What if you could distill 20 years of investing wisdom into just a few important lessons? Today, we are unpacking critical insights that can help you build a more resilient portfolio and make smarter financial decisions. As Ben Carlson says, I know plenty of investors who have been at this game for decades who still make the same mistake.

It's really more about having a process. We'll explore why even seasoned investors still struggle with risk and how to create a strategy that gives you confidence in any market. Whether you're a novice or a veteran, these lessons will transform how you think about investing and your financial future. I'm Chris Hutchins, and if you enjoy this video, give us a thumbs up.

Or if you have a question, please leave it in the comments. And if you want to keep upgrading your life, money, and travel, consider subscribing. Ben, you said that experience is not the same as expertise in investing. What did you mean by that? I think I just became annoyed at all the pitch books I was looking at early on in my investing career where it said we have 134 years of combined experience.

And if that's enough to be like, okay, we'll give you our money, sure. And you found that the whole idea of just because you've been in this game for a long time doesn't necessarily mean that you're an expert on something. It doesn't give you the just because you've been doing it for a long time that you have this predictive model or this process about how the world works.

And my whole point is that, yes, experience helps because if you're investing and you live through a lot of these different market cycles, you kind of pick up on some things. But I know plenty of investors who have been at this game for decades who still make the same mistakes or they change their investing strategy all the time and make the same mistakes that you would think some noob just starting out investing would make.

So it's really more about having a process that you'll stick to. That matters more than how many years you've been doing this. Yeah. And you say expertise is important, but you also had a lesson that intelligence doesn't guarantee investment success. So expertise isn't just intelligence, is it? Right. Well, there's the old Buffett quote that like, "Investing is not a game where the guy with 160 IQ beats the guy with 130 IQ," right?

He's like, "You can have the leftover." So it's more about the temperament and the ability to control your emotions and that emotional intelligence is the piece. Because when I first started in the investing world and I was this wide-eyed young person, I was really impressed by the smart people, the people who use the jargon and the people who sounded like they knew what they were talking about, the people who made predictions all the time.

And they were very certain in everything that they were saying. And I thought, "Oh, man, that's where I want to be someday. I want to be in that person's seat where I can have complete certainty over what's going to happen in the economy and the markets." And the longer I was in this game, the more I realized like, "Oh, wait a minute.

Those people are full of it. They don't really know what's going to happen." It's just that people want to have certainty in their life because the future is always uncertain, especially when it comes to investing in the markets and the economy. Like no one really knows what's going to happen.

And I always really was attracted to the people that would say occasionally, "I don't know," or "I was wrong," or, you know, "And here's how we're going to fix it." So those are the people that really, I thought, had the most intelligence to me. The people that admitted, like, "This part of the game is too hard for me to do.

So here's how I'm going to get around that. And here's what I'm going to do instead." Yeah, it's funny. I got a call from a friend yesterday who said, "I'm dumping all my NVIDIA. It's AMD. AMD is the winner now." And I couldn't help but be like, "Am I missing out here?" Like this person knows what they're talking about, right?

That's why they told me this. How do you react when someone says that? Because it's so hard. I guess I try to stay in the lane of there are no always or nevers when it comes to the markets. There's no 0% or 100%. It's a range of probabilities. And unfortunately, the probabilities are not like a casino where you walk in and you know these are the probabilities.

This is the payoff. Investing would be a lot easier if that was the case. But I think you still have to just think in more in terms of a range of outcomes. So that person who says AMD is going to be the winner, they should probably put some sort of, you know, bandwidth on that.

Like, you know, there's a 70% chance that this is going to happen. Here's how I'm going to size my position accordingly. But there's also a 30% chance I'm wrong. NVIDIA is actually going to be the winner and AMD is going to follow up. So I think that's the way you think about these things in terms of a range of outcomes and how willing you're able to make a big bet on something as opposed to just trying to say like, "Yes, this is it.

100%. This is what we're doing." And I feel like it's hard to ever get to that point when you're investing. So you had these 20 lessons. Number three was that no one lives life in the long term. And I think it's kind of relevant here because it almost doesn't matter what your bet is if you can't handle it.

Why is it important for people to realize that while they might be investing in the long term, they don't live long term? I saw that part of that quote from Daniel Kahneman, who recently passed away. And he spent his whole career studying human foibles and human behavior and emotions.

And when he gave his Nobel Prize speech, he said, someone asked him like, you know, "Why can't more people stay the course for the long run?" He said, "The long run is not where life is lived, right? It's a series of short runs." And I think your experience when you were born, the way you came up, all that stuff, the personality you were given, all that stuff really impacts the way that you save and invest and handle your finances.

We were talking to a client a couple months ago who worked at Lehman Brothers and had 75% of his net worth in Lehman stock heading into the GFC. And it went to zero. And he had to slowly but surely, he went to another Wall Street firm, made some more money.

Now he's making a very good living as a Wall Street trader. But that experience, he admitted it. He said, "Listen, going through what I went through at Lehman has changed my entire perception of risk forever. I'm just not willing to take as much risk as I should be based on how much money we have and how much money I make." And that was actually, I thought, a wise decision 'cause someone would say like, "Listen, this person is making a lot of money working on Wall Street.

They get these huge bonuses. They have plenty of money in the bank. They have this big portfolio. They have the ability to take a lot of risk." But this person realized, "I don't care what that ability is, what the spreadsheet tells me. I can't physically or mentally make myself do that.

So I wanna take a more conservative route with my portfolio regardless of what the results are gonna be. I know my results would be better if I could invest more aggressively, but I have this mental block that's holding me back." And actually, I think that's the right decision as long as you don't take it too far, right?

And do those experiences change over time? Does someone who is 25 feeling like they have a grasp on their risk tolerance, should they be checking in as they get older, get married, have kids, buy a house? How should you evolve your risk? I think the biggest thing too is the difference between dollars and percentages.

So if you're just starting out and you're young and you have $10,000 in your Robinhood account and you lose 50%, you're down $5,000. It stings, but you have a whole lifetime ahead of you of saving and investing that you can make up for that. Now, let's say you get to $100,000 and you lose 10%, you're now on $10,000, right?

