Relationship with Money
A blog that knows money is more than numbers
51 | The More Things Change, The More They Stay the Same
This post is Part 3 of 3 of the “Promoting Transparency Instead of Perpetuating Taboo” series.
Progress continues to be made, options continue to proliferate, information continues to become more accessible, convenience continues to be ubiquitous, and yet we're still plagued by the same money problems.
These money problems existed 1,000 years ago and they will exist 1,000 years from now, because they are fundamental to the human condition.
Our lifetimes are marked by constant movement along a number of money spectrums - overconfidence vs. paralysis, fear vs. greed, regret vs. pride, contentment vs. longing, scarcity vs. abundance, control vs. chaos, and so many others - that can't be "figured out" or solved "once and for all" because our daily life experience is constantly changing our position on them.
Every single person is faced with the same unanswerable money questions - How much is enough? Am I ahead or behind where I am "supposed" to be? What is the "right" type or amount of spending? Why is it so much harder to spend out of my savings than out of my income?
Every single person's life experience is wildly unique to them and also only really known by them, so the layers of nuance that are then baked into our individual relationships with money are hard to comprehend and impossible to map out on a piece of paper.
And yet financial hardship, at every level of wealth, can be pointed back to three basic principles...
- Running out of cash on hand.
- Spending that exceeds income for too long.
- Expectations of the future that outpace the ability to support that future.
No matter the point in history or the amount of wealth, the same three principles explain every hardship that someone has experienced with money.
They’re not complicated principles and they don’t require much technical knowledge, but they continue to perplex human after human - not because we haven’t found the tactics, but because the tactics aren't the missing piece of the puzzle.
Every single one of us has the final puzzle piece in our possession, it’s just too scary and hard to place in its spot.
The final puzzle piece is the willingness and courage to begin slowly chipping away at money's taboo-ness so that we can actually begin changing our collective relationship with money.
Not recklessly talking about it, but discussing it with intent and legitimate desire to change our relationship with it.
Conversations that are characterized by more listening than telling. More questions than answers. More accountability than advice. More encouragement than judgment. More awareness than correctness.
Common languages for discussing it that span household, age, and dollar amount.
Common tools that stop measuring, bench-marking, or promising certainty and instead provide context, comparability, and promote resilience.
50 | More Context, Please!
This post is Part 2 of 3 of the "Promoting Transparency Instead of Perpetuating Taboo" series.
There are two primary ways we communicate about money that compound its taboo-ness.
There are the things we say that only serve as gas on the fire of things we observe...
"We can't afford" when we've actually just chosen to spend on something else.
"We really screwed up" when it wasn't actually a bad decision, but only new information that came to light and made hindsight 20/20.
"Once we 'catch up' or 'get ahead' then everything will be better" without acknowledging that "more" doesn't actually change our relationship with money.
The list of phrases is endless, but the themes are eerily similar every time - emphasis on non-critical, ambiguous details, single points in time, and things that are out of our control.
Then there are the things we don't say that leave us all filling in the blanks with an infinite list of "whats" and no accompanying "whys".
What we have experienced in the past with money - good or bad.
What we have observed family and friends do with money - good or bad.
What part of our finances feels like a function of luck - good or bad.
What part of our finances we wish was different - good or bad.
What we know about the future - good or bad.
What we don't know about the future - good or bad.
The reality is that these thoughts and feelings actually drive our decisions and feelings of well-being, but our tendency to reduce money stories to "I-see-what- they-bought,-so-I-must-know-their-story" leads us to believe that "more" spending means "more" wealth which means "more" well-being.
What we observe and discuss only perpetuates the taboo nature of money and obscures the fact that, regardless of our actual level of financial wealth, the exact same emotions and challenges impact every single one of us…
49 | The Teeny Sliver
This post is Part 1 of 3 of the "Promoting Transparency Instead of Perpetuating Taboo" series.
Morgan Housel says it so well, "People are good at learning by imitation. But the hidden nature of [financial] wealth makes it hard to imitate others and learn from their ways.”
Observe someone playing a sport. You can probably figure out how to score.
Observe someone raising a child. You can probably snag some pointers.
Observe someone doing a good deed for stranger. You can probably replicate it.
Observe someone interacting with their money. Take it with a grain of salt.
The reality is that we "see" a fraction of a fraction of how people interact with money - a teeny sliver of how they spend it.
Toss in the fact that we tend to compare other's highlight reels to our own blooper reels and that teeny sliver of spending becomes even more misleading.
Everybody has to maintain their car and pay utility bills, but the vacation or nice house or restaurant is what gets filed away in the observer's brain.
