Structured products can offer unique investment opportunities and customization but also come with risks and complexities. It is vital to thoroughly understand the product's structure, risks, and potential returns before investing. In this episode, we delve into the value of structured products and recap a past episode about the philosophy of money before continuing our focus on reading and finance by diving into the book, Just Keep Buying by Nick Maggiulli. Nick is a highly regarded author known for his insightful and engaging works on finance and investing. With a passion for demystifying complex financial concepts, Nick has earned a reputation for his ability to present information in a clear and accessible manner. His ability to blend storytelling with data-driven insights made his articles immensely popular among readers of all backgrounds. We discuss the pros and cons of financial products, why investors prefer them, the dark side of structured products, and what investors need to avoid. We recap a past episode with Barry Ritholtz about the philosophy of money and the main takeaways from our conversation with him. Then, we delve into Just Keep Buying and the invaluable lessons and uncover hidden gems it offers readers before speaking to Nick about savings and investing. We discuss the best strategies for investing, how to spend your money comfortably, why you should never wait for the markets to dip, and much more. To learn everything about structured products and valuable insights about saving and investing, tune in now.
Key Points From This Episode:
Learn about structured products and what they offer investors. (0:03:12)
Why structured products can be a problem for investors. (0:07:00)
We discuss whether the pricing of structured financial products is fair. (0:12:05)
How financial institutions use complexity to exploit uninformed investors. (0:14:51)
Outline of key findings from research conducted on structured financial products. (0:17:47)
The behavioural aspect of structured products and why investors prefer them. (0:22:20)
A recap of the main takeaways from our interview with Barry Ritholtz. (0:26:10)
This week’s book review of Just Keep Buying. (0:28:54)
Nick explains the difference between saving and investing. (0:32:54)
A comparison of just keep buying and dollar cost averaging strategies. (0:35:21)
Whether people should wait for a dip in the market before investing. (0:37:23)
Why you do not need as much savings as you think you need. (0:39:04)
What the biggest lie is regarding personal finance. (0:42:29)
Find out how to spend your money guilt-free. (0:44:13)
He unpacks what comes after the just keep buying strategy, and how to be comfortable spending more in retirement. (0:46:48)
Financial advice that Nick has for listeners. (0:51:03)
The aftershow: upcoming guests, feedback about the show, and more. (0:53:59)
Read the Transcript:
Ben Felix: This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL.
Cameron Passmore: Welcome to episode 255. The show just keeps on going, Ben, every week. And some weeks are a little scrappier than others. It's funny. Right up to the last minute, you're entering notes into this. Anyways, in this episode, you dive into a topic you've done a lot of work on lately about structured products. You had a pretty hot Twitter thread on that recently.
Ben Felix: Yeah, a hot thread that some people weren't too happy about.
Cameron Passmore: No. No.
Ben Felix: Which is fair enough.
Cameron Passmore: It's okay. And then we take a look back at episode 57 where you and I went to see Barry Ritholtz in New York. And as part of our continuing focus on reading and finance, we dive into the book Just Keep Buying: Proven Ways to Save Money and Build Your Wealth. And we actually get to talk to the author Nick Maggiulli. And, of course, for the three of you that stick around, we'll have the after-show afterwards. And we've got lots of stuff to talk about today.
You're part of a conversation thread in the community I saw called What are the AUM/Income Requirements to Become a PWL Client? Now we used to have a minimum. However, that was put in place that we keep up, fair to say, the quality of service because we're going quite quickly. But we have made a decision to eliminate that minimum, which is what it's absent from our online form. But, probably, that caused some confusion I think for some listeners.
Ben Felix: Listen. People have noticed that we're talking about PWL. Because like we're doing it at the beginning of every episode. So it's no secret. So people are hearing us say that. And we got a couple of questions in the community after our last episode asking what you just said. Like what's the minimum to be a client?
Like you guys are asking us to refer people to you or to talk to you. But we don't know what the minimum is. So we answered that question. There is currently no minimum. Somebody also asked like, "What should I say to my family member that's in high-fee mutual funds?" I don't have the answer to that question. Maybe that's something we can come up with later. But that's a – it's always tricky, right? Talking to family about –
Cameron Passmore: It's just a second opinion. Offer a second opinion if they're interested. Nothing more than that.
Ben Felix: Right. Now on the minimum. We do still have sort of a soft minimum. But it's kind of based on some combination of assets, expected future savings, and complexity. Because more complex clients take more of our resources. But it's something we have to look at case-by-case. So I would say don't worry about the minimum. And reach out and we'll point you in the right direction if it's not a fit.
Cameron Passmore: Exactly. Great setup. All right. So with that, let's go to episode 255.
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Cameron Passmore: Welcome to episode 255. Ben, kick it off with another rip-roaring subject. This one is rip-roaring.
Ben Felix: Yeah. For our geeky audience, I think maybe it is.
Cameron Passmore: But it's important, right? Because it is so popular in the marketplace. This topic is super important.
Ben Felix: Yeah. And it's popular all over the world, you know? That's something that I found interesting when I did a Twitter thread about this, which like you said earlier in the introduction, picked up quite a bit of steam. Lots of people were interested in it. Lots of people agreeing. Some people disagreeing quite angrily. And some disagreeing very politely.
But I got messages and like tweets. But, also, direct messages from people in all sorts of countries around the world saying, "Wow. I knew this was a big thing in, whatever, Poland. But I didn't realize it was a big thing in Canada too."
I mean that makes sense that financial products would be a global phenomenon. But I just hadn't really thought about the fact that people would have the same thought that you just articulated, that these things are such a big deal.
Anyway, structured products are investment vehicles with returns based on some underlying asset. That's a very general statement. But they'll often be marketed based on some headline rate of return, which is like the best-case rate of return that the product can have. That their products that have underlying options. So a bank will take a payoff stream and package it up and sell it as a product. I'll go into more detail on that in a minute.
They often also offer principal protection. That's a big thing. And Canada is principal protected notes where you look at the headline rate of return, like the best-case scenario. You get whatever some high rate of return. But the worst-case scenario, your principal is protected. And that's very attractive to people.
Now on that note, structured products are attractive to investors for very legitimate behavioral reasons. Like I just mentioned, principal protection, investors don't like losing money, of course. Structured products, in some cases, offer protection against loss of your capital. Investors also want to avoid missing out on potential gains. They get FOMO. Again, structured products can offer participation in some underlying asset.
Now that principal protection with upside participation, that seems like a free lunch. But to draw on a quote from John Cochrane, "When you're having dinner with lions, you have to make sure you're at the table. Not on the menu."
I'm going to back up for a second and talk about fundamentally what these products are. They are senior unsecured debt securities. Kind of like a special kind of bond. Sort of – well, I mean, yeah. I guess they kind of are. And they've got payouts depending on the value of some underlying asset, which could be a stock, a basket of stocks, and index, whatever.
Now banks or investment banks can create a structured product, hedge its exposure to the payoffs using whatever other financial instruments by, say, owning the index, or by using options, or whatever, or zero-coupon bond and an option or options. And then they can sell the product to consumers at a significant markup on their costs.
Now that's the key for the bank. Because if they can create the product for X cost and sell it for some markup of that to the consumer, assuming that they can hedge their exposure, which somebody in the Rational Reminder community is familiar with this space and said that that's not always the case. Some banks have had big losses from not being able to hedge their exposure in certain cases.
Anyway, that's actually an important point too. Because a retail investor couldn't really create, in most cases, the exact payoffs that a structured product can cost-effectively. We would expect some level of markup because the bank or investment bank is giving investors access to a stream of payoffs that it would be difficult for them to create on their own. Anyway, so it's interesting for banks. Because if they can sell these things at a significant markup, it's like really low-cost financing effectively.
Now they might offer – that appearance of a free lunch of the upside participation with the principal protection in the case of that type of note is kind of what makes them, at least in my opinion, one of the things that makes them a big problem for investors. These things usually have terms of around five years, some are longer, and some are shorter.
