00:00 Michael Port: Welcome to Steal the Show with Michael Port. This is Michael. Today’s guest is David Stein and he’s the host of the podcast Money For the Rest of Us, which is a show that I listen to religiously. I think he is one of the best in the business at teaching personal finance for the rest of us. Over 25,000 listeners download each episode of the show. It’s all about how money works, how to invest it and how to live without worrying about it. He also provides market insights, asset allocation help and portfolio guidance to over 500 members of the Money For the Rest of Us Hub, an investment education platform.
00:42 Michael Port: Previously, David was Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group, which was a $50 billion, I stumble over the word because it’s such a big number. I don’t usually say $50 billion institutional investment advisor, so that’s what they did. And at FEG, David was co-head of the firm’s 21-person research team that provides institutional research on private equity, real assets, hedge funDavid Stein, equity and fixed income, including topical level and manager specific research. He was responsible for top-down research including macro-economic analysis, market sentiment research, portfolio modeling and capital market analysis. And he also co-founded FEG’s $2 billion Asset Management Division. He developed its investment philosophy and process, and acted as Lead Portfolio Manager for over nine years.
01:44 Michael Port: Now, you listen to all this and go, “How the hell is this guy gonna help me with personal finance? This stuff is so way out in left field for the average person.” But trust me, this is what he does. He really, really focuses on Money For the Rest of Us. He just happens to have an extraordinary amount of experience in very, very large institutional, investing and research as well. He’s spoken at numerous investment related conferences including events sponsored by Morningstar, I Shares, TD Ameritrade and FinCon. So, you can find more at moneyfortherestofus.net or moneyfortherestofushub.com. So, without further ado… Hi, David.
02:36 David Stein: Hey.
02:38 Michael Port: Okay. I don’t have too many guests on the show whose podcasts I listen to regularly, but yours is a favorite of mine. It’s absolutely phenomenal.
02:51 David Stein: Well, I really appreciate that.
02:53 Michael Port: I like to think I’m not prone to hyperbole, but I mean that. For me, over the last number of years, a big, big focus in my life has been studying personal finance because, of course, I made the mistake of getting serious about personal finance when I had some money. I thought, “We’ll, I don’t have any money when I was younger, so that’s not relevant.” And I thought, “Well, there’s a man in the suit, he knows what to do and he’ll tell me what to do,” and that’s not always the case.
03:22 David Stein: And now, I tell you you’ll learn that the men in the suit or the women, most don’t know what they’re doing. Even though they’re collecting fees to do that.
03:30 Michael Port: Exactly. So, I wanna touch on that in a little bit. But one of the things I’d love to do right off the bat, is learn a little bit about the mistakes that you made with respect to your personal finance early on in your life.
03:46 David Stein: Well, I made a lot of the same mistakes and I truly… Everyone has an investment journey and so we had some early credit card debt that many people have… I started out. Most people’s introduction to finance, they find a stock that they’re interested in or a company, and they buy stocks. And so I’d made mistakes buying stocks, realizing that I don’t have any type of information or edge when it comes to buying stocks because the stock market, it’s an auction market. So when you’re buying a stock, somebody is selling it to you. And unless you know more than the people on the other side of the trade, most of the time, you’re not gonna win, you’re not gonna outperform the market. And so, no, I didn’t make any huge mistakes, it’s just small mistakes you make over time as you learn and you find the way that you’re most comfortable investing.
04:43 Michael Port: Were you a saver from day one? Was that always part of your DNA?
04:50 David Stein: Not really. No. I knew I was suppose to save but I… We grew up in a pretty poor family and so, there was not a lot of savings. And so coming out of that experience, there was definitely, knowing I needed to save, but no. Over time, and you see this with a lot of people that end up retiring early, it isn’t so much their savings percentage, it comes from income. In other words, their income grows, they find a way to be creative to increase their income and then they can save the 15% to 20% or more that most people need. Today, especially with investment returns so low, the target should be 20%. If you wanna retire at a normal age or if you retire early, you’re gonna have to save much more than 20%. And I admit, that takes discipline.
05:47 Michael Port: A lot of my listeners have their own businesses, and sometimes in the early days, your financial situation can be anxiety provoking. And especially for those who are young, you did an episode on the “American Dream” and asking, is the American Dream dead? And just today in the Wall Street Journal, maybe you saw that there’s an article about the percentage of young Americans living with their parents has risen to a 75-year high and that means 40% of young Americans are living with their parents.
06:25 David Stein: That’s amazing. Right.
06:25 Michael Port: That’s extraordinary. So, even though the economy has rebounded to a decent degree, and the job market is better than it has been, if we need to increase our income in order to save more substantially, do you think that being a business owner will give you an advantage over being an employee or vice versa?
07:02 David Stein: Oh, absolutely. And I did an episode on “How You’re Not Gonna Get Rich Investing.” Very, very few people have gotten rich investing. Most have gotten rich through their own businesses. Even in the investment space, the hedge funDavid Stein, they’re getting rich collecting fees from their hedge fund business, not necessarily always from the returns itself. Generally speaking, yeah, I think that individuals if they have the willingness, should start their business, be at a side project or something. It’s an incredible world out there right now, where we can leverage technology, leverage the tools that we couldn’t access before. And so, you can start business on a shoe string and just start connecting with people and find out what they need that you have an interest and a talent to provide.
