Renting versus owning a home, the

biggest financial decision most people

make in their life. So, we're going to

talk about all of the unrecoverable

costs [music] of owning a home,

including property taxes, maintenance

costs, which is the one that I think

people underestimate the most. And then

there's also emergency costs. I've got a

whole stack of them, as well as a 5%

rule to figure out if renting is a

better financial decision. We'll go

through that. What else have we got?

>> So, this is something that people just

don't think enough about, which is the

top 10 financial mistakes that I think

people make. For example, tax planning

opportunities. Like, there are simple

things that people can do [music] to

minimize the amount of tax they're

paying, and we'll go through those. Ben

Felix's firm manages the money of more

than 3,000

people, ranging from people with huge

amounts of money and not so much money.

His whole thesis is giving people money

advice that is based on academic

research. Our brains, our psychology,

absolutely gets in the way of making

good long-term financial decisions. And

today, we're going to answer the big

money questions, like what should I

invest in? A lot of people believe they

need to have a lot of background

information before they can start

investing, but I would argue that people

who know just a little bit, they will be

better long-term investors. There's a

ton of evidence supporting that this

will outperform most other investment

strategies.

>> And also, what is the mentality, the

mindset of people that end up making

money over the long term?

>> Psychology is important for determining

what your financial goals are. So, this

is a framework that we developed to

elicit higher quality goals. What would

you say to young people that are

thinking about their financial strategy?

>> A lot of young people feel a lot of

pressure to save, but there is research

suggesting [music] that it's probably

suboptimal for young people to save,

which we'll talk more about later. And

then, in a world of AI where everything

is changing so quickly, what should I be

doing with my money right now? Ben Felix

has the answer.

This is super interesting to me. My team

gave me this report to show me how many

of you that watch this show subscribe,

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If you are a regular viewer of this show

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simple free thing that you could do to

help us, my team, everyone here, to keep

this show free, to keep it improving

year over year and week over week, it is

just to hit that subscribe button and to

double check if you've hit it. Only

thing I'll ever ask of you.

Do we have a deal?

If you do it, I'll tell you what I'll

do. I'll make sure

every single week, every single month,

we fight harder and harder and harder

and harder to bring you the guests and

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stayed true to that promise since the

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and I will not let you down. Please help

us. Really appreciate it. Let's get on

with the show.

>> [music]

[music]

>> Ben,

there are lots of people out in the

world talking about personal finance and

investing and all these adjacent

subjects.

What is the approach you take that you

think is different to lots of the other

sort of finance experts that are on

YouTube that are giving people advice?

What I think, and the approach that I've

always tried to take, is what can we

take from academic literature, very

smart people who spent a lot of time

thinking about these things,

what can we take from them and apply to

making good financial decisions for a

typical person? And what are the key

questions that you've sought to answer

for the audiences that you have? Is

renting versus owning a home. So, that's

always been big. Asset allocation is

another big one. How much should you

invest of your of your long-term money

that you can afford to take some risk

with.

Another important question people wonder

about is,

why should I not do this other

investment strategy that seems very

attractive?

And who who are we appealing to with

this conversation? Is it just people

that have lots of money, or is it No, I

think these questions need to be

answered. I mean, the the renting versus

owning a home one is applicable to

pretty much everyone, because that is

the biggest financial decision most

households will make in their lives,

regardless of what their net worth is.

But investing, or what should you do

with your long-term investments, that's

applicable to anybody.

Anybody that's going to be saving for

their future, whether they have $10,000

or $10 million, the same principles

apply.

And how much of this

game of investing, making money, is

comes back to psychology?

So, I like to say investing's been

solved. We're going to use index funds.

That's it. The hard part is actually

doing that.

Because our brains, our psychology,

absolutely gets in the way of making

good long-term financial decisions.

Our brains are designed for survival.

They're not designed to thinking about

long-term abstract concepts like taking

your money today, investing in the stock

market, ignoring all the stuff that

happens in between, and then having

money left over later

to to fund your retirement. That's so

interesting, cuz a lot of the time

people talk about tactics and

strategies, but I guess underpinning

your ability to execute on any of those

tactics or strategies are one's own

psychology. And is there academic

research about the best sort of mental

approach to take towards money and

finance and investing? So, one of the

best approaches, and it's a little bit

counterintuitive, is to not look at your

investments. There is a an academic

paper showing that the more people look

at their investments, the less risk they

take, and the lower returns they earn.

Because when you look at your

investments every day, the stock market

goes up and down. We know that. If

you're looking every day at your

portfolio and it's down 5%, up 6%, and

going up and down all the time, that can

be very stressful, and it makes it seem

like the stock market is very risky.

And so, people will invest less in the

stock market. In reality, for for

long-term investors who can invest in

stocks, buy and hold for a very long

period of time, that they're a lot safer

than people think. Mhm. So,

[clears throat] we've got some props

here for some demonstrations we're going

to do. Could you just give explain to me

the high-level of what these things are

on the table and the different

frameworks we're going to go through?

Sure. So, we have a bunch of things

here.

Uh this is one of my favorites that I

bring up

in a lot of my videos. So, this is the

the PERMA model, which comes from

positive psychology. Psychology is

important for investing well, but it's

also important for figuring out what

your long-term investing strategy should

be. We'll go through that. What else

have we got here?

This is the top 10 financial mistakes

that I think people make. Uh this is the

the three steps for investing your first

$10,000. Okay. And we've got $10,000

there, so you're going to talk me

through how we do that as well.

>> all of the We're going to talk about all

of the unrecoverable costs.

Got a whole stack of them

that you incur when you own a home.

Okay. And I I I guess this begs the

question,

who is Ben Felix? What is your

background, and what is the education,

the reference points, the experiences

that you're drawing upon to give us this

information today? Probably where it

starts

for for being relevant is I I did a

degree in mechanical engineering at

Northeastern University.

And I say that's relevant because when I

came into finance, I wanted to approach

it like an engineer, and a lot of

finance, a lot of financial services of

of investing and wealth management is

not approached like an engineer. It's

approached like a I feel almost bad

saying this, but it's approached like a

like a car dealership, like selling

selling product. So, I was disappointed

in that and and had to find my find my

own way. So, they haven't got my best

interests at heart. In in a lot of

cases, I don't think so.

And I started spending a lot of time

reading through academic literature so

that I could be very confident and

comfortable that the advice that I was

giving to people was good, high-quality

advice. And where is the best place to

start?

Is it in the psychology? Is it one of

the one of these frameworks? Is it

somewhere else? Is there a background

understanding of the economy one needs

to

to get going? That is a great question.

I don't think so, and I think that's

where a lot of people get stuck, where

they believe they need to have a lot of

background information before they can

start investing.

