Rank #1: Should You Pay Off Debt Or Invest?
#188 How our net worth is more than our financial capital but includes our lifetime earning capacity or human capital. What role does debt play in investing in human capital and how our human capital impacts how we allocate our financial investments. Why stocks aren't less risky in the long-term. How to invest a lump sum payment and how I recently did so in today's market environment. More information, including show notes, can be found here.
At some point in our lives, we all have to deal with the issue of debt. It’s a specter that hangs over our heads and gives us an uneasy feeling until it is gone. Debt has a cost, naturally so because it demands interest all the time. A question that comes up often is whether or not it is better to pay off debt immediately, primarily because it IS debt, or if a better return can be achieved, should available money be placed into investments instead? You could run the numbers and figure out what looks best on paper and go with that. But the answer is honestly not that simple. This episode is designed to walk you through many of the issues that should be considered when answering the question.
If it costs you less numerically to pay interest on loans than you could make on investments, you should invest instead of paying off debt, right? Maybe it’s not that simple
Let’s do the math. If you are paying 5% for your home mortgage and have a lump sum of cash available to pay it off, but you also have the opportunity to lend the money to a real estate crowdfunding platform with a guaranteed return of 9%, isn’t it true that you would make 4% more by investing in the crowdfunding platform than you would if you paid off the mortgage? Yes, that’s what the numbers say, but there’s more to be considered. You want to think about things like human capital, the nature of the debt, and the mental cost you bear for having the debt hanging over you.
Most people should try to do both: invest and pay off debt. Here’s why-
When it comes to the choice between paying off debt with available funds or investing those funds elsewhere, there is no cut-and-dried answer that fits everyone. But after doing his research in thinking through the issue, David feels that most people should try to do both. While there is a psychological benefit to paying off debt, there is also the knowledge and discipline that comes from investing.
In This Episode You’ll Learn
[0:46] Welcome to the show – and could you help spread the word?
[1:55] Should you pay off student loans first or put your cash into investments?
[4:20] We’ve got to consider the cost of developing “human capital”
[9:40] What is debt and how does short-term VS long-term debt apply
[12:45] How do human capital issues impact how we invest?
[16:13] Why most people should try to do both: invest AND pay off debt
[22:50] Should a lump sum be invested all at once or dollar cost average it?
Rank #2: What Happens If U.S. Interest Rates Turn Negative?
What are negative interest rates, why they could come to the U.S. and what investors can do about it.
In this episode you will learn:
- How negative interest rates are even possible.
- How longer life spans, central bank actions, changing time preferences and the FIRE movement are contributing to negative interest rates.
- What is the paradox of thrift.
- How investors can earn a positive return on bonds even if interest rates are negative.
- What are some indicators to watch for that could signal imminent negative interest rates in the U.S.
- How individuals need to adjust their lifestyles in an era of negative interest rates.
For show notes and more information on this episode click here.
- [0:20] Germany government bonds go negative for the first time.
- [2:38] Understanding savings: the paradox of thrift.
- [6:35] The concept of the individual choice and the perceived expense of saving.
- [11:05] The savings glut could lead to negative interest rates in the U.S.
- [14:40] Three reasons one would invest in negative-yielding bonds.
- [18:38] Central banks are influencing the spread of negative-yielding bonds.
- [20:29] What could happen to the U.S. economy if interest rates fell.
- [22:11] Three factors David is looking at for an indication of falling interest rates.
- [25:49] What we can do if U.S. interest rates go negative.
Rank #3: How To Become Wealthy
The three-step plan for becoming financially wealthy and how to be wealthy without the money.
In this episode you’ll learn:
- The results of two recent surveys on wealth, investing and retirement planning.
- How much money do people believe they need to consider themselves wealthy.
- How is wealth distributed across the U.S. population and how wealthy are Americans?
- Why you need a simple financial plan.
- What are the three steps to becoming financially wealthy.
- How to live like you are already wealthy.
For show notes and more information on this episode click here.
- [0:16] Schwab and Stash survey results.
- [2:49] Saving vs. living paycheck to paycheck.
- [4:29] How much does one need to be considered wealthy?
- [7:44] The value of social security.
- [9:23] The historical distribution of the country’s overall wealth.
- [11:33] The importance of having a plan.
- [13:38] Step One: increase your income.
- [15:10] Step Two: increase your savings percentage.
- [16:44] Step Three: increase your investment returns.
- [23:57] It’s not about optimization. It’s about diversifying and learning.
- [25:20] How to live like you are wealthy today.
Rank #4: Should You Invest In Individual Stocks?
#3 Why investing in individual stocks can be so intoxicating and dangerous. What you should know before you try. Show notes at https://moneyfortherestofus.com/should-you-invest-in-individual-stocks-003/
Rank #5: Investing Won't Make You Rich
#119 The primary role of investing is to preserve your wealth not grow it. How then do we grow our wealth?
Rank #6: Where Should You Invest Your Cash Savings?
#220 How to evaluate cash savings options at banks, credit unions and brokerage firms. Why are yields on cash savings so much higher than a few years ago. How to tell if your bank or credit union is in experiencing financial difficulties. Thank you to Blinkist for sponsoring this week's episode.
For show notes and more information on this episode click here.
- [0:10] All about banks, credit unions, and the pros and cons of cash savings
- [4:47] How can banks and credit unions become financially unstable?
- [14:25] The Federal Reserve is setting a new short term interest rate target
- [15:55] What tools does the Federal Reserve have to keep short-term interest rates in line with its target?
- [19:20] There are other options for investing your cash savings
- [25:49] Is it really worth pursuing multiple investing options for your cash savings?
Rank #7: Four Investment Lessons From Warren Buffett
#194 Four investment lessons from Berkshire Hathaway's fiscal year 2017 Shareholder Letter with additional insights from Howard Marks and Seth Klarman. More information, including show notes, can be found here.
Every year, Berkshire Hathaway releases a letter written for their shareholders filled with information on their performance, portfolios, and investments. On this episode of Money For the Rest of Us, David digs into the 2017 letter and discusses four investment lessons Warren Buffet shares. It’s filled with great insights that any independent investor shouldn’t miss, so be sure to check out this informative episode.
Investment Lesson #1 – Use debt prudently
Buffett writes in this letter, “Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. ‘Risk’ is the possibility that this objective won’t be attained.” On this episode of Money For the Rest of Us, David encourages his listeners to utilize debt in such a way that maximizes future opportunities while also managing the risk that comes with taking on debt. He discusses the idea of “float” money, how one investor could have avoided losing half of his portfolio, how to manage margin calls, and why you have to be confident in your decisions as an independent investor.
Investment Lesson #2 – Keep your eyes open and focus on a few fundamentals
It takes patience, but independent investors can focus on the leading edge of the present and invest in ways that major corporations may not be able to do. One must simply be aware of the opportunities that are occurring right now as well as focus on a few fundamentals: valuations, economic trends, portfolio drivers, asset classes, etc. David quotes Buffet on this episode and explains that “Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”
Investment Lesson #3 – Stick with easy decisions and avoid excessive trading
Unfortunately, trying to outsmart the market can lead to short-term gains but longer-term mediocrity in investing. David outlines a bet that Warren Buffett made with Protégé Partners and how Buffett learned that sticking with the big, easy decisions often pays off more than getting caught up in the minutia of constantly buying and selling. By making infrequent, larger decisions an independent investor can make better progress in their portfolio.
Investment Lesson #4 – Be willing to be early and look foolish
Investing is never a guaranteed game. All investors have a fear of looking foolish after making a decision, but Buffett explains that “A willingness to look unimaginative for a sustained period – or even to look foolish – is essential.” David talks about the importance of gaining experience, not becoming caught up in the crowd mentality, and understanding that the “dust never settles” when it comes to finances. There will always be risks to take, and timing can be unpredictable. But with considerable risk comes comfortable reward. For more great information on the 2017 Berkshire Hathaway Shareholder Letter, be sure to listen to this episode of Money For the Rest of Us.
