Remember back in March when Goldman Sachs and a host of other experts predicted $200-a-barrel oil. At the time oil was at $130, then it ran to $147 as money poured into energy related investments.

Oil is now close to $50!

Now the point here is not whether Goldman was wrong (after all if you take the time to read the report it was a long-term forecast and may well be right on), the point is that when we take these forecasts and ACT on them we are making SHORT term bets with LONG-TERM money.

That is speculating not investing! And financial planning and speculating DO NOT MIX!

Now you have the “market strategists” coming down from the mountain tops saying that they predicted this market decline. Please remember that even a broken clock is right twice a day!

The reality is that there is ZERO evidence (after countless studies) that anyone can predict the short term direction of the market consistently ENOUGH to make more than just staying in. In fact, according to Bloomberg at the start of 2008 the consensus view of people who get paid a lot of money to get this right was that  the S&P 500 would end 2008 at 1632. Today we are around 850!

If you are going to GAMBLE your families future on some self-proclaimed expert, PLEASE remember that at this point you don’t care who “called” this market downturn, what you are betting on is your ability to find the person that will call the NEXT ONE!

During the plan design and review process I have starting wondering if I could answer the question “what are you planning for?” for each client. With most clients I have been able to come up with at least one goal that defines why we are planning in the first place.

Answering the question: “what are you planning for?” has the potential of changing things. It is really a fairly basic principle:

When you connect on a personal level with things that are really important you start to identify goals.

When you identify a goal, it becomes a focus.

When you have something to focus on, other things start to become less important, and the decisions that you make NOW become much more clear.

Lets say it is really important for my wife and I to make sure that we have the resources to provide our kids with amazing educational experiences. If we then design a plan to make sure that we hit that goal, by defining all the variable and we arrive at a number that we need to save to hit that goal. If we are then faced with day to day choices about spending it becomes much easier to say no, because we have a much bigger yes.

So:

What are you planning for?

Take a hard look at your investments. Do your real-life returns fall short of the rates touted in the media? If so, you’re not alone. Historically, we’re bad investors—the numbers show we buy high and sell low. This behavior creates a gap between individual returns and reported investment returns. We call this difference the Behavior Gap™.

Another early sketch also highlighted the idea that too often we treat investing like entertainment. However, you can’t afford to confuse investing and entertainment. Go to the movies instead. Major mistakes happen when you try combining investing and and entertainment. And those mistakes can cost you, leading to a gap between individual returns and reported investment returns.

Finally, there’s the simple, but not always easy, way to outperform your neighbors. It won’t be because you found better investments. It’ll be because you behaved better than they did. It’s that simple. You see, in general, we’re bad investors—we tend to buy high, sell low. This behavior creates a gap between individual returns and reported investment returns.

These sketches are at the core of what makes the Behavior Gap different from everything else out there. The Behavior Gap is about taking big ideas and making them easier to understand so you can learn how to close the gap on your investment returns.

From what I can gather, this all starts from the October 7th Testimony of Teresa Ghilarducci to the Committee on Education and Labor on “The Impact of the Financial Crisis on Workers’ Retirement Security. The full testimony is only 5 pages double spaced, and maybe took 10 minutes to read twice. You can find it here.

A couple of points about the hearing:

• In his opening statement Chairman Miller paints a dire view of the retirement saving landscapes, pledges increased transparency in the 401(k) industry, BUT DOES NOT even come close to suggesting confiscating 401(k)s accounts.

• Ghilarducci was one of 5 witnesses that testifies before the committee, and as I point out below it does not include any mention of “confiscating” 401(k) accounts.

• Jerry Bramlett, CEO of BenefitStreet a company that  provides 401k plan services was another witness. His testimony does not include any mention of “confiscating” 401(k) plans

In the short term Ghilarducci advocates that congress allow workers to voluntarily exchange there 401(k) for a “Guaranteed Retirement Account composed of Government Bonds (earning 3% adjusted for inflation)”. This must be the source of the rumor.

Whether you agree or not with the suggestion, the point is that a “voluntary exchange” is not even in the same ballpark as “confiscating”!

In the longer term she recommends that the government scale back the tax breaks assocaiated with a 401(k) type plans.

Again this post is not about the merits of her testimony, it is about the contents.

We could argue all day about the merits, but after reading it a few times it would be difficult, and I think irresponsible to suggest that Ghilarducci reccommends the forcible confiscation of retirement accounts.

I found a few major talk show hosts (Rush Limbaugh and Sean Hannity) that spun this another way. My only assumption is that they did not take the time to read her testimony.

Other news:

Behavior Gap was included in the “The Carnival of Personal Finance” which is a weekly showcase of the best articles written about personal finance and investing. This week it is hosted here.

GOOD News: This Volatile October

It has really become quite silly and totally unhealthy. Investments are LONG-TERM. If you have a financial planner worth anything at all, then your plan includes bear markets.

Why?

Because they happen! Of course the timing of this bear market and the circumstances surrounding it is a total surprise, but the fact that it happened is something that any good planner expected.

That is the point. We can’t know when bear markets are going to happen, but we should plan on them happening. Because we plan on them happening, we should not act surprised when they do.

If we act surprised then we end up doing things like selling our long-term investments along with everyone else glued to CNBC.

Imagine this: for the month of September and the first half of October, $105 billion dollars was pulled out of long-term investments and put, I can only assume, in cash to wait on the sidelines until Jim Cramer declares it safe.

That is $105,000,000,000!

Then, of course, we have these one day 10% moves up. Right after everyone sells…

Like Karen Dolan, Morningstar’s director of fund analysis, has observed:

“Cashing in during a fear-stricken period like the one we’re in now is like watching a bad horror flick where the plot is clear and predictable from the very start. Investors are notoriously bad market timers…we’ve found that investors buy high and sell low to their own disadvantage.”

Like a bad movie…

With this year’s deficit hitting $455 billion, it’s worth noting that despite the dire predictions related to the 1984 deficit, the S&P 500 more than doubled over the next 10 years, going up 218%.

These were really smart folks.

Being really smart can lead to a high level of confidence in your decisions. Unfortunately history shows that being really smart can also lead to overconfidence.

But is not just really smart people who have this problem. If you think that we are not all prone to overconfidence try this little experiment: walk into a room of men and ask how many of them consider themselves “better than average drivers.”

This level of overconfidence turns out to be extremely hazardous to your wealth.

The geniuses (I mean that literarily) at Long-Term Capital had estimated their maximum loss on any single day was unlikely to exceed $35 million.

On Friday, August 21, 1998 they lost $553 MILLION.

They were wrong.

Sometimes the most important question we can ask is: What happens if I am wrong?