In This Show:
The Behavior Gap
The concept of the “behavior gap” is a significant issue in the world of investing. Carl explained that the behavior gap represents the difference between the returns an investment could achieve and the actual returns investors experience due to poor decisions based on emotions and behavior. While an investment may promise a certain percentage return if left untouched for a decade, most investors in reality don’t behave in a way that allows them to realize that return. Good investing flies in the face of what we are taught in nearly every other part of our lives. In most parts of life, the harder you work and the more energy you put into something, the better the return will be. Investing is one of the rare places that you are rewarded for doing less. And that can be hard for us to remember.
Carl explained that instead of staying the course, investors often react to short-term market changes or hype in financial media. They tend to buy high when a fund is performing well and sell low when it dips, leading to suboptimal outcomes. This difference between the potential and actual returns is what he has termed the “behavior gap.” He talked about the gap being largely due to normal human instincts. We are driven to seek safety and avoid pain, so it makes sense that, if we are watching our money drop in value, it can be extremely difficult for us to leave it alone even if we know that effective investing happens over a long time horizon.
Carl emphasized that the behavior gap is not just about investments but extends to other financial decisions like spending and insurance. Even well-intentioned actions often lead to less-than-ideal results because they are driven by emotions rather than rational analysis. For example, switching between funds based on short-term performance or media suggestions is a common behavior that exacerbates the gap.
He also discussed how some financial advisors have taken advantage of this concept to justify their services. While advisors can add value by helping clients avoid the behavior gap, they can also inadvertently contribute to it if they’re too focused on frequent trading or reacting to market fluctuations.
Despite decades of research and increasing awareness, Carl pointed out that this behavior remains persistent. Even with the rise of behavioral finance studies, people continue to make the same mistakes. This persistence is rooted in our evolutionary psychology where following the herd and seeking security is deeply ingrained in us, making it hard to change even when we know the consequences. Overcoming the behavior gap requires a mindset shift. It’s not about finding the next hot investment but maintaining discipline and sticking to a long-term plan, even when it’s uncomfortable—Carl acknowledged this is easier said than done, given our natural tendencies and the counterintuitive nature of effective investing.
More information here:
Michael Kitces on the State of Financial Planning
Why Staying the Course Is Hard
What Can We as Investors Do About the Behavior Gap?
Carl said to succeed as an individual investor, it is important to focus on the right principles rather than getting caught up in constant market shifts. He shared how he initially struggled with constantly changing investment strategies despite having the best training and working for top firms. Over time, he realized the solution is not about constantly finding better funds but about sticking to a plan that aligns with your personal goals.
The key is understanding why you are investing the way you are. Many people base their choices on tips from friends, articles, or industry familiarity, but these are not acceptable places to determine how you invest. Richards suggested that the correct approach begins with defining your values. Your values then inform your goals, and those goals should drive your portfolio decisions. In essence, you should ask yourself, “What am I trying to achieve?” and “Why do I want to achieve it?” before even thinking about specific investments.
For example, if your value is freedom, your investment strategy might look different than if your value is accumulating wealth or influence. Once you’ve identified your values and goals, you can design a portfolio that gives you the best chance of meeting them. This portfolio should guide your investment choices rather than letting individual investments dictate your strategy.
Carl said the order you do this matters a lot. First, determine your values and then your goals. You follow that by making a plan, and lastly, you select the investment products. Most people—and even the financial industry—get this backward by focusing first on products, which leads to short-term decisions and ultimately bad outcomes. This sequence ensures that your investments remain aligned with your deeper purpose even when the market fluctuates.
More information here:
Finding Your ‘Why’ for Your Desired Financial Behavior
For Docs, It’s Not Just About Financial Literacy; It’s About the Behavior That Gets You There
The Society of Advice and How to Find a Real Advisor
Carl agreed with Jim that the financial advisory industry is a mess and is difficult for even financially educated people to navigate, let alone the average person. There is so much complexity and mixed incentives. Carl emphasized that while the industry as a whole can be frustrating and riddled with conflicts of interest, there are still highly skilled, honest advisors who truly have their clients' best interests at heart. Unfortunately, finding these real advisors is challenging.
Richards founded The Society of Advice to address this challenge, aiming to connect people with advisors who genuinely act in their clients' best interests. He set a high bar for membership, asking whether an advisor was someone he would personally recommend to his mother. The Society aims to shift the focus from selling financial products to offering genuine, unbiased advice. These are advisors who diagnose before they prescribe, who take the time to understand their clients’ unique goals, and who operate transparently about their compensation and potential conflicts of interest.
The challenge with such a society is that there simply aren’t enough of these high-quality advisors to meet the demand. Many of the best advisors are either terrible at marketing or have full practices and long waitlists, making it even harder for people to find them. Despite this, The Society of Advice continues to be a concept that resonates with those who are tired of the traditional financial services model and are seeking something more trustworthy and client-centric.
For people looking to find a reliable advisor, Richards suggested starting with some basic checks, although he admitted that even these steps cannot guarantee you will find a real advisor. He suggested first ensuring the advisor is a Certified Financial Planner (CFP). He said he knows many excellent financial planners who are not CFPs, but it is a good requirement if you are not sure where to start your search. He also recommended finding an independent advisor who is a fiduciary and is willing to take the time to listen and understand your specific situation. A good advisor should diagnose your needs before offering any financial solutions, much like a doctor would before prescribing medication.
One key indicator of a trustworthy advisor is whether they focus on asking questions and truly understanding your financial goals rather than immediately pushing specific products. If you feel like you’re being sold something rather than advised, that’s a red flag. It is important to ask direct questions about how the advisor gets paid and if there are any conflicts of interest—like commission-based compensation—that could influence their recommendations.
Carl pointed out that conflicts of interest are inevitable in financial planning. The difference between a real advisor and a less reliable one is how openly they discuss and manage these conflicts. Real advisors will be transparent and willing to address any concerns you have about how their compensation might impact their advice. For those who only need occasional guidance rather than full-time management, it can be harder to find an advisor who works on an hourly or project basis, as most established advisors focus on clients who want them to manage their entire portfolio. Despite this, there are some advisors who cater to this middle group, or validators, who just want a little help. There are advisors who offer check-ins and tailored advice without requiring ongoing management. Finding a real financial advisor requires doing some homework, asking the right questions, and being aware of the potential pitfalls within the industry. With some patience and diligence, it is possible to find someone who aligns with your goals and can help you navigate your financial journey.
To close the conversation, Carl asked everyone to remember that money is just a tool. It is settled doctrine at this point that the things that will matter to you on your deathbed are the time and the experiences you had with the people you love and the difference you made in individual lives. It is so easy to forget this and to focus solely on making more money and acquiring more things. He said to remember what brings us lasting happiness and to prioritize those things over everything else.
You can learn more from Carl at The Behavior Gap and The Society of Advice.
If you want to learn more from this discussion, see the WCI podcast transcript below.
Milestones to Millionaire
#185 – Communications Pro Hits Quarter Million Dollars
Today, we have a communications pro on the podcast who is only a few years out of college and has already reached a net worth of a quarter million dollars. He attributes his success to his dad who taught him from a young age the power of compounding interest. In addition to traditional means of growing wealth, he has had success dabbling in things like crypto, NFTs, and sports betting. This guest is a great example of showing that there is more than one way to have financial success and that we all need to set our own goals and follow our own path.
Finance 101: Don't Time the Market
The financial markets can be unpredictable, and recent events highlight this. Following a jobs report that came in lower than expected, the stock market reacted with a significant drop while bonds rose in value. These shifts sparked speculation that the Federal Reserve might cut interest rates more than initially anticipated. The relationship between stock and bond prices often sees them moving in opposite directions based on economic outlooks, and this pattern held true once again. Despite such fluctuations, the key thing to remember is that attempting to time the market is rarely successful. Your focus should be on staying invested over the long term rather than reacting to short-term market swings.
It's common for people to overanalyze their investments, spending way too much time monitoring the markets or reading articles about their preferred assets. This level of engagement certainly isn’t necessary and is definitely not recommended. A more effective approach is the “set it and forget it” strategy. Check your investments only occasionally and make adjustments only when new funds need to be allocated. This approach reduces the likelihood of making emotional or rash decisions that can harm your portfolio. A long-term mindset with patience and consistency is far more beneficial for wealth-building.
When it comes to bonds, understanding how they work is very important. Rising interest rates initially hurt bond prices, but over time, they can lead to higher returns as bonds are reinvested at better rates. On the flip side, while falling rates might temporarily boost bond prices, they result in lower yields for future investments. The key is not to get too excited or discouraged by these shifts. Consistently contributing to your investment accounts, adhering to a solid financial plan, and resisting the urge to make hasty decisions are the best ways to achieve your financial goals. In the end, successful investing is about staying focused on your own goals and not getting distracted by the noise in the markets.
To read more about the importance of not trying to time the market, read the Milestones to Millionaire transcript below.
Sponsor: Southern Impression Homes
Sponsor
Today’s episode is brought to you by SoFi, helping medical professionals like us bank, borrow, and invest to achieve financial wellness. SoFi offers up to 4.6% APY on its savings accounts, as well as an investment platform, financial planning, and student loan refinancing featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at www.whitecoatinvestor.com/Sofi. Loans originated by SoFi Bank, N.A., NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, Member FINRA/SIPC. Investing comes with risk including risk of loss. Additional terms and conditions may apply.
WCI Podcast Transcript
INTRODUCTION
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.
Dr. Jim Dahle:
This is White Coat Investor podcast number 382 – The Behavior Gap with Carl Richards.
This episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com/sofi.
Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. This brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.
