Money Rehab with Nicole Lapin - An Investing Masterclass with Financial Rockstar Peter Mallouk

Episode Date: May 21, 2024

Nicole does a deep dive into investing with Peter Mallouk, President and CEO of Creative Planning, an award-winning wealth management and investment advisory firm with over 300B assets under management or advisement. They cover everything from stocks, bonds, gold, real estate and even crypto. Whether you're a newbie investor, or work on Wall Street, you'll learn something helpful in this conversation. Plus, Peter shares what it was like co-writing a book with Tony Robbins.

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I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your

reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. On the road to financial freedom, I would say there are three major landmarks,

investing, adulting, and planning. On this road today, we have a very special GPS, Peter Malouk. Peter is the president and CEO of Creative Planning, an award-winning wealth management and investment advisory firm with over $300 billion of assets under management or advisement. Today, we do a deep dive on investing, and Peter gives us his thoughts on everything from stocks to bonds to commodities and even crypto. Plus, Peter shares what it was like co-writing a book with Tony Robbins. We nerded out so much that we only covered half of the topics we wanted to. So later, you'll hear the second part of the conversation. But for now, here's part one. Peter Malouk, welcome to Money Rehab. It's great to be with you, Nicole. It's great to have you here. You are a big deal in the finance world. I don't think you're going to say it, but I'll just say it for you. You have

been named number one independent financial advisor in America at the number one wealth management firm. So you're a rock star in the financial world. And you're a big deal too. So I'm on the number one podcast. So that's great. It's good to be with you. We're a team of number ones around here. So your book, The Path, loved it. And I do not say that often. You honestly had me at hello. So you say the opening line in The Path is the financial services industry is broken. Yes, it is. Tell me why you said that. Well, I think it's a lot of things you've talked about on your show over the years, which is there's so many conflicts in this space. There's so many people selling products. There's so many people making things more complicated than they need to be. All of these things make it just a landmine for the

typical person. And people assume their advisor is well-intentioned. If you go to a lawyer, the lawyer, their job is to act in your best interest and get you the best outcome. And if you go to an accountant, their job, they have a legal duty to act in your best interest and get you the best outcome. Same with the doctor. So you go to the financial advisor, you think it's going to be the same, but the reality is the overwhelming majority of financial advisors are really in sales. They're selling something. They're selling insurance. They're selling the investment product that their company has on the shelf or the private investment their company has on the shelf. Sometimes it has the same firm's name on it. Sometimes it has a different name. People don't know the commissions they're paying, the fees they're paying.

There's something in the industry called revenue sharing where somebody recommends something in an exchange, they get a kickback. It's just very messy. And every time Congress tries to pass a rule to change these things, a group of advisors get together to block it. And that blockage, the name of that rule is the Merrill Lynch rule. Because Merrill Lynch got a bunch of brokers together and told Congress, we don't want this law. They wanted to be able to, along with all these other advisors, sell their own products

and have commissions and so on on investments. And that's what makes it so difficult for somebody to navigate. Because you go to somebody and say, give me advice. And they go, sure, I'll charge you a fee for advice. But then they go sell you a product. It'd be like going to a Ford dealership, paying a fee to the sales guy and saying, okay, what car should I buy? And he'll say, wonderful, choose from one of these sports, right? And so the conflict is very hard for a typical person to navigate. It's true. Tony Robbins, who you co-wrote this book with, the duo, the financial world, didn't know it needed, but we did. He often talks about the idea between a butcher and a dietician, right? Somebody is going to be biased when they're trying to sell you something. So it's really important that you look for a fiduciary when it comes to your financial planning. That's right. And what's even trickier is anyone can

say they're a fiduciary. So there's a law that says when it comes to retirement accounts, you have to be a fiduciary. So you've got people that are brokers. They don't have a legal obligation to act in the client's best interest. You have people that are fiduciaries all the time, but most people are in between. So if you even said to your advisor, are you legally a fiduciary? They could say yes, but maybe not all the time. And the ultimate question that your listeners can ask their advisor is, do you have the Series 7 license? If you have the Series 7 license, then it means that you are also a broker. Even if you're a fiduciary part of the time, you're also a broker. You can also go to a website. And if the website of the firm or the business card of the advisor says, investments are offered through, and then it has like a third party, it's that usually that's the signal as well, that that's a disclosure required of a broker.

