Matt Feret (02:26)

Hey everybody, my guest today focuses on something most people underestimate when it comes to money. Not what we know, but how we behave. He's the founder and CEO of Fusion Family Wealth, a fee only registered investment advisory firm based out of Long Island, New York. His work centers on helping people make better financial decisions under uncertainty by understanding the emotional, emotional

 

and psychological biases that quietly drive poor money choices. Rather than chasing headlines or reacting to markets, his approach is about discipline, temperament, and stick into a plan, especially during stressful or uncertain times. He's widely recognized for his work in behavioral finance and has spent more than two decades helping individuals, families, and professional advisors understand why smart people still make bad money decisions and how to change that.

 

My guest today is Jonathan Blau. Jonathan, welcome to Matt Feret Show.

 

Jonathan Blau (03:29)

Thank you, Matt. It's pleasure to be here with you today.

 

Matt Feret (03:32)

For people meeting you the first time, tell us what you do and how long you've been doing it and how you ended up focusing so much of your work on behavior and decision making, not just investments.

 

Jonathan Blau (03:44)

Sure. So when I started in the wealth industry, it was the summer of 87, I was an intern at Lehman Brothers that went out of business during the financial crisis after over 200 years being a successful company. And I was in a, it was 55 Water Street down by Wall Street. And I was a young kid in with these 20 somethings that were all previously salesmen, top salesmen at companies like

 

Xerox and IBM and Linear Products was a big copy machine company and they had the top sales training programs. And so they came in and they were stuck in a closet for four months to study for the series seven. Usually takes four weeks, but took these guys four months, but they were great salesmen and that was their training program. And so that's how I first got introduced into the business. But the business back then was ⁓ cold calling ⁓ wealthy people from ⁓ cards you bought from Dun & Bradstreet with their backgrounds.

 

and their wealth levels. And you had a whole what they called a pitch book with rebuttals or rebuttal book. And when I did that for a couple of summers, I said, that's definitely not what I want to do. I did get on the phones and help the those days they were stock brokers do it. And they were all young millionaires. They were very, very best salesmen. And so after that experience, I decided that I wanted to go into this business, the wealth management business, but not that way. I wanted to learn the technical aspects that wealthy people deal with.

 

and then go into the wealth management is the right way. So I joined Arthur Anderson after getting a master's in tax and MBA in accounting from Fordham University at Lincoln Center. And I learned everything from trusts and estates on the tax side of things to retirement planning on the tax side of things. And then I joined what was then the largest privately owned money management firm in the country, which was called Sanford C. Bernstein. Now it's Alliance Bernstein. They merged in about 2000.

 

And so what happened was when I started my career with Bernstein, it was 1997. I was in a training program for six months. I raised, I don't know, $50 million or so in the first couple of years. And then in 2000, it went down in half because of the dot-com bubble burst thing combining with the terrorist attacks. And then I rebuilt to over 100 million by 2006, 2007.

 

And then it went down 60%. So it went down to 40 million because we had the credit crisis. So in the first decade or so of my career, we saw something that happens once or twice in a hundred years happened twice in less than 10. And so I said to myself, there's gotta be a better way to manage client relationships and a business than walking the same people off the same cliff today that I did last month, last week and yesterday. And so in the first...

 

kind of month of training at Bernstein, we had been introduced to behavioral finance and I kind of put it in the back pocket in my brain. And then one day after the 2008 crisis, my second real crisis in 10 years, I said, I got to do something different. So I realized that the answer to successful investing for investors doesn't lie in intellect, what we know. You can study PE ratios and betas and alphas and all the call the ABCs, alphas, betas and correlation coefficients, things that mean nothing to investors and really to me either.

 

⁓ as an advisor, but you can study those all day long and the key is no matter how smart you got, when the crisis hit, you still ⁓ in 2008 was selling some or all of your equities in fear of existential threat of the financial system collapsing. And you did the same thing in 2002 after the dot com bubble burst. So I said, there's gotta be a better way. And the better way was, I remember from Bernstein, teaching people the lifeboat drill long before the bow of the boat went near going beneath the water.

 

And so that's how we got into behavior. ⁓ And we wanted to help people understand that ⁓ it's not which investment you have. You could have any investment going into 2008. If you were a CEO or someone who inherited money, someone who had a PhD in finance or never went to school, no one was less likely than the next person to sell everything out in existential fear. It's again, what you do, not what you know.

 

Matt Feret (08:03)

That's a fascinating background, by the way. I and I was trying to do the dates in my head too. Yeah, you saw a lot ⁓ over those years, very quickly. And those are big numbers moving up and down. And it gave you certainly a really interesting seat to where we are today meeting. ⁓ You mentioned the phrase, and I did too, wealth management. And immediately, people think it doesn't apply to them. Well, I'm not wealthy. How do you explain what you do in a way that connects with

 

Jonathan Blau (08:10)

Quickly. ⁓

 

Matt Feret (08:31)

with everyday people who are saving, investing, or approaching retirement.

 

Jonathan Blau (08:35)

Sure, so yeah, we cater to investors who have five million or more in liquid investments, but the principles that we use to help them to succeed apply to everybody. So we can apply what I'm gonna say to everybody regardless of what level of wealth. In other words, everybody who's worth five million and everybody who's worth 5,000, right, is a human being.

 

And so we all respond to fear and greed and envy and regret and uncertainty all the same way, right? It doesn't matter how much money we have. It's just the consequences of letting our behaviors and our emotions take over our decision-making are more costly when we have more money and less costly when we have less money. That's all. So we can address the broad audience with these ideas.

 

Matt Feret (09:26)

Yeah, why is behavior such a dominant factor in whether people succeed or fail financially?

 

Jonathan Blau (09:33)

Yeah, well, and I'd say not just financially, like to succeed or fail in life. So basically, if you think about it, the human brain hasn't really developed that much in the last 50,000 years, meaning we were programmed with biases or tendencies to protect ourselves without much thought, know, what I call the emotional intelligence, just react quickly in order to survive life and death threats from the lions in the African savanna hundreds of thousands of years ago.

