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Posts tagged ‘Carl Richards’

Conversations About Money…Even When They Are Not

Written December 10th, 2010 by Chad Griffeth, AIF
Tags: 401k tips, Carl Richards, investment behavior, personal finance
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Conversations Around Money If you follow this blog at all, you know I am a fan of Carl Richards, who does a fantastic job of simplifying investing concepts but also our behaviors around money. The following post from the New York Times is a fantastic example and advice from which we can all (mostly us men) can benefit from.

What I’m about to relate is a story I suspect many of you have experienced at least once if you’re in a relationship.

My wife mentioned that her friend had recently redone her kitchen. As she explained all of the renovations, I started doing mental arithmetic that quickly added up to big dollars, dollars we couldn’t afford. Instead of engaging in a fun conversation about why my wife liked the kitchen and what she thought was cool about it, I responded with my typical “We can’t afford that.”

Of course when she heard my response, my wife gave me a confused look and said, “What are you talking about?”

Clearly, after 15 years of marriage, I haven’t fully learned the lesson that just because my wife is talking about a new kitchen she’s not implying that she wants to remodel her kitchen. She was only discussing something of interest to her and what she thought might be of interest to me.

So why did I make the leap and start to feel tension in my shoulders? After all, my wife is no stranger to money. Her undergraduate degree is in finance, and she served as the chief financial officer of a small development company. More recently she’s taken over as our family C.F.O., which leads me to wonder why I’m assuming she’s talking about money when in reality she’s just talking about life.

This conversation isn’t the first time that I’ve made the leap to money based on things my wife tells me. For example, every time she mentioned someone she knew that was planning a family trip to Hawaii, I immediately started calculating how much such a trip would cost. Even something as simple as talking about where friends plan to send their children to college makes me start thinking about money.

The reality is that my brain is wired to think differently when it comes to money. Based on my experience, and the stories others have related, it’s clear that men and women can have completely different approaches to how they talk about money. What I took as code for, “I want a new kitchen,” was just my wife talking about something she enjoyed. How many times has this happened between you and your spouse?

Even if it happens a lot, this is not a question of who’s right and who’s wrong. Rather, it’s an opportunity for us to recognize that when we’re dealing with people who we care about, we can’t impose our money language and expectations on them.

I will probably continue to do mental arithmetic when I’m chatting with my wife, but if I remember that 99 percent of the time she’s simply talking about subjects that interest her, I can reduce my anxiety over money. How we were raised to view money (let alone the other influences of gender, experience and education) all play a role in how we talk and think about money. So it’s healthy to recognize that we all bring baggage to these conversations. Hopefully it won’t take me another 15 years to put it into practice.

Are You an Investor or a Collector?

Written November 8th, 2010 by Chad Griffeth, AIF
Tags: 401k tips, Asset Allocation, Carl Richards, investment behavior, personal finance
1 Comment »

Our friend Carl Richards of BehaviorGap.com and the NYTimes.com Bucks blog just wrote an article illustrating how the ‘over diversification’ of portfolios can simply be ‘buying more’ instead of ‘buying different.’ Take a look:

Over- or under-diversifying your investments remains one of the classic behavioral mistakes.

Over-diversification happens when we become collectors of investments instead of simply being investors. Think of the people who buy the mutual funds they read about in Smart Money magazine. Next year they buy the Top 10 Funds recommended by Money magazine. A year later they buy two or three new international funds because that’s what’s on the home page of Forbes.

Before they know it, they have a smorgasbord of unrelated investments, with no cohesive strategy at work. Then there are all of the taxes and transaction costs — and the impact on your life of having to keep track of it all.

For anyone with a portfolio that looks like this, consider a relatively simple suggestion: Each individual component of a portfolio should be there for a reason. Think of each investment that you own as a thread in a larger tapestry.

Being under-diversified is an equally troublesome problem. Under-diversification can take the form of owning only a single stock, or too much of one. For instance, maybe you work at Apple, and you’re convinced that Apple stock can only go up, so you put your life savings into Apple stock. We’ve seen why this choice can be a bad idea; ask anyone who had a lot of stock in A.I.G., Enron, Wachovia or Lehman Brothers.

