A Low-Stress Way to Spend Guilt-Free and Keep Your Finances Healthy (EP.170)

0:27We all need to make smart decisions with our money. my friend Justin Peters, on his show, The Struggle is Real. I've gotten a lot of feedback from listeners, from viewers that you enjoy when I share these interviews I do on other podcast platforms. And in this conversation, I think you'll really enjoy how we try to take the very complicated world of personal finance and simplify it wherever possible. As always, you can find links in the show notes at the longterminvestor.com. And while you're there, be sure to sign up for my newsletter because when you hit reply on that newsletter, each and every time it comes to my inbox directly and each and every time I respond to messages that I receive.

1:12And now here is my conversation with Justin Peters on his podcast, The Struggle Is Real.

1:22Peter, excited to have you on the show. This is an interview that I've been looking forward to for quite a while. And I'm not going to say that we're going to cover the basics. I wouldn't really call it the basics, but I do want to call it simple. I want to talk about some of the simple yet impactful needle moving items whenever it comes to personal finance. And we were talking about this before recording, but there's something called Pareto's principle, which essentially just says 80 % of your results come from 20 % of your actions. I want to focus on those 20 % of actions, kind of the things that 20-somethings can do right now that almost feel bulletproof, or at least bulletproofing their finances for the future.

1:58Let's open it up with simplified investing. And I wasn't quite sure what your take was going to be on investing as a chief investment officer. But then I downloaded your guide at helppeterinvest.com. And I was really surprised to find that you invest in one fund. So tell me a little bit about why or what led you to make that decision, because I know that wasn't always the case for you. It's something that I'm proud of. The degree of simplification within my own portfolio, it's a little bit like a chef eating their own cooking. And so I oversee roughly$7 billion as of this recording for clients all across the country.

2:34And there is a lot of work that goes into developing an investment philosophy one, and then building a portfolio around that philosophy, too. And without getting into like the nitty gritty of philosophy, I mean, it's keep costs low. It's be really diversified. It's don't try to predict the future. It's being mindful of taxes, stuff like that. And ultimately, what we do for clients, we could do in one fund, just like I do for myself. But people need this illusion of complexity. The stock market, the bond market, finances seem like a place of complexity, it's hard to sometimes wrap your head around the idea of the simplistic answer solving the complex problem.

3:20And so for me, there's a couple things. I had been an index investor in my 401k from when I graduated college in 2007, all up until when I joined Plaincorp in 2015. And by index investing, basically all I did was own the entire market. If people listening aren't familiar with index funds, it's the lowest cost, cheapest, most tax efficient way to get access to the total market. And there is literally nothing wrong with indexing. You will never, ever, ever hear me talk somebody out of indexing. Do I think you can improve upon indexing? I do. And we can talk about that if you want, but it's really not that important and it's marginal.

3:58And I was coming to a firm that helps people implement some strategies that do try to improve on indexing. And I wanted it to be similar, but I also had a lot of experience maneuvering my portfolio at the wrong time. I've made literally every investment mistake that you read about in behavioral finance books. And this is someone who knows all the things. And what I felt like was the best thing for me when I was rolling over this pot of money, this 401k account that I've been maxing out every year during a recession, worst recession since the Great Depression, and then a roaring bull market. And this is a big decision.

4:32And what I decided was I'm going to own one fund that is globally diversified, that is the appropriate mix of stocks and bonds for me at this point in time, which is 100 % stocks for whatever that's worth, that is low cost, that has the same sort of overweight portions of the market that our clients typically carry. And the biggest thing I was getting hung up on, honestly, was the fact that it was orders of magnitude more expensive than an index fund. An index portfolio is less than like 0.1%. At the time, I was willing to pay this one mutual fund over 0.3 % to do this. And to me, that was sort of like a lot of the decision that people make when they hire an advisor.

