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Stupid money mistakes seniors make (part 1)

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Here are a few of the traps your seniors may find themselves in without the benefit of your financial guidance and counsel and the ways to fix them. As you read each of these objections and concerns from your clients and prospects, let them know first what the concept is and, if possible, tell stories about other clients who have mistakenly believed similar notions and how you helped them.

The problem

“I want to keep my money where it is. If I sell now, I will ink those losses.”

* This investment mistake is called “sunk cost fallacy”–throwing good money after bad.

These seniors believe their portfolio is still OK until they cash in. You can’t make changes to the portfolio because that would realize your loss. The smart thing would be to take the money out and move it into a more sound investment. The U.S. government gave $70 billion to General Motors in 2008. GM asked for $30 billion more in March of 2009. Both the Bush and Obama administrations fell into this trap, believing GM was too big to fail. But the ensuing GM default was the biggest sunk cost mistake in American history. If GM had been restructured in September of 2008, it could have saved the company billions and taxpayers nearly $100 billion. Because of the inability to recognize this falacy, every citizen in America now owes $600 on behalf of one company.

The Fix

Ask your clients, if they didn’t already own their investment, would they buy it again? That will bring them back to reality quickly.

The problem

I want to stay with my advisor (even though I have lost 42 percent of my life savings over the last year).

* This investment mistake is called “status quo bias.”

William Samuelson of Boston University showed clients three investment options: One stock with a 50 percent chance of staying the same, a U.S. Treasury Bill with a 9 percent return and a municipal bond with a 6 percent, tax-free return. Which to choose? Nearly half of those who already owned an investment ignored the options and remained with the investment they currently had. People are inclined to stay with what they have, no matter how bad the performance. This also explains why some seniors will stay with a bad advisor, despite the obvious.

The Fix

Tell your prospects a story about a client who realized this mistake and how well he did by working with you.