Advice

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—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 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 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.