Ben Carlson, CFA: Risk, Reward, and the Real Price of Long-Term Investing

Thanks for having me.

It seems like AI is bleeding into everything. And it's funny because there are people who are terrified of AI as it relates to like the impact of the labor market. There are people who are excited about AI in terms of like what the technology can do, what it means for investing implications. There are also people who are trying to figure out which stocks are going to benefit, which stocks are going to get crushed, all these things. It seems to just be bleeding into everything. And I'm using AI more, right? So, it's just one of those things that is becoming more ubiquitous. And some people say stop talking about AI because it's all doom and gloom. But the labor market, other people just can't get enough of it because, you know, again, the separation between the winners and the losers. Like you have this one group of stocks that's crashing and this one group of stocks that's going crazy and I don't know. Times like these, to me, when you're in the innovation and people are extrapolating and trying to like figure stuff out on the fly, that's really exciting as far as I'm concerned.

Yeah. I'm a glass-half-full kind of guy, but that's generally my take is that sometimes the transition periods are very difficult, but we have a dynamic economy and there's constantly new jobs being created. And I think and hope that's what will happen this time, too.

Yeah. So my background was in the nonprofit space. So, I mainly, when I started my career, worked with endowments and foundations and pension plans. And worked for a single investment office for a billionaire family for about eight or nine years. And really enjoyed it. Got to work with all these different asset classes. We were working with, you know, public equity managers and fixed income managers and hedge funds and venture capital and private equity and all these things. And it was very interesting. But I just kind of got the itch, like I don't want to just work for one large, rich family. I want to work for a bunch of different people. I want to help people with other things. So, I got the kind of the itch to help others, and that's what led me down the road to start to write. I said, you know, I get questions all the time from I'm like the CFA guy, right? I'm the finance person in the family. I get questions from my family and friends as the finance guy. And I get these questions from people who are just regular people, you know, not in the finance world. And I thought, well, how can I just explain the topics to them that are easier to digest? And so, that's when I started writing. That was the whole impetus behind my writing.

And it's funny because after I started writing, I started hearing from financial advisors saying, "Hey, I really like the way that you explain this. Can I use this for my clients?" And that was never the intention for me. I was just trying to talk to normal people. And I thought, oh, and then that kind of led me the writing and getting into like the financial blogosphere in the early 2010s, there's a whole, you know, community of people. It led me to get to know Josh and Barry at Ritholtz, and eventually join them and, you know, broaden the base out a little bit. So, I've been there for a little over 10 years now. And selfishly, the process of writing for me is it's a way to learn, and I enjoy the process. Someone once said that, you know, writing is figuring out what it is you really think about something. And I feel like I have all these jumbled thoughts in my head, and writing helps me clarify them. It helps me communicate with clients and our financial advisors better. So, I've just found I've gotten a lot of benefits personally from writing.

But I can tell when I get an AI-written something, right?

My book that came out, I'm getting all these PR emails from people, and I can tell immediately when one is from AI because it just takes the description from Amazon, and it summarizes it. And I say, "I'm not going to read this if you're not going to write it yourself, right?" So, I do think that people who have their own voice and can share their voice and be creative, that's going to be a way to stand out from the crowd in this more tech-driven world.

Yeah, you're right. And in those kind of plans you're dealing with People always ask me like, "What's the difference between investor or like individual wealth management clients and institutions?" And I say it's the politics and the group decision of it, right? Yeah, you have committees and you have board members and you have maybe alumni or donors or whatever. And yeah, you're right, they're from all walks of life. Some of them are very investment knowledgeable, some of them aren't. We have clients who are like firefighters and police officers, right? And again, so education is a big piece of it sometimes for that. So, yeah, you're right, that communication piece is really really important.

Yeah, I like that you described it as a trade-off, because that's what I think almost all investing and financial decisions are. It's a trade-off, right? If you want to earn higher expected returns, you're going to have to deal with volatility. And I think you wouldn't get the high returns you get in the stock market if there wasn't this threshold of pain, right? That this volatility and the fact that you could have these crashes that exist in such a swift and fast manner and lost decades and all the bad stuff. You wouldn't get the good stuff if you didn't have the bad stuff. That's kind of the way that I view it. Because you know, people in the There's so many different opinions out there for the way, you know, the stock market as a whole, right? People have different time horizons, different styles of investing. There's traders, there's speculators, there's algorithms, there's the long-term bogleheads. There's all these different people that are trying And that's why you have, you know, the gyrations that you do in the stock market, because people have different time horizons, they have different needs for when they need their money and what they're trying to do with it. And so I think without that volatility, that price of admission, you wouldn't get the high returns. If you could just clip 9 or 10% every year in the stock market and people knew that was coming, everyone would have their money invested in it, right? It would be too easy. And then it probably wouldn't work anymore. And I think that's part of it. The only reason it works is because you're able to hold on through all the things. That's one of the reasons I wrote the book is just to show If you look at the past 100 years, there's all this really nasty, gnarly, bad stuff that's happened. And despite that bad stuff, the results have also still been good. It's not like you just get the good results by side-stepping all the bad stuff and sweeping it under the rug. It's part and parcel.

