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How to keep personal biases from torpedoing your retirement plan

Vancouver resident Ryan Caulfield has no plans to live in Edmonton, but he invested in rental homes in the Alberta capital in 2010, putting head before heart when it comes to generating income for his retirement.

Today, even with a downturn in the energy economy, he still holds his Edmonton properties because they are fully rented and continue to bring in steady income.

"One thing that people get caught up in is the emotion, when they panic on the crashes," says Mr. Caulfield, a chartered professional accountant in the aviation industry. "You have to separate emotions from your investments, including real estate."

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That's not easy, say those who study the personal biases of investors saving for retirement.

University of Toronto finance professor Lisa Kramer, who examines human behaviour in financial decision making, says seasonal depression can spur people to sell in a volatile market because they become despondent and risk averse.

"What people will do is panic and sell, rather than riding it out," she says. "A big implication for people close to retirement is that they will sell their whole nest egg right at the market crash and lock in at a low value."

A counter-strategy, she suggests, is to have a financial plan and stick to it. "The worst thing to do can be to act when we are feeling emotional."

Toronto financial adviser Jason Abbott of Inc. says aversion to losing money is a major bias, sometimes thwarting a rational discussion on saving for retirement.

He cites an example of an investor in his mid-40s who got spooked when his portfolio declined sharply during the 2008-9 recession. Instead of hanging tight and waiting for a rebound in the stock market, the investor converted to cash and chose to pay down his mortgage instead of contributing to his retirement account.

Such a conservative approach, Mr. Abbott says, means the investor lost money when measured in real purchasing power, thereby risking a delay in retirement or a premature depletion of the nest egg.

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In today's financial environment, the need for investors to recognize their own biases is more important than ever.

For example, with the disappearance of defined benefit pensions, the onus is on investors to make sound decisions about contributing to a defined contribution pension plan at work or their personal retirement savings account.

In addition, retirees are living longer than past generations.

"People's health is much better, and you could have retirement after 65 that lasts for 25 to 30 years, says Andy Mitchell, managing director for SEI Investments Canada. "If you haven't saved appropriately and don't have good spending habits, it could be a problem," he says.

He recommends investors try to overcome biases by establishing retirement goals in consultation with an adviser instead of being blown off course by emotional responses to negative events.

"We need to do a better job to build the framework and have a middle road, so we can make sure people think about their long-term goal instead of their short-term need," Mr. Mitchell says.

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Meanwhile, with a volatile stock market, the plethora of sometimes contradictory financial information can shake investor confidence in sticking to a long game.

"Your emotional bias can really affect your end rate of return," says Mark Ting, a senior investment adviser with Holliswealth in Vancouver and a financial blogger.

Invest early and steadily, he says, to take advantage of compound interest on savings. "You end up investing a lot less of your money for retirement if you start early and [contribute] often," he says.

Another bias, says Mr. Ting, is for investors to assume that Canada is the only safe place to invest. "We are a small part of the global economy, about 3 per cent," he says. "Having all of your assets in Canada is not a good bias to have."

In Mr. Caulfield's case, he diversified his retirement portfolio in 2010 by buying those rental properties in Edmonton and later near Surrey, B.C. In 2014, with experience gained in Canada, he purchased property south of the border.

He did not buy when U.S. real estate was at its lowest in 2010-11, after the financial crash, but Mr. Caulfield says "it has returned good money even if it was not at the bottom."

Mr. Caulfield says that with the benefit of 20-20 hindsight, he might have done some things differently, just as putting a bigger emphasis on the U.S.

But does he have real regrets?

"No, I have learned a ton in what I am doing now," he says. "It is not a windfall, but it is still solid."

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