THEBEHAVIORGAP

THEBEHAVIORGAP

CARLRICHARDS

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Firstpublishedin2012byPortfolio/Penguin,amemberofPenguinGroup(USA)Inc.

Copyright©CarlRichards,2012Allrightsreserved

SomeofthedrawingsinthisbookfirstappearedinTheNewYorkTimes.

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LIBRARYOFCONGRESSCATALOGING-IN-PUBLICATIONDATA

Richards,Carl,1972–Thebehaviorgap:simplewaystostopdoingdumbthingswithmoney/Carl

Richards.p.cm.

1.Finance,Personal.2.Investments.3.Portfoliomanagement.I.Title.HG179.R4472012332.024—dc232011033413

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ForCori&

Lindsay,Grace,Samuel,andRubyJane

CONTENTS

INTRODUCTIONFourPairsofSkis

CHAPTER1WeDon’tBeattheMarket,theMarketBeatsUs

CHAPTER2ThePerfectInvestment

CHAPTER3IgnoreAdvice,MakeFunofForecasts

CHAPTER4FinancialLifePlanning

CHAPTER5TooMuchInformation

CHAPTER6PlansAreWorthless

CHAPTER7Feelings

CHAPTER8You’reResponsibleforYourBehavior(ButYouCan’tControltheResults)

CHAPTER9WhenWeTalkAboutMoney

CHAPTER10Simple.NotEasy.

CONCLUSION

ACKNOWLEDGMENTS

INTRODUCTIONFOURPAIRSOFSKIS

THISisabookabouthowyoucanmakegoodmoneydecisions.Iamnottalkingaboutwhichinvestmenttobuyorhowmuchtoinvestinthe

stockmarket.Iamtalkingaboutdecisionsthatareintunewithreality,withyourgoals,

andwithyourvalues.Whywouldanyonenotmakedecisionsthatway?Well,wegetconfused.Wegetscared.Wegetcarriedaway.That’swhythisisalsoabookabouthowtoavoidconfusion,howtocope

withfear,andhowtostaygroundedwhenmakingfinancialchoices.Thatsoundshard—andaswe’llsee,it’snotalwayseasy.Butit’spretty

simple.Infact,simplicityisoneofthekeys.IliveinParkCity,Utah,wheresomeofustakeskiingprettyseriously.One

morningsomeyearsback,afriendswungbymyhousetopickmeuptogobackcountryskiing.Iranintothegaragetograbmyskis.Istoodthereforasecondlookingatmyfourdifferentpairsofskis,eachdesignedforparticularconditions,andsuddenly,Iwasparalyzed.Ijustcouldn’tchoose.

Myfriendsatinthecarhonkingthehorn—Let’sgo,Carl!Moveit!Thesun’scomingup!Thesnow’sgettingsoft!—whileIstaredatthoseskis.Itwasridiculous.I’dspentallthatmoneyandtimeandenergycollectingtheseskissoIwouldbereadytodealwithanysituation—andnowIjustfeltpowerless.

Thatdaywasaturningpointforme.Igotridofthreepairsofskis,andkeptmyfavoritepair:theonesthatwouldletmedowhatIreallycareaboutdoing,whichistomovelightandfastthroughthebackcountry.

TheskisIkeptaren’tperfectineverycondition.They’reactuallyaprettybadsolutioninheavysnoworinreallysteepterrain.Sowhat?They’readecentcompromiseinmostsituations,andtheyworkbeautifullyintheconditionsIlikebest.

NowIdon’thavetothinkaboutwhichskistobringonatrip.IjustgrabtheonesIhaveandgo.Itrustmyexperienceandmyinstinctsandmylucktomakeitthroughsituationswhenmyequipmentisn’tperfect.

Lotsofpeoplethinkthattomakegoodmoneydecisionsyouneedtohavea

planforeverysituation.Youneedinsuranceforeverypossiblesetback,andinvestmentsforeverymarketcondition.Allofyourassumptionsaboutthefutureneedtoberefinedtoperfection,sothatyouwillneverbesurprised.Youneedtoknowandunderstandeverythingaboutthefinancialmarkets,andyouneedtobudgetyourspendingtothelastdime.

Thatkindofthinkingisbasedonfear.Wefear(naturallyenough)life’suncertainty,itsupsanddowns.Andsowemakeplansthatwehopewillgiveusthepowertocontrolourfuture.IfIdothis,thatwillnothappen;ifIsellnow,Iwillavoidthecomingdownturn;ifIpicktherightinvestments,Iwillbefinanciallysafe;ifIworryenough,Iwillbereadywhenbadnewscomes.

Troubleis,therealworldiscomplicated:wedon’tknowwhat’sgoingtohappen.

Thatmeansthatmostofourplansareuseless.WhenIhadfourpairsofskis,Iwasalwayschoosingthewrongonesanyway!

Thepointis,noplanwillcovereverysituation—andthat’sokay.Youdon’thavetochoosetheperfectinvestmentorsaveexactlytherightamountorpredictyourrateofreturnorspendhourswatchingtelevisionshowsaboutthestockmarketorsurfingtheInternetforstockpicks.Youdon’tneedaplanforeverycontingency.

Soifplanningisn’tthesolutiontoourmoneyproblems,whatis?Moresimply,whatcanwedotogetwhatwereallywant?

Wecanstopchasingfantasies.Wearenotgoingtogetwhatwewantbybeatingthemarketorpickingtheperfectinvestmentordesigningtheperfectbulletprooffinancialplan.Infact,whenwetrytodothosethingswegetintobigtrouble.

Wecanprotectourselves—toapoint.Riskiswhat’sleftwhenyouthinkyou’vethoughtofeverything.Ourassumptionsaboutthefuturearealmostalwayswrong.Wecanneverthinkofeverything—butwecantakesensiblestepstoprotectourselvesfromlife’sinevitablesurprises.

Wecanembraceuncertainty.Changeisn’talwaysaproblem.Many—perhapsmost—oflife’ssurprisesaregoodnews.Ifwearen’tlockeddownintoarigidplan,wecanrecognizeandseizeopportunitieswhentheycomeup.

Wecandecidewhatwereallywant.Whensomeoneasksyouwhatyoureallywantoutoflife,you’reprobablynotgoingtosayyouwantaninvestmentthatdeliversgoodreturns.Liketherestofus,youwanttobehappyandfulfilled.Yourfinancialdecisionsshouldalignwithwhatyouknowaboutyourselfandtheworld.Themoreyouknowaboutyourself,themoresuccessfulyourinvestmentswillbe—thatis,themoretheywillalignwithyourtruegoalsasahumanbeing.Decidingwhatyoureallywanttakesanawfullotofwork,whichisonereason

whymostofusdon’tdoit.Butonceyouknowwhatyou(andyourfamily)reallywant,youwillknowwhattodo—howmuchinsurancetobuy,wheretoinvestyourmoney,whethertoquityourjobandstartanewventure.

Wecanmakedecisionsthatmakesense.Wecan’tcontrolthemarketsortheeconomy,butourbehaviorisuptous.It’struethattheoutcomesofourdecisionsmayvary.Infact,youcanmakeagooddecisionandhaveabadoutcome.Butsensible,reality-basedchoicesareourbestshotatreachingourgoals.

Wecantrustourluck.Mostfinancialplannersdon’tliketotalkaboutluck.Theideathatsomethingsjusthappenbychancecanbeascaryone.ButIthinkit’sreallycoolthatwedon’tcontrolourdestinies.Wecanstayopenandrespondcreatively.Andsometimesthethingsthathappentousaremuchbetterthananythingwecouldplanourselves.

MywifeandImetataskishopwhenwewerecollegestudents(luck).Wemarried(smartbehavior,atleastonmypart)in1995,whenIwasstillanundeclaredmajorattheUniversityofUtahanddiggingditchesforalandscapingcompany.Coridecidedthatdiggingditcheswasn’talong-termcareerpathforme,andwefoundawantadforwhatwethoughtwasajobthathadsomethingtodowithsecurity—beingasecurityguard?workingwithalarmsystems?—youknow,keepingthingssafe.

Itturnedoutthejobwasinthesecuritiesindustry,withamutualfundcompany(luck).Theinterviewersnarrowedthepoolofapplicantsdowntotwoofus.TheotherguyandIsatnexttoeachotherinawaitingroomwhiletheydecidedwhomtohire.

Thedooropened.Ayoungwomaninformedusthatthey’dpickedtheotherguy.Helookedatmeandsaid,“Idon’twantit.Youcanhaveit”(luck).

SoIgotthejob.I’vespentthepastfifteenyearsgivingpeoplefinancialadvice.Everygreatthingthathashappened(andtherehavebeenabunch)hasbeenatleastpartlyamatterofluck.Eventhesetbackshavetaughtmeimportantlessons,includingsomethatI’vetriedtopassalonginthisbook.Oneofthoselessonsisthatyouaren’tinchargeofeverything.Dowhatyoucan,andthenrelax.

Wecantrustourselves.Ofcourse,luckisonlypartofit.Onedaymysupervisoratthatsamemutualfundcompanyinformedmethatmyshifthadchanged,andI’dhavetoworkonSunday.IhadothercommitmentsonSunday,andItoldherso.Shetoldmetochoose,soIquit.Thatledtomynextjob,whichledtomynext,whichledtomybusiness,whicheventuallyledtoaregularblogforTheNewYorkTimesandthisbookandallkindsofgreatstuff.

Istoodbywhatreallymatteredtome—IwantedSundaysoff—andIlostmy

job.Whatadisaster,right?Andsofar,atleast,thatdecision—andthatdisaster—havemadeallthedifference.

Idon’tbelievethatthereisasecrettogettingrich.Butintheend,financialdecisionsaren’taboutgettingrich.They’reaboutgettingwhatyouwant—gettinghappy.Andifthereisasecrettogettinghappy,it’sthis:betruetoyourself.

Maybeyou’veheardthatonebefore.ButI’llbetyouhaven’treaditinabookaboutmoney.

1.

WEDON’TBEATTHEMARKET,THEMARKETBEATSUS

COMPANIESlikeMorningstarandDalbarhavedoneabunchofstudiesthattrytoquantifytheimpactofinvestorbehavioronreal-lifereturns.Thestudiestypicallycompareinvestors’actualreturnsinstockfundstotheaveragereturnsofthefundsthemselves.Justtobeclear,they’retryingtocomparethereturnsinvestorsgettothereturnsinvestmentsget.

Istherereallyadifference?Oh,youbetthereis.Typically,thestudiesfindthatthereturnsinvestorshaveearnedovertimearemuchlowerthanthereturnsoftheaverageinvestment.

Whatthatmeansisthatwe’releavingmoneyonthetable.Takemutualfunds.Allwehadtodowassimplyputourmoneyinan

averagestockmutualfundandletitsitthere.Butmostinvestorsdidn’tdothat.Instead,theymovedtheirmoneyinand

outofstockfunds.Theirtimingwasmiserable—anditcostthemdearly.Icoinedtheterm“behaviorgap”tolabelthegapbetweeninvestorreturns

andinvestmentreturns,andIstarteddrawingthesketchyouseehereoneverywhiteboardIcouldfind.Sincethen,I’veusedthebehaviorgaptodescribeallkindsofsituationswhereourbehaviorleadsustosubparresults,andI’vedrawnmanysketchestohelpmyclientsandreadersunderstandwhat’sreallydrivingtheiractions.Butthissketchistheoriginal.

It’sclearthatbuyingevenanaveragemutualfundandholdingontoitforalongtimehasbeenaprettydecentstrategy.Butrealpeopledon’tinvestthatway.Wetrade.WewatchCNBCandlistentoJimCrameryell.Webuywhat’supandsellwhat’sdown.Inotherwords,wedoexactlywhatweallknowweshouldn’tdo.

Iknowit’stimetobecautiouswhenIgetlotsofemailsfromreadersofmyNewYorkTimesblogurgingmetoaddstockstomyholdings.Likewise,Iknowit’sprobablyagoodtimetobehopefulaboutthemarket’sprospectswhencertainfriendsandcolleaguesareanxioustosellstocks.

What’sincredibleisthattheyknowit,too!Welaughaboutittogether.Theyknowtheirimpulsestobuyandsellaredangerous.Theyrelyonmetohelpthemkeepthoseimpulsesundercontrol.

Backinthespringof2009,myclientswereveryworriedindeed.Threeofthemcameintogethertoseemeoneday.Likemostofus,theywerescaredtodeath.Themarkethadplunged,andthey’dsustainedsignificantlosses.

Theconversationquicklyturnedtohowscarythestockmarketwas.Them:Hey,Carl,wethinkit’stimetosell.Me:Areyousuggestingthatwesellsomethingsimplybecauseit’sdown30

percent?Them:Well…youknow…arewejustgoingtokeepsittingherewhilethis

thinggoesdown?Me:Thedamagehasbeendone,guys.Youmayfeellikeselling,butdoesit

makeanysensetosellnow?Them:It’sscary!Me:It’sokaytobescared,butit’sabadideatoactonyourfear.

Them:Butthisisjusttoopainful!Ifthingscontinueatthisratewe’llhavenomoneybytheendoftheyear!

Me:Actually,stockswerealotriskierwhentheyweremoreexpensive.Butbackthen,youwerehappytoholdthem.Whysellnow?

Them:Sowhatdowedoinstead?Myanswertothatonewasprettysimple.Itoldthemweshoulddo

absolutelynothing.Instead,we’dwaitforthingstocalmdownabit,andthenreviewtheirplanstomakesuretheystillmadesense.

Fast-forwardacoupleofyears.Thesamethreeguyscametoseemeagain.Stockshadreboundedsharply,andwehadaverydifferentconversation.

Them:Shouldwemovemoreofourcashintostocks?Me:Uh,why?Them:Becausethemarket’sdonesowelllately!Me:Youmeanyouwanttobuymorestocksbecausestocksaremore

expensive?Them:Well,theymightkeepgoingup!Me:Wehavenoideawhatthemarketwilldointhefuture.Whydon’twe

stickwithourplan?Ihavetheseconversationsallthetime.Inearly2011,withgoldup80

percentovertwo-plusyears,everyonewantedtoknowiftheyshouldbebuyingit.ForawhilethatwasthemostcommonquestionIgot.

Iansweredthatgoldwasnowriskierthanithadbeeninaverylongtime.Ifitwasn’talreadypartoftheirplan,whyadditnow?

Myfriendsandclients(oftenthesamepeople)aren’ttheonlyinvestorstemptedtodothewrongthing.In2008,2009,andmostof2010,mutualfundinvestorsconsistentlytookmoremoneyoutofstockmutualfundsthantheyadded.InDecember2010alone,wepulled$10.6billionoutofequitymutualfunds.

Then,inJanuary2011,someonehitaswitch:thatmonth,wepouredanestimated$30billionintothemarket.Investorshaddecidedthatitwastimetogetbackintostocks.Thisdecisioncameafteranalmost100percentgainfromthemarketbottomin2008.

Isitrationaltopourmoneyintoanassetthathasdoubledinvalueinlessthantwoyears?Wouldyoubuyahousethathadclimbedinvaluefrom$300,000to$600,000intwoyears?(What’sthat?Youdid?How’dthatworkout?)

Let’sgobacktoearly2000.Thedot-commarketisbooming.TheNASDAQhasgainedbetterthan80percentduringthepastyear.Peopleareborrowingagainsttheirhomeequityandusingthecashtobuystocks—especiallytechnologystocks.

Investorsputcloseto$44billionintostockmutualfundsinJanuary2000,accordingtotheInvestmentCompanyInstitute,shatteringthepreviousone-monthrecordof$28.5billion.

Weallknowthestoryfromthere.Moneycontinuedtopourintostockfunds,breakingrecordsforFebruaryandMarch.TheNASDAQclimbedto5,000,onlytoplummet,losingsomethinglikehalfitsvaluebytheendoftheyear.

Butifyouthinkwegetirrationalatmarkettops,waituntilyouseehowwebehaveatmarketbottoms.October2002wasthefifthmonthinarowthatinvestorspulledmoremoneyoutofstockmutualfundsthantheyputintothem—thefirsttimeeversuchastreakhadoccurred.

Justtakeawildguessatwhenthemarkethitbottom.October!Stopandthinkaboutthisforasecond.Atthemarketpeak,wewere

borrowingagainstourhomestobuyover-pricedtechnologystocks.Atthebottom,wecouldn’tsellstocksfastenough.Andwherewasallthemoneygoing?Investorswereusingittobuybondfunds,whichrecordedrecordcash

inflowsduringtheperiod—eventhoughbondpriceswerebysomemeasureshigherthanthey’dbeeninmorethanfortyyears.

Thisisnothingnew.Wedoitallthetime.Wediditwithemergingmarketsin2004,withrealestatein2006and2007…Repeatuntilbroke.

Nowondermostpeopleareunsatisfiedwiththeirinvestingexperience.Themoreexpensivestocks(orhouses)are,themoreriskytheyare—yet

that’swhenwetendtofindthemmostattractive.Inshort,investorsasagrouptendtobehorrendouslybadattimingthemarket.

Itmakesfarmoresensetoignorewhatthecrowdisdoingandbaseyourinvestmentdecisionsonwhatyouneedtodotoreachyourgoals.Butman,isthathardtodo.

It’snotthatwe’redumb.We’rewiredtoavoidpainandpursuepleasureandsecurity.Itfeelsrighttosellwheneveryonearoundusisscaredandbuywheneveryonefeelsgreat.

Itmayfeelright.Butit’snotrational.

InvestmentMistakesAreInvestorMistakesIammoreconvincedthaneverthatallinvestmentmistakesarereallyinvestormistakes.

Investmentsdon’tmakemistakes.Investorsdo.Whenyouinvest,you’remakingachoice.That’sthepartweoftenforget.At

somepoint,wesaidyestotheinvestment.Wehadcontrolovereverythingleadinguptothatpoint.Wedecidedwhich(ifany)questionstoaskabouttheinvestment.Wedecidedwhomtoask.Wedecidedhowmuchtoinvestandwhentoinvest.

Ifaninvestmentperformswell,weliketothink,“Ipickedawinner.”Andhey,it’snicetotakecreditwhenthingsgowell.

Butwhenoneofourinvestmentstanks,it’ssomeoneelse’sfault.Weblame

theguywhosoldittous,therogueinvestmentbankerswhowreckedtheeconomy,out-of-controlgovernmentspending,liesinthemedia,badweatherinBrazil…justaboutanyscapegoatwilldo.

ItallremindsmeofthattimeIranoverasprinklerheadwithmyparents’lawnmower.Irememberrunninginsidetotellmymomthatthelawnmowerhadhitthesprinkler.Shepatientlytaughtmethatlawnmowersdon’thitsprinklers;ten-year-oldboyspushinglawnmowersdo.

Wedothesamethingwhenitcomestoinvesting.Ifwehaven’tdoneourresearch(figuredoutwherethesprinklersare)andwebehavepoorly(runoverthesprinklers),we’renotgoingtoliketheresults.

Andwecan’tblametheinvestmentforourdecisions.Atsomepoint,wemustacceptresponsibility.Otherwisewe’llkeepmakingthesamemistake.Andinthatcase,wemightaswellgiveuptryingtoinvest,putalloursavingsinfixed-ratebankCDs,andgoenjoyourlives.

Onedefinitionofinsanitygoessomethinglikethis:insanityiswhenyoukeepdoingthesamething(inthiscase,blamingyourinvestmentsforyourlosses)andexpectadifferentresult(inthiscase,goodreturns).

Let’sstopactingcrazy.

Long-TermMemoryLossTherearewaystotrytoclosethebehaviorgap.Butbeforewesetouttochangeourbehavior,weneedtounderstandit.

Forstarters,there’sthatnaturaltendencyofourstoavoidpainandseekpleasure.Beyondthat,we’redownrightterribleatpredictingthefuture.

Boom-and-bustcyclesarelargelyafunctionofourcollectiveexpectations.Expectationsdriveourbehavior—buttheyarealmostalwayswrong.

Typically,expectationsarebasedonourrecent—oftenourveryrecent—

experiences.Oneday,yourneighbor’shousesellsforabigprofit.Thenyourbrother’shousesellsforanevenbiggerprofit.Thingshavechanged.Afterawhile,youadjustyourexpectations.Younowthink(assume)thatvalueswillcontinuetorise.Andyoustarttobehavedifferentlybasedonthoseexpectations.Maybeyouborrowagainstyourhome’srisingvalueandspendthemoneyonanicercarorafamilyvacation.

Homeprices(andourrelatedbehavior)mayeventuallyreachdangerousextremes.Atthatpoint,pricesmaycollapseandfallwellbelowanyrealisticestimateofwhathomesareworthinthelongrun.Boom-and-bustcyclesoftentakepricestoincredibleextremesinbothdirections.Lookingback,it’salmostalwayspainfullyobviousthatweallowedourexpectationstogetoutofwhack.Atthetime,though…thingsarenotsoclear.

It’simportanttoavoidgettingcaughtupinthesecycles.Onewaytoavoidthemistolengthenourdefinitionofthepast.

Historyissoimportant.IthasbeensaidthatthethreemostimportantwordsintheEnglishlanguageare“remember,remember,remember.”

Morespecifically,weneedtothinkbackpastthetrendsoftheveryrecentpast,andrememberthosetimesinourliveswhenthingschangedinwaysthatreallysurprisedus.

Wedon’thavetolooktoancienthistoryforusefulexamples.Mostofuscanremembertheendoftheboomintechnologystart-upsadecadeago…theendofthehousingboom…the2008debtcrisisthatsentworldmarketsplummeting…

You’dthinksucheventswouldbeeasytorecall.Butwesometimespushsuchmemoriesaside—especiallywhenthingsaregoingwell.Truthis,welikethenewtrend.Whenhomepriceswererising,wewerereallyhappyaboutit.Whyworryaboutthepastwhenthepresentissopleasant?

Because,asthehistorianandphilosopherGeorgeSantayanasaid(moreorless),thosewhodon’trememberthepastjustgethammeredagainandagain.

ALittleExperienceCanBeaDangerousThingWhenweignorehistory,weendupbasingouractionsonourownlimitedexperience.Thatcanbeverydangerous.

IwasprettycarefulthefirsttimeIclimbedtheGrandTeton.Likemostclimbers,mypartnerandIhikedupintothemountainsandspentthenightsowecouldriseearlyandheadforthesummitbeforedawn.Everyonesaidweshouldgetuptothetopasearlyaspossible,andheaddownbyteno’clockinthemorning;thatway,we’davoidafternoonthunderstorms.

Itwasabeautifulday:warm,sunny,almostnowind.Weendeduptakinga

naponthesummitinshortsandT-shirts.Weheadeddownaroundnoon.Noworries.

Basedonthatexperience,ItookadifferentapproachthenexttimeIsetouttoclimbthepeak,thistimewithapartythatincludedmydad.Iwasn’tasworriedaboutgettingupanddownearly.Wegotalatestart…andweranintocloudyweather.Therewassnowontheroute.Onthesummit,wehitanelectricalstorm.Wefeltourhairstandup,andwecouldhearourmetaliceaxesbuzzing.Mydadgotknockeddownbylightningstrikes—notonce,buttwice.

ItturnsoutthatthereisareasonclimbersliketogetoffthesummitoftheGrandTetonearly.ThunderstormsarecommononthesummitofthepeakinAugust.WewereliketouristswhovisitSeattleonasunnydayanddecidethatallthosestoriesabouthowmuchitrainsarejustamythdesignedbythelocalstokeeppeoplefrommovingthere.

Manyinvestorsnowapproachingretirementcameofagebackatthebeginningofthegreatestbullmarketinhistory—whichbeganalmostthirtyyearsago.Theyfiguredinvestingwaseasy.Sotheytookonmoreandmorerisk.Thenthecloudsrolledin.

Mountainsaredangerous.Thatdoesn’tmeanyoudon’tgoclimbing(althoughmaybeyoudon’t).Butitdoesmeanthatifyouwanttostayaliveyou’dbetterrespectthosedangers.

Thesameistrueofstocks.They’redangerous.Whenwepretendotherwise,wegetintotrouble.

PickYourPoisonWeoftentreatfearandgreed—theprimarydriversofmostofthebigbehavioralmistakesinvestorsmake—asflipsidesofthesamecoin.Butthey’rereallytwoverydifferentemotions.It’simportanttofigureoutwhichemotionisthebiggerissueforyou.Thatknowledgewillhelpyoumanageyourbehaviorduringperiodsoffearandperiodsofgreed.

Ifyou’relikemostpeople,youwillfindthatthepainoflossoutweighsthepleasureyougetfromgain.Inthatcase,youcanmanageyourportfoliotoreducethepaintoalevelthatyoucanmanageevenduringtrulybadmarketdownturns.Thatjustmeansbeingmoreconservativewithyourinvestments.Youmaymissoutonsomegainswhenthemarketrises—butyou’llknowthatyourriskisreasonable.

Butwhatifyouhavetheoppositeproblem?Whatifyoujustcan’tstandsittingontheinvestmentsidelinesandhittingsinglesanddoubleswhileyourbrother-in-lawbragsabouthittinghomeruns?ThenyouneedtotiltyourportfoliotowardinvestmentsthatwillgetyouyourshareofgainswhengreedisrampantonWallStreet.

Ifyoupursuethismoreaggressiveinvestmentstrategy,youwillalwaysbepositionedforbullmarkets.Butyou’llsufferthebruntofthenextdownturn.That’sfine—justmakesuretheportfolioisn’tsoaggressivethatyoucan’thandlethosetimes.

