Nick Maggiulli: ‘The Biggest Lie in Personal Finance’

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I’m Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Nick Maggiulli. Nick is the author of a new book called “Just Keep Buying: Proven Ways to Save Money and Build Your Wealth.” He is also the author of OfDollarsAndData.com, which is a blog focused on the intersection of data and personal finance. In addition, Nick is chief operating officer and data scientist for Ritholtz Wealth Management. He graduated from Stanford University with a degree in economics.

Nick, welcome to The Long View.

Nick Maggiulli: Thanks, Christine, for having me on.

Benz: Well, we’re thrilled to have you here. So, you’re chief operating officer and data scientist for Ritholtz Wealth Management. Most people probably have some familiarity with what a chief operating officer does. But what does the role of data scientist entail?

Maggiulli: It’s interesting because not many RIAs, registered investment advisors, have data scientists at their firms because it’s just such a new thing, the data science, in general. But some of the stuff I was doing early on for the firm was just basically answering business questions with data–we call this business intelligence. Data science is a very broad field. It goes from everything from data infrastructure, on how you build out servers and all that, machine learning, to just even simple charts, graphs, things like that, just to answer questions. Ultimately, what you’re trying to do is organize information and answer questions to the best of your ability.

So that means I’m trying to figure out what type of leads are most likely to convert into prospects, which can then become clients? There might be certain factors that we know about the leads. And I’ve done certain types of analyses, creating models to look into that. Or what’s going on with attrition, or what’s going on with how our clients are investing money–all sorts of questions that we can look and see. And that’s just getting aggregated statistics, all sorts of stuff. It’s any sort of business question. It’s always evolving. We may look into something, and then say, “Actually we don’t need to look into that anymore.”

One of the things, as you may or may not know, our firm does content marketing. So, I have a blog, Josh Brown has a blog–he is on CNBC. They have a YouTube channel with 100,000 subscribers. There’s a podcast. There’s so much stuff we do. I’m also analyzing content data to see where the viewer is coming from, how is that leading to leads, and all sorts of stuff like that. So, there’s a lot of things where we’re just looking at information trying to answer best we can.

Ptak: You just referenced the fact that many of the people, many of your colleagues at Ritholtz, have public personas. You’re blogging, you’re appearing in the media, and so on. How do you balance that part of your job with serving client needs?

Maggiulli: Most of my week-to-week is working on stuff and operations in the firm. I still have a full-time job. That’s why I’m only putting out like one blog post a week. I don’t have time to be doing podcasts–like have a podcast where I’m creating the content every week or TV appearances, things like that. I don’t have that time yet given all the operational things we’re trying to do, because we’re growing so much. So, for me, most of my time is being spent on that. And that’s why I still consider my blog Of Dollars And Data, the book, all that, that’s a side hustle. Even though it is kind of related to my main job, it’s a secondary thing, because the firm does come first, and I have to spend a lot of time there.

Benz: We want to talk about your book, “Just Keep Buying.” A key thesis of the book and really a theme that runs throughout your work is the virtue of saving as much as you can in the early years of the investing journey. Most people listening are no doubt familiar with this concept of getting started as soon as you can. But can you provide an example, perhaps with data, to illustrate why you think this is so important?

Maggiulli: Yes, I think this is an important idea for two reasons. First, all of your listeners already know and you’ve heard this thousand times before–compounding, compounding returns. So, that’s one reason, just the mathematics of compounding–earlier payments are going to grow to larger amounts than later payments, all else equal, assuming a similar growth rate over time. That’s pretty obvious at this point for a lot of your listeners.

The thing which may be a little less obvious, the second point is that this is a behavioral point, is that compounding is easy, but saving money is hard. What do I mean by that? It’s much harder to save money and raise your income and change spending, whatever you’re doing to save money, than it is to compound your money. Because literally, compounding, you just put it in the market and wait obviously. Obviously, that doesn’t mean that there’s going to be times when the market crashes and you’re going to want to second guess yourself and things like that. But generally, it’s much easier to compound money than it is to save money, in my opinion. The market does the compounding for you.

So, when you combine those two points together, the compounding grows money more, the earlier you do it, and then the second point, which is the behavioral point, that it’s much easier to compound money earlier; it’s nicer to just save earlier. That’s just a very obvious thing. So, from a behavioral thing, it’s easier. And then, mathematically, it’s easier as well. And the example I like to give, if you were to save the same amount of money every year–it doesn’t matter whether you save $1,000 a year or $10,000 a year–and invest that every single year for 40 years earning, let’s just say, 7% a year. After 40 years has passed, half of your portfolio value of the final value came from the first 10 years of contributions. So, think about that. The first 10 years is half of your final product, and the next 30 years is the other half. So, that’s why saving early is so important. Because if you saved $10,000 a year, compounding at 7% a year for 40 years, whatever that grows to in the end–it’s probably like $1 million something–those first 10 years, that’s half of the final value. And so, people don’t realize that. But that’s why saving early is so important. I think that example really illustrates it.

Ptak: In the book, you discuss what you call the biggest lie in personal finance. What is it, the biggest lie in personal finance?

Maggiulli: I think the biggest lie in personal finance is that you can grow your wealth by just cutting your spending. You can just cut your way to having a lot of wealth. And I think, generally, if you look at the data, it’s just not true. Yes, of course, if you’re someone who has high income, you have very, very high spending, then it’s very possible for you to do that. But most people, they don’t have a high enough income to grow their wealth. It’s not their spending that’s the issue. I was looking at data from the Bureau of Labor Statistics, and people in the bottom 20% or the bottom 40% of households, there’s not much to cut. I actually show the numbers in the book. If you’re spending $800 a month on rent, or $900 a month on rent, how much you’re going to cut there? There’s not enough wiggle room for them to grow their wealth just based on cutting spending. And so, I think it’s a lie, because generally, it doesn’t work for most people most of the time, which means the solution is to grow your income.

