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BiggerPockets Money Podcast
Ben Felix Critiques FIRE… And Then Makes the Case for 100% Equities in FIRE
01:04:57
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- [00:00]
A
We had Ben Felix on the podcast a couple of weeks ago to talk about small cap value funds and today we're having him back on the show because he has such a wealth of knowledge. It's a great conversation and you will not want to miss our fun debate on the fire Community, what he actually thinks is a safe withdrawal rate and how to approach portfolio design. Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My. My name is Mindy Jensen and with me, as always, is my Loves to talk about Portfolios Co host Scott Trench.
- [00:35]
B
Thanks, Mindy. Love to factor that into the discussion every day here on BiggerPockets Money. Today we're joined again by Ben Felix. Ben is a portfolio manager and the Chief Investment Officer at PWL Capital. As a reminder, this episode, as always, is not investment advice and is for entertainment purposes only. Ben, welcome back.
- [00:50]
C
Thank you so much.
- [00:51]
B
Awesome. Well, before we get into portfolio construction, we had a really big error that we made on the last episode. I believe that some of the members of the Rational Reminder community called out. Could you let us know what that was?
- [01:04]
C
Yes. So when we were talking about avuv, which is the Avantis Small Cap Value Fund and dfsv, which I don't know if we actually mentioned the ticker, but it's Dimensional Fund Advisors Small Cap Value etf, I mentioned that AVUV is less constrained into small caps and can go into mid caps a little bit, which is not true. If you look at the holdings of AVUV and dfsv, they're both totally constrained to small caps and AVUV is actually a little bit smaller on average than dfsv. Where my mind was going when I said that was that AVUV is allowed to drift more into small cap growth stocks, whereas DFSV is very constrained within the small cap value universe. Anyway, the Rational Reminder community, in their infinite nerdiness listened to our last episode and were very quick to point out that what I had said there was not exactly true. So I did want to issue that correction.
- [01:55]
B
I think it's just a good reminder as well that you can know all of this stuff and then the precision of language that you use in the moment can just throw somebody off for years. Right? I mean, I, I, like, I, I wrote, I won. One time I told somebody about a backdoor Roth and they were thinking about that, you know, two years later they came back to me with a scratch pad of paper and it was like, no, I put the back door there. If you were over the income limit, they were Trying to do it back. So it's just like these, like little things that stick with people and it's just a reminder to be that precise with language. And it's a handicap after you spend 10,000 hours studying this stuff. But yeah, I, I don't think that was a pretty particularly egregious error. For the record here.
- [02:31]
C
Yeah, I don't think it was that big of a deal, but worth correcting.
- [02:34]
A
Yes, let's make the correction. It's also a reminder that this is a show for entertainment purposes only. We're having a conversation. It's. It's pretty accurate. I like, we're not just making stuff up. But if you hear something that you want to dive deeper into, do your research. Don't just, oh, Mindy said something, or Ben said something. So therefore I'm going to take it as gospel. You have the whole Internet at your fingers today.
- [02:58]
B
I think what I'd really love to get your opinion on, other than the intricacies of small cap versus mid cap and where that cutoff actually lives it, is the fire movement as a whole. I want to zoom way out here, and I think that you have a really good take on this. You're not overly critical and you're also not a full supporter of it. Could you tell us your position on the fire movement?
- [03:18]
C
Yeah, so, I mean, we've been a little bit critical of it on our podcast over the years and we've taken lots of criticism back for our criticisms. And I think that my view on it have evolved over time with that back and forth. I think a lot of the listeners of our podcast are fire proponents and are pursuing fire, which is great and which is why they would get upset when we would talk about it. So I think I have to start by stating my sort of understanding or my definition of the fire movement, because I think that the definition of it ends up being one of the big issues when we're discussing this topic, at least to have an intelligent discussion about it. So my sort of interpretation of fire is the idea that people should find work that pays them as much as possible, even if they don't love it, in some cases, even if they hate it, save a huge portion of their income to invest in low cost index funds so that they can be free from the need to work for money as soon as possible. Does that sound right?
- [04:11]
B
I think that that's fairly close. I think I would say we're going to optimize for the ability to not need to work for money, not necessarily take the highest job. And I think that the fire community is in conflict with itself over whether to take the highest job, whether to relax a little bit on that journey and delay it by a little bit in order to have a much higher quality of life now. And I think it's also grappling whether there ought to be a purity contest in terms of continuing to spend very low amounts of money throughout one's life. I think that there's multiple sub factions warring it out over that. Do you agree with that?
- [04:46]
C
Yeah, I completely agree. And I think that is sort of the crux of the whole issue about whether you agree with fire or not. Because I think that there are flavors of it like you just described, where there are really healthy teachings from it. I will say, and this is. I said this in one of my videos and some people got upset about it, but I think it is the right way to characterize it. Fire is ultimately a self help ideology. It fits within that framework of self help, which is not a bad thing. It's just I think that that's one of the really good ways to describe it. And the teachings of that self help ideology are anti consumption, which I don't think is a bad thing. Or at least very careful consumption, very intentional consumption, sometimes at the extreme, like you mentioned, Scott, and where it becomes a bit of a purity contest. Another one of the big teachings is frugality, which is of course related. Financial literacy is another tenet which is good. Like teaching people about the stock market and about the impact of saving and about how much spending is actually costing you in the long run. That's all healthy. A final piece that I think is a big teaching is independence. Wanting to be completely independent from needing to work. But in some cases it almost feels like being independent from society, not socially, but being able to completely sustain yourself, do your own stuff, not pay for services, that kind of thing.
- [06:03]
A
Everything you just said is great in moderation.
- [06:06]
C
Agree.
- [06:07]
A
Even I have a bit of an issue with the community as a whole when they go to such extremes and are so judgy about it.
- [06:15]
C
Yeah, and that's, I think, a big part of the issues. There are healthy teachings like I think the idea of connecting your spending to your values, that is extremely valuable for anyone to do. Doing an audit of your expenses and thinking, oh, I'm spending this much on that thing that brings me no joy or satisfaction. Of course you should cut that. But that's a healthy exercise for people to do regardless. To the extent that fire gets people to do that and teaches them about that I think that's fine. I think spending on stuff that won't bring lasting joy to you and your family while also putting you in debt, like I'm thinking about buying luxury cars or I don't know, I don't know what else people spend ridiculous amounts of money on that forces them to need to work longer at a job that maybe they don't even like anyway. Yeah, like if we can get out of that cycle, that's really good. And I think FIRE does teach those principles. Spending less than you make, that's like, you know, a lot of people spend more than they make and that's not very good. And I think FIRE teaches people not to do that and to save, you know, quite, quite a lot. I think it is healthy to strive for financial independence. Like the idea that you can sort of mitigate the risk of your labor income if you lose your job, even if you didn't want to stop working. Being in a position where you can weather that is great. Being in a position to do work that you like, that maybe doesn't pay as much, that's a good objective to have. I think, and you mentioned this, Scott, that the speed at which you have to get there, I think is one of the issues that FIRE principles can have. So those are all like good principles that I think FIRE teaches. Does that all kind of jive with what you guys think?