We don't see how much cash they have on hand.
We don't see how much equity they have (or don't have!) in their home.
We certainly don't see any investment balances.
We don't know their income level.
We don't know what else they spend.
We don't know their savings rate.
We don't know what their investment experience has been.
The funny thing about the teeny sliver of spending is that, if anything, it's a glimpse into what is preventing someone from building financial wealth.
Drawing conclusions about someone's financial well-being by observing their spending is like assuming someone is physically fit because you have seen them lounging on the couch or eating a piece of cake.
If incomplete, irrelevant observations are the embers on the fire, the way we talk (and don't talk!) about money only fans the flame...
48 | Pricing Land Mines
I took our two older kids to the movies for the first time. We ate more popcorn and drank more Sprite than we ever would at home. We experienced the magic of watching a movie in a theater. We took a picture beside the cut outs in the lobby. We had a shared experience that all three of us added to our memory buckets.
It doesn't really matter if the popcorn was $5 or $15 or $30 of the $45 that we spent for the experience.
The funny thing is that it's easier to say that than it can be to actually feel that way.
It's all too easy to focus on the specific price because it's easy to measure, while appreciating the general value is harder because it's impossible to measure.
Movies aren't the only place it's easy to get stuck on the price. There are little "pricing land mines" everywhere that can ruin an experience if we don't maneuver around them or disarm them ASAP.
A professional sporting event costs $20 to get in and sells a beer for $15. How different would it feel if you paid $35 at the door and received a free beer ticket?
An online retail item costs $70 and then on the next screen you realize that shipping costs another $10. How different would it feel if the list price was $80 and there was free shipping?
A hotel costs $300 for a night and then charges $30 for self-parking on-site. How different would it feel if the room cost $330 and the parking was complimentary?
It's hard to recognize when you might step on a "pricing land mine" until it has already exploded.
A few ways to navigate them are...
Observing how often you or someone you're around talks about the specific price of things - notice whether it emphasizes the price or the value received.
Zooming out and describing the experience as a whole instead of the individual components. Name the value of the things that you're getting - they're not always obvious and they are different for everyone.
Acknowledging that the "whats" are much easier to discuss than the "whys", but the "whys" are what actually drive contentment. Name the "whys" behind the decision to spend in the first place.
Remembering that someone else's price doesn't have to change your experience.
47 | Keeping Tabs on the Story
This post is Part 3 of 3 of the "Zooming Out Instead of Fixating on the Details" series.
The risk is not that we will miss an important detail with our finances.
The bigger risk is that we get lost in the details and lose track of the bigger story.
The reality is that there are only a handful of things that need to be addressed from the technical side of our finances.
Beyond those few things, the rest of our relationship with money consists of the stories that we tell ourselves to fill in the gaps and make sense of our lived experience with money.
When we get lost in the weeds, we start to lose track of the story.
When we push on a rope, we start writing a different story.
When we zoom out, we give ourselves the best chance to keep tabs on the story.
Zooming out allows us to quickly see if we're caring for the technical things.
Zooming out allows us to orient when the details try to overwhelm.
Zooming out helps us call out feelings that are not in line with reality.
Zooming out helps us to rewrite narratives that have gotten out of whack.
Zooming out ensures that we're all seeing and talking about the same things.
Zooming out allows us to recognize when we need to change course and instructs us on what we should change first.
Zooming out ensures that the story we're telling with our finances matches the story that we're trying to live out in our lives.
46 | Pushing on a Rope
This post is Part 2 of 3 of the "Zooming Out Instead of Fixating on the Details" series.
The weeds have an ability to disorient us and then lure us into focusing on things that don't actually move the needle.
We take action, but inevitably that action doesn't do anything to address the uncertain feeling in our gut around money.
At first it might, because doing something feels good.
The trouble is that that "good feeling" doesn't always imply "good progress".
Eventually, we circle back to the same old feelings of...
"We've been here before."
"Well, that didn't really change anything."
"Why does the hole still feel so deep?"
"Why does it feel like we are still 'behind'?"
If being disoriented leaves you overwhelmed and confused. Putting energy towards the wrong things leaves you tired and frustrated.
Changing companies for modest income boosts without addressing our risk of burnout or increasing the horizon on our ability to generate income. Eventually, we'll discover that we're pushing on a rope.
Trying to control spending by saying "no" to hundreds of $5 decisions instead of saying "no" to a few $500 decisions. Pushing on a rope.