So you don't want them selling stuff. That's right. You want to go to somebody and say, look, I'm going to pay you a fee to get your advice. And I want the advice to be unbiased. I want to know whatever investments you bring to me, you're going to be paid the same. So you don't have an incentive to recommend one product over another. It's super refreshing how you really call this out because it's hurt so many people. And Tony has also been beating this drum for a really long time. What was it like to work with him? He is not lacking personality. No, he's not. He's a fascinating guy I've seen. He's done so much

for so many. And he had written a book without me originally called Money Master the Game. He's a fascinating guy I've seen. He's done so much for so many. And he had written a book without me originally called Money Master the Game. I had a lot of clients come in with that book and ask questions. I got to know his advisor. His advisor would refer some clients to me that would call him. And we got to know each other. And I eventually met Tony. And Tony came to Creative and we wrote some books together. And he did not understand the very first point you brought up was he had told his followers in his first book, hey, I used to be at this broker. I found out I was paying these really high 401k fees, high fees on my personal account. I talked to my friends in the business.

He's got clients that are billionaire hedge fund managers. And he wound up talking to John Bogle and Alan Greenspan and Warren Buffett and all these people. And one of his takeaways is people should ask for a fiduciary. And later he found out from me and him talking that people can be registered as both a fiduciary and a broker. And he was very upset about that. He thought, he said like, Peter, look, I spent hundreds of hours on this. I wrote a whole book about this. I talked to more great minds in finance than anybody in the last century, which was true. In that book, he interviewed more people than anyone had. It's incredible, incredible book. And he did not know that distinction. So he's like, how is a lay person supposed to understand that? That's how we started working together. We wrote

Unshakeable to clear up that point and talk about our investment philosophy and then the path, which is more financial planning related. So fiduciary is not enough. You want to ask if there's a series seven, correct? That's right. If there are no series seven, then they're not a broker. You're dealing with a pure fiduciary. Okay. So on this road to financial independence, financial freedom, I think of three steps in this process. There's first for somebody who wants to get into investing, then adulting, and then planning. So if we could go through all of them, that would be awesome on the investing journey. First, let's talk to newbie investors. You say that cash and bonds do not make sense for younger long-term investors.

Why is that? Right. Well, I would not think of cash as an investment ever. So cash is really dead money. So every dollar bill is always working for somebody. So as an investor, you want to think about your dollar bills as going to work for somebody. If I put them in the bank, the bank is going to take my dollar bills and go loan them to somebody else to go buy a house or build a business. And they're going to charge them seven, 8%. And they're going to keep that money. They're making money off my money. So I want my money to throw a shovel over its shoulder,

go to work every day and work for me, right? So all of your listeners, they want to think about those dollar bills. When they go to work, those dollar bills should be going to work for them. Cash is dead. It's working for somebody else, but you should still have some cash in case of emergencies. Like if I've got a job and I'm not sure about the total security of my job, then maybe I want to make sure I've got enough cash to cover three, four, five months. So if I lost my job, I can make my car payment, I can make my house payment or rent without having to sell my investment portfolio when it might be down. That's the reason to have cash.

Cover short-term purchases and emergencies. Now from there, we want to get the best return possible. The rest of the money is not emergency reserve, it's investing. Well, we look at stocks, stocks historically average around 10%. If we look at bonds, historically, they average less than half of that. Today, it's probably 10% on stocks, maybe 4.5% on bonds. That's a very big difference. Stocks are taxed at capital gains rate, which is the lowest tax rate. And you only pay the tax when you sell, which for your listeners should not be for decades. And then bonds, you pay income taxes or you accept a lower yield to get a municipal bond. So the discrepancy between the two before tax is big, after tax is even bigger.

So we want to have as much in stocks. So where do bonds fit in at all? Well, somewhere between the emergency reserve and long-term money, there are stuff that could happen that we want to have access to. So let's say I want to have three to six months for an emergency, that's cash, but maybe, maybe I will buy another house in five years that will require some money from me, or maybe I'll want to start a business in three years. That's where the bonds come in. I want to have enough bonds to cover three to five years in case I want to do something big. Or if I'm retired, so if I'm withdrawing, I've got a place to go to if the stock market's down.

All the long-term money I want in stocks, the price I'm going to pay to be in stocks is I'm going to be negative one in four years. Cash is always positive. Bonds is positive 90% of the time years. Cash is always positive. Bonds is positive 90% of the time. Stocks is only positive 75% of the time. But if we stretch out to five years, it's positive about 93 to 95% of the time. So I'm not really worried about the stock market over five years. I'm definitely not worried about it over 10. That's where I'm going to get the most bang for my buck. So I want to have as much there as possible. So what do you say to somebody that says, yes, I know that historically, but like, I

know as soon as I do it, it's going to go down for five consecutive years or something like that. I have so many girlfriends who have even sold their companies for, you know, nine figures or something and have all of it sitting in their Bank of America account because they're freaked out. You know what I tell them is, I just imagine you're the unluckiest investors of the last 20 years. So let's say you're somebody, let's do the last 25, the worst five investors. One invested the day before the tech bubble burst. One invested the day before 9-11.

