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We've locked in low prices to help you save big storewide. Look for the locked in low prices tags and enjoy extra savings throughout the store. Ralph's. Fresh for Everyone. Radical Personal Finance, Episode 18. Welcome to the Radical Personal Finance podcast for today, Friday, July 11, 2014. Today's show is going to be a question and answer show.

And today we're going to talk about how do you protect yourself in a bear market? We're going to talk again about what financial advice would you like to have at 18 years old? What would be the best investment strategy for a young couple looking to buy a house in the next three to five years?

And what's the most complicated thing in my day? And then my thoughts on the book, The Millionaire Fast Lane. Stay with us. So I've been looking forward to today's show. This is fun. I like doing Q&A. And as we start to get some good traction online and we start to get some more people more and more more of more of you listening, which I really appreciate and I thank you for those of you who are listening.

I am excited about doing these Q&A shows because to me, you know, I can sit back and I do sit back and try to think, well, what are the things that I think are the most relevant or the most useful for people to know and understand? But really, it helps me a lot if you just simply tell me.

Tell me what you want to know and what you want to understand. And so this past week, we've been engaged, I've been engaging with you guys on Twitter and asking for your questions, which, by the way, if you'd like to follow us on Twitter, the Twitter handle for the show is Radical PF.

So just go on Twitter and search Radical PF and you will find us. And I'd love to engage with you there and I'd love to have a conversation, help out any way that I can. And so we're going to cover these, was that four questions, five questions that I received from the audience.

I'm going to recover, but very briefly this time, one of the questions that I did the whole show on on Wednesday because I got some additional ideas and I'd like to do a little bit better job with it. So we're going to be covering those questions and then I hope to make this a regular Friday event where basically on Fridays I answer your questions and I do my best to be specific and direct and give you some ways, some things to think about.

And my biggest frustration back when I was a practicing financial advisor is that it always frustrates me that it seems like people don't go to professionals for financial advice. Now, I understand there's a lot of distrust of financial advisors. If you actually look at the statistics and the industry statistics, it's seen that financial advisors have a lower trust rating than do car dealers, used car dealers.

And, you know, I always feel I always felt bad for car dealers because, well, actually I could always empathize with car dealers because it seems like, you know, they're the brunt of a lot of jokes. But yet, you know, I was a life insurance salesperson and that's the brunt of a lot of jokes.

And a financial advisor, you're the brunt of a lot of jokes there. So it's good. Those jokes are probably good though because hopefully they keep us honest and they keep our industry honest and they keep us getting better each and every day trying to improve our reputation. Now, obviously there's a lot of people that deserve that bad reputation and there are a few of us that really try to develop a good reputation.

So what I'd like to do is I'd like to give you access to me. You know, I'm a certified financial planner. I've got a bunch of technical knowledge. Hopefully you start to like some of the ways that I think about things and the ways that I talk about things.

And the reason that I'd like to provide this as a service is because people don't take me up on it. I always used to joke with my clients and I'd say, listen, anytime, not joke, I used to tell my clients anytime you ever have a financial decision, call me and just talk to me about it.

I'm here. I'm not going to charge you for the phone call. Just call me and talk to me about it because what I see over and over, and this is the joke, is that usually people ask the wrong people for advice. The example that I always go to is, let's say that you take on a new job and you're sitting there and human resources comes in with this giant stack of papers and they toss it on the desk and it goes right on the desk.

And there is a big, big stack of papers there and you pick it up and you kind of scratch your head and say, I don't understand these words. So usually, here's what most people do. They kind of lean back in the chair and they ask the broke guy next to them and they say, hey, Joe, you know, listen, what did you put down on these papers?

And I'm saying, why on earth are you asking the broke guy in the cubicle next to you for financial advice? Pick up the phone and call a financial advisor. And even if that person charges you, let's say they charge you 50 bucks for a 20 minute conversation. That would probably be a better idea than asking the broke guy in the cubicle next to you.

But the problem is, people aren't accustomed to calling financial advisors. They're not accustomed to talking with financial planners. And so what I'd like to do is give you access to just mainly how a financial planner would think, which is how I'm going to handle these shows. Now, unfortunately, there's this little problem.

There's a little problem that in the United States, giving financial advice is heavily regulated and probably rightly so. So what that means is I can never give personal financial advice. That's a reason for the disclaimers at the end of the show. I can't tell you what you should do, but I actually don't think that's the most important thing.

Number one, I can't know who you are and what you are looking for in a Twitter comment. So I can't in 140 characters figure out what what your life story is. But my hope is that is to send you back to and at cause you and encourage you to go and find somebody that you can trust and go and find your individual financial planner, your advisor, your most trusted financial person, whoever that is, whether that's an accountant, an attorney, a trusted friend or business associate, an insurance agent, a financial advisor, whatever that is.

I want to encourage you to go back to that person because that's the person who can really understand what you are, what you are, what your situation is. But what I believe I can do and what I want to do with these questions is tell you how I would think about it.

Is talk to you about some of the different ways that I would approach the problem. And if I can successfully do that and give you some ideas on how I would approach the problems, then my hope is it will kind of stir up your creative juices. And then if you are a do-it-yourselfer, all the information is out there for free.

Go down to the library, go online, be careful online because it's a lot easier for somebody to write a forum post and you think it's really good. In reality, it's not. Generally, you don't have a lot of posers writing in-depth technical financial planning textbooks. So you might be better off going down to the library and reading some books where there's a higher investment on behalf of the author than just going based upon a forum post.

But still, if you're a do-it-yourselfer, fine. Hopefully this information will give you help. If not, hopefully it will give you some encouragement and motivation to seek out an advisor that you trust and have a conversation with them and see if they'll be able to help you out. I really hope they could.

This is one of my, I guess it's not secret, but this is part of my agenda for the show, is that I always never understood why don't people talk to financial advisors more. I used to think, "I'm a good guy." And I understand the distress. I've talked with lots of people about it.

But hopefully we'll help a little bit and hopefully we'll arm you with information so that you can smoke the good ones out from the bad ones and you can understand and you can be a better educated consumer. I hope this helps you. So, a couple of quick announcements before we get going.

First of all, I did get some of my technology issues worked out, so I am able to do some interviews. So hopefully you enjoyed the interview yesterday on not paying your taxes because of as a war tax resistance movement. I certainly did. It's a subject that I've never heard discussed on a financial show.

And my advice is still going to be to pay your taxes because that's the proper advice. However, I would encourage you to kind of research and consider what your conscience would say. And I would admire you if you decided that you needed to follow in the path of David Gross, who we talked to yesterday.

I have, it's a thought-provoking topic. And I enjoyed the interview. I'd love to talk to other people that are in that world as well. Because again, I often in the past would say, "Well, these people are crazy." But I tell you, David sure isn't crazy. Or he sure didn't sound crazy.

And when you read his thoughts and you read, and especially if you read his book and see the research, I had no idea about the history of tax resistance and the impact that it's made in places where it really was needed and had a big impact. So this next week, I've got two interviews lined up.

I'm going to be interviewing Jake DeSilis from the show, the podcast and website called The Voluntary Life. I've enjoyed Jake's podcast for a couple of years. And he's just a really neat guy. He's from the UK. He's an entrepreneur. He's just written a book on entrepreneurship. And I haven't read that book yet.

I plan to read it over the weekend here before I speak with him to try to be able to do a better interview with him. But I have certainly enjoyed his content. And he's very soft-spoken. He's very gentle on his podcast. And I would commend his podcast to you.

And if you're interested in some of these topics of financial literacy and financial philosophy as it interacts with things like political philosophy, then I encourage you to check out his show, The Voluntary Life. If you have questions, if you've listened to his show or you have questions for him after maybe reviewing his content over the weekend, let me know those questions either on Twitter or via email.

And I will be interviewing him next week. Also going to be interviewing Jacob Lund Fisker from the Early Retirement Extreme. I reviewed Jacob's book, Early Retirement Extreme, and I love that book. And I highly commend it to you. I did a lengthy book review where I wound up just reading more from the book and saying it's awesome a lot rather than actually any keen and cutting insight.

But I really enjoyed Jacob's book. And so I would encourage you, if you have questions for Jacob, he is not so much in the public eye these days, but I think I've sweet-talked him into doing an interview with me. I'm pretty excited about it. So if you have questions that you would like me to ask him, please ask me those questions as well.

And I'll make sure to include them if I'm able to on Twitter. Again, ask me on Twitter or send me an email at joshua@radicalpersonalfinance.com. joshua@radicalpersonalfinance.com or on Twitter @radicalpf. Also, just a reminder, if you're enjoying the content, come by the blog and sign up for the email list. I don't-- just a quick note on the email list, and I'm sure I'll repeat this throughout the course of the show.

The email list is designed to give you information on what the show is about, so you can decide whether to listen. I'm releasing a lot of content. I'd be surprised if you're able to keep up with it each and every day. I hope you do. That would be awesome.