Like I mentioned before, they're not risk-free to the manufacturers. And investors can't necessarily create the exact same payoffs on their own. We expect some level of markup. We don't expect that type of service for free. But the problem, and this is one of the things that we'll talk about the empirical evidence on, is that the markups tend to be huge.
One of the questions is if the markups are huge, why do they continue to be popular with many retail investors? Now look at Canada. We talked in a recent episode about how many Canadians still invest in high-fee actively-managed mutual funds. Maybe asking why investors invest in structured products is a silly question. They just like expensive financial products. I don't know.
But I think, more seriously, structure products play – and it probably makes similar arguments for actively managed mutual funds actually. But they play on a few biases that are common among investors. One is the money illusion. This one wouldn't apply so much to active management. But for structured products, it does.
The money illusion, that's where mental accounting is conducted in nominal dollars. That's not adjusted for inflation. Of course, real returns are what matter to our ability to consume or to purchase stuff. But if a structured product returns your initial investment at the end of a five-year term or whatever the term is, there's a good chance you lost money in real terms over that period. But people think about their mental accounts in nominal terms. So the investment feels like it's guaranteed. You get your capital back even though it's not a guaranteed positive return. Positive real return, which is what actually matters.
Another issue is the index illusion. That's where the performance of structure products is linked to the price return of an index rather than the total return. But, of course, an index investor, just buying an index fund, you get the total return of the index including dividends.
But in many cases, structured products are linked to the price return of an index. And you think it, about if you're the bank, that's pretty nice because you can buy the index including dividends and then link the return of a note to the price. And the dividends are what the bank gets to keep plus any additional markup.
And, of course, if we look at like a Canadian index, for example, the dividends make up a meaningful portion of the total return. A little bit less so for something like a US index. But, again, I looked at Canadian index structured products. And if you look through the information form, they talk about this buried in the text. But it's definitely not prevalent though.
Cameron Passmore: Oh, but it is in there.
Ben Felix: You'd think it would have to be on some level. But it is. It is explained. At least the ones that I looked at. But I know that other than the ones that I've looked at personally, this is a common issue with structured products that comes up in some of the papers that I looked at.
They also tend to have lower payoffs in states of the world that investors underweight and higher payoffs in states of the world that investors overweight. That leads investors to overvalue the features of the contracts.
I'll give you an example because I know that was kind of a hard statement to think about. If you think that the market's going to crash horribly in the next five years, you'll be willing to pay a lot for insurance against that outcome. So that makes a note with downside protection. And capped upside seem pretty great.
Because if you're pretty – I'm pretty sure the market's going to crash in the next five years. But I don't think it's going to go up 200%. And, of course, you'd be willing to take the – you'd be willing to take the downside protection even if it's really expensive.
Now, interestingly, a lot of investors do believe incorrectly, as it usually turns out, that a large market crash is imminent. They're influenced by recent market events and by media sentiment. And this is from a Will Goetzmann paper that he did with Robert Shiller. I think we talked to him about it when Will was on.
They're influenced by recent market events and media sentiment. And they assess the probabilities of a one-day market crash on par with like a 1987 crash or a 1929 crash. The probability of crashes like that to be an order of magnitude larger than the actual frequency of such events.
Now those subjective beliefs about market crashes, they matter a lot to how investors behave. Subjective crash probabilities are negatively associated with equity mutual fund flows. And the equity share of investors’ portfolios is heavily influenced by, among other factors, people's personal experiences investing in the stock market. If you've lived through a crash. And the perception of the risk of rare disasters. People who think that there are going to be these big market crashes next week. They'll hold less in equities, which makes sense. But I think structured products cater to those concerns that investors have.
Cameron Passmore: Absolutely.
Ben Felix: It's kind of interesting when you think about it, right? The evidence that we just talked about, that's from three different papers on equity fund flows and equity share in portfolios. Maybe structured products are properly priced. Because if the alternative is having a lower equity share or an equity share that's arguably too low for your situation and a structured product solves that, hey, maybe it's not so bad.
Cameron Passmore: And if you see value in that, it's your choice.
Ben Felix: Yeah. Yeah. And we'll talk a little bit more about the behavioural side later. But these things are not without their warts, which is what we're going to talk about next.
I think one of the big issues for investors assessing structured products is that they're more complex than something like an index fund. It's really easy for most investors. Well, that's maybe not even fair to say. It's relatively easy for an investor to look at an index fund than understand the cost of owning it.
I said that, now that I'm thinking about it, I did a post in the Rational Reminder Community last week on the total cost of ownership of a dimensional fund versus a Vanguard asset allocation ETF. Even there, there's a lot of stuff that goes into that. There's the management fee. And the management fee may not be fully reflected in the management expense ratio. Because the management expense ratio is always the 12 months of trailing fees. But in the case of this dimensional example, they lowered their fees six months ago.
The current MER overstates the actual fee that you're paying. Then there's also the TER, trading expense ratio. There's foreign withholding tax depending on the fund if structured. There's portfolio turnover. I don't know if there are other things in there. Anyway.
Cameron Passmore: Sec lending could be in there.
Ben Felix: Oh, yeah. Of course. The sec lending return. Yep. Anyway. But even still, it's not that easy to assess the cost of an index fund. But more, it's a lot easier to assess the cost of an index fund than it is what you're paying or whether you're paying an appropriate price for a complex payoff structure of a structured product. These, they have an option like payoffs. Assessing how to price the note compares to its value is not something that the average retail investor is going to be able to sit down and do while they have their morning coffee.
And even though I just mentioned how index funds – that can also get complex typically. The big chunk of the cost is going to be easily visible in something like the management expense ratio typically. Sometimes the TER can be bigger than the MER. But anyway, that's a whole other topic.
Now in economic theory – and this whole idea of looking at structured products and just complexity. Like we had Paul Calluzzo on to talk about complexity recently. But this came from our fundamentals, the back-to-basic stuff that we were doing. And I started reading about complexity and there's this one theoretical paper from 2006 that kind of got me going down this whole path.
But anyway – so in economic theory, complexity may be used by firms to shroud some aspects of their products in order to exploit uninformed consumers. Or firms may strategically create complexity to reduce the proportion of investors who are informed. There's theory there and there's also empirical evidence supporting that theory in one of the papers I just mentioned. But, also, in a bunch of papers that we're about to go through.
In that situation, economic theory predicts that firms offering complex products will have high markups on their complex products, which just – I mean, that's the whole idea. If there's complexity, investors can't assess, "Hey, this is expensive." Then you can charge more for it.
Okay. So with all that background, the obvious empirical question is how do structured products tend to be priced. We've talked about, "Hey, they might be expensive." I've mentioned that they are expensive. We talked about the complexity and markups. And then the other question is whether they make investors better off than some alternative in any meaningful way. The alternative could be purchasing options directly. It could be just buying stock and bond indexes. So we're going to talk through a few papers on this.
One 2011 study, ‘The dark side of financial innovation: A case study of the pricing of a retail financial product’ looks at 64 issues of a popular retail structured equity product and then finds that their prices are almost 8% greater than their estimated fair market values using option pricing methods. So there's an 8% markup in that case.
With reasonable assumptions about the underlying stocks expected returns, the mean expected return estimate on these structured products is slightly below zero. The products in that sample, they don't provide tax liquidity or other benefits. And the authors explain that it's difficult to rationalize their purchase by informed rational investors. So the findings in that paper support using complexity to exploit uninformed investors.
Cameron Passmore: Wow.
Ben Felix: Yep. There's a pair of 2011 studies looking at structured products. They have two different types of structured products and they find that they're overpriced by 4.5% and 6.5%. A 2017 study, ‘Catering to Investors Through Security Design: Headline Rate and Complexity’ and they find that structured products with higher headline rates. And that's, as I mentioned earlier, the best-case scenario return for the product. Those are positively correlated with complexity and risk. And higher headline rates more complex and riskier products are more profitable for the banks distributing them.
Cameron Passmore: Isn't that interesting?
