Afford Anything - The End of Recessions?, with Ben Carlson

Episode Date: August 18, 2021

#333: In the 1890s and early 1900’s, we had recessions every two years. From 2009 to 2020, we enjoyed an 11-year bull run, the longest bull run in history. And when we finally had a recession, it lasted only two months. It was the shortest recession in U.S. history. The duration between recessions is growing longer (these days, we average 10 years between recessions, as opposed to two years at the turn of the previous century). And when recessions strike, we recover faster. The average length of recessions is growing shorter. What does this mean? If we project these trends into the future, are we bound for the end of recessions? That’s the question that kicks off this discussion with Ben Carlson, Director of Institutional Asset Management at Ritzhold Wealth Management and the host of the Animal Spirits podcast. For more information, visit the show notes at https://affordanything.com/episode333 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything, just 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. That applies to anything in your life that's a scarce or limited resource. Saying yes to something implicitly means turning away all other opportunities. And that opens up two questions. First, what matters most?

And second, how do you align your decision-making around? That Which Matters Most. Answering these two questions is a lifetime practice, and that's what this podcast is here to explore and facilitate. My name is Paula Pan. I'm the host of the Afford Anything podcast, and today, we ask the question, where have all the recessions gone? Back in the late 1800s, early 1900s, there were frequent recessions, with the average duration being approximately two years in between recessions. Today, the duration, the duration, between recessions is significantly longer. In recent history, it's averaged eight to ten years, which means the frequency of recessions has declined, and while the severity has not changed,

a recession when it strikes could be as severe as it was in the past, yet the length of that recession, the duration of the recession, has shortened quite a bit, with our most recent recession being only two months long. So we have fewer, quicker recessions. And we kick off today's episode with a conversation about whether or not we should learn to expect this. Is this the way of the future? Will recessions continue to happen less frequently and for shorter periods of time? Or are we running the risk of becoming complacent because we live in such a strong bull market era? To discuss this question as well as many others, I've invited Ben Carlson to join me on today's episode. Ben is the Director of Institutional Asset Management at Ritzholt Wealth Management and the host of the Animal Spirits Ports podcast.

He also runs a website called A Wealth of Common Sense. In this upcoming conversation, we discuss how the markets have shifted and what lessons we can take from that as we think through our own investment strategies. Here he is, Ben Carlson. Hi, Ben. How's it going? It's great. How are you doing? I'm awesome.

Excellent. Excellent. Could you introduce yourself for us, please? Sure. I wear a lot of different hats, I guess. I work for a wealth management firm. Rit holds wealth management. I've been there for about five years.

I do produce a lot of content, so I'm a co-host of a weekly podcast, Animal Spirits, where we just talk about the markets and investing in personal finance in our lives. And then I write for a blog called The Wealth of Common Sense, which I've been writing for since 20, With regard to animal spirits, do you consider yourself to be more of a bull or a bear? I am definitely a glass-safel kind of person. I like to look at the positives of situations.

I think that's just my natural disposition. I know I've met a lot of people in the finance world who are naturally pessimistic. And I think there are a lot of people out there who just, that's their personality. I've always kind of tried to look at the, look for the bright side of things. And I think, again, that's just personality-based. Let's talk about how much the markets have changed since the start of the pandemic. I think a lot of people, particularly people who listen to finance and investing podcasts, thought they knew how the world worked until 2020, at which point everything, all the

fundamental paradigms shifted. What do you see as some of the biggest shifts or perhaps realizations that have come out of the past year? Well, I think some of the biggest ones are certainly the force with which the government can turn around the economy. because that was our biggest problem coming out of the last 2008 crisis was it was really slow and people were really kind of repairing their balance sheets, both consumers and corporations, and it was a slow plotting recovery, and people were still hurting from the housing market.

And I think a lot of people thought, well, if that happened last time, that's probably going to happen this time again, right? It would make sense because that's in our mind recently. I don't think people realize, and I think that 2008 crisis actually planted the seeds for what happened this time because the Federal Reserve and the government really tested out a lot of things they'd ever done before in terms of spending and helping people. And a lot of people think they didn't go too far. And this time around, they really did. They pulled out the bazooka, they threw out the kitchen sink, everything. The Federal Reserve stopped all the credit markets

from seizing up. And they really just provided tons of liquidity. The government sent checks out to people. The way that I look at this is, this is a genie that you cannot put back in the bottle. Now that people know, the government has the ability to spend trillions of dollars in a recession, and they got checks and they made more money in some cases taking unemployment than they would have if they would have kept working. I don't see how people can say, listen, we had a two-month-long recession because the government acted. I'm not sure how we can ever go back to a place where we have a recession and people are hurting financially and the government doesn't do something to step in. I think we're going to look back at this time as like this pivotal moment,

like a fork in the road, just because of the pandemic, that we've created a situation where the government helps people and potentially stops a recession from ever getting worse than it could have. So does that mean that this is the end of recessions? I mean, if we take that to its logical extension, would it mean that public pressure to for government intervention at the beginning of the next recession would be so pronounced? Are recessions obsolete? I wouldn't go that far because this one was unique. I think everyone knew there was that night in the middle of March 2020 where the NBA shut down its season and Tom Hanks and his wife both got COVID. And I think I wrote on my blog the next day, it's time to prepare for recession because,

you know, the schools were closing and businesses were shutting down. I think everyone almost knew the exact date of a stoppage because we put the economy on ice effectively, right? Everyone quarantined and businesses were shut down and factories stopped and all this stuff. So it's not quite as easy to tell a recession, I think, in a normal situation where you know, like the recession started here and we know for sure because everything shut down and everyone at the same time. So I think that's going to be a little harder to do in terms of the timing. So it's going to be hard to stop that from happening ever again because even in 2007, 2008, we had a slowdown and everyone at the time couldn't really agree on it. It doesn't happen all at once. So I think that's a problem. But I think once everyone is

on board, you know, political will is the sort of monkey wrench here. But once everyone's on board and realizes, okay, unemployment rate is ticked up and we're seeing a slowdown, people are losing their jobs, all this stuff, I think it's going to be hard for the government to sit back and and not do something now that people know they have that ability. So identifying the start time of a recession may be a challenge in the future, but once people agree that a recession is underway, there would be public pressure for intervention, greater public pressure than there was before. I think so.

