3 Practices for Calm Investing

Many moons ago, when I was in my 20s and new to Knight-Ridder—then the second-largest newspaper publisher in the country—our treasurer pulled me into his office to discuss the company 401(k) savings plan and tell me why he considered it imperative that I join.

At the time, the company was matching 50 percent of whatever part of my earnings I was willing to put into the firm’s retirement savings program, up to 6 percent of my salary. “There is no better investment in the world,” the treasurer told me. “You will never get a better deal anywhere, ever,” he said.

“You’re being guaranteed a 50 percent return on whatever you decide to invest. You’ll never get that kind of return on investment anywhere else.”

Makes sense, right? But I didn’t jump at the chance, at least not that moment. Shortsighted indeed. But since then I’ve studied investments and why we make them and—more importantly—why we don’t.

Shlomo Benartzi, professor and co-chair of the Behavioral Decision-Making Group of the UCLA Anderson School of Management and one of the key pioneers in his field, cites three basic reasons why regular folk do not make the best decisions when investing in retirement savings plans:

Aversion to loss: Various psychological studies show that the idea of losing what we have is about twice as painful as the idea of gaining more is satisfying and rewarding. So accept that any investing for the future may feel uncomfortable! This fear of loss makes sense in an evolutionary time frame, but it make no sense in the modern world of compound interest and fast-moving financial markets in which you have to save for retirement.

Inertia: We keep things as they are. Many bright people lack an understanding of even the simplest financial concepts. If you try putting them through a traditional investment seminar steeped in these concepts, they will tend to stash their employer’s literature in a drawer.

Myopia: We think about what we want to have right now, ignoring future needs—whatever the price. Buying an attractive new pair of shoes when you need to pay the rent would fall into this category.

Dalbar, a Boston-based financial services firm, identifies several related culprits that plague investors of every stripe: these include media response—the tendency to react quickly to news without sufficient examination—and herding—copying the behavior of others despite unfavorable outcomes. In 2013, Dalbar estimated that psychological factors account for 45 to 55 percent of investment return shortfalls for retail investors in both stock and bond markets.

So, how do nonfinancial types make better investing decisions?

1. Make it automatic.

Employers have learned from the behaviorists that one of the best ways to get their workers to save anything close to what they need to save is by using an “autopilot” approach. So, if your employer offers you a 401(k) featuring automatic features such as auto-enrollment or auto-escalation—meaning your savings in the plan automatically increase over time—seriously consider taking advantage. If your employer doesn’t offer such an option, consider automatic investments from your own checking account. The key is to avoid having to make decisions that trigger our innate aversion to loss. Better still, get a fee-only investment advisor to set this up—and deal with the pain for you.

2. Get familiar with your emotional and physical responses.

If you hear of a disturbance in the market and check your investment balance online, notice and label your feelings (panic, nausea, excitement, etc.) Over time, you’ll learn how to use awareness of your emotional or physical responses to avoid overreacting.

3. Think long term.

Realize that isolated news reports don’t tell the whole story—not even close. Take the time to put the latest news in context and learn what else may be happening. Postpone making investment decisions until you’re over the shock of any unexpected development and you can consider the broader implications.

Ironically, the best way to be mindful about retirement investments for nonfinancial people may be to set up a system in which you don’t think about it. Just set it up before you stop thinking about it!