Ben Felix: Oh, yeah. The research in here is fascinating. I should also mention that for a future episode, I don't remember which one it is, but we have two of the authors. Actually, one of the authors I don't mention the paper in these notes. But one of the authors, I do. But they've both done research on structured products. So we have them coming up. We're going to do an episode with kind of like what we did with Paul Calluzzo. But we're going to have two different academics to discuss their papers on this topic.
Cameron Passmore: Episode 257 I believe. That's two weeks.
Ben Felix: Okay. Cool. Yeah. That'll be interesting to dig more into some of these topics. The authors of that paper, the 2017 one that I just mentioned, they also find that banks targeting less sophisticated client bases offer the most complex products, which again kind of supports that idea of exploiting less informed consumers using complexity.
A 2021 study, and this is one of the studies that we have the author of joining us, Engineering lemons looks at over 28, 000 structured products called yield enhancement products and finds that they offer attractive yields but negative returns. Kind of reminds me of covered calls.
Anyway, they cost investors the equivalent of 6% to 7% in total annual fees. Net of fees, most products in that sample, have negative expected returns. Now they could still make sense for investors who value them for hedging purposes. But the author of the study shows that simple combinations of listed options could achieve the same hedging properties at a much lower cost.
A 2014 study, ‘Ex-post Structured Product Returns: Index Methodology and Analysis’ analyzes the ex-post returns of more than 20,000 individual structure products issued by 13 brokerage firms. And they find that the ex-post returns of US structured products are highly correlated with the returns of large-cap equity markets in the aggregate. And individual structure products generally underperform simple alternative allocations to stocks and bonds.
High markups typically underperforming either portfolio of indexes. Or if you want the hedging properties, you can recreate that using listed options. And I think the big important question is why do they continue to be purchased by investors? One explanation that we've touched on a couple times is that they target unsophisticated investors who don't understand them and are having their biases catered to.
Another possibility is that the marketing of the product often focuses on the best possible outcome. While an investor would need to understand options to estimate the range of possible outcomes. And then, finally, I think that and this one's icky to talk about. But structured products often pay much higher commissions to the broker or financial advisor selling them than simpler lower-cost products.
Cameron Passmore: And the numbers are huge. Like 28,000 and 20,000.
Ben Felix: Number of issues that they looked at?
Cameron Passmore: Number of issues that are coming out that are in these studies, these are large numbers. Therefore, I would presume they have to be pitched by advisors to their clientele.
Ben Felix: Yeah. Yeah. I mean, there was a guy on Twitter, when I tweeted about this, who was – I mean, he sells structured products. But he was adamant that there's a way to do this cost-effectively in a way that's good for investors. And that may well be true. And I'll touch more on that in a minute actually.
But I think the point that I'm trying to make here is that if you look broadly, in aggregate, I think it's safer for an investor to assume that, if they're being offered one of these things, they should at least approach it with extra caution. An extra level of scrutiny.
I'm not trying to say that these are all bad all the time. And that's probably not true. The idea of engineering specific payoffs for an investor's situation, there's nothing necessarily wrong with that concept. It's just if someone says, "Hey, do you want to buy this structured product?" You should be more skeptical than if someone says, "Hey, do you want to buy this low-cost index fund?" But the thing is nobody's selling low-cost index funds. And there's a reason for that. They sell themselves. Yeah. Okay. So the commission thing I think is important.
And in other realms, like in insurance, and annuities and stuff like that – so commissions came up in one of the studies that I looked at. But looking at other assets, commissions have been studied more extensively, more directly. And there's a meaningful relationship between commissions and what people sell. Even if the high-commission products are detrimental to the end investor, they're more likely to be sold if they pay higher commissions to the person making the recommendation.
There are papers on that for insurance. I've seen papers on that for annuities. In Canada, there was a study on that for mutual funds. So it's a thing, which makes sense. Incentives matter. We know that to be true.
Now a huge markup and expected underperformance might be acceptable for some investors who are sufficiently behaviorally motivated. We've talked about that a couple times as we've gone through here. But I think it's more likely that many investors are just unaware of what they're buying and how much it's costing them.
Meir Statman, who we have in an upcoming episode, he's one of the founders of the field of Behavioral Finance. He explained to us when we recorded with them that there's a difference between an error and a want. And his explanation of this I found it to be just so well articulated and such a clean way to think about this topic.
I might call investing in a structured product an error. But some investors might hear everything that we've just talked about and say "No. I still want to own this structured product." But as long as they know the information and still decide to do it, that's expressing a want as opposed to making an error.
I think the error is not knowing the information or not being able to assess the structured product and buying it anyway. But once you know, "Okay, this is going to cost me a 4% percent markup," or whatever. Or this is likely to underperform the index because the market's probably not going to crash horribly in the next five years or whatever. If people know that information and say, "Yeah I still want to buy it because it feels right," then that's fine.
And Meir Statman has a 2013 paper looking specifically at structured products. And he says that options and structured products have no roles in mean-variance portfolios. But they have roles in behavioural portfolios. He's basically saying, like in a rational portfolio optimization framework, these things have no place. But for behavioural investors for humans who have mental accounts and are affected by prospect theory, they can play a role in portfolios.
Now to be fair – and I already touched on this. To be fair to structured products, it is possible that they could meet the specific needs or desires of some investors. And not all of them are necessarily overpriced. I've talked to somebody in our business who has a pricing model for structured products. And if they want to give their clients a specific exposure, they will go to bank desks and look for products that are appropriately priced. Or they'll ask for a specific payoff stream at a specific price.
And approaching it that way I think is reasonable. But in that case, we're talking about an analyst or team of analysts with a model to price the product for their clients. That's very different from somebody saying, "Hey, I've got this structured product to sell you. This hot new issue." But I think that's the big problem, is that most retail investors don't have the sophistication to evaluate these types of products for their own situation.
Again, this is a generalization. And I'm not damning all structured products. But I think, as a generalization, most investors would be well-served to avoid them. And it's like what are you losing by not investing in these products? Unless it's a severe behavioural disadvantage to be investing in just traditional stocks and bonds for that person, I think it's tough to make a good argument.
Anyway, like I mentioned before, some people were not happy with my Twitter thread on this. So if there are any good arguments for structured products that we missed, I would love to hear about them.
Cameron Passmore: And Meir Statman joins us in three weeks. And that is a must-listen episode.
Ben Felix: Yeah, it's a good episode. He was really nice to talk to.
Cameron Passmore: Yeah, a real joy.
Ben Felix: Yeah.
Cameron Passmore: Okay. Good to move on?
Ben Felix: Yep.
Cameron Passmore: Let's do our one episode in 60 seconds. A bit of a back story. We've been following New York City-based Ritholtz Wealth Management for many years. Safe to say, Ben, and those guys are very prolific content creators. In fact, the podcast Animal Spirits form part of I think our motivation to start this podcast.
Ritholtz was founded by Barry Ritholtz. And then, soon after, was joined by Josh Brown, who was our guest on episode 126 with Brian Portnoy and their book that they released. Barry hosts the very popular podcast Masters in Business, which is on Bloomberg.
We just reached out to him. And this is early on, right? This is episode 57. We reached out to him and he said, "Sure. Come by my office in midtown." Off you and I went. We packed our backpacks with the equipment and the mics. It's so crazy now to think about all the effort. Because doing it on Zoom just wasn't a thing that you did, right?
I mean, what did we know first of all? It's still early on. We hopped on a plane, went to New York. And, yeah. I mean, it was great to meet him. Great to be in his office. Quite the eclectic, fun, a little bit wacky environment they work in at Ritholtz. And that's kind of their character, which shows through, as everybody knows.
All right. So with that, here's a quick recap. For episode 57, we sat down with Barry Ritholtz, founder and CIO Ritholtz Wealth Management. Barry also hosts a Master’s in Business Podcast. Barry's a lawyer with a very long career in Wall Street and a keen reader of all sorts of content. And someone who largely shares our investment philosophy. You add in some humor, some opinion and a whole lot of energy and you get an incredible hour with Barry.
