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[MUSIC PLAYING]
DAVID MOLTZ: Cool, So let's start
with your blog and your podcast.
You call it \"Afford Anything.\"
Where did that name come from?
PAULA PANT: So the concept of \"Afford Anything\"
is really the concept of opportunity cost.
It's this notion that you can afford anything,
but not everything.
And every decision that you make is a trade-off
against something else.
And this concept doesn't just apply to your money,
even though the word afford conjures up images of money
immediately.
It also applies to your time, your focus, your energy,
your attention because we all have limited cognition, limited
mental bandwidth.
So really, it's this notion of recognizing
that most of the resources that you
deal with on a day-to-day basis are limited resources.
And we need to be extremely conscious--
I would say even ruthless--
about how we allocate them.
And that means, number one, allocating our resources with
more intention and, number two, deeply reflecting on how,
at a 30,000-foot level, what is actually a priority to us
in our lives to each individual, not what does society say ought
to be, or what are the default priorities that we've been
taught.
DAVID MOLTZ: Very nice.
And your best known, you know, kind of
in the personal finance community
for talking and writing a lot about financial independence.
So what is financial independence?
And how does it relate to your story?
PAULA PANT: OK, so financial independence
is an interesting concept, and it's
one that's gained a lot of popularity
in the past few years.
I define financial independence as the point
at which your passive income typically, but not always,
through investments is enough.
And when I say enough, I mean that it's enough
that it creates at least some type of a safety
net underneath you, some type of a floor
or a foundation such that you know that, in a worst case
scenario, in a black swan situation, you would be OK.
And so let's unpack that a little bit because there's
a lot going on in that concept.
Now, first of all, so financial independence
is the point at which your passive income, typically
through investment-- so what we mean by that?
So passive income is income that does not
come through exchanging time for money directly.
So for example, if you have access to a 401(k),
and you make contributions of income into your 401(k)
that money will, hopefully, grow.
Right?
That money will grow both through capital gains
and through dividends.
And then that growth will compound.
So that would be an example of passive income.
Regardless of whether or not you harness it,
right, it's income in the sense that it fuels your net worth,
and it makes your balance sheet bigger, your personal balance
sheet bigger, regardless of the fact
that you are not actively pulling money out
of your 401(k) on Tuesday in order
to pay for a pair of shoes.
It's still yours.
Right?
Same thing with if you make contributions to an IRA
or to a health savings account or if you
use that money to buy a personal residence or a rental property,
assuming that those appreciate or if the rental property does
well.
In all of those examples, you have a source
of passive income coming in that's
fueling your net worth, despite the fact
that you're not actively trading dollars for it.
Now when we talk about--
so the last portion of the definition
of financial independence is this concept of enough.
And that leads to a fairly big philosophical question,
which is how much is enough.
And this is a source of endless debate within the Financial
Independence community, which is abbreviated
as the FI community.
But at a bare bones, basic level, enough is, as I see it,
enough such that, in a worst case scenario,
you would at least be OK.
You could feed yourself.
You could keep the lights on.
You could have some type of a reasonable human shelter.
It might not be what you prefer, but you
know that you would be OK.
And the example that I often like to use is--
so a lot of people conflate financial independence
with extreme wealth or big other highfalutin,
pie in the sky ideas.
The example that I like to give to kind of bring it
down to Earth a little bit is let's
say that you had a brother or sister.
And today, in an hour from now, you get a phone call,
and you find out that your sibling just got diagnosed
with a terminal illness.
And they have one year left to live.
And you want nothing more than to take a one year
leave of absence, unpaid leave of absence
from work, so that you can spend that last year or that last six
months with your sibling.
And you can't do that locally because your sibling lives
on the other side of the country,
or they live in a different country.
All right, so you need that time.
Financial independence is the state
of having enough passive income so
that when you're doing that, when you drop everything
to be with your sibling for those critical moments,
you'll be OK.
