Episode #19: Jonathan Clements, HumbleDollar, “If Money Can Buy Happiness, Then Why Doesn’t It?” “Because People Don’t Spend It Right.”

Episode #19: Jonathan Clements, HumbleDollar, “If Money Can Buy Happiness, Then Why Doesn’t It?” “Because People Don’t Spend It Right.”



Guest: Jonathan Clements is a financial writer based in New York City. He’s the author of the award-winning Jonathan Clements Money Guide and a new book, How to Think About Money. Jonathan spent almost 20 years at The Wall Street Journal, where he was the newspaper’s personal-finance columnist. Between October 1994 and April 2008, he wrote 1,009 columns for the Journal and for The Wall Street Journal Sunday. He then worked for six years at Citigroup, where he was Director of Financial Education for Citi Personal Wealth Management, before returning to the Journal for an additional 15-month stint as a columnist.

Date: 9/1/16     |     Run-Time: 51:39

Summary: Episode 19 is a fun, unique episode, delving into the connection between “more money” and “more happiness.” Turns out, Jonathan has literally written the book on this complex relationship. Do you know what studies suggest is the “line in the sand” for annual income, separating happy and unhappy people? Good chance it’s lower than you think. But why? Jonathan tells us. That dovetails into a discussion about how people should spend their money in order to optimize their happiness. It turns out that spending our money on “experiences” with important people in our lives produces far more intrinsic happiness than money spent on “things.” Next, Meb leads the discussion into familiar territory – investing. Jonathan notes two major traps most of us fall into when investing: 1) overconfidence, and 2) loss aversion. These two Achilles Heels tend to inflict significant damage to our portfolios. So what’s our best defense? Jonathan gives us his three-pronged strategy. The topic then moves to portfolio construction, with Jonathan noting how his own approach has changed from a U.S.-centric, core-holding starting point to a global-market-portfolio starting point. Next, they move to a topic less discussed on the podcast: retirement. Jonathan gives his thoughts on withdrawal rates, portfolio management strategies in retirement, and even timing suggestions on when to start taking Social Security. There’s far more on the show, including what studies say about the effect of kids on happiness, why we need to flip our advice to our children (instead of “pursue your passions early in life” it should be “work your butt off early and save, so you can pursue your passions later”), and finally, specific action steps you can take right now to be a better investor. What are they? Find out in Episode 19.

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Links from the Episode:

Running Segment: “Things I find beautiful, useful or downright magical”:

  • Jonathan – Allow for ample time in between deciding on a course of action and actually acting on it
  • Meb – Photos printed on wood

Transcript of Episode 19:

Welcome Message: Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

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Meb: Hello, friends, we got another podcast here for you, and today’s guest is Jonathan Clements. Jonathan, welcome to the show.

Jonathan: Hey, Meb, it’s great to be with you.

Meb: So, for those who aren’t familiar, you possibly may have read seven of Jonathan’s books. He’s the award-winning author of The Money Guide. Born in England, graduated from Cambridge, now lives outside of New York, is currently on vacation in Cape Cod. He used to write for EuroMoney, Forbes, wrote for The Journal for almost 20 years, and enjoying the dark side six years at Citigroup as Director of Financial Education for the wealth management business.

So, Jonathan just had a new book come out, How to Think About Money. I got an early copy, loved it. It’s kind of like [00:02:30] a playbook for how to make wise decisions but with a focus on life happiness, so I think we’d kind of like to start there. The podcast, we spend so much time getting deep into the weeds on investing and the specifics of investing and how to make money. But one of the things you talk about in the book in my mind is there’s kind of this unspoken or unchallenged implication that making more money will just naturally make us all happier. [00:03:00] What have you found about the actual link between money and happiness as a starting point to talk about the book?

Jonathan: If you go back more than 40 years, there’s an economist called Richard Eastland, who came forward with this notion that really didn’t get a lot of attention at the time. It’s now known as the Eastland Paradox, and what it was was this. He looked back at the data not only for the United States but also for other countries and found that even though standards of living had risen dramatically in the post-war period, [00:03:30] reported levels of happiness had barely budged. As I said, that insight was sort of forgotten for a couple of decades, and then researchers started to dig deeper into the topic. And we’ve had a slew of research devoted to money and happiness over the past 15 years. I’ve been fascinated by it from the beginning.

The fact is, we all know that money doesn’t necessarily buy happiness. We can all think of [00:04:00] homes that we were so excited to buy, and pretty soon we own the new, larger home. And it’s like, “Ho hum, it’s just another place to live.” We’re excited to buy the fancy new car. Three months later, it’s just another way to get around town. The connection between money and happiness is clearly much messier than we’re led to believe by conventional wisdom.

Meb: And this kind of starts a discussion in so many different areas. One of the first is this kind of concept of relativity [00:04:30] and happiness that you mentioned about relative to your neighbors. You know, a lot of us would be happy to have a million in the bank but less thrilled to have a million in the bank if we live in a town where all of our neighbors have 10 million in the bank.