But I think selective listening is fine. So the best way to keep tabs on the content of the show is sign up for the email list, and with that-- and sign up there. And each day, I'll send you the full show notes. It'll pop up right in your email when the show is published, so you'll be able to look at it and see if it's a topic that you're interested in.

And so please consider doing that. That'll help you to be able to curate your content a little bit to see what you're interested in and not. And then on Wednesday next week, I'm planning to do an in-depth show on some of the fundamentals of stocks and bonds, trying to continue with the teaching shows, and talk through some of the fundamentals to give you a way to think about it when you hear the word "stocks," to give you a way to think about what that means.

Right now, in today's show, we're going to be talking-- the first question I'm going to look at is, "What steps would you take to protect your investments in a bear market?" And I'm going to give a detailed answer to that question, but I may be throwing terminology at you you're not familiar with.

It's all going to build over time, and it's going to build starting with a proper understanding of what are stocks and bonds. So look for that on Wednesday, and then look for the Q&A show next Friday. Hopefully, I'll get these interviews run on Tuesday and Thursday. And then Monday, I haven't decided the content yet.

I may do another teaching show, or I may do something else, talk about current events or something like that. We'll see. So we'll see how that goes. So, first question here. This comes from-- this one came in on Twitter. And the question is a good one. The Twitter handle here is @MotoJones.

And so, Moto, thank you for the question. And the question here is, "What steps would you take to protect your investments in a bear market, and when would you put them in place?" And so, I'm going to answer this specifically, but it's going to be a big answer. And there are a few-- there are a few ways to answer the question.

And, Moto, I apologize to you in advance. It's not a simple answer. It is one of the most complicated questions that you could possibly answer. So, my short answer to the question is-- has three parts. What step would I take to protect my investment in a bear market? I would-- so the first answer is, I would take whatever steps my strategy indicated that I should take to protect my investments in a bear market.

The second answer is, nothing. I wouldn't take any steps to protect my investments in a bear market. And the third answer, as far as when I would put them in place, I would put them in place before investing any money. And so, let me give you the answer, and let me expand on those things so they just don't sound like crazy talk.

And I tried to touch on this this last week when talking about markets and the reaction to-- on Monday's show, when talking about Dow 17,000. And when I came away from that show, I realized I really struggled to communicate this clearly. But the point that I was trying to get across was that there's no one strategy that works.

And actually figuring out, you know, what should you do when the bear market comes, which I understand you're asking it in advance, but what most people say is, "Well, what should I do? I think there's a bear market. What should I do?" And you've got to understand your strategy long before the bear market ever comes.

It's completely the wrong question to ask. And you need to incorporate into your strategy, "What are you going to do in a bear market?" And, you know, markets are-- seem at times incredibly logical and rational and seem, the rest of the time, you know, completely schizophrenic. I can't remember, Ben Graham had a cute saying on it.

It was something about-- I forget his quote, but, you know, the market is crazy. One day it's totally sane and the next day it's totally rational. I should look up that quote and memorize it. But the only way to survive in a bear market or a bull market is to understand your strategy and know what you're going to do.

And so there are very few strategies that I know of that should be changed in a bear market. Now, you do have to have a strategy for the bear market, but there are very few strategies that should be changed when you're in a bear market. And here's where you've got to understand what your actual investment strategy is and all of the research and the history and the planning behind it.

And so, first, when you study markets and you study-- you get a little bit more sophisticated and you start looking at portfolio management. And my caveat, I am not a portfolio manager. I'm not that interested in-- I'm interested in studying it. I'm not interested in doing it. I'd love to have some great portfolio managers on it sometime, but I know enough to really admire it and to understand kind of the theory behind it.

But the actual practicing of it, it's not my deal. But the key is you can make tons of money in a bear market. Tons of money in a bear market. You can make just as much money in a bear market as you can in a bull market. And maybe you can make more.

And you can lose your shirt in a bear market and in a bull market. It's not these phrases, "What is a bear market?" or "What is a bull market?" In general, people think a bear market is a simple thing. And it is. So the way it's reported in the press is that, "Well, we're in a bear market." So what that means, basically, is that the prices of stocks measured in aggregate, in general, are going down in a nominal basis.

So the actual price, not in a relative basis, but in a nominal basis, is going down over time, over an extended period of time. Now, there are more specific definitions, but that's my working definition for today. So bear market, stocks going down over time. But the thing is that you've got to realize that's only one part of the story.

That is an aggregate observation that goes well when you're talking about a big picture idea, stock prices declining. But it tells nothing about the success of the individual investor. And so we'll talk about kind of what are some of the different ways that success could be managed, and what are the different strategies, and how would those different strategies adjust in a bear market.

So first of all, let's go with how most people think about portfolio management. I'll call this just simple, straightforward portfolio management. And the point I tried to make on Monday, ineffectively, was that most people are using not individual stocks, but most people are using some type of managed investment, be that a mutual fund, be that a set of sub-accounts within a variable annuity, or a set of sub-accounts within a variable life insurance policy, or an exchange-traded fund, or something like that.

They're using some kind of managed investment. So in managed investments, from the simpler versions, you've got fairly straightforward management styles going on. So let's talk about stock mutual funds. So we're going to be specific. I'm going to ignore the management of bond mutual funds. Let's just talk specifically about the management of stock mutual funds.

And let's talk about active funds, and let's talk about passive funds. So if you pay any attention to financial press, then one of the things that is basically accepted as gospel among the online-- I should come up with a name for this-- the online financial gurus, or financial literati-- oh, I'll coin something one of these days.

But in the online world, it's basically accepted as gospel that the only approach to investing that works, and that's the best, and that's the best thing that everyone should do with their money, is to use passive index funds as the basis for your investments. And I don't agree. I don't disagree.

I'm not going to comment on that today. But let's just start with passive investing. So passive index investing. So the fundamental premise behind passive index investing is this is built on the efficient market hypothesis. This is built on the idea that markets are absolutely efficient, and that it's impossible for you to find any way to do better than another person based upon research.

And even if it is possible to find a little bit, it's not possible for you to do it for less cost. So most people who are really involved in passive investing and in the concept of indexing would say, well, we wouldn't necessarily-- many people. I should steer away from most, because I have absolutely no statistics to back this up.

It's just an oppression that I've gotten from research. So many people would say, well, we wouldn't necessarily say that an active manager can't outperform a passive portfolio. But we would say that an active manager can't outperform a passive portfolio and cover the costs. So we'll just strip out all the costs of the active manager, and we'll do good enough.

And we'll just take the average return of the market, and we'll try to just own the market. All right. So this strategy, it works. I don't see any reason why it can't work, why it won't work, why it doesn't work. Most of the academic literature would say that this works.

But the key here is that the premise is that the market is always right. And so if you have a bull market, the market is right. And if you have a bear market, the market is right. And so the key is you've got to stick with the market. And you've got to be committed under this strategy to never adjusting based upon the bulls or the bears.

Now, we'll talk in a moment about derivatives. So you could say, well, I'm going to use something like an exchange-traded fund. I'm going to make my own bet on the market. So if this were your strategy and this were your trading strategy, then you could say, I'm going to use an ETF, a total market ETF.

And I'm going to short that because I think the market is going to go down. And that's your trade. But that's not passive investing. So we'll get to trading in a moment. But passive investing, you just simply accept the market is right. The market is the consensus-- the market price of stocks, of these companies that we're trading, is the consensus of all of the people involved.

And they are correct. So therefore, if the market price is down, the market price is down, that gives me an opportunity to buy more. The market price is up. That's great because the money is going up. But I'm just going to simply go on faith that this is always the correct price.

And I'm going to put my money in over time. And I'm going to depend on economic growth to drive my returns. So the economic growth of the companies-- because I know if the managers of the companies can't produce economic growth, the board of directors will fire them. And they will hire a new set of managers.

That's the philosophy behind passive investing. So if that is your philosophy, there's no room in that philosophy or in that trading strategy for saying, I'm going to get out because there's a bear market. But yet, many people do. So they say, well, I know where the bear market is.

Problem is that you probably can't know. But being right when a bear market is coming requires you to be right twice. You've got to be right going down. So you've got to say, OK, the market's going to go down, and I'm going to get out. And then you've got to be right going in again, as far as when to get in again.

And it is incredibly difficult to be right twice because there's so many factors at play. Now, at the end of the day, that's your prerogative. If you want to trade your portfolio like that, that's totally fine. If you think you can be right-- I've had those ideas myself. I've had those hunches.

But if you think that you can, that's fine. But recognize that it requires you to be right twice. And this is the big one that I've observed in the financial press over the last, what, five years since 2008, six years since 2008. Many people would say, well, look, I'm right on getting out.

Look, I see the decline coming. But when did you tell people to get back in? Because in one way, it's really easy to see bad news. In other ways, it's really easy to not know when-- it's really tough to know, OK, the bad news is over and I'm ready to get back in.

And so I just leave that for you to think about. You consider what you want to do. There are various strategies where the people will say, listen, I know this and I can do this. But this idea that I'm just going to own an index fund in my 401(k) and every-- in one month I'm going to get in and 11 months I'm going to get out, I've never seen any proven research to show that that would be correct.

