Advice

Let me tell you a little story about my wife and me.

At the time that this story took place, we’d been married for more than a decade. For a good chunk of that, I’d been writing a New York Times column about Money and Feelings. I was also a certified financial planner.

Keep that context in mind as I tell you this story.

I had been traveling for a few days for work. I came home, sat down, and after my wife and I exchanged normal greetings, one of the very first things out of her mouth was, “Hey Carl, Kate remodeled her kitchen, and boy, it looks great!”

Now let’s pause real quick. Just ask yourself… what did you hear?

Because what I heard was: “Hey Carl, Kate remodeled her kitchen, and boy, it looks great… AND THE REASON I’M TELLING YOU THIS IS BECAUSE I WANT TO REMODEL OUR KITCHEN.”

I immediately stopped listening, and went into calculation mode. Approximately $49,672… at 6% interest… And so, I replied with the only possible rational response: “Cori, we can’t afford that.”

To which my wife replied, “What are you talking about?”

You can probably guess how the rest of the conversation went.

“You said you wanted to remodel the kitchen.”

“No, I didn’t, I said Kate…”

“Yeah, I know… but that means you…”

“No, it doesn’t. It means you’ve been gone for four days, and this was just me trying to start a conversation, which, by the way, is now over.”

…

Look, let me be super clear, this has nothing to do with gender. This isn’t me saying women spend money and men try to save it. There may be some differences in how men and women think about money, but if there are, I’m not privy to the information. This is just a specific example where my wife was saying something, and I was the calculator. Often the role is reversed, and my wife is the calculator.

The point here is that this conversation helped me realize that for 12 years, my wife and I were talking around money instead of about it.

This is just one example out of countless ones from my own life, and that readers have shared with me.

I think the reason we do this, the reason we talk around money instead of about it, is twofold.

1- Nobody taught us how to do it.
2- When we go to talk about money, it’s suddenly very emotional. We expect it to be rational, but it quickly ends up in the realm of feelings, and we say, “I’m never going to do that again.”

What I try to do now instead (and this is still a challenge for me), is this:

1- Ask questions. “Oh, that’s interesting. Can you tell me more about that?”
2- Clarify the conversation. “Are we talking about buying something, or are we just talking about something?”
3- Don’t calculate… Listen. This may be the most obvious one, but trust me, that doesn’t necessarily mean easiest.

Like I said, it’s a work in progress for me, too. So if you have any suggestions, feel free to send them my way!

What has worked for you?

-Carl

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

I want to make an important but relatively narrow point about investing.

This is going to sound self-evident or obvious, but most people don’t understand it.

The point I want to make is this:

There’s a difference between investment returns and investor returns… and only one of them matters.

Let me explain.

Imagine you open the newspaper, and there’s an ad for a mutual fund. The ad says that investment has returned 10% a year for 10 years.

That is the investment return: 10% a year for 10 years.

Now, let’s talk about investor returns.

If you put your money into that investment at the beginning of the 10 year period, and you left it there for the whole 10 years—didn’t add any, didn’t take any out, just left it there—what would your return have been? And no, this is not a trick question.

Ding ding ding: That’s right! Your return would have been as advertised: 10% a year for 10 years.

But here’s the catch: No one invests that way!

No one buys long-term investments and holds them for the long term.

That would be silly!

On average, we only hold long-term investments for two to three years, and then we get distracted by the next hot investment.

So while the investment, in this case, does 10% per year, we almost never earn that return because we don’t own the investment long enough. We’re too busy switching in and out of different investments. The return happened… we just weren’t there to get it.

And the only reason for that is our own behavior.

We think the job of any self-respecting investor is to constantly be searching for the best investment.

That makes sense and sounds reasonable enough.

But that well-intentioned behavior consistently leads us to buy investments that have just done well and to sell investments that have recently done poorly.

In other words, the well-intentioned search for the best investment leads us to buy high and sell low, over and over again.

And it’s that repeated behavior that leads to the difference between investment returns and investor returns. In other words… The Behavior Gap.

Once you see this, it’s hard to unsee it.

And that’s my hope. My hope is that this will be seared into your brain, and you won’t be able to forget it.

Stop searching for the best investment and, instead, focus on being the best investor.

You’ll save a lot of money, and a lot of heartache, if you do.

