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Welcome to Personal Finance for long-term investors, where we believe Benjamin Franklin's advice that an
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investment in knowledge pays the best interest both in finances and in your life. Every episode teaches you personal
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finance and long-term investing in simple terms. Now, here's your host, Jesse Kramer. Hello, and welcome to
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Personal Finance for long-term investors, episode 128. I'm Jesse Kramer. By day, I work at a fiduciary
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wealth management firm helping clients nationwide. You can learn more at bestinterest.blog/work. blog back/work.
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[music] The link is in the show notes. And by night, I write the best interest blog. I
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host this podcast. I also put out a weekly email newsletter. All of which are free and all of which help busy
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professionals and retirees avoid mistakes and grow their wealth by simplifying their investing, their
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taxes, and their retirement planning. And we've got a fun episode today. I've
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compiled a list over time of some so-called dumb moves in financial planning. at least, you know, suboptimal
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moves in financial planning, but moves that personally I'm okay with or I have
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some rationale behind them where I I kind of see this thing and I say to myself, well, it's not nearly as bad as
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people say. And, you know, some of the stuff might make Dave Ramsey cringe. Some of the stuff won't be what a
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spreadsheet says is ideal. Heck, maybe some of this will make you unsubscribe from the podcast and unsubscribe from
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the newsletter and leave a nasty comment on the blog. Well, I really hope not, but at the very least, I think it'll
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make you think. Before we get into the juicy fun stuff, we'll do a quick review
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of the week. This one is from CP Prime 25 who left a five-star review and said, "Great personal finance show. Great
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informative show that covers all aspects of personal finance." Thank you, CP
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Prime, for that succinct and to the-point review. I'd be happy to send you a Supersoft podcast t-shirt. Drop me
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an email to [email protected] and I will get you hooked up with that supersoft t-shirt. And now without
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further ado, let's dive into the fun stuff, the controversial, the dumb, the
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suboptimal takes that I actually think are okay. The first one is having some small sandbox investing account, a side
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account of fun money, a cowboy account to take your personal bets. Going back to some of my original investing lessons
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from John Bogle himself, I've never seen an issue with someone taking 5% or 10%
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of their money. I will say I I draw the line personally at 5%. hopefully not much more than say 10%. But taking that
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small portion of their money, but still, you know, a pretty reasonable slice of the pie, setting that money to the side
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in some way, and then taking any number of potential investing bets under the sun with that money that they've set
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aside. I think one exception here that I'll point out before I go any further
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is taking on leverage or taking on short positions. You know, if you can lose more than the 5% or 10% that you're
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putting at risk, you're probably doing this wrong. But anyway, the point is that if you really need to scratch that
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particular investing itch because, I don't know, your brother-in-law gives you interesting stock tips. Well, I get
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it. You can go follow your brother-in-law's advice, but do it with 5% of your money. Then take the other
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95% of your investable assets and follow the triedand-true long-term investing principles with that money. If 95% of
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your money is doing the smart thing, the efficient thing, I'm pretty confident
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you will get to where you want to go over the long run. On paper, well, this is bad advice because let's be honest,
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most of us will do worse with the 5% play money than we will with the 95% smart money. Most of us will be hurting
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our overall returns, will be hurting our overall performance versus if we'd simply left the money alone. If we'd
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kept all 100% working in this smart, efficient way. If we're all a little more robotic, the numbers would probably
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look better on paper. But, as you will hear time and time again today, we're
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not robotic. We're humans. And if being that little investing cowboy on the side
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is enough to scratch your itch, I say giddy up. Personally, I've shared here
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on the podcast before that outside of my very typical long-term investing account, I own these tiny slivers of,
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say, Berkshire Hathway, an individual stock, right, Warren Buffett's company.
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I also own this tiny sliver of an ETF that holds Bitcoin and an ETF that holds Ethereum, another cryptocurrency. I'm
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scratching the itch a little bit there. I'm also in case of cryptocurrency buying a little bit of schmuck insurance
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so I don't feel too stupid in the long run if they perform well in some though
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those three positions the two cryptocurrency and the Bergkshire Hathway positions they make up barely
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more than 1% of my investable assets and less than 1% of uh our family overall net worth the crypto especially I
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believe has a real chance of losing significant value or going to zero and I'm okay with that risk the other 99% of
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my investable assets are all rowing in the right direction you could make I think you could make a legit argument
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that owning Bergkshire is basically like owning a a large mutual fund and actually one that has many many
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structural benefits to it. So the Bergkshire ownership is probably rowing in the same direction anyway too. If you
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have an interesting cowboy account story though, I'd love to hear it. But for
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now, we'll move on to the next topic today, which is deciding to prioritize paying off a lowinterest loan. typically
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in concert with some of your other goals. But still, the idea that you're going to prioritize paying off a low
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interest rate loan. A spreadsheet would tell you that paying off a low interest loan is dumb and inefficient. After all,
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why would you pay off that 5% mortgage when you can make 10% in the market? Or so the argument goes. Well, I really
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don't like that particular argument. So, I think this topic deserves a little bit
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of nuance. If we're going to make the what return could you get in the market
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argument, we need to be honest. It's a guaranteed loan, right? a guaranteed rate of return or a guaranteed interest
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rate on the loan versus an unknown return from the market. And I think that distinction really matters. Would you
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rather have a guaranteed 7% or an unknown risky return? Sure, that risky return, if we're talking about the US
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stock market, has historically averaged out to 10% per year over the last 100 years. I get that the math I I won't
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argue with it, but there's no guarantee it'll do so going forward, especially
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over any short or kind of midterm period of time. Of course, that argument has some gray area, too. What if it's a a
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guaranteed 4% from paying off the loan versus an unknown, risky maybe 10%. Well, that feels different than a
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guaranteed 7%, right? Paying off a 7% mortgage should feel different than paying off a 4% mortgage. And there's
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some gray area. There's some nuance here. For what it's worth, I personally
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feel very much different about paying off a 7% loan than I do paying off a a 4% loan. If your mortgage rate is lower
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than cash interest rates, okay, I really do think we've now kind of ventured away
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from the gray area into a black and white area. So, to be specific with some numbers, if you happen to be one of
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those lucky people out there who secured a 2.5% mortgage and right now, as I record this, cash is earning 3.5%. I
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really can't defend any sort of early loan payoff in your particular case. But
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let's look at a current day example, right? Mo right now, most high yield bank accounts are paying between 3.25 25
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and 3.5%. That's guaranteed interest rate on short-term reserves right now. And let's say you have a 4.5% mortgage.