I’m not saying growing your income is easy, but that’s the path out. And if you actually look at the data as well, savings rate and income are highly correlated, positively correlated. People generally with more income, save more, and that’s true as you go further and further up the income spectrum. So, that one piece of information alone kind of proves my point. And of course, you’re going to say “Well, I know a rich guy that doesn’t save anything.” Those are the exceptions. “I know a celebrity that blew all their wealth.” You can name like five or 10 celebrities that went bankrupt. I can name every other celebrity that didn’t. That’s the difference. It’s very seductive to use these stories and examples of people that went broke. And I’m not saying they don’t exist. But at the same time, I have so many more examples on the other side. I don’t know anything about, for example, The Rock, or Oprah, or any of these people and their money mindset and how they spend money. But I do know that they all have high income. That’s the one thing I know with certainty. I think that’s the main point I’m giving up there.

Benz: How about some ideas for growing income? What are the key things that you talk about in the book with respect to that?

Maggiulli: I would put these into two different camps. Your main hustle thing and then there’s side hustle stuff. In main hustle, which is like climbing the corporate ladder. I’m one of those people that I’m not against 9-to-5s, you shouldn’t do that, you should be your own boss and all that. And I’m not against the people that do that, either. But I think a lot of people, a lot of millionaires out there got there by working a 9-to-5 job and getting experience and doing that. We all don’t need to be entrepreneurs and run our own businesses. So, I think there’s a lot to just building your skills and becoming valuable in a company and slowly making more money over time. I think that’s definitely a way to do it.

The other options, which are all like side hustles, is do you sell your time and expertise? That’s one idea. Do you sell a product or service of some sort, something that’s not always linked to your time, but maybe it’s linked your time initially. But over time, as you get more efficient at it, you can sell it for less time. There’s the idea of teaching people, doing online courses, things like that. I’ve seen people make some good money making a product in that way. I think those are the biggest ones you can look at.

And then, the last way to grow your income I’d say in addition is buying income-producing assets. So, the whole idea of creating these income streams, and those are great and all, but you ultimately want to take that money from those income streams and then invest it in income-producing assets that start paying you more. So, that’s things that will pay you dividends or any sort of cash returns, cash yields, things like that. So, I think, ultimately, the short runways to increase income are all based on your labor and work you do, whether it’s selling products, teaching, things like that, selling your time. But in the long run, to raise your income, you’re going to have to invest in income-producing assets. And I think that’s the ultimate way to build wealth.

Ptak: I wanted to go back to something you mentioned before. It was that first 10 years example, it accounting for 50%, essentially, of what’s ultimately built up over time. And as we know, sometimes life and circumstances can intrude, and people aren’t able to put away savings to the extent that they might want. And so, listening to that, they might conclude, “Oh, my God, I’m screwed. I wasn’t able to tuck money away in my first 10 years.” So, what are the implications for say, my longer-term financial and retirement security? What do you say to try to assuage concerns like those?

Maggiulli: It’s not that you’re screwed. There’s so many factors here. I would need a little bit more information. If you have zero dollars in retirement savings, and you’re 60 years old, I can’t make that math work. Unless you have some really high-paying job that you can save enough in five years or something, you plan to retire at 65 or 67, then it’s going to be very tough. I’m not going to sugarcoat it. For certain people, it is going to be very difficult to do things like that. You may just have to lower your lifestyle. But that’s not true for everyone. I didn’t save in the first 10 years doesn’t mean you’re screwed. It just means you have to save more in the intervening years, or maybe just work a little longer. All else equal, assuming you want that same lifestyle.

I don’t think it’s like, “Oh, they’re screwed.” There’s still time. There’s still time for people to do things. And I think the thing I would focus on then is not worrying about, “I don’t have as much money invested.” It’s like, “What can I do to raise my income? Maybe this is like a gift. I realized I wasn’t optimal in the past. But what can I do now to improve my future?” And maybe the fact that you didn’t save then is now causing you to work harder or think more about how to do this in such a way such that you raise your income. So, it’s not always a bad thing that you’ve made mistakes. I made a bunch of mistakes. And if I hadn’t made those mistakes, I wouldn’t be behaving better now. So, I don’t think we need to always look at mistakes just like it’s a massive failure, because we learn from that, and that might make you better in the future. So, I think that’s the thing to focus on is how can you be better instead of beating yourself up for messing up.

Benz: You’ve said that we begin our lives as growth stocks but end our lives as value stocks. Can you talk about that?

Maggiulli: Yes. That’s a funny little story. So, basically, there’s some data that showed that early on in people’s lives and when you’re in your early 20s, you have a lot of expectations for yourself. You imagine how your life is going to be in the future, in your 30s, 40s, and so on. And a lot of people have very high expectations, but unfortunately, a lot of these expectations don’t always get met. So, I say, earlier in our lives, we’re like growth stocks, because we believe like a growth stock–there’s a lot of future belief in high growth, high earnings. We have a lot of expectations. And a lot of times growth stocks can do very well. But usually at some point, if that growth stops happening, if we don’t meet those high, very high expectations, those prices generally fall. And so, what happens, there’s like a revalue, and you learn that actually, all these crazy things I thought were going to happen, didn’t necessarily happen.