Sure. So, it was when I first started my blog, actually. And I remember that we top-ticked the market in the great financial crisis in October of 2007. And we didn't hit new highs again until the spring of 2013. So, it was a long time. And so, once we hit all-time highs again, it wasn't like people were celebrating. People were nervous because they go, "Oh my gosh, I remember the last time this happened. And are we going to run off a cliff like Wile E. Coyote and fall, you know, is it going to be the same thing?" And so people were worried. And so I got the idea, I said, "Okay, fine. Let's say like this is a peak." Which is kind of funny to think about now. That was like 12, 13 years ago. And we've had many, many new highs since then. So I said, "Let's just say you were a person who had the worst luck in the world and you only invested at market peaks." So I came up with this story about a guy named Bob who just hoards all of his money in the bank until he's ready to buy and it always is right at a peak, right? So he invested over 45 years. So he invested right before like the 1970s bear market, which was bigger than people remember, the 1987 crash, right before the dot-com bubble blew up, and then right before the great financial crisis. So he made four purchases. But his one saving grace was that he kept his money in. When he put the money in, he kept it in. Even though he put the money in and there immediately was a crash. And the results were way better than I would have anticipated. And he ended up a millionaire based on like a lot of the numbers that you can find in the book or whatever on my blog post. But the IRR for him was like 7 or 8%, it was actually pretty good, you know, it was better than you would have assumed. And obviously I think I ran the numbers too if he would have just dollar-cost averaged in then he would have doubled his money or something, he would have done better. But the point was a longer time horizon can iron out a lot of mistakes. Right? And that's the idea that I was trying to get across there is just like the time horizon is the ultimate equalizer. And that I think the big point of the book too is just understanding what your time horizon is. Whatever you're investing in, right? You don't have to be a long-term buy and hold Vanguard index investor to have this mindset. I think you just have to define like how long am I holding this for and that helps you define kind of your risk parameters and your goals when making any investment.

I think I don't know if it's outperforming. I think it's more like a psychological test because we have First of all, most people dollar-cost average because that's just how they get paid, right? They invest out of their paycheck, right? I get paid every 2 weeks or every month or every week or whatever it is. And when I get the money, I put a portion of it into the market. And it just works like that because it's convenient. Right? I think that's one of the best parts about like a workplace retirement plan is just that it's convenient. It's taken out of your paycheck. You never see it. But we have clients who come to us with a lump sum for whatever reason, right? They've got a big inheritance. They've sold some stock from somewhere else and they're sitting on a lump sum of cash. And they know they need to invest it. But they can't force themselves to do it. So we always talk them through the numbers. And if this is kind of like a facts versus feelings kind of thing, right? If you look just at the facts, and I have a lot of my book, you would say the probabilities tell you to put the money in immediately. Put a lump sum in because whatever, three out of every four years on average the stock market is up. So that's pretty good odds. If you had those odds at the casino, you'd take it every day, right?

75% chance of a gain or whatever. But most people think, "Okay, I know the numbers. It makes sense. You've shown me all the graphs. I get it. But what if I'm the one who has the bad luck like Bob and I put it in and then it crashes." So everyone has that mentality of, "Yeah, but I'm But it's this is me. It's only one chance and it's going to So for most people psychologically, it's just easier to break it up and do it over 12 months or something or 6 months and you put it in once a month or once every 2 weeks or whatever the cadence is. And what we tell people is just, "All right, fine. If you're going to go the psychological route, just pick a plan and stick with it come hell or high water. Like don't try to You know, you could say, 'Listen, if the market falls 20%, maybe I'll speed it up a little. Fine.' But whatever your plan is, like make it ahead of time and follow it faithfully without trying to second-guess yourself.

The funny thing is, I think the worst thing that can happen to you as an investor is that you do it once and you get it right.