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How are the Futures of Finance and Medicine Similar?

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The term “Integrative Medicine” has been picking up steam lately.

According to Duke University, integrative medicine seeks to restore and maintain health and wellness across a person’s lifespan by understanding the patient’s unique set of circumstances and addressing the full range of physical, emotional, mental, social, spiritual and environmental influences that affect health.1 A key aspect of integrative medicine is the intentional focus on the whole individual, as opposed to focusing on individual symptoms or diseases.

What does this have to do with investing and financial planning?

While the term “integrated health” can be interpreted to cover a broad range of medical practices, I’m going to focus specifically on the growing medical trend of integrating behavioral health with primary care. The merging of these two fields draws a parallel to the direction in which professional financial planning is moving.

Many advisors and firms focus strictly on one aspect of your financial life, such as investment selection.  Yet we know that investment selection doesn’t wield the same degree of power as investor behavior.2 This is exemplified when an investor picks a great long-term investment, but sells out of it during a correction and suffers a loss on the investment. There are quite a few heuristics, or behavioral biases, that lead to investors making decisions to both sell and purchase with poor timing.

Confirmation Bias

Let’s take a look at confirmation bias, which suggests that we seek out evidence or arguments that support our current worldview, and discount evidence that contradicts our desired belief.  Politics provides a great example of confirmation bias. Do you know anyone who continually posts articles, or “fake news” that backs their current ideology and isn’t open to understanding the quality points of the opposing argument?  This tendency plays out in finances as well.  If an investor really likes a stock or has a personal connection to the company as a customer, they will have a tendency to base their investment decision on arguments in favor of purchasing it, and discount negative arguments to avoiding the stock.

Being aware of the bias is not enough to avoid falling victim to it.  How can we combat behavioral biases from a financial point of view?  Sticking to a plan and setting up systems to prevent over-reaction is a good start.  Strategies such as dollar cost averaging through automatic contributions and committing to increasing  withholding for retirement plans through your employer help you stick to your savings goals.  Having an advisor to talk through the pain of wanting to liquidate at the wrong time can be critical.  A common behavior that works against investors is watching day-to-day portfolio values in long-term accounts.  It can be damaging to financial health and can create emotional distress that makes it easier to fall victim to poor financial decisions. Imagine how much worse it could have been if everyone had a minute-by-minute valuation of their home during the financial crisis of 2008 as they do with their retirement portfolio!

Reaching long-term financial success requires a big picture approach, and is as much about limiting losses as it is acquiring gains.  Just as behavioral health is becoming more integrated with physical health in the medical profession, managing financial behavior needs to continue to become top of mind in the advisory world.

If financial planners and investment advisors can help their clients stay the course and minimize behavioral errors, clients will be in a better position to hit their targets.




wisdom wealth strategies

Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.

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