Trying to save what is leftover at the end of a month or year instead of setting aside the money on the front end to "pay yourself first". Pushing on a rope.
Chasing hot investments and accidentally establishing the dreaded habit of "buying high and selling low". Pushing on a rope.
Inevitably, pushing on a rope leads to no real progress, consumes all of our energy, and leaves us exhausted and bitter.
Instead of trying to get every single little detail right and hoping it will change our relationship with money, we're better suited to zoom out and focus on the things that actually matter...
Additional Reading
Staring at decisions by Seth Godin
The perils of investing based on past performance by Carl Richards
45 | Lost in the Weeds
This post is Part 1 of 3 of the "Zooming Out Instead of Fixating on the Details" series.
One of the first challenges with money is orienting to what matters and what doesn't matter so we can experience real financial well being.
Because finances are complex and hard to talk about, it's easier than ever for conversations about money to get lost in the weeds.
Once you're lost in the weeds, it's hard to get out, it's easy to become overwhelmed and feel like you "don't have what it takes to succeed", and it can seem like the only solution is "more".
Sadly, much of the financial services industry begs us to dive further into the weeds by emphasizing and marketing undifferentiated "products" - investments, financial plans, and tactics - as the things that you're missing.
We don't need experts driving us further into the weeds, because the reality is that any conversation about finances is always at significant risk of getting lost in the weeds...
We find ourselves evaluating different banks trying to squeeze out an extra 0.20% of interest thinking it will make a difference - "more" must be better! - instead of acknowledging that the fact that we have cash set aside and available at any moment, not its rate of return, is what actually matters.
We find ourselves haggling or stressing over the last few thousand dollars in the sale or purchase of a home - how much "more" can I capture? - instead of realizing that 99% of the financial implications of the decision are already water under the bridge.
We find ourselves wondering if we, or an advisor, can find the handful of investments, of the tens of thousands that exist, that will provide the most return - "more" has to be better! - instead of acknowledging that as long as we care for a few basic things that infinite combinations of investments can be good enough.
We find ourselves wrapped around the axle on the precise level of this year's raise or bonus - "more" today must be better! - instead of assessing and reflecting on the trajectory and sustainability of income over the next couple of decades.
We find ourselves defeated and discouraged when we exceed an arbitrary monthly budget for any category of spending - if only we had "more"! - instead of intentionally observing the spending over a longer period of time and evaluating its role in driving lasting contentment.
We find ourselves perplexed and overwhelmed by the different types of accounts that we could use to save - which one will lead to "more"? - instead of knowing that the fact that we're actually saving is the ice cream sundae and the exact account to which we save is only the cherry on top.
We find ourselves ruminating and socializing on the daily, weekly, or monthly moves in the stock market - "more" must make these emotions go away? - instead of accepting that the short term moves don't mean a thing and that they will never go away.
Getting lost in the weeds in one category can hijack our relationship with money, but society makes it hard not to get lost in the weeds in every single category.
Once we're lost in the weeds, then any effort to address the feeling of disorientation, overwhelm, or discontentment is a lot like pushing on a rope...
44 | The Urge
The urge is real.
The urge is strong.
The urge is persistent.
The urge is for the "deliverable" - the tool, tactic, analysis, projection, or product - to solve everything and allow us to surpass the underlying emotions and feelings that define our relationship with money.
It's a two-way street.
The urge is the easy way out for the one providing advice or counsel.
Once we've identified or felt enough of the tension in the conversation, we can point to the "deliverable" to make the tension go away and then subconsciously cross our fingers!
The trouble is that this runs a substantial risk of missing the mark, pulling us further away from what we actually need, and discouraging us along the way.
"I am feeling significant angst trying to buy a home in the current housing market." Well, here's a summary of your investment performance over the past 12 months and a commentary on what outperformed in your portfolio.
"We feel significant tension making spending decisions and often find that we can't reconcile differences in our perspectives." Well, here's a projection of what you can spend over the next 30 years to be sure you don't run out of money.
"We want to save for college for our kids, but we're not sure if that will be in the cards for them and we're hesitant to designate so much money to this one goal." Well, here are all the tax benefits of saving into a 529 account and thoughts on why it's a good idea.
The "deliverable" is the cheap way to get out of the real conversation.
The urge is the easy way out for the one receiving advice or counsel too.
When we're feeling the typical overwhelm that so easily accompanies our experience with money, we subconsciously cross our fingers and hope that someone will point to the "deliverable" that can make the tension go away!
The trouble is that this "magic bullet" does not exist and pretending that it might only expedites our journey to a disappointing day of reckoning.
