The Wealth Ladder: Proven Financial Strategies with Nick Maggiulli

Yeah, thanks for having me back on again.

I mean, if you're a student of history, like these things have happened and worse things have happened. Scarier economic times have happened and you know, the United States has gone through it. That doesn't mean that there can't be extended periods of market declines like we're, you know, this all the stuff, the volatility that started in April with all the tariffs and all that. I don't think that's over completely. Obviously, the market has kind of recovered a bit since then, but in terms of what's going to happen next, who knows? And even then, we're filming this ahead of time and by the time it gets released, the environment could be different as well. So, I how I kind of counteract that stuff is I just, you know, you know, history a little bit. You know, like these types of things happen. I wish they didn't happen, but they do. And so, given that, like, you know, just got to prepare yourself mentally for these types of events. And, you know, and my philosophy, it really doesn't change. I just keep buying. And I really mean that. So, I'm not just trying to plug my own stuff, but that's literally what I've done since 2012. And I've not sold an investment besides some individual stocks. I've literally just, you know, in and some basic rebalancing, I've just been buying over time. So, yeah.

I mean, if you look, and this is not just the US market because some will say, "Hey, US stocks were an outlier. We're like technically not the best stock market, you know, in let's say recent decades, but we're top three." You know, I think the only ones that are better are South Africa and Australia. Like Australia hasn't had a recession or something like few decades or something like that. So there are a few that have beaten us, but just a generally well diversified portfolio of income producing assets purchased over time is going to build wealth. It has historically. I don't doubt that in the future. It won't build wealth as quickly as just US stocks have, I don't think, and of course that trend could reverse in US stocks, which is why you're diversified. So even if there is a lull in US stocks, maybe this is the beginning of that period, who knows, you have other assets that are generating value over time. So the mantra in my first book, Just Keep Buying, is the continual purchase of a diverse set of income producing assets that I think if I knew nothing about you and I had to give you one piece of advice to like build wealth, that's what I would tell you to do, right? I would just give you that mantra and it's all in there. Continual purchase, keep buying over time, diverse set. There's the diversification element. And what are you buying? Income producing assets. That doesn't mean you can't own some gold, you can't own some Bitcoin, you can't own some art, whatever. But I think that should be a minority of your portfolio. So 85 to 95% of your portfolio should be income producing assets, which are things like stocks, bonds, real estate, private businesses, whatever it is. There's farmland. There's a lot of different ways you can do this and I don't think there's a right way of doing it. But whatever fits you and your profile and your, you know, risk profile, the types of investments you like. Some people like the tangibility of real estate. Whatever it is, just find those things and keep buying them over time.

I don't think the mindset changes. I think the allocation might have to change. And so usually, I mean, the typical advice is, you know, you do whatever 100 minus your age or 110 minus your age and that's your stock allocation, your allocation to equities. So if you're, let's do 100 just to make the math easy, 100 minus your age. Let's say you're 25, then that means you should be 75% stocks, right? If you're doing 110 minus your age, then you're 85% stocks, right? And then you just slowly taper it down over time. That's the typical advice. I don't necessarily agree with that. I think your portfolio should also kind of match your liabilities a bit. So if you have, for example, if you are, you know, in your 30s and you're a couple and you don't plan on having kids, I think you can take more risk than if you're in your 30s and you have four kids, for example, right? So, I think the type of risk you take and the amount, there's different ways of doing this. You can just have it all in one portfolio or you can just have a bigger emergency fund and your portfolio has the same level of risk that you would have had regardless of your liabilities. But I think adjusting for your liabilities is the way to kind of set your asset allocation.

Yeah. Yeah.

Of course. Yeah. So this was, you know, adjusting for different risk tolerances. So it's like assuming you have this, assuming the same person with the same risk tolerance, I still think there should be like an adjustment based on the number of liabilities you have, right? So that's all else equal. But yeah, of course all those things are going to matter and how you reacted in 2020, how you reacted in 2022, how you reacted in April of this year are all going to be very informative for the type of portfolio you might want to have. If you are panicking when the market is down 20%, that probably means you have too much in equities and you're not going to be able to hold when the market's actually down 40 or 50 or more, you know, cuz that has happened historically, and I can almost guarantee it's going to happen again. I don't know why, and I hope it doesn't, but it probably will happen at some point. And when it does, that's where people can really make decisions that end up losing them a lot of money.

