← Afford Anything | Make Smart Money Choices
Afford Anything | Make Smart Money Choices
Q&A: Remember When Money Advice Came From Just One Book at the Library?
01:24:46
Loading summary
Transcript191 lines
- [00:00]
Paula Pant
Joe, you and I are both members of the financial media, but we kind of do our own thing. Of course, we're not big mainstream media.
- [00:07]
Joe Salsihai
No, no, no, no. It's financial Illuminati, and we coordinate everything ahead of time to affect the decisions that are made in the market.
- [00:15]
Paula Pant
That's right. You can't tell them about the secret cabal, Right?
- [00:18]
Joe Salsihai
We have the handshake.
- [00:20]
Paula Pant
Absolutely. And the emblem that we wear. We have the matching tattoos right on.
- [00:26]
Joe Salsihai
My butt.
- [00:28]
Paula Pant
Where we can scan it with black light every time you enter the secret lair.
- [00:33]
Joe Salsihai
Oh, that got weird in a hurry.
- [00:34]
Paula Pant
We're going to be talking about the financial media today in response to a caller who deserves his own show. I'm just going to say that we're just going to dive right in. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. We cover five pillars. Financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's Double Eye Fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode, I answer questions from you, and I do so with my buddy, the former financial planner, Joe Salsihai. What's up, Joe?
- [01:05]
Joe Salsihai
We're going to talk here in a second about where I live. Texarkana, Texas. You've been here, Paula?
- [01:11]
Paula Pant
I love it. I've been there twice.
- [01:12]
Joe Salsihai
Well, we have all this road construction on the freeway, and this truck just turned over that was full of Vicks vapor rubber. And the good news is there was no congestion for an hour. Come on, Steve. That deserves better than a wap wap.
- [01:30]
Paula Pant
Let's go to our first question, which comes from a guy who totally deserves his own show. And I bet he doesn't tell corny jokes. That comes from George.
- [01:39]
George
Howdy, Paula and Joe. This is George from a little metroplex just west of Texarkana. I know much of your audience is solidly in the Gen X and Millennial generations, but as a member of the baby Boomer cohort, I wanted to chime in. So many folks here are interested in financial independence. Retire early. Whether it's Fat Fire, Lean Fire, Coast Fire, Barista Fire, or even Double Eye Fire, I offer you a new alternative Fire. For me, that stands for financial Abundance. Happily retired. Fahr Far Far. I pulled the rip cord a year ago, retiring with the missus at the tender age of 60. It's not that tender, to be honest. Our philosophy was simple. Earn a good living, strive for excellence in our jobs, intentionally invest 25% of our gross income, yet live an abundant life centered around family anyway, wanted to share them bonafides. As I formulate my questions, what is the role of financial media in informing but not overwhelming its consumers? When I grew up, we didn't have much access to the world of personal finance and investing. We had Money magazine, maybe a finance book from the local library that was about it. There were no experts to listen to as leaders in the financial media space. What do you say to young financial enthusiasts in their 20s or 30s or 40s who fear that if they miss a Single podcast or TikTok video, they'll remain hopelessly behind? Should they read all the sacred texts, you know, simple path to wealth, millionaire next door, Mr. Money Mustache's famous blog post. Maybe even stacked? Or should they practice frugality or take on five side hustles or drink the real estate Kool Aid? Or should they simply die with zero, living their best van life and quote unquote, retiring to live in Portugal or bali at age 26 with their bucket of fu money, then later, of course, creating their own podcast. I'm just afraid that people will continue to chase the latest fad and believe wholeheartedly in the holy trinity of financial buzzwords, hacking and leverage and arbitrage, all the while failing to understand that their perspectives will likely change when children enter their family or a spouse decides to leave or a job goes sideways or a serious illness strikes unexpectedly. Well, them's my observations would appreciate your thoughts on the role of financial media on this subject. Thank you.
- [04:33]
Joe Salsihai
Can we just start off with George, that the word stacked should not have a question mark at the end, even stacked. And by that, George, I think you mean start with stacked. I think that's what he means.
- [04:49]
Paula Pant
Start with page 13 of that book. That's the page I'm featured on.
- [04:54]
Joe Salsihai
That's a fantastic question, Paula. And George, you need to come to TXK and let's go to Naaman's, have some barbecue because George sounds like my kind of guy.
- [05:03]
Paula Pant
Man. George, you please start your own podcast. When you said maybe even start their own podcast. The world needs your podcast.
- [05:14]
Joe Salsihai
I become frustrated with, I think, some of the things that George is talking about. And by the way, George, I don't get frustrated about you talking about him.
- [05:22]
Paula Pant
I love George talking about I could listen to George all day.
- [05:24]
Joe Salsihai
Yeah. And I was like 100%. Because there are people I know, I call them broke professors. And broke professors are people that have listened to all the shows, they know all the buzzwords, they've read all the stuff, and they still aren't doing anything.
- [05:43]
Paula Pant
So they're not literal professors. They're the professor archetype.
- [05:47]
Joe Salsihai
Right.
- [05:47]
Paula Pant
Also, you know, practice.
- [05:49]
Joe Salsihai
Yes. By broke professor, I mean, you know everything, and you haven't done any of it. It isn't about what you know. It's actually about taking action. So I think for me, the right amount of financial media is. I listen to enough that gives me the idea to help me go take the next action. And I take the next action, and then I use it to fill my head with surround sound. That's much better than the things that we've normalized. People having a lot of debt, people being in over their head, people thinking about better income strategies or negotiation skills. We've normalized all that. And creating this new normal, I think is important while you're taking action.
- [06:28]
Paula Pant
Yeah. So here's the fundamental issue. We live in a society where we have zero financial education in schools. Most of us. There are a few very lucky people who have exceptions to that rule. A small, small handful of people who got a personal finance class in high.
- [06:46]
Joe Salsihai
School, we're up to now. I think the number I just heard, Paula, was 40% of schools this year have it, but they're not great. It's like we're checking the box.
- [06:57]
Paula Pant
Yeah, well, and that's a big improvement over even what millennials and Gen X and certainly baby boomers experienced.
- [07:03]
Joe Salsihai
It's gone from 25 to 40 just in the last three years.
- [07:07]
Paula Pant
Yeah. So we live in a society where personal finance is not taught in schools, and yet it is the foundation of your life, literally your wealth and your health. There are no two things that are more fundamental. Wealth, health, and relationships. I should say those are the fundamental building blocks of your life. And yet when it comes to all three of those, we don't get any education in it. We don't get education in effective interpersonal communication and having a high emotional intelligence such that we can sustain healthy relationships. We don't get education in how to live a healthy lifestyle. Maybe there some people might have a health class in eighth grade, but for the most part, we don't really get an education on the importance of sleep or nutrition or anything related to our health and wellness. And we don't get education on personal finance. These three core building blocks of life are completely overlooked at school. What do we do? Well, these days, a lot of people turn to social media. The issue there is that, particularly if you are feeling hopeless or feeling discouraged. Hopeless is a strong word. But if you're feeling discouraged, there are people online, on social media, who will sell the dream. And that dream is something for nothing. That dream is quick and easy wins that are risk free. You know, that dream is let's stick a middle finger at Wall street by piling into shares of Gamestop and we can simultaneously make a statement about despising Wall street while also getting super rich overnight. That's the Gamestop meme stock saga. Right. With Gamestop and AMC and BlackBerry and all of those other meme stocks that ran up and it was actually just a pump and dump scheme. But that's how we end up falling for pump and dumps.
- [09:21]
Joe Salsihai
Well, you see that with crypto coins. The Hoktua woman, we still haven't gotten clarification on this, but that coin that she created, right. I kind of feel like she even had it pulled over on her. She was being used for a pump and dump scheme.
- [09:38]
Paula Pant
Exactly. Like she came into fame very, very suddenly. To her credit, she formed a company called 16 Minutes because she understood that she was in her 15 minutes of fame and she wanted to extend that. So to her credit, shows a great deal of self awareness. She named her company 16 minutes. She started a podcast, which is how you form deeper, more longer term relationships with your audience. She really started to make the move from being a viral sensation to developing a fan base. And unfortunately she was convinced by bad advisors surrounding her that she should jump in on the cryptocurrency craze. I think she did not understand crypto. She didn't know what she was doing and the people around her turned it into a pump and dump scheme and really made her the, the fall person. So her reputation took a, I'd say a fatal hit. She may or may not go to jail.
