Building Wealth When Markets Get Messy w/ Ben Carlson #1136

This is an iHeart Podcast. Guaranteed human. Run a business and not thinking about podcasting? Think again. More Americans listen to podcasts, then add supported streaming music from Spotify and Pandora. And as the number one podcaster, iHeart's twice as large as the next two combined. Learn how podcasting can help your business. Call 844-844-IHEART. Welcome to How to Money. I'm Joel. And today I'm talking building wealth when markets get messy with Ben Carlson. okay so so often when we think about risk we picture shark attacks or plane crashes dramatic headline grabbing events that feel terrifying but are incredibly rare i have to explain that to my kids all the time. We go in the ocean, shark attack, highly unlikely. The odds are you're never going to experience either of those things. Meanwhile, something as ordinary as driving to work is actually far riskier. It's just not the way our brains think about it. But in the US, there are actually 6 million car accidents a year. So when you start looking closely, risk and reward, they show up everywhere in our lives. And for investors, especially understanding the real risks that we face, not the ones that dominate the headlines, is essential to building a strategy that truly works over the long haul. My guest today, he's made it his mission to bring common sense back to finance. Ben Carlson, he's one of my favorite writers in the investing world. His new book, Risk and Reward, is part economic history, part practical playbook. And honestly, I think it's an instant classic. So Ben, I'm so thrilled to have you joining me today on the show. Thanks. Appreciate that. First question that I ask everyone is what the craft beer equivalent is. So what, Ben Carlson, do you like to splurge on while you're still saving investing intelligently for your future? Okay. So I like to spend on outdoor activities with my family, especially with my kids. I tell my wife all the time, my oldest daughter turns 12 in April. Okay. My youngest, my twins turn nine in May. And I tell my wife, like we're halfway done with them. They're going to be 18 and they're gone. And so we, all the time, we, we spend money. We prioritize. My wife said to this to me when they were young, we're going to prioritize traveling experiences with our kids, right? So we cut back on other areas of our life. We're not like luxury vehicle people. We don't like going out to nice dinners, you know, there's stuff like that. But when it comes to vacations and experiences and doing stuff and being outside, especially because I live in Michigan, so in the summer months, we really want to make sure we're out on the water. So that is what I really prioritize when it comes, and I want to spend a lot. And the great thing about it, especially with kids, is that I want them outside doing stuff and not on screens, right? So that's why that's a huge priority for us. It's kind of a win on multiple levels. It's like you get bonding time, you get to be outdoors, and then also, yeah, the more time you spend outdoors, the less time you're on screens, which is just great formation for them. What was the last outdoor activity y'all did together that really moved the needle? You know, the thing that we do, I grew up around the lakes because I live by Lake Michigan, and we were never a boating family. Just didn't understand them. I had friends who had boats. and finally a few years ago my wife and I made the plunge and decided to buy a boat. We bought a pontoon, right? I figured there's no way I could break a pontoon. It's like a couch on the water, right? Sure. It's metal and I can't break it too bad. And I basically taught myself how to drive a boat and my kids love to go tubing behind the boat. We'll wake up at 9 in the morning. Let's go. We're going to the boat. We're taking the tube and that sort of thing. And this year I decided the kids are getting bigger. I need a little more speed. and I got a new boat and it was a totally impractical purchase. I didn't need a new boat. As boats always are. Yes. And that's funny. The guy at the boating, the guy who sold me the boat said, listen, no one needs any new boat. Do you want a new boat? Well, I want a bigger motor. And so I got it. And very impractical purchase. People always say a boat stands for bust out another thousand because it costs so much money to have. Storing it and the gas. But to me, that those are the memories that I'm creating with my kids. And to me, that is an investment in experiences, being outside, being on the water, being in the sun. To me, I don't think you can put a price on that, even though it wasn't a cheap thing to buy. Again, it's a splurge. It's a splurge. And this is one of the things I want to talk about today, about risk and reward. And there is risk in putting too many of our eggs in the far-off financial future basket and skipping out on living life in the here and now as well. I'm curious, from your standpoint, how does the average person tend to think about risk? And in what ways are they wrong about that? I think a lot of the risks today come from just paying too much attention, like the fire hose of information that we get. I think it's really hard to know what is worth paying attention to and what is not worth paying attention to. I don't think our brains have evolved enough to handle as much information as we get. Our ancestors never had as much information coming at us in terms of alerts and 24-7 news and stuff on social media and look at this headline. And I just don't think that we were meant to see all the bad stuff that can happen in the world. The bad stuff has always happened. We've just never been so aware of it as we are today. And I think that's the problem with people is that I've been in the wealth management industry for 20 years, and I think about all the risks and stuff people have been warning about in that time and how well the markets and the economy have done since then and all the stuff that people worried about that never led to anything bad, you know, no bad outcomes. Or if it was a bad outcome, it was a short term in nature and, you know, life moved on for people. And I think that's the hard part for people to know, like, how to filter it. What's something I really should worry about and focus on and what's something that I shouldn't? And I think that's the hard part for people is figuring out what are the right sources of information I should trust? What stuff actually impacts me, my personal circumstances, versus this is just a worry for the world at large. And I think that's where most people get into trouble is they're looking at these existential risks that could impact millions and millions of people instead of worrying about what's going to happen to me personally and my family and my household. Yeah, it's interesting because Adam Smith wrote about that in The Theory of Moral Sentiments 250 years ago. And he talks about just how it's just not in our human nature, essentially. If someone says, hey, there was an earthquake in China, and you're like, oh gosh, that's awful. But it's really hard to, you can't walk around with that weight on your shoulders all day. But if you break your hand, you're so much more concerned about that than you are about the earthquake in China suddenly. But we have a million of those world events coming at us constantly because of the information atmosphere that we live in. And I think it's really hard for people to distinguish between those things because yeah, you have empathy and you're sad that you heard about that event that happened. But it's really hard to care about it significantly. I have a funny one with my wife. You mentioned the shark thing. So every year for spring break, we go to Marco Island. And it's all these canals and inlets and stuff. And we run an Airbnb house on the water. That's another splurge for us, I think. It's a way for us to be outside and be on the beach. And the houses have kayaks. And you can go on these little inlets and kayaks. And my wife goes, absolutely not. There could be sharks in these inlets. And I tell her my stats about shark attacks. And finding a shark in here is impossible. The same day we