00:00:00
Renting versus owning a home is the biggest financial decision most people make in their life. So, we're going to
00:00:04
talk about all of the unreoverable costs [music] of owning a home, including property taxes, maintenance costs, which
00:00:09
is the one that I think people underestimate the most. And then there's also emergency costs. I've got a whole
00:00:14
stack of them, as well as a 5% rule to figure out if renting is a better financial decision. We'll go through
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that. What else have we got? >> So, this is something that people just don't think enough about, which is the
00:00:22
top 10 financial mistakes that I think people make. For example, tax planning opportunities. Like there are simple
00:00:28
things that people can [music] do to minimize the amount of tax they're paying. We'll go through those.
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>> Ben Felix's firm manages the money of more than 3,000 people, ranging from
00:00:36
people with huge amounts of money and not so much money. His whole thesis is giving people money advice that is based
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on academic research. >> Our brains, our psychology absolutely gets in the way of making good long-term
00:00:48
financial decisions. >> And today we're going to answer the big money questions like what should I
00:00:53
invest in? A lot of people believe that they need to have a lot of background information before they can start
00:00:58
investing, but I would argue that people who know just a little bit, they will be
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better long-term investors. There's a ton of evidence supporting that this will outperform most other investment
00:01:06
strategies. And also, what is the mentality, the mindset of people that end up making money over the long term?
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>> Psychology is important for determining what your financial goals are. So, this
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is a framework that we developed to elicit higher quality goals. >> What would you say to young people that
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are thinking about their financial strategy? A lot of young people feel a lot of pressure to save, but there is
00:01:26
research suggesting [music] that it's probably suboptimal for young people to save, which we'll talk more
00:01:30
about later. And then, in a world of AI where everything is changing so quickly.
00:01:34
What should I be doing with my money right now? Ben Felix has the answers. This is super interesting to me. My team
00:01:42
given me this report to show me how many of you that watch this show subscribe. And some of you have told us according
00:01:46
to this that you are unsubscribed from the channel randomly. So, favor to ask all of you. Please could you check right
00:01:52
now if you've hit the subscribe button if you are a regular viewer of the show
00:01:54
and you like what we do here. We're approaching quite a significant landmark
00:01:58
on this show in terms of a subscriber number. [clears throat] So, if there was one simple free thing that you could do
00:02:03
to help us, my team, everyone here to keep this show free, to keep it improving year over year and week over
00:02:08
week, it is just to hit that subscribe button and to double check if you've hit
00:02:11
it. Only thing I'll ever ask of you, do we have a deal? If you do it, I'll tell
00:02:15
you what I'll do. I'll make sure every single week, every single month, we
00:02:19
fight harder and harder and harder and harder to bring you the guests and conversations that you want to hear.
00:02:23
I've stayed true to that promise since the very beginning of the D of Sio, and
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I will not let you down. Please help us. Really appreciate it. Let's get on with
00:02:30
the show. [music] [music] Ben, there are lots of people out in the world talking about personal finance and
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investing and all these adjacent subjects. What is the approach you take that you think is different to lots of
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the other sort of finance experts that are on YouTube that are giving people advice? What I think and the approach
00:02:56
that I've always tried to take is what can we take from academic literature,
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very smart people who spent a lot of time thinking about these things. What can we take from them and apply to
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making good financial decisions for a typical person? >> And what are the key questions that
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you've sought to answer for the audiences that you have >> is renting versus owning a home. So,
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that's always been big. Asset allocation is another big one. How much should you
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invest of of your long-term money that you can afford to take some risk with? And another important question people
00:03:24
wonder about is uh why should I not do this other investment strategy that seems very attractive?
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>> And who who are we appealing to with this conversation? Is it just people
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that have lots of money or is it >> No, I think these questions need to be
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answered. I mean, the the renting versus owning a home one is applicable to pretty much everyone because that is the
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biggest financial decision most households will make in their lives regardless of what their net worth is.
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But investing, what should you do with your long-term investments? That's applicable to anybody. Anybody that's
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going to be saving for their future, whether they have $10,000 or $10 million, the same principles apply.
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>> And how much of this game of investing, making money is comes back to psychology.
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>> So, I like to say investing has been solved. We're going to use index funds.
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That's it. The hard part is actually doing that because our brains, our psychology absolutely gets in the way of
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making good long-term financial decisions where our brains are designed for survival. They're not designed for
00:04:20
thinking about long-term abstract concepts like taking your money today, investing in the stock market, ignoring
00:04:26
all the stuff that happens in between and then having money left over later uh to to fund your retirement. That's so
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interesting because a lot of the time people talk about tactics and strategies but I guess underpinning your ability to
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execute on any of those tactics or strategies are one's own psychology and is there academic research about the
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best sort of mental approach to take towards money in finance and investing. So one of the best approaches and it's a
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little bit counterintuitive is to not look at your investments. There is an academic paper showing that the more
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people look at their investments the less risk they take and the lower returns they earn. Because when you look
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at your investments every day, the stock market goes up and down. We know that if
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you're looking every day at your portfolio and it's down 5%, up 6%, and going up and down all the time, that can
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be very stressful and it makes it seem like the stock market is very risky. And so people will invest less in the stock
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market. In reality, for for long-term investors who can invest in stocks, buy and hold for a very long period of time,
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that they're a lot safer than people think. >> So, [clears throat] we've got some props
00:05:28
here for some demonstrations we're going to do. Could you just give explain to me
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the high level of what these things are on the table and the different frameworks we're going to go through?
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>> Sure. So, we have a bunch of things here. Uh this is one of my favorites
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that I bring up in a lot of my videos. So, this is the the perma model which comes from positive psychology.
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Psychology is important for investing well, but it's also important for figuring out what your long-term
00:05:52
investing strategy should be. >> We'll go through that. What else have we
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got here? This is the top 10 financial mistakes that I think people make. Uh this is the the three steps for
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investing your first $10,000. >> Okay. And we've got $10,000 there. So
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you're going to talk me through how we do that. Yeah. As well. >> We're going to talk about all of the
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unreoverable costs. Got a whole stack of them that you incur when you own a home.
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>> Okay. And I I guess this begs the question, who is Ben Felix? What is your
00:06:21
background? and what is the education, the reference points, the experiences that you're drawing upon to give us this
00:06:27
information today? >> Probably where it starts for for being relevant is I I did a degree in
00:06:32
mechanical engineering at Nor Eastern University. And I say that's relevant because when I came into finance, I
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wanted to approach it like an engineer. And a lot of finance, a lot of financial
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services of of investing and wealth management is not approached like an engineer. uh it's approached like a I
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feel almost bad saying this but it's approached like a like a car dealership
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like selling selling product uh so I was disappointed in that and and had to find
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my find my own way >> they haven't got my best interest at heart >> in in a lot of cases I don't think so
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>> I started spending a lot of time reading through academic literature so that I
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could be very confident and comfortable that the advice that I was giving to people was good high quality advice
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>> and where is the best place to start is it in the psychology is it one one of
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these frames marks is it somewhere else? Is there a background understanding of the economy one needs to to get going?
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>> That is a great question. I don't think so. And I think that's where a lot of
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people get stuck where they believe that they need to have a lot of background information before they can start
00:07:32
investing. Uh they may do research on specific industries. They may look at like the energy sector so they can build
00:07:38
out an energy portfolio as one example. But investing the way that I would say is sensible for most people which is
00:07:44
just using lowcost index funds capturing market returns. the the market returns have been there and they're going to
00:07:50
continue to be there. They should continue to be there in the long run. Uh doing that doesn't require a lot of
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background knowledge. I would argue that people who know just a little bit, just
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enough. They just know that index funds are sensible and they have enough conviction they can stick with that they
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will be better long-term investors than someone who knows enough to hurt themselves.
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>> What What would you say to young people that are thinking about their financial strategy? Would you say
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that someone in their early 20s, 21 years old, should adopt a completely different approach to money based on
00:08:22
what you've just shown me versus someone that's 51 years old? >> It's going to be different for sure. I I
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think and this is a it's a tricky subject, but a lot of young people feel a lot of pressure to save and that might
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be saving for their retirement. It might be saving to buy a home, but they feel a
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lot of pressure from their parents uh and just from society in general that they need to be saving money and that if
00:08:41
they're not saving money, they're being irresponsible. But again, if we come
00:08:44
back to academic research, there is research suggesting that it it's probably suboptimal for young people to
00:08:50
save. General point is that you should save more when you have a higher income and save less when you have a lower
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income. And what that ends up meaning is that young people may not need to save or may not need to save as much as they
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feel pressured to save. The reason this topic is tricky is that while what I just said is true, it can cause bad
00:09:11
habits where if people spend all of their income and then don't have that shift towards saving at some point, then
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they'll they'll end up in a difficult position later on in life. Someone who's
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50, it's going to depend on their situation. If they're the person who I
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just mentioned who never saved, they're in a tough position and they are going
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to need to save a lot in order to have some wealth later on in life. But if they've already saved and they have
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wealth, then they can focus more on some of these topics. >> And you've got the the 10 money mistakes
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people make here. Can you run me through those ones and just let me know if any of them are particularly pertinent or
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interesting that we should dive deeper into? >> So, this this one's controversial. It's
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not earning enough money. A lot of people feel like they don't have an option. that they're not
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earning enough money because that's just the way things are and there's nothing
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that they can do about it. I don't think that's necessarily true. Investing in
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your human capital and that can be formal education, it can be gaining skills, it can be becoming an
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entrepreneur. Those are all ways to make your your own self a more valuable asset
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to increase the value of your human capital and allow you to earn more money. So that's that's a big one. I
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think people who get stuck in the in the feeling or the thought that they do not
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have the ability to increase their income and that this is just the way things are. I think that can be very
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problematic. I've always thought of it across these sort of five buckets. The
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first two buckets that we attempt to fill when we're starting our careers are
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our knowledge and then our skills. And kind of like when knowledge is applied, it becomes a skill. And these two first
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buckets are so imperative because they can almost never be unfilled. Whereas the other three buckets, which is your
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resources, your network, and your reputation, you can have career fluctuations and earthquakes that cause
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those buckets to unfill. So, as like you were saying earlier on about young people, one of the things I've always
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thought is like when you're young, just like optimize for filling your knowledge
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and skills as much as you possibly can. And actually, I guess the the level of nuance there is acquiring a rare but
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complimentary stack of knowledge and skills that the market values. And I think over the long term, you know, this
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doesn't apply to everybody because things happen in life and bad things can happen, but over the long term, I think
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life tends to land you pretty much in and around the value of and the rarity and the compl complimentarity of those
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knowledge and skills as it relates to the market's demands. >> That's absolutely true. There's data on
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this too where we know that there is a mechanical relationship at least historically. We can talk about the
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future but historically there has been a mechanical relationship between formal education or trade ed education and
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lifetime earnings and we also know that certain degree types like engineering, finance, uh business, some other
00:11:56
sciences have higher lifetime earnings than other degrees. So it's you're I
00:12:00
think you're absolutely right. There are and the hard part is we don't know what
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exactly those degrees and skills that are going to be the highest paying in the future are going to be. 10 years ago
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we might have said software developers. Today we might not. But even you as an example, so you did engineering and then
00:12:13
you did finance and now you've added this other string to your bow which is you know how to make content on YouTube
00:12:19
and that makes you as a finance expert and professional and CIO so extremely rare. It almost makes you like one of
00:12:29
100 on planet earth maybe and this is what I mean by rare and complimentary skills. You could have just learned more
00:12:35
finance and I don't think that would have moved you up this sort of earning ladder, but because you added this
00:12:40
really rare skill of being able to make content to the your other skill stack, I'm guessing it made you money.
00:12:47
>> It did. It has. And I I continue to be paid well. And you know, it was Please don't. But if you were to go back
00:12:54
and watch my old videos, which are still up, I'm so rigid and nervous and I and I
00:13:00
was. And it took probably years of recording and we do a podcast too. So just being in front of the camera for me
00:13:06
to feel pretty good. I mean I it probably took me three years to smile on camera
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>> really. [laughter] >> So yes, that was a skill that I acquired through just practice. I guess
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>> I say this because I really want people to think about how rare their skill
00:13:19
stack is. It's not something we're taught. And then also one of the things
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I noticed I used to work in a a biotech company for a little while while I was in between things and we were looking
00:13:28
for a writer, a biotech writer. Now the other writers that we'd hired at our
00:13:33
other companies might have been paid I know $50,000 whatever it is for a biotech writer we would pay them a
00:13:38
quarter of a million and all the only difference is the biotech writer had like some base they didn't have to go to
00:13:45
medical school. They just needed experience in writing about biotech. >> Yeah.
