Planning

There’s a difference between speculating and investing, and it pays to know what the difference is.

Speculating is exciting, full of breathtaking ups and downs. If you chart it over time, it looks like a heartbeat. Probably an elevated one.

Investing, on the other hand, is slow and boring. In the short term, you may have some ups and downs. But if you chart investing over time (over many years of time), it looks like a long, slow curve upward.

Speculating is like a Vegas casino. Investing is like watching grass grow.

Know which game you’re playing.

-Carl

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

You can make a bad decision and have a good outcome… but that doesn’t make it a good decision.

Let me give you an example: There was a guy in his early 20s who sold everything he owned, borrowed some money from friends and family, went to Las Vegas, and bet it all on one spin of the roulette wheel.

Good decision or bad one?

I think we can all agree it was a bad decision.

But the story doesn’t end there. He actually won! I can’t remember the exact amount of money, but I remember it being a lot.

Let me ask the question again: good decision or bad? It was still a bad decision!

The fact that he got lucky does not make the decision good. It’s the process that matters.

Over time, the accumulation of many outcomes will make evident whether the process was good or not. But in the short run, focusing on the outcome instead of the process just leads to trouble.

-Carl

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

The following is a message from the Center for Personal Finance Disease Control about a particularly dangerous virus called Pretend Investor Disease (PID).

PID is an especially malignant disease that, if left untreated, can suck your savings dry. It works by convincing you to buy an investment at a silly price for no other reason than the hope that it will continue to go up so you can sell it to someone else at an even sillier price.

Warning: This. Is. Not. An. Investment. Strategy.

There’s actually a name for the behavior PID causes—it’s called The Greater Fool Theory. It’s the idea that we can get away with doing something foolish because we assume that somebody else is going to come along and be even more foolish. See: Ponzi Schemes.

PID is incredibly contagious. The more you hang around pretend investors, the more you will be exposed to dangerous disease-spreading agents like insider tips, hot stocks, and hashtags.

If the thought, “I’m going to buy this and hope it keeps going up,” occurs to you, you may already be infected.

1- Stop what you are doing immediately.
2- Do. Not. Buy. That. Stock.
3- Seek help from a trained professional (e.g., a Real Financial Professional).

So far, the only way we know to combat PID is to have a rock-solid investing plan, based on your values and goals, that you don’t change when other people around you are doing things that look foolish.

PID appears to be all over the world. You may even run into asymptomatic carriers who have gotten wildly wealthy from hope-based investing by sheer luck. Just remember that for each of them, there are 10 more investors for whom PID has caused financial ruin.

Be safe out there, people, and stay vigilant.

-Carl

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

Investing based on past performance is like driving while looking in the rear view mirror. It. Will. Cause. Accidents.

Now, I know we’ve all heard the disclaimer repeated in every single investment advertisement: “Past performance is no indication of future results.”

We hear it often enough.

We might even believe it.

But then… what’s the first thing we do when we have a pool of money to invest?

In fact, what feels like the right thing to do?

No prizes for guessing because you know the answer. The first thing we do when we have money to invest is look for the investment that has recently done well. AKA, past performance.

Look, I get it. It feels like that makes sense. If you’re going to hire a contractor to remodel your kitchen, it would be reasonable to go look at the work they’ve done in the past and to expect that quality of work to continue, if not improve.

But when it comes to investing, this does not hold up. Because investments go in cycles, looking at how things have done in the recent past leads us to buy high, which inevitably leads us to be disappointed, and then we sell low. And we repeat the process over and over and over.

Driving while looking in the rear view mirror doesn’t make sense. Neither does investing based on the past.

-Carl

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

Greetings, Carl here.

What I’m about to tell you is going to sound crazy, but bear with me because it’s definitely true.

Ready? Here it is…

We get to decide what we focus on.

Hold on… let me repeat that in case you missed it.

We. Get. To. Decide. What. We. Focus. On.

When it comes to investing, that means you have a choice. You can focus on days or decades.

If you choose to focus on days, you are signing up to make yourself miserable. And for no good reason. There’s actually no benefit to this perspective. I can handle pain that leads to gain, but this is just pain that leads to more pain.

On the other hand, when it comes to investing, we actually get rewarded for ignoring the daily noise. As Warren Buffet said, “Benign neglect, bordering on sloth, remains the hallmark of our investment process.”

Remember, you actually have a choice.

Days or decades.

What’s it going to be?

-Carl

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

Budgeting doesn’t have to be painful. In fact, it can be a fun game.

Some friends of mine played this fun little budgeting game I created called Carl Richards’ Budgeting Treasure Hunt.

When they started, they had a goal of saving $1 million dollars. Crazy, right? The only way that ever happens is by getting lucky in the stock market or an inheritance.

Years later, I got a call. “Carl,” they told me, “we did it! We just crossed the $1 million mark.”

