Hosted by Creative Planning Director of Financial Education, Jonathan Clements and President, Peter Mallouk this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
Transcript:
Jonathan Clements: Hi, this is Jonathan Clements, director of financial education here at creative planning in Oakland Park, Kansas. And with me is Peter Mallouk president of the firm, and we are Down the Middle. So Peter, I’m amazed, even as you run this company, you still regularly meet with clients all the time. So tell me, what’s the number one thing that you learn from talking to clients?
Peter Mallouk: Well, I mean, one of the great things about meeting with clients is I’m very in touch with what people are thinking about. So along with you and others, I write newsletters here to our clients. I never have to go, gosh, I wonder what they’re thinking about because I’m hearing from them all the time and that’s my favorite part of my job. And so I feel that makes me much more in tune with how to help educate our clients and keep them informed of things that they care about. What I’ve learned from my clients is that there are very few people that have a very healthy relationship with money and really helping me understand what that is. And I’ve adjusted a lot of my behaviors having seen that. I mean, a lot of our clients are very diligent savers, they’re that A type of personality.
In their family, they’re the high achiever and they are the ones putting money away, putting money away, putting money away, saving, saving, saving, saving, and they just can’t get themselves to turn it around and spend. Then there are other people that they’re spending, spending, spending, spending. It doesn’t matter how much money they make. They will find a way miraculously to spend it and finding that person who’s not depriving themselves, enjoying their lives, spending their money, whether it’s on themselves or their kids or charities, but spending it a way where they can enjoy it while they’re alive, but not undo their financial independence. That’s a rare group of people and really just watching them, it seems that so much of this is embedded at a very, very, very young age.
And trying to help them get to a place where they can enjoy themselves, is one of my… I consider one of my top priorities is helping people switch that behavior a little bit and go look, you’re here now. You can enjoy this wealth. And sometimes people will give you excuses, like, well, I’m saving it for my kids. Well, give some to your kids now and enjoy it, or they’ll say, oh, I want to give it to char. Well, charities are here right now. You can give it to the charities right now and enjoy that a little bit too. But helping people get to that point is one of the favorite parts of my job. And I’ve learned to do that myself from learning that from clients as well.
Jonathan: Yeah. I think it’s really hard to offer a lifetime of saving, to say to yourself, I have enough, and now I can enjoy what I have.
Peter: That’s right.
Jonathan: And making that switch from being a saver to a spender, not a wild crazy spender, but a spender who’s willing to enjoy their wealth is hugely difficult for a lot of people. I mean, it’s a minority problem here in the US.
Peter: That’s right.
Jonathan: Probably only 20% of the population really have to worry about this issue about trying to become a better spender, but it is difficult. And I think one of the things that you mentioned about giving, is hugely important because even if you don’t give yourself permission to enjoy this money, there is enormous pleasure in giving away money. I mean, we know from the research, that being generous is a huge source of happiness.
People assume that spending money on themselves is going to deliver greater happiness and spending it on other people. But the research tells us that just the opposite is true. That if you are generous with your time, you go and volunteer at the weekend, that’s going to be a whole lot more fun than sitting at home and doing something that you personally enjoy. Similarly, giving money away, whether it’s to charity or to your children, it sort of gives me great pleasure. And when I see other people doing it, they tell me that it also gives them great pleasure. And why not give it now? Because if you give it to your kids and you see them be so grateful that you’ve helped them helped ease their financial worries, you’re enjoying it now while you’re alive.
Peter: That’s right. And it’s making a bigger difference to them. So if you’re in your sixties and your kids are in their forties, they’re going to get a lot more pleasure and relief. That’s their maximum financial attention in their life is around that age. They’ve still got a mortgage. They’re usually getting ready to be paying for college education, or they’re already paying for college education. They’re worried about retirement. They’re spending most of the money that’s coming in trying to meet those demands. If you drop in even 5,000, 10,000 or a bigger number, that makes a very big difference in that household. If you die at your normal life expectancy and you’re in your eighties or older and your kids, I use the word loosely, are in their sixties. Well, all of that’s behind them. Now their house is paid for and their kids are out of school and maybe they got financial aid, maybe they didn’t, but you’ve missed your opportunity to really provide them relief.