Uh they may do research on specific

industries, they may look at like the

energy sector so they can build out an

energy portfolio as one example. But

investing the way that I would say is

sensible for most people, which is just

using low-cost index funds, capturing

market returns, the the market returns

have been there, and they're going to

continue to be there. They should

continue to be there in the long run.

Uh doing that doesn't require a lot of

background knowledge.

I would argue that people who know just

a little bit, just enough, that just

know that index funds are sensible, and

they have enough conviction they can

stick with that, they will be better

long-term investors

than someone who knows enough to hurt

themselves.

What would you say to young people that

are thinking about

their financial strategy? Would you say

that someone in their

early 20s, 21 years old, should adopt a

completely different approach to money

based on what you've just shown me,

versus someone that's 51 years old?

It's going to be different, for sure. I

I think, and this is a it's a tricky

subject, but a lot of young people feel

a lot of pressure to save.

And that might be saving for their

retirement, it might be saving to buy a

home, but they feel a lot of pressure

from their parents and just from society

in general that they need to be saving

money, and that if they're not saving

money, they're being irresponsible. But

again, if we come back to academic

research, there is research suggesting

that it it's probably suboptimal for

young people to save. General point

is that you should save more when you

have a higher income, and save less when

you have a lower income.

And what that ends up meaning is that

young people

may not need to save, or may not need to

save as much as they feel pressured to

save.

The reason this topic is tricky is that,

well what I just said is true,

it can cause bad habits.

Whereas people spend all of their

income, and then don't have that shift

towards saving at some point, then

they'll they'll end up in a difficult

position later on in life.

Someone who's 50,

it's going to depend on their situation.

If they're the person who I just

mentioned who never saved,

they're in a tough position, and then

they are going to need to save a lot in

order to have some wealth later on in

life.

But if they've already saved, and they

have wealth, then they can focus more on

some of these topics.

And you've got the the 10 money mistakes

people make here.

Can you run me through those ones, and

just let me know if any of them is

particularly pertinent or interesting

that we should dive deeper into? So,

this this one's controversial.

It's not earning enough money.

A A of people feel like they

don't have an option. That they're not

earning enough money because that's just

the way things are and there's nothing

that they can do about it.

I don't think that's necessarily true.

Investing in your human capital, and

that can be formal education, it can be

getting skills, it can be becoming an

entrepreneur. Those are all ways to make

your your own self

a more valuable asset, to increase the

value of your human capital, and allow

you to earn more money. So, that's

that's a big one. I think people who get

stuck in the

in the feeling or the thought that they

do not have the ability to increase

their income, and that this is just the

way things are, I think that could be

very problematic. I've always thought of

it across these sort of five buckets.

The first two buckets that we attempt to

fill when we're starting our careers are

our knowledge and then our skills. And

kind of like when knowledge is applied,

it becomes a skill. And these two first

buckets are so imperative because

they can almost never be unfilled.

Whereas the other three buckets, which

is your resources, your network, and

your reputation, you can have career

fluctuations and earthquakes that cause

those buckets to unfill. So, as like you

were saying earlier on about young

people, one of the things I've always

thought is like when you're young, just

like optimize for filling your knowledge

and skills as much as you possibly can.

And actually, I guess that the level of

nuance there is acquiring a rare but

complementary stack of knowledge and

skills that the market values. And I

think over the long term, you know, this

doesn't apply to everybody cuz things

happen in life and bad things can

happen, but over the long term, I think

life tends to land you pretty much in

and around the value of and the rarity

and the complement complementarity of

those knowledge and skills as it relates

to the market's demands. That's

absolutely true. There's data on this,

too, where we know that there is a

mechanical relationship, at least

historically. We can talk about the

future, but historically, there has been

a mechanical relationship between formal

education or trade education and

lifetime earnings.

And we also know that certain degree

types, like engineering, finance,

business, some other sciences have

higher lifetime earnings than other

degrees.

So, it's you're I think you're

absolutely right. There are and the hard

part is we don't know what exactly those

degrees and skills that are going to be

the highest paying in the future are

going to be. 10 years ago, we might have

said software developers. Today, we

might not. But even you as an example,

so you did engineering and then you did

finance. And now you've added this other

string to your bow, which is you know

how to make content on YouTube. And that

makes you as a finance expert and

professional and CIO so extremely rare.

It almost makes you like one of

100 on planet Earth, maybe.

And this is what I mean by rare and

complementary skills. You could have

just learned more finance. And I don't

think that would have moved you up this

sort of earning ladder. But because you

added this really rare skill of being

able to make content to your other skill

stack, I'm guessing it made you money.

It did. It has and I I continue to be

paid well and, you know, it was

Please don't, but if you were to go back

and watch my old videos, which are still

up, I'm so rigid and nervous and I when

I was. And it took probably years of

recording and we do a podcast, too, so

just being in front of the camera for me

to feel pretty good. I mean, I it

probably took me 3 years to smile on

camera. Really?

>> [laughter]

>> So, yes, that was a skill that I

acquired through just practice, I guess.

So, I say this because I really want

people to think about how rare their

skill stack is. It's not something we're

taught. And then also, one of the things

I noticed, I used to work in a a biotech

company for a little while while I was

in between things. And we were looking

for a writer, a biotech writer.

Now, the other writers that we'd hired

at our other companies might have been

paid, I don't know, $50,000, whatever it

is. For a biotech writer, we would pay

them a quarter of a million. And all the

only difference is the biotech writer

had like some base They didn't have to

go to medical school. They just needed

experience in writing about biotech.

Yeah. And it 5x their earnings. So, this

other point is, you might have a skill

stack, but are you selling them on the

right market? And even me, first part of

my career was marketing. I was helping

Uber and fizzy drinks company and dress

seller company sell their dresses.

As I just said, the second little stop I

took in my career was helping biotech

companies with marketing that are about

to IPO.

>> [laughter]

>> My first contract with one of those

companies was worth 8 million, 6 months'

work.

And I it made it was a real pivotal

moment in my career where I go, it's not

just the skills you have, it's like

where you the market and industry where

you sell those skills can wildly change

your your, as you say on that card, your

earning potential. Yeah. And as you say,

that this is something that you don't

have full control over because you could

do all those things and not find work as

a biotech writer, but putting yourself

in that position, I think, does increase

the odds. What's the second one you've

got there?

Second one is not saving enough.

Touched on this a little bit. Young

people maybe don't need to save, but at

some point, you do have to start saving.

And the tricky thing about saving is

that wealth compounds over time.

And if you're not saving enough, you're

missing out on compounding and it gets a

lot harder to catch up with the amount

of savings you would have otherwise had

if you'd started earlier.

