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00:01:34.640 | Hello, and welcome to another episode of All The Hacks, a show about upgrading
00:01:43.040 | your life, money, and travel all while spending less and saving more.
00:01:47.040 | I'm Chris Hutchins, and I'm excited to have you on my journey to optimize
00:01:51.080 | every aspect of my life.
00:01:52.400 | When it comes to the big decisions about money, how you invest your savings has
00:01:56.920 | to be one of the biggest questions we all face, and honestly, one of the most
00:02:00.840 | important.
00:02:01.320 | So I wanted to do an episode all about investing, and I couldn't think of anyone
00:02:05.360 | better to join me than Andy Ratcliffe.
00:02:07.120 | Andy is the co-founder and CEO of Wealthfront, an investing app that makes
00:02:11.080 | it delightfully easy to build long-term wealth with over $27 billion in assets.
00:02:16.160 | He also serves as the chairman of the Endowment Investment Committee for the
00:02:19.920 | University of Pennsylvania and is a member of the faculty at the Stanford
00:02:23.480 | Graduate School of Business.
00:02:25.040 | Prior to Wealthfront, Andy co-founded Benchmark Capital, arguably one of the
00:02:29.280 | most successful venture capital firms of all time, with their first fund returning
00:02:33.400 | 92 times the original investment.
00:02:35.520 | In fact, Andy is so impressive that after meeting him and learning about Wealthfront,
00:02:39.440 | I decided to shut down my last startup, Grove, and join Wealthfront with a handful
00:02:43.720 | of the people from our team.
00:02:44.720 | In this episode, we'll talk about how you should be investing to build your wealth.
00:02:48.480 | We'll take a look at the mistakes so many people make investing.
00:02:51.920 | We'll talk about how investing should or maybe shouldn't change as you make more
00:02:55.240 | money, and Andy will give you his take on why he thinks many of you should stop
00:02:59.000 | contributing to your 401(k).
00:03:00.520 | Finally, just to clear up any conflicts, I am an employee and shareholder of
00:03:04.800 | Wealthfront, and Andy is my indirect boss.
00:03:07.160 | But Wealthfront didn't pay me to be here, and this podcast is completely mine, so
00:03:11.760 | all of the opinions I express are solely my own and do not reflect the opinion of
00:03:15.560 | Wealthfront.
00:03:16.000 | As always, this podcast is for informational purposes only, should not be relied upon
00:03:21.000 | for investment decisions, and all investing involves risk.
00:03:24.160 | So without further ado, I hope you enjoy my conversation with the one and only Andy
00:03:29.560 | Radcliffe.
00:03:30.040 | Andy, thanks for being here.
00:03:34.640 | Thank you for having me.
00:03:36.200 | Yeah, so the common thread on your resume is investing, and so I'd love to start a
00:03:42.040 | conversation about your journey investing and go back as early as it was when you
00:03:47.240 | made your first investment.
00:03:49.000 | Well, that's actually, I think, an interesting story.
00:03:52.560 | I knew nothing about investing.
00:03:54.200 | I had no interest in it.
00:03:55.360 | No one in my family had ever worked in the investment industry or had any
00:03:59.600 | sophistication around it, but I went to Wharton as an undergraduate student, so
00:04:06.440 | University of Pennsylvania's business school as an undergraduate student.
00:04:09.880 | I also spent my time in the engineering school, but the most interesting course
00:04:15.040 | that I took at Wharton was the first business simulation course.
00:04:19.680 | Basically, the professor had come up with a way to simulate the financial
00:04:25.880 | performance of companies that competed with one another.
00:04:29.520 | So to take the course, you were split into teams of four, and each week you had to
00:04:35.480 | make 26, something like 26 decisions, as did all of the other teams in the class.
00:04:40.960 | So you had to make decisions like how much money were you going to raise?
00:04:46.560 | How much manufacturing capacity did you want to build?
00:04:49.480 | How many units would you build?
00:04:51.080 | What would you price them at?
00:04:52.600 | How much money would you spend promoting them?
00:04:55.280 | So you had to go through all of these inputs, and they were all fed into a
00:04:59.560 | model, and out would come a financial statement, a balance sheet, and a stock
00:05:05.320 | price.
00:05:05.760 | I was absolutely captivated by this, and about two or thirds or three quarters of
00:05:14.840 | the way through the course, I started to wonder, I figured out what the algorithm
00:05:19.320 | was for success, and I wondered, "Huh, I wonder if you applied what the model
00:05:27.320 | looked for in companies, would that lead to good investment performance?"
00:05:33.000 | Remember, this is circa 1978, and what the course really promoted is that
00:05:41.720 | companies should focus on high growth.
00:05:43.920 | They should focus on market share.
00:05:45.840 | You price low to get share, and then once you have the share, you can raise
00:05:50.440 | price to earn higher margins.
00:05:52.320 | So it really looked for companies that built high return on equity and high
00:05:57.000 | operating margins, but first and foremost, high growth.
00:06:00.600 | And so I looked for companies that had high growth and high return on equity
00:06:05.320 | and high margins, and lo and behold, they were all tech companies.
00:06:09.960 | So I built a simulated portfolio of the companies that matched what the simulator
00:06:15.240 | in the course looked for, and they did really well over six months to a year.
00:06:21.040 | So I convinced my father to give me a couple thousand dollars to invest in a
00:06:27.520 | couple of companies that best fit the model, and they did exceptionally well.
00:06:32.480 | And I continued to follow this model for quite some time, and I ended up paying
00:06:38.240 | for my graduate school education this way.
00:06:41.280 | Wow.
00:06:42.240 | So that's how I became an investor.
00:06:44.160 | I had never had any intent to do so, but from this course really inspired me.
00:06:49.160 | I became a TA of the course, and I just fell in love with it.
00:06:52.040 | And did you know at that point that this would probably make
00:06:55.400 | up the rest of your career?
00:06:56.560 | No clue whatsoever.
00:06:58.400 | As a matter of fact, quite the contrary, because my dad had
00:07:02.560 | a small manufacturing business.
00:07:05.000 | He was an entrepreneur, and my intent in going to an undergraduate business
00:07:11.200 | school was to join him on graduation and work in his company, and I thought I was
00:07:17.080 | going to go work in the family business, the very small family business, but I was
00:07:22.120 | so captivated by this that a couple of weeks before I graduated, I decided
00:07:26.880 | that I wanted to go out on my own.
00:07:29.040 | So I worked in investment banking for a couple of years.
00:07:33.520 | So as I said before, I had a background in finance and computer science.
00:07:37.560 | So I first sought a job in computer science in New York.
00:07:42.760 | So I grew up about 25 minutes outside of Manhattan and had
00:07:46.240 | always wanted to live in New York.
00:07:47.760 | And so I looked for a job when I graduated in software development, but
00:07:52.600 | they were all time-sharing bureaus that served financial services companies.
00:07:57.040 | And they all treated their programmers, as they then called them, like crap.
00:08:01.920 | And I thought, "I don't want that job."
00:08:03.600 | So I got a late start on looking for a job on Wall Street.
00:08:07.520 | So I got a job working in mergers and acquisitions for one of
00:08:13.200 | the top five investment banks.
00:08:15.400 | And as luck would have it, they were very early on in
00:08:19.760 | representing technology companies.
