back to index11 Investing Lessons They Don’t Want You to Know (ft. Ben Carlson)
Chapters
0:0 Introduction
0:43 Experience Is Not the Same as Expertise in Investing
1:41 Intelligence Doesn’t Guarantee Investment Success
4:12 No One Lives Life in the Long Term
6:16 Experiences Shape Your Perception of Risk
9:8 The Biggest Risks Are Always the Same yet Different
12:49 Optimism Should Be Your Default
17:30 There Is No Such Thing as a Perfect Portfolio
20:13 Overthinking Can Be Just as Debilitating as Not Thinking at All
22:24 How to Think About a Simple Portfolio with International Exposure
24:25 Less Is More
28:58 Ways to Reduce Overthinking
30:59 Tax Loss Harvesting vs. Direct Indexing
35:42 Why Ben Wrote a Post on 20 Money Lessons
36:56 There Is a Big Difference Between Rich and Wealthy
40:43 The Reason Ben and Chris Invested in Holiday Homes
46:11 What's a Reasonable Amount to Save?
49:29 You Probably Need Less Money Than You Think for Retirement
55:12 The Final Biggest Takeaway
00:00:00.000 |
What if you could distill 20 years of investing wisdom 00:00:05.280 |
Today, we are unpacking critical insights that can help you build 00:00:08.560 |
a more resilient portfolio and make smarter financial decisions. 00:00:14.000 |
I know plenty of investors who have been at this game for decades 00:00:19.680 |
We'll explore why even seasoned investors still struggle with risk 00:00:23.360 |
and how to create a strategy that gives you confidence in any market. 00:00:28.480 |
these lessons will transform how you think about investing 00:00:32.960 |
I'm Chris Hutchins, and if you enjoy this video, 00:00:36.160 |
Or if you have a question, please leave it in the comments. 00:00:38.480 |
And if you want to keep upgrading your life, money, and travel, 00:00:42.160 |
Ben, you said that experience is not the same as expertise in investing. 00:00:49.680 |
I think I just became annoyed at all the pitch books 00:00:52.320 |
I was looking at early on in my investing career 00:00:54.560 |
where it said we have 134 years of combined experience. 00:00:57.280 |
And if that's enough to be like, okay, we'll give you our money, sure. 00:01:03.120 |
of just because you've been in this game for a long time 00:01:05.120 |
doesn't necessarily mean that you're an expert on something. 00:01:07.120 |
It doesn't give you the just because you've been doing it for a long time 00:01:13.040 |
And my whole point is that, yes, experience helps 00:01:18.400 |
and you live through a lot of these different market cycles, 00:01:21.680 |
But I know plenty of investors who have been at this game for decades 00:01:26.240 |
or they change their investing strategy all the time 00:01:28.720 |
and make the same mistakes that you would think 00:01:31.200 |
some noob just starting out investing would make. 00:01:34.080 |
So it's really more about having a process that you'll stick to. 00:01:36.880 |
That matters more than how many years you've been doing this. 00:01:49.760 |
Right. Well, there's the old Buffett quote that like, 00:01:52.160 |
"Investing is not a game where the guy with 160 IQ 00:02:02.240 |
and that emotional intelligence is the piece. 00:02:04.160 |
Because when I first started in the investing world 00:02:11.600 |
and the people who sounded like they knew what they were talking about, 00:02:13.840 |
the people who made predictions all the time. 00:02:15.520 |
And they were very certain in everything that they were saying. 00:02:18.000 |
And I thought, "Oh, man, that's where I want to be someday. 00:02:19.920 |
I want to be in that person's seat where I can have complete certainty 00:02:23.360 |
over what's going to happen in the economy and the markets." 00:02:26.800 |
the more I realized like, "Oh, wait a minute. 00:02:28.960 |
They don't really know what's going to happen." 00:02:31.360 |
It's just that people want to have certainty in their life 00:02:36.320 |
especially when it comes to investing in the markets and the economy. 00:02:39.280 |
Like no one really knows what's going to happen. 00:02:41.440 |
And I always really was attracted to the people 00:02:49.840 |
So those are the people that really, I thought, 00:02:55.280 |
"This part of the game is too hard for me to do. 00:03:01.280 |
I got a call from a friend yesterday who said, 00:03:06.560 |
And I couldn't help but be like, "Am I missing out here?" 00:03:10.080 |
Like this person knows what they're talking about, right? 00:03:22.080 |
there are no always or nevers when it comes to the markets. 00:03:34.560 |
Investing would be a lot easier if that was the case. 00:03:37.520 |
But I think you still have to just think in more 00:03:40.560 |
So that person who says AMD is going to be the winner, 00:03:43.520 |
they should probably put some sort of, you know, 00:03:50.000 |
Here's how I'm going to size my position accordingly. 00:03:56.880 |
So I think that's the way you think about these things 00:04:00.240 |
and how willing you're able to make a big bet on something 00:04:06.160 |
"Yes, this is it. 100%. This is what we're doing." 00:04:09.280 |
And I feel like it's hard to ever get to that point 00:04:14.160 |
Number three was that no one lives life in the long term. 00:04:18.480 |
because it almost doesn't matter what your bet is 00:04:23.440 |
Why is it important for people to realize that 00:04:26.800 |
while they might be investing in the long term, 00:04:30.160 |
I saw that part of that quote from Daniel Kahneman, 00:04:33.520 |
And he spent his whole career studying human foibles 00:04:42.880 |
"Why can't more people stay the course for the long run?" 00:04:46.640 |