QUOTE OF THE DAY
Let's do our quote of the day to start with today. This one comes from Suze Orman, who said, “A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life.” That's really what it's about. Taking care of your money is just a small part of your life, but when you're doing it right, it becomes an almost non-existent part of your life, and you can focus on the things that really matter.
Thanks to all of you out there for listening to the podcast. Without you, there is no podcast. You're an essential part of the podcast. Yes, we have guests. Yes, we have a host. Yes, there's certainly Megan and Wendel working hard on the podcast, but we're not going to make this thing if you weren't listening. Thank you for being there. Thank you for your feedback and helping us improve this over the years. We appreciate you being out there and spending some time with us each week.
By the way, if you're looking for an easy side hustle, a little bit of extra cash, you might want to check out paid surveys. These are particularly good for many specialties, most of those specialties that prescribe expensive treatments, but all specialties can get some surveys. whitecoatinvestor.com/survey is where you can learn about all of those companies.
We've got a great interview today. We've got Carl Richards on today. If you don't know who he is, I'm going to introduce him momentarily, but he's somebody you ought to know about. His work has really made an impact, I think, on a lot of people, a lot of financial advisors, a lot of individual investors. And I think you'll appreciate hearing directly from him.
We've actually been trying to get him on for years now. He contacted us after reading, get this, reading a write-up I did and published on the website, never ran it on the blog, but an article about a climb I did in the Tetons. It reminded him that he was supposed to come on the podcast with us. He contacted us and we got him right on. I think it's just a great interview we had. I hope you enjoy it as much as I did.
INTERVIEW WITH CARL RICHARDS
I'm excited to have our guest today on the White Coat Investor podcast. Our guest is Carl Richards. He's a certified financial planner, but that's probably not what you know him from. He probably isn't your financial planner. You probably know him from some of his books. He's written a couple of books, one of which is very famous, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money”, but also one that I love the title of “The One-Page Financial Plan: A Simple Way to Be Smart About Your Money”.
He's been on all kinds of places. He had a sketch column in the New York Times for a decade. He's been on Forbes. He's been on Oprah. He's been on all kinds of places, Marketplace Money.
I actually first heard about Carl in a very introspective column he wrote. You probably remember this, I'm guessing. I think it was back in 2008, about the time you moved out of Las Vegas. I'm like, “Well, this is somebody interesting I should pay some attention to.” I've been following your work for the last 15 years. I'm excited to have you on the podcast today. Welcome to the podcast, Carl.
Carl Richards:
Thanks, Jim. Likewise, the impact that you've made is really, really fun to watch. Just the compounding of that impact has been super fun. Thank you.
Dr. Jim Dahle:
Yeah. We're going to talk about all kinds of stuff today. We're going to talk about The Behavior Gap. We're going to talk about the financial advisory industry and society of advice and what real financial planners are. We're going to talk about mountains and risk and some of the projects you're working on now, because that's a love that we share.
CARL RICHARDS CAREER AND WHAT HE IS DOING NOW
Tell us a little bit about what you're doing now. What does your career look like right now? What are you doing with your time?
Carl Richards:
I don't know how to answer that question. It's funny, because my kids are always like, “How do we explain this?” I'm like, “I don't know. Just tell them that I get unmarked bills and giant satchels outside the house.” Typically, to get out of the question, I just say I'm an author. But the truth is, I just think of my career as a series of projects about trying to find meaning in money, to connect that, and really to help myself.
Largely, I think of my work as an adventure journal far more than I do self-help. It's my own journey of trying to align my use of capital. I can feel myself trying to even draw this for your listeners. If you would imagine a Venn diagram, and if there's any Venn diagram police on the episode listening, don't send me an email. I've already gotten it. It's fine. It's just a circle sketch. It's not a big deal. There's some trauma involved with the Venn diagram police.
One circle says “Your use of capital.” And capital has an asterisk, and the asterisk says time, money, energy, and attention. Time, money, energy, and attention. Your use of capital. The other circle says, “What's important to you?” Trying to get alignment around our use of capital and what's really important to us, that's really what I think of as the work that I do. Then that work takes various artifacts. It could be a book. It could be a podcast. Could be work on our TV show. It could be a bunch of different things. It has different audiences. I think of it as the humans, and that's where the books go.
Then I also do a lot of work trying to help financial advisors do the work that they need to be doing in our industry. Speaking broadly, the financial services industry is a mess. You don't need me to tell you that. It's a disaster, but I'm still convinced there's a core group of financial planners that I call real financial planners. That's another part of my audience is trying to help them do that work. That's essentially what I think of as my career right now.
Dr. Jim Dahle:
You're not doing direct financial planning with any clients right now. Is that correct?
Carl Richards:
No. I've got whatever, some friends and family, but I don't have any clients. I sold that firm back in 2012.
Dr. Jim Dahle:
One of the most interesting things about your work is so much of it is visual. It's sketches. Your sketches have been like an art display at an art museum. Why the sketches? Why that visual component? How did you get into that?
Carl Richards:
It's interesting as this started sitting across the table from a doctor. One of my clients was an ER doctor and his wife was a technical sales rep. Two very smart, really successful people. I was never a doodler. I didn't take art class. I took a pottery class when I was eight at the Kimball Art Center where I lived in Park City. But I didn't think of myself as visual at all.
There I was sitting across the table from these two really smart, they were friends, but they were also clients. I was trying to explain a concept to them that I thought was really important for them to understand in order for us to make this important decision about their money. And I was getting nowhere. I remember having the distinct feeling of, “Wait, these are two really smart, intelligent people. If I'm just getting blank stares, they're not the problem. I must be doing something wrong.” And I thought I was good at explaining things simply and clearly, but I just couldn't. Honestly, an act of desperation with those exact people.
There was a whiteboard in the office that I was using. It wasn't even my office, my conference room. There was a whiteboard. I stood up. I was like, “No, like this.” I drew squares. You've seen the work. It's not hard. I drew squares and arrows. I remember, their names are Dave and Diane. I remember Dave was like, “Oh, I get it now.” I remember thinking, “What was that?” I became addicted to that feeling of insight. I did it again. Then I did it again, and I did it again, and I did it again. Then I started doing it in public. Then the editor of the New York Times said, “Hey, we love these. Would you do them for us?” I knew well enough to say yes to that. Then it just has never stopped.
Now I realized what it is, is I don't have a lot of mental RAM. I want to absorb deep, I want to consider the nuance and the edge case of a problem, dive really deep into it. Then as soon as I can, my whole goal is to simplify it, figure out what is it that matters.
In that distillation process, there's some editing that goes on that I'll get it wrong. I might leave out nuance that was really important sometimes. I often do. But when I get it right, I've nailed the thing. I almost think of it as if I had to have a souvenir of the learning experience, almost like a logo, I could wrap it up in this one symbol. And then I can clear out all that mental RAM to start with the next problem. That's how they happen.
Dr. Jim Dahle:
I love it because that's when you know you really understand something, is when you can simplify it to its essential parts.
Carl Richards:
Yeah.
WHEN BEING LAZY IS REWARDED
Dr. Jim Dahle:
The financial world in particular is so complex that people get lost in the details and they need that simplification. They need a framework on which to hang the details, but too many of them are lacking that framework.
Carl Richards:
Yeah. You've pointed to this in a number of places that there's only a few things that really matter. When it comes to investing specifically, if you get just a few things right, you're as good as 99%. Most of what we hear in the financial pornography news, the financial pornography network and the entertainment industry that goes along with it, most of it is just entertainment, but the stuff that is smart is about the last 1%. You can spend all your time debating the 1% and then you miss one behavioral mistake, for instance. Build the best portfolio ever created ever, misbehave one time in a decade, and you may as well own CDs at the bank.
I would much rather get, if we can get you to 95% by investing in low cost diversified index funds, and you behave, you'll outperform 99% of your neighbors. The stuff that actually matters is relatively simple, not easy, but relatively simple when it comes to finance. The hard part is ignoring all the complex noise that distracts you and thinking you should be doing more. You get paid, paid really well, rewarded for being simple and lazy. That's what I'm trying to get at, and you've pointed to the same stuff.
Dr. Jim Dahle:
It's cool because it's one of the few things in life where that's true.
Carl Richards:
Which is why it's so hard.
Dr. Jim Dahle:
Doing less and being lazy is usually not rewarded.
Carl Richards:
Which is why it's so hard for people like you and your audience, you're used to the more effort I put into this, the more energy. Entrepreneurs are the worst investors in public markets on the planet. Real estate developers might even be worse, because they're used to, if something goes wrong, I can get in there and fix it, get it rezoned, paint it, remodel it. You're saying to that person, “Hey, that behavior will actually hurt you over here.” I think that's why it becomes so hard.
THE BEHAVIOR GAP
Dr. Jim Dahle:
Absolutely. You've called it the behavior gap. I don't know if you coined that term or not, but certainly you've got the book that's called The Behavior Gap. Tell us what the behavior gap is.
Carl Richards:
I'll give you the progression of it really quick. It started as a very simple concept, and it's that if you look at the average investment, and it sounds silly, but I know I didn't get it. There's a difference between investments and investors. In an investment, if you open the newspaper, the old foldout newspaper, and you see an ad for a mutual fund that says “This fund returned 10% a year for 10 years.” So, it averaged 10% a year for 10 years. That's the investment return. That's the return you would have gotten if you put your money in at the beginning of that time period, and you left it there. You didn't add or take any away. You left it there for the full 10 years.
