Searching for the Soul of Wealth with Brian Portnoy

Welcome back and welcome aboard, and be careful getting your bags from the overhead compartments, as last week's volatile selloff may have caused items to shift. While last week started with some relatively good news on inflation, hawkish comments from Fed Chair Jerome Powell following the Federal Open Market Committee's (FOMC) decision to raise the federal funds rate by half a percent put the big chill in new investor enthusiasm. Stocks sold off hard from Wednesday afternoon to Friday's closing bell. For the week, the Dow fell 1.7%, the S&P 500—down 2.1%, and the Nasdaq—2.7% lower. The past two weeks were the worst two weeks for U.S. equity markets since September.

U.S. Treasury yields fell as recession fears gripped global bond markets. The yield curve remains deeply inverted, with the 10-year note yield at 3.49%, while the two-year note yielded 4.19%. That's just one of several inverted yield curves, and it's starting to look like a yoga studio around here. Those yield curve inversions are the telltale sign that investors have little-to-no confidence in the near-term prospects for the U.S. economy. As widely expected and telegraphed, the FOMC increased its policy rate by 50 basis points (bps) to 4.25 to 4.5% on Wednesday, downshifting a little bit from the 75-bp hikes from its previous four meetings.

But it was the Fed's dot plot—the most boring, yet the most important chart in economics, that threw the wet blanket on stocks. The dot plot, which is the chart of the Fed policymakers' median projections for where interest rates should be over the next 24 months, now shows the federal funds target rate rising to 5.1% next year—a level last seen in 2007. Back in September, the dot plot was signaling a terminal rate for the fed funds rate at 4.6%. The message from Jerome Powell and members of the FOMC?—higher rates for longer, and don't even think about the Fed cutting rates next year.

The 'Big Three' This Week

Number one—it's definitely not so cool being Chicken Little this close to Thanksgiving, but there may be some serious selling pressure ahead. According to an analysis by JPMorgan and StoneX Financial, the world's biggest money managers are set to unload up to $100 billion of stocks in the final few weeks of the year as they rebalance their funds and shift more heavily into bonds. This is after one of the worst years in history for the stock market and the bond market together. You see, at the end of every quarter and every month, pension funds and other institutional investors check their market exposures to make sure they meet strict allocation limits between equities and bonds, as well as between domestic and international stocks.

Even though global equities have gotten hammered this year, many sectors and indexes have still outperformed a lot of other asset classes—including bonds. And now, many of these money managers have to cut their exposure to stocks, and load up on more fixed income. The good news is that the timing looks better for buying bonds given higher yields. The bad news for equity investors is that these big money managers will likely not be buying the dip in the equity market, depriving the rest of us of a huge layer of support under the global stock market. This could be the kind of spoiled milk that will keep a Santa Claus rally at bay in 2022.

Number two—where have all the IPOs gone in 2022? Long time passing, 2022 will go down in history as the worst year for U.S. IPOs since 1990. According to Pitchbook, U.S. IPO proceeds are down 95% from 2021, and at least 50% lower than any year in the last three decades. It's been a little bit better outside the U.S., especially in the Middle East—thanks to all those oil profits, but this year has been no friend to the initial public offering (IPO).

And number three. Since we are approaching the end of the year—and what a year it's been—let's set our sights on 2023, and a few things we might expect the New Year to bring to us. Recessions—everywhere you look, the rapid rise in interest rates around the world, with the exception of China and Japan, in order to battle inflation running at multi-decade highs, is almost certain to cause steep economic contractions, notably in the U.S., Europe, and the U.K. The International Monetary Fund (IMF) predicts global growth will slow to 2.7% next year—the weakest pace since 2001. Global gross domestic product (GDP) is expected to grow about 3.2% in 2022, down from a blistering hot 6% in 2021, amid the pandemic recovery.