- [07:46]
B
Sounds like an ad for fire. I'll take the like the kind of assertive stance here. I, I, I believe in pursuing financial independence and the option to retire early, aggressively from the get go. Like I think many, many, many more people who have the opportunity start at a median income, which is great, which is a really good advantage. Coming out of college or in their early twenties ought to live pretty frugal lives with roommates, drive cheap economy paid off cars, pack their lunch, maybe go out and have some fun with that. You know, relax a little bit on the entertainment budget. Don't live super austere there, but grind. Go and go and read a bunch of books, get better, try to drive that income up, take opportunities, save up cash, make some big bets, and attempt to achieve some semblance of financial independence by the 30 or 35th birthday because of the options that opens up for the rest of one's life. I fear control from somebody else over my life, a boss, for example, who has power to dictate where I live and what I do with my day, to a large extent, I want and am willing to sacrifice for that freedom to direct those activities. I'm also not in this. I'm going to live frugally forever. But I'm very much in the camp of frugality is the number one tool in the early part of the journey. And by grinding those costs down as low as possible on a fixed level, that empowers you to save up, reach financial independence sooner, and then layer those costs back in later. I like the problem of having to learn how to spend again once you become wealthy as a good problem in there. So those are, those are how I feel about the. The fire community. What would you push back on with that view? Because I am, I would say, more aggressive than many in the fire community who are loosening up in terms of what I believe is an optimal approach.
- [09:31]
C
Yeah. So, I mean, I can talk about what I see as some of the issues and why I'm not pursuing fire. I mean, I do save money, but I'm not, not at the extreme and I don't spend lavishly. But I also, you know, I don't worry too much about what I'm spending. I think. And this is one of the issues, I think spending can be okay and being frugal can be a negative thing in some cases. There is a concept in economics called utility. Without getting too nerdy about it, it's basically like when you're younger and have less income, each dollar of spending is worth a lot more to you. There's one paper out there that's a bit of a controversial paper, I guess, but it does suggest that young people shouldn't be saving at all outside of what they pay into from their government programs that they're forced to save into to publish paper.
- [10:15]
A
Well, they're wrong. I haven't even read it.
- [10:17]
C
Well, it's interesting, right? Because there's. On one hand, there's compounding. Saving early is good because of compounding. That is true. On the other hand, if you take a utility perspective, which is like how much satisfaction you derive from consumption at various points throughout your life, spending instead of saving early on is actually worth a lot more to you than it is later when you have a higher, higher income.
- [10:37]
D
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B
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- [13:24]
A
going to push back on that and say I think it's more difficult to start saving after having the spendy lifestyle than it is to start spending after having the saving lifestyle. So whoever wrote that paper, please give me a call because I have a bone to pick with you.
- [13:40]
C
They talk about that in the paper too, but that's the trade off, right? It's like from a pure rational economics perspective, you should spend more. And I, but I, I agree with you completely that, that habit formation is not easy to break anyway. So that's just one, one thing to think about that conflicts with the idea of being frugal when you're young.
- [13:56]
B
This seems like a very powerful argument against fire. And I'm not sure I completely buy it here before we move on, because I, I completely agree that experiences are more valuable when you're 23, maybe, than when you're 20, 50, right? And to some degree, right, you can just do more. You can ski harder, you can play rugby at a higher clip or basketball. I know you were a basketball star, right, Ben, and those are real advantages. But when I was 23, I was able to ski just as much as my friends. I was able to party just as much as my friends. I just lived in a place with a roommate that was much cheaper and drove a Corolla or biked around town for most of that. I packed my own lunches. I have a really hard time buying that eating at a fancy lunch by myself during a workday has higher utility at 23 than packing that lunch and bringing it in into work. So that's where I would push back against the study. I would partially agree, but push back. It's a mistake to deny those major life experiences, the big trip around the world or whatever, but I don't think it is a mistake to keep your fixed cost of life much lower. And I'll also say that now at 35 with two kids, living without roommates is a real privilege. I am much happier doing that than I would, than I would be if I, if I had roommates or was driving, you know, an unsafe or very old vehicle that was less reliable. Now there's a real utility in some of that spending. Now at 35, what are your thoughts there?
- [15:20]
C
No, I don't, I don't disagree with anything that you said. I mean, if you can do all of the things that you want to do and don't feel like you're being denied anything that you would have wanted or experience that you would have wanted to have, then that's, I mean, that's great. If you can do that while being frugal and saving a huge portion of your income, then that's, that's totally fine. You can make life choices and get satisfaction from the things that you enjoy without spending a lot of money. Like, like who am I to say that's a bad thing?
- [15:42]
B
Well, let's keep going. What are some other thoughts you have here?
- [15:44]
C
We talked in our last conversation about the Fama and French five factor asset pricing model. There's another five factor model that's very different that I also really like. It's called the perma model of human well being. So it's from psychology, not from financial economics. It's called a positive model of human well being. And positive means that it kind of tells you what tends to make people have lives that they evaluate as good. But it's not prescriptive. It doesn't tell you exactly what you should do with your life. The factors in the model are positive emotion, which is like enjoying what you're doing right now. You know, we're having a good conversation, we're feeling good. That's positive emotion, being grateful for your circumstances, all that kind of stuff. Engagement is the E that's finding states of flow or being fully immersed in an activity or task that matches your skill level. So that's, that's engagement. E, relationships is R, and that's having strong connection with family and friends. Meaning is finding purpose beyond yourself. And that can come from a lot of different places. That can be religion for some people. It can be work, hobbies, all kinds of stuff. And then the last factor in the model is accomplishment, which is setting and achieving goals that provide a sense of just, you know, I did. That kind of classic example is mountaineering, where it's like, it kind of sucks while you're doing it and it's dangerous and it's kind of miserable. But then you summit the mountain and you're like, yes, I did it. So that's, that's accomplishment.
- [17:09]
B
This sounds very believable to me. I can, I can, I can instantly accept some version of those five things as clearly true, even if without reading the study. And I will read the study. That's a great one to hear. I love how everything's got a paper for you that's very scientifically based. So life goals for me take it to that same level. But let's, let's take those circumstances, engagement, relationships, meaning, and accomplishment as truths. Where do you feel fire is incompatible?