 

We were not programmed to survive the vagaries and uncertainties of the financial markets and decision-making about finances when they collide with uncertainty. so not only were we not programmed properly for these things, but the way we were programmed to survive in the African savanna is often the opposite of how we need to be programmed to survive now. So I'll give you a quick example. In the African savanna, we were running from the bear in the woods because it was a permanent life and death threat.

 

And at the base of our brain, the organs that are the fear sensors called the amygdala. And the amygdala doesn't know the difference between the permanent threat of the bear in the woods or the temporary threat of the bear market. It sends off the same danger signal and sell now and ask questions later. That's the worst way we could be programmed to survive financial decision making. And there's so many biases. There's something called loss aversion bias. So again, that helped us survive in the savanna.

 

We feel the pain of a loss two times more than we feel the pleasure of an equivalent gain is pleasurable. And we program that way so we can seek to avoid losses and survive as long as we possibly can that way. The problem is now we're still programmed that way. And as an investor, when I should be seeking out strategies that maximize the potential income stream I'll have when I retire so I can retire comfortably and stay comfortably retired and that maximize my wealth.

 

to the extent whatever wealth I have, maximize it. Instead of seeking those strategies out, we're programmed to seek out strategies that are the opposite, strategies that minimize the short-term chance of loss and that maximize the quickest route to pleasure. These are the opposite things of what we need to survive financially, but they perfectly protected us from the threats that we were programmed to be protected.

 

Matt Feret (11:56)

when, ⁓ thank you for that. yeah, someone introduced me a long time ago to the concept of your amygdala being hijacked, hijacked amygdala.

 

Jonathan Blau (12:06)

The amygdala hijack.

 

was that Doug Lenick?

 

Matt Feret (12:11)

I don't remember who it was. mean, this is going back years and years and years, but it was one of those self-help books or the... ⁓

 

Jonathan Blau (12:18)

Yeah,

 

could. Doug Lennox, an author, and he's a friend of mine, he's 73. He was the advisor to the CEO of American Express, which was during 9-11. He was the guy who helped Ken Shadolt get his whole firm back on track. And Doug, I know, wrote about it. And one of his mentors, I think, might have coined the phrase, the amygdala hijack, but it's in his book that I recently read because he sent them to me.

 

Matt Feret (12:44)

Really.

 

Jonathan Blau (12:46)

And the funny thing is we were just talking about it. He was on my podcast about two months ago. And one of the ways you, you help yourself to fight these biases, the emotional biases from taking over. Doug created a system called the four Rs. So the, the four R stand for, ⁓ recognize. when you, when he says recognize, you're recognizing how you're feeling at the moment that your emotions are taking over, whatever the situation is.

 

How are you feeling? What's going on externally, internally around you? And then so you recognize, once you recognize you reflect, reflect on what's happening, right? And then what values do you have that should guide your decision? Not what emotions. What's most important to you at the time you're feeling these things as far as your goals. And then reframe. How can I view the situation differently? And then respond. So what that for ours does is it

 

slows and prevents sometimes the amygdala hijack because it stops it. So by not making that quick decision, by going right into the four Rs, recognizing, reflecting, reframing, responding. So the example Doug gave me, which is a fun one, he said, Winnie the Pooh, Winnie the Pooh left his house. ⁓ He looks at, he's walking along, looks at his shirt. He says, I don't like this shirt, but then he says, geez, now I got to go all the way back home. And so he said, instead of changing his shirt, he changed his mind.

 

That's an example of the four R's. And so he rated and said, I value more not having to go back home. So I'm reframing the shirts. Okay. I changed my mind. I'm going along my day.

 

Matt Feret (14:23)

That's funny. You know, what you just described though is, is you have to be aware of it, number one, but then also you have to, um, you have to take action or do something with it. You have to act actively recognize it and then respond in a way that's, that's methodical. And I think I want to draw that parallel to, you know, this, this concept of intelligence and everybody hears, you know, IQ or emotional intelligence, or, know, how many degrees or certifications or training you have, but you, you've said this already and you say it in other places that investor temperament.

 

matters more than intelligence. And I would imagine you might also say that intelligence can actually be worse ⁓ than, you know, if you think you're smarter than everybody else, you might make even worse decisions around these emotional times and temperament matters. ⁓ True? False?

 

Jonathan Blau (15:11)

It is true. I I wrote a piece that Barron's published in the middle of 2020 that highlighted the self-published investment habits of what was called Tiger 21, which is arguably the world's wealthiest investment club. Many billionaires among them, I think it's 35,000 a year now to join. And they published every quarter what as a group they were doing with their allocation. So as a group, went, we were 12 % cash. Now we're 16 this quarter.

 

We were 10 % hedge funds and that were five, so on and so forth. And what I was able to prove, and that's why they publish it over dozens of quarters of their own publications, is the very wealthy make the same mistakes as everyone else, but they do it with two big differences. They do it with a lot more confidence and a boatload more money. And the first part that I mentioned addresses your question. It's called overconfidence bias. So the more successful someone is in their own field, the more they feel they can succeed in any other field.

 

with their hand involved better than the professionals can. ⁓ And so when they do that, it's like taking a big magnifying glass over the biases that we all have and they don't realize. So in that regard, there's a guy named Morgan Housel who writes the best psychology money books. ⁓ he always says that a good definition of behavioral finance is when you're reading about

 

big mistakes that people make with money and finances and investing. And you think you're reading about other people, but you're really reading about yourself. You just don't accept it. And the wealthier we are, the less we accept that we're human and that human nature is immutable and it affects us as much. And as you say, because of overconfidence bias is what you were describing, affects us even more. And the penalties are greater for us if we're wealthy. And then one other concept that's good to just know about for the audience.

