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Welcome to personal finance for
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long-term investors, where we believe
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Benjamin Franklin's advice that an
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investment in knowledge pays the best
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interest both in finances and in your
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life. Every episode teaches you personal
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finance and long-term investing in
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simple terms. Now, here's your host,
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Jesse Kramer. Hello and welcome to
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Personal Finance for Long-Term
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Investors, episode 115. I'm Jesse
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Kramer. By day, I work at a fiduciary
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wealth management firm helping clients
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nationwide. You can learn more at
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bestinterest.blog. back/work link is in
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the show notes. And by night, I write
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the best interest blog and I host this
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podcast. I put out a weekly newsletter.
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All of which help busy professionals and
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retirees avoid mistakes, grow their
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wealth by simplifying their investing,
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their taxes, and their retirement
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planning. And today is going to be a
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fun, somewhat cathartic episode of me
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pointing out some of the the common
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problems, the common hiccups, some
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common frustrations that I observe with
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other financial professionals, with DIY
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investors, DIY planners, other content
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creators. And I'm not recording this
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episode for my own therapeutic purposes,
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although that'll be a nice side effect.
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Instead, my hope is that by highlighting
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some of these negatives, you all will be
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able to uh pull a Charlie Munger, as it
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were, and invert. Always invert. And if
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you choose to avoid the negatives, if
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you invert on those negatives, you will
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by definition be more positive. So
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anyway, that's the goal. But first,
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let's do a review of the week. This one
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is from Scott Anderson.
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>> Mr. Anderson,
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>> clear, engaging, educational, five
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stars. I came across this podcast at the
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recommendation from talking real money
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and I am so glad I checked it out. The
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clear and practical approach from an
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engineering type perspective really
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resonates with me. The ability to chart
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out your own success and plan and excel
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is something that really excites me and
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it's something I've taken steps to do. I
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really feel more empowered to my own
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retirement instead of more of a spray
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and prey method that I've seen with
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friends and colleagues. Thanks for
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putting on such a great show. Well,
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Scott Anderson, thank you so much for
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the kind words and the fivestar review.
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Feel free to shoot me an email to
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and I'll get you hooked up with a uh
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supersoft t-shirt. Okay, let's go
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through some fun, some interesting, some
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often negative common tropes, common
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mistakes, common hiccups that I see in
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this world of financial planning. just
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stuff that I will maybe run into time
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after time via Reddit posts or time
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after time on the DIY Facebook groups or
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just emails, repeated emails that I'll
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get from listeners that are just earnest
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and honest emails that I totally
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understand where they're coming from,
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but yet are are full of mistakes that I
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hope we all can avoid. So, this first
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one is is kind of the screw taxes and
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screw them in one fell swoop approach.
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Now, what do I mean by that? A lot of
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people, we approach the world in a a
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kind of rip off the band-aid type
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approach. And I put myself in this
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category. You know, is there is there a
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hard conversation that I need to have?
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Just have the conversation. Am I am I
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dreading a workout? Well, well, screw
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it. I'm going to lace up the shoes and
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I'm just going to get to work and it's
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going to stink at least for the first
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few minutes, but eventually I'll get
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used to it. Just dive in. But that same
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approach does not always apply to smart
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retirement planning, to smart financial
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planning. And here's the perfect
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example. a listener of the podcast,
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Roger, he wrote to me. He and his wife
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are in their early 70s. They have
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pensions. They have social security,
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summing up to about $150,000 a year of
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fixed income. They also have $4 million
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of pre-tax assets. So that's like
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pre-tax IRA, pre-tax 401k assets. And
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over the next few years, as they age
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into their RMD years, they'll eventually
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have $200,000 of RMDs kicking in. it'll
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only go higher in the future. Bringing
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their baseline income to that 150 that
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was pension and social security plus 200
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of RMDs, they'll have a baseline income
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of $350,000.
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Roger's worried about the taxes that
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come with those RMDs. He's worried about
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Irma, all that kind of good retirement
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stuff that we've talked about here
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before. And Roger's instinct is to to
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bite the bullet and convert all $4
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million of his tax deferred accounts to
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Roth accounts. And to do that mass
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conversion here in 2025, he'll pay about
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$1.4 million in taxes if he does that.
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And he'll use a combination of his
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taxable savings, of his uh Roth dollars,
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and of his taxable brokerage account,
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which will realize capital gains. And
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that will generate its own tax of about
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$250,000 more dollars. So, he's going to
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use bank savings, taxable brokerage
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account, and Roth dollars to pay the
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approximately $1.65 $65 million tax bill
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that he'll incur here in 2025. But then
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going forward, Roger's going to be 100%
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Roth. He'll have no more RMDs. He'll
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eventually, because there's a 2-year
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delay with Irma, if you're not aware,
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eventually he'll have no more Irma,
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he'll really have no more extra taxes
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once we're a couple years down the line
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from this decision. And this is not the
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first time I've been asked about this
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exact strategy. Just taxes in retirement
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are intimidating. Taxes in retirement
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are scary. So, I'm just going to rip the
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band-aid off, pay every cent of tax that
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I'll ever have to pay, convert
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everything I have into Roth dollars, and
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then I'll never worry about taxes again.
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But the short response to to Roger's
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idea is that I highly highly recommend
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you do not pursue this kind of path, at
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least especially for Roger because of
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his specific case. But just in general,
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as a general rule of thumb, doing this
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is almost never the right path. Now, in
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Roger's case, he's going to be realizing
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$3.3 million of of the $4 million that
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he and his wife convert. They're going
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to be realizing $3.3 million of those
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dollars at the 37% federal tax bracket
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when simply they don't need to do that.
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As Roger pointed out in his question, uh
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right now, based on his income, his
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pension and social security income, he
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and his wife are actually in the 22% tax
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bracket. Once RMDs kick in, they will
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definitely move up into the 24% tax
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bracket. And then for Irma, if Irma
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affects you, the the rule of thumb that
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I keep in mind as just this um kind of
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this way to like gate how big Irma is,
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Irma is almost always going to be less
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than 1% of your annual income. Meaning,
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okay, if you earn in retirement, like
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Roger and his and his wife eventually
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will, they'll be earning $350,000
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uh of income between the pension, social
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security, and RMDs. Irma, the Irma tax
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is going to be less than 1% of that, is
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going to be less than 3,500 bucks per
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year. So Roger's plan, as he's kind of
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outlining it to me, is that he's going
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to trade his 22 or 24% tax rates right
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now, plus 1% for Irma, right? Maybe 23
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or 25% federal taxes, the marginal,
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right? That's the marginal tax rate in
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exchange for 37% marginal tax rates. I
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simply do not like that math whatsoever.
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Part of Roger's plan is also to use the
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$400,000 he currently has in Roth
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accounts to cover his tax bill. And
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that's almost never something we want to
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do, right? Roth dollars once a dollar
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has kind of entered our Roth account,
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it's essentially one of the most
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precious dollars in our financial
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ecosystem, in our financial plan,
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because you never have to pay taxes on
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it again. So to withdraw all those Roth
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dollars all at once to cover an
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unnecessary tax bill is something we
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never want to do. And part of his
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question that maybe I should have
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highlighted earlier is he said part of
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his plan is he's outlying it is because
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he's uh specifically wants to take
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advantage of some of the things
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highlighted in the big beautiful bill
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that was recently passed by Congress.
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And and one of my thoughts there is that
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the benefits of the big beautiful bill
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are going to help out Roger and his wife
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with or without this drastic tax plan
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that he suggested. I just see I see lots
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of problems with that plan. So again
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going back to the idea where a lot of
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times as investors, as planners, as
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retirees, part of our human instinct,
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maybe just part of the way we approach
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the world is to just rip off the
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band-aid to to to do the hard things and
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to do them all at once. And in a lot of
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places in life and a lot of facets in
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life, I I totally get that and I agree
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with that, too. But I think that
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financial planning is one where we don't
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always want to rip off the band-aid all
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at once. We don't always want to do all
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our Roth conversions at once. We don't
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always want to deposit a lump sum into
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the market all at once. There are
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reasons. There are perfectly rational
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and mathematical reasons for sometimes
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delaying things over time for planning
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years ahead and then executing that
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plan. And this is one perfect example of
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that. The next one I want to talk about
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the availability bias. The availability
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bias and how it affects investors and
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how it affects retirees of all stripes.
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So this availability bias also known as
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the availability heruristic. It's one of
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those cognitive biases, right?
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behavioral finance, Danny Conorman,
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Richard Thaylor, Nobel winners who who
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have won these Nobel prizes in economics
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for their work in the way that human
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psychology makes us do irrational
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things. So the availability bias
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describes the tendency for people to
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rely on the information that comes to
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mind most readily when making judgments
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or decisions. So, right. So, instead of
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taking their time and thinking through
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all the possible information, the not
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only the information that they know, but
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instead of realizing like, oh, there are
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probably some things that I'm not
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thinking of here and I should take those
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things into account, too. I should
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research those things and try to figure
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out what I don't know. Taking that into
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account, the availability bias says we
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have a tendency to only rely on the
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information that comes to our mind when
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we're making judgments or decisions.
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Totally understandable, right? But of
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course, it leads to biased and flawed
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decision-making because, well, the most
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easily accessible information may not be
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the most representative or the most
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accurate of the complete truth. And
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specifically, vivid or recent
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experiences, traumatic experiences like
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dramatic news stories and very personal
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experiences, those tend to be more
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readily available. And the the ease of
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recall is often confused with the
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probability of or or frequency of of
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experiences repeating themselves in the
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future. And that leads to the belief
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that easily remembered events are also
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more common events or are also more
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likely events and more common more
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likely to occur than than reality
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actually plays out. And I see
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availability bias happening all the time
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in personal finance. And a few main
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examples that come to mind, here's one.
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my neighbor, my brother, or my colleague
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is doing X, is doing this thing, and I
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think I should be doing X, too. So,
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maybe X is they're all in on the stock
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market. They're buying a rental house.
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They're planning to retire at age 50.
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They hired an accountant. They fired an
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accountant. Whatever it may be, the idea
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is that this person I know, or sometimes
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it it gets even worse if it happens in
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multiple. These multiple people I know
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are all doing this one thing, and I
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think I should be doing this one thing,
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too. Perhaps the most common one I hear,
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a person told me about X company. Do you
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think it's a good investment? I'm seeing
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a lot of X company in the news. X
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company is building a store in my city.