You know, you're not going to be going to Disneyland.
You're not going to be having $400 steak dinners,
but you'll at least be OK.
And there's a lot of freedom that comes with that.
A lot of people who reach financial independence-- and I
reached it when I was 31.
We'll talk about that in a minute.
But a lot of people who reach financial independence often
find that nothing in their life necessarily changes.
The day to day of their life might
look exactly the same post-FI, as it did pre-FI.
But the psychological relief that
comes from knowing that you've built your own safety net
is valuable.
And so sometimes, I joke that FI is an extremely elaborate
anxiety reduction measure.
[LAUGHTER]
So in my own life, so my own story is
I graduated from college when I was 21.
This was in 2005.
And I shortly after, a few months after that, I got
my first job at a newspaper.
And my starting salary was $21,000 a year.
And I worked at that job until 2008.
And at the time that I left, my salary was $31,000 a year.
By the way, I know it's unusual to like
to sit on stage with a microphone revealing
your salary, but I'm a blogger and podcaster.
And I've made this very, very public for years.
So I'm comfortable sharing all these numbers.
So at the time that I left my job, which was in 2008,
I was making $31 a year.
And I had a lot of anxiety at that time.
Like being in my early 20s, I could
live like a college student.
So it was fine, but I knew that later in my life
I was going to need something more, something
bigger, something better, especially if I ever wanted
to have a family or ever wanted to own
a home or anything like that.
And so I became really obsessed with saving
and obsessed with investing.
I started making money--
while I was still in newspaper, I
was making money on the side as a freelancer,
and I continue to grow that.
And I became just extremely aggressive
about saving and investing, largely fueled
by honestly fear, which, you know,
I wanted to make sure that I would be OK.
And so over the course of the next--
basically throughout the rest of my 20s
and into my early 30s, myself and also
my husband at the time, soon to be ex-husband,
Will, who shares my same like enthusiasm for saving
and investing, we lived on oftentimes
about 50% of our combined income and invested the rest of it.
And we invested in a combination of 401(k)--
I have a Roth Solo 401(k).
He has a simple IRA.
We both had Roth IRAs, which later turned back to Roth IRAs.
We had HSA accounts.
We had the whole alphabet soup going on.
And so we put a lot of money there.
And then we put a lot of money into rental properties as well.
We lived with roommates until we were 31.
And I mean, our net worth at the time that we stopped
living with roommates, our combined net worth
was over $1 million at the time.
So we were millionaires living with roommates
so that we could save 50% of our income
and just shovel that into investments.
And that was the level of our dedication towards investing.
So that was how I reached FI.
DAVID MOLTZ: Wow, over $1 million
and financially independent by 31,
which brings us to a very important question.
Please share with us your investing philosophy
and some tactics and strategies that you use.
PAULA PANT: Sure, at a high level,
my investing philosophy is one that
is very fond of passively managed investments.
So there is this thing called index funds
that was created by John Bogle who's the founder of Vanguard.
And an index fund is a fund that tracks a market, a broad market
index.
So for example, an index fund might track the S&P 500 index.
And when you invest in an index fund,
that fund attempts, to the best of its ability,
to mirror everything in that index.
And that means that it will do as well as or as poorly
as what it's tracking.
So if you invest in the total US stock market index,
you will do as well as or as poorly
as the total US stock market, no better and no worse.
And what they found is that, statistically speaking,
over the long term, over about a 15- to 30-year time span,
you are, statistically speaking, more
likely to do better trying to match the market
than you are trying to outperform the market.
You will sometimes, occasionally, in the short run,
have funds or fund managers that momentarily outperform.
But then they tend to, over time, revert to the mean.
So you're better off just taking the passive approach.
And similarly, with real estate investments,
I'm a big fan of rental properties.
And with rental properties as well,
I favor a passive approach of, you know,
don't try to constantly be flipping home in my view.
There are other people, of course,
who do it differently than me.