 

It's called epistemic trespassing. So when you have someone who's a successful entrepreneur and they've been wildly successful, they, they opine to people on, uh, about other fields as if they're expert in those fields and they're called epistemic trespass. They're trespassing into some other field that they have no experience in, but because they're so successful, they pretend to. And listeners to this podcast should realize there is, I have found in

 

In the old days, I used to say I found no correlation between wealth and wisdom. But I now say it differently. Often, I find there's a negative correlation. The wealthier they are, the less wisdom when it comes to money and investing. Not everything else they have. And the more they pretend to have and like the sound to have. you know, said differently, I've met a lot of wise people who don't have a lot of money. And I've met a lot of

 

people with a of money who when it comes to managing money and investing are not.

 

Matt Feret (18:06)

Wow. And you wouldn't think that, but I think we would all relate to the concept that you mentioned, is, know, smartest guy in the room just to ask him. You know, the guy who made the Amazon buy in 2002 and just held on and all of sudden now he's, know, wildly rich. Now he's, you know, he's going to tell you how to run your life, right?

 

Jonathan Blau (18:17)

Right.

 

Exactly.

 

And oftentimes not a very good investor outside of his business or her business.

 

Matt Feret (18:36)

Yeah.

 

Yeah, interesting. So in your experience, what you're talking about too, is like some of the most the smartest people may not be and some of the smartest people in terms of wise, wiseness, you know, may not be the richest. Is that because I mean, where does it meet? Does it meet the middle? Is it because people lack information? Because of how they react emotionally? ⁓ What? Why? Why? Why have you found that to be the case?

 

Jonathan Blau (19:03)

I think the wise person understands, because they're wise, what their values are and what makes them happy. And I forget, there's a famous philosopher, somebody who made a list of the top 10 things that make people happy, and money wasn't one of the things on the list. And so when we use external benchmarks to measure our happiness,

 

⁓ Meaning, I'm going to take my family to a hotel, I've got a family of four. What's important to most people is we want to have enough space in the rooms that we have and so forth. But that's the internal benchmark. That's what I value. But many people will make the decision that I just described on the external benchmark. I'm going to squeeze into a one bedroom in a four seasons because then people will think I'm wealthy.

 

Right? Because I'd rather be uncomfortable in a smaller room than I go to the Marriott and have a bigger room because I'm now going to appeal to my external benchmark. So a lot of times what we don't realize is when we're chasing things, whether it's a new car or a new home, we get the thing. And then if we're not happy, we're still not happy. That thing doesn't make us happy because what's happening is we're just craving more dopamine. So what happens when we're getting a new car is

 

we get that dopamine rush anticipating the purchase. Once we make the purchase, it goes away and we're still, however happy we were before the car, we're just as happy or unhappy after. And now we want another dopamine rush, so we'll get another big car or another big house. And so the wise person recognizes, that's not what makes me happy. What makes me happy is family, ⁓ charity, doing good things for other people in general. And that's the difference, right? So it's not about smart, it's about wisdom. I've always said that,

 

We're living in a world of tremendous information age. And it started with the internet, democratizing what I call data, right? You can get all the data you want. And now the AI is democratizing knowledge. But the thing that's still not democratized is wisdom. Data isn't knowledge and knowledge isn't wisdom. Wisdom comes from having a lot of knowledge that you've applied successfully to gain successful outcomes for you and other people, in my mind.

 

And so it's not, I don't think it has to do with how smart someone is or not. It has to do, I think it starts with what your values are. And again, I wise people might tend to have better values.

 

Matt Feret (21:32)

really, really interesting perspective. And I like it. You used a word I'm gonna use it back at you crave, right dopamine crave. You know, I think people also crave certainty, especially around money. And you and you talked about earlier, people get scared, you know, if they if they've got got some bucks, no matter how much 5000 5 million, they don't want to lose it, right. And so what might have gotten that 5000 or 5 million, you know, you don't want to lose it. So especially around money and

 

retirement and the future. Why is that search or that craving for certainty actually dangerous when it comes to financial decisions?

 

Jonathan Blau (22:11)

The first reason is because you're chasing something that doesn't exist anywhere in nature, right? Certainty. ⁓ I tell everybody that the one defining characteristic about the future is there are no facts about it. It doesn't matter if you're hearing someone on CNBC with a PhD in finance at Goldman Sachs as a managing director says it, or if someone who is in junior high school says it, neither of those people has one more fact about the future than the other or than you or I have. And so people need to understand that. But given that as a fact,

 

that there are no facts about the future, we have to learn to operate rationally, right? So everybody wants certainty. We have, in order to succeed, we have to first accept that certainty doesn't exist anywhere as a condition in nature. And once you accept that, so what is acting rationally? I like to say in life, again, money, life, doesn't, it's all the same to me. I like to teach my clients to compound rationality, not just compound money. And what I mean by that is,

 

Just a simple, recent example, someone sold their business, said, well, we have $10 million, Jonathan. Shouldn't we wait and invest it periodically over a period of months or even years? And that's, course, very seductive, right? Because feel, what if I put it all at once and it goes down? And so those decisions, when I say compounding rationality, since 1926, there's, I think, well over 1,112 month, what they call rolling periods.

 

So from January 26 to December 26 would be one of those. February 26 to January 27 is another one and so forth. 75 % of those periods, the stock market shown positive returns. So every time I hold back a dollar that's ready for investment, the evening it's ready, I take a three to one odds bet against me being right, right? So always invest the money by nightfall of the day you get it to invest and

 

25 % of the time you'll be wrong, but 75 % of the time you'll be right. And so that's compounding rationality, right? You don't have certainty. So take a look at what's probable and always base your decisions knowing I might be wrong sometimes, right? I might invest my business money that I liquidated in February of 2020, right before a 34 % unprecedented 33 day decline.

 

But then again, if I had invested it right before that decline, by the end of the year, I still made 18 % in total return. Had I not invested it because of my theory, well, what would happen is I said, well, gee, now maybe I'm glad I didn't invest all of it. I'm just going to wait this thing out. Well, from like April to the end of the year, went up 60, 70 % something like that. You didn't have a chance to get in. So now you're sitting with a real permanent loss because

 

I'd rather catch a 20 % or 30 % temporary decline than miss out on any portion, a meaningful portion of the next 100 % permanent increase. And that's the way people need to train themselves to think. That's compounding rationale.