And so, this kind of comparing element is challenging in a lot of ways, including on the investing side, where one of the challenges of indexing and thinking about investing in general is no one really wants to be average. And comparing to the relativity [ 00:05:00] and why so many people behave poorly in bull markets, and we’ll get into investing in a minute. I don’t want to get to that too early, but one of the things you wrote about was that day-to-day happiness rises along with income until you hit…usually, there’s like a certain kind of line in the sand. It’s not specific but a certain amount of income per year. Do you remember that figure, or maybe talk a little bit about how…your thoughts on why that may be?

Jonathan: Yeah, let me try to unpack this a little bit, Meb. [00:05:30] The figure that you’re referring to is $75,000 a year, and that came out of an academic study on which Danny Kahneman, who I’m sure many of your listeners know was one of the co-authors. When we think about happiness, it’s really useful to think about it in two different ways. There’s day-to-day happiness, whether we’re having a good time, whether we really enjoy every day. And then there’s happiness when we sit back and contemplate our lives.

Now, [00:06:00] if you look at day-to-day happiness, whether people really enjoy each and every day, it seems that happiness rises until we hit around $75,000 a year income or thereabouts. And what’s astonishing, of course, is the number is relatively low. I’m not saying $75,000 isn’t a decent amount of money, but it’s not like you’re going to make the Forbes 400 with that sort of income. In fact, once you get above that level, there are many indications that people who have [00:06:30] super high incomes actually don’t enjoy the day-to-day all that much. Studies have found that people who are in relatively senior positions at companies tend to suffer more moments of stress and anger during the day than those with lower incomes, so day-to-day happiness seems to cap out at a relatively low level.

Nonetheless, if you ask people whether they’re happy, people who have higher incomes, who are wealthy, are more likely [00:07:00] to say they’re happy. Now, why is that? What matters when you sit back and contemplate your life is what you focus on, so if I say, “Are you happy?” Meb, you’re going to think about all the good things in your life. You’re going to think about the fact that you’ve been successful, that you live in a beautiful spot in the world, all the material possessions that you have. You’re going to say, “Yeah, I’m happy,” and people who have lower incomes and less wealth are going to say they’re less happy. [00:07:30] But that doesn’t mean that the people with less wealth and less income are enjoying the day-to-day any less.

Meb: You know, it’s interesting. So actually, right before this, I went and looked up the numbers off…there’s a website called The Global Rich List that you can type in your income and it’ll show you what percent, where you fall in the world. In the U.S., that 75k number puts you, I think it’s in about the top third because 50% is about 55k. And so one of the reasons [00:8:00] I think that maybe that’s the line in the sand is that, going back to what we were talking about earlier, this relativity, where if you’re above 55k a year in the U.S., also you’re above average. The relative happiness, you’re saying you’re slightly better off than most in the U.S. And by the way, the top 10% in the U.S. would be 50k. The top 1% would be 400k per year. Interestingly enough, globally, however, the US is obviously the largest economy, [00:08:30] the top 1% in the globe only makes 33k a year, which wouldn’t even put you in the top half in the US. So really, probably most Americans are already in the one percenters. They just don’t know it. If you framed it that way, it might be make them a little happier.

So, one of the things famous philosopher and rapper Biggie Smalls said, “More money, more problems.” We talk about more money doesn’t automatically mean more happiness, but one of the ways [00:09:00] that we can possibly increase the happiness is, and we’ve talked about this a before a little bit on the podcast, is trying to optimize your spending. And there’s a quote in the book, which I think is actually from a study, but it said, “If money can buy happiness, then why doesn’t it? Answer: because most people don’t spend it right.” So maybe talk a little bit about that idea and concept of how should people best spend their money to enjoy it and increase their happiness.

Jonathan: When I think about the connection between money and happiness, [00:09:30] I believe that there are three things that money can do for us, three big things that can help improve our happiness. First and most basically, if you have a moderate amount of money, if you have some decent understanding of financial basics, you’re going to worry less about money, and that’s a huge advantage. I like to say to people that money is sort of like health. It’s only when you’re sick that you realize how great it is to be in good financial [00:10:00] shape. Similarly, it’s only when you’re broke that you realize how great it is to have money. So what you want to make sure of is that you’re never anywhere close to that line of being broke. And if that’s the case, then money, having money can get rid of some bunch of financial worries.

Second, the research tells us that having a robust network of friends and family can give an enormous boost to happiness. And not only can it boost happiness, it can also increase life expectancy. [ 00:10:30] People who have a more robust network of friends and family tend to live longer on average. So if you’re going to spend your money and your time on anything, you want to spend it creating special times with friends and family. You want to be going out to dinner with friends. You want to be paying for the family vacation. You want to be flying across the country to see the grandchildren.