00:08:21.680 | And I was the only person in the department who actually
00:08:24.920 | knew what the companies did.
00:08:26.280 | So I got exposure that I never should have gotten.
00:08:29.720 | Meanwhile, I continued to hone my skills investing, and I learned
00:08:33.360 | about venture capital in my first year out of college, and I thought,
00:08:38.960 | "God, that's the coolest job ever."
00:08:41.560 | It combined computer science, which I loved, with entrepreneurship, which
00:08:46.840 | I appreciated from my dad, and investing.
00:08:50.040 | And so I had become friendly with someone who also worked as an
00:08:55.440 | analyst on Wall Street who wanted to work in venture capital.
00:08:59.400 | And he said, "We've got to go to Stanford.
00:09:00.920 | That's how we're going to get into this industry."
00:09:02.960 | And that's how I ultimately applied to Stanford Graduate School of
00:09:06.360 | Business, got in, and it changed my career.
00:09:08.400 | Wow.
00:09:09.520 | And so did you know throughout Stanford that venture capital was
00:09:13.480 | the end goal after graduation?
00:09:15.080 | Absolutely.
00:09:15.400 | I knew I wanted to get involved as soon as I possibly could.
00:09:18.840 | And I had a lot of really lucky breaks along the way.
00:09:23.000 | The fellow who ran the M&A department at my firm before business
00:09:28.560 | school was a Stanford grad, and his son was a year ahead of me in business school.
00:09:33.600 | So he took me under his wing when I got to Palo Alto.
00:09:36.960 | And his best friend was the son of the CEO of Hewlett-Packard,
00:09:44.040 | which was the Google of its day.
00:09:46.760 | And he worked for the Premier Seed Fund before that was a real thing.
00:09:52.120 | And this fellow, Greg Young, for some reason took a liking to me.
00:09:57.120 | We had great chemistry, and he introduced me around to a bunch of
00:10:01.320 | venture capital firms to see if I might be able to get a part-time job
00:10:04.920 | while I was going to business school.
00:10:06.200 | And he ultimately introduced me to the first crossover firm that
00:10:10.880 | invested in late-stage private and early-stage public companies.
00:10:14.120 | And after this successful career for multiple decades, building one of the
00:10:20.200 | most well-known and best-performing funds, you got to a point where almost
00:10:24.640 | anyone would retire and just stop.
00:10:26.960 | And you did what is maybe the complete opposite of retirement and decided
00:10:30.920 | to go start a company, which I have done and is a lot of work.
00:10:35.200 | And I'm not sure I would pick up that.
00:10:37.080 | Unclearly not that intelligent, Chris.
00:10:39.040 | But you decided to start a company in the investment space.
00:10:44.480 | What did you think people were doing wrong that drove you to start Wealthfront?
00:10:48.640 | Sure.
00:10:49.120 | Well, contrary to what most people think, great companies are not started as the
00:10:54.920 | result of an entrepreneur saying, "I want to start a company, so I'm going to go
00:10:58.920 | find the best opportunity I can and then do that."
00:11:02.000 | And typically it's described as, the process is described as someone who looks
00:11:09.200 | for a market that has a problem and then you develop a solution for the problem.
00:11:14.600 | And that's how you get started.
00:11:16.160 | Those kinds of businesses lead to very mundane and small outcomes.
00:11:21.720 | The really great successes in venture capital are the result of an
00:11:26.880 | entrepreneur recognizing an inflection point in technology that allows them to
00:11:32.280 | build a new kind of product, and then they try to find a market for that product.
00:11:37.760 | So it's the exact opposite of what you think it is.
00:11:40.800 | I had absolutely no desire to start a company.
00:11:44.960 | So I didn't know what I wanted to do, but when you've been successful and you
00:11:51.280 | retire, it's amazing how many interesting things find you.
00:11:55.680 | Now, I was focused on giving back because I have a life beyond
00:12:00.240 | anything that I ever imagined.
00:12:01.920 | So I wanted to give back.
00:12:03.920 | So I became a trustee at my undergraduate alma mater, Penn.
00:12:08.720 | I started teaching, which I still do, at my grad school alma mater, Stanford.
00:12:13.560 | And my wife and I started an innovative cancer research funding initiative.
00:12:21.400 | So I wanted to give back to society.
00:12:23.480 | And one of my responsibilities as a trustee at Penn was to sit on their
00:12:28.880 | endowment investment board, and the premier university endowments are the
00:12:33.520 | best managed diversified pools of capital in the world, and they all
00:12:37.400 | invest very similarly, and it struck me when I went to a meeting, one of my
00:12:42.280 | first meetings, that a lot of what they did was manual and spreadsheet based,
00:12:45.840 | and that there were some APIs that had been created in the brokerage world that
00:12:50.000 | would allow you to build an automated investment service, and this was
00:12:54.040 | interesting to me because when I was a venture capitalist, a lot of the people
00:12:57.880 | that I recruited that went on to financial success would come to me for
00:13:02.240 | investment advice, and I could never tell them to do what I do because they
00:13:05.560 | couldn't afford the minimums, and so if one were to basically do an 80/20 on the
00:13:11.480 | endowment investment model and automate it, you could make really sophisticated
00:13:17.200 | investing available to the masses. And so I felt like I needed to do it for
00:13:21.840 | social good, not because I wanted to build a business out of it, and I
00:13:25.840 | thought, oh, if it works, I'll just hire a CEO and I'll be a board member. So I
00:13:30.440 | never intended to run the company.
00:13:32.360 | And yet here you are.
00:13:34.360 | And yet here I am.
00:13:35.600 | And so when you thought about that original kind of moment of, okay, let's
00:13:40.200 | build an 80/20 version of the endowments, what does that mean? What types of
00:13:44.800 | investments did you think people needed to have in their portfolio, and what did
00:13:48.360 | you want to build there?
00:13:49.080 | Well, like almost every successful company, we pivoted from where we
00:13:54.600 | started. So the original insight from endowment investing was that university
00:14:01.200 | endowments are really good at picking managers that are likely to outperform
00:14:06.880 | the market. Now, this might sound like heresy coming from a guy who co-founded
00:14:12.480 | a company that built much of its reputation on passive investing, but
00:14:17.560 | there is a small percentage of managers out there that consistently outperform
00:14:23.080 | the market, and the endowments are really good at finding them. And they do it in
00:14:27.800 | a very similar way, and that is basically they look for managers who have a pretty
00:14:34.320 | long track record of outperforming, but who have done so consistent with their
00:14:40.360 | stated strategy. And that's the hard part. So that's how we started, was we
00:14:46.680 | built a marketplace of investment managers, and the managers that we chose
00:14:51.160 | over a year and a half outperformed the market by 4% net of fees, which was the
00:14:57.600 | good news. The bad news was nobody cared because it was too inconvenient. We were
00:15:03.640 | really only choosing managers that were ideal representatives of your US equity
00:15:10.040 | allocation, and US equity should be about a third of your portfolio. So it was
00:15:14.880 | really inconvenient because you had to take care of investing in non-US equities
00:15:19.600 | and in bonds. So the refrain that we would often hear from people is, "I'd
00:15:25.200 | rather that you manage all of my money adequately and inexpensively than a
00:15:31.160 | portion of it superbly." And that's when we pivoted into a diversified portfolio
00:15:36.480 | of low-cost index funds.