One invested the day before the 08-09 crisis. One before COVID. All of these were disaster. In all these instances, over the next five years, you made a huge amount of money. So you have to think about this pile of money as being five-year money. And over five years, that's going to look like a blip. It just doesn't matter. So the key is we've got to get your money working for you. Even if you put it in today and there's a bear market tomorrow, there's a bear market every five years. If you've got a listener and they're 35 over the course of their lifetime, they're going to have about nine or 10 bear markets.

They're going to have a ton of them. They have to get used to it. That's the price you pay for owning stocks. You're still collecting dividends. Even while they're down, it will come back. There's been about 130 times the market's pulled back and about, and not about, all 130 times the market's recovered and gone on a new highs. And so just have that education, that mindset. Being in the market is much less risky than being out of it. If you're out of it and the market goes up, it may never

come back down to pick you up. The people that left around COVID, the market has never gone back to those levels. It may never go back there. They had permanent loss of opportunity. But if you're in the market today and there's a crash tomorrow, well, that's temporary. Your money is going to come back. So the risk of being out, much, much more detrimental to the long-term investor than the risk of being in. So you said three really important things there. And I want to underscore them. First, it's not timing the market, but it's time in the market, as they say in the financial services world. It's also the fact that we have never not recovered from a single recession or depression in US history. That's right. And we work so freaking hard for our money,

it's time it returned the favor. That's right. And a lot of people even will get your doomsday scenarios. Well, what if the United States is no longer the world leader? Look at China. Well, the United Kingdom is no longer the world leader. Their stock market has gone up over the last hundred years. You don't have to be the leading. I mean, even if you take these doomsday scenarios, it still works itself out. Yeah.

And some of those doomsday scenarios and people are like, well, what if I, you know, what if the S&P 500 goes to zero? I'm like, well, we're going to have greater problems. We're going to have apocalypse, zombie apocalypse problems at that point. You also say, speaking of some zombie apocalypse vibes, that commodities are generally not great investments. And doomsday sayers, I would say, would go into gold thinking it's historically always been a safe haven. It's hitting record highs right now. So how do we reconcile your idea that commodities are generally not good investments and the all-weather portfolio that Ray Dalio touts has some commodities in there? Right. So let's talk about just what commodities are more broadly for your audience. So that can be copper and zinc and all these, you know, say minerals, oil, things like that. So starting with like copper, zinc, platinum, all of those things, there's like 50 things you can trade. These things are far more volatile in stocks. So in other words, they go up and down more than stocks. And they historically have had a much

lower return than stocks. So I get to choose between buying these commodities or buying the best companies in the world. Apple, McDonald's, Nike, 500 of those companies. I'm taking the companies. The companies are the ones that are producing dividends for me today. Commodities produce nothing. I just have to hope they're going to be used. Someone will buy them at a higher price. So I know historically that stocks do better than commodities. I know they provide an income and I know they're less volatile. Normally, if you're going to have more volatile, you want a better return. Bonds are more volatile than cash. I get a better return. Stocks are more volatile than bonds. I get a better return. Commodities are more volatile than stocks, but a worse return,

no thanks. So in the creative planning portfolios, my firm's portfolio is we never recommend commodities like that. Now I would isolate gold and oil as being different things. Now, if you own a diversified portfolio, first of all, you own all of this because you own mining companies and companies that make these materials, own these materials and find these materials, right? So you already have it. If you own S&P 500, for example, you have ExxonMobil and a bunch of other energy companies. If oil prices go way up or down, you feel it. If you own various indexes, you own gold mining companies and companies that have these things on their balance sheet. So you do have some exposure. Separating out just gold, you often hear a lot of bears, like you mentioned, Nicole,

they really recommend gold. The world's going to end, I'm going to buy gold. And I really view gold as money, right? So gold was money 4,000 years ago. Gold was money 1,000 years ago. And gold is money today. So if you told me, Nicole, hey, Peter, I'm going to give you $100,000 and we're going to get in a time machine and it's 4,000 years from now and we can only use one currency, what are you going to take? I'm not going to take dollars. I'm going to take gold because every other currency in the history of the world has eventually gone away. Romans, Greeks, Egyptians, whatever.