So that would be passive investing. And that's how to answer the question is, if you understand the strategy, unless your strategy incorporates a trading strategy or an insurance strategy, which we're going to go to in a moment, then in general, you just got to commit to yourself, I'm going to sit tight and I'm going to enjoy the ride.

And I'm going to do something else, which we'll talk about that something else in a moment as how to protect yourself because this is where the real key is. We're going to do something else to make sure that I'm protected in the mutual fund. And that's something else just to whet your appetite.

That something else is financial planning, not portfolio management, meaning that you're not going to be relying on these assets in a time of a bear-- in a time of a bear market. So number two, let's go on to active funds. So in an active mutual fund strategy, and let's stick for a moment with stock mutual funds.

In an active mutual fund strategy, here you have a portfolio manager, which is actually a large team of managers working together, although there is one person who is in charge and has the full responsibility for the portfolio. And this team would be a team of researchers, a team of traders, a team of strategists, and the manager is bringing it all together.

So these funds could work, but if you own these funds, you're not going to be adjusting in a bear market, or at least you shouldn't be adjusting in a bear market because you are choosing a philosophy and you're going in and you're buying those funds. So read your prospectus and understand what is my manager doing for me?

Why am I paying him the $15 million a year that he's earning? Why am I actually doing this? And understand it. And don't-- you don't make the change because of the bear market. So this is like, if you're telling your manager, "Okay, manager, I want you to be looking for value stocks." And let's say that you're using a value fund.

And so on this-- in this type of strategy, you're using a value stock fund. Your manager has the charge to go out and shop for bargains, looking for companies that have low-- lower multiples and high dividend yields. And so they're out trying to find bargains. And they're trying to say, "I think that this company's stock price is down because of this-- these factors that are going out.

And I think they're going to rebound, either because the economic environment is going to get better, because we've got new management, or because we've got new products, or things like that." And so these managers are going out and trying to find companies that they can buy at a value.

Well, when are they likely-- the most likely to find companies that they can buy at a value? In a bad market, right? In a declining price market, which is what a bear market is. So if all of a sudden you are-- you're pulling your money out of an active mutual fund, and you're owning value stock mutual funds within that portfolio, and you're pulling your money out, what does the manager have to do?

They have to sell investments to raise cash so that you can redeem your shares in the mutual fund. That's what happens. That's how it's done. When you buy an investment in a mutual fund, that cash flows into the mutual fund manager's portfolio. The manager then uses that cash to buy investments.

When you redeem shares in a mutual fund, then the mutual fund manager has to sell investments, raise the cash to pay you your redemption fees. And this is one of the downsides of mutual funds, is that you have these times of euphoria and depression in the market swings. And so this really causes mutual fund portfolio managers a real challenge, because they've got to keep enough cash on hand to-- they've got to keep enough cash on hand to allow you to redeem your shares when you sell your investments.

So this is a real challenge if you're managing a portfolio. You've got to figure out, how much cash do I keep around? And maybe your best investment ideas aren't going to pay off for a year, because you see the company, but you've got to all of a sudden, because the prices are going down, you've got to all of a sudden sell the portfolio out.

So if you're using actively managed mutual funds, you've got to be committed to staying the course. When I was managing-- well, technically it's called managing investment portfolios, but I always called it managing investor behavior. And that my job was to be the go-between, to talk the investors off the ledge.

Because if we're going to trust this strategy, then that means we've got to trust this strategy, we've got to trust this manager all the way through, and not respond to panic, and not respond to euphoric greed. If we're not going to stay the course in that situation, we should never start.

If we can't handle the ups and downs and the volatility of owning this company, or owning this portfolio that this manager is managing, we should never start. And so my job, what I saw as a financial advisor, was largely to help investors manage their emotions and help them try to help predict a little bit, hey, here's what the emotions you're going to face.

Because if you're warned about those things, then you know in advance, OK, here's what I'm going to face. So that would be a good example. And so in this world, because this is most investment still currently, or actively managed mutual funds that people own, don't try to -- my summary statement is don't try to get in or out based upon the bull market or the bear market.

Know what you own. And if you're happy with what you own, if you're happy with the job that your manager is doing, then stick with them. Because you ham tie -- what's the -- hamstring -- I don't know what the cliche is, but you screw it all up when you tell your portfolio manager, here, you can have my money when markets are going up.

But all of a sudden I see that your performance is underperforming, so all of a sudden I'm going to pull my money out. No, it's your money. You've got the prerogative to do it. But it sure makes your manager's job a lot more difficult. And if you understand what your manager is doing, because you read your prospectus, and you understand that your growth manager is out looking for companies that are going to grow, your value manager is out looking for companies that are bargain priced right now, maybe you've got a manager that is using a top-down investment approach.

So in this situation, this manager is making their choices based upon the expectation of the macro economy. So he's seeing, okay, the economy is going to go down, he's adjusting. On the other hand -- and so if this manager is saying, I foresee this decline in economic prices, he's already adjusting the portfolio to that.

On the other hand, if you're using a manager that's using more of a bottom-up approach, well this person is ignoring the macro economy, or at least not considering that to be the highest value, and they're focusing on the individual companies. And he's trying to say, well, yes, we have headwinds coming for the general economy, but here's a company that's going to sail right through that headwinds.

And so if you're choosing a manager and that's their style that they're doing, then the headwinds mean nothing because they've already adjusted the portfolio for that. So hopefully that's clear, but the key is that you've got to understand what you actually own with your investments. And even if you're worried about them performing, underperforming, recognize that your managers are going to be judged based upon their benchmarks.

So the managers are going to be judged based upon their peers and on their benchmark returns, and so they are accounting for that in their portfolio. So if they're trying to -- let's say that they have a suspicion that there are headwinds in the economy, so therefore it's likely that we're going to be entering into a bear market.

They're going to adjust their strategy to try to deal with that, and they're going to try to outperform the benchmark, which is going to be probably some index such as the S&P 500 index, and they're going to try to outperform that benchmark because that benchmark is going to take a tumble.

And so they're going to put some kind of strategy in place to try to limit the returns. So just simply understand that if you are using these strategies, which these are the most common strategies to use, the best thing you could do is ignore the bear market and trust your managers to do it, or if you're not hiring active managers, trust your -- trust your -- you know, the efficient market hypothesis to bring you through.

And in that time, you should -- I'm going to go on a tangent here for a moment. The other thing is you've got to reinterpret what a bear market actually means. In a bear market, if you are in an accumulation phase of your financial life, where you're accumulating money, you should be rejoicing over a bear market because it gives you opportunities to invest more money.

And for some reason with stocks and bonds, for some reason with stocks and bonds, people don't view things rationally. So if you go down and you -- whether you are -- I don't know what you're into buying, but let's say you're into buying, you know, electronic gadgets or clothes or something like that, and if you were going to go down to your favorite store and all of a sudden see a bargain bin with your favorite electronic gadgets and your favorite clothes, and there's a big sign above them that says 50% off, you would double up or triple up and buy as many of those things as you could, right?

In stocks it's the same way. A good manager to someone who's thinking about investments, buying companies is exactly the same thing. And if you wake up and you say, "Look, all of my favorite companies, I've been watching this company, you know, I want to buy Apple stock." I think they're still the number one highest market cap, so we'll pick on Apple.

I'm not recommending you buy Apple stock, okay? If you say, "I want to buy Apple stock," and you love Apple products and you're convinced that Apple is the way to go, but you've been sitting back looking at the price of Apple stock and saying, "Ugh, I'm just not so comfortable with this price." If you woke up the next day and all of a sudden saw on your morning news show that Apple price had plummeted in value by 50% overnight, and you knew there was nothing necessarily rational that was driving that, it wasn't that all of a sudden there was a big scandal, it wasn't that their product blew up and they were going to face a massive lawsuit, you would be rejoicing, or at least I would.

You would be thrilled, and you'd double up and you'd sell your car, you'd sell your house, you'd sell anything you could to get your hands on that Apple stock at 50% off. This is what someone who is comfortable with markets and comfortable with investments, this is how they think, is that this is an advantage to load up on your favorite companies at bargain basement prices.

But in general, the general public doesn't think of this. Now here's the problem. That only works in your accumulation phase. So if you're in the accumulation phase, that would be how you would think. But if you're living on your portfolio and you're sitting back and saying, and you wake up and all of a sudden your portfolio value is destroyed in value by 50%, you're sweating bullets, which is why we need good financial planning.

We're going to get to that after I finish my conversation on, and I'm going to answer your question on how to protect yourself. But recognize that these situations are very unique. I'm in the accumulation phase. My father is in the distribution phase. So I would be rejoicing if the Dow tomorrow morning, if I woke up tomorrow morning and the Dow had plummeted from 17,000 points to 7,000 points, I would be dancing in the street and I would be trying to persuade my wife to sell everything we own and buy stocks.

But my dad, on the other hand, he'd be in a different situation. Because if he's living on those values, that's going to dramatically affect the value. So if he's doing some kind of share liquidation strategy to provide for his retirement income, this would be a problem. So that's where good financial planning comes in.