And you say, "Well, that's more money than I lost with a 50% loss at 10,000." Then you get to a million dollars and a 10% loss is $100,000. So I think sometimes people have a hard time going from percentages to dollars and realizing that the more money you have saved, the harder it can be to see those percentages or those market values go down, right?

So I think that's a hurdle sometimes for people. So as you go from like the young investor who has decades and decades ahead of them, compounding is the whole thing and saving, where the bear markets don't really matter, the bear markets can sting when you get towards middle age, later age, heading into retirement.

Even if you know that eventually the stock market is going to come back, it's a lot more painful to view those dollars just evaporate like that. Yeah, I was just looking for the sake of an argument I was trying to make at the average S&P return. And it seems like over, I don't know, 50, 60, 70 years, it's been over 10%, but obviously in short periods of time, it's been down 30, 40%.

How do you tell people who are here for the long run? Like they know that it's 10%, they're okay with 10%, but they're struggling in the short term. What do you tell them? Well, I think perfect is the enemy of good in a lot of ways. I think you have to know yourself first.

That's the important thing 'cause you could make a blanket statement saying, "Listen, all young people should have all their money, "100% invested in equity. "Stocks are your best long-term bet "based on expectations and history "and the way that these things should work." But some people just don't have the ability to sleep at night if they know that their portfolio is going to drop 30, 40, maybe 50%.

I think a lot of people in the first decade of this century realized that there was a 50% crash following the dot-com bubble blowing up and then a 50 some percent crash when the great financial crisis hit in 2008. And I think a lot of people realized I was not prepared for this to happen.

There's only so many like Warren Buffett and Charlie Munger quotes that you can listen to, but hey, if you can't stand a 50% correction, you shouldn't be in stock, that's what they say. And for some people, that just means, I don't know, holding more cash or holding more bonds or something that is a little safer so you can actually get to that point.

That may not be optimal based on the spreadsheet and based on the compound interest formulas and all these things, but if you have to do that so it makes you stay in the game, I think making those suboptimal decisions, it's actually okay. - Yeah, last one on risk. You said the biggest risks are always the same yet different.

So a part of me is like, you know what? It always works out, but will it work out this time? I feel like people are constantly thinking, you know, yeah, it always worked out, but maybe this time is different. - Yeah, there is this thing in your head where you think, geez, when stocks fell in the past, that was a huge buying opportunity, but what if this time, what if it's not?

And sometimes these things do last longer than others. There are times when stocks go nowhere for a decade. It happened from 2000 to 2009. The total return to the S&P was negative 10%. You lost 1% a year and that's not even including inflation. And so there are times when that can happen.

And so the long-term for certain people, some people might think a decade is a long time, but there have been handful of instances where asset classes have gone a decade and given you zero return. So it can be very difficult to stick it out in the stock market. And I think the, I don't know, the simplest form of risk management is probably just diversification.

And that is, you know, maybe by asset class or strategy or sort of your income streams, or I don't know, however you want to be able to survive. 'Cause I think the whole point of the long-term is that survival is the key. And back to your like experience thing, I came up, I started my career a few years before the great financial crisis.

And I think living through that, seeing what happened and how people, how they handled that situation, I think changed my outlook on the markets and investing for the better. Because I was young and dumb and naive. And I've been reading stocks for the long run and Jack Bogle and Warren Buffett.

And I just assumed this stuff happens and then it comes back. And it did come back. So that was good for me. But I also saw all these people in the industry lose their minds. I had a colleague who was one of the smartest people I know. We talked about the high IQ thing.

During the great financial crisis, he told me I'm turning off all my 401k purchases in the stock market and I'm going to money market funds. And he says, because I'm just worried that the whole system is going to collapse. And I thought this guy is nuts. But he's also one of the smartest people that I know.

And he just, he lost his temperament. And I mean, I'm never going to make better purchases than I made in my 401k plan. Then during that 2008 period, when stocks were down 50, 60%, you know. But it's a lot easier to say in the rear view mirror, of course you should have been buying them.

Because at the time, people were freaked out. And so I think you just have to have some sort of process that helps you understand your time horizon and risk profile. So if and when those periods happen, and they don't happen very often, you actually have a plan instead of trying to make a plan when emotions are very high.

And understand the needs you might have for the money, right? If you really don't need this money for 30 years, try not to, you know, like you can't ignore and not look at it. That's super hard. But you know, when it's down, even if you have a 10-year dry spell, it's okay.

I do have a sort of rule of thumb, personally. And it sounds irrational, but I never look at the balances of my investment accounts when we're in the bear market. I just, I don't look. I don't want to look. I know in my head, based on this percentage loss, I kind of know where I'm at.

But I don't want to look. I only look during bull markets. And that may be irrational. But I think you need some sort of out of sight, out of mind. And I think to your point, the time horizon thing is a big one. If you are going to put a down payment on a house in five years, I don't know, that money probably, you shouldn't have it all in the stock market.

Because the stock market, as we've seen these past few years, can drop very swiftly. It fell 35% in a month, basically, in 2020. If you were holding that money in the stock market and waiting for a down payment, you lost a third of your money. So I think aligning your time horizon with your assets makes a lot of sense.

Yeah. And I would say, if you weren't around for the great financial crisis, you probably were, if you're listening to this, around during the pandemic. And think back to how that felt. There were people saying the exact same thing. Markets were down 30%. And I remember telling people, I was like, "Isn't this a good buying opportunity?" And they're like, "What if we could be going to the world falling apart and everything?" And sure enough, it was a very, very short bear market.

But it didn't feel like that was obvious at the time. Which I guess brings me to this lesson you had, which was that optimism should be your default. And talk to me about why that's important. My whole thinking is if you're pessimistic about the future, what's the point of investing anyway?

Investing itself is delaying gratification now so you can have better results in the future. So I think... Listen, the world is an unforgiving place. There's lots of bad things that can happen. And I think the internet has made more people cynical and pessimistic in a lot of ways. But when it comes to your portfolio, I think you have to have long run optimism.

