E35: The Millionaire Mindset: Investment Secrets from StashAway's CEO - Michele Ferrario

27:44And so when Rocket Internet came knocking at my door, I was like, oh, yeah, that's maybe my chance to be ahead of the curve. You know, if you put this in context, this was in 2011. This was in Italy in 2011. Amazon opened an office in Italy three or four years later. So this was pre-Amazon in Italy. That's what we're talking about. So it was very early days from an internet perspective from where I was at the time, Italy. And so there was a little bit of this, let me be ahead of the game. And plus, there is also the idea that this was actually another step into doing something even more entrepreneurial.

28:19So having said that, let me answer your question. What are the new trends? It's a difficult question to answer. to answer. I've been historically skeptical of some of the hype in some of the technologies that have been very much talked about in the last few years. While I do blockchain, I think there is a lot of things that will be impacted. And I see a lot of applications on custody and many other areas but i thought that there was a bit of overhype in the past i don't know now where we stand but i thought it was a bit of overhype now no one gives a shit anymore yeah cycles where everybody goes crazy about the thing and it's gone it's gone yeah if you talk about that you are in the industry like people say they're in finance now they don't say they're in blockchain okay i didn't okay yeah no crypto is different crypto is different so also crypto i was not an early adopter and honestly to my mistake, I wish I was.

29:22But, you know, I obviously, I came to the train quite late on the crypto side. And I do, you know, I do see potentially, you know, some areas of continued development. But I was always more among the skeptics rather than among the ones super bullish. I have to say that on the artificial intelligence train, while I do think there is some overhype right now, I actually think that the potential to change many, many, many, many, many things is incredibly concrete. So to ask you a question, I do think that artificial intelligence is a train that people should consider looking into if they're looking at doing different things.

30:14So it's, what does that mean? It's joining a company, because it's very technical. So it's joining a company. Let's say you do marketing, for example. It's joining a company that is integrating some AI or marketing some AI in their products. I think it's, first of all, it's working on yourself. It's making sure that you are upskilling yourself. So I was speaking at our own town hall a few weeks ago and we kind of, everybody at Stash Away. So this is from marketing to engineering to compliance to customer support, everyone. And what I told everyone is you should spend your, I told if you are less than 55, which is 100 % of people employ a stash away, you might want to spend a lot of your free time, your evenings, your weekends, trying to make sure that you learn how to use AI to become better at what you do.

31:12So that's your first step. And so I think that you need to work on yourself. You need to, I think, make sure you're in a company that embraces change and enables you to learn, enables you to grow, enables you to try new things and maybe do some mistakes here and there. I don't think you need to, I don't think everybody needs to work in NVIDIA to be in AI, right? So it's not that you need to work at the people building the chips to actually benefit. I think the power of what's happening with artificial intelligence is the breadth of its potential impact. And therefore, there is going to be opportunities in many different areas.

31:51And so you just need to make sure that you are, if you want to harness this opportunity, you need to, first of all, work on yourself, on your skills, and on your openness to these new technologies. and secondly being in a place that enables you to experiment, to learn, to do stuff. So it's actually how can I get much better at my job using AI and almost every job now can be complemented with AI. You just take Charge EPT 3, 3.5, 4 and you realize, oh man, I didn't realize but I'm able to be much more efficient in everything I'm doing. So that's the first step basically. It's that. and then the problem with that's an issue actually we're saying you need to work in a place that embraces change if you look at most of the big corporations like for the moment what they're doing they're saying no no no you can't use AI because all this data is going to go everywhere and it's too dangerous and like they're not the same as the cloud 2014-15 oh no no my server is in the cloud are you crazy all my customer data will be everything is going to be in the cloud anyway and everything is going to end up with AI anyway.

33:01Yeah, I think prohibiting the people to use new technology is absolutely crazy. And so I think if you are working in a company that prohibits you to do that, the fact that they are reducing your development, right? And they're potentially making you unemployable in the future, which is something that you need to think about. So don't take the excuse that your company is prohibiting the usage of AI to not spend your evenings or your weekends on learning this stuff because I know not everyone has the luxury to say, ah, employer, you don't want to, you're prohibiting me to use AI, therefore I'm going to change.

33:40Obviously, a lot of people don't have this luxury to say, I'm just going to change my job because, but it's not an excuse to just say, ah, this is not going to happen because it's actually happening already at a crazy pace. No, absolutely. Use your personal computer and in the weekends, you know, do some experiments which don't need to be just learn just put yourself out there and I think that we're still in the very early phases of this and AI obviously is not just chat GPT obviously it became very very it went on the first pages of newspapers recently because of chat GPT and generative AI but in reality there is much more happening and much more that has been happening for a long time and I was speaking to our chief investment officer, Stephanie, a couple of weeks ago.

34:29And she wrote her, she's a computer scientist and she wrote her master thesis in, I think, 2001, 2002, something like that, at Stanford in artificial intelligence. 2001. Yeah, something like that, 2001, 2002. So, you know, this is not something that, so it's been just a development of many, many, many things over a long time. and we actually, all of us deal with AI technology in many, many different ways already. Now it's becoming available to all of us. I think that's what actually Gen AI makes it possible. And therefore the potential impact is now more obvious to each of us. So to your question, I don't, so to your initial question, which is, what is the trend that people should jump on right now?

35:14But I don't think that necessarily to maximize your career potential, which to me means making sure you continue to have fun at what you do, you need to jump on the next technological train. I don't think it's that simple. I think just make sure you're an organization that enables you to have fun, enables you to have responsibilities, enable you to learn, and that's what matters and that will pay off also financially if that's what you're targeting at the end of the day. In terms of trend, I do think that out of the many, many trends we've been kind of talking about over the last few years, I do think that artificial intelligence is maybe the one that is the broadest potential impact and therefore is the one that everybody should pay attention to.

36:02Yeah, it's very practical, actually. Even yesterday, I had to write a business plan for one of my businesses, actually. And I was just postponing for weeks. Like, I don't have time to write this business plan. And then I was like, oh, I could go on Upwork or Fiverr, this freelance platform and just hire someone to write it for me. So they're going to ask me all the right questions. I'm going to answer and they help me frame the whole thing. And then I just go business plan AI and there's these AI softwares where you just answer. They're doing what the dude on the, or the gal on the Upwork would do.

