December 3, 2022

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In this podcast, Motley Fool senior analyst Asit Sharma discusses:
Economists and personal finance authors have very different opinions on topics like savings and investing. Motley Fool host Alison Southwick and and Motley Fool personal finance expert Robert Brokamp break down the differences and share their own thoughts.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on September 27, 2022.
Chris Hill: Whatever you’re going through as an investor, we’ve been there, too. One of the tricks is to just keep going. Motley Fool Money starts now. I’m Chris Hill. Joining me today, Motley Fool Senior Analyst Asit Sharma. Thanks for being here.
Asit Sharma: Chris, thank you for having me.
Chris Hill: It was looking pretty good for a few minutes this morning right after the market opened and everything was in the green, and here we are, just a few hours later, and the headline is the S&P 500 hitting a new low for the year. Down just about 25% from its high for the year, and you and I were chatting before we started recording. I’ll return to a theme I’d been hitting recently. I don’t want to say it’s at an all-time high because I don’t have that level of perspective, but boy, pessimism really is running high right now.
Asit Sharma: Pessimism is through the roof. It’s a contrary indicator for many investors. Times of maximum pessimism often tend to be a good time to invest if you stretch your time horizon out. It’s so funny, Chris, what you mentioned about, those few minutes it looked good. In this day and age, that’s all you get, so I live in the moment. If I see some green, I celebrate a little bit because you come back to your chair after a cup of coffee, it’s going to be in the red. But yeah, it’s a tough market and we’ve got so many factors that have been pushing the market down, and we’ve got some new ones on top of that. Just over the last two weeks, I was looking at the strength of the US dollar. It’s gained about 6% on the euro, just in the last two weeks. That’s a huge move for a currency.
The greenback is so strong at this point that it’s worrying lots of people who follow the market, because so many of our biggest and baddest companies have sales all around the world. Every time the dollar creeps up, it affects their sales, pushes down that top line in foreign currency translation, which means that someone somewhere is calculating what the S&P 500 earnings are going to look like as a group next quarter, which breeds further pessimism. [laughs] We’ve got the never-ending supply of factors pushing down the market.
Chris Hill: But at some point Asit, look, there’s a tendency to look at the market writ large, and if you want to look at large categories of stocks, a lot of oxygen has been expended on growth stocks as a category, and we’ve heard the refrain over and over that even though some of these stocks have been cut in half, they’re still not technically all that cheap. Yet you look at some of the biggest companies out there, and they’re getting to that price point where it’s like, if you’re going to sell me Apple at this price, or Microsoft, or Alphabet at its current price, at some part, some of these big tech companies start to look even more attractive.
Asit Sharma: That’s very true. The smaller companies, I’ve been investing in them, you can calculate what their cash flows will look like over the next few years, and see if they’ve got some insulation from inflation and higher interest rates, etc. These biggest companies that have been pushing the market forward for several years, it’s a small group. The usual suspects that have some ungodly percentage of the total S&P 500 in any given your 10-20% among big tech, these are the companies that have fortress balance sheets, so they’re going to be OK no matter what. The worst-case scenario, they just redirect their investments into a new space. Next year, they’ve got the wherewithal to cope with just about any scenario. It behooves us as investors not to try to be precision experts here. I tend to follow my gut when it comes to these big-picture questions. Like, should I buy an Apple, or an Amazon, or a Google, or maybe a Netflix which has suffered a little more and has less of a fortress balance sheet. But you get the picture. Should I buy that stock now? After a while, your gut becomes a louder and louder voice in your decision making. You still bring a little bit of number crunching to the equation. But I think for investors who have capital and are looking for high-quality ideas to be repetitive here to a good degree, it’s not a bad time to put some money to work.
Chris Hill: Our email address is [email protected] I’ve got a question from Lisa, who writes, I know not much about investing, so my wife and I selected one stock we heard about, and thought would learn from doing this. We didn’t invest money that we could not afford to lose. We’ve resolved to hold on for the long term and not be emotional investors, but I have to admit to being a bit horrified at the stock’s lack of performance. Even in this disappointing market, it is currently at $0.37. The stock is Mullen Automotive. My wife had been seeing it mentioned a lot on Twitter, so we began looking into it. Did we fall for a silly investment? Is Mullen considered a meme stock? Thank you for the question. Sorry for the experience, although I’m reminded of one of my favorite quotes, which is, “when we don’t get what we want, we get experience.” I’d never heard of Mullen Automotive, Asit. I literally went onto Google and just typed in, is Mullen Automotive a meme stock? I don’t know that it necessarily is, although it is a penny stock, and it has been for a while now. What do you think in terms of this question?
