How Your Behavior Impacts Your Finances with Dr. Daniel Crosby #094

decision making. That's a lot of bologies, a lot of oologies. He sets forth practical tips as well for making improvements and so when he's not consulting around market psychology, Daniel enjoys exploring the American South, fanatically following St. Louis Cardinals baseball, and spending time with his wife and three children. So, Daniel, thanks for being here, man, Yeah, my pleasure, Thanks for having me. He mentioned the Cards didn't they wamp the

Braves a few days ago? Did you watch that game? Well? I was at all of the games, but then the Braves wamped the Cardinals the second too. But there was a streaker at the second one, so it was still worth it. Yeah, that was crazy. He was a non nude streaker who made it all the way from left field to home plate and then got crushed. I want the Braves security. I love the video of that security. People always just hammer them. He crushed him over a

half brick while it was incredible. This is my moment. Yeah. Well, and he slipped. He broke his knees like this guy he was coming at him. He juked him, he slipped, then he got back up and laid the tackle on him. So go go Braves security guard. Wow, that's awesome. I think that that might be the most you hear us talking about baseball. We tend to talk about soccer here on the podcast. We're unintentional hipsters, I think, but we're trying not to be great soccer city. Yeah. By the way, Daniel,

thanks so much for bringing beer. Daniel brought Land of brewing companies hop Planta for us to have on the show today. So yeah, we really appreciate you bring tasting notes on that one at the end of the show. So the first question we ask anybody that comes on the podcast now, Tamiel is since we do drink a beer on every show. It's something that we splourge on. What it's like the craft beer equivalent in your life.

So it's it's cheese. So so my wife and I we we average seven different types of cheese and said at any given time, so we are love cheese. We uh we. Price is no object. We just buy what we want and it's absolutely a blast to to write different types of cheese for us. So that's our thing, it's your splurge. It's also a consumable. What is it about things that we consume that I don't know? We we derive a lot of pleasure from the senses, right, like cheese, I assume what kind of cheese? A do

you like? We we like double cheese. No, I don't love this stinky stuff. Our favorite sort of easy go to is the doubling our cheese. We we tried it in Dublin for the first time and it's like got good family memories from a family trip I took there. So yeah, yeah, yeah, not nothing too stinky though. We're that's cool all right. Well we want to ask you too, like why did you decide to get into thinking about money?

And you received your doctorate in psychology, but you've turned your focus to kind of investing in and behavioral finances. So like what spurred that on in you? Yeah? So um not wanting to be broke because the easy answers, so the UM. I had two great loves early on in college. One was investment management. I'm the son of a financial advisor, so just grew up in a house where we were always talking about investing in stocks at

the dinner table. Uh. So grew up with a real love and a and a real familiarity with with that whole world. But it was also fascinated by human behavior. And so I went through my doctoral program, got about halfway through and had just had enough of being a clinician. You know, I'd met with thousands of clients and I was frankly just stressed out by it, you know, the rigors and just the tough slog of seeing forty fifty people a week who were having a very bad week. Uh.

We just beginning to take its toll on me. And so I said, look, I love thinking about human behavior. I love wondering about why people do what they do, But is there a non medical application of this? And so my dad, being who he was I stumbled upon behavioral economics behavioral finance pretty early on. Uh, and it's been a great ride since. Were you board by the financial discussions at the dinner table when you're as a kid? No,

I actually loved it. And it was one of those things where, you know, in my in my fifth grade um stock market game simulation, I dominated, right, And so you know, having having my dad helped me out. And I remember investing in the Chicago Tribune and these different stocks, Harley and these different stocks early on and watching it go up and just thinking how amazing it was that

I could make money off of other people's work. I mean that was like as a as a young lazy kid, I was like, wow, Like other people are working and I'm getting paid and I'm clipping coupons getting dividends. It was just transformative to me. So I actually quite loved it. So let's talk a little bit about your book, The Behavioral Investor. In that book, like in the first portion of it, you spent a lot of time talking about

our bodies and our minds and society as well. Why do you find that that's so important to to focus on in particular when it comes to investing in making those decisions. Yeah, so I I tried to take a big step back with this book because you know, most people, maybe they give some thought to psychology, but they give

very very little thought to context. And so one of the things that that I have learned in my study of why we make the decisions that we do is that willpower is very limited and that context matters a great deal. You started off with with talking about the beer that I brought. So I'll give an example from a liquor store that was trying to titrate the the inflows and outflows of the different types of liquor. They found that the type of music they played was the

best predictor of what people would buy. So they're trying to manage how much wine or champagne or beer they have. In days that they played German music, that the consumption of beer went up over On days when they played French music, the consumption of champagne went up over seventy percent. But if you ask someone leaving the store, like why did you buy this beer, They're not going to say,

you know, I was subtly influenced by environmental cues. So we go through our days and we make all these choices sort of beneath our awareness, and so I wanted to highlight, you know, societally, physiologically, here are some of the things that are impinging on your ability to make good financial choices, because I thought there was sort of a gap in the literature around that. So, yeah, that's

a great example. I think that actually helps us see how our brains are susceptible to having things that aren't necessarily self generated to make a decision um. And so when it comes to our brains, why is it that our brains play tricks on us? And why does that make it hard for us to be actually savvy, decent investors.

