In his first book, The Behavior Gap, financial planner and columnist Carl Richards uses common-sense advice, deceptively simple cocktail napkin sketches and clear-eyed insight to explain why we behave the way we do around money.
Here he talks to us about the divide between investor expectations and investor return, and how we can start to have consequential conversations about money.
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The Behavior Gap rises above an ocean of competing financial advice. What makes your book unique?
It's meant to provide the framework for more meaningful conversations about money. It's meant to provide a framework to help us make these highly individual decisions and to start talking about the why of money. It's about focusing on the process of making smart financial decisions, instead of on what product to buy. It's about the process and not the product.
You already have high-profile venues for talking about money. What inspired you to collect your opinions in this book?
You know you have a problem when CNBC is on in your dentist's office. I thought that there was a need to provide tools to make sense of it all, to help people understand what is important and what is just noise. I found myself having the same conversations over and over with my clients, friends and through e-mail with readers at the New York Times that I became convinced I had to write the book.
What made you first notice this discrepancy between expectations and returns, and why is it important to investors?
Research studies almost all come to the same conclusion: investors behave badly and that behavior often leads to a return that is less than they could have if they'd just done nothing. It's crazy that despite knowing better we continue to chase last year's hot investment just in time for it to tank. We seem to repeat that process over and over until we're broke. It's so important to understand that by making some subtle changes in our behavior both our financial lives and our lives in general will be better.
Why do you think readers find your sketches appealing, and how are they useful to you?
My goal with the sketches has always been a pragmatic desire to communicate what can sometimes be a relatively complex concept in the simplest way possible. I think of them as simple, but not simplistic, and I believe there is a difference. I think the reason I receive so much positive feedback about them is because people are hungry for things they can understand, especially when it comes to something as important as money. People are starving for a new language to help them understand money better.
What do you think causes all the noise, shock and awe in the marketplace?
Because the financial services industry relies on complexity, there's this sense that in order for a decision to be right it needs to be overly complex and, frankly, confusing. We seem to be looking for and expecting complex answers. We feel overwhelmed and there's this sense that we'll never figure it all out.
I want people to understand that there are really only a few things that we have to get right. It's often challenging to get it right, but there's only a few of them. So if we focus on those things and treat them as common sense things, we'll be much better for it.
What’s the biggest difference between yourself and the Jim Cramers of the world?
One of the most important things that we can understand is the huge difference between entertainment and financial advice. There is nothing wrong with what Jim Cramer does. In fact, the evidence shows he's very good at what he does, but he is not your financial adviser; he's there to entertain. It doesn't surprise me that people watch his show because it's incredibly entertaining. What surprises me is we would confuse that entertainment with actual investment advice and then use our hard-earned dollars to implement it.
What role does emotion play in the investing world?
I don't know how we can continue to avoid the reality that emotion plays a huge role in financial decisions, particularly when it comes to how we invest our money. We get scared when the market goes down, and we sell when it turns out we should buy. Emotion plays a huge role, and it's time that we start recognizing it. Of course, the twin culprits of fear and greed will always threaten to lead us to make dumb investment decisions. So we need to be on the lookout for them.
Do you follow your own advice when working with clients?
I try! The thing people need to understand is that no matter your profession, it's difficult to do on your own because of the emotion involved. It always helps to have an objective third party, a good friend, you can count on to walk you off the ledge before you do something dumb. It's hard to sort them out on your own. My family recently hired our own financial planner because I believe so strongly you need to have an objective third party to help you sort through these decisions because we're just too close to them.
What’s the most important lesson you’d like people to take away from The Behavior Gap?
We don't have to keep repeating the same mistakes over and over again. We need to start talking about money so we can figure out how we feel about money. Then we can change the way we act in relationship to money. This is not some New Age idea. This is reality.