08:01 Michael Port: Not all… It’s interesting, the word entrepreneurship is thrown around a lot but often, when folks start a business, they’re not actually starting an entrepreneurial venture. They’re starting a business or they’re starting a practice. If you open a mom and pop type shop in your neighborhood, you’re probably a business owner rather than an entrepreneur. If you start a service-based business, you’re a practice and maybe you can turn that into a scalable leverage type business that is sellable. But certain types of businesses offer more opportunity for sale than other businesses. And from day one, I’ve been doing this kind of work for 15 years writing books, and speaking, and teaching, and I knew that the business was really the retirement vehicle. That’s how I thought about it because a great aspect of my business is based on my personal brand. And so, it’s a little harder to sell that kind of business than say, Twitter, where most people wouldn’t even know who started Twitter.
09:17 David Stein: You’re right.
09:17 Michael Port: Yeah so I guess, I’m just saying it like… I’d love you to address how you think about using your business as a retirement vehicle because I know that the income generated by the business is designed to produce a retirement, not necessarily focusing on designing the business so I can sell it. Does that makes sense?
09:37 David Stein: Exactly and I think that that’s a very important component. My business right now, it’s unsellable because the business is me and I suspect yours is similar that the business is you, which is… But then, by leveraging your talent, you can create the income and save from that and not necessarily have a sale at then end. Most people won’t necessarily have a business that they can sell at the end of their life but it’s creating the income stream for doing something you enjoyed doing, but that creates enough income stream that you can save that 20%. And even if… Some people love being employees but when we saw on the investment business that I ran, it was pretty clear which employees were showing initiative and wanted to just not sit and focus on the widget. They wanted to find ways to improve the business and those individuals naturally rose in the organization. And you can do that as an employee or you can do it as an entrepreneur. You just gotta find the right match ’cause some people don’t want to build a big organization. They just want to do their thing and the key is to find a way to not be a commodity in doing that thing, so that you can demand premium fees for doing the thing you wanna do.
11:00 Michael Port: Yeah and what’s wonderful is that the retirement vehicles that are available to business owners are great. They are much more productive than the retirement vehicles that are offered to employees. Unless you’re at a company that is very unusual in offering you a defined benefit plan of some significance that they’re contributing to, which we do here, I’m very proud of, but most individuals can’t use the types of retirement vehicles that small business owners can. So, it really be great idea for them to focus, learn more about what’s available to them in terms of tax deferred investing. And it’s something that often they don’t think about until later on, when hopefully the business is done very well, but if they think about it earlier on, they may benefit.
11:57 Michael Port: Speaking of improvement, you talked about improvement, how do you improve your emotional relationship with money? Some people hoard it. They will not spend it and they won’t even invest it because the market scared them, and other people won’t save at all.
12:15 David Stein: Well, that’s a great question. I think it just comes from being honest with yourselves, and sometimes it requires counseling, right? If you’ve had a tough relationship with money or money was just not something you ever talked about growing up, or was just this un-discussable topic. Sometimes, we have a lot of money baggage, but I think the first step is just to be open about it and talk about it and think about it. And realize that money is not the end all of living. Money flows in, money flows out. We have to understand some basics of investing, but we don’t have to be the ultimate expert when it comes to money.
13:06 David Stein: We just have to understand some basic building blocks, and everybody can learn how to put together a diversified portfolio of ETFs and not spend all this time worrying about it. There’s a basic level of education, and then save, save, save, but just don’t stress over it so much, and it takes awhile to get there. But you recognize, especially if you, and I’m sure you have, traveled overseas, you see what real money stress looks like in terms of the vast majority of the people have very, very little money in the world and hardly enough to meet their neeDavid Stein. And even in the US, I was shocked by this, the bottom 50% of the US population on average is bringing home $16,000 per year. That’s not a lot of money, and granted that causes stress…
13:57 Michael Port: That’s unbelievable.
13:58 David Stein: But for the vast majority of your audience, and I suspect my audience, they have enough money. The question is managing it and [chuckle] emotionally learning how to handle it, but it’s not the type of stress you have when there’s no money at all.
14:14 Michael Port: Well, let me ask you the $64,000 question which I imagine you’ve been asked many times. How do you get people to invest when they think they don’t have enough money? I can think of one person in particular I was talking to, who has a practice and her client list is a little smaller than it has been in the past, but she’s still making money and she’s still buying expensive things, but she doesn’t feel like she has enough money to put away. How do you get them to do it? How do you make that connection? ‘Cause for me it was this idea… For me, it was my family and what I wanted to do once I stopped working. At the beginning, I was really… You did an episode about “Working to Live or Living to Work.” I was really deep into that cult of overwork, and I was loving what I was doing and I still do, but I don’t want to do it forever. So, my vision became much more clear about what I wanted to do, and that helped. Is there anything else we can do to get people to put away even just a little bit? I mean, even just the act of putting away say, $50 a month, is gonna change the way you start to think about money.
