#526: Recorded LIVE on stage at the Morningstar Conference in Chicago! We chat with behavioral finance professor Meir Statman. He breaks down the differences between standard finance and behavioral finance, making it clear that understanding human behavior is an essential part of investing.

Statman starts by explaining that standard finance assumes people are rational. They make decisions purely based on logic and aim to maximize wealth. However, behavioral finance sees people as normal, not always rational. We often act on emotions and cognitive shortcuts. For instance, people might prefer receiving dividends over selling shares, even if both result in the same financial gain. This is because dividends feel like income, while selling shares feels like dipping into savings.

He uses a great metaphor to explain how investors view their portfolios. Think of a dinner plate: behavioral investors like their investments separated, like mashed potatoes on one side, vegetables on another, and steak in the middle. Rational investors don’t care if it’s all blended together because they only focus on the total nutrients. This shows that normal investors have different needs and want to balance safety with growth.

Statman talks about the importance of diversification. He recalls a lunch with Harry Markowitz, the father of Modern Portfolio Theory, who supported the idea of having a mix of safe and risky investments. Markowitz himself had municipal bonds to avoid poverty and stocks to grow wealth. Diversifying helps investors manage risk and meet both their safety and growth needs.

We then dive into how people manage money across their life cycle. Statman points out that young people know they need to save but are tempted to spend. They often control this urge by putting money into retirement accounts like 401(k)s. As people get older, they become so good at saving that they sometimes forget to spend and enjoy their money. Statman gives a funny example of his mother-in-law, who refused to replace an old sofa because she didn’t want to dip into her savings.

Statman also touches on asset pricing and market efficiency. He explains that while traditional finance focuses solely on risk, behavioral finance considers other factors like social responsibility. Some investors are willing to accept lower returns to stay true to their values. Additionally, he argues that market prices do not always reflect true value, and it’s hard to predict when they will.

Towards the end, we discuss the broader aspects of wellbeing. Statman emphasizes that financial wellbeing is just one part of a happy life. Family, health, work, and community are also crucial. He believes financial advisors should help clients achieve overall life wellbeing, not just financial success.

For more information, visit the show notes at https://affordanything.com/episode526

Timestamps

Note: Timestamps vary on individual listening devices based on advertising run times.

1:23 - Explain the differences between standard and behavioral finance.

4:30 - Discuss Harry Markowitz's influence on modern investment strategies.

6:08 - Highlight life cycle investing and saving/spending behaviors over a lifetime.

10:02 - Explore mental accounting and differentiating between income and capital.

11:14 - Talk about common trading mistakes due to cognitive errors.

14:26 - Discuss utilitarian, expressive, and emotional benefits of financial decisions.

17:41 - Explain the difference between System 1 and System 2 thinking.

21:39 - Discuss how emotions and moods impact investment decisions.

25:59 - Explore the concept of regret and how it affects financial decisions.

30:21 - Emphasize the importance of human touch in financial advising.

44:00 - Discuss the impact of AI on different industries and investment decisions.

48:24 - Highlight the need to balance financial wellbeing with overall life wellbeing.

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We chat with renowned financial advisor Michael Kitces at the Morningstar Investor Conference in Chicago.

Kitces answers a big question: Is the economy worse than we think? He explains that a few big companies like Nvidia, Meta, and Alphabet are holding up the S&P 500. But this doesn’t mean the economy is bad. It's common for a small group of companies to drive the market. Since it’s hard to predict which companies will do well, he stresses the need for diversification.

Kitces tells us to focus on long-term growth instead of trying to time the market. He shares a famous quote from economist John Maynard Keynes: "Markets can remain irrational longer than you can remain solvent." This means it’s better to invest broadly and wait for the market to grow over time.

Kitces also says that career development is important. He believes boosting your income through career advancements can have a bigger impact on your financial health than trying to get the highest returns on your investments. He says, "Spending more time focusing on my career and getting a raise... will actually be more meaningful than trying to improve the returns on my own money."

We discuss the importance of index investing and proper asset allocation. Kitces advises owning a diversified portfolio that includes international and small-cap funds. Even if these funds aren’t performing well in the short term, diversification helps spread risk and capture growth from different sectors and markets.

Kitces talks about the cyclical nature of markets. Some people worry that the market will go down just because it’s been up for a long time. He explains that markets don’t "die of old age." Many factors influence market cycles, and it’s hard to predict when a downturn will happen. This reinforces the idea that staying invested and diversified is usually the best strategy.

Finally, we talk about inflation and interest rates. Kitces explains that it’s hard to predict when inflation will return to the Fed’s target rate of 2 percent. This means that interest rates might stay high for a while. It’s important to keep a long-term perspective and not make drastic changes based on short-term market movements.

This episode offers practical advice on investment strategies, the importance of diversification, and why focusing on your career can be more beneficial than trying to outsmart the market. Kitces’ insights help anyone who wants to reach financial freedom.

