November 28, 2020

Bucks: Lessons Learned From Well-Behaved Investors

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

During my time writing for Bucks, I’ve read several comments from different people that share a common theme: “I don’t have any trouble behaving when it comes to investing. So why can’t you?”

If you fall into this group, investing and behaving may appear so simple to you that you can’t help but wonder if the rest of us are short a few brain cells. But your ability to behave is really quite remarkable.

After all, as Daniel Kahneman noted in his brilliant book, “Thinking, Fast and Slow,” we all suffer to some extent from cognitive biases that make it nearly impossible to behave. These biases often cause us to take mental shortcuts that can thwart our efforts to successfully balance logic and emotion.

In a recent interview with Morgan Housel of The Motley Fool, Dr. Kahneman explains why some people (maybe you?) can better handle these biases. He also discusses why these biases can be so hard to avoid (the portion of the interview presented below was edited out of the video for space):

Morgan Housel: We often hear that Warren Buffett was born hard-wired for the traits that he has as an investor, which sounds nice. But I wonder if there’s any truth to that. Is there evidence that some people are more prone to cognitive biases than others?

Dr. Kahneman: Yes. There certainly are differences among people. There are differences in intelligence and there are differences in cognitive style and the degree to which people check themselves. So some people definitely are more prone to biases than others. That doesn’t mean that they are doomed to be biased. But certainly being prone to self-control and to slow thinking in general, you’ll find differences in children aged 3 or 4, and some of these differences persist into adulthood.

Morgan Housel: So most of these biases are things that we are born with; they’re not traits that we learn.

Dr. Kahneman: The biases that I’ve been concerned with are really characteristics, I think, of the way we’re wired to interpret the world. So in that sense, yes, we’re born with them. I mean we’re born to see patterns, and if seeing patterns leads you into bias, then that bias is built in.

We’re born with our biases. So what’s an investor to do?

Since behavior plays such a huge role in investing — and as Dr. Kahneman notes, these biases are hard to avoid — you need a strategy to keep you on track. The best source for figuring all of this out is watching the people who do behave well. What do they do differently than the average investor?

1) Separate decisions from emotion

I’ve often said that I’m great at making unemotional decisions when it’s another person’s money. But when it comes to my own money, it can be a struggle. Warren Buffett is a perfect example of this principle. Mr. Buffett has said over the years that he tries to be fearful when others are greedy, and greedy when others are fearful. That is essentially putting into practice the notion of “buying low and selling high.” And it means sticking with a plan even when it’s painful (for instance, when stocks suddenly jump or slump).

2) Doing nothing is the default choice

When I heard about the study that found soccer goalies could be more successful by doing nothing, I immediately understood why there would be resistance to the idea that not moving could block more goals. I suspect most of us have a bias toward action, especially if we think we’ll look stupid if we stand still. The best behaved investors understand that it’s in their best interest to do nothing most of the time, even though everyone else around them may be saying otherwise.

3) Understand that investing and entertainment are two different things

I’m the first to admit that reading and watching the so-called financial news can be interesting, even outright entertaining. But those who manage to behave seem to have adopted two approaches: watch it, but don’t act on it or ignore it completely. They’ve drawn a line between investing and entertainment. They may watch and read, but what they see doesn’t sway them from their plan.

Obviously, none of these three things are particularly complicated. So is something more going on? Is it a case of survivorship bias, where the people who appear to behave just haven’t made a mistake yet?

I doubt it. I think well-behaved investors are just better equipped than the average investor over the long haul. But  they’ve also done something that the rest of us can do. They have acknowledged the connection between emotion and behavior.

There are no guarantees that we’ll avoid our biases in the future, or that we’ll avoid making mistakes. But simply recognizing that the land mine exists may get us out of some difficult situations or avoid them entirely. So take a look around you.

Do you know anyone who seems particularly well-behaved? How about someone who bought something like a low-cost index fund and then stayed put for 10, 15, even 20 years?

What have you noticed about them?