Third, money can allow us to spend our days doing what we love. [00:11:00] There’s this myth out there that what we all really want to do is sit back and relax. Not true. Relaxation might make us happy for a day or two. It’s not going to make us happy in the long run. We are most satisfied when we are engaged in activities that we think we’re good at, that we think are important, that we’re passionate about. So what you want to do is to use your money to design a life for yourself where you can spend your days [00:11:30] doing what you love.

Meb: Yeah, I think one of the quotes you had in the book, which I thought was pretty accurate. You talk about the retirement and lounging around, drinking pina colada, but you say, “Look, we aren’t necessarily built for leisure. We’re built to strive,” which I thought was a really great point. Going back to the spending, I think a classic way to say that most of us understand is to spend money on experiences rather than things. [00:12:00] When you start to think about how people spend their money, and you see it’s so evident everywhere.

I’ll give you a great personal example. I just bought a few years ago…my first car was a 1983 Toyota Land Cruiser. Loved that car more than any car I’ve had since and so always wanted one of the earlier models, which is called the FJ40. Found one locally here. Bought it pretty cheap. Kid was moving out of an apartment, I think, with his girlfriend and needed the money. Got a great deal. [00:12:30] 1967. Drove the damn thing home, wouldn’t even fit in my garage. All right, so problem number one. And then, let’s fast forward a year later. I was Ubering for six months because the truck had consistent problems and had that whole just kind of dread of buying something and the romance of ownership. There’s so much romance, and this applies to real estate as well, but so much romance with ownership. But once you get down to the reality of it, it tends [00:13:00] to be not as exciting.

All right, let’s shift gears a little bit. I want to talk a little bit about investing, and we can kind of tie some of this in with spending and happiness as well. But when you talk about investing, your book talks a lot about reasons why we’re not good investors, and it’s a lot of behavioral reasons. Maybe you want to touch on a few of those that particularly trip up investors.

Jonathan: You know, there’s this whole body [00:13:30] of devoted to behavioral finance, and the number of mental mistakes that people make is vast. And these have been heavily documented in the academic literature. But when I think about the mistakes that really derail people’s financial lives, three really stand out. First, we’re too likely to spend today, and we’re not especially inclined to save for tomorrow. That’s number one, there’s tendency to over consume. [00:14:00]

Two, and this goes more to the investing question, is, two, we tend to be over confident. We think that we’re better than average. We believe that we can outperform the market averages. We can succeed where so many others have failed. And then on top of that and sort of a third major behavioral problem that we have is that we’re too loss averse. We freak out when markets go down. The pain we get from losses is far greater [00:14:30] than the pleasure that we get from gains, and that means that when we have declining markets, people tend to shoot themselves in the foot. At a minimum, they tend not to add to their portfolios, and in the worst cases, they panic and sell at the worst possible times.

Meb: You kind of summarized that in the book. It’s kind of a three-pronged solution to avoid being a bad investor. First, so you mentioned, be a great saver, and I think any sort of ways that investors can automate that, so that they’re not seeing the money come out of their accounts necessarily, but it’s an [00:15:00] automated savings plan is a great nudge, which Thaler would talk about as a way to get people to avoid spending it.

Two, you mentioned be humble, as far as people trying to think they’re above average and always going to beat the market. And the last one you talk about was training ourselves to focus on kind of fundamental value, and I think the analogy you gave was think like a shopper. Maybe you want to talk a little about that, about investing and that mindset, which I think is a great analogy because it’s one of our favorite quotes, [00:15:30] and I think this is Mark Yusko. But says, “Investing is the only business when things go on sale, everyone runs out of the store.” And so maybe talk a little bit about that on the investing side.

Jonathan: Yeah, that’s absolutely classic. As you say, when the department stores hold a sale on the day after Christmas, everybody rushes to buy. When the stock market holds a sale, everybody rushes to sell. People need to get into the mindset of thinking [00:16:00] when something falls in price, odds are, everything else being equal, that it is now better value. And yet that simple notion, that simple notion that when something falls in price it’s likely better value seems to be extraordinarily hard for people to accept. Even if they accept it intellectually, they can’t bring themselves to act on it.

That is one simple way for people to try to see that there is a difference between what [00:16:00] market prices are and what underlying fundamental value is. One of the other suggestions I make to people is to think about the stock market as a line rising gradually at 6% every year. The reason I pick 6% is that’s my forecast for sort of the long run total return on a globally diversified stock portfolio. So you imagine this line rising every year steadily at 6%, but of course that’s not how share prices [00:17:00] move. In good years, you can earn far more than 6%. In bad years, you can earn far less, but what you should think about is that line rising steadily into the future.

When prices are above that 6% line over the past year, you should anticipate that we may have rough times in the years ahead. When it’s below, you should expect a period of catch up. So even as you’re happy about rising share prices, and even as you’re depressed about falling prices, you should know that there’s going to be either [ 00:17:30] a period of weak returns going forward as a result of the good returns or a period of great returns going forward as a result of bad returns.