get there, we walk out onto the little thing, and I'm showing my kids outside on the dock, and 50 feet in front of us, out of nowhere, we see a bull shark jump out of the water. No way. I mean, and three feet in the air. You know, pretty, I don't know, six-foot shark. And your wife's like, I told you so. Yes. And I said, no, honey, you don't get the, what about the statistics, though? But I think that's the thing. If you see something like that in your face, and you go, okay, that's it. I'm never going in the water again. That's the problem, is that being scared off for life. And that's the thing with the stock market. People who experience one bad outcome in the stock market say, that's it, I'm done with it. I know there was a lot of people who did that after 2008, because I talked to a lot of them. I'm going to cash, I'm never going back again. I saw what happened to my parents, or this happened to my portfolio, and nope, not again. I'm done, I can't handle that risk anymore. So how does an incorrect view of risk, then, impact the way people make investing decisions in their lives, do you think? I think a lot of people, and I try to really hammer this home in the book, is the whole time horizon thing and not understanding what their actual time horizon is. Like, when are you going to need the money? I think that is the one big determinant of risk for most people. Now, part of it is your personality and your emotional makeup and how risk and how losses and stuff impact you personally. If you say, listen, I have to tap out. I can't take this much risk, then that's a tradeoff. But I think for most people, it's understanding, like, well, when am I going to need the money in the first place? And is this short-term volatility really going to impact me? Is it going to change my lifestyle in a meaningful way? That's the kind of stuff you have to figure out. Are you going to have to spend the money in a couple years? Yeah, maybe you probably shouldn't have it in stocks then. But if you're not spending the money for years or decades, then you shouldn't have to worry about what's going on in the headlines today. It's more about the compounding and leaving it alone. I still remember having a conversation with a co-worker during the Great Recession when the stock market was cratering. And he was young. He was relatively young. like still in his 30s. And he's trying, he's like, I got to get out, man. It's too tough to stomach. And but his timeline would have suggested otherwise, right, that he has many decades to recover. And so that even though this is a significant event, it should be a blip on the radar. How do we train our brains to think that way, though? Yeah, I tell the story in the book, I had a colleague, and I was in my early 20s. And I just started working when 2008 happened. And the stock market is down almost 60%. And I'm just shoveling money in. And I didn't make a lot of money at the time, but I'm putting as much as I can in. And a colleague said, hey, I'm putting all my new 401k contributions into a stable value fund. It's like a money market. You should do the same, because I don't know if the financial system is going to survive this. And my thinking at the time, just being a naive 20 person who had probably read a couple of Warren Buffett books, was, well, either these are the lowest stock prices I'm ever going to see in my life, or the system does go under, and it's not going to matter what anyone's invested in. So, why not? So, then you buy. That's a big existential one, obviously. But again, I think a lot of people, and I see this a lot with the wealth management clients that we work with, they think that the changes need to be made to your investment plan because of what's going on in the market. Rates are high, rates are low, inflation's up, inflation's down, geopolitical event, whatever it is. And sure, sometimes those things can make changes, right? If rates are at a certain level and the risk reward, whatever, those things can matter. But most of the changes to an investment plan happen because of your personal circumstances, a life event, something happened in your life where your income changes, you decide that your financial plan is changing. I want to retire 10 years earlier than I thought. So most of the time, I think it's those personal circumstances. Those are the risks, right? The biggest risk for almost all people is, am I on track to achieving my financial goals? If you're not, that's a huge risk. If you are, you're doing pretty good. I think that's the misnomer for a lot of people is not paying attention to their own personal circumstances, because that's stuff they can control. You and I don't have any control over what the Fed's going to do, what the government's going to do, what tax rates are going to be, what the market's going to do. We have no control over any of that. Yet we're often wringing our hands about all those things and paying maybe too close attention to the things that are out of our control, wishing, hoping, wanting different results when the only thing we can control is the input. I'm curious, too, one of the anomalies, I guess, in investing history that you point out in the book is what happened in Japan. Essentially, three lost decades of Japanese stocks. How does that impact the risk tolerance or view about the kind of risk we can or should take on as American investors? And that whole situation and that caveat is one of the reasons that I wrote the book in the first place. Because I've been writing about the benefits of long-term investing for 10 plus years. And I did it coming out of the 2008 crisis because I saw all these people saying, like, okay, buy and hold is dead. Long-term investing is dead. Like all these things, like the last decade has proven, right? Because in the first decade of the century, we had two huge crashes and we had two recessions and people, and housing market crashed. And all these people said, I, that's it, I give up. This, this doesn't work anymore. Something else has to change. And I thought, no, this stuff just kind of happens, unfortunately. The bad things, bad times can happen, but that doesn't negate the power of long-term thinking. And I, I espouse the benefits of long-term investing in my books and in my blogs and my podcast. And people always say, well, what about this and what about that? And Japan is the prime example. We had three decades where Japanese stocks went over. They topped out in 1990, and they didn't hit new all-time highs until last year. 45 years of going nowhere, essentially. And so, it wasn't like a lost decade. It was a loss of multiple decades. People say, there, see, long-term investing doesn't work. and I try to point out in the book that the Japan situation was literally probably the biggest financial asset bubble in history. They pulled forward returns so far in advance that the returns going afterwards had to be so bad to make up for it. From 1970 to 1989, returns were like 20 plus percent per year. And then they were so bad after that, that if you just start from 1970, the total returns were like 9 percent per year. It's actually about the long-term market average. It's just that they were compressed in such a short period of time because the asset bubble was so big. Bigger than anything we've ever seen here. And the other point is, Japan got to be 45% of the total global stock market in 1989. It was bigger than the U.S. stock market. It went all the way back down to 5%. Today, it's like 6%. And the crazy thing is, if you just owned the whole world stock market in that time, Japan went nowhere. It was the biggest stock market in the world. Went nowhere for three-plus decades. You still returned like 9% per year. inclusive of Japan being in there. So the point is not just that long-term investing doesn't work. It's that if you take this one extreme, you're going to put all your money into one country or one specific strategy or one region, you could have a bad outcome. And I think that it just really makes the choices known that diversification is the way that you protect yourself against that stuff. That's one of the things. It's not that just you blindly assume these risks won't happen to you. You have to hedge some risks to make it to the long term. So does that lead you to think that for investors, it's too risky to be 100% in American stocks, in U.S.