 

Matt Feret (25:18)

⁓ I've heard of the concept of dollar cost averaging, which you were discussing and I think that's the first time I've heard it put the ⁓ argument against that ⁓ put so succinctly.

 

Jonathan Blau (25:31)

Yeah, I'm not against dollar

 

cost averaging. In other words, if you've got a young person, I believe in teaching them a good habit. Save every month, I tell them, $100,000, whatever you can afford. Just get into the habit of saving into your investment portfolio so you can compound at somewhere in the 8 % 10 % range over your lifetime and get it done early. If someone's parents says, what's the most important thing I can teach my child about investing that's going to yield the best result to their overall long-term?

 

result. Start early. That's the, know, save as early as you can. Compounding does all the heavy lifting. It's not finding the next great investment. It's starting early, compounding at the best kind of average rate that you can sustain for the longest period. And if you could teach those lessons to people early on, ⁓ people would, I think, avoid a lot of the bad habits of performance chasing and all those sorts of things.

 

Matt Feret (26:29)

How do those media headlines you talked about and the constant market commentary make this worse for everyday investors?

 

Jonathan Blau (26:37)

⁓ it's a disaster. mean, one of my podcasts that I did, I do a version called Fix It Friday, which are 10 or 15 minutes, not of an interview like this one, but of me in a monologue about things that cause us to make bad decisions and how to overcome them. And one I did is how the media and big Wall Street firms collude to make money at your expense, meaning the investors' expense. So all these headlines, when you think about it, and this podcast hits on your question. When you think about it, when you watch CNBC,

 

The commentators have no idea how to advise people to manage money. They're not wealth advisors. ⁓ But worse, they have no interest in it. Their interest is in sensationalizing as much as they can the stories of the day, 24 hours a day, to get clicks to increase so they can increase the ad revenues from the person on the right side of the screen who's from Goldman Sachs and the person on the left side of the screen who's from Merrill Lynch, because those two people...

 

are paying for the ads, by the way, right? And they're trying to scare the bejesus out of my clients who are watching because they want to sell them these products that offer more return for less risk. I call those products the darkness, right? Because they don't exist or whatever they're selling on that day. And they'll be asked an unanswerable question. So the person on the left from Merrill Lynch has asked, is this 20 % interest rate decline during the tariffs last April? this the beginning of a bear market or is it a buying opportunity?

 

I don't know, flip a coin, right? And whoever it is you believe most, you're going to do. So, but what's interesting is there's a guy named Phil Tetlock who's recognized as having done, I think, the most widely respected research on the efficacy of forecasting. And what he found is that expert forecasters are right 49 % of the time. So you flip a coin, just as efficacious. But what he found, and this is the worst part, is those people on TV,

 

He found that the smartest sounding and the best educated, most intelligent sounding people are the ones with the least accuracy and forecasting. Yet those are the ones people are most likely to listen to. So that's the key. These shows and these people can destroy investors every day. Because what are you doing? Instead of compounding rationality and sticking to your plan in the face of the pandemics and the recessions and the Trumps and the Bidens or whatever it is that's going on.

 

⁓ You're constantly changing the portfolio in response to current events and short-term market moves. We counsel people to do the opposite, to ignore that stuff and constantly ⁓ and continuously act on their plan, never react to current events. You can feel the fears, you can be concerned, just don't reflect those fears by altering your long-term plan that's designed to get you to your objectives.

 

Matt Feret (29:22)

Stay the course

 

is a.

 

Jonathan Blau (29:23)

And one other thing I'd like

 

to mention to you staying the course is because it relates to your question in a practical way. So I'll get asked the question a lot when there's some crisis going on in light of X crisis Jonathan. What what portfolio decisions are you having your clients make today. And my answer is simple and this is for your audience. ⁓ If you're going to be successful as a long term investor keep it simple.

 

doesn't need to, Leonardo da Vinci said, simplicity is the ultimate sophistication and nowhere is it more true than investing. Buy index funds, diversified globally, you in the last year and a quarter, international stocks knocking the cover off the ball. Everyone wrote them off a year and a half ago. But at the end of the day, stay diversified. That means you're humble. You know that you don't know what tomorrow's leader is going to be. And if you keep it simple like that, you won't be responding.

 

to all of the headlines. And you need more sevens than threes. This is the major point. you need stocks for the last 100 years, S &P 500 have made 7 % after inflation. Equivalent investments in companies, similar companies in bonds have made three after inflation. We need many more sevens than three to even have a chance. And so my answer is what decisions are you telling your clients to make in light of the X crisis?

 

My clients made all the decisions a long time ago when we decided we needed a lot more sevens than threes. This crisis doesn't change that. There are no new decisions they need to make.

 

Matt Feret (30:55)

Yeah, you've, you've talked about before, because I was doing the research before the show, challenging some of those common assumptions of stocks versus bonds. Can you talk more about that? Why do you why do you why are those misunderstood? And what's actually actually risky?

 

Jonathan Blau (31:10)

Yeah, so it's from my perspective, right? So from my perspective, when you think about it, what's most important to the person who has money and wants to protect their money is what's most important to them in reality, making sure that money doesn't have some, the number of dollars that they have in their portfolio doesn't fluctuate from time to time too much, or is it more important that the value of every one of the dollars doesn't permanently disappear to the tune of at least 3 % a year?

 

Logically, which one is more important?

 

Matt Feret (31:42)

Yeah, the latter.

 

Jonathan Blau (31:43)

Right? So, so if we say that the latter is obviously more important, then why in the world do we think that the industry has it right when they teach us our big risk is volatility, the temporary fluctuation in the number of dollars. And it, once you mis-define risk and safety that way, which to me is very mis-defined, ⁓ the solution has to be wrong. The solution is more bonds. We all heard of the 60-40 portfolio for, and particularly as you're going into retirement. Now the average

 

Matt Feret (32:08)

Yeah. Right.

