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Afford Anything | Get Smarter With Money
[I] Why Young Investors Focus on the Wrong Things [GREATEST HITS]
00:47:20
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- [00:01]
Paula Pant
Merry Christmas Eve. It is Wednesday, December 24, Christmas Eve, we are running a five day special for the five letters of F double I, R, E. We kicked off on Monday with the letter F. Financial Psychology by airing an interview with the behavioral finance guy, Dr. Daniel Crosby. And we followed it up on Tuesday with the first letter I. Increasing youg Income with Jeff Wetzler on the Art of Negotiating. Today, Wednesday, Christmas Eve, we are airing an interview with Nick Magiulli from of Dollars and Data in honor of that second letter I Investing. Now, all of the interviews that we are airing this week come from our Greatest Hits vault. Nick's been on the show multiple times. Today's episode Originally aired on April 13, 2022. Nick is a Stanford educated data scientist who has written multiple books on the data behind how to build wealth. And I am thrilled to share it with you to commemorate the letter I Investing. Enjoy. Hi, Nick.
- [01:12]
Nick Maggiulli
How you doing, Paula?
- [01:13]
Paula Pant
I'm great. How are you doing?
- [01:15]
Nick Maggiulli
Good.
- [01:16]
Paula Pant
Nick, one mistake that you have publicly talked about was that when you were in your 20s, you made the mistake of prioritizing your investments. And that sounds counterintuitive to everyone who's listening. Can you describe what you did and why it was erroneous in hindsight?
- [01:32]
Nick Maggiulli
Yeah. So when I first got out of college, you know, I started reading a lot of investment books. I was like, I'm going to get this right. I knew my asset allocation. I really, I obsessed over it kind of. I was like, oh, do I need to have 10% in bonds or 5% or 15%? Maybe I'm not taking enough risk. All these concepts that you read about in theory, and now you're kind of seeing it play out. Now you actually have money on the line, right. Versus just reading about it in college. Right. So started earning just a little bit of money, started saving and all that. And I spent so much time, I had spreadsheets, I had net worth projections, all these crazy things I had. And I didn't realize spending all this time on this thing, which was kind of cool in its own right. But at the same time, I was going out with my friends in San Francisco and just partying all night and I'd easily spend $100. And so let's say, for example, when I first started, after maybe a month or a couple months, I had probably $1,000 in my 401. Let's say I could get a 10% return on that for 1K. Right. So in a year I could probably earn about $100. Right. In investment returns, assuming I Just kept it at a thousand. And so in one year's investment returns, I was blowing in one night, like, with my friends, just going out, like, just regularly. And so what I realized, I only, I didn't realize it then. I didn't realize much later, probably five, six years later, like, why was I obsessing over my investment so much when, like, what I really should have been focusing on was like, either my spending or like, how could I raise my income, how can I improve my career, Things like that. And so when I say I made a mistake, I don't think I made, like a major flaw, but I just, I could have been more optimal. I could have said, you know what, it doesn't really matter what my investments are doing right now because I don't have that much money yet. And for a lot of young people, that's going to be true. And I know people like, hey, I got $500. Like, where do I put it? I just saved it. And like, it's good to be thinking about that and be like, that's a positive. You know, you kind of want to think about investments because you're even thinking about it. At the same time, like, I think it's be more impactful for a lot of young people to focus on their career and see kind of how they can get their earning power higher over time. Because that's going to allow you to save, oh, 500, no, now you're going to be saving, oh, I can say $5,000. Right. That's going to be far more impactful for you than what you do in the short run. And don't get me wrong, I know about compounding and doing all that. Trust me, I know that matters. When you start earlier, not telling people not to get invested, of course, I would never say that. At the same time, though, don't obsess over it. Just put it in something. Don't worry about the mix is perfectly right. Just kind of get started and focus on, like, where you're spending your time. And as you get older and actually you have more money invested, then you can start worrying about, like, what's the precise asset allocation? That's where it starts to matter, right?
- [03:48]
Paula Pant
So the thing that people overlook is that your contributions are the single biggest determinant of your success, especially early on.
- [03:54]
Nick Maggiulli
I mean, later, of course later, it's definitely going to matter what your investment returns are. One of the best stories still, this is going back to something Morgan Housel said is like, if you took Warren Buffett and you gave him the Same returns from age 30 to where he is today or wherever. He wrote the article a couple years ago. He's like, the reason he got to where he's today because at age 30, he had, like, a couple million bucks with him. This is back in the 60s or something. The same returns, he gets to like, 60, 70 billion or whatever he had at the time. Right. But let's say he only had like 100,000. He had like, you know, $10,000 at age 30. Like, he'd only have a billion dollars at age 70. It's like that initial. Having that initial mass of money was much more important for Warren Buffett in the long run than his investment returns. So they both matter, but, like, having that initial set of money is going to matter a lot more.
- [04:36]
Paula Pant
Right. But I'll make the devil's advocate argument here, and this actually is something that came out of your book. You also make the point that if you ask people if they would want to trade places with Warren Buffett today, with Warren Buffett being 87 years old. Right, right. If you could have all of the wealth of Warren Buffett, but also the age of Warren Buffett, a lot of people would say no. A lot of people intuitively understand that time is their most important asset and would not choose to be 87 or 88 or however old he is, even if it meant having all of his wealth. And so the fact that you were blowing a hundred bucks a night going out in San Francisco, those are cherished memories in your life. Those are experiences, and we know that experiences. Spending money on experiences derives a certain level of happiness. So would that not be a laudable form of spending?