But I don't want to be spending all of my time
trying to flip homes or trying to go into extremely
sophisticated tactics because that's not what I do full time.
I have a different full-time job.
And I want to focus on that other full-time work
because that's my core competence.
And so I want to make my real estate investments
as passive as possible so that they take up as little
of my cognition as possible, again,
because you can do anything, but not everything.
DAVID MOLTZ: Right, and you write and talk
a lot about growing the gap.
So what do you mean by growing the gap?
PAULA PANT: So growing the gap is the result of a big--
an argument, a debate that is popular among people
in the personal finance community
and in the FI community, which people love to argue about
whether it is more efficient to earn more or spend less.
It's that classic like chocolate versus vanilla, peanut butter
versus jelly debate.
Right?
And people often tend to--
they'll choose a side.
They'll pick a camp.
It's almost like you have a favorite sports team.
I'm on the earn more side.
Well, I'm on the save more side.
And the way that I was able to find a bit of compromise
between those two is I asked myself
what are we actually trying to do here.
Like forget what camp you're in.
What's the goal?
Well, the objective is to increase the gap between what
you make and what you spend.
And when you think of it in that terms,
you know, growing the gap is--
the objective becomes more clear.
Right?
You're not caught up in endless penny-pinching.
You're not caught up in like trying
to shrink your way to greatness, nor on the other side
are you caught up in just, you know,
going for promotion after promotion and raise to raise,
trying to make as much money as possible,
but being super careless about your spending.
Like growing the gap is that recognition
that you can earn more.
You can spend less.
You can do a combination of both.
But ultimately, your approach or your tactic
matters less than the size of the gap.
DAVID MOLTZ: So on the saving side,
there's a cliche that says, you know, don't buy lattes.
Or said another way, don't pay $5 for a cup of coffee.
Do you agree with that?
PAULA PANT: So that was coined by David Bach.
And David Bach, he's a best-selling author.
And he very much meant that as a metaphor for don't be
mindless about your spending.
The $5 a day, you know, the buying a latte,
if it is done with intention, if you sit down, and you think,
you know, I really value this.
I value this moment in my morning
where I can drink a latte and write in my journal
and reflect on what's coming up in my day.
That conscious, intentional spending
is very different than mindlessly
buying a $5 coffee every morning and then,
at the end of the week, complaining
that you don't have enough or wondering why you're still
in credit card debt.
Those are same action, but the thought behind it
is the differentiator.
That being said, in the world of saving money,
there's what I call the big three--
housing, transportation, food.
And if you can get those big three right,
then you can actually make a lot of small--
you can get a lot of small things
wrong, if you get those three things right.
Because for the average American,
housing, transportation, and food
are going to be your three biggest expenses.
DAVID MOLTZ: And actually, just as a
follow up on that, same concept of like how
do you think about making budgeting and budgeting
and spending decisions, especially
for certain categories?
So to come up with a budget, how do you
decide for these categories, oh, my budget
is going to be $50 or $100 or $200 a month?
Is it arbitrary?
And then also, like how do I decide how much to spend
versus how much to invest?
You know, if I have x amount of dollars, you know,
from my paycheck, how do I decide
where to allocate that money?
PAULA PANT: So it's interesting that you
ask about different categories because I'm
going to take a step back for a second
and question the premise.
What is the point of allocating your budget
into specific, granular, line-itemized categories?
Ultimately, a budget is a tool that people
use in order to make sure that you are saving enough.
So again, let's take that step back and ask
what's the objective here.
If the objective is to make sure that you're saving enough,
well, let's start with that.
So you take whatever your take-home income is,
your after-tax income and, from that,
decide how much you want to save.
And when I say save, I mean that very broadly.
I mean that as anything that improves your net worth.
So how much money do you want to put into retirement accounts,
use as additional payments on a debt, so maybe
additional payments towards a student loan or a mortgage?