So one of my favorite stats that I that I came across in the book was that your brain accounts for about two to three percent of your body weight, but it accounts for of your metabolic expenditures in a given day. So of the calories that you burn in a day are down to thinking effectively. And so because there's this enormous mismatch, your body is always trying to go into energy saver mode and be more efficient. And of the ways that we do this basically by shutting

the brain down, like trying to think less. So we do things like we look at our neighbors and see what they're doing, and we try and do that, or we turn on the TV and see what the financial talking heads are telling us we should do. We draft off of the opinions of others, or we do what we've always done, or we do what our parents do.

We're just not equipped to really make well thought out, well reasoned financial decisions again and again and again, because there's this huge mismatch between how hungry our brain is and how big it is. And so that to me is is an incredible Uh, was an incredible thing to learn. You know. The other thing I learned is that we lose thirteen percent of our intelligence of our i Q

when we're under financial stress. So even if your brains fully loaded, right, even if your brain is is locked and ready to go with all the right financial education that you need, when when the risk hits the fan, so to speak, you're dumb, Like you you have least access to these things when you need them most. So your brain is not not too well equipped to be a savvy financial decision maker. Yeah, even though you know those facts, you know what you should be doing when Yeah,

like when when the stuff hits the fan. Yeah, you are incapable of making the proper decision. One of the other things you mentioned in your book as well was how we're wired for more that immediate gratification and how we have a really tough time thinking beyond that, and that again makes us terrible long term investors, right, yeah, it does. There was a fascinating study in Merrill Lynch

actually bought this technology. There was technology that allowed you to age your face so like you could take picture of you and then it would make you look like you were, you know whatever, a hundred years old. Joe loves that app co my co worker literally the other day, took a picture of me. Was like he was like, stand still, I'm gonna take a picture of you and I had no idea what he's doing for and he turned me into a girl. Yeah so yeah, yeah, you

still get carded, don't you pretty much? Yeah. So what they found though, is when people were able to envision themselves older, they dramatically up their retirement savings. Because most of us think, you know, we're going to be this age forever and the me that exists today is the me that will always be. But we have to really get a more visceral sense of a of a future self that's gonna want vacations and food and you know, a warm place to sleep just as much as today

you does. And that's hard for us to get our minds around, right, And so anything that we can do to kind of get a better picture of that future self is powerful, But it's nothing we do very naturally. Yeah, I think, Yeah, most people in their twenties, and looking back to when I was in my early twenties, it's kind of abnormal interested in this stuff. But most people it's just you think you're invincible, you think you're gonna live forever when you're twenty two, and that's just not

the case. And but that's the most important time to start getting invested too, in the stock market, to start thinking about the future. But that's often the time that people are least thinking about the future. Yeah, the world of investing is full of these paradoxes, right, Like, twenty two is exactly when you need to be started building

a compounding life financial legacy. And at that point, your prefrontal cortex isn't even fully formed, and you don't even fully grasp a relationship between cause and effect, and I think if we all look back to college, we can we can bring to mind instances where where this was on full display. But yeah, you're you're well positioned to start saving, but not psychologically. So, Daniel, you talked some in the book as well about the primacy and the

recency effect. Can you explain that a little bit when it comes to investing. You know, we're talking about age and how certain things affect how we view money and just things in general. How does it affect how we view investing? Yes, So the primus see in recency effect, is this notion in psychology that's backed up by the literature that we have the best memory for things that happened early on and things that have happened recently. And

so this is true of even conversations. You go have a conversation with a friend, you're going to have the best memory for sort of the opening gambit and then the last thing that you said before parting. It's also true of our investing live so you know, we look at someone like I'll use myself as an example. So you know, I went to a lot of school, so I didn't really get my first job until I was about twenty seven, and so I get out, get my

first job. When I'm twenty seven, I start saving. I got a four oh one K, and then within a year and a half it's the Great Financial Crisis. So you know, you're just getting started. You think you're doing the right thing, and this nice little nest that you've built up is crushed right, it's down, and then you know, bring it to today and we'll go back to Q

four of eighteen again, we're down fifteen or so. Someone like me, if they're not careful and if they don't sort of automate good practices, could say, look, the first thing that ever happened to my money was it got you know, when went down a third. Uh. Recently we've had more volatility. Therefore the market is a scary dangerous place forgetting that. You know, there's also been a whatever

a four increase in that time as well. So we have to be careful because memory plays tricks on us, and especially I think millennials and others who who have started saving at an inopportune time or a time when they had a traumatic first experiences can be in a little trouble. And you know, the interestingly, the inverse is true too. You see some people who come out and confuse a bull market with a big brain. So they

