Stock Expert: Becoming Rich Is Simple, But You Won’t Do It!

Renting versus owning a home, the. biggest financial decision most people. make in their life. So, we're going to. talk about all of the unrecoverable. costs [music] of owning a home, including property taxes, maintenance. costs, which is the one that I think. people underestimate the most. And then. there's also emergency costs. I've got a. whole stack of them, as well as a 5%. rule to figure out if renting is a. better financial decision. We'll go. through that. What else have we got? >> So, this is something that people just. don't think enough about, which is the. top 10 financial mistakes that I think. people make. For example, tax planning. opportunities. Like, there are simple. things that people can do [music] to. minimize the amount of tax they're.

paying, and we'll go through those. Ben. Felix's firm manages the money of more. than 3,000. people, ranging from people with huge. amounts of money and not so much money. His whole thesis is giving people money. advice that is based on academic. research. Our brains, our psychology, absolutely gets in the way of making. good long-term financial decisions. And. today, we're going to answer the big. money questions, like what should I. invest in? A lot of people believe they. need to have a lot of background. information before they can start. investing, but I would argue that people.

who know just a little bit, they will be. better long-term investors. There's a. ton of evidence supporting that this. will outperform most other investment. strategies. >> And also, what is the mentality, the. mindset of people that end up making. money over the long term? >> Psychology is important for determining. what your financial goals are. So, this. is a framework that we developed to. elicit higher quality goals. What would. you say to young people that are. thinking about their financial strategy? >> A lot of young people feel a lot of. pressure to save, but there is research. suggesting [music] that it's probably. suboptimal for young people to save,

which we'll talk more about later. And. then, in a world of AI where everything. is changing so quickly, what should I be. doing with my money right now? Ben Felix. has the answer. This is super interesting to me. My team. gave me this report to show me how many. of you that watch this show subscribe, and some of you have told us, according. to this, that you are unsubscribed from. the channel randomly. So, favor to ask. all of you, please could you check right. now if you've hit the subscribe button. If you are a regular viewer of this show. and you like what we do here. We're. approaching quite a significant landmark. on this show in terms of a subscriber. number. [clears throat] So, if there was.

simple free thing that you could do to. help us, my team, everyone here, to keep. this show free, to keep it improving. year over year and week over week, it is. just to hit that subscribe button and to. double check if you've hit it. Only. thing I'll ever ask of you. Do we have a deal? If you do it, I'll tell you what I'll. do. I'll make sure. every single week, every single month, we fight harder and harder and harder. and harder to bring you the guests and. conversations that you want to hear. I. stayed true to that promise since the. very beginning of The Diary of a CEO, and I will not let you down. Please help. us. Really appreciate it. Let's get on.

with the show. >> [music]. [music]. >> Ben, there are lots of people out in the. world talking about personal finance and. investing and all these adjacent. subjects. What is the approach you take that you. think is different to lots of the other. sort of finance experts that are on. YouTube that are giving people advice? What I think, and the approach that I've. always tried to take, is what can we. take from academic literature, very.

smart people who spent a lot of time. thinking about these things, what can we take from them and apply to. making good financial decisions for a. typical person? And what are the key. questions that you've sought to answer. for the audiences that you have? Is. renting versus owning a home. So, that's. always been big. Asset allocation is. another big one. How much should you. invest of your of your long-term money. that you can afford to take some risk. with. Another important question people wonder. about is, why should I not do this other. investment strategy that seems very. attractive?

And who who are we appealing to with. this conversation? Is it just people. that have lots of money, or is it No, I. think these questions need to be. answered. I mean, the the renting versus. owning a home one is applicable to. pretty much everyone, because that is. the biggest financial decision most. households will make in their lives, regardless of what their net worth is. But investing, or what should you do. with your long-term investments, that's. applicable to anybody. Anybody that's going to be saving for. their future, whether they have $10,000. or $10 million, the same principles. apply. And how much of this. game of investing, making money, is.

comes back to psychology? So, I like to say investing's been. solved. We're going to use index funds. That's it. The hard part is actually. doing that. Because our brains, our psychology, absolutely gets in the way of making. good long-term financial decisions. Our brains are designed for survival. They're not designed to thinking about. long-term abstract concepts like taking. your money today, investing in the stock. market, ignoring all the stuff that. happens in between, and then having. money left over later.

to to fund your retirement. That's so. interesting, cuz a lot of the time. people talk about tactics and. strategies, but I guess underpinning. your ability to execute on any of those. tactics or strategies are one's own. psychology. And is there academic. research about the best sort of mental. approach to take towards money and. finance and investing? So, one of the. best approaches, and it's a little bit. counterintuitive, is to not look at your. investments. There is a an academic. paper showing that the more people look. at their investments, the less risk they. take, and the lower returns they earn.

Because when you look at your. investments every day, the stock market. goes up and down. We know that. If. you're looking every day at your. portfolio and it's down 5%, up 6%, and. going up and down all the time, that can. be very stressful, and it makes it seem. like the stock market is very risky. And so, people will invest less in the. stock market. In reality, for for. long-term investors who can invest in. stocks, buy and hold for a very long. period of time, that they're a lot safer. than people think. Mhm. So, [clears throat] we've got some props. here for some demonstrations we're going.

to do. Could you just give explain to me. the high-level of what these things are. on the table and the different. frameworks we're going to go through? Sure. So, we have a bunch of things. here. Uh this is one of my favorites that I. bring up. in a lot of my videos. So, this is the. the PERMA model, which comes from. positive psychology. Psychology is. important for investing well, but it's. also important for figuring out what. your long-term investing strategy should. be. We'll go through that. What else. have we got here? This is the top 10 financial mistakes. that I think people make. Uh this is the.

the three steps for investing your first. $10,000. Okay. And we've got $10,000. there, so you're going to talk me. through how we do that as well. >> all of the We're going to talk about all. of the unrecoverable costs. Got a whole stack of them. that you incur when you own a home. Okay. And I I I guess this begs the. question, who is Ben Felix? What is your. background, and what is the education, the reference points, the experiences. that you're drawing upon to give us this. information today? Probably where it. starts. for for being relevant is I I did a.

degree in mechanical engineering at. Northeastern University. And I say that's relevant because when I. came into finance, I wanted to approach. it like an engineer, and a lot of. finance, a lot of financial services of. of investing and wealth management is. not approached like an engineer. It's. approached like a I feel almost bad. saying this, but it's approached like a. like a car dealership, like selling. selling product. So, I was disappointed. in that and and had to find my find my.

own way. So, they haven't got my best. interests at heart. In in a lot of. cases, I don't think so. And I started spending a lot of time. reading through academic literature so. that I could be very confident and. comfortable that the advice that I was. giving to people was good, high-quality. advice. And where is the best place to. start? Is it in the psychology? Is it one of. the one of these frameworks? Is it. somewhere else? Is there a background. understanding of the economy one needs. to. to get going? That is a great question. I don't think so, and I think that's. where a lot of people get stuck, where. they believe they need to have a lot of.

background information before they can. start investing. Uh they may do research on specific. industries, they may look at like the. energy sector so they can build out an. energy portfolio as one example. But. investing the way that I would say is. sensible for most people, which is just. using low-cost index funds, capturing. market returns, the the market returns. have been there, and they're going to. continue to be there. They should. continue to be there in the long run. Uh doing that doesn't require a lot of. background knowledge. I would argue that people who know just. a little bit, just enough, that just.

know that index funds are sensible, and. they have enough conviction they can. stick with that, they will be better. long-term investors. than someone who knows enough to hurt. themselves. What would you say to young people that. are thinking about. their financial strategy? Would you say. that someone in their. early 20s, 21 years old, should adopt a. completely different approach to money. based on what you've just shown me, versus someone that's 51 years old? It's going to be different, for sure. I. I think, and this is a it's a tricky. subject, but a lot of young people feel.

a lot of pressure to save. And that might be saving for their. retirement, it might be saving to buy a. home, but they feel a lot of pressure. from their parents and just from society. in general that they need to be saving. money, and that if they're not saving. money, they're being irresponsible. But. again, if we come back to academic. research, there is research suggesting. that it it's probably suboptimal for. young people to save. General point. is that you should save more when you. have a higher income, and save less when. you have a lower income. And what that ends up meaning is that. young people.

may not need to save, or may not need to. save as much as they feel pressured to. save. The reason this topic is tricky is that, well what I just said is true, it can cause bad habits. Whereas people spend all of their. income, and then don't have that shift. towards saving at some point, then. they'll they'll end up in a difficult. position later on in life. Someone who's 50, it's going to depend on their situation. If they're the person who I just. mentioned who never saved, they're in a tough position, and then. they are going to need to save a lot in.

order to have some wealth later on in. life. But if they've already saved, and they. have wealth, then they can focus more on. some of these topics. And you've got the the 10 money mistakes. people make here. Can you run me through those ones, and. just let me know if any of them is. particularly pertinent or interesting. that we should dive deeper into? So, this this one's controversial. It's not earning enough money. A A of people feel like they. don't have an option. That they're not.

earning enough money because that's just. the way things are and there's nothing. that they can do about it. I don't think that's necessarily true. Investing in your human capital, and. that can be formal education, it can be. getting skills, it can be becoming an. entrepreneur. Those are all ways to make. your your own self. a more valuable asset, to increase the. value of your human capital, and allow. you to earn more money. So, that's. that's a big one. I think people who get. stuck in the. in the feeling or the thought that they. do not have the ability to increase. their income, and that this is just the.

way things are, I think that could be. very problematic. I've always thought of. it across these sort of five buckets. The first two buckets that we attempt to. fill when we're starting our careers are. our knowledge and then our skills. And. kind of like when knowledge is applied, it becomes a skill. And these two first. buckets are so imperative because. they can almost never be unfilled. Whereas the other three buckets, which. is your resources, your network, and. your reputation, you can have career. fluctuations and earthquakes that cause. those buckets to unfill. So, as like you.

were saying earlier on about young. people, one of the things I've always. thought is like when you're young, just. like optimize for filling your knowledge. and skills as much as you possibly can. And actually, I guess that the level of. nuance there is acquiring a rare but. complementary stack of knowledge and. skills that the market values. And I. think over the long term, you know, this. doesn't apply to everybody cuz things. happen in life and bad things can. happen, but over the long term, I think. life tends to land you pretty much in. and around the value of and the rarity.

and the complement complementarity of. those knowledge and skills as it relates. to the market's demands. That's. absolutely true. There's data on this, too, where we know that there is a. mechanical relationship, at least. historically. We can talk about the. future, but historically, there has been. a mechanical relationship between formal. education or trade education and. lifetime earnings. And we also know that certain degree. types, like engineering, finance, business, some other sciences have. higher lifetime earnings than other. degrees. So, it's you're I think you're.

absolutely right. There are and the hard. part is we don't know what exactly those. degrees and skills that are going to be. the highest paying in the future are. going to be. 10 years ago, we might have. said software developers. Today, we. might not. But even you as an example, so you did engineering and then you did. finance. And now you've added this other. string to your bow, which is you know. how to make content on YouTube. And that. makes you as a finance expert and. professional and CIO so extremely rare. It almost makes you like one of. 100 on planet Earth, maybe.