No commentary about the current job market finds you a new role.
No budgeting app assesses the level of contentment in your spending.
No future projection does the saving for you.
No investment product protects you from the uncertainty of the future.
The "deliverable" is a crutch to making real progress.
It sounds like I am suggesting that tools, tactics, analyses, projections, or products are not necessary for financial well being. This is not the case.
The reality is that fancy "deliverables" are much less necessary to financial well being than we've been led to believe and, if we're not careful, they run the risk of distracting us from our relationship with money.
43 | Why So Many Bank Accounts?
Any time I see a bunch of bank accounts within a single household...
I cringe a little bit.
Yes, I understand the mindset of segregating money for a specific goal from everything else.
I see how having separate accounts in a relationship could allow spending to happen seamlessly without a value judgment being placed on each purchase.
I also know that a business owner needs to keep the business finances separate from personal finances.
Certainly there are other advantages that I am not listing.
I can buy into each of these advantages if they are done with clear intention, but it also doesn't have to be this hard.
The number of disadvantages to allowing your list of accounts to grow without pruning seem infinite and hard to measure from a psychological perspective.
When everything comes into one place, and everything goes out of one place, it makes it a lot easier to do something that is important in finances...
Keep track of how much is coming in and how much is going out.
This sounds so simple, but it's so easy to overlook.
When funds are spread across a bunch of different accounts…
It's a lot harder to keep track of what is real income and what's a transfer between your own accounts.
It's close to impossible for the average person to keep tabs on where dollars are being spent.
It's a lot easier for things to run on autopilot for many months or years longer than they were intended to run in the first place.
It's a lot easier to panic when an account balance gets low even though your collective account balances are more than enough.
When it comes to the number of accounts, "Less is more!".
42 | Running on Empty
This past weekend, my dad and I were riding down to Pinehurst to meet up with my brother for a weekend of golf, college basketball, and quality time.
Pinehurst has been a special place to all three of us for many years - U.S Opens, golf weekends, and visits to my grandparent’s-in-law house.
Over the past 15 years, I'd bet that I have driven the route from Winston-Salem to Pinehurst somewhere between 25 and 30 times.
I know the route well - the food options, the golf courses we pass along the way, the exits with tons of options, and the exits without much of anything but an on/off ramp.
About seven miles away from the traditional turn off, we passed an exit with our last gas station option. As we drove under the overpass - the exit officially behind us - Dad said, "I think we should be able to make it to the next exit before we have to fill up."
At this point, the warning indicator read, "1 Mile to Empty".
For a few minutes we chuckled as we discussed the decision - how long has the light been on? Does the light coordinate with the mileage counter? Does "1 mile" mean 1 mile or does it mean 35 miles?
Based on prior experience, we sensed that we had some leeway, but the exact amount of leeway was unknown and the previously casual discussion quickly pivoted to how far we were from the next gas option.
After a few minutes, we began approaching the normal exit and saw big, orange barricades across the entire ramp - "EXIT CLOSED".
The innocent chuckles and "what ifs" of a few miles back pivoted further into somewhat nervous laughs and a quick glance at Google Maps to assess the reality of the situation.
At this point, we were winging it on what seemed like a gallon at the most and fumes at the worst.
The innocent decision to pass on an easy gas stop seemed like no big deal until the next option, which had been available every time before, was not available at the precise moment we needed it.
The reality is that cash in a savings account is a lot like gas in your car.
With a full tank of gas, you can access exponentially more destinations than you can even with a half tank. The next fill up is way down the list of things you need to be concerned about and you have the freedom to dream and adventure without being too concerned with immediate logistics.
When you're driving on fumes or even a gallon, you are constantly thinking about when, where, and maybe even if you will be able to fill up again. You're completely susceptible to any uncertainty that is thrown your way. Even routine trips begin to feel reckless because there's a chance it won't go as smoothly as it always has.
With the gas tank, it is easy to see the cause and effect. With money, that relationship is not as obvious.
Ample gas in the tank, or cash in the bank, can feel like such basic advice that it's easy to overlook under the presumption that you'll always have the ability to fill it back up.
No matter the car, if you run out of gas, you're stuck.
No matter the level of wealth, if you run out of cash, you're stuck.
Fortunately, the next exit was only a couple of miles down the road. It didn't have a gas station, but we were able to navigate back to the closed exit in a roundabout kind of way to fill up the tank and grab lunch.
For us, the worst outcome would have been waiting on the side of the road for AAA and possibly missing a tee time for the afternoon. A bummer, but not a life changer.