15:32 David Stein: Well, I think it does, and what’s amazing is there’s tools to be able to do that. I mean, it used to be very difficult to invest in the stock market. Brokers charged $40 a trade. Well, if [chuckle] you’re only putting $100, you can’t be paying $40 in commissions. And so, now there’s apps out there, M1 Finance is one, there’s others out there where you can start an account for $100, and they don’t charge commission, they just charge a small annual fee. And so you can actually… There’s tools to do that and the robot-advisors out there, so you just start getting in that habit and automate it as much as possible so it’s just coming out.
16:14 David Stein: And what I have found is once people start to have a little bit of savings, then they become more interested in terms of learning how to invest it. But I think in your case, it was your vision of what life could be like 20 to 30 years ahead, and realizing that you wanted a different vision. You didn’t necessarily want to be working 80 hours a week. And most people, the reality is today, they haven’t saved enough for retirement. And so, in their case, they need to figure out a plan… Obviously, keep saving, but how can they sustain a comfortable life, perhaps a side project, or lifestyle business, or something that they can continue to work until 60’s or 70’s because that’s just the reality of the numbers. And I think as more people… I was at a McDonalds the other day buying breakfast, and the back kitchen staff, I think the average age was probably 70…
17:21 Michael Port: Wow.
17:21 David Stein: In the back, and I think [chuckle] as we see more and more of that…
17:26 Michael Port: We do.
17:27 David Stein: That can be a motivation for people to start saving more and learn some basic financial education when you’re in your 40s or, 50s, or 30s.
17:36 Michael Port: Yeah, we are seeing that a lot, aren’t we? I often feel bad that somebody who is my senior like that is waiting on me and doing remedial work when they may have done more advanced work earlier on in their careers but they had to retire from that and now they need the money, and that’s gotta be tough. Actually, even… Sort of a sad story but one of my good friends growing up, his parents were both doctors and had done very, very well and had retired and they had a good percentage of their retirement money locked up with Bernie Madoff.
18:18 David Stein: Oh, wow.
18:19 Michael Port: And they both had to go back to work at about 75 years old.
18:25 David Stein: Yeah, that’s tough, which goes back to that basic education. And I’m not saying that they were at fault. I mean, you never know but one thing you learn from… Everyone should learn from Bernie Madoff, and just recently I think just this week, there was another firm, Platinum Partners or something, was in the same situation. And part of learning to invest, and that’s why you start out buying one stock and you realize markets are really volatile. They go up and down. And so if somebody’s coming and saying, “I’ve made 15% a year and never lost money, you just…
19:06 Michael Port: You just say no and it’s not…
19:07 David Stein: You start questioning.
19:08 Michael Port: Yeah. Right.
19:08 David Stein: It feels like there’s something wrong here. But if you’ve never invested, you don’t know that. You’d think, “Well, there is some genius that can do that.” And you realize there are very, very few geniuses, if any, when it comes to investment.
19:21 Michael Port: Well, I’ll lead to my question about trusting the markets. When Wall Street is generally, and I try to stay away from generalizations ’cause all generalities are false, including that one. But I’d say generally, many financial advisors and many on Wall Street are not trustworthy. And that’s at least how people feel. How do we engage fully in say, investing in the markets when we don’t trust the systemic behavior of Wall Street? How do we balance those two thoughts in our mind that you know what, the stock market historically over time has been a very effective way to produce generous compound returns, yet we have these people who are very involved in the market who are making some really often very bad decisions and blowing up the market?
20:25 David Stein: Well, I think there’s a balance there. One individual should have as many different return drivers in their portfolio, so you diversify as much as possible. So, diversification, many eggs in many baskets, you’re also diversifying fraud, right?
20:43 Michael Port: Yeah.
20:45 David Stein: There are unscrupulous investors but generally speaking, the market itself, there’s people that’s still… There’s been issues with fixing of interest rates and stuff. But most of the major fraud gets found out eventually and it’s not like it cost an individual a huge percent. Maybe it was pennies in terms of it, and it’s sad but we have to be willing to invest, which means learning about asset classes, learning what an ETF is or an exchange trade of funDavid Stein and stocks. But you have to focus on what you can learn and just know essentially to just start with the basics is the way to do it and trust that fraud will be found out, and which you’re gonna invest when it comes down to it.
21:47 Michael Port: Yeah…
21:47 David Stein: And it’s hard, it’s hard.
21:48 Michael Port: Well, there’s so many different investing products out there that it can be very, very overwhelming. Even for newer folks, and sometimes, even people who have been doing it for a while, the concept of diversification can seem complicated or overwhelming. Well, diversification means a lot of different things and I gotta learn a lot of different things, and that can be overwhelming. There are insurance products that are often bundled with so called investment products and they’re pitched very hard and then there are all sorts of different actively managed funDavid Stein, which are pitched very hard.
22:25 David Stein: Exactly. Which is why the place to start, you start with asset classes and index funDavid Stein or exchange trade of funDavid Stein and just figure out, alright, here’s how much I wanna put in stocks, here’s how much I’m gonna put in bonDavid Stein. Not investing in individual stocks, takes away half the work ’cause suddenly you don’t have to worry about what Apple is doing versus IBM. Sometimes, it’s fun to play with that on the side, but if you’re saving for retirement, you can just avoid that whole area and focus on just the basic: Keeping fees as low as possible, don’t buy insurance products tied to investment products because the assumption there is somehow the insurance companies are better investor than everybody else, and they’re not.