00:13:49
>> And it 5xed their earnings. So this other point is you might have a skill
00:13:53
stack but are you selling them on the right market and even me first part of my career was marketing. I was helping
00:14:00
Uber and fizzy drinks company and dressellar company sell their dresses. As I just said the second little stop I
00:14:08
took in my career was helping biotech companies with marketing that are about to IPO. [laughter]
00:14:14
My first contract with one of those companies was worth eight million, six months work. And I it was a real pivotal
00:14:20
moment in my career where I go, it's not just the skills you have, it's like
00:14:23
where you the the market and industry where you sell those skills can wildly change your your as you say on that
00:14:30
card, your earning potential. >> Yeah. And as you say that this is something that you don't have full
00:14:35
control over because you could do all of those things and not find work as a biotech writer, but putting yourself in
00:14:39
that position I think does increase the odds. >> What's the second one you've got there?
00:14:43
Second one is not saving enough. Touched on this a little bit. Young people maybe don't need to save, but at
00:14:51
some point you do have to start saving. And the tricky thing about saving is that wealth compounds over time. And if
00:14:57
you're not saving out enough, you're missing out on compounding. And it gets
00:15:00
a lot harder to catch up with the amount of savings you would have otherwise had
00:15:04
if you started earlier. Uh so that that's a big one. And some people will wake up when they're 50, 55, maybe even
00:15:11
60 and realize they haven't saved enough. But by that time, there's nothing that you can do about it or very
00:15:17
little that you can do about it. There's a lot of parallels with health here
00:15:20
where if you eat poorly and don't exercise, you can wake up when you're 55
00:15:23
and you can have heart disease. That is very difficult to reverse and it's the
00:15:28
same effect. It's compounding over time. I think health and wealth have a lot of
00:15:31
parallels anyway. So, not saving enough can be very problematic because it is so
00:15:36
hard to reverse the effects of it once you've realized it's a problem. >> Interesting. I read a book um called The
00:15:41
Slight Edge by I think it's Jeff Olsen when I was 18 which talks exactly about
00:15:46
that. I think it uses one of the analogies it uses is like brushing your teeth. Don't brush them today, it's
00:15:50
fine. Don't brush them every day this week, you're fine. Don't brush them
00:15:52
every day this month, you're fine. But in 5 years, you're [ __ ] >> That's right. [laughter]
00:15:55
>> In 5 years time, you can't like stop brushing them then you're in a dental
00:15:59
chair having them ripped out. And I guess finance is the same in this regard. Exactly. Yeah. Number three is
00:16:03
not setting financial goals. And that's we talked a little bit about this earlier as well. If people don't set
00:16:10
goals, they will do things like think they need to earn more money because because because that's what you do. Or
00:16:18
they'll think they need to buy a house because that's what you're supposed to
00:16:20
do. But they won't step back and reflect on what are the components of a good
00:16:24
life for them. What do they want their life to look like? And what would they need to do to achieve that? And if you
00:16:29
don't go through that exercise, you can end up spending years or dollars achieving things that don't really
00:16:37
matter to you. And again, because of compounding, by the time you realize those things didn't matter, that's time
00:16:42
and money that you can't get back. >> So, how do I go about setting good
00:16:45
financial goals? What is the process there? >> So, this is the the process that we
00:16:49
created is three steps. List your goals. >> Okay. So, [clears throat] what does that
00:16:57
look like? So, you're going to sit down with a piece of paper or we we built an
00:17:01
app for this uh that we use with with clients. Uh you just list out your goals. >> So, I could say, "I want to be a dad. I
00:17:08
you know, I want to buy a Ferrari." >> Yep. >> We want to go on holiday to Cancun.
00:17:12
>> Yep. >> I want to be able to retire at 50. Those kinds of goals. >> Yep. Now, step two. So, you've got your
00:17:18
list of goals. You're going to double the list. >> Double it. >> Yeah.
00:17:23
>> Why? >> So, you came up with I think four goals just now. you're going to write down
00:17:25
eight goals because this forces you to think harder about what other important what other goals might be important to
00:17:31
you and research does show that this elicits more goals that people later identify as being at least as meaningful
00:17:37
as the initial goals that they listed. And then the last thing we're going to
00:17:40
come back to the perma model. So the perma model is a five factor model of human flourishing. If you have these
00:17:48
components contributing to your life, there's a very good chance that you'll
00:17:52
live a good satisfying life. I think you've you've lived through this experience where you've seen that wealth
00:17:59
does not lead to a good life. >> Mhm. >> And so what does Well, there's there's a
00:18:04
whole bunch of really good research on this and it does suggest that positive emotion is one big piece of it. What
00:18:10
does that mean? It's literally enjoying what you're doing and feeling good
00:18:13
throughout the day. engagement. You could probably argue that we're getting some of that right now where you're
00:18:19
doing something that you enjoy doing that's maybe a little bit challenging, but it's at your skill level. It's the
00:18:24
idea of getting into flow. I know I get that when I do podcast interviews, when I do research, when I'm sitting down and
00:18:30
writing a video script. >> Relationships [clears throat] is is having good strong relationships with
00:18:35
with people who are close to you in your life. And that can be friends, it can be
00:18:38
family members, it can be colleagues. Meaning is being part of something that is bigger than yourself.
00:18:44
That can be a lot of different things. For some people it's religion. For some
00:18:47
people it's community. For some people it's their own business. >> And accomplishment is achieving hard
00:18:55
things, setting goals and achieving them. You're going to look at the items of the perma model. You're going to look
00:19:00
at those as categories and think about what other goals you may have that fit into those categories. That's called a
00:19:06
categorical prompt. And again, there's evidence behind that helping people elicit more meaningful goals.
00:19:11
>> So, one of the things I said is buy a Ferrari. Again, these aren't my goals. I
00:19:13
don't care about Ferraris, but in case they want to sponsor the podcast, then I
00:19:16
care about Ferraris. Um, but say the Ferrari thing. Do do I have to find where it sits with in terms of positive
00:19:22
emotion, engagement, relationships, meaning accomplishment? >> It would be wise to, and this is why I
00:19:26
think this framework is so important because you might realize that a Ferrari does not contribute to any of these
00:19:30
things. It might though, like maybe you take it to the track and you spend hours
00:19:35
racing it >> and that would be engagement. >> That would be engagement.
00:19:38
>> Maybe you have a bunch of buddies who have Ferraris and you want to be part of
00:19:40
that friend group. So that's relationships. Yeah. >> Okay. I mean, positive emotions, but
00:19:45
that might only last a couple of days. >> Yeah. Well, it's the hedonic treadmill
00:19:47
idea. That's exactly it. Yeah. >> And then accomplishment. I mean, it's
00:19:52
not really an >> If it was a goal that you've had since you were 5 years old, maybe that you
00:19:56
could call that accomplishment. Maybe. >> Okay. So, I fit my my financial goals,
00:20:00
my life goals into the perma model as a way to understand what my financial goals should be.
00:20:06
>> Yeah. >> Okay. How many people in the general public do you think have actually
00:20:10
thought about what a good life for them looks like? >> Not not enough. Not many. I think
00:20:15
everyone's people are so busy with their day-to-day lives. And I know this is
00:20:19
true for me and my family too. It's really really hard to step back and have
00:20:22
this kind of thoughtful discussion about what you actually want your life to look
00:20:26
like. Cuz I was just thinking about that. I was thinking I don't even know if I've got um really clearly defined
00:20:32
life goals for myself. Like I think most of us just kind of act on how we feel. >> Yeah.
00:20:37
And that can somewhat dri drift us towards the short term. Like if I just Yeah. What's going to make me feel good
00:20:43
today and do that every day? I don't know. Some might argue that you have to
00:20:48
be a bit more long-term thinking. >> It can it can help, right? Because it it
00:20:51
can help you from making decisions that you might regret in the future. >> Mhm. Yeah. Cuz when I look at this perma
00:20:57
model, there's some things on here that I've optimized for which have sacrificed
00:21:00
the other things that >> That's it. That's it. Yeah. like I might have I might have overindexed on this
00:21:04
like achieving things but might have cost me some relationships. So what's the fourth mistake people
00:21:10
make? >> Yeah. So this is related to what we were just talking about but it's it's
00:21:13
overspending on the wrong things. >> Okay. When you think about what is a good life for you and you realize, if
00:21:21
you realize that you're spending on things that are not contributing to that, which is resulting in you not
00:21:25
being able to save toward things that would contribute to what you want your life to look like, that's probably not a
00:21:30
great position to find yourself in. So, it could be spending $12 on a an iced coffee every morning and not enjoying it
00:21:38
because you could get positive emotion out of that, but you're like rushing to
00:21:41
work chugging down the $12 coffee every day. That's probably not contributing to
00:21:45
a good life. Number five might be one of the bigger ones, which is not taking investment risks.
00:21:57
And that's really the stock market has delivered these incredible long-term returns and on expectation it should
00:22:03
continue delivering strong returns for investors. Not participating that in that is a huge mistake and it's a
00:22:10
mistake that many many people make. A lot of people don't invest in stocks at
00:22:14
all and a lot of people who do invest in the stock market don't invest enough in
00:22:17
stocks. They have very conservative portfolios and that has a very large implicit cost. By not participating in
00:22:25
the stock market when you could be, you're giving up a huge amount of of economic gain.
00:22:29
>> How do you quantify that for the average person in terms of what kind of gain
00:22:33
they're giving up or the size of the gain they're giving up? Well, you can
00:22:35
look at the historical returns on stocks. Uh, and you can also look at the expected returns on stocks. So, let's
00:22:43
say it's let's say it's 7% that we expect stocks to to earn in in the long
00:22:47
run. And if you could get 2% by sitting in cash, that 5% difference is your opportunity cost of not investing in the
00:22:56
stock market when you otherwise could be. 5% compounded over the long term is enormous.
00:23:03
So, say I have $10,000 uh and I invest it in the stock market and I'm getting what
00:23:11
did you say? 8%. >> Seven say 7%. >> How much money is that? Let's have a
00:23:18
look. So, I've done $10,000 which is what we have here. >> Mhm. >> Invested in the stock market at 7%
00:23:24
return over 40 years. That would be $150,000. Do you know what's um Do you know what's
00:23:33
quite scary when I think about that is does that that kind of means that today if I spend $10,000 I'm actually spending
00:23:39
$150,000. >> Yes. >> Which makes me not want to spend any money on anything.
00:23:45
>> Yeah. >> Cuz if you buy I don't know what cost what cost $10,000 like a a small car.
00:23:51
>> Yeah. Maybe. Yeah. you're actually spending $150,000 when you factor in the fact that if you
00:23:55
put that $10,000 into the stock market, you could have made 7% a year and it would have turned into $150,000.
00:24:01
>> Yeah, that's that's one side of the coin. I think you also have to think
00:24:04
about any enjoyment or utility that you get out of that car. If that car lets you drive to a job you couldn't have
00:24:10
otherwise done, it may have a significant economic value to in the long run. >> As one example,
00:24:16
>> you know, I've got a coffee here. Some people spend $10 on a cup of coffee with
00:24:21
frappa chappa toppings and all that stuff. Looking at that over the long term, in 40 years, if you had not bought
00:24:28
that coffee and put it into the stock market and got just 7% return, you would have had $150.
00:24:35
So when you buy that $10 coffee, you're actually theoretically spending $150 in 40 years time.
00:24:41
>> So you better really enjoy the coffee. >> Is there a bit of a fear that it makes
00:24:45
us not want to spend money on anything? And therefore we end up having a shitty life in the near term.
00:24:49
>> No, I think that's why this this framework that's why the the perma
00:24:53
framework for thinking about these decisions is so important because you do want to have positive emotion and
00:24:57
engagement, relationships, meaning and accomplishment. Those are all really really important. And yes, that money
00:25:02
could be worth more in the future, but it can also be worth a lot today if you're optimizing on the right things.
00:25:09
>> What else? Number six, >> it's another big one. So not taking
00:25:12
enough risk is is important. taking the wrong risks with your investments. So, I
00:25:17
we we just ran some numbers about a 7% stock market return. You can basically get that using an index fund.