Many people now know better than to put too much money into a single stock. But I still often meet people who own a number of mutual funds and believe they’re properly diversified. The reality is that fund overlap can leave you heavily invested in a relatively small number of individual stocks.

This happens because many mutual fund managers have similar ideas, or they create funds based on what’s popular at the time. If you look carefully at many of the largest mutual funds (the ones people are most likely to buy), they have significant overlap among the top 10 stock holdings.

Whether you’re under- or over-diversified, you are probably only doing what you thought you were supposed to do. You’ve spent a lot of energy, time and even money trying to pick the right investments. Unfortunately your efforts may have created the exact opposite of what you wanted to accomplish.

Remember, you’re not a collector. You’re an investor. You want stocks (or funds) that get you closer to the financial goals you’ve set for yourself. You also need to make sure that what you own doesn’t expose you to greater risk than you can handle, again based on your goals.

The end result should be a portfolio that reflects those goals, not the collection of magazines on your coffee table.

Read the Entire Article at NYTimes.com

Annual Dalbar Study Shows Investors Are Still Behaving Badly

Written August 9th, 2010 by Chad Griffeth, AIF
Tags: 401k tips, Asset Allocation, Carl Richards, investment behavior, personal finance, retirement
4 comments

Dalbar releases an annual study gauging the impact of investor behavior on investors’ long term portfolio returns. Our friend Carl Richards of BehaviorGap.com, writing for the NYTimes.com Bucks blog, illustrates the impact of investors’ decisions on their long term portfolio performance via the findings of this year’s study.

Every year the research firm Dalbar does a study that tries to quantify the impact of investor behavior on real-life returns by comparing investors’ earnings to the average investment (using the S&P 500 as a proxy).

The latest study looks at the 20-year period that ended Dec. 31, 2009:

Average investment return = 8.20 percent
Average equity investor return = 3.17 percent

If you had put money into an S&P 500 index fund 20 years ago and just left it there — no buying, no selling, just investing and forgetting about it — you would have earned (minus fees) about 8 percent.

But real people don’t invest that way. We trade. We watch CNBC and listen to Jim Cramer yell. Despite knowing better, we give into the genetic tendency to get more of those things that give us pleasure — buy high — and get rid of things that cause us pain — sell low. We’re just wired that way.

What is really interesting is how little this seems to change over the years. When it comes to investing, the tendency to behave badly is not going away.

So what do we do about it?

1. Admit it. Like any destructive behavior that first step to fixing it is to admit that there is a problem in the first place. Being honest with yourself and reviewing past decisions will help:

Did you get caught up in the tech bubble in 1999?
Real estate in 2006?
Did you sell in 2002, late 2007, or early 2008?

2. Develop a checklist. Then go through that checklist before you make major investment decisions. It works for pilots and doctors. It will help you avoid mistakes in investment behavior, too.

Try writing down the proposed change and then let it sit for 24 hours, or call a trusted friend or adviser and walk them through your thinking before you make the change. Often just hearing yourself explain why you want to make the change will convince you to forget the whole thing.

3. Don’t play. Sometimes the answer might be to take our money and go home. There is nothing that says you have to invest in the stock market to be considered an intelligent human being. It is fine to recognize that it might work better to follow Will Rogers’s advice and focus on the return of your money instead of the return on your money.

The reality is investing successfully is hard. But hopefully by focusing on our behavior, we can close this gap in the next 20 years.

