Behavioral Finance – The Accumulator

Behavioral Finance – The Accumulator

Are you an entrepreneur, perhaps the first in your family to earn significant assets?  Do people describe you as decisive, strong willed, and confident—a natural-born leader?  Have you been willing to take on risk to gain a reward, whether through a daring career change or trusting an inexperienced-yet-promising new colleague?

If so, you may be an Accumulator.  In my previous blog post, I discussed how we all have different ways of thinking that color our decisions.  In behavioral finance, we’ve identified four major personality types, or patterns of how we act: Accumulator, Independent, Follower and Preserver.  This article will discuss the first and most aggressive personality type—the Accumulator.

What are common financial blind spots for Accumulators?

When it comes to investing, Accumulators are pros.  Many have first-hand experience in the precarious world of startups, and so understand that more and more risk is needed for a higher payback.  Accumulators also have the courage to stick to an investment plan through market pullbacks.

This doesn’t mean, however, that Accumulators are free from financial blind spots.  We all have gaps in our thinking from our natural biases, and Accumulators are no exception.  In reaching their financial goals, Accumulators should watch for these five common pitfalls: Overconfidence, Self-Control, Affinity, Illusion of Control, and Outcome.

Overconfidence Bias

While confidence sets Accumulators apart as resistant to market panic, it can cause problems if they lack the knowledge to back it up.  Accumulators may optimistically stake too much on one promising investment that later turns sour.

Self-Control Bias

Whether foregoing that early-morning jog for extra time in bed or taking one too many slices of a decadent desert, we’ve all felt the pull to enjoy now at the expense of later.  Accordingly, Accumulators must watch that today’s purchases don’t threaten tomorrow’s savings.

Affinity Bias

Loyal by nature, Accumulators often invest in a way that reflects personal values, such as socially responsible funds or patriotic portfolios of mostly domestic stocks.  These investments can drag down returns if they give disappointing results.

Illusion of Control Bias

Because many Accumulators actively earned their wealth, they may try to control investing just as they did their careers.  However, outside factors, such as the political climate or “animal spirits”, have the final say in how we’ll perform.  Accumulators might chase performance by trading in and out of positions, which can build up high trading costs without significantly improving returns.

Outcome Bias

Accumulators tend to cut to the bottom line.  When it comes to investing, however, they must be careful not to cut out too much.  Accumulators may rely on one metric, such as past returns, and not consider other key factors.

How can an Accumulator overcome these biases to achieve financial success?

The first step in beating these biases is knowing how the market works.  Your investment success depends on more than your actions.   Global economic trends, political debacles, demographic shifts, and even weather patterns all deliver the final verdict on our returns.   And, with such a complex and ever-changing mess of variables, not even the top economists have it all figured out.  In this case, individual investors can’t possibly spend enough time, energy, or will-power to guarantee good results.

Secondly, think long term.  Goal-oriented and driven, many Accumulators want results yesterday and so may enter increasingly risky investments.  However, investing is for the long haul.  It’s a marathon, not a sprint!  Accumulators must plan ahead for the next 5, 10, and 20 years.  Instead of chasing tomorrow’s returns, make careful decisions to succeed for decades to come.

Finally, never be afraid to get help.  While conviction makes Accumulators successful leaders, it isn’t enough when making decisions that impact your and your family’s financial future.  Protect your wealth by inviting professionals into your decision making.  A second pair of eyes can help catch blind spots before they hinder your financial dreams.

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