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And meanwhile, just about every other asset class under the sun is up more than 4.5% over these past 12 months. So,
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are you a dummy for choosing to pay off your mortgage right now when it's only a
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4.5% interest rate? So, one way I like to answer this question, I'm not sure
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it's the perfect way to answer this question, but I would honestly ask you, how much sleep are you losing over your
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mortgage? Or another good question, how worried about you entering retirement in
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debt with that mortgage still on your balance sheet? In other words, how much better will you feel by taking more
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action against your mortgage? Here's another good question. How much worse would you feel if the stock market drops
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20%. In the next 12 months and if your stock investments dropped 20%. When you could have used those same exact dollars
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today to pay off your mortgage. Does that make sense? As I've explained it every single day, we all are doing
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something like that. We are all say for example choosing to keep tens of thousands hundreds of thousands of
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dollars in bank accounts or in a taxable brokerage account. Perhaps that taxable
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brokerage account is invested in the stock market. We are actively choosing to invest in stocks over paying off our
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mortgage. In my personal case I am choosing the unknown volatile risky 10% I hope from the stock market over the
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known 6.5% from paying off my mortgage. That's what my mortgage rate is 6.5%.
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So, what if over the next 12 months, those same stocks that I own today are down 20%. And I haven't paid off my
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mortgage at all. Well, I'm going to want to jump into a time machine back to
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today, before the 20% drop off in in the stocks, before the bare market, and I'm
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going to want to sell those stocks today and use that money to immediately pay down my mortgage and guarantee the 6.5%
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return. Right? So, the question is, how much worse would you feel in that case? Except your time machine, like my time
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machine, right? It's not working well and you're going to have to sit there 12
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months from now, I'll be there sitting in hindsight bias because of course you
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believe you made a good decision at the time you originally made it, but you're
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going to have to sit there second guessing yourself. Will you be okay with that feeling? Not everybody is. Now,
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personally, I think I'm okay with that feeling, right? I understand the probabilities and the odds well enough
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to know that yeah, sometimes you make this probabilistic bet in investing. The odds are in your favor, but the odds
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aren't 100%. And anytime it's it's just like gambling. Sometimes you make this
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probabilistic bet that you know if you continue making that smart bet time over time over time, eventually in the long
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run it'll average out in your favor, but on any given flip of a new card from the
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top of the deck, you might lose. And this trade-off is kind of the same way. So the point is that I'm okay with
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someone choosing to pay off lower interest debt instead of taking on a higher return investment risk. It's okay
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to strike a balance instead of optimizing your spreadsheet in this case. Okay, the next one on the list is
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leasing a car. Now, I've gone back and forth on leasing a car. In fact, I wrote
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an article about a year ago. Confession, I leased a car. I'll link to that in the
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show notes. And when I wrote it, I will say a few other people uh they reached out to me and they said, "Hey, Jesse, I
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think you're missing some points here." And I think they actually made good
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points. So, here's my one point that I still stand on when it comes to leasing
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a car. I'll say all else being equal, right? It's not really a smart financial
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move. It's hard to make a good argument for it. If if nothing else, it's kind of
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just a luxury move, right? Mo mo most of the time, I'll say it that way. Most of
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the time, it's just a luxury move. It's a flex where you get to say, "Yeah, I'm
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going to intentionally spend 10 to 20% more on my all-in car costs just so I can drive something that I really want
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to drive for a short period of time and then just change it up without any sort of hassle in in three or four or 5
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years, however long the lease is, 2 years, something like that." But there is one legitimate financial reason to
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lease a car, and it has to do with cash flow. It has to do with this fact that, you know, if I buy a car new today,
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let's say I buy a a $35,000 car, which unfortunately is kind of this roughly
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average car cost these days, and uh I get a four or 5% loan. I'm just kind of
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doing some math in my head here. So, let's say it's a 4-year loan. I've got
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48 months to pay off $35,000 plus some interest. It's probably going to be $800
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a month, if not a little more, in terms of my my my monthly car cost. I'm buying
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the car, right? I'll own it at the end of those 48 months outright, but meanwhile, my cash flow for the next
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four years, I'm out $800 plus dollars a month. That same car, if I leased it,
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would probably be around $400 a month or roughly half the cost. So, if you're in
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a particular position where you say, "Huh, at least over the short term, maybe because of some unknowns in my
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financial life, I'm not really in a position to commit $800 of monthly cash flow to a new car. I'd rather just
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commit $400 of that cash flow and then in three or four years have to make this decision starting from scratch." You're
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committing the $400 of cash flow. You're not really getting anything for that,
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right? at the you don't own the car at the end of the day. But at least when I
