If you’re lucky, summer was a chance to unwind, catch up on beach reads and spend quality time with family and friends before the familiar rhythm of fall resumed. But what happens when there’s no routine to return to? For many, that’s the dream of retirement: endless relaxation, free from the constraints of work. But the reality can be more complicated.
Retirement is a major life shift, one that impacts more than just your schedule. It can reshape your sense of identity, daily habits and even your health. In fact, research has shown that retirement can raise the risk of heart disease and other medical issues by up to 40%.1 The reason? Experts point to a loss of purpose and reduced social connection, both of which can take a toll on mental and physical well-being.
Without a plan for how to spend your time meaningfully, the transition can bring unexpected emotional challenges.
Who should you listen to when everyone is talking? Scroll through your social media feed after a major move in the market, and you’ll see a flood of hot takes, bold predictions and “can’t-miss” tips.
Welcome to the age of the influencers or should we say “finfluencers”—social media influencers who broadcast their takes on investing, budgeting and other financial topics to large online audiences.Here’s the thing: A finfluencer might be a highly credible financial professional, or they might be an enthusiastic amateur.
They could be a sports star who dabbles in cryptocurrency or a trendsetter who has big thoughts on budgeting. But regardless of who’s dishing out advice, people are listening. In fact, more than 40% of people haveconsidered acting on advice from finfluencers—and that number is higher among younger investors.
And while some advice may be sound, much of it is self-serving or flat-out wrong. Separating good advice from bad isn’t always easy.
Protecting yourself from inaccurate financial advice—whether from media sources or influencers—is critical to making sound financial decisions. You have the power to protect yourself—and your loved ones—from risky financial advice. Here’s a closer look.
The Hidden Risks of Online Advice
When it comes to financial advice from big names in social media, there are several concerns:
Accuracy.Posts on social media spread because they’re engaging, not because they’re accurate. Plus, it’s not always obvious which finfluencers are academics or professionals with expertise who may be pushing sound advice, and which ones aren’t.
With recent market volatility, you may be looking at your portfolio returns and wondering if you should make investment changes to decrease risk. The trade-off between risk and reward is a key part of any investment strategy. But risk means different things to different people.
While risk can be a source of sleepless nights, it can also be the key to unlocking greater gains. Each of us must find the right balance for our needs.
So how much risk are you willing to take on to reach your goals and sleep through the night? Figuring out your risk tolerance is a crucial step. It’s an important building block for your investment plan and can help you create a portfolio that’s well-positioned to meet your goals without compromising your financial—and emotional—health.
There’s no simple equation for determining your risk tolerance, but the following three questions can serve as a guide.
What Are Your Goals and Time Horizon?
Risk tolerance isn’t just an emotional attitude; it’s also logistical, determined in large part by your goals and time horizon.
Consider your own investment goals. In addition to long-term goals such as funding a long retirement, you may be socking money away for shorter-term goals such as your child’s college education or a lake cabin. When do you want to achieve each goal? This is your time horizon.
The longer your time horizon for each goal, the more time you have to ride out short-term volatility in the market and the more risk you can take on. The market can experience dramatic swings in the short-term, which usually means taking on less risk for the assets earmarked for spending on your short-term goals. For instance, you might wish to ensure there are enough low-risk, liquid funds in your 17-year-old’s 529 plan to cover their college expenses over the next several years.
If you’ve ever listened to public radio’s “Marketplace” with Kai Ryssdal, you may have noticed the songs they play when they “do the numbers.” On days the market is up, it’s “We’re in the Money.” On down days, they cue up “Stormy Weather.”
These musical accompaniments are a way to acknowledge the emotion listeners may be feeling when they learn whether markets have spiked or sunk on any given day. Ultimately, it’s lighthearted stuff. But it’s one example of how the media uses various tactics to play to your emotions and make the financial market news more compelling. Some of these ploys are more insidious than others.
Consider, for example, how the media discusses market volatility using magnitude versus percentage—a point Wall Street Journal columnist Jason Zweig has noted. While both ultimately describe the same thing, magnitude—the number of points a given index rises or falls—is often more sensational.
For example, on Monday, August 5, 2024, the Dow Jones Industrial Average fell 1,033.99 points from the previous week’s close. That number sounds big and scary to many people, quickly grabbing their attention. And that’s what news sources often want to do.
Unfortunately, this number doesn’t account for the index’s starting point. On August 2, the Dow Jones closed at 39,737.26 points. Divide 1,033.99 by 39,737.26, and you’ll discover that this roughly 1,000-point plunge represented a 2.6% drop in the index. That’s a sizable one-day decline, but we’d wager it sounds far less scary by that measure.
Your brain can be quite tricky with some 95% of its activity occurring subconsciously.[1]With every spontaneous signal, our cerebral synapses expose us to countless behavioral biases, duping us into making misguided money moves long before our rational resolve kicks in.
These biases can affect our investing behaviors and decisions. We may leap before we look, making choices based on emotions rather than rational planning.
Because many of our most powerful biases are based on reflexive rather than reflective thinking, it’s not enough just to be aware of them. We must also learn how to defend against them. Or better yet, turn behavioral biases to our advantage. How do you do that? By tricking your brain right back.
Biasing Toward Better Behaviors
To illustrate this principle, here’s one “trick” that has worked incredibly well for retirement plan participants.
When companies started offering 401(k) retirement saving plans in the 1980s, employees were traditionally invited to participate but were not automatically enrolled. In other words, you had to take deliberate action to get started and increase your contributions over time.
Today, you can still decide if and how much you’ll contribute to your company retirement plan. But instead of requiring you to opt into participating, many companies now auto-enroll you unless you deliberately opt out. Your employer also may automatically increase your contribution rate to the maximum allowable amount over time, unless you say no. By requiring action to avoid saving for retirement, you can trick yourself into saving more than if you had to take action to start saving. Thus, we recruit our tendency to favor inertia, using it to improve on, rather than detract from retirement plan participation.[2]
