Behaviors That Ruin Your Finances

If you ask me what I think the biggest part of investing is, I will always say that it is mindset.

It can make or break your finances, so I think it’s important we talk about it.

Especially as physicians, we've invested years and decades of hard work to reach where we are. 

However, despite being high earners, many of us find ourselves in the category of "HENRY" : High Earners Not Rich Yet. 

Surprisingly, according to a 2022 Medscape report surveying 13,000 physicians, only half of them reported a net worth of over a million dollars, and that was typically not until the age of 55.

Part of the reason behind this might be our lack of financial education. 

We haven't been taught to be financially savvy, and money is not a subject frequently discussed in our field. 

That's where the financial freedom movement comes in. 

Its mission is to encourage us to think about money differently and consider what would happen if we were no longer able to work.

The ultimate goal is to reach a point where our money works for us, even when we're not actively earning. 

Because as Warren Buffet famously says, "If you don't find a way to make money while you sleep, you will work until you die."

So through conversations with hundreds of physicians, I've put together five of the most common biases or behavioral patterns that many of us fall victim to, myself included! 

It's essential to understand these patterns and recognize the disadvantages they bring, which is why in this post we’re going to explore these five biases and discuss how we can shift our mindset to avoid their pitfalls. 

Here we go!

1. Not Having a Financial Plan

The first common issue I frequently encounter when discussing finances with physicians is the lack of a financial plan. 

Even among hardworking individuals from two-physician households with substantial incomes, many admit to having insufficient savings and little understanding of where their money goes. 

It's important to note that these individuals are not spending recklessly but rather find themselves trapped in a cycle of working tirelessly just to make ends meet. 

Consequently, they don't have the time or mental space to think about investing or developing a financial strategy.

Another group of individuals lacks a clear plan altogether. 

They tend to impulsively invest in projects brought to them by friends, succumbing to emotional decisions rather than following a well-thought-out approach. 

I have personally experienced this issue myself, having allocated my money into various investments while neglecting a balanced asset allocation.

The key to correcting these financial shortcomings lies in creating an Investment Policy Statement (IPS), a personalized roadmap that aligns with one's specific goals and resources. 

Sit down with your spouse or significant other to develop this statement, determining how much you aim to save each month and defining your preferred asset allocation—how much to allocate to stocks, bonds, and real estate.

Remember, as retirement approaches, adjusting this allocation is crucial to managing risk effectively.

Equally important is considering how to respond to market downturns, whether in stocks or real estate. 

Having a written plan in place ensures that emotional impulses do not guide your decisions during challenging market periods.

In my personal experience, writing down my financial intentions proved immensely powerful when I started making financial adjustments. 

So for that reason, I strongly encourage everyone to create a comprehensive IPS that factors in their unique goals, resources, and risk tolerance, collaboratively with their family members. 

Putting this plan in writing provides a solid foundation for a successful financial journey.

2. Loss Aversion

The second behavior that I've noticed frequently is loss aversion. 

It's understandable that many individuals fear losses and base their actions on avoiding them. 

This often leads to investing primarily in CDs, bonds, or money market funds, as they seem safe and secure, but they come with their own drawbacks. 

For instance, the income generated from these investments is often taxed at high marginal rates, leaving investors with only a fraction of what they initially expected.

Clickbait headlines can exacerbate this fear, causing investors to make decisions based on exaggerated or misleading information. 

This is especially true for those who have experienced financial struggles in the past, leading to money trauma and a strong inclination toward risk-free or low-return investments. 

However, in reality, these choices may not protect their wealth adequately or keep up with inflation.

It's important to recognize that feeling comfortable with market investments may never come easily, and there will always be reasons to delay or doubt one's entry into the market. 

But the real danger lies in staying out of the market altogether, as that perpetuates a cycle of trading time for money and limits financial growth.

To mitigate risks and succeed in different market cycles, it's crucial to plan and educate oneself about de-risking strategies. 

In the context of real estate syndications, GW Capital has shifted toward lower-risk assets with high cash flow and safer investment structures. 

They prioritize deals with fixed interest rates, substantial income-to-mortgage ratios, and a focus on value-add opportunities.

For anyone seeking a terrific real estate deal in the current market environment, GW Capital's latest offering in Indiana might be worth exploring. 

