So for 10 years, I basically built this company and basically figured it out along the way. And then at the age of 34, I sold my company for just over $5 million. I didn’t want to be one of those lottery winners that goes back to being a garbage man, you know, two years later, so I started reading every book I could on personal finance and investing. They all said the exact same thing, and it’s something that most people just in the normal flow of their lives don’t really hear that message. I really love talking about personal finance and investing. And so I started Personal Finance Club to basically help spread the knowledge of wise financial advice without any ulterior motives.

Robert Leonard  04:49

We’re gonna cover a wide range of investing and personal finance topics today, but I want to start with one that’s been top of mind for a lot of people and that is: should we be investing when the market is at a record high?

Jeremy Schneider  05:04

That’s a great question. And it’s a question I get all the time. It’s a question I get this year. I got that question last year. I got it in 2018. I got it in 2017. I got in 2016. I got in 2015. I got in 2014 and 2013. Do you know why I got that question every single one of those years? Because they were all highs, because they were all record highs. So the question is, would you have invested in 2013, if you had the chance at that record high? In fact, it didn’t start in 2013, almost every year as a record high because the market goes up, you know, there are crashes, there’s a year where we don’t hit a record high sometimes. But most years, we hit a record high.

In fact, one of my favorite things to do on Tuesday nights is to open up a spreadsheet and download the history of 130 years of the US stock market and basically do a little research. I went and looked at every single month in the last 130 years, from 150 years, from 1870 and 2020. I looked at just the months that were record highs, all-time record highs, the highest the market’s ever been if you invested just in those months, and then looked at the performance for the following year. On average, investing starting in those months, you would have an 11.2% return in one year.

So that means you’re actually on it, and in the history of the stock market, the market goes up a little bit better than 10%. So if you invest starting during a record high, you actually get an 11% return for the following year. Is that what’s gonna happen starting today? I have no idea because I can’t see the future. But I do know over the last 150 years, that’s what’s happened. And most years, we are in a record high. But since the stock market is basically like a stairway that only goes up, you just kind of got to get in and you’re always going to be flooded with record highs. So it’s a good thing because the market goes up.

Robert Leonard  06:46

If we are going to invest even at highs like today, how should we consider portfolio allocation? When we think about international ETFs? They’ve significantly underperformed over the last decade. Why does or doesn’t that matter?

Jeremy Schneider  07:01

Yeah, international. Basically, if you look at the last 10 years, international has done poorly compared to the US. It hasn’t like lost money, it just hasn’t gone up as much. But the last 10 years have been a very good 10 years for the US because 10 years ago was 2010, right at the bottom of the financial crisis. And so if you can measure just from the bottom of the crisis until today, it’s this long march off with a few bumps on the road. Like the Coronavirus crash, which we’ve already recovered from. And then when you compare it to international, which has had like the Greece thing and the Euro thing and the Brexit thing. They’ve had a few issues that we haven’t had; US has outperformed.

So people ask me, why would I bother investing internationally if the US has done better? And then what I asked them is, okay, that’s what happened last 10 years. What’s going to happen in the next 10 years? Is the US going to perform better, or is International going to perform better? And they usually say that they don’t know, because of course they don’t know because no one knows. But if you look back further than 10 years, you look back like 100 years, it basically looks like a seesaw. Like sometimes the US outperforms, sometimes international outperforms. And sometimes the last five years, sometimes the last 10 years, sometimes last two years. There’s time between 2002 and 2007, where international performed in the 70s. International performed, in the 50s, and so it’s basically like every decade has switches.

So if you invest at this point, after we’ve just had this huge outperformance by the US and you then drop international, you’re basically selling low. You want to sell high. If you were to say, hey, Jeremy, should I drop US and go on international? Because things are likely to flip flop and revert to the mean, I’d say you’re the first person ever asked me that question. I respect that you’re not chasing past performance, although I still wouldn’t do that, because we just don’t know. Basically, I guarantee myself the full growth, the world economy returns by buying both, and I just rebalance. I just pick my asset allocation. You know, I was US until 60/40 or 70/30, or whatever it is, and then just stick with it, because that’s how I think I’m gonna maximize my own wealth.

Robert Leonard  09:06

That reminds me when I talked to JL Collins, and I asked him if he recommended the Total Stock Market Index Fund versus the S&P 500 Index fund. And he said, both of them will probably do fine. One will do slightly better than the other. I have no idea which one so I go with VTSAX, and it makes me think of the same ideas: international and the US. Both are probably going to do well, and at certain points one will outperform the other but we don’t know which one. So have a little bit of allocation to both, I suppose.

Jeremy Schneider  09:34

And you know, in his book JL Collins, he mentioned international and he just loves VTSAX. He says there are people like him and like Warren Buffett, even Jack Bogle. There are people who’ve said that the US has so much international business, that you are inherently diversified around the world by owning US businesses. I can’t dispute that because those are people who are probably wiser and more educated than me. But from my world perspective. you know, maybe something weird happens to the US. And we have like, the dollar is no longer the global currency or who knows what might happen. I want to have not all my eggs just in one country’s economic basket.

Like you said, we don’t know the future, but I think it’d be just pick a plan, stick with it, and invest for the long term, you’re gonna have a lot of wealth. If you keep making a bunch of changes, that’s where you’re probably gonna lose out.

Robert Leonard  10:22

I want to take a look at your seven sins for investing. And we’ll start with number one, which is holding cash in retirement accounts. Before I ask my actual question, I want to tell you, and the listeners and everybody on Instagram Live, a quick story that I was told by another guest on the show. There was an individual who started investing in their mid 20s and invested for 35-40 years until they retired. And when she got to retirement, she had a couple $100,000 saved up, which is amazing. But she expected to have a lot more. And she ended up consulting with a financial advisor to find out why she didn’t have more, only to realize that she never actually invested that money. People told her that she needed to save for retirement. But no one ever told her that she actually had to invest the cash that was going into her account. So just sat in a cash fund, it was never actually invested.

