Money

Repeat after me: You. Can’t. Time. The. Stock. Market.

Sure, there are data models that may be 93.7% accurate 91.8% of the time. But there’s no such thing as a stock market oracle or crystal ball.

The stock market is not like gravity or even the weather. It doesn’t follow set laws.

On any given day, the stock market represents the collective feelings of all of us. More often than not, those feelings are based on emotions (rational or not). And it is only in hindsight that we recognize our mistakes.

So while on one level, human behavior seems predictable (e.g., we get excited and buy stocks when they are flying high; we get scared and sell when stocks decline), it’s awfully hard to know what we’re doing until it’s too late.

The basic facts have remained the same. Over time (think 10, 15, or 20 years), stocks typically do better than bonds, and bonds typically do better than cash. Low expenses are typically a good sign of future relative performance. We also know that a diversified portfolio will help protect you from the variability of the stock market. Typically.

Beyond that, stock market timing is just a guessing game, and we’re pretending to know something we don’t.

I’m ready to stop pretending. Are you?

-Carl

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

Once upon a time, I sent an email to my newsletter subscribers with a simple question: Is it hard for you to talk about money with your spouse or partner?

Most people said yes, but the response I got that really hurt was this:

“YES! It is hard, because it often feels defensive. She spent too much. He spent too much. Was that aligned with our values? What are our values? How come there isn’t more? And if only she would spend less, then I wouldn’t have to work so hard. :)”

If that sounds too close to home, imagine how it felt to see those words from… you guessed it… my wife!

I have to admit that upon reading that, I was discouraged. There was even a part of me that felt like a fraud. Who am I to be talking to other people about money if my own wife feels this way?

But I also need to admit she’s right. It’s challenging for us to talk about money. Not just with each other, but with our parents, our children, even our siblings, and friends.

And you know what? That’s OK.

This, my friends, is one of the keys to talking about money: knowing that it’s going to be hard. Sometimes, it’s going to be painful. And that’s OK.

Talking about money may not be necessary for all couples. But for the vast majority, it’s like taking out the trash or doing the laundry—just one of those things that has to happen.

So do your best, keep it as civil as possible, and maybe even think of it as an opportunity to connect more deeply. And, like anything else difficult in life, if at first you don’t succeed, try and try again.

-Carl

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

You know what’s worse than judging a book by its cover?

Judging a book by its cover… and then making financial decisions based on what you guess the book might tell you.

And yet, we do this all the time. Not with books, but with people.

A smart economist named James Duesenberry called this The Relative Income Hypothesis. According to Mr. Duesenberry, people tend to spend more “because the higher spending of others kindles aspirations they find difficult to meet.”

Can we pause for a second and just think about that? Not only do we judge people for, say, the vehicle they’re driving (#NiceRangeRover, bro), we’re also likely to spend more on our own ride just to keep up.

My question is… WHY?

Let’s call these stories what they are: fictional narratives. Layer upon layer of assumptions that have no basis in reality.

These stories are incredibly insidious—they seem to sneak into everything we do. The truth, though, is that you just don’t know.

You don’t know anything about that guy in the Range Rover. Or that other guy in the Hummer. Or that other guy in the Corolla. Now, tell me. Do you really want your spending to be dictated by the story you’re telling yourself about someone else?

That, my friend, is the worst form of speculation…

-Carl

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

Do me a favor.

Try to remember a time when you read or heard something about money in the news, you acted on it, and then, with the benefit of hindsight, you were glad you did.

This could include any number of things: the latest IPO, bear markets, bull markets, mergers, market collapses.

Go ahead, I’ll wait. Close your eyes and think about it.

I’ve done this experiment hundreds of times around the world, and I’ve only had one person come up with a valid example. It was news about a change in the tax law.

That’s it.

Isn’t that interesting?

Think of all the financial pornography out there, think of all the dental offices that have CNBC playing in the background, think of the USA Today Money section. Almost all of it is noise. Almost none of it is actionable.

Sure, every once in a while, there is this little teeny tiny speck of information that might be useful. But you sure have to wade through a lot of garbage to get to it.

This leads to one obvious question: Why are we paying attention to the noise in the first place?

It might be fun, if you’re into that kind of thing. You know, like going to the circus. But most likely, it’s just a waste of time.

What if, instead of obsessing over the financial pornography network, you used that time to work on that list you have…

You know, “The List.” The one that has all the really important things you actually want to do with your time.