Asit Sharma: It’s a great question, and I side with you on what experience can teach us. All of us come at investing from different paths. I actually started out in my investing journey by doing some trading and lost some money really quickly. Hearing about a stock on Twitter when you’re new to investing might be the first entry that you have into understanding how to invest, how to research stocks, and how to learn about them. I didn’t know anything about Mullen Automotive. I don’t know either fits a meme stock or not. But it has an interesting characteristic, in that it seems to have little or no revenue. This reminds me of a great lesson from Peter Lynch. You can Google this. Peter Lynch has a wonderful speech in which he talks about the 10 investing myths that an investor should be conversant with. One of the last ones is about falling for long shots. He says that in his career, he has identified numerous stocks that made money that he thought had very little potential. He knew they were mispriced and had solid prospects, and they turn out to be multibaggers over time. He’d look around and see that several of his stock picks were suddenly doing quite well. Then he talked about his track record with what he calls long shots. He says I’ve never made money on a long shot. Now, here’s the distinction.
Peter Lynch defines a long shot as a company, they used to call them to whisper stocks he says, that doesn’t have any revenue. It’s got a lot of sizzle, and a lot of excitement. Twitter seems like the perfect place to drum up excitement about a stock that might not have solid revenues on the ground. But he says that those have been some of his worst investing mistakes. This is one thing we can all learn from. When someone presents you with an idea around a company that doesn’t yet have any appreciable revenue, be very careful. It doesn’t mean that you can’t make money on that, but those opportunities are few and very far between. That’s one thing we can learn. The second is, this reader is doing some things right. They didn’t invest any money that they could afford to lose. They resolved to hold for the long-term. I would say that works when you’re holding onto quality stocks, or companies that have very solid financials. But you’ve got two out of three things that are pretty decent right here. Maybe if you’d been able to find a stock which had some better forward prospects, you wouldn’t be, I guess, horrified is the term that the reader wrote. All sympathy with that, but to say, look, I’ve been there before. This was my experience too. I just had a disastrous beginning of my investing career, but it motivated me to learn some more, and I hope it does the same for these two. What do you think, Chris?
Chris Hill: Now I agree with that. Obviously, everyone should manage their money how they want to manage their money. But I was telling someone earlier this week about why I continue to hold my shares of Under Armour, which is the biggest loser in my portfolio. It’s because it’s a tiny fraction of my portfolio, so in that sense, the money itself is not really consequential. What’s of greater value to me is the lessons I learned in buying Under Armour in the first place, the mistakes I made. Maybe Mullen Automotive, could be the same for these folks and again, if you need the money, you want to do some tax-loss harvesting, that sort of thing. Great, by all means do that. But in my own personal life, I find it helpful to just have that little reminder in my portfolio so that every time I look at my portfolio, on great days, my head doesn’t get too big. I’ve always got that reminder of the mistakes I made.
Asit Sharma: Yeah, I think that’s a great point and we should say neither of us has really researched the company so maybe it will return as an investment. Peter Lynch says, look, the odds are against it in a case like this, I did look at the stock chart. I think it’s fallen from 10 or 12 bucks all the way down to these $0.37 in a short amount of time. But on the other hand, if you can remove any of the new emotional baggage and not let that be baggage that sticks around, this could be the beginning of a great journey and other great thing I will say this person is doing is listening to Chris Hill on a regular basis and getting some great education about stocks. For sure, look for strong businesses, businesses that you understand. Take some time before you buy those companies just to make sure you’re comfortable with the basic investment thesis. You don’t have to be a financial whiz to do that. Many times we do that right here at the Motley Fool for you if you’re a subscriber to our services and spread that love around, we always say hold at least 25 stocks if you can, over a period of at least five years. If you use a fractional share broker, then you can even put a small amount of money to work and just spread it across 25 stocks. Keep going. Don’t let this be the last investment we’re rooting for you. Again, as we said at the beginning of this show, it’s not a bad time to put some money to work.
