← Rich Habits Podcast
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- [00:01]
Steven Sykes
You're about to make a trade.
- [00:02]
Austin Hankwitz
Which u do you listen to? Is it get optioning those options or let's do a little research. Learn more@finra.org TradeSmart when did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans, send event invites and pin messages so no one forgets mom 60th and never miss a meme or milestone. All protected with end to end encryption. It's time for WhatsApp message privately with everyone. Learn more@WhatsApp.com hey everyone and welcome back to the Rich Habits podcast, a top 10 business podcast on Spotify brought to you by public.com by the end of this episode, you're going to understand how direct indexing could potentially help you save thousands of doll per year and how to get started with as little as $1,000 unlike the $250,000 minimums required elsewhere. My name is Austin Hank which and I'm joined by my co host Robert Krok. Robert is a seasoned entrepreneur with lifetime revenues over 300 million and I'm a multimillionaire in my late 20s with a background in finance and economics. As the show name might suggest. Every episode we talk about rich habits as they relate to business, finance and mindset. So Robert, what are we going to be talking about in today's episode?
- [01:29]
Robert Krok
In today's episode we're sit with Steven Sykes, the chief operating officer of Public, one of the most innovative platforms in America and one of our favorite platforms for sure. Before joining Public, Stephen spent nearly four years at SoFi leading their investment products. And before that he was an engagement manager at McKinsey & Company, working on digital strategy for top wealth managers. And he also was an army officer with deployments to Afghanistan. Stephen's helping lead Public's mission to make the markets work better for everyday people. And today we're going to talk about something that could fit fundamentally change how retail investors think about index funds and ETFs. Public has officially launched direct indexing, a strategy that historically requires $250,000 minimums and was only available through private wealth managers. And as of this month, they're making it accessible to anyone with a public account and a thousand dollars.
- [02:24]
Austin Hankwitz
Most of us know ETFs like Voo and QQQ, right? You go, you buy the ETF and the ETF itself owns all of those underlying stocks inside of the corresponding index, right? So Voo, you buy the ETF, it owns the 500 names in the S&P 500, you buy QQQ. The ETF itself owns the 100 names inside the Nasdaq 100. You buy one share of an ETF, you get exposure to all these different names. You don't actually own the names directly. You are owning the etf, but with direct indexing you're actually going out and buying all of the individual stocks that yourself. So you have 500 positions now inside of your portfolio with the S&P 500, 100 with the NASDAQ 100. It sounds like a subtle difference, but the tax advantages by doing this can be massive, especially when you're someone who's building hundreds of thousands of dollars towards your base and trying to build wealth over time. So Stephen, first off, thank you for your service. I had no idea that you were an army officer. That's awesome. Again, thanks for hanging out with us and tell the listeners about you, what public's up to and just introduce yourself.
- [03:33]
Robert Krok
Yeah.
- [03:34]
Steven Sykes
Anyway, it was my pleasure to serve and it's my pleasure to be here. Thanks for having me. Happy to talk about direct indexing, which I've said many times is like my favorite product launch in the history of public. Public exists to like, you know, serve people who are serious about investing. And what that means to us are people who want to get the most out of their money, right? They want to have long term returns, they want to, you know, leverage the amazing sort of wealth creation engine that, that are the public markets in the US to their advantage. And what does that really mean when we like get it to the smallest kernel? That means after tax returns, how do you make sure at the end of the day, when you've got all of your money invested and you want to take it out to spend stuff, you have the most money possible after the taxes that you pay. And so direct indexing is literally tailor made to solve sort of for that optimal path for, for the vast, vast, vast majority of people. And you know, it's a really exciting day at public for us to be able to, to sort of build this product for serious people who are passive investors, which is cool. We've invested a lot of effort in being, you know, an amazing platform for more active trade and active investors. People who want to leverage things like crypto and options trading, margin accounts where we have the lowest rates, stuff like that. But like, hey, that's not for everyone. And we know the powers of passive investing as you guys talk about a lot. And now we have a product. What I'll say is finally, that can really help passive investors have better long term after tax returns. And I'm excited to talk more about it.
- [04:55]
Austin Hankwitz
Yeah, let's dig into direct indexing, what it means, all the fun stuff, you know, it's important for people to do it, but on the surface it's like, well, hold on. Direct indexing is just investing into like these broad index funds and ETFs, like the S&P 500, the NASDAQ 100. Right. So maybe let's start there. Like, can you define what these indices are and why maybe someone even wants exposure to them in the first place when it comes to building wealth over a long period of time?
- [05:21]
Steven Sykes
Yeah. So I think it's become sort of like the, the common wisdom, the accepted wisdom of sort of the financial services world that the best approach for most people to invest in the markets is to follow this sort of modern portfolio the theory, which means own a broadly diversified, low cost basket of, you know, equities stocks across your home market. And maybe, you know, you sprinkle in some international here or there, or if you're getting closer to retirement age, you sprinkle in some bonds and you sort of manage your portfolio accordingly. And like, what the, like the kernel of that, where that comes from, where that advice comes from is, you know, this idea that the only quote, unquote free lunch in finance is diversification. And what people mean when they say diversification is owning a wide variety of assets. And really what they mean is not a wide variety of assets. What they mean is owning a wide variety of uncorrelated assets. What that means is when some things go up, some things go down, and when other things go up, other things go down. And while they all might go up, you know, over the, over the long term, in aggregate, on any individual day, some are going to go up and some are going to go down. Which is true of sort of all the indexes that you mentioned before. Right. Same, you know, the S&P 500. Even on banner S&P 500 days, it's very rare for every single company in the S&P 500 to go up on the same day. Usually it's like on a great day, it's like 80% go up or 70% go up and 30% go down as well. And so, you know, that sort of idea of those returns across the entirety of the index being uncorrelated is what leads to sort of better diversification and better sort of risk management, more, more modest drawdowns and so on over time. And direct Indexing is, is the same thing. It is owning fundamental, you know, fundamentally taking the same strategy as you do when you go and you buy the S&P 500, the NASDAQ 100, the Russell 2000, same, same exact strategy that you're doing there, which is owning the full index, harnessing the power of diversification, uncorrelated returns and doing so at low fees in order to again get as consistent a long term risk adjusted return as you can. Direct indexing does the same thing, but direct indexing does one additional thing which is you can own every, you own every individual position within your brokerage account, which means over time, you know, on a given week, a given month, as some things go up and other things go down, what you can do is you can take that opportunity to sell the thing that went down, which then recognizes a capital loss, which allows you to keep that sort of capital loss in the bank for tax purposes and use that to offset a future capital gain so you don't have to actually pay those taxes. And so it's a great way of managing sort of your after tax returns over time within sort of direct index. And it's sort of unique to this idea of direct indexing and owning each of the individual positions instead of just owning an ETF as a whole.