5:11I thought, now I've made this decision. I'm going to maintain this until I'm 50. Then I'm going to add some bonds. Why? Again, we can get into that. You're trying to stay out of the details too, too much. But ultimately for me now, I don't have to make any decisions. I spent a lot of time making one really good, thoughtful decision. And now the key is just to stay the heck out of the way of compound interest, minimize investment mistakes. And for me, this was the path to do so. Man, I'd love to roll the recording back and re-listen to that line again, but simply just spending time making one good decision.

5:47So you don't have to spend time thinking about the stitches and over and over again, I do feel like is somewhat the power of this one fund portfolio, which I'm super impressed about. I did understand now why you might even pull that one fund apart into a couple of different funds, because whenever you're communicating that with your clients, and when your clients are opening up their statement alone at by themselves at the kitchen table, and they see this fund is down or not trending the way you wanted to. Although that's understandable. There are mechanics in each of those funds that might be averaging out, but it does kind of make sense now.

6:23It's like, okay, cool. We're going to do this three fund approach instead. This fund is kind of high growth and it should be around here. This fund is kind of steady and it should be here. And this fund is maybe somewhere in the middle. And now whenever they open up that statement, the combined average of all three of those funds might be the exact same thing as the one fund. But the fact that that was the discussion you had, and that is what they're seeing on their statement totally makes sense for me from an advisor standpoint as well. Well, and I think that one thing that people sometimes don't realize is that I'm gonna use the example of making a lasagna.

6:58You can go buy a frozen lasagna in the freezer aisle at your grocery store. You can go to the part of the grocery store where they're making something fresh every day or you can make it yourself and use premium ingredients. And yes, the premium homemade lasagna is going to be the best one, do you always have to do all those different things? For me, I just, I can eat frozen lasagna. That's all that matters. I also, if you go to howpeterinvest.com, the biggest question I always get is, well, what's the fund? Why don't we make them go to howpeterinvest.com? They can figure out what the fund is. You can also get a little more of the logic of why that fund versus maybe some others.

7:37But I think the key piece, when people are choosing investments for themselves or evaluating the investments that someone has chosen for them. I don't think that more always equals more. Less doesn't always equal less. There are reasons for tax purposes, for really it's purely tax purposes that having multiple pieces that you can break out can be useful. But ultimately, simple investments are what you're going to be more likely to stick with when they're not doing the way that you want them to. And then the other thing is that it just ends up keeping costs a lot lower. There are fewer decisions to make.

8:13And just think about this. Like if we had to flip a coin and we have a 50-50 chance of predicting heads or tails, if you have to flip a coin twice and predict 50-50 twice in a row, your chances of doing that correctly are now 25%. And if you do it a third time, you're now down again to 12.5%. And every time you make decisions, you are increasing the probability of failure or decreasing the probability of success that you make the right series of decisions. And so investing is something that should be thought of as a multi-decade exercise. There are always crazy things going on in the world. And I feel like a great understanding of market history and market theory certainly help with arriving at something that you can stick with for multiple decades.

8:57but recognizing that you don't have to make a decision right this second. You don't want to put it off for years, but you can take your time and put as much time into that investment selection at least as you would planning a vacation or buying a new refrigerator. I can't tell you how many crazy reviews I read about when we had to replace our refrigerator earlier this year. And it was so exciting because the refrigerator we had was just a piece of junk. And we haven't had ice in our house for multiple years. And here we finally get this new thing. And right when the refrigerator comes, I still like it, but it makes a louder noise than I expected.

9:31And I read and read and read and nobody ever mentioned that. But that's still something that stands out where maybe I'm a little dissatisfied. There's always a ping of regret. With investing, regret is so easy to measure because the numbers are right there. And you could see what could have been if you had only invested this way or that way. That's fine to feel that way. That's actually normal. you're trying to make decisions that will minimize regret. And then when you do feel that regret, trying to be honest with yourself of what did I actually know at the time of the decision truly? And those are when you talk about managing$7 billion as opposed to just one personal portfolio.

