When it comes to investing, historical returns show us that, for the most part, a buy-and-hold strategy will always outperform an active one.
This means that, once you have a concrete investing plan in place, you should stick with it through thick and thin — no matter what the market does on any given day.
But that doesn’t mean you can randomly buy stocks and bonds and expect things to go your way.
Well, you can, I guess…but you will likely regret it for years to come if you do.
In today’s podcast, I interviewed Peter Lazaroff, financial expert and author of Making Money Simple: The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever to find out the biggest mistakes even the most well-intentioned investors make with their portfolios over time.
His answers may surprise you, so you don’t want to miss out. Listen to today’s podcast episode by clicking on the links below:
How to Listen to Today’s Episode
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- Peter Lazaroff
- Planet Money: How Much Does a Cow Weigh [PODCAST]
- How Can a Jar of Jelly Beans Teach Students About the Stock Market?
Want to Retire? Avoid These Three Tragic Investing Mistakes
Taylor Schulte: Hey everyone. Quick announcement before we start the show. My guest today is Peter Lazaroff and he's the author of a new book called Making Money Simple. And thanks to Peter, I have five signed copies of the book and I'd love to give them away.
So if you want a copy, all you have to do is shoot me an email at email@example.com with the subject line. I want Peter's book and I'll send it out to you. There's no catch. I'm not adding you to the email list or anything, I just want to help Peter and help get good information in people's hands. Alright, let's get into it.
Peter Lazaroff: People are overly active, particularly if they're not using an advisor, but if they are using an advisor and they're paying them every quarter, they want to see a transaction every quarter like that's getting their money's worth. Whereas 99 times out of a hundred, the best action in investing is to do nothing.
Taylor Schulte: Welcome to the Stay Wealthy podcast. I'm your host Taylor Schulte, and today I have a really special guest for you. I'm joined by Peter Lazaroff, who is the Co CIO of Plan Corp, a $4 billion investment advisory firm out in St. Louis. Peter's also the author of a new book called Making Money Simple and today he's going to share with us three common mistakes that he sees people make when investing for retirement.
Peter is a C-F-A C-F-P. He writes for the Wall Street Journal and Forbes. You'll see him on CNBC from time to time. I think you're quickly going to recognize that Peter is just an all-around rockstar and he's a wealth of information.
For all the links, resources and show notes for this episode, you can go to youstaywealthy.com/43. Alright, let's go make money simple. Welcome Peter Lazaroff to the Stay Wealthy Podcast. Thank you for joining me.
Peter Lazaroff: Hey Taylor, how's it going?
Taylor Schulte: I'm doing well, Peter, you've got a new book out called Making Money Simple, and in the book you share this story, which I've heard this story dozens of times, but every time I hear it it still almost sounds unbelievable. But you share this story about the wisdom of crowds and since today we're talking about common investment mistakes and how to think about building a portfolio for retirement.
I'd love to just lay the foundation for our conversation today by having you share that story with us and then maybe just talk about why it's so important.
Peter Lazaroff: Sure. I think my first experience with the collective knowledge of financial markets was really a concept that was presented to me through jelly beans, but the one that I really highlight in the book is a study that was replicated originally done by Francis Galton, who's a mathematician, probably more famous for being the cousin of Charles Darwin.
But he had run an experiment back in 1906 where he marched a cow around a fair and asked a bunch of butchers, how much do you think this cow weighs? And when he averaged up all the guesses, he found that the butcher's average was pretty darn close to the actual weight.
And he said, well, that's interesting. I wonder what happens if I ask people who aren't around cattle all day. And so he marched the cow around the fair again and found that the people when he averaged up the guesses of those who were not necessarily meat experts was also incredibly close.
And so Planet Money a while back, they had done something, I think it was in 2015 where they just put a picture of a female cow up on the internet and said, Hey, guess how much Penelope weighs? And they got a little over 17,000 responses and the average guess was, I believe 1,287 pounds. The actual weight of the cow was 1,355 pounds.
So the crowd's guess was only off by 5%. I'd mentioned the jellybeans because that's when you see done a lot and everybody's gone and guessed the number of jellybeans in a jar and then you win the whole jar of jellybeans. But what happens when you get a large enough group of diverse independent thinking people making guesses about the value or the size or the amount of something?
There are two pieces in every guess. One piece is information and one piece is error. And when you're thinking about guessing the size of a cow's weight in the original picture, there's a guy standing next to a cow.
And so you might say, well, that cow looks 10 times size as weight, or maybe you know that the average cow weighs 1500 pounds, but it's a female, so you guess that it's less. Or maybe you cheat and you go to Google and say, how much does the cow weigh?
All those strategies are different and they're all incorporating information, but they're all a little imperfect in that they have error. And what happens is when you get a large enough group of diverse independent opinions is that the errors tend to cancel themselves out. And what you're left with is information.
Now in the global stock market where there are over 75 million trades per day for a little under half a trillion dollars every single day, you have investment firms collectively pouring billions of dollars into their research budgets.
You have trading floors that are littered with PhDs and CFH charter holders. And generally what's happening is you're getting a lot of people estimating what the future cash flows of a security are going to be. And as more and more people guess, there are flaws in their process, but the errors tend to cancel themselves out.