Otherwise, what are you investing in the first place? 'Cause the people who aren't very optimistic, they put all their money in gold bars or cash and hide it away under the mattress or in the backyard or something. And that's just... I mean, you have to invest in something if you wanna beat the rate of inflation.

If you want your future to be better than the present, you have to put your money to work and take risk in some form. And I think having an optimistic view about the future can help you stay invested even during those tough times when it feels like pessimism is ruling the day.

You mentioned earlier, if you have these upcoming events, maybe you take it out of the market. I think one silver lining for people living right now and investing right now in 2024, we're recording this in July, cash is actually a decent asset right now. We've had years where cash would pay nothing.

And the market is really your source of return. But if you need money in 2 years, I can't think of a time in my life where it's been easier to feel good about not investing your money for the short run because you can lock your money up for 2 years right now and earn a pretty good return.

4% to 5% on your cash is really good, especially where we're in the 2010s. And I've always had something of a barbell portfolio. On the one hand, I take a lot of risk and equities over here. And in all my long-term accounts, it's 100% equities. But then over here in my more liquid bucket is cash savings.

And that's for any sort of rainy day fund or vacations or any other shorter intermediate term thing that we're planning for. We're gonna renovate our house in 2 years. So we have it in here. And I kept that money in cash even when rates were zero for all those years, right?

Because I really valued that liquidity and the ease of access and the ability to just take it and know it was going to be there and it wasn't going to fall and it wasn't going to be volatile. And now that I'm actually earning something on that, it's, yes, it makes things a lot easier.

Like the other side of that, unfortunately, for some people is now you see, "Oh, I'm earning 4% or 5% in cash. Why do I need to take any risk at all?" I think cash can become a gateway drug to market timing. So I think you really have to make a definition in your head of your portfolio of this cash is part of my overall asset allocation, or it's my emergency fund, or it's my intermediate term savings, or whatever it is, and not just get sucked into the fact that, "Well, I'm just going to keep all my money there because it doesn't move.

It doesn't lose money on a nominal basis." So I think you have to be a little careful there and just understand what the purpose of that bucket is for, because these 4% or 5% rates aren't going to be here forever if and when the Fed cuts rates too. - Yeah, and you probably know off the top of your head, this year, if you went into the beginning of 2024 saying, "Wow, cash rates are good.

Let's just do that. I'm worried the market's overpriced." You would have missed out on a pretty monster first half of the year. - Yeah, the U.S. stock market's up almost 20%, you know, through the year. Yeah, and that's after a 26% gain last year. And so that's the problem.

And then that's when mistakes can compound. If you don't have these things bucketed out, if you're just kind of, you know, going out about this without a plan and say, "Yeah, cash rates are high. I'm going to put all my money there." And the stock market takes off, then what do you do?

"Well, I'm going to wait for a downturn." What if it takes a long time for the downturn to happen? Or when the downturn finally does happen, I saw this a lot after 2008, you know, there'd be a 10% correction. And it's like, "All right, buying opportunity. No way, I'm going to wait till it's 20%.

I'm going to wait till it's 30%." And then you get stuck in cash. So I think you have to have a plan of attack with that, whether that cash is ever going to be invested, or if it's not, I think you can't just get stuck in the middle where you're trying to guess when a good time to put it back in the market is.

- It's funny because one of the reasons I think, especially people that are kind of have an optimizing personality, might get stuck trying to put cash to work, trying to pick a portfolio comes to one of your lessons, which is there's just no such thing as a perfect portfolio.

- No. And that's why dollar cost averaging is such a simple strategy. And it's probably not the best strategy in the world. I'm sure you could think of a way better way to optimize that and make these better rules. I'm going to buy when the S&P 500 does this, or when this trend line is broken or whatever it is.

But if you just invest a little bit of money out of every paycheck or every week on a weekly basis, or a monthly basis, or quarterly, wherever it is, and just follow that strategy, we did this with a client in 2022. They came to us with a big chunk of cash.

And unfortunately, they had sold some of their stocks in 2020, right? They got freaked out by the pandemic, and they were sitting on way too much cash for far too long. And they came to us at the end of 2021 and said, I need to get this cash back to work.

I know I do. I know the data says I should probably just put it back in the market, right? Because on average, 75% of the time over a one-year basis, the S&P 500 is up, right? So that's pretty good odds that it's going to be up again in the future.

So the numbers would tell you, put that money to work today in a lump sum, and just forget about it. And most of the time, you're going to have better results. But people think through this regret framework, right? Where, well, what if I put it in and the stock market falls 20%?

Then I'm going to feel like an idiot. So dollar cost averaging from a psychological perspective can help. And with this client, we invested in dribs and drabs. It was like the 15th of every month for a whole year. And the market was very volatile through that whole period. And this is the start of the bear market.

So the tiny worked out pretty good. But throughout that bear market, we have wild ups and downs, right? And we set this plan in advance. We said, let's just follow it, come hell or high water. And this is the plan we're going to stick to. But six months in, well, should we put more in now?

Should we not put enough? Should we take it back a little? And we said, no, this is the plan we set out to do. Regardless of what the market's going to do, let's follow it. And after we did it, we followed the plan. Things worked out great. And looked back and said, this was the right decision.

But we also told them, listen, this was the right decision regardless of what happened to the market, right? Because the market could have taken off on day one. And you would look back and said, why did I do that? And the whole point was, you made the decision ahead of time.

And you know you can't predict where the market's going to go. So just follow your plan. And that's the problem a lot of investors have, is even if they have a plan, it's really hard to follow it. Which is why I think technology and automation is one of the giant leaps forward for individuals.

Because you can just make a good decision ahead of time, hit a couple buttons, and forget about it. And let the system do it for you. Yeah, I think one of the most valuable lessons I've learned, and it's hard to even stick to, even though I know it well, is evaluating decisions on the information you had when you made them.

I remember there was a point in time where there was this kind of optimal tax thing I could do, but it required being out of the market for like three months. And it just happened that those three months were an election. And I was like, I don't know what's going to happen.

But I know that unless the market goes up 10% in three months, like this is a good decision. And statistically, the market's probably not going to do that in three months. So I'm going to do this. And the market went up. And it went up about on par where it was a breakeven decision.