- [08:02]
Austin Hankwitz
So just to summarize here, right, the question was why own ETFs and index funds? And you said, because the only free lunch in finance is diversification. And by having, let's call it 500 of America's most profitable companies, largest and most profitable companies in your portfolio via The S&P 500, as American capitalism pushes the markets higher, profits go up, things like that. Generally speaking, you're going to have your portfolio trend higher by having, you know, allocation and exposure to these names. They're not going to go up in the same way. Some zigs well, other zag, but that's part of the game. And now you're saying that traditionally speaking there's been these ETFs like Voo or QQQ, where they give you exposure to these 500 names or the 100 names with the NASDAQ. But what you're saying is direct indexing essentially says Instead of taking $10,000 to go buy shares of Voo, you're taking that $10,000 to go buy in proportionate to the S&P 500 from a market cap weighted perspective, those 500 individual stocks. And then you also saying here, as, as the weeks and months go by, some of those stocks might be Trading lower. Because that's what happens in the stock market, right? Stocks go up and down. But what's cool is you're saying when you own the individual stock itself versus just the etf, you get to do something called tax loss harvesting against that individual stock that is in the red book, that as a capital loss of, let's say, 500 bucks or something, and then you can put it in the bank, which is like your back pocket or an envelope for later, which means if you made a 500 capital G somewhere else in your portfolio, the $500 capital loss offsets that $500 capital gain. Therefore, you do not owe a dime in taxes. Did I summarize that pretty well?
- [09:48]
Steven Sykes
Yeah, that's exactly right. That's exactly right. And again, in a, you know, you've got that, you've got that sort of benefit of managing your tax exposure much, much, much more efficiently. While again, we manage the index to make sure that you're even when you make those sales, right? When you make that sale and you sell a position that has, has taken a loss, you're going to own something that's slightly different than the overall index at that point. But we're going to take those funds that are raised by selling that position and we're going to reinvest it in the thing that we think is going to be closest to tracking the index as a whole. So we're going to keep that sort of what they call tracking error, which is how close a direct index matches the actual underlying index. We're going to try and keep those as close as possible. And typically, again, they stay remarkably close over time. So you're very nearly getting the returns of the S&P 500 or your chosen index, but you're also getting this tax benefit over time and on an after tax basis that's worth way more than the fees you're paying for an ETF or, you know, even to a manager, a manager like public.
- [10:46]
Robert Krok
So before I go into the next question, I really want to click back at this because I want to make sure all of you, all hundreds of thousands of you listening this episode, really hone in on direct indexing and tax loss harvesting and the importance. We're kind of glossing over it getting granular and going into all the details. Details. But it's so important to understand for all of you retail investors, this game is changing right here today with what Public is offering. Because what we mentioned earlier is very factual and we're going to get into it a little deeper that usually this type of strategy was only available to those that went through high net worth people that had $250,000 to be able to implement this strategy. Now you're able to do it with a thousand dollars on public. So I want to make sure we broke that down for the everyday person. You guys got pretty deep in the weeds there. I want to make sure all of you listening understand how incredibly important this is for your portfolio as well. So this is where it gets really interesting. So let's break this down. Historically, direct indexing has only been available to high net worth individuals with 50, 100, $250,000 minimums through private wealth advisors or platforms like Wealthfront, Fidelity and Vanguard Public is now bringing this to people for as little as $1,000. That's a huge shift. What was the decision making process behind democratizing this strategy and why now? Because this is game changing for millions and millions of people out there that use public. And I'm excited for this answer.
- [12:17]
Steven Sykes
Yeah, I mean, like I said earlier, we think about direct indexing and this sort of approach to investing and passive investing as being one of the sort of objectively correct ways for people to invest. And we want, we wanted to make that accessible. And I think, you know, Austin and I have talked about this before, but like for a long time at public, you know, we serve a broad set of customers and we have a big group of people who are passive investors. They identify that way. They want to own the index, they want to own these low cost ETFs, they want to invest in them in a recurring basis over time. Like that's a great strategy for the vast majority of people and one we fully recommend. But again, in building our business, you know, we hadn't really built an amazing investment product for those people. We hadn't helped them on their journey.
- [12:58]
Robert Krok
Right.
