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You heard about it here. Again, that's longangle.com. Hello, and welcome to another episode of All The Hacks, a show about upgrading your life, money, and travel all while spending less and saving more. I'm Chris Hutchins, and I'm excited to have you on my journey to optimize every aspect of my life.

When it comes to the big decisions about money, how you invest your savings has to be one of the biggest questions we all face, and honestly, one of the most important. So I wanted to do an episode all about investing, and I couldn't think of anyone better to join me than Andy Ratcliffe.

Andy is the co-founder and CEO of Wealthfront, an investing app that makes it delightfully easy to build long-term wealth with over $27 billion in assets. He also serves as the chairman of the Endowment Investment Committee for the University of Pennsylvania and is a member of the faculty at the Stanford Graduate School of Business.

Prior to Wealthfront, Andy co-founded Benchmark Capital, arguably one of the most successful venture capital firms of all time, with their first fund returning 92 times the original investment. In fact, Andy is so impressive that after meeting him and learning about Wealthfront, I decided to shut down my last startup, Grove, and join Wealthfront with a handful of the people from our team.

In this episode, we'll talk about how you should be investing to build your wealth. We'll take a look at the mistakes so many people make investing. We'll talk about how investing should or maybe shouldn't change as you make more money, and Andy will give you his take on why he thinks many of you should stop contributing to your 401(k).

Finally, just to clear up any conflicts, I am an employee and shareholder of Wealthfront, and Andy is my indirect boss. But Wealthfront didn't pay me to be here, and this podcast is completely mine, so all of the opinions I express are solely my own and do not reflect the opinion of Wealthfront.

As always, this podcast is for informational purposes only, should not be relied upon for investment decisions, and all investing involves risk. So without further ado, I hope you enjoy my conversation with the one and only Andy Radcliffe. Andy, thanks for being here. Thank you for having me. Yeah, so the common thread on your resume is investing, and so I'd love to start a conversation about your journey investing and go back as early as it was when you made your first investment.

Well, that's actually, I think, an interesting story. I knew nothing about investing. I had no interest in it. No one in my family had ever worked in the investment industry or had any sophistication around it, but I went to Wharton as an undergraduate student, so University of Pennsylvania's business school as an undergraduate student.

I also spent my time in the engineering school, but the most interesting course that I took at Wharton was the first business simulation course. Basically, the professor had come up with a way to simulate the financial performance of companies that competed with one another. So to take the course, you were split into teams of four, and each week you had to make 26, something like 26 decisions, as did all of the other teams in the class.

So you had to make decisions like how much money were you going to raise? How much manufacturing capacity did you want to build? How many units would you build? What would you price them at? How much money would you spend promoting them? So you had to go through all of these inputs, and they were all fed into a model, and out would come a financial statement, a balance sheet, and a stock price.

I was absolutely captivated by this, and about two or thirds or three quarters of the way through the course, I started to wonder, I figured out what the algorithm was for success, and I wondered, "Huh, I wonder if you applied what the model looked for in companies, would that lead to good investment performance?" Remember, this is circa 1978, and what the course really promoted is that companies should focus on high growth.

They should focus on market share. You price low to get share, and then once you have the share, you can raise price to earn higher margins. So it really looked for companies that built high return on equity and high operating margins, but first and foremost, high growth. And so I looked for companies that had high growth and high return on equity and high margins, and lo and behold, they were all tech companies.

So I built a simulated portfolio of the companies that matched what the simulator in the course looked for, and they did really well over six months to a year. So I convinced my father to give me a couple thousand dollars to invest in a couple of companies that best fit the model, and they did exceptionally well.

And I continued to follow this model for quite some time, and I ended up paying for my graduate school education this way. Wow. So that's how I became an investor. I had never had any intent to do so, but from this course really inspired me. I became a TA of the course, and I just fell in love with it.

And did you know at that point that this would probably make up the rest of your career? No clue whatsoever. As a matter of fact, quite the contrary, because my dad had a small manufacturing business. He was an entrepreneur, and my intent in going to an undergraduate business school was to join him on graduation and work in his company, and I thought I was going to go work in the family business, the very small family business, but I was so captivated by this that a couple of weeks before I graduated, I decided that I wanted to go out on my own.

So I worked in investment banking for a couple of years. So as I said before, I had a background in finance and computer science. So I first sought a job in computer science in New York. So I grew up about 25 minutes outside of Manhattan and had always wanted to live in New York.

And so I looked for a job when I graduated in software development, but they were all time-sharing bureaus that served financial services companies. And they all treated their programmers, as they then called them, like crap. And I thought, "I don't want that job." So I got a late start on looking for a job on Wall Street.

