Should We Just Keep Buying?

Regardless of market conditions, should we just keep buying? Nick Maggiulli, chief operating officer and data scientist at Ritholtz Wealth Management, has a lot to say on the subject — like how continuing to invest even in unfavorable markets will bring you financial success in the long run. 

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Learn more about Nick:
Book: https://www.amazon.com/Just-Keep-Buying-Proven-wealth/dp/0857199250
Blog: https://ofdollarsanddata.com/
Twitter: https://twitter.com/dollarsanddata
Instagram: https://www.instagram.com/nickmaggiulli/

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Transcript

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- Regardless of market conditions, should we just keep buying?(upbeat music) Welcome to "Common Cents on the Prairie", a podcast dedicated to helping you demystify the sometimes complex topic of money. I'm Adam Cox, head of wealth Management for the First National Bank in Sioux Falls. We're a community bank based outta South Dakota. In this podcast, we share expert insights from around the country and stories from our local community, to arm you with the tools you need to make better financial decisions. Because the truth is, the more we talk about this stuff, the better off we're all gonna be.(upbeat music) Today I'm joined by Nick Maggiulli. Nick is the chief operating officer and data scientist at Ritholtz Wealth Management, where he oversees operations across the firm, and provides insights on business intelligence. He is also the author of"OfDollarsAndData.com", a blog focused on the intersection of data and personal finance. Nick's work has been featured in the Wall Street Journal, CNBC, and the Los Angeles Times. And more recently, Nick wrote a fantastic

book titled, "Just keep Buying: 1:02

Proven Ways to Save Money and Build Your wealth". Nick graduated from Stanford University with a degree in economics, and currently resides in New York City. I hope you enjoy my conversation with Nick Maggiulli. Nick, welcome to the show, and thanks so much for joining me.- Thanks for having on, Adam.- All right, I have been looking forward to this conversation. I'm a big fan of your work, but I am especially a big fan of your book,"Just Keep Buying". So let's start there if you don't mind. What was the inspiration behind the book?- Yeah, I had been blogging for I think four years at that point, and COVID was underway and I was like, you know, if there's ever a time and opportunity, where I'm trapped inside and I have nothing else to do, it's, you know, might as well kind of take some of the work I've put together and, you know, just make it into a book basically. And so I kinda think I had enough for an investment philosophy, kind of put everything together. I got an editor to actually edit this stuff 'cause my, I didn't really have an editor before that. It was just my dad looking for typos and stuff like that.- Yeah.- But we really kind of, you know, put something together and yeah, and kind of just went from there.- Perfect, so the concept, just keep buying, where did that come from, what was the inspiration there?- So back, I think it was like an early 2017, when I first started blogging, I remember I was like watching this YouTube video from Casey Neistat, and he was like a vlogger. He lived in New York City, whatever. But he had been talking about like, he had a video called like, you know, three words that got me to like 3 million subs or something. And another YouTuber named Roman Atwood had told him that, this advice, which was just keep uploading. So I'm like, oh that's a great idea. You know, you just keep kind of doing something over time, and it grows like compounding, et cetera.- Sure.- At the same time, I was running analysis on the US stock market. I basically found like no matter when you purchased, as long as you just kept buying over time, you would've built wealth. And this is even over, you know, 20, 30-year-periods, et cetera. So that's kind of how "Just Keep Buying" was born. It was just like this high level investment philosophy, which I've defined in the book as the continual purchase of a diverse set of income producing assets. That's like the mantra of "Just Keep Buying".- Yep.- But the book's about a lot more than that. Obviously, most people have heard of dollar cost averaging, you know, just buying over time, people know that. But the book goes into a lot more than that, and kind of where to focus your time. It answers a lot of questions. You know, buying versus renting. It talks about, you know, where, what you should own, you know, what you should invest in, why you should invest, you know, market timing, all these types of things, which we can get into during this conversation. But yeah, that's kinda where it came from.- Absolutely, so big picture, Nick, the concept of "Just Keep Buying". Why is this so important for investors to understand?- It's important because, you know, there's times like today even where, you know, things can get scary honestly. Like, you know, right now it's not looking good. I mean the 60-40 portfolio is having one of its worst years ever, maybe going back to like possibly the Great Depression or something. And it's scary to think like, Oh, should I keep investing, or should I pull my money out, and wait in cash, or do different things? And so there's a lot of fear that people have out there. But the idea is over the long run, you know, a diversified portfolio will build wealth. And I believe that and I, you know, I don't just say that, like most of my assets are invested in that. Like I own, I actually figured out 97% of my net worth is in financial securities. The other 3% is in like everything else I own, which includes clothing, my shoes.- Yeah.- I mean, I don't even own furniture. My whole place is furnished, right?- Okay.- So like even this thing that you see behind me, this is not my bookshelf, right? So these are my books but not my bookshelf, right? I'm really all-in on this idea. And I completely believe that like, you know, owning financial securities and having ownership of income producing assets will build wealth over the long run. And I'm trying to prove that with my own wealth, but also trying to convince people to kind of join the journey.