And so I was like, gosh, I went through all these hoops to basically save no money. However, I just kept reminding myself, I didn't know what the market was going to do. And there were a lot of outcomes. And so if you evaluate it with saying, "Hey, if I had the information I had at the time, would I have made the same decision?" And the answer is yes, then hopefully you could stop overthinking it.

And that's true in business or life or investing, right? And that's why I think it's important for a lot of, especially if you're prone to making mistakes. And this may seem like overkill to people, but a lot of times I think performing that like pre-mortem, pre-mortem instead of post-mortem, where you kind of write down some of your reasons for making a decision ahead of time.

And we do this with our... I'm on the investment committee at my firm. And when we make a decision to either do something or not do something, we take notes, we write it down. And like you said, we use the information we have at that time, because we don't know what's going to happen from here.

There's all these different paths and tree branches or wherever that things could go. And we just want to make sure that we're making a consistent decision-making process with the information we have at the time and the understanding that there's this irreducible uncertainty going forward. And I think for people that are prone to investment mistakes, writing down those reasons ahead of time, and then regardless of which way the market goes from there, or however the decision works out, you can go back and say, "Listen, I use all the information I had at the time.

Things worked out great. If they didn't work out, you still made the right decision." I think that's the thing about investing in terms of getting from the short-term to the long-term is just making good decisions over and over again, with the understanding that sometimes they're going to lead to bad outcomes.

- The decision and the outcome are very different. - Yes. - We talked about there's no perfect portfolio and diversification can help. There's the whole rest of the world you can invest in. How do you think about having a simple portfolio, but international exposure? - Well, a lot of people do not like international exposure right now because the US stock market is the only game in town for the past 12 to 15 years, right?

And the US now makes up 60-65% of the global stock market, depending on what you're counting. So it's a huge, it's like, if you look at a pie chart of the US over time, it's like Pac-Man eating the rest of the globe, right? It went from, I think as low as 35% in the great financial crisis.

So it basically flip-flopped from 35 to 60-65. And the US has outperformed everything. And I think the reasons are pretty obvious. The tech stock sector is way bigger here. We have more innovation. And I think part of it is we really value the stock market here more than other countries.

But the historical returns before 2008 for US and international stocks of the previous 40 or 50 years were essentially the same. You got like 10% in international stocks and 10% a year in US stocks. And there were cycles of outperformance for each. International stocks did better in like the '70s and part of the '80s.

US stocks did better in the '80s, '90s and part of the 2000s. And you had these periods where they would flip-flop. And now we've had the longest period of US outperformance in history, not just in terms of magnitude, but of duration. It's been like 15 years. So I think a lot of people are giving up on international stocks.

My whole thing is I don't like to go to extremes. And so I think the value of international investing is just that there's going to be a period in time when the US underperforms, the dollar gets weaker or these tech companies falter and stocks in other sectors outside of the US do better.

And I think it just takes away the concentration risk of being invested in the one stock market that underperforms all the other ones because it's happened before in the US and it will probably happen again, even if it doesn't feel like it now because the US seems like it's invincible.

So you had this lesson that you ended your post on with less is more. And I keep coming back to every time I've had a complicated investing strategy, I don't adjust it over time. I can't really explain it to myself. How do you think about what the right amount of complexity is?

My whole investing ethos has boiled down to simple over complex. And I came of age in the investing world in the endowment and foundation world. And all of these endowments were chasing Yale and Harvard and University of Pennsylvania and Princeton because they had these extremely complex portfolios. And they were really hard to run operationally and they involved hedge funds and private equity and venture capital and hard assets and all these different and very few stocks and very few bonds.

And so it was a very exciting type of portfolio. But I think a lot of these organizations that tried to copycat that didn't realize the complexity involved. And those schools had these teams of people, you know, dozens and dozens of people overseeing these funds. They had experts in each of these asset classes and strategies.

Whereas if you try to just run this with a handful of people, it's much harder to do and it's much harder to gain access. And that was a good lesson for me in terms of the complex stuff is way more interesting, right? It just is. It makes an easier sell.

If you're a salesperson in the investing world, selling complexity is way, way easier than selling simplicity because going simple is harder because it requires you to actually understand what you're doing and make good decisions ahead of time and then kind of just get out of your own way. Whereas a complex system, you feel like your hands are on a steering wheel and you feel like, well, geez, this is someone really smart brought this to me.

It has to be good. But I think the problem with complexity is as you said, it's harder to understand. The fees are typically higher. And I think when you don't understand exactly how something works, it's way easier to give up on it, especially when it inevitably underperforms because everything underperforms eventually.

So I think a simple strategy is easier to stick with over the long run because you understand it. Like when I'm invested mostly in index funds, when the stock market falls, I'm perfectly comfortable putting money back into index funds. If you hold a complex strategy or even a strategy of a handful of individual stocks, it's way harder to look at yourself in the mirror when you're down money and you say, well, am I rebalancing into the pain here or not?

I think that's the hard part is when it doesn't do very well. It's easy to hold a strategy when it's doing well. I think that's the problem with complexity is that it makes it harder to double down and stick with it over the long run. And that's why most people fail then because the first sign of trouble, they get out of it and then they go to another complex strategy that I think is gonna do even better and you just end up hopping around and it just doesn't work over the long run.

- Yeah, I remember when we had the crash in the pandemic, I had some percentage of my portfolio in a risk parity fund that Wealthfront had launched. And I was like, I remember best I can explain risk parity, which by the way is way more complex than I'm gonna even attempt was like, you're levering up your bonds to try to get similar returns to stocks.

But unfortunately, during the pandemic, bonds and stocks both went down. And I remember being like, "Wow, this strategy got just hammered." And my wife asked me, she's like, "Was it gonna go back up if the market recovers?" And I was like, "I don't know how to answer this." Like when something really levered goes down, can you ever recover?

I'm not sure. And the solution for me was like, just get out. Even though it's down, fortunately, there'd been enough tax loss harvesting to kind of just make it feel like selling at a loss was worth it. But I can't tell you how much better I feel just being able to explain why everything is what it is and why I'm doing it and how it works.

