Our guest today is Ben Carlson, of A Wealth of Common Sense. He is a financial advisor, author, blogger, podcaster and self-professed introvert. Today's discussion will have a little something for everyone, as we cover a broad range of topics from inflation to cryptocurrency to how to pick an asset allocation and stick to it. We also get into more philosophical topics, such as how to not let money ruin your life and why investors need a sense of optimsm.


 

Early Life and Education 

Let's introduce you a little bit to our audience. I think there are probably a lot of people here that don't know you and aren't familiar with your work. But let's start at the beginning. Tell us a little bit about your upbringing and how it affected your views on money.

“I was upper-middle class and grew up in Michigan. My dad was a finance guy. He was a CFO at a hospital. My parents weren't cheap, but they were definitely frugal. They didn't spend money lavishly, and I think that had a big impact on my financial background. From an early age, my dad talked about the perils of things like credit card debt. I think a lot of your upbringing and your personality have a lot to do early on with how you are with your finances. Some combination of the way I'm wired and my parents upbringing, that sort of thing. I was always a saver from a very early age. I was saving lunch money and stuff and packing my own lunch from an early age. It's interesting because I realized right when I got out into the working world that it didn't really matter what my investing style was. I was more concerned with personal finance at that point because I didn't have any money. I needed to save before I could actually start to invest. I think that my upbringing definitely helped get me a good step ahead there.”

OK. You leave home. You've got a pretty decent financial background for someone just leaving home. Tell us about what you did then about your education and your career up to this point.

“My education really started after I got done with formal school. I got done with college. I got to my senior year of college. I was never the person who at 12 years old was reading the Wall Street Journal and picking stocks. I was more interested in sports and girls and partying and stuff growing up. I got to my senior year of college, and I realized I don't really know what I want to do. I knew I wanted to be something in finance and I was more analytical in nature. I was always much more of an introvert than extrovert, and a lot of the finance jobs that I was applying to out of college were basically sales roles. And I realized I didn't want to be a salesperson. I'm definitely not a salesperson. That's not in my personality.

I got into an analyst role for a consulting firm. Actually, for your audience, this is kind of interesting. The majority of the money that we managed was for hospitals. It was a good education to me that all the hospitals are nonprofits, and they sure have a lot of money. A lot of these hospitals had four or five different accounts, and I was a performance analyst. I was learning how to do Excel and all these things. But all these hospitals had a pension fund and insurance for their malpractice liability, endowment, maybe a foundation, and an operating fund. That was a really eye-opening thing to me. I think I got lucky from the positioning of just getting this job and again, not knowing what I wanted to do. My boss was really big on asset allocation and creating a comprehensive investment plan. He had a different plan for each one of these different funds. I learned right away that asset allocation is way more important than stock-picking. He didn't care as much about stock-picking. He cared more about the asset allocation. Each of these different plans had their own asset allocation. And I got to see, ‘Oh, I get it, you matched the goal of the fund with the portfolio.' I learned from early on in my early 20s that that's the way to invest. I still use a lot of those principles to this day. It made a lot of sense.

The other thing for my education is, I came out of college not knowing much besides the textbook stuff. I learned right away that I did not understand the stuff these people were talking about in these financial circles. I had to learn, and this is before a lot of financial blogs were around, before there were podcasts. I think there's way more tools available to people these days than I had back then. I graduated in 2004. I just read every book that I could get my hands on. And everyone I came into contact with, I asked them what their three favorite finance or investing books were. I read everything I could because I realized how far behind I was, because I didn't really know what I wanted to do with my life.”

Since then, you've gone in all kinds of different directions. For someone who views himself as an introvert, you sure interact with a lot of people. You have a popular blog, you've got a popular podcast, you've written four books. Lots of people have read those. And you give advice to people. Which of those activities do you like best and why?

“I can't remember who said it, but someone said blogging is sales for introverts. I started the blog first. I think it was about 10 years ago in 2013. I'm coming up on my 10-year anniversary. The funny thing is I had no grand plans when I started the blog. I was the finance guy among friends and family. I was getting questions from normal, regular people about their 401(k) plans and the stock market and what's it going to do next and all these things. Everyone I came into interaction with about the markets or about finance thought it was just really complex and didn't understand it. They had a lot of questions, and I thought if I write a blog, I'm going to write this assuming my audience is my friends and family. I want to take the complexities of finance and how people think it's really difficult and simplify it and put it in plain English.

I was never much of a writer before I started blogging, and I just fell in love with the process. I think that introvert thing, it made it easier when I found a topic that I really enjoyed. One of the things I liked about it is not just the nuts and bolts of the analytical side of things. It's the human element. The behavioral stuff about the markets and how crazy things can get and how important behavior andook psychology is when a person is creating an investment plan and trying to follow it. The blog still has a special place for me just because I've been doing it so long. I think it's forced me to continue to be a lifelong learner because you have to continue to learn if you're going to continue to provide feedback and write. I think there's an old saying, it goes something like ‘I write to know what it is I really think.' And I think blogging for me has been helpful. Now, I don't know about you, but I get way more feedback from podcasting than I do from blogging. Is that true for you as well?”

I don't know if it's true or not, it's just easier to give feedback on a blog if you have comments under the blog. I think I probably get more on blogging, but we actually reach more people with our podcast than we do with our blog.

“The surprising thing to me with the podcast is people feel like they know you more because they feel like they get your personality, they get more of who you are. It's not as edited and clean as maybe a blog post could be because you have some more time to think through it. You're just talking. It's totally different mediums and I think part of it for me is sometimes you forget that there's a person on the other end consuming your content. You forget that there's an audience listening to this. You forget there's someone reading it. I love the feedback I get from people. I know a lot of people think that the internet is just this horrible hellscape for people and it's awful. But the feedback I get is usually helpful, and a lot of times people will give me other stuff to think about or look at or different views and perspectives. I think the feedback I get from both the blog and the podcast is actually helpful to me, and it actually gives me ideas for stuff to talk about in the future.”

I've definitely found that. It's interesting you call your blog, “A Wealth of Common Sense,” a little bit of an allusion I think to Jack Bogle there. That is a phrase he used a lot in one of his books. Was there inspiration for the name from Jack Bogle?

“He's certainly a hero of mine. One of the things when I was growing up, my brother and I would always talk about this kind of stuff, and we'd see people making mistakes in their finances or with the markets or in business or anything. We would always come back to  the question, ‘Where's the common sense here?' Just understanding how this mistake could have been avoided. That's kind of where the name was spawned from. I think for a lot of people, if they just stepped back and had a little more self-awareness and thought through things a little more and used their common sense, they would avoid a lot of problems. What's the old saying? ‘Common sense is not so common.' That's kind of where I started from with all this. If people just used a little common sense, they wouldn't get themselves into so much trouble with their finances.”

A little bit of a buttoned-down tone, a little bit of a buttoned-down name, and then you go to the podcast, which is called Animal Spirits. It sounds like a party.

“I think that's a John Maynard Keynes saying actually. The podcast started because I work remotely and did before the pandemic. I was doing it before it was cool, I guess. My colleague Michael works in New York, and we were constantly sharing and feeding thoughts and ideas and charts throughout the day. We just decided that we're constantly thinking and talking about this stuff. Let's bring that conversation to a podcast, and we have a lot of fun with it.”

You and I both agree that the most important thing investors can do is get a solid written long-term investing plan and follow it. But that's not that fun to talk about. So today, we're going to go over a potpourri of topics, some of them are more current than others, and just get your thoughts on those and talk about those.

“Let's do it.”

 

Energy Stocks and Price of Oil 

One of the interesting things in the markets this year has been energy stocks and the price of oil. Can you talk a little bit about some of the things you found surprising in that realm this year?

“I think one of my overarching tenets is just that markets and finance in general is hard. I think anyone who tries to tell you it's easy is delusional or lying to themselves. I think you can make finance simpler, but I don't think you can make it a lot easier for people. I think that's true with personal finance and with markets in general. This is especially true when trying to handicap the macro-economic environment. If you go back to the end of February, oil was trading for $90 a barrel. This is right before Russia invaded Ukraine. Immediately after they invaded, by the first week of March, oil was at $120 a barrel. All the headlines are saying oil is going to $200 a barrel. I have to admit, at the time, that narrative made sense to me. I'm not an energy person. I don't follow these markets closely.

But listen, everyone knows what's going on in the energy markets because we see these huge electronic numbers when we drive down the road for gas prices. It's the one consumer price everyone knows and talks about. If oil goes up and gas goes up, everyone knows about it. We saw a lot of mal-investment in the energy infrastructure in the 2010s because prices were low and then prices went negative in the pandemic and oil was just kind of an afterthought. Then it becomes, ‘OK, wait, this is a really important resource again.' We've had a pipeline shut off, and it's really important. And $200 a barrel seemed like it was only a matter of time. Little did we know by the end of March, oil had stopped going up. It's basically crashed since then. Then there was a story just this week saying oil has round-tripped. It started the year at $75 a barrel and now it's back there to $75 a barrel. Again, proving just how hard it is to predict the future. The funny thing is, I could have told you at the beginning of the year, oil is going to be flat on the year after spiking. How do you think energy stocks are doing? You probably said, ‘Well, energy stocks are probably doing OK.' But they're up like 70% this year. Oil has gone nowhere, essentially flat. Energy stocks are still up 70%.

I just think even if you had the headlines for the macro economy three, six, 12 months into the future, it'd still be hard to make money on that information. Markets are surprising, but they're literally never boring. I think it’s one of the lessons we've learned the last few years.”

 

Cryptocurrency

Speaking of never boring, one of the most fascinating things to watch—and this has been going on really the whole time I've been blogging since I started in 2011—is crypto. It's fascinating. I've been watching it from the sidelines, essentially, since before I started blogging. I almost can't look away. It's like a car wreck that you just have to look at because it's so fascinating. But this year has been an epic meltdown. Bitcoin is down over 70%, and that looks pretty good compared to other crypto assets. More recently FTX has gone bankrupt in spectacular fashion, and now BlockFi has followed suit. What lessons should investors take from the crypto story, at least the story we know to date?

“I feel like we could spend an entire podcast on the lessons here. I have two big ones. One of them is if we just go back to 2020 and 2021. I think it should never be so easy to make so much money in such a short period of time. We had people making millions of dollars in a matter of weeks and months. I think people started to think that that was just going to be normal. If I just put my money into this and I take a big risk, then it should pay off and I should become wealthy beyond my imagination. I think a lot of new investors thought that was just a normal thing, and it's certainly not and should never be.

I think the second one is just that diversification is the ultimate risk control. We hear all these success stories about people who went all in on crypto or Tesla or some other moonshot. I always look at these stories as survivorship bias. There's never going to be a story in the Wall Street Journal or the New York Times about the person who dumped 75% of their life savings into a penny stock and went broke. You never hear that story because the winners write the history books. I'm not one of those people who's going to scold others and tell them, ‘You can't speculate with some of your investments. You can't go into crypto. You can't pick stocks.' I don't have a problem with speculation as long as it's sized correctly.