So, that's a big one. And some people

will wake up when they're 50, 55, maybe

even 60 and realize they haven't saved

enough. But by that time,

there's nothing that you can do about it

or very little that you can do about it.

There's a lot of parallels with health

here where

[laughter]

[clears throat]

if you eat poorly and don't exercise,

you can

>> that

positive emotion

is one big piece of it. What does that

mean? It's literally enjoying what

you're doing and feeling good throughout

the day. Engagement,

you could probably argue that we're

getting some of that right now where

you're doing something that you enjoy

doing that's maybe a little bit

challenging, but it's your skill level.

It's the idea of getting into flow.

I I know I get that when I do podcast

interviews, when I do research, when I'm

sitting down and and writing a video

script. Mhm. Relationships

[clears throat] is is having good,

strong relationships with with people

who are close to you in your life and

that can be friends, it can be family

members, it can be colleagues.

Meaning is being part of something that

is bigger than yourself.

That can be a lot of different things.

For some people, it's religion. For some

people, it's community. For some people,

it's their own business. Mhm.

And accomplishment is achieving hard

things. Setting goals and achieving

them.

You're going to look at the items of the

PERMA model. You're going to look at

those as categories and think about what

other goals you may have that fit into

those categories.

That's called a categorical prompt. And

again, there's evidence behind that

helping people elicit more meaningful

goals.

So, one of the things I said is buy a

Ferrari. Again, these aren't my goals, I

don't care about Ferraris, but in case

they want to sponsor the podcast, then I

care about Ferraris.

But say the Ferrari thing,

do do I have to find where it sits with

in terms of positive emotion,

engagement, relationships, meaning,

accomplishment? It would be wise to and

this is why I think this framework is so

important because you might realize that

a Ferrari does not contribute to any of

these things. It might, though.

Like maybe you take it to the track and

you spend hours racing it. And that

would be engagement.

>> engagement.

Maybe you have a bunch of buddies who

have Ferraris and you want to be part of

that friend group.

So, that's relationships. Yeah. Okay. I

mean, positive emotions, but that might

only last a couple of days. Yeah, what's

the hedonic treadmill idea? That's

exactly it. Yeah.

And then accomplishment, I mean, it's

not really an acco- If it was a goal

that you've had since you were 5 years

old, maybe that you could call that

accomplishment, maybe. Okay, so I fit my

my financial goals, my life goals into

the PERMA model as a way to understand

what my financial goals should be. Yeah.

Okay. How many people in the general

public do you think have actually

thought about what a good life for them

looks like? Not enough. Not many. I

think everyone's people are so busy with

their day-to-day lives. I know this is

true for me and my family, too. It's

really, really hard to step back and

have this kind of thoughtful discussion

about what you actually want your life

to look like.

Cuz I was just thinking about that. I

was thinking I don't even know if I've

got um really clearly defined life goals

for myself. Like I think most of us just

kind of act on how we feel. Yeah.

And that can somewhat drift us towards

the short-term. Like if I just

Yeah, what what's going to make me feel

good today?

And do that every day. I don't know.

Some might argue that you have to be a

bit more long-term thinking.

It can help. It can help, right? Cuz it

it it can help you from making decisions

that you might regret in the future.

Mhm. Yeah, cuz when I look at this PERMA

model, there's some things on here that

I've optimized for, which have

sacrificed the other things that I care

>> That's it. That's it. Yeah. Like you

might have I might have over-indexed on

this, like

achieving things, but might have cost me

some relationships.

So what's the fourth mistake people

make? Yeah, so this is related to what

we were just talking about, but it's

it's overspending on the wrong things.

Okay.

When you think about what is a good life

for you, and you realize if you realize

that you're spending on things that are

not contributing to that, which is

resulting in you not being able to save

toward things that would contribute to

what you want your life to look like,

that's probably not a great position to

find yourself in.

So that could be spending $12 on a an

iced coffee every morning and not

enjoying it, cuz you could get positive

emotion out of that. But you're like

rushing to work, chugging down the $12

coffee every day.

That's probably not contributing to a

good life.

Number five might be

one of the bigger ones,

which is not taking investment risks.

And that's really the stock market has

delivered these incredible long-term

returns, and on expectation, it should

continue delivering strong returns for

investors. Not participating that in

that is a huge mistake, and it's a

mistake that many, many people make. A

lot of people don't invest in stocks at

all,

and a lot of people who do invest in the

stock market don't invest enough in

stocks. They have very conservative

portfolios. And that has a very large

implicit cost. By not participating in

the stock market when you could be,

you're giving up a huge amount of of

economic gain.

How do you quantify that for the average

person in terms of what kind of gain

they're giving up, or the size of the

gain they're giving up? Well, you can

look at the historical returns on

stocks,

uh and you can also look at the expected

returns

on stocks. So let's say it's uh let's

say it's 7%

that we expect stocks to turn in the

long run.

And if you could get 2% by sitting in

cash, that 5% difference is your

opportunity cost of not investing in the

stock market when you otherwise could

be.

And 5% compounded over the long term is

enormous.

So say I have $10,000

uh and I invest it

in

the stock market, and I'm getting what

did you say, 8%? 7 Say 7%.

How much money is that?

Let's have a look.

So I've done $10,000, which is what we

have here. Mhm. Invested in the stock

market at 7% return over 40 years,

that would be $150,000.

Do you know what's um Do you know what's

quite scary when I think about that? Is

does that kind of means that today if I

spend $10,000, I'm actually spending

$150,000.

Yes.

Which makes me not want to spend any

money on anything. Yeah.

Cuz if you buy I don't know what cost 10

What does What cost $10,000? Like a a

car, small car? Yeah, maybe. Yeah.

You're actually spending $150,000

when you factor in the fact that if you

put that $10,000 into the stock market,

you could have made 7% a year, and it

would have turned into $150,000. Yeah,

that's that's one side of the coin.

Yeah, I think you also have to think

about any enjoyment or utility that you

get out of that car. If that car lets

you drive to a job you couldn't have

otherwise done,

it may have a significant economic value

to you in the long run.

As one example. You know, I've got a

coffee here. Some people spend

$10 on a cup of coffee with frappachappa

toppings and all that stuff.

Looking at that over the long term,

in 40 years, if you'd not bought that

coffee and put it into the stock market

and got just 7% return,

you would have had $150.

So when you buy that $10 coffee, you're

actually theoretically

spending $150 in 40 years' time.

So you better really enjoy the coffee.

Is there a bit of a fear that it makes

us not want to spend money on

anything, and therefore we end up having

a shitty life in the near term? No, I I

think that's why this this framework

That's why the the PERMA framework for

thinking about these decisions is so

important, because you do want to have

positive emotion and engagement,

relationships, meaning, and

accomplishment. Those are all really,

really important. And yes, that money

could be worth more in the future, but

it can also be a worth a lot today if

you're optimizing on the right things.

