Financial Intelligence, How to Make Smart Decisions
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|The Lange Money Hour: Where Smart Money Talks
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- Introduction of Guest – Doug Lennick, CFP
- Investments Work, Investors Don’t
- Emotional Intelligence is Real
- Prepare for Uncertainty
- Recharacterization of Roth IRAs
- The Four Rs – Recognition, Reflect, Reframe, Respond
Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
Hana: Hello, and welcome to The Lange Money Hour, Where Smart Money Talks. I’m your host, Hana Haatainen Caye, and tonight, we are talking smart money with CPA and Attorney Jim Lange, best-selling author of two editions of “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again,” with testimonials from Charles Schwab, Jane Bryant Quinn and Ed Slott. Tonight, we are joined by Doug Lennick, CFP and behavioral finance expert. Doug is the author of several books, including “Financial Intelligence.” He is a fellow at the Carlson Executive Development Center, Carlson School of Management and University of Minnesota. In addition, he is a member of the prestigious consortium for research on emotional intelligence in organizations. Doug is going to provide some perspective on how we fundamentally react to markets like this and how we should react. We’re looking at a nerve-settling discussion tonight. Welcome Doug. We’re happy to have you with us tonight.
Doug Lennick: Thank you very much. Glad to be here.
Hana: Before I turn it over to Jim, I want to remind our listeners that the show is live, so please feel free to call in. The number is (412) 333-9385. Good evening, Jim.
Jim Lange: Good evening. And before I get into the substance, I just want our listeners to know that even though this isn’t going to be, in effect, a “hard” show, we’re not going to do detailed tax analysis or detailed financial analysis, so in that sense, it’s softer, but I would say that this is maybe even more important than technical things, because I think that it is the behavior of investors, and frankly, the bad behavior of investors that puts so many people in such trouble, and I think that is we get this part right, that we’re going to go a long way for securing our own financial security, and when I had this idea in mind, it was very obvious that Doug Lennick was THE guy to talk about. I have his book in front of me. It’s some great information. We have a great show planned for you, so thanks so much for agreeing to be on the show, Doug.
Doug Lennick: Well, thank you Jim for having me, and actually, it’s interesting you mentioned soft because I will just simply say to your listeners, as it turns out, the soft is the hard, and the reason that is so is the data shows that investments work a lot better than investors, and the reason that is so is because of what some people refer to as “the soft.”
Jim Lange: Well, “the soft” is really going to be what I’d like to concentrate on tonight, and I think what you mean by that is, let’s just say, for discussion’s sake, that I am a Vanguard S&P 500 investor, and I really believe in Vanguard and I believe in low cost and everything else, and I’m more or less buy and sell according…and let’s even say that I have a well-diversified portfolio and maybe I’m diversifying a number of funds within Vanguard, and I’m a do-it-yourselfer and I really believe in low fees, but if I compared my performance to the index performance of those same funds, even with those same blends, if I’m the typical investor, I’m not going to do nearly as well as those funds, am I?
Doug Lennick: No. You are absolutely correct. You know, one of the greatest funds of all times, you know, the fidelity fund Magellan, and Lynch himself expressed disappointment that although the fund did really well, the investors in the fund did less well, and so there are many instances of that, and the shows, and one of the things that maybe many of your listeners are familiar with, but there’s kind of an industry watchdog out there, an organization called Delbar, and they point out how investors do versus investments themselves, and if you look at the twenty year period of time ending December 31st of last year, so December 31st, 2010, the S&P, the Standard and Poor’s 500 had an annual growth rate of 9.14%, but the average equity investor in equity mutual funds, whether they be Vanguard or others, I can’t name specific names, but I’ll just say what Delbar points out is the average equity investor actually did 3.83%, and then, when we look at bond investors, it’s not any better. In fact, it’s actually worse relative to the gap because Barclay’s Bond Index shows the twenty-year return at 6.89%, and it shows the fixed income investors at 1.01%. And so the data says that investments work and investors don’t, and so the soft stuff is the hard stuff.
Jim Lange: Well, I couldn’t agree with you more, and I think that yes, and I’m not sure if they’re including fees and costs in those numbers, but the amount…and I’m, by the way, going to assume that most of our listeners, although that’s probably not a good assumption. I personally like low cost, and I myself am associated with basically low cost buy-and-hold type investments.