And what you're left with is information and prices have an abundance of information and it's one of the reasons that passive investing or low-cost investing has been a winner for such a long period of time. And it's also the reason that it is really, really, really hard to beat the market.
Taylor Schulte: You summarize that story really well and every time I hear it I'm like, how is that even possible? Have you ever done the jellybean example live in person before?
Peter Lazaroff: I was at an Easter party where someone was getting guesses for a jellybean. I'm like, Hey, can I have everyone's guesses when they're done? And you looked at me with the strangest look.
I would love to get an animal, so I'm from St. Louis and tomorrow will be the home opener in St. Louis for the Cardinals and they'll march the Clydesdales around. And I would love to get a Clydesdale at a client event and have people guess the weight of a Clydesdale. I've never personally replicated it, but I've certainly seen other financial advisor events it be done.
And then you see variations like this cow study be done, but really quite incredible how that works out when people don't necessarily know anything about the subject matter that they're estimating.
Taylor Schulte: It's wild. And then the example of Planet Money just using a picture is even crazier. So I have a few questions around that story, but let's just back up really quickly and just maybe briefly tell us a little bit about you, your role at Plan Corp, and then I know there's a new project called Bright Plan and you can maybe talk a little bit about that.
Peter Lazaroff: Sure. So I'm the Co-Chief Investment Officer at Plan Corp, which is a national RIA managing a little over 4 billion in client assets. And I was drawn to Plan Corp. I've been here four years. I was drawn because it was started as a fee-only planning firm in 1983.
So well before fee-only planning firms were the normal vernacular of financial advisors at least. And for the first decade or so, the firm, we didn't even invest money. I mean we were truly doing just financial planning.
So it's in the blood, the culture of the firm. One of the big exciting projects that we helped with launched in November of 2017, and that's Bright Plan. Bright Plan is a digital financial wellness platform that builds customized financial plans and goals-based investment portfolios. So if you are familiar with a lot of the Robo-advisors, we'd like to think we're not quite like a robo-advisor.
Really more of a plan first, then invest as opposed to just investor money. There are customized financial plans and we try to take the 35 plus years of financial planning and investment expertise that Plan Corp has and digitize that so that you can get fiduciary advice at a very, very low cost.
So the account minimum is only $500. Getting access to a good advisor used to require a million dollars and there are certainly more and more options. We're just trying to give the broader public another option and kind of focusing on this financial wellness angle. It's a huge issue.
It kills productivity in the workplace, it keeps people up at night, but when you just allow people to use simple tools to improve their financial situation, so much can change for someone's mental health, for their physical health, for their productivity at work, and then of course their finances.
Taylor Schulte: And at Bright Plan, you also serve as the CIO, is that correct?
Peter Lazaroff: That's correct. So I'm one of a handful of employees at Plan Corp that are duly employed at Bright Plan, which is a totally separate RIA, which is a registered investment advisor. Both firms have their own ADV part twos and Bright Plan.
I think one of the cool things was the first firm digital firm to be CFI certified. So CFI is the Center for Fiduciary Excellence and CEX, the acronym is C-E-F-E-X is a designation. It's been around for a little over a decade. Plan Corp was one of the first firms to get it, I believe 12 years ago and one of the few firms to have it more than 10 years.
But we were really excited we went through what CFI does is it's an independent third party that comes in and looks at your processes and the way that you're delivering advice. And it's not saying whether advice is good or bad, but is it delivered in a fair manner are conflicts disclosed?
Because generally speaking, the only time someone gets audited is if the SEC comes in. But by having a third party come in each and every year to both Plan Corp and Bright Plan giving their approval that we are trying to follow the fiduciary process as it was designed to be.
Taylor Schulte: So as the CIO of Bright Plan Co CIO of Plan Corp, which is like you said, a 4 billion investment advisory firm, you guys certainly know what you're doing over there. I want to better understand how that story you shared in the beginning about guessing the cow's weight and the wisdom of crowds.
How does that story shape your approach or maybe defend your approach to how you guys or maybe you as ACIO invest money for your clients?
Peter Lazaroff: I think as I think about building a portfolio, constructing a portfolio, the most important thing to me from that story is that the competition's really hard. And so I don't think that picking and choosing which areas of the market are going to do well in which periods is a useful tactic for investment success.
Certainly following a rules-based approach rather than something that's forecasting the future is really important because when you're competing against the collective of all investors, well that's a pretty tough competitor.
I mean, if you were to be playing tennis against somebody, it's one thing to be playing one person across the court, but this is playing someone who has the world's best serve, the world's best backhand, the world's best forehand, the world's best net game on this giant Frankenstein of a player. And you wouldn't win a point.
And so generally, I think when I think about portfolio construction, we know that we don't want to be traditional active managers. We take a factor approach. I tell people all the time, indexing and factor investing are like one in one in my book.
They're both tremendous approaches because they're low-cost because they do not predict the future. On the equity side, they have low turnover. And from there it's really just trying to build portfolios that people can stick with for as long as humanly possible.
A lot of investment success in my mind comes down to minimizing mistakes and getting the heck out of the way of compound interest. And when you build a portfolio, if you recognize there is no such thing as a perfect portfolio, there's only the one you can stick with for the longest period of time.
And so as we manage 4 billion in assets at Plan Corp as well as the digital portfolios at Bright Plan, you have to think about what is the investment experience. It's not just the numbers. You have to think of the optics of what that day-to-day or quarter-to-quarter, year-to-year is going to look like because I could put you in a strategy that doesn't look anything like the index and it moves all over the place.