He said, "The long run is not where life is lived, right? 00:04:51.680 |
And I think your experience when you were born, 00:04:59.120 |
all that stuff really impacts the way that you save 00:05:03.440 |
We were talking to a client a couple months ago 00:05:20.480 |
Now he's making a very good living as a Wall Street trader. 00:05:25.760 |
He said, "Listen, going through what I went through at Lehman 00:05:28.400 |
has changed my entire perception of risk forever. 00:05:31.120 |
I'm just not willing to take as much risk as I should be 00:05:33.600 |
based on how much money we have and how much money I make." 00:05:35.680 |
And that was actually, I thought, a wise decision 00:05:40.080 |
"Listen, this person is making a lot of money 00:05:46.960 |
They have the ability to take a lot of risk." 00:05:53.920 |
I can't physically or mentally make myself do that. 00:05:57.760 |
So I wanna take a more conservative route with my portfolio 00:06:05.040 |
but I have this mental block that's holding me back." 00:06:08.800 |
And actually, I think that's the right decision 00:06:18.080 |
feeling like they have a grasp on their risk tolerance, 00:06:20.320 |
should they be checking in as they get older, 00:06:29.280 |
is the difference between dollars and percentages. 00:06:32.560 |
So if you're just starting out and you're young 00:06:34.000 |
and you have $10,000 in your Robinhood account 00:06:39.280 |
It stings, but you have a whole lifetime ahead of you 00:06:41.440 |
of saving and investing that you can make up for that. 00:06:43.760 |
Now, let's say you get to $100,000 and you lose 10%, 00:06:48.640 |
And you say, "Well, that's more money than I lost 00:07:00.720 |
and realizing that the more money you have saved, 00:07:03.120 |
the harder it can be to see those percentages 00:07:09.360 |
So I think that's a hurdle sometimes for people. 00:07:20.080 |
the bear markets can sting when you get towards middle age, 00:07:24.560 |
Even if you know that eventually the stock market 00:07:26.880 |
is going to come back, it's a lot more painful 00:07:30.560 |
to view those dollars just evaporate like that. 00:07:33.200 |
Yeah, I was just looking for the sake of an argument 00:07:35.920 |
I was trying to make at the average S&P return. 00:07:38.560 |
And it seems like over, I don't know, 50, 60, 70 years, 00:07:41.440 |
it's been over 10%, but obviously in short periods of time, 00:07:47.040 |
How do you tell people who are here for the long run? 00:07:52.960 |
Like they know that it's 10%, they're okay with 10%, 00:07:59.680 |
Well, I think perfect is the enemy of good in a lot of ways. 00:08:06.320 |
'cause you could make a blanket statement saying, 00:08:08.800 |
"Listen, all young people should have all their money, 00:08:20.560 |
to sleep at night if they know that their portfolio 00:08:26.160 |
I think a lot of people in the first decade of this century 00:08:41.840 |
and Charlie Munger quotes that you can listen to, 00:08:43.360 |
but hey, if you can't stand a 50% correction, 00:08:45.680 |
you shouldn't be in stock, that's what they say. 00:08:47.440 |
And for some people, that just means, I don't know, 00:08:55.680 |
That may not be optimal based on the spreadsheet 00:09:00.720 |
and all these things, but if you have to do that 00:09:13.760 |
It always works out, but will it work out this time? 00:09:23.200 |
where you think, geez, when stocks fell in the past, 00:09:29.440 |
And sometimes these things do last longer than others. 00:09:32.240 |
There are times when stocks go nowhere for a decade. 00:09:37.760 |
The total return to the S&P was negative 10%. 00:09:47.840 |
some people might think a decade is a long time, 00:10:11.520 |
or I don't know, however you want to be able to survive. 00:10:13.520 |
'Cause I think the whole point of the long-term 00:10:37.920 |
And I've been reading stocks for the long run 00:10:47.840 |
But I also saw all these people in the industry 00:10:50.400 |
I had a colleague who was one of the smartest people I know. 00:10:56.400 |
he told me I'm turning off all my 401k purchases 00:10:58.960 |
in the stock market and I'm going to money market funds. 00:11:06.320 |
But he's also one of the smartest people that I know. 00:11:12.320 |
And I mean, I'm never going to make better purchases 00:11:22.080 |
But it's a lot easier to say in the rear view mirror, 00:11:26.400 |
Because at the time, people were freaked out. 00:11:28.880 |
And so I think you just have to have some sort of process 00:11:38.560 |
you actually have a plan instead of trying to make a plan 00:11:43.920 |
And understand the needs you might have for the money, right? 00:11:47.760 |
If you really don't need this money for 30 years, 00:11:56.080 |
even if you have a 10-year dry spell, it's okay. 00:11:58.640 |
I do have a sort of rule of thumb, personally. 00:12:03.200 |
but I never look at the balances of my investment accounts 00:12:09.840 |
I know in my head, based on this percentage loss, 00:12:19.040 |
But I think you need some sort of out of sight, out of mind. 00:12:24.400 |
If you are going to put a down payment on a house in five years, 00:12:29.200 |
you shouldn't have it all in the stock market. 00:12:30.640 |
Because the stock market, as we've seen these past few years, 00:12:38.240 |
If you were holding that money in the stock market 00:12:50.080 |
if you weren't around for the great financial crisis, 00:12:52.640 |
you probably were, if you're listening to this, 00:12:58.880 |
There were people saying the exact same thing. 00:13:04.240 |