And this is what I mean by rare and. complementary skills. You could have. just learned more finance. And I don't. think that would have moved you up this. sort of earning ladder. But because you. added this really rare skill of being. able to make content to your other skill. stack, I'm guessing it made you money. It did. It has and I I continue to be. paid well and, you know, it was. Please don't, but if you were to go back. and watch my old videos, which are still. up, I'm so rigid and nervous and I when.

I was. And it took probably years of. recording and we do a podcast, too, so. just being in front of the camera for me. to feel pretty good. I mean, I it. probably took me 3 years to smile on. camera. Really? >> [laughter]. >> So, yes, that was a skill that I. acquired through just practice, I guess. So, I say this because I really want. people to think about how rare their. skill stack is. It's not something we're. taught. And then also, one of the things. I noticed, I used to work in a a biotech. company for a little while while I was. in between things. And we were looking. for a writer, a biotech writer.

Now, the other writers that we'd hired. at our other companies might have been. paid, I don't know, $50,000, whatever it. is. For a biotech writer, we would pay. them a quarter of a million. And all the. only difference is the biotech writer. had like some base They didn't have to. go to medical school. They just needed. experience in writing about biotech. Yeah. And it 5x their earnings. So, this. other point is, you might have a skill. stack, but are you selling them on the. right market? And even me, first part of. my career was marketing. I was helping.

Uber and fizzy drinks company and dress. seller company sell their dresses. As I just said, the second little stop I. took in my career was helping biotech. companies with marketing that are about. to IPO. >> [laughter]. >> My first contract with one of those. companies was worth 8 million, 6 months'. work. And I it made it was a real pivotal. moment in my career where I go, it's not. just the skills you have, it's like. where you the market and industry where. you sell those skills can wildly change. your your, as you say on that card, your.

earning potential. Yeah. And as you say, that this is something that you don't. have full control over because you could. do all those things and not find work as. a biotech writer, but putting yourself. in that position, I think, does increase. the odds. What's the second one you've. got there? Second one is not saving enough. Touched on this a little bit. Young. people maybe don't need to save, but at. some point, you do have to start saving. And the tricky thing about saving is. that wealth compounds over time. And if you're not saving enough, you're. missing out on compounding and it gets a.

lot harder to catch up with the amount. of savings you would have otherwise had. if you'd started earlier. So, that's a big one. And some people. will wake up when they're 50, 55, maybe. even 60 and realize they haven't saved. enough. But by that time, there's nothing that you can do about it. or very little that you can do about it. There's a lot of parallels with health. here where.

[laughter].

[clears throat].

if you eat poorly and don't exercise, you can. >> that. positive emotion. is one big piece of it. What does that. mean? It's literally enjoying what. you're doing and feeling good throughout. the day. Engagement, you could probably argue that we're. getting some of that right now where. you're doing something that you enjoy. doing that's maybe a little bit. challenging, but it's your skill level. It's the idea of getting into flow. I I know I get that when I do podcast. interviews, when I do research, when I'm. sitting down and and writing a video.

script. Mhm. Relationships. [clears throat] is is having good, strong relationships with with people. who are close to you in your life and. that can be friends, it can be family. members, it can be colleagues. Meaning is being part of something that. is bigger than yourself. That can be a lot of different things. For some people, it's religion. For some. people, it's community. For some people, it's their own business. Mhm. And accomplishment is achieving hard. things. Setting goals and achieving. them. You're going to look at the items of the. PERMA model. You're going to look at.

those as categories and think about what. other goals you may have that fit into. those categories. That's called a categorical prompt. And. again, there's evidence behind that. helping people elicit more meaningful. goals. So, one of the things I said is buy a. Ferrari. Again, these aren't my goals, I. don't care about Ferraris, but in case. they want to sponsor the podcast, then I. care about Ferraris. But say the Ferrari thing, do do I have to find where it sits with. in terms of positive emotion, engagement, relationships, meaning, accomplishment? It would be wise to and. this is why I think this framework is so. important because you might realize that. a Ferrari does not contribute to any of.

these things. It might, though. Like maybe you take it to the track and. you spend hours racing it. And that. would be engagement. >> engagement. Maybe you have a bunch of buddies who. have Ferraris and you want to be part of. that friend group. So, that's relationships. Yeah. Okay. I. mean, positive emotions, but that might. only last a couple of days. Yeah, what's. the hedonic treadmill idea? That's. exactly it. Yeah. And then accomplishment, I mean, it's. not really an acco- If it was a goal. that you've had since you were 5 years. old, maybe that you could call that. accomplishment, maybe. Okay, so I fit my. my financial goals, my life goals into.

the PERMA model as a way to understand. what my financial goals should be. Yeah. Okay. How many people in the general. public do you think have actually. thought about what a good life for them. looks like? Not enough. Not many. I. think everyone's people are so busy with. their day-to-day lives. I know this is. true for me and my family, too. It's. really, really hard to step back and. have this kind of thoughtful discussion. about what you actually want your life. to look like. Cuz I was just thinking about that. I. was thinking I don't even know if I've. got um really clearly defined life goals.

for myself. Like I think most of us just. kind of act on how we feel. Yeah. And that can somewhat drift us towards. the short-term. Like if I just. Yeah, what what's going to make me feel. good today? And do that every day. I don't know. Some might argue that you have to be a. bit more long-term thinking. It can help. It can help, right? Cuz it. it it can help you from making decisions. that you might regret in the future. Mhm. Yeah, cuz when I look at this PERMA. model, there's some things on here that. I've optimized for, which have. sacrificed the other things that I care.

>> That's it. That's it. Yeah. Like you. might have I might have over-indexed on. this, like. achieving things, but might have cost me. some relationships. So what's the fourth mistake people. make? Yeah, so this is related to what. we were just talking about, but it's. it's overspending on the wrong things. Okay. When you think about what is a good life. for you, and you realize if you realize. that you're spending on things that are. not contributing to that, which is. resulting in you not being able to save. toward things that would contribute to. what you want your life to look like,

that's probably not a great position to. find yourself in. So that could be spending $12 on a an. iced coffee every morning and not. enjoying it, cuz you could get positive. emotion out of that. But you're like. rushing to work, chugging down the $12. coffee every day. That's probably not contributing to a. good life. Number five might be. one of the bigger ones, which is not taking investment risks. And that's really the stock market has. delivered these incredible long-term.

returns, and on expectation, it should. continue delivering strong returns for. investors. Not participating that in. that is a huge mistake, and it's a. mistake that many, many people make. A. lot of people don't invest in stocks at. all, and a lot of people who do invest in the. stock market don't invest enough in. stocks. They have very conservative. portfolios. And that has a very large. implicit cost. By not participating in. the stock market when you could be, you're giving up a huge amount of of. economic gain. How do you quantify that for the average.

person in terms of what kind of gain. they're giving up, or the size of the. gain they're giving up? Well, you can. look at the historical returns on. stocks, uh and you can also look at the expected. returns. on stocks. So let's say it's uh let's. say it's 7%. that we expect stocks to turn in the. long run. And if you could get 2% by sitting in. cash, that 5% difference is your. opportunity cost of not investing in the. stock market when you otherwise could. be. And 5% compounded over the long term is.

enormous. So say I have $10,000. uh and I invest it. in. the stock market, and I'm getting what. did you say, 8%? 7 Say 7%. How much money is that? Let's have a look. So I've done $10,000, which is what we. have here. Mhm. Invested in the stock. market at 7% return over 40 years, that would be $150,000.

Do you know what's um Do you know what's. quite scary when I think about that? Is. does that kind of means that today if I. spend $10,000, I'm actually spending. $150,000. Yes. Which makes me not want to spend any. money on anything. Yeah. Cuz if you buy I don't know what cost 10. What does What cost $10,000? Like a a. car, small car? Yeah, maybe. Yeah. You're actually spending $150,000. when you factor in the fact that if you. put that $10,000 into the stock market, you could have made 7% a year, and it. would have turned into $150,000. Yeah,

that's that's one side of the coin. Yeah, I think you also have to think. about any enjoyment or utility that you. get out of that car. If that car lets. you drive to a job you couldn't have. otherwise done, it may have a significant economic value. to you in the long run. As one example. You know, I've got a. coffee here. Some people spend. $10 on a cup of coffee with frappachappa. toppings and all that stuff. Looking at that over the long term, in 40 years, if you'd not bought that. coffee and put it into the stock market.

and got just 7% return, you would have had $150. So when you buy that $10 coffee, you're. actually theoretically. spending $150 in 40 years' time. So you better really enjoy the coffee. Is there a bit of a fear that it makes. us not want to spend money on. anything, and therefore we end up having. a shitty life in the near term? No, I I. think that's why this this framework. That's why the the PERMA framework for. thinking about these decisions is so. important, because you do want to have. positive emotion and engagement, relationships, meaning, and. accomplishment. Those are all really,

really important. And yes, that money. could be worth more in the future, but. it can also be a worth a lot today if. you're optimizing on the right things. What else? Number six. It's another big one. So not taking. enough risk is is important. Taking the. wrong risks with your investments. So I we we just ran some numbers about a. 7% stock market return. You can. basically get that using an index fund. The problem is a lot of people don't. invest in index funds. They pick individual stocks hoping to.

earn really high returns. They trade. individual stock options. Uh they trade. crypto tokens and all that kind of. stuff. And a lot of those types of risks. have negative expected returns, or they. have high costs if you're doing a lot of. trading. And that can really erode long-term. investment growth. What about buying a house? Is that a good investment? I wouldn't consider buying a house to. live in an investment. It's sort It's. sort of is. You get an asset,

but you're really you're buying an asset. that funds your housing consumption. It. kind of pays you a dividend that's sort. of like getting rent. from the house that you own. When you do the side-by-side comparison, which I think is the only way to think. about this, if you compare buying a house, so that. means in Canada, you'd usually save up. for a 20% down payment. So you put 20%. down on your house. Uh you take out a mortgage to finance. the rest. You know, living in the house, you're. paying your mortgage payment, you're.

paying for some maintenance costs, you're paying for property taxes. Alternatively, you could have rented the. house. That 20% that went into buying a. home could have been invested in the. stock market. So again, we're back to. the idea of opportunity costs. And the other important thing here is. that renting typically has lower cash. flow costs than owning. So these are the. unrecoverable costs. of owning a home. Mortgage interest. So that's when you buy a house and you. borrow to to fund the purchase, you're. paying interest to the bank. That's a I.

