Ep #165 - Are you Too Confident About Your Financial Plan?

[00:00:00] Ben Haas: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts now.  

[00:00:27] Adam Werner: So today we're gonna talk about h-how overconfidence, maybe bleeds its way into financial planning and investing. And just in general, the psychology behind it and where that can take us in the financial world. I've read this many times, I feel like you have too, Ben. 

The idea where you just-- you ask a room full of people, you know, "Raise your hands if you believe you're an above average driver." And it's like the overwhelming percentage of people will say, "Yeah, I'm an above average driver," which statistically can't be possible, right? We can't all be above average, but I would certainly raise my hand. 

I might be wrong. I don't think so, but there's the overconfidence part of it. So that, that idea in general isn't just relegated to driving. There are many aspects of life that I'm sure that applies to. We're gonna take the financial approach here and how it applies to investing, how it applies to financial planning, and are there ways to maybe use that overconfidence to, or in our favor to get to maybe a better outcome? 

I'll just, I'll leave it there and let you kinda get into some of that too. 

[00:01:39] Ben Haas: Yeah, because so co-confidence is a really interesting word because I do think more often than not, we probably get hired 'cause people lack confidence, right? And they, really need some support to say, "Okay, a-am I gonna be okay in the long run here?" So getting them to be confident is important. 

But to your point, you know, theme of the, the podcast, we see the opposite end of that too, where overconfidence just becomes this problem 'cause it can lead to mistakes, it can lead to expensive mistakes, whether we're talking about investing or financial planning. So, absolutely makes sense for us to talk about, but let's first humanize it just by saying, like, overconfidence as this kind of bias, it's not a character flaw, right? 

That this is a part of being human. Our brains naturally give more weight to our successes than our mistakes. Like, we are resilient as people and that can just sadly create this kind of like inflated sense of our own abilities. So it's not to put this podcast on other people and go, "Hey, if you're overconfident, like how dare you?" 

That's this is a very human thing and we're kind of wired that way. So, you know, let's just put that out there before we maybe talk about how we see this show up in financial planning, and the point of the podcast. Like, just talk about how we might be able to help with these things. 

[00:02:56] Adam Werner: Yeah, and I wonder to what degree, you know, overconfidence or oversimplifying something are somewhat related. I'm just trying to think of the analogy of I'm trying to fix something at home and it's something I've done before. I'm confident in that ability. I may just like skip ahead to the end and I may miss steps in the middle because I'm... 

it's so clear to me it's, it should be so simple, right? I gotta take this thing apart, fix this, put it back together, done. But meanwhile, I missed a couple of steps. I get to the end, I go, "Well, crap. I this wasn't as easy as maybe I thought. I was maybe too confident." So 

[00:03:32] Ben Haas: can I call out my wife here too? I, I don't know that she's gonna listen to this, but I marvel at the fact that she will make something, like make a dish, and then the next time she's not measuring anything. She's just throwing ingredients together like, "I've done this before," and you'll wonder why it tastes different the second time. 

But I think that's just another good example of, you know, very low stakes here. But yeah, to your point, we can- we just can get overconfident in our ability to just remember something or do something. 

[00:04:00] Adam Werner: Yeah. It, Desiree, in your defense, I don't, I me- like Amy, A- my wife says, "You measure with your heart." It's... I make dinners wildly different from night to night, even if it's the same thing, because yeah, I don't measure either. It's cl- close counts 

[00:04:14] Ben Haas: I didn't know this about you, Adam, and I feel differently about you right now. 

[00:04:18] Adam Werner: So 

[00:04:19] Ben Haas: Back to the podcast 

[00:04:20] Adam Werner: Yes. So then going into that, that planning aspect of it, where does that... where do we really kind of see that show up? We've had so many of these conversations. Again we're coming this from the approach of we've talked or walked people through retirement or that transition to retirement dozens of times.  