- [17:35]
C
I don't know if it's incompatible, but. So the thing that has always, I've always struggled with with respect to fire is that work is certainly not a requirement to attain any of those things, but it is a very good way to get a lot of them. A lot of them. I mean relationships, meaning accomplishment, engagement, positive emotion if you like what you're doing. I mean, I'm technically working right now and I'm having a good time talking to you guys. There's stuff that you can do that's not work that brings you those things, but work can also bring them to you. Now, I understand that fire is not anti work by any means. It's pro independence but not necessarily anti work. But I think that to the extent that fire requires extreme frugality and I know we've already talked about how it doesn't have to be extreme and you can still enjoy your life, I understand that. But to the extent that it does require extreme frugality and enduring, and I know we talked about this too. Enduring, unenjoyable, but high paying work to achieve financial independence at a frugal level of spending. I think it's problematic when you hold that up against the alternative, the counterfactual, where you find work that you enjoy and get really good at it. Like you talked about that earlier, Scott, about gaining skills and reading books and all that stuff. Maybe, I don't know, I don't know if I'm a good example or not or if I'm an outlier. But I, I have a job, you know, I have a boss, I'm an employee. But I really like what I do and I get paid well to do it. Maybe I'm a bad example, I don't know, maybe there aren't that many people out there like me. But I'm pretty happy doing what I do and earning what I earn and not having to worry too much about what I spend? Is there an alternative reality where I'm super, super frugal and don't have to work and I'm happier? I mean, maybe, I don't know. But it kind of seems like there's two ways to get to a similar place where when you become a high valued employee that's paid well, you do get a lot of independence, you get paid, you have flexibility and all that kind of stuff.
- [19:26]
B
So Ben, I love this. I want to take a different set of circumstances and make your argument for you because I think you're right on a lot of this. We see a lot of people in the fire community who violate these five factors that you've just identified here. Wow. Factor investing, factor life building. You go so frugal that you circumstances are miserable and you miss out on your 20s because you're optimizing that next dollar instead of actually going to a bar and spending $12 on drinks to hang out with friends. Right. That's, that's crushing your circumstances and your relationships here. Right. Some people are also optimized for the highest paying job. And there, there's such a spread between the amount of income they can earn at that job and their next best alternative that it's making them miserable. They're basically trapped in it because the opportunity cost is so large for moving to something that's more enjoyable. That's, I think what fire empowers, the pursuit of fire is it allows the option to move on from that job. And I think that there's a powerful benefit to it. And then there's also a huge sector of the economy that is genuinely happy with what they do on a day to day basis with their work, that are paid well, or at least they feel that they're paid well for it, like you. And I think that one question I would have or one challenge I'd have from the fire perspective is, well, Ben, that's great, but what if the numbers start moving down over some prolonged period of time there because nothing compounds forever. But will that same job that pays very well and is very enjoyable right now be around in five years? What happens if changes happen to your boss or up the chain that make that not as enjoyable? Isn't it worthy to pursue fire and maintain a financially independent personal financial position even if you do love your job and are world class at it, like
- [21:13]
C
Ben, you should still save. Like I'm not suggesting, like for young people in certain circumstances maybe that at least that paper says they shouldn't save, which I know we already talked about being debatable. I'm not saying you shouldn't save. I still save a lot. Just not, you know, 60% of my income or whatever it would be for achieving financial independence asap. I have enough of a financial cushion that I could be off work for an extended period of time and it was, wouldn't be financially troublesome. I probably couldn't retire at my current lifestyle with what I have saved now, but I'm okay. And I think that any high paid employee can get to a similar position without going to the extremes of frugality. And then the other thing that I would say is, and this is, I think a pretty good counterpoint to what you just brought up is that when you do invest in your human capital and when you make yourself very, very valuable as a, as a resource, as an expert, as a professional, if something goes Wrong with the job that you have at the moment, it's relatively easy. Like if I got fired, as long as I didn't get fired for something egregious that was, you know, made me unemployable, it would be pretty easy for me to go and find another job that pays probably pretty similar to what I make now, if not more honestly. So I think it's possible to put yourself in a position where your human capital is not to say you shouldn't build your financial capital, but you can put yourself in a position where your human capital is valuable and transferable to the point where it can be relatively safe. Now, there are still risks, like massive layoffs in your industry. That's something that's a little harder to deal with. That's a good reason to save and to build financial independence. But I do think that you can invest in your human capital and build complementary skills in such a way that it makes it. It fairly easy to move around if you're not happy where you are or if you for some reason lose your employment.
- [23:03]
B
I think that's a great philosophy and I think that the fire community needs to. The mental model is the asset base that you're building is not just financial, it's also your human capital. And it's not a top priority for you to stop doing work. It's a top priority for you to have options in your life. And that's really what fire is about. And that's just another way of producing that option. So I think these are great challenges and counterpoints, and I think the way to put a pin in what I think your. What I understand your view to be on fire is nothing wrong with it. But when it's taken too literally or to these extremes that violates these areas that are clearly conditional to human happiness, then it's wrong. The approach is wrong.
- [23:46]
D
It's taken too far.
- [23:47]
C
I think that's a really nice summary of my thoughts. Yeah, it's like there are a lot of good lessons in there and there are a lot of things that a lot of people out there in the world can and should learn from the fire movement and its teachings. But you got to be aware of where the limits are and where the extremes are and where it starts to have a negative effect in your life. And then the other thing that I would add to that is that like we were just talking about, it's kind of always seemed to me that earning more income or investing in your human capital, making yourself more valuable and achieving fire, so investing in your Financial capital and growing your financial capital are kind of. There are two ways to get to a similar place. Achieving either one is not going to solve. If you're an unhappy person and you're not hitting on all the right elements in the PERMA model, achieving really valuable human capital or financial independence, it's not going to make you happy. It's not going to solve that problem. But I think that achieving a state where you have the financial flexibility to choose work that you enjoy, which may be high paying or not, depending on whether you want to invest in your financial capital or your human capital and work that you know, contributes to all the elements in the. In the PERMA model that that's a really good thing to have. I really like the idea of finding work that is both rewarding financially and psychologically. I'd be sad if someone said, you know, you can't do your job anymore. Even if someone said, you know, we're not going to pay you anymore, but you can still do your job. I'd be happier in that case than if someone said, you just can't do it anymore. You can never write a YouTube video again and do stuff like this and communicate with people online about personal finance. I'd be super sad because I like doing that stuff. I like that I get paid for it too. But yeah, so that's the last thing is sort of that exchangeability or the trade off between focusing on investing and building your financial capital versus your human capital, which can both provide flexibility and options. But in either case, I think that you have to take that lens of what is a good life look like for you and kind of work backwards from there. And if that means investing heavily in financial capital by saving as much as possible for in a condensed period of time so that you can do kind of whatever you want with your time, that's fine if that means doing an extra degree or certification or whatever or building complementary skills. Like for me a big thing was I did a whole bunch of education related to finance and personal finance. Like I did an MBA with a finance concentration, the CFA program, the CFA program, CFP program, and a couple of other things that are specific to Canada.
- [26:09]
B
That's more letters than in Ben Felix.
- [26:11]
C
Yeah, there's a lot of letters in there which is cool and like, you know, anybody can go and get financially educated. But then for me, the complementary skill that I think sets me apart in a lot of ways is creating content. And I'm not saying everybody needs to go and create content, but building complementary skills like that where it's like this thing a lot of people have and maybe this thing a lot of people have, but these two things together is very rare. I think finding opportunities like that with your human, human capital is just a really interesting thing to do and a nice way to make a living and not have to worry about becoming financially independent as soon as possible. Because you actually love what you're doing. Yeah.
