11 Investing Lessons They Don’t Want You to Know (ft. Ben Carlson)

00:00:00.000 | What if you could distill 20 years of investing wisdom

00:00:03.040 | into just a few important lessons?

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.

00:00:12.640 | As Ben Carlson says,

00:00:14.000 | I know plenty of investors who have been at this game for decades

00:00:16.640 | who still make the same mistake.

00:00:18.000 | It's really more about having a process.

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.

00:00:26.800 | Whether you're a novice or a veteran,

00:00:28.480 | these lessons will transform how you think about investing

00:00:31.520 | and your financial future.

00:00:32.960 | I'm Chris Hutchins, and if you enjoy this video,

00:00:35.200 | give us a thumbs up.

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,

00:00:41.040 | consider subscribing.

00:00:42.160 | Ben, you said that experience is not the same as expertise in investing.

00:00:48.240 | What did you mean by that?

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.

00:01:00.320 | And you found that the whole idea

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

00:01:09.600 | that you have this predictive model

00:01:11.120 | or this process about how the world works.

00:01:13.040 | And my whole point is that, yes, experience helps

00:01:16.880 | because if you're investing

00:01:18.400 | and you live through a lot of these different market cycles,

00:01:20.480 | you kind of pick up on some things.

00:01:21.680 | But I know plenty of investors who have been at this game for decades

00:01:24.960 | who still make the same mistakes

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.

00:01:40.640 | Yeah. And you say expertise is important,

00:01:42.800 | but you also had a lesson that intelligence

00:01:45.440 | doesn't guarantee investment success.

00:01:47.040 | So expertise isn't just intelligence, is it?

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

00:01:54.720 | beats the guy with 130 IQ," right?

00:01:56.880 | He's like, "You can have the leftover."

00:01:58.560 | So it's more about the temperament

00:02:00.560 | and the ability to control your emotions

00:02:02.240 | and that emotional intelligence is the piece.

00:02:04.160 | Because when I first started in the investing world

00:02:06.560 | and I was this wide-eyed young person,

00:02:08.480 | I was really impressed by the smart people,

00:02:10.320 | the people who use the jargon

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."

00:02:25.440 | And the longer I was in this game,

00:02:26.800 | the more I realized like, "Oh, wait a minute.

00:02:28.160 | Those people are full of it.

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

00:02:33.920 | because the future is always uncertain,

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

00:02:44.480 | that would say occasionally, "I don't know,"

00:02:46.880 | or "I was wrong," or, you know,

00:02:48.640 | "And here's how we're going to fix it."

00:02:49.840 | So those are the people that really, I thought,

00:02:52.320 | had the most intelligence to me.

00:02:53.680 | The people that admitted, like,

00:02:55.280 | "This part of the game is too hard for me to do.

00:02:57.360 | So here's how I'm going to get around that.

00:02:59.440 | And here's what I'm going to do instead."

00:03:00.800 | Yeah, it's funny.

00:03:01.280 | I got a call from a friend yesterday who said,

00:03:02.960 | "I'm dumping all my NVIDIA.

00:03:04.320 | It's AMD. AMD is the winner now."

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?

00:03:12.320 | That's why they told me this.

00:03:13.760 | How do you react when someone says that?

00:03:17.280 | Because it's so hard.

00:03:18.880 | I guess I try to stay in the lane of

00:03:22.080 | there are no always or nevers when it comes to the markets.

00:03:24.960 | There's no 0% or 100%.

00:03:26.160 | It's a range of probabilities.

00:03:29.040 | And unfortunately, the probabilities

00:03:30.320 | are not like a casino where you walk in

00:03:32.320 | and you know these are the probabilities.

00:03:33.680 | This is the payoff.

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

00:03:39.040 | in terms of a range of outcomes.

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,

00:03:45.840 | bandwidth on that.

00:03:47.120 | Like, you know, there's a 70% chance

00:03:48.960 | that this is going to happen.

00:03:50.000 | Here's how I'm going to size my position accordingly.

00:03:52.160 | But there's also a 30% chance I'm wrong.

00:03:53.840 | NVIDIA is actually going to be the winner

00:03:55.600 | and AMD is going to follow up.

00:03:56.880 | So I think that's the way you think about these things

00:03:58.640 | in terms of a range of outcomes

00:04:00.240 | and how willing you're able to make a big bet on something

00:04:04.640 | as opposed to just trying to say like,

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

00:04:11.360 | when you're investing.

00:04:12.320 | So you had these 20 lessons.

00:04:14.160 | Number three was that no one lives life in the long term.

00:04:16.960 | And I think it's kind of relevant here

00:04:18.480 | because it almost doesn't matter what your bet is

00:04:22.400 | if you can't handle it.

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,

00:04:28.560 | they don't live long term?

00:04:30.160 | I saw that part of that quote from Daniel Kahneman,

00:04:32.400 | who recently passed away.

00:04:33.520 | And he spent his whole career studying human foibles

00:04:36.560 | and human behavior and emotions.

00:04:38.080 | And when he gave his Nobel Prize speech,

00:04:40.720 | he said, someone asked him like, you know,

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?

00:04:49.120 | It's a series of short runs."

00:04:51.680 | And I think your experience when you were born,

00:04:55.600 | the way you came up, all that stuff,

00:04:57.920 | the personality you were given,

00:04:59.120 | all that stuff really impacts the way that you save

00:05:02.080 | and invest and handle your finances.

00:05:03.440 | We were talking to a client a couple months ago

00:05:06.240 | who worked at Lehman Brothers

00:05:07.920 | and had 75% of his net worth in Lehman stock

00:05:10.960 | heading into the GFC.

00:05:12.000 | And it went to zero.

00:05:14.960 | And he had to slowly but surely,

00:05:17.200 | he went to another Wall Street firm,

00:05:19.600 | made some more money.

00:05:20.480 | Now he's making a very good living as a Wall Street trader.

00:05:23.360 | But that experience, he admitted it.

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

00:05:39.200 | 'cause someone would say like,

00:05:40.080 | "Listen, this person is making a lot of money

00:05:41.840 | working on Wall Street.

00:05:42.640 | They get these huge bonuses.

00:05:44.080 | They have plenty of money in the bank.

00:05:45.520 | They have this big portfolio.

00:05:46.960 | They have the ability to take a lot of risk."

00:05:49.040 | But this person realized,

00:05:50.160 | "I don't care what that ability is,

00:05:52.400 | what the spreadsheet tells me.

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

00:06:00.400 | regardless of what the results are gonna be.

00:06:02.160 | I know my results would be better

00:06:03.600 | if I could invest more aggressively,

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

00:06:11.360 | as long as you don't take it too far, right?

00:06:13.840 | And do those experiences change over time?

00:06:15.840 | Does someone who is 25

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,

00:06:23.840 | get married, have kids, buy a house?

00:06:25.680 | How should you evolve your risk?

00:06:26.960 | I think the biggest thing too

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

00:06:36.080 | and you lose 50%, you're down $5,000.

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%,

00:06:47.040 | you're now on $10,000, right?

00:06:48.640 | And you say, "Well, that's more money than I lost

00:06:50.160 | with a 50% loss at 10,000."

00:06:51.920 | Then you get to a million dollars

00:06:53.680 | and a 10% loss is $100,000.

00:06:56.560 | So I think sometimes people have a hard time

00:06:59.360 | going from percentages to dollars

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

00:07:05.680 | or those market values go down, right?

00:07:09.360 | So I think that's a hurdle sometimes for people.

