Planning for Outliers and Risk

#681: Barry Ritholtz's mom sold real estate. Those dinner table conversations about mortgages helped him spot the 2008 crash before most of Wall Street did.

Now he runs Ritholtz Wealth Management and joins us to explain why we're often our own worst investment enemy.

He breaks investing mistakes into three categories: bad ideas, bad numbers, and bad behavior.

Here's what stood out. Research shows just 2 percent of stocks create all the market's value. The other 98 percent? Pretty much worthless. Barry says 90 percent of everything is garbage — from science fiction to investment advice.

Even experts have blind spots. Michael Jordan dominated basketball but couldn't make it in minor league baseball. The lesson? Being brilliant at one thing doesn't make you brilliant at everything.

Those financial memes everyone shares? They're misleading.

Take Kevin's Home Alone groceries — $20 in 1990, $75 today. Sounds terrible until you realize wages went up the same amount. We actually spend less of our income on food now.

Or that scary stat about the dollar losing 96 percent of its value over 100 years. Barry asks: who buries cash for a century? His math: $1,000 buried in 1925 buys almost nothing today. Same $1,000 invested in stocks? It's worth $32 million.

Markets don't die of old age. Alan Greenspan warned about "irrational exuberance" in 1996. The Nasdaq kept climbing another 431 percent over four years.

Recessions need triggers. They don't show up on schedule like buses.

Fear wrecks more portfolios than anything else. Barry quotes neurologist William Bernstein: "Control your amygdala or die poor." Our fight-or-flight response helped us escape predators. It doesn't help us navigate market crashes.

Make your investment plan before crisis hits. As Barry says, reading emergency instructions while the engine falls off at 25,000 feet is too late.

He's seen every crash since 1987. Markets drop 30 to 40 percent about once a decade. Accept it. Plan for it.

Barry advocates for Roth conversions and something called the "Mega Roth." Pay taxes now, withdraw tax-free later. We know today's tax rates. Future rates are anyone's guess.

His bottom line: humans are terrible at predicting the future. Build portfolios that can survive anything, because anything will happen.

Timestamps:

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(00:00) Intro

(02:00) How fear of mistakes can make investors too conservative

(06:00) Bad ideas vs good ideas in investing

(09:00) Process over outcome in decision making

(15:00) Thinking probabilistically about market outcomes

(20:00) Why recessions and bull markets don't follow calendars

(26:00) AI's real capabilities vs hype

(33:00) Different market commentator archetypes

(41:00) Expertise doesn't transfer between domains

(50:00) Misleading financial statistics everywhere

(56:00) Managing emotions when markets crash

(1:00:00) Creating an investment plan before crisis

(1:05:00) Tax strategies and Roth conversions

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