And so, if you’re somebody sitting around, again, we’re talking about world class problems here, but if you’re somebody sitting around with more money than you need, and your financial plan says, hey, you’ve got excess wealth, you can enjoy yourself. A part of that pleasure, a lot of research shows is from giving, and you get the pleasure of watching the gift in motion.
Jonathan: One of the things that I’ve written about frequently is how I’ve sort of treated my kids like financial Guinea pigs in terms of trying to help them to develop good financial habits. But also, when I give them money, I always give them money for a reason. So, I set up various accounts for my kids when they were teenagers. And even earlier designated for say, buying a house down the road, designated for college, obviously, designated for retirement. And in doing that and setting up the accounts, what I felt was not only was giving them money and maybe a sense of financial security, which I think is hugely important. But also I was telling them what I value, what I think is important. And, to your point, also realizing that a thousand dollars to me is really not going to make a whole lot of difference in my life, but a thousand dollars to them seems hugely valuable.
I actually blogged about this, this past Christmas talking about the checks I’ve written for my two kids and my two step kids. And for instance, my oldest stepdaughter is spending the semester in Australia. And so I went to the bank and I got her 500 US dollars, which was 700 Australian dollars. And I gave it to her and I said, you will have so much more fun with these 700 Australian dollars than I could ever have for the same amount of money.
Peter: Right? Of course.
Jonathan: So, the money has so much more value. So this is all a varied long segue into what one of the topics we wanted to discuss about today, which is money and happiness. And when I think about money and happiness, I really feel that there are three ways that we can use money to improve our lives.
One is, I always say this, money is sort of like health. It’s only when you’re sick, that you realize how great it is to be healthy. Similarly, it’s only when you’re broke that you realize how great it is to be in good financial shape. Simply being in good financial shape, not worrying about how you’re going to pay the bills, what will happen to your family if you lost your job, or you went over the next bus. Being in good financial shape, not worrying about money day to day is the one huge way that money can help our happiness.
Peter: And I’m glad you said that. I just don’t want to interrupt you too much here, but it drives me nuts when people say, oh, money doesn’t matter. The only people that say that are people that have money. I mean, when I have people that are really struggling, that are coming here for help, they never say money doesn’t matter. That’s a completely condescending thing that only somebody with money would ever say, because obviously it does. And there’s a tremendous amount of research that says, it takes a certain threshold to meet the basic needs of life that make you feel secure and make those around you feel secure. So of course, to some degree it matters. Now it doesn’t, once you get over a certain amount incrementally, it doesn’t matter anymore, but it definitely does to everybody to some degree.
Jonathan: And so, a quick little rant here. There’s this famous federal reserve study that’s been done multiple times. And what you find is that roughly four out of 10 Americans could not handle a $400 financial emergency without either selling something or going into debt or borrowing from friends or family members. And when I see that number, what I think is, well, one, obviously money is a huge daily burden for these folks. And two, is if they could just get to the point where they have a couple thousand dollars in a savings account and enough in their checking account to cover the next month’s bills and they get rid of that credit card debt, those few simple steps would so dramatically improve their level of financial happiness. And it’s so simple.
And yet so many people don’t manage to do it. And I just think it’s hugely unfortunate. And to some extent, I think it’s because, we don’t get the message out that money can be a big stressor and buying that extra pair of shoes of the shopping mall is not going to make it go away. It’s only going to make it worse.
So anyway, not worrying about money, I think is one pillar of having a happier financial life. Two is spending money on experiences rather than possessions. And it’s hardly because experiences tend to age better than possessions. If you go out and you buy a new car, you’re just going to have to watch it deteriorate over time. That shiny object, when you bought it is going to become that broken down car in the driveway that you curse about because it won’t start in the morning. By contrast, experiences don’t deteriorate like that. In fact, over time experiences tend to become sources of greater happiness, because we remember them more and more fondly. So if you go on a vacation, you should be sure to take photographs and have them up around the house. So you can remember the good times that you had.