00:25:25
The problem is a lot of people don't invest in index funds. They pick individual stocks hoping to earn really
00:25:32
high returns. They trade individual stock options. Uh they trade crypto tokens and all that kind of stuff. And a
00:25:38
lot of those types of risks have negative expected returns or they have high costs if you're doing a lot of
00:25:43
trading and that can really erode long-term investment growth. >> What about buying a house?
00:25:52
Is that a good investment? >> I wouldn't consider buying a house to live in an investment. It's sort it sort
00:25:59
of is. You get an asset, but you're really you're buying an asset that funds
00:26:04
your housing consumption. It kind of pays you a dividend. That's sort of like
00:26:09
getting rent from the house that you own. But when you do the sideby-side comparison, which I think is the only
00:26:14
way to think about this, if you compare buying a house, so that means in in Canada, you'd usually save up for a 20%
00:26:22
down payment. So you put 20% down in your house, uh you take out a mortgage to finance the rest. You're now living
00:26:28
in the house, you're paying your mortgage payment, you're paying for some
00:26:31
maintenance costs, you're paying for property taxes. Alternatively, you could
00:26:35
have rented the house. That 20% that went into buying a home could have been invested in the stock market. So again,
00:26:42
we're back to the idea of opportunity costs. And the other important thing here is that renting typically has lower
00:26:48
cash flow costs than owning. So these are the unreoverable costs of owning a home. Mortgage interest. So that's when
00:26:56
you buy a house and you borrow to to fund the purchase. You're paying interest to the bank. That's a I call
00:27:02
these unreoverable costs. That's money that you're paying for the use of money
00:27:05
in this case. And you're not going to get those dollars back. It's gone.
00:27:12
Opportunity costs. So that's what I just mentioned. Whatever equity you have in a
00:27:16
home is equity that you could have otherwise invested in the stock market. The capital portion, the principle, the
00:27:23
the price of homes has increased around inflation at the rate of inflation maybe
00:27:29
a little bit higher. Historically, stocks have far outpaced inflation. So by having money sitting in a house as
00:27:36
opposed to invested in the stock market, you have what is called an opportunity cost. You're not earning returns you
00:27:42
could have otherwise been earning. So that opportunity cost is one of the largest costs of owning a home.
00:27:49
So I've got mortgage interest, the opportunity cost of equity. Property taxes are another big unreoverable cost.
00:27:57
Property taxes vary depending on where you are, but it's say between 0.5% and
00:28:01
1% maybe some sometimes a little bit higher. You get utilities and some services in exchange for it, but it's
00:28:06
again it's an unreoverable cost. You pay that, you've got nothing left afterwards.
00:28:11
>> Then we've got maintenance costs. >> Oh, this is the annoying one.
00:28:14
>> This is the it's it's the annoying one, and it's the one that I think people
00:28:17
underestimate the most. >> Mhm. >> I started making content about renting
00:28:21
versus owning a home years ago. I used to say 1% was a reasonable estimate of maintenance costs and people would push
00:28:27
back and say that's way too high. There's a bunch of academic literature
00:28:30
on this too. That's it says it could well be over 2%. I think that's probably
00:28:33
a more reasonable estimate. Having been a homeowner now for 6 years after renting prior to that, I'm fairly
00:28:40
confident, at least in my case, that maintenance costs are far higher than 1 or 2% of the property value per year.
00:28:46
>> Yeah. I mean, I I bought my first home a while ago and uh [ __ ] hell. I I
00:28:52
didn't think about the gardening and the pool pump gets broken and then there's a
00:28:56
crack in the the patio outside and then the heating system breaks and then everything just seems to break
00:29:02
>> and it's always breaking. >> It's always breaking every time I go
00:29:04
back there which is it's in a different country. I'm the first week I'm just
00:29:08
spent looking at the things that have broken since I was last here like making a list of the new expenses and it's
00:29:13
never cheap. >> No. >> And if I was renting that wouldn't be my problem.
00:29:17
>> No. There's also like another cost here which we don't talk about which is like
00:29:21
the time you waste on the maintenance like when we think of maintenance cost I imagine people are
00:29:28
thinking about the fees to fix things but actually the time I spend having phone calls and speaking to people for
00:29:35
me is is worth a lot more than just the costs but anyway yeah maintenance cost. Yeah, the coordination is huge and you
00:29:41
could outsource that, but that would be expensive. And depending on how valuable
00:29:46
your time is, it could make sense to outsource it, but I I agree with you. I do the same thing. I spend time on the
00:29:50
phone finding which contractor is going to come in and fix this thing. >> Mhm.
00:29:54
>> And then you have to wait for them and then maybe they're late. >> Yeah. So, that's maintenance costs. We
00:30:00
have emergency cost here, which is really a subset of maintenance costs. So, you can have big things like the
00:30:05
roof needs to be redone, the foundation cracks, whatever. Those can be very significant. And one of the challenges
00:30:11
with those types of big costs is that you kind of have to have liquidity available to fund them.
00:30:17
>> And that means that you have to have cash sitting somewhere or at least some
00:30:21
liquid assets sitting somewhere. So probably not invested in the stock market, which also has an implied cost
00:30:26
to it, >> which is more opportunity cost, right? >> More more opportunity cost. Exactly. And
00:30:29
then this one's this one's interesting, and this is one that I don't think I
00:30:33
appreciated until I own my own home, >> which is renovation spending. We talked
00:30:38
about maintenance. When you fix something in your house, you don't just fix it to get it back to the baseline
00:30:43
level that it was at before. >> Yeah. >> You make it a little bit nicer.
00:30:45
>> You're right. I never did that when I was renting. So, the side by side.
00:30:49
>> So, you run the sideby-side comparison. You account for all of those unreoverable costs the owner has. You
00:30:54
account for the renter investing in the stock market and investing the cost difference, the cash flow cost
00:30:59
difference between renting and owning each month or or whatever frequency. And what you'll find, and I've done this
00:31:06
with projections, so looking at expected stock returns and expected real estate appreciation, you can very easily show
00:31:11
that there is an equivalence. There is a level of rent where you are indifferent
00:31:17
between renting and owning. I did a video years ago that has millions of views now where I I came up with this
00:31:23
idea called the 5% rule. So, I took some of those costs. I took property taxes, maintenance costs, and the cost of
00:31:30
capital, which is the the opportunity cost and the cost of of borrowing. I wrapped all that up and said we've got
00:31:37
roughly 1% for property taxes, roughly 1% for maintenance costs, which is probably way too low as we just talked
00:31:42
about. And I said 3% for opportunity cost, which I think is also on the on the low end. And you put all that
00:31:49
together and you get 5%. So I said, "Okay, if you divide the price of a home
00:31:55
by 5%." And then divide that number by by 12, you will get the monthly rent
00:32:00
that has equivalent that is equivalent to the unreoverable cost of owning that home.
00:32:05
>> Okay, so let's do that. So I'm thinking of buying a $300,000 house. What What's
00:32:11
the method I need to do to figure out if it's better to rent? >> Multiply by 5%. And then divide by
00:32:16
divide that by 12. >> Divide it by 12. Okay. >> You're brave. I usually have a rule to
00:32:20
never do math live on a podcast. >> I can edit. So, just in case. [laughter]
00:32:25
>> Okay. The result is 1,250. >> There you go. 1,250 is the equivalent
00:32:31
rent where you're roughly break even between renting and owning. >> So, if I could rent for 1,250 instead
00:32:38
>> or less >> or less, I should rent. >> Renting is a better financial decision.
00:32:42
So, this is an important part of this topic. We can show financial equivalence and that just that is important. like we
00:32:48
can show that there is financial equivalence between renting and owning. I've done more uh robust versions of
00:32:53
this analysis since then. We have PWL has a calculator on our website where you can see the the break even by
00:32:58
putting specific numbers in instead of just doing this rough rule of thumb because things will change it. For
00:33:03
example, if your asset allocation is more conservative or more aggressive, that opportunity cost number can be
00:33:08
different. If you're a taxable investor, meaning that you're taxed on your
00:33:13
investment gains by investing in the stock market or the bond market, your opportunity cost decreases because the
00:33:18
after tax expected return on stocks and bonds decreases relative to uh home ownership. 5% is a very rough rule of
00:33:26
rule of thumb. Do you think for the average young person, let's say someone's, I don't know, 25 years old,
00:33:31
they should and they're thinking about building their wealth over the long term, do you think they should buy be
00:33:36
buying a house as an investment or should they be doing something else? I think for young people, it's really
00:33:42
tough. And it's tough for a couple reasons. One is because home prices are high. You have to save up a lot of money
00:33:47
to buy a house. Another one is that it can limit your mobility. We've seen in
00:33:51
in Toronto, in Canada, where I'm from, uh prices, condo prices in particular,
00:33:56
have plummeted. They've fallen off of a cliff. If you bought a condo in Toronto
00:34:01
and you get a job offer somewhere outside of Canada, what are you going to do with that condo that's that's at a
00:34:06
big loss? >> You're kind of stuck. >> Yeah. >> Or you're have to try to rent it out and
00:34:11
now you've got this this just difficult situation to deal with. And plus, there
00:34:15
are big transaction costs if you're if you're selling a place. So for young
00:34:19
people, I do think that home ownership can be tricky because it can limit your mobility, your your ability to go and
00:34:25
find maybe higher paying work. It introduces a risk that you probably don't need in your life because you may
00:34:30
end up moving somewhere else. And then people often move up where they want a condo today, but they're going to want a
00:34:37
house later. For my family, I I met my wife. I was renting a place. The first place we met in a second place, a third
00:34:44
place, and a fourth place. We rented four different places as we were having our family. We have four kids and so our
00:34:49
needs were changing over time. We needed a bigger a bigger condo and then we had
00:34:53
a townhouse and then we had a house. Uh but we just the lease ended and we gave notice and we left. We found a better
00:34:59
rental that was more suitable for our needs. If we had been homeowners, the amount we would have paid in transaction
00:35:03
costs to do that would have been insane or we would have had to buy the house that we were going to have forever much
00:35:09
earlier, which would have introduced significant opportunity costs. That's one of those things that's just
00:35:12
impossible to measure and because it's so intangible, but like the psychology
00:35:16
of feeling like you can't easily move. And I see this a lot actually with people that apply for jobs in our
00:35:23
company. >> Is in the interview process, they'll say, "Well, I've just bought a house in
00:35:28
insert city." And you can see this their sort of psychology is is um holding them
00:35:33
back from taking an opportunity because they've made an investment in a particular city. And so they might lose
00:35:40
as you say like an opportunity in New York or LA or London because mentally they feel committed to a place.
00:35:46
>> Yeah. Now the flip side of that is that if you're really sure that you want to
00:35:51
stay in one place, one of the best ways to accomplish that is buying. >> Who can be sure?
00:35:56
>> Yeah, you can't. But if if someone was really sure, maybe someone has maybe
00:35:59
like me, I have four kids, they're all in the same school. It's very unlikely
00:36:03
that we would move. >> The other big mistake I think I made is I bought a holiday home. That was a
00:36:08
terrible Well, I shouldn't say terrible idea, but kind of a terrible idea. In
00:36:12
part because of the same reason. In part because it means you go you only go on holiday to one place.
00:36:16
>> Yeah. [laughter] >> Which is like defeats the point of a holiday.
00:36:19
>> Yeah. And it's I I have not done that. And the main reason is the mental
00:36:22
overhead. I don't like having to think about one property. >> Mhm. [clears throat]
00:36:27
>> I can't imagine having to think about a second one that I'm not at.
00:36:31
>> Such a dumb idea. I don't like it. I don't know why I did it. Especially when
00:36:34
you're like young. It's like the whole point is you can still walk up mountains
00:36:38
and do things. You don't want to be sitting in a in the same house every day.
00:36:41
>> Yeah. >> Are homeowners happier than renters. >> Depends how you slice the data. If you
00:36:49
control for property types and neighborhoods and all that kind of stuff, no, they're not. If you don't
00:36:55
control for those things, I think owned homes do tend to be a little bit nicer and better maintained. They do tend to
00:37:01
be in better neighborhoods. So uncontrolled renters are a little bit less happy. There's a there's multiple
00:37:07
studies on this. Statistics Canada has a really good one that does exactly that.
