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Ralphs. Fresh for everyone. We all need a financial mentor, right? Well, today we talk to the financial mentor, Todd Tressiter. ♪ Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets. I'm your host. Today is Wednesday, October 22, 2014. And today we're going to be talking about how to build wealth.

Various wealth-building strategies, advantages, disadvantages, drawbacks. An interview with Todd Tressiter, founder of FinancialMentor.com. ♪ I know it sounds a little funny to say, but it actually is true. We do all need a financial mentor. And hopefully I can serve that way with you as far as I'm able to go.

And then hopefully when you're done with me, you'll be able to find some other people that can take you a little bit farther. And I think that one of those people that deserves a consideration, at least for today, is a man named Todd Tressiter. And I've been reading Todd's site for years.

I have really enjoyed it over the years. It's always been challenging, as I've said on the show before, to find really great online websites. I guess websites are usually online. Really great, really challenging for me to find websites and resources that I can send people to without having to give all kinds of disclaimers about, "Well, you'll find this here and you'll find that, and this is really good, but you have to ignore the other thing." And Todd's has been one of those sites, one of just a handful that I have sent a lot of people to over the years, because he writes in-depth, detailed articles that will help people to think.

And the biggest help of his site is that it's largely focused on wealth-building. And wealth-building is something that, in the financial advisory world, frankly we can't and don't talk that much about. Now, that may sound a little bit weird to you if you're not familiar with the concept, but usually a financial advisor, if a financial advisor is going after a client base, he's going to be going after a client base that's already wealthy.

And so most of what we do, or what many of us do, is primarily going to be in the wealth management space. In fact, you'll find many financial advisors, their title that they will select for themselves is actually "Wealth Management Advisor." Now, it is possible to find a financial advisor that is helping people to build wealth, and that can work.

But basically, the primary way that we would do that in the financial advisor space is by encouraging people to figure out their own investment plan, or by helping them build wealth through assets like their 401(k) contributions or an IRA, or basically usually publicly traded securities. But yet there are many other ways to build wealth.

And so there's kind of always this balance. When I was an advisor, I always tried to help people to build wealth, but very few people are thinking about building wealth. They're just thinking, "Well, I'm putting money in my 401(k)." Well, that might get you there. It might. And that's a good way, but that's only one way.

And so that's why on this show you've heard me so much talk about all the different ways and how they're all connected through. So I've invited Todd on the show today, and I think we had a really good interview. You'll find that we talk about a few different things.

We talk about how to go from a level one understanding of a subject, so for example, investments, to go on to a level two understanding, kind of go a little bit deeper on what's required to do that. We talk about the different asset classes that can be used in building wealth.

We talk about the advantages and the disadvantages of different asset classes and how to implement them. It's a really good interview, and you'll even find we got into a bit of an argument at times. Even after I shut the recorder off, we continued to argue. So I should have left the recorder on and released that to you, but it was a really good interaction.

I enjoyed it very much. Todd's background, just a quick intro because I asked him in the beginning a little bit of info, so he does that introduction in the beginning. But he really has been a longtime entrepreneur, and the primary way that he built his wealth, which makes it interesting, is that he built his wealth through investment management.

So he built a hedge fund, and actually from basically the age of 23 to 35, he was able to invest his way to wealth, becoming a millionaire and at age 35 "retiring." So that he would be free to do other things. I think after that, he went on a trip for a year or two and backpacked around the world.

And so it's unusual that he's actually built his wealth through the topic of investing. So it's a really great interview. I hope that you enjoy it tremendously, and I'll be back at the end to wrap up. So Todd, welcome to the Radical Personal Finance Podcast. I appreciate you being with me.

Thanks for having me, Joshua. Let's start. I would love for you to tell your story with money. If somebody didn't know you and wasn't familiar with your work and your writing, what's your experience and history as surrounds finance, money, investing, and your own personal journey through the swamps of finance, so to speak?

Well, mine's been multifaceted. I started off, you know, the whole reason I became wealthy was, you know, just to be straight up, just, you know, let's start out with a bang here. I had, you know, issues around self-worth and stuff. I had, you know, quite a few issues I'm not going to go into detail on right now, unless you want to.

I'm fine with it. And so when I built wealth, it was just to prove out, you know, I was acting out through money, proving out socially that I was worthy, you know, that that was a socially acceptable way to prove your self-worth was by improving your net worth. And then, of course, once I became a millionaire and I looked in the mirror and I was still the same miserable cuss of a person.

And so I had to realize that one of the first lessons I got was that what I really valued was freedom. And like so many people, I projected an internal value, this value on freedom onto an external thing called money, you know, or I, you know, had a desire to be at peace with myself and be free of the anxiety and all those things that come with a low self-worth.

And so I projected all that out onto an external thing called money. And when you do that, you're set up. It's a prescription for disaster. So, yeah, I built a high net worth and I used all those issues in order to drive me. But ultimately, it didn't result in happiness, which is the real end goal.

So then anyway, that was that probably was that period in my 20s and early 30s. And then as I moved through my 30s into 40s, a lot of personal development, self-growth, you know, came to terms with a lot of the stuff that's through where my coaching career developed. And then and then from there, I've really learned that money and having a high net worth is really more of a bridge than it is the way a lot of people understand it.

Like a lot of people understand wealth and they think that it gives you freedom to do nothing. Like when people think of retirement, they have an image of somebody laying in a hammock with a Mai Tai on a tropical beach or, you know, playing endless rounds of golf. And that is not happiness.

Finding fulfillment in life is there's much more depth to it than just an endless vacation, what I call the pro-leisure circuit. You know, I've dubbed it the professional leisure circuit or pro-leisure circuit. That's really not happiness for most people. I suppose there's some individuals that might find joy in it, but I have not met them.

Most people that perceive joy as that, if you really get to know them, they're not experiencing joy in life. And so I've come to learn that money is nothing of what I thought it was in the beginning of this journey. That money is really, it gives you a bridge to do the next great thing in your life.

But if you, you know, like I did, I quote unquote "retired", you know, if you could see me right now, I have air quotes around the word "retired". You know, for somebody who retired at 35 and I'm now 53 as we record this in 2014, you know, if that's the last great thing you do in your life, you're not going to be a very happy individual.

I mean, there's so much to life and there's so many cool things to experience. You know, to me, wealth is about experiences, not stuff. So I don't know if that answers it or not, but money is just a bridge. It's a way for you to go to your next thing and not have to worry about putting food on the table or paying the rent.

Do you regret then spending so much time on making money if perhaps you could have maybe dealt with some of your personal issues without doing all the hard work of getting rich? Oh gosh, no, no, because see what happened is by building wealth, it stripped away all the illusions.

You know, I couldn't blame it on a crappy boss. I couldn't blame it on my life circumstances. See, that's the thing about freedom and, you know, financial freedom is once you have financial freedom, with it comes responsibility. And that's something a lot of people don't understand because now you're responsible for your life.

You can't blame anything on anyone. If you're not happy, you have to look in the mirror and own it because who are you going to blame it on? It's you. Right. So no, I'm extremely thankful and I wouldn't change a thing. I mean, obviously I have regrets and there's things to change in life, but don't we all?

You know, that's just reality. I'm interested if you're willing to share. I'm interested because I have observed that many people seem to compensate for internal personal hangups with external marks of success, money, status, you know, a certain lifestyle, things like that. And it's something I've actually never talked about on the show and never explored.

Was there a specific… Oh, it's very common. Yeah, and it's interesting you brought it up because I haven't even thought to talk about it. Was there a specific event that you were trying to recover from or just kind of a general thing? I'd love any details you'd be willing to share on that.

