Are you a creature of habit? When you visit the grocery store, do you fill your cart with the products and brands you’ve bought for years? The same cheese, the same wine, the same soap. Is that because they’re the best of the options … or because they’re the ones you know best? It can be hard to tell, can’t it?
A familiarity bias is the subconscious tendency to gravitate toward what we know, often without realizing it. It’s why you might place the same coffee order every time without thinking twice, or perhaps why you’ve consistently owned a particular brand of car.
Lots of us go with what we know – and that’s not always a bad thing. However, when it comes to your financial plan, leaning too heavily on what’s familiar can lead to an underdiversified portfolio and gaps in your wealth plan. By trying to play it safe, you could actually be putting yourself and your hard-earned wealth at risk.
Americans invest nearly 75% of their portfolios in U.S.-based assets – despite the fact that the U.S. accounts for a fraction of global GDP and a little more than 35% of the world’s capital markets. Source: JP Morgan
The trouble with familiarity when it comes to wealth is that it can sway people to make decisions that aren’t aligned with their holistic financial picture. When it comes to investing, this often leads to a lack of diversification in portfolios. For example, if someone is selecting investments based on familiarity, they might be overweighted in domestic securities, or a disproportionate number of their investments could be large, well-known companies or those they’ve worked for. Plus, if an investor chooses a stock solely because of its name, they might not have researched all of its underlying characteristics – like risk.
Just because you like a company as a consumer doesn’t mean it is the best fit for your portfolio. And just as we shouldn’t overestimate what’s familiar, we shouldn’t necessarily underestimate what’s unfamiliar, either. For example, someone might not know much about certain estate planning solutions but that doesn’t mean these specialized vehicles aren’t a good fit in their financial plan. Similarly, an individual may opt for a traditional savings vehicle instead of considering alternative solutions like 529 plans or HSAs*.
While we all enjoy taking the path more traveled from time to time, that doesn’t mean familiarity needs to get in the way of your long-term financial well-being. Fortunately, there are several steps you can take to help you avoid the potentially negative effects of familiarity in your financial plan.
For starters, seek out objective research in all elements of your wealth strategy. For your investments, this can help you vet a security for its risk level and historical performance. As your advisor, I can not only help provide you with research about individual investments but can also offer guidance and recommendations to help ensure you have a well-balanced portfolio that fits into your larger wealth plan.
Further, we can review your comprehensive financial plan and see where we might incorporate strategies that may be a good fit for you – including those you might not be familiar with. Using the sophisticated planning software at my disposal, we can review your progress and adjust as needed to make sure your financial plan is aligned with your long-term goals.
Put simply, there are many factors to take into consideration when crafting a healthy financial plan. That’s why I’m here to serve as a trusted resource and sounding board, able to provide you with the experienced insight and knowledge you need to address each of your objectives with objectivity.
To help you keep familiarity from overly influencing your financial plan:
There is no assurance that any investment strategy will be successful.
Diversification does not ensure a profit or protect against a loss. Investing involves risk, and you may incur a profit or loss regardless of strategy selected.
*Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. These risks include but are not limited to: limited or no liquidity, tax considerations, incentive fee structures, speculative investment strategies, and different regulatory and reporting requirements. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided.