Weight Management vs. Money Management Advice Similarities, Revisited

nodietI’ve written previously about the importance of permanent habit change in both managing your finances and your body weight. After finishing Smart People Don’t Diet by Charlotte Markey and then reviewing my Kindle highlights, please allow me to compare weight management and money management one more time.

I’m going to keep it simple; I’ll quote exact sentences from the book, and then tweak them ever-so-slightly to magically transform them into personal finance wisdom. Here’s a quote about her overall reason for writing this book:

Psychologists like me have been doing research about eating and weight loss for over a hundred years, and thousands of studies about these issues have been published. Scientists in related fields such as nutrition, medicine, and community health have also been studying and publishing about these issues for a very long time. And yet it seems that the most marketable and even outlandish ideas are what get the most attention when it comes to weight loss—not necessarily the ideas that are really going to work!

Here’s my Mad Libs version (all changes are bolded):

Finance academics like me have been doing research about investing for over a hundred years, and thousands of studies about these issues have been published. Scientists in related fields such as economics and behavioral psychology have also been studying and publishing about these issues for a very long time. And yet it seems that the most marketable and even outlandish ideas are what get the most attention when it comes to investing—not necessarily the ideas that are really going to work!

Sounds about right to me. Now, the recommended first step is to track your eating with a food diary:

Phase 1 is all about taking inventory and getting to know yourself—a critical first step. There should be no sense of deprivation when you follow the instructions for Phase 1. Phase 2 is when you’ll start to actually make changes to your eating behaviors.

In the same way, my recommended first step has been to track your spending with a daily log. There is virtually no change needed!

Phase 1 is all about taking inventory and getting to know yourself—a critical first step. There should be no sense of deprivation when you follow the instructions for Phase 1. Phase 2 is when you’ll start to actually make changes to your spending behaviors.

However, many successful people don’t need to keep up this daily tracking forever.

This is all common sense, but it is also supported by research: keeping a mental record of what you eat, or “counting” what you eat, is exhausting. This is one reason I don’t recommend constantly counting calories or counting anything as part of a long-term approach to weight management: food choices shouldn’t add to your mental fatigue.

The key is to measure your baseline and then make incremental but permanent changes. Nowadays, I still add up my expenses at the end of each month, but I don’t track anything on a day-to-day basis.

This is all common sense, but it is also supported by research: keeping a mental record of what you spend, or “counting” what you spend, is exhausting. This is one reason I don’t recommend constantly tracking every expense or counting anything as part of a long-term approach to money management: financial choices shouldn’t add to your mental fatigue.

Here are tips on creating better habits that won’t suck up all your willpower:

You don’t need to squeeze your own oranges to make juice; just eat an orange. You don’t need to make homemade bread; just buy whole-grain bread. It is okay to rely on frozen fruits or veggies to ensure that you eat enough each day. If you want to change your habits for the long-term, stick to a plan that is simple and create food routines. Simple is sustainable.

Simple is sustainable, I like that phrase!

You don’t need to analyze the balance sheets of individual companies; just buy an index fund. You don’t need to remember to manually save every month; make it automatic with scheduled online transfers to your IRA and/or 401k. It is okay to rely on Mint.com or PersonalCapital.com and credit/debit cards to track your overall spending. If you want to change your habits for the long-term, stick to a plan that is simple and create financial routines. Simple is sustainable.

Finally, a nice little summary. (The book has a lot of good advice, but it is a little repetitive.)

What I recommend to people to help them to lose weight is not always sexy, but it is what works. Weight-loss books change; most of them don’t stick around because they don’t work. To be healthy and lose weight, you have to change your habits. You also have to understand why you are eating. Convenience, habits, and our emotions are all an important part of our food choices.

What I recommend to people to help them to save and invest wisely is not always sexy, but it is what works. Personal finance and investing books change; most of them don’t stick around because they don’t work. To save prudently and achieve financial freedom, you have to change your habits. You also have to understand why you are earning and spending. Convenience, habits, and our emotions are all an important part of our financial choices.

DietBet Review: Game Tips, Final Results, Payout Details

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I just completed a weight-loss challenge at DietBet.com, where I bet my own hard-earned cash that I could lose 10% of my body weight within 6 months. More specifically, a group of folks (strangers or friends) agreed on a weight loss goal, put money into a community pot, and the winners split the pot. My final results were pretty surprising to me – I ended up losing over 20% of my original weight and nearly doubled the money that I put at risk. Here’s a look back at how the process worked along with some helpful tips and detailed numbers.

Game basics. You pick from a list of available “games” that are starting soon. All of them have a goal of either losing 4% of your body weight in 4 weeks (Kickstarter), or 10% in 6 months (Transformer). I chose the 10% goal and joined The Transformer (Feb 5 – Aug 4), mostly because there were over 1,000 participants and I figured there had to be some people that would drop out. A selfish move, but Dietbet uses the poker rake model where the winners take money from the losers. This is smart because Dietbet doesn’t risk any of its own money (also doesn’t have any incentive for you to lose).

Weigh-in rules and tips. Your weight is verified each round by uploading two pictures: one with your feet on a digital scale, and another of your entire (lightly-clothed) body on the same scale. You are given a special keyword to ensure that the weigh-in is done during a 48-hour window. Here are my tips:

  1. Use the smartphone app. Having the smartphone app made it so much easier to snap the pictures and upload with a few taps. iOS and Android only.
  2. Check the dates with your work schedule. During one of my weigh-ins, I was on the road. Dietbet says digital scales are “preferred” but the only thing at my hotel’s gym was a non-digital balance scale. My submission was still accepted. If my hotel gym didn’t have a scale at all, I would have had to search for a Wal-Mart or something.
  3. Know the rules and give yourself time for rejections. One of my submissions was initially rejected because I was wearing running shoes (in that same hotel gym) and I forgot that shoes aren’t allowed in the pictures. You only get a 12-hour grace period after a rejection to re-submit a qualifying weigh-in.

Overall, I felt that Dietbet was fair and quick when judging my weigh-in pictures. You may also be “audited” and be required to submit a video verification. I did not get audited.

Money details. The bet amounts can vary by game, but mine was for $25 a month times 6 months. I was offered one month free ($25 discount) if I paid $125 upfront, but since this is all about the behavioral component for me, I wanted the monthly charge to show up on my credit card bill. Players who have chosen to place their bets on a monthly basis may drop out at any time and avoid being charged for future, unplayed rounds.

There is one round per month; Rounds 1 to 6. Half of the total money bet is put towards Round 1 through 5. That is $25 x 6 / 2 = $75, split across 5 rounds is $15 per round. The other half is put toward the final weigh-in round. So $75 is bet on Round 6. Here’s a screenshot that shows my actual winnings from each round:

dietbetfinal2

  • Round 1 Breakdown: $16.09 (7% ROI on $15 bet)
  • Round 2 Breakdown: $26.94 (80% ROI)
  • Round 3 Breakdown: $31.36 (109% ROI)
  • Round 4 Breakdown: $31.50 (110% ROI)
  • Round 5 Breakdown: $30.42 (103% ROI)
  • Round 6 Breakdown: $152.87 (104% ROI)

I ended up winning $289.19, for a net win of $139.18. That’s a solid 93% return on my $150 initial bet! According to their documentation, the average “win” is 50% to 100% of your contribution. I would venture to guess that the 6-month games have a higher overall payout due to a higher difficulty level.

As noted above, Dietbet makes their money by taking a cut of the gross pot before distribution, between 10% to 25%. In a previous post, I erroneously assumed that the numbers being reported above were before fees were taken out. The numbers are actually net of fees. (You are always guaranteed never to lose money if you win, which otherwise technically could happen if enough people win.)

Your winnings can be withdrawn either via PayPal or paper check, but you have to pay a $5 fee and make special request for a paper check. When withdrawing via PayPal, you won’t pay any fees, and I was sent my money within a hour. Here’s screenshot proof of my winnings payout showing no fees.

Don’t overlook this part! When signing up for a challenge, Dietbet will automatically add $20 of “Official Weigh-in Tokens” to your cart. These are not mandatory. I think using the word “Official” is misleading. They should use “Optional” or “Additional” instead. You should treat them as extra raffle tickets for prizes like Fitbits and such. If you want that, fine, but otherwise be sure to remove them.

Cheating. I’m sure there are ways to try and cheat at these Dietbet games, despite their various anti-fraud protocols. But for one thing, I now know that if you really lose 10% of your body weight, your body will look entirely different and that is hard to fake. In addition, I think that for most people, losing the weight is worth much more than winning the money. The community board for my challenge was 100% positive in supporting other people towards their weight-loss goals.

