You vs. Your Monkey Brain

Our monkey brain.  Super helpful when we need to run from a saber tooth tiger.   Not so helpful when we need to make rational decisions.

This morning I cracked open a book on behavioral finance - Finance for Normal People: How Investors and Markets Behave..

Behavioral finance is a relatively new field.   It acknowledges that we are not rational beings driven by logic and critical thinking.  Rather we are we are irrational beings driven by emotions and shortcut thinking. 

The point of behavioral finance is to understand how your mind works, so you can prevent your monkey brain from making your financial decisions for you.   Like G.I. Joe said "…and knowing is half the battle."

Let's play a game.  Answer the following instinctively.  Without thinking.

“If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets?”

Was your answer 100 minutes?   Me too. 

Now think about it and answer again.   Ahhhh.  See it?  The answer is actually 5 minutes.

How about another one?  Quick!  Don't think!

"Consider a deck of twenty well-shuffled down-facing cards. You know that ten are black and ten are red. You win if you draw a red card. Now consider a second deck of twenty well-shuffled down-facing cards. You know that all twenty are either black or red. You win if you draw a red card. Which deck do you prefer to draw a card from?"

Did you choose the first deck?  So did I!!!

But reread it.  Ah-ha!.    You've actually got a 50% chance with either deck.  Your monkey brain at work.  (That one's called "ambiguity bias")

The reason your monkey brain can sabotage you is we make decisions with behavioral biases - assumptions our brains make to quickly fill in the missing gaps.

Again - super helpful if a saber tooth tiger is coming at you.   Let's not utilize the scientific method to determine if it wants to eat us.

But not so helpful when you hold on to an investment that's tanked because you lost all that money.  It only matters where it goes from here.  What you already lost already isn't part of the decision.  (That one's called "anchoring bias".)

People make financial decisions with their monkey brain every day.  Let's find out how that damn monkey works, so we can get it off our back and back to the ice age with its feline friend.

More to come….

Income Is Not the Same as Wealth

How much money you make is not important.  

How much money you have is.

From The Millionaire Next Door:
"Wealth is not the same as income.  If you make a good income each year and spend it all, you are not getting wealthier.  You are just living high. Wealth is what you accumulate, not what you spend. 

How do you get wealthy?   Wealth is more often the result of a lifestyle of hard work, perseverance, planning and most of all, self-discipline." 

If you're "income rich, savings poor" you are not going to enjoy the last 20-30 years of your life.  At some point, the income runs out.   "Working until the day you die" is not a feasible retirement plan.  Your body or your mind isn't going to let you. 

At that point, you will live off what you saved and Social Security.  If you haven't saved, then you'll have Social Security, which for a couple maxes out at $88,752…pre-tax.

The solution?   Save 20% of your income.  If you're over 50 and "lived high" for too long, save 30-35% of your income. 

It won't feel good at first.  It'll be a frustrating journey finding the things in your lifestyle you're willing to sacrifice.  But after the first year or two, you'll see your wealth build, and the progress you've made will motivate you to keep going.   You just need to get over that two-year hump.

The best time to start saving and accumulating wealth was yesterday. 

The second best time is today.

401k's - Great for Saving... Terrible for Investing

You nailed the interview, negotiated a nice, fat salary and completed the HR paperwork.

Congratulations on the new gig!  Good on you!

But in all the excitement of your new job, don't forget about your old 401k!

After you leave a company, you have options.   With your old 401k, you can: 

  1. Leave it behind
  2. Roll it over into your new 401k
  3. Roll it over into an IRA
  4. Take the money…pay Uncle Sam 50% in taxes & penalties… and run!

Just because it's an option doesn't mean it's a good one.    Obviously, taking the money out and paying taxes on the whole thing PLUS a 10% early withdrawal penalty (if you're younger than 59.5) is a terrible idea. 

Leaving it where it is or rolling it over into your new 401k aren't as bad, but they're only a little better.   Want to know a secret?  Come a little closer…

401k's are great for saving, but they are TERRIBLE for investing. 