got out in a year. You know, Let's say they started saving in in two thousand and ten, and they're like, wow, this is easy, Like all the stock market does is go up. I'm a genius. And so either success or a failure can actually be problematic, and we have to be careful not to let those early and those recent experiences loom too large. Do you think that that same principle can affect the way that we broadly view money,

not just investing. For instance, you sitting around the dining room table with your dad, who's you know, talking to you about stocks? Or for me, you know, I had an experience where my family didn't handle money well and we went through bankruptcy when I was thirteen, And that to me is like the line of demarcation of why I got interested in finances to begin with. How do those effects of primacy and recency affect us in regards

to how we think about money in general? Yes, so this is I mean, this is a fascinating question to me. It's certainly the lessons that we learned early take take deep hold. But what's fascinating to me is anecdotally, what I've observed is sort of both sides of this. There are people who grew up in in my situation, say, where you know this talk about money is ever present, and they go, yuck, you know this is too that was too much. You know, that was too much. I

don't I don't care about money. And there's people grow up in your situation where there's a bankruptcy or something, and sometimes that's going to lead them to say, I will never let this happen to me. I'm going to educate myself. I'm going to be different, this will never happen to me. And then other times, quite naturally, they perhaps learned the bad lessons that they grew up with. So I wish I knew better what separated people who who run from one style versus those who adopt it.

But I have seen in both cases there's always an impact. There's always an impact, but some people run toward it and some people run far away from it. But but either way, I think you're absolutely impacted by those early experiences. Yeah, Daniel, if only we knew the depths of our minds and then why it was that we behave that way, right, So after the break, we're gonna talk more specifically about investing for folks who are not investing at all, things to watch out for, but as well, if you are

already investing, we're going to talk about that as well. Alright, we're back from the break. We're speaking with Daniel Crosby, behavioral finance expert. Daniel, I so thoroughly enjoyed your book. I think I geeked out on somebody the studies and the specific stories that you discussed in there. By the way, for our listeners, we're going to give away a few copies of his book at the end of the episodes,

so stay tuned for that. But first I want to ask you about a story that you mentioned in your TED talk and then also mentioned in your book, and it was about a woman named Brooke. You were helping her with a specific situation and she seemed to just bury her in the sand about something that was happening in regards to college emissions. Can you tell us a story and then kind of how the how we can

learn from that. Yeah, So, Brooke and not not her real name, Brooke was my first ever counseling client, and so to set the stage a little bit. I'm twenty three years old at the time, which I think we can all agree is a great time to be dispensing, you know, life advice to people. Yeah, I've got it figured out. Come and get refer back to the prefuncile cortex. My prefuncial cortex is still half baked at this point. So Brooke foolishly comes to you know, comes to see me.

She's literally the first client I've ever seen. And she comes in and she doesn't say a word. She hands me six envelopes, like six six large envelopes, and I'm like, oh my god, like what, you know, what am I in for? This was not in the book? You know, this was what? What chapter was this? Because it's all book learning at this point. And you know, she explains to me that ever since she was a little girl, she's wanted to be a doctor, and she's applied to

six medical schools. She's heard back from all all six of them, and she can't bring herself to open the envelopes because she she feels like if she finds out that she didn't get in, she'll be crushed. So, you know, having recently been through the grad school application process myself.

If I say to her, like, look, don't you have to let them know that you're that you're coming, Like if you if you did get in, and she goes, yeah, I've got like a week and a half before before i have to you know, have have worked through this open these and have moved on. And so she opened them and she got into all six schools, which really saved my high I mean, that could be a that could have been the end of my therapy career if she had gotten into none of them. But she got

into all six schools. But the point that I made to her that that led her to open the envelopes is that sometimes in our efforts to to manage or mitigate risk, we bring about the certainty of the very thing we're scared of. And so in her case, you know, if she had the things she was scared of was not getting into grad school, and her tendency to not want to open these envelopes was going to guarantee the

very thing she was scared of. For investors, there's there's an analog here, because the thing that most investors are scared of is not reaching their financial goals, like not crossing the finish line. But the way that they manage that fear is by not investing, by sitting on the sidelines,

by staying in cash, by being too conservative. And in a world where your money is being destroyed by inflation at a rate of about three percent a year, choosing not to invest is bringing about the certainty of failure. You're dooming yourself to a diminished quality of life and diminished earning the potential. So that's the analog I'm trying to make their It's like, by not taking risk, you're actually choosing the most risky possible road. That's right. Not

risking is the riskiest thing you could ever do. So for those folks, I mean, what do you say to them, Like, to those folks who aren't investing and they do have their head in the sand and they're just trying to avoid making that decision altogether, do you just say invest? Well, So it's interesting, there's a I've used to be really bad at this because I would get frustrated and go, oh, come on, like you, why aren't you doing Why aren't you doing this? Like you know, and you kind of

