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Prepare Your Finances for 2021

Making it to the end of the year in what feels like the longest year ever is an accomplishment in and of itself. From unpredictable markets to an upending of holiday plans, 2020 has thrown lots of curveballs.

SoFi financial planners Brian Walsh and Lauren Anastasio led a recent livestream on Twitter and LinkedIn to reflect on a year of unexpected financial lessons and how everyone can learn from these experiences.

Looking Back on 2020: Hindsight Bias

Walsh and Anastasio work one on one with SoFi members to help them create financial plans for the future, but one pattern they both saw this year was the tendency to look back.

Hindsight bias is not exclusive to finances or investing,” Anastasio said. It’s a psychological phenomenon she saw play out again and again this year.

Hindsight bias is the belief that a person accurately predicted an event before it happened. After something happens, people often misremember what they felt or thought before, leading them to believe they knew what was going to happen all along.

We see this play out every day. It’s saying you “knew it all along” when your favorite sports team wins a game, after it wins the game.

In 2020, there were plenty of moments for hindsight bias to kick in. In the case of COVID-19, no one could have predicted the early dips in the market, or its fast recovery.

Anastasio said she has heard investors beat themselves up about not selling off portions of their portfolios in February, before the market crashed.

In December 2020, that idea might sound like a no-brainer, but back in February, making that decision would have seemed drastic. There was no way for any investor to know how the market would behave.

Walsh said he witnessed hindsight bias with the rise of Tesla stock. Some investors expressed their disappointment to him, saying how obvious it was that the stock would rise. At the time, though, it wasn’t easy to see that investment as a slam dunk.

Dealing With Hindsight Bias

The challenge with hindsight bias is not only investors’ negative thinking about what they should have done, but it also informs their choices in the future.

“We see these events transpire and we think they were easily predictable,” Anastasio said. That overconfidence can lead some investors to think they’re better equipped to predict the future of the markets.

“The reality is, none of us are able to do this,” Anastasio said. Overconfidence can lead to reading too much into the future and making drastic choices based on limited evidence.

The bad news? Hindsight bias is often subconscious; many of us aren’t even aware that we’re experiencing it. And often it’s just going to happen because it’s part of human nature.

The good news? There are ways to navigate it more effectively, particularly when it comes to investment habits. Anastasio offered these two tips:

  1. Play devil’s advocate. When investors feel certain that their desired financial bet will come true, they should think about the other outcomes that could just as likely occur. People don’t buy stocks anticipating that they’ll lose money on them, but there are countless unpredictable outcomes. It can help to be reminded that anything can happen in the market, even when an investor thinks something may be a “sure thing.”

  2. Start an investment journal. Every time you buy or sell a stock, you can note it in a journal. Writing a sentence or two about what you predict will happen and why you were motivated to act can serve as a mental time capsule of that moment. Revisiting the journal and seeing how wrong or right you were can help shatter the idea of predicting the future. Nobody has a crystal ball.

Combating Loss Aversion in 2021

Loss aversion is almost the reverse of hindsight bias, but Anastasio has also seen investors becoming scared of their strategies in 2020’s volatile markets. Loss aversion is the preference to avoid a loss because the associated pain is greater than the reward felt from a gain.

While being conscious of risk is important, sometimes loss aversion can become so strong that investors refrain from even well-calculated risks.

“This impacts me the most,” Walsh said. “I just don’t check the balances of my accounts” because the fluctuation is too stress inducing.

Loss aversion can keep investors from reaching their goals, but having a better understanding of risk can help, Anastasio explained. Every investment will carry risk, but having an overall financial plan can help combat that knee-jerk instinct to sell or stay out of the market.

Carrying Positive Money Habits Into 2021

2020 has come with a unique set of challenges, but Anastasio said she has been surprised by many of the positives she has seen. This year “feels like a wake-up call” for lots of the SoFi members Anastasio has worked with.

Whether clients lost a job or not, Anastasio said she is seeing more of them express interest in building emergency savings in case of a layoff. They may have stayed employed in 2020, but seeing rising unemployment numbers has made savings a top priority.

In preparing finances for 2021, having a liquid emergency fund in place is a great place to start, Anastasio said.

Without an emergency fund, budgeters shouldn’t rush to start investing, she said. An emergency savings fund is the foundation that investment strategies are built off of. Without that padding, it can be hard to invest confidently.

Similarly, more SoFi members are taking advantage of low interest rates to negotiate and tackle long-standing debt, Walsh said.

Hand in hand with paying off debt comes financial literacy. Maybe it’s all the time inside, but Walsh and Anastasio said they have worked with SoFi members who have been especially keen to learn more about their money, the market, and long-term financial planning.

Prep for 2021 With a Pro

As the year winds down, Walsh encouraged investors to stick with their plan, no matter how tempting end-of-year spending gets.

It’s “the diet starts on Monday” mentality, he said. When people see that they might not meet their financial goals this year, there’s a temptation to throw caution to the wind and just start again in the new year.

But overspending and neglecting budgets during the holidays will mean starting from behind financially come Jan. 1.
“Slow it down and ask what can you do between now and January to stay on track, even if you don’t achieve all your goals?” Walsh said.

One way to stay strong as 2021 comes into view? Personalized advice from a financial planner.

For SoFi members, one-on-one financial planning is complimentary.

With some advice, and tools to track spending and saving with SoFi Checking and Savings®, investors and budgeters can set up habits that last long after the New Year’s countdown.

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