The problem is no one, in asterisks, no one but your audience, no one behaves that way. Instead, what we do is we put some money in. We read something in the financial pornography magazine that says “10 Funds You Should Own Now.” We buy one of those. They do well for a couple of months, and then they do what they normally do. They have just a normal cyclical downturn. You wake up 18 months later, and you're like, “This fund has been terrible.” You pick up another magazine that you see that says something like, 10 Funds That Sizzle, and you sell your one, and you buy the other one.
Now you've bought high, sold low, and you've bought high again. What ends up happening is if you take the average return that investors earn, and I can give you lots of specific examples, but if you were to graph these two, you'd have a bar graph with two bars. One's the investment return, and you'd put a number on it, which I've stopped putting numbers on it because everybody wanted to debate the numbers, and they'd miss the point.
You'd have the average investment return at, let's just say, X. The average investor return is something below X. And that difference in the return, I just labeled that the behavior gap. It could only be due to behavior. Minus transactions and taxes, like just all those things set aside for a second, it was due to behavior.
By the way, normal genetic human behavior. We are hardwired to get more of what gives us pleasure and security, and run away as fast as we can from things that cause us pain. When we buy an investment, and it goes down, we perceive that as dangerous and painful. I don't really care what you tell me. If my hand is on a burning stove, I'm going to take it off. It's normal behavior.
I'm not making fun of the stupid humans. I could give you tons of examples of doing this myself, but that's what the behavior gap was, was this idea that if you just held on to a “mediocre”, an average investment, and you just behaved well, you would outperform 99% of your neighbors. I labeled that the behavior gap.
Now, I've let it expand a little bit to any well-intentioned behavior that produces a suboptimal result. I could give you examples around spending, and insurance, and all those other things. In finance, there are often well-intentioned behaviors that feel like the right thing to do, that actually produce a suboptimal result. I would include those in the behavior gap.
Dr. Jim Dahle:
Yeah. That'd be good to talk about some of those other examples, because I've certainly heard the term most frequently, and exactly the way you described it, that it's the difference between what the investment is earning and what you're earning. I don't know if this was your influence at Morningstar that caused them to start doing this, but they tried to calculate it. At least for a while, they were showing the difference between the time-weighted investment return and the dollar-weighted investor return. My recollection is they were showing gaps of 3% or 4% between those two long-term.
Carl Richards:
Yeah. Look, this has been abused pretty blatantly by the advice industry to say, “This is how advisors add value.” While some of that is indeed true, I've also seen advisors are often the cause of, because they're the ones watching all the time. So naturally, human, and they're trying to help their clients well-intentioned, trying to help their clients find new things, and they change around.
But I would say, if you were to put a number on it, I always sort of average it out to 1%. There are examples of it being way more than that. There are examples of it not existing. It's hard, because I had this conversation with some really well-known academics, Nobel Prize winners, actually, if this was true, then we could trade against it. And we can't really find a way to do that. And so, I don't know how, I'm careful now to be like, “This thing absolutely exists, and it's the proof of my…” I'm just saying, anecdotally, with every person I've worked with, I've seen this happen over and over and over.
Dr. Jim Dahle:
But you've been talking about this now for a decade.
Carl Richards:
Two.
Dr. Jim Dahle:
Two decades. We've now got all kinds of behavioral finance science out there showing these problems that we have, the way we think and how it applies to our finances. As near as I can tell, it's not changing. This behavior is persistent, the gap is still there. Why is it so persistent? Why doesn't the knowledge that it exists help us to decrease the size of it?
Carl Richards:
Yeah, isn't that interesting? I thought my favorite line or two in Kahneman's book, “Thinking Fast and Slow” was, and I'm totally paraphrasing here, but he said something in the introduction about how his hope in writing the book wasn't that behavior would change. His hope was that next time he did something silly, you'd know what to call it. Because he's like, “I can't figure out how to get behavior to change.”
Now, I think this is because I think there's some things around awareness, just simple awareness that are really helpful, which I wish we would do more of in our industry. In fact, that's really my prime focus right now. But I also think the reason that it's so persistent is because we're relatively new at this game genetically, you know what I mean? The idea that you should do whatever the herd does around you is far more hardwired in us than that you should not.
Buffett says, he has two great quotes. “The hallmark of our investment success is benign neglect, bordering on sloth.” That's one. Another one is “I try to be greedy when everyone else is fearful, and fearful when everyone else is greedy.” That statement, oh, that's pithy and cute. Well, try it. It’s much harder. The market is up, and you just got a bonus, and everyone around you, the TV, your neighbors, the financial pornography network, the radio, everyone around you is talking about how great the market is. We could use something even more specific, like crypto.
And we could go back to 1997, 1998, 1999. And I remember this, 1997, 1998, 1999 was just like crypto for the technology market. Cisco and Microsoft and all of those companies going crazy.
Dr. Jim Dahle:
Pets.com.
Carl Richards:
Yeah, and even getting deeper into the dot-com stuff. And if you were smart, you would be like, “This is silly, this is silly, this is silly, this is silly.” The cover of Fortune or Forbes had Warren Buffett, “Has He Lost His Touch?” It got harder and harder and harder to not just say, “Oh, you know what? I’ve got to go with the herd.” And so, I think that wiring, herd behavior, taking the recent past, it's called recency bias, taking the recent past and projecting indefinitely into the future, wanting more of what gives us safety and security.
All of that wiring is older than investing. And then there's so much that is counterintuitive. If you were to hire a new basketball coach, it would be totally reasonable to look at their record and assume that that would at least persist. If you were to do something as simple as get somebody to remodel your kitchen, you would probably go look at the past projects they did and expect your project to be a little better.
Last one, MBA 101. You have two divisions in your company. One's doing well, one's doing poorly. 101, kill the one that's doing poorly, reallocate the resources to the one that's doing well. It makes total sense. In the investment market, that would be selling low and buying high. It doesn't make sense. I think there's just wiring that's really, really persistent.
WHAT CAN WE AS INVESTORS DO ABOUT THE BEHAVIOR GAP?
Dr. Jim Dahle:
So, what's the individual investor to do?
Carl Richards:
Yeah, yeah. This is such a good question. I originally thought when I first found this, I was about to leave the industry because I could not get this right. I had the best training and it was like every 18 months we were changing everything. I was like, “Man, that just doesn't make any sense.” I was at the best firm. I had the best training. I'm not a dumb guy. I'm pretty competitive. I was like, “Get out, I'm leaving.” And then I discovered some of this research and I was like, “Oh, it's not just me.” And what the research told me was I could just buy the average. I could buy a mediocre fund. I could even buy a, heaven forbid, I could buy an active fund with a commission in it. If I held on, I'm not saying you should do that by the way. I'm just saying any one of those things, if I held on for 20 years, I would look around and be happier.
I thought it was just education. And then we get to this problem, the Kahneman’s problem we just talked about. Then I thought it was like, “Okay, if we link goals, the investment decisions to goals, maybe that will help behavior.” And that helped. But what I found is, us humans were really good at telling stories. So, if the investment behavior is painful enough, then we'll change our goal. We'll say, never mind.
I think the thing that individual investors have to do is take the time to get really clear about why you're doing this in the first place. You should be able to answer the question, “Why is your money invested the way it is?” I've been asking that question for 10 or 15 years as a hobby on planes, trains, automobiles, everywhere. And the normal answers I get is, the really smart people will whisper, like I read about it in The Economist. Other people will say “My neighbor told me about it, I read it on the news.” Or they may say, “I work in this industry, so I'm going to buy this pharmaceutical company”, for example.
That's not the right answer. The only right answer to why you've built and so intentionally designed this portfolio, the only right answer is this portfolio gives me the greatest likelihood of meeting my goals. You've got to know a bunch of things there. You got to have defined goals. And I think even beneath the goals is values. If you're optimizing for freedom, that's a different portfolio than you're optimizing for wealth or influence or power.
In my statement of financial purpose, that's what I call this state. My statement of financial purpose is time with my family, mainly outside. Sometimes I switch that around, time outside, sometimes with my family, that's just a joke. Time with my family, mainly outside, in service in my community, and my church. That's why.
Well, then I can take that and say, “Okay, what would that look like to operationalize that?” Put some framework around it. I'd call that a goal, but those goals are built on top of values. And then I take the goals. I say, “Okay, great. What portfolio should I have to help me meet those goals?” Then I take the portfolio and say, “Okay, what investment should populate the portfolio?”
If you do any of those in the wrong order, you are on a treadmill to disaster. Because if you pick the investments first, well, then they'll change and they'll do their normal thing. And you'll be, “Yeah, this was a bad idea. And why did I buy this?” And then you're shame and blame, and then you're out. It's got to be in that order. Values, goals, plan, product. It's got to be.
And all of them are important, but the only one we ever talk about is the product. The whole industry is built around arguing, debating the merits of a plane, taking a plane, train, or an automobile on a trip before you've decided where you're going.
So, that's what you do. That's what the average investor should do. Get a statement of financial purpose, define your goals, build a portfolio based on those goals, and then look for product to populate the portfolio.
Dr. Jim Dahle:
A real financial plan.
Carl Richards:
Yeah.
Dr. Jim Dahle:
That's what people need to do.
Carl Richards:
Yeah.
Dr. Jim Dahle:
That's what you're describing. This is what the process of financial planning is.
Carl Richards:
Yeah, done correctly. You're exactly right. That's why I'd use the word real.
WHAT THE MOUNTAINS TEACH US ABOUT RISK
Dr. Jim Dahle:
Yeah, very cool. Now, let's turn the page a little bit. You're working on a project, or thinking about working on a project, in the beginning stages of a project about mountains and risk, and I find this absolutely fascinating because time in mountains is something we both enjoy. Tell us what you're working on there and why you find this so interesting.
