Biases affect how you act, and the personal goals you’re working towards could distort how you perceive risk, rewards, and information. Indeed, the more important the goal is to you, the more likely it is that bias occurs.
Being aware of when bias might occur – and what might trigger it – could help identify when it may be affecting your decisions. Read on to find out more about the relationship between bias and your goals.
Your personal goals could mean you’re more likely to react emotionally
Biases are mental shortcuts that help with quick decisions. You have to make hundreds of small decisions every day, from what time to set your morning alarm to which route to take to work. Biases can help you tackle these daily decisions effectively. However, they can be harmful when you’re making important decisions.
One factor that affects how biases influence you is emotion.
Your financial objectives are often very important to you. They might represent long-term security or the opportunity to realise long-held ambitions. As a result, emotions are often attached to them, which can trigger biases that are easy to overlook.
If you’re excited about a goal you’re working towards or worried about what happens if you don’t reach your target, you may experience stronger biases.
Imagine you’re investing for your child’s education. It’s an important nest egg that will affect your child’s future. In this case, fear of missing the goal could make you reckless and cause you to take more risk than is appropriate. Alternatively, if you’re worried about investment volatility, you may decide to hold the money in cash and miss out on possible investment returns altogether.
Similarly, if you’re starting a new pension to support your retirement, your other assets could shape your emotions and how bias affects your decisions.
If the new pension will be your only source of retirement income, it will be essential for your long-term financial security. As a result, the emotions attached to the pension are likely to be stronger, which could trigger bias.
In contrast, if the pension will supplement your retirement income and you have other assets, such as additional pensions or investments, you might be better placed to make logical decisions.
A financial plan can help you keep biases in check
While it’s impossible to eliminate financial biases, a financial plan can help you keep them in check.
First, a financial plan will identify your goals. Then, you can start to understand what you need to achieve them. For example, if you want to retire at 55, you might consider how much money you’ll need from a pension and other assets to live comfortably.
Once you have your financial goals set, it’s time to look at what steps you’ll need to take to reach your target.
In the retirement example, this might include increasing pension contributions, reviewing how your pension is invested, or maximising employer contributions.
By creating a clear pathway to securing your goal, a financial plan can help you feel more confident about your future.
Your financial strategy also focuses on the long-term. Rather than assessing how to use your money now, it’s about how you can use your wealth over decades to create the life you want.
As emotional responses are often short-term, this long-term focus can help you keep bias in check.
If you read a headline about markets “plummeting”, your immediate response may be to worry about what it will mean for your pension and retirement. Remembering that your retirement plan covers decades, rather than weeks, and considers potential market volatility could put your mind at ease. In turn, you may avoid rash decisions that harm your ability to reach your objectives.
What’s more, when working with your financial planner, they can point out where bias might be influencing you.
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Working with a financial planner can help you establish why you’re investing and then create a strategy that reflects these goals. Please get in touch if you’d like to arrange a meeting.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
