Sometimes normal human instincts don’t lead to the best actions. That’s a basic finding from behavioral finance research, and it’s true for much of retirement planning. People often believe that taking more action is better than doing less, but doing it more often does not improve retirement plans and can often make them worse.
For example, very often when people tell me or show me their investment portfolios, I find that they are too complicated. There are too many investments. I know that the individual cannot keep track of so many investments. When asked, they often don’t remember why they bought some of the investments, what affected their performance over time, or how they fit in with the rest of the portfolio.
Most investors could reduce the amount of investments they own and make life easier for them without hurting their returns. Many would increase the return on your investments and reduce your risk.
Investment portfolios are not the only things that can be improved by reducing or subtracting.
Most people, when looking to improve or change something, instinctively consider things to add, according to a study by researchers associated with the University of Virginia published recently in Nature.
The study concludes that people overlook ways to improve their lives or aspects of their lives by subtracting and simplifying.
The researchers presented test subjects with situations related to Lego structures, essays, recipes, travel itineraries, miniature golf, and more. In each case, the subjects were asked to solve a problem or improve the situation.
Most of the time, the subjects considered ways to add something or do something additional. Rarely was it eliminating, simplifying, or subtracting something that the solution tried. However, subtraction or simplification was often the fastest and most efficient solution.
In his book, Think, fast and slowNobel laureate Daniel Kahneman noted that most people make decisions using mental shortcuts. Sometimes shortcuts are efficient and effective. But too often, especially with financial decisions, shortcuts lead to poor decisions. Instinctively seeking to add something rather than subtract is another form of mental shortcut.
In another example, Fidelity Investments took a look at the accounts that the owners had apparently forgotten. There had been no action on the accounts for years and the company had no communication from the owners. It turned out that these accounts performed higher on average than other accounts. That was probably because investors let their investments do their job. The most active investors often buy and sell at the wrong times, and that reduces their long-term returns.
I have often advised my readers to simplify their financial lives. That is one of the reasons why my recommended wallets in Retirement watch I don’t have dozens of investments in them and I usually recommend only a few changes during the course of the year.
Simplifying your financial life often produces better results. Simplifying often means doing less and reducing the number of items you work with, be they investments or other assets. It also frees up more time to participate in the activities you really want to do instead of managing your finances.