Unlock the secrets to financial empowerment and get ready to transform your approach to money with our latest conversation featuring host Steve Davenport and Clem Miller. We're breaking down the essentials: from the unparalleled power of compounding interest to the lifelong dividends of an investment in education, prepare to gear up your financial wellness journey. With our step-by-step guide, you'll learn how starting small can lead to big gains and why it's never too early to focus on retirement planning. It's time to start making your assets work tirelessly for you, and we've got the blueprint you'll need to make it happen.
This episode is more than just finance; it's about fortifying your human capital in an ever-changing job market where adaptability reigns supreme. We weave through the importance of nurturing your body, mind, and spirit, and how this holistic approach can amplify your productivity and job satisfaction. Embrace the strategies that fuse personal and financial growth, aligning your life with your core values for optimal success. Join Clem Miller and Steve Davenport on this enlightening journey, and let's chart a course to your most secure and satisfying future.
Unlock the secrets to financial empowerment and get ready to transform your approach to money with our latest conversation featuring host Steve Davenport and Clem Miller. We're breaking down the essentials: from the unparalleled power of compounding interest to the lifelong dividends of an investment in education, prepare to gear up your financial wellness journey. With our step-by-step guide, you'll learn how starting small can lead to big gains and why it's never too early to focus on retirement planning. It's time to start making your assets work tirelessly for you, and we've got the blueprint you'll need to make it happen.
This episode is more than just finance; it's about fortifying your human capital in an ever-changing job market where adaptability reigns supreme. We weave through the importance of nurturing your body, mind, and spirit, and how this holistic approach can amplify your productivity and job satisfaction. Embrace the strategies that fuse personal and financial growth, aligning your life with your core values for optimal success. Join Clem Miller and Steve Davenport on this enlightening journey, and let's chart a course to your most secure and satisfying future.
Straight Talk for All - Nonsense for None
Please check out our other podcasts:
https://skepticsguidetoinvesting.buzzsprout.com
Clem Miller:
Right, exactly. Welcome everybody to Skeptics Guide to Investing. I'm Clem Miller and today we are going to talk about managing money. Money management ideas top five how to start adulting. Steve Davenport and I will dig into the steps you need to take when starting out to get your assets working as hard as you do. When I think of money management, I find it hard to pick where you start, Steve. You've been focused on financial wellness most of your career? Where do you think investing and money management, personal finance, should start for people?
Steve Davenport:
There are a lot of lists out there, Clem, and I want to be clear about starting wherever you are and with whatever you can do. If it's $50 or $100 a month, that's where you start. There are no bad plans, but plans could be made with a higher chance of success.
Clem Miller:
Steve, you've done some work with this and over time, what did your group come up with for personal finance top five?
Steve Davenport:
These are ideas were created to look at your life and your finances and align them together for your best life. I think that people need to plan the way they want their life to be. Let's just get started and doing some of this is a great way to begin. It's a long journey and every journey starts with a step, so, really, we looked at two main areas of financial literacy personal finance and money management. We tackled personal finance a few weeks ago, but today we'll start the Money Management Podcast. We want to be brief so that people start who don't feel overwhelmed. I believe we're in a time of great change, where investments have become more mainstream and people want to get involved. These are done in no particular order, but they will all add value to your financial wellness.
Clem Miller:
So, Steve, what makes up the top five?
Steve Davenport:
Okay, let's do it. Number one the largest expenditure you'll have in your lifetime is going to be on your retirement. So taking care of your retirement early and starting to take advantage of some of the systems and the products that are out there, I think you should start talking about retirement. Most companies will have a 401k and in that 401k they'll match your contribution. This is free money. Repeat, free money. So you should be taking the free money as much as you can and start there, because that's a great way. If you put in two or 3% and you matched with two or 3%, you're immediately at 5% savings and it really hasn't impacted you as much as you think.
Steve Davenport:
Number two invest in your education and knowledge. Learning is a lifetime endeavor and it will add considerably to your overall wealth. The number one item the Fed noticed in terms of improving people's life was a degree, so that degree will add somewhere between $500,000 and $700,000 over the course of your life. Education matters the more you learn, the more you earn. Number three you are the biggest asset your human capital so take care of your body, your mind and your spirit. Number four compounding is a great force and you should use it to improve your chance of success. And number five asset types and expenses need to be understood to benefit you. Just as you learn how to cook, you learn how to do things with your yard and with your home. You need to do the same with your assets in terms of financial assets. These are high-level ideas and you can apply them in a rigorous or casual way. The important thing is to start thinking about them, start taking action, one day at a time.
