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🧭 Investment Strategies for Different Life Stages! | Dr. William Bernstein 📣
1.2k Plays2 months ago
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🌱Investment Strategies for Different Life Stages are essential for tailoring your approach to wealth management as you age. 🌳
In this episode, we discuss:
1️⃣ How Your Investment Strategy Should Change as You Age: Learn how to adapt your investment approach throughout different stages of life, emphasizing the shift from growth-focused strategies in youth to preservation as you near retirement.
2️⃣ Key Considerations for Managing Risk and Return in Retirement: Explore the essential strategies for balancing risk and return during retirement, including the use of safe assets like TIPS and annuities to secure your financial future.
3️⃣ The Impact of Societal Factors on Financial Decisions: Understand how societal factors such as inequality, trust, and behavioral biases influence investment outcomes and decision-making across various life stages.
🔗 Bill's Links:
📚 The Four Pillars of Investing
🔗 David's Links:
🍏 Forget About Money on Apple Podcast
🎧 Forget About Money on Spotify
📜 William Bernstein Quotes:
💡 "The purpose of money is not to buy things. The purpose of money is to buy you time and autonomy." — William Bernstein
🔗 "Sticking with your allocation, your strategy through thick and thin matters infinitely more than what your precise strategy is." — William Bernstein
📝 Episode Highlights:
💡 Life Cycle Investing: Tailoring Your Strategy
🚀 Managing Human Capital in Investing
⏰ Behavioral Finance Insights for Better Decisions
🌟 Effective Retirement Planning Tips
🎯 Achieving Financial Independence
#financialfreedom #InvestmentStrategies #retirementplanning
🎧 Listen & Subscribe: Don't forget to subscribe to "Forget About Money" for more insightful episodes featuring experts like William Bernstein. Hit the bell icon 🔔 to get notified of new episodes!
Disclaimer: The discussion is intended for general educational and entertainment purposes and is not tax, legal, or investment advice for any individual.
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Transcript
Investment Strategies Across Life Stages
00:00:00
Speaker
How should your investment strategy change as you age? What are the key considerations for managing risk and return in retirement? Here we go.
00:00:12
Speaker
Welcome to the Forget About Money podcast, where we encourage you to take action today so that you can focus on what matters most to you. Today's guest is William Bernstein, a distinguished financial theorist and author renowned for his groundbreaking works on investment strategies and economic history.
00:00:31
Speaker
With a unique background as a neurologist turned finance expert, Bernstein has written influential books like The Four Pillars of Investing and The Delusions of Crowds, offering invaluable insights into the world of investing and behavioral finance. Welcome, Bill. We had to be here.
Life Cycle Investing and Human Capital
00:00:48
Speaker
Bill today i thought we would take the accumulation of your knowledge experience and passion for helping others and have a discussion about investment strategies for different life stages who we are what we value.
00:01:03
Speaker
and our available capital change over time. And we should account for those differences over time in our particular investment strategies. This conversation will cover investment strategies and principles, economic and historical context, and behavioral finance and psychology as we address the adolescence, early adulthood, middle adulthood, and later adulthood life stages.
00:01:29
Speaker
Bill, again, ah thank you for being here and let's get right into it. There's an idea out there for investing strategy that is represented by something called life cycle investing. Why is that crucial to tailor investment strategies to different stages of life?
00:01:46
Speaker
The bedrock of personal investing is your capital structure. And what I mean by that is if you're a young person, you have an enormous amount of human capital, you know, probably a couple of millions of dollars of salary.
00:02:04
Speaker
and income that you're going to have over the course of your life. Your amount of investment capital, unless you're an heir or an heiress, is going to be much, much smaller than that. So if you look at your investment capital, it's only a couple percent you're under the age of 30 of your total capital. And so theoretically, at least, you should invest almost all of that in stocks.
00:02:29
Speaker
because your human capital looks like a bond. It's basically a stream of fairly steady income that's hopefully increasing a hat or a boundary rate of inflation.
00:02:41
Speaker
So it really doesn't matter what your investment capital does on any given date for two reasons. Number one, if you have a date like you did on Monday, ah August the 5th, which is the day after we're recording this, when the markets fell by several percent at some point, it really doesn't matter at all for two different reasons. The first reason is because it's only a very small part of your investment capital of your total capital.
00:03:06
Speaker
And the second reason why it doesn't matter is you're not going to leave the money for 30, 50, 70 years. So what does it matter what it did on one particular day? Now, the older you get, the more important your investment capital but becomes until the point where you're a retiree and you have no more human capital ah left. You might have a stream of social security or pension income if you're lucky.
00:03:29
Speaker
but you don't have any real human capital left. And so you have to be much more careful with your investment capital, that is the amount of stocks and bonds you have when you're retired. So that's that's the basic concept is your human capital versus your investment capital and how that changes as you get older.
00:03:50
Speaker
I think a lot of that makes sense, especially when you start making money. You're at your first job, usually in your 20s, but what if you're
Financial Education from Adolescence
00:03:58
Speaker
before your 20s? What about adolescence? At what age should financial education begin and ah what basic principles do you think adolescents should learn to prepare for a future financial independence?