What else? Number six.

It's another big one. So not taking

enough risk is is important. Taking the

wrong risks with your investments.

So I we we just ran some numbers about a

7% stock market return. You can

basically get that using an index fund.

The problem is a lot of people don't

invest in index funds.

They pick individual stocks hoping to

earn really high returns. They trade

individual stock options. Uh they trade

crypto tokens and all that kind of

stuff. And a lot of those types of risks

have negative expected returns, or they

have high costs if you're doing a lot of

trading.

And that can really erode long-term

investment growth.

What about buying a house?

Is that a good investment?

I wouldn't consider buying a house to

live in an investment. It's sort It's

sort of is. You get an asset,

but you're really you're buying an asset

that funds your housing consumption. It

kind of pays you a dividend that's sort

of like getting rent

from the house that you own.

When you do the side-by-side comparison,

which I think is the only way to think

about this,

if you compare buying a house, so that

means in Canada, you'd usually save up

for a 20% down payment. So you put 20%

down on your house.

Uh you take out a mortgage to finance

the rest.

You know, living in the house, you're

paying your mortgage payment, you're

paying for some maintenance costs,

you're paying for property taxes.

Alternatively, you could have rented the

house. That 20% that went into buying a

home could have been invested in the

stock market. So again, we're back to

the idea of opportunity costs.

And the other important thing here is

that renting typically has lower cash

flow costs than owning. So these are the

unrecoverable costs

of owning a home.

Mortgage interest.

So that's when you buy a house and you

borrow to to fund the purchase, you're

paying interest to the bank. That's a I

I call these unrecoverable costs. That's

money that you're paying

for the use of money in this case, and

you're not going to get those dollars

back. It's gone.

Opportunity costs. So that's what I just

mentioned. Whatever equity you have in a

home

is equity that you could have otherwise

invested in the stock market. The

capital portion, the principal, the the

price of homes has increased around

inflation at the rate of inflation,

maybe a little bit higher historically.

Stocks have far outpaced

inflation. So by having money sitting in

a house as opposed to invested in the

stock market, you have what is called an

opportunity cost.

You're not earning returns you could

have otherwise been earning.

So that opportunity cost is one of the

largest costs of owning a home.

So I mean, the mortgage interest,

the opportunity cost of equity,

property taxes are another big

unrecoverable cost. Property taxes vary

depending on where you are, but it's say

between 0.5% and 1%. Maybe some

sometimes a little bit higher. You get

utilities and some services in exchange

for it, but it's again, it's an

unrecoverable cost. You pay that, you've

got nothing left afterwards.

And then you've got maintenance costs.

Oh, this is the annoying one. This is

the It's It's the annoying one, and it's

the one that I think people

underestimate the most.

>> Mhm.

I started making content about renting

versus owning a home years ago.

I used to say 1% was a reasonable

estimate of maintenance costs, and

people would push back and say that's

way too high. There's a bunch of

academic literature on this, too, that's

says it could well be over 2%. I think

that's probably a more reasonable

estimate.

Having been a homeowner now for 6 years

after renting prior to that,

I'm fairly confident, at least in my

case, that maintenance costs are far

higher than 1 or 2% of the property

value per year. Yeah, I mean, I I bought

my first home a a while ago, and uh

hell, I I didn't think about the

gardening, and the pool pump gets

broken, and then

there's a crack in the the patio

outside, and then the heating system

breaks, and then

everything just seems to break.

>> And it's always breaking. It's always

breaking. Every time I go back there,

which is it's in a different country,

I'm the first week I'm just spent

looking at the things that have broken

since I was last year. Like making a

list of the new expenses, and it's never

cheap. No. And if I was renting, that

wouldn't be my problem. No. There's also

like another cost here which we don't

talk about, which is like the time you

waste

on the maintenance. Like when we think

of maintenance cost, I imagine people

are thinking about the fees to fix

things, but actually the time I spend

having phone calls and speaking to

people, for me is is worth a lot more

than just the costs.

But anyway, yeah, maintenance cost.

Yeah, the coordination is huge, and you

could outsource that, but that would be

expensive, and

depending on how valuable your time is,

it could make sense to outsource it. But

I I agree with you. I do the same thing.

I spend time on the phone finding which

contractor is going to come in and fix

this thing.

And then you have to wait for them, and

then maybe they're late.

Yeah.

So, that's maintenance costs.

We have emergency cost here, which is

really uh a subset of maintenance costs.

So, you can have big things, like the

roof needs to be redone, or the

foundation cracks, whatever. Those can

be very significant. And one of the

challenges with those types of big costs

is that you kind of have to have

liquidity available to fund them.

And that means that you have to have

cash sitting somewhere, or at least some

liquid assets sitting somewhere. So,

probably not invested in the stock

market, which also has an implied cost

to it.

Which is more opportunity cost, right?

>> More more opportunity cost, exactly. And

then this one's this one's interesting.

And And this is one that I don't think I

appreciated until I owned my own home,

which is renovation spending.

We talked on maintenance. When you fix

something in your house,

you don't just fix it to get it back to

the baseline level that it was at

before. Yeah.

>> You make it a little bit nicer. You're

right. I never did that when I was

renting. So, the side-by-side. So, you

run the side-by-side comparison.

You account for all of those

unrecoverable costs that the owner has.

You account for the renter investing in

the stock market and investing the cost

difference, the cash flow cost

difference between renting and owning

each month or or whatever frequency.

And what you'll find, and I've done this

with projections, so looking at expected

stock returns and expected real estate

appreciation, you can very easily show

that there is an equivalence.

There is a level of rent

where you are indifferent between

renting and owning. I did a video years

ago that has millions of views now,

where I I came up with this idea called

the 5% rule.

So, I took some of those costs. I took

property taxes, maintenance costs, and

the cost of capital, which is the the

opportunity cost and the cost of of

borrowing.

I wrapped all that up and said, "We've

got roughly 1% for property taxes,

roughly 1% for maintenance costs, which

is probably way too low as we just

talked about." And I said 3% for

opportunity cost, which I think is also

on the on the low end.

And you put all that together and you

get 5%. So, I said, "Okay, if you divide

the price of a home by 5% and then

divide that number by by 12, you will

get the monthly rent that has equivalent

that is equivalent to the unrecoverable

cost of owning that home."

Okay, so let's do that.

So, I'm thinking of buying a $300,000

house.

What what's the math that I need to do

to fit figure out if it's better to

rent? Multiply by 5%. And then divide by

by by divide that by 12.

Divide it by 12. Okay. You're brave. I

usually have a rule to never do math

live on a podcast.