And then savings could also be literal savings
in a savings account.
Right?
So take your income, then ask yourself how much of this
do I want to save, meaning any improvement my net worth.
Yank that off the top.
And then whatever is left over is yours to spend.
And there isn't actually any reason to line
itemize it any further than that.
Now if you want to, if you're the personality type who
loves tinkering with spreadsheets,
and that sounds like a really fun way
to spend a Friday night, then go for it, you know,
if that's what you want to do.
But to a lot of people, a lot of people
believe that they can't stick to a budget
because they create these incredibly granular budgets
where they've allocated precisely $37 a month
for dog food.
And then it turns out that they've spent $42 that month.
And then they throw up their hands in despair
and decide that budgeting is not for me.
And I'm just not very good at money.
Right?
And so the concept of what I call the anti-budget, which
is what I've just described, which
is this very simple, two-category budget of save,
spend, the anti-budget was something
that I developed in order to address
that concern that a lot of people had,
that problem that a lot of people
had because so many people were giving up
on the notion of budgeting, thinking
that it had to be more complicated than it is.
DAVID MOLTZ: So for people that do
want to increase their savings rate,
as you were talking about, what are some ways
to go about doing that?
PAULA PANT: Oh, so again, if you think of savings
more broadly as growing the gap, then you can earn more.
You can spend less.
You can do a combination of both.
So let's talk about each of those.
So earning more, you can do that--
and it depends on really where you are in life,
like what your life situation is.
For some people, like if you have the opportunity,
if you're at a company that is large enough
to have the opportunity for promotions and raises,
then hitting it really hard at work
and making yourself extremely valuable to your company
so that your company reciprocates with rewarding you
with some of that value that you are giving to them,
that can be an incredibly powerful way
to save because, if you keep your current standard of living
exactly where it is, and then you earn more--
you get raises.
You get promotions.
You earn more.
And then you bank all of those raises.
So you just keep living exactly where you are today
and save every single raise.
That, over the span of 10 years, assuming
that you continue to get raises and promotions over the next 10
years, that alone can be rocket fuel on your finances.
Of course, that assumes that you are
at a company that has those types of opportunities.
You know, in my case, I worked at a very small newspaper,
where, like I said, my maximum salary was $31,000.
And at that company, the highest paid person at that company
was making about $60.
It was just a small company that didn't
have those types of opportunities for advancement
or at least those opportunities for--
I didn't have the opportunity for a six-figure income
where I worked.
And so in that situation, developing
some type of a side hustle or a side business
could be a good approach.
And I'll divide that actually into two different levels
because, in terms of side businesses,
you have the gig economy stuff.
Right?
You have driving for Uber, driving for Lyft,
renting out of room on Airbnb, walking dogs on Rover,
renting out your car on Turo.
Those are all gig economy types of ways
to make some extra income.
The benefit is that that income is immediate,
but the drawback is that you can't--
well, with the exception of Airbnb,
you can't really distinguish yourself very much.
You don't have much of a competitive advantage.
And so while you have some immediate income,
your upside potential will be limited.
The other type of side income would
be something like freelancing, consulting, something
where you have unique value that is your market differentiator.
And so the advantage to that type of side income
is that you can potentially make a lot more.
The disadvantage is that that can take a while
to build into scale.
So that income is not necessarily
going to be immediate.
DAVID MOLTZ: Very nice.
And another thing you say is never delay gratification.
So what does that mean?
PAULA PANT: So that much applies to the thinking
or the mental construct around saving money and investing
money.
A lot of people refer to saving money as delayed gratification.
And I think that that's a huge mistake, especially
because, you know, you're trying to encourage people
in their 20s and 30s to save, especially
to save for retirement because the longer your money is--
time in the market is far more important than timing
the market.
And compounding growth is, you know, a wonder of the universe.
Right?
So when you tell someone in their 20s
to delay gratification, that sounds pretty awful.