And sure in 30 years the returns might be great, but would you have bailed after a handful of years of underperforming an index? So those are some of the considerations that go into it. I think what's amazing about the environment we live in now is that information is so readily available and there are so many bright minds freely sharing their thoughts on theory, on implementation.
There's a lot of collaboration across firms and advisors that I think really all goes to benefit the end investor. It's really an exciting time to be part of the profession.
Taylor Schulte: Well, since you mentioned starting the profession, my next question was since you've started and maybe even just started at Plan Corp, I'm personally curious if anything about your investment philosophy has dramatically changed, and if so, what caused that to change?
Peter Lazaroff: I think that the biggest thing that I have embraced more so than ever before is simplicity. I own a single mutual fund that's globally diversified, low-cost, and I do that. I had a 401K balance after spending eight years at my prior firm and I was rolling it over out of the firm's plan. I could have rolled it into Plan Corps's plan, but I wanted it out on my own to have some flexibility.
And ultimately I chose to just use a single fund, a hundred percent stocks. I'm 34 years old, I'm going to add bonds on my 50th birthday. I have a contract with my wife that I don't think she remembers about and nor does she care about. But it's important to me because I see investments every day, it'd be really easy for me to make a lot of changes or add a lot of different layers of complexity.
But what I know I'm getting with the one fund is global exposure. It's low cost, looking more for SUFFIC as opposed to maximizing. And I think that generally speaking, when I first got to Plan Corp and we made a few changes after I'd spent a few years here, a lot of them were just about reducing the number of funds and lowering costs.
I think if clients could handle it, I would have them in one stock fund and one bond fund. But I think a lot of people are used to seeing all these slices of the pie. And I was too, I mean I used to have a large-cap fund, a mid-cap fund, small-cap fund, a micro-cap fund, and then some value iterations of each of those asset classes and international merging and reality, the products that are available and the cost at which they come make it such that you don't really need to do that.
You just have to be comfortable not having a lot of different pieces to look at. And so simplicity for me, I think that's been the biggest thing that has changed since joining Plan Corp. And it's not just simplicity within my own portfolio, but thinking of simplicity of process, thinking of simplicity of reporting.
I think reporting in the financial industry has a long way to go to being user-friendly. But I do think that a lot of the digital platforms like ours and some of our competitors are taking steps to report things that actually matter as well as things that encourage good behaviors.
Whereas a lot of people, we have to have a meeting just to read the reports so that they understand what to look at. And I don't think that that is really what the standard should be. I definitely think that could become simpler as well.
Taylor Schulte: Yeah, we hear so many times from clients that they can't even read their simple monthly statement from the custodian, so it'll be really nice to see some of that stuff cleaned up at some point.
Peter Lazaroff: And if we could just get 'em to stop looking at statements, they might behave better, but that's unrealistic too. That's true.
Taylor Schulte: In your book, Making Money Simple, you talk a lot about how to build a successful financial plan and you do a really good job of simplifying this stuff, but you also talk about how to be a successful investor. And we've touched on some of this already. I know today you're going to be sharing three common mistakes that people make when investing for retirement.
But first I thought since we're going to be talking about these mistakes, maybe you and I should share one or two of our own mistakes just to let it be known that nobody's perfect here and we're all on this journey together to be financially successful, whatever that means to you. And I know I'm putting you on the spot here.
Peter Lazaroff: No, I like that. This is good.
Taylor Schulte: You need some time to think. Let me know and I can go first, but is there a mistake or two that you've made in the past and how'd you get over that?
Peter Lazaroff: One thing immediately comes to mind, and then a second one came pretty shortly after it. The first thing that comes to mind is I remember using a leveraged midcap ETF sometime around 2009, 2010 when markets were really volatile and I didn't really understand how the products worked. I saw two times S&P 400 midcap index. I thought, okay, well I'm just going to get double whatever the total return of this index is from the date I purchase it to the date I sell it.
And that's not really how the leverage inside those ETFs work resets every day such that the compounding really works against you. And those are really more trading tools. And the whole reason I did it was this idea kind of going back to there's no perfect portfolio.
I saw that my allocation for midcap was off by a certain percentage, and it was easier to use the leveraged ETF to get it to that very perfect decimal point, which I've come to learn. Those decimal points really don't make that big a difference.
And so I definitely lost relative to the market, I think I still made money, but I definitely would've made more if I just bought the midcap index. And so leveraged ETFs, that was, I feel like the biggest mistake, not just because the outcome wasn't good, but also because I didn't actually understand what I was owning.
If I were going to say a second mistake, although it's a mistake that I think almost everyone needs to make is that I bought individual stocks if I hadn't owned individual shares of Nike or Disney or Apple or my grandma bought a share of stock for each year of our birthday starting at age 12 up until we were 18.
And that's what got me passionate about investing. And the mistake of it came when in college I was buying stocks and doing well and not realizing, okay, it's a bull market. And then I got out of college and I was an analyst and I was picking stocks and they were doing pretty well.
Again, in a bull market, it just wasn't necessary. It could have been easier. I don't know if I did better or worse than index. I didn't track that well. I used to just think of it as, oh, I sold and I'm up at this point. That's great. And I just looked at the whole thing wrong and I just didn't have a great understanding of how markets work.