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X company started making Y product and
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my son and his friends are all into Y
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product. Shouldn't I invest in X
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company? Those are all examples where we
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use the information that's right in
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front of our face and we add this this
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almost artificial importance to the
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information that's right in front of our
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face and and by definition we're unaware
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of all the information that is not
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available to us. Right? It's that
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classic classic saying of I don't know
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what I don't know. We don't know what we
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don't know. But instead, we're just
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we're letting our our neighbors
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behavior, our our son's behavior, we're
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we're taking the fact that some person
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told us about X company and now it's
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front of mind. It's super available to
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us and somewhere in our irrational
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brains, we've convinced oursel that we
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ought to be investing. We ought to be
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taking advantage. We ought to be copying
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what the other people are doing too. So
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a lot of times I guess when you when you
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see what someone else is doing in their
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life or when you when you see someone's
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justification for doing XYZ, when you
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feel that little impulse in your head
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that you ought to be doing XYZ too, you
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might want to ask yourself, do you
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understand the entire situation or are
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you simply succumbing to the very
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understandable, the very human bias of
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availability bias? All right, this next
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one is a little bit of a pet complaint.
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Again, I think it's important for
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especially if you're out there DIYing
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stuff. I think this is really important
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for you to understand. It is a little
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nuanced. I hope I can explain it
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clearly. And and it starts with the
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simple fact that yeah, numbers are hard.
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Math can be hard. But at the end of the
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day, I'm going to explain these two
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different things. The arithmetic mean,
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the arithmetic average, and the
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geometric average. And I know it sounds
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a little esoteric, but if you're using
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the arithmetic average, which I will
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explain what that means, and if you're
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using that to determine your average
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investing returns over time, it it means
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one of two things. It either means that
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you have a very important and vital
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misunderstanding of the underlying math
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and we'll explain why that is or and
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this is the one that kind of irks me
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more. Sometimes I think it means that
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there's an intentional decision for
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someone to obiscate the truth. There's
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an intentional decision for someone to
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to use the incorrect math. Okay. So, the
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reason why I say that is because
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sometimes I will see some really smart
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content creator or some smart financial
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professional. Maybe it's another
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adviser, an asset manager, someone with
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a a big title at a nationally known
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firm. And they'll make a comment like
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this. They'll say, "If your return is 0%
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in year 1, then 30% in year 2, and then
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0% in year 3." So again, that was 0, 30,
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and 0. And then they'll say, "Your
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average return is 10% per year." And now
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we'll compare it to a second situation.
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They'll say, "But if your return was 10%
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year 1, 10% year 2, and 10% in year 3."
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So again, 10 10. They'll say your
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average return is also 10% per year. So
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they've laid out this this argument that
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these two investors have the exact same
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average return, right? 030 versus 10 10.
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Then they'll go on to say, and yet in
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the second example, you end up with more
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money. And listeners, again, if you plug
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these numbers into a spreadsheet, you'll
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see that what they've said is is kind of
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true. the 10 1010 example return does
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end up with more money than the 030
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example. So before defining the problem
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with this example though before defining
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the problem and I will define the
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problem I will define what arithmetic
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versus geometric averages mean. I'll
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explain to you which one was used in
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this example and why it was wrong.
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Because if you're a a serious DIY
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investor, if you're a serious retirement
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planner, if you're an adviser, I know
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there are a bunch of adviserss who
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listen to my podcast, you do this
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professionally, and you help people with
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real problems. If you actually care that
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your numbers represent reality, you
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should never, never, never use the
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arithmetic average like this. And you
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should always, always, always instead
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use the geometric average, otherwise
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known as the compound average return.
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The geometric average is the compound
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average return. The arithmetic average
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is the one that we're used to using in
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most of our lives, right? We add up all
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the numbers and then we divide by the
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total. You know, it's it's it's Jim has
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10 apples and Bob has 20 apples. So, I
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take 10 and then I add 20. I divide by
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two. Therefore, they each have 15 apples
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on average. That is the arithmetic
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average. But for investing, the reason
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why investing is such an amazing and
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wonderful force in our lives is the the
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yearby-year growth. It doesn't work by
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simple addition. It compounds. Right?
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Compound average is the reason we're all
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investing in the first place. And it's
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multiplicative. It's not just addition.
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It's multiplication. So going back to
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our earlier numbers, it's not 0% plus
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30% plus 0. It's not 10% plus 10% plus
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10%. It's 0% growth time 30% growth time
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0% again. It's 10% time 10% time 10%.
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And so maybe I'm preaching to the choir
00:15:20
here. Maybe you all know this. I I hope
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many of you do know this. But suffice to
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say, if you're trying to find the annual
00:15:26
average return from those two data sets
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where you're multiplying three annual
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growth rates together, you cannot simply
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then divide by three to find the
00:15:34
average. So arithmetically, right, we
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take a sum, we do addition, and then we
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divide by the total. We divide by three
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in this case. Geometrically, we have to
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take the product. So we multiply the
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growth rates together. That's a product.
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And then we have to take the nth root of
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that product to find the average. In
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this case, because we have three growth
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rates over 3 years, to take the nth root
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would be to raise it to the 1/3 power to
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find the product of that average. So, of
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course, what I just explained is more
00:16:01
complicated than the simple arithmetic
00:16:03
average that we're used to. And so,
00:16:05
sometimes, a lot of times, I see this
00:16:07
mistake happening and I simply think
00:16:09
that's totally okay. This person just
00:16:10
isn't familiar with the underlying math
00:16:12
of investing. But once it's explained to
00:16:14
them, they'll get it and they'll start
00:16:16
using the right math here, you know,
00:16:17
going forward. And if you find yourself
00:16:19
listening to this and and that applies
00:16:20
to you, this is wonderful. You you've
00:16:22
now learned from uh you've learned the
00:16:24
mistake and you can start using the
00:16:25
geometric or the compound average going
00:16:27
forward. But other times, especially
00:16:30
when it's another kind of expert content
00:16:32
creator or a financial professional
00:16:34
who's doing the explaining, I get a
00:16:36
little bit suspicious and I think to
00:16:37
myself like, do do you actually not know
00:16:39
the differences between these two
00:16:41
averages? which is okay. I I I guess.
00:16:44
But most of the time I think to myself,
00:16:47
this person knows better than that. This
00:16:48
person knows how compound average growth
00:16:50
rates work. And therefore, I I begin to
00:16:53
assume some sort of suspicious motive.
00:16:56
Like, why would this person be getting
00:16:57
this wrong? And there are some okay
00:17:00
explanations that I I think I know,
00:17:02
right? You know, first, the the
00:17:03
arithmetic average is simply easier to
00:17:05
calculate. Okay. Yeah, that's easy.
00:17:07
Second, the arithmetic average usually
00:17:09
looks better. Whenever any volatility is
00:17:12
involved, the arithmetic average is
00:17:14
always going to be higher than the
00:17:15
geometric average. That's just a a
00:17:17
principle of math. It's just the way the
00:17:18
numbers work. And the third reason they
00:17:21
make the understandable but again easily
00:17:23
avoidable mistake that average equals
00:17:25
typical. You know, they think to
00:17:27
themselves, well, if if I have 030,
00:17:30
then I should say, well, what's the
00:17:32
typical year for that investor? We'll
00:17:34
just shrug our shoulders and say it's
00:17:35
about 10. I don't like that. It's a
00:17:37
little bit lazy to me, but again, it's
00:17:39
it's understandable from a from a human
00:17:40
point of view, but it does make me think
00:17:42
of the apocryphal investing story that
00:17:44
maybe you've heard of of the man who
00:17:46
drowned in a river that was on average 3
00:17:48
ft high. So again, when we say words
00:17:50
like average and typical, it can hide a
00:17:52
lot of truth about a situation. You can
00:17:54
have a river that's 3 ft high on
00:17:56
average, but at some part is 10 ft deep
00:17:59
and you're going to drown in it. So
00:18:00
anyway, average and typical are are
00:18:02
dangerous words to some extent. But the
00:18:04
fourth reason and the one that I really
00:18:05
want to focus on is that I think some
00:18:07
people use this literally incorrect math
00:18:10
to weave a story that puts puts
00:18:12
volatility as the some sort of boogeyman
00:18:15
to avoid. They say, "Well, look at this
00:18:17
data. These averages are the same." And
00:18:19
yet the volatility the volatility of the
00:18:22
030 situation causes that investor to
00:18:25
perform worse than the other investor.
00:18:28
And my rebuttal to that is is no, the
00:18:30
averages aren't the same. If they were
00:18:32
the same, if you had two investments
00:18:34
that perform the same on average, that
00:18:36
would be using the geometric average,
00:18:37
then the investments would have an
00:18:39
identical performance and instead this
00:18:41
person is just using bad math to weave
00:18:43
an incorrect story. That begs another
00:18:45
question. Why are they making volatility
00:18:47
out to be the boogeyman? And I know I
00:18:49
mean volatility can be hard to to
00:18:51
stomach. It can be hard to live through.
00:18:52
That's something we talk about here all
00:18:54
the time. But I heard a great quote from
00:18:56
financial planner Michael Kites who
00:18:57
described certain sales tactics as quote
00:19:00
digging a hole, throwing the prospective
00:19:03
client or customer down in the hole and
00:19:05
then telling them that you're the only
00:19:06
one with a rope. And when I see someone
00:19:08
who who ought to know better getting
00:19:09
this kind of math wrong, I also usually
00:19:12
see them digging a hole. The hole is
00:19:14
called volatility is an enemy. And then
00:19:17
they throw their audience down in that
00:19:18
hole saying, you know, volatility can
00:19:20
ruin your retirement. But then they
00:19:22
offer a rope to get out of that hole.
00:19:24
Oh, but but my portfolio, my
00:19:26
investments, my strategies, my
00:19:28
annuities, my insurance product can
00:19:30
dampen your volatility and smooth out
00:19:32
your ride. And at the end of the day, in
00:19:34
the examples I've seen, it's almost
00:19:36
always a bit of a false equivalency
00:19:38
because I think if we were really
00:19:39
talking about real world investment
00:19:41
returns, real numbers, real portfolios,
00:19:44
we wouldn't see the numbers I shared
00:19:46
with you before of 10 10 versus 030.
00:19:51
Instead, it would be 555 versus 030.
00:19:56
Because whenever you have a situation
00:19:58
with almost no volatility, you you
00:20:00
almost have to by definition be giving
00:20:02
up some sort of return. Risk and return.
00:20:04
I know that risk and volatility aren't
00:20:06
necessarily the same thing, but there's
00:20:08
a relationship there. And whenever you
00:20:09
have an investment that has a guaranteed
00:20:11
or a steady return, you're almost always
00:20:13
giving up some sort of reward. And in
00:20:15
that case, despite the much higher
00:20:17
volatility of the 030 investment, it
00:20:20
would easily beat the low volatility
00:20:23
555%
00:20:24
investment. So anyway, arithmetic mean,
00:20:27
try to avoid it in investing. Instead,
00:20:29
focus on the geometric or the compound
00:20:31
average returns, the geometric mean.
00:20:33
You'll end up with a much more realistic
00:20:36
view of your financial plan, much more
00:20:38
real realistic numbers, and ultimately
00:20:40
you will make better decisions because
00:20:41
you're actually using the correct math.
