Investment Lessons from "The Behavior Gap" by Carl Richards
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
“Investment Lessons from "The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money" by Carl Richards”
“Take mutual funds. All we had to do was simply put our money in an average stock mutual fund and let it sit there. But most investors didn’t do that. Instead, they moved their money in and out of stock funds. Their timing was miserable — and it cost them dearly. I coined the term “behavior gap” to label the gap between investor returns and investment returns. … I’ve used the “behavior gap” to describe all kinds of situations where our behavior leads us to subpar results.” - Carl Richards, CFP®
"The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money" is a thought-provoking financial guide penned by Certified Financial Planner professional, Carl Richards. This compelling book focuses on the divergence between what we should do with our money and what we actually do – a discrepancy Richards labels as the "Behavior Gap." Using his signature sharp wit and simple sketches, he makes complex financial concepts digestible and offers practical solutions to common financial mistakes. His approach to financial planning goes beyond merely analyzing numbers; it involves understanding our relationship with money and the emotional biases that often lead us astray.
Richards shares “No wonder most people are unsatisfied with their investing experience. The more expensive stocks (or houses) are, the more risky they are — yet that’s when we tend to find them most attractive. In short, investors as a group tend to be horrendously bad at timing the market.
It makes far more sense to ignore what the crowd is doing and base your investment decisions on what you need to do to reach your goals. But man, is that hard to do.
It’s not that we’re dumb. We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right. But it’s not rational.
I am more convinced than ever that all investment mistakes are really investor mistakes. Investments don’t make mistakes. Investors do.”
Richards' "The Behavior Gap" is an enlightening journey into the often irrational world of personal finance. By interlacing narrative with accessible sketches, Richards successfully demystifies complex financial concepts and focuses on the psychological pitfalls that cause people to make poor financial decisions.
The book doesn't promise a magic formula to attain wealth. Instead, it urges readers to understand and confront their financial behaviors, thereby bridging the behavior gap. This self-awareness, along with the recommended strategies, can lead to more effective money management and greater financial stability.
Interestingly, Richards shares that even thought his clients know better, they still have trouble controlling their impulses to trade. “What’s incredible is that they know it, too! We laugh about it together. They know their impulses to buy and sell are dangerous. They rely on me to help keep those impulses under control.”
"The Behavior Gap" is as much about psychology as it is about finance, making it a holistic guide for anyone willing to reevaluate their relationship with money. Its tone is conversational and relatable, rendering it a delightful read that empowers readers with practical knowledge and tools to make smarter financial decisions.
Key Takeaways for Investors
Emotions and Money: The book tells the story of an investor who got caught up in the technology stock craze of the late 1990s. Like many others, he kept buying tech stocks as their prices soared, driven by the fear of missing out (FOMO). When the dot-com bubble burst in 2000, instead of staying the course, he sold out of fear, turning his paper losses into real ones. This example illustrates how letting emotions dictate investment decisions can lead to financial loss.
Goal-Based Investing: Richards presents the case of a client, a middle-aged father, who had a significant amount of savings. This client got a hot tip about a potentially lucrative, yet risky, investment opportunity. He was tempted to divert his savings into this venture, lured by the prospects of quick, high returns. However, upon revisiting his primary goal—securing his children's education—he realized that a potential loss could hinder his ability to pay for their college. This helped him resist the temptation and stick to his original, less risky investment plan.
Understanding Risk: The book recounts a story about a newly retired woman with a sizeable nest egg. Despite having the financial capacity to afford high-risk investments, she had a low tolerance for market volatility and the possibility of losing money. Recognizing this mismatch, Richards advised her to adopt a more conservative investment strategy focused on preserving her wealth and providing a steady income, rather than chasing high returns. This underscored the importance of understanding both risk capacity and tolerance when investing.
Simplicity is Key: Richards tells the story of a woman with little knowledge of the stock market. Despite this, she managed to retire comfortably because she followed a simple plan: she saved a portion of her income every month and invested it in a well-diversified, low-cost stock index fund. She avoided the temptation to chase after "hot stocks" or get swept up in market hysteria. Her story exemplifies how keeping a straightforward investment strategy and staying consistent can yield favorable results in the long run.
Avoiding Financial Traps: A couple approached Richards after they had invested a significant portion of their savings in a complex, high-fee financial product sold to them by a smooth-talking salesman. They were promised high returns, but instead, they found their investment eroding due to the high fees and underperforming returns. This example shows how important it is to fully understand an investment product before committing money to it and to be skeptical of investments that promise high returns with low risk.
"The Behavior Gap" effectively emphasizes the crucial role of behavior and emotions in our financial decisions. Richards shares, “It’s clear that buying even an average (stock) mutual fund and holding onto it for a long time has been a pretty decent strategy. But real people don’t invest that way. We trade. We watch CNBC and listen to Jim Cramer yell. We buy what’s up and sell what’s down. In other words, we do exactly what we all know we shouldn’t do.”
Its anecdotes and straightforward advice make it a valuable read for anyone looking to improve their financial wellbeing.
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About OpenAI’s ChatGPT tool:
GPT (short for "Generative Pre-training Transformer") is a type of language model developed by OpenAI that is trained to generate human-like text. ChatGPT is specifically designed for generating text in a conversational style. It is a machine learning model and has been trained on large datasets of real-world conversations in order to learn the patterns and styles of human communication.
Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.