And that generally speaking, even if you are really, really smart, that isn't what is required to beat the market. And by picking individual stocks, I don't think people think they're trying to beat the market when they go out and say, buy Amazon or Facebook, but that's a hundred percent what you're doing even if you don't think of it that way.
So that's what I would say would be the second mistake. But you learn a lot of lessons owning individual stocks, and I think I'm far smarter for it, and I feel like it's one of those experiences that you can't learn from it in a book. You almost have to make the mistake yourself.
Taylor Schulte: Yeah, I couldn't agree more. Our stories are eerily similar. My grandfather gave us some stock when I was 12 years old and I was extremely disappointed. We used to get cash and that year we got some stock. And one of the biggest mistakes that I've realized, and it's not my fault, is I'm going to blame it on my family for this one and then I'll share one of my mistakes.
But he gave us this stock and he used it as a tool to teach us about money and investing in dividends are a big part of owning stocks. And so he would give us those dividend checks, he would cash the check, and then he'd send us cash in the mail, I think if I remember correctly. And so we would get those dividend payments and we could do whatever we wanted with them. It was kind of fun.
But looking back on, I own that stocks from I was age of 12 until, gosh, I think 25, and the stock that he had bought for us, I mean it went through the roof. And I think about what if those dividends were reinvested instead of paid out? To me, compounding interest is magical, and I got to think that stock would've been worth a lot more if those dividends were reinvested.
So grandpa, I don't know what you were doing there, but I would've loved to see those dividends reinvested. The other mistake I think about is when I first got into the industry, you're littered with all these investment opportunities and you have these people called wholesalers that are trying to sell you the next best mutual fund or try to get you to put your clients in these things and they would preach historical track records.
And I remember really clearly this fund called the, maybe you remember it called the Van Campen EFA 20. It was a unit investment trust. It was like the hot fund and it was like 20 high growth international stocks wrapped up in this UIT wrapper. And it just had this phenomenal track record.
And you and I both know past performance does not equal future results, but I got so enamored by the historical performance I put for me a large sum of money into this one fund. And then shortly after performance suffered, we went through the great recession and I think that thing lost 70% of its value.
And so choosing investments based on historical track records alone was my huge mistake. Also, just not really doing my due diligence and understanding what I was putting my money in.
Peter Lazaroff: Well, I definitely lost, I mean, I think everyone who was working during the last recession lost a lot of money in something, and that reminded me of something that the CIO at my old firm told me my very first day, he said, Hey, I'm going to be making investments. Don't assume that I know anything. Don't do what I'm doing because you think I have some insight into the situation.
And meanwhile, I followed him and a few other people into Countrywide Financial as it was going down. I didn't heeded his advice, but I tell people that all the time today, even being a hundred percent stocks, I think I'm comfortable, I understand what it is.
I don't know, I can't tell anyone if they can handle that, but certainly for people who work at bigger firms and they have someone who seems really smart and knows what they're doing, it is really tempting to say, well, if they're doing it, then it's probably a good opportunity. So I definitely fell victim to a version of that as well.
Taylor Schulte: Yeah, you certainly have to build a plan that makes sense for you. Alright, so we've showed some vulnerability here and we're all out there making mistakes and like I said on this journey together, but you have a really good resume. You're a really smart guy, you're ACIO for a really large firm and you have a lot of wisdom to share around investing.
So I'd love to kind of dive into these three big mistakes that people make when investing for retirement. I'll let you just kick it off here with number one.
Peter Lazaroff: Yeah, so I think, and we've touched on this a little bit, the big thing is that people are overly active, particularly if they're not using an advisor, but if they are using an advisor and they're paying them every quarter, they want to see a transaction every quarter that's getting their money's worth.
Whereas 99 times out of a hundred, the best action in investing is to do nothing. And doing nothing is an active choice. And I think people miss that and being overly active, whether it's with their investments making changes from one thing to the next, I think people change advisors too frequently.
So advisor has a couple down years, and a great example is if you had an advisor who used value investing, last year was a really bad year. Well, the advisor told you this is part of the strategy, you'd lose some, you win some, but over a longer period of time on average you win.
But if you jumped into a growth manager after value's been winning or right now US has been winning a lot and international has been trailing, and you might jump to an advisor who says, well, we're not going to own international now because clearly not winning.
Whereas you should have a long-term view and this need to be active is deeply ingrained in our DNA. I think our species evolved based on reacting to what feels like danger. And so we're hardwired incorrectly to be good investors. Our instincts are the complete opposite of what they should be.
And I think if you can remember, 99 times out of a hundred, if you want to do something with your portfolio, you're probably best off doing nothing. And oftentimes if you do need to do something, the best course of actions just to review the underlying assumptions within your financial plan.
Taylor Schulte: It's so hard for all of us to wrap our heads around that we had, I know Dr. Daniel Crosby, we had him on the show a few months ago and he brought this up as well and saying, it's just so backwards. If we want to get in better shape, we'll go to the gym more often.
But when it comes to investing, doing more does not mean a better result. And so it's really hard for a lot of us to wrap our heads around doing nothing. One of the questions or pushback that I get from people, and maybe you do as well and I'd love to hear your thoughts, is well, if you're not going to do anything and you're just going to buy and hold this portfolio, then why would I hire you? What are you doing for me if you're not going to be making active decisions?