But if you reframe that mental concept,
and if you say you know what, I'm not delaying gratification.
I am super gratified by watching my net worth grow.
Like I am super gratified by looking
at the numbers in this account and watching them get bigger
and tracking my net worth and watching that line go up.
That's super cool.
And that brings me far more of a sense of satisfaction
than some cheap plastic junk or a car
that is marginally nicer than the one that I already have.
Right?
Like that's a way that you can reframe gratification, rather
than delay it.
The other aspect of that is to have a very strong
why that motivates you.
So you don't want to be unhappy in the present
for the sake of a future.
You do want a future that you look forward to.
You want a strong, compelling why in the future,
but you also want to frame that saving and investing in a way
in which you're enjoying the present moment.
So for example, when I lived with roommates,
like my thinking at the time, my mentality was like, cool,
I've got built-in friends.
You know, I've always got people to eat dinner with.
And you know, so there were, of course, certain drawbacks
with that like sharing a refrigerator.
But I mentally focused on the advantages, rather than
the disadvantages.
And that made it feel like an immediately fun option,
rather than as a sacrifice.
DAVID MOLTZ: And so yeah, we talked about kind
of saving and investing.
How about investing versus paying off debt?
So you know, most people have some sort of debt,
whether it's a mortgage or student loans or whatnot.
And how do you think about whether, if you
do have some extra cash, do you pay down debt quicker?
Or should I do the minimum payment
and invest that in the stock market?
And there seems to be arguments both ways.
What are your thoughts on that?
PAULA PANT: That's an excellent question.
Now first of all, both of them are fantastic options.
Anything that improves your net worth is awesome.
So regardless of which one you choose, either way, it's great.
In terms of how to think through that question,
there are a couple of different approaches.
First of all, I'm going to differentiate
between high-interest debt versus low-interest debt.
Now we know that, historically, the US stock market, depending
on the years that you're looking at, the time frame that you're
looking at, historically, the US stock market
has returned somewhere between 7% to 10% ish
as a long-term aggregate average.
Warren Buffett has predicted that the US stock market
might, to the extent that anybody can ever
predict anything about the future,
has predicted that the US stock market may produce 7% returns
in the future, moving forward.
Of course, projection is just a fancy word for guess,
but we can use that as a ballpark figure
as we're kind of thinking through this decision.
So if you have a debt that has double-digit interest rates,
right, if you've got a debt that's 10% or more--
or I would argue, personally, 8% or more,
pay that off because you're not likely to do better
in an index fund, in a broad market index fund.
Now if you have a debt that has a high single digit--
we'll say somewhere between 5% to 8% interest rate--
there's still a strong argument for paying that debt off.
Although, the argument is a little bit less strong.
But when you talk about investment returns,
you want to think of them in the framework
of a risk-adjusted return.
And what that means is that getting
a return of 8% in a treasury bond
is very different than getting a return of 8% in Bitcoin,
right, like two totally different types of risk
that we're talking about.
So if you're thinking about arbitraging the difference
between the interest rate that you're
paying on a loan versus the return
that you could get in an investment,
you want the potential gap to be big enough.
You want that spread to be big enough
to justify the added risk.
So for example, if you have a mortgage at a 3.5% interest
rate, and you have $10,000 that you got as a bonus,
and you're wondering should I apply
this $10,000 towards my mortgage,
or should I put this $10,000 into the stock market, well,
at that point, we're talking about a spread that
is large enough that there would be, in many cases, a pretty
valid argument for putting that 10 grand into the market.
If the spread is really small, then it's just not worth it.
So that being said, the other thing that I'll say
is that there are many people who
are proponents of getting rid of debt as quickly as possible
because there are a lot of emotional and psychological
benefits to getting rid of that debt.
And so in addition to the math of it,
in addition to the opportunity cost and the expected value,
you also do want to think about, you know, we're not machines.
We're not robots.
