Dealing with Optimism & Confirmation Bias with Joey Khoury | Mission Wealth

this video is part of a series that applies psychology to financial planning so we can all make wealthier decisions and avoid psychological traps as a multi-billion dollar investment and planning firm Mission wealth is able to give you the collective wisdom and real life examples from thousands of multi-millionaires every quarter we publish one to three psychological topics that are relevant for current markets risk perception and financial decisions prior updates are published on our behavioral Finance page and include how to manage Market volatility in your Investments and how political perspectives may impact your investment choices this quarter we’re covering the psychological traps of optimism bias and confirmation bias across Three core areas First Investments next financial planning and lastly estate planning we’ll spend about 1 minute on each of the three areas and share practical planning tips along the way so you can avoid falling into these psychological traps the first area we’re going to cover is going to be how optimism and confirmation bias may impact your Investments key Point number one on

optimism bias is not to let two years of positive market performance cause you to lose sight of what normal volatility looks like and how often markets are negative optimism bias is the tendency to expect positive outcomes and avoid thinking of the negative ones and when markets are extremely positive like they are now this causes us to put the blinders on regarding normal market pullbacks so here are a c few quick facts to keep reality in mind nearly 100 Years of data shows us that a positive year in the market is followed by a negative year about 20% of the time and while markets are overall positive 73% of the time it’s perfectly normal for the S&P 500 to land between postive 45 to – 255 in any given year it is totally normal for the market to have a 10% pullback once a year a 15% pullback once every 3 years and a 20% pullback once every six years so averages we are currently in the top 10% performance of any year for 24 and the S&P 500 and while the outlook for 2025 remains positive caution is due not to get swept up in irrational exhuberant experienced investors know that cycles

of expansion are often followed by contractions and those are perfectly normal the best time to buy an umbrella is when the sun is brightly shining and not when it has already started to rain and similarly the best time to discuss what to do during Market pullbacks rain is when markets are very healthy Sunshine like they currently are positive times can give you the clear-headedness to discuss future Market contractions if you overcome the natural urge not to think about it Point number two confirmation bias a rising tide lifts all boats we are seeing a lot of investors who have participated in the soaring Market since the pandemic and this can create a positive feedback loop investors believe they are great at investing because they have earned positive returns called confirmation buys what many investors don’t see is how Overexposed they might be to a market correction our investment analysis can tell you how connected you are to the S&P 500 00 and how far down your specific positions are correlated to a General market downturn we can give you a draw down analysis to exemplify how much of your portfolio would drop if

the S&P fell by 20% and we can recommend potential changes which may help reduce this correlation risk talk with your adviser to assess what your draw-on risk is and if now is the right time to consider taking some risk off the table avoid the temptation to attribute positive returns to confirmation bias a ship’s Captain does not take credit if the ocean gives them smooth water Waters to sail in second core area we’re going to chat about is optimism bias in financial planning with two incredible years of market performance behind us we are seeing a lot of financial plans that are now healthy but were once not and some families are banking on these recent gains to make critical decisions such as when to retire talk to your adviser about how you may further diversify to reduce your portfolio drawn on risk especially if the financial plan does not have a large buffer for maximum loss planning tip number one is part of our planning process we can tell you what the total amount of money your financial plan can afford to safely lose in one number with this number in mind whether it’s 10,000 or 10 million you

can compare it to the size of Maximum JW on risk of your current portfolio or to the size of concentrated positions having a risk factor below what your total Financial capacity for risk is will help Safeguard your financial Independence and retirement planning tip number two we can also run a bad scenario timing to show you what your retirement would look like if you were faced with a hypothetical severe Market correction now the last core area we’re going to chat about is optimism buys as it relates to estate planning with the tax cuts and jobs act likely being extended the push to assess or revise estate documents is alleviated a little bit however frequent reviews of the estate plan are still necessary and families with taxable Estates should still plan to meet with their financial tax and estate advisers regardless of the expected tax law extension nobody wants to think about what happens when we’ve passed on it’s just not a pleasant thought nor Pleasant conversation optimism bias here acts as a defense mechanism to thinking about the subject matter however it’s necessary to care in

the best way for our families so that they are not left in a sea of financial confusion should something happen to you having an up to date estate plan can not only help you avoid potential costs like estate tax or probate fees but it can also give the people you love the most chance to process the change should the tax cust and jobs acts be extended the Congressional budget office CBO expects the federal deficit to increase by about 3.3 trillion and that’s per their publication in May of 2024 this deficit will have to be rectified in the future somehow which opens up potential changes in future estate or tax law in the future so our plan and tip here is to incorporate our planning process which can give you a rough estimate of your future estate size and poti potential estate tax liability led by our in-house attorney Andrew koua we can help review and assess your estate structure for potential issues or recommend potential changes chat with your adviser about reviewing your estate documents if this is an area you’d like to refresh in conclusion we hope you found these topics helpful as we enter the new year

for more detailed Market commentary I welcome you to read or watch our chief investment officer’s Market commentary uh from our insights blog to submit requests for future topics please don’t hesitate to email me directly at j k h r y Mission wealth.com thanks so much hope you have a great start to the new year [Music]