The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money Hardcover – Illustrated, January 3, 2012

This book is written in a conversational style which is quite easy to understand, while delivering much sound advice related to investing and financial planning. The advice is of a general nature and focused on overcoming our inherent psychological tendencies which can cause us to make poor decisions, so I can recommend the book to all investors, ranging from novice to veterans.Here are my notes from the book:1. Cycles and other factors do cause markets to go to ‘inefficient’ high and low extremes.2. Stocks should be treated as potentially useful, but also dangerous. And increased potential upside does generally come with increased risks (but the converse isn't true: higher risk doesn't always mean increased potential upside).3. In the long run, the vast majority of people who attempt market timing do worse than the markets, and we shouldn’t fall prey to the hope that we can rely on others to make such predictions. So it’s best to formulate an approach which will likely work well long-term regardless of how markets fluctuate in the short and intermediate terms, since the long-term trend is up; but this does assume that the future will repeat the past in the long-term, whereas there have been bear markets of more than a year in the past, so 'riding out' long bear markets can be a painful process which wouldn't be a good situation for people nearing retirement or already retired.4. The most effective investors are moderate and humble rather than overconfident, and recognize their inability to reliably make accurate predictions. In fact, people with the highest proportion of accurate extreme forecasts tend to do worse overall. And because of the lack of predictability, rather than trying to adhere to rigid long-term plans, we should take a more flexible approach of adapting to evolving circumstances by making small but consistent course corrections. This means that we need to pay attention to what’s happening in timeframes of weeks and months in order to make decisions which will tend to work well over years, while ignoring intraday or day to day fluctuations, and recognizing that sometimes doing nothing is the best option.5. Following the herd and doing what’s popular will usually mean buying rather than selling when markets are high, and selling rather than buying when markets are low. Ironically, people who are relatively disciplined and really try to stick to their plans are most vulnerable to this, because they’re among the last to 'give in' and buy (near tops) and among the last to sell (near bottoms). 'Safety in numbers' isn't a valid maxim for investing.6. Financial planning is part of life planning, and needs to be personalized – what’s suitable for one person may be unsuitable for another. Generally, we should only take as much risk as needed to meet our financial goals (rather than trying to maximize return and thereby taking on unnecessary risk), while keeping in mind that additional money has diminishing value in terms of enhancing our lives once we reach upper middle class (personal relationships, experiences, and the feeling of doing worthwhile work matter more, once our basic needs are met). The harm we suffer from a major loss is usually greater than the benefit we derive from a major gain, so loss aversion makes sense.7. Because of regression to the mean and the role of luck, funds which performed well in the past are less likely to do well in the future. Unlike most other fields, in investing, past performance is NOT a reliable indicator of the future, and may even be a misleading indicator. The only consistent correlation is that funds with higher expense ratios tend to perform more poorly.8. Because of good and bad luck, sometimes bad decisions will result in good outcomes, and good decisions will result in bad outcomes. Rather than being mislead by that, we need to stick to approaches which are likely to work longer term.9. Most of what’s reported in the financial media is just noise, and is best ignored. Try to keep your models simple and robust. That doesn’t mean we should ignore important developments on large geographic scales, but we should accept that context as ‘given’ and focus our financial planning decisions on where we can have an influence.10. A good test for evaluating a portfolio is to imagine being in cash and then asking how similar and different your portfolio would be if you reconstructed it. Don’t keep things the same just because of wanting to preserve the status quo, attachments, laziness, or wanting to ‘break even’ on an investment. A portfolio should be evaluated based on anticipated long-term future performance, not what has happened in the past to get to this point.11. Don’t fall prey to hindsight bias and compare your current portfolio value with a previous peak, as though the portfolio is at a 'loss' compared to that. Such extremes aren’t meaningful reference points. Instead, look at rate of return over longer timeframes. (It's not mentioned in this book, but given that the long-trend of markets has been upward, buying low is a better and generally safer strategy than trying to sell high. And of course, things will usually look bleak - 'blood in the streets' - when markets reach lows.)12. If an investment option looks too good to be true, it probably is. Scrutinize such options intensively.13. Investing should be done dispassionately, rather than approached as an entertaining game. This will generally lead to better decisions. If you sense that you’re about to make an impulsive decision, sleep on the decision for one or more nights before deciding.14. Take responsibility for all of your investment decisions, rather than selectively taking credit for gains and blaming others or situations for losses.15. Don’t be penny wise and pound foolish in making financial decisions. Maintain perspective on what really matters by considering absolute dollar amounts, and prioritize your time accordingly.