And one of the reasons that experiences are a big source of happiness is not simply that we get to anticipate them and then we get to think back upon them and have fond memories, but also because we tend to do them with other people. And the research is unequivocal on this, having close relationships with friends and family, seeing them regularly is an enormous boost to happiness. So the real reason that experiences are so valuable is because you do them with other people. And it doesn’t actually have to be a big expenditure, simply taking a hike with your friends can be an enormous source of happiness. Having family over to dinner can be an enormous source of happiness, getting together with people and having those experiences is hugely valuable.
And then the third thing that people can do to boost their happiness is trying to arrange their lives. So they spend their days doing what they love. And we talked this about this in an earlier podcast about how people should save diligently early in their adult lives so that they buy themselves the financial freedom later in life to potentially change careers and do what they love. But even day to day, you can think back on the typical week and say, which parts of the week do I really enjoy? And which do I dislike? And what you should try to do is arrange your life. So you spend more time doing what you like, and either don’t do the things that you don’t like, or if you have to do them, pay somebody else to do them for you.
Peter: That’s right.
Jonathan: If you don’t like cutting the lawn, find some kid to do it for you. So those are my three pillars for a happier financial life.
Peter: And I think people are starting to figure that out. I mean, I remember early in my career, it was all about buying a cool car or a bigger house. And people are really starting to focus more on experiences and trying to find things where they can build a memory. And I think that’s a very positive trend that I’m seeing carried out. And I think it’s because of education from people like you really pushing that to the forefront.
Jonathan: And I would put in a plug for millennials here. I think millennials are much smarter about how they spend their money than we, baby boomers are, maybe you’re not a baby boomer, Peter.
Peter: Sorry. I’m not a baby boomer. I’m caught in between these two very famous generations. But yeah, I think millennials are definitely, they’re not impressed with things. They don’t want your big mansion. And you’re seeing that in housing prices and they don’t care about the cars and things like that. I mean, that’s the good part. The bad part is they can’t go on a trip without finding like the four Instagram photos or they can’t turn that social media thing off. But for the most part, I think they have that better than the generations before them.
Jonathan: Yeah. They are the Ikea generation, right. They’ll buy the furniture. And then when it’s time to move on they’ll toss it.
Peter: That’s right.
Jonathan: The bad news for us baby boomers who have been collecting stuff our entire lives, things that we think are beautiful, they have no interest. I mean, the antiques that I’ve received from my parents.
Peter: The China you got at your wedding, I mean, this is-
Jonathan: The antiques are now brown furniture. Nobody wants it.
Peter: Right. That’s exactly right.
Jonathan: So actually, when I was a kid, these things, these beautiful possessions were considered to be an investment. Right? And so that is yet another segue into the other major topic we wanted to talk about today, which is alternative investments. And I know that you have a fund invested antiques for creative tax, right?
Peter: Well, this is like a hard right here, topic wise, but it definitely mixes it up. And I think that when you look at investing, we’re talking about houses and things like that, those we both agree about, have written about are not really investments, right? They might be your biggest asset because you’ve got to pay off mortgage and you can sell the house later. But along the way, it’s taking more money from you versus the type of investments we’re talking about, which are investments that bring money to you. And for the topic of alternative investments, I just give a start with an explanation, because a very confusing topic to a lot of people. There’s the stock market, the bond market, publicly traded real estate. People understand that you go to your computer, you hit a button and all of a sudden, you own all three of those things. Very easy, very efficient market, buy and sell very low cost.
Well, each of those has an alternative. You can buy private equity instead of public stocks and private equity, you’re investing in a fund that’s buying small businesses. Sometimes they’re in one industry. Sometimes they’re in a multitude of industries. Sometimes they’re in one geography. Sometimes they’re across the whole country or in a different continent, even. Instead of bonds where you’re lending money to corporations or government entities or any anyone else in that space, you could have a private lending fund where you’re lending money to businesses that may have 50 million of revenue, a hundred million of revenue and want to seek financing in the private markets rather than through banks. And just like there’s publicly traded real estate. I think most people are familiar with private real estate where you buy an apartment complex or a storage facility or an industrial building or a commercial building that’s renting to offices where you buy that property, all of a sudden, you’re in the alternative real estate business.