I think we've proven that, yeah, that it can be effective. And the speed at which we turned this around, I think they said the recession actually lasted two months, which is the shortest one in U.S. history. And if you think about how nasty it was and how high unemployment spiked and how GDP growth just fell out of a window, it's a lot. hard to believe that we were real turned around so quickly. Right. So what does this mean when we look at historic trends, the duration between recessions is getting longer and the duration of the recession itself is getting shorter.

To what extent can we project both of those trends into the future? I think there's a number of reasons for this. And I've thought long and hard about this, too, because if you go back to the late 1800s, early 1900s, we had a recession like every two years, basically in this country. And it's funny back then, they didn't really know what GDP was. GDP didn't become an actual data point until after the Great Depression of the 1930s. Like no one, GDP wasn't really a thing. So the measurement of this stuff wasn't quite as exact. And a lot of times they've gone back and repiece this together. But yeah, you're right. It's lengthening. And I think part of that is we're just a more mature economy now. We're more diverse than we ever were before. There's more sectors and

industries and technology has really made things a little bit more secure. Central Bank, that the Federal Reserve wasn't created until the early 1900s. And I think in the Great Depression, which honestly the pandemic could have turned into had we not had a policymakers stepped in, right? We could have had this nasty thing where the stock market fell 80 percent and the economy kept crashing. Policymakers made things worse back then of the 30s. And I think each time we go through one of these difficult periods, these crises, I think we learn a little bit more. So we had the recession in the early 2000s from the dot-com crisis blowing up and then 9-11. And I think central bankers and the government and learned a little bit from that. And in 2008, we learned a little bit more. And I think in 2020, we learned even more. I think each time they build on themselves and they get a little smarter about how to step in. So I think if you're someone who's actively trying to handicap the markets or the economy, it's going to be hard to divorce the central banks and the U.S. government and their responses from what could potentially happen in terms of a downturn. So yeah, so it is making things, I think, a lot more stable. Now, you could say, on the other hand,

And maybe that means we don't have as great of bull markets or recoveries when they do come back because you're taking effectively some risk off the table. So I think that's maybe the other side of it. But that's kind of the tradeoff between stability. That was going to be my follow-up question. Does a more stable market or a more mature economy indicate slower growth in the future? On the one hand, for the economy, if the government continues to spend, you have to say that, well, economic growth could be a policy choice, right? because we've created this six or seven or eight percent growth this year, pretty much on the back of government spending. A lot of it is, you know, we had a lower base coming off. But I think in

terms of like the stock market, you have to think, if you take a great depression scenario off the table where you have an 85 percent crash in the stock market because the Federal Reserve and the U.S. government can step in and stop that at whatever level it is, 40 or maybe call it 50 percent, and you take that left tail situation off the table, maybe it makes sense that valuations are higher and future returns are even lower because of it. of that stability. So maybe in the past, returns had to be higher because you didn't have a backstop like we have today. Right. One of the other trends that we've seen that has intensified in the past several years, and particularly in the past years, the popularity of cryptocurrencies,

NFTs, SPACs. There are all of these acronyms that people are using now that no one was talking about five years ago. How is the growing popularity of these new financial instruments tied to everything that we have just discussed? Or is it? I mean, when you think about it, a lot of the economy and the markets and everything, I've always liked to think in terms of numbers, but a lot of is just squishier than that. It's feelings and how people think about the moment and how optimistic they are about the future and what is their appetite for risk. It's hard to place these buckets in people in terms of like Gen Z and millennials because technically, I think by definition, I was born in 1981, the oldest millennial alive, right? I turn 40, actually, in about a week. Happy birthday.

Thank you. And, but there's also other millennials on the lower side of the scale that are whatever in their mid-20s or something just getting into the job market. So trying to bucket us together is kind of difficult. But I think when you look at the risk taking between baby booburn generation and Gen X and then millennials in Gen Z, I think the risk appetite thing is the most interesting aspect of this to me because millennials came up in a time in the early 2000s when they're getting out of school and there was a terrible job market and we had the right when people got jobs for most of them there was the 2008 crisis and it was hard to get a job it's hard to get ahead it was hard to make more money and now you see this other generation where they see a two

month recession and the stock market crashes 30 percent but it lasts for a couple months and they they've maybe invested some money in cryptocurrencies and they see an 80 percent crash but it doesn't last that long and it comes back and they're more accustomed to things like volatility and they live their whole lives on the internet. And so some of these things are more for entertainment value than they are for a spreadsheet in terms of the investment capability. So it's interesting for me to see the change in risk appetite for, and a lot of it has to do with, you know, the time you were born and what you came up in and your experiences. I think if you're someone who didn't live through 2008 in terms of being in the job market and in experiencing what that felt like or people who lost their homes or whatever,

if you've come and pass that as an adult, everything seemed pretty good for you, right? And so your appetite for risk is probably going to be different. And I think that change in mentality for these new investors and traders and everything coming in is going to color a lot of the ways that what happens in the market. You're seeing that, these things that would seem crazy in the other time are now a lot of people are just accepting them for what they are. These NFTs and crypto and all this stuff that is still pretty brand new. There's a group of people who are way more accepting of this stuff than they ever would have been in the past. One of the lessons I've learned from all this is just to be way more open-minded about it. And even if this stuff, if some of this stuff is not particularly useful or relevant to me,

it can be for certain groups of people. And so I think you don't always have to understand something to, you know, give it credence and allow it to work for some other people. Why have you learned the lesson to be more open-minded about it? I mean, you easily could have observed the same set of circumstances and taken away the lesson of these people. are setting themselves up for a world of hurt. They're naive. Right. I think a lot of it is just experience on my part because when crypto first came out in, you know, 2015, 2016, 2017, and it was really had that first huge bull market run. I remember just thinking, I just, I don't get it. You know, I've never been an early adopter

