Investors like to believe they’re rational, disciplined, and above average at managing money. The reality is far messier, and the consequences can be expensive, especially for those approaching or living in retirement.
That disconnect between confidence and competence is at the heart of many investing mistakes, according to Dana Anspach, CEO and founder of Sensible Money and co-host of Making Retirement Make Sense. Overconfidence, fear, and other behavioral biases routinely push people to abandon sound strategies in favor of concentrated bets or extreme caution, often at the worst possible times.
In a recent interview, Anspach explained how investors can behave more, well, sensible.
Below is an edited-for-clarity-and-brevity transcript of that conversation.
Robert Powell: When it comes to investing, people aren’t always sensible. Joining me to talk about that is Dana Anspach, CEO and founder of Sensible Money. Dana, welcome.
Dana Anspach: Hi Bob. This is a fun topic we’re getting into today.
Robert Powell: I love the irony here. We’re talking about being sensible, yet people often aren’t when it comes to their investments. You’ve seen a lot of this firsthand.
Dana Anspach explains how behavioral biases, fear and overconfidence drive costly investing mistakes, especially near retirement.
Photo by PodMatch on Unsplash
Overconfidence and other behavioral traps
Dana Anspach: People aren’t always sensible, and a lot of that comes down to behavioral and cognitive biases. One of the most common is overconfidence, sometimes called the better-than-average bias. There’s also what researchers describe as the illusory superiority effect.
This dates back to a 1981 study where people were asked to rate their own driving skills. Ninety-three percent said they were above average, even though mathematically that’s impossible. That same dynamic shows up when people assess their athletic ability, leadership skills, and even whether they think they’re biased.
That gap between perception and reality often drives investment decisions. People convince themselves [that] something is a sure thing. When it isn’t part of a well-thought-out strategy, it can end very badly. I’ve seen people lose all their money making those kinds of bets. I’ve also seen cases where I was able to intervene and stop someone from doing real damage.
That’s what people mean when they talk about the behavioral coaching role of an adviser. There are times when I know, with certainty, that someone would be in a far worse position if I hadn’t stepped in and brought logic into the conversation.
The measurable value of behavioral coaching
Robert Powell: I’ll admit, my kids like to remind me that I’ve said I’m the best driver I know, so I may be guilty as charged.
There’s also research showing that behavioral coaching matters. Studies from Vanguard and others suggest that an adviser who helps clients manage behavior can add about 1% to 2% per year to outcomes, regardless of asset allocation. Helping people avoid overconfidence or recency bias can make a big difference.
Dana Anspach: I’ve been practicing since 1995, and I’ve seen these patterns repeat over and over. In the late 1990s, it was the tech bubble. People wanted to move everything into science and technology stocks.
In the early 2000s, it was real estate. When I lived in Phoenix, people were leveraging everything they had to buy rental properties. I watched people file for bankruptcy when that market unwound.
After the Great Recession, the bias flipped. People were so fearful they held too much cash for years, sometimes for nearly a decade, missing most of the market’s recovery.
More recently, we’ve seen it with AI-related stocks and the so-called “Magnificent Seven.” People convince themselves they’re superior stock pickers and abandon diversification. They don’t fully understand the risk they’re taking, and I’ve seen how catastrophic it can be when those bets go wrong.
Understanding the range of outcomes
Robert Powell: What advice do you have for people who want to be more sensible and avoid these mistakes?
Dana Anspach: I focus on helping people understand the realistic range of outcomes. Especially in retirement, you should have a clear floor, the minimum outcome you need to maintain your lifestyle.
A diversified portfolio might give you a reasonable range around that floor. You could have a bad market and dip a bit below it, but not so far that you’d need to go back to work.
When people abandon diversification and make concentrated bets, that range of outcomes widens dramatically. Yes, the upside might look bigger, but the downside can become catastrophic.
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I’ve seen this with individual stocks, with tech, with real estate, with Bitcoin, and now with companies like Nvidia. People are convinced these investments are different this time.
I once worked with a man about five years from retirement who wanted to put everything into his employer’s stock. That stock ended up flatlining for nearly 20 years. A diversified portfolio would likely have doubled over that period. That’s a massive opportunity cost.
Anytime you’re making a concentrated bet, you need to ask what you don’t know and what the full range of outcomes really looks like. If it were a sure thing, everyone would be doing it.
The role of an adviser as a counterbalance
Robert Powell: Without an adviser, investors are probably more vulnerable to confirmation bias, looking only for information that supports what they already believe.
Dana Anspach: That’s exactly right. A good adviser offers a different point of view. In some cases, I’ve told clients that if they wanted to proceed with a certain move, they would need to do it without me.
A true fiduciary is sometimes willing to say no, even if it risks losing the client. That’s the kind of adviser you want, because they may be protecting you from a permanently damaging outcome.
There’s a big difference between normal market volatility and a permanent loss of capital. I’ve seen people in their early 60s lose everything and have to go back to work. That’s not a situation you can easily recover from.
Regrets and lessons learned
Robert Powell: What regrets do you see most often?
Dana Anspach: People regret staying in cash for too long out of fear. Others regret not saving more or not engaging in planning sooner.
I’ve also seen regret around complex products. The products themselves weren’t necessarily bad, but they were sold without a cohesive plan. Clients didn’t understand the tax implications or how those products would affect their income in retirement.
Those regrets usually come from not feeling comfortable enough to say, “I don’t understand this.”
Separating safe money from play money
Robert Powell: I once heard Jim Cramer say that what he talks about on Mad Money isn’t retirement money. Retirement money should be safe money.
Dana Anspach: That distinction can work very well if it’s clear. Some people do fine with a small “play” bucket, as long as the rest of their portfolio is built around predictability and reliability.
Where people get into trouble is confusing luck with skill. If you bet on red and win, that doesn’t make it a good investment strategy.If someone really wants an outlet, I usually suggest limiting it to no more than 5% of the portfolio, an amount small enough that losing it wouldn’t derail their retirement.