- [12:58]
Steven Sykes
We'd done recurring investments that was great, but that was really the last thing we'd done to make that path easier. And really that was just something about automating and saving them time as they go through the investment process. What I think we really wanted to do is figure out how to help them actually make more money over time. And so we said, all right, this thing, direct indexing, we've all heard about it from our, like you said, friends at the big wealth firms. We'd heard about it on the news, we talked about the high minimums. We're like, what can we do? And so we took our amazing real time fractional trading engine that exists, you know, across stocks, ETFs, crypto, and bonds. And we turned it on this indexing challenge and we said, okay, how low can we bring this based on, you know, sort of reasonable, reasonable cost models and what's going to make sense? And we were like, hey, we can get people started with a well diversified direct index portfolio with $1,000 minimum. Right? And that's the lowest it's ever been done. Now again, full disclosure, you're not going to get all 500 positions in the S&P 500 with a thousand dollars.
- [13:53]
Robert Krok
Right.
- [13:53]
Steven Sykes
The real reason, and we can get into the nitty gritty of it, is just there are some regulatory transaction costs. So you're talking like when you sell a position, you're going to incur a 2 cent charge that goes to the regulators to sort of manage the capital markets wherever you are. So like having a $1 position that you might sell out of and lose 2% of it, you know, that doesn't make a ton of sense. So we have some like logical minimums and what, what can make sense at a position level. But we brought that as, as far, as far down as we possibly could in order to make this product as accessible as possible. And again, that was a thousand bucks. And again, you know, and even, even still like to get the full 500 positions in the S&P 500 also still, you know, way lower than the 250,000 or $500,000 minimums that we see sort of across the street. And I think we're working hard all the time to continue to bring those down and make the product more accessible.
- [14:40]
Austin Hankwitz
Now before we ask Stephen our next question, got to give a shout out to NEOS investments. NEOs offers ETFs that seek high levels of monthly income with a keen tax efficiency while providing core portfolio exposure across equities, fixed income, real estate, cryptocurrency and cash alternatives like t bills. Their ETFs may be especially interesting for investors looking to generate tax efficient monthly income inside of their investor portfolios. Their funds may serve as a compelling income focused alternative or complement to many of the investments already in many investor portfolios.
- [15:15]
Robert Krok
So if you're looking to add passive income focused ETFs to your portfolio, consider learning more about NEOs ETFs@neosfunds.com and as with all investments, investors should carefully consider their investment objectives, risk charges and expenses of NEOS exchange traded funds before investing. To obtain a prospectus containing this and other important information, please visit neosfunds.com Please read the prospectus carefully before you invest and Investment in NEOs ETFs involves risks, including possible loss of principal. There is no guarantee the NEOs ETFs will make monthly distributions and the amounts may fluctuate from month to month. Cryptocurrency is relatively new and the markets has its own specific needs. So NEOs ETFs are distributed by Foreside Fund Services LLC.
- [16:05]
Austin Hankwitz
All right, back to our interview with Steven. I want to like really get granular here when it comes to someone who is now let's say they got 50,000 or $100,000 and. Well, I guess I'm asking, I'm going to ask you two questions. The first one is, okay, cool, they're now direct indexing, you know, maybe 20 grand or 50 grand, 100 grand in their public account. And now they're looking at it and it says 500 positions and it's trading and moving. They're getting email notifications and their phones buzzing. Right. Like, how are you guys helping them kind of distill this and keep them calm as you all are doing a lot of the work behind the scenes there.
- [16:37]
Steven Sykes
Yeah. So what I'll say is we started from the idea that direct indexing needed to feel like investing in an etf. Right. For us, like that's what we see as the competitive product, right. We look at all of our members that own voo, vti, iwm, like they are long term passive investors owning these low cost, well diversified ETFs and we're like, we need to do better for them. Let's make this feel as close as possible to that while they get the advantages of owning every individual position. So in your public account, you're going to look at it and it's going to look just like an etf. It's going to sit as an asset in your overall portfolio. Yes, you can click into that and the same as an etf, you can go and see the holdings in your direct index. You click into it, you can go and see the holdings. And you do have the added benefit of being an individual shareholder in each of those positions. So you do get those shareholder rights if you want them. You don't have to vote every position. We'll take care of that and make sure we're, you know, voting according to the best recommendations that we can find for each of those positions. But if you decide there's something you care deeply about at one of your holdings, obviously you'll be able to vote, vote your shares. You'll also be able to be the beneficiary of any potential shareholder actions or settlements that might come up that do occasionally happen that you might not get access to if you own the etf. And the last thing is you will own the entire index. Or you can, I should say. But if you already own a lot of, let's say Apple, or you already own a lot of Tesla, or you work at a S&P 500 company and you're like, I don't actually need to own more of that in my index. It's very easy for you to customize or personalize the index you want to own. So you can have your very own, you know, S&P470 if there's an entire industry or sector you don't want to have exposure to. And literally it's as easy as like, like clicking a button. You literally click the Lex icon. You know, all those, all those guys that you don't want to invest in go away. And we reallocate those funds. And again, you're gonna have something that's a slightly different return than the index, but still that you're gonna get the same broad diversification, uncorrelated returns that underlie the thesis and the strategy in the first place.
- [18:29]
Austin Hankwitz
To my second question. So that was a great answer. I appreciate you walking me through that. So why would someone maybe want us just stick with the VOO or the qqq, right? Like, let's strum in that argument. Like, would someone want to stick with those, like, maybe fees, Walk us through fees. I'm sure this isn' just a free service you guys charge. So like walk through that. And then maybe the assumptions on maybe tax loss harvesting to offset those fees. Like how have you guys thought through that, like straw man, the argument as to why someone would not want to go with direct indexing?
