Everyone gets this wrong about building wealth

0:01You know what I love, Damo? Things that save me time. You don't have YouTube Premium, mate, so I just don't believe that. Granted, I'll give you that one. However, I've got one for you. A great time saver in personal finance is Money Week magazine. They spend a lot of time distilling the biggest stories in personal finance down into consumable chunks, so you don't have to scroll and scroll. They give practical tips on savings, investments, pensions, the UK economy, the global economy. It's like your five a day, but for finance. If you want to give Money Week a try, you can get six issues in print and the app absolutely free by visiting moneyweek.com forward slash money.

0:34After your trial, you'll save an extra£5 a quarter on the subscription, which is exclusive to Making Money listeners. And that's moneyweek.com forward slash money. But there's a link in the description if you just want to click that.

0:50The big misconception for me is that the way that you create wealth is through cutting your consumption. But I can tell you as a financial advisor, the 4 % rule doesn't even come into my thinking. Okay, well, there we go. You know, it's too generic. And I'm not saying that this is wrong, but I'm just saying that it's not as right as everybody says. It's the whole idea that you should only invest into index funds, right? That you should avoid active investing at all costs. Chris Bourne has worked in the finance industry for over 20 years. I first got to know him through his YouTube channel. He was very different to my idea of what a financial advisor was back then.

1:25In fact, the first video you see on his channel is all about when you don't need an advisor. We got him on today to have a chat about our biggest misconceptions about building wealth and how we can do it in the most tax efficient way possible. You know, just relying on the stock market, that's one way. And investment companies would have you believe that it's the only way. But, you know, it's definitely not.

1:54We've known each other for years now, isn't it? Yeah, it's a few years now. Yeah, I think we started around about the same time on YouTube. So it's, how long is that? Is there anyone on YouTube you don't know? No. He's big in the game. He likes to know everyone. Yeah, keep my ear to the ground. Just in case there's any like, you know, young upstarts trying to - Take around. Displace him off his throne. Yeah, there is no throne. There's this dodgy wooden seat I'm on that hurts my ass. No, but the thing I've always liked about your content was I felt that it was kind of a level above in terms of like technical knowledge and detail.

2:28and I think that's your background as an advisor, but you're kind of, I don't think you'd like your typical advisors. I don't know. You're very clear in your value prop of like higher net worth. And so, I mean, you describe it maybe better than I can. Yes. I mean, I've always focused on the retirement planning end of the spectrum because I think that I just personally think that's where I can add the most value to people. Usually when they've built some assets up because a lot of the value that I can bring comes from tax planning and that sort of thing. I've always tried to make it a big part of my proposition that I say to people, look, in pounds and pence, I want to be able to show you that I can create more value than I'm taking away.

3:08And if I can't, then, you know, I'll say, I'm not right for you. Yeah. Well, that inherently means that you'll obviously deal with people that have probably got big chunks of money because they can save more. Is there anything that you would say that you've learned, like, is there anything you would start off with that you say that wealthy clients do that anyone could do? I mean, there's certainly a lot of psychology around investing, behavioral economics, loss aversion and that kind of thing. This whole idea that the pain of loss is greater than the joy of gain. And if we look over a long period of time, look over a long period of history, 100 years, we look at the stock market chart over 100 years, we know that it's going to go up, of course.

3:47But there's been various times over that period where you might have seen two consecutive years of falls. There's been several times that that's happened. I think there's been twice where there's been three consecutive years of stock market falls. And, you know, that's a long time to be losing money. Feels a lot longer when it's going down, right? Feels a lot longer when it's going down. So it's never really been tested for a lot of people. And we overestimate our ability to kind of withstand that pain. So I've seen, you know, with many people over time, otherwise sensible kind of individuals, intelligent people have kind of made mistakes that they wouldn't have necessarily thought that they would make.