Doug Lennick: I like low cost too, and I’m actually, I would say, for those who are low cost folks, I believe in low cost and I believe in buy and be smart.
Jim Lange: And I think that makes sense, but I guess what my point is, is that I know other people other than yourself have said that it is well worth the cost of having a money manager just to keep you from doing something stupid, which is what we’re going to get to. So, whether you use a money manager or whether you’re on your own, I do want to get to the stupid things that people do, and maybe you could tell our listeners why the Magellan Fund has done so well, but Magellan investors have done so poorly? Why did the S&P do so much better than S&P investors? Because it’s really the same answer, isn’t it?
Doug Lennick: Yes, it really is. And actually, although I don’t want to get into too much of the detail of this, I will say that in order to answer that question, we really have to integrate several disciplines and three in particular: traditional financial theory, behavioral finance and neuroscience. Although that all sounds, you know, that’s like “Wow!” That’s a mouthful and it sounds like a lot, I’ll try to put it on the other side of the complex and make it as simple and accessible as possible.
Jim Lange: That’s fine, but don’t be afraid to give people some real meat here. You know, I’m not trying to do a breezy show. I’m trying to give people some great information, and if this is the core, then take your time on it.
Doug Lennick: Well, the reality is, is that…well, there are three levels of understanding. You’ve got simplistic, you have complex and you have profoundly simple, and so I want to make it useful, but I’ll get into it enough to at least get to why is this the issue? So if you think of neuroscience, neuroscience is really the study of the brain and how the brain itself works. Behavioral finance is actually the psychology of money, and psychology is the study of the mind, and that in and of itself gets confusing. So I’ll just say this: the mind operates within the brain, but it is not the brain. So, if we could think of the brain as a musical instrument, we could think of the mind as the musician. So how our mind plays our brain has a lot to do with why we do what we do with our money. Now, traditional finance actually has its origins in Nobel Prize winning theory, and many of your sophisticated listeners and others are very familiar with modern portfolio theory, which Harry Markowitz authored way back in 1952 and won the Nobel Prize.
Jim Lange: And I’ll put in a little plug for our archives where you can listen to Roger Ibbetson, who is right along with Harry, and you can hear some information on classic portfolio theory by going to www.retiresecure.com, click on “listen now,” and there is an hour show with Roger Ibbetson, who is exactly the type of person you’re talking with. I didn’t mean to interrupt, but…
Doug Lennick: No, no, I think that’s great.
Jim Lange: You’re speaking with good company!
Doug Lennick: Yeah, well, I think that’s great. Well, in the theory, most other things, it offers or posits the notion that investors will make rational decisions with their money without bias with some intellectual understanding of the tradeoff between risk and reward. But behavioral finance actually gets at the psychology of it and behavioral finance says the theory has merit, and the theory absolutely has merit. However, once we put into place human behavior, we have to add that dimension in. So, if investors out there could think about a two-sided coin, one being technical and fundamental and somewhat traditional, and the other side of the coin being behavioral, if we can combine the two sides of the coin, then the investor can close the gap between their own performance and the investments that they have actually owned. Now, neuroscience deals with the brain, and the way the brain works is, the brain itself is hardwired to avoid danger. So, fortunately, you and I and all of us are wired to void danger. We’re also wired to pursue opportunity, and the reason we’re wired that way is it’s a survival instinct, and so I think it’s important for everybody to understand our wiring, and it’s also important to understand that the wiring is triggered by the emotions we experience as stimulated by some outside event. So, if something happens outside of ourselves, it will stimulate us emotionally first. That’s the way it works. That’s the way the brain works.
Jim Lange: And we don’t have a choice about this, do we? I mean, that’s just the way it is.
