• Home
  • /
  • Blog
  • /
  • Bogleheads Speaker Series with Carl Richards

Bogleheads Speaker Series with Carl Richards

Post on: November 23, 2020 by Rick Ferri

The John C. Bogle Center for Financial Literacy has published the first of its Bogleheads® Speaker Series videos. Carl Richards is well known as “The Sketch Guy” for his singular ability to turn complex financial concepts into simple, easy-to-understand sketches. Carl spoke with Morningstar Director of Personal Finance and Boglehead favorite, Christine Benz.


Bogleheads Speaker Series with Carl Richards

Rick Ferri: Hi, I am Rick Ferri, president of the John C. Bogle Center for Financial Literacy. The Bogle Center is a 501c3 nonprofit organization created in 2012 by the founders of the bogleheads organization with the assistance of Jack Bogle. The center's mission is to further financial education worldwide, promote low fees, and financial well-being, and to foster a sense of community among our all-volunteer membership. Your tax deductible contributions to this cause are greatly appreciated. Please visit boglecenter.net.

Today is our inaugural Bogleheads® Speaker Series live video event. The idea for a live online event came about after covid19  led to the cancellation of the 2020 Bogleheads conference which would have been held in October. As a matter of record the board is talking about resuming the conference in 2022. In the meantime we bring you this live speaker series.

I wish to thank all the board members for the hard work they have put into making today's event possible, and particularly Mike Nolan, who is Jack Bogle's former assistant and a Bogle Center board member, for all his hard work, and the work his committee has done to bring this event to you. A special thanks goes out to Vanguard for donating the time and resources to make today's presentation possible. Our first guest is Carl Richards. Carl is a certified financial planner, creator of the Sketch Guy column that has appeared in the New York Times since 2010, and a dynamic speaker. Today's interview is being conducted by Christine Benz, Morningstar director of personal finance, a longtime boglehead and a Bogle Center board member.

We wish to thank all of you who submitted questions on the board to Carl. We hope you enjoy this presentation, and tell others about it. Today's event is being recorded. The video will be available on boglecenter.net and a post will be made at boglelheads.org when it is available for viewing. Thanks again, and take it over Christine.

Christine Benz: Thank you so much for the introduction Rick. And thanks to all of you for taking time out of your weekends to join us for our inaugural event for the Bogleheads® Speaker Series. I could not be more excited to introduce Carl Richards. He's joining us from London where he lives. It's already Saturday night there. Carl specializes in conveying sophisticated financial concepts in an easy to understand way, specifically using a Sharpie. He is a certified financial planner and he's creator of the Sketch Guy column in the New York Times. He's also the author of a couple of books, The One Page Financial Plan:A Simple Way To Be Smart About Your Money  and The Behavior Gap: Simple Ways To Stop Doing Dumb Things With Money. He also did the wonderful sketches for a book that just came out that I’ve made a contribution to called How I Invest My Money. Carl welcome to the Bogleheads® Speaker Series, we're excited to have you here, and I'm even more excited because I found out that you may be able to sketch a little bit for us today.

Carl Richards: Christine, it's an honor to be here. And Rick and the whole board thank you for giving me the opportunity, with just a pleasure. I've always thought really, really highly of this group of people. So excited to be here.

Christine Benz: Well thanks for donating your time. I wanted to start by asking about your particular focus. For people who might not be familiar you're a CFP, a certified financial planner so you're certainly very knowledgeable about matters of asset allocation and tax planning but over the past decade or so you've gotten more interested in what we might call financial life planning. And let's talk about what that is, why you're so enthused about this idea of helping people align their financial plans with their bigger life goals. What set you on this journey?

Carl Richards: Yeah. So I think it was just repeated, so 20 whatever, 22, 23 years ago when I started in this financial industry. Speaking broadly, I got into the industry quite by accident. I applied to be a security guard, thinking that the ad says-I didn't realize he had said securities instead of security. And I didn't know the difference at the time. This was right while I was at university and it was in the late ‘90s, right. There's a lot of exciting things going on in the late ‘90s. 

And so after I got over the fact that I was a security guard, I was on the phone at a big call center, actually at Fidelity Investments, one of their big call centers at the time. It was their national call center in Salt Lake, and it's answering phones. And I just remember being struck for-- that it was years--I remember just being sort of unmoored a bit about this sense of it wasn't about spreadsheets and calculators right. I couldn't put words to it, but I didn't expect it to be so emotional. I didn't expect--I was like wait, this is spreadsheets and calculators isn't it-- and it turns out it's not.

 And then I spent a decade and a half working with individual clients and seeing this repeated pattern of what we think our job is as investors. And then even if you want to take it one step further, that we think what the industry thinks its job is-- is to provide products.  And I just saw this repeated focus on--maybe the best comparison is whether I should take a plane, arguing and researching about whether I should take a plane, a train, or an automobile on a trip. before we had decided where we were going to go.

And this idea of deciding where you want to go, right. Like that to me, we can build the best asset allocation ever created by the mind of man. Smartest, the most research-backed, the most evidence-based, the most  inexpensive. We can do all of those things but if it doesn't get us where we want to go, what's the point. And as this group knows really well, one behavioral mistake will blow the whole thing up anyway. So if we can't get the behavior right and we can't get the underlying, I'll use the term goals very loosely, but if we can't get the underlying goals right, we wake up--and we're seeing this all over the world--people waking up and saying what was it all for?  What, is this really what I wanted?

And so I think the idea of spending some time getting clear about why we're doing it in the first place has become to me, everything else feels like hacking at the branches, that we can make marginal improvements, but until we get that right or at least until we start guessing at that, we're never going to get it right. But until we start guessing at that, the rest sort of loses its importance. That's really how I started focusing on that.

Christine Benz: So let's talk about this. I think you probably know this group of bogleheads, you've got a group of people who are really good at the spreadsheet and calculator piece and how can we talk about how we get better at the other piece of it, at articulating our goals and our vision for our lives. What are the questions that we should be asking ourselves?

Carl Richards: Yeah. That's a really good question. I mean I think the first thing we need to do is  realize there's this sort of movement that I guess people call life planning-- and it's never really resonated a lot with me simply because life planning to me feels, and goal-based planning feels like oxygen based breathing, right. Like of course you should have goals for what you're doing. So I think the first thing is just to say, look this isn't about crying on the couch, it's not about therapy, it's not about getting, becoming one with yourself.

 It's just simply about saying look, the purpose of financial planning-- and I'm using that term broadly--is to align your use of capital with what's important to you. Okay, and obviously as you mentioned this group understands  like once we need to deploy capital, we understand at least the process of figuring out how to do it in a sophisticated way.  So the question becomes how do we align that, what we're so good at, with what's important to us. And I didn't realize, I don't know why I didn't realize, how hard that is for us to get clear about what's important to us.

You know we're not used to thinking about it. We're not used to having an idea of like look, and part of the reason is mimetic. We're so caught up in mimetic desire, right. Like looking, we don't know how, we don't even know how to know what we want. What we know is to look at what other people do, and take our clues from them. And this has only gotten harder with sort of the Instagram live. So many of us are trying to keep up with it's really hard to get clear.

And so I think the way to think through this is just to take the time. Like where do you want to go? What's important to you? I love the idea of  the calendar and the checkbook never lie. I don't really care what you say is important to you, Christine. Show me your calendar and your checkbook and I'll tell you what's important to you.

So this idea, if I were to draw it, and maybe we should have our first experiment here. So let's just think about--let's just use a word like values. You know I think you could substitute a lot of words like what's important to me, values. I love purpose. I love the idea of purpose and if we had a set of values and then we looked at--and we'll talk if it's okay, we can talk for a minute about how do we even get clear about this-- but if we then looked at how we use our money and our time, and we'll just call those actions. Often there's a gap here and that gap is called being a human. And it's really, this gap here, is really painful actually.

When you wake up and say, gosh I spent all that time at the office. I could have spent more time with the kids. All right you know we've got plenty of money but we never enjoyed it. Or you hear these things constantly, like I can't remember the name of the book, but it was the  palliative care nurse, the nurse at the end of life nurse, that took care of so many people. And she wrote that book about what their common regrets were. And it was always the things they hadn't done. There were very few regrets about stuff they had. People didn't really remember the mistakes they'd made, they remembered the things they hadn't done. And so there's often this gap between what we say is important to us and what we're actually doing with our time and money.

And so I just am hopeful that we can somehow get that those circles, just you know, can we to see some of this overlap. And wouldn't it be amazing if that was a venn diagram  where there was perfect overlap. I mean I had that once. Christmas eve, I remember the kids sitting on the couch, the snow was falling, the dog was there doing the thing. And then the next morning, of course we woke up and all the presents, and I was like, who bought all these presents? And what happened with the budget?

So we just circle, we just end up circling back and forth between these ideas of like, okay we get some overlap and then we end up back here where there's a gap. So how do we get clear about the values piece? And that's just a function of taking time to ask ourselves and to start noticing what are the things that really--and there's so much research around and hopefully this group is familiar with it-- around what really brings happiness as it relates to our use of money. That experiences with people we love, and even there we know that the anticipation of the experience is somewhere between 40% and 60% of the enjoyment we get out of the experience.

So there's so much we can do. What was her--Elizabeth, it's not Elizabeth Gilbert, maybe it's not Elizabeth Gilbert--Elizabeth Dunn!  Elizabeth Dunn's book on, she says  if you don't think money can buy happiness it's because you don't know how to spend it.  And so just getting a little more clear about the things that bring us--I assume the goal of money beyond freedom, stability--I assume the goal of money is let's call this thing happiness.

Well, we know a little bit about how we can use that and of how we can use money to bring happiness and often it relates to fulfilling our values and Simon Sinek's work on Start With Why. So that's to me, that's a really long-wind answer to your question of how do we get clear. We start thinking about it. And I think this is like 2008 and 2009, I remember people having conversations that I just had never heard before. I remember hearing at the coffee shop, you know, overhearing people talk about  what's important to them. Who do they trust right now?

We've been given permission in no way that I can ever remember to really be questioning those things. I mean assuming we have a little bit of stability to have those conversations, and granted lots of us don't, but if we do, a number of us have been giving permission to ask those questions like who do we trust, what's important to us, how do I really want to be spending our time in a way that we've never had before. So yeah, so hopefully that helps.

Christine Benz: It does, it does. I want to ask about the pandemic because you're right, I think many of us are thinking big picture thoughts about our lives, and the trajectory of our lives and what we're doing. I guess the question is, is this a good time to be making big lot life-altering decisions? I mean there are some things about what we're going through that are a little bit traumatic. I just wonder, you know you always hear like after the death of someone, not to make any big changes. How about right now, is this a good time to decide to relocate or change jobs or whatever?

Carl Richards: It might be. Yeah that might be slightly beyond my pay grade, but my sense is that now is a really good time to be noticing, taking note, recording, thinking, journaling, right. Like understanding now, and I also sense that it may, it obviously totally varies by your situation. There are some of us that have been massively impacted by this and there's others that financially, or whatever their situation, allows them a little--if you've got the freedom and flexibility to be making some of those decisions-- but my sense is right now is a really good time to be noticing and asking questions and deciding, you know, like what do I really want and then aligning your portfolio and your use of capital with what you said what you notice.

Christine Benz: I wanted to read you a question from one of our attendees. He or she wrote in your book  The Behavior Gap, you said that financial decisions are about getting happy and if there is a secret to getting happy it's this: be true to yourself. So that's great advice, but one must first know oneself. How would you advise investors to go about knowing themselves?

Carl Richards: Yeah, This is the huge problem I thought. I didn't realize I was opening such a huge can of worms for myself 15 years ago when I started thinking about this stuff. Because it's really challenging  when we say align your use of capital with what we see is important to us. Getting clear about what's important to you is really, really hard.

I mean we know a little bit about happiness and money, right. Like we talked about a minute ago, we know that spending money on experiences with people you love is far more enduring than buying stuff. We know that above a certain income level a lot more income doesn't necessarily add exponentially, certainly not to our happiness. So we know a few of those things. But what we don't know is do you enjoy spending time at the museum. And I enjoy spending time on a river. 

And so understanding--and let me give you an example. We used to go to movies with friends. It seemed like the thing you'd do,  you know you would meet, maybe have a quick dinner and then go to a movie. And the purpose of the evening together was to spend time together. And then we'd go to a movie where we spent no time together. I mean we were sitting next to each other but we said--and so one time we noticed, we were like well, wait. What if we invited a couple over to our house and we're not cooks, we have no, I mean we barely know how to cook anything. But what if we invited a couple over. We made a simple meal together. Like we made it together. We spent two or three hours doing that rather than going to the movie. Well every time we did that it brought, I  don't know what the right multiple would be but it's at least two ,maybe ten times more enjoyment than going to the movie.

Let me give you one more example. I had a friend. His name was Rob and so here's the process we used to take people through. So we would just say, look, track your spending and everybody loves this. Tracking their spending is everybody's favorite thing--but actually this group might actually do it--track your spending but just add one thing.

So I would just go through every transaction and say is this aligned with what I said was important to me or not. And you get a gimme on all utilities, right. You don't have to think through Is the power bill aligned. But all discretionary spending at the very least discretionary spending is it aligned or not. If it's aligned we used to just make a note of what was the value that it was aligned with.

And so my friend Rob did this and he noticed that he had a friend that he met every month for lunch, and he would pay for lunch, and this, you know, let's just say it was $35 or something. Rob noticed, okay what's the value. The value is friendship. Well this friend had been going through a couple of years of really tough times, and didn't have a lot of other people to talk to. And so Rob was like that's aligned, completely aligned.

But then the next step was is there another way. Would there be another way to align that, my use of time and money, with that value of friendship. And Rob was like well geez, we both really like to walk or hike, and we both work at a specific university that's right at the foothills of a bunch of really amazing mountains. So he said, look what if we just met the next month. He suggested let's just meet and go for a walk.

And Rob called me, so excited because he was like look--and what Rob did every month with that money he would use--so he took that $35 and he automatically upped his auto investment into the S&P 500 index fund. And I'm not making that story up just because of the audience, but it's actually what he did. So every month, so now he was like look I've got $35 more going in towards a vehicle that's going to express some other value and I'm spending more time with my friend .And so those are like yes and yes decisions where we can get granular on just noticing like, oh turns out I don't enjoy that.

One last one. A friend of mine who was just beating himself up for eating out so often. And the most ironic part about this is this friend of mine wrote one of the most popular New York Times best-selling  food books of the last ten years. And I pointed out to him like wait, you love eating out. He was like well yeah, but I shouldn't. I'm like who says you shouldn't.

 So the idea of looking for all the way down to the budgetary level, like the spending level--and then we can talk, if we want to, about how aligning that use in our investments--but looking for ways to be cut ruthlessly on things that don't bring us value and spend extravagantly on things that do. And the only way to sort through that, unfortunately there's no rule of thumb, there's no app for it, and  the only way to sort through that is to make a small bet.

Hey, let's try this. I think I like going to the museum. Oh you know I didn't enjoy that as much as I thought I would. Let's try to make small bets and notice where the tailwind shows up, and keep track, right. So that's the only way to do it. Unfortunately there's no shortcut.

Christine Benz: You really live this experience that you urge people to go through the process of pushing themselves to try out new ideas, or take small bets as you put it and  try out experiences that they think might contribute to a fuller and more fully realized life. Can you talk a little bit about your personal experience? You're in London as we said at the outset, but it's not been a straight trajectory. You were in Utah. You were in Australia, I believe. So can you talk about how you kind of pushed yourself in that direction and on the path that you're on now.

Carl Richards: Yeah and I should tell you I'm not sure this is a good idea  for anybody. And this is part of the problem, is we all are looking for models on how to do things, or templates. But we were thrilled living in Park City, Utah, which is sort of where I was. I lived there when I was younger, until I was about eight. So it's sort of home to me. The Wasatch mountains, even the smell of the Wasatch, I can feel it now, right. Like I love the place, happily there and then we-- but we had always talked about living overseas, and my wife particularly always wanted the experience--and an opportunity came up--and by opportunity came up, I just mean a window opened. There was no like job opportunity. We had to make this happen.

And it's a very long story, but I'll cut it short. To go to New Zealand--like somebody, all that happened was somebody suggested it to my wife at yoga, and we make all of our major financial decisions based on my wife's experience at yoga, right--so somebody suggested and we had a little window, it was  because we needed to move from one house to another. That was the window. It was like hey, we're moving anyway, why not move to New Zealand.

So we went to New Zealand for a year and stayed for three and a half because it was just amazing. Now I'm you know, we've got, we have, the flexibility because my work is location independent. But we didn't do this, I just want to be clear because I get this question all the time. Like oh wouldn't it be nice that we decided to value experiences with our kids over security. And it  was uncomfortable financially. Like are we really doing this? Are we really sure we should do this?  Because it  wasn't the stable thing to do.

So we went to New Zealand and it was worth every cent. I wouldn't--I mean it cost way more than we thought it was going to cost--because things come up, you know visas and all these things that you don't expect. But it was worth it. I would do it over again 100 out of 100 chances.

And then we're in New Zealand and enjoying it and my wife had always wanted to go to interior design school, and she had spent 24 years at that point you know sort of delaying all the things she wanted to do, to be heavily involved in the massive amount of work of running a household with four kids. And so we were sort of like hey, you should apply to this school.

She found the school in London and we didn't think it would happen immediately. She applied in June, I believe, got accepted and school started in September. So she was like well, I'll delay for a year, and the family looked at her and said, no, you've been delaying for a long time for the rest of us, like let's go. So we moved. We went to London. Got here, she came in September, we got here in January, just in time to really want to be back in New Zealand.  But it's been amazing. So yeah, that's what's happened here.

And we don't know, and this is interesting to me and I think might be useful to all of you. I think one of the big lessons of the last 11 months,10 months, has been that uncertainty is reality. It always has been, we just have gotten a stark reminder of it. And so these plans we make are our guesses, and it's okay, but life never goes--if you think life goes according to plan just go back and look at your goals that you wrote out in January of 2020 and tell me if any of them went the way you thought. I mean none of us saw this coming.

And so I think making plans is good, and in fact I know it is. Making plans is good because it gives us a baseline. It's a little bit like a flight plan and a plane. Every good pilot makes a detailed flight plan. But if you ask--every pilot I've ever asked how often does the plan go, how often does the flight go according to plan--they'll tell you the honest truth which is never. It's always slightly different.

So I think we've gotten a real reminder of that and I think it's really unsettling but it's true that life is uncertain, markets are uncertain. The biggest risk is the one we've never thought about and can't think about. And so planning in that environment forces us to accept this reality that things are temporary. There is no permanence. And then once we accept that things get a little easier to navigate because we're not attached to this idea of what we've stored up in the barn being there exactly the place we put it when we go back.

Christine Benz: One concept that you've talked about, you talk about quite a bit, and you've got a great sketch on this topic, is the idea of enough. And Jack Bogle wrote a book called Enough where he explored that idea as well. Can you take us through that exercise? How we can all figure out our own personal sense of what's enough?

Carl Richards: Yeah, yeah. Excuse me again, such a good question. This by the way is why I said yes to this opportunity is because I get to chat with you and you're always so thoughtful. So thank you. I don't know how to figure this out. In fact it's funny, I literally, I do a lot of my work while walking and just thinking about things and then calling a short list of people way smarter than--I mean there's a lot of people way smarter than me, I just happen to have the phone numbers of a very short list.

And last week I was having this conversation with Morgan Housel. I called him specifically and said, hey, how do you think about enough. And another friend of mine, Craig Davies, who's a real finance guy here in London, I think to me-- and I've spent, I'm not exaggerating when I say I spent a decade thinking about enough.

And I love that old, I believe it was Kurt Vonnegut, in that conversation where he said they're at a party that a hedge fund manager threw and somebody, Kurt said to somebody else, how does it feel to know that he makes more--and I can't really ,details--but it's like how does it feel that he makes more in one day than you'll make in your whole life. And whoever it was that Kurt Vonnegut was talking to said, well I have something he'll never have, which is enough.

And to me, after thinking about a decade, the only answer I have is we just have to think about it. I think the real answers to all of these questions, personal finance questions, budgeting questions, even investing questions, really we need to get more in tune with awareness than we do a spreadsheet.

And all those spreadsheet tools are really valuable, and there may be, there's probably some way to spend some time around the budget your spending to sort out what enough might be. But I think those represent the messy middle to me. Like looking at the spreadsheet, calculating, seeing how much we spent, seeing how much we need, projecting it out at a four percent withdrawal rate and using some Monte Carlo tool. Like that to me represents the messy middle.

Really, really important looking at other people's examples. It's a little bit like reading reviews of a pair of tennis shoes on Amazon. You know if you go read 50 reviews of the shoes you're thinking of buying, you don't leave with more clarity, you leave more confused. But maybe it's supposed to be that way. That represents the messy middle.

Considering the nuance, the edge cases, this is what I do with the sketches. I go into a problem like enough and I have conversations for 10 years and at some point, hopefully, I'll pop out the other side. So Jack Bogle said sometimes to get to simplicity you've got to cut through the swath the huge--I think he used the word--cut through huge swaths of complexity.

And I think it's the same thing with this idea of enough. Like just pay attention, notice that oh I thought that car would be really valuable to me, or I thought that vacation, or I thought that house, or I thought once I had a million dollars in my beautifully elegantly designed passive portfolio I would feel something. Well it turns out I didn't or I did, and there's no right or wrong answer to it.

So to me it all comes down to just can we just start having this conversation and not feeling like it's too California, or too new age, or some fuzzy thing. Like can we just start noticing. And I think this is where we've gone off track with money. Nobody taught us to talk about it in the first place. And if they did teach us to talk about it they taught us that it was a math problem. And then when we go to touch it, every time we go to touch it, it reminds me of a electric fence that you don't know is electric.

I mean if you've ever had that experience. I actually have, and I’ve got--my wife was recording it-- we were in France and we were on a mountain bike ride and there was this wire and I'd never seen it--I mean I'm from, you know, in the west we have bob wire, we don't have--and I brushed my leg up against it, was like cool, well that was weird. And I thought, oh is that an electric fence, while recording, I reached out and grabbed it.

But that's when it reminds me, when we talk about, or we touch these topics around money, is oh, I didn't expect that to be emotional. I thought this fit in a spreadsheet, that's all I was ever taught, and you're like, oh wow, turns out this isn't about--well it is also about spreadsheets--but it turns out this is really about fear and worry. It's the stuff that keeps us up at night. The stuff, sometimes it wakes us up in the morning.

And so the answer to the question around enough is can we just give ourselves permission to have this conversation. Can we just pay attention a little bit? Can we just think about it like that's where this will all start.

Christine Benz: I want to talk about this behavior gap concept. And I suspect a lot of people watching will be familiar with the most common behavior gap that investors think about. Which is that you've got this well-laid investment plan that you completely up in during times of market turbulence. Do you think that that is maybe over discussed at the expense of other behavioral gaps that might go on in our lives?

Carl Richards: That's such a good question. Over-discussed--I know that I for a maybe a year or two I got frustrated with the amount of times people wanted to talk about that one. And really, it's investment return compared to investor return. And this audience will be totally familiar with it.  And particularly the work even done at Morningstar, where you've got, for the same fund, the investment, and we could just use time weighted rates of return versus dollar weighted rates of return. For this audience, right, that was where the behavior gap originally was sort of named.

And it's what people often want to talk about because investments are what we talk about. So I got a little, I don't know, tired of it. And then I realized it's actually just kind of a righteous trick. It's just a trojan horse. It's an opportunity to get into a conversation that's more important. So yeah, I think it's over-discussed. But I also think at least we're talking about it. At least we're starting to understand the importance of behavior and at least we're having these conversations. You know 20 years on now, at least we're talking about it a lot.

Christine Benz: What are some of the other behavior gaps that you've observed?

Carl Richards: Yeah. So you could go through all the behavioral finance stuff and notice things like, I think clearly we've already talked about the other one that I'm most interested in. Which is just when we're not aligning. You know, I have made a habit of asking people--when they find out what I do it gives me permission to ask questions--so like on a plane or whatever, to ask people why is your money invested the way it is. So I don't know how many times I've asked that question, but I know it's hundreds, if not thousands of times now. And the most common answer I get--I mean let me tell you I’ve never gotten what I consider to be the only right answer-- which is  this poor I built this portfolio because it gives me the greatest likelihood of meeting my goals. I've never had anybody actually say that out loud.