Peter Lazaroff: Yeah, I do hear that. And I think of our role as that of a behavioral babysitter. So mostly of what you're paying us for is the financial planning. I think there is tremendous value in what we're doing on the tax front, on the estate planning front with the general optimizing of your savings plan.
So you may be saving a lot, but could you be earning more by saving differently, by putting things in different accounts, by changing the timing of different savings? That's where a lot of the value comes, the investment benefit. It's pretty lumpy. The investment benefit doesn't come every single year, every single quarter.
It comes when you're about to do something stupid. And I think it really comes down to that. And you can earn a lifetime of fees in a single bear market if you can be disciplined enough to manage an allocation and rebalance when you're supposed to and take the tax loss harvest opportunities when you're supposed to.
Yeah, then you don't need us for investment advice. But my experience is that most people don't do that either because they don't really know what they're doing and that is a huge part of it, but they don't have the behavioral wherewithal to stick with a plan.
And most of all, I think people just get busy, whether you're busy professional and you have a family with kids or whether kids you're an empty nester, your kids have left and you're nearing retirement or you're in retirement. I mean, there are different stages of life that have things better to do than rebalancing your portfolio.
Fortunately, guys like you and I love doing this and this is our job. And look, I can go mow the lawn myself, but I pay somebody to do it. I can clean my house myself, but I pay somebody to do it. The thing is, when I make a mistake in my lawn or if I don't clean the kitchen quite perfectly, the ramifications are pretty small.
But when you start making mistakes in your portfolio or missing out on opportunities and then those missed opportunities or those mistakes compound over time, it has an enormous impact and it's way more than what people pay in fees to their advisor.
Taylor Schulte: Yeah, I think it's really hard to take the emotions out of it when it's your money. It's much easier when you're removed from it, when you're the professional managing it on behalf of them. And it makes me think of, I'm not a handy person. I'm terrible at putting things together.
And the first office that we got several years ago, a lot of the furniture was IKEA furniture. And I told my wife, look, if you want to buy IKEA furniture, I am not putting it together. And so I hired a handyman to come by and put all this IKEA furniture together and he turned his music on and I mean, he was really enjoying the process of putting the furniture together.
And I had to ask him, how does this not drive you insane? One time I tried to put something together for IKEA and I ended up tearing it apart and throwing it in the trash. I was so frustrated, and he just made this comment that I always think about, which is, it's not for me, it's not my furniture, it's somebody else's.
And he's found a way to just enjoy that, where it might be different if it was him, if it was his house, if he was trying to please his spouse or whatever it might be. And so just kind of removing that made a world of a difference. And so it just makes me think about managing money and the emotions around it. When it's your money, it's hard to remove yourself from it, even if you understand the concepts.
Peter Lazaroff: I have been an advisor for 12 years. Only this year did I hire my own financial advisor. Now I hired Plan Corp because I see the work they do every day, but I'm ACFP, I'm ACFA, I can do these things, but I'm really busy.
And so that business factor of, well, I can do it, but I'm going to take care of my clients before myself and my kids before the finances is all the more reason to have somebody else there pushing the buttons. But also for me and my wife, it just helps to have an outside opinion, you know what you don't know, which is actually one of my biggest mistakes.
So now I just kind of spoiled it. But when you realize there's so much that people can do to help you the fee, it's definitely something, a question we get about. But fees are lower than they ever have been, and I think they'll continue to go down, but that's what market pricing does.
People aren't willing to pay the fee, then they go and do something else. And there are really low-cost options from big players like Vanguard or Schwab, but those don't have nearly the expertise and they're people who are mass-trained and don't have a lot of experience and don't have a lot of experience with someone like you.
I think it's so important about picking an advisor is finding someone who has experience with your specific set of needs, and that's something that those real big box players won't ever really be able to offer.
Taylor Schulte: Sure. So to recap, big mistake number one, being overly active. And that doesn't necessarily mean trading stocks and bonds all day long. It could mean changing advisors too much. So not being overly active, taking a passive approach to investing, finding a portfolio you're comfortable with, you understand and you can stick with, and then spending time on those things you can control. Is that a good summary?
Peter Lazaroff: Yeah, definitely. Okay.
Taylor Schulte: Alright. Mistake number two.
Peter Lazaroff: So I sort of referred to this, but not knowing what you don't know. And so earlier said, I can certainly mow my lawn myself, but I hire someone else to do it. I had a pretty big yard. It was something I really wanted in my first home. I'm not sure why.
And I especially regret it after I was mowing it every weekend, but generally speaking, I mowed it every weekend, take an hour and a half, two hours. The end result looked pretty good, but then we were having a baby and I was studying for the final level of the CFA exams and I realized I got to have somebody else do this.
And we started doing the little things like cutting the grass in different directions and edging and seeding strategically in areas where they needed it or cutting the grass at different length based on the sunlight exposure, all things that I would've never thought to do.
And so obviously the lawn was going to look better when someone else cut it, but it was the little stuff. There were things I knew to do and I wasn't doing well and there were things I didn't know to do that I wasn't even coming close to. And so with investing, I think the mistake people make is it's really easy. I mean there is a huge industry built on, Hey, you can do this yourself if you just listen to us. Wall Street encourages you to take activities.
