Q&A: Which Investments Should Go Into Which Accounts?

Summary

Afford Anything Podcast Summary
Episode: Q&A: Which Investments Should Go Into Which Accounts?
Release Date: July 2, 2025
Host: Paula Pant
Guest: Joe Sal Cehai

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Introduction

In this episode of Afford Anything, hosts Paula Pant and Joe Sal Cehai delve into listeners' questions about optimizing investment strategies, specifically focusing on asset location and portfolio rebalancing. The episode emphasizes the importance of critical thinking in financial decisions, utilizing frameworks such as the Efficient Frontier to guide listeners toward smarter investment choices.

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Listener Question 1: Diversifying with TIAA Traditional

Listener: Jared
Timestamp: 01:41 - 14:30

Overview: Jared, a 45-year-old investor with a net worth of approximately $1.5 million and a 92% allocation in stocks, seeks advice on incorporating TIAA Traditional into his portfolio. He acknowledges the potential benefits of annuities but is concerned about the opportunity costs and long-term commitment associated with pre-committing funds into such products.

Key Discussion Points:

1. Opportunity Cost vs. Guaranteed Income:

   • Jared’s Prediction: He anticipates Paula will focus on the opportunity costs of investing in TIAA Traditional, while Joe might highlight the balance between annuity benefits and potential market returns.
   • Paula’s Response: She agrees with Jared’s assessment, emphasizing that investing in annuities like TIAA's can reduce potential market returns but provides a stable income stream.
     • Quote: “You are giving up some potential returns. However, you do. And I love that he recognizes this in his mid-40s because an annuity does give him some other benefits that he is embracing.” – Joe Sal Cehai [05:10]

2. Benefits of Annuities:

   • Guaranteed Income Stream: Annuities provide a predictable income, which can alleviate the stress of managing retirement funds.
     • Quote: “An annuity payout is great because when we get Social Security, for example, Paula, we don't really think about that money. We just spend it.” – Joe Sal Cehai [06:09]
   • Behavioral Advantages: Having a guaranteed income stream prevents the common behavioral pitfall of saving excessively without spending, which can lead to decreased happiness.

3. Drawbacks of Annuities:

   • Limited Flexibility: Annuities often lack the flexibility required for unforeseen financial needs or changes in personal circumstances.
   • Intergenerational Wealth: Typically, annuities terminate upon the holder's death, potentially leaving little to no inheritance for beneficiaries.

4. Strategic Asset Allocation:

   • Balancing Aggression and Conservatism: Jared’s high equity allocation is offset by the conservative nature of annuities, aligning with the podcast’s emphasis on balanced asset distribution.
     • Quote: “I think that's great. It’s conservative, it's beatable, but it's not bad.” – Joe Sal Cehai [12:21]

5. Recommendation:

   • Holistic Approach: Paula recommends Jared continue with his strategy, integrating the annuity to secure a portion of his retirement income while maintaining a high-risk stock portfolio for growth.
     • Quote: “It's just a guaranteed paycheck at the end.” – Joe Sal Cehai [07:38]

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Listener Question 2: Asset Location Strategies

Listener: Jack
Timestamp: 17:50 - 29:57

Overview: Jack seeks advice on asset location for his and his wife's portfolio, which includes three major funds: domestic (Vanguard Total Stock Market Index - VTI), international (Vanguard Total International Stock Market Index - VXUS), and Fidelity Blue Chip Growth. He’s grappling with the optimal placement of these funds across taxable, pre-tax, and Roth accounts, considering factors like tax efficiency and growth potential.

Key Discussion Points:

1. Fund Tax Efficiency:

   • Fidelity Blue Chip Growth: Identified as the least tax-efficient due to high turnover.
     • Paula’s Insight: “the fidelity fund has high turnover... that is likely the least tax efficient holding. So that should absolutely be in a tax advantaged account.” [21:31]

2. Foreign Tax Credit:

   • International Funds (VXUS): While foreign tax credits prevent double taxation, they don’t offer additional tax advantages.
     • Paula Clarifies: “foreign tax credit... it's simply there to offset any taxes that you pay to a foreign country... it wouldn’t harm you to hold an international fund in a tax advantaged account.” [21:38]

3. Strategic Asset Placement:

   • Roth Accounts: Ideal for assets expected to grow significantly due to tax-free appreciation.
     • Paula’s Recommendation: Place large cap growth funds like Fidelity Blue Chip Growth in Roth accounts to capitalize on tax-free growth.
       Quote: “With a Roth account, all your growth, all your appreciation and your dividends and your capital gains are all, all tax exempt.” [24:40]
   • Taxable Accounts: Best suited for tax-efficient funds like VTI that generate minimal taxable events.
     • Joe’s Input: “VTI is the one that I think is most taxable brokerage friendly.” [22:19]

4. Balancing Contributions:

   • Contribution Limits: Roth accounts have stricter contribution limits compared to pre-tax accounts.
   • Flexibility: Maximizing growth in Roth accounts while using pre-tax or taxable accounts for other investments provides tax diversification.

5. Final Allocation Suggestion:

   • Example Allocation:
     • Roth IRA: Fidelity Blue Chip Growth
     • Taxable Account: VTI
     • Pre-Tax Account: VXUS
       Paula Summarizes: “the C fund, put in the taxable; the Fidelity in Roth, and the international in pre-tax.” [23:28]

6. Complexity Simplification:

   • Avoid Overcomplication: Paula and Joe emphasize maintaining simplicity to reduce the burden of frequent transactions.
     • Joe’s Advice: “But when I rebalance, I'm going to look at all these accounts and I'm going to try to keep my portfolio as simple as possible.” [62:15]

Conclusion: Jack is advised to place his less tax-efficient Fidelity fund in a Roth account, his highly tax-efficient VTI in a taxable account, and his international VXUS in a pre-tax account, aligning with the principles of tax-efficient asset location.

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Listener Question 3: Efficient Frontier and TSP

Listener: Harry Markowitz (Anonymous)
Timestamp: 34:08 - 68:51

Overview: Harry seeks guidance on applying the Efficient Frontier to his Thrift Savings Plan (TSP), which offers limited fund options: C Fund (S&P 500), F Fund (Fixed Income), and I Fund (International). He is struggling to balance risk and return effectively within these constraints.

Key Discussion Points:

1. Understanding the Efficient Frontier:

   • Concept Origin: Introduced by Nobel laureate Harry Markowitz in 1952, the Efficient Frontier represents the optimal balance between risk and return.
     • Joe’s Explanation: “there's a hyperbola, and that hyperbola is actually referred to as the Markowitz bullet.” [36:19]

2. Applying Efficient Frontier with Limited Funds:

   • Initial Analysis: Using Portfolio Visualizer, Joe demonstrates that Harry's current allocation (16% C Fund, 20% F Fund, 20% S Fund) is close to the Efficient Frontier.
     • Joe’s Observation: “you're pretty damn close.” [43:59]

3. Adjusting for Minimum Allocations:

   • Scenario Adjustments: By setting a minimum allocation (e.g., 10% in Small Cap), the Efficient Frontier shifts, but Harry's current allocation remains efficient.
     • Paula’s Insight: “Harry, you clearly are not that far off. 70, 20, 10... you're pretty damn close.” [42:55]

4. Expanding Asset Classes for Greater Diversification:

   • Advanced Strategies: For those with access to a wider array of asset classes (e.g., via Vanguard), Joe suggests incorporating mid-cap, small-cap, commodities, real estate (REITs), and bonds to achieve a more diversified and efficient portfolio.
     • Joe’s Strategy: “I like large value, large growth instead of just large cap... real estate in the form of a REIT.” [44:14]

5. Balancing Risk and Return:

   • Setting Return Goals: Joe recommends starting with a desired rate of return (e.g., 8-9%) and adjusting the portfolio to meet that goal while maintaining risk tolerance.
     • Joe’s Advice: “I'm looking for eight. And then I see what eight gives me.” [47:48]

6. Simplifying Rebalancing Processes:

   • Managing Transactions: Paula and Joe discuss strategies to simplify rebalancing across multiple accounts without executing excessive transactions.
     • Joe’s Practical Tip: “rebalancing does not mean that I'm going to have transactions in every single account.” [62:02]

7. Community Feedback and Simplification:

   • Addressing Listener Concerns: The hosts acknowledge the complexity of the Efficient Frontier concept and emphasize the importance of education and patience in mastering portfolio optimization.
     • Paula’s Encouragement: “This is a learning curve. It takes time to understand.” [56:24]

Conclusion: Harry’s current TSP allocation is nearly efficient within the constraints of available funds. The hosts advise maintaining his balanced approach while considering additional diversification if possible. They also stress the importance of aligning portfolio strategies with personal financial goals and risk tolerance.

