The title of certified financial planner Carl Richards’ book The Behavior Gap refers to the gap between “what we should do and what we actually do” when it comes to financial decisions. The book identifies a great many of the mistakes we make, and almost all readers who are honest with themselves will identify with some of the mistakes. Richards is well known for his napkin drawings, and there are plenty of them in this book. One says that the cost of your mistakes rises with your level of overconfidence. “Overconfidence is a very serious problem. If you don’t think it affects you, that’s probably because you’re overconfident.” We know we shouldn’t buy high and sell low, but “we make investing decisions based on how we feel rather than what we know . Falling stocks scare us; rising stocks attract us.” In a drawing offering investment advice, Richards says the chance that a fund will stink rises with its expense ratio. He offers more advice when he says our decisions about...

Here are my posts for the past two weeks: Are We Saving or Investing? The Four Pillars of Investing The Dangers of Personifying the Stock Market Things get quiet in the middle of summer, but I still have a couple of short takes: Dan Bortolotti warns novice index investors that the bull market can’t last forever. When markets inevitably stumble, active managers will be quick to claim they could outperform during bear markets, even though the evidence doesn’t back up that claim. Potato shows how to answer the question of whether you’re on track for retirement by going through an example case. As he shows, you can never know for sure that you’ll get the retirement you want, but you can find out if you’re way off.

Most people understand that the stock market reflects the collective actions of all stock traders, but we often personify the market, talking about it as though it has its own free will. This can lead to investing errors. When we say that “stock markets struggled this week,” we don’t literally mean that there exists some sentient entity called the “market” that has the desire to rise, but was unable to do so this week. But thinking of it this way can create the illusion that you have only a single foe when you trade stocks. It can also create the illusion that we can all somehow succeed against the market. When someone says that some past market event was easily predictable, such as the 8-year recovery from the 2008-2009 crash, many would agree. But it can’t be true. If we all knew stocks would rise so much, then buyers would have driven prices up right away. When we see the stock market as the collective action of all buyers and sellers, it becomes clear that there had to b...

While reading William J. Bernstein’s book The Four Pillars of Investing , I was unsure of how to summarize it. After finishing I’d say that it aims to give readers the right knowledge and expectations to become successful do-it-yourself investors. Without a solid grounding in each of the four pillars, investors are at risk of making expensive mistakes. The first pillar, called “theory,” is less intimidating than it sounds. It teaches the link between risk and reward and that “high previous returns usually indicate low future returns, and low past returns usually mean high future returns.” This is particularly true of stocks because they show more mean reversion than you’d expect just from randomness. We tend to think of money market funds as safe, but they get their returns in part from commercial paper that “does occasionally default.” There is no excess return without some risk. Bernstein explains the Gordon equation, which states that the market return is equal to dividen...

When we buy shares in a company, are we saving or investing? Most of the world would call this investing, but William J. Bernstein disagrees. In his excellent book The Four Pillars of Investing, he explains why he calls this saving: “When you and I purchase shares of stock or a mutual fund, we are not investing . After all, the money we pay for our shares does not go to the companies, but, instead, to the previous owner of the shares. In economic terms, we are not investing; we are saving .” He continues “Only when we purchase shares at a so-called ‘initial public offering’ (IPO) are we actually providing capital for the acquisition of personnel, plant, and equipment. Only then are we truly investing.” It’s certainly important to make a distinction between a simple change of ownership of shares and a company getting new money to run its operations. But I find the terms Bernstein uses very unsatisfying. When I commit money to my trading account with the intent to leave...

Here are my posts for the past two weeks: Payday Loan Information Are Payday Loan Users Victims? Enough: True Measures of Money, Business, and Life Arguments Against Index Investing Here are some short takes and some weekend reading: Preet Banerjee interviews Luke Kawa, a Bloomberg reporter, to talk about macroeconomics. It was good to get some buzzwords explained, but this interview didn’t change the feeling I’ve had for some time that macroeconomics is wild guesswork. Big Cajun Man reports that new CRTC rules will eliminate phone unlocking fees on 2017 December 1. He uses the example of Bell’s policies to show how onerous these fees can be. Canadian Couch Potato reports on new index ETFs from Royal Bank. Boomer and Echo ask whether your assets under management are really being managed.

I’m accustomed to reading arguments against index investing. The valid ones tend to point out that few index investors actually stick to their plans. The “other” arguments make less sense but get repeated frequently anyway. Jack Mintz managed to bring a great many of these less sensible arguments together in a recent short article . Here I examine Mintz’s claims. “What happens if the day comes that the entire stock market becomes solely made up of passive investors?” This won’t happen. We’re not close to it now. If we ever got close enough to 100% index investing, active stock picking would become profitable. “The lure of sharply reduced investment fees has enticed millions of investors to shift their portfolios to passive investments.” Calling low fees a “lure” implies that index investors can expect to get caught somehow. Mintz offers nothing to back this up. “There are problems with all this passivity.” I got to the end of the article without seeing anything to...

John Bogle thinks there should be more to investment management and business in general than maximizing profit. In his distinguished career, he has put his money where his mouth is by creating a structure for Vanguard that strongly incents employees to minimize investor costs. In his book Enough: True Measures of Money, Business, and Life , Bogle describes Vanguard’s history and explains his business philosophy. The book opens with the story of Joseph Heller being told that a hedge fund manager “had made more money in one day than Heller had earned from his wildly popular novel Catch-22 over its entire history. Heller responds, ‘Yes, but I have something he will never have ... enough.’” Bogle believes there are more important goals once you have enough money. Vanguard began amid a business dispute and it was “barred from assuming responsibility for investment management and marketing.” This proved to be a happy result for investors because it helped make Vanguard the investor...

In a recent post about payday loans , reader Paul had the following (lightly edited) comment: “You know I used to feel sorry for people who get caught up in this money cycle. But when most people would rather just watch Dancing with the Stars or an insane reality program and not spend 30 seconds on improving any aspect of their financial lives, I just can’t. “One’s financial problems seem to always be ‘someone else’s or some fat cat banker’s fault.’ No one is responsible for themselves anymore. For the poor who struggle to make ends meet and this is the only option, yes I agree that is bad; for the rest, you get what you deserve if you can't pay for that non-essential ‘toy’ or latest iPhone you purchased you just had to have.” There definitely are many people who deserve Paul’s criticism. But many who get caught up in a vicious payday loan cycle had plenty of help getting there. When I’m asked to referee a dispute, I like to say that we shouldn’t overlook the possibility t...