Morningstar Magazine - June/July 2017 - 22

Dispatches

an explosion of evidence-based investing advice.
Of course, it's far better than making financial
decisions based on friends and stories. But it
comes with its own risk: a false sense of precision.
We need to remember that finance isn't hard
science. Irrational people won't start floating away
if they stop believing in the law of gravity.
But irrational people can lose everything if they
assume evidence-based financial advice
is infallible.
4 The industry is hacking at the branches.

The personal finance industry tends to struggle
most with this issue. What budgeting software
should you use? What investment formula
should you adopt? What technical tool should you
recommend? Let's be clear: A tool doesn't
help anyone if we haven't helped people figure out
what matters most to them. We need to
spend more time talking about values and less
time talking about the tools. Until we get good
at helping people diagnose why they're doing
what they're doing, we'll struggle to solve the big
issues in our industry.

Song Remains
the Same
Investors still grapple
with the emotional side
of money.
BEHAVIOR GAP

1 Human behavior is still human.

The traits that helped us survive as a species-
choosing things that bring us security or pleasure
and running from things that cause us pain-
make us horrible investors. Our brains struggle
to adapt to a world where delaying gratification and dealing with pain are part of the package.
We want to feel good now, so we buy high.
We want to stop hurting today, so we sell low.
I know all of this won't be news to you. But
it's fascinating to me how little we've changed
since the tulip bulb market crash burned
Dutch traders in the 1600s.

Carl Richards
2 Money = feelings.

In the past decade, it feels like we've experienced
a lifetime of investing. We've hit the highs, we've
slogged through the lows, and we've debated
what, if anything, we learned. Plus, the knowledge
around investing has exploded. It's like we've
been living in a lab dedicated to learning
about investor behavior. Why do we really do the
things we do when it comes to money?
Here are five things I've noticed during my time
in the lab.

22

Morningstar June/July 2017

Money is emotional. We're not talking about
spreadsheets and calculators. Money is
about people's fears and dreams, their goals and
values. So, are we really surprised that things
tend to go off the rails when we focus on
the spreadsheet, but don't speak to the things that
matter most to people? We like to think we're
rational when it comes to money. But it's the rare
investor who only sees money as dollars and cents.
3 Finance isn't physics.

During the past few years, we've seen

5 The signal is buried in the noise.

Investors live in an information circus. Every theory,
every tool, every guru has their own center
ring of noise. To be clear, there's a ton of valuable
information about how to invest, budget,
and even make more money. But investors are not
necessarily better off because the volume
can overwhelm even the savviest of individuals.
We need to help people hit the mute button.
It's an exciting time to be in this industry, because
change is happening. We're rethinking what
it means to be a financial professional. We're
pushing to make things better for investors, and
I can't think of any place I'd rather be. K
Carl Richards, CFP, is the author of The Behavior Gap
and The One-Page Financial Plan: A Simple Way
to Be Smart About Your Money. He also writes the weekly
Sketch Guy column for The New York Times.



Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2017

Contents
Morningstar Magazine - June/July 2017 - Cover1
Morningstar Magazine - June/July 2017 - Cover2
Morningstar Magazine - June/July 2017 - 1
Morningstar Magazine - June/July 2017 - 2
Morningstar Magazine - June/July 2017 - Contents
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