The thing we've learned is that going to extremes, I think with any position, no matter what you're investing in, has a greater chance of financial ruin than making you obscenely wealthy. That's the thing a lot of people have learned, that no matter how much you believe in something like this—you want to invest in crypto because you think it's a promising technology, fine—but don't put all of your money into it. Especially in an asset class that can lose 80% in the blink of an eye. My way of thinking is if you need to scratch that itch and pick some stocks or speculate or invest in startups, just size it correctly with 5% or 10% of your portfolio. Use the other 90%, 95% in more boring plain vanilla investments that are low cost. You can put them on autopilot and just leave the bigger, more boring stuff alone.”

A comment you had made in one of your blog posts really resonated with me because I had thought the same thing. I wanted to ask you what you thought the over-under on Jonah Hill playing FTX CEO Sam Bankman-Fried was going to be?

“Probably pretty good odds. We do love a good story about a quirky sociopath these days who steals money from people. Part of me does wish that more people would look up to normal people who slowly but surely build wealth over time rather than people who become rich overnight. But I wrote a book a couple years ago called “Don't Fall For It.” It was a short history of financial scams. I looked back at hundreds and hundreds of years at all these financial scams. The craziest thing I found in my research—and I feel like I could write a whole different version of this book based on the last three years with crypto and all this other stuff—is that the environments are always different. There's always the economy or whatever, the place is always different, but the reasons for scams are almost always the same. One of them is this new and exciting technology, the promise for the future, I'm going to create great wealth.

There's always a founder or a product or a leader or something with a compelling story and persona. There's typically leverage or margin involved. It's usually new and exciting financial products and then just this promise of great and ever greater riches. It's always the same, just in a new wrapper. This one definitely checks all those boxes. It does make for a fascinating story, but it is kind of unbelievable how this stuff happens again and again. I guess because people, they want to believe that it’s easy riches. Even though it's not there for everyone else, they want to believe it's there for them.”

It's interesting that it really is the same story over and over again. William Bernstein in his famous book, Four Pillars of Investing, dedicates an entire pillar to understanding financial history, most of which is the history of manias that come and go once or more a generation that people fall for over and over again. I don't know where Bitcoin ends up five years from now, 10 years from now. I have no idea what the end of this story looks like, but many parts of this are simply the classic mania. It's tulip bulbs all over again. It's the South Sea Bubble all over again. If you've never read history, you're destined to repeat it.

“I talked earlier about how I kind of gave myself a self-education through books. I think the two biggest things that I learned, the history of manias is one, where it's a repeating cycle and it always happens. The other one is just this relationship of risk and reward in understanding what a reasonable rate of return is. I think that's where people get into trouble. If they have these outsized expectations for what they can earn on their capital, I think that's when people get into big-time trouble that they assume that they can earn 20%, 30%, 40%, 50% a year and that should be normal. If you've done any studying of financial market history, you realize that that's not the case, and it should never be for most people.

You just have to run the numbers. If you can get a 40% return on your money, you essentially own the entire world in your lifetime. Obviously, that's not going to happen.

“The thing that I found in my research is that wealthy people were more susceptible to scams—and not just wealthy people, but people who had higher financial IQs. The reason is 1) because they got a little overconfident, but 2) it's because they thought, ‘Because I'm wealthy, I have access to things that other regular people do not have access to. I have this singular path that I can figure out. I have a secret door and I have a foot in because I know these people and I get access to it.' People just want to believe that even though it sounds too good to be true, I mean, it always is, but for some people they think it just has to be for me because I'm special.”

We all want to be special, I suppose.

More information here:

What’s the Future of Cryptocurrency? These Fanatics Say It’s Pretty Darn Bright

Top 5 Ways to Spot (and Avoid) Investment Scams

 

Interest Rates and the Markets 

Let's step away from Bitcoin for a minute and talk about another huge event we've had. For years, financial markets have been kind of boring, and this year we've had all kinds of interesting stuff happen all at once, one of which is interest rates went up more rapidly than they have I think since the early '80s. Dramatically, these rises we're having every couple of months of going up 75 basis points with the Fed's rates. What surprised you, if anything, about the changes in interest rates this year? And perhaps more importantly, what surprised your clients?

“The speed of it, for sure. You mentioned the '80s. The '80s were coming from a much higher level. I think you were coming from 7%, 8% rates back then in going to 12% or 14%. Now we went from 0% to 5% and it happened in, I don't know, nine months or something. I think the speed at which we saw the rate increases caught a lot of people by surprise. It's definitely an odd year because the bonds are supposed to be the balance of your portfolio. They're supposed to be the anchor, especially when stocks go down. If you have a total stock market index fund and a total bond market index fund, they're both down about the same this year. They're both down 15% or 16%. That's a huge surprise to people that you can have that sort of risk in bonds. When we had rates rise in the past in the '60s and the '70s and the early '80s, it was a slow stairstep approach. You had time to have those higher rates kind of act as a buffer for you, whereas this year it happened so fast, there was no buffer. People had to eat those principal losses.

Now, the bad news is you had to eat those losses in principal. The good news is for the first time in forever it feels like you can actually earn some yield on your fixed income assets. It's not just these long higher-risk bonds, it's shorter-term bonds. Unfortunately, it's really tough for people to look at those losses and think that, because there's a lot of money coming out of bond funds this year. I'm hoping a lot of it is going into cash and cash-like securities that pay higher rates now, because again, we haven't had this. I think especially for people who are risk averse, especially retirees, that opportunity is something they haven't seen in, I don't know, 12-15 years where you actually have these much higher rates. It certainly has been a shock to people.

The things were so easy for so long for bond investors. You could put your money into any sort of bond for the last, call it, 35, 40 years. It didn't really even matter because rates were falling, and you didn't have much volatility. I think people might just have to be a little more cognizant of what's going on in their fixed-income portfolio and think through a little of that from an allocation perspective that it's not going to be just as easy as it was in the past. You might have to have a little more diversification there, I think, than you did in the past.”

What's fascinating about it is everyone's all mad that they lost money in bonds. But the truth is, for a long-term bond investor, all else being equal—which it obviously never is—higher rates are good. As long as your investing career is longer than the duration of your bonds, this is a good thing. You actually come out ahead with higher interest rates. And yet everyone is saying the sky is falling, and they're pulling money out of bond funds. This is when you actually should be putting money in.

“What I tell people is the stock market is, over the very long-term, driven by fundamentals. But in the short-to-intermediate term, it fluctuates all over the place because of headlines and people's emotions and all these things. The bond market is driven by math. Your return, call it five, seven, 10 years from now, is going to be driven way more by the starting yield in your bonds than by any macro moves. Rising, falling interest rates could affect that somewhat, especially in the short term. But in the long term, if you're starting from a high-quality bond portfolio with 4% interest rate, you're probably going to get 4% plus or minus some amount of basis points. It's going to be pretty close to that. Bonds are driven more by math than the stock market is. It was painful, but those are sunk costs at this point. There's nothing you can do about them. Going forward, the rates are so much higher. This is what needed to happen for bond returns to be higher. It's just unfortunate for people that it happened so fast.”

But the truth is, fast or slow, whether it's death by a million cuts or whether it's getting stabbed in the back like what happened this year, you really end up at the same place. As a net saver, if you're not borrowing money, higher interest rates are a good thing so long as they don't come with our next subject, which is inflation.

More information here:

The Fed Keeps Raising Interest Rates; Should You Start Buying Bond Funds Again?

 

Dealing with Inflation

I've always considered inflation to be the chief enemy of my portfolio. From the beginning, when I set up my portfolio back in 2004, I was very well aware of the risks of inflation. Basically, just about every asset class I put in my portfolio, I thought about how is this going to do in the event of significant inflation. And yet, for the next 16, 18 years, inflation really didn't rear its ugly head. Now, it's here for the first time for many investors. I'm 47 and for the first time in my investing career, real inflation has taken place. For anybody younger than me, they've never seen it either. So many investors are now encountering this for the first time in their lives. What advice do you have for people who are dealing with inflation or maybe feeling surprised by inflation?

“I look at inflation in three different buckets in terms of trying to hedge it, if it's possible. There's short, intermediate, and long term. For the long term, stocks are still your best bet because if you've been invested in US stocks before this year, you beat the inflation rate by 10% or 12% on a real basis for the previous 10 years. The thing about the stock market is if you're invested for the long term, you have to be invested when real returns are really good to eat the returns when they're really bad. If you look back at history over the last 100 years, dividends and earnings have both grown at roughly 2%-3% over and above the rate of inflation. I know a lot of people don't think about dividends in the stock market very much, but that's not only an income stream. People think, ‘Well, the dividend yield is like 1.8% or something on the US stock market.' That's not that much. But it's an income stream that grows with the rate over and above the rate of inflation over the long term. The stock market is still your best bet over the long term. If you look over the short term, the stock market does not like higher inflation because that eats into cash flows on a real basis. It eats into your return on equity. The stock market tends to do poorly when inflation is rising or high.

In the intermediate term, I look at this more as a personal finance thing. I think a lot of people underestimate the advantages of owning a home. It's one of the best inflation hedges that you can have. It might not help you with the grocery store bill. There are higher prices at the grocery store. But if you think about when inflation is higher, the cost of materials goes up, the cost of labors goes up. I know people who've been building homes the last couple years; it's much more expensive to build a home now than it was when I built a home seven years ago or something. I also have a fixed-rate mortgage where the rate is below the federal funds rate, which maybe that will be something to look back historically and go, ‘How did this ever happen?' But a fixed-rate mortgage is a pretty darn good hedge because the payment that you make every month is the same, and if inflation is going up, it's eating into those cash flows. I do think that owning a home is a pretty great intermediate term hedge against inflation.

Now, short term, I think this is a good reminder that cash or short-term bonds is a pretty decent hedge against this kind of environment. Especially when you think about the fact that—and it's kind of funny, if you look back at the '70s; if you look at stocks, bonds, cash—that's pretty similar to a savings account. The best performer of all three of those was actually cash in a rising rate environment or higher inflation environment. The reason is because as rates rise, those shorter-term instruments will mature quicker and you can reinvest at higher rates more quickly. It's the kind of thing where you think over the long term, if you are holding some part of my portfolio in cash or short-term bonds, you're losing out to the rate of inflation. But over the short term, it's actually a pretty good hedge because it allows you to reinvest at higher rates. Now, you can get higher rates on shorter-term bonds and ultra-short-term bonds than you can on longer-term bonds because the Fed is raising those rates and longer-term rates haven't gone up.