of technology. I'm more of a finance guy over here and I told you that, you know, before we started that, I'm kind of a glasses-a-full kind of guy, but people in finance usually are always looking for the risk. And what's the downside? And hopefully the upside will take care of the itself where people in technology, to their credit, the people in the tech world are always looking for what is the optionality here and what is the possibility and let's not even worry about what it is now. Like, what could it be? And so I give them credit there. And at first, I was really skeptical of it and trying to dive in and learn as much as I could. And I kept saying, beating my head against the wall saying, I just don't get it. And finally, I think I learned

enough and talked to enough smart people that it made more sense to me. But I think the internet makes it so it's so much easier to learn these days. And so for some people, that makes it. you more close-minded because you just latch on to whatever works for you and you know the confirmation bias. I found especially being in the content world and in writing a blog and writing a few books and doing a podcast that the feedback you get on that, if you keep saying the wrong stuff, there are certain people that are going to either tune you out or tell you that you're wrong or offer some help and say, here, why don't you look at it from this perspective? So actually putting stuff out in the world, I found it's been really helpful for me in terms of getting feedback because

effectively sometimes I'm learning out in the open for people that can correct me or offer some recommendations and stuff to learn a little bit more. How do you distinguish wise feedback from noise? I think a lot of it is people that get themselves in the most trouble don't have good filters because you hear all this stuff about social media just being horrible. And I know for a lot of people it really is, it can be detrimental. It can affect your mental health and it can really put some of the wrong thoughts in your mind in terms of what is right.

and if you look at these people with their fake lives on Instagram and it can just put you in a bad place. I think having a good filter in place can help. So I think something like Twitter that I've used, so many people think it's such a toxic place. But if you can filter out the wrong people to listen to and just find the right people that can be sources of information, you can find people who are experts on one small, tiny little area of the markets or the economy or personal finance or whatever it is and learn from them. And if there's a topic that you are unsure of, you can kind of go to find someone else who has done way, more studying and reading and it's their niche or their areas of expertise. And so I think finding those right sources of information are critical in terms of understanding what's going on and helping

yourself get better. So what I'm hearing is listen to the niche experts rather than the masses. I think so. I think just finding those right sources and filtering out, I think part of it is just not having the bad stuff. And I think as long as you can get rid of the people who are constantly wrong. And I think especially after 2008, I found in the finance world that people, were so attached to that doom and gloom mentality. And it was hard for people to turn around. And I was kind of worried about that coming from the pandemic. And I think, I don't think it happened as much. But because things were so bad back then, I think it was easy for people to just, just be pessimistic about everything. And they're always looking for the shoe to drop. And when's this next 2008 going to happen?

And when's the next housing crisis? And when's the next double-dip recession? And I'm sure I fell for some of that at the time, too. But I think after a while you realize, okay, this person sounds very smart, but they keep saying the same old thing over and over again. I think that's one of the great things about the internet is there's a record of it out there. You can see, okay, this person has been wrong for years now. What's the point of continuing to follow them? So I think as long as you can filter out some of the bad stuff and really figure out who not to pay attention to, that's almost just as good as figuring out who to pay attention to.

Day trading and short-term trades in general have taken on an increased popularity, particularly during the pandemic with more people being unemployed and being able to become self-taught Robin Hood day traders. Is that good insofar as it's getting more people interested in investing, or is it dangerous in so far as it's furthering a short-term mentality, particularly among Gen Z millennials? I kind of go both ways in this, and I still haven't quite figured out where I've fallen on this, because I think if you look at some of the stats that Robin Hood has given now that they become a public company, they're saying that all these millions of people who opened up their first brokerage account did so with them. and they're doing it with a small amount of money. I think Robin Hood has an average user size of like a little over $4,000. And if you would have asked me this five or ten years ago, I probably would have said it's nuts. But I do think for some people that just have to have that itch be scratched and have to speculate a little bit,

as long as they have their 401k doing okay over here or their Roth IRA or their HSA or 529 for their kids, whatever it is, if they have that stuff taken care of and it's sort of automated and in good standing. and they need to have five or 10% of their portfolio to just go crazy, make angel investments, or speculate on crypto or day trade, whatever it is. I'm okay with having that fun piece of your portfolio. Now, where it's not okay is if someone starts off and they think, oh, I made a ton of money in 2020 because the market came roaring back, I'm going to do that every year and I'm going to be a millionaire like that.

It's nothing. If you have that mentality overall, so I think the difference there is really defining and setting some parameters around, is this speculation for, you know, because some people do view it as entertainment, have some entertainment value or gambling. It's much like online sports betting now that's growing a little bit and going to the casino.

I think if you have the right mentality there, like most things, and when done in moderation, it can be good for you in a way if it allows you to leave the other stuff alone, because if you keep your emotions out of everything else and you just have it in this one little thing, this one speculative bucket,

then, you know, maybe that's not so bad. I know there's a lot of people out I think it should just be 100% of your stuff should be automated and disciplined. And I think I've dealt with too many human beings to realize that not everyone is going to be able to do that. But yeah, I do think it can be bad for the people who think that this is the only way to do it. And I'm going to trade these YOLO options for the rest of my life. And I'm going to become rich. And that's just not the way.