- Sure, well, theory is great, right? But it's only great if it works. So I'm gonna read a passage from your book, that I think speaks to just how well this works. And you've touched on it a little bit already. But you mentioned that if you picked any random months since 1926 to start buying a broad basket of US stocks and kept buying them for the rest of the following decade, there's a 98% chance that you would've beaten sitting in cash, and an 83% chance, you would've beaten 5-year treasury notes as well. More importantly, you would've typically earned about 10 and a half percent on your money while doing so. So this idea really holds up.- Yeah, I mean if you look through the, throughout history I mean, that's true in the US and if you even, I mean I think right after that passage, I talk a little bit about international stocks. We see similarly high numbers. The numbers aren't as good as they are in the US, but the US has obviously been an outlier in that regard. But even when we look internationally, just look at international stocks, a broad basket of, you know, international stocks would've done the same thing. It's ironic that I say that because over the last 10 years, like international stocks have not done that well, like in, you know, in the most recent decades.- Right.- So US stocks have actually crushed it. I was looking at the data today. And I think like developed market stocks have done something like 10% total return over the last 10 years, which is like nothing. Which is like not even 1% annualist I think.- Yeah.- But US stocks have done 157%, which is about 10% annualized over the last decade. So just realizing that like, of course, this doesn't mean that every single decade's gonna be good. But over the long haul I believe like, you know, open capitalist economies will build wealth.- Sure, and I've heard you say before, that implementing this strategy of just keep buying has never been easier than it is today. Why do you say that?- Well, I mean a lot's changed in the last, you know, let's say 20 years, but even before that, the last 30, 40 years, in terms of, you know, now, we don't have any trading costs, right? Transaction costs are basically zero. It doesn't cost money to trade anything. Back in the day, you know, even just as 2000 it was like, you know, E-trade or all these different companies, it was like five bucks to trade, or ten, eight dollars to trade, whatever it was. And you go back further, you go back to the 70s, and let's say you were buying a mutual fund, there were load fees going in, and there were some funds, where you had to pay 7% just to get in the door.- Yeah.- So you put $100 in, only 93 actually made it to the fund, right? So you do that over time, and you can see all these costs will eat up at your capital. Today, that's not true anymore. Of course, there's still costs, there's hidden costs with cash drag and all sorts of other things. But now you can buy a low cost diversified portfolio for basically nothing. So it's never been easier to just keep buying, and there's never been a better time for like a common retail investor person. You don't have to be, have tons of money and have tons of access. Any average person can go in and build wealth using a strategy. Of course, obviously it requires you having a high income and saving money. You know, you have to be able to save money. But conditional on that, everyone, you know, the access has never been easier.- So there's, you mentioned this before, and I wanna come back to this. You talked about the markets right now, and they've gotten beat up quite a bit this year. I think a lot of investors spend a lot of time thinking about, when is the perfect time to invest? But for most of us, do you think it matters all that much?- I mean, it depends what you're trying to do. I think for most people it doesn't matter, because most people are accumulating assets over time, you know? If you're someone who, you know, you haven't saved any money your whole life, you just sold your business after working for let's say, working in it for 50 years, and you have, this is like your life savings and you're putting it all in right now into the market, that can be a little scary. And I can understand why maybe market timing might matter for you. Even for that person, I would say generally...- Yeah.- It's better to like just get invested. But most people don't live like that. Most people are earning money over time, they're saving over time. So when you get invested, it doesn't really matter that much, and it's marginal differences. That's why I say like do what the data says, and the data says like get invested earlier. And like for example, even over a course of one year, let's say you had a hundred, a hundred or $12,000, right? You can either put all$12,000 to work now, or you can put $1,000 to work over each month for the next 12 months. Those are the two options, right? You slowly average in, or you kind of just lump sum it in now, right? The data says that within US stocks, if you put it all in now, you're probably gonna earn about 5% more than if you slowly average in, on average, right? So if you slowly wait in on average. That's true in US stocks.- Yeah.- This is true in, I mean the percentages change, but it's true in gold, it's true in Bitcoin. And I talk about this in the book, no matter what asset class you look at, if it's an income producing asset, even when it's not in the case like gold or Bitcoin, generally, it's better to put the money money in now,'cause things tend to go up over time, you know, with through, whether through inflation or just from price appreciation. So generally, you know, going now is the right move. And so I think market timing doesn't matter that much. You know, obviously there are specific circumstances you could come up with. What about someone in Japan in 1989?- Yeah.- It's like how many people are putting their entire life savings into the top of one of the arguably biggest bubbles in, you know, capitalist history. So, you know, I understand those arguments, but they're also very, very extreme.- Yeah.- Like Japan was the biggest bubble of all time of any market I've ever seen, and I don't think we'll ever get anything close to that ever again.