They want it to be easy, it's accessible. Everybody's an investment expert. We have a team of engineers at Bright Plan. I don't go tell them how to code. I don't know how to code or a doctor makes an assessment. I don't really question it. Although people do a little bit with WebMD, and I say that because my parents were physicians, but if a lawyer is going to review a legal document or argue a case in court, I'm not going to be able to replace that expertise.
And so with investments, I'd mentioned earlier, you got to know how to rebalance and tax loss harvested. That's the easiest of the things you need to know how to do. But you do need to know different funding strategies.
Should you do a Roth conversion? Should you not? Where should you send your savings? Which retirement plans should you use? Which healthcare plan should you use? How should you use your HSA? Should you fund it and then not spend it and invest it for the future? The little stuff. And then understanding the little workings of the funds, they all look roughly the same.
But again, that's by design. Most of Wall Street gets money when you're active and if you buy stuff and you feel like you can do it yourself, then they can get commissions from you. And even the free trading stuff, there's so much free trading promotions out there and it drives me crazy because what essentially has happened is all transparency has been lost because there is nothing free for all those funds that are offering free trading.
Well, there's something happening on the backend where the fund company is revenue sharing and sending revenue to the custodian where, and then that just prevents them from lowering the expense ratio. And so there's little things that I obsess with every day because I am really passionate about it.
I think not understanding that you don't know everything. A lot of people feel like they're an expert hefter having read one article or one book, but then they forget about that competition that we are talking about earlier, that there are millions of people out there and they're highly incentivized to make sure that they take advantage of any price inefficiencies that may exist.
It's just really tough to compete. And so I think that's definitely a big mistake people make as they approach retirement from a number of angles.
Taylor Schulte: And one of the things you touched on that I talk about two episodes ago, episode 41 on social security mistakes is there's a lot of factors that go into these decisions. It's not just, should I take social security now or delay social security?
But there are other things to consider like Roth conversions, you may be in your gap years, may have a really low tax bracket that's going to factor into it. How risky of an investor are you? What does your investment portfolio look like? And all these things go together and using your lawn analogy, which is really basic, but I think it's really good, is like what is the sunlight doing? What time of year is it?
All these other things factor into how do you cut your lawn? And it's not just about how do I put this portfolio together, but there's all these other decisions around that that all kind of intertwine and work together to help influence the decision you're going to make. So there's just a lot a of information out there.
Peter Lazaroff: It just occurred to me that you live in San Diego. Do you have to mow your lawn all the time? I only have to do it like three or four months a year.
Taylor Schulte: Look, here's the deal, I already said that I'm not a handy person. We bought our house last year and the first thing I did was rip out all the grass and I put in AstroTurf, I have two young kids, so it just makes it easy. They go out there and run around low maintenance.
Peter Lazaroff: That's brilliant.
Taylor Schulte: Yeah, I don't mow any lawn, but the last house that I lived in, we did have a lawn and I was the only person in the neighborhood that didn't mow my own lawn. I paid the 20 or $25 for somebody else to do it because I would rather work on my business or spend time with my family or watch a movie with my son, whatever it might be like that was the trade off I was willing to make.
Peter Lazaroff: Smart man.
Taylor Schulte: All right, so mistake number two was you don't know, which you don't know, which I love. What's number three?
Peter Lazaroff: So number three I would say is misperceptions in your time horizon. And this works actually on two fronts. So there's one piece where people really worry about their portfolio in relation to the daily news or the weekly news or the quarterly news.
They get feedback on their portfolio and I have an iPhone and I look at my stock market app and it's really easy to see data on the stock market, but what that does is it mentally adjusts your feelings as to the time horizon is right this second.
Whereas in reality, your portfolio's horizon doesn't really make a difference over a daily, weekly, monthly, quarterly basis annually. Sure, and I joked earlier it'd be really great if people didn't look at their statements, but in all reality, the less often that you look at the market and you look at your portfolio, the more likely you're going to see a gain because over time markets tend to go up.
And this is the idea of myopic loss aversion, and it's certainly something I talk about in the book, but that's one end of the misperception of time horizon worrying about current events and forgetting that when you invest in the stock market, you're really making a bet on capitalism.
You're making a bet that people like money, that CEOs, there're going to be rule changes from different governments and there's going to be obstacles from a global perspective, but as long as people continue to like money, capitalism works. And that's what you are effectively betting on in long-term with the stock investment.
So that's one part of the time horizon. The other part I think, and it's more focused at retirees, is that I don't think that they appreciate how long their time horizon is. I frequently hear people in their sixties and seventies say, I don't really have that much time to wait out something.
Or they want to take less risk because they are heading into retirement or in retirement. But what they forget is well, look at life expectancies. You'll live until you're 83. We personally plan out to age 95 because there's a 50% chance that one spouse of a couple will live into their nineties. That's a really long time horizon. If you're in your sixties, that means you have 30 years.
Also, at a certain point, you will accumulate enough assets where you're not going to spend them all yourself and thus a part of your portfolio is actually for whoever is going to inherit it. And if that's for your children, well then the portfolio needs to consider their time horizons within the plan.
And so I think generally speaking, my rule of thumb is your time horizons double whatever you think it is. I think even as we sit here in our thirties and we'll maybe hang it up in our sixties or seventies or I don't know, I feel like I'll work forever, but my time horizon isn't to retirement. It's still out to age 95, and I'll probably accumulate enough assets, I sure hope I will, where my kids are eventually going to be incorporated within my time horizon.