Maybe I’ve misjudged the situation, and perhaps it isn’t possible to behave over the long haul. Still, I’d like to think that we have enough examples from well-behaved investors to learn from. And that can help make the seemingly impossible become more probable for the rest of us.

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Bucks: Investment Plans and Forecasts Don’t Mix

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

“I know you can’t time the market. But in your view, where is the market going?”

I still get this question from people, at event after event, even after people have heard me talk about the importance of behavior and how we can’t predict short-term market performance.

During a recent trip to South Africa, I got even more specific questions:

  • Where is the United States economy headed?
  • Where are interest rates headed?
  • Is now a good time to invest in Japan?
  • Is the housing recovery for real?

Here’s the thing: I totally understand why people are asking questions about timing. First, there’s an assumption that having an opinion — whether it’s about the market, the economy, or Japan — makes someone look smart. Being able to talk about these subjects must mean you have more money and your investments do better, right?

Not true.

Second, if you don’t talk about sports or politics that only leaves economic issues (Again, not true. It just feels that way). Now maybe you like to talk about all three, but it’s reached the point where talking about the economy and markets is an official spectator sport. We all feel capable of playing.

And while it may be fun to chat about what the market might do next at your neighborhood barbeque, don’t kid yourself. What we know about the market comes down to a bunch of guesses, also known as forecasts.

Forecasts about the future of the market are very likely to be wrong, and we don’t know by how much and in which direction. So why would we use these guesses to make incredibly important decisions about our money?

That’s right. You shouldn’t because you know better, and relying on what’s really just a hunch is an all but guaranteed recipe for financial pain.

Instead of relying on guesses to dictate our financial decisions, we need to focus on the investing basics:

    • Figure out where you are today
    • Make a guess about where you want to go
    • Buy diversified, low-cost investments that have the best shot of getting there
    • Behave for a long time

Obviously, this list isn’t nearly as interesting as speculating about whether the Dow will break 16,000 before the end of the year. But it is a list that will keep you from doing something dumb, like thinking it’s a good idea to bet your portfolio on a guess.

So, just in case I’ve left you in doubt, please don’t forget: Plans and guesses don’t mix!

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Bucks Blog: Talking Numbers With Your Children

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

Few things will humble parents faster than when they realize they’ve made some dumb assumptions about their children. And twice in the last few weeks, my own children have shown me where I’ve gone wrong when it comes to teaching them about money.

I thought my wife and I were covering all the bases. We have talked about budgeting. We have talked about saving. We’ve even talked about why we made certain financial decisions. But guess what we never really talked about? Numbers.

You’ve probably done it, too. Let’s say your children know that you’re buying a new car. You probably wouldn’t talk to them about how much it cost.  After all, they could mention the number to your neighbors, and you wouldn’t want that to happen. So, here’s what I learned from my children. Hopefully, my own experience will help you have better conversations with your own children, as well as your spouse, or anyone else that you share financial decisions with.

1) Don’t hide the numbers

One Saturday afternoon, I decided to stop at the boat shop. I have fond memories of long summer days at the lake, and I wanted to see what it might cost to buy a boat for our family. The fact that we don’t really need a boat probably explains what happened next. But since I was feeling a little sheepish about the whole “needs versus wants” subject, I hid the price tag when my son asked me how much the boat cost.  And I compounded the mistake by making up some funny number, like 54 quarters, to try to throw him off.

I should have shown my son the price and explained: 1) why a boat costs that much; 2) why I think it’s worth that much money; and 3) how we saved as a family over the previous years to afford it (should we decide to buy it). In short, I would have helped my son put the buying decision into context, which leads me to the next lesson.

2) Don’t assume your children think the same as you

One of the best parts about being a parent is getting to watch my children make decisions and try new things. Little did I know that my daughter’s decision to explore soccer would be a lesson for my wife and me. After attending the orientation meeting, my daughter came home and explained what she’d learned, and my wife asked her about the costs to play.

My daughter replied “$20,000,” with just a slight hint of caution.