But gold has always been there. It's a currency because it's basically stable. And so if you look at gold over the very, very long run, it barely matches inflation. It buys you a good suit today, buys you a good suit a thousand years ago, buys you a good suit a hundred years ago. So you get all this volatility, all this ago, buys you a good suit 100 years ago. So you get all this volatility, all this up and down for a historical rate of return that's worse than bonds, no thank you. So I'm not a big fan. It doesn't mean I don't think gold is worth something. It is.

It's just not a great investment. It's a store of value. It's a store of value. And I would say it's barely a store of value because if you think about your dollar, you're losing your purchasing power every year. The advantage of stocks and owning these companies is you stay ahead of inflation. Whether we look at from COVID to now or the Great Depression to now or anywhere in between, if you invested in stocks, you didn't just keep up with inflation, you earned triple what inflation was on average. Gold just barely stays with inflation, just barely holds your purchasing power. I want to double click on inflation in just a moment. But I think a couple

of things that you mentioned that are really important is that not all commodities are created equal. I started my career on the floor of the Chicago Merc. I was floored that you could sell pork bellies and soybeans and all sorts of other stuff coming from an immigrant family. I had no idea that that was possible. But gold and oil are much different, as you note, and that you can also get exposure in stocks that are already in the S&P 500. We talk a lot about low-cost S&P 500 index funds on the show.

Warren Buffett likes them. He left them in his will for his own wife, as you know. And so when you have exposure there, you can get them through equities or stocks. Archer, Daniels, Midland, you can get commodities exposure there. If you are not interested in oil companies, you can get S&P 500 index funds, X oil and other stuff that people might not be morally in line with. That's right. I think if you're an index-based investor, if you own a diversified pool of investments, you wind up owning all these things, whether you want to or not.

Now, you can go through certain... We're able to help clients screen out things they don't want. People would say, I don't want energy or I don't want guns or whatever. So you're always able to go another step. But the typical person who's buying some indexes, they're going to get all of this exposure, probably more than they think they have. Yeah, for sure. And your wallet is a vote. So if some of these things don't die with you, you don't have to invest in them. Let's talk about crypto because crypto had been touted as

this great hedge for inflation like the dollar. That has not been the case. I've been historically bearish on crypto. Crypto boys come for me all the time. But Bitcoin is back past $65,000. Where do you think it would go? And what place do you think it has in a portfolio? Well, I think it's interesting because Bitcoin's been on this incredible two or three year run, but it's underperformed the S&P 500 over that period. So I would break out crypto into a couple categories. First, all of crypto. So we go to time machine, we go back five, 10 years from now, we look at some pretty famous people that wrote books about this or put their position on this. They talked about all these cryptocurrencies that would prevail. The reality is 99.9% of

cryptocurrencies have gone to zero, not down 95%, like to zero. And the overall majority of the remainder have gone down 90% or more. Someone who had a diversified crypto portfolio got crushed in almost all categories. Now, one dramatic outlier to this is Bitcoin, right? Bitcoin has held up. It's been resilient. It's been extremely volatile. It's definitely not a store of value. The definition of store of value is what you and I were just talking about with gold, which is, hey, if I put this money in here, if I trade dollars or some other currency for gold, I have a reasonable expectation that I will have matched inflation over a period of time. That's a store of value.

Bitcoin, basically, we have a very high expectation that it's going to be way more or way less a year from now. Like, for example, betting on a football game, right? I mean, we're going to have a very wide variety of outcomes we don't expect. In fact, we would be shocked if we woke up a year from now and it was up 3% or 6% or whatever inflation is. It's all over the place. Now, the argument for cryptocurrency is the dollar diminishes in value every year, which I would submit is true, and that the government prints more dollars whenever they want. And by doing that, they create inflation, and they steal the value of the dollar away 10 years later, that money is probably going to be worth about 60%. What it's worth today will only buy a Chipotle burrito bowl. It's going to

take a lot more to buy that same bowl. You have to use more dollars to do it. That's the same thing as taxing you without you noticing it, taking value away from you. It's completely true. And the government's reckless with their spending, which is true. So the idea is, hey, we need a currency that they can't print more of and that it's going to be stable. And Bitcoin is going to be the magic one because it's blockchain, it can't be replicated and so on. Well, anybody can create a cryptocurrency. Anyone can put it on the blockchain. Anyone can set it up so that there aren't any more. So these features are not unique to Bitcoin. For Bitcoin to prevail, and it's possible it will, it will have to be accepted as currency by everybody, almost everybody. Then it is a currency. What made gold a currency or today

makes dollar a currency is everyone accepts that it's a currency. But these features that people talk about, well, Bitcoin is super unique because you can't make any more and it's on the block. All of those things, anybody can do them. Many other cryptocurrencies have done them and they failed. What Bitcoin has is it is becoming more mainstream and the question is, can it totally break through? We'll know it has totally broken through when it's totally stable in value and everybody's using it all the time, neither of which we're at today. So if someone wants to invest in it, and everybody's using it all the time, neither of which we're at today.

