Welcome to a brand new series here on TEBI — Rethinking Money with CARL RICHARDS.
Carl is an expert on how we can improve our financial wellbeing by modifying our attitudes, thought processes and behaviour.
In this first interview in the series, Carl explains how the simplest way for investors to outperform the vast majority of their peers is to take a long-term view — and to tune out all the noise surrounding the financial markets.
TEBI: Why in your view does human behaviour plays such an important part in the outcomes that investors experience?
CR: There’s this hyper-focus on performance. When you open the newspaper or you watch the financial pornography networks on TV, they always talk about the performance of investments.
And what we don’t realise is that there’s a big difference between an investment and an investor.
If you buy an investment for ten years and hold it for the whole time period, and don’t add or take any money away, you get that investment performance.
But nobody does that — that’s the dilemma. Of course we want the best investment we can find. But the challenge is, even when we own the best investment, our behaviour gets in the way.
Why is that? Why do people find it so hard to be rational when it comes to money and investing?
It’s natural. We’re hard-wired to get more of the stuff that brings us security and pleasure, and run away from stuff that’s causing us pain.
The way that plays out with investors is this. You see on the news that some investment, or sector of the market or the market as a whole, is down and everybody’s selling. You feel like you should sell. Or something’s gone up, and you feel like you should buy.
Look, you can have the best investment portfolio ever created, but make one behavioural mistake a decade and you may as well have been in cash.
So I think arguing about the best investment is like arguing about whether to go on a plane, train or an automobile before you’ve not even decided where you’re going.
In your book you refer to something called the Dalbar Study. For those who don’t know, what is it?
The Dalbar Study changed my life. It changed the path that my career was on, because I thought it was all about trying to find the best investment. I thought that was my job, and most investors think that’s the adviser’s job.
But what the Dalbar Study shows is that there’s a difference between the average investment return that an investment generates, and what the average investor in that investment receives.
Often it’s because we’re trading, changing in and out. We’re looking for the next hot investment because that’s what we think our job is. That’s what the news tells us. The financial pornography circus tells us that’s our job!
The average hold time for an investment is under three years. Nobody buys things and holds onto them for the long term. That’s silly, right?
From a behavioural point of view, how valuable is it to have a financial adviser?
Managing investor behaviour is one of these crazy, maddening things. It seems so simple, but that’s not to be confused with easy.
It’s not that we don’t know what to do. There are so many other areas in our lives where this is true, where knowing is easy, but doing is often hard. We can point to health. We can certainly can point to diet. We all know what we should do, but doing it is quite hard!
So most people don’t hire a financial adviser because they don’t know what to do. They certainly don’t hire an adviser because they’re dumb. You hire a financial adviser to be the thing between you and poor behaviour.
But what does that actually mean in practice?
We all have blind spots, and — this is the most profound thing you’ll hear all day — you can’t see your own. By definition, you can’t see your own!
So a financial adviser — a good one, a real one — is just there to help remind you of what you know. They’re there, first, to clarify where you want to go, and then remind you of what you said when you’re thinking of doing something silly.
Investment behaviour is one of those things where we’re hard-wired to do things that are against our own self-interest.
A good financial adviser can say, “Hey, wait. Let’s just back up and remember.” They can help walk you in off the ledge when you feel like jumping. That’s the role of a good financial adviser.
CARL RICHARDS is a Certified Financial Planner and the founder of Behavior Gap, a communications consultancy for financial advice firms. He is a regular contributor to The New York Times and a frequent keynote speaker.
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