>> edit, so just

>> [laughter]

>> Okay, the result is 1,250.

There you go. 1,250 is the equivalent

rent where you're roughly break even

between renting and owning. So, if I

could rent for 1,250 instead,

>> or less, or less, I should rent.

Renting is a better financial decision.

So, this is an important part of this

topic. We can show financial

equivalence. And then just that is

important. Like, we can show that there

is financial equivalence between renting

and owning. I've done more

uh robust versions of of this analysis

since then. We have PWL has a calculator

on our website where you can see the the

break even by putting specific numbers

in instead of just doing the rough rule

of thumb,

cuz things will change it. For example,

if your asset allocation is more

conservative or more aggressive, that

opportunity cost number can be

different.

If you're a taxable investor, meaning

that you're taxed on your investment

gains by investing in the stock market

or the bond market, your opportunity

cost decreases because the after-tax

expected return on stocks and bonds

decreases relative to uh homeownership.

5% is a very rough rule of

rule of thumb. Do you think for the

average young person, let's say

someone's under 25 years old, they

should, and they're thinking about

building their wealth over the long

term, do you think they should buy be

buying a house

as an investment, or should they be

doing something else? I think for young

people it's really tough, and it's tough

for a couple reasons. One is because

home prices are high. You have to save

up a lot of money to buy a house.

Another one is that it can limit your

mobility. We've seen in in Toronto, in

Canada, where I'm from,

uh prices, condo prices in particular,

have plummeted. They've fallen off of a

cliff. If you bought a condo in Toronto

and you get a job offer somewhere

outside of Canada,

what are you going to do with that condo

that's that's at a big loss? Mhm.

>> You're kind of stuck. Yeah. Or you're

have to try to rent it out, and now

you've got this this just difficult

situation to deal with. And plus there

are big transaction costs if you're if

you're selling a place. So, for young

people, I do think that homeownership

can be tricky because it can limit your

mobility,

your your ability to go and find maybe

higher-paying work. It introduces a risk

that you probably don't need in your

life because you may end up moving

somewhere else.

And then people often move up where they

want a condo today, but they're going to

want a house later. For my family, I I

met my wife, I was renting a place. The

first place we met in, the second place,

the third place, and a fourth place.

We're at the four different places as we

were having our family. We have four

kids. And so, our needs were changing

over time. We needed a bigger a bigger

condo, and then we had a townhouse, then

we had a house. Uh but we just

the lease ended and we gave notice and

we left. We found a better rental that

was more suitable for our needs. If we

had been homeowners, the amount we would

have paid in transaction costs to do

that would have been insane. Or we would

have had to buy the house that we were

going to have forever much earlier,

which would have introduced significant

opportunity costs. That's one of those

things that's just impossible to measure

in because it's so intangible, but like

the psychology of feeling like you can't

easily move.

And I see this a lot actually with

people that apply for jobs in our

company is

in the interview process they'll say,

"Well, I've just bought a house in

insert city."

And you can see this that sort of

psychology is is um holding them back

from taking an opportunity because

they've made a an investment in a

particular city.

And so, they might lose, as you say,

like an opportunity in New York or LA or

London because

mentally they feel committed to a place.

Yeah. Now, the flip side of that is that

if you're really sure that you wanted to

stay in one place,

one of the best ways to accomplish that

is by Who can be sure?

>> Yeah, you can't. But if if someone was

really sure, maybe someone has maybe

like me. I have four kids, they're all

in the same school. It's very unlikely

that we would move. The other big

mistake I think I made is I bought a

holiday home.

That was a terrible Well,

I shouldn't say terrible idea, but kind

of a terrible idea. In part because of

the same reason, in part because it

means you only go you only go on holiday

to one place.

>> [laughter]

>> Which is like defeats the point of a

holiday. Yeah. And it's I have not done

that, and the main reason is the mental

overhead. I don't like

having to think about one

property. Mhm.

>> [clears throat]

>> I can't imagine having to think about a

second one

that I'm not at.

>> That's a dumb idea. I don't know why I

did that.

I don't know why I did it, especially

when you're like young. It's like

the whole point is you can still walk up

mountains and do things. You don't want

to be sitting in a in the same house at

>> Yeah.

Are homeowners happier than renters?

Mhm.

Depends how you slice the data.

If you control for property types and

neighborhoods and all that kind of

stuff, no,

they're not. If you don't control for

those things, I think owned homes do

tend to be a little bit nicer and and

better maintained. They do tend to be in

better neighborhoods. So, uncontrolled,

renters are a little bit less happy.

There's a There's multiple studies on

this. Statistics Canada has a really

good one that does exactly that. They

have controlled and uncontrolled life

satisfaction differences for renters and

owners. If you're a professional who is

thinking about buying a house in a nice

neighborhood or renting a nice house in

a nice neighborhood,

it's unlikely that you'll be happier in

either case.

If you are forced to be a renter in a

not very nice neighborhood because all

you can afford, you may be less happy,

but it's not necessarily the renting

that's making you less happy. Is there

any particular group of people that you

think should be buying a house? Yeah, so

people who are very risk-averse, people

who want to stay in one place for a very

long time, because they have a family or

something.

>> Yep. Yeah. And you don't want to be

priced out of of of the market that you

live in. This did happen in in some

cities in Canada in recent history. It's

now reversed,

but there were people who were getting

priced out of their market. They've been

renters for a long time, and rents went

up so quickly that they they just

couldn't keep pace. And it depends on

your rental market. Some rental markets

are controlled where that's less of an

issue. So, you do have to think about

things like that. But yeah, if you want

to stay in one place, owning your home

is is the way to do that. But it's a

double-edged sword because if you

realize you want to leave,

you might be

you might be stuck. Uh and then the

other big one for who should own a home

is it a taxable investors with with high

tax rates. And again, that comes back to

the opportunity cost, where if you're

paying a lot of tax on your investments,

whereas real estate tends to be tax

preferred. In Canada, gains on your

primary residence are tax free.

US has a I believe an amount. And so,

that's that's another thing to think

about, where the opportunity cost

changes depending on your specific tax

situation. When we have these

conversations about buying a house or

not buying a house, one of the things I

see a lot in the comment section is

people um sharing their case studies of

them buying a house 30 years ago, and

now it went from

being worth $100,000 to $600,000.

And they're they're asserting that

that's evidence that it's a good idea.

You probably see this a lot.

>> is this is the thing. This is the

example. Uh and then everyone has the

family member that bought a house for

$70,000 and sold it for a million. I'm

just going to read you the top four

comments, and I'd like to get your

response on them. Now, the first one is,

"The not buying a house does not work in

the UK as 90% of rents are higher than a

mortgage cost. Also, if you want to

start a family, you need a stable place

to raise your children.