Doug Lennick: We do not, Jim. We don’t have a choice, and in fact, an important point is emotional intelligence is real. You know, as mentioned, we’re members of the Consortium for Research and Emotional Intelligence, a long name, a bunch of people who are extraordinarily smart are in the Consortium. I’m more of a practitioner. I’m not one of the extraordinarily smart research guys, but I’m interested in application, and when it comes to emotional intelligence, we must understand a few things: one is, it’s very real. So emotional intelligence is real. Number two, it is not cognitive, and although we’re talking about it with words, and therefore, it sounds like it must be cognitive, it really isn’t, and number three, it sacrifices accuracy for speed. It’s very fast. It’s frequently wrong. And then, finally, when it comes to money, and investors should especially relate to this given what’s been happening lately in the market, is our emotional intelligence literally cannot tell the difference between a bare market and a bear in the woods. Both bears will scare us, one of which is life-threatening, and the other is not. A bare market is not a life-threatening fear. The bear that you encounter live and direct in the woods, and I have met a bear. I was actually in a canoe and the bear wanted to join me in the water, and I will tell you that I was able to achieve fear, just as investors are when the bare markets are coming.
Jim Lange: But you might have gotten a squirt of adrenaline that helped you get away from the bear, but what happens when, well, you can go on with your explanation, but I can picture the same thing is happening to an investor, and maybe paddling away very quickly isn’t the right approach.
Doug Lennick: In fact, it’s the dead-set wrong approach. Running from the bear and running from the bare market is an emotional response. It’s a survival response that actually is irrational. So, if you actually, really, if those people who are your listeners who have dealt with bears in the wild, you don’t want to run from the bear. Actually, what you want to do with the bear is you want to get big. You want to get noisy. You want to get loud, and I will tell you, what I really did is I took my paddle and I beat the heck out of the side of my canoe, which luckily was aluminum. So it was noisy, and the bear just decided to go back up into the woods. And so when we run from the bare market, we lose our money. When we run from the bear in the woods, we lose our life.Jim Lange: Alright, so, on the other hand, it’s so hard because, you know, I have clients who have experienced significant losses, and they’re really worried that it’s just going to keep going, and what doesn’t help is all the news. You know, you turn on the news and Greece is about to go under and now Italy and then Spain, and Ireland has this unbelievable amount of debt, and now, closer to home, California’s broke and the news just keeps coming and coming. So what are people supposed to do, or how do we handle this?
Doug Lennick: Well, my recommendation actually is kind of interesting because a few years ago, I was going somewhere from one engagement to another, and it was fortunate, I live in the Minneapolis-St. Paul area, where, by the way, the Minnesota Links are playing in the WNBA finals. I know it’s not the Super Bowl, but we’re very excited, and after your show tonight, I’m going to go to the game, but I was driving across the state of Wisconsin because I was going to Green Bay, last year’s Super Bowl champion.
Jim Lange: That is not a pleasant memory for Pittsburghers, by the way!
Doug Lennick: Well, you know what? We have several great Minnesota connections. Your coach, Mike Tomlin, was formerly with the Vikings. Tony Dungee, who preceded him, did an outstanding job. He played for the Gophers, so we have a great Minnesota connection, and I love Pittsburgh, so I actually do love the city and I was listening prior to the broadcast coming on, I was very excited to hear how I think civic-oriented would be the word obviously Pittsburgh is, and how much giving there is in that city. But I’m driving across Wisconsin and I get a call from the Associated Press, and they basically said, “Are you the guy who doesn’t know what’s going to happen?” And I said, “I am your guy!”
Jim Lange: That’s really reassuring for our listeners, isn’t it? So listeners, this is the guy who doesn’t know what’s going to happen!
Doug Lennick: Exactly, because what our listeners also don’t know is what’s going to happen, and anybody else who tells them that they do, they immediately and appropriately have some mistrust, because nobody knows for sure. Now, financial professionals should have better educated guesses and better hypotheses than somebody who’s not educated, but at the end of the day, an educated guess remains a guess.
Jim Lange: I will remind our listeners that you are a certified financial planner. You’re not just a behavior guy who happens to know a little bit about money. You make your living as a financial planner, not as a behavioral theorist. Is that fair to say?
Doug Lennick: Well, in fact, I don’t practice financial planning anymore, but I do work with a number of financial services organizations, and I do try to help financial professionals integrate the understanding of human behavior into their value proposition, because at the end of the day, it’s not really the product selection. It’s not whether you own Magellan or don’t. It’s how you behave with it when you do. It’s not whether you own any particular investment or not, it’s how you behave with that investment when you do. And so, what I suggest that all people do is get better at preparing themselves for the truth, and the truth is uncertainty. And so, one can get ready for what I call the certainty of uncertainty. So we can get ready for that. And so I can actually get ready for the financial implications of the uncertainty of the length of my life. I can get ready for the financial implications of the health status of my life. I can get ready for the financial implications of the stock market fluctuating and being volatile, and the economy being strong or being weak. I can get ready for all of those things, and if I choose to do so, then even though my portfolio might not always be going up, I will always know that if I need some money for any particular reason tomorrow, there’s going to be a smart place to get it.
Hana: Okay. We’re going to take a break right now. Thank you for all of the information you’ve given us so far. We’re going be right back with Jim and Doug. You are listening to The Lange Money Hour, Where Smart Money Talks.
Hana: Welcome back to The Lange Money Hour, Where Smart Money Talks. I’m Hana Haatainen Caye, and tonight, I’m here with James Lange, CPA/Attorney, best-selling author and Attorney, and our guest, behavioral finance expert Doug Linnick, CFP. I want to remind our listeners that the show is live, and call-ins are welcome. The number is (412) 333-9385. And Jim, before we get back to talking about the psychology of money with Doug, I want to touch on something you mentioned before the break. You mentioned our hour-long discussion with Roger Ibbetson that can be accessed in our audio library on the website, and I think it’s important to let our listeners know that we have what is probably the best free financial audio library in the country, with over fifty hours of content with Jim and guests like Roger Ibbetson, Jane Bryant Quinn, Natalie Choate and many other top experts. So I just wanted to let you know that you can access them at www.retiresecure.com. And let’s get back to the discussion.
Jim Lange: Okay, welcome back, Doug.
Doug Lennick: Thank you, Jim. By the way, I must say, if you don’t mind an unsolicited endorsement from a guy out here in the Midwest?
Jim Lange: I really hate when I get unsolicited endorsements, Doug! No, go ahead!
Doug Lennick: You can delete this from your archives if you need to, but your comment about the recharacterization of Roth, and even the name of your show is awesome. So, what you’re talking about when you talk about smart money and this recharacterization provision is so unbelievable. So when it comes to being able to use the Roth, I was so struck by, and in fact, I know you know, like, tons more than I do about it, but one of the things that I like about the whole idea of the Roth thing is one can break it up into…and tell me if this is wrong, but if I have, let’s use $200,000 as an example. If I have $200,000 in an IRA and convert it to a Roth, I could put it into ten different investments. So I would have ten different $20,000 investments, and if I wanted to, I could recharacterize some and not recharacterize all of them. Would that be true?
Jim Lange: That’s absolutely true, and that concept is actually explained in my book “The Roth Revolution: Pay Taxes Once and Never Again.” We call it the “Roth Nonsure” with the idea that some of those…so again, let’s say that you put those ten different accounts totaling $200,000 in different sectors for discussion’s sake, and some of the sectors go up and some go down and you keep the ones that went up and you recharacterize or undo the ones that go down. You can really launch the benefits of the Roth IRA by a substantial amount. Not a lot of people do it, but we oversee it for our clients, and actually, with our clients now, Doug, I happen to be a very proactive type of advisor, so as an example, if we did your tax return and you did a Roth IRA conversion in 2010, you got a letter from us saying you did a Roth IRA conversion in 2010, the market has since gone down and you might want to recharacterize, or we actually sent out that book to all of our clients, even if we did a Will for you twenty years ago and haven’t talked to you since, we sent out the book “The Roth Revolution” because we think it’s so important, and there are just tremendous opportunities in the Roth world. So, again, let’s call it some of the hard stuff that I like to do. By the way, Doug, for whatever it’s worth, the nature of this show and your show and the show in general is to provide people with great information, but ultimately, sometimes people after becoming educated like to delegate some of the work of both managing assets and making financial decisions like Roth IRA conversions and recharacterizations and estate planning, etc., which is obviously what I do, but I do think it’s great to educate people and you picked up on one of our favorite strategies, by the way, a strategy that I was writing about back as long ago as 1998. I was one of the early guys, and the other guys were Barry Picker and Bob Keebler. We all wrote very similar articles that came out at the same time. So, you picked up on a very valuable one.
Doug Lennick: Well, I mean, it really is absolutely brilliant, and I do believe that, although I understand why a number of people go the do-it-yourself route, I do think it’s in the interests of the consumer, investor, prospective client, or whatever label we give them. I do think if they get the advisor with the right competencies, then they’re better off retaining the services of that advisor, and that’s not as easy as one would want it to be, but that’s very doable, and having had a chance to look into what you do, I will say this for your listeners. I really was open to coming onto this program because I really believe that what you’re doing represents the kind of integrity that they need, and trustworthiness, which is so important because the operative word there is “trustworthiness.” The financial services industry is littered with the investment losses of people who trusted somebody they shouldn’t have, and so being trusted is not good enough. Being trustworthy is way more important, and that’s one of the reasons why I said I’d do the show.
Jim Lange: Well, I sure appreciate that, and by the way, in case anybody is thinking, I’ve actually never talked to Doug before this show. I talked with him for about one minute right before we went on, so this is not a planned thing. So I sure appreciate those kind words, Doug.
Doug Lennick: Yeah, you know, I have a book out called “Moral Intelligence.” I don’t want to come on board and lie to your audience right away.
Jim Lange: Not right away! Maybe three-quarters of the way through and then you can lie to them! How’s that?
Doug Lennick: Yeah, I’d better save that for a really special moment! No, I mean, seriously, integrity is really the big deal, and, you know, if you look at, not that I want to promote my own stuff, although I guess I’ll just comment…
Jim Lange: Go ahead, but actually, you know, we do want to put in a plug for your book because I think that this is really important stuff, and honestly, just being very frank, there’s two people who I think write about this a lot and really get it and do it in a way that makes a lot of sense, and that’s you and Nick Murray, and I don’t want to say anything bad about Nick, but I’ll just say that I far preferred having you on the show.
Doug Lennick: Well, you know, Nick and I have been on the same stage at different times…
Jim Lange: I would imagine so!
Doug Lennick: …and he’s got some behavioral investment stuff that I think is really good. My sense of it, however, is even beyond investments, and it’s really getting prepared for everything, and I think we can. I mean, it’s really important that we get ready for all that can happen, and there are financial implications with it, you know, and I use my own life story as an example. My mother was killed, sadly, not killed, but she died after the accident, but she died as a result of injuries sustained in a car accident, and she was in her sixties, healthy in the morning, dead at night, and she still had a job, you know, her children, my sister and I had grown, but her death had some financial implications. Now, my dad survived that accident. They were in the car together, but eventually, he ended up living in an assisted living facility, and that had financial implications, and he passed away two years ago. He was going to be 85 years old, and he had a great life, but the last six years, he needed assisted living physically. His mind was sharp. He continued to write articles and so forth. He was an avid reader and writer, but physically, he needed assistance, and there are financial implications for that. And then, of course, the markets, and there are financial implications with that. There are some things that we can predict when they are going to happen, but we don’t know when or where we should get the money from to pay for the occurrence. You know, an example would be educating children. I have three children, all now adults, all of them went to private schools, one on the west coast, two on the east coast, all expensive colleges, but they went at different times, and where the money came from to pay for the education changed. And so, the important thing for our listeners to understand is the opportunity is to be prepared for it all, and to have yourselves situated such that whenever you and your family needs some money, there will be a smart place to get it. And so, if I die tonight, which I surely hope I do not do…
Jim Lange: At least wait until after the show!
Doug Lennick: Yes! In addition to whatever net worth I have, I actually have life insurance. And like you mentioned earlier that some people have taken some paper losses, their net worth may be down, and that certainly happened to me when the markets went down in 2008. I didn’t expect it, but I did decide that after that happened, I would increase the death benefit on my life, and some of what you do is you help prepare people for the tax consequences of where their money is, and I just think it’s terrific what you’re doing, and you combine the expertise of a CPA with the expertise of an attorney into also being a financial professional. You know, and I will admit to you I stopped going to college. I eventually graduated, but I was a quarter short a degree in accounting, so you made it all the way. My dad would have loved you because he wanted me to be a CPA. I never made it.