-Carl

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

When it comes to financial goals, the only ones that matter are yours. 

Listen, I realize any discussion of goals can be tricky. But at least for this discussion, I find it helpful to think of a goal simply as an object of desire. It’s something I want. 

But here’s the rub: We are really bad at knowing what we actually want. 

In fact, we learn what we want by watching what other people want. From the youngest age, we learn to desire by seeing what our parents, siblings, and peers desire, followed eventually by what people on social media desire. 

In a very real sense, we co-opt other people’s goals because it’s actually very hard to get clear about our own. 

This can wreak havoc in so many areas of our lives, but particularly when it comes to our relationship with money. 

There’s an old saying that we spend money we don’t have to buy things we don’t want to impress people we don’t even like. This happens when we shop for cars or houses or investments. 

You hear your wealthy uncle talking about how important it is to own municipal bonds. He must be really smart because he has a bunch of money, right? Suddenly, you think you should go buy municipal bonds, too. 

You hear about all the cool kids investing in startups and all the fancy people buying Teslas. Maybe you should do that too. 

But here’s the thing: None of that matters. None of it. 

The only goals that matter when it comes to your money are your goals. Not anyone else’s. 

So… what are your goals?​

-Carl

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

One crazy thing we do as humans is take the recent past and project it indefinitely into the future. 

As the news cycle has sped up, this problem has only gotten worse. It used to feel like the “recent past” went as far back as a couple of years. Now, it can feel like the last couple of minutes. 

We think if things are going terrible, they are going to continue being terrible forever. If your portfolio value seems to be dropping, it’s tempting to say, “At this rate, if this continues, I won’t have any money [insert number of months] from now.” 

On the other hand, if things are going well, we expect them to continue going well forever. If every year for the past five years you’ve gotten a bonus in January, and in October of this year you want to buy a new house, it may be tempting to factor that bonus you will surely get in January into your decision. Of course, it’s terribly disappointing if that bonus doesn’t come. 

Turns out, this phenomenon has a name. It’s called Recency Bias—and if you’re not aware of it, it can wreak havoc in your life. 

The only solution I’ve come across is to lengthen your definition of the recent past. 

As they say, those who don’t learn from history are doomed to repeat it. 

We would do well to make our memories go back just a little bit further than the common goldfish. That way, we may find ourselves recalling a time when the bonus didn’t come, or the market was better, or whatever financial boon or burden we need to keep in mind is a distinct possibility in the very near future. 

If we can do that, we stand a much better chance of not falling into the same traps over and over again. Not just in our finances, but in every aspect of our lives.

-Carl

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

I absolutely LOVE Jeni’s Salty Caramel Ice Cream. 

Sometimes, on the way home from work, I’ll stop at the grocery store, buy a pint, and eat it. 

That’s right. The whole thing. 

Yes, I know. That’s a LOT of ice cream. 

I’ve noticed that a very interesting thing happens when I do this: 

Bite 1: Best thing in the world, ever.
Bites 2-10: Really good.
Bites 11-15: Good.
Bites 16-20: Meh.
Bites 21+: Ok, now I’m sick. 

I learned this lesson the first time I ate a pint of Jeni’s in a single sitting. 

And yet, for some reason, I still occasionally repeat the experiment. 

Of course, this phenomenon doesn’t only occur with ice cream. This is a well-documented economic principle called Marginal Utility, and (you guessed it) it applies to money, too. 

Just like ice cream, beyond a certain point, having more money will not lead to more security, freedom, and happiness. 

Fact. 

The academic literature on that is clear. 

My question is: Why do we devote so much of our time, energy, and attention to having more? 

Wouldn’t we maybe be better off if, instead, we focused on having enough?

-Carl

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

If you’re worried about the stock market, find someone to give you a hug. 

Let me explain. Humans are wired to want more of what gives us security and pleasure and to run away from things that cause us pain. This behavior has likely kept us alive as a species, but it creates havoc when we invest. 

When the markets go down, and the financial pornography networks start yelling that you should save yourself before you end up living under a bridge, it feels like a wild animal is chasing you. The only thing to do is run! 

Feeling scared is normal at that moment, and the last thing you need is a lecture on the history of long-term stock market returns. You don’t need facts and figures; you need a hug! You need someone to listen to you. You need empathy, kind murmurings, physical affection. An embrace. 