Meb: It’s great advice. One of the tweets that we did a few months ago was about…we tried to put this in context, where we said, “Look, stocks, by definition, if you’re not at an all time high, you’re in a draw down. That’s just the way that math works. And stocks only in the U.S. spend about 17% at all-time highs. So the vast majority of the time, [00:18:00] you are in some form of draw down. It may be your 1% from an all-time high. It may be your 50%, it may be your 80%, but that means you got to get used to being a loser in some regards to be a winner, if that makes any sense. And that applies to every other asset class. It happens the same way in real assets, in foreign stocks and bonds. Of course, bonds are a little more exposed to inflationary problems than just price declines, but in general, it’s hard to be an investor because a lot of the time, you are losing. [00:18:30] And it’s challenging for people, like you mentioned, to be buying when the more things go down.

You talk a little bit about expected returns. I think you’re spot on. Almost every asset allocation model we did in our global asset allocation book on a real basis did that 4-6% per year. Not a ton of variation, so you talk a little bit about the global market [00:19:00] portfolio in the book. Maybe talk a little bit about how you think about asset allocation, some simple advice for investors about how best to construct their portfolio and any sort of guide post that might be useful for them in that regard.

Jonathan: This has actually reflected a bit of a change in my thinking in recent years. When I used to think about portfolios, I always used to say, “All right, I’m going to start with this core position in U.S. stocks, and then I’m going to think about how I’m going to diversify that core position in U.S. stocks.” I’ve now changed my thinking over the last couple of years, and I now start with the global market portfolio, the [00:19:30] global portfolio that everybody collectively owns, the investable universe of stocks, bonds, private equity, publicly traded real estate.

If you look at that portfolio, which is, roughly speaking, half in the U.S., half abroad, somewhat more heavily into bonds than in stocks, then you say to yourself, “Okay, that’s what everybody collectively owns, so that should be my starting point. Now, what do I want to subtract out [00:20:00] of that?” And you might say, “Okay, I’m a small investor. I can’t really invest in private equity, so I’m going to deduct out the private equity. I think, about the bond side, maybe I don’t want to take quite so much foreign currency risk on the bond side. So maybe I’ll either downplay foreign bonds or eliminate them entirely.

Meanwhile, I think about the mix of U.S. and foreign stocks. Maybe I don’t want to have quite so much in foreign stocks because I know down the road, when I liquidate my portfolio [00:20:30] in order to pay for retirement, most of my spending is going to be in U.S. dollars. It’s going to be on goods and services produced here in the U.S., so maybe I want to have the bulk of my assets in dollar denominated securities.” And so that’s how you start to tweak the global market portfolio. But I still think that global market portfolio is a great starting point to think about how to build a portfolio because when you start there, what you’re doing is tapping in [00:21:00] to the collective wisdom of all investors. This is what they’ve collectively decided is worth owning and they’ve put a price on it. So when you buy that portfolio, you are tapping in to their collective wisdom, and we know that investors collectively tend to make better decisions than all of us individually on our own.

Meb: Look, we love that advice. We talk a lot about the global market portfolio. Most investors around the world have a vastly [00:21:30] different portfolio intentionally or not. It’s totally okay if they do, but we often say, “Look, at least realize the active bets you’re making.” Most people put way too much in their own country, not just in the U.S. but almost everywhere and say, “Look, that’s fine if you want to put 80% of your money in Italian stocks, but just realize that you’re doing that and have some reasons for doing so.” You talk a little bit about retirement in the book, so do you have any opinions [00:22:00] on shifting asset allocation as you get older? And particularly, we have a lot of listeners that are certainly worried about a low interest rate environment that are older investors. Do you have any comments or thoughts on that as well?

Jonathan: When I think about retirement, which is pretty close to me, I take this total return approach. What I want to do is have enough money in super conservative investments to cover my portfolio withdrawals [00:22:30] for the next five years. I figure, over a five year period, that’s long enough for the market to take a steep drop and then come back, so I want to make sure that the spending money I need for the next five years is somewhere safe.

So if you’re using the 4% withdrawal rate that’s still pretty popular, it’s come under question here and there, but if you accept that 4% withdrawal rate, what you want is 20% of your portfolio in super conservative investments so that you know where your next five years of portfolio withdrawals are coming from. That [00:23:00] frees you up to invest the other 80% of your portfolio in any way that you want, and my inclination would be to invest it more aggressively than not. Invest it heavily in stocks, and then every year look to cash in some of those stocks and replenish the conservative portion of your portfolio. If we have a rough year in the market, a 2008, 2009, you hold it off all sales until the market has bottomed out and started to recover, and once it’s started to recover, [00:23:30] then you can replenish that cash cushion that you’ve been drawing on to cover those five years of living expenses.