And with renting, you can be kicked out

within a few months' notice, and your

whole life could be turned upside down."

I personally think there are ways around

that, and I as I mentioned earlier, I

did rent for 6 years of my life with a

wife and an increasing number of kids.

The two things that I always made sure

to do were to rent from professional

landlords.

We did have one experience renting from

a a sort of mom-and-pop person who had

bought a condo and rented it out.

And that that wasn't great. But after

that we we were very careful about

vetting our landlords and only renting

from professionals. And then the other

thing that we did, which addresses at

least in Canada, addresses one of the

other points there, is we would sign

long leases.

If we want to stay in a house for a few

years, we would sign a multi-year lease.

And landlords do tend to to like that.

The other point that was was in there

that I think is really important is that

rents are higher than mortgage payments.

I think this is one of the biggest

mistakes that people make when they're

making the rent versus own comparison is

they'll say, this is my mortgage

payment, this is my rent. If the

mortgage payment is lower,

owning must be better.

But that's not the case. As we talked

about a minute ago, you have property

taxes, maintenance costs, potential

renovation spending that you wouldn't do

otherwise, and the opportunity cost of

of capital. When you add all that up,

the cost of owning a home is far more

than the mortgage payment.

This guy here said, I bought a house,

it's the best thing I ever did. It's

launched my mindset in new directions.

Remember that having your own space has

profound psychological impact and can be

life-changing for some of us

that want to live in a healthy

environment.

What do you make of that point? If it

have profound psychological impact.

>> If someone believes that it does, and

they've really taken the time to reflect

on their life and has decided that yes,

it it is in fact true that it has a had

a profound psychological impact, of

course that person should own a home.

Of course they should. Is it

Is it true for everybody?

I don't think so. Don said, my

experience, I purchased a house in 2013

with 20% down payment deposit. My total

payment including taxes, insurance, HOA

home owners insurance?

>> Yeah, yeah. insurance. Um is $1,800

a month. As of today, the exact same

house is renting for $4,000. The

property value has also gone up 3x. I'm

glad I bought my house.

Yes. So there are cases where

it a real estate allows you to use

leverage very easily as as Don

mentioned.

And if you end up buying in a market

that goes up a lot in a short period of

time, it can be really really good.

However, and this is what we've seen in

Canada more recently, it hasn't touched

other markets yet, although of course

the US has had their own declines and so

have other countries, but Canada is

right now in one of the biggest real

estate price drawdowns, when you adjust

for inflation, going back to 1975.

And so if you had bought, yes, 7 years

ago,

and then, well, and then looked at the

price in 2022, you'd think, wow, I'm a

genius. Of course everybody should buy.

But if you had bought in, I think it's

2021 was the was the kind of peak, and

you look at it today, you're thinking

like, wow, I've ruined my life.

>> [laughter]

>> So yes, there are examples like that,

for sure. But that that is not what

people should expect every time that

they purchase a home.

So are you saying that the future is not

going to be as

like as the past? Uh for this I know the

Canadian market best, but I think these

it generalizes outside of Canada. Where

we've seen record decreasing interest

rates. So that's that's changed a little

bit now, but for a period of time we had

interest rates going down down down. In

Canada we had a ton of immigration. I

have no problem with

immigrants, uh but we had levels of

immigration that were just not

compatible with the amount of housing

that we had in in Canada, which was

contributing to prices going

up. We we have have housing supply just

not growing uh quickly enough, which are

all things that Canada is addressing

now, but all that causes price cause

prices to go crazy, which is I think why

they've come down in such an extreme

way. So I'm not I'm not saying

necessarily that we're never going to

see high house prices again or house

prices going up at an extreme rate

again, but in Canada at least, that has

now normalized or at least started to

normalize. I don't think it's reasonable

to expect stock-like returns from real

estate forever, even though we did see

that for for some years.

So for most people then you think, if

their goal is to make money and they

care about mobility, being able to get

up and go if opportunity arises,

a better investment decision would

probably be just investing in an index

fund

which gives you exposure to the stock

market. Yeah, though I think the

mobility piece is key there, because

remember, just from a wealth

perspective, we can show that hey, these

are pretty close to equivalent. Mhm.

>> [clears throat]

>> But if mobility matters to you, yeah, I

think that that matters a lot. If you

have unique investment opportunities,

that that can be another reason where

your opportunity cost is really high.

Like I had an opportunity to buy equity

in my company years ago,

and

if I had been a homeowner at the I think

I actually had just bought a house, and

I think I even had to reduce the amount

of equity I bought because our I think

our well pump broke like around the same

anyway, it was a whole thing.

>> isn't it?

>> But that's like there's opportunity cost

in the stock market, which is, you know,

call it 7% or whatever, but there's

other opportunity costs that can be a

lot higher like in that specific

situation.

And the next one there is number seven.

Yeah.

Missing tax planning opportunities.

This is something I think I think people

just don't think enough about,

but it's not terribly complex, but there

are some simple things that people can

do to minimize the amount of tax they're

playing paying. For most people, it's

just optimally using things like in

Canada we have the RRSP and the TFSA, in

the US it's the the Roth and traditional

IRA and and 401Ks. Uh using those things

optimally make a lot of sense. So then

the rest other types of tax planning

tend to get more country-specific. There

tend to be lots of things for

particularly for higher income people

that you can do to pay a little bit less

tax. And I think What about for lower

income people?

For lower income people, the government

accounts that are provided uh are

>> ISA in the UK?

>> Yeah, exactly. Those are probably the

best thing for people to be focusing on.

But even then, I don't like people are

often not using them optimally. One of

the things people don't talk about

enough is all the ways that rich people

do things to avoid paying tax.

They have like they hire people so that

they don't have to pay tax. I hear about

all these crazy stories of like I've

started this business on the side here

so I can get real estate license. And if

I get a real estate license, I don't

have to pay the same tax on this thing

here. And I move the money around here

and I flip it around there and then I

don't have to pay any tax. Most people

like the average people don't have any

loopholes that they can they jump

through. Yeah, it's true.

And even one of the crazy ones I learned

about when I got some money was that you

can take a loan against your stocks

and there's no tax on the loan.

So if I have a million dollars of

Facebook stock, I can go to a bank and

get 500k in cash

loaned against that stock without having

to sell it. And then on that 500k, I

have no tax to pay.

And I can just hold that Facebook stock.

When it goes up to 2 million, I can go

back to the bank and say, give me

another 500k. You could. But if it goes

down, you get margin called and you have

to come up with the cash to

Don't they just sell? Don't they just

sell the stock? They might, but then

you're selling after it's

come down. So it's not risk-free. But

yeah, that is a thing that people do.