00:07:11.440 | So as you go from like the young investor

00:07:13.840 | who has decades and decades ahead of them,

00:07:16.000 | compounding is the whole thing and saving,

00:07:17.600 | where the bear markets don't really matter,

00:07:20.080 | the bear markets can sting when you get towards middle age,

00:07:22.880 | later age, heading into retirement.

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,

00:07:45.520 | it's been down 30, 40%.

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%,

00:07:55.200 | but they're struggling in the short term.

00:07:57.920 | What do you tell them?

00:07:59.680 | Well, I think perfect is the enemy of good in a lot of ways.

00:08:03.600 | I think you have to know yourself first.

00:08:05.520 | That's the important thing

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,

00:08:11.440 | "100% invested in equity.

00:08:13.040 | "Stocks are your best long-term bet

00:08:14.640 | "based on expectations and history

00:08:16.080 | "and the way that these things should work."

00:08:18.560 | But some people just don't have the ability

00:08:20.560 | to sleep at night if they know that their portfolio

00:08:22.960 | is going to drop 30, 40, maybe 50%.

00:08:26.160 | I think a lot of people in the first decade of this century

00:08:28.880 | realized that there was a 50% crash

00:08:30.560 | following the dot-com bubble blowing up

00:08:32.640 | and then a 50 some percent crash

00:08:34.560 | when the great financial crisis hit in 2008.

00:08:36.880 | And I think a lot of people realized

00:08:38.480 | I was not prepared for this to happen.

00:08:40.320 | There's only so many like Warren Buffett

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,

00:08:50.240 | holding more cash or holding more bonds

00:08:51.920 | or something that is a little safer

00:08:53.360 | so you can actually get to that point.

00:08:55.680 | That may not be optimal based on the spreadsheet

00:08:58.480 | and based on the compound interest formulas

00:09:00.720 | and all these things, but if you have to do that

00:09:03.200 | so it makes you stay in the game,

00:09:04.240 | I think making those suboptimal decisions,

00:09:06.480 | it's actually okay.

00:09:07.280 | - Yeah, last one on risk.

00:09:09.280 | You said the biggest risks

00:09:10.800 | are always the same yet different.

00:09:12.480 | So a part of me is like, you know what?

00:09:13.760 | It always works out, but will it work out this time?

00:09:16.640 | I feel like people are constantly thinking,

00:09:18.640 | you know, yeah, it always worked out,

00:09:19.920 | but maybe this time is different.

00:09:21.680 | - Yeah, there is this thing in your head

00:09:23.200 | where you think, geez, when stocks fell in the past,

00:09:26.080 | that was a huge buying opportunity,

00:09:27.600 | but what if this time, what if it's not?

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.

00:09:35.600 | It happened from 2000 to 2009.

00:09:37.760 | The total return to the S&P was negative 10%.

00:09:40.160 | You lost 1% a year

00:09:41.760 | and that's not even including inflation.

00:09:43.440 | And so there are times when that can happen.

00:09:46.400 | And so the long-term for certain people,

00:09:47.840 | some people might think a decade is a long time,

00:09:49.600 | but there have been handful of instances

00:09:52.000 | where asset classes have gone a decade

00:09:54.720 | and given you zero return.

00:09:56.960 | So it can be very difficult to stick it out

00:10:00.080 | in the stock market.

00:10:01.440 | And I think the, I don't know,

00:10:02.880 | the simplest form of risk management

00:10:04.240 | is probably just diversification.

00:10:05.680 | And that is, you know,

00:10:07.200 | maybe by asset class or strategy

00:10:09.120 | or sort of your income streams,

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

00:10:15.920 | is that survival is the key.

00:10:18.240 | And back to your like experience thing,

00:10:20.000 | I came up, I started my career a few years

00:10:22.560 | before the great financial crisis.

00:10:23.760 | And I think living through that,

00:10:25.520 | seeing what happened and how people,

00:10:27.680 | how they handled that situation,

00:10:30.000 | I think changed my outlook on the markets

00:10:33.280 | and investing for the better.

00:10:35.200 | Because I was young and dumb and naive.

00:10:37.920 | And I've been reading stocks for the long run

00:10:40.400 | and Jack Bogle and Warren Buffett.

00:10:41.920 | And I just assumed this stuff happens

00:10:44.320 | and then it comes back.

00:10:45.120 | And it did come back.

00:10:47.280 | So that was good for me.

00:10:47.840 | But I also saw all these people in the industry

00:10:49.840 | lose their minds.

00:10:50.400 | I had a colleague who was one of the smartest people I know.

00:10:53.360 | We talked about the high IQ thing.

00:10:55.040 | During the great financial crisis,

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.

00:11:01.040 | And he says, because I'm just worried

00:11:02.800 | that the whole system is going to collapse.

00:11:04.480 | And I thought this guy is nuts.

00:11:06.320 | But he's also one of the smartest people that I know.

00:11:08.320 | And he just, he lost his temperament.

00:11:12.320 | And I mean, I'm never going to make better purchases

00:11:14.880 | than I made in my 401k plan.

00:11:16.400 | Then during that 2008 period,

00:11:19.040 | when stocks were down 50, 60%, you know.

00:11:22.080 | But it's a lot easier to say in the rear view mirror,

00:11:25.280 | of course you should have been buying them.

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

00:11:31.520 | that helps you understand your time horizon

00:11:34.080 | and risk profile.

00:11:34.880 | So if and when those periods happen,

00:11:37.520 | and they don't happen very often,

00:11:38.560 | you actually have a plan instead of trying to make a plan

00:11:41.760 | when emotions are very high.

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,

00:11:50.000 | try not to, you know, like you can't ignore

00:11:52.560 | and not look at it.

00:11:53.360 | That's super hard.

00:11:54.240 | But you know, when it's down,

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.

00:12:01.680 | And it sounds irrational,

00:12:03.200 | but I never look at the balances of my investment accounts

00:12:05.760 | when we're in the bear market.

00:12:06.800 | I just, I don't look.

00:12:07.760 | I don't want to look.

00:12:09.840 | I know in my head, based on this percentage loss,

00:12:13.040 | I kind of know where I'm at.

00:12:14.400 | But I don't want to look.

00:12:15.280 | I only look during bull markets.

00:12:17.360 | And that may be irrational.

00:12:19.040 | But I think you need some sort of out of sight, out of mind.

00:12:21.440 | And I think to your point,

00:12:22.480 | the time horizon thing is a big one.

00:12:24.400 | If you are going to put a down payment on a house in five years,

00:12:27.280 | I don't know, that money probably,

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,

00:12:32.800 | can drop very swiftly.

00:12:34.640 | It fell 35% in a month, basically, in 2020.

00:12:38.240 | If you were holding that money in the stock market

00:12:40.800 | and waiting for a down payment,

00:12:41.920 | you lost a third of your money.

00:12:44.880 | So I think aligning your time horizon

00:12:46.960 | with your assets makes a lot of sense.

00:12:48.400 | Yeah.

00:12:49.360 | And I would say,

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,

00:12:54.640 | around during the pandemic.

00:12:56.320 | And think back to how that felt.

00:12:58.880 | There were people saying the exact same thing.

00:13:01.600 | Markets were down 30%.

00:13:02.480 | And I remember telling people,

00:13:04.240 | I was like, "Isn't this a good buying opportunity?"

00:13:05.840 | And they're like, "What if we could be going

00:13:08.320 | to the world falling apart and everything?"

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.

00:13:26.160 | And talk to me about why that's important.

00:13:28.960 | My whole thinking is if you're pessimistic about the future,

00:13:32.960 | what's the point of investing anyway?

