: All right. Let's talk about it. You know, one that these money scripts, a behavior that this can foster in us, and it's called money avoidance. This is the belief that money is bad or that wealthy people are greedy. Folks that have this money avoidance tendency, they tend to feel guilty about their wealth. They might give too much money away as a result or under invest because they feel guilty about having what they consider to be too big of a nest egg actually grow more. It could really set us back.
Brian: Yeah. And sometimes I also see it...not so much greedy where they feel guilty about it, but just terrified of it. There are a lot of people out there who will bring all their life savings to us to do a plan and invest, and then dump it on our doorstep so we can manage it. And then we can't get a hold of them sometimes to review the plan. It's interesting to me that people just want to avoid the topic.
Bob: Yeah. Another one that we need to nail down here is what we'll call money worship and this belief that more money will solve all of our problems. And we see this in folks who keep chasing the next dollar even when they don't need it. And we kind of talked about this already this morning or this afternoon. But we know people with millions in investable assets who still feel broke. They feel bad about taking a vacation. They feel like, you know, if I spend any of this money, that means I'm going to run out. And that's not a good thing either.
Brian: Yeah. And I see this a lot of times where people...again, not necessarily from greed. For whatever reason, they get...they're fixated on the dollar amount. You know, I had somebody the other day who told me that I'm going to retire when I hit $2 million. And my answer to that is, how did you come to that exact dollar figure? Why is it that you know you need $2 million? If they've done a plan and they figured out here's my cash flow that'll exist, here's what I need to supplement, and the answer is $2 million, that's one thing.
But for a lot of people, it's simply, well, I'm kind of in the ballpark of that anyway. So, I just want to squeeze these last few years of work out so I can get over the hump. And a lot of times, people end up sacrificing unnecessarily. Heaven forbid you do all those things. You save a little more money, and the market decides to take a chunk away. Are you really going to work an extra two, three, four years, put off retirement because '22 happened? A lot of people had to make that decision, again, because they're worshipping that dollar figure. I want to see more zeros and commas with my name on it.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Here's another one, Brian. And we run into this one often, money status. And I think, a lot of times, this is passed down to us from parents and grandparents, or peers. And it's just the idea that our self-worth or that net worth number on that financial plan, the net worth equates with our self-worth. It's our whole identity. And you see this with people who overspend to "look successful" to their neighbors and peers. Hey, the guy parked next to me at the country club has this kind of car. My car works just fine. It's super nice. But, boy, I got to have the same car as this guy next to me. Kind of the whole keep up with the Joneses mentality. And that can result sometimes in lifestyle creep, and you end up spending more money because you think you can, not because it aligns with your true financial goals.
Brian: Yeah. And I think, a lot of times, people run into...I want to do these things. I feel like I've got the money. My cash flow supports it. I've got a strong salary and good cash flow coming in, but I haven't sat down to figure, just because I can afford something now, what impact does that have in the future? This actually works in the opposite direction, too. People sometimes have absolutely no idea what they can get away with. So, they do nothing. The whole point of this is, as always, figure out what it is that you need to do and what resources are required to do it. Just because you can afford something this year, doesn't mean you should because you may be sacrificing something you haven't yet thought of in the future.
Bob: Yeah. Sometimes people don't actually use this word, but the sentiment comes across. It's almost like, well, I deserve to have this because I've worked hard. Well, there's no such thing as you deserve or what...it is what it is. You've got to have a financial plan and follow it. Now, if your plan suggests that you can do and have some nice things that are really important to you, then by all means, let's do it. But not often, but sometimes, and I'm sure you've gotten these calls or emails, too. I think sometimes clients will go out and buy the RV or book the three cruises, and then tell us after the fact because they knew if they asked us in advance whether this is going to work, they knew the answer would be no. So, they'll just tell us after the fact and ask for forgiveness rather than permission. Does that ever happen with you?
Brian: Oh, yeah. The answer is, well, it's your plan. It's not my money. You don't need permission to spend your own money. I'm just telling you what the outcome might be.
Bob: Here's the Allworth advice. Your biggest financial challenge might not be math. It might be a childhood story that you've never questioned or really gotten your emotional arms around. Next, why reinforcing what you already believe could wreck your financial future. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. One of the most dangerous things in investing isn't inflation, taxes, or even market downturns. It's your own brain, specifically the way it filters information to match what you already believe. It's known in the behavioral finance world as confirmation bias. And, boy, this is a big one that I want to make sure we dive deep into and tackle tonight, Brian.
Brian: Bob, tell me if you've run across anybody like this lately. They're absolutely convinced that the market is coming down. It's at an all-time high, and it just can't go any higher. It's coming down. They got this information from articles online. Every article they read is worse than the last one they read, and it's just kind of backing up on them. What they don't realize, however, though, is Google and social media is doing this on purpose because all they care about, all those companies care about is making sure your eyes stay glued to that screen. So, if this guy's interested in bad news about the market, then absolutely, we're going to serve it up on a platter for him because that'll keep him here, looking at these ads. And that's how we all make money. We, being Google and social media and so forth. That is confirmation bias. They know that you are seeking out opinions, and you'll be happy to read more things that you already agree with. So, they're going to shove it in your face.
Bob: Well, this is one of the benefits. You know, you and I have both been doing this a long time. So, we've got many clients. And I don't know about you, Brian, but, you know, I'm going to talk about politics here for a minute because, depending on who the occupant is in the White House and who's controlling Congress and all that, I can almost predict, you know, from each side of the aisle, the four or five clients that are going to be constantly in my ear, telling me how and why the entire global economy is going to collapse because so and so is in the White House, and they're purposely ruining the country. Do you have those little handful of clients that, you know, come out of the woodwork depending on who's occupying the White House at any given time?
Brian: Okay. I'm going to hit you with a phrase here, Bob. I rehearsed this on the way in, knowing we're going to talk about this. Political passion has no place in prudent planning. You like that? [crosstalk 00:22:05].
Bob: Wow. That's a lot of Ps. I'm not even going to try to repeat that.