Read Article at the NYTimes.com Bucks Blog

Everyone Makes Investing Mistakes, Just Don’t Create ‘Anchors’

Written July 26th, 2010 by Chad Griffeth, AIF
Tags: 401k tips, Carl Richards, investment behavior, retirement
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Our friend Carl Richards, writing for the NYTimes.com Bucks blog, does an excellent job of speaking to the ‘waiting-until-I-get-back-to-even’ mistake many investors make. It’s called anchoring. Essentially, we create a value in our mind for an investment we want to receive before selling. The following are some excellent examples of how this can hurt you more than simply cutting your losses:

One of the more common behavioral mistakes we make when it comes to investment decisions is the tendency to anchor to a certain value or price. When we focus on, or anchor to, a price, it can lead to costly blunders. Here are a few examples:

1. You pay $800,000 for your home, and a few years later you need to sell it. We have a tendency to feel like we should at least be able to get what we paid for it. So you insist upon listing it for $800,000, even though the market value is less than that. You pass on offers around $775,000 and then ride the market all the way down to the point where you are just hoping to get $650,000 a year later. Now that first offer looks like a dream.

The reality is the market doesn’t care what you paid for you house. It doesn’t care how much you put in to it or what it cost you to landscape. All that matters is what it is worth today.

2. You buy a stock for $50 a share, and six months later it is $30. You decide that you really shouldn’t own it anymore but you want to wait until you “get back to even” before you sell. This idea of holding on to an investment that is no longer appropriate, or may have been a mistake in the first place, until you get back to even makes no sense. The fact that you paid $50 has no bearing whatsoever on what you should do now.

In fact, I think it is fair to say that getting back to even is never a good reason to hold on to an investment. If you find yourself saying that, it’s time to re-evaluate.

3. Your portfolio was worth $500,000 at the top of the tech bubble in early 2000, and you still think about that value each time you open your statement and see that it’s worth less than that. You just want to get back to your high-water mark of $500,000.

This may not have any impact on your decisions, but it sure is affecting your life. I know people like this, still holding on to a value in the past. It is like that guy next door who is still telling stories of his glory days in high school football.

The past is the past. All that matters now is making the correct decision for today.

Read the Article at NYTimes.com

Ignore Generic 401(k) Guidance Posed as Advice

Written July 8th, 2010 by Chad Griffeth, AIF
Tags: 401k advice, 401k tips, Carl Richards, investment behavior, personal finance, retirement
2 comments

Our friend Carl Richards wrote yesterday on this subject at the NYTime.com Bucks blog, and it is very good advice. We have seen people follow guidance from the likes of the Jim Cramers, Suze Ormans and Dave Ramsey (though we are big fans of his debt reduction advice), which more often than not steers people into an inappropriate portfolio. Many 401(k) providers will even provide some general guidance as well, but they leave investors to figure out the ideal recipe (asset allocation) to create from their plan’s ingredients (investment options). Understanding some basics such as age and your prospective time horizon for retirement are easy, but understanding your risk tolerance can be tricky. Additionally, here is an easy way to distinguish general guidance from specific, personal advice:

Advice will tell you specifically which funds in your 401(k) plan you should be invested in as well as what percentage. Guidance only speaks to the types of investment options.

The following are some key excerpts from the Bucks blog post by Carl Richards:

It is dangerous to mix investing with entertainment. The classic example is thinking that Jim Cramer is your investment adviser rather than some sort of circus clown.

But what can be even more dangerous is taking what’s meant to be general financial information and acting on it, without first taking the time to figure out if it applies to your particular situation.

Making important decisions about how to invest your life savings seems to be getting more and more complex as the amount of information continues to grow.

Take this article, “A Market Forecast That Says ‘Take Cover,’” that appeared in the The New York Times this weekend. It offers up advice from a market watcher who suggests that individual investors “move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come.”

The article has been among the most e-mailed articles for several days, so it’s clearly getting a lot of attention. But the question is what you’re supposed to do with information (general advice) like this. Should you follow this advice to “take cover,” regardless of your age, unique goals and family situation?

The financial press, personal finance bloggers and best-selling authors are all sources of information. But don’t confuse information with the real work of figuring out how it applies to your very unique situation. I know many of the best personal finance bloggers. As good as many of them are at providing a filter for information, and even providing general rules of thumb, you are the only one who can figure out how it applies to your life.

The reason is simple: planning for your financial future is personal. It has to be. A good plan will be unique to your situation, and what is right for your situation may be a disaster for your neighbor. So read as much as you want, but then make sure you spend the time to figure out how it applies to you before you make important decisions about your life savings.