Final thoughts. Loss aversion is quite a strange thing. Even though 25 bucks a month isn’t all that much money, the prospect of losing it was a powerful motivator. Powerful enough to get me back in the same pants size and weight as 19-year-old me. But winning 150 bucks? I’ll probably forget about it in a few weeks. An additional motivator was the fact that I told people about the challenge and didn’t want to admit publicly to failure.

While Dietbet was not there to cook my healthy meals, exercise for me, or keep me away from the late-night Doritos, it was the missing catalyst that I needed to get my health back on track. For other people this might be a heart attack or other medical issue. I’m glad I didn’t have to wait for something like that.

But remember, diets don’t work. That is, if you do something special to lose that 4% or 10%, and then stop doing that something special, you’ll eventually just gain the weight back. Instead of gimmicks, you should focus on long-term changes that you can maintain for the rest of your life. I personally use portion control and moderation in place of strict rules.

In the end, Dietbet does a good job of using loss aversion as a motivational tool. The rules are clear, the app is easy to use, and the monthly check-ins are a good frequency. Even if I “lost” the challenge but also lost 5% of my body weight, that is still something. Most importantly, you get the feeling that everyone including Dietbet wants you to succeed. I am still in an ongoing 9-month challenge at a similar site called Healthywage, but so far I would recommend Dietbet over Healthwage – the financial reward ended up being higher at Dietbet, for starters.

I was hoping to never need another Dietbet challenge again, but they just announced a beta test of a new challenge type called a “Maintainer” where you just have to maintain your weight-loss. Intriguing!

Pact App: Cash Motivation For Exercising or Eating Healthier

gEHJgtmM_400x400I am nearing my 6-month anniversary of making a weight loss bet with HealthyWage (3 months left) and DietBet (less than a week left). My aversion to losing money has really helped me remain focused on my goals, so I have a newfound respect for this niche inspired by behavioral economics. I’m also looking forward to spending my winnings! 😉

The Pact app (Free: Android, iOS) is another way that you can use money to motivate your health-related goals. (Formerly known as GymPact.) While the betting websites above track weight loss, this one has three different goals that you can choose:

  • Gym workouts. You make a commitment to “work out” at a set frequency per week. Any gym workout, run, or bike ride over 30 minutes counts, as does walking 10,000 steps in day. Only one workout per day counts, and the app will use GPS or built-in motion sensors to track your progress. You can also link up a Fitbit or Jawbone.
  • Food diary logging. You make a commitment to log your daily food intake a certain number of times per week. A complete daily food log with at least 1,200 calories and 3 recorded meals will count as a completed day. In partnership with MyFitnessPal.
  • Eat more veggies. You make a commitment to track and eat a certain number of servings of fruits and vegetables per week. This is tracked by uploading pictures taken by your smartphone and verified by other Pact users.

Some screenshots:

pactapp3 pactapp2 pactapp1

For each item that you miss, like a missed workout, you agree to a set penalty like $10. Upon starting a pact, you must provide a payment source of either a credit card or PayPal. If you complete the pact, then you will actually earn a small profit from the money taken from other users. The numbers will vary, but the reports I have found indicate that it has worked out to between 15 cents to at most $1 for each completed task, usually more towards the lower end. Pact gets their cut of the broken commitment penalties first, as that is how they make money.

In order to understand how or why such money-based incentives work, read this article from The Atlantic which summarizes recent academic research in behavioral economics:

Cash is a strong incentive, but the motivation goes away soon after the money does. That’s where those commitment contracts come in. At the end of the month-long incentive program, Royer and her team approached some of the employees with a proposal: They would hold onto your money if you committed to going to the gym once every two weeks, over a period of two months. If you met that goal, they’d give you your money back; if you didn’t, they’d give it away to charity. Not everyone the researchers approached signed on, but the ones who did—women and overweight people were the groups most likely to opt in—went 25 percent more often than those who didn’t.

[…] But it was the after-effects of the contracts—the behavioral changes that had been cemented long after the agreements expired—that most thrilled the researchers. Even two to three years after the study, those who participated in the month-long incentive program and then signed a two-month contract went to the gym at a rate that was 20 percent higher than those who weren’t entered into any program. Twenty percent may not seem like a lot, but it’s a remarkable uptick for an experimental program to maintain long after its conclusion.