Oh, gosh. You know, that's probably not terribly appropriate because many of the people involved are still alive to this day. And so I don't really want to name names or go into details. I will say this, that it usually goes back… My experience… Okay, so let's first of all back up to your original point, which is that you've seen this in other people.

Well, yeah, I see it in a lot of people. You know, basically it's called acting out, right? We all act out in different ways. But a lot of times people who are very successful, very driven, they're acting out from a sense of low self-worth. I mean, it's a gross generality, but it is true in a surprising number of cases.

I see it in my work with clients a lot. You've probably seen it in your work. So it's way more common than people realize. It's just that most people don't have deep, candid conversations to share these ideas. And so, you know, we sweep it under the carpet. And where it almost always comes from is difficulties in childhood.

You know, I mean, we're born perfect. We're not born with self-esteem issues. They're learned. And they're usually not fully rational. They're developed through childhood and through childlike responses to conditions that we grew up with that we weren't responsible for. You know, it's not the child's fault that certain circumstances occur, that things happen to them.

And so, you know, fortunately, you know, I've come a long ways. Do we ever fully overcome it? No. No, you know, once it's really ingrained in you, you never really fully overcome it. But you learn that you learn and can get to a point where it doesn't control you.

That you can run your own life again. And that's as good as it gets. Right. Yeah, I've certainly experienced it myself. And it's challenging, you know, because you have to kind of judge yourself. If you're judging your self-worth by what other people think of you, then you constantly have to work on something that may be not so important to you.

And it's sometimes -- I know that for me, recognizing -- I learned it through doing financial planning. I learned so much that I never would have had the opportunity to learn by helping other people with their financial planning. Not that I was the expert in telling them how to do what they were trying to do, but that I could listen.

And you started to see people who were trying to plan for something with money that was much simpler. And I always joke that, you know, the way to escape a bad job is probably not first go and save up enough money to escape the bad job. Just go get a better job.

And it seems like a lot of times, though, it's not a logical thing. It's a personal thing. And once we get the personal issues squared away to some degree, it can make the financial aspects so much easier. Well, you know, one of the things I say is that building wealth is only about 20% financial.

It's a guess number. I don't really know the exact number. But it's very little financial, even though it's a completely financial issue. It's almost all personal. You know, you're your biggest asset and you're your biggest liability. And you're going to make a handful of key decisions that ultimately determine your financial outcome in life.

Right. So how did you achieve financial freedom and financial independence? Pretty straight up. The formula for wealth is well established. Just almost nobody follows it, which is you make more than you spend and you invest the difference wisely. And so, you know, you can take everything known about wealth and you can put it in that one sentence.

Do you need to sell me a $99 e-book to tell me the secret to wealth now? Yeah, exactly. Exactly. I mean, it's a well-worn truth. And so I did the same thing, right? The only difference in my formula was I made a whole bunch. I was in the hedge fund business.

I had an insight when I was in college, which is, you know, I want to be wealthy. I already shared that. I knew I wanted to be. And so when I was in college, I started studying how people built wealth. And I realized that, okay, well, I'm going to have to become an expert investor.

So I figured, well, I'll just get -- if I have to go out and get a job because I wasn't born with a silver spoon. I had to work. I had to start from less than zero. And so I figured if I have to go get a job, I may as well get one learning how to manage money.

And so I went into the hedge fund business. Right out of college you went into the hedge fund business? Yeah. No, my first job out of college was with Hewlett Packard. That was about a six-month stint. And that was interesting in that, you know, I made several million dollars for them.

I turned around a whole section of their business and got fired in the process. And so -- and everybody said the same thing. They go, "Wow, man, you just produced amazing results." And they didn't want to do it. But yet I had no political correctness at all. I mean I had zero ability to maneuver the politics of the corporation.

I was just -- I was way too immature. And so I just riled some people's feathers. And to me it was like, well, policy says you've got to have a two-day turnaround on this, you know. Right. And it was like -- and I needed a two-day turnaround to turn around my stuff.

And they're like looking at me like, "Who is this kid, you know, telling me I've got a two-day turnaround on this stuff?" I was like, "Well, that's policy. I have to have that in order to turn around. That's what's killing my section of the business. I've got to turn this around." It's like I didn't know any better.

I was just too stupid, you know. So anyway, I ruffled some feathers and people really appreciated what I produced. I mean they were really torn because it's like -- Hewlett-Packard had this interesting management structure where you actually had two managers. You had one that was directly managing you and you had another one.

And so I had these two managers and one absolutely loved me. I completely converted his business, made all his numbers work, did everything right. I mean he's like, "Wow, you're amazing." And the other one's like, "You're fired." Wow. I mean it was like you couldn't have a greater extreme of, you know, viewpoint on whether this guy's a good employee or not.

Sure. So I lasted about six months there and it was the best thing that could have happened to me because I was spending all my time studying investing. And I ended up going into the hedge fund business and became a partner. How did you start? Because I have a lot of people that listen to this show that are interested in investments.

But how did you actually start? Administrative as a junior analyst? What was your path through into that? I can't really say that there was a path. What happened was I was studying the stuff extensively and I was actually doing research. I had some crazy ideas early on that turned out to be all true.

And so I was already doing some stuff and I was introduced to another guy that had an early startup hedge fund. And he and I just hit it off immediately. When he heard the stuff I was working on and where I was going, he's like, "Whoa, who is this guy?" And so it was similar to some of the stuff he was working on and we just hit it off and we just worked.

So I can't really say that there was any specific path through it, if you will. It was just an introduction to the right person at the right time and we were the right match. How did you find money? Well, it was a sales process. We raised money through mostly entrepreneurial firms.

So they're not going to be startups, but they're large enough. They had sizable retirement plan assets. And so we had a promotion strategy and we'd reach out to them. And over time they'd follow us and they saw that we were legitimate. What really broke the business wide open, and again this shows my age, is when the '87 crash came and we were out, they were like, "Whoa, these guys are for real." Because normally they make money all the way up, but they didn't get nailed on the big downturn.

And we sold out almost instantly and we were closed down from then after. Good for you. So then you built your wealth through business. You basically built a business that was dependent on the application of skill, of investing. You could say that. The wealth really was I took a very high income as a partner in the business.

So really the high income was the only value of the business. And then just lived on a college lifestyle. I was so young at the time and I've never had a big taste for spending. I have nice stuff. I live a nice middle class lifestyle and drive perfectly acceptable cars.

But I don't drive a Mercedes Benz and I don't dress in flute and clothes. I don't have any taste for it. I don't care. I just always was that way. I didn't spend much of it. I just saved most. So I have a post on my site called "How Anyone Can Retire in 10 Years or Less." And it pretty much explains the math.

It shows how long it takes you to be financially independent if you save, say, 70% of your income or 60% of your income. Which sounds like an absurd number, but I'm not the only guy to ever do it. And so I just put away a ton of it. I made a whole bunch.

I never suffered because I was making so much and I didn't have big taste for spending. I just put it all away. Did you have a goal of saving a certain amount for the purpose of financial freedom? Or did it just happen because you were busy working and knew you wanted to get rich and it just kind of happened that way?

Yeah, I didn't have a specific dollar amount goal because there was never enough, right? At least in the framework that I was in. But I knew the math. I mean, I knew what it took to become financially independent. So yeah, I guess you could say I had financial goals and I knew where I was going with it.

I never figured it out until I was too late to get rich in the early, early age. And I kind of feel gypped because I spent a lot of time in the personal finance space. I figured, "Oh, if I'm saving 10% of my money, 10 or 15% of my money, then I'm in good shape." And so I did that dutifully.

