Afford Anything - Money and Investing Have Changed, with Chuck Jaffee

Episode Date: July 28, 2022

#393: Chuck Jaffee is a forty year veteran financial journalist who regularly writes for the Wall Street Journal and is also a nationally syndicated financial columnist. He discusses how money and investors' attitude towards investing has changed over the last few decades. 00:44: Introducing Chuck Jaffe 03:05: How people interacted with the market in the 1980’s 06:50: Dealer and liquidity risk when investing in the market 09:23: How the environment 40 years ago impacted investor psychology  12:53: Long term impact of Black Friday, the worst market crash experienced by any living investor 16:10: Discussion of fund options that are more illiquid and can sell at discounts  18:04: The combined influence of access real time data and the ability act in real time  28:31: Moving away from employee supported retirement plans 29:00: The difference between financial education and financial literacy 31:26: Chuck’s take on the 4% rule 50:16: Portfolio and personal optimization For more information, visit the show notes at https://affordanything.com/episode393 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, any limited resource that you need to manage. Saying yes to something implicitly carries opportunity costs, and that opens up two questions. First, what do you value? And second, how do you align your decisions around your values? Answering those two questions is a lifetime practice, and that's what this podcast is here to explore and facilitate. My name is Paula Pant. I am the host of the Afford Anything podcast, and today,

the nationally syndicated financial columnist and veteran financial journalist Chuck Jaffe joins us to talk about how the world of money has changed over the last 40 years. Chuck Jaffe has been a financial journalist since 1984. He spent six years, starting in 1988 as the business editor of a newspaper in Allentown, Pennsylvania, and then for the next nine years, he became the personal finance and mutual funds columnist for the Boston Globe. While working at the Boston Globe, he became a nationally syndicated financial columnist,

and for 27 years, starting in 1995, he has been a nationally syndicated columnist whose articles about personal finance and mutual funds have run in newspapers across the country, the country. This happened concurrently while he was writing finance columns for the Boston Globe, as well as later, starting in 2003, when he became the senior columnist at MarketWatch, a position that he held for the next 14 years until 2017. He is the host of Money Life with Chuck Jaffe, a weekday one-hour radio show and podcast, which he has hosted since 2012 for over 10 years.

in our upcoming conversation Chuck describes what the financial world was like in the mid-1980s when he began writing about money and how it has changed in the nearly four decades since. We then discuss how to apply that knowledge to our own lives what that means for the way that we handle money

and what lessons we need to learn and potential obstacles we need to be aware of as we handle our finances in this era, of trading apps, Twitter, and instant communication. Here he is, financial journalist Chuck Jaffe. Hi, Chuck. Hey, Paula. Thanks for having me on your show. Thank you so much for coming on the show. Chuck, you've been covering finance for 38 years since 1984. Let's climb into a time machine. Let's go back to 1984. What were people talking about back then? What were the big news stories back then? I'm interested in learning how things have changed and how they've stayed the same.

Well, news is always kind of fleeting. We could list a bunch of headlines and some people might get them or not. Let's go back to how people interacted with the market in those days. Okay. So in 1988, I became business editor at the morning call in Allentown, Pennsylvania. And we wanted to get more people to read the business news section. So I had a cat named Millie, who every day would interact with, my day. And I still read a newspaper old fashioned. I read it spread out. And she would come after she'd

finished her breakfast and lay on my newspaper. And I thought in the days before the internet, which we now know to be a device to get people to look at cute pictures of cats, well, we didn't have the internet back then. So I thought, hey, I'm going to have my cat pick stocks. And you did this by having your cat by charting where she would lay on the stock tables, because that's usually when she got there. And for a month, I charted where her feet and nose were because in those days, you walked into a broker's office and if the advice smelled good, you took it. That was how you interacted with the market was through somebody else. There were no discount brokers. There were no infractional shares were only in mutual funds.

You couldn't buy stocks that way. There were no index funds and all those other sorts of things in the early and mid-1980s. You had very limited knowledge of what it was that you were. buying. And if you found out, as I did when I was in college, somebody told me about this guy named Peter Lynch who was running a mutual fund and it was going to do better than my money market funds. Money market funds that when I was in high school were paying double digit returns. But then the market normalized and you weren't able to get 10% on your money market funds. And so you went in, you bought a mutual fund, but you had no idea what you were buying.

There was no morning star at that point. There was no star ratings. You didn't know. that Peter Lynch was a star other than somebody talked about him. Somebody did whatever. You saw him on Wall Street Week or what have you. So, I mean, the biggest change over the years is how finance has democratized. And it's had both good and bad. You've got plenty of things where, you know, Jack Bogle known for being the father of indexing. Well, there are plenty of things that Jack Bogle created or started that are not used anymore the way Jack Bogle would have used them. And that's kind of the logical conclusion of things. We can start them. We can say they're all good, but they go in directions. Maybe we're not all aware of. And man, has the financial world

ever gone in directions none of us could have foreseen 30 and 40 years ago? 40 years ago, or between 35 to 40 years ago, you're describing the scene where we learned about what happened in the markets from a physical print newspaper. that was delivered once a day. So we only got a market update once a day. We couldn't go online and purchase index funds or stocks, so we had to use a third-party intermediary. So it sounds as though I'm really old. I was living in the dark ages. That's what it sounds like. I was going to say it sounds as though we moved more slowly, which may potentially mean that we acted less impulsively, but also that we were much more subject to the words of middlemen who may or may not have had our fiduciary best interests at heart.