- [10:33]
Joe Salsihai
That is my belief too. I mean, I don't have any evidence of what happened. You and I obviously weren't in the room, but that's my feeling too. Yeah, she got used.
- [10:40]
Paula Pant
Yeah. I've listened to interviews, not just interviews, but I've listened to investor calls with her. So I listened to like some of the calls that she did with the crypto investors who bought her coin. What an example of somebody who really did a lot of things right and made very savvy moves to turn a fleeting viral moment into a sustainable business. And I think she could have done it. I think she had that entrepreneurial edge. She was charming, she was witty. She really had that edge. And she could have done it had it not been for the fact that she got bad advice.
- [11:19]
Joe Salsihai
Horrible advice.
- [11:21]
Paula Pant
Yeah.
- [11:21]
Joe Salsihai
You know, there's people also, Paula, on the other side of this, you talk about selling the dream. There's also people that sell the fear. You know, the annuity salespeople really come out of the woodwork. When we start talking about down markets, you know, it could all go bad. The gold salespeople, right? Oh, you know what you do? You turn this into gold coins, and we've got these. These coins that you should buy instead, or these gold bars that you should buy. People selling fear, people selling something for nothing. The salespeople in an unregulated social media environment just seems to be the worst place to look. And yet, when you see studies to your point, the younger you are, the more likely you are to get your advice from social media, right?
- [12:05]
Paula Pant
And so I think that is the fundamental problem is we have this subject matter that is critically important to our lives. We receive no formal education on it. And when we turn to online sources for advice, we don't know what we don't know. And therefore we don't have in the early stages, the judgment to be able to separate the wheat from the chaff. We don't know how to critically assess all of these different voices that we hear. One is telling us about forex trading, one is telling us about day trading. One is talking about options and futures. One is talking about crypto. One is a bogleheads forum and is talking about index fund investing. And if you're a beginner, they're all the same. How do you differentiate one from another? If you're just starting out, you don't have the critical infrastructure inside of your head to be able to ask the right questions and pick at the flaws. Because when it comes to money, the. The goal is not to have the answers. The goal is to know how to ask better questions. And when you're just starting out, you don't know enough to be able to ask intelligent questions. I had this guest on our show a few weeks ago, he was a neurologist. You see the level of sophistication that I bring to the questions that I ask to a former hedge fund manager versus the level of sophistication, which was zero, that I brought to my interview with the neurologist.
- [13:34]
Joe Salsihai
So you got your brain and stuff?
- [13:36]
Paula Pant
Yeah, yeah. I literally think that one of my questions, it might have been my. One of my first questions, I was like, so what is a brain? We were starting from there. By contrast, when Bob Elliot, the former Bridgewater guy, who's the head of Ray Dalio's investing team, he comes on the show and boom, instantly, we're talking about Tariffs and trade policy and monetary policy. We're diving right into the subject matter and I'm talking about how to develop a critical framework so that we can look at monetary policy, government spending, tariffs and taxes as a cohesive whole, rather than looking at each one piecemeal. And that's a much more nuanced question than what is a brain? And both are important, but they certainly reflect different levels of background, different levels of understanding how to critically assess what you are hearing. And so I think, George, to your question. The beauty of what we currently have, which is this infinite cacophony of sources, is that in theory, by virtue of listening to a wide variety of voices, we can start to develop some criticality because we're going to hear conflicting advice from the index fund person versus the forex trading person versus the day trading person. We're going to hear different ideas, different styles, different philosophies. And in theory, by virtue of being exposed to this wide variety of ideas, we can then narrow down to find the one that makes sense to us. I think that is the optimist view of it. The perhaps realist view is that we do a lot of our thinking with our amygdala. To go back to the brain, we think we're thinking from the prefrontal cortex, but we're actually acting from our amygdala more than we realize. No amount of listening to a wide variety of voices is going to change that. And in fact, listening to a wide variety of voices, and particularly over listening to the wrong voices, can pull us off course, sometimes to very damaging degrees. Imagine if, as part of your financial education, I'm using education in air quotes. Imagine if as part of it, you go down the rabbit hole of listening to voices that tell you that sports betting is a great way to manage your portfolio and that you should take all of your savings and put it into sports betting. If you hear somebody say that often enough, you will start to believe that it is true and it's exciting and it's addictive and it could be construed as, quote, unquote, financial education because, hey, it's teaching you how to make more money. And so I think that the counter to that, you know, because when we talk about financial advice, advice is by definition prescriptive, I think as the counter to giving prescriptive advice. What we need is financial media that creates a foundational building block understanding of how things work. And that comes from the study of economics. And so I think what we truly need is economic media.
- [17:12]
Joe Salsihai
For me, with Stacking Benjamins if somebody wants to talk economics, I generally pass. But the reason I pass is because economics so often intersects with politics. My whole foundation, I love the idea of foundational knowledge. My whole foundation is we deal with the politics that we have. Let's talk about what we do about it. So I believe the Stacking Benjamin show begins with what do we do with what we have been handed with the deck of cards that we have. So I will often begin building not at economics, I'll begin building with the rubric of the Certified financial planning community discusses the six areas. Now seven because they include behavior, but the six non behavioral areas of financial planning and how do those work? How do we dig into those six areas and how do we make a better life using these guides that the professionals use?
- [18:16]
Paula Pant
And what are the six areas?
- [18:18]
Joe Salsihai
You'll see these with different names attached, but generally speaking, number one, cash flow management. You'll see that also listed in places is financial position. Second is risk management, investment planning, tax planning, retirement planning, and estate planning are the six different areas. In fact, it's funny, I'm even online looking at different financial planning websites and here's another one that talks about cash flow analysis. Again, same thing as cash flow planning. Protection planning versus risk management. Same thing. Investment planning, tax planning, retirement planning, estate planning. But those are the six areas of financial planning. And then they added behavior, which is a huge part of learning to be a financial professional is not just knowing the ins and outs, the laws, the modeling that goes into these areas, but dealing with the fact that your client is going to be a human being who's going to sometimes do some things that run contrary to the mathematics of the situation.
- [19:24]
Paula Pant
Mm, often.
- [19:25]
Joe Salsihai
Often.
- [19:26]
Paula Pant
Always. Yeah, often and always.
- [19:29]
Joe Salsihai
Yeah.
- [19:30]
Paula Pant
You know, and the reason that I like to start with economic education or like to incorporate it, and that's something that I learned while I was at that one year training that I did when I was at grad school. The reason is because so many people get outraged because they don't understand the motivations of others, whether those others are other people or other organizations. And they will often attribute the actions of others to greed or malfeasance. But if you lay it out, kind of lay out, hey, here's how the system works, here's how the game is played, and here are the motivations and perspectives of every player in the game. It's like learning the rules of chess. This is how it all operates. I think if you can do it right, it has the effect of diminishing that outrage. And we Live in a society where so much media, again, people get paid to make you angry. That's the way the media landscape currently works. And if you can be that voice in the media that provides calm rather than outrage, that takes a measured approach rather than jumps to conclusions, that takes a nuanced look rather than engages in.
- [20:54]
Joe Salsihai
Tribalism, I love that discussion because when I was in college, I began taking psychology classes because I thought that I wanted to know why people do the things that they do. And then I realized that I wasn't getting that from psychology. Don't get me wrong, there's a lot of it wrapped up in psychology. But you know where I found it, Paula? Was in philosophy. When I start taking philosophy classes, and then we realize we get these conflicting philosophies. I've got part of me operating on philosophy A, another piece operating on philosophy B. And they often, in ways that we can't even articulate, they come out in different areas which make us contradictory in the way that we act.
- [21:37]
Paula Pant
We.