Timestamps

[Note: Time codes will vary on individual listening devices based on advertising run times.]

1:23 - Becoming a famous financial advisor.

2:08 - Role of a small number of companies in holding up the S&P 500.

5:11 - NVIDIA's role in AI and cryptocurrency.

7:38 - Importance of diversification.

11:27 - Irrationality and efficiency of markets.

16:26 - Role of international and small-cap funds in diversification.

18:10 - Impact of regulatory frameworks on AI development.

32:11 - Demographic advantages of emerging markets.

40:01 - Cyclical nature of markets and investor fears.

51:30 - Inflation and wage growth.

For more information, visit the show notes at https://affordanything.com/episode525

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#524: Mark and his partner will soon inherit an IRA worth over a quarter million dollars. With today’s elevated interest rates, would throwing it all at a primary residence be the smartest play? 

An anonymous caller and his girlfriend are musicians who dream of building a home with a monetizable recording studio. How do they untangle personal wants from business needs?

Will feels stumped about the options in his defined benefit pension plan. When should he choose a guaranteed annuity over a lump sum payment? 

Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.

Enjoy!

P.S. Got a question? Leave it at https://affordanything.com/voicemail

For more information, visit the show notes at https://affordanything.com/episode524

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#523: How much is an hour of your time worth?

Google's Executive Productivity Advisor , Laura Mae Martin, joins us to answer that question.

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#522: Emily Anne is worried about her obsessive tracking behavior. She’s in great financial shape but struggles to shake the constant compulsion to check her accounts. What should she do?

An anonymous caller and his partner plan to use geo-arbitrage to retire early before reaching their financial independence number. Can they have their cake and eat it too?

Kevin and his wife are having second thoughts about their Delaware Statutory Trust (DST) real estate investments. How do they back out without compromising their estate plan?

Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.

Enjoy!

P.S. Got a question? Leave it at https://affordanything.com/voicemail

For more information, visit the show notes at https://affordanything.com/episode522

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If you're a longtime listener, you'll enjoy this candid, behind-the-scenes conversation about entrepreneurship and growth between Paula Pant and former financial advisor and Stacking Benjamins host Joe Saul-Sehy.

For more information, visit the show notes at https://affordanything.com/episode521

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#520: Happy 248th birthday, USA!

In this 5th of July First Friday economic update, we cover five topics: the economic impact of elections in the UK; the S&P 500 topping 5500; the effect of the Supreme Court’s Chevron ruling on Social Security and retirement planning; the latest jobs report; and California’s new law allowing accessory dwelling units to get sold separately as condos.

For more information, visit the show notes at https://affordanything.com/episode520

Resources Mentioned:

UK’s Office for National Statistics: May 2024 report

SupremeCourt.gov: Loper Bright Enterprises v. Raimondo

Federal Register: SSA

Social Security Administration: Will Social Security Be There for Me?

Bureau of Labor Statistics: June 2024 jobs report

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#519: We sit down with Jim Kwik, a brain coach and expert in memory improvement, speed reading, and optimal learning.

As a child, Jim suffered a brain injury that made learning difficult. He was labeled "the boy with the broken brain," which deeply affected his confidence and performance in school.

Today, he’s an expert in memory, focus, learning, cognition and mental performance.

He’s here to remind us that our brains are our number one wealth-building tool.

He talks to us about strategies for improving memory. He debunks myths like multitasking being efficient. He talks about the negative impact of digital distractions and the myth that we only use 10% of our brains. He describes a great brain diet, and discusses nootropics and other brain supplements.

This episode is packed with practical advice. If you want to improve your memory, learn faster, and maintain better brain health, you’ll enjoy Jim Kwik’s tips.

Timestamps:

[Note: Time codes will vary on individual listening devices based on advertising run times.]

0:58 - Jim shares his childhood experience with a traumatic brain injury

2:26 - Impact of being labeled "the boy with the broken brain"