Brian: Thank you. Thank you. I rehearsed, like I said. Anyway, no, yeah, clients all the time...we all...and it's not...you know, there's nothing wrong with this thought process. We're simply looking for that mechanical button or the lever that we can say, if this, then that. If so and so is in office and in control and I don't like them, then that means I should do this black and white process, meaning liquidate everything or go to gold or whatever. We have this all the time. But in reality, the history shows that the market could absolutely care less who's in office. It goes up no matter who's in office because that's how the economy works. There are always more and more people buying more and more things.
Again, I'm talking about the longer term, not the short-term swings, which we can't control or predict. But the economy will function underneath presidents and leadership of any stripe. And there is ample history going back through...all the way back through the Great Depression and including the most recent administrations that it just doesn't matter who's in charge. That causes short-term swings and heaven knows we've seen enough of those. But in the longer term, generally speaking, things go up. Just don't let the short term wag the dog.
Bob: Yeah. I've already made kind of the cardinal rule mistake here mentioning politics. So, I'm going to use another one here at the risk of angering even more and more people. And that's talking about the importance of having both spouses in a room when we do planning, and we talk about risk tolerance and all that. Because, Brian, I don't know about you, I find almost always, the people that are coming to me with this deep embedded confirmation bias, almost 100% of the time, it's men. It's men.
Men and their egos, or our egos, we want to be right. We want to predict the future. We want to protect our family, all that stuff. And we come in thinking we already know how it's all going to work depending on who's in the White House or what have you. And we start consuming media sources to just confirm that bias, where I find that the women are way more level headed, even keeled. And that can oftentimes balance out a good financial planning review by making sure both spouses are in the room, we're hearing from both spouses, and we're kicking around this confirmation bias, you know, identifying the elephant in the room, and hopefully hunting it down and killing it so we can move on with more productive conversations.
Brian: If this, then that. If this happens, then I know I'm going to do that. That way, I'm forcing it to be predictable, and I'm forcing myself to pretend, and I'm going to put that in caps, pretend that I have control over this because that's how, as a man...like you said, as a man, I want to fix things. I want to tackle it, take it on, take the bull by the horns, and fix the problem. But no, it doesn't work that way. As a matter of fact, that assumption can get us into a lot of trouble. That confirmation bias comes back to haunt us in terms of forcing us to think that we have way more control than we do.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. And Brian, it seems, at least to me, the more money people have, the more costly a mistake can be if we allow this confirmation bias to really take hold on major decisions. Do you find the same thing?
Brian: Yeah, absolutely. And the thing to remember, too, a lot of people, when they've built a good, solid nest egg, a market decline of 1% can look like a massive amount of money. If I have $10,000 and I lose 1%, well, I just lost $100. That's not obviously a huge amount of money. But if I have $5 million and the market takes 1% away, that's $50,000. But it's the same 1%, and it's affected by the same strings of the market no matter how big the investment is. So, the idea there is pay attention to the percentage, not the dollar amount. I just had this conversation the other day with a client who has really worked up over a 1% loss.
Bob: Yeah. I mean, people don't like looking for dissenting views or anything that goes against that bias. And I think, to talk about...you know, we've talked about what not to do. Let's spend a little time talking about what to do. And I think you got to get different ideas from different people, people that are intelligent, people that are well-read, people that can check their emotions at the door. And that helps, you know, kind of filter out some of that strong bias.
And this is where I want to give kudos to our chief investment officer here at Allworth, Andy Stout, because he is wonderful at this. And every so often, I don't know, Brian, every three or four months, if a headline comes across or something happens where I'm starting to get a little worked up, it's always...I enjoy having a little dose of reality fed to me by Andy. Because he'll pull out the inflation scorecard, he'll pull out all the data that's actually is making the markets move in one way or another. And when you actually look at the reasons behind why markets move, and how they move, and when they move, it has literally nothing to do usually with what we see in the headlines or these articles that we want to consume just to confirm our own embedded biases.
Brian: Yeah. I would agree with that. It's a great tool that we have to be able to rely on our own teams internally, of course.
Bob: Again, it's important to get a second opinion. And this is where a fiduciary advisor can provide enormous value. And we are not here or a good advisor is not here to agree with everything that you're thinking with your fears or hype or articles that you've read. We are here to challenge those assumptions and protect you from blind spots that you might have.
Here's the Allworth advice. Confirmation bias isn't just a mental quirk. It's a financial risk. And the more wealth you have, the more damage it can do if you don't identify and address it.
All right. Your neighbor just bought NVIDIA. Should you jump in? We'll talk about a powerful factor that could pull you away from your financial plan next. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. If you have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question, and it'll come straight to us.
All right, Brian, let's be honest. None of us like to feel left out, especially when it comes to money. And when your coworker brags about their Bitcoin gains or your neighbor says they doubled their portfolio in six months, it triggers an emotion in us that we want to identify that fear of missing out, or FOMO for short
Brian: FOMO, Bob. FOMO. FOMO. FOMO. FOMO can cause a lot of problems in terms of making terrible financial and otherwise decisions. So, the world of investing, you'll feel some pressure just from the people you're golfing with or people at a cocktail party. Everybody's talking about, you know, something that you weren't aware of or you didn't do. And that may or may not be a good idea. But what your brain kicks into is, have I missed out on an opportunity? Is there something out there that I should do, that I should be doing right now? And how can I fix that problem?
Well, so, maybe there's people out there that you know. You know somebody's got a solid retirement plan. They got everything they need, a couple of million in assets. But they read this one article about AI, and all of a sudden, they've pivoted their...you know, a good chunk of their portfolio toward the big names in AI. Good idea, bad idea? I say, not so much because they did that with their emotions, not with their logical brain of, does this help my plan? Do I need this kind of growth, or am I just in the casino playing with poker chips?
Bob: All right. Well, let's get down to brass tacks here. I mean, how many of your clients come to you with this kind of stuff? Hey. I love the plan, Brian. Everything's fine. I think people get bored sometimes. They get bored with their plan because it works so well. So, they just create this FOMO emotion. Again, back to needing to do something, or wanting to do something, or introducing some juice to the whole situation. Do you have clients that come to you with that? And how do you deal with it?
Brian: Yeah. I'm going to go another way on you, Bob. I'm going to go with myself on that one. We feel this, too, as advisors. We run into it, too. So, I was actually...my family is considering an investment. And I talked to another advisor here at Allworth, who had some experience with it. And his answer was, why do you want a more complicated life? And that put me on my heels because this was a private equity type thing with some moving parts to it and all that. And I hadn't even thought about that. I was just interested in the...you know, it's just a portion of my portfolio and so on and so forth. But there's moving parts to any decision like that that you make.
