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Speculative Trading Is Like Eating 'Nothing but Twinkies'

Author and financial educator Manisha Thakor discusses recent trading frenzies and the financial well-being of young investors and couples.

This week on Morningstar's The Long View podcast, Manisha Thakor, author and founder of MoneyZen, a financial education consultancy, offered her take on the implications of recent trading frenzies in meme stocks, cryptocurrency, and nonfungible tokens. In Thakor's opinion, over-participating in these trading trends is akin to "feeding your child nothing but Twinkies and Pop-Tarts for five years."

Expanding on this idea, Thakor discussed how social media can warp young people's perceptions of financial well-being, how we might work to address the gender wealth gap, and how couples can cultivate advantageous financial habits.

Here are a few excerpts from Thakor's conversation with Morningstar's Christine Benz and Jeff Ptak:

Is the Speculative-Trading Frenzy Concerning?

Benz: Helping young people get off to a healthy start financially is another issue that you focused on in your career. Is the trading frenzy in so-called meme stocks, cryptocurrency, and NFTs concerning to you, or do you think it's a healthy low-stakes experimentation that could help young investors become better investors down the line?

Thakor: I think it's an absolute horror. It's like feeding your child nothing but Twinkies and Pop-Tarts for five years. It's junk personal finance. The core of personal finance that young people--whether they are college-aged, or in their 20s, or into their early 30s--need to learn basically revolves around making sure that you're living within your means, making sure that you are saving enough for the future. It's important to protect yourself, whether it's having the appropriate renter and car insurance, or, if you're getting married, having the awkward money talk prior to getting married to make sure that you're financially compatible. These are the core skills. And then you have to factor in debt. So many young people are dealing with student loan debt right now; many young people are graduating with a mortgage, that's how large their student loan debt is. So, understanding where buying a house fits into that picture, because it's very different than the picture their parents faced when they were their age.

If you're focusing on these speculative investments--we can call them risky, or esoteric, or some people may say cutting-edge--and they make up 5% of your total investment, that's great. But then 95% of the hard-earned money used to live within your means really should be invested in a more tried-and-true manner.

A while back, I penned a short piece for The Wall Street Journal's wealth panel experts online. They asked, "What is the worst piece of advice parents can give their kids?" I said, "Telling them to invest in the stock of a company they know about." And I got slings and arrows for saying that. It seems like there's a widespread belief that you are putting your young adult child on the path to financial success by encouraging them to invest. While investing is, of course, incredibly important, it has to be done in the context of your total financial life. So, investing in speculative assets, you're basically doing the financial equivalent, in my opinion, of eating Pop-Tarts and Twinkies. No one's talking to you about nutrient-dense fruits, vegetables, high-quality fish and meat, and so on.

How Can Younger Homebuyers Navigate the Current Environment?

Ptak: Buying a home is a big financial goal for many younger people. How would you suggest they proceed in the current environment where interest rates are very low, but home prices are high, and inventory is low?

Thakor: Very, very carefully. I think there's a misnomer that we really need to change: the notion that owning your own home is the American dream. It was for our parents. And a big part of the reason for that is they took out 30-year mortgages in a time period where that payment was steady, and home equity lines of credit and HELOCs were a very rare entity. And they had this steady payment that they were making over that 30-year period, and 10 to 15 years of that period was crazy high inflation. So, they were getting really nice annual increases in their income--as in salaries--but their home price payment stayed the same. Then, they lived in that house for a good 30 years. So, they were heading into retirement with an asset that was completely paid off and turbocharged by the rising salaries, in nominal terms, relative to the debt payments.

Today, buying and selling a home costs roughly 10% by the time you factor in all the different expenses. If you are a young person today, mobility is often the name of the game; if you're at the same place for longer than five years, it's no longer considered a badge of honor. Instead, people might ask, "Are you not motivated?" You might buy a home, but your dream job could still pop up anytime and anywhere across the country. Additionally, with women increasingly becoming co-breadwinners and primary breadwinners, you have two careers to think about. This is why I feel like the notion of the home being the greatest source of wealth has not kept up with the reality of mobility in the modern era--the number of jobs, locations, and homes people will have going forward.

I'm not against buying a home. But I do encourage people not to buy home until they can put 20% down, have a solid six-month emergency fund, and reasonably think that they're going to be in that home for five to seven years, so they have reasonable odds of offsetting the price of selling the home with house-price appreciation. And on top of all of that, I would advise making sure--especially if you have student loans--that your total all-in housing cost is not more than a third of your take-home pay. And when you stir all of that up, maybe you need to rent a little bit longer. There's nothing wrong with that. It's not throwing money out the window; I think we need to disabuse that notion. It's giving you an option on the most important asset that you have at a young stage, which is your income stream--your future income stream.

How Should Couples Talk About Money?

Benz: You co-wrote a book about how couples can find compatibility in their financial lives. When is the right time in a relationship to start talking about financial matters? And what's the right way to go about it?

Thakor: Well, I'd say the right time is before you get divorced. I co-wrote this book while I was getting divorced; it's a book based on hard-earned lessons. When you first meet someone you are asked, "Are you physically compatible? Are you spiritually compatible? Are you intellectually compatible?" Nobody asks if you're financially compatible. I encourage people to ask this question. When you're in a serious relationship that could lead to living together or marriage, you should begin discussing finances.

Having an understanding of where each partner stands, in terms of net worth and debt, is a great place to start. Sharing credit scores can also be beneficial. You might feel a little awkward discussing income in the beginning, however, talking about where you are in terms of savings--your attitude toward it, where you're doing it, how you're utilizing your 401(k) or 403(b), and how you chose your investment selections--is critical.

I would recommend starting the conversation with some of the hopefully more positive parts or the parts that can really impact where the relationship is going. You can also begin with a gentler conversation about data; year after year, the American Psychological Association finds that money is one of the top causes of fights in relationships and divorce. You can say, "Let's start with talking about where we each learned about money. What has our best money move been? What is the best piece of financial advice we've ever received?" You can start with these positive topics and then progress to some of the tougher ones. It's not a one-and-done conversation either; you need to reset expectations as careers evolve and circumstances change.

How Can Couples Work Together to Develop Healthy Financial Habits?

Ptak: If one partner in a relationship is financially healthy and the other is not, is there ever a successful resolution where the couple essentially adopts the habits of the financially well person?

Thakor: Frequently. There are so many ways this could happen. I call it the "financial three-way," the three buckets being: yours, mine, and ours. Some couples feel strongly that everything goes into the "ours" bucket. They say, "Your debt is my debt." Other couples will say that "ours" is only the moves we make together going forward. For instance, neither of us spends more than $100 without checking with the other, but at the same time, each of us has $50 a month, if you're just getting started, that you can spend no questions asked. Either way, you and your partner should work to develop the rules that best fit your situation.

It's not a romance or relationship killer to have wildly different financial attitudes and habits. I read somewhere (and this isn't fact-checked) that in the early stages of courting there is something intoxicating about financial otherness. Oftentimes, that's why savers and spenders attract. But the studies show that shared financial values keep couples together in the long run. I would suggest using the financial three-way--yours, mine, and ours--to figure out how you want to populate those buckets.

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.

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