36:37But now like it's just, I answer this question. The thing is writing the whole business plan for me with like doing analytics of trends. And I'm like, and I paid 19 bucks. and my businessman I thought would take me like a week or two. Obviously, I'm going to have to like go through it. But the chunk, the bit is there. It took me 45 minutes. I paid 19 bucks and it's there. And it's just, you can apply this to everything. Food recipes, sports stuff, probably learning, everything. Like it's crazy. And probably it was already there before, but now we have this much bigger awareness that this is a thing.

37:17And therefore, we're going to start to think for everything we need to do, we're going to think about, yeah, is something using AI already available? It is. And therefore, you're 10 times, 100 times faster and better. So it's people say now AI is not going to replace you, but someone who knows how to use AI will. And at some point, probably AI is going to replace you, but we're not there yet. But like you need to, as you said before, like you need to understand that this is your Google search where people who use Google and like use YouTube to understand stuff, put stuff together, had a probably big advantage 10 years ago.

37:57Now it's like, do you know how to use AI to complement and become much better at what you're doing? No, absolutely. And then obviously you cannot trust the answers blindly and you may need to make it yours. Otherwise it becomes, you know, otherwise you become useless for real, right? and so you know and what you need to do is you need to add value and you need to add value I mean in the example you gave you add value by asking the right questions and directing the software the AI to give you certain type of answers and then editing refining fixing changing you know it's a sandwich strategy you kind of the iteration the sandwich strategy is a good one yes absolutely Let's talk about investing.

38:41The key topic today. Let's do it. Why is it so important for people? So let's start with the basics, right? Like not how to invest and all that. Why is it so important for people to not only save? Because a lot of people don't even save money. They just leave paycheck from paycheck. So step number one, I should try to save 10, 20 % of my salary every month. Right. Let's make the assumption people understand that. which, by the way, I think it's 50 or 60 % of American people don't even have like 500 bucks on their bank account in case there's a problem happening. So it's a crazy statistic. But anyway, let's make people, assumption, people understand.

39:19Why should people not only save, but also invest their hard-earned cash? It's very simple because if you save, let's see if we can do some numbers. If you save$1 ,000 a month, let's say, so that's$12 ,000 a year. You do it for 30 years and you put it under the pillow or in the bank account that gives you the fact of 0%. And you have your 30 years, you have$360 ,000, which, you know, it's not bad. If you do the same, but instead of putting it under the pillow or in a bank account, you put it in a diversified balance portfolio, which on average over the last decades have given something around 6%, let's call it, so 6 % to 7%.

40:10Let's call it 6%. After 30 years, you have a million dollars. So the difference between$360 ,000 and$1 million in terms of, let's call it retirement, it's quite significant. Obviously, you can scale it up. Instead of$1 ,000, you can make it$2 ,000 is the difference between$720 ,000 and$2 million. And that makes a big difference. Now, we can introduce concepts like inflation. I want to talk about all that. Exactly. But that makes the discussion more difficult. I think the simplest way to think about it, forget inflation, irrespective of how much a dollar is worth 30 years from now, it's the difference between having 360.

40:51Two and more or not. 360 or 1 million. That's the difference, right? Then whether a sandwich costs$5 or$10 or$20, it doesn't matter. You can buy more sandwiches if you have$1 million than if you have$360 ,000. Yes. Now, that's why I keep it super simple. And I'm using 6%. You can do the math with 5 or 7 or 4. Yeah. It's going to change the numbers slightly, but the concept remains the same. Over a long period of time, the difference between money that is not working for you and money that is working for you is gigantic. It's called compounding. And the problem is that you don't see it next month.

41:30You don't see it the following month. You don't see it in five months from now. You don't see it even in two years from now or three years from now. That difference compounds over time. And we are wired in a way that we seek instant gratification and therefore we don't appreciate this compounding effect. And therefore, we don't have the intrinsic motivation to actually have this long-term goal and keep at it, keep at it, be constant, be disciplined, et cetera, et cetera, et cetera. It's the same as if you take two 20-year-old people and one of them, you know, they do exactly the same life and they have these, you know, two twins, let's say.

42:14They have exactly the same life, the exact same body shape, et cetera. The difference is that one of the two doesn't do any exercise at all and the other one does 10 minutes of exercise every day. 10 minutes every day, nothing. Nothing, but compounded every day. After 20 years, they would be completely different people. Completely different people, right? It's only 10 minutes every day. But if you do it every day, discipline for 20 years is going to change you completely. The same happens with money. It compounds. So you want to talk about inflation? We can. Regarding combining, the brain is not, the human brain doesn't understand exponential growth.

42:52So the only way you can do that is either take an Excel spreadsheet and calculate the compound interest, which is a bit weird, but there's also a lot of compounded interest calculators online or on most of this wealth management platform. And I suspect on Stash Away too, like you basically have, if you invest that much at that percentage, look at the growth of your portfolio over time and you can project yourself. And then there's always this kind of queue or benchmark that you have and you look at, I know I'm investing every month. Yeah. Because I want to get there one day. Yes. And then you need to know that it's not going to be a linear journey, right?

43:28So it's not that the markets go up by... So when I say 6 % in 30 years, it doesn't mean 6 % every year. So 6 % a year in 30 years doesn't mean 6 % every year and definitely does not mean 0.5 % per month. You're going to have positive months, negative months, positive years, negative years. And if you get scared and you try to kind of overthink it, you will potentially actually not make it happen. Yeah. Let's try to go a bit deeper into that. So now we understood the very, very basics. I still want to go a bit deeper into what we call inflation and also how it's tied to basically the agenda of the central banks.

44:24So it's actually going not only with inflation, but saying, I mean, the whole concept of wage deflation, money printing, the fact that asset prices go up, therefore retirement costs more and more because asset prices go up, but wage don't go higher or don't follow. like this concept basically. So not too long, but at least we understand why is everything becoming more expensive and therefore why is real estate also becoming more expensive? So if I don't have it, it's becoming expensive. But if I own it, stocks or real estate, I'm beneficiary. But why? How is the system built so that this stuff is actually, so people understand I'm not just doing a gamble on the future that these companies are going to do well, but actually the entire system is built for these asset prices to go up?