Because I think I read that risk parity white paper four times and I still don't feel like I could explain it to someone. Yeah, setting expectations is a big part of it. So if you're invested in the stock market, on average, once every year, year and a half, you're gonna experience a 10% drawdown probably.

Once every three or four years, you're gonna have a bear market. Once every, I don't know, 10 or 12 years, you're probably gonna experience some sort of crash. That could be like a 30, 40% or even worse. And it doesn't run on a schedule like the trains, but you can build that into your expectations of losses are going to happen.

I'm not just gonna hope that they're gonna go away. And I think that can help set your asset allocation and help set your different strategies if you actually have some expectations of the potential range of outcomes, even if you can't predict when they're gonna happen ahead of time. - Yeah, yeah, I mentioned this other lesson about overthinking, being debilitating.

How do you get past that? I mean, you know, I have an optimizer's personality. I think maybe you have a little bit less, but probably there's some in there. - It was helpful for me to study history and some of the greatest investors and just know that even they go through these periods where they're totally out of favor.

And I think it's okay to know that. Like the only way you can invest in the perfect portfolio is with hindsight, right? It's in the path, the rear view mirror. And everyone's really good at fighting the last war when investing. This happens a lot during, or in the aftermath of bear markets.

Like, okay, if this happens again, I'm going to be ready. So in 2008, following that in, I remember in 2009, 2010, 2011, I was getting pitched all these black swan funds, right? Just wait, if 2008 happens again, you need to be invested in this. And it's funny, all of those hedge tip strategies bring in all their money after the crash already happened.

And all this money comes in and then you have the upswing and then the money slowly goes out. And so I think that sort of fighting the last war mentality can help understanding that there really is no perfect portfolio. And I think if you get down to the level of splitting hairs, well, geez, should I put 5% of my portfolio in a strategy or 6%?

You already kind of won the game. I think it's the big stuff. If you get the big stuff right, the studies show that like the variation of your portfolio and asset allocation explains something like 90, 95% of it, right? Your allocation between stocks, bonds, cash, and other assets. Just those right away, just that asset allocation, that's all the heavy lifting for you.

If you're getting down into the minutia of geez, small cap value makes up 2.5% of my portfolio instead of 4.5, what should I do? Those little levers aren't gonna make as big of a change. So I think just getting the big things right, that's the, and for most people it's, how much am I going to have in risk assets like stocks?

Just getting that decision right, I think is the biggest one for most people. And then optimizing from there doesn't matter as much. It's funny, I remember when I was trying to understand the nuance of tax loss harvesting and direct indexing. So for anyone unfamiliar, we've talked a lot about tax loss harvesting, but direct indexing is instead of buying the index, you buy all the individual stocks in the index.

And one of the advantages that is stated is that because you're invested in all these individual stocks, while the market might be up on the whole, individual companies have gone down. And so you can sell them at a loss and capture the losses to offset income or other gains much more easily.

And I remember asking someone, well, in tax loss harvesting normally, if you've got an index fund in the S&P and it goes down, you can replace it with another US index so you stay in the market. But if you're holding a stock and it goes down and you sell it, you can't buy it back.

And there's not like two things that are perfectly correlated that are AMD or Google or something. What happens, and this investor told me, "Oh, well, you're just not in the stock "for the period you need until you can rebuy it." And I was like, "Well, then you're not in the stock." And they're like, "Oh yeah, if you take the S&P return "and you take any individual stock out of it, "and maybe NVIDIA and Microsoft and the top 10, "let's leave those aside, it doesn't matter." And so it just introduced this idea to me that you could be out of 10% of the stocks at any given point in time in the market, and it'll have almost no impact on the return.

The returns of those two portfolios are like 99 point something correlated. And so it helped me to realize that it doesn't really matter what 0.1% of my portfolio, whether it's in Peloton or NVIDIA or Microsoft or anything, it doesn't matter. And it really helped me stop trying to perfect things.

- And I do think that the small, the slight edges can compound over the time if you have a bunch of them. If you rebalance your portfolio and you do tax-lost harvesting and you do asset location right, I think that stuff can add value, but those are second order decisions.

And full disclosure on the direct indexing thing, we use that in my firm. And it does, getting back to the simple versus complex thing, it does introduce more complexity and it's much harder to run 'cause as you pointed out, if you take out one stock because it's down, you're introducing tracking error.

So the way that we do it, you have to turn the dial up and down with how much tracking error do you want versus how many losses do you wanna take? And what's your actual tax exposure? And those kinds of strategies require, we think, like a financial advisor and a trader and a tax person who understands your specific situation.

It's not something that you can just set and forget and turn it on and off. You have to say, I sold a business last year and I got all these huge capital gains taxes, I need to offset them. So turn the dial way up for me for tax loss harvesting.

And that's the kind of thing where you're trying to balance the investing side of things with the tax side of things. So one of those types of strategies that actually requires more handholding than you think and the automation isn't as easy with that kind of strategy. I think tax loss harvesting is super valuable if you have gains to offset with your losses.

And if you don't, and you're earlier in your career where you can only offset $3,000 of your income with losses. If offsetting the taxes on $3,000 is meaningful 'cause you're early in your career, maybe you live in California, you've got a lot of taxes, but you don't make that much money yet, great.

But if you're not making capital gains every year, especially at short-term rates, the losses aren't as valuable as they might seem. Right, and the funny thing is about, thinking in terms of indexing versus stock selection, if you're an individual stock picker, JP Morgan had this chart that showed like for the last 30 years, the S&P 500, it's up, I don't know, 80% of the time, right?

And an annual basis, but on average out of those 500 stocks, 150 of them are down every year. So there's like these tax loss harvesting opportunities, but also if you're a stock picker, there's a pretty good chance that even if the stock market is up, your stock or a handful of stocks might be down, which is one of the reasons I think indexing is just a simpler, easier strategy than picking stocks, but that's another discussion.