23:14 David Stein: And so, people should protect against the downside, so have some term insurance but don’t… Most people don’t have to deal with insurance investment products. They don’t have to deal with active management products, they don’t have to deal with buying individual stocks. Focus on the building blocks, which is asset classes and learning what drives the return for stocks over time, and just cover the basic education you can find through podcast and other means, and start there. Now, eventually, perhaps you wanna start adding what I call pockets of independence outside of the financial market, so maybe you have some food storage, some gold, or other issues, you might hear the dog. M dog is yelling in the background. I apologize for that.
24:05 Michael Port: That’s okay. As long as he’s okay, he didn’t get hurt or anything. It’s not that kind of yelling.
24:10 David Stein: No, it’s a Shih Tzu. She expresses displeasure by acting like she’s being murdered.
24:18 David Stein: It’s the most bizarre thing.
24:20 Michael Port: I know some people like that. When you’re referring to minimalist investing, you did an episode on that. Is this the concept that you’re referring to?
24:32 David Stein: Exactly.
24:32 Michael Port: Yeah.
24:32 David Stein: Right and an example, so I had somebody, I did a call webinar a while ago and generally beginning investors and her first question was about currency. Should I’d be buying this currency position? And I said, “It doesn’t matter. Don’t worry about that.” But that’s often the introduction of people because there are so many people out selling stuff. Their first introduction to the investing is suddenly, they wanna trade currencies. But, trading is not investing. And so, a minimalist investor right, they wanna keep it as simple as possible. You can build a diversified portfolio of six to eight ETFs and for most people, and the beauty of investing in the early years, it doesn’t really matter how you invest. What matters is how much you are saving. It’s only later after you spent time learning and making mistakes investing, your portfolio gets big enough that the actual return starts to make more of a difference than the money being put in each and every year.
25:37 David Stein: And so there’s times to make the mistakes when it’s young and you’re learning and you can try different things but if you’re somebody that doesn’t really like investing and it sounds too complicated, you keep it simple and you focus on the basic building blocks which is asset classes, index funDavid Stein, ETFs, and keeping your fees low, and people can retire that way.
26:03 Michael Port: Yeah, it’s interesting. I was an artist when I was young, I was an actor. I saw myself, I didn’t see myself as somebody who was a numbers person. I still have trouble with math. My wife does all the math for us. And yet, here I am feeling very, very confident about the way that I manage our finances and our investing. And my friends growing up, my best friends, most of them went to business school and then onto Wall Street. They run hedge funDavid Stein, they’re analysts. And what I said and we talk about the stuff, I sometimes feel like I actually am a much better investor than they are and I know about 1/1000 of what they know about the markets because they…
26:51 David Stein: Exactly because they are very niche. In fact, I had a call yesterday. It’s somebody that retired from a hedge fund and suddenly, now he’s focusing on his own portfolio and he realizes, “Well, this is actually a little different.” [chuckle] Because I used to be an investment manager and it’s one, it’s much easier investing other people’s money, particularly institutions, because they’re not as personally involved in it but the skills and investing your own retirement is completely different than running a hedge fund or something an institutional investment advisor and so it is a different skill sets. So, you’re right. You have learned and the other thing that you have is you are humble, right? The thing about the…
27:37 Michael Port: Yeah, I know so little that I will not do stupid things anymore.
27:46 David Stein: Right.
27:47 Michael Port: Yeah, it’s knowing. It’s this feeling of real comfort knowing that it’s okay not to know everything but you know what you need to know and that’s it.
28:00 David Stein: Exactly and when I left the investment business, I went to Mexico for a week and I was on the beach just writing and I was answering what I called the terrifying question, “How would I invest if I didn’t have a clue what was gonna happen next but everybody else was investing like they did?” And that’s the world we sort of live in.
28:25 Michael Port: Yeah.
28:25 David Stein: Where you have Wall Street and you have all these institutions that think they know what’s gonna happen but they really don’t. And I think they believe they know what happen. Some, if they’re honest, say they don’t really know but people pay them to act like they know. But, if we don’t know what’s gonna happen, well, that’s actually a strategic advantage because then we can invest knowing we don’t know what’s gonna happen. That takes out a vast majority of the investments we just don’t have to deal with. And so then, we are investing in a way, as I mentioned that, where we can protect against the downside. In other words, we’re not gonna be 58 or 60 and have 100% of our investments in stocks because we believe stocks will always outperform bonDavid Stein, because we know that’s not the case. We can have 60% drawdowns in stocks and if that happens, that can royally mess up somebody’s retirement plans. And so, it’s a completely different mindset that everyone can learn and recognizing nobody knows what’s gonna happen. And so, if you invest knowing nobody really knows, well then, you’re gonna be way more diversified and perhaps take a little less risk than conventional wisdom and make it up by hopefully generating income in some other way and saving more.
29:48 Michael Port: Speaking of predictions going wrong, we just came through an election cycle that surprised many people. We have a president who wasn’t expected to win. And as a result, there’s a lot of uncertainty in the world, not just the markets, but in the world. And interest rates are rising for a number of different reasons, not just because we have a different president who’s gonna have a different economic policy. But we do know now that interest rates will be rising. What should people do about that, if anything?