After seeing my wife’s shocked expression, she was quick to assure her mom that it covered two uniforms and an assortment of other things for the entire season. But, and I think you can see where I’m going, my daughter hadn’t made the connection between the crazy number and what she thought she was getting in return.

To be clear, the disconnect isn’t because we’re a family who uses money as paper towels. And our children know what it means to earn a few dollars doing chores. They have savings accounts. They have an allowance. But it appears that we haven’t taken the time to give my daughter a point of reference for a number as large as $20,000. Because a number this large was unfamiliar, and because she had never played soccer before, she didn’t have any real context to help her understand why it didn’t make any sense at all.

As it turns out, $20,000 was actually the budget for the entire team for the entire season. The cost per player was closer to 1/10th of that number. But my daughter’s experience made it perfectly clear that we had dropped the ball.

So, the next time you’re talking with your children, your spouse or anyone else about money, please make sure that you’re talking about the same thing. Don’t avoid talking about the numbers or the price. And please don’t make the same mistake I did, and assume that it’s not worth having a conversation that gets specific. Based on these experiences, I’m convinced that there would be fewer money issues in our families if we worried less about what people thought and more about what our families know.

I want each of my children to know what things cost so they can weigh the pros and cons of buying this versus buying that. I want my kids to understand just how much money $20,000 is so that they can make a fair judgment about the worth of something compared to what they’re getting in return. And perhaps most important of all, I don’t want my discomfort to stop me from providing my kids with the skills and information they need to make smart money decisions.

I bet you want the same things for your children, too.

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Bucks Blog: What You Don’t Know About Your Portfolio May Help You

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at The BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

Back in 2008, a friend of mine left for a two-week trek in Nepal. While he was gone, the entire financial world exploded.

Merrill Lynch was sold to Bank of America. Lehman Brothers filed for bankruptcy protection. A.I.G. received an $85 billion loan from the Federal Reserve to avoid bankruptcy.

But here’s the interesting part: he didn’t know anything happened because he didn’t have any connection to the outside world. Although recently retired from the investment industry, my friend would have been glued to his computer. But he had no idea what was going on.

Think about that for a minute. I remember those days. I remember waiting up to see how markets opened in Japan. I remember being so worried that I didn’t sleep for days. And I remember another friend who called me from a cruise ship to ask if things were O.K. He said that many other passengers got off at the first port and flew home to deal with what was happening in the market.

My friend in Nepal missed it all, and it didn’t make one bit of difference. He was actually better off.  All my worrying didn’t change one thing.

In fact, my friend said that when he got back and eventually heard the news, something became crystal clear. He knew exactly what was going to happen for the rest of his life: the markets were either going to move up and then down, and then up and down again — and then he would die. Or, they would go down and up and down and up — and then he would die.

In either scenario, he was still dead. And no amount of obsessing over the stock market would change that.

This idea of being unconnected for a few weeks reminded me of Warren Buffett’s statement: “Benign neglect, bordering on sloth, remains the hallmark of our investment process.”

But it’s still so hard to ignore the market because we’re so connected. We seem to be obsessed with economic news. I’m not sure when exactly it happened, but sometime in the 1990s investing became America’s favorite spectator sport. I knew there was a problem while sitting in my dentist’s office and seeing CNBC on the TV in the lobby. It’s only become more difficult to avoid, now that everyone has a smartphone.

But knowing doesn’t help. And much of the time, it actually hurts. Aside from the tendency to trade too much when we’re following every market move, there’s also the issue of our happiness. It doesn’t feel good when our investments go down, even if it’s just for one day.

We have an aversion to loss. In other words, you’re likely to feel the pain of loss far more acutely than the joy of an investment gain. We feel twice as bad losing money as we do making money. And yet, knowing this, we continue to do things that will cause us pain.

Since many of us use the Standard Poor’s 500-stock index as a proxy for the market, let’s take a look at the period from 1950 to 2012 to see how often we’re likely to feel positive, based on how often we check our investments:

  • If you checked daily, it would be positive 52.8 percent of the time.
  • If you checked monthly, it would be positive 63.1 percent of the time.
  • If you checked quarterly, it would be positive 68.7 percent of the time.
  • If you checked annually, it would be positive 77.8 percent of the time.