Oh yeah, we've had this discussion a handful of times, I'll put some links to episodes that we've talked about in the past, maybe even one of the times you were on, but I think my advice to everyone is, invest in individual stocks only as much as you need to, to let the rest of your portfolio just ride it in index fund.

I don't mind people picking stocks, but yeah, size it in a manner and understand how much time and effort you can actually put into it before getting into it, 'cause it's not an easy game. Before we jump to this last lesson that I think will spawn a really interesting conversation, why did you write this post in the first place?

I think one of the reasons I love the market so much is because it's a constant exercise in learning. And I feel like I'm constantly learning new things, even though I've been doing this for like 20 years. And I just like to get my thoughts down and put them all in one place.

And I think I was just trying to figure out, like, what have I learned? And then it helps me think through some of the things I still need to learn. And for me, a lot of times, it's reminding myself of these things, as opposed to trying to provide this wisdom to other people, because I need constant reminders of the things that I need to do to stick it out for the long term.

And what do you think the impact of adopting these lessons would be for the average person? I think finances are such a big part of your life, and it's causes stress and problems in marriages. And I think having the ability to have a handle on them just can be really helpful to you in terms of your ability to sleep at night and your lack of stress and anxiety.

And that's the whole thing with me with finances is I don't want them to rule my life all the time. I love this stuff, and I love paying attention to it. I love writing about it and reading about it. But I don't wanna constantly be stressing about my own personal financial situation.

I wanna just make my life easier in that way. That is a perfect segue to the last lesson I wanted to touch on, which was that there's a big difference between rich and wealthy. And I think this is something that, I know we've personally talked about impacting our lives a lot the last few years.

Yeah, I know a lot of really wealthy people who are miserable because they work all the time or their job takes them away from their family or they work on a job that is kind of soul sucking and not happy to them. So I think there is really, there has to be some sort of balance between looking at this number in my portfolio and the number is the only thing that matters.

And these are the goalposts versus having a more balanced life. And I am like you, Chris, where you're more optimized than me probably, but we're spreadsheet guys, right? I have always been a saver my whole life. Some combination of my upbringing and my parents and then just personality traits that I was born with, I've always been a saver.

And I can remember when I got my first job, I took my salary and I had my budget planned and I did all the compound interest things for by the time I'm 30, I should have this much money and 40 and 50 and 60, I planned it all out, right?

And as you age, I'm entering my mid forties here. I guess I can call myself midlife. There's things that happen in your life that can change how you view that saving stuff. And obviously everyone's different. Some people have a problem spending too much money. Some people save too much.

Some people are in the middle. I've tried to bring my financial life more in balance to think of a wealthy life more as enjoying some of it now while still making sure future me is going to be set. And I think there's a lot of things that change it.

Of course, one of them is just having kids. That changed. That was a huge change for me. I have aging parents. My dad is in his late seventies. My mom is in her early to mid seventies. It's funny. They have this group of college friends, probably 10 to 15 people.

And their whole thing was every kid who gets married, they have to invite the whole group of college friends, which was really fun having that conversation with my wife or going through the wedding list on the tables. And oh, by the way, we need like a 15 top for my dad and my dad's college friends.

And it's non-negotiable. They have to come. But I've been seeing all these friends that I've known them my whole life. They're part of our family from when I was young. So many of them are having life-altering diseases. And some of them have passed away early when they reach retirement age.

And you see this happen. And luckily, knock on wood, my parents are very healthy. But you see this kind of thing happen. And it changes your perspective on these things. We've had clients in our wealth management firm who plan their whole life. And they get to the point where it's retirement time.

And they dropped out of a deadly disease, right as they're about to finally enjoy their money. So I think having those kind of experiences has shaped and changed me. Because I think in a lot of ways, people think, "Well, you're one way your whole life. And it's never going to change in terms of the way you think about money." And that has totally changed me in terms of how I think about the balance of spending now versus saving for the future.

And I'm not totally "Bill Perkins, die with zero." But I think that mentality has seeped into a lot of what I do because of where I'm at in my life. After my conversation with Bill Perkins, I remember talking to my wife. And we were looking at our combo of our net worth and our savings rate.

And we usually had these goalposts where it's like, "Gosh, if we can hit this number, if we can save this much, it'll be awesome." And now we kind of look at saving too much as a bit of a mistake. And I know that seems crazy. And it probably seems very...

I understand the fortunate situation we're in where we've been diligent savers. But there comes a point where it's just not the most important thing. So I wrote a blog post recently where I looked at... I have my whole spreadsheet. I'm still a spreadsheet guy. And I track my savings by year.

And I put them all in a spreadsheet. And I looked and 2021 really jumped out. It was like an all-time high savings for us. And I looked at it. And part of that was the pandemic. We weren't doing as much. We like to travel, not as much as you.

We're not quite as adventurous as you. But I looked in that 2021 really stood out. And I actually made a point that we don't need to have that high of savings anymore. Like once you hit a certain level, it's okay. And I wanted to make a point of spending more.

And so the last couple of years, we have been traveling more. And we've been spending more. And it's easy to spend money when you have kids, as you know. But part of it was spending time with them. And I still remember this conversation we had with a friend a few years ago.

My oldest daughter, she's 10 now. This is when she was like 5 years old. And they said something like, "Hey, listen. We have like 13 years left with them." Before they got into the world. And then they're kind of adults. And they're on their own. And that kind of thinking really has changed my mentality.

And we had twins. They are 7 now. And when they were about 1 year old, my wife and I realized as much as we love to travel and take vacations, it's really, really difficult to travel with twins and another kid because of all the stuff you have to bring.

You know, car seats, strollers. And we like to travel and get away. So at that point, we made a decision to buy a vacation home in Northern Michigan on the water. And I could have run all the numbers of missed compound interest if I would have just invested that money instead.

But it's easily one of the best investments we've made because we've created so many memories with the kids. And it forces us to be outside and do stuff and be away from screens. And that kind of thing, I don't know, myself 10 years ago, probably wouldn't be able to pull the trigger on that.

But knowing that I had kids and I wanted to create more quality time with them and memories made it a little easier to make that decision. Yeah, it's interesting because we did a similar thing, right? We bought a fractional Picasso. And we have this vacation home. And one of the challenges with it, which I think I didn't anticipate, is that when you own a fractional home, you have to share it with, in this case, 7 other people.