Despite the hype about “getting paid to work out” or “cash rewards for health living”, this app is mostly about the human tendency of loss aversion. Losing $5 or $10 for every time you slack off and skip the gym is going to hurt a lot more than getting 50 cents if you do go. But based on my own experiences, such motivation can definitely work if you make the commitment.

I personally like this app because I don’t think I can lose another 10% of my current weight, but I can keep eating a steady stream of fruits and vegetables. I just have to consider whether I will actually remember to check-in several times a week, even if I actually do the healthy activity. Otherwise, I’ll just be losing money due to another human tendency: procrastination!

Combining Maslow’s Hierarchy of Needs & Personal Finance

Updated. You may or may not be familiar with Maslow’s Hierarchy of Needs, which is part of one theory explaining human behavior by psychologist Abraham Maslow. It suggests that there are five general levels of needs:

  • Physiological
  • Safety
  • Social
  • Esteem
  • Growth

These are often represented as a triangle due to their relative importance. Lower needs must be satisfied before the higher needs can be addressed. For example, one must first obtain food and water (physiological) before worrying about what might happen if they get in a car accident tomorrow (safety). It’s just a theory, but an interesting one.

maslow_wiki

While not all of these needs can be explicitly bought with money, it’s not too much of a stretch to see the relationship between this triangle and finances. We usually worry about paying for rent and food first before worrying about giving to charity or that long distance telephone bill.

In the book Retirement Income Redesigned, the authors make a close correlation between the hierarchy of needs and planning for retirement. Here is a figure from the book:

maslowmoney600

The new levels:

  • Survival income. How much do you spend simply to survive?
  • What-if income. You will want to protect your life. This could mean health care costs, health insurance, and/or proper portfolio planning so you don’t outlive your money.
  • Freedom income. Money needed to do the things that bring joy and fulfillment to your life. Could be travel, education, or fine wine.
  • Gift income. Money for people and causes that deserve your help. This is the replacement for “love”.
  • Dream income. This is the elusive “self-actualization” level where you find true happiness and meaning.

By breaking down your income needs, this could be another way to track your progress towards financial freedom. You can make covering your bare necessities your first smaller goal, and move on from there. This would involve both measuring your expenses and also deciding how much you’d need to save to create that much income.

Alternative View: Keep Up With The OTHER Joneses

joneses

We’ve all heard the phrase “Keeping up with the Joneses”. It even has its own Wikipedia page with competing origin stories. Perhaps the greatest marketing trick ever is making people equate social status with material goods.

Instead of worrying about the neighbors who (supposedly) make more money than us, what if we instead looked carefully at the neighbors who make less than us? Their valuable example is what can actually help us grow real wealth. What am I talking about? Michael Taylor of Bankers Anonymous explains in his post Saving is never easy:

But – and here’s a key point that you should understand – if you make $50,000 per year, you probably live on the same street as someone who makes quite a bit less than you, say, $40,000 a year.

Somehow your neighbor making $40,000 has figured out how to pay all the bills and sock away an extra few hundred dollars every month. I don’t know she does it. Frankly, I’m resentful of her success. But I’m also impressed.

Also, she doesn’t understand how the family of four two blocks away can survive on $30,000. And yet, that family does it too.

Meanwhile, in another part of your same town, another family is going completely broke on $120,000 a year. If they could just find an extra 10% more income, they think, the checkbook would balance. They could pay down that ever-growing credit card balance. But each month comes and goes, and the debts grow.

Let’s consider this in the context of financial freedom and early retirement. If you wanted to oversimplify things, you would say that you need to control your spending to the household median income level (say, $50,000 a year) while boosting your household income to double that (say, $100,000 a year). A nice, round 50% savings rate. I’m sure many households who make over $100,000 would laugh at the idea of spending under $50,000 a year. Impossible. Can’t do it. But guess what? Half of all US households are doing exactly that every day, so it certainly isn’t impossible! For some reason of human psychology, it is just incredibly hard to make that choice.

My One-Page Financial Plan: Why Is Money Important To Me?

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onepage0I’ve already shared two nuggets from the book The One-Page Financial Plan by Carl Richards – the importance of getting started and the true value of a human advisor. But what about the title itself?

