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Carlson’s Way

William Ehart

IT ISN’T EVERY personal finance book that includes a chapter entitled, “You Will Lose Money.” But that’s Ben Carlson laying down the harsh truth for inexperienced investors in his self-published fourth bookEverything You Need to Know About Saving for Retirement.

I interviewed Carlson recently because I find his A Wealth of Common Sense blog among the most useful for a small investor like me—someone with an intermediate level of market knowledge. He’s director of institutional asset management at Ritholtz Wealth Management, where co-founder Barry Ritholtz and many on his team—including Carlson, Josh Brown and Michael Batnick—regularly blog and record podcasts.

Carlson started writing for small investors in 2013, partly to deal with constant queries from family and friends. “I was always getting kind of the same questions,” he says, talking from his home in Grand Rapids, Michigan. “Obviously, people aren’t getting the answers they need. I thought I’d just share some of my thoughts on what’s going on and try to put it in context.”

Putting things in context is among Carlson’s strengths. I appreciate his penchant for slicing data by time period, showing such things as cycles of performance for small cap, value and foreign stocks, but without making predictions. Here are my top five takeaways from his new book and from my recent interview with Carlson:

1. Watch your wallet more than you watch the ticker. “Early on in your financial lifecycle, the vast majority of your gains will come not from your investment prowess but from your savings rate,” Carlson writes. “Real wealth for normal retirement savers comes from a combination of saving, compounding and sitting on your hands.”

During our conversation, Carlson told me, “A lot of people confuse picking stocks with having a financial plan. If young people think that trading is going to be a way they make their millions, they’re going to be sorely mistaken.”

2. Avoid “the paradox of choice” by automating your finances. Psychologist Barry Schwartz theorized that having more choice, while seen by many folks as desirable, actually results in more anxiety and can lead to decision-making paralysis—the so-called paradox of choice. Elaborating on that notion, Carlson quotes legendary management consultant Peter Drucker: “Don’t make a hundred decisions when you can make one.”

That goes for both saving and investing. To reduce the number of decisions you need to make each month, set aside a portion of your paycheck automatically, such as through your employer’s 401(k). Soon enough, you won’t even notice the money is gone. That’s simpler and will likely have better results than thinking every month that you’ll save whatever you can spare. Carlson adds that target-date and index funds are also great options, especially for less experienced investors, because they simplify investing and reduce the need for constant decisions.

3. Change your behavior. “Information is useless unless it’s paired with an intelligent, concrete plan to change your behavior,” Carlson writes. Indeed, if facts were all we needed to make good decisions, the diet and exercise craze that took off in the 1960s would have made us svelte and fit. Instead, obesity has grown substantially.

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This gets back to the benefit of making our saving and investing automatic. Carlson quotes food researcher Brian Wansink: “The best diet is the one you don’t know you’re on.”

4. Read up on the fundamentals. I asked Carlson what he considered the best sources of information for average investors. “I’d prefer most people just read some basic books, because a lot of this stuff about personal finance doesn’t really change that much over time,” he says. “There’s a quote from [Berkshire Hathaway Vice Chairman] Charlie Munger about how people don’t go to church to hear an 11th commandment, they just need the ones they know reinforced.”

Carlson continues: “One of the things that people misconstrue when they watch financial television or read something is that it all requires context, because it’s a one-way conversation. If you’re getting someone who’s pushing predictions and saying, ‘You have to do this immediately, you have to put your money here,’ without understanding your financial goals and your situation, it’s not going to work for you.”

5. Down markets are the difference maker. Market pullbacks are “when you understand your true risk profile as an investor and what asset allocation you can stick with,” Carlson says. “Because that one mistake—selling your stocks when they’re down—can be really hard to come back from.”

William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.

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Roboticus Aquarius
Roboticus Aquarius
5 months ago

I’ve been reading Ben’s work for most of the 7 years he’s had a blog. I love the way he takes often confusing questions and finds the thread of logic that simplifies your choices.

#5 on his list was the most difficult for me. Not the not selling, but the not reacting. I endured two crashes before trying to time 2008. I did fine, but realized how lucky I had been. I needed I found my way out of that. I rebalance when my stock/bond allocation shifts by more than 5%. That often results in rebalancing near the bottom of significant stock declines, and makes me feel like I am ‘buying low’. This is an important psychological reinforcement for me – not only am I staying the course, but I’m also taking advantage of temporary dips in market value via maintaining my risk profile. Conversely, I may or may not be ‘selling high’ when rebalancing after the market rises significantly, but I am consistent in maintaining my risk profile. Many people may not have this issue, but we all have our weak points, and this is one of mine.

J. Money
J. Money
6 months ago

Enjoyed reading this one! And agreed – Carlson is great for our community.

IAD
IAD
6 months ago

Thank you!

greglee
greglee
6 months ago

Another way of avoiding the paradox of choice, not mentioned above, is inattention. This worked very well, for me. I was never much interested in investing, so I bought mutual fund shares and never got around to selling them — that is, I was never tempted to trade.

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