Meb: You also talk a little bit about, staying on the retirement theme, there’s a couple of other topics I want to touch on. One is you say, “Look, we’re all living longer.” By the time that I get to retirement age, the average age life expectancy should only be going up-and-up, advances in bio-tech. You say, “Look, a big difference in thinking about retirement is hopefully [00:24:00] generating a small bit of active income.” So whether that’s working or maybe doing something that will generate some income. The example in the book, even if you only make 16k per year, it’s like having a much bigger nest egg.

Talk a little bit about your thoughts there, and then also, a follow-up question is, several times in the book you mention you reference delaying social security, and that’s not a topic I’m that familiar with. So maybe touch on those two, thinking about practical advice [00:24:30] for people in retirement.

Jonathan: I know that one of your other guests recently has been Rob Arnott, and Rob has been a big proponent of this point. We simply can’t have a society where everybody retires in their early 60s. Currently, the median retirement age in the U.S. is age 62. That simply isn’t sustainable. We as a society cannot produce enough goods and services [00:25:00] if everybody continues to retire at age 62.

The retirement age has to rise, and that shouldn’t be a cause for despair. The fact is, this current conception that we have of retirement, that you’re meant to bust your chops for 40 years, earn as much money as you can, save as much money as you can, and then you quit the workforce and you spend the last two or three decades of your life relaxing? [00:25:30] That’s ridiculous. It’s a prescription for unhappiness. Most of us get a lot of satisfaction from work, as long as it’s work we’re doing that we’re passionate about.

So when you think about retirement, you shouldn’t be thinking about, “Oh, I want to spend my days playing golf and sitting in front of the TV and going out to dinner with the ladies.” What you want to think about is, “What am I going to do every day that’s going to give me a sense of purpose, that’s going to get me out of bed in the morning?” [00:26:00] And if you can figure out what that is, and you can also make some money doing it, your retirement is going to be a lot more financially comfortable. And it’s going to be a lot more satisfying because you’re going to spend your days doing what you love, rather than spending your days relaxing, which is not the path to happiness.

Switching gears, delaying social security, if you delay social security from age 62 [00:26:30] to age 70, the real value of your monthly benefit increases by 76% or 77% depending upon what your full retirement age for the purposes of social security is. So why should you delay? And the answer comes down to the fact that social security is the best stream of retirement income any of us are ever going to get. It’s government guaranteed. [00:27:00] It’s at least partially tax free. It rises every year with inflation. We’ll get it for the rest of our lives, and if we were the main breadwinner, our benefit may be received by our spouse after our death as a survivor benefit.

So even if we’re in ill health, if often makes sense to delay social security, so we ensure that larger survivor benefit for a husband or a wife. [00:27:30] People look at that and say, “Yeah, but what if I die in my 70s or my early 80s?” Well, if you look at the stats, even if you had median life expectancy, for a 65-year-old man it’s age 84. For a 65-year-old woman, it’s going to be age 87, so you’re going to be past the break even age. Plus, we know that a long life is becoming a luxury good that is particularly enjoyed by the upper middle class, [00:28:00] by the people, Meb who listen to your podcast. When insurance companies price annuities for these folks, for the affluent upper middle class, the people who have looked after their health. For these folks, insurance companies are betting that they’re going to live until their late 80s or early 90s. That’s the sort of life expectancy you’re looking at, and you should manage your money under the assumption that you’re going to live that long.

Meb: You kind of touched on this briefly in this question thread, but I’d like [00:28:30] to go back to this because this is an interesting thought that I think would be a little backwards for a lot of people. You talk about society and young people. You say, “Look, follow their dreams.” And you say many people follow this and then they realize they’re broke, they put their dream aside, and they settle into the typical 9-to-5 job, bills, and family. You say, in a lot of ways, this could be backwards, where it should be bills first, passions later. Maybe you could talk about that a little bit. [00:29:00]

Jonathan: Yeah, you’re absolutely right. This is something that I feel quite strongly about. When I talk to college kids, I don’t tell them to pursue their passions. I tell them to go out and find a job that’s going to pay them a lot of money so that they can save a heap of money early in their lives, so that later, they’ll have the financial freedom to potentially switch into a career that’s less lucrative but which they may find [00:29:30] more fulfilling. Now this, of course, bucks conventional wisdom.

Conventional wisdom is “young people should pursue their passions. They shouldn’t worry about money. They should go out and try all these things before they get saddled with a mortgage and a family and all those others financial obligations.” But this advice is based on the assumption that pursuing your passions [00:30:00] in your 20s is somehow more meaningful and more valuable than pursuing your passions in your 40s and 50s, and I think this is a total crock. In fact, the psychological literature suggests just the opposite. In the psychological literature, they distinguish between internal and external motivation, or intrinsic and extrinsic motivation.