With finances, the stakes can escalate much more quickly. The AAA equivalent when you run out of cash in a savings account is carrying a balance on a credit card out of desperation, selling investments at an inopportune time, or being forced to say "no" to something that might have been an automatic "yes" with more cash on hand.
Don't run your household on fumes!
Additional Reading
How your bank balance buys happiness: The importance of "cash on hand" to life satisfaction by Peter M. Ruberton, Joe Gladstone and Sonja Lyubomirsky
"Could liquid wealth, or "cash on hand" - the balance of one's checking and savings accounts - be a better predictor of life satisfaction than income?"
How I Think About Cash by Morgan Housel
"When chaos hits, nobody has enough cash."
41 | Who’s Throwing the Peanuts?
Don't model your life after a circus animal. Performing animals do tricks because their trainers throw them peanuts or small fish for doing so. You should aspire to do better. You will be a friend, a parent, a coach, an employee -and so on. But only in your job will you be explicitly evaluated and rewarded for your performance. Don't let your life decisions be distorted by the fact that your boss is the only one tossing you peanuts. If you leave a work task undone in order to meet a friend for dinner. then you are "shirking" your work. But it's also true that if you cancel dinner to finish your work, then you are shirking your friendship. That's just not how we usually think of it.
In May 2012, I clipped this excerpt from an article in the Wall Street Journal called 10 Things Your Commencement Speaker Won't Tell You.
It stuck out to me as a 24-year-old trying to find my way in the real world and it still rings true today.
Typically, before you are responsible for supporting yourself financially, you're spoon-fed metrics that streamline measuring progress - grades on report cards, scores on exams, win/loss records in sports, diplomas and degrees, etc.
It can be pretty difficult to orient in a world that doesn't have a standard way of measuring progress - a lot of career and even financial frustration can probably be pointed back to “failure to orient”.
Because it's so hard to find metrics in the real world, it's easy for income - one of the few things that spans household, profession, industry, and age - to become a default metric of progress.
Some level of income is vital, but beyond that level, it is a pretty lousy metric that doesn't account for the things that add all the color to life, particularly the quality of our relationships.
The line that hooked me was, "But it's also true that if you cancel dinner to finish your work, then you are shirking your friendship."
The quality or strain of a relationship is pretty easy to feel, but impossible to objectively measure.
With enough shirking, I think it's possible to get "fired" from a relationship. It's just a lot harder to recognize when we're on the brink in a relationship because there aren't any peanuts being tossed.
Oftentimes, work must be prioritized - not minutes at work, but real, value-creating work.
Oftentimes, a relationship must be prioritized too.
The nuance isn't in knowing precisely when to lean into each one.
The nuance seems like knowing that the peanuts aren't the only way to measure progress and figuring out creative ways to assess progress for the things that might not have peanuts.
40 | Why Do We Save?: The Most Powerful Reason
We save to keep our expectations in check.
A dollar that is not saved is spent - creating expectations.
A dollar that is not spent is saved - creating options.
The challenge is that every dollar gets assigned to either expectations or options - you can't pick "both" and you can't pick "neither".
This fact alone makes it the most complex relationship in our personal finances and the thing that most financial well being hinges upon.
A weekly coffee, a monthly streaming subscription, an annual trip, a specific school, a specific style of decorating a home - each has a different purpose, magnitude, and frequency, but every single one creates some degree of expectation.
When expectations grow out of control, eventually there is a day of reckoning and reality forces us to push the reset button.
When options grow out of control, there are a number of downsides too, but they're a conversation for another day.
The purpose here is not to determine an objectively correct level of spending/saving or make a value judgment on different types of spending.
Both are impossible tasks.
The purpose is to acknowledge the power of saving and its role in a world where expectations are easier than ever to create and as painful to change as they have always been.
39 | Why Do We Save?: The Underrated Reason
We save in order to keep flexibility in our finances.
A habit of saving - income (purple) consistently exceeding spending (red) - is the equivalent of playing a card game with wild cards.
The flexibility and combinations that come from having wild cards in your hand completely changes every hand, every decision, and eventually the entire game.
If you have an established habit of saving then you can...
Take a pay cut to make a career change or shift to part time without changing your underlying lifestyle.
Say "yes" to a once in a lifetime opportunity without crunching the numbers or wondering if you're being reckless.
Spontaneously give money to an organization or person that means something to you because you want to or because they have a specific need.
Temporarily re-direct funds that have historically landed in a bank or investment account and for a season cover college tuition or a car purchase or a trip.
The flexibility afforded by saving can be hard to wrap your mind around, because we think of "saving", or "not spending", as constraining.