00:37:10
They have controlled and uncontrolled uh life satisfaction differences for renters and owners. If you're a
00:37:15
professional who is thinking about buying a house in a nice neighborhood or renting a nice house in a nice
00:37:21
neighborhood, it's unlikely that you'll be happier in either case. If you are
00:37:26
forced to be a renter in a not very nice neighborhood because it's all you can
00:37:29
afford, you may be less happy. But it's not necessarily the renting that's
00:37:33
making you less happy. >> Is there any particular group of people that you think should be buying a house?
00:37:38
>> Yeah. So people who are very riskaverse, people who want to stay in one place for
00:37:42
a very long time >> because they have a family or something. >> Yeah.
00:37:45
>> Yeah. >> And you don't want to be priced out of of of the market that you live in. This
00:37:47
did happen in in some cities in Canada in recent history. It's now reversed,
00:37:52
but there were people who were getting priced out of their market. They've been
00:37:55
renters for a long time and rents went up so quickly that they they just couldn't keep pace. It depends on your
00:38:01
rental market. Some rental markets are controlled where that's less of an issue. So, you do have to think about
00:38:05
things like that. But, yeah, if you want to stay in one place, owning your home is is the way to do that. But, it's a
00:38:12
double-edged sword because if you realize you want to leave, you might be you might be stuck. Uh, and then the
00:38:18
other big one for who should own a home is taxable investors with with high tax rates. And again that comes back to the
00:38:25
opportunity cost where if you're paying a lot of tax on your investments whereas
00:38:28
real estate tends to be tax preferred in Canada gains on your primary residence are taxfree US has a I believe unamount
00:38:36
and so that's that's another thing to think about where the opportunity cost
00:38:38
changes depending on your specific tax situation. When we have these conversations about buying a house or
00:38:43
not buying a house, one of the things I see a lot in the comment section is people um sharing their case studies of
00:38:48
them buying a house 30 years ago and now it went from being worth $100,000 to $600,000 and they're they're asserting
00:38:56
that that's evidence that it's a good idea. >> You probably see this.
00:39:01
>> Oh, this is this is the thing. This is the example. Uh, and everyone has the
00:39:04
family member that bought a house for $70,000 and sold it for a million. >> I'm just going to read you the top four
00:39:10
comments and I'd like to get your response on them. The first one is the not buying a house does not work in the
00:39:15
UK as 90% of rents are higher than a mortgage cost. Also, if you want to start a family, you need a stable place
00:39:21
to raise your children. And with renting, you can be kicked out within a few months notice and your whole life
00:39:27
could be turned upside down. I personally think there are ways around that. And I, as I mentioned earlier, I
00:39:33
did rent for six years of my life with a wife and an increasing number of kids. The two things that I always made sure
00:39:41
to do were to rent from professional landlords. We did have one experience renting from a a sort of mom and pop
00:39:48
person who had bought a condo and rented it out and that that wasn't great. But
00:39:52
after that, we we were very careful about vetting our landlords and only renting from professionals. And then the
00:39:57
other thing that we did which addresses at least in Canada addresses one of the other points there is we would sign long
00:40:03
leases. If we want to stay in a house for a few years we would sign a multi-year lease and landlords do tend
00:40:09
to to like that. The other point that was was in there that I think is really important is that rents are higher than
00:40:15
mortgage payments. I think this is one of the biggest mistakes that people make when they're making the rent versus own
00:40:19
comparison is they'll say this is my mortgage payment. This is my rent. If the mortgage payment is lower, owning
00:40:26
must be better. But that's not the case. As we talked about a minute ago, you
00:40:30
have property taxes, maintenance costs, potential renovation spending that you wouldn't do otherwise, and the
00:40:36
opportunity cost of of capital. When you add all that up, the cost of owning a home is far more than the mortgage
00:40:43
payment. This guy here said, "I bought a house. It's the best thing I ever did.
00:40:47
It's launched my mindset in new directions. Remember that having your own space has profound psychological
00:40:54
impact and can be life-changing for some of us that want to live in a healthy environment. What do you make of that
00:41:02
point? Is it have profound psychological impact? If someone believes that it does
00:41:07
and they've really taken the time to reflect on their life and has decided that yes, it it is in fact true that it
00:41:13
has had a profound psychological impact, of course that person should own a home.
00:41:17
Of course they should. Is it true for everybody? >> I don't think so. >> Dawn said, "My experience, I purchased a
00:41:23
house in 2013 with 20% down payment deposit. My total payment, including taxes, insurance, HOA,
00:41:31
homeowners insurance, um is $1,800 a month. As of today, the exact same house is renting for $4,000. The
00:41:40
property value has also gone up 3x. I'm glad I bought my house." >> Yes. So there are cases where real
00:41:48
estate allows you to use leverage very easily as as Don mentioned and if you end up buying in a market that goes up a
00:41:54
lot in a short period of time, it can be really really good. However, and this is
00:41:58
what we've seen in Canada more recently, it hasn't touched other markets yet,
00:42:02
although of course the US has had their own declines and so have other countries, but Canada's right now in one
00:42:07
of the biggest real estate price draw downs when you adjust for inflation going back to 1975.
00:42:13
And so if you had bought yes seven years ago and then well and then looked at the
00:42:18
price in 2022, you'd think, "Wow, I'm a genius." Of course, everybody should
00:42:22
buy. But if you had bought in I think it's 2021 was the was the kind of peak
00:42:26
and you look at at today you're thinking like, "Wow, I've ruined my life."
00:42:30
[laughter] So yes, there are examples like that for sure, but that that is not what people should expect every time
00:42:35
that they purchase a home. So are you saying that the future is not going to be as like as the past
00:42:42
>> for this? I know the Canadian market best, but I think these it generalizes
00:42:46
outside of Canada. We've seen record decreasing interest rates, although that's that's changed a little bit now,
00:42:51
but for a period of time, we had interest rates going down, down, down. In Canada, we had a ton of immigration.
00:42:56
I have no problem with immigrants. Uh but we had levels of imig immigration that were just not compatible with the
00:43:02
amount of housing that we had in in Canada, which was contributing to prices going up. We have housing supply just
00:43:08
not growing uh quickly enough which are all things that Canada's addressing now
00:43:12
but all that causes price cause prices to go crazy which is I think why they've
00:43:16
come down in such an extreme way. So I'm not I'm not saying necessarily that
00:43:19
we're never going to see high house prices again or house prices going up at
00:43:23
an extreme rate again but in Canada at least that has now normalized or at least started to normalize. I don't
00:43:29
think it's reasonable to expect stocklike returns from real estate forever, even though we did see that for
00:43:36
for some years. >> So for most people then you think if their goal is to make money and they
00:43:41
care about mobility, being able to get up and go if opportunity arises, a better investment decision would
00:43:47
probably be just investing in an index fund which gives you exposure to the stock market.
00:43:52
>> Yeah, I think the mobility piece is key there because remember just from a
00:43:55
wealth perspective, we can show that hey, these are pretty close to equivalent. >> Mhm. [clears throat] But if mobility
00:43:59
matters to you, yeah, I think that that matters a lot. If you have unique investment opportunities, that that can
00:44:05
be another reason where your opportunity cost is really high. Like I had an opportunity to buy equity in my company
00:44:10
years ago and if I had been a homeowner at the I think I actually had just bought a house and I think I even had to
00:44:17
reduce the amount of equity I bought because our I think our well pump broke like around the same. Anyway, it was a
00:44:23
whole thing. It's >> annoying, isn't it? But that's like there's opportunity cost in the stock
00:44:26
market which is you know call it 7% or whatever but there's other opportunity
00:44:29
costs that can be a lot higher like in that specific situation. >> And the next one there is number seven.
00:44:37
>> Yeah missing tax planning opportunities. This is something that I think people
00:44:42
just don't think enough about but it's not terribly complex but there are simp
00:44:48
simple things that people can do to minimize the amount of tax they're playing paying. For most people, it's
00:44:53
just optimally using things like in Canada, we have the RRSP and the TFSA. In the US, it's the the Roth and
00:44:59
traditional IRA and and 401ks. Using those things optimally make a lot of sense. And then the rest other types of
00:45:07
tax planning tend to get more country specific. There tend to be lots of things particularly for higher income
00:45:12
people that you can do to pay a little bit less tax. And I think >> what about for lower income people? For
00:45:17
lower income people, the government accounts that are provided uh >> like the ISA in the UK.
00:45:22
>> Yeah, exactly. Those are probably the best thing for people to be focusing on,
00:45:26
but even then I don't like people are often not using them optimally. >> One of the things people don't talk
00:45:30
about enough is all the ways that rich people do things to avoid paying tax. They have like they hire people so that
00:45:37
they don't have to pay tax. And I hear about all these crazy stories of like
00:45:40
I've started this business on the side here so I can get a real estate license
00:45:42
and if I get a real estate license I don't have to pay the same tax on this thing here and I move the money around
00:45:46
here and I flip it around there and then I don't have to pay any tax. Most people
00:45:50
like the average people don't have any loopholes that they can they jump through.
00:45:54
>> Yeah, it's true. >> And even one of the crazy ones I learned about when I got some money was that you
00:46:00
can take a loan against your stocks and there's no tax on the loan. So, if I
00:46:05
have a million dollars of Facebook stock, I can go to a bank and get 500K in cash
00:46:13
loaned against that stock without having to sell it. And then on that 500K, I have no tax to pay. And I can just hold
00:46:20
that Facebook stock. And when it goes up to 2 million, I can go back to the bank
00:46:23
and say, "Give me another 500K." >> You could, but if it goes down, you get
00:46:27
margin called. They have to come up with the cash to >> Don't they just sell? Don't they just
00:46:32
sell the stock? >> They might, but then you're selling after it's come down. So, it's not risk-
00:46:36
free, but yeah, that is a thing that people do. >> I guess everybody could do that, right?
00:46:40
Most people could if they invested in the the S&P 500, they could go and get a
00:46:44
loan against that investment and that loan would be taxfree. >> Yeah. Same same rules for everybody, but
00:46:51
I would still say that you're you're taking a lot of risk by borrowing money
00:46:54
against risky assets like that. >> Okay. So, tax planning, there's nothing
00:46:58
else to cover there in terms of the average person. >> Yeah, I don't think so. But it is an
00:47:02
important thing for people to think about. If they're thinking about what mistakes might I be making in my
00:47:05
financial plan, they should definitely be thinking about are there tax planning opportunities that I am that I'm
00:47:10
missing. >> How would they find out? >> It's a tough one. A a good CPA,
00:47:15
>> what's a CPA? >> An accountant, a good tax professional should be able to identify tax planning
00:47:20
opportunities for you. Good financial planners similarly should be able to identify good tax planning opportunities
00:47:25
for your situation. But as you said earlier, the reality is there aren't that many things that people can be
00:47:30
doing. And it's really things that you could figure out how to optimize once
00:47:34
and then you're kind of set. >> Much of the reason most people haven't
00:47:38
posted content or built their personal brand is because it's hard and it's
00:47:41
timeconuming and we're all very very busy. And if you've never posted something before, there's so many
00:47:47
factors in your psychology that stop you wanting to post. What people will think
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of you am I doing this right? Is the thing I'm saying absolutely stupid? All
00:47:56
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I'll see you over there. Who does need a financial advisor? probably a lot of
00:49:41
people, but the financial advice profession has a lot of challenges. We were chatting about the the sales nature
00:49:50
of the financial services industry. And I do think that's a big problem because
00:49:54
if someone has here's Ben say, "Okay, Ben said I should have a financial
00:49:58
adviser and they go to a bank or they go even to some random firm, uh there's a
00:50:04
good chance that they're going to be sold products that they don't eat. And I don't have a solution for that.
00:50:11
Like that's a it's a difficult situation when that is the state of the financial
00:50:15
advice industry. >> I guess to get around that, one might ask their friends and family who does
00:50:20
their financial planning and then go with a trusted referral. >> Yeah. But people often trust people that
00:50:27
aren't giving them great advice. Like it's just really it's really problematic.
00:50:31
>> I I think a lot of people can benefit from financial advice. It's just finding
00:50:34
the right person. And a lot of people don't need financial advice because you
00:50:38
do pay fees for it. >> What's the next one? Number eight. >> Eight is it's kind of a similar
00:50:43
discussion what we just talked about, but it's it's missing out on estate
00:50:46
planning. >> What does that mean? >> Figuring out how your assets are going
00:50:50
to be distributed to the people that you want them to or the entities that you want them to when you die.