So if someone wants to invest in it, great. It's called speculation. You're placing a bet that it will probably work out. Maybe it will work out, but it's also possible it won't work out. It's very different than buying a diversified basket of securities where somebody is making cheeseburgers or phones or shoes,

and we have a reasonable expectation that in the future, people will still be buying cheeseburgers and shoes and phones. It phones, very different type. One's an investment, one speculation. Yeah. And it has been said that central banks can just print money whenever they want. And there's only 21 million Bitcoin ever created. And so the scarcity is going to create this hedge against inflation or macroeconomic issues, which we haven't seen at all. In fact, Bitcoin was just down 5% at the time we're recording this. And that is right along with the stock market. So we were hoping to have this other correlation, right, that would do

something different than the stock market. But that just hasn't panned out. It hasn't been the case. I think Andrew Ross Sorkin came out and said it was like a fairy tale of being a hedge for inflation. A 15-year-old today could come out with a cryptocurrency that's on the blockchain that has a limit on how many units can be issued. All of those things, anyone can create that today. None of that makes Bitcoin unique. The only thing that would make it unique is if people decide, this is the one thing, this is the main thing that we're going to look at to be an alternative currency. It's possible, right? But it's not the reasons that people give for why it has to be Bitcoin. They fall pretty flat, I believe. of a portfolio, I often suggest that if somebody is going to dabble in crypto, keep it to less than 1% of your net worth. I agree. And if you're really looking for an alternative currency, like if you really think the dollar is going to collapse, the world's going to collapse,

I think most reasonable people would say gold is more likely to hold its value than Bitcoin. People are not in Bitcoin because they think it's the new currency that's going to hold its value than Bitcoin. People are not in Bitcoin because they think it's the new currency that's going to hold its value. They're in it because they think it's going to rock it because it will be adopted as a mainstream currency. Once it is and it's widespread, it can no longer go up and down in value 20%. No one's going to buy a pizza or sell a house for a currency that 10 minutes later could be down 20%. That's not how transactions happen. You need stability of the currency. So by definition that you're speculating. And again, speculation is not how transactions happen. You need stability of the currency. So by definition that you're speculating. And again, speculation is not a dirty word. You just want to know when

you're speculating. You want to know what's an investment where you have a reasonable expectation of money coming back at you and where you're just taking a risk. Maybe it's even an asymmetrical risk, meaning, okay, if I buy something, it goes to zero. I can live with it. But if it goes up, it might go up 10 times. Great. Just know that that's what you're doing. It's very different than an investment. Yeah. It's the riskiest that you can possibly get. So if you're a new investor, proceed with caution. Because really, I think, Peter, at the heart of this is this draw of get rich quick, right? This has happened for the ages. There has to be a quick fix or like a quick way

or what's a tip. And the truth is, I think there's like a dad joke. I don't know if women say it's like a mom joke, but it's like a dad joke. If you want to double your money, the quickest, easiest way is to fold it in half. There's no like quick, easy, sexy, fun way. Making money grow generationally, building long-term

wealth is not fun and sexy. It's boring. But if I want a fun and sexy time, I'm going to go to a cool restaurant or read a tabloid. I don't want my money doing fun, sexy things, honestly. Yeah. And Bitcoin's fought through all of that. mean, like you look at NFTs blew up and most cryptocurrencies blew up. And so this is kind of the last speculative thing standing and maybe it'll be the one that works out. But what I don't like about it is there's a lot of people that are struggling that are really just betting the farm on this. And that's very different than somebody who's working and sophisticated and has money to lose, just make sure that you've got your emergency reserve in place, that you've got something invested for the long run. If you're going to speculate, again, totally fine. Just do it with a portion of your money.

Totally agree. You and I are totally in sync on the same page about the importance of investing and risk. But I think we can also agree that investing is very anxiety provoking. The old Wall Street truism, buy low, sell high. It feels exactly the opposite when our emotions get the best of us, right? When a stock hits an all-time high or an index hits an all-time high, you're like, I've made the best investment ever. I just want to buy more of it. Or if it tanks, I get DM slips that are like, I've made a terrible mistake. I need to get out.