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sell-off from the insiders that happens shortly after an IPO that you would recommend that people don't pay attention for at least the first week? It's pretty tough. In a lot of ways, I mean, these are new and exciting companies and people maybe want to be involved with them. But it's a really tough game to play. And it's interesting because now these companies like SoFi and Robin Hood are offering access to individual investors who never had access in the past. In the past, you would have had to go through your broker at Morgan Stanley or Golden Sacks or J.P. Morgan or something and get allocated shares to these IPOs because you had a good relationship with some of there and you had money there. Now we're seeing these companies say, no, we want to give

a piece of this to our clients. And Robin Hood did this in a big way and some other companies have done this. It's a really tough game to play depending on your horizon for these things. Are you planning and holding the stock for five or ten years and want to just get it on the ground floor? Are you planning on flipping it in very short order? So your mentality and your time horizon, and that's the same thing with every investment is defining your risk profile on time horizon and how long you plan on holding something. I think that's the hard part for people is distinguishing the difference between something I'm trading and having fun with and something that I'm investing in for the long term. And I think that's where people get themselves into trouble. It sounds like the overarching

theme is the democratization of finance, how products and opportunities that were previously not available to individual investors are now available and how there's an education component that's perhaps missing from that. Definitely. It's the old paradox of choice thing. I think that there's never been a better time to be an individual investor than right now. You have access to products and services at such a low cost in these tax efficient buckets. And you can invest in these investment strategies that were once reserved for only the most expensive hedge funds in the world. And now they're in an ETF that is this tax efficient wrapper at a very low cost for pennies on the dollar. So all this stuff in terms of individual

investing, like the field has just been leveled in the past 10 to 15 years, unlike anything we've ever seen before. You know, you can, instead of going into a branch somewhere in a brick and mortar building and filling out some forms and writing a check, you can now open an account on your phone and be investing in five minutes. The problem there is this paradox of choice is there are so many choices and it's so much easier to be tempted to do something different because I need to invest in this, in this, and this. And just like with social media, I think the filtering has to be involved there where you need to figure out the stuff that you won't invest in because there's always going to be something new coming along, whether it's a new strategy or asset class

or fund structure. I'm not saying that you say I'm never going to invest in anything different than this target date fund or index fund or whatever is very simple. But I think if you have some filters in place, it makes it easier to not pull your hair out and go crazy every time you see someone else striking it rich on something because unfortunately, with the advent of social media and the ease of investing, like someone is always going to be getting richer than you in something, right? The Dogecoin stuff and in crypto and these meme stocks and all this stuff going on, and you see it happening and you kick yourself and go, oh, I should have saw that coming and I'm going to get into the next one. It's obviously not that easy. So I think having those filters in your

place in place in your portfolio is helpful too because if you just have these hard and fast rules, listen, here's the few buckets of things I'm going to invest in, whether it's asset classes or strategies or types of securities, whatever it is. And here's the stuff that, you know, I know it could work for someone else, but based on my circumstances and my personality, it's just not right for me. Then I think that makes your life easier because you're not stressing about it all the time and pulling these what-ifs. And I just think the whole process of investing is this idea of regret minimization. That's how you make these decisions because no one can predict the future. So you've got to figure out when you're making these decisions, you know, which would I regret more? Putting lots of

money into this and seeing go to zero or holding off on this and seeing it go to the moon, right? Like, That's kind of the whole process of investing is determining those risk profiles. Two follow-up questions to that. First is, if you do set those parameters in place, how do you differentiate between stubbornly clinging onto those parameters, even when they no longer make sense, i.e. being dogmatic, versus caving to the social pressure to Yolo, but fooling yourself into thinking that you've made a reasoned choice? Honestly, that's probably one of the harder things to answer in all of investing. Like, am I being disciplined here or do I need to be flexible? Because you hear these stories of these legendary investors. And on the one hand, you hear people who say, the reason I've been successful for multiple

decades is because I was disciplined to a certain strategy and I stuck with it through thick and thin. And then that's why I became this world famous investor. Then you have people on the other side who say, no, no, no, no. The reason I've become successful is because I've been so flexible and I've changed with the times. and I've updated my investment process. And the truth is, there's probably a little bit of truth in both of those, right?

Both camps can be right, but that's a hard question to answer as an investor. And I think maybe it also makes sense to have like a parachute, you know, of a release valve where you go, you know, this is how I'm going to define whether I'm right or wrong about this, whether it's a trade or a portfolio strategy or whatever. However you're positioning your finances and your investments, having an out at some, And the hardest thing to do that, of course, is to answer it after the fact because then you know the outcome, right? Either it did well or didn't do well. So part of that process, I think, is defining that up front.

And so that could be writing it down. That could be sort of, and to sort of hold yourself accountable. I work with these nonprofit institutions to invest with. I tell them the most important thing to do is writing down your reason for investing and why you're doing it. Because if you try to do it after the fact, you're going to see what happened already. and you're just going to say either we were right or wrong because of this. But if you do it beforehand and you say, you know, here's how we'll know we were right and here's how we're wrong.

And you're not basing your decision purely on the outcome. You're basing it on what you knew at the time because everyone is a great, great investor in hindsight, right? When you're able to look back, it seems easy. But at the time, when you don't know what the fork in the road is going to be, defining that can help, you know, here's the decision we made based on all the information we had at the time. And then after the fact, even if the outcome didn't go your way, you can say, listen, we had a good decision-making process. And I think that's part of it is just having that good-because. Because anyone can be lucky once. Like, being lucky is not a repeatable process. Right? That's where a lot of people get themselves in trouble when they, that's why, like, being right as a young investor can sometimes be the worst thing that can happen to you.

Because if you're right in your, if you get lucky and you're right on your first investment, people still cash those checks whether you were lucky or you had this great investment thesis. But then you get in your own head and you get overconfident to your abilities and say, well, I wasn't lucky. I just was really smart. I'm going to do it again. And I'm going to do it again. And that's really hard to do. So, yeah, that's why having a good decision-making framework for whatever the world, you know, throws at you.

And having this sort of overarching worldview is probably the way to think about it. So the one thing we tell, like, our clients at my wealth management firm is that we're stubborn on our philosophy, like our overarching philosophy and values. We have some things in place that these are the things we believe in. But the strategy itself to implement that philosophy can change over time based on changing facts and market dynamics and the economy. So it's kind of the strategy versus philosophy kind of thing. And that's where you think you have discipline in the philosophy but flexibility in the strategy. Let's talk about the distinction between having an investment philosophy versus having an overarching personal finance philosophy. I do think the difference between personal finances and a portfolio.