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Final Thoughts

Throughout the episode, Paula and Joe reinforce the podcast’s core philosophy: "You can afford anything, but not everything." They advocate for critical decision-making, leveraging financial frameworks like the Efficient Frontier, and maintaining a balanced and diversified portfolio tailored to individual circumstances. The hosts emphasize simplicity, behavioral insights, and long-term thinking as keys to financial success.

Notable Quotes:

• Joe Sal Cehai [05:10]: “You are giving up some potential returns. However, you do. And I love that he recognizes this in his mid-40s because an annuity does give him some other benefits that he is embracing.”

• Paula Pant [21:31]: “the fidelity fund has high turnover... that is likely the least tax efficient holding. So that should absolutely be in a tax advantaged account.”

• Joe Sal Cehai [36:19]: “there's a hyperbola, and that hyperbola is actually referred to as the Markowitz bullet.”

• Joe Sal Cehai [47:48]: “I'm looking for eight. And then I see what eight gives me.”

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Additional Resources

Listeners interested in implementing the discussed strategies can download the free "Asset Location Made Simple" cheat sheet available at affordanything.com/asset-location. For further insights on annuities and the Efficient Frontier, links to in-depth podcast episodes are provided in the show notes.

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This summary captures the essence of the episode, highlighting the key discussions and insights shared by Paula Pant and Joe Sal Cehai. By addressing real listener questions with expert analysis, the hosts provide actionable advice for optimizing investment strategies and enhancing financial well-being.

Transcript

[Paula Pant]

In honor of today's episode, we made a free cheat sheet called Asset Location Made Simple. It's four pages long with actionable shortcuts and tips that you can use as you're rebalancing your portfolio. Download it for [e-mail] asset location. That's affordanything.com asset location. Hey Joe, what's one of your favorite takeaways from seven Habits of Highly Effective people by Stephen Covey?

[Joe Sal Cehai]

Don't drink your bath.

[Paula Pant]

What? He doesn't say that.

[Joe Sal Cehai]

Oh. Personally, I really like the three buckets. The things that we can control, the things we can influence, and the things that we can neither control nor influence. And most of us spend most of our time on things we can't control or influence. I really like reminding myself of that.

[Paula Pant]

That's my favorite part of it, too. Although I don't think of it as three buckets, I simply think of it as locus of control. Is this in my locus of control or not?

[Joe Sal Cehai]

Yeah, that's a good one.

[Paula Pant]

There's another one that you cite often and one of our callers calls you out on it. Oh, hey, yeah, we're going to hear which one that is in a moment. Welcome to the Afford Anything podcast, the show that knows you can afford anything. Not everything. This show covers five pillars. Financial, psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode ish, I answer questions from you and I do so with my buddy, the former financial planner, Joe Sal Sehei. What's up, Joe?

[Joe Sal Cehai]

Oh man, I'm so excited about today. We've got some fun questions.

[Paula Pant]

Yeah, great questions. Let's start with this first question which comes from Jared.

[Jared]

Good morning, Paula and Joe. Jared here, longtime listener, second time caller. My question is to what extent should I consider TIAA Traditional as part of diversifying my portfolio? I am currently 45 years old. I my net worth is approximately 1.5 million and I am 92% allocated into stocks. I am currently comfortable with that risk profile and I have not panic sold or anything like that. With the volatility of spring 2025, as part of looking into this option, I have uncovered TIAA Traditional as something my employer provides. As I understand it, this is a two part product. On the front end, I put money in. Now I get a minimum guaranteed return of 3%. In practice, based on historical data, it's closer to 4 to 6% per year. Then on the back end, I can convert cash value into a fixed income annuity which over the last couple of decades has been a conversion rate of approximately 8%. Based on my research, it seems as if TIAA is well regarded and respected in this space, is rather secure as an insurance company providing annuities, and provides more generous conversion rates and guaranteed income rates than other companies. That said, this is not a traditional product for reducing volatility in terms of common research into bonds or bond funds or those types of assets. The research I have looked at, including listening to some of the guests on this podcast, suggests that annuities can can be a very healthy part of a diversified portfolio. However, this is not just an annuity product. Accordingly, I'm curious what your two thoughts are. I think that Paul is going to focus on opportunity costs and the extent to which I at 45 want to pre commit my 65 or 70 year old self to an annuity in this way, especially when we don't know what conditions will be like in 20 plus years from now. Paula tends to privilege flexibility and adaptability over long time horizons and unknown conditions. I predict that Joe is going to talk about picking up both ends of a stick. And while the annuity product would probably be healthy in a diversified portfolio, all told, the other end of the stick in this case is the below market returns, which for someone at my age, I could really be losing out on a lot of returns over the next 20 years. Should I invest this money separately and then convert later even if that conversion rate is going to be lower than what TIA might provide? Thank you both in advance for your time. I look forward to your answer.

[Paula Pant]

Jared, I love the question. And you nailed what?

[Joe Sal Cehai]

Oh no, no, no, no, Paula, not at all. I was going to talk about opportunity cost, Jared, and I'm upset that you assigned that to Paula.

[Paula Pant]

He nailed it. But also the portion of Jared's prediction in which he said, Joe, that you would talk about the loss what he could otherwise make if he were to invest this in the market. That's probably what I would lead with. Even beyond flexibility there you got us mixed up. No, but he also his he nailed the prediction of me valuing flexibility over long time horizons. He nailed it.

[Joe Sal Cehai]

Yeah. And he's not wrong about how I would have answered it.

[Paula Pant]

Yeah, exactly.

[Joe Sal Cehai]

Jared. Damn it.

[Paula Pant]

He should start a betting site for how you and I are going to answer these questions because that was a really good guess as to exactly what we were going to say.

[Joe Sal Cehai]

Okay, so can we go on to the next question then?

[Paula Pant]

We should probably elaborate out on that answer.

[Joe Sal Cehai]

And actually, I do have more. I think he is partially off on what my answer would be.

[Paula Pant]

Oh, where'd he get it wrong?

[Joe Sal Cehai]

I don't think he got it wrong at all. I think you can do better. And I appreciate that he understands that which makes this juicier. Because as I've also said the past, the key to any great strategy is knowing where the Achilles heel is. If you think your strategy doesn't have an Achilles heel, you just haven't found it yet because everyone does. So he knows he's giving up some potential returns. However, he does. And I love that he recognizes this in his mid-40s because an annuity does give him some other benefits that he is embracing. The first one that he talks about is this guaranteed income stream. If he builds it now, rather than worry about bonds in his portfolio, he can build this guaranteed income stream that also has a positive and a negative. Let's talk about the positive first, because there's some positives that we never talk about when it comes to annuities and annuity payouts. An annuity payout is great because when we get Social Security, for example, Paula, we don't really think about that money. We just spend it. That's the first money in your budget in retirement. So you get your Social Security check, use that for groceries, use that for gasoline, for the car. That is base level spending. And you don't question it. Should I have used that money or not? You just use it. And a problem that a lot of people have with their portfolios, study after study shows, is that we accumulate all this money and we're great savers, and then we're afraid to spend it. What ends up happening is we do less and we have less happiness and we worry more. Because I'll tell you, as a former financial planner, I could tell you all day, over and over that even though that graph is showing you with less money every month as you're spending it down, you're still going to be okay. People still tend to freak out when the graph goes down.