00:50:57
>> This is an interesting one because nobody's Well, most people aren't
00:50:59
expecting to die anytime soon. >> Yeah. >> So, they haven't really thought much
00:51:03
about this. Yeah. And you know, some might also say, "Listen, I'm I'm not
00:51:08
going to be here, so why should I care?" Especially people that I guess that's a
00:51:12
mindset of someone that doesn't have kids, but >> yeah, it can cause a lot of problems if
00:51:15
you don't think through and plan for the way you want your estate to be distributed. You can pay a lot more tax
00:51:20
than you otherwise would have and your estate can go to people that you may not have wanted it to go to.
00:51:25
>> You can pay more tax >> if you don't have things set up properly. And again, this is going to be
00:51:30
country specific, but yeah, there there's cases where you would pay more tax if things were not set up properly
00:51:36
than if they were. >> Do you think everybody should write a will? >> Everybody that has any dependence should
00:51:42
write a will. I've heard an estate planning lawyer joke that everybody has a will, but it's the government's
00:51:47
default will, uh, which you may not actually agree with. >> It's like prenups.
00:51:51
>> Yeah, kind of like that. Yeah, it's exactly like that. You could say
00:51:54
everybody should have a will because it can help from having a big mess for other people to clean up. But for sure,
00:51:59
if you have kids, if you have dependence, I think having a will is really important.
00:52:02
>> And on that point of prenups, number nine is about who you marry. >> Yeah, this is this is a tough one. It's
00:52:10
a tough one because >> I mean, this is front of mind for me because as you can see from these
00:52:14
photos, I just I just uh proposed to my fiance. >> Yeah. And um I mean this is not the ring
00:52:20
but because this is a bit extra but um >> that's awesome. >> Oh my god, they put my face in the team
00:52:25
put my face in the box. That's but yeah. So why is this so important who you
00:52:29
decide to marry as it relates to how rich you'll be or or won't be? >> Well, it's not just how rich you'll be,
00:52:35
it's how satisfied you'll be with your life and with your marriage. Academic
00:52:41
research has identified two spending profiles that you can categorize people into. One is tight wads. It's people who
00:52:48
don't like to spend money. And one is spend thrifts. That's people who do like
00:52:52
to spend money. The names are kind of funny, but that's just that's what the
00:52:54
research calls them. And the crazy thing about this is that tight wads and spend thrifts are more
00:53:01
likely to end up marrying each other than to marrying someone who has the same profile as them. So two a tight wad
00:53:09
and a spenthrift are more likely to get married than a tight wad and a tight wad
00:53:12
or a spenthrift and a spenthrift. >> Why do you think that is? The the research on this talks just about kind
00:53:17
of opposites attracting and there may be some sort of thrill to the to the differences um initially, but tight ones
00:53:24
and spent thrifts as they go through their marriages do tend to be less satisfied in their marriages and have
00:53:30
more marital conflict around money. And again, that's based on an academic paper.
00:53:35
>> Now, that's the reasons why the marriage might not last. But in terms of how it
00:53:40
might impact your financial success, if you really want to save, if you have if you go through your goal setting
00:53:46
exercise and your perma model and you have have a vision for the life that you want to live that requires saving and
00:53:53
you have a spouse that wants to spend a lot of money today, that can be very very difficult. It can make it a lot
00:53:59
harder for you to achieve your goals. I don't think it's insurmountable. I think
00:54:02
a tight wad and a spanthrift can work. I mean, it's not like all of them end up
00:54:06
getting divorced, but it does require a different level of coordination and communication and being on the same
00:54:12
page. >> Do you have to speak to clients about this often? >> Uh, it it comes up a lot. We have lots
00:54:18
of clients who were single and end up getting in relationships and then getting married and we have to all have
00:54:23
all kinds of conversations about marriage contracts or prenups, um, estate planning.
00:54:27
>> Do you think everybody should get a prenup? Going back to what you said
00:54:30
earlier where you said you if you don't write your own, the government will give
00:54:33
you theirs. >> Yeah. Which just to simplify that if you don't write your own prenup then you are
00:54:39
the default position is the government will decide through the law how your assets are divided at a time when you
00:54:46
get when you break up. Problem is people find prenups to be really unromantic. >> That's right.
00:54:51
>> And they also think there's an implication that we're assuming we're
00:54:55
going to break up which is also not so sexy. >> Right. >> Do you think people should get them
00:55:00
>> if both partners are on the same page and comfortable with it? it's not going
00:55:03
to cause a major rift. And if it does, maybe that's a red flag. >> Do you know what I mean? Why would it
00:55:07
cause a rift? Do you know what I mean? And it's not to say that I'm just
00:55:10
keeping all my stuff and you're keeping yours. It's just to say, let's agree now
00:55:14
what would happen in the like 50% probability that this doesn't work out. >> Yeah, we've seen both. We've seen
00:55:20
clients come up with very creative and interesting uh marriage contracts that have, you know, specific formulas for
00:55:26
how things are going to work. And depending on how many kids they have, it's, you know, it's kind of an
00:55:30
interesting exercise. And in that case, it was kind of fun. and they they were engaged in the process and didn't cause
00:55:35
an issue. And we've also seen people who did not have anything in place and have
00:55:39
had very bad divorce outcomes from a financial perspective. >> I had a friend go through a divorce
00:55:45
recently and he's a very successful person. His wife was there from the beginning. She took looked after the
00:55:50
family while he was off gallivanting around the world building his his businesses all over the place. So
00:55:55
obviously she you know they she's contributed hugely to his success. What I noticed though is it's destroyed what
00:56:04
could have otherwise been a good relationship as they separated. They now really really hate each other because
00:56:10
lawyers have stood in between both sides >> and basically caused tension because
00:56:14
that's their job. They're going to get paid more and the her lawyers are
00:56:18
incentivized to squeeze every single penny they can out of this separation. And so I think he said it had been like
00:56:25
six or seven years since they decided to divorce and he's still in court arguing
00:56:30
with lawyers about how they separate and it's destroyed their relationship. They've got two kids.
00:56:36
>> You just think gosh like if you had a prenup this would have been >> quick and it could have saved the
00:56:40
relationship. Okay. Anything else to say on this this point of marriage and compatibility?
00:56:46
>> The academic research on this does have a a short quiz. I don't know if we have
00:56:50
it kicking around anywhere here. >> I think this is it. It's called the
00:56:53
tight word and spend thrift quiz developed by researchers at Carnegie Melon and the University of Michigan.
00:56:58
>> Yeah, >> this scale measures the pain of paying, the emotional distress some people feel
00:57:03
when spending money. Uh, and here's a quick DIY version of that quiz. Question
00:57:08
number one is, you see a highquality coat on sale for $100, which is usually $300. You need a coat and you have the
00:57:15
money. Do you buy it? Answer A, no. $100 is still a lot of money. I'll wait for a
00:57:21
better deal. B. Yes, it's a great value. I need something. C. Yes. And I might
00:57:26
buy a scarf to match since I save so much. Which one are you? >> I mean, if I need the code, I'm B.
00:57:32
>> I think I'm C. [laughter] But actually, to be fair, I just don't
00:57:38
buy stuff, so I don't even know if I'd buy it. Anyway, question two. You are at
00:57:43
a restaurant with friends. The bill is being split evenly, but you ordered the cheapest item. How do you feel? A.
00:57:50
physically pained. I'll likely mention that I should pay less. B a bit annoyed,
00:57:55
but I'll pay it to keep the peace. Well, C, fine. It all will even out in the
00:57:59
end. >> I'm between B and C. Really? I might I might feel a little bit annoyed.
00:58:04
>> Really? >> But I wouldn't I wouldn't cause a fuss about it.
00:58:07
>> I'm C again. Fine. It'll even out in the end. Number three, which statement
00:58:11
describes you best? A, I have trouble spending money even on things I actually need. B, I balance my spending and
00:58:18
saving pretty well. or C, I often spend more than I intended and regret it later.
00:58:24
>> I think I'm B. >> You said B, which is I balance my spending and savings pretty well. Um,
00:58:32
I would say I'm C again. But again, the caveat here is I actually don't h I
00:58:36
don't spend money on stuff anymore. >> I don't buy stuff anymore, [snorts]
00:58:41
>> but I can spend it on like travel and experiences and stuff. >> Yeah.
00:58:45
>> Last question. When you buy something expensive, your primary emotion is A
00:58:50
anxiety or regret, B satisfaction in the utility of the item or C excitement and
00:58:55
a rush. I think I'm B again. I I reckon I'm be as well there. So, scoring your
00:59:01
results. If you're mostly A's, then you're a tight wad. If you're mostly
00:59:06
B's, you are the unconflicted. And if you're mostly C's, you are the spend
00:59:11
thrift. So, I guess with that, you you are a unconflicted. You're in the middle. You have a healthy relationship
00:59:16
with money where you can save when necessary but enjoy the fruits of your labor without guilt. And I am a C which
00:59:22
is you feel very little pain when spending. You enjoy the moment but you might struggle with long-term saving
00:59:27
goals or buyers remorse. That's so [ __ ] true. [laughter] Everyone should do that at home. Okay,
00:59:33
that makes sense. >> So we we know that that tight and spent thrift are incompatible. Uh I I do think
00:59:38
it's an interesting concept like how do you have that discussion with a potential partner or do you just observe
00:59:45
it and kind of infer >> on on a date you can say say to your partner say oh there's this great
00:59:50
podcast on YouTube called the diver we should listen to it then listen to this episode they're listening with you know
00:59:54
right now if this you've done this and then just play along play along with your partner are you looking for your
00:59:59
partner to be the opposite then because you said opposites attract >> no time no opposites end up together but
01:00:06
then have conflict because of that. >> Oh, okay. >> Yeah. >> Interesting. [clears throat]
01:00:12
>> Yeah. I think if you're if you're a tight wad, being with the same is
01:00:16
probably good. If you're a spend thrift and you end up with another spend thrift, I think you have to be really
01:00:20
careful about your like finances. >> Yeah. I don't think my partner's a spend
01:00:24
thrift. I think she's in the middle with like you. >> Yeah. >> Doesn't really care.
01:00:27
>> Yeah. >> Which is useful. >> We do have one more Okay. >> card in the mistakes uh which is
01:00:32
underinsuring catastrophic risks. And I think that's one particularly for people who are not currently financially
01:00:40
independent that's really really important if if your household income relies on your income to maintain the
01:00:50
lifestyle of the household. It's really important to have sufficient life insurance where if you die, your your
01:00:55
human capital, your ability to earn income in the future is replaced by the insurance and also disability insurance
01:01:02
where if you lose your ability to work, you have insurance to replace that income.
01:01:06
>> Do many people think about this? >> Probably not enough. And it's cheap.
01:01:10
Well, disability insurance is not always cheap. Life insurance is generally pretty cheap if you're buying lowcost
01:01:16
term life insurance, which is what most people need. You made a video called the most
01:01:20
controversial paper in finance. >> Yeah. >> What paper was that? >> That was a paper we we didn't have it
01:01:26
out here, but that was a paper on uh life cycle asset allocation. >> What does that mean?
01:01:31
>> So, it's answering the question of how should your mix of stocks and bonds
01:01:36
change throughout your lifestyle. Conventional wisdom says that you should start out riskier in stocks and then
01:01:43
move towards safer bonds as you get older. This paper took a huge amount of data. They had data from 39 countries
01:01:51
going back as far as 1890. I believe they sampled from that large set of data to simulate a million potential sort of
01:02:00
hypothetical lifetimes that you could live through. And then they asked the question of in this simulated data which
01:02:06
asset allocation gives the best outcomes and they tested target date funds which
01:02:12
increase the weight in bonds over time. And those are a lot of people have those
01:02:16
through their retirement accounts. So it's just one fund and it starts out when you're younger with more equities
01:02:21
and then transitions to bonds over time. That's a target date fund. They tested I
01:02:26
believe a 6040 60% stock 40% bond asset allocation. There might have been some other stuff in there too. They might
01:02:32
have tested only domestic stocks. And what they find in this paper is that the optimal portfolio from the perspective
01:02:39
of a retirement uh consumption utility and and and bequest utility. >> What does that mean?
01:02:46
>> It's like the satisfaction you get from retirement spending. >> Okay.