- Yeah, yeah, yeah. It is tough for investors especially, especially when markets are down, to stay on the sidelines. And we have these conversations with folks all the time, and a lot of it comes back to investor psychology, which I get it, it can be scary to throw it all in at once. So it's a give and take and it, it really does depend on individual circumstances. So alright, one of my favorite things about your work, Nick, is you're able to take really complex ideas, and make them much more simple for people to understand. And my favorite part is you add a good amount of humor with it as well. And so there's a few concepts from your book, that I'd like to walk through and get your, get your thoughts on. The first idea is,"Saving is for the poor and investing is for the rich." Tell me about that idea.- So this idea is, is basically that, where you focus on in your, you know, financial journey, or I'm saying what where you focus on is dependent on where you are in your financial journey. So let's think about this. I'll give you some examples to make sense. So let's say you're 22, you're fresh outta college, or you know, you're 18 years old, fresh outta high school and you start working, right? How much does your investment portfolio matter? And I'm gonna argue not that much,'cause you don't have that much money, right? Unless you have some trust fund or something. And most people don't have that, you don't have any money. So how you invest that money doesn't matter all that much. I'm not saying you shouldn't invest money. I'm not saying you shouldn't care about the stock market, and care about your allocation at all. But you shouldn't overanalyze those decisions, right? And why do I say that? Because let's say you had $10,000 even, right? You save up for a couple of years, you have 10 grand in the market, okay? A 10% return, which would be a good year, that's $1,000, right? That's not a insignificant amount of money. But you could make that easily through like a side hustle or something else over the course of a year, right?- Sure.- So even a 1% difference in that return is a hundred bucks. And so when I was like 23 years old, $100, like I could easily have spent that out when I was living in San Francisco. One night out, you know, Uber, drinks, dinner, like you can spend $100 in the night very easily. And I think people in their, in their early 20s know what that's like, right? It's very easy to spend $100.- Yeah.- So it's like, oh I'm gonna improve my investment returns by 1%. Like you could blow that in an entire night. Like when you don't have a lot of invested, it's really about, you know, saving money. That's why I say saving is for the poor. Now, investing is for the rich, is let's take the opposite. Let's say you have, you're 65 years old, you've been saving your whole life, you've been very successful. Let's say you have $10 million invested, right? You know, a 10% return that year is a million bucks. Like even if you're one of the best savers ever, saving a million dollars in a year is very, very difficult, right? You have to have a super high income to do that. So you can see why savings doesn't really matter once you have a lot of money. Once you're rich, it's all about your investment returns really, that's what moves the needle. And when you're young, it's all about how much money you can save. So that's kinda this like, I call it the save-invest continuum. And it's this idea of figure out where you are in that continuum, and then optimize accordingly, or kind of figure out what you wanna focus on accordingly. And so the simple way to do this is, okay, how much can you save in the next year? That's one value. Let's say you could save five grand in the next year, there's 5,000. So let's say, and then second value is how much can your investments earn you in the next year, right? So let's say you had 10,000 invested as I said, and you can get a 10% return, that's a thousand bucks. So 5,000 was how much you can save in the next year. A thousand is how much you can earn from your investments in the next year, which one's bigger? The save one. So that's where you need to focus.'Cause you need to get that number higher, save more money, get that invested, so that you can raise the other number. In theory over time, you know, you should have, okay, next year I'm gonna be able to, my investment's gonna meet, you know,$1,200, then 1500, then 2000, then 25, you know, you see? And over time, over time what should happen is that investment number should keep growing, and growing, and growing, to the point where it actually dwarfs your, what you can save in a year. And you should see that happen sometime between your probably 40s and 50s. You should start seeing that transition, where now, oh my gosh, I've been saving for a couple decades now, and now like my investments can earn me more than I can even work in a year and save, right? And that's where you're really starting to see this transition take place.- Sure, those are great examples. And I think you also made a correlation there between saving and investing or growing your income, with the weight loss debate, whether it's diet or exercise. Can you talk a little bit about that analogy?'Cause I thought that was fantastic.- Yeah, so there's two ways to save money. You either cut your spending or you raise your income. And I think like in the terms of the diet versus exercise debate, it's pretty clear that yes exercise can help you to lose weight at least initially, but there's, there's no evidence like long-term, that just exercise alone is going to help you lose weight. Because the example I give these, these people called the Hazda, they live in I think northern Tanzania, and these people are very active. They're out, you know, digging up tubers, they're out, you know, catching animals, they're climbing trees, you know, to get honey, all sorts of active. So they're running around all day doing stuff, right? And despite all that extra activity, when you control for body size, they burn the same number of calories as someone in the US or Europe, right? So if they, if let's say one of them weighed 130 pounds, that 130-pound man, or 130-pound woman, or whatever, that person would burn the same number of calories, who's running around all day, as someone who's actually in the US or Europe, just kind of sitting there and maybe, maybe have more sedentary lifestyle. So your body basically adjusts to your, your physical output. But what it doesn't adjust to is diet, right? So diet, as you change diet, that really is the big thing there. And so you can use that corollary and say, okay, well, how is that similar to what I'm seeing in the personal finance debates? It's because like cutting spending is like exercise. Like it works temporarily. You can do stuff temporarily, but the real way to raise your savings straight over the long term is to raise your income, right? It's like the long term sustainable path.