[00:04:41] Ben Haas: Right 

[00:04:42] Adam Werner: I, we probably should put a number to that, but many times, and we've made this comment before too, where the people that we're talking to, they're probably only going to experience retirement this one time, but we have this wealth of experience to kind of draw on. But something just as simple as how long is retirement going to last for me? 

I- we've been told many times in our projections, we run as a default to age 95 unless there's extenuating circumstances in that situation. And we often hear, "Well, I'm not gonna make it to that, so I don't need to plan for that, that length of retirement." Or just overestimating the investment returns that I am going to get in the future. 

'Cause these are all very important inputs. When we're talking about a 25, 30 plus year, you know, runway in retirement little variables or these assumptions can really lead to chasms of outcomes way down the line. Something as simple as I know this is what I'm spending now, but I'm earning a paycheck. 

When I retire, my expenses are gonna significantly drop. Our experience, maybe that's true, m- maybe not. W- it's... Again, it's all situational, but these are just areas that can very easily be just thrown into the, "Well, I know this about myself. I'm confident that this is going to happen, so I'm gonna plan on these variables," and maybe that's not going to be the outcome, and that can lead to some, some pretty consequential outcomes that maybe were unintended. 

[00:06:12] Ben Haas: Yeah, and o- of that list there, Adam I think it's probably fair to say that a lot of overconfidence leans towards this this assumption that things just won't go wrong, or that I'm gonna be insulated from something, or, you know, that life is going to be in the future as it is today and change won't occur. 

So, you know, I don't need to tackle this estate planning, or the insurance stuff isn't as important, or, you know, tax planning doesn't need to be proactive. That, that concept, right? Some of these great financial risks are often the ones we're kind of confident just won't happen to us, and that's a flaw in itself, right? 

Proactive planning is about making sure that we're checking all the boxes. But I would move us beyond just the planning because I think overconfidence shows up a lot more in our conversations around just investing 

[00:07:00] Adam Werner: Yeah. Which I'm glad you, you pivoted us there quickly because my thought and when you just said, you know, we-- when it comes to planning, we often think about you know, things not going wrong, like everything's just kinda gonna work out. I think investments, we often talk to people that it's the opposite, right? 

There's a lot of negativity in the headlines. It's the stocks are gonna suffer, bonds are gonna suffer, you know, all of these variables that are happening across the globe. How can things turn out well? I'm going to plan as if they're not going to turn out well, and that can, again, lead somebody to some overconfidence in the wrong direction. 

That is, "I'm not going to take risk. I'm gonna sit somewhere very safe and very stable." Meanwhile, the market continues to do what the market does over long periods of time, and that can leave somebody behind with whatever their goals may be in retirement as well. 

[00:07:50] Ben Haas: Yeah. So it's that whole we talk and preach so much about diversification. Just stay away from this idea that you can be overconfident in this one sector, or overconfident in this one stock or this, this new fad. We know, and for good reason, that diversification's supposed to be boring, but it is one of the best defenses against just our own overconfidence. 

You know, and acknowledging that let's just be fair and say that none of us knows what's gonna happen in the future. So often the best path forward is just to diversify and not be overconfident about any one sector stock theme. 

[00:08:25] Adam Werner: Yeah. And I-- We've certainly had conversations with clients before too where it's hard to pinpoint, you know, I took this action, and this was the outcome that occurred. But there may have been s- many different variables that were a part of that whole outcome that we just kinda discount because, again, I did this thing and this was the outcome, therefore, if I do this thing again, I'm gonna continue to get that outcome. 

Where we know just, again, in our experience what's the saying? Ca- causation and correlation are not relate-- are not the same thing. So yeah, there, there could be a scenario where the outcome was great, I did the right thing, but there could have just been an element of good timing, some of it is luck. 