WhatI’msayinghereisthatyoucan’thaveitbothways.Buildinganinvestmentstrategythatleanstowardmanagingfearisfine.Buildingastrategythatleanstowardmanaginggreedisalsofine.Eachpathhasitsbenefitsanditspenalties.Theideaistoaimforabalancethattrulyreflectsyourownemotionalstrengthsandweaknesses—sothatyouwon’tfeelcompelledtojumpinandoutofthestockmarket,shiftingbackandforthbetweenamoreaggressive(managinggreed)andamoreconservative(managingfear)approach.

Irepeat:youcan’thaveitbothways.Andyetwetrytodothatallthetime.Whenthemarketsoarsorhitsarough

patch,there’sanaturaltendencytodosomething.Fast.Ournaturalreactionistosellafterbadnews(whenthemarketisalreadydown)andbuywhennewsisgood(afterthemarketisalreadyup),thusindulgingourfearandourgreed.

It’sanimpossiblestrategy.

OverconfidenceOverconfidenceisaveryseriousproblem.Ifyoudon’tthinkitaffectsyou,that’sprobablybecauseyou’reoverconfident.

Infact,thepeoplewhoaremostoverconfidentaretheonesleastlikelytorecognizeit.

Worse,asthelevelofoverconfidenceincreases,thecostofourmistakesincreasesaswell,sinceourconfidencemakesuswillingtotakeonmoreandmorerisk.

Long-TermCapitalManagementwasahedgefundrunbyextremelysmartpeople(NobelPrizewinners,infact).ThegeniusesatLong-Termwerepositivethatthemosttheycouldeverloseinasingledaywas$35million.Thenonedayin1998theylost$553million.Thefundendeduplosing$3billion.

AlanGreenspan,chairmanoftheFederalReserveSystemunderfourpresidentsandthesubjectofcountlessravesinthefinancialpress,coulddonowrong.YetMr.Greenspan’ssteadfastbeliefinthevalidityofthemodelshehadusedforalmostfortyyearscontributedtotheworstmarketcrashsincetheGreatDepression.InOctober2008,Mr.GreenspanadmittedtoCongressthathewas“shocked”whenthemodelshehadusedsoconfidentlyturnedouttobeflawed.

ItwouldbeniceifonlyNobelPrizewinnersandFederalReserveBoardchairmenwerepronetooverconfidence—butreamsofresearchshowthattherestofushaveasimilarproblem.Fortunately,wecandosomethingaboutit.

Wecanrecognizethatwe’renotassmartaswethinkweare.Infact,thesmartestinvestorsaretheoneswhoacknowledgethatthey’renotsmartenoughtoforecasteventsorpickthebeststockoravoideveryscamor…

Thenexttimeyou’reabouttomakeaninvestmentdecisionbecauseyou’resureyou’reright,takethetimetohavewhatIcalltheOC(OverconfidenceConversation).It’sbeenatrulypowerfultooltohelppeopleintheirdecisions.Findafriend,spouse,partner,oranyoneyoutrust,andwalkthemthroughyouranswerstothefollowingquestions:

IfImakethischangeandIamright,whatimpactwillithaveonmylife?WhatimpactwillithaveifI’mwrong?

HaveIbeenwrongbefore?

AguyIknowhadhismoneyinvestedinhiscompany’sstock.Hehadenoughmoneytoretirecomfortably,buthebelievedtherewasagoodchancethevalueofthestockcouldcontinuetorise—maybeevendouble.Hewantedtoknowifheshouldsellthestockuponretirement,orhangonandwaitforthestocktogoupfurther.

WehadtheOverconfidenceConversation.Iaskedhimthreequestionsandweansweredthemtogether.Questionone:Whathappensifyouholdthestockandyou’reright—the

stockdoubles?Answer:You’llhavemoremoney.Questiontwo:Whatifyouholdthestockandyou’rewrong?Answer:

You’regoingbacktowork—maybefortwentyyears.Questionthree:Haveyoubeenwrongbefore?Answer:Yes.Hesoldthestock.

GreaterFoolsandYourMoneyLet’sgobackagaintothelatenineties,whenpeopleweretakingcashoutoftheirhomestobuytechnologystocks.

Thatbuyingfrenzywasnotbasedonin-depthanalysis,anditcontinuedforsolongsimplybecausethemarketseemedtogonowherebutup.Itdidn’tmakeanysense.Infact,itwasdumb.

Manyinvestorsintechnologystocksknewthesharestheyboughtwerehugelyovervalued—buttheyboughtthemanyway.Why?Becausetheyfiguredtheywouldfindsomeidiot(theGreaterFoolofstockmarketlore),andsellthestocktohimatanevenmoreridiculousprice.

ButwhathappenswhenwerunoutofGreaterFools?I’mremindedofWarrenBuffet,whooncesaidthatwhenthetidegoesout,

wefindoutwhowasswimmingnaked.Beforeyouinvestyourhard-earnedmoney,askyourself:Areyoubuyinga

particularinvestmentbecauseyouthinkit’sagoodinvestment?OrareyourelyingonaGreaterFooltocomealong?Ifso,doesn’tthatmakeyou—nooffense—abitfoolishyourself?

ALosingPatternOnedayIwasreadingthepaper,andIcameacrosstheweeklysurveyofinvestorsentimentdonebytheAmericanAssociationofIndividualInvestors.

Thissurveyreportedthatinvestorshadn’tbeensobullishsincethemarketpeaksomemonthsearlier.

Hmmm.Iseemedtorecallthatthesamesurveyjusttwoweeksearlierhadfoundthatinvestorsweremorebearishthantheyhadbeeninmorethanayear.

Whathadchangedintwoweeks?TheonlythingIknewforsurewasthatthemarketwasup5percentbetweenthetimeinvestorswantedtosellandthetimetheywantedtobuy.

Itwastheusualinsanity.

Onceagain,peoplewereexcitedaboutbuyingstocksbecausestockshadjustbecomemoreexpensive.

Sigh.We’vebeendoingthisforalongtime.Wedoitbecausewemakeinvestingdecisionsbasedonhowwefeelratherthanwhatweknow.Fallingstocksscareus;risingstocksattractus.Butweknowbuyinghighandsellinglowleadstolosses—andweneedtostopdoingthatifwewanttogetdifferentresults.

Canwestop,though?Someofuscan.Butmanyofuscan’thelpourselves.Wearegoingtocontinuetorunawayfromstockswhentheycauseuspain.

Ifyoufindyourselfroutinelybuyingorsellingatthewrongtime,it’stimetodosomethingdifferent.Onealternative—admittedlyaprettydrasticone—istoswearoffthestockmarketforever.

I’mnotkidding.Ifyoucan’tstandtheheat(andtherecordclearlyshowsthatmostpeoplecan’t)thenmaybeyoushouldhavethesensetogetoutofthekitchen.Whatevertheexpertsmayclaim,steeringclearofstocksisn’tstupid.You’lljustbefollowingWillRogers’sadvice:focusonthereturnofyourmoneyinsteadofthereturnonyourmoney.

Ofcourse,ifyouavoidstocksaltogether,youwillbegivingupsomepotentialreturns.Youwillneedtocompensatebysavingmoreoradjustingyourgoals.

Thatwouldbebetterthancontinuingtobuyhighandselllow.Butmaybethere’sanevenbetteralternative.Maybeyoushouldgethelp

fromafinancialprofessionalyoureallytrust,whowillhelpyoumakebetterdecisions.Sometimeswejustneedsomeonetowalkusinofftheledgewhen

we’reabouttodosomethingdumb.Evenifyougettrustworthyprofessionalhelp,youneedtostayinvolvedin

theprocess.Thisiswhattheprocessshouldlooklike:

Havearealplan.Iamnottalkingaboutoneofthosetwo-inch-thickbookswe’vecometoknowasfinancialplans.I’mtalkingaboutdecidingwhereyouaretoday,whereyouwanttobelater,andhowyouwillbehaveinordertogetthere.Findinvestmentstopopulateyourplan.Thiscomesattheendoftheplanningprocess,afteryou’veestablishedyourgoalsandputtogetheraroadmaptoreachthem.Youwouldneverspendtimeresearchinganddebatingwhethertotravelbyplane,train,orcaruntilyoufiguredoutwhereyouweregoing.Admitthereisaproblem.Thefirststeptoquittingadestructivehabitistoadmitthatyouhaveaprobleminthefirstplace.Reviewingpastdecisionswillhelp.Didyougetcaughtupinthetechbubblein1999?Howaboutrealestatein2006?Didyousellstocksin2002,late2008,orearly2009?Facethefactthatcashisnotasolutiontoacrisis.Goingtocashuntilthings“clearup”islikejumpingoutofthefryingpanintothefire.Normally,peoplegotocashtoalleviatetheirstress:theyjustcan’thandlethepainanymore.Butwhenyousellyouhaveanewproblem:whentogetbackin.Themostcommon“solution”tothatproblemistobuybackinwhenthingshave“clearedup.”Ofcourse,whenthingshave“clearedup,”themarketwillbehigher.Sowhatwe’retalkingaboutisengaginginaplantoselllow(now)andbuyhigh(later)onpurpose.That’sabadplan.Developachecklistofquestionstoaskbeforeyoumakemajorfinancialdecisions.Howareyoufeeling?Areyouactingoutoffearorgreed—ordoyouhaveacleartakeonwhat’sgoingon?Areyoureactingtothemedia?Areyoudoingthisbecauseotherpeoplearedoingit?Arethosepeoplegoodrolemodels?Doesthisdecisionflownaturallyoutofyourplanandsupportyourgoals?Thischecklistapproachworksforpilotsanddoctors.Likewise,itwillhelpyouavoidmistakesininvestmentbehavior.Takeyourtime.Trywritingdownanyproposedchangeinyourinvestmentportfolioandthenletitsitfortwenty-fourhours.Maybecallatrustedfriendoradvisorandwalkthemthroughyourthinkingbefore

youmakethechange.Oftenjusthearingyourselfwillconvinceyoutoforgetthewholething.Incorporatenewinformationslowly.Youcanlearnthingsduringmarketcorrections,andwhatyoulearnmayhaveimplicationsforyourstrategyandyourgoals.Duringthedeclineof2008to2009,manyofuslearnedthatriskisnotsimplyanabstractconcept.Thatexperiencemighthaveledyoutoscalebackyourgoals.Thatwouldbeareasontomakeachangetoyourinvestments—perhapsbecominglessaggressive.Buttakeyourtime.Waituntilthingssettledownandyoucanthinkrationallyaboutthenextcourseofaction.Focusonyourownbehavior,notthemarket’sbehavior.“Haveyouseenwhatthemarketisdoing?”Peopleoftensaythiswhentheyareinastateofshockorexhilaration.They’rereadytogotocashuntilthings“clearup,”orthey’repreparingtoloaduponstocksbeforeit’s“toolate.”Noticetheimplicationthatthemarketis“doing”somethingrightnow.Inreality,weonlyknowwhatthemarkethasalreadydone.Itmaybepeakingorbottomingoutandreadytoreversecourse.

Wedon’tknowwhatcomesnextforthefinancialmarkets.Intheend,ourownbehaviorisallthatwecancontrol—andultimately,ourbehaviorcanmakeahugedifferenceinourfinancialsuccessandourpersonalhappiness.

Inotherwords,it’suptoustoclosethebehaviorgap.

2.

THEPERFECTINVESTMENT

NOTlongago,Icameacrossastoryaboutahedgefundmanagerwhowasbuyinguptheworld’schocolatesupply.Thestorygotmethinkingaboutthecrazinessoftheglobalmarkets.HowarewesupposedtounderstandthemwhenahedgefundmanagerinLondon,withofficesinWestAfrica,isbuyingchocolateonexchangesallovertheworldandmaybe(whoknows?)blowingmywife’schocolatebudgetrighthereinParkCity,Utah?

Andyetsomeinvestorsmighttakethenewsaboutthehedgefundmanagerbuyingupchocolateasasignaltogooutandloaduponchocolatefutures(yes,therearesuchthings).Probablynotthebestidea,givenhowmanyfactorsaffectthepriceofchocolate,andgiventhefactthatwedon’tknowthehedgefundmanagerfromAdam.Forallweknowhecouldbeanutcase.Ormaybeheisbuyingchocolatebecausehereally,reallylikeschocolate.Ormaybehethinkschocolateisahedgeagainstanotherrecession(don’tpeopleeatalotofchocolateinarecession?).

Chocolatefuturesmaybetheperfectinvestment.ButIdon’tknowenoughaboutchocolateoraboutthathedgefundmanagerorhismotivestodecideifchocolateisagoodinvestment.SomaybeI’lljustgoeatacandybarandforgetaboutit.

FindingYourFinancialBalancePlanningforyourfinancialfutureisaboutmakingtrade-offs.It’slargelyaquestionofdealingwiththeconstanttensionbetweenlivingfortodayandsavingforsomefutureevent.

Whatseemslikeacomplicatedprocess(somuchsothatweoftengiveupbeforeweevenstart)isreallyjustabalancingact.I’vefoundthatithelpstoputaframeworkaroundthisprocess,whichwecandobyaskingafewquestions:

Howmuchcanyoureasonablysave?Whatrateofreturnwillyouearn?Howmuchdoyouneed?Andwhenwillyouneedit?

Whilethesequestionsmaysoundsimple,they’renotnecessarilyeasytoanswer.Andcertainlytherearemorequestionsthatyoucanask.Butthesefourareprettycentral.

Onlyoneofthequestions—thesecondone—hastodowithinvestments.Yetsomuchofouranxietyaboutmoneyrevolvesaroundthatprojectedrateofreturn.

Rateofreturnisonlyonerelativelysmallpartoftheequation.Thepursuitofhigherinvestmentreturnsmaymakeapositivedifferenceinouroutlook,assumingthingsgoaswehope.Butthereareotherthingsyoucandothataremorecertain—youdon’thavetorelyonhope—andjustaseffective.Savealittlemoreifyoucan.Considerretiringalittlelaterorpursuingasecondcareer.

Planningforyourfinancialfutureisabalancingactratherthanasingle-mindedpursuitofthehighestreturn.Realplanningrequiresthought,frequentcoursecorrections,and,aboveall,anefforttokeepthingsinbalance.Findingthatbalanceisadifferentprocessforeveryone.

InSearchoftheWorld’sBestInvestmentPeoplespendalotoftimeandenergytryingtofindthe“best”stocks,mutualfunds,orotherinvestments.Magazinesdevotecoverstothissearch,andauthorswritebooksaboutit.Thereareentireindustriesbuiltaroundthiswildgoosechase.

Butlet’sclearthisuprightnow:thereisnosuchthingasthebestinvestment.

Thiswidespreadnotionthatsomewherethereexistsaninvestmentthatoutshinesallotherssimplydoesn’tmakesense.Nosingleinvestmentisrightforeveryone.Thebestinvestmentsforyoudependonpersonalfactors—yourgoals,yourpersonality,yourexistingholdings,yourcreditcardbalance…Thelistisendless.

Financialproducts—includingthingslikebankaccountsandinsurancepoliciesaswellasinvestments—shouldbejudgedonhowwelltheyhelpyoureachyourgoals.Sinceyourgoalsareunique,whatmightberightforyoucouldbeadisasterforsomeoneelse.

Moreover,thespecificinvestmentsyouchooseprobablywon’tdetermineyourfinancialprospects.Ioftenrunintofolkswhospendalotoftimehuntingforgreatinvestmentsevenastheyignoremorefundamentalissuesintheirfinancialsituation.

Someonemightcomeinlookingforthenexthotstock.Iaskafewquestions,andfindoutthattheyhavenolifeordisabilityinsurance.Oranewclientwillcomeintomyofficelookingforthehighest-yieldingsavingsaccount,whilecarryingacreditcardbalanceat18percentinterest.That’smycuetosaysomethinglikethis:WhatarewedoingscrapingaroundforanextrahalfpercentinCDyields?Howaboutifweusesomeofyoursavingstopayoffsomecreditcarddebt—whichisprettymuchlikeearningan18percentyield?

Ihaveafriendwhoretiredfromhisjobasadoctorandbecameafinancialadvisor.Clientswhofocusonthehighestreturnswhileignoringbiggerproblemsintheirfinancesremindhimofoneofhisformerpatients,asmokerwithhighbloodpressure.

Thispatientwouldcomeinandaskmyfriendwhichbloodpressuremedicationwouldworkbestinhiscase,andthendebatethequestionendlessly.

Myfriendcouldn’tbelieveit.Hehadfantasiesofreadingtheguytheriotact.Hisimaginedmonologuewentsomethinglikethis:

Butyoustillsmoke!WhyarewehavingtheseendlessdebatesaboutdifferentmedicationswhenYOUSTILLSMOKE!Italmostdoesn’tmatterwhichmedicationwechoose—andinanycase,youhavenoideawhatyou’retalkingabout!You’renotadoctor!

Thesmokershouldquitsmoking.Thatissomethingthatmatters,andit’sadecisionentirelywithinhispower.Likewise,theguywiththeexpensivecreditcarddebtshouldstopwatchingCNBCandfindawaytopaythatbalanceoff—andearnanimmediate,guaranteed18percentreturnonthatinvestment.Theguywithoutlifeinsuranceshouldgetsomeandprotecthisfamily,ratherthanwastetimereadingcoverstoriesabouthotstocks.Searchingfortheperfectinvestmentcandistractyoufrommoreimportantthings.And,bytheway,itdoesn’twork.

(Don’t)CollectThemAll!Thinkofeachinvestmentthatyouownasathreadinatapestry.Eachcomponentofaportfolioshouldbethereforareason—andnotbecauseyouthinkit’sacandidateforworld’sbestinvestment.

Somepeoplecollectinvestmentslikekidsusedtocollectbaseballcards.ThisyeartheybuythemutualfundstheyreadaboutinSmartMoneymagazine.NextyeartheybuythetoptenfundsrecommendedbyMoneymagazine.Ayear

latertheybuytwoorthreenewinternationalfundsthatshoweduponthehomepageofForbes.com.

Beforetheyknowit,thesecollectorshaveasmorgasbordofunrelatedinvestments,withnocohesivestrategyatwork.

Worse,thoseinvestmentsoftenareconcentratedinsimilartypesofassets—maybelargecompanystocksorlong-termbonds—justasabaseballcardcollectormightfocusontheBostonRedSox.Ioftenmeetpeoplewhobelievethey’reproperlydiversifiedbecausetheyownfifteenortwentymutualfunds.Butdifferentfundscanhaveverysimilarinvestmentstrategies.Andwhenthevalueofonefundfalls,thesharesoffundswithsimilarstrategieswillfallaswell.

Meanwhile,therearecostsinvolvedinmaintainingsuchasmorgasbordofholdings,nottomentionthetimeandtroubleittakestokeeptrackofthemall.

Remember,you’renotacollector.You’reaninvestor.Youwantinvestmentsthatworktogethertoclosethegapbetweenyouandyourfinancialgoals.Youalsoneedtomakesurethatwhatyouowndoesn’texposeyoutomoreriskthanyoucanhandle.

Thefinancialmagazinesonyourcoffeetablearekindoflikeyourdentistoryourbrother-in-law.Theymayplayaconstructiveroleinyourlife.Buttheydon’tknowwhichinvestmentsarebest—letalonebestforyou.

LookingforMr.LynchWheneveramutualfundadvertisesperformance,theSecuritiesandExchangeCommissionrequiresthatitincludethedisclaimerthat“afund’spast

performancedoesnotnecessarilypredictfutureresults.”AstudybyresearchersatArizonaStateUniversityandWakeForestSchool

ofLawsuggeststhatthiswarningisnotenough.Theresearchersrecommendsomethingabitstronger:“Donotexpectthefund’squotedpastperformancetocontinueinthefuture.[Ours]tudiesshowthatmutualfundsthathaveoutperformedtheirpeersinthepastgenerallydonotoutperformtheminthefuture.Strongpastperformanceisoftenamatterofchance.”

DespitetheSECwarningandprettyconclusiveevidencethatpastperformancehasverylittlepredictivevalue,mostofusstilluseperformanceasthepredominantfactorinchoosingourinvestments.

Thisisoneofthosetimesininvestingwhenourexperienceinotherareasoflifeworksagainstus.Whenyouareconsideringhiringacontractortoremodelyourhouse,oneofthefirstthingsyoudoislookatthecontractor’sworkonotherhouses.Itseemsreasonabletoexpectthattheirworkonyourhousewillbethatgood,ifnotbetter.

Whenitcomestomutualfunds,however,thepasthasalmostnopredictivevalue.Peoplehavespentyearslookingforawaytoidentifymutualfundsthatwilldowellinthefuture.Theyhavelookedateducation,experience,and,ofcourse,pastperformance.

Itturnsoutthatfeesaretheonlyfactorthatreliablypredictsafund’sperformance.Thehighertheexpenseratio—thecostofowningthefund—theworsetheperformanceforshareholders.Thisisacasewhereyouactuallygetwhatyoudon’tpayfor.

Despitethis,westillscourmedialistsof“TenHotFundstoOwnNow”(whicharetypicallybasedonpastperformance),lookingforplacestoputoursavings.

OneofmyfinancialwriterfriendsoncewroteamagazinecoverstoryaboutfindingthenextPeterLynch(thelegendarymanagerofFidelity’sMagellanFundfrom1977to1990).Lynchhadjustretired,totheshockofmanyfundinvestors,andpeoplewerelookingforasuccessor.Myfriendendedupprofilinglikelycandidates—folkswhohaddeliveredverystrongreturnsoverfiveyearsorlonger.

Thosemanagersturnedouttobeadecentbunch,onthewhole.Oneortwowerequitesuccessful;oneortwoflopped;theotherswereaverage.Notabadbunch,butnolegendsinsight.

Tryingtofigureoutwhichfundwillleadthepackduringthenextquarterornextyearornextdecadeisafool’sgame.Focusinsteadonfindingalow-costinvestmentthatyoucanstickwithoverthelonghaul.

TheNextApple?Don’tBite.TheoddsofyoupickingthenexthotstocklikeGoogleorAppleareinsanelylow.Yet,likethosemisleadinglotteryadvertisements,popularstoriesaboutthenext“big”investmenttemptustobelievethatwecandoit.

Afewyearsaftermyfriendtried(andfailed)tofindthenextPeterLynch,he

wroteastorycalledsomethinglike“FindingtheNextMicrosoft.”Thestorywasfuntowrite—heandhisteamofreportersintervieweddozensoftopmoneymanagersandanalyststotrytounderstandwhatmadeMicrosoftsuchafindinitsday.Thentheywentlookingforotherstocksthathadsimilarcharacteristics.Itwasacoolexercise,andmyfriendlearnedalot,buthedidn’tfindthenextMicrosoft.Thearticlegotnominatedforanationalaward—itwasmeticulouslyreported,andalotoffuntoread—butmyfriendcan’tevenrememberthenamesofthestockshenamedinthepiece.

Heeventuallyquitwritingstock-pickingstories.“It’salittlelikewritingabouthorseracing,”hesays.“It’sreallyfun,andyoulearnalotabouthowcompaniesoperateandhowpeopletrytovaluestocks.Sometimesyoucanhelpweedouttheworststocks,andonceinawhileyoucomeacrosssomethingthatworksoutandyouthinkit’sbecauseyou’resosmart.Butintheendmostofitisjustentertainment.Youknowthat,andyouhopenoonetakesittooseriously.Butyouknowsomepeopledo.”

Lookingforthenexthotstockisbadenough.Investingintoday’shotstockisevenworse.

NathanPingeratYCharts,anorganizationthatanalyzesmarketdata,notesthatGoogle’sstockpricerosefrom$100to$600persharefromAugust2004toDecember2010.Appleclimbedmorethan4,000percentfromtheendof2000totheendof2010.Asaresult,lotsofpeoplehavedecidedthosearestocksthatbelongintheirportfolios.Unfortunately,Pingeraddsafootnote:“Tryingtopickastock’sfuturegrowthpathbasedonpastgrowthisliketryingtoguessifacoinwillcomeupheadsortailswhenyouknowthatthelasttosswasaheads.Theprevioustosstellsyounothing.”

Infact,thatmayunderstatethecaseagainstbuyingtopperformers.Thehottertheinvestment,thegreatertherisk.Thebrotherofafriendofafriendofmineboughtabunchofsilverin2010andmadealotofmoney—maybe$200,000.Itwasariskyinvestment,anditworked.Sohedecidedtobuymore.Hefiguredifsilverwasabargainathisoriginalprice,itmustbeanevenbetterbargainattriplethatprice.

Wedon’tknowhowthisguy’sinvestmentwillendup.Butdoeshisbehaviormakesensetoyou?Itmadesensetohim!Afterall,hereadabunchofarticlessayingsilver’spricewasgoingtokeeprising!

Thisremindsmeofanotherproblemconfrontingeveryinvestor.Wehaveatendencytoassumethatwhatwedoknowismoreimportantthanwhatwedon’tknow.Thissilverfanhadreadabunchofbullishreportsfromfirmsthatwantedtosellhimsilver.Itneveroccurredtohimthattheremightalsobelotsofreasonsnottoinvestinsilver.Soheputhisretirementmoneyintothemetal—andsuggestedthathisbrotherdothesame.(Ifgettinginvestmentadvicefromyourbrotherisabadidea,givinginvestmentadvicetoyourbrotherisevenworse.Inthiscasethebrothersaidnothanks…)

EverysooftenI’llgetaphonecallfromaclientwhohashissightssetonthenextbigstock.Tohim,itmakesperfectsensetodumphisplan,ignorehisgoals,andbetthefutureon,well,atipfromhisbrother,whohadthelucktobuythestockbackwhenitwascheap.