- Yeah.- It's harder, don't get me wrong. It's a much harder path, but it's the only sustainable way out.'Cause you can only cut so much. At some point, like you have to eat, you have to like live somewhere, right? So there's only so much you can do. Of course, if you're being frivolous and spending tons and tons of money and you don't need to like, you know, there's easy ways to cut. But for most people, I don't think most people are like that. I don't think most people are like frivolous spenders, right? They're generally pretty good about their spending. And where you really see the issue is just they just don't have enough income. So the question is how can you raise your income? And that's kind of a bigger topic, we could definitely get into.- Yeah, sure. Well, sometimes the answer is both. You know, you can, you can cut and, but you can also try to earn more. So that's great. This next one made me laugh. And as a lifelong Catholic, I just love this one. You said, "Even God couldn't beat dollar cost averaging." Tell me about that.- So this is a, I mean this is not actually God. But this is the, the thought experiment here is like, imagine I told you like when all of these dips would be in the future, this is about buying in the dip, right? So if someone's like, "I'm gonna wait till a dip." Well, I said let's say I made you quote God in this scenario and I said, I'm gonna tell you exactly when you're in a dip. So you can save cash, wait till there's a dip, buy at every exact bottom going forward, right? If you had done this throughout history, you know, something like 80% of the time, you would've lost out to someone who just bought every single month and never cared, didn't know about the future dips, didn't know anything, just bought every single month. And the question is, well, why is this true, Nick? It's because when those dips occur, they usually happen at higher prices than what you could have bought at originally, right? And so the example I give is, I started blogging in early 2017. I wrote a post called "Just Keep Buying", which eventually became the intro to the book in some way. And in that blog post I, you know, I talked about, you know, US stock market, all that stuff, right? And people were like,"Oh the US stock market is too overvalued. You know, I'm gonna wait until there's a dip." Let's say you had perfectly waited for the dip that happened in March, 2020. Let's say you perfectly waited, and you actually timed the exact day of the bottom, on March 23rd, 2020, right? Let's say you had this magic ball, like your god or something, and you did that, right? Even if you had done that, and save cash, and waited, you would've bought at prices 7% higher than what you could've gotten in early 2017. So it goes to show like, yes, even when I give you all these assumptions, all this great foresight, which no one's gonna have that obviously, right? This is a fantasy here. But even if I gave you all of that, and you had bought the dip perfectly, you still would, most of the time you'll buy at higher prices. So because of that tendency, because big dips don't happen that much, they're just, it's not worth it to save cash and wait for a dip. Because the dips don't come, they don't really happen. And by the time they do happen, most dips are at a much higher price. By the time your dip comes, it's at a much higher level than what you could have bought at originally. So that's why even God, someone, or someone who knows the future, can't really beat dollar cost averaging. Now, technically God could just sell out and then rebuy every time if (indistinct).- Yeah.- We're being honest here, like this is not really a great technology for God. This is like kind of a, not that omniscient God, but you get the point here.- Yeah.- It's kind of a funny little game here, but it just, it just shows that even when you know the dips, and you say, "Hey, I know I'm at the bottom now," that's not necessarily information that's gonna help you.- Yeah, I just wanna make sure my mom, who listens to the show, very Catholic, we're not saying God couldn't beat the market.(Nick and Adam chuckling) So let's talk about spending money for a minute, Nick. You have a couple really good concepts and things that I think could help us as we think about spending money. So for some people, spending money is very easy, some people have a problem with spending money. For others, it actually can be really, really difficult. And you have two ideas that you laid out in your book, and I've seen in other interviews, that I think are great to help give people some comfort and just a little freedom, when it comes to spending their money, and they are the 2X rule, and to focus on maximizing fulfillment. Can you walk us through those?- Yeah, so the 2X rule is pretty straightforward. If you know you wanna splurge on yourself, or on something that costs some amount of money, we'll call that X, just save two times that amount for it. So let's say you were gonna buy, the example I think I used in the book is, Oh, I wanna buy a really nice pair of, you know,$400 dress, shoes, or something,'cause I'm going to an interview, right? So if I'm gonna, if I wanna, if I feel guilty about that, what I'll do is I'll save another $400, and then invest that in income producing assets. I might buy, you know, an S and P 500 index, or emerging markets fund index, or something like that, right?- Yeah.