[Paula Pant]

Yeah. After spending an entire lifetime knowing that you have an income stream. Right. Knowing that your whole life, starting from the age of 12, when you begin your paper route or babysitting or 15 maybe, when you get your first job at McDonald's, starting from early adolescence, and then throughout your entire life, you're used to money always coming in the door. And so even as you spend, you know that's going to be offset by the fact that new money is still going to be flowing in and it's incredibly hard to Suddenly in your 60s or 70s, wrap your head around the idea of spending with nothing new flowing through.

[Joe Sal Cehai]

And I love how your afforders are recognizing that. We had that call recently from the gentleman was like, do I put it in the Roth ira because I'm afraid that I'll be afraid to take it out. Yeah, like people get that I got this money in the tax shelter and I love the tax shelter, so I don't want to take it out. And he already knows that is the wrong answer. Not taking it out. So the great thing about the annuity is that when that becomes an income stream, you just spend it. Just spend it. Which is great because it's going to add to your lifestyle. It's going to give you some freedom from worry. That is awesome. So the answer is on paper, can you do better by not doing the annuity 100%. And by the way, there's a reason for that. And this is not annuity companies ripping you off. That's the reason we hear all the time is annuity companies are ripping you off. Let's talk about what annuity is. And Jared also reference this. Jared said he recognizes this is different than a bond. It's an insurance policy. An annuity is an insurance product. And whenever you take control away from you and you decide not to insure, in this case, AKA invest in a diversified portfolio for myself to insure my future. And I'm going to hand that over to an insurance company who's going to insure my future income streams. They're going to get paid. They're gonna get paid and they're gonna make sure that you win. But they win too. So it is the necessary evil of getting a guaranteed payout every month. Tiaa, very respected. He doesn't get this wrong. Tia, very respected company. One of the best in the annuity business. I love TIA and disclosure. In the past, I've had a relationship with TIA where they paid me. But I was gleeful that TIA wanted to work with me because they're a kick ass company. I had it. I was gleeful.

[Paula Pant]

I've never heard anyone say that word. I think I've only ever read it.

[Joe Sal Cehai]

Gleeful. I skipped to mom's basement to the microphone every day because TIA is great. And by the way, TIA works with some of the smartest people in America. TIA is the main provider of college campus retirement funds. So smart people hire tia.

[Paula Pant]

I'm a client of tiaa. I'm not compensated by them in any manner. But I am just a Regular, run of the mill, individual client.

[Joe Sal Cehai]

Yeah, I've been compensated by them in seven years maybe, and I still love them. But anyway, so if you're going to pick an annuity provider, TIA is a fine one, but they're going to get paid. Now, the other downside, and this is a big downside that I really want to ask you about, Jared, which is tell me about your family. Tell me about your wishes beyond you. Because the big thing about annuity payouts is that there are ways that you can take this annuity payout later where some might be left for your, your beneficiaries. However, in most cases, the annuity dies with you. So while it can make sure that your life is free of worry, you're going to have more happiness. You're going to spend money the way that you want to without thinking about where this money's coming from, because this is just a guaranteed paycheck at the end. Your beneficiaries, I want to be clear, this is a wild generality and I get that there are ways to make it so your beneficiaries get something, but. But just wide brushstrokes, they get very little or nothing. So you're making a trade also on the intergenerational wealth building when you choose an annuity. So I'd ask about that ahead of time. I don't think this is a bad way to go. I agree, Jared. This is not a bond replacement. This is just a guaranteed income stream. You can certainly say I'm not as worried about needing money tomorrow so I can put more of my money in a 10 year plus bucket because I have more of a guaranteed income stream coming in, which means I can be more aggressive with my stock portfolio, which is you're 92% stock, so that's great already. So I'm on board with the strategy. I think it's conservative, it's beatable, but it's not bad.

[Paula Pant]

Yeah. And you know what I like, Jared, about your approach is that you're offsetting being more aggressive with your asset allocation. You're offsetting having a very high equities allocation with something that on the other side is quite conservative, which is an annuity. And I generally like, even though technically it's not what is commonly referred to as a barbell allocation. It has the ethos, the spirit is right. Yeah, it has the ethos of a barbell allocation, which is also what I use and what I really like. I like the two ends of the extreme. Highly conservative on one side and then highly aggressive on the other side.

[Joe Sal Cehai]

So, Jared, did we surprise you? That's what I want to know. Because what I really want is. Didn't expect that, Jo.

[Paula Pant]

I think we are just predictable.

[Joe Sal Cehai]

That's so annoying.

[Paula Pant]

No, it's great. It's continuity. We provide continuity in people's lives and it shows moral consistency, intellectual consistency. Right. That we would apply the same consistent principles to a variety of applications, to a variety of life applications.

[Joe Sal Cehai]

You're saying that Jared can be assured we don't have a dartboard that we used to answer these? Because if you're saying that I got to take the dartboard down. I do think he asked about build it elsewhere. Don't do that. Don't build it elsewhere and then move it to TIA later. Just build it at TIA in terms of behavioral stuff. The juice ain't going to be worth the squeeze to build up a pot of money over here and then move it to TIA later. Don't just build it now.

[Paula Pant]

By the way, if anyone who's listening wants a deeper dive into annuities, if there's people who are listening to this going, wait, what's an annuity? Who? What? Where? When? Why? We're going to link in the show notes to a couple of episodes that we've done that are deep dives on annuities. So that'll be there for anyone who wants that background primer. But for the most part, annuities are not something that I proactively would ever suggest to anyone. But for somebody like Jared, who clearly has done his research, he knows his stuff, he knows the pros and cons, he's thought about it, and this is the path that he wants. I think that's great.

[Joe Sal Cehai]

Me too.

[Paula Pant]

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[Jack]

Hi Paul and Joe. Jack here. I have a question about asset location. I feel pretty good about my wife and I's asset allocation, you know, what funds we've chosen to buy. But I tried to do a deep dive into where we should be holding each of these funds, you know, across taxable pre tax Roth. And it's got my head spinning just a little bit. Big picture backing up. We really only have variants of three funds. I say variants because I don't want to differentiate between VTI and vtsax for example. So I'm just going to give the three big picture variants. We have what I'll say just domestic think vti, Vanguard Total Stock Market Index. We have international, the Vanguard Total International Stock Market Index, vxus. And then from before we married, my wife has a sizable position in Fidelity Blue Chip Growth. And I guess the big picture question here really is where should we be placing each of these three? Should vxus be in taxable, should VTI be in Roth, that sort of thing. It seems that if you expect VTI to grow the best, which, who knows, you know, I guess it trades back and forth between domestic and international performing and outperforming each other and, and whatnot. But you would want the ones that are going to perform the best in Roth. Right? But then if we don't know what's going to happen in the future, should I just put half of Roth as VTI and half of Roth as vxus or should I bet on one or the other? And then when it comes to the international, it gets a little bit more gnarly because you've also got this foreign tax credit. So I guess the foreign tax credit cuts in favor of keeping vxus in taxable accounts, otherwise you forfeit the tax credit. It's free money you're forfeiting. But on the other hand, VXUS is less tax efficient than vti. So presumably based on tax efficiency, the ex us should be in your pre tax accounts. And then of course we've got this Fidelity Blue Chip Growth here, which I don't really want to sell. I should say my wife and I don't really want to sell. It's my wife's. It's up to her what she does with it. I'll play her any response that you give us, but it seems to me that that's the least tax efficient of all. So if we want to keep that, we should do what we can to move it into some form of tax advantaged account. Anyway, this is kind of a big picture question and I'd be curious for your answer on how best to go about doing this. I appreciate your time, Jack.