And I think it's safe to say that was a pretty interesting hour. He talks about the early days of starting his firm and starting his daily blog many years earlier. He was actually one of the very first financial bloggers. And it's still going daily. Barry also shared with us how we decided to set up his firm and what it means to act as a fiduciary for clients. He talked about what is the greatest value ad from an advisor. And why that is worth paying for?
At the end, we ask him, as someone who worked and acts near Wall Street, how stock brokers and active mutual funds still survive. He said he has been wrong for 20 years. And that, when you incentivize someone to harvest a client's organs for a resale on the black market, they'll harvest the client's organs. Incentives matter. Can he change the world? His response was, “I think you can change the viewpoints of people that are willing to have their viewpoints changed." That was Barry Ritholtz on episode 57. And, Ben, that was almost four years ago.
Ben Felix: Crazy. He said incentives matter. I didn't read that in the notes ahead of time. But that fits nicely with what I said that exact same thing a minute ago.
Cameron Passmore: Yeah. I chose that episode to review because the book review this week is from one of his colleagues, Nick Maggiulli. And the book is called Just Keep Buying: Proven Ways to Save Money and Build Your Wealth.
And as you know, as part of our back-to-basics theme this year for '23 and '23 challenge, we've been emphasizing financial literacy. And this week, I'll do a very quick review of that book and then we'll jump into a conversation with Nick.
Nick is the Chief Operating Officer at Ritholtz Wealth Management, where he oversees operations across the firm and provides insights on business intelligence, which is his specialty. He's also the author of the blog ofdollarsanddata.com, which focuses on the intersection of data and personal finance.
His work has been featured in The Wall Street Journal, Forbes and CNBC. Nick graduated from Stanford with a degree in economics. And lives in New York City. This book, Just Keep Buying, was published in April 2022. I found it quite an interesting and almost an inspirational read. And it's very compelling how he writes it. It's basically a philosophical way of viewing your savings habit.
And it comes down to save what you can and just keep doing it. Just keep doing it. If you look back over time, if you believe in a prosperous future, then you should just decide to keep acquiring investment assets. Just keep buying into a portfolio that makes sense. Keep your head down and keep on buying. That's my biggest takeaway.
He breaks the book down into two sections, on sections on saving. The sections on investing. Of course, you invest to save your future self, to preserve money against inflation and replace your human capital with financial capital. But he highlights early on in the book that savings matters more when your rate of savings has a greater impact than your rate of return, right?
Your savings matter far more than your return in your early years. And later as your portfolio grows, the rate of return matters a lot more. He says, "Basically, make sure you focus your energy on what matters more." Earlier on, focus your energy on your savings rate. Later on, you can get arguably more focus on the actual portfolio.
But if a large portfolio gets large enough, make sure you funded the life you need before you risk it for the life you want. Basically, as your portfolio gets larger, keep an eye out for the amount of risk you're taking on.
He also, at length, talks about some of the very common herd investment advice to cut spending such as skipping your lattes. And he argues that most of this type of advice is based on guilt. And his argument is, instead of focusing on that, you should focus on what you can do to become more valuable and to command higher compensation, which will lead to a higher savings rate.
He says, "To become more valuable, you should focus on five methods. Either sell your expertise, sell a skill, teach people, sell a product or climb the corporate ladder." Basically, he said it's much more effective and much more fulfilling to be top-line focused. Focus on your career. Focus on getting the flow. Focus on doing things where you can add value. As opposed to feeling guilty but having that latte. Again, it's a philosophical viewpoint.
Anyways, I really like the book. Easy to read and lots of solid recommendations. With that set up, let's go to our conversation with Nick Maggiulli.
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Cameron Passmore: Nick Maggiulli, welcome to the Rational Reminder podcast.
Nick Maggiulli: Thanks for having me on, Cameron.
Cameron Passmore: It's awesome to see you again. And congrats on your book. I know it's been out for, I think, a year or so. The book is Just Keep Buying. And I really enjoyed it. Congratulations.
Nick Maggiulli: Thank you I appreciate it.
Cameron Passmore: So your book has a very clear distinction between saving and investing. What is the significance of this distinction?
Nick Maggiulli: I think the difference between saving and investing kind of represents the typical financial journey we get throughout our lives, right? And so, for those who are younger, let's say you're in your 20s, just starting out, the thing that's really going to move the needle in terms of changing your wealth is going to be your savings. How much money you can save from your job? Your income? Et cetera. Save it. Get it invested. Et cetera. Right?
And then as you go through life, in theory, you're building up an estate. And that portfolio should start generating income for you. And that amount of income should keep growing until – once you hit retirement, it should be able to generate, hopefully, more income than you could, right, at the time.
And so, I can give you a simple example of this, right? When you're – say you're 22 years old. Let's say you have a thousand dollars invested. At 10%, return's like a hundred bucks, right? It's not too difficult to save a hundred dollars. But now take the flip side, and now take someone who has, let's say they're 65, they've been saving their whole life. Let's say they did very well in their career. They have $10 million, right? At 10%, return is a million bucks, right? For someone to save a million dollars in a year is just very, very difficult unless you have a super high income, right?
You can see like what's going on is people who are younger, don't have as much, focus on your savings. Focus on how you're going to get your income, how you're going to save it, how you're going to get it invested. As you get older, then you have to think about tax optimization, your asset allocation, all those things. Because that's where the investment piece that you can think of them as levers. Like in which lever you pull changes over time.
Cameron Passmore: You recommend people should kind of think about that metric about when that crossover position happens? And I guess their mindset shifts as they go through that point, right?
Nick Maggiulli: Yeah. And so, I think most young people should just exclusively focus on career. Most mid-career people have to think about both. I would say I'm mid-career now where I can't just not care about my investments. I have to care about asset allocation. I have to care about all that stuff.
And then once you're in the end game, once you're in retirement and stuff, like it's all investments like completely all the way down. And so, you have to get like just where you focus. I'm not saying, if you're 22, just, okay, don't invest your money. No. I'm not saying that at all. But don't obsess over it. Get into some portfolio.
It doesn't matter if you're like in an 80/20 or a 60/40. When you're that young, it doesn't really matter. Of course, you should pick something that fits your risk characteristics and risk profile. But it's not going to make that much of a difference over the first five years of your career. But by the end, it can make a huge difference. When you're 65, you really need to know your risk tolerance and stuff like that.
Cameron Passmore: What is the difference between just keep buying and dollar cost averaging?
Nick Maggiulli: So I would say better branding. The term dollar cost average, as soon as you say, that most people's minds just shut off. And so, I think just keep buying. I mean, besides, it's just rebranding, dollar cost averaging. It's also a more aggressive approach. And I would say like the psychological piece is built in.
I mean, it explains itself in the phrase itself, right? I think it's a cool catchphrase. A lot of people like using it. I've noticed that. And like I get so many comments all the time to just keep buying. And so, it's like all – especially, when the market starts to decline, people just start sending me these. And so, it's so funny. But I think that's the one thing.
And then in addition, just keep buying what it represents is like a philosophy of using data and evidence to support your arguments. That's really what the book is. And it's – I mean, I don't just talk investing. As I said, there's savings, there's personal finance aspects of this I discuss. And then I get into the investment piece as well.
It's not just like, "Oh, if I just buy every month for the rest of my life, I'll be good." That could work. And if I could only give you three words, that's probably the best advice I can give you. Of course, there's a lot more to that. But I'm trying to say, like, think about your whole investment philosophy and then like boil it down to a few words as possible and like that's the thing that I think is the most impactful for investors.
Cameron Passmore: Can you talk about the impact that that phrase "just keep buying" has had on you? Because in your book, it's clear that it impacted you.
Nick Maggiulli: For me, it's like – for example, right now the big thing everyone's talking about is the US debt ceiling, right? What's going to happen if this or that? And like no one knows. If we technically default, I think markets will crash. If we actually default, we will definitely crash, right?
And so, it's a question of like what's going to happen? It's like let's look throughout history. We've never had this happen before. So we don't have a lot of data on like what happens when countries default. But they generally survive and they move. And we'll go through a crash. But the world will move on.
