This article offers general information for Fortune 500 employees and retirees and should not be acted upon without obtaining specific advice from a qualified professional. The information is not intended as benefit, investment, tax, or legal advice, nor the solicitation for the purchase or sale of any security.
Making Judgments
Upon years of working with Fortune 500 employees and retirees, we have identified several topics that may prove beneficial for you to understand.
Behavioral retirement advice and what it is.
Three highly uncertain historical timeframes.
The brain's decision-making process.
The role of emotional intelligence in better financial decision-making.
Behavioral finance and the role of heuristics.
How to modify behavior – the 4 Rs.
Extreme Turmoil
We will be evaluating financial and retirement decision-making for Fortune 500 employees during periods of extreme turmoil.
Addressed historical time frames are comprised of events occurring in the past two decades:
2000-2002 –The Tech/Telcom Bubble and 9/11
2008-2009 –The Financial Crisis and the housing bubble
2020-Ongoing–COVID-19 pandemic and downturn
Decision-Based Finance
Integrates retirement planning and modern portfolio theory with recent findings in the fields of neuro economics and behavioral finance to achieve an emotional state for making better financial decisions.
Behavioral Finance Theory
An emerging field confronting us with our deeply irrational selves
The influence of psychology on the behavior of investors and it's subsequent effect on the markets
Help to explain how we make choices and decisions
Conventional Financial Theory
Conventional finance is predicated on the belief that
Both the market and investors are rational and unemotional
Investors make decisions without being biased by emotions
Investors have self-control and are not confused by cognitive errors and information processing errors
Behavioral Finance Theory
Traits of behavioral finance:
Investors are treated as “normal” not “rational”
Investors have limits to their self-control
Investors are influenced by their own biases
Investors make cognitive errors that can lead to wrong decisions
Three Uncertain Periods:
S&P 500 Index
U.S. Initial Jobless Claims, Per Week
Total U.S. Nonfarm Payrolls
GDP Annualized Growth Rate
During the last 75.75 years (since 1945) there have been 190 declines of 5% or greater.
Sources: Standard & Poor’s Corporation; Copyright 2020 Crandall, Pierce & Company
The Market's Reaction to a Financial Crisis
Cumulative total return of a balanced strategy: 60% stocks, 40% bonds
In US dollars. Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy: 12% S&P 500 Index, 12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% FTSE World Government Bond Index 1-5 Years (hedged), 10% FTSE World Government Bond Index 1-3 Years (hedged), 10% ICE BofAML1-Year US Treasury Note Index. Assumes monthly rebalancing. For illustrative purposes only. S&P and Dow Jones data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. ICE BofAMLindex data © 2019 ICE Data Indices, LLC. FTSE fixed income indices © 2019 FTSE Fixed Income LLC. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Dimensional indices use CRSP and Compustat data.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See the “Balanced Strategy Disclosure and Index Descriptions” pages in the Appendix for additional information.
“When dealing with people, remember you are not dealing with creatures of logic, but creatures of emotion.”
-Dale Carnegie
Physiology of the Brain
The human brain has not changed much in terms of size and weight
More of history finds humans as hunter-gatherers and farmers
Scanning the horizon for what might eat us was more important than evolving towards making complex financial decisions
Our brains are designed better for these primitive tasks
The Three Sections of the Brain
Outer layer – rational center
It handles complicated, cognitive processes like objective rational decision-making; the cerebral cortex
Middle layer –the emotional center
The limbic system & the amygdala translates outside stimulus into emotions
Inner layer –habit center
Not thinking; we just do it automatically In addition to breathing & body functions, we form habits
Brain Anatomy
Layers of the brain communicate via neural pathways and chemicals
Emotions like fear and anxiety can be so powerful that they have the effect of disabling the rational center of the brain
With stimulus, the brain processes emotions faster than a rational thought
The quality of decisions is impaired when our brains act reflexively
Brain Tendencies
Brains are better wired for survival than to deal with complex financial decisions
The brain has evolved slowly and is better suited to life 10,000 years ago and is not suited to keep up with the changes of the last 100 years
Technology makes it very easy to impulsively spend and invest. Two potentially dangerous things to do impulsively.
Brain Systems
Reward System
Produces Dopamine
Chemical plays a role in motivational component of behavior, we sense pleasure
Danger System
Adrenal gland produces cortisol (stress) & adrenaline
Emotional Brain
Stock market volatility
While emotionally painful, is not life-threatening
Our nature is to sacrifice the accuracy of our rational brain for the speed of the emotional brain
This is how we can get a closet full of shoes
Adapting Your Brain
The Brain Can Be Changed
We can change how we respond to financial situations
Neuroscientists refer to the brain as “plastic”
Neuroplasticity means we can create new habits so that when faced with challenging financial situations we can respond in ways that are in our best long-term interests
Financial Choices
Most people do not like thinking about finances
Retirement decisions are analytical, cold, and oftentimes abstract
Linking financial decisions to a financial life plan helps people make decisions in the pursuit of a satisfying happy life after Fortune 500.
