All right, welcome everyone. Thanks for tuning in to this episode of the Hawaii Retirement Show. Our guest today is Ben Carlson. Ben is a Chartered Financial Analyst and the Director of Institutional Asset Management at Ritholtz Wealth Management. Ben also has a blog, A Wealth of Common Sense, where he writes about wealth management, investing, financial markets, and investor behavior. He's the co-host of the popular Animal Spirits podcast. I'm a huge fan of that. And he's also the author of several books, including his most recent book, which I'm here to talk to Ben about, Risk and Reward. I got my copy here. Ben, thanks so much for joining us.
Awesome. Yes, let's jump into the book. I read it. I love it. When I was in my mid-20s, I read The Four Pillars of Investing by William Bernstein. It really opened my eyes to a lot of things. And reading your book, I got the same kind of feeling. I think it's great whether you're, you know, a new investor, but it's kind of evergreen. There's like timeless classic lessons in there for somebody to circle back to. Like it was refreshing for myself. I consider myself very familiar with a lot of this stuff. But the way you outlined it, there's a lot of data, a lot of graphs, a lot of reasons why, and I just love everything about it. So, you want to tell us what inspired you to write Risk and Reward there?
Cool. I love that you mentioned The Four Pillars. That's one of my favorite books. Bernstein is one of my heroes in the investment thought leadership area because I think he hits on the most important stuff and he always says that like the four most important things to understand are you have to understand some math if you're going to be a good investor, right? You really have to understand financial market history and he did a good job of explaining that in his books, I think. You also have to have kind of an interest in the process, right? If you're not interested in something, it's going to be hard to stick with it. And then the other piece, the biggest one, is behavior. And so, I think having all those things, that's what I tried to really hone in on here. And you're right, a lot of it is probably stuff that we're, you know, reinforcing in terms of understanding markets and how they work. And I think I wanted to write this book for really two different types of people. One of them was the people I was dealing with coming out of the 2008 financial crisis who were in the fetal position and just thought like, 'Oh my gosh, the stock market is way too risky for me. I can't take part in it. You know, I need to just take a step back.' And the other people are maybe they weren't around for the 2008 financial crisis and they don't know how bad things are because they're only invested this decade and they're going, 'Oh my gosh, this isn't that bad. Sure, we have a few pullbacks here and there, but they don't last very long and if I buy, it comes right back.' And so, I wanted to kind of remind people risk and reward is like the yin and the yang of like you don't get one without the other. So, I think it's important to remember both sides of the coin there, that you can never get too conservative with this stuff, but also you have to remember that like the reason that stocks produce such good returns is because there are really nasty, bad, scary, painful things that can happen.
Yeah, totally. And I think, you know, there's a large cohort of society out there that's familiar with, 'Okay, long-term passive investing, you know, it'll work out in the long run.' But I love that your book kind of took it a step further beyond just that tagline or the headline and says, 'Here, look, I'll show you exactly why in the worst and the best cases.' So, I love that, you know, it took that extra step to explain here to remove the shadow of the doubt and just the headline, let's go in and show you, you know.
Yeah, I think that was the main point, is not just like, I don't like the idea of like buying and hoping, like hoping things don't go wrong, right? Like what if my investment time horizon just perfectly lines up with like this perfect period and I don't have to worry about... like you have to have a backup plan and perform like a pre-mortem of like what do I do if and when things do go wrong. It's funny, we get a lot of clients who reach out to our firm during bear markets because they realize that there was no plan B from their financial advisor, right? Or they themselves didn't know like, 'What do I do when this situation happens?' And I think you have to provide context around that stuff to understand, here's how you can survive this stuff and here's the perspective you need to understand what you need to do. And you can't try to come up with something on the fly, you have to have a plan in advance.
Yeah, completely. One of my favorite Bruce Lee philosophies that I live by with my relationships and my business and whatever it is, everything is this idea of as complex as necessary, but as simple as possible. And I think that applies too to a lot of the lessons that you're kind of conveying in this book as far as there's no one perfect investment strategy, but there's a lot of them that'll work and complexity isn't better, right? Being active, being always engaged. As complex as necessary, we don't want to be too simple in our approach to everything and you want to be aware of things, but as simple as possible. I just love that philosophy. What are your thoughts on that?