-centric portfolios? Do we need more international exposure to be able to de-risk our portfolio? Listen, a lot of people will say, the U.S. makes up 65% of the world stock market now. 40% of all revenues for the S&P 500 come from out of the United States. I'm fine being all in U.S. stocks. I'm sure you probably would be okay, if your time horizon is like 20 or 30 years But over a decade period we had that from 2000 to 2009 the U stock market went nowhere It lost 1 per year for a decade And international stocks did well Immersion market stocks did well Bonds did well And REITs did well And small caps and mid caps. And all these other asset classes actually did okay, did pretty well and made you money when the U.S. stock market went nowhere. So, I think that's what diversification protects you against. It's not like a bad day or a bad month or a bad year. It's kind of like a bad decade that you're trying to protect against. And I do think most people probably would be fine in the U.S. But I also think the fact that technology is sort of flattening the world in so many ways that the rest of the world has so many more opportunities now. And I just don't know what risks are out there for the United States in years ahead. So it's the kind of thing where you're maybe protecting against some sort of risk that never comes to fruition. But again, I think people around the world wake up every day trying to improve their station in life, just like people in the U.S. And we certainly have a lot of advantages here that other countries simply don't. We have the biggest, most dynamic economy. But I think if you look at the numbers, we make up 65% of the world stock market, okay, by market cap. We make up 25% of the world GDP and 4% of the population. It's kind of crazy when you put it in that perspective. Can that continue? Maybe. But they say that winners write the history books, and the U.S. stock market has won over the last 100 years. Is it going to win over the next 100 years? maybe, but I can't plan for that. I'm not certain about that. So that's why I think international diversification has a place in most portfolios. One of the things you talk about in the book is stress testing your investing beliefs. Why is that important and what does that look like? Yeah, I'm kind of like a strong opinion, loosely held person. And I don't think that there's any one specific way to invest successfully. I know a lot of investors who have totally different mindsets or philosophies. I think the whole point is just having a philosophy. But I think just blindly following anything and just saying, I think there's a fine line between discipline and delusion. Some people will be disciplined to a fault where they follow this strategy until it stops working because sometimes the rules change in the market. So I do think you have to look at all different sides and provide some sort of context and perspective and think through not will this stop working, but what are the downsides of it? What's the bad part about this? And with diversification, the downside is you're always going to be apologizing about something. There's always going to be something in your portfolio that you hate. If you don't diversify and you have a more concentrated portfolio in one country or one strategy or one sector, maybe a handful of stocks, you could hit a grand slam. You could make a ton of money. My firm has had clients come to us. I put money in 10 years ago into NVIDIA, or I put money in Tesla or Apple, and it made me wealthy. That happens to people. Is there a little survivorship bias in there where you don't hear the other side of the people who tried to do that and didn't hit the home run? Yeah. But the other part about hitting a home run is you could also strike out. And I think that's – you just have to understand the tradeoffs in any investment strategy. And I think that's what you're trying to figure out when I'm stress testing something. thing is just like, what are the downsides of this? When is it not going to work? Because I know that no investment strategy works forever. Even Buffett has underperformed over multi-year periods. So I think you just have to understand when whatever you're doing is not going to work. And then, because I think that allows you to sort of lean into the pain and reinvest during those times and not get scared out of your strategy. Yeah. Investing too is just a risky endeavor, right? I mean, if you're putting money into the markets in hopes that over time that your returns will outpace inflation and outpace what you could earn in cash. But then there's also a risk, right, and a very real risk that people, I think, minimize of not investing for the future. I feel like that's something that doesn't get talked about enough, although maybe a little bit more so in recent years with inflation having taken off in a way that, but inflation was always kind of this silent killer of the portfolio where your money was going to be worth less over time. And if, and investing was really, that was the way to outpace that problem. Do you think people understand that a little more viscerally now? Yeah. I mean, cause we went essentially 40 years without really sky high inflation, right? And it felt like with that, you know, we've solved this or something we've, we've got, we've gone from four to 5% inflation to, you know, two to 3% inflation. And I talk in the book, how in the past people dealt with like 10% inflation and then 10% deflation. Like it was way more like the swings were way wilder in like the 1800s and early 1900s. And now for that 40 year period from the 80s, 90s, 2000s, we kind of figured it out. We were in this tight band. And then we had the, you know, 9% inflation. And I do think it was a huge psychological shock to a lot of people. And I don't think a lot of people were prepared to deal with it. I talk about the psychology of that in the book. And it's interesting because when you have high inflation, typically what happens is wages go up really fast too. But people don't look at wages as part of inflation. They think, I'm doing better at work, right? I deserve this. The wages are going up. My dad told me a story that in the late 1970s, when inflation was really, really bad, at one of his first jobs, he got a raise twice in the same year, because they're trying to keep up with inflation. And he's like, listen, it wasn't a good thing. They were trying to make sure we kept up with the standard of living. Luckily, it didn't get that bad here, and inflation kind of came back down relatively quickly, but those price levels don't come down. And I think there was a lot of people who were confused about that, going, oh, we'll just go back to 2019 price levels at some point, right? And then you ask people, would you go back to 2019 wages as well? And they'd kind of go, wait, what? Oh, no, just the prices. Yeah, so I think psychologically, it's such a challenging thing to deal with. And your point about investing is a good one. That's one of the big risks that you're trying to figure out is because a 3% inflation rate will cut your money in half in less than 20 years. I think I give the example in the book. The Millionaire Next Door came out in 1996. Every smart personal finance person has read that and espoused the benefits of that book. I think that would be worth $400,000 in today's dollars. Or alternatively, a million dollars back then would be worth $2.4 million now or something. So yeah, that part of investing, you're right. Not investing anything, just burying your money under the couch or keeping it in cash or CDs or something, it's opportunity costs that you're missing out on. And are you going to keep up with the standard of living? So right, that's a risk too. There's all these other unknown risks that you're taking by investing in the stock market, but not investing is a known risk. You know you're going to lose money to inflation. So yeah, you might rather take the unknown risks that come with investing as opposed to the known risks that come with burying your head in the