That's one that I think is actually not a great hedge over the long term, but a pretty darn good hedge over the short term. Again, that gets to the diversification. If we're talking personal finance here, obviously, the ability to negotiate higher wages, it seems like for most of the last 40 years, capital has done better than labor. The financial markets have done better. If you're a business owner, you've done better, and people haven't really had the ability to negotiate higher wages. We've finally seen in the last 24 or 36 months where people who have jobs have the ability to negotiate higher wages because they're in more demand and people have been in need of workers. If you've made yourself a strong worker, you can have the ability to negotiate higher wages. I think that's helpful as well.”

That is a good reminder to doctors. The trend in medicine has been for docs to be more and more employees over the years. So, they do find themselves in the labor seat a lot more frequently than they used to. You mentioned the short-term bonds and longer-term bonds. This year some of the best assets out there have been any sort of fixed-income investment where the principal is fixed. We're talking about the TSP G fund, we're talking about stable value funds. We're talking about I bonds, which had maybe the best year they've ever had. Anything that benefits from rates going up but doesn't lose principal has done particularly well.

Meanwhile, the other kind of inflation indexed bonds, TIPS, have been hammered because they're bonds and because the real interest rates have gone up dramatically. On the five-year TIPS, I think real rates have gone up like 3.5%, 4% in the last year. Of course, they've had a relatively huge loss in principal, but what a difference to compare and contrast those two different types of fixed investments.

“I've heard from a lot of people over the last couple years saying, ‘Listen, I was planning on this inflation being a little higher, and I went into TIPS and I still lost money. Explain this to me.' The problem with TIPS is they act more like bonds when rates rise, unfortunately, especially coming from a low rate. What you've seen, though, is rates from TIPS went from negative 2% to positive 2%. The bond market again is not stupid. It's governed by math where you had to essentially eat a negative nominal return to get that inflation kicker in the past. But now the nominal returns are higher, and actually, because yields have risen so much, TIPS look a lot more attractive to me from here than they did when they had negative returns. Because if you could get 1.5%-2% in TIPS plus whatever inflation is going to be, let's say inflation is 3%, you're looking at a 5% real rate of return, which is not too bad. I think a lot of the TIPS that people own are longer term in nature. When rates rose, TIPS fell harder, and they sometimes act just like bonds as opposed to this real hedge sort of thing. But now I think going forward, they're probably in a better position, like all other bonds are now that rates are higher. It's just you've had to eat that.”

I think a lot of us viewed them as some sort of a hedge. If inflation goes up all of a sudden and we get unexpected inflation, the TIPS are going to do really well, and that's going to make up for the hit I take with my nominal bonds or that I take with my stocks or whatever. They really don't work that way. It turns out what they are is a very risky asset in the short run but a riskless asset in the long run. If you buy a 10-year TIPS, 10 years from now, you're going to get what you bought. You're going to get inflation plus whatever the rate is. If they're 2% now, you get inflation plus 2% in 10 years when you get that back. Very riskless. But in any given year, like this year, you might lose 15%.

“They're certainly not a good short-term hedge. The funny thing is that TIPS really haven't been around for that long. We didn't really have a long time series to look back and see. TIPS weren't around in the '70s. They came around in the mid to late '90s. I think the UK might have had them a little earlier, but they don't have this long history where you could kind of see how this happens in short-term inflationary spikes. It's unexpected inflation. In 2021, they actually did OK. In 2022, they've gotten killed.”

Another thing I find interesting, as I look at the news, as I look at what's happening around us, is that I see politicians doing things. This is on both sides of the aisle. This is not a partisan complaint here, but politicians doing things, talking about them helping inflation that, in my view, very obviously make inflation worse. Let me give you a few examples. There are about 20 states sending cash to their residents. Inflation payments, they're calling them. They're printing money, they're pumping money into the system despite inflation being high. People on the right are talking about more tax cuts. People on the left are extending the student loan holiday, essentially leaving this free money out there at 0% no payments required for even longer and increasing government spending. Should there be a required course in economics before one can take political office? Do you view this the same way I do, that people are doing things that are actually making inflation worse in the name of fighting it?

“Well, yeah. If you look at their views on stock buybacks and wanting to ban stock buybacks, it probably wouldn't be a bad idea. I think what we've learned these last few years, if you go back to March and April of 2020, when they enacted a lot of that fiscal spending, I totally agree with a lot of what they did back then. They put the economy on ice and everyone had to stay home in quarantine and they shot all this money into the system, and I think it made sense. But I think what we've learned is the Fed certainly kept all the pipes running and functioning for the financial markets as well. They kept that system running because if the Fed wouldn't have stepped in, we could have had the treasury bond market falling apart in it. It could have been way, way worse if the government hadn't stepped in.

I think what we've learned is that it's much easier for politicians and for the Federal Reserve and central bankers to step in in a time of crisis, but it's much harder for them to take the punchbowl away. You'd think the idea would be if they're trying to sort of massage the economy and help it, that when things go really well after they've fixed things and we've got these low mortgage rates and housing prices are going crazy and the stock market is going crazy, then you've got to slowly take the punchbowl away. And politically that's much harder to do. We've learned it's really easy to send people money and spend money and do the PPP loans and for the Fed to step in and buy mortgage bonds. It's much harder for them to pull away because people are then going to blame them if we have a slowdown. I think the political risk is too much for them, and unfortunately, that does kind of leave it to the Fed. I think that's one of the reasons that the Fed has raised rates so aggressively because they know they're not getting any help from the government in all of this. Unfortunately, whether it's fair or not, the Fed is taking a lot of the blame for this, too, because they're the only ones who are doing anything about it.”

Yeah. And to be fair, I think there's great wisdom in the way the Fed was set up to be insulated from the political process so that somebody can do what's actually necessary without having to worry about whether they're going to get elected next year.

More information here:

I Bonds and TIPS: Which Inflation-Indexed Bond Should You Buy Now?

 

The Challenge of Being Wealthy 

Let's turn the subject away from inflation and let's talk a little bit about the challenges of being wealthy. In a recent blog post, you quoted Steve Jobs who said, “I watched people at Apple who made a lot of money and felt they had to live differently. Some of them bought a Rolls-Royce and various houses, each with a house manager and then someone to manage the house managers. Their wives got plastic surgery and turned into these bizarre people. This is not how I wanted to live. It's crazy. I made a promise to myself that I'm not going to let this money ruin my life.”

How can we avoid falling into that trap once we become wealthy? Should we deliberately impoverish ourselves, drive beaters we don't need to drive, not get a NetJets subscription that we can afford? Go camping a lot and sleep on the ground. How do we avoid falling into that trap where you become a different person just because you have money?

“I mentioned it earlier that I was always a saver. I actually had to turn that around a little bit once I started building my wealth and had to turn into a spender, but I still wanted to have my frugal way. I almost look at it as being selectively cheap. That means it's OK to spend money on the things that really matter to you, but then don't worry about cutting back mercilessly everywhere else. I think what it comes down to is figuring out your financial priorities and what you want to spend money on. My wife and I like to go out to eat or do takeout, but we couldn't care less about fancy restaurants. We don't spend a lot of money on that kind of stuff. We like to have a nice house, but we don't incorporate interior decorators or nice furniture. I think you have to have some tradeoffs on stuff like that, where you can figure out the stuff that really matters to you.

We're not really big on luxurious vacations. We're into getting away and creating experiences. We do own a summer lakehouse, but I view that as not only a financial investment but also an investment in time that we spend together to make memories. We've made that a priority, but then we cut back elsewhere. We're not driving luxury vehicles; we're not going on ski trips. I think really for most people it's more about tradeoffs and understanding that if you want to remain wealthy, you have to have some balance in your life and you can't have everything.”

 

Choosing an Asset Allocation 

That's good advice. We've talked about some of the big headlines this year, some of the exciting stuff to talk about. Let's talk about something a little more practical. This is a question I get a lot from people, and I would describe these people as intermediate in terms of their investing knowledge. They ask how does one choose an asset allocation? Especially when they don't know all that much about investing, maybe haven't ever invested through a bear market. What should they think about when they choose an asset allocation?

“I wish there was an easy way to do this for people, but unfortunately when we're first starting out, it's probably more trial and error than anything else. I tend to err on the side of caution, but I think the starting point for most people should be, ‘Let's assume the stock market could probably fall 50%-60%.' That's a pretty easy assumption. If you can't handle seeing your life savings get cut in half, you probably shouldn't have all your money in stocks. You can do some back-of-the-envelope kind of stuff between how am I going to manage between really risky assets like stocks and then really safe assets like cash? If the stock market can fall 50%, how do I pull that other safety lever? I do think all investing is a form of regret minimization, where it's really about striking the right balance between, ‘I have this desire for goals and I have the ability to handle losses and what's the right balance to strike.' I wish there was a more scientific answer here.

My only thing for most people is perfect is the enemy of good, since the perfect portfolio is only going to be known with the benefit of hindsight. If you get down to the point where you're toggling between 2.5% allocation to this small cap value or 2% allocation to REITs or whatever, if you're getting to that minutia, you're probably going to be OK and it's not going to matter all that much; 2.5% or 5% position in the grand scheme of things is probably not going to matter that much. As long as you get the risky stuff vs. the safe stuff, if you get that figured out, I think that's probably the biggest thing for most people. Then if you are just starting out, I think a target date fund is probably the easiest thing for most people in terms of just setting it for someone else and you know the lever that you can pull to get riskier by going further out on the risk curve or get more conservative by coming to a date that's closer to you.”

Good advice. I like the idea of regret avoidance. When you've gotten to the point that you fear missing out, your greed perfectly balances your fear of loss, you know you have at least your risk-to-riskless asset ratio right.

“These past few years are a perfect example of that, where in early 2021 you were looking at all these people making gobs of money and going, ‘Geez, I wish I would've taken more risk.' Then this year when you see losses, it's a good reminder that, ‘Oh, that's right. This is why I have some diversification and balance in my portfolio, because the pendulum is always going to swing probably a little too far in each direction.'

But the process feels arbitrary. It feels like you're just picking something and then sticking with it, which honestly probably matters more than what you pick. How do you find the intestinal fortitude to stick with an asset allocation in a nasty market when you know the process of picking it initially was so arbitrary?

“I always think that the good plan you can stick with is far superior to the great plan you can't stick with. It really comes down to this. It's like you're understanding your risk profile and time horizon. The question that's helped me a lot over the years is when am I actually going to spend this money? I first started investing in the mid-2000s. I started building some capital right before the 2008 crisis. I was still in big-time savings mode and didn't have a lot of money. That was actually relatively easy to keep saving then because I didn't have a ton of money. Sitting through this bear market and then the one in March 2020 were a little harder because I actually had some money to invest.

