AI-powered
podcast player
Listen to all your favourite podcasts with AI-powered features
Maven Money Personal Finance Podcast
275 - Megasode - The Greatest Hits
Jan 5, 2023
07:44:10
AI Summary
Highlights
AI Chapters
Episode notes
Podcast summary created with Snipd AI
Quick takeaways
- The stock market is a collection of real companies selling real products or services to real people, and understanding its volatility and long-term upward trend is crucial for successful investing.
- Short-term declines in the stock market are common but temporary, and the market is positive 75.6% of the time, emphasizing the importance of staying invested for long-term success.
- Being aware of and prepared for market fluctuations, such as bull and bear markets, is essential for successful long-term investing.
- Investor behavior plays a significant role in investing success, and understanding common biases can help individuals make informed decisions.
- Managing lifestyle creep by being mindful of expenses, tracking spending, and prioritizing saving and investing is crucial for financial well-being.
- Avoiding common financial mistakes, such as not understanding investment volatility or seeking perfection, can help individuals achieve financial success.
Deep dives
The Stock Market: Real Companies Selling Real Things to Real People
The stock market is a collection of real companies selling real products or services to real people. It is a volatile market that goes up and down, but has a long-term upward trend. Trying to predict which sectors or companies will perform better is nearly impossible, and it is essential to understand that volatility is inherent in the stock market.
Understanding Entry Year Declines and Positive Years
On average, every calendar year experiences a 14.2% decline in the stock market, known as the entry year decline. However, the stock market is positive 75.6% of the time, with only 24.4% of years having negative returns. Therefore, understanding that short-term declines are common but temporary is crucial for successful investing.
The Importance of Bull and Bear Markets
The stock market experiences bull and bear markets. Bear markets occur when the market declines by 20% or more from a peak, while bull markets are periods of significant market growth. It is important to be aware that these market fluctuations are natural and will continue to happen. Understanding and being prepared for these swings is essential for long-term investing success.
Investing Principles: A Summary
Investing Principle #1: The risk in the stock market is not being in it. Principle #2: Money is future purchasing power, and the biggest threat is inflation. Principle #3: When investing in the stock market, you're investing in real companies that sell real things to real people. Principle #4: Stock market volatility is always temporary, expected, and feared by those who don't understand it. Principle #5: No one can time the markets or predict winning sectors, fund managers, or countries. Principle #6: Lifetime investing success is more about investor behavior than investment returns.
Lifestyle Creep: An Overview
Lifestyle creep refers to the tendency for expenses to increase as income increases. It is important to be aware of and manage lifestyle creep to ensure financial well-being. Lifestyle creep can be influenced by factors such as societal pressure, personal choices, and changing circumstances. It is essential to have a budget, track expenses, and prioritize saving and investing to avoid excessive lifestyle inflation. Focus on increasing income, understand the risk in the stock market, and be mindful of behavioral biases that can affect investing decisions.
Understanding Investor Behavior in the Stock Market
Investing success is influenced by investor behavior rather than just investment returns. Emotional and behavioral biases can impact investment decisions. It is crucial to be aware of common biases such as overdiversification, panic, fear, greed, and euphoria. Successful investing requires discipline, overcoming emotional responses, and making informed decisions based on long-term goals. By understanding investor behavior and avoiding common pitfalls, individuals can optimize their investment strategies and achieve more favorable outcomes.
The Importance of Saving and Investing
It's important to understand the difference between saving and investing. Saving is setting aside money for specific goals, while investing is for your future financial security. It's crucial to save a portion of your net income consistently to achieve your financial goals. The amount you should be saving depends on your income, but a general guideline is saving around 20% of your net income. This includes contributions to your retirement savings, like pensions, and other long-term investments. It's also important to invest in yourself and increase your earning capabilities. Don't wait until it's too late to understand the importance of savings and investments.
Common Financial Mistakes to Avoid
Financial mistakes can hinder your progress towards financial goals. Some common mistakes include not realizing you can switch mortgage products with your current lender, buying brand new cars with cash instead of considering leasing, ignoring opportunities for additional income, not understanding the role of equities and investment volatility, not paying for financial advice when needed, making property mistakes like buying off-plan or in hotspots without proper research, setting up a business too late in life or in unfamiliar areas, not understanding pensions until it's too late, and seeking perfection rather than taking action. Avoiding these mistakes can help you achieve financial success.
Guidelines for Saving and Investing
When it comes to saving and investing, there are some guidelines to consider. In an ideal world, it's recommended to save around 20% of your net income. This includes contributing to retirement savings and other long-term investments. It's important to differentiate between saving, which is for specific goals, and investing, which is for your future financial security. Investing in yourself and increasing your earning capabilities can lead to more opportunities for additional income. Moreover, understanding the importance of pensions and starting to save for retirement early can have a significant impact on your financial well-being. By following these guidelines, you can work towards a more secure financial future.
The Three Flavors of Risk
The informed risk scale categorizes risk into three flavors: loss of capital, loss of purchasing power, and loss of behavior. The uninformed risk scale fails to consider these different flavors and primarily focuses on volatility as the only risk factor. The informed risk scale helps investors make more informed decisions by considering the specific risks associated with different asset classes. Some examples include global equity funds, physical property, and emerging market equity funds. By understanding and properly managing these risks, investors can increase their chances of long-term success.