Chris Hill: Keep the emails coming [email protected], or you can call the Motley Fool Money hotlines 703-254-1445. That’s 703-254-1445. Leave us a question on the voice mail. Asit Sharma, always great talking to you. Thanks for being here.
Asit Sharma: Thanks so much, Chris. Always a pleasure. 
Chris Hill: When it comes to questions like how much should you save? When should you invest in the stock market? It turns out that economists and personal finance authors have very different answers. Alison Southwick and Robert Brokamp break down the differences.
Alison Southwick: According to the U.S. Bureau of Labor Statistics, there are almost 16,000 economists in America. Teaching classes, analyzing data, publishing studies, and trying to explain the distribution, and consumption of wealth. But when it comes to where Americans go to learn about money, do they turn to economists? Not so much? Take a look at any list of the most popular personal finance books and few, if any, will have been written by an economist. You might wonder, is the advice offered by the typical personal finance guru better? Or should more Americans be looking to the Ivory Tower for guidance? Well, we won’t be able to settle that debate in this episode, but we do have some thoughts.
Robert Brokamp: Indeed we do, but we weren’t the first people to have these thoughts. Because in fact, the idea for this segment comes from a recently published academic paper entitled Popular Personal Finance Advice Versus the Professors. It was written by Dr. James Choi, who is a professor of finance at Yale. Here’s what Dr. Choi did. He read through the 50 most popular personal finance books as ranked by goodreads.com as of 2019 and compared the advice offered in those books to what is generally recommended by academic economic theory. Obviously, this required a good bit of simplification. Not all personal finance authors agree on everything and neither do all economists. But we chose five financial questions that are addressed in Dr. Choi’s paper and we weigh in on whether we think the writers or the economists are offering the best answers.
Alison Southwick: All right. The first contentious question is, how much should a household be saving? Bro, what did the economists have to say about this?
Robert Brokamp: Well, in the world of economics, the foundational theory that explains spending and saving is called the lifecycle hypothesis, and it’s been around, since, around the 1950s. The basic idea is that people want a relatively consistent cost of living. They don’t want their expenses and thus their lifestyle to go significantly up or down from year to year or even over the course of their lives. When you’re young and you don’t have much money, don’t even bother trying to save for the future. In fact, feel free to take on some debt because you know, higher earning years are ahead of you. But then as your income rises, you pay off the debt and you gradually increase your savings rate, but you actually have to do that. You can’t use the raises to increase the cost of your lifestyle. Eventually, you have enough savings so that you can maintain your lifestyle without working, which of course is known as retirement.
Alison Southwick: Then what do the personal finance authors have to say?
Robert Brokamp: They say start saving as soon as possible and don’t deviate, always be saving and they’ll often rollout illustrations showing that someone who started saving at age 25 and stopped at age 35 would have just about the same amount in retirement as someone who waited until age 35 to start saving and saved for the next 30 years. That’s the power of compound interest and starting early.
Alison Southwick: All right, Bro, where do you come down on this question?
Robert Brokamp: Well, I have to come down on the side of the personal finance authors for this one, though, in full recognition that it can be difficult to save when you’re just starting out. You might have school loans trying to buy a house, start a family, or pay for child care. But the benefits of investing even small amounts that have decades to grow, they’re just too good to pass up. Plus, many studies have found that people actually retire sooner than they expect. It’s better to save while you can, because you just don’t know how long your career is going to be.
Alison Southwick: The next question of contention is, what should you do with your money in retirement? Let’s start with the economists. What do they have to say is the best path to take?
Robert Brokamp: Part of that whole lifecycle hypothesis is that you build up your savings while you’re working, but then when you retire, you actually spend down your assets as you age rather than trying to maintain your net worth. The best way to invest your money in retirement, according to economists, is to put most or maybe all of your wealth into an immediate annuity, which provides a lifetime of guaranteed income. It’s like creating your own pension.
Alison Southwick: What did the personal finance authors have to say?