- [26:43]
B
You know you're in the right profession. If it's 11 o' clock at night, you can't sleep because you're debating somebody via your anonymous Reddit handle about a very specific swapping of a position in a detailed investment order of operations. Right. That's how you know you're in the right profession. If you like doing it that much. No monetary value in that activity.
- [27:02]
A
That was a very specific example, Scott.
- [27:05]
B
Ben knows what I'm talking about.
- [27:06]
C
Oh yeah, I do.
- [27:08]
A
Ben, you're a portfolio manager. Let's talk about building a portfolio. When you think about portfolio design, what are some of the core principles that you are looking at when you are choosing what to put in your portfolio?
- [27:25]
C
So big things for us and for me personally are broad diversification. This is stuff you guys probably heard before. Broad diversification, low fees, tax efficiency. Those are the big three characteristics that kind of, if a fund doesn't have those things, if it's overly concentrated, if it's got high fees, if it's tax inefficient, it's going to be excluded pretty quickly for use by our firm. So those are the kind of main, main building blocks and that typically will point toward either low cost index funds or systematic funds like Dimensional Fund Advisors and Avantis that we talked about last time.
- [28:01]
A
So you're saying funds, you're not looking at individual companies to put into a portfolio.
- [28:07]
C
We don't do any individual securities. No.
- [28:09]
A
Oh, okay. Well, I think that's really important for people to hear because there are so many people that are trying to, you know, pick the next whatever. And Ben Felix is a rather successful portfolio manager and he. How did you say it? They don't do any individual securities.
- [28:25]
B
No, I think that it's broadly accepted. Those three premises are broadly accepted by a lot of investors here in 2026. I think where someone pursuing financial independence might get hung up, or at least where I get hung up is there seems to be a clear consensus on broad based low cost index funds. Maybe there's some evolution towards factor tilts for long term wealth accumulation, but it's a common approach that's widely accepted is, you know, Put in The S&P 500 Low Cost Index fund through one of these providers and let it ride for a long time. You know, there's a couple conflicting opinions, but there are several answers that seem to be accepted as correct for an end state portfolio. I'd love to hear one of those from you. Like what is a portfolio that's suitable for withdrawal versus accumulation? But what I think is really missing is this gray zone in the middle, right? So I'm approaching my fire number or I want to preserve financial independence and I'm still working. How do I think about my portfolio in that context? So could you help us walk through how you would think about those portfolios in the, you know, the decumulation phase or approaching retirement or sustaining a level of financial independence while continuing to work.
- [29:34]
C
It's complicated is the very short answer. There are so many different things that are going to play into that, into that decision, really. Talking about the mix between stocks and bonds, right? Those are the big asset classes. Stocks have higher expected returns. They are historically much more likely to at least keep pace with and exceed inflation over very long periods of time. Bonds in particular nominal bonds, which in the US you do have tips, which are inflation protected bonds. In Canada we have real return bonds, but that market is becoming thinner because our government has actually discontinued the real return bond program. Anyway, nominal bonds means bonds that are not adjusted for inflation. Those have historically, if you look around the world, been pretty risky in real terms. Like the probability of losing money in nominal bonds over a long period of time is actually pretty high for very long term investors, which when we're talking about fire folks, of course they will be. If you're retiring at 30 or 40, your time horizon is enormous. I do think that there are risks to at least nominal bonds. Inflation protected bonds can solve some of the problems, but they're not perfect either, especially at really, really long horizons. A lot of it comes down to the individual's preferences. Their psychological ability to take risk is one big constraint. So If I said 100% equity portfolios make sense and someone said, well, last time the market dropped 20%, I sold everything and didn't get back in the market market for six years, they probably shouldn't be in a 100% equity portfolio. We do have on our website and I can give you guys a link, a tool for psychological risk profiling. I think it's 31 questions that people can go through and it spits out their sort of range of stock bond mixes that make sense based on their psychological profile and it also gives a bunch of other cool pieces of feedback about overconfidence and other little psychological traits. Anyway, it's a neat tool. So I think stuff like that, and that's meant to be a predictive tool about how you will react in a major market downturn. So I think that's one big input. Because if people are in portfolios that are too risky for them in terms of volatility, that can be disastrous if they end up bailing out of the market. I think people hear stuff like that and they're like, well, no, I wouldn't do that. I wouldn't do that when the market crashes. But you have to remember, when the market crashes, it's crashing for a reason. And that reason is usually some very scary thing. Like if we look at the COVID market crash, markets dropped a ton and it looked like the world was ending and we didn't know when things were going to go back to normal and all that kind of stuff. So I think that narrative that accompanies market declines is a really important piece of understanding psychological risk tolerance. It's never just, oh, the market's down 20%, it's the market's down 20% because of this terrible thing that's happening and we don't know how much further things are going to go down before they get better, if they're going to get better at all anyway. All that to say big constraint is the psychological piece. Another piece is capacity to take risk. If somebody has whatever a million dollar portfolio and they need to spend $700,000 to buy a house next year, they can't take very much risk with those assets. On the other hand, if someone's spending 3% a year from their portfolio, they can take quite a bit of risk. That's another big consideration, I think, with equity portfolios particularly well for any retiree. But for early retirees, I know it gets talked about a lot, people worry about sequence of returns risk. So if you get a bunch of bad years of returns in a row and you're spending from your portfolio, you can run out of money a lot sooner than you hoped. Analysis like the 4% rule is designed around finding the spending rate at which you would not have run out of money. Even in the worst cases in U.S. stock market history with a stock and bond portfolio in the original analysis. And that's fine, but I like to reframe sequence of returns risk as sequence of withdrawals risk because no one's forcing you to continue taking inflation index withdrawals from your portfolio every year. Regardless of what's happening in the market. And I do think that flexibility in spending is a really good way to mitigate sequence of returns risk. If the market drops a whole bunch, you can spend a little bit less. That also allows you to take more equity risk in your portfolio without worrying so much about running out of money if things go poorly for a bit.
- [33:46]
A
You said something about nominal bonds and I don't know what that is. I don't have a lot of money in bonds personally and I have, I've not. I don't like bonds because they don't return a lot. I like growth and because growth is better. Why would somebody invest in nominal bonds? You said that nominal bonds, your chance of losing money is pretty high. I thought the bonds were the stability of your portfolio.