Each 401k plan is different, but even the most robust 401k's offer only a limited number of funds to invest in.  You're options are limited to whatever Human Resources has picked out for you.

I've seen the investment options of hundreds of 401k plans.   And I can tell you from experience, the funds usually kinda suck.  (And that includes the Target Date funds I bet you're invested in right now.)

So you're forced to pick the best of the mediocre and call it a day…until you leave your company.

Once you leave, you can roll your 401k into an IRA - Individual Retirement Account. 

It's tax-free and penalty-free to do so.   More importantly, once it's in your IRA  you can invest in pretty much anything you want.   Instead of picking from the best of the mediocre, you can pick from the best of the best!  Woohoo!

Then you can invest in a well-diversified portfolio of low-cost index funds, which is how you should manage all of your "serious money".  And what's more serious than your retirement savings!?

Then as you progress throughout your career and get better and better jobs, you consolidate all of your old 401k's into the same Rollover IRA.  

If you have old 401k's laying around, we'd be happy to help.   Check out our website - - and if you like what you see, schedule a free initial consultation

Disclaimer: This information is for educational purposes only and should not be considered advice or a recommendation.   Speak to your financial advisor for help with your specific situation.

Only Two Ways to Invest

Picture a little boy running around a cruise ship.   Little Johnny runs up the slide, then down the slide.   Dives into the pool, then runs over to look over the edge of the ship.   

Around and around little Johnny goes.   Where he'll run next is anyone's guess.  If you're not his parents or in the wake of destruction it might even be mildly amusing. 

Little Johnny is like the short-term fluctuations of the market.  He's all over the place and just when you think you know where he'll run next, he does the opposite.  Trying to keep up with him or predict his movements will be an exercise in frustration and futility.

The cruise ship is the long-term market returns.  We know it will arrive at its destination no matter where little Johnny runs. 

As an investor, you only have two choices.  You can either chase around Little Johnny or you can sit back, relax and sip your daiquiri. 

Chasing Johnny means you chase returns, get in and out of the market and bet on stocks.

Sipping your daiquiri means you buy and hold low-cost index funds and just enjoy the ride.

Your choice.

Money's Like Soap...

…the more you handle it the less you have.

The unspoken secret to long-term investment success is…ironically…to do nothing.  Buy...and then hold.

Wall St. doesn't want you to know this.   Wall St. doesn't make money if you buy and hold. 

They make money from the transaction fees you generate for them when you buy and sell and then buy and sell again.

If you truly want to beat the system, don't try and beat the system.

Your future, happily retired self will thank you.

Who's Your "Guy" - A Broker? An Insurance Agent? Or a Financial Planner?

We are all called Financial Advisors… for now. 

The SEC is proposing restrictions on the use of "Financial Advisor" for brokers and insurance agents.

Why do they care?  Why should you care?

Because brokers and insurance agents are salespeople.   And while there is nothing wrong with salespeople, an informed client is an empowered client.  If you are dealing with a salesperson, you should know you are dealing with a salesperson. 

Here's why:

I'm at brunch with friends and the soon-to-be-dad lamented that he needs to finish his life insurance application.  The already-dad mentioned how cheap and easy term life insurance is.   Knowing I'm a financial planner, he then leans over to me and says, "I also bought a little whole life insurance."   Without even looking up, I said "Northwestern Mutual?".   "Yup" was all he responded. 

A little background is needed:  99% of financial planners do NOT recommend whole life insurance for young clients.  It's expensive insurance, a lousy investment and totally inappropriate for young clients.   Term life insurance is cheap and appropriate and the only life insurance a young family needs.  

So why did my friend's "Financial Advisor" at Northwestern Mutual - an insurance company - "recommend" a whole life insurance policy? 

Well, duh.   BECAUSE HE'S AN INSURANCE AGENT!  His job is literally to sell insurance. 

But his business card doesn't say "Insurance Salesman".   It says "Financial Advisor". 

Do you think if my friend saw "Insurance Salesman" instead of "Financial Advisor" on this guy's business card he would have bought a whole life policy he doesn't need?  

Probably not.

