BAM's Richards: Follow Goals, Not Herd

July 26, 2013

Record stock prices are just distracting headlines that have little to do with real investing, Carl Richards says.


Carl Richards has made a living out of keeping things simple. With a Sharpie always at hand to illustrate his points, he travels the globe trying to convince one investor at a time that when it comes to investing, following the herd never beats pursuing your life goals. The Director of Investor Education for BAM Alliance, who is also a prolific contributor to the New York Times and other publications, has a very no-nonsense approach to investing.

In his book, “The Behavior Gap: Simple Ways To Stop Doing Dumb Things With Your Money,” Richards goes out of his way to emphasize that when it comes to investing, there’s no such thing as financial planning, there’s only life planning. And in the pursuit to ignore the noise, low-cost passive investing is a good idea. What do you make of the ongoing strength in the U.S. equities markets given that we are faced with tepid growth, at best?

Carl Richards: Honestly, I don’t know what to make of it, and therefore I don’t spend a lot of time worrying about it. I read about it and I enjoy seeing the commentaries and what everyone thinks, but at the end of the day I think it’s all pretty worthless. What I keep reminding myself of in times like this is that, as an individual investor and as an advisor, you need to have an investment plan that doesn’t depend on anybody’s feelings or on forecasts about what’s happening or going to happen next in the market.

The reality is—and what this recent rally has demonstrated again—is that it doesn’t really matter what you feel or think about the market and why it’s doing what it’s doing. It should serve as another reminder that when it comes to investing, we should really focus on our individual plan as opposed to focus on what others think is going to happen in the market. It drives me crazy to see us all getting excited again because the market is rallying, and forget that we need to invest based on our life goals, not on what everyone else is doing. Do you think investors, then, are upping their appetite for risk out of some sort of irrational exuberance, if you will, without really knowing why they’re jumping in?

Richards: That’s the problem. This recent rally is a demonstration that we tend to act irrationally when it comes to investing our money. The fact that people are starting to feel like now is a good time to get back into the market doesn’t make any sense. Stocks are getting expensive. They’re buying high just to sell low in a panic when the market turns lower. If you can’t answer why you’re investing the way you are, you should do nothing else until you figure that out.

Again, investing should be linked to your goals. It’s not a game, not a hobby. I can’t say this enough: You don’t invest because the market is going up, or because it’s fun; you invest because you want to meet some financial goal. And outperforming the market is not a financial goal. So you recommend staying put and sticking with your asset allocation plan despite the market’s ups and downs. What kinds of events, then, should send investors back to the drawing board to revisit that allocation?

Richards: Aside from disciplined rebalancing, you should rethink your investment plan when something changes in your life, and not when something changes in the market. If your goals change, revisit that plan, but I have to say that I can’t think of a single market-related reason you should change your investment plan.


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