Read the Article at the NYTimes.com Bucks Blog

Are All Investment Mistakes Investor Mistakes Instead?

Written May 24th, 2010 by Chad Griffeth, AIF
Tags: 401k tips, Carl Richards, investment behavior, personal finance, retirement
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Carl Richard’s latest article illustrates a very interesting perspective on investing. The following sums it up pretty well,

We’re quick to focus on the reward but fail to appreciate the consequences of our choice. If an investment performs well, we like to think, “I picked a winner.” If it’s the reverse, and the investment fails, it’s someone else’s fault.

This reminds me of the time that I was mowing the lawn as a child and I hit a sprinkler head with the mower. I remember running inside to tell my mom that the lawnmower had hit the sprinkler head. She patiently taught me that lawnmowers don’t hit sprinklers, 10-year-old children do.

We do the same thing when it comes to investing. If we haven’t done our research (figured out where the sprinklers are) and we behave poorly (run over the sprinklers), we’re not going to like the results.

And we can’t blame the investment for our decisions. At some point, we must accept responsibility. Otherwise we’ll keep making the same mistake since we’re blaming the investment rather than accepting responsibility for our choices. And if that’s the case, we’d be better off in a certificate of deposit.

Read the Full Article at the NYTimes Bucks Blog

The Temptation (and Danger) of Past Investment Performance – NYTimes Bucks Blog

Written May 11th, 2010 by Chad Griffeth, AIF
Tags: 401k tips, Carl Richards, investment behavior, personal finance, retirement
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It’s understandable. We look to invest in something different in our 401(k), and what is the most accessible bogey to judge the funds in your plan? Past performance. They tug at the foundation of human nature, greed and fear. Our friend Carl Richards wrote an excellent piece in the NYTimes.com Bucks Blog on this topic:

Whenever a mutual fund advertises performance, the Securities and Exchange Commission requires that it includes the disclaimer that “past performance does not guarantee future results.”

A new study by researchers at Arizona State University and Wake Forest Law School suggests that this warning is not enough. They recommend something a bit stronger: “Do not expect the fund’s quoted past performance to continue in the future. Studies show that mutual funds that have outperformed their peers in the past generally do not outperform them in the future. Strong past performance is often a matter of chance.”

Despite the warning from the S.E.C. and pretty conclusive evidence that past performance has very little predictive value, most of us still use performance as the predominant factor in choosing our investments.

This is one of those times in investing where our experience in almost every other area of life works against. If you’re going to hire contractors to remodel your house, one of the first things you do is look at other houses they have done. It seems reasonable to expect that the work they do on your house will be at least as good, if not better.

When it comes to mutual funds, however, the past has almost no predictive value. People have spent years looking for a way to identify mutual funds that will do well going forward. They have looked at almost every factor you can think of: education, experience, hair color and, of course, past performance.

The only factor anyone has found with any predictive value was the internal costs of the fund. The higher the costs, the worse the performance. This is a case where you often get what you do not pay for.

Despite all the evidence to the contrary, we still scour the annual lists of “Ten Hot Funds to Own Now,” which are often based on past performance, looking for a place to put our life savings. We still look in the rear-view mirror. Think about the last time you made an investment decision. Did you look to the past for some prediction of the future? After all, how much sense would it make to invest in a fund that had performed poorly?

But finding the next Peter Lynch is an almost impossible task. Focus instead on finding a low-cost investment that you can stick with over the long haul.

Read the Article at NYTimes.com

Why There Are No ‘Best’ Investments – BehaviorGap @ NYTimes

Written April 6th, 2010 by Chad Griffeth, AIF
Tags: 401k tips, Carl Richards, investment behavior
1 Comment »

Real 401(k) Planning

As you know, our friend Carl Richards is a writer for NYTimes.com. We have definitely encountered people trying to find the “silver bullet” investment that will magically create huge gains for their 401(k). Unfortunately, this typically results in some really outlandish investment “strategies” and chasing the performance of the “best fund.” The cost of those decisions to their nest egg is tremendous. The following is Carl’s most recent post, and I won’t try to water it down with a summary, for I think every investor should read it.