Well, fiduciary was not a term that was being kicked around by anybody in the financial planning world in the 1980s until maybe the very end of that decade. That was when one or two people maybe started to come to the conclusion that that would be a good thing. Yeah, there was a lot of what still exists in like the collectible world. You had a lot of what's called dealer risk. So in other words, you know, if you own baseball cards or gold coins or what have you, well, they may have a value and you may be able to look them up on eBay and go, hey, they're worth this much, but you have a tremendous amount of dealer risk and you have a tremendous amount of liquidity risk about whether you can bring them to market.

Well, back in those days, I mean, you know, I started with a small stock portfolio. I had a lacrosse teammate who worked for Dean Witter and he basically looked at me and I said, look, we're going to be friends first. So you're never going to come to me and pitch me a stock because the minute you do, I'm your customer and we're done. And how much can you discount my commissions? And he's like, I can get you down to like 3%. Because back in those days, it was a 6% commission.

And oh, by the way, if you were buying under 100 shares, if you weren't buying a round lot, you're going to pay some extra fee on top of that. And so it was a real thing when you would go, oh, I've got an extra $500 to invest, which is how I was back in those early days. I got a couple hundred bucks here. I want to buy 10 shares of this or 20 shares of that. It was not an efficient transaction. Right. Right.

The barriers to entry were higher. The transaction fees were higher and the initial amount of money that you would need in order to go into an investment was quite a bit higher. Now you can buy fractional shares for five bucks. Well, and with no other costs. I don't have to worry about, oh, if I don't get up to $50,000, they're going to ding me with a $75 or $100 or $200 fee over the course of a year. I don't have any other transactional costs. I can buy big baskets of stocks at almost no cost whatsoever.

And then we have greater liquidity, which on the one hand, people tell you it's really important. On the other hand, I actually tend to disagree. I think, for the most part, liquidity is something that you're paying for that you don't really need. How does that affect investor psychology? What we've described so far creates a snapshot of the environment. And as we know, our environment affects our mentality. And we also know that investor mentality, behavioral psychology, is one of the single biggest determinants of the way that people interact with their portfolio, whether they become aware of their own biases as investors and put into place safeguards to protect

themselves from themselves or they don't. So how did this environment that you're describing 40 years ago, how did it infect investor psychology? Well, it made people nervous. I'm going to put my money into something and I don't quite know what it's going to be and I don't quite know how it's going to do. and they wanted all of that kind of knowledge, and they were anxiously searching for it.

And what we wound up with ultimately was, if you look at the way mutual fund money goes, more than 100% of the money, basically every dollar that's going into mutual funds goes into four or five star funds or new funds. Anything with three stars or less is in redemption. That's how you get over 100%, right? Is that 100% of the,

percent of the new money and then they're taking money out of those things that are lower rated. Well, that's not what Morning Star ever set out to do. They set out to say, wow, can we come up with something that says the risk adjusted return here that you're getting paid for the risk you're taking? And yeah, relatively speaking, you know, this fund does okay relative to its peer group. But what it became was, hey, if it's getting a good star rating, then it must be okay. So you've got things like that and then go back. You know, we have the ETF revolution where Jack Bogle famously didn't really like ETFs.

He softened a little bit near the end of his life. But, you know, Jack Bogle, the founder of index funds, felt that ETFs were not great. And he didn't like them because he felt that you would trade them. If you create a trading vehicle, someday, sometime, somebody's going to trade it. And that is not what Jack Bogle wanted from index investors. He thought you should buy, hold it for the rest of your life, add to it appropriately, make sure it's right with your asset allocation. But that was it.

And I used to, and I knew Jack very well. And I've told the story many times that I told Jack that what he envisioned was life as a Daffy Duck Elmer Fudd cartoon that I remember from my childhood. How so? The cartoon was this. Daffy Duck is selling Elmer Fudd, the house of the future. And it's a push button house where, oh, you need your neck. tie, push a button and a robot comes out and puts your necktie on. And of course, in Looney Tunes fashion,

it tries to strangle Elmer Fudd and all these things go wrong. So at some point, they're looking at this board with all these buttons and Daffy says, well, push one. And Elmer looks and at the bottom right, there's a big red button. And he reaches for that one. And Daffy stops and said, don't ever push the red button. You should never push the red button. Okay. More hijinks ensues. And eventually, Elmer Fudd kicks Daffy Duck out of the house. And then he goes back and he's got that whole board with all those buttons. What does he do? He pushes the red button.

Next thing you know, the house is going up and it's in case of tidal wave and it's all the way up in the sky. He opens the front door almost falls out. And here comes Daffy Duck by in the helicopter. And Daffy says, for a small charge, I can sell you this blue button to get you down. Hmm. Okay. The point was that if left to their own devices,

everyone would push the red button. That was what Jack Bogle worried about, was that you would get in and go, oh, the market's melting down today. I got to get out. Now, that's not what has proven to happen. But let's go back to that 1987 scenario and point out that the worst market crash

any investor alive has lived through because nobody who is alive today was investing in 1929 was 1987. Yep, October 19, 1987. Exactly. No one who was stuck in their mutual fund on that day. Remember, that's roughly 40 years ago, not quite 30 some odd years ago. If you were about my age at that point, you're not quite to retirement age now. But there is no one alive who because they were stuck in their mutual funds on Black Monday, 1987, who is now going, I got to work two extra years because I couldn't get my money out at 10 o'clock in the morning. That person not only does. doesn't exist, I know plenty of people, myself included, who can tell you exactly where we were while the market was melting down on Black Monday, 1987, but who can't, and again, myself included, tell you what happened to our portfolio that day. Now, some of that is we didn't have the