I need to get out. I need to sell it all. So what do you tell your clients when the market goes down or dips to try and fight against those natural emotions? Hold on to your wallets. Money Rehab will be right back. One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two

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Members FDIC. Spot me eligibility requirements and overdraft limits apply. I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have

time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. And now for some more money rehab. So what do you tell your clients when the market goes down or dips to try and fight against those natural emotions? Right. I think that the key is education. A bad

investor, when the market's down, they panic and they go to cash or they never invest because the market's going to go down. You really got to get off that base to be a good investor and invest. Now, when the market's down, if you're panicking, but you hold, off that base to be a good investor and invest. Now, when the market's down, if you're panicking, but you hold, okay, you're a pretty good investor. You're better than most people, not where you need to be yet. If you're invested and the market goes down and you get excited because you can rebalance from bonds to stocks and buy even more stocks when it's down, or your new paycheck is going into more into your 401k when the market's down, if you get excited about it, welcome, you've become a great investor. That's the definition of a great

investor. They're excited when everything goes on sale. They feel like 10 years from now, 20 years from now, a Happy Meal at McDonald's is going to cost more, a ticket to Disney World is going to cost more, a flight on Delta or Southwest Airlines is going to cost more, and probably their stocks are going to cost more. So let's get excited about going in more today with today's paycheck. So you're a great investor when you don't just accept the downturns that happen on average, a 14% drop on average about every year, a 20% drop or more on average every five years, instead of worrying about them, you get excited about them. Now you've arrived. Yeah, because some good stuff goes on sale. Not always, though. So I think a key distinction here is between bad times and bad investments.

You know, folks shouldn't buy low if there's a reason that the stock is falling, right? Don't go and buy First Republic or, you know, something like that. But if there's a fundamental issue with the company, it's just a bad company. When should people understand that they should cut their losses? And how should somebody make that decision and know that it's just a bad investment versus just a time where COVID is happening or something that's going to rebound is happening? That's such a great distinction, Nicole. So thank you for bringing that up. because I do think that we hear too often when things are down, buy more is completely not true when it comes to individual stocks. So I like being diversified.

The way I like to explain it to people is if you lived in the city you're in 20 years ago and you looked at the 20 restaurants that were around you today, those 20 restaurants aren't there. There might be seven of them there and 13 of them might be gone. But today, there's still about 20 restaurants. There were 20 restaurants 20 years ago near you. There's around 20 today, but they're not the same ones. So if one of them was struggling, you wouldn't want to go all in on it. But if you bet on the group, well, today, if you go into those 20, the prices are higher than they were 20 years ago. The revenues are higher, the earnings are higher, and the value of those enterprises is higher. Whether it's a Subway franchise chain or McDonald's,

the value of it is higher because their earnings are higher because prices have gone up. If you're betting on a diversified group of restaurants, I feel pretty good that 20 years from now they will still be there and they'll be doing well. I don't want to go all in on one. I really need to know that one. It's the same thing with the stock market. If a bunch of stocks are down, one of them is down a lot, whether it's at Silicon Valley Bank or First Republic, I want to know what's going on there before I double down. But if I've got a diversified basket, if it's the S&P 500, I'm all in. I'm very comfortable with buying that when it's down. I think just like it's hard to know when to sell a losing stock, people also struggle to know when to sell a winning stock. People also struggle to know when to

sell a winning stock. I know you don't necessarily advocate individual stocks, especially for newbie investors. But the other half of that truism is sell high. The problem is we don't know where the low is and we don't know where the high is. So when should investors think about selling or taking some money off the table? I have this conversation about NVIDIA a lot. It's skyrocketed. So some people that got in early on are taking 50% of the money off the table and keeping the rest in. Right. Well, I think that it has a lot to do with what else is going on for you. So let's say that somebody has bought NVIDIA. It's gone up a whole bunch. Instead of being 5% of their portfolio, it's 20%. Well, one way to solve the problem is if you're still young and earning money, you can take your new money and buy other things.

So you're not really even selling NVIDIA, but you've made it a smaller percentage of your portfolio by allocating your new dollars to other things. So instead of selling it down to being 5%, you are adding to other things until it's still at 5%. That's one way to solve the problem. On the other end of the spectrum, if it's 90% of your portfolio and you're going to need this portfolio in five years or so, you definitely need to just pay the taxes and sell. The number one goal of an investor is to meet your needs. What are your needs? What are you trying to accomplish? Do you want to retire at a certain date, buy a different home at a certain date, pay for kids' college, all of those things.