00:13:34.240 | Investing itself is delaying gratification now

00:13:38.640 | so you can have better results in the future.

00:13:41.360 | So I think...

00:13:43.040 | Listen, the world is an unforgiving place.

00:13:46.400 | There's lots of bad things that can happen.

00:13:48.080 | And I think the internet has made more people cynical

00:13:51.600 | and pessimistic in a lot of ways.

00:13:54.000 | But when it comes to your portfolio,

00:13:55.920 | I think you have to have long run optimism.

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

00:14:05.600 | and hide it away under the mattress

00:14:07.120 | or in the backyard or something.

00:14:08.240 | And that's just...

00:14:10.400 | I mean, you have to invest in something

00:14:11.760 | if you wanna beat the rate of inflation.

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,

00:14:31.120 | maybe you take it out of the market.

00:14:32.720 | I think one silver lining for people living right now

00:14:35.760 | and investing right now in 2024,

00:14:37.760 | we're recording this in July,

00:14:38.800 | cash is actually a decent asset 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.

00:14:48.400 | But if you need money in 2 years,

00:14:50.400 | I can't think of a time in my life

00:14:52.640 | where it's been easier to feel good

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

00:15:00.400 | and earn a pretty good return.

00:15:02.000 | 4% to 5% on your cash is really good,

00:15:04.640 | especially where we're in the 2010s.

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

00:15:22.880 | or any other shorter intermediate term

00:15:24.960 | thing that we're planning for.

00:15:26.160 | We're gonna renovate our house in 2 years.

00:15:27.680 | So we have it in here.

00:15:29.040 | And I kept that money in cash

00:15:30.960 | even when rates were zero for all those years, right?

00:15:33.440 | Because I really valued that liquidity

00:15:36.960 | and the ease of access

00:15:38.000 | and the ability to just take it

00:15:39.200 | and know it was going to be there

00:15:40.480 | and it wasn't going to fall

00:15:41.600 | and it wasn't going to be volatile.

00:15:43.360 | And now that I'm actually earning something on that,

00:15:45.120 | it's, yes, it makes things a lot easier.

00:15:48.160 | Like the other side of that, unfortunately,

00:15:49.920 | for some people is now you see,

00:15:51.840 | "Oh, I'm earning 4% or 5% in cash.

00:15:53.360 | Why do I need to take any risk at all?"

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

00:16:03.200 | in your head of your portfolio

00:16:04.800 | of this cash is part of my overall asset allocation,

00:16:08.240 | or it's my emergency fund,

00:16:09.520 | or it's my intermediate term savings,

00:16:11.520 | or whatever it is,

00:16:12.640 | and not just get sucked into the fact that,

00:16:15.200 | "Well, I'm just going to keep all my money there

00:16:16.720 | because it doesn't move.

00:16:17.520 | It doesn't lose money on a nominal basis."

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,

00:16:23.920 | because these 4% or 5% rates

00:16:25.920 | aren't going to be here forever

00:16:27.040 | if and when the Fed cuts rates too.

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,

00:16:35.040 | "Wow, cash rates are good.

00:16:36.800 | Let's just do that.

00:16:37.600 | I'm worried the market's overpriced."

00:16:39.440 | You would have missed out

00:16:40.320 | on a pretty monster first half of the year.

00:16:42.800 | - Yeah, the U.S. stock market's up almost 20%,

00:16:45.520 | you know, through the year.

00:16:47.280 | Yeah, and that's after a 26% gain last year.

00:16:50.240 | And so that's the problem.

00:16:51.040 | And then that's when mistakes can compound.

00:16:53.280 | If you don't have these things bucketed out,

00:16:55.840 | if you're just kind of, you know,

00:16:57.360 | going out about this without a plan and say,

00:16:58.960 | "Yeah, cash rates are high.

00:17:00.400 | I'm going to put all my money there."

00:17:01.600 | And the stock market takes off, then what do you do?

00:17:03.200 | "Well, I'm going to wait for a downturn."

00:17:05.200 | What if it takes a long time for the downturn to happen?

00:17:07.600 | Or when the downturn finally does happen,

00:17:09.200 | I saw this a lot after 2008,

00:17:10.800 | you know, there'd be a 10% correction.

00:17:13.440 | And it's like, "All right, buying opportunity.

00:17:14.880 | No way, I'm going to wait till it's 20%.

00:17:16.560 | I'm going to wait till it's 30%."

00:17:17.680 | And then you get stuck in cash.

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

00:17:26.720 | in the middle where you're trying to guess

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,

00:17:32.320 | especially people that are kind of

00:17:33.840 | have an optimizing personality,

00:17:35.760 | might get stuck trying to put cash to work,

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.

00:17:44.720 | - No.

00:17:45.680 | And that's why dollar cost averaging

00:17:47.760 | is such a simple strategy.

00:17:49.520 | And it's probably not the best strategy in the world.

00:17:51.920 | I'm sure you could think of a way better way

00:17:53.760 | to optimize that and make these better rules.

00:17:56.080 | I'm going to buy when the S&P 500 does this,

00:17:58.000 | or when this trend line is broken or whatever it is.

00:18:00.320 | But if you just invest a little bit of money

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,

00:18:06.640 | and just follow that strategy,

00:18:08.720 | we did this with a client in 2022.

00:18:11.440 | They came to us with a big chunk of cash.

00:18:12.880 | And unfortunately, they had sold some of their stocks

00:18:16.080 | in 2020, right?

00:18:17.280 | They got freaked out by the pandemic,

00:18:19.120 | and they were sitting on way too much cash

00:18:21.120 | for far too long.

00:18:22.400 | And they came to us at the end of 2021 and said,

00:18:24.640 | I need to get this cash back to work.

00:18:26.000 | I know I do.

00:18:26.640 | I know the data says I should probably

00:18:28.640 | just put it back in the market, right?

00:18:30.000 | Because on average, 75% of the time over a one-year basis,

00:18:34.240 | the S&P 500 is up, right?

00:18:36.000 | So that's pretty good odds that it's going to be up again

00:18:38.160 | in the future.

00:18:38.640 | So the numbers would tell you, put that money to work today

00:18:42.160 | in a lump sum, and just forget about it.

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?

00:18:50.960 | Where, well, what if I put it in

00:18:52.400 | and the stock market falls 20%?

00:18:53.680 | Then I'm going to feel like an idiot.

00:18:54.880 | So dollar cost averaging from a psychological perspective

00:18:57.360 | can help.

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.

00:19:06.480 | And this is the start of the bear market.

00:19:07.840 | So the tiny worked out pretty good.

00:19:09.120 | But throughout that bear market, we have wild ups and downs,

00:19:11.920 | right?

00:19:12.640 | And we set this plan in advance.

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?

00:19:23.120 | Should we not put enough?

00:19:24.000 | Should we take it back a little?

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.

00:19:30.720 | And after we did it, we followed the plan.

00:19:33.040 | Things worked out great.

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.

00:19:52.800 | So just follow your plan.

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,

00:20:08.000 | hit a couple buttons, and forget about it.

00:20:10.720 | And let the system do it for you.

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

00:20:26.320 | optimal tax thing I could do,

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,

00:20:42.240 | like this is a good decision.

00:20:43.840 | And statistically, the market's probably not going to do that in three months.

00:20:46.800 | So I'm going to do this.

00:20:47.680 | And the market went up.

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

00:20:55.600 | to basically save no money.

00:20:57.280 | However, I just kept reminding myself,

00:20:58.880 | I didn't know what the market was going to do.

00:21:00.960 | And there were a lot of outcomes.