ability to look at our portfolio quite the same way then as we do now. We couldn't see it minute by minute to go, oh my God, look at what's happening. That's where you have to wonder, armed with today's technology, which can be good or bad at times, depending on how you use it, would folks be more likely in a big market crash or meltdown to pull the trigger at exactly the wrong time? To go back to the earlier point that you made, the people who were invested on October 19, 1987, the people who suffered that massive one-day market. decline. Fast forward to today, no one in the long term, no one's portfolio is adversely affected, assuming that they didn't react to the news, assuming that they held and didn't

convert paper losses into real losses. That's correct. And remember, converting your paper losses into real losses was difficult because if you held a mutual fund, there were no ETFs, you didn't get out at 10 o'clock in the morning. You had to wait till the end of the day. And at the end of the day, things had bounced back a little bit. And people were talking about it. And you kind of knew that, okay, I would have had to sell out at 10 o'clock in the morning to get the closing price on the day. Because you had that window of uncertainty, right? There are a lot of folks that even today, if that's a reason potentially to hold a traditional fund instead of an ETF, because, yeah, you've got to wait till the end of the day to get out. Is liquidity something you actually need?

Like, is it a feature of an ETF? Or is it a benefit of an ETF? for most people I would say it's a feature, not necessarily a benefit. And by the way, for folks who want to get into more esoteric things, which may not be your audience, I would tell you that you pay for that feature. If you wanted to make things even cheaper, you want to be a pure Boglehead kind of investor, I'll buy what I can. I'll hold it for the longest time period possible and I want the lowest possible expenses. Well, then you wouldn't want daily or hourly liquidity because there's a cost of doing that. It's a drag. It's a drag. drag on the fund. You'd want to say, ah, let me out every quarter. You know, a couple days a year

you could get my money out if I need to. That would be better for you in terms of the investment vehicle. But man, is that a tough sell with people because of all the investor psychology that goes behind it? Are there any funds that lock up your money that don't allow that liquidity? Yes. There are what's called interval funds, which typically are a type of closed end fund. They frequently sell at discounts. Think about that, right? A fund that is selling at a discount closed end funds. You can look at the portfolio and where a traditional fund or ETF says, hey, let's add up everything. What's the net asset value of all of our assets here? A closed end fund trades like a stock. It could be at sentiment that says, oh, you know,

you can buy this for 90 cents on the dollar. You could buy this for 110 cents on the dollar, but usually they're trading at discounts. So you can buy assets cheaply. If the discounts get really wide, people will step in and say, hey, let's fight to change the fund structure and get on money back, which they can usually do. But then you have an interval fund, which basically says you can only take out a certain percentage of your money and you can only do it quarterly. And there are definitely people, it's not just to guard against the people. It's also about the kinds of investments that they're pursuing. They are pursuing some strategies where if a whole bunch of people rushed the exit at the same time, the fund would really suffer. Regular funds can

have that happen too. Don't get me wrong. But the interval fund structure is particularly good. when somebody goes, oh, I want alternative assets. I'm buying some exotic credit or something along those lines that doesn't necessarily trade every day. You want to make sure that if you're going to be in something like that, that a nervous neighbor is not going to be the one who's like, oh, wait, I got to pay the cost because they got scared today. So it sounds as though the fact that we now have the ability to, number one, get market news more quickly and number two, to react to that market news more quickly. we can essentially do both of those things in real time, that may increase our ability to become our own worst enemy or to act impulsively. Yes. Most assuredly, the fact we can become our own worst enemy in a lot of ways, in a lot of ways. And it's not just the ways that you think. Think about this from an analytical standpoint. And people get fixated on numbers, right?

Right. So I'll tell the story of my uncle. My uncle was an immigrant from Germany, came to America and became a farmer. And farmers are notoriously frugal and he was legendarily frugal. Right. And this guy could squeeze two pennies together till they screamed. Ultimately, he had a goal of leaving to his children a million dollars. He told this to my father. And he was already the cheapest guy out there. But when he actually got to where he had a million dollars, he couldn't spend a penny. Why couldn't he spend a penny? Because any money that he spent would drive his portfolio below a million dollars. And that ran the risk that he wouldn't get there again. And I mean, look, it's a real thing. I remember being a kid and having a football player who I rooted for who got a thousand yard season in the NFL. and then on the next play, lost six yards, and got hurt.

And they didn't put him back in the game and he didn't get his thousand yard season. Like theoretically, sure, it can happen. Right. If you had crossed your million dollars right before this current market meltdown started, right? Now you got less than a million dollars. Are you suddenly feeling you'll never get there again? Well, hopefully not. He went from being the stingiest or the most frugal guy in the world to being the poorest guy in the world,

even though he had a million dollars. And the point here is we look at numbers. To get reasons. Like you want to be able to say, hey, why am I doing so well? Let's look at the numbers to come up with reasons for what is working and what is not. But then numbers become the reason. Why was he investing? Not to leave a good legacy, whatever.

