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: investing in the market
#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!
#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!
#334: Ask Paula: What Paintbrush Did Michelangelo Use? (said no one ever)
In today’s episode, we answer three questions from a college senior named Rafael.
He asks about productivity tools and tactics, student debt, Robinhood and market investing, and how to establish yourself as an expert in a given domain.
We answer his questions by widening the lens.
People often ask about productivity tools. “Do you use Asana or Trello?” But nobody asked Michelangelo what paintbrush he used to paint the Sistine Chapel. The discussion around tools misses the point, which is to master the craft.
Sure, we answer his direct, overt questions. But we also dive deeper, refining these topics and exploring the questions *behind* his questions.
This is an episode in which we peel layers off the onion.
#328: Ask Paula: I’m on the Verge of Retirement and My Taxes are Rising … Help!
Sarah O Sahara’s parents sold their rentals and business of 24 years. They’d like to create a trust for their grandkids with boundaries in place to avoid entitlement. How should they structure this trust?
Renee and her husband are in their 60s, and most of their retirement funds are in pre-tax accounts. They have federal tax credits they’d like to use to move these funds into taxable accounts. Is this a sound strategy?
Anonymous “Yvette” in Canada has a fully paid off condo that she wants to turn into a rental once her new townhome is ready. Should she mortgage against the condo to reduce the mortgage on her townhome? Are there any tax benefits to having a mortgage on a rental?
Luis’s wife wants to start moonlighting in her field. Can she open and contribute to a Solo 401k even though she has a TSP account with her 9-to-5 employer?
Russell and his partner want to emigrate to Canada in the near future. Should they move their investments into Canadian funds?
My friend and former financial planner Joe Saul-Sehy joins me once again to answer your questions. Enjoy!
(Have an investing, entrepreneurship, lifestyle, or decision-making question you’d like us to answer? Submit it here!)
#322: Ask Paula – I Want to Retire at 50; How Do I Bridge the Gap?
Jess wants to reach financial independence by the time she’s 50. But she’s worried that she doesn’t have enough money in cash or taxable brokerage accounts to bridge the gap in her first few years of retirement. What moves should she make, if any?
Yisell wants to invest money now. Should she cash out her $70,000 pension in hopes to generate more than the $1,000 per month she’s guaranteed from it?
Abbey is 22 and she would like to go back to graduate school for nurse anesthesia. Should she save up and pay for it in cash, or invest her money and take out federal loans?
Eliana enjoyed our interview with Paul Merriman on the two-fund portfolio. She’s curious about what growth stocks and value stocks are, and how they fit into a passive index fund investing strategy.
Finally, Sneezy wants to know: why aren’t stocks a good hedge against inflation?
My friend and former financial planner, Joe Saul-Sehy, joins me to answer these questions on today’s episode. Enjoy!
#320: Ask Paula – Thinking about Money from First Principles
Rob hopes to retire at age 60, but he has a pesky mortgage balance he wants to eliminate beforehand. He and his wife expect to inherit $300,000. Should they use this money to pay off their mortgage or should they bulk up their retirement accounts?
“Billy” has two questions. One is about the tax efficiencies of ETFs vs. mutual funds, while the other is about Ginny Mae funds and whether there are bond funds that have an inverse relationship with equities.
Priya is looking for information on home equity loans: where can you get the best terms, and what are the disadvantages? Additionally, she’d like to know which city is best for rental investing: Atlanta, Dallas, or Raleigh?
My friend and former financial planner, Joe Saul-Sehy, joins me on the show to answer your questions. Let’s dive in!
#314: Ask Paula – I’m Worried About My Parent’s Retirement. What Should I Do?
Briale opened a Variable Annuity inside a 403b at work when she was 23. She has 17 years to go before retirement. As an elementary school teacher, her pension will be $6,000 per month. Should she stop contributing to the annuity and contribute to a Roth IRA instead?
Debi has an extra $1,000 each month and isn’t sure where to save it. She also has $10,000 in a CD which will reach maturity in August 2021. Her goal is to buy a residence in the next five years. Should she save this all for a downpayment?
Dominique is concerned about her parents retirement portfolio. Their advisor charges a fee of 1.5 percent assets under management. Her parents are frugal and they don’t realize how much they’re paying. Should she talk to them, or drop the issue?
Sarah isn’t sure whether she should put more of her savings towards a Roth 401k or a 529 fund for her future kids. Which option is best if she wants financial flexibility?
Hunter put a credit freeze on his two children’s credit, which required sending each credit union documentation via mail. Experian and TransUnion confirmed the credit freeze, but Equifax didn’t. Upon calling, the representative gave Hunter a different mailing address for the documents. What should he do?
My friend and former financial planner Joe Saul-Sehy joins me once again to tackle these questions. Enjoy!
#312: Ask Paula – How Should I Invest $5,000 Per Month?
After paying basic living expenses and maxing out their 401k’s and Roth IRAs, Caroline and her partner have $4,000 – $5,000 left each month. Where should they put this money if their goal is to simply have their money work harder for them?
Sanjay is torn between selling his townhome or renting it out. The rental numbers don’t work on his 15-year mortgage — should he refinance to a 30-year mortgage instead?
“Olivia” has two unrelated questions: what are our thoughts on the housing market in relation to the moratoriums on mortgage payments and emergency bans on evictions? What will happen when they go away? Additionally, what tools, questions, or resources do we recommend to have a productive financial conversation with your partner?
Kyle wants to construct a portfolio with the highest Sharpe ratios and wants to know: would the risk parity model work? What are the downsides?
“Priyanka” wants to know: do you need to submit receipts for the HSA contributions you make?
G is curious: does the stimulus check received for their children count as earned income for the kids? If so, can they put it toward the Roth IRAs they opened for their children?
My friend and former financial planner, Joe Saul-Sehy, joins me as usual to tackle these questions. Enjoy!
#300: The Two-Fund Investment Portfolio, with Paul Merriman
Target date retirement funds are simple, automated, easy.
The problem? What’s simple might not be optimal.
Investment expert Paul Merriman joins us to discuss the two-fund portfolio, a mix of one target date fund and one small cap value fund. He describes why this could be the ultimate portfolio for buy-and-hold investors who want to boost their returns, without excessive complexity or risk.
Here’s the idea behind a two-fund portfolio:
- Your age x 1.5 = the percentage of your portfolio in a target date fund
- Invest the rest in a small cap value fund
According to Merriman, this simple strategy could dramatically improve long-term aggregate returns without creating too much volatility or complexity.