sand. One of my favorite quotes from the book, Ben, you write, doing more, trying harder, making more trades, and paying more attention to your portfolio can be hazardous to your wealth. And we're in this era where we have a rise in active investors, and even just lots of speculation too, right, with the poly market and CalShe and just being able to trade at our fingertips. So should investors be active in any way in their portfolio? What does that look like? Or should just a purely passive dollar cost averaging strategy, is that the way to go? The way that I look at it for most people is I think a lot of people in the investment industry want them to be robots. And want them to just, listen, purely passive, put it all in an index fund, go to the beach, enjoy your life. And some people have the ability to do that. but some people actually get entertainment and find value on this right and i think that that's part of the the kelsey prediction market stuff too sure some people are like turning into degenerate gamblers and that's that's not a great thing but i think a lot of people are just using it there's definitely some of that yes there's a lot of that and and frankly it's not my type of thing i tried a couple of sports gambling apps it didn't really you know didn't really do anything for me but i think for some people if you need to scratch that it's kind of like a diet most diets fail because people try to follow them too religiously and don't give themselves like an out. Like I'm going to have a cheat meal or a cheat day or whatever. Right. I think some investors need the cheat day and they need like a part of their portfolio. I think you just have to size it correctly. Right. So have some sort of carve out, whether it's 5% or 10% of your portfolio, whatever the amount is, where you can go crazy and you can pick stocks and you can time the market and you can buy options and crypto and, you know, speculate to your heart's desire. But as long as that lets you leave be the rest of it. It's like a behavioral release valve in some ways. And I think some people just need that. And some people enjoy following individual companies and stocks. I've kind of realized the longer I've tried to do that over the years, it's just I look at the other passive stuff and I go like, well, that's just doing better. Why wouldn't I just? And so I slowly but surely kind of wound down that fun portfolio, you know, because it wasn't fun anymore. And it plus it gives you- Losing money is just not fun. And it gives you like a benchmark too, like whether it's a target date fund or an index fund or whatever it is that you have, something more balanced, you can kind of look at that and go, okay, here's the performance of that. Here's the performance of this other brokerage account that I've been playing with. And the thing that I found too was that that 10% of my portfolio was taking up 90% of my investing mindshare. I'm checking the performance. And it's like, is that brain damage worth it? Even if let's say I outperform the market by 1% a year, is that worth the time and effort that it takes? And I think that's part of it that you have to think too. Some people do really love the game of investing. And there's no problem with that. But I think if it's not something that you're really putting time and effort into, I think you've got to carve out a small piece or throw the password away and don't look at all. Yeah. All right, there's more I want to get to with you, Ben, including I want to talk about the headlines of an AI-induced stock market bubble. We're not seeing as many right now. But still, how much of a risk does that present? We'll get to that and more right after this. I'll see you next time. at iHeartAdvertising.com. That's iHeartAdvertising.com. If you're watching the latest season of the Real Housewives of Atlanta, you already know there's a lot to break down. Norcia accusing Kelly of sleeping with a married man. They holding Kate Michelle back from fighting Drew. Pinky has financial issues. I like the bougie style of Housewives show. I think it looks like it's gonna be interesting. On the podcast, Reality with the King, I, Carlos King, recap the biggest moments from your favorite reality shows, including the Real Housewives franchise, the drama, the alliances, and the tea everybody's talking about. As an executive producer in reality television, I'm not just watching it. 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Listen to Inside American Soccer with Tom Bogert and Tab Ramos on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Yeah, I'm talking with Ben Carlson. We're talking about building wealth in volatile markets. And Ben, let's get super current with it then. Like a lot of people, the headlines at the beginning of this year were all about, are we in this AI-induced stock market bubble? That was all anybody could talk about. And then there's the software sell-off. And just maybe some geopolitical events that happened created more market turmoil. Maybe they took some air out of the balloon. I'm not seeing quite as much written about that right now. But do those headlines worry you? Are you ever like, oh my gosh, we're in some sort of bubble. And not to go back to Japan, but we could be in some sort of stagnant returns environment for the next five, eight, 10 years because returns have been pulled forward to such an extent. So I wrote about a lot of the financial asset bubbles in the book. And there really aren't any times, if AI is the big innovation that everyone in the technology field says it's going to be, that's going to change the nature of work, it's going to change the way that we interact with technology and do everything, if it really is that big, and the big companies are spending trillions of dollars on it. So, they obviously believe this, right? This is not just like them talking. They're putting their money where their mouth is. They think this is going to be one of, maybe the transformative technology of this century, if it really is that big, history shows that that almost always leads to a bubble. And it's never not led to a bubble. So it'd almost be more surprising if it didn't. But the funny thing about the market is, there's an old quote, and I'm butchering it a little bit, but it's kind of like, once you learn the rules, the market changes the game. And it would be kind of funny if people have all these historical analogies of the dot-com bubble and the railroad bubble, and AI is following this to a T, right? It's too much spending and not enough return, and that deflates the whole thing. It would almost be funny if this one didn't lead to it, even though it seems like it checks all those boxes. So I think the hard part for people trying to figure these types of things out, that it's always easy to know in hindsight. Of course that was a bubble. And it's kind of funny, because everything that people predicted about coming into the dot-com bubble in the late 90s and more like it's come true like all the stuff that people if you were to tell people 25 years ago you're going to get you know streaming videos on your tv and you're going to be able to have youtube where you can anyone can put up a video anytime they want and watch it and you can have food delivered from your smartphone and all these things that all the build-up that we did came true but we had to go through the dot-com bubble bursting to get there. That's the kind of thing that worries a lot of people these days. O And that where timing is so clutch right Because you can be right generally speaking about the fact that maybe we in some sort of a market bubble or there is a meaningful pullback beyond what we already seen this year But if you wrong in terms of timing or in terms of extent, I mean, there were people predicting the stock market being in a bubble. Over the past decade, there have been a lot of people pointing to stuff like that, right? Like, hey, there's going to be a massive market pullback. You should move to cash or move to gold or something like that. And those people have been incredibly wrong. And so if you get the timing wrong, if you're six years too early on that, you miss out on some massive stock market gains, even