00:15:38.960 | And how did you decide what kind of asset classes people should be investing
00:15:43.200 | in?
00:15:43.360 | The mix of asset classes is an incredibly well-understood problem. The
00:15:50.400 | solution to which was invented, I think, in 1958 and won the Nobel Prize in
00:15:54.960 | 1990, called the Modern Portfolio Theory or the Capital Asset Pricing Model. So
00:16:01.160 | there's no rocket science associated with this. This is real commodity
00:16:05.720 | technology. It's just applying a computer to do it instead of a person.
00:16:10.440 | And do you think that for most people, it's a better approach to be passive and
00:16:17.440 | hands-off than to try to pick stocks?
00:16:20.000 | The academic research on this is unbelievably clear and consistent. So
00:16:27.640 | this reminds me of climate change, that 98% of scientists or more believe in
00:16:36.600 | climate change. The problem is that when news channels put together a debate,
00:16:43.520 | they only have one person representing each side, which makes it seem like it's
00:16:48.200 | a 50/50 argument. But in the scientific community, it's 98 to 2. Well, the same
00:16:56.000 | goes for active versus passive investment, that it is almost impossible
00:17:02.320 | net of fees to outperform the market over the long term. You know, only a
00:17:08.760 | third of professional investment managers outperform the market in any one
00:17:14.160 | year. After 10 years, it's less than 15%. So what makes you as an amateur think
00:17:22.680 | that you can do this if you're not spending all of your time trying to find
00:17:27.560 | companies that are likely to beat their expectations? The fact that you like the
00:17:32.600 | company or not is nothing to do with whether or not the stock price is going
00:17:37.200 | to go up. It's deciding whether or not you think the company's earnings are
00:17:42.080 | going to be in excess of the expectations or not. And that's really
00:17:47.000 | hard to do in something that amateurs, including myself, shouldn't be doing.
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00:21:00.280 | And so, does that mean there's, you know, not a place for buying stocks in someone's
00:21:05.720 | investment portfolio, and that most of the people that are doing that should be
00:21:09.040 | really passive investing with everything? Or how do you think about that mix?
00:21:13.440 | Well, what they should be doing, or what they... The problem here is, the data's really clear
00:21:20.160 | that unless they have a really unique and unfair insight, they should not be
00:21:28.480 | picking stocks. Now, academics believe that the only way that one can outperform
00:21:35.280 | the market is if you have an information advantage. And they further believe that
00:21:42.320 | the only information advantages are illegal. I don't believe that. I actually
00:21:48.400 | think that some people are better at interpreting signal than others through
00:21:53.640 | experience. So there are a small number of investors who are outliers, who are
00:22:00.840 | able to outperform the market, not every single year, but over the long term. I
00:22:07.760 | think there are very, very few amateur investors who are able to do this. The
00:22:13.640 | fact that you did well one year doesn't mean that that you were really good. You
00:22:18.560 | know, one of the biggest mistakes people make is confusing absolute returns with
00:22:22.280 | relative returns. So, for example, Robinhood made a statement that their
00:22:27.760 | average customer from April 1st, 2020 to March 31st of 2021 saw an increase in
00:22:36.600 | their portfolio value of about 30%. So those people thought they're brilliant
00:22:41.800 | because if you could make a 30% return, you must be brilliant. Only problem is
00:22:46.760 | the S&P 500 was up 55%. So you lost 25% relative to having bought the index. Now,
00:22:56.320 | when the market's only up 5%, those people are going to be down 20%. They
00:23:01.200 | don't realize it, but that's what's going to happen to the vast majority of them.
00:23:06.480 | You know, you wouldn't think about picking up a scalpel and operating on
00:23:09.960 | your friends. Why would you think that without training you can invest like the
00:23:15.640 | best professionals? You can't. It's an apprenticeship business. Now, there might
00:23:22.400 | be a few outliers out there who could do it. So, all that being said, to me,
00:23:29.000 | investing is like a diet, that you're unlikely to just invest passively
00:23:35.560 | because it's really boring and you hear your friends talk about the stocks they
00:23:39.320 | bought and how well they did. So, my thought is encourage people to buy a few
00:23:44.640 | stocks with less than 10% of their net worth to learn that they really don't
00:23:49.400 | know what they're doing. So, even if they lose some money, it's okay, or if they
00:23:54.120 | underperform the market, it's okay. But if you tell people you should only invest
00:23:59.880 | in passive, they're not gonna live up to that diet because it's too boring. And so,
00:24:04.880 | I'm in a really fortunate position that I have access to some of the best
00:24:09.680 | venture capital firms in the world, some of the best hedge funds in the world,
00:24:13.080 | because they want access to my network and my experience. If I didn't have
00:24:19.080 | access to those people, all of my money would be in a passively managed,
00:24:25.040 | diversified portfolio of low-cost index funds.
00:24:28.040 | - I know a lot of people that have heard venture capital startups growing and
00:24:32.880 | decide they think they want to start angel investing. Do you think that is a
00:24:37.120 | similar strategy to stocks that people are going to outperform?
00:24:40.360 | - It's even worse. The data shows that it's even worse. So, what's really
00:24:47.560 | consistent is that the top 20 venture capital firms generate on the order of
00:24:53.760 | 95% of the realized returns of the industry. Now, many people confuse these
00:25:00.840 | numbers by looking at the unrealized returns, which are irrelevant. All that
00:25:05.120 | matters is that the return ultimately gets realized. So, you can have really
00:25:09.360 | high unrealized returns if you invest in a company and then the next round they
00:25:14.800 | get valued at $300 million and then at a billion dollars. But unless the company
00:25:19.600 | ultimately gets acquired or goes public at a valuation in excess of a billion
00:25:24.120 | dollars, that's not worth anything. So, about 3% of the venture capital firms
00:25:31.480 | generate 95% of the industry's realized returns. That says that 97% of
00:25:39.200 | professional venture capitalists are horrible at what they do. 97% of people
00:25:48.440 | who do this for a living are horrible at what they do. So, again, what makes you
00:25:54.920 | think as an amateur that you are going to generate great returns? Look, might you
00:26:01.560 | luck into one or two of them? Yeah, but you're not going to do it consistently,
00:26:07.080 | so you shouldn't try. But I wrote an article about this for TechCrunch a
00:26:13.720 | number of years back, where I say you shouldn't do it, but you're not going to
00:26:18.440 | listen to me, so keep it to under 10% of your liquid net worth. Yeah, so it sounds
00:26:23.480 | like the the common theme is small amounts to feed that excitement, but if
00:26:28.320 | you want to increase the likelihood that your money will grow in the best way
00:26:32.000 | possible, passive investing, even if it's boring. You know, it's really funny. Our
00:26:36.800 | chief investment officer is the guy who invented passive investing, the father of
00:26:42.120 | that passive investing, Burt Malkiel, an emeritus professor at Princeton, who
00:26:46.600 | started this whole thing off with his book, A Random Walk Down Wall Street.
