If Your Money Is In The Bank, You Need To See This

Is this broadly accurate? This graph here shows the impact of inflation on cash kept under the mattress over 20 years, and you start with $10,000 in terms of purchasing power, and 20 years later, if that cash is under the mattress, you have $5,336. It doesn't show me the inflation rate. Oh, that's at 3% inflation. You're losing half of your money effectively, and the source here is St. James Place. So a lot of people who are just holding on to cash don't really realize that over a 20-year period, assuming a 3% inflation rate, they're halving their money. It ties back to, I don't remember which number it was, but it ties back to one of those biggest mistakes in personal finance we talked about, which is not investing, not taking the right kinds of risk with your investments. And just hoarding cash. Hoarding cash is, in its own way, taking a type of risk. You don't have an expected return when you hold cash. You, in real terms, have a negative expected return. Do you think we should all be thinking about retirement planning? I think it ties into the perma-thinking and designing the life that you want to live. But at some point, I mean, at some point, we can't work anymore. It's rare for somebody to be able to work into their, I don't know, 80s. I think that it's sensible to plan for that. But beyond that, a lot of people don't want to have to work forever. People might choose to work forever, but they might choose to do lower-paying work. But the idea that you will be forced to work forever I don't think is very attractive to anyone. So from that perspective, building financial independence by saving and planning for retirement, yeah, I think it's important for everyone to think about. Is the social contract of retirement changing based on how the economy is changing? Because I hear a lot of people saying you're not going to be able to retire and get a pension because there's not enough money, or you're going to have to work later than ever before. I think the onus has been put back on individuals. Pensions used to be much more common from companies and governments. So retirement's changed from that perspective for sure. But I don't know if we can say we're in a crisis. I think people have more personal responsibility now than they've had in the past, but they also have better tools than have historically been available. 30 years ago, we were just starting to get low-cost index funds proliferating and being readily available to everybody. Prior to that, you were paying 2% or more to invest in a mutual fund. So the tools people have available to them are better today than they've been in the past. But there's also a lot more responsibility that people have to take for their own personal finances. You were naming the things that people shouldn't invest in. The first is that call thing. Yeah, covered calls. What else? Another one that I think is really problematic is thematic ETFs. And so that's like an AI ETF or, I don't know, space or energy, like any specific ETF that's targeting a specific theme. Why? What tends to happen with thematic ETFs is that something becomes really hot. So maybe it's AI, maybe it's cannabis. Electric vehicles was another one. Sustainable energy. Yeah, that was another good one. Clean energy. And so what happens is asset prices in that theme go up because there's a lot of interest in it. Everybody wants to invest in that space. Asset prices go up. An index provider creates an index for that hot theme and then an ETF gets launched. But it gets launched when the asset prices are up here. And what tends to happen is the asset prices come down and the returns on thematic funds tend to be very poor. Okay. Yeah, I think I was guilty of that in my early career, was like, oh my God, a sustainable energy ETF. I believe in sustainable energy. I should invest in that. But you're right. They created that when it was hot. So you should have invested, I guess you're saying just invest in the FTSE 100, the S&P 500 instead, or technology, which is a broader basket. Technology is tough. Technology has performed so incredibly well, but it is still one sector. Okay. I have trouble saying you should invest in tech. If you had invested in tech for the last 20 years, well done. Should you choose to invest only in tech or have a big concentration in tech today? I think that's a lot less obvious. One would say, well, look at all this AI stuff. How do I invest in all the AI stuff? A lot of it's private right now. Although a lot of the public companies do own chunks of some of these private companies. We'll see how that plays out. But that's another one that's been tough recently where a lot of investors are interested in investing in some of these private companies. A lot of them AI related, but SpaceX is another one. And it's really hard for retail investors to get access to those types of things. But there are companies who are creating products that say that they can give access to these things. They're charging high fees. It's not obvious that they've been able to buy the underlying securities that they're saying they have access to at good prices. But it's just another example of financial companies preying on the desires and biases of investors. Financial firms are very good at seeing what investors want, even if that thing is not good for them, and then creating a product to fulfill that desire. So if someone listening now is, let's say they're 50 years old, and they've got $20,000 in savings, in cash, and you had to be decisive. You don't know the nuance, the detail of their life. You don't know their PERMA framework necessarily. But your job was just to make the money in the next 10 years. How do you think you would allocate that? Let's say $10,000. It's easier. $10,000 in cash. How would you allocate