01:02:50
>> Measured in a with a formula um so that it can be studied. And then likewise for
01:02:54
the amount of money that you have left over at at death. Uh they they measure the probability of running out of money
01:02:59
as well. There's a whole bunch of different metrics they look at and they find that a 100% equity portfolio with
01:03:06
uh a big chunk in international stocks is optimal is a one-/ird domestic 2/3 international
01:03:14
stocks. >> When you say domestic, what does that mean? >> That's a great question. So the way they
01:03:19
set up domestic in the paper is that it it can be any country. So the way they do the simulations is that for each
01:03:25
draw, so they're drawing uh it's on average 10 years of returns. We're say
01:03:30
we're in the US, they'll draw the US returns measured in US dollars for a
01:03:34
10-year block. That's the domestic return. And then the international block is going to be 10 years on average of
01:03:42
all the other countries samples returns measured in US dollar. So I've got the
01:03:47
domestic return, the international return. The next block might be 10 years from Italy measured in uh whatever the
01:03:54
Italian currency was at the time. And then the international portion is going to be all the other countries excluding
01:04:00
Italy measured in Italian currency. And so they're weaving together all these
01:04:04
blocks. That's called bootstrap simulation. So domestic to answer your question is whatever country you live
01:04:10
in. >> So the outcome or the conclusion from this should be that you should invest. I
01:04:15
mean, if we're following this and if it was 100% accurate, what 60% in whatever
01:04:20
country you live in, in the stocks of whatever country you live in, >> 30% domestic. So, yeah, one third
01:04:24
domestic, 2/3 international. >> Okay. So, if I'm in the United States,
01:04:28
one So, I get 30% of my capital and invested in the American companies. >> Yeah.
01:04:35
>> And then 60% in international stocks. >> Yeah. Well, yeah. 67%. Yep. Yep. So that
01:04:41
one important finding in the paper and I talk about this in the video is that the
01:04:45
the curve for how optimal the domestic amount is is pretty flat if I remember correctly between sort of 10% and 50%.
01:04:54
So they do say in the paper that for a US investor you don't necessarily have
01:04:58
to be a third domestic. Even if you're 50 or even if you're just market cap
01:05:02
weighted which is currently around 60 or 65% that's probably fine. But for a
01:05:06
Canadian investor or someone who's in a country other than the US, one-third in
01:05:10
your domestic country ends up being a pretty big home country bias. In these simulations, are they saying that you
01:05:16
need to invest in international stocks because sometimes in the simulations your domestic country, your home country
01:05:22
has problems? >> Yeah. High inflation tends to be bad for retirement consumption that you're
01:05:27
spending a lot more and for domestic stock returns and international stocks protect against that.
01:05:33
>> So it diversifies you a little bit. >> Yeah. Well, that's exactly what it is.
01:05:36
Diversification. And that paper was it was controversial. I mean, we had the co-author on our podcast twice to talk
01:05:42
about it, but it it was met with a lot of controversy from everybody, from a lot of professionals, uh, from other
01:05:49
academics. >> Why? >> It's an extreme finding. the conventional wisdom that you should be
01:05:55
allocating more toward bonds throughout the life cycle is so ingrained in everyone's thinking that uh a finding
01:06:02
like this that shows that that's basically wrong of course it's going to
01:06:05
be met with controversy but at the very least I think it's an interesting paper
01:06:10
it's telling us that stocks are a little bit safer for long-term investors than
01:06:13
we probably thought and bonds which are typically considered safe are actually a
01:06:18
little bit riskier than we may have thought for long-term investors. The reason being that during periods of high
01:06:22
inflation, bonds get absolutely decimated. >> What's a bond? >> A bond is a debt instrument. So, you're
01:06:29
effectively lending money to a government and you're receiving interest payments over time and then your
01:06:33
principle back at the end. >> What is the uh the most important thing we haven't talked about that your
01:06:38
audience come to you to understand? >> Oh, well, a lot of a lot of the things I
01:06:43
talk about are financial products that you should not invest in. >> Okay, tell me some of those.
01:06:46
>> Which I always think is fun. A big one that I spent quite a bit of time on last
01:06:50
year, I did three videos on it, was on on covered calls. >> What's that?
01:06:54
>> So, that's where you you own a stock and then you sell a call option, which is
01:06:58
the option to buy the stock. You're selling that option to somebody else, which gives you a an option premium. And
01:07:05
so, you get some income from having sold the call option. But it also means that
01:07:09
if a stock that you own appreciates sufficiently, you are required to sell it to the person who bought the call
01:07:15
option from you uh at a at a preset price. So the stock's whatever $40 and you you sold a call at $50 and the stock
01:07:23
goes to $60, you have to sell it at 50. >> So you're giving up a big chunk of your
01:07:27
upside. And this plays on one of the big biases that investors have, which is a preference for income. Uh it's the
01:07:33
mental accounting bias where investors separate capital and income. And so there's a a huge proliferation now of
01:07:39
covered call products where they do that that strategy that I just described inside of an ETF. They charge usually a
01:07:47
higher fee and these are being marketed really heavily to investors on the premise that you're going to get
01:07:52
appreciation, capital appreciation, and you're also going to get income. But I
01:07:56
think my my view on this and what I tried to explain in those videos is that you're giving up so much upside that I
01:08:03
don't think most investors realize that they're giving up that the implied cost
01:08:06
of these products is enormous. On that point of fees, I've got this graph here
01:08:09
which I think is pretty pertinent to what you're saying because when we start
01:08:13
investing in ETFs and various index funds, we often don't think about fees. It'll say, "Oh, 0.5%." We think, "Okay,
01:08:21
whatever. 0.5%'s fine, 1% fine. Small numbers, but when you look at that graph, you see how that can impact your
01:08:28
outcome over time. >> Yeah, fees compound. Any rate of return that compounds over long periods of time
01:08:34
can be very impactful in dollar terms. >> And and some people choose to keep their
01:08:39
money in cash um because most of us are never educated on this subject of inflation and what
01:08:45
inflation means. So some of us, you know, we might keep $10,000 under the bed. What do you say to those people?
01:08:52
>> Yeah. So, inflation is it's everywhere. It's it's been around for for uh
01:08:57
throughout history and it's probably not going to go away. We have central bank
01:09:01
policies in most developed countries that actually target a low but stable rate of inflation.
01:09:06
And there's there are reasons for that. But what it means is that if you have
01:09:09
money sitting under your mattress, its purchasing power will decrease over time. And that can be very damaging to
01:09:14
your wealth. You can maybe keep pace with inflation using short-term government debt instruments which are
01:09:21
going to pay you a little bit of an interest rate. Uh but again, periods of high inflation can cause even that to to
01:09:27
decline in real value. So, one of the best ways to fight fight inflation for long-term investors, something we've
01:09:32
been talking about is just investing in lowcost index funds to avoid the fee issue uh and participate in the stock
01:09:38
market, which throughout history has far outpaced inflation. One of the smartest things a business
01:09:43
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01:09:50
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01:09:55
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01:10:00
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01:10:04
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01:10:31
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fill your business's gaps. That's pro.fr.com. fiverr.com. This is something that I've made for
01:10:42
you. I've realized that the direio audience are striv goals that we want to accomplish. And
01:10:49
one of the things I've learned is that when you aim at the big big big goal, it
01:10:54
can feel incredibly psychologically uncomfortable because it's kind of like being stood at the foot of Mount Everest
01:11:00
and looking upwards. The way to accomplish your goals is by breaking them down into tiny small steps. And we
01:11:06
call this in our team the 1%. And actually this philosophy is highly responsible for much of our success
01:11:12
here. So what we've done so that you at home can accomplish any big goal that
01:11:16
you have is we've made these 1% diaries and we released these last year and they
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all sold out. So I asked my team over and over again to bring the diaries back but also to introduce some new colors
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and to make some minor tweaks to the diary. So now we have a better range for you. So, if you have a big goal in mind
01:11:35
and you need a framework and a process and some motivation, then I highly recommend you get one of these diaries
01:11:40
before they all sell out once again. And you can get yours at the diary.com. And if you want the link, the link is in
01:11:47
the description below. Is this broadly accurate? This graph here shows the impact of inflation on
01:11:53
cash kept under the mattress over 30 over 20 years. And you start with $10,000 in terms of purchasing power. And 20
01:12:01
years later, if that cash is under the mattress, you have $5,336. It doesn't show me the inflation rate.
01:12:07
Oh. Um, that's at 3% inflation. You're leaving losing half of your money
01:12:12
effectively. And the source here is St. James Place. So, a lot of people who are just holding
01:12:18
on to cash don't really realize that over a 20-year period, assuming a 3% inflation rate, they're halfing their
01:12:23
money. Uh it ties back to I don't remember which number was but it ties back to one of those biggest mistakes in
01:12:27
in personal finance we talked about which is uh yeah not not investing not taking the right kinds of risk with your
01:12:33
investments >> and just hoarding cash. >> Hoarding cash is is it's in its own way
01:12:38
taking a type of risk. You you you don't have an expected return when you hold cash. You in real
01:12:44
terms have a negative expected return. >> Do you think we should all be thinking
01:12:48
about retirement planning? I think it ties into the perma thinking and designing the life that you want to
01:12:54
live, but at some point it it I mean at some point we can't work anymore. It's
01:12:59
rare for somebody to be able to work into their, you know, I don't know, 80s.
01:13:03
I think that it's it's sensible to plan for for that. But beyond that, a lot of
01:13:08
people don't want to have to work forever. People might choose to work forever, but they might choose to do
01:13:13
lower paying work. Uh but the idea that you will be forced to work forever, I don't think is very attractive to
01:13:18
anyone. So from that perspective, building financial independence by saving and planning for retirement.
01:13:22
Yeah, I think it's important for every everyone to think about. >> Is the is the sort of social contract of
01:13:27
retirement changing based on how the economy is changing? Because I hear a lot of people saying you're not going to
01:13:31
be able to retire and get a pension because there's not enough money or you're going to have to work later than
01:13:36
ever before. >> I think the onus has been put back on individuals. The pensions used to be much more common
01:13:43
uh from companies and and governments. So retirement's changed from that perspective for sure, but I I don't know
01:13:51
if we can say we're in a crisis. I think people have more personal responsibility
01:13:54
now than they've had in the past. But they also have better tools than have historically been available. 30 years
01:13:59
ago, we we were just starting to get lowcost index funds proliferating and being readily available to everybody.
01:14:04
Prior to that, you were paying 2% or more to invest in a mutual fund. >> So the tools people have available to
01:14:10
them are better today than than they've been in the past. But it's also there's
01:14:16
also a lot more responsibility people have to take for their own personal finances.
01:14:19
>> You you're naming the things that people shouldn't invest in. The first is that
01:14:24
call thing. >> Yeah, covered calls. >> Covered calls. What else? >> Another one that I think is really
01:14:30
problematic is thematic ETFs. And so that's like an AI ETF or I don't know a
01:14:36
space or energy like any any specific uh ETF that's targeting a specific theme.
01:14:42
>> Why? What tends to happen with thematic ETFs is that something becomes really
01:14:46
hot. So maybe it's AI, maybe it's cannabis, electric vehicles was another
01:14:51
one. >> Sustainable energy. >> Yeah, that was another good one. Clean
01:14:53
energy. And so what happens is asset prices in that theme go up because there's a lot of interest in it.
01:14:59
Everybody wants to invest in that space. Asset prices go up. An index provider creates an index for that hot theme. And
01:15:08
then an ETF gets launched. But it gets launched when the asset prices are up here.
01:15:13
>> And what tends to happen is the asset prices come down and the returns on
01:15:18
thematic funds tend to be very poor. >> Ah okay. Yeah. I think I was guilty of
01:15:22
that in my early career was like, "Oh my god, a sustainable energy ETF. I believe
01:15:25
in sustainable energy. I should invest in that." >> But you're right. They created that when
01:15:30
it was hot. So, you should have invested I guess you're saying just invest in the
01:15:34
Footsie 100, the S&P 500 instead or technology, which is a broader basket. >> Technology is tough. Technology has
01:15:42
performed so incredibly well, but it is still one sector. >> Okay, >> I have trouble saying you should invest
01:15:48
in tech. If you had invested in tech for the last 20 years, well done. Should you
01:15:53
choose to invest only in tech or or have a big concentration in tech today, I think that's a lot less obvious. One
01:15:59
would say, well, look, all this AI stuff there. How do I invest in all the AI stuff? A lot of it's private right now.