Robert Brokamp: Well, you’re not going to find too many of them who love annuities, even these plain vanilla annuities that provide lifetime income. Instead, most will recommend that you just keep investing in cash, bonds, and stocks like you did while you were working. But you choose a historically safe withdrawal rate and not surprisingly, four percent was the rate most recommended by the books that Dr. Choi surveyed in his study.
Alison Southwick: Bro what do you think?
Robert Brokamp: I say it’s a tie, although if I had to choose a side, I’d guess I’d go with the authors. If you’re listening to this podcast, you’re likely comfortable with investing and dealing with the ups and downs and uncertainty of living of a portfolio. But studies do indicate that middle- to higher-wealth retirees could spend more than they do. But they’re hesitant, perhaps because of the uncertainty of those portfolio returns. In other words, they’re not spending down their assets and perhaps not enjoying themselves as much as they could. One way to alleviate that uncertainty is to buy an annuity. I do think immediate income annuities make a lot of sense for a portion of the bond side of your portfolio to retirement. With interest rates higher nowadays, payouts are higher. Depending on your age and gender, you could get $7,000 to $8,000 a year from investing $100,000 into a single-premium immediate annuity. As confirmed by a recent study by David Blanchett and Michael Finke, retirees with higher levels of lifelong guaranteed income are more comfortable spending their money.
Alison Southwick: It’s time to move on to our third contentious question, which is, which debts should you pay down first? What did the economist say?
Robert Brokamp: Well, this one is pretty straightforward. The economists say basically start by eliminating the debt with the highest interest rate and then you move on to the debt with the next highest interest rate, and so on.
Alison Southwick: I guess the math just works out there.
Robert Brokamp: Exactly.
Alison Southwick: All right. What do the personal finance writers say?
Robert Brokamp: Well, some, not all, but some suggests that you should instead eliminate the debt with the smallest balance first. This has come to be known as the debt snowball method. Once you pay off that balance, that sense of accomplishment, you feel by eliminating that debt, inspire you to continue making progress and eliminate the rest of your debt.
Alison Southwick: Bro, what do you think?
Robert Brokamp: As you said, the math is clear with the economists here. It just makes more sense to pay off a debt charging 20% interest rate before paying off a debt charging 10-15%. However, I mean, you do have to know yourself. If eliminating the smaller debt will be more motivating for you, then that’s the route to take. In fact, some studies have found that people who follow this debt snowball method have been successful.
Alison Southwick: Wait who conducted those studies? Was it economists?
Robert Brokamp: That’s a thing about all these studies. All the studies are done by the economists, but yes. 
Alison Southwick: Question No. 4. How much should you invest in the stock market? What do the economists have to say?
Robert Brokamp: Well, so unlike what some might think is the conventional wisdom, some economists believe that the stock market actually gets riskier the longer your time frame. That’s because they think of risk more in terms of predictability than year-to-year volatility. Think of it this way, let’s say you have a sum of money, and you want to invest it for a retirement that is 30 years away. If you invest it in the stock market, how much will it be worth in 30 years? The answer is, who knows? It’s impossible to predict. You can use historical returns and run some calculations, but there’s no guarantee the future will look like the past. However, if you invest that money in a 30-year Treasury bond, you’ll know exactly how much interest you’ll receive each year and how much the bond will be worth in 30 years.
In that way, the bond is much less risky. Just very generally speaking, I would say that economists tend to lean toward more conservative asset allocations. That said, they still generally believe that younger workers should be mostly in stocks, but that’s because they factor in human capital, which is your ability to earn an income. When you’re young, your human capital is like an enormous bond that is going to pay instead of interest payments for years, it’s going to pay paychecks for years. Because you’re essentially a big bond, that allows you to take more risk with your portfolio. However, as you get older, you use up that human capital. You’re essentially spending down your bond. You should gradually play it safer with your portfolio.
Alison Southwick: What do the personal finance writers have to say?
Robert Brokamp: These folks will point out that the longer your time frame, the greater the chances are that an investment in the stock market will be profitable and outperform cash and bonds. They’re more likely to say the longer your time frame, the less risky stocks are. Most suggest some bucketing strategy, you play it super safe with money you need in the next few years, you maybe take an intermediate amount of risk for the money you need in the next several years, and then invest in stocks with most of the money you can leave alone for like a decade or more.
