If you ever want to feel bad about yourself, take a class on financial psychology. You’ll take a deep dive into all the reasons we aren’t financial wizards who make all the right decisions with our saving, spending, and investing. Then once you have it all figured out? You’ll keep right on doing what you did before. One of my favorite concepts is called outcome bias. This is a term that explains how we love to make decisions based on the outcomes of previous events instead of thinking about the (often) long process it took to get there.
We fall prey to outcome bias frequently. We want to jump headfirst into an investment after we see somebody else make a huge profit, but we don’t take the time to analyze the journey it took to get there. A penny stock skyrocketing might have come after dozens of disastrous stock picks. A real estate profit might have just been lucky timing. A successful business might have only shown profit after years of scraping by. Hedge funds are another great example. They love to tout outlandish returns, but an eVestment report released in 2022 shows the average fund underperformed the S&P 500 every year from 2015-2021.
So, if the grand slam investment is hard to find, what do we do? We do the one thing that’s often the hardest. Take it slow. Save consistently and invest wisely for the long term. It’s true that you will never read a Wall Street Journal article about the “woman who saved her excess income each month, bought prudent investments, and retired on time with an adequate nest egg.” I also think that woman is just fine with that trade-off.