- [18:56]
Steven Sykes
Yeah, I mean, listen, I think the fees are a great place to start. And so we said, hey, what we want to do is make sure we're delivering better after tax, after fee returns for everyone that invests in these products. Right. And so we want to start with a fee level that we think is competitive with sort of these broadly diversified passes ETFs. So this product on public, it's a, you know, single fee for everyone. It's 19 basis points. So 0.19%. So what, on a thousand, on $1,000 a year, that's a $90 that you're paying a year. So we're not talking about, you know, that's, it's what, 15 cents a month from a management fee perspective, if my math is correct. And so I Think you're talking about just a very modest sort of fee to manage sort of the product over time. And like, like, yeah, there are plenty of passive ETFs that are going to have single digit basis point sort of expense ratios similar to our management fee in the same ballpark. And then listen, I'm not going to get myself in trouble with our compliance team by coming on here and making claims about what tax loss harvesting can do in terms of excess returns. But I'll say all of the third party research, all the third party competitors that have published sort of their own research on the benefits of tax loss harvesting demonstrate clearly you're going to do better on an after tax, after fee basis. Especially when you talk about starting with just such a modest fee of 19 basis points like we have. You're going to do again, you're going to do much better over, over the long run and again without, without getting too much into the numbers. It's one of those things. I would encourage everyone to go do their own research, but I think it's actually not, not, not a particularly close call in this, in this day and age.
- [20:25]
Austin Hankwitz
So I will get in trouble with the compliance because guess what, I'm not compliant. And I'm gonna give you all the real numbers because this isn't you talking, it's me talking. I've been doing direct indexing with, with $20,000 is where I did some direct indexing for the last started June of last year. So what is that here? Let's call it like 15 months or so, 16 months. I've tax loss harvested $2265 so just about 11% right. Of my initial investment. So again, we are not claiming that any tax loss harvesting going forward, mine's going to. We're not saying that. I'm just saying from my own experience with the tax loss harvesting sort of people behind the scenes that are doing that automatically for my own direct indexing has turned into for myself here, which I think is really cool.
- [21:08]
Robert Krok
Right?
- [21:09]
Austin Hankwitz
Like that's insane. Like that's $2,000 of gains. Now I can have somewhere else in the portfolio that'll be offset there. So just keep that in perspective people. When you're thinking about like whoa, fees like I don't know man, 19 basis points seems like it's kind of high compared to VOOS 3 basis points. It's like sure, 15 cents a month. I mean let's, let's really get granular and talk about that. But you know, I'm sharing my experience doing direct Indexing myself here for the last, let's call it 15, 16, 17 months. It's been a really easy experience and I'm excited now to expand that now with Publix, all the customization that comes with that, that Steven did such a great job of explaining The S&P470 or different industries that I want to add.
- [21:48]
Robert Krok
So before I go into my next question, I feel like this whole episode is about one of the biggest messages that I've lived on for years in my educational process. And that is it's not what you make, it's what you keep. And I feel like everything we're talking about right now illustrates that of just really finding ways to further enhance your gains and your tax loss harvesting aspects and just really keep more money in your pocket. So, Stephen, I want to like understand this a little better for the listeners with S&P 500 global rebalancing the portfolio frequently. Are you guys going to be doing the same thing for these portfolios through direct indexing? And what is the distinction and difference if there is one?
- [22:32]
Steven Sykes
Yeah. So we are going to follow, for people that want to follow the s and P500, we are subscribed to that index, meaning we get all of the updates from S and P. They're going to tell us when somebody gets added and subtracted and we will trade them on the same exact cycle. Now I will say that's a point of customization also. Right. There are plenty of people that might decide they actually want to just maintain Today's S&P 500 and therefore they don't want to rebalance, which is a setting that they can do. But again, our default is to follow the index. Again, follow the professionals who are building the index, follow their constituents and trade it accordingly. And. And that's exactly what we'll do.
- [23:07]
Robert Krok
Wow. So what else do you see coming down the pipeline in terms of things for everyday investors that want to build wealth and where do you feel the industry is headed?
- [23:17]
Steven Sykes
Yeah, I think one of the cool things we've been working on for a while is helping people that have a thesis about the markets really express that and then manage that well for a long period of time. So a few months ago, we launched a platform called Generated Assets, which sort of harnesses the best of AI technology to help people that have a thesis build that into a full diversified portfolio. You can probably see where I'm going, right? If you use Generated Assets to say, hey, I want a portfolio of companies that have adopted AI or are the largest token users of OpenAI, like we just saw them announce yesterday. And that's your thesis. Previously you could see the 30, 40, 50 stocks that were in that portfolio and the LLM would help you sort of enrich that. Now you can imagine on the back of direct indexing, we have an engine to help invest in that and manage that over time. And so I think, you know, as we look forward, that's the sort of thing we want to work on is helping people take an existing index strategy and help manage that with all of the amazing, amazing features that we've discussed already. But take their own index, right? Their own strategy, their own thesis, and have the same approach. And again, I think within a broader public portfolio, you're not limited to just one direct index. You're not limited to owning individual stocks or options or whatever. You can make your portfolio how you want it to be. So if you want to have a couple of different direct indexes, you want to build your own, you want to own stocks, crypto bonds on the side, like that's, that's all up to you. And it all works really well. All sort of within the same, within the same app, within the same great web experience.
- [24:37]
Austin Hankwitz
I could not be more excited for generated assets to turn into investable generated assets. I remember when it first came out a couple months ago, I was so fascinated by it. I went to generatedassets.com right? That's all you gotta do, generatedassets.com and I typed in, it's kind of like a prompt, like a chat GPT prompt. It's like, hey, like what do you want to like invest in, right? And so I was like, okay, I want to invest in the top 20 companies whose revenue per employee is the highest in the S&P 500. And it gave me like the 20 companies whose revenue per employee were the highest. And it back tested it to show me if I had invested in this exact strategy like 10 years ago or five years ago, like how it would have performed against the S&P 500. And then I was able to publish that strategy onto like, you know, the list or whatever because you can go to the generatedassets.com and see like the best performing, like created indices that people like come up with here. I'm looking at some of them on the, on the top list right now. It says Future Prosperity list. Tech and innovation titans, Elite Resurrection, Protocol, chip duopoly, the A16Z universe. Like this is like really cool things that people can come up with here. And so I guess what you're saying is you are very close now with direct indexing to be able to say hey, come up with something cool with generated assets and maybe here pretty soon you could be able to invest into those, those ideas that you come up with with.