00:26:50.800 | About a year into Wealthfront's starting, or a year into offering a diversified
00:26:58.320 | passive portfolio, we recruited him to be our chief investment officer. And soon
00:27:03.000 | thereafter, we held an event in Palo Alto for our local clients, where they got to
00:27:07.360 | meet Burt and ask him questions. And one wise guy raised his hand and said, "Burt,
00:27:13.200 | do you own any stocks? Because here's the guy who really believes in index
00:27:18.120 | investing." And Burt had a cute little grin on his face, and he said, "Yes, and I also
00:27:25.040 | like going to the dog track. I find them both very entertaining." So even Burt
00:27:32.680 | does it, but he does it for entertainment and with a very small percentage of his
00:27:36.800 | net worth. I haven't bought an individual stock in 15 or 20 years. And I was a
00:27:44.800 | really good public investor.
00:27:46.440 | What made you stop?
00:27:48.480 | I don't have the time to do it. If I don't do a bunch of surgeries, would I
00:27:54.000 | operate on someone? No.
00:27:56.000 | Yeah. You know, there are experts that pick stocks. There are experts that buy
00:28:01.800 | art. So the platforms that let you invest in those, my general rule has been
00:28:06.600 | similar to yours, which is, it's probably not the best place for returns if
00:28:11.000 | they're coming to me, because I have not as much money as most people and don't
00:28:15.400 | know what I'm doing. And it probably seems like the reason they're coming to
00:28:18.320 | me is for exactly those reasons, that I don't know what I'm doing.
00:28:21.000 | I think Warren Buffett said something like, "If you're really good at
00:28:25.680 | investing, why would you share your ideas? Why wouldn't you get some other
00:28:32.680 | people's money so you could buy more of those ideas?"
00:28:35.800 | Yeah, that always set me off with some of the platforms that let you crowdfund
00:28:41.840 | large investments, which is, if these are such great investments, aren't there
00:28:44.880 | institutional capital that would fund them? And am I just the sucker? But there
00:28:50.280 | is one asset that I think a lot of people I talk to believe is different,
00:28:55.560 | which is real estate. And I meet plenty of people who think, you know, the way
00:29:00.000 | to save for the future is not to invest in the stock market, but to buy real
00:29:03.880 | estate, whether it's for rentals or for flipping. Do you think real estate fits
00:29:09.080 | in someone's kind of, not investment portfolio, but savings plan for their
00:29:12.960 | future?
00:29:13.480 | You know, I've heard that over and over and over again. We get that feedback a
00:29:19.040 | lot from our clients at Wealthfront. I actually wrote a blog post that showed
00:29:25.840 | how the numbers work for buying rental properties. And what most people don't
00:29:31.160 | realize is that if you buy a rental property for the first at least five
00:29:38.160 | years, or maybe even 10, you're going to have negative cash flow. So it's not
00:29:44.400 | really an income property, that if you have to borrow the money to buy the
00:29:49.920 | property, if you look at the all in costs, they're likely greater than the
00:29:55.200 | rents that you're going to earn. And it's going to take a while for the rents
00:29:59.680 | growing at inflation to catch up to your expenses. Now, maybe you were
00:30:04.800 | fortunate that you bought it in an up and coming neighborhood and you're able
00:30:08.560 | to significantly increase your rents. But then that means that you're an expert
00:30:14.280 | at identifying neighborhoods that are going to change. So to me, that is
00:30:19.640 | completely analogous to picking individual securities. And if you don't
00:30:24.080 | do that for a living, what makes you think that you're going to be better at
00:30:28.640 | it than the people who are doing that for a living? There are many people who
00:30:32.720 | do nothing but look for properties that are likely to appreciate at a very rapid
00:30:39.080 | rate so that they can increase the rents. So I don't understand why people
00:30:45.960 | would go out and try to buy properties. To me, it's the same as buying stocks,
00:30:51.440 | better to invest in a diversified pool, like a real estate investment trust or
00:30:57.200 | something of that sort.
00:30:58.400 | And one thing I often remind people that are asking me similar questions is that
00:31:05.000 | people often don't factor in the down payment. They say, well, the rent is
00:31:08.840 | going to pay for the mortgage. And even if it covers all the HOA fees and the
00:31:12.680 | property tax, that down payment would have otherwise also been earning a
00:31:16.640 | return in the market. And at a minimum would maybe have some dividends that
00:31:22.000 | would count as cash flow that they forget. And they say, well, they're just
00:31:25.680 | looking at the mortgage payment. They're just comparing that to the rental
00:31:28.400 | income and forgetting that maybe they had to put $50,000 or $100,000 down.
00:31:31.760 | They don't have the insurance payments built in. They don't have the real
00:31:35.120 | estate taxes. They don't have maintenance. There's all sorts of things
00:31:39.480 | that they leave out of the equation that we put into the blog post that
00:31:43.120 | explained. And I even shared the spreadsheet where I did all the
00:31:46.520 | calculations so people could play with their own numbers. It is really, really
00:31:51.440 | difficult to generate positive cash flow from a supposed income property.
00:31:58.920 | Yeah. So, you know, when I started this show called All The Hacks, the idea
00:32:03.040 | was to find kind of the extra optimizations that can help you earn
00:32:07.560 | more and upgrade money and life. And, you know, the strategy of passive
00:32:12.800 | investing maybe doesn't feel like that. But there are some investment, what
00:32:16.320 | I'll call hacks, that I'm curious which of or if any of them you think are
00:32:20.520 | actually opportunities for people. So are things like tax loss harvesting or
00:32:25.920 | pre-tax retirement accounts or direct indexing, are any of those things that
00:32:31.120 | might kind of give you an edge in the long run that might be viewed as kind
00:32:34.960 | of an optimization or a hack that many people aren't taking advantage of?
00:32:38.480 | Well, I'm going to quote Bert Malkiel again, who loves to say, "You can't
00:32:44.080 | outperform the market, so you shouldn't try. Better to buy index funds and
00:32:50.240 | focus on the three things over which you do have control." And they are
00:32:54.240 | diversification, which he calls the only free lunch in investing, minimizing
00:32:59.800 | fees and minimizing taxes. Now, what most people don't realize is there's
00:33:05.600 | far more opportunity to minimize tax than there is to minimize fees. I mean,
00:33:12.720 | I think it's like 40x the amount of extra benefit you can get from doing a
00:33:17.760 | few smart things. So tax loss harvesting is one of them. People who earn more
00:33:23.680 | income typically don't qualify for Roth IRAs, but you can convert from a
00:33:30.120 | traditional to a Roth IRA with what's known a backdoor Roth. We do that
00:33:34.960 | automatically for you at Wealthfront. That's a really nifty way to save
00:33:39.920 | taxes. So there are a bunch of hacks around minimizing your taxes that can
00:33:47.600 | actually make a difference of 30 to 70% of what you ultimately can retire on
00:33:55.280 | just by saving those taxes.
00:33:57.360 | And you mentioned tax loss harvesting. For people who aren't familiar, how
00:34:02.600 | does that work? And is that something anyone can implement and start doing
00:34:06.000 | themselves?