- [34:09]
C
Yeah, so it's, it's super confusing and it's like, it's really interesting. It's like, what is risk? I mean, it's a hard question to answer and I think that's kind of the crux of what you're asking about with why so somebody would invest in bonds. A lot of people feel risk as volatility. Stock market drops 20%, that feels like risk. But if we look at long term investor outcomes, does that 20% drop really matter to a long term investor, even if they're withdrawing a bit from their portfolio? Probably not that much. Bonds on the other hand are not going to have that kind of volatility. I mean, sometimes they can drop. They did a few years ago. There was a pretty significant bond decline. But they're not typically as volatile as equities, like not even close. And so people see that and they think, well, okay, bonds are safe. And from that perspective, strictly from the volatility perspective, they are relatively safe. They also tend to be imperfectly correlated with stocks. So when stocks go down, bonds are often flat or maybe even up a little bit. They can still drop at the same time as stocks. Sometimes it's not perfect, but they generally do diversify stock risk. However. However, if we take the other perspective of is owning bonds likely to allow you to meet your long term financial goals? Bonds start to look a little bit riskier. So there's two perspectives there.
- [35:22]
B
Your view is widely shared in the financial independence, retire early community. When we poll people in the biggerpockets money audience, including those who are at fire, very few of them actually allocate any meaningful percentage to bonds. I think there was less than 10% who had any bonds bonds in their portfolio in a recent poll. At first I was really struggling with that. I've been really trying to wrap my head around portfolio theory. The last year we've talked to a lot of experts in the space and I was like, well that's totally irresponsible if you actually think about it rationally. You get to where you're at, where you know it's a losing bet over 50 years if you're going to have that type of portfolio in place. And so I think that's the challenge that a lot of people in the financial independence community have. My solution to it was to go into real estate, not leveraged real estate because I need a safe part of my portfolio, but paid off rental real estate. My belief is that yes, I take concentration risk in that asset or that market, but I also fundamentally get an inflation adjusted store of value and an inflation adjusted income stream with that investment. And I also have the option to refinance it or sell it at future points even if there's a depressed market. How do you feel about that? Answer to the question that I think we're really trying to get at here.
- [36:34]
C
You can kind of deconstruct the returns of real estate historically and they look kind of like a mix of stocks and bonds, stocks and corporate bonds. It's not the worst thing to do. I think you do have a little bit of control over the outcome because you can manage the property well and all that kind of stuff. I do also think that the idiosyncratic risk that you mentioned is an issue for me personally. And I know you want to talk about simplicity. There's absolutely no way that you could convince me to be a landlord. You can barely convince me to be a landlord for myself. Like I, I don't like doing that stuff. Not because I can't, but just like there's always this tension of like my kind of litmus test is always, would I rather do this thing than sit down and write a YouTube video that you know a few hundred thousand people are going to watch and it's gonna whatever, whatever and house related stuff. Even though I don't mind doing it. I would way rather sit down and write a YouTube video playing with my kids, like playing, playing basketball with my kids. I would rather do that than write a YouTube video deal. But I don't know, fixing the house or I don't know, even coordinating contractors and all that stuff. No chance dealing with someone else living in a property that I'm responsible to manage. Like you couldn't pay me enough money to do it. It just wouldn't happen. That's my personal preference about real estate. So I mean historically real estate's been a perfectly fine asset class when you look at the total return of capital and net rental yield. There's a paper that looks at this going back into I believe the 1800s and it's performed well on a global basis. I do think that the idiosyncratic risk in real estate is a lot higher than people tend to realize. And that's because you're taking idiosyncratic risk at a whole bunch of different levels, right down to the individual property level and the individual tenant level. So that's, you know, I mean if you can manage that, that's fine. Some of it's hard to manage like the geographic idiosyncrasies, but I don't know, I don't hate real estate as an asset class. I think the big challenge is diversification. It's hard to diversify when you have a handful of properties. But then again, for me personally it just wouldn't happen.
- [38:35]
B
So we hate real estate. We're not going to go into real estate. Sorry I brought it up. Let's talk about just public securities here. What are some of the frameworks or solutions to this problem of hey, I'm at my fire number or approaching it or I'm actually going to begin to accumulate and I'm younger than 50, what do I do? How do I begin answering that question?
- [38:54]
C
I mean there are two ways that you can solve it. One way is on the portfolio side. So you could do something like build a TIPS ladder for the portion of your income that is non negotiable, not flexible. In Canada you can't do that. As I mentioned, in the US you could, you could duration match your expenses to TIPS and build an inflation indexed income stream. That's going to be pretty be pretty safe over a long period of time. You're going to lower your expected return a bit relative to investing in equities. I prefer the spending solution where you're not going to try and change your portfolio and do anything fancy over there, you're just going to accept the fact that you're spending. And I mean it's interesting, it kind of ties into the FIRE principles more generally. If you can spend conservatively and be flexible in your spending, I don't think you have to diversify outside of equities.
- [39:40]
B
That is the most popular answer in practice in the financial independence, retire early community is I'm just keep my portfolio flat and keep rolling. And in practice what happens is the portfolio swells after A few years. Mindy's a classic example of this. Right. You achieved financial independence, kept everything in equities, and now your net worth is ballooned to many, many times what you're spending. So many more times what you're spending is Mindy, that it's all academic, this discussion on safe withdrawal rates, because you're probably spending it close to 1 to 2% of your portfolio. Is that right, Mindy?
- [40:13]
A
Not including when I'm building a house. Yes, when I'm building a house. That's significantly more than the 1%.
- [40:19]
C
I'm renovating a house. I hear you.
- [40:21]
B
I'm always renovating houses.
- [40:22]
C
Oh,
- [40:24]
A
I can't imagine I'm living in a house that I'm renovating while somebody else is building me a house around the corner. And I am much more enjoying them building the house than me renovating the current house.
- [40:36]
C
Yeah, I'm also living in a house being renovated. It's. Yep, it's something.
- [40:40]
A
It's something.
- [40:41]
B
Ben Felix is a live in flipper. That's what we just wanted today.
- [40:44]
C
I'm not leaving. I'm not leaving this house.
- [40:46]
A
Oh, yeah, I know. I move into it because it's awful and fix it up while I live there and then I sell it and do it again. This is my last one.
- [40:54]
C
Yeah, no, I. I bought a house. This is the first house that I've ever bought. We've been here for six years, did some small renovations along the way, and now we're doing some pretty significant renovations. But we're doing that with the intent of staying here indefinitely. I don't know if we don't have
- [41:07]
B
a timeline, this is great. And I want to go back to what I think is a really simple, powerful and elegant answer. We cannot move away from this because this is something we've been searching for. For the last year, we've had several different conflicting opinions on what ought a fire portfolio, what ought it to look like. And we've gone to this risk parity portfolio where we've got percentages in stocks, percentages in bonds, allocation of gold, managed futures and international or cash to get different correlated returns. You're saying, no, I would just stay all in equities, maybe with some factor tilts here and there, and ride it for the long term with flexible spending. That's a very simple solution. So, for example, we've had big debates about the correlation between all these things. What drives a higher safe withdrawal rate. What does that mean? If I'm going to be all in stocks, does it mean I Have to take a lower safe withdrawal rate. What are the assumptions that I'm making here about from a portfolio theory perspective that back up, that just stay on all that equities assertion that you have
- [42:07]
C
relative to all of those other asset classes. The challenge that I would pose there is that back testing asset classes like those in a portfolio and saying, hey, look, we get a higher safe withdrawal rate, I would put very, very little faith in that type of analysis is the simple answer. Correlations are unpredictable, fees and costs matter. And some of those asset classes have higher fees and costs, future returns are unknowable, all that kind of stuff. So if someone says, hey, look at this back test, it gives me a 6% withdrawal rate, I would put very little weight in that type of analysis.