So here’s the thing to ask yourself. Other than upsetting yourself half of the time, what good is it doing you to look anyway? Maybe we should all invest as if we’re going on a 12-month trek in Nepal!

So along with your do-nothing streak, let’s see how long you can go without looking at your investments (assuming you’re in a low-cost, diversified portfolio, of course). I think you’ll discover that it makes you happier, keeps you from doing something stupid and helps you become a more successful investor.

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Bucks: Challenge What You Think You Know

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at The BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

I used to ride my road bike a lot.

While I didn’t race very often, I did ride with a group of really competitive riders. And when you ride a bike competitively, especially when long climbs are involved, weight is a factor. The less you weigh, the faster you go. Needing all the help I could get, I got in the habit of stepping on the scale regularly, and that habit has stuck with me even though I ride less now than I did a few years ago.

As I’ve observed my interaction with the scale, I’ve noticed a curious tendency. I’m much more likely to weigh myself when I’ve been eating well, and I think I’m going to like the number I see. I’ve also noticed that I pretend the scale doesn’t exist after a late-night ice cream session. Sound familiar? Even the time of the weigh-in mattered. Based on a quick poll of my athlete friends, their preferred time for the daily weigh-in is after an early morning run and right before breakfast.

This tendency to look for information that supports the way we feel about something isn’t isolated to the scale. We do this all the time. In fact, academics even have a name for it: confirmation bias. It’s when we form an opinion, and then we systematically look for evidence to support that opinion while discarding anything that contradicts it.

The first place we go for feedback about what we believe is other people. And who do we ask first? That’s right, people we know who are already inclined to think the same way as we do. And friends don’t always tell one another the truth, even if they disagree. The result is a dangerous feedback loop that actually confirms our bias. It’s incredibly hard to avoid.

A great example of this bias is described in “Decisive: How to Make Better Choices in Life and Work,” a new book by Chip and Dan Heath:

Smokers in the 1960s, back when the medical research on the harms of smoking was less clear, were more likely to express interest in reading an article with the headline “Smoking Does Not Lead to Lung Cancer” than one with the headline “Smoking Leads to Lung Cancer.” (To see how this could lead to bad decisions, imagine your boss staring at two research studies headlined “Data That Supports What You Think” and “Data That Contradicts What You Think.” Guess which one gets cited at the staff meeting.)

Confirmation bias is super tricky because it’s so easy to convince ourselves that we’re right. We’ve found evidence to support our decision and people who agree with us. The only solution that I see is to purposely expose yourself to views that don’t match yours.

For a great example, let’s look at politics. Let’s say you consider yourself a liberal. Chances are most of the people you hang out with are liberals, too. So the only way to avoid this confirmation feedback loop is to expose yourself to views that don’t match yours.

The hard part? You’ve got to do it with an open mind. As Stephen Covey, the self-help and business author, has said, “Most people do not listen with the intent to understand; they listen with the intent to reply.”

Your goal should be to understand. If you are just listening to judge, then you’re only building more confirmation into the system.

So take a deep breath and turn on Fox News or listen to Rush Limbaugh. Try, just try, to listen, to understand. See if you can get to the point where you can honestly say, “I understand the argument and can see why they feel that way.”

Of course, this may not change your views. But then again, it might. In fact, the possibility of changing your mind might be why this is almost impossible for most of us to do. Beyond politics, we face just as much risk of confirmation bias in investing.

Suppose you’ve watched the market race up during the last few months, and you think the market is close to its peak. Maybe, you think, it’s time to get out. I can guarantee you’ll be able to find evidence — probably enough to write a thesis — that supports your decision. But I’m just as sure that there’s plenty of evidence that says otherwise. And that’s the slippery slope of confirmation bias.

We’ll always be able to find something or someone that says, “Yes, you’re right.” But our goal should be to understand the opposite of what we believe, put it into context with what we think is true, and then see where we stand. Otherwise, what we “think” we know will someday be trumped by what we don’t.