45:19I mean, the way I simply think about it, I mean, first of all, let's start from the concept. What is inflation? Inflation means that, positive inflation means that price of goods and services grow over time. Most central banks in the world target an inflation rate at around 2 % per annum. So a good assumption to make is that in the next 30 years, you're going to average more or less 2 % per annum inflation. So if you're thinking about a long-term, this year it's going to be higher, but over the long-term, more or less inflation will probably be 2 % because that's what the central banks want and the central banks actually have the tools to make it happen.

46:05What does it mean is that the sandwich that today costs, actually, let's do an easier number. What can cost$100? A chair that today costs$100, let's say, next year on average costs$102. The following year was cost$104.4. And that compounds similarly to, so it's not plus$2 every year. It's$2 the first year. The second year is$2.4. And that's going to be then$2.8, et cetera, et cetera. So it's going to grow over time. and that will make your cost of life higher. Now, as you work, most probably your salary will also grow in line with inflation or if you're making a good career, probably higher than inflation.

46:52I mean, as you get more senior, actually your salary will probably grow faster than inflation. And so you actually become wealthier versus the cost of your life. the issue is that when you stop working and you retire inflation will continue growing while your assets that you put together to pay for your retirement are now where they are and unless you continue working you're not going to have inflow of other cash that will continue to grow with inflation and that's why it's important that you plan for it way ahead of that because otherwise it's too late and you're forced to do potentially things you don't want to because maybe you want to stop working or maybe you can't work anymore because you are at a certain age and you can't physically do that anymore.

47:41And so that's why it's important that you start planning very much in advance. Now, so that's the core basic concept. Now you were asking, so just before that, basically it means that back to our first question, which was why should you invest and not just keep your money in cash, it's because of this 2 % inflation every year, which might be more in the future. We'll see about that. Your purchasing power is just becoming less and less. And again, if you understand this concept of compounding, $2 this year, next year, 2.4, in 30 years it's going to be a lot. And if your money is not working to at least beat this 2 % every year, you're getting really screwed.

48:27That's the basics. Absolutely. I would argue that even with 0 % inflation, you should still invest because having a million dollars is better than having 360 irrespective of how much a sandwich costs. But you're right, that inflation makes it even more obvious. Yeah. So now you wanted to add because now we're talking about... For me, it's basically adding a new concept. I mean, it's not new, but like to this conversation now that we understood the basics is since the dawn of times governments have been it's getting a bit more complex but it's very important to understand I think governments have been funding wars and their expenses and economic crises with money printing from the central banks and how this is affecting and we're seeing it now because of what happened in 2020 during COVID how this is affecting the cost of different things, which not only the food and the rent and all that stuff, that's bad, but that's not the worst.

49:29The actual worst is why do people work? Okay, they want to have fun and they need to be busy and then it was stimulated, but people work because one day the goal is to retire. What is their definition of retirement? It's either working on something that I love too and I don't need to necessarily make money or I can just stop working. And when central banks, since pretty much forever, and governments, when there is a problem in the economy, because we have a debt-based system, so the system is basically based on a growing debt. when every time there is a problem, the answer to this problem is printing more money.

50:08This affects the prices of assets because the assets are fixed and they're generated in a value, the dollar, the euro that is not fixed, that is just being printed, that is less and less valuable. Therefore, the price of these fixed assets, real estate, stocks, crypto, whatever, is going up on average in time just because there is always more and more money printed. And so therefore, if I'm working all my life to retire, I'm working basically to earn in cash, to buy these assets that in the future should cover my life expense at, let's say, interest rate of 5 or 4 % or whatever. if let's make the assumption i'm not i don't have an amazing career where i just like get these better jobs and grow my income a lot let's say my income like increases like slowing inflation two percent but then the money the central bank is printing and printing and printing money and therefore these asset prices that i need to acquire to one day be able to retire are becoming more and more expensive because it's what's happening why is real estate going up like crazy since forever or stocks that's basically what we're trying to get at like in this conversation is it's it's it's partly because yes the companies i'm investing in are doing great that's one thing but the actual thing is there is so much money printing that if you look in terms of real return and nominal return i think was um so it's raul pal that was he was since 2010 2009 since the QE quantitative easing after the great financial crisis he was just saying let's divide the S &P 500 so stock market real estate by the central bank balance sheet to see whether the growth in this asset is due to good performance or is due to money printing and basically he was saying look so nominal basically we went up a lot but in real rates we're kind of flat meaning that almost none of this growth would be from actual growth but much more from money printing look I'm not an economist and so you know the economists listening will hopefully you know accept my apologies in advance for my simplifications also I don't want to go I'm not going to go too technical because I'm not the right person for that but But obviously, cycles of money printing have an impact on all asset classes.

52:49And we saw it in the last few years, right? So the 2021, let's call it asset bubble or kind of market tops across multiple asset classes was driven by the fact there was a lot of money in circulation. And as soon as the banks started to dry up a little bit in order to fight inflation, obviously that has an effect on most asset classes. In reality, when you look at the stock market today, more or less, let's look at S &P 500. it's now at you know around somewhere between you know 17 and 19 times price earnings that's the core measure of value right now so de facto you're assuming you're going to get a bit more than 5 %

53:48earnings yield it's not dividend but you know let's call it earnings yield on your equity assuming no growth which is more or less the historical standards. And it's a kind of a, it's not a crazy number, right? So now obviously this is a broad number. It doesn't look at all the companies out there. It's not cheap. It's not expensive. It's more or less the average was 18 times. And now I think it's a bit above that. It's maybe 19 right now. Driven mostly by the famous six or seven companies. And so - Actually, regarding that, I saw this morning a charter yesterday. It was saying, this year, I think this year, the market is up, so US market is up 11%.

54:39If you take out these top seven companies, you're basically flat at zero. Yes, exactly. So it's incredibly narrow right now. But forget for a second, this is something that happened the last six months. But in general, Overall, I don't think that the message is that increased prices of assets over time is driven by some sort of financial manipulation or excessive money printing. Money printing has an effect on markets and on asset prices for sure. Depending on expected returns in different asset classes, you're going to see money moving from one place to another. And so, for instance, this year, we're starting to see more and more money moving to short-term government bonds because two years ago they were giving zero.