if maybe at some point there is a pullback. You still look wrong. Yes. And that's why I think market timing is, the hard part is you have to be right twice, right? It's easy to sell, pull the trigger, I'm going to get out, it makes me feel better because I'm in cash now. Then you have to figure out when to buy later. And I talked to a lot of people who maybe sold in 2008, and then they waited and they waited and they waited. And I talked to them in 2013 or 2014 or 2015, and they said, I'm still in cash. I was waiting for the pullback that never came. And if the pullback did come and it's actually down 10%, then I want to wait. Well, what if they fall 20%? And then I didn't get in at 20 because I was waiting for 30. And 30 never came, and it took off again. And that's the psychological warfare that you – you need to have some sort of rules in place anytime you do any of this stuff, I think. And that's, I think, why I talk about dollar cost averaging in the book, which is the simplest strategy there is. And it works not because it's like this great thing. You're diversifying your entry points, but because that's just how most people save anyway. You save out of your paycheck. So on a monthly basis or a weekly basis or a bimonthly basis, you get paid, and you take a portion of that paycheck and you put it into the market. And now you don't have to worry about all the timing problems that come from the psychology of this endeavor. This makes me think about one of the quotes you use in the book from Warren Buffett. He says, the time to get interested in stocks is when no one else is interested. And I like that. But I'm curious, too. You just mentioned dollar-cost averaging. And I agree. It's the way that most people invest because it's just, yeah, I'm getting money regularly. Most people don't have lump sums, and they're trying to decide what to do with it, maybe on occasion, an inheritance or something like that, or a tax refund, a small lump sum. But what does that mean to you then about dollar cost averaging through good and bad times? When it's that sort of, I love that kind of be fearful when others are greedy mentality that Warren Buffett espouses. But what is that? How do we know when that time is? And how do we have the dry powder on hand to be able to take advantage if we're dollar cost averaging? Yeah, so part of it Yeah, if you're saving money at a high savings rate, that's dry powder. Another part is just people who decide they can't take the volatility of having 100% of their portfolio in stocks. They can have a barbell portfolio where it's cash and fixed income in 10% or 20% or 30% or 40% of their portfolio. And then they give up the expected high returns from being on stocks. But then they have this dry powder that they can rebalance into the pain. And the simplest way to do that is just by setting an asset allocation. If I'm a 70-30 portfolio of stocks and bonds, if it goes to 75-25, I'm taking from the stocks and I'm putting into the bonds. If stocks fall and it goes to 60-40, I'm taking 10% from the bonds and putting it back in this box and I'm re-upping it. That's like the simple way that I think you can force yourself into being a buy low, sell high person. But to be honest, for most people, it's you buy high and then you buy higher, right? Because most of the time the stock market goes up. Yeah. So that's your point. You talk about the dry powder thing. it always sounds great to be a buyer during a recession or during a huge crash, but to have that dry powder, you had to be in cash in the first place. You have to have a source of cash. And for some people, again, that could be a barbell type of portfolio. That's how I view my world. But the barbell for me is more about the safety and the emergency fund and the vacation fund and all that stuff. So I'm more than fine taking stock risk over here because I'm not going to need to touch that money for years and maybe decades into the future. but then I need to have that short-term liquidity to get me through if I need to pull money out for some reason. The biggest thing I don't want to do is sell stocks when they're down. I want to let stocks ride when they're down. So that's part of it too, is not only having the dry powder, but just ensuring that you don't become a forced seller and have to sell stocks when they're down, because that's just doubling up on a mistake. You're down already. You want to wait and let stocks come back instead of selling them while they're in the midst of losses. So maybe that dry powder is less about actively being able to take advantage of and buy more stocks when they're cheap. Maybe it's a little bit of that. But it's at least on the other end of the spectrum about being able to allow those asset prices to recover when they're down. Because you've got enough cash on hand where you don't have to work or sell. Yes. And for me, too, I have a threshold in mind for my emergency savings liquid piece of the portfolio, or my cash piece. And if I'm spending on a lot of stuff because things are happening and we're going on vacation or something happens to the house and I have to repair it, that gets depleted and I fill it up. But I put a certain amount of month in there, too. And if I'm above my threshold there, I'll take money out and I'll sweep it into the market too and use that as a source of liquidity. But again, I kind of separate those two things. The portfolio is for investing and the cash is like a personal financing. I think those are two separate things, and I try not to mix them too much. But I think both just have their place, obviously. Do you think that someone's individual risk appetite should be built around their particular situation? Like how generalized should this advice be? So I'm thinking like someone's age, their risk appetite, how willing they are to kind of go all in in a more specific direction, right? Like, oh, yeah, I'm totally down to be in tech stocks heavily for the next 20 years because I just see a lot of upside there. as an individual, their proximity to drawing that down. How should someone think of or conceive of their overall risk appetite based on their specific characteristics? I do think age is a big one. And age can also determine whether a risk matters to you or not. A bear market is way scarier and a way bigger risk to someone who's retired and doesn't have any income, like no human capital left, right? But if you're a young person, a bear market is actually not a bad, it's a good thing for you, because you have the ability to deploy your human capital and your savings into the market at lower prices. So as a young person, you shouldn't really care about a bear market unless you have to spend that money. And most people, for their retirement savings, of course they don't. So the majority of young people almost can't take too much risk because human capital is their biggest asset. Future savings are going to make up for it. You have time to wait out a bear market. You have time to invest during a bear market. Now, some young people will say, I understand that, and I still want to de-risk my portfolio because I can't handle it. I talk about the psychology and the neuroscience behind losses in the book and how, for some people, you can relive your financial losses in your sleep. And if financial losses impact you that badly and you can recognize that fact, then taking less risk, to me, makes sense, even as a young person, if it's going to allow you to stick with your portfolio. Because perfect is the enemy of good. A good plan you can stick with is way better than a perfect plan you can't stick with. The numbers, the optimized numbers, would tell you young people should have all of their money in stocks. But some people just admit to themselves they can't handle that. They've tried it. They've paid their tuition to the market gods. It didn't work. And I also know older investors. Most older investors should be de-risking their portfolio the closer they get to retirement. Because, again, you don't want to have to get rid of those stocks. But I know some people who have enough money who have said, maybe I don't need to take risk, but I want to take risk. I talk about there's the three ways that