There's a huge difference between seeing a percentage decline in your portfolio and a dollar decline in your portfolio. The more money you get, even a smaller percentage decline can be a bigger dollar value. It can sting more. My guiding principle has always been, ‘When am I going to spend this money?' For my retirement accounts, I know I'm not going to touch that for decades. I really don't think about that much. I have it on autopilot, my contributions, I rebalance automatically and it's not really going to impact me that much. For stuff that I know I'm going to be spending in the next couple of years, I don't try to take a lot of risk with that. The thing for most people is just trying to figure out the financial planning side of things and ‘Well, when am I going to need this money?' Obviously, there's an emotional component. Some people need more cash or bonds as an emotional hedge and that's the tough part.

But to your point about being married to a portfolio and trying to stick with it, even though it's arbitrary, I think the big thing for most people is just what are your goals in the first place? People come to us and I get a lot of questions from people like you, ‘What asset allocation should I use?' My question back is always, ‘What are you doing with this money? What's the point of it? What are you investing it for in the first place?' If you don't answer that, if your only goal is ‘I want high returns and I want to make more money,' if there's no light at the end of the tunnel or end goal, then it's going to be really hard to answer any of those questions in advance because you don't really have anything guiding you in terms of what that portfolio is for.”

Excellent advice. The process really does have to start with your goals. Absolutely. It turns out that the rest of it gets easier if you start there. If you start with setting your goals and you decide what accounts you're going to invest for each goal, what accounts you're going to use to get there, and then you choose an asset allocation for each goal, by the time you're selecting investments, the investment selection process is very simple. Whereas if you start with trying to pick the investments, it’s practically impossible.

 

The Importance of Optimism for Investors

Let's change the subject a little bit and talk about optimism. I saw a statistic the other day that we've gone from having 70% of the world's population living in just terrible abject poverty to just 10%. That's over just the last 100 years. In 100 years, we've gone from only 30% of us not being terribly poor to 90% of us not being terribly poor. Yet everyone wants to listen to pessimists. It's the pessimist that sounds so sexy, that sounds so smart when they are talking heads on TV. Why do you think optimism is such an important trait for investors?

“The simplest one for me is: what's the point of investing if you don't think the future's going to be better than it is today? If you don't believe that, then why are you investing anyway? I do think that, unfortunately, progress is not an event. It happens more slowly. Progress is not going to be a headline in the newspaper, but a terrible event could be. It's easier for people to latch onto pessimistic viewpoints, unfortunately. It's like a personality trait. There are some people that are just more cynical and pessimistic and I think, for them, automating their investments is probably going to help a lot by taking themselves out of the equation. I like the idea of saving like the glass is going to be half empty but investing like the glass is going to be half full, where you give yourself a little bit of a margin of safety because we don't know what's going to happen.

I personally like to think that most people around the globe are getting up and trying to improve themselves, improve their lives, make more money, improve the lot of their family, that sort of thing. When you read some of these books that tell you how far we've come, even since the 1800s, it's a completely different world. If anything, we probably have just more time today to complain about things. In the past, people were working so much they didn't have time to complain about it. They're on the farm for 12 hours a day, seven days a week, and they didn't have time to sit and think about how bad certain things are. It is a luxury for us to have so much time to complain about things.”

It's interesting. I've heard somebody say something similar about burnout. Tons of people are burned out at work. Surveys of physicians show 50% of doctors are burned out. One counterpoint I heard from somebody is, “Yeah, we're all burned out. There's a club for that. It meets Friday night down at the bar.” The truth is, imagine the serfs of the 1700s in Russia. You don't think they had burnout from working 12 hours a day, seven days a week in the fields? Of course they did. This isn't a new phenomenon. But it's an interesting counterpoint to a lot of what we hear about the difficulty of finding a job that makes you feel fulfilled rather than something where you're really just trading your time for money.

At any rate, we're starting to get short here, but something between 30,000-40,000 people are going to listen to this podcast eventually—mostly high-income professionals, mostly doctors. What have we not talked about today that you think they should know?

“One of the things that I've learned over time is that when I first started out, I assumed I'm going to find the answer for financial success in the investment portfolio and all these things. I think that there's really no one way to succeed. I think a lot of it has to do with, again, your emotional makeup, your own circumstances, your goals, and I think whatever works for you. There's a lot of different paths to success in finance, whereas the routes to ruin are pretty similar for most people. It's taking on too much risk and leverage and not saving money and overspending and all these things. There's a lot of different paths to success. You just have to find the one that works for you. Whether that's doing it yourself, whether that's hiring an advisor, whether that's investing with a robo-advisor, whatever it is. As long as it works for you, that's all that matters. There's no one right way to do this.”

We've been talking with Ben Carlson, CFA. He's a blogger at A Wealth of Common Sense. He podcasts at Animal Spirits. He's written a handful of books. He also works as a financial advisor. Check out his website to learn more.

 

This episode is sponsored by All Global Circle. You have valuable knowledge and can always use a little extra money. The All Global Circle community is set up to provide a clear, easy, and efficient means of communication between the pharmaceutical industry, the research industry, and those professionals who are using new developments and end products on an ongoing daily basis. If All Global Circle can't get you a survey to take within 90 days, they'll pay you a loyalty bonus just for logging in and checking a couple of times per month. By signing up at All Global Circle,  you'll get an extra $50 just for being a member of the WCI community.

 

WCI Survey

WCI is primarily driven by you! Here at WCI, we're trying to serve you by helping you become more financially literate and more financially disciplined. Our annual survey is to help us to do that better. Please go to whitecoatinvestor.com/survey, where you can give us the feedback on what you like, what you don't like, what you'd like to see, what we're doing well, and how we can do better. It only takes a few minutes, plus you will be entered into a drawing for a free T-shirt or a free course!

 

Quote of the Day

Robert Arno said,

“In investing, what is comfortable is rarely profitable.”

 

Milestone to Millionaire 

#100 — This doc hit his first million just a few years out of residency. He advises med students to choose their specialty wisely and avoid unnecessary debt. The specialty you choose makes such a big impact on your financial future. But no matter what your income is, you still have to have a financial plan and stick to it!


Sponsor: 37th Parallel

 

Full Transcript

Transcription – WCI – 297

Intro:
This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This episode is sponsored by All Global Circle. If you have valuable knowledge, you can always use a little extra money. The All Global Circle community is set up to provide a clear, easy, and efficient means of communication between the pharmaceutical industry, the research industry, and those professionals who are using new developments and end products on an ongoing daily basis.

Dr. Jim Dahle:
If All Global Circle can't get you a survey to take within 90 days, they'll pay you a loyalty bonus just for logging in and checking a couple of times per month. By signing up at whitecoatinvestor.com/global, you'll get an extra $50 just for being a member of the WCI community.

Dr. Jim Dahle:
All right, welcome back to the podcast. New Year, new you. I wish you a lot of luck and a lot of success in your careers this year, in your finances this year. We don't know what the markets will do, but if you're doing this correctly, your success does not depend on the markets.

Dr. Jim Dahle:
As a long-term investor, if the markets are down, you get more shares. If the markets are up, the shares you already own are worth more. It's really a win-win situation either way when you have a solid financial plan in place. If you don't have one, get one. Please. You need one. You need a written financial plan. When I survey White Coat Investors, only half of you have one. It really does help your life. It makes it a lot easier. You can do it yourself. It's the way I did it. If you're into this stuff, if you're a hobbyist, if you can read books, you can ask questions on forums, you can put together a financial plan yourself. It's not that hard.

Dr. Jim Dahle:
If you need a little bit of help, take our Fire Your Financial Advisor course. We even have a version of it that offers CME. You can use your CME funds to buy it and get a plan in place. If you need even more help than that, we've got a list of recommended advisors who will give you good advice and solid service at a fair price. So, you can check that out at whitecoatinvestor.com as well.

Dr. Jim Dahle:
Two things I want to make sure people know about. One, if you are a first year medical or dental student, or if you know one, please tell them or sign up yourself for our Champion program. You can do that at whitecoatinvestor.com/champion. All Champion is, is a huge book giveaway. We're trying to give a copy of the White Coat Investors Guide for Students to every single first year medical and dental student in the country. We can't afford to ship them all out one at a time and we think we're not going to get them all to everybody that way anyway.

Dr. Jim Dahle:
We think there's a much better chance if they are handed to the students by somebody in their class. That person is the champion. We will send you a big box or two, or three or four, whatever it takes for however many people are in your class of these books. And all you have to do is pass them out. You'll be these people's hero for the rest of their lives because getting this information early in your career might be worth a couple million dollars to each of them. You could save hundreds of millions of dollars for your class collectively. That's pretty awesome for somebody who can barely find any time to work at all right now. Literally your actions could be worth a hundred million dollars for your classmates. So, please sign up whitecoatinvestor.com/champion. Not only do you get to be the hero for your classmates, you get a copy of the book for yourself absolutely free. And we'll send you a t-shirt.

Dr. Jim Dahle:
If you send us a picture of you passing them out to your classmates, we'll even send you a Tumblr or some extra gift. So, please sign up whitecoatinvestor.com/champion. I want to do better than we did last year. We got it to about 70% of the first year's last year. I think it'd be awesome to break 90% this year.

Dr. Jim Dahle:
For the rest of you, the first years can do this too. But for the rest of you, I would really appreciate it if you would fill out our survey, whitecoatinvestor.com/survey. We run this from mid-December through the end of January. We want to know what you like about White Coat Investor, what you don't like, what you'd like to see, how this podcast can improve, how the blog can improve, how the forum and the Facebook group can improve. What other products you'd like to see. Is there a course you'd like to see us make?

Dr. Jim Dahle:
A lot of the stuff we've done, we've done because of what you tell us on these surveys. The changes we've made with the conference, online courses we've made, what book I write next, the blog subjects that we cover, how we do the podcast, all that stuff is really driven by you. And the way we get that information best from you is when you take the survey. I know, I know we're not paying you to take the survey like a lot of those people will but if you could take a minute with it, we'd really appreciate it. whitecoatinvestor.com/survey.

Dr. Jim Dahle:
Our quote of the day today is from Robert Arno who said, “In investing what is comfortable is rarely profitable.” There's a lot of truth to that. The best investing is kind of boring investing most of the time. But if you're chasing performance, the things that everybody else is doing, you're buying Tesla when Tesla's going through the roof, Bitcoin, whatever, turns out maybe that wasn't such a profitable move, even though it felt comfortable at the time because it felt like so many other people were chasing performance with you.

Dr. Jim Dahle:
All right, we got a great guest today. He's not a doc, he's a financial advisor and an author and a podcaster and a blogger. I think he's got a lot to teach us. And like me, he's grateful for the sacrifice you made in your twenties and thirties to be able to help those in our society who are struggling. Whether it's health problems, whether it's legal problems, whatever your profession might be, thanks for taking the time to become a high income professional and need the information that we're providing here at the White Coat Investor.