Before even reading the book, I was impatient and tried to make a one-page financial plan but it didn’t sound right. Even after reading it all the way through, I got a bit lost as besides “one-page plans”, it also tried to cover other big topics like budgeting, investing, and insurance. It took a few re-reads before things finally settled down in my mind. Here are the parts that helped the most:

Your one-page plan simply represents the three to four things that are the most important to you: some action items that need to get done along with a reminder of why you’re doing them.

Having done this with hundreds of my clients, I’ve found no more efficient strategy for solving the problem of how to handle our finances than asking “Why is money important to you?” […] If you’re doing this with a spouse, it’s important that each partner answer the question separately.

The reason I ask my clients this question is because it helps us understand their values. Often, the process of asking “Why?”—“Why is money important to me?” or “Why have I been so anxious about money lately?” or “Just why do I work so hard anyway?”—uncovers deep desires and fears that we are often too busy or too scared to think about. While the process can be uncomfortable, recognizing what really matters to you is the first step toward making financial decisions that are in sync with your values.

Recently, the author shared his own plan on his website – What Does a One-Page Plan Look Like?:

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There are many reasons why my plan (at the top of this post) will be different from the author’s and yours. Our current situation is different, our priorities will be different, our goals will be different.

Why is money important to me?

  1. I greatly value security, sometimes so much that it is irrational. I don’t want to have to rely on anyone else for money or favors. We cut back on work hours to spend more time with kids, but we still want to make more than we spend. It’s not time to touch that nest egg yet!
  2. I greatly value spending time with my family, both on a day-to-day basis and for extended vacations in new and strange places. I have to work hard to avoid getting into a rut where the days and weeks all start melding together. Even if it means lugging multiple car seats and strollers everywhere, I still want to stay curious, make some mistakes, have some adventures.
  3. I want to someday shift my activities such that they more directly give back to my community or some other greater good. I don’t like the idea of just writing checks though, so I need to find a more active and satisfying role. If I could make some money while doing this, that would be great, but otherwise I need to put enough aside that my investments will support me.

The overall point of both this exercise and the book is that improving your financial life doesn’t have to be done perfectly. Just by getting started and putting down your best guess down on paper, you’ll already be better than most. If you see something wrong when comparing your values and your actual behavior, then make some changes. Having done them, I recommend both doing this exercise and reading the book. If your library participates with Overdrive.com, it is available to borrow as a Kindle eBook.

The True Value of a Real, Human Financial Advisor

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The hot buzzword right now is “FinTech”, where technology will help us manage our finances more and efficiently than before. But I’ve also been tracking the reasons why working with a human advisor can be worth the money and time spent. As I’ve mentioned, the strength of the book The One-Page Financial Plan by Carl Richards is that you’re hearing the voice of an experienced financial planner who also has the skill of distilling his experiences down to a sketch. Here’s how he puts it:

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Takeaway: A good financial advisor keeps you from making The Big Mistake that derails your plans.

The big institution Vanguard says that a good financial advisor should be able to improve the performance of a “average” client’s portfolio by about three percentage points in the following ways. Take note of which one factor makes up half of that 3%:

vgalpha

Takeaway: The biggest “value add” from good advisors is their “behavioral coaching”.

Here’s more incisive commentary by Josh Brown of The Reformed Broker, called When the flood comes:

When the flood comes, all of the bullshit arguments among the financial commentariat will come to an end. This will be my third time through. Believe me. We will not be arguing about how many basis points an advisor charges versus another advisor or a software program.

The people who are there for their clients and keep a cool head in public will come through okay. More than okay – they’ll actually raise assets from new and existing households who realize what a mistake they’ve made with their previous advisor or solution.

Takeaway: A good client advisor will help you keep your cool when the next disaster comes.

I’m sure you’ve caught onto the theme by now.

The value in a financial advisor arrives when they help you maintain your plan through both the good times and bad. They will prevent you from participating in the mania during the next bubble, and they will keep you from bailing out during the next crisis.

The problem is, how do you find this “good” financial advisor amongst a sea of average to downright dangerous ones? Here’s some advice from The One-Page Financial Plan:

To a certain extent, the process of finding a real financial advisor is a qualitative experience. It boils down to the question “Can I see this person getting to know me well enough so that I can trust him to help me behave for the next twenty years of my life?” Yes, you should verify that they’re properly registered. Do a Google search of their regulatory record. I’m not talking about blind trust here— the kind that would allow someone to steal your money. I’m talking about finding someone who’s willing to get to know your goals and values well enough to help you stick with your plan. Remember, your financial advisor is the only one standing between you and the Big Mistake of buying high and selling low. You’re hiring them to do what you can’t: make unemotional decisions about your portfolio. If they can’t do that, why pay them?