I know that’s not your point with your first sin of investing. But when I read about this sin, I instantly thought of this story, and I just had to share it. But anyway, what is holding cash in your retirement account? Why is that your first sin of investing?

Jeremy Schneider  11:24

That’s literally exactly my point. But that story is like the extreme version. And I hear a version of that story almost every day where people basically conflate the name of the account with the investments inside the account. So for example, people put money into a Roth IRA. They, like the poor woman in your story thinks that they have invested. But there’s a second step you have to do, which is to invest the money. No, it’s just like putting money, it just moves money from one account to another, like between checking and savings, from savings to Roth IRA. That’s fine, but still just cash just sitting there.

The magic of investing and the magic of compound growth happens when you take that money and buy something with it. Buy stock in the US or world economy, like we were just talking about. And like I said, almost every day of my life, I talk to someone who opens up their Roth IRA, and to see it is either all in cash or partially in cash. And that’s exactly what the first sin of investing is; if you have any sort of investment account, it’s very likely that you should have zero cash in there, because all the money should be invested.

You know, if you’re over the age of 70, and you’re just trying to preserve your capital, and you want to have some cash available inside of your IRAs, that’s fine. But this isn’t over the age of 70 investing. This is Millennial Investing. And so for millennials out there, no cash or retirement got every single penny should be invested. So when you open up your Roth IRA, if you see it, say anything like cash, or core or sweep, or you know, anything that looks like it’s not an index fund, or stock or an investment, that probably means that you have cash sitting there. All those different words, just mean, this is the place that cash sits until it’s invested. And don’t have any money sitting there because you’re not investing, you just have money sitting there doing nothing.

Robert Leonard  13:03

What if a millennial intentionally leaves cash in one of those funds until maybe they’re trying to time the market? Maybe they want to wait for a better time to invest?Is that also a sin?

Jeremy Schneider  13:13

That millennial is breaking one of my other sins of investing, which I think we’re gonna get to shortly.

Robert Leonard  13:19

A lot of investors that listen to the show are individual stock pickers. So we may not all agree with your second sin of investing: that is picking individual stocks. Why is picking individual companies to invest in a sin of investing?

Jeremy Schneider  13:33

This sin kind of pains me because I know that just the temptation and the excitement around investing in individual stocks draws a lot of people in. And if the choice is between not investing, or picking random stocks that you research or you’re guessing or your tips, whatever, I would always prefer investing in stocks over not investing. The problem with picking stocks is that the market is efficient. And so when you are me or any individual person looks at a specific stock and tries to make the decision: is the stock more likely than not to outperform the market going forward? It’s basically impossible to do, because everything that I know and that you know, and that any individual person knows is already priced into the market.

So for example, if I say Apple’s a great company. I love iPhones, all our friends have iPhones, I’m going to buy Apple. Everybody else knows that too. And so all that information is already priced in. So you have to pay so much for one share of Apple until basically all these people who also know that information says okay, Apple’s not that good. It’s facing threats from Google, or there’s gonna be a lawsuit or the CEO could die or who knows what, that’s one pay too much. I’m gonna sell my share.

That’s what an efficient market means. It’s like once everyone who has all the information and this is happening like millions of times a second as all these shares are traded constantly when the markets open. That’s where the prices met, right? So I can’t then look at just from my perspective, decide which stocks to buy. So what happens when you buy individual stocks, is you’re basically just exposing yourself to greater volatility.

So instead of owning the whole market and guaranteeing yourself your share of every stock, every every sector, you know, every size of company, all that stuff, you’re basically concentrating your investments in certain stocks. And then you can have more volatility. But in exchange of volatility, and in exchange of high risk, you’re not getting a higher expected return. On any set of stocks you buy, on average it’s expected to return the same as the market, because those stock prices are all efficiently priced. When you trade more volatility for not greater return, that’s a bad trade.

That’s why stock picking is a sin. That said, I actually live by the 90/10 rule, which is 90% of my investments go into index funds, buying and holding index funds, just let it ride for decades, let it go. That’s how I think I’m gonna become the most wealthy. And then with the remaining 10%, go nuts. Go pick stocks, Bitcoin, futures, options, trading, whatever you want to do. I think if you do that, and you’re very honest about the accounting of it, you’ll see how your index fund over time is very likely to outperform your stock picking.

Robert Leonard  16:04

I’m not insinuating that you’re old Jeremy, but because you’re 40 and on the higher end of the millennial scale, do you think millennials could adjust that 90/10 percentage? For example, I use 70/30, sometimes 60/40. 60/40, as in 60 stocks, 40 index funds, you think we could do that as younger investors?

Jeremy Schneider  16:24

You can do whatever you want. Yeah, but thank you for calling [me out]. Yeah, I was born in 1980. So according to about half the websites on the internet, I’m still a millennial. You can do whatever you want. I believe that your index fund portion is going to grow more. And so it’s not really a matter of, you know, I think some people say I’m willing to take on more risk. When you say I’m willing to take on more risk, the second half of that statement is in exchange for higher returns. But if you’re not getting high returns, and you don’t want more risk, it’s not like I’m taking a trajectory, it’s gonna have less growth, I’m taking the trajectory with the maximum growth, while also mitigating my risk, right?

That said, if all you did was put 100% of your money and picking stocks and pulling them to the dartboard you’d be in great shape. Like it’s all about putting more money in, right? If someone is picking stocks randomly, or doing the research or whatever, and they’re putting $1,000 a month, and someone else is putting in $100 a month, and in an index fund $1,000 a month is gonna win, right? Like it’s has way more to do with how much money you’re putting in, than perfectly getting your investing strategy right.

If someone’s 70/30 or 50/50, or whatever, I’m not going to wag my finger and say you’ve picked too many stocks. I mean, I guess that is what I’m doing, because I called it as in, but just as a matter of education, because I want them to know that they’re probably not going to get higher returns out of that portion of their portfolio.