- [05:27]
Nick Maggiulli
Oh, of course. When I was making this argument about me not behaving optimally, I was not saying I shouldn't have been going out with my friends. And that's not kind of the takeaway I want people to have. I'm sorry if that's kind of what I was leading for. The takeaway was I shouldn't have been spending so much time looking at my investments in those couple of hours, I might have been looking at a spreadsheet every week. I could have been learning a new skill or doing something else. Yeah. It's not that my spending was the issue. It was that at my. Where my focus on income was not the issue. Right. It's like what I was doing with my time, like, instead of focusing on the investments, I should have been focusing on, you know, how can I grow my income? That's kind of the thing I thought I Think would have been better. It's not like, oh, my gosh, I never should hung out with friends. It's just. I'm trying to show the absurdity of it because I went out basically every weekend. And so because of that, like, you can see, like, you know, I could have skipped one weekend. Yes. But, like, it's not about that. It's more about, like, thinking about, like, where are you spending your time? So you bring up this example of Warren Buffett. I think that's why it's such a useful example, because you. You intuitively understand you wouldn't trade places with Buffett today because, like, yeah, you don't have as much time now. And Warren Buffett sounds like, would Warren Buffett give up half his fortune to be like, 30 or 35 today? He would give up all of it. He'd probably go into debt. I'd actually argue he would go into massive amounts of debt to be 35 today. Like, he would probably say, give me a million bucks in debt. I don't care. Like, he could get out of it. I'm pretty sure. Like, imagine you take his connections, too. So he just saw his brain. But he gets to go back in time, and like, not back in time, but he gets to go. You. When he'd be 35 again, I think he would go into debt. And I think a lot of people who are like that would do the same.
- [06:53]
Paula Pant
Yeah. And so all of that leads to one of the first rules that you introduce, which is to think about if your savings exceeds your investment income or not. Can you talk about the distinction between that in terms of how the people who are listening to this should be thinking about what they should be focusing on.
- [07:11]
Nick Maggiulli
Yeah. So kind of going back to me, like, where I should have been spending my time when I was in my early 20s, I kind of came up with something called the save Invest continuum. And basically all. All you need to know about, like, everyone's on this continuum, and it's a question of, like, you know, where you are kind of based on two numbers. Right. And they're all relative to your life. So the first number is, like, how much could you save in the next year? Like, reasonably. So let's say you can say 500 bucks a month. You do that for 12 months, that's $6,000. So that's. That's number one, six grand. Right. That's how much you could save. And then how much can your money earn you in the next year? So let's say you have $20,000 invested. You're going to get, let's say a 5% return. Your expected 5% return, like in an average year, okay, so that's $1,000. So that's your second number. Your expected investment return is 1,000. So now compare those two. Which one's bigger, the 6,000 expected savings or the 1,000 expected investment return? And in this case, because the 6,000 is bigger, you need to spend more time focusing on how you get and how you can raise your savings and then put that into investment so you get your investment income up over time. You know, when I was starting this whole thing, like, you know, in my early 20s, my expected investment income was as I said, like $100 or something, maybe 500 bucks. Whatever. It was small, right? In a given year, it very small. And that's with a 10% return. So I was actually pretty liberal with the return. But my expected savings was much higher. I could probably save a couple thousand dollars in a year, right? So a couple thousand versus a hundred. It's not even close. I should have been focusing much more on what I was doing, how I was raising my income to save more money. And that's what you need to do because over time you're going to see this flip, right? There's like the same invest continuum. There's also a phrase I use to kind of represent this. And I say saving is for the poor, investing is for the rich. Now when I say poor, I don't mean that in absolute terms. I always mean this in relative terms and I mean this relative to yourself. Like if you do this properly, if you're in your early 20s, you start saving money, investing, your wealth starts to grow, you will be relatively richer in your future than you were when you started. Does that mean you're going to be in the 1% or you're a billion? Doesn't mean any of that. It doesn't mean you're in abject poverty. If you're living in San Francisco as a 22 year old college grad, like, no, that's not what I'm getting at. It's about the relative difference. And so when I say that is like you're going to see over time, in future years, if you do this right, like when you're older, you can lose more money in a year from your investment returns than you could ever expect to save. Like if there's a bad year in the market, like, there's nothing you could do to like make up for that. Like, let's say you have a $10 million investment portfolio hypothetically is a really extreme case. Right. A 10% drop is $1 million. Like how are you going to save $1 million after tax in a year? It's not possible for most people unless you have a very, very high paying job for most people. Let's say you could, even if you could save 100,000, which is a lot of money, that's still 10x more, you know, taking a 10% drop, that's not that outrageous. Like those things happen pretty often. I think when you think of it that way, you start to realize like, oh my gosh, no wonder, like your investments don't really matter as much when you have very little invested. But as you kind of have a lot more invested, that's all that matters because it can have a bigger impact on your wealth than anything you do personally. So that's kind of what's happening over time. You should see that transition so early on. Like, I'm at a point now where I'm kind of in the middle where I kind of have to focus on both. I can't just focus on one another, but I've been working for 10 years, so I should expect something like that around this 10 to 20 year mark, you should start to see that happen.
- [10:18]
Paula Pant
And so what does it mean to focus on both? For the people who are listening who also find themselves in the middle and they hypothetically can save 6,000 a year and their investments will return around 6,000 a year. Right. They find themselves right at that midpoint. What should they do in order to focus on both?
- [10:35]
Nick Maggiulli
You just got to, you got to get educated both in terms of the savings stuff. You got to be like, what can I do to, you know, improve my career, do things I care about, whatever that is, there's that piece. And on the investment side, you do have to care about your asset allocation. You have to care about, you know, timing decisions and like, what are you doing? Are you making timing decisions or not, etc. Right. The thing is, when you're very young, it doesn't really matter as much what you're doing with your money on the investment side. But as you get very old, that's all that matters. Like if you retire, you have no income, you have no way to save. Right?
- [11:02]
Paula Pant
Right.