I call these unrecoverable costs. That's. money that you're paying. for the use of money in this case, and. you're not going to get those dollars. back. It's gone. Opportunity costs. So that's what I just. mentioned. Whatever equity you have in a. home. is equity that you could have otherwise. invested in the stock market. The. capital portion, the principal, the the. price of homes has increased around. inflation at the rate of inflation, maybe a little bit higher historically.

Stocks have far outpaced. inflation. So by having money sitting in. a house as opposed to invested in the. stock market, you have what is called an. opportunity cost. You're not earning returns you could. have otherwise been earning. So that opportunity cost is one of the. largest costs of owning a home. So I mean, the mortgage interest, the opportunity cost of equity, property taxes are another big. unrecoverable cost. Property taxes vary. depending on where you are, but it's say. between 0.5% and 1%. Maybe some.

sometimes a little bit higher. You get. utilities and some services in exchange. for it, but it's again, it's an. unrecoverable cost. You pay that, you've. got nothing left afterwards. And then you've got maintenance costs. Oh, this is the annoying one. This is. the It's It's the annoying one, and it's. the one that I think people. underestimate the most. >> Mhm. I started making content about renting. versus owning a home years ago. I used to say 1% was a reasonable. estimate of maintenance costs, and. people would push back and say that's. way too high. There's a bunch of. academic literature on this, too, that's.

says it could well be over 2%. I think. that's probably a more reasonable. estimate. Having been a homeowner now for 6 years. after renting prior to that, I'm fairly confident, at least in my. case, that maintenance costs are far. higher than 1 or 2% of the property. value per year. Yeah, I mean, I I bought. my first home a a while ago, and uh. hell, I I didn't think about the. gardening, and the pool pump gets. broken, and then. there's a crack in the the patio. outside, and then the heating system. breaks, and then.

everything just seems to break. >> And it's always breaking. It's always. breaking. Every time I go back there, which is it's in a different country, I'm the first week I'm just spent. looking at the things that have broken. since I was last year. Like making a. list of the new expenses, and it's never. cheap. No. And if I was renting, that. wouldn't be my problem. No. There's also. like another cost here which we don't. talk about, which is like the time you. waste. on the maintenance. Like when we think. of maintenance cost, I imagine people. are thinking about the fees to fix.

things, but actually the time I spend. having phone calls and speaking to. people, for me is is worth a lot more. than just the costs. But anyway, yeah, maintenance cost. Yeah, the coordination is huge, and you. could outsource that, but that would be. expensive, and. depending on how valuable your time is, it could make sense to outsource it. But. I I agree with you. I do the same thing. I spend time on the phone finding which. contractor is going to come in and fix. this thing. And then you have to wait for them, and. then maybe they're late. Yeah. So, that's maintenance costs.

We have emergency cost here, which is. really uh a subset of maintenance costs. So, you can have big things, like the. roof needs to be redone, or the. foundation cracks, whatever. Those can. be very significant. And one of the. challenges with those types of big costs. is that you kind of have to have. liquidity available to fund them. And that means that you have to have. cash sitting somewhere, or at least some. liquid assets sitting somewhere. So, probably not invested in the stock. market, which also has an implied cost. to it. Which is more opportunity cost, right? >> More more opportunity cost, exactly. And. then this one's this one's interesting.

And And this is one that I don't think I. appreciated until I owned my own home, which is renovation spending. We talked on maintenance. When you fix. something in your house, you don't just fix it to get it back to. the baseline level that it was at. before. Yeah. >> You make it a little bit nicer. You're. right. I never did that when I was. renting. So, the side-by-side. So, you. run the side-by-side comparison. You account for all of those. unrecoverable costs that the owner has. You account for the renter investing in. the stock market and investing the cost. difference, the cash flow cost. difference between renting and owning.

each month or or whatever frequency. And what you'll find, and I've done this. with projections, so looking at expected. stock returns and expected real estate. appreciation, you can very easily show. that there is an equivalence. There is a level of rent. where you are indifferent between. renting and owning. I did a video years. ago that has millions of views now, where I I came up with this idea called. the 5% rule. So, I took some of those costs. I took. property taxes, maintenance costs, and. the cost of capital, which is the the.

opportunity cost and the cost of of. borrowing. I wrapped all that up and said, "We've. got roughly 1% for property taxes, roughly 1% for maintenance costs, which. is probably way too low as we just. talked about." And I said 3% for. opportunity cost, which I think is also. on the on the low end. And you put all that together and you. get 5%. So, I said, "Okay, if you divide. the price of a home by 5% and then. divide that number by by 12, you will. get the monthly rent that has equivalent.

that is equivalent to the unrecoverable. cost of owning that home.". Okay, so let's do that. So, I'm thinking of buying a $300,000. house. What what's the math that I need to do. to fit figure out if it's better to. rent? Multiply by 5%. And then divide by. by by divide that by 12. Divide it by 12. Okay. You're brave. I. usually have a rule to never do math. live on a podcast. >> edit, so just. >> [laughter]. >> Okay, the result is 1,250. There you go. 1,250 is the equivalent.

rent where you're roughly break even. between renting and owning. So, if I. could rent for 1,250 instead, >> or less, or less, I should rent. Renting is a better financial decision. So, this is an important part of this. topic. We can show financial. equivalence. And then just that is. important. Like, we can show that there. is financial equivalence between renting. and owning. I've done more. uh robust versions of of this analysis. since then. We have PWL has a calculator. on our website where you can see the the. break even by putting specific numbers. in instead of just doing the rough rule.

of thumb, cuz things will change it. For example, if your asset allocation is more. conservative or more aggressive, that. opportunity cost number can be. different. If you're a taxable investor, meaning. that you're taxed on your investment. gains by investing in the stock market. or the bond market, your opportunity. cost decreases because the after-tax. expected return on stocks and bonds. decreases relative to uh homeownership. 5% is a very rough rule of. rule of thumb. Do you think for the. average young person, let's say. someone's under 25 years old, they.

should, and they're thinking about. building their wealth over the long. term, do you think they should buy be. buying a house. as an investment, or should they be. doing something else? I think for young. people it's really tough, and it's tough. for a couple reasons. One is because. home prices are high. You have to save. up a lot of money to buy a house. Another one is that it can limit your. mobility. We've seen in in Toronto, in. Canada, where I'm from, uh prices, condo prices in particular, have plummeted. They've fallen off of a. cliff. If you bought a condo in Toronto.

and you get a job offer somewhere. outside of Canada, what are you going to do with that condo. that's that's at a big loss? Mhm. >> You're kind of stuck. Yeah. Or you're. have to try to rent it out, and now. you've got this this just difficult. situation to deal with. And plus there. are big transaction costs if you're if. you're selling a place. So, for young. people, I do think that homeownership. can be tricky because it can limit your. mobility, your your ability to go and find maybe. higher-paying work. It introduces a risk. that you probably don't need in your. life because you may end up moving.

somewhere else. And then people often move up where they. want a condo today, but they're going to. want a house later. For my family, I I. met my wife, I was renting a place. The. first place we met in, the second place, the third place, and a fourth place. We're at the four different places as we. were having our family. We have four. kids. And so, our needs were changing. over time. We needed a bigger a bigger. condo, and then we had a townhouse, then. we had a house. Uh but we just. the lease ended and we gave notice and. we left. We found a better rental that. was more suitable for our needs. If we.

had been homeowners, the amount we would. have paid in transaction costs to do. that would have been insane. Or we would. have had to buy the house that we were. going to have forever much earlier, which would have introduced significant. opportunity costs. That's one of those. things that's just impossible to measure. in because it's so intangible, but like. the psychology of feeling like you can't. easily move. And I see this a lot actually with. people that apply for jobs in our. company is. in the interview process they'll say, "Well, I've just bought a house in. insert city.". And you can see this that sort of.

psychology is is um holding them back. from taking an opportunity because. they've made a an investment in a. particular city. And so, they might lose, as you say, like an opportunity in New York or LA or. London because. mentally they feel committed to a place. Yeah. Now, the flip side of that is that. if you're really sure that you wanted to. stay in one place, one of the best ways to accomplish that. is by Who can be sure? >> Yeah, you can't. But if if someone was. really sure, maybe someone has maybe. like me. I have four kids, they're all.

in the same school. It's very unlikely. that we would move. The other big. mistake I think I made is I bought a. holiday home. That was a terrible Well, I shouldn't say terrible idea, but kind. of a terrible idea. In part because of. the same reason, in part because it. means you only go you only go on holiday. to one place. >> [laughter]. >> Which is like defeats the point of a. holiday. Yeah. And it's I have not done. that, and the main reason is the mental. overhead. I don't like. having to think about one. property. Mhm. >> [clears throat]. >> I can't imagine having to think about a. second one.

that I'm not at. >> That's a dumb idea. I don't know why I. did that. I don't know why I did it, especially. when you're like young. It's like. the whole point is you can still walk up. mountains and do things. You don't want. to be sitting in a in the same house at. >> Yeah. Are homeowners happier than renters? Mhm. Depends how you slice the data. If you control for property types and. neighborhoods and all that kind of. stuff, no, they're not. If you don't control for. those things, I think owned homes do. tend to be a little bit nicer and and. better maintained. They do tend to be in.

better neighborhoods. So, uncontrolled, renters are a little bit less happy. There's a There's multiple studies on. this. Statistics Canada has a really. good one that does exactly that. They. have controlled and uncontrolled life. satisfaction differences for renters and. owners. If you're a professional who is. thinking about buying a house in a nice. neighborhood or renting a nice house in. a nice neighborhood, it's unlikely that you'll be happier in. either case. If you are forced to be a renter in a. not very nice neighborhood because all. you can afford, you may be less happy,

but it's not necessarily the renting. that's making you less happy. Is there. any particular group of people that you. think should be buying a house? Yeah, so. people who are very risk-averse, people. who want to stay in one place for a very. long time, because they have a family or. something. >> Yep. Yeah. And you don't want to be. priced out of of of the market that you. live in. This did happen in in some. cities in Canada in recent history. It's. now reversed, but there were people who were getting. priced out of their market. They've been. renters for a long time, and rents went. up so quickly that they they just. couldn't keep pace. And it depends on.

your rental market. Some rental markets. are controlled where that's less of an. issue. So, you do have to think about. things like that. But yeah, if you want. to stay in one place, owning your home. is is the way to do that. But it's a. double-edged sword because if you. realize you want to leave, you might be. you might be stuck. Uh and then the. other big one for who should own a home. is it a taxable investors with with high. tax rates. And again, that comes back to. the opportunity cost, where if you're. paying a lot of tax on your investments, whereas real estate tends to be tax.

preferred. In Canada, gains on your. primary residence are tax free. US has a I believe an amount. And so, that's that's another thing to think. about, where the opportunity cost. changes depending on your specific tax. situation. When we have these. conversations about buying a house or. not buying a house, one of the things I. see a lot in the comment section is. people um sharing their case studies of. them buying a house 30 years ago, and. now it went from. being worth $100,000 to $600,000. And they're they're asserting that. that's evidence that it's a good idea. You probably see this a lot.