I was like, "Isn't this a good buying opportunity?" 00:13:10.480 |
And sure enough, it was a very, very short bear market. 00:13:14.800 |
But it didn't feel like that was obvious at the time. 00:13:19.760 |
Which I guess brings me to this lesson you had, 00:13:23.600 |
which was that optimism should be your default. 00:13:28.960 |
My whole thinking is if you're pessimistic about the future, 00:13:34.240 |
Investing itself is delaying gratification now 00:13:38.640 |
so you can have better results in the future. 00:13:48.080 |
And I think the internet has made more people cynical 00:13:59.440 |
Otherwise, what are you investing in the first place? 00:14:01.440 |
'Cause the people who aren't very optimistic, 00:14:02.720 |
they put all their money in gold bars or cash 00:14:13.040 |
If you want your future to be better than the present, 00:14:16.400 |
you have to put your money to work and take risk in some form. 00:14:19.200 |
And I think having an optimistic view about the future 00:14:21.520 |
can help you stay invested even during those tough times 00:14:25.120 |
when it feels like pessimism is ruling the day. 00:14:28.080 |
You mentioned earlier, if you have these upcoming events, 00:14:32.720 |
I think one silver lining for people living right now 00:14:42.640 |
We've had years where cash would pay nothing. 00:14:45.200 |
And the market is really your source of return. 00:14:54.800 |
about not investing your money for the short run 00:14:57.360 |
because you can lock your money up for 2 years right now 00:15:06.560 |
And I've always had something of a barbell portfolio. 00:15:10.320 |
On the one hand, I take a lot of risk and equities over here. 00:15:13.280 |
And in all my long-term accounts, it's 100% equities. 00:15:15.840 |
But then over here in my more liquid bucket is cash savings. 00:15:19.280 |
And that's for any sort of rainy day fund or vacations 00:15:30.960 |
even when rates were zero for all those years, right? 00:15:43.360 |
And now that I'm actually earning something on that, 00:15:55.360 |
I think cash can become a gateway drug to market timing. 00:15:59.520 |
So I think you really have to make a definition 00:16:04.800 |
of this cash is part of my overall asset allocation, 00:16:15.200 |
"Well, I'm just going to keep all my money there 00:16:19.760 |
So I think you have to be a little careful there 00:16:21.520 |
and just understand what the purpose of that bucket is for, 00:16:28.720 |
- Yeah, and you probably know off the top of your head, 00:16:31.680 |
this year, if you went into the beginning of 2024 saying, 00:16:42.800 |
- Yeah, the U.S. stock market's up almost 20%, 00:17:01.600 |
And the stock market takes off, then what do you do? 00:17:05.200 |
What if it takes a long time for the downturn to happen? 00:17:13.440 |
And it's like, "All right, buying opportunity. 00:17:19.920 |
So I think you have to have a plan of attack with that, 00:17:22.400 |
whether that cash is ever going to be invested, 00:17:24.960 |
or if it's not, I think you can't just get stuck 00:17:28.320 |
when a good time to put it back in the market is. 00:17:29.920 |
- It's funny because one of the reasons I think, 00:17:38.400 |
trying to pick a portfolio comes to one of your lessons, 00:17:42.400 |
which is there's just no such thing as a perfect portfolio. 00:17:49.520 |
And it's probably not the best strategy in the world. 00:17:53.760 |
to optimize that and make these better rules. 00:17:58.000 |
or when this trend line is broken or whatever it is. 00:18:02.000 |
out of every paycheck or every week on a weekly basis, 00:18:04.320 |
or a monthly basis, or quarterly, wherever it is, 00:18:12.880 |
And unfortunately, they had sold some of their stocks 00:18:22.400 |
And they came to us at the end of 2021 and said, 00:18:30.000 |
Because on average, 75% of the time over a one-year basis, 00:18:36.000 |
So that's pretty good odds that it's going to be up again 00:18:38.640 |
So the numbers would tell you, put that money to work today 00:18:44.080 |
And most of the time, you're going to have better results. 00:18:46.320 |
But people think through this regret framework, right? 00:18:54.880 |
So dollar cost averaging from a psychological perspective 00:18:58.080 |
And with this client, we invested in dribs and drabs. 00:19:00.560 |
It was like the 15th of every month for a whole year. 00:19:03.600 |
And the market was very volatile through that whole period. 00:19:09.120 |
But throughout that bear market, we have wild ups and downs, 00:19:15.280 |
We said, let's just follow it, come hell or high water. 00:19:17.760 |
And this is the plan we're going to stick to. 00:19:19.760 |
But six months in, well, should we put more in now? 00:19:25.280 |
And we said, no, this is the plan we set out to do. 00:19:27.360 |
Regardless of what the market's going to do, let's follow it. 00:19:34.080 |
And looked back and said, this was the right decision. 00:19:37.440 |
But we also told them, listen, this was the right decision 00:19:40.720 |
regardless of what happened to the market, right? 00:19:42.640 |
Because the market could have taken off on day one. 00:19:45.120 |
And you would look back and said, why did I do that? 00:19:46.800 |
And the whole point was, you made the decision ahead of time. 00:19:49.280 |
And you know you can't predict where the market's going to go. 00:19:54.000 |
And that's the problem a lot of investors have, 00:19:56.160 |
is even if they have a plan, it's really hard to follow it. 00:20:00.400 |
Which is why I think technology and automation 00:20:03.360 |
