Money

How to stop doing dumb things with your money

No-frills advice for investors from a very frank financial planner

Book of DowSelling stock when it’s going down and buying when it’s going up is irrational, writes Carl Richards, a ski fanatic from Park City, Utah, whose new book The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money is full of ironic advice like, “Don’t just do something, stand there!”

“When the market soars or hits a rough patch,” he writes, “there’s a natural tendency to do something. Fast. Our natural reaction is to sell after bad news (when the market is already down) and buy when news is good (after the market is already up), thus indulging our fear and our greed. It’s an impossible strategy.”

Richards, who is also a certified financial planner, uses the term “behaviour gap” to describe any situation where a person’s behaviour leads to subpar results. For example, if you are lonely, you may feel unsafe, and in an effort to belong, you may buy a new car or some clothes that allow you to blend in. “Meanwhile, you may sacrifice your real financial security in your half-conscious attempts to achieve emotional security.” He tells his clients, “Find out who you are and what you want. Then you can stop wasting your life energy and your money on stuff that doesn’t matter to you.”

Feeling certain that a stock is a great deal? “Overconfidence is a serious problem,” he writes. “If you don’t think it affects you, that’s probably because you’re overconfident. Fortunately, we can do something about it. We can recognize that we’re not as smart as we think we are. The next time you’re about to make an investment decision because you’re certain you’re right, take time to have the ‘overconfidence conversation.’ Find a spouse, friend, or anyone you trust, and walk them through your answers to: what impact will it have if I’m wrong? And, have I been wrong before?”

Speaking of advice, ignore it, writes Richards. “Let’s face it, most of the advice we give and get is useless or worse. People tend to give advice that’s based on their own fears, their own experiences, their own motivations.”

Following a tip you’ve read about is “just dumb.” If you read about it in The Economist, a magazine that sells more than a million copies a week, so did “a whole bunch of people who think they are being clever in exactly the same way at exactly the same time.”

When planning for retirement, don’t get hung up on how much money you’ll need to buy your dream house, he urges. “Just make sure there’s enough in the budget to visit the kids, pay your golf club dues, and maybe see a marriage counsellor when things get bumpy.”

If you’re routinely buying or selling at the wrong time, Richards suggests one alternative is to swear off the stock market forever. “I’m not kidding. Whatever the experts may claim, steering clear of stocks isn’t stupid.”

Or if you’re constantly worrying and fiddling with stocks, try going on an information fast. “We can check the performance of our stock portfolio in the middle of the night, on vacation, at our daughter’s wedding. The trouble is it often makes us feel worse—and eventually we act on our fears.”

Richards, the founder of Prasada Capital Management, confesses that he doesn’t know when it is a good or bad time to buy, and this frustrates friends and family. “It’s bad enough that I don’t know where the market is going. People are still more confused when they find out I don’t even care. Believe it or not, the ability to build and protect wealth is often inversely related to knowing what’s going on in the market. I tell my clients: it’s a terrible idea to try to predict the market’s movements. Worse, it makes people anxious—and anxious people screw up.”

Focus on personal goals, he writes. If your financial goal is to send the kids to college, “tracking the performance of the Dow this week is not going to help you reach that goal.”

He tells the story of an older woman, worried how events in Lebanon might affect her portfolio. “I told her two things. ‘First, Lebanon isn’t going to play a major role in what happens to you. Second, there is not a thing you can do to influence events in Lebanon.’ Then I asked her, ‘Given those two facts, why are we talking about Lebanon?’ ”

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