Mastering the Money Mind (eBook)

Introduction

“A person is smart. People are dumb, panicky, dangerous animals, and you know it.”

—Kay, Men in Black

Tommy Lee Jones’s character, Kay, wasn’t talking about money when he said it, but he might as well have been. The truth is, an otherwise rational person can become their own worst enemy when it comes to their financial decisions, either by following their own primal impulses or by giving in to a mob mentality.

We’ve seen it a thousand times. Human beings are skittish animals, and their behavior shifts dramatically with their circumstances. In good times, they actively seek risky behavior. In bad times, they start heading for the hills. This behavior can lead to inconsistent and occasionally calamitous thinking when it comes to money.

It’s all too common for someone with a well-designed investment portfolio to flush the whole thing suddenly in response to some traumatic event. An otherwise intelligent person who has been making careful investment decisions toward a long-range goal gets spooked by news reports about a market downturn, or they lose their job, or a close family member dies unexpectedly. The trauma becomes psychological justification for making a wildly irrational financial decision.

Consider the case of the hard-working engineer who suddenly lost his job after twenty-five years. Shocked, he thought, “Well, maybe this is a sign that I’m supposed to sell off all of my investments, buy a catamaran, retire early, and sail down to Aruba, even though I can’t quite afford it.” In doing so, he derailed a smart investment strategy and torpedoed his future.

People tend to overreact to bad circumstances. That’s just human nature. It often happens because they receive poor advice, get spooked by alarmist talk from the media, or see other people making irrational decisions and blindly follow them.

Sometimes, it’s not fear driven. Plenty of people use consumption to fill emotional holes in their lives. “I need a bigger house, another car, another expensive trip, a bigger wardrobe. Then I’ll be happy.”

Others go to the opposite extreme. “I can’t spend a dime because something bad might happen to me down the road, so I’d better live like a miser.” That’s how you get millionaires living in ratty shacks, clipping coupons while the house slowly falls down around them. You know the type. Neighbors assume they’re paupers, but when they finally pass away, the community is shocked to discover they were worth millions. What’s the use of millions if you live a miserable life?

Irrationality tends to aim for the extremes, but rational thinking strikes a healthy balance, working toward long-term goals without making the short term miserable. With the right advice and a healthy perspective, we can all strike that balance.

The Dangers of the Primal Brain

Unfortunately, our own evolutionary tendencies are working against us. Neurologically, we’re programmed to deal with threats just like our tree-dwelling ancestors: lash out at the threat or flee from it. When something happens that seems potentially harmful, we will always revert back to that primal response. This tendency is fine if you’re getting charged by a hungry bear in the woods. With a direct physical threat, “fight or flight” is the proper response nine times out of ten.

When it comes to financial decisions, however, “fight or flight” usually leads to trouble. Our primal brain has enabled us to survive and propagate the species for millions of years, but it isn’t good for spending, saving, or investing.

To make smart long-term financial decisions, you sometimes have to act contrary to your primal brain. It’s not an easy thing to do, and if you lack the knowledge or perspective to achieve your goals, it’s going to be practically impossible. Couple this primal reaction with the all-pervasive mob mentality that afflicts the human race, and you’ve got a real recipe for disaster.

“Oh, wow, I keep seeing news reports about the market plunging a few hundred points,” you think. “The pundits seem really freaked out! I guess I’d better sell my investments, take the money, and run!”

In modern society, we have multiple group dynamics influencing our decisions. Think about it. People are part of all kinds of identity groups: political parties, social clubs, online forums, social media, religious organizations, families, friend groups—so many opportunities for a mob mentality to override rational decision-making.

Alex conducted a little experiment at a dinner party once. A large group had come together at a restaurant. After the meal, the waiter approached and said, “Would any of you care for coffee?” For a couple of seconds, no one responded. Then a few shook their heads, a few others shrugged.

The waiter was just about to walk away when Alex said, “You know, I’d love a cup of black coffee. I have a long drive ahead of me.”

Suddenly, seven or eight other people around the table spoke up.

“I think I’d like a coffee, too.”

“Yes, that does sound good. Bring me a cup.”

“I changed my mind. I want a coffee, please.”

When it comes to an after-dinner coffee, that kind of mob mentality is not a big deal. When it comes to financial decisions, it can be a huge problem. It’s dangerous to go with the flow unless you have a good reason for doing so.

If you could just step outside of your primal brain, away from the mob mentality, and even your own sometimes-irrational tendencies and desires, you would be able to make objective decisions about things like 1) the amount of money you spend, 2) the amount of money you invest, and 3) how and where you invest that money so it serves your long-term needs and objectives.

Put more simply, money should serve you rather than you serving your money.

Slicing the Pie

People sometimes think of investment strategies as a simple game of finding what yields the best return, but the truth is it’s first and foremost a psychological exercise. It’s less about deciding if you should put your money in, say, a Roth IRA than it is breaking down your preconceived notions, prejudices, primal responses, and mob mentality to make reasonable and rational investment decisions.

Ultimately, there are four things you can do with your income:

• You can buy things.
• You can buy experiences.
• You can save money for some future consumption.
• You can help others.

View this as a pie cut into four slices. Consider how big each of those pieces should be, according to your own goals. This differs for each of us. You may put more money into experiences, like traveling the world, while your neighbor puts more into things, like buying a second home.

Ideally, you slice the pie in a way that you think is best for you. For example, if you really want to retire and leave the workforce early, you’ll want to reserve more of your income for that future consumption slice. It’s delayed gratification to achieve a cherished goal.

The point is your money is serving you, not the other way around. Slice the pie according to what you want to get out of life.

In Ancient Greece, people would go to the Oracle of Delphi when they needed guidance or understanding. Inscribed upon the pediment of the temple was the saying, “Know yourself.” There are a few different ways to interpret that saying, but we think the most relevant is this: to determine the right course of action, you have to understand yourself and your own motivations.

What drives you? What scares you? What are your hopes and dreams? If you know all of these, then you’re in a much better position to make the right decisions on your own. You won’t need the Oracle of Delphi to tell you the correct path. You might benefit from a bit of gentle redirection, but if you know yourself, then you can make the right decisions about your future based on what you’re trying to achieve.

That’s what we do when we meet with clients seeking financial consultation. We’re not there to tell them what to do. We’re there to help them figure out what they want and provide the best options for achieving it.

Some people are very well-informed about their money but they make poor emotional decisions. Others can govern their emotions well, but they don’t understand the fundamentals of investing. Still others are good at both but don’t have the time to manage their own investments. Our mission as financial advisors is to have deep-dive conversations that help them get to the heart of what they really want their money to do for them, so we can steer them in the right direction.

That’s our goal with this book as well.

In fact, we’ve been doing this for quite a few years. We came to the financial industry by very different paths, and from very different backgrounds, but we’re united by the same core values and a singular mission.

A Mindset Mission: Ed’s Story

Ed first became fascinated with the stock market during the tech boom of the late nineties. He decided to study economics in college, and the more he learned, the more he realized, “There are a lot of people who could use some help with their personal finances.” And so, by the time he was nineteen, he knew he wanted to provide financial advice for a living.

It proved to be an interesting time. Ed entered the industry in the spring of 2000 as an intern with Morgan Stanley, just a few short months...