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