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look back at my decision to lease a car, I feel pretty good that that was the position I was in. And at least now 12
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months later, I feel pretty good that I still made the right decision that I didn't want to commit that higher amount
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of cash flow to car costs at that time. And I thought that really I would kind of grow into I was growing my cash flow
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enough that uh given two or three years of time, in my case it's a three-year
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lease, that I'll be able to make the decision fresh in 3 years and then I'll
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probably buy the long-term family car that we need at that point. So anyway, even leasing a car, which I think, you
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know, in terms of black and white and gray issues, it's pretty black and white, but there's just that little
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smidge of gray that I think is worth understanding. And uh a lot of issues in financial planning have that little
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smidge of gray. Here's a quick ad and then we'll get back to the show. Every
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January, we make the same promises. Eat better, work out, read more books, and of course, something about money. You
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know, this year is the year I finally get my retirement plan organized. Personal financial planning is one of
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the most common resolutions out there. So, if 2026 is a year you want real clarity, serious financial planning, a
00:12:50
full review of your complex financial picture, or just someone to help you make good decisions with confidence, I'm
00:12:55
currently accepting new clients. You can head to bestinterest.blog/work and fill out the short form. Let's make
00:13:01
better finances the resolution that actually sticks this year. Going on to the next issue, holding some extra cash.
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How big should your emergency fund be? You'll get answers that vary far and wide, but usually it's measured in
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months. three months of spending, 6 months of spending, 12 months of spending, something like that. Some
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people say it's enough to cover your largest insurance deductibles. That's
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how much cash you should hold. Well, what about someone entering retirement? There's a much wider spectrum of cash
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allocation recommendations here. And the recommendations overlap with portfolio recommendations in a lot of ways. So,
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for example, there's some reasonably well-known retirement portfolios that consist of a few years of cash, usually
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3, four, 5 years of cash, and then everything else in stocks. The idea is that the cash provides a serious buffer
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should any serious uh stock bare market occur. But what if you're listening right now and the idea of a six-month
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emergency fund doesn't make you feel good? Or what if you want more than 5 years of cash to start your retirement?
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5 years worth just doesn't feel like enough. Or perhaps more simply, what if
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you know you're already on a good path for a successful financial life and now
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you're just asking yourself what to do with your kind of marginal additional
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dollars? Do you take risk with those additional dollars or do you just build a larger safe foundation? Point being,
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there are many different reasons to hold on to cash. Some of those reasons have the serious objective rationale to them.
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For example, the more I learn about sequence of returns risk, the more appealing it is to me to have at least 6
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years of low volatility assets to start retirement. That might be cash, that might be US Treasury bonds with a proper
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duration to match up with those six years. But either way, I can see the reason for having more than 5 years
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worth of really safe, low volatility assets to start retirement. But then some of the cash reasons are very
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subjective. If you've already won the game and you have another year worth of
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cash burning a hole in your pocket, does it make you feel better just to keep it
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as cash? I won't argue with that feeling, especially if you're in a position where you've already won the
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game. Now, the spreadsheet, of course, is never going to tell you to keep any extra cash on hand. Why? Because, well,
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we input those rates of returns into our spreadsheet. And if you input 3% for cash right now and then you input 9% for
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stocks or 7% for a moderate portfolio, the spreadsheet is going to very very clearly tell you exactly how much cash
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you need to have on hand. So this really is a subjective one. It's not black and
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white. There's a lot of gray here too. The next one, a a very interesting topic
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that certainly came to the four here in uh in 2025, last year in 2025. And this topic is using a correction or using a
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bare market, maybe even using a crash to change your asset allocation. It's a
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really interesting one. There's a lot of nuance here. So, let me see if I can
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explain it. Well, let's say it's 2014. You realize you're behind on your
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retirement planning. You discover the online personal finance world, the FIRE movement, the bogal heads, the idea of
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lowcost diversified passive investing, the whole nine yards. And within a month, you've tightened the belt. You've
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opened up a couple new investment accounts and you're dollar cost averaging into say VO, the S&P 500 index
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fund. And then over the next six years, you watch your assets grow for the most part. 2018, maybe your investments
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dropped a little bit in the fourth quarter. Now, that's not ideal, you think, but that's the life of a stock
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investor, at least according to what you're reading online. That 9% drop that
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happened in the fourth quarter of 2018, well, that's that's normal, right? That
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stuff can happen. And anyway, by April of 2019, you're you're back to an
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all-time high. And by early 2020, your earliest investments from 2014, they've
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almost doubled in just six years. And since you've been dollar cost averaging,
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well, not every dollar of yours has doubled. Sure, your your more recent contributions haven't grown that much