After the hugging is over and everyone is feeling reasonable again, we can review the careful analytical work that went into designing your portfolio. We can revisit the goals and values we baked into that analysis. We can even consider the weighty evidence of history and talk about how the best thing we can do is stay invested. All of that is important. 

But first, a big bear hug. Feel better now?

-Carl

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

Most of us make the same mistake with our money over and over: We buy high out of greed and sell low out of fear, despite knowing on an intellectual level that it is a very bad idea. 

The easiest way to see this behavior in action is to watch money flow in and out of mutual funds. Let’s go back to early 2000. The dot-com market had reached a fevered pitch. People were using their home equity to buy tech stocks right after the NASDAQ had a single-year return of better than 80 percent! 

Then, in January 2000, investors put close to $44 billion dollars into stock mutual funds, according to the Investment Company Institute, shattering the previous one-month record of $28.5 billion. We all know the story from there. Money continued to pour into stock funds, breaking records for February and March and pushing the NASDAQ to 5,000, only to lose half of its value by October 2002. 

This gets worse. That same October (at the low for the cycle), as investors were selling stocks as fast as they could, where was all the money going? Into bond funds, at a time when bond prices were near record highs. 

Think about this pattern for a minute. At the top of the market, we can’t buy fast enough. About three years later, at the bottom, we can’t sell fast enough. And we repeat that over and over until we’re broke. No wonder most people are unsatisfied with their investing experience. 

I realize this is a story from ancient history; 2000 feels like a long time ago. But we do this again and again. At this point, there’s a story like this every month. 

Can you imagine doing this in any other setting? Picture walking into an Audi dealership and saying, “I need a new A6.” The salesperson says, “Oh my gosh, you’re in luck, we just marked them up 30%!” And you say, “Awesome, I’ll take three!”

Look, I get it. We’re hardwired to get more of what gives us security and pleasure and run away as fast as we can from things that cause us pain. That behavior has kept us alive as a species. Mix that with our desire to be in the herd, the feeling that there’s safety in numbers, and you get a pretty potent cocktail. When everyone else is buying, it feels like if we don’t join them, we’re going to get eaten by the financial version of a saber-toothed tiger. 

But I’m telling you, this behavior is terrible for us when it comes to investing. 

Of course, it’s important to know that it’s totally normal to feel fear and greed or to be scared when the markets are scary. The fact that you feel those things just means you’re human. 

It’s OK to feel it. But understand that acting on it will cause financial harm. 

So do whatever you need to do to not act on fear and greed. That could mean staying out of the kitchen, building guardrails, having a plan, or hiring a planner. Whatever you need to do, just do it. 

I have found that just knowing this helps me behave better. I hope that will also be true for you.​

-Carl

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

Tell me if this sounds familiar.

You go to make a decision.

It seems relatively simple and straightforward.

And then you do what you are supposed to do when you make decisions.

You read reviews, ask your friends, make pros and cons lists, consider edge cases and nuance.

And suddenly, your simple decision seems massively complex. Like you’re in the middle of a giant ball of yarn and can’t get out.

I used to think when I found myself in the complex middle that I had done something wrong. But now I’ve realized it’s actually part of the process.

It’s called “research.”

It’s supposed to be confusing. We’re supposed to consider edge cases and nuance. We’re supposed to play “what if” games. We’re supposed to spend some time in the complex middle.

The question is, how do we get out of the complex middle?

The answer is, you get quiet.

Let me explain.

After you’ve done the research, after you’ve done the homework, after you’ve considered the edge cases and the nuance… you get quiet.

For some people, that may look like sun salutations and a walk. For others, it means prayer and meditation. For me, it’s often a combination of active prayer while moving through the mountains. I take that problem to my quiet place. And then I feel my way through.

I ask myself: What feels right?

And again, it’s important to emphasize you’re relying on what feels right after you’ve done the homework.

So next time you find yourself stuck in the complex middle, don’t get frustrated. Realize it’s part of the process. And the next step is to get quiet and feel what’s right.

-Carl

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

There are 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 focusing 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, nothing matters anywhere near as much as your behavior.

You can design the greatest portfolio ever created by humankind, and one behavioral mistake a decade could mean 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 most is having 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 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 it 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 it 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.