And I also believe in diversification, right? That's another big piece of this, right? Just keep buying is not like just keep buying only US stocks and don't invest in anything else. I would never say that.
I would say like own a diversified portfolio and just keep buying that whole basket and just see where it leads you. And I think that, just that consistent behavior, is more important than anything else. And that's what I emphasize.
Cameron Passmore: Almost antithetical to that is something that I'm sure you hear that we here in our day jobs, which is, “I'm holding on to cash, keeping the dry powder just in case opportunities arise.” Should people wait to buy on the dip?
Nick Maggiulli: Generally, the answer is no. I would almost never recommend that. And the reason why is because, if you actually look like throughout at least history, most equity markets most of the time, like, dips will occur but they usually happen at a higher level than where we started investing.
Let's say there was some index values at 100, right? I'm going to wait for a dip. Wait for a dip. The index may get to 200 and then it dips by 50% to 150 – or I'm sorry. By 25% to 150 and you just bought at 150. But it's like you could have been buying at a hundred like way before, right?
And that's the thing. With this whole just keep buying thing, I remember people, like, back in 2017 when I wrote a blog post called Just Keep Buying, which is like the introduction of this, people are like, "Oh, the market's over value. Market's over value." Blah-blah-blah.
Even if you had weighted and held cash starting in 2017 and accumulated, accumulated, accumulated and waited until the bottom, the day of the bottom in March 2020, right? March – I think it was 23rd, 2020. And bought then. Let's say you could perfectly time the market, which, of course, you can't. But let's just imagine you could. You still would have bought at prices 7% percent higher than in the beginning of 2017, right?
So it goes to show it's really tough to time. And if you do happen to get a dip and buy it and get lucky, like thank your lucky stars, take your victory lap. But don't do that again. Because if you keep trying to do that, over the long haul, you're going to lose out like on average because it's just too difficult to do, right? And no one can do it consistently. That's the other problem. If you do it once, don't think you're going to be able to do it again. That's my advice, honestly, to people.
Cameron Passmore: Why might people need to save less, less than they think?
Nick Maggiulli: I've looked a lot of data on retirement in the United States, and one of the things that kind of like shocked me a little bit was like there's a lot of people who are leaving a lot of money like on their deathbeds, right? And you actually look at the data, people in their 70s leave more than people in their 60s, right, who pass? People in their 80s leave more than people in their 70s on average, right? And it goes up from there generally.
The whole thing is like what's going on, at least based on what I've seen in the data, is like a lot of retirees are actually just their portfolios keep going up. And they actually think like, "I'm going to run out of money." And I think the real problem they have is that their portfolio is growing faster than they can actually consume it.
And so, that can seem – I know right now in 2022 it won't feel that way. But like most of the time throughout most of US history, retirees would have actually been pretty well off.
And so, the thing to keep in mind here is like, imagine you want to pull money out of your portfolio, a lot of these people they'll pull some money out but they won't pull – they actually aren't pulling down their principal. They're like living on their investment gains or even less than that.
And so, actually, five and seven retirees don't pull any money out of their principal. Only two and seven of those who have a portfolio at least actually pull-down principle, right? The rest don't.
And so, that's kind of the shocking thing here is like there's very few people who are actually selling down their assets. And a lot of people just like have more investment gains than they spend in a year and then they end up just reinvesting money, right? And there's a good minority of people have to take required minimum distributions as things that the United States government requires. And they say, "Hey, you have to take this money out."
And so, a lot of these seniors like, "I don't know what to do with this." So they just reinvest it, right? So it's like it's this thing where you look at the data, and like a lot of the retirees are actually just keep buying as well. It's such a funny thing. I joke about – well, everyone's like, "What about retirees? Do retirees just keep buying?" Well, like a lot of them actually do. They are still investing and they're still recording their portfolio.
And I'll leave you with one other cool – like probably the coolest data point I found when doing all the research on this, Michael Kitces did this research and he found that over a 30-year time period and like a 60/40 portfolio using the 4% rule. So you're actually pulling money out 4% a year, adjusting for inflation, all that. You are more likely to 4X your portfolio over that 30-year period than you are to be below your starting value.
Let's give you some numbers to make this real. Let's say you start with a million bucks, right? You start the 4% rule. Pull your 40K, whatever. The next year you adjust it, et cetera. And you run that through market history, right? You just pretend you did those 30 years as a simulation. At the end of the simulation, you're more likely to have $4 million than less than a million. And that's after pulling that money out over time, right?
It's because like I think people underestimate market growth. And so, I think one of the things here with retirees, I think a lot of retirees probably need to save less than they think. And, especially, people I'm guessing listening to this podcast who are probably super diligent investors, are doing great at saving, I would assume so.
And so, their issue is not going to be like, "Do I run out of money?" It's going to be like, "How do I spend all that money I accumulate?" And I think that is a real issue. And I once – I talked to a room a bunch of bogleheads once and that was like the thing I said. Like most of you guys are crushing it. You're absolutely crushing it. And it's not about like, "Oh, am I going to have enough money?" It's like, "Okay, how do I make sure to spend my money so that I can at least enjoy my life to the max?"
I mean, I'm not saying you have to – there's this great book out there, Die With Zero. And we may get into that a little more. Great book. But I'm not saying you have to die with zero. But I think it's direction accurate. Die closer to zero and not like, "Oh, I had $10 million." Like you could have done and given that to someone, or something, or whatever.
Cameron Passmore: This next question I know the answer, of course, which is why I'm asking it. And I agree with you. What is the biggest lie in personal finance?
Nick Maggiulli: The biggest lie in personal finance is that you can cut your spending to get rich. And don't get me wrong. There are people that have done it. There are people that have reused their dental floss and all sorts of crazy. Made their own laundry soap at home or something and they've gotten rich from that. But most people don't.
And you look at the data and it's pretty clear that the thing that builds wealth is income. And if you looked at like what's the most correlated with savings rate, it's income level, right? The people with the highest incomes have the highest savings rate. And that's true on average across the board, which means it's going to be true for most people.
Sitting here and telling people to cut their lattes and this and that, it doesn't move the needle enough, right? And, of course, those people are like, "Well, if you just cut your latte every day and did that for 40 years you'd have a million bucks." Right? But it's like, "Yeah, you have to have a 10% return. You have to have –" there's all these other assumptions that are built into that that are a little extreme.
I mean, I'm not saying that there's nothing to lattes. But it's like getting a latte could boost your morale and make you work harder and you may get a bigger raise. I think it's worth the cost for things like that. I don't think spending is the problem for most people. I think it's income. And the data tends to show that. So that's why I kind of say that.
And, of course, every person on here is going to be like, "Well, what about this person? They had a huge income. They didn't get rich." It's like – and I love when people do this for like celebrities. Like, "Oh, Mike Tyson went bankrupt. Or Lindsay Lohan." Like you can name like, what, five ten celebrities that went bankrupt that had high incomes and that aren't rich? Guess how many I can name. Every other celebrity except those 10, right?
Like you have ten. Like if N is all the celebrities, you have ten. I have N minus 10. Every other celebrity who's doesn't have a spending problem is rich. Because why? They have a huge income, right? It's as simple as that. I don't think the existence of a couple exceptions disproves the rule, right? And so, that's something to keep in mind.
Cameron Passmore: What are the two different tips that when combined will allow you to spend your money, as you say, 100 guilt-free?
Nick Maggiulli: Yeah. I've come up with different ways of like looking at how to spend money. As I said, I think this is going to be a big issue for a lot of people who are doing well at accumulating. And one of the things I do if I'm like, you know, let's say I wanted to go a nice dinner that's going to cost 500 bucks. Or I want to get a nice pair of dress shoes. Maybe they're $400. Whatever it is. I will save twice the amount. So I'll call this the 2X rule. Instead of saving $400 for these dress shoes, right, I'll save 800. And I'll take the 400, buy the dress shoes. And I'll take the other 400 and I'll invest it in income-producing assets or my portfolio, et cetera. Or I can donate to 400. There's different ways.