30:29 David Stein: Well, first up, we don’t know interest rates can be rising.
30:32 Michael Port: But didn’t the Fed just say, “We’re gonna be raising three times… ”
30:35 David Stein: Oh, they… Yes, they said that they’re gonna raise their short-term policy rate, but that does not necessarily mean that longer-term rates are gonna rise.
30:44 Michael Port: Oh, good. Could you explain that ’cause that’s something that, clearly, I didn’t understand. So maybe some other people don’t understand that. What’s the relationship between the short-term and the long-term rates?
30:56 David Stein: Well, there’s some relationship. You have the short-term rates that the Fed is setting, but it’s a 30-day rate, so it’s a very, very short-term rate. They don’t control the long-term rates. But longer-term rates are… Let’s say, a 10-year rate is actually made up of a series of short-term rates. In other words, if you could buy a 10-year bond, or you could buy a 30-day bond, or a fixed-income instrument, and you just roll it over every 30 days. And so, there is some relationship, but it’s not exact because interest rates are also driven by investor fear and greed. And so, you had that whole people aspect to investing. And so, it isn’t a straight relationship from what the Fed is doing versus what actually happens with long-term rates. And there’s… One, interest rates aren’t predictable in that aspect because there’s so many things that determine, and determining global forces for example. So, even though the Fed is raising interest rates, we also have higher rates in the US versus Europe, the UK, and other areas. And so, money will flow to wherever they can get the most attractive return, and that kinda puts a ceiling on US rates. And so, ultimately, we don’t know where interest rates are gonna go.
32:21 David Stein: Now, the thing I like about math or about bonDavid Stein and fixed income, and I teach, is it is more math-driven in terms that you can estimate what your return is gonna be if you invest in bonDavid Stein. But generally speaking, that’s kinda how the rates work. Now, I forgot what your actual question was in terms of… That led up where interest rates are definitely gonna rise.
32:43 Michael Port: Well, yeah, so let’s say if interest rates rise, and we’ve seen some of these already in the housing market, is there anything that we should do to prepare or make different decisions with respect to our investing? Because interest rates affect home-buying, it affects car-buying, it affects investing and many other vehicles. Is there anything that we should do to prepare for that?
33:10 David Stein: Well, in terms of… Obviously, if somebody is buying a house or the rate’s really high, we are at historically low interest rates. We’re not at the bottom, but generally speaking, you should read finance. Or if you want rates… OdDavid Stein are, rates will go up. We don’t know if it’s gonna happen, but they will go up. But the good thing is, the main reason they’re going up is ’cause the economy is getting better globally. And so, there’s been a lot of fear while rates go up, the stock market’s gonna tank. That’s not necessarily the case because if rates are going up, and they’re going up slowly as they have been, it’s usually because the economy’s doing better, which can help corporate profits, which can help other asset classes. And so, people have been worried about rising rates for three or four years now. And the behavior of investors shouldn’t necessarily been any different. They should still have had multiple portfolio drivers, and their portfolio should’ve had some bonDavid Stein, they should had some stocks, and other asset classes, and they would’ve been perfectly fine, and not be overly fearful about rising rates. ‘Cause just ’cause rates rise doesn’t necessarily mean it’s gonna be a disaster in terms of the economy or the markets.
34:27 Michael Port: Now, one of the things we have seen rise, and I have seen it rise significantly, in my case, is health insurance. And most of the people, many of the people, I should say, who listen to this podcast have their own businesses of one kind or another. And so, they’ve gotta deal with health insurance themselves. They gotta buy their own plans. My plan for my wife, my son, and I was $1,500 and change last year. And for 2017, it’s $2,200 and change. And that’s…
35:00 David Stein: Per month, right?
35:00 Michael Port: Oh, per month, yeah, yeah, of course. And that would be great if it was per year. It’s a PPO, so it’s supposedly, the best platinum plan you can get, but I still pay $40 to see a doctor who is not in network, and most of the doctors that I see just happen to not be in network because so many doctors are not taking the insurance anymore. You did an episode where you addressed insurance. Do you have some thoughts on how we can keep our cost under control, given that premiums seen to be going up? The insurance companies are often leaving states altogether, so you have fewer choices and prescriptions. The cost of prescriptions are going up as well.
35:45 David Stein: Well, it’s flawed. I did an episode because I had the same experience. My insurance premiums were gonna go up 50%. And your first thought is, “I’m mad at the insurance company. Why are they ripping me off?” And so, I researched it and this was a Blue Cross in Idaho. It turns out, no, they’re actually losing money. How is it they’re having to raise rates 50% and they’re still losing money? And as you start, there are many different influences but the ones that I settled on in that particular episode was the pharmaceuticals. Not generics but it’s the… And you’ve seen instances of this with the allergy medicine where the pharmaceutical companies essentially have monopoly pricing power when they bring a new drug to market, where they can price… They bring a new cancer drug to market, their decision on how much to price it, and they’ve readily admitted this, is how high can they charge without people screaming too much? Either politicians, etcetera. That’s the primary driver, is this pharmaceuticals cost and there neeDavid Stein to be, I’m not saying a price ceiling, but there neeDavid Stein to be a more… You can’t have monopoly power in any economy and have it work well.