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yet, but still, you feel like you're in a great place and and you're you're
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starting to feel more on track, right? You felt behind in your retirement planning in 2014, and now just 6 years
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later, you you see the light and you know you're on track. But then in March
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2020, you log in every single day to see your portfolio drop and drop and drop. In fact, on March 23rd, 2020, the low
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point of the COVID crash, you would have logged into your account to realize that
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every single dollar of gains from the past 6 years of investing was gone. Well, to be slightly more accurate, the
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total account returns summing up for six years of investing in one of the greatest bull markets ever on that day
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in March 2020, the 6-year total return was below 1%. Not 1% per year, less than 1% total. I think it's hard for me to
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explain what that must have felt like here over a podcast, right? We only get to relive the past through some memory
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or by looking backward at charts. But the world was shutting down, right? Everyone was worried. Life as we knew it
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was taking a 90 return and your retirement dreams, which for six years had seemed so hopeful, all of a sudden
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you're literally back at square one. The money wasn't gone, but your returns were
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basically zero. It's like you had been dollar cost averaging under your mattress the entire time. Like
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literally, it's the the amount of money that you put in over 6 years was essentially the same as the amount of
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money you had on that day in March, just like you'd been hiding it under your
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mattress. So, you might ask yourself, is this investing? Right? You invest for years and years and years and then poof,
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all of your returns disappear literally in three short weeks. So for many investors, COVID was the first big one
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that they suffered through. For other investors, the great financial crisis was the big one or the dot bubble or or
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maybe even Black Monday. Shout out to any of you investing back in uh 1987. The point is that these kind of events
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can rattle the most stoic bogalhead type investors. It begs a really hard question. Am I really actually
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comfortable with 100% of my investable assets exposed to the stock market or 90% or 80% or whatever your allocation
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is? So now going back to where I started this whole uh story about making changes
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to your portfolio in the middle of a bare market or because of a bare market or because of a crash. So what I don't
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think is appropriate is someone making this rash complete overhaul of their portfolio literally in the middle of a
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crash or a bare market. I wrote about this topic extensively in in April 2025 in the middle of the tariff tantrum. But
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what I do think is okay is to make some sort of slow, steady, tempered, low emotion plan to eventually shift your
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portfolio away from high-risisk exposure. It's not that you're selling out of fear during the worst of times,
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but it's that the worst of times, which again don't happen that often. It's that
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the worst of times made you realize what your true willingness for risk is. You thought your willingness for risk was
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one thing and then this really bad time in the market made you realize like, oh,
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my willingness for risk is actually much less than I once assumed. Everyone has that plan until they get punched in the
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face as Mike Tyson says, right? These terrible times in the market when they happen, they can punch us in the face
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and suddenly we realize, hm, I think I might want that mouthguard after all. Okay, the next topic is taking social
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security ASAP. Now the more you dig into the details of a comprehensive financial
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plan, the more you realize a couple different important truths. The first one is that social security itself is an
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important pillar for many most retirements even. So even those retirements for say high net worth
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retirees, people who from the outside you might think don't really need social
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security, it's still a very important pillar of their retirement plans. But then the second thing you realize is
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that the specific timing of social security claiming is this negotiation between math on a spreadsheet and the
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feelings of security, no pun intended, of the retiree. Meaning, you know, Bob is going to retire this spring at age
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64. Everything about Bob's financial plan points to him delaying his social security until at least his full
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retirement age of 67, if not the upper limit of 70. That's how his retirement
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plan has the greatest probability of success. But Bob just can't get over the
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idea of no longer having a paycheck. It's going to be a huge change for him.
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It's this mental hurdle that he just cannot step over. And no matter what the
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spreadsheets say, Bob decides to apply for social security right away as soon as he leaves his job so that he can
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maintain this kind of mental accounting of a paycheck coming in every month. And
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the question is, did Bob just totally ruin his retirement? The answer is probably not. Without diving into every
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single detail of Bob's story, most retirees can afford some wiggle room in their social security claiming timing.
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There are some cases where a retirees plan might be right on the cusp of success. And in that case, any number of
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of dozens of different risks could push them over into the risky, limited, threatened retirement. And sure, in
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those cases, social security timing is one of many factors that these retirees need to do their best to get right. they
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need to ignore their feelings and follow what the math suggests. But in most cases, you know, if we talk in terms of
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say Monte Carlo analysis, solid retirement planning tool, if you know what you're doing, you might see a
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retiree with a so-called, I don't know, 85% chance of success, which is good.
