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Afford Anything | Make Smart Money Choices
Q&A: Why Smart Investors Are Questioning VTSAX and Chill
01:23:18
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- [00:00]
Paula Pant
Joe, I think we took the Internet by storm.
- [00:02]
Joe Salsihai
We did, yeah.
- [00:03]
Paula Pant
It was when you came out guns blazing about vtsax and chill, how that has been the dominant thinking in the personal finance space and it needs to end.
- [00:14]
Joe Salsihai
Well, in one corner of the personal finance space.
- [00:17]
Paula Pant
Yes, exactly.
- [00:19]
Joe Salsihai
The fire space. And you know what? I said it politely how many times, Paula. So I just finally. I'm sorry, I lost it.
- [00:26]
Paula Pant
Yeah. Gloves off. Gloves off. All right, well, we're going to talk about that today.
- [00:31]
Joe Salsihai
Oh, no.
- [00:32]
Paula Pant
Because we've got questions that have come in from this community and the first question that we're going to tackle is about what to do if you are not vtsax and chillin.
- [00:43]
Joe Salsihai
Oh, that's interesting.
- [00:45]
Paula Pant
We're also going to talk about Roth IRAs, and we are also going to discuss at the very end, this is a really nice closer, especially around the holidays. What if you had a hundred dollars to spend on personal finance books? What would it be? What would you get?
- [00:59]
Joe Salsihai
And not even for you. For other people.
- [01:02]
Paula Pant
Yeah. Not even for you. For others. Such a perfect holiday. Question. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade off and that applies not just to your money, but to your time, your focus, your energy, your attention to any limited resource you need to manage. So what matters most and how do you make choices accordingly? Those are the two questions that this podcast is here to solve. We cover 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, I answer questions that come from you and I do so with my buddy, the former financial planner Joe Salsi. Hi. What's up, Joe?
- [01:46]
Joe Salsihai
Hey. I guess we're going back at it, huh?
- [01:49]
Paula Pant
Oh, yeah. Vts X and Chill has been the dominant thinking in the financial independence space for so long. And it has its place. It absolutely has its place. But there are more sophisticated ways to invest your money.
- [02:03]
Joe Salsihai
Some people that rubs the wrong way. And I think it's because you get so invested in something and you believe that that is the way. And we're not saying, to your point, Paula, that it's not the way it is for the right person. Beginning, it's beautiful, it is very simple, it's awesome. But then what's also wild is the telephone. That happens that I've heard throughout the Internet. Like, I know exactly what I said and then I hear about what I said later on and like, we'll hear from this question. I think a lot of what I said is being vastly misinterpreted.
- [02:37]
Paula Pant
Distorted, right? Yeah. The game of telephone. It's repeated and then repeated and then repeated until the the eighth iteration looks nothing like the first.
- [02:46]
Joe Salsihai
Which makes me excited because it does give us an opportunity to keep diving into it. Because to cement somebody's knowledge in a better way, that's not as an easy a talking point as VTS X and Chill. When it gets a little more granular, you gotta keep going over that ground. So I'm very happy to do it.
- [03:02]
Paula Pant
Oh, perfect. Well then our first question today comes.
- [03:05]
Jason
From Jason Hi Paul and Joe. First off, thanks for everything you do. You're wonderful and I constantly refer people to your content. I've been interested by your recent discussions about the efficient Frontier and diversified investing versus the proverbial VTSX and chill strategy. I feel like the S&P's annual report proves that actively managed funds tend to underperform. J.L. collins did a good job highlighting that. I think I've heard both of you mention it on the podcast, and Paul Merriman even spent a few moments emphasizing this point in his recent episode with Paula on the podcast. I agree with these assertions. I tell people that if highly paid Wall street pros who spend every day, all day picking stocks are statistically unlikely to beat the market, then what hope do we as individuals ever have? And yet it strikes me as a little contradictory that discussions with both Joe and Paul have immediately transitioned into talking about strategies for picking stocks. Sure, you're picking baskets of stocks, asset classes. However, isn't this still just trying to pick winners and losers, the very thing that we all agree we're statistically unlikely to succeed at? I say that if a person wants to do better than vtsax, there are much better investment options out there. I've gotten into investing in real estate and specifically syndications over the last few years and frankly, they blow away both VTSAX and the VTSAX plus 2% that Paul suggested you can achieve with his four sector strategy. Many of the investments allow me to deduct 60% of the value of my initial investment in the first year through a combination of accelerated and bonus depreciation. That's a $30,000 deduction on a $50,000 investment, resulting in an immediate tax savings of $10,000 in my tax bill. Now that can only be deducted against investment income because I don't have real estate professional status. However, by setting up a syndication ladder where you invest in syndications year after year. You can carry these deductions forward indefinitely and reap the tax rewards over time. Those advantages alone represent a 20% ROI in the first year. Then I get annual distributions targeted at 4 to 8% per year. Then at the end of the investment, usually planned for three to five years, everything gets sold and I get my entire initial investment back plus profit. The overall target returns are usually 1.5x to 3x over the 3 and 3 to 5 year term. These investments require some careful research and due diligence up front. However, once you pick a syndication sending your money, it's every bit as passive as vtsax or a more complicated portfolio. I like real estate investing in general because the risks are different than those in the stock market. Not necessarily better or worse, just different. If we're going to advocate for not doing VTSX and chill and taking on more risk, why not advocate for something more than just picking some stocks and trying investments? Thanks and I'd love to hear your thoughts.
- [05:52]
Joe Salsihai
Paul, you want to go first?
- [05:54]
Paula Pant
Yeah, I've got plenty to say. Jason, first of all, thank you for the question. I love what you've discussed, but let's tease out a couple of different topics because I want to make sure that we're discussing each one independently without conflating various topics. So first there is the question of if we are not vtsax and chilling. If we are going beyond just vtsax in our investments, we are. What else should we invest into? First there's the question of should we accept that we're going beyond simply VTS X. Then beyond that there is the question of if we go beyond VTS X, should real estate be a component of that portfolio? And then if the answer is yes, all right, if real estate is part of the portfolio, should real estate syndications be be a portion of that portfolio? We've got three layers of questions here and I want to unpack them one by one and to give a quick highlight overview of where my answers lay. And anybody who has listened to me for any amount of time knows this. I love real estate personally. Real estate is a major, major, major focus of my portfolio and ballpark. It's been a while since I've looked at my net worth, but rough ballpark, I would say about half of my net worth is in investment real estate. Not a primary residence, but investment properties. But that's about roughly half of my net worth and the other half of my net worth is in equities. That's not counting private business ownership. So yes, Personally, I love real estate. I also recognize it's not for everyone. Tons of people just not interested. And for the people who are listening to this, because remember, I'm talking to tens of thousands of people. The subset of this audience that is not interested in real estate should not go into it based out of fomo. I don't want anyone who listens to this podcast thinking, man, I have no interest in this. I don't want to learn about it. I don't want to do. Do the due diligence. I'm not into it. But everybody else says, I quote, unquote, should. That is the worst possible reason to go into real estate. So if the natural curiosity, curiosity is there, then absolutely follow your curiosity. If that curiosity is not there, if you're dreading doing the due diligence, then, then stay away.
- [08:22]
Joe Salsihai
It's going to be a disaster if you don't have that curiosity.
- [08:25]
Paula Pant
Yeah, exactly.
- [08:27]
Joe Salsihai
If it's just fomo, and hey, everybody else is doing it. And I listen to this podcast and it's all around. Yeah, stay away from it.
- [08:33]
Paula Pant
Yeah, absolutely. I think everyone, no matter who you are, everyone should invest in equities, but not everybody should invest in real estate, because real estate requires more upfront knowledge. It requires more knowing what you're doing.
- [08:47]
Joe Salsihai
I will challenge that just briefly.
- [08:49]
Paula Pant
Yeah, Paula.
- [08:51]
Joe Salsihai
Because I like where you're going, so I don't want to take too much time on this. If your piece of the efficient frontier says you should be in real estate, there is an option that's a regulated security that can give you real estate exposure. So you can buy real estate in a way where you can not care, which is through a reit. And you don't have to buy an exact reit. You can buy an index, which is the real estate index, North American real estate index. So there are ways to actually buy real estate, which I totally agree with Jason here. Real estate is a fine asset class for returns. Historically, over long periods of time, real estate as a market and the stock market as a market have ended up in about the same place over long periods of time. Now, that's wide swaths of real estate and wide swaths of stocks. He's talking about syndication, which I know you're getting to next.
- [09:47]
Paula Pant
Right, exactly. And so then turning our attention to.