And I think this is where a lot of people get themselves into trouble, especially when you're first starting out. And this could even be people who come to us as wealth management clients. And they come to us and they think, we're hiring you to manage our portfolio and pick our investments. That is certainly one of the things that we do as wealth managers is we create a portfolio and we help them rebalance and we help them figure out their tax situation. But the biggest thing we do is create a financial plan for them. And we tell our clients, we cannot pick investments for you until we understand your financial situation. How are we supposed to offer you investment advice if we don't know what you're trying to do with your investments? We don't know your goals, your desires, your dreams, when you're going to spend this money, what your time horizon is, how your relationship with money is.

And I think that's the same way for individuals. If you don't have a saving system in place, I don't care if you're the second coming of Warren Buffett. It doesn't matter if your investment returns are great if you don't save any money in the first place. You have to have some capital to invest. So I've always thought that personal finances is underrated because I do think for most people, it's way more important. Like if you've gotten to this point where you're trying to figure out, should my allocation to small cap value be 6% or 5%, right?

You've already kind of won the game, right? If you've got money in a portfolio and you're worried about where do I take my investments from? What's the best tax strategy for, you know, should I take money out of my Roth IRA first or my taxable investments? If you've gotten to that point, you're best. off than 95% of the population. So for most people it is, you know, you're spending and your budgeting in figuring out the things that where you want to spend your money and how to save

more and how to progress your career so you make more money. All these things are way more important. You have to get all that stuff done before you ever think about your investment strategy and how to position a portfolio. And actually that leads to, you know, what should a person do? There are a lot of people who are listening to this who sometimes find themselves a little too deep in the weeds. For those people, how A, do they recognize that and B, how do they pull themselves out of that? Yeah, like the minutia. I do think that getting 80 to 90 percent of the way there with just a few building blocks can do it.

And if you want to focus on the minutiae from there, that's fine. But I think once you get that stuff in place and you have a high savings rate and you're automating your bill pay and you have an asset allocation in place that's automated and rebalances on its own, I think all that stuff, if you get those big building blocks out of the way, I think you realize all the stuff you do on the edges just doesn't really matter nearly as much as you think. Maybe for some people they need to feel like they have their hands on the wheel to control that. But I think especially when it comes to investing or your finances, you realize a lot of times that's this illusion of control where you think because you're doing more and working harder that you're going to make things better. And a lot of times, especially when investing, since there are no additional points for a degree of difficulty, the more you do, the worse your results. because the market doesn't care how hard you're working or what you're trying to do and how smart you think you are, the market's going to do what it's going to do.

I think it's probably the same with finances. You focus on the things you can control. And a lot of times that is these big building block items. So if you're spending money, I always tell people, like, if you are overpaying on your transportation or your housing, it doesn't matter what you spend on your money from day-to-day basis, whether you're brown bagging a lunch or you're buying lattes or whatever. if you're overspending in those areas, your other small spending is not going to matter because those are the huge things that matter in your life. If you live in a very expensive place with expensive housing, obviously there are people who make that work, but it's going to be much harder to find money in other areas of real life.

You have to cut back elsewhere. So I think it's just getting those really big things and focusing on those things you can control on. And then everything else, unfortunately, you have to kind of let it go and it's going to fall where it's May. Right. Focus on the big wins. Yeah. Yeah. that makes sense for personal finance and investing all that stuff. And then if you get to the point where,

again, you're focusing on, should I have my allocation be 10% of this or 15, sure, that matters around the edges. But I think if you did enough research into that, and we've done all this too, that whether your portfolio was 60, 40, or 70, 30, or 80, 20, or the long one, it's not going to matter all that much. What matters more is, are you sticking to that one, not changing it all the time? Right. Because to try to predict what the outcome would be, in any event, depends on a bunch of assumptions that may or may not come to fruition. Right. The perfect investment strategy that you can't stick with is useless. It's no different than failure, but a good strategy you can stick with over time, that's great because even a subparish plan is better than no plan at all,

right? Right. Going back to something that we talked about a little earlier, from what I heard seem to indicate that it's too simplistic to ascribe a particular type of risk tolerance to an entire generation that's a little too reductive. And yet it's also simultaneously true that Gen Z and younger millennials may have a higher risk tolerance based on life experience so far. Do you see that continuing in the future? Or is this one of those things where high risk tolerance often comes to the youth and gets aged out of you over time? I do think risk is way more dependent on where you are in your life cycle than macro factors or where the market is. So some people will say the biggest risk right now in the stock market is it's going to crash 50% and that is going to be horrible for everyone.

But that 50% crash is going to be way worse for someone who's retired and doesn't have years ahead of them to save and invest or earn more money than it is to someone who is just starting out earning money and is going to be a net saver for decades to retire. come, the crash for that young person is going to be, they should get on their hands and knees and pray for that because guess what? They get to put money in at lower valuations and lower prices and higher dividend yields, whereas that older person isn't going to have nearly as much time to wait out a potential long bear market. So for young people, the biggest risk is not saving when that crash occurs and pulling out of the stock market because they have so much time ahead of them. So risk, I think, means different things to different people depending on where they are in their investor life cycle. So a lot of that depends, you know, I have a much different risk

tolerance now going on age 40 than I did at 25 because I have family and kids. And so I think these are the things that kind of change you over time. Everyone's perception of risk is going to vary depending on where they are in their life cycle. And that's why generally older people tend to have more bonds in their portfolio because even if it returns less over the long term, it keeps their portfolio stable if they need to spend some money. And so a lot of it is where you're on your life cycle, but also your personality and your appetite for risk depending on your relationship with money in the markets. We'll come back to this episode after this word from our sponsors. How would you approach allocating your money in an environment in which everything appears to be

overvalued? Housing stocks, every asset that you look at appears to have an absurdly high valuation. It's one of those things, Jack Bogle, the legendary now deceased co-founder of Vanguard, said you have to invest in something. So the alternative is what, parking your money or burying your money in your backyard or putting it under your mattress. And I've heard that since, I don't know, 2015 or so that everything is overvalued. And of course, this stuff can't continue to go up forever, especially at the velocity and speed that it's going, things like housing prices and such. And a lot of that in the future is probably going to depend on the path of interest rates. You know, if interest rates stay low forever, maybe this stuff never completely comes crashing back down to earth.