- [21:38]
Joe Salsihai
We do these contradictory things. So I love that. What I also realize, and this, to me is what I also love about what you and I get to do, is that some podcasters are just storytellers. They don't talk about any of this. They do everything according to story. I've decided I don't have enough time. I don't have enough time to do all the things I want to do. So here's the little square that Stacking Benjamin is going to do. You have the square that afford anything is going to do. There's another square of people that are, I'm going to make you angry. This is my square. But what's cool is as a creator, you get to decide. I think that's important because I think everything you said is important. I'm not going to do it on Stacking Benjamins, because for me, we have also the background that having been a financial planner for so long and og still being a financial planner, we can go deep, way deeper on teaching you what's going on across the table from you and how a pro does this act of financial planning during the same time. I 100% think as a listener, I also have to know what that rubric is that the creator is using, because then I also know what type of an audience member that I am. I mean, let's. Let's talk about Dave Ramsey as an example. When Dave Ramsey says all debt is bad, that's phenomenal advice, Paula, for his average listener, for the people that come to him with the problem that they have. If you begin with all debt is bad, that is kind of an introductory money philosophy. But when I'm talking to 5 million people, I'm not going to dilute it with, oh, some's good, some's bad, and there's a gray area. And you know what? No, it's going to be black and white. But I think, Paula, knowing that that's where Ramsey's at and understanding this is what the creator is building. You, me, Dave Ramsey, Susie Orman, doesn't matter. I think that's an important point of knowing what you're getting into when you listen to any financial creator.
- [23:55]
Paula Pant
I think the big question underlying all of this that hasn't been directly stated is who do you trust and under that, how do you trust and why do you trust? What decision making criteria do you use to determine who you trust? And I think in relation to that question, we have this K shaped distribution of the population where there's a small number of personal finance enthusiasts who know who Dave Ramsey and Susie Orman and you and I and JL Collins and Mr. Money Mustache and Vivian Too, your rich BFF. They know who all of us are and they follow that cacophony of voices. And then there are people who don't. And the vast majority, the other side of the K, it's K is not even the right shape for it because K kind of assumes some evenness in the bra. It's more like a. A river with a tiny tributary. Personal finance enthusiasts are the tiny tributary.
- [25:03]
Joe Salsihai
Super tiny.
- [25:04]
Paula Pant
Right. But the vast, overwhelming majority of people know nothing about personal finance. Absolutely nothing.
- [25:13]
Joe Salsihai
Remember at the Stacking Benjamin's meetup in Nashville a couple years ago? You and I were there. We sat in a circle outside with a bunch of cool stackers and afforders and we had a great time. And there was a guy there who'd worked on Wall street his entire career, had no idea who Dave Ramsey was. Remember that?
- [25:29]
Paula Pant
That's right.
- [25:31]
Joe Salsihai
I still remember. His name was Kenny. Kenny just raised his hand partway through because somebody asked us a question about Dave Ramsey and whatever, and he's like, who's Dave Ramsey? Worked on Wall street for 30 years. Like that's what a small tributary this is. There's people on Wall street who have no idea what's going on in personal finance.
- [25:49]
Paula Pant
Right? Exactly. And even cnbc. You know, George mentioned CNBC and the business media. Often they'll cover what's happening in the world of major companies. This stock went down, that stock went up. This company revised their earnings reports. This company saw their revenue decline. This company, you know, they will report on what's happening in the world of major companies, but that's very different than personal finance. So to George's point, you really did for a long time just have Money magazine and a couple of books, the Millionaire Next Door. And so for that tiny tributary of people who want something more than just Money magazine and the Millionaire Next Door, both of which are amazing, but it's nice to have options for that tiny tributary of people. The world has expanded in a way that I think is very positive, and now there are so many niches you can find people who reflect your set of interests. I remember Even back in 2010, it was difficult to find that intersection between personal finance and real estate investing for individual investors. Right. If you wanted to design a retirement portfolio, but one that assumes that you also have some rental property holdings, it was very hard to find media that talked about that. And that was 15 years ago. You know, now there's certainly a lot more so you can find. Now because of this abundance of choice, you can find a variety of voices that match your interests, but you also get a lot of noise with that as well.
- [27:27]
Joe Salsihai
I think that when it comes to. When it comes to that rubric of. Of who do you listen to? I just keep going back to the take action. What do you listen to that actually makes you go do something instead of just listening to another one, another one, another one, another one, another one, another one. I'm going to fill up my day with listening to financial podcasts and I'm going to do nothing.
- [27:49]
Paula Pant
Right, Right. But it's a great way to stay motivated. You know, some people say, oh, motivation is only temporary. But like showering is only temporary. That's why you do it every day.
- [27:59]
Joe Salsihai
It is great surround sound.
- [28:01]
Paula Pant
Yeah.
- [28:02]
Joe Salsihai
If you're doing those right activities to surround yourself with normalizing those activities that so few people have but more people need is just an exciting place to be.
- [28:14]
Paula Pant
Yeah. So thank you for the question, George, and I love your voice and your spirit.
- [28:21]
Joe Salsihai
Come on over, neighbor. Come on over to TXK.
- [28:30]
Sponsor
This episode brought to you by Progressive Insurance. Do you ever find yourself playing the budgeting game? Shifting a little money here, a little there, hoping it all works out well? With the name your price tool from Progressive, you can get a better budgeter and potentially lower your insurance bill too. You tell Progressive what you want to pay for car insurance and they'll help find you options. Options within your budget. Try it today@progressive.com Progressive Casualty Insurance Company and affiliates Price and coverage match limited by state law, not available in all states.
- [29:06]
Paula Pant
You know when you're at a cafe or a salon or at a coffee shop or a festival, you go to check out and there's that point of sale system. It's in the shape of a square. Well, it's called, you're never gonna guess square. And I want to tell you about it, about what happens behind the scenes, because there's more to it than meets the eye, right? What you see is a square, a square piece of hardware behind the scenes. It keeps everything running smoothly. So Square's point of sale system is not only user friendly, but it's also highly intuitive. You can track sales, stay on top of inventory, get a better understanding of your customers. Square supports all major credit cards and payment methods, including contactless options like Apple Pay and Google Pay. It's designed for businesses at every stage, including if you've just started, you can sell in person or online. You don't need any special training. And you know, running a business involves a lot of moving parts. And Square just helps simplify it. So for your business, Square will give you the tools that you need at every stage without making anything more complicated than it needs to be. Square keeps up so you don't have to slip slowdown. Get everything you need to run and grow your business without any long term commitments. And why wait? Right now you can get up to 200 off square hardware at square.com Go Paula. That's S Q U-A-R-E.com Go Paula. Run your business smarter with Square. Get started today.
- [30:38]
Sponsor
When I started this podcast, which was late 2015, early 2016, there was a lot that I needed to figure out on my own, like the setup, the tech, the scheduling, the process, even the.
- [30:48]
Paula Pant
COVID art, the logos, right?
- [30:50]
Sponsor
Every day seemed to introduce a new decision that needed an answer. And when you're starting off with something new, it can feel like your to do list keeps growing every single day with new tasks. And that list can easily overrun your life. So finding the right tool that not only helps you out, but that simplifies everything can be a game changer. And, and for millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e commerce in the US including household names like Mattel and Gymshark, and also brands that are just getting started. You can get started with your own design studio. Shopify has hundreds of ready to use templates. You can use Shopify's AI tools to write product descriptions or page headlines. You can create email and social media campaigns and Shopify is your commerce expert with world class expertise in everything from managing inventory to international shipping to processing returns. So if you're ready to sell, you're ready for Shopify. Turn your big business idea into With Shopify on your side, sign up for your 1 month $1 per month trial period and start selling today at shopify.com Paula go to shopify.com Paula shopify.com Paula.
- [32:16]
Paula Pant
Our next question comes from Heather.