Interest rates? Likely higher for longer. The Federal Reserve has raised the federal funds rate seven times in 2022, from zero to 0.25% to between four and 4.25%—the fastest pace of rate hikes on record. While inflation has cooled in some areas, with the latest reading of the Personal Consumption Expenditures (PCE) Price Index showing a 6% annual increase, it's still a far cry from the Fed's target rate of about 2%. That means more rate hikes are coming in the new year.

The good news about rising rates, though, is that savers and those living on fixed income are finally getting a return on their money. Money market accounts, CDs, and short-term government bonds are at last delivering real yields to investors and savers, providing some alpha in the face of inflation and a tenuous stock market. These products have had heavy inflows for the past several months, and that's a trend that's also likely to continue next year.

Meet Brian Portnoy

Brian Portnoy is the founder of Shaping Wealth, a financial wellness company which works with advisors, companies, and families on making better financial decisions. He is the author of two bestselling books: The Geometry of Wealth and The Investor's Paradox, in which Brian lays out actionable insights for aligning purpose with planning. He has served as keynote speaker, seminar leader, and coach to thousands of investors on topics ranging from portfolio strategy to investment selection, to the connection between money and happiness.

For two decades, Brian held senior investment and education roles throughout the hedge fund and mutual fund industries. He is active in the field of youth financial literacy and is on the advisory board of the Alliance for Decision Education. Brian is a certified Charted Financial Analyst (CFA), holds an undergraduate degree from the University of Michigan, and earned his doctorate at the University of Chicago.

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What if we stop thinking about building our wealth as a mountain to climb, or a race to run? What if we started thinking about it more like a puzzle—a mosaic of our complete lives, not just our financial well-being. A puzzle that takes shape through our life stages, but is assembled with purpose, with meaning, and with happiness as its frame.

That's been the focus of Dr. Brian Portnoy, and he's been helping teach financial advisors and their clients on how to shape the vision for their puzzles through his company, Shaping Wealth, and through his terrific books, speaking engagements, and conversations within the financial services industry for more than 25 years. He's one of my favorite writers on money because he keeps it simple, he keeps it smart, and he makes it matter. He is our very special guest this week on The Investopedia Express. Thanks for being here, Brian.

Brian: "Great to be here."

Caleb: "I've been looking forward to this conversation for a while. We just recently met, but I've been reading you for years and years. Let's talk about the geometry of wealth—this is one of your most famous, in the name of your terrific book, but it's also the foundation of your coaching practice and of your overall philosophy, at your company. Let's get into the circle, the triangle, and the square. So important and so fundamental."

Brian: "Absolutely, and thank you and nice to see you. So, The Geometry of Wealth was a book that I wrote a few years ago, that helped me not only professionally but personally, to distinguish between what it means to be rich versus what it means to be wealthy. And, where things came down was defining 'rich' as the quest for more, and recognizing that the quest for more—while exciting—is ultimately unsatisfying. And then for me, both professionally as a writer, educator, investor, but also as a husband and a father, and a friend as a neighbor—thinking about wealth in much broader terms."

"And so, I coined this phrase 'funded contentment'. It's the idea that true wealth is the ability to underwrite a life that's meaningful to you. This phrase, 'funded contentment'—two words—you start with the second one—you ask the hard, enduring questions about "What is a life well-lived?" I mean, this is something that we, as a species, have been thinking about for many, many millennia. And so, once we've asked and maybe come up with some ideas for what that good life looks like, we can then ask the next question of "How can I afford those things? How can I underwrite the things that make me contented, happy, joyful?"

"And The Geometry of Wealth is my answer, meaning that there is a three-step process to achieving funded contentment, that I would just summarize by saying, "First, we define our purpose. Second, we set broad financial priorities. And then third, we make specific financial decisions." And this is not a one-and-done. This is an iterative process. It's a circle, where we ask the big questions, and then we get into the weeds. And then you know what happens? Life happens, the market happens, and we reevaluate, and around and around it goes."