Clem Miller:
So, steve, let's focus on the retirement aspect. Why bother with retirement in your 20s? I mean, isn't there plenty of time when you're still 23, 24, 25?
Steve Davenport:
Your career will take you many places and you need to get started and get your match and get confidence that you're acting for your financial future. The minute you start to talk about doing something, it immediately, if you implement it, you immediately get some feedback that says hey, look at this, every month I'm doing this, every year I've done this, and that momentum needs to start early and if it does start early, you can handle this retirement. But right now one of the worst parts of our financial literacy as a country is that people aren't prepared to retire, that people aren't prepared for retirement.
Clem Miller:
Okay, so retirement is, in my view, obviously a critical factor. I also agree with you on education in school. Those are critical factors as well. In fact, I would say that, steve, you and I both went out there and got the designation of Chartered Financial Analyst. I think that's helped us measurably in our careers. But in general, speak to the issue of education and school. How does that really help, especially on a lifetime basis?
Steve Davenport:
So I think there's a concept here that was really talked about and discovered and recognized in the 70s. There was an economist at Chicago named Gary Butler who won the Nobel Prize for the idea of human capital. It used to be people thought of capital only as equipment and factories, real estate, physical items, and then his idea was looking at the GDP per person. He noticed that the countries with higher education levels had higher GDP per person, and so if you think about effectiveness at a country level, you would want to have more GDP so there'd be more resources, so you could afford more schools, roads, etc. So his concept really started at the country level. And when you think about it, you're going to have 40 years of your career and 20 to 30 years of retirement. So when you look at your human capital, whatever you're preparing it for, you're going to put yourself in a better position the more opportunities and the more strengths you have on your resume. So when I look at the concept of GDP per person, it eventually led to the concept of human capital and the starters of startup companies and investment managers who were yielding great results and helping pay their clients for their fees. So it used to be an expression when I was at State Street, that all the talent goes up and down in the elevators every day. That's the human capital that matters, and so now I think we're taking this human capital to the next level. We're not thinking about big companies. We're not thinking about how much human capital Musk brings to Tesla. We're thinking about how do individuals think about themselves.
Steve Davenport:
When I was graduating from college, all I had was debt. I had no assets. I was starting life and but my human capital because I graduated from engineering school and math degree that human capital in me had potential for 40 plus years to generate reasonable income and ultimately allow me to save. That's when you're at your richest with human capital, but at your poorest with financial assets. As you add to those financial assets and they start to grow, you start to realize that your human capital is being transferred to financial assets, and that's really the concept that people need to understand.
Steve Davenport:
When they're doing something, they're doing something that they take with them. When I got my CFA, I was with State Street and I took that with me to other companies because it's an asset in me. I'm now worth more because I got a CFA, and that's the way people need to think of it, enhance your value, make yourself more valuable and ultimately, those certifications and conferences can help you find a niche or specialty. You have a special set of skills and abilities. When you bring those to the companies, they want to include you in the organization. The more things you can bring. So what do you think of these guidelines, Clem?
Clem Miller:
I think they're excellent, and I would add a few observations.
Clem Miller:
First of all, when I look at a younger generation and actually not that much younger than we are, Steve. Companies tend to spend far less time at a particular company than, say, we did Steve, and there's a lot. I wouldn't say, job hopping that used to be the negative connotation, but there's a lot of movement from one company to the next and, quite frankly, some companies are less loyal to their employees than perhaps they should be, and so there are layoffs.
Clem Miller:
That can happen quite frequently, especially in some industries. So you have to be prepared to change, to change jobs if there are layoffs, to change jobs if you find potentially other opportunities to change jobs, to develop additional skills that you might get out of a new job Applying your old skills, applying your old skills but picking up new skills. You have to be ready for that, and the way to be ready for that is to develop your education, obtain certificates, build experience, move around different firms. This is it. This is the way you build that human capital that you, steve, were talking about, that can be transferred into financial assets over time, not just for your retirement, but also so that you can have an enjoyable life throughout your life.