55:38Now, U.S. is giving 5%, Singapore is giving 3.5%, et cetera. And probably starting to see now kind of a slightly longer term bonds attracting capital as well. But this is simply natural movement of investment trying to get the best returns. And I think it's fair and it's kind of good behavior of the market. Are there bubbles out there? For sure. I mean, there are bubbles and I do think that there is some overhype on AI, for instance. I mean, I said earlier, I do think AI will have a gigantic impact. I do think that some of the AI valuations out there don't make sense to me, at least. but and we will continue to see bubbles and this is something that will continue to happen you're going to have periods of overexcitement versus a certain topic and then you're going to have the opposite you know the underexcitement about other topics which is why I always go back to the same to the same mantra which is it's very difficult to get to get it always right to always know which are the six companies that are driven the returns.

56:57You mentioned this year, seven companies made all of the returns of the S &P 500. And if you only invested in those seven, you would have made, I don't know the number right now, 40, 50%, something like that. If you invested in the S &P, you made around eight or 10 or something like that. Because you probably don't know which ones are going to be the next seven And in the next six months, you're better off always diversifying and investing in the S &P if you're just looking at the U.S. markets. My perspective, you should be looking at global markets and you should not be looking just at equities, but also bonds, et cetera, et cetera.

57:31So, you know, diversification is honestly the answer to all of these questions. So now we've understood why we should invest. Basically, do you want a million or do you want 360K in 30 years to make it simple? you need to invest your cash, because you want more money in the future. Let's talk about the principle of investing. So the principles, there's a few principles that are very important because people will ask, okay, and I understood why. Oh, I'm just saving. And I'm actually thinking about my girlfriend. She has a, she's just saving money. Like she's like, I have six figures on my bank account.

58:06I'm like, so now. I have a solution for her. We'll talk about it later. We're getting there. So.

58:20so she's gonna ask how do I do that what do I need to understand you know and so just before we start the conversation like a few principles I'll just recommend four books that I read that I think are amazing to start my journey the first one is called Unshakable by Tony Robbins that is basically a summary of a bigger book that I also read that is also amazing called Money Master the Game the second the third book is The Little Common Sense of Investing by John Bogle, the founder of Vanguard. And the fourth book is called A Random Walk Down Wall Street by Bertrand Malkiel. And all these books basically say the same thing.

58:58So probably you can read two of them. It's just like you want to read maybe two or three different authors to realize, ah, it's actually always the same because everybody's saying the same. And everybody who's been making a lot of money has been applying the same very kind of boring principles, which we'll talk about right now. So Michele, you're building a very successful business around those principles, basically, and making it easy for people to invest. So can you spill the beans and tell us what are the few key principles that new investors need to understand if they want to apply their financial goals, to reach their financial goals?

59:37Yeah, so look, the way I think, so the way I thought about it for myself and I couldn't find a solution that helped me and that's why I started building Stash Away, it's quite simple. What you need to do is, as you mentioned, you need to invest. First of all, you shouldn't just be out. You need to diversify. So you shouldn't bet in a single company or even a single segment or a single sector or a single country. So you need to diversify it across asset classes, depending on your risk level. But you don't want to have probably equities and bonds and gold and real estate. And I'll talk about risk in a second.

1:00:24You want to diversify across geographies. All of us have what is called a home bias. So if you talk to British people, they'll have excesses of investment in the UK. Americans have excesses of investment in America. Singaporeans have excesses of investment in Singapore. It's normal and it's wrong. So diversify geographically is important as well. Diversify across sectors and themes, let's call it just more broadly. So diversification is very important. You also need to diversify across times. You don't want to time the market. And that's why the best way to do it is what people call dollar cost averaging, which in practice means that you decide that every 22nd of the month or 3rd of the month or 14th of the month, whatever your favorite number is, you invest whatever your monthly saving is,$100,$1 ,000,$10 ,000,$1 million, every month in that diversified portfolio.

1:01:30And you do it for a very long period of time. So you are going to, when the markets are higher, you're going to end up buying a few less assets when the markets are lower you actually buy more they're on discount so it's better but you don't try to predict what's going to happen because anyway you're going to get it one time right and three times wrong and so it's a useless expensive complex and not good use of your time maybe something to add to that is actually you said it would be the 16 the 22nd and the 3rd when I most people I think should try to automate that first. Like you need to, first you need to pay yourself first.

1:02:14What does that mean? It means that as soon as you receive your salary, let's say it's on the 25th, the first thing you do is this 10 or 20 % that you want to invest. You invest them right away and then you leave the rest of your month with the remaining money. If you do it later on, you're not going to invest. I agree. And you should automate that and then you can even have like your employer match some chunk of that depending on like what scheme you're under, because if you automate it, it's going to be done automatically, obviously. And if you do it right after receiving salary, then you're going to, you're going to do it.

1:02:44Yeah. And you know how much you can spend because that's what's left in your bank account. Yeah. And actually the idea of having a spending account and kind of separated with, you know, your kind of investments, which includes maybe your emergency funds, by the way, which should not be your spending account. Your spending account, your emergency fund should not be the same account because then it becomes tricky. So anyway, going back to what I was saying earlier, diversify dollar cost average, which de facto is diversify time as well. And maybe the third principle, or maybe the first one is make sure you're investing at the right risk level.

1:03:24And why it's so important is because if you're taking too little risk, let's say, you're not maximizing the value of your money over time. And if you're taking too much risk, you will end up stopping your plan. There is going to be one day where you're not going to sleep at night because your portfolio is down more than you can support because you took too much risk and you're going to sell everything at the worst possible moment. And so that's why it's so important that you take the right risk level. Now, what is the right risk level? It depends from two factors. One is timeline. The more time you have, the more risk you can take.

1:04:11So for your retirement plan in 30 years, you can take more risk. For your, I want to buy a house in two years time, you need to take much, much, much less risk because you only have two years to go. So more time, more risk, less time, less risk, first. And second, personal preferences. There is people that can sleep very well at night, even when their portfolio are down a lot. Let's use crypto numbers for a second. You might be down 85 % and some people can still sleep at night. And people that when they start seeing red in their investment portfolio, they can't sleep at night. And so it's important to recognize and acknowledge the situation and take into consideration.

1:04:55So diversify, diversify time, so dollar cost average. Make sure you're taking the right risk level because that's what was going to prepare you to go through the ups and downs and embrace those ups and downs. You know, if you are in your 30s and you think you're going to retire 30 years from now, but that's true also if it's 20 years or 15. But let's use 30 just as an example. In the next 30 years, most likely, you're going to go through five or six bear markets and 20 plus corrections. That's a fact. Bear market is more than 20 % correction. Yeah, bear market is when the markets go down by more than 20 % and correction is when the market is down between 10 % and 20%.