Robert Leonard  17:42

When I was reading about your third sin of investing, I couldn’t help but think about Dave Ramsey’s investing approach, with his personal finance advice being what it is, his investing approach really surprises me. What he does is he recommends investors look for actively managed mutual funds that have done well in the past and invest in those because they’ll continue to do well into the future. Or at least that’s what he says. I don’t agree with this strategy at all. Actually, I think Dave is wrong. But what are your thoughts around chasing past performance? And why is that a sin of investing?

Jeremy Schneider  18:15

So the third sin is chasing past performance. I like Dave Ramsey, I think we owe him a thanks for championing getting out of debt. I think he’s largely a voice for helping millions of people with money. On this, he’s just simply wrong. In my opinion, he has to make money for his company. One of the ways he makes money is by having his Smartvester pros who pay him a fee to be part of his network. And those Smartvester pros charge their clients a fee to invest and they recommend they invest in these high fee funds. So the mutual funds are getting a fee, the Smartvester pros are getting a fee, Dave Ramsey’s getting a fee, and guess who’s paying all those fees. It’s the individual investor. It’s the Dave Ramsey listener who’s paying all those fees.

 So Dave Ramsey, if he champions index funds, and index funds are like a main line from the growth of the US economy, the growth of the world economy directly into your investment account with as small fees as possible–if he champions that, he cuts out himself, the Smartvester pro and the mutual fund company all from that, that system. Right? That’s why Dave says what he says.

Regarding his proposal, you can look at the performance of mutual funds and buy the one that has a history of perfect performance, and then it will continue to outperform, you know, there’s study after study after study that has shown: that’s simply not true.

You know, they’ll look there’s a study or look at like 10 years of mutual fund fund performance, you know, those 10 years, maybe 10% of them will outperform the stock market and 90% will underperform. So they just take that 10% and then they look at the next decade. So only the winners now. Only the winners of the next decade, 90% of those underperform. So even though they were all outperformers for the first decade, in the second decade, they had exactly the same results as the entire set of mutual funds. And then after two decades, they just take the10%. Now we’re talking about the 1% of mutual funds, and then just track those the best of the best the cream of the crop. Over the next 10 years, 90% of those underperform the market, right.

So what it goes to show is that these mutual funds that are outperforming the market, it’s not that they’re good, it’s just that they’re lucky. And it’s called confirmation bias or in 2020, like hindsight bias. You take a set of a thousand mutual funds, and over the course of 20 years, 50, are going to outperform. Even though the results were random, you can’t then just like, look at those 50 and say, look, see? We did great, they’re outperformed. I see this all the time when we when a new investor is talking to a financial advisor, who usually is not a fiduciary find financial advisor, but a commission based financial advisor. That financial advisor will say, hey, see, we beat the market. Here’s a couple different prospectuses of mutual funds that have a history of outperforming. And then the new investor says, Wow, great. You found some winners? Yeah. Are you you have the winners?

What they didn’t show is that of the two outperformers they have, they have 98 that underperformed that they just sweep under the rug at this point and only set out the winners. Are those two going to continue to be winners going forward? Almost certainly not. And if it is, it’s mostly it’s due to luck, not skill. So tracing past performance is when you look backwards and say, Hey, this is what just did well, therefore, it’s what’s about to do well. That’s simply not true.

Robert Leonard  21:24

And all these mutual fund companies are dealing with a massive survivorship bias, because what they’ll do is they’ll say, just for round numbers, they’ll have 100 different mutual funds out there, they’ll see which ones outperform, then they’ll shut down all the ones that don’t outperform. Then because they’re shut down all their data and history and record goes away, and nobody knows of them or really remembers of them. And then they have the ones that outperformed and then like you said, the financial advisors just out those ones. Now look, all their funds have outperformed.

Jeremy Schneider  21:51

There’s a chart that was in one of Jack Bogle’s books where he looks at a set of hundreds of mutual funds over the course of 30 years. 90% of them have just been deleted, just due to underperformance. Of the remaining 10%, 6% of those have underperformed like this, they’re still around but they’ve underperformed and then of like the whenever there’s like luck for 4%, like maybe 2% have outperformed by 1% and 2% have outperformed by like 2%.

So there’s this extremely slim chance that you pick a mutual fund that outperforms and even if it does not perform by a pretty small proportion. There’s like a huge percent chance that like these actively managed funds get deleted or rolled into another fund or just basically swept under the rug. Survivorship bias. That’s a good word for it.

Robert Leonard  22:34

I was talking to another investor the other day, his name’s Gary Mishuris, and he runs a fund. What he taught me was really interesting, and intuitively it makes so much sense. But I really hadn’t thought about it in my 10 years of investing. But what he said is, why do all these companies have so many different funds, when if you want to earn your best, like if you’re gonna put your best product out there? Why do you have all these different funds, there has to be one that’s the best and then everything else is subpar. So why would you not just focus on your best product and put all your best ideas into one fund? It just doesn’t really make sense to have all these other products that are subpar.

Jeremy Schneider  23:09

Well, it makes 100% perfect sense when you realize they’re just like throwing spaghetti against the wall, right? And there’s the thing that sticks and they’re like, Oh, see, we knew all along. If they knew all along, they wouldn’t have had all the other stuff. I mean, you know, it gets a little bit nefarious. But like, I think I could create a pretty effective scam, where I went and created 10 or 50 or 100 different YouTube channels, and then every channel for a week, I would tout a different number one stock and like post the video maybe post as unlisted or something. Then all the YouTube channels where I happen to post a loser, just delete them all.

Then the remaining one that happened to have six winners in a row, then release it to the world and say, hey, look at this for six weeks in a row I’ve picked it consistently. I picked a stock that has jumped up by 5%. I’ve never been wrong. Look at the data. Look at what happened afterwards, here here. And people be like, this dude can pick stocks, right? But really I was just putting up nonsense there too. And then I would sell a subscription to my news picking or my stock picking newsletter and make a million bucks, I’d be great. I’m tempted to do that. Except I just, I’m a slave to integrity, I can’t do it.