Not that we wanna discount that, but it is the reality of the situation. Sometimes it's hard to know which input led to the outcome, and oftentimes it's all of them that are leading to the outcome 

[00:09:25] Ben Haas: Yeah, and you used the word timing there. That's- we probably need to put that in the camp of somebody being overconfident in their ability to either get out of the way of a market downturn or predict when things are gonna come back around. This isn't to point fingers at people that are very confident, you know, investing by themselves. 

I think it's great if people really are able to do that and create a system that they can follow. But I would say for some people that are probably out there doing it for themselves, being overconfident in their ability to time the market ends up being far more co- costly than, I don't know paying an advisor to help you stay invested, to diversify, to not term- time the markets, e- whatever their services are whatever they're doing for you. 

I, I know that we've seen and kind of tried to predict our own math on some of that. What am I really getting for paying an advisor? Sometimes it's just to be between you and the buttons that you can press that, look, it's very rational to try to get out of the way of a bad market. 

It also can be incredibly expensive, 'cause I've also heard you say this, so I'm gonna steal the line. Sometimes it's easy to get the timing right on the way out, 

[00:10:30] Adam Werner: Sure 

[00:10:31] Ben Haas: but by the time you feel good about getting back in, the market's already recovered 

[00:10:34] Adam Werner: Yeah. Yeah, and I think we often... Should, maybe I shouldn't say often. We do talk to a lot of people that are more of the do-it-yourselfer on the investment side while they are accumulating, and I think that can often develop a sense of confidence that I've been invested for a long period of time. I know these investments are gonna go up and down. 

I'm disciplined enough to not sell when things get scary. That's just one aspect of the investment conversation, right? We met with somebody this morning. I'm not gonna put her into that camp, because she's not necessarily the do-it-yourselfer, but the investments weren't necessarily the problem. It was the tax ramifications of where I was pulling money, I've now retired. 

I need to recreate a paycheck. I'm not getting planning help, so I'm just gonna pull from this account because I think that makes sense, and I think I can afford to do it. Meanwhile, we're compounding a tax problem that may have been avoided had she been getting some, some proactive advice. Yeah, that yeah, I, I feel really bad for that situation, but again, point being, sometimes it's not just I can pick an investment, I can pick a, you know, an S&P 500 index fund and just go along with the ride of the market, and I'm disciplined enough to ride that out. 

But there is so much more that goes into the investing or, in our situation, dealing with retirees. The income generation has a lot of dominoes. 

[00:11:55] Ben Haas: So I mean, may- maybe we can move this into kind of our role and why we're bringing this up in a podcast. Maybe it is as simple as to say there, there are certain biases that people would have, let's put overconfidence in that camp where, well, how do you combat that? It's just, it- that's then the value of having partnership. 

That's a value of having a second opinion. You know, maybe the, one of the best things that we can bring to relationships isn't that we've got this crystal ball or we can make better predictions or better asset allocations. It's just, let's give somebody a different perspective, and just place many of these discussions in the camp of you don't know what you don't know. 

You haven't experienced what you haven't experienced, but that doesn't mean you should turn a blind eye to it and be more confident than you should be. Where when you have a partnership, when you have coaching, when you have people looking out for you ,you often just get a better outcome by being able to assess all the different ways that things could go. 

[00:12:51] Adam Werner: Yeah, I think o- one of the things that we kinda talked about in prep for this is that, that coaching aspect of it. I mean, there are athletic professionals, professional athletes, they still have coaches, they still have trainers. They're still probably getting some feedback and advice because they rely on that. 

They take that for what it's worth, and I'll throw myself into that camp. If this is what we do for a living, but if I'm dealing with a, you know, a, my own financial situation, I'm trying to make a big decision, I will often come to you and say, "Ben, I need your opinion." Like, I need a second set of eyes because I may be in just my own world with my blinders on and think very clearly if I need to get from A to B, this is the path I'm gonna get to. 