 

Jonathan Blau (32:12)

retiring couple is 62 in this country and their average joint life expectancy, meaning one of them will live 30 years. You send someone into a 30 year retirement with 40 or 50 % of their money and something that's going to freeze it in the face of three to 5 % annual inflation that permanently itch it away, you're killing them. So the solution you're giving to the wrong problem, the illusion of risk volatility, the solution being bonds.

 

is actually the carrier of the disease of money, which is inflation, because bonds freeze every dollar in the face of runaway compound inflation for the rest of your life in a retiree 30 years, a long time. So it's that simple. There's a guy named Harry Markowitz in the 50s who won the Nobel Prize, and he won it because ⁓ before his work, keeping this simple, you would compare a few portfolios historically and say, okay, which one looks more efficient? And so let me take this

 

this combination of investments, because this one's more efficient. He said, no, no, no, we have to put a component of risk in each of those to compare one to the other, not just which one's likely to return more, which one has less risk. He chose the variable for risk to be variance or volatility. And because of him, I think he's, from my perspective, he's singularly responsible for killing more wealth in terms of the dollars disappearing to inflation with that theory than almost anyone else, because the whole industry adopted his definition of risk.

 

which is why you hear these products are the darkest, more returnless, risk, all this stuff. It doesn't exist. You know, it just doesn't exist. I mean, I'll give you one last example. When I was with UBS ⁓ during the financial crisis, they were going to all the top advisors in the firm, telling me, you have to buy these things called municipal arbitrage securities and collateralized mortgage obligation portfolios that were really AAA, which we know were not AAA. They were worthless.

 

Matt Feret (33:45)

Well,

 

Jonathan Blau (34:07)

But the reason you should buy them is because they're not correlated with your equities and they have a return of 7 % a year and blah, blah, blah. Maybe they went to zero, right? So all this academic stuff about alphas and betas and correlation coefficients, when you go into crisis, betas go to one, meaning everything's moving the same way ⁓ relative to the market. So all that stuff to me needs to go out the window. And it starts with Harry Markowitz's work with modern portfolio theory.

 

teaching people that when you add bonds, you're reducing your risk.

 

Matt Feret (34:40)

I mean, I want you to talk more about that because when retirement and even midlife 50s plus right now, when retirement is 10, 15, 20 years away, not just people turn in 62, right and one of them has got to get 30 more years, you don't want to do that. that often brings heightened anxiety around money, not only because of they've got a portfolio in their 401k or their IRAs, but also because the likelihood of them losing their job probably goes higher.

 

⁓ in their late 40s and 50s and early 60s and the ability for them to get a job to replace that income or a job at the same income level that they once enjoyed is also going down. So you kind of got this, I have my portfolio, I'm looking at retirement not 30 years away now, but 10 or five. ⁓ And you know, stuff's going on at work, white collar recession.

 

Jonathan Blau (35:27)

Bye. ⁓

 

Matt Feret (35:33)

So there's a lot of heightened anxiety around that. And you mentioned the 60-40 and the bond problem that you see, but what other traps do people kind of, you see people fall into as they approach or enter retirement? ⁓ I'm thinking of people in bonds, right? To your point, keep up with inflation, but it was not going to support something. The second one I see a lot is cash.

 

Hey, cash is making 4.25 % in it just show up. Cash is king, right? Cash gives utility cash makes me feel warm and fuzzy at night when I, you know, see a market blip. Like what behavioral traps? Do you see people specifically fall into as they approach or they're entering retirement?

 

Jonathan Blau (36:02)

Cash is king, right? Cash is king.

 

Well, it's interesting what you said. So my mentor is a guy named Nick Murray. And he always says, ⁓ there's something magical about the age of 50. When people get to 50, they realize they don't have more than five or 10 more years to make up for a lot of lost years of when they should have been saving. And so they start to get panicky and they're wondering how are they going to do it and all this. So 50 is according to his belief, a very magic age in the mind of people and their runway shortening to get to their retirement this thing.

 

⁓ I think, look, one of the traps is like trying to think that there's a ⁓ correlation between how old somebody is and what's going to work for them for the rest of their life as an investor, right? So I'll give you an example. I spoke to someone in the last year who was in their mid seventies. And when I said to them, my philosophy on bonds versus stocks, risk safety.

 

He said, that all sounds good, Jonathan, but you know, I'm 75. You know what mean? I don't have that time horizon. can take the risk of stocks. He still, you know, defaulted to the risk of stocks. I said, well, what do you mean? Because I had said to him, it's not that I don't believe in bonds. I just don't believe that bonds should play the role of muting volatility. What role I think bonds should play is if we look back 100 years, the S &P 500 has gone from a peak

 

to a trough and back to new highs. That whole round trip has taken 40 months on average. So as long as I have three years of living expenses to defend against when those declines come so that I don't have to sell stocks while they're temporarily down, I switch my spending after let's say down 20%, a normal bear market, I switch my spending to the side pool and then three years on average, I've gotten back to even and I haven't had to sell stocks at any meaningful loss at all.

 

If I have $10 million and I'm spending $400,000 a year for my living expenses, and Jonathan says keep three years living expenses and bonds, that's about a million too. I've got 90 % of my money because of that strategy fighting the biggest threat to it, which is inflation. Instead of only having 60 % of my money fighting it because I've got all this extra bond money for the volatility. And so that's the big mistake is correlating my age with what still works.

 

So I said to this person who said, it still work for me at 75? don't, know, and so let me ask you a question. If I said that historically it takes about three years to go from a peak to a trough and back, which is why we have three years in bonds, is that statistic changing because someone's 50 or 75? Or is that just the statistic, right? So you have to just reframe how you think about these narratives that have been fed to us our whole lives. And then one of the biggest killers of wealth.

 

for a lot who are probably listening, is these target date funds in the retirement accounts, right? So these target date funds, what they do is if I'm someone who's 40, so my target retirement date is 65, right? That's 25 years from now. So I might have the target date 2050 fund. In that fund, there's way too many bonds.

 

And so with these funds is the older you get and the bigger threat inflation is going to be to you because your healthcare inflation costs, you get older, bigger than your other inflation, right? The bigger the threat, the more they programmatically and systematically move you from the 7 % after tax investment to the 3 % after investment. They're a programmatic, systematic killer of wealth. And yet over 50%, I think, of retirement plans are invested in them. Now I have people who are invested in them.