And it wasn't until after--I don't remember. It wasn't until five or six years ago, something like that, that I finally figured out, "Oh, I could save a higher percentage of my money." And then by then I had allowed my expenses to grow and I had to start really trimming down.

But that's why I'm so interested in people that have it as a goal. I wasn't smart enough to figure it out at an early age and I'm so impressed with people that are. Yeah, I mean, I studied this stuff. I made a study of wealth. I had it as a goal.

And then I purposely arranged my career to become an expert in investing. So I just really kind of methodically, step by step, put the pieces of the jigsaw puzzle together. It's funny you say about--that's why I wrote that book, "How Much Money Do I Need to Retire?" because so much of the information written on it is just wrong.

I mean, it's just wrong. And I went through it and I thought I had it all figured out back in my 30s and I got it wrong. And I had studied this stuff extensively. There's just so much misinformation on how that works. So it seems like it would be straightforward, but you really--there's a lot to understand.

Like when you go into sequence of returns risk and you start looking at the difference between the different ways you can structure portfolios and how they're impacted by the cash flows drawing down from retirement, there's more to understand than I've seen written almost anywhere else. So you would--you're an expert at investing, formerly professionally an expert.

Now you hold the title of financial mentor. If you were going to teach somebody without--with minimal knowledge of investing, a young person, perhaps somebody just kind of waking up, how would you encourage someone to go about the process of learning the investment skills and the different options and paths available to them?

Well, you're giving me a layup for pitching my upcoming course. Do you want me to do that? Sure. Sure, go for it. All right. Well, I mean, it's like-- That wasn't intended to be a layup, but I like it when people have developed courses and things like that. Go for it.

All right. Well, I mean, I've been teaching--I struggled with this for a long time, right? So I've been coaching clients since 1998 when I sold the hedge fund. And everybody wants to know how to invest more reliably, right, and get produced more consistent returns. And so I started teaching clients years and years and years ago, and the success rate was really low.

I had a lot of problems trying to explain how to put all these pieces together. And I finally did get it down to a formula. I've got a three-module course. I've been teaching clients now with 100% success rate, literally, for about two and a half, three years. And I've taken quite a few people through.

I got it down to a science. And so I have a course. I call it expectancy investing. Everything's based on mathematical expectancy. It's like the science of investing. And I will be offering that course. It's going to start January of 2015, and the whole making it available should start, like, November of 2014.

And so it's the first time I'm taking it into a format where multiple people can do it. I've only had it for one-on-one clients before this. Is there any part of the framework or just the general principles that you would--? No, you have to do it very carefully. That's the thing I've learned in teaching it.

I mean, I've understood this stuff for years, right? I spent 12 years researching all kinds of mathematical systems in the markets. I was one of the early pioneers of all the stuff you see today. You've got to go back. You've got to realize when I started doing this stuff, it was the IBM 8088 processor.

The first PCs were out. It was the Apple II, then the Apple IIe. I mean, the databases, I had to hand-key punch in the Dow Jones Industrial Average back to 1885. Literally, I learned 10 key by touch just to build the databases. Wow, good. Yeah, because none of it existed.

And I hand-programmed everything in BASIC and then later on in C. So I had to learn all that stuff in order to do it because none of the platforms existed back then that you have today. Now you can just point and click and test anything. So anyway, I was teaching clients this stuff, and I kept trying to figure out how to get this message across.

And I finally got it into a three-module thing because it's layers of knowledge, and you have to take people from where they are and what they understand today. So if somebody has a basic buy-and-hold, passive index philosophy, that's where I can take somebody from there to advanced investing. And I start with that, and I help them get a much deeper understanding of what's going on in that model.

And the way I equate passive investing as it's taught today, it's not broken. It's not wrong. But it's kind of the equivalent of Newtonian physics. It works for a narrow experience of reality, kind of like Newtonian physics is what we see in our physical world. Even though there's so much beyond what we can personally experience in the physical world, and that's where you get quark theory and relativity.

And there's so much more that has to be developed in order to understand the full facet of the physical universe. It's the same thing with investing. What happens is buy-and-hold is this narrow case reality. It works most of the time, and it's valid. It's statistically valid. It's one of three valid methods I teach.

But it just has a really miserable risk-reward ratio from extremely high valuations and/or low interest rates, which happens to be the environment we're in as we record this. So it has certain characteristics that make it undesirable, and those characteristics are also what causes tremendous problems in retirement planning. Because it's from the periods of high valuation that you get the sequence of returns risk, and you get the largest drawdowns.

And those are the things that mess up retirees. And again, that's why I developed all this stuff, is because I "retired" at 35. I lived off my assets now for 18 years, raising a middle-class family. And so I had to be a better risk manager. I couldn't endure the sequence of returns risk and have made it this far.

I mean, if I had done traditional asset allocation the way it's taught, I would have been broke long ago. So you then focused on adjusting your portfolio differently to account for the downside risks, to lower the sequence of returns risk. And so that's what you're teaching, then, is the management of the portfolio.

No. See, you're going to try to put it in a box, and I've got to explain to you, Joshua, you've got to build it up step by step. You've got to start with the base understanding as you're coming from, as you asked that question. I have to go through and I have to explain what's true, what's a half-truth.

You have to get to what I call the second layer of understanding. So in any field, there's a second level of knowledge. So you can take -- like, let's take dieting as one that people are intuitively familiar with, right? And everybody knows that you eat less and exercise more, and that's like that superficial level of knowledge, right?

But there's a second level of knowledge out there that you've got to understand your body is not a checkbook. It's a chemistry experiment, and that there's a much deeper level of understanding around food, food combining, what food does within your body, how sugars react. It's a chemical thing going on inside your body.

It's not how many calories you consume. It's the quality of what you're consuming. And so -- and exercise, too. It's not like you've just got to go out and exercise more. Some exercises can be downright unhealthy, and particularly if you go about it wrong. And so you've got to get to that second level of knowledge.

And so what I do is I explain that, you know, the first level of knowledge is this superficial understanding that intuitively passes the smell test. So eat less, exercise more. That intuitively passes the smell test, and it's close enough to reality that it passes as truth. And so it becomes widely known as truth.

But in fact, it's not. It's a partial truth. It's a half truth. And so as you go to a deeper level of knowledge, it introduces dynamics. It's more of a dynamic equation. There's more involved in it. Now, it takes a deeper level of understanding to get there. But once you do, now you can fully represent reality, and you can come to, in the case of diet and health, a much healthier understanding for your body.

And it's the same thing in investing. There's a second level of knowledge out there that most people aren't approaching. So how do you teach? And obviously this is if you've been able to do it well in your course, then it's going to be awesome and be a massive, massive resource.

But I struggle with how to convey this to people because I agree with you. Let's pick on passive index investing. And my area of expertise is not in portfolio management or investment management. It's in financial planning, which is an entirely different discipline. So I'm relatively a novice when it comes to portfolio management.

But I've done enough studying to feel confident that, yes, I agree with you. Buy and hold is a workable strategy, but it's not the only strategy. And so what happens is that many times, especially in the personal finance space -- buy and hold, passive indexing is what I meant to say -- in the personal finance space, then this is often we get into these debates about, well, this is -- you can't beat this when you factor in cost.

This is the way to go. And I just say, well, if it were the way to go, then every portfolio in the world would be managed that way because there are a lot of financial people that are paid big money to manage a portfolio well. It's not the only answer.

But I don't know how to effectively communicate that to somebody with some examples. How would you effectively communicate that with somebody that has a basic level of knowledge and you're intending to illustrate that perhaps their understanding is not the only way that things are? Well, that's what took me two years to figure out.