Dr. Jim Dahle:
Anyway, our guest today is Ben Carlson. He's a great blogger, great author. I think you're going to love a lot of the stuff we talked about today. Let's get him on the line.

Dr. Jim Dahle:
All right, our guest on the White Coat Investor podcast today is Ben Carlson, CFA. Ben is an author, he's a blogger, he is a podcaster, he's a financial advisor. Welcome to the podcast.

Ben Carlson:
Hey, thanks for having me, Jim.

Dr. Jim Dahle:
Let's introduce you a little bit to our audience. I think there's probably a lot of people here that don't know you, aren't familiar with your work. But let's start at the beginning. Tell us a little bit about your upbringing and how it affected your views on money.

Ben Carlson:
Upper middle class, grew up in Michigan. My dad was a finance guy. He was a CFO at a hospital. My parents weren't cheap, but they were definitely frugal. They didn't spend money lavishly and I think that had a big impact on my financial background.

Ben Carlson:
From an early age, my dad talked about the perils of things like credit card debt. I think a lot of your upbringing and your personality have a lot to do early on with how you are with your finances. Some combination of the way I'm wired and my parents upbringing, that sort of thing. I was always a saver from a very early age. I was saving lunch money and stuff and pack my own lunch from an early age.

Ben Carlson:
It's interesting because I realized right when I got out into the working world that it didn't really matter what my investing style was. I was more concerned with personal finance at that point because I didn't have any money. I needed to save before I could actually start to invest. So, I think that my upbringing definitely helped get me a good step ahead there.

Dr. Jim Dahle:
Okay. You leave home. You've got a pretty decent financial background for someone just leaving home. Tell us about what you did then about your education and your career up to this point.

Ben Carlson:
Well, the education thing. My education really started after I got done with formal school. I got done with college. I got to my senior year of college. I was never the person who at 12 years old was reading the Wall Street Journal and picking stocks. That was never me. I was more interested in sports and girls and partying and stuff growing up.

Ben Carlson:
I got to my senior year of college and I realized I don't really know what I want to do. I knew I wanted to be something in finance and I was more analytical in nature. I was always much more of an introvert than extrovert. And a lot of the finance jobs that I was applying to out of college were basically sales roles. And I realized I didn't want to be a salesperson. I'm definitely not a salesperson. That's not in my personality.

Ben Carlson:
I got into an analyst role for a consulting firm. Actually, for your audience, this is kind of interesting. The majority of the money that we managed was for hospitals. And it was a good education to me that all the hospitals are nonprofits, they sure have a lot of money.

Ben Carlson:
And a lot of these hospitals had four or five different accounts and I was a performance analyst. I was running performance numbers for you. I'm learning how to do Excel and all these things. But all these hospitals had a pension fund and an insurance for their malpractice liability, endowment, maybe a foundation and an operating fund. And that was a really eye-opening thing to me.

Ben Carlson:
I think I got lucky from the positioning of just getting this job and again, not knowing what I wanted to do. My boss was really big on asset allocation and creating a comprehensive investment plan. He had a different plan for each one of these different funds. And so, I learned right away that asset allocation is way more important than stock picking. He didn't care as much about stock picking. He cared more what's the asset allocation. And each of these different plans had their own asset allocation. And I got to see, “Oh, I get it, you matched the goal of the fund with the portfolio.” I learned from early on in my early twenties that that's sort of the way to invest. And I still use a lot of those principles to this day. It made a lot of sense.

Ben Carlson:
But the other thing for my education is, I came out of college not knowing much besides the textbook stuff. So, I learned right away the stuff these people are talking about in these financial circles, I don't understand what they're talking about. I had to learn, and this is before a lot of financial blogs were around, before there were podcasts to learn. I think there's way more tools available to people these days than I had back then. And I think I graduated in 2004, 2005.

Ben Carlson:
I just read every book that I could get my hands on. And everyone I came into contact with, I asked them what are your three favorite finance or investing books? And I read everything I could because I realized how far behind I was because I didn't really know what I wanted to do with my life.

Dr. Jim Dahle:
It's interesting. Since then, you've gone in all kinds of different directions. For someone who views himself as an introvert, you sure interact with a lot of people. You have a popular blog, you've got a popular podcast, you've written four books. Lots of people have read those. And you give advice to people. You speak to people. Which of those activities do you like best and why?

Ben Carlson:
Well, I can't remember who said it, but someone said blogging is sales for introverts. I started the blog first. I think it was about 10 years ago, actually, 2013. I'm coming up on my 10-year anniversary. And the funny thing is I had no grand plans when I started the blog. I was the finance guy among friends and family. And so, I was getting questions from normal regular people about their 401(k) plans and the stock market and what's it going to do next and all these things.

Ben Carlson:
And everyone I came into interaction with about the markets or about finance thought it was just really complex and didn't understand it. And they had a lot of questions and I thought if I write a blog, I'm going to write this assuming my audience is my friends and family. And so, I want to take the complexities of finance and how people think it's really difficult and simplify it and put it in plain English.

Ben Carlson:
I was never much of a writer before I started blogging and I just kind of fell in love with the process. I think that introvert thing, it made it easier when I found a topic that I really enjoyed. And one of the things I liked about it is not just the nuts and bolts of the analytical side of things. It's the human element. The behavioral stuff about the markets and how crazy things can get and how important behavior in psychology is when a person is creating an investment plan and trying to follow it.

Ben Carlson:
The blog still has a special place for me just because I've been doing it so long. And I think it's forced me to continue to be a lifelong learner because you have to continue to learn if you're going to continue to provide feedback and write. I think there's an old saying, it goes something like “I write to know what it is I really think.” And I think blogging for me has been helpful.

Ben Carlson:
Now, I don't know about you, but I get way more feedback from podcasting than I do from blogging. Is that true for you as well?

Dr. Jim Dahle:
I don't know if it's true or not, it's just easier to give feedback on a blog if you have comments under the blog. I think I probably get more on blogging, but we actually reach more people with our podcast than we do with our blog.

Ben Carlson:
Yeah. But I think on the podcast, the surprising thing to me is people feel like they know you more from a podcast because they feel like they get your personality, they get more of who you are. It's not as edited and clean as maybe a blog post could be because you have some more time to think through and you're just talking. It's totally different mediums and I think part of it for me is sometimes you forget that there's a person on the other end consuming your content. You forget that there's an audience listening to this. You forget there's someone reading it.

Ben Carlson:
And for me, I love the feedback I get from people. I know a lot of people think that the internet is just this horrible hellscape for people and it's awful. But the feedback I get is usually helpful and a lot of times people will give me other stuff to think about or look at or different views and perspectives. So, I think the feedback I get from both the blog and the podcast is actually helpful to me and it actually gives me ideas for stuff to talk about in the future. Because a lot of it is questions, “Hey, did you think about this?” And it just kind of builds on itself.

Dr. Jim Dahle:
Yeah, for sure. I've definitely found that. It's interesting you call your blog “A Wealth of Common Sense”, a little bit of an illusion I think to Jack Bogle there. That is a phrase he used a lot in one of his books, etc. Was there inspiration for the name from Jack Bogle?

Ben Carlson:
He's certainly a hero of mine. One of the things when I was growing up, my brother and I would always talk about this kind of stuff and we'd see people making mistakes in their finances or with the markets or in business or anything. And we would always come back to “Where's the common sense here?” And just understanding how this mistake could have been avoided. And that's kind of where the name was spawned from.

Ben Carlson:
I think for a lot of people, if they just stepped back and had a little more self-awareness and thought through things a little more and used their common sense. What's the old saying? “Common sense is not so common.” That's kind of where I started from with all this. If people just used a little common sense, they wouldn't get themselves into so much trouble with their finances.

Dr. Jim Dahle:
Yeah. A little bit of button-down tone, a little bit of a button-down name, and then you go to the podcast, which is called Animal Spirits. It sounds like a party.

Ben Carlson:
Well, yeah. I think that's a John Maynard Keynes saying actually. And that's kind of the behavioral side. Yeah, the podcast started because I work remotely actually kind of before the pandemic. I was doing it before it was cool, I guess. And my colleague Michael works in New York and we were constantly sharing and feeding thoughts and ideas and charts throughout the day and we just decided that we're constantly thinking and talking about this stuff. Let's bring that conversation to a podcast and we have a lot of fun with it.

Dr. Jim Dahle:
All right. Well, you and I both agree that the most important thing investors can do is get a solid written long-term investing plan and follow it. But that's not that fun to talk about. So today we're going to go over a potpourri of topics. Some of them are more current than others and just get your thoughts on those and talk about those.

Ben Carlson:
Let's do it.

Dr. Jim Dahle:
One of the interesting things in the markets this year has been energy stocks and the price of oil. Can you talk a little bit about some of the things you found surprising in that realm this year?

Ben Carlson:
Yeah. I think one of my overarching tenants is just that markets and finance general, it's hard. And I think anyone who tries to tell you it's easy is delusional or lying to themselves. I think you can make finance simpler, but I don't think you can make it a lot easier for people. I think that's true with personal finance and with markets in general. And this is especially true when trying to handicap the macro-economic environment.

Ben Carlson:
If you go back to the end of February, oil was trading for $90 a barrel. This is right before Russia invaded Ukraine. And immediately after they invaded by the first week of March, oil was at $120 a barrel. All the headlines are saying oil is going to $200 a barrel. And I have to admit, at the time, that narrative made sense to me. I'm not an energy person. I don't follow these markets closely.

Ben Carlson:
But listen, everyone knows what's going on in the energy markets because we see these huge electronic numbers when we drive down the road for gas prices. It's the one consumer price everyone knows and talks about. And so, if oil goes up and gas goes up, everyone knows about it.

Ben Carlson:
And we saw a lot of mal-investment in the energy infrastructure in the 2010s because prices were low and then prices went negative in the pandemic and oil was just kind of an afterthought. And then it becomes, “Okay, wait, this is a really important resource again.” We've had a pipeline shut off and it's really important. And $200 of the barrel seemed like it was only a matter of time.

Ben Carlson:
Little did we know by the end of March, oil had stopped going up. It's basically crashed since then. And then there was a story just this week saying oil has round tripped. It started the year at $75 a barrel and now it's back there to $75 a barrel. Again, proving just how hard it is to predict the future. And really there's not much of a good reason for it to happen.

Ben Carlson:
The funny thing is, I could have told you at the beginning of the year, oil is going to be flat on the year after spiking. How do you think energy stocks are doing? You probably said, “Well, energy stocks are probably doing okay.” But they're up like 70% this year. So, oil has gone nowhere, essentially flat. Energy stocks are still up 70%.

Ben Carlson:
I just think even if you had the headlines for the macro economy 3, 6, 12 months into the future, it'd still be hard to make money on that information because markets are so predictable. They're surprising, but they're literally never boring. I think it’s one of the lessons we've learned the last few years.