It's too easy to think that "spend whatever you want" is flexibility.
In actuality, "spend when you want" is a truer form of flexibility that comes only from a habit of saving.
Additional Reading
Overstuffed by Seth Godin
38 | Why Do We Save?: The Obvious Reason
We save to set aside money that we can spend later.
OK...?
Tell me more please...
Not saving is like...
Routinely running your gas tank to empty. You're always looking for the next gas station, you're limited in how far you can travel, and you're always susceptible to a tiny change in plans or expectations leaving you stranded on the side of the road.
Buying food for your next meal only. There's no slack in the system in case you’re unable to go to the store tomorrow, someone else decides to join you unexpectedly, or you find out the food has gone bad.
Operating with only the roll of toilet paper that is on the holder. Once you get to the second half of the roll, you're going to be pretty aggressive with conservation and pretty selective with who you'll call if you happen to run out.
We have no problem operating with a little more gas or food or toilet paper than we need for the next moment. We're also pretty adept at not hoarding any of them.
In reality, money doesn't need to be any different, but for some reason it feels much more complicated.
With money, it's easy to do the equivalent of always operating on E or towing a tank truck of gas behind you so you never run out. Finding the right middle ground is so much harder.
Inevitably, every dollar spent over a lifetime is not perfectly timed with an offsetting dollar of income. This is the essence of why we need to save something.
What's challenging is that if this is the only reason for saving, eventually we're going to get burned out, forget why we're saving, or struggle to determine how much is enough.
37 | The "Single Jump" Myth
In a conversation with a friend, my wife came up with a fantastic metaphor for pursuing career change.
The metaphor can be extended to anything where there is a vision that is grander than the current reality - assembling a group of people, starting a business, or even running a household.
Pursuing any change is a lot like trying to get from one side of a river to the other.
Our modern-day habits of small talk and social media have led us to believe that some people can make it across the river in a single jump.
No one can cross a river in a single jump...I promise.
There are two troubles with the "single jump" myth.
The first is that it makes change seem easier than it is, which is pretty discouraging when your first jump ends with a splash.
The second is that it makes it seem like there is more to be found on the far bank than there is in the river.
In reality, change is more like gradually jumping to different rocks to get closer to the far bank.
Some rocks are huge, easy to spot, and bone dry.
Some rocks are bunched closely together, and some rocks are far apart.
Some rocks are tiny and hard to spot initially but are the only way to keep making progress.
Some rocks are wobbly or slippery (or both!) and require extra care landing on them, standing on them, and leaping off them.
Sometimes your shoe, maybe even your sock, gets wet.
Sometimes you hit a dead end and must retrace a couple of steps.
Sometimes you might have to avoid the rock with the snake on it.
As I have pursued career changes, the process has made me more confident that you can't make it across the river in a single jump - all you can do is find the next rock.
The process has also made me wonder if the far bank is what we're pursuing or if the pursuit is actually the rock jumping itself.
Additional Reading
What’s the next smallest step? by Carl Richards
Reminder that scary things are less scary when you make them smaller.
You Accomplished Something Great. So Now What? by A.C. Shilton
Easy to read introduction to the "arrival fallacy".
118: Start Small by Emily P. Freeman
"Small things don’t always turn into big things, but big things always start out small."
36 | Investments are a Distraction
Wait a second…what?!?
We just did a deep dive on how to invest and now it's a "distraction"...are you kidding me?
Nope.
Once we've cared for the basics and are prepared to behave, there isn't much else we can do when it comes to investing.
Whether it's the fact that there are infinite investment options that all converge into a similar outcome over long periods of time or...
The fact that our lived experience with money has so much more to do with how we generate income, how we spend it, and how we set it aside, or...
The fact that most details of investing are like your doctor reading you the footnotes of the research papers that led them to arrive at their proposed treatment plan.
Investments are an enormous distraction.
They are a distraction behind-the-scenes if we waste time with their administration.
They are a distraction in conversation the moment they have gone over the head of the least knowledgeable (or interested!) person in the room.
They are a distraction when we pretend that any tactical tweak is going to change our relationship with money.
The reality is that the numbers side of financial well being is mostly covered by three core themes...
At all times, do/will I have sufficient cash (blue) on hand?
On average, does/will my income (purple) exceed my spending (red)?
Over time, am I aware of how my spending (red) expectations compare to what I am setting aside (blue/gray/yellow)?
Beyond these basics, investments (and any other tactical details for that matter!) run the risk of completely distracting us from the story that we're writing with our use of money.