I want you to do it in two minutes right now. It took me years to figure it out, and the course will take anywhere from six to nine months to complete. But let me do it on this interview for you, Joshua. Perfect. I'll give you two minutes. Go. To give you in a nutshell the overview, the way I do it is I first start with kind of a creative act of -- I call it -- every act of creation is at first an act of destruction.

And so in order for people to open to understand that second level of knowledge, I first have to go through all their understanding and show what's true, what isn't, you know, half-truth, et cetera, kind of like I just did with the diet thing. Only we do it specifically with investing.

And we really dissect the buy-and-hold strategy and really look at the research. Everything I teach is based on research. None of it's my opinion. It's all supported by math and numbers. If you really look at it, like the response that most people give me when they've been through the course is, "Todd, this is so obvious.

I can't believe nobody's teaching it this way." And that to me is the ultimate compliment because that means that it is being taught right if it's that incredibly obvious. Once you see it, you can't unsee it kind of thing. So hopefully I can -- you know, I've been doing it one-on-one.

Hopefully I can translate it into that group format. As I said, it starts in January. But to answer your question, it starts as creative destruction and that lays the foundation for layering in that deeper level of understanding once you first open the mind to it by showing what's not true and what is true of the understanding that somebody has in their mind right now about how investing is supposed to work.

And by the way, I'm not saying buy-and-hold is broken. It's not. Okay? Buy-and-hold is what it is. It is valid. It has positive mathematical expectancy. And I teach that there's ten tenets of a valid investment strategy and it passes the ten tenets of a valid investment strategy. This is not an attack on buy-and-hold.

I agree. It's understanding what it really is and taking your knowledge to a deeper level so you can make a conscious decision. I mean I've actually had clients come through the course and they do leave a portion of their allocation to buy-and-hold. Right. And specifically where that usually occurs is in 401(k) plans where the investment limitations are so pronounced that they decide they do want to isolate that source of return that exists within the buy-and-hold strategy and so they'll do that for that portion of their assets.

So again, I clearly I do not run around and advocate that it's broken. What I do try to do is not make it the one-stop only solution as it's commonly taught today. I don't have a beef with buy-and-hold at all. What I do have a beef with is how people teach it as the only valid solution and that's just not true at all and the math doesn't support that at all.

And the other thing too is I think that there's not enough information disclosed on the fundamental problems with the strategy. Is it possible to go to a – I'll make up the terms based upon what you said – a level two understanding without going through a level one understanding?

No. No. Because you have to have – you need to understand what is true out there and why it's become what it is because what happens is you're going to be inundated with it once you're away from Todd's influence and you're out of the course. You're going to be inundated with the stuff and you have to know it because the whole world operates at level one understanding and that's where the major media is at because again, those are sound bites.

Eat less, drink more. I'm sorry. Eat less, exercise more. I'm going to write that diet book. That will be good. How about drink more water? OK. There we go. So eat less, exercise more, right? So I mean it's everywhere. It's a simple truth to understand and it's quoted everywhere.

And so that just becomes mainstream belief and it's the same thing with low-cost passive index buy-and-hold. And again, there are some really good points to it that I keep. For example, low-cost index investing, completely valid. Every research study shows it's valid. Vanguard was founded on it. The Bogleheads got it right.

And you want to keep that principle throughout your entire investment strategy and so throughout all my teachings, it includes low-cost passive indexing because that's completely valid and there's a math reason why and I go through and I teach it. You mentioned that there are three valid methods, one of which is buy-and-hold.

What are the other two? The other one is valuation-based investing. So what I do is I call it passive index asset allocation, valuation-based asset allocation, and then momentum-based asset allocation. And those are probably the three premier that have the most documentation that somebody that doesn't want to live in front of a computer screen can implement.

And that's the other premise of the course is that somebody doesn't want to spend their life in front of a computer screen and they don't want to make investing their life, but they're willing to put out a small amount of effort, like maybe 30 minutes a month, less than an hour a month, 30 minutes a month, to dramatically improve their risk-reward relationship.

That's kind of the premise of the course is you're willing to put out some effort, but you don't want to be owned by your investing. You got a life outside of it. You've written about three, if my memory is correct, three paths to wealth. One, paper assets, real assets, and I think building a business, something like that.

And I couldn't find the article, the specific article in the deluge of other articles that you've written, but I have used that kind of mental model as far as three different approaches, each of them having advantages and disadvantages. Talk through that subject as far as actually building a wealth plan, because I think one of the biggest holes in financial advice, especially in professional financial advice, those of us who come from that side, is usually we're seeking out people who are already wealthy.

And so by seeking out someone, like that's the reality. Oh, it's totally the reality. And I want people to recognize it. You can quickly manage other people's assets. Right, right. Even people that have assets. When you are a financial advisor, you are going to make a lot more money working with people who have a lot more money.

And so it is in your own best interest to seek out people who are wealthy. I don't know how to make a living as a financial advisor other than on maybe a mass scale with something like this, media, podcast or radio show or something like that, working with people who are not yet wealthy.

But the problem is that the financial advisors are working with those who are wealthy, and then the people who are not yet wealthy are in many ways left to figure it out on their own. But there are several paths to wealth. So how would you characterize the different paths to wealth and advantages and disadvantages of them, going a step beyond spend less than you earn and invest the difference wisely?

Right. So there's basically three asset classes which comprise the three paths to wealth, right? So you've got business or entrepreneurship. You've got real estate. And when I say real estate, I'm talking directly on real estate because a REIT qualifies as a paper asset, which is the third category, paper assets.

And so that's it. Three asset classes, paper assets, real, direct on real estate and owning your own business. And so and then you can kind of branch off like there's kind of a hybrid where some people have careers where they get stock options, which essentially makes them a partial owner of the business.

So that can be a path to growing wealth depending on how you're compensated. But typically those are the three paths because those are three asset classes and they have different characteristics. And so if you look at the studies of how people have built wealth and where wealth comes from, the number one is business, owning your own business.

And the reason for that is pretty simple when you look at it, there's tax advantages and leverage. Those are two of the key principles in a properly designed wealth plan. And when I talk about a wealth plan, I'm not talking about the quote unquote, again, air quotes, if you could see me wealth plan that a financial advisor is going to give you because that's not a wealth plan.

What a financial advisor will do is they'll design a quote unquote investment plan where if you funnel your money or your wealth built somewhere else to their control and invested according to these assumptions that your money will grow to X within Y years. That's what they're calling a wealth plan.

I'm not calling that a wealth plan at all. When I talk about a wealth plan, I'm talking about how do you build your wealth and how do you invest your wealth and how do you grow your wealth? How do you translate your wealth from one side, from the income side, the asset side?

There's pieces and moving parts to a properly designed wealth plan. It looks nothing like what financial advisors do. But anyway, getting back on track here, the two main principles in wealth planning and designing your wealth plan are leverage and tax advantages. The reason for that is leverage is how you do more with fewer resources of your own.

That's part of essentially what creating wealth is. Then tax advantages, your number one expense is taxes. Understanding the tax system and tax strategy is integral to the wealth plan because it's not how much you make. It's how much you keep, which ultimately is what your wealth is. The thing about business entrepreneurship is it has the most, that's probably not good English, the greatest number of tax advantages as well as leverage points.

Real estate is second. That's why you see tremendous wealth built through real estate as well. These are not mutually exclusive. You can combine them within the same wealth plan, and I usually do. Then paper assets, which probably gets the most attention because it's the one people can sell. Right, exactly.

Yeah, so that's the one that can be sold because it's investment products and everybody's running around developing investment product and they can sell it to you and they make money off it. That's where it gets the most attention. Surprisingly, it plays the lowest role in most wealth plans. It's really a parking place for the wealth created somewhere else with the intention of growing it beyond the inflation rate, but it's usually not a source of wealth.