Keep your eye on that ball. What's the number one way to not get there is not to save enough. The number two way is to have an overweighted position blow up. Those are the two main ways not to get there. What you want to do is be putting enough money away and be putting it away in a group of things where we have a high probability of getting a certain return. What we want is a really, really high probability of earning, say, 10% on stocks instead of a smaller probability of earning a lot more or a lot less and not hitting our goal altogether. So look at where you are, how big a part of your

portfolio it is. Can you solve it with new money or do we need to solve it by trimming the position over time? Yeah. I think of it as like pruning hedges or something like that, or like a bonsai. It's asset allocation. It's rebalancing a portfolio, basically. That's exactly right. And you don't have to rebalance by trading. Sometimes you rebalance by adding new money. Sometimes you have to trim and sometimes you have to do a big trade. Depends on what's going on. And also it's really important to remember that the two most important days for any of this are the day you buy and the day you sell. And everything else is noise. So when I hear people are like, oh, my God, I lost so much money in the market. It's like, did you? Or are you mourning paper losses? I mean, at the end of the day, we know that the value, it's variable.

It's moving up and down. All that matters to your points, the day you buy, the day you sell, a very high probability that over a long period of time, it's going to work out. You have to focus on 10-year periods of time, not day-to-day periods of time, especially when it comes to stocks. And I think people get nervous too at all-time highs. Like the market, it's rocked all 2024 and people think, okay, well, there has to be a crash or a correction or something like that. When do you think about this idea that it's

rocking and maybe that's the new low and not a harbinger of doom? Yeah, I mean, the market has absolutely crushed it this year. And they were like the top 20 analysts, 19 of them had a year end prediction that's already been surpassed, which shows you how worthless short-term predictions are. But the stock market, we hear that headline all-time high. And the first question I'll get from a lot of people is, should I take money off the table? And the answer is no, because the stock market hits an all-time high about one every 19 days, all of the time. But if you think about it, when you go to, you know, Capitol Grill Steakhouse or you go to Wendy's, the meal is at an all-time high almost all the time, right? Inflation by itself lifts prices up.

The ticket to Disney World is almost always at an all-time high. So it shouldn't be crazy for us to go, well, Apple's charging more for a phone than ever. So sure, it makes sense that their stock is hitting all-time highs if they're still selling the same amount of products and their prices are going up. Inflation is just a very, very big part. We don't go, oh my God, the Hershey's bar is at an all-time high or the cheeseburger is at an all-time high or the box of cornflakes is at an all-time high. But we're surprised when Nestle and Hershey's and Kellogg are at an all-time high.

I mean, they go together. I think that's a really good point. And that's an awesome stat. Every 19 days, the market hits an all-time high. Yeah. And sometimes it's 20 days in a row, and sometimes you can go a year without it happening, but it's a very common occurrence. So when people are starting to get their financial lives together and starting to invest, they think they're going to have to defer living their lives and having experiences while they work

toward this independence. I think the sweet spot for financial planning is somewhere between thinking you're going to live forever and thinking you're going to die tomorrow. You don't need to cut out all the fun stuff to do it. What do you think? Where is the balance? Well, I'm not the guy that's going to tell people to not get a coffee if it's really a big part of your day or not to take the trip. I was giving a talk at a college, which I love doing. And I love doing it when my kids are there. And one of the kids stood up at the end and was telling me a story about how he wasn't going to go this summer and he wasn't going to go with his friends and he

wasn't going to tour Europe and backpack it because he was instead going to take the $2,200. He was going to put it away and he calculated if it compounded how much it was going to be worth. And I just talked about the power of compounding and he was saying how great it was. And my unsolicited advice to that kid was that's a big mistake because that experience comes with an expiration date. You are never going to go to Europe. You've lost the opportunity for the type of experience you're going to have for the rest of your life. Don't miss those things. There's plenty of ways to get where you want to go without sacrificing every minute of every day. We don't know how much time we have on this earth.

You can't make everything about when you turn age 65 or 62 or whatever it is. You have to celebrate. You have to have fun along the way. I kind of got chills during that because I remembered my time in a hostel in Europe when I was 19 and no, I'm never going back. Yeah, you're not doing that today, Nicole. I'm glad you got it in. So let's move on to the second phase, which is adulting. Once listeners start building these good financial habits, they're going to have to get smart about taxes. Tax harvesting is a big buzzword in the financial planning community. Can you break that down and how taxes impact investing returns and how you should start thinking about it from

the jump. Yeah. So it's not just what you earn, it's what you keep, right? So if you buy an Apple stock and you go from having $1,000 in it to 2,000 and you sell it, well, now you're down to 1,800 because you paid taxes. So it's all about what you keep. So one of the things that some advisors or people will do on their own is tax harvesting. I think the easiest way to describe it is to go over to the world of real estate. And let's say you had $200,000 and you're buying this small duplex in the middle of Iowa, right? And to rent it out. So you go buy this duplex. There's two right next to each other. They're exactly the same, but one's blue and one's red. And you buy the blue one for 200,000 and COVID happens. And it goes down in value all the way down to $120,000. You could just hold.