- [42:36]
B
What can we assume from a safe withdrawal rate? Because if we're saying that there's a whole body of work that is produced by very smart people who try very hard to get to an answer around safe withdrawal rates and you're like, nah, screw that, let's move on to something more that we can actually defend here. What can I assume for safe withdrawal rates? What is well researched in your view?
- [42:56]
C
I mean, it's all based on historical back testing is part of the problem, right? But if you're in an equities portfolio and we're using fixed safe withdrawal rates, where you're spending an initial amount of the portfolio and then increasing it over time with inflation, so that's the inflexible spending, somewhere around 3 to 3.5% based on historical analysis is probably fine. If you introduce flexibility where you're going to change your spending based on how things have done previously, instead of just doing a fixed inflation adjusted spend, it's going to be higher than that depending on how flexible you want it to be.
- [43:30]
B
Okay, so we're kind of back to the 4% rule with all equities and just be flexible.
- [43:34]
C
I don't know, 4% still fails a bit too much. But you know, the difference between 3.5 and 4% is not immaterial.
- [43:42]
D
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- [45:32]
B
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- [45:33]
D
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- [46:20]
B
You clearly, the way you phrase that, have done your homework on the sequence of returns, risk and withdrawal rates and specifically the next level of thought around assuming inflation adjusted fixed spending that you've really nailed. Your numbers there don't have flexible. Clearly there's a lot grounding what you're saying there in terms of safe withdrawal rates. One of the things that I think the fire community misses is that in a well run Monte Carlo, assuming some of these 4% safe withdrawal rate numbers, your portfolio dwindles over the 20, 30 years leading up to traditional retirement age. So if you start with 2.5 million, you dwindle it to a million in real inflation adjusted dollars by 65, you
- [47:03]
D
can still survive from there with Social
- [47:05]
B
Security layered in into a retirement at your targeted inflation adjusted level of spend. And I think that is academically understood by some people. But in practice, the experience of watching that portfolio dwindle relative to inflation is going to be very, very painful in practice, which I think is an argument for, for lower safe withdrawal rates in the range that you suggested. Could you let me know if that's something that you agree with or have observed advising retirees early or traditional?
- [47:32]
C
I mean the perception of the portfolio declining, I can see that being a psychological challenge, but I mean, I just think that having a high safe withdrawal rate, it introduces a lot of risk of running out of money, period. That's the issue. I mean, I don't think 3.5% is particularly low. I also don't love the idea of fixed inflation adjusted spending. I think flexible spending makes a lot of sense to me. We just had a guest on our podcast, our episode with Elroy Dimpson, who's one of the leading researchers in stock market history. He was on our podcast and we talked about this. We talked about bonds, we talked about long term portfolios, we didn't talk about safe withdrawal rates specifically when we're asking about the role of bonds in portfolios. He talked about how he's like, well, I'll tell you what I do. And he talked about how he's in equities, doesn't own bonds and he keeps his spending low. He didn't say exactly what his withdrawal rate is, but he said he keeps his spending low. And he's got a lot of flexibility and his expenses. He's got a simple lifestyle. And I mean that's from someone who's spent more time thinking about financial markets than I've been alive. So, you know, when he said that, I was like, I love it because it's exactly how I think about this. I don't know, I think that's a, it's a simple, elegant way to think about this stuff. I think the idea of layering on a whole bunch of funky asset classes. I don't know, man, I don't, I don't like it. I think adding complexity in general is not a Good thing. And when it comes to financial markets especially, it's, it's a, generally speaking, a bad thing.
- [48:50]
A
You said the 4% rule fails too often, but according to Bill Bengan's research, It fails about 4% of the time.
- [48:58]
C
Ooh, are we doing Bill Bengan's research?
- [49:01]
B
Yeah.
- [49:01]
C
Okay. Okay, okay.
- [49:02]
A
Well, he said 4% and Michael Kitces redid it in like 2008 and came up with the same numbers. When Wes Moss did it, I want to say in 2015, he came up with the same numbers. What do you consider an acceptable failure level? Because Bengan's research said that like there was only one period or no, maybe that was, that was Kitsis, because he has the amazing chart. There was only one period where they ran out of money and it was in year 31 and they were all doing 30 year timelines. Let's put all the caveats out there.
- [49:33]
C
Yeah. So there's two, two issues with all of those pieces of research. I'm not familiar with who Moss is, but I know Kitz's research and I know Bengan's research. Of course they all arrive at the same result because they're all using the same data. The big issue is that they're using U.S. historical data. And we know now, looking back in time, that the US Market is the best performing financial market that has existed in modern history. I think there are a couple others that have maybe done better. Like, I think, I don't know if that's still true. A couple years ago, Australia, I think had done better and South Africa had maybe done better. But you know, big, big markets, US is the best performing market that exists. If we go and recreate Bengen's analysis and Kitsey's analysis using two little changes, including international data, which I think makes sense because when we're thinking about what are the expected returns of the stock market, I don't think looking at the one, the single best performing market in history is a good place to anchor our expectations for the future. So that's one thing. So we use just what has happened to stocks everywhere, and we can argue about whether other economies are comparable to the US I would counter that that is true. But the greatness of the US economy is reflected in its currently high stock prices, which makes it very hard to expect similarly high returns in the future because you're paying a lot for expected future earnings today. So if we introduce international stocks. And then the other one that you did mention, Mindy, is if we extend the, the time horizon past 30 years, which for an early retiree is certainly a reasonable thing to do. I would say that number starts to go down below 4%. So Bengen's analysis was great. I mean, what he did was something very unique. And it's obviously become an important part of how people think about retirement planning, even if it's not perfect. I think dynamic spending is much more sensible. But the 4% math gives people a very quick way to think about how much they need to save for retirement, how much they can spend in retirement, which is very cool. I like that. I mean, we had Bill on our podcast. I actually asked him what about international stocks? And his answer was very simple. I look at US Stocks, I've never looked international. I was like, okay, that's fair enough. But there are other researchers who have done the analysis using international stocks and it does change the results for the simple reason that international stock returns have been not as good as the US Market. I think the only other country, Wade Pfau did a study on this where he looked at the safe withdrawal rate for a bunch of individual countries. I think Canada was the only other country that has historically sustained. This is back when he wrote his paper had historically sustained a 4% safe withdrawal rate. Most other countries supported much lower rates. And the global index supported, I think it was around a 3% safe withdrawal rate in that analysis. And then there's more recent papers that use different approaches using something called bootstrap simulation to take a whole bunch of historical data and simulate future returns using that. And they similarly find lower withdrawal rates.