It's a pretty rare individual. I happen to be one of the freak standouts that built wealth in paper assets. It's certainly probably one of the toughest paths and one of the slowest paths. Would you say why? I agree with you. I'm just interested in why. Because it doesn't have leverage and it doesn't have tax advantages.

Okay. So you're essentially having to create the wealth somewhere else and you're translating it over. If you look at the math on most investment strategies, there's kind of upper limits to how fast the wealth can grow in the paper asset field despite what all the guys trying to sell you stock option courses and day trading courses and whatever else are trying to tell you.

If you look at the hedge fund results, which is kind of the rocket science of the investment universe, you'll see once you get rid of the survivorship bias and the data and everything else that's out there, you'll see that the results aren't all that impressive in general. There's a few outliers, few and far between, but basically there's upper limits of how much you can compound wealth within the paper asset category.

And again, there's common sense as to why that's true. If you look at compound rates of return and what people throw around when they're trying to pitch you on the latest get rich quick course in paper assets, you can't grow money that fast. At some point you'd own the whole stock market or you'd own the entire United States.

It's just crazy. And obviously that can't be true. So there must be limits to how it can grow and there are. Right. One of the most important skills I think for many people as far as a skill of financial self-defense is learn how to run a compound interest chart or run a compound, even though you're doing a rule of 72/2 calculation or running a financial calculator.

A few years ago, my brother was pitched on, I can't remember the name of the company. He was pitched on one of these ideas where you got involved in it and it grew or something like that. And they were advocating officially a certain rate of return. And he had looked at it, looked at it, and he asked me what I thought.

And I just pulled out my calculator. I punched in the rate of return. And I said, if that's the case, if that were to continue, your $10 investment would turn into a million dollars in six months. And he said, oh, interesting. And two weeks later, the company was shut down by the FTC.

And like so many things, if you just simply run the chart and push it out and see how long would it take me for, how long would it take for me to own the US economy? And you can probably smell a lot of rats that way. Well, once you've done your homework in the field, you can smell rats from pretty far away.

Like I was actually introduced to the Bernie Madoff track record before Bernie Madoff got busted. And it was a client. And I looked at it and said, it has to be a fraud. And they're just like, what? And I said, well, either Madoff knows something I don't or it's a fraud.

And I'm pretty sure he did. And I'm not trying to be egotistical. It's just I spent-- you got to understand, I spent 12 years. My job was to research everything out there. I researched pretty much most available trading methodologies. That was my job. And almost nothing works. There's very few things that actually holds up.

And so when I see a track record, I can smell it. Because if it-- there's certain limits to what you can do. There's no perfect investment approach. Every investment approach has an Achilles heel. And you have to understand what that Achilles heel is and how it relates to market conditions.

And so when you see a track record without an Achilles heel, you basically have a fraud. Unless you can look-- unless you can identify the source of returns and see why those source of returns are holding up. And so I got introduced to that one. There was another one that I got introduced to.

I can't remember the guy's name. And ultimately, he was featured-- again, I don't want to name names because I don't want to get us in trouble here. But he was another famous blowup. He was a little lower scale than the Bernie Madoff one. And I saw that track record and I did the same thing.

I said, "Well, either he knows something I don't or he's a fraud." And within months, he was busted. There's just certain things you start to understand. I did that with another client for a real estate fund that she was a part of. I said, "No, this smells like a fraud from every which way." And she actually worked for the company.

And I said, "This smells like a fraud. I'm just telling you." "Oh, the guy seems so nice. I'm sorry." And sure enough, hers was about a year and a half later, they were busted. Of the three, I guess, asset-- not asset classes-- three paths to wealth-- business and entrepreneurship, real estate investments, and paper assets-- do you think that they would be ranked that direction in order of potential returns from the highest potential returns?

Well, you've got to be careful, though. It's not potential returns. You have to understand the client and what's going to work for them. Just because you have this "what's ranked from top to bottom in terms of potential returns," you could say business entrepreneurship is ranked at the top, and you can look at the stats and show that's how most wealth is built, and certainly the greatest wealth is built through business.

But that doesn't make it right for an individual person. You get somebody that just does not want to or have the ability to run a business and doesn't have the idea they want, but they love real estate. So, the example I like to use is a schoolteacher who has summers off and loves to work with his hands.

That guy should go ahead and pick up a rental house every summer and fix it up and convert it into long-term cash flow. And it doesn't take very many rental houses to replace the schoolteacher's salary, and I know some schoolteachers who have done that. That's a great path for an individual with that skill set who's lacking capital because schoolteachers aren't making a whole ton.

So, you've got to understand the person's resources, skills, abilities, interests, and then you've got to understand the specific characteristics of the asset classes, and you've got to match it all up within a wealth plan that's perfectly tailored to that person's needs. So, it's not a question of what's best, it's what's best for that particular individual based on their needs.

You're stealing all my personal finance lingo. I get so frustrated at the industry. People never seem to factor in the individual's inclination, and that's a huge deal for me, so I'm glad that you mentioned that. Yeah, well, it literally makes or breaks their success. I mean, to not mention it is heresy.

Yeah, and goals may change over time. At the moment, I have not, do not, and have not ever invested in personally owned real estate, but I'm interested in it, I understand the advantages of it, and I can clearly see my life circumstances changing in such a way that I may pursue that as a wealth plan.

And one is not right and one is not wrong. So, just because I went to a real estate seminar and it said it's great doesn't mean it's great for me. And this is what we need is we need more individuals who understand the advantages and disadvantages of each of the different paths, and then we need to understand ourselves, and then connect those two carefully.

I've seen a lot of people screwed in real estate because they knew going in, I had an experience with my dad. My dad made a real estate investment, and he said before, "I don't want to own real estate. I don't want to be a landlord." He wound up getting in a situation where he made a choice to purchase property, and he wound up being a landlord, and it was a bad experience all around until he was finally able to extricate himself from the situation.

And what should have been the tip-off was not how great was the deal, how wonderful was the situation, but the fact was, he said, "I don't want to be a landlord." And if he had stuck with that, if I had done a better job with him, he would have been better off today.

Yeah, and then the flip side is real estate has a wonderful advantage in that you've got inflation-indexed income that you can never outlive if you maintain the property. So, there's some really cool characteristics to it, and there's some downsides. So, what I like to say is that real estate is half business, half investment.

You have to run it as a business, and you have to run it intelligently to extract that cash flow. And it is an investment. It has investment characteristics. It's kind of half each. And that's why I put it in between the two. I put it between passive investing, paper asset investing, and is it one polar end?

And then you've got real estate in the middle, and you've got business entrepreneurship at the other end. And each one has its own characteristics. You can run a business as a lifestyle business. And I find I can get greater freedom from my business than I could from my real estate holdings, because my real estate holdings could have blow-ups while I was out of town that forced me to deal with them, whereas my business I can manage in a way that I can be gone for a month, and it works fine.

So, if your goal is freedom and you want lifestyle, there's different characteristics. The thing I love about my business is it creates a more fulfilling life for me. It's a way I give back. It provides intellectual stimulation. It keeps me in touch with where the world's going, and all the technology going on, all this stuff that I never would be dealing with if I wasn't running this business.

It gives me a community connection with others like you, as an example. Joshua, we met, and we never would have met if it wasn't for the business. Right. We met at FinCon, and I read your site for years and always enjoyed it. And then we had a chance to meet at FinCon a couple of months ago.