4:25When you've actually seen potentially the value of your house lost, or you've lost five years worth of income, even though you might know that things are going to kind of get better and return to normal, or you should know that, when you're in it, every neuron in your brain will be screaming at you, bail out now, you idiot. Sell, sell, sell, sell, sell. Yeah. So obviously every crash is different as well. So your news outlets will be saying things like, this has never happened before. This is unprecedented because they're trying to sell news. So, you know, against your better judgment, you know, you might, your mind will play tricks and you will trick you into thinking that this is different, that it isn't going to get better.

5:04Do you ever think, God, is this time different? Everybody does. Even me. Yeah. You know, like, you know, in the deepest, darkest depths of a market crash or recession, you know, when you've got that such a negative news flow, you know, there's all sorts of cognitive biases that we've got, right? You know, and this is a big part of planning finances and investing, the whole behavioral economics piece. You know, Daniel Kahneman was somebody who was instrumental in this from the 1970s. And he's written about all these cognitive biases that we've got. One of them is what we call the optimism bias.

5:39So we are naturally predisposed to be more optimistic than we perhaps should be. And that borrows from something called the availability heuristic. That's another cognitive bias. Oh, there you go. Finally, you've got to hit the buzzer. My uncle will be happy because if I don't push that in an episode, he's like, you've not pushed that buzzer enough and I don't know what the hell is going on. I know, I can't even repeat what you just said. Heuristic? It sounds like a source. Yes. Hoisin. Heuristic source, yeah. Heuristic source. What was it? Heuristic what? Availability heuristic. And all that is, is essentially, you know, we kind of use information that we've seen before to make connections in our mind.

6:19So, well, we'll use the stock market chart as an example again. You know, we've all seen that 100 years of stock market. We know that it goes up over time. But that doesn't really focus in on the years that it hasn't gone up. So, that doesn't really prepare us for those times. So our brain isn't always prepared for these periods of time that don't meet our expectation. And that's why people kind of make mistakes because of these cognitive biases that they've got. It's just not a comfortable journey. And the main thing that I say to people when they become clients, if they don't know this already, is that I'm only going to promise you one thing.

6:58And that's that you will lose money at some point in time. Interesting sales pitch. Very interesting sales pitch. I promise you that you're going to lose money. I'm going to lose you some money. And it shocks them, right? It shocks them. It gets them to listen because you think, well, nobody's ever said that to me. But I say, but it won't be a permanent thing. But you will. There will be a time when you come to see me where your investments are worth less than they were the year before. And if we're investing into stocks, you know, completely into stocks, then there can be some really sharp falls in value.

7:31So I'll only promise you that that will happen. And I say that to you now because you'll be prepared for it. And when they come, you say, I told you so. And then they're like, oh, I feel so bad. He did promise me this would happen. You mentioned that then, the heuristic. Heuristic, yeah. Heuristic. And you said that it's this thing where we look at what's happened in the past and we kind of project forward or whatever. So to counter that, we all sit here and go, the markets have returned 9 % pre-inflation for the last 100 years. And that's kind of why we continue to invest and we think that that will continue to happen.

8:08Do you think that that might not happen and we're all sitting here basing things on the past? And do you think that Gen Z and millennials might face different challenges that previous generations didn't? I would say that when you're projecting anything forward, you should always err on the side of caution. So I would never make a projection that anticipates 9 % growth for somebody. Even if we think that that's a realistic possibility, what we have to remember is that the 20th century was a hell of a party, really, for investments. The US in particular, the growth that it saw, the economic prominence that it gained during the - that drove a lot of growth.

8:51And there's no guarantee that that will always be the case going forward. And that's exactly - you've hit the nail on the head. We use the past and we project that forward and we think that that is going to be the case, but we don't know. So it's always best to be more conservative with any projections that we're making. But I think as far as Gen Z, millennials are concerned, I think that they've got an even greater opportunity today to make money, to carve out a great future for themselves than anybody ever has before. just because there's more information at our fingertips now than there ever has been before.

9:28And the whole democratization of investing, the fact that anybody can do it and you don't have to go through advisors anymore. But there's equally, there's probably greater risks in some ways than there ever has been before for people who don't plan now or don't start to plan because there's a chance that those people could be working longer than any other generation. as before them, if they don't make a plan. Because safety nets have been pulled in, the gap is widening. And unless you take control of the situation, you could quite easily find that you never get a chance to retire. So everybody does need to make a plan.