- [52:21]
B
Well, Ben, you can't just drop that and then not tell us how low does the international data support this Three and a quarter to three and a half withdrawal rate range. Is that what we should take away from what you just said?
- [52:31]
C
Yeah. So with equities it does look pretty good with fixed income that more recent research finds much lower withdrawal rates. But with those heavy fixed income allocations using international bonds from lots of countries that have had struggles historically. That research does an interesting thing where the way that they sample from global stock markets, they'll randomly pull a country from their data set and they'll set that as 110 year on average. They have varying block lengths, but it'll be 10 years on average. So say it's 10 years. So they're going to pull a 10 year block out of their sample from I think 38 different countries. So they're going to say, okay, this 10 year block is Canada. So we're going to look at Canada as the domestic country. So for that Poll. The domestic stock return will be Canadian stocks, the bond return will be Canadian bonds and the international stock return will be global stocks excluding Canada measured in Canadian dollars. So that's one 10 year block of returns and then they're going to pull another 10 year block. So this time maybe we're going to get, I don't know, Denmark. So we've got 10 years of Denmark equity returns, international ex Denmark equity returns for international stocks and Denmark bond returns. And they keep stringing together those blocks. This is a method called block bootstrap and that produces these long samples of simulated returns where you can test stuff. So they've done this, they've looked at optimal portfolios for long term investors and that's where a lot of the. Although this paper is not published yet, but it's still academic research. But that paper supports 100% equity portfolios over target date funds and over 60, 40 portfolios. It supports a big allocation to international stocks which I think is also interesting, especially for a US audience. And then those co authors have also written a paper looking at safe withdrawal rates in that paper don't include an internationally diversified all equity portfolio but the safe withdrawal rates they find with stocks and bonds using that approach are below 3%. I'm not saying that's what people should use, it's just that's what that paper found. I can give you guys links to all these papers.
- [54:27]
B
Another analyst who brings a very comparable level of rigor to what you do is Karsten Jeske over at early retirement. Now are you familiar with his work?
- [54:37]
C
A bit.
- [54:38]
B
And I would say he's arrived at a very similar range to what you have from a different direction, which is from valuations. He takes the cyclically adjusted price to earnings ratio and then he modifies it. He thinks that there are certain components that are unfair about the way that we're comparing a Cape ratio today to 1999, like when companies do share buybacks or the tax code changes that have, you know, around corporate earnings. So he adjusts that it's still high regardless of how you, you know, after you modify for those things. But that is how he's arriving at this kind of. Yeah, I think the safe withdrawal rate is lower and I think he arrives at a similar conclusion to you in terms of portfolio construction for early retirees. So I think it's interesting that you two have arrived kind of independently from different angles at that same conclusion. And I also think that there's a pretty hardcore very staunch part of the, the investment community that will really push back hard against what you're saying here and say no, 4% already is conservative enough. Like what am I going to do? Delay my life by 4, 5, 6 years, my retirement by 4, 5, 6 years just to get a few marginal extra bumps of safety in my portfolio? That's a real criticism of this that I think is valid if you're willing to take on a little bit of that risk that your portfolio could begin depleting or you will need to be flexible at some point in time.
- [55:55]
C
I agree with that. Listen, I did a video a while ago when one of those papers I mentioned came out and I titled the video which I knew was going to be provocative and it pissed a lot of people off and made them say stuff like that. They of course it was definitely rage bait. They of course only read the title and didn't listen to the video. But I talk about how that paper had found a 2.7% safe withdrawal rate. But then I also talk about how safe withdrawal rates just aren't. They're not a good metric to figure out how much you can spend from your portfolio. They're just not.
- [56:21]
A
What is a good metric?
- [56:23]
C
I think using tools like amortization based spending, which is just kind of a pretty simple calculation, but it helps you figure out how much you can spend from your portfolio without any probability of running out of money. By adjusting the amount that you spend each year based on how things change over time is the simplest way that I can explain it. But even just using some relatively simplistic variable spending rule instead of assuming fixed inflation adjusted withdrawals is going to increase the amount that you can spend over your lifetime. So I think ignoring flexibility when we're talking about safe spending, it just doesn't make sense. It's a huge miss. And I mean, I agree, if you introduce flexibility, 4% starts to look pretty reasonable as a starting point. You could probably go even higher.
- [57:05]
B
So where I would beat up the 4% rules from the complete opposite side here, there's so much high quality research on, on withdrawal rates when they're adjusted for inflation in a static lens. But the reality of life is very different than that. And there's so many ways. The 4% rule can be way too aggressive or way too conservative depending on the pattern of your spending in your particular situation. So one of my favorite bones to pick is health care. At least in the United States, your health care premiums will go up as you age because insurers can charge you more from a premium perspective and you cannot count on subsidies as an early retiree across a 30 or 40 year early retirement as a multimillionaire. That's a preposterously bad base plan for financial independence. That's a way you might need more than the 4% rule or a more conservative withdrawal rate than 4% rule research or even what your research the 3 1/4 to 3 1/2% withdrawal rates require. On the flip side of that, if you have a house that's in process of being paid off at a low interest rate, that's an argument that you can actually withdraw a little higher rate than the 4% rule because that payment will be fixed nominally and will rise slower than inflation and then roll off at some point in the future. So that's a big offset. College funding can be another one. And those are way more practical ways to blow up your 4% rule withdrawal research than this incredible amount of academic research that's unknowable and predicting future returns. Those are much easier to predict or forecast expense profiles in your life than the risks that Ben just talked about or that we've talked about with, with Frank Vasquez or Bill Bang and all these academic experts in the space. I think that's more of the risk there. And I think in practice the way that the financial independence retire early community operates by and large is the 4% rule is the beginning of the end. I am now financially independent and I'm going to now begin shoring up and defending that position. What we find is common is that everybody's got a unique ace in the hole. Their rental property, their pension, their part time job. They're my favorite wife fi, their wife still works and that covers all of the benefits and those types of things. Some people argue whether that is actually financially independent or not. I don't know. What's common is that somebody's, everyone's got one of those. The overwhelming majority have one of those. And what's unique is which one it is. And that's, you know, perceived as unique to my situation. And I think that's in practice how folks go about this. And you'll find that, you know, we're still on this quest. We, we've looked for this person for years and we've maybe met five of them in all of this time who are true. I'm at the 4% rule and I have very low cash reserves, maybe six months to a year. And I truly just live off that. They do exist, but some of them actually do it as an experiment to prove the point rather than as a practical output of the fire journey. And I think that's what makes this fun in practice.
- [59:43]
C
Yeah, that's very interesting.
- [59:44]
B
Ben, can you remind us where people can find out out more about you?