Well, what happened? If you held, it came back. It's probably today. It's probably worth $300,000, right? You'd be very proud of yourself. You'd say, hey, I bought it at $200,000. It went down to $120,000. It's worth $300,000.

I made $100,000 because I stayed. I held. I didn't panic. The really smart investor says, okay, I bought it for $200,000. It went down to $120,000. You sell it, walk next door, buy the other duplex that's almost exactly the same for $120,000. And today it's worth $300,000. So you wound up with the same $300,000 asset. You also only paid $200,000 for it. But there's a big difference. On your tax return, you have an $80,000 loss.

Because instead of buying a $200,000 and holding when it went down, you actually sold when it went down, put the loss on your tax return, went next door and bought the other one, and you wound up in the same place. You wound up making a profit. In the real world, you made $100,000. But also in the real world, on your tax return, you lost $100,000, but also in the real world on your tax return, you lost $80,000. In the stock market, the way that works is if you own Hershey's and it goes down $10, instead of holding, you sell it, you buy Nestle. They're probably pretty correlated. When one goes up, the other goes up. You never really left the market. You're not market timing. Exxon goes down, you buy Chevron. You just move from one to the other that's very similarly correlated. You get to put the loss on your tax return. So it's a pretty sophisticated concept,

but if you can really figure it out or work with somebody who hasn't figured out, it can make a very big difference in terms of after-tax returns. So when you're selling Hershey's, you're not going to get taxed on that money if you immediately put it into Nestle? Well, yeah, because you saw it was down. So you got to put the loss on your tax return immediately. And then you go buy Nestle, and then Nestle recovers. So you have a real gain. But on your tax return, you get the loss. And you talked about a duplex, but that would be an investment property. You also say that a home is not a surefire investment, which somebody in this TikTokified financial planning world, for that person, it's a hot take. If it's not a surefire investment, how should we think about our homes? Yeah, look, if you live in Austin or Nashville, or there's a lot of places in the

United States where somebody's going, oh my God, this is where I made all of my money. There's no question it's worked out. But even if you were in Austin, even if you were in Nashville, even if you're in San Diego, you would have made more money in the S&P 500. And so the difference is one brings money to you and one takes money from you. If I buy stocks, the dividends come to me. If I buy bonds, the yield comes to me. If I buy an investment property, the rent comes to me. But if I go buy a home, it's taking money away from me. I cannot be clear about this because I did this on CNBC and they took a little clip of me out of context and put it on the internet saying I was saying don't buy homes and everyone went nuts. That's not what I'm

saying. I live in a home. All of us would probably be better off if we lived in a cardboard box and took all the money that went in our home and instead bought stocks with it. But that doesn't make sense because you and I just talked about enjoying your life, right? So I like my home. I could live in a smaller home. I don't, right? So, but I know that my home, even though it's up in value by 35%

over however many last years, I know every month I pay maintenance, every month I pay taxes, every month I pay insurance, I'm paying all this repairs and stuff. I'm mowing my lawn. All this stuff is going out, out, out. My house is not writing I pay insurance. I'm paying all this repairs and stuff. I'm mowing my lawn. All this stuff is going out, out, out. My house is not writing checks to me. And I know my stocks and my

investment, real estate, business, things like that. They're bringing money to me every month. That's the difference between an income producing asset and a debt asset. Now a home can go up in value, but even if you bought a home for a million, or let's say you bought it for 400,000, it's worth 800. Over that time, if you really go back and look at all you paid for your roof and your lawn and your insurance and your taxes year over year over year, people would be surprised at what their real return is. So the only message from this is you don't take all your money and buy the biggest house you can thinking it's going to be an amazing investment.

You're much better off investing in other things that bring money to you. I agree with you. I have also been taken out of context with this. I think that a home is a home. It's not the place you're going to get rich. You shouldn't treat it that way. And there's also a lot that doesn't come back to you. Closing costs, interest, and the rest. That's right. Tune in tomorrow for Nicole's second episode with Peter, where they cover

all the rest of the adulting and planning topics from retirement to wills and everything in between. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer

is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. happen. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself,

which is the most important investment you can make.