00:34:06.600 | Sure. Well, they can try, but they can't do it as well as a computer can do
00:34:12.520 | it. So it's a loophole in the tax code that has existed for decades that
00:34:18.480 | wealthy people have taken advantage of because their financial advisors
00:34:23.360 | offered it for them that most people didn't know existed. So basically, the
00:34:29.520 | way that it works is imagine that you have a portfolio of three index funds,
00:34:35.920 | U.S. stocks, foreign stocks, and bonds. And let's say you invested $10,000 and
00:34:42.960 | you invested $3,333 in each of those three index funds. Now, imagine that
00:34:51.040 | the foreign stocks goes up and the bonds goes up, but the U.S. stocks goes
00:34:55.360 | down to $3,000. So the way tax loss harvesting works is you could sell that
00:35:01.840 | index fund for U.S. stocks, and you would take the loss of the $333. And
00:35:09.200 | then you would reinvest the $3,000 in another U.S. equities index fund, but
00:35:17.000 | something that was slightly different than the index you had before. You
00:35:20.680 | can't do the identical index. Otherwise, you can't apply the losses that you
00:35:26.040 | recognize to lower your taxes. So if you had an S&P 500 index fund, you'd get
00:35:32.960 | a Russell 3000 index fund. And that way, you have maintained the risk and
00:35:39.440 | return characteristics of your portfolio. You still have $3,000 invested
00:35:43.680 | in U.S. equities, but you've recognized this loss of $333 that you can either
00:35:50.480 | apply to up to $3,000 of ordinary income each year or against short-term
00:35:56.880 | capital gains. And if you have more losses than you have gains and more
00:36:03.000 | than you have $3,000 of ordinary income, you can roll it forward for future
00:36:07.600 | years. So your portfolio stays the exact same in terms of risk and reward
00:36:13.720 | characteristics, but you have these tax losses that you can use to reduce your
00:36:19.320 | taxes. For most financial advisors, it's too complicated to do this more
00:36:25.400 | than once a year because they might have 200 clients and they have many tax
00:36:31.680 | lots for each client. So if you add on deposits, that's a new tax lot. Every
00:36:36.680 | time one of your index funds pays a dividend, you reinvest that. That's a
00:36:41.200 | tax lot. So it's really complicated to look at this more than once a year, but
00:36:46.800 | computers don't care how many times they look at it. So Wealthfront does it
00:36:50.920 | on a daily basis and that way we're able to capture more of these losses than a
00:36:57.040 | human being could do themselves. And the amount of value that we've generated, we
00:37:02.040 | actually publish these numbers. We're the only people who publish the amount of
00:37:05.720 | losses that we've been able to harvest, which says a lot about how much better
00:37:09.600 | we are than everyone else because others would publish if they could meet our
00:37:13.880 | performance. But depending on whether you live in a state where you have to pay
00:37:19.440 | state income tax and depending on how risky a portfolio you're in, the riskier
00:37:24.840 | the portfolio, the more volatile it is, the more opportunity for tax losses. The
00:37:29.760 | amount of benefit, after-tax benefit, that we generate each year is worth
00:37:33.920 | anywhere between 3 to 13 times the fee that we charge. So you're almost doing
00:37:39.800 | yourself a disservice if you try to do this on your own. Better to allocate it
00:37:45.640 | to us because it's not that we're so good, it's just that computers are much
00:37:49.360 | better at doing this than human beings are.
00:37:51.160 | So unless you want to write your own software, which is probably not the best
00:37:55.160 | It's not just that, Chris. So even if you wrote your own software, you would need
00:37:58.920 | real-time data feeds in order to do this. And then you'd have to get an API from
00:38:04.480 | your brokerage firm with real-time data feeds that you have to pay for in order
00:38:10.160 | to do all this. So the cost of the data is quite significant if you can't
00:38:14.360 | amortize it across thousands or millions of clients.
00:38:18.600 | Yeah, that makes sense. And so to someone listening who maybe hasn't really
00:38:24.000 | thought deeply about their investment portfolio until now, holds a few stocks,
00:38:28.280 | maybe holds a few mutual funds, a hodgepodge of things, how do you think
00:38:31.960 | people should make big changes to the way they've been investing?
00:38:35.160 | Well, as I said before, there's more money to be saved through minimizing
00:38:41.000 | taxes than anything else. So if you have a short-term gain, you might want to
00:38:47.080 | think about holding onto it for a year before you sell it so that you pay a
00:38:51.120 | much lower tax rate on that gain. If you've only owned it for, you know, a
00:38:56.320 | couple of months, then I would think about selling it now. And if there's
00:39:00.840 | something in which you have really high conviction, because you have an
00:39:05.160 | information advantage, not because you like a company, then you might want to
00:39:11.480 | hold on to that security as well. But as you sell the securities when they go
00:39:16.760 | long-term, or you have less conviction, and as you save incremental money, I
00:39:24.120 | really think you would be better served investing in a diversified portfolio of
00:39:28.920 | low-cost index funds, whether on your own or through Wealthfront, where you
00:39:33.520 | get the benefit of tax-less harvesting.
00:39:35.280 | And what would you say to the person who's not investing today and, you know,
00:39:41.160 | is constantly hearing through the media that the markets are overvalued and
00:39:45.280 | nervous to just invest all this money they've been saving and, you know,
00:39:48.880 | probably saving hard for years?
00:39:50.640 | You know, one of the biggest disservices the media does for individual
00:39:56.560 | investors is tout the fact that the market's at an all-time high. Well, the
00:40:02.520 | market should be at an all-time high every year because, on average, the U.S.
00:40:08.200 | equity markets compound at a rate of about 8% a year. Well, if that's true,
00:40:14.640 | then we should be hitting records every single year. So, the fact that the
00:40:19.640 | market is at the highest level it's ever been is absolutely irrelevant. And one
00:40:25.160 | thing academic research has shown that it's almost impossible to time the
00:40:29.600 | market for when it's cheap. I know about five people on Earth who are pretty
00:40:34.520 | good at this, and they all run hedge funds that charge enormous fees and that
00:40:40.040 | require $50 to $100 million minimums. So, it's not something that the average
00:40:46.440 | human being can do. So, my attitude is you shouldn't try to time the market.
00:40:50.680 | Just dollar-cost average. You know, invest monthly or quarterly so that
00:40:56.960 | maybe you get some benefit of the volatility of the market. But it should
00:41:01.200 | always be up, and it should always be at a high.
00:41:04.520 | Yeah, I know that dollar-cost averaging, there's a Vanguard study that showed
00:41:10.600 | that putting all of your money in at once is actually a better option than
00:41:15.200 | dollar-cost averaging. But that so much of investing is emotional, that if you
00:41:20.720 | have an emotional satisfaction of knowing you paced out your investing
00:41:24.360 | over a year, over six months, that might actually be worth it for you as a kind
00:41:29.600 | of net happiness combined with investment return than just investing
00:41:33.880 | all at once, even if that is the academically best thing.
00:41:36.840 | But, you know, one of the major reasons why the Vanguard research came to that
00:41:43.040 | conclusion is because on average markets are up every year. So, if you're playing
00:41:50.000 | the averages, of course you shouldn't dollar-cost average. You should put
00:41:54.520 | everything in now. So, that's somewhat of the fault of that study, and I know I'm
00:42:01.440 | arguing against myself. But I think the big reason why the data shows you
00:42:07.760 | shouldn't dollar-cost average is because on average markets go up. Therefore, you
00:42:12.000 | should invest as soon as you possibly can to get the benefit from that. But I
00:42:16.840 | think in terms of regret minimization, which is really important and a big part
00:42:22.200 | of the reason why behavioral economics is so compelling, is that people would be
00:42:27.560 | better off if they dollar-cost average.
