Source: The Diary of a CEO podcast
Compiled by: Felix, PANews
Ben Felix, portfolio manager and chief investment officer at PWL Capital, is an evidence-based investment expert who translates academic financial research into practical decision-making that ordinary people can understand. Recently, Ben Felix appeared on the podcast "The Diary of a CEO," revealing why most people make poor financial decisions. PANews has compiled the highlights of the conversation.
Host: There are many experts in the world who discuss personal finance and investing. How does your approach differ from other financial experts on YouTube?
Ben: My approach has always been to draw wisdom from academic literature. See what conclusions the brilliant people who spend a lot of time thinking about these issues have reached, and then apply that to the financial decisions of ordinary people. Whether it's renting or buying a house, or asset allocation, whether you have $10,000 or $10 million, the principles of investing are the same.
Host: How much of the success of making money through investing is due to psychological factors?
Ben: The investment problem has actually been "solved"—simply buy low-cost index funds. The real challenge lies in our psychology. The brain is designed for survival; it's not good at processing long-term and abstract concepts, such as taking your money today, investing in the stock market, ignoring everything that happens during that time, and then having some left over for retirement. People often talk about strategies and techniques, but I believe the ability to execute any strategy or technique depends entirely on one's mental state. One of the best methods, though somewhat counterintuitive, is to avoid looking at your investments. Academic research shows that the more frequently you check your investment account, the lower your risk tolerance and the worse your returns. This is because watching the stock market fluctuate daily creates extreme anxiety, leading to the misconception that the stock market is extremely risky; while for investors who buy and hold long-term, the stock market is actually much safer than imagined.
Host: What advice would you give to young people in their early 20s who are thinking about financial strategies?
Ben: This is a tricky topic. Young people often face enormous pressure to save money from their parents and society. However, academic research suggests that excessive saving during periods of low income may not be the optimal choice. The general principle is to save more when income is higher and less when income is lower. However, the premise is that one should not develop the bad habit of spending all their money and being unwilling to save even when income increases later.
Host: Let's now discuss the 10 common financial mistakes you mentioned one by one.
Ben: Okay, mistake number one is not earning enough. Many people feel that low income is unavoidable, but you can actually invest in your human capital, such as formal education, learning new skills, or starting a business, to make yourself a more valuable asset. Academic data confirms that there is a mechanical causal relationship between education and skills and lifetime income.
Host: I've always believed that you should optimize your "knowledge" and "skills" as much as possible when you're young. The key is to acquire a combination of skills that are in high demand, scarce, and complementary. For example, if you studied engineering and finance, and now you've mastered the skills to create YouTube content, this significantly increases your earning potential. When I used to work in marketing for a biotech company, I discovered that a writer with no medical background but some knowledge of biotech writing could earn $250,000, five times the salary of an average writer. Selling your skills to the right market can lead to exponential growth in your income.
Ben: Yes, mistake number two is not saving enough. Wealth grows through compound interest over time. If you don't save enough money early on, it becomes extremely difficult to catch up later. Just like health, if you eat poorly and never exercise, it's very difficult to reverse the damage if you get heart disease at age 55.
Host: This is like the analogy about brushing your teeth in the book "The Slight Edge": You can skip brushing your teeth today and it's okay, you can skip brushing your teeth this week and it's okay, but if you don't brush your teeth for five years, you're doomed and will end up in the dentist's chair having teeth pulled. The same applies to finance.
Ben: Mistake #3 is not setting financial goals. People often blindly pursue making money or buying a house without thinking about what constitutes a good life for themselves. We've developed a three-step method: First, list your goals; then, double the number of goals to stimulate deeper thinking; and finally, use the PERMA model (Positive Emotions, Engagement/Flow, Relationships, Meaning, Achievement) to evaluate these goals.
Host: What if my goal is to buy a Ferrari?
Ben: Ferrari itself may not fit the PERMA model, and the positive emotions it generates may only last a few days. But if you drive it to the track and enjoy the thrill of racing (immersion), or if you become part of the sports car community (interpersonal relationships) because of it, then it has meaning.
Mistake 4 is overspending on the wrong things. For example, spending $12 a day on iced coffee just to rush off to work doesn't boost your mood; instead, it takes away money you're saving for a better life.
Mistake #5 is ignoring investment risk. The opportunity cost of not investing in the stock market is enormous. If the return on cash is 2%, while the long-term expected return on the stock market is 7%, the 5% difference in compound interest is astonishing. Investing $10,000 now, at a 7% annualized return, will become $150,000 in 40 years. In other words, if you spend $10 on a cup of coffee now, you're essentially giving up $150 in 40 years.
Mistake 6 is taking on the wrong investment risks. Many people don't buy index funds but instead speculate on individual stocks, options, or cryptocurrencies, which have negative expected returns and high transaction costs.
Host: What about buying a house? This is the biggest decision most people make in their lives.
Ben: I don't consider buying a home to live in as an investment. You're actually buying an asset that provides housing for your consumption needs. There's a huge opportunity cost to the down payment; it could have been invested in the stock market. There are also many unrecoverable costs, such as mortgage interest, property taxes of about 0.5%-1%, and severely underestimated maintenance costs, which are reasonably estimated to be well over 2% of the property's value.
Host: That's right. After I bought a house abroad, the garden, water pump, floor tiles, and heating system were always breaking down. If I were renting, this wouldn't be my problem, not to mention the huge time and cost wasted contacting repair services.