However, we end up over-correcting as we get older. So, we start to beat down ourselves so much that we think things aren’t going to get better. And that’s kind of this midlife crisis thing people hear about where they don’t feel as good about their lives and stuff. And so, then we become, what I call, value stocks. Because over time, as we start to beat ourselves down, we think life is not going to be as good in the future. But then, we’re surprised. There are some positive surprises. And that’s kind of how value stocks tend to perform is yes, they’re beaten down badly, but there are times when there’s these positive upside surprises that end up allowing them to generate some return.

So, that’s the history of how value has beaten growth. I don’t know if that’s going to be true in the future. But you can think of that thinking and apply it to your life. And you’ll see there’s a lot of people–like when you’re 22 years old, the world is your oyster, so to speak, and you can become anything. But as you get older, you realize you can’t do this, you can’t do that, or maybe that path is not open for you. And so, you just think of your life that way. That’s why I use that story. And it was my story as well. I thought by the time I was 30, I wanted to have half a million dollars by the time I was 30. Because Buffett had $1 million at 30. I’m like, I’m not Buffett. And I didn’t even adjust for inflation. I think at the time his million was like 9 million. So, I was like I can take Buffett’s million, cut it in half, I think that’s doable. I didn’t even make that. I would say the goal wasn’t super, super high, but it was decently high, and I still didn’t even make it to that. So, I was beating myself up. But it’s OK. That’s how life is. Don’t beat yourself up so much. Sometimes that happens. It’s a very natural feeling. And I think the reason that blog post did well, and why I included it in the book, is because a lot of people feel that way. We have dreams about our future, and they don’t always come true. And that’s fine. You can keep working at it because things can get better in the future. I feel like I’m much better off than I was at 30 despite the fact it’s only been a few years.

Ptak: Mindful spending is a big topic for you. How can people ensure that whatever spending they’re doing aligns with their life goals and what makes them happy versus just spending to keep up with friends and neighbors?

Maggiulli: I think this is probably one of the hardest questions to answer simply because as an individual it’s one of the hardest questions to answer, because you have to know yourself. This is something that philosophers have been debating for centuries–know thyself. If you know what you really want out of life, then your finances become so much easier. If you know, “I’m OK spending a lot of money in these areas, and I’m not OK with spending money in these areas,” then that’s really helpful. But a lot of people don’t know. They think, “Oh, if I could just travel the world all the time, then I would be happy.” And then maybe you do that for a few weeks, and then it loses its luster, and you realize, “Maybe that’s not what’s going to make me happy.” Or whatever it is. People have these idealized fantasies of what’s going to make them happy with their spending. And a lot of people just don’t know. Sometimes it takes trial and error to get there. But you got to just figure that out.

And so, for me personally, I’m very OK spending a lot of money at restaurants, but I don’t spend a ton on clothing; I don’t have a car. There’s a lot of things in my life where I’m not going to spend a lot of money on a lot of these areas. But when I go to restaurants, I enjoy that. I like food. I would consider myself a foodie. I live in New York City. So, this is a great city for that. So, I’m very aligned with where my spending is. And some would say my spending at restaurants is exorbitant, and it probably is relative to most people. But that’s what I like; that’s my thing. And so, find your thing. If your thing is nice watches, that’s fine. Do that. If your thing is fancy cars, do that. Just figure out what your thing is and spend it in a way that you like, that aligns with your values and what you care about. And so, for me, it’s experiences.

Benz: One thing I like about the book is that it includes these helpful rules of thumb for thinking about your money. And you talk about what you call the two times rule as a way to spend money guilt-free. Can you talk us through that?

Maggiulli: So, the 2x rule is a way to escape any sort of spending guilt you might have. I’ll give you an example. Let’s say I was going to go to a nice sushi tasting, and I was going to take a date there, and it’s going to be like $200 a person or something like that. That’s very expensive for a dinner. If I want to do this nice thing, maybe I’m going to spend this $400, like I already budgeted for. At the same time, I’m going to take another $400 and I’m going to invest it in income-producing assets of some sort, stocks, bonds, whatever. I invest it in some way. Or I can take that other $400 and donate it. So, there’s a lot of things. The 2x rule is if you’re going to spend X dollars, save 2x, and then take half of that and invest it or donate it and take the other half and spend it. So, whether it’s like, I need to buy a nice pair of dress shoes that are $200. Then, I’m going to save $400 and then $200 goes in the market, $200 goes to the shoes, whatever. There’s a bunch of different ways you can do this. And what’s the splurge? Every person is different. For some people the splurge is $100. For other people, it’s going to be $10,000 or even $50,000. I don’t know; every person is different. So, whatever you consider a splurge is a splurge. So, this is a way where you can say, I’m not going to feel guilty about spending this money because I’m now taking that money and investing in my future or donating to a good and so on.

Ptak: I think another rule of thumb, useful rule of thumb, that you have is something you’ve called the hourly wage test. A balance we’re all trying to strike is money versus time. And I think you’ve noted that the hourly wage test is a way to approach whether something is worth your time or better off outsourced. Can you talk about that?