00:21:02.400 | And so if you evaluate it with saying,

00:21:04.480 | "Hey, if I had the information I had at the time,

00:21:06.720 | would I have made the same decision?"

00:21:07.920 | And the answer is yes,

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.

00:21:19.200 | And this may seem like overkill to people,

00:21:21.440 | but a lot of times I think performing that like pre-mortem,

00:21:23.920 | pre-mortem instead of post-mortem,

00:21:25.760 | where you kind of write down some of your reasons

00:21:27.520 | for making a decision ahead of time.

00:21:28.800 | And we do this with our...

00:21:30.960 | I'm on the investment committee at my firm.

00:21:32.320 | And when we make a decision

00:21:34.080 | to either do something or not do something,

00:21:35.520 | we take notes, we write it down.

00:21:37.680 | And like you said,

00:21:38.480 | we use the information we have at that time,

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

00:21:44.400 | or wherever that things could go.

00:21:46.400 | And we just want to make sure

00:21:48.160 | that we're making a consistent decision-making process

00:21:51.200 | with the information we have at the time

00:21:52.960 | and the understanding that there's this

00:21:54.240 | irreducible uncertainty going forward.

00:21:56.160 | And I think for people that are prone to investment mistakes,

00:21:58.400 | writing down those reasons ahead of time,

00:22:00.000 | and then regardless of which way the market goes from there,

00:22:03.040 | or however the decision works out,

00:22:04.480 | you can go back and say,

00:22:05.120 | "Listen, I use all the information I had at the time.

00:22:07.440 | Things worked out great.

00:22:09.120 | If they didn't work out,

00:22:10.000 | you still made the right decision."

00:22:11.840 | I think that's the thing about investing

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,

00:22:18.720 | with the understanding that sometimes

00:22:20.000 | they're going to lead to bad outcomes.

00:22:21.360 | - The decision and the outcome are very different.

00:22:23.280 | - Yes.

00:22:24.080 | - We talked about there's no perfect portfolio

00:22:27.120 | and diversification can help.

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,

00:22:36.000 | but international exposure?

00:22:37.920 | - Well, a lot of people do not like

00:22:40.320 | international exposure right now

00:22:41.360 | because the US stock market is the only game in town

00:22:43.600 | for the past 12 to 15 years, right?

00:22:46.160 | And the US now makes up 60-65% of the global stock market,

00:22:50.160 | depending on what you're counting.

00:22:51.680 | So it's a huge, it's like,

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?

00:22:58.000 | It went from, I think as low as 35%

00:23:00.640 | in the great financial crisis.

00:23:01.680 | So it basically flip-flopped from 35 to 60-65.

00:23:05.840 | And the US has outperformed everything.

00:23:08.160 | And I think the reasons are pretty obvious.

00:23:11.920 | The tech stock sector is way bigger here.

00:23:13.920 | We have more innovation.

00:23:15.120 | And I think part of it is we really value

00:23:18.560 | the stock market here more than other countries.

00:23:20.160 | But the historical returns before 2008

00:23:23.680 | for US and international stocks

00:23:24.960 | of the previous 40 or 50 years were essentially the same.

00:23:28.160 | You got like 10% in international stocks

00:23:31.120 | and 10% a year in US stocks.

00:23:32.800 | And there were cycles of outperformance for each.

00:23:36.400 | International stocks did better

00:23:37.520 | in like the '70s and part of the '80s.

00:23:39.600 | US stocks did better in the '80s, '90s

00:23:41.280 | and part of the 2000s.

00:23:42.720 | And you had these periods where they would flip-flop.

00:23:45.280 | And now we've had the longest period

00:23:46.480 | of US outperformance in history,

00:23:48.480 | not just in terms of magnitude,

00:23:49.760 | but of duration.

00:23:50.480 | It's been like 15 years.

00:23:52.080 | So I think a lot of people are giving up

00:23:53.520 | on international stocks.

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

00:24:04.160 | when the US underperforms,

00:24:05.520 | the dollar gets weaker

00:24:06.800 | or these tech companies falter

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

00:24:15.680 | of being invested in the one stock market

00:24:17.840 | that underperforms all the other ones

00:24:19.600 | because it's happened before in the US

00:24:21.600 | and it will probably happen again,

00:24:22.800 | even if it doesn't feel like it now

00:24:23.920 | because the US seems like it's invincible.

00:24:25.680 | So you had this lesson that you ended your post on

00:24:27.920 | with less is more.

00:24:29.440 | And I keep coming back to every time

00:24:31.920 | I've had a complicated investing strategy,

00:24:34.160 | I don't adjust it over time.

00:24:35.600 | I can't really explain it to myself.

00:24:37.440 | How do you think about what the right amount

00:24:40.720 | of complexity is?

00:24:41.840 | My whole investing ethos has boiled down

00:24:44.800 | to simple over complex.

00:24:46.560 | And I came of age in the investing world

00:24:50.480 | in the endowment and foundation world.

00:24:52.320 | And all of these endowments were chasing Yale

00:24:55.680 | and Harvard and University of Pennsylvania

00:24:58.240 | and Princeton because they had these extremely

00:25:00.320 | complex portfolios.

00:25:01.440 | And they were really hard to run operationally

00:25:05.360 | and they involved hedge funds and private equity

00:25:07.200 | and venture capital and hard assets

00:25:09.520 | and all these different and very few stocks

00:25:11.760 | and very few bonds.

00:25:12.640 | And so it was a very exciting type of portfolio.

00:25:16.640 | But I think a lot of these organizations

00:25:18.800 | that tried to copycat that didn't realize

00:25:21.040 | the complexity involved.

00:25:22.080 | And those schools had these teams of people,

00:25:25.600 | you know, dozens and dozens of people

00:25:27.120 | overseeing these funds.

00:25:28.400 | They had experts in each of these asset classes

00:25:30.880 | and strategies.

00:25:32.080 | Whereas if you try to just run this

00:25:33.840 | with a handful of people,

00:25:35.040 | it's much harder to do

00:25:37.200 | and it's much harder to gain access.

00:25:38.720 | And that was a good lesson for me

00:25:40.240 | in terms of the complex stuff

00:25:42.480 | is way more interesting, right?

00:25:44.240 | It just is.

00:25:44.800 | It makes an easier sell.

00:25:46.800 | If you're a salesperson in the investing world,

00:25:48.720 | selling complexity is way, way easier

00:25:50.560 | than selling simplicity

00:25:51.440 | because going simple is harder

00:25:53.040 | because it requires you to actually understand

00:25:56.480 | what you're doing

00:25:57.040 | and make good decisions ahead of time

00:25:58.320 | and then kind of just get out of your own way.

00:26:00.720 | Whereas a complex system,

00:26:02.080 | you feel like your hands are on a steering wheel

00:26:04.480 | and you feel like,

00:26:06.560 | well, geez, this is someone really smart

00:26:08.960 | brought this to me.

00:26:10.080 | It has to be good.

00:26:11.280 | But I think the problem with complexity

00:26:13.360 | is as you said, it's harder to understand.

00:26:15.360 | The fees are typically higher.

00:26:16.640 | And I think when you don't understand

00:26:19.280 | exactly how something works,

00:26:20.320 | it's way easier to give up on it,

00:26:21.840 | especially when it inevitably underperforms

00:26:24.000 | because everything underperforms eventually.

00:26:26.400 | So I think a simple strategy

00:26:27.680 | is easier to stick with over the long run

00:26:29.760 | because you understand it.