>> is this is the thing. This is the. example. Uh and then everyone has the. family member that bought a house for. $70,000 and sold it for a million. I'm. just going to read you the top four. comments, and I'd like to get your. response on them. Now, the first one is, "The not buying a house does not work in. the UK as 90% of rents are higher than a. mortgage cost. Also, if you want to. start a family, you need a stable place. to raise your children. And with renting, you can be kicked out. within a few months' notice, and your. whole life could be turned upside down.".

I personally think there are ways around. that, and I as I mentioned earlier, I. did rent for 6 years of my life with a. wife and an increasing number of kids. The two things that I always made sure. to do were to rent from professional. landlords. We did have one experience renting from. a a sort of mom-and-pop person who had. bought a condo and rented it out. And that that wasn't great. But after. that we we were very careful about. vetting our landlords and only renting. from professionals. And then the other. thing that we did, which addresses at. least in Canada, addresses one of the.

other points there, is we would sign. long leases. If we want to stay in a house for a few. years, we would sign a multi-year lease. And landlords do tend to to like that. The other point that was was in there. that I think is really important is that. rents are higher than mortgage payments. I think this is one of the biggest. mistakes that people make when they're. making the rent versus own comparison is. they'll say, this is my mortgage. payment, this is my rent. If the. mortgage payment is lower, owning must be better. But that's not the case. As we talked. about a minute ago, you have property.

taxes, maintenance costs, potential. renovation spending that you wouldn't do. otherwise, and the opportunity cost of. of capital. When you add all that up, the cost of owning a home is far more. than the mortgage payment. This guy here said, I bought a house, it's the best thing I ever did. It's. launched my mindset in new directions. Remember that having your own space has. profound psychological impact and can be. life-changing for some of us. that want to live in a healthy.

environment. What do you make of that point? If it. have profound psychological impact. >> If someone believes that it does, and. they've really taken the time to reflect. on their life and has decided that yes, it it is in fact true that it has a had. a profound psychological impact, of. course that person should own a home. Of course they should. Is it. Is it true for everybody? I don't think so. Don said, my. experience, I purchased a house in 2013. with 20% down payment deposit. My total. payment including taxes, insurance, HOA.

home owners insurance? >> Yeah, yeah. insurance. Um is $1,800. a month. As of today, the exact same. house is renting for $4,000. The. property value has also gone up 3x. I'm. glad I bought my house. Yes. So there are cases where. it a real estate allows you to use. leverage very easily as as Don. mentioned. And if you end up buying in a market. that goes up a lot in a short period of. time, it can be really really good. However, and this is what we've seen in. Canada more recently, it hasn't touched.

other markets yet, although of course. the US has had their own declines and so. have other countries, but Canada is. right now in one of the biggest real. estate price drawdowns, when you adjust. for inflation, going back to 1975. And so if you had bought, yes, 7 years. ago, and then, well, and then looked at the. price in 2022, you'd think, wow, I'm a. genius. Of course everybody should buy. But if you had bought in, I think it's. 2021 was the was the kind of peak, and. you look at it today, you're thinking. like, wow, I've ruined my life.

>> [laughter]. >> So yes, there are examples like that, for sure. But that that is not what. people should expect every time that. they purchase a home. So are you saying that the future is not. going to be as. like as the past? Uh for this I know the. Canadian market best, but I think these. it generalizes outside of Canada. Where. we've seen record decreasing interest. rates. So that's that's changed a little. bit now, but for a period of time we had. interest rates going down down down. In. Canada we had a ton of immigration. I. have no problem with. immigrants, uh but we had levels of.

immigration that were just not. compatible with the amount of housing. that we had in in Canada, which was. contributing to prices going. up. We we have have housing supply just. not growing uh quickly enough, which are. all things that Canada is addressing. now, but all that causes price cause. prices to go crazy, which is I think why. they've come down in such an extreme. way. So I'm not I'm not saying. necessarily that we're never going to. see high house prices again or house. prices going up at an extreme rate. again, but in Canada at least, that has. now normalized or at least started to. normalize. I don't think it's reasonable.

to expect stock-like returns from real. estate forever, even though we did see. that for for some years. So for most people then you think, if. their goal is to make money and they. care about mobility, being able to get. up and go if opportunity arises, a better investment decision would. probably be just investing in an index. fund. which gives you exposure to the stock. market. Yeah, though I think the. mobility piece is key there, because. remember, just from a wealth. perspective, we can show that hey, these. are pretty close to equivalent. Mhm. >> [clears throat]. >> But if mobility matters to you, yeah, I.

think that that matters a lot. If you. have unique investment opportunities, that that can be another reason where. your opportunity cost is really high. Like I had an opportunity to buy equity. in my company years ago, and. if I had been a homeowner at the I think. I actually had just bought a house, and. I think I even had to reduce the amount. of equity I bought because our I think. our well pump broke like around the same. anyway, it was a whole thing. >> isn't it? >> But that's like there's opportunity cost. in the stock market, which is, you know, call it 7% or whatever, but there's. other opportunity costs that can be a.

lot higher like in that specific. situation. And the next one there is number seven. Yeah. Missing tax planning opportunities. This is something I think I think people. just don't think enough about, but it's not terribly complex, but there. are some simple things that people can. do to minimize the amount of tax they're. playing paying. For most people, it's. just optimally using things like in. Canada we have the RRSP and the TFSA, in. the US it's the the Roth and traditional.

IRA and and 401Ks. Uh using those things. optimally make a lot of sense. So then. the rest other types of tax planning. tend to get more country-specific. There. tend to be lots of things for. particularly for higher income people. that you can do to pay a little bit less. tax. And I think What about for lower. income people? For lower income people, the government. accounts that are provided uh are. >> ISA in the UK? >> Yeah, exactly. Those are probably the. best thing for people to be focusing on. But even then, I don't like people are. often not using them optimally. One of. the things people don't talk about.

enough is all the ways that rich people. do things to avoid paying tax. They have like they hire people so that. they don't have to pay tax. I hear about. all these crazy stories of like I've. started this business on the side here. so I can get real estate license. And if. I get a real estate license, I don't. have to pay the same tax on this thing. here. And I move the money around here. and I flip it around there and then I. don't have to pay any tax. Most people. like the average people don't have any. loopholes that they can they jump. through. Yeah, it's true. And even one of the crazy ones I learned. about when I got some money was that you.

can take a loan against your stocks. and there's no tax on the loan. So if I have a million dollars of. Facebook stock, I can go to a bank and. get 500k in cash. loaned against that stock without having. to sell it. And then on that 500k, I. have no tax to pay. And I can just hold that Facebook stock. When it goes up to 2 million, I can go. back to the bank and say, give me. another 500k. You could. But if it goes. down, you get margin called and you have. to come up with the cash to.

Don't they just sell? Don't they just. sell the stock? They might, but then. you're selling after it's. come down. So it's not risk-free. But. yeah, that is a thing that people do. I guess everybody could do that, right? I mean most people could, if they. invested in the the S&P 500, they could. go and get a loan against that. investment. And that loan would be. tax-free. Yep, same same rules for. everybody. But I would still say that. you're you're taking a lot of risk by. borrowing money against risky assets. like that. Mhm. Okay, so tax planning, there's nothing. else to cover there in terms of the.

average person. Yeah, I don't think so. But it is an important thing for people. to think about if thinking about what. mistakes might I be making in my. financial plan, they should definitely be thinking about. are there tax planning opportunities. that that I'm I'm missing. How would. they find out? It's a tough one. A a good CPA. What's a. CPA? Uh. uh an accountant. A good tax. professional should be able to identify. tax plan planning opportunities for you. Good financial planners similarly should. be able to identify good tax planning. opportunities for your situation. But as. you said earlier, the reality is there. aren't that many things that people can.

be doing. And it's really things that. you can figure out how to optimize once, and then you're kind of set. Much of the reason most people haven't. posted content or built a personal brand. is because it's hard and it's. time-consuming. And we're all very very. busy. And if you've never posted. something before, there's so many factors in your. psychology that stop you wanting to. post. What people will think of you. Am. I doing this right? Is the thing I'm. saying absolutely stupid? All of these. result in paralysis, which means you. don't post and your feed goes bad.

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to get started. That's. pipedrive.com/ceo. I'll see you over there. Who does need a financial advisor? Probably a lot of people. But the. financial advice profession has a lot of. challenges. We're chatting about the the sales. nature of the financial services. industry. And I do think that's a big problem. Because if someone's has Here's Ben say, "Okay.". Ben said I should have a financial. advisor. And they go to a bank or they go even to.

some random firm, there's a good chance that they're going. to be sold products they don't need. And I don't have a solution for that. Like that's a It's It's a difficult. situation when that is the state of the. financial advice industry. I guess to. get around that one might ask their. friends and family who does their. financial planning and then go with a. trusted referral. Yeah. But people often trust people that. aren't giving them great advice. Like. it's just really It's really. problematic.

