Kicking Off the New Year with a Healthy Mindset

As we wave good-bye to 2024 and welcome 2025, it is an ideal time to look back and reflect on all that has happened to us over the past year, both positive and negative, our goals, and the lessons we’ve learned through our accomplishments and failures. This reflection can serve as a powerful tool for setting meaningful goals for a healthy and wealthy 2025.

For some, practicing mindfulness is part of a regular approach to keeping one’s well-being in check. Mindfulness is a form of meditation where you focus on and become acutely aware of your present sensations and feelings without judgment. This practice can be achieved through breathing exercises, guided imagery, and other techniques that help calm your body and mind. More and more people around the world are discovering that focusing their attention on the present moment in a non-judgmental manner is a useful tool for stress reduction and for improving mental health and general well-being. However, can this also be applied to the world of investing? Absolutely!

Investing is as much about mindset and behavior as it is about markets. In a world of 24/7 news cycles and constant social media updates, it’s easy to let emotions take the wheel when making financial decisions, which can lead us to make choices that contradict a rational investment strategy. We might start with a well-thought-out plan, but as market conditions change, our emotions can take over. Fear, greed, and overconfidence are just a few of the emotions that can cloud our judgment. This is normal and okay. The goal is to become aware of these biases and shrink the “behavior gap.” The behavior gap is a term coined by Carl Richards, a certified financial planner and author of “The Behavior Gap.” It represents the returns an investment could achieve and the actual returns investors experience due to poor decisions based on emotions and behavior. While an investment may provide a certain percentage return if left untouched for a decade, most investors don’t actually behave in a way that allows them to realize that return. Instead of staying the course, most investors react to financial media hype and FOMO (Fear Of Missing Out) kicks in.

For example: You’re investing exactly as your plan suggests you do. You’re appropriately allocating across asset classes. You’re diversifying within them and you’re rebalancing regularly. But you always seem to know someone who seems to be enjoying higher returns. Even though you try to ignore their wins, FOMO kicks in and you start thinking it’s time to change your own investment strategy. They must be doing something right and you must be doing something wrong. That may be what you are thinking, but that is not the reality. It’s human nature for folks to keep talking when they happen to own that particular stock that is up 200%; however, they never say a word about those other stocks of theirs that are losing money.

Comparing yourself to those who are doing better than you at a given moment will always leave you feeling worse. The worse you feel, the more persistent the need becomes to make a change and then you start doubting your strategy. This constant mental chatter can lead to irrational decisions based on imagined fears.

When you sell something you own that isn’t working just to buy something that has been working better for someone else, you’re making a bet that these things all move in a straight line. You’re betting that reversion to the mean is a thing of the past. It is tempting to give in to anxious thoughts in the face of uncertainty and make sudden changes to your portfolio that undermine these goals, causing you to sell low, buy high, and otherwise jeopardize the outcome.

When you follow an approach to investing that is based on emotions, you are prone to:

• Constantly worrying about the stock market

• Succumbing to the behavioral bias of overconfidence, which leads to market timing mistakes

• Losing sleep at night stressing over your performance

Not only does this go against what all great investors teach us, but it also has emotional consequences. If you cultivate awareness of these thoughts and tendencies, however, you have a better chance of recognizing them for what they are and resisting the urge to give in to them. That is mindful investing. Mindfulness involves being fully present and aware of our thoughts and emotions without being overwhelmed by them. Mindfulness helps us recognize these thoughts and stay focused on the present, reducing the likelihood of making impulsive investment choices. We can take a step back to reassess our strategy, which should result in:

•  More consistent returns and a higher probability of reaching long-term outcomes

• Sleeping better at night

• Ability to tune out the financial press (aka: noise)

However, even with the rise of behavioral finance studies, people continue to make the same mistakes. This persistence is rooted in our evolutionary psychology where following the herd and seeking security is deeply ingrained in us, making it hard to change even when we know the consequences. Overcoming the behavior gap requires a mindset shift. It’s not about finding the next hot investment; it’s about being aware of our biases, so we can make more rational decisions and improve our chances of achieving our financial goals.

We hope you had a wonderful 2024 and are excited to support you on your journey into 2025! Let us know how we can assist you in reaching your long-term goals.