But to, to get another professional's opinion, that objective, subjective, objective, third party view often is helpful just again to make sure I'm not missing something, that I don't have a blind spot that I'm just discounting or I'm not even aware of. There is a lot of value in that, that second opinion idea. 

[00:13:55] Ben Haas: And we've, done podcasts before on, like, actually planning with worst-case scenario in mind. And it-- So it's not... Look, we-- I'll go back to where I started, and then you can close this however you want. We definitely deal with people who lack confidence, and I'm so grateful for the opportunity to work with people where we can provide the education to hold their hand and literally say, "You're gonna be okay," and, like, let that-- see that sigh of relief. 

When you work with people that are overconfident, part of our value is just to slow them down and say, "All right, this is great. It's great to plan this way." But part of our job is to go, "Well, what could go wrong? How should we plan? What would our plan B be?" B be. What would our plan B be? and how would w- how would we pivot? 

Like, what levers could we pull? That is part of the planning process. So if you are overconfident, it's not to, again put you in a camp and say, "Well, something... You know, you're just, you're gonna be off the rails at some point." No, let's just slow down, and let's actually talk through the different outcomes that could occur, because inevitably, right, something like this is going to happen. 

And if we had the conversation beforehand, not only are we more emotionally prepared for something to go wrong, but we probably now have done a better job assessing the options and preparing for it in a way that we're gonna get through it more effectively. 

[00:15:09] Adam Werner: Yeah, I think so many thoughts are like hitting me now all at once. Just that idea of Pl- I, I'll s- I'll say this and my-- I don't know that my wife listens to this either, but she hates when I play devil's advocate, right? And that is just my default nature. But I think when it comes to client conversations, we it's naturally what I do, right? 

If somebody's overconfident, it's okay, this could all be true, but how can it go wrong? But the, the flip side is also true. We may work with people, like you said, that are-- that lack that confidence and are more worried about how can th-- you know, this is all gonna go bad. But we then come at it from the opposite perspective of, but what if it doesn't? 

What if it all goes right, and 

now you're left with an excess, and was that what you wanted to see, you know, end of life? Was there something you would've done differently if things were going positively? So sometimes it is just that. It's us being that, that sounding board or, again just thinking through all the different possibilities, good or bad, depending on where the client is coming from, just to make sure that we've kinda covered all of our bases. 

And this is the stuff that drives m-my wife nuts, and I think it drives my... It drives m-- I drive myself nuts in overanalyzing something sometimes, but I can't help it. I wanna make sure I've explored as many different areas of how this is going to play out, and then I'm okay to move forward. But I think that's part of the value that we bring in these conversations, is just to make sure we're approaching it from a holistic approach, and we're not missing something because of either a lack of confidence or overconfidence. 

[00:16:44] Ben Haas: It's all part of, I hope we're-- I know we're trying to grow in the space. You and I will continue to try to get better at what we do, but I do know that you're very good at this, and I hope, you know, you would say the same of me. We meet people where they are. Like, what one person needs is not what somebody else needs. 

So while we've, like, focused on overconfidence here, I'm glad we've brought in, you know, also the aspect of lack of confidence. The whole point here is just to recognize what somebody needs, to meet them where they are and try to balance them out, right? Because really, where should everybody fall? 

You hope somewhere in the middle, right? Where you're confident progressing forward, but not in a way where your blinders are on to who knows what happens in the future. But it is the value of partnership, for sure. 

[00:17:27] Adam Werner: Yeah. Yep. Yeah. So maybe that, well, I was gonna say to put a bow on it, but I think you just did. 

[00:17:32] Ben Haas: Oh, well thank you. Beautiful bow right on top of it. 

[00:17:35] Adam Werner: That's right. 

[00:17:37] Ben Haas: As always, appreciate your feedback, appreciate all you do. 

[00:17:40] Adam Werner: Yeah, likewise. 

[00:17:41] Ben Haas: Till next time. 

[00:17:42] Adam Werner: Bye. 

Ben Haas: Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening.  

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