Why Do We Behave Badly When it Comes to Money?

You are standing on the edge of a cliff and the only thing that separates you from a 1000 foot fall are the rocks you are standing on and a small branch sticking out of rocks, hanging perilously over the abyss.  However, you have been told that if you could just get out to the end of that branch, the view becomes amazing and it would change your life.  At your core, you know a ‘view’ can’t change your life.  But what if they are right?  What should do?  There is not a mentally sound person alive that would not agree that the right thing to do would be to back away from the cliff’s edge.  We are a species that values survival, so this makes sense.  But when it comes to money and money decisions, we do this over and over and over again.

I am not referring to just investment decisions, although these are well documented.  Karl Richards wrote a fantastic book called The Behavior Gap where he discusses, among other things, how it is that the average mutual fund performance is between 2-4% per year higher than the average performance of the investors…in that same fund.  In short, it is investors behaving badly by buying high and selling low.  I will guarantee that every one of those investors got in the game with the goal of buying low and selling high, so why did the majority of them do just the opposite?  This is the behavior gap, and Karl will explain it much better than I will, so read his book.

I am also referring to our decisions around other areas of finance such as cash flow, debt and generosity.  I think most people know what they should be doing with these areas of finance, but very few actually execute this well.

Cash flow is pretty straight forward.  The #1 principal when it comes to money is ‘Spend less than you make.’  Absolutely no other part of your finances will work as well as they should if you do not have this under control.  You cannot plan and save for the future if you are not staying solvent today.  Heck, you won’t be able to plan for tomorrow.  This is critical and is a lesson I have had to learn the hard way.

Debt flows right out of cash flow.  Show me a person that is spending more than they make, eventually, we will be discussing their debt problem.  The problem with debt is that you are writing checks off of your future with no assurances that the money will be there to pay for it.  It may work out ok for you, but then again, it may not, and do you really want to live with that uncertainty?  Make no mistake, there are better and worse uses of debt, but the principal of debt is to be careful.  The old Proverb states that, “The debtor becomes slave to the lender.”  If you have ever been in an extreme amount of debt, you understand what it means to be indentured to that debt.

Generosity is something we should all practice on a daily basis to as many people that intersect our life.  This is life at its fullest.  Of course there are many more ways to be generous and kind to someone other than using your money.  However, there is also no question that the thoughtful and strategic engagement of money with need can changes lives and impact people for generations to come.  I think we are all wired to want to help.  It is an incredible feeling to know that your efforts, thoughtfulness, and yes, money, have made an impact on someone.  It will change their day, but I am certain it will change your day.  But you can’t even get here if you have misbehaved so badly in other areas of your financial life.  We all know this at our core, and yet we knowingly sabotage our desire to

I don’t think anyone does this on purpose, but this is what happens when the behavior gap is compounded exponentially.  It is never just about what we did to miss out on returns this year or what bad decision we made today to live beyond our means.  These decisions are never made in a vacuum and they always compound into a much bigger problem if a course correction is not made.

Post Election Letter to Client

Do you remember what I wrote earlier this year in June after the historic Brexit vote in Great Britain? In light of our own historic vote in the US yesterday, I think I could cut and paste every word and it would still be as relevant as it was then. Winston Churchill rings in my ears yet again, reminding us that “Democracy is the worst form of government, except for all the others.” We do not have a perfect system to elect our officials, but it is the system we have had for generations that has allowed for a peaceful transfer of power since the beginning of our young nation. And it worked again. It worked in the sense that, regardless of which side of the ticket you voted for and supported, we have a system that gives us a voice in the outcome of the formation of the government that is in place to represent us. This is no small feat and cannot be overstated. But make no mistake about it…presidents do not make this a great nation that we live in, people do. We have always been a nation with some pretty incredible people, so that give me encouragement.

Do you know what else I said in June? “Any conclusions around what these new trades deals (insert ‘this new presidency’) will look like and the impact on global economies is purely speculation at this point.” Make no mistake about it, the volatility in the futures markets overnight shows that investors are still looking for details on plans and policies. As those come out, likely within the new President’s first 100 days, the markets will digest it and move on.

So what does this mean for global stock markets and your money? In the long term, probably not much. In the short term, probably more volatility than we have seen in recent months. Historically, markets are pretty much impossible to predict in the short term. People have tried to predict and failed for years, and other will continue to try and fail. In the long term (and we are talking 10+ years), however, they tend to behave pretty consistently. And what does that behavior look like? Stocks do better than bonds, and both tend to grow over time. No matter what is going on in the short term, if you are going to have a successful financial life plan and achieve your goals, you have to get compound interest working for you. And the way you do that is to get in the game and stay in the game.

Am I saying that you should do nothing? No, not at all. I may sound like a broken record here, but you have to look at volatility, especially larger than normal volatility, as a unique opportunity to buy good, long term investments while they are on sale. I will be spending time today going through client accounts to see if there is excess cash that should be utilized to buy any short term dip, if there is a dip. These strategic rebalances add value over time. Interestingly enough, even though the media was quick to highlight that US stock futures were down overnight over 5% (at one point, signaling an opening worse than the day after 9/11), as I review the S&P 500 index right now at noon EST, it is UP almost 1%! That is a dramatic turn around, but highlights that, friends…don’t pay attention to what the media is trying to sell you. They sell fear, and fear is not a good partner when it comes to planning or investments.