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And then if that same retiree decides to do something suboptimal with their social security, their chance of success
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will often drop, but by 1% or 2% or maybe 3%. Now, the details are certainly important here, but having done this a
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bunch, that's usually what you see. So, if taking Social Security three years
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earlier than optimal means you get to sleep better at night for those three years, but it also means your chance of
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retirement success drops from 85% down to 83%. Well, I'm going to be okay with
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that. Okay, on to the next one. Uh, the next one I have here is intentionally owning your company stock as a point of
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pride, as an incentive to work harder, as having skin in the game, putting your money where your mouth is, whatever,
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whatever it may be. This is very much related to the sandbox idea I talked about before. If you work for Microsoft
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and you want a little bit of extra Microsoft in your portfolio, again, as that point of pride, so you can eat your
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own cooking, so you can kind of put your money where your mouth is, I'm okay with
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that. Again, it's all about determining the right size of this extra bet uh in
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your own company stock. I will say there's an extra risk here because the place where you're getting your income
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from, right? All your future human capital is invested in that company and now you're going to put some of your
00:22:58
investment capital into that company, too. So, there's a little bit of extra
00:23:02
risk, but I'd lean back to the sandbox rule and I draw the line at 5% of your
00:23:05
portfolio. So, when someone comes to me with 40% of their portfolio in their own
00:23:10
company stock, I don't really like that. But if you have 95% of your money invested in a smart, logical,
00:23:15
fundamental, long-term manner and then 5% of your money in your own personal company, I'm fine with that trade-off.
00:23:21
It's not that I believe your portfolio will be better off for it because I don't. But instead, I think that you
00:23:26
will be better off for it if you tell me that's what you want to do, and the
00:23:29
portfolio damage that you might be doing along the way won't be that severe. The
00:23:33
next one is choosing to put money into a taxable brokerage account before you max
00:23:37
out your qualified retirement accounts. Over the long run, any qualified account
00:23:42
where you get a big tax advantage up front or you get a big tax advantage upon distribution and you also get
00:23:47
tax-free growth along the way, any one of those qualified accounts is going to outperform a taxable brokerage account.
00:23:54
The one exception though, which I'll link to in the show notes, is when uh if
00:23:57
your workplace retirement account, like a 401k, has such high fees that the fee drag is actually worse. FEe drag is
00:24:04
actually worse than the maybe matching money that they give you. It can happen. It's pretty rare. As an example, if your
00:24:09
401k has an overall fee of 1% per year, which is pretty high for 401ks these days, and your 401k matching percentage
00:24:16
is only 25%, then you'd likely be better off skipping the 401k in the first place
00:24:20
and just putting your money in a taxable brokerage account. Anyway, that is the exception, not the rule. And I'm
00:24:24
digressing a little bit because what I'm talking about here are people who have
00:24:28
access to good 401k accounts. They have access to a Roth IRA. They have access maybe to an HSA account. And yes, they
00:24:34
do use those accounts, but they also use a taxable brokerage account. And in some
00:24:38
cases, they're choosing to contribute to that taxable brokerage account before
00:24:43
maxing out all of their qualified accounts. They don't squeeze all the juice out of their qualified
00:24:47
opportunities. And some people see that as a really big problem. But when done for the right reasons, I don't really
00:24:53
see any problem at all. So what are those right reasons, you may ask? Well, taxable brokerage accounts provide time
00:24:58
flexibility. You know, there are no hard and fast rules about when you can withdraw that money, how much of that
00:25:03
money you're allowed to withdraw in a month, in a year, or anything like that.
00:25:07
Taxable brokerage accounts also provide withdrawal flexibility via the combination of withdrawing basis, which
00:25:12
is not taxed at all. That's just the money you contributed in the first place. You can also withdraw capital
00:25:16
gains, which are taxed at preferential to capital gains rates. you know, more preferential than say income tax rates
00:25:22
which might affect IAS or 401k accounts. Those withdrawals for many sound retirement plans which again may last 20
00:25:29
or 30 or 40 years, those retirement plans may see drastic shifts in tax regime and tax landscape over time. The
00:25:37
idea of having a three-legged tax stool for flexibility, that's simply a smart
00:25:41
idea. And again, those three legs, you have some dollars in pre-tax traditional accounts. So those are accounts that
00:25:47
will be taxed as income eventually upon withdrawal. You have some dollars in tax-free Roth accounts. They're never
00:25:53
going to be taxed in any way ever again. And then you have some dollars in a taxable brokerage account. You can
00:25:58
withdraw it at any time for any reason. The basis won't get taxed. The capital
00:26:02
gains will get taxed at a capital gains tax rate. But all of a sudden you have these this flexibility. You have these
00:26:07
tools that you can kind of give and take and eb and flow with. And depending on the given tax regime during that period
00:26:14
of retirement, depending on your lifestyle needs during that period of retirement, you have these different
00:26:18
levers to pull. In fact, there's some pretty smart people out there who talk
00:26:21