Carl Richards:
I spend a lot of time in mountains like you do, and a lot of that time is spent in uncertain environments and navigating that type of uncertainty where there's a set of objective hazards that you just can't get rid of, but you can certainly make some decisions to avoid terrain where you can limit your exposure to those objective hazards, and you could even get it close to zero, maybe the same as getting hit by a car while golfing or something. You can get it down to that level, but most of the time when you're in the mountains, you're always playing with some objective hazard that you can't get rid of.
Being honest about that and then understanding there's a core set of principles around navigating uncertainty that I wish I'd known 20 years ago that are really fascinating to me because in the mountains, if you pretend, you can't pretend very long. The mountains are really honest, and you can't just chant to yourself that you're good at something and survive. You do that and you die.
You actually have to have some skill, and you have to be honest about your skill and the hazards, and I think there's a lot, so much of what goes on in the markets and our money, we're just not even aware of the risk. There's some really interesting data around how many years of history does a mutual fund, for instance, how much track record do you have to have from a mutual fund to know whether or not that investment manager had skill? 64 years before I can even start to understand that. Well, there's no mutual fund manager with 64 years of history. Buffett doesn't even have 64… I mean, he's getting close, but there's no manager with 64 years of history, and yet we in like three and a half months will make a decision. I find that the lessons I'm learning in the mountains are incredibly valuable for the markets and the way I invest. So, that's why I'm engaged in that.
Dr. Jim Dahle:
You live in Park City, I suspect you do some backcountry skiing, and I think there is very little else that can compare to this risk. There's this risk underlying backcountry skiing of avalanche. It's there, we know the factors that increase it, new snow increases it, wind loading increases it, you get up above 30 degrees slope, that increases the risk of it sliding. But the actual risk showing up is an on or off event. Either the slope slides or the slope doesn't slide.
And I hate the sport for this one reason. The one reason I hate it is the better the skiing, the higher the risk. The steeper, the deeper, the newer the powder, the higher the risk, and I hate that about backcountry skiing. You can go out there and have a pretty darn low risk day that just is boring skiing, it's not that fun. It's low angle, you're stuck in the trees, and the snow is four days old, and it's a little sunbaked, and it's not that fun.
I think that applies to investing in some ways. That this risk, you want to push the edge a little bit, but you don't want to go over, like the price is right, you want to get as close as you can to it without the slope sliding on you. You want as aggressive a portfolio as you can handle without panic selling in a down market. But do you have any thoughts on backcountry skiing and how it can apply to life?
Carl Richards:
Yeah. And first, I would challenge you on it's not that fun. I started calling myself. The last two seasons here have been good. Two seasons ago was historic, last season was still great. I started calling myself Dr. Low Angle, and I just started farming low angle stuff. I was like, “Look, I'm not going to even put myself in that environment.” And I read the Avalanche Bulletin every morning, I've got a bunch of tech that helps with slope angles and understanding stuff, but I'm just not going to put myself in the environment where that's going to happen.
And I could tell you probably 10 stories from last season about like, “Oh my gosh, I'm glad we made that decision.” Because I would do a debrief after every single, I take my GPS route that we actually skied, and I would compare it to what I said I would ski, and then I would look at other things that happened that day and do a debrief video for myself and the people we were with just to remind ourselves of it, and I could tell you a couple of stories about, “Oh my gosh, we got lucky”, which even as Dr. Low Angle, we got lucky.
That's the first thing I'd say, but the second thing I'd say is what's really, to me, risk is an arbitrary concept until you experience it, and talking about getting punched in the face is completely different from getting punched in the face.
Dr. Jim Dahle:
Another area of risk in the mountains is the concept of solo climbing. People have seen Free Solo. And they've seen Jimmy Chin turn his face away from the camera as he's filming Alex Honnold on the hardest part of the climb. And that's how I felt watching it. I just had to look away. I couldn't watch. It was the same way watching The Alpinist. I don't know if non-climbers can watch that in one sitting, but I couldn't. I had to put it down and I had to walk away. It took me five or six sittings to watch that movie because when I'd see that drone footage of him 2,000 feet up, dry tooling some crazy climbing section, I knew how much risk he was taking.
But every real climber, every real alpine climber does at least a little bit of soloing. You have to on the approach to the climb or coming off it or you cannot belay every step of a 4,000 foot mountain and still complete the climb in one day. Some of it must be soloed and each climber has to decide what they're comfortable doing without a rope. And how they draw that line is fascinating to me, watching what some people do versus what other people do. How do you think that sort of risk can apply in our regular lives and finances?
Carl Richards:
Yeah, I love that example. I think there are two types of risk in this context. There's ignorant risk and there's honest risk. Ignorant risk is when you're just not aware, there's the unknown unknowns. And that's where you sort of see people making silly mistakes. In that example, that would be like, we see this in the mountains near our home, the Wasatch Mountains, where people will be up and they'll be unaware and they'll get themselves into a situation where they are scared and often end up really hurt or dangerous or rescued.
And then there's honest risk. We don't have the time to talk here about why does somebody take that kind of risk. Alex Honnold now is the most famous example. I think that's a pretty honest risk. He knows exactly what he's doing.
And I think when you think about things like leverage, and leverage could be as simple as how much money you borrow for a home, certainly the investment markets, how comfortable you are in terms of what we would traditionally call an emergency fund. Some people are very comfortable with two months of liquid investments. And some people can't even imagine being even able to breathe without five years of liquid investments.
But being honest about that risk, honest about that nature of risk, taking that with your eyes wide open, concentrated, and this would come up with some of your listeners, opportunities to invest in the company you work for, or in a stock that your buddy has some familiarity with, because he's involved in the technology that's going into a medical device. Knowing that, what would be the implications of that going wrong?
Sometimes I call this the overconfidence conversation. And this goes back a little bit to what we said earlier, that getting punched in the face is different than talking about getting punched in the face, but at least talk about it. What would happen if this went wrong? And this is the question I've asked. If you're thinking about making an investment that you're just like, “Oh man, this is an opportunity, this would finally make a big difference.” And you're thinking about making it, it's going to be a relatively dramatic shift in your portfolio.
I love asking the question, “Let's assume this goes well. Just like you think. it goes well. What would be different about your life?” Most of the time, the answers are kind of around the edges. I'd take an extra trip, I'd retire a little earlier, like around the edges. It's not dramatic.
Then you ask the second question, which is, “Let's assume that this goes terribly wrong, which is not out of the realm of possibility, but let's assume this investment goes to zero. How would your life be different then?” And most of the time, the answers are a little bit more dramatic. Like, “Oh geez, I might have to work for five more years.”
I think just using that simple question, “If it goes well, what would be different? If it goes poorly, what would be different?” And then I love the third question to me, ask it very gently to yourself is, “Have you ever been wrong before?” Just trying to elongate your definition of recent past, thinking back.
The good news with investing is it leaves a trail. And if you have a history of making these mistakes, like most of us do, at a certain point, if you have a history of understanding, you just shouldn't be soloing because you can't trust yourself.
Here's an example, mountain biking. I grew up mountain biking. We moved to New Zealand and the mountain biking there is different. This is before Enduro got really popular here. Enduro is crazy. I'm chasing my 16 year old son around with his friends. And we're on big long travel bikes and these guys are 10, 15, 20 feet in the air and I'm chasing them around.
And I got off one day, I was like, “What are you doing? If you fall, you don't bounce like these kids are going to bounce.” And I wouldn't want them to fall either, but it could be catastrophic for me. And I had to actually say, “I can't trust myself because there was so much muscle memory from riding when I was younger.” I was like, “I can't do that sport in that environment because I can't trust myself.”
And with investing, if you have a history of making mistakes, just be honest about the risk and say, “Maybe I shouldn't be doing this anymore. Maybe I should hire somebody to help me. Maybe I should only stick to Vanguard S&P 500 fund.” Whatever you do, put some guardrails around it because remember those mistakes, you only get one a decade. And if you can't do that, maybe you don't do it.
It's okay. It's not un-American to just buy CDs the rest of your life and take, what is it? Will Rogers, “Don't talk about the return on my money, talk to me about the return of my money.” So many people I know in their 60s and 70s would trade just having all the money back from their investment. That's crazy. In a market that's done 10 to 12, historically abnormal highs over the last 30 years, I know a lot of people that would just trade their investment results for just having all their money back.
Dr. Jim Dahle:
Wow. That's really an indictment of how we invest.
Carl Richards:
A lot of things. The whole industry, the whole thing.
Dr. Jim Dahle:
I like that bit about soloing though, because soloing, you make it to the top, you make it back down, no problem. Awesome. You had a great day. So you feel a little bit better, but if you fall, the consequences are catastrophic. They're dramatically different than the consequences of success and failure. And a lot of ways that's, that's what investing is. If you just stick with singles and doubles and quit going for the home runs, you wouldn't have the possibility of falling off the mountain.
Carl Richards:
Yeah. I love thinking about that in terms of the difference between the probability of an event occurring and the consequence of the event occurring. And my first experience with this was on the Grand Teton that I know you love as well. And I was up with a friend of mine. I was leading. We were on an easy route that I'd done multiple times. He's literally a rocket scientist, like a PhD in nuclear science or something.
He was following me up and I hadn't put in a lot of protection and he was fine because he was following me up. I was keeping him safe, but he made the argument that I wasn't safe. And he was a little bit upset with me. He was like, “That was irresponsible.” And I said, “There's no way I would have fallen.” And we were over this 2,000 foot black ice couloir. And I was like, “There's no way I could have fallen here. You'd have to jump to try it.” He said to me, “Well, but if you did, you would have died.” And he was focused on the consequence. I was focused on the probability.