So I got a job working in mergers and acquisitions for one of the top five investment banks. And as luck would have it, they were very early on in representing technology companies. And I was the only person in the department who actually knew what the companies did. So I got exposure that I never should have gotten.

Meanwhile, I continued to hone my skills investing, and I learned about venture capital in my first year out of college, and I thought, "God, that's the coolest job ever." It combined computer science, which I loved, with entrepreneurship, which I appreciated from my dad, and investing. And so I had become friendly with someone who also worked as an analyst on Wall Street who wanted to work in venture capital.

And he said, "We've got to go to Stanford. That's how we're going to get into this industry." And that's how I ultimately applied to Stanford Graduate School of Business, got in, and it changed my career. Wow. And so did you know throughout Stanford that venture capital was the end goal after graduation?

Absolutely. I knew I wanted to get involved as soon as I possibly could. And I had a lot of really lucky breaks along the way. The fellow who ran the M&A department at my firm before business school was a Stanford grad, and his son was a year ahead of me in business school.

So he took me under his wing when I got to Palo Alto. And his best friend was the son of the CEO of Hewlett-Packard, which was the Google of its day. And he worked for the Premier Seed Fund before that was a real thing. And this fellow, Greg Young, for some reason took a liking to me.

We had great chemistry, and he introduced me around to a bunch of venture capital firms to see if I might be able to get a part-time job while I was going to business school. And he ultimately introduced me to the first crossover firm that invested in late-stage private and early-stage public companies.

And after this successful career for multiple decades, building one of the most well-known and best-performing funds, you got to a point where almost anyone would retire and just stop. And you did what is maybe the complete opposite of retirement and decided to go start a company, which I have done and is a lot of work.

And I'm not sure I would pick up that. Unclearly not that intelligent, Chris. But you decided to start a company in the investment space. What did you think people were doing wrong that drove you to start Wealthfront? Sure. Well, contrary to what most people think, great companies are not started as the result of an entrepreneur saying, "I want to start a company, so I'm going to go find the best opportunity I can and then do that." And typically it's described as, the process is described as someone who looks for a market that has a problem and then you develop a solution for the problem.

And that's how you get started. Those kinds of businesses lead to very mundane and small outcomes. The really great successes in venture capital are the result of an entrepreneur recognizing an inflection point in technology that allows them to build a new kind of product, and then they try to find a market for that product.

So it's the exact opposite of what you think it is. I had absolutely no desire to start a company. So I didn't know what I wanted to do, but when you've been successful and you retire, it's amazing how many interesting things find you. Now, I was focused on giving back because I have a life beyond anything that I ever imagined.

So I wanted to give back. So I became a trustee at my undergraduate alma mater, Penn. I started teaching, which I still do, at my grad school alma mater, Stanford. And my wife and I started an innovative cancer research funding initiative. So I wanted to give back to society.

And one of my responsibilities as a trustee at Penn was to sit on their endowment investment board, and the premier university endowments are the best managed diversified pools of capital in the world, and they all invest very similarly, and it struck me when I went to a meeting, one of my first meetings, that a lot of what they did was manual and spreadsheet based, and that there were some APIs that had been created in the brokerage world that would allow you to build an automated investment service, and this was interesting to me because when I was a venture capitalist, a lot of the people that I recruited that went on to financial success would come to me for investment advice, and I could never tell them to do what I do because they couldn't afford the minimums, and so if one were to basically do an 80/20 on the endowment investment model and automate it, you could make really sophisticated investing available to the masses.

And so I felt like I needed to do it for social good, not because I wanted to build a business out of it, and I thought, oh, if it works, I'll just hire a CEO and I'll be a board member. So I never intended to run the company. And yet here you are.

And yet here I am. And so when you thought about that original kind of moment of, okay, let's build an 80/20 version of the endowments, what does that mean? What types of investments did you think people needed to have in their portfolio, and what did you want to build there?

Well, like almost every successful company, we pivoted from where we started. So the original insight from endowment investing was that university endowments are really good at picking managers that are likely to outperform the market. Now, this might sound like heresy coming from a guy who co-founded a company that built much of its reputation on passive investing, but there is a small percentage of managers out there that consistently outperform the market, and the endowments are really good at finding them.

And they do it in a very similar way, and that is basically they look for managers who have a pretty long track record of outperforming, but who have done so consistent with their stated strategy. And that's the hard part. So that's how we started, was we built a marketplace of investment managers, and the managers that we chose over a year and a half outperformed the market by 4% net of fees, which was the good news.

The bad news was nobody cared because it was too inconvenient. We were really only choosing managers that were ideal representatives of your US equity allocation, and US equity should be about a third of your portfolio. So it was really inconvenient because you had to take care of investing in non-US equities and in bonds.