- [11:02]
Nick Maggiulli
So, or maybe you have Social Security or something, but once you have very little savings and all that matters is the market. So you have to really think about that a little bit more and kind of understand what you're doing. Tax things, all, there's all these things where there's taxable consequences. And I'm not going to get all that right now. But you can understand how, like, your tax consequences of your investments probably matter a lot more when you're 65 than when you're 25. Right. So thinking about those things is what's important. So people in the middle just, I mean, there's no easy answer. It's the toughest part. It's like the middle, middle life. So it's the toughest part of life in general, but let alone because, like for, on a financial perspective, because you have to care about everything. You kind of have to care about everything. You can't just focus on one or the other.
- [11:37]
Paula Pant
Right. And if you are in that space where you find, regardless of your age, you find that you've amassed a large enough portfolio that your investment returns are greater than any amount that you could reasonably save in a given year, could that be the new definition of retirement?
- [11:53]
Nick Maggiulli
The only problem with that is it doesn't take into account your spending. Let's say I could save $1,000 in a year, but I could get $10,000 from my investment portfolio. If I'm spending 20 grand a year, then you can see, like, sure, that's a problem. Right. So that it doesn't solve that. The whole point of the save invest continuum is figuring out where to focus. That's the point of that. It's just like, where should I spend my time? Right. Everything kind of goes back to time. Eventually it's your most important asset, because we just talked about that. But figuring out where you spend that time is one thing. But yeah, whether that's, I don't know if you can consider retirement. You need to take into account your spending. Right. And if you start to spend more, you can save less. But then is your investment income enough to offset that? Right. And when it is, it's good. But if it's not, you got to keep saving, you know, until you get there.
- [12:32]
Paula Pant
Right? Yeah. No, I guess in my head I'm imagining fairly large numbers and I'm imagining, you know, if a person, if a person gets to that point where your expected investment returns are dwarf anything that you could reasonably save. I mean, oftentimes I hear my audience say, how do I know when? And that could be one of many signals that might indicate a certain level of when.
- [12:55]
Nick Maggiulli
Yes, of course. Yeah. Well, I think there's the crossover rule. That's a great one. Vicki Robin, she talks about that in your money, you life and she just like once your expected investment returns surpass your expected spending over A given period, then you're kind of at your crossover point where your investments basically can pay for your lifestyle. Right, Right. Of course, if there's a market crash or something, that's not always true, you have to have a little. There's a little bit of de risking you have to do. But you could imagine there's some people out there that are at that point, that's a decent proxy is once your investment returns exceed your spending.
- [13:25]
Paula Pant
Right. Let's talk a little bit more. So you talk both about how to improve your savings rate and savings, by that definition, is your income minus your spending. Right. So it's not necessarily frugality. It's increasing the gap between what you earn and what you spend. One of the things that you talk about is the 2x rule. Can you describe that when I'm talking.
- [13:46]
Nick Maggiulli
About the 2x rule? I think there's a lot of stuff in the personal finance space where a lot of people are guilted into, you know, you have to, oh, you don't buy your coffee, you're paying away a million dollars. You've heard, I mean, you've heard a lot of these things. You know, you should reuse your dental floss or make your own laundry. So I've heard it all. I'm like, is this the new thing that they're pushing? Right. And so I know, I've read your work, Paul. I know you're against a lot of this guilt stuff. You can't afford this. You can't afford that. I understand you're all against that stuff as well. And so for me, I think I am trying to come up with different ways that people, different tricks people can use to kind of get them out of that guilt. There's this spending guilt that's out there. And so one of the tricks I use if I'm ever splurging, it's not for someone like when I go to buy eggs or something, I don't care about that, Right? But like, if I'm splurging, like if I want to take myself out, go out for a nice dinner, buy myself a nice pair of shoes or something, right. Whatever it is, if I ever spend a large amount of money, let's say I'm going to spend $300, 400 bucks, whatever it is, I make sure to take the same amount of money and I either invest it, right? So let's say, so if I'm going to buy a $300 pair of shoes, like a nice pair of dress shoes, I will take another $300, so 2x my original purchase price, and I will invest it in something or I can donate it. There's different ways you can do this to kind of get rid of the guilt so you don't feel guilty about buying the shoes because you're, like, also investing for your future or you're also helping a good cause or something like that. So I think this rule is really effective not only from, like, an affordability perspective, because if you can save 2x for it, then you can obviously afford the first X, so to speak.
- [15:09]
Paula Pant
Right.
- [15:10]
Nick Maggiulli
But also it really eliminates spending guilt in a lot of ways. And I think that a lot of the personal finance issues out there are issues that are in people's heads and they get, oh, should I not spend this? And they're very frugal, and there's nothing wrong with being frugal, but there are times when, hey, you want to splurge on yourself a little, it's okay. And this is a way to kind of allow yourself to do that.
- [15:27]
Paula Pant
You also talk about the importance of saving roughly half of your future raises, but there's actually a more complex formula that you walk through. Can you walk us through this?
- [15:39]
Nick Maggiulli
To be honest with you, there isn't actually like a hard formula because I had to simulate a bunch of data and then I basically solved all the answers. I don't know. There's no formula I can say. Give me X and I'll give you Y. It's not a simple mathematical formula because you're. You're basically taking someone who's like, in a steady state. Hey, I'm saving X dollars per year. I'm making it to my retirement goal. They're on basically a path. They're on this, like, equilibrium, perfect world where you get the same investment return every year. You're saving X dollars per year. You're moving to this path, right? So you can just imagine, like, someone's in a perfect equilibrium state. They're going to hit their retirement, they're going to spend, you know, 4% of your retirement, etc. And everything's perfect. Obviously, this is not realistic, but just go with it for now.
- [16:16]
Paula Pant
Right?