bang your head against that wall. But we as a human family have a profound sort of get lost impulse when someone commands us to do something, you know, we kind of give them the finger, you know, metaphorically when they try and tell us to command us to do something or tell us we're so dumb for not doing something. So what I do now is I listen, you know, I listen and say, you know, what are what are

the fears around this? And I try and empathize with those fears, and people once they feel understood, I feel like then they're open to having a conversation about the nuts and bolts of why investing is a good idea. But I find the same thing with diversification because here in Atlanta, I run across all sorts of folks who have eighty percent of their wealth and Coke or ups or a flack or any of the large corporations that are around here, and they're scared to diversify away from

these really concentrated positions. And then when you start to listen, though, if you just say, look, you know, it's dumb. All of your eggs are in one basket, they they're not responsive to that. But if you listen and hear things like, look, um, you know this company took a chance on me when I had nothing, and they've made me a millionaire. They've made me who I am today. You can go, okay, you know, you can listen, you can empathize, and you can go, well, it's still dumb, but but but they're

in a place to hear that. I think once they've been understood, Yeah, I think. Yeah, dogmatism can be a turn off for so Okay, So, how does your investing timeline influence how we should think about risk when it comes to how we allocate our investments. Yeah, so, I mean, you you definitely want to take less risk as you approach retirement, and you even within that, you want to take less risk with buckets of money that you need

in the short term. You know, there's plenty of folks who are young people who are saving for say a down payment on a home or or vehicle or something like that. You don't want to put that money at risk if you're gonna need it in the next two or three years. Because markets have historically returned, you know, returned your investment quite nicely over ten or twelve years.

You've you've never had a nominal loss in the stock market over a twelve year period, but over one year or two years, anything can happen, So yeah, you definitely want to take less risk. But we see people starting to change those assumptions now. You know, I have we all have young children here, and I remember when my my two year old was born, the nurses told us, you know, fort pent of the kids that are her age will live to be over a hundred. That's shocking,

that's crazy. You know, it's shocking to think that. Let's you know, you go to college until you're twenty two, maybe you go to grad school toil your twenty four twenty five, you work for forty years, and then you've got to live for forty years of what you work for. I mean, that's an incredible lift, right, And so historically that the idea has been and it remains a good

idea to take less risk as you age. But we find that, you know, people even in retirements still need to hold stock because that you're gonna live for thirty or forty more years in many cases. Yeah, it goes back to that idea that not taking enough risk is actually the riskiest thing you can do. Yeah. Yeah, And the other thing is too, is with so much information at our fingertips, when it comes to research and stocks and just all the publications that are out there and

all the articles. At times there can be such an overwhelming flood of information and recommendations as to what we should be investing in. How would you recommend to folks uh to start approaching that? Like, how do you take that first bite? How do you narrow in your focus and decide what to actually invest in? So there's there's something called the Lynda effect, which shows that the longer

something's been around, the longer it's likely to be around. Okay, So like if we look at today, Um, Kim Kardashian has a book of herselfies which is like right at the top of the book charts right, and it's been there for a year. Um, but I wouldn't bet that it will be there in a hundred years. That's just my guess. And yet you look at the age to disagree.

And yet you look at like great philosophical works or even you know, books like The Richest Man in Babylon or something like this, these sort of classics, it's like if they have endured, their likely to endure. And so I think that is a sound principle when you're trying to understand how to get started with with educating yourself about how to invest. There there are a couple of really good books that have been around for a really

long time. They're timeless principles, they're not going anywhere, and that is a great place to start. Books over articles,

long form over short form. I think podcasts like yours are another fantastic place to start people who uh don't have a reason to steer you wrong because unfortunately, you know, so many people are incentivized to to give a brand of financial advice that puts money in their pockets, and unfortunately, in this country, we we still don't have a system where even you know, some financial advisors so called, have to act in the best interests of their clients, which

is sort of an incredible thing to consider. So books that have been around a long time are a great place to start. And then you know information sources like yours that that aren't conflicted and can give you a great unbiased starting point. Daniel, can I interest you in our life insurance that we're offering. Yes, well, I mean hold that note though, do you want to recommend a couple books? I mean, you mentioned the richest man in Babylon it's a classic. Other a couple other favorites of

yours that I recommended listeners. I'm going to of course blank. So the there's a link called the Nocturn Capital Reading List which has some of the best, uh the best books that I love that that list of the best books, right, So that's a great place to start. I would recommend, of course, shamelessly, my book The Laws of Wealth as sort of a good to introduction. The Richest Man in Babylon Intelligent Investor uh is a is a classic. That's

the one that sort of got Buffett started that. There's many others though, Oh, The Millionaire next Door is another wonderful book, classic, another classic. I think you're so right, though. We have all this information at our fingertips, but it turns out that most of what people are reading is stuff that's been written in the last year or two, and all these great resources that have proved true over

