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Financial Planning > Behavioral Finance

Saving Face and Facing Fears: Why Investors Make Rash Decisions

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Parents always advise their children to be content with what they have and rightly so. Yet whether they know it or not, everyone is trying to keep up with the Joneses in some way, shape or form, and this common human affliction can have a huge impact on financial decision making.

“Let’s face it, we all want what our neighbor or our friend has,” says Paul Puckett, an investment advisor and author of a recently published book entitled “Investiphobia: Overcome Your Deepest Investment Fears.”

Puckett believes that the fear of not keeping up with the Joneses is a major impediment to proper financial planning. People generally lack confidence in themselves, he says, and they’re bound to think that their neighbor or their friend has a sounder handle on finances and has made better-paying financial decisions than they have. But the desire to have what their neighbors have, or what they perceive their neighbors have, can often lead people to make rash investment decisions that are detrimental to their portfolio, he says.

The fear of not keeping up with the others is a very real fear that financial advisors need to help their clients work through.

“You don’t want to feel like you’re missing out on something good, so if someone is telling you an uncommonly positive story, you’ll want to be a part of it,” says John DeGoey, a financial advisor with Burgeonvest Bick in Toronto. 

A big part of the problem, he says, is that people benchmark themselves against what they think their peers are doing, but without really knowing what those peers are actually doing.

“As advisors, we really need to help our clients figure out their financial goals and get them to not worry about what their neighbors and friends are doing,” he says. “We need to work through with people so that they understand their circumstances, so they can protect themselves from themselves, because most people are their own worst enemy.”

But overcoming any kind of fear, particularly the fear of not being as financially successful as one’s peers, is very tough, and advisors trying to help their clients realize what their fears are have their work cut out for them.

In his book, Puckett outlines 18 fears—all of which are perfectly common and affect most people around the world—and all of which impede proper financial planning. These include, among others, the fear of losing income; the fear of inflation; the fear of buying the wrong financial products; the fear of making mistakes and the fear of disappointing parents—even if those parents are deceased.

Ironically, one of the greatest fears that people suffer from is the fear of not finding the right financial advisor, even though they know that they need an advisor to help them work through their fears and help them make the proper financial decisions.

“I really don’t think that people are wise enough to work through their fears on their own or do things solo in the long term,” Puckett says.

To this end, a section of his book is dedicated to helping people select an advisor who’s right for them and with whom they feel chemistry—which in his opinion, is the most important factor for a client to consider.

Advisors, too, need to feel chemistry with their clients, and they need to understand their clients’ fears properly. Puckett is at work on a second volume, which will serve as a guidebook for advisors; it will enable them to recognize the different fears their clients have and then provide them with the tools to help people work through those fears.

“It’s impossible for a person to have all 18 fears at once, because some are opposite to each other, such as the fear of loss, which is not the same as the fear of inflation and produces a different kind of investment behavior,” Puckett says. “The hurdle advisors face is getting people to recognize their fears, and then for people to realize they have made a mistake based on fear, but that it’s okay, and to move forward from there for a better future.”


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