- With the other $400. And so what that does, it kind of eliminates the guilt. And you don't just have to invest it, there's other things you can do. You can take that other$400 and you can donate it. So you're saying, "Hey, if I'm gonna spurge on myself, I wanna help someone else as well." And so there's a lot of different ways you can do this. There's no right way to do it, but that's just a way to kind of eliminate the guilt.'Cause even if you're spending on yourself, at least you're either investing for your future self or you're helping someone else at the same time. So I think coming up with little tricks like these, I mean, it's not gonna work for everyone, but it can work for some people, and that's kinda the point of this. It's just to find things that help you kind of get over guilt about spending money.'Cause I know how difficult it can be for some people to spend money. I know a lot of people don't have problems with that, but some people do.- Yeah.- And I don't think we talk about it enough. That's the first idea.- Yeah.- The second idea is kind of focusing on, you know, your values and maximizing your fulfillment. And so when I talk about fulfillment, I think it's a little different than happiness. We always talk about, "Oh, we wanna maximize our happiness, I wanna be as happy as possible." But happiness can be something that's fleeting. I think fulfillment is something that can be much deeper. And I think a simple example illustrates this. Imagine you're, you know, you like rock climbing and you wanna climb Mount Everest. I would say that climbing Mount Everest is probably a very fulfilling experience, but I would say it's probably not a happy experience. It's probably very grueling and very difficult just getting, you know, the conditioning just to get ready to do that. And then going up there, it's not a fun experience, I would say. But I would say, it's something that people that have done it probably found fulfilling. So if that means, oh I need to go buy the best climbing gear, or I need to hire a coach, or a trainer, or something to get me to do this, and it's gonna cost a little bit more money, I think in those cases it's worth it. And since then, since talking about the book, I've found other systems that work. For example, there's a great book called "Die with Zero" by Bill Perkins. And in it he talks about memory dividend.- Yeah.- So when you buy something, think about is this gonna gimme a memory dividend? Like, and then what he, what he means is like, am I gonna be able to come, think back about this experience and kind of have some enjoyment from it even after it's already happened, right? So it's paying you like a memory dividend over time. So every time you bring up, you know, oh that vacation I took to Chicago, or that vacation I took to Europe, or whatever it is, you can kind of remember that experience, and get some "pleasure" from it over time. So that's another way of looking at it. So as I kind of learn about these things, I kinda add them in and maybe if there's ever a second edition of "Just Keep Buying", I will be adding these other things in there.- Yeah.- But those are ways to help people spend money.- Good, well, for our sake, I hope there is a second edition. As a hyper saver, this next one, like you almost lost me in the book when I came to this point, but I love the way you laid this out. You said that,"We may not need to save as much as we think we do." Can you talk to that?- So there's a couple, there's a couple pieces of data that makes me think this. So the first piece of data is, if you actually look at people that are leaving requests, people as they're passing, right, how much money they're leaving to their heirs, that number tends to go up as people get older. So someone in their 60s is leaving something like 300,000, and I think by their 70s, it's like 350, and then it goes up from there. And in their 80s is even higher, right? So it's like, how are people getting older yet they're leaving more money? Shouldn't they be leaving less? They be running outta money. And the data just doesn't seem to support this, at least for most people. Of course, there's someone you might know, that ran outta money and things like that, but for the most part the data doesn't support it. And there's another piece of data I found which said that, only one in seven retirees is actually pulling down principle from their portfolio. So of those that have portfolios, so some that has some sort of savings,'cause remember there's a good portion of Americans, who have no retirement savings at all, so I'm not including them. So just conditional on someone, who actually has some sort of savings for retirement, right? And I'm guessing most of your audience has saved some money for retirement, at least something. So that's probably going to include them.- Sure.- So if you take that group of people, only one in seven is pulling down principle. What does that mean? The other six outta seven, they're either just living off whatever, whatever investment income they get from their portfolio, or they're living off less than that investment income, and reinvesting the rest of it, right? And there's more kind of data showing this as well. For example, Michael Kitsis did this great study, where he said, if you had done, if you had just used the 4% rule, which I mean just as quick reminder, you know, you're pulling 4% of your portfolio every year. We can, you know, we can discuss that more. But using the 4% rule with the 60-40 portfolio in retirement and doing that for 30 years, every year just pulling 4% of your portfolio. After 30 years, you're more likely to have 4X your portfolio then be below your initial balance. So let's go through an example. Let's say you start with a million dollar nest egg, right? After 30 years, you know, using historical data, running the simulations and going through, you know, 60% stocks, 40% bonds, right? Owning that portfolio, pulling 4% out, you do that for 30 years. After 30 years, you're more likely to have $4 million than you are to have less than a million. So what the main point from all this is that wealth, even once you're in retirement, people think, "Oh I'm gonna run outta money." It's usually the opposite. Their money just keeps growing in such a way that they don't even know how to spend it all. And of course, you can find examples where that's not true. But for the most part wealth tends to go up over time, and especially for retirees, if they're not spending enough of it, right?- Yeah.