So, it is always valuable to just take a breath and figure out what the big picture is. If I'm going to throw...and let me be clear. I have absolutely no problem with people wanting to play with the stock market. Go ahead. Knock yourself out. Just don't do it with the notion that I'm going to double my money next week and all my problems will be solved. Do it with the idea that this is an interesting thing. And I like the story behind this investment, and I want to participate in it. And that's fine. Just don't hang your entire financial future on it.
Bob: Yeah. And I'll tell you how I handle this, because if somebody comes at me and at me and at me long enough, I just tell them, hey, fine, let's split your portfolio into two pieces. And I've done it this way for over 30 years. We got your serious money. This is the money you can't afford to lose. And it's got to take care of you for the rest of your life. And then there's play money. And as long as they're willing to talk about it, I'm like, hey, have at it. Let's slice off a piece of play money. I'm not going to manage the play money for you. You go do it.
Brian: Yeah. The serious money...
Bob: Go show me how good you are. Look at all your charts, day trade it. You know, buy AI stocks to your heart's desire, gold, whatever you want to do. Go get in and out of all of it. Get back to me in six months, and let me know how you're doing, because it can...oftentimes, if people actually have to go out and do this, and have the time and the inclination, and study all the details, and execute on what they think can be very easy to do, I like to give them six months to a year to actually go out and do it, and then come back to me and let me know how it's going.
Brian: Yeah. The serious money permits the existence of the play money. And so, you have to think about it in terms of, you know, if I want to throw a very small amount, you know, into something, take a flyer is usually the word that people use. That's perfectly fine. But it shouldn't be treated as something that's going to change your life. If you're willing to bet half or more of your portfolio on some crazy bet, then I'm going to go ahead and say that you're going to create financial problems for yourself down the road. On the other hand, if you're willing to invest a small amount, then even if it doubles, triples, it's not going to change your life anyway. So, just remind yourself of how important this really will be to you.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, let's get into how that FOMO or fear of missing out emotion starts to rear its ugly head. What causes people to feel that?
Brian: Yeah. Well, what causes it is exactly that. It's the fear. You know, somebody's doing something. Somebody has found an opportunity that I'm aware of, but I'm not executing on. Am I missing out? That's where it comes from. But the very first thing that happens is it causes you to abandon your overall plan. If you had a solid financial plan, which you'd mentioned it earlier, Bob, a solid financial plan can be boring. Let's call it what it is. Right? I've built my machine. It's in good, solid running shape. Now what? You know? If you're a person who's into repairing cars, the most boring thing is a couple of cars in the garage that are running just fine. I want a project. I want to buy something and beat it up and fix it and so forth. Again, that's okay with a tiny amount of the portfolio. But you're going to be...you're forcing yourself to do things that you don't have control over.
Bob: Yeah. That's the key point here. The key point I want to drive home is make sure we separate play money from serious money, and make sure that we do not do anything that's going to violate the viability of that serious money, meaning your long-term financial plan. And as long as people are willing to do that, things tend to work out fine. And if they want to carve off that piece and get speculative, we just carve that out of the financial plan so we can always demonstrate for our clients the viability of that financial plan, factoring just the serious money piece.
Brian: Yeah. So, take three steps here. First, ask yourself, does this fit the plan that I've already put in place, or am I just reacting to that fear of missing out? Second one, look at those goals again. Maybe if you built a solid financial plan, make sure the goals still match what you want because things change over time. What are you really trying to achieve? And number three, talk to your advisor or a trusted accomplice or somebody else that knows the situation, and just get an opinion from an arm's length away.
Bob: Here's the Allworth advice. Chasing heat can often result in getting burned. A good financial plan keeps you cool. Next, the most valuable part of financial advice. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Here's the truth. When people think about financial advice, they think about investment picks, tax strategies, estate planning. And all those things are important. But maybe the most valuable thing your advisor should be doing, behavioral coaching, Brian.
Brian: Why do we know this? Well, Morningstar, which is a big investment research firm out there, has done some research. They've shown through those studies that good behavior, which means sticking with that plan and avoiding the urge to try to time the market, that can add 1.5% to 2% in returns annually. And that is not magic. That's guidance. That's somebody standing an arm's length away, looking at your situation. And again, this can be a professional advisor, it can just be somebody you bounce ideas off of and so forth, but just somebody to kind of act as checks and balances to your own decision making skills. That literally results in real dollars because somebody can pull in the reins on you if you're about to make a bad decision.
Bob: Yeah. I bring this up all the time, especially when people are kind of fee avoidant, kind of wanting to talk about the advisory fees, and why do we charge this, and what do they get out of it? I think the default provision most people or a lot of people could come to us with is, well, if I'm going to pay an advisory fee of 1%, 1.5%, what have you, my investment returns better be, you know, in excess of that every single year or you aren't doing anything. And all these studies have shown, people completely forget about the behavioral impact of being left to your own devices and making these decisions on your own to say nothing of the tax alpha and the other benefits that come with good financial planning. It's this behavioral coaching and taking people by the hand and helping them not make mistakes from which they can't recover that really add the value here at the end of the day.
Brian: Yeah. And again, there's nothing wrong with being a do-it-yourself-er as well, but you're going to run into these same things, same situations, even if you're making your decisions on your own, which again, is a perfectly acceptable way to go. I like to think of it in terms of reminding people that, hey, when the market goes down, that is not a failure. It's a failure if you lost a lot more than the market because you probably weren't invested in a very diversified manner to begin with. However, just viewing the normal ups and downs of a market as up is good, down as bad is a failure. I would compare that to, you know what, if it's raining. You know, if it's raining outside today, maybe we should just brick up these windows. Think of the money we'll save on heating if we just don't have any windows anymore. Because it's raining today, therefore, the sun will never come out again. That's not the way to think about it. A brief period of bumpiness, volatility, or losses is to be expected and dealt with, not to be attempted to be avoided. That's the trap that a lot of people fall into.