00:04:11
Speaker
well The comment that I'm going to make is basically directed towards parents. And what I like to say is that the single most important bit of financial education you impart to your children is what they see you doing. So if you live in a McMansion and you're driving a eight series or a seven series Beamer i and you're flying ah first class or worse yet private,
00:04:40
Speaker
You've sent a message to that kid and you may very well have ruined them for life. So it doesn't really matter or it matters less what you say than what you do and what your kids see you doing. Now, when should you start a child financial education? An easy way to do that is to start a small custodial account.
00:05:00
Speaker
when they get to be nine, 10 years old, and maybe once a quarter have an investment meeting. And if they made money, they get to keep half of the return ah on that to stand on the things they want. And if they've lost money, well, ah better yet, you've shown them that markets can move down and it doesn't affect their standard of living or their style of living.
00:05:22
Speaker
And you do that for for some years. Now, the real question, and this is a very deep question that academics should spend some time looking at, is when does it pay to start providing formal financial education, teaching a kid about finance? And the answer to that is probably not until the later years of college, junior or senior year of college.
00:05:41
Speaker
Because unless you're managing a checking account and a bank account or a credit card, it really doesn't do much sense ah roy doesn't make much sense to be talking about stocks and bonds. So you save that for later in a kid's education.
00:05:55
Speaker
I think about my own adolescence and I made my own money and I saved money, but I didn't and didn't know too much about investing and I didn't get any ah any education in high school for it. ah But my father did promote and encourage us to save 80%, which we did. He didn't tell us what to do with it after we saved it, so we ended up spending a lot of it eventually after it was saved. But even that, I think,
00:06:19
Speaker
is probably more than most kids get through their adolescence. at At least I knew the concept of saving. And then that, I think, just the idea of even working with money interested me enough to just start reading books in my you know late teens, early 20s regarding finance. But everybody's different, every family's different, everybody's got different dynamics. So it's interesting how you talked about the transition to formal education. And that's actually a surprising surprising to me because ah Right now, we've got many high schools beginning mandatory financial education. I think more than 21 states are already mandating it. So, it it would be interesting to close the gap between but experts why experts think that financial education formally should be given a junior or senior year of high school rather than or of colleges rather than high school.
00:07:10
Speaker
ah So, let's talk about early adulthood, which for the sake of this conversation is going to be ages 19 to 45. Now, I would probably make the case that early adulthood probably would be sooner, but again, that's my perspective as a 46-year-old, and I probably don't feel like i'm very and very much in an early adulthood right now. You described human capital as a bond, is that right? Yeah, it behaves like a bond. Human capital is basically a stream of income.
00:07:37
Speaker
which is basically how a bond behaves. And how should this influence investment strategies for young adults? That is again, people from their twenties to age 45. Well, if almost all of your capital is human capital and that behaves like a bond, then you really can't invest too much in stocks. And in fact, at least from a theoretical point of view, there are people who say that a young person should be leveraged two to one, three to one in stocks, which I think is insanity, but at least there's a theoretical argument for doing that.
00:08:09
Speaker
which is that if you've only got a $10,000 IRA, and you've got $2 million dollars of human capital ahead of you, and you leverage that $10,000 to up to $20,000 or $30,000 with borrowing, and you still only have a couple percent of stock exposure. That's the theory. In practice, there aren't very many beings in this quadrant of the galaxy that can tolerate 100% leverage or 200% stock exposure, stock exposure. For most people, even 100% stock exposure is probably more risk than they can tolerate on a day-to-day basis.
Young Investors and Risk Management
00:08:43
Speaker
Why is it important for young investors to invest heavily in stocks and how can they manage the associated risks that you just mentioned?
00:08:50
Speaker
Well, it's important because the risk of stocks has actually decreased when you have a stream of savings. So if you're a young investor, you want an awful stock market for almost you know the first half or three quarters of your investing career so that you're buying stocks that very well depressed.
00:09:08
Speaker
prices. So stocks are actually, if you think about it, less risky for young people who have a stream of savings. Now, the exact opposite is true. Of course, if you're retired, if you're retired, ah stocks aren't just risky. They're three mile island risky.
00:09:23
Speaker
And so that's the most important thing to realize about how the life cycle affect that. Now, the problem of course, is that most young people aren't able to psychologically handle watching that $10,000 or $50,000 IRA fall in half during a bad year. And that can happen. All right.
00:09:44
Speaker
And the important thing to that person to realize when that happens to you is, don't worry, you don't need the money for 30, 40, 50 years. And so there'll be plenty of time for that to recover. How do you balance the lifestyle of what normally goes on for someone in their 20s and 30s and maybe early 40s? And there are significant differences in those three decades, I think. What factors would should someone consider when they're deciding how much to have in stocks and how much to have in bonds as they go through those three decades?