So the refrain that we would often hear from people is, "I'd rather that you manage all of my money adequately and inexpensively than a portion of it superbly." And that's when we pivoted into a diversified portfolio of low-cost index funds. And how did you decide what kind of asset classes people should be investing in?

The mix of asset classes is an incredibly well-understood problem. The solution to which was invented, I think, in 1958 and won the Nobel Prize in 1990, called the Modern Portfolio Theory or the Capital Asset Pricing Model. So there's no rocket science associated with this. This is real commodity technology.

It's just applying a computer to do it instead of a person. And do you think that for most people, it's a better approach to be passive and hands-off than to try to pick stocks? The academic research on this is unbelievably clear and consistent. So this reminds me of climate change, that 98% of scientists or more believe in climate change.

The problem is that when news channels put together a debate, they only have one person representing each side, which makes it seem like it's a 50/50 argument. But in the scientific community, it's 98 to 2. Well, the same goes for active versus passive investment, that it is almost impossible net of fees to outperform the market over the long term.

You know, only a third of professional investment managers outperform the market in any one year. After 10 years, it's less than 15%. So what makes you as an amateur think that you can do this if you're not spending all of your time trying to find companies that are likely to beat their expectations?

The fact that you like the company or not is nothing to do with whether or not the stock price is going to go up. It's deciding whether or not you think the company's earnings are going to be in excess of the expectations or not. And that's really hard to do in something that amateurs, including myself, shouldn't be doing.

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Or how do you think about that mix? Well, what they should be doing, or what they... The problem here is, the data's really clear that unless they have a really unique and unfair insight, they should not be picking stocks. Now, academics believe that the only way that one can outperform the market is if you have an information advantage.

And they further believe that the only information advantages are illegal. I don't believe that. I actually think that some people are better at interpreting signal than others through experience. So there are a small number of investors who are outliers, who are able to outperform the market, not every single year, but over the long term.

I think there are very, very few amateur investors who are able to do this. The fact that you did well one year doesn't mean that that you were really good. You know, one of the biggest mistakes people make is confusing absolute returns with relative returns. So, for example, Robinhood made a statement that their average customer from April 1st, 2020 to March 31st of 2021 saw an increase in their portfolio value of about 30%.

So those people thought they're brilliant because if you could make a 30% return, you must be brilliant. Only problem is the S&P 500 was up 55%. So you lost 25% relative to having bought the index. Now, when the market's only up 5%, those people are going to be down 20%.

They don't realize it, but that's what's going to happen to the vast majority of them. You know, you wouldn't think about picking up a scalpel and operating on your friends. Why would you think that without training you can invest like the best professionals? You can't. It's an apprenticeship business.

Now, there might be a few outliers out there who could do it. So, all that being said, to me, investing is like a diet, that you're unlikely to just invest passively because it's really boring and you hear your friends talk about the stocks they bought and how well they did.

So, my thought is encourage people to buy a few stocks with less than 10% of their net worth to learn that they really don't know what they're doing. So, even if they lose some money, it's okay, or if they underperform the market, it's okay. But if you tell people you should only invest in passive, they're not gonna live up to that diet because it's too boring.

And so, I'm in a really fortunate position that I have access to some of the best venture capital firms in the world, some of the best hedge funds in the world, because they want access to my network and my experience. If I didn't have access to those people, all of my money would be in a passively managed, diversified portfolio of low-cost index funds.

- I know a lot of people that have heard venture capital startups growing and decide they think they want to start angel investing. Do you think that is a similar strategy to stocks that people are going to outperform? - It's even worse. The data shows that it's even worse.

So, what's really consistent is that the top 20 venture capital firms generate on the order of 95% of the realized returns of the industry. Now, many people confuse these numbers by looking at the unrealized returns, which are irrelevant. All that matters is that the return ultimately gets realized. So, you can have really high unrealized returns if you invest in a company and then the next round they get valued at $300 million and then at a billion dollars.

But unless the company ultimately gets acquired or goes public at a valuation in excess of a billion dollars, that's not worth anything. So, about 3% of the venture capital firms generate 95% of the industry's realized returns. That says that 97% of professional venture capitalists are horrible at what they do.

97% of people who do this for a living are horrible at what they do. So, again, what makes you think as an amateur that you are going to generate great returns? Look, might you luck into one or two of them? Yeah, but you're not going to do it consistently, so you shouldn't try.

But I wrote an article about this for TechCrunch a number of years back, where I say you shouldn't do it, but you're not going to listen to me, so keep it to under 10% of your liquid net worth. Yeah, so it sounds like the the common theme is small amounts to feed that excitement, but if you want to increase the likelihood that your money will grow in the best way possible, passive investing, even if it's boring.