[Paula Pant]

Thank you for the question. So, first of all, just to summarize your question, you've got essentially three major asset classes, really. Two, you've got Fidelity fund, which is a large cap growth fund. You've got a total stock market fund, which is really a large cap growth fund as well. It's the total stock market. But overall that's also very much a large cap growth oriented fund in aggregate. And then you've got an international fund between the three. The Fidelity fund is, as you've said, the least tax efficient. So that should absolutely be in a tax advantaged account. The international fund you mentioned, the foreign tax credit. The foreign tax credit is simply there to offset any taxes that you pay to a foreign country. So the foreign tax credit is there in order to keep you from double taxation, but it isn't a tax advantage in any other sense of the word. You're paying taxes to a foreign entity and you simply get the tax credit in order to not be double taxed. So it wouldn't harm you to hold an international fund in a tax advantaged.

[Joe Sal Cehai]

Account because just leveling the playing field, it's not advantageous like a Roth IRA makes it more advantageous.

[Paula Pant]

Right, Exactly.

[Joe Sal Cehai]

It just makes it not suck as bad.

[Paula Pant]

Yeah, exactly.

[Joe Sal Cehai]

I think that's what the pros say.

[Paula Pant]

Yeah, precisely. It's not a tax credit in the it's going to lower your taxes sense of the word. Technically it will lower your taxes, but only because you're already paying taxes to another country. So all it does is equalize. So where I would start with is of the three asset classes that you named, if you've got to hold something in a taxable brokerage account, which one would you most want to hold in there? And of the three that you've mentioned, vtsax or vti and is the one that I think is most taxable brokerage friendly. So I'd start with that as the fundamental route.

[Joe Sal Cehai]

I would, with one caveat, Paula. The only caveat I would put on that is I want to know what part of the game he's playing. Because if he's playing, it's time to begin withdrawing money. I think I start from a whole different rubric, but I think that if he's in asset accumulation phase, then we can really focus on just getting rid of the friction of taxes because my thinking is going to be different. If you're taking money out, I'm not going to worry as much about taxes because I'm much more worried about making sure that there's more money in the right place, that it's easy to grab. But if he's an asset accumulation phase, 100%, just line these up with the most efficient things outside in the brokerage. And then really, to me, I don't know. How do you feel about the Roth and the Pre tax?

[Paula Pant]

The fidelity fund has 22% turnover. I looked it up. Fidelity fund has high turnover. It seems to me as though of the three that he's mentioned, that is likely the least tax efficient holding. So that's the one that I would bias towards putting into the Roth. It's also a large cap growth fund.

[Joe Sal Cehai]

Why parsing the Roth versus the Pre tax.

[Paula Pant]

To his point, we historically, at least in the last 10 years, we have not seen a whole lot of appreciation come from international stocks. To a certain extent, it's a guessing game as to how well international will perform over the next 20, 30 years for as long as he's in the accumulation phase. And even once he enters the drawdown phase, he's still going to be holding it for another 20, 30 years. So over the span of their investable lifetime, there's a guessing game of how well international stocks will perform. But if we operate on the assumption that a large cap growth fund, whether it's an index fund like vtsax, VT or ETF like vti, or whether it's the Fidelity fund, I would want that large cap growth fund to be placed in a Roth. And given that he has two large cap growth funds, he's got, I'll just say vtsax, vti and then he's got Fidelity. Then the question is, which one of these two should go Roth and then which one of these two should go taxable? And between the two, I would go vtsax, vti, taxable and vtsax and Fidelity Roth.

[Joe Sal Cehai]

I see, you're not thinking Roth versus Pre tax, you're thinking Roth versus taxable.

[Paula Pant]

Yeah.

[Joe Sal Cehai]

Yeah, agreed.

[Paula Pant]

Yeah. Because with Roth, and just to widen this out so that everyone understands the logic behind this, with a Roth account, all your growth, all your appreciation and your dividends and your capital gains are all, all tax exempt. So whatever is going to grow the most is what you want in that Roth. And with a taxable account, you pay taxes on the turnover, you pay taxes on that churn. So whatever is going to generate the Least amount of turnover and churn you want to put in the taxable. And that's why of the two large cap growth funds, the one that creates the least amount of turnover in churn, which is VTS x vti, that one goes in the taxable account. Large cap growth is likely going to see the greatest rise in value over time. So the other large cap growth fund, the one that has more turnover and more churn, which is Fidelity, that goes in Roth, then that just leaves international leftover and it leaves the pre tax position left over.

[Joe Sal Cehai]

I think the interesting part of this, and this is going to come as a shock to no one, is looking at the future like where do we end up with these things? And if we don't want to predict, then having international and the US large company in both the Roth and in the pre tax makes perfect sense to me to have some both. However, obviously the more you do that, the more that increases complexity. We don't know because it's ahead of time how much that juice is worth the squeeze. I'll tell you in 20 years whether it was worth it or not to put those in the same account so that I have the same asset allocation in both. I would certainly introduce more of that complexity when I'm putting my withdrawal strategy together during my retirement years. Then I think it's just a necessary evil. But ahead of time, do you do it? Do you not do it? I can go either way on that. Paula.

[Paula Pant]

Yeah, he sounds like he and his wife are both going to be earning an income for quite a while. The impression I got from the question is that they're nowhere near even thinking about withdrawals.

[Joe Sal Cehai]

But I can still see doing that. I can still see putting them both in because the goal is going to be to give ourself tax flexibility later. And if one of these accounts outgrows the other by a ton, then I end up with less flexibility to do whatever the heck I want. My strategy becomes pretty apparent just based on whatever serendipity happened in the markets.

[Paula Pant]

But given the fact that there are some stringent contribution limits on how much you can put into a Roth and there are relatively speaking more generous contribution limits as to how much you can put into pre tax positions.

[Joe Sal Cehai]

You're assuming that he can't do the Roth as a workplace retirement plan.

[Paula Pant]

Well, even if he could do 401k Roth, like a Roth i401k for example, or a Roth 401k, even if he could, the employer position, the employer match is still going to go pre tax Pre tax.

[Joe Sal Cehai]

Right. So he's still going to have some pre tax.

[Paula Pant]

Yeah, exactly. So given the restrictions around how much a person can put into Roth, it makes sense that you would want to drive as much growth in Roth as possible because your ability to grow that account through contributions is so limited, whereas you have many more options to grow your accounts in a pre tax position. And you have no restrictions, of course, on growing your accounts in taxable position. So from the contribution side, he can over time redirect where he makes new contributions if the Roth starts outpacing things and he wants to catch up more in some of the other positions in pre tax or taxable during retirement years.

[Joe Sal Cehai]

And we're both assuming, Jack, that this is not your question, but during retirement years, I just don't start from here. My goal is to start with the strategy that is an all weather portfolio that I can be assured that I'm going to do the least damage to my portfolio when I'm taking money out. And, and then step two is I'm going to make that as tax efficient as possible and that's going to change from person to person. And we covered that on a previous episode much more in depth. But I go back and listen to that, our discussion about how to set that up.