10:10But I think the opportunities that exist to everybody today in the world, the world is becoming a smaller place. I think they're greater than they ever have been. Yeah, I think you can do it yourself now, but you also need to do it for yourself. Yes. It's not like, it's like there's choice, but there's no choice, you know, you need to. Yeah, absolutely right. Yeah, you need to kind of, you need to start a plan. You need to start a plan yesterday. I always say to people, you know, there's absolutely no benefit to deferring making a kind of a plan for yourself. There's loads of benefits to starting.

10:43There's not one benefit to deferring. But if you need support in making your plan, like a financial advisor, most of you are geared towards the older, richer people. So where's a good place for someone in their 20s, 30s to start making a plan? Yeah, it is a good question. And I think there is more information that is available to people without even having to leave their home today. So, you know, things like YouTube are a fantastic resource. Shout out YouTubers. Shout out all the YouTubers out there trying to make the world a better place. Shout out to the regulators because I'm not sure they like us.

11:18Oh, yeah, I know. Well, don't talk to me about the regulators. You could be hit or miss though, because you can get like, you can get someone who's not giving you the best advice or you can get someone like Damien Talks Money who's giving you great advice. Exactly. I'm not giving anyone any advice. Or gives no advice. Don't clear about that. Steer away from that. It was like, T's not going to be in trouble. Yeah, a bit of guidance maybe. Guidance. So yeah, where do you get the right guidance from? Like yeah, YouTube, but apart from YouTube, where could you get some guidance? Yeah, I mean, that is a fantastic resource.

11:46And if you haven't got access to a financial advisor, then you do have to kind of take responsibility for learning. But there is more content out there than there ever has been before. I think the thing is, it can be confusing. It can be overwhelming at first. But there's a lot of information. And if you start to kind of consume that information that's out there, you'll start to see regular themes emerging. People saying the same sort of things. Sensible advice. And it's things that kind of are consistent across all channels. Now, sometimes there's a little bit of dogma and things that are sometimes repeated that aren't always necessarily correct.

12:24But in the main, I think you'll find that the same themes will be sort of given to people. And I think that it's just a case of starting and sometimes starting messy as well. That's the most important thing because mindset is everything. this point around you don't need to be perfect with finance it feels like people want the optimal strategy straight away to implement from day one yeah when in reality and i see the same with the gym see people like being like which is the best diet and training plan should i do a three-day split or a five-day it's like just get in the fucking gym and move some shit about exactly and like do that for a bit of time and get better and better over time yeah and like the first time i ever went in the gym i just ripped my biceps for an hour and left the next day i couldn't move with all that is.

13:09The glamour muscles. Yeah. That's all you're interested in. Forget the legs. Yeah. What's a leg day? What's a leg? That's why I film from the waist up, because it's got these two little chicken legs. But no, it's like, it doesn't need to be optimal. It just needs to start. And it's more that psychology point of, if you get started, you realize, oh, this isn't that bad. I'm not dead. My money's not disappeared. Now I'll learn a bit more and a bit more. And then five years down the line, maybe then you're doing what's right, but you've still got a bit of cash there. haven't you built up? Exactly.

13:39And, you know, it's all about where your focus is as well. And that's a good analogy to use, actually, the gym. Weirdly enough, I'm a sport, qualified sports nutritionist as well, but that's a whole other story. But the big misconception for me is that, you know, the way that you create wealth is through cutting your consumption. There's loads of content out there about that. Money-saving content. Money-saving content. Spend less, you know, and, you know, the whole kind of financial independence, retire early. A lot of it centers around cutting your consumption. but that's not how you create wealth.