00:26:31.040 | Like when I'm invested mostly in index funds,

00:26:33.680 | when the stock market falls,

00:26:34.960 | I'm perfectly comfortable

00:26:36.160 | putting money back into index funds.

00:26:38.080 | If you hold a complex strategy

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

00:26:45.280 | when you're down money and you say,

00:26:47.040 | well, am I rebalancing into the pain here or not?

00:26:49.600 | I think that's the hard part

00:26:50.720 | is when it doesn't do very well.

00:26:52.800 | It's easy to hold a strategy when it's doing well.

00:26:55.040 | I think that's the problem with complexity

00:26:56.480 | is that it makes it harder to double down

00:26:58.560 | and stick with it over the long run.

00:27:00.640 | And that's why most people fail then

00:27:02.160 | because the first sign of trouble,

00:27:03.840 | they get out of it

00:27:04.480 | and then they go to another complex strategy

00:27:05.840 | that I think is gonna do even better

00:27:06.960 | and you just end up hopping around

00:27:09.120 | and it just doesn't work over the long run.

00:27:10.480 | - Yeah, I remember when we had the crash in the pandemic,

00:27:15.120 | I had some percentage of my portfolio

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,

00:27:24.320 | which by the way is way more complex

00:27:26.080 | than I'm gonna even attempt was like,

00:27:28.000 | you're levering up your bonds

00:27:29.280 | to try to get similar returns to stocks.

00:27:31.360 | But unfortunately, during the pandemic,

00:27:33.760 | bonds and stocks both went down.

00:27:36.000 | And I remember being like,

00:27:36.880 | "Wow, this strategy got just hammered."

00:27:39.600 | And my wife asked me, she's like,

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,

00:27:48.880 | can you ever recover?

00:27:49.920 | I'm not sure.

00:27:50.880 | And the solution for me was like, just get out.

00:27:53.120 | Even though it's down,

00:27:54.080 | fortunately, there'd been enough tax loss harvesting

00:27:57.600 | to kind of just make it feel like

00:28:00.960 | selling at a loss was worth it.

00:28:03.120 | But I can't tell you how much better I feel

00:28:06.080 | just being able to explain why everything is what it is

00:28:09.280 | and why I'm doing it and how it works.

00:28:10.960 | Because I think I read that risk parity white paper

00:28:14.960 | four times and I still don't feel like

00:28:16.880 | I could explain it to someone.

00:28:18.560 | Yeah, setting expectations is a big part of it.

00:28:20.400 | So if you're invested in the stock market,

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.

00:28:27.280 | Once every three or four years,

00:28:28.960 | you're gonna have a bear market.

00:28:30.320 | Once every, I don't know, 10 or 12 years,

00:28:32.000 | you're probably gonna experience some sort of crash.

00:28:34.240 | That could be like a 30, 40% or even worse.

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

00:28:43.200 | of losses are going to happen.

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

00:28:49.600 | and help set your different strategies

00:28:51.120 | if you actually have some expectations

00:28:52.960 | of the potential range of outcomes,

00:28:54.640 | even if you can't predict

00:28:55.440 | when they're gonna happen ahead of time.

00:28:56.640 | - Yeah, yeah, I mentioned this other lesson

00:28:59.120 | about overthinking, being debilitating.

00:29:01.120 | How do you get past that?

00:29:03.040 | I mean, you know, I have an optimizer's personality.

00:29:05.280 | I think maybe you have a little bit less,

00:29:06.800 | but probably there's some in there.

00:29:08.000 | - It was helpful for me to study history

00:29:10.960 | and some of the greatest investors

00:29:12.800 | and just know that even they go through these periods

00:29:14.560 | where they're totally out of favor.

00:29:15.760 | And I think it's okay to know that.

00:29:18.720 | Like the only way you can invest

00:29:20.240 | in the perfect portfolio is with hindsight, right?

00:29:22.320 | It's in the path, the rear view mirror.

00:29:24.240 | And everyone's really good at fighting the last war

00:29:26.720 | when investing.

00:29:27.440 | This happens a lot during,

00:29:29.040 | or in the aftermath of bear markets.

00:29:30.640 | Like, okay, if this happens again,

00:29:32.720 | I'm going to be ready.

00:29:33.520 | So in 2008, following that in,

00:29:35.520 | I remember in 2009, 2010, 2011,

00:29:37.920 | I was getting pitched all these black swan funds, right?

00:29:41.280 | Just wait, if 2008 happens again,

00:29:43.280 | you need to be invested in this.

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.

00:29:50.960 | And all this money comes in

00:29:52.560 | and then you have the upswing

00:29:54.160 | and then the money slowly goes out.

00:29:56.480 | And so I think that sort of

00:30:00.400 | fighting the last war mentality can help understanding

00:30:03.360 | that there really is no perfect portfolio.

00:30:05.200 | And I think if you get down to the level of splitting hairs,

00:30:08.080 | well, geez, should I put 5% of my portfolio

00:30:10.240 | in a strategy or 6%?

00:30:11.200 | You already kind of won the game.

00:30:12.960 | I think it's the big stuff.

00:30:14.800 | If you get the big stuff right,

00:30:16.000 | the studies show that like the variation

00:30:18.720 | of your portfolio and asset allocation

00:30:20.240 | explains something like 90, 95% of it, right?

00:30:22.480 | Your allocation between stocks, bonds, cash,

00:30:26.000 | and other assets.

00:30:26.720 | Just those right away, just that asset allocation,

00:30:30.080 | that's all the heavy lifting for you.

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

00:30:37.760 | instead of 4.5, what should I do?

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,

00:30:44.800 | that's the, and for most people it's,

00:30:47.360 | how much am I going to have in risk assets like stocks?

00:30:49.440 | Just getting that decision right,

00:30:52.160 | I think is the biggest one for most people.

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.

00:31:05.440 | So for anyone unfamiliar,

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.

00:31:14.880 | And one of the advantages that is stated

00:31:18.720 | is that because you're invested

00:31:20.240 | in all these individual stocks,

00:31:21.920 | while the market might be up on the whole,

00:31:24.160 | individual companies have gone down.

00:31:26.080 | And so you can sell them at a loss

00:31:27.840 | and capture the losses to offset income

00:31:31.280 | or other gains much more easily.

00:31:33.600 | And I remember asking someone,

00:31:35.840 | well, in tax loss harvesting normally,

00:31:38.000 | if you've got an index fund in the S&P and it goes down,

00:31:40.560 | you can replace it with another US index

00:31:42.560 | so you stay in the market.

00:31:44.080 | But if you're holding a stock and it goes down

00:31:46.400 | and you sell it, you can't buy it back.

00:31:50.320 | And there's not like two things

00:31:52.960 | that are perfectly correlated that are AMD

00:31:55.920 | or Google or something.

00:31:57.760 | What happens, and this investor told me,

00:32:00.480 | "Oh, well, you're just not in the stock

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."

00:32:18.240 | And so it just introduced this idea to me

00:32:21.120 | that you could be out of 10% of the stocks

00:32:24.400 | at any given point in time in the market,

00:32:26.560 | and it'll have almost no impact on the return.

00:32:29.360 | The returns of those two portfolios

00:32:30.960 | are like 99 point something correlated.

00:32:33.440 | And so it helped me to realize

00:32:36.400 | that it doesn't really matter what 0.1% of my portfolio,

00:32:40.800 | whether it's in Peloton or NVIDIA

00:32:43.120 | or Microsoft or anything, it doesn't matter.

00:32:46.240 | And it really helped me stop trying to perfect things.

00:32:51.040 | - And I do think that the small,

00:32:52.960 | the slight edges can compound over the time

00:32:55.120 | if you have a bunch of them.