you can define your risk profile. It's your willingness, need, and ability to take risk. Right? Your need to take a risk is kind of like what's your expected return that you need to hit your financial goals, right? Your ability to take a risk is kind of your circumstances. What do things look like? What do you need to do to hit your specific goals? And then your willingness is the, that's like the in-between piece. That's on the fence. Like, do I want to take a risk? What's my appetite for risk, right? I have a huge, I have a $10 million portfolio. I have the ability to take a risk, but I don't want to. I'm fine. I don't need to get rich twice. Other people will go, no, I have the ability to take risk with all this money. I'm going to put my foot on the gas and do it. That's more of a qualitative decision. It's kind of up to the individual. One of the things you talked about in the book, too, in terms of risk, you talked about inflation for a while. And we talked about inflation just a little bit ago. But when you think about the traditional things that a financial advisor might point out as a way to protect yourself against inflation, you might think of tips or you might think of I-bonds. Think about how hot I-bonds were for that hot minute when inflation was soaring. But you highlight other ways that you think people can and should protect themselves against inflation that most people might not think are at least traditional. What would you point to as a way to protect yourself from inflation? Yeah. So I said that the three best ways to protect yourself against inflation are a good job, a 30-year fixed-rate mortgage, and stocks. And I mentioned the wage thing before. I think that is imperative. And I think one of the places personal finance people probably don't pay enough attention to. I think there's a ton of good information in personal finance about saving money and paying off debt and even investing, right? But I think it's hard for the career advice piece because it's hard to give career advice. When you and I were growing up, did we ever think we were going to be podcasters? No, I didn't. It wasn't on my radar. I don't think either of us could have possibly planned our careers out if we tried. And so I think it is hard to offer career advice to people. but I think it's probably more important than ever. And I think a lot about this with my kids having to do with AI when they grow up. Like, how are you going to make yourself an indispensable employee to your employer to make sure that you have a job and can grow your income over the years? You know, most people are able to save more money because they're able to make more money, right? That's the thing that can really ramp up for you is if you're able to make more money. So I do think the ability to grow your income is one of the best ways to grow your wealth because it just makes it easier to save. doubling your income doesn't necessarily mean you double the amount you can save. For some people, it could be 2, 3, 4x, right, the amount of savings if you double your income. So I think that's a big part of it. It's like compounding on top of compounding. I do think that a fixed-rate mortgage, and I go through the whole history of that in here, and I was kind of like this part of history that just sort of happened because of the Great Depression. And a lot of other countries around the world actually don't have fixed-rate mortgages. They have floating-rate mortgages. So we have to reset every five years to new rates. And I just think from, listen, owning a home is not for everyone. So that's an obvious caveat. But roughly two-thirds of all households in the U.S. do own a home with a homeowner. I just think the ability to plan your finances out behind a cost that is fixed. Now, there are ancillary costs of owning a home, property insurance and all these things. but having that payment fixed I think is a great hedge especially if you could get it at a lower if you could have gotten at a lower rate earlier this decade especially the further along you get in that mortgage it's nice in those first couple years but it really pays off 15, 18, 22 years down the road when you're like now your mortgage looks like a pittance in comparison to what you'd pay in rent yes exactly and more of the money is going to principal at that point and not as much to interest And so, yeah, I think my 3% mortgage is probably one of the best financial assets that I have. I don't know if we'll ever see that again in my lifetime. Maybe we will. We always debate whether or not we can call that an asset or not. It feels so weird to call a debt an asset, but it really feels like that in some ways. Yes. With inflation at 3% and I'm paying 3% to the bank, effectively on a real basis, it's flat. You almost feel bad for people who missed out on it. And one of the reasons that so many people are upset about the current housing situation, obviously. Yeah. And then, yeah, I talk about stocks, too. It's interesting, because in the short run, if you get a really high inflation spike, like we saw in 2022, the stock market tends to do bad. If inflation is rising from one year to the next, the average returns for stocks are much lower than normal. And if inflation is above 5% or something, stocks tend to not do very well. So, stocks aren't necessarily a great short-term hedge against inflation, but over the long term, that's where it really makes up for it. And no other asset is like that, where you get this really great... Even housing, over the long run, is just kind of above the rate of inflation. Cash and bonds are just above the rate of inflation. Stocks are multiple times above the rate of inflation. Over the long run, it's something like 7% over the rate of inflation. It's just really hard to find something that can compound your wealth over the standard of living like that. So, based on what you just said about returns of bonds, and the average How to Money listener is Gen Z and millennials. The vast majority of our listeners are young. They're in the wealth-building phase of their life. And you look at the average return over the past five years of a U.S. bond index. It's not pretty. It's not good. How should younger listeners who are in the wealth-building phase of their lives think about the role that bonds play in their portfolio? Yes. I think it ends up being... So there's three reasons to own bonds. One is that emotional volatility hedge, right? You just can't handle the volatility. you need to dampen it a little bit. And that's one of the reasons. Two would be that dry powder. And that dry powder could be for a number of reasons. It could be to buy more stocks. It could be because you're worried about spending your money. You have a wedding you need to pay for, right? You have a trip you want to go on. It's something where you're going to need that money in the next three to five years, and you don't want to take the risk with stocks being in a drawdown when you go to sell. And then the third one is just the income piece. You want sort of regular income. Now, it's funny talking about inflation. That's typically the biggest risk for bonds. And that's why they've done so poorly this decade is because inflation was higher and rates were rising. Now, the good thing is, if you want to set expectations, I have no idea what the future returns in stocks will be. I have a pretty good idea what returns in bonds will be. Take your starting rate right now. So if you own a U.S. Treasury fund and it's yielding around 4% or so, in the next three to five years, you're probably going to earn something like 4% per year. So rates were so much lower in all the 2010s and the early 2020s that owning bonds was not a very good proposition. Now you're earning 4%. It's not quite as bad as it was. So I think setting expectations there for understanding where your returns will be. Now returns won't be exactly that, because rates can go up or down and inflation can go up or down. But it's pretty close. You can't really set expectations like that. You can't in the stock market. And that's one of the reasons that bonds don't give you higher returns, because you have that more predictable nature of how they work. And