And I felt the same way as far as being involved in a new industry and a new business. I felt a real kinship with many other people that I met, and it was neat. It's a valuable aspect of business, is the social environment. Well, how about this? It's a valuable aspect of a fulfilling life.

Right. We're people. We're social animals. This creates community and connection. That's a lot of the stuff people don't understand about "retirement" is what creates a fulfilling life in retirement. How do you structure that? And so there's a lot of depth to it. And so, anyway, putting these pieces together for an individual is an art form.

That's where the coaching comes in versus straight up financial advice, is really connecting it to the individual. I mean, yeah, there's finance involved. We're talking about finance here, but we're really talking about people. I want to go back to those three categories because I think it's such a valuable thing.

And then we'll switch the conversation to a totally different area. But I want to react to this statement, and this is just how I think of it in my mind. I'm interested in your feedback on it. Assuming that an individual is well-suited and well-qualified and, from a personal perspective, is willing and able to invest, either through their own business or entrepreneurship or through real estate or through paper assets, assuming that that's the case, I think there are two major factors involved as to why I think the potential returns would be ordered based upon potential returns of business or entrepreneurship, number one, highest, number two, real estate, and number three, paper assets, because of, A, the level of work involved, the level of work necessary, the level of involvement by an individual, and, B, the efficiency of the market, and that a business or entrepreneur -- and then also tax advantages and ability to leverage.

But a business or entrepreneurial activity, it is possible and has happened many times that you could have a 10,000 percent rate of return on a specific investment in a certain type of a business, a specific investment in a marketing program or in developing a new product that, in comparison to dollars invested, the rate of return can be astronomical.

But yet business and entrepreneurship is usually going to require the highest level of work and involvement. It's also, as you said, where all the sweet stuff is. People always talk about, well, there's a different tax code for the rich and the poor. I haven't found it. I found the same tax code for everyone, except there's a business tax code and a personal tax code, and all the good stuff's in the business tax code.

And then real estate also, because the level -- okay, and then the last thing was because the market -- an entrepreneur is usually going to go after an identified market that's not being met, and so he's focusing on an inefficient market and trying to bring a new product. Real estate is a less efficient market and also requires half business, half investment.

But because it's a less efficient market than a national stock market, then you have the potential for higher returns, plus it can be more safely and easily leveraged than a margin account on a trading account for stocks. And then paper assets are often the least level of work, but it's also one of the more efficient markets because it's saleable, so you have tens of thousands of people all focusing on it, but it's also the least level of work.

So they do have their place, but I think that the level of work and involvement and then the efficiency of the market do dictate the potential returns. What say you? Am I right, wrong, close? I agree on all points. I tend to -- you brought out the third dynamic, which is efficiency of the market, which I agree with.

The thing I tend to emphasize more and that you didn't bring in was what the person's goal is, so I can match -- because in the end, you don't want to climb the ladder to success only to find it's leaning against the wrong wall, and I've done that, and I've had a lot of clients that have done that.

And so it's not just this cute little mute point of, "Oh, let's start with their goal first." No, you really have to understand the person and what they want and how they envision their life going forward so that when they do climb that ladder to success, it is leaning against the right wall.

So I emphasize goal a little bit more in the beginning of the conversation in designing the wealth plan. And then the other thing, too, is I emphasize leverage more than you're bringing into the conversation because it's through principles of leverage that you can design the business to reach your goals.

Because you're not only referring to financial leverage, borrowing money to improve -- Oh, gosh, no. -- you're returning to leverage in a fuller sense. Yeah, yeah, no, all kinds of leverage, knowledge leverage. I mean, like you could even take your efficiencies and really break it -- almost all of it patterns into the concept of leverage because like your inefficiency in the marketplace could come into market leverage -- or I mean, market leverage, knowledge leverage.

There's all kinds of different ways in which you're leveraging different things. In the end, if you think about it, all you really have is resources which you leverage, and then they produce certain outcomes. But, yeah, I agree with everything you said. It's just different phraseologies, different ways of coining it, and it takes your mind in different ways depending on how you phrase it and how you structure it.

I've been accused on my show of turning this into like the entrepreneur's hour. But the reason I've done that in many ways and focused so highly on entrepreneurship is I've gotten many questions on the show from people saying, "Well, how should I best invest?" And I'm looking at their goals, either on a corporate basis or answering their questions, and I'm looking at it and saying, "Your answer is not in a paper asset investment that has its place, but in your situation, you either, A, need a wealth plan when you're just getting started, or, B, you need a lifestyle plan." And either one of those, oftentimes entrepreneurship is in many cases a better answer than is a paper asset plan or a real estate plan.

And it 100% has to depend on the individual, but the challenge is that so few people are thinking about that. When the average person in our society thinks about investing, automatically they're thinking paper asset, publicly traded stock inside a 401(k) at work. They're not thinking about all of the other things that they should do with money, and I want us as a culture to transform that and to consider all of the potential uses of money so that we make better decisions for our own situation.

Well, you're opening up a topic, kind of underlying behind what you're saying is the difference between product and process. So when most people come to you or me and they say, "I want to get a good investment," and so underlying that is there's such a thing as a good investment, and that's a belief in product.

And everybody thinks that way because they've been trained to think that way because that's what investment businesses sell. They create investment product and they sell investment product. That's how they make money. It's not a big conspiracy theory. That's just the reality of what people deal with, and so they're trained to think a certain way.

But in fact, if you really look, it's all governed by process, and that's what I teach in the investments course is the distinction between product and process. But you can apply it in what you're saying. So for example, you're bringing up this idea of your life process and how you manage your life process and how it results in savings, and that's not going back to product.

And if you look at the whole wealth building equation and what the terminal wealth equation looks like, you'll see that in the beginning of the terminal wealth equation, it's all about your savings rate as a percent of your income. And then at later stages, it's all about your compound growth rate, net of inflation.

And so there's a tradeoff point at some point, and so people focus on the wrong thing at the wrong time. In the beginning, it's all about your savings rate. Later on, it's about investment return, and you've got to understand how to build one to get ready for the next.

And again, you've got to build that all into your wealth plan. And so this distinction of product versus process is central to my coaching work, and it's key for people to really start wrapping their head around. It's part of that second level of understanding is getting out of this product mentality.

Give some numbers. I'd like you to reemphasize what you just said, where at the beginning, the key differential is savings rates and then toward the end, it's investment returns, because people often don't think about that. And depending on where somebody is in the process of their wealth building, oftentimes someone who's writing about or thinking about early retirement is very focused on the percentage of savings, the percentage of income, and rightly so.

But then it's rarer to find someone at the end who's focusing on the rate of return. Give some numeric examples to expand the point about depending on where you are, you're going to have a different focus as being the biggest lever in your arsenal. Well, I mean it's kind of intuitively obvious--hard to say, but intuitively obvious.

So if you have $1,000 and you get a 20% return instead of a 10% return, so you got $200 instead of $100. Right. Okay? Compared to if you were to up your savings rate--let's say you're earning $50,000 a year and you're currently saving nothing versus you up your savings rate to 50% of your income.

And I know it sounds like an extreme number, and it is. Let's use a smaller number just to be fun. Right. 20% of your income, so now suddenly you save $10,000. Well, $10,000 is a tenfold return on your $1,000 versus $100 difference in magnifying your compound return. Right. Now, so in the early days when your dollar amounts are small, adding to your savings is more powerful than compounding it.

But that only holds while the dollar savings are small. As your savings grow, at some point the compound rate of return outstrips your ability to contribute savings. And so that's kind of that tradeoff point where you have to become a very good investor, you have to learn how to manage risk.

I mean, I can't tell you how many clients I've dealt with where they'll lose more in their investment accounts than they make in their earnings because they've got sizable assets, but they haven't figured out how to manage them. That's part of why they come to me. So right before the call dropped, we're talking about how at different stages different things matter.

