Avoiding bias when you invest

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An April 2016 study from National Bureau of Economic Research (NBER) indicates that Americans might be their own worst enemy when it comes to investing.

The study discusses two biases that investors must overcome. Present bias values what’s available now more than what’s available in the future, and exponential-growth bias neglects to account for compounding interest in savings. These biases can lower retirement-portfolio amounts by 12 percent, NBER says.

To overcome, or at least to avoid, these biases, experts say you should try to automate savings as much as possible. Sending a tax refund directly to savings and matching your salary raises with increases in saving to a 401(k) plan or an individual retirement account avoids present bias, as does moderating purchases of big-ticket items, such as homes or automobiles, experts say.

To combat exponential-growth bias, you should make consistent deposits into savings, says Robert Stammers of CFA Institute. “You have periods of good returns and periods of low returns,” he says. “The only way to really make sure that you can reach your financial goals is to continually put money into savings and continually invest that money,” regardless of the returns at the time.