about their regret for overfunding qualified accounts earlier in life. I know Nick Mulli has a story that he
00:26:26
leans on a lot about maxing out his 401k throughout his 20s only to realize in his 30s that his most pressing financial
00:26:32
need was a down payment on a house, but all of his potential liquidity was locked up in his 401k. And sure, it's
00:26:38
it's nice to have that money when you're retired in your 50s and 60s, but Nick
00:26:42
needed more money right now, and his decisions in his 20s prevented that from happening. So, I'm certainly not saying
00:26:48
stop your 401k, stop your Roth contributions, put it all in taxable account. I think that's a bad idea. But
00:26:53
I am saying feel free to make measured contributions across many different investment accounts with all different
00:26:59
tax treatments because it's unlikely you'll regret providing yourself with
00:27:03
that flexibility when the future comes. Here's a quick ad and then we'll get
00:27:07
back to the show. I send a free weekly email to thousands of readers that shares two simple things, just two. The
00:27:12
first are my new articles and podcast so you'll never miss when I publish new
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content. And the second is my favorite financial content from other corners of the internet so you can see what's been
00:27:21
helping me the most. But Jesse, I don't want another email. >> I hear you. I make this newsletter
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00:27:46
That's right, a free weekly email that thousands of people like you are already
00:27:49
reading, a free white paper to help you plan for retirement, and you can sign up
00:27:53
for free at bestinterest.blog. The next one here is using an HSA early to actually pay for run-of-the-mill
00:28:01
medical expenses. Back in episode 124, I went pretty deep on HSA accounts, including the ideal way to contribute to
00:28:07
them, to let them grow, and eventually the way to use them to reimburse old medical expenses. In short, the ideal
00:28:14
method means that you do not pay for any medical bills early in your life with an
00:28:18
HSA. Instead, you save all those receipts, you log all your medical expenses, say in a spreadsheet, you
00:28:24
invest your HSA dollars, and you allow them to grow tax-free for years and years. And only later in life, after
00:28:30
years of taxfree growth, do you then decide to reimburse your old medical expenses and all those reimbursements
00:28:36
and distributions, they're all taxree. The money went in taxree, it grew taxree, it's distributed taxree. So that
00:28:42
triple tax advantage is pretty unique to HSA accounts. And that long-term reimbursement strategy I just outlined,
00:28:48
it allows you to maximize that triple tax advantage to the utmost. And again, that's what a spreadsheet would tell you
00:28:54
to do. But you know what? Sometimes you've got a busy household with three kids who are catching the flu and
00:28:59
twisting their ankles. And then you have a weird rash that requires a series of dermatology appointments. And your
00:29:04
spouse is having a hormonal imbalance that requires a visit to the endocrinologist. And the next thing you
00:29:09
know, you've spent $7,000 on your deductibles this year. and you really didn't have $7,000 out of pocket lined
00:29:15
up. Suddenly, your emergency fund is a little slimmer than it's been in years,
00:29:18
and it gets worse and worse and worse, whatever. But the point is that to me, that seems like a perfect time to say,
00:29:23
"Well, wait a second. We've got $40,000 saved up in our HSA from years and years
00:29:27
of diligent saving." And spending 7,000 of that 40,000 would all make us feel a
00:29:32
lot better right now. I know the spreadsheet tells you not to, but to me, that kind of use just feels like good
00:29:39
common financial sense. And I'm a big proponent of using your HSA early to pay
00:29:44
for run-of-the-mill medical expenses if it's going to make the rest of your current financial life that little bit
00:29:49
easier and less stressful. The next controversial topic that I don't think is that big of a deal is renting even
00:29:55
when you could afford to buy the house. Now, the rent versus buy debate is something that I believe will never ever
00:30:01
die. And that's okay. As much as I love diving into numbers, that's not a debate
00:30:05
I'm particularly interested in diving into. I think the problem is that every
00:30:08
time I've ever seen it done, the numbers either feel obviously incomplete or so
00:30:14
unbelievably nuanced that it's hard to understand and just hard to argue with.
00:30:18
Uh so anyway, not going to get into that. I do like some of the rules of thumb. You know, this ratio of your home
00:30:23
payment versus an equivalent rent divided by the interest rate, blah blah blah. Okay, cool stuff. And I think if I
00:30:28
was either in the market for a house or an apartment or if I was a residential landlord, I'd probably be much more
00:30:33
interested in this topic. By the way, episode 101 of this podcast is a good one if you're asking yourself, you know,
00:30:40
should a retiree, should a long-term investor own residential real estate as an investment. But anyway, I just want
00:30:45
to focus on this particular topic, rent versus buy and whether one is better than the other or, you know, really
00:30:51
whether one is um financially better than the other. Can you save money by renting? Do you save money by buying?
00:30:57
And I jokingly just lean on something that I call Jesse's theory of rent versus buy, equilibrium, and efficiency.
00:31:03
I know that's a mouthful. We're just going to focus on the words equilibrium
00:31:06
and efficiency right there. In economics, this equilibrium point is this nice resting place in a market. A
00:31:12
resting place between price and quantity, a resting place between buyers and sellers. Everything is nicely in
00:31:17
sync. You know, supply tells us how much producers want to sell at a given price.
00:31:22
Demand tells us how much consumers want to buy at a given price. And if you plot
00:31:27
those two lines of supply and demand, you will find a point where they intersect. That's the equilibrium point.
00:31:32
And at that point, at that price, the quantity supplied equals the quantity demanded. There's no natural pressure
00:31:39
for the price to move up or down. And the market has essentially a clear view on that product. So that's equilibrium.