- [26:01]
Steven Sykes
Yeah, that's totally right. Something we're actively working on and excited to talk more about it in the future.
- [26:05]
Robert Krok
So many of our listeners are in the early stages of their wealth building journey and maybe they've got their first 10 to $20,000 saved up and they're looking trying to figure out how to deploy it. What advice would you give these people that are just getting started? Should they get into direct indexing right away or some of the listeners just stick to the basics with traditional ETFs for now and is there a certain crossover point where you think maybe it's their first 100k, 200k or wherever, where then direct indexing might make more sense for them to initiate versus traditional ETFs?
- [26:39]
Steven Sykes
Yeah, I mean listen, I think we've worked hard to bring that barrier down. I mean I think that the waterfall of like standard personal finance advice is the same which is like invest in your 401k, get the full match, max that out, then start talking about tax advantaged savings outside of that right with you got to understand your own liquidity needs and when you're going to need money in the near future. But with that sort of of disposable income, manage it with tax exposure through again 401k IRA. But once you're done with that, again having that same idea in mind of how do I get the best after tax return that sort of those tax advantaged accounts present and that's sort of what the top of the waterfall is as you get an individual accounts. We really think direct indexing on a recurring basis is one of the best products that you could invest in because it's going to again solve for that diversification, those long term compounding uncorrelated returns across a broad portfolio of diversified assets. It's going to do it at low fees and it's really built to solve for great after tax returns. So you know, and again you can start that a thousand bucks, you can do a thousand bucks up front, 100 bucks a month, that sort of thing, whatever your sort of disposable income can support. I think it's a, it's a phenomenal product for anyone in that sort of early stage of their savings or people that are later. Right. Again it's a great news, it's a great new strategy even for people that own quite a lot of ETFs because again, our our view is that it's going to outperform in the long run.
- [27:55]
Robert Krok
Steven, this has been incredibly valuable. I'm sure our listeners are going to love this episode. The work you've been doing at Public to level the playing field for retail investors is incredibly important and inspiring to me. And I know our audience is going to walk away with just kind of this clear understanding of how to think about direct indexing as a whole and the tax optimization of it. So where can people go to learn more about it on Public and get started with direct indexing?
- [28:22]
Steven Sykes
Come to public.com check it out. All the information's there. I also make it make myself very easy to find online, whether That's Reddit, Twitter, etc. Frankly, you find me on any of the platforms, happy to have a chat about it or help you get started. Austin also knows how to tag me and if you find him on socials. So again, happy to talk to, happy to talk to current customers, future customers, whatever I can do to be helpful, helpful.
- [28:43]
Austin Hankwitz
Stephen, thank you so much my friend. We can't wait to have you back to talk about generated assets when that of course gets really figured out and launched here. Who knows when that'll be. But I'm excited for that to take place, man. And thanks again for joining us and educating our listeners and just walking us through such an important innovative milestone in Public's history here and just unlocking a insane tax optimization strategy now for the masses.
- [29:05]
Steven Sykes
Awesome. Thanks for having me guys.
- [29:06]
Austin Hankwitz
Robert, what a super fun conversation we just had with Steven Sykes, the Chief Chief operating officer@public.com as a reminder, direct indexing $1,000 minimum get started. If you literally like think about it like this. Hey, I'm building my portfolio. Robert and Austin think that I should be investing 65 to 85% of my net new income, net new investments into these like core holdings, right? We talk about core satellite holdings. 65 to 85% should go to the core holdings which are ETFs and index funds like the S&P 500, like the NASDAQ 130 things of that nature. So now instead of putting net new capital into buying shares of Voo, QQQ, SPY, whatever other S P or Nasdaq ETFs and index funds you do like to buy, you can put that net new capital into direct indexing on public.com and start to take advantage of the tax loss harvesting that comes with that. I'm telling you guys, tax loss harvesting is insane. We've been direct indexing for the last about 16, 17, 18 months. I direct index $20,000 in the S and P, and I had tax loss harvested so far, like 2200 of that, which is like 11% in about a year and a half. Right? So I'm not saying that you're going to see the same 11%, you know, tax loss harvest of what you invest. Right? So if you put in 100k, I'm not going to say you're going to tax loss harvest $10,000 in the first year, year and a half, like we have. Because again, tax loss harvesting is opportunistic as to what the actual markets are doing has nothing to do with the platform you use. It's all about what the markets are doing here. But at the end of the day, why not? Why not? Robert?
- [30:43]
Robert Krok
Yeah, I think it's all just about one of the best things we do here is really seeking out the best strategies for all walks of life to help people keep more money and, and really take advantage of tax strategies like this. And so I'm really excited about this episode. I hope everyone takes notes, goes to public, reads up on it and sees if it's a good fit for them. Because at the end of the day, anything we can do to put more money in the pockets of our listeners, that's what we're here for.