- [09:50]
Joe Salsihai
Syndication, I feel like it's like comparing an apple and a duck.
- [09:55]
Paula Pant
Yeah, right. You know, I think Jason said it really well when he said that what he likes about real estate is that the risks and benefits are different. They're not better or worse, they're just different. When he said that, he meant that in the context of real estate as a broad asset class versus equities as a broad asset class. But I would also apply that same statement to real estate syndications versus individually selecting and owning properties. Both the benefits and the risks are different. I don't think either is better or worse than the other. They're simply different. Both require a huge amount of upfront due diligence and both require knowing what the downside is. Jason, in your message you talked about the upside. You talked about what could happen if everything goes right. But as I'm sure you know, there are a lot of things that could go wrong with syndications as well. You have to be able to pick good people and good projects. And choosing people and projects is a huge skill set in and of itself. And there's a lot that can go wrong there.
- [11:07]
Joe Salsihai
There was a story we did recently on Stacking Benjamin's Paula because we do a headline segment about a huge, huge syndication in the Dallas, Texas area that went belly up because it turned out the dude was a fantastic salesperson, an amazing salesperson running it, but truly had no clue how to manage real estate.
- [11:27]
Paula Pant
Right.
- [11:28]
Joe Salsihai
And so many people gave him millions and millions and millions of dollars and it all crumbled and all that money went bye bye.
- [11:34]
Paula Pant
Yeah, in that regard, it's almost, and this is not a perfect analogy, but it's almost like picking an active manager for an actively managed mutual fund. Like you are selecting a fund manager. And choosing a fund manager is a skill set. There is an entire industry of people in the investment world, in the financial world, whose job, their full time career is picking fund managers. It's not even managing funds themselves. It's fund manager selection. Right. That's a, that's an area of specialty. So getting that right is, among other things, one of the keys to being successful at syndication investing. And that's why I say I don't think it's better or worse than any other form of real estate investing. I think there are pros and cons to every form. It's just different. The reason that I don't do it is because I learned that I have the bandwidth, the capacity, the interest to specialize in only one specific area. So I specialize in privately held, personally held residential rental properties. Did I choose that because it's the quote unquote, best? No, there's no such thing as best. I chose it because it was accessible and it was something that I could specialize in. And once I chose it. I developed a very, very deep knowledge in that specific niche. And I decided that I would intentionally never venture outside of that niche because I would rather go deep than wide. Because when you go deep, you can specialize in an area and that's your unique advantage. Scale comes from specialization. And again, I want to emphasize I didn't choose the quote, unquote, best niche. I just picked a niche and went deep in it. And so if you want to do that with syndications, do it, do it. Know the risks, know the opportunities. And you said it yourself, the asset class as a whole is not better or worse. It's simply different. And so that requires a deep knowledge to be able to achieve mastery.
- [13:35]
Joe Salsihai
And that's why I think this A equals B argument that Jason is making is already proving that A what Merman is saying. The thing that struck me first was he said, if you're going to tell people to take more risk in your portfolio, then why wouldn't you do this? Jason, I'm not telling people to take more risk. This is the beauty of getting closer to what historically, when it comes to asset classes, has won. You can take whatever risk matches the goal that you are trying to achieve. But when we look at vtsax, we look at this VTI strategy that a lot of people in this community use, you're nowhere close to the historic efficient frontier. So what I'm saying is this. You can either take a hell of a lot less risk and get the same return that you're getting with vtsax, less risk, same return. Or if you're sleeping well at night, you can take no more risk and get a greater return over time. And all it is is following history. That's all that we're doing. Instead of taking one gob of gunk and throwing it at the wall, we're separating that gob into a little bit more analytical areas and looking at them and going, how do these work together? So by diversifying a little bit more and taking 15 minutes a year without taking more risk, we can do great things. By the way, looking into some of Merriman's research recently, let me put this into specific numbers for people because there was a specific portfolio that was mentioned on the show. The last time I was here, we were talking about a four fund portfolio looking at, by the way, Paul Merriman's US all value for fund portfolio versus the total stock market index from 1970 to 2022. Paula, the US total stock market index had 11 down years. Now, if you went with this all value portfolio, which is not the same thing that I'm advocating for, but it's what Merriman put forward. With these four funds, you know how many losing years it's had? It's had 12. So is there more risk? Yes, but I will say if you have the risk tolerance over a 52 year period to be okay with 11 down years. It's probably the same risk tolerance for 12 down years. Now, what was the worst year for each of these two different investment strategies? The worst year in the total US stock market index was minus 37. This US all value portfolio of Merriman's is minus 38.8. Once again, he's got lots of different portfolios. Just looking at one again, is 38.8 worst year, worse than 37? Yes, but I think if you're upset with minus 37, you're not any appreciably more upset with minus 38.8. You know what I'm getting at, right? The risk is different. You can see it in the numbers. But in terms of risk profile of an investor, we were only looking at two different people because I would assert that we're not. If you're okay with 11 down years, you're okay with 12, you're okay with minus 37, you're okay with minus 38 point, you're not like, nope, minus 37.4 was my cutoff. I'm done.
- [17:04]
Paula Pant
What you're saying is that the proportional or incremental increase in risk is well justified by the upside over that 52 years.
- [17:13]
Joe Salsihai
If you took $10,000, you'd have an extra $4.5 million. What would the US total stock market index create with that $10,000? 1.89 million. So the question of is, will VTSAX and chill get you there? I'm going to go back to what I said initially. Yes, it will. You will be fine. You'll be okay. Life will be good for you. But for 15 more minutes, you could have turned $1.89 million into an extra four and a half million on top of that. Fifteen minutes. Four and a half million dollars. Fifteen minutes. Four and and a half million dollars. Do I need to do that again? Fifteen minutes. Four and a Half million dollars.
- [18:00]
Paula Pant
Heck of an hourly rate.
- [18:02]
Joe Salsihai
I know, right? And truly, again, I want to get back to what I said last time. That is not the point. We're not trying to be wizards, Jason, and pick better investments. That's not what we're doing at all. We're trying to broaden out the risk In a more thoughtful way than just everything against the wall. Throwing everything in a glob against the wall, which is what the total stock market index does, is beautiful. When you're starting out, don't worry about analytical diversification. I get so frustrated when people that are just starting out choose. Here I go. Paula. I get so frustrated when people choose to hire a robo advisor.
- [18:46]
Paula Pant
Really? I didn't know that about you, Joe. I didn't know that you were.
- [18:50]
Joe Salsihai
Think about how ridiculous this is. I'm saving my first hundred dollars. Here's what I get. I get over diversification with my hundred dollars. So maybe I earned three extra pennies and I'm probably going to choose the one. Because if I'm choosing a robo advisor, I'm worried about risk, which is silly. Don't get me wrong. I don't want people to lose money. But that is the wrong thought. The wrong thought is how quickly can I shovel. And if I'm buying the entire economy and I know I'm doing it for more than 10 years, then heck, I know it's going to be higher. So I just need to shovel. If it isn't higher, the economy hasn't continued, so then who cares? Real estate's not going to do it either. Right? Nobody's going to look at your deed and think that your property is safe. If the economy is gone, you may need to protect it better. So none of this stuff works. So the economy is going to continue and if it does, it's going to keep going up or you are going to have it completely fail. I'm going to bet on it continuing if that happens. Why am I over diversifying with my first hundred dollars? Why am I not just putting as much money in as I possibly can? And this is what cracks me up about these robo advisors. Why are they charging me extra for tax loss? Harvesting, right? Yeah, Like I got all these neat things and I'm keeping like 10 of my money in cash and I got bond exposure. Why do I need bonds? I don't need. What am I doing? I'm applying so much friction for something, by the way, that a 55 year old needs. Because you know who robos would be great for? They'd be great for a 55 year old. Let me tell you why, Paula. Guess what the robo is doing. The robo is getting closer to the efficient frontier with your money. They're over diversifying your money. They're doing some magic but they don't even market to those people. They market to the Wrong group of people who don't need the thing.
- [20:45]
Paula Pant
So what you're saying, Joe, is robo advisors are marketing to the people who tend to be young, they tend to have lower balances. And those are the people who could vtsax and chill. Those are the people who are best suited for.
- [20:58]
Joe Salsihai
And should.
- [20:58]
Paula Pant
Yeah, could and should.
- [21:00]
Joe Salsihai
100% should.
- [21:01]
Paula Pant
Right? Because when you've got a thousand dollars to invest, okay, you can put your first thousand dollars in VTS X. When you have $500,000 or heck, even $100,000, do you have $1,000 or you have $100,000? That's the question.