Caleb: "I love that it's simple, but the simple things are usually the most important and the most fundamental, because a lot of folks never ask themselves that question: What is my north star? What is the purpose of money in my life? And we've had a lot of conversations with folks on this show and outside of it, on what does it cost to be me? What does it cost to be the me I want to be? But I love funded contentment, because what does it mean to be me at my happiest, and what makes me happy? If you start there, and work your way backwards, you come up with some very fascinating answers, don't you?"

Brian: "I think so. It sometimes feels a little bit awkward to ask within a financial context, within the context of financial advice—what is a meaningful life to you, what is your purpose? Depending on how it's delivered from advisor to client, or just an individual thinking about those things, it could be a heavy lift. But if asked in an open way, one where someone has true permission to explore those things, you can actually get to then the financial weeds of it pretty quickly, across not just the investing dimensions but across all the dimensions of money, life, earning, saving, spending, borrowing, giving, and protecting. Across all of those dimensions, we can really begin to attach those day-to-day decisions to something much bigger and more meaningful."

Caleb: "You came out of the financial services industry, and the research portion of that as well, through your work at Morningstar—you were in the hedge fund industry. You know, you've played at the highest levels as an investor, but you saw the need to address the soul of money, and what it means to our overall happiness. Why did that happen to you? What happened to you that made you want to do that?"

Brian: "Well, I'm glad we've booked, what, five or six hour, because I'd like to..."

Caleb: "Lie down on the couch, relax, and start to tell me what's going on, please."

Brian: "Yeah. So I got to Morningstar almost 25 years ago—and what a fabulous company, and I'm still good friends with a number of people there. The sign on the front door says "Investors Come First." And I really got into it, you know, working with people like Christine Benz and Jeff Pittock and Kunal Kapoor and Joe Mansuedo, and others. And so, that really did kickstart a career in investment research and manager due diligence that at a certain point led me away from the long-only mutual fund world, to the complex world of hedge funds, long/short equity, arbitrage strategies, global macro."

"And part of my entry into that world was just based on pure curiosity, like, "Wow, this is a big, interesting world. I achieved some things in the hedge fund industry. I got to make investments on behalf of institutional investor clients and learned many things. In fact, I wrote a book called The Investors' Paradox, that summarized that journey in the world of mutual fund and hedge fund due diligence."

"But at a certain point, I stepped back and said, "Does any of this matter?" And the answer is, it matters, but maybe not as much as I had thought when I was just in the eye of the storm. What really matters are the questions that I think I'm dealing with, and The Geometry of Wealth and my current company, Shaping Wealth. The investment piece ends up being the end of the process, contrary to the way I think many of us in our industry put it, which would be the beginning of the process."

"So I joked in the preface, or the beginning, of The Geometry of Wealth, that it was a prequel to my earlier work, because not until I kind-of said my piece about all things investing, and how to make better investment decisions, how to include hedge funds in a portfolio, how to evaluate long-short equity managers—something I did for a decade. Once I kind of got that out of my system, I was able to step back and say, "okay, good, important in a narrow sense," but it has to be embedded in a broader framework for thinking about a life well-lived."

Caleb: "Let's get into the difference between being rich, and being wealthy. They're very different things, and I think a lot of folks get caught up in the 'rich' part of things. But from your perspective, what are the key differences there?"

Brian: "So, what is being rich, or more importantly, what is getting rich? It is accumulating more. So if you go to basic economics—what is one of the core assumptions, the driving frameworks for all of economics? It's mostly that more is better. So if I have, you know, $100,000, having half a million is better, and a million is better than that, and so on and so forth."

"And what we know from the psychology discipline—social psychology in particular, is that there's something in our life called 'hedonic adaptation', which is kind-of a fancy term, a lot of syllables to say that we get used to just about everything that happens in life. And so, as you go from a million bucks to two million bucks, to three million bucks and on and on, the idea that that's going to lead to higher and higher levels of happiness just simply isn't true. We know that conceptually, but more importantly, we know that empirically—there's been a ton of research on that."

