Saving for Retirement. It’s a myth that smart people don’t make mistakes. Or that they make fewer mistakes. Smart people make mistakes. But they make mistakes with confidence and sometimes blissful ignorance. Worst, though, they make the same mistakes over and over. Just like everyone else. It pays to recognize the pattern of our mistakes or biases when investing for retirement because success requires you to fight some of your instincts. Even right, isn’t enough. Being smart without empathy or the ability to persuade can be counterproductive. And, even smart people are often wrong in both detail and the big picture.

In the long game of saving for retirement

So what are common smart people mistakes when it comes to saving for retirement?

1. Perfect Information Indecision.

Deferring decisions until you have all the information or the perfect information is a common mistake. It’s common to perfectionists. You’ll never have perfect information. And failing to decide is a decision. It is a decision to accept the status quo. So don’t put off making necessary decisions. Learn to gather enough information and pull the trigger. It’s important to get started. Identify what you’d like to know that would influence your decision but for which there is no good answer today. You can improve your information and decision-making as you go. But get started down the savings and investment road in your saving for retirement.

2. Ignoring Chaos and Bounded Rationality.

Even if you had all the information in the world, it wouldn’t solve the fundamental problem. Because of chaos, there would still be uncertainty. Because of the bounds of human capacity or so-called bounded rationality, you couldn’t process all that information. You have to be able to live with good enough and playing the probabilities. You can’t achieve certainty, no matter how smart you are. Humans don’t get a God’s eye view of the universe no matter how much we think of ourselves.

3. Believing there Can be Only One (Right Answer).

A related mistake is the belief that there’s one best answer out there to be found that solves all the problems. This is another version of perfectionism. It ignores the problem of bounded rationality or the limits of what’s knowable and usable by any single person or human enterprise. But it also appears when all of the choices are less than perfect and involve takeoffs. Sometimes you can’t have it all. Stop looking for the highest year-over-year returns with no risk, low volatility, and low fees. You really do have to pick the order of your priorities among return, current income, and security of principle. It’s why investment advisors try to understand your risk tolerance and stage of life. Further, there’s often more than one way to skin a cat – more than one right answer. It’s not sword swinging immortal Highlanders.

4. Playing Sideline Critic.

This smart person mistake tends to latch onto the weakness in any tradeoff and compromise as if it’s the only thing that matters. In car discussions it’s the guy who says the perfect car has a gazillion horsepower, stops on a dime, gets a 100 MPG, and keeps you safe crashing into a fixed wall at 100 MPH, all while looking cool. This critic will nitpick any car on whichever “failing” is more glaring. In real life, engineers have to balance trade-offs. It’s why there’s no one perfect car for everyone. In investing and saving for retirement similar tradeoffs are necessary.

It’s hard to have high returns, low volatility, personalized service, and low fees all at once. Look at the balance struck, not just one feature in isolation.

Yes, low fees matter in long-term investment returns, but you can’t ignore value. If the lowest fee option is also a terrible investment advisor or mutual fund, what are you getting for your money? Value matters more than the nominal price. Look at returns net of fees to account for value. You can’t pick based just upon low fees. Nor can you pick based upon high returns last year, ignoring fees.

5. Role Confusion.

Smart people tend to wear a lot of hats. It’s easy to forget which hat you’re supposed to be wearing for any particular decision. You have a policy hat of what should government economic policy be? But investing requires making decisions based upon what current economic policy is and future policy is likely to be.

I had a Board Chairman once adamantly opposed to government subsidies for a particular industry. He was a former Fortune 100 CEO, Harvard MBA, and Ivy League lecturer. Seriously smart by any measure. But we missed a major investment win because, whether it was good public policy or not, subsidies fueled dramatic growth and profitability in this industry.

One investment advisor role is to counteract the propensity to confuse politics and investing. We need an investment strategy in our saving for retirement that works … regardless of who wins elections.

6. Emotional Decision-making.

Smart people still have emotions. And they often decide based upon emotions. Like everyone else they may dress-up facts to justify an emotional decision. We praise people for their good judgment. Smart people are often employed to exercise good judgment. There’s a strong element of emotional intelligence in good judgment. But investment markets can’t really be evaluated like people. Substituting data for emotion helps play the probabilities over the long-run.

7. Ignoring other actors.

No business plan survives first contact with the market. It’s a corollary of the First Rule of Battle. The market always responds. Buyers and competitors make unexpected decisions. Game theory can help consider permutations and probabilities but there’s still some degree of the unexpected chaos. Investing is not a one move game, but an infinite game. It’s a mistake to ignore other actors and their likely responses.

8. Action Bias.

Smart people tend to prefer action as a response to new stimuli or new information, even if the prior strategy already accounts for the new information. A bias for action in strategic decision-making is good, but a bias for action at the tactical level that frustrates strategy is counterproductive. Stop and think, how does my strategy account for this risk? Do it before jumping to change things in response to current headlines. You have to keep your finger off the panic button to avoid buying high and selling low. A good strategy consistently pursued and well executed is generally better than constantly changing strategies.

Tactics inconsistent with strategy can also be disastrous. For instance, value investing requires volatile markets with a lot of mispricing to work. Value investors like market turmoil. You have to understand your strategy (or that of your investment advisor or fund manager). If you’re committed to value investing as a strategy, volatility is an opportunity and not the time to get out of the market. You make your money when you buy. The details of bad news and good news vary day-to-day. But you can expect some of each, every day and year. You can’t build a strategy that just hopes for the best or that expects only the worst.

9. Lack of focus.

Smart people often confuse the, “I could do better,” with the reality of the effort and focus required to really do better. With a full-time job do you have the time and focus required to manage investments at the same time? It calls to mind the lawyer admonition, the lawyer who represents himself or herself has a fool for a client. Perhaps you could be an expert in almost anything. But you can’t be an expert in everything. You have to focus on what you do best and delegate other questions to deep experts. I don’t want to have to know the intricacies of compliance or every tax nuance of 401ks. I expect my investment advisor and tax advisor to be the expert and advise me accordingly.

In a future article, we’ll talk about our current best answer to the saving for retirement challenge.