So it's not a simple answer. I want to keep going though because I hope this helps. In one way, there are no simple answers with financial planning. In another way, there are tons of simple answers in financial planning. And that's what you're going to find throughout the show is that there's tons of little maxims and little things that make sense to people.

But as you start to dig in, you'll find lots of situations where those don't apply. And you've got to look at your individual self, your individual person, and your individual situation for the answer. So let's say you're a trader. Trader, not trator. So you're a trader. You are trading your stocks.

So if you are a trader, you may be doing this yourself or you may be hiring a manager to trade this for you. So one of the, some people say advantages, some people say disadvantages, of mutual funds is that in general, mutual funds are not permitted to use some of the more sophisticated and riskier strategies.

Again, some people would see this as an advantage, some people as a disadvantage. I could argue both sides equally well. I'm not going to share my opinion on it. My job is to teach you about how the perspective risks and the perspective advantages. So in general, mutual funds are restricted from using any or using a lot of margin.

So using leverage, buying, borrowing money to buy and sell securities. They're limited on selling short. They're limited on using derivatives to trade investments. So then you go over to the hedge fund world. Well, in the hedge fund world, you've got a lot more freedom. Hedge funds are allowed to invest.

They're just simply not restricted like mutual funds are. Hedge funds can invest in a wider variety of assets. They can do stuff like take up positions in really illiquid assets that can be really difficult to sell. So this would be where you go in and this is not something that's very tradable, whereas a mutual fund can't take up the position.

Let me explain why. A mutual fund is usually limited from exposing a large percentage of its portfolio. There's all kinds of rules as far as the percentages. But a mutual fund is limited from exposing a large percentage of its portfolio to an illiquid investment. So if there's a company that is there on -- if there's a company that a mutual fund manager is looking at, but this company is going through financial distress and is probably going to be very difficult to sell, the mutual fund manager probably isn't going to be able to buy it.

Because if all of a sudden that mutual fund's clients come and redeem their shares, the manager has to be able to sell that investment out and sell the investment to be able to allow the investors in the mutual fund to redeem their shares. Now a hedge fund can invest in the illiquid assets.

And the reason is because the hedge fund can put in rules that lock up the investor's money. So a hedge fund can require its investors to keep their money in the funds for months or even years at a time. This is why, if my memory is correct, I think a few years ago you saw the hedge fund bought -- what was it?

Chrysler. Daimler Chrysler. When Daimler sold Chrysler Corp. -- what was the hedge fund that bought? I don't remember the name. But there was a hedge fund that bought Chrysler Corporation. I can't remember if they still sell it or not. I had to Google it and research it. I don't remember.

So you go check that out. But in that situation, you have a struggling company. That's a very illiquid investment. That was different than at the time buying Ford stock. So if you could buy Ford Corporation stock, that was a very active market. That was different than Chrysler because Chrysler was facing some issues.

So the hedge fund can come in and the hedge fund investor has a lock-up period where they're not permitted to pull their money, no matter if they want it or not. The hedge fund manager can just say, "Sorry, I'm not giving you your money back." And so now that hedge fund manager has the time to pursue something like that, to pursue an illiquid investment.

Well what does that mean with regard to a bear market? Well that's when a hedge fund manager is going to be making all of their major investments if they have it. Because they've got the lock-up, they can go ahead and they've got the lock-up period where they've got the money guaranteed.

And now they can go ahead and do that and they can dispose of the asset over time according to their plan. This is why in general, hedge funds are limited to accredited investors. Basically the idea behind an accredited investor is an accredited investor has to own at least 5 million bucks of investments, ignoring their primary residence.

And they are the only ones that can invest in-- and there's another thing on income. I can't remember, it's something like $250,000 of income or something like that. That's what makes an accredited investor. And the idea here is that an accredited investor should be smart enough to do their own due diligence.

So a hedge fund can't go out and if you pick up Money Magazine, you'll see mutual fund advertisements all over the place. You'll never see a hedge fund advertisement in Money Magazine because a hedge fund is not allowed to advertise to the general public. They can only market themselves to an accredited investor.

Because these strategies are sophisticated and they come with a higher degree of risk of loss. And so that's the difference. So they might make a lot more money. I don't know. I have to go and research what ended up happening with Chrysler because it would be an interesting case study.

I just remember that from a few years ago. I was paying attention to it. But I don't know if they made money or not. I hope they did. But this would be one of the major differences. A hedge fund can use extensive amounts of leverage. So the hedge fund can borrow a lot of money to try to blow up the investment returns.

So that can be awesome if it turns out well. That can also be really tough if it doesn't work. Leverage is a two-sided sword. And so depending on your risk profile as far as how comfortable you are with that, which would come down to personal financial planning, that would be a major thing to consider.

If you didn't have anything to lose by employing a lot of leverage, it may be smart to employ it. If you've got a lot to lose by employing leverage and you don't need it, what's the point of an extra $20 million if you've already got some? Don't risk it.

It would be silly to risk it. And that would be a very individual decision. A hedge fund can use short sales. So they can sell stock short. So in this situation, if a hedge fund manager were saying, I'm going to go ahead and I perceive economic headwinds, I perceive a bear market coming, well, they can short all over the place.

They could short individual stocks. They could short the general market. They could short specific asset classes. They could short all kinds of things. And that would allow them to make gains when the market prices are going down if their shorting strategy works out well. So there's a lot of different things that these funds could do.

And just to give you an idea, I don't know if you've ever studied sophisticated portfolio management. It's fascinating. But you would have different strategies. Here are a few strategies that I just made some notes on that I thought would be fun to go over. So a hedge fund manager could use the equity long short.

And so this was the strategy that was used and still is used-- was used, excuse me-- by the oldest hedge fund, which was a fund called the A.W. Jones and Company. So under this strategy, what the manager does is the manager will buy some stocks long and sell some stocks short.

This is still the most popular hedge fund strategy today. And so I think industry numbers-- I was pulling this from-- well, this is a few years old now. But I'm pulling this from Robert Pozen and Teresa Hamacher's book called "The Fund Industry." And they say about 30% of all hedge fund assets globally are allocated to the equity long short.

And so here, the hedge fund manager is ignoring the economic headwinds as far as in general. And they're buying stocks that they consider to be undervalued long. So they're hoping that those stocks go up. And they're buying stocks that they consider to be overvalued. And they're selling them short, hoping that the prices will go down.

So this is not a strategy for the general market. This is a strategy for the specific companies. Although, theoretically, you could use this in asset classes or in various parts of the market. Number two would be the relative value strategy or arbitrage. So relative value is a long short strategy.

But it would involve the specific types of securities or assets other than stocks. So you could use a strategy called a merger arbitrage. And so under this scenario, a hedge fund would buy shares of a company that is in the process of being acquired and short the shares of the acquirer and try to take the value of the arbitrage relationship, the difference in pricing between those two stocks.

A relative value manager would look at the past relationships between different securities that are issued by the same company and try to profit from where they're different from historical norms. One kind of variation of this would be convertible arbitrage, which would mean you would buy a convertible security and sell short the underlying stock.

So if there were a convertible security that you could get a hands on and then just sell short the stock and wait on the arbitrage opportunity between the two to make your money. Intercredit strategy. So you would look at the relative value between different types of fixed income securities such as corporate bonds versus government bonds and try to exploit any mispricing that you could find.

So a hedge fund manager could pursue a distressed strategy. So this would be buying the securities or other assets of a company that's in or near bankruptcy. And so you remember movies back from the 80s of the corporate titans going in and trying to say, "We're going to buy up this company that's in near bankruptcy and sell off all the assets." And if that happens, you just got to find the right opportunity.

Shareholder activism. So this is where hedge funds get involved a lot. And they say, "We have this company, but we're going to try to make a major change in the way this company is managed. So we're going to try to buy enough of the shares that we can get some voice in it, or we're going to try to market the changes that we want.

So we're going to market to the shareholders and we're going to say, "Listen, here's how the company could be better served so that at the next annual meeting we can clear the board of directors from these three directors who are standing in our way and install our new board of directors to take the company in the way that we're going to, that we think is better." You could use a global macro view strategy.

So you could say, "We have a view on what the macroeconomic events that are coming." So for example, changes in interest rates, changes in the relative value of currencies, maybe the global supply and demand for natural resources. We're going to take a position on this and we're going to make a bet that this happens." And so probably the most famous example of that is George Soros' short sale of the British Pound back in 1992.

And so he was known as the man who broke the Bank of England because he sold short the British Pound, made, I don't know, was it a billion dollars, something like that? I'd have to go research it again. But made a huge amount of money because he said, "This is what's going to happen." There was a guy, I forget his name, but there was a guy back in 2008 that sold short the housing.

What instrument did he use? I forget what he actually sold short, whether it was the securities, the package securities that were being traded. But basically he was a doctor, a practicing medical physician who enjoyed this and he sold this. There's a game on it called, I think it was called, there was a book, I think it was called The Great Short.