00:10:13
Speaker
Well, to start out with, you start with a young person who theoretically should be 100% in stocks with their investment capital. And what limits that is what they're asking actual risk to tolerance. so So the worst thing that can happen in that situation is the person thinks they're risk-polerant. They start investing during a bull market. And then one fine year comes along and they can see that they've lost 50% of their money. And the question is, how did they respond to that? And that's a very individual thing. I know people that's happened to. Didn't bother them at all. They kept buying more stock ah all the way down until stocks finally recovered. They didn't lose any fleet.
00:10:52
Speaker
On the other hand, I'd seen people who, you know, risked their lives in combat who threw up ah when their stock portfolio lost 10%. Okay. So the question is, where do you fit on that?
00:11:06
Speaker
Are you someone who is extremely sensitive to risk or not? And you don't know the answer to that until it's actually happened to you. So what I generally counsel young investors to do is start act, you know, with a 60 40 50 50 felt bond portfolio. And then a bad bear market comes along and that will teach you what your actual risk tolerance is. And so it'll happen to you soon and enough.
00:11:31
Speaker
It'll happen to you probably within the first 10 or 15 years of your investing career. If you're lucky, it happens to the very first year of your investing career and you find out early what your actual risk tolerance is. So if you were really bothered by it and you lost sleep, maybe you're a 40, 60 person. Okay. If on the other hand, you dove in with both so ah feet or both hands and you bought stocks and you did well, well, then you're a, you know, a hundred zero person, at least for that portion of your your early life.
00:11:59
Speaker
Yeah, I like that. That's a practical process to go forward because we see these you know online questionnaires that are supposed to determine your risk factor. But like you said, you never really know until you watch that portfolio drop a significant amount. So I like the idea of starting 6040. I think that's a conservative approach. Probably anyone, any starter, no matter what age,
00:12:21
Speaker
60-40 approach, and then after a couple of years, either just up or down based on just how you feel about it yeah and your performance. The analogy I like to use is that a spreadsheet or a risk profile is kind of like a flight simulator. It can crash all day long in ah in a flight simulator. It doesn't bother you at all. You can respond very differently if you're piloting an aircraft in a really bad situation than you did in the XEM. It's the same thing with the nesting.
00:12:48
Speaker
So let's transition into the middle adulthood, which is, for the sake of this conversation, ages 46 to 65.
Middle Adulthood Strategies
00:12:57
Speaker
So many, in particular in the financial independence community, has already built a net worth such that they could retire early. So if we could, can we talk about the traditional retiree and the general financial independence retired early person. So it's probably like two tracks yeah and and this in this middle a middle adulthood age group. Well, the way I like to approach that question, because it's a very difficult question, is to ask, ah what is the ah goal?
00:13:32
Speaker
And the goal is simply to have a enough safe assets to retire on. So if let's say you've decided you need a million dollars to retire on, and ah that million dollars should be largely in relatively safe assets because if they're in risky assets and those risky assets do very poorly in your retirement, then you're going to be significantly constrained. So the goal that I like to see is for someone to have enough money to meet their basic living expenses after they've paid their taxes.
00:14:02
Speaker
And after they've gotten their social security and their pension and whatever else we're going to ah to be getting when they're retired to safely take them to, you know, age 85 or 90 or even a hundred. And once you've acquired.
00:14:17
Speaker
Well, you're approaching that amount of money. The obvious thing to do is to start cutting back on your stock allocation and to invest in fixed income assets. Now I'll probably get a little later on into what those fixed income assets look like. But that's the, that's the, the hardest part. That's the hard, most difficult stage of investing. And what I like to say is that when you've won won the game, you should stop playing the game. It doesn't mean selling all of your stocks, but it needs to start bailing some of the risks out of your portfolio and do it slowly and gradually.
00:14:47
Speaker
over the years after you've convinced yourself that, you know, you do have enough to retire on. Because the worst thing that can happen to you is you retire and then the first five or 10 years of your retirement, your risky assets start to decrease significantly in value.
00:15:02
Speaker
So this is where I've seen the conversation go in one of two directions. You've got some people who say and argue the math just as we stated earlier that if you're young, you should be a high percentage in equities or stocks. and And so I wonder if at this point it the question becomes, what do you want the money to do after you die? ah Because if you, let's say you're 60 and you live another 30 years, yes, you could create your income floor through very conservative asset classes, such as a SPIA, which we'll talk about, or, you know, maybe got a pension already in those things. but But again, the math at least historically says you should still maintain a significant portion. And if you want growth,
00:15:48
Speaker
significant portion and equities overtime so i guess you have to decide what problem you're solving for for at this point you have to decide okay do i want. To leave as much money as i can to my ears or do i want to ensure my own one hundred percent safe retirement isn't either or is there some kind of balance between.
00:16:07
Speaker
Well, it's like everything else in economics, which is it's a trade-off. So the less you spend, the lower your bone rate, the less, lesser the lesser, the smaller percent of your assets you're spending every single year, the safer you're going to be. But of course, the less you're consuming. All right. And you have to decide the whole concept of but where you fit on, um you know, on the one hand, you want to lead the quests. On the other hand, you want to be.