- [21:18]
Joe Salsihai
Yeah. If you're just starting out and you have a robo advisor. And again, I'm not saying robo advisors are bad. I just said they're good. They're just marketed to the wrong people. If you're starting out and you have a robo advisor or you are starting out, you picked a Target Date Fund. Here's what I want you to do. I want you to go read JL Coll Cullen's book, the Simple Path to Wealth. You will see how this stuff works. You will chuck that crappy Target Date fund or that rotten robo. And once again, they're not rotten. They're rotten for you. I don't care if it's the vanguard one that's really good. I don't care. It's not for you. What's for you is vtsax. Do that. JL Collins got it right. Then you get to a hundred thousand. Then we get more analytical. So we. Because that's when the efficient frontier begins mattering. That's when you're going to see these incremental changes. There is a fun company called Dimensional Funds. Dimensional Funds is a Wall street operation. And Jason, to your point that people can't beat the stock market, that is wrong. That is wrong. Now I'm going to go into exactly what I'm talking about there. But Dimensional has a couple of Nobel Prize winners on their staff. And what Dimensional does is kind of, Paula, what we're talking about, they take the S P500. What they do is they're like, we don't know which ones are going to win. We just know which ones are really crappy, that we'll probably lose. So they just take out a few of them. So they're taking smidges and hairs. I'm not even talking about doing this stuff because I think that stuff is way above my pay grade. I'm not going to pick who the winners and Losers are. But through their methodology, they will show you that they beaten the market. They have beaten their indexes. Most years, they beat their index. And by the way, Jason, the reason why stock market people don't beat their index is because they're stupid. It's because of the fact that they get paid to not get killed by their index. So let me ask you, Paul, if you've got a job and your bonus, which is going to be 80% of your pay, is based on being within a certain range of your index. Right. Not getting killed by your index, are you going to take big chances? No, you're not. And by the way, if you do take big chances, there's a prospectus, that thing that you get in the mail that you throw away. And now hopefully you don't even get them in the mail. You just get them online and you delete it without reading it because it's 85 pages long and you don't know what it says. But it's all this legalese. All that legalese is to protect the shareholder. You know what that really does? It handcuffs the manager. These people aren't dumb. They are chained to their job, which says don't get creamed. And because of that, then they end up losing to the market. Now, I'm not saying that they would win and they would win big and that we could predict the person next year. We've seen this study over and over and over. Nobody can predict who's going to do it next year. Nobody can predict. And that's really the game you're avoiding by going with indexes. And you're avoiding being a part of this thing that doesn't historically add any alpha because of the prospectus and because of the way the managers paid well.
- [24:29]
Paula Pant
And what we know is that even funds that have outperformed the underlying index, funds that have outperformed the S&P 500 funds that have outperformed any underlying index that represents what they're investing in. The drag that comes from fees and taxes often means that those funds ultimately underperform the index.
- [24:53]
Joe Salsihai
Great point.
- [24:54]
Paula Pant
Yeah.
- [24:55]
Joe Salsihai
There's a third drag to Paula, which actually gives a small investor like Jason a better chance than that fund manager has, which is this. They're trying to manage billions of dollars. Imagine getting an order deciding that you to buy Nike, let's say, and you're managing a billion dollars and you're trying to put 5% of your portfolio into Nike. Do you know how hard it Is to get 5% of a billion dollars into a single Stock like how many trades that take and how long it takes and how many people are following your trades. It is so difficult to get that money in at a reasonable price because you affect your own future pricing.
- [25:41]
Paula Pant
Right.
- [25:41]
Joe Salsihai
As you buy in.
- [25:43]
Paula Pant
You're right, because those shares have to be available. It's as individual investors, you know, you and I are making very small trades. So we never have to think about, if I want to buy a share of a stock, will shares be available? Yes, shares are always available. I've never gone to place an order as an individual investor and been like, oh, we're out. Tesla stock is. It's all sold out. Sold out, Right. But if you're placing massive, massive orders for every buyer, there's got to be a seller and vice versa. Right. Those shares have to come from somewhere.
- [26:23]
Joe Salsihai
When the free market starts seeing that somebody's buying, the price goes higher. Right. As there's more buyers, and in this case, a single buyer with a ton of money starts buying into a stock, they affect their future ability to buy more at that price.
- [26:37]
Paula Pant
Right.
- [26:38]
Joe Salsihai
So small investors historically. And by the way, there's a guy who details all this. His name is Jack Schwager. He's a wonderful journalist. He's written books called Stock Market Wizards. My favorite Jack Schwager quote, by the way, Paula, is the market is not efficient, but for 99.9% of us, we should pretend it is. And the reason is because of the fact that a beating it is a fool's game. The juice isn't worth the squeeze, the amount of time, the energy, the setting it up, the amount of times you're going to fail before you even get to anything that resembles a hopeful strategy. And then that strategy might be fleeting. It might work for just a little while, and then it's gone. And now then you know how you find out your strategy didn't work? You lose all the money that you made. And so Jack profiles these people that are brilliant. And as you read them, you read these wonderful narratives of, yes, it is possible, and no, I never want to do that. They're amazing books, the stock market wizard books. But, Jason, people can beat the stock market and people have beaten it. But that's not why you don't play the game. You don't play the game for all the reasons that we've talked about. The statistical probability of you doing it is so, so, so small.
- [27:44]
Paula Pant
Right. And, well, the other thing that Jason mentioned, and I want to highlight this, Jason, you talked about how the probability of beating the stock market is incredibly Low. But you talked about that in the context of transitioning from vtsax to a strategy that involves additional index funds, which is what Paul Merriman is advocating. No one is saying that you can't boost your returns by virtue of choosing a better selection of index funds. When, when we say that you are unlikely to beat the market, we mean you are unlikely to hand select individual stocks. A little bit of Nvidia here, a little bit of kava there. Right. You are unlikely to hand select individual stocks and put together a portfolio that will beat the market. And actively managed mutual funds. That's what they attempt to do. These active fund managers attempt to hand select a basket of stocks with the goal of beating the market. And what we have seen over and over and over is that they cannot consistently do that over time, largely due to the drag created by the fees on the account because those are big, big fees that actively managed mutual funds have, plus the taxes, plus, as Joe just talked about, the load, the curse of bigness. Yeah, yeah, right.
- [29:10]
Joe Salsihai
There's another thing that struck me about what Jason said that I really need to make sure we're clear about. Jason said, if you're going to go from this one strategy to picking other funds, I'm only going to address this, Paula, because I've seen it elsewhere too, where Joe picked small cap value or Joe picked this thing, or Joe did. I pick nothing. Nothing. The Efficient Frontier won a Nobel Prize because all it shows is what historically has done this repeatedly. Historically has done this. So I just look at history. The only bet that I'm making isn't on a fund manager. It's not. I'm picking a fund because I'm just going with the index that fits that category. I'm not betting on anything except that history probably won't repeat itself. But I bet it's going to rhyme. And if it does continue to rhyme, which it always has, then I think that is a much safer bet to say that these asset classes, when you put them together, will give you less risk and similar returns or similar risk and higher returns than what I'm getting now or which the one I like best, as you know, Paula, is pick the spot for the return you need and forget all this beating VTS X. I don't care. Find the rate of return you need to reach your goal and get a little more analytical about it by getting on the Efficient Frontier. And then once a year, look at that. I think that just doing that versus picking which syndication I want, there's a huge difference in those Two strategies. And you can see how. And I love. Again, you said it earlier, Paula, reiterating what Jason said, it's different. Jason, what happens when you go to these individual investments like a syndication, you're adding volatility to the portfolio. There is no free lunch. If you do a great job of picking, it's going to be way more wonderful than what I'm talking about. If you miss on it, the downside isn't going to be small. It's going to be absolutely huge. And this actually is even, Paul, a part of the efficient frontier. Because initially on that graph, returns go up rapidly. From cash to bonds, the different types of bonds, your returns go up, but the more risk you take, the less incremental the return additions become.
- [31:37]
Paula Pant
Right. It becomes diminishing returns, very much diminishing returns.
- [31:41]
Joe Salsihai
You can keep adding on more risk and more risk and more risk and more risk. And what I'm saying is, Jason, your strategy is killing, probably what I would advocate and definitely vtsax because of the fact that you're taking a crapload more risk.