 

But what I do is if someone's got, whenever they're retiring, go out and buy the 2070 target date, not the one they tell you to buy, because that'll give you all the diversification across the stock components, international, U.S. market, without giving you dramatic bond exposure. And every few years, when there's a 2075, go to that one. Right? So this way, you can still set it and forget it and be protected without killing your wealth because it's giving you way too many bonds by age 50.

 

in your retirement accounts that you're not touching until age 75 if you're 52.

 

Matt Feret (40:30)

It super interesting take on it and one that I that I can absolutely understand. Let me go back to that. Yeah.

 

Jonathan Blau (40:37)

Another thing I'll answer to your question. You asked about

 

what are the things. So my podcast coming out, I think next Friday, the Fix It Friday, I talk about avoiding the trap of cash accumulation. so, yeah, and you mentioned that. So there's four reasons people accumulate cash, in my view. One reason is legitimate. And that reason is I've got a fixed and determinable expense that I've got to save for. Taxes, buying my child a house, whatever it is.

 

Matt Feret (40:49)

cash. Yeah, hit it.

 

yeah, do it.

 

Jonathan Blau (41:06)

That's legitimate. should save that cash. Once you've met someone retiring or anywhere else in life who's got more than 5-10 % of their portfolio in cash and you ask them that question, what's it there to pay for? And they say, nothing really. Well, then there's three other reasons it's there. It's one or a combination of the three. Either they have no plan. If you have no plan, the gravity that pulls your cash is the bank account.

 

Two, you had a plan and it blew up or you abandoned it. So now gravity pulling that cash to the bank account. And three, and this is a tough one, is you accumulated cash for a while and along the way during the years of accumulating, you made either a purchase or an investment. And the outcome of that purchase or investment was so painful in a bad way that in order to avoid the regret, and regret is the most powerful emotion because long-term regret never goes away. It's the only emotion that never goes away.

 

So in order to avoid that regret, we revert to what's called status quo bias. If I just simply keep accumulating the cash, that thing will never happen to me again. So it's a combination of I have no plan, I abandoned my plan or regret aversion, because I did something that really backfired. So now I'm going to punish myself by having substandard results for the rest of my life and go to status quo bias. So I just wanted to hit that one because that's an important one. And what your audience should do to avoid that,

 

Matt Feret (42:29)

⁓ That's an

 

Jonathan Blau (42:32)

is keep the cash they're accumulating for stuff they need in a separate account and keep all the other cash and then say, okay, when my other cash that's not set aside, when it hits 10,000, five, it goes to my investment. goes to my, you know, draw those lines in the sand so you don't fall into that trap.

 

Matt Feret (42:47)

I, you're making me think I'm not pausing because I don't know what to ask yet. But you're making me think about my, my own stuff and my own biases.

 

Jonathan Blau (42:56)

Well, we're all, look, we're

 

all guilty of this, know, Matt, I'm guilty, you know, for all human beings, right? So if people listen with an open mind, this stuff helps because we're all suffering from some, like I said earlier, the fellow who I mentioned who write the psychology of money, Morgan Housel, is behavioral finance often is when we're reading about problems and biases and things that, big mistakes.

 

that we're reading about that we think will happen to other people, but they really happen and will happen if they haven't to us, right? And it's the same thing.

 

Matt Feret (43:32)

Yep. So let me go back to that topic. But also that 75 year old you were talking about. I don't know. There's there's a part of me that goes if I were 75, I would hope that I would have a plan. You know, the old rotisserie chicken. I always talk about that that commercial from the 80s. That said it and forget it. Like if I'm 75 still kind of messing. Yeah, yeah. If I'm I'm if I'm still tempted to do something with my money, like I hope I'm not there but

 

Jonathan Blau (43:51)

Right. Popeye.

 

Matt Feret (44:02)

also know me and I know I'm different than you know, everybody's unique little snowflake. for anybody listening doesn't really matter the age, but who feels tempted to constantly do something with their money, like what would you want them to understand?

 

Jonathan Blau (44:14)

When it comes to investing, mean, constantly do something? Yeah, look, yeah.

 

Matt Feret (44:17)

Yeah. Yeah, we're just their money with their cash with their

 

bond with their little their allocations and what who they listen to and what do they do and should I, you know, United Health Care went down 20 % should I buy like, you know, just that kind of constant din.

 

Jonathan Blau (44:23)

Well, just keep it simple.

 

If you're doing the things that you should be doing based on the principles I'm sharing, which is to say, first of all, have a plan. That's the first thing. Most people don't have a plan. And a plan is not a portfolio. A portfolio is a servant to a plan, meaning it's the part that gets you that return component you're hoping to get. But the plan is... ⁓

 

What number do I need to get to? What principal sum do I need to get to to generate 200,000 a year when I want to retire at 60 so I can spend 200, grow it for inflation and still leave a legacy for my family? That's a plan. Then, all right, so what's the best way to fund that plan and one of my biggest threats to it? Inflation and behavior are the biggest threats as far as I'm concerned. So get yourself a behavioral counselor. It doesn't have to be me. Get yourself a behavioral investment counselor and then have your plan.

 

And then understand that if I need a lot more than sevens stocks last hundred year return after inflation, then threes the equivalent return for bonds of loaning to those companies, then you've made your plan and you have your decision. Once you do that and you you're retired, you have your three years living expenses set aside, there should be no news item. There should be no political item, geopolitical item that should convince you.

 

that the needs of your plan, which would have survived over the last hundred years, by the way, to make it successful through pandemics and recessions and the market having three times in 73 for 2002 and 08 and 09 and 13 bear markets in addition to that and nine or 10 recessions since 1970 and interest rates as high as 20, low as zero and Republicans and Democrats in equal numbers. If my plan,

 

It made 10 % a year in equity, seven after inflation during that hundred year period I just described. Right? And all I had to do to get that seven was to buy the S &P, put it in a drawer and elect to reinvest dividends. I would have gotten those returns. Most of the population doesn't get half of that return because they're constantly reacting to these things and they're getting out thinking they can time the way out and then time the way back in successfully and consistently. It can't probably be done one time.