- [16:17]
Nick Maggiulli
Now, let's say there's a positive shock to the system. And when I say positive shock, I just mean you get a raise, you get a bonus, right? So what should you do to make sure you still land at the same equilibrium? Right? So you're saying if I got a raise or a bonus, then that's only good, right? Because if I save the entire raise and I can Just retire earlier. That's one option. But what if you want to spend a little bit of the raise? Like, you know, if you spend all of the raise, the problem is you're actually going to retire later. It's very counterintuitive. How is that possible? How of me spending all of my raise means I'm going to retire later? Well, assuming you want to spend the same amount of money over time, right. You want to have some sort of like, lifestyle maintenance. Yeah, maintenance, exactly. You know, over time. Assuming that's true, if you're spending this raise, you know, you weren't spending that money in the past, but now you are. That means you have to save more to keep spending in that level in retirement. So there's only two ways. You either spend your raise, and as soon as you hit retirement, you drop your lifestyle to back to what it was before the raise, right? Let's say you have another ten grand a year to spend, right? And you spend that. I don't know, on. I'm just making something. Let's say you buy a Jacuzzi every year for $10,000. Just buy a new Jacuzzi every year. That's just part of your lifestyle, right? And then once you hit retirement, you can't do that anymore. The Jacuzzi you have to go back to however you live before Jacuzzi time. Right? You could do that. But let's say you want to keep doing that Jacuzzi stuff forever, then you're gonna have to find a way to, like, you're gonna have to work longer or something like that. So I think that there's no real formula for it. Generally, I find that as long as you save at least half of your raises, you will be fine. Like, for most savings rates, as long as you save at least half, if not more, then you can stay kind of. You can keep your spending pretty constant over time. Like, you can even allow your spending to go up. Because remember, if you save half, that means you're spending the other half by definition. I think it's a cool way to think about this because so many people in personal finance space just say, hey, like, no, you should save every dollar of your raise. And of course, if you're far behind, you're not even close to reaching a retirement goal, you should do that. But at the same time, like, this is a way of like, okay, maybe you're on some path, and now you need to know, like, okay, what should I do now? And so I've used data and I've kind of like, Simulated this thought experiment to see what would happen in all these cases. And so basically I find that, yeah, if you're saving a lot of money already, you should save at least 50% of your raise. And if you're not saving a lot, you should save roughly at least 50% of your raise. So I think it works well. It just by chance, it kind of. I don't know what the right word is here, but the answer, 50% just kind of. It was around that answer. It's not. There's no perfect end. You'll see. I have a table of like, if your savings rate 25%, you need to save X percent raise. If it's 30%, you knew. So I kind of give you what the, you know, I break it out in the, in the book, the exact figures, but I said like, 50% is like a rough round answer where it needs to be. And it fits well with the 2x rule. So I can kind of reuse the rule. Right. So it's easier to remember. I think that's the main takeaway there. It doesn't have to be exact or everything. Just kind of think about like, you know, half's for me and the other half's for future me. Right. That's kind of the simplest way to think about it. If people do that, they'll be far better off. And it allows for some lifestyle creep, I think. Lifestyle creeps, okay. And I think just saying, oh, you can't have any lifestyle creep. That's terrible. Like, what, what's the point of working so hard if you can't enjoy at least a little bit of it? So I'm saying enjoy half of it. And I've solved it. I've shown mathematically you can do this instead of guilt tripping people into like not spending any of their raises or enjoying, you know, celebrating right now.
- [19:25]
Paula Pant
A lot of raises are essentially inflationary increases. You know, if inflation is 3% and your raise is also 3% or maybe 4%, then the raise is functionally a cost of living increase. Does this apply to only the portion of your raise that is in excess of that inflationary increase?
- [19:44]
Nick Maggiulli
Yes, of course. Yeah, of course that's true. Yeah. So obviously I don't know if I mentioned that specifically, but yeah, we were taught everything was supposed to be real returns, like inflation adjusted returns, because. Yes, yeah, if we are talking about. Yes, inflation's going up every year. If inflation's 8% and you got a 7% raise, you can't go spend half of that 7% raise. You're actually now and you're actually spending.
- [20:03]
Paula Pant
Yeah, you actually got to pay.
- [20:04]
Nick Maggiulli
Your income has gone down. Yeah. So of course this would be real raise. Any sort of real inflation adjusted raises, of course.
- [20:16]
Kevin Harlan
Kevin Harlan here. This Friday, the NBA on prime crew is back with another action packed doubleheader. The night starts with Jaylen Brown and the Boston Celtics going toe to toe with Pascal Siakam and the Indiana Pacers. Then James Harden and the Los Angeles Clippers head to Portland to take on Shayden Sharp and the Portland Trail Blazers. It all comes your way this Friday on Prime. And if you're not a Prime member, that's not a problem. Sign up for a 30 day free trial to get started today. The Celtics and Pacers, the Clippers and Blazers coverage starts Friday at 7pm Eastern only on Prime. Restrictions apply. See Amazon.com AmazonPrime for details.
- [21:01]
Paula Pant
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- [23:37]
Nick Maggiulli
Yeah. So when I discuss this in the book how we can increase your income, I have five different, or technically there's six different ways. Well, the six is kind of a surprise we'll get into at the end, but there's like five different ways I think people can increase their income. Some of these are, you know, main hustle things, as they say, in terms of your, your core job. And some are, you know, side hustles or other things you can do on the side, whether it's freelancing, stuff like that. So I'm going to kind of talk about each one of those. So the first one I talk about is like selling your time or expertise. The thing about selling your time, like you can go and, you know, work for someone else, have a part time job, you know, you're an expert in a specific thing and you can maybe tutor someone, teach someone something. Those are easy ways to kind of do that, right? The pros, obviously they're easy. There's low startup costs of doing that. There's even like, you know, stuff like Instacart and all sorts of stuff now where you can just sign up quickly and start doing something for someone else, right? The con is like your time's limited. It's not really going to scale in the same way. Right, as something like selling a product, which we'll get into in a second here.