You make good financial decisions only within the context of your goals.

This may seem obvious, but think about the amount of time and energy spent trying to find the “best investment.” Magazine covers are devoted to it, and books are written about it. There seems to be an entire industry built around this wild goose chase.

But the reality is that there is no such thing as the best investment.

The idea that there is some mythical investment that we can label the best, without first considering how it fits into the context of your life, is crazy. It’s like getting in a debate with a friend about which car you should drive on a trip before you’ve even decided where you’re going. How can you decide on the vehicle before you determine the destination?

This is true for all financial products. Life insurance, mutual funds and even bank accounts can be judged only based on how well they help you reach your goals. Since your goals are unique, what might be right for you could be a disaster for someone else.

Instead of spending so much time searching for the best financial product, we’re much better off taking the time to reflect on what is really important to us and then aligning our use of capital with those values. What good would it do to find the mythical best investment and end up with a bankrupt personal life? David Brooks recently highlighted a similar issue: most of us are focusing on the wrong things if our goal is happiness.

So rather than reading the latest list of the “10 Best Investments for a Post Credit Crisis World,” try asking yourself some questions to discover what is really important to you. Here are two sites to spark some thought:

1) A discussion of George Kinder’s three questions about life planning on the Get Rich Slowly blog.

2) Krista Tippett’s discussion about the economic crisis and the questions it forces us to ask ourselves.

I have to warn you that this can be a painful process, because it forces you to think about things outside the confines of a spreadsheet. Be patient with the process and realize that in the end it’s not about the money. It’s about your life.

401(k) Investors’ Achilles Heel #2: Goal-Based Investing – Good or Bad?

Written March 22nd, 2010 by Chad Griffeth, AIF
Tags: 401k advice, 401k tips, Carl Richards, investment behavior, personal finance, retirement
1 Comment »

This month, our team has conducted dozens of 1-on-1 consultations. During these consultations, we walk the 401(k) investor through an investor questionnaire that takes into account their age, time horizon for accessing their 401(k) assets, and their risk tolerance. During this review of their account, we consistently run into investors who have an expectation of what they need to achieve from a performance standpoint in order to meet their goals. Just as I was considering this, Carl Richards wrote an article (click the napkin to read) specific to whether financial plans are worth the paper they are drawn up on.

The following is an example of some of the things we hear:

“I think that I can consistently get 8%, but if I work with someone that knows what they are doing, I think I should be able to get12%.”

“I need to get to $XXX,XXX in order to meet my goal for my 401(k).”

Right. For the next 10 minutes, we had to discuss how such a scenario would likely have to work.

Us: “Would you agree that no one knows where the market is going to close at the end of the week, month or year?”

Investor: “Yeah…”

Us: “So let’s say it’s the end of June, and your account is -4% for the year. What would you have to do in order to produce the 16% turnaround to get to a +12%?

Investor: No response

Us: “Would you agree that you would likely have to take on more risk in order to generate that return?”

Investor: “That makes sense”

Us: “By increasing that risk from where you want to be, that is an absolute bet that the market is going to be positive from July 1st – December 31st. What would happen if the market drops 10% across the board?”

Investor: Silently waiting for me to answer my question…

Us: “If you increased your risk in order to achieve your goal of 12%, you could likely lose a lot more than the 10% that the market dropped, right?”

Investor: (Nodding…)

Us: “So it’s fair to say that since we cannot control performance, we should instead focus on controlling what we can, specifically risk?”

Investor: “That makes sense.”

The conversation above has happened so many times, it leads me to believe that financial “plans” can be very deceiving when it comes to the reality of investing. It has really made me call into question the true value of financial plans if it leads people to have misconstrued beliefs that lead them toward making poor decisions. For example, if someone has a goal of $X when they retire, they might want to increase their risk 3 years before retirement. Well that’s great when someone is absolutely positive the market will be positive during that time period, but what if it is not? Is that investor willing to pay the price of that increased risk?