Now, I still don’t see myself hiring an outside advisor. But I do keep my portfolio conservative enough that my portfolio “boat” stays relatively stable even in rough weather. We’ll see if I can remain unemotional during the next flood, as it is not a matter of “if” but “when” the next one comes along.

Your Financial Plan & The Importance of Getting Started

onepage0I’m currently reading The One-Page Financial Plan by Carl Richards, who also writes for the New York Times. Given the title, I thought it would be a quick read but it turns out to cover a variety of topics over its 200+ pages. So far, I like that it comes from the point of view of an experienced financial planner who spends his days talking with clients.

A valuable observation is that the most common financial mistake most people make is simply doing nothing. Either they are scared of what they might find, or they are overwhelmed by how hard it is to plan for something with such uncertainty. Future jobs and/or income? Uncertain. Childcare/Healthcare/Retirement costs? Uncertain. Future investment returns? Uncertain.

As a financial planner, his job is get people over this hurdle. Guessing is okay! You can always correct your course as you go along, but as long as you are facing the problem and doing something, you are much more likely to have a good result. Carl Richards is also known as “The Sketch Guy” and this one from the book illustrates things well:

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However, you could replace “investment” with any decision that you have been putting off. Don’t worry about making mistakes (you will). Don’t worry about making the perfect or optimal decision (you won’t). Financial planning is not an exact science.

Here’s another take from inspirational speaker and writer James Clear in Why Getting Started is More Important Than Succeeding:

I can’t think of any skill more critical to the active pursuit of a healthy life than the willingness to start. Everything that signifies a happy, healthy and fulfilled existence — strong relationships, vibrant creativity, valuable work, a physical lifestyle, etc. — it all requires a willingness to get started over and over again.

Take note: being the best isn’t required to be happy or fulfilled, but being in the game is necessary.

Get started and correct your course as needed. In terms of personal finance, so many people have never drilled down to the real reasons why money is important to them, they have never calculated their net worth, never tracked and broken down their monthly expenses, and thus never properly prioritized their time, energy, and money accordingly. But that’s okay, as now is still a great time to get started! I have finished the book yet, but apparently you can fit an entire plan on one page. :)

DietBet.com Update: My Weight Loss Profit Breakdown

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Back in early February 2015, I wrote about and started participating in a weight loss challenge at DietBet.com. As the picture above indicates, a group of folks (strangers or friends) agree on a weight loss goal, put money into a community pot, and the winners split the pot (after fees). It’s part gambling for profit, part community support group, and part behavioral modification nudge.

Knowing myself, I definitely hate losing money if I can at all help it. So far, it’s working! The idea that I would lose hundreds of dollars definitely kept me on track during times of weakness and doubt. (In addition to DietBet, I also did a simultaneous bet at similar site HealthyWager to up the total ante.)

Anyhow, since this is a money blog I figured I’d share some details about my financial results so far on DietBet. You pick from a list of open “games” with a goal of either losing 4% of your body weight in 4 weeks, or 10% in 6 months. I chose the 10% goal and joined The Transformer (Feb 5 – Aug 4), mostly because there were over 1,000 participants and I figured there had to be some people that would drop out. I know, it’s selfish, but it’s like poker – all your profits come from the losers! Indeed, DietBet uses the poker rake business model where they take a cut of the pot and thus never have to risk their own money.

Your weight is verified using a smartphone app (or website) that uploads two pictures each month: one with your feet on a digital scale, and another of your entire (lightly-clothed) body on the same scale. You are given a special keyword to ensure that the weigh-in is done during a 48-hour window.

I put up $25 a month for 6 months. I was offered one month free ($25 discount) if I paid $125 upfront, but since this is all about the behavioral component for me, I wanted the monthly charge to show up on my credit card bill. Players who have chosen to place their bets on a monthly basis may drop out at any time and avoid being charged for future, unplayed rounds.

There is one round per month; Rounds 1 to 6. Half of the total money bet is put towards Round 1 through 5. That is $25 x 6 / 2 = $75, split across 5 rounds is $15 per round. The other half is put toward the final weigh-in round. So $75 is bet on Round 6.

