How Bad Behaviors Yield Bad Returns
On this episode of Martinis and Your Money, I’m talking to New York Times bestselling author, Dr. Daniel Crosby, to discuss the problems we have as human beings leaving our investments alone!
Investor behavior is the #1 reason portfolios don’t grow – and that’s because we let our emotions drive our decisions rather than tried-and-true financial planning principles.
Dr. Daniel Crosby has been studying investor behavior for years and offers sound solutions to help us follow the laws of wealth based on the 10 Commandments of Investor Behavior written in his book, The Laws of Wealth: Psychology and the secret to investing success.
As a side note: the first Financial Gym location has opened in New York City at 226 5th Avenue, 5th Floor. Please stop by and have a drink with us if you are in the area or check out The Financial Gym online for its tools and resources to help you break free from your financial challenges and live a financially healthier life! We’ll kick your assets into shape!
What are we drinking?
Daniel — Coke Zero (he has never had an alcoholic drink in his life)
Shannon — Vodka & fresh grapefruit juice
- Daniel is the son of a financial advisor and grew up in a house where money was heavily discussed.
- He went to school to be an investment advisor and left after his freshman year to be a missionary for his church.
- After a couple of years, he went back to school and switched his major to psychology.
- While in school for his PhD in clinical psychology, he switched to a non-medical and non-clinical application of psychology.
- Daniel now has an asset management firm, Nocturne Capital, and also speaks at events throughout the year helping train financial advisors.
- Shannon says behavior and emotion are what complicate weight loss and finance – especially investing.
- Dan says you need a financial advisor, but not for the reason you think.
- Research shows that people who work with an advisor outperform dramatically, but mostly because advisors manage their bad behaviors and keep them from making bad decisions.
- 90% of performance returns are based on asset allocation and only 10% are based on actual assets you pick (individual stocks vs. ETFs vs. mutual funds, etc).
- Daniel discusses the two different parts of his book, The Laws of Wealth.
- Part 1 is 10 commandments of investor behavior
- Part 2 is about how to apply social science to the actual construction of portfolios and selection of securities.
- The 10 commandments are widely applicable and great for everyone.
- Commandment #1 – You control what matters most.
- People tend to think external factors are the biggest driver of whether or not they will reach their financial goals, but that is not the case.
- Shannon says she is more concerned about her clients having the money to invest than actually investing – it is your day-to-day activities that are going to get you where you want to go.
- Daniel says fund managers are prone to all the same biases we are unless they automate their systems to take human behavior out of the equation.
- Commandment #2 – You can’t do this alone.
- Commandment #8 – Excess is never permanent.
- In his book Daniel discusses how corrections in the market happen with greater regularity than Christmas.
- His solutions for people who invest and are concerned that their emotions will impact their returns are:
- Enlist outside help (Commandment #2)
- Follow a rules-based approach
- Shannon’s solution for people who invest and are concerned that their emotions will impact their returns are:
- Align your asset allocation with your goals in life and stick to that
- Commandment #9 – Diversification means always having to say you’re sorry.
- Shannon says she loves the bond market because it is very formulaic and has a lot less emotion to it.
- Everyone wants to benchmark to stocks when times are good, but then everyone suddenly loves fixed income when things are bad.
- You’re never going to have the most high-flying results with a diversified portfolio – something is always going to be down, but something is always going to be up too.
- That is why diversification is a very sensible approach.
- Even though it seems counterintuitive, you need to be process-based and not outcome-based because the outcomes are so uncertain in financial markets.
- TAKEAWAY: Your financial choices are heavily driven by emotion and the more that you can create a system to protect yourself from those emotional times, the greater the financial returns you can expect!
Random Three Questions
- If you won a free trip anywhere in the world, where would you go and why?
- What is a book that has influenced your life?
- What do you like to do on your down time?
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