And that's just one anecdote of many.

Cross your fingers that the SEC passes this proposition.    It should be perfectly clear if you are working with a broker, an insurance agent, or an actual financial planner. 

The Wisdom of Warren Buffet

After the Berkshire Hathaway shareholders' meeting last weekend, CNBC interviewed Warren Buffet, Charlie Munger and Bill Gates this past Monday. 

Here are some valuable takeaways.

On buy-and-hold, low-cost, index investing:

…this time I went back to 1942 when I bought my first stock as an illustration of all the things that have happened since 1942. We have had 14 presidents. 7 Republicans. 7 Democrats. We have had world wars, 9/11, Cuban Missile Crisis. We have had all kinds of things. The best single thing you could have done on March 11th, 1942 is buy an index fund and never look at a headline... If you put $10,000 in an index fund that reinvested dividends… It would come to $51 million now.
— Warren Buffet

On "investing" in Bitcoin vs. stocks:

“When we buy a business [buy stocks or stock index funds]…we are buying something that at the end of the period we not only have what we bought in the first place but we have something that the asset produced. When you buy non-productive assets [like Bitcoin] — all you’re counting on is whether the next person is going to pay you more because they’re even more excited about it. But the asset itself is creating nothing. 
— Warren Buffet

Rick's note: This can be applied to any commodity - oil, natural gas, gold, silver, pork bellies…or GASP!…your house.   Don't "invest" in something that's only potential return is the next guy paying more for it.  Invest in things that produce - like companies in the form of stocks or stock index funds.

More on Bitcoin: 

And—it’s better if they don’t understand it. That’s the other thing about non-product— if you don’t understand it you get much more excited than if you understand it.
— Warren Buffet

Rick's note:  That thing you heard about that's too good to be true?  Educate yourself and truly understand it before you buy into it. 

On the company you keep: 

It’s very important in life to associate with people that are better than you are. It’s the most important decision — you will go in the direction of the people that you associate with.
— Warren Buffet

Rick's note: Amen.


Lastly, some reading recommendations from Warren and Bill:

Warren Buffet recommended: The Intelligent Investor by Benjamin Graham
Bill Gates recommended: Factfullness by Hans Rosling
Both recommended: Enlightenment Now by Steven Pinker

2 Year Anniversary

Young, bootstrapped small businesses eventually become a victim of their own success.  The business outgrows the business owner and he can no longer "do it all".  It's time to hire some help. 

This week marks the 2 year anniversary of The Financial Zen Group (can you believe it!?).   That feels like an appropriate time to legitimize the "Group" in The Financial Zen Group.  

James Carnahan starts this week.   He's part of a husband and wife team who have provided virtual assistant services exclusively for financial planners for over 25 years - check em out here.

He will handle all of our administrative tasks - paperwork, transfers and meeting prep/follow up to start with.   And because he only works with financial planners, he already know all the technology that we use which means he'll add value immediately.

This will allow me to spend more of my time doing the important stuff - talking to clients and  developing and implementing financial plans. 

You can reach James at (330) 310-3826 and

The Wisdom of Rip Van Winkle

Did you know… on average, since 1900 there has been a market correction of 10% annually?  


Every year the market is down 10% at some point between January 1st and December 31st. 

And 5% corrections happen 3 times per year on average.

The markets had a 10% correction back in January-February.   But only after shooting up 6%.  

Up 6% - down 10% - for a net of -4%.  All inside of 6 weeks.   If you squint real hard, you can see that as a 10% correction.

Cool.  We're average!

But then we recovered 3.5%.  And now we're down -0.55% for 2018. 

If you had Rip Van Winkled it since January 1st and woke up to see your portfolio down 0.55%, would you Chicken Little it the rest of the year worrying about the 5% corrections yet to come?

Or would you just go back to sleep?

Own the Racetrack

Last week, the investment quilt taught us that chasing returns is a great way to slice your long-term return in half.   Buying and selling based on last year's… last month's… last week's returns is a surefire way to buy high and sell low.

And so we buy and hold…. and then hold some more. 