even a high-yield savings account, like, yeah, I was paying 5% 18 months ago, but that's collapsed, not collapsed, but it's gone down significantly. So even people who are like, oh man, it's so nice to be earning more than the rate of inflation in cash they seen that drop dramatically Cash is just over time it eroding your wealth even when it looks like it a decent place to park your money Yeah and that was a great thing And actually you were getting a higher rate on your high savings account than the government bond was paying out right So it was this period of time where the Fed had to jack up rates to bring inflation down. And now that inflation has come down, the Fed is lowering rates. So, yeah, you're right, it's probably 3.5% or 4% for most people in the high-yield savings account. And if the Fed continues to cut rates, that yield is going to go down commensurately. If the Fed cut rates down to 3%, your high-yield savings account is going to be probably around there. If they go to 2%, so that's the risk with cash. You don't have to worry about the losses in the short term on a nominal basis, but yields can and will come down. And that's the part that is hard to understand. So it's a trade-off between the lack of volatility in that account versus you could have less income if rates fall. Yeah. All right. Ben, I got a few more questions with you. I want to specifically talk about kind of risky behavior in terms of how we mimic or follow other people and the problems that can present for our portfolio. We'll discuss that. We'll get to that in just a bit more right after this. Run a business and not thinking about podcasting? Think again. More Americans listen to podcasts than ad-supported streaming music from Spotify and Pandora. And as the number one podcaster, iHeart's twice as large as the next two combined. So whatever your customers listen to, they'll hear your message. Plus, only iHeart can extend your message to audiences across broadcast radio. Think podcasting can help your business? Think iHeart. Streaming, radio, and podcasting. Call 844-844-iHeart to get started. That's 844-844-iHeart. If you're watching the latest season of the Real Housewives of Atlanta, you already know there's a lot to break down. Of course you're accusing Kelly of sleeping with a married man. They holding K. Michelle back from fighting Drew. Pinky has financial issues. I like the bougie style of Housewives show. I think it looks like it's going to be interesting. On the podcast, Reality with the King, I, Carlos King, recap the biggest moments from your favorite reality shows, including the Real Housewives franchise, the drama, the alliances, and the tea everybody's talking about. As an executive producer in reality television, I'm not just watching it. I understand the game. As somebody who creates shows, I'll even say this. At the end of the day, when people are at home, they want entertainment. To hear this and more, listen to Reality with the King on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. American soccer is about to explode. The World Cup is coming. I'm Ty Bramos. I'm Tom Boat. On our podcast, Inside American Soccer, you'll get the real storylines. I'm not worried about Pulisic. I'm not worried about Balogun. I'm not worried about McKinney. My only concern is what happens in the back. The biggest decisions. You're going to look at stats and numbers. he has no shot at making this World Cup team. And the truth about the U.S. national team. It wouldn't be a huge surprise if our team ends up in the quarterfinals or potentially a great run into the semifinals. The World Cup is almost here. Experience it all with us. USA! USA! USA! Listen to Inside American Soccer with Tom Bogert and Tab Ramos on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. I'm talking with Ben Carlson. We're talking about building wealth when markets are volatile. And talk about loss aversion. You talk about that in the book. And just the, I think when we check our portfolio regularly, like how often should someone check their portfolio? Because you should probably have an idea of how things are going. But do you think the average person is checking too frequently and then that's setting themselves up for failure? Because when they do, when there's a dramatic week in the stock market, and they see red on the screen, are they more likely to make poorly advised moves? You know, it's funny. The only time I don't look at my portfolio when it's in the midst of a drawdown. Really? Other than that, you're checking it all the time? I have a, not all the time, but I have a good sense of what it probably would be, because I know what's going on in the market. But I do feel like during those times when things are going down, that's when you set yourself up for the biggest mistakes. And the whole idea of loss aversion is just that loss is sting twice as bad as gains feel good. And I've been trying to teach my kids this. When our sports team loses, like we're big Michigan fans, if the Michigan football team or basketball team loses, I tell my kids, like, you're going to remember this loss way more than you remember all the wins that happened before it. It's just, it's human nature. You always remember the what if or the almost, or the bad call or whatever way more than like the championship game or something, right? And it's the same thing with losing money. And my point is that if you look at the stock market on a short-term basis, it's going to make you feel terrible every single day, because it's almost a coin flip between gains and losses on a daily basis. I went back 100 years, and the stock market is up 53% of the time on trading days and down 47% of the time. It's closer than you'd think. It's a little better than a coin flip. It's just this small, minor gain that compounds over time to give you these wonderful stock market returns. My point is, with loss aversion, if you look every day, the stock market is going to make you terrible every single day because those losses will sting twice as bad, will totally offset the gains, right? Because losses sting twice as bad as gains feel good. And so, yeah, I think the biggest thing is just trying not to look as much when things are going down because that's when your emotions are heightened. And that's why I think you need to have some more automated decisions in place. So you're not trying to make decisions during those times because that's when your brain is not clear and your emotions are running higher And you might be more willing to just say, oh, screw it. I'm hitting the sell button. I'm out. Get me out of here. Something else that clouds our brains and clouds our judgment and probably causes us to do something we wouldn't have otherwise done is trying to compare ourselves to others or mimic the way other people are investing. And it's easier than ever. There are whole apps built around not just trading frequently, but around mimicking how other people invest their money. What's your take on that trend? And maybe it's even more than that. Maybe it's not that insidious or that on the nose, but it's just the people I follow on TikTok. Or the guy who's talking about gold's run up over the last year, and then, boom, I get in at the exact wrong time because I listened to him and I thought he was making some good points. Yeah, I think it's harder than ever to not compare yourself to the Joneses. And in the past, the Joneses used to be just your coworkers and your peers and maybe the people that you lived around in your neighborhood. And now it's everyone because it's on social media. And it's funny, as personal finance people, you and I are supposed to tell people, you know, don't react to this stuff. Pay attention to yourself. Don't have those feelings. But I get those feelings when I see someone else. You know, it's impossible to not have those human emotions of, geez, how did they get that? Or how did that happen to them? Why are they on this vacation? And I'm not. I think that's just a natural human emotion. and one of the things that I try to do, whether it's investing or anything else in life, is trying to put yourself in their shoes and determine what did it take to get to that point for that