The Misconceptions of the Stock Market
The stock market is made up of companies, and investing in the stock market means investing in the great companies of the world. The notion that the stock market is risky is a common misconception. The value of the stock market is driven by the profitability of these companies over the long term. By investing in a globally well-diversified equity portfolio, investors can participate in the returns generated by these profitable companies. It is important to approach the stock market with a long-term perspective, avoiding the temptation to react to short-term market volatility.
Understanding and Navigating Risk
Risk is an integral part of investing, and it's essential to have a clear understanding of the different types of risk involved. Loss of capital, loss of purchasing power, and volatility are the three primary flavors of risk. Investors must assess their tolerance for each type of risk and allocate their investments accordingly. While it is natural to be attracted to investments with seemingly low risk, such as cash or government bonds, these assets may not provide the desired long-term returns. By diversifying investments and being mindful of the different risks at play, investors can make informed decisions and increase their chances of achieving their financial goals.
Challenge: Going from 0 to 100K
The journey from 0 to 100K is a personal finance challenge that requires discipline, sacrifice, and learning. It is counter-cultural and goes against the now culture of immediate gratification. To achieve this challenge, you need to set up automatic investing, pay yourself first, and control your expenses. The behavior shift required is to save and invest like nobody else around you. Understanding the concept of your future self is crucial, as your current self has to work for your future self's benefit. The challenge also involves increasing your saving percentage, setting up a pension, and grasping the power of compound interest. Once you achieve the 100K milestone, the challenge shifts to timing, as you aim to go from six to seven figures. Overall, this challenge is about taking control of your finances, developing good saving and investing habits, and staying focused on the long-term goal of financial independence.
Asset Misallocation and its Impact on Wealth
Asset misallocation is a common issue that many DIY investors face. By not properly allocating their investments, they may miss out on potential returns. The story of Urban Massage and PepsiCo highlight the importance of optimizing asset allocation. The two most important questions in investing are: what percentage of your invested capital is in global equities, and how will you react during market declines? Focusing on these questions and avoiding distractions is crucial. Data shows that asset misallocation can significantly impact returns. For example, a portfolio with 60% in global equities and 40% in bonds over the last 30 years would have resulted in higher returns compared to a similar portfolio with a 1% advisor fee. Proper asset allocation and a disciplined approach are key to achieving long-term investment success.
Main Idea 1
Investing in global equities over the long term leads to wealth accumulation.
Main Idea 2
Investing in index funds is a wise and financially sound choice.
Main Idea 3
When the stock market declines, it actually increases in value, making it a good time to invest.
53.
The Number One Financial Mistake I See My Clients Make Not Understanding Pensions
3min
86.
When the Next Deep Scary Temporary Stock Market Decline of Minus 50% or More Comes, I Will Take Absolutely No Action
3min
In this episode of the Maven Money Personal Finance Podcast… Andy unleashes the megasode.
Timestamps:
00:31 - Ep 004 - Asset Classes 20:41 - Ep 005 - Life Stages 36:46 - Ep 006 - Saving, Investing, Speculating 50:13 - Ep 011 - An Introduction to Capitalism (The Stock Market) 01:14:03 - Ep 026 - Spend Your Way To Wealth - Expenses Matter 01:39:01 - Ep 032 - Lifestyle Creep 02:02:27 - Ep 037 - Investing Principle of the Good the Bad the Ugly 02:20:12 - Ep 043 - What Great Financial Advice Can and Can’t Do 02:40:30 - Ep 048 - Real Life Financial Mistakes 03:01:07 - Ep 056 - How Much Are You Investing? 03:23:29 - Ep 075 - The Mexican Fisherman story 03:25:22 - Ep 105 - Luck 03:33:07 - Ep 107 - Scams 03:54:21 - Ep 111 - You Are the Stock Market 04:08:11 - Ep 115 - Informed Risk 04:32:16 - Ep 125 - Five Minute Money Message 04:36:52 - Ep 143 - Your Financial Prescription 04:51:28 - Ep 162 - Cloning - Why is it hard to do? 04:57:25 - Ep 163 - -50% or more 05:15:15 - Ep 167 - The First 100k 05:34:41 - Ep 191 - Know Your Numbers 05:51:24 - Ep 195 - Wall of Worry 05:56:44 - Ep 198 - The Man in the Arena 05:59:54 - Ep 199 - Your Contributions versus The Investment Return 06:18:50 - Ep 222 - Asset Misallocation 06:43:09 - Ep 235 - A Story of Units 07:00:09 - Ep 245 - Index Fund Investing - Is Average Right? 07:17:10 - Ep 246 - Womb to Wisdom 07:26:05 - Ep 252 - Invest by Sunset
Links:
Don't forget to check out the Maven Adviser website for more great content.
So sit back and enjoy unrivalled words of wisdom from Andy Hart - host of the UK’s premier personal finance show.
Is there a topic you’d like Andy to cover? We’d love to hear from you! Contact Andy Hart directly with any comments / feedback on team@mavenadviser.com. Alternatively you can reach out on Twitter @MavenAdviser.
Get the Snipd
podcast app
Unlock the knowledge in podcasts with the podcast player of the future.
AI-powered
Discover
highlights
Listen to the best highlights from the podcasts you love and dive into the full episode
Save any
moment
Hear something you like? Tap your headphones to save it with AI-generated key takeaways
Share
& Export
Send highlights to Twitter, WhatsApp or export them to Notion, Readwise & more
AI-powered
podcast player
Listen to all your favourite podcasts with AI-powered features
Discover
highlights
Listen to the best highlights from the podcasts you love and dive into the full episode