"So we in society, especially American society, are wired to, or at least encouraged to accumulate more—we're a, very prosperous society. But we see firsthand, anecdotally in surveys and other research, that just because you accumulate more and more money, and you become more and more rich, it doesn't necessarily produce the quality of life that you want—that extrinsic motivation."

"There's a whole theory called self-determination theory, that says that extrinsic motivations, such as being richer, more famous, prettier—all those things—they don't make a lasting impact. They aren't ultimately what motivates us. What motivates us are the intrinsic things, and that's where we get into being wealthy. It's that connection to others. It's that sense of autonomy, living the life that you want, being able to do the things that you want. It's having a sense of competence, or mastery, meaning that you're really good at something that's meaningful to you—could be in your job, it could be a hobby, your vocation."

"And then, what's really important is what I call context, and that is the idea that you are attached to something bigger than yourself. And historically, that's been two things. That's been either faith or place, or both. So religion, spirituality, faith, and then secondly, place—meaning patriotism or hometown pride."

"So the framework that I developed in The Geometry of Wealth, that we use for coaching purposes at shaping wealth, is what I call the four Cs—the forces that define true contentment. And those are: connection, control, competence, and context. I could also replace the four Cs and call it belonging, autonomy, mastery, and purpose. But rather than saying 'BAMP', I'm going to say 'four Cs'—it's a little bit more memorable."

Caleb: "Fits on a t-shirt a little bit better as well. These are so important, but again, we rarely take the time to stop and think about them. But that's kind-of where the financial advice and planning industry is headed, or at least some of it. And we've had a lot of advisors on here—we're big champions of financial advisors, especially those that focus on education, and that holistic financial planning, which is not just "What can I do for your portfolio this year," but "What's the life you want to live? Can you afford it? What's it going to take and what's the plan?"

"And the more holistic it gets, the better it is, because then you're thinking about money as it relates to every part of your life. So I know you're essentially a coach of the coaches, right? You coach financial advisers on how to work with clients like me. How important is it for them to be thinking about us as complete people, versus beating the benchmark every year, or making sure that I have the right stocks in my portfolio?"

Brian: "So I like the way that you put that, whether or not we should think of clients as complete human beings—complete people. I think the short answer is 'yes', but let's make sure we know what we're doing, because the more we get into the human side of financial advice, the more that we are playing a bigger game, and the more involvement, engagement, accountability there is. We're not just picking stocks on somebody's behalf. And, you know, stocks go up or down, but it is what it is."

"We're on a 50-year arc of what I call from Gordon Gekko to Brené Brown. And going back just a couple of generations—and before that, this was a brokerage business. So there really wasn't much of anything that we would now call financial advice, or financial planning. There was "Blue Horseshoe Love's Anacott Steel," and what a financial advisor does, or did, was to come up with great investment ideas. And, by the way, that that hasn't gone away. It's rarely the case in most big capitalist industries that the old things completely disappear. You just have layers of function and wider profit margins on the things that come up more recently."

"So, as we go from the old days of brokerage—Gordon Gekko and Bud Fox, and fast forward to today—building a financial plan for people, where you've got a series of goals through life, with the biggest being retirement—that's sort-of the standard trope in our industry, and going beyond just goal setting and asking these bigger questions in terms of, "Okay, well, not just what do you want to have, and not just what you want to do, but also, who do you want to be?"

"Well now we're cooking with gas—now we're having a big conversation. And, you know, financial advisors increasingly can be part of that conversation. In fact, most, or at least very many of the advisors that I know professionally or just as friends—they want to make that positive impact. The question is how. And consider this one simple fact—behavioral finance and client psychology entered the CFP curriculum in 2022—not 2012, not 2022—this year."

Caleb: "Five minutes ago."