00:32:56.160 | If you rebalance your portfolio

00:32:57.760 | and you do tax-lost harvesting

00:32:59.600 | and you do asset location right,

00:33:01.280 | I think that stuff can add value,

00:33:03.440 | but those are second order decisions.

00:33:06.080 | And full disclosure on the direct indexing thing,

00:33:08.400 | we use that in my firm.

00:33:10.000 | And it does, getting back to the simple versus complex thing,

00:33:13.120 | it does introduce more complexity

00:33:14.720 | and it's much harder to run 'cause as you pointed out,

00:33:17.280 | if you take out one stock because it's down,

00:33:20.160 | you're introducing tracking error.

00:33:21.760 | So the way that we do it,

00:33:22.880 | you have to turn the dial up and down

00:33:24.560 | with how much tracking error do you want

00:33:26.720 | versus how many losses do you wanna take?

00:33:28.240 | And what's your actual tax exposure?

00:33:30.240 | And those kinds of strategies require, we think,

00:33:33.840 | like a financial advisor and a trader

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

00:33:42.560 | and turn it on and off.

00:33:43.840 | You have to say, I sold a business last year

00:33:46.480 | and I got all these huge capital gains taxes,

00:33:49.120 | I need to offset them.

00:33:50.080 | So turn the dial way up for me for tax loss harvesting.

00:33:52.880 | And that's the kind of thing

00:33:53.840 | where you're trying to balance the investing side of things

00:33:56.000 | with the tax side of things.

00:33:56.880 | So one of those types of strategies

00:33:58.480 | that actually requires more handholding than you think

00:34:01.040 | and the automation isn't as easy

00:34:02.880 | with that kind of strategy.

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

00:34:20.160 | 'cause you're early in your career,

00:34:21.680 | maybe you live in California,

00:34:23.520 | you've got a lot of taxes,

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,

00:34:30.480 | especially at short-term rates,

00:34:32.080 | the losses aren't as valuable as they might seem.

00:34:36.000 | Right, and the funny thing is about,

00:34:38.320 | thinking in terms of indexing versus stock selection,

00:34:41.920 | if you're an individual stock picker,

00:34:43.840 | JP Morgan had this chart that showed

00:34:45.520 | like for the last 30 years, the S&P 500,

00:34:48.720 | it's up, I don't know, 80% of the time, right?

00:34:50.880 | And an annual basis,

00:34:51.920 | but on average out of those 500 stocks,

00:34:54.560 | 150 of them are down every year.

00:34:56.320 | So there's like these tax loss harvesting opportunities,

00:34:59.200 | but also if you're a stock picker,

00:35:00.720 | there's a pretty good chance

00:35:02.080 | that even if the stock market is up,

00:35:03.440 | your stock or a handful of stocks might be down,

00:35:06.240 | which is one of the reasons I think indexing

00:35:09.040 | is just a simpler, easier strategy than picking stocks,

00:35:11.840 | but that's another discussion.

00:35:14.320 | Oh yeah, we've had this discussion a handful of times,

00:35:17.200 | I'll put some links to episodes

00:35:18.480 | that we've talked about in the past,

00:35:19.760 | maybe even one of the times you were on,

00:35:22.320 | but I think my advice to everyone is,

00:35:25.600 | invest in individual stocks only as much as you need to,

00:35:29.040 | to let the rest of your portfolio

00:35:31.200 | just ride it in index fund.

00:35:32.960 | I don't mind people picking stocks,

00:35:34.080 | but yeah, size it in a manner

00:35:35.920 | and understand how much time and effort

00:35:38.400 | you can actually put into it before getting into it,

00:35:40.720 | 'cause it's not an easy game.

00:35:42.240 | Before we jump to this last lesson

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.

00:35:58.960 | And I just like to get my thoughts down

00:36:00.800 | and put them all in one place.

00:36:02.240 | And I think I was just trying to figure out,

00:36:03.360 | like, what have I learned?

00:36:04.560 | And then it helps me think through

00:36:05.840 | some of the things I still need to learn.

00:36:07.360 | And for me, a lot of times,

00:36:08.480 | it's reminding myself of these things,

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

00:36:20.560 | would be for the average person?

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

00:36:32.160 | just can be really helpful to you

00:36:35.440 | in terms of your ability to sleep at night

00:36:37.440 | and your lack of stress and anxiety.

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.

00:36:48.400 | But I don't wanna constantly be stressing

00:36:50.000 | about my own personal financial situation.

00:36:52.160 | I wanna just make my life easier in that way.

00:36:56.160 | That is a perfect segue to the last lesson

00:37:00.000 | I wanted to touch on,

00:37:00.880 | which was that there's a big difference

00:37:02.480 | between rich and wealthy.

00:37:04.720 | And I think this is something that,

00:37:06.560 | I know we've personally talked about

00:37:08.480 | impacting our lives a lot the last few years.

00:37:11.040 | Yeah, I know a lot of really wealthy people

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

00:37:21.440 | and not happy to them.

00:37:22.480 | So I think there is really,

00:37:23.680 | there has to be some sort of balance

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.

00:37:32.000 | And these are the goalposts

00:37:33.360 | versus having a more balanced life.

00:37:36.400 | And I am like you, Chris,

00:37:38.240 | where you're more optimized than me probably,

00:37:40.080 | but we're spreadsheet guys, right?

00:37:41.680 | I have always been a saver my whole life.

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,

00:37:50.880 | I've always been a saver.

00:37:52.720 | And I can remember when I got my first job,

00:37:55.120 | I took my salary and I had my budget planned

00:37:58.080 | and I did all the compound interest things

00:38:00.560 | for by the time I'm 30,

00:38:01.840 | I should have this much money

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.

00:38:10.480 | I guess I can call myself midlife.

00:38:12.240 | There's things that happen in your life

00:38:14.160 | that can change how you view that saving stuff.

00:38:17.840 | And obviously everyone's different.

00:38:19.040 | Some people have a problem spending too much money.

00:38:21.360 | Some people save too much.

00:38:22.240 | Some people are in the middle.

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.

00:38:34.640 | Of course, one of them is just having kids.

00:38:36.960 | That changed.

00:38:38.320 | That was a huge change for me.

00:38:39.920 | I have aging parents.

00:38:41.760 | My dad is in his late seventies.

00:38:43.680 | My mom is in her early to mid seventies.

00:38:45.360 | It's funny.

00:38:46.320 | They have this group of college friends,

00:38:48.400 | probably 10 to 15 people.

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.

00:39:01.360 | And oh, by the way,

00:39:02.880 | we need like a 15 top for my dad and my dad's college friends.

00:39:06.480 | And it's non-negotiable.

00:39:07.600 | They have to come.

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.

00:39:21.680 | And you see this happen.

00:39:22.560 | And luckily, knock on wood, my parents are very healthy.

00:39:26.080 | But you see this kind of thing happen.

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

00:39:32.240 | who plan their whole life.

00:39:34.320 | And they get to the point where it's retirement time.

00:39:36.800 | And they dropped out of a deadly disease,

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,

00:39:48.960 | "Well, you're one way your whole life.

00:39:50.720 | And it's never going to change in terms of the way you think about money."

00:39:54.080 | And that has totally changed me

00:39:56.400 | in terms of how I think about the balance of spending now

00:40:00.320 | versus saving for the future.

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

00:40:08.160 | because of where I'm at in my life.

00:40:10.320 | After my conversation with Bill Perkins,

00:40:12.640 | I remember talking to my wife.

