Jason and David discuss the difference between investing, speculation, gambling and whether you should use Bitcoin in your investment portfolio.

David Stein produces and hosts the investing podcast Money For the Rest of Us where he teaches over 30,000 listeners per episode about money, how it works, how to invest it and how to live without worrying about it.

David also provides market insights, asset allocation help, and portfolio guidance to over 800 members of Money For the Rest of Us Plus, an investment education platform.

Previously, David was Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group, LLC (“FEG”), a $50 billion institutional investment advisor.

At FEG, David was co-head of the firm’s 21-person research team that provides institutional research on private equity, real assets, hedge funds, equity, and fixed income, including topical level and manager specific research. He was responsible for FEG’s top-down research including macroeconomic analysis, market sentiment research, model portfolios and capital market analysis. David also co-founded FEG’s $2 billion asset management division, developed its investment philosophy and process, and acted as lead portfolio manager for over 9 years.

David has spoken at numerous investment related conferences including events sponsored by Morningstar, iShares, TD Ameritrade and Fincon.

Below is the full transcript:


Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now, here is your host, Jason Parker.

Jason: America, welcome back to another round of Sound Retirement Radio. So glad to have you tuning in this morning. You’re listening to episode 153, Money for the Rest of Us, with David Stein. I’m really excited to have this interview and this conversation. Before we bring David on, though, as many of you know, we like to get the morning started right two ways around here. The first is by renewing our mind and we do that with a verse, and this verse comes to us from Luke 15:4, and then Jesus told them this parable. Suppose one of you has 100 sheep and loses one of them. Doesn’t he leave the 99 in the open country and go after the lost sheep until he finds it? And the parable goes on, but you’re going to have to read it on your own to see what happens next. But that’s a good one. A friend of mine told me it was that verse when he heard it that something just resonated with him. It clicked and that was the moment that he formed a relationship with Jesus.

 The next thing we like to do is share a joke, something to put a smile on your face. If you’re going to go see the grandkids, we always like to have a joke that you can share with them, and so our joke this morning is: Why was Santa’s helper sad? Because he had low elf esteem. You guys keep tuning in and the jokes keep getting worse, but thank you.

 Okay. So for our episode 153, David Stein produces and hosts the investing podcast, Money for the Rest of Us, where he teaches over 30,000 listeners per episode about money, how it works, how to invest it, and how to live without worrying about it. David also provides market insights, asset allocation help, and portfolio guidance to over 800 members of the Money for the Rest of Us Plus, an investment education platform. Previously, David was chief investment strategist and chief portfolio strategist at Fund Evaluation Group, FEG, a $50 billion institutional investment advisor. At FEG, David was co-head of the firm’s 21 person research team that provides institutional research on private equity, real assets, hedge funds, equity and fixed income, including topical level and manager specific research. He was responsible for FEG’s top down research, including macroeconomic analysis, market sentiment research, model portfolios, and capital market analysis.

 David also co-founded FEG’s $2 billion asset management division, developed its investment philosophy and process, and acted as lead portfolio manager for over nine years. David has spoken at numerous investment related conferences, including events that were hosted by Morningstar, iShares, TD Ameritrade. And I had the good fortune to meet him at a recent FinCon. David Stein, welcome to Sound Retirement Radio.

David: Well, thanks. It’s great to be here.

Jason: That is quite the bio. I actually didn’t know all of that about you when we met and had lunch at FinCon, so I’m really excited to have you on the program. I know that we’re going to be able to add some significant value to our listeners’ lives. Before we get into some of the nuts and bolts on things people should be thinking about, I’m curious to know why you decided to, at 46 years of age, quit your successful investment career.

David: More freedom, which is surprising, because I didn’t really have a boss and I worked and I telecommuted, so I live in Idaho. My home office is in Cincinnati, so I had a ton of supposed freedom. But I sort of felt like there was more. I could do more. I could travel more, just more. I sort of felt like I’d peaked, and you kind of get … I was in my mid-40s, so you felt like you were kind of waiting out the clock and I just wanted more opportunity, more challenges, and so I left.

Jason: Wow. Man, that must’ve been … Are you married?

David: I am married. Yeah.

Jason: What did your wife think about that when you told her?

David: She was all for it.

Jason: Really?

David: She was encouraging me. Oh, sure. Well, for example, once I quit, I had about 12 clients, endowment and foundation clients in addition to my other responsibilities, so I had meetings. I was flying everywhere. And so this allowed me, we took three months to travel with our family in Europe and Asia. It’s been five, six years now, and that’s precious time I’ve been able to spend at home with our youngest daughter. It was a great move, personally.