Steve Davenport:
Yeah, I mean I think about all the travel you've done as being involved in international finance, and that's in line with what your values are. You're interested in international, so you travel more and it makes your speaking on the topic much deeper. To have that, I think that you know. I'll start with number three. You are the biggest asset. Your house, your car, your jewelry, your TV, those aren't it. You are the biggest asset and therefore you need to take care of that asset. You need to take care of your body, your mind and your spirit in order to be the best you can be.
Steve Davenport:
I think that there's two ways you can find your life going In a virtuous cycle or a vicious cycle. Your work can just be moving sideways, but I'll take the two extremes. A virtuous cycle is you take care of yourself. You exercise, your diet is good, you meditate daily or pray and all of a sudden, when you go to work, you notice you have more energy, you seem to be more on top of things and your boss appreciates that that leads to more income and more opportunities and more areas for you to succeed. If you don't bring that energy, if you don't take care of yourself, if you miss work and you have high healthcare costs.
Steve Davenport:
That's what we call a vicious cycle, where you're not going to be succeeding and you're going to be having trouble at work, getting there on time and getting there to perform the same way that person who's exercising and has some good habits. All of a sudden, your reviews aren't going to be as good, your energy isn't as good and therefore your company starts to consider you when they're thinking about layoffs. That's the way you've got to look at yourself and say, in order for me to help this company, I need to first as they say on the airplane put your mask on first before trying to help others with their mask. That's where I think we all have to say it might be unselfish to go to the gym. It might be unselfish to do this fancier food that's organic and that's not really. You're really trying to figure out the best way to be the best you so diet, exercise, meditation, rest, balance all of these things help you to be better.
Steve Davenport:
There's free ways to find contentment First bathing and other strategies out there. There was a study done in Toronto where they looked at people who walked in the underground tunnels that they have during the winter and they also had a person walk outside on the same two miles through the city, outside, through the city underground, and the endorphins and the information they got from the person who was outside was much more positive blood pressure was lower and people were better. How does that happen? Because we benefit from being around nature. We benefit from these things. So therefore, align your plan, your vacations, your home, your bike versus a car, your talking and walking. All of these things help you take responsibility to making your life the best it can be and ultimately, that improves your financial well-being.
Clem Miller:
Wow, I like those thoughts. So now, how about your thought number four, which is compounding?
Steve Davenport:
Sure, compounding is a mathematical term and basically what it means is your earnings start to grow as well. So when you buy a company and it pays you a 2% or 3% dividend, that dividend then gets reinvested in more stocks and now all of a sudden you have $103 instead of just $100 when you started at the beginning of the year. And leaving that alone and letting it compound really makes a difference. Time is your friend at 22. You have 40 years to retirement. Patience determines results. When we think about what characteristic of an investor makes him most successful, it's most likely patience. It isn't the timing of the market, it's the time in the market. So let yourself be patient and you'll realize that, hey, I'm doing things, my money is working for me and therefore I don't need to be involved in touching it. Touching and changing and trading involves more taxes and transaction costs, which ultimately leads you to the last grid results Over the 10-year rolling periods. There's almost no negative returns in the last 100 years. No negative returns if you leave something alone for 10 years. That's a pretty strong argument.
Steve Davenport:
Einstein had a comment which is either accurately or not accurately attributed to him, that the miracle of investing is compounding. It's better to earn interest than to pay it. I think that's a very good point for all of us is that we fund things that we want to fund, but we try to avoid paying interest and we try to make sure that we're earning enough interest. When you look at yourself and the compounding, I think of compounding. I think this should be invested in several ways. What do you invest in when you were young, clem? How do you make sure the compounding helped you as you went along in life?
Clem Miller:
Obviously, I'm at an age where I and with knowledge and skills right now where I can make decisions about investing in particular stocks and other assets and avoiding other stocks and other assets. I can make those decisions. When I was 23, 24, 25, I would say, even when I was in my early 30s, I just felt like I didn't have enough knowledge to be able to make those kinds of discriminating decisions. I think when you're young, the best thing to do to compound is to be in the market overall, to be in an index fund, an S&P 500 index fund, maybe a combination of an S&P and a small cap and an international index funds. That's what I did and through a good chunk of my youth I would spend investing in those broad passive market instruments and certainly not speculate nothing speculative.