is one of the giant leaps forward for individuals. 00:20:05.760 |
Because you can just make a good decision ahead of time, 00:20:12.640 |
Yeah, I think one of the most valuable lessons I've learned, 00:20:16.160 |
and it's hard to even stick to, even though I know it well, 00:20:19.120 |
is evaluating decisions on the information you had when you made them. 00:20:23.520 |
I remember there was a point in time where there was this kind of 00:20:27.840 |
but it required being out of the market for like three months. 00:20:30.560 |
And it just happened that those three months were an election. 00:20:34.000 |
And I was like, I don't know what's going to happen. 00:20:36.160 |
But I know that unless the market goes up 10% in three months, 00:20:43.840 |
And statistically, the market's probably not going to do that in three months. 00:20:49.200 |
And it went up about on par where it was a breakeven decision. 00:20:53.520 |
And so I was like, gosh, I went through all these hoops 00:20:58.880 |
I didn't know what the market was going to do. 00:21:04.480 |
"Hey, if I had the information I had at the time, 00:21:08.880 |
then hopefully you could stop overthinking it. 00:21:12.160 |
And that's true in business or life or investing, right? 00:21:15.520 |
And that's why I think it's important for a lot of, 00:21:17.200 |
especially if you're prone to making mistakes. 00:21:21.440 |
but a lot of times I think performing that like pre-mortem, 00:21:25.760 |
where you kind of write down some of your reasons 00:21:40.480 |
because we don't know what's going to happen from here. 00:21:42.000 |
There's all these different paths and tree branches 00:21:48.160 |
that we're making a consistent decision-making process 00:21:56.160 |
And I think for people that are prone to investment mistakes, 00:22:00.000 |
and then regardless of which way the market goes from there, 00:22:05.120 |
"Listen, I use all the information I had at the time. 00:22:13.520 |
in terms of getting from the short-term to the long-term 00:22:16.560 |
is just making good decisions over and over again, 00:22:21.360 |
- The decision and the outcome are very different. 00:22:24.080 |
- We talked about there's no perfect portfolio 00:22:29.920 |
There's the whole rest of the world you can invest in. 00:22:32.160 |
How do you think about having a simple portfolio, 00:22:41.360 |
because the US stock market is the only game in town 00:22:46.160 |
And the US now makes up 60-65% of the global stock market, 00:22:52.960 |
if you look at a pie chart of the US over time, 00:22:55.280 |
it's like Pac-Man eating the rest of the globe, right? 00:23:01.680 |
So it basically flip-flopped from 35 to 60-65. 00:23:18.560 |
the stock market here more than other countries. 00:23:24.960 |
of the previous 40 or 50 years were essentially the same. 00:23:32.800 |
And there were cycles of outperformance for each. 00:23:42.720 |
And you had these periods where they would flip-flop. 00:23:54.400 |
My whole thing is I don't like to go to extremes. 00:23:58.480 |
And so I think the value of international investing 00:24:02.560 |
is just that there's going to be a period in time 00:24:08.800 |
and stocks in other sectors outside of the US do better. 00:24:12.480 |
And I think it just takes away the concentration risk 00:24:25.680 |
So you had this lesson that you ended your post on 00:24:52.320 |
And all of these endowments were chasing Yale 00:24:58.240 |
and Princeton because they had these extremely 00:25:01.440 |
And they were really hard to run operationally 00:25:05.360 |
and they involved hedge funds and private equity 00:25:12.640 |
And so it was a very exciting type of portfolio. 00:25:28.400 |
They had experts in each of these asset classes 00:25:46.800 |
If you're a salesperson in the investing world, 00:25:53.040 |
because it requires you to actually understand 00:25:58.320 |
and then kind of just get out of your own way. 00:26:02.080 |
you feel like your hands are on a steering wheel 00:26:31.040 |
Like when I'm invested mostly in index funds, 00:26:40.400 |
or even a strategy of a handful of individual stocks, 00:26:43.760 |
it's way harder to look at yourself in the mirror 00:26:47.040 |
well, am I rebalancing into the pain here or not? 00:26:52.800 |
It's easy to hold a strategy when it's doing well. 00:27:10.480 |
- Yeah, I remember when we had the crash in the pandemic, 00:27:18.000 |
in a risk parity fund that Wealthfront had launched. 00:27:20.400 |
And I was like, I remember best I can explain risk parity, 00:27:41.120 |
"Was it gonna go back up if the market recovers?" 00:27:43.360 |
And I was like, "I don't know how to answer this." 00:27:46.160 |
Like when something really levered goes down, 00:27:50.880 |
And the solution for me was like, just get out. 00:27:54.080 |
fortunately, there'd been enough tax loss harvesting 00:28:06.080 |
just being able to explain why everything is what it is 00:28:10.960 |
Because I think I read that risk parity white paper 00:28:18.560 |
Yeah, setting expectations is a big part of it. 00:28:22.240 |
on average, once every year, year and a half, 00:28:25.280 |
you're gonna experience a 10% drawdown probably. 00:28:32.000 |
you're probably gonna experience some sort of crash. 00:28:36.880 |
And it doesn't run on a schedule like the trains, 00:28:40.080 |
but you can build that into your expectations 00:28:44.320 |
I'm not just gonna hope that they're gonna go away. 00:28:46.240 |
And I think that can help set your asset allocation 00:29:03.040 |
I mean, you know, I have an optimizer's personality. 00:29:12.800 |