00:16:34
Speaker
shake and how do you how do you trade that off? And I know people who really you know don't care that much about their heirs. Maybe they don't have any children and their nephews are spend trips and they don't want to leave them any money and they care about only faking. Well, that person should have a higher percent of bonds than the person who wants to endow their children with a lot of money or wants to endow a wing at the hospital.
00:16:56
Speaker
That requires you to invest more aggressively. Now, this gets to a really important concept in retirement. was there If you're really lucky, you get to the point where you have enough money to meet your basic needs for the rest of your life with shape assets. What do you do with the rest of the money?
Portfolio Management Techniques
00:17:10
Speaker
Well, that's a risk for it.
00:17:11
Speaker
And the thing to realize about that risk portfolio is that yes, you can invest it in risky assets, but at the end of the day, it's really not your money. and Okay. Cause you're not going to wind up spending it. That money is either going to go to your heirs or to your, to your charities. Uh, and so I tend to look at them as two separate portfolios. one One is what I call a liability matching portfolio, which matches your living expenses every single year. And we'll talk about how you do that.
00:17:38
Speaker
And then the other part of the portfolio is the risk portfolio, which is the stacks and the bonds, which, you know, maybe you will splash out on a beaver if life first clash every now and then, and but more likely than not, that money is going to people after you go on. Okay. I like the framework of the liability portfolio and the risk portfolio. And that reminds me of a conversation I just had with Stan, the annuity man, and he educated me on annuities. I knew nothing about it. I did have a negative bias towards it, but,
00:18:07
Speaker
I've since ah adjusted that perspective. So liability versus risk portfolio. The liability, again, is the setting your income floor, you're like covering your living expenses, and however you projected that out for your own ah life expectancy. And then the risk portfolio would be the action portion of your portfolio, the stocks, the whatever else you've got going on that's a little bit more volatile and not fixed income or or set returns.
00:18:37
Speaker
And in that conversation I had with Stan, he mentioned that most annuity salespeople don't, or at least you have to justify why would you why would want to put more than 50% of your net worth into an annuity. And in many cases, i he says it's like a practice that's not even expected. So before that, I thought you could put as much as you could into an annuity. And maybe there are some special cases, but he said as ah as a practice, they don't but like allow you to put more than 50% into an annuity. and i And for me, I think that's kind of in line with your, it could be in line with your, your liability versus risk portfolio kind of theory. Is that how you see it practically play out when you have clients or people having this conversation with you? Yeah. Now here's the way that you should think about it. Let's assume that after you've gotten your social security payments,
00:19:30
Speaker
you need $50,000 a year on top of that and on top of your pensions too in in living expenses. All right. And they're going to be, that's $50,000 today. Now that's going to go up with inflation. So what is the best way to cover that? Well, the very best way to cover that is with a ladder of real bond, all right, bonds that that increase ah their value along with inflation that mature every single year. And if they mature every single year at $50,000 per year, then you have covered your living extension, all right? <unk> And we are very fortunate in this day and age that the US s Treasury actually issues set of bonds. They're called tips, Treasury Inflation Protected Securities.
00:20:14
Speaker
And so ideally, you would have that you would have a ladder of those going, you know, all the way out to the point where you're pushing up the daisies. Now, there's a couple of problems with doing that. The biggest problem is you can only buy them in maturities up to 30 years. Now, if you want to retire at age 55, then that ladder will end when you are 85 and you'll have a little bit of a A problems. That's the first problem. There's another minor problem, which is sort at the present time, there are no maturities between 2035 and 2039. Uh, so that's, that's, you know, that's the ideal way to do it. Now you can, you can and solve that longevity problem by buying a speech, a single premium immediate annuity. The only problem with B is actually, there's two big problems with speakers.
00:21:08
Speaker
The very first problem with the SPEA and annuity is that they're nominal. You used to be able to buy ah real annuities or reflation adjusted annuities. You can't buy them any more. And the reasons for that are ah complex. So the initial payout, you may be looking at $50,000 worth of income from your annuity in year one, but 30 years from now, that may be funny money.
00:21:29
Speaker
because it's a nominal $50,000 doesn't increase with and with but inflation. The other big problem with annuities is that they are issued by insurance companies. And insurance companies carry with them credit risk. Insurance companies have failed. There is a theoretical backup, the state level for for insurance annuity contracts. But in a bad state of the world, ah you're going to blow through that. The states will blow a through that like a knife through hot water.
00:22:00
Speaker
ah show so that So there's pluses and minuses to both spears and chips. There'd be nothing wrong with split the difference in and putting some of your assets into a spear and some of your assets into a chip slider. What percentage of your overall portfolio would you recommend in these types of asset classes?
00:22:21
Speaker
That depends upon how much money you're burning every year. It's not not how much of your portfolio do you put in them. It's how much of them do you have to buy to maintain the income you need. So that example I just gave you need $50,000 worth of income.
00:22:36
Speaker
per year, then to last 30 years, ah you would need, well, really about $1.2, $1.3 million. dollars And so if you've got a $5 million dollars portfolio, ah then you know you've got $3.7 million dollars go into the risk portfolio and you can invest that however you want. If on the other hand, ah you've only got $1.3 million, then you want to be putting most of your money into that liability matching portfolio.