I tell my clients that have a duplex, you’re in the alternative investment business. You’ve got real estate and it’s private. Each of those private markets, they’re more complicated than the public markets. Some of them the law says, Hey, they’re so complicated. We’re not even going to let you invest in them unless you have a million dollars, which means you’re a credited investor. And some of them, you have to have $5 million, which means you’re a qualified purchaser. Because the government’s saying, look, these are so complicated and have so many downsides that you may not understand that we’re not even going to let you go there unless you have a certain amount of money. But what we get an exchange for that complexity, which is everything from as simple as a K-1 form that might delay your tax return, to being tied up for a long period of time in an investment because it takes time to buy buildings and then sell them later.
What we get for that is we will probably perform better. So if you own a private real estate, you could expect to probably do better than public real estate, especially if you are running it well. So if you own your own real estate, you’re going to control the tax consequences. You’re going to control the time in the time out. But also, and you’re controlling the leverage on the property and the market is efficient enough to say, that’s going to give you a bigger reward. When I come to work at creative planning, I expect to make more money than if I just shut down everything and said, I’m going to go put my money in financial stocks. I expect to earn less in the stocks than I would in a private company, right? Otherwise no one would go to work in America and run any private business.
So, these folks investing in these private companies, they expect to do better than the public markets. They go in with their management teams. They try to improve operations, develop synergies. Oftentimes the person that takes a business from one employee to 3000 does not have the skill set to take that company to 30,000 or 50,000 folks. That’s a whole different group of people and private equity tries to unlock that value. And I think it’s a very hidden part of what makes capitalism work. So the funds like this coming in and helping these businesses grow to the next level, whether they combine them with other businesses to develop synergies or put in management teams that have more experience or grow them enough to take them to the public markets. So if you qualify for those sorts of investments and you are willing to complicate your life a little bit with illiquidity and delay K-1 and having to do a lot more due diligence on your investments, because their managers do matter.
If you hire one guy to buy you a bunch of real estate, you have a very different outcome than another person who we have a lot of what we call manager risk there. If you’re willing to deal with those things and you have a very long time horizon, because that money’s not coming back to you for sometimes two years, oftentimes 10 or 12 years. If you’ve got that very long time horizon, those can really make a lot of sense for a very long term investor. And you see a lot of very ultra-fluid families. That’s a normal part of their portfolio.
Jonathan: So, one of the interesting things is at Creative in terms of the public markets, the stock and bond market, it’s a strong belief that the markets are reasonably efficient. Efficient enough that even a skilled active manager is highly unlikely to outperform the market averages after investment costs. And yet when it comes to these private markets, you’re backing on some level of inefficiency.
Peter: That’s right. Well, I’m actually not. I’m banking on it to be efficient. So for example, the bond market and stock market are both publicly traded. They come with different returns, they’re both efficient markets, but the stock market is riskier than the bond market. It brings more volatility. We have a higher expected return. When you go to the private markets, it’s less liquid. Things are less marketable you’ve got manager risks. So the market efficiently prices these to give you a better expected return. Now within that marketplace, it’s highly inefficient and that one real estate manager can perform much differently than another. One private equity manager is going to perform differently than another. And that’s what I’m talking about with manager risk is there, we do care a lot about who the manager is because we can’t just say I’m going to go buy private equity. I will randomly buy five private equity funds. The way we might be able to do is stocks. Here, you’re going to have a very different outcome based on the different types of risks we’ve discussed.
Jonathan: And so, do you think that it is a must do to have alternative investments in your portfolio or it’s a nice thing to do for people who have the stomach for the risk involved in the time horizon?