Ourwillingnesstotakeafliermakesacertainkindofemotionalsense.Wegrowuphopingandkindofbelievingthatsuperheroesandmagicarereal.Werootforunderdogseventhoughweknowbeatingthefavoritewilltakeamiracle.Weevenbuylotterytickets.Itjustdoesn’tfeelallthatcrazytobelievethatthe

starswillalignandonefinancialdecisionwillchangeourlivesforever.Infact,itfeelsgood.

Theproblemisthatwhenyouchaseafteraparticularinvestment,youlosesightofthethingsthatactuallymatter,likeyourgoalsandplans.

Fantasiesareonlyfunwhiletheylast.Backinlate1999,Iwasresistingthetemptationtobuytechnologystocks—atemptationthatwasgrowingmoreandmorepowerfulbythemonth.Everyone—myfriends,myfamily,myclients—wantedmetobuytechnologystocks.Itdidn’thelpthatmybrother-in-lawworksinthetechnologyindustry,andhekepttellingmestoriesaboutpeoplemakingeasymoney.

Andyouknowwhat?Igavein!IwentandfoundthehottesttechnologystockIcouldfind(InfoSpace)andImadeaprettyheftyinvestmentinit.

Thestockpricewentfrombelow$100toover$1300inamatterofmonths,butbyMarch2001,thestockhaddroppedbelow$25.

That’showitgoes.Theterribleironyinallthisisthatthepeoplewhoaretryingthehardesttosticktotheirplans—theoneswhoholdoutthelongestbeforetheyfinallycapitulate—aretheoneswhoendupgettinghurttheworstbecausetheybuynearestthepeak.Oncethosehard-coreholdoutsgivein,youknowthetopcan’tbefaraway,becausethereisnoonelefttobuy.

Ifyoudropbymyoffice,youwillnoticeaframedstockcertificateonthewall.Lookclosely:thosearemyInfoSpaceshares.IhadthecertificatemailedtomesoIcouldframeitandlookatiteveryday,asareminderofmyfolly.Itstungatthetime—stillstingsabit—butthelessonwasworththeloss.

For99.99percentofus,chasingaftertheGooglesandtheApplesoftheworldwillleadtodisappointment.

Meanwhile,theoddsofachievingfinancialsuccessaremuchhigherifwesimplywork,save,andbuildaninvestmentportfoliobasedonreality.

InvestingIsn’tAlwaysFairOfcourse,notallinvestingstorieshaveaclearandupliftingmoral.Sometimesfollyisrewarded,andgoodsenseandprudencearepunished—atleastintheshortrun.ThatiswhyIjudgeinvestmentadvicenotbyitsoutcomebutbythevalidityoftheprincipleit’sbasedupon.

Oneclientcametomewiththesharesofhisgrandmother’sminingcompany.Thefamilyhadlostmillionsofdollarstryingtosavethefirm,whichplayedalargeroleinthefamilylore.Thestockhadsunktoaroundtwodollars.Theclientwastryingtodecidewhattodo.Hewasworriedthatifhesoldthestock,itmightrecover—andthenheandhisfamilywouldwishtheyhadkeptit.

Itoldhimifhesoldthestockanditdoubledortripled—whichwasarealpossibility—he’dfeelbadly.ButIalsotoldhimthatifhekeptthestock,itmightgotozero—andthenhe’dfeelmuch,muchworse.

Whenmakinggoodinvestmentdecisions,ithelpstobeemotionallypreparedforapainfulresult.Butyouneedtokeepmakinggooddecisionsanyway.Intheend,that’sabetterstrategythanmakingbaddecisions.

I’mremindedofthatguyfromEngland,thirty-twoyearsold,whosoldeverythingheownedandtookthecash($135,300)toVegasforonerolloftheroulettewheel.

Gooddecisionorbad?Turnsouthewon—doublinghismoney.Now,wasthatagooddecisionorabadone?Answer:itwasstillahorribledecision.Anotherclientcametoseemeafterhisemployermergedwithanotherfirm.

Hewasforcedtoretireearly,buthetookwithhimagreatbigpileofstockinthenewlymergedcompany.Thestockamountedto90percentofhisnetworth.Hehadbeendevotedtohisformeremployer,andbeingforcedtoretirewastraumaticforhim.

NowIwasalsotellinghimtosellthestock,hislastconnectiontothefirm.Client:Why?Doyouthinkthestockpriceisgoingdown?Me:No.Myadvicehasnothingtodowiththestock’spriceorwhereIthink

it’sgoing.Idon’tknowwhereit’sgoing,soitdoesn’tmatterwhatIthinkanyway.Client:Butwhatifthestockgoesup?Me:You’llfeelbad.Butitdoesn’tmatter.Holding90percentofyournet

worthinonestockisaterribleidea.Mypointwasthatdecisionsshouldbebasedonprinciples,notonour

feelingsaboutwhat’sgoingtohappen.Theprincipleherewastheonethatsaysit’salwaysabadideatohavetoomuchofyournetworthwrappedupinasingleinvestment,letaloneasinglestock.

Hesoldit.Thestockdeclinedbymorethan90percent.HestillcallsmeSantaClaus.Ikeepremindinghimthatsellinghisstockwouldhavebeenagooddecisionevenifthestockhadimmediatelydoubled.

Thereisnobestinvestmentoutthere.Butsometimes,thebestdecisionisobvious.

3.

IGNOREADVICE,MAKEFUNOFFORECASTS

WEalllikegivingadvice.Itmakesusfeelneeded,useful,important.Butlet’sfaceit:mostoftheadvicewegive(andget)isuselessorworse.

AfriendofmineandhiswiferecentlybuiltasmallhouseonaprettyremotebeachinCentralAmerica.Theywentdownforafewmonths,andtheneighborsalldroppedby.Eachneighborhadadifferentpieceofadvice,usuallyintheformofawarning.Oneneighborhadsufferedfromtermites.Hepredictedthatmyfriend’shousewouldbeeatenupbythebugs,whileofferingvariousideasabouthowtopreventthis.Anotherneighborhadbeenrobbed.Sheoffereddirewarningsaboutthat,withlotsofadviceaboutsecuritymeasures.Anotherneighborwasterrifiedoflightning,whichhadstruckatreeinheryard,soshewarnedmyfriendandhiswifetowatchoutforlightning.Anotherneighborhadlosthispropertyinalegalbattle.Hewarnedmyfriendaboutthatriskandurgedhimtothinkaboutsellingbeforeitwastoolate.

Myfriendthoughtitwasallprettyfunny.“Nodoubtsomethingbadwillhappentoourhouseatsomepoint,”hesays.“Butitwillbesomethingcompletelydifferent.Itwillbeourdisaster.”

Hisstorygotmethinkingabouttheoriginsofadvice.Peopletendtogiveyouadvicethat’sbasedontheirownfears,theirownexperience,theirownexpertise,theirownmotivations.Theiradvicetypicallyhaslittletodowiththerealityofyourlife.Evenourfriendsandfamily,whopresumablyknowusfairlywell,usuallygetitwrong.

Mostoftheadvicewecomeacrossinthemedia(includingbooks!)isevenworse.Ittypicallyhaslittleornothingtodowiththerealityofourlives.Howcouldit,whenthepersongivingtheadvicedoesn’tevenknowus?

Predictions,withtheiraccompanying(explicitorimplied)adviceaboutwhattodonow,aretheworst.In2010,TheNewYorkTimesrananarticlecalled“AMarketForecastThatSays‘TakeCover.’”Thepieceofferedadvicefromanexpertwhosuggestedthat“individualinvestorsshouldmovecompletelyoutofthemarketandholdcashandcashequivalents,likeTreasurybills,foryearstocome.”

Thearticlegotlotsofattention.Itwasamongthepaper’smostemailedarticlesforseveraldays.

Butwhatareyousupposedtodowiththisinformation?Shouldyoufollowtheadviceto“takecover,”regardlessofyourage,uniquegoals,andfamilysituation?Cometothinkofit,wheredopeoplegetoffgivingspecificinvestmentadvicetocompletestrangers?Wouldyoutakeadvicefromarandom

guyonthestreet—evenifhewaswearingafancysuit?Whytakehisadvicewhenyoureaditinanewspaper?

Whatabouttheadvicehandeddownviabooks,television,andothermediabypopularpersonalfinancegurus?Someofthemhavegreatideas.Butdoestheirgenericadviceapplytoyou?Maybe.Butmaybenot.

Takeannuities,whichcanprovideaguaranteedmonthlyincome(inexchangeforasizableup-frontinvestment).Thebestgurusadvisetheirreaderstosteerclearofthem—andgenerally,they’reright.Annuitiesareinfactaterribledealformostpeople,thanksinparttotheirhighfees.Ihaveabiasagainstthethingsmyself.I’veconsideredusingannuitiesdozensoftimes,andIcanonlythinkoftwooccasionswhenIendedupusingthem.Butinthosetwocases,annuitiesworked.

OnecaseinvolvedawidowIknowwhohadjustenoughmoneytogetthroughretirement.Shecouldn’taffordtotakeanyriskswithhercapital,butsheneededtoearnmorethanCDspaid.Aftercarefullylookingatallheroptions,wedecidedthathercircumstancescalledforanannuitywithaguaranteedrateofreturn.

Thiswasin1999.Basedonhowthingsworkedout,hersonstillcallsmetothankmeforkeepingheroutofthestockmarket.Hiswords:“Ifwe’ddonethingsdifferently,shemighthaveendedupoutofmoneyandlivinginourbasement.”

Again,asaruleofthumb,annuitiesarenotgreatinvestments.Butmypointisthatrulesofthumbaredangerous,especiallywhentheycomefrompeoplewhodon’tknowyou.I’dgosofarastosaythereareveryfewrulesofthumbthatactuallyapplytoanysingleindividual.They’restartingpoints,atbest.

Asforthatfamousfinancialplanningpersonality,hemaybeagenius.Hemayhavehelpedalotofpeople.Butremember:Hedoesn’tknowyou.Heisnotyourfinancialplanner.

PersonalFinanceIsPersonalTakeitfromme(astranger):followingtheadviceofstrangersisatrickybusiness.Let’ssayyou’replanningavacation.YoureadamagazinearticleaboutsomeonewhohadagreattimeataduderanchinMontana.Thepictureslookfantastic.Yougo—andthebugsdriveyoucrazyandyouhatetheheatandthefoodandthehorses.Maybethetravelwriteractuallyhadagreattime.Butyou’renothim.

Thefinancialpress,personalfinancebloggers,andbest-sellingauthorsareallsourcesofinformation.Theymayhavegoodideas,whichyoumayfind

useful.Buttheycan’ttellyouhowtheinformationandtheideasapplytoyoursituation.Theydon’tknowyou.Moretothepoint,theyaren’tyou.

MyfriendTimMaurerisafinancialplanner,educator,andauthor.Hisfavoritelinegoeslikethis:“Personalfinance…ismorepersonalthanitisfinance.”

It’strue.Planningforyourfinancialfutureispersonal.Ithastobe.Agoodplanwillbeuniquetoyoursituation,andwhatisrightforyoursituationmaybeadisasterforyourneighbor.Soponderhowtheadviceyouencounterappliestoyoubeforeyoumakeimportantdecisionsaboutyourmoney.

TheirGuess,YourMoneyOnedaysomeyearsback,afriendcameintomyofficeworriedaboutsomethingcalled“thebinLadentrades.”ArumorwasgoingaroundthatamysteriousinvestorhadmadeahugebetthatthestockmarketwoulddeclineinSeptember2007.Thetheorywasthatoneperson(maybeOsamabinLaden!)hadmadethebetbecauseheorsheknewaboutanimpendingterroristattackthatwouldhammerstockprices.Myfriendwonderedifheshouldsellstockstoavoidthecomingcrash.

Soundedprettyfarout.Itoldmyfriendtoignoretherumorsandtherelatedpredictions.Asitturnedout,therewasnosuchconspiracy,nosuchmysteriousinvestor…andtheprojectedcrashdidn’thappen.

What’smore,eveniftherumorshadbeentrue,wewouldhavebeenrighttoignorethem.

Withveryfewexceptions,marketandeconomicforecastsarereallynothingmorethanguesses—someofthemprettywild.Butaswecontinuetoreckonwithanuncertaineconomicfuture,itismoretemptingthanevertoseekoutaguru.Wewantsomeonetotelluswhat’scomingsowecanplanaccordingly.Weliketheideathatwecanknowthefutureandprepareforit.

Itjustisn’tso.

Whenyoucomeacrossforecasts,keepinmindthefollowing:Nooneknowswhatthefutureholds.Historydoesn’treallyhelpexcepttotell

usthatit’shardtoforecastaccurately.Ifpeoplemakeenoughguesses,theyareboundtogetatleastafewofthem

right.Evenabrokenclockisrighttwiceaday.Sodon’ttakeittooseriouslywhensomeonecallsamarketturncorrectly.Mostlikely,it’sluck.

IcameacrossastorybyJoeKeohaneinTheBostonGlobe.ThepiecefocusedonNewYorkUniversityeconomistNourielRoubini.Backin2006,Roubinipredictedthattheeconomywasabouttogooffacliff.WhentheGreatRecessionarrived,hewaspromotedtoprophet.ButRoubinihasmadeotherextremepredictions,andhe’softenbeenwrong.Totakeoneexample:inMarch2009,hepredictedtheS&P500woulddropbelow600thatyear;itclosedtheyearat1,115,fora12-monthgainof23.5percent.

Theguyswhooccasionallynailaverydramaticforecastareactuallylessreliablethantheirmoremiddle-of-the-roadcolleagues.Keohanecitesa2010studybyOxfordeconomistJerkerDenrellandNewYorkUniversity’sChristinaFang,whodugthroughdatafromthearticle“SurveyofEconomicForecasts”inTheWallStreetJournal.

DenrellandFangconcludedthateconomistswhocorrectlycallthemostunexpectedeventshaveworselong-termrecordsthantherestofthepack.Infact,theynotedthattheanalystwiththelargestnumberandthehighestproportionofaccurateextremeforecastshadbyfartheworstoverallforecastingrecord.

Makessensewhenyouthinkaboutit.Theguyswhotendtomakeboldforecaststendtobewrong—becausethey’reconstantlyoutonalimb.Onceinawhilethey’reright,andthentheylooklikegeniuses.Moreoften,they’rejustoutthereinleftfield.

Ifyounailabigguessasamarketforecaster,youcanliveoffitforalongtime.Thinkofallthepeoplewhocameoutofthewoodworkclaimingtohaveforecastthecollapseof2008.Mostofthemwerejustlucky.

Thoughtfuleconomistsandmarketanalystscanprovideusefulinsightintothepresent.Buttheycan’tpredictthefuture.

Noonecan.

GurusAreRightUntilThey’reWrongInJuly2010,well-knownmarketforecasterRobertPrechter(whochampionssomethingcalledtheElliottWavePrinciple)madethisprediction:“TheDow,whichnowstandsat9,686.48,islikelytofallwellbelow1,000overperhaps

fiveorsixyearsasagrandmarketcyclecomestoanend.”Earlyin2011,Yale’sRobertShillerpredictedthattheStandard&Poor’s

500-stockindexwouldrisefrom1,280(itslevelonJanuary10,2011)to1,430overthenextdecade,a1.3percentincreaseperyear.

InJanuary2011,veteranmarketwatcherLaszloBirinyiforecastthattheS&Pwouldhit2,854by(markthedate)theendofthedayonSeptember4,2013.

Sothereyouhaveit.Threemarketguruswiththreedivergentforecasts,allprettyextreme.Allthreeforecastsshowedupinreputable,mainstreamnewsoutlets.

What’saninvestortothinkordo?Ignorethem.

Itcanbefuntochatwithfriendsorcolleaguesaboutyouropinionofthestockmarket.Sometimesitcanfeellikethedutyofanyself-respectingAmericantohaveanopinionaboutthemarketandtheeconomy.

Butnoonecantellyouwherethestockmarket(oranymarket)isgoing.Andevenifsomeonedidpossessthatability,howcouldyou(orI)

distinguishthatpersonfromtheclownswhogetluckyonceinawhile?WouldyoulistentoPrechter,Shiller,Birinyi…orsomeoneelse?

SoWhyDoWeListen?Wegetinterestedinpredictionsbecausewe’rehuman.Anumberoffactorsconspiretomakeuseasymarksforforecasters.

Foronething,oursurvivalinstinctmeansthatwe’reconstantlytryingtopredictwhatdangermaybelurkinginthebushes.Andsincewe’resocialanimals,welovebeingintheknow.WelovebeingtheonetobreakthenewsonFacebookorTwitter.Onaprimallevel,wewanttobethe(highlyvalued)personwhowarnsothersofdangeroroffersthemusefulinformation.

Meanwhile,it’sscarytoacceptthatmuchofwhatgoesonisrandomandthattheonlyconstantseemstobechange.Werelyonpredictingandforecastingforalmosteverydecisionwemake,includingtheweather,ourcommutetime,andevenwhattowear.Itmakesusanxioustoadmitthatmostpredictions(our

ownandthoseofothers)areflawed,atbest.Andsowearegratefulwhenpeople—especiallyfamous,respectedpeoplequotedinmainstreampublications—offertotelluswhatwillhappeninthefuture.

Okay.Soitmayfeelkindofscarytogiveuptheideathatyoucanrelyonstrangerstotellyouwhattodowithyourmoneyorwhat’sgoingtohappennextinthefinancialmarkets.Infact,however,givingupthosenotionsisthefirststeptowardacertainkindoffreedom.

Ourcontinuedwillingnesstolistentoadviceandpredictions,despiteexperienceandresearchthatsuggesttheycan’thelpus,isanexampleofwhyit’ssodifficulttobehavecorrectlywhenitcomestoourrelationshipwithinvestments.Wewantsomeonetotelluswhattodo.Butintheend,wehavetorecognizethatthefutureisunpredictable.Adviceandforecastsareoftendistractionsfromourrealtask:gettingtoknowourselvesandourgoals,makingchoicesalignedwiththosegoals,andadaptingtothesurprisesthatareboundtocomealong.

Wehaveevolvedtoscanthehorizonfordata,andmakequicksnapjudgments.AndrewLo,afinanceprofessoratMIT,notesthatifyouweretogointoyourcloseteachdayandtrytocomeupwiththeperfectcombinationofclothes,youwouldhavetochoosefromthousandsofpossiblecombinations.

Thesameistrueforinvestments.Therearemillionsofwaystodesignyourfinanciallife.Soit’snicetoimaginethatsomeonewilltelluswhattodo—orgiveusinformationthatwillmakeourchoicesverysimple(stocksaregoingup;buystocks).

Sowhatdowedowhenwerealizethatadviceisgenericandpredictionsareunreliable?Isn’tthatabigproblem?Notreally.Wedon’thavetopicktheperfectinvestments,ortheperfectportfolio.

Afterall,wedon’tneedorwantsomeonetopickourclothesforuseachmorningbasedonpredictionsaboutwhatourdaywillbelikeorwhowe’llencounterandwhatthey’llthinkofourpinkshirt.Instead,werelyonourexperienceandourjudgmentandourowntasteinclothing.

Wealsorelyonourflexibility—ifwegetitwrong,we’lladapt.Ifit’shotterthanweexpected,we’lltakeoffourjacket.Ifwe’reunderdressed,we’llapologize.Nobigdeal.Andmeanwhile,ifweneedsomeoneelse’sperspective,wecanalwaysask:HowdoIlook?

Likewise,wecandesignourportfoliostosuitourbestcurrentunderstandingofhowfinancialmarketstendtowork,andwhatwewanttoachieveoverthecomingyears.Whenthingschange,wecanadapt.

Andifweneedperspective,wecanturntotrustworthypeoplewhoknowus—notsomestrangerwithashowoncable.

YouGottaBeYouAfewyearsago,Ihadadiscussionwithsomebodywhowasunhappywiththeresultsofhisinvestingstrategy.Wediscussedonewayhecoulddoitdifferentlyandheaskedme,“Ifthatissuchagoodidea,whydoesn’tHarvarddoitthatway?”

Iwasn’ttotallysurprisedbythequestion.Theguyisaprofessor,andatthetimeHarvardandYaleweregettingalotofpressfortheinvestmentperformanceoftheirendowments.

Anyway,ItoldhimIdidn’tactuallyknowwhatHarvardandYaleweredoingwiththeirportfolios(Ihadaroughidea,butnoneofthedetails).Moretothepoint,theirgoalsaseducationalinstitutionswerealmostcertainlyverydifferentfromhisgoalsasahumanbeing.

Harvard’sgoalsmightreflecteverythingfromthesizeoftheircurrentholdingstotheirdecisiontobuildanewcampusin,say,Ecuador.

Theinvestinggoalsofanindividualorfamilywillbemorealongthelinesofeducatingyourkids(maybeatHarvard!)orhelpingyourelderlyparentsremainfinanciallyindependent.

Institutionsalsogetverydifferentdealsontheirinvestments.Feesonalternativeinvestmentsandhedgingstrategiesputthemoutofthereachofpeoplelikeyouandme.Endowmentsgetabreakbecausetheycaninvestlargeamounts.Asaresult,theymayrelyheavilyonthosetools.

Inshort,yourportfolioisnotauniversityendowment.Expectingthatthesameinvestingstrategieswillworkforyouisalittlebitlikeshoppingatabig

andtallstoreifyou’reonlyfivefeetsix.Itisn’tagoodfit.Okay,somaybeitneveroccurredtoyoutoinvestliketheguysatHarvard

andYale—or,forthatmatter,yourownstateuniversity.Butyou’veprobablybeentemptedtofollowthestrategiesofothersuccessfulinvestors.

Sometimesthey’refriendsandfamily.Oftenthey’refamousmoneymanagerswithbest-sellingbooks.Butthesamelessonapplies:Theyhavedifferent-sizeportfolios,differentgoals,anddifferentrisktolerances.Theymayhavesomethingtoteachyou,butyouneedastrategythat’smadespecificallyforyou.

Someofusknowbetterthantotakefinancialadvicefromfamilymembers—almostalwaysaterribleidea.ButwhataboutWarrenBuffett,theOracleofOmaha?Everyoneagreesthatheisabrilliantinvestor,andthathisapproachmakesalotofsense.ButhisapproachsuitshispersonalityandhisgoalsandthegoalsofhisshareholdersatBerkshireHathaway.

Here’saguywhohasalwayslovedinvesting—it’shismeatanddrink,alongwithCherryCoke(ugh!).HestudiedwithBenjaminGraham,thefatherofmodernsecuritiesanalysis,andwentontoinventaversionofvalueinvestingbasedonfinding,acquiring,andmanaginggreatbusinesses—whichisreallyafull-timejob,evenifyouareagenius.Buffettgetsabreakonmanyofhisacquisitions,becauseotherbigplayerswanthim,notsomeoneelse,asapartner.

DoesanyofthatsoundlikesomethingyouorIcanduplicate?Meanwhile,Buffettistryingtobuildabusinesshimself,deliveringlong-

termvaluetoshareholderswhohavetheirownagendas.It’sallprettycomplicated,andoccasionallyevenhegetsitwildlywrong.

MaybewecanlearnafewgeneralprinciplesfromBuffet.ButmostofusarenotgoingtoinvestlikeBuffett,nomatterhowmanybooksweread.

Ihatetobreakittoyou:You’renotWarrenBuffett.You’renoteventhenextWarrenBuffett.Fortunately,youdon’thavetobe.

Youcanbeyou.

4.

FINANCIALLIFEPLANNING

Ispendalotoftimetalkingandwritingaboutworst-casescenarios:investorsbehavingbadly,peoplelosingtheirretirement,andsoon.

Butlet’snotforgetwhywe’resofocusedonourfinancialsecurity.Wewanttobehappy,andtoprovideagoodlifeforourlovedones.

Thissketchisoneofmyfavorites,eventhoughitdoesn’tsayawordaboutmoney.WhenIgetupinthemorning,Itrytorememberwhatreallymakesmehappy—greatexperienceswiththepeopleIlove.WhenIusethatgoalasthebaselineformydecision-making,itbecomesaloteasiertofocusonthethingsthatreallymatterwhenitcomestoinvesting:thingslikeworkinghard,savingalot,andbehavingwisely.

WhatMoneyBuysHappinessismoreaboutexpectationsanddesirethanitisaboutincome.AfriendjustbackfromanextendedtriptoNepalwasstruckbyhowlittlepeopleovertherehadandhowhappytheyseemed.Shewasonlythereafewweeks,andpovertyisarealprobleminNepal;itcausesmuchsuffering.Butstill,someofthosefolksseemedprettyhappytomyfriend.

ArecentstudybyDanielKahneman,awinneroftheNobelPrizeinEconomicSciences,andPrincetonprofessorAngusDeatonfoundthatAmericansreportanincreaseinhappinessastheirincomesriseto$75,000ayear.Afterthat,theimpactofrisingincomeonhappinesslevelsoff.