And so I don't think I realized in advance how different your schedule of life is once your kids go to school. So my daughter starts pre-K next year and we got the schedule and I was like, "Oh, so she's got summer, spring break, Thanksgiving, and Christmas. And other than that, she's in school every day." And so the thing we've realized recently is, "Well, how do you get 6 or 7 weeks in your vacation home if you have to share it with other people and you can only go twice in the summer?" And so we're having a little bit of a struggle here because like you, we just realized that when we get away for a week, we have such great experiences, right?

Like we're by the pool. We're working a little less. We're having fun. My daughter is trying to swim across the length of the pool. It's amazing. And those experiences will last forever. And it's so much easier for me, I imagine also for you and other people, to make this one-time purchase that then after the fact will just force you to use it.

And it can be small. I remember when I lived in New York City, I knew that optimally I should pay for every metro ride. But I knew that if I just paid what was more for the unlimited metro ticket, which was like $70 a month, I would just never think about whether I was going out.

And this goes back to me being a saver and letting $2 metro rides change what I did. But I just knew that sometimes making a decision that might not be the financially best outcome will force you to do a thing that would be otherwise difficult. And I imagine both of us would have really struggled to pay for a bunch of vacations every week during the summer, renting houses, going places, as much as we would have spent time in a home that we owned, in your case, all of, part of for me, which because yours is in Michigan was probably about the same cost.

Yeah, and we have brutal winters here. So I wanted to enjoy the water and be out and stuff. But it doesn't have to be something, obviously, that's not something everyone can afford. Especially now, we timed it pretty good and got in six years ago or so. But it can be other things.

Like I value paying for my time more, I would advocate. So I used to do all my lawn work myself to our house. I used to go out and snowplow the driveway myself. And now we will pay for time because as opposed to me spending an hour every weekend mowing the grass and trimming everything, now I realized, well, wait, I can spend time with my kids and have someone else do that.

So I think paying for time and convenience is a big help too, if you want to have more time to do the things that you care about. I think that's the big change that I've made. And it's funny because my parents were completely the opposite. And I do have some of that element in me.

But I also can see myself fighting against that and trying to go the other way. And there are still certain things that I will not spend money on. I just, I'm not a luxury car person. I don't like going out and spending on fancy restaurants. And I'm not degrading people who like to do that.

I think you just have to pick the things that you care about and prioritize them. And then there can still be these other categories where you say, "You know what? As much as I could spend money on that if I wanted to, I don't need to. So I'm still okay cutting back on that area." Yeah.

Paula Pan has this podcast, "Afford Anything." And she's like, "You can afford anything you want, just not everything." It's like, you got to pick what you want to afford. But in that post about savings, you said, "I prefer to save a reasonable amount of money and enjoy the rest." I think something a lot of people struggle with is what's a reasonable amount.

This is the hard part with retirement planning in general, because there's so many variables that you getting back to the uncertainty part. You don't know what inflation is going to be in the future, what financial market returns are going to be, what interest rates are going to be, how your income is going to change over time, if any other life events are going to impact you.

So it's funny, when I started my job and I did this linear extrapolation of compounding and saving and stuff, I never could have thought about the different events that would happen in my life from having kids to buying houses to all these things that happen that throw off your plan for a period of time, right?

And you have this savings rate you think is going to be there forever, but then you need to take those savings and use them for something because life gets in the way. So I tell people, my baseline is just, I would love to see everyone at least have a double digit savings rate.

That's a good, I think that's a good goal for most people is just to have that as a good starting point. - Is that double digit net or gross income? - I'm more of a net kind of guy. So I think having a double digit percent is a good starting point.

And I think then you kind of turn the dials up depending on how well things are going for you. In personal finance, people always talk about lifestyle creep, right? This is the biggest enemy is lifestyle creep. And I think it's as you make more money and your career progresses, I think you should introduce a little lifestyle creep, but have the savings creep up too, right?

So have it be a certain percentage of your income. So if your income goes up and you're still saving a similar percentage, your savings will go up as well, right? So your spending and your savings should both go up commensurately. I think that's a good way to sort of give yourself some benefits of your fruits of your labor, but also increasing the savings over time.

- Yeah, when I was trying to figure this out, I went deep into kind of safe withdrawal rates, right? We've all, you know, the 4% rule is out there. And I actually had Karsten from early retirement now. I don't know if you've read his blog on the podcast. And he's written, I don't know, probably six books worth of blog posts on just safe withdrawal rates.

And I went in and tried to use his free template to dial in my safe withdrawal rate to try to figure out where I was at for retirement. 'Cause it was, you know, I think there's kind of multiple levels of tools you can play with. I think the two I love the most are Projection Lab and this safe withdrawal rate toolkit.

And I realized that the 4% rule was designed, you know, for a 30-year time horizon, but to work almost every time. And when I was trying to design- - It's like worst case scenario, right? - Yeah, yeah, this is what I realized. In his tool, you can actually optimize for a failure rate.

And I found myself optimizing for a failure rate of like 2% to 5%. And I realized that, you know, I've been fortunate to do a lot of financial plans. And when you look at these Monte Carlo simulations of what all the outcomes can be, you know, if you're optimizing for a 2% to 5% failure rate, you know, you will succeed 95% to 98% of the time.

But more than 50% of the time, you will wildly succeed way beyond your expectations. - Yeah, you'll have more money than you thought in the future. - Yeah, and so I was actually, as I was thinking about that, I found this post you wrote about how you might need less than you think for retirement.

And it was crazy how much money some people have, even when they think they're trying to save conservatively, they just don't spend what they think. And I think Bill Perkins found the same thing to be true in his book. And I think it somewhat comes down to this mentality that I'm guilty of myself of really optimizing for no failure, which means that you're more likely than not going to wildly exceed what you expect.