- [32:20]
Heather
Hi Paula and Jo, I'm Heather, longtime listener, first time caller, started listening in about 2019. Just been listening to Paula's rant about why renting isn't necessarily wasting money. I in principle agree, but I think frequently for the majority it does make sense to buy. Firstly, my house that I live in now only has a 1% rate on the mortgage. Monthly payments were meant to be 2,100 of which 370 was interest on a 500k mortgage and we decided to set the payments at the rental value of three grand and now we've set them at the rental value of five grand, which means we will pay off this mortgage in 10 years just by making payments at what the rental value will be. And it's quite a huge chunk going to principal because the interest rate is so low. Secondly, I don't think in the UK there is necessarily a huge opportunity cost of investing in your property versus the stock market because most people, roughly a third of first time buyers, get their deposit as a gift from parents and of those that aren't even getting the gift from parents, the money is just sitting in a cash account. Only 20% of Britons invest in the stock market. Most people are too scared and they don't. In terms of the running costs of a home in the UK they seem to be a lot lower than they are in the US. I just insured a four bed home. The insurance for the whole year was £300. We don't have property taxes, we have something called council tax and the person renting has to pay that maintenance. On average I just sold a home I'd owned for 18 years and the maintenance including mortgage was about £500amonth and all the other maintenance, including anything I had to fix in that house over the 18 year period averaged £100amonth which is really low. And in terms of home equity, the house that I just sold increased in value from 250k to 580k when I sold on your property to rent ratio. Incidentally, that was 21, both when I bought and when I sold. But I only put a 12,500 deposit into that house and only lived in it for about five years and was only paying mortgage interest of 500 quid. It was an interest only mortgage and hence making a huge return on the, at first 1500 rental and then two grand. So for a 12,500 investment, which I recouped multiple times over through rentals and then ultimately made a 330k capital gain, I don't see how that could have been a bad investment and I would be really interested to see why you think that would not be a good investment. So, sorry, I'm speaking fast, but I got timed out and I'm about to again.
- [35:04]
Joe Salsihai
And she gets timed out.
- [35:06]
Paula Pant
She did. There's a three minute limit on our voice messages.
- [35:10]
Joe Salsihai
I think we got the nature of the question though, Paul.
- [35:12]
Paula Pant
Yes, absolutely. So, Heather, first of all, thank you so much for the question. Thank you for listening. Thank you for being part of the afforder community since 2019. That means that you've been with us through Covid, through the pandemic, through all of the changes that have happened around the world in the last six years. So thank you for being part of this community for so long to respond to what you've talked about. So first of all, as you mentioned, the price to rent ratio for Your home was 21, both at the time that you bought and at the time that you sold. So you're actually totally in line with what I've been talking about, which is that if the price to rent ratio is 15 or less, it's a slam dunk that you should buy. You don't even have to think about it. If the price rent ratio is 15 or less, buy. If the price to rent ratio is 25 or more rent. But if the price to rent ratio is between 16 to 24 and you are pretty much right in the middle of that at 21. Right. If the price rent ratio is 16 to 24, then you're in the gray zone. And when you're in the gray zone, that's when it's time to take a lot of other factors into account. And so what you've talked about, which is the fact that your maintenance fees are low, and it sounds like in the UK maintenance fees are generally a lot lower than they are in the us, based on what you've said, the fact that your maintenance fees are low, the fact that the interest rate is low, and what that means fundamentally is that the amortization crossover point is going to happen much earlier because remember, the amortization crossover point is a function of the interest rate based on all of those factors. When you're in that gray zone of having a price rent ratio that's between 16 to 24, that those are the factors that you should consider. So you're completely spot on. We're in total agreement because your price rent ratio at 20:1 is right in the middle of that gray zone. There were a couple of other things that you said that I want to comment on for the sake of the broader audience. You mentioned that only 20% of Britons invest in the stock market. I haven't verified that. I haven't fact checked that myself. But if that is true, that sounds like a problem. Because without stock market exposure, without equities exposure, how are you going to build any type of long term wealth? If it's true that 80% of Britons are leaving their money in cash, that means that money is getting whittled away to inflation. And I know that the UK has had a battle with inflation just as we've had here in the us. The solution is not therefore more Britons should put their money into buying a property. The solution is therefore more Britons should invest in the stock market. Because gaining that exposure to long term assets is going to be critical to any type of long term wealth building or any type of long term goal. You mentioned a third of first time buyers get their deposit from parents. I'm assuming every time that I talk, I'm assuming that you support yourself or that you and your spouse as a couple support yourselves. So if somebody has the benefit of generous parents, we can talk about that on a case by case basis. It would not be responsible to give financial education based on the assumption that you come from a family that has so much disposable income that your parents can give you tens of thousands of dollars, which is what a down payment would be. In addition to that for the cohort of people who do have that benefit. That doesn't change the math around whether or not a home is worth buying. For example, if you live in a place where the median price to rent ratio in your location is 30, right. Or 35, it doesn't make any sense to buy there whether you get that down payment from your parents or not. And so if they are willing, let's say that your parents want to give you a gift of $30,000, it would be better for that gift of $30,000 to go into the stock market, to go into equities it would be better for that same bucket of money that your parents are giving to you as a gift to go into equities rather than go into a property. If you live in an area where the price rent ratio makes renting a slam dunk.
- [39:51]
Joe Salsihai
Can we also evaluate this piece of property against the stock market? What you're talking about using her numbers. Now, I didn't quite catch all of the cash flow numbers, so her number is going to be a little better, maybe much better than just the capital gain that she got on the property. But if we just take the capital, I just want to take that capital gain because the capital gain to everybody in the community is going to sound great. She took a Property that was $250,000 and 18 years later sold it for $580,000. That sounds like a significant amount of money. And don't get me wrong, it is a significant amount of money.
- [40:32]
Paula Pant
Yeah, well, pounds.
- [40:33]
Joe Salsihai
However, if we use arbitrary unit of measure, right. Whatever it might be, taking something from 250, 000 things to 580, 000 things over 18 years sounds great. But if we use the rule of 72, 72 for people new to this community, is this mathematical magical number that you take the interest rate you think you're going to get, you divide it into 72 and it tells you how many years it would have taken your money to double.
- [41:01]
Paula Pant
For example.
- [41:02]
Joe Salsihai
Yeah, let's take 8%. Eight divided into 72. Every nine years, Heather's money's going to double. So if she had $250,000 in equity in the stock market, every nine years, it would double. The first nine years have become half a million arbitrary units of measure.
- [41:20]
Paula Pant
Dollars or pounds. Yeah.
- [41:22]
Joe Salsihai
Into then the second double then would be a million. So what we need to compare it to is not. Does 250,000 to 580,000 sound like a lot? Yes, it does. For years. But in 18 years in the stock market getting 8%, which is a metric that the stock market has beaten consistently over long 18 year periods of time, it doesn't over short periods of time, but over long periods of time it does. That number should have been a million.
- [41:49]
Paula Pant
Right. If over the span of 18 years that money went from 250,000 to 580,000. If we're looking purely at the appreciation, like let's assume that this home is paid off and we're talking about having that amount of money in cash. If we're looking purely at the appreciation on a cash value asset, that means.
- [42:10]
Joe Salsihai
She has quote unquote lost $420,000 of opportunity cost. Now, some of that I know she got back through cash flow. I had trouble keeping up with the cash flow number. I think I might have missed a piece of it. So it would have been closer than that 420 with the cash flow. However, still, there's going to be a significant delta between the two. Paul.
- [42:30]
Paula Pant
Right. Well, and what muddies her particular example is that she's blending primary residence with rental property. So she lived in this residence for five years and then rented it out. And so when we talk about whether or not you should purchase a home, we're talking about your primary residence. The math around evaluating a rental property is completely different.
- [42:50]
Joe Salsihai
Good point. So because yes, it was renting versus buying was the original. You're right, exactly.
- [42:55]
Paula Pant
And so when she talks about the cash flow that she received from this property after she moved out of it after year five, for the purposes of the question of renting versus buying your primary residence, that cash flow is irrelevant.
- [43:10]
Joe Salsihai
Non existent.
