The chronic failure of individual investors to earn investment returns greater than the market over the long term is a well-documented phenomenon. Given how many individuals are still tempted to try to be the exception to this rule, however, we would like to explain why this is the case and how working with a financial adviser and having a deliberate investment strategy can help.
Don’t Trust Your Head. Unfortunately, the main culprits sabotaging your individual investment efforts are: your head and your heart. The field of behavioral finance has uncovered several cognitive biases that interfere with successful investing strategies, especially for investors trading in individual stocks, and we have observed these biases with real estate investing as well. For example:
Don’t Trust Your Heart. Even when investors avoid dabbling in individual stocks and follow a less active investment strategy, their emotions can significantly hamper their investment returns by influencing when and how they invest. Investor emotions generally fluctuate based on the market cycle, feeling elated when the market is high and fearful when low. If investors act on those emotions, buying when they feel elated and selling when they are afraid, that often translates into buying at the peak of the market when prices are highest and selling when prices are lowest, i.e. the opposite of the ideal investment strategy. An article in US News on the “7 Bad Investing Habits That Are Holding You Back” compares this reactive behavior of individual investors to that of an impatient driver, stuck in traffic and envying other lanes that appear to be moving smoothly. The article explains, “[The temptation to get in the other lane] won’t necessarily get you to your destination faster, but the urge is powerful.” Emotions tend to drive investors to switch lanes (into different stocks, asset classes, or cash) often at the worst possible time, when their fear is most intense.
We are simply not wired to be good investors. While we love to buy other products on sale (new car, clothes, etc.), we do not feel the same way about our investments. Hiring a financial adviser, especially one with a clearly outlined and faithfully implemented investment strategy, can remove much of the negative influence of emotional and cognitive biases from your investment performance. Commitment to a long-term “buy and hold” investment strategy (with a fixed asset allocation and regular portfolio rebalancing) will reduce many of the cognitive biases over which individual investors stumble. And the fact that the strategy will be implemented by a relatively objective third party ensures that emotions will play less of a role.
Don’t trust your heart, or even your head. Hire an adviser, who will feel less emotional about your investments, and trust in a disciplined investment strategy though the highs and the lows instead.
On July 4 of last year, President Trump signed into law the “One Big Beautiful Bill” Act (OBBBA), a budget reconciliation bill that impacted a wide array of public policies. We published blog posts at that time on some of the major provisions of the bill, including the new student loan limits for graduate and professional schools. However, the OBBBA also has the potential to impact student loan options for undergraduates, beginning with the upcoming school year.
For financial aid packages starting after July 1, 2026, colleges have the option to limit the amount of federal student loans offered to undergraduates based on a student’s program of study. Certain majors generate higher average earnings, making it easier to pay back student loans after graduation. Engineering and computer science majors, for example, can expect higher starting salaries than those who majored in social work or fine arts, which increases the possibility of default among the latter group.
The OBBBA leaves the decision to colleges—at the discretion of the financial aid administrator—of whether (and how much) to limit federal student loans for lower paid programs of study, as long as the limit is applied consistently to all students in a given program. Thus, it is difficult to gauge the extent to which this provision of the OBBBA will impact financial aid packages for the upcoming school year. If smaller federal loan packages make a particular college less desirable to applicants, wouldn’t that induce colleges to forego the option of limiting federal loans? Perhaps. But there are three reasons that they might make use of this OBBBA provision.
First, consumer protection for students. The purpose of the legislation was to limit over-borrowing in which students take out loans that they will not be able to pay back. Colleges want to avoid graduates trying to service loans that constitute a crushing amount of their monthly income and/or dealing with the negative consequences of defaulting on a loan early in their professional life.
Second, the timing of choosing a major. For many colleges, students do not choose a major until after freshman or sophomore year. Therefore, limits on federal student loans for certain programs of study would not necessarily influence their choice of college because they may already be enrolled at a college for a year or two before the limits would start to apply.
Third, preserving institutional access to federal aid. Defaulting on student loans affects not only the student but the institution that he or she attended. Since the late 1980s, the Department of Education has tracked “Cohort Default Rates” (CDRs), which reflect the proportion of students from a particular school who defaulted on their federal student loans prior to the end of the second fiscal year after starting repayment. If a college’s CDR exceeds 40 percent in a given year or 30 percent over 3 years, the school will lose the ability to award federal student loans (as well as Pell Grants) to its students.
What can undergraduates do if colleges limit the amount of federal student loans for their area of study? An easy way to circumvent the impact of this change is to simply borrow more using private loans. The downside of this strategy is that private loans generally involve higher interest rates and less flexible repayment options than federal student loans, and eligibility is based on the borrower’s credit score, which could be a problem for some lower income households.
Perhaps a harder but more sensible path would be to reconsider your choice of major (and prospective career field). If the limited amount of federal loans offered by your college for your desired major is insufficient to cover the cost of attendance, that could be an impetus to explore other options. Some students may “hedge” against less lucrative interests with a second major in a field that offers more financial opportunity. In other cases, it may make sense to forego a first choice major entirely and instead pursue a program that is not subject to federal student loan limits.
While this option may involve some disappointment and difficult adjustments of expectations in the short run, it may help the student avoid significant financial stress in the future. Also, most college-educated workers in the United States ultimately end up in jobs unrelated to their majors, so one’s choice of major may not be as paramount as it seems at the time in determining the course of a student’s career.
If you have questions about helping with education funding for your children or grandchildren, please do not hesitate to call or email us any time.
Happy New Year! This is the time of year when many of us are taking stock of our routines and committing to new and improved habits. Not only is it a great time to commit to healthier eating and exercising more, but January is also a great time to review your retirement savings plan! Are you on track to meet your goals? If not, what will it take to get there?
For those who are contributing the maximum allowed by law to their retirement or health savings plans, note that the IRS raised contribution limits in 2026 for most types of accounts, and they are implementing a new rule for catch-up contributions, as described below.
IRA contribution limits
401K, 403b and most 457 plan contribution limits
Flexible Spending Account (FSA) contribution limits
Health Savings Account (HSA) contribution limits
*Note that, starting this year, any catch-up contributions for those over 50 years old to 401k, 403b, or 457b accounts will now have to be made to the Roth version of their employer-sponsored retirement plan for high income employees. High income employees are defined as those who earned more than $150,000 in FICA wages for that employer in the previous year. (Check Box 3 of your W-2 for your FICA wage amount in 2025.) This new provision may change whether it is advantageous for high income earners to make catch-up contributions to their retirement accounts at all, so if you are impacted by this change, please reach out to us at PFS so we can discuss the best strategy.
If you have any questions about your retirement savings plan or any other financial issues in the new year, please do not hesitate to call or e-mail any time.
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