person? How much hard work did they have to do? What else is going on in their life? How happy are they with this situation? How much debt are they in? All these different things. That's key. That's key. How much debt is? Is this actually a lifestyle they can really afford? Do they have the optionality that I have? Because, man, they're in over their head and they're worried every night falling asleep because they owe everybody money. Yes, so I think that's the big thing. And again, the people who strike it rich, there's so many stories, especially this decade. I feel like the 2010s, there weren't nearly as many stories about this person struck it rich investing in crypto earlier, investing in this stock or whatever. There's way more stories like that in 2020, it seems like, because we're in this bull market. But again, we don't see the stories of the people who lost everything, are the people who tried that and put all their money in options and their portfolio went to zero. And that's the stuff that you've done. I think you have to remind yourself. And also the fact that a lot of these people showing their lives on social media, it's an orchestrated life. It's not the real thing. They're showing you the best parts of their life, not everything else. So it is hard. I think getting older has made it a little easier for me. I'm just a little more seasoned. And I don't know, I care more about my kids and their lives than my own in some ways. but uh it's it's i think it's never been more challenging for people to to have not have that jealousy and envy and comparison it's really really difficult i i will say it's probably never been harder than it has been today and i think there's so much thing i think there's a lot of nihilism right now and just kind of like well if man the the and i think that's maybe the the adverse reaction people have a hard time thinking about building wealth over the long term slowly but surely. It's like, why do that when there's all these ways that I could do it a whole lot faster? You're a long-term investor. That's your mindset. How would you encourage someone to think more in long-term realities, even though, oh, I'm thinking of future me 20, 30 years down the road, who's got a million dollars versus trying to do it quickly in the next year to making big bets? Yeah, it is hard. And because it's just a more boring way to invest, right? I think it's just a higher probability bet, you know, maybe people need to take more statistics classes or something. But going back to your first question about, you know, what do you spend money on and have fun with? I think you have to try to figure out a way to make it so you're saving and investing is like a bill, right? Every month I pay my gym membership, I pay Netflix, I pay my utilities, and I pay myself in my Vanguard account, my brokerage account, or whatever it is, my 401k. And then the rest of the stuff that's left over, I'm going to enjoy it a little. I think that it has to be some sort of balance like that to get you to be able to, like, I'm taking care of my future self, but I'm also taking care of my current self. And again, a lot of that to come, I call it being selectively cheap. Like there's certain areas of your life where you cut back and you just, you recognize, I don't care about these things as much. I'm not going to spend money on them. Whether it's, again, nice cars, nice furniture, nice whatever. But if you like those things, that's fine. Then you have to cut back in other areas. And I think that's the thing is just figuring out ways to prioritize little things that matter to you so you can splurge on, have those minor splurges. And I think that helps with the mindset of I'm taking care of both things at once. Because I do think it's really hard if you're, and I did this a lot in my 20s and 30s when I wasn't making as much money, is the being frugal and just save, save, save was my only mindset. And I think you can only have that for so long before it's like, well, what's the point? Yes. Why am I doing this? Who cares if I am taking care of at 60 if I'm not taking care of at 30? So I think there has to be some give and take there. Yep, I agree. Ben, this has been a lovely conversation. Thank you so much for joining me. Your new book, Risk and Reward, comes out next week. you want to tell listeners where they can find it and maybe a little more about it real quick? Yeah. Published through Harriman House. It's just kind of a collection of all my favorite anecdotes and charts and stats about the stock market and the sort of context behind long-term investing and how to take care of and manage the biggest risks that happen to you as an investor. You can find it on Amazon, Barnes & Noble, anywhere you find your books. Awesome. Thank you, Ben. Appreciate it. Thanks for having me. Man, I always love talking to Ben Carlson. Man, I don't get to do it often enough. Actually, the last time we had him on the show was six years ago, which is kind of crazy. I told him before we started recording, we both have a few more grays on top of our head six years down the road. But man, so much good information. And just, I love his perspective. I love the way Ben thinks about investing. The fact that he calls himself a long-term investor says that's really important to him. And actually, for most people, that timeline is a really, really important factor. And it's why most of us should be far less interested in the daily movements of the stock market, or in a year even where the stock market is in a malaise. or, you know, that's something Matt and I talk about regularly, a correction, or even a recession, right? Even seeing the stock market go down 10 or 20%. This is in terms of stock market history, the more you acquaint yourself with it. It's not an anomaly. We just haven't experienced that as much in recent years. The stock, if you were someone who started investing, let's say in the in 2015. You just haven't experienced nearly as many of those corrections. And so for a long time, I think a lot of people saw the stock market as a high yield savings account on steroids. Well, I can just stick money there. And of course, I'm going to do better than cash. And that is true over a long period of time, but it might not be true in a short period of time. And so I just think we have to get ready and understand the history. And that's what Ben is so good at doing is using history to inform his belief system, right? So what he talked about stress testing your beliefs. And I think the more you can point to history, and the more you can point to your own emotion and reaction, then the more you can come up with a plan of attack for how you want to invest in a way like what he said, have rules in place. And he talked about writing it down. And there's so much about that being a rules based investor that allows you to, to not give into emotion. And maybe you play with investing on the side just a little bit here and there. And so that becomes for you, your emotional outlet. Oh, heard somebody talking about investing in this ETF or that individual stock. Great. If you're keeping that sandbox and it's 5% of your portfolio, let your emotion run wild. But even as he talked about, that it was such a small percentage of his net worth, it became but it was 90% of his mental load in terms of investing. And he wasn't even finding that he was able to get superior results. I think that's true for the vast majority of people. And so unless you're just really interested in it, and that's a game you want to you just like, have fun. And you can sandbox it, like I said, keeping it to a small percentage of your portfolio, go for it. But I think for a lot of people, it's it's wasted time, it's wasted effort. and in fact, they're going to have inferior returns as well. So, and treat investing and saving like a bill. That's what Ben said at the end and I think that's classic personal finance wisdom. Pay yourself first. So yeah, please do check out Ben's book. It's super fascinating. Risk and reward comes out next week. We'll link to it in the show notes. You can find those up on the website at howtomoney.com. Until next time, best friend out. This is an iHeart Podcast. Guaranteed human.