Steve Davenport:
I started at State Street Global and they were the index kings. Of course, the 401k had indexes and so it was pretty easy to make the decision because I don't know if there was even an act of the choice. I think that some people are starting to lean that way with encouraging plans where the individuals are giving good choices and they're not giving choices that have 1.5% fees and therefore are going to hurt their ability to compound. Well, I think the most important thing is getting started and seeing the money grow. I think it has a great follow-on effect. For number five, asset types and fees. There's really two types of assets when we look at it simply there's risky assets and there's safe assets. I'll put risky assets as equities, homes, real estate, commodities, other items, and then I'll say safe assets as bonds, cash and items where you are going to get return of your principal, not just return on your principal.
Steve Davenport:
Vanguard has done a study, not coincidentally, that shows that the best indicator of success for a fund is the fee. If the fee is low, the fund will have a higher probability of success in reaching its goal. If the fee is high, it has less of a success. Let's just think about that $10,000 invested with 1% fee, you're losing two fees $100 every year. When you think about that, okay, $100. The 8% return that's the average is $800. So if you lose a hundred of that 800, you're losing about 12.5% on your investment. That's significant. I agree with the idea of you have to pay the manager something, but today we're paying managers and those funds somewhere around $5. So when you think about that, $5 versus $100, $5 on $800 is less than 1%. That's a big difference in 12 and a half.
Steve Davenport:
So when we think of an industry that's full of solutions, how do I break all these solutions down? First place you look is fees. Look at the fees and understand what you're paying for. And when I looked at some of the fees and some of my IRAs, I was like, is this really gonna give me that much more value that I'm gonna pay a fee of 1% to 1.5%? And I hate to say this, but I see a lot of people who don't even know what their manager fees are. Look at your fees, understand what you're paying and who you're paying it for. When I see people who have relationships with large brokerage organizations and they're non-fiduciaries, I see them say, oh, I've paid this manager 1% and then he's putting in me in five or six different mutual funds. Each of those funds have a 1% fee. Some of them have loads which are 4% or 5% to get in. Now, all of a sudden, you're starting to see that these people are not really getting a lot for their money. That's what you gotta avoid.
Steve Davenport:
So Buffett had a simple solution. He said if I was to recommend to somebody and I wasn't here to invest for them, what would I get them? They should have 80% in an S&P index and 20% in treasuries. I think that's a simple and great explanation for how you should be invested. Should we try to be more sophisticated? Add international, add small, add mid cap.
Steve Davenport:
I have a group of investments called the messy middle. There are somewhere between being fixed income and safe and somewhere between being in equity and risky. I'd call those REITs high yield preferreds. They don't fully have the characteristics of all the safe assets and they don't have all the characteristics of the risky assets. So I'm a middle child, so I believe in the messy middle, but I can see some people not. Time again is your friend. So therefore, make a decision, stick with it and forget about it. Focus on your job, focus on your living and let your investments work for you. That's what's most important. Time can yield more results, but there's no free lunches. Every time you take risks you're most likely gonna have to take to get great reward. You need to take greater risks and I'd recommend it when you're starting. You have the more time to make up for some of those risks.
Clem Miller:
So, steve, let's jump, shall we, to summarizing the podcast today. So what are your again? What are your five big points, your five big takeaways that you would let especially the younger people know about how to approach investing.
Steve Davenport:
Okay. The first one is retirement. Focus on it early, get started. It's a big mountain to climb, but you're gonna start sometime and the sooner you start, the more you're gonna be able to tackle it. Number two invest in your education and your knowledge. You are going to add more and have less unemployment when you have an education. Three you are the biggest asset, not the home, not the car, so take care of your body, mind and spirit. Three compounding is a great force and you should use it to improve your chance of success. It is one tool and one idea, so therefore, put it in the mix and say to yourself I'm not touching these assets, because if I touch them and I cheat and I take money out, I'm hurting my long-term capability and my long-term results. And five asset types and expenses need to be understood to benefit you. I think that all of these items are doable and all of the items just take a little bit of time and you'll get a great return on that time you spent. Clem, do you have anything else?
Clem Miller:
to add. I do not, steve. I think you covered everything extremely well. I hope our audience, especially the younger folks in our audience, got a lot out of this experience. Please let us know if you have any questions or would like us to follow up in any of these areas. We really would welcome the opportunity to talk about some of this material in greater depth.