- [31:55]
Paula Pant
Right. And to tie that back in with what I said earlier, when you make the decision that you are going to take on more risk in your portfolio, specializing is the manner through which you mitigate that risk. It is through deep specialization and deep due diligence that you are able to mitigate that risk. Because you know so much about this very, very narrow subset of the monetary universe. Right. And we're talking right now about equities, bonds, real estate. But let's broaden this out. Businesses, privately held businesses. Yeah, right. Cody Sanchez, who's a guest on this show, her specialty is acquiring privately held service based businesses such as plumbing companies, porta potties, electrical companies, laundromats, things of that nature. Right. That is an area of specialty. It's a very, very specific area of specialty Real estate. Syndication is a very different but very specific area of specialty. Residential or commercial real estate investing. Super, super specialized. Starting a business, starting your own business from scratch. Right. Its own independent area of specialty. So all of these are independent areas of specialty. And they all come with enormous risks. The vast majority of small businesses fail. What is it? 9 out of 10 small businesses fail. So starting your own company comes with a massive, massive load of risk. How do you mitigate that risk? You specialize.
- [33:42]
Joe Salsihai
Yeah.
- [33:43]
Paula Pant
You would gain deep knowledge.
- [33:44]
Joe Salsihai
That's really what I like, Paula. That's what I like about the Schwager books too. That even inside the stock market, as he looks at these people, these people are incredible. Specialists.
- [33:54]
Paula Pant
Right.
- [33:54]
Joe Salsihai
They do one thing, they do it really, really well. They know it intimately.
- [33:59]
Paula Pant
Right.
- [34:00]
Joe Salsihai
They know this thing intimately. Full time job and more.
- [34:04]
Paula Pant
Right. Who is the guy, the PIMCO guy who was like a absolute master at bonds, bond trading, bond investing.
- [34:11]
Joe Salsihai
Bill Gross.
- [34:12]
Paula Pant
Bill Gross, exactly. World class at bond investing. Now think about that. If you're world class at bond investing, you probably have the underlying skill set, you've got the intellectual chops to be able to be world class at equities investing or in private equity or in hedge funds. But he never went there. He focused his specialty on bonds, even though that is generally a lower performing asset class because he knew that he could absolutely master that one specific subset of the financial world. And he made legendary money doing that.
- [34:54]
Joe Salsihai
All of us have a unique talent, and you see some of these talented individuals when it comes to specializing in the investing that they do. But truly, I believe that everybody listening to this in the afford Anything community has something that they're talented in. And we spent a lot of time over the past few months since I had my little rant talking about the role of risk in your portfolio. But I don't think we look at risk widely enough. I truly think that we're asking our portfolio to do some heavy lifting. We're asking our portfolio to do a lot. And then we go and we don't ask for the raise at work or we don't push ourself in our career.
- [35:34]
Paula Pant
Yeah.
- [35:34]
Joe Salsihai
We don't look at ways to make more money. Like, the real place where I want to take risk is in those places where I'm a specialist.
- [35:41]
Paula Pant
Right.
- [35:42]
Joe Salsihai
And if you're a at a job and you know that area, there's a good chance that you could make more money doing the thing that you're really good at and stop begging your portfolio to take all the risk while you're not doing everything that you could do outside of your investment portfolio. I think we need to widen where we're taking risks.
- [36:04]
Paula Pant
Right. Which is why it's so important. That's why I'm building a course around how to get a raise, how to.
- [36:11]
Joe Salsihai
Make more at work, take the risk there.
- [36:13]
Paula Pant
Right. You know, it reminds me of what Nick Magiulli talked about when he was on this show, about how one of his regrets from his 20s was that he focused so heavily on trying to squeeze returns out of his teeny, tiny portfolio. Right. Because he was in his 20s, it was a beginner portfolio, and he was so focused on how to squeeze returns out of this small portfolio that he was ignoring his greatest asset, which was his ability to earn.
- [36:44]
Joe Salsihai
And what's funny about Nick is he's doing okay.
- [36:47]
Paula Pant
Yeah, he's doing great.
- [36:48]
Joe Salsihai
And for Nick to say I could have done a lot better, it's like, wow, right?
- [36:53]
Paula Pant
But he understands, you know, the point that he was making with that is that contributions are the single biggest determinant of portfolio success when we can and should understand how to optimize our portfolio. But again, we should also be aware of when we're hitting those diminishing returns and then to bring it back to specialization. That's exactly why when we want to add more volatility to the portfolio, we bring unique talent to the volatility that we're adding. And that unique talent comes from deep due diligence, deep understanding.
- [37:29]
Joe Salsihai
I love this discussion, Paula, and I hope Jason, you and everybody else hanging out with us realizes why. I said early on that I think this is comparing an apple and a duck because I think it truly is. It truly, truly is.
- [37:46]
Paula Pant
It was a great discussion.
- [37:48]
Joe Salsihai
Yeah, it's pretty exciting. Now what I would do, Jason, let me tell you what I would do. As you learn about the efficient frontier, you're going to have a piece that you want in in real estate and then take your when it comes to real estate investing and put that in your portfolio and you will take the risk that you enjoy taking in a safer way by having then that with a mix of other investments. Because you know, one last thing, Paula, that we didn't get to is he has this false assessment of this is either or. And truly what he's doing could be incorporated into the same stuff that I'm talking about. I've known Paul Merriman for quite a while. I know he uses some shorthand, but it really is what Paul's talking about too. You can do that and incorporate it in a safer strategy and get the upside returns on parts of his portfolio while lowering the overall standard deviation. It doesn't have to be either or. It isn't. Real estate good, stock bad, or stock good, real estate bad. It can be a combo of all the above.
- [38:57]
Paula Pant
Well, thank you, Jason, for the question. We're going to take a moment to hear from the sponsors who make this show possible. And when we return, we're going to have a discussion about Roth accounts. We'll also cover what books we would buy if we had $100 to spend on books for others. Stay tuned.
- [39:18]
Joe Salsihai
How high is the interest rate for the new Laurel Road High Yield Savings account? This high. The air is really, really thin up here. The Laurel Road Very High Yield Savings Account Variable Annual Percentage Yield APY is subject to change at any time. No minimum balance required. Fees may reduce earnings on the account. For full terms and conditions, see laurelroad.com savings. Laurel Road is a brand of KeyBank member FDIC. This episode is brought to you by Google Gemini. With the Gemini app you can talk live and have a real time conversation.
- [39:55]
Paula Pant
With an AI assistant.
- [39:56]
Joe Salsihai
It's great for all kinds of things, like if you want to practice for an upcoming interview, ask for advice on.
- [40:01]
Paula Pant
Things to do in a new city.
- [40:02]
Joe Salsihai
Or brainstorm creative ideas.
- [40:04]
Paula Pant
And by the way, this script was.
- [40:06]
Joe Salsihai
Actually read by Gemini. Download the Gemini app for iOS and Android today. Must be 18 to use Gemini Live. This episode is brought to you by Lifelock. The holidays mean more travel, more shopping, more time online, and more personal info in places that could expose you to identity theft. That's why LifeLock monitors millions of data points every second. If your identity is stolen, their US based restoration specialist will fix it, guaranteed or your money back. Get more holiday fun and less holiday worry with LifeLock. Save up to 40% your first year. Visit LifeLock.com podcast terms apply.
- [40:51]
Paula Pant
Welcome back. Our next question comes from Michelle.
- [40:57]
Michelle
Hi Paula and Joe. Can we talk about the details of the backdoor Roth? My husband and I are always teetering on the edge of an adjusted gross income too high to contribute to a Roth ira. We've continued to contribute to the Roth each month in the hopes that we would be just below that threshold, but for the past two years have had to recharacterize that money to a traditional IRA at the beginning of the following year and then convert it to a backdoor Roth. This has left us with gains from the year that exceed the Roth contribution limit that then need to be rolled over to our 401k, which will be taxed upon withdrawal in retirement. If we decide to directly contribute monthly to our traditional IRA from the get go. We have the same issue with an annual backdoor conversion where our gains will have to be left in the traditional IRA or converted to our traditional 401s. I've considered converting to a backdoor Roth monthly to make sure that any gains grow tax free, but that seems like an administrative pain. Or we could just contribute once annually to the traditional IRA and then convert to the backdoor Roth immediately, but then we would lose out on the dollar cost averaging and a year of possible gains. And I haven't even pondered the considerations in the event that the account lost money during the year that that's like something that luckily we haven't had to consider over the last couple of years. Basically, I'm so befuddled by the options, and I've never heard anybody address the specific details of, like, how to actually go about doing it on a month to month basis. I'd love to hear your thoughts and suggestions. Thanks so much, you guys, for all of your advice over the years.
- [42:34]
Paula Pant
Oh, I've got two. I've got two. I've got two ideas because I've grappled with this myself in the past.
- [42:41]
Joe Salsihai
It is a pain, though, isn't it? It's such a pain. Yeah, I know exactly what she's talking about.
- [42:47]
Paula Pant
Yep, exactly. We've been through this. Yeah, I feel you on this one.