it? That's a tough question. I don't know if it's answerable. Especially over 10 years, it's tough. What about 20 years? If they have a long time horizon. So I can tell you personally, I like to invest in stocks. I have a globally diversified stock portfolio with a Canadian home country bias, kind of like what that paper, the controversial paper found. We were doing that prior to that paper coming out. But I think that general concept of a globally diversified portfolio, maybe with some home country bias, makes a lot of sense for most people, including for retirees. But there are so many like, what's his risk tolerance? If he's going to panic when the market goes down and sell everything, then it wasn't a very good idea. And he's not going to get the outcome, but the good long-term outcome he may have otherwise gotten. And would you go all in on stocks? All at once? Yeah. Like dollar cost averaging versus love some? Yeah. Like how would you invest? Would you go 100% in stocks or would you even diversify that? Yeah, that's what I'm saying. I think 100% stocks is personally a portfolio that I'm very comfortable with. And I'm not old enough to be thinking about retirement, but it's a portfolio that I don't expect to change throughout my personal life cycle. Is that how you allocate your personal finances now? I know you have a home, but otherwise the money you do invest is in the stock market. Yeah. So I've got my home, I have my stock market investments, and I do have a pretty significant chunk of equity in the company that I work for. No crypto. I never touched it. Never touched it. That's not true. When I was researching Ethereum and Bitcoin, I remember when that was, it was a few years ago, I bought $1,000 of each just so I could feel like I was participating while I was learning about it. What do you think of Bitcoin and Ethereum and other cryptocurrencies? I think that they solved a really interesting problem. The premise of digital cash is something that the cypherpunk community, the kind of libertarian community of privacy-focused computer nerds, where they were trying to solve this problem for many, many years, of digital cash. How do you create digital cash that doesn't require a trusted third party to mediate transactions? And they solved that. Satoshi Nakamoto solved that. And that was cool. And he used a bunch of different pieces. You can kind of see in the paper how he used Adam Bach's ideas that he had created to stop email spam. And it's just how it all came together. It's an unbelievable, fascinating story. The technology was really interesting. I think it has become an ideological vehicle where people who believe that the world should be a certain way or believe that government's role in money should be a certain way, they can invest in Bitcoin and feel really good about it. I think it's got that component to it. And then the other component that it has to it is that it's a speculative asset. People buy Bitcoin because they think it's going to go up. So it's not a good investment. Is that what you're saying? I personally wouldn't. We don't allocate to it for our clients at PWL. We manage quite a bit of money for quite a lot of people. And we've decided not to touch it. And I personally don't touch it. I had a phone call actually from a friend of mine. She's very well known in the UK. And she was, because there's lots of wars going on everywhere. And there's the Strait of Hormuz is closed. And there's Russia, Ukraine, there's all of this stuff going on. She was asking me for financial advice on what she should do in such a moment. I don't know why she was calling me. I just thought I'll ask you when you come here. But it's interesting because my team found this article from 1847, which was in a magazine. And it almost sounds like today. The article says this. Things are bad all over. It is a gloomy moment in history. Not in the lifetime of any man who reads this paper has there ever been so much grave and deep apprehension. Never has the future seemed so dark and incalculable. In France, the political cauldron seethes and bubbles with uncertainty. England and the English Empire is being sorely tried and exhausted in a social and economic struggle. The United States is behest with racial, industrial and commercial chaos drifting we know not where. Russia hangs like a storm cloud on the horizon of Europe, dark and silent. It is a solemn moment and no man can feel indifference. Of our own troubles, no man can see the end. An apt description of things. Very apt. And that was on October the 10th, 1847. Magazine. It very much sounds like today. It could be today. Yeah. So as we zoom out on the cycles, the big sort of economic cycles, the geopolitical cycles, my friend that called me and said, listen, there's lots of stuff going on in the world. Should I be thinking about my money differently? My investing strategy? What the hell's going on? What would you say to those people? Yeah, well, as the clip that you read suggests or tells us, the world has been through a lot of crazy stuff, a lot of crazy times, a lot of wars, a lot of turmoil, a lot of political upheavals. And we've come out okay in general. There's been pain and suffering and not everybody's had good outcomes, but generally speaking, here we are. And if we think about that from the perspective of financial markets, stock returns have been positive despite all the craziness going on in the world. There's lots of interesting charts that overlay news headlines about all the madness going on in the world on top of the stock chart that's just going up. Doesn't mean the stocks are always going to be up. They will go down when things get crazy. Like when, when this war started, stock returns did get a little bit negative for a while since comeback, but there will be volatility in financial markets, volatility