Should you make any other changes to your financial life plan or investment strategies? No, probably not. When it comes to money, the best thing you can do for yourself in most cases is exactly nothing. Don’t take the bait that in front of you from so many different angles…the media, friends, family. Don’t make drastic changes you will live to regret later. Don’t get too emotionally tied in to what you see on the news. Emotions can make terrible decisions. When you hear that little voice trying to amp up the fear in your head, drowned it out with truth. The truth is that you are still ok…stick to the plan that you made during calmer days. You have to remember to control what you can control. This is why I harp so much on making a plan that maps out your goals and puts you on a path to achieve things that are most important to you. Buying in to the fear found in the day to day does not help you one ounce to harness your wealth to live your great financial life.

All of this is a wonderful reminder to make sure you have a plan that matches your values with your money. This is where you play in the realm of controlling what you can control. Can you control the Return on Investment (ROI) that you get from day to day? No, you can’t, and neither can I! The markets will provide the return that the markets provide…your job is to stay invested so that you can capture 100% of that. I want you to focus on achieving your maximum Return on Life (ROL) and you do this by having a thoughtful, well-designed plan that matches your money and your values. ROL trumps (excuse the play on words) ROI any day of the week because ROL means you are moving towards goals that are meaningful to you and impact the lives of those around you. That is what truly matters and can be accomplished no matter who gets elected as president. If you are not sure if you are on track or haven’t looked at your plan lately, get in touch with me and we’ll make sure you are controlling the things that you can control.

Stay calm, friends…

Josh

On Brexit

“Democracy is the worst form of government, except for all the others.”

 

It’s ironic to me that this quote is associated with Winston Churchill, considering all the going’s on in the last 24 hours within his home land.  As you no doubt have heard, the unlikely occurred and voters in the United Kingdom voted to leave the European Union after 43 years of membership.  The uncertainty that this casts on economies around the globe has caused stock, currency and even some bond markets to behave erratically today.  

 What I want you to know is that all is not lost, the sky is not falling, and the world as we have known it is not over.  I walked out of the house the morning for an early morning run, and you know what I heard?  The same thing I hear on every other morning…the birds were alive and chirping, the wind blowing through the trees which had been replenished with an overnight rain, and oxygen still filled my lungs just like it has on every other day.  It reminded me that we have to concern ourselves with things that we can control, and remove worry around events that we have no control over.  Brexit is one of later mold.   

 What does this mean for you and me?

The fact is I don’t know…no one does.  There is so much still yet to be determined.  The voters have made their voice known.  Now it is up to Parliament to move forward and negotiate the details of their wishes.  There will be months, if not years, of new negotiations between the UK and the EU and other trade partners.  Any conclusions around what these new trades deals will look like and the impact on global economies is purely speculation at this point.  But the fear and uncertainty in the ultimate conclusion is exactly why markets are behaving so erratically today, and probably for some days to come.  The value declines do not mean that the markets think the world is collapsing…it just means that they don’t know what is going to happen, so ‘traders’ are acting on emotion, fear and possibly greed.  These are never good ingredients for a long term investor’s strategy.  But I do know that this vote should not change the course of your long term plan.

 Trader vs. Investor

A trader is actively trying to time the market, moving in and out of investments based on one data point or another.  The research shows this has never been a consistent winning strategy over time.  An investor follows along with Warren Buffett’s favorite holding period for investments: forever.  Be an investor, not a trader.  I think Warren knows what he’s talking about.

 What should you do?

The best thing you can do for your self is exactly nothing.  Short term market movements do not change the course of your long term plan.  Remind yourself where you stand in regards to your long term goals.  Log in to our planning site, MoneyGuidePro, and see if your progress towards your goals has changed at all. [Note: if you do not yet have a financial plan built, let us know sooner than later.  This tool is extremely important to ensure that you are getting the maximum return on life (ROL) and always moving towards your goals.  This is much more important than worrying about your return on investments (ROI)] I assure you that your probability of your plan success has not changed.  The reason is that the probability calculation takes in to account the possibility of wild short-term (and even mid-term) volatility already!  

 Volatility = Opportunity

You have heard this from me before…where there is fear and volatility in the short term, there is opportunity to buy things on sale for the long term investor.  We are always looking to see if volatility in certain asset classes creates enough skewing in a portfolio to provide a strategic rebalancing opportunity.  This pays dividends in the long run.  If you have cash that you have considered investing, pay attention.  If the volatility continues, you will have a unique opportunity to buy a good, long term asset at a discount.  

 Let me reiterate again…the best thing you can do for yourself is exactly nothing.  If your portfolio has been allocated correctly based on your time horizon and your risk tolerance, you are still on the right course.  Turn off the TV, ignore the pundits, and look around you…the air still fills your lungs too, just like it did yesterday, and the sun still rose the same this morning as every other day.  Life is good, so enjoy your weekend. We are always here to talk, so do not hesitate to call or email with any questions.  

 Josh