- [42:52]
Joe Salsihai
Yeah. I think that's the reason we don't talk about it more is because we just try to keep it simple on the show.
- [42:58]
Paula Pant
I thought you were gonna say because we're so traumatized, we're trying to block it from our memories.
- [43:02]
Joe Salsihai
Well, that too. Probably that too. I used to have hair, Michelle. It was the backdoor Ross that did it.
- [43:11]
Paula Pant
All right, so two suggestions. One, and Michelle, you. You stated this is make the conversion every month, automatically direct money into your traditional ira. Oh, Joe is shaking his head. Oh, okay. We're gonna have some gloves on, but let me finish. All right, so you automatically make the monthly contribution to your traditional ira, and then I don't know of any platforms that will let you automate it. In a perfect world, you could just make set that up as an automation where the money goes into your traditional IRA. It sits there for 24 hours in cash, and then after 24 hours, it automatically goes to a Roth. I mean, that would be a perfect world. I don't know of any brokerages that allow you to do that. So what it means is that once a month you log in and then you bloop, bloop, Just transfer that money from your trad IRA to your Roth ira. You can do it on your phone, you can do it from the toilet on your phone. It's a very simple process. You just need to remember to do it. You know, you set a monthly calendar reminder and that's that. So that's one option. The other option, and Michelle, you mentioned that by virtue of contributing a lump sum, you miss out on dollar cost averaging throughout the year. That would only be true, let's say, 2025. Right. Let's imagine that in 2025, you refrain from making contributions for the full year, and then you make a big contribution on, say, December 30th. Right. Yeah. You would lose out on all of those gains for the entire year. But my question to you is, do you have $6,000 in a taxable brokerage account that you could just throw in lump sum on January 1st? Because if you do, and then you just continue the habit of throwing that entire lump sum in on New Year's Day, that's your New Year's Day tradition, then you don't miss out on any lost compounding interest. You are setting that clock ahead with a big lump sum right at the start of the year.
- [45:17]
Joe Salsihai
I love it. I love it.
- [45:19]
Paula Pant
Ooh.
- [45:20]
Joe Salsihai
This was. Yes. Okay, Paula, that was the one.
- [45:23]
Paula Pant
Have I redeemed myself?
- [45:24]
Joe Salsihai
Joe, here's the thing. Getting rid of complexity is 9/10 of the game.
- [45:29]
Paula Pant
Yeah.
- [45:30]
Joe Salsihai
Because the more complex it is behaviorally, we're not going to do it. So my goal is to make sure that perfect isn't the enemy of good. And I know exactly what she's dealing with, being right on that line. And am I in? Am I out? Now the IRS has made it even harder for you. You can't do the recharacterization thing, and that's going to create tax penalties or problems down the road. I don't want any of that. So what do I do? Michelle, the only flaw I heard in your thinking, and Paula picked it up, is that you're assuming that when you put money in the ira, you're putting it in on the last day.
- [46:01]
Paula Pant
Yep.
- [46:02]
Joe Salsihai
Instead, put it in on the first day.
- [46:04]
Paula Pant
Yeah.
- [46:05]
Joe Salsihai
Because you get this big 15, 16 month time frame to put money into this IRA. Instead of going with April 15, instead, let's go with January 1, the year before the year that begins the year. And by the way, dollar cost averaging is overrated. Here's the problem with dollar cost averaging. The market goes up 70% of the time. So 70% of the time you lose if you don't put your lump sum.
- [46:33]
Paula Pant
In right away before the pitchforks come out. Let me put an asterisk here. Dollar cost averaging is great for money that you have not earned yet.
- [46:41]
Joe Salsihai
Sure.
- [46:42]
Paula Pant
Because you can't invest money that you don't have.
- [46:45]
Joe Salsihai
Sure.
- [46:46]
Paula Pant
So it's a great way to plan on how you are going to spend future paychecks or future income.
- [46:53]
Joe Salsihai
Definitely do it.
- [46:54]
Paula Pant
Yeah.
- [46:54]
Joe Salsihai
But what that assumes is the second you have the dollar available to invest.
- [46:58]
Paula Pant
You put it in. Yeah, exactly.
- [47:00]
Joe Salsihai
You invest it. So truly, I don't think of it, Paula, as much as dollar cost averaging is, I'm lump suming a little bit at a time, the second I have it available, whatever my contribution is. But if I'm worried about taking a lump sum of money and dividing it into 12 things, I learned how to do that when I first became a financial planner. And then I found out later on why I learned how to do that.
- [47:24]
Paula Pant
Why'd you learn it, Joe?
- [47:26]
Joe Salsihai
Because if the market goes down and your clients don't understand how the markets work, they will fire you because they think that you helped them purchase something stupid. And so what I was worried about was keeping my job. Actually, my trainer was worried about it because once I learned that, I told my client, I said, listen, here's the deal. The market goes up about 70% of the time. So it's going to be a bet no matter what we do. It's more about you. Dollar cost averaging is more about you than it is about the investment.
- [47:55]
Paula Pant
Well, that's assuming that you already have the money.
- [47:59]
Joe Salsihai
Well, once again, this is a lump sum, right?
- [48:02]
Paula Pant
Right.
- [48:02]
Joe Salsihai
If we're using a lump sum and we're going to parcel it out, this is much more about you. If you don't think you can stomach putting $3,000 in and having it drop by 35%, to use the analogy we just had about the efficient frontier and that stuff, if your stomach can't handle that, then dollar cost average in if you can't handle those swings. But generally speaking, it's better to invest early and invest often. Invest like it's a Chicago election. Right.
- [48:33]
Paula Pant
Is that vote early and often.
- [48:35]
Joe Salsihai
Vote early and often cast a lot of votes.
- [48:39]
Paula Pant
But what the heck happens in Chicago? Man, I shouldn't even do that with.
- [48:43]
Joe Salsihai
All the election, I think the elections rigged thing. I shouldn't have joked about that. But a long time ago people would talk about Chicago elections because of the quote mafia. That was an old joke. So sorry. Old guy humor. I think, though, getting in early January 1st and just doing the IRA contribution. Flip that thing over. Going to save you a lot of trouble. You're going to think about it once a year.
- [49:09]
Paula Pant
Yep.
- [49:09]
Joe Salsihai
You're gonna. Most years it's gonna go up. It's gonna be great.
- [49:13]
Paula Pant
Yeah. If you've got that money sitting in a taxable brokerage account, then just throw that in on January 1st. You know, I lump sum everything. I love throwing in big lump sums. And it's, it's because of exactly what you said, Joe. I understand that over the long term that money is likely to do well. This is what helped me a lot because there was a time in My life when I was uncomfortable with throwing in big lump sums of money. Ask yourself, if you had invested a gigantic lump sum of money on January 1, 2008, and if you'd left that money in the market, look at how much it would be worth today. Now, that means that that money you put that money in and immediately it endured the 2008 recession. Or heck, actually, some of that really started in 2007. So let's just go back a year and say you put in a big lump sum January 1, 2007. Right. So it got beat up in 2007. Then it got decimated in 2008. Then it hit its absolute low in March of 2009. Right. So from January 1, 2007 through March of 2009, you had two and a quarter very, very bad years. Those would have been an Absolutely terrible 27 months. But look at where you would end up today. So anytime that I feel nervous about putting in a lump sum of money, I think about January 1, 2007. And then I'm like, cool, we're good.
- [50:51]
Joe Salsihai
If that's the worst, I can withstand it.
- [50:54]
Paula Pant
Yeah, exactly.
- [50:55]
Joe Salsihai
I'm going to be better. Like, what's the worst that can happen? Oh, I have to wait a little longer. Well, this is long term money anyway. Yeah, wonderful. It's kind of annoying, Paula, because I so thought we were going to fight. Ah, I was just so looking forward to that. And we didn't get to do it.
- [51:10]
Paula Pant
Well, the other option, and I use Schwab, so I understand different brokerages, depending on their user interface, their process might be more onerous. So, Michelle, I don't know what brokerage you're using, but if it's Schwab or if it's anything like Schwab, the actual mechanics of the process is very simple.
- [51:31]
Joe Salsihai
So easy. Schwab.
- [51:32]
Paula Pant
Yeah, exactly. You put the money in a trad IRA and then you just hit a button and boom, it moves over to the Roth and you're done. So it's literally something you could do from the toilet.
- [51:44]
Joe Salsihai
Spoken like somebody who's done it.
- [51:47]
Paula Pant
It's where I do all my investing.
- [51:51]
Joe Salsihai
Paul accidentally drops her phone. Her investments go in the toilet. What happened? My investments are in the toilet. Literally.