And if interest rates go to 5%, then it could be a different story. So I think getting back to the focusing on the stuff you can control, setting expectations, people have been saying we should be expecting. And I was one of these people who said this, probably in 2016 or something. We should be expecting much lower returns going forward. And returns have been excellent in the U.S. stock market. They've been lower elsewhere, but they've been excellent here. double digits for years. I think I was checking today since 2009. And if we include this year, the S&P 500, which is basically a good proxy for the U.S. stock market, is up 12 of the last 13 years.

So we've had an amazing run in U.S. stocks. And the whole way people have been telling us, just wait for the crash and wait for the lower returns. And it hasn't happened. And eventually above average returns, turn into below average returns, and that gives you your overall average. We just don't know when and we don't know why and we don't know how long these things will last. But I think getting back to the personal finance versus portfolio thing, the one thing you can do is diversify. So there's other places to invest besides the wonderful tech stocks that have done so well the past decade and a half. You can invest in overseas markets. You can invest in different asset classes and different types of stocks.

So you can diversify. I think that's one way to spread your risk. And I think that's probably the simplest way to do it is just to spread your risks among a number of different investment classes. And second, you can always increase your savings rate, especially if you're not. you're young. I think that's one of the best things you can do. So I wrote this piece a few weeks ago saying, could this be the best environment millennials we'll ever see for returns? And a lot of people, a lot of millennials got really mad at that one. I heard some feedback and said, well, this stinks because what if that was the best cycle we've ever seen for the last 12 or 13 years

and we didn't have as much money? Now we're going to have more money and returns are going to stink. And I said, that's actually a good situation. So if we have 10 years of the stock market going nowhere and we have two or three bare markets and prices go down and up and down and they don't really go anywhere. if you're a net saver, that's actually a good thing for you. You want high returns later, right? You want to be able to put your money. So that's actually one of the positives about the volatility of the stock market where a lot of people just can't stomach it. One of the positives about it is eventually you get these opportunities if you're saving over time to put your money in at lower prices. And so I think, again, getting back to the risk thing, that's not a huge risk if you're not planning on spending that money. If you're planning on spending the money in the next five or ten years, a terrible stock market is not going to be great for you. But if you're not going to be great for you. But if you're not a huge risk, you're not going to be you're just planning on saving once a month or once a week or once every other week when your paycheck comes in, that's actually not the worst thing for you. And actually, if you're dollar cost averaging into the market overtime, you should want that. And so going back to every asset seems to have a high valuation. If your dollar cost averaging, it wouldn't matter as much.

But how do you approach something like purchasing a home, for example? Well, I think it all comes down to time horizon. And I tell people a lot of times, I've been against buying a starter home where you buy a house and then two years later you try to move up to another one. I think you should approach it in having a long time rise. And if you're going to live in a home for a minimum of seven to 10 years and really make sure that this purchase is going to be meaningful because it is such a big purchase, if you can take some of the transaction costs off the table of selling it and closing and all these things, then I think the return doesn't matter as much. And the problem with housing is it seems like such an amazing investment because housing prices have gone up so much for the

last 12 to 15 months. But housing is still a form of consumption. Personal residences, yeah. Yeah, everyone has to live, yeah, if it's not a rental, everyone has to live somewhere. So you're either buying or renting. And if you are a homeowner, trust me, there's a lot of ancillary costs that come with it. There's property taxes, there's the interest expense you paying the loan, even though mortgage rates are generally low levels right now. You have to do landscaping. You have to upkeep and maintenance and all these things. And, you know, I don't think many people ever calculate the actual return they get on it. But again, it's a form of consumption, so you have to be somewhere. But I think if you can approach it with a longer-term mindset, even though housing prices are up, I do feel for people who are in

the first-time homeowner camp right now and just looking because they're in the situation where they're having to deal with people coming in with way more money than the asking price and paying in all cash offers, it's a very difficult situation for a first-time home buyer right now. And I feel for them. But if you're looking at it from the terms of, am I going to get 10%? per year on my house versus 2% or whatever, and am I going to be, or am I going to lose money on it? I think you have to approach that one more from the decision of, is this going to be a good place for me or my family to live? Is this a place I want to put down roots? I want to be in the community.

So I think there's so many other aspects of that decision beyond the financial spreadsheet ones. And those ones do matter, but I think that there's so much more that goes into that decision that that's a way different calculus than investing in the stock market. Right. And with both, with housing and the stock market, as well as any other type of asset, one of the of the themes that I'm hearing you talk about is the importance of that long time rise and time heals high valuations. Yeah. So I wrote the most popular blog post I've ever written.

I still get tens of thousands of views on it a year. I wrote in 2014 and I wrote about this guy. I said, and it's funny, even back then, we thought the stock market was way too high and the valuations were too high. And I said, well, what if historically you just, you put all your money in at the peak right before a huge market crash? So in the 1970s, we had this 50% crash. In 1987, you had a 33% crash in a week, you know, at the end of the 1990s.

And I said, what if this guy saved his money and just invested then? And the whole point was if he invested over this 40 to 45 year period for retirement, he still ended up doing pretty good because he just, he never took the money out and he kept it in there. And so, yeah, so I think patience is kind of the ultimate equalizer. And that's the great thing about I've, you know, worked in professional investment circles for most of my career with these big institutional money managers. and they care so much about the day-to-day in a quarter to quarter. But if you're an individual investor, you don't have a board or investors that are breathing down your neck trying to ask, you know, what is your alpha you're producing?

Or what are your returns against the benchmark? You don't have to worry about any of that stuff, right? So you can have patience to sort of see these things through. And I think if you bought a house today, even if it's at an elevated price and you lived in it for 10 years and you created a lot of memories. And at the end of that, you say, geez, I look back and I made 1% per year, but the stock market was up 7% per year. What was I thinking? Are you still going to be okay with that decision if you had a place to live and you made out okay and you really loved it and create a lot of memories? I think that's a little bit harder to put an actual price tag on.