time are the ones that we're avoiding. Um And so that's to our great shame, really, And so I think anybody who's listening to this picking up an older book that has to be the test time is a great advice. What other big hurdles do you see beginner investors face as they're just kind of attempting to dip their toes in the water and start. So I think two things. I think one is just getting started, right. You know,

an object in motion tends to stay in motion. And the thought can be, you know, I only make whatever, I only make X per year, and so it'll be a drop in the bucket. It's not going to make a difference. And so realizing that inertia cuts both ways, that doing nothing can lead you to do more nothing, but that even getting started, even in a small way, can get you going. And then not knowing where to start,

you know, not knowing where to start. I read the other day that there are now over two hundred and fifty thousand different mutual funds. So just doing something like a Vanguard Total Index right there, you go start there. You know, something that's well diversified, something that's cheap is a great place to start and you can figure out the rest later. But not knowing where to start, there is an overwhelming mountain of complexity. Uh, and you know, not much of it is in the investor's favor. So

just picking a place to start and getting started. But I think a a World Index a a total index is a great place to start. So that's great advice, right for folks who have not yet started investing, for folks who are investing but maybe aren't doing the best job. Right, That's what we're gonna talk about next. In your book, you mentioned how the Mona Lisa it didn't become famous

until nineteen eleven after it was stolen. Probably my favor were story in the whole book, right, I didn't know, and then I just got to wow somebody the next day about that. It was really cool. It's like, did you know, so what does that antidote have to teach us when it comes to our own biases? Yes, so quickly this story so you can be impressive at cocktail

parties to the story. The story is, you know, the Mona Lisa is the most talked about, the most reproduced piece of art around, right, And so we think it is that way because it's the best. But really, for a long time it was sort of forgotten. It sat in this dusty recess of the of the Louver and it was only once it was stolen that it became sort of an item of national national interest. And you know, people are talking about who done it, where did it go?

Why did why this piece? And what's fascinating it was three days before they noticed it was gone. They stole the Mona Lisa and no one noticed for three days, right, I mean, can you imagine now, like you know sirens two seconds later, but three days later, you know, someone notices all you know, there's a there's a dusty spot on the wall, and and it's missing. And so we think the Mona Lisa is is great because we've heard of it, but really we having heard of it is

what made it great. And so the point here is this, people tend to overinvest in what they know. Okay, we find this a couple of places. One one thing is called home bias. Uh. Look at America. The average American tends to have about eight five pc of their wealth in US stocks, even though US stocks only make up about half of the world of the world stage of equities.

So we want to in general have our asset allocation align more or less with the world uh, the world stage, so we should be about we're closer to eighty five. We even see in various parts of the country in the northeast, people tend to be overweight financials. In the Midwest, people tend to be overweight agriculture. In Atlanta, people are overweight you know, coke and and afflack and things that

they've heard of. And we think that we're doing ourselves a favor by buying what we know because it seems safer. This is human nature, like, oh, i've heard of that, I know that, so yes, give me some of that. And we also over invest in our own company stock, even when accounting for, even when controlling for you know, employee stock ownership plans and things like that. So you're actually loading your risk. You know, let's use Atlanta as

an example. You're here in Atlanta, you load up on coke stock and UPS stock because you want to, you know, root for the home team. Well, your home value depends on how Coke does and how UPS does. You know, your local economy and your ability to stay employed in your local economy depends on how these large fortune companies do. So when we invest in what we know, we're typically triple loading that risk. And also a lot of what's

in the news is sort of sensational. You think about something like cryptocurrency, which has been all over the news lately, you know, it feels like you know it because you're hearing about it every day, and so it feels safe. Well, you know of it, love crypto or hate it. It's volatile, and so you know you're you're having heard of it doesn't guarantee that it's safe. In fact, it it guarantees

that it's quite risky. Yeah. I mean in the book you mentioned, is it Peter Lynch that had the quote of investing what you know and how Yeah, that, in fact is pretty terrible advice when it comes to picking a stock or or investing in something that you think will you know, do well over the long term because chances are yeah, like you said, you're just more familiar with it, not because it's gonna be awesome. Yeah yeah, bye bye. What you know is one of these sort

of easy Wall Street sayings that it's actually quite dumb. Yeah, all right, So what about for experience investors? People have been doing in a while. They think they're savvy, they have a good strategy, they know what they're doing, but often there are mistakes, even for people that have been investing for quite a long time. So what what typical

mistakes do you see a seasoned investor making? So It's just like we talked about earlier, how how early success can be the hubris that that leads to the downfall. I think successful investors can get cocky or they can fall prey to this need tom complex complexify. That's not a word. We're gonna roll it where. Yeah, we're gonna

we're making it a word today. They're gonna need to, you know, want to make their investments more complex because they get bored, right, Like, I'm just holding these you know, all you need is a handful of funds if you get the right ones, and like, what what am I gonna do? Now? How can I put a sexier spin