1:05:42That's the usual definition. So, you know, this is going to happen. In the next 30 years, there's going to be probably five to six bear markets and probably 20 plus corrections. That's a fact of life. You cannot go around it. Don't even try to time it. You might get it once right and 24 times wrong or twice right and 23 times wrong. And so what you need to do is you need to prepare to go through these corrections and you look at them with the right mindset. Exactly. The right mindset is actually if you have your standing instruction where your eGyro setup, where you invest on a monthly basis and the markets are down, that month you're actually buying more than in the previous month when the price were higher.

1:06:28So when you look at it from the eyes of the future, you're actually making your best investments when the markets are down, not your worst investments. Then the problem is that we are wired to look at it with the eyes of the past, not the eyes of the future. There is a beautiful quote on this from Warren Buffett that says, imagine you are driving a car and you have one third of your, you know, your fuel is one third full, two third empty. And you're driving past a gas station and the gas station says price minus 50%. I say, wow, this is great. You drive in and you, you know, you fool your tank, right?

1:07:09You put the two third on because it's cheap. You're happy. If you're early in your investment career, and therefore your investment tank is one third full and two third empty because your earning potential is much higher than what you earned so far. You're going to invest more in the future than you invested in the past and you have more time ahead of you and the markets are down. Let's use the same number, 50%. You should use the same logic. You should be happy because you're fueling the tank at a lower price for future benefits. it's honestly obviously very difficult as a human being to grasp this it's just against all of our biases but it's the right way to think about it so in the unshakable i think the book one of the things that struck like it's and i read it many years ago one of the the chapter is called tax fees and fear so the thing is what the what are the things you control in investing you don't control the markets, what they're doing.

1:08:16But there's three things you control. Taxes, which is going to be very easy for us because, I mean, we're in Singapore, so it's much better for people. There's no capital gain taxes, no tax on dividends, et cetera. Fear, you just talk about it. Like risk profile to make sure that you can stomach these bear markets or these up and down. And the last one is fees. do you want to talk more about how important the fees are and how the entire financial industry is built to extract as many fees as possible and to sell you products that are not in your favor. And that's also based on your personal story.

1:08:59When you started to invest, you said people were... Yes. Let me start from why it's important. Let me use numbers again. So let's say that you invest$2 ,000 a month for 30 years. And actually two different people, you know, both invest in$2 ,000 a month for 30 years. Both of them investing in portfolios that return 6 % per annum before fees. Same risk, same sophistication, same intelligence, same returns. 6 % per annum gross of fees. One of them pays fees that are typical of mutual funds or unit trust in Singapore. So the assumption here is that they will pay 2.5 % entry fees every two years. I'm generous here because on average, people churn every year.

1:10:01So I'm saying every two years. And then around 1.5 % per annum. Again, I'm generous here because on equity products, it's actually 1.8, 1.9. So one of them pays 2.5 % every two years, churning product, and 1.5 % per annum on everything. That's more or less what you end up paying all in if you're investing through kind of a unit trust track. Then we can talk about the different products. But that's kind of more or less your baseline if you invest with a bank. The other one pays, I mean, I use the stationary number because I have the stationary numbers in mind. But anyway, our fees, which starts from 0.8%, they go down to 0.2 % as your portfolio grows larger.

1:10:40So on average, during this journey, you probably end up paying 0.3, 0.4. I don't have the exact number, but the numbers are doing right. At the end of the 30 years, remember, same return, 6%, 6%. At the end of the 30 years, the first guy, the one paying the bank's fees will have$1.2 million. The second guy will have$1.8 million. The only difference has been fees. Now, the difference between$1.8 and$1.2 million, which is 50 % more,$600 ,000, is the difference between a retirement where you watch a lot of TV and a retirement where you go to Paris once a year, or you go to Tokyo once a year, or you go to Seoul once a year.

1:11:27Or let's be even more extreme. is the difference between one where you're basically worried if you're going to die, if you're going to run out of funds before you die, which is a catastrophe, but it's happening to a lot of people, or one where you just basically have... And the one where you worry, you're probably not retiring, you have to work longer because you don't know. Whereas the other one, you have a great retirement. It's changing everything. Absolutely. Or one where you could say, actually, I don't want to retire at 65. I can retire at 60 or at 58, whereas the other, you need to work longer.

1:12:02So it's a massive difference of just making a different decision on who I invest with and what fees, the difference of the fees. Why? Because these fees compound over time, the same as the interest, except they work against you. Exactly. So it's not that you paid$600 ,000 more in fees. It's that the fees you paid early on, they're not in your investment account any longer and so they don't compound for you any longer and therefore reduce your total amount at the end. Now, this is not the worst of the problems though. So this is why it's so important. The worst of the problem to me is that the typical fee structure in most of the investment industry creates a series of misalignment of incentives.

1:12:49Completely. So if the person that is, talking to you about investments, makes money at the end of the month personally, makes the bonus, makes the career, et cetera. If he or she sells you products that make more money to the bank or the institution the person is working for. Than for you? Obviously, and for good reasons. I mean, this is not being a bad person. This is just, you know, this is a problem of incentives. For good reason, this person, when they started between showing you product A that gives to the bank 1 % and product B that gives to the bank 1.2%, which one do you think they're going to show you or promote you a bit more?

1:13:40Obviously, product B. Are you 100 % sure that they're going to show you product B because they think, in all honesty, that product B is better for you than product A? Maybe sometimes you have that alignment of logics, but in most cases, at least the question mark remains there. And this misalignment of incentives over time reduces the efficiency of your investments, not just on the cost side, but also on the assumption before was having the same 6 % gross returns. Here I'm telling you, actually, in reality, probably, you're also going to leave money on the table on the sophistication side because the system is just built in a way that doesn't incentivize the person on the other side of the table to actually help you make sure that you make money over time.