As a financial advisor,I'm always trying to find ways to explain complex topics to my clients. I had been enjoying Carl Richards drawings in the New York Times for a while. So I was delighted to find that he had written a book and was just as delighted after I read it.Richards displays a true understanding of human nature with his words, but also with his disarmingly simple sketches that portray powerful truths about people's behavior around money. You will recognize yourself in many of them. With amazing insight into how our brains work, he uses real-life stories and humor to show how we are our own worst enemies when it comes to money management. He also offers up great advice on how to make better money decisions.Some of my favorite "behavior gap" insights include: * Investments don't make mistakes. Investors do. * Figure out which emotion is the bigger issue for you--fear or greed--and invest accordingly. You can't have it both ways. * Planning for your financial future is a balancing act rather than a single-minded pursuit of the highest return. * There is no such thing as the best investment. * Planning for your financial future is personal. A good plan will be unique to your situation. * No one knows what the future holds. * Our real task is getting to know ourselves and our goals, making choices aligned with those goals, and adapting to the surprises that are bound to come along. * Financial decisions are almost always life decisions. Before you decide on your financial goals, you need to choose your life goals. * Focus on your personal economy and stop worrying about the global one. * Our deepest instincts will tell us that money doesn't mean anything, it's simply a tool to each our goals.Two thoughts kept running through my head as I read Carl's book: "I wish I had written this" and "All of my clients need to read this." Even if you don't have time to read the book, flip through and take in all the sketches. They tell the story of our behavior gap just as well and may just motivate you to stop doing dumb things with your money!

Anyone whom wants to know where they are heading financially and the pitfalls to avoid should read this book. It is very easy to read and contains many 'nuggets' you'll not get from your bank, life insurance/fund salesperson or stockbroker.Unlike many journalists Carl is a Certified Financial Planner so has a degree in financial planning - the folks writing in the personal money pages online and in newspapers are rarely (it at all) as well qualified. His back of the napkin sketches in the NY Times are the stuff of legend - pictures paint 1,000 words.As a CFP and lifestyle financial planner myself the only thing I disagreed with is where Carl seems to suggest that you should not do (and pay for) a proper financial plan - one with personal lifetime cash-flows including catastrophe scenarios etc - as the plan goes out of date the minute you print it off. The whole point of a financial plan is that it acts as a blueprint and should be reviewed at least annually as things change - life is not a straight line. It's important to check back to make sure you are still on track.I'd suggest you need a proper financial planner (harder to find than you might think) to challenge your assumptions and make sure you keep to your plan - even (especially when) the markets have just tanked 30%. DIY investors rarely look themselves in the eye and state 'this too will pass'. They are more likely to panic out.This is a great read. Even if you are not that money orientated.

I saw Carl give a lecture at a confrence recently and was captivated. He really nailed it with this book.I work as a financial advisor and struggle with the fact that we can't control the equity markets, and the general advice for people without enough money is that they "need" to take on more risk to achieve their goals. But at the same time, these people can't really "afford" the risk that they need to take, and if things don't work out (or they give up on the plan when things don't go as expected, which is more likely) then they are in real trouble! I prefer to advocate lifesytyle planning, realistic expectations and increased savings if necessary. Reduce debt, control spending, get your home paid for (in most cases), and you can have a lot more confidence in achieving your goals than by taking on significant additional risk to (hopefully) have a higher return. In fact, this allows you to take on more risk because you can deal with it more easily if things don't go as planned.This book covers complex concepts and makes them easy to understand, without dumbing it down. It also spends a lot of time on non-financial asepcts of investing. I highly recommend it, in fact I bought 20 copies to give to clients!

If you only ever read one finance book in your life do yourself a favour and make it 'The Behavior Gap' by Carl Richards.As well as being an accomplished Financial Planner, Carl's clearly an expert in human behaviour. With numerous sketches and anecdotes, he cleverly highlights how we get in our own way by repeating irrational decisions when investing. More importantly, he tells what to do to break the cycle.This book, more than almost any other, defines the role investing plays in helping us achieve our most important goals and ultimately live a more enjoyable life. Don't make the mistake of thinking it's just for the avid investor. In fact, it's quite the opposite.At long last, we've got a book which offers straightforward advice on how to avoid the usual investment pitfalls, why we should ignore the investment media and how to apply simple, tried-and-tested principles to building long-term wealth.It's a very enjoyable read, written in a witty, laid-back style. If you've got a weekend to spare get your hands on a copy. Provided you take on board Carl's lessons I predict you'll be a lot wiser and wealthier as a result. Happy investing.

The simplicity of this book is also its brilliance! Concepts and advice this simple made me feel so reassured about my financial future. Thanks Carl

A must read for anyone investing