10:11Those are the conversations that really come into play and probably end up generating some more complexities than you might find with my one fun portfolio. Speaking of slow decision-making process. How painful was that to finally sell your Nike stock? And setting aside performance and kind of where it was headed or where you thought it was headed, the emotional impact of that decision, how did that play out? Well, to take a few steps back, the Nike stock was a gift from my grandmother on my 12th birthday. And it's what I usually assign as the moment in which I started building an education that turned into an interest that then turned honestly into an obsession with stocks, just broadly speaking.

10:55And Nike did absurdly well from the point in time it was gifted to me up until the point in time where I actually donated the final set of shares. And I started out my career as more of an individual stock analyst. And I feel like I did a pretty good job. As I kept learning, I kept starting to think, well, maybe I'm doing a good job because I'm getting lucky. Maybe there's some skill involved, but ultimately individual stocks, the probabilities in which any given stock is going to experience a catastrophic loss is enormous. There's actually a study that JP Morgan put out. I'm happy to share a link with you for the show notes.

11:29They look at all of the Russell 3000 companies since 1980, roughly 40 % of all stocks have suffered a permanent 70 % decline from their peak value. Other things that you see is like two thirds of all stocks underperform the Russell 3000 over their lifetime. The median return of a stock versus the Russell 3000 is minus 54%. So like the median stock did 54 % worse than the Russell 3000. These are stats that I didn't have when I started to think maybe this is luck. It was more like me learning about theory and learning about who you're really competing with when you trade. And I did have an emotional attachment to a number of the individual stocks I owned, Nike being the biggest.

12:10And I know when I went to PlanCorp, I decided I am not going to own any more individual stocks because again, I know I feel emotional about it. And mostly I had been gifting them away to charity. That way, the capital gains I had realized over the years don't actually get taxed and just get to write off as a tax deduction for the charity, keep the individual stock. They probably will sell it. They won't keep it. Most likely most charities get it, sell it, take the cash, fund their programs. It was tough, though. I had already moved on mentally. The harder part actually was 2020 is the first time that I felt like I really wanted to buy a couple individual stocks because during the pandemic, really interesting opportunities come from crisis.

12:51The US markets were down more than 30 % in a month. And there were a couple of companies that were being priced like they're going out of business. That was the hardest time, honestly, to stick with the I'm not doing individual stocks piece. And that has been why writing down what my investment plan is, is so important. Yes, it's public. But even when you work with a financial advisor, you write down a plan and you try not to deviate from that plan. And no financial plan should require that an investment goes absolutely bonkers for your life to work out. And so I think in general, the last slug of Nike selling was tough.

13:29It's an attachment to my grandparents. It's an attachment to a sense of education. and I see that with people who get equity compensation at their companies. They have an attachment to the company or stocks that they inherited from a grandparent or a parent or similar to me have just held forever. That emotional attachment is real. There are plenty of behavioral finance studies that show they call it the endowment effect that you assign a greater value to something you already own than you would otherwise. And so for example, even when I was donating that last bit of Nike. I asked myself if I had cash today, would I go buy Nike stock?

14:06And the answer is no. I'd already decided that the probabilities of any given stock doing better than owning a very broadly diversified, low-cost portfolio, the odds of an individual stock doing better are just not really realistic to be anchoring your wealth to. I got to be clear though, Justin, a lot of people who like individual stocks, we work with clients who carve out a small piece and they use it to express themselves They like it as a hobby. I have no problem with that. And honestly, if you know that about yourself, it's almost better to do it that way where you have, say, less than 5 % of your money in a portfolio where you're trading.

14:41Yes, you may be a long-term investor, but ultimately you're trading and you're making bets. And then the other portion of your wealth is left uninterrupted because the key to investment mistake, excuse me, because the key to investment success is really just minimizing mistakes and trying not to interrupt compound interest. And individual stocks introduce too many opportunities for that, plus the probabilities just are working against you. Yeah, and I see it as fine as well. If that keeps you excited about investing and it's a portion, it doesn't have to be a small portion, but at least a predetermined portion of your portfolio.