And if that psychological benefit to being debt-free
is going to help you get a better night's sleep,
well, then there's added value in that.
DAVID MOLTZ: Yeah, so you've obviously
made a very compelling argument like why you should invest.
There are seasoned investors in the room.
And there's also people just getting started.
And I guess one challenge that I still
have is trying to figure out my ideal asset allocation.
Everyone disagrees with it.
You know, some people would say you're very young.
You should be all stocks.
Some people would say you should have your age in bonds.
Some people should say the market has been very volatile.
You should have real estate in your portfolio.
And others would say cash is king.
So with so many different asset classes,
how do you make a decision on how-- you know,
based on things like risk tolerance,
how do you decide for you specifically, rather
than just some rule of thumb?
Like how do I decide what my personal asset
allocation should be?
PAULA PANT: That's also a good question.
So when people diversify their investments,
the idea behind diversification is
to have an assortment of what are known
as low-correlation assets.
And so low-correlation assets are
assets in which, when one moves this way,
the other doesn't move, or it moves, you know, inverse.
So like stocks and bonds, that's an easy example.
They tend to have an inverse correlation with one another.
When one goes up, the other goes down.
And so having that mix of stocks and bonds
smooths out the ride in your portfolio.
And really, what it does is when you rebalance--
the idea behind rebalancing is that you
sell some of the winners and buy more of the losers.
You know, you buy things that underperform--
you sell things that are doing really well
and buy more of what's underperforming.
Rebalancing a portfolio forces you to do exactly that.
It forces you to sell the winner, harvest the winners,
and buy the underperformers.
And as a result, the whole concept of rebalancing
forces you to take a contrarian approach
and move in the opposite direction of the market.
It forces you to be greedy when others are fearful and fearful
when others are greedy, to paraphrase that famous quote.
And that's the reason why asset allocation and buying
an assortment of like different assets
and then rebalancing periodically
is so well regarded among many people.
That being said, it's not necessarily
the only way to do it.
There are plenty of people who make the argument
that, particularly when you're young,
having an all-equities portfolio,
you know, balanced out with a strong cash reserve
would be better than putting a portion of your portfolio
in bonds since, historically, over a 40-year time span,
those equities are going to do better.
And so there are people who will argue
that having any type of a bond allocation
means that you are giving up some returns in exchange
for that smoother ride.
So if you talk to 100 different people about asset allocation,
you're going to hear 101 different responses.
The way to think through it for yourself
is, first and foremost, again, what's going to help you
sleep more easily at night because your behavior
and your contributions are the single biggest determinant
of market performance.
They've found that people often underperform the funds
that they are in.
And on the surface, that sounds impossible.
Like if you're in a fund, how could you possibly underperform
the fund that you're in?
But the reason that that happens is because people get nervous,
and then they dance in and out of the fund.
And as a result, they underperform
what they're already holding.
And so they've actually found that dead people actually
outperform the living when it comes to investment returns
because they just don't touch-- they
don't touch their portfolio.
And so actually, I learned that through JL Collins who
gave a great talk at Google.
And so that's the first question that I would ask yourself.
Right?
Like the math of it is one thing,
but the behavioral component cannot be understated.
So if having that bond allocation
or having some portion of your portfolio in commodities
or in real estate or just keeping an excess in cash
beyond what most financial advisors might recommend,
if that's what helps you hold steady through market declines
and hold steady through a recession,
then it's worthwhile.
DAVID MOLTZ: So speaking of JL Collins and other industry
titans, like Warren Buffett, Jack Bogle,
they all say US stocks.
You know, put your money in either the S&P 500
or the total US stock market and don't touch it
for a really long time.
What are your thoughts on US versus international investing?
So should people be investing in international stocks?
So I guess could you talk about kind
of home-country bias and then whether or not
you recommend investing internationally as well?
PAULA PANT: So I do, yes.
I think that it is a very good idea.