00:31:45
Now, the second term I mentioned before, efficiency. You might be familiar with that term efficient. Efficient markets
00:31:50
from the stock market as in the efficient market hypothesis. An efficient market is one where the prices
00:31:56
do a really good job of telling the truth. And I I use that word a little bit cautiously. It's not that the market
00:32:01
is guaranteed to be right. It's not that the market is predicting the future with
00:32:05
certainty. It's basically that it's the best estimate we have given the information available right now. The
00:32:11
market has efficiently processed all the information to give us the best estimate
00:32:15
for value we have given that information. In an efficient market, prices quickly reflect any new
00:32:21
information that's provided. In an efficient market, thousands or even millions of buyers and sellers are all
00:32:26
competing for that specific product or good in question. If something is obviously mispriced, smart people will
00:32:33
rush in to profit from that mispricing. But in doing so, their demand will move the price in the opposite direction and
00:32:40
will actually eliminate the mispricing. Just in case that doesn't quite make
00:32:44
sense, you know, if there was this one gas station in town, maybe they just put up the wrong number. They're selling gas
00:32:49
for a dollar a gallon and everything else is at $3 a gallon. Well, everyone's
00:32:54
going to go to the gas station that's selling at $1 a gallon. And pretty soon
00:32:57
they're going to realize, huh, something is going on here. Why is there all this
00:33:00
demand for our gas? Oh, well, we actually just made a mistake, right? It was one, we ought to mark it up now to
00:33:07
three. But even if it was just say uh a little bit cheaper. At anytime a product
00:33:11
is mispriced in that way, the people who are flocking, who are sending their demand toward that product are going to
00:33:17
naturally push the price up. That's what demand does. You can kind of see that
00:33:21
these ideas of efficient markets and economic equilibrium points are somewhat related. Now, let's go back and think
00:33:27
about housing markets and renting markets. We can think about them nationally if we want, or we can think
00:33:31
about them in your little corner of the world. Are there thousands if not millions of people who live in homes,
00:33:37
who buy or sell homes, who rent apartments, or choose to rent out their space to another tenant? Yes, there are
00:33:42
millions of people who do that. And if the underlying financial data was so overwhelmingly clear that buying was
00:33:49
better than renting or that renting was better than buying, what would these thousands or millions of people do?
00:33:54
Well, they would flock to the better choice. And in doing so, their demand for that better choice or their lack of
00:33:59
demand for the worse choice would do what? Well, it would drive the price of the better choice up and it would drive
00:34:05
the price of the worst choice down such that the overwhelmingly clear better option would actually kind of muddy up.
00:34:11
It would become gray, not so overwhelmingly clear anymore. So again, efficient markets naturally eliminate
00:34:17
any mispricing. So I would argue that on any given day, week, month, or year, I'm
00:34:22
sure there are local markets in America where renting seems clearly better than buying and vice versa. And that might be
00:34:28
true, but I do not think it is likely to be some sort of permanent rule of economics. I don't think it can be. If
00:34:33
it was that way, if it was so overwhelmingly obvious at all times, efficient consumers would eliminate that
00:34:39
mispricing. Therefore, my conclusion via, you know, kind of amateur economic theory alone, not even diving into the
00:34:45
numbers is that renting and buying must be similar enough so as to not be worth losing that much sleep over. That's my
00:34:51
theory. And my last topic today has to do with what I call true lazy investing. And I I I'm going to bury the lead a
00:34:58
little bit. I won't tell you exactly what I think about true lazy investing quite yet. What do I mean by true lazy
00:35:04
investing? I think that lazy investing in its laziest form involves the following. Your investments are all
00:35:10
index funds. It involves a very small minimum number of different funds. I think three is probably the maximum, but
00:35:16
lazy investing can totally be done with just one fund. It involves the same asset allocation in every single
00:35:22
account. Or put another way, really no concern about asset location. No such thing as putting tax inefficient bonds
00:35:30
inside of a qualified account. No such thing as putting tax efficient stocks in a taxable account. All of your accounts
00:35:35
just have the same exact asset allocation. Certainly no tilts, no small cap tilt, no value tilt, no momentum.