When we’re in our 20s, extrinsic motivation is the big motivator. We really want those pay raises and those promotions. Working at some tedious, high-paying corporate job [00:30:30] can actually give us a lot of satisfaction because we want the thrill of getting those pay raises. We want the thrill of getting those promotions, but once you get into your 40s and 50s, and we’re talking here about the reason behind the mid-life crisis. You get into your 40s and 50s, and you realize that all those promotions and pay raises, you know, they really aren’t worth that much. They haven’t really boosted your happiness, and you start casting around for what are you going to do. And that’s when people start [00:31:00] thinking, “Hey, maybe I should try a new career. One that may not pay as much but is going to give me that sense of purpose.”

Now, if you’ve been saving diligently since your 20s, making that kind of career switch is a real possibility. If in your 20s instead you were pursuing your passions, and you belatedly got a serious job, and you’re at the point where you’ve got a huge mortgage, and you’re still saving for the kids’ college, and you’re behind on retirement savings, [00:31:30] you may not have a choice to change careers. You may have to get back up tomorrow and go to a job that you’ve come to hate.

Meb: You know, it’s funny, I have a very personal example of this. So I studied bio-tech and engineering undergrad and was going to take a year off before going back for a PhD, and my oldest brother had done his and took forever, and he kind of has a full family, four kids. And it had taken him forever, and he’s like, “Meb.” His advice was like, “Look, take some time off, maybe [00:32:00] go make some money.” Because he was like, “A PhD is a long slog. You’re not going to make any money. Go make some money so you don’t have to worry about it as much as I did.” And this was his own personal experience, and so I said, “That’s great advice.”

I started working, but ironically, I started working as a bio-tech analyst, and then that started kind of my career in finance. And unbeknownst to me and him at the time, it kind of sent me down this path and a very small fork in the road at the time. But then again, I ended up moving [00:32:30] out of San Francisco trying to target “bills first, passions later.” But that was during the tech bubble bust, so there were no bill-paying jobs. So I unintentionally started working as a ski bum, so unintentionally doing passions trying to do bills.

But there’s two other comments I wanted to make. One was that I remember being at right out of college a few years, hanging out with a buddy at a pool, and he brings out a book. We were just hanging out, reading magazines, sitting by a pool, and I look over, [00:33:00] and he’s reading a book called The Quarter-Life Crisis. For someone who’s 25 years old, and I was like, “Dude, are you kidding me right now? You don’t have any problems in 25 years old.”

I thought that was really funny. Smart, smart book idea, and you touched on this earlier too. I remember that. I just wanted to bring this up. I remember listening to Ritholtz’s podcast with Kahneman and listening to this whole long podcast and near the end, he was talking about it, and he actually said, [00:33:30] “I actually think a lot of happiness is genetic.” Which was an interesting aside that we’ll see it play out in the next 10, 20, 40 years. But you certainly see that some people are predisposed to being more cheerful than not. If you’ve ever seen me in the morning, you’ll know that I am predisposed genetically to not being a nice person for the first few hours of the day. So you talk a little bit about, one of your studies talks about, and a lot of people may not like hearing this, the relationship between children [00:34:00] and happiness. Any thoughts there?

Jonathan: As I do in the book, I’ll start off by mentioning that I do have two children and two stepchildren. I cannot be accused of being some nasty childless New Yorker, but the research here is really mixed on the virtue of having children when it comes to happiness. What the stats tell us is the people who are in relationships tend to be significantly [00:34:30] happier than people who aren’t in relationships. That’s undeniable, but when you add children to the mix, it really isn’t clear that they boost happiness. Going back quite a few years, there was this incredible chart of reported happiness by couples as they approached the birth of their first child. And the chart looked like the stock market in 1987. It rose and rose [00:35:00] and rose, and the little rug rat arrived, and it was just like October 19th all over again. Their happiness just plummeted.

I like to believe that having children has made my life richer. As I was telling before we started recording, I recently got remarried, which added two more kids to the mix. And one of the reasons I was happy to do it was because I love having kids around, and I feel like having kids in my life [ 00:35:30] has enhanced it. But the research says that I am delusional. I just want to come back to something you were mentioning earlier about this sort of predisposition to be happier or less happy. There’s an academic study that divides up happiness into three parts.

What it says is, essentially, “Fifty percent of happiness is based on a happiness set point. It’s a genetic predisposition.” [00:36:00] There’s 50% of your happiness you basically cannot change. You’re either naturally happy or naturally not-so-happy. And there’s 10% is what’s called situational, and this is driven by things like what the state of your health is, how much you make, how much wealth do you have. That, to some extent, is elements that are difficult to control, but then there is another 40% [00:36:30] that is within our control. We can decide whether we want to be in a relationship. We can decide, how are we going to use our time? Are we going to sit in front of the TV, or are we going to go out into the world and interact with people and do something challenging? So a lot of happiness is indeed within our control, but there is also a significant portion that is beyond our control.

Meb: Is there anything that you can think of personally that, as you’ve been through this research, over the past [00:37:00] decade or two decades learning about behavior psychology that you’ve implemented in your own life that you think is something that as a result of this research you’ve kind of put into practice, whether it’s a behavior around just happiness in general and/or spending. I’m sure there’s lots for investing, but anything that has kind of been a change for you on how you approach things or think about things on a daily basis.