and just know that even they go through these periods 00:29:20.240 |
in the perfect portfolio is with hindsight, right? 00:29:24.240 |
And everyone's really good at fighting the last war 00:29:37.920 |
I was getting pitched all these black swan funds, right? 00:29:44.480 |
And it's funny, all of those hedge tip strategies 00:29:48.000 |
bring in all their money after the crash already happened. 00:30:00.400 |
fighting the last war mentality can help understanding 00:30:05.200 |
And I think if you get down to the level of splitting hairs, 00:30:20.240 |
explains something like 90, 95% of it, right? 00:30:26.720 |
Just those right away, just that asset allocation, 00:30:32.000 |
If you're getting down into the minutia of geez, 00:30:34.480 |
small cap value makes up 2.5% of my portfolio 00:30:39.120 |
Those little levers aren't gonna make as big of a change. 00:30:42.880 |
So I think just getting the big things right, 00:30:47.360 |
how much am I going to have in risk assets like stocks? 00:30:54.240 |
And then optimizing from there doesn't matter as much. 00:30:58.720 |
It's funny, I remember when I was trying to understand 00:31:01.840 |
the nuance of tax loss harvesting and direct indexing. 00:31:06.720 |
we've talked a lot about tax loss harvesting, 00:31:08.160 |
but direct indexing is instead of buying the index, 00:31:11.120 |
you buy all the individual stocks in the index. 00:31:38.000 |
if you've got an index fund in the S&P and it goes down, 00:31:44.080 |
But if you're holding a stock and it goes down 00:32:02.800 |
"for the period you need until you can rebuy it." 00:32:04.960 |
And I was like, "Well, then you're not in the stock." 00:32:07.120 |
And they're like, "Oh yeah, if you take the S&P return 00:32:10.080 |
"and you take any individual stock out of it, 00:32:12.080 |
"and maybe NVIDIA and Microsoft and the top 10, 00:32:15.360 |
"let's leave those aside, it doesn't matter." 00:32:26.560 |
and it'll have almost no impact on the return. 00:32:36.400 |
that it doesn't really matter what 0.1% of my portfolio, 00:32:46.240 |
And it really helped me stop trying to perfect things. 00:33:06.080 |
And full disclosure on the direct indexing thing, 00:33:10.000 |
And it does, getting back to the simple versus complex thing, 00:33:14.720 |
and it's much harder to run 'cause as you pointed out, 00:33:30.240 |
And those kinds of strategies require, we think, 00:33:36.480 |
and a tax person who understands your specific situation. 00:33:40.800 |
It's not something that you can just set and forget 00:33:46.480 |
and I got all these huge capital gains taxes, 00:33:50.080 |
So turn the dial way up for me for tax loss harvesting. 00:33:53.840 |
where you're trying to balance the investing side of things 00:33:58.480 |
that actually requires more handholding than you think 00:34:04.160 |
I think tax loss harvesting is super valuable 00:34:06.640 |
if you have gains to offset with your losses. 00:34:09.760 |
And if you don't, and you're earlier in your career 00:34:13.040 |
where you can only offset $3,000 of your income with losses. 00:34:17.200 |
If offsetting the taxes on $3,000 is meaningful 00:34:24.400 |
but you don't make that much money yet, great. 00:34:27.040 |
But if you're not making capital gains every year, 00:34:32.080 |
the losses aren't as valuable as they might seem. 00:34:38.320 |
thinking in terms of indexing versus stock selection, 00:34:48.720 |
it's up, I don't know, 80% of the time, right? 00:34:56.320 |
So there's like these tax loss harvesting opportunities, 00:35:03.440 |
your stock or a handful of stocks might be down, 00:35:09.040 |
is just a simpler, easier strategy than picking stocks, 00:35:14.320 |
Oh yeah, we've had this discussion a handful of times, 00:35:25.600 |
invest in individual stocks only as much as you need to, 00:35:38.400 |
you can actually put into it before getting into it, 00:35:43.840 |
that I think will spawn a really interesting conversation, 00:35:45.840 |
why did you write this post in the first place? 00:35:48.800 |
I think one of the reasons I love the market so much 00:35:50.800 |
is because it's a constant exercise in learning. 00:35:53.680 |
And I feel like I'm constantly learning new things, 00:35:56.800 |
even though I've been doing this for like 20 years. 00:36:10.880 |
as opposed to trying to provide this wisdom to other people, 00:36:13.360 |
because I need constant reminders of the things 00:36:15.680 |
that I need to do to stick it out for the long term. 00:36:17.600 |
And what do you think the impact of adopting these lessons 00:36:22.880 |
I think finances are such a big part of your life, 00:36:25.680 |
and it's causes stress and problems in marriages. 00:36:29.120 |
And I think having the ability to have a handle on them 00:36:39.120 |
And that's the whole thing with me with finances 00:36:41.120 |
is I don't want them to rule my life all the time. 00:36:44.160 |
I love this stuff, and I love paying attention to it. 00:36:46.240 |
I love writing about it and reading about it. 00:36:52.160 |
I wanna just make my life easier in that way. 00:37:08.480 |
impacting our lives a lot the last few years. 00:37:13.520 |
who are miserable because they work all the time 00:37:16.160 |
or their job takes them away from their family 00:37:18.720 |
or they work on a job that is kind of soul sucking 00:37:26.240 |
between looking at this number in my portfolio 00:37:30.160 |
and the number is the only thing that matters. 00:37:38.240 |
where you're more optimized than me probably, 00:37:45.280 |
Some combination of my upbringing and my parents 00:37:49.040 |
