Oh Behave!


On a recent vacation to New Zealand, my Kiwi friend Martin told me about his father, Frank, an elderly man who, over his lifetime, owned 26 pieces of real estate. I figured Frank would be sitting pretty now, either living off 1) the income and principal of a huge investment portfolio that holds the sales proceeds of all that real estate or 2) a semi-stable income stream from the real estate he didn’t sell. Unfortunately, neither is true. Frank barely gets by, relying entirely on a modest pension income. If he has any extraordinary expense, Martin will be forced to supplement Frank’s income. So how did this happen?

It all boils down to bad behavior.  According to Martin, Frank had two nasty money habits. As soon as he made the money, he spent all of it (expensive cars, boats, and vacations). And he believed it was ok to borrow money to live beyond his means. In short, Frank never put any money aside for the future.

We all face a “retirement income” issue, even if the idea of retirement seems old school – just because you want to work forever doesn’t mean you will. Most of us will need to replace our income for the roughly 3 decades where we aren’t working and the cost of, well, everything, is rising. In Nick Murray’s book for financial advisors, Behavioral Investment Counseling, he suggests that about 90% of one’s real life returns are driven by behavior, not investment performance. For example, if your fear causes you to move to cash after a large market decline, it doesn’t matter which mutual funds you selected.

You don’t reach a state of financial independence because you pick the next Apple stock, diversify better than your neighbors, have one great investment year, or pick a magazine’s recommended funds of the year.  You get there because you learn how to defer gratification and save some of what you earn.  You get there because you take some of the chips off the table when you sell a business. You get there by deferring a portion of every paycheck into a retirement account. You get there by not selling your investments when the market declines and not getting aggressive when the market reaches new heights.

So am I saying you shouldn’t put any energy into selecting good investments? Heck no. A properly engineered portfolio could very well lead to financial independence a few years earlier than if you built a so-so portfolio.  However, instead of focusing on the performance of your investments, monitor your portfolio’s progress against your life plan. Are you saving enough? Are you being patient? Are you being disciplined? Are you rebalancing the right way? Are you truly diversified? If you can answer yes to these questions, you can turn off CNBC, stop reading financial blogs (except mine), and go surf (like I do, but hopefully better).


The opinions expressed are those of the author and are subject to change without notice in reaction to shifting market conditions. This blog is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.