But what do we buy and then hold?   A diversified portfolio.

The "Asset Alloc." in the white boxes stand for Asset Allocation - aka a diversified portfolio.   Notice how it's never the best and never the worst.  A diversified portfolio loves the middle way (points if you picked up that zen reference.)

And because we know it will be in the middle over time, there's no anxiety about what to do.   We don't need to worry if NOW is the best time to buy or sell something.   

We don’t' need to worry if we picked the right horse because we own the whole race track. 

Investment Quilt.png

The Investment Quilt

Colors!  Pretty!!!

Investment Quilt.png

Each colored square is an ingredient in your investment stew.  If you're a client of The Financial Zen Group, most of these ingredients are in your portfolio.

The ingredients are sorted from top to bottom.  The best performing ingredients are at the top.  The worst are at the bottom. 

Look at the first column, for example.  In 2003 "EM Equity" aka Emerging Markets was the best ingredient.  It had a 56.3% return in 2003.   

The worst ingredient in 2003 was cash.   Cash only earned you 1%.

Make sense?

One of the many things the "Investment Quilt" teaches us is that past performance is a lousy indicator of future results.  Therefore you should not "chase returns" by getting in and out of the market based on what it just did. 

Follow emerging markets from year to year. 

It's either the best or the worst.  And it's usually the worst right after it was the best. 

If Wall Street has fooled you into thinking market timing works, then you'll probably invest after it was the best, just in time for it to be the worst.   And then sell it after it was the worst, right before it's the best. 

In other words, buying and selling at exactly the wrong times.  Studies confirm this happens consistently.  The average investor gets half of the market returns because they are always buying and selling at the wrong time. 

The solution?  Never sell.  Buy and hold and then hold some more.  We know the market's long-term return is 10%.  That's pretty darn good.  Why would you mess with that? 

We Make It Look Easy

There once was a man who had a squeaky hardwood floor. 

For months and months he tried to fix it.   But for the life of him he couldn't get the floor to stop squeaking. 

So he finally called a carpenter.

The carpenter came in, looked at the floor for a few minutes, took out one nail, hammered the nail into the floor and left.

Sure enough, the floor was fixed.  It didn't make a peep after that.

A week later the man received the bill in the mail.  It was for $200.   He was surprised that a few minutes of looking around and one nail cost $200.  So he called the carpenter asking for a detailed invoice. 

A week later the invoice arrived.  It read:

One nail……… $1
Knowing where to hammer the nail…. $199

The professional always makes it look easy because she knows exactly what to do.  But she only knows exactly what to do because she spent thousands and thousands of hours trying everything else first. 

Do you have thousands of hours to try everything else first? 

Run for the Hills...Again!

Editor's Note (doesn't that sound fancy?):  The universe really wanted to drive this lesson home.  As if on cue, between writing this last week and publishing it this week the market bounced back nearly 3% in just two days. 

The market dropped 6% last week.  EEEEKKKK!!!!!

Hope your bomb shelter's stocked up on shotgun shells and canned goods because we are running for the hills…again!

Surely we should worry this time, right? 

Only the smartest people read my newsletters, so I know you already know the answer.  Of course not.

Pictures are fun.  Below is a picture of market returns since 1980.  The gray bar is the total return for the year.  The red dot is the lowest point it reached that year.

S&P 500 Market Returns.png

Look at 1980.  At some point between January 1, 1980 and December 31, 1980, the market was down 17%.   Oh  noooooooo!!!!!

But wait.  

By the stroke of midnight on New Year's Eve, it was up 26% for the year!  Woohoo! 

It bounced back 43% from the lows that year.  That's one helluva year!  

All those people who dove into their bomb shelters when it was down 17% actually had nothing to worry about.   

And I bet you dollars to donuts before they dove for cover, they sold all their investments "before it got worse."  

Then I'll double down and bet they missed out on some - if not all - of the recovery because they were too scared to "get back in."  

So not only did they not bring in the New Year with 26% more money than they had a year before, but they were probably down 17% because they sold everything at the bottom and never got back in. 

As our Commander-in-Chief would say - SAD!

