Advice

There’s a lot of people running around out there making a lot of noise and waving their hands, trying to tell you what you should be focused on as an investor.

These “hand wavey” people talk about China, things like The Fed, monetary policy, stimulus, asset allocation, cryptocurrency, and shiny objects like silver and gold. It’s an awful lot to keep track of.

And don’t get me wrong, some of those things actually do matter. It’s not a bad idea to learn about them.

But one thing is certain: When it comes to investing, they don’t matter anywhere near as much as your behavior.

You can design the greatest portfolio ever created by humankind, and one behavioral mistake a decade and you would’ve been better off in CDs at your bank, or stuffing the cash in your mattress.

So yes, the economy matters, smart portfolio design matters, how much we have in small cap, value and growth, all those things matter. 

But the thing that matters more than anything else is that you own investments that will allow you to behave.

In fact, I would argue that even portfolio design only matters to the degree that it influences good behavior.

Arguing over whether you should have 17.2% or 17.5% in emerging markets—that might be an interesting debate, but the difference between 17.2 and 17.5 is a misdemeanor, when the felony we’re all committing is behaving poorly. 

So next time a “hand wavey” person shows up in your face telling you all the things you should be doing, just smile, nod, and walk away. 

And remember that none of that matters if you don’t know how to behave.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

Psst. Excuse me. I’ve got a secret.

I feel like I should be talking really quietly right now, but first I need to warn you. This secret is going to seem incredibly obvious. You may even wonder why I’m going to tell you about it at all.

The secret comes in two parts:

1- We all have blind spots.
2- By definition, we can’t see them.

That’s it… that’s the secret.

See what I mean about being obvious? 

They’re called blind spots for a reason… it’s because you can’t see them. But here’s the real tragedy: We’re often totally uncoachable when it comes to dealing with them. Not only can we not see them, but when somebody points them out, we don’t believe they exist!

I know this is true because I’ve experienced it myself. For months, my trainer was trying to help me solve a stomach issue. He suggested I keep a food journal to see if my symptoms pointed to an allergy. For months, I refused. 

“I already know what I’m eating,” I said, “I don’t need to write it down in a journal!” 

Sound familiar?

Trust me… You have blind spots. But there is hope. There is a solution.

The solution is to be coachable. We need to find, and then listen to, other people who can see our blind spots.

A friend of mine, a retired investment banker, did just that himself. This guy knew his way around money and definitely knew how to invest. But he was looking for help with his money. I asked him, “Of all the people I know, you’re in the best position to deal with your own money. Why do you need help?”

“Carl,” he replied, “I could manage my own money, except for the ‘I’ part.”

He understood that when it came to his own money, he had a blind spot. And he recognized the value in having someone else help him see the mistakes he might make. 

This is one of those cases where the solution is simple but not easy. 

You don’t hire a coach—whether to help you with money, business, creativity, or sports—because you’re stupid. 

You hire a coach because they’re not you.

Other people can see things you clearly cannot see. 

Your job is twofold:

1- Don’t run away from the feedback of people who can see your blind spots.
2- Listen to feedback when you get it. Treat it like gold when it shows up, don’t be defensive.

If you can do that, you may learn to see what you were previously blind to. And that can be incredibly helpful in investing, relationships, or life in general.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

Humans are pattern-recognition machines. We see patterns everywhere! In fact, we’re so good at recognizing patterns that we often see them where they don’t even exist.

This shows up frequently anywhere there are big bodies of data. And while well-intentioned, this is one of the big behavioral mistakes we make time and again in personal finance. We look for patterns. And guess what, they absolutely exist, right up until the point where you try to invest your money based on the pattern. Then *Poof!* they vanish into thin air.

One of my favorite examples of this was some research done by David J. Leinweber at Caltech. Apparently, he figured out how to predict the stock market using just three variables:

1- Butter production in the United States and Bangladesh.
2- Sheep populations in the United States and Bangladesh.
3- Cheese production in the United States.

This is amazing! Right? 

It turns out these three variables predicted 99% of the stock market’s movement!

#TimeToStartAHedgeFund.

There’s only one problem: The joke’s on us.

In our very human pursuit of patterns, we start seeing things that aren’t really there. We think if something happened a certain way in the past, then it will surely continue into the future. We start to believe—we desperately want to believe—that this pattern will have predictive value.

But it doesn’t. And that’s the thing about most patterns—they don’t predict the future; they just describe the past.

While some of these silly data mining tricks might be interesting to talk about, they don’t actually help us. 