Brian: "Five minutes ago—literally five months ago. And it's not that advisors weren't thinking about client psychology. In fact, I've never met an advisor who hasn't said, "Hey, at some point I felt like that person's psychologist or therapist." This is just the nature of the thing, because when we're talking about retirement, or sending our kids to college, we're talking about legacy. We're talking about relationships. We're talking about love. And we're talking about a whole suite of different emotions."

"It's not that this is new. It's that from the professionalization of financial advice perspective, we now have to answer the question "How do we understand what's at stake? How do we get good at this—how do I get good at this, how does my team and my firm get good at this?" And that's the opportunity I saw in the last few years, and the basis on which shaping wealth is sort-of landing well, with, you know, advisory teams, both small and very large all over the world."

Caleb: "Yeah, and that's basically led you to the launch of your new project, which is—if I'm getting it right—this is outsourcing the Chief Behavioral Officer part to you, and you're serving that purpose for financial planning and advice firms. Tell us about that, and why it's so important right now to have that in your practice."

Brian: "Yeah. So my aspiration for shaping wealth is to be the wealth industry's Chief Behavioral Officer. And what is a Chief Behavioral Officer? Well, think about other chief roles—Chief Investment Officer (CIO), operations, technology, talent. These are individuals who oversee a very important function in an organization. Well, as we've established here in the relatively early 21st century, topics like making better decisions, forming better habits, understanding the emotions or psychology of money, achieving higher well-being—this is now everywhere in the industry. It's legitimate and it's happening at scale."

"But then, where are you getting your training? Where are you getting your resources, your tools? Where are you engaging? With whom are you engaging? We need better conversations about all of these various topics. And so, yes, for the last year or so, Shaping Wealth has offered some flagship coaching programs, which have been very well-received. Those have a beginning and an end. So, you know, over the course of three months, we do some immersive coaching on what we call behavioral advice. But I saw the opportunity—we see a long term opportunity to be a source of just light and easy, but scalable and impactful ongoing content and coaching for advice teams."

Caleb: "What is Brian Portnoy's definition of retirement?"

Brian: "I don't have like a pithy catchphrase for retirement. My perspective is that it's a very historically specific idea that's evolving right before our eyes. And so, the current idea of retirement is a relatively brand new idea. It wasn't that long ago, meaning up until about 100 years ago—what happened was people worked until they died. Yes, physically, maybe you had to slow down or stop, but it's not like there was some big retirement system in your country or your society that would support you. And, for reasons we don't have time to get into, the history and sociology of it is quite fascinating."

"Fast forward to now, we have massive retirement systems in many different countries, but things are changing, in no small part. We, as human beings, are changing. Longevity is not what it used to be, in the good sense. You know, I think about my grandparents, who retired to Del Boca Vista, down in Florida, and sadly but true, within five to 10 years, they passed. There really wasn't a lot going on. Now, it's not unreasonable to think about living a healthy life into your 80s or your 90s. And, I think my kids, from the actuarial table—three teenagers—they might be expected to live into their 100s, using the traditional definition of retiring at age 65, and then having enough cash flow to support yourself through the rest of your days."

"What does it mean to retire at 65 and then have 30 years to go? Our frames, not only financially but also sociologically and psychologically, have not been updated to accommodate this new reality. So to bookend it, retirement is to some extent necessary, because we have to slow down, just as a physical imperative. But what that means for who we are, and what we want to do and how we fund it—that is changing quickly before our eyes."

Caleb: "You're an author. You're a professor. You're a professional. But what is your favorite book about money that's not one of your own? Which is the one you want to recommend for folks, coming up here on either the holidays, or just to buy as a gift or refer to as like a great cookbook or Bible in their bookshelf?"

Brian: "So let me give one old and one new. And on the old front, it taps into my passion for history and for economic history. I think it's really important for all of us to appreciate the context in which we're living our lives, because it might seem, "Okay, this this is my own little world," but man, you expand the scope. You're like, "Oh, we've kind of been here before." People have grappled with these sorts of things."