“Life is 10% what happens to you and 90% how you react to it.”
-Charles R. Swindoll
Emotional Intelligence
The ability to perceive and control one’s emotions and use those emotions to guide thought and behavior
Many experts suggest emotional intelligence correlates better to happiness and success than traditional IQ
IQ vs EI
IQ = Brain Processing Power
EI = Relating & Communicating with Others
Book Smarts vs. Street Smarts
Braininess vs. Savvy
Ei 4 Unique Skill Sets
Self-Awareness
Self-Management
Social Awareness
Relationship Management
Self-awareness is the First Skill Set Required for Achieving Ei
Noticing our emotions and giving ourselves an accurate assessment
Pivotal to understanding ourselves
What is Mindfullness?
Is a tool to help cultivate self-awareness
Emotional self-assessment is easiest when we are alone, quiet, relaxed and inward
Meditation can help cultivate this state
Being mindful benefits
Shown to reduce stress and anxiety
Helps us to accept our experiences
Improves sleep quality
Helps with better concentration
Improves memory
Cultivates greater internal optimism
Engenders self-confidence and self-worth
Engaging in Mindfullness
Focus on breathing, listening (scanning) to your body
Notice thoughts without judgements
Examine underlying assumptions and beliefs
Connect feelings and thoughts for better decision making
Self-Management is the second skill set needed to achieve EI
Use emotions to assist thinking, including changes to our environment
Recognizing the role emotions play in decision making
Investors with good self-management skills have an increased ability to monitor their emotions
They can then be flexible and adaptable when responding to changing situations
Social Awareness is the third skill set in achieving EI
The ability to identify and understand another’s emotions
The nuts and bolts of financial planning and investment management are improved by effective and open dialogue
Better communication improves outcomes
Social Awareness
Having empathy and listening intently fosters self-reflection and openness in the listener
Helps to be able to see others’ contributions and how to effectively build relationships
Fosters better communication between partners/spouses
Relationship Management is the fourth skill set in achieving EI
Inspirational leadership
Strategic decision making
Cultivating a team environment
Consensus building
Community connections and strong relationships
Conflict management skills
Financial Self-Control & Self-Management
Financial self-control recognizes that “things” do not equal happiness
Wealth is income not spent, it is deferred consumption
Material consumption can distract us from activities that do improve happiness and quality of life
A simple lifestyle is much easier and less stressful to maintain
Heuristics
Emotional and impulsive decision making relies on certain mental short-cuts to make quick decisions
They rely upon people’s biases developed from:
Life experiences
Preferences
Perspectives
Heuristics Very Commonly Biased
They could lead to incorrect estimates and sometimes serious errors
Used to simplify complex problems that might otherwise require more time and consideration
Recognize your Biases
We all have mental biases; they are short cuts for the many thousands of daily decisions we make
Some mental biases cause us to ignore key information
Or attach too much importance to one piece of information
Or encourage decisions that are misguided by biases
These are entirely natural and unavoidable but the more skilled we are at recognizing these biases, the better our financial decision making
Four Kinds of Bias
Self-Deception– Tricking ourselves into thinking we know more than we do
We are closed off to information that we need to make an informed decision
Simplification– We make shortcuts and oversimplify.
Emotion– Decisions made when we are angry, sad, happy, etc.
Affects the types of decisions we make
Social influence – How we are influenced by others
Myopic Loss Aversion
Most investors suffer from myopic loss aversion
The tendency to compare the performance of their portfolio from the perspective of avoiding a possible loss rather than potential gain
They have a greater sensitivity to losses than gains and a tendency to evaluate outcomes frequently
Don't Overthink
Weighting past experiences too much in decision making
Similarity of objects is confused with the probability of an outcome
Using stereotypes that color decision making
In US dollars. Performance data is historical and does not predict future returns. Indices not available for direct investment. See index descriptions in the appendix.
Don't be Overconfident
Putting too much emphasis on one’s predictive abilities and knowing what the future holds
Illusion of control –people think they have control over a situation when in fact they don’t
Over-Confidence
Timing optimism –where people overestimate how quickly they can accumulate wealth over time, overestimate security selection and market timing
Desirability effect –when people overestimate the odds of something happening because the outcome is preferable to the alternatives “wishful thinking”
Nasdaq Composite: 2010-2021
Anchoring
Failing to adjust to changing or new information
Heuristic revealed by behavioral finance
Rely too much on pre-existing information and first data points
Confirmation Bias
Look for confirming rather than disconfirming evidence
Looking for information that agrees with us (“echo chamber”)
Political Affiliation Influences Economic Perception
Percentage of U.S. adults who rate national economic conditions as excellent or good
Pew Research Center, July 2019, “Public’s Views of Nation’s Economy Remain Positive and Deeply Partisan.”