I have to go and check it. It's on my reading list. But he sold short the whole housing market and made tons of money because he said, "Look, the whole housing market is falling apart here." And he made a ton of money on it. Managed futures. So managed futures would be doing some sort of commodity trading where a managed futures hedge fund would invest in futures contracts on various types of commodities.

So energy, metals, grains, things like that, and on the financial market. So they would trade the futures market without, based upon their hunch about the direction of the investment. You could combine all these together and you could combine all these strategies, pick and pull from the ones that you want, add in leverage, borrow money to enhance your returns.

I mean there's all kinds of things that you could do if you were running a hedge fund. But if you were in that kind of fund, and the hedge fund is a good example, you got your money locked up and you just got to sit back and you got to trust your manager.

So a lot of times people aren't familiar with the concept of trusting their active portfolio manager or trusting their passive strategy. They're much more familiar with the idea, however, if you're buying into a hedge fund and they tell you there's a two-year lockup on your money, well now you've just got to go with it.

If you're running your own portfolio. So let's say that you are running your own portfolio and you're trading some individual stocks. You could use some very basic techniques. So if you wanted to protect yourself from a bear market, you might put a collar on your stock and you say, "Okay, if the price rises from $20 to $30 and then it retreats to $28, I want to sell that stock out automatically at $28 a share." You could do it where over time, if you're, let's say you buy the stock at $10 and you say, "I'm going to sell it out at $12, I'm going to sell 20%.

At $14, I'm going to sell 20%. At $18, I'm going to sell 20% and I'll keep riding some, but then I'll put a collar on it that would allow the value to still be held if the market were to decline." Maybe you're going to trade options. So one way to protect yourself in a bear market, you may own a stock and you say, "Well, I own this stock, but I'm concerned about the market going down, so I'm going to go ahead and buy a put option on the stock.

So a put option would allow me to sell the stock at a guaranteed price." Now you're going to pay for the option, so you may choose not to exercise the option, but that would allow you to have a strategy in place if the value of the stock were to decline.

Or you know what? You could just simply be confident in the company and just sit tight and buy more when the price dumps. The example that I think of here is, can you imagine, let's pick on Walmart. Walmart stock, Sam Walton distributes the majority of the stock, goes out to his children and to the Walton Foundation.

So they've got massive amounts of stock and they're vested in the company. Can you imagine if Walmart stock declines in value by 20% because they get some stupid lawsuit or they get some union issue or they get some bad press or they have a truck that blows up on the side of the road.

Can you imagine the Walton Foundation and the Walton family members all of a sudden saying that's it, we don't have confidence in our company, we don't think we're going to come back from this, we've got this 20% loss, we've just got to sell our stock. No, I mean I can't, maybe you can, but I can't even imagine that.

They would say, you know what, we're so confident in our company, we'll buy everything that we can. You saw that this last year if you pay attention to this stuff. And you saw that the Walton family is buying back as much of their own stock as they can. And so they're looking at the marketplace and they're saying, you know what, the best investment we can find right now is our stock.

It's undervalued so we're going to buy it back. And we're going to go ahead and buy our own stock and increase our share price by lowering the number of shares outstanding on the market. Can you imagine the Buffett kids or a better example would be the Bill and Melinda Gates Foundation where Warren Buffett gives most of his stock, his Berkshire Hathaway stock to the Bill and Melinda Gates Foundation and he's doing it over time.

Can you imagine the Bill and Melinda Gates Foundation portfolio manager waking up one morning and seeing that Berkshire Hathaway for no external reason that anyone can find, but all of a sudden there's no major fraud that was discovered. They didn't pull an Enron or a WorldCom. But all of a sudden he wakes up and says the Berkshire Hathaway stock price declined by 15% or 20% or 30%.

So therefore the Bill and Melinda Gates Foundation, we got to dump our, what is it, $40 billion or something. I could be off on that number. But we got to dump our billions of dollars of stock into the market because of this 20% decline. I can't imagine it. And so the problem is that hopefully those examples help to understand a little bit.

But those people are thinking about the great company that we own. Berkshire Hathaway, this huge, widely diversified company with lines of income and profits across the entire world, across various industries, this really strong balance sheet, these world class company managers running it, this incredible culture, this incredible reputation, this incredibly low basis.

We've got these good companies at these great prices. We've got a great reputation where basically everyone thinks Warren Buffett's God and if he says something about investing it must be true. And that therefore Warren says this is what you should do so this is what you should do and the whole world jumps to it.

Can you imagine them just really even being concerned about those fluctuations in stock price? No, because they know the underlying company. Same thing with Walmart. Can you imagine the Walton family saying, well, our price value declined in 10% so therefore we're just going to throw up our hands and say that's it, we got to leave this business?

No, because they know the company. They understand that a stock is ownership in a company. Now are there people trading all around the edges of that? Absolutely. I guarantee you there's people trading Berkshire Hathaway. There's people trading Walmart. You've got everything from a flash trader owning a stock for a few microseconds on the way through up in New York where he's got these guys that you pay extra to get your Bloomberg terminal closer to the Internet connection so that your computer can start the trade a couple microseconds before your competitor across the street and so you can profit on the arbitrage between this tiny little fraction of a stock price.

Yes, there's people doing that every day. Could you be a day trader where you're saying I'm going to go on each and every and I'm going to hold my stock out in the morning and the evening and really trade it with one day? Absolutely. Can you do some sort of swing trade where you're covering out over a couple of days or a couple of weeks?

Absolutely. But in none of those situations are you worrying about the general bear market? The micro trader, the day trader, he doesn't care about what the market is doing over this several month period of time. He or she cares about what's going on within their trading horizon. Now could you be a momentum trader and kind of over a longer period?

Absolutely. Could you be looking for some kind of good news that you think is going to happen? Absolutely. There's people doing trading on every single aspect of it. But all of these things together make up the market. It is not stupid just to sit back and say, "You know what?

My granddaddy started Coca-Cola and my granddaddy left me $10 million of Coca-Cola stock. And I think Coca-Cola is pretty good. They're in hundreds of countries around the world. They've got this incredible moat, as the investment people would say. It's a great well-run company. I've got good managers." I'm going to completely ignore, with the exception of reading my annual report, I'm going to completely ignore what happens to the Coca-Cola stock on a daily basis.

And I'm going to go play golf every day or whatever their version of that is. Is that stupid? I don't think so. I'd be happy to own $10 million of Coca-Cola stock and I'd feel, "Hey, it's pretty good." I might go ahead and I might like to own a few other companies in case something happened.

But if my granddaddy started Coca-Cola or whoever the story is, whatever it is, what do I have to fear? I mean, again, good financial planning is going to come into that, personal financial planning, lifestyle, having a margin in your life, not being over-committed, being able to handle the swings if the dividend has to be cut, those types of things.

But that's called financial planning. So the point of this is trust your managers if you have them. And if you don't have managers, understand your philosophy. And if you don't understand your philosophy, don't invest in stocks. If you can't handle it, if you don't have a plan in place in advance for the bear market, then don't ever get in in the first place.

In some ways, one of the best things and one of the worst things that ever happened was 401(k)s. And we'll talk -- I always say, "We'll talk about this in the future." There's so much to talk about. I think I could do a thousand shows of two hours long talking about things I'm interested in.

But there's so many 401(k)s. And if you look at kind of the history of the 401(k), these days, most people have some version of a 401(k), whether it's that actual 401(k), whether it's the non-profit equivalent, which would be a 403(b), whether it's the smaller business equivalent, which would be a SEP IRA or a Simple IRA or something like that.

Most people have, these days, some kind of plan that they can adjust the investments as far as their pension plan, their individual pension plan. Originally, in case you're interested, originally a 401(k) is more appropriately designed as a profit-sharing plan. It is technically a profit-sharing plan. And that's what it can be set up.

But what the 401(k) added is it added what's called 401(k) provisions to a profit-sharing plan. And the 401(k) allowed people to defer some of their own income into that account. So to not have to pay taxes on the money currently to be able to defer their income. And so over the last about 40, 50 years, you've seen a tremendous change in the corporate world between a traditional defined benefit pension, which is where I work at this company, I turn 65, they guarantee to pay me 60% of my finishing salary for the rest of my life.

You had a tremendous conversion from a defined benefit pension to a defined contribution pension. And in a defined benefit pension, you had an investment manager. This would be a professional investment manager. And this is the person who's responsible for making sure that our pension is funded such that we can support these payments that we've promised.

And now it's on the people. So now you can pull up on your phone, you can log into your Fidelity 401(k) account, and you can buy and trade stocks right in there on your phone. Now is that an advantage for some people? It's a huge advantage. It's a huge advantage.

If you're an investment guy, and the fact that you can sit up there and you love to trade stocks, and you can do this in your 401(k), and you can defer $17,500 in there, you could throw in another $5,500 if you're over the age of 50. You can have a profit sharing contribution in there.

You could get $51,000 into that account every year. I was talking to somebody yesterday about setting up a solo 401(k) and getting $51,000 in there. So you're telling me that I can -- so if I were a stock trader, I would say, "You're telling me that I can set up an account.

