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Tag: financial freedom

June 29, 2022By Paula Pant

#388: “Feeling Anxious About Your Investments?”, with Scott Nations

Recessions are terrifying.

Market crashes often bring out the worst in people’s anxieties and fears.

This fear triggers us to act even more irrationally than usual – which can lead to making expensive mistakes in our investment portfolios.

In today’s episode, Scott Nations, who spent his career studying market volatility, describes some of the most common cognitive biases and irrational behaviors that investors make. He shares tips on how to master the mental game of investing, especially in turbulent times.

Here are a few irrational biases that destroy wealth:

#1: The disposition effect – Humans have a tendency to sell their winners and hold their losers.

Why? We get a dopamine hit when we sell a winning asset and lock in our gains. Meanwhile, sunk cost fallacy makes us want to hang onto the loser ‘until it comes back.’

How can we avoid falling prey to this?

First, if you’re thinking about selling off an asset that’s performing well, ask yourself: What’s the real motivation? Do you want to book a profit for the sake of booking a profit? Or do you believe that some underlying fundamental has changed?

Next, compare this decision to your investor policy statement, which is your written statement about your goals, timeline, risk tolerance, risk capacity, strategy and style as an investor. Is this decision aligned with your written personal policies?

#2: Status quo bias – Our tendency to overvalue our current situation, such as the mix of assets that happens to already be inside our portfolio. We demand a higher burden of proof to justify any change than we do to justify holding the status quo.

This is often triggered by information overload – when we feel overwhelmed by excess information and too many options, we react by doing nothing.

Psychologist Barry Schwartz calls this the “paradox of choice” – the more choices we’re offered, the more likely we are to not make any decision.

How can we protect ourselves from this? One tactic is to adopt a low-information diet, in which we carefully curate the amount of news and information that we receive.

Another tactic is to look at our resources and imagine that we’re starting from a blank slate. If we didn’t have our current mix of stocks, bonds, real estate, crypto, etc. – if we imagine that we’re starting with our entire net worth in cash – how would we allocate our capital if we were starting from scratch?

#3: Overconfidence – Research shows that people consistently overestimate both their abilities and their predictions of positive future outcomes.

The majority of people think they’re an above-average driver, which is mathematically impossible.

Most people overestimate their probability of getting and staying married forever, of not grappling with fertility issues, choosing a winning investment, or becoming a millionaire.

Today’s interview guest says that he’s aware that, among all the cognitive biases he describes, he’s personally the most susceptible to overconfidence bias. Staying aware of his personal susceptibility helps him keep it in check.

#4: Loss aversion – The sting of a loss is more emotionally profound than the joy of a gain. As a result, our brains are hardwired to avoid losses, rather than pursue gains.

This closely relates to the sunk cost fallacy that fuels the disposition effect, which we described above.

We describe many more cognitive biases in today’s episode. Enjoy!

Keep reading...

May 24, 2022By Paula Pant

#382: Ask Paula: There’s No Such Thing as a FIRE Number

Sara wants to leave her job to spend time with her children, and she needs help in calculating her FIRE number. But is this possible?

Joe is buying his first house hack and would like to understand if the FHA loan or the doctor loan would be better for him.

Kat received a windfall and is wondering if she should invest it in stocks, real estate, or a combination of both.

Aisha is moving to the US and wants to start investing ASAP – how should she approach her goal to reach FIRE?

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

Enjoy!

P.S. Got a question? Leave it here.

Keep reading...

May 5, 2022By Paula Pant

#378: Ask Paula: Should I Take a Higher-Paying Job if I Can’t Save As Much for Retirement?

Anonymous is 25. She has a job offer that comes with a substantial raise. Hooray!

Buuut … there’s a problem. If she accepts this job offer, her new employer won’t allow her to contribute as much money to her company retirement accounts.

How should she think about the trade-off between increasing income and funding her retirement?

Meanwhile, Dan from California is retiring soon and wants to know what he and his wife should do with the loan they took out against their 401(k).

Finally, an anonymous caller who goes by “Daughter” has a whole life policy that only costs her less than $50 per month. Since her policy is so cheap, should she keep it?

Keep reading...

April 20, 2022By Paula Pant

#376: Ask Paula: How Should My 64-Year-Old Mom Handle a Toxic Boss?