on this? And so I think the risk with with savvy investors are long term investors is either that they get bored with sort of the plane vanilla stuff that they're holding and want to go into more esoteric paths, or they get cocky. And one of the things that is, you know, I talk about sort of these four major behavioral errors in the book, and one of the big

ones is ego. And you have to really, really in investing cultivate this beginner's mind, and you have to understand that the same uh risk infallibility and foibles that befall everyone else. You're just as susceptible to those things is the next person. And so thinking that you have it figured out is a real risk. And ironically, if you're listening to this and you're thinking, well, it's not me, I'm I'm humble, I'm cool, you're wrong. Like more this

it's cool. If you feel implicated in this statement, you're probably okay. And if you don't feel implicated, you're in trouble. But it's say, you know, investing is full of paradoxes. All right, so this is super fascinating stuff. I'm really excited to get into kind of some specific questions that will I think hone in on how our listeners can apply some of these actual behavioral things that happen inside of us to specific actions they can take when it

comes to investing. So we'll get to that with Daniel Crosby right after the break. All right, we are back from the break. Let's talk now what our listeners need to do next. Daniel, we want to specifically talk about passive investing. Joel and I. You know, we, along with great minds like Warren Buffett, recommend a very basic approach to an besting for most folks, in particular folks that are just getting started, widely diversified, low cost index funds. Um,

what would you add to that? What advice would you give to folks? So I would say that, you know, the active passive debate is one that rages quite ferociously in my world. Uh, there are a couple of things I think more than how active or how passive a vehicle is that I think you need to keep in mind. Okay, So one is rules based. So part of why passive has one over long periods of time is just that

it's systematic. And you find even among the best active managers, you know, folks like Jim Simons at Renaissance Technology, who has had you know, absolutely eye popping technologies and returns. Rather, none of us have enough money for him to take our phone call, but you know, he he is. He says, we have a model and we follow it slavishly. So one is you don't want human discretion involved. You want an automated, rules based system, or at least a a system with a lot of rules and maybe a touch

of human discretion. Research I did in my book The Laws of Wealth found that over two hundred studies were done on comparing human discretion to simple rules and algorithms and found that nine percent of the time the rules beat or match human level discretion PhD level human discretion. And that's no work. And you forget it basically, like you follow those rules to a t. Yeah, absolutely, so

you want you want something that's rules based. And even when passive vehicles have gotten in trouble, it's because they strayed from their rules. Now people don't know this, but the SMP five hundred is made up of a committee, right that selects who goes in and out, and they have these rules about you know, it needs to be profitable, it needs to have this many years and they have

deviated from those rules historically. They did to include A O L back in the late nineties, yep, and they got crushed, right and they so you hadn't been around as long as they be. It wasn't profitable. But people were clamoring for it, right because it was the tech bubble and it was hot, and they're like, give me the A O L. And like they they they buckled, right, and they did, but they shouldn't have. And then you know, one year later it dropped whatever and they couldn't afford

to send CDs around all our house. You want that annoying dialote noise. Yeah, So you want something that's rules based. You want something that's you know, has a reasonable fee. You're gonna pay more for small cap, You're gonna pay more for international exposure. So don't get so hung up on you know, a three basis point fee that you that you can't get the exposure that you need. But you wanted to be rules based, you wanted to be a low fee. Those are the Those are the biggest

things to me. Yeah, So when you're talking about rules, it makes me think of one rule would be to automated and dollar cost averaging is one of the ways that most of us do that through a four oh one K or through just an automatic a c H deduction from our one of our checking our savings accounts and it goes to hopefully a low cost brokerage account company into a ROTHIRA or traditional area or whatever it is.

So what what other rules besides just keeping it automatic and and doing it consistently, what other rules should we implement to ensure that we're investing well. So just a quick plug for automation there's nothing better that you could do than automate. You know. One of the things that my research has shown is that our willpower is just so much weaker than we think, and so automation is the number one thing that I would tell you. The second thing I would tell you is sort of counterintuitive,

and it's too it's to celebrate winds. You know, I feel like some people, this journey to financial freedom is a long journey, and it takes a ton of money. And I start research the other day that says people are spending on average two hundred and fifty thousand dollars in retirement on medical expenses outside of insurance premiums. I we just need tons of money. You just need tons

of money to retire. So celebrate wins along the way, because it really really is a slog And so, you know, my family and I were very disciplined, but we recently hit a big milestone for us, and we're gonna go sploige a little. We're gonna do things we don't usually do, and it's gonna hopefully give us that next, you know, shot of adrenaline to go the next leg of the race, because it's a very, very long race. And I think you want to automate, but you want to you want

to congratulate yourself because saving is hard. Investing is hard. One of the big points I make in the book is that everything we're asked to do right, to take on risk, to take on uncertainty, to take money that we could spend today on stuff that would be fun and put it aside for old man Daniel, who's not very real to me. All of this is psychologically difficult. To make sure you give yourself a break along the way. I do want to hang out with old man Daniel.