Heuristics Availability
Describes the way in which people assess the probability of an event by the ease with which they can remember a similar event
The more easily we recall something from memory the more likely it is to be true
The common effect leads us to believe other people think like we do because our opinion dominates our considerations
Illusion of Money
Investors think in nominal results without figuring in inflation
They are making investment decisions while not looking at real returns
Bias Toward the Status Quo
When forced to make a complex decision with uncertainty, people tend to procrastinate and delay their decision
Often happens when it comes to saving for retirement
Doing nothing is easier
The Narrative Fallacy
Make a decision based on the way information is presented as opposed to facts themselves
We love stories and we let our reference for a good story cloud the facts and our ability to make rational decisions
Emotions and Bias: A Dangerous Mix
How is Your Investor Psyche
Risk Tolerance
People who are less worried when taking greater levels of risk are considered to have a high-risk tolerance
People who are less willing to take risk are risk averse
Risk Capacity
A person’s ability to take financial risk based on their financial resources
Financial Capability
Defined as an individual's capacity based on financial knowledge, skills and access to manage resources effectively
Reducing Bias
Decision readiness is impacted by fatigue, distractions, visceral influences and individual differences
To reduce biases, we must modify the decision maker
Spend time educating yourself, take an alternative view and use proven checklists
Life is Full of Unknown Variables
There are many things we do not control and admitting this is a necessary first step in being able to plan for it
We cannot know when our life or that of a family member will be significantly changed
We cannot know when our employment will be disrupted
We cannot know what is going to happen with the overall economy, stock/bond market, real estate
Planning for Uncertainty
Most Fortune 500 employees desire to make sense out of our lives, so we set goals
Being deliberate about aligning values to goals helps keep us on task toward building a meaningful life
Writing down goals enhances our commitment and makes us responsible for the choices we make
Researchers Say You’re
42% more likely to act on your goals if you write them down.
Certainty in the Face of Uncertainty
There is no shortage of opinions and prognostications, and it is natural to want to know the future, but it is important to know that there is a certainty of uncertainty
Manage resources in an “all weather” way and build in a “margin of error”
Account for the certainty of uncertainty and reduce the temptation of trying to know the future will help to better manage the potential outcomes
How To Protect yourself
Being extremely well-diversified across a variety of financial instruments
Using debt only very prudently
Use insurance to transfer some of the risks of uncertainty to an insurance company
Have a financial plan but know that things will not go exactly according to plan. You’ll change.
Consider these five Elements:
Why the 4rs are Important.
We can better balance between the emotional and the rational sections of the brain:
Emotions sacrifice accuracy for spee
Rational thinking is more accurate but not quite as fast
We are hard wired this way, but we can gradually change so we can make better decisions
Be Aware and Recognize
Stop whatever you are doing to take notice of everything you are thinking, feeling and doing
Pay attention to the objective facts surrounding the potential decision
Check Your Awareness
When managing emotions, you begin with recognizing the role they play
As we have learned, they are involuntary and come with physical sensations like heart rate, tension, sweat, etc.
Recognizing this is the key
The act of recognizing gives your rational logic side time to work
Looking back
What values are important and how should they influence the choice?
What biases might be influencing the situation?
Be Aware and Reflect
By increasing awareness of what we are experiencing and how we react to inbound stimulus it helps us perform better
Changing the source of stimulation to something internal that is based on values helps logic take control from emotion
Practicing being reflective is a good part of self-care and going about it intentionally works
Reflection Techniques
Deep breathing is at the heart of most relaxation techniques
Diffusing emotions happens only with several deep and slow breaths
Reflect on the big picture of life, your values and economic reality
Emotions make exciting opportunities and scary news developments fertile ground for bad decision making
Know your big picture: Finances, Family, Goals, Health
This helps make sure your decisions are not impulsive
Be Real
Your ideas about the situation by stating the most positive, realistic outcome for the decision you are about to make.
Stay True to Yourself
To create positive change, we must change our attitude rather than our circumstances
Learning to look at things in different ways
Admit, using our reflection about our habit patterns to see the big picture helps us to re-interpret whatever financial situation we are in
Stay Present
Emotionally stimulating events tend to tilt ourselves positively or negatively and away from our usual rational mind
Acknowledging that you do not need to predict the future to succeed financially is a valuable first step
Trust Yourself
Most everyone has a baseline:
Positive or negative
Sense of well-being –thriving or struggling
Our own view of our intelligence –high or low
Optimists need to be careful because they get overconfident
Pessimists tend to be overconfident that they know things will not work out well
Both types trust their instincts
The 4 R's Responsivity, Recognize, Reflect and Reframe
Make a decision that is consistent with your values and goals that are properly aligned.