Jonathan: I think there are two things that [00:37:30] have been pretty big for me. One is, the research shows unequivocally that commuting is terrible for happiness. It’s just the worst. Somebody once said to me, “Commuting is a different kind of hell every day.” We like to be in control of our lives, and whether you’re driving your own car or you’re taking public transport, your commute is out of your control. You end up stuck on the LA freeway. You get stuck on that train heading into New York [00:38:00] City, and all you can do is sit in your seat and fume.

One of the things that I did five years ago was I sold my house in suburban New Jersey, and I moved into New York City just to eliminate my commute, and I really feel like it was one of the smartest moves I ever made. It was just such a relief not to have to commute anymore. And the second big change I made was a couple years ago when I gave up my job at Citigroup, and [00:38:30] I decided to work for myself. What I found when I was at Citigroup as Director of Financial Education was I was spending all my time battling with lawyers and compliance people, and I realized that even though I was getting paid handsomely, it was the only time in my life that I had ever worked purely for money. And that just didn’t sit well with me, so I quit the job at Citi. I did wait to get my final bonus, but I quit my job at [00:39:00] Citi and started working for myself. I’ve been earning probably about a third of what I used to earn at Citi, and I’ve never been happier.

Meb: That’s great. The commute is funny because I see so many people that still do it. My brother commutes an hour a day. The good news is, though, that a lot of people can now listen to my podcast, and that’s a great use of that time. But I live like three miles from my office because I’m very cognizant of how much I hate [00:39:30] commutes. We have people in the office that commute an hour a day, and I’m like, “Look, for a 40 hour work week, that’s a quarter of the work week that you’re spending.” And the time, most people obviously aren’t using that productively.

We have a funny story of a buddy was driving home one day stuck in LA traffic, and he looks over to his right and sees a friend of ours in the car. And he’s just white-knuckle gripping the steering wheel, just screaming. And he sees the friend later, and he says, “Hey, man, you okay? Is everything all right? I saw you commuting today.” [ 00:40:00] And he goes, “Oh, yeah, sorry, I do that a lot on the way home just to get out my aggression from being stuck on this terrible commute.”

I spend a lot of time, there’s a couple of other decent books on this topic. I remember reading one, I think it was called Happy Money that talk about this optimizing your happiness and spending. I think it’s a hugely important topic because we spend so much time, particularly on this blog, but in general, thinking about [00:40:30] investing and how best to maximize our returns. And then you have the money, and then you go spend it on a huge house that you don’t particularly like or an expensive car or whatever, all these things in many ways become more burdensome then.

I remember there was a quote from Soros, where a reporter was asking him. He was like, “I love great wine,” and they were like, “Oh, why aren’t you a collector? Why don’t you have a wine library [00:41:00] like most rich people with thousands of bottles of old wines.” And his answer was so perfect, and he goes, “Because then I would have to remember all those bottles, or like think about that I own all of these bottles.” And I thought that was such a wonderful description. Most people don’t think of kind of the drawbacks of ownership. All right, one or two more questions and then we’ll start to wrap this up. All right, so you’ve given a couple quick takes on how to improve [00:41:30] happiness and how it’s changed in your own life. Going back to investing, what’s the quick takeaways for you on people implementing a basic investment program? I think you’ve touched on it but maybe a quick summary on how you think is the easy way for people to put this into practice.

Jonathan: One of the things people need to think about is why do we invest? We don’t invest to beat market. We don’t invest to become the richest family in town. [00:42:00] We don’t invest to prove how clever we are. Instead, we invest very specifically for goals like retirement, college, to buy a house, but more generally, we invest in order to be able to lead the life that we want. That’s the goal. We want to have enough money to lead the life that we want, and when you frame it up that way, it becomes much clearer how you should [00:42:30] invest. If you go out there, and you roll the dice, and you try to become super rich, you’re taking all these risks in an effort to beat the market. There is, with that opportunity for success, comes a big risk of failure, and failure is not an option.

We all get one shot to make this journey from early adulthood through to the end of our retirement, and we cannot afford [00:43:00] to fail. So however you manage your money, you should manage it in such a way that there isn’t a high likelihood that you are not going to succeed. For me, the answer to that conundrum is to be as broadly diversified in the stock market as possible, to be really careful about taxes and investment costs, and to make sure that I have enough in conservative investments to cover my spending needs in the years ahead. [00:43:30] Other people will come up with a different answer, but whatever it is, the answer should not be, “I’m going to take crazy risks.” Because you take those crazy risks, and you fail, your life is going to be miserable.

Meb: Here’s the perfect example. We often talk about, I think investors across the board and this includes advisors, the portfolios they recommend almost universally I think are too risky. And the reason being is exactly what you touched on. 10 years from now, [00:44:00] 20 years from now, will someone notice the difference between a 4% and 5% return? Or even a 4% and 6% return? No, it’s not going to make a huge difference in their quality of life.