- [31:11]
Austin Hankwitz
It's, it's really a no brainer. Like, I'm telling you guys, like, if you are someone that's like, oh, I don't know if this is right for me. I guess taxes are something you like to do and pay, right? I don't. So I. Tax loss harvesting is always right for me. But yeah, do your own research, figure out what's right for you. In our opinion, 99.5% of people, direct indexing is the way to go when it comes to investing into the index funds and ETFs we talk about. Especially now with just a thousand dollars minimum like before, it's like, well, I didn't have 20, 50, hundred, $250,000 to do this. Like, I can't do it. It's like valid, super valid excuse. If you have a thousand dollars invested into V or QQQ, you should be direct indexing it on public.com, period. End of story. All right, Robert, so now it is time to jump into the Q and A section of this episode. But before we do that, got to give you guys a quick reminder as to why our podcast is called Rich Habits the name of our podcast is Rich Habits for a reason, because the behavior we have with our money is the most important aspect when it comes to building wealth. Wealth. It's one thing to earn money, it's another to make our money behave in such a way that we become wealthy over time. GetSequence IO is a platform that takes behavior to the next level. Their financial automation platform will help you take control of your money and give every dollar a purpose. On GetSequence IO you essentially create rules for your money and when a specific event happens, like Payday on Friday, that rule is executed upon maybe you want to set aside $200 every time you get paid to save your dream vacation or Autom. Automatically deposit $500 every other Wednesday into your brokerage account. Or maybe you're a business owner like us and you want to automatically set aside 33% of revenue for taxes. Sequence connects to all of your financial accounts, personal business, credit cards, loans, all of the things that you can think of, which gives you one nice clean map so you can automate everything in one place. GetSequence IO puts your finances on autopilot, routing your money exactly where you want it to go.
- [33:09]
Robert Krok
GetSequence IO is a financial lifesaver. If you're someone who loves a good sinking fund, you can build smart rules and even add conditional logic. Make it easier for you to hit your financial goals. Want to route 15% of your income to taxes, 25% to savings, a fixed amount to debt, and the rest to your wants and needs without even lifting a finger? Sequence brings your financial strategy to life and adopts it on the fly, handling transfers automatically or only investing if Your income exceeds $10,000 that month. Automatically route your money to your brokerage account, Roth, IRA or High Yield Savings based on your specific rules and income triggers. Plus, it's not just for personal finance. Business owners can use it to automate payroll taxes, expenses all in one place. No spreadsheets included. Check it out at getsequence IO Rich Habits podcast to start automating your finances and focus on what matters most.
- [34:06]
Austin Hankwitz
Post all right, Robert, Our first question for the Q and A section of this episode comes from Alex F. On Instagram. Alex says, I believe I have an interesting situation. While I have received great advice from successful friends and family, I'd love to get Yalls take on it. My name is Alex, I'm 25 and I live at home. I have roughly 19600 in student loan debt that starts to accrue interest this December. It's broken down into four groups. 3600, 4500, 5500 and another 5500 all at different interest rates that Alex put here. But we don't want to confuse you all. So four different groups. I also just purchased a truck that's going to cost $870 a month between insurance and my vehicle loan. I just graduated with a bachelor's in Civil Engineering this past May and I've passed my FE for the past year I've been working as a project manager for a subcontractor and I just landed an entry civil engineering job. Starting at the end of this month, I will be taking home $4,744 every month. Considering I have nothing in retirement or any investments, I'd like to take the next year to supercharge what I can. In doing so, I would likely need to only put the minimum payments toward my student loans. Now I'm being told that it would be better to pay as much as I possibly can toward my student loans. I can knock them out in the next one and a half years if I did this. The minimum I'd put toward my 401k if I did that simultaneously was 6% or about $285 a to get the available 3% match that you guys talk about. What would you guys suggest I do? The minimum monthly payment for the student loans is $205 and it will allow me to invest upwards of 1000 monthly between my Roth IRA and my 401k, assuming everything above that goes to the student loans. So long story short, pay off the student loans fast or invest. Robert, what's your take?
- [35:51]
Robert Krok
Alex, I think you're getting some bad advice. First and foremost, if you're making $4,700 a month, I would not have an 800 $170 a month truck payment first and foremost. That is way too much payment for what you're making. Secondarily, I would break down these student loans and the first one at $3,650 2.75% interest, the second one 4,500 at 4.99 and even probably the third one, I would keep paying the minimums. What I would think to do is knock out the $5,500 one at 6.53% interest, leave the others go because they're mostly considered lower interest and the arbitrage you could make in the stock market and by Investing in these ETFs would favor you generously. That's my first take on this. Secondarily, you have to look forward to that. You're living at home right now. But if you wanted to move out on this $4,755 salary with a $900 a month car payment, you're not leaving, leaving any wiggle room to invest or pay rent, whether you had a roommate or not. So I would be very careful on what you do. I would only knock out the high interest student loan debt and I would work on getting some money put into investment accounts like we talk about traditional brokerage Roth IRA and build those up on top of the 401k before I went all in to pay off these low interest student loan debt debts.