Yeah, I'm on board. I never heard that from Bruce Lee before. I'm going to have to remember that one. My whole thinking is just like less is more and I do believe that simple beats complex, but you're right, part of the investment process, it does have to... it's never easy, right? There's always some problem and I totally agree with you. I think there are some people who assume that like investing is a solved problem, right? We figured it out, we've solved the problem. And I've met with and dealt with, you know, thousands of investors over the years and I know that there's not one right path that works for everyone. There are people who get rich by investing in individual stocks. There's people who get rich by starting their own business or investing in real estate or technical analysis or, right, fundamental-driven stock picking using factors, whatever it is, index funds. I've seen all different types of people who are able to build wealth. And I think some of the things that they all share in common is having a process that they can stick with, right?
That, and I think if it is too complicated to the point where you don't understand it, it's a lot harder to stick with. It's way easier to hit the eject button if there's something that you don't understand and you don't believe in. If you don't know what you own and why you own it, I think it's really hard to stick with it when it's not working because nothing works all the time. There's always something in your portfolio or in your strategy that's going to have a hard time and not work. So, I think that's part of where simplification helps a lot is just like, 'Okay, fine. It's not working now, but I understand why it's not working and I expected this to happen at some point.' So, it allows me to lean into the pain and stick with it or maybe buy more when it's down.
Yeah, and the other thing that came to mind, and you talk to a lot of sophisticated people on Wall Street, a lot of, at least with your firm and the podcast and all. And a real, I would say, a lot of high-level, really smart investors. And I think for the average person out there, there's still this belief that with the market, it's this black box and, 'Ben, you must know a secret that all of us don't. You guys know a secret. You guys are making a lot of money because of the secrets and I don't know the secrets.' Is that right?
Yeah. Yeah, I think a lot of wealthy people assume that. Like, 'Okay, fine, but wink wink hint hint, what do you... Like, there is no holy grail, but what do you got for me? Like, what's the secret back door that you can open for me and show me how to do this.' And I think the other thing is a lot of people, if they're successful in one avenue of life, you know, a lot of like doctors and lawyers and engineers, like they did a lot of schooling, right? Very intelligent people. There's this assumption that that intelligence is going to automatically translate into the markets. And the problem is a lot of them have been taught, rightfully so, that like the harder you work, the better you get at something. And with the market, sometimes it's the opposite. Like, the more you do, the worse your results tend to be because there is no like degree of difficulty in the markets, right? So, I think sometimes there's that misnomer. And yeah, so sometimes you can be so intelligent and so smart that you're overconfident in your abilities and you think you're smarter than the market overall. And I think that's where people get into trouble is thinking like, oh, everyone else is an idiot. No one... I'm the only one who really understands what's going on, not them. They don't realize the market's wrong about this. And the market's obviously not always right, but it's right more often than you think.
Yeah, completely. So, that brings me to my next point is when does investing turn into gambling? So, I think the platforms like Robinhood and there's several others, they've done a lot of great things and I think we'll get into this later and your book touched on it. There's more people who are involved in the market today than ever before and that's a great thing. But the allure of... I think I got the quote later, I'll say I forget what it is, but the idea that we have to do something. We want to feel control so we do something and then we get into this day trading. We're getting into options and futures, right? And a lot of us walking through our lives, we might come across somebody, I know I do, where they're going to tell us, oh, I made this X amount of dollars on this options trade or this futures. And it's, in my opinion, it's mostly there to give you a sense of... to lift them up and to give you a sense of FOMO there. And with some of these people, I'm not trying to put anybody down. I don't think there's anything wrong with speculating and what I would call gambling, but just don't call it investing. Because what you're doing, those are two different things and I think if you're going to call it investing and you're doing a lot of the active trading, then you should have some background or at least some method of financial analysis of how you're going about it, otherwise it's just purely speculation and gambling.