Robert Leonard  24:11

You’re too ethical for that. I’m not sure if we talked about this last time. But what you just explained, it’s just the modern day version of a scam that actually happened. And I forget which book I read it in. I read it in one of the books. But basically what a guy did was he mailed out letters, I think it was every month, he would mail out a letter to say thousands of different people. He would just send out, you know, stock picks. And then he keeps sending out these letters. And just by the way probability works is most people will see that he was wrong. But some people will continue to get the right letters every single month. They’ll think that he’s a genius and has gotten it right for six months in a row. He raised a ton of money for his fund that way. And it’s really just a way to play with, again, this whole idea of survivorship bias.

Jeremy Schneider  24:55

Right? If you’re one of those people who got the winners every time you’re like, Dude, this guy’s right and I gotta go with him.  I think jL Collins mentioned that in the back of his book regarding the scams, I’ll think that’s like the plot of one of the episodes of The Twilight Zone, this content has been around a lot. Yeah. But yeah, it could be stock picking. But I mean, that’s like that’s basically mutual funds are doing. They’re just like highly quietly, like sweeping all the illusions under the rug and be like, see where we got winners.

Robert Leonard  25:20

You have a fun little game on your website that illustrates this next investing sin very well. Of course, it’s just a model that helps illustrate the point. But nonetheless, when I played around with it, I thought it was interesting, pretty fascinating. How can timing the market be a bad approach for investors making it an investing sin?

Jeremy Schneider  25:40

So yeah, so number four, timing the market. So timing,the market is any sort of jumping in or out or holding cash or deciding when to make a purchase. And it can come in a lot of flavors that can come by holding cash, jumping in now, selling, jumping inside. It can  come when you decide to dollar cost average, it can come in terms of buying the dip, or waiting to sell. Basically looking at the market and to try to time when you should do something. And that’s a sin, because it doesn’t work, right? We don’t know, based on the world we live in, what’s gonna happen in the future.

So it’s kind of similar to the first question you asked, which was not one of the things but the first question, which was like, should I invest an all-time high? The answer is, of course, because you should always be investing early and often. Whenever you have cash, put it in the market, plan, don’t buy and hold for decades, because any sort of timing the markets is more likely to hurt you than help you.

So if you wait to put money in, you’re way more likely to see the market go up 50% before you experience a 10% drop, right? So if you’re waiting for a 10% drop, and then the market goes up 50% before you get it, timing the market was bad. If you happen to be in one of the rare moments, where does drop 10%? Then you have to answer the question, well, is it gonna drop 50% 20%? Are we at the bottom? And the answer is you never know.

I actually have a story about this where I look at three different strategies of investing from like 1980 to 2020. One person invests only at right before the four crashes of the last 40 years right before. There’s like a 20% or 25% quake crash. There’s a 1987 Black Monday there was the dotcom crash, there was the financial crisis and then the COVID crash. So they basically saved up all their money and invested right to the record high. Then the second what that person continued to hold forever. So let’s call this investor invested only in the top market Tiffany. So Tiffany invests only the top, she invested $250 or $200 a month. But she saved her money in a cash account, and then at the very top of the market, put all her money in, only to experience a crash. But she held all her shares for the remainder of the 40 years. Then the second crash did the same thing. So she was invested at the top. And for her effort, investing the top of the market, her investment returns at $773,000. So over the course of 40 years, $200 a month, even when you invest right before the crash.

The second investor, let’s call her Brittany because she invested the bottom. She saved up all her money in a savings account just like Tiffany. But instead of investing right before the crash, she invested right at the bottom of the crash. So Brittany is just a brilliant investor. She knows the exact moment of the bottom of the crash. She’s omniscient, she’s omnipotent, whatever you want to call it, she does something that no human on the earth could absolutely ever do.

She invested the bottom of the quake crisis at the bottom of the day when the 1977 Black Monday shoe is gonna drop by 30%. She bought the bottom dollar. Same for the dotcom crash. Same for the  financial crisis. Same for the Coronavirus crash. She did it every single time. Her investment, instead of $773,000 has grown to $1.1 million dollars. That’s pretty good. It’s way better. $400,000 better, but still for being omniscient. It’s not that much better.  You know, most of the growth in both cases came from holding for the whole period.

But wait, there’s one more investor. It’s slow and steady, steady, slow and steady. Sarah. Sarah doesn’t know when the market crashes are coming. She doesn’t even attempt to know. Instead of saving up her money and dumping it in the market at the perfect moment, she just puts her $200 a month in each and every month. If it’s high, she puts $200 in if it’s low, it’s she puts $200 in every single month for the entire course of her investing career. She puts it in, she probably logged into Vanguard 40 years ago, set it on autopilot and didn’t log into her account ever again. After 40 years, her investment I remember investing the top was $773,000. Investing at the bottom perfect timing was $1.1 million. Sarah gets up to over $1.6 million dollars. So like 50% more than the perfect timing.

The reason that is, is because even with perfect timing, Brittany who bought at the bottom she’s waiting. She’s watching the market go up, waiting for the crashes. Meanwhile, Sarah is like riding the market up and then when it goes down, she’s running it down and putting more into the bottom so that that dollar cost average that early offer investing actually outperforms perfect omniscient market timing. You know, this is a little bit of a corny example because theoretically if you had perfect market timing, you could be buying and selling it every single intraday dip and valley. You could be tripling your money every single week and have more money than Jeff Bezos in two months or something.

But  in general, what people try to do in buying the market or buying the dip or buying at the bottom, you know, it doesn’t work, even if you know, ahead of time when the bottoms are, like Brittany did.

Robert Leonard  30:15

I love dollar cost averaging, I was actually taught it when I was 18. And I worked at a bank, I was a loan officer, and we had an in branch, financial advisor. And he came over to me and he said, I don’t have a ton of time to teach you about investing right now. But he knew I was into it. So he said, if you don’t know about dollar cost averaging, you should look into it. And I did. And that’s when I researched it and started to learn about it and understood how powerful it was. Ever since then, I’ve used it to this day for the last 7/8/9 years. And what’s great about 401K’s is if you’re contributing weekly, bi-weekly with your paycheck, you’re automatically dollar cost averaging, which should do well for you over the next 40 years as you invest through into retirement.