You know, it's really funny. Our chief investment officer is the guy who invented passive investing, the father of that passive investing, Burt Malkiel, an emeritus professor at Princeton, who started this whole thing off with his book, A Random Walk Down Wall Street. About a year into Wealthfront's starting, or a year into offering a diversified passive portfolio, we recruited him to be our chief investment officer.

And soon thereafter, we held an event in Palo Alto for our local clients, where they got to meet Burt and ask him questions. And one wise guy raised his hand and said, "Burt, do you own any stocks? Because here's the guy who really believes in index investing." And Burt had a cute little grin on his face, and he said, "Yes, and I also like going to the dog track.

I find them both very entertaining." So even Burt does it, but he does it for entertainment and with a very small percentage of his net worth. I haven't bought an individual stock in 15 or 20 years. And I was a really good public investor. What made you stop? I don't have the time to do it.

If I don't do a bunch of surgeries, would I operate on someone? No. Yeah. You know, there are experts that pick stocks. There are experts that buy art. So the platforms that let you invest in those, my general rule has been similar to yours, which is, it's probably not the best place for returns if they're coming to me, because I have not as much money as most people and don't know what I'm doing.

And it probably seems like the reason they're coming to me is for exactly those reasons, that I don't know what I'm doing. I think Warren Buffett said something like, "If you're really good at investing, why would you share your ideas? Why wouldn't you get some other people's money so you could buy more of those ideas?" Yeah, that always set me off with some of the platforms that let you crowdfund large investments, which is, if these are such great investments, aren't there institutional capital that would fund them?

And am I just the sucker? But there is one asset that I think a lot of people I talk to believe is different, which is real estate. And I meet plenty of people who think, you know, the way to save for the future is not to invest in the stock market, but to buy real estate, whether it's for rentals or for flipping.

Do you think real estate fits in someone's kind of, not investment portfolio, but savings plan for their future? You know, I've heard that over and over and over again. We get that feedback a lot from our clients at Wealthfront. I actually wrote a blog post that showed how the numbers work for buying rental properties.

And what most people don't realize is that if you buy a rental property for the first at least five years, or maybe even 10, you're going to have negative cash flow. So it's not really an income property, that if you have to borrow the money to buy the property, if you look at the all in costs, they're likely greater than the rents that you're going to earn.

And it's going to take a while for the rents growing at inflation to catch up to your expenses. Now, maybe you were fortunate that you bought it in an up and coming neighborhood and you're able to significantly increase your rents. But then that means that you're an expert at identifying neighborhoods that are going to change.

So to me, that is completely analogous to picking individual securities. And if you don't do that for a living, what makes you think that you're going to be better at it than the people who are doing that for a living? There are many people who do nothing but look for properties that are likely to appreciate at a very rapid rate so that they can increase the rents.

So I don't understand why people would go out and try to buy properties. To me, it's the same as buying stocks, better to invest in a diversified pool, like a real estate investment trust or something of that sort. And one thing I often remind people that are asking me similar questions is that people often don't factor in the down payment.

They say, well, the rent is going to pay for the mortgage. And even if it covers all the HOA fees and the property tax, that down payment would have otherwise also been earning a return in the market. And at a minimum would maybe have some dividends that would count as cash flow that they forget.

And they say, well, they're just looking at the mortgage payment. They're just comparing that to the rental income and forgetting that maybe they had to put $50,000 or $100,000 down. They don't have the insurance payments built in. They don't have the real estate taxes. They don't have maintenance. There's all sorts of things that they leave out of the equation that we put into the blog post that explained.

And I even shared the spreadsheet where I did all the calculations so people could play with their own numbers. It is really, really difficult to generate positive cash flow from a supposed income property. Yeah. So, you know, when I started this show called All The Hacks, the idea was to find kind of the extra optimizations that can help you earn more and upgrade money and life.

And, you know, the strategy of passive investing maybe doesn't feel like that. But there are some investment, what I'll call hacks, that I'm curious which of or if any of them you think are actually opportunities for people. So are things like tax loss harvesting or pre-tax retirement accounts or direct indexing, are any of those things that might kind of give you an edge in the long run that might be viewed as kind of an optimization or a hack that many people aren't taking advantage of?

Well, I'm going to quote Bert Malkiel again, who loves to say, "You can't outperform the market, so you shouldn't try. Better to buy index funds and focus on the three things over which you do have control." And they are diversification, which he calls the only free lunch in investing, minimizing fees and minimizing taxes.

Now, what most people don't realize is there's far more opportunity to minimize tax than there is to minimize fees. I mean, I think it's like 40x the amount of extra benefit you can get from doing a few smart things. So tax loss harvesting is one of them. People who earn more income typically don't qualify for Roth IRAs, but you can convert from a traditional to a Roth IRA with what's known a backdoor Roth.