- [24:32]
Paula Pant
What strikes me as I hear you talk about this is that this applies both to gig economy work, instacart driving for Uber, as well as for more specialized work like freelancing or consulting. In either case, there are low barriers to entry, low barriers to getting started, low startup costs, but it's not scalable.
- [24:54]
Nick Maggiulli
Exactly. The alternative instead of just say, okay, well I don't want to sell my time, I want to sell something that's not completely linked to my time. And that's my second thing is, well, if you, you could sell a skill or service, right? So that's still going to be Obviously linked to your time. If you have a certain skill for doing something or you have a service you provide to someone, if you get better at that thing, you can still charge the same price. And if you, you can just lower the amount of time it takes, you can just, you can sell it for more. Right. So you can think of that being like, let's say you're great at photography or something. Right. You can just. And you can. Or even developing photos or Photoshop is an example of that. Where that's a skill you're selling, you can sell that and they have no idea how much time you take to do it. Right. And they're not explicitly paying you for the time. Right. So that's something where you can get higher pay, you can build a brand around it about a marketable skill or something. The con I guess is like it just takes time to develop a skill. Like, skills are not easy to develop. There's a lot of things out there where you can make money and just when you're just selling your time, you don't need to have too much skill. But then there's things out there where you need to spend that time to either develop a skill or develop expertise or something. And that's also not going to scale too greatly for most things. Like if you're just selling a skill or service, there are some ways it can scale, but generally if you need to do 10 Photoshop things, there's still some time. So they're very similar 1 and 2, but I think there's a slight distinction there.
- [26:07]
Paula Pant
Right, right. And it seems to me that in order to stand out from the crowd, you would need some sort of niche differentiation.
- [26:12]
Nick Maggiulli
Yes, exactly. And so you have to find that's where brand building comes in. Right. I think that's, that's an important point to bring up. The next thing you can do is just teach people. And I think like teaching people whether they're doing it online or in person, if you can do like an in person course, in person courses are harder. But now there's so many different online courses that I've seen people build courses and they do cohort based or they do ones where they just record themselves in a video and they teach people. Or even you can Even think of YouTube as kind of like a teaching platform and that's very scalable. Right. You, I mean, you can have millions of people watching you on YouTube. Right. If you're teaching about something. Right. Versus if you're just doing it in person or something like that. The problem is there's lots of competition because it's so lucrative and can be so lucrative. There's a lot of people on YouTube. There's a lot of people in these teaching platforms. So once again, it's about branding and how do you stand out? How do you attract students? It's gonna be an ongoing battle to do this right, to keep getting people to come in. So how do you kind of keep. Create a referral network? So that's another way of thinking about it, another way you can increase your income. The fourth thing is selling a product. So if you create a product, you know, that's obviously very scalable, because if you can create a product in a way that's. You can create a lot of them or even, especially a digital product can be very scalable. Like, I just write for. I write a digital book once, and I can sell it in infinite times in theory, right. The other issue is there's lots of upfront investment there and a lot of marketing, right? To do something like to sell a product, There are pros and cons to each one of these things. There's like, those are all. Those first four are basically all like kind of side hustle, gig economy things.
- [27:32]
Paula Pant
Yeah. Would it be accurate to say, based on what I've heard you just describe, would it be accurate to say that there is an inverse relationship between scalability and startup cost?
- [27:41]
Nick Maggiulli
There can be in a lot of cases, right? Like maybe there's some like, Goldilocks zone or some magical outlier out there. But generally, like, if you're selling a product, like, the only way you sell a product that people like, it's really good. It generally has to be like, pretty good. You have to have some deep skill or expertise in creating that product or something, right? It's not going to just come to you out of nowhere, right? So the only one I'm doing on this list right now is I'm selling a book, right? And it's like. And I did that by writing online for five years about investing and reading so much investing and doing this stuff. So it took five years of work to even get to something that I could actually, you know, create and send out there, right? So it takes time and you have to do. And I wasn't really being compensated for until like 2020. I started running some side ads on my website. So I started getting some compensation for that. But for three years it was free. It was nothing, no ads, nothing on there. And so I just. I was just working for nothing, basically just doing. Because I loved it, right? So that's an example of like you have to put out, there's a long Runway, but then, you know, maybe you can pay off one day, who knows, right? And then the last thing I want to say is climbing the corporate ladder. I know a lot of people talk about, oh, you know, you got to start your own thing, you got to be your own business owner, this and that. But I think for a lot of people just being a professional, a corporate professional, there's nothing wrong with that. There's nothing wrong with a 9 to 5. And there's a lot of people that do well in that environment and there's a lot of people that you can build a lot of wealth there. There's a lot of millionaires that are doing nine to five. It's not about like, oh my gosh, I have to run my own business and all this and all that because it's not necessary.
- [29:02]
Kevin Harlan
Right?
- [29:02]
Nick Maggiulli
There's a lot of people that can do that. And so the pro of working in a corporate environment is you're going to gain skills and experience, you're going to work with lots of people, there's going to be a lot more exposure for you versus you're trying to do something on your own. Right. And there's less risk around your income growth because generally most over time, a lot of positions, you'll get promoted, your income goes up. And we've seen that this is true. Generally you look in the data and this is true for most people in these kind of corporate environments. It generally goes up and then obviously does level off at some point. But for a lot of people it does keep going up from your 20s, 30s, into your 30s, 40s even. The only problem is you don't control what you're doing. You don't really control your time in the same way. So that's something to think about, right? It's a downside. But yeah. And the last thing, so that's the main hustle. The last way to raise your income, number six, is buy more income producing assets. Think like an owner. That's really the best way to raise your income. Because going back to what we said with the save invest continuum, you're taking money out of savings, you're taking your savings and you're investing it. And that's going to raise your income and raise your income, raise your. And that's the ultimate goal. All these ways of raising your income should be funneled into income producing assets which do it for you. Right? So that's the ultimate goal. Ultimate goal, eventually. So I think that's kind of a good way to think about it is like all of these things you're doing to raise your income, the point is to get that money invested so that it keeps paying you, you don't have to keep working for it.