Four rounds have been completed so far, and here are my winnings. Here’s the graphic from my profile page that explains things pretty well:

db2

  • Round 1 Breakdown: $16.09 (7% ROI on $15 bet)
  • Round 2 Breakdown: $26.94 (80% ROI)
  • Round 3 Breakdown: $31.36 (109% ROI)
  • Round 4 Breakdown: $31.50 (110% ROI)

According to their documentation, the average “win” is 50% to 100% of your contribution. My personal results appear to be in line with these numbers. Based on the recent trend, I am not expecting the the future payouts to get much better than about 110% as these are probably the serious participants that will finish successfully. Additional people may also “catch up” and make that final Round 6 goal.

Dietbet does take a cut of the gross pot before distribution, between 10% to 25%. For my small monthly bet of under $100 a month, they will take a significant 25% cut. While I definitely think they should take a fee for providing this helpful service, I am conflicted as to what should be a “reasonable” fee. Keep in mind that taking 25% of the gross pot means that they usually take over 50% of your net winnings! (You are guaranteed never to lose money if you win, which otherwise technically could happen if enough people win.)

If I were to assume that I reach all my future weight-loss goals and a future 100% pot ROI, at the end of 6 months, I will have put in $150 and won $285.89 gross (135.89 in gross profit). After the 25% fee, I will take in $214.42 for a net profit of $64.42. That’s a projected 43% ROI on my $150 total bet. Hmm, that’s not too shabby. Perhaps I should have bet more money in retrospect. :)

But if I am honest, the fact that the last time I was this weight was about 15 years ago in college, THAT makes me happier than even winning a hundred bucks. In that very important aspect, I think DietBet has a great idea going. If I lost 9% of my total body weight, I’d still probably be okay with everything. There is also a supportive community aspect where people both commiserate and cheer each other on (which I did not actively participate in… not my thing).

You can read through all the Transformer rules here and how they discourage cheating and such. I’ll do a more complete final review once my 6 months is up.

Portfolio Rebalancing Frequency: Even Less Than Annually?

scaleHere’s another data point on the debate on how often to rebalance your portfolio to your target asset allocation. Econompic Data writes about rebalancing a portfolio back to 60% S&P 500 / 40% Barclays Aggregate Bond index from 1976-2014 and finds that rebalancing every 3 years actually produced slightly better average annual returns that rebalancing monthly (via Abnormal Returns):

econompic_rebal

Momentum is cited as a potential reason why this works. Looks good at a glance, but look at that y-axis. We are comparing 10.3% and 10.2%. Is that really significant?

I would point out that in a previous Vanguard research article, a similar backtest was done on a 60/40 Broad US Stock/Broad US Bond portfolio rebalanced across various thresholds from 1926-2009. Their conclusion (emphasis mine):

We found that no one approach produced significantly superior results over another. However, all strategies resulted in more favorable risk-adjusted portfolio returns when compared with returns for portfolios that were never rebalanced.

vgrebal

From a 2008 paper from Dimensional Fund Advisors:

Aside from avoiding excessive trading, there are no optimal rebalancing rules that will yield the highest returns on all portfolios and in every period.

From advisor and author William Bernstein:

The returns differences among various rebalancing strategies are quite small in the long run.

Instead of there being a benefit to rebalancing less often, it may just be safer that the frequency doesn’t matter. On the other hand, given the potential cost of rebalancing from taxes, commissions, and bid/ask spreads perhaps lowering the frequency doesn’t hurt.

I think the most important thing to note is that in every test case above, the rebalancing was done on a strict schedule and without emotion. The problem you are really trying to avoid is being afraid buy whatever has been getting crushed and selling what has been doing awesome. There’s that behavioral/emotional component again.

As for me, I try to check my portfolio once a quarter, but rebalance no more than once a year. An annual frequency is as easy to remember as your birthday, it’s not too often and not too seldom, lots of smart people are proponents, and it gives me the opportunity to do tax-loss harvesting. I use tolerance bands such that if my major asset classes are off by more than 5%, then I will rebalance. Otherwise, I “rebalance lite” year-round using any new money to buy underweight asset classes.

The Only Two States of Your Portfolio: Happy All-Time High or Sad Drawdown

emoinvestQuick question – What was the highest value ever for your investment portfolio? Now, what was the value exactly a year before that? You probably know the answer to the first question, but not the second, even though both have little to do with your final portfolio value.