We do that automatically for you at Wealthfront. That's a really nifty way to save taxes. So there are a bunch of hacks around minimizing your taxes that can actually make a difference of 30 to 70% of what you ultimately can retire on just by saving those taxes. And you mentioned tax loss harvesting.

For people who aren't familiar, how does that work? And is that something anyone can implement and start doing themselves? Sure. Well, they can try, but they can't do it as well as a computer can do it. So it's a loophole in the tax code that has existed for decades that wealthy people have taken advantage of because their financial advisors offered it for them that most people didn't know existed.

So basically, the way that it works is imagine that you have a portfolio of three index funds, U.S. stocks, foreign stocks, and bonds. And let's say you invested $10,000 and you invested $3,333 in each of those three index funds. Now, imagine that the foreign stocks goes up and the bonds goes up, but the U.S.

stocks goes down to $3,000. So the way tax loss harvesting works is you could sell that index fund for U.S. stocks, and you would take the loss of the $333. And then you would reinvest the $3,000 in another U.S. equities index fund, but something that was slightly different than the index you had before.

You can't do the identical index. Otherwise, you can't apply the losses that you recognize to lower your taxes. So if you had an S&P 500 index fund, you'd get a Russell 3000 index fund. And that way, you have maintained the risk and return characteristics of your portfolio. You still have $3,000 invested in U.S.

equities, but you've recognized this loss of $333 that you can either apply to up to $3,000 of ordinary income each year or against short-term capital gains. And if you have more losses than you have gains and more than you have $3,000 of ordinary income, you can roll it forward for future years.

So your portfolio stays the exact same in terms of risk and reward characteristics, but you have these tax losses that you can use to reduce your taxes. For most financial advisors, it's too complicated to do this more than once a year because they might have 200 clients and they have many tax lots for each client.

So if you add on deposits, that's a new tax lot. Every time one of your index funds pays a dividend, you reinvest that. That's a tax lot. So it's really complicated to look at this more than once a year, but computers don't care how many times they look at it.

So Wealthfront does it on a daily basis and that way we're able to capture more of these losses than a human being could do themselves. And the amount of value that we've generated, we actually publish these numbers. We're the only people who publish the amount of losses that we've been able to harvest, which says a lot about how much better we are than everyone else because others would publish if they could meet our performance.

But depending on whether you live in a state where you have to pay state income tax and depending on how risky a portfolio you're in, the riskier the portfolio, the more volatile it is, the more opportunity for tax losses. The amount of benefit, after-tax benefit, that we generate each year is worth anywhere between 3 to 13 times the fee that we charge.

So you're almost doing yourself a disservice if you try to do this on your own. Better to allocate it to us because it's not that we're so good, it's just that computers are much better at doing this than human beings are. So unless you want to write your own software, which is probably not the best It's not just that, Chris.

So even if you wrote your own software, you would need real-time data feeds in order to do this. And then you'd have to get an API from your brokerage firm with real-time data feeds that you have to pay for in order to do all this. So the cost of the data is quite significant if you can't amortize it across thousands or millions of clients.

Yeah, that makes sense. And so to someone listening who maybe hasn't really thought deeply about their investment portfolio until now, holds a few stocks, maybe holds a few mutual funds, a hodgepodge of things, how do you think people should make big changes to the way they've been investing? Well, as I said before, there's more money to be saved through minimizing taxes than anything else.

So if you have a short-term gain, you might want to think about holding onto it for a year before you sell it so that you pay a much lower tax rate on that gain. If you've only owned it for, you know, a couple of months, then I would think about selling it now.

And if there's something in which you have really high conviction, because you have an information advantage, not because you like a company, then you might want to hold on to that security as well. But as you sell the securities when they go long-term, or you have less conviction, and as you save incremental money, I really think you would be better served investing in a diversified portfolio of low-cost index funds, whether on your own or through Wealthfront, where you get the benefit of tax-less harvesting.

And what would you say to the person who's not investing today and, you know, is constantly hearing through the media that the markets are overvalued and nervous to just invest all this money they've been saving and, you know, probably saving hard for years? You know, one of the biggest disservices the media does for individual investors is tout the fact that the market's at an all-time high.

Well, the market should be at an all-time high every year because, on average, the U.S. equity markets compound at a rate of about 8% a year. Well, if that's true, then we should be hitting records every single year. So, the fact that the market is at the highest level it's ever been is absolutely irrelevant.

And one thing academic research has shown that it's almost impossible to time the market for when it's cheap. I know about five people on Earth who are pretty good at this, and they all run hedge funds that charge enormous fees and that require $50 to $100 million minimums. So, it's not something that the average human being can do.

