Are you devoted and loyal to friends and family? Do others see you as “even-keel” and “level-headed”? Are you content with what life has to bring instead of always reaching for unlikely, risky gains?
If so, you may be a Preserver. Behavioral finance gives us four major personality types: Accumulator, Independent, Follower and Preserver. In this article, we’re wrapping up this series with the most conservative type of investor, the Preserver.
Preservers are conservative, balanced, and steady. They emphasize financial security and preserving wealth over high returns. Preservers usually gained their wealth by working for a company, not by starting their own, and they care deeply for family members and future generations.
What are common financial blind spots for Preservers?
While Preservers aren’t likely to lose everything in a high-risk investment or whittle away their savings, they are by no means free of financial blind spots. In reaching their goals, Preservers may encounter five common pitfalls: Loss Aversion, Status Quo, Endowment, Anchoring, and Mental Accounting.
Loss Aversion Bias
No one likes losing, especially Preservers. Typically, they feel the pain of loss twice as strongly as the pleasure of gain. As a result, Preservers may hold a losing investment too long in the hope that it will recover, or sell a winner too soon in case the price falls back down.
Status Quo Bias
Once something is the “status quo”, Preservers often want to keep it that way. However, familiarity can blind us to areas of improvement. Creaking floorboards, dented gates, and slowly dripping sinks can all easily slip into the background as the “status quo”. Similarly, Preservers may fail to refinance a mortgage after rates drop or maintain an underperforming investment that drags down returns.
Whether it’s a grandmother’s wedding dress, a father’s gold watch, or a first car—people attach special value to objects given to them or owned for a long time. This same attachment can also apply to investments held for years or inherited from loved ones. Preservers should watch that the comfort of familiarity doesn’t keep them from objectively evaluating a lackluster position.
When making financial decisions, Preservers may become fixed to certain “anchor” levels, such as their purchase price or a recent high on the S&P. As a result, they may resist selling an investment until it rebounds back to this anchored level—which is never guaranteed!
Mental Accounting Bias
Preservers often classify financial assets into different mental “buckets”. They might have buckets for basic expenses, leisure, and fun, or perhaps buckets for an inheritance, bonuses, and gambling wins. While this approach can be an efficient way to keep track of investments, Preservers shouldn’t miss the “forest for the trees” and forget to examine their total asset allocation as well as its individual components.
How can a Preserver overcome these biases to achieve financial success?
First, take a step back—don’t let emotions rule your finances. Many of the common investing pitfalls for Preservers—such as loss aversion, endowment, and anchoring biases—all reflect decisions based on what “feels good”. Unfortunately, the stock market doesn’t care about your feelings! The best financial decisions are those based on objective facts, such as corporate earnings or the political environment.
Second, learn about how the market works. This will help combat many of the pitfalls we discussed earlier. For example, someone struggling with anchoring bias needs to learn that, just because a stock hit a certain price in the past, it may never return to this same level in the future. When it’s time to move on, you may need to accept less that what you originally paid.
Similarly, those with loss aversion bias need to realize that investing always entails risk. The market can shoot up one day and then take a nosedive the next. These ups and downs are natural and healthy, just part of the journey to your financial goals.
Another important concept is diversification. In investing, you need to consider how your overall portfolio is performing, not just the individual parts. Even if one part of your portfolio has some losses, you might very well be up elsewhere. In fact, every diversified portfolio has its share of “winners” and “losers”. If everything is up at the same time, you aren’t truly diversified!
Finally, consider getting a “second pair of eyes” to help navigate your finances. A trusted friend or family member can objectively distinguish between emotional and factual decisions. You may also benefit from a professional financial advisor with the experience to do what’s best for your long-term goals in every financial market.