I think the overall allocation to equities, that shouldn't matter all that much in my opinion. I kind of look at individual stocks as kind of more undiversified bets and there's nothing wrong with them. I just think there's a lot of reasons why I don't do them. And I can tell you about my reasons. Like I've gone through different phases of like why I didn't buy individual stocks. The first one was like the performance argument, like, hey, you're probably going to underperform an index. Most people know this one already. It's the dead horse that's been beaten so to speak in terms of the anti-stock picking movement. The second one, which is the second argument, is the one I put forth in Just Keep Buying, and that was the existential argument, which is how do you know if you're good at stock picking, right? Like if me and LeBron James went and played basketball right now, like it would be very obvious within not even five minutes that he has talent and I don't. Even if you didn't know who LeBron James was, you know what I mean? Like you can pick up, you can recognize talent in certain industries very easily. If me and some other person went and picked stocks, you wouldn't know who's skilled for maybe a year. And even if I was more skilled, they could have just gotten lucky, right? It might take a decade or longer before you had just absolute proof that one person was skilled and one wasn't, right? So, I think that's the second argument I put forth. And the third one, which is the final one, is just the mental freedom. I don't spend any of my time thinking about individual stocks because when I own them, I spend so much time looking at them. Even if they were like 1% of my portfolio, like the S&P could be down, you know, whatever, 3, 4% on the day. And in terms of my absolute wealth, that's impacting my wealth a lot more. But I'm still focused on this little 1% position that I kind of bought because I think you identify with it. You're like, I made a choice that was not the default choice, which is an index fund. And so because of that, I focused so much on it. So now that I've gotten rid of all those positions, I don't have any individual type positions like that. All I have is, you know, diversified index funds. I don't worry about that at all. And so that mental freedom I have allows me to go do other things, do research, write blog posts, write books, etc. Like it just takes so much, you know, that stuff can take so much of your time, your mental time, and I don't spend any of my mental time on those things. And I think it's benefited me as a result.

Yeah.

I mean, there's a lot of different ways you can do it. I think the original thinking, which I haven't written about as much, I've written about a little bit, was based on like maybe your allocation shouldn't be based on like things that have nothing, like I don't want to say nothing to do with you, but like your age is not something that has anything to do with your risk tolerance or your ability to take risk. Like there's something there. I'm not going to say it's absolutely nothing, but there's something there. But it's not individualized to you. Like everyone, there's a bunch of 30-year-olds in a room. They probably have many different things that are impacting their financial profile and their age is probably one of the least important. It matters definitely, but it's one of the least important. So the thinking was, well, okay, let's say you're in the oil and gas industry, maybe you shouldn't own oil and gas stocks. Your income's already exposed to that, right? So that was like the thinking, okay, if I'm in the financial services industry, if I'm a partner at a wealth management firm and I have equity in that firm, should I also be taking as much stock risk as I'm taking? Right? That's a question, right? And then, oh, if I also have four mouths I need to feed, like is that, you know, you start running through these questions and once you start to go through this, you can say, okay, maybe I should change my risk profile based on my actual life and me specifically instead of just saying, "Oh, I'm 30 years old. I should be 70% equities." Right? That's the typical advice that's out there and there's just no thought put into it. It's because it's a simple math formula and I don't agree with that. I think you have to change kind of your advice based on what you know about a person, right? And so like in my next book, which is coming out, The Wealth Ladder, that's exactly kind of what I'm talking about. And that one piece of information I get from you is just your current wealth, like how much, what's your net worth right now? Like you take all your assets minus all your liabilities. That includes like your assets going to be, you know, your car, your home, your stocks, your cash, etc. minus your liabilities, mortgage, debt, credit card, whatever. You get your net worth, right? And you don't even have to have exactly your net worth because you know The Wealth Ladder has six levels and there's different ranges and some of them are pretty large. And so once you just know what level you're in, I can kind of say, okay, now I know you're in level one, which is less than $10,000, here's what I would recommend. If I know you're in level two, which is $10,000 to $100,000 in wealth, here's what I'd recommend, etc. So I think the idea behind a lot of this stuff is to think about how does the advice change based on your current situation. I think your strategy should change over time. It's very easy to say, "Hey, just use this one strategy forever." But I realized it was like not perfect. It's a decent thing, like Just Keep Buying. It's a decent strategy that I think works for most people, but if you're trying to get to over $10 million in wealth, it's not the strategy. It just simply isn't. And so once I started realizing the flaw of some of the, you know, one-size-fits-all types of solutions that people put out there, I realized, okay, the better approach is to say, hey, if you're here and you want to go here, here's the strategy, right? All right. And so I think it's a little more nuanced. And the analogy I give in The Wealth Ladder is just like a fitness coach would give different advice to an obese person versus like a well-trained athlete who's trying to get to the next level. The same thing's true with our financial advice. And so I think when you're talking about allocation, when you're talking about any of these things, I think it's true. This is just outside The Wealth Ladder. I think we should be doing more thinking about how is this different for different people and is there a framework we can use for that. So yeah.

I think the stereotype, it wasn't a stereotype. It more was like a data issue I had problems with. It was like millennials are the poorest generation ever, this and that, and it looks terrible. And at the time with the snapshot data they had, it did look like millennials were far behind on all these metrics and they've since caught up a lot because a lot of wealth, some wealth's been passed down, like they've gotten better jobs, incomes have improved. Does that mean every millennial is doing well? No. I think there's still very big distributional impacts where people in the bottom 20% are doing worse than any generation ever. But the rest of the cohort's doing okay now and so it's actually caught up a bit. So I think sometimes it's, you know, using data is great for making arguments and I love using it, but sometimes there's lags, there's weird things like, well, at the same age this time they should have had this. It's like, well, you know, we have certain things that boomers didn't have, but then boomers, you know, had cheaper housing, right? So there's debates to be had about what's better or worse. And I'm not here to say, oh, this one's better, that one's worse. It's more about like, hey, every generation's different, and I get annoyed when it's like, oh, look, they aren't at the same spot on this particular metric. Like, that's true, but we also have these other things which I think are better than prior generations had. So you kind of need to balance it a little bit.