Jeremy Schneider  30:54

The 401K, I think it’s kind of a weird rule that your employer has to decide which things you’re allowed to invest in. You only get to take advantage of this tax break at the discretion of your employer. But it does encourage that regular investing, and so most millionaires get there just by regularly investing, when they wake up and like oh, got a million bucks in the old 401k. You know, meanwhile, they’re trying to like out there like hustle and pick stocks and day trade Bitcoin or whatever, you know, that doesn’t end up being a million. It’s just the slow and steady thing over a career, which builds real wealth.

Robert Leonard  31:27

Going back to Dave Ramsey’s investing approach, and this episode is totally not meant to just bash on Dave, I like a lot of what Dave does. But going back to the actively managed mutual funds. Investors are typically required to pay very high fees. We talked about how all the other downsides to actively managed mutual funds. But another one is the very high fees relative to other options out there. Why is paying high fees detrimental to investors, long term wealth creation?

Jeremy Schneider  31:55

So yes, that is sin number five: paying high fees. The reason is, because it’s the only thing that you can do as an investor that is predictive of better future performance. There’s a study that looks at 11 different factors of actively managed mutual funds. They were like Morningstar rating, and past performance, and manager tenure, and cape ratio, and an expense ratio, every way that you could define or measure or put a metric on an actively managed mutual fund.

Of those 11 factors, 10 of them had no correlation to future performance and one of them did. And the one that had correlation to future performance is lower fees. The lower the fee of the mutual fund, the higher the performance. Think about it right? If you think of the world of stocks, like every single stock like Google, Exxon, Mobil, Amazon, Apple, FedEx, whatever, all these stocks, they’re just pumping money into the market. They’re just profiting and growing and generating revenues, and all this can basically be encapsulated into an index.

That is the whole market. If then all these traders are trading the same exact stocks, taking all the cream off the top and putting in their pockets, and returning with leftover, on average, all of those returns are reliably mathematically good to be less than the market because there’s money being shaved off the top by the active managers, the traders.

So as an individual investor, since we don’t know, studies have proven basically, we don’t know ahead of time, which active manager or which strategy is going to outperform, the only thing we can do to improve our own future performance is to minimize fees. And fees can be crippling. If you just pay a 2% fee- a 2% fee can be pretty high. But a lot of times it’s like a 1% fee and a mutual fund. And there’s like there’s a little bit of a front load, and there’s an account fee, and that kind of like all this stuff adds up. But just a 2% fee doesn’t sound like much either, like out of 100%, you get 98% plus all the gains, and they just take 2%.

Of the 2% fee, over the cost of a career basically erodes half of your nest egg. So it turns a $2 million portfolio into a $1 million portfolio just from the cumulative devastating impact of that 2% fee. And so when you’re trying to improve your own future growth, minimize that fee. An index fund these days is like about 0.1% or lower. The average actively managed fund is like 1% or so. So you can get 10 times less fees just by buying and holding index funds.

Robert Leonard  34:25

I think my S&P index fund is .03%, which is just crazy.

Jeremy Schneider  34:31

Fidelity actually offers four 0% expense ratio index funds, because they just saw this battle happening. They’re like well, whatever, we’ll just have it be like a loss leader and try to sell something else. So yeah, they have like a US large cap and international and maybe a small cap or something. Four different 0% fee index funds if you want to go sign up with Fidelity. Although I mean when people ask me if they should switch that .01, .03, they’re all so close doesn’t really matter. So if you were at Vanguard or something, don’t switch to Fidelity just to lower it by a few basis points. Things like bonds, you can’t really trade for free. And so those index funds will never be free anyway. So it’s not really worth splitting hairs over that last couple of basis points.

Robert Leonard  35:12

If you’re talking about switching from 1%, to .1 or .03, then I would say that that’s worth it. But if you’re talking about .03 to 0, it’s really not not worth the effort and the time and all that to switch.

Jeremy Schneider  35:25

Yeah, when you chart this over time, like, one 1% fee will turn into like hundreds of thousands of dollars. And then like a .03% field, will turn into a few hundred bucks. It’s just so little compared to the growth of the entire amount that you can’t reliably expect it to matter. Maybe just the day you buy would have a bigger impact than that tiny fee.

Robert Leonard  35:47

If I had to pick one of my favorites of your seven sins of investing, I think I might have to pick this next one, which is number six. This sin is thinking short term. The reason I like this one so much is because we talk mostly to people aged 20 to 35 here on the show. Unfortunately, this tends to be the demographic that thinks the most short-term and tries to get rich quick. Why is thinking short-term actually a really good way to stay broke, rather than becoming rich?

Jeremy Schneider  36:16

I think you say all the time, I say all the time, it’s basically people who are trying to get rich quick. That phrase sounds so  cliche at this point. I don’t think anyone thinks that’s what they’re doing. They’re like, I’m not trying to get rich quick. I’m just trying to become a Bitcoin billionaire or a Stern, an MLM that’s going to explode or whatever. But any sort of short term thinking where you’re trying to build wealth in a year or a few months, or even two years.

If you’re looking at Warren Buffett’s wealth, it was built over 60 years, right? When he was young, he wasn’t he didn’t make $10 million in a day, he was making long-term decisions. He says things like, if you wouldn’t own a company for a decade, I wouldn’t even think about owning it for a minute.  He’s not trying to figure out what companies I got this month or this year, he’s trying to look at what company’s gonna be a good company for decades.

Sometimes people see what I talk about and they say, I don’t want to wait 40 years to get rich. I was like, well, you got two choices, you can you can get rich slowly, or you can get rich not at all. The get rich, quick mentality is what keeps someone broke.