37:06 David Stein: And so, it is not as simple as repeal ObamaCare. That’s not gonna solve the problem because that’s not… There’s only 11 million people in ObamaCare and 8 million get some type of subsidy. But the reality is, it’s gonna have to be a systematic solution, perhaps market driven and perhaps in even Trump suggested allowing insurance companies to sell across state as opposed to every state have their own little plan. But, to be honest, I don’t have a total answer. I just know that that’s one issue that neeDavid Stein to be addressed somehow and in terms of some market solution, so you just don’t have that monopoly power. ‘Cause it’s a huge, huge driver cost.
37:51 Michael Port: Do you, in your own case, do you buy high deductible or low deductible plans? And if you do low deductible plan or high deductible plans, do you also use an HSA or similar vehicle for savings? What’s the path that you took?
38:11 David Stein: I used to just pay it. And then when I ended up doing it in 2017 is one, I had a PPO, which was nice ’cause we like to travel and even with a PPO, the out-of-pocket deductible was reasonable. Well, this year, the Blue Cross divided up the state into these little pockets, like really little pockets. So likely, your hospital wasn’t even on there. And if you went out of it, the deductible was $150,000. And so, we had used high deductible plans like a $10,000 family deductible and it worked fine. I set up an HSA but I didn’t like the paper work honestly. I just put some money in there. I just paid our expenses. This year, we ended up doing something I haven’t even heard of two months ago called a Health Share, which is essentially a coop for health insurance that you don’t have to pay the ObamaCare penalty.
39:06 David Stein: They’ve been around for decades and basically, you pay a premium but they call it a share and it works just like health insurance but your health care cost get paid by other members. And I was a little apprehensive about that but they’ve been around a long time and it brought the cost of, it was gonna be $1,500 for the Blue Cross plan and we’re down to about to $500 to $600 now per month with a lower deductible.
39:39 Michael Port: Which is extraordinary. Is this one of those Christian Ministry type plans?
39:44 David Stein: It was, right, and so… But it wasn’t a situation where there was a huge litmus test. It was, agree to live a healthy life, agree to help other people with their health insurance cost, and a belief in God. It wasn’t… Most people probably could, yeah.
40:06 Michael Port: I read about this recently ’cause I was talking to an insurance broker trying to look at what my options were and he’s like, “Listen, there really aren’t any good options. I can’t get you anything that’s gonna make you happy but there are these plans that are popping up,” and he said, “Obviously, I’ve nothing to do with them.” But, go check them out. And when I read about, I read the site for one of them and I was a little skeptical and it wasn’t very clear, how much do they cover? I think they needed a little bit of help on their, maybe on the marketing side to discuss it…
40:41 David Stein: Well, it could be, right. The one we’re in is Liberty. I think they cover a million dollars and in my moment, I joined assuming that this is a year or two perhaps until they resolve the health care, hopefully resolve the health care issue in terms of premiums.
41:03 Michael Port: You’re very optimistic.
41:05 David Stein: I… Well, yeah.
41:06 Michael Port: That they’ll solve it in a year.
41:08 David Stein: I’m generally an optimist but maybe it will be a long term. And I was skeptical too and I have little trepidatious but I’ve talked to… Once you start asking around, you realize, well, there’s actually a lot of people tickling the personal finance blogging podcasting space that they’ve been doing it for years. I’m willing to try it out and we’ll see and it works just like, you got a little insurance card or a little card and you give it to your doctor and they bill Liberty and they can go negotiate which was one of the big benefits of insurance companies is at least they had agreed upon rates so it often got knocked down in terms of… It’s just a flawed market.
41:53 Michael Port: Yeah, it’s…
41:54 David Stein: We could go all day discussing it but we’ll see how it comes out.
41:58 Michael Port: How do you feel about robo advisors?
42:02 David Stein: I think they’re a great place for beginning investors to start. I did an episode where I answered all the questionnaire. There was seven or eight robo advisors. I answered the questions the same and found that the recommended portfolios were all over the place. What a robo advisor won’t ever do is tell you what you can earn investing. They’re not a financial planner. They will let you answer three questions, or four, and they’ll say, here’s a mix, and it’s a diversified mix of exchange traded funDavid Stein. The fees are reasonable, the benefit of robo advisor is technology being able to move money in and out. But, I don’t think individuals should rely on robo advisors as their primary savings vehicle throughout their life. I think people should get a little more education on investing than that. But they’re a solution particularly for newer investors. They’ve done a great job in bringing in a lot of individuals that had never invested before. But once you’re there, you kind of have to go beyond that.
43:08 Michael Port: I’m not sure why someone would choose, even if they’re just starting out, choose a robo advisor, especially if they’re investing in tax-deferred accounts, when they can just call up Vanguard, do a little bit of paper work, open an account there and even just use a Total World fund, or a retirement date type fund. Maybe they’re ready to do a three fund portfolio or something, but it seems like if that’s just as easy, you’re not gonna necessarily get better returns because of this robo advisor, and you’re still gonna pay lower expense ratios at a place like Vanguard. That’s one of the reasons, when they’re popping up for newer, younger investors I kinda go, “Well, is it because it seems cool and sexy and that there’s some smart algorithm on the backend that it’s gonna know something?” Just like, “Oh the smart man in the suit. Well, he knows something that I don’t know, cause that’s what he does.” Just the same. Well, there’s an algorithm that is gonna figure this out because computers are really smart, and they’re gonna be smarter that me so I should give them the money.