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00:43:40.560 | Do you all remember episode 122 when I spoke to Chef David Chang about leveling
00:43:47.440 | up your cooking at home? If not, definitely go back and give it a listen.
00:43:51.120 | But one of his top hacks was using the microwave more. I'll admit I was a
00:43:55.720 | skeptic at first. But after getting a full set of microwave cookware from
00:43:59.920 | Anyday, I'm a total convert and I'm excited to partner with them for this
00:44:03.800 | episode. Anyday is glass cookware specifically designed to make delicious
00:44:08.160 | food from scratch in the microwave. And honestly, using it feels like a kitchen
00:44:12.640 | cheat code because it speeds up and simplifies the process so much. The
00:44:17.320 | cookware is 100% plastic free and you can cook, serve, store and reheat all in
00:44:22.840 | the same dish that happens to be dishwasher, freezer and oven safe too.
00:44:27.400 | And if you need a recipe suggestion to kick off your Anyday adventure, I highly
00:44:31.640 | recommend David Chang's Salmon Rice. It is so good. And if you haven't checked
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00:44:41.360 | out. So to get 15% off our new favorite cookware, go to allthehacks.com/anyday.
00:44:48.400 | Again, that's allthehacks.com/anyday for 15% off. I just want to thank you
00:44:56.640 | quick for listening to and supporting the show. Your support is what keeps
00:45:00.800 | this show going. To get all of the URLs, codes, deals and discounts from our
00:45:05.880 | partners, you can go to allthehacks.com/deals. So please consider
00:45:11.320 | supporting those who support us. Are there any other behavioral economics
00:45:16.040 | lessons you've learned over the years that would be worth listening to and
00:45:20.000 | sharing about when it comes to investing and saving?
00:45:22.640 | Nothing about investing, good investing feels right. So there's a lot of
00:45:28.200 | academic research that has shown that on average individual investors prefer to
00:45:34.040 | invest when the market is rising and they prefer to sell when the market
00:45:39.520 | declines. Well, that's the exact opposite of what you should do. That's
00:45:44.080 | actually really, really bad. So it's hard to pick when the market is declined
00:45:52.120 | enough, which is why I just say dollar cost average. But whenever something
00:45:57.760 | feels like it's the right thing to do in investing, you better question it
00:46:01.920 | and ask someone who's really good at investing about it, because the
00:46:05.360 | likelihood is that that's not the right thing to do.
00:46:08.880 | So so one of the feelings I have right now is I'm watching countless people
00:46:14.400 | online that I know making boatloads of money, buying, you know, NFTs on the
00:46:20.680 | internet, buying long tail cryptocurrencies that no one's ever heard
00:46:25.000 | of. What do you say to the person who's sitting on the sidelines feeling like
00:46:29.840 | they're totally missing out while their friends are making 5, 10, 100 times
00:46:34.040 | their money in matters of weeks? Obviously, you know, it would feel good
00:46:39.000 | to start making that money. But what do you say to those people?
00:46:42.000 | That's not investing, that's speculating.
00:46:44.480 | And is there a place for speculating, you know, in the market for for
00:46:50.920 | people's portfolios? Or is that
00:46:52.880 | I don't believe there is. I personally don't believe there is the most
00:46:59.240 | sophisticated investors I know, don't speculate. So the difference between a
00:47:03.600 | speculation and an investment is that an investment has a cash flow. So you
00:47:09.400 | can evaluate its merits based on your expectation for those cash flows.
00:47:17.640 | Something that doesn't have a cash flow is purely a gamble. Why should gold go
00:47:24.080 | up? It's a shiny metal. It's purely emotional. The same is true, I think,
00:47:31.680 | for cryptocurrencies. So to me, they are speculations. Commodities are
00:47:37.760 | speculations. I don't think that speculations have a place in a
00:47:44.400 | responsible portfolio. That being said, people have a fear of missing out. So
00:47:51.400 | they're going to do it. And all I can say is keep it to a small percentage
00:47:56.640 | of your portfolio. The fact that they went up doesn't mean that the person
00:48:01.560 | who bought them was smart. It means they were lucky. And that's the part
00:48:06.040 | that people have a hard time understanding. This is like this is why I
00:48:11.840 | really preach, don't judge a decision by its outcome, because luck can play
00:48:18.640 | a role in that outcome. Judge it by the quality of the process that you
00:48:24.160 | pursued in reaching that conclusion.
00:48:27.240 | Yeah, I try to look back, a friend of mine always reminds me, you know, if
00:48:32.600 | there are decisions we made in our lives, that if we made an alternative
00:48:36.360 | decision, we would have made more money. And he always says, look back at the
00:48:39.560 | information you had when you made the decision. And with only that
00:48:43.000 | information, did you feel like you made a good decision? And you should feel
00:48:46.560 | good that you made a good decision. You might have missed out on making a lot
00:48:49.800 | of money, but you can at least know that you made a good decision.
00:48:52.720 | So luck plays a role in outcomes. So you can't totally judge a decision by
00:48:59.560 | the outcome.
00:49:00.200 | That makes sense. You've mentioned a lot of times, you know, a lot of the
00:49:05.160 | people you know, and the most sophisticated investors you know, do
00:49:07.800 | this. What do you think changes as people have more money in terms of the
00:49:12.520 | way they invest? And what threshold is it that those changes happen?
00:49:16.600 | I think as people become wealthier, they think they become smarter.
00:49:21.240 | And it sounds like you don't believe that's true.
00:49:24.000 | I do not.
00:49:25.400 | So do you think there's a level at which people's investment strategies
00:49:29.240 | should change?
00:49:30.000 | I do not. So the wealthier you get, so once your wealth goes above a certain
00:49:36.000 | level, you qualify for a private wealth manager as a financial advisor versus
00:49:41.600 | just a regular financial advisor.
00:49:43.480 | A private wealth manager might have a five or $10 million minimum and might
00:49:48.720 | work for Goldman Sachs or Morgan Stanley or JP Morgan, whereas the financial
00:49:53.200 | advisor works for Morgan Stanley, Smith Barney, or a general brokerage firm.
00:50:01.600 | Now, one of the things that one of the biggest things that private wealth
00:50:06.120 | managers sell to entice you to let them manage your money is access to
00:50:12.400 | alternative assets.
00:50:13.920 | So alternative assets include venture capital and private equity and hedge
00:50:19.640 | funds. So people constantly hear stories about how well those kinds of
00:50:25.400 | investment managers do, and therefore they want access to them.
00:50:29.120 | And the private wealth manager sells the ability to get access.
00:50:33.200 | What they don't tell you is the ones that they give you access to are
00:50:37.320 | horrible. And they can tell you this from experience, that as the manager of
00:50:44.480 | a co-manager of one of the premier alternative asset managers, Benchmark
00:50:50.240 | Capital, we had our choice of investors.
00:50:53.520 | We did very, very well.
00:50:54.920 | And if you do very well, you have a choice of investor.
00:50:58.640 | As I said earlier, individual investors consistently like investing when the
00:51:03.720 | market goes up and they like selling when the market goes down.
00:51:07.200 | Well, that's the exact opposite of the person that we want as an investor in
00:51:11.440 | our fund. When the market declines, we don't want people running for the exits.
