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A podcast designed to help retirees and those nearing retirement navigate finances and life planning with expert insights from financial advisor Trevor Lawson. Tune in for practical strategies and inspiring ideas to ensure your retirement years are purposeful, fulfilling, and truly your best chapter yet.
*Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Branch phone: 919-546-0400.
Welcome to The Retirement With and On Purpose Podcast. I'm your host, Trevor Lawson, and this show is all about helping you not just reach retirement. But truly thrive in it. You've put in the work. Now let's make sure you can enjoy every moment to the fullest.
Today's episode introduces a multi-part series on different cognitive biases. So cognitive biases impact all of us in, in our, our thinking, but I'm gonna really hone in on how it impacts our thinking from an investment standpoint. And what prompted this idea for this series is a recent publication from one of our investment teams at Signature Investment Advisors.
So in April of this year, when the market [00:01:00] was, was very volatile, they published an article. Introducing a couple of cognitive biases for investors to be aware of, and so I'm gonna revisit that publication today and talk about some of these biases for us to be aware of. So I'm gonna quote this article throughout, and there will be a link to it in the show notes, but technically, well, the article first and foremost is called Beware, high Watermark Thinking.
And so technically, a high watermark refers to the highest peak value an investment fund or portfolio has achieved. However, beyond its technical application, the high watermark concept profoundly impacts. Individual investor psychology, I'll, I'll give you an example here in just a second. Many investors instinctively use their portfolio's highest recorded value as a mental reference point.
When the market dips and the portfolio value falls below this peak, it feels like a loss, even if the portfolio has generated [00:02:00] significant positive returns over the long term. So this was very timely because in April, again, the market was very volatile at that time. A lot of us were seeing paper losses on our statements, but we were coming off of a two year very good run in the market.
So many, many investors had seen all time highs lately in their, in their accounts. And so when this volatility kind of reared its head, a lot of us, myself included, attached. Our portfolio's value to that recent high watermark making volatility, which is very, very normal and will continue to be a part of the investor's journey, feel a lot more impactful and dire because we were coming off of that recent high watermark.
So. This feeling I'm quoting again. This feeling is primarily driven by two powerful cognitive biases. And so these cognitive [00:03:00] biases I'm gonna introduce to today and again, several more over the, the course of the next couple of weeks, just helping us be more aware of how these play into how investors think about their, their money loss aversion.
A cornerstone of behavioral finance loss aversion describes the tendency for people to feel the pain of a loss. Roughly twice as strongly as the pleasure of an equivalent game. And that's, you know, if you think about a hundred dollars and you and your buddy are betting and you may find it a lot more difficult to, you know, to lose a hundred dollars than you would pleasurable for winning a hundred dollars.
That's, that's loss aversion in a nutshell. Most of us find it, uh, we get much more attached to an item when someone's going to take it from us than we do when someone gives us, you know, that same item I. The other here that that impacted the high watermark thinking was anchoring bias. So investors often anchor their expectations and [00:04:00] perceptions of value to a specific reference point, in this case, the peak value of their portfolio.
Subsequent performance is judged by this anchor making any value below it seem inadequate or like a failure regardless of the broader context. So again, this, this was all too timely. In April, this year when we were coming off a very, very good run in the market. It was easy. For all of us to get anchored to those, those high watermarks that we were seeing, those, those all time highs making a very normal pullback feel that much worse because our minds started to anchor to that, that new high point that we've seen in our portfolio.
So some strategies to think about, to overcome high watermark thinking, and in turn these two powerful cognitive biases. [00:05:00] One zoom out. So embrace the long term perspective. You always, I feel like a, you know, I, I'm beating a dead horse. Advisors always talk about the importance of the long term, the long term, and I'm sure clients get tired of hearing it too, but it's important.
Here, especially with handling these, these cognitive biases. So instead of fixating on daily, monthly, or even yearly fluctuations relative to the most recent peak, focus on your portfolio's performance over much longer timeframes, five, 10, or even 20 years zooming out, can really help the anchoring as well as that high watermark thinking.
So zoom out, embrace the long term is one strategy. Three others to consider, or excuse me, four others. So recognize your cognitive biases. So just being aware can, can really help us during these times of volatility. So that's my, my hope over the next couple of weeks is to make you more aware of these cognitive biases, and maybe next time [00:06:00] we experience a volatile patch in the market, you'll be more aware of your, your line of thinking around it.
Third, stick to the plan, the power of discipline, a well-defined investment plan. Crafted alongside your advisor can be a valuable tool against emotional decision making. Your plan should outline your financial goals, risk tolerance, time horizon, and target asset allocation. So have a plan and stick to it, you know, the power of discipline.
Fourth, resilience through diversification, a diversified portfolio across different asset classes. Geographic regions and sectors can help mitigate the impact of downturns in any single area. So diversification. Diversification, again, it's, it's redundant, but it's important because it helps smooth out the investment rod and really helps prevent these cognitive biases from getting in our way.
And then lastly, just keep in mind, volatility is [00:07:00] normal. Volatility is the price we pay for long-term growth potential. So. What we experienced in April and what we'll experience again numerous times along our investment journey is very normal. And keeping that in mind as well as being aware of these cognitive biases can really help and investor stay in their seat and embrace the ride up over time.
That's it for today. Thank you for your time. And I'll look forward to connecting again soon.
Thanks for tuning in to The Retirement With and on Purpose podcast. I hope you're walking away with new ideas and a fresh perspective on how to make the most of your retirement journey. And remember, retirement isn't the end. It's your time to live with purpose. Until next time, I'm Trevor Lawson. Here's to a fulfilling and thriving [00:08:00] retirement.