Yeah, there's definitely a process element that turns you from a speculator into an investor. I think the hard part about investing, especially this decade, is you're right, there's so many people that have gotten overnight riches and it's so much survivorship bias that you don't see... you see one or two examples of it, but you don't see the hundreds of thousands of people that tried to and didn't have it happen, right? They didn't hit it out of the park with the stock pick or the options or the crypto or whatever. And I do think that to be a good investor, however you invest, it requires a thoughtful process that you can follow on a consistent basis. It's like, you know, rules and guidelines that you can follow, you know, A happens, I'm going to do B. If X happens, then I'm going to do Y. And I think that's the biggest difference between speculation, because anyone can get lucky, right? But winning a lotto ticket investment is not something you can consistently do, right? And sometimes the worst thing that can happen to you as a young investor is you do knock it out of the park and you time the market correctly or you pick the great stock that goes up and you go, 'Oh, this is actually kind of easy. I can do this again and again.' And we all know that that's impossible. No one can do this stuff consistently.
Yeah, the overconfidence. And I think, I don't know, we may... you would know better than I do, we may be facing some of that overconfidence because of this secular bull market run that we've had that I think people are feeling themselves. They're feeling pretty good out there. It's very... I don't want to say it like this, but it is kind of easy to make money in investing in this time frame, right? From 2008 on.
Yeah, yeah, I wrote something recently about how just because there's a bull market doesn't mean you're a smarter or better investor, but just like when there's a bear market, you're not an idiot. You're not a worse investor. Sometimes it's just about the timing. And I do think there is something to be said about having a little humility and being grounded and understanding that, yeah, I'm kind of just riding the wave here. And sure, you can make better selections than others at times, but yes, this has been a great time to invest. It's crazy to think about the fact that the US stock market was up 13% per year or something in the 2010s coming out of the great financial crisis. Really, really, you know, above-average returns. And returns are higher on average this decade already, like 15% per year. So, we've lived through a really relatively calm period in the markets. There have been stuff... there's been stuff that's happened, but no financial crises, no real big recession, you know, to speak of. Yeah, so this hasn't been the most challenging period to be an investor. It's been a great time to be an investor.
Sure. Can you touch on... Can you give us an overview of why the time horizon, a long time horizon, is the most advantageous thing for an investor and how... I don't know, if you just touch on it broadly, just, you know, if you have a long time horizon, you're going to do okay in the end.
I just think having the correct time horizon in mind when you're investing in any type of investment is one of the most major decisions you can make, right? Like, am I spending this money in 3 to 5 years on a house down payment or a wedding or something or my kid's college fund? Or am I going to save it for retirement and I don't have to touch it for decades? Because people always like to link the stock market to a casino, right? It's a casino and it's rigged against me or something, but I always say that the stock market is the best casino in the world because the longer you sit in an actual casino at the tables, the higher your odds of walking out a loser because the house has the edge, right? It's a mathematical... the longer you stay and play, the higher your odds of losing. And the stock market is different. The longer you stay in the stock market, the higher your odds of potential of seeing a gain. So, I give the stats in the book that like on a daily basis, it's 50... call it 53, 54% of all trading days are positive. Meaning like 46, 47% are negative. And that's just a little bit better than a coin flip on a daily basis. But you go out 1 year, and now we're talking about 75 to 80% of the time it's positive. Go out 10 years, and now we're talking it's, you know, like 96, 97% of the time is positive. And I think that the US stock market has never been down over 20 years. So, that's the thing is you just put the odds more in your favor when you have a longer time horizon.
Sure. And who I work with in this podcast, a lot of the topics revolve around retirement planning. And when you look at retirement planning, I often come across this. I always often say we're not investing to retirement, we're investing through retirement. Your retirement might be 20, 30 years, hopefully, right? And so, a lot of these principles still hold true. Now, it's a little different because we're talking about distributions and the timing of distributions, the timing of rebalancing, and having some diversification to kind of balance the portfolio for making it a distribution portfolio, kind of changes things. But the principles remain the same because you still have that long time horizon. And like you said, if you know you're going to retire and you need to pull X amount of dollars in a couple years for, you know, the first few years of retirement, you're obviously going to position that money in a way where hopefully it'll be there, or you position the portfolio in a way where you're going to have that ballast to, hopefully, if the market, you know, takes a dip, you're not going to feel it as bad, and you can continue on, right? Because what I don't like... what I... sorry, what I don't like is I don't want people to delay their spending in retirement because of what the market did. We want to position it so that way, you know, you spend your whole life working, let's enjoy it, right? And you got to position it that way.