Jim Lange: Well, you know, sometimes people think of CPAs as really number-oriented people, but to me, it’s much more conceptual, and also, just to be fair to our audience, I myself do not manage money. I work very closely, we actually have five different money managers, some of whom are classic active money managers, like a Warren Buffet-type value-oriented money manager who has done quite well if you stick with him over a longer period of time, and we also work with dimensional funds advisors that is really the index-type approach, and the dimensional funds advisor gives very good statistics on the difference between how well the fund is doing versus how well most investors that invest in the fund are doing, which is not nearly as well. Again, getting back to the behavioral part, because the whole idea of what we want to do is we want to buy low and sell high, but what happens in the real world with that behavior, with that little voice in our head that we can’t turn off. So maybe you can tell our listeners why people do what they do and what they should do about it?
Doug Lennick: Well, what’s really happening is, you know, when most people buy a product that is one of their favorite products, their preference is to buy the product on sale. That makes sense to them. But if the stock of the company that makes the product is on sale, they want to avoid it. So, emotionally, the weird thing is, emotionally, it’s more comfortable to buy high, and emotionally, it’s very easy to sell low, and so many people do. And so, what we do, what I suggest, and this literally can profoundly change the lives of your listeners, we developed a concept called “The Four Rs.”
Jim Lange: Yeah, and by the way, this might be a good time to mention your book, because I do think that you get it, and you know, the way that Nick Murray says it is, for the vast majority of people who are better off getting, as you said, a trusted advisor who can give you the appropriate information, but for people who want to, let’s say, do it yourself or at least understand, can you give people the name of your book and if you prefer that they get it on Amazon or directly through you?
Doug Lennick: Well, thank you. I will say this: the name of the book in particular that we’re probably talking about now is “Financial Intelligence.”
Jim Lange: Right, that’s the one I have in front of me.
Doug Lennick: Yeah, and the subtitle is “How to Make Smart, Values-Based Decisions With Your Money and Your Life.” That particular book came out in the spring of 2010, and then I had a book that came out earlier this year that I co-authored with Fred Kiel that’s called “Moral Intelligence 2.0,” and “Financial Intelligence” was published by the FPA Press. “Moral Intelligence 2.0” was published by Prentiss-Hall, and they certainly can Google me, Doug Lennick, or they can go to our website www.lennickaberman.com. They can order the books from us, if they like, but they can also go right to Amazon, and I would certainly not discourage them from doing so. The book “Moral Intelligence 2.0” was actually inspired by the financial crisis, because several years earlier, “Moral Intelligence” came out, Orton School Publishing was our publisher, and I didn’t know of course at the time that that was a first edition, but there was a second edition, and that was inspired by the financial crisis, but relative to how do people actually do it, in “Financial Intelligence” and also in “Moral Intelligence,” I actually cover the four Rs. In “Financial Intelligence,” each R has its own chapter. In “Moral Intelligence 2.0,” it’s one chapter that kind of covers it, but in the chapters on the Rs, we’re talking about the first one, which is recognition, and these are…the way the brain works, you know, we talked a little bit about neuroscience earlier, Jim, but the brain actually is kind of an interesting instrument, and practice makes permanent. Practice does not make perfect. So, what one repeatedly thinks, or what one repeatedly does, gets wired into the habit center of our brains, and you know, for those who care, the technical term is basal ganglia.
Jim Lange: Alright, now I think, wait, wait, hang on. I think you’re getting a little bit too technical. Earlier in the show, I said, “Get technical, it’s OK.”
Doug Lennick: You don’t need basal ganglia?
Jim Lange: Well, I don’t, and we need to take a break.
Hana: Yeah, Doug, we’ll get back to the four Rs after our break. We want to just take a quick one right now, and we’ll get back to Jim and Doug to continue this fascinating discussion on the psychology of money. You’re listening to The Lange Money Hour, Where Smart Money Talks.
Hana: Welcome back to The Lange Money Hour, Where Smart Money Talks. I’m Hana Haatainen Caye, and tonight, I’m here with James Lange, CPA/Attorney, best-selling author and an attorney, and our guest, behavioral finance expert Doug Lennick, CFP, and I just wanted to let you know that you can still call in at (412) 333-9385. The show is live. And Doug, you mentioned your first of the four Rs, which was recognition. Do you want to continue with that?