15:16If you're saving and investing money into long-term investments, even if you're doing some trading with that, you're probably ahead of most people. in all honesty. If it's even 50 % of your portfolio and the other 50 % is from a very diversified, low-cost strategy, you've got to guess that you're still probably ahead of 90 % of people that are out there. Yeah, I'm with you. You learn a lot from the individual stock investing. There's a thought experiment that says, how much are you willing to pay to learn that you're not good at stock trading? And the answer is different for everybody. It's however much you lost relative to the overall market before you made that choice.

15:55And it's true to some extent, and hopefully you get lucky. And again, I'm not trying to shame people from doing it. I think if you are interested in it, you need the right framework for thinking about why you're doing it, then it's a totally different thing. If it's about growing your wealth at a rate greater than inflation without taking undue risk, no, it's not going to fall in that bucket. That's what investing is all about. And if you hit a home run, yes, that would be great. How would that change your life when you're putting small amounts of money in. The only way for it to change your life is to put an irresponsible amount of money in.

16:27And that's just a recipe for disaster. I know you said you didn't want to get into the details, but I'm curious, what led you to making the decision whenever you hit 50 years old, you're going to add, I believe it's 30 % bonds to your portfolio. It was just random. I think in general, there's real risks in the few years leading up to retirement, especially the first few years of retirement when you're drawing on your portfolio that if the market is down that first year or two that you're in retirement, you're permanently impairing the growth potential of your portfolio. And so trying to reduce some of the volatility there makes some sense.

17:01You know, on the other hand, I don't have any taxable investments other than the business that I partially own with my partners, which is PlanCorp. And in that investment that I talk about in the ebook that we're referencing at howpeterinvest.com, that investment dwarfs my retirement portfolio right now. And so it could be that I get to 50 and say, I actually don't really need bonds. Your mix of stocks and bonds is really dependent on your ability to tolerate risk and your willingness to tolerate risk. And ability is pretty objective. It's stuff like time horizon, liquidity needs. Willingness is pretty subjective.

17:37Like I know that I'm very willing to deal with losing 60 % of my money. If you were invested going into 2007, down to the bottom in 2009, the S &P 500 lost about 60%. So it's a big, big loss. The pandemic was scary for very different reasons. 2022 is kind of like this routine ho-hum bear market. I wish they were all that way. But ultimately, for me, I feel like I should probably take some of the volatility out. That 70-30 mix is probably the thing I hesitate the most on as a decision that was made, let's say, nine years ago at this point. It still seems right. And I think my fear is if I don't stick to it, there needs to be a really good reason why.

18:21It's fine to change your mind over time, but you want to try to change your mind using facts, not feelings. And so I think right now I am feeling like I might want to change the plan, but as it gets closer and some of the facts about my situation are clear, perhaps that'll change. You still have a decade plus to make that decision, but what would be some of the facts that would lead to that? Is it simply you're a plan corp, you have no end in sight in terms of leaving there, you have plenty of money coming in, you're not gonna be drawing down on your retirement assets anytime soon, so you can continue to leave them in an all-stock portfolio or are there some other facts that you might be considering or might impact that decision?

19:01Yeah, it's a really interesting question. I think the biggest one would be what I project my liquidity needs to be relative to the size of the portfolio and not necessarily at age 50, but at age whatever it is when I retire. I used to think I for sure was working till my 70s. I think that might still be true, but I'm not as gung-ho about it as I was a decade ago. I would say that if it feels like I have more than enough money to support my needs given a big market downturn, then I might as well just stay more aggressive. It's not that different than when we have people hit their 70th or 80th birthday and they're in a moderate sort of portfolio for a retiree where we say, hey, a lot of this money is actually for your kids.

19:47And so the portfolio should reflect their time horizon. And so I feel like when you're 80 is when you arguably, if you have plenty of money, you should go back to being 100 % stocks. You don't need the money anymore. You might as well have it match the horizon of who is using it. So I think those are some of the things that would go through my mind. And in about a decade, I turned 40 in December. And so I'll have a decade to sort this out. The other thing, and it's in the ebook that we reference is, I think it's in there. So if we're in the middle of a recession, I'm not going to add bonds. I'm not going to sell my stocks while we're in a bear market.