00:20:43
Here's a quick ad and then we'll get
00:20:45
back to the show. You probably know that
00:20:47
I love listener inspired content, but
00:20:49
this is my first listener inspired
00:20:50
advertisement. Frank asked me in short,
00:20:52
Jesse, is there a best time to start
00:20:54
working with you as a client? And the
00:20:56
short answer is yes. There are two ideal
00:20:58
times. One is at the beginning of a new
00:21:00
year for probably some pretty obvious
00:21:02
reasons, but the second one is right
00:21:03
about now, September and October. It's
00:21:05
the perfect time for year-end tax
00:21:07
planning to ensure you find the correct
00:21:08
balance of Roth conversions, tax gain or
00:21:11
tax loss harvesting, making charitable
00:21:13
gifts, spreading out any portfolio
00:21:15
changes over multiple tax years, or
00:21:17
whatever other tax dials we can turn for
00:21:19
you. Working backward from the December
00:21:21
31st tax deadline, the time to start
00:21:23
those initial conversations is right
00:21:25
now, August, September, maybe into early
00:21:27
October. You want to give yourself and
00:21:29
us enough runway to make sure we get
00:21:31
this right for you. So, if you're
00:21:33
interested in starting a conversation
00:21:34
with me and my colleagues, you can go to
00:21:36
bestinterest.blog/work
00:21:38
and fill out the form there. Again,
00:21:40
that's on my blog on the work with Jesse
00:21:42
page. The address is
00:21:44
bestinterest.blog/work
00:21:46
and fill out the form. The next one I
00:21:49
want to talk about is uh this super
00:21:51
common question that that I get that I
00:21:53
read about online. This is a question
00:21:54
that I myself asked at one point in my
00:21:57
financial journey and even a question
00:21:59
that when I changed careers, it still
00:22:01
kind of nagged me in the back of my mind
00:22:02
and I wasn't sure if I had a good answer
00:22:04
for it at that point. And the question
00:22:06
was, why would I hire a financial
00:22:08
planner when index funds exist? And so,
00:22:11
obviously, I'm a little biased here, but
00:22:12
this is a fun and and really interesting
00:22:14
question worth answering. And first I
00:22:17
think to myself, we all make decisions
00:22:19
every single day to hire professionals.
00:22:21
A mechanic, contractor, a trainer,
00:22:23
personal trainer, an attorney, a doctor,
00:22:26
a lawyer. I guess it's the same thing as
00:22:27
an attorney, isn't it? But in each case,
00:22:29
I would argue that part, if not a
00:22:30
majority of the thought process there is
00:22:33
something like, I don't want to screw
00:22:34
this up. The professional knows more
00:22:36
than me. They can be more efficient than
00:22:38
me and save me time. They do this every
00:22:40
single day. I might only dabble. This
00:22:42
issue stresses me out and they can help
00:22:44
reduce my stress. they can hold me
00:22:46
accountable to make sure that I actually
00:22:47
follow through on what I need to do.
00:22:49
They have tools and resources that I
00:22:51
don't have. Ultimately, in every single
00:22:53
one of these scenarios, the value that
00:22:55
you get from the interaction with the
00:22:57
professional, it should it kind of has
00:22:59
to economically far outweigh the cost.
00:23:02
Otherwise, obviously, you wouldn't do
00:23:03
it. And and yeah, and that's going to be
00:23:05
one of the main arguments we talk about
00:23:06
here is does the value of working with
00:23:09
with any professional, including a
00:23:11
financial professional, does it outweigh
00:23:12
the cost that you pay them? If you've
00:23:14
interacted with a financial adviser
00:23:16
whose only value ad is that they they
00:23:19
will tell you they'll throw your money
00:23:20
into index funds, I totally understand
00:23:23
the hesitation to engage with someone
00:23:24
like that. Perhaps worse might be the
00:23:26
adviser whose only value ad is to throw
00:23:29
your money into like the the ash shares
00:23:30
of an active mutual fund cuz we we know
00:23:33
mathematically that that's not likely to
00:23:34
work out in your favor. Let alone the
00:23:36
adviser who works off of commissions
00:23:38
from a whole life insurance or
00:23:40
annuities. And I get it. I I mean, the
00:23:42
reasons you're you're here listening to
00:23:44
me right now is because you probably
00:23:46
recognize the terrible value from that
00:23:47
type of sales pitch, too. And you've
00:23:49
decided, yeah, I'm going to do this
00:23:50
myself. I'm I'm going to learn all these
00:23:52
financial planning tactics. Maybe you're
00:23:54
going to learn from from podcasts like
00:23:56
mine, from blogs like mine, and you're
00:23:57
going to apply that in your own
00:23:58
financial plan. If I contrast those
00:24:01
again, those kind of I almost want to
00:24:03
say objectively bad value propositions.
00:24:06
If I contrast that against at least
00:24:08
some, maybe it's a minority, but some
00:24:10
important fiduciary adviserss out there,
00:24:12
that's where the conversation starts to
00:24:14
get intriguing. Now, personally, I do
00:24:16
know some fee only advisers who try to
00:24:18
beat the market. A few of them do
00:24:20
succeed. Most do not. And therefore, I I
00:24:22
think it's dubious to suggest that the
00:24:24
value ad is to beat the market. But let
00:24:26
me start with this. I think it's okay
00:24:28
for an adviser to say, "I'm going to get
00:24:30
you market average returns." And I know
00:24:33
some of you out there are getting market
00:24:35
returns all on your own. More power to
00:24:37
you. But the simple data shows that many
00:24:39
people are not getting market returns.
00:24:42
Some of you might be familiar with the
00:24:43
Dalbar study, D A L B A R Dalbar study.
00:24:47
I can throw a link in the show notes,
00:24:49
which for example showed that from 2001
00:24:51
to 2020, again a 20-year period, 2001 to
00:24:54
2020, the average retail investor
00:24:56
received a 2.9% investment return.
00:24:59
Whereas a simple 60/40 portfolio
00:25:01
performed at 6.4% per year over that
00:25:04
time frame. 6.4% per year versus 2.9%
00:25:08
per year. Some of you might be sitting
00:25:10
there saying like how could the average
00:25:11
investor underperform so much? And the
00:25:14
answer is behavior, behavior, behavior.
00:25:17
Right? The average investor got worried
00:25:19
and changed their asset allocation. Then
00:25:21
they got excited and they changed their
00:25:22
asset allocation back. They were chasing
00:25:25
performance. They heard someone mention
00:25:26
a stock and they bought it. They let
00:25:28
interest rates dictate their investment
00:25:30
choices. They lived through the the
00:25:31
great financial crisis. Uh that that
00:25:33
period was uh also the dotcom bubble.
00:25:36
2020 is when COVID occurred. The bull
00:25:38
run that occurred starting in the the
00:25:40
pits of 2009 and extended through 2020.
00:25:43
Maybe they got out of the market during
00:25:45
the great financial crisis cuz it scared
00:25:46
them and then they didn't get back in
00:25:48
until 2012 missing out on years of the
00:25:50
bull market. Those kind of things
00:25:52
matter. Maybe they let my uncle Jim
00:25:54
Kramer dictate their investment choices.
00:25:55
I don't know. He's not really my uncle.
00:25:57
he's more of an alien. But, uh, I was
00:25:59
speaking to a wonderful podcast listener
00:26:01
last month. She works in higher
00:26:02
education at at a at a college and she
00:26:05
felt the impacts of COVID probably more
00:26:07
acutely than most people did back in in
00:26:09
the spring of 2020 due to her role at at
00:26:11
this college at this university. And
00:26:14
understandably so, during that time
00:26:16
period, she thought to herself, man,
00:26:18
this is going to change society forever.
00:26:21
And I I don't blame her for thinking
00:26:22
that. So, she she went to cash and then
00:26:25
she missed out on 40% returns before she
00:26:28
decided to buy back in. And I just went
00:26:30
back and looked, right? The S&P 500 has
00:26:32
grown at 10.5% per year over the last 20
00:26:35
years, assuming all dividends were
00:26:37
reinvested. But if you put her 40%
00:26:40
mistake from 2020 into that compound
00:26:43
growth, her 20-year compounded return is
00:26:46
7.7% per year. Again, the market
00:26:49
returned 10.5%.
00:26:51
And at best, she got 7.7% per year. Now,
00:26:55
I know many of you might never make that
00:26:57
mistake, and good for you, but I got a
00:26:59
lot of nervous phone calls and emails
00:27:01
back in April 2025 during the tariff
00:27:03
tantrum. That was a 12% peak to trough
00:27:06
drop and then a 5week recovery after
00:27:08
Liberation Day, what was it,
00:27:10
Independence Day, Revolution Day. And if
00:27:12
you'd rather start the clock back in
00:27:13
February of 2025 at the local market
00:27:15
high, it was a 19% drop peak to peak to
00:27:18
trough. 19% drop and then a 4mon period
00:27:21
until we were back to all-time highs.
00:27:23
Now, that type of drop, 12% over 5
00:27:25
weeks, happens literally every year.
00:27:27
Literally 10% drops in the market happen
00:27:30
more than once per year on average. It's
00:27:31
more frequent than Christmas. So, if
00:27:33
you're immune to that, amazing. I I hope
00:27:36
we most of us are. That's a great place
00:27:38
to be in your investing. If you can just
00:27:40
ignore the 10, the 15% drops. Maybe my
00:27:42
work has helped you get there.
00:27:44
Fantastic. But if you're not immune to
00:27:45
those drops, that's okay. A lot of
00:27:47
people aren't immune to those drops. And
00:27:49
I would contend that you have someone
00:27:51
that you know, someone in your family,
00:27:52
some friends, some colleagues who aren't
00:27:54
immune to those kind of drops. And if
00:27:56
those people are getting 3% per year
00:27:58
instead of 6% per year like the Dalbar
00:28:01
study shows, if those people are bailing
00:28:02
in COVID, turning a 10.5% return over 20
00:28:06
years into a 7.7% return over 20 years,
00:28:09
then yeah, I think that person would
00:28:11
likely get hundreds of thousands of
00:28:13
dollars in value out of working with
00:28:15
some some helpful, honest financial
00:28:18
planner. And that's only the investing
00:28:20
part, right? That's only the portfolio.
00:28:22
All I've talked about so far is the
00:28:24
behavior of good, simple investing. We
00:28:26
haven't even gotten to the fun stuff
00:28:27
like tax efficient draw down strategies
00:28:29
in retirement and when to take social
00:28:31
security and how to ensure you aren't
00:28:32
whacked by Irma even if it is only 1%
00:28:35
per year. Proper estate planning, how to
00:28:37
think about how to leave assets to your
00:28:38
heirs, how to think about best take
00:28:40
advantage of capital gains and capital
00:28:42
losses. Now, personally, those are
00:28:44
things that I think about and that I
00:28:46
work on every day. And for a lot of
00:28:48
those items that I just listed, I know
00:28:49
that we can only increase someone's
00:28:51
after tax investment returns by maybe a
00:28:54
tenth of a percent here, a quarter of a
00:28:56
percent there, a third, a half of a
00:28:58
percent over here. But if you cobble all
00:29:00
those things together, all of a sudden
00:29:02
you're talking about thousands of
00:29:03
dollars per year, every single year
00:29:06
compounded for the rest of someone's
00:29:07
life. And the funny thing is, you could
00:29:09
spend some time, you totally could spend
00:29:11
some time to learn all this stuff on
00:29:12
your own. I mean, seriously, right? 10
00:29:14
years ago, I pretty much knew none of
00:29:16
this stuff I'm talking about now.