It was to get a million dollars. That wasn't the actual goal. That's a number. And by the way, I'll point out his kids never did need the money. I mean, I'm sure they were happy with. whatever they got from him, but they didn't need the money. His kids are all super successful, right? But he had it in his head and thus the end of his life was much less comfortable than it

could have been because he was focused on the numbers and that had become the reason as opposed to the reasons. Yeah, I want to make money to be able to do what I want and to help my kids in a way that I never got help. Okay, great. take the number off of it and he would have been golden and he could have maybe allowed himself and his wife to have a little bit more comfort to do some things that would have helped them and not been totally focused on the numbers and that's part of what happens too is that

in that day to day you look at a number and that's trying to tell you something and that number unfortunately again it's a search for reasons that becomes the reason to act right right and so often we can get so distracted by the number that we're pursuing that we miss, miss the forest for the trees, miss that bigger picture. Absolutely. Miss what it's all for. I see that a lot in the financial independence community where people will set a goal of a specific FI number and in the pursuit of that number end up giving themselves a lifestyle

in which they are less happy than they otherwise would have been, which is counterproductive. given that the whole purpose of FI is ideally to increase your happiness and your contribution. I wrote a piece. You and I are members of FinCon. I'm sure some of your audience members have heard you talk about it occasionally, et cetera. It's financial content creators and bloggers and podcasters and what have you. And in 2019, I was at a FinCon where a guy told me that I was not fire. This was a young man. Now, mind you, as we record this, I'm a week away from my 60th birthday. And I live through, you know, my employers, my primary day job telling me, hey, we're replacing you with a couple of people who are younger and what have you. And I turn down opportunities to go do

a corporate job to stick with what I love doing and to bet on myself. So in my world, I'm fire. I basically told the corporate role, you guys, I don't need you. I can do what I want to do. I can make this work. I've worked my entire life to be in a situation where I have these choices. But in his mind, well, I've never been somebody who had $50,000 in debt that I had to get out of or what have. Like, I didn't realize I had to be irresponsible to become responsible. Right. And things along those lines. And, you know, to me, I hate the fire acronym. It's convenient. But to me, and I tried to come up with one that would make it Fig Newton, but I couldn't quite get there.

Because for me, it's financial independence gaining choice. And gaining choice, what you want is to be able to say, hey, I've got this money. I can do a lot of things with it. I can save it. I can spend it. I can do whatever. But come up with the lifestyle that you want. I mean, I don't know entirely what's going to happen with every dollar I've made towards the end of my life.

But I can tell you as a 60-year-old man who has had a heart attack that I've had discussions with my kids and I have reminded them that although, you know, yep, when it's all done, you get whatever's left, that I don't want them to spend my last years caring for me in ways that I don't want them to care for me. In other words, I made this money to make sure that like if I need help on certain things, or bodily functions or whatever, I earned money to be able to hire somebody to help me with that so that you can stay my daughter. You don't have to deal with that. Now, is that a purely financial choice? No, of course not.

And how will things play it at the end? Oh, who knows? The point is the numbers aren't important to me. They're only important in that I get to say, yep, I'm not going to be a burden to someone. That's the number that matters to me. So I don't like the retire early side because the vast majority of fire people that you and I know, they're not retiring early. They're just changing their lifestyle.

That's why I would say financial independence gaining choice. But I'm not a member of that, as fire people have told me consistently, even though I kind of thought I was doing everything that they would like. So who knows? We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, but they're not just. fast and efficient. They're also powered by the latest in payments technology, built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative

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Sale ends December 7th. Let's go back to the historic context or the historic framework of how people thought about money, interacted with money, handled money back in the 1980s versus how we all live with our money and manage our money today. other than the two changes that we've talked about, the speed of information and the speed of our ability to react to that information. Well, I mean, let's start with the fact that Ted Bena and, you know, didn't discover the loophole of 401K until the 1980s, right? If you go back, it was 1978 that basically 401K became part of the interstate. revenue code and it took a little while to have people sort of figure it out, right? Because

basically it was like they weren't setting out to do what they did. It was a tax loophole that ultimately we've all driven through and hopefully to our benefit. Back in those days, you still had pensions. Today, people don't even understand pensions, which makes it really tricky because now you have some really good tools that a lot of people don't really understand, you know, certain types of annuities where somebody is really, they're looking for comfort and they're looking for something that's going to say, hey, I invest and I get a payment back and it's this much money every month for the rest of my days. We don't have those pensions that we used to have in almost everyone's situation. So the result is that we don't really understand how a lot of those things work

and worse yet, then you've got annuities that are sold poorly. So I'd start with that in terms of you know, back in the 1970s, we really weren't responsible for our retirement. our employer was much more responsible for our retirement. And it changed and it wasn't really until about the late 90s or 2000s when it became clear. I mean, I remember in 1984, I was an intern at the Detroit Free Press. I was writing a story that became a big deal, even though like I was the lowest level reporter in the place. And it became a big deal because I was talking about how much health care for the workers

and pension costs for the workers actually meant to the cost of a car. And it was something like you could buy a car in those days, you know, brand new off of the factory and hamtramic coming off the line for like 20,000 bucks, of which $8,000 directly was pension and worker health care costs. That's before they put tires on it. And, you know, how sustainable is that model and what does that do comparing it to Japan? And as, you know, back in those days, that was like kind of unheard of thinking. And today, yeah, you wouldn't think of it any other way.

And we kind of recognize, oh, you're probably not going to have a pension plan. And you're going to have to do a lot of this for yourself. And, you know, now you have tools that even if you're not doing it for yourself, your employer may be saving for you. And they can do it in better tools. My sister, after she left the corporate world, started, was an early adopter to a certain franchise company. she wanted to have a retirement plan basically for herself. And she found that all the people who worked for her, who were much less capable of affording anything in their retirement plan,

would take the money that she was putting in for them. Like they weren't necessarily adding to it. And they'd put it in the stable value, you know, so the least possible amount of growth that they could have. So even when they were getting something and it was working in their favor, they didn't know how to do it. So that's still part of the problem. Do you think that the fact that people today are responsible for funding their own retirement, which is a change that has happened in the last 40 years, do you think that that increases people's interest in financial education and financial literacy? Have you seen that shift?