- [37:20]
Austin Hankwitz
Totally agree. Right. So at 4745amonth is what you're taking home. You've got an $870 a month car payment. I agree. I think that's too much. I think you should sell the car, find something that is not as high as insurance. Maybe borrow 15, 20,000 versus you probably ended up borrowing 45 or 55. Oh, I got a new job, I'm out of college, I can afford the payments. Recipe for disaster. You're putting $900 a month into a depreciating asset. So here's what I would do. Do don't worry about trying to pay specific parts of the student loans in the segments or anything. Just pay the minimum, the 205 every month. That's the minimum of the student loans. Keep paying the minimum. Invest as much as you can for the next 12 to 18 months. Continue living at home and get your total invested capital between your Roth IRA and your brokerage account on public.com at or above that 19,600 of student loan debt. We only encourage people to start paying down their student loans aggressively after they have an equivalent amount or more invested in the stock market. Because let's say you took that $20,000 and you spent the next one and a half years paying it down and now you have no student loan debt. Congratulations, your student loans are now at zero. Your net worth is essentially $20,000 higher. However, if you took that same 20,000 and invested it, congrats, your net worth is also $20,000 higher. And it's going to perpetually compound decade after decade after decade. Remember, stock market doubles, historically speaking, every seven years. So this 20,000 would double, double, double and double again. And that'd be 320,000 over the next 21 to 28 years, whatever that ended up being. Right. So it's like you could absolutely be Setting yourself up to have hundreds of thousands of dollars more in retirement by focusing on getting your stuff invested first before paying down the student loans aggressively. I cannot agree more. The truck, it's too much. I'm excited for you. You got the big boy truck. Unfortunately, you can't afford it. Let's talk numbers. 47, 45. You said that you're contributing. What is it here? 285amonth to the 401k, your rent when you move out one day, because you're not gonna live with your parents forever single, you're probably going to be paying about 2,200. That's what it is here in Nashville. You're maxing out your Roth IRA at 585. And then you got this $870 payment that leaves you about $800 after everything's said and done with just the stuff I talked about. $800 to buy groceries, plus utilities, plus, say, for a big purchase, plus save for a trip. Like 800 bucks a month. I'd rather that be much closer to a thousand or twelve hundred dollars a month. Because your car payment went from 900 to 500 or 900 to 400. Right. So let's figure out how to get rid of that car, get that monthly payment much lower, and get as much invested as you can before paying down those student loans.
- [40:07]
Robert Krok
Loans, Yeah. I had a situation the other day that just falls right in line with this. There was a girl that walked in. Two girls walked into the elevator with me. And the girl had the Louis Vuitton purse, all Lululemon clothing, and she had the Labubu doll, a lot of Ls there. And she had a brand new cell phone. And she was telling her friend how she didn't have enough money to pay her car payment that month. But I'm sitting there thinking, wow, she has dripped head to toe with every consumer item you could have have, but doesn't have the money in her account. And she showed her friend her account and I'm like, guys, that's not the way to live. You have to be able to have some financial breathing room. Otherwise you're always going to be working just to survive. And we don't want to see that. For anyone. That follows the Rich Habits podcast.
- [40:51]
Austin Hankwitz
And you know, Alex F. I fell for the same trap when I graduated college. I went and I bought a three or four year old Lexus IS250F Sport. It was my dream car since high school. I wanted one so bad. Finally bought one. I was like, I can afford that $440 a month car payment and the $275 a month insurance. So all in, what is that? $715 a month is what I was paying for that car. And I had it for like, I don't know, 18, 24 months. It was awesome. I loved it. And then I realized, I looked around and I was like, wow, I've not maxed out my Roth IRA yet and I don't think I'll be able to do it this year. And I was like, wait a second, second. Why am I spending 700amonth on a car? Why don't I get rid of this car, drive a beater, a crappy car instead that I pay cash for and then free up the 700amonth. So that's what I did. I ended up buying a 2005 Lexus ES330. I paid like five or six thousand dollars for it. I ended up lowering my monthly insurance from the 275 down to 110. So now I freed up $600 a month. Well, you know what, maxing out your Roth IRA is 580 something a month. So now I could max out my Roth IRA for the first time every month, right? So it's like that's the type of sacrifice that I made to ensure that I had long term financial freedom. And it's not that I couldn't afford it, quote unquote, because theoretically I could afford the payment. Yeah, it's great. But at the cost of what? And for me, I understood. And I'm sure you guys understand now too because we had this episode called called how to 70 extra money. Every dollar invested in your 20s turns into $70 in retirement. For me, it was at the cost of tens, hundreds, maybe millions of dollars that, that wouldn't be in my retirement account in my 60s and my 70s. So it's like, is it really worth driving a four year old Lexus? That I thought was amazing. So now I drive a much cooler car, which I'm really excited about. It's a 4Runner. But I guess I'm trying to say here is that like, like make sacrifices in your early 20s. Like you just graduated college, dude. Like you don't deserve a new truck. Like get that through your brain. I didn't deserve a new Lexus. Like it doesn't matter. But when you're older and you've got tens, if not hundreds of thousands invested, then yeah, go get the truck. That's cool. But right now, like just take it down a notch. You're in your 20s. This is when you save money, you grind, you put in the work and you do the right things for the next seven or eight years until you're 30 and then you'll wake up and look around, you're like, whoa, I've got a couple hundred thousand invested, tens of thousands in my emergency fund and I should be able to afford a home soon. Right? Like that's how you should be thinking about this.
- [43:33]
Robert Krok
Yeah, I think that's a great takeaway. And personal finance is personal, so just make sure you adjust accordingly. But nowhere in this scenario should people be starting out so cash poor without leaving themselves any breathing room because they feel they need to have a $900 a month truck payment. It just doesn't make sense unless you're already crushing it and you have hundreds of thousands of dollars put away and you're putting away tens of thousands of dollars a year from investing.
- [44:01]
Austin Hankwitz
So our last question comes from Jessica on Instagram. Jessica says, first, I have to tell you I've been listening to your podcast for the last two years. It has completely changed my retirement trajectory and I feel so confident now with investing my money. I'm self employed and I make about a hundred thousand a year. I'm struggling with how much money to keep in my business High Yield Savings account, which I use to pay for inventory. I'm wondering if I'm keeping too much in and could be investing more of it. I essentially transfer all extra income from my business beyond payroll and everyday expenses to a high yield savings account. I have two to three significant inventory buying events that take place each year where I spend anywhere between 40 and $80,000 each time I do that. So my high yield savings Normally fluctuates between 10,000 to 90,000 depending on the time of year and averages around $50,000. I'm 43, have 100,000 in my solo row Roth, 100,000 in my Roth IRA and 58,000 in my bridge account. My total income for 2024 was 422,000. My cost of goods sold, aka buying the inventory was 220,000. And this year I've already maxed out my Roth IRA and contributed 23,000 to my solo Roth 401K. Thank you for all your help, Jessica. Robert, you want to kick this one off?