Maggiulli: So, when I think about, “Should I do this activity or should I outsource it to someone else?” I start to think about how much time is it going to take me to do this, and then on top of that, what else could I be doing? What’s my opportunity cost and my time? So, if my opportunity cost is, let’s just say, it’s writing a blog post. And from ads and affiliate deals, whatever, I make $500 on a blog post, and it takes me 10 hours. So, let’s say, my hourly rate is $50 an hour. After tax I’m making $35 an hour. So, if that’s my after-tax rate for that thing, $35 an hour, I’m saying, should I do my laundry or should I pay someone else $20 to do my laundry? And so, in one of those obvious cases, if it takes me, let’s say, an hour to do laundry, but it only cost me 20 bucks to have someone else do it, I would rather just pay someone else because I can create $35 or I can have someone else do it for $20. You can see the logic there. Plus, I hate folding laundry, but that’s a separate discussion. So, I would pay somebody just to fold the laundry; I could do the rest. So, that’s the kind of thinking–is this something where I could just outsource? And I would outsource it. So, that’s why I like using laundry services because in terms of my time, I could be writing a blog post, I could be doing something else that’s a little bit more productive.

I don’t think about that every single moment in my life. If you start to do that, you’re going to beat yourself up about everything you do. You can’t watch a TV show because I could be making more money. You don’t want to get into that space. But if it’s something you don’t enjoy doing, and you want someone else to do it, I think there’s arguments to be made for something like that.

Benz: One word that seems to come up a lot in your work, in the book and on your blog, is optionality, that money buys us optionality. Can you discuss what that word means to you and why it’s so important?

Maggiulli: To me, I think, optionality is just having more choices. And more choices are always a good thing. I think there are cases where it’s not. If anyone has read Barry Schwartz’s “The Paradox of Choice,” what they find is, as you have too many choices, it’s actually more difficult to make a decision. So, I believe in optionality up to a point. But what money allows you to do, it gives you optionality in the sense of, “Maybe I can do this. I can do my own venture, or I can take a job that maybe doesn’t pay me as much, but I enjoy it more.” There are all sorts of ways that money can help with optionality in terms of whether it’s on the spending side, on the income side, with your career, with lifestyle things. There are all sorts of ways optionality can be helpful.

Obviously, at some point, I think too much optionality can be bad. So, for example, I think a lot of people–this is a hot take I have–if you just gave them $100 million, and they just never had to work again, I think there would be a decent number of people who would probably get depressed because they would have no purpose in life. Those people that already know, “If I had $100 million, I’d do XYZ,” they know. They would probably be great with $100 million. But there’s a lot of people out there that would probably lose their sense of purpose and it’d be bad for them. That’s too much optionality. If you don’t ever have to work again, that could be necessarily bad for some people’s psychology. So, I think it’s thinking about getting some optionality that allows you to do a little bit more, but not so much that you’re overwhelmed and can’t make a decision basically.

Ptak: You have a section in the book on buying a home versus renting. What are the key factors that people should keep in mind as they approach that decision?

Maggiulli: I think there’s three big ones. The first one is, how long you’re going to be there. And my rule, I say, is roughly you have to be there 10 years for it to make sense if you’re going to own versus renting. That’s one thing. The second thing is what’s the stability of your financial and personal life? If you’re single now and you plan on buying a home, but you might have a family in a few years, then it’s very likely you’re going to have to sell that home and upgrade, unless the home already has a sufficient size to support a family of your desired size. So, that’s the next thing is, how stable is everything in your life? That matters a lot. Because I think if you don’t have stability, it’s really tough to take on a 30-year fixed, a lot of debt, and making payments, and then you have instability, whether that’s in your personal life or in your financial life. I think that matters a lot.

And then, lastly, can you afford it? There’s different metrics people use for affording it. I think you should be able to put down 20% down payment. I don’t think that means you have to put down 20%, but you should be able to. There’s a big distinction there. Because I think people that can put down 20% are probably decent at saving money and financially responsible enough. But I’m not saying that that means that the optimal choice is for you to put down 20%. You can put down less, and I can understand why someone might want to put down less and just take out more debt if rates are low, or they just don’t want to lock up so much money in an illiquid asset like real estate. That makes sense.

And the other way to look at affordability is debt/income ratio. I think the qualified mortgage to have that is like 43% max debt/income ratio. So, something like that. Obviously, there’s different metrics you can use for that. I’m not sure what’s the perfect metric, but let’s just say 40%. So, as long as the debt/income ratio, your debt payment per month is less than 40% of your gross income. That’s probably a good thing. Those are the three factors I’d say: affordability, stability in your life, and then how long you’re going to be there are probably the most important things. Because I think almost everyone across the spectrum, especially as incomes go higher, homeownership rates go up. So, even people are like, “I’m going to rent for life.” A lot of these people end up owning, too, because you lock up your housing costs. You don’t have to go to the free market every year and get the rent and pay the rent, pay the market rent every year. I think there is something to that especially if there’s inflation. Like, right now, inflation is 8%. People who bought homes in 2019, as long as they’ve seen their income grow with inflation, they’re doing very well right now because inflation is high, and their payment is not moving at all. But guess what, I’m a renter, and my rent is moving with inflation. So, I know the downsides of not owning.

Benz: There’s been this stampede effect in the housing market where it seems like there’s scarcity that’s a mindset. And then, with the threat of rising interest rates, I think you’ve got a lot of first-time homebuyers feeling some pressure to lock in a home purchase. Do you think that there’s potentially risks to making decisions in this kind of environment where things feel a little bit frenetic?

Maggiulli: There’s always risks to making a decision anytime. Because you never know the future. At the end of the day, I don’t think people should market-time too much. When you’re buying a home, it’s kind of like buying an individual stock in the sense that it’s not a diversified portfolio. You have idiosyncratic, individual risk with the individual property, or with an individual stock. So, I understand with individual securities, market-timing matters a lot more than it does for, let’s say, a diversified portfolio. So, that’s why I usually don’t tell people to market-time. But I kind of understand why they do for things like this. I have friends right now that sold a place in Seattle, and they’re just waiting right now. They’re just waiting, waiting, waiting and say, “I think this can’t last and prices are going to come down, and then I’ll get something.” I’d tell them, “That’s true, that could happen. At the same time, prices could just go up a bit more, and then just stay flat for a long time.” And so, you don’t really know at the end of the day.