Yeah. Amen. The baby boomer generation is going to live longer than anyone that came before them. I think the numbers are like a 65-year-old couple today has a 50% chance of at least one of the spouses living until their 90s, right? So, we're talking 20, 30-plus years potentially to continue to grow that money. Now, you're right, you have to balance it a little bit out with the fact that they're spending in the near future, but you have to keep up your standard of living, right? A 3% inflation rate could cut the value of a dollar in half in like 22 years or something, right? So, you still have to grow that money and take some risks. And we tell that to clients all the time, too, that like you can't just shut it off and say that you've won the game. You have to continue to invest and grow the pile to spend it. But I'm totally on board with you in terms of, yeah, spending the money and enjoying it as well. So, there has to be some balance there, and you have to have some sort of margin of safety built in.
Yeah, and I heard that... I heard it framed, and it might have been on your show, one of the Compound shows or somewhere else, but somebody framed it as cash has a negative 3% yield. And when you frame it that way, you start to think about, you know, the real risk isn't the market risk. The real risk is inflation risk, you know, more so than anything else, right? Purchasing power can be the real risk in somebody's retirement portfolio or any portfolio.
Yeah, you got to keep your standard of living up. I write about inflation a lot in the book because it seems like we've got a reminder of it this decade. Like, oh my gosh, we thought that we just ironed it out of the system and we didn't have to worry about inflation anymore. It's only going to be 2% and that, you know, people can deal with that. And you see the volatility we've had in prices this decade, it can change things on a very quick basis. You have to have some assets in your retirement portfolio that can account for that.
Totally. Market timing and rebalancing. Rebalancing your portfolio, if you have a system in place, maybe that's semi-annually, quarterly, annually, it acts as a way of kind of, in some ways, dollar-cost averaging and you balance out the market timing. But I like... I think you mentioned in the book there, market timing requires you being right twice. If you're going to pull your money out, okay, hopefully I was at the high. And when am I getting in? Hopefully I'm at the low. And the odds of doing that, even for a sophisticated, high-level investor, is very... really difficult, right?
Well, the biggest challenge there is the psychology behind it, right? So, it's easy to... you talked about like having action and that there's this old like Roman army saying that like action removes fear. So, doing something like hitting the sell button, hitting eject during a downturn or some volatility, it feels good because like, oh, I did something. I put my hands on the steering wheel. I took control. Well, then you got to think, well, now when do I get back in? So, this is being right twice side of it. I'll just buy back in when the market is down 20% from here, right? It'll be fine. I'll wait for the dust to clear, then I'll buy. The problem is if the market actually does fall 20%, then you're not going to want to buy then either because you're going to go, well, wait a minute. This is pretty scary. What if the market falls another 20% from here? And then you get this cash becomes an addiction to this market timing where you just keep trying to time it perfectly. And the other side of it is what if you sell and then the market takes off and it goes up 20 or 30%? Do you wait for it to fall back to where you were or do you put in and then you kind of like are chasing? And that's the hard part is that if you don't have some rules in place to guide your actions through this stuff, it's just really challenging. And I talked to so many investors that came to us in 2014, 2015 that said, I sold in 2008 financial crisis, you know, I saved myself from some losses, but then I never put the money back to work. I'm still sitting on cash 6 years later because the bull market took off and I was waiting for it to pull back and it never did to the point where I wanted to get back in and it's just like debilitating for people.
Yeah. And, you know, a selfish plug for the financial advising industry, having that person who's a third party who's not... you know, because it's... I mean, it's easy for us to sit here and say, oh, well, if the market drops, just don't do anything. Yeah, say that to somebody who just lost, you know, 500 to a million dollars or whatever it might be. It's very emotional. It's hard, right? And having that third-party objective person on your team that can go a long way.