Makessense.Mostofusfindthatit’sprettyhardtobehappywhenwecan’taffordfood,shelter,orhealthcare—andithelpstoaddhobbiesandasociallifeandmaybeevensometravel.Oncewehavethosethings,wecanaffordtoturnourattentiontodeeperneeds(love,personalgrowth)—thesortofneedsthatmoneymaynotaddress.

Wheredoesthatleaveus?Well,mostofusneedatleastsomemoneytohaveashotathappiness.Beyondthat,moneycanbeatoolthathelpsuspursuethethingsthatwillbringushappiness—butitcan’ttelluswhatthosethingsmightbe.

Allofthismeansthatwehavetodecidewhatwillmakeushappy,andthenmakefinancialdecisionsthatsupportthosegoals.Ifwewantcommunityandsharedpurpose,wemightgoworkforanonprofitfoundationandgiveupthebiggerbucksintheprivatesector.Isthatagoodfinancialdecisionorabadfinancialdecision?Thequestiondoesn’tmakesense:it’snotafinancialdecision.

It’salifedecision.Financialdecisionsalmostalwaysarelifedecisions.Beforeyoudecideon

yourfinancialgoals,youneedtochooseyourlifegoals.Whenyoulinkfinancialdecisionstolifedecisions,youencounterawhole

differentsetofchallenges.Eachperson’sfinancialsituationbecomesunique,becausetheirgoalsareunique.It’snolongeraboutabstractionslikeasecureretirementoracollegeeducation—it’saboutyourvisionofretirement,andyourchild’seducation.Whatbringsyouhappinessmaynotbringyourneighbor

happiness—andacannedplanwon’tworkforeitheroneofyou.Weallknowthisonsomelevel,andyetwecontinuetoactasifthe

connectionbetweenmoneyandincomeweresimple—asifmoremoneywillalwaysmakeushappier.Even(orisitespecially?)richpeopleactthisway.

I’mnotfoolishenoughtobelievethatmoneyplaysnoroleinhappiness.Moneycancertainlyrelievestress,andreducedstresscancertainlyleadtoincreasedhappiness.Sothereissomecorrelation,butitseemsprettyfuzzytome.

Iwonderiflinkinghappinesstomoneymightbepartofthiscontinuingobsessionweseemtohavewithmeasuring,comparing,andcompeting.AsfarasIcantellthereisnounitof“happy.”Wehavenostandardquantitativewaytomeasureit.Butifwelinkhappinesstomoney,thatissomethingweallunderstand.Itgivesmeawaytocomparemylevelofhappinesstoyours.

Unfortunately,themorewetrytodefine,measure,andcompeteforhappiness,theharderitistofind.

Evenso,wecontinuetocompareourlotinlifewiththeguystandingnexttous.Wemeasureourhappinessbasedonwhetherwe’rekeepingupwiththeJoneses.Andweenduplesshappyforit.

Okay.Sowhat’stheconnection,ifthereisany,betweenhappinessandmoney?

First,moneycanbuyhappiness—uptoapoint.Youneedsomemoneytobehappy,butoncethebasicsarecoveredthelinkfadesquickly.

Second,experiencesmattermorethanobjects.Rememberthethrilloffinallygettingtheshinynewtoy?Atsomepoint,itstoppedbeingnewandshiny.Thesamedoesn’tapplytothatamazingtripyoutookwithyourfamily.Thetripmaylastforonlyafewdays,butthememoriesyoucreatewillbringyougreater

happinessthroughoutyourlifethanthegadgetyoupickedupatthestorelastweek.

Third,happinesssneaksuponyouwhenyouletit.Wemayhaveaninalienablerighttopursuehappiness,butthere’snoguaranteethatwe’llactuallycaptureit.Maybewe’veletourselvesgetsocaughtupinthepursuitthatwe’remissingthepoint.

WhentheZenmasterWuLiwasaskedwhattodotoachieveenlightenment,heresponded,“Chopwood,carrywater.”

Whenhewasaskedwhattodowhenyouhaveachievedenlightenment,heresponded,“Chopwood,carrywater.”

Maybehappinesscomeseasiestwhenwearesobusyworking,takingcareofkids,shovelingsnow,orcleaningthehousethatweforgettolookforit.

LoveorMoney?Insteadofspendingtimesearchingforthebestfinancialproduct,weshouldreflectonwhatisreallyimportanttousandthenalignouruseofcapitalwiththosevalues.Ratherthanreadingthelatestlistof“TheTenBestInvestmentsforaPost-Credit-CrisisWorld,”spendsometimethinkingaboutwhatisreallyimportanttoyou.

Maybestartwiththisquestion:whatmakesyouhappy?DavidBrooks,authorandNewYorkTimescolumnist,wroteaninteresting

columnafterSandraBullockwonherAcademyAwardforbestactress.Youmayrecallthataroundthesametime,shefoundoutthatherhusbandwascheatingonher.

Brooksaskedhisreaders:Wouldyoutakethatasadeal?Ahugeprofessionalsuccess,followedbythecollapseofakeypersonalrelationship?

Youprobablywon’tbeshockedtofindoutthatmaritalhappinesstrumpsprofessionalsuccessasapredictorofpersonalhappiness.

Likewise,Brookspointedout,theconnectionbetweenincomeandhappinessisprettycomplex—andnotasstrongasyoumightexpect.Aswe’veseen,onceyouhitthemiddleclass,itdoesn’tmuchmatterhowmuchmoreyoumake.

Bycontrast,personalrelationshipsareabsolutelycrucialtohappiness.Brooksnotedthatjoiningagroupthatmeetsonceamonthproducesasmuchhappinessasdoublingyourincome.(Wow!)Justbeingmarriedis(onaverage)worth$100,000ayearintermsofemotionalgains.

Brooks’sconclusion:modernsocietyconcentratesonthewrongthings.Governmentstrackeconomictrends,butpaylittleattentiontohowsocialprogramsandinstitutionsaffecthappiness.Likewise,individualsworrytoomuchaboutmoneyandnotenoughaboutthingslikefunand…well,love.

Howdoesthisrelatetoyourfinancialplans?Ifyou’rethinkingabouthowmuchyou’llneedtoretire,don’tgethunguponhowmuchyou’llneedtobuythehouseofyourdreams.Butmakesurethere’senoughinthebudgettovisityourchildren,payyourgolfclubdues,andmaybeseeamarriagecounselorwhenthingsgetbumpy.

Fear,Greed,andtheAlternativeBackin2009,aboutsixmonthsintothefinancialcrisisthatrockedworld

markets,authorandradiohostKristaTippetthostedaseriesofconversationsonpublicradio.Sheaskedvariousreligiousthinkers,scientists,economists,andartiststotalkabouthumanvaluesinthewakeofthecrisis.

Dr.RachelNaomiRemen,apioneerofthemind-bodyholistichealthmovement,talkedaboutthecrisisasanopportunityforspiritualinquiry.Shesawitasachancetoaskquestionslikethese:Whatcansustainme?WhatdoIneedinordertolive?

Okay,let’sponderthefirstone:Willabiggerhousesustainus?Orstrongerrelationships?Goodhealth?

Theseareall,inasense,financialgoals.Obviously,abiggerhousecostsmorethanasmallerhouse.Lessobviously,stayinghealthymightmeanspendingsomemoneyonregularcheckups,eveniftheyaren’tfullycovered.Strongerrelationshipsmightmeanspendingalittlelesstimeatwork—oreventakingapaycut—sothatyoucanspendmoretimewithyourkids.

Remenandseveralotherthinkerswhotookpartintheseriespointedoutthatourfinancialdecisionsoftenreflectourpersonalconfusionorinsecurities.Ifyouthinkyou’realone—ifyou’relonely—youmayfeelunsafe.Ifyoufeelunsafeyoumaylookforwaystofeelsafer,tofeelapartofyourcommunity.Thatmightmeanbuyingthesamecarandclothesasyourneighbors,ortakingthesameexpensivevacationstheytake.Intheend,youwon’tfeellessalone.Meanwhile,youmaysacrificeyourrealfinancialsecurityinyourhalf-consciousattemptstoachieveemotionalsecurity.

Wetalkaboutfearandgreedasmotivators,butyoucanarguethatthey’rethesamething.Ourgreedgrowsoutofourfear—andtheybothleadustobehaviorthatresultsinusspendingmoneyinwaysthatdon’treflectwhowetrulyareandwhatwereallyneed.

Themoral:whateveryouhavetodotogainself-knowledge,doit.Findoutwhoyouareandwhatyouwant.Thenyoucanstopwastingyourlifeenergyandyourmoneyonstuffthatdoesn’tmattertoyou—andstartmakingfinancialdecisionsthatwillgetyoutoyourtruegoals.

LifePlanningVersusFinancialPlanningInthelastfewyears,ourpublicdiscourse—inthemedia,andincoffeeshops—hasbeguntoincludediscussionsaboutmoneythatgetatdeepquestions.Whocanyoutrust?Whydoweneedmoney?Tenyearsago,mostpeoplewouldhaveconsideredthisNewAgeCrazyTalk.Nowitdoesn’tfeelsocrazy.

GeorgeKindertakesaverybroadapproachtothenotionoffinancialplanning,whichhepreferstocalllifeplanning.Lifeplanning,hewrites,aimsto

“discoveraclient’sdeepestandmostprofoundgoals…”Kinderaskshisclientsthreequestions,whichboildowntothis:First,imagineyouarefinanciallysecure.Howwouldyouliveyourlife?

Whatwouldyouchange?Next,imagineadoctortellsyouthatyouhaveonlyfivetotenyearstolive

—butyouwon’tfeelsick.Whatwillyoudointhetimeremaining?Finally,thistimethedoctorsaysyouhavetwenty-fourhours.Whatfeelings

arise?Whatdidyoumiss?Asyouworkthroughtheanswerstothosequestions,youmaylearn

somethingaboutwhatreallymatterstoyou.Mostpeople’sanswerscitefamilyandfriends—relationships.Manyresponsesciteauthenticityorspirituality,creativity(peoplewanttodothingslikewriteanovelormakemusic),givingbacktotheircommunity,andconnectingtoplacesthroughnature.

Whateveranswersyoucomeupwith,considerthemwhenyoumakefinancialdecisions.Chancesareyou’llmakechoicesthatbetterreflectyourvalues.

Self-explorationcanbeapainfulprocess.Bepatientwiththeprocess.Keepremindingyourselfthatit’snotaboutthemoney.

It’saboutyourlife.

UrgentVersusImportantI’mwritingthesewordsatthebeginningofspring.Eventhoughthere’sstillsnowonthegroundhereinParkCity,Isuddenlyrealizethatnearlyaquarteroftheyearhascomeandgone.

Likemanyofyou,ImaderesolutionsinJanuary.TherewerealotofimportantthingsIwantedtoaccomplish.Andforafewweeks,Ididreallywell.

Butnowit’sMarch.Partofmeispanicked.There’sstillsomuchtobedone.Butanotherpartofmelatchesontothesecondhalfoftheequation:Istillhavethree-quartersoftheyeartogo.What’sthebigdeal?

BobGoldman,afinancialadvisor,saysthatheseesasurgeinbusinessaroundJanuaryandFebruaryaspeoplecomeinwiththeirNewYear’sresolutionstoupdatetheirinvestmentportfoliosorcreatetheirestateplans.Soatleastpeoplearetrying.ButMr.Goldmanoftendoesn’tseethosepeopleagainforyears.

Followingthroughonthebigdecisionstendstodropdownthelistquicklywhenyou’reconfrontedbylife’sday-to-daydemands.Weallhavealotofthingswewanttodo,needtodo,andoughttodo.

Howcanwehandlethesecompetingdemands?Ithelps—alot—whenwedistinguishbetweentasksthatareurgent(pressing,immediate)andtasksthatareactuallyimportant(fundamentaltoourgoals).

Sometasksarebothurgentandimportant.Theybelongatthetopofyourlist.Sometasksareurgentbutnotsoimportant;stillothersareimportantbutnotsourgent.Typically,theonesthatareurgentbutnotimportantgetdone.Thephonegetsanswered.SodoesreadingtheFacebookpostingfromyourhighschoolclassmate.

Meanwhile,thetasksthatareimportantbutnoturgentdroptothebottomofthelistandstaythere.Thiscancausebigproblems.Dreamsareawfullyimportant,buttheyoftendon’tseemurgent.Andsoourdreamsfalltothebottomofourlist.

Youmightneedtofixthecar—that’sprobablyurgent,andmightbeprettyimportant.Shoppingforanewsurfboard?Probablyfeelsurgent,butit’snotasimportantassomeofthenon-urgentstuffthatwillaffectyourfamily’slong-termsecurity.(Mysurferfriendsmaydisagree.)Clarifyingwhowilltakecustodyofyourchildrenifyoudie?Mightnotfeelsourgent,butitcanbeawfullyimportant.

Onaday-to-daybasisit’seasiertofocusontheurgentstuff,leavingthenon-urgentbutimportantstufftowait.Whichwouldyoudofirst:getthecarwashedorupdateyourwill?Thecarisreallydirty!Thewill?What’stherush?

What’smore,updatingyourwill—likebuyinglifeinsuranceorsettingupcollegesavingsaccounts—isacomplicatedprocess.Washingthecariseasy.

Wealsoenjoythesenseofcheckingurgent(notalwaysimportant)thingsoffalist.Someurgenttasks(shoppingforthatsurfboard!)areevenfun.Bycomparison,sittingdownandworkingthroughthedetailsofyourpersonalandfinanciallivesmaynotseemtoofferthesamesenseofexcitementandimmediategratification(thoughitcan).

Ofcourse,theimportanteventuallybecomestrulyurgent.Butbythenitmaybetoolatetodomuchaboutit.Thinkaboutthestoriesoffriendsandcolleagueswhoaredealingwithcomplicatedestatesbecausefamilymemberslettheurgenttrumptheimportant.Thentherearetheparentswhodidn’tthinkeighteenyearswouldpasssoquickly;nowthey’reunsurewhethertheycanhelppayforcollege.

Afriendwhoisanestate-planningattorneynotedthatpeopleoftencometohiminapanicrightbeforetakingatripwithouttheirkids.Withworst-casescenariosontheirminds,thesecoupleswanttheirwillsdoneincasetheplanegoesdownortheshipsinks.Sinceestateplanstaketime,it’softenimpossibletofinishbeforetheyleavetown.Andthenmyfrienddoesn’thearbackfromtheparentsagain…untilafewdaysbeforethenexttrip.

Seeapatternhere?Scheduletimeeachmonthtotackletheseimportantbutseeminglynon-

urgentquestions.Youwillbetemptedtobrushthemasideuntilnextmonth.Don’t.

Aftereveryfinancialcrisisweoftenask,Howdidwemissthesigns?Infact,alarge-scalefinancialcrisiscanbehardtopredict,letaloneprevent.

Bycontrast,apersonalfinancialcrisisisalmostinevitableunlessyouaddressthetrulyimportanttasksinyourlifebeforetheybecomeurgent.

5.

TOOMUCHINFORMATION

MARKETSaretouchy.Lastwinter,afriendofminewassittinginanoutdoorbaronthebeachinCentralAmerica—aplacecalledSolyMar.MyfriendwastalkingtoaguynamedGritty,amilitaryveteranandanelectrician.

Thetelevisionoverthebarwason,andsometalkingheadwassayingthatoilpriceswereupbecauseofchaosinLibya.Grittytoldmyfriend(whohasfollowedfinancialmarketsforthirtyyears)thatthatwasstupid.

Libya?Hell,theydon’tsupplymuchofouroil.There’ssomethingelsegoingon…

MyfriendthoughtaboutitanddecidedGrittywasright.Iagree.Here’swhatJoshuaBrownwroteforablogcalledMoneyWatchAfrica:“AlthoughLibyaisanetexporterofcrude[oil],itisonlytheseventeenth-

largestsourceofoilglobally,withnodirectexportstotheUnitedStates.ThustheconcernfrominvestorsthatLibyacouldceasetocontributetooilproductionseemsoverblown….OPEC[OrganizationofthePetroleumExportingCountries]andotheroil-producingstatescouldabsorbthedeficitbyincreasingtheirownproduction….”

Okay.ButmaybeinvestorswereworriedthatprotestswouldspreadtoabigoilproducerlikeSaudiArabia.Ormaybepeoplejustfreakedout,ortheysoldbecausetheyworriedthatotherpeoplewouldsell.

Thepointis:whoknows?Notme.NotevenGritty(althoughhemayhavehistheories).

Ponderingthis,Iamremindedofhowonepieceofinformationcanleadtoawholestorybasedongreedorfear—whichcangetusintobigfinancialtroubleawfullyquickly.

Wesometimesdeviatefromourplaninresponsetoabitofnewsthatmaynotmeanwhatwethinkitmeans.Someofushavemadeitahabittowatchthenewsforcluesaboutwhatweshoulddo.

Wow.Whatatrulybadideathatis.Remember:youonlyhavecontrolovercertainthings.Payattentionto

what’shappening,butdon’toverrateitssignificancetoyouandyourplans.Withthatinmind,arehigheroilpricesasignaltorevampyourinvestment

portfolio—evenassumingtheyaregoingtostayhigh?No.

TheEconomistSmirk

Idon’tknowwhatitisaboutreadingTheEconomistthatmakessomepeoplefeelliketheyaresomehowsmarterthantherestoftheworld—butitdoes.Iwasasubscriberforawhile,andIalwaysfeltthatjusthavingthelatestissueinmyoffice,maybelyingonmydesk,mademesmarter.

LikeIknewsomethingeveryoneelsewasmissing.RecentlyIdiscoveredthatthereisanEconomistsmirk.Thissmirksuggests

thatyouhaveasecret,thatyouarepartofanelitegroupwhothinkdeeplyabouttheissuesandhavetheinformationtheyneedtonavigatetheworldmoreskillfullythanotherpeople.

IsharedthisEconomistSmirkTheorywithagoodfriendwhohappenstobealoyalEconomistreader,andshethoughtitwassilly.Shedoesn’tsmirkwhilereadingTheEconomist;shesmirksonlywhensheseessomeonereadingTimeorNewsweekinsteadoftheTheEconomist.

Ofcourse,thewholeideathatsomethingyoureadinamagazine(orseeontelevisionorhearontheradioorencounterontheInternet)isasecretis…dumb.TheEconomistsellsmorethanamillioncopiesaweek.Awholebunchofpeoplethinktheyarebeingcleverinexactlythesamewayatexactlythesametime.

Andyetoftenwe’retemptedtoactonsomeinvestmentadvicewecomeacrossinthemedia—asifwehavecomeintopossessionofanimportantsecret;asifwesomehowhavethisideathatweweretheonlyoneswatchingtelevisionthatday.Betteractquicklybeforeanyoneelsefindsoutaboutthis!

Unfortunately,theyalreadydidfindout.

Everybody’sDoingItMaybewewanttothinkwe’reuniquelyintheknowbecauseonsomelevelweunderstandthatwhenitcomestoinvesting,followingthecrowdcanbecostly.Afterall,wheneveryoneisbuyingsomething,it’sprobablyexpensive(andthereforeriskytoown).Andwheneveryoneissellingsomething,it’sprobablycheap(andthereforepotentiallyappealing).

Weknowthis,andyetwefeelsaferinnumbers.Whenwedowhateveryoneelseisdoing,wecantakecomfortinknowingthatevenifwe’rewrong,we’llbewrongwithabunchofotherpeople.

Thiskindofbehavior—followingthecrowd—canhavedisastrousresults.Itledinvestorstoloadupontechstocksinthelate1990s,bondsin2002,andrealestatein2006.Andyetwekeepdoingit,andthebehaviorgapgrows.

ThatMagazineIsNotYourFinancialAdvisorIlovemagazinecoversaboutthemarketsandtheeconomy.

OneofNewsweek’sforaysintothedangerousterritoryofpredictivecoverscameinthespringof2010,whenthemagazineboldlydeclaredthat“America’sBack.”Thearticlepointedtoanumberofpositive(butshort-term)indicationsthattheeconomywasrecovering:jobcreation,productivity,andtheDow’s70percentrise.

Asitturnedout,theirpronouncementwasfaulty.Theeconomystumbledagain,andcontinuedtostruggleasweheadedintothefallof2011.Buttherealpointisthis:youshouldn’tmakeinvestmentdecisionsbasedonwhatyouseeatthenewsstand.

Let’sthinkaboutthisforasecond.Ifyousoldwhenthingswerebad(Remember?Backwhenalmostallthemagazinecoversweredeclaringtheendoftheworld?),youmissedoutonbigmarketgains.Whenamagazinesays“America’sBack,”isittimeforyoutomoveyourmoneybackintothe(muchhigher)market?

Ifyoueverfindyourselfoutofstocksandconsideringgettingbackinbecausethingslookbetter,becareful.Thefactthatyousoldwhenthingswere

bad(manyothersdid,too)isvaluableinformation.Nomatterhowgoodthingslookrightnow,thetimewillcomewhenthemarketcorrectsagain.

Whatareyougoingtodothen?Maybethefactthatyousoldthelasttimethingsgotroughistellingyou

something.Maybeyouneedaplanyoucanstickto—onewithlessinvestmentrisk.

Ontheotherhand,ifyoudidn’tsell—ifyoumakeyourinvestmentdecisionsbasedonyourfinancialgoals—thenwhatdoyoucarewhatamagazinesaysonitscover?

Idon’tknowwhatconstitutesabadorgoodtimetoinvest.Thepointisthatit’salwaysagoodtimetostopthecycleofsellinglowandbuyinghigh.WhocareswhatNewsweeksays?Focusonyourgoals.Buildaplanthathasthebestshotofgettingyouthere,andthenturnyourattentiontolivingnow.

Youwillbehappierforit.(Andricher.)

Ignore(Almost)EverythingPeoplewholearnthatIrunawealthmanagementbusinessandwriteaboutpersonalfinanceimmediatelystartaskingmequestions—usuallyaboutthestockmarket.

Maybeitgoeslikethis:Newacquaintance:So,anyway,whatdidthemarketdotoday?Me:Um,sorry.Ican’ttellyou.Newacquaintance:Puzzledsilence.Me:Imean,I’dtellyouifIknew.ButIdon’tknow.Newacquaintance:Morepuzzledsilence.Orlikethis:Newacquaintance:Wheredoyouthinkthemarketisgoing?Me:Gee,Ihavenoidea.Sorry.Notreallymything.Newacquaintance:Oh,sorry.Ithoughtyousaidyouranawealth

managementbusinessandwroteaboutpersonalfinance….Whatdoyoudo,again?

It’sbadenoughthatIdon’tknowwherethemarketisgoing.PeoplearestillmoreconfusedwhentheyfindoutthatIdon’tevencare.

Afrustratedfamilymemberonceaskedmeaboutthemarket’sprospects.Igavemyusualanswer.

Hisresponse:“Sowhatexactlydoyoudoifyoudon’tfollowthestockmarket?”

ItoldhimthatIhelppeoplemakesmartdecisionsaboutmoneysotheycan

buildandprotecttheirwealthovertime.Itoldhimthatthisworkdoesn’trequiremetocareaboutwhatthemarketdidtodayorwherethemarketwillbeinthefuture.

Iaddedthat,believeitornot,theabilitytobuildandprotectwealthisofteninverselyrelatedtoknowingwhat’sgoingoninthemarket.Andit’scertainlyinverselyrelatedtoactingonthatknowledge.

ItoldhimwhatItellmyclients:it’saterribleideatotrytopredictthemarket’smovements.Monitoringmarketmoves,watchingstockmarketshowsonCNBC,andporingoverfinancialforecaststakealotoftime.Worse,itmakespeopleanxious—andanxiouspeopleoftenscrewup.

Thinkaboutit:evertrydoinganythingwhenyou’reanxious?Calmisalwaysbetter.

Whathappenstoanxiousgolfers?JackNicklaussaysthatveryfewpeopleholdtheclublightlyenough.Afriendwhotriedtoteachmetoplaygolftoldmeyoushouldpretendyou’retryingtoholdababybird.Whenyougetanxious,yougriptheclubmoretightly—andsuddenlyyou’reshankingshotsallovertheplace.

Whathappenstoanxiouskayakers?ThefirsttimeIgotinakayak—intheSnakeRiveroutsideofJacksonHole—Iwasstruckbyhowimportantitwastokeepmyhipsloose.Whenmyhipswereloose,Icouldmovewiththeboat.AssoonasIgotanxious,Igotstiff—andassoonasIgotstiff,theboatgottippy.

Whathappenstoanxiousinvestors?Whenyoustartfocusingtoohardonmarketmoves,everylittleripplecanfliptheboat.Anxiouspeopletendtobuyhigh(they’reworriedbecausethey’remissingthebiggains)andselllow(they

worrythelosseswillkeeppilingup).Anxiouspeopleseekcomfortinfamiliarity.Forexample,theyloadupon

sharesoftheiremployers’stock—whichmayinfactbequiterisky.Ortheybuyastockjustbecausethey’veheardofitorknowitsproducts.

Anxiouspeoplegetstuckinthepast.Let’ssayyoulostmoneyinastock.Youknowyou’llfeelbetterifyoucanjustgetbacktoeven—butthestockkeepsfalling.Nowwhat?Moreanxiety.Morebaddecisions.

Monitoringthestockmarket’supsanddownsmakesusanxious.Tryingtopredictthefuturemakesusanxious.Anxietycanmakeuspoor.

TooMuchInformation!Iadmitthatgatheringtheinformationweneedtomakerationaldecisionscanhelpreduceouranxiety.Buttoomuchinformationcanmakeouranxietyworse.

There’sbeenalotofchatterrecentlyabouttheimpactoftechnologyonourlives—inparticular,thewaythatitmakesitpossibleforustobeconnectedtodataallthetime.Wecanchecktheperformanceofourstockportfoliointhemiddleofthenight,onvacation,atourdaughter’swedding…andwedo!

Whyisthat?What’ssocompellingaboutallthisdata?Howdoesithelpus?Hurtus?Ithinktheseareimportantquestions.

Notlongago,thepopularblogBoingBoingrananinterviewwithindependentgamedesignerJonathanBlow.Whenaskedaboutonepopulargame(it’scalledFarmVille),Blowexplainedthatthegamewasn’tdesignedtomakeplayersfeelgood.

It’ssupposedtolookcuteandproject“positivity.”Butthegamedesigners’realaimistogetpeopletoworryaboutitwhenthey’reawayfromthecomputer.Thatway,they’llbedrawnoutoftheirreallives,andgobacktothegame.

Howoftendoesthinkingaboutmoneymakeyoufeelthisway?WatchingCNBCdailyorcheckinginwithBloombergonaregularbasisrarelyhelpsyoufeelbetterinthelongtermaboutyourfinancialdecisions.Butyoukeepworrying,andchecking,andworrying,andchecking…

Myphonecontainsfeedsfromallmyfavoritenewssources,hundredsofpodcasts,allmyemailnewsletters,andabunchofbooks.Nowwheneverthereisasparemomentofquiet,Ialmostautomaticallyfillthespacewithdata.I’mlikeasugaraddictinacandystore.It’sjusttooeasytograbsome.

Itisbecomingharderandhardertoseparatethesignalfromthenoise.Mostofuswanttoknowwhat’sgoingonintheworld.Wefeellikeit’sourdutytobeinformedcitizens,towatchtheworldmarkets,tostayontopofpolitics,andto

keepupwiththewideworldofsports.Ifwedon’t,wemightmisssomethingorbeleftoutoftheconversation.

Unfortunately,thesheerquantityofinformationmakesitvirtuallyimpossibletosiftthroughallthenoise(mostofitisjustthat)andfindthestuffthatactuallymatters.Worse,we’relosingourabilitytodistinguishbetweenthetwo.Whatmatters?What’sjustnoise?

FreeYourMindResearchersinrecentyearshavefoundthatwhatwethinkaboutcanactuallychangethestructureofourbrain,sothatpatternsofthoughtbecomehabitual.Themoreweworryaboutthemarket,themoreweworryaboutthemarket—andthemorewethinkitmatters.

Thismeansthatcheckingtheperformanceofourinvestmentsorthefinancialmarketscanbecomeasortofcompulsion.Themoreweindulgeinit,thestrongeritgets.Atacertainpoint,webecomeaddictedtoinformationthatwehopewillmakeusfeelbetter.Troubleis,itoftenmakesusfeelworse—andeventually,weactonourfears.

Moneyisn’ttheonlythingatstakehere.IrememberaWallStreetJournalarticlethattalkedabouttheimpactoftechnologyonourfamilyrelationships.Onequotejumpedoutatme:“Technologyshouldbeonthelistofthetopreasonswhypeopledivorce,alongwithmoney,sex,andparenting.”

Thesolution:changeourhabits.Weneedtospendlesstimewatchingandworryingaboutourmoney—lesstimegivingintoouranxiety,ourneedtocontrolthings.Ifwecandothat,we’llsoonrealizethatit’snotimportanttoknowwhathappenedonWallStreetthisweek.Whatmattersiswhatwedidordidn’tdoinordertomoveclosertoourgoals.

Meanwhile,ifwefreeourmindsfromclutter,we’llgetbackintouchwithourrealgoalsandwhatwecandotomeetthem.We’llhavemoretimetoconnectwithfamilyandworkthatmatters.We’llfeelagreatersenseofpersonalfulfillment.WhenIconsumelessinformation,mysenseofwell-beingincreases.ThelessIknowthebetterIfeel.

Tryit.Thenexttimeyouturnonthenews,thinklongandhardabouthowyouwanttoactinsteadofjustreacting.Infact,thinkaboutwhetheryoureallyneedtowatchthenewsthatday.

You’llfindthatit’sprettyeasytocatchupwhenyoumissadayortwo.WhentheDowhit12,000inearly2011(beforeitdroppedagain),therewasagreatdealofmediadiscussionaboutwhatthisbenchmarkmeantforinvestors.Butwhoreallycares?It’sjustanumber.Weallmightaswellhaveskippedit.

I’msayingturnitalloffandgodosomething.Here’sanidea:trygoingonamediafast.Makeitapointtoavoidreading,

watching,listeningto,orthinkingaboutinformationrelatedtotheeconomyorthefinancialmarketsoryourinvestments.Whenthoughtsaboutthemarketarise,letthemgo.Goforabikeride.

Maybegoonavacationwhereyoucan’tgetemailorphoneservice.Butdon’tbesurprisedifyougothroughwithdrawal.Theremightevenbephysicalsymptoms.IoncespenttwoweeksonanislandoffthecoastofSouthCarolinaduringastressfultimeinthestockmarkets.Afteradayortwowithoutaccesstonews,Icamedownwithareallystrangerash.Thereweretwodoctorsonthetrip.Theyclaimedthatitmighthavesomethingtodowithmediadetoxification.I’mstillnotsureiftheywerekiddingornot.

Evenafulldaymakesadifference,buttakeafewdaysoffifyoucan.Afterthreedayswithnocellservice,theneedtoreachformyphonestartstoebb.Thereisasenseofspaciousnessandtime,andIcanfeelmyanxietyabate.

Tuningoutcouldevenbecomeahabit.Iknowthismayseemlikeascaryidea.Andfortherecord,Idon’tsupport

stickingyourheadinthesand.Ijustthinkyouneedtobalanceyourmoneyanxietieswithperspective.Checkthenewsorlistentothedailymarketreportifyoumust,butdon’tmakeitthefocusofyourday.

Ifyoumustthinkaboutmoney,thinkaboutyourgoals—thethingsthatreallymattertoyou.Somethingcrazyisalwayshappeningontheothersideoftheworld,butwhatdoesthathavetodowithyou?Youcan’tdoanythingaboutit.You—andtheworld—arebetteroffifyoufocusonwhatyoucando.

Let’ssayyouwanttosendthekidstocollege.Greatidea.TrackingtheperformanceoftheDowthisweekisnotgoingtohelpyoureachthatgoal.You’dbebetteroffcheckinginwithyourkidstoseehowthey’redoinginschool.

Thissameideacanapplytoanyofyourfinancialgoals.Yes,youwillfeelanxietyattimes.Lifehappens,andyouwonderifyou’vedoneenough.Stocksfall,andmaybeyoukickupyoursavingsrate.

Butdon’tletyourfearsruntheshow.Irepeat:almostnoneofthatstuffonCNBCmatters.Nothingbadwill

happenifyoumisstheendlesscommentaryonthelatestFedannouncement,Ipromise.

Ifinvestmentsuccessistrulyaboutbehavingcorrectlyoverthelongtermandchoosinginvestmentswithinthecontextofyourplan,whathappensinthemarketdaytodayshouldhavenoimpactonyourdecision-making.

Tryit.Seewhathappenswhenyouturnoffthenoiseandpaymoreattention

towhat’shappeningrightnow,rightinfrontofyou.

AwarenessBeatsAnxietyGatheringinformation—beingintheknow—isnotthesamethingasbeingmindful,beingaware,beingpresentforwhat’sactuallygoingonbehindthenewsandthechatterandthestuffthatjustdoesn’tmatter.

Oftenwhenwethinkaboutmoney,it’sintermsofeitherpastmistakesorworriesaboutthefuture.Bothofthosetypesofthoughtstakeusawayfromfocusingonthepresent.

Manypeoplehaveatendencytobeatthemselvesupwhentheymakeafinancialmistake.Butmostofusshouldspendlesstimeworryingaboutthingswecouldorshouldhavedonedifferently.

Instead,wecanuseourexperiencestohelpourselvesandothersavoidsimilarmistakeswithoutgettinginvolvedinfeelingsofblameorfeelingsofshame.Wecanlookatourmistakes,makenoteofthelesson,andmoveon.

Spendingtoomuchtimeworryingaboutthefuturecanalsoundermineourenjoymentofthepresent.Thisisatrickyissueformebecausemyworkofteninvolvesencouragingpeopletohavemoremeaningfulconversationsabouttherolethatmoneyplaysintheirlives—andnormallysuchtalksrevolvearoundplansforthefuture.

Onesolutionistodrawalineseparatingthetimethatyouspendfocusedonplanningforthefutureandthetimeyouspendlivingfortoday.Planningforthefutureisveryimportant,butitneedstobedoneinisolationtoavoidovershadowingthejoyoftoday.

Thinkaboutsettingasidetimeeachmonthtoevaluateyourrecentfinancialbehavior.Trytoidentifyanymistakesyoumayhavemade,andnotethelessonsthatyouneedtolearn.Thinkaboutyourgoalsandwhatyoushoulddonowtomoveclosertoreachingthem.

Onceyou’vedonethat,getonwithlivingyourlife.Moneydecisionsareemotionaldecisions—andmakinggoodmoney

decisionsrequiresemotionalclarity.Sotrytopayattentiontoyouremotionsaroundmoney.Thiscanbeassimpleasconsideringhowyoufeelwhenyouget

yourmonthlyinvestmentstatementorwhenamedicalbillarrivesinthemail.Acknowledgingthosefeelingsandbeingawareoftheirpotentialimpactonyourdecisionscanbeimportant,ofteninwaysthataren’tclearrightaway.

I’vefoundmyselfaskingsomereallyfundamentalquestionsduringthelastseveralyears.WhoIcantrust?What’sreallyimportanttome?WhatdoIreallyvalue?Howmuchisenough?HowshouldIreallybespendingmytime?

I’vewatchedasclosefriendshavelosttheirbusinesses,theirhomes,andevenfriendshipsovermoney.I’veseenfriendsstruggletofindjobsatatimewhentheyhadplannedonbeingwellintoretirement.Otherfriendshavehadtomoveparentsintocarefacilitiesthatfallshortoftheirfamily’shopesbutareallthattheycanafford.I’veseenmyownchildren’sdisappointmentwhenIhadtotellthemthatwecouldn’taffordsomethingtheyreallywanted.

Whenwegothroughtheseexperienceswecanfeelsorryforourselvesandgetangry.

Orwecantrytounderstandpastmistakes,practiceself-awareness,andactfromourdeepestinstincts.

Whichapproachwillbringusclosertoreachingourmostimportantgoals?

6.

PLANSAREWORTHLESS

THEnotionthatplansareworthlessprobablysoundsfunnycomingfromaguywhomakeshislivingasafinancialplanner.

Butitfeelsreallygoodtosayitinpublic,soIrepeat:plansareworthless.Thereareanumberofreasonswhywe’rehesitanttospendtimeplanningfor

ourfinancialfuture.It’stime-consuming;itmakesusanxious;we’renotsurehowtodoit.

ButIthinkthemostimportantreasonisasubtlerone.Ithinkwehaveconfusedtheprocessoffinancialplanningwithitssupposedendproduct:afinancialplan.

Financialplansareworthless,buttheprocessoffinancialplanningisvital.Aplanassumesthatyouknowwhat’sgoingtohappen—eventhoughyoudon’t.Bycontrast,planninginitstruestsenseisareality-basedprocessthatallowsforlife’sunpredictability.Itrequiresustomakedecisionsbasedonwhat’sactuallyhappening,ratherthanmakingdecisionsbasedonwhatwehopeorexpectorfearwillhappen.

Atraditionalfinancialplanstartswithabunchofassumptions.Theseassumptionstypicallyareaboutfactorssuchasfutureratesofinflation,whatthestockmarketwilldo,howmuchyou’llsave,whenyou’llretire,howmuchyou’llspendinretirement,andevenwhenyou’lldie.

Ifyou’vebeenthroughthisprocess,youknowthatitfeelsuncomfortable.Onereasonforthediscomfortisthatweknowthatnomatterhowhardwetrytomakeaccurateassumptionsaboutfutureevents,wewillbewrong.

Wedon’tknowthatinflationwillaverage3percentannually,orthatthestockmarketwillgoup8percentannually,orthatwe’llbeabletosave10percentofourpay(orwhatthatpaywillbe),orwhenwe’llretire(wemightnotgettochoose),orhowmuchretirementwillcost,orevenwhenwe’lldie(atagesixty-one?seventy-eight?ninety-two?thirty-seven?).

TimeaftertimeIseeclientswhoseliveshavechangeddramatically—forbetterorworse—totallyderailingtheirplans.Acoupledecidestosave10percentoftheir$180,000incomeeachyear.Thenthewife’sbusinesstakesoff,andtheirincomedoublesandtheirwholeplanchanges.AnothercoupleorganizestheirfinanciallifearoundtheirgoalofretiringtoPanama,butoneofthemfallsinlovewithsomeoneelseandtheygetadivorce.Joblosses,inheritance,bullmarkets,grandchildren…

Let’sfaceit:aphonecallcanutterlychangeyourlife,yourplans,yourobligations,yourresources.What’stheoldsaying?Youplan,Godlaughs.

WhenIlookbackonmyownexperience,financialsurprisesaretherule—nottheexception.MyfamilyandImovedtoLasVegasin2004.Weboughtahousefor$575,000.Theguywhosoldittoushadpaidlessthan$400,000.Thehome’svaluerosetomorethan$1millionin2007,attheheightoftheLasVegashousingboom.

Ididn’tbuildafinancialplanbasedontheassumptionthatVegasrealestatewouldcontinuetoappreciate.Goodthing.BythetimewemovedbacktoUtah(themoveitselfwasalsoasurprise),theVegashousingmarkethadcollapsed,andweowedthebankmorethanthehousewasworth.Wehadtoworkoutadealwiththebank:wesoldthehousefor$425,000,andtheyforgavetherestofthedebt.

Wow.Talkaboutasurprise.Wecertainlydidn’tplanonthehousegoingfrom$575,000to$1million.Andwedidn’tplanonthevalueplummeting,either.Thereisnowaywecouldhaveanticipatedeitherevent.Surprise!

Startinginthelatenineties,afriendofminebuiltabusinessfromscratch;hebeganitinhisbasement.Hehadpotentialbuyerslookingtopaymorethan$50millionforhisfirm.Basedonthat,hestartedworkingonplanstofundacharitablefoundationtohelpeducatechildren.Thentheboombusted,andhisbusinesswasworth$1.5million.Notatragedy—andhe’smovedonverysuccessfully—butmeanwhilehehadtomakesomecoursecorrections.

Anotherfriendmarriedaguywhohadinheritedafortune.Thehusbandmanagedtospenditonfastcarsandhighliving.Heunexpectedlyinheritedanother$8millionorsofromadistantrelative.Hespentsomeofthat,too—andlostmostoftherestday-tradingbehindhiswife’sback.

Nowshe’sinhersixtiesandlookingforherfirstjob.Notwhatsheplanned…

Thisisoneofthecruelironiesoftryingtocreateaplanofanysort:youdon’thavetheinformationyouneedwhenyoustart.Thismeansthatyourplan,whateveritis,willbebasedlargelyonmoreorlessplausiblefiction—orevenoutrightfantasy.

Optimist,Pessimist,RealistThere’sasyndromeIcallRetirementStoryHour.Acoupleworriedaboutretirementgoestoafinancialadvisor.Theadvisorcreatesaplanbasedonvariousassumptions,andthecouplefindsthatthey’llfallshortoftheirgoals.Theytalkitover,andtheplannermovessomeassumptionsaround.Thecouplefindsthattheyareallsetiftheyearnabitmoreontheirinvestmentsandretireafewyearslater.Sotheygobacktobehavingasthey’vealwaysbehaved—andsecretly,they’restillworriedbecausetheyknowtheassumptionsarebasicallynonsense.(Whichbringsmetoanotherconclusion:it’sjustfakeryunlessitaffectsyourbehavior.)

Over-optimismisonlyonesideoftheproblem.Sometimesassumptionscanbetoopessimistic.Whenyougazeintothefuture,youmightfindthatatyourcurrentsavingsrateyou’llnevermeetyourgoals—soyougiveupsaving.Butthere’saverygoodchancethatyou’llbeabletosavemuchmoreovertime.AwriterIknowwasekingoutalivinginNewYorkCitythirtyyearsago,scrimpingtosave15percentofhis(actuallyfairlymodest)incomeinhopesthathecouldretiresomeday.Hegotsickofhisjobandleftthecitytomovetothesticksandstarthisownpublishingcompany—anditturnedouthewasgoodatit.Threeyearslaterhisincomehadtripled;hehasbeensemiretiredsincehismidforties.

Pessimisticassumptionsoftendiscouragepeoplefromdoinganythingtoimprovetheiroutlook.Yourfutureholdspositivesurprisesaswellasrisks.Wefocussomuchonprotectingourselvesfromnegativesurprises(jobloss,disability,divorce,death…thewholecatastrophe)thatweforgettofactorinthepositiveones(araise,abusinessthatworksout,anewcareer,abullmarket)thatcansometimeschangeourentireoutlook.

Soremember:goodthingshappen,too.Thepointofallthisisthatallourassumptionsareguesses.Howmuchwill

weneedinretirement?Theanswerdependsuponinflation,taxrates,ourhealth…thelistisendless.Andwecan’treallypredictanyoneofthosevariables.

Yearsago—morethanadecade—Ihadaconversationwithafriendwhowasaclient.Heandhiswifehadrecentlyhadachild.Iaskedhimhowmuchhe

thoughtheshouldsaveforhercollegecosts.Here’swhathesaidtome:“Hey,Carl,Ihaveanidea.HowaboutifIsaveasmuchasIreasonablycan?”

Mypointisn’tthatwedon’tneedtoplan.Wedoneedtoplan.Butifweacceptthefactthateventhebestplanwillturnouttobeafictionalnarrativeaboutthefuture,wecanfocusourenergyontheprocessofplanninginsteadofobsessingovertheassumptions.

Theprocessofplanningmay—infact,probablywill—requireustochartacoursethat’sheadedinthedirectionwehopetogo.Thatmayinvolvemakingsomeassumptionsaboutthefuture.Butreality-basedplanningacknowledgesthatsuchassumptionsaremereguesses.Wemakethebestguesseswecan.Thenwecanmoveontothemoreproductivebusinessofinvestigatingourcurrentmotivesandcircumstances,sothatwecanactfromaplaceofunderstanding—nothope,notfear,butclarity.

ItellmyclientsthatI’mgivingthempermissiontoletgooftheneedforprecisioninplanning.Makethebestguessyoucanandthenmoveon.Putastakeinthegroundthirtyyearsout;thinkofitasamarkerthatyoucanalwaysmovelaterwhenyouhavemorefacts.

Thinkofthedifferencebetweenaflightplanandanactualflight.Flightplansarereallyjustthepilot’sbestguessaboutthingsliketheweather.Nomatterhowmuchtimethepilotspentplanning,thingsdon’talwaysgoaccordingtotheplan.

Infact,theyrarelygojustthewaythepilotplanned.Therearejusttoomanyvariables.Sowhiletheplanisimportant,thekeytoarrivingsafelyisthepilot’sabilitytomakethesmallandconsistentcoursecorrections.Itisaboutthecoursecorrections,nottheplan.

Twoorthreeyearsago,Iclimbedamountainwithafriendofmine.Aswehikeduptothebaseoftheclimb,itstartedtorain.Otherpartiesofclimbersstartedtoturnaround,ontheassumptionthattheclimbwouldbewetanddangerous.

BradandIhadplannedtoclimbarelativelydifficultroute,butnowwedecidedtohiketothebaseofadifferentroute—it’seasier,andtheseriousclimbingstartshigheruponthepeak.Thatmeantwewouldbeabletogivetheweatherabitmoretimetomakeupitsmind(youknowmountainweather…itchanges).

Asweclimbedhigher,morecloudsrolledin.Butitstillwasn’tdangerous,sowekeptgoing.Eventually,westoppedbehindarockandbrewedsometeaandwaited.Theweatherimprovedalittlebitandwemovedhigheroneasyground.Allthistime,wewerepassingpeoplewhohadturnedaroundandheadeddown—butwekeptgoing.

Eventually,thesuncameoutanddriedofftherock.Weropedupandheadedforthesummit.Theclimbingwasfantastic,andwereachedthetopsafely.

Theexperiencewasallthemoresatisfyingbecauseweknewthatwecouldhaveeasilyturnedaroundatthefirstsignofbadweather.Instead,wekeptcheckingthesituationandadaptingtoit.Wedidn’tmakeupstoriesaboutwhattheweatherwasgoingtodo.Wewatchedtheweatherandworkedaroundit.Weendedupdoingadifferentroute—butwegottothetopofthemountain.

Short-TermPlanningforLong-TermResultsOnceyouhaveageneralideaofyourdestination,thefocusshouldshifttowhatyoucandoovertheshortterm.Focusonthenextthreeyears.Thinkinginshortertimeframesinspiresustoactbasedonwhat’sactuallyhappening.Thisisfarmoreskillfulbehaviorthanworryingaboutwhatmighthappeninfifteenyears(orevenfive).Remember:wejustdon’tknow.

That’swhyit’simportanttotrytoliveinthepresent.Thepresentistheonlyplacewecanlive.Whenweliveinthepresent,wearealerttowhat’sactuallyhappening—tous,andintheworldatlarge.Wecanthenactbasedonthatawareness.Andfinancialplanningbasedonrealitytendstoleadtobetterresults.

Bycontrast,whenweliveinthefuture,we’relostinfantasyorfear.Whenweliveinthepast,we’relostinregretornostalgia.Financialplanningbasedonfantasy,fear,regret,andnostalgiaislikelytoleadtomoreofthesame.

Setacourse,realizethatyou’llcertainlybewrong,andplanonmakingcoursecorrectionsoften.Remember:theongoingprocessofplanning—nottheplan—willkeepyouheadedtowardyourgoalsandoutofthebehaviorgap.

InvestmentRiskIncreasesOverTimeWeoftenrelyonpastresultstomakeourassumptionsaboutthefuture.Seemsreasonable.Butevenifthepastcanteachusaboutthefuture(andsometimesitcanhelp),wefaceanotherproblem.Wehaveatendencytomisinterpretthemessagesthatthepastsendsus.

Takeourreadingofrisk.Whenpeoplemakefinancialplans,theygenerallyspendsometimeandenergytryingtodecidehowmuchrisktheywanttoaccept.Atsomepoint,ifyouspentanytimehangingoutwithtraditionalfinancialservicessalespeopleorintheinvestmentsectionofabookstore,you’llnodoubtheartheclaimthatriskdeclinesovertime.

Thisstoryisoftenaccompaniedbyan“educational”piecethatlookssomethinglikethesketchabove.Thefoundationofthisstoryrestsontheideathatovertime,therangeofpotentialinvestmentreturnsnarrowstowardalong-termaverageofabout10percent.

Inotherwords,whenyoulookatthebestandworstreturnsforthestockmarketforanyone-yearperiod,youcouldhavelostover40percentorgainedover60percent.That’sareallywiderange.

Butwhenyoulookattwenty-yearperiods,theworstaverageannualperformancewasagainofaround3percent,withthebestbeingabout15percent.That’samuchmorenarrowrange.Overthirtyyears,thingsgetevenclosertotheaverage.

Theproblemisrealpeopleintherealworlddon’treallycareaboutpercentages.Wecareaboutdollars.Nomatterhowhardyoutry,youcan’tpayforfood,college,orretirementwithabucketfulofpercentages.

Andguesswhat:whenwemeasurethesamerangeofpotentialinvestmentoutcomesinactualdollars,wegettheoppositepicture.Thepotentialoutcomesgetwiderovertime.

Howdoesithappen?Ifyouhappentoearn5percentinsteadofthe7percentyouplannedon,it

willmakeverylittledifferencetwelvemonthsfromnow.Butintwentyorthirtyyears,youwillendupinagreatlydifferentplace.

Again,flyingprovidesausefulmetaphor.Imagineacross-countryflightleavingfromLosAngelesandheadingtoMiami.Ifyou’reahalfinchoffcoursewhenyoutakeoff,youwillhardlynoticewhenyouflyoverLasVegas.Failtomakeacoursecorrection,however,andyouruntheriskofendingupinMaineinsteadofMiami.

Ifyoubaseyourplanonearningthelong-termaveragereturnofthestockmarketandnevermakecoursecorrections,you’reatgreatriskofendingupsomeplaceotherthanwhereyouplanned.Ontheotherhand,ifyousetacourseandthenmakeslightcoursecorrectionswhenyoufindyouhaveveeredoff,youcanhomeinonyourdestination.

FinancialMattersYouCanControlWe’reconstantlybombardedbyinformation:fromreportsofmarketupsanddownstoheadlinesaboutnuclearaccidentsandoverseasrevolutions.Buthere’sthething:noonereallyknowswhattheseeventsreallymean.

Whenwecomeuponthingsthatwedon’tunderstand,itcangenerateanxietyandfear.Inourpursuitofcontrol,weoftenobsessovertheconsequencesoffutureevents,eveniftheyarealmostalwaysbeyondourcontrol.