14:09And, you know, it's the same thing when people start to switch on to fitness, their obsession becomes about burning calories, where really what it should be about is building muscle. Yes. And then you burn calories as a byproduct because you're bigger. Because you're bigger, yeah. So the more of your body weight that is muscle, the calories kind of thing takes care of itself, right? And it's the same thing with creating wealth. Your focus needs to be in the right places. It needs to be about focusing on value, the value that you can create rather than how much you can stop spending. Don't think about how much you can cut out because you're not going to live a very good life.

14:47Think about how much value you can add to as many people's lives as possible. Money will come as a byproduct from that. That's what I've seen from my wealthiest clients as well and all the people that I deal with. You said something about the YouTube space where you said that the basic themes are right, but there are some things or dogma that persists. Do you have any examples of that that come to mind where everyone talks about the same thing and you're like, that's just not right from a financial planning perspective? That's a good question. The thing that probably sticks out to me is, and I'm not saying that this is wrong, but I'm just saying that it's not as right as everybody says.

15:19It's the whole idea that you should only invest into index funds, right? That you should avoid active investing at all costs. But it's not really a case of - You're breaking my heart here. I was going to say, this is a very sensitive subject on this podcast. I'm holding my breath like I'm going to be reached into your chest. But no, what I'd say is that it's not a case of active versus passive investing. It's a case of high cost versus low cost. If you can get active management with the right price point, then that can be valuable, but only in certain sectors. If you're looking at a global index fund or anything that focuses on the US, go index.

16:00The US is such an efficient market. Most developed markets, highly efficient, all the information's out there. So actually trying to, you know, paying money to try and beat those markets is a fool's game. But there's certain emerging markets. You know, if you're investing into an emerging market index fund, you'll find that it's laden with China. And you might not want to be in China. You know, emerging markets, there's big differences between them. So having some local knowledge, understanding where the value is, where the inefficiencies are, and there's much more of those in emerging markets.

16:30you can get value same in fixed income investing as well you can get value by being more selective over what's incorporated in your portfolio so that's something that's repeated by a lot of people on youtube and i i agree to an extent but that's some of the dogma that i see you know because it it frightens people away they they apply that to everything and when people talk markets they talk america don't they and like you're saying they're so efficient it's hard to beat the market. But if you're investing in India, you might want a guy who knows Indian businesses because it's not a very efficient market.

17:04Exactly that type of thing. Yeah. Yeah. That's where you come in, right? How do you get the knowledge of Indian markets, Chinese markets, unless you're doing a lot of research or you're financial advisor and that's kind of your job to know those markets. Exactly. Well, yeah. Not necessarily know the markets myself, but just understand where there can be value in different types of management and where different styles of management can kind of complement each other. Don't write it off. Yeah, don't just completely block your ears to something. But I will say that, you know, costs are corrosive.

17:32100 % agree with people. In investing, you should try and keep your costs to an absolute minimum or only understand where there's value to paying a cost. It's like going back to what we were saying earlier on, understanding where there is value and where there isn't value. And that's, you know, a part of what I do. It's a big part of what I do for people. And what about then the 4 % rule, which is another thing that is like the Trinity studies waved in where everyone's faced. This is the idea too. that damn it i was about to appreciate you good good friend yeah so that it's i think it was based on the trinity study originally but it's this idea that you can draw four percent of a portfolio in retirement and that the portfolio will last you until you die it's like a safe withdrawal rate how much can i take off it a year and it lasts but i think it's over the years it's become like from like a 10 to 15 year retirement to oh i could retire at 30 and draw four percent forever and it would last.

18:23You know, it's become... Well, I can tell you as a financial advisor, the 4 % rule doesn't even come into my thinking. Okay, well, there we go. You know, it's too generic. You know, going back to kind of fitness and all that kind of thing, you know, it's like saying that every man should have 2 ,500 calories a day. Every woman should have 2 ,000. It's just too generic, you know, it doesn't take any account of their body size, level of activity. And it's exactly the same with withdrawal as well. So, you know, your lifestyle, your expenses, your other income sources, all of those things will dictate the level of withdrawal that you need.