Well, financial education and financial literacy to me are kind of two different things. Literacy is a big broad effort. And on the one hand, I love it and I support it. And, you know, you don't do an hour. of financial talk a day if you're not hoping that people are going to be financially literate. On the other hand, most of the literacy efforts have shown me that they're really good as long as they're being done when people need them. Like, you know, if you don't have any money to invest and they teach you in high school about investing, you may not understand, you know, you may not retain what you need to retain to make it work.

I do find that people are much more interested in financial education, but I also find that people, again, they're struck by numbers and the rest. I believe if I'm not mistaken, I think you had Bill Bangan on the show. Yes, we did. So he's known as the father of the 4% rule. And here's the thing. Like, I hear people in the fire movement talk about the 4% rule all the time. They should be the people who hate the 4% rule the most.

I'm not going to, I'm not bashing the 4% rule. I'm not. but I'm going to tell you about an experience that I think is very common for people and maybe some in your audience, which is the basic idea behind the 4% rule is you amass enough money that you can live off of 4% every year. So let's just say for the sake of argument, you can amass a million dollars. That means $40,000 a year is what you're going to tap into and what, having bills now so the number may be a little bit higher. Right. So you've got that $40,000 that you're tapping for. from your retirement savings plus your Social Security, and maybe there's some income because you own some dividend producing stocks or what have.

Well, again, what are you trying to do? For a lot of people, they look at that number and they go, I'm never going to get to a million dollars. And if I don't get to a million dollars, I'm going to have to live like a pauper. Well, I can tell you in the 1970s and 1980s, there were lots of stories about old people who had to turn to eating cat food. And you don't see those stories anymore. And you don't see them because if you think about what the four,

percent rule does, the 4% rule is not designed to make it that your money lasts you the rest of your lifetime. It's designed to make it that your money will not be depleted if you live eternally. You can live, oh, live to 94% rule will serve you. Live to 100. 4% will serve you. Live to 110. You'll still be doing just fine.

And when you die at 110, your heirs will get this nest egg. Meanwhile, the financial advisor who's been working with you, he's got the equivalent of an annuity because he's got your million dollars or whatever it is, and he's getting his 1%, and he gets it every single year that you've got the money there. And as long as it doesn't get depleted a whole lot, he's golden. So who is this rule great for? It's ideal for the financial advisory community. It's incredible for them.

But for you and me, look, I hope that I leave money to my kids and my grandkids. I hope that my kids can look and go, yep, grandpa paid for the college or whatever it is. I'd love that. And that's part of what I work for to this day. However, the most important thing for me is that whenever I die, I haven't gone broke one day before, that I'm not a burden to somebody else, that nobody's paying my bills when I'm gone. So what you're talking about is longevity risk, right? So longevity risk is the risk that you may outlive your money. And the 4% rule is designed as a safeguard against longevity risk.

But it's quite a conservative rule given that it is, by definition, it is the safe withdrawal rule. It is the least amount of money that you can take out to give you the highest probability of not outliving your money. Correct. And that is a very specific goal. The goal of managing longevity risk, that is a very specific goal that often gets conflated with the goal of. of early retirement, and therefore it sounds as though what you're saying is those two camps may not be talking about the same thing. Some people are using the 4% rule, misapplying it when they're designing an early retirement for themselves, when in fact the 4% rule is

actually designed to manage longevity risk. Well, I think there's a few things in there. I mean, for me, a part of it is I worry less about the financial independence crowd because they're trying to make sure they're going to have enough and they're looking at it. For them, the problem with 4% tends to be that it's very simplistic and depending on what they want to do, hey, I'm going to retire early. I'm going to travel the world is a lot different than I'm going to retire early. I'm going to retire on time and move into a retirement community. Those are two, you know, and hope that I can spend two weeks a year in Florida or something along

those ones. They're very different paths. But to me, the bigger problem is that it makes tremendous sense for the financial advisor who is selling it to you. And that's what they're going to push you to do. But the fact is that it almost always, and this is the part that they don't talk about, it almost always winds up leaving behind this massive nest egg. That's great. But did you work your whole life? Did you scrimp and save? You know, you talked about what the people who were trying to get to financial independence, what they do to get there, what they give up as part of the journey. Right.

So to beat back longevity risk, not in the worry that you're going to run out of money, but that you're going to basically deplete your nest egg, which could make it deplete faster, which ultimately means you're going to leave less to the next person. Like, here's the thing. For most of us, we have a number. I normally call it, don't screw it up money, except I'm using a different verb in there, right? Don't mess it up money. So my father, my parents were married for over 60 years, but they managed their money separately

because my mom was the risk taker and my dad was not. There came a point where my father's looking at things and he trusted me to be his advisor most of the time. He always made his own decisions, but he would ask all the questions of me. And I finally looked at him and I said, dad, you, know that this number right here would work for you. And he goes, absolutely. I said, well, you've got it. And at this point, as long as you protect that amount of money, you could go buy scratch tickets with the rest of it. You can do anything you want and you will be fine. It's not that, oh, he went off and did

that. My father would never bought a scratch ticket in his life, would never buy a lottery ticket, would not encourage you to do it. But what it did do was like, oh, wait, you know, let's spend a little more on this vacation. Let's do what we can as his health and my mom's health was not as good. Oh, let's fly first class or do whatever. And look, these are first world problems. But I worry about the person who looks and goes, I'm never going to be able to save for retirement so I won't do it. The origin of the answer that you just gave stemmed from a question about the distinction between how people interacted with their money back in the 1980s and how they interact with their money today. And so what we've established so far is, number one, that news traveled more slowly.