I guess everybody could do that, right?

I mean most people could, if they

invested in the the S&P 500, they could

go and get a loan against that

investment. And that loan would be

tax-free. Yep, same same rules for

everybody. But I would still say that

you're you're taking a lot of risk by

borrowing money against risky assets

like that. Mhm.

Okay, so tax planning, there's nothing

else to cover there in terms of the

average person. Yeah, I don't think so.

But it is an important thing for people

to think about if thinking about what

mistakes might I be making in my

financial plan,

they should definitely be thinking about

are there tax planning opportunities

that that I'm I'm missing. How would

they find out?

It's a tough one. A a good CPA. What's a

CPA? Uh

uh an accountant. A good tax

professional should be able to identify

tax plan planning opportunities for you.

Good financial planners similarly should

be able to identify good tax planning

opportunities for your situation. But as

you said earlier, the reality is there

aren't that many things that people can

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saying absolutely stupid? All of these

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Who does need a financial advisor?

Probably a lot of people. But the

financial advice profession has a lot of

challenges.

We're chatting about the the sales

nature of the financial services

industry.

And I do think that's a big problem.

Because if someone's has Here's Ben say,

"Okay."

Ben said I should have a financial

advisor.

And they go to a bank or they go even to

some random firm,

there's a good chance that they're going

to be sold products they don't need.

And I don't have a solution for that.

Like that's a It's It's a difficult

situation when that is the state of the

financial advice industry. I guess to

get around that one might ask their

friends and family who does their

financial planning and then go with a

trusted referral.

Yeah. But people often trust people that

aren't giving them great advice. Like

it's just really It's really

problematic.

I I think a lot of people can benefit

from financial advice. It's just finding

the right person. And a lot of people

don't need financial advice because you

do pay fees for it. What's the next one?

Number eight. Yeah. Eight is It's

kind of a similar discussion to what we

just talked about, but it's it's missing

out on estate planning. What does that

mean?

Figuring out how your assets are going

to be distributed to the people that you

want them to or the entities that you

want them to

when you die.

This is an interesting one cuz nobody's

Well, most people aren't expecting to

die

anytime soon. Yeah. So, they haven't

really thought much about this.

Yeah. And you know, some might also say,

"Listen, I'm I'm not going to be here,

so

why should I care?"

Especially people that I guess That's

the my mindset of someone that doesn't

have kids, but Yeah. It can cause a lot

of problems. If you don't think through

and plan for the way you want your

estate to be distributed, you can pay a

lot more tax than you otherwise would

have. And your estate can go to people

that you may not have wanted it to go

to. You can pay more tax.

If you don't have things set up

properly. And again, this is going to be

country specific. But yeah, there

there's cases where you would pay more

tax if things were not set up properly

than if they were. Do you think

everybody should write a will?

Everybody that has any dependents should

write a will. I've heard a an estate

planning lawyer joke that everybody has

a will.

But it's the government's default will,

which you may not actually agree with.

It's like prenups. Yeah, kind of like

that. Yeah. It's exactly like that. You

could say everybody should have a will

because it can help from having a big

mess for other people to clean up. But

for sure, if you have kids, if you have

dependents, I think having a will is

really important. And on that point of

prenups, number nine is about who you

marry.

Yeah, this is this is a tough one.

It's a tough one because

I mean, this is front of mind for me

because as you can see from these

photos, I just I just uh proposed to my

fiance.

>> Yeah. And um I mean, this is not the

ring, but cuz this is a bit extra. But

um That's awesome. Oh my god, they put

my face in the They didn't put my face

in the box. That's creepy. But yeah, so

why is this so important who you decide

to marry as it relates to how rich

you'll be or or won't be? Well, it's not

just how rich you'll be, it's how

satisfied you'll be

with your life and with your marriage.

Academic research has identified two

spending profiles that you can

categorize people into. One is

tightwads.

That's people who don't like to spend

money.

And one is spendthrifts. That's people

who do like to spend money. The names

are kind of funny, but that's just

That's what the research calls them.

And the crazy thing about this is that

tightwads and spendthrifts are more

likely to end up marrying each other

than to marrying someone who has the

same profile as them.

So, two A tightwad and a spendthrift are

more likely to get married than a

tightwad and a tightwad or a spendthrift

and a spendthrift. Why do you think that

is? The the research on this talks just

about kind of opposites attracting and

there may be some sort of thrill to the

to the differences

um initially.

But

tightwads and spendthrifts as they go

through their marriages do tend to be

less satisfied

in their marriages and have more marital

conflict around money.

And again, that's based on an academic

paper. Now, that's the reasons why the

marriage might not last, but in terms of

how it might impact your financial

success

If you really want to save, if you have

If you go through your goal-setting

exercise and your PERMA model

and you have have a vision for the life

that you want to live that requires

saving, and you have a spouse that wants

to spend a lot of money today

that can be very, very difficult. It can

make it a lot harder for you to achieve

your goals.

I don't think it's insurmountable. I

think a tightwad and a spendthrift can

work. I mean, it's not like all of them

end up getting divorced. But it does

require a different level of

coordination and communication and being

on the same page. Do you have to speak

to clients about this often?

I It It comes up a lot. We have lots of

clients who were single and end up

getting in relationships and then

getting married. And we have to all have

all kinds of conversations about

marriage contracts or prenups, um estate

planning. Do you think everybody should

get a prenup? Going back to what you

said earlier, where you said you you If

you don't write your own, the government

will give you theirs. Yeah. Which just

to simplify that

if you don't write your own prenup

then you are the default position is the

government will decide through the law

how your assets are divided at a time

when you get when you break up. Problem

is, people find prenups to be really

unromantic. That's right. And they also

think there's an implication that

we're assuming we're going to break up,

which is also not so sexy. Right. Do you

think people should get them?

If both partners are on the same page

and comfortable with it, it's not going

to cause a major rift. And if it does,

maybe that's a red flag. Do you know

what I mean? I wouldn't want to cause a

rift. Do you know what I mean? And it's

not to say that I'm just keeping all my

stuff and you're keeping yours. It's

just to say, "Let's agree now what would

happen in the like 50% probability that

this doesn't work out."

>> Yeah. We've seen both. We've seen

clients come up with very creative and

interesting

marriage contracts that have, you know,

specific formulas for how things are

going to work. And depending on how many

kids they have, it's you know, it's kind

of an interesting exercise. And in that

case, it was kind of fun. And they they

they were engaged in the process.

And it didn't cause an issue.

And we've also seen people who did not

have anything in place and have had

very bad divorce outcomes from a

financial perspective. Oh, I had a

friend go through a divorce recently.