Well, I always say that the biggest question that everyone wants to answer when they come to a financial advisor, regardless of how much money they have, is just, am I going to be okay? If I... like if I do put this plan in place, am I going to be okay? Is my family going to be okay? If I decide to buy this vacation home with my retirement dollars, am I going to be okay? Does it change my plan at all? Right? And having that... if you're right, that objective third party to tell you like, listen, we built in the fact that markets are going to fall into this plan. Like there's going to be markets as part of the plan. We built you a durable enough portfolio. You're right. It can be helpful to hear from someone else who just goes, you know what? Take a...
deep breath. You're going to be okay. And I agree that the whole idea, like, financial advisors love to say the phrase like, 'just ignore the noise,' right? Which sounds great, but you can't ignore all the noise today. It's a firehose, right? And it's spraying you every day. So you have to figure out ways of not just ignoring the noise, but filtering it correctly and having guidelines in place and listening to the right people and the right sources. And, you know, everyone has phones in their pockets now. Like, you can't—the alerts are on, you can't ignore the noise. It's constant. And so you have to figure out ways of dealing with the noise. And that, for a lot of people, that's like placing limitations and guidelines on your portfolio about the stuff you will invest in and won't invest in, and when you'll make changes and when you won't, and all these things. And the funny thing is, you know as well as I do, the changes to portfolios typically come from life events, not necessarily the market, right? Markets can change and the risk-reward framework can change based on level of yields or level of stocks and the valuations and all these things, but most of the time it's: did you have a life event that made you change your risk profile and your time horizon and those types of things?
Sure. A quote from the book that I love: 'Financial panics and stock market crashes are a feature, not a bug, and they're never going away.' So true, and the next one is coming, and we don't know when. The problem is when you know that it's a feature and not a bug and you accept this, you can spend a lot of your time looking over your shoulder, which isn't a good feeling, right? So it's hard to accept that and just like—it's just everything we were just talking about, to just keep, you know, moving forward knowing that that's coming.
I felt this coming out of the Great Financial Crisis. The fact that, like, I felt like people were spending 90% of the time planning for things that happen 5% of the time, right? Like these things, these huge crashes—most 10% corrections don't turn into a 50% crash, right? They're pretty rare, but that doesn't mean they can't happen, right? I think you have to plan in your investing lifetime on, I don't know, perhaps two or three times the market's going to fall 40 or 50%, and you just don't know when. It's like, if you think about it, we didn't have that happen for a very long time, and then within a 10-year period, you know, the dot-com bubble and then the Great Financial Crisis, it happened in the span of eight years. Right? So you can't, like, set your watch to these things, but you have to understand that, like, because of human nature, we tend to take things too far in both directions, and that's why there's all these overreactions and underreactions, and it's just kind of part of the markets these days.
Sure. And can you speak to—talking about the noise, right? In our phones and the news headlines, can you talk about why the economy and the market sometimes rhyme, but they're not one and the same, right? We can't read a headline on the economy and expect it to impact the market, and we shouldn't let that influence our behavior as it pertains to the market in most cases.
Yeah, if you think about it, I mean, the economy is this big 30-plus-trillion-dollar behemoth, and it's kind of like—to get it to move, it's kind of like turning a battleship, right? It takes a while. The economy is slow, this kind of slow and plodding, and things happen way faster in the stock market, especially today with the information age and the way that things are. And I don't know, something like 50% of the stock market is now tied to technology in some way, right? And that's not the economy. The economy is more, you know, service-based businesses. And so, yes, the long-term trajectory of the economy going up and the pie growing, that's good for the stock market because you kind of need economic growth for stock market profits and revenues and these types of things. But the old saying that the stock market has predicted nine of the last five recessions is true. Like, the stock market is just so much more volatile because there's expectations built into it, extrapolations, and individual companies which themselves don't impact the overall economy, right? And so you have to kind of separate the idea that the anecdotes you hear about the economy are going to impact the stock market and vice versa at all times. It's not always like that. You know, we had a pretty nasty recession in 2022 and people were sure that there was going to be a recession and it never happened even though the stock market went into a bear market. And so I think the problem a lot of people have is that they think about their own personal economy as being like part of the greater whole, when your personal situation is nothing like those overall aggregates. No one has that—the overall aggregate is their, you know, no one has the inflation rate. Your personal inflation rate does not match what the government is saying, right? Because it's an average. It's all of us as a collective, and you have your own personal stuff, and that's why, you know, some of this stuff is totally out of your control, right? When the stock market is going up a lot, when it's going down, what's happening in the economy. You can only control what's going on in your universe, but you can't assume that your universe is what's happening in the rest of the world.
