One is a significant financial risk whereas the other is a financial guidepost
One of the biggest obstacles on so many financial journeys is the inability to identify risk. That blindness to risk is due to a variety of reasons, but one of the most pronounced is overconfidence (another one is ignorance).
When it comes to your financial plan, try to avoid overconfidence in yourself or any self-proclaimed investment wizards. This is perhaps the most damaging form of risk blindness. There are many stories of smart, well-educated, successful individuals losing lifetime savings or small fortunes because of overconfidence. Financial achievement does not necessarily equate to talent nor does it justify the true risk involved.
There are stories of executives who retired from a long and successful career in business with significant retirement savings only to lose it all day trading. Then there is the amateur stock or options trader who seems to have it all figured out, only to see years of successful trading wiped out when the odds finally catch up.
Consumer Confidence Index
Individual confidence and consumer confidence, however, are two very different things. Economists use indices of consumer confidence as an indicator of the state of the U.S. economy, measured in part by the degree of pessimism or optimism in relation to how much consumers are spending and saving. And one of the most widely followed measures of consumer confidence is the Consumer Confidence Index, published by the Conference Board at 10 a.m. EST on the last Tuesday of every month.
Here is what the Conference Board released on July 28th:
- “The Conference Board Consumer Confidence Index decreased in July, after increasing in June.
- The Index now stands at 92.6 (1985=100), down from 98.3 in June.
- The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – improved from 86.7 to 94.2.
- However, the Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – decreased from 106.1 in June to 91.5 this month.”
The Conference Board further reported that:
“Large declines were experienced in Michigan, Florida, Texas and California, no doubt a result of the resurgence of COVID-19. Looking ahead, consumers have grown less optimistic about the short-term outlook for the economy and labor market and remain subdued about their financial prospects. Such uncertainty about the short-term future does not bode well for the recovery, nor for consumer spending.”
How This Matters to You
Investments are part of a complex financial system. As Charles Perrow, in his essay on Complex Organizations states, “most accidents in risky systems stemmed from a major failure that could have been prevented.”
Ask yourself these questions:
- How do you manage risk?
- How do you function in a complex system and avoid an accident?
To provide stability, there must be a disciplined investment program that is driven by standardized processes and policies. Otherwise, common behavioral finance traits such as overconfidence, availability bias (where recent events seem to govern future outcomes) and belief perseverance (clinging to ideas even when there is evidence to the contrary) can lead to assuming inordinate risk positions that too easily end up devastating a retirement portfolio.
With money, success depends on avoiding obstacles as well as pursuing returns. It is nearly impossible to avoid them all, but being aware of the more common missteps and taking a clear path away from danger will help you arrive at the destination that you have worked so hard to achieve.