Soherearethreethingstorememberwhenyoufeellikeyouhavenocontrolorunderstandingofhowtheworldisabouttochange:

First,thesethingsarenotproblemsnow.WhenIstarttoworryaboutfutureevents,I’vefoundthatit’shelpfulto

focusonwhat’sgoingonrightnowinmylife.Often,IfindthatIdon’thaveanyproblemsrightnow,atthisverymoment.

Tobeclear,I’mnotpretendingitmeansthatIdon’thavethingsgoingonthatcouldhaveasignificantimpactonmylife.Withoutquestion,weallneedtodealwiththesetypesofconcerns,butithelpstoisolatethatexercisefromtherealityofeverydayliving.

Second,focusonyourpersonaleconomyandstopworryingabouttheglobalone.

There’smuchthat’sstillinyourcontrolifyoufocusonyourpersonaleconomy.That’swhyIlovethisquotefromtheinvestorJimRogers:“Anyeconomywhichsavesandinvestsandworkshardalwayswinsoutinthefutureovercountrieswhichconsume,borrow,andspend.”

Whenthingsgetreallycomplex,Ifindthatitoftenhelpstofocusonmypersonalsituation.IcanstillfigureoutawaytospendlessthanImakeandinvestinmyskillsormybusiness(overwhichIhavealittlebitofcontrol).AndIabsolutelycangetoutthereandworkhard.

Forgetaboutwhat’sgoingoninChinaorglobaldemandforthedollarorthepriceofgold.Whilewe’reworryingaboutthosethings,wecouldbedoingthingsthatactuallymakeadifferenceinourfinanciallives—likeworkingortryingtofigureouthowtosaveorearnalittlemore.

Asimilarprincipleholdswhenwegetcaughtupintheideathathigherinvestmentreturnsarethekeytomeetingourfinancialgoals.Sometimesweevenindulgeinthenotionthatourinvestmentswillsetusfreefromlivesthatdon’tsatisfyus.Wecanquitourjob,stopworrying,retiretoMexico…changethethingswedon’tlikeaboutourlives.

Butstocksaren’tthelotterywithbetterodds.Kickingupyourreturnsprobablywon’tdramaticallyalteryourfinancialprospects,letaloneyourlife.

Fortunately,youcandothatyourself.Whilemakingwisedecisionsabouthowyouinvestyourmoneyisimportant,itdoesn’thavenearlytheimpactofworkinghardandsavingmore—letalonestartingabusiness,goingbacktoschool,orreinventingyourselfinanynumberofways.

I’mremindedofamanIknowwho,backinhistwenties,sufferedfromdepression.Hedidabravething:heborrowedmoneyagainsthishousetopayforintensivetalktherapy.Fiveyearslater,hefeltgoodenoughabouthimselftoquithisdead-endjobandstartacareerasanauthor.He’ssincesoldahalfmillionbooksandcountlessarticles.Hesaystherapywasthebestfinancialinvestmentheevermade.

I’vefoundthatithelpstothinkofearningmoneyasmyjob,andthinkofinvestingasatooltoprotectthemoneyI’veearned.OfcoursethatmeansthatImighthavetowatchfromthesidelinesasthemarketsscreamtonewhighs.Butiftakingthisapproachallowsmetofocusonearningmore,startingasidebusiness,orevenjustworryingabitless,itmayleadtoabetterresultinthelongterm.

It’salsoimportanttorememberthatyouhavezerocontroloverwhatthemarketdoesandatleastsomecontroloverwhatyoudo.

Thenexttimelifestartstofeeltoocomplexandoutofcontrol,rememberthatyoucangetrecenteredbyfocusingonthesimple(note:Ididn’tsayeasy)thingsyoucandotoimpactyourpersonaleconomy.

WisdomIsaFinancialStrategyHere’sanoldZenstory.Twoyoungfishswimpastacoralreef.Anolderfishwatchesthemfromadistance,andheshoutsacrosstothem:Hey,how’sthewateroverthere?

Thetwoyoungfishexchangepuzzledlooks,andoneofthemanswerstheoldfish:Whattheheckiswater?

Thestorymakesmethinkofourrelationshiptomoney.We’reswimminginaseaofmoney-relatedquestions,worries,andhopes.Butwe’renotfullyconsciousofthefundamentalrolethatmoneyplaysinourlives.

Thechangeinourrelationshiptomoneystartsassoonaswerealizehowimportantmoneyisinourlives.Whenthathappens,westarttounderstandhowimportantitistomakefinancialdecisionsthatwillfreeusfromanxietyandconfusion.

Asourclaritygrows,wecanbegintoputmoneyintoperspective.Wemayseethatmoneyisnotascorecard,letaloneaguaranteeofhappiness.Theamountofmoneywehavesayslittleornothingabouthowsuccessfulweareas

humanbeings,anditdoesn’tnecessarilydeterminethequalityofourlife.It’sjustoneofmanyvariables,alongwithmorefundamentalonessuchasskill,talent,generosity,clarity,love,luck…thelistisverylong.

Infact,ourfinancialself-interestrequiresustospendlesstimethinkingandworryingaboutmoneysothatwecanfocusonnurturingfundamentalqualities—wisdom,health,experience,andsoon—thatcanultimatelyhelpusaccumulatemoremoneyinthelongrun.(It’shardertomakemoneywhenyou’refoolish,sick,andconfused.)

Ourdeepestinstincts(ifwelistentothem)willtellusthatmoneydoesn’tmeananything:it’ssimplyatooltoreachgoals.AndbygoalsIdon’tmeanearningahighrateofreturn,outperformingtheS&P500,orfindingthenextgreatmutualfundmanager.

Bygoals,Imeanstuffthatmatterstoyou.Thingslikeputtingyourkidsthroughcollege,startingabusiness,becomingayogateacher,takingayearoff,retiringatsixty,spendingmoretimeathomewithyourkids,buyingasweetcar,kayakingtheGrandCanyon,orhelpingyourelderlyparents.

Shiftingyourfocusfromabunchofmoreorlessincoherentworriesaboutmoneytoyourgenuinefinancialgoalswillclearyourmind.You’llstopworryingaboutpseudogoals(pickingtherightinvestment)andloseinterestinfakegoals(owningahousebiggerthanyourneighbor’s,eventhoughyoudon’treallycare).

Thatwillfreeyourmindtospendmoreofyourtimeandenergy(bothmentalandemotional)focusedonwhatyoureallywant—whatactuallymatterstoyou.You’llstartactinginwaysthatareconsistentwithyourvalues,andactlessoutofconfusionorfear.

Ofcourse,youstillhavetothinkaboutwaystoreachyourgoals.Butthatwillbeeasierwhenyourealizethatyourfinancialstrategyissimplyameanstoanend(whichyoumightcallsomethinglikehappiness).

FindYourFocusYouhaveonlysomuchtimeandenergy.Youneedtouseitwisely.Whattodo?

Myruleissimple:limityourattentiontothingsthatmeettwocriteria—theymattertoyouandyoucaninfluencethem.

Oneofmyclientsisanolderwomanwholivesinaruralcommunity.ShecalledmeonedayinastateofrealanxietyabouteventsinLebanon.Shewonderedwhatthosegoings-onmightmeantoherportfolio.

Itoldhertwothings:First—Lebanonisn’tgoingtoplayamajorroleinwhathappenstoyou.Second—thereisnotathingyoucandotoinfluenceeventsin

Lebanon.ThenIaskedheraquestion:Giventhosetwofacts,whyarewetalkingabout

Lebanon?Icouldtellyouahundredstorieslikethat.Ihavetwoclients,marriedto

eachother,bothphysicians.Theymadeitthroughthefirstyearortwoofthiscenturyjustfine.Y2K,thedot-comcollapse—thosescaresdidn’tbotherthematall.Thencamethe2003SARSepidemic.

RememberSARS?ThelettersstandforSevereAcuteRespiratorySyndrome.Backinthewinterof2002to2003itkilledmorethaneighthundredpeople,manyoftheminChinaandHongKong.NooneintheUnitedStatesdiedfromtheillness.Itwasatragedy—oneofthemanythatoccuronthisplaneteveryday.

Myyoungfriends,thetwodoctors,wereveryworriedabouthowSARSmightaffecttheirinvestmentportfolio.Infact,theywantedoutofthestockmarket.

Itwasstrange.NoneofmyotherclientswereworriedabouttheimpactofSARSontheirfinancialplans.AndSARSwasn’treallyabigdealfromaninvestmentstandpoint.Eveniftherewassomerisk,therewasnowaytoavoiditwithoutderailingtheirplans—whichwouldmeantakingamuchbiggerfinancial

risk.Inshort,evenifSARSdidpresentafinancialrisk,therewasnothingtheycoulddoaboutit.

Thisisallveryinterestingtome.Peopleworryalotaboutthingstheysimplycannotcontrol.

Thesolution:focusonthethingsthatmattertoyouandcanbeinfluencedbyyourbehavior.

Forgettherest.

7.

FEELINGS

FEELINGScanbeexpensive.Forexample,holdingontoinvestmentsforemotionalreasonscancostus

dearly.Oneofmyclients,aneighty-two-year-oldwoman,wasleftwithherentirenetworthinahandfulofindividualstockswhenherhusbanddied.Thestocksweren’tsuitableforthecouple’sportfoliowhenthehusbandwasalive—andtheycertainlyweren’tsuitableforanelderlywidow.

Iexplainedthistothewidow,butshedidn’thearme.NothingIcouldsaywouldgethertoletgoofthosestocks.Herhusbandhadboughtthem,andshehadalwaystrustedhim.Itoldherthathaving90percentofyourportfoliotiedupinahandfulofstocksisalwaysabadidea—andthatitwasanevenworseideaforsomeoneinhersituation.Shedidn’thearme.

People’sfeelingssometimesconvincethemtoholdontotheiremployers’stockeventhoughitmaybecompletelyinappropriateforthem.

Youknowhowthatgoes.You’reworkingforCompanyX,thecompanyisgrowing,thestockisrising,youstarttohavevisionsofearlyretirement.Youknowyoushouldsellsomeoftheshares—afterall,theymakeup80percentofyourlife’ssavings—butyouhangon.Thisisfun!Besides,youbelieveinwhatthecompanyisdoing!You’rereinventingyourindustry!

Thenthecompanycollapsesandyouloseeverything—notonlyyourjobbutyourlifesavings.

That’sanextremeexample—butrememberTyco,Enron,andLehmanBrothers?HowaboutGM?Noonewantstobelievethecompanytheyworkforcanfallapart,butsometimesithappens.IhadfriendswhoworkedforTyco—andtheyhadnoideawhatwascominguntilitcame.Enron?JeffSkillingwasaherotomanyinthebusinesscommunityuntilshortlybeforethecompanycollapsed.

WhenItellstorieslikethistomyclients,theynodsagelyandagreethatpeoplewhoworkedforthosecompanieswereabitfoolishtokeepalltheirmoneytiedupintheirstocks.ButthenItrytalkingtothemabouttheirowncompanystock—andImeetresistance.(JusttrytalkinganAppleemployeeintosellingsomeofhisApplestock.)Timeaftertime,Iseepeoplewithmostoftheirnetworthtiedupintheiremployers’stock.They’rebeingloyalemployees!

Andsotheyputtheirretirementatgraverisk.Evenmoreoften,weholdontoinvestmentsjustbecausewealreadyown

them.Inertiaisapowerfulforceinportfoliomanagement.Wearecomfortablewiththefamiliar.We’vealwaysownedastock,soit

feelsrighttocontinueowningit,eventhoughwecan’trememberwhyweboughtitinthefirstplace.What’smore,weknowthatifwesellthestockitmightgoup,andthenwe’llfeeldumb.Noonewantstoriskfeelingdumb—notwhenit’ssoveryeasytodo…absolutely…nothing.

Troubleis,doingnothingcanbeprettydumbitself.Youneedtotakeacloselookatyourportfolioeveryonceinawhile,andmakesureitmatchesyourgoals.

TheOvernightTestAfriendofminerecommendswhathecallstheOvernightTest.Askyourselfwhatyouwoulddoifsomeonecameinandsoldallofyourinvestmentsovernight.Thenextmorningyouwakeupandyou’releftwith100percentcashinyouraccount.

Here’sthetest:youcanrepurchasethesameinvestmentsatnocost.Wouldyoubuildthesameportfolio?Ifnot,whatchangeswouldyoumake?Whyaren’tyoumakingthemnow?

Peoplehaveatoughtimewiththisone.Maybethey’velongsinceforgottenwhytheyboughtthoseinvestmentsinthefirstplace(theremusthavebeensomereason,right?).It’skindoflikecertainrelationships:yougrowapart,yourlivestakedifferentdirections,andthere’snothingmuchlefttotalkabout…butyoukeephangingaroundwitheachotherbecausechangewouldrequirework.

Inthecaseofinvestments,youcan’taffordthatkindofstagnation.Youneedinvestmentsthatmakesensegivenyourcurrentgoals,whichmeansyouneedtotakealookatthosegoals,whichmeans…work.ThisiswhysomepeoplewhotaketheOvernightTestjustwanttoask(Please!)fortheiroldinvestmentsback.Theymaynotadmitit,butreallytheyjustdon’twanttodotheworkofcomingupwithnewones.

Iunderstand.We’rebusy.Wehavealotonourminds.Whowantstoaddanotheritem(inthiscase,“reviewinvestmentportfolio”)totheirto-dolist?Unfortunately,thisisoneto-dothatreallyneedstogetdone.

I’mnottalkingaboutchangeforthesakeofchange.Buyingandsellinginvestmentscostsmoney.I’msayingyouneedtoknowwhatyouown,andwhyyouownit.

KnowingWhentoSellHowdoyouknowwhenit’stimetosell?IthinkaboutthisquestioneverytimeIhearpeoplegoingonaboutbignewsonWallStreet—thingslikerecord-breakingearnings,companytakeovers,orthelatestIPOs.

Suchtalkwasespeciallycommoninthelatenineties.Yourememberthetime.Everyonedidwellwiththeirinvestmentsjustbypickingtechnologystocksorcompanieswhosenameendedwith“.com.”Duringthattime,peopleoftenbalkedatsellingtheirstocksbecausetheydidn’twanttodealwiththetaxesontheir(oftenenormous)capitalgains.Theyalsobelieved—orwantedtobelieve—thattheirinvestmentwouldkeeprisingindefinitely.Ifitcoulddouble,itcouldtriple!

Emotionsplayahugeroleinmakingthedecisiontosell—ornottosell.Wedon’twanttopaytaxesbecauseitmakesusfeelbadtogiveuppartofourprofittoUncleSam.Ormaybewedon’twanttogiveupthefantasythatthisparticularstockisgoingtobetheonethatmakesus,atlonglast,rich.Ormaybewejustlikebeingabletosaythatweownthelatestcool(hot)stock.

Butwhenweletourfeelingsgetinthewayofourdirectperceptionofthe

facts(forexample,thefactthatastockismuchriskiernowthatitspricehasclimbed),wegethurt.Sometimesweevensufferlife-changinglosses.

Soifyoufindyourselfwithafewwinningindividualstocks,howdoyoumakeadecisionthatmakessense?

First,behonestwithyourself.Let’ssayyouinvestedinastockattendollars,anditclimbedtothirtydollars.Wereyousmartorjustlucky?Ifyou’rebeinghonest(whichisn’talwayseasy,sinceevolutionhaswiredourbrainsforacertainamountofself-deception),you’llprobablyacknowledgethatanytriple-baggersinyourportfolioreflectatleastasmuchluckasskill.

Second,taketheOvernightTest.Wouldyoubuyitnow,basedonthecompany’sorthefund’sprospectsandprice?(Ifyoudon’tknow,theanswerisno.)

Third,reviewtheinvestment’spotentialroleinhelpingyoureachyourgoals.PickingthenextAppleisnotafinancialgoal.Savingforretirementorhavingenoughmoneytosendyourkidstocollegearefinancialgoals.Oncewe’reclearaboutthewhy—thatis,aboutthegoalsthatmotivateustoinvestinthefirstplace—makinginvestmentdecisionsbecomesmuchsimpler.

Withthatinmind,askyourself:Doesthisinvestmentplayaclearroleinyourportfolio?Doesitadddiversificationbenefits,aneededinfusionofgrowthpotential,orsomeotherelementtothemix?Inotherwords,doesitplayaroleinyoureffortstoreachyourgoals?Ifnot,sell.

Fourth,walkawayanddon’tlookback.It’squitepossiblethatifyoumakethedecisiontosellaninvestmentbecauseitdoesn’talignwithyourgoals,thestockwillpromptlytakeoff.Likewise,ifyoumakethedecisiontocontinuetoholdaninvestmentbecauseitdoesalignwithyourplans,theinvestmentmayfalloffacliff,oratleasttriponacurb.

Withthatinmind,youneedtobeemotionallypreparedforthetimeswhenyourfaithinyourperfectlysound,reality-baseddecisionswillbetested.Andofcourse,thisappliestoeveryinvestmentdecision—notjustthedecisiontosellornottosell.

Meanwhile,let’snotmakeallthisseemharderthanitis.Makingthedecisiontosellorholdaninvestmentisrelativelysimplewhenwe’reawareofthecognitivetrapsoffearandgreed.Itshouldbecleartoanyonethatifyouownaninvestmentthathastripledinprice,andyoumadethatinvestmentbasedonluck,itwouldbewisetotaketheprofitandinvestitinsomethingthatmoreaccuratelyreflectsyourplan.

Asusual,doingtherightthingissimple.Maybenoteasy.Butsimple.

GettingStuckonaNumberOneofthemorecommonbehavioralmistakeswemakewhenitcomestoinvestmentdecisionsisthetendencytogetstuckonacertainvalueorprice.Whenwegetstuckonaprice,itcanleadtocostlyblunders.

Let’ssayyoupaid$800,000foryourhomeafewyearsago,andnowyouneedtosellit.Youwanttogetbackatleastasmuchasyoupaid.Soyouinsistuponlistingitfor$800,000eventhoughyouknowtherealestatemarkethascomedown.Threemonthslater,youpassonanofferofaround$750,000.Anothersixmonthslater,you’rehopingtoget$700,000.Thatfirstofferlookslikeadream.

Hey,guesswhat:thehousingmarketdoesn’tcarewhatyoupaidforyourhouse.Itdoesn’tcarehowmuchyouputintoit,orevenwhatitcostyoutolandscape.Allthatmattersiswhatitisworthtoday.

Here’sanotherexample:youbuyastockforfiftydollarsashare,andsixmonthslaterittradesatfortydollars.Youknowthatitreallydoesn’tbelonginyourportfolioanyway.Butyoudon’twanttosellituntilyou“getbacktoeven.”

Thisideaofholdingontoaninvestmentthatisnolongerappropriate,ormayhavebeenamistakeinthefirstplace,makesnosense.Thefactthatyoupaidfiftydollarshasnobearingwhatsoeveronwhatyoushoulddonow.

Infact,Ithinkitisfairtosaythatgettingbacktoevenisneveragoodreasontoholdontoaninvestment.

Yetonemoreexample—thekindofthingIseeallthetime:yourportfoliowasworth$500,000atthetopofthemarket.Youstillthinkaboutthatvalueeachtimeyouopenyourstatementandseethatyourinvestmentsareworthlessthanthat.Youreally,reallywanttogetbacktoyourhigh-watermarkof$500,000.Youoccasionallyfindyourselfdaydreamingaboutit—likethatguynextdoorstilltellingstoriesofhisglorydaysplayinghighschoolfootball,whenheshouldbeoutpilingupvictoriesorlossesinsomeotherpursuit.

Thepastisthepast.Whatmattersnowismakingthecorrectdecisiontoday.

TheDumbMoneyWe’veallheardoftheso-calledsmartmoney:themoneythatknowswhentobuyandsellandwhattobuyandsell.(Itdoesn’texist,bytheway.)Butwhataboutthe“dumbmoney”?That’swhatsomefolksonWallStreetcallpeoplewhorepeatedlysellstocksatalowprice,onlytoturnaroundlaterandbuythemforhighprices.(That’smostofus.)

Tiredofbeingthedumbmoney?Thenyouhavetomakedifferentchoices.Themostimportantchoicecomesdowntothis:doweactbasedonwhatwe

knoworhowwefeel?

Inanintellectualexercise,knowledgewins(buylow,sellhigh!).Butintherealworld,we’rehardwiredtopursuethethingsthatgiveuspleasureorprovidesecurity,andrunasfastaspossiblefromthethingsthatcauseuspain.Ifthatweren’tthecase,wewouldhavebeeneatenbysaber-toothedtigersalongtimeago.Thismeansthatwe’reoftendrivenbyhowwefeelinsteadofwhatweknow.

InDecember2008,TheEconomistpublishedareallystrikingcover,dominatedbytheimageofabottomlessblackholeintheground.AtthetimeIwasstruckbyhowwelltheimagecapturedhowIfelt.WhenIsawitagainin2010,Ihadasurprisinglystrongemotionalresponse;thecoverbroughtthosefeelingsback.

Thepicturemademefeellikeeveryoneelsedidduringthattime:depressedandhopeless.IfeltlikeafoolfornotgatheringwhatlittlegoldIhadleftandhidingitunderthehousebeforeit,too,fellintotheholepicturedonthecover.

Buthere’sthething.WhilethepicturecapturedexactlyhowIfelt,Iknewthatactingonthatfeelingwasaterribleidea.SoIdidn’tsell.

Investmentdecisionsshouldbemadebasedonwhatweknow,nothowwefeel.

Soifyou’rethinkingaboutmakingasuddenchangetoyourportfolio,askyourselfifyourdecisionisbasedonhowyoufeelorwhatyouknow.Isitbasedonyourfeelingsaboutwhatisgoingoninthemarketorisitbasedonaninvestmentplanyouputinplacewhenyouwerethinkingclearly?

There’sanoldsaying:don’tjustdosomething,standthere.Whendealingwithinvestmentsthereisoftenthisfeelingthatweshouldbedoingsomething.Alackofactionimplieswe’remissinganopportunityormakingamistake.Cultivatingagardentakeslotsofhardwork,butatsomepointyouhavetolettheplantsgrow.Ifyouhaveaplan,letitwork.

Ifyou’restillconvincedthatyouneedtoact,takeamandatorytime-out.Writeyourselfaletterthatexplainswhatyouintendtodoandwhy.Pretendlikeyouaretryingtoconvinceawisefriendthatyourproposedcourseofactionmakessense.Itmighthelptoactuallymeetwithsomeoneyoutrustandtalkitthrough.

Please.Ignoreyourgutfeelingsaboutthedirectionofthestockmarket.Ican’ttellyouhowmanytimesIhaveheardpeopleusetheir“gut”asanexcusetobuyorsellstocksatwhatturnsouttobejustthewrongtime.

Iknow,Iknow.It’snotrealistictothinkwecanremoveallemotionfromourdecision-making.Butwecanworkhardertomakeroomforknowledgeinourfinancialchoices.

UncertaintyIsOkayInvesting,likelifeitself,forcesustomakedecisionsinthemidstofuncertainty.Wewillneverberightallthetime.Wecancontroltheprocessofmakingthedecision,butwecan’tcontroltheoutcome.Investmentdecisionsrequireustomakeeachdecisionbasedonavailableinformation:watchtheoutcome,considernewinformationasitbecomesavailable,makecoursecorrections—andrepeattheprocessoverandover.

Mostofthetime,youshouldn’treacttonewinformationatall.Butsometimesyoushould.Howcanyoutellwhethertoactornot?Tryaskingthesetwoquestions:

One:ifIactonthisnewinformationanditturnsouttoberight,whatimpactwillithaveonmylife?

Two:ifIactonthisnewinformationanditturnsouttobewrong,whatimpactwillthathaveonmylife?

Justforcingyourselftoconsiderthepotentialoutcomesofbeingwrongwillresultinmakingmuchbetterinvestmentdecisions.

8.

YOU’RERESPONSIBLEFORYOURBEHAVIOR(BUTYOUCAN’TCONTROLTHERESULTS)

BERNIEMadoffspentmostofthepasttwodecadesrunningthelargestPonzischemeinhistory,defraudingthousandsofinvestorsofbillionsofdollars.Manyofthoseinvestorswereintelligent,sophisticatedpeople.SomeweretopmanagersatmajorWallStreetfirms.Whathappened?

Sameold,sameold.Hepromisedthemoon,andwewantedtobelievehecoulddeliverit.

Therewerewarningsigns.ManypeopleonWallStreethadtheirsuspicionsofMadoff.Afewwereflat-outconvincedthathewasafraud(andtriedtotelltheSECandotherregulators).SomeWallStreetfirmsavoideddoingbusinesswiththeguy.

Otherskeptsendingclientstohim.Itwouldbenicetoblamethewholethingonafewdirtyrottenscoundrels.

Butthat’stooeasy.Partoftheproblemlieswithouralmostuniversaltendencytobelievewhatwewanttobelieve.It’sreally,reallyhardtoresistadealthatlookstoogoodtobetrue—especiallywhenotherpeoplearebuyingintoit.

IunderstandwhypeopleinvestedwithMadoff.Theguyhadgreatcredentials,andhisrecordwasverystrong.Mostfolksdidn’taskquestions.Theywantedthosereturns,andtheytrustedtheiradvisorstoprotectthem.Theiradvisors,inturn,trustedregulators.Andregulatorsdidn’tgetthejobdone.