00:23:02
Speaker
Because if you put it into if you if you put it into a portfolio that stacks and bonds and you get a bad sequence of reverse of the of returns, you're going to be in a world torched early shortly. So over the last few questions, we've we've clearly gone into the ah later adulthood stage.
00:23:19
Speaker
ah which is, I guess, marked by probably social security. You know, age 60 to 65 is probably what someone introduced you know is transitioning into the later adulthood stage. And that's marked by getting an annuity, which was social security. And a lot of people don't recognize social security as an annuity, but it is.
00:23:37
Speaker
and Luckily, that's actually ingested for inflation, unlike a SPEA. By the way, deferring Social Security to age 70 for the maximum payment is the best annuity that money can buy. It's better than any commercial annuity because it is adjusted for inflation. And for every year that you delay taking Social Security beyond your full retirement age, whether that's 66 or 67, you're going to have a seven and a half or an 8% higher monthly paycheck.
00:24:08
Speaker
And, you know, when you're very, very old, that may be the difference between a comfortable retirement, eating dog food. Hmm. Yeah. That is significant. One thing, and I have not run the numbers, but one thing I want to explore is what if I took, and let's assume I didn't need to spend any social security and I began taking it at the
Social Security and Withdrawal Rates
00:24:27
Speaker
earliest possible. And I just took that and I put it into a broad market, low cost index fund. Would that make a difference and i in a good way? Cause then you're kind of,
00:24:37
Speaker
You're getting more on your side of the ledger earlier on. I don't know. I haven't done the math, but that's something I want to explore. And and I'm sure somebody else has done it and I just haven't researched it. depend upon what your time horizon is you have to understand that over periods of up to two decades stock can have zero realel retime and hello you know, 15, 20 years, stuff can have negative real work times. And you have to ask yourself, do I want to take that risk? By the way, if you want to decide what's the very best age to take social security, or more importantly, if you have a specs, how to game, who takes the social security went when, when, uh, there's a wonderful website, one by a guy by the name of Mike Piper.
00:25:19
Speaker
i I believe it's opensocialsecurity.org. I think that's the name of the website. But look up Mike Piper's, you know, just Google Mike Piper's social security calculator and his tap leader will come up with a pretty darn good strategy for you and your spouse to couple. Yeah. Thank you for that. I definitely need to get smarter on social security. Um, as you probably many other people, especially those who are trying to determine it what enough is if they're retiring long before they actually start social security, how how are they going to work that into their plan?
00:25:50
Speaker
One of the guiding principles in the financial independence community is the 4% rule, safe withdrawal rate. And you already mentioned that if you run into trouble your first few years of retirement using the 4% rule, you have a market downturn, and that is the definition of a sequence of returns risk. Do you agree with the 4% rule? to you How do you use the 4% rule, if at all, when you're advising a client? Well, it's a good rule of thumb.
00:26:17
Speaker
And the 4% rule is merely the inverse of 25 years. So I felt like tell people you should have 25 years of living expenses saved up. Well, that's 4% per year, 125th per year. Now, if you want to retire at age 40, a 4% burn rate may be a very big risk.
00:26:37
Speaker
If on the other hand, you are 70 years old, then you can probably spend 5% per year. The easiest way to think about that is to think about a tips ladder that goes out 30 years. Now, if you amortize the current interest rate on tips, which is roughly 2%, and you add it you take a voyage calculator and you amortize that out to 30 years.
00:27:00
Speaker
That means that you can spend 4.5% per year before your money finally runs out. That's the way the mortgage calculation falls out. Now, you know, I'm 76 years old and, you know, 30 years from now, I probably don't have to worry about that. But if you're trying to retire at age 40,
00:27:19
Speaker
that 4% or let alone 4.5% is probably a bridge too far. Maybe you should be only be spending 2.5% or 3% if you really think you want to retire at age 45.
00:27:30
Speaker
yeah There's definitely a lot of psychological and behavioral aspects with money over time that when I'm 46, which I am right now, I think differently than when I was 32 or 22. And I'm sure it'll be different you know a decade from now. What behavioral challenges from a behavioral finance and broader insight perspective is do investors face a different life stages and how can they overcome them?
00:27:56
Speaker
Well, the basic problem that human beings have is that we're risk myopic, which is that we pay too much attention to short-term returns and we don't think enough about long-term returns. And if I can get into a little bit of evolutionary psychology, we have all been a state of nature where our risk horizon might be a fraction of a second long. If you're in the military, it might be a fraction of a second long pill.
00:28:20
Speaker
ae And so your responses are very much tuned to short-term risk. On the other hand, we now live in a post-industrial environment where the biggest risk for you is running out of money. And that's a risk horizon which is decades long, up to 50 years long. And the analogy I like to use is ah that of a skunk, which over millions and millions of years has evolved a very effective strategy for dealing with risk with predators, which is to turn 180 degrees, less their tail, and to spray. All right. That's a very effective response if you're a skunk.
