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The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money Hardcover – January 3, 2012
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"Carl has a wicked way with a Sharpie." — Barry Ritholtz
"Carl Richards is the anti-Jim Cramer. He doesn't pick stocks, and he doesn't shout. In wise, calm style, The Behavior Gap teaches us how to rein in the emotional saboteur within us-the voice that leads us to double-down when the market is peaking and to make a panicky exit when stocks are a bargain. Richards shows us that, when it comes to our financial security, slow and steady wins the race." — Dan Heath, coauthor of Made to Stick and Switch
"Ah, clarity! Carl Richards can see the mistakes that humans-being human- make again and again with money. Then with humor and an I've-been-there nudge he sets them on the right course." — Jean Chatzky, author of Pay It Down
"The Behavior Gap throws light on an important question: How can we think more clearly about money and its role in a happy life? Carl Richards shows how to shape our behavior to invest, save, and spend to foster greater happiness." — Gretchen Rubin, author of The Happiness Project
"Who says common sense is common? Smart, tactical, practical advice for anyone who has done dumb things with their money." — Seth Godin, author of We Are All Weird
"Carl Richards's deceptively simple sketches in The Behavior Gap will make you laugh, change your relationship with money, and leave you the wealthier for it. This one is bound to be a classic!" — William Bernstein, author of A Splendid Exchange and The Investor's
"Carl has a knack for showing-gently and with charts!-that when it comes to money, most of us are idiots. Carl prods us to master money, rather than letting it master us." — Laura Vanderkam, author of All the Money in the World
"A brilliant guide to the ways we often trick ourselves into staying poor. Read this before you make your next financial decision." — Zac Bissonnette, author of Debt-Free U
"If a picture is worth a thousand words, Carl's sketches could change a life! He captures the essence of life and money." — Marty Kurtz, president of the Financial Planning Association
About the Author
independent advisors. He contributes to the Bucks blog at The New York Times and is a columnist for Morningstar Advisor. Richards appears regularly on National Public Radio's Marketplace Money, and is a frequent keynote speaker at financial planning conferences and visual learning events. You can find more of his work at BehaviorGap.com. He lives in Park City, Utah, with his family.
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Here are my notes from the book:
1. Cycles and other factors do cause markets to go to ‘inefficient’ high and low extremes.
2. Stocks should be treated as potentially useful, but also dangerous. And increased potential upside does generally come with increased risks (but the converse isn't true: higher risk doesn't always mean increased potential upside).
3. In the long run, the vast majority of people who attempt market timing do worse than the markets, and we shouldn’t fall prey to the hope that we can rely on others to make such predictions. So it’s best to formulate an approach which will likely work well long-term regardless of how markets fluctuate in the short and intermediate terms, since the long-term trend is up; but this does assume that the future will repeat the past in the long-term, whereas there have been bear markets of more than a year in the past, so 'riding out' long bear markets can be a painful process which wouldn't be a good situation for people nearing retirement or already retired.
4. The most effective investors are moderate and humble rather than overconfident, and recognize their inability to reliably make accurate predictions. In fact, people with the highest proportion of accurate extreme forecasts tend to do worse overall. And because of the lack of predictability, rather than trying to adhere to rigid long-term plans, we should take a more flexible approach of adapting to evolving circumstances by making small but consistent course corrections. This means that we need to pay attention to what’s happening in timeframes of weeks and months in order to make decisions which will tend to work well over years, while ignoring intraday or day to day fluctuations, and recognizing that sometimes doing nothing is the best option.
5. Following the herd and doing what’s popular will usually mean buying rather than selling when markets are high, and selling rather than buying when markets are low. Ironically, people who are relatively disciplined and really try to stick to their plans are most vulnerable to this, because they’re among the last to 'give in' and buy (near tops) and among the last to sell (near bottoms). 'Safety in numbers' isn't a valid maxim for investing.
6. Financial planning is part of life planning, and needs to be personalized – what’s suitable for one person may be unsuitable for another. Generally, we should only take as much risk as needed to meet our financial goals (rather than trying to maximize return and thereby taking on unnecessary risk), while keeping in mind that additional money has diminishing value in terms of enhancing our lives once we reach upper middle class (personal relationships, experiences, and the feeling of doing worthwhile work matter more, once our basic needs are met). The harm we suffer from a major loss is usually greater than the benefit we derive from a major gain, so loss aversion makes sense.
7. Because of regression to the mean and the role of luck, funds which performed well in the past are less likely to do well in the future. Unlike most other fields, in investing, past performance is NOT a reliable indicator of the future, and may even be a misleading indicator. The only consistent correlation is that funds with higher expense ratios tend to perform more poorly.
8. Because of good and bad luck, sometimes bad decisions will result in good outcomes, and good decisions will result in bad outcomes. Rather than being mislead by that, we need to stick to approaches which are likely to work longer term.
9. Most of what’s reported in the financial media is just noise, and is best ignored. Try to keep your models simple and robust. That doesn’t mean we should ignore important developments on large geographic scales, but we should accept that context as ‘given’ and focus our financial planning decisions on where we can have an influence.
10. A good test for evaluating a portfolio is to imagine being in cash and then asking how similar and different your portfolio would be if you reconstructed it. Don’t keep things the same just because of wanting to preserve the status quo, attachments, laziness, or wanting to ‘break even’ on an investment. A portfolio should be evaluated based on anticipated long-term future performance, not what has happened in the past to get to this point.
11. Don’t fall prey to hindsight bias and compare your current portfolio value with a previous peak, as though the portfolio is at a 'loss' compared to that. Such extremes aren’t meaningful reference points. Instead, look at rate of return over longer timeframes. (It's not mentioned in this book, but given that the long-trend of markets has been upward, buying low is a better and generally safer strategy than trying to sell high. And of course, things will usually look bleak - 'blood in the streets' - when markets reach lows.)
12. If an investment option looks too good to be true, it probably is. Scrutinize such options intensively.
13. Investing should be done dispassionately, rather than approached as an entertaining game. This will generally lead to better decisions. If you sense that you’re about to make an impulsive decision, sleep on the decision for one or more nights before deciding.
14. Take responsibility for all of your investment decisions, rather than selectively taking credit for gains and blaming others or situations for losses.
15. Don’t be penny wise and pound foolish in making financial decisions. Maintain perspective on what really matters by considering absolute dollar amounts, and prioritize your time accordingly.
Also, while I did not expect to receive actual financial advice (where to put money, how much, etc), I felt that the author could have used more examples of what he typically recommends to his clients in specific areas (not just, "move out of stocks" or "invest in bonds") for those of us who are new to the process of saving.
Overall, a good book for the thought concepts that one can appreciate when it comes to finances.
I started with nothing and today I'm financially independent.
Carl Richards puts the focus precisely where it should be; beginning by determining what is really important to you in life as the foundation of your investment plan.