Additional Reading
Retirement Success Financial Independence: A Surprising Look into the Factors that Drive Positive Outcomes from the ASPPA Journal
Yes, I crossed out "Retirement Success" - the principle is the same regardless of the goal - see the first paragraph of Page 5 and the related visual
Market High Soup For The Soul by Jared Korver
Your Complete Financial Life by Carl Richards
Not a solicitation - just a powerful visual
35 | Patient Investing, Part 7 of 7: The Secret Ingredient
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
Forecasts rarely match reality.
Outcomes do not always align with effort.
The story in our head doesn't always align with the story that unfolds.
Patience is the only way that I know to bridge these gaps.
Patience is to successful investing what the heart is to the human body.
When you see something that challenges the fundamentals of your own way of thinking - patience to lean in, listen to the facts, discuss them with a friend or colleague, and evaluate whether your beliefs still hold true.
When you see someone else experience investment performance that appears to outpace what you are experiencing - patience to acknowledge the discomfort it may cause without abandoning your own plan.
When the world seems to be falling apart at the seams and the value of your investments seems to be free-falling - patience to make an adjustment to the things you can control without getting overwhelmed by the things you can't control.
When a new idea is promoted as the "next big thing", but in reality it doesn't seem to create real value that will ever enhance our collective life experience - patience to wait for its day of reckoning to arrive without getting caught up in the hullabaloo.
When a part of your portfolio feels like dead-weight that needs to be pruned because of recent under-performance - patience to know that each investment will have its ups and its downs, and that recent disappointment does not necessarily call for permanent abandonment.
When a decision feels so urgent and important that you are becoming paralyzed by the moment and the stakes - patience to know that buying a little more time will likely bring more clarity, more information, and more ability to make a sound decision.
Patience isn't a cute virtue.
Patience isn't convenient to have in case of emergency.
Patience is the backbone of success.
Patience is a superpower.
Additional Reading
How long is forever? by Seth Godin
Stop worrying about investments, become a better investor by Carl Richards
Staying Put by Morgan Housel
34 | Patient Investing, Part 6 of 7: How Long is "Long"?
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
What do you think the market is going to do this year?
What a question...
It's hard for folks not to ask and it's impossible to answer.
I literally have no idea what the market is going to do this year.
The same will be true if I'm asked again next year, or in 5 years, or in 10 years, or in 20 years.
I'll go as far as to say that someone constructing an answer to the question, "What do you think the market is going to do this year?" is taking the easy way out and only further ingraining our unhealthy desire to grasp for certainty.
If I'm forced to give an answer, I'd probably point to the left hand side of the JP Morgan chart below and say if we're 100% invested in stocks then I'd bet this year will be somewhere between -39% and +47%.
Obviously, that's not super helpful.
I think we're asking the wrong question though.
The question should never be, "What do we think the market is going to do this year?"
The question should be, "Why do we have dollars invested if we think we'll need them next year?"
Investing is not a slot machine, but the shorter the horizon, the more it's going to feel like a slot machine.
Ask me how I think the market (i.e. the collection of companies that make up the market) are going to perform over the next 10 or 20 years and now we're talking about something worthwhile.
If our outlook for investing is a single year, at some point there are going to be some pretty disappointing results - hopefully (cross your fingers!) those results don’t correspond with a significant life event.
If our outlook for investing is a couple of decades, I don't think we'll ever be disappointed by the results regardless of whether they are the historical best or historical worst for a 20 year period.
The tricky part is that for more than a couple of decades, we've been building habits of daily life and engaging with technology in ways that have made the next moment seem like the only moment that matters...
Additional Reading
Keep It Going by Morgan Housel
The delay by Seth Godin
Days or decades: What’s it going to be? by Carl Richards
Stocks For the Long Run by Ben Carlson
33 | Patient Investing, Part 5 of 7: Be Careful What You Ask For
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
A friend of a friend rode the GameStop wave from the bottom to the top and back to the bottom in January and February of 2021.
An initial investment of something close to $10,000 grew to something close to $1,000,000 within a few days with the biggest moves happening within hours and even minutes.
What a psychological Petri dish.
So much personal financial wealth tied up in a single stock, that for a couple of days a financial future was reduced to a slot machine with pay outs surging and plummeting by life-changing amounts every few minutes.
I think it's easy to say, "How did you not sell it when it was $1,000,000?!?", but the problem is it's impossible to put ourselves in the vacuum.
If you've made $1,000,000 in the last 10 minutes from holding something, what do you think you're going to do for the next 10 minutes?