- So because retirees tend to basically match their spending to their income. They never end up pulling down their principles, so their wealth keeps growing over time. And that's really the... If I had to give you the one punchline, that's the story, and that's what the data seems to show. So that's why I say people, all these people are saving all this money, and worried about not having enough money and running out, when the data shows most people aren't even getting close to running out, their wealth's going up as they're in retirement.- Hmm, yeah, that is contrary to what we normally hear and we talk about. And I think the other interesting thing is when people talk about spending in retirement, sometimes we see a little spike, right? At first, when people retire, they take the trips they've wanted to take, they go see the grandkids, they do all those things. But then it slowly decreases over time, they become less active, they become more sedentary, and they're not able to do the trips anymore, and they do send, end up spending much less money than they were before.- Yeah, so they find that, I think JP Morgan looked at this and it was like retirement spending declines by about on average 1% a year. So after 10 years you're down 10%, after 20 years you're down 20%, et cetera, so...- Nick, what is lifestyle creep, and how much is okay?- Lifestyle creep is when you get a increase in income of some sort. Maybe you get a raise at work and you decide, hey, I'm gonna spend all of that, and live a better lifestyle. And most personal finance experts will tell you to avoid that at all costs. No, don't have lifestyle creep, live the same way, like live like a college student forever, save all your raises, and you know, you'll retire early, right? And that's fine and dandy, for some people that's great. But I wanted to say, how much could you actually spend of your raise and still like kind of retire on time? That's the questions. Like let's say you're on some path, you're like, hey, if I follow this plan, I'm in a retire at age 65 and this is, everything's set up perfectly. I'm trying to obvious, it's obviously a fantasy, but let's just go with it for a second, right? Now the question is, let's say you have what economists call a positive shock. You get a raise, great, great news, right? Your income just went up. The question is, how much of that do you have to save in order to stay on path, so you would retire at the same time, right?'Cause if you spend it all, I can tell you that you're gonna retire later than usual. And the reason why is because assuming you wanna keep your lifestyle the same, the only way for you to, you know, adjust for that spending is you have to, you have to work longer and save more, to update your increased spending, right?- Yep.- If you save it all, you'll retire earlier because you are now having more money, and so you're gonna get to whatever. You're not gonna have to retire at 65, maybe you'll retire at 64 or 63, et cetera, right? So you'll get there earlier. So the question is, well, what, how much, what's the right amount I need to save or spend of that raise in order to get me to the same date? And the answer is, I've looked at a bunch of, it actually matters based on your savings rate. But for most people and most savings rates, which are generally in like the lower range, 20, 30%, whatever, it's 50%. So if you can save half of your raise, then you're basically, you can spend the other half without worrying about it. So remember this is after tax money, right?- Yeah.- So let's say you add a hundred thousand dollars, I'm just making them numbers easy. A hundred thousand dollars, your current after tax income, and you got a 10% raise. So now you're making 110,000 after tax, right? You could save 5,000 of that, and you could spend the other 5,000, and you would retire basically at the same time, it wouldn't change anything. And the great part about this is, on top of that, you would actually have more money you can spend in retirement. So it's kind of a cool, like it's a, you know, a double whammy, in the sense that you get to retire at the same time and you get to spend more. And so how did I come up with that? I ran a bunch of simulations of this, and that's basically what the numbers show.- Sure, well, and related to that, I loved you bringing up the point that high savers, when they get a raise, they actually have to save more than the average saver, just to keep pace with their own saving rate.- Yeah, and the reason for that is because how much a raise could affect their spending. It's really, it's the effect on total spending that matters, right? So someone that's a high saver by definition is a low spender relative to their income, right?- Yep.- So if you're saving a lot, that means you're not spending a lot. So all of a sudden, if you get this raise, you have to save at least that portion of it, if not more of it. Otherwise, you're gonna impact your spending too much, and then that's gonna affect, you know, how much you have to, how long you have to save for, et cetera. So it's really about looking at spending, and how does it impact your spending?'Cause that's where everything comes down to at the end of the day.- Yeah, it sure does. Do you think everyone should max out their 401k?- Definitely not. I know this is a controversial opinion.- Yeah, it is.- But the re, the reason it's controversial, so I'm not saying that no one should max out their 401k. I think that would be equally foolish. I think the issue is if you ask personal finance experts, they will tell you max out your 401k, every single one of them.- Yeah.- And it's what I've heard my whole life. But I actually run the numbers on this, and it's not always a great bet, especially, if your 401k fees are particularly high. So if you are paying like something like anything over, as I say, you know, 0.7% on your funds, or let's say over that, and that's generally pretty high already. But anything over that, and plus the plan fees, et cetera, if you're all in fees are anything above 0.7%, you're not getting any benefit in your 401k, compared to just taking that money and putting it into a, you know, taxable brokerage account, right?- Yeah.- Now, just for the record, I just wanted to say this quickly. You should always save up to the employer match. Like that's free money. There's no debate there.