00:29:17
Literally like close to zero of it. I
00:29:19
just decided to dedicate a lot of my
00:29:21
waking life to it. Ended up changing
00:29:23
careers, right? Wrote a few hundred
00:29:25
articles, produced over a 100 podcast
00:29:27
episodes about it. I've done, I think, a
00:29:29
decent job of building up this pretty
00:29:30
foundational knowledge base. If instead
00:29:33
I devoted all that time to car
00:29:35
maintenance, I would never hire a
00:29:37
mechanic again, right? If instead I
00:29:39
devoted all that time to health and
00:29:40
wellness, maybe I would have opened up
00:29:42
my own gym or my own, I don't know,
00:29:44
nutrition guidance business, but I ended
00:29:47
up choosing because I enjoyed it.
00:29:49
Devoting all that time to smart
00:29:50
financial planning and I see the value
00:29:52
that I can provide. I can measure that
00:29:54
value in dollars and cents. So, yes,
00:29:56
index funds exist. For some of you, you
00:29:58
hear my episodes and you say, "Yep,
00:30:00
Jesse, I know that stuff. I get what
00:30:02
you're saying. I'm going to implement
00:30:03
all of it in my own life because I just
00:30:05
love it, Jesse. Kind of like you love
00:30:06
it, Jesse. And so, sorry. I'm a DIYer
00:30:08
through and through and that's amazing.
00:30:10
Seriously, kudos to you. But for the
00:30:12
others and the people, you know, I just
00:30:14
want to say that I don't think there's
00:30:16
anything wrong with saying I know what
00:30:18
I'm doing. I understand what Jesse has
00:30:19
to say, but I also understand my own
00:30:21
limitations. I want to reclaim my time.
00:30:23
I want to set something up for my spouse
00:30:25
in case something happens to me. I also
00:30:27
know I could be squeezing more out of
00:30:29
these lemons. You know, they have tools
00:30:31
I don't have. They have expertise I
00:30:32
don't have. This stresses me out and I
00:30:34
don't want it to. Index funds are
00:30:36
beautiful, a foundation I think of just
00:30:38
about any good portfolio. But what real
00:30:41
financial planners have to do is a lot
00:30:43
more than that and sometimes a lot more
00:30:45
important than just index funds. And so
00:30:47
anyway, on that note, another common
00:30:49
question that I get and a totally
00:30:51
totally reasonable question is someone
00:30:52
will write in and say, "Jesse, can I pay
00:30:54
you like $200 for an hour of your time?
00:30:57
I just want you to spot check, you know,
00:30:59
just give me a spot check of my DIY
00:31:00
financial plan." And unfortunately, the
00:31:02
answer to that question is no. But it's
00:31:04
important I explain why. You know, so
00:31:06
far this year, I think probably 30,
00:31:08
maybe 35 of you have reached out to to
00:31:10
wanting to hire me for an hour here, a
00:31:12
little retirement check there, one or
00:31:14
two hours. And again, the answer has
00:31:15
been no. I don't offer hourly planning
00:31:18
services. And the important question is
00:31:20
why? Why not? And so, first I I think of
00:31:22
this little metaphor between Wegman's
00:31:24
and Costco. Costco, you've probably
00:31:25
heard of. Wegmans, if you don't know, is
00:31:27
a very popular, probably the most
00:31:29
popular grocery chain in New York, let
00:31:31
alone kind of in the northeast, the
00:31:32
mid-Atlantic coast. And and so the
00:31:35
question I have is, you know, why
00:31:36
doesn't Costco have this beautiful
00:31:39
curated cheese and olive bar like
00:31:41
Wegman's does? Like Wegman's has this
00:31:43
beautiful, it's just so many fancy
00:31:45
cheeses, fancy olives, all this fancy
00:31:47
shakurerie. But then again, why doesn't
00:31:49
Wegman's sell diapers in packs of 222?
00:31:52
Yes, that's the real number. packs of
00:31:54
222 diapers like Costco does? I think
00:31:56
the answer is pretty simple. Wegman's
00:31:58
and Costco, they have different business
00:32:00
models and different ideal customers.
00:32:02
Those customers have different wants,
00:32:04
different needs, different expectations.
00:32:06
Both businesses can clearly thrive in
00:32:08
the same marketplace. They're similar in
00:32:10
a lot of ways, but they're different
00:32:12
enough that they appeal to different
00:32:13
customers, and they can both thrive. And
00:32:15
the same applies to the world of
00:32:17
financial planning. Some people do not
00:32:18
want an hourly financial planning
00:32:20
service, nor a one-time planning
00:32:22
service. Some people want an ongoing
00:32:24
relationship with a financial planner
00:32:25
for the rest of their life and they
00:32:27
expect to pay an annual fee for that.
00:32:29
Some people want Wegman's, some people
00:32:30
want Costco. Some people want hourly
00:32:32
services. Some people want full-time. I
00:32:34
know that statement is polarizing,
00:32:36
especially in the DIY personal finance
00:32:38
movement. And I know that's a lot of you
00:32:40
listening. Cuz I I get it. I see the
00:32:42
numbers. I see the emails I get. And and
00:32:45
many, maybe even most DIYers, they don't
00:32:47
want an ongoing relationship. They want
00:32:49
a static one-time service to spot
00:32:51
checkck their DIY results. And again,
00:32:54
it's it's the fitness buff. If you're a
00:32:55
fitness buff, you'd probably never hire
00:32:57
a personal trainer. If if you're a
00:32:59
fantastic cook, you're not going to go
00:33:00
out to dinner or order dinner as much.
00:33:02
You're going to cook on your own. If
00:33:04
you're really handy, you'll remodel your
00:33:06
bathroom instead of hiring a contractor.
00:33:08
My brother's a contractor, right? He he
00:33:10
redid his own bathroom. He redid his own
00:33:11
garage. He redid his own basement. I'm
00:33:13
not as handy as he is, and I hired him
00:33:16
to do my basement. Anyway, that's the
00:33:18
way of the world. If we've developed
00:33:20
strong DIY skills, we're less likely to
00:33:22
hire a professional to help us. If you
00:33:24
love digging into every nook and cranny
00:33:26
of your financial life and you're
00:33:28
accepting of the consequences, both good
00:33:29
and bad, then you should 100% continue
00:33:31
down the DIY path. If that sounds like
00:33:34
you, I I totally get it. That is how I
00:33:36
felt as a DIYer before changing careers.
00:33:39
But, and trust me when I say this, we
00:33:42
have self- selected, you all have self-
00:33:43
selected to listen to a nerdy podcast
00:33:46
about the nitty-gritty details of
00:33:48
financial planning. We are this little
00:33:50
tribe of financial planning nerds. And
00:33:54
trust me when I say this, a lot of
00:33:56
people, maybe even most people out
00:33:58
there, they're not like us, okay?
00:34:00
They're not like us. They do not want to
00:34:03
be a nerdy retirement planning DIYer who
00:34:06
spends an hour every other week
00:34:09
listening to Jesse Kramer talk about
00:34:11
nerdy retirement planning topics.
00:34:13
Instead, most people, they want to
00:34:15
outsource it to some sort of trusted
00:34:17
expert full-time. They don't want to fly
00:34:19
the plane. They want to hop in the back
00:34:21
of the plane, hands off the tiller, and
00:34:23
they want to let a professional pilot
00:34:25
fly them to their destination. So, going
00:34:28
back to to me in my business, right? I I
00:34:29
don't need to be a 7-Eleven convenience
00:34:32
store that caters to people who just
00:34:34
need a quick item. My business model and
00:34:36
and more on that in a minute works and
00:34:38
works well without hourly engagements.
00:34:41
But I want to get into this broader
00:34:43
reason why there are few good financial
00:34:46
planners offering hourly or onetime
00:34:48
services. And the main reason why is
00:34:50
well one of two main reasons why which
00:34:52
I'll get into is it's a regulatory and
00:34:54
compliance hassle. And so for better or
00:34:56
worse, running a firm that offers
00:34:58
ongoing services is significantly easier
00:35:01
than running a firm that offers hourly
00:35:03
services. So to be an independent
00:35:05
financial planner like me, you have to
00:35:07
form an organization called a registered
00:35:09
investment adviser or RAIA. So I I'll
00:35:11
use that term a little bit right today.
00:35:13
Raia, registered investment adviser. So
00:35:15
an RAIA is a firm, not a person that is
00:35:18
registered with either the Securities
00:35:20
and Exchange Commission. So that's the
00:35:21
SEC right on the federal level. and and
00:35:23
that's the case if the firm manages over
00:35:25
$und00 million for its clients or an
00:35:28
RAIA can be registered with individual
00:35:30
state regulators if the firm manages
00:35:33
less than $100 million for its clients.
00:35:36
So RAAS they can kind of run the gamut.
00:35:38
They can provide investment advice to
00:35:40
their clients. So that's individuals,
00:35:41
families or businesses. RAAS are
00:35:43
fiduciaries by law. They are legally
00:35:45
obligated to always act in their clients
00:35:47
best interest. So again, they have to
00:35:49
register with the SEC or at the state
00:35:50
level, disclose their fees, file
00:35:52
regulatory documents, adhere to
00:35:54
compliance rules. There's some overhead,
00:35:56
there's some headache really to to
00:35:57
forming an RAIA. But let's consider
00:35:59
those regulations, those rules, those
00:36:01
registration rules through the lens of
00:36:03
hourly planning, right? 99% of hourly
00:36:06
planning clients, maybe some folks like
00:36:07
you, they only want advice. They only
00:36:09
want planning. That's the advice only
00:36:11
business model. They don't want
00:36:13
investment management. They're going to
00:36:14
maintain and manage their portfolio on
00:36:16
their own. Therefore, for the RAIA, that
00:36:18
hund00 million federal threshold is
00:36:21
never going to be reached. Hourly
00:36:22
planners instead need to register at the
00:36:24
state level. And to make matters worse
00:36:26
really for the planner, they have to
00:36:28
register in every state in which they
00:36:30
have five or more clients. So,
00:36:32
personally, based on relationships that
00:36:34
I formed either on my own or or through
00:36:36
the podcast, I would have to register in
00:36:38
New York, California, Texas, and
00:36:40
Florida, Washington, North Carolina,
00:36:42
Tennessee, Georgia, and Illinois. Like
00:36:45
that's a lot of regulatory hassle that I
00:36:47
would have to manage independently as a
00:36:49
solo hourly planner. I can't charge
00:36:51
clients for that time, right? It's just
00:36:53
a sunk cost that I have to deal with.