 

So people need to realize compound rationality, have a plan, understand you need more sevens than threes, and then tune all the noise out because that's what it is. The signal is what you're interested in. that's your, to me, the signal in investing is earnings, right? The reason the S &P 500 is at record highs is because earnings are at record highs, right? So it's not like a mystery. If you look back historically, you'll see that earnings and dividends grow 6 % a year and earnings are at record highs.

 

So of course the market should be at record highs. It's not because of the Fed making easy money or anything like that. That's all just narratives that are out there to ⁓ cause people to question things. Should I buy all these new ETF products that have been created every

 

Matt Feret (47:38)

What's your take on on individuals, ⁓ let's say non professionals, ⁓ doing individual stock buying, and I've read it all over the place. I personally I don't buy individual stocks. ⁓ Here's why. I'm not a pro. I don't have the experience. You do. ⁓ I would be guessing the by the time I get information, it's going to be outdated and already acted upon.

 

My job is my job and my job is not but you know stock picking and so I kind of leave it to the index and I leave it to the pros to help me as well. It's no different than yeah can I rehab a bathroom? Sure it'd take me a really long time you know triple the time double the money and it wouldn't look very good or I can hire a guy who's done this for the last 30 years and everything will be done well kind of my take on it but there are still people out there my age older younger.

 

⁓ You know all the all the all the new platforms out there that two pushes of a button you can you can go you can go click What would you say to the folks that do that do it keep doing it if you like it? You think you're good at it? Would you put it at 10 % of your portfolio 0 % half? What's your take on that?

 

Jonathan Blau (48:48)

Yeah. Here's what I say

 

to people. know, look, first of all, it's scary because when you talk about professionals doing it for 30 years, what is it? Most professionals in my industry, the longer they've been doing it, the worse off you're hiring them because they've been doing modern portfolio theory, alphas, betas, and correlation coefficients for 30 years. They're doing all, they're giving you 40 % bonds to protect against the illusory risk. So the longer they've been doing it, the less I want to meet those people, right?

 

Matt Feret (48:59)

Yeah.

 

Jonathan Blau (49:17)

So they're doing the wrong thing for 30 years and so, but they got 30 years experience. Well, what kind of experience? You need someone who's going to know the right things to do, however long they've been doing it. More experience, I agree is better, but experience with the right things, right? Someone who's not practicing some form of behavior and whose things portfolio, the answer is inside the portfolio more than in between years. They're just missing the boat. And so...

 

Matt Feret (49:17)

Ha

 

Jonathan Blau (49:43)

The point is the people who do those things, who manage money, who pick stocks, professionals, you said pick stocks, right? Do you know the statistic over 15 year periods, professional money managers, mutual fund managers, and it gets worse the longer you go out. 90 % failed to match or beat their benchmarks, right? 90%. So they're spending millions of dollars annually on research and technology to try and do it. But the individual with all their biases who has none of that,

 

If they're going to do it successfully, come on. It's a waste of time, energy, and you're going to have subpar results almost every time. And you're going to have a lot of aggravation along the way. Now think about when the markets get into a panic situation, whether in just the last six years, you had a one in 100 year plague roll in, caused the market to go down 34 % in a month. Then the whole global economy shut down for a year.

 

And then just like maybe two years later, when that started to feel like it was resolved, you had a 25 % decline because interest rates and inflation spiked 40%, unannounced, unexpected. And then Russia invaded Ukraine. And then just a couple of years later, you had a tariff threat that caused 20. That's all in the last six years. But you know what else happened in the last six years? The S &P went from 3,300 to 7,000. And so you've got to understand, if you were nervous about all those things,

 

You know, the broad stock market, all of the companies aren't going away, right? But if you owned five stocks, you're my God, what if this company doesn't turn around? You're out. You're out. It's worse because the panic is now individualized to these companies, which you can't possibly feel certain about as you could an index of companies. And so if the professionals can't do it, the first message is you can't do it. They're spending a lot of time and resources, but they're also human. Their biases are the same as yours and mine, and it's even worse.

 

because they measure their success, oftentimes managers, quarterly. So they're constantly looking to move. mean, even in the mutual fund industry, there's a term, real term called window dressing. At the end of every quarter, they move in all the things that did well for the quarter. So when someone looks at their holdings at the end of quarter, it looks like they did really well picking things at the beginning. And they sell all the stuff that did poorly. So it doesn't look like they owned it. And so they're selling high and buying low systematically just for marketing. The advice is buy index funds.

 

and have a plan and have rules to your plan. also, you know, so this is helpful for people who are investing properly. When things go badly, meaning for whatever reason, the markets go down, it's okay to feel the emotion. Don't reflect the emotions by changing your portfolio in response to them. And if it's really hard, get in your car, go to Starbucks, buy a coffee, go to the mall, go to the Apple store, buy a pair of sneakers at Nike, go back home and see how many packages from Amazon and realize that the long-term enduring values of these companies didn't change a bit.

 

It's just the price that changed. Separate the price from the value. Understand that everything that you're doing while the market's down 30 % ordering the Amazon buy, everyone else is still doing it. You use these products every day. That helps you separate like the stock market. We don't own the stock market. We own great companies. The stock market to me is the craziest place where some of the craziest people gather every day to react to some of these craziest things in the most illogical ways. That's not what we own. That's just not what we own.

 

Matt Feret (53:01)

That's a fin.

 

That's a fantastic quote. I think I'm going to lead the web page with that. That was awesome. ⁓ Listen, if somebody wants ⁓ to improve their financial decision making, let's turn this into action. If somebody is listening or watching and goes, Yeah, yeah, yeah, I recognize me and a lot of that. If they want to improve their financial decision making, regardless of how much money they have, what's the first habit or mindset shift they should focus on?