Will they notice a difference between a 4% return or that 6% or 7% or whatever return that had to go through a 50% or 60% or 70% draw down? Absolutely. That sequence of returns, the ability to sit through it, is hugely, hugely [00:44:30] underestimated…or overestimated that people can actually do that. Often, when we’re talking about investment portfolios with clients, I’ll talk to them and I’ll say, “Look, this is the portfolio you’re comfortable with. Take the risk down a notch from there because if you’re comfortable with this risk on paper, chances are you want to err on the side of even more conservative.”

You know, my mom, going back to one of her favorite quotes is, “Life isn’t a dress rehearsal,” and I think that’s [00:45:00] so thoughtful in many ways. All right, we’re going to wind this down. We always ask guests if they have something beautiful, useful, or downright magical that other people may not know about. Do you have any thoughts here today?

Jonathan: Wow, I wish you’d sort of teed this one up beforehand so I had a chance to think about it.

Meb: Tell you what, I’m going to go first. If you think about something, I’ll give you a minute or two to think about. It could be anything. It could be an app, a website, [00:45:30] a gift, a philosophy, a thing. Mine today is, and we’ve had some really weird suggestions on the blog, including an ax, or on the podcast including an ax. But one of them is, it’s a cool website, it’s pretty basic. It’s not mind-altering or anything, but it’s called WoodSnap. It allows you to take any photograph that you may have or digital picture, and they’ll print it out [00:46:00] on a piece of wood. And that may not sound too cool, but I ordered one, and it ends up being one of the most beautiful ways because it gives the picture a certain element of warmth or depth that is lost I think in just a digital print or a traditional print. So we’ll add that to the show notes on the link. If anything you’ve thought about? If not, we can just cruise along to the ending.

Jonathan: I will mention one thing that I’ve [00:46:30]] actually become more focused on in recent years, and that is having a period of time between reaching a conclusion and acting upon it. I wish I was better at this than I am, and often I find that a situation flares up, I’m immediately angry, and if I’d waited an hour, everything would have played out completely differently. But it also [00:47:00] is hugely important to spending and to investment decisions, and part of the reason is, we aren’t very good at figuring out what’s going to make us happy. So if there is a time period in there, we can ponder whether we’re about to do the right thing.

But also, when it comes to spending, one of the things that we know is that one of the best parts of spending is the anticipation. So if you’re going to plan a vacation, plan a year ahead of time [00:47:30] because that year as you think about the vacation is going to be the best part of the vacation. Actually going on the trip? So-so. Afterwards? Maybe. But the year in which you think about the vacation and all the things you might do, that’s the best part. And in your head, you can go on hundreds of different vacations. You can think, “Okay, maybe we’ll go to Hawaii. No, we’re going to go Europe. Hey, how about Asia?” Having a period of time between when you make a decision and [00:48:00] when you act on it is hugely valuable.

Meb: That’s awesome. You know, on top of that, when you’re talking about the vacation idea, the research shows too that if you pay ahead of time, if you’re going to pay for that vacation, try to pay for the flight, the hotel, and everything ahead of time because it takes away the emotional pain of paying for it at the time. So yes, you build up that wonderful anticipation of the vacation. I am notoriously last minute. I mean, I am flying to Canada, [00:48:30] today’s Wednesday, on Friday, and I still don’t have a ticket yet. And so I’m very aware of this concept and trying to implement it in my life. It’s a bit more challenging for me.

But going back to…I cannot think of a single time where time would not have helped a situation, where being like sending a text message, sending an email, responding to a high emotion conversation. I cannot think of a single time where waiting a day would have hurt, and this goes back to one of the reasons we took comments off my blog in like 2008 just because I was like, “People behave so poorly online anonymously. They say everything very quickly. It’s easy to type something in. I don’t want to deal with that headache.”

But that to me is such profoundly good advice. I’m the world’s worst at implementing it but trying [00:49:30] to be more aware of it. Jonathan, great book. Where can people find more about you? By the way, the new book is How to Think About Money. You can buy it on Amazon. Where can people find more of your writing and follow you if they want to learn more?

Jonathan: I have a website, jonathanclements.com, where I blog regularly and it has information about all my various books and how to get in touch with me. I’m on Twitter @ClementsMoney, and I’m also on Facebook with the Jonathan Clements Money Guide [00:50:00] page. So go to any of those three areas, and you can keep up with me, and all my books are available through Amazon.

Meb: Great. Look, everyone, thanks for taking the time to listen today. We always welcome feedback and questions for the mailbag at feedback@themebfabershow.com. As a reminder, you can always find show notes, we’ll link to Jonathan’s books as well as other papers and ideas that we referenced at mebfaber.com/podcast. You can subscribe to the show on iTunes as well as other [00:50:30] podcast methods, and if you’re enjoying the show, please leave a review. Thanks for listening, friends, and good investing.

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