I think it’s really tough to say, “OK, I’ll wait till the dust settles,” because there’s always a reason to sell. One of my colleagues, Michael Batnick, he’s always saying, there are many reasons to sell. There’s this is a great chart that shows the U.S. stock market over time up into the right, and he puts a point throughout on the chart of every single time that there’s been something happening–a war, or pandemic, or whatever is happening in the world–there’s always a reason to sell, there’s always a reason to wait till later. And so, obviously, sometimes those reasons are accurate, but a lot of the times, the market keeps going up anyway. So, I’m not necessarily saying that’s going to happen here with real estate, but it could happen. There’s nothing stopping real estate prices from going higher, unfortunately. Obviously, it can’t go up forever, just rising at this rate, at this pace forever. But the question of whether you should take that too much into account, I think you probably should, because no one knows the future.

Ptak: I wanted to turn to investing in markets. You’ve written a lot about dollar-cost averaging versus lump-sum investing. And I think you concluded that getting the lump sum invested is usually the better course of action. But doesn’t that whole discussion obscure the fact that most of us have no choice but to dollar-cost average because our investable assets come in dribs and drabs through our earnings?

Maggiulli: I think the issue here is more about definitions. It’s a definitional issue. When we say dollar-cost averaging, there’s actually two definitions for dollar-cost averaging, which is why this is so confusing. The first definition, which you referenced, is just like lump sum versus dollar-cost averaging. That definition is when, let’s say, you sold a house, and you have $100,000 in extra equity. Or you sold one house, bought another, and you have extra money, or you got an inheritance, or you sold your business, whatever. Let’s say, you have $100,000 to invest. You have two options. Or there’s probably more than two. But basically, let’s say, there’s two options. You can lump-sum it, which is take that $100,000 and put it into, let’s say, the stock market or a 60-40 portfolio today. Or you can take that $100,000 and slowly, what I call, average in. I don’t like saying dollar-cost averaging there because I’ll explain in a second. I only use that for the second definition. So, I like to say average in. You take that 100 grand, and you slowly go into the market over the next year. I call that averaging into the market. And in the book, I say “average in” for that.

The second definition of dollar-cost averaging is actually original. And I think the first time it was used in print, referenced was Benjamin Graham saying, “Oh, yeah, just buy over time, you’re dollar-cost averaging.” So, the one you’re talking about, Jeff, with regards to our 401(k), putting money in every two weeks. That’s what I call dollar-cost averaging. But if you really think about it, relative to the first definition, you’re really making these little lump sum payments over time. You’re getting these little lump sums from your check and you’re putting them in. So, really, all this breaks down to, just invest as soon as you have the money to invest. And so, with your 401(k), it’s not like you’re getting paid, and then you’re like, “I’m going to take 4% of my paycheck, and I’m going to put it into the market over the next six weeks.” No, you put it in as soon as you get paid. So, that’s what’s important. And so, lump sum versus DCA or average in, as I call it, the average-in method, that’s really about investing as soon as you can. And when you’re putting money in in dribs and drabs, as you say, over time, you really are putting it in as soon as possible. So, you’re doing the same thing. Those are consistent. When I when I say dollar cost average in, I’m referring to just buying over time and lump summing or investing as often as possible. So, I hope that clears up the confusion there.

Benz: It does. You’ve talked about the role of nonportfolio factors, such as the industry where someone works, as potentially being influential in terms of how they should invest their portfolios. Can you discuss that concept and perhaps share some examples of how human capital should influence financial capital?

Maggiulli: Of course. I think this is a newer idea. And I think it’s going to be something that’s going to take off a lot more in the coming years–this kind of gets into direct indexing, custom indexing stuff, which we can talk about. But basically, if you work in the oil industry, and let’s say you work for Exxon, and Exxon is giving equity. From a risk perspective, it probably makes sense for you to down-weight oil and down-weight your employer, because if something were to happen with the oil industry–oil prices go negative in March 2020, or whatever, something like that–you could be adversely affected. Not only is your financial portfolio down, but maybe your job is at risk now.

I think the key there is to have a portfolio that has different risk characteristics than your income. You can even think of your income. I think this is like CFA material–you can think of your income from your employer as a bond payment that you’re receiving. And so, you worked your labor, and then you get paid a bond payment. So, if you’re getting that bond payment from Exxon every two weeks, do you want to own also the equity of Exxon or the equity of Exxon’s competitors? Maybe not, maybe you want to down-weight that a little bit. And so, I think in the future, we’re going to be able to do that. As technology gets better and better, you’re going to be able to create… Imagine creating an index of the S&P 500, but just down-weight all the oil companies and up-weight everything else as a result. So, there’s a lot of math there and ways you can do that. But that’s how I think about it, is look at your human capital and skills and where you’re getting your income from, and maybe adjust your investment portfolios so you’re not over-leveraged in a certain area. I am not doing this, unfortunately, because I work in financial services and literally 97% of my assets are in financial securities, one or another. I don’t own anything physical. Everything I own is like paper-based, stocks, bonds, REITs.

It’s interesting for me to say, this is going to be important, and I probably should do that at some point. But I write about this stuff. I can’t say, “Go invest in stocks,” but optimally, it’s probably better for me to own more gold or something. So, I have to live like that because of what I’m doing with my life. I’m talking about my investments, I have to live that. And so, I cannot be investing differently and inconsistent with what I’m telling other people to do. I do think, though, that adjusting your investments with your capital makes sense. I just don’t think think it’d be consistent for me to say, “Go buy the S&P 500,” and then I own very little S&P 500. So, I think in my case, I’m doing something a little different than that. But, generally, I’d recommend that.