- [30:12]
Paula Pant
Right. So yeah, essentially what you're doing is selling your time as a stepping stone to allowing your money to make money for you.
- [30:18]
Nick Maggiulli
Exactly. You're taking your human capital and converting it into financial capital. And that's kind of how I like to think about it. It's almost like you're rebuilding yourself as a financial asset equivalent. And of course this is very weird to say things like this, but like you're basically saying like, hey, I only have so many, so many hours, I'm going to work the rest of my life. You can think of your human capital is like always a dwindling asset, not because you can't learn new skills, but you just, you're going to run out of time eventually. Right. So over time, your time, you know, in theory your time's going down. So while that's happening, while your human capital is decreasing, you need to offset that by increasing your financial capital so it's paying you even when you can't work anymore. Right. That's kind of the idea.
- [30:53]
Paula Pant
Right. So let's talk about owning income producing assets because you make a distinction, as do I. As I've said many times to this audience that any asset earns money in one of two ways, either through capital appreciation and or through the dividend or income stream that it pays off. But there are certain assets that only earn or lose money via capital appreciation and those are speculative, the ones that don't have any kind of income stream attached to them. And I see that you, like me, tend to not prioritize those more speculative assets as much. Can you talk about how you came to that decision and from there lead us into a conversation about specifically the income producing assets.
- [31:39]
Nick Maggiulli
As you mentioned, like you said, there's two ways. There's basically like, there's price changes in how people feel about prices. That's one thing what people think something's worth. And then there's something which a lot of people might call fundamentals or earnings or income. There's different ways of discussing that. And those things I think are more weighted in some sense of reality. Right. And so the example I like to give, you know, imagine there's this factory they're selling for, you know, a million dollars. But you know, this factory is producing, you know, half a million dollars of profit every year, right? And so it's like, wow, that's a great, like why wouldn't I2X earnings, that's incredible. It's incredibly, that's the pricing is great, right? So it's like you can say it's worth 10 million or 1 million or whatever. No matter what that anchors the earnings. Their earnings exist, they're real and they're paying off half a million dollars a year. That's real. So whether the price is jumping up and down around that, there's always this anchor which is fundamentals. Now compare that to gold or bitcoin or art or wine and there's not the same thing. The only reason the price of those things change is based on attitudes and perceptions of those things. Now of course I'm not saying that income producing assets, people can't feel differently. For example, you know, factories could go out of fashion for some reason. Oh, I don't want to own a factory. They're too whatever dirty or this or that. We can make something up, right? Let's say you investors just decide to give up on factories and guess what, the price of that factory goes from 10 million to 1 million. And now it seems like a bargain. But at the end of the day, if it's still producing that half a million dollars a year in profit, that's something real that people can touch. It's really, it's going to pay you out no matter what. It's not just based on the whims of the market, right. So to speak. I'm not saying you should never own gold or never own crypto or never own art or wine. I own all of, all of those things or I don't own gold, I own crypto and art. I've dabbled in wine and thought about other things like that. But mostly I just try to keep that like 10 to maybe 15% of my portfolio. All of those non income producing assets. So I say 85 to 90% of your portfolio should be in income producing assets. So that's things like stocks, small businesses, real estate, investment properties, REITs, all these. There's a bunch of different things I talk about in the book. If you want to invest in royalties or something, that's another one you can do. And I just do that because there's income streams associated with them. Bonds, all these things have income streams. And so for me it's really just about finding something that has some anchor to reality and paying me versus like I have to do it completely based on the price action. Now I'm not saying you can't make money doing that. Like the entire crypto space made money completely on price action. I'm not saying there's no fundamentals or no use case there, but the use case isn't always necessarily linked to cash flows. There are exceptions to that. There are times where you can take your crypto coins and stake them and earn money because you're providing liquidity and all this. I don't want to get into all the super crypto things. And there are ways of turning these non income producing assets into income producing assets, but that's not their main use case. There are uses for these things. I'm not saying they're not useful, I'm just saying they don't necessarily provide a cash flow. And that is the thing that I have to have. I feel more secure owning income producing assets and I think most people will feel more secure owning income producing assets over the long haul. Yeah, you want to dabble in those things. I don't care. I just think just keep it to a smaller percentage of your portfolio. I've looked at the data on a lot of this stuff. Even when I ran a simulator where I was trying to figure out what's the optimal portfolio. When I. When Bitcoin first did this big run up in 2017 and it said it was like, and remember this is like the perfect solution. It was like if you went back from like 2010 to 2017 or something, it was like the best thing you could have done was like 55% stocks, like 40% or 43% US bonds and like 2% Bitcoin or something. So it was in there, but it was just like very small because of how risky it was or something. It's just thinking about that and I think that's kind of the, the philosophy I like to use. And I don't think there's any right mix of this. I just think when you're investing you've got to have income producing assets.
- [35:27]
Paula Pant
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Nick Maggiulli
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Paula Pant
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Nick Maggiulli
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- [37:18]
Paula Pant
You said you keep your own portfolio about 10 to 15% speculative and the rest are income producing assets. How much weight do you give individual stocks within that 85% of your portfolio that is comprised of income producing assets.