I appreciate goals, I do. However, truly helping investors includes clear, concise communication, articulating a plan of action that is within their ability to control, not creating a pipe dream in order to sell products.

Unfortunately, their “number” and projections of performance can lead investors to make decisions which fly in the face of prudent investment principles. Like the saying goes, if you want to make God laugh, make a plan.

Instead, I think the following can be a very simple plan that works for 98% of people:

Be a Saver – Save as much as you can afford, then work to save more.
Manage Risk – No one knows where the market will close at the end of the week, month or year. If they tell you they can, run in the opposite direction. Fast. No one can control the market, but you can control risk in your portfolio.
Be Aware of Greed, Fear and Overconfidence in Your Investment Decisions – People are funny about their money. Emotional attachments to specific investments, buying high, selling low, and assuming you understand how much risk exists in your portfolio without an independent assessment are recipes for 401(k) failure.

We would welcome your feedback via the Comments section below.

401(k) Investor Achilles Heel #1: Overconfidence

Written March 9th, 2010 by Chad Griffeth, AIF
Tags: 401k advice, 401k tips, Carl Richards, investment behavior, personal finance, retirement
2 comments

From time to time, all of us think we know what we are doing when clearly we do not, but it is not until we are proven wrong that we come to realize it. For me, it’s home repair. I know it’s not my strong suit, but my “man” button keeps blinding me to that fact until I am calling the repairman to fix the original problem and everything additional that I destroyed, broke, etc.

That, my friends, is humility. And humility is good for all of us. When it comes to investing, such overconfidence in our abilities can be extremely costly. In fact, the larger the balance of your 401(k), the more costly mistakes can be to you.

401(k) investors should be very careful not to allow overconfidence to creep into their mindset after last year’s remarkable rebound, which began after the market bottomed exactly one year ago today. Being a fan of Carl Richards of BehaviorGap.com, his post in the NYTimes Bucks blog section was a great explanation of how to handle overconfidence if it creeps into your investing life.

Carl Richards

When it comes to investing, however, we all have a problem.

As we become more and more confident we become willing to take on more and more risk. Why? We start seeing risky behavior as, well, less risky. But the reality is that as the level of overconfidence increases, the cost of our mistakes increase as well.

And…

But we can do something about it. We need to recognize that we’re not as smart as we think we are. In fact, the smartest investors (and frankly the smartest financial advisers) are the ones that acknowledge that they’re dumb.

So the next time you’re about to make an investment decision because you’re sure you’re right, take the time to have what I call the Overconfidence Conversation. Find a friend, spouse, partner or anyone you trust and walk them through your answers to the following questions:

1) If I make this change and I am right, what impact will it have on my life?

2) What impact will it have if I’m wrong?

Considering the consequences of being wrong might lead you to make more careful decisions and to a greater appreciation of the enormous potential costs.

Our word to the wise is when the market has as strong of a rebound as we have seen over past twelve months, it was the market that drove our accounts to the fantastic gains we experienced in our year end statements, not us as individual investors. Simply put, if you were in stocks, you were going to make a very good return. Hey, it was great after suffering through ’08 and early ’09 until a year ago today. However, keep in mind, overconfidence in your asset allocation (investment recipe) is fine if you are positive you understand it. If not, get some help to make sure…

Read the Entire Article Here

Older Entries

Posts tagged ‘Carl Richards’

Conversations About Money…Even When They Are Not

Are You an Investor or a Collector?

Annual Dalbar Study Shows Investors Are Still Behaving Badly

Everyone Makes Investing Mistakes, Just Don’t Create ‘Anchors’

Ignore Generic 401(k) Guidance Posed as Advice

Are All Investment Mistakes Investor Mistakes Instead?

The Temptation (and Danger) of Past Investment Performance – NYTimes Bucks Blog

Why There Are No ‘Best’ Investments – BehaviorGap @ NYTimes

401(k) Investors’ Achilles Heel #2: Goal-Based Investing – Good or Bad?

401(k) Investor Achilles Heel #1: Overconfidence

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