Financial reviews provide a great opportunity to ensure your financial decisions continue to reflect your goals and assess if you’re on track. They’re also useful way to reduce behavioural bias.
Over the past few months, you’ve read about why financial reviews are important and why you may need to update your plan following one. Now, read on to discover why they could help you make better financial decisions.
Behavioural bias could mean you make financial decisions that aren’t right for you
Behavioural bias refers to beliefs or behaviours that unconsciously influence your decision-making. It’s something you do every day, and it helps you make decisions quickly. For instance, you might give little thought to which way you’ll drive to the office or what you’ll eat for breakfast.
However, bias can also lead to mistakes, as you might be basing your decisions on faulty reasoning or emotions rather than facts.
When you’re making important financial decisions, like where to invest a lump sum or how much of your pension to withdraw, eliminating bias often leads to better outcomes.
Let’s say you have some money to invest. You overhear several co-workers chatting about how they’ve all invested money into a tech company that’s sure to deliver “huge returns” or become the “next Google”. You might feel excited about the opportunity everyone seems to be talking about, or worried that if you don’t invest right now, you’ll miss out. So, you decide to invest your money based on a bias sometimes referred to as “herd mentality”.
Yet, if you delved deeper or looked at the bigger picture you might find that the investment isn’t right for you. It could be a high-risk investment that doesn’t suit your risk profile, or the investment time frame isn’t right for your goals.
If you plunged ahead and invested your money without research, you could later find you’ve made a mistake because you’ve acted on bias.
There are steps you can take to reduce the effect bias has on your financial decisions, including giving yourself time to fully review the options and recognising when emotions are influencing your views.
This is something financial reviews may help with too.
1. You’ll be less likely to make impulsive decisions
Regular financial reviews help keep track of how you’re progressing towards your goals, which means you’ll feel more comfortable taking the time to review all your options.
While bias can affect any decision you make, you’re more likely to recognise its influence if you’re not making a snap judgment. With more time, your emotions will change, and this can alter how you view an investment or other financial decisions. It can also provide an opportunity to carry out research and find that your initial assumptions were inaccurate.
By reducing impulsive decisions, you could limit the effect unconscious bias has on your finances.
2. You may be in a better position to assess what’s right for you
Financial planning isn’t just about growing your wealth but understanding what’s right for you. As part of your financial reviews, you’ll talk about your investment risk profile, long-term goals, and more. It means you’ll develop a better understanding of different financial opportunities and how they fit into your wider plan.
So, following a financial review, you might feel more comfortable bypassing an investment opportunity that at first seems like a “must buy” because you know it’s not right for you.
3. You’ll have someone to turn to when you have financial questions
Sometimes, having someone to talk to is all you need to recognise bias in your financial decisions. Having another person look over an opportunity you’re interested in could give you a different perspective.
Working with a financial planner on an ongoing basis means you have someone to turn to when you’re thinking about making changes to your plan. We help you assess how the potential changes may affect your long-term finances and fit in with your goals.
Please contact us if you’d like to review your financial plan.
Risk warnings
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment 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.