- Yep.- I'm not debating that at all. Always save up to employer match. It's every dollar beyond the match, is whether you should do that or not. And I think for most people, it's not worth it because of the opportunity cost. Like where's the flexibility of that money? Like that money can be used for other things. And a lot of people don't even know what fees they're paying and they don't check. And so because if they don't know, they're probably not getting that much of a benefit. And if the typical average 401k, all-in 401K fee in the US is something like, you know, 0.4 to 0.5%, the annualized benefit of a 401K compared to a taxable brokerage account is something like 0.2% a year, which is not that large. And 0.2% a year, don't get me wrong, and that can add up over time, but it's not that large to the point where you're like, why am I even doing this, you know? And that's where I'm like, okay, I ran the numbers and I'm not convinced that maxing your 401k is the right move. And so that's why I'm challenging it and there's, I've yet to hear anyone else who's like... There's very few people that agree with this, but I'm still pushing it out there to try and get more people to understand the argument and why I say. I just don't think enough people are talking about it. It's almost assumed as a given that you should max your 401k and I just don't agree with that. And I think we need to kind of have a bigger discussion around that.- Well, I just, yeah, I like the viewpoint. And I think the other thing, and you touched on a little bit too, those after tax dollars, those can be used at any time. They're not locked up, there's no penalty to get them. So life happens, somebody loses a job, you've got that flexibility. And when we look into retirement, it's kinda nice to have different buckets of assets, so you can decide which assets to pull from at certain points in your life, depending on what your income is, depending on what your tax situation is. It's nice to have that flexibility.- Yeah, I agree. And that's why I'm saying like I think there's a lot more to be done in terms of flexibility. That's why someone's like, oh should I do a pre-tax 401k, a traditional, or should I do a Roth? And I'm like maybe do both, right? And I think I generally prefer pre-tax, because you can play more tax games later. But for the most part, I would say try and do both. There's flexibility, there's games you can play. There's all sorts of things you can do when you have more type of accounts you can use. So that's just something to consider. Or maybe early in your career you do Roth,'cause you're assuming your income's lower. And then as you start to earn more and more, you go to pre-tax, right? So you're paying a lower tax rate on average throughout your career.- So speaking of unconventional ideas, one of the ideas that you mentioned was this idea of luck in investments, and whether that has come from timing, whether it comes from the assets that we buy. Not many people are willing to, to talk about the fact that sometimes we're lucky when we get in and sometimes we're not so lucky. So, are we captive to luck, or do we still have power to influence our financial futures?- Of course, you're never always captive to luck. Of course, luck matters, to say it doesn't would be foolish. And I think my favorite data point that illustrates that was, if you had beaten the market by 5% a year from 1960 to 1980, right? The US stock market, you would've made less money than someone who underperformed the market by 5% a year from 1980 to 2000. So let's think about what that means. Someone with skill, with actual skill, beating the market by 5% a year is not easy to do, right? You definitely have skill, if you can do that for 20 years, right?- Yep.- Someone that with skill from 1960 to 1980, would've underperformed somebody with negative skill, who clearly is losing to the market by 5% a year. Because why? The overall market return was so much higher from 1980 to 2000, it was like, I think 13% a year, compared to 1960 to 1980, where it was only 2% a year, right? So you can see that's how big of a difference. So of course, that's cherry pick. That's probably one of the most extreme cherry picked examples you can, you can find, in terms of lucky versus unlucky. However, it illustrates how much luck matters. However, saying that, there's a lot of things you can do, and you always have flexibility, in terms of your spending, there's flexibility, in terms of, you know, your income and how hard you work, how many years you work, do you wanna work more or less, et cetera? How you invest your portfolio, right? The asset allocation, there's always things you have. And so even during times now, like times like now where things look really bad, inflation's high, we have geopolitical uncertainty, there's a developing energy crisis in Europe, there's a lot of stuff happening. There are still options for people, right? And so like what are those options comprised of? Like maybe it's like, okay, I need to get a side job. Maybe you can't find a side job. Okay, maybe I need to, you know, look at, re-look at my spending, re-examine my spending right now, especially as inflation's going up. You know, what things are increasing the most and how can I, you know, try and make my way around those, or maybe reduce my dependence on those types of things, right? And so it may take extreme examples, but sometimes you have to do that during extreme times. And so just thinking about that, there's always options. And I think to keep that in mind, you know, during times like this.- Sure. So despite the premise of the book to just keep buying, at some point, a lot of us are going to have to make the decision to sell some investments, whether that's to live on, or for a big purchase, whatever it is. But that decision can be one of the toughest decisions that we as investors make. So how should we go about approaching that, that point in our lives?