I I think a lot of people can benefit. from financial advice. It's just finding. the right person. And a lot of people. don't need financial advice because you. do pay fees for it. What's the next one? Number eight. Yeah. Eight is It's. kind of a similar discussion to what we. just talked about, but it's it's missing. out on estate planning. What does that. mean? Figuring out how your assets are going. to be distributed to the people that you. want them to or the entities that you. want them to. when you die. This is an interesting one cuz nobody's. Well, most people aren't expecting to.

die. anytime soon. Yeah. So, they haven't. really thought much about this. Yeah. And you know, some might also say, "Listen, I'm I'm not going to be here, so. why should I care?". Especially people that I guess That's. the my mindset of someone that doesn't. have kids, but Yeah. It can cause a lot. of problems. If you don't think through. and plan for the way you want your. estate to be distributed, you can pay a. lot more tax than you otherwise would. have. And your estate can go to people. that you may not have wanted it to go. to. You can pay more tax. If you don't have things set up. properly. And again, this is going to be.

country specific. But yeah, there. there's cases where you would pay more. tax if things were not set up properly. than if they were. Do you think. everybody should write a will? Everybody that has any dependents should. write a will. I've heard a an estate. planning lawyer joke that everybody has. a will. But it's the government's default will, which you may not actually agree with. It's like prenups. Yeah, kind of like. that. Yeah. It's exactly like that. You. could say everybody should have a will. because it can help from having a big. mess for other people to clean up. But. for sure, if you have kids, if you have.

dependents, I think having a will is. really important. And on that point of. prenups, number nine is about who you. marry. Yeah, this is this is a tough one. It's a tough one because. I mean, this is front of mind for me. because as you can see from these. photos, I just I just uh proposed to my. fiance. >> Yeah. And um I mean, this is not the. ring, but cuz this is a bit extra. But. um That's awesome. Oh my god, they put. my face in the They didn't put my face. in the box. That's creepy. But yeah, so. why is this so important who you decide. to marry as it relates to how rich.

you'll be or or won't be? Well, it's not. just how rich you'll be, it's how. satisfied you'll be. with your life and with your marriage. Academic research has identified two. spending profiles that you can. categorize people into. One is. tightwads. That's people who don't like to spend. money. And one is spendthrifts. That's people. who do like to spend money. The names. are kind of funny, but that's just. That's what the research calls them. And the crazy thing about this is that. tightwads and spendthrifts are more.

likely to end up marrying each other. than to marrying someone who has the. same profile as them. So, two A tightwad and a spendthrift are. more likely to get married than a. tightwad and a tightwad or a spendthrift. and a spendthrift. Why do you think that. is? The the research on this talks just. about kind of opposites attracting and. there may be some sort of thrill to the. to the differences. um initially. But. tightwads and spendthrifts as they go. through their marriages do tend to be. less satisfied. in their marriages and have more marital.

conflict around money. And again, that's based on an academic. paper. Now, that's the reasons why the. marriage might not last, but in terms of. how it might impact your financial. success. If you really want to save, if you have. If you go through your goal-setting. exercise and your PERMA model. and you have have a vision for the life. that you want to live that requires. saving, and you have a spouse that wants. to spend a lot of money today. that can be very, very difficult. It can. make it a lot harder for you to achieve. your goals.

I don't think it's insurmountable. I. think a tightwad and a spendthrift can. work. I mean, it's not like all of them. end up getting divorced. But it does. require a different level of. coordination and communication and being. on the same page. Do you have to speak. to clients about this often? I It It comes up a lot. We have lots of. clients who were single and end up. getting in relationships and then. getting married. And we have to all have. all kinds of conversations about. marriage contracts or prenups, um estate. planning. Do you think everybody should. get a prenup? Going back to what you. said earlier, where you said you you If.

you don't write your own, the government. will give you theirs. Yeah. Which just. to simplify that. if you don't write your own prenup. then you are the default position is the. government will decide through the law. how your assets are divided at a time. when you get when you break up. Problem. is, people find prenups to be really. unromantic. That's right. And they also. think there's an implication that. we're assuming we're going to break up, which is also not so sexy. Right. Do you. think people should get them?

If both partners are on the same page. and comfortable with it, it's not going. to cause a major rift. And if it does, maybe that's a red flag. Do you know. what I mean? I wouldn't want to cause a. rift. Do you know what I mean? And it's. not to say that I'm just keeping all my. stuff and you're keeping yours. It's. just to say, "Let's agree now what would. happen in the like 50% probability that. this doesn't work out.". >> Yeah. We've seen both. We've seen. clients come up with very creative and. interesting. marriage contracts that have, you know, specific formulas for how things are. going to work. And depending on how many. kids they have, it's you know, it's kind. of an interesting exercise. And in that.

case, it was kind of fun. And they they. they were engaged in the process. And it didn't cause an issue. And we've also seen people who did not. have anything in place and have had. very bad divorce outcomes from a. financial perspective. Oh, I had a. friend go through a divorce recently. And he's a very successful person. His. wife was there from the beginning. She. took looked after the family while he. was off gallivanting around the world. building his his businesses all over the. place. So, obviously she you know, they. She's contributed hugely to his success. What I noticed though is.

it's destroyed what could have otherwise. been a good relationship as they. separated. They now really, really hate. each other because lawyers have stood in. between both sides. Yeah. And basically. caused tension because that's their job. They're going to get paid more. And her. lawyers are incentivized to squeeze. every single penny they can out of this. a separation. And so, I think he said. it'd been like six or seven years since. they decided to divorce. And he's still. in court arguing with lawyers.

about how they separate. And it's just. ruined their relationship. They've got. two kids. You just think, "Gosh, like if you had a. prenup, this would have been. quick and it could have saved the. relationship." Okay. Anything else to say on this this point. of marriage incompatibility? The. academic research on this does have a a. short quiz. I don't know if we have it. kicking around anywhere here. I think. this is a It's called the tightwad and. spendthrift quiz developed by. researchers at Carnegie Mellon and the. University of Michigan. Yeah. This scale.

measures the pain of paying, the. emotional distress some people feel when. spending money. Uh and here's a quick DIY version of. that quiz. Question number one is you. see a high-quality coat on sale for. $100, which is usually $300. You need a. coat and you have the money. Do you buy. it? Answer A, no. $100 is still a lot of. money. I'll wait for a better deal. B, yes, it's a great value. I need. something. C, yes, and I might buy a. scarf to match since I saved so much. Which one are you? I mean, if I need the.

coat, I'm B. I think I'm C. >> [laughter]. >> But actually, to be fair, I just don't. buy stuff, so I don't even know if I'd. buy it anyway. Question two. You are at a restaurant with friends. The bill is being split evenly, but you. ordered the cheapest item. How do you. feel? A, physically pained. I'll likely. mention that I should pay less. B, a bit. annoyed, but I'll pay it to keep the. peace. Or C, fine. It all will even out. in the end.

I'm between B and C. Really? I I might I. might feel a little bit annoyed. Really? But I wouldn't I wouldn't cause a fuss. about it. I'm C again. Fine, it'll even. out in the end. Number three. Which statement describes. you best? A, I have trouble spending. money even on things I actually need. B, I balance my spending and saving pretty. well. Or C, I often spend more than I. intended and regret it later. I can be. You said B, which is I balance my. spending and saving pretty well.

Um. I would say I'm C again. But again, the caveat here is I actually. don't Hmm. I don't spend money on stuff. anymore. I don't buy stuff anymore. >> [snorts]. >> But I can spend it on like ex-. travel and experiences and stuff. Yeah. Last question. When you buy something. expensive, your primary emotion is A, anxiety or regret. B, satisfaction in. the utility of the item. Or C, excitement and a rush. I think I'm B again. I I reckon I'm B as well there.

So, scoring your results. If you're mostly A's then you're a. tightwad. If you're mostly B's, you are. the unconflicted. And if you're mostly. C's, you are the spendthrift. So, I. guess with that, you you are a. unconflicted. You're in the middle. You. have a healthy relationship with money. where you can save when necessary, but. enjoy the fruits of your labor without. guilt. And I am a C, which is you feel. very little pain when spending. You. enjoy the moment, but you might struggle. with long-term saving goals or buyer's. remorse. That's so true.

>> [laughter]. >> Everyone should do that at home. Okay, that makes sense. >> So, we we know that that tightwads and. spendthrifts are incompatible. I I do. think it's an interesting concept, like. how do you have that discussion with a. potential partner? Or do you just observe it and kind of. infer? On on a date, you can say say to. your partner say, "Oh, there's this. great podcast on YouTube called The. Diary of a CEO. We should listen to it.". Then listen to this episode. They're. listening with you know right now if. this you've done this. And then just. play along. Play along with your. partner. Are you looking for your. partner to be the opposite then because.

you said opposites attract? No. They. don't do well all the time. Opposites end up together, but then have. conflict because of that. Oh, okay. Yeah. Mm, interesting. [clears throat]. Yeah. I think if you're if you're a. tightwad, being with the same is probably good. If. you're a spendthrift and you end up with. another spendthrift, you'd be really careful about your like. finances. Yeah. I don't think my partner's a. spendthrift. I think she's in the middle. with like you. >> Yeah. Doesn't really care. Yeah. Which. is useful. We we do have one more Okay. card in the.

mistakes, which is under insuring. catastrophic risks. And I think that's one, particularly for. people who are not currently financially. independent, that's really really. important. If if your household income. relies on your income. to maintain the lifestyle of the. household, it's really important to have. sufficient life insurance. where if you die, your human capital, your ability to earn income in the. future is replaced by the insurance.

And also disability insurance, where if. you lose your ability to work, you have. insurance to replace that income. Do. many people think about this? Probably not enough. And it's cheap. Well, disability. insurance is not always cheap. Life. insurance is generally pretty cheap if. you're buying. low-cost term life insurance, which is. what most people need. You made a video called the most. controversial paper in finance. Yeah. What paper was that? That was a paper we. we didn't have it here, but that was a. paper on life cycle asset allocation.

What does that mean? So, it's answering. the question of. how should your mix of stocks and bonds. change throughout your lifestyle? Conventional wisdom says that you should. start out riskier in stocks and then. move towards safer bonds as you get. older. This paper took a huge amount of data. They had data from 39 countries going. back as far as 1890, I believe. They. sampled from that large set of data to. simulate a million potential sort of.

hypothetical lifetimes that you could. live through. And then they asked the question of in. this simulated data, which asset allocation gives the best. outcomes? And they tested target date funds, which. increase the weight in bonds over time, and those are a lot of people have those. through their retirement accounts. So, it's just one fund and it starts out. when you're younger with more equities. and then transitions to bonds over time. That's a target date fund. They tested, I believe, a 60/40, 60%. stock, 40% bond asset allocation.

They might have been some other stuff in. there, too. They might have tested only. domestic stocks. And what they find in this paper is that. the optimal portfolio from the. perspective of retirement consumption. utility and and and bequest utility, What does that mean? It's like the. satisfaction you get from retirement. spending. Okay. Measured in a with a. formula so that it can be studied. And then likewise for the amount of. money that you have left over at at. death. They they measure the probability of. running out of money as well as a whole.

bunch of different metrics they look at. And they find that a 100% equity. portfolio. with. a big chunk in international stocks. is optimal. It is a a 1/3 domestic, 2/3. international stocks. When you say. domestic, what does that mean? That's a. great question. So, the way they set up. domestic in the paper is that it it can. be any country. So, the way they do the. simulations is that for each draw, so. they're drawing it's on average 10 years. of returns. We're saying we're in the.