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,

00:40:20.640 | "Gosh, if we can hit this number,

00:40:22.160 | if we can save this much, it'll be awesome."

00:40:24.320 | And now we kind of look at saving too much as a bit of a mistake.

00:40:30.720 | And I know that seems crazy.

00:40:31.840 | And it probably seems very...

00:40:33.360 | I understand the fortunate situation we're in

00:40:35.920 | where we've been diligent savers.

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...

00:40:46.000 | I have my whole spreadsheet.

00:40:46.960 | I'm still a spreadsheet guy.

00:40:48.160 | And I track my savings by year.

00:40:49.680 | And I put them all in a spreadsheet.

00:40:51.360 | And I looked and 2021 really jumped out.

00:40:53.600 | It was like an all-time high savings for us.

00:40:55.280 | And I looked at it.

00:40:57.200 | And part of that was the pandemic.

00:40:58.320 | We weren't doing as much.

00:40:59.600 | We like to travel, not as much as you.

00:41:01.440 | We're not quite as adventurous as you.

00:41:02.800 | But I looked in that 2021 really stood out.

00:41:05.200 | And I actually made a point

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.

00:41:16.480 | And we've been spending more.

00:41:18.000 | And it's easy to spend money when you have kids, as you know.

00:41:20.720 | But part of it was spending time with them.

00:41:23.040 | And I still remember this conversation we had with a friend a few years ago.

00:41:27.040 | My oldest daughter, she's 10 now.

00:41:28.720 | This is when she was like 5 years old.

00:41:30.160 | And they said something like, "Hey, listen.

00:41:31.600 | We have like 13 years left with them."

00:41:33.200 | Before they got into the world.

00:41:35.360 | And then they're kind of adults.

00:41:36.640 | And they're on their own.

00:41:37.440 | And that kind of thinking really has changed my mentality.

00:41:40.960 | And we had twins.

00:41:44.160 | They are 7 now.

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

00:41:56.160 | because of all the stuff you have to bring.

00:41:57.520 | You know, car seats, strollers.

00:41:59.280 | And we like to travel and get away.

00:42:02.240 | So at that point, we made a decision to buy a vacation home

00:42:04.880 | in Northern Michigan on the water.

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

00:42:35.440 | quality time with them and memories

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?

00:42:43.200 | We bought a fractional Picasso.

00:42:45.600 | And we have this vacation home.

00:42:47.280 | And one of the challenges with it, which I think I didn't anticipate,

00:42:50.960 | is that when you own a fractional home,

00:42:52.720 | you have to share it with, in this case, 7 other people.

00:42:56.800 | And so I don't think I realized in advance

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."

00:43:14.880 | And so the thing we've realized recently is,

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,

00:43:32.240 | we have such great experiences, right?

00:43:34.960 | Like we're by the pool.

00:43:36.320 | We're working a little less.

00:43:38.240 | We're having fun.

00:43:38.960 | My daughter is trying to swim across the length of the pool.

00:43:41.440 | It's amazing.

00:43:42.160 | And those experiences will last forever.

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.

00:43:56.560 | And it can be small.

00:43:58.880 | I remember when I lived in New York City,

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,

00:44:09.600 | which was like $70 a month,

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,

00:44:35.360 | renting houses, going places,

00:44:37.360 | as much as we would have spent time in a home that we owned,

00:44:41.760 | in your case, all of, part of for me,

00:44:44.240 | which because yours is in Michigan was probably about the same cost.

00:44:48.000 | Yeah, and we have brutal winters here.

00:44:49.840 | So I wanted to enjoy the water and be out and stuff.

00:44:51.760 | But it doesn't have to be something,

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.

00:44:59.280 | But it can be other things.

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.

00:45:08.960 | And now we will pay for time

00:45:10.960 | because as opposed to me spending an hour every weekend

00:45:14.400 | mowing the grass and trimming everything,

00:45:17.280 | now I realized, well, wait, I can spend time with my kids

00:45:19.520 | and have someone else do that.

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.

00:45:35.920 | And I do have some of that element in me.

00:45:38.240 | But I also can see myself fighting against that

00:45:39.920 | and trying to go the other way.

00:45:41.040 | And there are still certain things that I will not spend money on.

00:45:43.920 | I just, I'm not a luxury car person.

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.

00:46:11.680 | But in that post about savings, you said,

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,

00:46:30.480 | what interest rates 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

00:47:00.000 | because life gets in the way.

00:47:01.600 | So I tell people, my baseline is just,

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.

00:47:14.400 | - Is that double digit net or gross income?

00:47:18.000 | - I'm more of a net kind of guy.

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,

00:47:42.240 | but have the savings creep up too, right?

00:47:44.720 | So have it be a certain percentage of your income.

00:47:47.040 | So if your income goes up

00:47:48.720 | and you're still saving a similar percentage,

00:47:50.720 | your savings will go up as well, right?

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

00:47:59.680 | of your fruits of your labor,

00:48:01.280 | but also increasing the savings over time.

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.

00:48:18.080 | And he's written, I don't know,

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

00:48:26.960 | to dial in my safe withdrawal rate

00:48:29.680 | to try to figure out where I was at for retirement.

00:48:32.240 | 'Cause it was, you know,

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

00:48:38.800 | and this safe withdrawal rate toolkit.

00:48:41.920 | And I realized that the 4% rule was designed,

00:48:46.000 | you know, for a 30-year time horizon,

00:48:48.080 | but to work almost every time.

00:48:50.240 | And when I was trying to design-

00:48:51.600 | - It's like worst case scenario, right?

00:48:53.040 | - Yeah, yeah, this is what I realized.

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%.

00:49:02.880 | And I realized that, you know,

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

00:49:10.720 | of what all the outcomes can be, you know,

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.

00:49:20.000 | But more than 50% 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

00:49:34.880 | than you think for retirement.

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,

00:49:45.440 | they just don't spend what they think.

00:49:47.280 | And I think Bill Perkins found the same thing to be true

00:49:49.280 | in his book.

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,

00:49:59.120 | which means that you're more likely than not

00:50:02.160 | going to wildly exceed what you expect.

00:50:04.160 | - So my experience working with clients

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,

00:50:10.560 | who get to the point where they can retire.

00:50:12.000 | Obviously, there's certain people

00:50:12.960 | who just don't have enough.

00:50:13.840 | But the people who are in the wealth management space,

00:50:17.040 | a lot of times what happens

00:50:17.920 | is they save and invest their whole career,

00:50:19.520 | or they build a business and they sell the business,

00:50:21.760 | they have this big lump sum of cash,

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.

00:50:28.960 | So we get these people who say,

00:50:30.560 | "I just wanna live off of the dividend income

00:50:32.320 | "from my portfolio,

00:50:33.040 | "and I never wanna touch the principal."

00:50:34.480 | And, or, you know, "I just can't get myself to spend any."

00:50:38.720 | And I think that's what I've realized

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.

00:50:47.440 | Right, and people have got around it

00:50:48.960 | by giving away to children or giving to charity.

00:50:50.960 | And some people have to force themselves

00:50:53.280 | to go on vacations and stuff.

00:50:54.320 | But I think for most people,

00:50:55.520 | you don't realize that your spending

00:50:57.840 | is probably going to fall as you age.

00:51:00.880 | Like the first decade of retirement,

00:51:02.320 | people spend a little more.

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.

00:51:07.520 | Right, and so I think a lot of people

00:51:09.440 | just have a hard time mentally becoming spenders

00:51:12.800 | when they, "Well, I don't work anymore.

00:51:14.640 | "I'm not having income come in.