Believe me, I’ve gone down the rabbit hole many times. For years, any time someone approached me with this type of pattern I would feel like I had found the Dead Sea Scrolls. But each time, the same thing happened. The pattern existed right up until it was time to invest… and then it didn’t.

Now when people approach me with this research—and it’s always called “research”— promising to show me a new pattern in the data, I come back to them with a magic pattern of my own.

“It turns out,” I tell them, “that the only pattern that will influence your investing success is your behavior.”

• Can you break the pattern of buying high and selling low? 
• Can you break the pattern of chasing after the next “big” investment? 
• And perhaps most importantly, can you buy low-cost investments in a diversified portfolio based on your values and goals and then simply ignore it?

Now that’s a pattern I can endorse.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

In this three-part audio series, I want to introduce a relatively narrow and simple, but insanely powerful, concept. It is an idea I’ve been working on for over a decade. Throughout this three-part audio series, I’m encouraging you to explore what trust means alongside me.

We’ll examine trust and three ways to look at it:

• Treating Trust as an Asset
• Trust on an Individual Scale
• Building Trust at Scale

Let me start by making an argument that trust is the single most valuable asset any real financial advisor has—the trust of your current clients, your future clients, your community, collectively as a society of real financial advisors, and then expanding to the trust of the world.

Here’s why I think it’s the most valuable asset: Just for a minute, I want you to take that asset away. Let’s say you did something tomorrow to lose the trust of your current clients, your future clients, your community, or collectively the world. If you lost that asset, what would you have left?

I don’t think we have to argue that you would have nothing, right? Sure you can rebuild, of course, but at that moment, you would have nothing.

That’s why I make the argument that trust is the most valuable asset any real financial advisor has. It’s fascinating to think about that because it doesn’t really show up on a balance sheet. But it would do us all well to think that way. What would it be if trust showed up on your balance sheet? What does it look like? What does it even mean to have trust as an asset?

As we look at trust on an individual level, I want to start by saying I don’t believe that trust is a function of the quantity of time you spend with somebody, but more a function of the quality of the experience. We can spend a lot of time with someone, and depending on the nature of the experience it could actually lead us not to trust them.

On the flip-side of that, we could spend a brief amount of time with somebody, and we walk away thinking, “Wow, I really trust that person.” 

What’s the difference?

The difference is the quality of the experience. I think to a considerable degree, as it applies to our jobs as real financial advisors, that is a function of the quality of the questions you ask.

My friend and mentor John Bowen used to say that people will judge you by the quality of the questions you ask. I would contend the fastest way to build trust as an asset on an individual level is to ask really good questions and listen. It all comes down to treating somebody like you would like to be treated—ask good questions and then listen carefully to what they tell you with empathy. 

We’re not doing this because it’s a sales technique. We’re doing it because it’s the right thing to do. We care about our profession and we care about our clients. If trust is the single most valuable asset we have, the way to build it on an individual level is to practice being trustworthy.

Be intensely curious. Go into the discussion curious about the other person.

While trust on an individual level is valuable to practice, one of the things I’ve been thinking about for over a decade is this idea of trust at scale. How do you do trust at scale? To me, that is what we’re trying to capture.

To scale trust, I would encourage us to build a trust asset. What if trust is something that could even show up on your balance sheet?

For me, the simplest way to think about trust is an email list. There is a collection of people that have given me permission to communicate with them. I send them relevant, and hopefully, valuable information to help them do a better job. That list, in a very large and in a very real sense, is the most valuable asset I have. Tens of thousands of people have raised their hands and said, “Hey, you can communicate with me!” It’s the single most valuable asset I have, and so I try to be really careful about never doing anything to abuse that trust. They’ve given me permission to take a little bit of their attention. 

In today’s world, I would argue that giving someone your attention is one of the most valuable things to give. I don’t take it lightly that people have given me permission to take a little bit of the attention they have each day.

An example of trust at scale is when a collection of people give you permission to communicate with them again. They’ve essentially raised their hand and said, “Hey, I’d like to hear from you again.” Real financial advisors can start to build trust at scale in the form of a simple email list.  

Sending relevant, timely, and valuable information to people who trust you doesn’t cost anything but a little bit of your time. I would make the argument that it might be the most valuable thing you could invest your time in. You begin to build a trust asset that is prime for scale—permission to communicate with people that have given you permission to do so.

I had the pleasure of chatting with the folks at The Motley Fool as part of the series they did on financial advice. While the title of the first story alone makes it worth reading (“How to Thwart the Opaque, High-Fee, Underperforming Financial Advisors Who May Be Mismanaging Your Money”—I love it!), they do a great job, over seven articles, of outlining what to look for in an advisor and some of the other issues around financial advice. 

