2924: Slam Dunk Financial Planning by Jesse Cramer of Best Interest Blog on Investment Portfolio Advice

[00:00:01] Dieser komplexe Finanzierungstalk ist ganz schön anstrengend. Ob ich mein Depot jemals angelegt krieg?

[00:00:06] Aber du hast doch schon ein Depot.

[00:00:08] Äh, nee.

[00:00:09] Doch, du hast das Vodafone Gigadepot.

[00:00:11] Ach, stimmt! Und da hab ich ja selbst in der Hand, wie groß mein Depot ist.

[00:00:15] Jetzt mit dem Vodafone Gigadepot unverbrauchtes Datenvolumen in den nächsten Monat mitnehmen.

[00:00:19] Go on im zuverlässigen 5G-Netz von Vodafone. Vodafone. Together we can.

[00:00:26] Brauchen wir wirklich noch einen Computer? Alle wahrscheinlich nicht.

[00:00:29] Aber wenn du Musik mit der Power eines Neuralprozessors neu erfindest, oder unterwegs Migrationsmuster mit einem ganztägigen Akku analysierst,

[00:00:36] oder deine Ideen mit dem KI-gesteuerten Co-Creator zum Leben erwächst, dann kann ein Co-Pilot-Plus-PC einen Unterschied machen.

[00:00:42] Nicht alle brauchen einen leistungsstärkeren KI-Computer.

[00:00:44] Aber wenn du versuchst, die Welt zu verändern, auch wenn es nur deine eigene ist, haben wir einen für dich entwickelt.

[00:00:49] Microsoft Co-Pilot-Plus-PC mit Snapdragon. Die bisher schnellsten und intelligentesten Windows-PCs.

[00:00:54] Die Akkulaufzeit variiert je nach Nutzung und Einstellungen.

[00:00:56] Das ist Optimal Finance Daily.

[00:00:59] Slam Dunk Financial Planning.

[00:01:01] By Jesse Kramer of BestInterest.blog.

[00:01:04] Und ich bin deine host und Personal Finance Enthusiast, Diana Merriam.

[00:01:08] Wir werden jetzt gleich in die Woche zu starten.

[00:01:12] Als wir optimieren Ihre Leben.

[00:01:18] Slam Dunk Financial Planning.

[00:01:20] By Jesse Kramer of BestInterest.blog.

[00:01:24] I don't watch many live sports these days.

[00:01:27] Life is busy.

[00:01:29] But I've caught a few quarters of NBA playoff basketball, and I'll watch game replays while sipping morning coffee.

[00:01:36] If you're unaware, the NBA has been revolutionized by moneyball ideas over the past decade.

[00:01:42] The main new idea affects three-point shots.

[00:01:46] The ratio of attempted three-point shots has increased dramatically in recent years.

[00:01:51] Yet, despite the league's new widespread emphasis on three-point shots, one basketball maxim remains true.

[00:02:00] A wide-open layup or slam dunk is always worth taking.

[00:02:04] A guaranteed two points is better than a possible three points.

[00:02:10] Reducing your range of outcomes has many benefits.

[00:02:13] In this particular basketball scenario, simple math supports it.

[00:02:19] 99% of two points, a near-guaranteed dunk, is better than approximately 40% of three points, the approximate make percentage of three-point shots.

[00:02:30] There are ancillary benefits too.

[00:02:33] A reduced range of outcomes is simply more dependable and thus easier to plan for.

[00:02:38] Smart financial planning reduces the range of outcomes in your life, specifically by decreasing the odds of financial failure.

[00:02:47] The more I study successful financial plans, the more true this idea becomes.

[00:02:52] A good financial plan will identify possible failure mechanisms, such as risks and abate them,

[00:03:01] provide options for short- and long-term flexibility, that is, ways to go around future obstacles,

[00:03:09] and increase the probability that you reach your unique goals, even if decreasing the odds that you die filthy rich.