And it's really interesting to think about that when it comes to investing. If you invest 2% of your portfolio and it goes poorly, that's a different discussion than if you invest 50% of your portfolio and it goes poorly. Knowing both, knowing both the probability and the consequence, that helps you determine what type of landscape you're making a decision in. And that helps you be honest about the risk instead of ignorant.
SOCIETY OF ADVICE AND THE FINANCIAL ADVISORY INDUSTRY
Dr. Jim Dahle:
I'd love to spend the whole episode talking about climbing, but I wanted to make sure we spent at least a little bit of time talking about the financial advisory industry. You were the founder of the Society of Advice. I think maybe in its first iteration, it was something like the Society of Real Financial Advisors or something.
Carl Richards:
That’s right, that’s right.
Dr. Jim Dahle:
But tell me why you founded that, why you think that's important. Give me your indictment of the financial advisory industry and maybe talk about how an individual investor can interact safely with it.
Carl Richards:
Yeah, it's interesting because Jim, I've watched your work over the years and you don't hold back, which is why people love you and why the advice has been valuable. When you see something, you call it like it is. I'll admit to occasionally being frustrated by that, but I understand that the frustration comes from the fact that there's a bunch of truth in it.
And here's the problem. The industry, speaking broadly, is a disaster. And a normal human, even somebody in the industry can't figure out how to navigate it. But a normal human outside the industry, it's impossible. When you go to the Toyota dealership, you know darn well what you're getting into. You do not expect them to tell you that a Honda would be better. But when you go to people in the financial advice industry speaking broadly, you don't necessarily know. You think you might be getting advice because it's couched that way. People even throw words around like fiduciary when they shouldn't be throwing those words around. In other words, they have an obligation. So it's really complex.
And so, my frustration with the financial services industry, and I've got to be really clear here, my frustration with the financial services industry, broadly speaking, is that the incentives are a disaster. Most people aren't even very good, I think I could go to many financial services conferences and ask people calling themselves advisors, “Okay, calculate a mortgage payment for me”, and they couldn't do that. It's a place where there's a bunch of people who should be selling shoes and are instead selling you investment products at first, and now even selling you financial plans as a product. I think we're on the exact same page there.
And then the reason I started the Society of Advice is, and this is a giant “and.” And you had to have listened to that. You have to get to this “and”, or else this doesn't work for me. “And there's a bunch of people who are really, really good at this. They're just really hard to find.”
I remember being frustrated with this in 2007, 2008, 2009, and that's when I first coined the phrase, “The secret society of real financial advisors.” Because it's like there's a secret society. And when I mentioned them to my journalist friends, they would look at me like I was talking about the butcher, the baker, the candlestick maker. Like “Cute story, Carl.” But there are, I know them. And these are crazy words, honest, people who are professionals, people who, especially when it comes to knit, specific occupations in the financial, the unique challenges that specific occupations face. People who can save, I don't even know what the right number would be, a multiple of their fee every year because of the advice they give.
That's why I started The Society of Advice. But the problem is they're really, really hard to find. And part of the reason they're really hard to find is there's not very many of them, to be honest. There's not very many of them compared to the whole industry. And when I say industry, I'm talking about insurance, banking, investments, CNBC, the whole industry. It's hard to find somebody who you would say, “I'll send my mom to that person.” That's how membership in the society of advice started. That was the question I'd ask is, “Would I send Sharon to you?” That's my mom's name.
Dr. Jim Dahle:
Yeah. The other problem is their practices are full.
Carl Richards:
Yeah. That's a whole other issue. The good ones.
Dr. Jim Dahle:
There's not enough of them.
Carl Richards:
The good ones have wait lists. There are a bunch of really, really good ones who just nobody knows about, and they're terrible at marketing because they're really, really good at what they do. And I'm convinced that if people knew what they did, there would be a line outside their door. And for many of them, there is a line outside their door.
There's not enough highly trained, highly skilled, honest advisors. There's so many slippery slopes in the industry, so many misincentives, so many human behavioral biases that can get in the way. It's actually a really, really hard job to do well, but there are people who do it.
Dr. Jim Dahle:
Yeah. The other issue, I was talking to Michael Kitces about this a few weeks ago.
Carl Richards:
Don't believe anything he says.
Dr. Jim Dahle:
And the dilemma is that the industry real financial advisors, they're very good at serving delegators. They're very good at these people that are like, “I need a money person. I want someone to take care of this. I see the value. I'm willing to pay for it.” And the resources are out there for the do-it-yourselfers. They can come and read blogs like mine. There's lots of books out there. There's great internet forums and subreddits, and they can get the support they need to be a do-it-yourselfer.
But there's this huge group in between, which Michael believes is the biggest group. I think he may be right. He calls them validators. People that need a little bit of advice. People that need someone to tell them, “Yes, you're doing it right, or you missed this one point.” And that is a very hard group for the industry to serve effectively. Why is that?
Carl Richards:
Yeah. First of all, that's right. And there's some really, really good research that Michael's leaning on around that. I think it's because most of the people that are in this industry for more than five or 10 years are making enough money that they don't want to try and figure out a different model.
way you would, and I've told plenty of people this, that validator population, what you need is a check-in every once in a while. “Okay, I'm making a really big decision. Can you do some research?” So, you need somebody who would bill you on either project or hourly, like a project-based or hourly.
Well, that's a harder business model than what most advisors are running now. And most advisors who are good either have a wait list or are on their way to one. So, when you just are making an allocation decision about how you should spend your time as somebody running a financial advisory, then you should be working with people who want to pay you to delegate this whole thing to you. And there are plenty of people who want that, and they're getting great value.
Delegators are happy. A delegator working with a real financial advisor is happy, thrilled, the way they describe their relationship. They're aware of how much they're paying. There's nothing hidden. They're thrilled with the trade. But if I've got a line of delegators waiting to sign up for me, it's hard to make the argument that I should go do hourly-based work.
Now we're seeing that change. There's more and more hourly-based planners, and it's a super frustration of mine, like yours. Because not only is it validators or do-it-yourselfers who are high income, there's also this whole population of people who aren't high income that you could argue need advice more, at least as much, but if not more, and aren't able to get it. We've been talking about this for 30 years in the industry, probably longer, actually, but I know as long as I've been around, we've been talking about it. How do we help?
Because as you pointed out at the beginning, it's not getting any better. People's relationship with money and the results they're having, investment experience, “Do I have enough money to pay for the car repair?” We've seen that stat. “How much do you have to save for retirement?” None of those numbers are getting better.
To me, if that's the job of, even more specifically, the financial planning profession inside the big industry, the profession, if that's the job, we're not making a lot of progress. But believe me, that profession is thinking hard about that, trying to figure it out, and it's just a hard challenge.
IS IT POSSIBLE TO RECOGNIZE A REAL FINANCIAL ADVISOR?
Dr. Jim Dahle:
All right. How can an individual investor, whether they're a validator or whether they're a delegator, how can they recognize a real financial advisor?
Carl Richards:
I knew this question was coming. It's impossible. My editor and I, Ron Lieber at the New York Times, tried to write this column every year. And Ron actually wrote it one year, and what he wrote essentially was, he said, “I need to hire a financial planner. I'm going to write about the process.” He hired an advisor, and I can't remember how many years, two or three years later, he got a note from the SEC about that advisor doing something bad.
And so, every time I went to write this column around a checklist, we would find counter evidence. I finally ended up with this is what I would do. Sign number one is, and this should resonate with your audience, “Do they diagnose before they prescribe?” And thoroughly. When I go to the doctor, that same ER doctor that I realized I had to do the sketches, he was also my neighbor.
And so, when I split my head open, he took me to the emergency room and sewed it up. And after that experience, I was telling him about this problem of trying to find out who's a real advisor. And it's a longer story, but he essentially said to me, “Hey, last time you went to the ER, what did you leave with?” I was like, “A little piece of paper.” And he's like, “Could you even read it?” I was like, “No, I couldn't even read.”
He's like, “What did you do with it?” I was like, “I went to a scary place with people with white coats and gave it to them, and they went behind the counter and they mixed things up, and then they came out and gave it to me, and I had to sign a form that said, yeah, if I grow a third arm, I won't sue anybody, and then I took it.”
He's like, “Why did you do that?” I was like, “Well, because I felt like I'd been thoroughly diagnosed.” He's like, “You didn't get a second opinion? You didn't Google the medicine? Don't click on images? You didn't do any of that stuff?” I was like, “No.”
So, the first tell is, and listen, we also have to be careful here because the criminals know this too, but the first tell is, “Did they take the time to actually really listen to you?” The first meeting or two should be about really understanding your situation, why you're there. Largely, nothing should come out of their mouth unless it ends in a question mark. If instead, it's like, “Hey, Jim, I've got blue. Oh, you don't like blue. I've got green.” If instead you feel like you're fending off car salesmen, not to degrade car salesmen, but if you feel that way, leave.
So, that's step number one. Did they take the time to listen and hear you? Do you walk out thinking, “Oh my gosh, that person asked me questions I'd never thought of before.” Did you learn something about your spouse that you didn't know before about money? Those would all be signs of like, “Oh, that's interesting.”
I think you can start with CFP. I think it's reasonable, I know lots of great financial planners who are not CFPs. But I think if I was just in the public trying to make a decision, I could make that cut pretty quick. I think if you want to, you could start with independent. I think anybody you could ask them, “Can you put in writing that you're a fiduciary?” Again, I know plenty of people who can't do those things that I would send my mom to. But if I was looking from a cold start, CFP, independent, RAA, and fiduciary would be a good start.
Dr. Jim Dahle:
Yeah, it's difficult.
Carl Richards:
What would you do?