Dr. Jim Dahle:
Yeah. Speaking of never boring, one of the most fascinating things to watch, and this has been going on really the whole time I've been blogging, I started in 2011, is crypto. It's fascinating. I've been watching it from the sidelines essentially, since before I started blogging. And I almost can't look away. It's like a car wreck that you just have to look at because it's so fascinating.

Dr. Jim Dahle:
But this year has been an epic meltdown. Bitcoin is down over 70% and that looks pretty good compared to other crypto assets. More recently FTX has gone bankrupt in spectacular fashion and now BlockFi has followed suit. What lessons should investors take from the crypto story, at least the story we know to date?

Ben Carlson:
I feel like we could spend an entire podcast on the lessons here. I have two big ones. And one of them is if we just go back to 2020 and 2021. I think it should never be so easy to make so much money in such a short period of time. We had people making millions of dollars in a matter of weeks and months. And I think people started to think that that was just going to be normal. If I just put my money into this and I take a big risk, then it should pay off and I should become wealthy beyond my imagination. I think a lot of new investors thought that was just a normal thing and it's certainly not and should never be.

Ben Carlson:
I think the second one is just that diversification is the ultimate risk control. We hear all these success stories about people who went all in on crypto or Tesla or some other moonshot. But I always look at these stories as survivorship bias. There's never going to be a story in the Wall Street Journal or the New York Times about the person who dumped 75% of their life savings into a penny stock and went broke. You never hear that story because the winners write the history books.

Ben Carlson:
I'm not one of those people who's going to scold others and tell them, “You can't speculate with some of your investments. You can't go into crypto. You can't pick stocks.” I don't have a problem with speculation as long as it's sized correctly.

Ben Carlson:
The thing we've learned is that going to extremes, I think with any position, no matter what you're investing in, has a greater chance of financial ruin than making you obscenely wealthy. That's the thing a lot of people have learned that no matter how much you believe in something like this, you want to invest in crypto because you think it's a promising technology, fine, but don't put all of your money into it. Especially in an asset class that can lose 80% in the blink of an eye.

Ben Carlson:
My way of thinking is if you need to scratch that itch and pick some stocks or speculate or invest in startups, just size it correctly with 5% or 10% of your portfolio. Use the other 90%, 95% in more boring plain vanilla investments that are low cost. You can automate them, put them on autopilot and have this other stuff. So, you leave the bigger, more boring stuff alone.

Dr. Jim Dahle:
It's interesting. A comment you had made in one of your blog posts really resonated with me because I had thought the same thing. And so, I wanted to ask you what you thought the over-under on Jonah Hill playing FTX, CEO Sam Bankman-Fried was going to be?

Ben Carlson:
Probably pretty good odds. We do love a good story about a quirky sociopath these days who steals money from people. Part of me does wish that more people would look up to normal people who slowly but surely build wealth over time rather than people who become rich overnight.

Ben Carlson:
But I wrote a book a couple years ago called “Don't Fall For It.” And it was a short history of financial scams. I looked back hundreds and hundreds of years at all these financial scams. And the craziest thing I found on my research, and I feel like I could write a whole another version of this book based on the last three years with crypto and all this other stuff, is that the environments are always different. There's always the economy or whatever, the place is always different but the reasons for scams are almost always the same. And one of them is this new and exciting technology. The promise for the future, I'm going to create great wealth.

Ben Carlson:
There's always a founder or a product or a leader or something with a compelling story and persona. There's typically leverage or margin involved. It's usually new and exciting financial products and then just this promise of great and ever greater riches. And it's always the same just in a new wrapper. And so, this one definitely checks all those boxes. It does make for a fascinating story, but it is kind of unbelievable how this stuff happens again and again. I guess because people, they want to believe that it’s easy riches. Even though it's not there for everyone else, they want to believe it's there for them.

Dr. Jim Dahle:
Yeah. It's interesting that it really is the same story over and over again. William Bernstein in his famous book, Four Pillars of Investing, dedicates an entire pillar to understanding financial history and most of which is the history of manias.

Ben Carlson:
Yeah.

Dr. Jim Dahle:
That come and go once or more a generation that people fall for over and over again. And I don't know where Bitcoin ends up five years from now, 10 years from now, I have no idea what the end of this story looks like, but many parts of this are simply the classic mania. It's tulip bulbs all over again. It's the South Sea Bubble all over again. And if you've never read history, what's the saying? You're destined to repeat it or whatever.

Ben Carlson:
You repeat it. Yeah. I talked earlier about how I kind of gave myself a self-education through books. I think the two biggest things that I learned, the history of manias is one where it's a repeating cycle and it kind of always happens. The other one is just this relationship of risk and reward in understanding what a reasonable rate of return is.

Ben Carlson:
And I think that's where people get into trouble. If they have these outsized expectations for what they can earn on their capital, I think that's when people get into big time trouble that they assume that they can earn 20%, 30%, 40%, 50% a year and that should be normal. And I think if you've done any studying of financial market history, you realize that that's not the case and it should never be for most people.

Dr. Jim Dahle:
You just have to run the numbers. If you can get a 40% return on your money, you essentially own the entire world in your lifetime. And obviously that's not going to happen.

Ben Carlson:
The scams that I read about, that was typically one of the things, is just people thought. The funny thing is, the thing that I found in my research is that wealthy people were more susceptible to scams, and not just wealthy people, but people who had higher financial IQs. And the reason is one, because they got a little overconfident, but two, it's because they thought, “Because I'm wealthy, I have access to things that other regular people do not have access to. And I have this singular path that I can figure out. I have a secret door and I have a foot in because I know these people and I get access to it.”

Ben Carlson:
And people just want to believe that even though it sounds too good to be true, I mean, it always is, but for some people they think it just has to be for me because I'm special.

Dr. Jim Dahle:
We all want to be special, I suppose.

Ben Carlson:
Yeah.

Dr. Jim Dahle:
All right, let's step away from Bitcoin, etc, for a minute and let's talk about another huge event we've had. For years financial markets have been kind of boring and this year we've had all kinds of interesting stuff happen all at once, one of which is interest rates went up more rapidly than they have I think since the early 80s. Dramatically these rises we're having every couple of months of going up 75 basis points with the Feds rates. What surprised you, if anything, about the changes in interest rates this year? And perhaps more importantly, what surprised your clients?

Ben Carlson:
Yeah. Well, the speed of it for sure. You mentioned the 80s. The 80s were coming from a much higher level. I think you were coming from 7%, 8% rates back then in going to 12% or 14%. Now we went from 0% to 5% and it happened in I don't know, nine months or something.

Ben Carlson:
I think the speed at which we saw the rate increases caught a lot of people by surprise. For clients, for sure. It's definitely an odd year because the bonds are supposed to be the balance of your portfolio. They're supposed to be the anchor, especially when stocks go down.

Ben Carlson:
If you have a total stock market index fund and a total bond market index fund, they're both down about the same this year. They're both down 15% or 16%. That's a huge surprise to people that you can have that sort of risk in bonds because when we had rates rise in the past in the 60s and the 70s and the early 80s, it was a slow stair step approach. You had time to have those higher rates kind of act as a buffer for you, whereas this year it happened so fast, there was no buffer. So, people had to eat those principal losses.

Ben Carlson:
Now, the bad news is you had to eat those losses in principle. The good news is for the first time in forever it feels like you can actually earn some yield on your fixed income assets. And it's not just these long higher risk bonds, it's shorter-term bonds. Unfortunately, it's really tough for people to look at those losses and think, because there's a lot of money coming out of bond funds this year. I'm hoping a lot of it is going into cash and cash like securities that pay higher rates now, because again, we haven't had this. I think especially for people who are risk averse, especially retirees, that opportunity is something they haven't seen in, I don't know, 12 to 15 years where you actually have these much higher rates. And so, it certainly has been a shock to people.

Ben Carlson:
The things were so easy for so long for bond investors, you could put your money into any sort of bond for the last call it 35, 40 years. And it didn't really even matter because rates were falling and you didn't have much volatility. So, I think people might just have to be a little more cognizant of what's going on in their fixed income portfolio and think through a little of that from an allocation perspective that it's not going to be just as easy as it was in the past. You might have to have a little more diversification there, I think, than you did in the past.

Dr. Jim Dahle:
Yeah. What's fascinating about it is everyone's all mad that they lost money in bonds. But the truth is, for a long-term bond investor, all else being equal, which it obviously never is, but all else being equal, higher rates are good.

Ben Carlson:
Yes.

Dr. Jim Dahle:
As long as your career, your investing career is longer than the duration on your bonds, this is a good thing. You actually come out ahead with higher interest rates. And yet everyone is saying the sky is falling and they're pulling money out of bond funds. This is when you actually should be putting money in.

Ben Carlson:
Yeah. What I tell people is the stock market is over the very long term driven by fundamentals, but in the short to intermediate term, it fluctuates all over the place because of headlines and people's emotions and all these things.

Ben Carlson:
The bond market is driven by math. Your return, call it five, seven, ten years from now, is going to be driven way more by the starting yield in your bonds than by any macro moves. Rising, falling interest rates could affect that somewhat, especially in the short term. But in the long term, if you're starting from a high-quality bond portfolio with 4% interest rate, you're probably going to get 4% plus or minus some amount of basis points. It's going to be pretty close to that.

Ben Carlson:
Bonds are driven more by math than the stock market is. So yeah, you're right. It was painful but those are sun costs at this point. There's nothing you can do about them. Going forward, the rates are so much higher, this is what needed to happen for bond returns to be higher. It's just unfortunate for people that happened so fast.

Dr. Jim Dahle:
Yeah. But the truth is, fast or slow, whether it's death by a million cuts or whether it's getting stabbed in the back like happened this year, you really end up at the same place. And as a net saver, if you're not borrowing money, higher interest rates are a good thing so long as they don't come with our next subject, which is inflation.

Dr. Jim Dahle:
I've always considered inflation to be the chief enemy of my portfolio. From the beginning when I set up my portfolio back in 2004, I was very well aware of the risks of inflation. Basically, just about every asset class I put in my portfolio, I thought about how is this going to do in the event of significant inflation. And yet then for the next 16, 18 years, inflation really didn't rear its ugly head. Now it's here for the first time for many investors. I'm 47. And for the first time in my investing career, real inflation has taken place. And for anybody younger than me, they've never seen it either.

Dr. Jim Dahle:
So many investors are now encountering this for the first time in their lives. What advice do you have for people who are dealing with inflation or maybe feeling surprised by inflation?

Ben Carlson:
I look at inflation in three different buckets in terms of trying to hedge it if it's possible. So, there's short, intermediate term and long term. The long term, stocks are still your best bet because if you've been invested in US stocks before this year, because for the previous 10 years you beat the inflation rate by 10% or 12% on a real basis.