[00:03:19] Devil's Advocate

[00:03:21] What I don't mean

[00:03:22] I think the devil's advocate would hear those words and say,

[00:03:27] Jesse, just buy a 30-year bond.

[00:03:29] Guaranteed 4.6% rate.

[00:03:32] There's your outcome.

[00:03:33] No variance to it whatsoever.

[00:03:35] Or perhaps worse.

[00:03:37] Jesse, buy an indexed life annuity.

[00:03:41] Wait 10 years, then start collecting your guaranteed 4% annual returns for life.

[00:03:47] No variance.

[00:03:48] It's true.

[00:03:50] Both investment ideas have a singular range of outcomes.

[00:03:53] And I just touted that as a good thing.

[00:03:56] But to be clear, I believe those specific outcomes are pretty bad.

[00:04:02] Long-duration bonds expose us to a terrible amount of inflation risk.

[00:04:08] Annuities are almost always a complete racket.

[00:04:12] I'm not seeking guarantees at any cost.

[00:04:15] I want to be very wary of the costs.

[00:04:18] Some examples.

[00:04:20] What exactly do I mean?

[00:04:23] Life insurance protects against catastrophic failure mechanisms.

[00:04:27] That you die and leave your family's finances in a lurch.

[00:04:30] I want to eradicate that outcome.

[00:04:34] Blow it off the map.

[00:04:35] While whole life insurance and similar ideas are frequently atrocious products.

[00:04:41] A good term life policy is essential if loved ones depend on your income.

[00:04:46] A diversified portfolio is another way to narrow the range of potential outcomes.

[00:04:52] It will always underperform some of its constituent parts and always outperform others.

[00:04:58] An equal-weighted portfolio of all the asset classes never wins.

[00:05:03] But it never loses.

[00:05:05] It does reduce the range of outcomes, providing a reliable level of investment returns.

[00:05:12] It provides an expectation, a foundation from which you can build a sturdy financial plan.

[00:05:18] But Jesse, stocks outperform bonds over the long run.

[00:05:22] Yes, it's true.

[00:05:24] On average, stocks do outperform bonds.

[00:05:26] But an important adage in financial planning is to never forget the six-foot-tall person

[00:05:32] who drowned crossing the stream that was five feet deep on average.

[00:05:36] Or put it another way, a long-term average can gloss over nasty short-term blips.

[00:05:43] However, the short-term volatility of stocks can cause our human wiring to short-circuit.

[00:05:49] When applied to portfolio management,

[00:05:51] that simple human fallacy is one of Danny Kamen's most prolific ideas.

[00:05:57] Another way to reduce your range of outcomes is to give yourself more time.

[00:06:02] Perhaps my favorite Jack Bogle quote is that

[00:06:05] reversion to the mean is the iron law of investing.

[00:06:09] The only way to experience that reversion to the mean is to buy and hold a stable allocation of assets

[00:06:17] for a long period of time.

[00:06:19] We've seen 10-year periods where the S&P has returned more than 20% per year.

[00:06:25] We've also seen 10-year periods of decidedly negative S&P returns.

[00:06:30] That's a wide range of outcomes.

[00:06:33] But over 30-year periods, we see an amazing reversion to the mean.

[00:06:39] Everything ends up in the 5-8% range.

[00:06:44] Simply put, time allows us to reduce our range of outcomes.

[00:06:49] Personally, I think humility and contentedness are beneficial too.

[00:06:54] A good retirement plan would lead a retiree to say,

[00:06:57] There's a 60% chance I live the exact lifestyle I want in retirement.

[00:07:03] There's a 30% chance my lifestyle is slightly better than I expected.

[00:07:07] There's a 10% chance my lifestyle is slightly worse than I expected.

[00:07:12] But no matter what, all three scenarios are acceptable to me.

[00:07:16] So there's a 100% chance I'll enjoy life throughout my retirement.