Dr. Jim Dahle:
I've tried to do this. We try to have a list of advertisers. And I wrote a column once about the perfect financial advisor. And as part of that column, I had to confess that I couldn't find one. I couldn't find a perfect financial advisor that if I came up with this checklist of 30 things I think they ought to do or not do or whatever, there is nobody that meets every one of those criteria.
And so, every time we bring on an advertiser, it's “Well, is it good enough? Is that okay? I don't love that part of it, but is it good enough that it's going to meet people's needs?” And so, it's hard. My mantra is good advice at a fair price. Sometimes it's really easy. You just start with the second piece. And you're like, “No, they're not charging a fair price. So I'm not going to put them on my list. I wouldn't send anybody to them because it's obvious they're charging a bad model that even good people can’t overcome the incentives from.” Or they are just going to be too expensive? There's people willing to do good work for similar clients for a third of the money.
And so, sometimes it's almost easier to start with the price than it is to look at the quality of the advice. Although it feels like that's the wrong way to do it. It feels like the right way is make sure the advice is good because there is no price low enough at which it makes sense to get bad advice.
Carl Richards:
Yeah. I would tell you that one thing, this is one thing I did suggest is if you start with a price, you should be unashamed to say, “Wow, that sounds like more than I would pay somewhere else. Will you please explain to me, can you give me some examples? Help me understand why you're worth it. Can you just even hypothetically walk me through?” That's totally different than “Show me your returns.” That's a really, really dumb question. Don't ask that question and I can explain why, but it won't help you at all to ask an advisor to show you returns. But that's a different question. And so, I find real advisors don't shy away from that exact, direct, like, “Hey, explain to me the value here.”
And another great question is, it's two parts. One is, “Explain to me exactly how I will pay you.” The client saying this, “How will I pay you?” And then number two, “How much will you make from working with me?” Because sometimes there's other incentives that you at least want to know about. It doesn't rule somebody out, but as close to the same as those answers can be. If there's any difference between those answers, like, “Will you pay me this? And sometimes do you go on any incentive trips? Do you get paid by the products that you place?” Those are the kinds of questions. As soon as those questions are, “Yeah, I get paid on incentive trips or the products I place”, just ask for explanation. It doesn't mean it has to rule it out, but if they hide that, then it's like, yeah, there's enough to go interview other people. Or if they back away from that or you're not getting answers that feel clear.
And here's the last thing I'd say about that. There is always going to be a conflict of interest. Always. When you're paying for services, an hourly, you got a conflict. Why did it take so long? Do you know what I mean? We all have this conflict with our attorneys. There's always a conflict.
The difference to me between a real advisor and a not real advisor is that a real advisor is open and willing to talk about those conflicts, manage those, be upfront about those conflicts because they're not hiding them. And they're aware, “I got to manage this.” Like an AUM advisor gets paid on a percentage of assets. A conflict is, “Hey, I really want to pay off my house. I'd feel so great to pay off my house.” Well, if you take the money out of the account and pay off your house, they get paid less.
Well, a real advisor, understanding you, running the numbers for you, then understanding how you feel as well would say, “You know what, Jim? It may not make total optimized sense to pay off your 3% mortgage, but based on how the fact that you and your spouse will feel, let's pay that off.” If that's the right answer for you. And they'll even say, “I want you to know, I may or may not get paid more or less based on this decision. That's not why I'm doing it.” It's hard to manage. There's always going to be conflicts. Real advisors are open about them.
Dr. Jim Dahle:
Yeah. I think that's excellent advice. You just cannot work for money and not have conflict.
Carl Richards:
For sure.
Dr. Jim Dahle:
Unless you're willing to do this for free and precious few people are willing to do real financial planning for long for free.
Carl Richards:
Yeah. I'm not sure that would be worth what you paid for it.
Dr. Jim Dahle:
All right. Well, Carl, we are pushing up against an hour on this recording. I think we probably ought to stop. But I think maybe our next conversation ought to be while walking up toward something for Dr. Low Angle or doing a ridge climb around.
Carl Richards:
Let's make that happen for sure. That and tacos.
Dr. Jim Dahle:
Awesome. Well, you've got an audience here, 30,000, 40,000 people, probably. What have we not talked about today that they ought to hear before we stop recording.
DON’T FORGET MONEY IS JUST A TOOL
Carl Richards:
This is just a plea. The project we're working on right now is called 50 Fires. It's a podcast about money and meaning. We're co-producing with the Magnolia Network. It's just a plea. I think so many of us, all of us, it's so easy to lose the plot and remember money is just a tool. It's so easy in the society we live in, the culture we live in. And your listeners will all relate to this. They are driven, successful. It's so easy to forget and end up having money slowly, insidiously sneaky. It's a sneaky little thing. Money becomes the end instead of just the means.
And remember that it's settled doctrine at this point. Having sufficient for your needs so that you can focus on the things that matter is what matters. And for sure, the things that matter, for sure. We all know it's cliché at this point. On your deathbed, the things that will matter to you are the time and the experiences you had with the people you love and the difference you made in individual lives. Not necessarily a big difference, billboard difference. Just like the generosity you had with individuals.
And I'm just continually frustrated with myself and with the culture we live in that we can't keep the plot. That this is just everything you and I talk about. It's just like a wrench in the garage. That's all it is. There's literally a label next to wrench that says money and it should stay on that hook. You take it off when you need it, put it back up. Because what really matters, what really matters is you and I walking up to a mountain. What really matters is walking to the mailbox with my wife each night.
What really matters, last story Jim, sorry. A couple of years ago, we had the summer of our lives and I grew up, I didn't have a passport. I didn't even know our trips were to Southern Utah, in the station wagon, I didn't even know. We went all over the world. It was amazing. And I'm sitting at home with my youngest, with my son, who I can't remember how old he was, but young. And I was like, “Hey, tell me about the summer. What was your favorite part?” And he was like, “Do you remember that time we threw rocks in the lake?”
Dr. Jim Dahle:
I thought you were going to say the hotel pool.
Carl Richards:
Yeah. What about Paris? What about Australia? “No, no, the rocks in the lake.” And I just think the evidence is clear. That's actually the greatest source of lasting happiness. Not more stuff, not more numbers on a screen. So, be a little reckless. Prioritize those over everything else. That's all I would say. That's really the focus of my work now.
Dr. Jim Dahle:
Yeah. Awesome. Great advice. For those who want to learn more about Carl, you can go to the Society of Advice. Probably a better place though is behaviorgap.com. You can check out his books, The One-Page Financial Plan and The Behavior Gap.
I'm excited to watch what else you're going to come up with over the years. And thank you so much, not only for being on the podcast today, but for all of your work the last 10, 20, 30 years. We'd really appreciate it as a group, a society of people who are interested in finance. We appreciate your contributions to the field.
Carl Richards:
Cheers, Jim. Likewise.
Dr. Jim Dahle:
All right. Thanks for those of you leaving us five-star reviews and telling your friends about the podcast. We had one recently from Rod who said, “Truly life-changing. To have all of this knowledge available to me is life-changing. My life, financial and social will never be the same now that I have this knowledge. It will be a major player in my financial success. All of this inspired myself and a few others to start a finance interest group in medical school. Got us published in academia. Now I'm grant-funded developing personal finance curricula for my medical school. Thank you very much.” Five stars.
Wow. That's a heck of a review. Thank you so much for that.
SPONSOR
All right. As I mentioned at the top of the podcast, SoFi is helping medical professionals like us bank, borrow and invest to achieve financial wellness. Whether you're a resident or close to retirement, SoFi offers medical professionals exclusive rates and services to help you get your money right. Visit their dedicated page to see all that SoFi has to offer at whitecoatinvestor.com/sofi.
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Don’t forget about our surveys, whitecoatinvestor.com/survey. This is for paid surveys. They pay you to take these surveys, they want your opinion, they value your opinion and your experience and are willing to pay you for it. So, don’t forget to check that out.
All right. We’ve come to the end of this podcast again, but there is going to be more next week. So, keep your head up, shoulders back. You’ve got this. We are all here to help you be successful and be able to put more attention on the things that really matter in your life. Whether that is your own wellness, your family and those you care about, your patients, your practice, let’s get this finance stuff taken care of so you can get back to what really matters.
DISCLAIMER
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
Milestones to Millionaire Transcript
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.
Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 185 – Communications Pro hits a quarter million dollars.
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We are currently in the early bird period for WCICON25. This is a physician wellness and financial literacy conference. You get the cheapest price you can get by saving $300 off from now through September 10th. You can sign up at wcievents.com. Not many doctors have people to discuss financial challenges with. People who can relate to having student loans hanging over your heads, paying what seems like too much to the tax man, or feeling burned out or doing something that you've wanted to do since, well, you were a kid.
I found that spending time with those who truly understand is one of the most important parts of the physician wellness and financial literacy conference. I hope you'll join us February 26th through March 1st, 2025 outside of San Antonio, Texas. Don't miss out on our lowest price. You can save $300 on registration until September 10th.
This is truly my favorite event of the year. I know I'm a little biased, but I love hearing about your successes and challenges during breaks, dinners, and all the fun wellness activities in person, face-to-face. I just like meeting you guys. It drives our content for the next year. It drives my motivation to keep pursuing this mission of helping doctors and other high-income professionals get their financial ducks in a row.
But at WCICON, you surround yourself with people who actually get it. You talk with the physician finance leaders you've followed for years. You'll learn a lot and you'll have an incredible time.
The biggest threat to your career and your finances is not disability. It's not some sort of turf war within medicine. It's not changing tax codes. It's burnout. And this conference is the closest thing you can get to buying burnout insurance.