It's like the psychic income that you produce too. So I think these are the things that you think of in terms of that's more of a personal finance decision than it is like an investment decision in my mind. And it goes back to regret minimization. Correct. Well, thank you for spending this time with us, where can people find you if they would like to know more about you and your work? Yeah, a website is a wealth of common sense.com. And then every Wednesday we have a new episode of Animal Spirits with my co-host, Michael Bannock. Thank you, Ben. What are some of the key takeaways that we got from this conversation? Here are six. Number one, as we said at the open of the show, we don't have recessions the way we used to. If you think of three concepts,

frequency, severity, and duration. The frequency and the duration of recessions are both a lot lower than they used to be. The severity is the same, which is why you hear so many doom and gloomers saying, hey, yeah, but the market tank 80%. Sure, it could. That is an expression of severity. But it happens less, and when it does happen, we recover faster. If you go back to the late 1800s, early 1900s, we had a recession like every two years basically in this country. And it's funny back then, they didn't really know what GDP was. GDP didn't become an actual data point until after the Great Depression of the 1930s. Like no one, GDP wasn't really a thing. So the measurement of this stuff wasn't quite as exact. And a lot of times they've gone back and re-piece this together.

But yeah, you're right. It's lengthening. And I think part of that is we're just a more mature economy now. We're more diverse than we ever were before. There's more sectors and industries and technology has really made things a little bit more secure central bank intervention that the Federal Reserve wasn't created until the early 1900s. And I think in the Great Depression, which honestly the pandemic could have turned into had we not had a policymaker stepped in, right? We could have had this nasty thing where the stock market fell 80 percent and the economy kept crashing. Policymakers made things worse back then of the 30s. And I think each time we go through one of these difficult periods, these crises, I think we learn a little bit more.

And so what does that mean for you as an individual investor? Well, first of all, if you have a low-risk tolerance, one that's not befitting your timeline, the one that suffers from being perhaps overly conservative, you can take some solace in knowing that, at least historically, assuming that the future plays out in the way that the last few decades have, you're likely to not experience as many recessions and to not experience as many recessions, and to not experience. experience them for that long when they do arrive. And so if your risk tolerance is unduly low, this might serve as a data-driven reminder to shake yourself out of that a little. And same thing, if you have a spouse who's maybe a bit too conservative in their investment allocation, or a sibling who's a little too afraid of the markets, this might be some good information to share with them. But conversely, if you already have too much of a risk appetite, don't let this fuel your hubris. Rule number one about investing is that we have no idea what the future holds. Same as true of life. And the moment you forget that, you learn it in the most painful

manner possible. Wow, I'm being a bummer right now. So let's move on to key takeaway number two. The difference between a finance mindset versus a tech mindset. Let's listen to Ben as he explains the distinction. When crypto first came out in, you know, 20, 2015, 2016, 2017, and it was really had that first huge bull market run. I remember just thinking, I just, I don't get it. You know, I've never been an early adopter of technology. I'm more of a finance guy over here and I told you that, you know, before we started that, I'm kind of a glasses to have full kind of guy, but people in finance usually are always looking for the risk. And what's the downside? And hopefully the upside will take care of itself where people in technology,

to their credit, the people in the tech world are always looking for what is the optionality here and what is the possibility? And let's not even worry about what it is now. Like what could it be? I wanted to throw this in here because it's a quick but fascinating observation. He's right. People in finance are trained to look for the downside. We're trained to always ask, what's the risk? And that's good. That's an important question to ask. But it fuels a mentality that is hypervigilant about risk, as it should be. And that's a very different mindset than the mindset of an entrepreneur or the mindset of someone, particularly in the tech industry, who is constantly asking the question, what's possible?

What could be? You hear about these people in tech who think big, really big. We're talking hyperloop. We're talking humans becoming a multi-planetary species. We're talking about a day in which homo sapiens, sapiens are not the only species under the genus Homo. There would be other humans of different species, other people in the... I mean, we're talking big concepts, and you see that from people in different fields,

people in less risk-averse fields, where imagination is encouraged in a way that sometimes in finance, it's not. But then you see where finance meets imagination. You see that innovation as well. You see crypto. and the rethinking of record keeping, which means the rethinking of power and trust, which is what cryptocurrencies and blockchain technology provide, you see that innovation happen and it's fascinating to watch.

I was thinking about his observation, finance mindset versus tech mindset, as it applies to, of course, the field of fintech financial technologies, the space where these two verticals intersect. And sure, you see a lot of incremental iteration, companies that are building products that are 5% or 10% better than what already exists. Those are necessary. But there's something compelling about a mindset

that is ready to take a moonshot. And to bring this back to why I love financial independence and money management. much is because when your basic security is achieved, I'm not talking about crazy luxury here, but if you have at least a minimum safety net underneath you so that your rock bottom won't be that bad, it might not be your ideal lifestyle, but it's tolerable, acceptable. When you build out that safety net, you then have the protection to be able to take a moonshot in your own life, you then have the ability to ask yourself what's possible,

what could be. And so, again, if you have a spouse or a sibling who thinks finance is boring, I would say finance is the backbone of all innovation, both at a macro level, as well as in our own individual lives. Got a little philosophical with that second key takeaway. I can't believe I actually included the part about Homo sapiens. I'm not going to edit that out. I'm keeping that in.

By the way, if you want to read more about that, the book Sapiens by Yuval Noah Harari, oh my goodness, favorite book in the world. That's where that idea comes from. Anyway, moving on, let's talk about key takeaway number three. In this third key takeaway, we face an inevitable truth about life,

which is someone's always going to be richer than you. I'm not saying that you say I'm never going to invest in anything different than this target date fund or index fund or whatever is very simple. But I think if you have some filters in place, it makes it easier to not pull your hair out and go crazy every time you see someone else striking it rich on something. Because unfortunately, with the advent of social media and the ease of investing, like someone is always going to be getting richer than you in something, right?