If I structure it right, I can get $50,000 in this account, and I can do this before paying any income tax at all, and I can buy and sell. I can ignore all of the short-term capital gains, long-term capital gains rules. I can day trade in this account on a 401(k).

You're telling me I can do that? No. There's limitations. Ignore that I'm speaking in broad strokes. But you're telling me I can do that right on my phone? That's amazing. But yet for the average person who has no interest in trading stocks or has no interest in these funds, all they know to do is every few months they open up their computer and they say, "Oh, my mutual fund is down," and they switch the money to the mutual fund that has a green arrow next to it, and it's up 6% instead of the mine, which has a red arrow and is down 11%.

This is the worst thing that ever happened to people's investment accounts. And I think we know this intuitively. This is where if you want to ask somebody kind of intuitively about doing it yourself versus hiring somebody, and you have the financial world that says, "Well, you're better off just doing it yourself," but yet you've got all these financial advisors that say, "Hire me.

Hire me." I mean, the equivalent is this. If you could invest your money with the Harvard Endowment Fund and you could have the manager of the Harvard Endowment Fund investing your money with that fund, would you rather do that or would you rather invest the money yourself and choose your investments for yourself?

The majority of people in my experience that I've talked to have given that kind of either/or would say, "I'd rather have my money alongside the Harvard Endowment." And that's kind of how pensions used to be, 'cause the pension legally had to provide for the person under this certain formula payout, and now it doesn't have to do so.

So trust your managers. And then the last thing I have on this, and hopefully this is interesting. Hopefully this is interesting. I just looked down. I've spent 50 minutes answering this question. But understand the difference between price and value. The example that I always use is real estate. Now real estate and stocks, stocks have a dramatic disadvantage from real estate.

In real estate, if I were to tell you every single day how much your house is worth, that would drive you nuts. One day I come out and I say, "Hey, listen. I'll give you today $182,433 for your house." And then the next day I come out and say, "I'll give you $191,673 for your house." And the next day I come out and say, "I'll give you $211,932 for your house." And the next day I come out and say, "Hey, today it's $133,467.67." That would drive you nuts.

That's what stocks do when you pay attention to them every day. Every day there's a price, price, price, price, price, price, price. Does price determine value? Does the value of your house as a place to shelter your family and a place to have a home built together, does that change based upon the price?

It doesn't. Now, the price is important over the long term, but the reason why people will sit and own a house for a long time and why people who are real estate investors will very rarely trade their houses is A, because they're not very liquid because it's got a massive dollar figure next to it, but B, because it's really hard to sell and you don't actually know the final price until the sale happens.

That's the only time you know it. And so it's a lot easier when in the reality the actual price of your house is up and down and up and down and up and down all the time and there's bear markets and bull markets on your house. You're not aware of it because you're just simply living in that house and you have the value of the house.

Well, to me the most rational strategies for investments follow the same exact plan. The most rational values for investments follow the idea that, excuse me, the most rational plans for investing follow the same idea, which is I'm going to focus on the value of my investment if you're investing.

Or if you're trading, you're going to focus on, I'm going to focus on the mechanics of my trade and here's the trade that I'm going to do and I'm going to put this insurance in place in case I'm wrong. I'm going to buy/sell these options. I'm going to buy/sell these call options, these put options.

I'm going to put this collar. I'm going to put a straddle. You can do an option strategy where you make money on the downside and you make money on the upside and you only lose money if the market is flat. You can make an option strategy where you only make money if the option is flat, if the market price of the underlying security is flat and that you lose money if it goes up or down.

You can bet it both ways. Now, those are such individual examples, but my point is that all of this stuff together makes up the market. So when I said how I would deliver market news is if I were actually doing a daily market news update, I would say, "Today, millions and millions and millions of market participants bought and sold things based upon their own personal situation.

And the values and the prices at which things were bought and sold wandered around randomly based upon the individual person's strategies and philosophies." Now in general, we saw that the general trend was this, and so therefore these indexes that we manage is this. And we think that it's possible that this bad news on the jobs report had this impact, although we know there were probably some people that made a bunch of money off of that.

And we think it's possible that this negative forecast from this company analyst affected this company's price. But the reality is we bet that somebody had that trade and made a bunch of money off of that, and we can't actually report that because all we're reporting is the current market price of these basket of stocks.

And we have no idea who actually made how much money because there is a way bigger derivatives market in place than the value of all the market prices of the companies combined. That would be how I would report financial news. So a substantial answer to you, Mr. or Ms.

Moto-Jones, I didn't look to see the details. I don't think there was an actual name there. And that would be my answer to you. And so my encouragement to you would be understand your strategy and spend a lot of time learning before you actually do any investing. And then figure out what strategies make sense to you.

And if your strategy makes sense to you, don't worry about the bear market. Unless your strategy has in its buildup, in its philosophy, a strategy for the bear market, in which case you already know that and you never ask me the question. I hope that helps. Okay, next question.

I did not expect that one to take an hour, but hopefully it came across clearly. And I was thinking a lot about that Monday show, trying to figure out if I did a good job of talking about why I was -- I didn't feel like I did a good job on Monday.

So hopefully this helped to fill in some of your thoughts and understanding a little bit. Okay, next question from Steve, Twitter handle @SteveOnomics. His question, best investment strategy for a young couple looking to buy a house in the next three to five years. So Steve, couple answers to this question for you.

Number one is I don't have an investment strategy that's going to work. And I'll explain why. And you're probably expecting this answer. But I don't know of anything that you can do with money that is going to make a dramatic difference of the return that you get over a three to five year time period for where you're looking to buy a house that involves a financial instrument.

And there are a couple of reasons for this. The one that most people are familiar with, which is absolutely accurate, is the matter of time horizon. So in general, the price you pay to get high returns on your money is in general volatility. If there were no volatility, no ups and downs in the prices of things, then in general, then you get a lowered return.

So this is why if you look at the highest long-term growth rates among asset classes of stocks is among small cap stocks. So small cap means smaller companies with a market capitalization under a certain dollar amount, which we all argue on what that number is. But let's just ignore it for today, small cap stocks.

So small cap stocks, you have the most ups and downs because these are the companies that are the most volatile. There's a major difference between a brand new technology company with a market cap of $2 billion versus GE as far as their business plan and the stability of it.

So small cap stocks among asset classes have a higher rate of return over the long term, have a higher rate of return than do large cap stocks, but yet they're way more volatile over time. So you say, OK, I get the higher return. What about bonds versus stocks? Well, bonds-- and we'll go into this in detail on Wednesday with our stocks versus bond explanation-- bonds are called fixed income investments.

So in general, you know how much of a payment you're going to get on that bond. Now the bond price is going to wander around a lot based upon the actual current-- based upon the interest rates and the changes of the interest rates. But you know what you're going to get.

It's a guaranteed payment. And so as long as the company doesn't default on the payment, then you know I've got in place. I've got this amount of money coming in. So there's a lot lower return, but there's also less volatility if we ignore temporarily interest rates. Over the short term, interest rates of bonds can bring in dramatic volatility.

But just ignore that just for the sake of my simple example. On the other hand, if you go down to the bank and you buy a CD, they're going to give you a very low nominal interest rate return. But that's a guaranteed growth rate. There's not going to be any fluctuation in the value because it's not traded.

It's not dependent on interest rates. It's not going to be the kind of thing-- we're not talking about negotiable CDs, which can be traded on the market. We're only talking about just a traditional bank CD or even a savings account. You've just got a very simple value. Or a money market fund, where it's designed to keep the net asset value at a buck a share.

Then we go in and we've got a very short term investment. So we've got not much return. So the first answer as far as why it doesn't really matter-- and there is no investment strategy for three to five years. And the reason is because three to five years is not in the world of investing.

Traditionally you'll hear, if you don't have about five years of time, you shouldn't be investing in stocks and things like that. That can be a little bit misleading. But because if you've got six years, in a year you'll be in the five year time. So what, should you sell out then?

Depends on the situation. This is very, very individual. But the problem with house is that you've got a plan that in three to five years, you're going to need a large lump sum. So in that world, you can't stomach-- even if you had a six year time horizon, you need knew that six years from now, I'm going to need this lump sum.

I still probably wouldn't invest it in stocks in general, because you're looking at a situation where you have a lump sum that's due on six years. So unless you can put in a strategy-- so maybe you could purchase an individual bond that had a six year duration, or a specific-- it ended in six years.

So in bond trading, we call this duration. And so maybe you could put in some kind of immunized bond portfolio in place for six years. But this is completely inaccessible. I mean, that would be great if you had a lot of money. But this is completely inaccessible to the average person who's trying to fund this portfolio for $100 a month over time, building it up, and finishes out.

Let me explain real quick what that means. So if you had a lump sum, you could buy an immunized bond portfolio. The idea behind an immunized bond portfolio is that you're trying to immunize the bond against a major change in interest rates. And you do this by adjusting the duration of the portfolio such that your exact goal-- that you hit your exact goal, and you're going to have the money that you need in the exact goal.