Taylor Schulte: It's not even just your kids either. A lot of people we work with are charitably inclined and they've worked hard to save up this bucket of money and they want to support these charities when they pass.
And you and I both know that those charities would love for you to invest that money maybe a little bit more aggressively so that in 20, 30 or 40 years whenever they get that distribution that it's a higher amount that they certainly don't want you to park that money in cash.
So I think thinking about the future, and maybe it is your kids, maybe it isn't charity, but whoever it's for, think about investing this money or a portion of this money on behalf of them and what their needs might be in the future.
Peter Lazaroff: Agreed.
Taylor Schulte: Alright, a few questions about the book before we wrap up. The book is called Making Money Simple. It's available on Amazon. We'll link to it in the show notes. I love interviewing authors. Writing is so difficult. I always like to ask people, what was the hardest part about writing the book?
Peter Lazaroff: It was a very vulnerable process. I write frequently on my blog. I'm a contributor to Wall Street Journal and to Forbes and I do a few other things elsewhere. And when I typically write one of those articles, it's maybe 600 to 800 words, like a really long article for me gets into that 1500 word spot.
But when you are dealing with a document that's 60,000 words, editing is a challenge. It definitely is a long process. I don't think I incorporated enough editing help at any stage of the writing process personally.
So that was probably the logistically most challenging thing because when you read an article start to finish, you can really get a sense of the tone and the cadence and the style. But when you have to read an entire book over just to get a feeling for where you need to be directing the story because you're trying to make it a story, you don't want it just to be a book report on financial planning.
That was really challenging. It was very unexpected. The other piece, I felt like it was just a very vulnerable process because again, if I write a blog article and I make a mistake, I can change it. But the book, once it's out there, it is out there.
And certainly asking people to help and give feedback, I was pretty self-conscious about that. Fortunately, I have a lot of good friends in the business who are willing to take a look, which was great. And generally speaking, I'm really glad I did it. I think I maybe have another one in me, but I probably need a couple of years to recover.
Taylor Schulte: Did you learn anything new either about yourself or even the financial markets while researching and writing that book?
Peter Lazaroff: I think I learned a lot about how important compounding is. It's one of those really underappreciated things and we all know it, and every time you see it, you're like, yep, I've seen that. I think it really gave me a lot of awareness how every little tiny decision we're making in all areas of our financial plan that benefit compounds over time.
And that was really underappreciated. I think even though I would've told you the power of compounding is a big deal, so save early. I think a theme that shows up throughout the book is that, Hey, you got to find a way to leverage this power of compounding.
I moved the chapter on compounding up to the front of the book because I realized it was coming in throughout. And again, I definitely understood the power of compounding, but when you just start really thinking about all these little things as I'm watching clients do, that was a really, I think a big thing.
And then also, I do feel like my view on investing, I had mentioned since I got to Plan Corp, I generally emphasize simplicity. Whether it's looking at modeling, trying to get fewer variables, whether it's looking at different portfolio changes and measuring the uncertainty versus the potential, I think I gained a greater appreciation in learning how I view investing through a more simplistic lens and the importance of that and how really most of what gets in the way for people having investment success is just themselves.
Generally speaking, if you can find a way to get out of your own way, that's great. The challenge is that you can't really take the human nature out of humans. And so how do you build a system around that that acknowledges them, but doesn't try to change who you are? How do you build these habits that kind of tricks yourself into making the right decisions?
And so I think getting a lot of appreciation for that component as well. Probably something that's always been drifting around my mind, but when you're forced to write it out in a succinct way, it really clarifies it for you.
Taylor Schulte: We've kind of danced around the book a little bit and talked about some of the different topics and chapters, but maybe you can just give just a really brief description of the book, what it's about, who it's a good fit for.
Peter Lazaroff: Sure. So Making Money Simple when I sat down to write it, what I really wanted to do was describe the blueprint that my wife and I used to be, what I think is pretty financially successful. I thought people turning career success into financial success was a good goal, and it really lays out the steps we took.
It lays out the same steps that we use with clients. It lays out a lot of the systems that are incorporated with how we built Bright Plan. We were actually building Bright Plan at the same time we were writing the book, which I think was really advantageous for all parties.
And generally speaking, I'd say it's going to be a good read for anyone in their twenties, thirties, or forties. I'm visiting several college campuses here in the next few weeks, so certainly a great graduation gift for anyone listening.
But I think if you have children in high school age or younger, or you're single or you're just out of college, those are the people who I think will find the most use out of this because the book's really segmented into three sections.
The first is all about setting goals and prioritizing where your saving should go. The second section's all about investing and the right way to do it in my mind. And the third section are those less frequent, one-time event type decisions that you have to make that are really important and are really easy to get wrong. And so kind of a how-to guide to some of those decisions.
Taylor Schulte: Very cool. And I just finished the book last night. It's really, really well written. I love all the analogies you use. And really quick, don't forget, I have thanks to you, I've got five signed copies of the book and I've told listeners, just shoot me an email at firstname.lastname@example.org. Put in the subject line, I want Peter's book and I'll get it out to you.