In this audience that might just be like come on seriously. No, never. What I often get is I read about it in the newspaper, you know I saw it in the news. My buddy at the club told me about like that's how. Oh and the really smart people whisper carefully, they say I read about it in the Economist, right like the super smart ones. So that's a big gap, is not thinking through. I did a bunch of institutional consulting, and even in the institutional consulting space, like huge university endowments, where we'd have this conversation. And in a university endowment setting the right answer to why is the money invested the way it is, should be because this portfolio gives us the greatest likelihood of meeting our spending policy. It never was, it was always like well, we got a two inch thick book from XYZ firm telling us what some super smart person came in and bought steak dinners and talked to us about this.

There's always these crazy things. So I think that's another gap. It's not aligning our portfolio with the goals. And one last one last story about this, a friend of mine named Jeff ,a retired investment banker, had a big pool of money when he retired. Enough that he could get him to see the best financial  quote-unquote financial people in the world. He had met with five different firms, all of which he would recognize. This is actually the New Year's Eve party.  He pulled me aside, I've got to talk to you, he tells me. He's like, I've met with five different firms and not one of them yet, not one of them has aligned the portfolio they're suggesting to my goals.

 And I was like what are you talking about?  Like what are they lying?  And they're like, well they're aligning to their tactical asset allocation model, or their forecast of what's going to come, or their, you know, chief investment strategist and that's all great except that that's not the reason we invest the money, right. So that's another big gap, and not one more well spent.

We've already talked a little bit about one of the big, big mistakes I see, and I think I'm going to be, if I can, I'll just be a little direct because I think this group probably is prone to this mistake, is overconfidence. And here's the reason I think you're prone to it. Overconfidence is a problem of experts, right? Overconfidence is what you get when experts behave exactly the way you would expect experts to behave. That's why it's so tricky.

I don't have a solution other than well, here's a little exercise anytime you're thinking. And the reason I think--and hopefully the fact that you're prone to this comes across as a compliment right,-- like you're experts and overconfidence is what we get when experts behave exactly like experts are supposed to behave. So here's a little exercise before you go to make any change to the portfolio because you're convinced something's going to change or whatever. That is you read something on the internet and you've decided that there's some change you need to make.

There's a conversation that I like to go through with myself, and other people called the overconfidence conversation, and you just simply ask, what if you're right and you make this change. How would your life be different?  So there's three questions. If you're right and you make this change, how would your life be different? Normally the answer to that question is sort of marginally, right. Like it's around the edges, I might take an extra vacation, maybe I could retire a year earlier. Like even if it's like a big bet, it's not like I'm suddenly going to  have an airplane.

Normally because we're not talking massive bets. So if you were right how would your life be different question number two. If you're wrong, you do this thing and you're wrong, how would your life be different? Often the answer to that question is like, oh geez, I mean you know what, I might be in trouble at home. I also might have to work five more years. And part of that's playing into this idea that we feel the pain of loss far greater than we do the pleasure of gain.

So then the third question is, and this is hard to ask people, but have you ever been wrong before? And so if you can just get yourself in the mindset of like-- well that's the only hint I have for dealing with overconfidence is to just remind yourself of times when you were so sure before and it turned out to be wrong. And the reason it  is so hard is we're so good at weaving narratives about our skill when maybe it was luck, or about our bad luck when maybe it was a poor decision right to suit our  own story. And if we, again it all comes back to awareness, we can just be honest and clear-eyed about the decisions we've made.

Christine Benz: Would you say extended bull markets like the one we've had tend to give rise to more overconfidence, is it related to what's happened in the market.

Carl Richards: Yeah. So there's another challenge when we have extended markets either direction and this recency bias problem is a big deal, right.


And so whenever this is going on what we expect--so recency bias is just taking the recent past and projecting it indefinitely into the future. So what we expect is this to happen. And even if it's not on the same trajectory we're expecting something like this to happen. And often what does happen is like expectations versus reality. 

And so yes, I think what happens in extended bull markets is we just start to forget what it means, what risk means. We say things like risk, what risk. And I can't tell you, and we do the same thing in a bear market obviously. And the challenge we have these days is our definition of the recent past has shortened. You know it used to be maybe we would talk in years. Now we're often talking in days. I once made a chart of all the apocalypse du jours that we went through, I think it was in 2016. I can't remember what it was, but it was just like every day, and then it was gone. Like in the news all day long for three days and then gone like not a mention of it.

And so when things are going up we tend to forget, risk is so easy to forget. It's an arbitrary concept until you experience it. And all the lifeboat drills like talking about getting punched in the face is different than getting punched in the face. And so when we've forgotten, bull market, bull market, bull market, we start to say things like yeah, I think I'd be comfortable with that 60/40 portfolio moving to 80/20. You know what I've heard of people that are 100% equity, what's wrong right, we're not making those.

Most of us--now this group may be different. I'm hoping this group is different--but most of us are not wired to make a decision to go deeper, increase our equity allocation when things are scary.  And there's all those reasons, like we are wired as herd animals, we're looking around, stay safe, everybody else is doing it. It feels safe staying in the herd, right. We equate leaving the herd to being killed. So I think recency bias is a huge problem. And the only way I know to solve recency bias is, again, to expand your definition of the recent past, to look back. The good news about investing is it leaves a breadcrumb trail. Investing behavior--how did you behave in 2008-9. If you can go back, what were you doing in ‘99, 2000, 2001, notice the behavior. And like I've noticed for myself, I'm terrible at it, terrible. Which is why I have a great financial planner that I literally don't want to know anything about it. I just want to throw the money over the wall. Do not talk to me about it. I'm really good at giving other people advice, terrible at taking my own. And so I think we need to understand that some of us are hardwired that way.

Christine Benz: So yeah, the recent past is a challenge. Speaking of thinking back to how we thought during bad market environments like 2008. We're all 12 years older. So I guess the question is even if we might have been really placid during that period are we going to feel the same now that we're 12 years closer to retirement?

Carl Richards: Yeah, yeah. No, I think, so there's a couple things that go on. Number one, every time there's a scary market it's, you know, we have these words, like I don't know who said the famous quote, the last four words of any great investor are this time it's different.  But the reality is it is different. It's always different, like the cause of the scary market is always different enough to trick us into believing that the outcome will be different. And I think that quote is pointing to the outcome, not the cause.

The outcome as far as the way the evidence of history shows us, is we get through these things when they're scary, but we don't know that when it's happening. And there is some truth to the fact that we don't know for sure. That's why it's called risk. Risk isn't just volatility. Risk is the total of the idea that like look, are the equity markets going to always work the way they always have worked. No we don't know. What's the best bet we can make? The way of history, right.

Like it's the only way I want to live anyway. But it's also the only reasonable bet to make. But the event itself is different enough, our lives are different enough, that those two combine to help us make all sorts of crazy decisions in scary markets and greedy markets. And so I think it's just really, really smart for us to say wait.

Wait, let's get out of these branches here. Like these way out on the branches. We all know what it feels like to be way out in the branches. I mean look at a branch next time in the windstorm. Like those things move a lot. Then look at the trunk of the tree. It's not moving much. The trunk of the tree- these products that we use, the investment performance--those are the branches. At the trunk of the tree are you, your life, and your goals.

If you haven't taken the time to clarify that you've got no touchstone to grab when you're scared or greedy, one of the two, and so I think we can spend all of our time, it's in fact sometimes even a useful exercise, some of us find it entertaining, right. Spend all the time with the financial pornography network. Understand all that stuff out on the branches.

But then we have to come back and go wait, wait, wait, wait. Why am I doing--like for me that's time with my family, mainly outside and serving in the community. Above that is a layer of goals. Like in order to meet that, why time with my family mainly outside serving the community is a set of goals--if I come back to those then I can say are these goals all the same still. Well maybe a few of them have changed. You know we don't need that much money, we'd like to move to the country, you know whatever. But mostly those haven't changed. The value almost never changes. Time with my family, mainly outside serving the community, I’ve been saying that for 12 years at least. 


The goals, if I say to myself the goals haven't changed, then I go great. So the purpose, goals, and then right above that I should be drawing this, right, purpose, goals. And then right above that I would be thinking process. And that's the investment process, okay. And we all know the investment process predominantly here. We've got whatever the portfolio of passive funds that makes sense. That's low cost and diversified, whether it's the three portfolio fund or the four or seven portfolio or whatever. It is all mixed together in an allocation that matches the goals. Then above the process sits product, the least important part but it's the part we all spend all of our time talking about. Product would be a set of mutual funds or ETfs that populate the product.

So we can go from wait, that's right, this is crazy, is my purpose still the same, are my goals still the same, is the process still valid. Okay did I pick the right products to validate to populate the process. The products are just things to populate the plan, and if that all still yes, we can go okay I guess I don't have to do anything today. 

Christine Benz: I want to take another audience question Carl. It's a good one. What are three nudges you would recommend to improve your finances?

Carl Richards: So yeah. I think I would probably start with--I mean depending on where you are in this journey, the--look we all know that one of the most important parts of this process is a great portfolio. Amazing, but if you don't have any money to put into it, it doesn't do any good. So I think the idea of getting aligned with spending is always the place to start. And one easy way to do this, I just think of it as finding free money.

So you track your spending. And I wouldn't track my spending as a tool to beat yourself up with. So I'm the self-declared king of permission granting. I have a little staff-- and this is my staff, it's actually the Apple pencil-- but it's my staff and I'm going to grant you all permission to stop budgeting to beat yourself up. We're going to use budgeting as a tool to help us meet goals. It's fun. It's a game. I know I'm totally lying about the fun part, but I’m just trying to convince you like stop,it's not a tool for inflicting pain, it's a tool for awareness so I'm going to grant you permission to do that.

