Financial reviews provide you with a chance to ensure your financial decisions continue to reflect your goals and circumstances, and to assess if you’re on track. They could also be a useful way to reduce behavioural bias.
Over the last 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 could lead to mistakes as you might be basing your decisions on faulty reasoning or emotions rather than facts.
When you’re making large financial decisions, like where to invest a lump sum or how much of your pension to withdraw, eliminating bias might lead 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 options and recognising when emotions are influencing your views.
This is something financial reviews may help with too. Here’s how.
1. You may be less likely to make impulsive decisions
Regular financial reviews mean you can keep track of how you’re progressing towards goals, which could lead to you feeling more comfortable taking your time to review all the options.
While bias can affect any decisions you make, you’re more likely to recognise its potential influence if you’re not making a snap judgement. With more time, your emotions will change, and this might alter how you view an investment or other financial decision. Or you could have 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 might talk about your investment risk profile, long-term goals, and more. It means you could 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 you can turn to when you’re thinking about making changes to your financial plan. We could help you assess how the potential changes may affect your long-term finances and fit your goals.
Please contact us if you’d like to review your financial plan or talk to us about how we could help you manage your finances.
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.