and then just personality traits that I was born with, 00:38:02.720 |
and 40 and 50 and 60, I planned it all out, right? 00:38:07.040 |
And as you age, I'm entering my mid forties here. 00:38:14.160 |
that can change how you view that saving stuff. 00:38:19.040 |
Some people have a problem spending too much money. 00:38:23.040 |
I've tried to bring my financial life more in balance 00:38:26.240 |
to think of a wealthy life more as enjoying some of it now 00:38:29.760 |
while still making sure future me is going to be set. 00:38:32.800 |
And I think there's a lot of things that change it. 00:38:50.480 |
And their whole thing was every kid who gets married, 00:38:55.360 |
they have to invite the whole group of college friends, 00:38:57.120 |
which was really fun having that conversation with my wife 00:38:59.440 |
or going through the wedding list on the tables. 00:39:02.880 |
we need like a 15 top for my dad and my dad's college friends. 00:39:08.160 |
But I've been seeing all these friends that I've known them my whole life. 00:39:12.240 |
They're part of our family from when I was young. 00:39:15.040 |
So many of them are having life-altering diseases. 00:39:18.960 |
And some of them have passed away early when they reach retirement age. 00:39:22.560 |
And luckily, knock on wood, my parents are very healthy. 00:39:27.360 |
And it changes your perspective on these things. 00:39:29.920 |
We've had clients in our wealth management firm 00:39:34.320 |
And they get to the point where it's retirement time. 00:39:39.440 |
right as they're about to finally enjoy their money. 00:39:42.800 |
So I think having those kind of experiences has shaped and changed me. 00:39:47.760 |
Because I think in a lot of ways, people think, 00:39:50.720 |
And it's never going to change in terms of the way you think about money." 00:39:56.400 |
in terms of how I think about the balance of spending now 00:40:01.360 |
And I'm not totally "Bill Perkins, die with zero." 00:40:04.320 |
But I think that mentality has seeped into a lot of what I do 00:40:14.080 |
And we were looking at our combo of our net worth and our savings rate. 00:40:17.680 |
And we usually had these goalposts where it's like, 00:40:24.320 |
And now we kind of look at saving too much as a bit of a mistake. 00:40:33.360 |
I understand the fortunate situation we're in 00:40:38.160 |
But there comes a point where it's just not the most important thing. 00:40:43.760 |
So I wrote a blog post recently where I looked at... 00:41:07.360 |
that we don't need to have that high of savings anymore. 00:41:09.840 |
Like once you hit a certain level, it's okay. 00:41:12.000 |
And I wanted to make a point of spending more. 00:41:14.080 |
And so the last couple of years, we have been traveling more. 00:41:18.000 |
And it's easy to spend money when you have kids, as you know. 00:41:23.040 |
And I still remember this conversation we had with a friend a few years ago. 00:41:37.440 |
And that kind of thinking really has changed my mentality. 00:41:45.520 |
And when they were about 1 year old, my wife and I realized 00:41:47.520 |
as much as we love to travel and take vacations, 00:41:50.880 |
it's really, really difficult to travel with twins and another kid 00:42:02.240 |
So at that point, we made a decision to buy a vacation home 00:42:08.400 |
And I could have run all the numbers of missed compound interest 00:42:14.720 |
if I would have just invested that money instead. 00:42:16.400 |
But it's easily one of the best investments we've made 00:42:19.120 |
because we've created so many memories with the kids. 00:42:23.040 |
And it forces us to be outside and do stuff and be away from screens. 00:42:27.440 |
And that kind of thing, I don't know, myself 10 years ago, 00:42:31.440 |
probably wouldn't be able to pull the trigger on that. 00:42:32.960 |
But knowing that I had kids and I wanted to create more 00:42:37.840 |
made it a little easier to make that decision. 00:42:40.240 |
Yeah, it's interesting because we did a similar thing, right? 00:42:47.280 |
And one of the challenges with it, which I think I didn't anticipate, 00:42:52.720 |
you have to share it with, in this case, 7 other people. 00:42:59.760 |
how different your schedule of life is once your kids go to school. 00:43:04.480 |
So my daughter starts pre-K next year and we got the schedule and I was like, 00:43:08.640 |
"Oh, so she's got summer, spring break, Thanksgiving, and Christmas. 00:43:12.640 |
And other than that, she's in school every day." 00:43:18.160 |
"Well, how do you get 6 or 7 weeks in your vacation home 00:43:21.920 |
if you have to share it with other people and you can only go twice in the summer?" 00:43:24.960 |
And so we're having a little bit of a struggle here because like you, 00:43:29.200 |
we just realized that when we get away for a week, 00:43:38.960 |
My daughter is trying to swim across the length of the pool. 00:43:44.160 |
And it's so much easier for me, I imagine also for you and other people, 00:43:50.240 |
to make this one-time purchase that then after the fact will just force you to use it. 00:44:01.040 |
I knew that optimally I should pay for every metro ride. 00:44:03.920 |
But I knew that if I just paid what was more for the unlimited metro ticket, 00:44:12.080 |
I would just never think about whether I was going out. 00:44:14.400 |
And this goes back to me being a saver and letting $2 metro rides change what I did. 00:44:18.880 |
But I just knew that sometimes making a decision 00:44:21.680 |
that might not be the financially best outcome 00:44:24.240 |