Old man Daniel is gonna be sweet. Daniel is going to be sweet. Cheese cheese every cheese for days, with the cheese in a rocky chair. So also, you don't have nice things to say about investment managers. They have bias as well. Should investor ever pay an advisor is a just silly to shell off his fees. Okay, So I I work for an investment manager, so I have to be careful right now. So I I say in my book The Laws of Wealth, you need a financial advisor,

but not for the reason that you think. Okay, most people when they hire a financial professional, they think the reason that I'm bringing this person on is because they're gonna pick hot stocks for me. They're an investment wizard. All of the research shows that, uh, that is not the case, right. Uh, financial professionals make the same dumb mistakes with their money that we do with our money.

But the research also shows that people who work with a financial professional tend to do two to three percent a year better than those who don't, even net of fees. And that's because they're a behavioral coach. They keep you from doing the stupid thing. They they encourage you to do the hard thing. So I think about ten percent of the world does not need a financial professional in their corner, or does not need a robo advice or any sort of advice. They're going to figure the stuff out.

They're gonna do it by themselves. They've got the discipline. Ten Another ten percent of the world, on the other end, are just degenerate gamblers. There's not you know, there's not enough good advice in the world to to save these folks.

But for a lot of people in the middle, whether it's uh, you know, a full service financial advisor, whether it's sort of the on call financial advice that's available now through Schwab and Vanguard and other people for as little as thirty bucks a month, or whether it's a robo advisor. Most of us needs some sort of framework, and you can ratchet that up or down depending on

how disciplined you are. But I would say that almost all of us need some sort of hand holding, some sort of guidance, and that is the number one thing that an that an advisor or an advisor light does, and its behavioral coaching and not asset selection, because you can, I mean, you can take this weekend, read five books and figure out how you should allocate your assets. It's quite easy. It's very very easy to get a low

cost diversified portfolio. It's much harder to day of the course. Right, So it's not like you said, it's not the asset allocation part of it. It's the behavioral part of it

that's the tricky part. Um I mean, is that not where you feel that a robo advisor could, you know, for a low cost kind of keep you on that path of making sure that you're you know, you've got your pie selected and you're rebalancing and you're you're sticking to what you want to invest in would that be a way that folks could could save money and not pay higher fees potentially. So there's there's really three things

that I think folks need. They need education, you know, to to do the right thing, and a robo advisor provides that they need the right environment, which is the portfolio in this case. The robo advisor does that as well as anyone um. And they need just in time advice. They need someone to like slap the bad decision out of them at the at the inopportune moment. And so that is where I think that robo advisors candidly are a little unproven, just because most of them have only

existed in a relatively sanguine market. Right It's been a very good run for as long as the wealth fronts and betterments of the world have been around. Now Better and in particular is doing really cool stuff with behavioral finance.

Dan Egan is their head of behavioral finance. Does an excellent job and does things like, you know, if someone's about to sell, the robo advisor will pop up a thing that says, here are your tax consequences if you sell, and people go yuck, like you know, I hate paying taxes. You know, and so then they're induced, oftentimes to to stay the course. So there are subtle nudges that I

know that robo advisors are are working on. But I think for some people still you need Bob down the street to call you up, to come to your house and say, hey, man, chill out. So I think that for some people that will work, for some people that won't. And I think that robo advisors are still kind of untested, and nobody's more excited to see how they do than

me when where you know, we have a leg down. Yeah, I mean, I remember during the Great Recession talking to co workers, and people were panicked, and a lot of folks that I knew just weren't willing to stay the course. They just couldn't handle the heat in the kitchen, and they said, I have to sell, I have to make some changes, I have to put more of my money in cash because I just I can't ride this ride anymore.

And I do think that you're right that the number one reason to consider having a financial advisor is if you have a personality where you are unable to stay the course, where you're unable to obey those rules that you've set for yourself, I think in a perfect world because Matt recently on the show, we talked about fees and the importance of fees right when you include your financial advisor, and that oftentimes the fees become excessive and a lot of people just don't have a lot of

people won't can't even be seen by a financial advisor because they don't have enough money, right, And then there are a lot of people who balk at the fees because that hurts returns over time. But I do completely understand your sentiment, and I think it makes a lot of sense that a lot a lot of people are unwilling to continue abiding by their rules and to continue to invest consistently even through the hard times, even though that's the most important time to to continue to be invested.