- [59:47]
C
Yeah, I've got a YouTube channel that's just my name, Ben Felix. I've got a podcast called the Rational Reminder Podcast. My company is called PWL Capital pwlcapital.com and I'll give you guys a link to that risk profiling tool that I mentioned and also a couple of the papers that we talked about.
- [60:02]
D
Awesome.
- [60:02]
B
We tried to debate Ben, but we couldn't because we agree on pretty much all these. These components.
- [60:07]
C
I think that's the thing is like so many of the debates around this stuff and I tried to set that up at the beginning with like, let's define fire. Because so many of the debates on this stuff are just people talking past each other. When I think you just think about what is good financial planning, what should a good life look like. And there's so many commonalities between any approach that you take to solving that problem. And fire is one approach. But I think it's the details, the little details that we can debate. But broadly speaking, a framework like that is a healthy thing. And so I did a video on this where I talked about this. I was like, fire is controversial, here's why. But a lot of it is just, well, people. People talking past each other or strawman arguments when there's actually a lot of sense in the principles.
- [60:48]
B
I think that's right. And I think that some people take portions areas of it as identity. They build their identity around that and they take it to extremes and then they judge everybody else around it. And that creates this very hostile environment. Right. Here's what it ought to be. Well, that's fine. That's your opinion. We'll talk about what it actually is and what it can mean to various folks. And I think that as long as it. I think that the big takeaway I'm going to remember for a long time is these five factors of a great lifestyle and how fire should support each one of those. And if it's detracting from them, it's wrong. And if you're failing to achieve those because you're not implementing basic money management habits, that's also wrong. So thank you for sharing really good wisdom with us, Ben, and 17 papers.
- [61:32]
C
Thank you guys for having me on. If your listeners are interested, my most recent video at the time that we're recording is called I think it's how to use your money to Be happier or something like that. But it's all about the perma model and living a good life and all those kind of principles. So if people are interested, they can check that out.
- [61:47]
B
Awesome. Go check out the Rational Reminder and Ben's YouTube channel. It's a really wealth of knowledge and I've begun watching them regularly. So thank you, Ben, for all you do. Awesome.
- [61:55]
C
Thanks so much, guys.
- [61:56]
A
Thank you, Ben, for your time today and we'll talk to you soon. All right, Scott, that was yet another fantastic conversation with Ben. What did you think about his points on the safe withdrawal rate?
- [62:06]
B
I think that the conflicting opinions between well researched experts that we've had on BiggerPockets money are really interesting and I think that it creates more confusion over time the deeper you go into the subject matter. Right. I'm really interested to hear, hear Frank Vasquez respond to this position that Ben Felix has taken here. So maybe we'll, we'll put that shout out there, Frank, we'd love to have you, you come on and chat about that again in the future. But I think that that's the, the conflict is do I build a withdrawal or decumulation portfolio? When do I begin moving towards that and how. And I think Ben is, is giving a big portion of the financial independence community validation to stay aggressively invested with this particular episode. And I think that that's interesting and that's something that I've been very uncomfortable with personally. Maybe it was the right move the whole time. Maybe it's the right move for the next couple, next 30 years. Maybe it's not. And I, I, I find that really intellectually challenging to figure out what to do with a portfolio as one approaches fire and begins withdrawing from it.
- [63:05]
A
Sounds like you need to take his personality test that he's got on his website, which we have a link to in our show notes. I think that would be very interesting. You're not a risk enthusiast when it comes to investments and I'm, I, you know what, Scott, maybe we'll unpack that. Why you aren't a risk enthusiast. I think that would be very interesting. But you're risk averse. That is a fact about you and that is something that you should own and embrace. I am risk averse, therefore I am not going to invest in risky stocks. What is the point of investing in something that makes you stay up nights freaking out about your investments? Don't do that. Invest in things that you feel comfortable investing in. And that's to everybody, not just Scott. Although I'm saying it to Scott too. I don't share the same risk averseness that Scott has. So I am investing in riskier things and I'm okay if something happens. But I've also got a longer length of time that I've been investing. So I've seen the ups and downs. I've seen the stock market recovery a lot. I have faith in the American economy. And I'm not saying that you don't, Scott. I'm just saying that I think there's a lot of factors that support having a riskier portfolio for me. But again, that's me. Money is personal. So do what you need to do to invest and have peace of mind.
- [64:27]
B
I don't even know if risk averse is the right word. It's. It's certainly accurate Today here in 20276 with my position portfolio. But it's also not an accurate description of a 23 year old buying his first house hack and putting every extra dollar in the S&P 500 in index funds for many, many years until the point of financial independence is achieved. I think that what I'm really seeking is what is the intellectually honest answer to what to do to these problems. And that is where I'm struggling. Maybe one is a great intellectually, a honest answer to that is potentially what Ben just said today. Stay invested in equities with maybe some factor tilts. Another is what Frank Vasquez or other proponents say, which is build a decumulation portfolio with uncorrelated diversified investments across asset classes and rebalance as you withdraw. And I think that both of those are good. And I think that's the challenge that I'm having is squaring up which one is right for me, which one is right for a 35 year old retiree? Which one's right for a 70 year old retiree.
- [65:29]
A
Again, it's a personal decision. It's a personal answer. You just need to know yourself and what you're comfortable with. And yet 23 year old Scott was totally comfortable living in that neighborhood. What did you say to me, Scott, once? That people who would come to visit would ask you to walk them out to their car?
- [65:47]
B
I don't know about that, but we definitely played gunshots or fireworks a little bit too frequently. Not a very fun game.
- [65:53]
A
No, not a very fun game when it's real close. Maybe I'm thinking of somebody else, but I would absolutely. If I was visiting you at night in your original house hack, I would have you walk me to my car. That's not a neighborhood that I would have moved into. So in that regard. Yeah, you were not risk averse at all.
- [66:10]
D
Yeah.
- [66:11]
A
And it's done very well for you. So it's just. What are you comfortable with? I would not be comfortable with that. So I didn't do it. Just like you were uncomfortable having such a large portion of your net worth in the stock market at these valuations, so you did something about it. So it's. You make the best decision with the information you have at the time and your decision doesn't have to be permanent. You can jump back into the stock market if you want to, Scott. You can choose to stay out of it if you want to.
- [66:38]
B
Yep.
- [66:39]
A
You just have to make an informed decision. All right, well, this, this show ran long, so we don't need to run even longer in the outro. Should we get out of here, Scott?
- [66:46]
B
Let's do it.
- [66:47]
A
Oh, you know what? Before we get out of here, I do want to let our, our listeners know that we have even more financial independence information on our website, which is biggerpocketsmoney.com and we also have Instagram, Facebook and YouTube, which is @biggerpocketsmoney. You can join our newsletter. You can also find free resources, calculators and templates to help you on your journey to financial independence. All right, now, Scotch, we get out of here. You already said yes. So that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Tredge. I am Mindy Jensen. Saying bye bye pecan pie.
- [67:20]
D
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B
Promise.
- [67:50]
D
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