The Dogecoin stuff and in crypto and these meme stocks and all this stuff going on, and you see it happening and you kick yourself and go, oh, I should have saw that coming. and I'm going to get into the next one. It's obviously not that easy. So I think having those filters in your place in place in your portfolio is helpful too. No matter how sound, how well-planned, how thoughtful your investing strategy,

someone's going to get bigger returns. Maybe as a result of better processes, maybe through sheer dumb luck, maybe some mix of the two, but for whatever reason, someone will always be getting better returns than you. someone will always be growing a higher net worth faster. And when we see that, and digital connectivity makes that more apparent than ever,

when we see that it's easy to have FOMO, the fear of missing out. You can avoid FOMO by knowing your own parameters, or as Ben puts it, by having filters in place. If you're not sure what you want to invest in, and perhaps it's a good idea to not be too certain of what you want to invest in, given that the options for what you can invest in, the choices available to you, are continually growing and changing. So if you're not sure what you want to invest in, then your filter can be what you don't want to invest in, not just what type of asset,

but what characteristic of asset. In other words, not what, but why? Why would you not invest in a thing. Answer that question, develop boundaries, parameters around that, and you're more likely to avoid getting blindsided by FOMO and rushing into the next ill-advised thing for no reason other than the fact that it's had a temporary run-up. So, that is key takeaway number three. Key takeaway number four, there's a distinction between philosophy and strategy. Be stubborn in the former. adaptive in the latter. We are stubborn on our philosophy, like our overarching philosophy and values. Like we have some things in place that these are the things we believe in.

But the strategy itself to implement that philosophy can change over time based on changing facts and market dynamics in the economy. So it's kind of the strategy versus philosophy kind of thing. I'm going to introduce one other concept. Ben talks about philosophy, your investment philosophy versus your investment strategy. I'm going to take that one step further. There's a distinction between philosophy, strategy, and tactics. For example, my philosophy might include a predominantly passive approach to managing my investments

that includes a portion of assets that provide a residual stream of income. That could be part of the philosophy. The strategy could be buy and hold residential real estate. And that's a very specific strategy of all the niches of real estate, residential, office, warehouse, mobile home park. Residential is a specific niche. And buy and hold, as opposed to flipping, as opposed to tax liens, as opposed to the myriad of ways that you can engage with real estate, buy and hold is a very specific strategy. So passive investing, predominantly passive investing is a philosophy.

Buy and hold residential real estate is a strategy. And then looking for off-market deals through forming relationships with wholesalers or driving for dollars or launching a direct mail campaign. Those are specific tactics that support that strategy. So to Ben's point, you want to be stubborn in the philosophy that you hold because that's your North Star, that's your guiding light. But the strategies that you use to get there and the tactics that you adopt in support of those strategies, those you can be very flexible on. So, that is key takeaway number four. Key takeaway number five, sometimes it's hard to know whether

you're trading or whether you're investing. And that's the same thing with every investment, is defining your risk profile on time horizon and how long you plan on holding something. I think that's the hard part for people is distinguishing the difference between something I'm trading and having fun with and something that I'm investing in for the long term. And I think that's where people get themselves into trouble. What's interesting is that you yourself might not know whether you're trading or investing. Or you might fool yourself. You might convince yourself that you're investing when in fact you're actually trading. In fact, if you want to hear a great interview about how often we fool ourselves, how we are the easiest people to fool.

fool. Yourself is the easiest person to fool. Listen to our interview with Dan Ariely. We will link to it in the show notes. You can subscribe to the show notes for free, afford anything.com slash show notes. But watch for cues. Observe your own behavior in order to recognize the disconnect between what you think you're doing and what you're actually doing. You know that cliche action speak louder than words? That applies not just to our understanding of others, but also to our understanding of ourselves. When we observe our own actions, sometimes we notice that there's a disconnect between what we think we think or what we think we feel and the way that we act. And noticing those disparities, both in investing and broadly in

life, can provide that level of insight that lets us know whether we're on the right track or not. and in this particular case, whether we are investing or whether we're just trading. And all of this leads us to our sixth and final key takeaway, that we are all fortunate to live in the golden age of being an individual investor. I think that there's never been a better time to be an individual investor than right now. You have access to products and services at such a low cost in these tax-efficient buckets. You can invest in these investment strategies that were once reserved for only the most expensive hedge funds in the world. And now they're in an ETF that is this tax efficient wrapper at a very low cost for pennies on the dollar. So all this stuff in terms of individual investing, like the field has just been leveled in the past 10 to 15 years, unlike anything we've ever seen before.

You know, you can instead of going into a branch somewhere in a brick and mortar building and filling out some forms and writing a check, you can now open an account on your phone and be investing in five minutes. problem there is this paradox of choice is there are so many choices and it's so much easier to be tempted to do something different because I need to invest in this and this and this and just like with social media I think the filtering has to be involved there where you need to figure out the stuff that you won't invest in because there's always going to be something new coming along. We are living in the era of the democratization of finance. assets that have previously never been available to ordinary mom and pop investors

have become available to us and it's happened in the last 10 to 15 years. It's happened alongside the development of the internet and the development and popularity of smartphones and apps. And the great thing about that democratization of finance is the access and opportunity that we now have. But the flip side of it, is that with that selection comes the responsibility to learn what we're doing.

And as a result, financial education and investor education has never been more important than it is today. So if you're listening to this, congratulations, because you are using the resources at your disposal. You're using your phone to listen to a podcast to learn about how to be a better investor, which is a subset of how to be a better thinker. And so congratulations to you for being proactive about learning that skill because it will serve you well. Thank you for tuning in. My name is Paula Pant.

This is the Afford Anything podcast. If you enjoyed this episode, please do three things. Number one, open whatever app you're using to listen to this show and hit the follow button so that you don't miss any of our amazing upcoming episodes. number two, while you're there, leave us a review. And number three, share this with a friend or a family member, a spouse or a sibling. That's the single most important way that you can spread the message of financial education and investor education. And that is a message that more people need to hear.

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