Please don't pretend that you have so much control over your rational brain to cash out your winnings.
If you cash out and it continues to surge, you're kicking yourself for a pretty long time.
If you don't cash out and it plummets, you're kicking yourself for a pretty long time.
If you happen to cash out and it plummets, odds are pretty good that you'll have an imaginary friend named "Overconfidence" live the rest of your investing life with you helping you hunt for the next big opportunity.
The Gamestop saga certainly compressed the time and increased the dollar amount, but it's a textbook example of what's happening when we concentrate our financial net worth into a single company or investment.
If you Google "diversification", you'll get some analysis about holding 25 or 30 individual stocks.
It's not actually about the numbers though.
Diversification is about matching up your expected investment gains and losses with what your stomach can handle, knowing that we are not trying to keep from vomiting, but we're actually trying avoid chronic mild nausea.
Diversification is about knowing that in theory the upside is wonderful, but in reality the downside is completely unacceptable.
Diversification is about trusting that scar tissue is a real thing instead of believing it's something that won't impact you.
Diversification is about putting your eggs in different baskets, so that when one basket breaks, gets stolen, or spoils, you have others that allow you to keep playing the game for as long as possible...
Additional Reading
Portfolio thinking by Seth Godin
Easy Money is Money Easily Lost by Ben Carlson
Diversification Means Always Having To Say You're Sorry by Brian Portnoy
32 | Patient Investing, Part 4 of 7: The Ceiling is the Roof
Investing in a manner that you believe in and in which you have a baseline understanding knowing that, regardless of strategy or plan, the only guarantees are that someone will always outperform you and that how you behave during the inevitable unsettling times will be the biggest determining factor in your lifetime returns. Owning businesses tends to increase potential returns, diversification tends to make the ride smoother, long horizons tend to increase the probability of positive returns, and above-average patience is a superpower.
The "Aura" of the Owner
Maybe there aren't that many dots to connect here. I think we all inherently know that owning something carries a different aura.
When someone says, "I work for this company", it's only so interesting and inspiring. Even someone in a key role will eventually be limited in the impact they can have and the reward they can reap.
When someone says, "I own this company", we're immediately taken to a different level. You feel it in your gut. An owner gets a different level of respect and share of the pie because they take on a different level of accountability and responsibility.
The Rewards of Ownership
When you own a business (as the sole owner or as one of many shareholders!), you get at least two things - income generated by the business and participation in the growth of the business itself.
When it comes to traditional investing, I think technology has abstracted each of these realities in distinct, unhelpful ways.
The income generated from a business used to arrive as a paper check that made it easy to see, feel, and appreciate. Now income gets commingled in an account and likely automatically reinvested making the income side of the equation feel a bit more mystical than it actually is.
The growth portion has turned into a convoluted, real-time metric that is updated every second on your smart phone, CNBC, or your Robinhood app. Instead of trusting that creation of value eventually leads to capturing of value, we've trained ourselves to believe that daily and even hourly moves of investments matter.
Even with these abstractions, the nature and rewards of owning a business have not changed one iota since the first business was incorporated - the income and growth potential that comes with ownership builds financial wealth in a way that is unmatched by being a lender or even speculating on the value of a scarce item.
As MJ would say, "The ceiling is the roof!" when it comes to the upside of owning a business.
The way that "owning-the-business-upside" plays out over time doesn't require an advanced degree to understand. In Morningstar's visual below, two lines are not like the others. That's the "different aura" showing up in the numbers.
The Hidden Side of Ownership
The sexy part of ownership is easy to sense and see.
The hard parts of ownership aren't quite as obvious.
Businesses get paid for fixing things that are broken or improving something that is sub-optimal.
This means that when a lot of things are broken or sub-optimal there is the greatest opportunity for growth.
The only way to participate in that growth is to be an owner before, during, and after the "fixing" or "optimizing" has happened.
The top lines above look great on paper, particularly relative to the lines beneath them, but the chart ignores the uncertainty and discomfort faced every step of the way.
Every bit of growth happens before, during, and after wildly unsettling things are happening all over the world.
Morgan Housel illustrates it well in this chart below. This is the "different aura" showing up in the lived experience.
A key word in all of this is "owning businesses tends to increase potential returns". Because it's not a guarantee, that's all the more reason we own a bundle of companies instead of just one...
Additional Reading
Asset allocation: Key to your investment climate by Vanguard
Stock, Bond & Cash Returns Over the Past 95 Years by Ben Carlson
Keep in Mind, Stocks Rose 1,100-fold During This Period by Morgan Housel