Jason: Wow. So looking back, no regrets about walking away from it.

David: None at all. No. No.

Jason: Well, that’s a fascinating story. You may not know this, but Sound Retirement Radio is all about retirement and helping people make this transition into and through retirement. One of the things that a lot of them are looking forward to is that freedom that you just mentioned that you also were seeking. And so if you had just one thing that you could share with people that are getting ready to make that transition into retirement, David, what’s the most important thing you’d want to tell them?

David: You can’t just have empty freedom. You have to have freedom with a purpose. There needs to be some project, ongoing project, routine, discipline, that you’re committed to because … And when I quit, it took me a while to figure out. What am I going to do with the rest of my life? Having what I do now and continuing to educate people and teach them, knowing I have to product a podcast once a week, that gives me something, a routine, because just empty space … I spend a lot of time with elderly. My neighbor’s 92 and it can be boring to be retired. It can be and it’s something I’ve never really thought about because we’re always looking forward to this freedom and we have it, but then if there’s nothing we’re committed to, we can get bored very quickly.

Jason: I actually experienced a little taste of that. Several years ago, I decided to take a couple of weeks off, and I had never done that in my life. It was very foreign to me. But at the end of that couple of weeks, I was getting a little stir crazy. I was like, “I need to get back to be productive and working and doing something with my time.” And I got just a little bit of taste of what it was like to not have to do anything for several weeks. It was a great refresher for me. I mean, I didn’t even check email for a couple of weeks. But I was definitely ready to come back and realize that, at this point in my career, and at that point in my career, I was nowhere near ready to retire.

 David, we’re in a weird economic environment right now, one where our debt continues to grow over $20 trillion now. They’re talking about tax cuts. The stock market is at some of the highest levels we’ve ever seen. Interest rates are starting to rise, putting pressure on bonds. If somebody’s getting ready to retire from a financial standpoint, can they have confidence that the numbers are going to continue to work for them from an investment standpoint as they make this transition into retirement. What are your thoughts about that?

David: Well, you have to recognize where we’re starting at. Bonds are real simple. It’s based on math, and so if you look over the next decade, the expected returns for bonds based on their current yield of maturity is about 2.7% to 3%. And if you assume that for bonds, 3%, and assume 5% to 6% for stocks, those are the numbers you should be basing your retirement on. Sort of a 4% to 5% portfolio return, kind of best case scenario, based on, as you mentioned, very low bond yields with upward pressure and interest rates and above average valuations. And so if you go in recognizing that those are the numbers and base your spending on that, then yes, you can be confident that retirement will work out.

 If you need 8% to 9% for your retirement math to work, then that’s a challenge, which is why for most individuals, they’re going to have to continue to work some, perhaps part-time, in their retirement, which is actually a good thing. It’s a perfectly acceptable thing to do because we don’t want to go into retirement with false numbers. We have to look at where we are. And where we are is, very low bond yields and above average valuations for stocks, which means lower returns looking out over the next decade or two.

Jason: With that in mind, the concern is sequence of return risk. Right at the time you retire, the market tanks. So it’s not just the assumption of the low return, the 4% or 5% return. But what if somebody is getting ready to retire, they need money from their portfolio to help supplement their lifestyle needs and the market falls off a cliff right at the same time. Is that possible in today’s environment from your standpoint?

David: Of course. It’s always possible. The sequence of return risk is huge, which is why most retirees should not go into retirement with a heavy equity exposure, stock exposure, 70% stocks. We should always assume that the market could fall 50% at any time. And then think about: What would the consequence of that 50% decline be on our retirement? For some, that means they’ll put aside three to four years of spending in a separate account, which effectively lowers their stock allocation. But there’s ways to go about that. But yeah, going in with an equity heavy retirement, unless you have a pension plan. If you have a pension plan that’s covering most of your expenses, then you can afford to take more risk. But if you’re dependent on your individual retirement account and perhaps social security for retirement, then going into retirement with lower stock exposure is very important so you do not get burned by the sequence of return risk.

 I think the other thing to keep in mind is just, 30, 40 year retirements a long time, so you take it year by year and look at it. What did I earn this year and what did I spend? And you can adjust. You don’t have to make … We’re not making 30 year decisions here. We’re taking retirement year by year.

Jason: I think that’s a really good point. I think it’s important to try to make those projections out into the future and at the same time realize that they’re just projections and we’re going to have to pivot. We’re going to have to make some adjustments as time goes on. I think that is the prudent thing to do.