Doesn’t that sound so much better than spending another hour watching CNBC?

-Carl

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

What’s important about money to you? 

This is an uncomfortable question because we aren’t used to thinking about money in those terms. But it’s one of my favorite questions to ask. 

The purpose of this question isn’t to think in terms of goals. It’s to go deeper than that, to get at the reason why we have certain goals. 

The first answers people come up with are usually easy—things like security and freedom. But once we pause and really think, we can move deeper into what might be called the “why” of money. 

This question gets uncomfortable because it forces us to get really clear about our underlying reason for doing things. It also forces us to face some inconsistencies in our lives. 

Let me give you an example of how this works. 

My friend, who we’ll call Sara, was a hard-charging professional whose career required her to be super competitive. She was “type A” to the hilt and worked long hours. So when I talked to Sara and her husband and asked her this question, I was curious what she would say was most important. 

“Freedom,” Sara said, almost instantly. 

When I asked her what freedom meant, she replied, “More time.” 

So I said, “Okay, let’s pretend you’re there. Let’s say you have more time. What’s so important about being at that spot?” 

With some emotion, she said, “I just want the time to raise a child.” 

Bingo. 

Now, don’t get caught up on Sara’s specific answer. Her values are her own, yours may be completely different. The thing to keep in mind is that, like Sara, once you identify what’s most important to you, things get clearer. 

Being able to answer this question gives you a lens through which to view your financial decisions. And after you’ve identified what’s most important, you’ll have incredibly useful information to help you make decisions that match your values. 

In fact, it can even make it easy to say no to things that distract you from what’s important. Like Stephen Covey said, “It’s easy to say ‘no!’ when there’s a deeper ‘yes!’ burning inside.” 

For Sara, her answer became that “deeper yes.” The same can be true for you. You just have to ask the question.

-Carl

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

Imagine it’s a very still day, and you’re in a boat on the ocean.

There’s no wind.

No swell.

The water is as flat as a mirror.

The calm goes on just long enough for you to start to feel like it’s normal.

When a small wave finally comes… it feels big. When a regular wave comes… it feels huge.

As scary as it might feel, it’s important to remember that waves are normal.

In fact, occasional storms are normal.

And the last thing you want to do when you get into a storm is abandon ship.

-Carl

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

Humans don’t fit into an algorithm.

This is particularly true when we’re talking about humans and their money.

“Humans + Money” is a messy little cocktail that economists refer to as a complex adaptive system. It’s complex because cause and effect can only be identified with the benefit of hindsight, and it’s adaptive because our interaction with the system changes it.

Try cramming that into an algorithm.

As much as we would all love a simple formula to tell us what to do with our money, the more we try to fit the big money questions into a neat little box, the more we find ourselves saying, “It depends.”

The only way to navigate in a complex adaptive system is through constant course corrections. Assess, guess, act, repeat.

Of course, the cycle rate for these steps is driven by the volatility of your situation. If the situation is relatively stable, you may only cycle through every six months. But when things blow up, you may be cycling through your financial decisions every day.

Life, markets, and money are messy. So make yourself as adaptable as you can. The important thing is to remain flexible.

Humans don’t fit into an algorithm, so don’t try.

-Carl

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

Talking about money is like grabbing an electric fence you didn’t know was electric.

In other words, shocking. And not very pleasant.

We’ve been taught, if we were taught anything about money, that it’s about spreadsheets and calculators. It should be rational and reasonable. But then we go to open the AmEx bill with our spouse or partner, and suddenly, we find ourselves in a fight.

If money is all about spreadsheets, how does greed fit in a spreadsheet? How about fear? How about the concern that you’re not going to be able to provide the life for your kids that you hoped?

We all know that no matter how worried, scared, or excited we’re feeling, 2+2 always equals 4. But when it comes to money, 2+2 equals all kinds of emotions—like fear, greed, insecurity, pride, and more.

The sooner we realize this is true, the sooner we can begin having realistic expectations around what it’s like to talk about money.

Look, I get it. Talking about money is hard.

But just because it’s hard doesn’t mean we should avoid it. In fact, as is often the case with difficult things, talking about money can actually be very fulfilling once you learn to do it correctly. The first step, though, is simply to acknowledge what the conversation is about.

Money ≠ Math.

Money = Feelings.

-Carl

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

You want to achieve enlightenment? The key is not in down dogs and green smoothies. The key is budgeting.