- [52:01]
Paula Pant
It's not a huge burden to do it, but it is. Like, why do something 12 times a year if you could instead do it once a year?
- [52:10]
Joe Salsihai
Amen.
- [52:11]
Paula Pant
But if you do decide to process that monthly, if you come to that conclusion, then tie that habit to something else that you are already doing monthly. So, for example, I don't know. Let's say you, every time you go to the hair salon, you process that transaction. Boom. By virtue of tying it to an existing habit that you're already doing monthly, you're unlikely to forget it. And this is a tip that comes from James Clear. He looked at habit formation, and he found that this practice, there's a term for it, it's called habit stacking. And it's just when you stack a bunch of habits on top of pre existing habits. So in its simplest terms, every time that I pick up my toothbrush, I automatically pick up a tube of toothpaste. I don't even think about it. If one hand grabs the toothbrush, the other hand grabs the toothpaste. It would be strange not to. The next steps are very predictable. Then I unscrew the cap from the top of the tube of toothpaste. Then I put the toothpaste on the toothbrush. Then I brush, then I rinse. I never have to think about the order of those steps. It's automatic. And the reason it's so automatic is because the deep, deep recesses of my brain have tied each habit to the next one. I know that when I'm standing there holding a toothbrush that has toothpaste on it, the next step is to brush my teeth. And I know that once I've done that, the next step is to rinse my mouth. There is no level of thought that goes into that. So you want to take that same model and apply it to any habit that you're building. So if you do decide to do it monthly, and Michelle, I'm not just saying this to you, but there's probably people listening to this who say, you know what, I like the January 1st idea, but I don't have $6,000 sitting around, or 12,000 if it's two people. Actually, look at me, I'm going off of odd numbers. Isn't it 6,500 now?
- [54:13]
Joe Salsihai
Well, in this 2025.
- [54:15]
Paula Pant
Eek.
- [54:16]
Joe Salsihai
No, I'm saying it's 2025. Number is going to be 7,000.
- [54:19]
Paula Pant
Oh, my goodness. Inflation.
- [54:22]
Joe Salsihai
And if you're 50 or older, Paula, 8,000.
- [54:26]
Paula Pant
Look at me, living in the past. Been saying 6,000 this whole time. It's actually seven.
- [54:33]
Joe Salsihai
Remember when it was six, we were.
- [54:35]
Paula Pant
Young and innocent back in the day, back in my day, and we thought.
- [54:41]
Joe Salsihai
The Roth IRA contributions, oh, those were good times. But these are better times.
- [54:46]
Paula Pant
All right. Yeah. So there are a bunch of people who are listening to this who are going, all right, I don't have $7,000 sitting around or I don't have for two people, $14,000 just sitting around. So for those people who don't have the money for the January 1st lump sum, I'm saying making this monthly recommendation for all of them, tie it to an existing habit that you already do monthly.
- [55:12]
Joe Salsihai
So, Michelle, we're with you. Yeah, 100%, we're with you. It's a pain, and I think this might not shovel exactly the same amount of money in, but it's going to be so much easier for you.
- [55:25]
Paula Pant
Well, thank you for the question, Michelle. Enjoy that backdoor Roth. We're going to take one final break to hear from the sponsors who make this show possible. And when we return, we will field a question from Evan, who's wondering what personal finance books we would buy if we were buying them so that others could read them. Welcome back. Our final question today comes from Evan.
- [55:58]
Joe Salsihai
Hi, Paula and Joe.
- [55:59]
Paula Pant
This is Evan in Maryland. I'm a high school teacher and I've.
- [56:03]
Joe Salsihai
Just gotten permission to spend $100 to.
- [56:05]
Jason
Put personal finance books into our school library.
- [56:08]
Paula Pant
I've heard you can afford anything, but not everything. And I'm curious which books would make the cut for you if you could only spend $100.
- [56:15]
Joe Salsihai
I look forward to hearing your thoughts. If I had a hundred dollars.
- [56:22]
Paula Pant
If I had a hundred dollars.
- [56:25]
Joe Salsihai
I buy books for my school. I bought books for my school.
- [56:30]
Paula Pant
All right, so what changes this answer? Not changes, but like one of the ways in which I am approaching this answer is specifically what books would I buy for high school students?
- [56:41]
Joe Salsihai
Yes.
- [56:42]
Paula Pant
And honestly, this is actually pretty similar to what I would buy for adults. But specifically, when I'm looking at it through the lens of what would I buy for high school students, there are two that jump out. One is Rich Dad, Poor dad by Robert Kiyosaki. Because it is such a foundational book, it's an easy read. But when I say an easy read, it is profound concepts stated simply and the mindset shift that comes from this particular book. Robert Kiyosaki in this book essentially talks about how we've all been taught that getting a whole bunch of degrees and getting a big fancy education and a big prestigious job is how you make a lot of money. But the reality is owning assets is how you make money. Now, a bunch of degrees and a big fancy job will get you a high income, but having a high income is not the same as owning assets. A high income can be used to purchase assets, but fundamentally, what you need in order to become wealthy are assets not income. And so he really lays that out in a way that is digestible. It's easy to understand. He really even highlights the distinction between being self employed, where you own a job, to being a business owner where you own an asset that can survive beyond your own lifetime.
- [58:09]
Joe Salsihai
One of my favorite analogies comes directly from this book. It's this idea, and I remember how when I first read Rich Dad, Poor dad, how this struck me that you can go to work every day with your lunch pail, but if you create an investment pool, whether it be a business with other people working for you, bringing in money or investments, whether it be real estate, stocks, whatever it might be, that money goes to work every day with its lunch and comes back with more money. And then you realize this idea of passive income, which in a lot of ways is a lie. Really what that's all couched in is you want to create a pool of money that's making money for you so that if one day you're sick now you're beyond living this day to day existence. I thought that was really powerful.
- [59:02]
Paula Pant
Yeah. Your labor can create capital and your capital can create capital.
- [59:06]
Joe Salsihai
And over time the capital creates way more capital than you ever could.
- [59:10]
Paula Pant
Right, exactly. Because you're limited by the constraints of one human life, two hands. Yeah, yeah, exactly. Your capital is unlimited.
- [59:19]
Joe Salsihai
That was powerful. I will say in this book because Paula, this was not on my list, but I 100% agree. This book changes people's viewpoints so much they go, oh wow, I never thought of it that way. Like it's such a slap across the face for a lot of people. In a good way, by the way, that well meaning relative who's giving you the lovingly. Yeah, slap across the face. But I'll tell you the downside about this book. I don't like the tactics he uses. At the end of the book he talks about micro cap. Stocks and real estate are all you need to own and you're going to get there. I'm like, well, but I'm not going to throw out the baby with the bath water, so to speak. As my mom says, I think 99 of this book is wonderful. It's just absolutely wonderful.
- [60:03]
Paula Pant
To me, the downside is where Robert Kiyosaki has gone since publishing the book. I think the book is wonderful.
- [60:09]
Joe Salsihai
Well, when you look at actually how that book was made, don't get me wrong, it was Kiyosaki's inspiration. But Sharon Lecter, his co author, when you look at what she's done recently and what he's done, you can kind of see how that book might have gotten written, if you know what I mean.
- [60:26]
Paula Pant
Yeah. With all due respect, I was debating whether or not I should say this publicly, but I'll simply say this. There is a reason that we have elected not to have him on this podcast.
- [60:38]
Joe Salsihai
He will not be on Stacking Benjamins either.
- [60:40]
Paula Pant
Yeah. As in, you have made that choice, Joe.
- [60:44]
Joe Salsihai
I have made that choice. Yeah. I will never have him on Stacking Benjamins.
- [60:48]
Paula Pant
Yeah. I have also made that choice. We have had many opportunities to have him on the show and we have declined.
- [60:55]
Joe Salsihai
But this book.
- [60:57]
Paula Pant
But the book is great. Yeah. Honestly, it's one of my favorite books.
- [61:02]
Joe Salsihai
Yeah.
- [61:03]
Paula Pant
It's difficult to have a book that you love and that changed you and that inspired you in such meaningful ways and to have the current reality of the author.
- [61:15]
Joe Salsihai
Do you want to just go back and forth on these, Paula? Because I have a list like yours.
- [61:19]
Paula Pant
Yeah. Yeah. Let's hear yours.
- [61:21]
Joe Salsihai
Yeah. So the first one on my list is one that we talked about earlier in the show, so I'm just going to go ahead and do that. This book was written so specifically for the author's daughter. His goal was to give her this. Let's not freak out about money. Oh, oh, oh.