[00:07:21] That's a reasonable range of outcomes.

[00:07:23] It takes humility and contentedness to accept that.

[00:07:28] Imagine I took the previous scenario and poured some gas on the portfolio,

[00:07:32] such that the retiree said,

[00:07:35] There's a 60% chance I live the exact lifestyle I want in retirement.

[00:07:39] There's a 30% chance my lifestyle is way better than I expected.

[00:07:44] And there's a 10% chance my lifestyle is way worse than I expected.

[00:07:50] Would you pursue way better at the risk of way worse?

[00:07:55] Do you need to take that risk?

[00:07:57] To each their own.

[00:07:59] But I posit,

[00:08:00] No way, Jose.

[00:08:01] I don't want to intentionally widen my range of outcomes in any way.

[00:08:06] Why risk a lifestyle that is perfectly tolerable for one that is intolerable?

[00:08:12] As Uncle Warren says about taking unnecessary risk,

[00:08:16] Why risk having something you have and need for something you don't have and don't need?

[00:08:22] If you can build a reasonable expectation of long-term returns, that is, a narrow range of investment outcomes,

[00:08:30] you can design a specific future state.

[00:08:33] You can plan to spend, save, gift, grow, etc. in a precise way.

[00:08:39] That sounds pretty good to me.

[00:08:40] Flexibility helps too.

[00:09:12] I want to spend, save, etc. in a precise way.

[00:09:17] I want your personal finances to be high-scoring, don't get me wrong.

[00:09:24] But I don't want stomach-churning uncertainty.

[00:09:26] I want dependability.

[00:09:28] I want an easy slam dunk.

[00:09:35] You just listened to the post titled,

[00:09:37] Slam Dunk Financial Planning, by Jesse Kramer of bestinterest.blog.

[00:09:42] And I'll be right back with my commentary.

[00:09:45] Buy low, sell high.

[00:09:47] It's easy to say, hard to do.

[00:09:50] For example, high interest rates are crushing the real estate market right now.

[00:09:55] Demand is dropping and prices are falling,

[00:09:57] even for many of the best assets.

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[00:11:17] Jessie did such a great job of dispelling some misconceptions that many people have about

[00:11:23] investing.

[00:11:24] It's not about beating the market.

[00:11:26] It isn't complicated.

[00:11:28] You aren't going to lose all of your money.

[00:11:31] And it's not as risky as that whole life insurance salesperson would lead you to believe.

[00:11:36] But investing in the stock market does tend to bring on emotions of fear and greed.

[00:11:41] We're afraid it's too risky.

[00:11:43] Or our greed causes us to take on unnecessary risk in an effort to beat the market.

[00:11:50] If you take this simple approach of matching the market versus trying to beat it,

[00:11:55] you buy all the stocks through index funds versus picking stocks,

[00:11:59] and you focus on the long term versus gambling with a get-rich-quick strategy,

[00:12:04] you are pretty much guaranteed to win with investing in the stock market.

[00:12:10] I love the quote in today's article from Warren Buffett, who said,

[00:12:14] Why risk something you have and need for something you don't have and don't need?

[00:12:20] It reminds me of what my friend Frank Vasquez over on the Risk Parity Radio podcast says

[00:12:26] about financial goals.

[00:12:28] He says that when you win the game of money,

[00:12:31] meaning when you reach financial independence and have enough money to stop working,

[00:12:35] there is little utility in continuing to play the game.

[00:12:39] Greed is a tricky emotion,

[00:12:41] and our societal conditioning tells us that more is always better.

[00:12:47] However, I've come to realize that enough money is actually better than more money,

[00:12:53] because it allows you to put the entire pursuit to rest

[00:12:57] and focus on what really matters in life.

[00:13:00] And that's a wrap for another Monday show.

[00:13:03] Have a great rest of your day and start to your week.

[00:13:05] And I'll be back tomorrow as usual, where your optimal life awaits.