- [43:11]
Paula Pant
Exactly. Because the question that we're addressing is should you rent or buy your own personal residence, your primary residence, the place where you sleep? Again, Heather, the fact that this property had a price to rent ratio of 21, which is right pretty much smack dead center of that gray zone. If the gray zone is 16 to 24, the dead center is 20. You're neighboring dead center of the gray zone both at the time of purchase and at the time of sale. And so you're a perfect example of corroborating exactly what I've said about purchasing a home as a primary residence based on calculating the price to rent ratio. And then if you land in the gray zone, taking these other factors that you've talked about, such as amortization, crossover point and maintenance costs, and length of time that you think you'll hold the property, taking all of those factors into account. Now, that being said, my expertise is the US real estate market. I don't know the UK real estate market. And as you've talked about it sounds as though in the UK across the board there are lower property taxes, lower insurance costs, lower maintenance costs. And so it may be the case that again, the UK market is not my expertise, but it may be the case that the price to rent gray zone might shift a little higher in the UK in order to accommodate for the fact that the carrying costs are lower. If that is in fact the case. And the beauty of the price to rent ratio is that you know that if you're outside that boundary line, you know, you know that if the price to rent ratio is 35 or 40, then don't even think about it. I live in Manhattan where the median price to rent ratio is 55,0:50. So don't even think about buying a place here, at least not for monetary purposes. You might want to do it for emotional satisfaction, the same way that you would buy any consumer item like a handbag or a set of golf clubs or a sports car. There are certainly a lot of things that people buy a boat, you know, people buy lots of things for the sake of emotional satisfaction. If you want to do that, cool, do that all day long. But as a purely financial decision, in a place like Manhattan where the median price to rent ratio is 50, it simply does not make financial sense. And so the beauty of having a price to rent ratio calculation is that you know when it's a slam dunk to buy, which is 15 or under, when it's a slam dunk to rent, which in the US is 25 or over. And when you're in the gray zone, and being in the gray zone simply means you apply a lot of numbers, apply a lot of math to figure it out. Shaw, I want to go back to what you talked about, about how the home, over the span of 18 years increased in value from 250,000 to 580,000, which drastically underperforms, just using the rule of 72, that dramatically underperforms what the market would have done. Assuming an 8% annualized average market return, A lot of people will counter that, hey, she put down only 16,500. And so all of the gains that she made, she didn't make those gains on a $250,000 purchase. She put down 16,500. And therefore her cash on cash return.
- [46:52]
Joe Salsihai
Yeah, leveraged money return.
- [46:54]
Paula Pant
Yeah, exactly. The leveraged money return is much higher. That is the argument that a lot of people make specifically for rental properties. And when it comes to buying rental properties, if you do want to use a leveraged money return example, and I talk about this kind of in depth in my class, in your first rental property, there is validity to a certain extent, the cash on cash return equation, which is the leveraged money return equation, when you're considering the purchase of a rental property, because you are fundamentally looking at an asset and asking yourself, does that asset produce a sufficient return, enough of a sufficient return such that it would be worth leveraging into it? Certainly when you're purchasing a rental property, running that calculation makes sense for a primary residence. And again, my expertise is in the U.S. but in the U.S. you, for a primary residence, once you factor all of the holding costs, the property taxes, the insurance, the maintenance, the hoa, the tremendous holding costs that we have here, it really starts to become awash. So I do want to make a distinction between evaluating a property as a primary residence versus evaluating it as a rental, because they're completely different games. And that's why, Heather, when you talk about the performance of your property, I want to tease out the fact that it was a primary residence for you only for five years, and after that it switched into being a rental. And so we have to evaluate it by two separate sets of standards based on its use. There's one final point that I also want to raise, and this is if we can up level this for a moment. This is a thinking about how to think point, Heather. What I notice is that for the majority of your voice message, you give us one very specific anecdotal case study. And extrapolating from one anecdotal case study out to a broader population is not a framework for thinking through financial decisions. For example, let's use an analogy here. When you get the flu, you might have a friend who recovered from the flu by not taking any medicine and just drinking tea, decaf tea, and eating lots of chicken noodle soup. And then you might have another friend who took medication and drank a lot of water. And then you might have another friend who just drank beer and vodka the whole time. All right, so you've got these three friends and they had three different approaches to dealing with the same problem. And you've got a bunch of anecdotal case studies and you don't know what's what, and you don't know what's the right approach. And how do you deal with the fact that you have this, this flu? Right. Let's say the friend who just drank beer and vodka the whole time. Let's say all three friends had positive outcomes. Can we extrapolate from any one of those anecdotal case studies to arrive at a broader conclusion as to what most people with the flaw flu should do? No, not necessarily. Instead, not even.
- [50:13]
Joe Salsihai
Not necessarily. I think it might be dangerous.
- [50:15]
Paula Pant
Right? Exactly. Exactly. I was trying to be gentle there. Yeah, it would be dangerous to extrapolate from those three anecdotal case studies when you've got the one person who drank tea and ate soup, one person who took a variety of over the counter medicines, and one person who just drank alcohol the whole time. Drank vodka the whole time. Right. It would be dangerous to extrapolate from any of those, even though for each individual it worked in that one particular case. So instead, when we think about how to deal with the flu, we rely on foundational principles rather than singular case study anecdotes. And as a framework, as a thinking framework, that's what I want to impart to everyone when it comes to the topic of real estate. Because so often in real estate and in investing generally, there's often an over reliance on individual anecdotes, anecdotal case studies, where people will say, well, it worked for me, therefore it should work for everybody. And that is easy to do when you don't have any formulas or any equations or any structured way of doing the math around it. And that's why I talk about the price to rent ratio. That's why I talk about, for rental properties, calculating the cap rate. That's why I bring up the cash on cash return equation and the various pros and cons associated with using it so that we can have the structure of mathematical formulas in order to not rely on anecdotal case studies.
- [52:01]
Joe Salsihai
It's easy to think that way as well, Paul. It's actually easier than ever before to think that because it works this way for me, it works this way for everyone. And truly we have to guard against that more than ever before because social media algorithms are better than they've ever been. And through a recent class that two of us at Stacky Benjamins took at mit, we dove deeply into this topic. And it's troubling, it is troubling how easy it is to fall into the trap of. Because we are in a surround sound that's created specifically to get more advertising dollars out of our wallet, that everybody thinks the way I do. And when I hear somebody who has a conflicting view, I'm much more likely then to say, well, they're the exception and I'm not, because the people that agree with me are the people that social media shows me. So it really is something we need to guard against more than ever before, right? It's easier now for financial companies to prey on our fears or people selling things that prey on our fears. If I'm worried about the stock market or I'm worried about investment risk, all of a sudden annuities start showing up, right? If I think that, you know, I've been looking at how to make money quicker, all of a sudden the crypto stuff that we talked about earlier in the show, that starts showing up, this magic thing, this pill that's going to solve all my Problems start showing up. It is incredible how companies are able to do that and just how they do it. It's funny because everybody talks about how, you know, we all think our phone is listening to us. And our wonderful professor, Sanan Oral is his name, talked about how much more nefarious it is what companies are doing. Paula, if you have your phone on right now and I have my phone on right now, we have, through one of the hundreds of apps that we have on our phone, one time given permission that it can locate us. One app will use the permission another app gave it to place you and I in the same place. They will use predictive modeling about the things you've been talking about recently and the things I've been talking about recently. Recently to predict what the conversation is that we're having. Therefore, it will begin showing you things that are interesting to me that I've been talking about recently. And then you will ignore the five things that we didn't talk about, but you'll pick up immediately the one thing that we did talk about that is something that was interesting to me that I just shared with you. And now when you go search for that thing, it knows. The algorithm then knows how it spread. It spread from me to you and it picks that up as well. It's far more nefarious than the speaker listening to us. The geolocator is downright creepy.
- [55:01]
Paula Pant
Wow. Like a virus.
- [55:03]
Joe Salsihai
It's so horrible. It's so horrible.
- [55:05]
Paula Pant
Have you heard about the stories on Tick Tock? There are a bunch of people who talk about how the Tick Tock algorithm knew that they were bisexual before they themselves knew. Wow. Right.
- [55:17]
Joe Salsihai
Like group of friends who you were around, what you were talking about, what you were thinking about. Predictive modeling again.
- [55:23]
Paula Pant
Yeah. TikTok knew their sexual orientation before they themselves became consciously aware of it.
- [55:29]
Joe Salsihai
Just using law of large numbers and you fit into this group probably and wow.
- [55:37]
Paula Pant
Yeah. There are a whole bunch of creators on TikTok who talk about that.
- [55:41]
Joe Salsihai
Yeah.
- [55:42]
Paula Pant
So, yes, that's why we want to rely on first principles thinking, which means what is a formula? A mathematical formula is simply a concise representation of an idea of a principle. And so that's why we use these mathematical formulas like cap rate or like price to rent ratio or cash on cash return, or if you're getting into real estate investing, the internal rate of return, the net present value. We use these formulas because fundamentally a formula is simply the manifestation of a concept of a principle. And by virtue of using formulas, we can make these first principles rooted decisions. Now, that being said, we have to be careful about which formulas we use. So like I said, cash on cash can be problematic. There are pros and cons to it, but the cash on cash formula specifically I think can be problematic. I've got a whole different rabbit hole I could go down about that one. When I say careful about what formulas we use, that's another way of saying careful about which principles we adopt. But all of that, that rooting in first principles, thinking, that's what spares us from overreliance on anecdote. But in your case, Heather, you did a great job. I mean, wonderful, wonderful returns on that property. Joe, we have a special treat next.