It emphasizes safety and aims to provide investors with a solid foundation for their financial future.

3. Recency Bias

Next up is recency bias, a common decision-making flaw that can lead to unfavorable outcomes. 

Recency bias occurs when we base our decisions solely on recent events rather than considering the bigger picture or long-term trends.

An example of this was evident during the pandemic when many individuals became drawn to option trading and day trading because those activities were yielding impressive results. 

However, this was a classic case of recency bias as people were overly focused on short-term gains, ignoring the historical performance of these strategies over the years.

Moreover, during market corrections or crashes, recency bias can play a detrimental role. 

Individuals who experienced past crashes, like the '08 crash, might be overly fixated on the idea that the next crash will be just as severe and lengthy in recovery. 

Consequently, they might engage in panic selling, missing out on potential opportunities for their investments to bounce back swiftly.

To combat recency bias, it is crucial to take a holistic approach to decision-making. 

Relying on longer-term historic data, examining multiple market cycles, and maintaining a strategy that accounts for different scenarios can be more effective in navigating investment decisions. 

Remember, you can control certain aspects of your investments, such as tax savings and forced depreciation, irrespective of market conditions.

For example, real estate investor, Dr. Cory Fawcett, invested during the '08 crash and managed to thrive because he held onto his properties and allowed the market to recover. 

Similarly, during the pandemic, those who adhered to their investment plans and remained focused on their criteria saw positive outcomes.

The key takeaway is to resist the lure of recency bias and maintain a balanced perspective that considers both short-term trends and long-term historical data. 

By doing so, you can make more informed decisions, avoid unnecessary losses, and seize opportunities even in unpredictable market conditions.

4. Timing the Market

Some individuals advocate for timing the market, believing they can predict the best moments to buy low and sell high. 

However, I stand on the other side of this debate, where I firmly believe that time in the market is a wiser approach than trying to time it perfectly.

Timing the market requires getting two critical decisions right: knowing when to sell at the peak and when to buy at the lowest point. 

In reality, consistently making accurate predictions is extremely challenging, even for industry experts. 

Few individuals have managed to do this consistently throughout their careers.

Reflecting on the events of 2020, during the pandemic-induced market drop, not many of us seized the opportunity to invest at the all-time low. 

Such instances are often lost opportunities. 

Personally, I remained cautious and didn't pump more money into my stock portfolio, partly influenced by external opinions.

Instead, I adhered to the strategy of dollar-cost averaging, consistently investing over time. 

While I did this with real estate, I didn't fully apply it to my stock portfolio during the market decline. 

This emotional decision was one that many of us might have made.

The key lies in understanding that timing the market isn't as effective as staying invested for the long term. 

Time in the market allows one to weather ups and downs, making good deals great and bad deals acceptable. 

And in my opinion, all of this just points to the value of having a well-thought-out plan and sticking to it. 

Because, while it's not always easy to remain steadfast and resist the temptation to time the market, having a plan in place makes it a lot easier to be confident in your investments. 

You can trust in your knowledge that the market tends to rise due to inflation and other factors. 

And you can feel safe knowing that by investing consistently, your portfolio will be dollar cost averaged.

5. Herd Mentality

The last factor I want you to consider is herd mentality, which I know many of us can relate to, especially in the aftermath of the pandemic.

Even young children like my eight-year-old son have become aware of the concept of FOMO (the fear of missing out). 

The pandemic brought attention to various new investment opportunities, such as cryptocurrency, option trading, I-bonds, GameStop stock, NFTs, and even exotic purchases like expensive turtles.

However, it's essential to recognize that these novelties lack the decades of data needed for sound investment decisions. 

Emotional investing driven by FOMO often leads to buying at high prices and selling at low ones, which is speculative rather than truly investing. 

Instead, the better approach is to listen to various opinions, maintain a conservative mindset, and seek consistent returns based on long-term patterns.

And in terms of real estate, it's crucial to focus on cash flow rather than speculative appreciation. 

Relying on long-term data can provide valuable insights and help in making informed choices. 

So, the motto I’ll leave you all with from Tony Robbins is that we should “prepare for and profit from anticipating winter, rather than reacting impulsively to it.” 

Happy investing!

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