Book Review: The Behavior Gap by Carl Richards
Simple Ways to Stop Doing Dumb Things with Money
2020 was a reminder to not let your emotions get in the way of a well-developed investment plan. With the start of a new year, what a great opportunity to self-reflect on investing behaviors that may have hurt last year. Although “The Behavior Gap” was written over 8 years ago, we pulled it off the shelf for a refresher on how our behaviors can affect our investing.
The author, Carl Richards, is well-known for his simple explanations of complex financial topics through Sharpie sketches, which often appear in the New York Times. In his book “The Behavior Gap”, Richards attempts to simplify the solutions to common investor mistakes by emphasizing a focus on goals and value-based decision making. The more you focus on these, the less likely you are to fall prey to the Behavior Gap, or the gap between what you know you should do and what you actually do.
We like this book because it is practical, enjoyable, and frankly exposes the mistakes we all seem to make. And, Richards does all this with a bit of panache (and data). We encourage you to read this modern-day classic. Here are some of his key points.
1. You cannot control the markets but you CAN control your behavior.
Are you guilty of running to cash at the first sign of a downturn, making impulsive decisions to buy or sell based on market ups and downs, listening to forecasters, or thinking you have special knowledge about investments that others don’t have? All these mistakes can be costly and maybe you’ve felt those consequences in the past.
“We can recognize that we’re not as smart as we think we are. In fact, the smartest investors are the ones who acknowledge that they’re not smart enough to forecast events or pick the best stock or avoid every scam...”
You can’t control the markets, but you can control your behavior! How? He gives 8 strategies:
Have a plan that guides your decisions.
Choose investments that match the direction of your plan.
Admit if you’ve made investment mistakes in the past.
Know that running to cash will make you lose more.
Have a conversation before making a decision.
Don’t make sudden decisions when changing your portfolio.
Don’t let one new piece of information change your strategy.
Control your behavior when you can’t control the markets.
2. All money decisions are emotional decisions.
The investor who is holding onto investments that are a bad fit because their loved one left them behind, the employee who is overweight in their company’s stocks, the individual who pulled all of their investments in the market downturn… We all know them or are them. These emotions can be very expensive. The antidote is awareness. Once you are aware of your emotional tendencies, you can determine if you should act on how you feel or what you know to be true. And you can surround yourself with trusted people who can tell you when you are acting emotionally.
“We’ve all made mistakes but now it’s time to give yourself permission to review those mistakes, identify your personal behavior gaps and make a plan to avoid them in the future. The goal isn’t to make the perfect decision about money every time but to do the best we can and move forward. Most of the time, that’s enough.”
3. Specious advice and forecasts distract from your goals.
We can allow fear and news hype to impact well-conceived investment plans. Every few years there is a forecast of looming catastrophe. Hype, fear-mongering, and other tactics cause many investors to make emotional decisions that are expensive and inconsistent with their usual behavior. If you are listening too closely to dramatic headlines, predictions about the future, or exciting stories from peers, you may be led to make a decision that is not in line with your specific needs and goals.
And, if someone is making you promises about the markets, you should be very wary. At Kings Path, we’ve been tracking major banks’ forecasts since 2017! Read the results here.
Make a plan, stick to the plan, and focus on the long-term horizon of your unique goals. We couldn’t say it better ourselves! (In fact, you see this at the end of most of our blogs!)
“In the end, we have to recognize that the future is unpredictable. Advice and forecasts are often distractions from our real task: getting to know ourselves and our goals, making choices aligned with those goals, and adapting to the surprises that are bound to come along.”
4. Steady plodding brings prosperity.
Richards promotes the “slow and steady” approach to investing.
“Being slow and steady means that you’re willing to exchange the opportunity of making a killing for the assurance of never getting killed.”
While it may not be as flashy or exciting, a slow and consistent approach to making incremental and appropriate changes over time is likely to be much more productive over time.
Even though Warren Buffett started investing at age 10 and manages to achieve returns most can’t, the majority of his wealth – 99%, in fact – was built after his age of 50. All because of compounding.
https://thehustle.co/how-rich-was-warren-buffet-when-he-was-young
Compounding is a beautiful thing in investing. Keep costs low, stay invested and allow time for your investments to grow. Jumping in and out of the market can be disastrous.
5. Financial planning is really life planning.
Over and over, Richards emphasizes the importance of goals and values. It is impossible to plan for every outcome in life. But if you focus on what really matters to you, your planning is much more streamlined and productive for your life. After all, money is just a tool to accomplish your goals. But if you do not define or focus on your goals, you will never be able to make your money work for you.
One-size-fits-all planning does not work. Your plan must be customized to you, your family, your interests, passions, and community. The core of all financial planning is to FOCUS on your goals, TUNE OUT emotional decisions and bad advice, and ENJOY long-term success.
What is financial planning? Read our blog on how we approach financial planning at Kings Path.
Conclusion
Whether we like it or not, we are all limited by our own behavior – our biases, our fears, our emotions, our echo chambers, and more. These behavioral tendencies lead us to make decisions that may not be rational. Richards says it best, “I am more convinced than ever that all investment mistakes are really investor mistakes.” However, when we are aware of our tendencies and we have the right checks in place, we can implement the necessary measures to avoid making costly mistakes.
“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.”
Give "The Behavior Gap" a try and let us know what you think! We’d love to discuss with you and help you think through changes you may want to make in your investing habits.