The lesson is simple.  Whatever is happening at this moment has ZERO predictive power over what will happen in the next moment.  

I'm sure when the market was down 17% in 1980 no one was saying "I bet it recovers 43% and finishes the year up 26%."  NO. ONE.

So what should we do?  Go to work.  Spend time with our friends and family.  Enjoy our lives. 

After all, we've seen this movie before.  We know how it ends.  If you're patient and give it enough time, it always has a happy ending.

Buyer Beware

Caveat Emptor.    Buyer beware.

If someone's job title contains the word "Advisor," you would think they'd be required to give you good advice.   Or at least advice they BELIEVE is good advice. 

It's so obvious everyone assume that's how it works. 

It doesn’t.

If your "Financial Advisor" works for a large Wall St firm or insurance company - Wells Fargo Advisors, Morgan Stanley, Merrill Lynch, Ameriprise, Northwestern Mutual, AXA, etc. -  he is NOT legally required to advise you in your best interest. 

Let's say Mutual Fund XYZ sucks.  And your "financial advisor" knows it.  But XYZ pays a big, fat commission that will help him win a company sales contest.  So your "advisor" recommends you buy it anyways.   That's totally okay in the eyes of the law.

Caveat emptor.  It's up to YOU to figure out that it sucks and he's trying to win a sales contest.

Good luck!

The Dept of Labor tried to change this.  They created the Fiduciary Rule which would require "advisors" at big brokerage & insurance companies to act like independent financial planners who are legally required to put their clients' interests above their own. 

It was supposed to become law last year.  Then it was delayed.  And last week it all but died.  The 5th Circuit Court of Appeals decided investors should fend for themselves

Buyer beware. 

Only fiduciary financial planners are legally required to put your interests above their own.  And only fiduciary financial planners are required to file a form called an "ADV Part 2" with the SEC each year. 

So if you don't want to figure out if XYZ is great or your guy is trying to win his sales contest, just ask to see their ADV Part 2.  If he doesn't have one, move on.

Here's mine.

Speculating vs. Investing

If you are saving 20% of your income and investing it in a boring, long-term, buy-and-hold portfolio that's well diversified with a professional-level asset allocation - then you can feel good about speculating on some "fun stuff." 

  • Love real estate and enjoy being a landlord?  Cool!  Go get yourself an investment property.
  • Obsessed with finding the next Facebook?  Nice!   Go invest in some Pre-IPO companies.
  • Think you've got a knack for currency trading?  Awesome!   Go-to-town arbitraging dollars for euros.
  • Feel like you your poker skills are second-to-none?  Sweet!  Go hit the high-stakes tables at Vegas.

But only - and I repeat ONLY - after you have your investment foundation built - saving 20% in a well-diversified, low-cost, index portfolio.

Don't let Wall St. (or your neighbor) sucker you into thinking speculating is investing.   If you can't predict your return, then you are speculating.  And if you are speculating, one of those unpredictable returns is -100%. 

Consider The Source

6 hours of my "reading time" every week is dedicated to honing my craft- staying on top of industry trends… researching new financial planning strategies… studying client psychology… etc. 

What do I read, you ask?

Advertising, of course.

…I dive deep into the 4-page annuity advertisements in my industry rags. 

…I devour "Top 5 Mutual Funds" articles in Money magazine. 

…I'm glued to the CNBC commercials slinging gold with limited-offer "Patriot Coins." 

Why do I read advertising to educate myself?  Because the best way to learn is from someone trying to sell you something.  (A universally accepted "sarcasm font" is way overdue, don't you think?) 

Personal finance is complicated.  It's too complicated… and too confusing… and let's be honest - too boring -  for most people to be motivated to educate themselves.  The financial industry takes advantage of this.  

  • The company hustling gold hopes you don't know their Patriot Coins are a terrible investment.
  • The Pre-IPO investment company hopes you don't understand the investment and liquidity risk of investing in pre-IPO companies.
  • The insurance company hopes you don't know that whole life policy is really expensive insurance and a really lousy investment.

But they gotsta eat too, ya know?