The truth is most individuals would probably benefit from financial advice. Saving and investing is complicated, and most of us need help making decisions on asset allocation, diversification, and retirement vehicles, to name just a few challenges. The experts cited in this series agreed that financial advice can be invaluable for many investors.

The work real financial advisors do changes people’s lives. This is true!

Fake financial advisors can destroy people’s lives. Sadly, this is also true.

Because the media stories are almost always about the fake advisors, sometimes even the real ones doubt their value. It’s easy to do. After hearing the 97th story about how easy it is to do everything a (fake) advisor does, you start to wonder about the value of your work.

But let me be clear:Because behavior plays such a huge role in a client’s lifetime success, helping clients behave well in scary markets is massively valuable. It is critical that real advisors understand and believe that. Instead of learning how to justify the fee you charge a client, get so good at your craft that your value isn’t a question.

The work that real financial advisors do is different than the work the traditional financial services industry has done. Real financial advisors all over the world take heart: We’re all working through a massive opportunity together to make a difference in people’s lives.

As investors, we can’t put our heads in the sand when it comes to personal finance. If you haven’t had a chance to do so, I encourage you to read through The Motley Fool’s entire series.

If you are a financial advisor who wants to get clear about your value and how you provide it during scary markets, might I humbly suggest heading over to The Society of Real Financial Advisors where we share communication tips with financial advisors around the world. It represents some of my most valuable work, and I want as many advisors as possible to have access to it.

You made a huge mistake last year with your money. You know this now, right? The only investments in your portfolio that did very well were probably United States stocks. Bonds may have held their own, but everything else was just pitiful. International stocks performed horribly and emerging markets weren’t much better.

What were you thinking? Clearly you missed a big opportunity in 2014. You should have skipped diversifying and gone all in on United States stocks.

This is the problem with the diversification strategy you stubbornly insist upon. Every year you’re going to be unhappy with something in your portfolio. Most years, if you own five distinct asset classes, one or two might do well, one will sit in the middle, and two will perform badly. And you can’t tolerate that, no way. After all, why would anyone settle for anything less than top performance?

Luckily, the solution is an easy one. On January 1 of each year, just figure out which asset class will do really well and move all your money into that investment. Forget diversification. Just pick the winner!

Lest you think all of the sarcasm up until this point does not reflect the worldview of many investors, I had a client in my past life whom we will call Dave. He had a lot of money. I remember having a conversation in which he was really mad over this very issue. He said to me, “This is simple. All I want you to do is tell me what to buy before it goes up and what to sell just before it goes down. That’s it.” I remember replying, “Really? Why didn’t I think of that?”

But seriously, with no proven model for picking the next winner, can you really afford to bet big on any one investment? If you had to, could you even pick one, and only one, investment for the rest of this year? The answer can’t be no! Don’t you know by now who the winner will be in 2015? How can you not know?

So in all seriousness, perhaps the better choice really is to stay diversified. Yes, a diversified portfolio all but guarantees you’ll be unhappy with at least one investment each year. But the investments that make you unhappy change from one year to the next. One set of investments zig while another set zags. Take this unhappiness as a sign you’re doing diversification right.

That’s the way markets work, after all.

Plus, on a scale of 1-10, with 10 being abject misery, I’m willing to bet your unhappiness with a diversified portfolio comes in at about a 5, maybe a 6. But your unhappiness if you guess wrong on your one and only investment for the year? That goes to 11.

Beyond diversifying, there’s rebalancing, which is something else that will probably make you unhappy. You’re selling at least some of an investment that’s done well and buying more of one that hasn’t. This unnerves people. They don’t see it as buying something on sale but as trading a winner for a loser.

In years like 2014 with an obvious winner, diversification becomes everyone’s favorite whipping boy. One type of investment does so much better than the others, it seems insane to diversify, let alone rebalance.

But that’s the problem with judging a tool like diversification from one year to the next. You need to judge diversification’s value over the long term, and by long, I’m referring to decades. You’re not diversifying because of how stocks or bonds did last year. You keep diversifying because you don’t know how they’ll do over the next 10 years.

Sure, your brother or sister-in-law or some talking head on television may have tried picking the investment winner of 2014 and gotten it right. In that year. But if you try and get it wrong, make sure you have a calculator handy. You’ll need it to figure out how much longer you’ll have to keep working to make up for the loss.

This column, titled Diversification Is the Sane Alternative to Betting Big on One Investment, originally appeared in The New York Times on March 15, 2015.

In 2012, I sat down with Susan Johnston Taylor at US News for a Q&A. I shared tips for avoiding common financial blunders and setting money goals. You can read the original article here: How to Break Bad Money Habits in 2012.