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

00:51:25.840 | they have and see it be depleted over time

00:51:28.320 | because the biggest risk is I'm gonna run out of money.

00:51:31.520 | And that's what everyone is worried about.

00:51:32.960 | So they end up not spending as much

00:51:34.400 | as they probably can or should.

00:51:35.920 | Yeah, you shared this study.

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

00:51:50.480 | in the first 10 or 20 years.

00:51:51.920 | As Employee Benefit Research Institute,

00:51:53.680 | they looked at 20 years worth of retirement people.

00:51:56.640 | And they looked at all different types.

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

00:52:04.560 | from their portfolio

00:52:05.440 | and just avoided taking the principal balance,

00:52:07.200 | like I talked about.

00:52:08.240 | And they said after like 20 years,

00:52:10.000 | retirees, even with the biggest nest eggs,

00:52:12.000 | spent less than 12% of their portfolio.

00:52:14.320 | So unfortunately, these people

00:52:15.760 | are probably holding themselves back

00:52:19.360 | from enjoying retirement a little bit

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

00:52:27.120 | that pays them a regular stream of income

00:52:28.960 | spend more money than someone with just a portfolio

00:52:32.080 | trying to create their own stream of income.

00:52:34.080 | And even if you look at annuities

00:52:35.760 | and think of all the bad parts about them,

00:52:37.360 | the high fees and the liquidity,

00:52:38.800 | and there's problems with annuities

00:52:40.640 | that some people have.

00:52:42.240 | But if that kind of strategy

00:52:45.280 | allows you to mentally get over the hurdle of spending money,

00:52:48.000 | it probably makes sense,

00:52:49.360 | even if it is potentially suboptimal

00:52:51.360 | from a return perspective.

00:52:52.320 | Yeah, or even I could make a case

00:52:54.960 | if you're not comfortable with annuities,

00:52:56.240 | it's like shifting into really high dividend investments

00:52:59.600 | that maybe is not the perfect portfolio

00:53:02.560 | from a long-term return standpoint,

00:53:04.720 | but laddering on a bunch of US treasuries

00:53:08.560 | and dividend stocks

00:53:09.600 | so that you produce a higher amount of income

00:53:11.840 | so you just feel better about spending it.

00:53:13.520 | But I think my takeaway from it all is

00:53:16.320 | if you have the ability to flex and go back to work

00:53:22.400 | or do something on the side,

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

00:53:37.040 | and how much you're saving,

00:53:38.080 | but it looks like the average person

00:53:40.960 | who will hit a six-figure retirement balance at some point

00:53:45.120 | is probably going to oversave,

00:53:48.000 | which means underspend.

00:53:50.320 | And the years that you and I are at right now

00:53:52.880 | where we have young kids,

00:53:53.920 | I think there's a case for spending more

00:53:56.560 | than we're comfortable with.

00:53:57.920 | And I'm glad that you and maybe me to a lesser extent,

00:54:02.960 | but my kids are still a little younger,

00:54:04.960 | are getting comfortable with it.

00:54:06.480 | And the thing you have to remember too,

00:54:07.920 | the kids are gonna be gone someday

00:54:09.360 | and hopefully off of the family budget.

00:54:11.440 | And that's the point where

00:54:12.320 | if you wanna do the catch-up savings,

00:54:14.160 | you can make it up at the end,

00:54:15.760 | especially if we're gonna be potentially living longer.

00:54:18.160 | So yeah, that's part of it too.

00:54:19.600 | And I think the flex part too,

00:54:20.720 | if you said be flexible

00:54:21.840 | with potentially making earnings more income,

00:54:23.920 | you can be flexible with your spending in retirement too.

00:54:26.080 | When there's really good years

00:54:27.120 | and you wanna spend a little bit more

00:54:28.160 | and take an extra vacation, that's fine.

00:54:29.840 | If the market does happen to tank early on in your retirement

00:54:32.800 | and it freaks you out,

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.

00:54:38.080 | The 4% rule, I think it's a good baseline

00:54:41.360 | for people to start with.

00:54:42.320 | It doesn't have to be followed religiously for everyone.

00:54:45.520 | I think you can also be flexible

00:54:47.120 | in terms of how much you spend

00:54:48.400 | depending on what the environment happens to be.

00:54:51.040 | 'Cause if you retired 15 years ago

00:54:55.040 | and the stock market is up 12% per year, whatever it is,

00:54:58.880 | you're probably in a far better position

00:55:00.240 | than you ever thought was possible.

00:55:01.600 | Home prices are up a lot.

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

00:55:08.160 | and how they mesh

00:55:09.600 | and then make course corrections from there.

00:55:11.760 | - Yeah, I think the biggest takeaway you had,

00:55:14.720 | which I actually made this tweak

00:55:17.440 | in the "Safe Withdrawal" spreadsheet

00:55:19.760 | that I was playing with

00:55:20.480 | was instead of using the amount of money we need to live

00:55:24.000 | as what we spend right now,

00:55:26.080 | I basically said, "Here's what we spend

00:55:28.480 | minus everything we're spending on kids

00:55:30.480 | and school and all this stuff."

00:55:31.920 | And then I made that like a fixed expense

00:55:34.800 | for the next maybe 18 years.

00:55:37.040 | And then it went away.

00:55:38.960 | And then it didn't really factor in the house.

00:55:41.760 | But if you figure, chances are

00:55:44.000 | you're probably not gonna upgrade your home in retirement

00:55:47.520 | once the kids are gone.

00:55:48.720 | So I also made all the spending on our home,

00:55:51.280 | at least the mortgage payments,

00:55:53.680 | fixed things until the end of the mortgage,

00:55:56.000 | which meant that my spending post-kids, post-mortgage

00:55:59.920 | dropped by more than 50%.

00:56:01.200 | And I was mentally planning for,

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,

00:56:12.080 | minus the mortgage, minus the kids,

00:56:15.520 | which is drastically smaller amount of money

00:56:19.040 | and requires drastically less savings.

00:56:20.880 | - Yeah, and the taxes might be lower.

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.

00:56:26.880 | I have not gone that far yet.

00:56:28.480 | So you beat me.

00:56:29.440 | - It was interesting.

00:56:30.560 | But the way I backed into it was,

00:56:32.880 | how much money do I have to make each year

00:56:35.360 | to get to the confidence interval I want?

00:56:37.200 | And that number, it became my savings rate, right?

00:56:40.960 | So it was like, if I want to be able to

00:56:43.200 | stop working at year X and I want a failure rate of Y,

00:56:46.880 | what do I need?

00:56:48.160 | And I just tried a bunch of numbers

00:56:49.680 | until I was like, this is how much money I need to save.

00:56:52.480 | And then anything between that,

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

00:57:06.480 | while they want to hang out with us.

00:57:08.560 | While we have jobs that we do

00:57:11.760 | that are a little more flexible

00:57:12.800 | and we could take a little time off and all that kind of stuff.

00:57:15.360 | So it's been really eye-opening.

00:57:17.520 | I'm glad you wrote that post

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.

00:57:26.400 | This has been great.

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.

00:57:37.120 | And yeah, find me there.

00:57:39.200 | I probably talked about the podcast

00:57:40.560 | more than any other podcast.

00:57:41.920 | It's in my regular queue of listening.

00:57:43.680 | So thank you for doing that.

00:57:45.360 | And thanks for all your writing.

00:57:46.240 | And thanks for joining me.

00:57:47.040 | Glad to be here.

00:57:48.240 | Thanks, Chris.

11 Investing Lessons They Don’t Want You to Know (ft. Ben Carlson)

Chapters