You know, one non-stock market story might be someone who is trying to flip houses. Flipping houses could be a good business, but someone who’s trying to buy and sell quickly or do arbitrage or move houses here and there, they might make money in one lose money in one. I could see someone doing this for like a decade, and then they wake up in 10 years and they own zero houses and they have no money. And they’re like what happened? I’ve been hustling for 10 years.

Meanwhile, an investor who bought one house waited a couple of years for the house to appreciate in value and for the renters to pay down the mortgage, and then they bought another one and maybe it was five years before they bought the second one, then maybe on year seven, they bought the third one, and maybe year eight they bought the fourth one, then year 10 they bought the fifth one. Then 10 years later, they own five rental houses. The first one now is paid free and clear, it’s cashflow positive by thousands of dollars. [Inaudible] for five years, that’s okay, because I’m thinking long term. And I know that this is going to eventually start to snowball.

Robert Leonard  38:14

There’s a graph out there. I’ll try to find it and put it in the show notes for anybody that’s interested. But there’s a graph out there of Warren Buffett’s net worth. It’s a bar chart, and it shows how it’s progressed as he’s gotten older. He was really rich, even when the numbers are small. But it starts out so small, so small, so small, and it really doesn’t get big. His wealth doesn’t really exponentially grow until he was like in his 60s or 70s and that’s when it really explodes. It really illustrates that long term thinking.

Jeremy Schneider  38:40

That’s how exponential growth works. Although in his 40s, I think he was like, well into the millions. But it also demonstrates how big a billion is. People hear a billion and million and then I call it both rhymes with -illion, but like a billion is 1000 millions. So when you want to understand the difference between a billion and a million, it’s about a billion. That’s like, that’s billions, all of it at that point. And so yeah, when you see him at $40 million at the age of 50, or 40, or whatever it was, and then now he’s at like, $50 billion, that $40 million looks like it’s nothing.

Robert Leonard  39:12

Yeah, there was an analogy used the other day, I forget where I heard it, and I’m gonna butcher the exact numbers, but it really makes you think. Like you just said, you hear a million a billion, you don’t realize how big of a difference that is. But then you hear it in the perspective of time?  I forget exactly what this was, but like a million seconds is like a couple days or something like that. And then a billion seconds is like 30 years or something ridiculous like that. That’s the huge difference between a million and a billion.

Jeremy Schneider  39:38

Yeah, I’ve heard that same analogy. When you look at Jeff Bezos, his net worth of $150 billion, you’re like, Okay, that’s 1000s of years then. So if you have to make a million dollars to get like $1 a second for two days, whatever you like said, but to get Jeff Bezos you have to have like 1000s of years. You’d be dead long before you could get that money.

Robert Leonard  39:59

Yes. There’s another analogy out there, Jeff Bezos could spend like a couple $100 million I think, per day, every day for the rest of his life without making another dollar and never spend all of his money. It’s pretty crazy.

Jeremy Schneider  40:11

He’s got a lot of money.

Robert Leonard  40:13

Let’s wrap up your seven sins of investing with the most deadly sin of them all. And that is not investing early and often. Why is this the most deadly of them all? And what if we go against the other six sins that we discussed, but we at least get this one right and invest early and often?

Jeremy Schneider  40:31

It is the most deadly. You and I think we love getting a little bit academic, you know, talking about stock picking and expense ratios, and P/E ratios and timelines and highs and lows. At the end of the day, it’s all about how much money you put in. So in this example, I show Amanda, who puts $500 a year away to investing for 10 years, not bad. 10 years is a pretty long timeframe. 500 bucks a year, it’s real money. , rather than 500 bucks a year for 10 years grows to $6,907. So ain’t much. That isn’t going to be your retirement money. You can’t even buy a car with that.

But actually invest $500 per month instead of per year. And she does it for 40 years. So again, it’s not that crazy a difference. $500 a month versus $500 a year, 10 years versus 40 years. But instead of $6900, Ashley’s investment has grown to $1.1 million, actually almost $1.2 million. So the difference is massive.  So all these other sins, except for maybe the cash one, that one’s pretty bad. But all these other sayings like time to market, the expense ratio, or stock picking or all this stuff.

If you do that perfectly, and you don’t put any money away. If you don’t do it for a very long time, it doesn’t matter. On the flip side, if you’re putting away a lot of money for a long time, and you’re screwing up all the other stuff, you’re still gonna do great. I start with the cash one, because it’s just such a damaging thing. I end with this one because it’s so easy to get lost in the weeds. People are like Roth versus traditional and the tax rates and timing in ETF versus index funding like all these are academic discussions.

I’m like: Hey, dude, if you just put away $1000 a month into a brokerage account and buy some random stocks, you’re gonna make a ton of money. IT doesn’t matter if you perfectly nail stuff. Meanwhile, if you don’t put the money away, it’s not gonna matter, you put $10  a year away, you’re gonna have no money.

Robert Leonard  42:27

I love this discussion because not that long ago, probably three or four years ago, I was the investor that had to get everything right. I didn’t really care about the simplicity, I wanted every single tax advantage, every single basis point that I could eke out on the fees and returns and everything like that. I wanted everything to be as fully optimized as I could. And as I get older, granted, I’m only 25, so I’m not old. But as I get older, I am valuing simplicity so much. I just really default to that advice you just gave where you just do something that’s not atrocious. Do the semi-right thing at least and do it for a long time. And you’ll turn out okay.

Jeremy Schneider  43:06

Yeah, I actually had that exact same experience where, when I had my windfall six years ago, I read all the books and like, you know, read all the details and got very academic about like, I bought, like, like seven different ETFs. I heard ETFs are more tax efficient than index funds and like, efficient fund placements between my retirement accounts and my brokerage account. Looking back, I think, did I actually make more money than if I just bought a single index fund and put the same exact index fund all my accounts? The answer is I don’t really think so.

I think that complexity that I was adding, and not that I kept it so complex, right, I bought seven ETFs or whatever. But that complexity, I think, is more likely to hurt the individual investor than help, right? So if I just throw all this money in. That’s one of the reasons I prefer index funds or ETFs, because you can automate it, you invest in dollars, you can put every dollar in, you don’t need to worry about shares. Just put all in, leave it there. Forget about it. I think that’s what’s most likely to make you most wealthy. All the tinkering to try to get it perfect is actually not likely to be very helpful if it doesn’t even hurt you?