Bob: Yeah. What we're trying to do here is paint a picture of why you would want to work with a good, solid fiduciary advisor. And this isn't meant to be a commercial for Allworth. I mean, we do this kind of planning, but other people do it as well. The key is to find a good fiduciary advisor who cannot...who won't just sit there and tell you what you want to hear, but oftentimes tell you what you need to hear. Because at the end of the game, at the end of the day, job one here, at least in my mind, is to make sure all of our clients have above a 90% probability of meeting all their long-term financial goals and not running out of money in spite of what may come down and often will come down the road.
Here's the Allworth advice. A great advisor won't just manage your money. They'll protect you from yourself. Thanks for listening. You've been listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
Brian: Yeah. So, picture this. You've done everything right. You've built your pile of money. You've saved aggressively. You've done all the right things. You've checked all the boxes, but you still have that voice in the back of your head saying, "There's not enough, there's not enough, there's not enough." That's kind of where we all start. We start with this notion of scarcity. I don't have enough. I don't have enough. And the comparison I use with people when we're sitting down doing a financial plan is to say, hey, look at this pile of money you've grown now that you're in your late 50s, early 60s, whatever age. Now, think back. If you were told at 25 that you'd have this much money at this age, what would you have thought back then? And the answer is always, oh, my gosh, I thought I'd be in fat city. You know, I never thought I'd have this much money. Yet here we sit, worrying that there's just plain not enough. So, let's talk about those psychological hurdles that come in there.
Bob: Well, and that sense of scarcity, and I'll just be open about this, that's kind of how I was raised. And we can get into that if you want to. But it was always like, you want money, you got to go earn it. And there's never going to be enough. There's never going to be enough. It's that quasi West Side Green Hills mentality. You know, having a paper route when you're nine years old, and just working, working, working. That's kind of how I was raised. And it tends to feed into this next bias that we want to talk about, and that's action bias. And this is the idea that when things go wrong, anything goes wrong that will upset that giant nest egg we've worked so hard to build, you know, say the market drops 10% or so in a week, our instinct is we got to do something. We got to go into protection mode.
And for some of our clients, especially those used to running a business or managing big teams, doing nothing or inaction feels like failure because, let's face it, the thing that made us successful to a large extent is we were the problem solving people. Right? If something went wrong, our job was to fix it, fix it today, check the box, and move on. And it doesn't work that way. We can't fix the global economy in an afternoon, Brian.
Brian: Yeah, psychologically. This is really the same thing as, you know, sometimes when you're driving somewhere and you realize that, hey, I can get off the highway and take the back roads, and it's going to take longer. But at least I'll be moving rather than sitting on the highway. It doesn't help you in the long run. It doesn't help you at all to have taken that step. But in financial planning, it actually hurts you, like you said. So, we need to need to think of this in terms of, for example, with the market drops. Just think of in terms of this is something I should anticipate and I should be...I should know how to deal with it versus taking action to actually do something different in response to it.
Bob: Yeah. The market doesn't respond to hustle. It doesn't care if we try harder. And that's why, sometimes, the smartest move when you peel it all back is do nothing at all. And that's sometimes very hard for all of us to comprehend and grasp. Let's switch into another bias and, you know, kind of flipping the script here a little bit, over confidence. You know, we can get very overconfident in our ability to handle things or manage the market or manage our portfolio.
Brian: Yeah. Lots of people feel like, you know what, I've always been willing to put in that much more effort than the next guy. And that's how I got the job. And that's how I've done this and raised my family and so forth. I put that extra effort in. So, if I just do a little bit more internet research, I will find that one method, that one investment management philosophy that has all upside and no downside. Nobody says this. But this is...nobody says it that way. But this is sort of in the back of all of our minds, that I can control more than the next guy because I am willing to put more work in. And again, that works in 90% of the things you run across in life, but not in financial planning. Financial planning and investing is all about managing. It's 90% managing your emotions and 10% actually doing things with your investment.
Bob: And this is a good time to point out. There's an independent firm out there called Dowbar. Most people have never heard of this unless you're in our industry. But Dowbar basically just tracks investor behavior versus the markets. And it really tracks how decisions that are made by self-directed investors versus investors that have a good financial advisor working for them. What are the results? And these numbers, Brian, I've been in this industry over three decades now, and these numbers have never changed. The average investor out there underperforms the market. You know, a benchmark apples to apples market return by several percentage points per year. And it's 100% because of their behavior and the decisions they make with this overconfidence in thinking they can outsmart the market. Two to 3% a year is a big number, and you compound that over 20, 30, 40, 50 years, we're talking about real money.
Brian: Yeah. Another analogy I like to use to help people understand this is whether you're working with a financial advisor or if you're doing your own thing, that person or you are the weatherman. It is not the weatherman's job to stop the rain. It is the weatherman's job to give you a heads up on what might be coming and how you might want to prepare for it. If you take that mentality with financial planning and stop trying to prevent the "failure" of a down market...and a lot of people think of it that way. When the market comes down, I did something wrong. I must have failed somewhere. I will find that point of failure and never make that mistake again. And lo and behold, two, three, four years later, it happens again because we're focused on the wrong thing. So, be a weatherman. Tell people or tell yourself how to how to deal with it, not try to prevent it.
Bob: Yeah. Another one that crops up often is this...we'll call control illusion. This is another trap. Again, especially with people that are used to running things, controlling things, whether that's a business or a family, or you're a high-level executive that manages people, you are used to controlling the outcome. And we got to remind people all the time, you could control your planning. You could control your own behavior, but you can't control inflation, the Fed or global markets. And that illusion of control that we all sometimes walk around with, that can lead to micromanaging your investments or jumping in and out of things and trends in the short term. And that's one of the things that significantly harms returns.
Brian: Yeah. I think one of the concrete pieces of advice we can give people here is, by control, we mean...we're talking about controlling, again, your behavior. So, a way you can mechanically do that is make sure that the dollars you might need in the short run, a year, maybe it's 24 months or whatever, if you know you've got a certain pile of cash you need because you're spending it down or just pay the bills or you've got a big thing you got to do to the house, college tuition, so on and so forth, carve that out and make sure that the market doesn't touch it. That makes it okay for the stuff that you can't control to impact your longer-term investment.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Let's get into another trap that we see sometimes, and that's one that we will call status quo bias. Brian, you talked about this with an actual case example here earlier this week. Talk about what status quo bias can do to negatively impact our sense of enjoying our retirement.
