Wealth preservation is a challenging endeavor, as it involves discipline, patience, faith in the future, and an abiding optimism.
Some key elements leading to success include developing and continuously following a comprehensive financial plan, and avoiding the big investing mistakes that are inherently part of human nature.
Regardless of our level of education, our success in business, our age, or any other differences among people, we are all hard-wired with certain emotional and reasoning-based biases that lead us to make destructive financial decisions when faced with uncertainty. We are all bound by one common link—the immutability of human nature.
The propensity for potentially life-altering financial mistakes is always present. During times of emotional transition, like divorce, the potential for and magnitude of such mistakes can be magnified dramatically.
One example is what I call the endowment bias. This is when we place a greater value on an asset we own than we would place on the same asset if we had the opportunity to purchase it. Assume one is selling a home that the broker found had comparable sales ranging from $500K to 700K. The owner would likely set an asking price at or near $700K. If the same person was buying that house, he or she would likely place a bid close to $500K.
In divorce, I have seen what I call the reverse endowment bias. One spouse may rush to sell a certain asset, knowing it is important or meaningful to the other spouse. He or she may do this even if it may be counter to his or her financial interest to sell it, due to the associated tax liability or potential for future appreciation.
Guidance from a qualified behavioral investment counselor is invaluable to almost all investors, but it is especially valuable to those faced with the often emotionally unsettling process of going through a divorce.
Try to view the financial decisions you make during divorce negotiations based solely on the facts and circumstance surrounding these potential choices. Emotional decisions almost always lead to poor outcomes.
With respect to investing, successful investments are goal-focused and planning-driven. Failed investments are market-focused and current-events/performance driven. All successful investors are continuously acting on a plan. All failed investors are continually reacting to current events.
It is natural to experience strong emotions when dealing with financial decisions under conditions of uncertainty and stress. They key is to not allow these emotions to play a dominate role in making those decisions.
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