Ptak: This year has been a bit unusual in that both stocks and bonds have fallen at the same time, which bucks the conventional wisdom that high-quality bonds will diversify stock exposure. Given that, should investors be worried that stocks and bonds could become more closely correlated in the future?

Maggiulli: I’m not as worried about that. I can’t remember the exact number, I think it’s something like negative 0.3, that’s like the long-term correlation between stocks and bonds. So, it’s negative, which means when stocks go down, bonds generally go up. But it’s not negative 1. So, it’s not like every time stocks drop, bonds go up. It is negative, and it’s slightly negative. But because of that, that means there can be periods like this period now, where stocks and bonds decline together. Let’s just say that bonds and stocks had zero correlation, that would just mean stocks fall and you have no idea what’s going to happen to bonds. So, the negative, let’s say, 0.3 or whatever that estimate is, it says, generally, bonds will help you out when stocks are falling, but that’s not always true.

And it also changed over time. Even during March 2020 during the COVID crash, there were days when stocks and bonds declined together. But for the most part, bonds kind of held their value and increased a little bit despite having some crash days. So, I’m not as worried about that. Obviously, it’s tough right now. Yields are coming back up. So, bonds are now actually creating some income when they weren’t really creating much before. But obviously, inflation is high as well. So, it’s tough to be a bond investor now, and I understand that, but I still own bonds. I still own some bonds. And I think it’s prudent for anyone who is trying to control risk to own some bonds. I know it’s not great. It’s not a great situation we’re in right now. But we don’t really have many other choices if you want to control some risk.

Benz: One thing I wrestle with is the bonds versus cash decision. What is the case for holding bonds versus just holding cash?

Maggiulli: I think you get some income. So, let’s say, cash is paying zero. Bonds are, let’s say, the 10-year right now is paying close to 2.5%. So, if inflation is 8%, your cash earned a negative 8% real return; your bonds earned a negative 5.5% real return. So, you just lose less. That’s basically it. You’re going to lose less money over time by being in bonds over cash, that’s it. Of course there’s still risk with bonds that’s not there in cash. So, over very short time periods, if you know you’re going to need the money, and I discuss this in the book, if you’re saving up for a big purchase or something, I recommend using cash. Especially if you’re below three years for sure, use cash, but anything beyond that, you want to have some bonds.

Ptak: Another quandary is deciding whether and how much to invest ex-U.S. It’s probably difficult to convince U.S. investors to do so because performance has been much worse outside of the U.S. than it has been stateside, generally speaking. What’s your thinking on how investors should approach that question, the U.S. versus non-U.S. question for their portfolios?

Maggiulli: So, I understand that since, let’s say, 2010 the U.S. has basically crushed international markets where the international–you’re saying developed or emerging–send very well. But look what happened from 2000 to 2010. It’s the opposite story. I’m not saying that that’s going to happen again. I have no clue. We can’t know the future. But for me, having too much U.S. exposure, and then something happens in the U.S.–let’s say if U.S. underperforms international markets, it’s going to hurt really bad as a U.S. investor, because not only are you probably feeling the effects economically, like just in your job, but on top of that your portfolio is getting hit.

So, the scenario now where if you’re, let’s say, half of your equity exposure is to developed and emerging markets and half is to U.S., that’s not great, because you didn’t make as much if you were just a U.S. investor. But at the same time, like in the flip scenario, in a scenario where emerging or developed does really well and the U.S. doesn’t, you’re much better off than the people who are all U.S. And I’ve heard arguments, “You don’t even need international stocks because the U.S. companies are basically everywhere.” I’ve heard that before. At the end of the day, I still think it’s prudent to have some international exposure. And I believe it. And you don’t have to. Remember, there’s a lot of ways to get rich. I talked about this in the book. There’s no right answer to this. I know people that are rich that just do real estate, like physical real estate. I know people that are rich that just do stocks. I know people that are rich that do REITs. There’s so many different ways you can put together a portfolio that works for you. And I don’t think obsessing over the small details matters as much as people think. It’s just about owning income-producing assets, and on average, you should do well. And you have to be diversified. You can’t put all your money into Russian stocks and hope for the best. As long as you’re diversified and you’re just buying over time, I think you’ll probably be fine.

Benz: I wanted to ask about target-date funds as a simplification tool for young investors. How do you feel about them?

Maggiulli: I don’t get into this specific topic in the book. But the general idea is it’s fine. I have no problem with target-date funds. I don’t think it really matters that much, especially for younger investors. And you are saying, “Why would you say that, Nick?” Because for a younger investor–and this is like what I talk about in the first chapter of the book–there’s something called the save invest continuum, and it’s basically when you’re young and you have very few investable assets, your asset allocation does not matter. You’re saying, “Why? How is that true?”

Let’s say you have $1,000 to your name. Let’s say your target-date fund, let’s say it’s going to get a 10% return, which is a little high, but I just want to make the math easy. So, let’s say, you have $1,000 invested to your name, your target-date fund gets you 10% return. That’s a $100 investment return in a year. If you’re a young person out there, and let’s say you have friends and you go out to a bar or something, you could easily spend $100. Let’s say you spend $50 in the night, and you do that twice. That’s your entire investment returns gone from you going out two times in a year. So, if you really think about it, what’s more important–looking at your spending and how you’re saving money early on, or your investment returns? And the answer for most young people most of the time, it’s going to be their savings and their income and their career.