Hill Country Texas is a perfect destination to get away for a break from medicine. And new this year, we're excited to offer 20% off your partner's conference registration. Over 150 attendees signed up on the spot at the end of last year's conference. I promise this is the best use of your CME funds. Go to WCI Events for all the details and take advantage of the early bird sale.
INTERVIEW
All right, we got a great interview today. It is not a doctor, med student, dental student, et cetera. It's somebody else. Let's get them on the line. And I think you'll like this interview.
Our guest on the Milestones podcast today is Spencer. Spencer, welcome to the podcast.
Spencer:
Great to be here. Thanks for having me, Jay.
Dr. Jim Dahle:
Why don't you tell us what you do for a living, what part of the country you're in, and how far you are out of school?
Spencer:
Yeah. I work in communications and media relations for a trade organization up in Washington, D.C., just outside of D.C. And I've been out of school for about three and a half years now.
Dr. Jim Dahle:
Three and a half years. That’s what? A bachelor's degree, a master's? What do you get to do that?
Spencer:
Yeah, out of a bachelor's degree.
Dr. Jim Dahle:
Okay. So, three and a half years out of college and in a pretty expensive area of the country. And you hit a milestone recently. Tell us what milestone you recently achieved.
Spencer:
Yeah, I hit a $250,000 net worth, as well as a $100,000 retirement savings goal.
Dr. Jim Dahle:
Awesome, awesome. Three and a half years out. When I was three and a half years out of college, I was, let's see, 27. I was still in med school. I had a net worth of zero at best. Most doctors at that point have a net worth of minus $300,000. You already have a quarter million dollars. Congratulations. That's awesome.
Spencer:
Thank you. Thank you.
Dr. Jim Dahle:
So, what's your income been average over the last three or four years?
Spencer:
I've definitely had quite the range of income. My main 09:00 to 05:00 full-time job is pretty stable at about $75,000. But I have a lot of sources of income that wildly differ over the last couple of years. And that's coming from reselling toys and vinyl, mostly online, as well as sports betting and a couple other random things here and there. But those usually come out to about $25,000 to $30,000 over the last couple of years, but a little higher this year, shooting for close to $125,000.
Dr. Jim Dahle:
Okay. So, low six figures is basically what you make. You can't drop something like horse betting on this podcast without providing details. You're actually keeping track of your horse betting and you're ahead?
Spencer:
Yeah. It's just general sports betting. Yes, I am ahead.
Dr. Jim Dahle:
Oh, sports betting. I thought you said horse betting. Sorry.
Spencer:
There's definitely a couple of horse bets in there. But in Virginia, we're lucky to have numerous amounts of sports books that give lots of options, kind of like playing the market and definitely been successful over that. Keep a very good track of it and treat it just like another investment.
Dr. Jim Dahle:
Cool. I think we had somebody on here once that was kind of a professional poker player too. And it's always super interesting to me because it seems like the odds and that sort of a thing are not with you, but every now and then somebody is really good at it, I guess.
Okay. Well, tell us about how you did this. Most people coming out, they start making money and they go get a car loan. It's the first thing they do coming out of college. You didn't do that, obviously. You've done something pretty special here because you've only made about $400,000 and you've got a quarter million dollars already. So you are not spending all your income. Tell us what you're doing with it.
Spencer:
Yeah. Mostly saving as much as I can. Through my job I maxed out my 401(k) contribution to maximize the match for my company. I maximize my Roth IRA every year as well. And I really rely on my side hustles and non-full-time job to pay for my cost of living and try to put the majority of my salary into my retirement accounts and other investments and keep some of the cash.
I guess my strategy really there is to try to really grind on the side hustles and eBay and Amazon selling and sports betting, whatever else I can, so I can really focus on putting my full salary into savings and keep that money growing.
Dr. Jim Dahle:
Is there a partner, a spouse, any kids in the pictures or just you?
Spencer:
It's just me in the picture, but I definitely have to put a huge thanks to my dad, Randall Dobkin. He's a huge fan of the show. One of the big reasons I applied to come on and I have to say a big thank you for just him instilling that financial wisdom in me as a young kid and teaching me the real power of that compound interest and really started investing a little bit of money as a kid that I made selling fruit right off my trees or whatever I could. And he really taught me how to save wisely and that's really helped me out to this point, just saving as a kid even.
Dr. Jim Dahle:
What are the odds that you are an employee 10 years from now versus working for yourself?
Spencer:
I'd say pretty low honestly. I'm a very big self-starter. I definitely love working in an environment with a team with organizational goals and stuff that I do have my full-time job. But I really am interested by the self-starter mentality, trying lots of different things.
Over the last few years, I've had some skills that I never thought I'd pick up. I dabbled in crypto and NFTs back in 2021, 2022, and that was definitely a nice boost as well to help me get to where I am. And I really think just once I find that one thing that really does interest me, keep me happy, but also makes me money, that I'll most likely move to that. But for now, I'm definitely enjoying working in a traditional office job.
Dr. Jim Dahle:
You actually made money in NFTs.
Spencer:
I did. And it was something that I had to keep very good track of to check myself. I was very fortunate to fall into a group of people that were nice enough to educate me on that. And it's something I still follow a little bit. But since the rise a few years ago, it's definitely been a much more volatile market. And I've kept my investments a little safer. But it was definitely a fun thing to learn about and get some experience.
Dr. Jim Dahle:
All right. What did your dad do to get you interested in this finance stuff, to get you understanding the benefits of compound interest and how powerful that is when you start in your 20s?
Spencer:
I think he just showed me some of the strategies he's used throughout his life with very traditional investing techniques, nothing extremely volatile.
Dr. Jim Dahle:
He wasn't into the sports betting and the NFTs?
Spencer:
He's come around to it after seeing the success and being careful and mature about investing in those types of things. And definitely told me at a young age, it's important to take a couple more risks at a time when I can. But really just showing me how successful he's been and keeping me updated with new news about markets I can put my money in, different financial vehicles I could be a part of.
It's really just him showing me that if I want to have certain things and protections later in life, that a little work now can really go a long way. And I think that message has just resonated with me. I have plenty of fun now. I spend money, but saving it is also going to really protect that life I would like to have later down the line.
Dr. Jim Dahle:
All right. Let's break down your net worth. You said you had $100,000 in retirement accounts. What's the other $150,000? And is there any debt?
Spencer:
I'm debt-free. Very thankful to have had my parents pay for school, which really got me to a great place. Very thankful for that. I'm actually up to about $120,000 in retirement right now. I have about $50,000 in brokerage accounts and other investments, index funds, a little bit of crypto in there. About $25,000 in sports books to keep growing that profit there, as well as I'd say the rest is probably the $50,000 is in cash and property, which includes my one car, as well as some of the inventory that I have for my reselling business.
Dr. Jim Dahle:
Cool. That's pretty awesome, man. What a fun story. I think a lot of people listening to this are like your dad. They're 40s, 50s, whatever. And they'd love to pass tips along to their kids, have their kids be interested in finances. And so, I think your story probably really resonates to a lot of them in that respect. I don't know how many 24-year-olds, 25-year-olds we have listening to this. And I suspect most of them that are, are probably pre-meds or in dental school or medical school or something like that. Let's assume there are a few people out there like you, and they want to have the success you've had, what recommendation would you give to them?
Spencer:
I'd say just educating yourself and learning about all kinds of ways to invest your money, savings tips. I really was able to watch, like I said before, how my dad has invested over the years, as well as just how he saves, where he saves money. But I think the biggest thing is probably just educating yourself and learning about your options. There's lots of things that you could just jump right into, whether it's investing or buying a car, picking a new apartment.
But it's definitely something that if you know all of your options, it really gives you that step up. I think it really just gives you an opportunity to make your own decisions and not just follow with what's in the news, what's going on, what are most people investing in. Just really being able to spread out your options and pick what's right for you and your situation. And I think that just having that knowledge as a young person from my dad, from the internet, it just gave me the options to choose what my right path was.
Dr. Jim Dahle:
Yeah, it's pretty awesome to have the accumulated knowledge of the history of the world sitting on a device in your pocket, isn't it? It's amazing what you can learn from the internet.
Spencer:
It really is.
Dr. Jim Dahle:
One other thing we ought to talk about. You're living in D.C., you said?
Spencer:
Yeah.
Dr. Jim Dahle:
Tell us about how you've dealt with being in a high cost of living area and still managing to build wealth on what a lot of people that listen to this show would say is not all that high of an income. Tell us how you've managed to build wealth so quickly despite being in an expensive place.
Spencer:
Yeah. I definitely lucked out when I moved originally, it was during the pandemic. So I did get a little bit of a cheaper rent as they were trying to bring people in. But I say aside from that, I cook most of all of my meals, which helps definitely save some money. I use public transportation when I can to use the metro to go in and out of D.C. and Virginia and Maryland, and really just cutting corners where it's not affecting my quality of life.
But like I said, the power of compound interest, if I could save $5 here, $10 there, it really adds up. And I think if you're really thinking about it and keeping it on mind without letting go your quality of life or having fun, it really does add up without focusing too much on saving as much as possible rather than just finding ways to save a little here, a little there. It really does add up.
Dr. Jim Dahle:
What are you renting? Are you in a one-bedroom apartment with no roommates? Or what kind of place are you in?
Spencer:
I did just move into a one-bedroom apartment, which is a little more expensive. But for the last few years, I have had two roommates. That definitely helped with the cost. I had pretty much a full area to myself and everything. So, it wasn't really sacrificing that quality of life, like I was saying. But it was definitely helping me save quite a bit.
Dr. Jim Dahle:
Very cool. Very cool. Well, Spencer, you've done fantastically. You're on a great pathway. You are not afraid to try stuff and fail and succeed and see what works. And I love it. I love your openness to trying things and wish you the best as you continue forward in your financial journey. Thanks so much for coming on the podcast and inspiring others to also reach their net worth milestones.