Brian: Status quo bias is the notion that it ain't broke, so, why fix it, which most of the time is usually good advice. However, when we make this big transition into retirement, we all tend to hide behind this notion of scarcity. That's where we start. There isn't enough, isn't enough. I got to save, I got to save, I got to save. And then eventually, the light will eventually go on. Maybe you've done a financial plan or you put the pieces together, and you realize, you know what, there is enough. I can be done with that.
The big hurdle hiding behind the notion of scarcity is that unwillingness to start to spend down the nest egg. It is amazing to me. I just had this conversation yesterday with somebody who just had no idea what the money machine that they had built for 30, 40 years, there's no concept of what that could spit out for them. So, for example, a million dollars can easily spit out $40,000 a year in terms of income. Two million dollars is $80,000. You created somebody else with a job in your household that brings in income. People have a hugely difficult time getting over that hurdle of spending the nuts that I've been saving for the winter.
Bob: All right. And then another emotional trap we want to call out here and address is what we'll call the herd mentality. It's common. We don't see it too, too often with our clients that come in, but we all feel this. You know, our golf buddy brags about, you know, the big profit they made in NVIDIA stock or Bitcoin, or you got a coworker that moved all their money to cash one day before the market went down 4%.
Brian: And still talks about it to this day.
Bob: And they want to brag about it by the coffee machine. Yeah, we've all been there. And then we get enough exposure to that kind of stuff. And we start questioning our own plan. Well, wow, I'm not doing anything. My plan is just static and sitting there. I got to do something, do something. And let's face it. The financial media does not help either. There's always a new, hot trend, a scary headline. I mean, they're just constantly peppering us with reasons to be fearful or greedy or both in the same segment of the same show.
Brian: You know, Bob, when I was a kid, one of the first exposures I had to investments in stocks and things like that — this would have been in the '80s, I'm dating myself a little bit here — was when my dad and his brothers, my uncles, and some of their friends would all kind of pass around their latest stockbroker who gave them a tip that worked out. And it took me a while to figure this out. But by the time I entered the career, I realized that there had been, like, three, four, five of these guys who got hot one time and gave everybody a hot stock tip, and that he was the guy for a while or the lady or whatever. And then it would all kind of fade away. And it was never good for more than one or two. And there's nothing wrong with the advice these people are giving. But it's the wrong approach to make investment decisions based off of one good turnout.
Bob: Here's the Allworth advice. Wealth amplifies your options, your choices, but it also amplifies your mistakes if you allow emotion to take over. What did you learn from your parents about money? We'll look at the impact that may be having on your behavior, coming up next. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Hey. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. You can listen the following morning during your commute, or at the gym, or taking your walk around the neighborhood. And if you think your friends or family could use some financial advice, tell them about us as well. Search "Simply Money" right there on the iHeart app or wherever you find your podcasts.
Straight ahead at 6:43, the hidden force that could steer your portfolio in the wrong direction. All right, Brian, we talk a lot about financial planning, tax strategies, and investment allocation. But what if the most important part of your financial life was something that happened decades ago at your kitchen table growing up?
Brian: The money script is what we call this. We've all had some understanding of financial success and/or failure ingrained in us from an early age. Very rarely, it seems, do families actually talk about this. Clients always frequently say that this is not a topic. We didn't talk about money. It was taboo. You just didn't discuss it because you didn't want to compare yourselves to other people or show the dirty laundry or any of that stuff. It's not very often at all that somebody will say that they had a plan from kind of the beginning.
So, you know, for me personally, I remember my first exposure to all this was sitting in front of my dad's Apple IIc at the time. And I was...my job was to program in some fancy calculator or something that he got out of "Money" magazine. And that was the very first time I remember paying attention to what dad was doing. And why are you putting money? Why are we doing this? Why are not outside playing baseball? Well, he was planning for the future more so than I think a lot of his peers were at the time because he kind of could see on the horizon that they needed to have a little better plan. But that's where mine came from. A lot of people just don't have anything in their background. And that's how we get younger people that make messes of themselves in early years.
Bob: But how did that money script growing up impact how you think about money today?
Brian: Obviously, Bob, I came to a conclusion of where I...you know what? I don't think I want to work for the rest of my life. So, I may as well get into helping people figure out how not to work for the rest of their lives, because by the time it's my turn, I'm going to be really gosh darn good at it.
Bob: Sounds like you made a good choice. All right.
Brian: I did.
Bob: Well, I'll share mine. I mean, mine is a story of scarcity. And it was all well-intentioned. I mean, I'm the first of three kids in our family, you know, the first child. So, the parents are usually pretty buttoned up and strict and, you know, by the book with the oldest child. And I vividly remember sitting at the kitchen table. I'm nine years old, Brian. And my parents are looking across the dinner table from me and saying, "All right. You're nine years old now. You're not getting an allowance again, ever. You want a candy bar? You want to go to the movies? You want to go, you know, do whatever, you got to go earn that money." So, there we go. I'm out having two or three paper routes, and I'm starting to think every day, this all depends on me. I got to make the money. I got to work. And that has really stuck with me, you know, until today. And there's always that voice in the back of my head saying, it's not enough. It's not enough. It's not enough. The only person that's going to take care of you is you. And that can lead to some interesting behavior.
Brian: You know, funny you mentioned paper route. That was also my first experience with earning money and blowing it. So, I had a paper route up and down Jessup Road that had three candy stores on it. There was Whistles Deli, Supreme Nut and Candy, and something else. I didn't bring home a dime from that job.
Bob: So, you had literally spent the whole thing before...
Brian: I would go get my money and then spend it on candy before I got back home.
Bob: My middle son would love hanging out with you.
Brian: I've gotten better. I don't do this anymore.
Bob: All right. Let's talk about it. You know, one that these money scripts, a behavior that this can foster in us, and it's called money avoidance. This is the belief that money is bad or that wealthy people are greedy. Folks that have this money avoidance tendency, they tend to feel guilty about their wealth. They might give too much money away as a result or under invest because they feel guilty about having what they consider to be too big of a nest egg actually grow more. It could really set us back.