00:28:57
Speaker
in a state of nature. On the other hand, if the are major threat to your existence is the hunk of steel moving at 60 miles an hour towards you, then that is not an effective response. And that's the be be situation that investors find themselves in. if They did not evolve.
00:29:12
Speaker
to deal with finance and in ah in an and in an effective way at all. Basically, ah we're we're living in a space age world with stone age mind, and that's our problem. So how do you deal with that? And you what you deal with that is you educate yourself about behavioral finance.
00:29:29
Speaker
And the best way to do do that is to, first of all, read about it. And I'll plug one book by a guy by name, Jason Zweig, called Your Money and Your Brain. He's a Wall Street Journal reporter. And he be that book, it's an excellent book about how dysfunctional our brains are and how to deal with that. And the bottom line is that, you know, we have two systems. We have a reptilian brain, which is our system one, which is, you know, but how we come to decisions, risk decisions, very quickly discussed here in greed, all that sort of stuff. And we've got our, you know, wonderful system to our, our, our, our rational brain. And the trick is to train your system to, to hear what your system one is telling you.
00:30:13
Speaker
and My favorite aphorism for that is the best investment decisions I've made and the best purchases I've made have been made while my system one was telling me to throw up. Hmm. Can you give an example? Well, that example, uh, is the way that I felt about investing in late 2008 and 2009. I'd watched my risky assets pull by almost two terms. Uh, and yet I was still buying more. And let me tell you how bad that felt.
00:30:38
Speaker
It felt like exactly the wrong thing to do. But I had learned over the decades previous to that, but that's exactly what you should be doing when the markets are behaving badly. And that's where something else comes in, which I think you're you probably want to ask me about, which is the importance of investing history.
00:30:55
Speaker
just as you have to learn about investing psychology, you also have to learn about investment history to learn that you're not the first person to experience a bear market and that eventually bear markets come around. And that in fact, the very best times to invest are when the sky is the darkest and the very worst times, the very best worst times to invest are when there's lots of sunshine out and everybody's optimistic.
00:31:19
Speaker
How would you characterize the market right now?
Impact of Societal Factors on Investing
00:31:21
Speaker
and Well, until about two weeks ago, it was the the sun was shining. There were a couple of sprinkles in the style yesterday. Today, yeah the sun's coming back out again. You've written a lot of books and many of them have a historical context. I'm not sure how deep you get into the social inequity piece, but in a country where it seems like we're divided along every other, any line that can be drawn, how do societal inequality and the radius of trust influence investment outcomes and financial strategies across a person's lifespan?
00:31:54
Speaker
Well, those are two very big subjects. Let's talk about radius of trust. Radius of trust is how much trust people have for strangers. And in modern Western societies, that radius of trust is fairly high. You can you know go and deal with strangers behind a behind a cashier's counter or give your credit card number to somebody over the phone. And you are reasonably trusting.
00:32:19
Speaker
and reasonably assured that that person will not cheat you. That's going to be true 99.9% of the time. That's not the way it is in all societies. From an investor's point of view, it's really good to live in a society where there's a high radius of trust, because where there's a low radius of trust, ah it's very difficult to invest well, and security returns tend to be very low in societies with low radius of trust.
00:32:45
Speaker
And so, you know, there's a reason why over the past century or two centuries, securities returns have been the highest in English speaking countries. Why? Because English countries have a common law that protects property rights and protects people in contract. All right.
00:33:01
Speaker
That's not the way things work in much of the rest of the world. Now, you asked the question about inequality, which gets to be a very, very difficult and politically fraught question. But the one thing that is absolutely true is that inequality makes people miserable. Okay. When, you know, the the person next to you is driving a BMW and your next door neighbor is driving a BMW and you're driving a clapped out Toyota, that doesn't make you feel as good but as if your neighbor is just driving the same Toyota. People don't like inequality. and And I'm not sure that has anything to do with investing, but it is a fact. I wonder how it might impact someone's investment decisions though. Do I want to think, does this fall into the keeping up with the Joneses maybe, or if there's more there's more and a dichotomy between different
00:33:53
Speaker
what get this societal It gets to the rate of importance of saving versus investing. okay We're talking about investing, but far more investing or far more important than investing is savings. Your name can be Warren Buffett, but if you can't save, it doesn't do you any good.
00:34:09
Speaker
And the most important thing you can understand about money is not that it buys you things. If your idea of money is that it enables you to buy a fancy car or a bigger house, ah then you probably lost the game. The purpose of money is not to buy things. The purpose of money is to buy you time and autonomy.
00:34:30
Speaker
And that is the single most important thing you you can understand. And it's to resist keeping up with the Joneses. If you're a next door neighbor, ah you may see that your next door neighbor ah has the BMW and maybe that person, maybe not, but maybe that person just went into debt to buy it. You're in much better shape than that person is going to be.
00:34:50
Speaker
And what I like to say, and I hope I don't offend too many people when I say this, is that a BMW or a Tesla is not a motor vehicle. It's an IQ test.