Again, this is one of those controversial topics
where there are some people, JL Collins being an example--
he makes the argument that, if you
are invested in major companies that are based in the United
States, like Google or Nike, you know,
many of the big companies based here
do business in countries around the world.
And so he and many other people make the argument
that, simply by virtue of investing in large-cap US
companies, you necessarily have international exposure
indirectly through them.
And his argument is that, for that reason,
international funds are unnecessary.
They also, oftentimes, depending on the specifics
of the type of plan that your company offers,
these funds can often be more expensive.
And there's also currency risk because you're
using US dollars to invest in companies that operate
in different currencies.
And so in addition to all of the risks
that you have when you become an investor in a company, which
is what happens whenever you buy a stock,
you also have currency conversion risk
to contend with as well.
So for that reason, there is a camp
of people who think that international investing is
unnecessary.
Personally, I disagree.
I think that it is important to have an international component
to your portfolio.
And so there are three subsets, major subsets,
to international investing.
There's developed markets, emerging markets,
and frontier markets.
And I would argue that, at a minimum,
developed markets, which are well-established,
stable markets, should be a piece of your portfolio.
Emerging markets, probably, you know,
they tend to be a little bit more volatile.
But if you have the stomach to withstand that volatility,
I think that's also an excellent addition.
Frontier markets might be a little bit too volatile
for a lot of people.
So I wouldn't necessarily go there.
DAVID MOLTZ: Gotcha.
And several of your episodes have
gone into kind of behavioral finance, which
I know a lot of us find very interesting.
And so can you kind of share some key lessons
you've learned on how psychology impacts investing
and maybe what we should do about it.
PAULA PANT: So first, there's this notion of loss aversion.
And loss aversion is the concept that losing money
feels worse than making the equivalent amount of money.
If you invest $5,000, and you lose $1,000,
and now you're down to $4, that feels a lot worse than the joy
that you would feel if that $5,000 went up to $6,000.
And so loss aversion and, you know,
its closely related cousin negativity bias,
highlights how we often can spend more time playing defense
than we do playing offense.
Right?
We spend more time and energy trying to protect ourselves
from the downside than we do trying to pursue opportunities.
And that's something, as you feel yourself emotionally
reacting to your investments-- like if you make a practice
of tracking your net worth, and you do this quarterly--
DAVID MOLTZ: Daily.
[LAUGHTER]
PAULA PANT: You're probably going
to have some quarters-- unless you're very lucky,
there might be quarters where your net worth goes down,
perhaps significantly.
And when that happens, you will feel that sense of that.
Seeing your net worth decline feels a lot worse
than the joy you felt the previous quarter watching
it go up.
And that's that moment to check in with yourself and say
am I about to do something stupid.
Am I about to make an impulsive decision based on this feeling
that I have right now?
So that's one of the components.
Loss aversion is one of the behavioral components
of managing yourself as an investor.
I would argue that managing yourself and managing
your own mindset is the precursor to managing money.
You can't effectively manage your money
until you've managed your mental space.
So in addition to loss aversion, sunk cost
fallacy is another popular fallacy
that people get hung up on.
Sunk cost fallacy is this notion that I'm already in it.
I may as well stay in it.
I've already put in so much time and effort.
I may as well keep doing it.
I see this a lot when people buy rental properties.
Right?
You'll make 10 offers on properties.
None of them get accepted.
You make the 11th offer.
It finally gets accepted.
And then you send an inspector out to the property,
and the inspector finds something
completely unanticipated.
And you think to yourself I've put in so much work just trying
to find this property, plus I've paid $400 for the inspector,
you know, this has already cost me so many hours of my time.
Let's just buy the thing.
Right?
And that's sunk cost fallacy.
Now that you're this deep into it,
you don't want to give it up.
But that's not an effective framework
for making that type of six-figure decision.
Anchoring is another one.
So anchoring is this notion of, well,
I paid $100 for this stock.
And so now I'm price anchored to it at $100.