01:16:04
Although, a lot of the public companies do own chunks of of some of these private companies. We'll see how that
01:16:09
plays out. But that's another one that's been tough recently where a lot of
01:16:13
investors are interested in investing in in investing in some of these private companies. A lot of them AI related, but
01:16:18
SpaceX is another one. And it's really hard for retail investors to get access
01:16:22
to those types of things. But there are companies who are creating products that
01:16:27
say that they can give you access to these to these things. They're charging
01:16:30
high fees. Uh it's not obvious that they've been able to buy the underlying
01:16:35
securities that they're saying they have access to at good prices. But it's just
01:16:39
another example of financial companies preying on the the desires and biases of investors. Financial firms are very good
01:16:48
at seeing what investors want even if that thing is not good for them. and then creating a product to fulfill that
01:16:55
desire. >> So, if someone listening now is, let's say they're 50 years old and they've got
01:17:03
$20,000 in savings in cash and you had to be decisive. You don't know the nuance and
01:17:11
the the detail of their life. You don't know their perma framework necessarily,
01:17:14
but your job was just to make the money in the next 10 years. What how do you think you would allocate that? Let's say
01:17:19
$10,000, it's easier. $10,000 in cash. How would you allocate it? >> That's a that's a tough question in
01:17:25
>> I don't know if it's answerable, especially over 10 years is tough.
01:17:28
>> What about 20 years [laughter] >> if they have a long time horizon? So I I
01:17:34
can tell you personally I I like to invest in stocks. I I have a a globally diversified stock portfolio with a
01:17:42
Canadian home country bias kind of like what that that paper the controversial paper found. Uh we were doing that prior
01:17:48
to that paper coming out. Uh but I think that general concept of a globally diversified portfolio maybe with some
01:17:55
home country bias makes a lot of sense for most people including for retirees. But there are so many like what's what's
01:18:02
his risk tolerance? If he's going to panic when the market goes down and sell
01:18:05
everything then it wasn't a very good idea and he's not going to get the
01:18:08
outcome the good long-term outcome they may have otherwise gotten. >> And would you go all in on stocks
01:18:13
>> all at once? >> Yeah. >> Like dollar cost averaging versus lump
01:18:17
sum. >> Yeah. Like how would you invest? Would you go 100% in stocks or would you even
01:18:21
diversify there? >> Yeah, that's what I'm saying. I I think 100% stocks is personally
01:18:28
a a portfolio that I'm very comfortable with and I I'm not I'm not old enough to
01:18:32
be thinking about retirement, but it's a portfolio that I don't expect to change
01:18:35
throughout my personal life cycle. >> Is that how you allocate your personal
01:18:39
finances now? You I know you have a home, but otherwise the money you do invest is in the stock market.
01:18:45
>> Yeah. So, I've got my home. I have my stock market investments. And I do have
01:18:48
a pretty significant chunk of equity in the company that I work for. >> No crypto.
01:18:55
>> No crypto. >> No crypto. >> I never touched it. >> Never touched it.
01:18:58
>> That's not true. I I when I was researching uh Ethereum and Bitcoin,
01:19:03
remember when that was? It was a few years ago. I bought $1,000 of each just so I could feel like I was
01:19:09
>> participating [clears throat] while I was learning about it. >> What do you think of Bitcoin and
01:19:12
Ethereum and other cryptocurrencies? Uh I I think that they they solved a really interesting problem. The the
01:19:20
premise of digital cash is something that the cipher punk community, the kind of libertarian community of of uh
01:19:27
privacy focused computer nerds where they were trying to solve this problem for for many many years of digital cash.
01:19:33
How do you create digital cash that doesn't require a trusted third party to
01:19:37
mediate transactions? And they they solved that. Satoshi Nakamoto solved that in uh that was cool. and he used a
01:19:45
bunch of different pieces like you can kind of see in the paper how he used Adam's back Adam backs ideas that he had
01:19:49
created to stop email spam and it's how it all came together unbelievable fascinating story the technology was
01:19:54
really interesting I think it has become uh an ideological vehicle where people who believe that
01:20:03
the world should be a certain way or believe that government's role in money
01:20:07
should be a certain way they can invest in Bitcoin and feel really good about it
01:20:11
I think it's it's got that component to And then the other component that it has
01:20:15
to it is that it's a speculative asset. People buy Bitcoin because they think
01:20:20
it's going to go up. >> So it's not a good investment. Is that what you're saying?
01:20:25
>> I I I personally wouldn't. We don't allocate to it for our clients at PWL.
01:20:31
We manage quite a bit of money for quite a lot of people and we've decided not to
01:20:36
touch it and I personally don't touch it. So >> I had a phone call actually from a
01:20:41
friend of mine. She she's very well known in the UK and she was um cuz there's lots of wars going on everywhere
01:20:47
and there's the straight of Hmuz is closed and there's Russia Ukraine there's all of this stuff going on she
01:20:51
was she was asking me for financial advice on what she should do in such a moment I don't know why she was calling
01:20:56
me I just thought I'll ask you when you come here but but it's interesting
01:21:00
because my my team found this article from 1847 which was in a magazine and it almost
01:21:06
sounds like today the article says this things are bad all It is a gloomy moment
01:21:12
in history. Not in the lifetime of any man who reads this paper has there ever been so much grave and deep
01:21:18
apprehension. Never has the future seemed so dark and incalculable. In France, the political cauldron sees and
01:21:26
bubbles with uncertainty. England and the English Empire is being sorely tried and exhausted in a social and economic
01:21:33
struggle. The United States is behind industrial and commercial chaos drifting. We know not where. Russia
01:21:42
hangs like a storm cloud on the horizon of Europe, dark and silent. It is a solemn moment and no man can feel
01:21:49
indifference. Of our own troubles, no man can see the end. An apt description of things. Very
01:21:56
apt. And that was on October the 10th, 1847 magazine. That very much sounds like
01:22:01
today. >> It could be today. Yeah. So, as we zoom out on the cycles, the big sort of economic cycles, the
01:22:07
geopolitical cycles, my friend that called me and said, "Listen, there's
01:22:10
lots of stuff going on in the world. Should I be thinking about my money differently, my investing strategy? What
01:22:14
the hell's going on?" What would you say to those people? >> Yeah. Well, as as the clip that you read
01:22:20
suggests or or or tells us, the world has been through a lot of crazy stuff, a lot of crazy times, a lot of wars, a lot
01:22:28
of turmoil, a lot of polit political upheavalss, and we've come out okay. In general,
01:22:34
it's there there's been pain and suffering and and not everybody's had
01:22:37
good outcomes, but generally speaking, here we are. And if we think about that that from the perspective of financial
01:22:43
markets, stock returns have been positive despite all the craziness going on in the world. There's lots of
01:22:49
interesting charts that overlay news headlines about all the madness going on in the world on top of the stock chart
01:22:55
that's just going up. Doesn't mean the stocks are always going to be up. They
01:22:59
will go down when when things get crazy like when when this war started. Stock returns did get a little bit negative
01:23:05
for a while. They've since come back, but there will be volatility in financial markets. Volatility up and
01:23:10
down daytoday, but in the long run, stock returns, they they should continue to be expected to be positive. So for
01:23:19
your friend, I I don't know how their assets are set up. Um, but someone who's
01:23:24
globally diversified, exposed to the stock market, they don't have to make changes to their portfolios when the
01:23:30
world's getting crazy. I remember what she said to me. She said that she was
01:23:33
going to remortgage her house because I think she'd paid it down and she was
01:23:38
wondering what to do with that money. She was saying, "Do I just go buy another house or do I invest it in the
01:23:44
stock market?" Now, my my bias is the stock market, but I don't know what what
01:23:49
would you say to someone in that situation? I'd want to know why she's mortgaging her house, but given there's
01:23:54
a good reason for that, I would I would probably go in the stock market, not into real estate.
01:23:58
>> Do you think people shouldn't remortgage their houses? >> This is a tough question. Leverage, kind
01:24:04
of like how exposure to the stock market is good. Borrowing money to invest in positive expected return assets like
01:24:09
like the stock market is actually kind of a good thing on paper. Borrowing money generally improves long-term
01:24:16
expected outcomes, but it's stressful. You can you can have bad outcomes where
01:24:21
you lose all of your money. So, should people borrow money to invest? Should people mortgage their house to invest?
01:24:28
That's it's a very personal question. It's kind of like the stock bond
01:24:31
question. Should you invest in stocks or bonds? Should you invest in stocks with
01:24:34
leverage or not? It really depends on your goals and your situation. Uh but generally speaking, if we just look at
01:24:41
what what what do the data say about borrowing money to invest, it's not it's
01:24:45
not a terrible idea. One of the things we haven't talked about is AI. And does
01:24:50
AI change any of this equation? A lot of people are worried at the moment about losing their jobs. Anthropic released a
01:24:55
report who are one of the big AI companies saying that entry- levelvel people in particular are going to have a
01:25:00
hard time. And I think they said they're already seeing 13% of entry-level jobs
01:25:05
being disrupted because of these new AI and AI agents. I'm to be clear not a labor economist.
01:25:12
Um it's not my area of expertise. I do think though that when we look back through history, I like looking at at
01:25:18
history, there have been lots of technological revolutions that have been major major upheavalss to the entire
01:25:26
economy. Yes. So, ATMs, ATMs are one of those fascinating examples. People thought that ATMs were going to wipe out
01:25:35
bank tellers because ATMs could do everything the bank tellers do, but it was automated and you didn't have to pay
01:25:41
a person to do it. So there was a lot of concern and what what ended up happening
01:25:46
was very counterintuitive is that the cost of operating a bank branch decreased because you needed fewer
01:25:55
people to do all the bank teller stuff because you had the ATMs and banks opened more branches because it cost
01:26:01
less and their customers liked that and the end result was that there were actually more bank teller drops at the
01:26:09
end of the day. So the cost of providing the service decreased which caused it to
01:26:13
proliferate more provide that service to more people and it expanded the market instead of shrinking it.
01:26:21
>> Similar story with Jeban's paradox and um it's the same concept.
01:26:25
>> What's that story where coal became cheaper at a time when they used coal to
01:26:29
ship freight on trains and the coal engine got more efficient with coal. Coal industry panics. We're screwed. But
01:26:38
then what it meant is people used trains not just for shipping freight but also for other things like travel and people
01:26:44
started traveling on trains because it got cheaper. So the coal industry actually boomed in the end.
01:26:48
>> That's it. >> I have thought a lot about this Jevans paradox idea and I think it's I think
01:26:53
it's going to be true for artificial intelligence for sure. I there will be lots of other jobs created and actually
01:26:58
companies like mine if we save money we invest it in something else which then would would probably create jobs
01:27:03
whatever that is. The part that I sometimes struggle with is the speed of adoption in AI and then also when you
01:27:11
factor in robotics like my car in LA drives itself and I think one of the biggest employers on earth is driving in
01:27:18
all its forms but then if you look at warehousing and supply chains a lot of those are ran by people all over the
01:27:23
world and there was a video that I played the other day we can throw it up on the screen which shows that in
01:27:26
factories in certain parts of the world now they're having their labor force
01:27:31
wear cameras on their head showing what they're doing with their hands because
01:27:35
robots are ultimately going to replace that labor force. And I just I I haven't
01:27:40
I guess this is maybe something that happens in history. I haven't been able
01:27:42
to think about where those people go and what they then can go on to do, especially if it happens in short order.
01:27:50
>> Yeah. So, I've heard you I've heard you ponder this in your other episodes and I
01:27:53
I I agree that the speed of this is likely to be different. As you've said, it's we're talking about the internet.
