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