1:14:36So what you're saying is that your financial advisor in your classic bank doesn't have your life as a priority. I'll give you an example. I don't want to make it personal though. So it's not a financial advisor. It's not a fault of the relationship manager or the private banker. It's just that the incentive system is built that way. It's not their fault. And that's the difference between what we call these mutual funds and these ETFs. So two things regarding that. first one is again these books that I read and kind of like the statistic is when you start investing what do you invest there's thousands of products there's what we call actively managed products which is people say I'll buy and sell and I'll beat the market I'll do better than something where you just buy the average market which is the difference between a mutual fund and an ETF an ETF is basically buying the market to make it very simple 96 % of these mutual funds that are managed by people do not beat the market.

1:15:42So you're overpaying to underperform the market. That's the first thing. And the second thing that I actually learned a few weeks ago, talking to one of my financial advisor, D friends, who is a really good friend of mine. He actually told me, and this I was like, I knew it was bad, but I didn't think it was that bad. He told me, bro, I'm in town for two weeks because I need to make money. I'm like, how do you make? I know financial advisors make really good money. The principle is I find someone who has, let's say, a million to buy a certain product. He's telling me, actually, let's say one million, for example, could be five, could be 100K.

1:16:25Out of the one million that I get from my client that I invest for him or her, 10 % of that, so 100 ,000, is locked in for 10 years. Because the company that is providing this product knows that within 10 years, they're going to be able to do certain performance just with this 10%. I'm able, as a financial advisor, to get 5 % to 10 % of the whole 1 million, so 50 to 100K upfront like that. That's my commission. I get 10%. And then he says, obviously, I never tell this to any of my clients or prospects because they would never give me their money if they know that there is directly 10 % of the whole amount that goes into my pocket and is not invested in the future.

1:17:08But that's actually what's happening. So, I mean, it's pretty clear, right? The finance industry is very opaque with a lot of kind of wording and difficult terms and everything. But it's because the entire financial industry makes money out of all these people who just don't understand what to do. and I need someone, I'll give you my money because I trust you because you're a banker, you have a nice suit and you have a nice tie. So the products you mentioned, so those are typically insurance products. So these are ILPs, whole life, universal life endowments where either you have a one lump sum immediately, you're investing in a million dollars or a hundred thousand dollars, lock it in for a very long time, or you have a commitment to invest a certain amount of money every month for a very long time.

1:17:56these type of products, because they have very long lockups, they give incredibly generous commissions on day zero to the sales person, the relation manager, the private, the bank, either the institution or the person, depending on the structure. And again, and the fees that are, you know, if you look at the fee structure of these products, which are usually very difficult to understand, even if you look, if you read the perspectives, they are stupidly high, like, you somewhere between 2 % and 3 % per annum, which is a gigantic, I mean, it's more than the numbers I gave you, I used for the example earlier.

1:18:30And so that's in fact one of the other products that actually gets sold a lot for this reason. One thing in their defense is they're often also able to create some tax structure for the clients that might come from another country. And in the long term, you might be able to say, but at least that's how they feel better about the whole thing. But nonetheless, very important to understand that the fees, that often we don't even really know what we're paying and like it's all hidden and everything. And that most of the industry is not incentivized to help you out. And therefore you are the one who gets screwed because you're going to have to work longer or you'll be more stressed during your retirement.

1:19:08So that's why you should think about low fees and go for these cheaper options or products like ETFs or what you guys basically are doing at Stash Away. Yeah, but look, and you were talking earlier about active versus passive. And so you're right. And, you know, when you look at the statistics, you quoted a number, I guess, from Spiva showing that active managers actually underperformed the market on average, you know, 95 % over the last 15 years or something like that. So a gigantic number. The way we think about it is that it's now proven over the last two decades that security selection

1:19:49doesn't pay off its costs. What does it mean? When you think about investments, you have two steps. The first one is I have$100 and I need to decide how much of these$100 to put in equities, stocks, how much in bonds, how much in real estate, how much in gold, et cetera, et cetera. Let's say that you decided to put 10 % in North American equities. That's your asset allocation decision. So now you know that you're going to have$10 for North American equities. The next step is security selection. I have$10 to invest in North American equities. Do I invest in Amazon, in Google, in Microsoft, in General Motors, in Tesla, et cetera, et cetera?

1:20:31That's security selection. So the statistics you quoted earlier shows that security selection, so the process of actively deciding whether to invest in one company or another, doesn't pay off. like professionals doing it as a job over the last 95 % of professionals doing it as a job in the last 20 years actually underperform the index, the market, okay? And that's why we strongly believe, and not just us, all the books you mentioned actually say the same thing, in investing in what are called passive instruments, ETFs or index funds. So, you know, investing in, again, ETFs being the most easy ones because they are traded as a stock.

1:21:12They're passive. They simply buy the market. They buy the S &P 500. They buy the tech sector of the US. They buy the global bond index, et cetera, et cetera, et cetera. Now, where there is impact to be made is on the asset allocation side. Depending on different studies, BlackRock says 80%, Vanguard says 94%. Of the difference in returns between different investment portfolios is driven by asset allocation. So the decision of having 10 % gold versus 15 % versus zero is much more important than the decision to invest your North American equities allocation to Amazon, Google, or Tesla. and that's why we believe, I personally believe, and that's why Stash Away is also built this way, that it does make sense to actually spend time crafting an AST allocation that is, first of all, coherent with the risk you should be taking for that specific goal.

1:22:20We talked about the risk earlier. And secondly, that is optimized over time, not every day, over time, slowly, for changes in the macro environment and in the market environment. In 2022, you wanted more inflation protection. In 2023, you want a portfolio that, you know, start to leverage some of the higher yield you have in the market with treasuries, that you have some defensive positioning in case, in fact, the economy goes into a recession, still maintain some inflation protection. 2024, we'll see. You know, so things change over time. you want to, over time, dynamically adjust your positioning.

1:23:06I mean, the next question is very logical, and we kind of understand it after everything we've talked about. Why did you build StashAway? What is it and why did you build it? So I started StashAway with two other people, Nino and Freddie, my two co-founders. In 2016, we started. and the short answer to your question is that the idea came from me and came from the fact that I was extremely pissed off with the banks. At the time, I was the CEO of a company. I was decently paid. I was saving money. I started to accumulate cash in the bank, similarly to your girlfriend. So CEO of Zalora, committing cash in the bank and not really knowing what to do with that.