They didn’t get lucky, and they didn’t inherit a ton of cash. They just played the game. Here are the rules:

1. Pay attention. Every time you spend money, just take three seconds to notice what you’ve done. Don’t judge, just notice.

2. Find wasted money. If you start to notice that certain purchases don’t make you happy, consider that wasted money. Another good place to find wasted money is in basic utilities or subscriptions you’re no longer using.

3. Automate savings. Take the wasted money you found and spend it! But the trick is to spend it by automatically saving it every month. This can go into a savings account, into an investment, or you can increase the amount you’re throwing at your mortgage.

4. Repeat. The goal is to see if you can move your automatic savings number up a little each month. This can actually be fun! Again, think of it as a game.

Meeting big financial goals is not about getting lucky or having a big break, it’s about consistently doing boring but effective things. The solution is not to grit your teeth and work harder at budgeting. The solution is a simple mindset shift from “Harder, Painful, Grrr” to “Fun, Exploration, Treasure Hunt.”

So stop trying so hard, and play the game.

-Carl

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

Trying to pick the best investment before you’ve come up with a financial plan is like trying to decide whether to take a plane, train, or automobile on a trip before you’ve decided where you want to go.

It makes as much sense as a doctor handing out prescriptions before giving a careful diagnosis.

If you want to do something with your money that is slightly more rational, the very first step is to have a plan. Out of that plan, a process naturally comes into focus. You know, an investment process, a savings process, a process for making decisions about how much insurance to have. And then, and only then, do you get to the last step: finding specific products to implement that plan.

Most of the “news” you see on the financial pornography networks, most of the books written about finance, are about this little tip of the iceberg… the product.

I’m not saying the products aren’t important. They are.

But there is an order of operations to consider here.

First, have a plan, then define an investment process, then find products to populate that plan.

That is how you make smart decisions with your money.

-Carl

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

Real Financial Planning is not about being right today, it’s about being less wrong tomorrow.

Airline pilots know this. For years, every time I met one, I would ask two questions. The first was, “Do you prepare a flight plan for every single flight?” And every pilot I asked answered “Yes.” The second was, “How often does the flight go exactly as you planned?” To which they always answered “Never.”

This should come as no surprise. The flight always differs from the plan because life is unpredictable, and no matter how hard we try, we never have all the information we need about the future before we start.

Think about what we are trying to do when we create a financial plan that might span 30 years or more. We have to guess about rates of return, inflation, taxes, goals, a date of death, and on and on. There is no way to get that 100% right.

In fact, the only thing we know for sure about any good financial plan the moment we finish designing it is that it’s wrong. We just don’t know exactly how… yet.

So instead of being worried about getting everything right, we do the best we can to create a plan, and then we accept the reality that financial plans are worthless without the ongoing process of planning.

It’s the course corrections over time that allow us to narrow in the potential range of outcomes and reach our goal. Real Financial Planning is a process, not an event.

-Carl

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

“If it’s a one-page financial plan, then why isn’t the book only one page?”

I’ve heard this joke a few times since the publication of The One-Page Financial Plan.

While it does make me laugh, the joke actually highlights something I think is really important. I could have written a book with a single page and said this financial plan is for everyone, except for one simple reason.

I can’t predict or tell you what matters most to you. Without that knowledge, I certainly can’t tell you what your goals should be 10, 20, or even 30 years from now.

You have to figure out those answers for yourself. But people can have a hard time knowing what questions to ask, let alone the answers to those questions. So even though it required more than one page, I wanted to make sure you understood how to build your own one-page plan.

All of this leads up to a second question I’ve heard a lot: What does your plan look like?

The exact plan that sits on my desk is the sketch for this week. Anytime I face a big decision, I look at the list my wife and I created. We weigh our options and make decisions that fit our goals. But getting to this point didn’t come easy.

I had to let go of the idea that I needed “details.” It turns out, however, that the one-page plan isn’t really about details. Instead, it reminds me of what I value most, and helps me make decisions that keep me focused on those values.

Of course, the details matter, but at a much later point in the decision-making process. We only muddy the waters if we focus on details, or tactics, first instead of our overall plan.

For instance, the first question I need to ask about any decision involves the potential impact on items one, two, and three. If I can’t say that the choice I’m considering aligns with those three things, then does it really matter if I have my exact portfolio allocation at my fingertips? It’s only after the potential choice makes the first cut that I need to look at the details.

For me, I think of my one-page plan as the gatekeeper for my financial life. Nothing gets through unless it fits with what I value most. The same thing applies to you and your plan.

Plus, you don’t have to live with it for life. I know that my wife and I will revisit our plan after our kids finish school. Something else we value will take the place of that goal eventually.

The most important thing to remember about this process is that it’s about you. It’s about what’s important to you. It’s about what’s important to your family. The things that end up on your one-page plan should reflect what matters most to you. If you feel like sharing, I’d love to see your plans. Just send an email with an image attached to hello@behaviorgap.com.