Number two, that our ability to react to the news also happened more slowly, and therefore we behaved less impulsively. And then number three, that question specifically was related to the fact that today, as compared to the 1980s, more of us are responsible for funding our own. retirement, does that mean that more of us are interested in learning about money and investing? Yes, whether we want to be or not. You have to be. My girlfriend will tell you she hates having to do the money stuff, but she knows she does. And have you seen that as a journalist who has covered this topic for 40 years, how have you seen that play out in the types of questions that

people ask in the volume of questions that you receive, how have you seen that play out over the last four decades? Well, you certainly see it in the questions that you get asked. You certainly see people who are striving to find whatever information and whatever reliable source of information they can get. You've also seen it play out in ways that, unfortunately, you're bad. I mean, you've seen it in people who are reaching for things, you know, without asking questions. You know, without asking questions, which is how you wind up with a Bernie Madoff. There was a guy who owned a radio station that I worked for at one point who made his money the old-fashioned way. He stole it from people.

And the fact was that if you wrote your check to the wrong person, he was able to access your money and he took it. If you wrote it to the right people, he managed your money like the financial planner he was, which was apparently a really good one. And after he went to jail, there were people who had been his legitimate customers who told me they wished he was still managing their money because hey he had been okay so the answer is it pushes everybody to make decisions that they frequently don't want to make that they want to take fast and easy steps out of they're not asking questions Paula I don't know whether you're not you're old enough to ever get invited to you know the the steak dinners that people who sell equity indexed

annuities do in your community. And they do them in your community because they're doing them everywhere. Have you ever been to one? No. Well, I get invited to a lot of them. Part of that's because I wrote the stupid investment of the week column for Market Watch for 10 years. And I'm still on all of those mailing lists. And I go to one, oh, every two, three years, I go to take a look and see if they're all different. All I can tell you is that if you sit in the back of the room and you can't see the fine print on what they're showing and you take at face value what they're telling you, what telling you sounds great and you could make a compelling case. And I have sat at tables where people have told me, oh, you couldn't possibly be right about what they're saying. Why don't you walk

up? Let's go up to the front of the room and take a look at what the fine print says. And I've had people who on the way up would have bet me $100 to a penny that A, I was wrong and B, they were about to put their money into an equity indexed annuity, which would be the investment of a lifetime. And on the way back, they said, wow, maybe I need to investigate a little further. And just as we talked about impulse, well, you can do a lot of things, but in a world of data overload where it's hard to know who to trust, you're looking for any port in a storm and who you trust and why you trust them is very flexible and fungible. There's no one right way. There's a lot of good ways to do this stuff, but if you happen to find the wrong way, it's a problem. And I'll point out one more thing.

You know, I talked about that advisor who owned that radio station. Let me just point out, I've written two books on choosing and working with financial advisors. And although I was not a client of the man, before I went to work for his station, I did a full background check on the guy. I did everything I knew to do at that time. If somebody goes rogue on you, not much you can do. You're going to be along for the ride. So, it's a lot. even when you do it all right, you can still have problems and have things turn out wrong. That's what you guard against, much more so, by the way, than, ooh, am I going to end with a million dollars or a million two or 800,000?

We'll come back to the show in just a second, but first, you mentioned that we now live in a world of data overload, which is certainly the case. I think most of us feel the cognitive overwhelm that comes from having too much information. and too many notifications to parse through. How, as a journalist who's been covering this for so many decades, how have you seen people manage that data overload in the world of finance? And are there better ways to do it? There are always going to be better ways to do it, but I don't know that ideal.

Optimization is a big word in the investment world. I hate it. I hate it for other reasons. another story that maybe a bit off track but I'll try to get back on track so that I'm actually answering your questions or asking me. In 2010, I wrote a book. I didn't get to do much to promote it because as the book was coming out, my brother, who was nine years older than me, had developed, he won the evil lottery. He had a condition that was going to kill him. And so I went out to the hospital and while I was there, he was asleep and he sees me

looking at emails and I muttering under my breath and swearing and he goes what what is going on and I said well this guy has read an excerpt of my book that market watch had published and he's ripping me because I didn't talk about portfolio optimization and how much better things could be and et cetera now mind you my book had nothing to do with any of that stuff it wasn't appropriate in my book regardless but whatever and this is a pretty well-known guy who's written books if I said his name people would recognize it, or at least somewhat. And I wrote them back a note and I said, you know, hey, I'm really glad you wrote me because I'm at Stanford Medical Center where my brother is dying. And I just want to point out that like 16 years ago, my brother came to me and said, hey, I'm looking for

something that'll just kind of be my risky fund, my thing that'll put me over the top or, you know, whatever. I'm looking for something where I can take a flyer and have it be the thing that that cinches it. At the time, a money manager who I knew was opening a new fund and I was about to put money into it myself and I told my brother, you should put money into this fund. And from the day that that fund opened, my brother was in on the first day until the day I was writing it. It was the number one fund of all mutual funds that were in existence over that entire timeframe. Number one, nothing better. But the expense ratio was kind of high. And so what I was writing to this guy was, need you to tell me like what do I say to my brother where I did absolutely everything he wanted

but oh by the way I did not optimize his portfolio because he paid too much by what somebody said was the important rule right my brother thought I couldn't send it to the guy I of course hit send he said what's he going to say back he's going to say oh it's terrible that you're going through this and obviously you're too consumed by grief to really understand the point and whatever and That's exactly what the guy wrote me back. And by the way, we never had the follow-up conversation. Why? Because at that point, I didn't need to worry about optimizing my brother's portfolio.