- [61:36]
Paula Pant
Can I guess? Can I guess? Can I guess?
- [61:38]
Joe Salsihai
You got it.
- [61:39]
Paula Pant
Oh. The Simple Path to Wealth by J.L. collins.
- [61:42]
Joe Salsihai
I think this is perfect. It is written for people who are high school age and it's a wonderful way to begin your investing journey. With the right framework, you will be well off worrying about, not the stock market, but worrying about what you need to do. Wonderful book and a great starting point.
- [62:03]
Paula Pant
So the book that I was going to suggest, but then I kind of stopped myself. When I was in high school, I read the Millionaire Next Door and I got a lot of inspiration from that because I had previously assumed that as many teenagers too, like, oh, if you're rich, you probably inherited it, you came from a wealthy family, blah, blah, blah. And the data doesn't bear that out. And the Millionaire Next Door does a great job of highlighting that shows that the vast majority of millionaires in the United States are the first generation of their family to be millionaires and that over 50% of them never inherited anything, not even one single dollar, not even one dollar from their parents. And so this book really disrupted a lot of preconceived notions. And on top of that, it also showed that the majority of millionaires made their money by owning businesses and specifically owning, quote, unquote, boring businesses like Pest control. Like H Vac? Like a janitorial services company. So it goes back to our earlier conversation.
- [63:10]
Joe Salsihai
Was podcasting in there?
- [63:12]
Paula Pant
It was not in there. Well. Oh, but see, here's the reason that I might not recommend it. So the original book was written in the 90s before podcasting existed, I should add. And so a modern high schooler probably is not going to relate to a book that was written 30 years ago. Now, Dr. Thomas Stanley and his daughter, Dr. Sarah Stanley Fallow, came out with a sequel to the book in just.
- [63:37]
Joe Salsihai
A few years ago.
- [63:38]
Paula Pant
It was ballpark, roughly 2015. 2016.ish. Yeah, somewhere in the 2015, 2016 neighborhood of years. And so that book, which is called the Next Millionaire Next Door, is an update of the research that was done in the 90s. And so it gathers research from the 2010s and shows that the same applies, that really nothing has changed. Even think about the difference between the 90s and the 2010s. Now we're in the Internet era, in the 2010s, actually, we're even in the smartphone social media era. And yet still, even in that context, nothing had changed.
- [64:18]
Joe Salsihai
The best thing I like about this both books, Paula, and I think it's really important for high schoolers living in the social media world is that ostentatious wealth is not the same as real wealth.
- [64:29]
Paula Pant
Right.
- [64:30]
Joe Salsihai
And you know, Instagram and TikTok will have you believe completely otherwise. I need to look rich, I need to look like I'm doing stuff Right. And these books definitively prove that that is not true.
- [64:42]
Paula Pant
Yeah.
- [64:43]
Joe Salsihai
At all.
- [64:44]
Paula Pant
Both of these books talk about how millionaires have a preference for cheap beer. The Bud Light, Miller, like Coors, like type of a category of beers. Right. They have a preference for that over some fancy expensive wine, which is why.
- [64:58]
Joe Salsihai
It took me so long.
- [65:00]
Paula Pant
Your preference for fancy, expensive wine, like.
- [65:02]
Joe Salsihai
The fancy expensive wine. That was my number one problem, that the fact I couldn't budget or didn't budget.
- [65:11]
Paula Pant
So my knee jerk reaction was to recommend these books. But the original one from the 90s, I think is probably too old for a modern high schooler to relate to. And the new one, I mean, it's great.
- [65:27]
Joe Salsihai
Okay, so what's your next one? Because I've got like five.
- [65:30]
Paula Pant
Oh, geez. Gee. Okay, well, let's hear yours.
- [65:33]
Joe Salsihai
Well, he's got a hundred bucks. He doesn't have five bucks. I'm assuming he's buying one copy of each. Or were you thinking he's buying like.
- [65:40]
Paula Pant
Yeah, yeah, no, yeah, he's Buying one copy of each.
- [65:43]
Joe Salsihai
Yeah. So another book on my list. I think just the philosophy of your money or your life is really good in high school. I think this idea that if you learn from the very beginning not to trade your hours for dollars, especially for high schoolers that have had crappy jobs, because that's when I have my crappy jobs, that might be a good choice. You're looking at me like, nope. No.
- [66:06]
Paula Pant
Wow. Yeah. Well, I mean, that was also written in the 90s.
- [66:10]
Joe Salsihai
Yeah. But it's one of these big idea books that I don't think the idea grows old. You know what's funny? Every book on my list, I think if not written pre 2000, was written a long time ago. But they're still big books for a reason, Paula. They have staying power for a reason, because these books are speaking to something bigger.
- [66:31]
Paula Pant
Okay, well, here's a big idea book that I think the right high schoolers would really connect with. The Almanac of Naville Ravikant.
- [66:40]
Joe Salsihai
Wow.
- [66:41]
Paula Pant
Right? That's a big idea book.
- [66:44]
Joe Salsihai
Wow. That is a big idea book.
- [66:47]
Paula Pant
That is the biggest of ideas.
- [66:49]
Joe Salsihai
Well, and here's what I like about that pick, because the rest of my picks are not about personal finance.
- [66:54]
Paula Pant
Oh.
- [66:55]
Joe Salsihai
I think when we. When we talk about really a financial education curriculum, like, what is really important to get your money together. And I think it widens it. Much like Paula, on your show, you're widening the discussion to be about your thinking. Right.
- [67:11]
Paula Pant
Right.
- [67:12]
Joe Salsihai
So for me, it's, what are the skills that are going to help you build the portfolio? So I think these books are on here for different reasons. Simple path to wealth. Don't worry about it. Money or your life. Don't trade your hours for your time. You get those things down. And then I think there's other skills that we bring to the tables, which is the other three on mine. But I think you're bridging that with this book.
- [67:31]
Paula Pant
Yeah.
- [67:31]
Joe Salsihai
Because this book is much more about thinking.
- [67:34]
Paula Pant
Yeah.
- [67:34]
Joe Salsihai
Than about personal finance.
- [67:37]
Paula Pant
Right. And it absolutely ties to money. But it is such a big idea book, and it's so brilliant. It's insightful. It's timeless. It's one of the best books I've ever encountered. Naval Ravi Kent is an absolute genius, and he doesn't publish a lot, but everything that he says is so deeply inspired.
- [67:57]
Joe Salsihai
I always feel like his words are so reasoned, like he thought about them for about 16 days before he said anything.
- [68:04]
Paula Pant
He's more in the spotlight than naval, but he's enormously insightful, and he can Convey tremendous wisdom succinctly is Morgan Houselike and his book the psychology of Money.
- [68:21]
Joe Salsihai
That almost made my list.
- [68:23]
Paula Pant
It's a book about thinking and also, of course, as the title indicates, a book about money. It's a big picture book. It's a book about how we think about risk, how we think about opportunity, how we think about disasters and think through choices. So it isn't a book about the nuts and bolts, the. The actionable tactics of budgeting. It's a big ideas book.
- [68:45]
Joe Salsihai
My next book I put on the list specifically because I thought about you are going to spend most of your life earning money, and if you're going to earn money, knowing how that machinery works, I think is going to be a huge part of your financial success. So I'm going to the income side of the equation. I think every high schooler should read the e Myth.
- [69:11]
Paula Pant
Really? Wow.
- [69:13]
Joe Salsihai
Whether you build your own business or you work for somebody else, understanding that it's not about creativity inside the system, it's about building creativity outside of the system and then tweaking the machine. And when you look at life as a set of machinery versus working at trying to be brilliant for 15 minutes and then you have to replicate that over and over and over and over versus document the process that you did and automate it. Like, the stuff I got personal finance wise about automation really came for me from the e Myth. If I set my personal financial picture on autopilot, where the second that I find money, I'm able to add it into the plus column on my balance sheet. Brilliant. Just absolutely brilliant. And that comes specifically from the e Myth. Don't work inside a business. Work on the business.
- [70:07]
Paula Pant
Hmm. Work on it rather than in it. Yeah, yeah.
- [70:09]
Joe Salsihai
And I think that if you're a high schooler and you read that and you work for somebody, then you know what your boss wants, then I think you're going to be eligible for a raise much more quickly.
- [70:18]
Paula Pant
Wow.
- [70:18]
Joe Salsihai
I think you're going to cut through a lot of noise.
- [70:21]
Paula Pant
I might disagree with you there, Joe.
- [70:22]
Joe Salsihai
I think that, well, it's okay being wrong once in a while.
- [70:26]
Paula Pant
I think the book would be good for college students, but I think high school might be a little young for those concepts.