Brian: Yeah. And sometimes I also see it...not so much greedy where they feel guilty about it, but just terrified of it. There are a lot of people out there who will bring all their life savings to us to do a plan and invest, and then dump it on our doorstep so we can manage it. And then we can't get a hold of them sometimes to review the plan. It's interesting to me that people just want to avoid the topic.
Bob: Yeah. Another one that we need to nail down here is what we'll call money worship and this belief that more money will solve all of our problems. And we see this in folks who keep chasing the next dollar even when they don't need it. And we kind of talked about this already this morning or this afternoon. But we know people with millions in investable assets who still feel broke. They feel bad about taking a vacation. They feel like, you know, if I spend any of this money, that means I'm going to run out. And that's not a good thing either.
Brian: Yeah. And I see this a lot of times where people...again, not necessarily from greed. For whatever reason, they get...they're fixated on the dollar amount. You know, I had somebody the other day who told me that I'm going to retire when I hit $2 million. And my answer to that is, how did you come to that exact dollar figure? Why is it that you know you need $2 million? If they've done a plan and they figured out here's my cash flow that'll exist, here's what I need to supplement, and the answer is $2 million, that's one thing.
But for a lot of people, it's simply, well, I'm kind of in the ballpark of that anyway. So, I just want to squeeze these last few years of work out so I can get over the hump. And a lot of times, people end up sacrificing unnecessarily. Heaven forbid you do all those things. You save a little more money, and the market decides to take a chunk away. Are you really going to work an extra two, three, four years, put off retirement because '22 happened? A lot of people had to make that decision, again, because they're worshipping that dollar figure. I want to see more zeros and commas with my name on it.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Here's another one, Brian. And we run into this one often, money status. And I think, a lot of times, this is passed down to us from parents and grandparents, or peers. And it's just the idea that our self-worth or that net worth number on that financial plan, the net worth equates with our self-worth. It's our whole identity. And you see this with people who overspend to "look successful" to their neighbors and peers. Hey, the guy parked next to me at the country club has this kind of car. My car works just fine. It's super nice. But, boy, I got to have the same car as this guy next to me. Kind of the whole keep up with the Joneses mentality. And that can result sometimes in lifestyle creep, and you end up spending more money because you think you can, not because it aligns with your true financial goals.
Brian: Yeah. And I think, a lot of times, people run into...I want to do these things. I feel like I've got the money. My cash flow supports it. I've got a strong salary and good cash flow coming in, but I haven't sat down to figure, just because I can afford something now, what impact does that have in the future? This actually works in the opposite direction, too. People sometimes have absolutely no idea what they can get away with. So, they do nothing. The whole point of this is, as always, figure out what it is that you need to do and what resources are required to do it. Just because you can afford something this year, doesn't mean you should because you may be sacrificing something you haven't yet thought of in the future.
Bob: Yeah. Sometimes people don't actually use this word, but the sentiment comes across. It's almost like, well, I deserve to have this because I've worked hard. Well, there's no such thing as you deserve or what...it is what it is. You've got to have a financial plan and follow it. Now, if your plan suggests that you can do and have some nice things that are really important to you, then by all means, let's do it. But not often, but sometimes, and I'm sure you've gotten these calls or emails, too. I think sometimes clients will go out and buy the RV or book the three cruises, and then tell us after the fact because they knew if they asked us in advance whether this is going to work, they knew the answer would be no. So, they'll just tell us after the fact and ask for forgiveness rather than permission. Does that ever happen with you?
Brian: Oh, yeah. The answer is, well, it's your plan. It's not my money. You don't need permission to spend your own money. I'm just telling you what the outcome might be.
Bob: Here's the Allworth advice. Your biggest financial challenge might not be math. It might be a childhood story that you've never questioned or really gotten your emotional arms around. Next, why reinforcing what you already believe could wreck your financial future. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. One of the most dangerous things in investing isn't inflation, taxes, or even market downturns. It's your own brain, specifically the way it filters information to match what you already believe. It's known in the behavioral finance world as confirmation bias. And, boy, this is a big one that I want to make sure we dive deep into and tackle tonight, Brian.
Brian: Bob, tell me if you've run across anybody like this lately. They're absolutely convinced that the market is coming down. It's at an all-time high, and it just can't go any higher. It's coming down. They got this information from articles online. Every article they read is worse than the last one they read, and it's just kind of backing up on them. What they don't realize, however, though, is Google and social media is doing this on purpose because all they care about, all those companies care about is making sure your eyes stay glued to that screen. So, if this guy's interested in bad news about the market, then absolutely, we're going to serve it up on a platter for him because that'll keep him here, looking at these ads. And that's how we all make money. We, being Google and social media and so forth. That is confirmation bias. They know that you are seeking out opinions, and you'll be happy to read more things that you already agree with. So, they're going to shove it in your face.
Bob: Well, this is one of the benefits. You know, you and I have both been doing this a long time. So, we've got many clients. And I don't know about you, Brian, but, you know, I'm going to talk about politics here for a minute because, depending on who the occupant is in the White House and who's controlling Congress and all that, I can almost predict, you know, from each side of the aisle, the four or five clients that are going to be constantly in my ear, telling me how and why the entire global economy is going to collapse because so and so is in the White House, and they're purposely ruining the country. Do you have those little handful of clients that, you know, come out of the woodwork depending on who's occupying the White House at any given time?
Brian: Okay. I'm going to hit you with a phrase here, Bob. I rehearsed this on the way in, knowing we're going to talk about this. Political passion has no place in prudent planning. You like that? [crosstalk 00:22:05].
Bob: Wow. That's a lot of Ps. I'm not even going to try to repeat that.
Brian: Thank you. Thank you. I rehearsed, like I said. Anyway, no, yeah, clients all the time...we all...and it's not...you know, there's nothing wrong with this thought process. We're simply looking for that mechanical button or the lever that we can say, if this, then that. If so and so is in office and in control and I don't like them, then that means I should do this black and white process, meaning liquidate everything or go to gold or whatever. We have this all the time. But in reality, the history shows that the market could absolutely care less who's in office. It goes up no matter who's in office because that's how the economy works. There are always more and more people buying more and more things.
Again, I'm talking about the longer term, not the short-term swings, which we can't control or predict. But the economy will function underneath presidents and leadership of any stripe. And there is ample history going back through...all the way back through the Great Depression and including the most recent administrations that it just doesn't matter who's in charge. That causes short-term swings and heaven knows we've seen enough of those. But in the longer term, generally speaking, things go up. Just don't let the short term wag the dog.