[Paula Pant]

I should say that as we have this discussion over Jack's asset location, we don't know the size of each of these positions and we don't know what his ability or his desire is to switch money around between different types of accounts. We're talking about three assets, one of which is vtsax, vti, one of which is Total International, and one of which is this Fidelity Fund, which is a large growth fund. So we're talking in broad strokes about three different types of investments and three different types of accounts. But we're having this discussion without knowing how much he can place in each account. So we're having the discussion broadly in a manner that assigns one to one. And so to your point, Joe, to the extent that he can split some of these up, that's even better. But I think to start, since his question was about asset location, we start with this initial framework of one to one, just to get a sense of all else being equal. We like this type of asset. In this type of account, we'll start with pairing the puzzle pieces together. Red pairs with blue, yellow pairs with green. We'll start with just pairing these together. And then to the extent that you can split that.

[Joe Sal Cehai]

Fancify it.

[Paula Pant]

Yeah. And now red pairs with mostly blue, but a SMIDGE of green, yellow pairs with mostly green, but a smidge of purple. So I say that just to be clear that we're not advocating only holding one type of asset and one type of account. It's just an initial framework in order to establish the preferences. Thank you, Jack, for the question. Jo, you've developed a bit of a reputation on this show for being Mr. Efficient Frontier.

[Joe Sal Cehai]

Oh boy.

[Paula Pant]

Yeah, it's true. It's true. And we were talking earlier about the term Efficient Frontier can be a little off putting to a beginner.

[Joe Sal Cehai]

A little?

[Paula Pant]

Oh yeah, a lot.

[Joe Sal Cehai]

Efficient Frontier.

[Paula Pant]

Yeah. Feels weighty, right?

[Joe Sal Cehai]

It's horrible, right? I listen to anybody talking about Efficient Frontier and I immediately go, oh man, that sounds complicated.

[Paula Pant]

Exactly, exactly. It sounds. Sounds off putting. It's a terrible name.

[Joe Sal Cehai]

But once you grasp the concept, it's not nearly as difficult.

[Paula Pant]

Exactly. It's a beautiful concept with a terrible name. But anyway, our next question is.

[Joe Sal Cehai]

It's about the Efficient Frontier.

[Paula Pant]

Exactly. That is what we're going to address coming up right after this. 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 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.

[Joe Sal Cehai]

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[Paula Pant]

You know, when I was a kid, I remember how much time my mom would spend going from store to store to store to pick up basic goods that the family needed. Groceries, laundry detergent, things like that. These days I order all of that online and it fits. Feels like the packages just magically appear. Well, if you run an e commerce business, you know, packages don't arrive by magic, but it feels like it if you use Shipstation. Because last year alone over 700 million orders were fulfilled with Shipstation and with Shipstation you can sync orders from everywhere you sell into one dashboard and replace manual tasks with custom automations so that you reduce shipping errors and you do it all at a fraction of the cost. It can be the fastest, most affordable way to ship products to your customers. You get huge discounts with major global carriers and there are tons of features that help ensure accuracy and get your shipments out the door faster so your customers are happy. Now inside of afford anything, we don't ship physical goods. We only sell digital products and services. But I have many friends who are in E commerce and I know many people inside of this community are e commerce entrepreneurs. And shipstation creates these automations that makes it easier to scale your business faster. During the time of this spot, another 1400 packages were shipped with the help of ShipStation. Upgrade to a smoother shipping experience. Go to shipstation.com and use code Paula to sign up for your free trial. No credit card or contact required and you can Cancel Anytime. That's shipstation.com code contact Paula. Welcome back. Our final question today comes from Anonymous.

[Harry Markowitz]

Good morning, Paula and Joe. I just want to ask a question related to the Efficient Frontier. I know you covered a lot about it and I've been trying to figure out how to merge the Efficient frontier with the TSP3.7 plan for the government employees and military. We only have a very limited amount of funds or ETFs, equivalent funds that we can invest in. And I can't seem to find anything or any way to reduce risk without reducing the return significantly by combining the C fund, the F fund and the I fund. Basically we have a fund that tracks the S&P 500, we have a fund that tracks international except for China, and we have a fund that tracks small cap. The C fund would be the S&P 500, the S would be the small cap and the I would be international. I tried going in through the Efficient Frontier as Joe showed and suggested and couldn't figure out how it could possibly improve. I currently have 16 in the C fund, 20 in the fund and 20 in the S fund and believe that's a pretty good mix. But wanted to ask you guys, how would you suggest or how would you see about evaluating the correct mix of these funds in order to approach a more efficient outcome? Thank you.

[Joe Sal Cehai]

All right, Paula, we want to have some fun.

[Paula Pant]

Yeah, let's do it.

[Joe Sal Cehai]

Let's do it.

[Paula Pant]

Step one, we gotta give Anonymous a name.

[Joe Sal Cehai]

Oh, we do. Do you got one?

[Paula Pant]

So the concept of the Efficient Frontier came from a guy by the name of Harry Markowitz.

[Joe Sal Cehai]

Oh, this is great. I like where you're going. I think it'd be very funny if Harry was asking us questions about how to do his thing.

[Paula Pant]

So Harry Markowitz is an economist who in 1952 won the Nobel Prize for his development of modern portfolio theory. And the efficient frontier is a big cornerstone of modern portfolio theory, the thing for which he won the Nobel Prize. In the efficient frontier, there's a graph, there's a hyperbola, and that hyperbola is actually referred to as the Markowitz bullet. So in honor of Harry Markowitz, who developed the efficient frontier and modern portfolio theory, I'd like to name this collar Harry.

[Joe Sal Cehai]

I love that. Yeah. How do you use my thing? How do you use the thing I developed? That's fantastic. So do we want to do this live, Paula?

[Paula Pant]

Let's do it. Let's do it. So for those of you who are listening via audio, I'd encourage you to check out the YouTube video of this because we're going to be showing some images on screen that walk you visually through the efficient frontier. So tune into the video. It's on YouTube. YouTube.com afford anything.

[Joe Sal Cehai]

So if you are walking the dog or out on a jog, whatever it might be, I'll just describe what we're doing. So the first thing you do, you go to portfoliovisualizer.com and as always, if you remember, there's a big green button over here on the left that says get started. We do not want to go there.

[Paula Pant]

Ignore it. Ignore the button.

[Joe Sal Cehai]

You can use it later for other things. It's a great website, but we're not going there. We're going up to the upper right where there's a button that says tools. We're going to click that dropdown. We're going to go right down here to Efficient Frontier, and we're going to click that. And it brings us to our configuration. Now, this is where Harry is going to input the things that are available in the Thrift Savings Plan, the plan that he uses through the government. Very simple plan is going to make this very easy to look at, the efficient frontier. So the first thing that I'm going to do is I'm going to click up at the top, it says portfolio type. It defaults to tickers. We do not want to use ticker symbols. We want to use just asset classes. Because the Thrift Savings Plan choices is and C that he's going to put into his configuration. Those three choices are just really straight index, E kind of choices. So we're going to just do the asset classes. The second thing that we're going to do is then we're going to select the asset class. So the C fund is US Large cap. The I fund is international X us. There we go. And then the S fund is small cap. So I put those in.

[Paula Pant]

So for those of you who are listening via audio, Joe just selected those off of a dropdown menu.

[Joe Sal Cehai]

Yeah, there's a bunch of different asset classes and I just chose those three because those are all that are available. So here's what the software does. What I just told it is I don't want you to give me actual funds. I want you to give me the asset class. And the I is an asset class, the S is an asset class because it's small companies, the I is international companies and the C is big companies. So I just told it, just look at those three and make it as efficient as you possibly can. Historically from 1985 on is what this says going back up to the top. There's a drop down for start year. It put 1985. You know what Paula, just for fun, let's move that. Let's see if it'll give us data all the way back to 1972 because it will give us longer term data that's going to be even better because it's just more, more data. Yeah, a lot of different markets to look at.

[Paula Pant]

Who doesn't like more data?