Meghan’s mom is 64 years old and suffering under a toxic boss. It’s tough to switch jobs at her age. How should she think through the next steps?

Ellen has a 20-year-old son with physical and developmental disabilities. Her other child, age 21, will need to look after him for the rest of their lives. How should she handle their inheritance? 

Joe wants to start working part-time in four years, and fully retire four years after that. He worries he’s investing too aggressively for his retirement date.

In today’s episode, former financial planner Joe Saul-Sehy and I tackle these tough situations.

Enjoy!

Keep reading...

April 7, 2022By Paula Pant

#374: Ask Paula: Watch Out! Here’s How Lowering Your Investment Tax Bill…Might Increase Your Risk

Jake wants investment cash flow until he’s eligible for his military pension in 10 years.  Should he buy small multifamily properties right now, wait a few years and invest in syndications or should he invest in index funds through taxable accounts?

Andy in Palm Springs is shoveling money into a taxable brokerage account. He wants to use these investments to create another stream of income. But there’s a problem: his tax bill is going to be high. What should he do?

Anonymous is a U.S. citizen, lives in London, and can’t invest in index funds. Can he emulate the index fund experience by directly buying a huge number of individual stocks?

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

Enjoy!

Keep reading...

February 10, 2022By Paula Pant

#364: Ask Paula: No Spouse, No Family, And Thinking About Getting Old – How Do I Prepare?

Hypothetical from the Hampton Inn is curious about whether he should keep his 30 year term life insurance policy or let it lapse with 12 years left on the policy.

Ramon asks us about the details behind infinite banking.

Anonymous Emily is wondering which financial products would work best to cover care and expenses as she ages.

Max is thinking through real estate and stock market returns as they relate to future population trends.

Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it here and we’ll answer them in a future episode.

Enjoy!

Keep reading...

February 2, 2022By Paula Pant

#362: Ask Paula: Okay Seriously, Why Hasn’t Anyone Solved the Budgeting Issue?

David is questioning how to better manage his spending. He’d like a stronger framework to think through budgeting challenges.

Elisa and her husband bought a home, and now they’re saving extra income every month. She has a pension and her husband is an entrepreneur. How much should they be saving for retirement and how should they invest their extra money?

Geoff invested primarily in taxable brokerage accounts for the last twenty years. He’s built a $6 million portfolio and reached financial independence. He wonders about the smartest strategy for withdrawing from those taxable brokerage accounts to efficiently manage capital gains?

Jenna and her husband are planning on buying their next home in a few years. She wants to know if I-bonds are a good way to save for the down payment and closing costs.

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

Enjoy!

P.S. Got a question? Leave it here.

Keep reading...

January 13, 2022By Paula Pant

#358: Ask Paula: Should I Invest in Index Funds More Actively?

Where is the balance between the risks and potential returns of actively and passively investing in index funds?

Where do you place your savings after you max out your retirement and HSA accounts?

How do you finance building a rental unit when there’s already a home on the lot?

Is it more beneficial to buy back pension time with post tax deductions or a 457b plan? Or should I not buy back pension time at all?

In today’s episode, former financial planner Joe Saul-Sehy and I discuss the purpose and practice of mindful money.

Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it here and we’ll answer them in a future episode.

Enjoy!

Keep reading...

January 13, 2022By Paula Pant

#357: Practical Investing and the Efficient Frontier, with Joe Saul-Sehy

 Discussing advanced investing topics with me is former financial planner Joe Saul-Sehy.

You may recognize him from the Ask Paula episodes, but we discuss financial topics shared in his new book “STACKED: Your Super-Serious Guide to Modern Money Management” – co-authored with Emily Guy Birken.

Enjoy!

Keep reading...

January 13, 2022By Paula Pant

#355: Hospice Doctor’s Advice on Financial Independence, with Jordan Grumet

When Jordan Grumet realized he had achieved financial independence, he fell into a deep depression. He didn’t know who he was anymore, he says, and he didn’t know what should come next.

He learned about how to deal with us by observing his hospice patients. In this episode, Grumet, a hospice doctor, describes how working with the dying has taught him about life.

Enjoy!

Keep reading...

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Afford Anything

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