will force you to do a thing that would be otherwise difficult. 00:44:28.000 |
And I imagine both of us would have really struggled 00:44:31.360 |
to pay for a bunch of vacations every week during the summer, 00:44:37.360 |
as much as we would have spent time in a home that we owned, 00:44:44.240 |
which because yours is in Michigan was probably about the same cost. 00:44:49.840 |
So I wanted to enjoy the water and be out and stuff. 00:44:53.120 |
obviously, that's not something everyone can afford. 00:44:55.440 |
Especially now, we timed it pretty good and got in six years ago or so. 00:45:00.640 |
Like I value paying for my time more, I would advocate. 00:45:03.520 |
So I used to do all my lawn work myself to our house. 00:45:06.080 |
I used to go out and snowplow the driveway myself. 00:45:10.960 |
because as opposed to me spending an hour every weekend 00:45:17.280 |
now I realized, well, wait, I can spend time with my kids 00:45:20.320 |
So I think paying for time and convenience is a big help too, 00:45:23.440 |
if you want to have more time to do the things that you care about. 00:45:27.440 |
I think that's the big change that I've made. 00:45:30.800 |
And it's funny because my parents were completely the opposite. 00:45:38.240 |
But I also can see myself fighting against that 00:45:41.040 |
And there are still certain things that I will not spend money on. 00:45:46.320 |
I don't like going out and spending on fancy restaurants. 00:45:48.800 |
And I'm not degrading people who like to do that. 00:45:50.720 |
I think you just have to pick the things that you care about and prioritize them. 00:45:54.880 |
And then there can still be these other categories where you say, 00:45:56.640 |
"You know what? As much as I could spend money on that if I wanted to, 00:46:00.080 |
I don't need to. So I'm still okay cutting back on that area." 00:46:02.400 |
Yeah. Paula Pan has this podcast, "Afford Anything." 00:46:05.920 |
And she's like, "You can afford anything you want, just not everything." 00:46:08.720 |
It's like, you got to pick what you want to afford. 00:46:14.080 |
"I prefer to save a reasonable amount of money and enjoy the rest." 00:46:17.280 |
I think something a lot of people struggle with is what's a reasonable amount. 00:46:21.040 |
This is the hard part with retirement planning in general, 00:46:23.680 |
because there's so many variables that you getting back to the uncertainty part. 00:46:27.120 |
You don't know what inflation is going to be in the future, 00:46:28.960 |
what financial market returns are going to be, 00:46:32.240 |
how your income is going to change over time, 00:46:34.400 |
if any other life events are going to impact you. 00:46:37.200 |
So it's funny, when I started my job and I did this 00:46:40.640 |
linear extrapolation of compounding and saving and stuff, 00:46:44.080 |
I never could have thought about the different events that would happen in my life from 00:46:47.760 |
having kids to buying houses to all these things that happen 00:46:51.280 |
that throw off your plan for a period of time, right? 00:46:54.720 |
And you have this savings rate you think is going to be there forever, 00:46:57.200 |
but then you need to take those savings and use them for something 00:47:05.360 |
I would love to see everyone at least have a double digit savings rate. 00:47:08.080 |
That's a good, I think that's a good goal for most people 00:47:10.480 |
is just to have that as a good starting point. 00:47:20.160 |
So I think having a double digit percent is a good starting point. 00:47:25.040 |
And I think then you kind of turn the dials up 00:47:28.080 |
depending on how well things are going for you. 00:47:30.080 |
In personal finance, people always talk about lifestyle creep, right? 00:47:34.320 |
This is the biggest enemy is lifestyle creep. 00:47:36.480 |
And I think it's as you make more money and your career progresses, 00:47:39.760 |
I think you should introduce a little lifestyle creep, 00:47:44.720 |
So have it be a certain percentage of your income. 00:47:48.720 |
and you're still saving a similar percentage, 00:47:52.400 |
So your spending and your savings should both go up commensurately. 00:47:55.200 |
I think that's a good way to sort of give yourself some benefits 00:48:03.920 |
- Yeah, when I was trying to figure this out, 00:48:05.680 |
I went deep into kind of safe withdrawal rates, right? 00:48:08.640 |
We've all, you know, the 4% rule is out there. 00:48:10.960 |
And I actually had Karsten from early retirement now. 00:48:15.520 |
I don't know if you've read his blog on the podcast. 00:48:19.520 |
probably six books worth of blog posts on just safe withdrawal rates. 00:48:23.920 |
And I went in and tried to use his free template 00:48:29.680 |
to try to figure out where I was at for retirement. 00:48:33.440 |
I think there's kind of multiple levels of tools you can play with. 00:48:36.400 |
I think the two I love the most are Projection Lab 00:48:41.920 |
And I realized that the 4% rule was designed, 00:48:54.960 |
In his tool, you can actually optimize for a failure rate. 00:48:58.880 |
And I found myself optimizing for a failure rate of like 2% to 5%. 00:49:06.000 |
I've been fortunate to do a lot of financial plans. 00:49:08.480 |
And when you look at these Monte Carlo simulations 00:49:13.200 |
if you're optimizing for a 2% to 5% failure rate, 00:49:17.040 |
you know, you will succeed 95% to 98% of the time. 00:49:23.040 |
you will wildly succeed way beyond your expectations. 00:49:27.280 |
