The Behavior Gap by Carl Richards

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The Book in One Paragraph

The behavior gap refers to the gap between investment returns and investor returns. Due to fear, greed, and irrationally, most people buy and sell at the wrong times and lose money. The best investment strategy is often the simplest investment strategy.

The Behavior Gap Summary

This is my book summary of The Behavior Gap by Carl Richards. My notes include quotes, big ideas, and important lessons from the book.

  • “Investment mistakes are investor mistakes.”
  • The behavior gap is the difference between investment returns and investor returns.
  • People have a tendency to sell at the bottom when the market is at its worst and buy at the top when the market is at its best. Inherently, this leads to poor investment returns.
  • Fear causes people to sell at the wrong times. Greed causes people to buy at the wrong times. 
  • The less you touch your investments, the better your returns are likely to be.
  • The more you can manage your emotional responses to market changes, the more you can stick to an investment plan and resist the urge to buy and sell at all the wrong times.
  • Over the long term, very few active money managers are able to earn better returns than simple index funds. 
  • The best investment strategy is often the simplest investment strategy.
  • “We often resist simple solutions because they require us to change our behavior.”
  • “Being slow and steady means you’re willing to exchange the opportunity of making a killing for the assurance of never getting killed.”
  • “One of those lessons is that you aren’t in charge of everything. Do what you can, and then relax.”
  • “You don’t have to choose the perfect investment or save exactly the right amount or predict your rate of return or spend hours watching television shows about the stock market or surfing the Internet for stock picks. You don’t need a plan for every contingency.”
  • Finances play a crucial role in leading a good life. The whole point of understanding personal finance is to improve your quality of life. “In the end, financial decisions aren’t about getting rich. They’re about getting what you want – getting happy.”
  • Become clear on what you want out of life, then make financial decisions that align with what you want.
  • “Whatever you have to do to gain self-knowledge, do it. Find out who you are and what you want. Then you can stop wasting your life energy and your money on stuff that doesn’t matter to you—and start making financial decisions that will get you to your true goals.”
  • Money has diminishing returns. The more you accumulate, the less additional happiness it brings.
  • “That’s why it’s important to try to live in the present. The present is the only place we can live. When we live in the present, we are alert to what’s actually happening – to us and in the world at large. We can then act based on that awareness. And financial planning based on reality tends to lead to better results. By contrast, when we live in the future, we are lost in fantasy or fear. When we live in the past, we are lost in regret or nostalgia. Financial planning based on fantasy, fear, regret, and nostalgia is likely to lead to more of the same.”
  • Having a good family life tends to bring more happiness than having a successful professional life.

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