01:27:59
So, you can deploy these things at the snap of a finger and that is different. But where do those people go? This is
01:28:05
one of the interesting things. I don't know. We we don't know. >> And through history, we didn't know
01:28:10
>> exactly. Through history, it's been the same sentiment where people worry about
01:28:14
where are these people going to go? And they might be unemployed for a while and
01:28:16
there might be hard times, but things have worked out. And so two ways to think about it. One way is as a as an
01:28:22
individual, what should you be doing? We talked about earlier uh having complimentary skills that make you very
01:28:28
unique I think is important. Personally, content as you mentioned has been a big
01:28:32
part of that for for me. Not everybody can necessarily do that. But finding those things that you can do when
01:28:38
combined better than anybody else in the world, I think is very valuable. And then the other perspective is as an
01:28:43
investor, how should we think about this? And there I would come back to again, we have seen many technological
01:28:50
revolutions that have changed the world. They've changed financial markets. They've changed our culture. They've
01:28:56
changed the way we interact with each other. The world has changed so many times due to technology and the same
01:29:01
cycle has repeated itself. Uh there there has been unemployment. There has been social unrest. There has been
01:29:08
wealth inequality. But this happens every time. Are you expecting the stock market to collapse because there's been
01:29:15
a huge overinvestment in artificial intelligence? And at some point, the investors that put their money into
01:29:20
these sort of speculative AI startups that raised tremendous amounts of capital at crazy valuations, at some
01:29:28
point through history, doesn't the market always contract at some point? There's a great book by an economist
01:29:33
named Carla Perez. Uh the book is technological revolutions and financial capital. And she documents this exact
01:29:40
cycle throughout history. And yes, that's part of it. Part of it is asset prices getting really high and then
01:29:46
coming back down. Now, am I worried about a catastrophic market collapse? I think that's always a concern. I think
01:29:53
that's part of the risk of investing in stocks. We never know when it's going to
01:29:56
happen or what the trigger is going to be. So, it's not something that you can
01:29:59
do anything about. You need to have an ass allocation that you can stick with even if that outcome is going to
01:30:05
materialize. And in that book is does it suggest that the writing is on the wall
01:30:10
for the current economy and the way that we're heavily investing in AI and data
01:30:14
centers and you know a couple of years ago everyone was investing in crypto and web 3 and NFTTS and all this stuff and
01:30:21
all of the money seems to have been sucked out of that industry really honestly sucked out of almost every
01:30:26
industry and into AI. Um >> I remember when DeFi was going to kill banking and finance.
01:30:33
>> Yeah. [laughter] And that was only a couple years ago. In fact, a lot of the developers have moved
01:30:37
from that industry into the AI industry. But I but I think I do think about this
01:30:41
a lot. I've got a few startup friends who are getting a little bit nervous and
01:30:45
are raising a lot of money now because they think that in the next couple of years, maybe in the next 24 months,
01:30:50
there's going to be a big market contraction. When investors who invested in some startup idea that had a hund00
01:30:55
million valuation realize that they're losing their money and some domino usually falls in the market, some
01:31:01
catalyst moment means that there's a contraction. stock markets go down, it be gets really hard to raise money.
01:31:06
Yeah. >> Clients who you might be relying on now to pay your advertising budget, start to
01:31:11
lower their budgets. And in such a scenario, you're going to want to wish you'd prepared a little
01:31:16
bit. Some people are. >> This is part of the cycle. The the cost of capital for bubble companies, we'll
01:31:22
call them. I don't love the term bubble, but for companies who are in the industry that becomes the focus of a
01:31:27
technological revolution. So now we're talking about AI. the cost of capital
01:31:31
gets really low which means asset prices get really high and a lot of people want
01:31:34
to invest in that space but those asset prices are not typically sustainable and
01:31:39
they do tend to come down does that mean a total market collapse or catastrophe or or or panic for diversified investors
01:31:46
no >> oh is the writing on the wall >> I don't think we can say that if the
01:31:50
writing were on the wall that the way that I view financial markets is that if the writing were on the wall prices
01:31:55
would reflect that today >> okay >> if we thought market prices were going
01:31:59
to drop in the future they would drop today. >> So So it happens at a time when no one
01:32:04
is expecting it. >> That's exactly right. You mentioned >> writing is never on the wall.
01:32:08
>> That's right. Some some new piece of information, something changes and
01:32:12
that's what causes uh prices to come down. >> My brother said something to me. He's a
01:32:16
very smart person. He he's worked in sort of investing for the last 15 years.
01:32:19
He said something to me early in my career. He said, "Stephen, when you go to invest in something, assume that the
01:32:27
price you're paying for that investment, so say I'm investing in Facebook stock
01:32:30
at $10, is the total accumulation of everything everybody on the planet knows about that
01:32:38
company, and they've priced in everything the world knows about that company today." And he was like, "So
01:32:43
even if you think it's going to go up, that's also, by the way, priced into
01:32:46
today's price. So, you better know something that no one else knows when you're thinking about buying in an
01:32:54
investment. I've totally butchered what he said. >> No, you didn't. You didn't. That he he
01:32:58
is describing the concept of an efficient market. >> An efficient market is a market where
01:33:02
prices always and this is a sort of a theoretical concept. It's not actually
01:33:07
true, but in theory, an efficient market, a perfectly efficient market is a market where prices always fully
01:33:12
reflect all available information, including your thoughts about what the price >> Yeah. might do really if you trade on
01:33:18
those thoughts. >> So what are you investing in then? If it's if the futures already priced in
01:33:22
and all the information about the company's already priced in, what are you investing in?
01:33:26
>> You're investing in discounted future cash flows. Companies produce cash
01:33:30
flows. >> Mhm. >> They earn they earn profits. When you invest in a company, you're buying those
01:33:35
expected future profits at a discount. That that's called the discount rate.
01:33:39
It's getting pretty nerdy again, but that's that's how it works in finance.
01:33:41
What is what is the value of a stock? It's its discounted future cash flows.
01:33:45
Riskier stocks will tend to have higher discount rates, but you buy this asset and now you've got this discounted
01:33:51
bundle of cash flows which you then hold and you receive the discount rate as a rate of return as you continue to hold
01:33:56
the asset. So, a lot of people will invest in Tesla. They'll go, "Listen, I
01:33:59
I've got a Tesla. It's amazing. I'm going to buy some stock. What is the
01:34:03
fault in my thinking there >> in buying Tesla stock?" >> Because I I've got a Tesla. I think it's
01:34:08
a great car and I think I'll do well in the future. So, I buy the stock. >> They It's what we just talked about.
01:34:13
that information is already included in the price. Every everybody knows that it's a pretty good company making pretty
01:34:18
good cars that are selling really well >> and that's why it cost $10 today,
01:34:22
>> right? >> Whatever it costs today, >> whatever the price is. Yeah. If you look
01:34:25
at uh the data on professional money managers who are trying to beat the market, most of them don't. And the ones
01:34:33
that do, this is a crazy part, the managers who do beat the market over a period of time don't tend to go on to
01:34:39
beat the market in the future. And these are professional investors who are, you
01:34:44
know, and and you can look at this before or after fees. The data are are actually pretty similar. It's worse
01:34:48
after fees, but the distribution is is pretty similar. >> So what's the point in a money manager?
01:34:53
>> Well, ones that are trying to beat the market by picking stocks and timing the
01:34:56
market. I don't think that there is one. That's why I talk about just just buy
01:35:02
index funds. Buy buy the market. Let the give take the market's return. Accept
01:35:06
the market's return, which has been very good. >> And then don't do anything. Don't check
01:35:09
the [ __ ] thing. Don't check it. Don't open the app. Lose the password. I said
01:35:12
this about my my fiance. I said she's really good at investing cuz she always
01:35:15
forgets the password. And then we four years later, we'll be like, "Well, babe,
01:35:18
you should check your investment." And she goes, "I don't know the password." I
01:35:21
go, "Fucking." And then we have to do the whole password reset thing every
01:35:24
[laughter] And then we open it. We go I go, "Babe, you're rich. >> That's probably good."
01:35:28
>> And she goes, "Oh, amazing." And then she forgets the password again. And then
01:35:31
four years later, we take a look again at her investments. I >> I like to say you you want to focus on
01:35:35
the things that you can control. >> You can't control markets. you can't
01:35:39
control uh your performance relative to the market and trying to outperform tends to make you worse off rather than
01:35:45
better. But the things that you can control are a lot of the things we talked about. Having having an an
01:35:50
appropriate financial plan, having having the right goals set, having an asset allocation that makes sense for
01:35:54
you even if markets do decline, having emergency savings, tax planning. Those are things that you can control and
01:36:00
that's what people should focus on. >> Do you think women are better investors
01:36:02
than men? I'm I'm not super good on these data, but I believe what the data
01:36:06
say are that women tend to be a little bit more riskaverse. Uh but they tend to be a little bit less
01:36:13
overconfident, >> which I assume gets better results. >> Yeah, I I think women are probably
01:36:18
better investors. I'm just going to give I'm going to give the simple answer
01:36:20
right there. >> I've just got some numbers here. Fidelity said that across 5.2 million
01:36:26
accounts, women beat men with their investments. War business school women outperformed men by 1.8%
01:36:35
per year over a three-year period. UC Berkeley men traded 45% more often than women leading to annual returns that
01:36:43
were 1.4% lower than women's and Revolute which is a big bank founded out in the UK is says that women's
01:36:50
investments in the UK outperformed men's by 4% over. >> Incredible. I believe it.
01:36:57
>> Give your money to your wife. Uh-huh. Well, one of those data points is
01:37:00
specified. Uh, but I would assume that a lot of that is related to overtrading. >> Yeah.
01:37:05
>> Men tend to be overconfident. They tend to trade more. They try to pick stocks.
01:37:08
They think Tesla stocks going to go up because they like the car. >> They're also the the biggest gambling
01:37:13
addicts in the world are men as well. So, it's kind of correlates. >> For sure. It is. Yeah.
01:37:17
>> Ben, we have a closing tradition on this podcast where the last guest leaves a
01:37:20
question for the next not knowing who they're leaving it for in the diary of
01:37:23
the CEO. And the question that has been left for you is what experiment can you propose whose outcome could completely
01:37:33
contradict your current beliefs. Oh man, [sighs] an experiment that I could run if I take my current beliefs as one of
01:37:47
the big things that we talked about is markets being efficient and it being quite hard to outperform the market. Uh,
01:37:54
I mean the best the best experiment that we can run is is trying to beat it. >> People have done that,
01:37:59
>> but it's being run all the time. >> Isn't there a story in the psychology of
01:38:02
money by Morgan Hel where like was it Warren Buffett bet someone? >> Yeah. Warren Buffett bet Ted Ted Sites
01:38:09
who we've actually had on our podcast. Uh, he bet him that his index fund portfolio, which I believe was just the
01:38:16
S&P 500, could outperform any hedge fund portfolio that Ted picked. And they had
01:38:23
a specific timeline. It >> was 10 years, wasn't it? >> Yeah. And then they were going to donate
01:38:27
the the an amount of money at the end of the period and Ted lost the bet. Uh Warren Warren won. But that that was one
01:38:35
of those instances where the world kind of got to see, hey, this this index fund
01:38:40
thing Buffett has been a big advocate for index funds, but that was a big example where uh I think a lot of people
01:38:46
were exposed to that idea. >> Where do people find you? You know, I've
01:38:50
got your YouTube channel here, Ben Felix, which I'll I'll link below for
01:38:53
anyone that wants to continue to follow you on YouTube. Is there anywhere any other resources that we should direct
01:38:59
people to? >> Yeah, another place where I post actually a little bit more frequently uh
01:39:04
with longer form stuff is the rational reminder podcast. People can check me out there. And then
01:39:09
I do have some interesting tools for the rent versus buy calculation. We have a goal setting app. I don't think it's up
01:39:15
yet though. And we've got some other really interesting tools on uh the PWL Capital website,
01:39:20
>> pwlc capital.com. I'll link all of that below for anyone that's interested. Um
01:39:24
and the rational reminder podcast rationalre.ca/mpodcast and your YouTube channel will be linked
01:39:31
below as well. >> Awesome. Thank you so much, Ben. Thank you for doing what you do because um
01:39:35
finance is such an important part of our life and I think a huge percentage of the population for whatever reason
01:39:40
choose to avoid the subject altogether cuz it causes a little bit of anxiety but also we just don't get taught about
01:39:45
finance in school which I think is a great shame and in in my case you know it wasn't until I destroyed my credit
01:39:50
rating my credit score um that I started to figure out what finance was and by then kind of like brushing your teeth
01:39:55
I'd done a lot of damage and so since then from doing this podcast and speaking to smart people like you that
01:39:59
are good at demystifying complex things um but also in your case that use acade ademic research as the basis for the
01:40:05
claims they're making. It has helped to turn the lights on for me. And in this
01:40:10
domain, I think control or like understanding and information is power really like knowledge is power and a lot
01:40:16
of people are disempowered because they don't have the knowledge and they kind
01:40:19
of they're on that sort of roller coaster of their life circumstance and they don't feel like they have control
01:40:24
especially considering that the world feels so uncertain right now. So, thank you for doing what you do, Ben. Really,
01:40:28
really appreciate it and I hope to speak to you again sometime soon. >> Thanks so much. YouTube have this new
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crazy algorithm where they know exactly what video you would like to watch next based on AI and all of your viewing
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