What not to do when your investments tank with Financial psychologist Dr. Brad Klontz (ENCORE)
After witnessing a friend make over $100,000 trading stocks, Dr. Brad Klontz went all in.. just in time for the tech bubble to bust. He lost the cash, but learned a lot of lessons about the market, and his own mental wealth. Plus: the quiz you can take to find out if you have a money disorder, and what to do about it.
Brad’s Money Story:
Dr Brad Klontz:
So I didn't start out to be a financial psychologist. I actually started out to be a clinical psychologist, so to get through school I had to take out student loans and I'm sure some other people can relate to this situation. When I got out of school, I owed $100,000 in debt; student loan debt.
Dr Brad Klontz:
I grew up lower middle class. My mom says we were middle-class but lower and taught to be a healthy saver, not to overspend. I was also taught never have any debt, however, that was the only way I could get through school. So I, just to sort of set the stage, I had a lot of anxiety about having this debt. It was something that I wasn't comfortable with.
Bobbi Rebell:
How much debt did you have?
Dr Brad Klontz:
About a hundred thousand dollars?
Bobbi Rebell:
That's a lot.
Dr Brad Klontz:
Yeah, it was a lot, especially back then, but that's what I had to do to get my doctorate.
Dr Brad Klontz:
So I started my internship year. I was over in Hawaii and I saw a friend of mine make $100,000 that year, trading stocks. I would sit next to him at the computer and he'd be like, "Oh, I just bought 200 shares of EMC." I'm like, "What's EMC?" He's like, "I have no clue. Ha, ha, ha." Click. I saw him make $100,000 in the course of a year. I thought, what a brilliant way for me to get out of debt. So I'll just do the same thing.
Dr Brad Klontz:
So I sold what I had of value, which for me mainly was a truck and I put it all in the stock market.
Bobbi Rebell:
How much?
Dr Brad Klontz:
For me it was about like 10 or $15,000. I mean, I cobbled together everything I had and I had nothing beyond that and I put it all in the stock market. So this was everything I owned.
Bobbi Rebell:
Based on this one observation?
Dr Brad Klontz:
Well, I observed this over the course of about a year. So I watched this person make $100,000 trading stocks. So that's where I, where I came up with this idea. So I studied it for six months. I didn't just dive right in, Bobbi, but then I did. I dove right in and I had a fabulous two or three months and then the tech bubble crashed and I sat there and I watched all this money melt away. It was just a terrifying, terrible. I felt so ashamed and embarrassed. I couldn't believe I would do something so radically stupid with my money and I turned to the field of psychology. I did what grad students are very familiar with; I did a literature review, so I was going to dive into psychology and find these studies that have been done to help explain why a reasonably intelligent person would do something so stupid with his money.
Dr Brad Klontz:
I started to do the searches and I found nothing.
Bobbi Rebell:
Really?
Dr Brad Klontz:
Yeah. Really the field of psychology at utterly ignore the topic of money for decades. So I was kind of bummed by that. What I wanted to do was read a few studies, get my head straight, and move forward with my life as a clinical psychologist.
Dr Brad Klontz:
What I discovered is there was nothing there and so I decided to actually have to dig it around in my own financial psychology and what I found is that it was all my mother's fault.
Bobbi Rebell:
Okay.
Dr Brad Klontz:
That's sort of a psychology joke.
Bobbi Rebell:
By the way, your father, you're now in business with your father.
Dr Brad Klontz:
Exactly. But psychologists like to pick on mothers for some reason, typically because they're the ones who are most involved in there. But what I did is I actually, I did, I was like, okay, so I've learned, everything I've learned pretty much from my parents. So what I did is I hopped on a plane and I went back home and I sat down with my mother and then I did this with my father too, and I interviewed them, almost like an anthropologist would.
Dr Brad Klontz:
I'm like, okay, so I have this money psychology, I have no idea really what it is. I have a lot of anxiety around money, but where did it come from? So I sat down with my parents and by the way, as a grad student, I'd put them through this before and so it wasn't unfamiliar. So I was asking my mother, what was it like for you growing up? What was it like for grandma and grandpa around money? I got to tell you, Bobbi, I was shocked by some of the stories I heard.
Bobbi Rebell:
Like what?
Dr Brad Klontz:
Well, the one that was the most shocking for me was that my grandfather, my maternal grandfather, he lost all of his money and the family's money in the Great Depression. So he went to the bank one day and the doors shut. You have no more money. This was a traumatic experience and a lot of the research that we've done since then, there are a lot of these traumatic experiences around money that people have experienced in families or entire cultures or groups of people, and the story gets passed down in the anxiety gets passed down.
Dr Brad Klontz:
That's what happened to him and he's not alone. That happened to a lot of people, but what I didn't know is he lived to be in his mid-nineties he never put a dollar in the bank the rest of his life. That was such a traumatic experience for him.
Dr Brad Klontz:
He's like, you can't trust banks with your money; never put money in the bank again. He put it in a lockbox in his attic and of course it wasn't going so well for him financially and when he passed away, he was living in a trailer park. Super great guy, very generous guy, but was so traumatized by what happened around money, never even entered the door of possibly getting some interest or investing.