Ben Carlson:
The thing about the stock market is if you're invested for the long term, you have to be invested when real returns are really good to eat the returns when they're really bad. And I think if you look back at history over the last hundred years, dividends and earnings have both grown at roughly 2% to 3% over and above the rate of inflation. I know a lot of people don't think about dividends in the stock market very much, but that's not only an income stream and people think, “Well, the dividend yield is like 1.8% or something on the US stock market.” That's not that much.

Ben Carlson:
But it's an income stream that grows with the rate over and above the rate of inflation over the long term. So, the stock market is still your best bet over the long term. If you look over the short term, the stock market does not like higher inflation because that eats into cash flows on a real basis. It eats into your return on equity. So, the stock market tends to do poorly when inflation is rising or high.

Ben Carlson:
In the intermediate term, I look at this more as a personal finance thing. I think a lot of people underestimate the advantages of owning a home. I think it's one of the best inflation hedges that you can have. Now, it might not help you with the grocery store, right? Higher prices at the grocery store.

Ben Carlson:
But if you think about when inflation is higher, the cost of materials goes up, the cost of labors goes up. I know people who've been building homes the last couple years, it's much more expensive to build a home now than it was when I built a home seven years ago or something.

Ben Carlson:
And I also have a fixed rate mortgage where the rate is below the federal funds rate, which maybe that will be something to look back historically and go, “How did this ever happen?” But a fixed rate mortgage is a pretty darn good hedge because the payment that you make every month is the same, and if inflation is going up, it's eating into those cash flows. So, I do think that owning a home is a pretty great intermediate term hedge against inflation.

Ben Carlson:
Now, short-term, I think this is a good reminder that cash or short-term bonds is a pretty decent hedge against this kind of environment. Especially when you think about the fact that, and it's kind of funny, if you look back at the 70s, if you look at stocks, bonds, cash. That's pretty similar to a savings account.

Ben Carlson:
The best performer of all three of those was actually cash in a rising rate environment or higher inflation environment. And the reason is because as rates rise, those shorter-term instruments will mature quicker and you can reinvest at higher rates more quick. So, it's the kind of thing where you think, “Well, geez, over the long term, if I'm holding some part of my portfolio in cash or short-term bonds, I'm losing out to the rate of inflation. But over the short term, it's actually a pretty good hedge because it allows you to reinvest at higher rates. And now you can get higher rates on shorter term bonds and ultra-short-term bonds than you can on longer term bonds because the Fed is raising those rates and longer-term rates haven't gone up.

Ben Carlson:
So, that's one that I think is actually not a great hedge over the long term, but a pretty darn good hedge over the short term. Again, that kind of gets to the diversification. I also think if we're talking personal finance here, obviously, the ability to negotiate higher wages, it seems like for most of the last 40 years, capital has done better than labor. The financial markets have done better. If you're a business owner, you've done better and people haven't really had the ability to negotiate higher wages.

Ben Carlson:
I think we've finally seen in the last 24 or 36 months where people who have jobs have the ability to negotiate higher wages because they're in more demand and people have been in need of workers. And so, I think that's one of these things, if you've made yourself a strong worker and someone that you need, if you can have the ability to negotiate higher wages, I think that's helpful as well.

Dr. Jim Dahle:
Yeah. Good reminder to doctors. The trend in medicine has been for docs to be more and more employees over the years. And so, they do find themselves in the labor seat a lot more frequently than they used to.

Dr. Jim Dahle:
You mentioned the short-term bonds and longer-term bonds. This year some of the best assets out there have been any sort of fixed income investment where the principle is fixed. We're talking about the TSP G fund, we're talking about stable value funds. We're talking about I bonds who had maybe the best year they've ever had. Anything that benefits from rates going up but doesn't lose principle have done particularly well.

Dr. Jim Dahle:
Meanwhile, the other kind of inflation index bonds, TIPS, have been hammered because they're bonds and because the real interest rates have gone up dramatically. On the five-year TIPS, I think real rates have gone up like 3.5%, 4% in the last year. And so, of course, they've had a relatively huge loss in principle, but what a difference to compare and contrast those two different types of fixed investments.

Ben Carlson:
And I've heard from a lot of people over the last couple years saying, “Listen, I was planning on this inflation being a little higher, and I went into TIPS and I still lost money. Explain this to me.” And the problem with TIPS is they act more like bonds when rates rise, unfortunately, especially coming from a low rate. And what you've seen though is rates from TIPS went from negative 2% to positive 2%. The bond market again is not stupid. It's governed by math where you had to essentially eat a negative nominal return to get that inflation kicker in the past.

Ben Carlson:
But now the nominal returns are higher and actually because yields have risen so much, I'm not a fixed income strategist, but TIPS look a lot more attractive to me from here than they did when they had negative returns. Because if you could get 1.5% to 2% in TIPS plus whatever inflation is going to be, let's say inflation is 3%, you're looking at a 5% rate real return, which is not too bad.

Ben Carlson:
And I think a lot of the TIPS that people own are longer term in nature. So, when rates rose, TIPS fell harder and they sometimes act just like bonds as opposed to this real hedge sort of thing. But now I think going forward, they're probably in a better position, like all other bonds are that rates are higher. It's just you've had to eat that.

Dr. Jim Dahle:
I think a lot of us viewed them as some sort of a hedge. If inflation goes up all of a sudden and we get unexpected inflation, the TIPS are going to do really good and that's going to make up for the hit I take with my nominal bonds or that I take with my stocks or whatever. And they really don't work that way. It turns out what they are is a very risky asset in the short run, but a riskless asset in the long run.

Dr. Jim Dahle:
So, if you buy a 10-year TIPS, 10 years from now, you're going to get what you bought. You're going to get inflation plus whatever the rate is. If they're 2% now, you get inflation plus 2% in 10 years when you get that back. Very riskless. But in any given year, like this year, you might lose 15%.

Ben Carlson:
Yeah. There's certainly not a good short-term hedge. And the funny thing is that TIPS really haven't been on around for that long. We didn't really have a long time series to look back and see, TIPS weren't around in the 70s. They came around in the mid to late 90s. I think the UK might have had them a little earlier, but they don't have this long history where you could kind of see how this happens in short term inflationary spikes. It's unexpected inflation. In 2021 they actually did okay. In 2022 they've gotten killed.

Dr. Jim Dahle:
Yeah. Another thing I find interesting, as I look at the news, as I look at what's happening around us is that I see politicians doing things, and this is on both sides of the aisle. This is not a partisan complaint here, but politicians doing things, talking about them helping inflation, that in my view, very obviously make inflation worse.

Dr. Jim Dahle:
Let me give you a few examples. There are about 20 states sending cash to their residents. Inflation payments, they're calling them. They're printing money, they're pumping money into the system despite inflation being high.

Dr. Jim Dahle:
People on the right are talking about more tax cuts. People on the left are extending the student loan holiday, essentially leaving this free money out there at 0% no payments required for even longer and increasing government spending.

Dr. Jim Dahle:
Should there be a required course in economics before one can take political office? Do you view this the same way I do, that people are doing things that are actually making inflation worse in the name of fighting it?

Ben Carlson:
Well, yeah. If you look at their views on stock buybacks and wanting to ban type stock buybacks, it probably wouldn't be a bad idea. I think what we've learned these last few years, if you go back to March and April of 2020, when they enacted a lot of that fiscal spending, I totally agree with a lot of what they did back then. They put the economy on ice and everyone had to stay home in quarantine and they shot all this money into the system and I think it made sense.

Ben Carlson:
But I think what we've learned, and the Fed certainly kept all the pipes running and functioning for the financial markets as well. They kept that system running because if the Fed wouldn't have stepped in, we could have had the treasury bond market falling apart in it. It could have been way, way worse if the government hadn't stepped in.

Ben Carlson:
I think what we've learned is that it's much easier for politicians and for the Federal Reserve and central bankers to step in in time of a crisis, but it's much harder for them to take the punchbowl away because you'd think the idea would be if they're trying to sort of massage the economy and help it, that when things go really well after they've fixed things and we've got these low mortgage rates and housing prices are going crazy and stock market is going crazy, then you've got to slowly take the punchbowl away. And politically that's much harder to do.

Ben Carlson:
We've learned it's really easy to send people out money and spend money and do the PPP loans and for the Fed to step in and buy mortgage bonds. It's much harder for them to pull away because people are then going to blame them if we have a slowdown. I think the political risk is too much for them and unfortunately that does kind of leave it to the Fed.

Ben Carlson:
And I think that's one of the reasons that the Fed has raised rates so aggressively because they know they're not getting any help from the government in all of this. And unfortunately, whether it's fair or not, the Fed is taking a lot of the blame for this too, because they're the only ones who are doing anything about it.

Dr. Jim Dahle:
Yeah. And to be fair, I think there's great wisdom in the way the Fed was set up to be insulated from the political process so that somebody can do what's actually necessary without having to worry about whether they're going to get elected next year.

Ben Carlson:
Yeah. Or have the votes. Yeah, I agree.

Dr. Jim Dahle:
Yeah. All right, let's turn the subject away from inflation and let's talk a little bit about the challenges of being wealthy. In a recent blog post, you quoted Steve Jobs who said, “I watched people at Apple who made a lot of money and felt they had to live differently. Some of them bought a Rolls-Royce and various houses, each with a house manager and then someone to manage the house managers. Their wives got plastic surgery and turned into these bizarre people. This is not how I wanted to live. It's crazy. I made a promise to myself that I'm not going to let this money ruin my life.”

Dr. Jim Dahle:
How can we avoid falling into that trap once we become wealthy? Should we deliberately impoverish ourselves, drive beaters we don't need to drive, not get a net jet subscription that we can afford? Go camping a lot and sleep on the ground. How do we avoid falling into that trap where you become a different person just because you have money?

Ben Carlson:
I mentioned it earlier that I was always a saver. And I actually had to turn that around a little bit once I started building my wealth a little bit and turning into a spender, but I still wanted to have my frugal way. So, I almost look at it as being selectively cheap. And so, I think that means it's okay to spend money on the things that really matter to you, but then don't worry about cutting back mercilessly everywhere else. I think that that's what it comes down to is figuring out your financial priorities and what you want to spend money on.

Ben Carlson:
My wife and I like to go out to eat or do takeout, but we could care less about fancy restaurants. We don't spend a lot of money on that kind of stuff. We like to have a nice house, but we don't incorporate in tier decorators or nice furniture. I think you have to have some trade-offs on stuff like that, where you can figure out the stuff that really matters to you.

Ben Carlson:
We're not really big on luxurious vacations. We're getting away and creating experiences. We do own a summer lake house, but I view that as not only a financial investment, but also an investment in time that we spend together to make memories. And we've made that a priority but then we cut back other elsewhere. So, we're not driving luxury vehicles, we're not doing all this other stuff, we're not going on ski trips, so we could have that.