I am currently reading the e-book Global Asset Allocation by Meb Faber and he had a good observation that I don’t recall ever expressed in this specific manner (emphasis mine):

It is a sad fact that as an investor, you are either at an all-time high with your portfolio or in a drawdown – there is no middle ground – and the largest absolute drawdown will always be in your future as the number can only grow larger.

We tend to carry the highest value of our portfolio around in our heads because of the powerful cognitive bias of anchoring. Let’s say that 10 years ago you started with $20,000 and today with your contributions and investment growth your total is $100,000. If next year your portfolio experiences a drawdown to $80,000, you’ll probably identify your portfolio as being 20% down from $100,000, as opposed to a 400% increase from $20,000. $100,000 is “what you had” and you will forever be anchored to that number, even if for it only lasted just for a day.

That is, until you reach another all-time high (yes! $105,000) and that will be your new anchor. (This applies to individual holdings as well – I’ve found this especially pervasive when using brokerage smartphone apps that allow me to frequently check in with just a tap.)

If your portfolio is anything like mine, it has been repeatedly been hitting all-time highs for a year or two. The problem is, sooner or later, there is a 100% chance I’ll be stuck in a prolonged drawdown phase. I will think about my high-water value every time I check my statements (which is why perhaps it is better not to check your investment value much more than once a year). I will question my existing asset allocation and how to invest my new money.

Now add in loss aversion – the other finding from behavioral economics that people feel the pain of losses much more severely than the pleasure of gains (studies suggest we hate losses roughly twice as much as gains).

That means drawdowns are always lurking around the corner, and we hate them twice as much as any investment gain. It’s no wonder that investors are often their own worst enemies by not sticking to their investment plans.

Back to Basics: Simplify and Automate Your Savings

automateLet’s take a step back and focus on some actionable tips to simplify and automate your savings. Think of it as knocking out your New Year’s Resolution in just 10 minutes or less.

New Year’s resolutions fail because willpower is like a muscle. If you keep having to choose the “right thing” that does not provide immediate gratification, your willpower muscle starts to fatigue. Eat the healthy kale thing instead of the nachos? Yes for a few times, but after a month no no no. Take 15% of your paycheck and set it aside? You’ll forget. The key is to take away the decision = no willpower fatigue.

First, consider your paycheck. Is it bi-weekly, semi-monthly, or monthly? Let’s say it is biweekly and you get paid this Friday, January 9th. That means you know you’ll get paid on January 23rd, February 6th, and so on. You just need to schedule a transfer for 15% of your paycheck for each of those days directly into an online savings account. Here are screenshots and tips for some specific providers:

Auto-save with your 401(k) plan.
This allows you to get any company match, grow your money faster with tax advantages, and also takes the money out before it even reaches your paycheck. Our provider is TransAmerica, which like many others now offer an option for annual auto-increases as well. The only frequency option is every pay period.

save_trs

Auto-save with Ally Bank Savings Account.
This is my go-to savings account, and it has the most flexible list of frequency options: weekly, bi-weekly, every 15 days, weekly, every 2 weeks, every 4 weeks, monthly, every 2 months, every 3 months, every 6 months, every year, the first business day of each money, or the last business day of each month. With a competitive interest rate, no minimum opening balance, and no monthly fees, and other features – see my Ally Bank Savings Account Review for details.

save_ally

Auto-save with Capital One 360 Savings Account.
Formerly ING Direct, this is the original no minimums, no monthly fee online savings account. The frequency options include weekly, bi-weekly, semi-monthly, monthly, or quarterly. You can even set up special sub-accounts and name them things like “Vacation” or “Next Car”. See my Capital One 360 Savings Account Review for more details.

save_capone360

Auto-save with Vanguard IRA and mutual funds.
The best place for low-cost investing in an IRA. Under “Automatic Investments”, you can schedule investments for mutual funds in either IRA or taxable accounts. You’ll need to have the fund already established with the minimum initial investment. The frequency options include weekly, monthly, bi-weekly, or semi-monthly.

save_vanguard

What if I need the money? Well, if you put in an online savings account, if you really need the money, you can transfer it back. But even transferring back out of your savings account will take a conscious effort, so you’re less likely to do it. You can’t easily withdraw from a 401k or IRA, so you’ll just have to make the commitment.

The key here is to combat laziness. If you like this idea, take action today and you’ll be on autopilot the rest of the year!