00:36:55
Instead, though, I'm an employee at an
00:36:57
RAIA here in Rochester, New York. We're
00:37:00
well above the $und00 million threshold.
00:37:02
We're actually above $3 billion under
00:37:04
management. We work with about a
00:37:05
thousand families. And yes, we have to
00:37:07
register with the SEC. I have a specific
00:37:10
colleague, a co-orker, one person who
00:37:12
handles that compliance work for the
00:37:14
entire firm. The rest of us, we get to
00:37:16
focus on working with clients.
00:37:17
Personally, in my own day-to-day work, I
00:37:20
have zero regulatory hassle. But then
00:37:22
there's the juice, right? Is the juice
00:37:24
worth the squeeze? So, to be an hourly
00:37:26
planner, I think we should ask ourselves
00:37:27
that or any hourly planner, any business
00:37:29
person should ask themselves that, is
00:37:31
the juice worth the squeeze? And let's
00:37:32
be honest, we're here in a in a
00:37:34
capitalist system. Capitalism doesn't
00:37:35
have to be evil. It just means that we
00:37:37
work in a system where that the payoff
00:37:38
needs to be worth the effort that we put
00:37:40
into something. So, let's discuss fees
00:37:42
and revenue of this business. Now, the
00:37:44
SEC doesn't mandate how hourly fees
00:37:47
work, but many states do impose a
00:37:49
maximum on hourly fees that planners can
00:37:52
charge, and it's usually $250 an hour.
00:37:55
Now, the reader, Ken, who who kind of
00:37:57
inspired this this article that I'm now
00:37:59
reading out loud to you, he wanted to
00:38:00
offer me $150 to $200 an hour for my
00:38:03
time. And it's totally fair to ponder,
00:38:05
well, Jesse, if you were charging $200
00:38:08
an hour and you multiply that by the
00:38:10
average of 2,000 working hours a year,
00:38:12
that's $400,000 of revenue. And that's
00:38:15
an amazing amount, even after some cost
00:38:17
of running a business. If I could open
00:38:19
my own hourly practice at $400,000 of
00:38:22
revenue, I would be living large. But
00:38:25
that assumption has some really
00:38:26
significant problems. In short, no
00:38:28
hourly planner comes even close to 2,000
00:38:31
billable hours in a year. Most don't
00:38:33
even reach a thousand billable hours in
00:38:35
a year. Before I can offer any client
00:38:37
just the first morsel of advice, I would
00:38:39
need to do on average probably about
00:38:41
four hours of work. I have to meet with
00:38:43
a client, discuss working together or
00:38:45
not, like are we even a good fit? I'd
00:38:47
have to learn all of your financial
00:38:48
facts and circumstances, your goals,
00:38:50
your timelines, the things we talk about
00:38:51
here. I'd set you up in in recordkeeping
00:38:54
software. I'd perform the necessary
00:38:56
compliance activities to to add you as a
00:38:58
client, contracts, all that kind of
00:38:59
thing. set you up in our financial
00:39:01
planning software and upload all your
00:39:03
relevant information there. So, that's
00:39:05
probably like $800 to $1,000 of my time
00:39:08
before I can give you the very first
00:39:10
answer. And most DIYers do not like
00:39:14
that. They won't bite. So, as such,
00:39:16
hourly planners need to make a
00:39:17
concession. Either charge less or start
00:39:20
giving away time for free. Right? Those
00:39:22
first four hours of setup, not going to
00:39:24
charge you for it. I'm only going to
00:39:25
charge you for it when I actually start
00:39:27
my work. And and the list goes on. There
00:39:29
are just unfortunately a lot of
00:39:31
unbillable tasks. Compliance and
00:39:33
registration and archiving and audits,
00:39:35
business operations like accounting and
00:39:37
bookkeeping or taxes, integrating a tech
00:39:40
stack like what technology will the firm
00:39:41
use, choosing and maintaining planning
00:39:43
software, scheduling meetings, client
00:39:46
onboardings, doing that all under
00:39:48
umbrella of of perfect cyber security or
00:39:50
just marketing and business development.
00:39:52
So, you know, in my case, my blog, my
00:39:54
podcast play a really big role in my
00:39:56
business, but they take a lot of time.
00:39:58
And and no client pays me, and it's not
00:40:00
fair for any client to pay me for the
00:40:02
hours that I put into these projects.
00:40:04
And as Mike Piper, who's like a
00:40:05
well-known and wellrespected voice in
00:40:07
the financial planning space, he wrote
00:40:08
on this topic in a very similar way. He
00:40:10
said, and this is kind of a long quote,
00:40:12
relatedly, many people assume that an
00:40:14
hourly financial professional's weekly
00:40:15
compensation is probably somewhere along
00:40:17
the lines of 40 times their hourly rate,
00:40:20
but that's not remotely the case. A 2023
00:40:23
survey found that an hourly billable
00:40:24
rate of $24 an hour, which was the
00:40:27
average for CPAs, again, accountants
00:40:29
with 8 to 10 years of experience,
00:40:32
equated to an average annual
00:40:33
compensation of $15,000
00:40:36
a year or $2,000 a week. about 10 times
00:40:40
their hourly billable rate. And I
00:40:42
strongly suspect that it's typically
00:40:44
lower than 10 times their hourly rate
00:40:46
for registered investment adviserss
00:40:48
given that RAAS are regulated more
00:40:50
heavily than CPAs. They have to spend
00:40:53
more time on compliance activities that
00:40:54
are not billable. So again, that might
00:40:56
sound crazy. It even sounds a little
00:40:58
crazy to me, but what Mike Piper is
00:41:00
saying there is that the average
00:41:01
accountant bills at $200 an hour for 10
00:41:05
billable hours a week and that he
00:41:06
believes the hours for financial
00:41:08
planners are even lower. So that's
00:41:10
charging $200 an hour to make $100,000 a
00:41:13
year or less. And ask any attorney, ask
00:41:16
any accountant for their feelings about
00:41:18
hourly billing. It's a notorious pain in
00:41:20
the butt. It's a significant hurdle. So
00:41:22
what to do instead? That's why most RAAS
00:41:25
opt for an assets under management and
00:41:27
AUM percentage billing model. These are
00:41:29
businesses. This billing model results
00:41:31
in more consistent revenue for less
00:41:33
regulatory hassle with lots of
00:41:35
individuals and families knocking at the
00:41:37
door to sign up. Now, as a business
00:41:38
owner, I think it makes sense. It's
00:41:40
probably common sense to go down this
00:41:42
route. In many cases, including mine,
00:41:44
AUM firms are still fee only and
00:41:46
fiduciary. This is important, right? The
00:41:48
the AUM fee is the only way we collect
00:41:51
revenue. That's fee only. Now, what is
00:41:54
interesting and and totally worth
00:41:55
pointing out, the same states that cap
00:41:57
hourly rates at $250 an hour also often
00:42:01
cap AUM rates at 2.0%.
00:42:04
Now, a 2.0 annual fee is a ton. It's a
00:42:08
lot. And it ought to come with like
00:42:10
every single service and piece of advice
00:42:12
and expertise under the sun. And I'd
00:42:14
venture that any firms out there, like
00:42:16
99% of the firms out there that are
00:42:18
charging 2.0% 0% per year, they're
00:42:21
probably committing highway robbery. And
00:42:23
the same cannot be said for an hourly
00:42:25
planner who's charging $250 an hour.
00:42:28
Those two maximum fees are vastly
00:42:30
different, but the state regulators
00:42:32
don't seem to see that. Thankfully
00:42:34
though, that the kits, Michael Kitsies,
00:42:35
his research team found that most RAIA
00:42:38
firms have significantly lower AUM fees
00:42:40
than 2.0%. Especially as a client's
00:42:42
wealth increases. So simply put, as
00:42:44
asset sizes grow, the required work, the
00:42:47
required expertise typically don't
00:42:49
scale. Thus, someone's fee absolutely
00:42:52
should decay as asset levels increase.
00:42:55
Now, 1.00 1% is kind of the industry
00:42:58
standard. You know, I can speak here.
00:43:00
The average fee at my firm, the average
00:43:01
dollar here falls in the the 0.65%
00:43:05
range. So about 65 hundredths of a
00:43:08
percent. Again, I'm a little biased. I
00:43:10
get it. But that style of AUM fee,
00:43:12
especially when you compare it to the
00:43:13
services that someone receives, isn't
00:43:15
excessive. One lens to examine that
00:43:18
truism is through profits. If a company
00:43:20
is raking in huge profit margins, that
00:43:22
might be a sign that it's charging too
00:43:24
much. Fiduciary Ria firms typically have
00:43:26
a a 20 to 25 maybe 30% profit margins.
00:43:30
Legal and accounting firms, law and
00:43:32
accounting firms have similar margins.
00:43:33
Healthcare, construction, auto garages
00:43:36
typically have a 15 to 20% margin.
00:43:38
Grocery stores which we mentioned before
00:43:40
uh famously have near zero margins like
00:43:42
a 1 to 3% margin. However, since AUM
00:43:45
firms revenues are based on portfolio
00:43:47
performance, those margins can dry up
00:43:50
during bare markets. During, for
00:43:51
example, the great financial markets,
00:43:53
some of my colleagues, those in
00:43:55
leadership and ownership literally went
00:43:57
years without taking a paycheck. It was
00:43:59
a means to ensure that other employees
00:44:01
could keep their jobs. But that 20%
00:44:03
margin, that assets under management fee
00:44:05
that led to a 20% margin, when the
00:44:07
market drops by 50% like it did during
00:44:09
the great financial crisis, not only do
00:44:11
you no longer make profit, you might be
00:44:13
operating at a loss. So there's a risk
00:44:16
involved, there's also a bit of a
00:44:17
incentives problem that I think is
00:44:19
important to consider. Friend of the
00:44:20
blog Charlie Munger famously said, "Show
00:44:22
me the incentives and I'll show you the
00:44:24
outcomes." And I feel when I show up to
00:44:26
work every morning, these four strong
00:44:28
incentives that are working in favor of
00:44:30
of an annual AUM fee model that align my
00:44:33
work with my client's goals. The first
00:44:35
one is that client success equals
00:44:36
business success. You might have heard
00:44:38
that tagline, you know, if you do
00:44:40
better, we do better. Well, it creates a
00:44:42
a long-term win-win alignment. The
00:44:44
second one, there's a focus on
00:44:45
retention, right? Because I don't charge
00:44:47
a oneanddone fee. Because I charge an
00:44:49
annual fee, I'm incentivized to build
00:44:51
trust, to offer great service, and to
00:44:53
think long term on behalf of my clients.