- [37:33]
Nick Maggiulli
So right now I'm actually only like 10% with like art and crypto. Right now probably 10% of my net worth is in those two. Might even be less than that if I think about it might be like 8%. But of all of my assets I have 1% individual stocks. And in the book, and this is the funniest part, so in chapter 12 I say do not buy individual stocks and I still stay by that statement. I did buy both the stocks I bought. I'm not going to say the names. I've said them in other podcasts and stuff. I'm not here to pump them anything like that. I bought two individual stocks. One was a bunch of my friends did and I said okay, let's do it. I put half a percent of my net worth in it and then the other one I put another half percent in and they're both down bad, very badly at the time of this recording because tech stocks have been destroyed and so one's down like 70%, one's down like 60% or something. They're both very down very badly. I recommend you read that chapter and realize I was right all along about that thing and I never should have done it. However, despite that, I think you can do it for fun. I think having one a couple percent of your portfolio and 5% even in individual stocks. There's nothing wrong with that. I just think the bulk of people's money shouldn't be in individual stocks because it's very risky. Not just the performance piece of it, but also because you're not going to know if you're good at it. So if you're really trying to do it as I'm really good at investing my own money, look, I bought all these stock picks, I'm so good at it, I think it's really hard to tell if you're actually good at it. If you're just lucky, you're not going to know for a long time. By the time you find out, if you find out you're not good, it's not a great look. There's a lot of people who started buying in 2020 and did even better in 2021 and found out in late 2021 that they're not as good as they thought they were. And so that's a kind of a big wake up call. I think we're starting to see that happen now. See, I try to keep individual stocks actually in my mind individual stocks are income producing assets. But in my mind I try to put them into the non income producing assets because it's their speculative in my mind. But they definitely are income producing or they're supposed to be.
- [39:20]
Paula Pant
Yeah, yeah, no, I have that same kind of mental grouping where I associate owning individual stocks and owning cryptocurrency in the same mental bucket. Even though cryptocurrency is speculative, it's more analogous to I think a foreign currency exchange. Owning individual stocks, of course you are owning an income producing asset. You're taking ownership in a company in a very fundamental way. But given the volatility, given the risk, given the unpredictability of how it's going to go, I'm just like you. I have that same mental bucketing of this is the portion of my portfolio that is purely for play playtime and then this is the portion of my portfolio that's actually strategic.
- [40:05]
Nick Maggiulli
Yeah, I agree. And I think most people, if they think like that, they'll do fine. I think you just got to what's the percentage? What's the split? You exactly do. And so I think most people, even there's a lot of people I know that dabble in crypto and stuff like that and they sell like 80% of their money in index funds and stuff. I'm like, that's the way to go. If you're going to do Low cost index fund. It's like, yeah, you're messing around with 20%, but it won't necessarily be catastrophic if that even all went to zero. Now that would still be terrible to lose 20% of your money. But imagine if it's 100% of your money. Now that's really, really scary stuff.
- [40:32]
Paula Pant
Right? Exactly. Let's walk through some of the different income producing assets that a person can invest in and sort of walk through again, the pros and cons of each.
- [40:42]
Nick Maggiulli
Yeah. So there's stocks, obviously, it's the traditional, my favorite and my, you know, because I think they're very easy to own and trade. There's low maintenance, you don't have to do anything, you just own them and that's it. Generally pretty good historic returns. The cons is that there, there's high volatility, their valuations can change very quickly. That's why I said like, you know, one day people think all these tech stocks are going to the moon and next day they're like, oh, these things have no earnings now they're down 70, 80%. That's what happens in stocks.
- [41:07]
Paula Pant
Right, right.
- [41:07]
Nick Maggiulli
So diversifying is the key.
- [41:08]
Paula Pant
There's. Can we talk about farmland royalties? I mean, these are the things that we don't hear about very often.
- [41:14]
Nick Maggiulli
Yeah. So obviously stocks, bonds, investment property, REITs. REITs are just real estate. Investment trust. You're owning real estate, someone else is running it for you. Obviously, instead of owning an individual property, it's like a diversified thing. So then there's farmland. That's something I've kind of dabbled in a little bit. The issue with that, so you can own a farmland reit. That's probably the easiest way for most people to do it. However, I don't want to name any services or stuff out there. You can just search farmland investing. You'll find a bunch of ads on Google. You'll find all of those. Those are actually very interesting because they have a lower correlation with traditional financial assets and they still provide a lot of like, they can provide income. There's income you can get in different ways from the sale of the property by itself, the yield of what the farm actually produces. Right. That's another way you can have income and you'll have distributions paid out over time during certain deals. You'll have. So yeah, and because they're not correlated as much, like if the stock market crash doesn't mean that farmland prices are necessarily going to crash. Right. And usually they're illiquid. You buy them and you wait a Long time to kind of see your money back because of that. It's a, it's a different return stream. I think it's cool. So that's something to check out a lot. But a lot of those, if you're doing like farmland on those, on those different sites where you can invest in like a crowdfunding platform, they're required to be an accredited investor. So it's gonna be like you have to have a million dollars or you have to have $200,000 or more in income for the last two to three years. So the accreditation status thing, small businesses, you guys know what that is. You have to usually find people to do that to be an angel investor or something like that. And then lastly is like royalties. I mean, I think royalties are interesting. If you search royalty investing, you can find a lot of those firms out there as well. But I think that's interesting because they're kind of like individual stocks in a way because you're buying like you have to bet on like, oh, I'm betting on this particular song is going to do well over the next five or ten years or this particular piece of art or something. Right. And so a very piece of content is going to do well. It's interesting. So it's kind of like individual stock investing. So I think for most people you're going to have to have more money available to kind of get into these. But it's interesting to me because like, I don't know if you're just into music or art or something, it's another way to invest and kind of have yourself aligned with that. Right. That's another thing to think about. So yeah, so I'd say farmland, check out royalties. The other one too is like creating your own products. So this is something where like you have something that becomes an income producing asset for you. Right. And so that's kind of related to what we were discussing earlier with discussing how to raise your income, whether you're going to sell your own product, that can be an income producing asset, right? So thinking about that, if there's something you're really passionate about creating, something that you can sell to people, whether that's digital products, which are now it's very easy to sell those things on Gumroad or if you're self publishing a book, you can do that on Amazon, all sorts of different ways you can do things like this. So those are the big ones that I throw out there. You don't have to do all of them, just consider them, just look at them. Say, does this seem right for me? Do the fees seem right? Does this seem right? You go through everything and kind of just see what fits, what fits your profile.