44:13 David Stein: No. [chuckle]
44:15 Michael Port: Is that what people are thinking?
44:15 David Stein: Well, yeah, exactly. But you’re already more educated than most beginning investors. The idea of opening a brokerage account for most beginning investors is completely daunting. I actually did a series just… I walk people through the steps of opening an account. So with the robo advisor, the app, sometimes, it just seems easier. But I agree with you, and I took a deep dive when robo advisors first came out, because we had sort of done something similar. And they had really slick technology, but it was almost like the investing was an afterthought. [chuckle] They don’t have this smart… They basically put together diversified portfolio of ETFs. It’s not like it’s a smart algorithm. It’s a really cool slick interface that can help people get started. But I agree with you, most people are better served opening an account at Vanguard or Schwab or Fidelity, and learning how to invest and not rely on somebody else. And that can protect you down the road so you don’t become susceptible to somebody unscrupulous. Not that the robo advisors are unscrupulous, they’re building organizations.
45:32 Michael Port: Yeah. So…
45:33 David Stein: But there’s better ways.
45:34 Michael Port: Okay. A couple of more questions and then I’ll let you go. Number one, what books do you recommend for newer investors and what books do you recommend for a little more seasoned investors?
45:50 David Stein: I wish I had my list of [chuckle].. What I’ll do is I’ll give you a link, that you can put in the show notes, of all the books I’ve read in the past decade, and it includes some investing books. There’s not actually that many great investment books out there. For more seasoned investor, I’ve read a lot by Nassim Nicholas Taleb. “Antifragile,” I think, is a great book that helps you realize how unpredictable the world is. Something a little more simple is the book that just came out by Michael Lewis, in fact, my episode that I’m releasing this week is on that, “The Undoing Project” where he walks through e-profiles at Daniel Kahneman and Amish Tversky. They were sort of the founders of behavioral finance, and how we as humans are flawed when it comes to our decision making and our predictions. And it’s a great book to introduce people to this concept that there’s some specific things we need to do as investors to overcome flaws that we have. And an example is this whole Trump administration coming to office.
47:07 David Stein: I’ve gotten e-mails from people that are convinced to the core that the economy and the markets are gonna crash when Trump takes office, after he starts doing whatever he does. And you realize that that is what we use, what’s called the availability heuristic. We are coming up with a mental model in our mind, this is all subconsciously, and it’s the first one we could come to, and we saw this after The Great Recession. For years after The Great Recession, any economic data, there was always abundance, and many were saying “The next shoe is about to drop. The next recession is imminent.” Because what happens is, we tend to remember the worst thing that happened. That’s the first thing that comes to our mind. And people are convinced that that’s what Trump is gonna be.
48:00 David Stein: And so, we shouldn’t be selling our stocks because Trump’s coming into office because we don’t know if he’s gonna be a good president or a bad president. Nobody knows that. The way we should make a decision is our regret. If he turns out to be a bad president and the economy tanks and the market falls, how will we feel if we didn’t make changes to our portfolio to reduce risk? Versus how will we feel if we actually made changes and sold all our stocks and the market went up another 100%? These are risk aversion decisions that we need to make.
48:35 David Stein: In other words, what is the regret premium, as Lewis describes it, how much regret in terms of give up our future returns are we willing to take to avoid a 60% loss in stocks? That’s what people should be focusing on, not predicting what’s gonna happen when whoever gets into office. And so, this particular book talks about that and it’s a great book from that aspect.
49:05 Michael Port: Do you have any favorite podcast episodes that you’ve done? That you’d recommend? Like, “These are my favorite ones.” “Cause I know I have a couple that are my faves.
49:18 David Stein: My favorite is always the last one I did. [chuckle] Right now… And I just listened to it this… I run a solo show so I don’t do interviews and so I listen to my podcasts a lot. Sometimes, I listen to old episodes ’cause like, really? And I learn stuff from my… I don’t know if you do this but I learn stuff from myself that I said a year ago. It’s like, “Oh, yeah.” This one that just is gonna be released by or get released before [49:46] ____ episode, so released toward the end of December on “Should You Sell Your Stocks Before Trump Enters Office?” That I think is an important episode. The episode on health care.
50:00 David Stein: But the way my show is set up, it’s not just plain vanilla, nuts and bolts, invest in economy. It’s teaching people what is money, how it works, how to invest, but more importantly, how to live without worrying about it. There is a lot of philosophy involved, lot of storytelling, narrative driven. Because I use the podcast as a way to learn. I’m in it, you’re in it, just like everyone else. We’re all trying to figure this out and that’s why I love podcasting for just as a way that we can all learn together.
50:29 Michael Port: The big takeaway for me from your podcast over time has been how to think about money. And that’s, to me, worth more than any highly technical type of show or episode with respect to what to do with small cap value or whatever. Learning how to think about finance and put it into the context of everyday living has been so valuable to me, and I think that’s the theme that I take away from your show overall, is the learning how to think about it. Because once you learn how to think about it, then you can study properly and appropriately and make good, sound decisions. And when you don’t know something then you can search out the answers because you have a context for them.