US. They'll draw the US returns measured in. US dollars for a 10-year block. That's. the domestic return. And then the international block is. going to be 10 years on average of all. the other countries samples returns. measured in US dollar. So, I've got the. domestic return, the international. return. The next block might be 10 years. from Italy. measured in. whatever the Italian currency was at the. time. And then the international portion. is going to be all the other countries. excluding Italy measured in Italian.

currency. And so, they're weaving together all. these blocks. That's called bootstrap. simulation. So, domestic, to answer your. question, is whatever country you live. in. So, the outcome or the conclusion. from this should be that you should. invest. I mean, if we're following this and if. it was 100% accurate, well, 60% in. whatever country you live in, in the. stocks of whatever country you live in. 30%. >> 30%. >> Domestic. So, yeah, 1/3 domestic, 2/3. international. Okay, so if I'm in the. United States, one So, I get 30% of my.

capital and invest it in the. American companies. Yeah. And then 60%. in international stocks. Yeah. Well, 67%, yeah. Yeah. So, that. one important finding in the paper. talked about in the video is that the. the curve for how optimal the domestic. amount is is pretty flat, if I remember. correctly, between sort of 10% and 50%. So, they do say in the paper that for a. US investor, you don't necessarily have. to be a third domestic. Even if you're.

50 or even if you're just market cap. weighted, which is currently around 60. or 65%, that's probably fine. But for a. Canadian investor. or someone who's in a country other than. the US, 1/3 in your domestic country. ends up being a pretty big home country. bias. In these simulations, are they saying. that you need to invest in international. stocks because sometimes in the. simulations, your domestic country, your. home country, has problems? Yeah. High inflation tends to be bad for. retirement consumption where you're. spending a lot more and for domestic. stock returns. And international stocks.

protect against that. So, it diversifies you a little bit. Yeah, well, that's exactly what it is. It's a diversification. And that paper. was it was controversial. I mean, we had. the co-author. on our podcast twice to talk about it, but it it was met with a lot of. controversy from. everybody, from a lot of professionals, from other academics. Why? It's an extreme finding. The conventional wisdom that you should. be allocating more toward bonds. throughout the life cycle is so. ingrained in everyone's thinking that a.

finding like this that shows that that's. basically wrong, of course it's going to. be met with. controversy. But at the very least, I. think it's an interesting paper. It's. telling us that stocks are a little bit. safer. for long-term investors than we probably. thought. And bonds, which are typically. considered safe, are actually a little. bit riskier than we may have thought for. long-term investors. The reason being. that during periods of high inflation, bonds get absolutely decimated. What's a. bond? A bond is a debt instrument. So, you're. effectively lending money to a.

government, and you're receiving. interest payments over time, and then. your principal back at the end. What is. the the most important thing we haven't. talked about that your audience come to. you to understand? Oh. Well, a lot of a lot of the things I talk. about are financial products that you. should not invest in. Okay, tell me some. of those. Which I always think is fun. A. big one that I spent quite a bit of time. on last year, I did three videos on it, was on on covered calls. What's that? So, that's where you you own a stock and. then you sell a call option, which is. the option to buy the stock. You're.

selling that option to somebody else, which gives you a. an option premium, and so you get some. income from having sold the call option. But it also means that if the stock that. you own appreciates sufficiently, you. are required to sell it to the person. who bought the call option from you. at a at a preset price. So, the stock is whatever, $40, and you. sold a call at $50. The stock goes to. $60, you have to sell it at 50. Mhm. So, you're giving up a big chunk of your. upside. And this plays on one of the big biases.

that investors have, which is a. preference for income. It's the mental. accounting bias where investors separate. capital and income. And so, there's a. huge proliferation now of covered call. products where they do that that. strategy that I that I just described. inside of an ETF. They charge usually a. higher fee. And these are being marketed really. heavily to investors on the premise that. you're going to get appreciation, capital appreciation, and you're also. going to get income. But I think my my view on this and what. I tried to explain in those videos is. that you're giving up.

so much upside that I don't think most. investors realize that they're giving. up, that the implied cost of these. products is enormous. On that point of. fees, I've got this graph here, which I. think is pretty pertinent to what you're. saying. Because when we start investing in ETFs. and various index funds, we often don't. think about fees. You'll say, "Oh, 0.5%." You think, "Okay, whatever. 0.5% is fine. 1% fine.". Small numbers. But when you look at that graph, you see. how that can impact your outcome over. time. Yeah.

Fees compound. Any rate of return that. compounds over long periods of time can. be very impactful in dollar terms. Yeah. And and some people choose to keep. their money in cash. Um because most of us are never educated. on the subject of inflation and what. inflation means. So, some of us, you. know, we might keep $10,000 under the. bed. What do you say to those people? Yeah, so inflation is it's everywhere. It's it's been around for for. throughout history, and it's probably. not going to go away. We have central.

bank policies in most developed. countries that actually target a low but. stable rate of inflation. And there's there are reasons for that, but what it means is that if you have. money sitting under your mattress, its. purchasing power will decrease over. time. And that can be very damaging to. your wealth. You can maybe keep pace with inflation. using short-term government debt. instruments, which are going to pay you. a little bit of an interest rate. But again, periods of high inflation can. cause even that to to decline in real. value. So, one of the best ways to fight. it fight inflation for a long-term.

investors, something we've been talking. about, is just investing in low-cost. index funds to avoid the fee issue. All right, and participate in the stock. market, which throughout history has far. outpaced inflation. One of the smartest things a business. can do is build like a bigger company. without actually hiring like one. But, the problem we all face is that most. companies don't have every skill in. house. So, when I look at the businesses. seeing real success today, the. consistent pattern with all of them is. how quickly they move. They bring in. specialists with skills in emerging.

areas to keep themselves ahead. Even in. our company, we spent the last year. pulling in talent across areas like AI. native strategy, no-code builds, and. product workflows. And we find this. talent through our long-term partner. Fiverr Pro. Their premium service only. shows you vetted talent, so you've. always got the safeguard that anyone you. pull in to help you with a complex. project has the skills that you're after. and will deliver to the same high. standards as your internal team. And. most importantly, they'll keep up with. the pace. It's a simple strategy, but it. lets us stay agile without compromising.

on quality. So, if you need these kind. of skills in your business, head to. pro.fiverr.com to find pioneering talent. to fill your business's gaps. That's. pro.fiverr.com. This is something that I've made for. you. I realized that the Diary of a CEO. audience are strivers, whether it's in. business or health, we all have big. goals that we want to accomplish. And. one of the things I've learned is that. when you aim at the big big big goal, it. can feel incredibly. psychologically uncomfortable because. it's kind of like being stood at the. foot of Mount Everest and looking.

upwards. The way to accomplish your. goals is by breaking them down into tiny. small steps, and we call this in our. team the 1%. And actually, this. philosophy is highly responsible for. much of our success here. So, what we've. done is that you at home can accomplish. any big goal that you have is we've made. these 1% diaries, and we released these. last year, and they all sold out. So, I. asked my team over and over again to. bring the diaries back, but also to. introduce some new colors and to make. some minor tweaks to the diary. So, now. we have a better range for you. So, if.

you have a big goal in mind and you need. a framework and a process and some. motivation, then I highly recommend you. get one of these diaries before they all. sell out once again. And you can get. yours at the diary.com. And if you want the link, the link is in. the description below. Is this broadly accurate? This graph. here shows the impact of inflation on. cash kept under the mattress over 30. over 20 years, and you start with. $10,000. in terms of purchasing power, and 20.

years later, if that cash is under the. mattress, you have $5,336. It doesn't show me the inflation rate. Oh, and that's at 3% inflation. You're losing half of your money. effectively. And the source here is St. James's. Place. So, a lot of people who are just holding. on to cash don't really realize that. over a 20-year period, assuming a 3%. inflation rate, they're halving their. money. Uh it ties back to I don't. remember which number it was, but it. ties back to one of those biggest. mistakes in in personal finance we. talked about, which is.

uh yeah, not not investing, not taking. the right kinds of risk with your. investments. And just holding cash. Holding cash is. is it's in its own way taking a type of. risk. You you you don't have an expected. return when you hold cash. You you in. real terms have a negative expected. return. Do you think we should all be thinking. about retirement planning? I think it ties into the PERMA thinking. and designing the life that you want to. live, but at some point it it I mean, at. some point we can't work anymore. It's. rare for somebody to be able to work.

into their, you know, I don't know, 80s. I think that it's it's sensible to plan. for for that. But, beyond that, a lot of. people don't want to have to work. forever. People might choose to work. forever, but they might choose to do. lower-paying work. Uh but the idea that you will be forced. to work forever, I don't think is very. attractive to anyone. So, from that. perspective, building financial. independence by saving and planning for. retirement, yeah, I think it's important. for everyone everyone to think about. Is. there is the sort of social contract of. retirement changing based on how the. economy is changing? Cuz I hear a lot of.

people saying you're not going to be. able to retire and get a pension because. there's not enough money or you're going. to have to work later than ever before. I think the onus has been put back on. individuals. The pensions used to be much more common. uh from companies and and governments. So, retirement's changed from that. perspective, for sure. But, I I I don't. know if we can say we're in a crisis. I. think people have more personal. responsibility now than they've had in. the past, but they also have better. tools than have historically been. available. 30 years ago, we we were just.

starting to get low-cost index funds. proliferating and being readily. available to everybody. Prior to that, you were paying 2% or more to invest in. a mutual fund. Mhm. So, the tools people. have available to them are are better. today than than they've been in the. past, but it's also there's also a lot more. responsibility people have to take for. their own personal finances. You would. you're naming the things that people. shouldn't invest in. The first is that cool. thing. Yeah, covered calls. Covered. calls. What else? Another one that I. think is really problematic is thematic.

ETFs. And so, that's like an AI ETF or I don't. know, a space or energy, like any any. specific. uh ETF that's targeting a specific. theme. Why? What tends to happen with thematic ETFs. is that something becomes really hot. So, maybe it's AI, maybe it's cannabis, uh electric vehicles was another one. Sustainable energy. Yeah, asset prices. in that theme go up because there's a. lot of interest in it. Everybody wants. to invest in that space.

Asset prices go up, an index provider. creates an index for that hot thing. And then an ETF gets launched, but it. gets launched when the asset prices are. up here. Mhm. And what tends to happen. is the asset prices come down, then the returns on thematic funds tend. to be very poor. Ah, okay. Yeah, I think I was guilty of that in my. early career. It was like, "Oh my god, sustainable energy ETF. I believe in. sustainable energy. I should invest in. that.". >> Yeah. But, you're right. They created. that when it was hot. So, you should.

have invested, I guess you're saying, just invest in the FTSE 100, the S&P 500. instead. Or technology, which is a. broader basket. Technology's tough. Technology has. performed so incredibly well, but it is still one sector. Okay. I have. trouble saying you should invest in. tech. If you had invested in tech for. the last 20 years, well done. Should you choose to invest only in tech. or have a big concentration in tech. today? I think that's a lot less. obvious. One would say, "Well, look at all this.