[0:46] David introduces the topic for this episode, Four Investment Lessons from Warren Buffett
[2:15] Lesson #1 – Use debt prudently
[12:46] Lesson #2 – Keep your eyes open and focus on a few fundamentals
[17:17] Lesson #3 – Stick with easy decisions and avoid excessive trading
[24:00] Lesson #4 – Be willing to be early and look foolish
Rank #8: Is Life More Difficult For Millennials?
#168 How being a millennial is both different and the same from young adults of earlier generations.
Rank #9: Do You Have Enough To Retire?
#149 How to estimate how long your assets will last in retirement and the steps you can take to take make them last longer.
Rank #10: Keep Investing Simple
#95 Steps to take to keep investing simple. Plus how changes in China are having spillover effects for global economic growth and asset class returns.
Rank #11: Please Save More
#83 Why individuals need to save more for retirement and how to figure out how much more you should save. Show notes at: http://moneyfortherestofus.net/mny083-please-save/ To sign up for the Money For the Rest of Us Insider's Guide text the word INSIDER to 44222.
Rank #12: What You Need To Know About Retirement Calculators
#161 How retirement planning and retirement spending calculators work and what are some of their flaws. Why figuring out how much money you will have when you retire and how long it will last is a lot like the work hydrologists do to figure out whether Phoenix or Los Angeles will run out of water.
Rank #13: Interest Rates Are Rising. Four Things You Can Do.
#133 Here are four investment strategies investors can use to avoid losses due to rising interest rates.
Rank #14: Five Wealth Lessons From A Stoic
#96 Rumors are always circulating about economic collapse. How the stoic philosopher Seneca would handle these predictions of calamity. To get the Seneca's 5 Wealth rules and supporting quotes, text the word "SENECA" to 44222. Show notes at http://moneyfortherestofus.net/mny096-five-wealth-lessons-stoic/
Rank #15: What It Takes To Be A Value Investor
#102 Why the value style outperforms growth investing, and what are the attributes of successful value investors. Show notes at: http://moneyfortherestofus.net/mny102-takes-value-investor/ To get the article on growth investing mentioned in the episode, text the word "BUBBLE" to 44222.
Rank #16: All Countries Are Insolvent and That's A Good Thing
#42 Why all federal governments are insolvent but investors still line up to buy government debt at low interest rates. Show notes at http://moneyfortherestofus.net/mny042-insolvency/ To sign up for the Money For the Rest of Us Insider's Guide text the word INSIDER to 44222.
Rank #17: Is There An Indexing Bubble?
#163 How an indexing bubble is manifest, why most active managers underperform and how individuals can structure their own quasi index fund that outperforms the market.
Rank #18: How To Navigate A Housing Bubble
#211 Why housing bubbles can last such a long time and what to do if you really want or need to buy a house in a frothy market. More information, including show notes, can be found here.
Navigating a housing bubble is often on everyone’s minds. With changing family needs, balancing multiple incomes, and varying environmental factors, finding a great house is a struggle most families face. On this episode of Money For the Rest of Us, David responds to a listener’s question of how to navigate a housing bubble. He explains the idea of “economic gravity,” outlines factors that are influencing the global housing market, and offers solutions to the housing bubble crisis.
A housing bubble cannot break free from economic gravity
David discusses the idea of “economic gravity” on this episode. Simply, over the long-term housing prices can't be disconnected from the ability of households to service a level of mortgage debt - to successfully make those payments every month. Nobel prize-winning economist Milton Friedman explains, “When (corporate) earnings are exceptionally high, they don’t just keep booming - they can’t break loose from economic gravity.” The same concept applies to home prices. When prices are high, they can boom for an exceptionally long time. But they cannot break free from this underlying economic concept.
Factors that are driving up the global housing market
Housing bubbles are being created across the globe because of a few major factors. Low interest rates, offshore demand for domestic property, influxes in immigration, and interest only loans are all contributing factors to the housing bubble discussed in this episode of Money for the Rest of Us. David draws many parallels between the US housing market and those in Australia and Canada.