up and down day to day. But in the long run, stock returns, they should continue to be expected to be positive. So for your friend, I don't know how their assets are set up, but someone who's globally diversified, exposed to the stock market, they don't have to make changes to their portfolios when the world's getting crazy. I remember what she said to me. She said that she was going to remortgage her house because I think she'd paid it down and she was wondering what to do with that money. She was saying, do I just go buy another house or do I invest it in the stock market? Now my, my bias is the stock market, but I don't know what you, what would you say to someone in that situation? I'd want to know why she's mortgaging her house, but given there's a good reason for that, I would, I would probably go in the stock market, not into real estate. Do you think people shouldn't remortgage their houses? This is a tough question. Leverage, kind of like how exposure to the stock market is good, borrowing money to invest in positive expected return assets, like, like the stock market is actually kind of a good thing on paper. Borrowing money generally improves long-term expected outcomes, but it's stressful. You can, you can have bad outcomes where you lose all of your money. So should people borrow money to invest? Should people mortgage their house to invest? That's a, that's a very personal question. It's kind of like the stock bond question. Should you invest in stocks or bonds? Should you invest in stocks with leverage or not? It really depends on your goals and your situation. But generally speaking, if we just look at what, what, what did the data say about borrowing money to invest? It's not, it's not a terrible idea. One of the things we haven't talked about is AI. And does AI change any of this equation? A lot of people are worried at the moment about losing their jobs. Anthropic released a report, who are one of the big AI companies, saying that entry-level people in particular are going to have a hard time. And I think they said they're already seeing 13% of entry-level jobs being disrupted because of these new AI and AI agents. I'm to be clear, not a labor economist. It's not my area of expertise. I do think though, that when we look back through history, I like looking at history. There have been lots of technological revolutions that have been major, major upheavals to the entire economy. Yes. So ATMs, ATMs are one of those fascinating examples. People thought that ATMs were going to wipe out bank tellers because ATMs could do everything that bank tellers do, but it was automated and you didn't have to pay a person to do it. So there was a lot of concern. And one, what ended up happening was very counterintuitive is that the cost of operating a bank branch decreased because you needed fewer people to do all the bank teller stuff, because you had the ATMs. And banks opened more branches because it costs less and their customers liked that. And the end result was that there were actually more bank teller jobs at the end of the day. The cost of providing the service decreased, which caused it to proliferate more, provide that service to more people, and it expanded the market instead of shrinking it. Similar story with Jevons Paradox. It's the same concept. What's that story? Where coal became cheaper at a time when they used coal to ship freight on trains, and the coal engine got more efficient with coal. Coal industry panics, we're screwed. But then what it meant is people use trains not just for shipping freight, but also for other things like travel. And people started traveling on trains because it got cheaper, so the coal industry actually boomed in the end. That's it. I have thought a lot about this Jevons Paradox idea, and I think it's going to be true for artificial intelligence, for sure. There will be lots of other jobs created, and actually companies like mine, if we save money, we invest it in something else, which then would probably create jobs, whatever that is. The part that I sometimes struggle with is the speed of adoption in AI, and then also when you factor in robotics. My car in LA drives itself, and I think one of the biggest employers on earth is driving in all its forms. But then if you look at warehousing and supply chains, a lot of those are ran by people all over the world. There was a video that I played the other day, we can throw it up on the screen, which shows that in factories in certain parts of the world now, they're having their labor force wear cameras on their head, showing what they're doing with their hands, because their robots are ultimately going to replace that labor force. And I haven't, I guess this is maybe something that happens in history, I haven't been able to think about where those people go, and what they then can go on to do, especially if it happens in short order. Yeah, so I've heard you ponder this in other episodes, and I agree that the speed of this is likely to be different. As you've said, we're talking about the internet, so you can deploy these things at the snap of a finger, and that is different. But where do those people go? This is one of the interesting things. I don't know. We don't know. And through history, we didn't know. Exactly. Through history, it's been the same sentiment, where people worry, but where are these people going to go? And they might be unemployed for a while, and there might be hard times, but things have worked out. And so two ways to think about it. One way is as an individual, what should you be doing? We talked about earlier, having complementary skills that make you very unique, I think is important. Personally, content, as you mentioned, has been a big part of that for me. Not everybody can necessarily do that, but finding those things that you can do when combined