We just wrapped up all the extension returns for the 2017 tax year and can finally place our gaze SQUARELY at what’s ahead.
Which is a funny thing to say because, for many of our clients, we are continuously looking backwards – playing catch-up because they haven’t checked in with us before the year is over, meaning we aren’t able to make proactive moves that we could if given more time.
Let’s get ahead of the game! Give us a call (503) 648-6184) or shoot me an email, and let’s set up a time to do some tax planning on your behalf. This is especially important if you own a business. With all of the changes this year, I anticipate that our calendar is going to be quite full in December with last-minute moves.
Taxes aside, there are plenty of mental “traps” that you can fall into if you don’t have the right mindset regarding money.
For years, we’ve worked directly with families in vastly different situations. And there are plenty of tactical maneuvers we advise — both from a tax standpoint, and a more holistic, financial standpoint — but nothing can replace the proper financial mindset.
Last week, I gave you two “mental mistakes” that you might be making with your financial decisions:
1) Wrong Mental Accounting
2) Subtle Price Anchoring
This week, I have a couple more.
Lisa Heckman’s “Real World” Personal Strategy Note
Financial Self-Sabotage (Part 2)
“You can’t undo the past … but you can certainly not repeat it.” – Bruce Willis
Aside from the tactical moves that we often help families and clients to make, there are often underlying psychological traps that can influence the mistakes we make with our money.
Self-Sabotage Trap #3: Fixating on losses, instead of moving on
Definition: Our consistent tendency to avoid loss, rather than acquiring gain.
Typical Example: An investor is more likely to sell a stock which has increased in value, rather than selling stock that decreased. Over time, her investment portfolio is made up of investments that have decreased.
Cure: Don’t think of selling a stock for less than you paid for it as being a loss. It can actually work as a gain for two reasons:
* Tax deduction (which can really help!)
* The other side of opportunity cost: opportunity GAINED (i.e., you can better utilize that money elsewhere)
So, don’t check your portfolio so often. If you don’t know you’ve lost money, you don’t experience the pain. (And riding the roller coaster of your portfolio’s value is a waste of emotional space.)
Since stock prices go up in the long run, the longer you go without looking at your portfolio, the greater chance of seeing a gain. Sometimes taking that loss really is the best thing you can do.
Self-Sabotage Trap #4: Financial Herd-Following
Definition: The tendency for us to want to do the same thing as a large group of others, with no thought to whether that action is rational or irrational.
Typical Example #1: Buying when prices are high because everyone else is.
Typical Example #2: Selling when prices are low because everyone else is.
Cure: Warren Buffett said, “Be fearful when others are greedy, and greedy when others are fearful.”
Keep this in mind when making your next financial decision. If everyone is telling you to buy this or buy that (i.e., gold, silver, real estate), then do the opposite.
In the financial investment world, if it seems too good to be true, then it usually is.
One idea is to write yourself an investment policy statement or contract.
Include factors such as:
* Investment objective
* Investment goals
* Desired asset allocation and diversification
* Summary of your risk tolerance
* Rebalancing schedule
Before making any changes, consult with this contract.
You can also take advantage of our inherent tendency to do what’s approved by others, to affect positive behavior in yourself. For example, let’s say you are trying to pay off debt. Tell your three closest friends, make an informal contract, sign your name at the bottom, and then email it to them. The pain you would incur from breaking that contract is high, relative to the pain of breaking your behavior if you went about it alone.
You might be making more mistakes than you realize. Perhaps these.