00:35:01
Speaker
Well, if that, if that wraps people the wrong way, maybe this next one I'll get them too. In your writing, you mentioned a religion, how, how religion and countries affect their economic, like of its status or environment, but can you elaborate on the paradox of religion affecting individual and national economic health and what kind of implication that has on investors?
00:35:25
Speaker
Well, I don't think it has much to do with investing except in extreme cases. But the subject of religion fascinates me because when you stick strictly to the sociological data, what you find is that religious people are happier They live longer, they are more connected to the people around them. okay So in the individual case, religion is a real positive. But when you look at it on the national level, the exact opposite of pain. The most religious places in the world, the most religiously oriented countries in the world are the ones that are the poorest.
00:36:05
Speaker
They are the most violent, they have the ah ah worst quality of life and the lowest well-being. So if you look at, if you write countries by how religious they are, and you can do that fairly easily, and you look at well-being, you see that there's a very strong negative correlation. So it's sort of like Keynes' paradox of thrift.
00:36:24
Speaker
which is thrift is good for the individual, but it's bad for the macro economy. If everybody saves, then you get a depression, all right? And it's the same thing with religion, ah which is that it's good for you personally, but you don't want to live in a country where people are religious fanatic or very strongly religious, because you're going to be living someplace like Pakistan or Somalia or Southern Italy.
00:36:48
Speaker
where there's a low rate, and this gets to radius of trust. Very religious societies tend to be societies that have low radius of trust. And all of your writing across, I believe you published your first book in 2000 or 2002, and all of your writings and all of your experience, what are the most either novel or impactful ideas that you've explored and then tried to push out for the benefit of others?
00:37:14
Speaker
Well, the first is what I talked about with the Skunk analogy. It's just how irrational we are. We have this system one, ah which is our reptilian brain that reacts emotionally with fear and greed and disgust and and pleasure ah to the things around us. And then we have our system two, which is our rational contagion.
00:37:35
Speaker
brain. And we tend to think that we're ruled by our system one. But in fact, as Danny Kahneman ah like to say, the late Danny Kahneman like to say, our system two is just the press agent for our system one. We come to our our conclusions and our decisions about life using our system one, our reptilian brain, and then we use our system two to rationalize it. And then the thing that but i I wind up most being fascinated by is by evolutionary psychology, because it explains so much about human behavior, about human history. If I had to recommend one book about back to people, it's a book by a guy by the name of Joseph Hedlick, H-E-N-R-I-C-H of Harvard University, called The Secret of Our Success. He actually wrote two books. One is The Secret of Our Success, which connects evolutionary psychology to human behavior. And he also wrote a book called The Weirdest People in the World.
00:38:33
Speaker
which is about Western society. Western society is what he calls weird. And that's an acronym, not the term that way that Tim Waltz just used it, but it's weird it stands for Western educated, ah industrialized, rich and democratic. And what you realize and what Henrik makes you realize is that that is only a very, very small subset of the humanity. Most other people in the world live according to what what he calls a traditional moral structure.
00:39:02
Speaker
which is completely different than the weird moral structure. And we're weird. We we are the Westerners are the ones who are
Scientific Approach to Investing
00:39:08
Speaker
weird. So I would read him and then there's another book that I would recommend reading by Robin Dunbar called however How Religion Evolved. And it's really not about religion, okay, at all.
00:39:19
Speaker
what it's really about more is more about, in religion, it's about spirituality and it's about human communication and how we use our brains to organize social structures. And not at all about religion, don't let the kites turn you off. Rabin Dunbar is a brilliant man. He's got a number named after him, which is 150. Dunbar's number, which is a number of social relationships that a human being can keep straight. all right And beyond 150, you can't do it.
00:39:48
Speaker
And the reason why that's such an important number is because if you have a tribe, an aboriginal tribe, once that tribe gets to be more than 150 members, it falls apart because people can't keep their social relationships straight. And so the tribe will fragment into two or three different tribes. i And it's how he arrived at that number is even more interesting, which has to do with neurophysiology. It's just fascinating stuff. So that's the that's the stuff that really captures my interest these days. and nothing to do It invest has nothing to do with investing at all.
00:40:17
Speaker
you transition from being a neurologist to a financial expert what are the linkages if any. And almost no like it people think that is a neurologist i have some special x keys about human neuropsychology and i really don't i was a clinical neurologist a clinical neurologist and clinical neurologist.
00:40:36
Speaker
for the most part spend very little of their time dealing with deep neuropsychological issues. It's much more mainly things like headaches and multiple sclerosis and neck pain and back pain, ah things where there's you know not a lot of sophisticated neuropsychology involved. but really What really made me help me with the transition is just my basic scientific training, which is before I went to medicine, I was an organic chemist. And I inhaled the scientific way of looking at the world. And there is a scientific way of looking at investing. And so I live in a country that doesn't have a functioning social welfare system. I was going to have to save and invest on my own for my own retirement.
00:41:14
Speaker
And I approached that in the way I thought that any scientist would, which would be to read the peer reviewed literature, collect data, build models. And after I had done all those things, I realized that I had done something which was of value to ordinary investors. And I started writing about it. And then the rest is history. I guess. Yeah. but we Well, that's the tagline because in order to invest properly, you have to understand history. And, and I found that I enjoyed writing about history even more than I enjoyed writing about investing.
