The Behavior Gap is one of the books that I set out to read for my personal finance goals of 2017. It is often recommended by personal finance gurus.
The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money is written by Carl Richards, who is a financial planner, writes for the Bucks Blog at The New York Times , and Is a columnist for Morningstar Advisor. It is a very easy read and I read it in two days. The unique thing about The Behavior Gap is that he draws these graphs with Sharpies that make real sense and he breaks difficult personal finance concepts into very easy-to-understand pictures.
At times I did find it a bit redundant because I didn’t feel like I was learning a lot of new material. However, it is a good refresher for someone already interested in personal finance, and for someone who is new to personal finance and interested in taking care of their own money, I would highly recommend the book.
One of Richards’ main premises – which I whole-heartedly agree with – is that being a good investor isn’t necessarily about skill and knowledge and being able to time the market, but it is about discipline. It is human nature to buy high and sell low because of fear, and he reinforces that people should just tune out the white noise and ignore the chatter in order to grow your portfolio. Initially I listened to the white noise, I panicked and sold a lot of stocks out of my TFSA and RRSP in the market crash, but as I developed my own investing style and personality I began to tune out the white noise.
Here’s an Outline of The Behavior Gap
Chapter 1: We Don’t Beat the Market, the Market Beats Us
- Basically we can only blame ourselves for crappy returns because investment mistakes are investor mistakes, and we can also blame our emotions, fear and greed for this.
Chapter 2: The Perfect Investment
- Don’t bother with stock tips an trying to find the next Google or Netflix because you likely won’t find it.
Chapter 3: Ignore Advice, Make Fun of Forecasts
- Ignore financial gurus (like Jim Cramer who announces the next stock tip and everyone rushes off to buy).
Chapter 4: Financial Life Planning
- I liked this chapter because it emphasizes focusing on experiences rather than material goods and also focuses on what you want out of your life (hint, it’s not to keep up with the Joneses). Like it or not, money plays into helping our dreams come true.
Chapter 5: Too Much Information
- Ignore the market, ignore the hoopla, ignore The Economist because people who read that mag think they are better than you.
Chapter 6: Plans are Worthless
- Even if you have a solid financial plan mapped out, life gives you a curveball… focus on things that matter to you
Chapter 7: Feelings
- Step away from your ego and dissociate from it because investing can be full of regret (e.g. me selling Visa a few years back)
- Control your emotions and be disciplined
Chapter 8: You’re Responsible for Your Behaviour (But You Can’t Control the Results)
- Be careful about investing just to get higher income (e.g. what I did previously with buying preferred shares) because that may not always be the best return. Same goes for making decisions about investing just based on tax implications (like when I purchased these mutual funds just to get a tax refund and saw the value of the mutual fund decrease by 80% which was a great financial lesson for me).
Chapter 9: When We Talk about Money
- In this chapter, Carl Richards talks about relationships and money and how we should have open conversations about money but not force the other person to mold and have similar values as us because people are all different.
Chapter 10: Simple. Not Easy.
- Finally, the author reinforces that it is going to be a slow process investing, and there’s nothing exciting about it but that it just takes time and discipline, there’s no instant gratification involved. I have to wonder if given these parameters, Mr Richards is a fan of super simple investing solutions such as ETF investing or robo advisors.