- [57:08]
Joe Salsihai
Oh boy. Oh, ice cream. Ice cream.
- [57:11]
Paula Pant
It's better than ice cream. Whoa.
- [57:14]
Joe Salsihai
You're kidding me.
- [57:15]
Paula Pant
It is a call from a listener whose question we answered recently and he called with an update with an update on how he has applied our answer to his life and what's happened next. We love hearing these. So please, to anybody who has ever called with a question, please call back and give us an update because these are some of my favorites. So we're going to hear that next. Small Business Owners State Farm is there with small business insurance to fit your specific needs. Whether you're starting a new venture or growing an existing one, State Farm helps you choose the right coverage to protect what matters most. Working with a local State Farm agent helps you understand your coverage options, offering local support to help you achieve your goals. Focus on turning your passion into a thriving business. Knowing your insurance can change as your business grows. State Farm here to help you succeed with your business. Like a good neighbor, State Farm is there.
- [58:18]
Sponsor
What does the future hold for business? If you ask nine experts, you'll get 10 answers. Are we going into a bull market or bear market? Will inflation go up or down? Will rates rise or fall? We don't know. But over 40,000 businesses have future proofed their business with NetSuite by Oracle, the number one Cloud ERP. Bringing accounting, financial management, inventory and HR into one unified business management suite so that you have the visibility and control you need to make quick decisions with real time insights and forecasting so that you're closing the books in days rather than weeks. If we needed something this robust inside of afford anything, this is what we'd use. Because whether your company is earning millions or even hundreds of millions, NetSuite helps you respond to immediate challenges and seize your biggest opportunities. Speaking of opportunity, download the CFO's Guide to AI and Machine Learning at netsuite.com.
- [59:06]
Paula Pant
Paula this guide is free to you.
- [59:08]
Sponsor
At netsuite netsuite.com Paula P A U.
- [59:14]
Paula Pant
L A Summer is here.
- [59:18]
Sponsor
The days are longer, they're warmer. It's nice to be outdoors and feel comfortable again. I live in an apartment in Manhattan, so when I want to go outdoors I go to my building's common area. And my building has it decorated beautifully with just amazing outdoor furniture and everything. The building did a great job. But for those of you who don't live in apartments, if you have a home with outdoor space, you can get amazing outdoor furniture for your own space from Wayfair. They have a huge selection of outdoor seating like Adirondack chairs, chaise lounges. You could get outdoor dining tables, umbrellas, bar stools, grills, tableware, patio cushions, planters, garden statues. All the things that make your outdoor space really beautiful. I use Wayfair to get indoor things, so I've got a lot of shelving from them that's in my front entryway in my bathroom. Like I've used a ton of their shelving in order to create more storage space. I also have a daybed from Wayfair that's like multifunctional, right? It's a couch, but it can double as a guest bed. It's got a built in bookshelf, it's got drawers. So Wayfair has a huge selection of home items to make it easy to find exactly what's right for you. No matter your home size, your style, your budget, there's something there for every space, space and free and easy delivery. Even on the big stuff. You don't need to pay big delivery fees for patio furniture. You can get patio sets, gazebos, hot tubs, all of that shipped free. Shop a huge selection of outdoor furniture online this summer. Get outside with wayfair. Head to wayfair.com right now. That's W A Y-F A I R.com wayfair every style, every home.
- [61:04]
Paula Pant
Our final comment today comes from Nick.
- [61:09]
Nick
Hi Paula and Joe. This is Nick from Dallas. I was just calling to say thank you for answering my question about private equity in episode 601. I wasn't even aware of the accredited investor requirements and agree that would have only added additional risk to my portfolio compared to putting it in equities. And it's probably something my wife would not have appreciated me doing. After I submitted that question, I listened to various episodes on both Afford Anything and the Stacking Benjamin show discussing current market volatility and I realized I needed to cool my jets and think a little bit more objectively about the best place for our money. So I ended up meeting with Jesse Kramer over Zoom and he helped me out a lot, coming up with a good plan for how to best buy into the market downturn with the funds that we have. And I'm currently implementing it along the efficient frontier. Thank you both again for being the excellent educators that you are and I wish you both the best in the future.
- [61:54]
Joe Salsihai
Oh, that's so great.
- [61:55]
Paula Pant
Oh, I love that. I love that so much.
- [61:59]
Joe Salsihai
And our good friend Jesse from the Stacky Benjamin's Roundtable team. Yeah, helping out.
- [62:03]
Paula Pant
Jesse's fantastic. Just a great guy.
- [62:06]
Joe Salsihai
I'm very happy that we could help. Nick. It's funny because with all the volatility you're seeing this far too often. Paula There was a piece recently in Investment News, which is an industry rag for financial professionals, talking about how some firms are now authorizing their advisors, AKA salespeople, to recommend alternative investments far more than they were before because it's a huge sales opportunity, which really frustrates me a ton because I feel like if these companies had the guts to train their sales force to teach people that this is the time, this is the time when the market is lower. If you just believe the economy is going to pull through, which is not a far fetched bet by any means, that means that this is the time to be investing in the stock market. This is the time to double down on our position. Now don't get me wrong, if you've got money you need in the next three or five years, it was in the wrong place already and that's a whole different thing. But if your money is 10, 15, 20 years from now and you want more excitement, invest more money into those index funds because five years from now you're going to be high fiving yourself. And if these companies would teach their people to do that, sure, your short term sales might suffer a little because there's always going to be somebody that doesn't get it. But those long term investors that believed in you and relied on your advice and it was proven correct, they're going to love you even more. You know what's going to happen instead? They're going to buy these investments, these alternative investments, they're going to go south, a bunch of them are going to go sideways and five years from now they're going to lose the customer for two reasons. A, they didn't take advantage of the opportunity when it presented itself and B, they neutered their chance of success by investing in these things that didn't grow. Sure, it hedged against it, but it didn't grow. I'm seeing people talk about, well, maybe I should move toward gold. Looks like might go into a recession. What you should be moving toward are things that match your long term goals. And I get so excited to hear that Nick is doubling down on his long term goals. Because Nick, that's going to be the win. That will be the win for anyone.
- [64:28]
Paula Pant
Else who's listening, who is still feeling queasy about market volatility because the volatility has lasted, I think, longer than some people expected. I think a lot of people were hoping that we might have more one or two rough weeks and then things would be fine again. But it looks like things are going to be shaky for a while. We hear on the news every day that we may already be in a recession. The US in Q1 we had negative GDP growth. We may already be in a recession. And if we're not, we might go into one soon. Remember, recessions are only declared in hindsight. So we technically will not know when we're in a recession until after the fact. Now sometimes, like in 2008, it's blindingly obvious, or in 2020 it was blindingly obvious. But sometimes a recession is not necessarily obvious in the moment.
- [65:22]
Joe Salsihai
Well, there's plenty of things to be worried about, Paula, in the, the near future. I mean, as we record this, I'm reading these reputable sources like Reuters, Bloomberg, talking about empty container ships reaching the United States from China because so many companies were unsure of tariffs. So there's still another shoe that could drop when it comes to the economy people are talking about. Well, you might see some empty store shelves because companies are like, I don't know what's going to go on with this. So I'm going to wait to protect my company just to see so we can keep people employed, so we can protect ourselves. So, so there may be more volatility. And I think it's important to be okay with feeling the fear, but truly thinking through what the appropriate medicine is or the appropriate antidote in our portfolio. What's the best thing to do here? Feel the fear. You know, Paula, you and I telling people, oh, don't be worried about it. I mean, you're right, you're gonna worry about it anyway and there's plenty to worry about. But separating that emotion from your action, I think is a huge piece of, of successful investing.
- [66:42]
Paula Pant
I wanna recommend two things. Number one, Xanax. Have you watched White Lotus? Larazepam? I had to Google what it was. And then I saw all these memes that were like, there are two types of people in the world. The ones who had to Google what Lorazepam was and the ones that didn't.