3:59 - Struggles with school and a turning point with a friend’s father

5:33 - Encouragement to write down dreams, leading to a new perspective

8:22 - Introduction to personal development books and reading challenges

9:59 - Consequences of overworking and lack of self-care during college

10:45 - Realization of the need for better learning methods

11:50 - Breakthrough in understanding learning and memory techniques

12:25 - Teaching others and a student’s powerful story

13:35 - Importance of knowledge as a superpower

13:50 - Introduction to the concept of building a better brain

15:03 - Description of the four brain types and their traits

17:23 - Significance of understanding one’s brain type

19:18 - The forgetting curve and memory retention

20:11 - The three keys to a better memory using the "MOM" method

21:01 - The importance of motivation in remembering names and other information

22:37 - The role of observation in memory and being present

23:15 - Anecdote about Bill Clinton’s exceptional memory and presence

24:55 - Connection between being present and having a powerful memory

26:11 - The concept of "digital distraction" and its impact on focus

26:56 - The "four horsemen of the mental apocalypse" driven by technology

29:18 - The myth of multitasking and its negative effects

30:59 - The importance of monotasking for better focus

31:15 - Introduction to the "Faster" method for learning

32:06 - The role of forgetting in learning

32:50 - The misconception of multitasking and the benefits of focusing

33:35 - The significance of state and emotion in learning

35:22 - Tips for maintaining a positive learning state

36:11 - The power of teaching to reinforce learning

37:20 - Common misconceptions about learning

39:20 - The myth of using only 10% of our brain and neuroplasticity

41:08 - Importance of challenging limiting beliefs

43:08 - Influence of self-talk and belief systems on performance

45:04 - Scheduling time for learning and implementing new knowledge

47:04 - Making the most of conferences by setting aside time for implementation

48:48 - Application of AI to enhance human intelligence and learning

51:09 - Best practices for brain health and cognitive performance

57:25 - Importance of taking care of your brain as a wealth-building asset

59:04 - Steps to improve brain health, including diet, exercise, and positive peer groups

1:03:33 - Role of brain supplements and nootropics

1:06:00 - Influence of a positive peer group on behavior and performance

1:09:22 - Conclusion and final thoughts on brain health and continuous learning

For more information, visit the show notes at https://affordanything.com/episode519

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#518: If you want to learn about building wealth through entrepreneurship, you’ll enjoy this episode.

When Rachel Rodgers graduated from law school, she didn’t take the conventional path to working at a big law firm. Instead, she opened her own practice, specializing in intellectual property law. Many of her clients were entrepreneurs and small business owners.

Rachel quickly realized that many of her clients faced significant challenges in trying to grow their business. This ignited a new vision in her: to not just provide legal services but to help entrepreneurs achieve financial success.

She pivoted, shutting down her law practice to open Hello Seven, a company that offers comprehensive business strategies to help entrepreneurs reach seven-figure incomes.

She joins us today to share actionable insights that can help any entrepreneur, side hustler or small business owner reach seven figures in revenue.

Timestamps:

[Note: Time codes will vary on individual listening devices based on advertising run times.]

1:10 - Rachel introduces herself and her background in intellectual property law.

3:45 - Decision to start her own law practice.

5:27 - Challenges faced as a new lawyer and entrepreneur.

7:15 - Importance of financial independence and wealth-building for marginalized communities.

10:05 - Inspiration behind founding Hello Seven.

12:30 - Vision for Hello Seven and its mission to help entrepreneurs reach seven-figure incomes.

15:20 - The need for scaling businesses and making strategic decisions.

18:45 - Transition from a legal practice to a broader business coaching platform.

22:10 - Impact of Hello Seven's programs on entrepreneurs' lives.

24:55 - Concept of the "Million Dollar Badass."

28:30 - Success stories of clients.

31:15 - Challenges of balancing business growth with personal life.

34:05 - Importance of mindset in achieving business success.

37:20 - Introduction of the Hello Seven Foundation and its focus on supporting black mothers and babies.

40:00 - Plans for the future of Hello Seven and commitment to social impact.

42:30 - Advice for aspiring entrepreneurs looking to build successful businesses.

45:10 - Importance of mentorship and community support in entrepreneurship.

For more information, visit the show notes at https://affordanything.com/episode518

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#517: Kimiko is dismayed that the asset allocation books she’s read led her down a path to an underperforming portfolio heavy in ex-US stock investments. Where should she go from here?

Julie and her husband dream of owning a vacation rental in the Denver area even though the math doesn’t add up. It seems like everyone around can make it work though. What’s missing? 

Casey is excited to build his real estate portfolio and purchase his third rental property. He’s also worried that his plan to fund the purchase with his 457 Plan is flawed. What should he do?

Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.

Enjoy!

P.S. Got a question? Leave it at https://affordanything.com/voicemail

For more information, visit the show notes at https://affordanything.com/episode517

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#516: Have you ever wondered how small, seemingly insignificant actions can have massive impacts on your financial life? 

In today's episode, we talk to Dr. Brian Klaas, a Professor at University College London and an affiliate researcher at the University of Oxford. 

He explains how our decisions can lead to unintended and unanticipated consequences. 

He describes why resilience is more important than efficiency when it comes to protecting your investments and career from unexpected shocks. You'll learn how to tell the difference between predictable problems and those that are full of uncertainty, giving you a new way to think about your decision-making process.

Key Takeaways:

1. Embrace the unpredictability of life and recognize the interconnectedness of your actions.
2. Prioritize resilience over efficiency to mitigate catastrophic risks.
3. Understand the difference between predictable and uncertain challenges to make smarter decisions.

For more information, visit the show notes at https://affordanything.com/episode516

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