- So my experience working with clients in the wealth management space is most people probably have more savings than they'll ever need, who get to the point where they can retire. Obviously, there's certain people who just don't have enough. But the people who are in the wealth management space, a lot of times what happens is they save and invest their whole career, or they build a business and they sell the business, they have this big lump sum of cash, and they get to retirement and they can't mentally switch it around and go the other way and spend it.

So we get these people who say, "I just wanna live off of the dividend income "from my portfolio, "and I never wanna touch the principal." And, or, you know, "I just can't get myself to spend any." And I think that's what I've realized is that most people probably need less than they think because they just can't force themselves to spend more.

Right, and people have got around it by giving away to children or giving to charity. And some people have to force themselves to go on vacations and stuff. But I think for most people, you don't realize that your spending is probably going to fall as you age. Like the first decade of retirement, people spend a little more.

But from there, you know, after 70s, it drops a little 'cause you're not as active as you once were. Right, and so I think a lot of people just have a hard time mentally becoming spenders when they, "Well, I don't work anymore. "I'm not having income come in. "I can't, these bear markets are harder to ride out "'cause I don't have savings going back into 'em." So I totally understand where people are coming from.

But it's really hard to get people to take that nest egg they have and see it be depleted over time because the biggest risk is I'm gonna run out of money. And that's what everyone is worried about. So they end up not spending as much as they probably can or should.

Yeah, you shared this study. And it was interesting that at almost all levels of wealth, whether it was people with less than $200,000 all the way to way more than 500 to a million dollars, they all drastically underspent their retirement savings in the first 10 or 20 years. As Employee Benefit Research Institute, they looked at 20 years worth of retirement people.

And they looked at all different types. People who have less than 200K, 200 to 500 or 500 or more. And they found that most people spent the income from their portfolio and just avoided taking the principal balance, like I talked about. And they said after like 20 years, retirees, even with the biggest nest eggs, spent less than 12% of their portfolio.

So unfortunately, these people are probably holding themselves back from enjoying retirement a little bit because they're so worried about spending it. It's funny, the studies show that someone with an annuity that pays them a regular stream of income spend more money than someone with just a portfolio trying to create their own stream of income.

And even if you look at annuities and think of all the bad parts about them, the high fees and the liquidity, and there's problems with annuities that some people have. But if that kind of strategy allows you to mentally get over the hurdle of spending money, it probably makes sense, even if it is potentially suboptimal from a return perspective.

Yeah, or even I could make a case if you're not comfortable with annuities, it's like shifting into really high dividend investments that maybe is not the perfect portfolio from a long-term return standpoint, but laddering on a bunch of US treasuries and dividend stocks so that you produce a higher amount of income so you just feel better about spending it.

But I think my takeaway from it all is if you have the ability to flex and go back to work or do something on the side, if things fall into that 2% to 5% catastrophic level, you can probably start spending more now and saving less. Obviously, this is all dependent on how much money you have and how much you're saving, but it looks like the average person who will hit a six-figure retirement balance at some point is probably going to oversave, which means underspend.

And the years that you and I are at right now where we have young kids, I think there's a case for spending more than we're comfortable with. And I'm glad that you and maybe me to a lesser extent, but my kids are still a little younger, are getting comfortable with it.

And the thing you have to remember too, the kids are gonna be gone someday and hopefully off of the family budget. And that's the point where if you wanna do the catch-up savings, you can make it up at the end, especially if we're gonna be potentially living longer. So yeah, that's part of it too.

And I think the flex part too, if you said be flexible with potentially making earnings more income, you can be flexible with your spending in retirement too. When there's really good years and you wanna spend a little bit more and take an extra vacation, that's fine. If the market does happen to tank early on in your retirement and it freaks you out, then you can pull back a little bit, not spend as much.

So I think you just have to be flexible there too. The 4% rule, I think it's a good baseline for people to start with. It doesn't have to be followed religiously for everyone. I think you can also be flexible in terms of how much you spend depending on what the environment happens to be.

'Cause if you retired 15 years ago and the stock market is up 12% per year, whatever it is, you're probably in a far better position than you ever thought was possible. Home prices are up a lot. So I think you have to take all those variables into account of what reality fits with your expectations and how they mesh and then make course corrections from there.

- Yeah, I think the biggest takeaway you had, which I actually made this tweak in the "Safe Withdrawal" spreadsheet that I was playing with was instead of using the amount of money we need to live as what we spend right now, I basically said, "Here's what we spend minus everything we're spending on kids and school and all this stuff." And then I made that like a fixed expense for the next maybe 18 years.

And then it went away. And then it didn't really factor in the house. But if you figure, chances are you're probably not gonna upgrade your home in retirement once the kids are gone. So I also made all the spending on our home, at least the mortgage payments, fixed things until the end of the mortgage, which meant that my spending post-kids, post-mortgage dropped by more than 50%.

And I was mentally planning for, I need enough money to support my current lifestyle, not I need enough money to support my current lifestyle, minus the mortgage, minus the kids, which is drastically smaller amount of money and requires drastically less savings. - Yeah, and the taxes might be lower.

I will say, Chris, you're far more optimized than me because you've already planned out your retirement spending. I have not gone that far yet. So you beat me. - It was interesting. But the way I backed into it was, how much money do I have to make each year to get to the confidence interval I want?

And that number, it became my savings rate, right? So it was like, if I want to be able to stop working at year X and I want a failure rate of Y, what do I need? And I just tried a bunch of numbers until I was like, this is how much money I need to save.

And then anything between that, I should almost feel disappointed if we save more because there's so many ways that we could use that money to live a wealthier, happier life with our kids right now while they want to hang out with us. While we have jobs that we do that are a little more flexible and we could take a little time off and all that kind of stuff.

So it's been really eye-opening. I'm glad you wrote that post because it forced me to think about a lot of these things. I'll absolutely share a link to it in the show notes and curious what other people's experiences are here. This has been great. Where can people find everything you're writing?

A Wealth of Common Sense, sign up for the newsletter there. Weekly Animal Spirits podcast drops on Wednesdays. And yeah, find me there. I probably talked about the podcast more than any other podcast. It's in my regular queue of listening. So thank you for doing that. And thanks for all your writing.

And thanks for joining me. Glad to be here. Thanks, Chris.