Dr Brad Klontz:
Now, my mother had tons of anxiety around money. I knew that. She didn't invest in the stock market, but she would put money in the bank and CDs. What I realized was there's this entire family story that I hadn't even heard of, but I'm playing out the next chapter and of course growing up in that family, I'm like, I don't want to be poor like you guys, so I'm going to do the opposite of what you did.
Dr Brad Klontz:
So I, I call it like a dysfunctional pendulum swing. I went from extremely anxious and conservative to the most risky possible investment and I got burned really badly and if I wasn't a psychologist, I wonder if I wouldn't have sort of blamed the market. This is actually what we're seeing happen now with a lot of millennials where they saw their parents go through a trauma; losing a house, delaying retirement, that kind of thing and there's a general mistrust of the markets and financial institutions within that generation.
Bobbi Rebell:
Do you think that's why a lot of millennials, and we're totally stereotyping here, guys are less into buying houses as a generation and less into credit cards, more into debit cards and more in to experiences than owning stuff because stuff you can kind of lose and experience is with you forever.
Dr Brad Klontz:
I think so, and again it is a generalization, but I think that there are surveys that have really borne this out like this. This is a real thing. Like they experienced a cultural phenomenon that has impacted how they look at money, how they look at investing, how they look at risk, and so absolutely. Just like that Great Depression generation had a cultural experience that led to a bunch of hoarding, frankly. A lot of people know relatives who lived through that, who are a bit of hoarders. They're saving stuff. They don't want to get rid of it. They have anxiety about not having enough.
Bobbi Rebell:
Did you pull the money out when the market crashed in the tech bubble or did you ride it out?
Dr Brad Klontz:
You know what, I did a combination. I think I actually still own a couple legacy stocks from then that I just hold on to just as a reminder that that we're all vulnerable. We're all potentially vulnerable to emotional decisions around money. I took it in the chin. A lot of these were stocks that just basically went belly up because things were ridiculously crazy back then.
Bobbi Rebell:
Oh okay. So it wasn't even an option to ride them out because a lot of good companies went down and then eventually came back.
Dr Brad Klontz:
Absolutely. But I was on the, I was going after the riskiest stocks possible within that tech sector because that's what I had seen my friend do and make $100,000.
“We are vulnerable to emotional decisions around money.”
Brad’s Money Lesson:
Dr Brad Klontz:
So the lesson is this, that the craziest behaviors you have around money, the things that you must struggle with, you're not crazy. They make perfect total sense.
Dr Brad Klontz:
If you understand the story that your family experienced around money and the beliefs that you got based on that story, either your direct experience or the experience that was passed down to you, and the research that we do, we call them money scripts. These are those typically subconscious beliefs you have about money and we've done a dozen studies on this now. These beliefs will predict income, net worth, a whole host of financial behaviors including credit card debt, et cetera.
Dr Brad Klontz:
So these beliefs are extremely powerful and most of us have no idea they're clanking around in our head. So yeah, that's the message I would give.
“I was going after the riskiest stocks possible within that tech sector because that is what I had seen my friend do and make $100,000.”
Brad’s Money Tip:
Dr Brad Klontz:
Absolutely. So it's understanding those money scripts and there's a couple of different ways to do it.
Dr Brad Klontz:
On Yourmentalwealthadvisors.com I've got the test that we've used in all those studies. That's a quick, simple way to look at them, or another way is to actually sit back with a paper and pencil and ask yourself, what three things did my mother teach me about money? What three things did my father teach me about money? If you have the benefit of them being still alive, go interview them, ask them stories. What was it like for them growing up? What was it like for your grandparents? Because again, these messages get trickled down. We have no idea where they came from, but they totally drive all our financial behaviors.
“We saw a 73 percent increase in savings when people got really excited about what they were saving for.”
Bobbi’s Financial grownup tips:
Financial grownup tip number one:
After you take Doctor Brad's Money Disorders Test, which as you heard called me out as being a workaholic and sometimes to a not healthy level, actually do something about it. In my case, Doctor Brad got me started with some ideas by pointing me to a recent video he did on YouTube for workaholics. Among the tips, taking the Rocking Chair Test where you reflect on your life and you think about where you wish you had spent more of your time. We will leave a link to that video in the show notes.
Financial grownup tip number two:
One of the things that Doctor Brad does is that he has a money mantra. For him, it goes something like this. I worked very hard today. I'm really happy with what I did. Now my wife, my children and my health are actually more important to me, so I'm going to stop working right now and I'm going to leave. So maybe we should all make money mantras. Something I've thought about before, still haven't done, something to think about.
Episode Links:
Blinkist - The app I’m loving right now. Please use our link to support the show and get a free trial.
Brad’s website - www.yourmentalwealth.com
Paul Ollinger’s Financial Grownup Episode
The workaholic video I mentioned
Money Disorder Assessment
Follow Brad!
Instagram - @DrBradKlontz
Facebook - @DrBradKlontz
Twitter - @DrBradKlontz
LinkedIn - @DrBradKlontz
YouTube - @DrBradKlontz