Whatever.Thefactremainsthatsomeprettysophisticatedpeopledidn’tnaildownthefactsbeforetheyputmoney(theirownand/ortheirclients’)atrisk.

Ithappensallthetime.Fewpeopleaskedmanyquestionswhensupposedlyconservativebankersstartedofferinghigh-yieldingbutriskynewproductsto

mainstreaminvestors,likederivativesandsecuritiesbackedbysubprimeloans.Meanwhile,wekeptborrowingmoremoneyevenaswesensedthatno-money-downmortgagesmadeverylittlefinancialsense.Thebanksoffereduscheapaccesstomoney,sowedidn’taskquestions.Wetookit,andhopedforthebest.

You,me,andmosteveryoneelsestruggletoworkupthenervetoquestionthingsthatappeartoogoodtobetrue.Butasusual,itturnsoutthatourfinancialsecurityisourownresponsibility.Andsometimes,thatmeanswehavetobeskeptics.

ChasingIncomeIsBadforYourAssetsThesedays,Ihearalotfromolderfolkswholiveofffixedincomes.They’reworriedbecauseratesonbankCDsandmoneymarketaccountshavedeclined,insomecasestovirtuallyzero.Theyneedincomefromtheirinvestments,sothey’relookingforhigheryieldswherevertheycanfindthem.

Aretireewillcometome,andtheconversationmaygosomethinglikethis:Retiree:Hey,Carl,somebodytoldmeaboutthisreallyinterestingnew

product.Ityields4.5percent,andit’sjustlikeabankCD.Shouldn’twebuyabunch?

Me:That’sprettyinteresting,giventhattwelve-monthCDsareyieldingaround1percent.Iwonderhowthisproductcanyieldfourtimesasmuch.Maybeweshouldasksomequestions.Like,whataretheydoingwithyourmoneytogeneratethoseyields?DoesthishighyieldcomewithanykindofguaranteefromtheFDIC?

Retiree:Idon’tknow.Theysaidit’slikeaCD…Me:Hmmm.Theydid,didthey?Buthere’swhatbothersme:ifit’ssomuch

likeaCD,howcomeitsyieldissodifferent?Retiree:HowshouldIknow?Ijustneedsomeincome.Theretireecouldreallyusethat4.5percentyield.Afterall,hehasbillsto

pay.Butthatispreciselywhyheneedstobecareful.Themorevulnerableweare,themoretemptedwearetograbagreatdeal,

noquestionsasked.Butthatcangetusintobigtroublefast.Considerthemarketforbondsofcompanieswithlow-creditratings—theso-

calledjunkbondmarket.Junkbondstendtoofferhighyields,becausethey’remoreriskythanTreasurybonds.Everysooften,thejunkbondmarketremindsusthatchasingyieldisdangerous.Andyetjunk-ratedcompaniessoldarecord$287.6billioninbondsin2010,evenaspotentialborrowerswithsolidcreditstruggledtogethomeloans.

Investorsweregobblingupjunkbecauseitofferedhigheryieldsthanmorecreditworthybonds.Theyweren’taskinghowthoseyieldscametobequitesohigh.Infact,theydidn’twanttoknow.

Ifyoupushthem,manyinvestorswilladmitthatthey’reunclearaboutthelevelofriskthey’reassumingintheinvestmentstheybuy.Butatsomepoint,wehavetolearntoaskquestions—hardones—whenwearepresentedwithafinancialopportunity,especiallyonethatlooksincrediblytempting.

Itmighthelptorememberoneimmutablelawofinvesting:ifthepotentialreturnsarehigh,theriskisalsohigh.(Askanyeconomist.)Sowhenreturnsaresky-high,soarerisks.

TheMythofUnbiasedAdviceItwouldbenicetothinkthatyourfinancialadvisor’sinterestsarealwaysentirelyalignedwithyourinterests.Butthat’sjustnottrue.

OutrightcrookslikeBernieMadoffaretheexception.Mostfinancialadvisorsaretryingtomakealivingbyhelpingtheirclients.

Sometimes,however,thosetwogoalsareinconflict.That’sokay—butonlyifweunderstandthattheconflictexists.

Peopleoftenaskmetocreateachecklistthatwillhelppeoplechooseafinancialadvisor.Thekindofchecklisttheyhaveinmindusuallystartsoffbyaskinghowtheadvisoriscompensated.Theideaisthatifyouknowthis,you’llknowwhethertheadvisorislikelytorecommendunsuitableinvestmentsthatwilllinehisorherpocket(withcommissions,forexample).

Here’smytake:conflictsofinterestareinherentinalmostanysituationwhenyou’repayingforadvice.Lawyers,accountants,financialadvisors,automechanics…weallhavetocopewithsituationswhenourinterestsmaynotfullyalignwiththeinterestsofourclients,atleastintheshortrun.

Yourjobistoidentifythoseconflicts,andthenkeeptheminmindasyoumakeyourdecisions.Thinkofitthisway:whenyouwalkintoaToyotadealership,youdon’texpecttheguystheretotellyouthatHondasarethegreatestcararound.Youhopethey’rehonest,butyouknowthey’regoingtotrytosellyouaToyota—andyoumakeyourdecisionsaccordingly.

Whenyou’reworkingwithafinancialadvisor,itdoeshelptoknowhowheorsheiscompensated.Therearethreebasicmodels:Youcanpaybythehourforadvice.Youcanpayafeebasedonsomepercentageofyourassets.Oryoucanhireapersonwhoearnscommissionssellingyouproducts.

Manyadvisorsmixtwoorthreeofthosemodels.Otherslimitthemselvestoafee-onlymodel;othersrelyheavilyoncommissions.

Thereisagreatdealofdebateaboutwhichmodelisbest.Theanswerdependsuponyoursituation—whatkindofadviceyouneed,yourbudget,andsoon.Andwhilethecommissions-basedmodeloffersthemostpotentialforconflictsofinterest,nomodelcaneliminatethem.Afee-basedplannermaylosemoneywhenaclientwithdrawssavingstopaydownhismortgage,butitmight

betherightthingfortheclient.That’sapotentialconflictofinterestrightthere.Whatreallysetsgoodadvisorsapartishonesty.Aretheyopenabout

conflicts,anddotheymanagethoseconflictswithintegrity?True,judginganadvisor’sintegrityisnotalwayseasy.Ittakestimeto

developtrust—andintheearlystages,youmayhavetoworkhardandspendalotoftimemakingsureyoureallyunderstandtheadviceyou’regetting.

Overtimeyoucanstreamlinetheprocess,butitshouldalwaysbeapartnership.Alongtheway,keepthesepointsinmind:

First,WallStreetisinthebusinessofsellingstuff.Thatisitspurposeonearth.Ithasadutytoshareholderstomaximizeprofit,notnecessarilyshareitwithitscustomers.Thereareexceptions,butit’sunwisetopretendthatthepeopleontheothersideofthedeskhaveadutytoputyourinterestsinfrontofthoseofthefirmthatemploysthem.

Second,financialadvisorsarerequiredtodisclosetoyoutheinformationyouneedtomakeeducateddecisions.Yourjobistoreadandaskquestionsuntilyouknowwhatyou’retalkingaboutandfeelreadytomakedecisions.“Whateveryousay”isnotagoodanswertothequestion“Whatdoyouthinkweshoulddowithyourportfolio?”Abetteranswer:“Idon’tknow;tellmewhatyouthink,andthenI’llaskyouaboutsixty-fivequestions.”

Third,muchoftheadvertisingfromtheindustrymakesyouthinkyouaregettingindependentadvice—butforthemostpart,youarenot.

Financialadvicecomesfrompeoplewhoseinterestsareoftenindirectconflictwithours.Andthat’sfine,aslongaswerecognizeit.Thereisnothingillegalabouttryingtosellsomeonesomething.

Fourth,nooneisforcingyoutobuyanything.Keepaskingquestionsuntilyouknowwhatyou’redoing.Then,andonlythen,takeaction.

HopeIsNotaBudgetingStrategyMaybeyou’vealreadylearnedthistruththehardway,buthereitisagain:theuniverseisnotgoingtopayforthatBMWyouwant.

Thatmaysurpriseyouifyou’reafanofTheSecret,whichwasabest-sellingbookafewyearsback.Thebook’spremiseisthatyoucancreateyourownrealitythroughyourthoughts.Ifyoufocusintentlyenoughonsomething,itwillhappen.

Manyofusrecognizethatthinkinggoodthoughtswillgenerallymakeushappierandmoreattractivetootherpeople.Wealsoseesomelogicinthefake-it-until-you-make-itstrategy.Afterall,howmanyofusarereallyqualifiedforthejobsweapplyfor?

Butwecan’tchangeourrealitysimplybywillingit—andtheideathatwecanisparticularlydangerouswhenappliedtomoney.

Usingpositivethinkingtomotivateourselvestomakehealthyfinancialdecisionsisonething.It’ssomethingelseentirelytoleaseaBMWyoucan’taffordandhopethattheuniversewillmakeyourpaymentsbecauseyouthoughtaboutitreallyhard.

Maybethissoundssillytoyou,butIseesomethingsimilarhappenonaregularbasis.Iroutinelycomeacrosspeoplewhobelievethatgettingtothenextlevel,howevertheydefineit,requiresfakingitatanunsustainablelevelusingmaterialgoodsaspartoftheruse.

Forexample,thinkaboutthepeopleyouknowwhobelievethatmoreexpensiveclothesoraflashiercarwillhelpthemappearmoresuccessful,whichinturnwillhelpthemclosemoredealsorlandthatnextpromotionorproject.Therealquestioniswhetherthere’sanythingtobackuptheflash.

Positivechangerequireshardwork,patience,anddiscipline.That’sthesecretleftoutofTheSecret.

InvestingIsNotEntertainment

Wegetintotroublewhenweconfuseinvestingwithentertainment.Adecadeorsoago,investinghadbecomeAmerica’sfavoritespectator

sport.Everywhereyouwentpeopleweretalkingaboutfindingthenexthotstock,mutualfund,oralternativeinvestment.Magazineswithcoverslike“TenHotFundstoBuyNow”and“FiveStocksThatSizzle”madeinvestingsoundfun.Youcouldn’tturnonthetelevisionwithoutseeingsomeloutscreaming“Buy!Buy!Buy!”

Mostofthestockmarketcoverageinthemediawasdesignedtoappealtoourfantasiesaboutgettingrichquickly—ourwildestfinancialhopesanddreams.Andmostofuswereeagertoswallowthestorythatwecouldgetrichquicklyinstocks.So,despiteknowingatsomelevelthatmarkettiming,stockpicking,andday-tradingarehazardoustoourwealth,manypeoplestilldidthosethings.

Everyoneofthoseinvestorswouldhavebenefitedfromaskingthesequestions:AmIinvestingtomeetmymostimportantfinancialgoals,oramIinvestingasaformofentertainment?AmIbeingrealistic,oramIlettingmyfantasiesrunawaywithme?

Sure,investingisfunwhileyou’remakingmoney.Andit’sfuntoindulgeinoccasionaldaydreamsaboutgettingrichtheeasyway.ButthisisnotMonopoly.

Thisisreallife.We’redealingwithrealmoneyandrealgoals.Whenweforgetthat—whenweconfuseinvestingandentertainment—wealmostalwaysendupbehavingbadly.

Sonexttimeyouaretemptedto“playthestockmarket”maybeyoushouldgotothemoviesinstead.

WhiningIsNotaFinancialStrategyI’mprettysurethatthemoretimewespendcomplainingaboutthebigbanksandWallStreet,theworseourpersonalfinancialsituationgets.

Irealizethatsomepeopleandinstitutionswithfinancialpowerdothingsthatareflat-outcriminal,andtheydeservetobepunished.Butwhatgooddoesitdoyoutospendtimebroodingabouttheirguilt?Wouldn’tweallbebetteroffdevotingthatenergytoimprovingourownfinances?

Complainingdoesn’thelp.Sure,itmightmakeusfeelbetterforawhile,orgiveussomethingtotalkaboutatparties.Butitcanalsodistractusfromthetaskofponderingourowncontributionstothesituationthatiscausinguspain.

Yes,ithurtstoadmitthatwearepartlytoblameforourownlosses.Butit’sessentialtostepupandacceptthatresponsibility.Whenyouacknowledgetheroleyou’veplayedinyourownsuffering,youcanlearnfromyourmistakes.Ifyousimplyblameothers,you’llkeepdoingwhateveryoudidandyou’llendupintroubleagain.

Whiningsometimesreflectsamistakenbeliefthatsomeoneorsomethingwill(orshould)alwaysstepuptosaveusfromtheconsequencesofouractions.Thisbeliefcanleadustoengageinriskybehavior.Whynot?Afterall,someonewillrescueusifwegetinoverourheads.

Whenfriends,family,orgovernmentdobailusoutofajam,wetendtotakeevengreaterrisks.(It’sthe“moralhazard”problemthateconomiststalkabout—inaneraofbail-outs,financialinstitutionstakeonmoreriskthantheyotherwisewould.)Then,whenthingsgowrongagainandthistimenoonecomestotherescue,wefeelbetrayed.Weblameothers.Wewhine.

Don’tgetmewrong.Iknowtherearesituationswhereitreallyissomeoneelse’sfault.Irealizethatinmanycasesoffinancialhardship,family,friends,andthegovernmentneedtostepintohelp.Ihavebeenonthereceivingendofthatkindofassistancemyself.

Asarule,however,nothingwillchangeuntilwemaketheconsciousdecisionthatweareusuallyresponsibleforourownfinancialsituation.Andeveninthosecaseswheresomeoneelsewasclearlyatfault,ourenergyisfarbetterspentapplyingwhateverlessonswecanandmovingon.

LynnetteKhalfani-Coxwritesbooksaboutpersonalfinancethesedays,buttenyearsagosheowedmorethan$100,000onhercreditcards.Billcollectorsandrepomenwereabigpartofherlife.Herdebtdidn’treflectamedicalemergencyorajobloss.She’dsimplyspentfreely,oneverythingfromlandinvestmentstoprivateschooltuitions.Inherwords,shewasearningsixfiguresbutspendinglikeshewasearningsevenfigures.

Whenthecreditcardcompaniesstoppedlendingtoher,shehitbottom—andthenshedecidedtochangeherbehavior.Shecutherspendingway,waydown.Sheusedeverysparebitofcashtopaydowndebt.Shedoubledandtripledherminimumpaymentsoncards.Inthreeyearsshe’dpaidoff$70,000;shesoldsomelandtopayofftherest.

“Thecreditcardsaren’ttheproblem,”shetoldoneinterviewer.“We’retheproblem.”

ThingsstartedtochangeforKhalfani-Coxwhenshestoppedcomplainingaboutthebigbadcreditcardcompanies,learnedthetoughlessons,andtookresponsibilityforheractions.

FeelsVirtuous,ChangesNothingToreachourgoals,wehavetolookcarefullyatthethingswe’redoingthatwethinkarehelping.Inourpursuitoffinancialsuccessweoftengetcaughtupintasksthatactuallyaccomplishverylittle.Why?Maybebecausetheygiveusanexcusetoignorethebiggerissuesthatwillhaveagreaterimpact.

OnecloudydaylastwinterIfoundmyselfdrivingoutofmywaytogetsomecheapgasatCostco.Ididn’tneedapalletoftoiletpaperorfiftygallonsofmilk,justgas.

WhileIwasdrivingIstartedthinkingaboutpeople’stendencytofocusoncertainareasofsavingswhileignoringothers.Theoldideaofbeingpenny-wiseandpound-foolishreallyapplies.IfIsavedtencentsagallononatwenty-gallontankofgas,I’muptwodollars.Thathardlycoverstheextragasittookmetogetthere,letalonethetimeittookandthehassleofdealingwithtraffic.

Falsesavingsareaprettycommonproblemforsomeofus.Seeifyourecognizeanyoftheseexamples:

Doingyourowntaxestosaveafewbucks.Youmightwellmissoutonpotentiallygreatertaxsavings—aswellasanorganizedandmanageableaccountingofyourfinancesfortheyear.

Payingupforacarthatwillsaveongas.Lexusmakesahybridthatgetsanextrafourtofivemilesagallonbutcostssomethinglike$30,000morethantheconventionalmodel.MyfriendBarryRitholtz,authorofBailoutNation,recentlyflaggedaBarron’sreviewofthehybrid.Barron’spointedoutthatifgascostfourdollarsagallon,itwouldtakesomethingliketwohundredyearsofdriving15,000milesannuallytocovertheextracostofthishybrid.

Makinginvestmentdecisionsbasedontaximplications.AfriendofmineworkedforOracleduringthetechrun-upinlate1999andearly2000.Thetwoofuswerehavinglunchoneday,andhetoldmehewantedtobuytwosnowmobiles.Hedidn’thavethecashbecauseallhismoneywastiedupinOraclestock—whichhadclimbedsharply.Hewouldnotsellanyofthestockbecausehedidn’twanttopaythe20percentcapitalgainstax.Thesubsequentdropinthestock’svalue(itfellsomethinglike50percent)tookcareofthatproblemforhim.

Institutionsmakesimilarmistakes.TheIRSoncesenttwoagentsouttocollectfourcentsofbacktaxes.Maybetheyweretryingtomakeapoint,butstill…

Sure,itmakessensetogetgasatCostcoifIamalreadythereforthepalletoftoiletpaper.Insomecasesitmakessensetodoyourowntaxes,andyoumighthaveyourownreasonsforbuyingtheLexusHybrid.Mypointisthatweneedtofocusonthethingsthatreallymatterwhenwe’remakingfinancialdecisions.

You’reResponsible,butYou’reNotinControlWhileyou’rethinking,makesureyouconsiderthebiggerpicture—thecontextofyourbehavior.Asingleactionmayhavebroaderfinancialconsequencesthataren’timmediatelyobvious.Forexample,youdecidetostartyourownbusiness.Yourdaughterworksthereinthesummerandendsuprunningit.Thiscouldbegoodorbad—butitprobablywasn’tpartoftheplan.

YousendyourkidtoHarvardbecauseyouthinkit’sagoodinvestmentinherfinancialfuture—andshe(blessherheart!)endsupteachinghighschoolkidsinanurbansettingfor$19,000ayear.Thisprobablyisnottheoutcomeyouexpected.(Maybeit’stherightoutcome,butthat’sadifferentmatter.)

Getit?You’renottotallyincontrolevenwhenyouaremakingwisedecisions.Sobewareofmakingdecisionsforpurelyfinancialreasons.Instead,makedecisionsthatsquarewithyournotionsofvirtue,wisdom,andcommonsense.

Andremember:you’reresponsibleforyourownbehavior—butyoucan’tcontroltheresults.

9.

WHENWETALKABOUTMONEY

OURconversationsaboutmoneyoftenleaveusfeelingconfused,misunderstood,andevenangry.Whyisthat?

Onereasonisthatweusemoneyasastandinfordeeperissueswedon’twanttodiscuss.Totakeanobviousexample,wemaysaywecan’taffordsomethingbecauseweareanxiousaboutthefuture,orbecausewethinkwedon’tdeservethethingswewant.

It’seasiertotalkaroundtheseissuesthantofaceandacknowledgeourfeelings.Sowetalkabout(orargueabout)theexpensiveleatherjacketorthetriptothebeach,whenwhatwearefeelinggoesmuchdeeperandismuch,muchmoreinteresting.

Likereligionandpolitics(whicharealsohardtotalkabout),moneybringsupuncomfortablefeelings.Wemayfeelguiltyaboutspendingmoneyorgetahugethrilloutofspendingmoney—orboth.Wemayusemoneytocreateasenseofsafetyandsecurity:ifIhaveenoughmoneyinmy401(k),Icanbreathe.Wemayusemoneytocontrolpeoplewelove;orwemayhaveahistoryofbeingcontrolledbypeoplewithmoney.

Whensomeonesays,“It’sonlymoney,”they’reusuallywrong.Ourfeelingsaboutmoneyrundeep,andtheyareoftenverycomplicated—andsometimesquiteconfusing.Nowonderthingscangetprettyintensewhenthesubjectofmoneycomesup.Itbreaksupmarriages,families,friendships,communities—evencountries.

Moneyconversationsarealsocomplicatedbythefactthatfewpeopleknowmuchaboutpersonalfinanceorinvesting.Choosingamortgageorevenacreditcardisacomplexprocessthesedays—fewofusarereallyqualifiedtodecidebetweentheproductsoutthere.Thesamegoesforinvestments.

It’sallprettydaunting,andwehaveanaturaltendencytoavoidthingswedon’tunderstand.Wearewiredtoeitherflyorfightinconfusingsituations.Soweavoidthetopicofmoney—orwefightaboutit.

Moneyistooimportantatopictoavoid—andfightingdoesn’thelp.Weneedtodevelopadeeperunderstandingofwhatwetalkaboutwhenwetalkaboutmoney.Andweneedsimplerlanguage.Weneedtodevelopmorestraightforwardwaysofrepresentingconceptsandprinciplessothatwecanunderstandeachotherwhenwedohavetheseconversations.

What’sWorthTalkingAboutAwhileback,IattendedthenationalconferencefortheFinancialPlanningAssociation(FPA)inDenver.Despitemorethanfifteenyearsinthefinancialindustry,I’dneverattendedthisconference,soIdidn’tknowwhattoexpect.IfiguredI’dencounterlotsofpeoplewalkingaroundwithcalculatorsdiscussingobscurefinancialconcepts.Instead,Iwassurprisedtofindanamazinggroupofpeopleengagedinmeaningfulconversationsabouttheroleofmoneyinourlivesandhowtohelppeopledealwithcomplexity.

Iwalkedawayfromtheconferencestruckbyhowstronglymeaningfulconversationscanaffectourbehavior.Althoughmostofushavegrownupwith

theideathatit’snotpolitetotalkaboutmoney,everywhereIturnpeoplearestartingtodojustthat.Theyareaskingquestionsthatthey’veneveraskedbeforeandrethinkingassumptionsthey’velongheldasabsolutetruth.Thesequestionsareaboutbroadissues,liketrust,happiness,andthedefinitionof“enough,”andspecificissues,likethedefinitionofriskandfundamentalassumptionsaboutthestockmarket.

Thesearequestionsweshould’vebeenaskingallalong.Thereisagrowingrecognitionthatgreatconversationsaboutmoneyarereallygreatconversationsaboutlife.Thisrecognitionincludesacknowledgingthatthetraditionalapproachofthefinancialservicesindustriescanleadtopoordecision-making.Saving,budgeting,investing,taxplanning,insurance,andestateplanningshouldberelatedtothelargercontextofyourlife,yourgoals,andyourvalues.

IbelieveoneofthemostimportantthingsIcandowhenfacedwithafinancialdecisionistotalktosomeoneItrust:afriend,afamilymember,orapaidprofessional.

Starttalkingtopeopleyoutrustaboutquestionsthatmattertoyou.Whatroledoesmoneyplayinyourlife?Whatneedstohappeninthenextfewyearsforyoutofeellikeyouare

makinggoodprogress?Whatmoneymistakeshaveyoumadeinthepastthatyouwanttoavoidin

thefuture?Toomanyofourfinancialconversationsareaboutfindingthebest

investmentorbestlifeinsurance.Trytotalkaboutwhatmatterstoyou.

SheSays,HeSaysIfwearegoingtomakegoodfinancialdecisions,wehavetomaketheminthe

broadercontextofourlives.Thatmeanstakingintoaccountourpersonalhistories,ourfears,ourdesires,ourgifts,andourlimitations.

Thenexttimeyoufindyourselfinadiscussionaboutmoneythatfeelsemotionallychargedandfamiliar,takeastepbackandaskyourselfifit’sreallyaboutmoney.Whatareyoufeeling?Canyoutalkaboutthat?

Irecentlyreceivedanemailfromafriendhighlightingthisveryissue.Headmittedthatheavoidsmoneyconversationswithhiswifebecausehedoesn’tfeellikehehasagoodfinancialplan,whichmakestalkingaboutmoneystressful.

Formyfriendandhiswife,theabsenceofafinancialplanhasbecometheproverbialelephantinthelivingroom.Theyknowit’sthere—buttheydon’ttalkaboutit.

Thishappenstoalotofpeople.They’reworriedaboutmoney,buttheydon’tknowwhattodoaboutit.Sowhat’sthepointoftalking?

Well,ifyoudon’ttalkaboutit,nothingwillhappen.No,that’snotquiteright:thingswillgetworse.

Ofcourse,whenyoudoraisethetopicofmoney,thingscangetmessy—atleastforawhile.Foronething,peoplehavedifferenttakesonmoneymatters.Ourupbringing,ourexperience,oureducation,andourpersonalitiescanallplayaroleinhowwetalkandthinkaboutmoney.Weallbringbaggagetotheseconversations.

Unlikemyfriend,Idon’tavoidmoneyconversations.ItendtostartthemwhenIshouldn’t.

Oneday,mywifementionedthatherfriendhadrecentlyredoneherkitchen.Assheexplainedalloftherenovations,Istarteddoingmentalarithmeticthatquicklyaddeduptobigdollars.Insteadofengaginginafunconversationaboutwhymywifelikedthekitchenandwhatshethoughtwascoolaboutit,Irespondedwithmytypical“Wecan’taffordthat.”