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Bucks: The Perils of Investing in What You Know

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at The BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

If you’re my generation or older, you probably remember Peter Lynch.

He was the famous manager of Fidelity’s Magellan Fund from 1977 to 1990. While Mr. Lynch’s track record covers only 13 years, it’s easy to see why many consider him to be one of the greatest investment managers of all time.

When he took over the fund in 1977, it had only $18 million in assets. But when he retired in 1990, the fund had grown to $19 billion in assets. Over those 13 years, Mr. Lynch managed to achieve a compounded average investment return of 29.2 percent, while the Standard Poor’s 500 Index only rose 15.8 percent

On top of being a great manager, Mr. Lynch was also a prolific and talented writer. It was said that his approach to investing was so simple and clearly written in his books —  ”One Up on Wall Street” and “Beating the Street” — that he inspired many do-it-yourself investors and future managers.

I have a favorite Lynch saying: “Never invest in any idea you can’t illustrate with a crayon.” I think my reasons for liking that particular one are obvious. But I’m seeing a troubling trend related to another one of Mr. Lynch’s ideas: Invest in what you know.  People are using it to justify dangerous investing decisions.

This brand of investing was made famous by the great stories that Mr. Lynch told, particularly about individual stocks. For instance, he once told a story about how his wife loved a new Hanes product so much — L’eggs pantyhose — that he bought Hanes stock. It became the largest portion of the fund, and fundholders eventually enjoyed a 30-fold appreciation in the stock.

As fun as it can be to hear these stories, when they are viewed in isolation they can be incredibly dangerous for investors. And Mr. Lynch isn’t alone in being taken out of context. Warren Buffett has offered similar advice about how you should never invest in businesses that you don’t understand.

But here’s the thing we need to remember: Whatever the advice, it’s just the starting point for investors like Mr. Lynch and Mr. Buffett, not the end point. Yes, they may have started with things they knew. But they also did a bunch of research, and it’s this second part that’s missing from many investors’ decision-making process.

It seems crazy to assume that buying what you know should replace research, but that doesn’t seem to be stopping people. I’ve heard more than one person justify a decision to buy Apple stock because they really love their iPhone. That’s about as wise as buying Crumbs’ stock because you love their cupcakes. But that doesn’t seem to have stopped individual investors from buying shares of Apple. As a Times story noted last week:

The investment firm SigFig estimated last fall that 17 percent of all retail investors owned Apple stock, four times the number that owns the average stock in the Dow Jones industrial average.

If you pick and invest in individual stocks, what you’re really doing is focusing on just one piece of Mr. Lynch and Mr. Buffet’s advice. And for most of us, that’s just too risky. It makes more sense to invest in diversified, low-cost index funds. (In fact, Mr. Buffet bet that an index fund would beat a set of hedge funds; he’s winning that bet.)

And even though Mr. Lynch and Mr. Buffett clearly stand above the rest of us mere mortals, one piece of their advice doesn’t replace the other requirements of good investing behavior.


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Bucks: Why Budgeting Will Lead to More Awareness

Carl Richards

Carl Richards is a financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published last year. His sketches are archived on the Bucks blog.

I don’t run into too many people who love to budget. And when you add another person to the mix, like a spouse or partner, there’s a good chance one of you will actually hate the idea.

Budgeting clearly has a marketing problem. It’s a bit like flossing. We understand how important it is to floss, but it’s not something we like to even think about, let alone actually do. So we lie to the dentist about how often we do it and promise to do better, only to skip it again the next day.

Budgeting and flossing: Both insanely important, super simple, and for many of us, nonstarters. I had this conversation with Jesse Mecham, the founder of You Need a Budget, the online budgeting tool, and he touched on something that I agreed with completely. Budgeting is more about awareness than it is numbers.

In fact, budgeting equals awareness.

And who doesn’t want that?