A very simple explanation. We'll go into it in detail another time. But this doesn't work for an accumulation strategy. Because if you're saving $500 a month towards the down payment on a house, or $1,000 a month, whatever it is, you can't buy a $500 new immunized bond portfolio every time.

And your whole portfolio falls apart if you're trying to fund it month by month. Now, you could if you had a huge lump sum now, and you knew I've got a specific expense that's fully due five years from now. You could theoretically do it. But you're not going to find a trader who's going to set it up for you, unless you're going to do that kind of thing yourself.

And I don't know how to do it. This is a bond trading-- you need a portfolio manager. And it's not the kind of thing you go on E-Trade and say, I'm going to do this. I bet you could. I'm not smart enough to do it. And if you are, come and tell me how to do it.

Because it seems completely silly to me. The numbers are too small. You can't afford the advice. And that's the kind of thing that you would do. That's the kind of thing that would happen on an institutional scale if you had a large amount of money that you needed for a specific expenditure.

So you're in an accumulation phase, generally, if you're talking about an investment strategy. And all of the investment strategies that are available to you as a retail investor, they're not really going to make a big difference. And they're not going to make a big difference because of the volatility, first of all.

So unless you're willing to risk that five years from now-- in my example, Dow goes from, I don't know, maybe it's $25,000 five years from now. And it goes from $25,000 to $12,000. Or maybe it's at $12,000 five years from now. And you're going to make it on the gain.

This doesn't work. You can't invest in that period of time. Because you can't run the risk of the money not being there when you want to buy the house. So what do you do? Well, that's thing one. But thing two, here's the other problem, is that three to five years, rates of return are going to make very little difference.

So let's assume that you're going to buy-- I don't know where you live, Steve. But let's assume that you're going to buy a $200,000 house. And down here in Islet, where I live, West Palm Beach, that would be basically a starter house. I mean, somewhere between $150,000 to $200,000 house.

And so my numbers make sense at $200,000. So let's say $200,000 house. So let's assume you're going to put a 20% down payment. You're going to finance 80% of it under a traditional fixed rate mortgage. So in that 20%, you need to accumulate $40,000. So let's assume-- let's use the calculator here real quick.

And let's say, OK, let's assume that $40,000 is our future value. And let's put in-- let's say three years. Let's put in 36 months. And let's start with nothing. And let's say that we're going to use-- I don't know what CDs are today. Let's say we're going to use a 2% investment return, 2% annualized.

Well, our monthly payment that we're going to need to save to accumulate that is $1,079. So we're going to save about $1,000 a month under a 2% investment return to equal the $36,000 that we want to save. So let's look at the impact of interest rates over a 36-month period.

So I'm going to change the math here. And so now we're going to put in $1,000 for our payment. We're going to put in 36 for our number of periods. We're going to put in a 2% annualized interest rate. And we're going to start with nothing. So if we save at a 2% interest rate over a 36-month period, our total value that we have at the end of 36 months is $37,070.

And the reason that's not-- we're going to have $37,070. So we've got $37,070. Let's put in a 3% interest rate. Now instead of $37,070, we've got $37,620. So let's put in a 5% interest rate. Let's say that you could find something over the next three years that were really going to make a big difference for you.

Well, in this world now, the difference between at 2% and at 5%, the 5% interest rate is $38,753. So let's subtract 38,000-- from $38,753, let's subtract $37,070. And our answer is $1,683 to go from 2% to 5% interest rate. Now go out and look at the investment and savings options that are available for you over a 36-month period.

And you tell me how on earth you're going to go from 2% rate of return to 5% rate of return. With any kind of guarantees in today's low-rate world. I don't know of a strategy that's going to do it with any kind of guarantees. And when you're talking about saving for a house, you need to look at the guarantees.

So over this period of time, the difference of 2% versus 5% is a grand total of $1,683. Now let's say that you're saving for a house. Does 36 months versus 37-- what is that-- 37.6 months make a difference? 36 versus 38 months to buy the house and have your money that you need to make up that extra $1,600?

That makes no difference at all in your purchase plan. But it makes all the difference in the world if you have the volatility associated with the 5% investment. And all of a sudden now, you were expecting to have $40,000. And your $40,000 dropped in price-- dropped in price because of some interest rate fluctuation-- down to $28,000.

So over the short term, interest rates are almost irrelevant. That $1,600 is completely irrelevant. That's not even the cost-- when you're talking about buying a house, that's not even the cost of your inspection and your title insurance. So you're better off just simply ignoring, in general, the interest rates completely and just ignore them and go about your life and save the money.

Now you do the best you can. So toss that money in a money market fund. Money market fund-- great. That should work. Now here's what can make the major difference. What could you do with the money in the meantime that three to five years from now, when you're ready to buy a house, could make a much bigger difference for you?

So I can't fix the problem of investment returns in three to five years. I don't know an answer to it. There's nothing that makes sense other than toss it in a savings account, and it doesn't make a difference. Oh, one more piece of math I wanted to do on that.

So let's keep exactly that same $1,000. Let's go back to 2%. So now I'm going to change our period from 36 months, and let's go ahead and change it to 360 months. So we've got 360 months. So I'm at 2% interest rate annualized, 360 months. And let's start with nothing at present value, and let's put the same $1,000 a month into our account.

And let's say at $1,000 a month at 2%, then at the end of 30 years, investing $1,000 a month at 2%, we would have $492,725.39. Now under this scenario, let me raise this to 5%. So I'm going to raise my interest rate, no other changes to 5%. Now at the end of-- from 2% to 5%.

Now at the end of 30 years, we've got $832,258.64. Let's say that we raise this to 8%, just for numbers. At 8%, $1,000 a month, we've got $1,490,359.45. So if you want to understand why you hear every financial planner in the world say you can't keep your money in a bank account when you're investing for a 30-year period, it's because it costs you a million bucks to do so.

At 8%, it's $1,490,000. At 2%, it's $492,000. And think about the difference over a 30-year period of what having an extra million bucks to spend in your life as far as what you can actually spend that on. That makes a huge difference as far as your lifestyle. Whereas the $1,600 difference for your house is only the difference of having to wait another 1.6 months to buy your house.

You just started shopping at 1.6 months. So that's the difference as far as that time horizon. And once you understand that, you don't worry about making a big investment return on your house except for what I'm going to talk about in a second. You just don't worry about that.

Now what could you actually do? I would say rethink the whole house decision. Not rethinking in the meaning that Joshua recorded this show on buying a house as a bad investment and so therefore because I'm buying a house as a bad investment, then I should never buy a house and I should have to rent a house and now my wife's going to be upset with me.

Not in that way. Although that is accurate if you want to think about it. But think about what could I do where I could exercise control over this money such that I can be in a really good shape to cover this house in three to five years. So for example, do you have any money now?

If you have some money, what could be the most productive thing to do with that money? Could you start a small business on the side where instead of saving $1,000 a month, you save for three months, you've got $3,000, you start a small business or some kind of side gig or something that you have expertise in.

And then because you control that, you take your $3,000 investment or your $300 investment and you grow that business to the point where instead of it, you can earn two, three, $4,000 a month. Well, that would be something that you could control. And so now you're in the position where instead of saving $1,000 a month for that house, now you're in the position where you have the $1,000 from your daytime job plus you have the $3,000 of profit from your nighttime job or the business that you started on the side.

And maybe it's a gamble and you might lose the money, but maybe it could pay off. And when it pays off in the form of a business or a skill or something that you've done, then now you've got a situation where you can actually have a return that you can count on.

And even though it's a gamble, you can predict that return a little bit better. Maybe you're in a situation where you're in the corporate world and you're working and you're making $60,000 a year. And you say, "I've got $1,000 a month to save for a house, but in my job, I know that I need an MBA." Now, I don't know if you do your research on this because it varies, but in my job, I know that I need an MBA.

And if I had an MBA with my experience and if I had a better network, I could leave the company that I'm at and I could go from making $60,000 a year to making $160,000 a year because I built up a website, I built up a portfolio, I became a speaker and did these things.

Well, in that situation, I would say do that. Make that $1,000 a month, go down, join the local Toastmasters Club, become a skilled public speaker, go start buying a book and reading a book a week off the personal MBA checklist, and go join an executive MBA program and spend your Saturdays in MBA school so that 12 months from now, you've got your MBA done.

And then make sure that you're going to steal Brian Tracy's 1,000% formula. Make sure that you're spending that $1,000 a month going to four conferences in your industry every year. And take your wife with you, and you said young couple, so take your wife with you to those conferences, schedule your vacation around the conference, and go to the Widget Industry Conference in Denver and spend two days before that up in the mountains and two days after hanging out in Denver with the Denver people.

Things like that can actually make a difference. Now fast forward three years, you've done what you needed to do to build your career. Now in that situation, take yourself and go from $60,000 to $160,000. And I've got an extra $100,000 of income that I can play with. Guess what?

If you'll keep your lifestyle and expenses at the $60,000 level, $100,000 of extra income, let's assume you're bad at tax planning, so you've got to pay $20,000 of that out in taxes. So let's now say you've got $80,000. Now you've got an extra $6,667 a month that you can save.