Alison Southwick: But what does Bro believe? Because that’s what I want to know.
Robert Brokamp: You can probably guess that since we Fools tend to be big believers in the stock market and are very comfortable with risk, I tend to probably side more with the personal finance writers, although, in the end, the economists are offering similar advice. I would also say that I do think it makes sense to consider your human capital when thinking about the risks in your portfolio. What does that mean? Well, maybe you don’t have too much of your net worth tied up in the stock of your employer or maybe even stocks of the companies in your industry. The more volatile and unreliable your income, the more safety you should build into your portfolio.
Alison Southwick: Our fifth and final question of contention is, how much should you invest in international stocks? What do the economists have to say here?
Robert Brokamp: Well, studies show that investors have a home country bias, that is, they invest heavily in their own countries. This isn’t just the US, this is all over the world. Basically, people are concentrating their human capital and their investment capital into the same country. Many economists believe that people should instead invest in every country with the stock market in proportion to the size of that market. Right now the U.S. stock market makes up 60% of the global stock market, so everyone should have 60% of their stocks in U.S. companies. The next biggest market is Japan, which makes up 6% the global market, so everyone should have a 6% allocation to Japan, and a 4% allocation to the United Kingdom, and a 4% allocation to China, and a 3% allocation to Canada, and so on.
Alison Southwick: What do the personal finance writers have to say about it?
Robert Brokamp: Well, most do recommend investing in international stocks, but the average recommended allocation in the books that Dr. Choi surveyed was 27%. That’s lower than what maybe many economists might suggest. A couple of the books said, there’s actually no need for U.S. investors to buy international stocks since a significant portion of revenue from the companies in the S&P 500 comes from international markets.
Alison Southwick: What’s the final word from Bro then?
Robert Brokamp: Well, I would say if you live outside the U.S., the economists’ advice is spot on. You probably shouldn’t overweight your portfolio toward companies in your own country, especially if your domestic market is maybe not well regulated, or it’s dominated by just one or two sectors, or even just a couple of large companies, which is the case for many countries. But for American investors, international investing is a much tougher sell these days, the U.S. has outperformed non-U.S. stocks by around 8% a year on average over the past decade. With the war in Ukraine, the energy crisis in Europe, and the slowdown in China, things just looking not so great outside the U.S. for the near term. I still think it makes sense to invest some of your long-term money in international stocks, but probably not a 40% that some economic theory might suggest.
Alison Southwick: Well, that covered five contentious questions, but I think I still need a Bro’s bottom line to wrap this all up.
Robert Brokamp: What I would say is, as far as the general public is concerned, the question of whether who is more right, economists or personal finance writers, is essentially moot because the typical academic paper isn’t written in a way that the average person would understand. Just consider these sentences from Dr. Choi’s paper: ”If the investor has a constant relative risk aversion utility and no labor income, the optimal allocation to the stock market does not vary with the investment horizon. The story is different if stock returns are negatively auto-correlated, which causes the annualized variance of cumulative log stock returns to decrease with the investment horizon.”
Alison Southwick: So true.
Robert Brokamp: I was just saying the other day to my children. The typical person will read that and they’re like, what? I don’t understand what that means. Most Americans will continue to turn to the popular media because frankly, it’s more accessible, less theoretical, and probably more likely to factor in things like psychology, and human behavior. Fortunately, some economists do right for a more general audience and I would say one of the more interesting personal finance books published this year, in my opinion, is a book called Money Magic by Laurence Kotlikoff, who is an economist at Boston University. The good news is that I think that the more popular mass audience financial books offer, generally, pretty good advice and if they can incorporate some of the worthwhile insights from economists, as many do, all the best. 
Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill, thanks for listening. We’ll see you tomorrow. 
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alison Southwick has positions in Amazon and Apple. Asit Sharma has positions in Microsoft. Chris Hill has positions in Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Microsoft, Under Armour (A Shares), and Under Armour (C Shares). Robert Brokamp, CFP(R) has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Microsoft, Netflix, Twitter, and Under Armour (C Shares). The Motley Fool recommends Under Armour (A Shares) and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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