When it comes to investing, we humans can't help but get in our own way. In fact, the very traits that have allowed us to survive and thrive as a species can make us bad investors. Let's discuss how human anchoring might be detrimental to financial freedom.
Our brains tend to give artificial or undue importance to certain facts and figures. We use data as a grounding mechanism and can be unwilling to move away from what we believe to be true.
Imagine you're on vacation in a resort town and are shopping for beach sandals. You see a pair of designer flip flops priced at $1,000. Then you notice a similar pair selling for $100. The cheaper flip flops look like a bargain after seeing the designer pair at ten times the price. Had you not seen the first pair, it's likely you would think the second pair was too expensive.
Or think about it in terms of a kitchen remodeling project: you're far more likely to spend $2,000 on a faucet as part of a $100,000 kitchen renovation, than to spend $2,000 at Home Depot when your old faucet needs replacing.
The same anchoring tendencies can apply to investments in your portfolio. We attach certain worth to stocks and bonds based on their value when we purchased them. Our brains lead us to classify some investments as “winners” and some as “losers.”
In reality, these labels might be arbitrary since the value we attach is based on a moment in time, not the forward-looking purpose of the holding. Moreover, we all want what we perceive as everyone “winners” in our portfolio, and the idea of selling one might be troubling, even if there's compelling reasons to do so. Working with an advisor can help mitigate the risk of anchoring and allow you the freedom to focus on what gives you joy in life.
Nicole Gopoian Wirick JD, CFP® is the President of Prosperity Wealth Strategies, a business she founded to focus on providing a high touch, concierge style approach to financial planning. Call today to explore how she can help you achieve prosperity.