Spencer:
I appreciate it. Thank you so much for having me.
Dr. Jim Dahle:
All right. It's always fun to see people doing stuff. There's like dogma, right? Doctrine, whatever you want to call it. The WCI way or the Bogleheads way. You don't have to follow that to come on this podcast. We want to hear what you're actually doing. I don't care if you're putting some of your money in NFTs or going down to the track and betting it or whatever. We want to hear about your successes and use it to inspire others to do the same.
Everybody's got a different pathway. I certainly was not worth a quarter million dollars in my mid-20s. It is not common for those of us who went to medical school to have that sort of a network. We end up with a bigger shovel later and done right. We certainly catch up, but it's a different pathway. And we're all on a different pathway.
In the last two days, I've recorded like four or five of these episodes and they're just dramatically different. We had an orthopedist who’s already at $3 million, three years out. And we had a pediatrician that took seven years to pay off student loans. It's just a wide variety, even within the house of medicine. And especially when you get outside of the house of medicine, of our pathways to success. And that's okay. This is a single player game. It's you against your goals. So, pay attention to what you value, what your goals are, not how somebody else is doing. If you want to come on and share your experience, we'd love to have you. whitecoatinvestor.com/milestones is where you apply to come on the show.
FINANCE 101: DON’T TIME THE MARKET
Now we need to talk about something. I'm recording this on August 2nd. It's not going to run for 24 days. So, three and a half weeks. And so, this might be totally out of date what I'm about to say by then, but I think it's a good example anyway.
The big news this morning, bouncing around all the websites, the Dow has dropped like a thousand points in the last couple of days because the jobs report came in less than people thought it was going to be. Now everyone's like, “Oh, recession is going to happen. This is terrible. The Fed waited too long to cut interest rates.”
Maybe that's true. Maybe it's not. I don't know. But the market's pricing in, I think a majority of people think the Fed's going to cut rates by half a percent rather than just a quarter percent at their next meeting because of this jobs report. The Fed's got this mandate to control inflation and to try to get as high of employment as you can get.
And that dual mandate is obviously in conflict. And they're always constantly trying to thread the needle between those two things. But maybe they didn't wait too long. But the consequences of this jobs report are that bonds have gone up dramatically in value and stocks have gone down dramatically in value.
And this is kind of classic market behavior. When the economy is supposed to do surprisingly well, stocks go up, bonds go down. When the market does surprisingly badly, vice versa. But as I look at what's been going on in the markets, I just put in these common ETFs to get a quick look at the markets into Google, like VTI, the Vanguard Total Stock Market Index Fund.
I put that in. I look at a chart for the last month or so. And I see that it peaked at $279 a share. Today, as I read this, it is $262 a share. What's that down? About 5%. 5% in the last couple of weeks. So, if you used to have all your money in US stocks and you used to have a million dollars, you now have $950,000. You've lost $50,000. That's a very real loss. There's people that say, it's not a loss until you sell. It's bogus. It's a loss, just like it was a gain a few days ago.
If I look at bonds, I see that their price natered back in April. The Total Bond Market Index Fund natered at about $70 a share, $70.5 a share. And today, it's up to $74 a share, which is the highest it's been, it looks like since about 2022 when they started cutting interest rates.
And so, stocks down, bonds up. This happens. This is what markets do, right? What should you do with that information? Nothing. You should do nothing with it. You're not trying to time the markets. This is not how you make money. It's all about time in the market, not timing the market.
I generally only look at my investments probably on average every couple of months. And I'm trying to look to see where new money needs to be invested. If I wasn't putting new money in, I don't know. I might only look twice a year. That's how long-term investing works.
I always find it interesting. I have people write me up or send me emails or whatever about their investing technique. And frequently, it's this massively time-consuming thing. I got them sending me articles they read every day on their favorite asset class. And I'm like, “You're reading articles every day on your favorite asset class? This is way too much time. I am not interested in doing that.”
If you're spending hours a day on your investing, you got to ask yourself, “Is that really what you want to spend your life doing?” You only get one life. So it's okay to have a “set it and forget it” portfolio and look at it every few weeks or every few months or whatever. That's perfectly fine. It's a totally reasonable way to invest. And the beautiful thing about it is it helps prevent a lot of behavioral errors.
People who watch the markets too often are much more likely to do damage than good. I think it was Warren Buffett that said, “The best attitude toward your investments is benign neglect bordering on sloth.” Being lazy in this thing is counterintuitively beneficial to your money. Activity is not rewarded when it comes to investing. Patience is rewarded. A long-term mindset is rewarded. Your biggest enemy is you. So, watch out for that person in the mirror. There's a person most likely to trash your investing plan. Be careful when markets become volatile, when things seem to change and don't do anything crazy.
Remember how bonds work too. Everyone's all that owns bonds. “Oh, I'm excited. My bonds did really good this month. They're up 3.6% or whatever.” That's not necessarily a good thing long-term. You actually want all else being equal. Inflation being equal, all else being equal. You actually want higher interest rates if you're a bond investor.
Now, when rates go up, you're behind for a period of time. That period of time is equal to the duration of your bonds, your bond fund or whatever. It's got a duration of four years. Interest rates go up. You're behind for four years. And after that, you're ahead any period of time longer than the duration. So, that's a good thing.
Higher interest rates are a good thing for bond investors. When they go down, yes, your bonds are now worth more, but you're also reinvesting money at lower yields. And you're getting a lower yield on the bonds that you do own. So, you can have more principal and less return, or you can have less principal and more return. That's really the option.
So, don't get too excited or too depressed when things go up and down. It works out for you either way. Just keep stuffing those investment accounts full, and you will be surprised how much wealth you can accumulate in not that long of a time period. Focus on your own good investing behavior, your good financial behavior. Work hard, have a reasonable investing plan and stick with it. And you'll reach your financial goals and you'll win this game. Remember, the game is you against your goals. It's not you against anybody else.
SPONSOR
All right, our sponsor today is Southern Impression Homes. They're taking owning rental property to the next level with the innovative 2.0 approach, focusing solely on new construction investment properties, single-family homes, duplexes and quads in high-growth markets of Florida.
They handle every aspect of the process with expertise and efficiency, including financing, insurance, and property management. To learn more about Build to Rent, visit www.whitecoatinvestor.com/southernimpressionhomes or call 904-831-8058.
All right, this is the end of another great episode. I hope you enjoyed it. We certainly enjoyed making it and wish you well out there in WCI land, whether you're going to work or coming home or had a hard day. Thanks for what you're doing.
You can take care of this finance stuff. It's not the most important thing in your life. We totally get that, but it can be a big source of worry and we're here to help take that away. See you next time on the podcast.
DISCLAIMER
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
Wow! This is going to go down as one of the great ones. I liked the mental models about climbing and risk. The best fee structure is a bill from QuickBooks, where the client has to write you a check. That should be the only fee, if the advisor is buying or advising a client to purchase a Vanguard index fund (no kickbacks allowed). The “validator group” is an area of interest. A reasonable advisor will take a validator for 90 days with an unlimited amount of advisor time for a fixed flat fee, with the understanding that the advisor or client can cancel at any time. I like the validators, it is fun, kind of like teaching your kid to ride a bike when they almost get it. You are spot on about a wait list for a competent advisor. One concept is that it is easy to get clients when you are painfully honest and transparent—it is the only way to be. As for a fiduciary, simply ask what the investment advisor what investment did you put your wife, mother in law, and mother into? Finally, the advice at the end about throwing the rocks and what really one is aiming for is priceless.
What can be done to limit or minimize the behavioral biases we are all subject too? Besides having an investment plan and diversifying. Are there more active measures that can be utilized?
Is having recognition that we are subject to biases helpful in minimizing it somewhat?
The only direct activity that comes to mind is to look for disconfirming evidence/articles.
I’d just start with education. Recognizing biases exist is a great beginning.
This book has been significant to many of our financial planning clients and a great way to fill in the “gap” between what most people expect from a “financial advisor” and the impact of a true “financial advisor/planner” in peoples’ lives. After you read the article, I hope you will get a copy of The Behavior Gap and read the “long” version (it’s actually very short and is very practical). I believe it will reset at least some readers’ understanding of the financial advisory “profession” and help you make better decisions.
Via email:
Really enjoyed the recent podcast with Carl Richards. These conversations with experts are my favorite episodes at this point (have listened to all the episodes and started reading the blog about 2 years ago). Thanks!
In the podcast Carl mentioned for trying to find a good financial advisor a good start is-do they have a CFP (certified financial planner) resignation . It’s interesting because I was at my son’s recent soccer practice earlier this week and asked another soccer Dad what he does for a living and he said he was a financial planner. I said oh that’s pretty cool, and I asked are you a fiduciary and he replied oh yes “Im a fiduciary and a CFP”. When I went home I googled his name and he works for northwest mutual and sure enough by his name it says CFP. Seems interesting that a company that has advisors who make big commissions on selling insurance products to most people that do not need them can be a CFP.
It was obvious to me he was not very competent in financial planning when I asked him if he’s heard of the 72t rule (Rule 72(t) allows for penalty-free withdrawals from individual retirement accounts (IRAs) and other tax-advantaged retirement accounts like 401(k)s and 403(b) plans.)
He said no, and he googled it right in front of me. I feel like any CFP would know that information or at-least have heard of it.
In conclusion, a CFP should be taken with a grain of salt.
I’d still like to see a CFP most of the time, even if I am in total agreement with you that it is nowhere near a sufficient condition for an advisor.