better than anybody else in the world, I think is very valuable. And then the other perspective is, as an investor, how should we think about this? And there I would come back to, again, we have seen many technological revolutions that have changed the world. They've changed financial markets. They've changed our culture. They've changed the way we interact with each other. The world has so many times due to technology, and the same cycle has repeated itself. There has been unemployment. There has been social unrest. There has been wealth inequality, but this happens every time. Are you expecting the stock market to collapse because there's been a huge overinvestment in artificial intelligence? And at some point, the investors that put their money into these sort of speculative AI startups that raised tremendous amounts of capital at crazy valuations, at some point through history, doesn't the market always contract at some point? There's a great book by an economist named Carlotta Perez. The book is Technological Revolutions and Financial Capital. And she documents this exact cycle throughout history. And yes, that's part of it. Part of it is asset prices getting really high and then coming back down. Now, am I worried about a catastrophic market collapse? I think that's always a concern. I think that's part of the risk of investing in stocks. We never know when it's going to happen or what the trigger is going to be. So it's not something that you can do anything about. You need to have an asset allocation that you can stick with, even if that outcome is going to materialize. And in that book, does it suggest that the writing is on the wall for the current economy and the way that we're heavily investing in AI and data centers? A couple of years ago, everyone was investing in crypto and Web3 and NFTs and all this stuff. And all of the money seems to have been sucked out of that industry. Really, honestly, sucked out of almost every industry and into AI. I remember when DeFi was going to kill banking and finance. And that was only a couple of years ago. In fact, a lot of the developers have moved from my industry to the AI industry. But I do think about this a lot. I've got a few startup friends who are getting a little bit nervous and are raising a lot of money now because they think that in the next couple of years, maybe in the next 24 months, there's going to be a big market contraction. When investors who invested in some startup idea that had a $100 million valuation realize that they're losing their money and some domino usually falls in the market, some catalyst moment means that there's a contraction. Stock markets go down. It gets really hard to raise money. Clients who you might be relying on now to pay your advertising budget start to lower their budgets. And in such a scenario, you're going to want to wish you'd prepared a little bit. Some people are. This is part of the cycle. The cost of capital for bubble companies, we'll call them. I don't love the term bubble, but for companies who are in the industry that becomes the focus of a technological revolution. So now we're talking about AI. The cost of capital gets really low, which means asset prices get really high. And a lot of people want to invest in that space, but those asset prices are not typically sustainable and they do tend to come down. Does that mean a total market collapse or catastrophe or panic for diversified investors? No. Oh, is the writing on the wall? I don't think we can say that. If the way that I view financial markets is that if the writing were on the wall, prices would reflect that today. If we thought market prices were going to drop in the future, they would drop today. So it happens at a time when no one is expecting it. That's exactly right. You mentioned that writing is never on the wall. That's right. Some new piece of information, something changes, and that's what causes prices to come down. My brother said something to me. He's a very smart person. He's worked in investing for the last 15 years. He said something to me earlier in my career. He said, Stephen, when you go to invest in something, assume that the price you're paying for that investment, so say I'm investing in Facebook stock at $10, is the total accumulation of everything everybody on the planet knows about that company. And they've priced in everything the world knows about that company today. And he was like, so even if you think it's going to go up, that's also by the way priced into today's price. So you better know something that no one else knows when you're thinking about buying an investment. I've totally butchered what he said. No, you didn't. He is describing the concept of an efficient market. An efficient market is a market where prices always, and this is a sort of a theoretical concept. It's not actually true, but in theory, an efficient market, a perfectly efficient market is a market where prices always fully reflect all available information, including your thoughts about what the price might do, really, if you trade on those thoughts. So what are you investing in then, if the future's already priced in and all the information about the company's already priced in, what are you investing in? You're investing in discounted future cash flows. Companies produce cash flows. They earn profits. When you invest in a company, you're buying those expected future profits at a discount. That's called the discount rate. It's getting pretty nerdy again, but that's how it works in finance. What is the value of the stock if it's discounted future cash flows? Riskier stocks will tend to have higher discount rates, but you buy this asset and now you've got this discounted bundle of cash flows, which you then hold and you receive the discount rate as a rate of return as you continue to hold the asset.