I would say, just set some asset allocation that makes sense for you, and then don’t worry about it too much. And as you get older and have a lot more money invested, then you need to focus more on how you’re investing that money. Because once you have $100,000, that’s very different than when you have $1,000 invested. I think that’s the main thing I would say is, should I be in a target date, or should I do this? I used to obsess over that stuff, too. Should I have 10% bonds, 15%? It didn’t matter. Ultimately, it didn’t matter. I spent all this time, but it’s cool, because I was into it, but at the same time, it didn’t matter. I should have spent more time learning how to program in R or some other programming language or learning some other skill than doing that. If I could go back, I would have done things a little differently. Not that I have major regrets or anything. But just saying it’s one of those things where I realized I was not behaving optimally. I think a lot of people obsess over it when they don’t need to, especially young people, that is.

Ptak: At the same time, you think most individual investors should steer clear of individual stock investing, if I’ve got that right. Why is that?

Maggiulli: There’s two arguments for this. The first one is the one that probably most of your listeners have already heard, which is individual stock-pickers, active managers–whatever you want to call them–they generally don’t beat the market, especially after fees. So, basically, what that means is, the message is, if you’re going to try and pick individual stocks, you’re probably not going to outperform the S&P 500, especially over multiple years. There’s these reports that come out, the SPIVA reports, basically show no matter which market you look at over a five-year period, somewhere between 60% and 80% of active managers, stock-pickers, can’t beat their benchmarks after fees. So, if they can’t do it and they have teams of analysts, all these resources, what chance do you have? That’s the traditional argument.

I talk about that argument in the book, but it’s not my main argument. The real argument for why I say people shouldn’t pick individual stocks for the bulk of their holdings. If you want to pick individual stocks with 5% of your portfolio, a small amount of money and do it, that’s fine. You want to do it for fun, whatever, that’s fine. I have no problem with that. I think that’s prudent if you’re doing that. I don’t think it’s that crazy or anything. So, this is where people were like, “The bulk of my wealth is in individual stocks.” My argument to them is what I call the existential argument, which is, how do you know that you’re good at picking stocks? How do you actually know? Because with almost every endeavor in life you can identify a skill pretty quickly. If myself and LeBron James went on to the basketball court, and you didn’t know who LeBron James was, and we started playing, it would be obvious within five minutes that I don’t know what I’m doing; he does, I’m getting crushed. Anyone could tell you that. A basketball coach could look at that. Even people that don’t even know basketball could tell you that. Others can identify skill really easily. Same thing with computer programming. If I went up against the best computer programmer, you would know that this person understands computer programming better than I do, or better than someone that doesn’t know computer programming. You can identify skill easily.

With stock-picking, that’s not true. You and I can go pick stocks. And just because you did better does not mean you’re a better stock-picker. You could have gotten lucky. Or I could have gotten unlucky or vice versa. And so, there was a study that basically found–I referenced in the book–and it was just like looking at mutual funds and are there any actual stars? Are there people that are actually really good at doing this? And they found there’s about 10% of people that we can identify their skill.

So, let’s just do this little thought experiment. Let’s say, 10%, we can identify their skill, the top 10%. The bottom 10%, let’s say, we can also identify their skill, but they’re bad, they’re really, really bad. That means that we can identify the top 10; we can identify the bottom 10. That means the middle 80% we can’t identify. That means four out of five stock-pickers have no idea if they’re good. And how long are they going to have to do this game for, play this game of stalking before they know? One year, three year, or five year? You don’t know. All you have to do is get one really good pick, and it could just be enough returns to make you beat the market; you got lucky. You got an Amazon in 2000 or 2003 or whatever. You were buying somewhere near the bottom. You bought Amazon and it just did so well that it didn’t matter all your other picks. You just got lucky.

That’s the argument I’m going to give out. Do you want to look at yourself in the mirror every day and not really know if you’re adding value to something? Because I don’t have that issue. I think a lot of people don’t have that issue. They know, “When I do this, it creates value because it does this thing.” I think it’s really tough for people to realize, “Am I actually good at this?” For me, personally, I would beat myself up a lot, not knowing if I’m actually creating any value in something. And so, when I tell people, “Don’t pick individual socks,” it’s not for the performance of them or anything. That’s a great argument itself. Are you going to be good at it? And even if you are good, what if you start to underperform? Baird did a study–all the best managers underperform at some point. So, even if you start to underperform, you’re going to question, “Have I lost my touch, or maybe is this normal, like a lull in performance?” So, you’re going to beat yourself up. It’s a psychological game. It’s really, really tough to do that. And I think it’s really tough mentally to play that game. So, that’s why I don’t recommend it, because it’s just tough for a lot of people.

Benz: You referenced that considerations around asset allocation for young investors was probably pretty overrated and maybe a misuse of time. Can you think of another completely overrated debate in the realm of personal finance or investing?

Maggiulli: This is what I’ve written probably the most on is market-timing. I think there’s so much–not even articles I’ve written. I’ve just read other stuff from other people who do thought experiments like what if you bought the lowest point in the year versus the highest point; bought at the bottom versus the peak? How much of a difference does that make over 30 years? And they find it’s basically irrelevant. You keep doing that every year. More important thing is that you keep buying and that the market that you’re buying or the investment you’re investing in is going up over time. And so, most equity markets generally go up. Of course, there’s exceptions like Japan, Russia, Greece, Spain from 1973 to 1983. I know all of them. I’ve spent so much time studying all the failures–I have to know these. So, yes, there are exceptions to this rule. But as long as your investments are going up to the right, market-timing doesn’t really matter. That’s completely overrated. Yet somehow people still obsess over it. No matter what, you look at all the data, people still feel like they want to get a good price, they’re like, “I want to get the best possible price.” And I get that. We’re bargain-hunters. But at some point, you’ve to be like, “This is silly.” It’s not going to when the market is 2 times higher in like 10, 20, 30 years or whatever it is.