And there's no catch. I'm not going to put you on an email list or anything like that. Just shoot me an email. I want Peter's book. I've got five signed copies I'd love to give away, but it really is a great book and it really is simple, and you've done a great job taking these complex topics and simplifying them. Where can people find you if they want to learn more about you and keep up to speed on all the awesome things you're doing?
Peter Lazaroff: Sure. So I have a website, peterlazaroff.com. Lazaroff is an easily misspelled word, but I think if you Google it incorrectly, it'll still come up eventually. And Twitter at Peter Lazaroff, Facebook, Instagram, they're always just Peter Lazaroff.
I also developed a financial wellness assessment that you can find smartmoneyquiz.com. So it's just a nine-question quiz. You answer it, and I'll give you some quick feedback based on things that are going well and things that could use some help. So that's another free resource out there that people might check out.
Taylor Schulte: Awesome. I will link to all of that in the show notes. This will be episode 43, so to get all those links and resources you can go to youstaywealthy.com/43.
And Peter, thanks so much for coming on and sharing your wisdom with us. Really, really enjoyed the conversation and I'm looking forward to watching this book take over the world.
Peter Lazaroff: Thanks, Taylor. It's always great talking to you.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.
Three Tragic Retirement Investing Mistakes to Avoid
Have you ever seen one of those giant jars of jelly beans where you’re supposed to guess how many are inside? These games can be fun, but that doesn’t mean they’re easy. The reality is, it is insanely difficult to guess how many jelly beans can exist in a small space — especially when you have almost no information to go on.
Peter Lazaroff, financial expert and author of Making Money Simple: The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever says the investing world works similarly, although there are plenty of experts who do have lots of information.
In the global stock market where there are over 75 million trades per day, you have investment firms pouring billions of dollars into research budgets and trading floors filled with PhDs and experts trying to estimate what a security may be worth. As more and more people guess, there are flaws in their process but the errors tend to cancel themselves out.
This, my friends, is why passive, low-cost investing has been a winner for such a long period of time. With enough guesses being made, clear trends emerge and set the pace.
Lazaroff also says this is why it’s extremely difficult to beat the market over the long-term. Market trends are set by millions of guesses that average each other out, while your personal investing “guesses” could be all over the map.
Don’t Make These Three Investing Mistakes with Your Retirement
At the end of the day, reducing the amount of guessing you make with your portfolio could be the best thing you can do for your retirement. According to Lazaroff, there’s no such thing as a perfect portfolio. There’s only the one you can stick with for the longest amount of time, which gives you the greatest chance at the best returns.
With that being said, there are some mistakes you should never make with your retirement portfolio if your goal is maximizing returns. Here are the top three errors Lazaroff says he sees far too many people make in his career as a money manager:
Mistake #1: Initiating or Expecting Activity for No Reason
Whether investors save for retirement with or without a financial advisor, some of them start to correlate activity with progress. They want to see trades being made in their portfolios or new stocks being purchased at least every quarter. No matter whether these moves are good ones, they make them feel like they’re doing something to reach their goals.
“This need to be active is deeply ingrained in our DNA,” said Lazaroff. And it’s easy to think you’re not helping yourself if you’re not actively managing your portfolio.
But Lazaroff says that’s the opposite approach investors should take since 99 times out of 100 the best action for your portfolio is no action at all.
“Doing nothing is an active choice,” he says, adding that he thinks a lot of people overthink their retirement and investing strategies to their own detriment.
Mistake #2: Being Too Cheap to Pay for Professional Help
There are a ton of ways to invest on your own these days, but there’s something to be said for hiring professional help to manage your portfolio. After all, what’s more important than the portfolio that represents the collective efforts of your entire working years?
Think of it this way: It’s easy to pay someone to clean your house or mow your yard, right? If you pay someone to do it, there’s little they can do to mess it up. On the flip side, if you decide to take care of these chores on your own, it’s no big deal if you miss a sliver of grass or forget to clean your guest bath.
But, your retirement portfolio comes with higher stakes than your home or your outdoor space. If you make too many mistakes or don’t make the optimal moves, the financial toll can impact your portfolio for decades to come.
Lazaroff says that one of the biggest problems with investing is that it’s easy to do-it-yourself if you want. This gets people comfortable overseeing their money when they have no idea all the details they’re missing out on.
The bottom line: Sometimes you don’t know what you don’t know. And sometimes, hiring a professional can leave you better off — even with a buy and hold strategy.
Mistake #3: Failing to Understand Your Time Horizon
No matter how much you love a buy-and-hold investing strategy, it’s easy to get overly excited about clickbait news articles or temporary fluctuations that affect your portfolio. But you have to remember that, when you invest money in the stock market, you’re really making a bet that capital works over the long haul. This year’s returns may not be that great, but it’s the returns you score over 20, 30, or 40 years that matter most.
Also, keep in mind just how long your time horizon might be — even if you’re nearing retirement. Lazaroff says he frequently hears people in their 50s or 60s say they don’t want to “wait something out” or take too much risk because they’re running out of time when really, they have plenty of time to grow their money.
This is another area where having professional help with your portfolio can leave you ahead. You may not have a full grasp on how much risk you should take and for how long, but a fee-only financial advisor can help you figure it out.
To continue learning how to avoid other common investing mistakes and make smart financial decisions, be sure to check out Peter’s new book Making Money Simple: The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever.