Afford Anything Podcast Summary: Q&A – The Stock Market Sucks. Is Private Equity Any Better?

Release Date: April 22, 2025
Host: Paula Pant | Cumulus Podcast Network
Guests: Joe Salsihai

1. Introduction and Overview

In this episode of Afford Anything, Paula Pant and her co-host Joe Salsihai tackle pressing investment questions from their listeners. The primary focus revolves around the challenges of the current stock market volatility and explores whether private equity presents a viable alternative. Additionally, the episode delves into investment strategies concerning growth versus income-producing assets and the implications of Roth IRA withdrawals on tax brackets.

2. Navigating Private Equity Amidst Market Volatility

Caller: Nick from Dallas, Texas
Timestamp: [01:32] – [17:35]

Nick’s Situation:

• Age: 36
• Dual full-time incomes: $260,000 annually
• Investments: $550,000 in 401(k)s, Roth IRAs, and brokerage accounts
• Emergency Fund: $200,000
• Mortgage: $3.5% interest, 22 years remaining
• Investment Query: Considering allocating $100,000 from the emergency fund into private equity due to stock market volatility.

Key Discussions:

• Private Equity vs. Public Equities:

  • Joe: Highlights the high volatility and concentrated risk associated with private equity, contrasting it with the broader diversification of public markets. “Private equity is up and to the right, meaning a lot more volatility and not soft volatility.” ([03:15])
  • Paula: Emphasizes that private equity often leads to less diversification, which might not alleviate Nick’s concerns about market volatility. “Is the goal to reduce volatility in your portfolio? Private equity would actually give you less diversification.” ([12:10])

• Accreditation Requirements:

  • Joe: Points out that private equity typically requires investors to be accredited, meaning a net worth exceeding $1 million, which might be a hurdle for Nick. “I think in this case, Nick, when you shared with us your net worth number and your age... I don't think you have enough money to invest in private placements yet.” ([06:48])
  • Paula: Criticizes the arbitrary nature of accreditation criteria, advocating for a more nuanced approach to assessing investor sophistication. “It's a snobbish, crude approximation... Absolutely horse wash.” ([04:21])

• Diversification and International Investments:

  • Joe: Encourages broad diversification, especially international exposure, to mitigate US market volatility. Highlights recent international market performances.
    “Japan up 5.97%, Eurozone up 17.7%, China large cap up 25.99%, Poland up 37.72%...” ([09:00] – [19:00])
  • Paula: Supports maintaining international investments as a buffer against domestic market downturns. “International's doing well. I don't know how the stock market is going to be at the time that this episode airs.” ([10:09])

Conclusion: Paula and Joe advise Nick to reconsider private equity as a primary means to reduce portfolio volatility. They suggest enhancing diversification, particularly through international markets, before venturing into more concentrated investment vehicles like private equity.

3. Balancing Growth and Income-Producing Assets in Taxable Accounts

Caller: Cindy
Timestamp: [23:25] – [37:04]

Cindy’s Situation:

• Age: Mid-40s
• Savings: Over $900,000, 90% in retirement accounts
• Debt: None
• Goal: Building a taxable account to become work optional in 10 years
• Investment Query: Balancing growth-oriented investments versus income-yielding assets considering tax implications.

Key Discussions:

• Growth vs. Income Strategies:

  • Paula: Advocates for a growth-focused investment strategy in taxable accounts, emphasizing asset appreciation over high dividends. “Optimizing for growth in the value of the underlying asset is a better long-term approach than optimizing for high dividend stocks.” ([24:24])
  • Joe: Discusses the relationship between growth stocks and volatility, advising that growth-oriented investments tend to have higher standard deviations. “Growth-oriented stocks... increase your risk.” ([25:50])

• Tax Implications and Withdrawal Strategies:

  • Joe: Explains how high volatility in growth stocks necessitates careful withdrawal strategies to avoid selling during downturns. “If you have to go there to get some money out to live on, I'm not as likely to be stepping in it when I do that.” ([28:04])
  • Paula: Suggests that Cindy's 10-year horizon favors growth investments, which can yield significant appreciation before transitioning to income-generating assets during retirement withdrawals. “You are very much going to be in the mindset of a long-term investor.” ([30:47])

Conclusion: For individuals like Cindy, who are a decade away from becoming work optional, a growth-oriented investment approach in taxable accounts is recommended. This strategy maximizes asset appreciation, aligning with long-term financial goals, before shifting towards income-producing assets as retirement approaches.

4. Understanding Roth IRA Withdrawals and Tax Brackets

Caller: Josh
Timestamp: [38:52] – [41:50]

Josh’s Situation:

• Concern: Whether withdrawing from a Roth IRA during retirement will push him into a higher tax bracket, offsetting the tax-free benefits.

Key Discussions:

• Roth IRA Withdrawal Benefits:

  • Paula: Clarifies that qualified Roth IRA withdrawals are entirely tax-free, provided the account holder is over 59½ and the account has been open for at least five years. “Withdrawals from an IRA are tax free as long as you are above the age of 59 and a half and the account has been open for at least five years.” ([39:27])
  • Joe: Adds that Roth IRA withdrawals do not impact Social Security benefits and do not trigger the IRMAA fees, which are additional Medicare costs based on income. “Roth IRA withdrawals also don't impact Social Security.” ([40:36])

• Potential Unintended Consequences:

  • Joe: Highlights that while Roth IRA withdrawals are tax-free, other factors like earned income can affect eligibility for government assistance programs. “Earned income you're bringing in could affect your Social Security payments.” ([40:29])

Conclusion: Qualified Roth IRA withdrawals will not increase Josh’s tax bracket or negate the tax advantages of this account type. Roth IRAs remain a tax-efficient tool for retirement income, offering flexibility without adverse tax implications.

5. Listener Feedback and Insights

Anonymous Caller – Efficient Frontier Explanation
Timestamp: [33:20] – [35:19]

Feedback: An anonymous listener praises the exploration of the Efficient Frontier, explaining that they conducted their own calculations to understand how different asset combinations can achieve optimal returns for given risk levels. The listener suggests creating a better tool for visualizing the Efficient Frontier, expressing willingness to invest in its development.

Joe and Paula's Response:

• Joe: Appreciates the listener’s proactive approach to understanding portfolio optimization. “Portfolio Visualizer not being an ideal tool, I would be willing to pay quite a hefty sum if you all invested in creating a better tool.” ([35:16])
• Paula: Acknowledges the feedback and expresses openness to promoting effective tools developed by the community. “There is a market and there's a demand. So if someone wants to build it... we will promote the heck out of it.” ([35:38])

Anonymous Caller – Attribution of “Follow Your Curiosity”
Timestamp: [42:00] – [53:27]

Feedback: An anonymous listener points out the misattribution of the quote "follow your curiosity," clarifying that Elizabeth Gilbert first notably said it in her 2015 book Big Magic, while Cal Newport discussed similar concepts earlier in his 2012 book.

Joe and Paula's Response:

• Paula: Provides a detailed account of the origins and popularization of the phrase, acknowledging both Cal Newport and Elizabeth Gilbert's contributions. “Liz Gilbert is widely attributed as having popularized the phrase, because Liz Gilbert is more famous.” ([43:26])
• Joe: Adds historical context, comparing the evolution of ideas within the FIRE community to the dissemination of quotes and concepts. “This podcast has its own FIRE acronym. Double I Fire.” ([48:57])

Conclusion: The hosts appreciate listener engagement and the constructive feedback provided, emphasizing the importance of accurate information and the evolution of ideas within the financial and creative communities.

6. Final Thoughts and Encouragement

Paula and Joe conclude the episode by encouraging listeners to continue submitting questions and comments. They emphasize the importance of thoughtful investment strategies, understanding tax implications, and fostering a fulfilling career beyond financial independence. The hosts also highlight upcoming episodes and resources available through the Afford Anything community.

Notable Quotes:

• Joe Salsihai:
  “Private equity is up and to the right, meaning a lot more volatility and not soft volatility.” ([03:15])

• Paula Pant:
  “Is the goal to reduce volatility in your portfolio? Private equity would actually give you less diversification.” ([12:10])

• Paula Pant:
  “Withdrawals from an IRA are tax free as long as you are above the age of 59 and a half and the account has been open for at least five years.” ([39:27])

• Anonymous Caller:
  “Doing that simple math could be a helpful exercise.” ([34:00])

This episode of Afford Anything offers valuable insights into navigating investment decisions amidst market uncertainties, balancing growth with income strategies, and understanding the nuances of retirement withdrawals. Paula Pant and Joe Salsihai adeptly address listener concerns, providing actionable advice grounded in financial psychology and strategic planning.