I've done different things over time. And I think why that gets rid of the guilt is because like, "Okay, if I'm in a splurge on myself, at least I can invest in my future or help someone else out." Right? And so, I think that's the psychological barrier you have to get through in some way. And every person's splurge is different. For some people, $100 is a splurge. For someone else, it's going to be like two, five grand? Who knows? Whatever it is. But you got to figure out what is a splurge for you. And then once you're in that realm, say, "Okay, I can spend this much. But if I'm going to do that, I'm going to also, at the same time, either invest in my future or help someone else out." That's one of the rules, the 2X rule.
Another thing I think people should focus more on is not necessarily maximizing happiness but maximizing fulfillment. And so, what I mean by that is like there's a lot of things in life that don't necessarily make us happy but can make us very fulfilled. And I think an example I give I think I gave in the book was like climbing Mount Everest, or running a marathon, or something, right? These are things where once people do something like this, if they're into that, they can have this deep sense of fulfillment that they accomplish this very hard goal. But it wasn't necessarily a happy experience.
I think people who run the marathon, most people are like, "Oh, that was so happy." No. It's tough. It's a tough thing to do. It's tough on your body. But at the end of it, you feel fulfilled. And so, spending money to maximize fulfillment I think is a better way to go than to just like, "Oh, I want to maximize my happiness in every way possible." So that's kind of the main – you take those two rules together, you can kind of get rid of guilt. Kind of where to focus your money on. Figuring out like what you want to spend on and cut on the areas you don't want to. I think Ramit Sethi's idea of doing that is actually really great. And I think that is related to the fulfillment stuff, right?
It's like, oh, I – for example, I love restaurants. And I'm fine spending a lot of money at restaurants. But I don't particularly care too much about clothes. I don't spend too much on clothes relative to most people. And so, I think that's – it's figuring out which areas you want and which area is bringing you that fulfillment and then focusing on that.
Cameron Passmore: Having completed the New York City Marathon, it is very fulfilling. And it is not that happy of an experience.
Nick Maggiulli: Yeah.
Cameron Passmore: You're spot on with that.
Nick Maggiulli: Thank you. Thanks for backing that.
Cameron Passmore: I can back you up. Someone's just kept buying all through their savings life, when it comes time to draw down in retirement, do they flip? Do you just keep buying? Do you just keep selling? How does that work?
Nick Maggiulli: I mean, in theory, you want to sell as late as possible, right? You want to buy as soon as you can. But you want to sell as late as possible. Because, in theory, markets go up over time, right? All else equal, right? All else equals. Same risk tolerance. Everything else, right? Markets go up over time. You want to sell as slowly as possible, right?
But, obviously, when you're in retirement, you're going to be selling over time. And so, yes, you're going to have to start selling assets down to live your life and do the things you want to do. But if you want to like find a selling strategy, I would say sell as slow as possible, right? All else equal. I mean, obviously, if you're like, "Well, I know I'm going to need this money for sure." Then sell that. Take the risk. De-risk that. But beyond that, I would say wait as long as you can to sell.
Because on average, over a long period of time, you're going to see your portfolio is going to keep growing, right? And so, I think that's the thing that a lot of people are going to be surprised by. Unless you have a very high withdrawal rate, that will really pull your portfolio down pretty quickly. But things like 4% rule, you'll find that, "Wow, I thought my portfolio was going to shrink." And maybe it won't shrink as much as you thought it would.
Cameron Passmore: I'd like to go back to your comments about spending more in retirement. Do you have any practical advice for people on how they can become more comfortable spending more?
Nick Maggiulli: This is always going to be an individual situation. And you have to really understand your psychology. I think this is – I wish I could be like, "Oh, you just do this." It's like some people are going to hear that and say that doesn't work for me.
You have to understand your psychology. Where does your money beliefs come from? Like I can give you an example. I'll give you one small example and you might be able to find like, "Oh, I've thought there's a couple of things like that in my life."
For example, as I said, I love restaurants. I regularly go to nice restaurants in New York City. They're very expensive, right? I don't worry about the money in that situation, right? Obviously, I'm not going to Masa, which is like 2,000 bucks a person. But if it's 100 bucks a person, 200 bucks a person, that's not the most extreme thing. Okay. I want to go to a nice meal. That's where I spend my money.
But every time I'm at McDonald's, I end up only ordering off the dollar menu. And it's like why am I doing – I regularly spend more money. But every time I go to McDonald's, I order off the dollar menu. It's because, when I was a kid, I was always taught to order off the dollar menu. Money was – we didn't have a lot of money. So we always ate cheap.
And because of that, that's still in my psychology in some way to the point where I'm like, "Oh, I can't get that nice chicken sandwich. That's $6. I have to spend the 119 or 149, or whatever it is on the –" now the dollar menu is like a $2 menu. But you get the point, right?
And so, that's a particular psychological quirk I have where like it's hard for me to get over. And I know I have it. But I still like can't bring myself to like go and spend $5 on a sandwich at McDonald's. And so, figuring out like what your spending quirks are and then how to address them.
And like I think this is where the book Die With Zero does help a lot. Because if you're like, "I can't spend money," read this thing. Really dig into it and figure out like why is it making you feel that way when you spend money. There could be scarcity things. There's a lot of stuff. And I understand a lot of reason why people over-save. I know people are going to hear this and say, "Nick, I can't over-save. Why? Over-savings good. Because what happens if I have this crazy medical issue or if I have some other thing, right?"
And that's fair. And that's – actually, look at the data. That's why most people over-save. They're worried about these really low probability tail risks, which could happen. And it is unfortunate when that type of stuff happens. But it's very rare. And so, we can't prepare for everything, right? You can't be like, "Okay. I'm going to prepare for every single scenario." Then you would never spend money ever. And I don't think that's a good way to go through life. Of course, you want to be somewhat conservative when you do things. But I don't think you need to be like, "Oh, I need to have 10 years extra worth of savings and cash just in case.” There are people that are out there that are like that and I was like, "No. You probably don't need that."
And it's just figuring out that balance and understanding your quirks and addressing those. That's where I would say to someone who's like I need help spending money in retirement. Figure out why. Whether you have to talk to an advisor, talk to a therapist, whatever. I don't mean it like that is a bad thing. Figure out why you're doing that and then figure out how to address it in a way that you're comfortable with. And just make progress. That's the first thing. Go try to do one big thing. Spend a couple grand on a vacation that you would never do. Just go to it and just enjoy the money and try to enjoy the process. Instead of saying, "Oh, my God, I'm spending so much on this one thing." Just enjoy it purposefully. Set yourself a goal to spend like two or three times what you normally would spend, right, and see if you can do it. And just enjoy it. That's what I would say.
Cameron Passmore: Any final pieces of advice?
Nick Maggiulli: I mean, the main piece of advice I tell people, right, which is what I brought up earlier, is like I think a lot of this comes down to income. As much as I want to be like, "Oh, your investment choices matter, all that stuff." For most people, it's like income is the thing that moves the needle especially early on and through mid-career. And that's the thing that people really need to focus on, which is like, "Okay. But what does that mean? Does that mean you get a side hustle?" If you want to. If you're not at a place where you want to be financially, maybe you need to get a side hustle. Maybe you need to open a side business. Or you want to do tutoring or whatever. There's a lot of ways people can make income.
And I kind of talk about these different ways in a book. You know, creating a product, doing a service, selling your time. There's a bunch of different ways of doing this. But I think it's something that a lot of people don't think about and they just – most people, at least the United States, like they have their W2 job and that's it. And if they're not happy with their financial life, then it's like, "Okay, well, you need to spend time doing that."
And like the example I gave in my particular example is like I spent 10 hours a week blogging. You don't do blogging. But find something that you enjoy doing and try and do that for a while until, hopefully, you can find a way to monetize, right? I didn't monetize for three years. The first three years of my blogging life, I didn't make a single dollar basically. I had some Amazon affiliate links but that's basically nothing. It's like four cents per whatever. It's 4% of all those sales. It's pretty small.