1:23:52No, I knew what to do because I have a background in finance. So I knew what to do. I didn't have time. And, you know, I have two kids at the time and a wife and a fairly demanding job. And so I just wanted to do something right. So I wanted to feel good with myself. And I had two young kids. So I was in a phase where I was like, okay, I need to make sure that I take care of them, right? So I had a little bit of, you know, money suddenly became something a bit more important than, you know, I had, you know, And my daughter was actually recently born and my son was two years old. So it was very, very young kids.

1:24:28And as I was starting to think about, okay, I need to be responsible. I guess that was the real thinking. I need to be responsible. And I wasn't because cash in the bank, I knew was a mistake. Yeah. As we discussed earlier. And so I went to the two banks I was banking with. I'm not going to name them, but, you know, two very large banks. There's not many large banks in Singapore. No, no, no. One Singaporean, one international. very large banks I went to the two relationship managers and I told them hey I'd like to invest in a portfolio of ETFs on a monthly basis because that's what I should I used to do when I was back in Italy with very little money when I was younger so I was like I know what I want to do I used to do it so I just want to do it again and I said I want to do it automatically every month forever in a portfolio of ETFs and both relationship managers told me yeah I cannot help you with that but if you want I can sell you this beautiful mutual funds or unit trust or these insurance products.

1:25:23So that's where you see first-hand. Yes, because the problem of incentives. Of course. They don't even, they cannot even help you. Of course, because they make zero commissions on ETFs. Zero commissions on ETFs. So I didn't know at the time. I didn't understand it at the time. Now I know it very well. At the time, I didn't fully understand it, but they make zero commission ETFs. So they told me, if you want to buy ETFs, you can do it on the bank's platform. You need to do it by yourself. So I actually looked into it. And then it was impossible to automate it. The fees was stupid. And the platform was built in the 60s.

1:25:56And so I was like, okay, this is not going to work for me. And these are, you know, the two banks acted exactly the same way. They keep pitching me the same three products, all of them. Unitrust, insurance products like ILPs, and structure notes. And recently more structure notes than anything else. Again, structured notes, they make gigantic amounts of fees, and they don't need to tell you because they're actually margins, not fees. And so, you know, it's just, you know, the risk-reward imbalance is gigantic. Anyway, so that's where I was, right? And so I had this cash in the bank. I was incredibly angry with the banks.

1:26:35and then one day in April 2016,

1:26:41I found out about the existence of digital investment managers or robo-advisors, as people like to call them. I don't like it, but that's a name that used to be used a lot in the US. And the way I found it is that the largest shareholder of Zalora, a Swedish company called Sinevik, led a funding ground in the largest robot advisor in the US, Betterment. And so this landing on my desk, because I used to check their reports, the Shinnevik reports, and I read about it. I was like, okay, fully digital, ETFs-based, low cost. And I was like, aha, that's what I want. Invest my money. So I went on Google and I wrote, robot advisor Singapore, thinking let me find a local player.

1:27:28I'll invest there. And I couldn't find any. Nothing. And that's when I said, aha, maybe I should go back to my original finance roots. You know, remember my career started in finance and that's what I should be doing. And that's when I then I look for co-founders. I met first Nino, our CTO, then Freddie, our chairman of the investment committee. And when I found Nino, you know, close to two decades of experience building tech companies And then Friday, more than two decades of experience in investing billions of dollars for institutional investors, I thought there's not going to be anyone that can build such a complementary experience team.

1:28:08And that's how we started. That's how the best companies are built, by solving a problem that you experience yourself and you're very frustrated about and then finding a way to scale it to the masses. And that was absolutely needed for everyone. And then there is just the education part, like people need to get educated and understand, but that's why the first part of this podcast was all about kind of trying to educate people on why they should invest and then how, and then there is platforms here because even these few simple principles we talked about before, it's still like for someone who's too much.

1:28:47So like, I want something that can just put my money, it's just going to invest every month for me. And I know they have my best interest at heart. in the long term because the person who built that or who started that actually had all these frustrations and instead of complaining, basically said, I'm going to solve my own problem and then make this available to other people. In fact, one of the brand DNA tagline that we used to use internally in the early days was we want to build the investment service we want for ourselves. That was the way we discussed it internally. And in fact, all of my money is invested with Stash Away.

1:29:29My wife also has an account with all of her kind of personal spare cash because that's the way we... So all of your money that you're investing for a retirement account and everything is all on Stash Away? All of my financial investments are on Stash Away. Wow, amazing. So pretty much all of my friends are on Stash Away, which shows that I was actually saying I'm having Mikele on the podcast and you're like oh I know Stash Away I'm using it but some of them are not happy yes why are they not happy? for something you don't control which is the markets so how do you deal with people because people want to use a platform like Stash Away because it makes things much easier and you don't have to think too much about it but at the same time the less you want to think about this stuff the less you are kind of educated, the less you are patient with these markets.

1:30:24And we've been kind of trained for the last 10 years, 12 years before COVID and even after COVID like that. Is there an up only mode? How do you deal with people who are not happy and complaining because I'm down 20 % of my money this year? And when is my money coming back up? Like, should I just use another platform because they do better? No, that's a good question. So look, as we discussed a couple of times earlier, right? So the investment, a long investment journey will go through ups and downs. And let's use the same example as before. If you have a 30-year time horizon, you know you're going to go through five or six bear markets.

1:30:58We just went through one. And through 20 correction, we went through one in Q4 2018. Since we launched, we launched in July 2017. So since we launched, we had a Q4 2018 correction. We had obviously a super sharp correction. We actually, you can call it a bear market, but we're so sure that honestly, I'll call it a correction in March 2020. and then we went actually through a bear market over the last few quarters. So this is what happened over the last six years. So it's coherent with what I said, in 30 years, expect 20-ish corrections and four to six, five to six bear markets. How do we deal with it in talking to our clients?

1:31:42Since the early days, so when the markets are going well, we've always told clients there will be ups and downs. Don't get overly excited when things are hot. Don't get overly depressed when things are down. Continue investing, dollar cost average. You know, we have eGyro solutions, so you can actually completely automate it. And that's the right way to do it, first. Second, make sure you have the right risk level because when things go well, it will feel, oh, I should take more risk. Why? Because if I took more risk, I would have made 8 % easier instead of 6%. fair. But then when March 2020 happens and the portfolio makes minus 12 % in a month and the other one makes minus 15 % in a month, that makes a significant difference.