 You’re not the only one. I’ve had a lot of guests on this program over the years and some of them are very well respected in the industry. This idea of having three to four years of expenses, of cash on hand, seems to be a reoccurring theme. This is also in line with the type of planning that we do for a lot of people as they’re making this transition into retirement. Why do you think three to four years of cash is the right amount?

David: Well, it’s really just mental accounting, is what it is. Right? When you think about having three to four years, what that effectively means … Because I look at it on a portfolio basis, so yes you set this money aside. But what’s the overall asset allocation if you set aside three to four years? It just means it’s more bond heavy and less stock heavy, but it gives individuals some comfort, so they don’t emotionally overreact to what’s going on with the market. It’s not like it’s a magic number. It’s an element of mental accounting just knowing. And mental accounting’s important for controlling our emotions, which is a big part of being an investor, understanding the math of how markets work. But also understanding the emotional aspect of it, both personally and how markets are driven by emotion.

Jason: What are your thoughts? How important is it for somebody to really understand their expenses or their spending before they make that transition into retirement?

David: It’s huge. It’s huge. In fact, one year [inaudible 00:12:54] Roger Whitney talked about this. I don’t know if he did an episode, but in the past he’s said, because he’s a financial advisor, he has his clients practice retirement for a year. In other words, you live on the amount that you’re planning on living as a retiree and see. One, that helps people realize what they’re spending. But also, what’s it like to not have any income from your full-time job? Which was a transition when I quit my job, that was a huge transition for me, which I didn’t really think about. But I don’t have a paycheck anymore and I’m dependent on that investment income, and so then I’m scared to make decisions. And so it’s important to kind of practice retirement.

 One of the things that I teach a lot is, live like you’re already retired. In other words, try to create a lifestyle that you can sustain for decades, maybe in a career or profession part-time, aside sort of a lifestyle business or something along those lines. That you don’t have to just live in a way that you have, which you want, but you’re continuing to work in some way. And that way, you’re not dependent on your retirement portfolio until potentially late 70s or your 80s.

Jason: I love that. A couple of things, first of all. For our listeners out there, we developed something called theretirementbudgetcalculator.com. It’s a SaaS, Software as a Service, where people can use this calculator to really dial in what their spending’s going to be in retirement. And just a reminder to our listeners, we give a 50% discount off of the calculator if you use the coupon code, podcast, when signing up for it. What you just said, David, I think it pretty typical for a lot of high income earners. They don’t focus a lot on their spending because they don’t have to. But like you said, when your paycheck ends, all of a sudden you realize you have to live off of what you have.

 The other things that’s fascinating to me is how people are making a living today and the opportunity, or making maybe a side gig or a side hustle, which you just mentioned. One of the things I was fascinated by, by attending FinCon, were all the people that are making a really good income from their blogs and their podcasts and creating content and community online. What are your thoughts about these encore careers using those types of platforms?

David: Well, it works, but it takes time. Peter Drucker used to say, the management guru, “When you quit your job and you’re trying something else, allow yourself three to four years to be successful and be able to totally replace your income.” So I quit. I was 46. It’s been five years. This is the first year that I will have made enough on my podcast and education site to live on, so it’s take five years, because it’s like a flywheel, because most things grow by word of mouth online. People tell other people, and it takes a while to find your rhythm. And you have to be consistent. So many people quit too soon, but if you’re consistent and you’re able to iterate and willing to learn and accept when you make a mistake and make changes, one can find what I call lifestyle business, that sustains them for many years into retirement.

 I only work about 25, 30 hours a week, so this is still part-time with a full-time income. My approach is, I don’t like to sort of batch, and get everything done, and then go on vacation. I would rather work on vacation, so when we travel … I was recently in Japan. I podcast in Japan, because if it’s only 20, 30 hours a week, that’s something I can do as I travel. And other retirees could do that too. Find a way. Figure out what lifestyle you want and how you can generate some income doing that, and recognize it will take a number of years to figure it out.

Jason: I want to ask you about your thoughts between the difference between investing, speculating and gambling, and then dovetail into investing in gold or things like bitcoin.

David: Sure. This is an important concept because my belief, I’ve always been an asset allocator as an investor, both professionally and individually. And part of that is understanding. What is a particular asset class? Is it an investment? And an investment is something that has a positive expected return. Often, there’s a cash flow element to it or earning, so a real estate investment, you’re earning income. Earning rent. A bond is investment. Because you have those income streams, or a company stock has a profit, hopefully in aggregate, like an index fund. Those are investments because there’s a positive expected return.