So once you do that, you track and then you just look. Are there places where everybody has taken this through this workshop? Can I decree these are non-discretionary spending that I don't really care about. Like can I get a better deal on the cable. I’m not asking you to cancel it. I'm just asking you to make a phone call or two.

Everybody that's gone through that has found a couple hundred dollars, right. Like my utility bills, double checking that, paying the right tax rate on property taxes. Just take a month, 45 days to look for free money. When you find it, automatically increase your contribution--well assuming there's no credit card debt around, right--automatically increase your contribution into your S&P 500 fund.

Then the next level of that would be to find more aligned spending. Is there money that you're spending that you don't really care about? There are a hundred bucks a month going out the door to Netflix that you never use, or whatever. So that's the first thing I would do, is just go on a treasure hunt to find free money and redirect it towards a more useful cause.

That cause might be paying down credit card debt. It might be spent taking your spouse on a date that you've been neglecting. And it might be investing. So that's I think maybe just one giant nudge. As I would just understand,  I would look at spending more in the form of getting aligned with happiness. Not in the form of beating ourselves up.

I think so much of our budgeting personal finance stuff is all around inflicting pain. Make it painful. It should hurt, you should be deprived. Like no,that does not sound fun. No reason it doesn't work for most people. But if instead we can be around getting aligned and spending lavishly on the things that we value, including investing, and cutting ruthlessly on stuff that we don't care about, it can start to work.

Christine Benz: So I just want to mention the name of the book that you mentioned, Carl. Earlier on you talked about the nurse who wrote the book um about interviewing people as they were close to death. Mike Nolan tells us the book is called The Top Five Regrets of the Dying- A Life Transformed by the Dearly Departing.

I want to end on a question about Jack Bogle, Carl. Where I want to ask you to just talk about how Jack affected, impacted your career and the way that you think about investing and financial planning.

Carl Richards: There's only one--I  was trying to even figure out  who gave me the other quote--oh, Oliver Wendell Holmes. So here I’m going to draw this real quick.


There's only one quote that's had more impact on me than Jack's quote around simplicity. And it's the Oliver Wendell Holmes quote. So here's how my entire career has been built off of the idea that sometimes we have to cut through great, great, swaths of complexity to get to the simplicity on the other side. 

And also the idea that take 100 minus your age and put that in equities. And then this, and I don't really care about that part, what I care about it was the next sentence which, and I'm paraphrasing, there might be investment strategies better than this, but the number that is worse is infinite. Like that changed my life. It changed the way I dealt with clients. I used to have clients where we would have the simplest portfolios on the planet, you know, with millions of dollars. And all my colleagues would be like what da da. And I used to always just say, look if it's good enough for Bogle, it's good enough for me, right.

Like let's just put our focus on behavior. And so the way I think that simplicity quote that changed my life was really this idea that we start, we head into a problem around money and then, oh everything's going fine until we're like, oh geez what account should we put that in, and where, and  what's growth and income and emerging markets--I don't know--an expense ratio, 12b-1 fee.

Like we and the whole industry have been trained sort of to drop us right there, almost like a sales technique. Like dig a hole, throw a client into it and then look down and go hey, I'm the only one with a rope.

And what Bogle gave me permission to do was to take them here, right. Like I can go through all this, consider the edge cases, the nuance that's you know all of that stuff. But what clients and readers and friends and real people in the world really want is they just want to be taken here. Now I know some of our stereotypical engineers want to do that, right, and that's fine. That's a good day at the office for somebody who cares how smart I am.

But most people just want to know that.  And he gave me permission to do that, 20 years ago, and it completely changed my entire career. I have been spending my entire career since that time being warned about being too simple. Like it happens almost daily. I get an email like are you worried about me. 

And so about 10 years ago based on that quote--I mean that's always been my bedrock- like wait, if it works here I think it's okay for me too. But I  was like wait, it sounds like there's an exciting place called too simple, with scary monsters. That if you go there you'll be eaten and your career will be over. And I was like I think I'm going to go see if I can find this place, like how simple can I get. And I never found the monsters, right. All I found was this great quote from Bogle.

So thanks for asking. That was fun.

Christine Benz: Well thank you Carl. Thanks so much for being here. This was just as much fun as I hoped it would be. I hope the audience enjoyed it. And now I'm going to turn it over to Rick for some closing remarks.

Carl Richards: Thank you Christine. Thanks Rick.

Rick Ferri: Thank you Carl and thank you Christine for the outstanding interview. It's always interesting to hear Carl's deep thinking views on money and life. And I always say  simplicity is an alpha. So we talk about alpha all the time. Simplicity is one of the biggest alphas that you'll find .

This presentation has been recorded and will be available soon on boglecenter.net. Our next Bogleheads® Speaker Series event will be on March 5th featuring Dan Ariely, professor of psychology and behavioral economics at Duke University and author of New York Times bestseller Predictably Irrational. The discussion will be moderated by Alan Roth, a financial planner, long time Boglehead and a Bogle Center board member. Thanks for joining us today. We hope that you and your family have a safe and happy Thanksgiving, and see you next time.

About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant


Bogleheads Speaker Series

You may also like