[Joe Sal Cehai]

Here we go. So I'm going to click down at the bottom there's a button that says View I. Click view and there it is. Now he said right now he is 60, 20, 20. And so here is the efficient frontier. So we have this kind of arcing line. It doesn't arc a ton because we're just using three asset classes. We're not using any bonds. So it's going to start off at a fairly high rate of return and then go up. But if I peg this at looking for an 11% historical rate of return, there it is. He's going to be 78% US large cap and 21% international. So he's going to be closer to 8020 and get rid of the small cap altogether. And by the way, the reason for this is also interesting that even though this goes back to 1986, we put in 1972. But one of these portfolio visualizer only has data from 1986. So it will default to the closest year to today for whatever asset classes we look at. So I want to make sure what I'm looking at. So this is 86 to 2025, that's as far back as this goes. And as I've said before, this is a limitation of this particular program is that they have limited data sets. All the data sets for all these different asset classes don't go back as far as I would like. However, this is going to get me in the ballpark. And so if I look at an 11% rate of return, there it is, 78 and 22%. Now what's also interesting about this is this, Even though it's 86 to 2025, I really like the idea of having three funds instead of having two. CFPS will tell you that for better diversification might not have been historically as efficient. But the case for small cap value, you can look at some of the research done by Paul Merriman and others. The small cap value is worth being in, right? So it doesn't give it to me on the efficient frontier. It tells me don't be there. And I go, you know what, I want to be there. So what I can do is I can go back up to the top. So I'm going to flip back up to where I originally put in those three asset classes.

[Paula Pant]

You're going to put in a minimum allocation, aren't you?

[Joe Sal Cehai]

And I'm going to say, let's say give me at least 10% small cap. Now I could make that 20. But realize the more I tell it, it has to do, it's already telling me this is not as efficient as it could be.

[Paula Pant]

Right?

[Joe Sal Cehai]

But I'm going to tell it, let's go 10 and I'm going to view.

[Paula Pant]

So you put in 10% minimum.

[Joe Sal Cehai]

And now notice if I use just large cap, it's telling me it's above the efficient frontier. I get it, I get it. I understand why. Because I hardwired it and now I pretty much at that 11% return number. Now I'm at 70, 20, 10. So I would say already, Harry, you clearly are not that far off. 70, 2010 is what I would probably use. And you're at 60, 20, 20. So the answer is you are pretty damn close. And the cool thing is using the science backed approach of the efficient frontier, I think you can high five yourself and go, are you comfortable leaving it there? Sure. If you want to put in 20% which would be hardwired, I'm now going to change that 10 to 20. I'm going to go back in and look at the three of these together and at 11% it's telling me 60, 20, 20, it's telling me exactly what you have. So the answer is we can get there. Harry, doing what you asked this just verified that you're pretty damn close.

[Paula Pant]

So here's a question, Joe. In Harry's case, he has limitations on the asset classes that he can invest in. What would a person do if they are invested in Vanguard where they have just a wide array of asset classes that they can choose from?

[Joe Sal Cehai]

Sure. Then I go back to what we did during our training and hopefully Paul, you can link to that. But what I generally like is large value, large growth instead of just large cap. To use both of those, let's put a mid value, mid growth, small value, small growth. We're going to put in commodities. I can use commodities, precious metals or gold. Of those three, I can use any of the three I want. I'm going to go with commodities simply.

[Paula Pant]

Because it's the biggest, widest, widest ranging.

[Joe Sal Cehai]

It is the widest ranging, but that will include gold and precious metals. We're going to put in real estate in the form of a reit. And then I'm going to put in, of course, my international developed ex us. And then I'm going to put in emerging markets and in other places, by the way, you can see we can get as granular as we want in other places. I've said that you could just use eight different choices because a lot of people here will take out commodities and they'll just use international by itself instead of international and US markets. And then you have eight. I will often default to nine because I love emerging markets myself. So I'll put those in as a different asset class. And then I will use the long term treasury market, corporate bonds and high yield bonds, because high yield bonds will act like a hybrid between stocks and bonds. So where's my high yield corporate bonds? There it is. And Now I have 13 asset classes, which is generally the widest that I get.

[Paula Pant]

Oh, but 13 is an unlucky number, Joe.

[Joe Sal Cehai]

Oh, no.

[Paula Pant]

What about total International? So I'm curious as to why you chose international developed ex US rather than total International, which includes us.

[Joe Sal Cehai]

Because I've already got us up here with large cap, mid cap and small cap. I've already taken the US market and I've parsed it out to be six things that I don't want overlap.

[Paula Pant]

Cool.

[Joe Sal Cehai]

I want to keep my meat from touching my potatoes. All right, here we go. And now I view. Now it says I've repeated large cap growth. Where have I done that? Oh, I accidentally did that. I like that it pointed that out. So let's go mid cap growth, mid cap value. There we go. Now I've got it right. And we click the button and now look at what we've got. Look at that, a much more robust graph. And if I go up here to the same spot, 11% return, 77% large cap growth, 23% treasuries.

[Paula Pant]

That's a big treasury allocation.

[Joe Sal Cehai]

But what's interesting, Paul, you know how you like the barbell.

[Paula Pant]

Yeah.

[Joe Sal Cehai]

It's telling us Barbell's efficient Arbel is a great way to go. Stick with US Growth as your driver of growth and then during the downtimes, use the Treasuries. Now, of course, a CFP looks at that and goes, I'm not going to bet everything on large cap growth. And I know that the US market by a lot of different factors right now is pretty heated. What this is also telling me, though, that the last 10 years are factored in. So a CFP will then begin putting in a few minimums on some of these. So again, I can go to this small value, let's say, and put in a 10. And I can go to the developed markets and maybe put in international developed markets and put in a 20. Emerging markets. I like a number that's either 5 or 10. I'm going to add in those. You could again do whatever you want. Back when I was designing portfolios professionally, I actually found that we got a calmer ride by even putting 5% commodities into the market, 5% gold. I hate gold as an asset class. But it really calmed down the portfolio.

[Paula Pant]

Carsten Big Earn. He, in his safe withdrawal rate series, did a study on what would happen if you added gold to your portfolio. His bias was that he thought it would make it worse. That was his hypothesis going in. And it actually turned out it made it better. If you want to read that, it's Karsten safe withdrawal rate article number 34 on the safe withdrawal rate series.

[Joe Sal Cehai]

And here you'll see it gives me an efficient frontier that really rides those guardrails. 20, 10, 10. Now we're down to 15% treasuries and 40% large cap.

[Paula Pant]

Right.

[Joe Sal Cehai]

But a much more rounded out, less bumpy ride. If you look at the standard deviation on this portfolio, however, standard deviation goes down. But look what else went down. The expected return went way down.

[Paula Pant]

Yeah. Joe, on this hyperbola, the Markowitz hyperbola that we're looking at, what portion of the hyperbola do we want to be on?

[Joe Sal Cehai]

Great question. We want to begin with the end of mind. So for me starting with an 8% return or 9% return versus the more delicious 11, really for me is a better place to be. But part of that's because I'm 57 years old, right? If I was younger, I would go higher up. But I think if I start with what return do I want to set my goal at and then work from there backward, I think, is the way to be. So before I hit the efficient frontier, I go, you know what? I'm looking for eight. And then I go to eight and I see what eight gives me. So I don't begin with efficient frontier. I begin with my financial plan and what rate of return. Because if you remember, for people that have heard me talk before about this, there are three different levers that I have. Lever number one is how much money am I going to save? Lever 2 is what return do I expect that money to earn? Lever 3 is how much money do I need for the goal? And I can adjust either any of those levers. And frankly, part of that, how much money do I need Is also the timing of the goal, right? So I can push the timing back on that goal. I can pull it forward. That's going to make me need to save more aggressively or get a higher rate of return. I could lower the amount that I need. Overall. I'm only going to buy X house versus Y house. That was bigger. I'm going to lower what the goal expectation was. Or I raised the goal. I can save more, I can save less. I can look for a higher return or a lower return. And each of those have problems, right? If I raise the amount that I need to save, then I'm living on less today. And it truly is about, I don't know if I'm going to show up 20 years from now. Why am I going to save all my money for a future that I don't know is going to exist? When it comes to the return portion, if I set my expectation at 10, look at the standard deviation goes up, which means there's a bigger chance I won't get that. I'm throwing darts at a much wider dartboard than I am. As I go down the efficient frontier, my standard deviation is less and less and less. So there it is, the efficient frontier in action. Actually, what it shows me is that Harry is not wrong. Harry, you're not far off. You're very close to what I would do. I would be more of a 70, 20, 10, but 60. 20, 20. Yeah. Okay, great.