Housing markets don’t always align with growing family needs
Joe, the Money For the Rest of Us listener that submitted the question for this episode, is seeking different housing for his family as it grows and shifts. But he’s finding that unfortunately, housing markets don’t always align with growing family needs. Better school districts, larger homes, easier commutes, etc. are all factors that millions of Americans are seeking for their prospective homes. David encourages listeners to consider what type of housing their family can reasonably afford and still maintain the type of lifestyle they desire. You never want to purchase a house that you cannot comfortably afford. To hear more about the housing market in the US today, data on current housing prices across the country, and even more great information, don’t miss this episode.
3 ways you can respond to rising house prices
After considering all the data related to the housing bubble and overall market in your area, you essentially have 3 options:
- You can stay put
- You can move to a cheaper locale
- You can buy, while being patient and prudent
In order to make the most of the housing opportunities for your family, David encourages every listener to consider their personal affordability and examine their ability to handle unforeseen financial stress (loss of a job, medical emergencies, etc.) Navigating a housing bubble is challenging, but this episode of Money For the Rest of Us can help you make sense of all the angles. Be sure to listen.
- [1:05] A listener poses a question about how to handle a housing bubble in his area
- [6:47] Current data on the American and international housing bubbles
- [10:02] Is the current housing bubble starting to break?
- [10:57] What factors are driving the home prices in Australia, for example?
- [12:41] Comparing the Canadian housing bubble to Australia’s
- [15:45] So what should you do during a housing bubble?
- [18:09] Housing markets don’t always align with growing family needs
- [21:36] How to combat the factors driving up housing prices
Rank #19: Investing Rules of Thumb
#34 Why simple investment rules are more accurate than complex formulas. Show notes at http://moneyfortherestofus.net/mny034-rules-of-thumb/ To sign up for the Money For the Rest of Us Insider's Guide text the word INSIDER to 44222.
Rank #20: Is Your Portfolio Unbalanced?
#201 Why most conventional portfolios make huge and often unintended bets on the stock market. How role based investing can lead to a more balanced portfolio. More information, including show notes, can be found here.
Having a balanced portfolio is a key to financial success. It offers a secure future and provides a level of security to your day-to-day lifestyle. On this episode of Money For the Rest of Us, David considers the question, “Is your portfolio unbalanced?” A new member of Money For the Rest of Us Plus introduced him to the book “Balanced Asset Allocation” by Alex Shahidi and it was the inspiration behind this podcast episode.
4 main reasons behind market volatility
Shahidi writes, “The ultimate goal is to capture excess returns over time, with as little risk as possible. The more volatile the return, the greater the risk of capital loss.” David explains that there are often unintended consequences of single-track investment strategies and that having too much of your portfolio invested in one asset class is not a good strategy.
Here are three main reasons as to why the market is volatile:
A shift in the economic environment
Shifting risk appetites
A shift in expectations of future cash rates (future path of short-term interet rates)
Every market segment has inherent biases in various economic environments
The key to avoiding market volatility is to hold multiple asset classes. These various types of assets will allow you to benefit in any type of market. For example, slowing economic growth is better for traditional bonds, while accelerating growth is better for stocks. TIPS and commodities do better when inflation is increasing. Even though most investors have a heavy bet on economic growth because of their stock-heavy portfolio, the arguments outlined in Shahidi’s book encourage otherwise.
Don’t be in the unenviable position of not receiving returns on your portfolio
The single most important takeaway from this episode of Money For the Rest of Us is this: Don’t rely on any single asset class to provide financial returns. Shahidi writes, “Own asset classes that are as volatile as stocks, but that perform better in different economic regimes.” Shahidi recommends 30% in long-term Treasury inflation-protected securities (TIPS), 20% in commodities, 30% in long-term bonds, and 20% in stocks. Collectively, this type of portfolio could generate excess returns above cash, although many investors might find the volatility of the underlying segments unsettling.
Why David DOES believe you can identify shifts in the market
Investing will never be 100% predictable, it’s the nature of the game. But David does believe, contrary to what Shahidi writes in his book, that you CAN identify shifts in the market. Before a shift occurs there are often red flags that can be identified and researched, even if it takes a dedication to objectively watching market conditions.