And he's a very successful person. His

wife was there from the beginning. She

took looked after the family while he

was off gallivanting around the world

building his his businesses all over the

place. So, obviously she you know, they

She's contributed hugely to his success.

What I noticed though is

it's destroyed what could have otherwise

been a good relationship as they

separated. They now really, really hate

each other because lawyers have stood in

between both sides. Yeah. And basically

caused tension because that's their job.

They're going to get paid more. And her

lawyers are incentivized to squeeze

every single penny they can out of this

a separation. And so, I think he said

it'd been like six or seven years since

they decided to divorce. And he's still

in court arguing with lawyers

about how they separate. And it's just

ruined their relationship. They've got

two kids.

You just think, "Gosh, like if you had a

prenup, this would have been

quick and it could have saved the

relationship." Okay.

Anything else to say on this this point

of marriage incompatibility? The

academic research on this does have a a

short quiz. I don't know if we have it

kicking around anywhere here. I think

this is a It's called the tightwad and

spendthrift quiz developed by

researchers at Carnegie Mellon and the

University of Michigan. Yeah. This scale

measures the pain of paying, the

emotional distress some people feel when

spending money.

Uh and here's a quick DIY version of

that quiz. Question number one is you

see a high-quality coat on sale for

$100, which is usually $300. You need a

coat and you have the money. Do you buy

it? Answer A, no. $100 is still a lot of

money. I'll wait for a better deal. B,

yes, it's a great value. I need

something. C, yes, and I might buy a

scarf to match since I saved so much.

Which one are you? I mean, if I need the

coat, I'm B.

I think I'm C.

>> [laughter]

>> But actually, to be fair, I just don't

buy stuff, so I don't even know if I'd

buy it anyway. Question two.

You are at a restaurant with friends.

The bill is being split evenly, but you

ordered the cheapest item. How do you

feel?

A, physically pained. I'll likely

mention that I should pay less. B, a bit

annoyed, but I'll pay it to keep the

peace. Or C, fine. It all will even out

in the end.

I'm between B and C. Really? I I might I

might feel a little bit annoyed. Really?

But I wouldn't I wouldn't cause a fuss

about it. I'm C again. Fine, it'll even

out in the end.

Number three. Which statement describes

you best? A, I have trouble spending

money even on things I actually need. B,

I balance my spending and saving pretty

well. Or C, I often spend more than I

intended and regret it later.

I can be.

You said B, which is I balance my

spending and saving pretty well.

Um

I would say I'm C again.

But again, the caveat here is I actually

don't Hmm. I don't spend money on stuff

anymore. I don't buy stuff anymore.

>> [snorts]

>> But I can spend it on like ex-

travel and experiences and stuff. Yeah.

Last question. When you buy something

expensive, your primary emotion is A,

anxiety or regret. B, satisfaction in

the utility of the item. Or C,

excitement and a rush.

I think I'm B again.

I I reckon I'm B as well there.

So, scoring your results.

If you're mostly A's then you're a

tightwad. If you're mostly B's, you are

the unconflicted. And if you're mostly

C's, you are the spendthrift. So, I

guess with that, you you are a

unconflicted. You're in the middle. You

have a healthy relationship with money

where you can save when necessary, but

enjoy the fruits of your labor without

guilt. And I am a C, which is you feel

very little pain when spending. You

enjoy the moment, but you might struggle

with long-term saving goals or buyer's

remorse.

That's so true.

>> [laughter]

>> Everyone should do that at home. Okay,

that makes sense.

>> So, we we know that that tightwads and

spendthrifts are incompatible. I I do

think it's an interesting concept, like

how do you have that discussion with a

potential partner?

Or do you just observe it and kind of

infer? On on a date, you can say say to

your partner say, "Oh, there's this

great podcast on YouTube called The

Diary of a CEO. We should listen to it."

Then listen to this episode. They're

listening with you know right now if

this you've done this. And then just

play along. Play along with your

partner. Are you looking for your

partner to be the opposite then because

you said opposites attract? No. They

don't do well all the time.

Opposites end up together, but then have

conflict because of that. Oh, okay.

Yeah. Mm, interesting. [clears throat]

Yeah. I think if you're if you're a

tightwad,

being with the same is probably good. If

you're a spendthrift and you end up with

another spendthrift,

you'd be really careful about your like

finances. Yeah.

I don't think my partner's a

spendthrift. I think she's in the middle

with like you.

>> Yeah. Doesn't really care. Yeah. Which

is useful.

We we do have one more Okay. card in the

mistakes, which is under insuring

catastrophic risks.

And I think that's one, particularly for

people who are not currently financially

independent, that's really really

important. If if your household income

relies on your income

to maintain the lifestyle of the

household, it's really important to have

sufficient life insurance

where if you die, your human capital,

your ability to earn income in the

future is replaced by the insurance.

And also disability insurance, where if

you lose your ability to work, you have

insurance to replace that income. Do

many people think about this?

Probably not enough.

And it's cheap. Well, disability

insurance is not always cheap. Life

insurance is generally pretty cheap if

you're buying

low-cost term life insurance, which is

what most people need.

You made a video called the most

controversial paper in finance. Yeah.

What paper was that? That was a paper we

we didn't have it here, but that was a

paper on life cycle asset allocation.

What does that mean? So, it's answering

the question of

how should your mix of stocks and bonds

change throughout your lifestyle?

Conventional wisdom says that you should

start out riskier in stocks and then

move towards safer bonds as you get

older.

This paper took a huge amount of data.

They had data from 39 countries going

back as far as 1890, I believe. They

sampled from that large set of data to

simulate a million potential sort of

hypothetical lifetimes that you could

live through.

And then they asked the question of in

this simulated data,

which asset allocation gives the best

outcomes?

And they tested target date funds, which

increase the weight in bonds over time,

and those are a lot of people have those

through their retirement accounts.

So, it's just one fund and it starts out

when you're younger with more equities

and then transitions to bonds over time.

That's a target date fund.

They tested, I believe, a 60/40, 60%

stock, 40% bond asset allocation.

They might have been some other stuff in

there, too. They might have tested only

domestic stocks.

And what they find in this paper is that

the optimal portfolio from the

perspective of retirement consumption

utility and and and bequest utility,

What does that mean? It's like the

satisfaction you get from retirement

spending. Okay. Measured in a with a

formula so that it can be studied.

And then likewise for the amount of

money that you have left over at at

death.

They they measure the probability of

running out of money as well as a whole

bunch of different metrics they look at.

And they find that a 100% equity

portfolio

with

a big chunk in international stocks

is optimal.

It is a a 1/3 domestic, 2/3

international stocks. When you say

domestic, what does that mean? That's a

great question. So, the way they set up

domestic in the paper is that it it can