Ptak: How about the flip side? What’s underrated? I know that you think maybe the focus on cutting spending is overrated. And the corollary to that is that maybe maximizing income is underrated. What else is underrated?

Maggiulli: I think another thing that’s underrated–and I’ve kind of touched on this earlier in our conversation–is knowing yourself, knowing what you really want to do with your financial life. Why are you saving all this money? Why are you doing all this? And I think that is the ultimate question. And it’s not a financial question necessarily, but it affects your finances. I think a lot of people end up just going through the motions, and they’re saving all this money and they don’t know why. And that’s why even in the book one of the hat tricks I have is, you probably need to save less than you think because you end up having all these people who reach retirement–only one in six retirees based on this data I’ve seen are pulling down principal. That means five in six are just living off Social Security and their dividends, if they have dividends. So, most people aren’t even spending their money down. So, what was the point of all of this.

You start to wonder–I’m not saying you have to spend all your money down. I’m not saying that either. People say, “I’ll bequest” or “I want to give more to my children.” I get that. But I think at some point, you realize, like, “I’ve ended up saving so much money. Why did I do this?” There are so many people out there who ended up working extra hard, maybe neglecting their families possibly just to earn more money, and then at the end of the day, it’s like, why? That was not necessary. So, I’m having people question that; just question a lot of the premises we have in society and the messaging that’s out there. And of course, I want people to raise their income, but at the same time, know why. Don’t just raise your income just to raise your income. If you’re like, “I don’t need to raise my income.” Well, then, don’t.

For example, here’s something that I did recently. I run ads on my blog. I’ve since gotten rid of in-content ads on the blog because they’re annoying. And yes, I’m going to lose a little bit of money from that. But I can get 70% of my earnings and still keep people who are reading my work very happy. And I’m willing to take that because I’m not so desperate, like I need that extra money, that I’m willing to upset readers and possibly lose people. I value people’s time so much. And I talk about that in the book–I value people’s time so much that I don’t want to do that. So, figuring out what do you really care about and what matters and what doesn’t, that’s what I would say to focus on.

Benz: Maybe you can talk about your go-to reading items and podcasts each week. We’ll assume it’s a given that all of the Ritholtz-related podcasts and blogs are on your list. But what else?

Maggiulli: I mostly read blogs, or I’ll read podcast transcripts. And the reason for that is I’m just trying to be very efficient with my time. And I mostly do writing and I don’t listen to many podcasts. I will here and there, if there’s a guest I like, I follow them and see what they’re on here and there. And the reason I do that, I think a lot of my philosophy is, what is the highest-quality information I can get out there? And if you think about the amount of time put into writing generally is just so much higher than it is for anything else, any other medium. Let’s say I write a blog post, it’s 1,000 words, and it takes me 10 hours. So, I’m writing 100 words per hour. I’ve easily in this podcast spoken more than 100 words in maybe a couple of minutes. So, I’m not saying that those words aren’t useful or helpful. But a lot of this stuff, it’s not going to be as refined and thought through as well as me sitting down and writing every single answer. So, because of that I think there’s just higher-quality information in writing across the board because people have to really, really think about everything. It’s easy to misspeak; it’s very hard to miswrite because you’ll know and be like, “Oh, I didn’t want to say that.” You can fix it. So, I think that’s the big thing there.

I’ll give a shout out to one guy. I read Morgan and all these people that everyone knows. I wanted to give a shout out to people who are kind of up and coming. So, Kyla Scanlon, she’s really good. I read her stuff. You can check her out. She’s also on TikTok and a bunch of other stuff, but Kyla is good. And then, Jack Raines. He’s an up-and-coming blogger as well. I recommend those two. They’re up and coming. They’re young. They’re doing very well. They’re crushing it. So, I’d recommend it if you guys are into that type of stuff, check out their content. See if you’d like that.

Ptak: What do you do to combat complacency in your work and regain energy for it, I suppose?

Maggiulli: You just read a lot. I think that helps. You always have to find new ideas, find how people are thinking about ideas. How do you write once a week for five years and do that? Don’t you run out of ideas? And, yeah, there are times when I’m like, what should I write about? And I have to just think about different things. But the more information you consume, and really high-quality information, it’s just naturally going to create sparks. You can imagine you’re building a fire, and what you’re doing is you’re taking all this potential energy, which is like information that you’ve read over the years–these are like the wood. You’re putting it there. And then, once you read something, you create a spark, and then that fire starts over that idea. So, that’s kind of what I do. I try just to read a lot of stuff. And I’m reading all over the place. It’s not always financial stuff. It could be nonfinancial things as well, like biology or status or what have you. But I think reading is the key to that, at least for me. Every person is different. Some like podcasts, because you can sit back and just enjoy. And a lot of people that have been on podcasts have thought about these ideas a lot, too. So, I think there are efficient ways of using those as well. I happen to be a visual learner. So, I just have to read almost everything.

Benz: Well, Nick, this has been such an illuminating conversation. We really appreciate you taking time out of your schedule to be with us today.

Maggiulli: Of course. Thank you both for having me on, Christine and Jeff. Really appreciate that.

Ptak: Thank you.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)

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