18:56And what I see is that people spend much more in early retirement, or they want to spend much more in early retirement when they're active than they do when they're older. They spend less then. So it's not a bad thing as kind of a general broad rule of thumb just to get started. There's nothing wrong with kind of aiming towards a general idea of if I build up this amount of money and I kind of draw 4 % off it, I'll be okay. That's fine to start off with, but it's much more nuanced than that. So what you really need is a model of some sort that can inform you of what level of withdrawal is sustainable.

19:32And that's really where good financial planning comes into it, using the right sort of tools to be able to do that. So can I take more in my early years? And when my state pension kicks in, for example, can I drop my withdrawals down? What does that do to things? You know, what other sources of income have I got? Do I think I'll be spending the same amount of money forever? What about inflation? You know, all of these different types of things. So I use the sort of the tools that do a lot of that work for people and make it very visual. So I spend a lot of my time working on cash flow modeling with people.

20:09And that's where its real value is. Yeah, because we all want a simple rule. but we're all complicated individuals with our own lives. Yeah. And it doesn't work like that, does it? It doesn't. It's fine. As I say, it's a decent enough general rule of thumb, but people's lives don't work like that. It's far too generic. So everybody's circumstances kind of just need to be looked at differently because you could talk yourself out of retirement. You could think, well, I haven't got X number yet and I need 4 % of that and that's the... But you don't need to think like that. It's much more nuanced because you might not be taking account of the sources of income that you may have.

20:47You might not be taking account of when your income is likely to fall. You might not be taking account of the capital that may be coming your way in the future. All of those different types of things that can be planned in. And I know that you use Voyant, which is like really incredible software. You've done something quite interesting where you're giving people access to that tool. Yes. Yeah, which I think was really eye-opening to me because it's like an industry tool that normal people never get access to, but I think they're missing a trick in a way because there's clearly demand for it. Yeah.

21:17And you're like, you take people through that, through your course and stuff and show them how to use it. Yeah. Is there like, can you give ways that people could apply this plan into their own lives at the minute or kind of bring to life what that planning is doing for them so they understand what it is? So you need to kind of break your goals up into different segments. And rather than kind of looking at a long-term retirement goal, for example, you know your focus might need to be on creating more cash for yourself because let's face it you know if you're 20 now and you want to retire at 30 but you've got 100 pounds a month spare you're not going to do it not by investing into some product you know so you know the the maths just don't work you need an impossible level of return so your focus at that point in time needs to be how can i create more cash how can i create more wealth that i can that can then reinvest and really the only investment at that point in time that might stand a chance of providing the right return is one in yourself.

22:18So you need to kind of work out what needs to be done in order to give yourself that potential to earn more money. And so the first couple of years of planning might be not working on retirement, but working on, okay, building up a couple of years worth of expenses because I might need to retrain or I want to start a business. But I can't do it at the moment because I just haven't got, you know, I haven't got the assets to kind of fall back on to sustain myself. So it allows you to set goals over different stages and work towards those goals, break things up, see your progress towards them, which always helps with adherence as well.

22:59If you can see your progress being made towards something, it will help you stick to it. Because as I say, you know, if you've got really ambitious goals, you're going to need to kind of come up with a strategy, come up with a plan that allows you to create the necessary capital to do that. Investment returns alone won't do it. So investing in yourself is more about, okay, we're thinking about what skills do I need? Is it a course that I need to subscribe to? Is it just investing into different books or what other resources? The investment into yourself is the only thing I think in those situations that might yield enough of a return to be able to put yourself into that position where you can have a larger amount of capital to put aside and invest into a pension on a regular basis.

23:49Last time we recorded, Tomei, and you were having some real dramas with your accountant. So how's that been going, mate? They're sacked. So drama sorted. They're a big corporate firm. They didn't really reply to my emails very quickly, like took a week or two at times. And they charged me way too much. I mean, And yeah, they were charging me thousands. They saved me some money, but yeah, I had to move on. Slow and expensive. Pretty much, yeah. This is one of the reasons that we're really happy to be partnering with TaxApp. It's a tech platform that makes self-assessment simple. Whether you're self-employed like me, a freelancer, or a director like Damo, big dog.