Bob: Yeah. I've already made kind of the cardinal rule mistake here mentioning politics. So, I'm going to use another one here at the risk of angering even more and more people. And that's talking about the importance of having both spouses in a room when we do planning, and we talk about risk tolerance and all that. Because, Brian, I don't know about you, I find almost always, the people that are coming to me with this deep embedded confirmation bias, almost 100% of the time, it's men. It's men.
Men and their egos, or our egos, we want to be right. We want to predict the future. We want to protect our family, all that stuff. And we come in thinking we already know how it's all going to work depending on who's in the White House or what have you. And we start consuming media sources to just confirm that bias, where I find that the women are way more level headed, even keeled. And that can oftentimes balance out a good financial planning review by making sure both spouses are in the room, we're hearing from both spouses, and we're kicking around this confirmation bias, you know, identifying the elephant in the room, and hopefully hunting it down and killing it so we can move on with more productive conversations.
Brian: If this, then that. If this happens, then I know I'm going to do that. That way, I'm forcing it to be predictable, and I'm forcing myself to pretend, and I'm going to put that in caps, pretend that I have control over this because that's how, as a man...like you said, as a man, I want to fix things. I want to tackle it, take it on, take the bull by the horns, and fix the problem. But no, it doesn't work that way. As a matter of fact, that assumption can get us into a lot of trouble. That confirmation bias comes back to haunt us in terms of forcing us to think that we have way more control than we do.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. And Brian, it seems, at least to me, the more money people have, the more costly a mistake can be if we allow this confirmation bias to really take hold on major decisions. Do you find the same thing?
Brian: Yeah, absolutely. And the thing to remember, too, a lot of people, when they've built a good, solid nest egg, a market decline of 1% can look like a massive amount of money. If I have $10,000 and I lose 1%, well, I just lost $100. That's not obviously a huge amount of money. But if I have $5 million and the market takes 1% away, that's $50,000. But it's the same 1%, and it's affected by the same strings of the market no matter how big the investment is. So, the idea there is pay attention to the percentage, not the dollar amount. I just had this conversation the other day with a client who has really worked up over a 1% loss.
Bob: Yeah. I mean, people don't like looking for dissenting views or anything that goes against that bias. And I think, to talk about...you know, we've talked about what not to do. Let's spend a little time talking about what to do. And I think you got to get different ideas from different people, people that are intelligent, people that are well-read, people that can check their emotions at the door. And that helps, you know, kind of filter out some of that strong bias.
And this is where I want to give kudos to our chief investment officer here at Allworth, Andy Stout, because he is wonderful at this. And every so often, I don't know, Brian, every three or four months, if a headline comes across or something happens where I'm starting to get a little worked up, it's always...I enjoy having a little dose of reality fed to me by Andy. Because he'll pull out the inflation scorecard, he'll pull out all the data that's actually is making the markets move in one way or another. And when you actually look at the reasons behind why markets move, and how they move, and when they move, it has literally nothing to do usually with what we see in the headlines or these articles that we want to consume just to confirm our own embedded biases.
Brian: Yeah. I would agree with that. It's a great tool that we have to be able to rely on our own teams internally, of course.
Bob: Again, it's important to get a second opinion. And this is where a fiduciary advisor can provide enormous value. And we are not here or a good advisor is not here to agree with everything that you're thinking with your fears or hype or articles that you've read. We are here to challenge those assumptions and protect you from blind spots that you might have.
Here's the Allworth advice. Confirmation bias isn't just a mental quirk. It's a financial risk. And the more wealth you have, the more damage it can do if you don't identify and address it.
All right. Your neighbor just bought NVIDIA. Should you jump in? We'll talk about a powerful factor that could pull you away from your financial plan next. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. If you have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question, and it'll come straight to us.
All right, Brian, let's be honest. None of us like to feel left out, especially when it comes to money. And when your coworker brags about their Bitcoin gains or your neighbor says they doubled their portfolio in six months, it triggers an emotion in us that we want to identify that fear of missing out, or FOMO for short
Brian: FOMO, Bob. FOMO. FOMO. FOMO. FOMO can cause a lot of problems in terms of making terrible financial and otherwise decisions. So, the world of investing, you'll feel some pressure just from the people you're golfing with or people at a cocktail party. Everybody's talking about, you know, something that you weren't aware of or you didn't do. And that may or may not be a good idea. But what your brain kicks into is, have I missed out on an opportunity? Is there something out there that I should do, that I should be doing right now? And how can I fix that problem?
Well, so, maybe there's people out there that you know. You know somebody's got a solid retirement plan. They got everything they need, a couple of million in assets. But they read this one article about AI, and all of a sudden, they've pivoted their...you know, a good chunk of their portfolio toward the big names in AI. Good idea, bad idea? I say, not so much because they did that with their emotions, not with their logical brain of, does this help my plan? Do I need this kind of growth, or am I just in the casino playing with poker chips?
Bob: All right. Well, let's get down to brass tacks here. I mean, how many of your clients come to you with this kind of stuff? Hey. I love the plan, Brian. Everything's fine. I think people get bored sometimes. They get bored with their plan because it works so well. So, they just create this FOMO emotion. Again, back to needing to do something, or wanting to do something, or introducing some juice to the whole situation. Do you have clients that come to you with that? And how do you deal with it?
Brian: Yeah. I'm going to go another way on you, Bob. I'm going to go with myself on that one. We feel this, too, as advisors. We run into it, too. So, I was actually...my family is considering an investment. And I talked to another advisor here at Allworth, who had some experience with it. And his answer was, why do you want a more complicated life? And that put me on my heels because this was a private equity type thing with some moving parts to it and all that. And I hadn't even thought about that. I was just interested in the...you know, it's just a portion of my portfolio and so on and so forth. But there's moving parts to any decision like that that you make.
So, it is always valuable to just take a breath and figure out what the big picture is. If I'm going to throw...and let me be clear. I have absolutely no problem with people wanting to play with the stock market. Go ahead. Knock yourself out. Just don't do it with the notion that I'm going to double my money next week and all my problems will be solved. Do it with the idea that this is an interesting thing. And I like the story behind this investment, and I want to participate in it. And that's fine. Just don't hang your entire financial future on it.