And here's how I've organized that in my mind. You were giving the example right before the connection cut out about how somebody later in their career, they may lose more in their investment portfolio from the perspective of-- they may lose more in their investment portfolio than they earned in their salary in a given year.

So how I think about it, how I think about the wealth formula, I think of three things. Number one thing is you can only control how much you earn. Number two is how much you spend. And number three, the rate of return that you earn on the difference between those.

Those are the only three things that matter in terms of how much wealth someone builds up. But in terms of where to start, the first step toward financial success is, number one, focusing on your income. That's usually in many cases something that we can really affect, and you have to have a certain amount of income.

And we know this intuitively in our culture that we encourage people to go to college, learn how to do a high-paying trade or a job, get a high-paying job. So number one, focus on income. Number two, and it's not really--they're more concurrent than sequential, but focus on expenses because we can often do a lot and build skill with expenses.

And then number three, transition to focusing on how to enhance your investment return. And I think that by giving somebody--let's say a young person, if I were coaching a high school graduate, I would give them that model that very first you need to focus on income skills. Number two, you need to focus on expense skills.

And then number three, you need to learn about investment skills because in the beginning, if you're making $100,000 versus $40,000 a year, that makes the biggest difference, and then kind of go in that sequential order as far as building a well-rounded financial education. Does that fit intuitively? I mean, does that fit for you with how you think about it with clients?

Yeah. No, it's dead on correct. Again, it all boils back to mathematics when you really get down to it. There's only so much you can cut expenses before you experience deprivation. Absolutely. And so there's kind of a mathematical floor to how much you can save through frugality before you feel like your life is less than.

Whereas there's no mathematical limit upside to the income, at least theoretically. And so you can always magnify more on the income, but what happens is a lot of people then will say, "Oh, frugality doesn't matter." That's not true either. It's both. It's just like you said. It's both. You want to pay attention to your expenses.

You want your expenses to reflect your values. You don't want to be wasteful. You want to make sure that you're getting good value for your money as most wealth builders do. And then you want to focus on rising your income to increase the spread between them. And then you want to translate that spread into savings, and there's various strategies to do that, whether it's the tax advantages of real estate, tax-deferred retirement plans, etc., etc.

There's ways in which to translate it over efficiently into the asset column. And then from the asset column, you've got to learn how to expand your rate of return and net of inflation. So it's really very straightforward. I want to explore, because you brought up taxes, and I get this question a lot.

I'm interested in your feedback on it. I want to explore what provisions we should make or what allowances we should make for the macroeconomic environment and government policies, fiscal policy, monetary policy. How do you factor those in? If you were working with a coaching client, how would you work with a client and give them-- at what point in time would you tell them to start paying attention to fiscal policy, monetary policy, global economic policy, just basically the macroeconomy?

Would you ever talk about that, or how would you work through that with a client? Never. Just simply ignore it? Yeah, you make your own economy. It's not an issue. Am I missing something? No, I actually agree with you from a personal finance perspective, but I'm not sure from an investment perspective.

No, I haven't watched CNBC in years and years and years. I don't get The Wall Street Journal. I don't look at investors. It's all a waste of time. The media is in the entertainment business, because, see, they're in the business of selling advertising. If you look at what I read, I read academic research.

I read in-depth material books. I don't read the superficial stuff, and I don't have time to waste on media. They're in the entertainment business. If I'm totally fried and I need to veg out, I might consider wasting time with it, but even then I would use music over that.

Let me rephrase the question, because we agree, and I agree. I hesitate to say the same thing. However, let's talk about something simple as far as the impact of inflation. I've just recorded a show on just-- You have no control over it. You have no--it is whatever it is.

But how do you protect--how do you think through protecting your portfolio from the impact of inflation? Well, there's a key point in here. You can't predict anything. If you think you can predict inflation by studying macroeconomics, you're high as a kite. There's no possible way. The greatest experts who get PhDs in the subject can't get it right six months in advance.

How are you going to get it right for 30 years in advance for your financial planning or even five years in advance? So how do you build, then, an investment plan that doesn't factor on your--that doesn't influence-- Because you're coming from a belief structure without process. If you have investment process, you can manage for those outcomes.

If you invest according to product and asset allocation, then you're stuck in the world you're coming from. Again, there's a deeper level of understanding here. There's a premise in your question that's not true, which is that you have to make a macro bet. You don't have to make a macro bet.

I'm struggling how to articulate the question, because I'm not saying you have to make a macro bet, but I'm saying that you have to be aware of-- Okay, but let me ask you a question. If you don't have to make a macro bet, then why do you have to be aware?

I think you have to build a financial plan that works no matter what happens, because you can't control monetary and fiscal policy, but you have to be aware of it. Because the number one crisis that's going to face the average retiree in this country over the coming decades is an overexposure to the bond market and underperforming inflation by every case.

Just stop, stop, stop. Listen to what's underlying what you're saying. Overexposure to the bond market, that's a macro bet on bonds. You've got to understand, it's built right into your thinking process. It's underlying your entire thinking process and how you're approaching the question. You're thinking in the world of product.

No, I'm thinking in the world of the fact that the average person in our country, and what's being pressed more and more in the financial advice space, is to move into target date retirement funds. And so everybody in our culture--and I'm using the term loosely-- but the majority in our culture is functioning under the concept of decrease your exposure to equities and increase your exposure to fixed income investments as you get older.

Let me just cut in. And so that's laughable. And I've got a post on my site, I published it in April of 2013, right at the top of the bond market. And that was pure luck and timing. I even say it right in the post. It says, "The bond bubble is here, what's next?" And so if you look at the math behind the bond bubble in the bond market, it's basically a zero expectancy bet or worse.

There's almost no possible way to make money in bonds now that inflation, investing at the interest levels we're at. It makes no math sense whatsoever. And I got attacked roundly for it. People are like, "Oh, you've got to do this, you need a diversifier, this and this." No. What I teach is expectancy investing.

There's either mathematical expectancy or there's not. If you don't have mathematical expectancy, what's the point in putting capital at risk in that market? There isn't any. And so your question about making macro analysis, I just looked at what the bond interest rates were. I looked at the best possible outcome you could ever have.

Because there's a floor. The thing about interest rates is they're bounded on the downside. They're not bounded on the upside, but they are bounded on the downside. And that allows you to do firm analysis. And so because zero interest rate is a downside, yes, it can go below that temporarily, but basically it's a theoretical floor.

And so I took and analyzed the bond market from a 0% interest rate and the different time periods it would take to get there and what your total gain would be versus what your risk is to the downside. Not a risk/reward bet, it makes no sense. Did I have to have a macro environment understanding of that?

No. And so, I don't know, am I making sense? There's other ways to manage your money that don't require you to get glued to economic forecasts. And that's one of my fundamental tenets that I teach. I teach ten tenets of investment strategy, and one of them is, if it requires forecasting, it's invalid by definition.

Because nobody can forecast accurately, and if you're trying to forecast the future, some people are going to be right occasionally, but a broken clock is right twice a day, and you can't tell time with that. So you can't do it. And so if it requires any sort of forecasting whatsoever, it's flawed and you can't use it.

Right. I think we're more dealing with a challenge of communication rather than a disagreement of thought, although I'll need to consider more to see if I do have a paradigm that affects how I think and how I'm expressing myself that's based upon a flawed assumption. But I'm really concerned about -- and a person listening to this podcast -- we're an hour into this podcast -- the person listening to this podcast is not an average person, but I'm concerned with where we're going over the next couple decades for the average person.

