Sales and financial pitfalls. What do these two have in common? Let me give you two hints:
You walk into a retail store advertising 50 percent off store wide sale. You walk out the store after spending $150. Your budget was $80. Although it was over your budget, you did manage to walk out the store with more items for $150 than you could have without the sale.
When reading “financial crisis of 2008 to 2010” what images and emotions come to mind?
What they both have in common is fixation. For the majority of people, our minds are preoccupied with the idea of saving money on a sale and a memorable moment impressed upon our frontal lobe that seems to never fade.
The advertisement of a sale has no advantage unless you are saving money. Typically, we tend to overspend when there’s a sale which makes it difficult to save for retirement or other long-term goals. How many times have you or someone you know have said “oh, it’s only $40” (or another dollar figure) because, otherwise, the item would have never been bought for $80? It doesn’t stop there. Then, there’s something else that you have always wanted (it just happens to be that way because it’s a sale) and buy it. Next thing you know you are buying more than what you have intended. But you justify it because it’s a sale. But it’s up to you to not overspend. We anchor on the idea of a sale and automatically think we are saving money. Au contraire, a sale is an opportunity for the store to sell a higher quantity of their inventory.
Solution: if you want a sale to work in your favor where you are saving money, then set a spending limit. You will stay within your means and save money.
Financial pitfalls, such as the financial crisis of 2008 to 2010 have left a strong impression on our minds. A mix concoction of lack of trust in big companies, greed, loss of retirement funds, volatility, etc. have contributed to an inaccurate knowledge of doesn’t work! Resultantly, the average investor has reduced their contributions and lost sight of long-term investing. The challenge with the average investor is they are overly impressed with short-term gains. When it comes to investing it is crucial you are invested for the long-term. Does it necessarily mean you have to be invested 100 percent in equities/stocks? No. Many times the average investor is overly aggressive with stocks. It’s imperative that you have a properly diversified portfolio to minimize risk.
Holding on to such financial pitfalls can be more destructive. Studies have shown that investors who subject themselves to the daily financial news do worse than investors who tune it out.
Solution: instead of frequently checking your investments, cut it down to once or twice per year. Tune out the daily financial news so you are less likely to react emotionally to the natural ups and downs of the stock market.
Our emotions govern our decisions. At times, it can prove to be a setback costing us more money and losing sight of our investment objectives.