Bob: Yeah. And I'll tell you how I handle this, because if somebody comes at me and at me and at me long enough, I just tell them, hey, fine, let's split your portfolio into two pieces. And I've done it this way for over 30 years. We got your serious money. This is the money you can't afford to lose. And it's got to take care of you for the rest of your life. And then there's play money. And as long as they're willing to talk about it, I'm like, hey, have at it. Let's slice off a piece of play money. I'm not going to manage the play money for you. You go do it.
Brian: Yeah. The serious money...
Bob: Go show me how good you are. Look at all your charts, day trade it. You know, buy AI stocks to your heart's desire, gold, whatever you want to do. Go get in and out of all of it. Get back to me in six months, and let me know how you're doing, because it can...oftentimes, if people actually have to go out and do this, and have the time and the inclination, and study all the details, and execute on what they think can be very easy to do, I like to give them six months to a year to actually go out and do it, and then come back to me and let me know how it's going.
Brian: Yeah. The serious money permits the existence of the play money. And so, you have to think about it in terms of, you know, if I want to throw a very small amount, you know, into something, take a flyer is usually the word that people use. That's perfectly fine. But it shouldn't be treated as something that's going to change your life. If you're willing to bet half or more of your portfolio on some crazy bet, then I'm going to go ahead and say that you're going to create financial problems for yourself down the road. On the other hand, if you're willing to invest a small amount, then even if it doubles, triples, it's not going to change your life anyway. So, just remind yourself of how important this really will be to you.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, let's get into how that FOMO or fear of missing out emotion starts to rear its ugly head. What causes people to feel that?
Brian: Yeah. Well, what causes it is exactly that. It's the fear. You know, somebody's doing something. Somebody has found an opportunity that I'm aware of, but I'm not executing on. Am I missing out? That's where it comes from. But the very first thing that happens is it causes you to abandon your overall plan. If you had a solid financial plan, which you'd mentioned it earlier, Bob, a solid financial plan can be boring. Let's call it what it is. Right? I've built my machine. It's in good, solid running shape. Now what? You know? If you're a person who's into repairing cars, the most boring thing is a couple of cars in the garage that are running just fine. I want a project. I want to buy something and beat it up and fix it and so forth. Again, that's okay with a tiny amount of the portfolio. But you're going to be...you're forcing yourself to do things that you don't have control over.
Bob: Yeah. That's the key point here. The key point I want to drive home is make sure we separate play money from serious money, and make sure that we do not do anything that's going to violate the viability of that serious money, meaning your long-term financial plan. And as long as people are willing to do that, things tend to work out fine. And if they want to carve off that piece and get speculative, we just carve that out of the financial plan so we can always demonstrate for our clients the viability of that financial plan, factoring just the serious money piece.
Brian: Yeah. So, take three steps here. First, ask yourself, does this fit the plan that I've already put in place, or am I just reacting to that fear of missing out? Second one, look at those goals again. Maybe if you built a solid financial plan, make sure the goals still match what you want because things change over time. What are you really trying to achieve? And number three, talk to your advisor or a trusted accomplice or somebody else that knows the situation, and just get an opinion from an arm's length away.
Bob: Here's the Allworth advice. Chasing heat can often result in getting burned. A good financial plan keeps you cool. Next, the most valuable part of financial advice. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Here's the truth. When people think about financial advice, they think about investment picks, tax strategies, estate planning. And all those things are important. But maybe the most valuable thing your advisor should be doing, behavioral coaching, Brian.
Brian: Why do we know this? Well, Morningstar, which is a big investment research firm out there, has done some research. They've shown through those studies that good behavior, which means sticking with that plan and avoiding the urge to try to time the market, that can add 1.5% to 2% in returns annually. And that is not magic. That's guidance. That's somebody standing an arm's length away, looking at your situation. And again, this can be a professional advisor, it can just be somebody you bounce ideas off of and so forth, but just somebody to kind of act as checks and balances to your own decision making skills. That literally results in real dollars because somebody can pull in the reins on you if you're about to make a bad decision.
Bob: Yeah. I bring this up all the time, especially when people are kind of fee avoidant, kind of wanting to talk about the advisory fees, and why do we charge this, and what do they get out of it? I think the default provision most people or a lot of people could come to us with is, well, if I'm going to pay an advisory fee of 1%, 1.5%, what have you, my investment returns better be, you know, in excess of that every single year or you aren't doing anything. And all these studies have shown, people completely forget about the behavioral impact of being left to your own devices and making these decisions on your own to say nothing of the tax alpha and the other benefits that come with good financial planning. It's this behavioral coaching and taking people by the hand and helping them not make mistakes from which they can't recover that really add the value here at the end of the day.
Brian: Yeah. And again, there's nothing wrong with being a do-it-yourself-er as well, but you're going to run into these same things, same situations, even if you're making your decisions on your own, which again, is a perfectly acceptable way to go. I like to think of it in terms of reminding people that, hey, when the market goes down, that is not a failure. It's a failure if you lost a lot more than the market because you probably weren't invested in a very diversified manner to begin with. However, just viewing the normal ups and downs of a market as up is good, down as bad is a failure. I would compare that to, you know what, if it's raining. You know, if it's raining outside today, maybe we should just brick up these windows. Think of the money we'll save on heating if we just don't have any windows anymore. Because it's raining today, therefore, the sun will never come out again. That's not the way to think about it. A brief period of bumpiness, volatility, or losses is to be expected and dealt with, not to be attempted to be avoided. That's the trap that a lot of people fall into.
Bob: Yeah. What we're trying to do here is paint a picture of why you would want to work with a good, solid fiduciary advisor. And this isn't meant to be a commercial for Allworth. I mean, we do this kind of planning, but other people do it as well. The key is to find a good fiduciary advisor who cannot...who won't just sit there and tell you what you want to hear, but oftentimes tell you what you need to hear. Because at the end of the game, at the end of the day, job one here, at least in my mind, is to make sure all of our clients have above a 90% probability of meeting all their long-term financial goals and not running out of money in spite of what may come down and often will come down the road.
Here's the Allworth advice. A great advisor won't just manage your money. They'll protect you from yourself. Thanks for listening. You've been listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.