 Something is a speculation where there’s some disagreement on whether the return will be positive or not. Examples of that would be gold or bitcoin. There is no way to value gold and say, “This is the right price for gold and it’s over or undervalued.” It is selling for whatever investors, others, are willing to pay for it, and so there can be some disagreement. There’s a lot of disagreement right now. Is bitcoin in a bubble? Is it a mania? Certainly, people are excited about it. But you can’t say bitcoin is overvalued because there is no value. It’s worth what willing are people to pay and if people trust it, it might continue to do well. If people get disenchanted with bitcoin, it’ll plummet, and so that’s a speculation. Gold is sort of in the same boat. It’s been around for millennia, but there is no right price for gold. It’s what investors are willing to pay.

 Gambling, on the other hand, has an expected negative return. When you go to Vegas, you’re not … The house wins. Otherwise, Vegas wouldn’t exist if the house didn’t win. So you go in knowing, all right, expected loss in aggregate on average. Why do people gamble? They do it for the entertainment. And there are other investments that are gambles. We won’t go into it, but binary options is something that sometimes people get involved in where it’s a particular type of option. Sometimes they last only a minute or two, or less than an hour. That has a negative expected return. That’s a gamble, and people do it for entertainment. They think it’s an investment, but they soon realize that it’s really hard to make money when the house wins in order to stay in business.

Jason: Yeah. If people are going to allocate their resources towards these types of speculative investments, things like gold or bitcoin, any rules of thumb about how much they should allocate to it? I’m hearing stories right now about guys taking their entire retirement savings and buying bitcoin with it. What are your thoughts about that?

David: That’s terrifying. No. In my case, I have about 5% of my net worth, 4% to %5 gold and another 1% in cryptocurrencies, including bitcoin. To me, that’s seems reasonable. It’s a hedge against whatever. Part of it’s just interest. A big part of investing is regret management. Part of regret management is, if gold goes to $10,000 an ounce and I’m not participating, I’ll feel bad. On the other hand, gold might not do anything, or bitcoin could fall to zero. If I had most of my net worth in bitcoin and that happened, not only would I feel bad, but I would be in a serious negative financial situation. And so the idea is to scale your exposure so if you want to you can participate if it goes well. But you’re not going to be harmed because speculations can go to zero, because it depends on people trusting it. If people didn’t trust gold, it would be worth nothing. The same for bitcoin, it’s a trust asset.

Jason: One of thing you say is that investing won’t make people rich. Why do you say that?

David: Because I’ve met very, very few people that got rich investing. I spent years meeting with hedge fund managers, other stock managers, and the reality is, most hedge fund managers got rich because they have a hedge fund business. They’re getting a share of the profits from their clients. We talked about expected returns for stocks of 5% to 6%, 3% for bonds. You’re not going to get rich on that. You’re going to save, and you use investing to preserve your wealth, keep up with inflation. But if somebody wants to get rich, the best way to do that is to start your own business, and most people in the investment business that are wealthy have done so because they have an investment business, not because they’re necessarily earned it all through investing. Helped, and they probably have a good track record, but it came from the share of the profits that came from their clients. Clients paid them that money to make them rich.

Jason: I am going to have some time here in the next month to read a little bit more than I normally do, and so I’ve been asking friends on Facebook what their favorite book is. And for our listeners out there, I’d love to hear their thought too, because I’m just trying to narrow my reading list down for December. How about for you, David? What’s your favorite book? If you had to recommend just one, what would it be?

David: Well, let me just focus on investing. Best investing finance books I read this year was one by Andrew Lo. It’s called Adaptive Markets: Evolution at the Speed of Light. He talks about just how markets actually are. There’s so much argument. Markets are efficient. You should index everything. Markets are inefficient. You should be an active manager. He talks about, most investors, we invest by rules of thumb and we’re emotional beings. He talks of the emotion investing, how to use rules of thumb in your investing, and just how markets work. It’s a great, great book on that.

Jason: Awesome.

David: Another book is called The Wisdom of Finance. It’s by Mihir Desai. He just talks about … He kind of takes humanities and stories and integrates them into finance. In my podcast, I love telling stories. It’s a narrative driven show, and so any time there’s a story with finance, I eat it up.

Jason: David, we are out of time. Folks, if you want to find out more about David Stein, he has The Money for the Rest of Us Podcast. You can find him online. David, thank you for being a guest on Sound Retirement Radio.

David: Great. Thank you for having me, Jason.

Announcer: Information and opinions expressed here are believed to be accurate and complete, for general information only and should not be construed as specific facts, legal, or financial advice, for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee based wealth management firm located at 9057 Washington Avenue Northwest, Silverdale, Washington. For additional information, call 1-800-514-5046 or visit us online at soundretirementplanning.com.