- Yeah, you'll have more money than you thought in the future. 00:49:29.520 |
- Yeah, and so I was actually, as I was thinking about that, 00:49:32.320 |
I found this post you wrote about how you might need less 00:49:36.160 |
And it was crazy how much money some people have, 00:49:42.560 |
even when they think they're trying to save conservatively, 00:49:47.280 |
And I think Bill Perkins found the same thing to be true 00:49:49.920 |
And I think it somewhat comes down to this mentality 00:49:54.640 |
that I'm guilty of myself of really optimizing for no failure, 00:50:06.320 |
in the wealth management space is most people 00:50:08.640 |
probably have more savings than they'll ever need, 00:50:13.840 |
But the people who are in the wealth management space, 00:50:19.520 |
or they build a business and they sell the business, 00:50:23.040 |
and they get to retirement and they can't mentally 00:50:26.320 |
switch it around and go the other way and spend it. 00:50:30.560 |
"I just wanna live off of the dividend income 00:50:34.480 |
And, or, you know, "I just can't get myself to spend any." 00:50:41.280 |
is that most people probably need less than they think 00:50:43.200 |
because they just can't force themselves to spend more. 00:50:48.960 |
by giving away to children or giving to charity. 00:51:03.280 |
But from there, you know, after 70s, it drops a little 00:51:05.600 |
'cause you're not as active as you once were. 00:51:09.440 |
just have a hard time mentally becoming spenders 00:51:15.840 |
"I can't, these bear markets are harder to ride out 00:51:17.840 |
"'cause I don't have savings going back into 'em." 00:51:20.160 |
So I totally understand where people are coming from. 00:51:22.400 |
But it's really hard to get people to take that nest egg 00:51:28.320 |
because the biggest risk is I'm gonna run out of money. 00:51:37.360 |
And it was interesting that at almost all levels of wealth, 00:51:41.440 |
whether it was people with less than $200,000 00:51:43.920 |
all the way to way more than 500 to a million dollars, 00:51:47.120 |
they all drastically underspent their retirement savings 00:51:53.680 |
they looked at 20 years worth of retirement people. 00:51:58.160 |
People who have less than 200K, 200 to 500 or 500 or more. 00:52:01.360 |
And they found that most people spent the income 00:52:05.440 |
and just avoided taking the principal balance, 00:52:20.800 |
because they're so worried about spending it. 00:52:23.360 |
It's funny, the studies show that someone with an annuity 00:52:28.960 |
spend more money than someone with just a portfolio 00:52:45.280 |
allows you to mentally get over the hurdle of spending money, 00:52:56.240 |
it's like shifting into really high dividend investments 00:53:09.600 |
so that you produce a higher amount of income 00:53:16.320 |
if you have the ability to flex and go back to work 00:53:23.920 |
if things fall into that 2% to 5% catastrophic level, 00:53:29.520 |
you can probably start spending more now and saving less. 00:53:33.840 |
Obviously, this is all dependent on how much money you have 00:53:40.960 |
who will hit a six-figure retirement balance at some point 00:53:50.320 |
And the years that you and I are at right now 00:53:57.920 |
And I'm glad that you and maybe me to a lesser extent, 00:54:15.760 |
especially if we're gonna be potentially living longer. 00:54:21.840 |
with potentially making earnings more income, 00:54:23.920 |
you can be flexible with your spending in retirement too. 00:54:29.840 |
If the market does happen to tank early on in your retirement 00:54:33.600 |
then you can pull back a little bit, not spend as much. 00:54:35.760 |
So I think you just have to be flexible there too. 00:54:42.320 |
It doesn't have to be followed religiously for everyone. 00:54:48.400 |
depending on what the environment happens to be. 00:54:55.040 |
and the stock market is up 12% per year, whatever it is, 00:55:02.880 |
So I think you have to take all those variables 00:55:04.720 |
into account of what reality fits with your expectations 00:55:11.760 |
- Yeah, I think the biggest takeaway you had, 00:55:20.480 |
was instead of using the amount of money we need to live 00:55:38.960 |
And then it didn't really factor in the house. 00:55:44.000 |
you're probably not gonna upgrade your home in retirement 00:55:56.000 |
which meant that my spending post-kids, post-mortgage 00:56:05.360 |
I need enough money to support my current lifestyle, 00:56:08.400 |
not I need enough money to support my current lifestyle, 00:56:22.560 |
I will say, Chris, you're far more optimized than me 00:56:24.720 |
because you've already planned out your retirement spending. 00:56:37.200 |
And that number, it became my savings rate, right? 00:56:43.200 |
stop working at year X and I want a failure rate of Y, 00:56:49.680 |
until I was like, this is how much money I need to save. 00:56:54.640 |
I should almost feel disappointed if we save more 00:56:59.120 |
because there's so many ways that we could use that money 00:57:02.880 |
to live a wealthier, happier life with our kids right now 00:57:12.800 |
and we could take a little time off and all that kind of stuff. 00:57:18.720 |
because it forced me to think about a lot of these things. 00:57:20.880 |
I'll absolutely share a link to it in the show notes 00:57:23.760 |
and curious what other people's experiences are here. 00:57:28.640 |
Where can people find everything you're writing? 00:57:30.320 |
A Wealth of Common Sense, sign up for the newsletter there. 00:57:33.200 |
Weekly Animal Spirits podcast drops on Wednesdays.