Robert Leonard  44:09

Based on our conversation in this episode, so far, most people can probably tell you’re a simple non-stock-picking investor. So when I saw you post about IPOs on Instagram the other day, I actually found it quite interesting. You posted a pretend dialogue between two people where the first person said, Hey, I just bought into this hot new IPO and now it’s up 10% should I sell? Your cartoon character responded by saying- do you remember anyone who bought Tesla, Netflix, Bitcoin, and Amazon and then sold when they were up 10%? The other person responded, no. And you said me either. To me that insinuates that someone should hold on to these positions. How can that be true if everything we’ve talked about so far is also true?

Jeremy Schneider  44:55

That’s a good question.  I think this is really illustrating one of the seven sins, which is the sin of short-term thinking. Like I just said, getting it perfect isn’t what’s most important. It’s like doing the big things like buying and holding for long periods of time. I don’t know if this cartoon character or your, if your IPO is going to outperform, but I do know that every single IPO in history, if you want to, like, have it be like 100 bagger, which means it goes up 100 X, you’re gonna have to experience like huge ups and downs and swings, right? Because it’s the longevity of the whole time, which makes it so amazing, right?

So when you look at Amazon, or Netflix, or Tesla, or whatever, even Bitcoin, all those only look like these hot, amazing stocks now. But they’ve all been around like 10 to 20 years. So to have realized that amazing gain, you would have to hold it for 20 years. So while I still am not a fan of stock picking because I don’t know if IPOs outperform. If this cartoon character is like, Hey, I’m just going to sell and then like I’m doing next month now on to guarantee my wealth, I’d be like, that’s fine. But I guess I’m really, really proud, like the sin he’s committed here is short term thinking because what’s 10%? You know, 10% isn’t how you build real wealth, you have to hold for long periods of time.

Robert Leonard  46:11

He’s also trying to time the market. He’s saying it’s up 10%. I’m trying to time This, I think, because why would you sell right? If you think it’s gonna continue to go up, you wouldn’t sell, you’d hold on to it. So he’s essentially trying to time the market and say, Well, this must go down. So I’m gonna sell. So he’s essentially breaking a couple different sins.

Jeremy Schneider  46:27

That’s true. He’s picking individual stocks, he’s timing the market, he’s thinking short term, he’s breaking all sorts of sins. And you know, if he sold and took the money and then spent on something else, or you know, kept churning, if you fast forward his life forty years, he’s probably gonna end up with way less money. But if you just let it ride and kept snowballing over and over and over, right, so he’s an investment sinner this guy.

Robert Leonard  46:46

You don’t have IPOs as a specific sin, but I do. I’m not a big fan of IPOs, I was a little bit tempted with Airbnb recently, just because I like the business model. But my temptation didn’t overwhelm me, and I didn’t buy any shares. I tend to stay away from IPOs, because that’s one of my fictitious sins, if I had any.

Jeremy Schneider  47:04

It seems like they attract a lot of short-term thinking money.Then people when they don’t see the returns that they want after a few months or a year or two they sell. Then you don’t get that long term growth. You’re just buying high when everyone else is all excited about even though the price isn’t merited. But if I could prove that that was also inversely true, I would just short every IPO and put that money in index funds or whatever, but I’m with you, I don’t know if they’re gonna do well.

Robert Leonard  47:32

I recently had a guest on the show. His name was Chris Kawaja. And he recommended that people do invest their emergency funds. But I know you recommend not investing your emergency fund. I like getting differing opinions on the same topic from different guests so that the listeners of the show can hear both sides of the argument and then make their own educated decision. I think too often people are only fed one-sided information, and then they make decisions using confirmation bias. So to avoid that, I want to hear from you. Why do you think people shouldn’t invest their emergency funds?

Jeremy Schneider  48:06

I’ll tell you why. With all due respect to your previous guests, basically, I think part of building wealth is having a good defense. Part of offense is having good defense. And part of building wealth is not being broke. If you’re broke,you’re cash poor. Being broke is very expensive, it would incur overdraft fees or credit card fees or payday loans or borrowing money or going back into debt or whatever. Being broke is very, very expensive.

So you create this emergency fund, which isn’t a massive amount of money. Maybe three months or six months of your spending, maybe $10,000 to $20,000, depending on how volatile your job is, and how big your family is. This amount of money isn’t going to change your life if it’s invested. But it could change your life if you need it.

Usually, when things go bad, they go bad all at the same time, right? So if the market drops by 50%, because there’s a global pandemic or something, and then you also lose your job. If that money was invested in your emergency fund, would go from $10,000 to $5,000. Then you’ll have this devastating choice to make. Do I sell when the markets down 50% to buy food? Or do I go into debt or have some other thing where if it were, if it’s all $10,000, like okay, I can spend $2,000 a month and have five months and work a side hustle or whatever and make it.

So that money, despite cash doing nothing these days, the money is actually working for you. It’s working for you in the exact same way that insurance works for you. So when I buy insurance on my house, in case of a fire, I lose that money. If I don’t have a fire, then that’s fine because I’m protecting myself against the bad thing happening. Having your emergency fund in cash is doing the exact same thing. You’re paying a little bit of money in the opportunity cost of not investing it to protect yourself in the case of the bad thing happening, which is the market crashing, you losing your job at the same time. So I’d say it’s a good idea to like not invest your emergency fund and also not invest any money that you plan to spend within five years, because there’s just the growth opportunity over such a short timeframe isn’t enough to make it worth the volatility you’d have to endure.

Robert Leonard  50:10

That’s exactly why I talk about personal finance here on this podcast. When I originally launched this show, it was supposed to just be focused mostly on stock investing, really. But then as I got into it, I realized how big of a piece being a successful investor in personal finance is. I talked about this, and I hadn’t really put these two pieces together until I started the podcast.