The point was like I didn't really monetize for three years. And so, it's like – but now it's a decent little side hustle and it's something I do and I enjoy doing. Find the thing that you like to do and see if you can monetize it if you're trying to grow your income and do that. If you care about that. If you feel good, you're feeling like you're in a good place, then don't worry about that. I mean, it's all about kind of what your goals are. That's the thing I would say.
Cameron Passmore: Yeah. We talked about the five methods that you alluded to in the book in the intro to this conversation. It's sell your expertise, sell a skill, teach people, sell a product and climb the corporate ladder.
Nick Maggiulli: Mm-hmm. Yeah. And I think climbing the corporate ladder, people like – especially on Twitter, like dunk on that. Like, "Oh, don't be a person who stayed at a job for years." There's a lot of people that really got a lot of fulfillment out of doing something. If you're at a place you like, like there's nothing wrong with that. I think there's a lot of people out here that just dunk on traditional careers and like look down on that.
And like traditional careers were a big thing in the United States for most of its history. It's only in the last 20, 30 years that people are like, "Oh, don't do that. Like don't –" and it's just the environment changes on how people feel about things. And I don't necessarily agree with that. I think there's a lot to be – you can learn a lot in traditional careers. And that's how you get the skills to go and be your own boss and open your own business one day, right? If you really want to do that, right?
I don't think there's anything wrong with that. Sometimes there's a lot of people that wouldn't be good entrepreneurs. They don't have a vision but they're very good at executing, right? They don't have like, "Oh, I want to do this, this and this." Right? But I'm very good at getting things done. Maybe you would be better off in an organization helping someone else build their vision and just being a really, really good operator. And you can make good money and have a good career doing that. Think about that.
Cameron Passmore: Nick, great to have you on. Congratulations again on your book. And thanks for coming on.
Nick Maggiulli: Yeah, thanks for having me on, Cameron.
***
Cameron Passmore: That was Nick Magggiulli. And the book is Just Keep Buying: Proven Ways to Save Money and Build Your Wealth."
Ben, you get a flight coming up.
Ben Felix: Yep.
Cameron Passmore: By the time this is released, I guess you'll be back from your flight. But is that your first flight since the pandemic?
Ben Felix: In years. Yeah.
Cameron Passmore: Interesting. But I look forward to seeing how you enjoy it.
Ben Felix: I won't.
Cameron Passmore: I knew that already.
Ben Felix: Well, how many flights have you enjoyed? Flying is not nice, is it?
Cameron Passmore: I actually had some pretty good flights lately. But, again, weather can wreak havoc. But at least now it's almost summertime. Have you been kayaking at all yet?
Ben Felix: Not kayaking. No. But hiking a few times.
Cameron Passmore: I got a small story. There's a crack in the stairs of our pool. We've got acrylic stairs in our pool. So you got to get the crack fix, obviously, because it leaks. The pool's been leaking. Big mess. But we're changing the stairs later on. So I just want a quick repair. Have you ever bought Flex Seal? Like you see the Flex Seal on TV? The Phil Swift ads. You see them on TV? It just shows that advertising work. It's like, "Okay, why spend 600 bucks to repair this for a couple months? Flex Seal."
Ordered the Flex Seal tape. And it comes this piece of tape that might be a foot and a half long. It is unbelievably adhesive. You can barely get your fingers off. I put it on the crack on the stairs. I took the Flex Seal spray around it to make sure the seal is sealed. Wow. This stuff is unbelievable. So, Flex Seal. But it's not a plug for Flex Seal. It's just more that advertising works. That's kind of funny.
I joined Toastmasters. I told you that. I have another meeting tonight. Super fun actually. Gets me out on my comfort zone, which I wanted to do.
Ben Felix: Oh, yeah. I did it years ago. Definitely gets you out of your comfort zone.
Cameron Passmore: Oh, you did do it. I didn't know that.
Ben Felix: Yeah. No. I did it. Long time ago.
Cameron Passmore: Yeah, it kind of all ties together. Just finished the book Story Worthy, which we'll talk about – I don't know. If in a few weeks or so. And then Angelica recommended that I read a book she's reading now, Superfans, which also refers to the power of his stories.
And this book, Storyworthy, talks about having a daily habit of finding a story in your day and tracking the impact of that story. And he makes the argument that if you can just have these very brief short stories and you can link them all together, thread them all together, is it really helps you understand what's going on in your life and what's important to you.
And they have – there's not one in Ottawa. But it was called a Moth StorySLAM. Have you ever heard of this? Where it's like open mic night but for storytelling. And it's a podcast called The Moth, which plays back some of these stories. They're incredible. And how people can structure stories.
And in the book, Storyworthy, it helps you understand how to structure a story to be effective. But the whole power of storytelling is unbelievable. Especially in this chaotic world, it's supposed to help you make – form out of the chaos. This is something I've heard Scott Galloway talk about, which is the greatest gift that he's trying to leave to his boys, is to become good storytellers. Because he thinks it's incredibly good talent to have in their career. Says, I'm working on storytelling as well.
And next week we will come back, Hal Hirschfield, to talk about his book Future Self. And the week after that, I can't wait. It would be so much fun. We've got Giorgio Ugazio joining us, who you are on the Retire in Progress. What do you call – Twitch? Twitcher? What was it called?
Ben Felix: Stream.
Cameron Passmore: Stream. Whatever. Anyways, if you go to retirementprogress.com, you are still on the front page of Georgio's website. We're going to do a book review with Giorgio, the book he mentioned with you, which is Designing Your Life. Fantastic book.
Ben Felix: Are you going to start telling more stories? I don't know how I feel about that. We hear with the power of stories. There's nothing wrong with me, I think. Because I can't stand when someone starts telling me a story. Same with books. From reading a book and like half the chapter is a story or two-thirds of the chapter is a story, like show me the data that supports why the story is relevant. I don't care about the story. But I think that's a deficiency I have.
Cameron Passmore: Yeah. Getting to the point of the story is to understand why people do things. And it's not just to tell a story for the sake of telling a story. It's like what did you learn? How did you change from that story? There's more to it than just telling a story.
Like I used tell a story about the time I almost drowned off the coast of Florida scuba diving once. Everyone's got stories like that. Most people, even they say in the book, "Don't care." How did you change? What did you learn? How did it impact your life? That's a little more interesting. It's the ability to tell that.
I just find this mechanism. It's almost like how Seinfeld constructs jokes. How you do this? There's a whole – I don't know if it's science or not. But there's a whole methodology that the book goes into about how to tell an effective story. I have not figured it out yet.
A couple good reviews. Our friend, Jason, left a nice review calling the podcast a fantastic resource. Despite Cameron's refusal to condemn Tabasco as a garbage hot sauce, this remains the single best podcast for learning about evidence-based investing that there is. Thanks to our friend, Jason, for that.
Ben Felix: NPR Intern 65 from Canada says, "Personal finance for anyone. You don't have to be a finance wonk to enjoy this podcast. But if you are, you will love it even more. From basic personal finance to the inner mechanics of bonds and ETFs, to happiness, this podcast has it all. The hosts, Cameron and Ben, make complex finance topics accessible while referencing the latest academic research. The calibre of their guests is impeccable. There is no podcast I would recommend more than this one." That's very nice.
Cameron Passmore: Mm-hmm. Perhaps you can talk about a couple things going on in the community. We have meetups coming up. We are in Toronto, September 20th. Probably have something going on at the IAFP conference in Edmonton. The LA Meetup, going to be tough to pull off. And there wasn't a ton of interest. We're going to pass on that idea for now. But we're going to be hosting for advisors going to the Future Proof Conference. I'm going to try setting up a breakfast. Just drop us a note at info@rationalreminder.ca.
In the store. I think we just had our first week since we opened the store of no orders.
Ben Felix: I can tell you why.
Cameron Passmore: Why?
Ben Felix: Because you don't have my premium t-shirt in stock.