So, my attitude is you shouldn't try to time the market. Just dollar-cost average. You know, invest monthly or quarterly so that maybe you get some benefit of the volatility of the market. But it should always be up, and it should always be at a high. Yeah, I know that dollar-cost averaging, there's a Vanguard study that showed that putting all of your money in at once is actually a better option than dollar-cost averaging.

But that so much of investing is emotional, that if you have an emotional satisfaction of knowing you paced out your investing over a year, over six months, that might actually be worth it for you as a kind of net happiness combined with investment return than just investing all at once, even if that is the academically best thing.

But, you know, one of the major reasons why the Vanguard research came to that conclusion is because on average markets are up every year. So, if you're playing the averages, of course you shouldn't dollar-cost average. You should put everything in now. So, that's somewhat of the fault of that study, and I know I'm arguing against myself.

But I think the big reason why the data shows you shouldn't dollar-cost average is because on average markets go up. Therefore, you should invest as soon as you possibly can to get the benefit from that. But I think in terms of regret minimization, which is really important and a big part of the reason why behavioral economics is so compelling, is that people would be better off if they dollar-cost average.

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Are there any other behavioral economics lessons you've learned over the years that would be worth listening to and sharing about when it comes to investing and saving? Nothing about investing, good investing feels right. So there's a lot of academic research that has shown that on average individual investors prefer to invest when the market is rising and they prefer to sell when the market declines.

Well, that's the exact opposite of what you should do. That's actually really, really bad. So it's hard to pick when the market is declined enough, which is why I just say dollar cost average. But whenever something feels like it's the right thing to do in investing, you better question it and ask someone who's really good at investing about it, because the likelihood is that that's not the right thing to do.

So so one of the feelings I have right now is I'm watching countless people online that I know making boatloads of money, buying, you know, NFTs on the internet, buying long tail cryptocurrencies that no one's ever heard of. What do you say to the person who's sitting on the sidelines feeling like they're totally missing out while their friends are making 5, 10, 100 times their money in matters of weeks?

Obviously, you know, it would feel good to start making that money. But what do you say to those people? That's not investing, that's speculating. And is there a place for speculating, you know, in the market for for people's portfolios? Or is that I don't believe there is. I personally don't believe there is the most sophisticated investors I know, don't speculate.

So the difference between a speculation and an investment is that an investment has a cash flow. So you can evaluate its merits based on your expectation for those cash flows. Something that doesn't have a cash flow is purely a gamble. Why should gold go up? It's a shiny metal.

It's purely emotional. The same is true, I think, for cryptocurrencies. So to me, they are speculations. Commodities are speculations. I don't think that speculations have a place in a responsible portfolio. That being said, people have a fear of missing out. So they're going to do it. And all I can say is keep it to a small percentage of your portfolio.

The fact that they went up doesn't mean that the person who bought them was smart. It means they were lucky. And that's the part that people have a hard time understanding. This is like this is why I really preach, don't judge a decision by its outcome, because luck can play a role in that outcome.

Judge it by the quality of the process that you pursued in reaching that conclusion. Yeah, I try to look back, a friend of mine always reminds me, you know, if there are decisions we made in our lives, that if we made an alternative decision, we would have made more money.

And he always says, look back at the information you had when you made the decision. And with only that information, did you feel like you made a good decision? And you should feel good that you made a good decision. You might have missed out on making a lot of money, but you can at least know that you made a good decision.

So luck plays a role in outcomes. So you can't totally judge a decision by the outcome. That makes sense. You've mentioned a lot of times, you know, a lot of the people you know, and the most sophisticated investors you know, do this. What do you think changes as people have more money in terms of the way they invest?

And what threshold is it that those changes happen? I think as people become wealthier, they think they become smarter. And it sounds like you don't believe that's true. I do not. So do you think there's a level at which people's investment strategies should change? I do not. So the wealthier you get, so once your wealth goes above a certain level, you qualify for a private wealth manager as a financial advisor versus just a regular financial advisor.

A private wealth manager might have a five or $10 million minimum and might work for Goldman Sachs or Morgan Stanley or JP Morgan, whereas the financial advisor works for Morgan Stanley, Smith Barney, or a general brokerage firm. Now, one of the things that one of the biggest things that private wealth managers sell to entice you to let them manage your money is access to alternative assets.

So alternative assets include venture capital and private equity and hedge funds. So people constantly hear stories about how well those kinds of investment managers do, and therefore they want access to them. And the private wealth manager sells the ability to get access. What they don't tell you is the ones that they give you access to are horrible.