We'd done the best we could for him. He could live with all that consequences. He was thrilled. It had done everything he wanted it to do. And the expense ratio, who cared? Because in the end, you're not eating expense ratio. You're eating returns. And so we have all these rules and things that we're supposed to follow.

What matters is you being able to reach your goals. That is unchanged. You do not want to let today's technology, right? Think about the things that we can do. Think about what you see on commercials and how they impact you. The Geico is paying his insurance bill or no, what was the pig? What was the one with the pig? They're paying the insurance bill from the airplane.

Okay. Let's point out, it's okay to forget your bills and have to like do that last minute every now and again. But if you routinely need to pay your bills at the last second while you're escaping on vacation, because you've forgotten to do it at an ordinary time when you could get it all done, you have a financial issue that has nothing to do with your insurance. It has to do with how you handle your finances. We need to make things easier. Mostly they are. But so often people complicate things or they do things the wrong way or they take an idea that sounds good. and it maybe doesn't turn out quite as well because it's not perfect or we're adding too many things

in. Look, would I like it if we were all better? Sure. But if you understand how the market works, understand that disagreement makes a market. Okay, this is not a supermarket where you go in and they agree to sell you bread. If you want to go in and buy shares in Stock A, somebody is selling you those shares. If they thought those shares were going to be as good as you did, they wouldn't be selling them to you, at least not at the price you got. And yes, that's an oversimplification about a market that's more complex. But you should understand for everything that you do, somebody else believes the opposite. If they didn't, we wouldn't have a trade. So you don't have to be right all the time. You don't have to be perfect. You just have to be good enough for you. And that to me is

the worry for most people. It's like, look, my father could never invest in small caps. He'd look at a prospectus or a portfolio holdings list and see too many names that he didn't recognize. And every time the market would get hairy, he'd want to sell that thing. So eventually, we said, fine, just don't own any small caps. And every time he'd get some portfolio review, they'd say, you know, you've got a hole in small caps. He'd go, yep, I know it. And that's how I need to live. And that's okay. So for all that, data that we've got. Let's not get caught in the data. Like Morningstar created style boxes to be descriptive. And instead, they became restrictive. In other words, hey, Mr. Manager,

don't you own something that goes from this category to that category? Because I want to make sure you're doing the right things. And hey, Mr. Consumer, style boxes. Shouldn't you own one in every box? No. No, that's a misuse of the tools. Make this easier on yourself. And for the listeners who are not familiar with the Morningstar style boxes, so it's a three-by-three grid where funds are listed in terms of if they are value, growth, or a blend, that's one of the axes. And then the other axes is large, mid, or small. Right. And functionally, you can spend a lot of time worrying about the only thing you don't want to do is say, oh, let me go buy four funds in the same category. Because if you're doing that, you're basically getting the performance of an index fund in that one square.

But you don't need to fill the entire tick-tac toe board in order to say, oh, I've got a diversified portfolio. And so it sounds as though, from what I'm hearing, the solution to data overload is to ignore the stuff that doesn't apply to you, to focus on your goals, to start with the end in mind, and tailor your approach to the personal side of personal finance. Yes. I think in a nutshell, I don't know how long we've been talking for, but I think you just summed it up in a sentence. And there's probably a way to do it that goes along with, you know, your motto would afford anything is you can afford anything but not everything. Right. You know, it's like you can invest to reach your goals, but you can't invest to reach every goal or something along those lines. Keep your goals front and center. Keep your hopes and dreams front and center. Money itself is not the end.

What money can do for you is the important thing. Well, thank you for taking this time, Chuck. Where can people find you if they would like to know more about you and your work? You can go to any podcast app that you like and look for Money Life with Chuck Jaffe. My show is an hour every weekday. And it's not me talking. guess. I mean, obviously I'm asking the questions, but I'm on your side of the mic. And our website is moneylifeshow.com. And my columns are up there as well. So you can find my columns and find out

about the show at moneylifeshow.com on Twitter at Chuck Jaffe and at MoneyLififes show. Thank you, Chuck. What are three key takeaways that we got from this conversation? Number one, market crashes have happened throughout U.S. stock market history. But our ability to react and or overreact. to them has never been quite so easy. Chuck Jaffe has been a business and finance reporter for 40 years and as such has had the benefit of longevity when it comes to reporting on the day-to-day financial news. He describes the worst single-day market crash that anyone who is presently alive has ever experienced, which was the crash that took place on October 19, 1987. And as

Scary as that was at the time, he reminds us that while everyone remembers hearing that news, no one remembers what it did to their portfolio. And no one, assuming they did not panic and turn paper losses into real losses, has had to work for an extra two years, has had to delay their retirement as a result of a market crash that at the time felt like the end of the world. Let's go back to that 1987 scenario and point out, the worst, market crash, any investor alive has lived through because nobody who is alive today was investing in 1929 was 1987. No one who was stuck in their mutual fund on that day. Remember, that's roughly 40

years ago, not quite 30 some odd years ago. If you were about my age at that point, you're not quite to retirement age now, but there is no one alive who because they were stuck in their mutual funds on Black Monday, 1987, who is now going, I got to work two extra years because I couldn't get my money out at 10 o'clock in the morning. That person not only doesn't exist, I know plenty of people, myself included, who can tell you exactly where we were while the market was melting down on Black Monday, 1987, but who can't tell you what happened to our portfolio that day. Now, some of that is we didn't have the ability to look at our portfolio quite the same way then as we do now. We couldn't see it minute by minute to go, oh, my God, look at what's happening.