- [43:51]
Paula Pant
Right. The royalties one was really interesting. I've never heard anybody talk about that before. And you give the example of the song Empire State of Mind by Jay Z and Alicia Keys, and someone bought the rights to that for $190,000, the rights to the royalties produced from that song for the next 10 years. And in that example, I mean, yeah, it's absolutely easy to see. You're betting that that song is going to stay popular and relevant and you're betting that the royalties that it made last year will be comparable to or improved over the next 10 years. Like, you know, you're essentially betting on the long term viability of a song.
- [44:32]
Nick Maggiulli
Yeah, of course. And that's one of the things about this. And I have no idea how they. They probably. There's people out there probably model like the decay of royalty. So in this, in the particular, I'm going to read from the example. So in the year prior before it was sold, that song Empire State of mind earned $32,733 in royalties.
- [44:49]
Paula Pant
I'm surprised it was only that much. I thought it would be a lot more.
- [44:53]
Nick Maggiulli
Well, I mean, it's one song. I mean, it's a big song, but it's one song. There's so many songs out there, right? So it's like. And they paid $190,000 for it. If the royalties remain constant for the next 10 years, that's an 11.2% return you're getting on your money. It's as if I gave a bank $190,000 and they gave me 32 grand a year for the next 10 years. That's an 11% return. Now, there's no bank in America that would do that. Right. But maybe the royalties go downside over time, so the final return will be smaller. But if something were to happen to Jay Z or Alicia Keys, God forbid, you would get way more royalties because people be listening to that song. And so that's the thing to think about when you're investing in royalties. If anything happens to the artist, there's going to be all sorts of stuff that happens for the song, whether that's good or bad or vice versa. So obviously you don't want anything like that. But it's just one of the risks or benefits of royalty investing is to think about how trends change. I mean, if some were to get canceled, maybe people stop listening to those songs. Altogether, that's the other thing you got to think about both sides of the equation.
- [45:45]
Paula Pant
Wow. And I guess in that way there's also some crossover in terms of investing in art. But of course art is not income producing and royalties are. But with art also, you have that same issue where the popular sentiment about the artist can influence the perceived value of that piece of art, for better or for worse.
- [46:04]
Nick Maggiulli
Of course, that's completely true. And so I actually do invest in some art, but it's like once again, it's like it's crowdsourced. Well, I can't afford a Basquiat on my own, but I do own one through a crowdsource platform. You can own non income producing ass. There's nothing wrong with that. I just think you got to just be careful because not everything because you don't know what the people are going to feel about pricing if you just, if you happen to sell at a bad time. I mean, during the Great Depression, like there's so many rich people end up selling their houses for, you know, pennies on the dollar because they just needed money. And there was no one that could afford these really expensive things. Like how many people can afford $10 million paintings? Not many. Right. So the people that are buying those things are probably only going to do it in a good market if the market turns bad. Like they're not going to be wanting to spend a lot of money. So you could take a real hit on that. So that's. You got to be careful when you're thinking about those types of things. So that's the only downside of investing in non income producing assets.
- [46:51]
Paula Pant
Right. But in an inflationary environment where people are more likely to park their money into tangible items such as jewelry and art and houses, in the types of tangible items that historically have survived periods of high inflation, I mean, that's sort of the other, I don't want to say market timing component to think about, but you know, macroeconomic timing component to think about at least.
- [47:17]
Nick Maggiulli
Of course, yeah. All those things to think about. Right. And so when you're talking about inflation investing, I mean, I didn't really get into this in the book as much, but I've written on this on the blog and it's like equities generally are the best bet for most people most of the time. REITs are also pretty good. Real estate's pretty good for that. Home prices, things like that are good. The other thing, if you really think inflation is going to stay high for a very long period of time, and that's you would, in theory take out some debt. And why would you take out debt? Because that debt could get inflated away. If the cost is fixed, but the money supply is just deteriorating over time, then you're going to be paying back in depreciated paper. It's one of those things where people who did that I'm not saying we're going to have a hyperinflation again, it's silly. But any sort of thing in history where people were literally paying back, they took out a loan to buy a business and then they'd pay it back a couple months later and it's like I basically got the business for nothing. It's kind of crazy to think that that could happen because the currency depreciated so quickly. But yeah. So those are the ways to kind of fight inflation with investing.
- [48:16]
Paula Pant
Excellent. Well, thank you for spending this time with us. Where can people find you if they'd like to know more about you and your work?
- [48:21]
Nick Maggiulli
My website is of dollarsanddata.com all one word of dollarsanddata.com or you can just find me on Twitter mydata and my DMs are open, so feel free to send me a message or questions or whatever. I'd be happy to chat with you.
- [48:37]
Paula Pant
Thank you, Nick. Today's episode was brought to you by the Let for Investing and it is part of a special five day series that we are doing every day this week in honor of F Double I R E. In case you missed it, on Monday we played the letter F. Financial Psychology. We played an interview with a behavioral finance expert. On Tuesday we played an interview with a negotiation expert. That was for the first letter I. Increasing your income. And you just finished listening to this interview with Nick Maggi on that second letter I. Investing. Tomorrow we will share an episode on Real estate and on Friday we're going to share one on entrepreneurship. That's our five day special every day this week where we pull an episode from the Greatest Hits vault, an episode that has previously aired on this podcast. But it's been several years so if you're a newer listener, you might not have heard it. If you're a longtime listener, you heard it many years ago. Thank you you so much for being part of the Afford Anything community. Merry Christmas Eve and I will meet you tomorrow as we celebrate the letter R and we also celebrate Christmas. All of that is tomorrow. I'll meet you there.