The point is to consider the source.  If you are "learning" from someone trying to sell you something, take the time to educate yourself outside of what the salesman… or advertisement… or commercial is telling you.

After that, if you've just got to have those Patriot Coins then more power to you. 

Look Out for IRS Tax Scams

Repeat after me:

"The IRS"…

"Does NOT"…

"Contact people"…

"By email, text message or social media."

If you ever hear from the IRS by email, text message or social media - do not respond, do not open any attachments and delete immediately. 

It is 100% a hacker.

And if you ever get a call from the IRS, it's 95% likely bogus.   Until 2015, they never called.  Now they only call after sending you something in the mail first. 

These scumbags particularly like to prey on senior citizens, so be extra alert if you're a baby boomer. 

Here's some good info straight from the IRS website:

  • Scammers make unsolicited calls.  Thieves call taxpayers claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They con the victim into sending cash, usually through a prepaid debit card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls,” or via phishing email.
  • Callers try to scare their victims.  Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don’t get the money.
  • Scams use caller ID spoofing.  Scammers often alter caller ID to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.
  • Cons try new tricks all the time.  Some schemes provide an actual IRS address where they tell the victim to mail a receipt for the payment they make. Others use emails that contain a fake IRS document with a phone number or an email address for a reply. These scams often use official IRS letterhead in emails or regular mail that they send to their victims. They try these ploys to make the ruse look official.
  • Scams cost victims over $23 million.  The Treasury Inspector General for Tax Administration, or TIGTA, has received reports of about 736,000 scam contacts since October 2013. Nearly 4,550 victims have collectively paid over $23 million as a result of the scam.


The IRS will not:

  • Call you to demand immediate payment. The IRS will not call you if you owe taxes without first sending you a bill in the mail.
  • Demand that you pay taxes and not allow you to question or appeal the amount you owe.
  • Require that you pay your taxes a certain way. For instance, require that you pay with a prepaid debit card.
  • Ask for your credit or debit card numbers over the phone.
  • Threaten to bring in police or other agencies to arrest you for not paying.


Be safe out there.

Pay Yourself First

The concept comes from The Millionaire Next Door, a very famous personal finance book.   It studies 1,000 "ordinary" millionaires and how they got that way.  (Hint: none of them got lucky working at the right startup.)

Pay yourself first simply means save, THEN spend.   Most of us pay everyone else first.   We pay the Whole Foods cashier and the contractor and the golf course attendant and the waiter and our lawn guy and pool guy and the list goes on.

For the next 6 months, try paying YOURSELF first THEN pay everyone else. 

If you hate it, then in 6 months go back to normal and enjoy spending all the money you just saved.  

Here's how: 

  1. Multiply your monthly take-home pay by .05
  2. Set up an automatic, monthly transfer from your checking to savings for exactly that amount
  3. Don't look at your savings for 6 months.

On August 22, I'll send you a reminder to tell me how much you saved and how good you feel.

Baby Prep Planning

Are you about to have a baby? 

Are you about to be a grandparent?

If so, there are things you (or your kids) need to do right now to get your house ready.  And I don't mean plugging the outlets.

We're talking about your financial house.

It's the Baby Prep Plan trifecta - college, life insurance, and estate planning.

As part of my ever-expanding service offering, I will help you customize your own personal Baby Prep Plan.  

We'll make sure:

  • The grandparents will have somewhere to save for Baby's college expenses  (You'll need $350k to send Baby to UC Berkeley in 18 years.)
  • You have enough life insurance to protect your family (just in case).  (Promise you don't have enough through work.)
  • Your will, guardianship and all the other legal mumbo jumbo is squared away. (I'll make it super easy for you.)

As if that wasn't enough, that service is free for Financial Zen financial planning clients.

If that's you, and we need to talk, click here to schedule your Baby Prep Planning appointment.


Full Disclosure: As a fiduciary financial planner, I cannot accept compensation from third parties.  Therefore, I have no financial interest in working with any particular estate attorney or insurance guy/gal.   (Although I know some excellent ones we can use if you don't know anyone.)