I often hear people say they can’t stomach investing anymore. And I understand.
They’re scared about losing their money. But in my experience, contributing to the poor returns some investors receive are the bad decisions they made because they panicked, because they were greedy or because they didn’t investigate their investment choice.
“I am more convinced than ever that all investment mistakes are really investor mistakes,” writes Carl Richards, a certified financial planner and founder of Prasada Capital Management, a portfolio design firm.
Before you jump on Richards for blaming investors, especially given the many transgressions of financial professionals and the industry as a whole, hear him out. I did, and it’s why I’ve picked Richards’ newly released book, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money” (Portfolio, $24.95), for my first Color of Money Book Club selection for 2012.
“When you invest, you’re making a choice,” Richards writes. “That’s the part we often forget. At some point, we said yes to the investment. We had control over everything leading up to that point. We decided which (if any) questions to ask about the investment. We decided whom to ask. We decided how much to invest and when to invest.”
But when the investment doesn’t do well, people want someone else to blame.
Richards argues that investors should embrace two words: personal responsibility.
“We can’t blame the investment for our decisions,” he says. “At some point, we must accept responsibility. Otherwise we’ll keep making the same mistake. And in that case, we might as well give up trying to invest, put all our savings in fixed-rate bank CDs, and go enjoy our lives.”
Richards ultimately is trying to help investors become better decision-makers so they won’t panic when the markets do. He says:
Stop chasing fantasies. It’s highly unlikely you’ll find the next great stock that will make you a multimillionaire. “We are not going to get what we want by beating the market or picking the perfect investment or designing the perfect bulletproof financial plan,” Richards writes.
Accept that risk is part of investing. “Our assumptions about the future are almost always wrong,” he says. “We can never think of everything, but we can take sensible steps to protect ourselves from life’s inevitable surprises.”
Rely on your life plan and not on a financial plan. “The notion that plans are worthless probably sounds funny coming from a guy who makes a living as a financial planner,” Richards says. “But it feels really good to say it in public. A plan assumes you know what’s going to happen — even though you don’t.” However, the process of financial planning is vital, he contends. It requires you to chart a course headed in the direction you want to go.
Know what you really want. I love this point. “When someone asks you what you really want out of life, you’re probably not going to say you want an investment that delivers good returns. Your financial decisions should align with what you know about yourself and the world.”
What Richards offers is common-sense investment advice that has become far too uncommon.
I’ll be hosting a live online discussion about “The Behavior Gap” at 9 a.m. Pacific, Feb. 2 at washington post.com/conversations. Richards will be joining me to answer your questions.
Washington Post Writers Group
Win the book
Every month, I randomly select readers to receive a copy of the featured book, which is donated by the publisher. For a chance to win a copy of Richards’ book, send an email to colorofmoney@washpost.com with your name and address.
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