Anybody can put up with you and I for an hour is not the average person. That's exactly right. Let's switch gears, and the last question I want to ask for you, is in an unusual manner, you write a lot about financial advice. And this is interesting because in the personal finance space, there are a few people who write about financial advice and there are fewer that write about it accurately.

But you write a lot about financial advice in terms of how to spot a fraud, how to know if you are -- you write about specific products. You have a whole book that you wrote on variable annuities, which are one of the most hotly debated topics in the finance space.

How do you recommend somebody think through the process of engaging a financial advisor? Okay. I've never had one. I think that that industry is going to be completely changed. I think the days of your local financial advisor, who basically if you really look at how they're trained in sales, their number one way for building business is relationship, they don't really have any serious -- I'm making gross generalizations because we're dealing with tons of people.

There's obviously some brilliant -- there's brilliant financial advisors who do brilliant work and really help their clients, right? But by and large, they don't carry a tremendous amount of financial expertise. They're trained in product sales by the company. They know what they're trained in. They're good people. They're doing the best they can with what they know like so many people out there.

And their depth of knowledge is limited based on their training. And so what happens is there's not tremendous differentiation and it's kind of an antiquated business model in today's era where, what are the chances the guy in your local neighborhood is going to have the greatest investment expertise available to you?

The chances are almost zero and yet because of the electronic world we're in now and the online world, you have access to the best investment expertise in the world. And usually at a tiny fraction of the cost, your local guy is going to charge you because his business model isn't scalable.

He's dealing with relationship. And so he's going to have to charge more in order to deal with that relationship and have a viable business. So I really think--I mean, and I'm not saying it's a big secret. Financial advisors are feeling the squeeze. The whole movement now of robo-advisors in the investment space, you can buy insurance low cost online now.

All this stuff is getting--the thing about the internet is it's deflationary in the sense that it reduces margins across the board because it's scalable. And so that is hitting the financial advisor space and I think it's only going to become more pronounced. So to answer your question about how do you deal with a financial advisor, boy, that's a tough one carefully because they have massive conflicts of interest and there's limitations to their--I've got a couple podcasts myself where I go through with some very highly expertise financial advisors who are behind the scenes and they're sharing the same info I'm sharing which is these guys by and large aren't trained as financial experts.

They're trained as investment product sales people and they learn how to build--the whole business is based on asset gathering. It's not based on how much money can you make for your client. It's based on how many assets can you gather. That's the measure of a successful financial advisory firm.

It's asset center management. Look at how they advertise themselves. So it's a very conflicted model. It's a very out-of-date model and it's going to have some problems. And there's good reasons why it's having problems. There's going to be some that are great and they shift their model and they really serve their clients well and my blessings to them.

Yeah, I mean from being a financial advisor and being heavily involved inside the--behind the door so to speak, the thing that I predict over the next decade is there is going to be a real shakeout of-- there are going to be a lot of horrible advisors thankfully leaving the business because the margins are being pressed down and it is happening continually.

And it's already happening. It's becoming tougher and tougher and it should be happening because people who don't add value that is worth the fee, it should be happening. And then the really great advisors are loving it because what's happening is that it's the same transparency of-- the same transparency that the internet has brought with the competition is also bringing a transparency to their expertise and their ability to differentiate.

And there will be a--there's a real growth for the really great advisors. But man is it a rocky time right now in the financial advisor space, that is for sure. Well, here--you said something good which I think should have been the answer if I was more succinct which was you should only pay for that which puts more value in your pocket than it takes out.

Right, absolutely. Mathematical expectancy theory, right? Yeah, that's a hallmark of people who build wealth is you pay for what gives you more value than it costs. And so that's how I would approach a financial advisor is really look carefully to see if they're going to deliver more value than they cost.

And if they do, great, you found a great one. Right, and the value proposition will be different from person to person as well. It really will be and that's--financial advice is a very nebulous, undefined term. Usually when people think the word financial advisor they're thinking portfolio manager or investment manager.

And that is a very small subset of financial advice. That's one of the biggest misconceptions that I see in this space is that this term financial advisor is such a nebulous term. We need more specific terms. Well, the whole reason I did financial coaching is I--I mean, I was one of the first people ever to call themselves a financial coach on the Internet back in '98.

And I did that to differentiate from financial advisors, try to find a term that was totally different because I was coming at it in a totally different way and there was no investment product sales involved. And now, of course, financial advisors are all running around calling themselves financial coaches and there's tens of thousands of people calling themselves financial coaches.

But anyway. All right. If you were sitting down with your 18-year-old son and you were going to give him kind of a core nugget of-- core nugget of advice about wealth building, what would you share with him? Be happy and don't worry about it too much and just be smart with your money and let it take its course.

Focus on your life and your career and enjoying your life and where you want to go and what adds meaning to your life. And just be smart with your money. Live below your means wherever you're at at that time and just build reasonable savings and enjoy your life. Appreciate you coming on.

What's that? I said I appreciate you coming on. Hey, thanks for having me. Anything else? Financialmentor.com is your site. And you mentioned the course. Is that going to be coming out on financialmentor.com? Yeah, I'm transitioning the business. I've been coaching people one-on-one for a long time. I'm finally transitioning it to get the seven steps to seven figures, which is something I developed over many years of coaching.

It's a template for how people build wealth and the journey they go through. I'm finally getting that live in a course format. The first one is the advanced investing course. That should go live this January. And then I'll just keep building courses from there. My idea is to help more people at a lower price point and just serve more people.

Awesome. Awesome. Very cool. Todd, I appreciate you making the time for today's show. I think it will be a valuable resource for people. Thanks, Joshua. Told you you'd learn something. Todd, thank you so much for coming on. I enjoyed it. I would encourage you to go over and make sure that you make some time to go and check out his site.

Todd has written quite a bit. He's got a lot of information there in his articles. I think you'll find them thought-provoking. He's written a half a dozen or so short books under a series called 60-Minute Financial Solutions. He's got an excellent reading list you might find valuable. He's got a few longer books that are available.

I guess he's developing that course as well. If you're listening to this in October 2014, the course isn't out, but I know he's been working hard on that course. Head over and check it out. Maybe it will be a useful resource for you and your investing knowledge and investing experience.

Thank you so much for listening to today's show. I'm sorry that I didn't bring you a financial planning show today on Wednesday. I, again, have been working on a project, and it's consuming a massive amount of time. So I haven't had the time to prepare those shows the way that I need to prepare them for them to be effective.

Hopefully by next week we'll be back in the normal schedule. Tomorrow I'm going to be bringing you an interview with a man named Joey Furman who has written a book. It's a story teaching financial planning concepts and wealth building concepts. He also is a CFA, formerly worked on Wall Street.

We talk a little bit about that business. I think you'll enjoy that. Friday I'd like to do a Q&A show, but I could use some more questions and answers. So if you've got questions and answers, excuse me, questions, I've got answers, come by the website and leave a message for me.

You'll see the little send a voicemail message right there for you. So come on by and leave a message for me, and we will see you all tomorrow. Thank you so much for listening. Make sure that you subscribe to the show. I'd love a review in iTunes and Stitcher as well if you have a few minutes to do that right on your phone.

Thank you so much for being here. Talk to you tomorrow. (Jazzy 30's music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) - Thank you for listening to today's show. This show is intended to provide entertainment, education, and financial enlightenment. Your situation is unique and I cannot deliver any actionable advice without knowing anything about you.

This show is not and is not intended to be any form of financial advice. Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy, and consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions.

Hold them accountable for your results. I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes. If you spot a mistake in something I've said, please come by the show page and comment so we can all learn together. Until tomorrow, thanks for being here.

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