00:51:15.560 | We want people who are going to be there through thick and thin.
00:51:18.320 | So we want investors who have the longest term perspective.
00:51:24.000 | And they're generally the university endowments and charitable foundations.
00:51:28.800 | The last people we want are individual investors.
00:51:31.640 | So if you have a great track record, you're going to take money from the best
00:51:36.960 | investors and not the worst investors.
00:51:40.480 | So who do you think is going to take money from individual investors?
00:51:44.480 | The shittiest investment managers.
00:51:47.320 | So it's like a Groucho Marx used to say, never join a club that would have you as
00:51:52.520 | a member. If a private wealth manager is giving you access to a fund, you should
00:51:57.560 | not want it. But I see people fall for this over and over and over again.
00:52:05.520 | So is there a world where it makes sense for the average investor to work with one
00:52:10.560 | of these wealth managers or financial advisors and pay their fees?
00:52:14.120 | If they are very scared of investing and they need a lot of handholding, yeah.
00:52:20.280 | Yeah. If the alternative is not investing, it might be worth it.
00:52:23.160 | Agreed. Agreed.
00:52:24.600 | I think if one were to hire an outstanding tax advisor or tax accountant, you get
00:52:30.920 | 90% of the value of what you get from a wealth manager at a tiny fraction of the
00:52:36.600 | fee. You get all the handholding and all the sophistication without having to pay
00:52:43.360 | 1%.
00:52:44.120 | Yeah, I think the same thing goes with estate planning.
00:52:47.480 | I've talked to plenty of financial advisors that say, oh, we'll help you with
00:52:50.400 | your estate planning.
00:52:51.720 | And the funny thing is one of them, most of them don't actually do it.
00:52:54.520 | They'll just help find the person, which you could very well do on your own.
00:52:58.080 | But the cost of estate planning is like a one time few thousand dollars, update it
00:53:04.120 | maybe the next time you have a kid or something.
00:53:06.600 | But other than that, there's no reason to pay an ongoing fee for something like
00:53:10.520 | that.
00:53:10.720 | And the estate planner who works for the private wealth manager can't be anywhere
00:53:15.080 | near as good as the one who's independent because the one who's independent is
00:53:18.920 | going to make a lot more money.
00:53:20.600 | So it's an intelligence test working with the estate planner who works for the
00:53:25.080 | private wealth management firm.
00:53:26.560 | I never understand that either.
00:53:28.080 | Yeah, wow.
00:53:29.760 | So, OK, so I feel like we touched on a lot of different investing topics.
00:53:34.000 | The one thing that I also want to do is deviate kind of wildly from investing and
00:53:39.440 | ask for your thoughts on a few things that you've been fortunate to share with me
00:53:43.080 | before, but that I thought are really valuable lessons I've learned from you.
00:53:47.160 | One is all about negotiating.
00:53:49.720 | I've had the the pleasure of working for you when negotiating and then the
00:53:54.200 | alternative of working against you and negotiating.
00:53:56.520 | I think you got the better of me, Chris.
00:53:58.520 | But I think I think you have a strategy that is rare and I'd love you to share it
00:54:05.320 | a little bit about it.
00:54:06.040 | Well, it's one that I learned from my partner, Bruce Stanley, who's had the
00:54:10.400 | biggest impact on me professionally.
00:54:12.800 | He's the best venture capitalist I ever met and the best influencer I've ever
00:54:19.200 | met, not influencer in the Instagram context, but influencer in the context of
00:54:24.280 | ability to influence one's decision.
00:54:27.320 | Bruce is a really big believer in giving trust to get trust.
00:54:33.040 | And the analogy that I like to use to describe his strategy is you put the
00:54:38.880 | gun in the other person's hand.
00:54:40.600 | If they fire, you don't work with them.
00:54:44.960 | So when Bruce would negotiate with entrepreneurs, like if I were negotiating
00:54:50.600 | a deal with you, Chris, I would say, what do you think is the fair value?
00:54:54.200 | You just tell me and I'll do it.
00:54:55.880 | Now, Bruce knew what the approximate range of fair was.
00:55:01.600 | Most human beings don't want to be thought of as taking advantage.
00:55:08.560 | So many of them will actually ask for something that's slightly below average.
00:55:15.080 | Or maybe they might ask for something that's slightly above average.
00:55:21.520 | A very small percentage of human beings will ask for something
00:55:26.120 | well in excess of average.
00:55:28.120 | And if they do, that's like firing the gun.
00:55:31.120 | So you just don't work with them because you know that they're going to try to
00:55:34.160 | take advantage every step of the way.
00:55:37.240 | And that way Bruce slept well at night.
00:55:39.200 | He developed an unbelievable reputation among entrepreneurs as someone who was
00:55:43.440 | phenomenal to work with and everything seemed to work out well.
00:55:47.040 | So I consider things like that, just total great hacks that help you operate
00:55:54.840 | your life in a more effective way and, and help you with success.
00:55:58.280 | Are there other, either kind of like ways to operate in life or business
00:56:02.200 | that you've picked up that you think are kind of parting things to share?
00:56:05.800 | I think the biggest thing that I have to share is always try to be Pareto optimal.
00:56:11.360 | And by that, I mean you try to figure out what's the 20% that drives 80% of the value.
00:56:19.640 | The Pareto optimal is named for Vilfredo Pareto, a mathematician in the, I think
00:56:27.120 | 1880s in Italy, who came up with perhaps the most compelling rule of nature ever
00:56:34.520 | to be discovered, and that is the 80/20 rule that in almost everything, there's
00:56:39.560 | an 80/20, 80% of the wealth is held by 20% of the people, 80% of the contributions
00:56:46.560 | in a community are made by 20% of the people.
00:56:49.320 | There's 80/20 in absolutely everything.
00:56:51.840 | And I think it's an amazing proxy for judgment.
00:56:55.160 | People who apply the Pareto rule have much, much better judgment.
00:57:00.240 | Figure out everything is an equal.
00:57:03.520 | There are certain things you can do that are far more impactful than others.
00:57:07.080 | Figure out the most impactful things and only focus your efforts on those things
00:57:12.400 | and let all other stuff just happen.
00:57:15.320 | Cause it's not going to make much of a difference.
00:57:17.880 | Yep.
00:57:19.600 | I've tried my best.
00:57:20.800 | I think one of the things that many of the listeners here will, will share
00:57:24.560 | with me is, you know, a desire for optimization often feels hard to stop.
00:57:29.920 | And the final advice I have for them is instead of optimizing the last 20%
00:57:35.840 | of one part of your life, try to optimize the first 80% of another.
00:57:39.840 | That's phenomenal advice.
00:57:42.760 | And so if you've maxed out your, your travel hacking and your
00:57:46.160 | credit cards, look at investing.
00:57:47.960 | If you've maxed out investing, look at savings or look at your
00:57:50.720 | relationship and only come to the 20% when you've hit the 80% on everything.
00:57:55.760 | And if you've hit the 80% on everything, then just congratulate yourself.
00:57:59.680 | Cause that, that happens very rarely.
00:58:01.400 | Now there's one other thing that relates to the conversation we had about taxes.
00:58:06.080 | And that is, uh, interestingly, I do not try to minimize taxes wherever I can.
00:58:14.920 | Let me repeat that.