- [70:33]
Joe Salsihai
Well, then you're not going to like my next one either, then.
- [70:35]
Paula Pant
Oh, what is it?
- [70:37]
Joe Salsihai
You will like my last one, but you won't like this one because this is a book that's in college classrooms all the time. You should get this book in high school because much like the e Myth is A story. Why I think that high schoolers will latch onto this is because the fact that the E. Myth is a simple story makes it really easy reading, and I think it makes these big, heady ideas easier. Same thing with the next book, the Goal. I think the book the Goal, which goes over the theory of constraints, but it does it in a way that there's a factory that's failing. This factory is failing, and they're sure they can't save it. And this guy's coming in to kind of mop stuff up, and he's like, what if I can save it? And then he figures out about bottlenecks and about throughput and systems and that book, man. I read this book very early on, and I think I would have gobbled this up in high school just because it was such a cool story about a business and how to turn it around. And once again, it wasn't about being brilliant. It was applying some science. It was bringing in these different ideas. So I like those two things. In terms of how to make money, man, if out of high school you've read the E. Myth and the goal, you know, 80% of the landscape, by the time you hit college or your apprenticeship or whatever, the military, whatever you decide to do, you've got this solid foundation already of how the business world works that I think will serve you for a good long time.
- [72:11]
Paula Pant
Interesting. So the Goal is the first book that we've discussed that I haven't read. I've never read that one.
- [72:16]
Joe Salsihai
That's fabulous. Fantastic.
- [72:18]
Paula Pant
I'm still thinking about the Millionaire Next Door slash the new Millionaire Next Door.
- [72:23]
Joe Salsihai
Yeah.
- [72:23]
Paula Pant
Do I recommend it or not is still playing on my mind. The ideal circumstance would be to have both books because I think that they work best together when you read them both. The original book is powerful and it's beautifully written, and the second book really builds on the first. That said, Evan only has $100, and if he's got to choose. I was debating this in my head. I would still get that second book. Unfortunately for high schoolers. I personally think the first is better, but I don't think a high schooler would relate to these examples from the 90s. I would get the second because I think high schoolers can relate to it because it's more modern, it's newer, it's Internet, smartphone, social media age, and it reinforces those same underlying fundamental concepts.
- [73:11]
Joe Salsihai
Love it. Love it, love it, love it, love it, love it, love it. I like Scott Trench's book Set for Life, by the way.
- [73:17]
Paula Pant
Yeah, that's a great one, I think.
- [73:19]
Joe Salsihai
Especially for a high schooler, because it starts off with the assumption, which a lot of high schoolers have, that they want a bajillion dollars. Right. That life is about getting as much money as you possibly can. And if you want to get there, here's a roadmap. And so I think in high school I would have looked at Set for Life like it was a treasure map. But that's an honorable mention. Last book on my list again, because I'm looking at fundamental foundational knowledge.
- [73:48]
Paula Pant
Before your last book, I've got one more. Oh, Richest man in Babylon.
- [73:53]
Joe Salsihai
100% great idea.
- [73:55]
Paula Pant
Yeah. It's short, It's a story. It's a simple read, but it's timeless concepts.
- [74:01]
Joe Salsihai
I think the books that are stories with the concepts built in, some of these heady concepts built in are the best way. Look at how many of them made our list.
- [74:11]
Paula Pant
Right? Yeah.
- [74:12]
Joe Salsihai
That's the fourth one we've recommended. That's a story that's pretty powerful. I think you need to be organized. I just think if I would have learned earlier how to be organized, it would have made all the difference. I'm not naturally an organized person. I know when my kids were in high school, they weren't that organized. I went through this book with my high schoolers and it was helpful. Did it stick? I don't know. They're. They're almost 30 and sometimes I wonder. But I think there are so many good lessons in David Allen getting things done. I think the idea of getting things done is something high schoolers can appreciate. I think they can apply it right away. I think David Allen is a great person to latch onto when it comes to how to accomplish more, which they're going to need to do. They're going to need that no matter what they decide to do out of high school. So that was kind of mine. I also thought about another really heady book. And you know how much I love this book, but I think you need a little life experience before you do this last one. It's an easy read. Happy Money.
- [75:14]
Paula Pant
Oh, yeah. By Ken Honda. It's a cute book. It's an easy read. Yeah, I agree. I think you need to be in like your at least mid-20s to really appreciate it.
- [75:23]
Joe Salsihai
Yeah, that book hit me really hard. Hit me much harder than the fire movement idea did because it's so much about gratitude and sense of community and honor. Absolutely love it. Big ideas. Very simply put, happy Money. But I. I'm with you. I'm going to Cross that one off set for life. I think is is really good high school material.
- [75:45]
Paula Pant
Beautiful. So, Evan, there are your answers.
- [75:48]
Joe Salsihai
That was fun.
- [75:49]
Paula Pant
We should do this every holiday season.
- [75:51]
Joe Salsihai
Paula Jo's top five.
- [75:53]
Paula Pant
Yeah, exactly.
- [75:55]
Joe Salsihai
That's wonderful.
- [75:56]
Paula Pant
All right, Joe. Well, we did it again.
- [75:58]
Joe Salsihai
I can't believe it's over already.
- [76:00]
Paula Pant
Where can people find you if they'd like to hear more of you?
- [76:02]
Joe Salsihai
I mentioned this the last time I was here and I'd just like to mention it again, which is that I am working with a small cohort to get through. And by the way, I assumed I wasn't going to talk about my book, so my book's great for everybody all the time, no matter who you are. And Paula pants in it.
- [76:22]
Paula Pant
Page 13 or 17. Either page 13 or page 17. One of the two.
- [76:28]
Joe Salsihai
It is page 13. I looked it up.
- [76:30]
Paula Pant
Really? Oh, you did. You confirmed. Oh, great.
- [76:32]
Joe Salsihai
Yes. And Paula, on the book tour, best page in the book, would sign page 13 for people.
- [76:38]
Paula Pant
I would. Yeah.
- [76:39]
Joe Salsihai
Yes.
- [76:40]
Paula Pant
Congratulations on finding my page.
- [76:42]
Joe Salsihai
I know. And when Doug was with us, Mom's neighbor Doug from the Stacky Benjamin show, Doug would write in the very front, congratulations on meeting me.
- [76:50]
Paula Pant
That was where I got it from, actually. It was a play on Doug's joke.
- [76:55]
Joe Salsihai
It was so good. But I'm taking a small cohort of people through not just the efficient frontier, which we talked about, but how to timeline your goals. These tax strategies that get in your way. Like how do you fundamentally understand these things? Insurances, risk management, a financial plan from the beginning to the end. And starting near the end of January. I'm taking a very small group of people through my book. It's ten ninety minute sessions. We did a survey of people last year that went through this on a scale of 1 to 10 before they went through the. We call it the book club. On a scale of 1 to 10, before you did the book club with me, how comfortable did you feel with your overall financial picture? The average answer, Paula, was a 5. Afterwards, how did you feel on a scale of 1 to 10? 9. And the testimonials were huge. They didn't like just the fact that they were learning from me systematically how to do this, but also that they had this little group of people that they could also work with together. And when one person struggled with stuff, one of the great comments we got was sometimes I was struggling with stuff and I didn't even realize the right question to ask. And somebody else would ask the right question. And so I could learn from somebody else's question. Which was very helpful. So to get in, it's stackingbenjamins.com bookclub and it's not for everybody and it's gonna be a very small group, but I really look forward to working with a few people to go through the lessons in Stacked and build a financial plan. Let's go.
- [78:24]
Paula Pant
Oh, wonderful. Well, thanks to all of you for being part of the Afford Anything community. If you enjoyed today's episode, please do three things. First and foremost, share this with a friend or a family member, a neighbor, a colleague, a loved one, a liked one, a tolerated one. Share it with the people in your life. That's the best way that you can spread the message of great financial health and robust financial education. Number two, make sure that you're following this podcast on Apple Podcasts on Spotify, in your favorite podcast playing app, wherever it is, whatever it may be. Also, find us on YouTube, YouTube.com affordanything and number three, please subscribe to the newsletter affordanything.com newsletter we are reviving it. We're bringing it back. We're being more regular about it. So fresh content, insights, ideas delivered straight to your inbox. We don't publish this. This is not on the podcast. This is not on YouTube. This is unique material that only people who subscribe to the newsletter will get and it's absolutely zero cost. Affordanything.com Newsletter thank you again for tuning in. My name is Paula Pant.
- [79:40]
Joe Salsihai
I'm Joe Salsihai and we'll meet you.
- [79:42]
Paula Pant
In the next episode.