Ben: Yes, there are also emergency repair and renovation costs. I've developed a "5% rule" to measure the cost of buying versus renting. For example, a $300,000 house would cost $1,500 per month. If the monthly rent is equal to or less than $1,500, renting is financially a better decision. Furthermore, buying a house severely restricts the mobility of young people. For instance, with the collapse of condominium prices in Toronto, if you buy a house there but receive a high-paying job offer abroad, you'll be in trouble.
Regarding the common example of "someone buying a house for $70,000 30 years ago that's now worth $1 million," we can't use past property returns from periods of plummeting interest rates and population booms to predict the future. In Canada, if you bought at the peak in 2021, after adjusting for inflation, you're currently experiencing a severe decline in your asset value. If liquidity is a concern, investing in index funds is a better option. Only those with an extreme aversion to risk and a desire for long-term stability in one place should buy property.
Mistake #7 is missing out on tax planning opportunities. Ordinary people should fully utilize government-provided tax-free or tax-deferred accounts, such as Canada's RRSP/TFSA, the US's 401k/IRA, and the UK's ISA. The wealthy may exploit loopholes, such as pledging stocks to banks for tax-free loans and avoiding capital gains tax by not selling the stocks. However, ordinary people who borrow with highly volatile assets face significant margin calls.
Mistake number 8 is neglecting estate planning. Not making a will can lead to your assets being distributed in the government's default manner, resulting in high taxes and money going to the wrong people. Making a will is crucial if you have dependents.
Mistake number 9 is choosing a marriage partner. Academic research categorizes people into "misers" and "spendthrifts." These two types of people are extremely likely to be attracted to each other and marry, but this often leads to decreased marital satisfaction and financial conflicts.
Host: I have a successful friend who went through a 6-7 year divorce battle. The lawyers stirred up trouble and made huge sums of money in the process, which not only destroyed their originally good relationship but also caused their assets to shrink significantly. If they had had a prenuptial agreement, everything would have been much faster.
Ben: Yes, prenuptial agreements may not be romantic, but they can prevent future financial disasters if both parties agree.
Mistake #10 is insufficient insurance coverage for catastrophic risks. If you are the breadwinner of your family, you must purchase adequate life insurance (low-cost term life insurance) and disability insurance to prevent your family's financial collapse if you lose your ability to work.
Host: What about asset allocation? You once mentioned a "most controversial financial paper"?
Ben: The traditional view is that one should buy more stocks when young and switch to bonds when old. But a paper that tested data from 39 countries since 1890 found that the optimal long-term strategy is to hold 100% stocks for life, with one-third in domestic stocks and two-thirds in international stocks to diversify risk. The paper argues that in periods of prolonged high inflation, so-called "safe" bonds can actually be devastating, while stocks are relatively safer.
Host: What financial products should people absolutely avoid?
Ben: First, there are "covered call option" funds. These forgo huge potential stock price increases in exchange for a small immediate option premium, resulting in extremely high hidden costs. Second, there are "thematic ETFs" (funds that specifically invest in AI, cannabis, or clean energy). These funds are typically launched when a theme is at its peak and asset prices are at their most inflated. Subsequently, asset prices fall, and these funds often deliver extremely poor returns. Finally, there's hiding cash under your bed. At a 3% inflation rate, your money will lose half its purchasing power within 20 years. Holding cash inherently carries the risk of negative expected returns. The best approach is to invest in low-cost index funds.
Host: We are currently in the midst of an AI boom, and people are worried about losing their jobs. Many are also concerned that the massive influx of capital into AI could lead to a market crash. What is your opinion on this?
Ben: Historically, technological revolutions always bring disruption. For example, when ATMs first appeared, everyone thought bank tellers would lose their jobs; but because operating costs decreased, banks opened more branches, and teller positions actually increased. There's also the "Jeves Paradox": when coal-fired engines became more efficient, lower transportation costs led to more people using trains, and the coal industry prospered. As for market crashes, looking back at a magazine article from 1847, the world was also filled with panic and uncertainty, but history proves that humanity always survives, and the stock market has generally trended upwards in the long run. Of course, the massive influx of capital in the early stages of a technological revolution can indeed lead to inflated asset prices, which then fall back—this is a normal cycle.
Host: So how should we think when buying stocks? A friend once told me that when I bought Facebook stock for $10, all the positive news and future expectations for the company worldwide were already priced into that price, unless I knew a secret that others didn't.
Ben: Your friend is describing the efficient market hypothesis. When you buy stocks like Tesla, all publicly available information is already included in the price. Buying stocks is essentially buying a company's expected future cash flows at a discounted rate. Therefore, trying to beat the market by picking individual stocks or timing the market is futile. The vast majority of professional fund managers underperform the market in the long run. The best approach is to buy index funds, accept market returns, and then forget the password and don't look at it. Focus on what you can control: saving money, asset allocation, and tax planning.
Host: Research from Fidelity and Berkeley shows that women tend to have higher returns on investments than men because men trade more frequently. Do you agree?
Ben: I completely trust this data. Men tend to be overconfident; they try to pick individual stocks and trade frequently, which is also related to their greater susceptibility to gambling addiction, inevitably leading to worse investment results. Avoiding unnecessary activity is the key to successful investing.
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