- Yeah, so I guess it depends on, I'm assuming you're talking about retirement. But there's always, you know, different reasons why you might wanna sell something. For example, I used to own gold for a long time. And at some point, I started running more of the data analysis on gold, and I realized that there gold will have periods of, multi-decade periods, 20-year periods of negative real inflation adjusted returns. And once I realized that, I said, "I'm not gonna be able to own this asset class." So I had to get out of it. And it's not because it was even performing badly, it was doing fine, I think I broke even on my investment. But when I thought about it, I said, "Imagine I start that period now, am I gonna be able to hold it for the next 20 years?" The answer is no, I know I would bail on it. So I bailed on it right away, and I said I'm not gonna do that. So that's an example, a personal example, right? Another time, let's say you have a concentrated position, you've been in a company for a while, the company goes public or something, maybe it was private, it goes public, now, you own, now 80 or 90% of your net worth is in one company, right? That's an example, right? Or you've been getting, you know, stock from your employer for years and now you have, you know, 30, 40% of your portfolio in one company. That's an example where you might need to sell so you can diversify, right?- Sure.- In addition, rebalancing, that's very common and normal. You're rebalancing, maybe stocks are up, or bonds are up, et cetera. So you wanna kind of get back to your, your preferred allocation. But lastly, the most important reason to sell is you,'cause you wanna live the life you want. The whole point of us earning money, and saving, and investing, the whole point of all this is so we can kinda do the things we wanna do, right? So I don't think it makes sense just to like die with, you know, most money in the graveyard, right? So I think, you know, there are times when you have to sell, right? And so that means just like, hey, you gotta just, just part ways with it. And that mean, and I know it's scary because there's so many people who, as I just talked about with the retirement data, who are afraid to pull down their principal, they just wanna live off their income. I get that, I understand those fears. But at times, you have to realize like, what was the point of doing all that? Why did you save all that money in the first place, right? And if you're like, "Oh, I'm just gonna give it to my kids, I don't care if I don't save." Then that's fine, you can do that. But some would argue maybe you should give that to them now, and let, you know, let them have that sooner in life, and maybe you could have a bigger impact on them. I don't know, but those are debates that we had.- Sure. All right, let's get you outta here on this one. You said that we should fund the life we need before we risk it for the life we want. Tell me a little bit more about that.- So that's kind of thinking about how people let, that's kind of talking almost like a concentrated position.- Yep.- And how someone may have a very large position in, you know, let's say Bitcoin, or something like Apple stock, or whatever. It doesn't matter what it is, you have a very large amount of money in there. And the question is, like you've seen that asset come up, or go up a lot in price, and the question is like, should I sell or should I hold onto it? And so when I'm saying, you know, fund the life you need before you risk it for the life you want, it means like, hey, sell some of that down. Get it to, you know, get your lifestyle to some sufficient level, that you'd be happy with, even if you lost the rest of the investment. So if Bitcoin goes to zero, or Apple stock goes to zero, or whatever it is goes to zero, you wouldn't have major, major regrets on your decision. So kind of get some base for yourself. And then everything above that, you would've to just let it ride. And so I'm definitely, I used to be of the opinion that if you had a concentrated position, you should always sell it all down and then just, you know, put in diversified portfolio. But now, I don't believe that anymore. And the reason why is because I think of wealth more in like levels now, and this is kind of something I'm still developing. But basically, once you're kind of getting your lifestyle to some level that you care about, like, hey, I wanna be at this level, I'm good here, you can then let, you can take bets. You can say, "Hey, I'm gonna let this thing ride, and maybe it's gonna get me to a different, you know, type of lifestyle, if it goes well." And if it doesn't, hey, you at least have your base covered. But there's a lot of people that don't do that, and they put all their money into one thing, and they just hope that it goes up forever, and then they can lose it all. And it's really sad to see that. But you know, hey, that's their prerogative. I'm just trying to help people, you know, try and, you know, have some balance, right? Like risk adjust a little bit, diversify a little bit, you know, try and be prudent with your investments.- Fortunes are made and lost in concentrations, right?- Exactly.- All right, Nick, this was awesome. Thank you so much for doing this, I appreciate it. But we really just scratched the surface, and I love your work. So tell people where they can find more about you and your work.- Yeah, so you can find me on Twitter, @dollarsanddata, on Instagram at Nick Maggiulli, and my blog, OfDollarsAndData.com. You can also find the book, which is on Amazon, "Just Keep Buying".- Perfect. We'll put all those links in the show notes, and thank you so much for doing this, I appreciate it.- Yeah, I appreciate Adam. Oh, and by the way, if anyone wants to DM me on like Twitter or Instagram, I will, I answer every DM. So please feel free if you have questions or clarification about something I said, feel free to DM me. Thank you.- Awesome. Oh, very cool, thanks, Nick. I hope you found this helpful. If you did, please subscribe and share with your family or friends. If you have a topic you want us to cover in future episodes, send us a note through our website. And if you're at the point, where you want an expert opinion on your finances, reach out and we'd be happy to start a conversation. And remember, any comments, insights, or strategies discussed on this podcast are intended to be general in nature, and therefore may not be suitable for you in your situation, whatever that may be. Before acting on anything we discuss, please consult with your attorney, CPA, and or your financial advisor.(upbeat music)