This is the version of my talk, Personal Finance for Everyone, given at Box HQ in Los Altos, CA on May 13, 2014

1. PERSONAL FINANCE
wealthfront.com
Adam Nash @adamnash
May 13, 2014
FOR EVERYONE

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Caveats & Preface
• I am not a financial planner
• This presentation is not financial advice
• You would be extremely foolish to make investment
decisions based solely on the content of this
presentation or discussion
• The opinions in this deck are intended purely to provoke
discussion & further education
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Why Personal Finance?
• Poorly covered in traditional education, even
top tier universities
• Not technically difficult, but signal:noise ratio
is terrible
• Massive impact on your life
- Money is one of the top 3 reasons
for marital problems
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Fast Five Finance Basics
1. Behavioral Finance Basics
2. Liquidity is Undervalued
3. Cash Flow Matters
4. The Magic of Compounding
5. Good Investing is Boring
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5. How many of you think
you are rational with
your money?
(show of hands)

6. You are NOT rational
ANCHORING MENTAL ACCOUNTING CONFIRMATION &
HINDSIGHT BIAS
GAMBLER’S FALLACY
OVERCONFIDENCEHERD BEHAVIOR OVERREACTION &
AVAILABILITY BIAS
LOSS AVERSION
(PROSPECT THEORY)

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Anchoring
• People estimate answers to new /
novel problems with a bias towards
reference points
• Example: 1974 Study
• Most common examples:
• Price you bought a stock at
• High point for a stock
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Mental Accounting
• Money is fungible, but people put it
in separate “mental accounts”
• Lost movie tickets example
• “Found Money” problem
• Vacation fund & credit card debt
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Confirmation & Hindsight Bias
• We selectively seek information
that support pre-existing
theories, and ignore / dispute
information that disproves
them.
• We overestimate our ability to
predict the future based on the
“obviousness” of the past.
(example: real estate)
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Gambler’s Fallacy
• We see patterns in independent,
random chains of events
• We believe that, based on series of
previous events, an outcome is
more likely than odds actually
suggest
• Coin flip example
• It’s because with human behavior,
there are no “independent” events
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Herd Behavior
• We have a tendency to mimic the
actions of the larger group
• Crowd psychology is a major
contributor to bubbles (believed)
• Easier to be “wrong with everyone”
than “right and alone”
• No one gets fired for buying IBM?
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Overconfidence
• In one study, 74% of investment
managers believe they deliver
above average returns.
• Positively correlated with High
IQ...
• Learn humility early
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Overreaction & Availability Bias
• Overreact to recent events
• Overweight recent trends
• Studies demonstrate that checking
stock prices daily leads to more
trading and worse results on
average
• Worse in high tech, because we are
immersed in “game changers”
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14. Choice B:
You have a 100% chance of gaining
$500.
You have $1,000 and
you must pick one of
the following choices:
Choice A:
You have a 50% chance of gaining
$1,000, and a 50% chance of gaining $0.

15. Choice B:
You have a 100% chance of
losing $500.
Now, you have $2,000
and you must pick one
of the following choices:
Choice A:
You have a 50% chance of losing
$1,000, and a 50% chance of losing $0.

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Loss Aversion
(aka Prospect Theory)
• We hate losses more than we love
winning
• Average loss aversion is 3:1 (!)
• Affects views on wide range of
situations, including taxes, holding
on to losing stocks, “sunk cost”
mistakes
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17. It’s OK to not be rational.

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It’s OK to Not Be Rational
• The key is that humans are predictably irrational
• Know your own flaws, and you can set up systems to
account for them
• Self-awareness is key
(yes, my Mom is a psychologist...)
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Liquidity
• Almost universally undervalued
• Strictly defined - it’s the
quantification of how much money
you can get, and how fast.
• Liquidity is the power to take
advantage of great investment
opportunities
• Liquidity is also, in the end, the
only thing that matters when you
need to pay for something.
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Liquidity & Returns
• In almost all cases, liquidity is inversely
correlated with returns
• Examples:
- Cash = very liquid
- Private equity = very illiquid
• Common mistake: Safety != Liquidity
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Practical Outcome:
Emergency Funds
• Standard recommendation is that you
have 3-6 months of living expenses in
cash / cash-equivalents.
• That number increases if you are in
highly volatile industry / career.
• Worth considering length of time for
potential job search.
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Cash Flow
• The ultimate secret to personal finance is
quite simple:
- Spend less than you make
(on an ongoing basis)
• Very easy to measure, but few people do.
Annual budget is a great idea.
• Don’t forget to model in annual expenses
& “personal spending”
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Savings Targets
• What’s the right number? 3%? 6%?10%? 20%?
- There is no question - the more you save, the
more secure you are. Income comes & goes, but
expenses / lifestyle are sticky!
• A lot of models assume working 40 years, and
producing savings to generate 80% of working
income.
- These models don’t actually match anyone’s real
world experience.
- There are a lot of models out there, and rules of
thumb, but it’s important to run the numbers
yourself.
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The Magic of Compounding
• Not convinced that Albert Einstein said it was the
greatest force in the universe.
• It’s the key to almost all long term financial planning.
• Exponentials are bad in algorithmic cost, good in
savings returns.
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Simple Model
• Rule of 72
• In Excel, for each year, just use
=POWER(1+rate, year)
• 4% over 20 years is 2.19x
• 8% over 20 years is 4.66x
• Careful: it works on debt just as well as savings...
in reverse!
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The Benefits of An Early
Start
• Compounding really takes off over long time periods
Years Return at 8%
10 2.16x
20 4.66x
30 10.06x
40 21.72x
50 46.9x
In most retirement
planning models, money
saved between ages 25 -
35 produces more money
than all savings between
35 - 65!
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The Dangers of Debt
• Bankruptcy is literally when you can’t pay your debts.
You can’t go bankrupt if you don’t have debt.
• You will never find an investment that pays 8%
guaranteed, let alone 20%+
• You will find *tons* of credit offers out there that will
charge you that.
• “Bad” debt is toxic, your best return is to pay it off. But
emergency fund takes precedence.
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Good Investing is Boring
• No one wants to be average, but with investing, average
is actually well above average.
• You will beat most mutual funds, and a large majority of
your peers with simple, low-cost index funds.
• Asset allocation explains ~90% of the variance between
fund performance
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Basic Asset Allocation
• Different types of assets (stocks, bonds, etc) have
different volatility & return characteristics
• There is an efficient frontier of combinations that
can maximize return for a given volatility
• Complication: historical performance does not
predict future performance
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Simple Operating Model
• 2 hours of work per year.
• Pick an asset allocation that is appropriate for your
emotional character & time frame & goals.
• For each asset class, pick the cheapest index fund with
the lowest drift and best liquidity.
• Rebalance every year.
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Recommended Books
• WSJ Guide to Understanding Money & Investing
• The Millionaire Next Door
• A Random Walk Down Wall Street
• The Essays of Warren Buffett
• Common Stocks & Uncommon Profits
• The Intelligent Investor
• Devil Take the Hindmost
• When Genius Failed
• Against the Gods: The Remarkable Story of Risk
• http://blog.adamnash.com/2007/02/14/personal-finance-
education-series-2-recommended-books/
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Disclosure
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Text
Nothing in this presentation should be construed as a
solicitation or offer, or recommendation, to buy or sell any
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investors who become Wealthfront clients pursuant to a
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projections may not reflect actual future performance.
Investors should review Wealthfront’s website for additional
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