That's where you have to wonder, armed with today's technology, which can be good or bad at times, depending on how you use it, would folks be more likely in a big market crash or meltdown to pull the trigger at exactly the wrong time? In the moment, it's easy to catastrophize to think that this time it's different, that this crash, regardless of what the crash is, whether it's the market tumble of 2008 that led to the Great Recession, or whether it's the massive crash that we had in March of 2020 at the start of the pandemic, it's easy to think that when the markets are falling, it means the bubble has burst, everything's going down, and we need to somehow act or read. react accordingly. But the reality is that today's technology makes it easier than ever for us to overreact and to do so impulsively. And that is something that due to the real-time information we receive and due to the ease of making transactions from our phone, we need to exercise additional caution in guarding against. And remember, converting your paper losses into real losses was difficult because if you held a mutual fund, there were no ETFs, you didn't get out at 10 o'clock in the morning.

You had to wait till the end of the day. And at the end of the day, things had bounced back a little bit. And people were talking about it. And you kind of knew that, okay, I would have had to sell out at 10 o'clock in the morning to get the closing price on the day. Because you had that window of uncertainty, right? There are a lot of folks that even today, if that's a reason potentially to hold a traditional fund instead of an ETF, because you. yeah, you've got to wait till the end of the day to get out.

Is liquidity something you actually need? Like, is it a feature of an ETF or is it a benefit of an ETF? For most people, I would say it's a feature, not necessarily a benefit. Right now, it's easier than ever to become the detriment to your own portfolio's performance, to panic and turn paper losses into real losses. Sometimes taking action can give you the illusion of control, which can be comforting when you see your portfolio. portfolio, the money that you worked so hard to earn, getting pummeled by these broad macroeconomic

forces that are outside of your control. But what we know is that often it's in precisely these moments when taking action or having a reaction is the worst thing that you can do. The buy and hold approach over the long term can yield very powerful results. But with the tools we have today, buy and hold, is behaviorally an even bigger challenge. That is key takeaway number one. Key takeaway number two, we often conflate the number with the goal or the number with the reason. Chuck describes the story of someone who wanted to amass a portfolio of a million dollars so that he could pass it onto his heirs. But it wasn't the specific number, the $1 million, that was his true goal. His true goal was making sure that he had enough money

to leave some type of financial legacy. That was what he wanted to do. He wanted to make sure that he left enough such that his heirs would be taken care of. And $1 million, in his case, simply happened to be the numerical benchmark. But when we set these numerical benchmarks, and this happens not just in finance, it happens in any type of numerical goal that we might set, like wanting to achieve a certain weight, a certain scale victory, for example, anytime we set a numerical goal, we run the risk of conflating the number with the why. We look at numbers to get reasons. Like you want to be able to say, hey, why am I doing so well? Let's look at the numbers to come up with reasons for what is working and what is not.

But then numbers become the reason. Why was he investing? not to leave a good legacy, whatever, it was to get a million dollars. That wasn't the actual goal. That's a number. So if you find yourself doing this, if you find yourself getting so attached to a goal surrounding a specific number, whether it's a net worth goal, it's the size of your portfolio, it's the amount that you want to save this year, it's some imagined financial independence number, whatever number it is, or the number of the number of it. on the scale, whatever it is that you're dealing with, when you find yourself becoming overly obsessed with a given number, take a step back, zoom out, think big picture about why. What is it? What's at the heart of what you're trying to achieve? You're trying to build a financial life

in which you have more choices, more freedom, more flexibility. You're trying to have a large enough emergency fund that you can sleep soundly at night, that you aren't plagued by anxiety and worry, that some unforeseen bill will knock you on your butt. That's the why. And be careful not to conflate the broader purpose with the specific number. That's key takeaway number two. Finally, key takeaway number three. We live in a world of data overload. There is more information flying at us, then our brains can reasonably process. We need to screen, we need to filter. And so how do we do that, particularly when it comes to the 24-7 cacophony of information that surrounds investing and the markets and our financial lives? Just as we talked about impulse. Well, you can do a lot of

things, but in a world of data overload where it's hard to know who to trust, you're looking for any port in a storm and who you trust and why you trust them is very flexible and fungible. There's no one right way. There's a lot of good ways to do this stuff. But if you happen to find the wrong way, it's a problem. Data overload is a problem. But knowing your goals, knowing your targets, knowing that why, what's it all for? What are you really trying to achieve?

Is it greater choice? Is it greater freedom? Is it greater flexibility? Is it the psychological comfort of knowing that you have cash reserves in the event that something goes wrong? What is it that you're trying to build? What kind of ideal lifestyle? How do you want to act?

How do you want to feel? What type of work do you want to do? That's the why. And once you tailor the way that you manage your financial life towards alignment with that why, you can filter out everything else. because the quote-unquote best or most optimized investment means nothing if it doesn't fit your goals, your timeline, your strategy, your risk tolerance, and your risk capacity, which is different from risk tolerance.

Capacity is logistical, tolerance is psychological. The adage of know thyself is incredibly important when it comes to how you handle your investments, because personal finance is personal. And that is how to filter through the noise in our modern world of data overload. That's the third and final key takeaway from this conversation with Chuck Jaffe, the former financial columnist for the Boston Globe,

and a financial journalist who has been covering the markets and covering the world of money daily for nearly 40 years. Thank you so much for tuning in. If you enjoyed today's episode, please do three things. Number one, subscribe to the show notes. You can do this by heading to afford anything.com

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