00:44:56
The third big one is that our fee
00:44:58
structure discourages unnecessary
00:44:59
trading. Unlike commissionbased models,
00:45:02
AUM fees don't reward transactions,
00:45:04
right? There's no incentive to churn.
00:45:06
There's no incentive to sell or to push
00:45:08
products. The the only incentive is to
00:45:10
give honest and good advice so that you
00:45:13
want to continue being our clients. And
00:45:15
then the fourth one is that this fee
00:45:16
model encourages holistic planning.
00:45:18
Since the fee isn't tied to hours or
00:45:21
tasks, you know, my team is free to go
00:45:23
deeper to do ongoing work, estate
00:45:25
planning, tax planning, retirement
00:45:26
optimization, behavioral coaching
00:45:28
without needing to bill for time. And of
00:45:31
course, the AUM model is not perfect,
00:45:33
but I do believe it strongly aligns
00:45:35
clients with their financial planner,
00:45:37
with their professional. And I can point
00:45:38
to many instances of client success in
00:45:41
just, you know, three and a half, four
00:45:42
short years since my transition from
00:45:44
engineering. So those are all the
00:45:46
reasons I don't offer hourly advice.
00:45:49
There are many good adviserss out there
00:45:50
who do offer hourly advice. It's just
00:45:52
worth understanding the difference.
00:45:55
Here's a quick ad and then we'll get
00:45:56
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00:46:12
>> But Jesse, I don't want another email.
00:46:14
>> I hear you. I make this newsletter
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00:46:45
Okay, this next topic is one that, yeah,
00:46:47
maybe it's not the most complex topic,
00:46:49
but I see it coming up time and time
00:46:52
again in families that that otherwise
00:46:54
have, you know, some reasonably complex
00:46:56
financial plans. And yet, this the
00:46:58
simple topic really seems to it's a
00:47:00
hiccup. It's it's a tripping point. It's
00:47:02
something that so many families seem to
00:47:04
run into. And it's the fact that you
00:47:07
cannot outgrow or you cannot out
00:47:09
compound what I would consider a bad
00:47:12
spending plan. Or maybe we don't call it
00:47:14
bad. Maybe we just call it overspending.
00:47:16
And it's one of those things where yeah,
00:47:18
I don't spend a lot of time talking
00:47:19
about budgeting. I don't spend a lot of
00:47:21
time talking about spending because it's
00:47:22
kind of this personal finance 101 thing
00:47:25
that the the Dave Ramsey's of the world
00:47:27
spend a lot of time talking about. But
00:47:29
it is foundational. It's this
00:47:31
foundational thing and we can't get to
00:47:33
the point where we're talking about, you
00:47:34
know, intricate retirement tax
00:47:36
withdrawal strategies unless you have
00:47:39
some intricate retirement accounts and
00:47:41
some assets put away and you can't get
00:47:43
to that point where you have assets put
00:47:45
away. You can't out compound the fact
00:47:47
that you're not saving any money in the
00:47:48
first place. And now for reference and
00:47:51
and the reason why I kind of had this
00:47:52
thought in the f in the first place is
00:47:54
here in upstate New York, I'll see these
00:47:57
families, you know, married couples and
00:47:59
then they've got some children maybe and
00:48:01
they're earning like 90th 95th 99th
00:48:04
percentile salaries in the USA. That's
00:48:06
like 300500 $700,000 a year or more. And
00:48:10
some of these families are saving six
00:48:12
figures of of income per year. And
00:48:15
that's amazing. But other of these
00:48:17
families are basically living paycheck
00:48:19
to paycheck or sometimes even worse. And
00:48:22
on one hand, you might be thinking like,
00:48:24
"Wo, that's crazy. Sounds wrong. That's
00:48:27
exaggerated. It's baloney. There's no
00:48:29
way it's possible. You know, how often
00:48:31
do you have to eat out at restaurants to
00:48:32
outspend a $700,000 salary?" And the
00:48:36
short answer is, well, it's usually not
00:48:37
dining out that's really the problem. It
00:48:39
could be stuff like nannies,
00:48:41
housekeepers, personal chefs,
00:48:43
landscapers, personal assistants, people
00:48:46
outsourcing these time-consuming tasks.
00:48:48
Private schooling and tutoring is a huge
00:48:50
one. Private coaching for kids in
00:48:53
sports, music and dance lessons,
00:48:55
exclusive summer camps, college
00:48:56
planning, test prep, that's another
00:48:58
really big one. Kids are expensive,
00:49:00
especially if you choose to to let them
00:49:02
do really fun, fancy, expensive things.
00:49:05
Yeah, sure. there's the second home at
00:49:06
the lake or the beach or the mountains
00:49:08
that you know some people have that uh
00:49:10
as a big line item I think uh high-end
00:49:13
airfare travel fivestar resorts travel
00:49:16
concieres uh nice cars nice boats
00:49:19
jewelry art country clubs so a lot of
00:49:22
times there are these half million
00:49:24
dollar salary families living in very
00:49:26
close proximity with other half million
00:49:28
dollar salary families and to them some
00:49:31
of those trappings that I just listed
00:49:33
out that's just normal life right they
00:49:35
consider that are that normal life. It's
00:49:36
that all the families send their kids to
00:49:38
private school. All the families belong
00:49:40
to one of the golf clubs. All the
00:49:42
families have a cottage down at the
00:49:43
lake. And it really is. It's the
00:49:45
definition of keeping up with the
00:49:46
Joneses. But at the end of the day, if
00:49:48
that family can't also afford to save 15
00:49:52
or 20 or 25% of their income, then they
00:49:54
are falling behind in the long-term
00:49:56
race. And when we think about retirement
00:49:59
planning and things like the 4% rule and
00:50:01
the withdrawal rule, the money that you
00:50:03
earn does not matter in and of itself.
00:50:06
Again, I'll say that again because it's
00:50:07
so important. The money that you earn
00:50:10
does not matter in and of itself. It
00:50:12
only matters in relation to the money
00:50:14
that you spend and the money that you
00:50:15
save. That's what really matters, right?
00:50:17
Show me a family that's earning $200,000
00:50:21
but saving $100,000 per year. That's an
00:50:24
enormous 50% growth savings rate. which
00:50:27
I know it might not be possible for for
00:50:29
99% of families out there. But still, if
00:50:31
you show me that family, I'll show you
00:50:33
one of the most financially stable
00:50:34
families I've ever seen, but if I
00:50:36
contrast that against a family earning
00:50:38
half a million dollars a year, but only
00:50:40
saving 24 grand a year in one person's
00:50:43
401k, right, by maxing out one person's
00:50:45
401k, I'll show you a family who's
00:50:48
living a great life, I'm sure, a great
00:50:50
lifestyle, but really stressing their
00:50:51
finances to the maximum. Maybe they know
00:50:53
that. Maybe they know they're stressing
00:50:55
their finances and that worries them. Or
00:50:57
maybe they're just blissfully unaware of
00:50:59
how far behind they're actually falling.
00:51:01
But one thing I do know for sure, it's
00:51:04
very, very hard for these families to
00:51:05
remind themselves and and at times to
00:51:07
remind their children that they're
00:51:09
living a charmed life, right? It's that
00:51:11
David Foster Wallace thing. This is
00:51:12
water. It's one of my favorite speeches.
00:51:15
I know I reference it probably too
00:51:16
often, but it's hard to see life for
00:51:18
what it is when you're so immersed in
00:51:20
it. It's hard to see the picture when
00:51:22
you're inside the frame. So many people,
00:51:25
they don't feel wealthy. They don't feel
00:51:26
like they're in the top 10, the top
00:51:28
five, the top 1%. Their children don't
00:51:30
feel like they're living one of the
00:51:32
statistically best childhoods probably
00:51:34
in the history of humanity. They call it
00:51:36
hideonic adaptation. We get used to
00:51:37
things feeling good and then it just
00:51:39
becomes the new normal. But we must we
00:51:41
must must try to derive our satisfaction
00:51:44
and our purpose from other sources in
00:51:46
life. If our joy is tied to having a
00:51:49
bigger house, a nicer car, playing on
00:51:51
the better golf course, opening a nicer
00:51:53
bottle of wine, subtly showing off a
00:51:55
more expensive watch, sending the kids
00:51:57
to a better summer camp, summering, I
00:52:00
know, ew, summer as a verb, summering in
00:52:02
a more exclusive spot on a more remote
00:52:04
lake. To me, that's a hollow existence.
00:52:07
And getting back to financial planning,
00:52:09
I mean, no amount of compounding can
00:52:10
magically turn some three or four or 5%
00:52:13
savings rate into enough money to
00:52:15
retire. As an example, just for kicks
00:52:17
and giggles, I threw this in a
00:52:19
spreadsheet. I had someone who was
00:52:20
saving uh 4% of their annual income,
00:52:22
which is not enough. 4% of their annual
00:52:25
income, and then I assumed their
00:52:26
investment could compound at an
00:52:28
astronomical 12% per year forever. So
00:52:31
again, it's an unrealistic growth rate.
00:52:33
But just to show you, it would still
00:52:35
despite that unrealistic growth rate, it
00:52:36
would take this person 37 years of those
00:52:39
unrealistic investment returns to retire
00:52:41
in a healthy way. And the reason why is
00:52:43
they're simply not saving enough. But if
00:52:45
we contrast that against someone who's
00:52:47
saving a very very healthy 25% of their
00:52:49
income and we assume a much more
00:52:51
conservative 8% annual rate of return,
00:52:54
that person can retire in a very healthy
00:52:56
way after 24 years. So that would be
00:52:59
someone who maybe starts saving in their
00:53:01
20s or their early 30s and they're
00:53:03
retired by 50 or 55. And that doesn't
00:53:06
assume any use of social security even.
00:53:08
Now at these large amounts of income
00:53:10
that we're talking about in in this
00:53:11
case, and I know I'm kind of
00:53:12
cherry-picking only the the upper middle
00:53:15
class and even the upper class in terms
00:53:16
of wealth, but it's worth thinking about
00:53:19
some of the differences I just outlined
00:53:20
because again, let's say that both those
00:53:22
families in my hypothetical just now,
00:53:24
they're high earners. They're the people
00:53:25
earning 300, 500, $700,000 a year. In
00:53:28
this case, I'll just use the round
00:53:29
number of half a million dollars a year.
00:53:31
They're living a charmed life. And the
00:53:33
first family saves only 4%. They only
00:53:36
save 20 grand of that per year. They're
00:53:38
likely paying something like $125,000
00:53:41
in taxes per year if you run it into
00:53:43
into a tax calculator, which means left
00:53:45
over, they have about $30,000 a month to
00:53:48
spend. The second family that's saving
00:53:50
much more. They're saving 25%. So,
00:53:52
they're saving about $125,000 a year.
00:53:55
They're probably paying about a h 100red
00:53:56
grand in taxes. and therefore they only
00:53:59
only have uh 23 grand a month to spend.