Cameron Passmore: Oh, my God. Are we going to go to production with that?
Ben Felix: I don't know Angelica said you didn't want to have any more SKUs. I ordered it for myself. Oh, she said no more excuse. I ordered. I went on a website that lets you make your own shirt and I made it and ordered it.
Cameron Passmore: Okay. Describe the shirt and we'll see if there's interest.
Ben Felix: Well, it has. It's the Five Factor model printed on the front of a shirt. MKT minus RF, Market Factor. And SMB, HML, RMW and CMA in big white letters down the front of a black shirt. And it's called a premium t-shirt because it's got premiums on. It's funny.
Cameron Passmore: All right. If you're interested in that shirt, drop us a note and maybe we'll set up SKUs. I don't think it's a big deal to set up SKUs.
Ben Felix: I asked about getting the premium t-shirt and I was rejected. So I went and got my own.
Cameron Passmore: Okay. I didn't get the premium part. So now I get that actually is kind of funny. Anyways, go order stuff. It's super cheap. Shipping's free in North America. We throw in a bunch of free stuff. Why not? Do you want to talk about an article that our friend, Rob Carrick, wrote?
Ben Felix: Yeah. Rob Carrick, he's often occasionally critical of financial advisors and a big proponent of do-it-yourself investing. As I think we are as well. But he had a really nice post recently talking about it's kind of like the – and this is still a topic I want to cover on the podcast. Like all the investor mistakes, we talked about that a bit when we were talking about what is the value of a financial advisor. Well, I want to do a whole episode on mistakes that investors make that are documented in household finance.
Anyway, Rob had a post kind of like that that was like, yes, you can save on fees if you ditch your advisor. But there are some ways that I can go wrong. So he had an article on five ways firing an advisor can work against you. The five ways are if you don't have a financial plan to guide your investing. And he says good advisors base their investment plans for clients on a financial plan that maps out how financial goals will be reached.
Key points covered in a plan include how much you need to invest over the years. And what return you need to reach your goals? In other words, how much risk you need to take on? Another way can go wrong is if you don't diversify properly. And this is absolutely one of the well-documented mistakes in the household finance literature. Too much in stocks could overexpose you to market downturns and tempt you to sell at low points. Too little on stocks could deny the returns you need to generate. It's the way Rob articulated it.
I would expand on that saying that we know, again, from the household finance literature that investors often hold concentrated portfolios. One of the reasons is maybe overconfidence. But there are other possible reasons too. Like just straight up errors. Like we talked earlier about wants and errors.
We know from James Choi and Adriana Robertson's survey research that a lot of investors hold concentrated stock positions because they think that they're going to earn higher returns by doing so. But, of course, statistically, that's very unlikely.
Another way that firing your advisor can go wrong is if you suffer from analysis paralysis. If you're overwhelmed by information, you let cash sit idle in your investment account and expect zero interest paid on this money. And, again, that's well documented in the household finance literature. A lot of people are underexposed to stocks. It's called non-participation. Equity non-participation is a big thing in the household finance literature.
A lot of this is top of mind for me right now because I just finished preparing the questions for James Choi, who we're talking to tomorrow. His area of expertise is household finance. I didn't just have this stuff talking points in my head it's because I – and another way Rob says that it can go – firing your advisor can go wrong is if you think you can outsmart the market. Market timing traps include going to cash because you hear a recession is coming. Then waiting too long to get back into the market.
And again, in the structured products segment, we talked about how people think that a major market crash is more likely than it actually is. And there's that old quote. I can't remember what it was, what it is, that much more money's been lost trying to avoid market crashes than in market crashes themselves, which I think is probably true.
And then the last one from Rob is, if you stop adding new money to your account and miss opportunities to buy during market lows, good advisors keep you on a regular investment plan and encourage you to take advantage of bargains when prices fall. On your own, you can miss these opportunities. I don't know how well we time the market for clients.
But as a commitment device, sticking to a plan and making contributions continually even when the market is choppy. And maybe that's what Rob meant. Maybe he didn't mean timing the market. That's just kind of how it read.
Yep. So that's it. Those are the ways that firing your advisor can go wrong, which kind of we talked about I guess in that previous episode where, yes, you can save on fees by not having a financial advisor. But at least if you look at the literature, there's a lot of ways that households make themselves worse off. Whether an advisor actually resolves that, that's a whole other question which we covered in that episode.
Cameron Passmore: Speaking of The Globe and Mail, you're now contributing to ask an advisor series. Can you talk about that?
Ben Felix: I didn't realize they created that series for me. I used to write for The Globe and Mail and I stopped because we were super focused on building up this podcast and on my YouTube channel. And that just became such a big time commitment. And at that time I was still in a lot of client meetings. And so, it was just like I had to tell them that I had to stop writing.
But I reached out recently and asked if I could start writing something again. And they said something about an ask an advisor column. And I was like, "Oh, yeah. I can contribute to that." But then when they tweeted out my article, they said it was the first in the series. So I didn't realize that they had created this ask an advisor series.
Cameron Passmore: So you are the advisor?
Ben Felix: I think so.
Cameron Passmore: Okay.
Ben Felix: I guess I could ask them to be sure. But I –
Cameron Passmore: So it's ask this advisor.
Ben Felix: Yeah, I think so.
Cameron Passmore: Cool.
Ben Felix: Yes. We did the piece on covered calls. And when that came out, I saw on Reddit, because I go on the personal finance Canada subreddit when I'm sitting around. And somebody had posted about they'd invested in covered call funds even though they knew from Ben Felix that – from me, obviously, that dividends don't matter. That income doesn't matter or something like that. And then they wrote this whole long post about how they kind of blew themselves up in covered call ETFs.
And so, I posted the article because it had just come out. I saw the post in The Globe and Mail article came out. So I posted saying something like, "Sorry you had this experience. I know it's a little too late. But I just wrote about this in The Globe and Mail if you're interested." And a lot of people upvoted that.
Cameron Passmore: Awesome. Both of us are on Twitter. And in fact, both of us have our Calendly link in our bios on Twitter.
Ben Felix: You know what? Yes. We do. I clicked on mine the other day to remind myself what it looked like. And I have no availability. I was like, "Oh, huh. Maybe that's why no one's booking any meetings with me."
Cameron Passmore: Yeah. Well, we tried to set up a meeting for both of us with somebody. I think there's like two time slots in the next two months available.
Ben Felix: Yeah.
Cameron Passmore: I think we've become a little – at least I become a little too proficient in putting in time blockers to protect myself and just the way the rules work in the settings. We're not that busy. It's just the way the rules work. And the time blocks we put in and the time protection that Calendly builds in based on what we've asked for. So it makes it really tough.
Ben Felix: Yeah. We need to get better at using Calendly I think is the takeaway there.
Cameron Passmore: Yeah. You can always reach out at info@rationalreminder.ca It'll get through to us and we can try to find a different spot if you wish. I welcome all connections on LinkedIn provided you don't turn around and try to sell me stuff, which has been happening more and more lately.
Ben Felix: What are you getting sold?
Cameron Passmore: All kinds of stuff. Marketing stuff. No. No. Not product. Usually marketing stuff.
Ben Felix: What does that mean?
Cameron Passmore: We can help your SEO. We can help you get more followers. We can do all kinds of stuff.
Rational Reminder is on Instagram. And, in fact, we just passed 2,000 followers lately. Kind of fun. So we're on there. Ben, anything else this week?
Ben Felix: Nope. Hopefully, people enjoyed the episode.
Cameron Passmore: Beautiful. As always, thanks, everybody, for listening.
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'The dark side of financial innovation: A case study of the pricing of a retail financial product' — https://doi.org/10.1016/j.jfineco.2010.12.006
'Engineering lemons' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X21001653?via%3Dihub
'Ex Post Structured-Product Returns: Index Methodology and Analysis' — https://www.pm-research.com/content/iijinvest/24/2/45
'Catering to Investors Through Security Design' — https://academic.oup.com/qje/article-abstract/132/3/1469/3057435