1:32:32And then also the speed of rebound is different. And so making sure you have the right risk level that enables you to feel right and to feel you're doing the right thing even through the ups and downs is incredibly important. Now, what we offer is extremely diversified. We manage the asset allocation dynamically and over time we've done well. So since we launched in July 2017, so we have a bunch of portfolios, but if you look at kind of the core, it's 12 portfolios. We have also a few other products, but the 12 core portfolios, the majority of them have actually overperformed the benchmark. Okay, I was about to ask that.

1:33:16Okay. Yeah. So the majority of them have all performed the benchmark. There is the higher risk ones. They have not. And there are two reasons for that. One is that we launched them later. And so they didn't benefit from the earlier. So we launched those products around a year and a half later after the first one. And so they had less time. And the second one is that they had a China technology allocation in 2021 that actually depressed the returns in 2021. So, you know, looking back, obviously, you know, that actually has depressed the investment during that year. And that was kind of an asset allocation imperfection during the year, which depressed returns.

1:34:00But, you know, it's now, if you look at it with a three years, four years time frame, so since inception, let's call it, we're actually more or less at benchmark. So, you know, other, you know, last year, the high risk portfolios have overperformed benchmark by more than five points. and so we have continued to do quite well. What do I say to your friends? It's a long, long-term game, as I mentioned earlier. Buy more, continue investing now because if you're down, you're going to be able to buy a bigger chunk than in the future and therefore you're going to do better in the future and now is basically not the moment to take your money out.

1:34:37I mean, taking your money out is like the worst thing you could do. Yeah, but in general... Because you're going to screw this compounding. But yeah, but my general message is even more simple. It's not even about continue investing when the markets are down and stop investing when the markets are high or, you know, withdraw when the markets are high. I think my main message is don't, you know, continue. So if you continue to believe that you're doing the right thing and you're, so in practice, what you started, which was investing in a diversified portfolio is with the idea of doing it for a long time systematically.

1:35:13and you still believe that's the right thing, keep doing it, it will pay off. I keep doing it irrespective of markets. Markets are up or down. It doesn't matter. You keep doing it and you do it for a very long period of time. That's the right thing to do. And it will give you your expected returns over time. So if you have a high risk level, you're going to land at somewhere between 8 % and 10 % per annum over time. If you're a low risk level, you'll land at 4 % to 5%. over time, you just need to give it time. Absolutely. So someone now understood all these principles and they say, I'll use Tash Away because I'm based in Singapore in Southeast Asia, or I think even in, you're also in MENA, you've started in Dubai or...

1:36:02Yeah, we are in Singapore, Malaysia, Thailand, Hong Kong, and Dubai, UAE. Yeah. being there means we are licensed in each of these five markets. So in reality, you can open an account even if you live in Italy. Yeah. You can open a Singapore account. Yeah. But we're not licensed in Italy and we don't have a bank account in Italy. You need to send the money to Singapore. Okay. In each of these five markets, we accept local money and we are licensed locally. So kind of to wrap up today, I want to invest, but I, because I want to wrap up, you said like, how are we going to talk that long? but it's actually already over.

1:36:39I'm shocked. And there is so much more we could talk about. I'm shocked. We're going to do another episode too about AI and all this stuff, education, all this stuff we want to talk about. Anyway, so to wrap up this episode, I want to start investing but I'm scared because recessions and crash and everybody's scared and I have a lump sum. What do I do? I have 50K to invest now. So it's not as easy as saying, ah, I'm going to start investing 10 % of my salary every month? What do I do? It's a good question. So the short answer is it depends on how big of amount it is for you. It's 50K, 100 % of your net worth or is 1 % of your net worth?

1:37:22Yeah. I'll give you my specific case. When we went live with Stash Away in July 2017, all of my money was in cash. Yeah. And that was everything I had. Yeah. And so what I did is I set up a 24-month monthly plan where I took my cash divided by 24 and every month, one 24th of that cash was going to get invested into the diversified portfolio. I had a few portfolios for different reasons. Time diversification, basically. Yeah, exactly. Now, looking back, actually, it would have been better if I invested everything on day one because the markets went up. Because the markets went up over the time.

1:38:03But you don't know. Exactly. Looking back, it's too easy and on a risk-adjusted basis was the right thing to do. And so if, but I did 24 months because this was everything I had. So to answer your question, if it's 100 % of what you have, I would take a long time, let's call it 24 months, 20, 30, and do it in installments over a period of time. If it's 2 % of your net worth, you can do it in a month or in two months or in three months. Or another way to do it, I heard some people that are trying to, this is a little bit of time in the business. It goes a bit against my not the time in the market principle, but I heard a few people do this and say, hey, I have a lump sum.

1:38:46I have a 20 months or 24 months schedule, but if the markets go down by more than 5%, I put two months instead of one. Double, yeah, okay. I double. If it goes down by 10%, I triple or quadruple. If you go down by 15%, so in practice, you shorten your period. You're going to get fully invested faster because you are kind of speeding up your time to market. Again, it goes a little bit against the time to market, but it's a principle I could live with. Yeah, it requires a lot of discipline, actually, both. Because you could, like you say, I have 24 months, I'm going to invest every month, 1 24th.

1:39:26But everything is going up. at some point you could foam away and just say, fuck it, I'm just going to put everything because the thing is going up nonstop. So you need to keep discipline. Or you say, I'm going to double the amount if it goes down. The problem is like psychology will tell you if it goes down, it's going to go down even more. Therefore, I'm not going to invest double. I'm going to invest single or I'm going to invest nothing. I'm going to invest four times as much when it goes even more and then you end up like missing the tip. It's very difficult. Which is why I think my suggestion, if you want to do this, is actually write it down.

1:39:56like hold yourself accountable but no but they're right so but anyway the short answer is invest monthly even in these cases like you can actually use the logic of dollar cost averaging and diversifying time risk even if you have a lump sum amazing thank you so much for your time Michele and thank you so much for what you're doing for people in APAC and in MENA because this is so important and I mean this is so important because there's a big big problem since forever with this kind of finance industry and education and the new technologies and the internet and making people understanding that this stuff is actually not that difficult, especially with these platforms and that this thing, the earlier you start, the bigger impact it's going to have on your retirement.

1:40:41It's so important. Absolutely. I agree. Thank you for having me. Thank you so much. Thanks.