AI stuff. There's How do I invest in all. the AI stuff?". A lot of it's private right now, although a lot of the public companies. do own chunks of of some of these. private companies. Uh we'll see how that plays out. But, that's another one that's been. tough recently where a lot of investors. are interested in investing in in in in. investing in some of these private. companies. Uh a lot of them AI-related, but SpaceX is another one. It's really hard for retail investors to. get access to those types of things. But, there are companies who are. creating products that say that they can. give you access to these to these. things. They're charging high fees. Uh.

it's not obvious that they've been able. to buy the underlying securities that. they're saying they have access to at. good prices. But, it's just another example of. financial companies. preying on the the desires and biases of. investors. Financial firms are very good at seeing. what investors want, even if that thing. is not good for them, and then creating. a product to fulfill that desire. So, if if someone listening now is.

let's say they're 50 years old and. they've got. $20,000. in savings in cash, and you had to be decisive. You don't. know the nuance and the the detail of. their life. You don't know their PERMA. framework necessarily. But, your job was just to make the money. in the next 10 years. What How do you think you'd allocate. that? Let's say $10,000, it's easier. $10,000 in cash. How would you allocate. it? That's a. That's a tough question. I don't know if. it's answerable. Uh especially over 10. years, it's tough. What about 20 years?

>> [laughter]. >> If they have a long time horizon, so I I. can tell you personally, I I like to invest in stocks. I I have a a globally diversified stock. portfolio with a Canadian home country. bias, kind of like what that that paper. the controversial paper found. Uh we were doing that prior to that. paper coming out. Uh but, I think that general concept of. a globally diversified portfolio, maybe. with some home country bias, makes a lot of sense for most people, including for retirees. But, there are.

so many like, what's what's his risk. tolerance? If he's going to panic when. the market goes down and sell. everything, then it wasn't a very good. idea, and he's not going to get the. outcome but the good long-term outcome. they may have otherwise gotten. And. would you go all in on stocks? All at. once? Yeah. Like dollar-cost averaging versus. lump sum? Yeah, like how would you. invest would you go 100% in stocks or. would you even diversify that? Yeah, that's what I'm saying. I I think 100%. stocks is personally. a portfolio that I'm very comfortable. with. And I.

I'm not I'm not old enough to be. thinking about retirement, but it's a. portfolio that I don't expect to change. throughout my personal life cycle. Is. that how you allocate your personal. finances now? You I know you have a. home, but otherwise, the money you do. invest is in the stock market. Yeah, so. I've got my home, I have my stock market. investments, and I do have a pretty. significant chunk of equity in the. company that I work for. Yeah. No crypto. No crypto. Any crypto? I. never touched it. Never touched it. >> That's not true. I I when I was.

researching uh Ethereum and Bitcoin, I remember when that was, it was a few. years ago, I bought $1,000 of each just. so I could feel like I was. participating [clears throat] while I. was learning about it. What do you think of Bitcoin and. Ethereum and other cryptocurrencies? Uh I I think that they they solved a. really interesting problem. The that premise of digital cash is. something that the Cypherpunk community, the kind of libertarian community of of. uh. privacy-focused computer nerds, where. they were trying to solve this problem.

for for many many years of digital cash. How do you create digital cash that. doesn't require a trusted third party. to mediate transactions? And they they. solved that. Satoshi Nakamoto solved. that in uh. And that that was cool. And he used a bunch of different pieces, like you can kind of see in the paper. how he used Adam Back's Adam Back's. ideas that he had created to stop email. spam. And it's just how it all came. together. It's unbelievable, fascinating. story. The technology was really. interesting. I think it has become uh an ideological.

vehicle, where people who believe that. the world should be a certain way. or believe that government's role in. money should be a certain way, they can invest in Bitcoin and feel. really good about it. I think it's it's got that component to. it. And then the other component that it. has to it. is that it's a speculative asset. People will buy Bitcoin because they. think it's going to go up. So, it's not a good investment. Is that. what you're saying? I I I personally. wouldn't. We don't allocate to it for our clients.

at PWL. We manage. quite a bit of money for quite a lot of. people, and we've decided not to touch. it. And I personally don't touch it, so. I had a phone call actually from a. friend of mine. She she's very well. known in the UK. And she was um cuz there's lots of wars. going on everywhere, and there's the. Strait of Hormuz is closed, and there's. Russia-Ukraine, and there's all of this. stuff going on. She was she was asking. me for financial advice on what she. should do in such a moment. I don't know. why she's calling me. I just thought I'll ask you when you. come here. But it But it's interesting.

cuz my my team found this article from. 1847, which was in a magazine, and it almost sounds like today. The article says this, "Things are bad all over. It is a gloomy. moment in history. Not in the lifetime. of any man who reads this paper has. there ever been so much grave and deep. apprehension. Never has the future. seemed so dark and incalculable. In France, the political cauldron. seethes and bubbles with uncertainty. England and the English Empire is being.

sorely tried and exhausted in a social. and economic struggle. The United States. is behest with racial, industrial, and. commercial chaos drifting, we know not. where. Russia hangs like a storm cloud. on the horizon of Europe, dark and. silent. It is a solemn moment, and no. man can feel indifference. Of our own troubles, no man can see the. end." An apt description of things, very. apt. And that was on October the 10th, 1847. A magazine. Now, that very much sounds.

like today. It could be today, yeah. So, as we zoom out on the cycles, the. big sort of economic cycles, the. geopolitical cycles, my friend that called me and said, "Listen, there's lots of stuff going on. in the world. Should I be thinking about. my money differently, my investing. strategy? What the hell's going on?". What would you say to those people? Yeah. Well, I I. as the clip that you read suggests or or. tells us, the world has been through a. lot of crazy stuff, a lot of crazy. times, a lot of wars, a lot of turmoil, a lot of polit- political upheavals.

And we've come out okay, in general. It's there there's been pain and. suffering, and and not everybody's had. good outcomes, but generally speaking, here we are. And if we think about that that from the. perspective of financial markets, stock returns have been positive despite. all the craziness going on in the world. There's There's lots of interesting. charts that overlay. news headlines about all the madness. going on in the world on top of the. stock chart that's just going up. Doesn't mean the stocks are always going. to be up. They will go down when when.

things get crazy, like when when this. war started, stock returns did get a. little bit negative for a while. They've. since come back, but there will be. volatility in financial markets, volatility up and down day to day. But. in the long run, stock returns. they they should continue to be expected. to be. positive. So, for your friend, I. I don't know how the assets are set up, um but someone who's globally. diversified, exposed to the stock. market, they don't have to make changes to their. portfolios when the world's getting.

crazy. I remember what she said to me. She said that she was going to. remortgage her house. because I think she'd paid it down, and. she was wondering what to do with that. money. She was saying, "Do I just go buy. another house, or do I invest it in the. stock market?". Now, my my bias is the stock market, but. I don't know what you What would you say. to someone I'd want to know why she's. mortgaging her house, but. given there's a good reason for that, I. would I would probably go in the stock. market, not into real estate. Do you. think people shouldn't remortgage their. houses?

It's a tough question. Leverage, kind of. like how exposure to the stock market is. good, borrowing money to invest in. positive expected return assets like. like the stock market, is actually kind of a good thing on. paper. Borrowing money generally improves. long-term expected outcomes. But it's stressful. You can You can have. bad outcomes where you lose all of your. money. So, should people borrow money to invest? Should people mortgage their house to. invest? That's That's a very personal.

question. It's kind of like the. stock-bond question. Should you invest. in stocks or bonds? Should you invest in. stocks with leverage. or not? It really depends on your goals. and your situation. Uh but generally speaking, if we just. look at what what what do the data say. about borrowing money to invest? It's not It's not a terrible idea. One of the things we haven't talked. about is AI. And does AI change any of this equation? A lot of people are worried at the. moment about losing their jobs. Anthropic released a report, who are one. of the big AI companies, saying that. entry-level people in particular are.

going to have a hard time. And I think. they said they're already seeing 13% of. entry-level jobs being disrupted because. of these new AI and AI agents. I'm to be clear, not a labor economist. Um it's not my area of expertise. I do think though that we look back. through history. I like looking at the. history. There have been lots of. technological revolutions that have been. major major upheavals to the. entire economy. Yes. So, ATMs. The ATMs are one of those.

fascinating examples. People thought that ATMs were going to. wipe out bank tellers. because ATMs could do everything the. bank tellers do, but it was automated, and you didn't have to pay a person to. do it. So, there was a lot of concern. And what what ended up happening was. very counterintuitive. It's that the cost of operating a bank. branch. decreased because you needed fewer. people to do all the bank teller stuff. cuz you had the ATMs. And banks opened more branches.

because it cost less, and their. customers liked that. And the end result. was that there were actually more. bank teller jobs. at the end of the day. The cost of providing the service. decreased, which caused it to. proliferate more, provide that service. to more. people, and it expanded the market. instead of. shrinking it. Similar story with the Jevons paradox. and um It's the same concept. What's that story? Where coal became. cheaper at a time when they used coal to. ship freight on trains, and the coal.

engine got more efficient with coal, coal industry panics, "We're screwed." But then what it meant. is people used trains not just for. shipping freight, but also for other. things like travel. And people started. traveling on trains because it got. cheaper. So, the coal industry actually. boomed in the end. That's it. I have. thought a lot about this Jevons paradox. idea. And I think it's I think it's. going to be true for artificial. intelligence, for sure. I there will be. lots of other jobs created. And actually. companies like mine, if we save money, we invest it in something else,

which then would would probably create. jobs, whatever that is. The part that I. sometimes struggle with is the speed. of adoption in AI. And then also, when. you factor in robotics, like my car in in LA drives itself. And. I think one of the biggest employers on. Earth is driving in all its forms. But. then if you look at where housing and. supply chains, a lot of those are run by. people all over the world. And there was. a video that I played the other day. We. can throw it up on the screen, which. shows that in factories in certain parts. of the world now, they're having their.

labor force wear cameras on their head. showing what they're doing with their. hands because they're robots are. ultimately going to replace that labor. force. And I just I I haven't I guess. this is maybe something that happens in. history. I haven't been able to think. about where those people go, and what. they then can go on to do, especially if it happens in short order. Yeah, so I I've heard you I've heard you. ponder this in your other episodes, and. I I I agree that the speed of this is. likely to be different. As you've said, it's we're we're talking about the. internet, so you can deploy these things.

at the snap of a finger. And that is. different. But where do those people go? This is one of the interesting things. I. don't know. We We don't know. And through history, we didn't know. Exactly. Through history, it's been the. same sentiment, where people worry. about, "Where are these people going to. go?" And they might be unemployed for a. while, and there might be hard times, but things have worked out. And so, two ways to think about it. One. way is as a as an individual, what. should you be doing? We talked about it. earlier, uh having complementary skills that make. you very unique, I think is important.