- [45:14]
Robert Krok
So yeah, Jessica, congratulations. You seem to be in a pretty good spot. One glare daring thing that bothers me a little bit is it seems like your inventory versus sales is a little bit high. I would assume that your inventory would be at 30% of your total revenue. So being at 50% is a little high to me. So I would look at maybe raising your prices or trying to renegotiate your inventory. But I do agree with you on one thing, and that is you might be saving too much of the business's revenue for these inventory buying periods, periods to where you're only getting it into high yield savings, which is good because a lot of business owners don't even do that. They just leave it sitting in a checking account, rotting away and making no money. But I would really look deeply to see can you tighten that up a little more? So so much isn't sitting in the high yield savings account and get that into these other accounts you have, like your Roth. And I think you said you had a traditional brokerage account as well. Well, because you just don't want to have an overage sitting in that high yield savings year in and year out when it could be earning a lot more money. But keep crushing it. Look at those two things and I think you'll find a better path forward to build more wealth and maybe save yourself some money on inventory. Just don't ever, anyone that owns a business, don't ever sit comfortably, buy and not check pricing. We just did it the other day with our box provider for silly Bands where we renegotiated a deal and I was able to knock 9 cents a box off of a box that we use a lot of. We probably use 5 or 6,000 of that box size a year. 9 cents might not sound like much, but it is extra money to go to the bottom line. So always make sure you audit your expenses relative to your inventory.
- [46:59]
Austin Hankwitz
So I'm going to take the other side. Jessica. I think that your 50,000 in a high yield savings account on average is pretty perfect if you're doing 422,000 dol a year in revenue. And half of that is inventory. I'd imagine you're also, I mean, you said you made a hundred thousand last year, which means that of the, let's call it $200,000 difference, half of that is going to, you know, operating expenses, probably like payroll and rent and, you know, utilities, things like that to operate your business. So I'm always under the assumption that people should keep an emergency fund for their business just like they have an emergency fund fund for themselves. My general emergency fund for my business is about a month and a half of payroll, which is what I think is about perfect. So for me, it's about 15 to $20,000. I just always have in my business checking account. So for you having about 50,000, knowing that you're going to spend 40 to 80,000 on these significant buying events for your inventory, I think it's perfect, right? Let's call it maybe 10 or 15,000 of that 50 is like your emergency fund so you can make payroll in case a processor, a payment processor, like doesn't pay you on time or what, Like a credit card's weird or you have to make a last minute payment somewhere. Like you've got enough wiggle room where you're not going to be, you know, strapped for cash. But you also have enough where like if you need to spend, you know, 30 or $40,000 on a 48 hour notice on inventory because there's a big sale on your provider or maybe you've got a bulk order in from someone else and you have to like get rid of it. Right. So it's like you have some wiggle room there. And I like the 50. I wouldn't want to see it more than 50, but I also wouldn't want to see it less. I think you nailed it. I think 50,000, given the numbers that you've shared, makes a lot of sense. And you're doing a great job by using your solo Roth 401K and your Roth IRA and your bridge account. As a business owner, I hope you're using Carrie.com to do that. They make it super simple. Go check them out. But yeah, great job.
- [48:55]
Robert Krok
Yeah. I mean, the only thing is, I think that's a beautiful takeaway is she said she has 10 to 90,000 depending on the time of the year and just 90,000 is too much. I'm right there with Austin. I think that $50,000 range average is perfect. And you know, just always understand as all the business owners that follow this podcast, make sure you keep an eye on this. I think this is an important question because, you know, I just talked about this the other day in the Rich Habits network, Private Live. And that is so many business owners aren't thinking ahead. They wait till the holiday season to buy the things they need for the holiday season. And then you're always paying these up upcharges and these surcharges for these holiday season pricing swings. So just always be ahead of it. So I really appreciate that Jessica is and I love this question.
- [49:41]
Austin Hankwitz
Everyone, thanks so much for tuning into this week's episode of the Rich Habits podcast. Be sure to go check out direct indexing on public.com you need to be doing it. Take advantage of these tax loss harvesting opportunities. I don't care how much you have in the S and P or in the NASDAQ via VOO or qqq, I think some of that deserves to be parked in some direct indexing on public so you can take advantage of those tax loss harvesting opportunities. As always, be sure to subscribe to the Rich Habits newsletter. There's a link to that in the show notes below. And don't forget to check out the Rich Habits Network, our community for our biggest fans. We're up to 750plus people now hanging out with us where every Tuesday night we host a two hour long live stream. We have eight hours of video coursework. You can hit us up in the DMS or post questions and we'll definitely get to it. And all the fun stuff that comes with being a community member inside of the Rich Habits Network.
- [50:33]
Robert Krok
Yes, thank you all for stopping by. It means the world to us. We appreciate the shares on the podcast, the five star reviews because we all have friends and family members that need a little nudge in the right direction and we're here to bring that value. So make sure you share the podcast with a friend and we'll see you next time.
- [50:50]
Austin Hankwitz
Thanks everyone and have a great start to your week. And Doug, here we have the Limu Emu in its natural habitat helping people customize their car insurance and save hundreds with Liberty Mutual Mutual. Fascinating.
- [51:29]
Robert Krok
It's accompanied by his natural ally, Doug.
- [51:32]
Steven Sykes
Limu is that guy with the binoculars watching us.
- [51:35]
Austin Hankwitz
Cut the camera, they see us. Only pay for what you need@libertymutual.com Liberty Liberty Liberty Liberty Savings vary underwritten by Liberty Mutual Insurance Company and affiliates Excludes Massachusetts.