00:54:02
30 grand versus 23 grand per month to
00:54:05
spend. I know on paper there's a pretty
00:54:07
significant difference between 30 grand
00:54:09
and 23 grand a month. But I contend that
00:54:12
those are both big big numbers and in
00:54:14
most places in the United States you
00:54:16
could live a wonderful life, a simply
00:54:18
wonderful life at either of those
00:54:19
amounts. Two two different families
00:54:21
living two different examples of a
00:54:23
wonderful life. And it's just that one
00:54:25
family is going to work until their
00:54:26
mid60s at least and then the other
00:54:29
family is going to retire in their early
00:54:30
50s if they wanted to. So I suppose a
00:54:33
lot of this conversation comes down to
00:54:35
how much wonderful do you want in your
00:54:37
life and where are you willing to
00:54:39
sacrifice some wonderful in pursuit of
00:54:42
of better long-term uh results. And
00:54:44
here's what I mean. An example that just
00:54:46
kind of popped into my head as I was
00:54:47
writing these things down. me and my
00:54:49
hometown buddies, I'm from a a really
00:54:51
rural kind of agricultural town about an
00:54:53
hour east of Rochester. And and me and
00:54:55
some of my my buddies from home, we grew
00:54:57
up playing golf, like very kind of poor
00:54:59
golf on a former farm pasture that any
00:55:02
honest golfer would give like a D+
00:55:04
rating to. But we liked it. We had a lot
00:55:06
of fun. But the point is that my bar for
00:55:08
golf is pretty low. I've got a low bar.
00:55:10
Now, coincidentally, Rochester, New York
00:55:12
is oddly this bit of a golf mecca. We've
00:55:15
got a just a high frequency of really
00:55:17
highly rated courses, especially when
00:55:19
compared to just the the number of
00:55:20
people living here and our generally
00:55:22
lousy weather. I mean, the winters here
00:55:24
are brutal. Fall and spring aren't
00:55:26
exactly wonderful. Yet, for whatever
00:55:28
reason, we do have a lot of golfers and
00:55:30
a lot of really nice golf courses here.
00:55:32
And I could go join like a a Seale golf
00:55:35
club here, much nicer than the than the
00:55:37
golf course in my hometown, but by no
00:55:39
means like that nice of a club, and
00:55:41
expect to pay maybe $2 or $3,000 for a
00:55:44
year for membership. And to me, that
00:55:46
would be this wonderful luxurious perk
00:55:49
in life. Or to contrast that, I could go
00:55:51
join Oakhill. Oakill is regularly rated
00:55:54
one of the top 25 golf clubs in America.
00:55:57
It's got a onetime upfront initiation
00:55:59
fee over $100,000. Monthly dues are
00:56:02
probably something like 2,000 or 2500
00:56:04
bucks a month, including all the months
00:56:07
of the snow on the ground, by the way.
00:56:08
So, you're not golfing. You're still
00:56:09
paying, you know, two two grand to be a
00:56:11
member there. I've been there in the
00:56:13
clubhouse and on the course at Oakhill,
00:56:15
and it's amazing. There's no other way
00:56:17
to describe it, right? It's world class
00:56:18
in every way, obviously, including the
00:56:21
costs. But I want to go back to the idea
00:56:23
that a lot of this conversation comes
00:56:25
down to how much wonderful do you want
00:56:28
and where are you willing to sacrifice
00:56:29
your wonderful? Now for me, I'm not that
00:56:32
big of a golfer. I think it's a blast. I
00:56:34
I love to play, but I'm not that big of
00:56:35
a golfer and I've got a pretty low bar.
00:56:38
So for me, I can easily look at the
00:56:40
world and say I don't need to pay the
00:56:42
money that Oak Hill would cost, assuming
00:56:44
they'd even let me in the club in the
00:56:46
first place. And even, you know, I'm not
00:56:47
even sure I'd want to pay 2500 bucks a
00:56:50
year to join the Seale Club. I'm not
00:56:53
sure I would get my money out of it. I
00:56:55
might play 10 rounds of golf a year and
00:56:57
I'll just go pay, you know, 30 bucks, 50
00:56:59
bucks, 70 bucks at a time to go play.
00:57:01
And that's fine with me. I'm totally
00:57:03
willing to sacrifice a a wonderful golf
00:57:06
life in pursuit of something else
00:57:08
because I'll admit to you when I think
00:57:10
about the things that that really uh
00:57:12
light my fire, I've always loved
00:57:14
spending time in the woods and on the
00:57:16
water and and could I see myself someday
00:57:18
spending some probably inordinate amount
00:57:21
of money on a house in the woods or in
00:57:23
the mountains by the water? Maybe all
00:57:25
three. I totally could. It's a long-term
00:57:27
goal. It might take us decades to get
00:57:29
there and a lot of good decisions along
00:57:31
the way. And I think I think I'll really
00:57:34
enjoy it. And my point is that that's a
00:57:36
decision that that I'm making that we're
00:57:38
making in pursuit of our wonderful life.
00:57:41
And even though golf is fun, I don't
00:57:43
care about it nearly enough to sink any
00:57:45
significant money into it. I do enjoy
00:57:47
nature, the woods, the mountains, the
00:57:48
water enough to start saving for it
00:57:50
today. So whether you're earning $50,000
00:57:53
a year, $100,000 a year, or half a
00:57:56
million dollars a year, like we all have
00:57:58
to make these decisions. And I just
00:57:59
think it's so interesting that I can see
00:58:02
and I have seen some families earning in
00:58:04
the top 1% in the top 2%. They're
00:58:07
they're earning enough money that you
00:58:08
could argue they should be living a
00:58:10
totally wonderful life and they could be
00:58:13
saving a lot of money as well. But it
00:58:15
involves some hard decisions. What parts
00:58:17
of a wonderful life are they willing to
00:58:18
sacrifice? And unless we decide, unless
00:58:21
we really feel strongly about where
00:58:22
we're willing to sacrifice, it's easy to
00:58:24
fall into that trap of keeping up with
00:58:26
your neighbors and keeping up with your
00:58:28
Joneses and keeping up with the people
00:58:29
in the PTA and next thing you know,
00:58:32
you're spending every single penny of
00:58:33
that half million dollar salary and
00:58:35
you're not really making any progress
00:58:37
for the long run. And my last one today,
00:58:39
I I really like this one. And in case
00:58:41
you didn't already know it, man, the
00:58:43
world of internet financial advice is
00:58:45
the Wild Wild West. And I know I'm being
00:58:48
a little bit of a of a hypocrite here
00:58:49
because I I write on the internet. I
00:58:51
podcast on the internet. I'm speaking to
00:58:53
you right now via the internet in some
00:58:55
way. Granted, I do have something to
00:58:57
lose here though, right? I I could lose
00:58:58
my licenses or my clients. This is how I
00:59:00
put food on the table. I do have some
00:59:02
skin in the game to provide good,
00:59:04
thoughtful advice. And also, I'm not
00:59:06
anonymous, right? You can look me up.
00:59:08
You can send hate mail to me at
00:59:09
jessebinest.blog or you could look up my
00:59:12
boss and and send him some hate mail on
00:59:13
on my behalf. So, I've got a little skin
00:59:15
in the game. But anyway, back to the
00:59:17
point. The world of internet financial
00:59:19
advice is scary. And the reason why I
00:59:21
put this all down, I got an email the
00:59:23
other day from someone who was trying to
00:59:24
message me on Reddit. So, I went to
00:59:26
Reddit to try to find this message. And
00:59:28
an anonymous stranger, they wrote to me
00:59:30
and they said, "Hi, since you're a
00:59:32
fiduciary planner, I wanted to ask you
00:59:34
something. I run a small business where
00:59:36
I create personal finance guides to help
00:59:37
people just like you. I spent countless
00:59:40
hours researching and writing them. I
00:59:41
was wondering if you could give me your
00:59:43
feedback on one of my guides." you know,
00:59:45
it's a it's a reasonable request. They
00:59:47
create guides. I think when they said
00:59:49
for people just like me, I think they
00:59:50
meant for average Joe's and they just
00:59:53
maybe copied and pasted that for
00:59:54
somewhere else. And then they they sent
00:59:56
me a link to one of their guides. Now,
00:59:57
granted, I don't usually click on links
00:59:59
from strangers and I did not click on
01:00:01
this link. Instead, I went back to their
01:00:03
their Reddit history where you can look
01:00:05
at kind of the the comments and the
01:00:07
posts they've made in the past because I
01:00:09
wanted to see like, okay, what kind of
01:00:10
financial advice is this person doing
01:00:12
out over the recent weeks and months?
01:00:14
And here was an example. They wrote,
01:00:16
"When you retire, you want to have as
01:00:18
much money as possible. And in order to
01:00:20
do that, you need to max out your
01:00:22
contributions each year and invest in a
01:00:24
total market or S&P 500 fund,
01:00:26
specifically in a Roth IRA, because that
01:00:29
way you actually get to keep more of the
01:00:31
money. Okay, where did they go wrong?
01:00:33
First off, they started with when you
01:00:35
retire, you want to have as much money
01:00:36
as possible. I mean, sure, some people
01:00:39
might want that, but most people simply
01:00:41
want enough to retire. And as much money
01:00:44
as possible isn't exactly an attainable
01:00:46
goal. There's always more. Maybe it's
01:00:48
semantics, but already I'm a little bit
01:00:50
turned off by this advice. And then they
01:00:52
said you need to max out your
01:00:53
contributions each year. Now, in
01:00:55
general, that that is good advice. I I
01:00:56
won't argue with that. I think if you
01:00:58
have the capability of maxing out
01:00:59
contributions to your tax advantage
01:01:01
qualified accounts, like, yeah, totally.
01:01:03
I I get that. And then they say, and
01:01:05
invest in a total market or S&P 500
01:01:08
fund. Now, this is the classic case of
01:01:12
generally reasonable advice, but
01:01:14
specifically kind of crazy advice,
01:01:16
right? It's generally reasonable to
01:01:18
suggest that someone diversify via
01:01:20
lowcost index funds of broad-based
01:01:22
stocks. And I assume that's what this
01:01:24
person meant. But without knowing more
01:01:26
about the the individual who's actually
01:01:28
asking the question, right, without
01:01:30
knowing more about the individual who's
01:01:31
seeking the advice, it's specifically
01:01:34
crazy to suggest that they go allin on
01:01:38
stocks and allin on US stocks. It's
01:01:40
something we've talked about here
01:01:41
before. It's just it's not appropriate
01:01:44
to say, "I don't know anything about
01:01:45
you, but you got to save a bunch of
01:01:47
money and throw it all into the stock
01:01:49
market." And then last that he uh this
01:01:51
this person says, "Uh, specifically, you
01:01:53
want to save in a Roth IRA because that
01:01:56
way you actually get to keep more of the
01:01:58
money." So, this is when I knew I was
01:02:00
dealing with someone who just didn't
01:02:01
really know at the end of the day what
01:02:03
they were talking about. There's nothing
01:02:05
about a Roth IRA on its own that does or
01:02:07
does not allow an investor to keep more
01:02:09
of their money than say compared with a
01:02:12
traditional IRA or a taxable brokerage
01:02:14
account, right? We have to understand
01:02:15
the investor's current and future tax
01:02:17
rates to say something like a Roth IRA
01:02:20
provides you the best after tax value.
