Behavioral Investing: Why Smart Seniors Make Stupid Mistakes with Their Money

In the Great Depression of the1930s, much like the severe economic downturn of 2008, market technician Ralph Nelson Elliott made an interesting discovery. He noticed equity markets move in similar and replicating patterns with degrees of trend. This new field, called Socionomics, explained market movements’ response to the prevailing social mood: euphoria and discouragement, optimism and pessimism. In fact, Robert Prechter, who recently popularized this area, warned of a top in the market in 2000 based on past patterns of market movement, in turn based on social mood. This major mood swing, called a Grand Supercycle, portends the magnitude of what may happen in a future framework without predicting week-by-week changes. This concept can be likened to a TV meteorologist who is able to warn of incoming storms a week from now based on his or her assessment of low-pressure areas, yet they may not be able to pinpoint the precise day next week the storm will occur.

A more important part of this grand market movement is how your clients emotionally respond to these seismic financial changes. It is widely thought that we are in a secular bear market due to the levels of debt incurred by the current administration. This treasury debt is competing with private debt, dampening the ability of private capital to influence future investment growth. Yet despite this evidence, many seniors believe we are in a bull market recovery. Even in that were true, it would be a very shallow recovery with a great deal of volatility in the short term. If your clients are caught on the wrong side of that volatility, it will greatly impact their retirement lifestyles. Here are a few of the traps your senior clients may find themselves in without the benefit of your financial guidance and counsel. As you read each of these objections and concerns from your clients and prospects, let them know first what the concept is and, if possible, relate anecdotes about other clients who have mistakenly believed similar notions and how you helped them.

The Objection: “I want to stay with my current advisor (even though I have lost 42 percent of my life savings over the last year).

This stupid investment mistake is called status quo bias.

To illustrate this mistake, consider an experiment performed by William Samuelson of Boston University. He showed clients three investment options: one stock with a 50 percent chance of staying the same, another stock with a 40 percent chance of staying the same, and finally, a U.S. treasury with a 9 percent return combined with and municipal bond with a 6 percent tax-free return. Which to choose? Forty-seven percent of those who were told they already owned an investment ignored their selection and remained with the investment they already had. This study showed that people are inclined to stay with what they have no matter how bad the performance. This also explains why some seniors will stay with a bad advisor.

The Fix: Tell your prospects about this research and also relate a story about a client who realized this mistake and how well they did by working with you.

The Objection: “I want to keep my money where it is. If I sell now, I will ink those losses.”

This stupid investment mistake is known as the sunk-cost fallacy — essentially throwing good money after bad.

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Kerry Johnson

About Kerry Johnson

Kerry Johnson, MBA, Ph.D. is the best-selling author of seven books including his newest, “Behavioral Investing: Why smart people make dumb mistakes with their money (available at www.KerryJohnson.com). Peak Performance Coaching (his one-on-one coaching program) promises to increase your business by 80 percent in eight weeks. To see if you are a candidate for this fast-track system, click on www.KerryJohnson.com/coaching
and take a free evaluation test. You will learn about your strengths and what is holding you back. For more information, call 800-883-8787 or send an email to kerry@kerrryjohnson.com.