PWL Capital Chief Investment Officer: How many of these top ten financial misconceptions have you fallen for?

Source: “The Diary Of A CEO” podcast; Translation: Felix, PANews

PWL Capital Portfolio Manager and Chief Investment Officer Ben Felix is an evidence-based investment expert who translates academic financial research into practical decisions that everyone can understand. Recently, Ben Felix appeared on the “The Diary Of A CEO” podcast, revealing why most people make poor financial decisions. PANews has summarized the highlights of the conversation.

Host: There are many experts discussing personal finance and investing around the world. How does your approach differ from other financial experts on YouTube?

Ben: The approach I’ve always tried is to draw wisdom from academic literature. Look at what smart people who spend a lot of time thinking about these issues have concluded, and then apply that to ordinary people’s financial decisions. Whether it’s renting or buying a house, or asset allocation, whether you have $10k or $10 million, the principles of investing are the same.

Host: When it comes to making money through investing, how much is caused by psychological factors?

Ben: The problem with investing has actually been “solved”—just buy low-cost index funds. The real challenge lies in our psychology. The brain is designed for survival; it’s not good at handling long-term and abstract concepts, like taking your money today, investing in the stock market, ignoring everything that happens in between, and still having some money left for retirement in the future. People often talk about strategies and techniques, but I believe whether you can execute any strategy or technique depends on your psychological state. One of the best methods, though a bit counterintuitive, is not to look at your investments. Academic research shows that the more frequently you check your investment accounts, the lower your risk tolerance and the worse your returns. Because watching the stock market fluctuate daily can make you extremely anxious, leading you to believe the market is very risky; but for buy-and-hold investors, the stock market is actually much safer than it seems.

Host: What advice would you give to young people in their early 20s who are thinking about financial strategies?

Ben: That’s a tricky topic. Young people often face huge pressure from parents and society to save money. But academic research shows that over-saving during low-income periods may not be optimal; the general principle is to save more when income is higher and save less when income is lower. Of course, this assumes you don’t develop bad habits like spending all your money and being unwilling to save even when your income increases later.

Host: Let’s discuss the 10 common financial mistakes you mentioned one by one.

Ben: Sure. Mistake 1 is earning too little. Many people think low income is unavoidable, but you can invest in your human capital—such as formal education, learning new skills, or starting a business—to become a more valuable asset. Data confirms that education and skills have a mechanical causal relationship with lifetime income.

Host: I’ve always believed that in your youth, you should optimize “knowledge” and “skills” as much as possible. The key is acquiring a combination of scarce and complementary skills valued by the market. For example, if you studied engineering and finance, and now also master YouTube content creation, that greatly boosts your earning potential. When I was marketing for a biotech company, I found that a writer with no medical background but some biotech writing skills could earn $250k, five times more than an average writer. Selling the right skills to the market can lead to exponential income growth.

Ben: Yes, mistake 2 is saving too little. Wealth grows through compound interest over time. If you don’t save enough early on, it becomes extremely difficult to catch up later. Just like health—if you eat poorly and never exercise, by age 55, developing heart disease is hard to reverse.

Host: It’s like the metaphor in the book “The Slight Edge” about brushing teeth: if you don’t brush today, it’s okay; if you don’t brush this week, it’s okay; but if you don’t brush for five years, you’re done—you’ll have to lie in the dentist’s chair to get your teeth pulled. The same applies to finances.

Ben: Mistake 3 is not setting financial goals. People often blindly pursue making money or buying a house without thinking about what kind of good life they want. We use a three-step process: first, list your goals; second, double the number of goals to stimulate deeper thinking; third, use the “PERMA model” (Positive Emotion, Engagement/Flow, Relationships, Meaning, Accomplishment) to evaluate these goals.

Host: What if my goal is to buy a Ferrari?

Ben: A Ferrari itself may not meet the PERMA model; the positive emotion might last only a few days. But if you drive it on a race track to enjoy speed (engagement), or join the car enthusiast community (relationships), then it becomes meaningful.

Mistake 4 is overspending on the wrong things. For example, spending $12 daily on iced coffee just to rush to work doesn’t increase your positive emotions; instead, it takes away funds that could be saved for a better life.

Mistake 5 is not taking investment risks. The opportunity cost of not investing in the stock market is huge. If holding cash yields 2%, and the long-term expected stock market return is 7%, that 5% difference in compound growth is remarkable. Investing $10k today at a 7% annual return will grow to $150k in 40 years. In other words, spending $10 now on a coffee is equivalent to giving up $150 in 40 years.

Mistake 6 is taking the wrong investment risks. Many avoid index funds and instead trade stocks, options, or cryptocurrencies, which often have negative expected returns and high transaction costs.

Host: What about buying a house? That’s the biggest decision most people make in their lives.

Ben: I don’t see buying a house for personal residence as an investment; you’re actually purchasing an asset that provides housing consumption. The down payment has a huge opportunity cost—it could have been invested in stocks. There are also many unrecoverable costs, like mortgage interest, property taxes around 0.5%-1%, and severely underestimated maintenance costs, which can far exceed 2% of the property value.