And they can tell you this from experience, that as the manager of a co-manager of one of the premier alternative asset managers, Benchmark Capital, we had our choice of investors. We did very, very well. And if you do very well, you have a choice of investor. As I said earlier, individual investors consistently like investing when the market goes up and they like selling when the market goes down.

Well, that's the exact opposite of the person that we want as an investor in our fund. When the market declines, we don't want people running for the exits. We want people who are going to be there through thick and thin. So we want investors who have the longest term perspective.

And they're generally the university endowments and charitable foundations. The last people we want are individual investors. So if you have a great track record, you're going to take money from the best investors and not the worst investors. So who do you think is going to take money from individual investors?

The shittiest investment managers. So it's like a Groucho Marx used to say, never join a club that would have you as a member. If a private wealth manager is giving you access to a fund, you should not want it. But I see people fall for this over and over and over again.

So is there a world where it makes sense for the average investor to work with one of these wealth managers or financial advisors and pay their fees? If they are very scared of investing and they need a lot of handholding, yeah. Yeah. If the alternative is not investing, it might be worth it.

Agreed. Agreed. I think if one were to hire an outstanding tax advisor or tax accountant, you get 90% of the value of what you get from a wealth manager at a tiny fraction of the fee. You get all the handholding and all the sophistication without having to pay 1%.

Yeah, I think the same thing goes with estate planning. I've talked to plenty of financial advisors that say, oh, we'll help you with your estate planning. And the funny thing is one of them, most of them don't actually do it. They'll just help find the person, which you could very well do on your own.

But the cost of estate planning is like a one time few thousand dollars, update it maybe the next time you have a kid or something. But other than that, there's no reason to pay an ongoing fee for something like that. And the estate planner who works for the private wealth manager can't be anywhere near as good as the one who's independent because the one who's independent is going to make a lot more money.

So it's an intelligence test working with the estate planner who works for the private wealth management firm. I never understand that either. Yeah, wow. So, OK, so I feel like we touched on a lot of different investing topics. The one thing that I also want to do is deviate kind of wildly from investing and ask for your thoughts on a few things that you've been fortunate to share with me before, but that I thought are really valuable lessons I've learned from you.

One is all about negotiating. I've had the the pleasure of working for you when negotiating and then the alternative of working against you and negotiating. I think you got the better of me, Chris. But I think I think you have a strategy that is rare and I'd love you to share it a little bit about it.

Well, it's one that I learned from my partner, Bruce Stanley, who's had the biggest impact on me professionally. He's the best venture capitalist I ever met and the best influencer I've ever met, not influencer in the Instagram context, but influencer in the context of ability to influence one's decision.

Bruce is a really big believer in giving trust to get trust. And the analogy that I like to use to describe his strategy is you put the gun in the other person's hand. If they fire, you don't work with them. So when Bruce would negotiate with entrepreneurs, like if I were negotiating a deal with you, Chris, I would say, what do you think is the fair value?

You just tell me and I'll do it. Now, Bruce knew what the approximate range of fair was. Most human beings don't want to be thought of as taking advantage. So many of them will actually ask for something that's slightly below average. Or maybe they might ask for something that's slightly above average.

A very small percentage of human beings will ask for something well in excess of average. And if they do, that's like firing the gun. So you just don't work with them because you know that they're going to try to take advantage every step of the way. And that way Bruce slept well at night.

He developed an unbelievable reputation among entrepreneurs as someone who was phenomenal to work with and everything seemed to work out well. So I consider things like that, just total great hacks that help you operate your life in a more effective way and, and help you with success. Are there other, either kind of like ways to operate in life or business that you've picked up that you think are kind of parting things to share?

I think the biggest thing that I have to share is always try to be Pareto optimal. And by that, I mean you try to figure out what's the 20% that drives 80% of the value. The Pareto optimal is named for Vilfredo Pareto, a mathematician in the, I think 1880s in Italy, who came up with perhaps the most compelling rule of nature ever to be discovered, and that is the 80/20 rule that in almost everything, there's an 80/20, 80% of the wealth is held by 20% of the people, 80% of the contributions in a community are made by 20% of the people.

There's 80/20 in absolutely everything. And I think it's an amazing proxy for judgment. People who apply the Pareto rule have much, much better judgment. Figure out everything is an equal. There are certain things you can do that are far more impactful than others. Figure out the most impactful things and only focus your efforts on those things and let all other stuff just happen.

Cause it's not going to make much of a difference. Yep. I've tried my best. I think one of the things that many of the listeners here will, will share with me is, you know, a desire for optimization often feels hard to stop. And the final advice I have for them is instead of optimizing the last 20% of one part of your life, try to optimize the first 80% of another.

