Sunday, January 6, 2008

Retirement Planning and Indecision

Nothing is more devastating to a retirement plan than indecision. How you make the right one is open to discussion and has been a subject of great thinkers throughout the centuries as they struggle with various strategies. Herodotus wrote the following passage in 450 B.C.:

    "If an important decision is to be made [the Persians] discuss the question when they are drunk and the following day the master of the house...submits their decision for reconsideration when they are sober. If they still approve it, it is adopted; if not, it is abandoned. Conversely, any decision they make when they are sober is reconsidered afterwards when they are drunk." – from The Histories

I mention Jacob Freifeld in the book and will examine a quote I used from a paper he wrote in 1996 titled “Speculative Bubbles: Financial Genius before the Fall”. In my next entry, I will discuss this paper in depth but before I do, I want to take a look at the psychological aspect on indecision.

We all can be indecisive on one level or another. When it comes to retirement planning, the effects of those lack of concrete decisions can have long term ramifications on your future. Our day-to-day life is filled with these human foibles. To that end, I want you to ask yourself: “How many times have you employed one or more of the strategies below?”

Turning to outside sources – well outside what would be considered normal advice: Astrology palm readings, Feng Shui, numerology, fortune-tellers all fit this category and as odd as they may sound to many, once you feel the gripe of indecision, your are more likely to embrace more non-conventional methods. How the stars align themselves at your birth has little to do with which road to take in retirement planning.

Trusting in Fate: Once you believe that control of the situation is out of your hands, we allow fear of making a decision to you’re your future landscape. Doing this is tantamount to giving up. Hope does not have a twin in fate.

Ignoring the problem – often before it is a problem: This is the faith-based approach. While waiting for a miracle might seem like a good idea, the chances are slim to none that your financial future will have such a glorious or divine intervention. Someone once said that this is a little like “Jumping off a cliff while building your wings on the way down.”

Same day decision-making: As you go through life, you gather information. This is a continual process that involves a sort of evolution in thinking. The book provides you with numerous events that could change the course of your plan and solutions on how to absorb those changes in your future. In order to make a good decision, you need all of the information at your fingertips.

The Commitment to the Plan: No business that hopes to survive will keep doing the same thing over and over again if it does not seem to be working. Yet, we will look at our “investment” in time and effort as a reason not to turn change course.

Looking backwards: While the past is often discounted as something the already happened, mistakes that already were made, it is important to see where you have been in order to see where the next step might lead you. Good decisions take reflection on not only strategy, but also whether the strategy is still worth pursuing.

Prejudice: We tend to look for answers we expect and disregard those that do not support a pre-selected idea. This is a brain squabble that has no place in retirement planning. You can seek out information to support your idea but you also need to look for arguments against it.

Praying for a miracle: While prayer has its place in our lives, trusting our retirement plan to miracles is not a good choice.
The worse things get,
the harder people pray,
the worse things get.

Unbridled Optimism and Prudence: Henri Poincare said, "Doubt everything or believe everything: these are two equally convenient strategies. With either, we dispense with the need to think for ourselves." Those same doubts betray us, freeze us in mid-decision and that is the most crippling form of contagion. While caution is wise, too much of it can be habit-forming and that can put a retirement plan in a position where it is least likely to recover.

Pass the buck: In-decision makers are most likely to have someone to blame rather than a mentor who helps the make the decision by weighing the pros and cons. This is not a healthy conclusion for either party. Your future is your responsibility and the decisions you make (or don’t) are yours alone. While seeking someone to blame is human nature, it is corrosive when it comes to retirement planning.
Second-guessing your thoughts: Having a back-up plan is one thing – that can be called diversification – but second-guessing every decision before you make will leave exactly where you began.

Wrong first: Even if you have made numerous financial mistakes, all of them can be fixed. But not if you believe that trying something new is pre-destined to fail. Believing you will fail before you try is something that happens with the greatest of ease. thought.

Defining the problem: You need to believe this once concept. If you know the problem then, your solution might be good.

Common Sense should rule: The most indecisive people are those who are continually looking for something to argue with their gut feeling. When you are thinking for yourself you are entertaining what would appear at first glance to be unconventional. But common sense investing almost always demands you make some uncommon choices.

Understanding the problem: Investing is not easy. It relies on due diligence and education. If you put in the time you will subjectivity, irrational analysis, lateness or procrastination, lack of sensitivity, and lack of focus. No investment issue is too complex as long as you avoid boutique type investment strategies. Stick to those mentioned in the book and look to form your own comfort zone around those principles.

Analogies, Information, and Lack of Alternatives: Analogies are not made for proof. Not all information gathered is valid. And being backed into a corner from which there is no escape except to accept the alternative is not an option. The decision maker needs to be comfortable with their choices, which might fly in the face of some popular notions. Someone once wrote that it is not important what Wall Street says; it is important to do what Wall Street does.

Cognitive dissonance: This happens when you finally make the decision against the options you favored for the alternatives. Don’t be fooled by the first decision is the best decision strategy. Your financial future is a fluid place with numerous options that will change over time. Always review all possibilities and change the plan’s course if there are better options – ones you may have discounted.

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