01:02:22
And so anyway, that's just one piece of
01:02:24
advice from this one person on the
01:02:26
internet. And when I read their advice,
01:02:28
I I kind of realized I saw that this
01:02:30
person was stuck inside a particular
01:02:32
personal finance echo chamber. And
01:02:34
listeners, part of my goal is I don't
01:02:35
really want you to get stuck in that
01:02:37
echo chamber, too. The online, the DIY,
01:02:40
the fire echo chambers, they tend to say
01:02:42
things, not always, but it is a
01:02:44
tendency. They tend to say things like,
01:02:46
"Take your social security as early as
01:02:47
possible or take your social security at
01:02:50
70." Very rarely do I hear someone
01:02:52
actually detailing all the
01:02:53
considerations for when to take social
01:02:55
security. like it is a nuance
01:02:57
conversation. It involves a few
01:02:58
different moving pieces and yet I feel
01:03:01
like 95% of the advice I see out there
01:03:03
is either take it at 62 or take it at
01:03:05
70. Another very common piece of advice,
01:03:07
go all stocks or at least have a a much
01:03:10
much higher allocation to stocks than I
01:03:12
think I or any any reasonable financial
01:03:15
planner would recommend. And and why do
01:03:17
we see this advice so much? It's because
01:03:19
people, DIYers, investors in general are
01:03:22
a little bit blinded by recency bias of
01:03:25
the past 15 years. Because over the past
01:03:27
15 years, index funds and chill, all
01:03:30
stocks and chill, VO and chill, and
01:03:33
having that continued to provide a 12%
01:03:35
return every single year forever without
01:03:37
much volatility until the end of time. I
01:03:39
mean, that's the way the last 15 years
01:03:41
have been. But we need to zoom out a
01:03:43
little bit further and realize we need
01:03:44
to realize that we've had a pretty
01:03:46
blessed run for these last 15 or 16
01:03:49
years. It's really since March 2009 is
01:03:51
is kind of the beginning point. And it's
01:03:53
highly unlikely things will last like
01:03:55
this forever. So the idea of being allin
01:03:58
on stocks is a little bit too zoomed in.
01:04:00
It's a little bit myopic. And on that
01:04:02
note, kind of a sister a sister piece of
01:04:04
advice is the S&P 500 is all you need.
01:04:07
America is all you need. You don't need
01:04:08
international stocks. these big US
01:04:10
companies are international in some ways
01:04:12
anyway, right? They're multinational
01:04:14
corporations. All I can say about that
01:04:16
one is like all trends in the market,
01:04:18
the more people who actually believe
01:04:20
that specific piece of advice to be
01:04:21
true, the less likely it'll actually
01:04:23
play out in the long run. I think we're
01:04:26
much better off just remaining humble,
01:04:28
admitting that we probably don't have
01:04:29
the ability to make a decadesl long
01:04:31
macroeconomic predictions and avoiding
01:04:34
the the home country bias if we can. The
01:04:36
next piece of advice that we see online
01:04:38
a lot, Roth is king. Roth, Roth, Roth. I
01:04:41
mean, listen, I'm a huge fan of Roth
01:04:43
accounts. Of course I am. I'm super glad
01:04:45
they exist. My wife and I both have one.
01:04:47
Many, you know, as many of my clients
01:04:49
who can have one do have one. And in
01:04:52
many ways, your Roth dollars are the
01:04:54
most precious dollars in your entire
01:04:55
financial plan. Some people would say, I
01:04:58
suppose that HSA dollars are better, but
01:04:59
either anyway, you cut the cake. Roth
01:05:01
accounts are a wonderful thing, but just
01:05:03
because they are the most precious
01:05:05
dollars in a lot of our financial plans,
01:05:07
that doesn't necessarily mean that it's
01:05:09
the smartest thing for you to maximize
01:05:10
your Roth every year. It doesn't mean
01:05:12
that it's the smartest thing for you to
01:05:13
do Roth conversions just to put more
01:05:15
money in your Roth account because you
01:05:17
have to sacrifice something in order to
01:05:18
put dollars into that Roth account. You
01:05:20
have to pay taxes. So, some people will
01:05:22
forego tax deductions in their highest
01:05:25
tax brackets in pursuit of maxing out
01:05:27
their their Roth 401k. And 99% of the
01:05:30
time that's a dumb thing to do, but
01:05:32
because of this Roth Roth Roth kind of
01:05:35
uh undercurrent, people do it anyway.
01:05:37
Another one that I see a lot is when
01:05:39
someone says, "Well, you only need, you
01:05:41
know, X dollars to be financially free."
01:05:43
Or even something as simple as the 4%
01:05:46
rule. They'll say, "Oh, just multiply by
01:05:47
25 the 4% rule and you can retire." But
01:05:50
even the 4% rule is full of nuance. And
01:05:52
and just as an example, let me ask you
01:05:54
some questions and we'll see how many of
01:05:56
these questions you feel really
01:05:57
confident answering. What portfolio
01:06:00
allocation among stocks and bonds is
01:06:02
assumed in the study underlying the 4%
01:06:05
rule? What was the portfolio allocation
01:06:07
that created the 4% rule? What timeline
01:06:09
or how many years of retirement was
01:06:12
assumed in the study that created the 4%
01:06:14
rule? Does the 4% rule assume that
01:06:16
you're uh taking social security? Does
01:06:18
it assume that your spouse is taking
01:06:19
social security? How does the 4% rule
01:06:22
account for the different taxation
01:06:24
between traditional dollars and Roth
01:06:26
dollars and taxable dollars? Now, some
01:06:28
of you listening probably know every
01:06:29
single answer to those questions. I
01:06:30
would wager that though that many of you
01:06:32
might not know all of those answers and
01:06:34
that's totally okay, right? We don't
01:06:35
need to know everything except to know
01:06:38
we we should know that even the blanket
01:06:41
rules of thumb in financial planning
01:06:43
still require a lot of specific thought
01:06:45
when applied to our unique financial
01:06:47
plan. So again, when someone says, "Oh,
01:06:49
in today's day day and age, you just
01:06:51
need a million half dollars to retire.
01:06:53
You just need $800,000 to retire." It's
01:06:56
it's hogwash. It's there's it I hate
01:06:58
those things because even these blanket
01:07:01
rules of thumb require so much specific
01:07:03
thought to apply them to our unique
01:07:06
financial plan. And the last one today,
01:07:08
one of my personal favorites, a little
01:07:09
pet peeve or, you know, a pet project
01:07:11
that I like to to beat this drum is just
01:07:13
when people say the market always goes
01:07:15
up and and again, it just requires a
01:07:17
little bit of nuance, right? The 1970s
01:07:19
were a lost decade for the stock market.
01:07:21
The 2000s were a lost decade for the
01:07:23
stock market. Zero return. The market
01:07:25
does not always go up. You know, I I
01:07:28
suppose if we zoom out far enough, yes,
01:07:29
it always has gone up before. There's no
01:07:32
guarantee necessarily that it'll always
01:07:33
go up in the future. And this is one I
01:07:35
think I I think I mentioned this on a
01:07:37
podcast maybe in the last 10 episodes
01:07:38
where I said um some people will drop
01:07:40
lines like well if it doesn't go up in
01:07:42
the future then we're all screwed. Not
01:07:44
necessarily. There's a chance. I mean I
01:07:46
don't think this is a high probability
01:07:47
outcome. I just think it's it's possible
01:07:50
right? It's in the range of possible
01:07:51
outcomes and therefore I think this is
01:07:53
worth addressing where there's just some
01:07:55
sort of general stagnation and maybe
01:07:57
stocks don't really go up that much.
01:07:59
They also don't really go down that much
01:08:01
because we say, "Oh, we're kind of like
01:08:03
at full valuation to some extent.
01:08:06
Companies aren't growing as much as we
01:08:07
thought they would." And it's not that
01:08:09
the economy is collapsing. It's not that
01:08:11
the world is collapsing. It's just that
01:08:13
the companies and their earnings in the
01:08:15
stock market aren't necessarily growing
01:08:17
at rates of six and eight and 10% per
01:08:20
year anymore. Like, why is that not a
01:08:22
possibility? I I think it is. It's It's
01:08:24
within the range of outcomes. Again,
01:08:26
that's all I'm saying. It's not high
01:08:27
probability, but it is possible. And I
01:08:29
think it's worth asking for all of us
01:08:32
like how will my retirement plan fare if
01:08:35
there is a lost decade in the stock
01:08:36
market during my retirement. Now, not
01:08:38
only the numbers themselves, of course,
01:08:40
it's worth understanding the numbers
01:08:41
themselves, but how will your brain fare
01:08:44
if your portfolio stays negative for a
01:08:46
few years or if it stays stagnant for a
01:08:48
decade? If your portfolio doesn't grow
01:08:50
for for 10 years, if you're withdrawing
01:08:52
money to survive to live your retirement
01:08:54
and also the market is dropping around
01:08:56
you too, it's worth asking those
01:08:58
questions because yes, I know the market
01:09:00
has always gone up before and none of us
01:09:03
really want there to be a situation
01:09:04
where the market stays stagnant for a
01:09:07
few years, 5 years, 10 years or more.
01:09:10
But it's within the range of outcomes
01:09:11
and and it's important from a DIY
01:09:14
retirement plan, from a financial
01:09:15
independence retirement plan. It's
01:09:17
important to understand what you would
01:09:19
do, how your plan would fare if that
01:09:21
were to happen again. Thank you as
01:09:23
always for listening to to personal
01:09:25
finance for long-term investors. And if
01:09:27
you uh have any feedback, good or bad,
01:09:29
for this episode, if if you want to
01:09:31
contend with something I said, by all
01:09:32
means, drop me an email to
01:09:33
jessebinest.blog.
01:09:35
And as always, if you have any questions
01:09:36
for my ask me anything episodes, because
01:09:38
I know those ones are popular, you can
01:09:40
send your individual questions to jesse
01:09:43
at bestinterest.blog. Thanks for tuning
01:09:45
in to this episode of Personal Finance
01:09:47
for Long-Term Investors. If you have a
01:09:50
question for Jesse to answer on a future
01:09:52
episode, send him an email over at his
01:09:54
blog, The Best Interest. His email
01:09:56
address is [email protected].
01:09:59
Again, that's jessevestinterest.blog.
01:10:03
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01:10:16
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01:10:18
Finance for Long-Term Investors is a
01:10:20
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01:10:23
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01:10:25
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01:10:26
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01:10:28
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