- [67:06]
Joe Salsihai
I have not watched it.
- [67:07]
Paula Pant
I have watched it and I had to Google what that was. But now I know. And I also know which camp I fall into. Number one, I don't necessarily recommend having a barbell allocation for everybody. There are significant pros and cons to it. I personally have a barbell allocation in my own portfolio. Again emphasizing I don't recommend it for everyone or even for the majority of people.
- [67:35]
Joe Salsihai
Can we talk about why you don't.
- [67:37]
Paula Pant
Why I don't recommend it or why I.
- [67:39]
Joe Salsihai
Well, why you don't recommend it? I know why I wouldn't recommend it for everybody.
- [67:43]
Paula Pant
Okay, cool. I guess let's start by defining what it is. So a barbell allocation is if you think of a barbell at the gym, right, where you've got two big weights on either side of a bar. So I've got a ton of cash on one side and I've got all equities on the other side. I've got nothing in the middle, meaning I don't have a bond allocation. I don't recommend that for the majority of people because that bond allocation smooths out the volatility in your portfolio. It's an asset class that frequently moves inverse to equities. Not all the time, they're not necessarily inversely correlated, but they frequently historically have been. And so you get that mix of fundamentally companies that you own, which are equities and companies or organizations, government entities that you are lending money to. That's what bonds are. So for bonds you're the lender, for stocks you're the owner. And by being a mix of both an owner and a lender, that is both stocks and bonds, you get to a better risk adjusted return in your portfolio. Again, going back to the efficient frontier, you know, you get to a more comfortable place along the efficient frontier. And so that's why for the majority of people, I think having a mix of stocks and bonds is a good idea. For myself personally, I have two factors, two extenuating factors that make my portfolio a little bit different. One is that I have seven rental properties that are all paid off in full, free and clear. And so that acts as the income portion of my portfolio. If you think of a bond as an income producing asset, seven free and clear rental properties are the income producing portion of my portfolio. And so I see that almost as analogous to a bond allocation. On the other side, I also am an entrepreneur. I own a small business, and I have a handful of employees. And I need to make sure that first and foremost, my primary objective is to make sure that I can make payroll for my team. And so I need a heavy cash allocation because I'm not going to let this business fail. And I want to make sure that we have Runway. I'm not a W2 employee. I can't just find another job. My responsibility is not only to keep myself employed and continue paying myself a paycheck, but also to make sure that my team, which has. They have families that rely on them. Like, I want to make sure that they get paid. And so I need to adjust my own holdings accordingly, you know, for. For the sake of that small business Runway. Based on both of those things, I have a need for a lot of cash. And so then I use all equities to offset that cash. So that's why I have a barbell allocation. Where all of that is going is to say, even though I don't recommend barbell for the majority of people, when it comes to something like a recession or something just like a market drawdown, like what we're experiencing right now, there is a certain comfort that comes in the short term from knowing that you have a heavy cash allocation, you know, knowing that you have a Runway for the next at least year. And that in the W2 world, would be a solid emergency fund. Knowing that you've got that cash allocation, that emergency fund that provides a lot of immediate comfort. And then for the rest of your money outside of that emergency fund, this is a buying opportunity. When stocks go on sale, what do you do when anything goes on sale? If it's on sale, you buy more. If it's on sale, you load up stocks. It's volatile right now, and it's going to change day by day. But there are many days right now where the stock market is on sale. In the short term, are you catching a falling knife? Possibly. But in the long term, meaning 10 years or more bullish. On the long term, I think you're.
- [71:43]
Joe Salsihai
Catching a falling knife. If you're investing in an individual stock, or there's a much better chance if you're investing in an individual stock, if you're investing in an index, I think, sure, you're getting a lower price. But that knife, to your point, Paul, if you're looking 15 years out, there's no such thing as a knife. You're just buying at a lower price. You're buying into the economy a lower price than it was before. And if my goal is to evaluate this 10 or 15 years from now and not day by day, because I'm a tomorrow investor, not a right now investor, I'm not doing it. But certainly if you know, I'm investing in Nvidia, right after the deep SEQ news came out, there's a chance that's a falling knife. I don't know where that thing's going to land right at that. At that particular moment, we didn't know how Nvidia was going to respond. We had no idea. You're seeing this right now with Tesla and all the news around. Elon Musk now saying goodbye to government stuff and now getting back in the driver's seat of his company.
- [72:44]
Paula Pant
Are people, no pun intended, you like that?
- [72:48]
Joe Salsihai
Are people going to forget the hatred that all these supposed customers had around Elon, or are they going to remember? We don't know. We don't know if it's a knife or not. So for that reason, the falling knife, I think, depends on whether it's a diversified approach or a singular thing that we're looking at.
- [73:10]
Paula Pant
Exactly. I don't think a broad market index fund, such as AN S&P 500 Index Fund or VTSAX in the long term will not be a falling knife.
- [73:21]
Joe Salsihai
Yeah.
- [73:21]
Paula Pant
I don't make definitive statements. That was a definitive statement.
- [73:25]
Joe Salsihai
Yeah.
- [73:25]
Paula Pant
If you want me to couch that at all, I'll say, based on stock market history, what we know, let's put.
- [73:31]
Joe Salsihai
It the way that you really mean it, Paula.
- [73:33]
Paula Pant
It will not be.
- [73:34]
Joe Salsihai
Yeah, well, and if you are wrong, you and I don't have podcasts anymore.
- [73:39]
Paula Pant
Right. Civilization has collapsed, the economy has failed.
- [73:43]
Joe Salsihai
And we're now on a shortwave radio setting out. SOS is between people's caves.
- [73:49]
Paula Pant
Yeah.
- [73:50]
Joe Salsihai
Otherwise you're 100 correct.
- [73:53]
Paula Pant
Right.
- [73:54]
Joe Salsihai
Because you have to be. I mean, that's the nature of that singular bet you have to make for you to be correct. Is it the economy if the economy continues? 100 correct.
- [74:05]
Paula Pant
Right. Assuming that the US continues to exist. Assuming that civilization continues to exist. Right. Assuming anything other than an absolute, like such a black swan event that the term black swan doesn't even begin to cover it.
- [74:20]
Joe Salsihai
And this is why I really don't like the phrase play the stock market. I don't play the stock market. Play the stock market means it's a roulette wheel. And I'm looking too much at one day. You know what? Over one day, if you look at the statistics around the roulette wheel, that is the stock market, on a daily basis, there's a lot in common. But over time, where we can actually draw negative correlation, Paula, to the roulette wheel, because that little bit of edge the house gives itself in Las Vegas, Atlantic City or wherever, that makes sure over long periods of time, they're going to win. The fact that it's the companies that are creating the inflation that we're all fighting means that if the economy continues, they're going to win. Which is why on about a 70% basis, again, over long periods of time, the stock market ekes out meager gains. Meager gains? Meager gains that translate to 8 to 10% over an average year. And you learn the longer you invest that there's no such thing as average. So it's going to bounce around a lot more than that. But smooth sailing if you're looking at 15 year periods of time, not single days.
- [75:31]
Paula Pant
Right.
- [75:32]
Joe Salsihai
Can I talk briefly? Why I don't like a barbell allocation?
- [75:35]
Paula Pant
Oh, sure.
- [75:36]
Joe Salsihai
The reason why, and by the way, I love a barbell allocation, but the reason I also don't recommend it for everybody is this. Individual investors tend to not look at the entire barbell. They don't look at their real estate and their cash and their stock market investments as a single portfolio. We tend to isolate. And I know that from going into meetings and talking about rebalancing portfolios. And I go, hey, Paula, guess what? Fund A is through the roof this year. And you're like, yeah, that's been great. I love that one. Fun. B not doing so well. Yeah, I know. I really hate that one, Joe. And I go, okay, it's time to rebalance. Guess what we're gonna do? And you're like, oh, we're gonna put more in fund A because that's the one doing really well. And I go, no, we're gonna take money out of that. You're cr. Why would we do that? Okay, what are we gonna buy? It's probably something else. Good. We're gonna put in fund B and you go, what? The crappy one? Are you kidding me? Like, we micromanage our portfolio. We don't look at it as an organism that's organized so that one part goes up while the other part goes down. And because of that, what a barbell allocation does is it takes one part of your portfolio and drastically increases the standard deviation, meaning it's going to bounce around a hell of a lot more knowing that you're playing a full portfolio game. So I Wouldn't recommend it because you're going to blow up your own portfolio. Because you're going to be in my office going, we got to get out of this. Now. This bounces around way, way, way too much. Not thinking about your entire net worth. Just thinking about that one. So I don't like it. Not because it's wrong. I don't like it based on the behavior of the person that I'm recommending it to. There were some people, I'm like, this is the right medicine, but you can't handle it.