That's phenomenal advice. And so if you've maxed out your, your travel hacking and your credit cards, look at investing. If you've maxed out investing, look at savings or look at your relationship and only come to the 20% when you've hit the 80% on everything. And if you've hit the 80% on everything, then just congratulate yourself.

Cause that, that happens very rarely. Now there's one other thing that relates to the conversation we had about taxes. And that is, uh, interestingly, I do not try to minimize taxes wherever I can. Let me repeat that. I don't always try to minimize my taxes because there is typically a trade off between tax savings and liquidity.

The more you're willing to lock up your money, the more tax savings one is typically able to generate. I find that liquidity is undervalued that having money available when you need it is really, really important has been for me, and so I will give up tax savings in order to have more liquidity.

And that's something that runs counter to the hacks that you propose to people. I just want people to consider whether or not it's going to lock up your money. And if it is, is that a good idea? A great example of what I think is terrible advice for people who know how to save is maxing out your 401k.

Most pundits will recommend that you max out your 401k. I think that is horrible advice because you cannot use the money in your 401k for anything until you retire. So if you want to fund your kid's education, you can't access it. If you want to buy a home, you can't access it.

It's a really bad idea. Now, it's great to get those tax savings from the 401k, but I don't think those tax savings are worth the loss of liquidity. So my recommendation to people is only use your 401k up to your employer match. If they're not going to match, put it into an IRA because at least you can borrow from an IRA and use that money.

So that's something that's really counterintuitive that most people don't consider. And I think that the reason that pundits give this advice is that the vast majority of Americans literally don't know how to save. So the only way you can get them to save is to force them to do so by garnishing their paycheck through a 401k contribution, which is why I started out this advice by saying, if you know how to save, then maxing out your 401k is a really bad idea.

Is there a point at which if someone, let's say, knows how to save, has a decent amount of cash saved up for emergencies that you think it could make sense? It depends how much money you think you're likely to need in the future. And are there things you think people commonly don't realize they might need liquidity for?

Down payments on a home, especially if you live in a high cost of living area. I mean, if you live in California or New York or major metropolitan areas, you need a lot of money to make a down payment and you need a lot of money to pay for your kid's college.

What's your stance on a 529 then? It's a similar type of vehicle to a 401k from a tax advantage standpoint, but with kind of very restrictive rules on how you use it. But you can use it well before you retire. So I think it's a better product in that you have access to it sooner and there's more flexibility that I guess it can be used for private school if you want, but it's locked up for 18 years versus potentially 40 years.

There are still challenges associated with it, but I don't think it's as bad as a 401k. You said earlier that contrarian opinions are often valuable and hard to find. So I think that this is one of the more contrarian things in personal finance that I know you've shared with me and has made me rethink whether I'm valuing liquidity appropriately.

Boy, most people don't value it until they need it. Yeah. And then, then you're forced to pay huge penalties. Huge. And so, yeah, I think it's something to think about. And, and I think the, the number one thing that I'm sure we both agree is that if you aren't leaving aside enough money for emergencies, that, that should be priority one.

Absolutely. Absolutely. Well, thank you so much for being here. Before we go, where should people find you and Wealthfront if they're interested? Well, you can learn a lot more about Wealthfront at wealthfront.com. We have an Instagram account. You can follow us on Twitter. If you want to follow me on Twitter, it's A Rackleff, A R-A-C-H-L-E-F-F as in Frank.

And if you are thinking about opening a Wealthfront account, if you go to wealthfront.com/andy, you'll get a special offer of getting the first $5,000 you invest managed for free, and for everyone you invite, you and the invitee will get an additional $5,000 managed for free. So you can get a lot of money managed for free that way as well.

Great. Everyone here loves a deal. So thanks for sharing that. And thanks for being here. My pleasure, Chris. That was fantastic. I really have learned so much from Andy in the past few years, and I hope you learned a few things from him today as well. Next week, I'm going to be doing a solo episode from all the great questions and hacks you all have shared.

I'm really looking forward to that one. If you have anything you want to share, whether it's a question, a hack, or you just want to say hi, I love hearing from listeners. So please email me, chris@allthehacks.com or @hutchins on Twitter. That's it for today. See you next time. I want to tell you about another podcast I love that goes deep on all things money.

That means everything from money hacks to wealth building to early retirement. It's called the Personal Finance Podcast, and it's much more about building generational wealth and spending your money on the things you value than it is about clipping coupons to save a dollar. It's hosted by my good friend, Andrew, who truly believes that everyone in this world can build wealth and his passion and excitement are what make this show so entertaining.

I know because I was a guest on the show in December, 2022, but recently I listened to an episode where Andrew shared 16 money stats that will blow your mind. And it was so crazy to learn things like 35% of millennials are not participating in their employer's retirement plan.

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