00:41:43
Speaker
you clearly have a lot going on in your mind. I think, I mean, there's some people who are very strict, like money and investing type stuff, but I think wisdom is, I think the definition of wisdom is learning a lot about a lot of things and then figuring out where they overlap and then practically putting it into use. I think that's like the definition of wisdom. But if you're going to take all of that wisdom that you have right now and stand in front of a group of 25 year olds,
00:42:11
Speaker
In today's economic environment in America, do you think the advice that you give them would have been the same advice that you would have gotten from someone when you were 25? Probably not. ah ah you know my My thinking about investing has certainly involved evolved over the past 15 years. I mean, 50 years ago, I was watching Wall Street Week.
00:42:31
Speaker
with the root Kaiser, if which if you know, the program was very much about market timing and stock picking. Uh, and it took me 10 or 20 years to figure out that that was, uh, not a good way for individuals to invest. Uh, you know, if if I were to stand in front of a group of people, it would be first learn about as much, learn as much about psychology and investment history as you can.
00:42:53
Speaker
and then pick an allocation of broadly indexed ah stock and bond funds or, you know, treasuries have a good substitute for bond funds and cheaper ah and go about and live the rest of your life and don't focus too much on investing and cannot over consume.
00:43:13
Speaker
Yeah, I think I agree with all of that. I wish more bigger voices would focus on those things, but the but unfortunately, the bigger voices usually have a motive to profit from selling products and that kind of thing. so and That's the one thing that's so wonderful about the fire community is the fire community pretty much is internalized that ethic probably as well as anybody else. There's another community, but I'm involved with more than the fire community, which is the Vogelheads.
00:43:41
Speaker
who are the followers of John Bogle, the ah the founder of the Vanguard ah group. And the two groups, there's a lot of overlap between the two because the b yeah ah Bogle heads are also into ah not consuming as much as you should. There's all sorts of threads on the Bogle head for about how to spend only, you know, $8 a bump on a shell phone plan.
00:44:01
Speaker
It's interesting even, you probably see it in the Bogleheads too, and I see it in the ah financial independence retire early community. There's like a spectrum of frugality and then, you know, you got your fat phi group and you've got your barista phi group. And no matter where you're on that spectrum, you're still far better off, I believe, than the majority of the the mass population. So.
00:44:22
Speaker
but But the perennial, the perennial, which is about to interrupt you, the perennial threat, discretion threat on the below actually before him is I want to buy, I want to buy a Rolex. Does that make me a bad person? Well, what do you think? Uh, yeah, it makes you a bad person. Just just just kidding.
00:44:38
Speaker
I got to sell my Ferrari now. Thanks. I appreciate that. What's next for you? What's your next passion project? What are your motivators right now? Well, we've just talked about the two subjects that interest me most, which is writing about radius of trust and writing, writing about this paradox of religion, uh, that I, that I described earlier. And the big question is whether, you know, my publisher is interested in those. Do you already have the books written? No.
00:45:05
Speaker
I've done a lot of the reading, but I don't start waiting until I find a contract. Smart. Smart. It's got to be that risk reward. It's got to be that payoff. Exactly. ah Bill, thank you very much for sharing your expertise. Is there anything else that you you want to add before we close out here today?
00:45:21
Speaker
Yeah. The single most important thing about your investment strategy is that you stick with it. You'll see people arguing endlessly. What percent stocks, 1% bonds? Do I tilt the value in small stocks? Do I best emerging market stocks? What about REITs?
00:45:37
Speaker
None of that is real estate investment trust. That shields in into significance insignificance compared to your ability to stick with your investment policy when the excrement hits your ventilating system. So sticking with your allocation, your strategy through thick and thin matters infinitely more.
00:45:59
Speaker
than what your precise strategy is. If you want to just, you know, have a three fund portfolio by, and you know, have three mutual funds, or even for that matter, a light strategy fund or a target date retirement fund, as long as you can stick with that strategy, even if it's just one well-balanced mutual fund ah with low costs, that's fine. Okay. Don't, don't stress, don't stress the percentage points. Don't stress the nuances of your allocation. And that reinforces a,
00:46:28
Speaker
statement I heard from Rick Ferry when I interviewed him on this podcast. And i was I think I was asking him the question on what's the best asset allocation strategies. And he said, whatever asset allocation strategy that somebody's going to stick to. And I believe that was his answer verbatim.
00:46:44
Speaker
that that That's precisely right. I would, I can't imagine that I've ever disagreed with Rick about anything, but I can't imagine agreeing with him more about something than that. Well, thank you, Bill, for sharing your insights on how our investment strategies should be considered as we mature ah through our life stages. You've definitely given me a lot to think about for my own personal situation, but as someone who likes to help other people with finances, you've helped me give me a more perspective that I can use when I'm having these conversations with people who may be in a different stage of life than I'm in. So I appreciate that. Thank you very much. And thank you. And thank you all for watching and listening.