- [77:23]
Paula Pant
Right.
- [77:24]
Joe Salsihai
It just. You're not going to sleep. It's going to be horrible. No, thank you. Can't do it.
- [77:29]
Paula Pant
Right. It's the seventh principle of financial planning is behavior.
- [77:33]
Joe Salsihai
It's behavior, right. And it's so important. It was so important. Listen, this strategy will work, but you've been thrown off the roller coaster way before you get to the end, and that's the worst result ever. So why even get on that if you're going to. If you're gonna fall off and not reach your goal? So instead, I'd rather more smoothly expect lesser returns and get a ride that clicks along with a lot less volatility. Because if you seriously can't sleep every day and this goes back to. It's okay to worry, and I can't tell you not to worry. Worry is natural. You're going to worry. But if you're worried so much, Paula, that you're staying up at night, which the barbell approach, if you're a micromanager, is going to create, that, you can't do it. Well, you can. You shouldn't.
- [78:20]
Paula Pant
Yeah. The behavioral element is the single most important foundational element of personal finance. Oh, can I say one other thing, Joe? One other tip for people who are dealing with current volatility, I do believe.
- [78:31]
Joe Salsihai
It'S your show, so you can say whatever you want.
- [78:33]
Paula Pant
Thank you.
- [78:34]
Joe Salsihai
It's crazy how that works.
- [78:35]
Paula Pant
Wow. Thank you, Joe. If you are planning on making Roth conversions, make it when the market's down, because then you're converting a smaller amount of money, 100%. When you make a Roth conversion, you're paying taxes on the amount of your portfolio that you're converting. So if the market's down, you're paying taxes on a smaller amount. And then all of the gains, the recovery accrues in that Roth account.
- [78:59]
Joe Salsihai
I know a lot of people who save that move for the end of the year, so they have some certainty around their tech situation, their own personal situation. But in a year like this year. That's a great move to make.
- [79:11]
Paula Pant
Yeah.
- [79:12]
Joe Salsihai
Now, you know another move that I like that is in some people's investment policy statement. I don't like this reactively, but I love this when it's part of your policy. I love the policy that when the market goes down, assuming I'm in indexes, I am going to systematically increase my standard deviation as the market drops more. And what that means is different than the person I was reading in an online forum recently that wrote in this Facebook group, they wrote there's now it's gone from a 60% chance the economy's going into recession up to 90. I'm thinking about going into gold right now.
- [79:52]
Paula Pant
Oh, dear.
- [79:53]
Joe Salsihai
To counter that. I know. And I went, oh please, no, I hate that. I'd love it if systematically your system said, oh, that's the trigger. That means that I'm going to take more risk. I'm going to stay diversified. I'm not going to take individual position risk, but I'm going to use broad based indexes and I'm going to go further up the efficient frontier. I'm going to accelerate into it. That's a wonderful move. But only if it's a system. I think not. I think, I know. Only if it's a system and we have a plan to increase the gas and then a plan when I go back right to my original allocation. I love that. That's, that's another great move.
- [80:40]
Paula Pant
Yeah, awesome. I love that because then you're buying in at precisely the right time. You're buying in when it's cheap and you're buying into the asset classes that are going to over time likely to produce higher rewards.
- [80:54]
Joe Salsihai
They're going to rubber band harder.
- [80:56]
Paula Pant
Yeah.
- [80:57]
Joe Salsihai
Reversion of the mean. And I'm going to believe the economy is going to continue and if it does, I'm going to notch it up. Now. I'm not going to get crazy and put everything in small cap value. Right. But I might go from the 30% allocation for people that, you know, went through that with me, I might notch it up to 35. The more volatile areas of my portfolio make that the cap instead of 30. It's super, super interesting the ways people handle volatility. And gold is number one, the worst way to handle it. Not just because getting into gold now is not great, but also because you got to figure out when to get back out. When are you going to make that move, Paula?
- [81:41]
Paula Pant
Probably never. I think for most people. For most people it would be probably never.
- [81:45]
Joe Salsihai
Yeah, I remember A guest on the show talking about. And I won't throw them under the bus by saying their name, but saying that they had bet on precious metals and they'd sat there for three years. And now they're in the uncomfortable position of hoping the stock market goes down so they can get back some of the gains they missed. And think about that. When the market goes up 70% of the time and you're hoping for it to go down so that you can recover from your oops.
- [82:12]
Paula Pant
Yeah. You're hoping for a low probability event.
- [82:15]
Joe Salsihai
Yeah. That is not a great place to be.
- [82:17]
Paula Pant
Yeah. Yeah.
- [82:19]
Joe Salsihai
Just trapped. So. But Nick, fantastic.
- [82:23]
Paula Pant
Yeah. Love it.
- [82:24]
Joe Salsihai
Love it.
- [82:25]
Paula Pant
Thank you. Congratulations for taking all the right steps and thank you for calling and sharing that with us. And to anyone listening, if you have a question, afford anything.comvoicemail is where you can call in. Leave your question. Joe and I would be happy to address it. And if you've already called in, please give us an update. I love hearing voices from this community. That's why I love these Q and A's. We quite literally have more voices on the show. So, Joe, we've done it again.
- [82:55]
Joe Salsihai
We did it. And by the way, we should tell people actually how we did it. Paula, where are you right now?
- [83:01]
Paula Pant
Oh, I will never tell.
- [83:07]
Joe Salsihai
That'll be our secret.
- [83:08]
Paula Pant
Let's just say I'm working remotely from undisclosed location. From an undisclosed location. Joe, speaking of undisclosed locations, where can people find you if they want to know more?
- [83:19]
Joe Salsihai
Oh, man. At the Stacking Benjamin Show, Paula, we've had a bunch of great stuff. A week ago on Friday, you and Jesse Kramer and OG Doug and I, we recorded an episode that was really interesting because even with people who are as financially savvy as our roundtable group is, I asked the question, not what's the right move? What move makes you happier? And we drew this dichotomy between. The answers you guys gave were really interesting. Really. You hear some advice all the time. Does it make you happier to pay with cash or happier to pay with a credit card? Your answer surprised me. Does it make you happier to buy an individual stock or to buy a fund or an index? That surprised me on Wednesday. The always amazing guy. I can't believe that I've never had this guy on Stacking Benjamin's before. I talk about him all the time. When I give talks, I talk about how wonderful he is, especially when you're starting out. J.L. collins comes on the Stacking Benjamin show on Wednesday. So a couple great ones, but we're every Monday, Wednesday, Friday. So come join Paula and the gang on our fun roundtable.
- [84:27]
Paula Pant
Oh, fantastic. Thank you, Jo, for joining us and for sharing your insights and wisdom.
- [84:33]
Joe Salsihai
No, thank you, Paula.
- [84:34]
Paula Pant
Aw. And thank you all for being part of the Afforder community. If you enjoyed today's episode, first and foremost, please share this with your friends and family and anybody else that you know. Neighbors, bartenders, baristas, colleagues, babysitters, dog walkers, second cousins. Ooh. Second second cousins twice removed.
- [84:57]
Joe Salsihai
Twice removed.
- [84:59]
Paula Pant
Share this with all the people in your life. It's the most important way to spread the message of F double I R E. Number two, please open up your favorite podcast playing app and leave us up to a five star review. Write a few words, talk about what you enjoy about the show. It's a great way to to spread the message, to bring more people into our community and to help us book amazing guests. And number three, subscribe to our newsletter absolutely free affordanything.com newsletter that's affordanything.com newsletter thank you again for tuning in. I'm Paula Pant.
- [85:33]
Joe Salsihai
I'm Joe Salsihai and we'll meet you.
- [85:36]
Paula Pant
In the next episode.