[Paula Pant]

Joe. Conceptually, as we look at this graph, and again, for those of you who are listening via audio, I encourage you to check out the YouTube video. Joe Visually, as we look at this graph, if there are some asset classes that are above the efficient frontier, others are below the efficient frontier, what does it mean for an asset class to be above or below this hyperbola left.

[Joe Sal Cehai]

To its own devices without any input from my hand, if I just put everything in the efficient frontier. Paula, no asset classes above the efficient frontier. There is no such thing. So if I just let the software do what it will do, they'll all be below. The only time you will see an asset above the efficient frontier is when I've put, nope, I want a minimum weight like we did, of 10% into small cap. I'm telling the software to do that. When the software then gives me back then a return that shows something. Then in that graph above the efficient frontier, it's literally the software going. In this case, it truly is literal. The man's holding me down. The man being Joe Salsihai, is holding me down because the software is telling me, I think this historically has been more efficient if you didn't do the small cap, or if you didn't do the international to that degree, or the bonds or whatever it is. But CFPs looking at reversion, the mean, looking at point in time, looking at a safer withdrawal strategy, because we'll look at other things, right, not just efficiency, as we get closer to retirement. And so as we put these constraints in, it literally in this case is saying, the man's holding me down, Joe's holding me down.

[Paula Pant]

So functionally, if something's above the efficient frontier, it means it could be more efficient, it could be that. But by virtue of putting in these additional weights rates, we're not getting to that most efficient place. By contrast, when something is below the efficient frontier, it fundamentally means the returns just aren't commensurate with the risk. This is inefficient.

[Joe Sal Cehai]

And the ones that scare me the most are when they're inefficient and right on the graph because means I'm getting a lot more volatility and I'm getting risk that isn't worth the risk.

[Paula Pant]

And commodities there, right? And commodities are both far on the right side of the graph, but below the line of the efficient frontier.

[Joe Sal Cehai]

And it's interesting because if you look long term, if you take REITs long term, the North American real estate index and the S&P 500, they're not that different, which goes back to when I first introduced this on your lovely show, Paula that The S&P 500, left to its own devices is not that efficient. The vtsax not that efficient. It's when you pair it with other assets that you start getting some pretty exciting results. It's funny because I love analogies. And I remember when I was in this wine tasting class and this guy Vincent, who owned the local wine shop, taking us through it, he was a wonderful teacher. Vincent said, you know, this idea that drink whatever wine you want with whatever food. Everybody's always, oh, pair this with this. And then there was that backlash. People going, just drink whatever the hell you want. Forget about all this. He goes, that backlash is bs. And he took a glass of wine, and I don't remember what wine it was because I'm not an expert. He took a glass of wine and then he gave us a green grape, and he had us drink the wine with a green grape. And the wine tasted awful, just 100% awful. And then he gave us a blue cheese with that same wine. And I ate the blue cheese then with that wine, and the wine was flipping amazing. It was incredible. It was so good. And I think that's what with Frank Vasquez and his obsession with risk parity. It's all about this combination of food groups, in this case asset classes that together create this great stuff. But other asset classes together are horrible. An example, people think that stocks and bonds together make the portfolio less correlated. Stocks and bonds have a fair amount of correlation still to each other. They're not necessarily negatively correlated. So we saw this in 2007, 2008, right when the stock market and the bond market both fell at the same time. Now, what's interesting is that there's a much more negative correlation with the commodities market, which is why a little bit of commodities is like a nice calming factor. This is actually a great analogy because gold eight times more volatile in an average day than the stock market. But you put a little bit of gold into a stock portfolio, like we talked about earlier, Paula, it calms it down. Left to its own devices, it's not calm at all. But paired with a stock portfolio, your overall number on the top line gets smoother. It's fascinating how you can put these things together in a way that makes sense. Just like Vincent said, do whatever you want. I feel like VTSAX is that do whatever you want. The experts will go, don't do whatever you want.

[Paula Pant]

And you told me, Joe, a sad story about someone who had been with his financial advisor, invested along the efficient frontier, but then heard all of the Media, the Reddit threads.

[Joe Sal Cehai]

In this case, it was the online communities. Yeah, People saying two things. Favorite thing people do in online communities is go fire your financial advisor. If you say the two words financial advisor in an online forum, there will be 10 people that immediately say fire them. Immediately say fire them. Not even asking you are they good, bad, they, whatever, fire them. And the straw man argument they bring up is, you're smart enough to do this yourself. And I want to be clear, you are smart enough to do this yourself. They are not wrong. They are not at all wrong. But when I was a financial planner, the through line that I noticed of smart people was they surrounded themselves with really smart people.

[Paula Pant]

Every athlete has a coach.

[Joe Sal Cehai]

It is so amazing. Just surround yourself with smart people as a life guideline. It doesn't have to be CFP where you're paying them a bajillion dollars and they're investing. Just surround yourself with smart people. So the idea of financial advisor, fire them because you're smart enough, that's not a reason to fire them. Now, there may be plenty of reasons to fire them, but the fact that you're smart enough is not the argument. Of course you're smart enough. And then the second thing that they say is your portfolio is too complex. Just go read the Simple Path to Wealth and VTS X. And my response to that is, VTS X is a wonderful place to be when you're not dealing with a lot of money. When you're not dealing with much money, it's a beautiful place to be. There are significant repercussions to being in VTSAX later. AKA you're losing a ton of money with almost no more work. And look at how quickly I went in and looked at Harry's asset allocation. On the efficient frontier, there is a learning curve. Somebody online was busting me saying, this is very complicated. It took Joe a while to explain it. Yes, it does. It's like driver's training takes several weeks, but once you know how to drive a car, like you just jump in and go. So I agree with the person. They're like, no, this is more complicated than Joe's making it because it took him forever to explain how it works. Yes, correct. But once you know how it works, look how quickly I went boop. Nope. You know what, Harry? You got it. You're good. You are close enough that science has proven you very right.

[Paula Pant]

Well then, can I ask a couple of additional follow up questions?

[Joe Sal Cehai]

Oh, boy. No. I think our time is up. That's all the time we had.

[Paula Pant]

So this is a question. It actually came in the form of a comment, but one person asks, so if you are rebalancing your portfolio along the Efficient Frontier, would that be 36 separate transactions across our family's account? So, in other words, do you rebalance by individual account? Do you a balance by total sum across all accounts? Do you have to make tons and tons of different transactions when you have. Let's say.

[Joe Sal Cehai]

I think it's the same comment, Paula. I think it's just a person that was telling me how complicated it really is. Yeah. Because I read this one as well. And the answer is you can, if you decide to do this rebalance where you have a different Efficient Frontier in every single account, well, then certainly, clearly that's never been what I'm about. I'm about simplicity, Right. And so if you're in asset accumulation years, then I'm going to take that Efficient Frontier and then I'm going to answer Jack's question and I'm going to look at these different asset classes and go, what goes where? Right? Where am I going to put them based on how I'm saving? And I'm going to put some here, I'm going to put some here, I'm going to put some there. And when I reallocate, I'm going to look at all these accounts and I'm going to try to keep my portfolio as simple as possible. So if the Efficient Frontier is a long, If I'm using 13 different asset classes. Notice it didn't spit out 13. It didn't spit out 13 different things. It still spit out like 5. And by the way, when the Efficient Frontier gives me something that says you should have 3/4 of 1% in small cap growth, I don't need to be that efficient. I get rid of that and I add it to another area. I also don't do 0.75 or 16.75. I go 17. Call me crazy. Or I might even go even crazier and go 15 or 20.