00:58:17.480 | I don't always try to minimize my taxes because there is typically a trade
00:58:22.760 | off between tax savings and liquidity.
00:58:26.560 | The more you're willing to lock up your money, the more tax savings
00:58:30.800 | one is typically able to generate.
00:58:33.880 | I find that liquidity is undervalued that having money available when you
00:58:41.600 | need it is really, really important has been for me, and so I will give up tax
00:58:50.480 | savings in order to have more liquidity.
00:58:54.640 | And that's something that runs counter to the hacks that you propose to people.
00:59:00.840 | I just want people to consider whether or not it's going to lock up your money.
00:59:06.280 | And if it is, is that a good idea?
00:59:09.040 | A great example of what I think is terrible advice for people who know
00:59:16.000 | how to save is maxing out your 401k.
00:59:20.840 | Most pundits will recommend that you max out your 401k.
00:59:26.640 | I think that is horrible advice because you cannot use the money in
00:59:32.000 | your 401k for anything until you retire.
00:59:35.400 | So if you want to fund your kid's education, you can't access it.
00:59:40.640 | If you want to buy a home, you can't access it.
00:59:42.960 | It's a really bad idea.
00:59:46.200 | Now, it's great to get those tax savings from the 401k, but I don't think those
00:59:51.520 | tax savings are worth the loss of liquidity.
00:59:54.360 | So my recommendation to people is only use your 401k up to your employer match.
01:00:01.120 | If they're not going to match, put it into an IRA because at least you can
01:00:05.320 | borrow from an IRA and use that money.
01:00:09.600 | So that's something that's really counterintuitive that
01:00:14.440 | most people don't consider.
01:00:15.880 | And I think that the reason that pundits give this advice is that the
01:00:19.960 | vast majority of Americans literally don't know how to save.
01:00:24.320 | So the only way you can get them to save is to force them to do so by
01:00:29.560 | garnishing their paycheck through a 401k contribution, which is why I started out
01:00:35.560 | this advice by saying, if you know how to save, then maxing out your
01:00:40.320 | 401k is a really bad idea.
01:00:42.960 | Is there a point at which if someone, let's say, knows how to save, has a
01:00:48.840 | decent amount of cash saved up for emergencies that you think it could make sense?
01:00:54.280 | It depends how much money you think you're likely to need in the future.
01:00:58.120 | And are there things you think people commonly don't realize they
01:01:02.880 | might need liquidity for?
01:01:04.200 | Down payments on a home, especially if you live in a high cost of living area.
01:01:10.360 | I mean, if you live in California or New York or major metropolitan areas, you
01:01:15.560 | need a lot of money to make a down payment and you need a lot of money
01:01:20.280 | to pay for your kid's college.
01:01:21.760 | What's your stance on a 529 then?
01:01:26.280 | It's a similar type of vehicle to a 401k from a tax advantage standpoint, but with
01:01:32.640 | kind of very restrictive rules on how you use it.
01:01:34.840 | But you can use it well before you retire.
01:01:40.080 | So I think it's a better product in that you have access to it sooner and there's
01:01:46.360 | more flexibility that I guess it can be used for private school if you want, but
01:01:51.560 | it's locked up for 18 years versus potentially 40 years.
01:01:57.000 | There are still challenges associated with it, but I don't
01:01:59.680 | think it's as bad as a 401k.
01:02:01.480 | You said earlier that contrarian opinions are often valuable and hard to find.
01:02:07.760 | So I think that this is one of the more contrarian things in personal finance
01:02:12.160 | that I know you've shared with me and has made me rethink whether I'm
01:02:15.960 | valuing liquidity appropriately.
01:02:17.960 | Boy, most people don't value it until they need it.
01:02:23.440 | Yeah.
01:02:24.440 | And then, then you're forced to pay huge penalties.
01:02:27.800 | Huge.
01:02:29.160 | And so, yeah, I think it's something to think about.
01:02:32.560 | And, and I think the, the number one thing that I'm sure we both agree is that if
01:02:36.400 | you aren't leaving aside enough money for emergencies, that, that should be
01:02:40.440 | priority one.
01:02:41.160 | Absolutely.
01:02:42.560 | Absolutely.
01:02:43.840 | Well, thank you so much for being here.
01:02:46.320 | Before we go, where should people find you and Wealthfront if they're interested?
01:02:50.280 | Well, you can learn a lot more about Wealthfront at wealthfront.com.
01:02:57.400 | We have an Instagram account.
01:02:59.560 | You can follow us on Twitter.
01:03:01.360 | If you want to follow me on Twitter, it's A Rackleff, A R-A-C-H-L-E-F-F as in Frank.
01:03:08.640 | And if you are thinking about opening a Wealthfront account, if you go to
01:03:16.880 | wealthfront.com/andy, you'll get a special offer of getting the first $5,000 you
01:03:25.680 | invest managed for free, and for everyone you invite, you and the invitee will get
01:03:32.320 | an additional $5,000 managed for free.
01:03:35.520 | So you can get a lot of money managed for free that way as well.
01:03:38.480 | Great.
01:03:39.600 | Everyone here loves a deal.
01:03:40.920 | So thanks for sharing that.
01:03:41.960 | And thanks for being here.
01:03:42.840 | My pleasure, Chris.
01:03:44.560 | That was fantastic.
01:03:49.480 | I really have learned so much from Andy in the past few years, and I hope you
01:03:53.000 | learned a few things from him today as well.
01:03:55.080 | Next week, I'm going to be doing a solo episode from all the great questions and
01:03:58.440 | hacks you all have shared.
01:03:59.480 | I'm really looking forward to that one.
01:04:01.320 | If you have anything you want to share, whether it's a question, a hack, or you
01:04:04.920 | just want to say hi, I love hearing from listeners.
01:04:07.360 | So please email me, chris@allthehacks.com or @hutchins on Twitter.
01:04:12.120 | That's it for today.
01:04:13.360 | See you next time.
01:04:14.240 | I want to tell you about another podcast I love that goes deep on all things money.
01:04:29.320 | That means everything from money hacks to wealth building to early retirement.
01:04:33.080 | It's called the Personal Finance Podcast, and it's much more about building
01:04:37.280 | generational wealth and spending your money on the things you value than it is
01:04:41.160 | about clipping coupons to save a dollar.
01:04:43.640 | It's hosted by my good friend, Andrew, who truly believes that everyone in this
01:04:47.520 | world can build wealth and his passion and excitement are what make this show so
01:04:51.840 | entertaining.
01:04:52.520 | I know because I was a guest on the show in December, 2022, but recently I listened
01:04:58.080 | to an episode where Andrew shared 16 money stats that will blow your mind.
01:05:02.200 | And it was so crazy to learn things like 35% of millennials are not participating
01:05:07.160 | in their employer's retirement plan.
01:05:08.800 | And that's just one of the many fascinating stats he shared.
01:05:12.720 | The Personal Finance Podcast has something for everyone.
01:05:15.400 | It's filled with so many tips and tactics and hacks to help you get better with your
01:05:19.280 | money and grow your wealth.
01:05:20.640 | So I highly recommend you check it out.
01:05:22.800 | Just search for the Personal Finance Podcast on Apple Podcasts, Spotify, or
01:05:27.160 | wherever you listen to podcasts and enjoy.