I didn’t realize that you needed to have a strong personal finance base in order to be a successful investor, because of what you just said, if you don’t have that personal finance base, if something goes wrong in your life with your personal finances, if you need to make a debt payment, or you lose your job, or whatever, you have to cash out of those investments at the wrong time. That’s not how you become a successful investor; you need to be able to invest for the long term like we’ve talked about throughout the sins. That’s just not possible if you don’t have that strong base. It’s like building a house, right? You need the strong foundation. And I think for being a successful investor, that strong foundation is a strong personal finance base.

Jeremy Schneider  51:03

I agree, I think that’s a great way to think about. You have to be diverse, just like a football player, like a quarterback, if you can just throw really, really hard, but you don’t have good quarter strength and mobility, you’re not going to be a very good quarterback, right? You have to have every aspect of the game down. If your stock picking is great, but you are in crippling debt, and you’re an abusive spender and you don’t have an emergency fund, stock picking is not gonna matter much, right? So you got it, you gotta have a holistic approach to finance.

Robert Leonard  51:32

And if you don’t have your personal finances in order, you’re not going to have money to invest.

Jeremy Schneider  51:36

Right? Or you’re going to lose it pretty quickly when you gotta go pay off your gambling debts or something.

Robert Leonard  51:42

What has been the most influential piece of advice that you’ve ever received? It could be about business, entrepreneurship, investing, even just life in general. What piece of advice has had the biggest impact on you?

Jeremy Schneider  51:54

This is a hard one for me, because it’s kind of generic. The thing that I always come back to in terms of success in life is persistence. Calvin Coolidge, who is a US president, who I know very little about. I am sorry, Calvin Coolidge. I should probably do some more homework on you. But he does have this famous quote about persistence. I’m going to read it for you right now. I’m not really a quote guy. I think it’s a little bit corny, but I’m gonna read it because I think it’s great advice. And it’s as follows.

 “Nothing in the world can take the place of persistence. Talent will not. Nothing is more common than unsuccessful men with talent. Genius will not. Unrewarded genius is almost a proverb. Education will not. The world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘press on’ has solved and always will solve the problems of the human race.”
I love that because it’s true, right? Like how many people do you know, they have like a PhD and they’re like, you know, bums, teaching, you know, teaching, but like, you know, their bums that are not leaving their college town or, you know, haven’t really lived up to what they studied, or I know all sorts of talented people who whose lives are falling apart and genius, whatever. But people who just never give up, who are persistent and who keep pressing on, those are the people who end up being successful. That’s true in my life, too. When people ask me, like, What’s your secret for business? I was like, dude, I was just stubborn. I did not give up. I wasn’t like a perfect business guy. I’m still not but I just don’t give up. I don’t want to admit defeat. So I’m gonna keep going. The business doesn’t go out of business until you give up. And so yeah, persistence. That’s true with investing too. You brought up down, buy and hold and the people who keep pushing and keep investing more and more just pressing on. They’re the ones who are going to build that massive wealth.

Robert Leonard  53:44

We’ve talked about this in the perspective of Instagram, right? You started out and you’ve just been persistent every single day being there and doing what you need to do. And I’ve never heard it in your defense, I don’t know much about him either actually didn’t even know he was a president. So you’re one step ahead of me. But I think the modern day kind of quote of that, or at least the one that I’ve heard of that I like is hard work beats talent when talent doesn’t work hard, right. And talent can be replaced with education, you know, hard work beats educated people, if educated people don’t work hard. And I think that goes back to the same point you just made. I just think it’s so true. You put in the hard work, you’d be persistent. And really, you could do anything.

Jeremy Schneider  54:18

I’m not especially good at Instagram guys. Like for context, people listening. I started my account last January. So I’m almost two years old. I have like 150,000 followers right now. And you know, for talking about index funds on Instagram, you know, it’s not millions, but it’s pretty good in this space. And it’s not because I’m like some brilliant, brilliant index fund research guy or something like that.

I really think that the reason I do so well is because I post every single day, every single day for two years I posted, I like, comment, I stay persistent. I respond to DMs, I’m just pushing every single day. And in combination with that, I basically am trying to actively improve.

I don’t just do the same people who are just posting like quotes over landscapes or something. That’s not really demonstrating improvement. I’m looking at what’s coming back. I’m seeing what posts are doing well. I’m responding that I’m tweaking the process. And so those two things in combination, the persistence and the continuous improvement, I think that is why I have done well at Instagram. That’s why I did well in business. That’s not because I’m like some brilliant graphic designer, or have these amazing insights into finance. It’s just because I’ve been consistent, persistent and improving.

Robert Leonard  55:28

Jeremy, as always, whether it’s for an episode of the podcast, or just a personal conversation that we have, I enjoyed our time chatting. Where can everyone listening go to learn more about you and all the different things you’re working on?

Jeremy Schneider  55:40

Thank you, Robert. It’s a pleasure as always, entirely mine. Oh, yeah. I’m the personal finance club guy. So www.personalfinanceclub.com. Most of the magic is currently happening Instagram @personalfinanceclub. And I do basically everything for free. But I do sell one course that’s a $79 course on learning to invest in index funds. There’s no secrets inside of the course; it’s the exact same thing you’ll find in books and podcasts and on my website, my Instagram. But if you like my style, and just want to have it walked through, like videos and demos, you can find that at www.personalfinanceclub.com as well.

Robert Leonard  56:16

I will put a link to all those different resources in the show notes below. You can find them in your favorite podcast player. As Jeremy said, you can find him on Instagram. You can find me on Instagram @therobertleonard. If you’re having a hard time finding the profile, just go to my followers who I follow and you’ll see his name in there. I don’t follow a ton of people. Jeremy is one of them, and his advice is great. You’ll love all this content. So I highly recommend you guys go check them out. Jeremy. Thanks so much.

Jeremy Schneider  56:40

Thank you, Robert. It’s been awesome.

Robert Leonard  56:42

Alright guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro  56:49

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