I think anyone who takes the time to think about it would agree that spending money in a way that’s aligned with what we value will bring us more happiness. Of course, the only way to know if our spending is aligned with what we say is important is to track it. Tracking it will make us aware of how we’re spending our money, and then we’ll have the information to decide if we want to make changes.

So why aren’t we doing it?

1. It’s not fun.

True. But remember, to paraphrase Stephen R. Covey, the self-help author,  it might be even less fun to spend your entire life climbing a ladder only to find it’s leaning against the wrong wall.

2. I already know where my money is going.

No, you don’t. Sorry. Unless you track your spending, you don’t know where your money goes. Everyone I’ve ever seen go through the process of tracking spending for 30 days usually ends up saying some version of, “I had no idea I was spending that much on X.”

Trust me, you will learn something you did not know about yourself.

3. I’m not sure I want to know.

I think this is the biggest mental hurdle. Sometimes it’s better to be blissfully ignorant, at least for a while. The reality is that as we become aware of what and how we’re spending, we’ll find some things that surprise and bother us. Then we have to decide: Do we want to change?

There are plenty of reasons not to budget, but there are even more reasons to do it. You will become more aware, and while that awareness may be painful, it may lead you to spend money in a way that has the potential to lead to greater happiness.

So here is my challenge to you. Try tracking your spending for 30 days. (I hope the results of this challenge are better than my project at the homeless shelter.) Don’t stress about what app to use. If you have an app or another tool, great. But if you don’t, I suggest buying a stack of index cards. Pull one out of your wallet every time you buy something and write it down.

Tell me what you learn. I’m going to try it, too, and I’ll share what I learn. I think we’ll all be surprised at least once.

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Bucks: Why We Fear Simple Money Solutions

Carl Richards

Carl Richards is a financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published last year. His sketches are archived on the Bucks blog.

I keep coming across an interesting problem. People say they want things to be simpler — investing, life insurance, retirement planning, etc. But when a simpler (and effective) option is proposed, they reject it as too simple.

In most of the money situations I’ve come across, the best solution is almost by definition the simplest. (Note: I didn’t say the easiest.)

So why don’t we go for simple?

1) We don’t believe it will work.

We’re attracted to complexity because anything that requires a lot of something — time, details, money — should work, right? By default, if it’s simple, say only two steps instead of ten, we think we’re missing out.

2) We think simple should be easy.

It’s like the guy who goes to the doctor and says he doesn’t feel well. There must be something wrong with him that a pill could fix. But all the doctor says is, “Get more sleep, eat healthier food and exercise three times a week.”

It’s the simple solution, but it’s not easy.

3) We like tradition.

We get used to how things should look, work, act, etc. (Think of dishwashers; they all basically do the same thing.) So any time we see something that’s too different from what we’re familiar with, we treat it with suspicion. And if we’ve come to expect that money options should be complex, we’re going to be wary of anything simple..

The result? We paint ourselves into a corner.

This is one of the reasons that you have to go back to the A.T.M. to find the most recent revolution in the personal finance industry. We need to see more revolutions, not fewer. Simple and Ally are both examples of simpler banking, but I don’t see Bank of America or Chase disappearing any time soon.

I had this exact discussion with a friend who complained about earning zero interest on her money at the bank she always used. I showed her a few of the new, simpler banks. But despite the fact that a two-year CD was paying a lot more than the zero she was earning, she didn’t want something new. So she keep complaining.

We’ve got to come to grips with the reality that simple and incredibly effective financial solutions are right in front of us. But they may look different. To get there, we need to change our mindset, for example, from day trading to systematic investing in low-cost mutual funds.

It’s time to stop assuming that complexity will solve your problem when a simpler option may solve the problem and save you a headache.


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Bucks: The Over-The-Wall Portfolio for Excess Cash

Carl Richards

Carl Richards is a financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

If you’re an entrepreneur, you’ll spend years pouring everything — time, money, passion — into your businesses with the hope that someday it will pay off. If things go well, you’ll wake up one morning and find yourself with excess time, energy and, of course, cash.

Great! But now you have to figure out what do with that cash, and this is when things can get dangerous, fast.