[Paula Pant]

You round it to the nearest whole number or you round it to the nearest five.

[Joe Sal Cehai]

Yes, I want to be close. I do not have to be incredibly scientifically specific because the Efficient Frontier drifts every year anyway. As we get new data, it drifts right. Now, as everybody knows, we talked about this before. If you've listened to us, you know that large cap growth has been driving the bus for the last 10 years. And so this Efficient Frontier tool defaults to as much large cap growth as you possibly can, which is why we put in Some minimum weights, because we're already seeing this year, summer version of the mean. Right. With large cap growth doing worse and international funds finally showing up. Where have you been? International. But now notice what the efficient frontier is showing us now that it didn't show us a few months ago. Hey, you're better off having a little bit of international. The answer to that is you're going to end up with five, maybe six categories. If you're in retirement, you may have more because of the fact that you're doing these separate buckets, but the answer is, yes, you can. And I think they're using hyperbole when they're talking about the number of different transactions.

[Paula Pant]

36 transactions.

[Joe Sal Cehai]

Yeah. Yeah. I think.

[Paula Pant]

I guess depending on how many. Let's say you've got six different accounts with six funds in each account, say a married couple. So each individual has three accounts with six funds per account. So there's a total of 36.

[Joe Sal Cehai]

Am I rebalancing is not going to include every single one of those. Because what you're also going to find is when I rebalance, I need to rebalance my large cap by, let's say, 5,000 bucks. I need to add or subtract. I'm just going to add or subtract it in whichever account makes the most sense. So I'm going to subtract it in this account. Guess what I'm going to do? I'm going to rebalance in that same account, then into the other fund. So while I may have 36 different accounts, I'm only actually making the transaction in two.

[Paula Pant]

Right? You mean you've got 36 funds, but you're only making the transaction in two of the accounts?

[Joe Sal Cehai]

Yeah, because rebalancing does not mean that I'm going to have transactions in every single account. I'm going to do the rebalancing in just one place. It's a great question, and I saw that online and I think it was on Apple podcast, which frustrates the hell out of me because it's the one place I can't reply. We can reply on Spotify, which I love. We have great discussions for Stacking Benjamin's on Spotify. People write to me. That's crazy talking to the person, but people write to me. Joe, at Stacking Benjamins that ask me these questions when I see it in our different online forums in the Afford Anything Facebook group, I've answered people directly there. Apple's the one place I cannot answer your concern.

[Paula Pant]

And while you and I are different, Joe, in That you're very good at checking social media. I am mostly off of social media, so I.

[Joe Sal Cehai]

Good for you. That doesn't mean I'm good. That means I'm tortured because OG's done the same thing. He is largely done.

[Paula Pant]

Yeah. Yeah. I stay off of social media for the sake of my focus, my mental health, my ability to work. But I do value it as a place to interact with the community. There's limits to what I can and can't do. And I have chosen to mostly stay off of social media these days.

[Joe Sal Cehai]

Yeah. And I truly enjoy the one on one interactions. I frankly don't like Apple because I can't have a conversation with you. I just have to read it and go, man, I wish that you would have put this someplace where we could have a chat because this sounds like somebody that really wants to chat with me about what I really meant. But I do the feedback. I like the fact that I wasn't as thorough as maybe I should have been and maybe I should have explained this or used an analogy differently. So I like the feedback. I just like that I can't help you. I'm not as worried about people kicking me.

[Paula Pant]

Yeah. When you're in the public eye, that happens a lot.

[Joe Sal Cehai]

Yeah. When you do what we do, okay, people are gonna do whatever. But when I saw a comment like that that I can clearly help you do this better and I can't because of the forum that it's in, that's when I get frustrated. So I want to be clear. I am happy for people to say they don't like me. That's fine. Well, I'm not happy. But you get what I mean.

[Paula Pant]

Well, I like you, Joe.

[Joe Sal Cehai]

Thank you. That's why I keep showing up.

[Paula Pant]

And I think what we're both trying to do is introduce the notion of the efficient frontier to an audience in a way that communicates that diversification in your portfolio is important. And just vtsax alone is not going to give you that diversification.

[Joe Sal Cehai]

And this really beginner process of getting comfortable with the efficient frontier can show you some cool things. Look it for Harry. Harry didn't say it this way, but Harry, I think I'm of kind close. Can you help me? And the answer is yeah, you're really close. Yes. Yeah. Which is great. It's a great feeling. And I love this. When I was a financial planner, when somebody would walk in and I'd be able to say, you're doing a really great job. And sometimes people would go, you know what? I studied this and I worked really hard and in other times it was a complete fricking accident. But either way, it's awesome. Yeah, it's fantastic.

[Paula Pant]

Joe, thank you for taking all of this time and thank you for being Mr. Efficient Frontiers. You've become known.

[Joe Sal Cehai]

Yeah, if we could just get rid of those two effing words.

[Paula Pant]

All right, Joe, where can people find you if they'd like to know more?

[Joe Sal Cehai]

You can find me and sometimes the Paula Pant at the Afford Anything show. We call it the greatest money show on earth. It's a great.

[Paula Pant]

I think it's called the Stacking Benjamin show. Joe.

[Joe Sal Cehai]

Did I call it the stacking? Did I call it anything?

[Paula Pant]

You sure did.

[Joe Sal Cehai]

Oh, my God, that's funny. I'm taking over so you can find me here. And it is now my channel. It's a Stacking Benjamin show, the greatest money show on earth. And we call it that because of the fact that we try to surprise and delight you because it's a little bit of a financial circus there. Everything from some great mentors, some of the top minds in the business. We've had a lot of the Ritholtz people talking about financial planning, Josh Brown and Barry Ritholtz himself, Nick Magi on the show. Some of the greatest minds in the personal finance media space, Jill Schlesinger, Gene Chatky, some of the big time people there. But also just great conversations on our roundtable discussions on Friday and a little bit deeper dive on Monday with Doug and my co host, OG So come check us out.

[Paula Pant]

Fantastic. And thank you to all of you for being afforders. Remember, we have a free cheat sheet based on the answers that we gave in today's episode that you can download. It lays out exactly what you need to do to rebalance in the right spots. It's the asset location made simple cheat sheet. And it is yours, but for [e-mail] asset location. That's affordanything.com asset location. If you enjoyed today's episode, please do three things. First, share this with the people in your life. Share it with your financial planner, your wealth manager, your lawn mowing and landscaping services people, your lifeguard at the local.

[Joe Sal Cehai]

Community pool, your TIAA representative.

[Paula Pant]

Oh yeah, that annuities person. Share it with them. Share it with your dentist. Share it with the person who sells you dental insurance. Share it with all of those people. That is the single most important way that you spread the message of F double I R E number two, please open up your favorite podcast playing app. Leave us a review. Tell us what you enjoy about the show. As you can tell, we read all of these and really take them to heart. So please leave us a review on your favorite podcast. And while you're there, make sure that you've hit the follow button so you don't miss any of our amazing upcoming shows. And of course, subscribe to our newsletter affordanything.com newsletter where we share deep dives that you won't find anywhere else. Thank you so much for being an afforder. I'm Paula Pant.

[Joe Sal Cehai]

I'm Joe Salsihai and we'll meet you.

[Paula Pant]

In the next episode.