What are some of the most common money mistakes you’ve seen clients make or perhaps that you’ve made yourself?

One mistake that we’ve made way too often in relationship to investing is this human tendency we have to buy high and sell low. We all know that successful investing is about buying some asset for a low price, and then selling it sometime later for a higher price. But we all tend to do the opposite. We tend to get very excited when the market’s doing well. We all pile in just in time for it to go down. Then it goes down, we all get nervous and scared, and we jump out. So it sounds really simple and cliché, but one of the biggest mistakes we make is buying high and selling low, and doing it over and over again.

Any tips on breaking that pattern?

First, we can recognize the tendency to do it. Fixing any problem always starts with admitting that you have one. And with investing, it’s pretty easy to go back the last three years, last five years, last 10 years and look at the decisions you’ve made. Did you buy in late ’99? No. Were you liquidating your 401(k) account in 2002?

Number two, step back and ask yourself why you’re doing these things. Take the time to build a plan. Not some big, scary one-inch thick financial plan. Just take the time to step back and say, “Where am I today, and where do I want to go?” And then recognize that your investment portfolio should match that plan.

And then thirdly, go on a media fast. Stop listening to it, or start realizing a lot of what we hear in the financial press is more about entertainment than it is about advice.

You wrote a very candid piece for the New York Times about short-selling your own home and some of the decisions that led you to that point. If you could go back in time, what would you do differently?

Without trying to sound too self-serving to the industry, I would have a planner involved in my life. We recently hired a financial planner three, four months ago. And I am convinced that had I had this particular planner involved in my life five or six years ago, I wouldn’t have made those mistakes.

Now, I realize there’s some baggage as soon as you say, “Hire a financial planner.” But maybe the easier way to say it would be get a second opinion about major decisions. Ask a friend, a parent, a family member, a CPA, an attorney before you make major financial decisions, because we’re just too close to it to be objective.

Sometimes all it takes is just explaining to somebody what you’re thinking about doing out loud. In some cases they don’t even have to say anything. All you have to do is hear it out loud, and you realize it was a dumb idea. So I would have hired a qualified financial professional to help me avoid doing stupid things.

Your book is coming out in January, just after many people will have gone on a month-long spending binge. What should readers do to prevent that post-holiday hangover?

Most of these problems I get asked about are planning problems. Take the time to give yourself permission to take no blame, and no shame, and get really clear about your current financial reality. Where are you today? I used to think that was the easy part, but the reality is, most of us haven’t even figured that out.

After you’re really clear, you have some shot at figuring out where you want to go. If you have kids, what do you want to help pay for? Can you pay for college? When would you like to retire? This may be 30 years out — it may seem like a long time — but just figure out where you are today, and where you want to go. I’ve noticed a huge difference in people who’ve gone through that process on their own or with help, and it seems to me that they have an easier time being disciplined about day-to-day decisions.

Give yourself permission to let go of the need for precision, and this is perpetuated by the industry, of course. When you sit down, you want to know exactly what your retirement is going to look like in 30 years, and you don’t even have any idea where you’re going to be next month. That’s an overwhelming thing. So, at least start with the idea of understanding where you are today and realize this is going to be a process, and you’re going to course-correct.

How often should people be looking at their goals? Is it enough to make financial resolutions at the beginning of each year, or should you do it more often?

As often as you can. If you made a plan to do this once a quarter, I think it would be incredibly valuable. For example, let’s say you set a goal to save $100 per month into your child’s 529 account, because you decided education was really important, it was something that you really valued. Three months later you wake up and say, “Gosh, we said we’d save $100 a month and we only did that the first month. Is it still really important to us? Yes, it is. Maybe we should automate that.” Three months later, again no blame or shame, you think, “Oh wow, look, we saved $100 a month.” So I think quarterly is a good time.

Anything else you’d like readers to know about your book?

One of my goals was to write a personal finance book for people who never read personal finance books. And what I mean by that is, there’s this group, 35 to 50-year-olds, educated, typically have decent incomes, that are starting to realize, “Wow, I’ve got some important financial responsibilities that I haven’t thought that much about.” But you don’t really feel like running out and grabbing the latest Dave Ramsey book or whatever. So it was a personal finance book written for people who would never read personal finance books, and it’s not meant to be prescriptive. It’s really meant to sort of open the door to a bunch of conversations, because a friend of mine always says, “Personal finance is more personal than it is finance.” So I think one of the challenges is trying to get people the tools to have the right conversations instead of being very prescriptive about exactly what you should do.