51:26 David Stein: Well, I agree, that’s why… I mean, I don’t do a trade of the week show at all. This is evergreen content so your typical… Many listeners will listen to all 138 episodes because they do build and they build because I’m learning as I go and finding better ways to express my philosophy of money and how people can make it through a world that is becoming increasingly more complex. And so, that’s just the way it is. I encourage people to listen, give it a try.
52:01 David Stein: But the thing that I love about podcasting is, there’s people that… You gotta find what I call in investing, you need a virtual mentors. And so, many of the people that taught me the most about investing, Seth Klarman and others, I only met a couple times or I haven’t met at all. But I sort of like the way they think and I’ve learned from them. And it’s the same with podcasting. There’s some great podcasters out there. Joshua Sheets, for example, does Radical Personal Finance. He is the smartest financial planner I know but he has a view of the world and he has people that he teaches. And there’s many others that you just have to find that is your virtual mentor that can teach you about these concepts, not just in investing but in other areas.
52:50 Michael Port: Hey, you know what I’ll do? The founder of FinCon sent me a list of his favorite podcasts on finance so I’ll share that with this episode as well.
53:02 David Stein: Alright. Philip Taylor. Philip Taylor’s the one, he’s coming out with a podcast here in a couple months and he also would be very, very good.
53:10 Michael Port: He would. And of course, yours I recommend first and foremost. Okay, last question. How can the average person who is not financially educated or he has a little bit of financial education, how can they determine whether or not someone truly has their best interests in mind? Because this designation of fiduciary is not always adhered to. And frankly, if they give you, if a fiduciary gives you paperwork that says sometimes I’ll make a decision that’s actually not in your best interest, they can get away with it. How do you determine whether or not someone who is offering you their help actually has your best interest in mind?
53:57 David Stein: Well, first, I’ll see how they’re compensating. If there’s a commission involved, then they don’t necessarily have a fiduciary duty to bring the best ideas to the table. And so, I think getting financial help is important. But I believe it’s better to pay somebody a fee for their time on a project basis. And that will be a first place to start. Don’t pay somebody to manage your money if you can avoid it, because first off, the financial planner is gonna charge 1% or more in a world where interest rates for bonDavid Stein are 2%-3% and stocks potentially will only earn 6%-7%. That’s a huge chunk of money that you’re paying somebody that’s gonna do exactly what you could do if you just spend a little bit of time in building out a diversified portfolio.
54:54 David Stein: So, meet with a financial planner, have them do a financial plan, even if it cost a couple thousand dollars for the project, and then go implement it yourself. There’s nobody out there smart enough that’s gonna do it better than you. There is not a genius out there. Most of us as individuals, I mentioned Seth Klarman. He is the smartest investor I know, and he’s generated 18% annualized returns. But his fund’s been closed to new investors for over a decade. You can’t find people like that. And most financial planners, they’re good at putting together financial plans, they’re not investors.
55:31 David Stein: And so, understand what the compensation is, pay people upfront for the work that they do, and don’t do it through a commission. Because that’s where it becomes an issue. When it comes to insurance products, buy the plain vanilla disability insurance in term life insurance, don’t buy these Index Universal lives, whole life, because once we start combining insurance with investment vehicles, then it gets really, really complicated and very difficult to find out. So you just keep it as simple as possible.
56:08 Michael Port: And if a financial adviser is advising you to do something and you can’t understand what they’re saying, it’s likely they don’t know what they’re saying and that’s a great sign right there.
56:22 David Stein: Well, right. You should be able to… Nobody has this magic formula that… And ’cause I spent many years… Part of our business was trying to define the best investors in the world. And you realize there’s very, very few and most products are too complicated. And Wall Street likes to have the flavor of the month so you get these things that they’re always pushing, but for most individuals, it’s index funDavid Stein, it’s low fees, it’s diversifying as much as possible. Learn how asset classes work in terms of stocks, bonDavid Stein, etcetera, and you can do it. You can open account at Vanguard and put it together and focus more on generating more income, and having a successful life that you enjoy, and saving.
57:12 Michael Port: Many folks that I’ve talked to who’ve been studying personal finance tell me about a pivotal moment that really opened their eyes to what was possible for them and changed the way they saw the world. For me, that was a conversation with my father-in-law. And if a listener hasn’t had that experience yet with somebody, hopefully, this episode or maybe another episode of your show that they listen to or maybe if they join Money For the Rest of Us Hub, then maybe they’ll have that experience too and then forever more, the world will be different to you. You’ll really see the wold in a different way. And I think ultimately, much bigger way because you’ll see that you have options and you’ll see what’s possible for you. So, thank you so much, David. I really appreciate your time. Again, moneyfortherestofus.com and moneyfortherestofushub.com is a community of folks. I’m not in there, and I have no personal interest or conflict of interest when sharing David’s sites, but that’s a community of folks that you’re teaching personal investing to, is the way I understand it.
58:32 David Stein: Yeah, that’s right. Thanks, Michael.
58:33 Michael Port: Again, thank you so much and everybody, keep thinking big about who you are and what you offer the world. It’s a pleasure to serve you. I never take it for granted. I know my guests don’t either. It is an honor to have your ear for this time and we’ll keep doing our best always. Until next time, bye for now!