Doug Lennick: Sure. I mean, recognition basically is just paying attention to yourself, and one of the things that people assume is that they are very self aware, but research actually shows we are less so than we think, and the recognition R is actually what we call a freeze game, and Rick Aberman, who is the Aberman in Lennick-Aberman, long ago taught me this game when I was involved in running the retail distribution business for what was American Express Financial Advisors, and Rick is a performance psychologist and a sports psychotherapist, working with professional and collegiate athletes, etc.
Jim Lange: I’m sorry. Could we have the short version? We’re going to run out of time and I have a whole bunch of questions left. I don’t mean to interrupt, but…
Doug Lennick: No, that’s okay! The short version, Jim, is the freeze game is hit the pause button, and ask yourself, “What am I thinking right now? Emotionally, how am I feeling right now? And what am I doing right now?” The interaction between thoughts, emotions and behavior, what I’m doing, actually defines moment-to-moment reality. And if people could practice that one game, just that, it would profoundly change their lives. And you might think, “Well, that sounds too simple.” Well, simple and easy are not synonyms.
Jim Lange: Alright. So is that the most important of the four Rs?
Doug Lennick: Well, it is. It’s the most important of the Rs because paying attention to oneself, self-awareness, is the beginning of effective decision making, which is the beginning of self-management, which ends in effective relationships with people and money. So, for our listeners who want to have a great relationship with money, and they want to have a great relationship with people, that’s all about how they deal with themselves. How they deal with themselves is all about the decisions they make about what to think and what to do, and that’s all about self-awareness. And so it really begins with this recognition. The second R is reflect on what really matters, and I can say this to the listeners: although I have no way of raising your IQ, I can help you improve your access to the IQ you have. And so if you practice the first two Rs, recognize and reflect, it won’t make you smarter, it’ll just make you more rational, and it’s an important point that irrational decision making trumps high IQ every time. So there are long-term capital management and many other references we could make where there’re really smart people who did some things that weren’t rational, not because they weren’t smart, but because they weren’t rational. And so, when Greenspan said irrational exuberance, he was right because behavior was irrational, the emotion was exuberance. The third R is reframe, which is just change your thinking, and the fourth R is respond, and respecting the time, I’m gonna let you get to some of those questions because I want to cover them, whatever they are.
Jim Lange: Well, I do appreciate it, and I think that your book would be a great place for people to look at this, and in a way, would have more value than a number of technical books, with the exception of my own, of course. No, I’m just kidding! I think it would be really good for people to do that, and the other thing is…
Doug Lennick: Don’t you think they should sit side by side in the library? Your book and my book?
Jim Lange: Well, ideally, and frankly, you have different types of people who would read that book, but one thing that I think that people can get from your book is some of the concepts that you talk about have not just to do with when to buy and when to sell, but I think you mentioned a relationship with money, and I’ll give you an example: most of my clients are probably not baby boomers but are even older, and many of them were either brought up in the Depression or had parents who were brought up in the Depression, more likely, and they still have what I would call a Depression-era mentality, and they are great savers but they literally don’t spend money, and people who have millions of dollars and they’re still spending $5,000 a month, and I can show them rationally that they could afford to spend twice that or even more, and they even know it, but they literally just can’t do it. They would not enjoy driving a fast sports car. They would be much happier in an eight-year old Chevy, and some of these things really have more to do with money than just whether when to buy and when to sell. By the way, we just got a message that I unfortunately have the duty to tell people. Steve Jobs from Apple Computers has died. So we have a sad note that I thought our listeners might want to know.
Doug Lennick: That is sad.
Jim Lange: Yeah, and it’s right after the new Apple i-Phone came out, so boy, he was one of the best business guys and had some of the best products of all time.
Doug Lennick: Well, he was clearly one of the people who understood the customer experience, and what he did, speaking of profound simplicity, is he simplified the complexity of technology, and he made functionality functional.
Jim Lange: Yeah. I do have a couple of other questions for you, because you know, I just think that reading your book and understanding the difference of why we do some of the things we do maybe has two possible impacts: one is to maybe change our behavior in a way that will be better for ourselves and our family, and two, maybe just to feel better about the existing behavior that we are doing, and I think that both of them are valid. Do you think that there are differences between how men and women think about these kinds of things?