"So I generally recommend the work of Peter Bernstein, and I'd specifically recommend a book called Against the Gods. It's a fascinating history of risk. Like, what is risk? It's a complex, fascinating topic with multiple definitions. So when we say, "Hey, I'm going to take risk, or I'm going to avoid risk." Well, there is a very specific social and political history of how—in capital markets, at least—we defined risk, measured it, managed it, mitigated it, and so forth. So Against the Gods is a great historical read on the history of risk."

"The other, more recent book that just came out relatively recently is by a friend of mine, Nick Maggiulli, who is currently at Ritholtz, called Just Keep Buying. And Caleb, I know you know Nick. Everybody knows Nick. It's just a really good, easy book—short, punchy chapters that make not only commonsensical and sometimes profound points about how to navigate money life—Nicky Numbers, as he is known, is really good at providing evidence to support him."

Caleb: "Great recommendations there. Let's go out on this, Brian. You know we're a site built on our financial terms—that's how we were launched. What's your favorite financial or investing term, and why? What's one that really speaks to your soul?"

Brian: "Now I have to think again, because I don't know if it speaks to my soul, but the word that I've thought a lot about and written a lot about, and worked with investors on a fair bit over the last 10, 15 years is 'diversification'. And it sounds like a very simple idea—don't put all your eggs in one basket, but it ends up that, not only from a statistical or numerical point of view, but from a psychological point of view—it's a difficult idea to process. And I wrote a line that somehow took off and is still associated with me today, from a blog I think I wrote in Forbes in 2014—the line is diversification means always having to say you're sorry."

"So diversification is, again, this idea that you want to spread your bets, by something that both zigs and zags so that you have a relatively smooth ride that works out. One of the challenges with diversification is that, by definition, it means that something in your portfolio stinks. Something in your portfolio is not working, because the inverse is that if everything's working, you are, by definition, not diversified."

"And so, when you think about the core principles that any individual investor would use to build a healthy financial life, diversification is absolutely central. But let's also accept that it's more psychologically difficult to experience diversification than any of the textbooks would lead us to believe."

Caleb: "We love that. We love your explanation of it, and I'll actually include a quote on that in Investopedia's definition of diversification, because it is core, but I don't think we think through it as clearly enough. But that's what you're so great at. Brian Portnoy, the founder and CEO of Shaping Wealth, the author of The Geometry of Wealth and several other excellent books, and one of my favorite people out there on the circuit. So glad to have you on the Investopedia Express. Thanks for being with us."

Brian: "Great to be here."

Term of the Week: Capitulation

It's terminology time. Time for us to get smart with the investing term we need to know, this week. And this week's term comes to us from Madeleine Penelope, who hit us up on Instagram with her suggestion. Madeleine suggests 'capitulation' this week. And we like that term, given all the selling pressure in the market lately. It's also one of Investopedia's Top Terms of the Year, because it feels like we've been on the brink of capitulation all year long.

Well, according to my favorite website, capitulation describes the dramatic surge in selling pressure in a declining market or security that marks a mass surrender by investors. The resulting dramatic drop in market prices can mark the end of a decline, since those who didn't sell during a panic are unlikely to do so soon after. Capitulation typically follows significant downturns in price, which can take place even as many investors remain bullish as the downturn accelerates. It reaches a point where the selling by investors unwilling to suffer further losses snowballs, leading to another dramatic plunge in price.

At its lowest level this year, the S&P 500 dropped 25%. According to our friends at YCharts, the average drawdown in a bear market is around 35%. We know there's going to be a lot of selling pressure ahead, but will we see outright capitulation? What about you? What would make you throw in the towel? What's your sleeping point, as Professor Malkiel spoke about last week? Great suggestion, Madeleine. Some of Investopedia's finest socks are coming your way, just in time for some holiday chill time.