Most entrepreneurs get twitchy at the thought of idle money. They’re used to taking big chances and are comfortable with risk. So, there’s a temptation to assume the same approach to controlled risk when investing outside their business.

One of the smartest guys I know runs an incredibly successful company but provided a textbook example of this approach. As the business matured and started throwing off excess cash, he began thinking about what to do with it. He invested in some pretty strange ventures. He backed a doctor with a new toothbrush design, a car wash and a company that made kayak paddles.

He knew nothing about any of these businesses. Not surprisingly, he lost that money.

Instead of sticking to what he knew to make money and protecting the profits, he made the classic mistake of thinking he could do more. He took risks with money that he promised himself he would never lose.

It’s like what Warren E. Buffett said about the super-smart and incredibly wealthy founders of Long-Term Capital Management, who ended up doing something really dumb: “To make money they didn’t need, they risked what they did have and did need, and that’s foolish.”

Don’t be foolish. If you’re fortunate to have enough money to last for a good long while, the game can, and should, change. Of course you can still focus on growing your business. Or, if you’re a serial entrepreneur, you can build the next one. But at the same time, you can start building a portfolio to protect your future.

One thing I have heard over and over when interviewing successful entrepreneurs is the idea of what I call the Over-the-Wall Portfolio. Of course, the entrepreneurs didn’t call it that. They often referred to it as the safe money or the money they promised their spouse they’d never lose.

Whatever you call it, the concept is pretty simple: You take the excess cash your business generates, or the lump sum from the sale of a business, and throw it over the wall into stable (and probably boring) investments.

Then you forget about it.

The allocation of an Over-the-Wall Portfolio will vary, but here are a few general guidelines to consider:

  • Boring. Remember: excitement comes from being an entrepreneur (or the movies), not your over-the-wall money.
  • Liquid. If something goes wrong, you want to be able to get to the money.
  • Diversified. You can get rich by putting all your eggs in one basket, but you stay wealthy by being diversified.
  • Passive. The Over-the-Wall Portfolio can’t depend on you for day-to-day management. You’re too busy with your business and having a life. The last thing you should be doing at night is logging into your day-trading account.

The best part of this strategy? It lets you get back to doing what you do best — running your business. But you get the added comfort of knowing that if your business fails, you’ll be O.K.

Eventually, my entrepreneur friend recognized his problem. One day, he told me, “Carl, I finally figured it out. My job is to stay focused on my business and make money. And with the money I make, I have to be sure I never lose any of it.”

I couldn’t have said it better myself.

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Bucks Blog: An Election Probably Shouldn’t Change Your Financial Plan

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

New information is scary. When things change, we often don’t know what to do. We may have had a plan before things changed, but things are different. So now what?

With the election last week, we suddenly have lots of new information, or at least it feels like we do. A little less than half the country is surprised and even disappointed. And unless you’re living in a cave, you’re now hearing about the uncertainty surrounding the looming budget showdown.

At times like these, there is a tendency to act now and ask questions later. Before you do, take just a moment, a small pause, and walk through a few steps to avoid making a big mistake.

1. Do you have a plan?

I’m assuming you do. You have a clear idea of where you are today, where you want to go and you have spelled out the investment process that you think will get you there.

2. Does this new information change that plan?

Any investment or financial plan most likely has risk built into it. Uncertainty is not new. Of course, this time might indeed be different, but don’t bet on it. Instead, make sure that the level of risk you’re taking matches your goals.

3. Should you change course?

After reviewing your plan in light of this new information, the key question to ask is whether a change is warranted. The primary reason for making changes to a sound plan depends on changes in your life and goals, not changes in the markets or politics. So if your goals haven’t changed, and you have a rational plan to get there, stick with it.

If, on the other hand, this new information has you reassessing your goals and the level of risk required to get there, it might be time to revisit your plan. Do it deliberately and with care, because history has shown that selling when worried can be a bad idea.

And all this process requires is that you pause and ask a few questions before acting. It seems like a small thing to do to avoid making the same painful mistakes over and over again.


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