 

Jonathan Blau (53:27)

So the mindset shift that you focus on is to stop looking for certainty. Understand that I'm watching CNBC every day because human beings like to feel secure and we feel secure if we know because of hindsight bias. Oh yeah, I knew that would happen. Yeah, after the fact. Understand no one knew what would happen before the fact. No one knew the economy would close down for a year when the pandemic broke. So before it happened. just understand uncertainty.

 

is a condition in nature that doesn't exist. Certainty doesn't exist anywhere as a condition in nature. Two, have a plan. If you don't have a plan tomorrow, sit down and start making a plan. ⁓ When do I want to retire? How much do I want to save? Do I value sending my kids to college? Do I have a 529 plan? How can I segregate my monies to accomplish some of these values and start that plan working? And ⁓ lastly, ⁓

 

understand that less is more when it comes to compounding anything. When you switch jobs nine times, you're not compounding your career because you don't have a mentor who's taking you under the wing and giving you all the wisdom you need. Right? So you're not compounding. It's the same thing. When you're switching your investments every year or two or three or every day, some people, you're not compounding the dividends and the reinvestments and the success of the companies, which happens not daily, but over over years and decades.

 

Um, you've got to think long term and get all the short term stuff, throw it out the window, you know, uh, try to go a few days without watching the financial news. That's that's a big help or surfing the net looking for, Hey, when is the crash coming? Or, know, something we call confirmation bias searches. You only will say, you, if you're convinced that the world's for crap, cause you know, I hate Trump or whatever it is that's going on and we're going down, you're searching every day. Why the market's going to crash on the Trump. You never search.

 

Why is the market actually likely to continue going up? The opposite of what you believe. So engage in non-confirmation bias searches to try and challenge the thoughts you have that might be holding you back.

 

Matt Feret (55:35)

Thank you. Last couple of questions here. This has been really fun. ⁓ And really, and really interesting. ⁓ You know, what's the old adage? Before you make a big decision, you know, I think your mom told told you, you know, sleep on it. You know what I mean? You wake up in the morning. Or if you have a big, big purchase people, you know, I've heard this before, like if you're make a big purchase, put it off 48 hours, you know, like, like, wait, ⁓ that's kind of, you know, the little

 

Jonathan Blau (55:39)

Yeah, I'm enjoying it too.

 

Right.

 

True.

 

Matt Feret (56:05)

mental tricks, right? But we're talking about mentality here and money. What is one question people should ask themselves before making any major financial decisions?

 

Jonathan Blau (56:16)

What are my most important values, right? And what role does money play or not play in them? And so if one of my most important values is family and friends, I money doesn't really come into that. If it's education and I have children, then money comes into that, right? So start to try and align your decisions about money with your values. And then you'll make better decisions. Don't worry about...

 

the external, you one thing I'll leave your audience with, this also came from Morgan Housel. So we live our lives, most of us, and I'm guilty of it, trying to accumulate resume virtues. ⁓ know, Jonathan Blau was the CEO of a big money management firm and, you know, he left the Blau, you know, wing of the such and such hospital. Those are resume virtues, right? But yet when we

 

When we die, we'd like to have eulogy virtues. We'd like people not to say those things. Hey, Jonathan Plow, what a great guy. He was so funny. He always helped people. He had the best family. So we pursue our whole life wanting people to look at us as if we had eulogy virtues. But all we do is pursue resume virtues. Flip it.

 

Matt Feret (57:35)

Interesting point. And back, you've mentioned the word values a lot, and have to assume that when, and plan, but a plan without the underlying values defined is probably worthless. ⁓ Agree?

 

Jonathan Blau (57:49)

Yeah,

 

I agree. mean, one of the things I just helped the client with, they have a home that's not in New York and they bought a place in New York, an apartment, and they're kind of debating. I don't know if I want to carry these costs and do all those things. So I said, listen, when you're at a decision tree like this, where it's really hard to make the decision, make it easier. so I talk about making these decisions to, and Jeff Bezos says this, make decisions to minimize regret.

 

Would you regret more if you sold your place where you live out of state? Or would you regret more if you kept it but never had the New York apartment to enjoy? And then it became real easy to make that decision. They said, no, no, we would much more regret this. And so always make decisions when you're at a crossroads and you can't find a financial answer to minimize regret.

 

And that goes back to values, right? Because what are you saying? When you're to rise, right? What do I value more? Do I value more keeping my home or keeping my apartment? It's the same thing. It's another way saying it.

 

Matt Feret (58:53)

And the underlying values underneath of that

 

is family important to me? Is taking my walks in my old neighborhood or downtown New York important to me? Like you are making values call when you're trying to minimize that as well. Yep. Yep.

 

Jonathan Blau (59:00)

Right.

 

Exactly. It's the same

 

way of saying, it's a different way of saying the same thing. So hopefully this was helpful to the audience and I certainly enjoyed the, I'm passionate about it. So I enjoyed the conversation when someone's interested.

 

Matt Feret (59:18)

It comes right through

 

it's been a great conversation. Thank you I appreciate you about I appreciate this perspective you're bringing because reminds people that financial success isn't just about predicting the future or you know picking the right stock now or having the right ratio it's about behavior and discipline and Making thoughtful decisions when things feel uncertain ⁓ And they don't just affect portfolios affect stress relationships confidence

 

values that have to be defined, right? And ultimately, it's basically life, right? It's the kind of life people are able to live over time. This has been really fun.

 

Jonathan Blau (59:52)

Well,

 

my friend Doug Lenick, I'll leave you with this last thought, he said it to me on my podcast, The Best. He said, you show me someone who's happy and I'll show you someone who's successful. And I don't care if they live in a castle or a tent. And that says everything. If you have money, that doesn't make you

 

Matt Feret (1:00:12)

that brings rings very true to me. Thanks for joining me today, Jonathan and everybody listening or watching by paying attention to how you think and act around money. Taking a smart step towards better wealth, deeper wisdom and long term wellness in every stage of life. Till next time, guys, thanks for listening to watch into the Matt Feret show. I'm Matt Feret, and we'll see you next time.

 

Jonathan Blau (1:00:36)

Thank you, Matt.