Peter: Absolutely not a must have. So to me, this is about what are we trying to accomplish? So let’s just forget about the private markets for a second. Just say, you’ve got somebody who’s in the public markets and they have enough money that they could live off the bond income for the rest of their lives. Stocks are not a must have. Now if they say, look, I want to have all the money I need for the rest of my life. And I want a generation and two down the road. I want my portfolio to help them too, well now we’ve got to have a different conversation, right? If they want to look at their money and say, I don’t just want to meet my needs, I want to grow and meet the needs of others. And I’m willing to take volatility for it. I would introduce stocks.
To me, alternatives are the next extension of that. Do you have enough money that we can meet your needs with the public markets? And with that, what we call excess wealth here at Creative Planning with that excess wealth, are you willing to deal with some complexity, not to really maximize things for you necessarily, because we’re talking 10 years down the road, maybe for you, but mainly we’re talking people that are interested in generational wealth. That makes a lot of sense. And so really it has to align with what are you trying to accomplish and are you wanting to accomplish those enough to deal with the small downsides of those investments? So it’s definitely not a must have
Jonathan: Okay. Fascinating stuff. Anyway, the usual end of our podcast, it’s your chance to give us a tip for the month ahead.
Peter: Okay. So here’s my tip. What I watch is I watch my clients accumulate things until they’re about 70 and then they come in and they start to unwind things. And so their whole life is accumulating assets and then getting rid of them. And a lot of people have never seen a deal they can’t pass up. So be more selective in investments you get yourself pulled into, especially higher net worth people, get all these offers to be in things. They wake up one day, they’ve got a hundred different assets. An Indian client told me, there’s a saying that he didn’t understand until he became wealthy with Facebook stock, he’s worth maybe 40, 50, it’s probably more than that, million dollars. And he said, his dad had always told him the Indian saying that money pulls money. That once he had money, all of a sudden all these deals came to him.
And now he’s in a whole bunch of deals someday. You’ve got to get out of all those deals. And so ask yourself, what are we really getting out of this? I mean, if you’re worth $2 million and you invest $10,000 in the local bar, what is the point of that exactly? I mean, we’re adding a lot of complexity, especially if you do that 10 times, we’re not moving the needle on anything at all. If anything, you can argue, every deal you get into has its own set of risks and significant downsides for you and for your heirs. But start to look at that worst statement, not in terms of how many line items are that are on there, but what’s the net worth. If you’re trying to grow the net worth, make that your goal, you don’t need to have a hundred different things to do it. You can get there with a dozen or two things.
Jonathan: All right. So my tip for the next month, a little unusual, but I really think it’s a valuable exercise for two reasons, and that is sit down and write your own obituary.
Peter: Oh God, I’m not doing, I’m not going to do that.
Jonathan: And there are two reasons to do this. There are two reasons to do this. One is very practical, which is your family will be super grateful after you’re gone that all this information is on a sheet of paper. But two, is when you do it’s a great chance to think about what accomplishments in your life you are most proud of. And that may give your ideas about what you want to do with the remaining years that you have. You may discover, there are certain things that you’re so proud of and it may not be your career. It may be it’s things that you’ve done in the community or things that you’ve done for your family. That when you put it down on a piece of paper, you say to yourself, yeah, I am super proud of that. And I want to do more of that in the years ahead.
Peter: It’s supposed to have… You’ve done this, I assume.
Jonathan: I have.
Peter: How many times have you rewritten it?
Jonathan: A couple of times over years. Actually, I have that. And then I also have a letter of loss instruction for my family sort of detailing where everything is and what the rationale is behind the organization and my estate and so on. And every couple of years, normally before I get on airplane, I’ll sit down and add a little bit extra to it.
Peter: All right. So before you came to our headquarters today, you probably updated that.
Jonathan: Absolutely. And the more often you invite me out here, the more time I’m spending money on.
Peter: All right, now I know what you’re doing on that plane, right?
Jonathan: No. Before the plane.
Peter: Right. Before the plane, that’s true. It doesn’t help at all on the plane does it?
Jonathan: So anyway, that’s the end of another podcast. I’m here with Peter Mallouk. This is Jonathan Clements and we are Down the Middle.
Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed to be reliable, but is not guaranteed.