00:35:41
Certainly nothing more exotic. No single stocks, no individual bonds, no alts, no
00:35:45
real estate, no gold. You rebalance probably once a year around the same time you take your your one set of
00:35:51
withdrawals again once a year assuming you're in retirement. That's what I
00:35:55
think of as lazy investing. Maybe there are a couple attributes of lazy investing I'm leaving out, but pretty
00:35:59
much that's it. Super simple, hands off. Everything just looks the same. You're
00:36:04
not really touching it. You go in once a year, you rebalance, you pull some money
00:36:07
out. That's it. If you want to invest this way, I believe two things. First, I
00:36:12
think you're leaving a little bit of money on the table. I think there's some
00:36:14
more juice that you could squeeze out of this approach really without that much extra effort. But, and this is probably
00:36:21
the more important part, but I also recognize how great this approach actually is, how close this approach is
00:36:27
to what I might call the final product. And I don't want to make perfect the
00:36:31
enemy of good enough. That lazy approach, believe it or not, is good enough. I was thinking of some funny
00:36:37
analogies here, and the one that comes to mind is from the world of golf. Uh, not that I'm an expert golfer or
00:36:42
anything, but I admire the skill that it takes. And there's a a story about from
00:36:46
Tiger Woods career. Maybe some of you are already familiar with it. You know where I'm going. He was Tiger Woods was
00:36:51
the most dominant golfer the world of golf had ever seen. But in his pursuit for what he thought was perfection,
00:36:57
Tiger worked with a couple different swing coaches in the late 2000s, which he's already like one of the best
00:37:01
golfers of all time by the late 2000s. He's already the most dominant golfer of
00:37:04
all time. Like he he'd reached the top. And yet he went to work with a couple
00:37:08
different swing coaches to make his swing even better, even more consistent, even more perfect. But to all outside
00:37:15
observers, whether Tiger swing actually like looked more aesthetically pleasing or not, the shots he was hitting
00:37:22
certainly were not better. Virtually everyone agrees that his heavy tinkering with expert coaches made his swing
00:37:28
worse, made him a worse golfer. And if we go back to the world of investing and we think about this spectrum and on one
00:37:34
end of the spectrum we have a portfolio that's so simple it's actually bad and
00:37:39
then on the other end we have a portfolio that's so complex that it's bad. Way more investors live on the
00:37:44
complex side of that spectrum. And it's way easier to find yourself moving toward so complex it's bad than it is to
00:37:51
find yourself moving towards so simple it's bad. You know, if you're 59 years
00:37:55
old, you're retiring next year, and 100% of your money is invested in the S&P
00:37:59
500. That's very simple. I also believe that's not the right portfolio for like
00:38:04
99% of 59year-olds who are retiring next year. So, yes, I do think it's possible
00:38:09
to be so simple it's bad. But let's say that same 59year-old came to me and
00:38:13
said, "You know, Jesse, I sold 25% of my index fund and I decided to keep it all
00:38:17
as cash as a 5-year cash buffer. So now I have 5 years of cash plus the other 75% in the S&P 500. 75 stocks, 25% cash.
00:38:26
Well, that's still a very, very simple portfolio. And if it were me, yeah, I'd
00:38:30
make a couple important tweaks for sure. But I would bet that super simple 25% cash, 75% stock portfolio actually is
00:38:38
going to work just fine for that retiree. It's not ideal. I don't think it's perfect, but it's just fine. And I
00:38:43
only [snorts] share that example to explain how simple you can get without getting yourself into any sort of real
00:38:48
trouble. Whereas on the complex side of things, it feels like there are infinite
00:38:52
ways to build bad complex portfolios. And I know that because when I'm reviewing someone else's portfolio and
00:38:58
if I see significant problems with it, 98% of the time, if not more, the problems I'm seeing are due to
00:39:05
complexity badness, not due to simplicity badness. So, back to my point. While the laziest of lazy
00:39:11
investing isn't perfect, it's also certainly not bad enough to tear apart
00:39:14
or to call for a red alert. So anyway, that's it for lazy investing. And I'm
00:39:19
sure this this list, this podcast episode could go on and on. There are no shortage of, you know, debatable,
00:39:23
controversial, outright dumb moves in personal finance. And perhaps the moves that make the the talking heads can
00:39:29
argue with or that spreadsheet warriors would debate about hundredth of a percentage point. But to me, I guess my
00:39:35
overarching thought is some issues are black and white, but plenty of issues are gray. And I think one skill that's
00:39:40
hard to develop and and probably impossible to perfect is determining what's different between these true
00:39:46
black issues, the true white issues, the the really really dark gray issues, so that it's basically black but maybe not
00:39:51
quite there versus the actual kind of middleof the road gray issues. And then what are the underlying factors that
00:39:58
make these issues that way? To me, the the only thing that I found helpful in this cause is intentional and continuous
00:40:04
learning. Now, in you know, some of you know, you you receive my weekly newsletter, and you'll see that I send
00:40:08
out, yeah, my new article and my new episode, but I also send out my favorite three things that I've read or watched
00:40:14
or listened to that week from the online financial planning world. And I'm not
00:40:18
joking around there. I'm consuming a lot of really interesting ideas from the
00:40:22
world of financial planning and investment management. Over time, those ideas slowly start to shade these
00:40:28
various subtopics. a little bit more black here, a little bit more white here, or yeah, definitely gray over
00:40:33
there. And so, I really do think if you want to start to maybe develop some of your own black, white, and gray radar,
00:40:40
an investment in knowledge pays the best interest. Thank you for listening. Thanks for tuning in to this episode of
00:40:45
Personal Finance for Long-Term Investors. If you have a question for Jesse to answer on a future episode,
00:40:51
send him an email over at his blog, The Best Interest. His email address is [email protected].
00:40:58
Again, that's [email protected]. Did you enjoy the show? Subscribe, rate,
00:41:04
and review the podcast wherever you listen. This helps others find the show and invest in knowledge themselves, and
00:41:11
we really appreciate it. We'll catch you on the next episode of Personal Finance
00:41:15
for long-term investors. Personal Finance for Long-Term Investors is a personal podcast meant for education and
00:41:21
entertainment. It should not be taken as financial advice and it's not prescriptive of your financial
00:41:26
situation.