Doug Lennick: Well, yeah. I mean, there actually are differences between men and women in terms of women, you know, the data shows they are more predisposed to an emotional intelligence than are men, and it’s not uncommon for a woman to be a little more risk-averse than a male, although all of those stereotypical things are not true for everyone, but those would be true, but you were mentioning, Jim, some of the people that you work with and their experiences through the Depression and how they’ve come out of that, I really think that the key to having a successful life and being financially intelligent is actually making decisions that are consistent with one’s values, and so if one’s values are satisfied, with a purchase of an eight-year old Chevy using your example, versus a brand-new Porsche or a Lexus or a Cadillac or whatever their car of choice would otherwise have been, I think that makes more sense for them because happiness is really a state of mind. It’s not a state of affairs. But happiness is a state of mind contingent upon people living consistently with what they care about. And so, I think it’s very important for people to get in touch with what they value. What are your values? So, the subtitle to the book, “How to Make Smart Value-Based Decisions with Your Money and Your Life,” because money is simply an instrument contributing to how you live your life, and the thing about it for many people is many people either don’t have the health they need, or they don’t have the money they need, and our company, Lennick-Aberman, we focus a lot on healthcare and wealth care because if we could take care of our health, which is largely behavioral, if we could take care of our money, which is largely behavioral, then we might get blessed with a long life and the money to afford it, or money and a healthy life to enjoy it.
Jim Lange: Do you think, now, people are a product of their times, if you will, and so a lot of my clients have a certain feeling about money, and then you go to the baby boomers who, let’s say, for a while, and if you talk to my clients about their kids, they think they’re all a bunch of spendthrifts, but then recently, we have had, you know, some serious problems in the market, and a lot of people were just forced to spend a lot less. Do you think that that is going to change people’s future behavior and change their future value, even if either the national economy or their own personal situation dramatically improves?
Doug Lennick: Yes. You know, one of the neuroscientists who actually endorsed the book, Jeff Schwartz from UCLA, who is considered one of the world’s leading authorities on what’s called neuroplasticity, or self-directed neuroplasticity, which is a ridiculous name, but I’ve had him talk to some relationships that I have and one of the things he points out is much like is true of what the Depression-era folks experience, what they experience literally gets wired into their brain, and so the experience of the people who are the children of this baby boom group is way different than the experience of the baby boom group. And so, I do believe, in answer to your question, you are going to see totally different behaviors from that group of people who have experience their own Depression. We’ve all said, you know, a recession is when your neighbor’s out of work and depression is when you’re out of work, and there are a lot of young people in their twenties today who have never been able to take advantage of your education and get the job they want because of the high unemployment. That will profoundly impact them, and it will actually literally influence how their brains are wired.
Jim Lange: And I also think that there’re some other implications, and particularly in today’s uncertain world, I just like the way that you put it in “Financial Intelligence,” and by the way, I’ll put in a final plug for the book, which is “Financial Intelligence: How to Make Smart, Values-Based Decisions with Your Money and Your Life,” by Doug Lennick with Kathleen Jordan. Do you have any final thoughts? We have about maybe two minutes left. Do you have any final thoughts for our listeners that if there was one gem that they could walk away with that you would like to give them?
Doug Lennick: I’m gonna give them two gems: one is, prepare yourself for the truth. The truth is uncertainty. Number two, practice the freeze game. Practice the first R. Practice paying attention to yourself. If you do, it’ll change your life. I mean, literally, a lot of people, in conversations at some point, it occurs to them, you know, I’m not listening. So, if you practice paying attention to yourself, you’ll actually know when you’re not listening, or others who are listening to us right now. They’ve read a book. They’ve gotten to the end of a chapter, your book or my book, and they wonder what the heck did I just read? And that’s really literally not paying attention to oneself. So most people aren’t good at it. So, if you prepare yourself for the truth, which is uncertainty, and if you practice the freeze game, which is paying attention to yourself moment to moment, it’ll change your life.
Hana: Okay. I want to thank you, Doug, for being our guest tonight, and thank you all for joining us for another Lange Money Hour. We hope you found this conversation about the emotional side of investing helpful. This show will be rebroadcast on Sunday at 9:00 am. This is Hana Haatainen Caye with Jim Lange and Doug Lennick. Thank you again for listening.END
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.
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