So I think that makes a lot of sense. If you look at the research on the behavior gap, so the delta between the returns of the equity markets and what the average equity investor gets, it's usually somewhere around fort So like over the last thirty years, SMP has given you eight and a quarter percent, the average investors kept like four and a half percent of that, So

they're in and out because they're in and out. So paying an advisor one percent, which is admittedly a lot, Like paying an advisor one percent is a lot if you can do it by yourself. But if it saves you a four percent delta, then it's well worth it. And so it comes down to sort of being candid about your level of discipline and willpower. Uh, And that's a that's a hard thing to do. It's a hard thing to look in the mirror and go, yep, I'm the I'm the one the biggest problem. I'm the du

fist that's gonna sell at the wrong time. And yet you know most of us are so yeah. So it's almost like we don't need a Bob down the street. We need a Terry Crews to like come and like totally check us, right, to flex his pet and tell us that we better stay the course. So, Daniel, for most folks that that don't have a ton of money, right, maybe they've got five or ten or twenty thousand even right, Like, that's not a ton of money to be seen by

an individual advisor. Sometimes, what advice would you give to someone in that situation who is looking to be a better passive investor? How do you set up those rules that you mentioned earlier. Yeah. So the first thing, and this is again a little non traditional, I would say to invest in yourself. You know that you can't bleed a stone, so it takes income to be a successful investor. And so one of the most powerful things and most

ignored pieces of financial advice is taken online course. You know, go back to school, do what you need to do to get your income to a place where you can say more. So that's investing in yourself always pays great dividends. That The next thing that I would say is again just get started, and you can again take a lot of risk. I think when you don't have much to set aside, just find one or two funds that are going to cover the water front of the whole world

for very, very minimal fees. I get get that going and make sure that it's automated, because once it's automated, you never know, you miss it, you never see it, and and it won't hurt you avoid the pain of saving, because all of my research is shown there's a lot of psychological pain with you know, taking money and going well,

I'm going to save this. Now, you avoid that pain of saving when you automate the withdrawal process like you talked about before, So invest in yourself automated and celebrate those winds along the way. Yeah. I think if you're in the wealth building phase of life, like you just said, like you don't have tons of money, whether you're twenty or whether you're forty five, you can afford to take

one more risk with your investments. You don't have to be in a target retirement fund that's exactly matched to your age because you won't have as much risk and really what you want, you want exposure at that point in time where you're beginning to invest, no matter what your age you're at right, Yeah, absolutely, well, Daniel, thanks so much for for joining us today. We've really enjoyed

talking to you about behavioral investing specifically. I mean, there's just so much employ other than just knowing the right decision to make. There's so much in play kind of between our ears, right, Like our own minds are oftentimes the uh, the our worst enemy. So we really appreciate you sitting down with us. Yeah, it's been it's been my pleasure. Thanks for having me, guys. Yeah, thanks for coming in. Man, all right, Matt, that was a super

fun conversation. I mean, like, honestly, I truly enjoyed Daniel's book. I think I'm just fascinated by the way our brains play trickery on ourselves and and ultimately it ends up hurting us as as humans and as investors. Right, it's just fascinating, fascinating conversation. Yeah, it's It's definitely true. Man, Let's go ahead now move on to our beer. Daniel was gracious enough to show up with some Atlanta brewing companies, Hop Lanta, which is an I P A and will

you ever get tired of I P A? Joel n Man Never? And this one was was interesting and had a nice little citrus zest kind of to it, but it also had kind of that classic I P A bitter taste as well, so it kind of balanced, in my opinion, the new style of I pas and the old style, and I think it did it quite nicely. And plus it's a hometown beer. We gotta love it. Yeah, We're pretty much always gonna be fans of local Atlanta breweries. And this one was Atlanta's first original brewery, so they

actually recently changed their name back to Atlanta Brewing company. Jell. You remember when they were a red brick, but they're red brick there for a while and then they kind of changed back to that moniker Atlanta Brewing Company. Those are sad days when they were red brick for multiple reasons. The beer wasn't very good either. But they've got a new brewer at the Helm at Atlanta Brewing Company, and

their beers have just gotten a whole lot better. The branding is is sweet, and yeah, I thought this beer was great. All right, Matt, And it's time to give away three copies of Daniel Crosby's new book, The Behavioral Investor. And if you nerd out on kind of psychology, physiology and just kind of how that affects, you know, how we invest, then you will really really like his book.

And he was kind enough to not only donate the beer that we had on the show today, but also to have donated three books for our listeners to get. And so, Matt, you want to go into the details of how folks that are listening can qualify for the book give away, Yeah, Jeel, Like we've done in the past, what you need to do to end true into the book giveaway is head over to Apple Podcasts and just leave us a solid review. And if you're not an Apple person, if you're an Android person like me, you

know what, you can also leave a review. It's Stitcher and you can do that through your web browser, so you don't even have to do it through the app on your phone. It's super simple. And once you leave that review there for us, please send us a quick email at how to Money pod at gmail dot com letting us know as well as your screen name that you left that review under. We'll have that giveaway going all this week and we're going to close that down

on Friday at five pm. We'll announce that new winner on the next Monday's episode. So thanks in advance to everyone for doing that. Sweet all right, time to close out another good episode. Oh and by the way, we'll have show notes up for this episode on our website how to money dot com. So, Joel, I think that's gonna be it for this episode. Man, Until next time, Best Friends Out, Best Friends Out.