Mywifegavemeaconfusedlookandsaid,“Whatareyoutalkingabout?”Fifteenyearsofmarriage,andIstillhaven’tlearnedthatwhenmywifetalks

aboutanewkitchenitdoesn’tnecessarilymeanshewantstoremodelherkitchen.Shewasonlydiscussingsomethingofinteresttoherthatshethoughtmightbeofinteresttome.

Thisconversationisn’tthefirsttimethatI’vemadethemistakeofassumingmywifeistalkingaboutmoneywhenshe’sjusttalkingaboutlife.EverytimeshementionssomeonesheknowswhoisplanningafamilytriptoHawaii,Iimmediatelystartcalculatinghowmuchsuchatripwouldcost.Likewise,aconversationaboutwherefriendsplantosendtheirchildrentocollegegetsmethinkingaboutmoney.

WhatItookascodefor“Iwantanewkitchen”wasjustmywifetalkingaboutsomethingsheenjoyed.Howmanytimeshassomethinglikethishappenedbetweenyouandyourpartner?

IwillprobablycontinuetodomentalarithmeticwhenI’mchattingwithmywife,butifIrememberthat99percentofthetimeshe’ssimplytalkingaboutsubjectsthatinteresther,Icanreducemyanxietyovermoney.

Thisisnotaquestionofwho’srightandwho’swrong.Rather,it’sanopportunityforustorecognizethatwecan’timposeourviewsofmoneyandourexpectationsaboutmoneyonotherpeople.

Theelephantinthelivingroommaylookpinktoyouandgreentoyourspouse.Butyoustillneedtotalkaboutthatelephant.

YouandMe,We’reDifferentMypremisethatpeoplecanthinkandtalkaboutmoneydifferentlyfromeachotherupsetssomefolks—butthedifferencesdoexist.I’mnotsayingthatallmentalkaboutmoneyonewayexclusivelyandallwomenanother.There’snowayit’sthatsimple.

ButIwillsaythis:moneyconversationsbetweenpartnersareoftencomplicatedbythedifferencesbetweenthem—someofwhichmaybegender

related.(Aresuchdifferencesuniversal?Aretheycausedbynurtureorbynature?Idon’tknow.Buttheydoseemtoexistinsomecircumstances.)

It’sdangeroustopretendthatwe’reallthesame.Confusionaboutourdifferencescancausefrustrationandanxiety,andcanevenbreakuprelationships.

AwomanIknowgotmarriedlastspring.Herhusbandhadajob,andshemanagedtogetanewjobsoonaftertheirwedding.Theyalsogotagooddealonahome.

Amonthintothemarriage,thehusbandwaslaidoff.Hiswifedidn’tworrymuchatfirst.Heseemedconfidenthe’dgetanotherjob,andonceinawhilehedidgetsomeshort-termwork.Butnothinglastedmorethanaweekortwo.Worse,hedidn’tseemtobetryingveryhardtofindsomethingmorepermanent.

Thewifewasconcerned.Shebeganlookingforasecondjobtoboosttheirincome.Theguy’sresponse:“Whyareyousoworried?I’llgetsomethingsoon.”

Sixmonthslater,thewifeisindangeroflosingherjobandherhusbandhasn’tfoundanythingyet.Inherwords,he’swaitingfortheperfectjob.Heassuresherthathe’sontopofthesituation.

Thecouplealsodiffersonthesubjectofdebt.Whileshewasraisedtoavoiddebtasmuchaspossible—buyoldercars,don’trelyoncreditcards—hewas

raisedinarelativelyfree-spendingfamily.Everytimethewifeexpressesconcernabouttheirfinancialsituation,the

husbandshrugsitoff.Whoisright?Actually,thewifehasaprettystrongcase—thecouple’s

financialsituationdemandsattention—butthat’snotthepointIwanttomakehere.I’mmoreinterestedinthefactthattwopeoplewholoveeachotherhaveverydifferenttakesonthesamesituation.Thewifeisverypragmatic—evenalittleuptight—aboutfinancialmatters.Herhusbandismorerelaxed—perhapsabitreckless—aboutthesameissues.Andsothey’retalkingpasteachother,andmakingnoprogressatall.

Weallbringourpersonalbiasestothetablewhenitcomestomoney.Weneedtolistenhard—maybeashardaswe’veeverlistenedtoanyone—tofigureoutwhereourpartnersarecomingfrom.

Atthesametime,wemayneedtobeawareofourownbiases,andfindlanguagetoexpresswhatweneedandwhatwefeelaboutmoney.

Ofcourse,thatkindofworkcanalsohelpustoprepareforproductiveconversationsaboutotherissuesaswell.I’msayingthatcompassionandhonestyarepowerfultoolsinrelationships.Practicingthemcanbeagreatinvestmentinoursharedfinancialfutures.

I’mOkay.AreYouOkay?Peopletendtothinkthatifyoujustfollowachecklistoffinancialtips,you’llfeelmoresecure.Therealityisthatwhatmakesusfeelsafedependsonfamilybackground,education,workexperience,andourgeneralfeelingsaboutrisk.

OneconversationaboutfinancialsecuritythatIhavewitnessedmanytimesdemonstratesthis.It’sthedebateoverinvestingextramoneyversuspayingdownthemortgage.

Onespousesays,“Weshouldbuythatstock.”Theotherspousesays,“Iwanttopaydownthemortgage.”Theseconversations(whichoftenturnintoarguments)tendtotakeonmoreurgencyduringtimesoffinancialstress—andtheycancausestrainsinarelationship.

Fortunately,youcanavoidtheworststrainsandlearnsomethingabouteachother—butthatrequiresyoutolisten.Whenyouhear,“Iwanttopaydownthemortgage,”or“Iwanttobuymorestock,”takeaminutetofollowupwith,“Helpmeunderstandwhyit’simportanttoyouthatwedothat.”

Theseconversationsarenevereasy,andtheygetharderforcoupleswhodon’tknowmuchaboutfinancialmatters.It’sevenmoredifficultforfolkswhowereraisedtoavoidtalkingaboutmoney.Ifthatgroupincludesyou,you’llfinditespeciallyuncomfortabletohavedetailedconversationsaboutthethingsthatmakeyoufeelfinanciallysecure.

Sometimesyoucancomeupwithasolutionbylookingatthenumbers—howmuchyouneedtosave,whenyouplantoretire,andsoon.

But,asyoumayknowfrompersonalexperience,whatmakesusfeelsafemaybeatoddswiththenumbers.Onceagain,ascouples,weneedtotalkopenlyaboutwhatworriesusandwhatcomfortsus.

GenerationGapsMostparent-childconversationsaboutmoneygolikethis:

Parent:“Wecan’taffordthat.”Child:“Pleeeeeze…?”

Andsoon.Ithinkfearkeepsusfromhavingdeepermoneyconversationswithour

children.Weworrythatsuchdiscussionswillupsetthemorconfusethem.Orwedon’tknowwhattosay.Wealsomayavoidtheseconversationsoutofhabit,culturalnorms,orfamilytradition.

There’snoquestionthatthesediscussionsneedtobehandledwithcare,butwedoneedtohavethem.

Afriend’srecentexperiencewithhisoldestsoncapturesmypoint.Myfriendandhiswifealwaysbelieveditwasimportantforthemtoteachtheirkidsthattherearelimitstowhattheirfamilycouldbuy.Likemanyofus,myfriendsmadetheircasebyfallingbackonthestatement“Wecan’taffordthat”eachtimetheirkidsaskedforsomething.

Afterafewmonthsofthis,myfriend’sfourteen-year-oldsonaskedhimaquestion:“Dad,onascaleofonetoten,withonebeinghomelessandtenbeingBillGates,howmuchmoneydowehave?”

Astheydiscussedtheirsituation,itwasclearthathissonwasaskingnotbecausehewantedtobuymorethings,butbecausehewasactuallyworriedaboutwhetherthefamilywasokay.

Myfriendassuredtheboythathedidn’thaveanythingtoworryabout,butexplainedthattheydidn’thaveunlimitedmoney.Theyshouldspendtheirmoneyonthingsthatreallymattered,andavoidbuyingthingsthatweren’treallyimportanttothem.

Okay.Makessense.Kidsoftenknowmorethanwethinktheydo.Theysenseanxietyevenif

theydon’tmaketheimmediateconnectiontomoney—andwecanscarethemifwesaythingswedon’treallymean.

Wecan’taffordthatisnotthesamethingasWe’dratheruseourmoneyforsomethingmoreimportant.ThesecondstatementshiftsthedebatefromArewepoor,orwhat?toWhatmattersmosttoourfamily?

Whatagreatquestion.

10.

SIMPLE.NOTEASY.

WEmaysaywewantsimplicity,butwetendtochoosecomplexity.Whythecontradiction?Wegetcaughtbetweentwocompetingstories.Inthe

firststory,wetellourselveswewanttosimplify,simplify,simplify.Inthesecondstory,wetellourselvesthatthesolutiontoanimportantproblemhastobecomplex.

Onsomelevel,weallunderstandthatsimplicityistheultimateformofsophistication.Asaclimber,Iliketoreadabouttheexploitsofotherclimbers.ThemostadmiredpeopleinthesportincludepeoplelikeEdViestursandSteveHouse,whounderstandthevalueaswellasthebeautyofsimplicity.Theyclimbthebiggest,scariestmountainswithjustthethingstheycancarryontheirbacks—ahugeadvanceoverold-styleexpeditionsthatlaysiegetoapeakwithanarmyofportersandpilesofequipment.

Simplicityisbothbeautifulandfunctional.AndyetpeopleareoftendisappointedwhenIproposeasimplesolutiontotheirinvestmentorfinancialplanningproblems.Suchsolutionscanoftenbereducedtoasimplecalculationonthebackofanapkin.Butpeopleworriedaboutmoneytendtotakecomfortfromasixty-pagedoorstoppackedwithcharts,graphs,bulletpoints,andcalculations.

Thistendencytoseekcomfortincomplexityevenshowsupinemergencyrooms.Aphysicianfriendofminetellsmethatpatientsareoftendisappointedwhenheoffersaprescriptionthatisrelativelysimple:“Gohomeandgetsomerest,”or“Stopsmokingandeatalittlelessjunkfood.”Somepatientscomelookingforadiagnosisthatwillrequiresprofessionaltreatment(MaybeI’llgetsurgery!).Theycan’tbelieve—infact,they’redisappointedtolearn—thatthereisasimplesolutiontotheirhealthproblem.

Whythedisappointment?You’veprobablyguessedtheansweralready:Weoftenresistsimplesolutionsbecausetheyrequireustochangeourbehavior.

Andsowespend$40billionayearonweight-lossprogramsandproductsratherthantakethesimple,do-it-yourselfapproach:consumefewercalories,burnmorecalorieswithexercise,ordoboth.We’dratherlookforamagicbullet:somethingtosaveusfromtheday-to-daygrindofsimplydoingtheworkthatneedsdoing.

IcameacrossaReutersarticleaboutafamilywhoputtheirkidsthroughcollegewithnodebt.Theymanageditonamodestincomebydrivingthesamecarfortenyearsandputtingmoneyawaymonthaftermonth.Theauthorasks,“Isthisafairytale?”

Ifweansweryestothatquestion,we’veforgottenthebasictenetsoffinancialsuccess.Savingmoney,avoidingspeculativeinvestments,andrepeatingthatprocessoverandovermaynotbesexy,butitgetsthejobdone.

Ourattractiontocomplexitydistortsthewayweapproachourfinancialgoals.Thesimpleoptionsthathavethelargestimpactonyourfinancialsuccessrequirediscipline,patience,andhardwork.Theyrequirethatweapplythosebasicfundamentalsoverandoverforyears.It’smucheasiertoentertainourselveswiththefantasyoffindinganinvestmentthatwillgiveusafantasticreturnthantosavealittlebitmoremoneyeachmonth.Butintheend,thefantasywillfailus.

Theworkwilldeliver.

GratificationCanBePainfulSomeyearsago,Amazon.comcreatedapremiumshippingprogramcalledAmazonPrime.Foraflatrate,customerscouldgetfreetwo-dayshipping.

BusinessWeekclaimedthat“AmazonPrimemaybethemostingeniousandeffectivecustomerloyaltyprograminallofecommerce,ifnotretailingeneral.”Itconvertedcasualshoppers,“whogorgeonthegratificationofhavingpurchasesreliablyappeartwodaysaftertheyorder,intoAmazonaddicts.”

Thewordsstayedwithme:“gorgeonthegratification.”

Morerecently,IreadanarticleinNewsweekabouthowAmericanswerespendingagain,whethertheycouldafforditornot.Justtwoyearsearlier,themediawasclaimingthatanentiregenerationofpeoplehadchangedtheirconsumptionhabitsandidealsbasedontheeconomictumulttheyhadexperienced.Butevidencesuggeststhatmanyofushavealreadyforgottenwhatitfeltliketobepushedtothebrink.

Weallknowtheoldsayingthatoldhabitsdiehard,andnowheredoesthisseemtobemoretruethanwithourspendinghabits.Theyareawfullydifficulttochange.

I’mstruckbyhowoftenIencounterthephrase“Americanconsumers”inmycasualreading.Atsomepoint,itseemsthatwestoppedsimplybeingcitizensandbecameconsumers,too.Alongtheway,weboughtintotheideathatshoppingmakesushappyandthatourspendingisessentialtoshapingouridentitiesashumanbeings.We’reeventoldthat—asamatterofpatriotism—weneedtospendmoremoneytogettheeconomygoing.

Personally,Ithinktheeconomywillbebetterservedifwespendmorecarefully.

Youandyourfamilywillbebetterserved,too.Inthesixties,researchersat

StanfordUniversitylaunchedadecades-longstudythatlookedatourabilitytodelaygratification.Theyfoundthatpeoplewho’vefiguredouthowtopostponethefulfillmentoftheirdesires,insteadofgivinginimmediately,experiencedgreatersuccessthanthosewhohaven’t.

Youmightobjectthatbudgetscanbeboring.Butyouhavetoadmitthatsuccessisfun.Sohowcanyoukeepmoremoneyinyourwallet?

Tryamandatoryholdingpattern.Beforeyoubuysomething,stop.Addittoalistandletitsitforthreedays.Thenrevisitthelist.

It’samazinghowsomethingyouabsolutelyhadtohaveholdsalmostnointerestafterthreedays.Ifindthisespeciallytruewithbooks.WhenIfirstsignedupforAmazonPrime,IquicklyfoundmyselfwithastackofbooksthatIneverstarted.

NowIuseAmazon’swishlistorshoppingcartandletitemssit.IhaveaverylonglistofbooksonmywishlistthatIhaveneverordered,andyettheworldcontinuestospin.

Goonamultiweekbuyingfast.Seehowlongyoucangowithoutspendinganymoneybeyondnecessities.

ThisoriginallystartedformewhenIenteredeverytransactionintoQuickenmanually.Igotsickofenteringsomanytransactions,soItriedtoreducethenumberofpurchases.

Inacrazyway,thiscanbefun.Seehowfewtransactionsyoucanhaveinathirty-dayperiod.Ifyouuseacreditordebitcard,seehowshortyoucanmakeyourmonthlystatement.

Trackyourspending.Doit.Iknowyou’resickofhearingthissuggestion,butyouneedtomeasureandtrackspending.(UsesoftwarelikeQuickenorMint.)Thingsthatgetmeasuredalmostalwaysimprove.

Putapricetagonyourgoals.Doyouhaveanyideahowmuchitwillcostyoutosendyourchildtocollege?Howimportantisthattoyou?Isitmoreimportantthantheplasmatelevisiontoday?

Taketaxesintoaccount.Iffederal,state,andlocaltaxamountto35percentofyourearnings,youneedtoearnaroundthreehundreddollarstocleartwohundreddollars.Findoutyouroveralltaxbracketanddothematheverytimeyoubuysomething.Youmightstarttospendmorecarefullyonceyourealizethatyouhavetoearnthreehundreddollarstopayforthattwo-hundred-dollardinner.

Thinkaboutwhatyou’dearnifyouinvestedthemoneyinsteadofspendingit.Let’ssayyouspendsixhundreddollarsonaskiweekend.Nowassumeyouhadtoearnninehundreddollarsbeforetaxestopayforthattrip.Whatifyou’dinvestedthatninehundreddollarsina401(k)account?Don’tgive

upskiing—heavenforbid—butmaybeskipanoccasionaltripsoyoucanmorefullyfundyourretirementsavings.

Theseareprettysimpleideas,buttheyrequirediscipline.Simple.Noteasy.

TheSecretAfewyearsago,Ihadaninterestingconversationwithagentlemanwhohadmanagedtoturnarelativelysmallinheritanceintoaverylargenetworth.Thesedayshespendshistimefly-fishingonhisranchinUtahandsurfinginHawaiiandthatsortofthing.

HecametoseemeinmyofficeonasnowyUtahday;hewaswearingjeansandadownjacket,histypicalwintergarb.DuringthecourseofourconversationIaskedhimwhathissecretwas.Howhadhemanagedtoachievesuchfinancialsuccess?

Hegavemeaconfusedlook.Afteramoment,hesaid,“Sorry.I’mnotsureIunderstandthequestion.”

Isaidthatwhathehaddonewasveryunusual,andIhadthoughttheremightbesomesecretthathecouldshare.

Hisreply:“Carl,Ijustboughtboringthingsandpaidthemoffoverthirtyyears.”

Therealityisthatthereisnosecret.Justboringstufflikespendinglessthanyouearn,settingsomemoneyasideforarainyday,payingdowndebt,andsteeringclearoflargelosses.That’sit.

Simple.Boring.Butcertainlynoteasy.

SlowandSteadyCapitalWehaveallheardthestoryofthetortoiseandthehare.Slowandsteadywinstherace.

It’seasytoforgetthismantrawhenmostofwhatwereadinthefinancialpressiswrittentosellmagazinesordrivetraffictowebsites.Slowandsteadydoesnotsellmagazinesordrivetraffictowebsites.

I’veseenfirsthandthedamageinvestorsinflictonthemselvesbychasinghotinvestments.AndsoI’mreallyinterestedintheideaofslowandsteadyinvesting.Ilovetheterm“slowcapital,”whichIfirstheardfromventurecapitalistFredWilson.Iwouldaddtheword“steady.”

Slowandsteadycapitalcomesclosetodescribingmyidealinvestmentprocess.

Slowandsteadycapitalisfarmoreconcernedwithavoidinglargelossesthanwithchasingthenextgreatinvestment.Beingslowandsteadymeansthatyou’rewillingtoexchangetheopportunityofmakingakillingfortheassuranceofnevergettingkilled.

Slowandsteadycapitalmeansyoucanhavealife.Ifyouacceptthefactthatslowandsteadywinstheraceandyoufindawaytoinvestthatway,youcanturnoffallthenoiseofWallStreet.

Aclientofmineworkedinahospitalthatbackeduptosomeofthebesttrailrunninginthecountry.Doctorscompetedtoworktherebecauseitwasinsuchabeautifulplace.Myclientneverknewwhethertolaughorcrywhenhewouldheadoutforaruninthemountainsbehindthehospitalduringlunch.Ontheway

outthedoor,he’dseetheotherphysicians—manyofthemtrailrunnersthemselves—huddledaroundCNBC,asifJimCramerwasabouttorevealthesecrettoendlesswealth.Slowandsteadycapitalallowsyoutoignorethatnoiseandgorunningonthosetrails.

Slowandsteadycapitalknowsthatthegoalofinvestingistoaccumulatethecapitalyouneedtofundyourmostimportantgoals.Ifyourgoalistohavesomethingtotalkaboutatthenextneighborhoodparty,trysomethingelse.

Slowandsteadyisn’teasy.Italwaysseemsthatsomeoneelseisgettingrichquick.Buttakethetimetolookbehindthestories,andyou’llfindsomethingelse.

Ihadaconversationrecentlywithaprospectiveclientwhotoldmethathehaddoneprettywellwithanaggressivetradingstrategy.Ihaveheardthatenoughtimesovertheyearstoknowthatweallhaveselectiveandshort-termmemories.Sometimesittakesonlyafewwinningtradesforsomeonetoforgetthelosers.

Thatwasthecasehere.True,thingshadindeedgonewellformyprospectiveclientduringrecentmonths.Buthehadlostaround50percentofhissavingswhenthemarketslumpedin2008—sohisgrowthwasonamuchsmallercapitalbase.Allthingsconsidered,hehadaterribleinvestmentrecord.Moral:ifyoudecidetobeslowandsteady,remembertotakewithahugegrainofsaltallthosestoriesofpeoplegettingrichquick.

Slowandsteadycapitalisshort-termboring.Butit’slong-termexciting.

CONCLUSION

THISbookisn’tmeanttobeastep-by-stepguide.IwishIcouldbemorespecificabouthowtosolveyourproblems,butbecauseIdon’tknowyoupersonally,Ican’tgiveyouspecificadviceaboutyourindividualbehaviorgaps.Remember:takingfinancialadvicefromastrangerisdangerous.

Butthisbookdoesprovideaframeworkforyoutostartmakingbetterdecisionsaboutmoney.Thefirststepistotakeadeepbreathandreflectonpastdecisionstoidentifywhereyoucanchangeyourbehavior.We’veallmademistakes,butnowit’stimetogiveyourselfpermissiontoreviewthosemistakes,identifyyourpersonalbehaviorgaps,andmakeaplantoavoidtheminthefuture.

Thegoalisn’ttomakethe“perfect”decisionaboutmoneyeverytime,buttodothebestyoucanandmoveforward.Tomakethosedecisions,youalsoneedtoknowwhereyouwanttogo.Onceyou’vesettledonadestination,beitretirement,travel,orpayingforcollege,keepmakingdecisionsthatmoveyouinthatdirection.Youwillneedtomakecoursecorrections,butifyou’reclearaboutwhereyouwanttogo,itbecomesaloteasiertocloseyourbehaviorgaps.

Thegoalisn’ttomakethe“perfect”decisionaboutmoneyeverytime,buttodothebestwecanandmoveforward.Mostofthetime,that’senough.

ACKNOWLEDGMENTS

Thisbookhasbeentheresultofareallywild,almostmagicalseriesofhappyaccidents.Keepinmindwhatwearetalkingabouthere:afinancialplannerinParkCity,Utah,whousesaSharpieandcardstocktocommunicatecomplexmoneyissues.Whointheirrightmindwouldwantaseatonthattrain?Luckyformetherewasanarmyofpeoplejustcrazyenoughtoencouragesuchbehavior.

MarionAsneswasamongthefirsttoseethevalueintheworkIwasdoinginaquietlittlecornerofthefinancialplanningcommunity.

RonLiebertookachancebyincludingmeasthefirstever(andIamcertainthelast)Sharpie-wieldingcontributortotheNewYorkTimesBucksblog.ThebeliefRonhadinmyabilitytogetattheemotionalcoreoffinancialissuesservedasalightevenwhenitwasdark.

ChristyFletcher’sbeliefinmyworkandabilityisarealinspiration.IthinkofChristynotsimplyasmyagent,butasapartnerandfriend.

I’mnotsuretherearemanypeoplelikeClintWillisstillaround.Afantasticandaccomplishedwriter,hewasnotonlywillingtohelpwiththegoodold-fashionededitingbutactuallyreallyenjoyedtheprocessofmakingsureItoldthestoryIwastryingtotell.

OneofthehighlightsofmyprofessionallifewastheFridayafternoonthatCourtneyYoungcalledoutofthebluetoaskmeifIhadconsideredwritingabook.IstillrememberIwassittingintheparkinglotofmylocalskishopabouttopickupmyfreshlywaxedskisandheadoutforalaportwoontheNordictrack.It’soneofthefewphonecallsthatwouldcausemetoputskiingonhold.

IhadaquietdreamofworkingwithPortfolioonabooksomeday,andtheexperiencemorethanliveduptomyexpectations.Courtneyandtheentireteamhavebeenawesome.ThanksgotoEricMeyersforthepatientreminders,WillWeisserforhiskeeninsight,andAmandaPritzkerforgettingthewordout.Itisarealpleasuretoworkwithyouall.

ThissectionofthebookwastheonlypartwhereImissedadeadline,anditwasbecauseIcouldsimplynotfigureouthowtoexpressmythankstoBrittRaybould.Whatdoyousaytosomeonewhohasworkedonaproject(especiallywhenyouaretheproject)foryears,oftennotknowingforsureifitwouldever

payoff?Partprojectmanager,editor,shrink,coach,andalwaysatrustedfriend.IguessyousayTHANKS!

TheparadoxofthoseIconsidermyreallygoodfriendsisthattheyoftenleftmewiththeimpressionthatsomehowIwashelpingthemwhenitwasnothardtoseethatIalwaysenduponthereceivingendintheserelationships.ThisiscertainlytruewithBradPetersen,JasonSlatter,MattHall,VeruanChipman,andJohnStephens.Thanks,guys!

TheconversationsIhavehadwithanamazinggroupofclientsatmywealthmanagementfirminformedalmosteverypageofthisbook.I’msupergratefulfortheirpatienceandtrust…somethingIdonottakelightly!

Onemorething…IhaveanamazingMOM(yes,thatshouldbeinallcaps)whoisalwayslookingoutforme.IrememberthefirsttimeIwrotesomethingfortheNewYorkTimesandthecommentssectiongotprettyintense,itwasmyMOMwhocalledandaskedifIwasgoingtosurviveallthose“meanpeople.”It’sgreattoknowthatsheisalwaystherewatchingoutforme.Thanks,MOM!