Well $6,667 a month over the next 12 months, that's $80,000. In another six months, there's your $40,000 we were trying to get to for your house down payment. So that's how I would think about it. There is no good investment strategy over a three to five year period that's going to work as far as helping you save the money.

But if you could come up with some kind of alternative strategy, maybe another strategy that comes to me is maybe instead of buying a single family house, you guys could buy a quadruplex or a duplex or something like this. Well now you go in, you find a good price, you get involved in real estate investment, you buy a quad, and you've got to come up with a higher down payment.

So maybe you can build a relationship with a local real estate investor. Maybe that person can be a hard money lender. You can build a relationship with a hard money lender or someone that will help you out. And you can make the numbers work where for the same price that you're paying today in rent with the fact that you borrowed the money from a hard money lender or from a local real estate investor who wanted to be available and you split the deal with them and set up something where you're living in one of these four units.

And then over a five year period, you can live in that unit and then you can manage the quad, the quadruplex. And over that five year period, you can build up the cash flow from that to where you buy out the fellow investor. He gets his money back with a good rate of return.

You've got a place to live for the next three to five years. And then in three to five years, maybe you can make the cash flow numbers work where in excess you've got an amount, in excess of the mortgage payment on the investment property, in excess of that mortgage payment, you've got the money coming in where you can then turn it and cover your own mortgage payment and have less money that you need to cover that.

Now, is that possible? I bet you it is. Is it easy? Probably not. I don't know if those numbers would work. I'm making the idea up off the top of my head. But something like that is where I would spend my time focusing. Building your skills, building your knowledge, figuring out an alternative angle.

Now, last part to it. Is there anything wrong if you have a job that you like and you live in a place that you like and you're saving the money and you're really happy with your lifestyle and you don't want to work on the side and you don't want to go to four stupid conferences a year and you don't want to go on Saturday and waste your Saturday on an MBA program and you just want to save a thousand bucks a month for the next 36 months to have your $38,000, $40,000 down payment?

Is there anything wrong with that? There's nothing wrong with that. There's no inherent virtue in having more money. It's just that people, if you're listening to a finance show, this is how my ideas work to try to figure out what works and what doesn't work. So those are my thoughts for you, Steve.

Good question. Let me know what you think. I'd love to know if this advice helps you at all. I want to real quick, Robbie Courtney sent me that tweet and I covered it on Wednesday, but it was kind of a different kind of show. What financial advice would you have given your 18-year-old self?

Here's the short and sweet answer. On Wednesday, I was just thinking through some of the lessons that I've learned that I think affect more finances than just what financial advice would I do. But my answer to that question is invest in yourself and in your ideas first and then look for a strategy that's going to work faster than any kind of specific market thing.

If you're interested in investments, go out and get interested in it and spend all your time trading stocks or buying and selling investments. But you can do that, but you're going to be a different kind of person. You're going to be the kind of person who's obsessed with this stuff and for whom it's fun to sit and read annual reports.

The best example I give you of that is Joshua Kennan. I'd love to interview him at some point. If anybody knows him, please ask him for an interview. I'm going to send him a note. I don't know if he does interviews, but he's one of my favorite financial writers.

He writes the About Investing section for the About website. He does a great job. He's got a personal website at JoshuaKennan.com. But the interesting thing you'll find is that you'll see kind of a very open peek into the mind of how actual investors think. For him, his favorite thing to do is sit down with a stack of annual reports and a highlighter and read through annual reports.

That's not the average person. So he gets above average investment returns and he has an above average lifestyle because that's his fun. And so you're likely to find him at 2 a.m. reading investment reports. But if that's you, go for it. Number two, invest in yourself and in your ideas first.

So knowledge, skills, focus on that. Focus on your knowledge and your skills. We know this intuitively with college. Everyone says go to college so you can make more money. But what's the philosophy behind that? It's not as simple as saying I got a college degree so I make more money.

There's tons of college people out there making minimum wage. But the idea is skills. And so traditional people would say, well, a college degree grants you skills. You need to develop some kind of skills that will create your income. Because at the beginning of your life, you have unlimited human capital.

Not unlimited. You have the most human capital you're ever going to have and you have no financial capital. So you've got to enhance the human capital with the financial capital until the human capital is so valuable that you can then transform it into financial capital and use the financial capital to pay for everything else.

But the connection between financial capital and human capital is so important. So spend the money going to the places, the classes you need to go. Spend the money gaining the skills that you need to gain. Look for a way to find money that you don't have to have. So look for a way to leverage something.

So look for a way to leverage your skills and other people's money. Whether that's starting a business with investors' money or borrowed money or no money because you have skills and you can bootstrap the thing. Look for a way to develop artificial equity. So for example, maybe you don't have the money to go out and buy a real estate portfolio, but you're really invested in real estate.

So you would become a property manager and you would then leverage somebody else's investment, somebody else's money to then allow you to learn the skills that you need to do while you're then saving money so that you can become your own investor. So now you're leveraging someone else's money.

This is what financial advisors do. So a financial advisor who's managing assets. I wasn't a millionaire. I'm not a millionaire. I wasn't a millionaire when I'm managing a million dollar portfolio. So I'm essentially using the million dollar portfolio to provide for my income. And so that's what, so I can leverage my love and my skills with financial planning and portfolios and financial advice.

I could leverage that using other people's money. And so I can kind of develop an artificial equity. And that would send my friend Jim Collins crazy because he would say, "Joshua, that's crazy. That's unethical." We'll talk about it sometime, Jim, if you're listening. I hope you are. But you could do that in any kind of business and there's a lot of options for that.

Look for a strategy that will work faster. So don't look at the, "Okay, I'm going to buy a hundred." I spent years lost in these books of, "Save $100 a month and then at 10% you'll be a millionaire in the future." You've got to focus on building a financially valuable skill.

Then you've got to focus on investing that with some kind of extreme option while you have the time and flexibility. Follow Money Mustache's strategy of get financially independent by the time you're 30. Work your tail off, live like a college student from 18 to 30, and then you'll be a millionaire and then you can live like a millionaire the rest of your life because you've built these skills up.

Follow that strategy or follow the strategy where you lay it all on the line and build a business. There are so many alternative strategies. Look for a strategy that's going to work faster, that's also going to apply to your goals. There's nothing wrong with going the traditional route if that's what you're into.

That would be my short, again, answer to Robbie. Last question. Sorry, two more quick questions. Miriam, screen name or Twitter name, Moipmto, so Miriam Ortiz Epino writes a question. What is the most complicated thing in your day? Frankly, it was last week. It was trying to figure out how to get my Skype thing to work with my bad computer connection, but I think I might have fixed that.

I'm still trying to get another solution that'll work better. But the most complicated thing in my day is trying to figure out how on earth do you take this complicated stuff and make it simple. I struggle with it because I feel it's one of my skills, but it's an underdeveloped skill, which is why I'm doing the podcast, is I want to try to figure out how do I take these complex things like investments and portfolio management and complex topics and make them simple.

I think this has probably made one of the biggest differences. I made fun of Warren Buffett earlier, as people consider him to be the god of investing. But the thing that he is so good at, which is amazing, is he takes a complex concept and he boils it down into this very pithy, kind of down-home aphorism.

And so he's viewed as a lovable Uncle Warren. And the wisdom in this little aphorism is so great. I would really want to develop that. So I think a lot about how can I do that. And I want to develop that with the podcast going forward. Last thought from Wolfgang.

And his Twitter handle here is @WMThoughts on Twitter. So Wolfgang says, since you probably read all good finance books, any thoughts on the ideas in the millionaire fast lane? And I flipped through the millionaire fast lane a couple of years ago. And from memory, I think it was basically the idea is avoid the slow lane and get to the fast lane.

And basically, look for how to become wealthy faster than what you're originally told. I just went and bought the Kindle version. And so Wolfgang, I will read it again and do a comment on it. I'll do a book review on it. And I'd love to interview him. I think from my memory, I really liked what he had to say.

And it lines up with my own experience. If I'm remembering the book correctly, he talked a lot in the book about the idea of build out a business, build out something that's actually going to make you money a lot faster than the idea of work a job you hate for 40 years.

And this is kind of the common theme. And there's lots of ways to solve this nut. So we'll see. I will read it again. I really think I liked it. And I've seen other people make really positive reviews on it. So I will check it out. And I will read it.

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And I'll do a comment on it. So if you've enjoyed this information and you want to hear your question on the air, let me know. Have a great weekend. Enjoy. And I'll see you in the next video. Happy weekend, y'all. The holidays start here at Ralph's with a variety of options to celebrate traditions old and new.

You could do a classic herb roasted turkey or spice it up and make turkey tacos. Serve up a go-to shrimp cocktail or use Simple Truth wild-caught shrimp for your first Cajun risotto. Make creamy mac and cheese or a spinach artichoke fondue from our selection of Murray's cheese. No matter how you shop, Ralph's has all the freshest ingredients to embrace all your holiday traditions.

traditions. Ralph's. Fresh for Everyone.