20:20That's the opposite of what you want to do. There's really no hurry. But I do feel like 100 % stocks is something that I have never, ever, ever recommended to anybody. only you yourself can know that you can stick with it. And people I know really, really closely, there's maybe less than a handful of people that I feel like I know well enough to say they could or couldn't handle it. For me, it's just there's so much familiarity with the market. I don't even look at my portfolio, honestly. I look at the value just to fill out a net worth statement once or twice a year. Beyond that, when the market is down a lot, I'm just really busy.

20:57I'm talking to clients. I'm doing podcasts and TV and articles. And maybe as I get older and I'm less busy, if that's a thing, I will have more time to look at my portfolio. And that is the challenge, I think. So obviously our audience is not retirees that we're talking to today, but I'll tell those of you in the audience, I work with a lot of retirees who don't have as much to do. And as a result, they focus way too much on their portfolio. When you're in your 20s and 30s, you are grinding, you are trying to earn more. And you just got to make sure that you get your savings on the right track and set up and your investments set up in a place so that you don't have to worry about it.

21:35And if there's a big downturn, you'll be too busy with kids or career or something else to even notice. And that's great. There's been all sorts of studies. I think the most famous one, or at least the initial one was from Fidelity that looked at all of their accounts history and found that the best performing ones are the accounts that were either forgotten about. or the person named was dead. And so that just goes to show you, if you leave it alone, financial theory tends to work pretty well in the long run. The challenge is that the long run in the moment feels like an eternity. And so it's trying to kind of connect those dots between today and the future and all stuff that comes up regularly.

22:13But kind of going back to where the conversation started, the more you simplify it, the less you have to keep track of. And the more you can say, I know I made a good choice. I can just stay the course and let things play out as they're going to. Let's change course, actually, and kind of move off of investing and maybe chat about a few other money topics that I want to explore simplicity versus difficulty with. And one thing that comes up often for me is budgeting. It's either somebody really loves budgeting, they track every single dollar, every Friday they sit down and they plug it into their spreadsheet, or I get the opposite camps that are like, I absolutely hate budgeting.

22:53I'm never going to make a spreadsheet. I'm never going to input all of my expenses. I don't want to follow something. I don't want to restrict my spending in that way. So I want to speak to the latter audience here. And a topic that I don't believe we've really covered in any kind of detail on the show is reverse budgeting. Can you explain what this is and how it works and how this might be applicable to that last group? Reverse budgeting is by far the most important financial decision or set of decisions that I have ever made. And at the beginning of the show, you had mentioned how sometimes 80 % of the output comes from 20 % of the work.

23:27And really, reverse budgeting flips the whole process on your head where when you're budgeting, you have to track each expense and it forces you to make every decision as if you live in a spreadsheet. But we don't live in a spreadsheet. And rather than focusing on the expenses, I think it's better to focus on the savings. That's what reverse budgeting is all about. You simply figure out how much you need to save. You make those savings automatic, and then you just spend the rest the way you please. Now, if you overspend, this isn't for you, but knowing exactly what you're saving gives you a lot of control.

24:03And when you increase the amount you save, naturally that reduces the amount you spend. But if I were budgeting, let's say, $250 on eating out. And we run out of that in week three of the month. And we get my wife and I get invited to somebody's birthday party. And we're not going to not go because we had this budget line, especially if we see that the money is there. The one benefit that everybody has today that I didn't necessarily have when I didn't come up with the term reverse budgeting. I don't know where it came from. And I can't seem to remember whoever did it. But back then you had to use a spreadsheet.

24:40Mint.com was just coming out. Of course, now Mint has gone away. But there are all these budgeting apps that sort of let you do this. When you're reverse budgeting, though, basically the way I like to think about it is if you write down all your financial goals for the next five years. So let's say in the next five years, I want to max out my 401k. I want to pay down an auto loan. I want to go on a vacation to Europe. And I want to increase the size of my emergency fund. And so maxing out your retirement account, that's an annual goal. You might think that's a long-term goal, but it's short-term.