The stock has dropped to $70.
I'm just going to wait until it gets back up to $100,
and then I'll sell it.
Right?
That's a tempting thought to have.
But in reality, it's completely illogical.
The stock does not care what you paid for it.
So those are all examples of very, very common
mental fallacies that we can fall into as we think
about how to manage our money.
DAVID MOLTZ: And so knowing that psychology
has such a major influence on investing,
one thing I'd like to hear from you
is, so going back to the asset allocation,
if you're young, if you're in your 20s or 30s,
you should be predominantly all stocks.
So it seems like-- and some people
are even preaching be 100% stocks for example.
And that's extremely aggressive, especially
because a lot of millennials have never--
they haven't gone through 2008, for example,
with money and the market.
So I guess my thought is knowing--
again, going back to the loss aversion and things like that,
do you actually recommend maybe young people have
a more conservative allocation until they see how they react
going through volatility or a bear market
and making sure they can handle that sort of, you know,
volatility or loss?
And then once they do that, maybe they
could actually then take on a more aggressive allocation,
knowing they can handle it.
PAULA PANT: I would not recommend
that for all young people, but I would
ask each individual person to know yourself.
If you think that there is a reasonable likelihood that you
might panic the next time that we have a recession,
then put those safeguards in place
that will save you from yourself.
And so the tactic that you just cited,
which is have a heavier bond allocation or a heavier cash
allocation when you're young so that you
can see how you react at the next recession, that's
an example of a way that you can build a safeguard in which you
protect yourself from yourself.
That's one of many examples.
You could also work with an advisor
and give them clear instructions to like no matter--
when we have our next pullback, no matter
what I tell you, right, don't let me
shoot myself in the foot.
Right?
Don't let me be my own worst enemy.
That might be another way, another tactic that allows you
to save yourself from yourself.
But at the end of the day, what you
want to do is really know yourself and then put
those safeguards in place that allow you--
that they compensate for your weaknesses.
DAVID MOLTZ: Great.
I have one more question.
And then I think we actually might
have time for a few audience questions
so if you want to think about anything you might want to ask.
But first, before we get there, let's talk about habits
because that's a huge component.
You chat a lot about that on your podcast, habits and habits
building.
You've had some great guests come on and talk about that.
And one of the things you said that stuck with me
is that basically habits beat willpower any day.
And I think that's fascinating.
Right?
It's like it's very hard to walk by like a donut or something
and not grab it.
But if you, in advance, develop a habit to not walk
by the donut, it's very easy.
So can you chat more about that, building the habits.
PAULA PANT: Oh, this is one of my favorite topics.
OK, so first of all, yes, habits beat willpower.
The notion is willpower is kind of like a muscle.
It tends to be, for most people, it
tends to be strongest in the morning and weakest at night,
which is why a lot of people have--
they stick to their eating plan for the whole day,
and then they have that late night snack,
you know, that they never intended to have.
But it's 11:00 PM.
And you're tired.
And this seems like the perfect moment to eat that donut.
Right?
When you create habits, those habits are largely unconscious.
Right?
When I wake up in the morning, when I pick up my toothbrush,
the next thing that I do is I pick up my tube of toothpaste.
And I put the toothpaste on the toothbrush.
That's not a conscious thought.
I don't pick up my toothbrush and then
stand there looking at it wondering what to do next.
It's muscle memory.
It's a habit.
This is the trigger or cue--
picking up my toothbrush is the trigger or cue
that precedes the next immediate action, which is picking up
that tube of toothpaste.
And so in order to form a habit, things to be conscious
of-- and this comes from Charles Duhigg in his book \"The Power
of Habit\"--
is time, location, immediately preceding action,
emotional state.
Right?
And if there's a particular habit
that you're trying to break--
he gave the example of he would always
get up and start, around 3:30 in the afternoon, he would get up,
and he would eat a cookie.
And he just kept doing this.