Ben Carlson:
I think really for most people it's more about trade-offs and understanding that if you want to remain wealthy, you have to have some balance in your life where you can't have everything.

Dr. Jim Dahle:
That's good advice. All right, we've talked about some of the big headlines this year, some of the exciting stuff to talk about. Let's talk about something a little more practical. And this is a question I get a lot from people and I would describe these people as intermediate in terms of their investing knowledge.

Dr. Jim Dahle:
They ask how does one choose an asset allocation? Especially when they don't know all that much about investing, maybe haven't ever invested through a bear market. What should they think about when they choose an asset allocation?

Ben Carlson:
I wish there was an easy way to do this for people, but unfortunately when we're first starting out, it's probably more trial and error than anything else. I tend to err on the side of caution, but I think the starting point for most people should be, “Let's assume the stock market could probably fall 50% to 60%.” That's a pretty easy assumption.

Ben Carlson:
If you can't handle seeing your life savings get cut in half, you probably shouldn't have all your money in stocks. So, I think you can do some back of the envelope kind of stuff between how am I going to manage between really risky assets like stocks and then really safe assets like cash? And if the stock market can fall 50%, how do I pull that other safety lever?

Ben Carlson:
Now, I do think all investing is this form of regret minimization, where it's really about striking the right balance between “I have this desire for goals and I have this ability to handle losses and what's the right balance to strike.” And I wish there was a more scientific answer here.

Ben Carlson:
My only thing for most people is perfect is the enemy of good, since the perfect portfolio is only going to be known with the benefit of hindsight. I think if you get down to the point where you're toggling between 2.5% allocation to this small cap value or 2% allocation to REITs or whatever, if you're getting to that minutia, you're probably going to be okay and it's not going to matter all that much. 2.5% or 5% position in the grand scheme of things, it's probably not going to matter that much. So, I think as long as you get the risky stuff versus the safe stuff, if you get that figured out, I think that's probably the biggest thing for most people.

Ben Carlson:
And then if you are just starting out and you just say, “I don't know”, I think a target date fund is probably the easiest thing for most people in terms of just setting it for someone else and you know the lever that you can pull to get riskier by going further out on the risk curve or get more conservative by coming to a date that's closer to you.

Dr. Jim Dahle:
Yeah, that's good advice. I like the idea of regret avoidance. And when you've gotten to the point that you fear of missing out, your greed perfectly balances your fear of loss, you know at least your risk to riskless asset ratio right.

Ben Carlson:
Yeah. And these past few years are a perfect example of that, where in early 2021 you were looking at all these people making gobs of money and going, “Geez, I wish I would've taken more risk.” And then this year when you see losses, it's a good reminder that, “Oh, that's right. This is why I have some diversification and balance in my portfolio, because the pendulum is always going to swing probably a little too far on each direction.”

Dr. Jim Dahle:
Yeah. But the process feels arbitrary. It feels like you're just picking something and then sticking with it, which honestly probably matters more than what you pick. But how do you find the intestinal fortitude to stick with an asset allocation in a nasty market when you know the process of picking it initially was so arbitrary?

Ben Carlson:
Yeah. I always think that the good plan you can stick with is far superior to the great plan you can't stick with. But I think it really comes down to this. It's like you're understanding your risk profile and time horizon. So, here's the question that's helped me a lot over the years. When am I actually going to spend this money? I think for bear markets. And I think that's what's helped me sit through a lot of them over time.

Ben Carlson:
I first started investing in the mid-2000s. I started building some capital right before the 2008 crisis. And I was still in big time savings mode, didn't have a lot of money. That was actually relatively easy to keep saving then because I didn't have a ton of money. So, sitting through this bear market and then the one in March 2020 were a little harder because I actually had some money to invest.

Ben Carlson:
And I think there's a huge difference between seeing a percentage decline in your portfolio and a dollar decline in your portfolio. The more money you get, even a smaller percentage decline can be a bigger dollar value. So, it can sting more.

Ben Carlson:
And so, my guiding principle has always been “When am I going to spend this money?” So, for my retirement accounts, I know I'm not going to touch that for decades. And so, I really just don't think about that much. I have it on autopilot, my contributions, I rebalance automatically and it's not really going to impact me that much.

Ben Carlson:
And then for stuff that I know I'm going to be spending in the next couple of years, I don't try to take a lot of risk with them. I think that's the thing for most people is just trying to figure out more the financial planning side of things and “Well, when am I going to need this money?” Obviously, there's an emotional component. Some people need more cash or bonds as an emotional hedge and that's the tough part.

Ben Carlson:
But to your point about being sort of married to a portfolio and trying to stick with it, even though it's arbitrary, I think the big thing for most people is just what are your goals in the first place?

Ben Carlson:
People come to us and I get a lot of questions from people like you, “What asset allocation should I use?” And my question back is always, “Well, what are you doing with this money? What's the point of it? What are you investing it for in the first place?” And I think if you don't answer that, if your only goal is “I want high returns and I want to make more money”, if there's no light at the end of the tunnel or end goal, then it's going to be really hard to answer any of those questions in advance because you don't really have anything guiding you in terms of what that portfolio is for.

Dr. Jim Dahle:
Yeah. Excellent advice. The process really does have to start with your goals. Absolutely. And it turns out that the rest of it gets easier if you start there. If you start with setting your goals and you decide what accounts you're going to invest for each goal, what accounts you're going to use to get there, and then you choose an asset allocation for each goal, by the time you're selecting investments, the investment selection process is very simple. Whereas if you start with trying to pick the investments, it’s practically impossible.

Ben Carlson:
Yeah. It's like a funnel where you're funneling it down and the investments should be the last thing.

Dr. Jim Dahle:
Exactly. All right, let's change the subject a little bit and talk about optimism. I saw a statistic the other day that we've gone from having 70% of the world's population living in just terrible abject poverty to just 10%. And that's over just the last hundred years. In a hundred years, we've gone from only 30% of us not being terribly poor to 90% of us not being terribly poor. Yet everyone wants to listen to pessimists. It's the pessimist that sounds so sexy, that sounds so smart when there's talking heads on TV. Why do you think optimism is such an important trait for investors?

Ben Carlson:
Well, the simplest one for me is what's the point of investing if you don't think the future's going to be better than it is today? If you don't believe that, then why are you investing anyway? I do think that unfortunately progress is not an event. It happens more slowly. Progress is not going to be a headline in the newspaper, but a terrible event could be. So, it's easier for people to latch onto pessimistic viewpoints unfortunately.

Ben Carlson:
I do think, again, it's kind of like a personality trait. There are some people that are just more cynical and pessimistic and I think for them automating their investments is probably going to help a lot and sort of taking themselves out of the equation. I do like the idea of maybe saving like the glass is going to be half empty, but investing like the glass is going to be half full where you give yourself a little bit of a margin of safety because we don't know what's going to happen.

Ben Carlson:
But I personally like to think that most people around the globe are getting up and trying to improve themselves, improve their lives, make more money, improve the lot of their family, that sort of thing. And when you read some of these books that tell you how far we've come, even like the 1800s, it's a completely different world.

Ben Carlson:
And I think if anything, we probably have just more time today to complain about things. In the past, people were working so much they didn't have time to complain about. They're on the farm for 12 hours a day, seven days a week, and they didn't have time to sit and think about how bad certain things are. And so, it's almost a luxury for us to have so much time to complain about things.

Dr. Jim Dahle:
Yeah. It's interesting. I've heard somebody say something similar about burnout. Tons of people are burned out at work. Surveys of physicians show 50% of doctors are burned out. And one counterpoint I heard from somebody is, “Yeah, we're all burned out. There's a club for that. It meets Friday night down at the bar.”

Dr. Jim Dahle:
And the truth is, imagine the serfs of the 1700s in Russia. You don't think they had burnout from working 12 hours a day seven days a week in the fields? Of course, they did. This isn't a new phenomenon. But it's an interesting counterpoint to a lot of what we hear about the difficulty of finding a job that makes you feel fulfilled rather than something where you're really just trading your time for money.

Dr. Jim Dahle:
At any rate, we're starting to get short here, but something between 30,000 and 40,000 people are going to listen to this podcast eventually. Mostly high-income professionals, mostly doctors. What have we not talked about today that you think they should know?

Ben Carlson:
One of the things that I've learned over time is that when I first started out, I assumed I'm going to find the answer for financial success in the investment portfolio and all these things. I think that there's really no one way to succeed. I think a lot of it has to do with, again, your emotional makeup, your own circumstances, your goals, and I think whatever works for you.

Ben Carlson:
I think there's a lot of different paths to success in finance, whereas the routes to ruin are pretty similar for most people. It's taking on too much risk and leverage and not saving money and overspending and all these things. But I think there's a lot of different paths to success. And so, I think you just have to find the one that works for you. Whether that's doing it yourself, whether that's hiring an advisor, whether that's investing with a robo-advisor, whatever it is. I think as long as it works for you that's kind of all that matters. Yeah, that's kind of where I've fallen. There's no one right way to do this.

Dr. Jim Dahle:
Awesome. We've been talking with Ben Carlson, CFA. He's a blogger at A Wealth of Common Sense. He podcasts at Animal Spirits. He's written a handful of books. He also works as a financial advisor. Ben, what's the best way for people to get in touch with you if they want to learn more about you?

Ben Carlson:
Yeah, just go to my website, A Wealth of Common Sense. You can find everything there.

Dr. Jim Dahle:
Awesome. Well, I appreciate your time and coming on the podcast today.

Dr. Jim Dahle:
All right. I hope you enjoyed that podcast interview as much as I did. It's really fun doing your own podcast. This is the best part, especially if you have a decent size audience. You can get people on the podcast that you want to talk to and they'll say, “Oh, you got a big audience. Sure, I'll come talk to you for an hour.” And then you get to talk to them.

Dr. Jim Dahle:
Sure, you have to record it and someone's got to prepare it and it's got to get published later. But the fun part is just being able to get on and chat with some of these relatively big names in the personal finance community. So, I thank you for listening to the podcast so I can have the opportunity to do that.

Dr. Jim Dahle:
Don't forget about our WCI Champions program that's for the first-year medical students and dental students. whitecoatinvestor.com/champion is where you sign up. Also, don't forget to take the survey, whitecoatinvestor.com/survey. We appreciate you doing that.

Dr. Jim Dahle:
And also thank you for putting good reviews in for the podcast. It really does help spread the word to other people about the podcast. Here's one from DTK53 who said, “Fantastic. As a fourth-year medical student, soon going into the world, this podcast is perfect.”

Dr. Jim Dahle:
Well, I doubt it's perfect. You ought to see the results of the survey that we're going to do, DTK53, because a lot of other people don't think it's perfect either. That's okay. We're trying to get better and better as we go. I hope you are as well.

Dr. Jim Dahle:
Keep your head up and your shoulders back. You've got this, we can help. We'll see you next time on the podcast.

Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.