Chuck Jaffee, a forty-year veteran financial journalist who regularly writes for the Wall Street Journal and is also a nationally syndicated financial columnist, discusses how money and investors’ attitude towards investing has changed over the last few decades.
Tag: financial independence strategies
#390: Ask Paula: Help! My Bills Are Too High
We start this episode with two anonymous callers who have opposite problems: one says her bills are too high, while the other is worried that she’s saving too much.
Anonymous (“Izzy”) saves A LOT. She wants to relax about her spending more, and start including more joy into her life. How should she approach the next 10 or 20 years, so that she can enjoy her financial security?
A different anonymous caller (“Starlight”) has the opposite problem: her expenses are mounting. Her bills make her uncomfortable. She wants to shake up her investments so that she can tap her assets in order to make her payments. Ideally, she’d also like to buy a house in Europe within the next 10 years. How should she do this?
John liked the episode with Bill Bengen, where we discussed the 4% rule. However, he questions whether that rule should really be applied to the FIRE community.
Steve is a landlord who needs his property to cash flow, but doesn’t like to raise rents. What should he do?
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!
#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!
#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?
#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!
#370: Ask Paula: My Income Is Dropping From $190,000 to $40,000; What Should I Do?
Michelle makes $190,000 and is going to switch to a career that pays $40,000 on average. To prepare for this lower salary, she’s selling her current home and buying a different one. Should she pay off her new home with the proceeds from the old one? Or should she invest her profits?
Kristen is 32, and she and her husband want to retire in less than 20 years. They make too much to contribute to a Roth IRA. Should they use back door Roth conversions to speed along their path to early retirement?
Anonymous lives in a high cost-of-living area and is wondering where to keep her down payment and emergency funds. Should she use I-bonds, TIPS, or some combination of these two?
In today’s episode, former financial planner Joe Saul-Sehy and I tackle these tough situations.
Enjoy!
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.
#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!
#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.
#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!
#354: Ask Paula: How Do I Make Sure I Don’t Spend the Money I’ve Invested?
Charlie in Cali has enough money saved to pay cash for a house, but she and her husband decided to finance their home, instead. They’d rather invest the money and arbitrage the spread.
But one problem: how can they keep themselves from touching this investment?
Jay is choosing between Fidelity and M1 Finance and has questions about tax loss harvesting.
Nicole and her siblings will be inheriting some properties that they eventually plan to sell. How should they set up or organize these properties among so many owners? Should one person take the lead? Do they need a shared business account? Also, how should they evaluate a property and make sure they get a good deal when they sell?
Ed owns three homes, two of which he plans to sell in the next few years. He plans to live in them long enough to establish residence and take the capital gains exemption when they sell. Is his plan for handling the taxes solid?
We answer these four questions in today’s episode.
Enjoy!