Responsible decisions aligned with our values
The quality of our response is dependent on the quality of the first 3R’s
Recognizing –What am I thinking and feeling?
Reflecting –What biases do I have? What have I not considered? Who is affected and what are the consequences?
Reframing –How realistic is this, and am I too positive or negative?
Financial Security and Sound Decision-Making
Good financial decisions promote happiness
When decisions are in alignment with values it can increase the chance of having a meaningful life
Growing inner life capacities like love, generosity and empathy is better than acquiring more “things” in the external life
Be satisfied with what you have, stop moving the goal post.
Values and Goals Alignment
Aligning values to goals then to behaviors helps you create the best backdrop for finding financial meaning
When we are in alignment, we are at our best
It is an intentional process of doing things on purpose, with purpose
Values are different for everyone
They are an expression of what’s most important
They are an attitude about your life
Behavioral & Goals
Behavior puts the living into our values and goals
Behavior is what we do including our thoughts, emotions and actions
As we already know, emotions sacrifice accuracy for speed
Thus, we must take time to reflect on our values
Write down goals and behaviors that seek alignment between them
Financial Satisfaction
Having the correct amount in cash
Having the correct asset allocation
Feeling free from being debt-free
Monitoring spending and establishing control
Having clear communication with spouse or partner
Investing in an active social life and hobbies
Engaging in social spending versus consumer/materialistic spending
Financial Displeasure
Sustained fear, stress and loneliness will alter biological systems and is bad wear and tear on the mind and body
Sustained happiness is more important than how happy a person is on a single occasion
Emotional vitality is having a sense of enthusiasm, hopefulness and engagement
Negative emotions can harm the body
The Retirement Group is a nation-wide group of financial advisors who work together as a team.
We focus entirely on retirement planning and the design of retirement portfolios for transitioning corporate employees from Fortune 500. Each representative of the group has been hand selected by The Retirement Group in select cities of the United States. Each advisor was selected based on their pension expertise, experience in financial planning, and portfolio construction knowledge.
TRG takes a teamwork approach in providing the best possible solutions for our Fortune 500 clients’ concerns. The Team has a conservative investment philosophy and diversifies client portfolios with laddered bonds, CDs, mutual funds, ETFs, Annuities, Stocks and other investments to help achieve their goals. The team addresses Retirement, Pension, Tax, Asset Allocation, Estate, and Elder Care issues. This document utilizes various research tools and techniques. A variety of assumptions and judgmental elements are inevitably inherent in any attempt to estimate future results and, consequently, such results should be viewed as tentative estimations. Changes in the law, investment climate, interest rates, and personal circumstances will have profound effects on both the accuracy of our estimations and the suitability of our recommendations. The need for ongoing sensitivity to change and for constant re-examination and alteration of the plan is thus apparent.
Therefore, we encourage you to have your plan updated a few months before your potential retirement date as well as an annual review. It should be emphasized that neither The Retirement Group, LLC nor any of its employees can engage in the practice of law or accounting and that nothing in this document should be taken as an effort to do so. We look forward to working with tax and/or legal professionals you may select to discuss the relevant ramifications of our recommendations.
Throughout your retirement years we will continue to update you on issues affecting your retirement through our complimentary and proprietary newsletters, workshops and regular updates. You may always reach us at (800) 900-5867.
Psychology Today –Duke Medical School, published Aged and Aging, between 2009-2015, 4,478 participants
University College, London; English Longitudinal Study of Aging, 2014
Academy of National Sciences
The International Journal of Coaching in Organizations; The Emotional Intelligence of Money.Brenda Smith 2009
Financial Intelligence; How to make smart, values-based decisions with your Money and Life. Doug Lennick 2010
Emotional Intelligence 2.0 by Travis Bradberry and Jean Greaves
Behavioral Finance, Individual Investors and Institutional Investors, CFA program curriculum; 2011
Behavioral Financial Advisor curriculum; Kaplan Learning and think2perform
Emotional Intelligence: The Overlooked Ability Required for Successful Financial Planning,” Brunner, Jason Brunner, Ph.Dand Pasztor, Jim MSF, MPASW, CFP; 2013.White Paper 1304
Primal Leadership: Unleashing the Power of Emotional Intelligence; by Daniel Goleman and Richard Boyatzis.Harvard Business School Publishing, 2013
Modern Portfolio Theory & Behavioral Finance, Module 3: College of Financial Planning, Behavioral Finance Module, 2015
Client Psychology, Certified Financial Planner Board of Standards, Inc. Center for Financial Planning Series, Book 2, 2018
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