Host: Exactly. After buying a house abroad, I found that the garden, water pump, tiles, and heating system are always breaking. If I rent, that’s not my problem, and I save a lot of time on repairs.

Ben: Yes, plus emergency repairs and renovation costs. I propose a “5% rule” to compare buying versus renting. For example, a $300k house corresponds to $1,500 monthly. If rent is equal to or less than $1,500, renting is financially better. Also, buying a house severely limits young people’s mobility. For instance, if Toronto’s condo prices crash and you bought there but get a high-paying offer abroad, you could be stuck.

As for the common example of “someone bought a house 30 years ago for $70k and now it’s worth $1 million,” we can’t use past high interest rates and population booms to predict future returns. In Canada, if you bought at the peak in 2021, after inflation, you’re experiencing severe asset depreciation now. If you care about liquidity, index funds are a better choice. Only those extremely risk-averse and wanting to settle long-term in one place should buy a house.

Mistake 7 is missing tax planning opportunities. Ordinary people should fully optimize government tax-advantaged or deferred accounts, like Canada’s RRSP/TFSA, the US’s 401(k)/IRA, or the UK’s ISA. Wealthy individuals exploit loopholes, such as mortgaging stocks to get tax-free loans and not selling stocks to avoid capital gains tax, but ordinary people borrowing against volatile assets face huge margin call risks.

Mistake 8 is neglecting estate planning. Not making a will results in your assets being distributed by default according to government rules, leading to high taxes and passing money to the wrong people. If you have dependents, making a will is crucial.

Mistake 9 is choosing a marriage partner. Academic research classifies people as “money hoarders” and “spenders.” These two types are very likely to be attracted to each other and marry, but this often leads to lower marital satisfaction and financial conflicts.

Host: I have a successful friend who went through 6 or 7 years of divorce litigation, with lawyers stirring up trouble and earning high legal fees, destroying their good relationship and causing significant asset loss. If they had a prenuptial agreement, everything would have been much faster.

Ben: Yes, a prenuptial agreement may not be romantic, but if both parties accept it, it can prevent future financial disasters.

Mistake 10 is insufficient insurance against catastrophic risks. If you are the breadwinner, you must buy enough life insurance (low-cost term life) and disability insurance to prevent your family’s life from collapsing if you lose your ability to work.

Host: What about asset allocation? You once mentioned a “most controversial finance paper”?

Ben: The traditional view is to buy more stocks when young and shift to bonds when older. But that paper, which tested data from 39 countries since 1890, found that the optimal long-term strategy is to hold 100% stocks for life, with one-third domestic and two-thirds international stocks for diversification. The paper argues that during long periods of high inflation, so-called “safe” bonds are actually devastated, while stocks are relatively safer.

Host: Are there financial products people should absolutely avoid?

Ben: First, “covered call” funds. They sacrifice huge upside potential of stocks just to earn some option premiums, with hidden costs. Second, thematic ETFs (focused on AI, cannabis, clean energy). These funds often launch at market peaks when assets are most inflated, and their returns tend to be poor after bubbles burst. Lastly, keeping cash under the mattress. At 3% inflation, your money halves in purchasing power in 20 years. Holding cash is essentially a negative expected return risk. The best approach is to invest in low-cost index funds.

Host: We’re currently in an AI boom. People worry about job losses, and many fear that the influx of capital into AI will cause a market crash. What’s your view?

Ben: Historically, technological revolutions always cause disruption. Like when ATMs appeared, people thought bank tellers would lose jobs; but because operating costs dropped, banks opened more branches, and teller jobs increased. There’s also “Jevons’ paradox”: when coal engines became more efficient, transportation costs fell, leading to more train travel, and the coal industry thrived. Regarding market crashes, a magazine article from 1847 shows the world was also full of panic and uncertainty then, but history proves humanity always pulls through, and stocks tend to rise over the long term. Of course, large capital inflows during early tech revolutions can inflate asset prices, which then correct—this is a normal cycle.

Host: So, how should we think about buying stocks? My friend once told me that when I buy Facebook stock for $10, all the good news and future expectations are already priced in, unless I know some secret others don’t.

Ben: That’s the efficient market hypothesis. When you buy stocks like Tesla, all public information is already reflected in the price. Buying stocks is essentially purchasing the expected future cash flows of a company at a discount rate. Trying to beat the market through stock picking or timing is futile. Most professional fund managers underperform the market over the long run. The best approach is to buy index funds, accept market returns, and forget about it—don’t check the prices. Focus on what you can control: saving, asset allocation, and tax planning.

Host: Fidelity and Berkeley research show that women tend to have higher investment returns than men because men trade more frequently. Do you agree?

Ben: I fully believe that data. Men tend to be overconfident, try to pick stocks, and trade often, which is also linked to gambling addiction. This inevitably leads to worse investment results. Not messing around is key to investment success.