Planning

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

There are many types of Investor Diseases, but PID is an especially malignant one that, if left untreated, can suck your savings dry.

PID 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.

It is important to understand that 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 how 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.

At this point, PID appears to be all over the world. You may even run into asymptomatic carriers who have gotten wildly wealthy from hope-based investing through sheer luck. Just remember that for each of them, there are ten 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 on 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 first right thing to do?

No prizes for guessing right 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. We look at the track record.

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 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, only to repeat the process over and over and over.

Investing in the rear view mirror doesn’t make sense.

Turns out, investing based on what you think is going to happen in the future doesn’t make sense either.

The only thing that makes sense is to invest based on our own goals and values.

So forget looking in the rear view mirror. Forget predicting the future. And spend the time to get clear about where you want to go and what the money is for.

-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.

1- You can tune into the financial pornography network, go through endless cycles of “buy buy, sell sell,” obsess over the latest IPO, and deal with the apocalypse du jour while cycle through all the emotions that come with it. 

OR… 

2- You can focus on what actually matters when it comes to investing. And that’s time. A very long time: 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 that. 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 Morgan Housel says in his book The Psychology of Money, “Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen… His skill is investing, but his secret is time.” 

And you know what Buffett said? 

“Benign neglect, bordering on sloth, remains the hallmark of our investment process.” 

Does that sound like the type of guy who is constantly refreshing CNBC?

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.

I’ve spent countless hours of my life talking with people all over the world about money. 

During these conversations, one theme comes up again and again. 

Anxiety. 

Almost everybody has an idea of what the financial life of their dreams would look like. 

Almost nobody has a plan for how to get there. 

After having hundreds of conversations about this subject, I’ve come up with a strategy that may help. 

But first, a couple of disclaimers: 

1- It’s hard. Kind of like when your doctor tells you to eat more vegetables and exercise for at least an hour a day. 

2- It’s boring. Like watching an oak tree grow. Think short-term boring, but long-term exciting. 

For those of you I didn’t lose at hard and boring… 

Allow me to present: Carl Richards’ Very Unexciting, Four-Step Plan to the Financial Life of Your Dreams! 

Step 1: Pay attention to your spending.
Call it budgeting if you want, but I’m essentially talking about paying close attention as you spend money. This could be as simple as keeping an index card in your pocket and writing down every transaction or purposefully reviewing your monthly credit card statement. Whatever your method, just start noticing how you’re spending money. 

Step 2: Find wasted money.
The hard part of saving isn’t saving itself. The hard part is finding the money to save. Not long ago, I figured out a routine that helped. I printed out my credit card statements and went through each charge. On one statement, a few lines down on the second page, I found a charge for GoGo internet service. That’s the internet service available while flying on many airlines. I recall the charge being $39 per month for unlimited access (now it’s $59 per month). After highlighting the charge, I leaned back in my chair, deep in thought. How long had it been since I last got online at 35,000 feet? In a moment of Zen-like clarity, I realized I hadn’t even been on a flight that month. I did the math and discovered it had been more than a year, 13 months to be exact, since I had used this service. For 13 months, I’d been paying for something I wasn’t using. I’d wasted more than $500. It’s crazy I let it go on for that long, but I’m glad I found it! 

Step 3: Automate savings.
If anything qualifies as exciting, perhaps it’s this: I just found $39 per month to start saving. Because I was already spending that money, it wasn’t even going to hurt. All I had to do was log in (not at 35,000 feet) and set up an automatic investment for $39. Don’t get hung up on finding the best investment. That reeks of excitement, and we’re not into that. Just do something boring, like a Vanguard S&P 500 fund, or send the $39 to your kids’ 529 accounts. The important part is automating the behavior. Just have the money pulled regularly from your checking account and put into whatever boring saving or investment vehicle you decide. No stamps, envelopes, or willpower required. 

Step 4: Repeat.
At the risk of making the plan sound fun, what if you decide to turn it into a game? Kind of like a treasure hunt! Every month, pull out your credit card statements and carefully take notice of every charge, look for wasted money, and add it to your automated savings. See how often you can move that number up. See if you can start a streak and raise the amount each month, even if it’s just $5 or $10. I know it may sound boring to save $39, then $50, followed by $65, or even $67 (those two bucks matter). But over time, those dollars add up. How high can the number go? 

Some friends of mine played this game. They paid attention to their spending, found wasted money, automated their savings, and repeated their actions for longer than a decade. 

When they started, they had a crazy goal of having $1 million dollars. I remember thinking that goal was crazy. They would need to do something exciting like find a hot IPO or invest in the best mutual fund ever to make that work. 

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

Yes, it took 10-plus years of consistently doing boring things, but they reached their goal. 

And all it took them was doing four boring steps repeatedly for over a decade. 

-Carl

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

I want to tell you a quick story about my friend John Stevens. 

John helps run an awesome firm called TCI out of Tucson, Arizona. But he used to be a doctor.

Back during his doctoring days, John had this one patient who wanted to argue about which blood pressure medication he should be taking.

“But wait!” John would find himself saying, again and again, “you still smoke!”

I assume you can see the problem here: There’s no point in talking about blood pressure medications until we address the underlying cause of the condition. 

Similarly, it’s crazy to be worried about finding the best investment before you’ve decided where you want to go. That would be like arguing over whether we should take a plane, train, or automobile on a trip before we’ve even decided where we want to go or asking for prescriptions before we’ve had a diagnosis!

Step number one is to have a plan. And out of that plan, a process naturally comes into focus. An investment process, a savings process, a process for making decisions about how much insurance to have. But they would all be built on the foundation of the plan.

And then, and only then, do you get to the least important step: finding specific products to implement that plan. 

Most of the “news” you see on the financial pornography networks and 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 they are the least important part. 

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.

We do planning wrong.

It doesn’t matter what kind—financial, business, life… you name it.

Here’s how we typically plan:

1- We put a stake in the ground where we are today.​
2- We put a stake in the ground where we want to be in the future.​
3- We draw a straight line between the two stakes.

The problem is that because we don’t like dancing with uncertainty, we obsess over making the line as precise and accurate as possible. We think that if we just have a big enough calculator, we can get the line to be an accurate reflection of the future.

But we can’t.

Sorry.

In fact, the only thing we know for sure about that straight line is that it is wrong. We just don’t know why… yet.

But it will be wrong again and again and again because we can’t predict the future, no matter how many numbers we crunch.

The good news? That’s okay. 

That’s right… it’s okay not to know. It has to be okay because there’s no other option.

I’m not saying don’t ever draw the line. For sure, that’s an important part of the planning process. It gives us an approximation, a baseline, a direction to go. 

I’m just saying, don’t confuse the line with reality.

After the line is drawn, we need to relax into the idea that planning is an ongoing process. We need to understand that what matters far more than the line is how we behave when it’s time to make course corrections.

Straight-line planning is about being precisely correct today (again, something that is not possible).

Reality-based planning, on the other hand, is the process of being less wrong tomorrow. It’s the constant work of narrowing the potential range of outcomes over time. 

So instead of trying to carve the perfect plan in stone as if it’s a monument to the future, let’s write our plans in pencil and stay focused on the process of being a little less wrong tomorrow.

-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.