Personally, content, as you mentioned, has been a big part of that for for me. Not everybody can necessarily do that, but finding those things that you can do. when combined better than anybody else. in the world, I think is very valuable. And then the other perspective is as an. investor, how should we think about. this? And there I would come back to. again, we have seen many technological. revolutions that have changed the world. They've changed financial markets, they've changed our culture, they've. changed the way we interact with each. other. The world has changed so many. times due to technology,

and the same cycle has repeated itself. Uh there there has been unemployment, there has been social unrest, there has. been wealth inequality, but this happens. every time. Are you expecting the stock. market to collapse because there's been. a huge overinvestment in artificial. intelligence, and at some point the. investors that put their money into. these. sort of speculative. AI startups that raised tremendous. amounts of capital at crazy valuations. At some point through history, doesn't. the market always contract at some.

point? There's a great book by an. economist named Carlota Perez. The book. is Technological Revolutions and. Financial Capital. And she documents this exact cycle. throughout history and yes, that's part. of it. Part of it is asset prices. getting really high. and then coming back down. Now, am I. worried about a catastrophic market. collapse? I think that's always a concern. I think. that's part of the risk of investing in. stocks. We never know when it's going to. happen or what the trigger is going to. be. So, it's not something that you can. do anything about. You need to have an.

asset allocation that you can stick with. even if that outcome is going to. materialize. And in that book is. does it suggest that the writing is on. the wall for the current economy and the. way that we're heavily investing in AI. and data centers and you know, a couple. of years ago everyone was investing in. crypto. and web 3. and NFTs and all this stuff and all of. the money seems to have been sucked out. of that industry. Really honestly, sucked out of almost every industry and. into AI. Um and you know.

>> I remember when DeFi was going to kill. banking and finance. >> [laughter]. >> And that was only a couple of years ago. In fact, a lot of the developers have. moved from that industry into the AI. industry. But I But I think I do think. about this a lot and I've got a few. startup friends who are getting a little. bit nervous and are raising a lot of. money now because they think that in the. next couple of years, maybe in the next. 24 months, there's going to be a big. market contraction when investors who. invested in. some startup idea that had a $100. million valuation realize that they're. losing their money and some domino. usually falls in the market. Some.

catalyst moment means that there's a. contraction. Stock markets go down. It. gets really hard to raise money. Clients. who you might be relying on now to pay. your advertising budget start to lower. their budgets. And in such a scenario, you're going to. want to wish you'd prepared a little. bit. Some people are. This is part of. the cycle. The cost of capital for. bubble companies, we'll call them. I. don't love the term bubble, but for. companies who are in the industry that. becomes the focus of a technological. revolutions and now we're talking about.

AI. The cost of capital gets really low, which means asset prices get really high. and a lot of people want to invest in. that space. But those asset prices are. not typically sustainable. and they do tend to come down. Does that mean a total market collapse. or catastrophe or or panic for. diversified investors? No. Oh, is the. writing on the wall? I don't think we can say that. If the. writing were on the wall, the way that I. view financial markets is that if the. writing were on the wall prices would. reflect that today. Okay. If we thought. market prices were going to drop in the. future, they would drop today. So,

so it happens at a time when no one is. expecting it. >> That's exactly right. So, the writing is never on the wall. That's right. Some some new piece of. information, something changes. and that's what causes prices to come. down. My brother said something to me. He's a very smart person. He's worked in. sort of investing for the last 15 years. He said something to me early in my. career. He said, "Stephen, when you go. to invest in something, assume that the. price you're paying for that investment, so say I'm investing in Facebook stock.

at $10. is the total accumulation of everything. everybody on the planet knows about that. company and they've priced in everything. the world knows about that company. today." And he was like, "So, even if. you think it's going to go up, that's. also by the way priced into today's. price. So, you better. know something that no one else knows. when you're thinking about buying an. investment. I've totally butchered what. he said. No, you You didn't You didn't. He is describing the concept of an. efficient market.

An efficient market is a market where. prices always and this is a sort of a. theoretical concept. It's not actually. true. But in theory, an efficient. market, a perfectly efficient market is. a market where prices always fully. reflect all available information. including your thoughts about what the. price Yeah. might do. Really, if you. trade on those thoughts. So, what are. you investing in then if it's if. the future's already priced in and all. the information about the company's. already priced in, what are you. investing in? You're investing in. discounted future cash flows. Companies produce cash flows. Mhm. They.

earn They earn profits. When you invest. in a company, you're buying those. expected future profits at a discount. That That's called the discount rate. This is getting pretty nerdy again, but. that's that's how it works in finance. What is the What is the value of a. stock? It's its discounted future cash. flows. Riskier stocks will tend to have. higher discount rates. So, you buy this. asset and now you've got this discounted. bundle of cash flows, which you then. hold and you receive the discount rate. as a rate of return as you continue to. hold. the asset. So, a lot of people will. invest in Tesla. They'll go, "Listen, I. I've got a Tesla. It's amazing. I'm.

going to buy some stock.". What is the fault in my thinking there? In buying Tesla stock? Because I I've. got a Tesla. I think it's a great car. and I think they'll do well in the. future. So, I buy the stock. But they. It's what we just talked about. That. information is already included in the. price. Every Everybody knows that it's a. pretty good company making pretty good. cars that are selling really well. And. that's why it costs $10 today. Right. Whatever it costs today. >> Whatever the price is, yeah. If you look. at. the data on professional money managers. who are trying to beat the market.

most of them don't. And the ones that do, this is a crazy. part, the managers who do beat the. market over a period of time. don't tend to go on to beat the market. in the future. And these are professional investors who. are, you know, and then you can look at. these before or after fees. The data are. actually pretty similar. It's worse. after fees, but the distribution is is. pretty similar. So, what's the point in. a money manager? Well, ones that are. trying to beat the market by picking. stocks and timing the market, I don't. think that there is one.

That's why I talk about just just buy. index funds. Buy buy the market. Let. Give Take the market's return. Accept. the market's return, which has been very. good. And then don't do anything. Don't. check the thing. Don't check it. Don't Don't open the app. Lose the. password. I said this about my my. fiance. I said she's really good at. investing because she always forgets the. password. And then we 4 years later. we'll be like, "What, babe, you should. check your investment." And she goes, "I. don't know the password." I go, "Fucking." And then we have to do the. whole password reset thing every. >> [laughter]. >> And then we open it we go, "Oh, okay, babe, you're rich.". It's probably good. >> And she goes, "Oh, amazing." And then. she forgets the password again. And then.

4 years later we take a look at again at. her investments. I like to say you you. want to focus on the things that you can. control. Mhm. You can't control markets. You. can't control your performance relative. to the market. And tr- trying to. outperform tends to make you worse off. rather than better. But the things that. you can control. are a lot of the things we talked about. Having having an an appropriate. financial plan, having having the right. goals set, having an asset allocation. that makes sense for you even if markets. do decline. Having emergency savings, tax planning. Those are things that you can control.

That's what people should focus on. Do. you think women are better investors. than men? I'm not super good on these data, but I. believe what the data say are that women. tend to be a little bit more. risk-averse. Uh but they tend to be a little bit less. overconfident. Which I assume gets better results, no? Yeah. I I think women are probably. better investors. I'm just going to give. I'm going to give the simple answer. right there. I've just got some numbers here. Fidelity said that across 5.2 million. accounts, women beat men with their. investments. Warwick Business School,

women outperformed men by 1.8%. percent per year over a 3-year period. UC Berkeley, men traded 45% more often. than women leading to annual returns. that were 1.4% lower than women's. And. Revolut, which is a big bank founded out. in the UK. is says that women's investments in the. UK outperformed men's by 4%. over men. I believe it. Give your money to your. wife. One of those data points specified, but.

I would assume that a lot of that is. related to overtrading. Yeah. Men tend. to be overconfident. They tend to trade. more. They try to pick stocks. They. think Tesla stock's going to go up. because they like the car. And we're told that the biggest gambling. addicts in the world are men as well. So, it's kind of correlates. For sure it. is, yeah. Ben, we have a closing tradition on this. podcast where the last guest leaves a. question for the next not knowing who. they're leaving it for. In the diary of the CEO. And the. question. that has been left for you. is. what experiment can you propose.

whose outcome could completely. contradict your current beliefs? Oh, man. >> [sighs]. >> Uh. an experiment that I could run. If I take my current beliefs as one of. the big things that we talked about is. markets being efficient and it being. quite hard to outperform. the market. Uh I mean, the best the best experiment. that we can run is is trying to beat it. People have done that. But it's being. run all the time. Isn't there a story in.

the Psychology of Money by Morgan Housel. where like was it Warren Buffett bet. someone? Yeah, Warren Buffett bet Ted. Ted Seides, who we've actually had on. our podcast. He bet him that. his. index fund portfolio, which I believe. was just the S&P 500, could outperform. any hedge fund portfolio that Ted. picked. And they had a specific timeline. It was. 10 years, wasn't it? Something. Yeah. And then they were going to donate the. an amount of money at the end of the.

period. And Ted lost the bet. Warren Warren won. But that that was one. of those instances where the world kind. of got to see, hey, this this index fund. thing Buffett has been a big advocate. for index funds. But that was a big example where. I think a lot of people were exposed to. that idea. Where do people find you? You know, I've. got your YouTube channel here, Ben. Felix, which I'll I'll link below for. anyone that wants to continue to follow. you on YouTube. Is there anywhere any. any other resources that we should. direct people to? Yeah, another place.

where I post actually a little bit more. frequently with longer form stuff is the. Rational Reminder podcast. People can check me out there. And then. I do have some interesting tools for the. rent versus buy calculation. We have a. goal-setting app. I don't think it's up. yet, though. And we've got some other. really interesting tools on. the PWL Capital website. PWLcapital.com. I'll link all of that below for anyone. that's interested. And the Rational Reminder Podcast, rationalreminder.ca/podcast. And your YouTube channel will be linked.

below, as well. Awesome. Thank you so much, Ben. Thank. you for doing what you do, because um. finance is such an important part of our. life, and I think a huge percentage of. the population, for whatever reason, choose to avoid the subject altogether, cuz it causes a little bit of anxiety. But also, we just don't get taught about. finance in school, which I think is a. great shame. And in in my case, you. know, it wasn't until I destroyed my. credit rating, my credit score, um that. I started to figure out what finance. was. And by then, kind of like brushing your teeth, I'd. done a lot of damage. And so, since. then, from doing this podcast, and being. the smart people like you that are good. at demystifying complex things, and but.

also, in your case, that use academic. research as the basis for the claims. they're making, it has helped to turn. the lights on for me. And in this domain, I think control, or. like understanding and information is. power. Really, like knowledge is power. And a lot of people are disempowered, because they don't have the knowledge, and they kind of they're on that sort of. roller coaster of their life. circumstance, and they don't feel like. they have control, especially. considering that the world feels so. uncertain right now. So, thank you for. doing what you do, Ben. Really, really. appreciate it, and I hope to speak to. you again sometime soon. Thanks so much.

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