I know that sounds crazy. But take it from Thich Nhat Hanh, “Budgeting leads to enlightenment.”

I’m just kidding, Thich Nhat Hanh didn’t say that.

But as any good scholar of Buddhism knows, awareness is the key to enlightenment. And it just so happens that budgeting is an incredible path to greater self-awareness. In fact, that’s really all budgeting is! It’s simply being aware of our spending.

Unfortunately, there aren’t many people who love to budget. And when it comes to co-budgeting with a spouse or partner, there’s a good chance at least one of you will actually hate the idea.

But just think about it. Don’t you think spending money in a way that’s more aligned with your values will bring you more happiness? You can toss budgeting on a list with meditation, brushing your teeth, exercising, and eating healthy, and call it “Things Nobody Wants To Do But Really Should.”

I know it’s not fun. I know you think you already know where your money is going (I promise, you don’t!). I know you don’t want to know.

But just give it a shot.

Try tracking your spending for 30 days. Don’t stress about what app to use; just carry a pen and a little notebook, and each time you make a purchase, write down what you spent and how it made you feel. At the end of the month, go back through your notebook and just notice. Become aware.

That’s it.

If you hate it, you can always quit. If it revolutionizes how you live, you’ll be glad you tried.

-Carl

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

Investor behavior matters a lot. In fact, it probably matters more than skill. To understand why this is true, first you need to understand one fundamental concept: Investment returns and investor returns are almost always different.

In 1999, I was working diligently doing my job as an investment advisor or financial planner (I was never sure what to call myself back then). As far as I understood it, my job was to search for investments that would generate above-average returns for my clients. That’s what the entire industry was built on, and really, that’s what clients thought they hired me to do. 

Above-average returns is called “alpha,” and finding even a little of it was worth any trouble. The search for alpha was why investment firms hired bright people and gave them bigger computers than the “other guys.” As I was searching for a little alpha anywhere I could find it, I ran across a little annual study done by Dalbar. This study attempts to find out how investors did compared to the average investment. You see, investment returns are not the same as investor returns. 

Investment returns that you see in the paper or in marketing material are based on the assumption that you invest a lump sum at the beginning of the period, and then you leave it alone. You do not buy or sell. You do not change your mind and trade to another fund. You just buy once and hold. 

Investor returns measure your real-life return. The return you earn as you buy and sell your investments, or switch from one investment to another in your search for the next hot thing (remember our search for alpha?). 

Well, for as long as Dalbar has been doing their study, the result has been shocking! The latest update is not much different from the one I read back in 1999. The study uses the S&P 500 as a proxy for the “average investment.” For the 20-year period ending 2007, the average investment return was 11.81%. The average investor return was 4.48%.

Now think about this for a moment: The entire industry is based on the idea that their job is to find the best investments, and in the process, they are killing the patient. The well-intentioned search for alpha is resulting in the average real-life person underperforming the S&P 500 by over 7%. That is crazy stuff. 

When I realized the implications, my entire job changed. I realized that investment success is not about skill — it is about behavior. I could not figure out why this story was not being told anywhere. I even remember reading an issue of Consumer Reports that went into great detail about how to save a percent on fees by buying no-load mutual funds. Then, buried in the article was one sentence that mentioned the Dalbar study and warned people about this 7% problem. 

Three pages devoted to saving a percent, one sentence that mentioned a massive problem but offered no ideas for solving it! I started telling the story everywhere I could. I drew this sketch on the whiteboard in every client meeting and at every public speaking engagement.  

It turns out my job was not to find great investments, but to help create great investors. If all you had to do was buy good (versus great) investments and then behave correctly, that changes everything. I decided that the search for alpha didn’t matter (turns out it’s a fool’s errand anyway, but I didn’t know that at the time) if you lost 7% in the process just because of bad behavior. I decided to leave the complex task of finding the best investment to the smart guys with the big computers; I was going to focus on the simple problem of helping people behave correctly. 

It turns out that outperforming your neighbor is not about finding better investments, it is about behaving better. Wow, if this is true, think of what it does to your life. No more Jim Cramer, no more late nights after work trying to find the next Microsoft.  

If this is true (year after year, studies tell the same story), then the focus is really on the few things that you control. 

If this is true, your relationship with a financial planner should be based on trust.

If this is true, we can focus on the simple, but not easy, task of becoming a better investor.

The lesson is that investment success isn’t about skill. It’s about behavior.