LIVE FROM BROOKLYN: Episode 500 with ChooseFI’s Brad Barrett

26:33Do you think the fact that we had an 11 year bull market influenced that? Yeah, I mean, it certainly didn't hurt. let's let's be clear but i mean there have been a lot of ups and downs even amidst like roller coasters even she's good she's good the running theme of the evening i mean how many articles did you see in 2020 though is the fire movement dead right yeah it's easy to say that the community has been successful because of the stock market. And I mean, we're not gonna lie. Obviously it's helped, right? But how I look at financial independence is basically if you can build a life where you have a significant savings rate, however you define that.

27:27Again, we're not getting into the tit for tat, you know, mine's 52 point, whatever. But, you know, like, and I'll bring it back to my daughters, which seems to be what I bring everything back to at this point. But like, I tell them in essence, if you can more or less find FI, and they have a little unfair advantage, obviously, but if you can find FI before you've made any mistakes or got into debt in any way, and you save 50 % of your income, you can gleefully spend every other dollar and you are basically barring a zombie apocalypse going to be financially successful. It's almost impossible to screw up your life if you have a 50 % savings rate.

28:10And then we can dial it back from there. By no means is this the, you have to have a 50 % savings rate to succeed community. I mean, it just wouldn't be possible. And it's not possible in, I mean, we're in a high cost of living area right now in New York. Is a 50 % savings rate possible for most people? I don't think so. It wouldn't have been for me. And yet, here you are, right? And it is a very personal thing. It's easy to always kind of wish away. Like, it's almost like the, oh, this is for somebody else. There's always an excuse. There's always an excuse why that works for somebody else, but it doesn't work for you.

28:52It's just in life. I feel like it's always some elusive they, right? And in this case, the they is, oh, they succeeded because the stock market's been on fire for 11 years. Well, no, I think they succeeded, they being us, they succeeded because they reoriented their lives around what they value. And they understand that saving money is really, really critical. And that means both a combination of frugality and earning more. And I think this is something, you know, going back to your very first question, Paula, is something that we missed in the community at the beginning to our great detriment of earning more money.

29:29And you're huge about this. Yeah, yeah. Well, I'm huge about it because it's oftentimes when I'm speaking, I'm giving advice to the younger version of myself. Like I'm just saying all of the things that I regret that nobody told me when I was 22. I'm speaking to the 22-year-old version of myself. In my 20s, I was like just reading everything I could about managing money. And I kept reading the idea that, oh, you know, if you earn more, you're just going to spend more. So don't even bother focusing on the earning side of the equation. Just focus on save, save, save. In retrospect, that's a very reductive and dismissive attitude towards earning more.

30:09Like if you earn more, it doesn't necessarily follow that you'll spend more. If you earn more, then you could spend less. You could spend like, right. Right. There is no if then that in which the then is necessarily that you would spend at the level of your income to prescribe that as the only path or, you know, to assume that that's the only path is misguided. But but yet that seemed to be the dominant narrative in the early days. But again, you know, I do wonder, like we talk about the early days as 20 2012, 2013. I mean, we had just come out of the Great Recession at that point. We had just seen housing values crash and the stock market crash.

30:53Like we had just gone through the greatest economic upset since the Great Depression. And I think that that had to have some type of an impact on collective psychology. And similarly, I mentioned an 11-year bull run. But even when that 11 years got interrupted, the bull market ended in 2020, in March of 2020, for a month and then it went right back to bull again you know um so we're now in these like amazing economic headwinds and it just the party just doesn't stop like nvidia just keeps going you know a year ago i was like that that's it's overblown it's still going yeah the ship is to hell the year ago.

31:41And so now I think that what I hear so often is a fear of heights, right? I hear people say, the market is at all time highs. I don't want to get in. But people have been saying that now at this point for years, because we've just been at new all time highs. And I see people and everyone here is nodding their heads. This is resonating. So what do we do now in an environment where we're just in consistent all-time highs? Just like always with financial advice, this is not advice for anybody in particular, obviously. Learning the simple path to wealth was one of those lightning bolt moments in my life where, I don't know about you guys, but investing always seemed impossible.

32:33It always seemed like something that you needed some expert or you were missing something or you needed to study for years and years and years. And it's one of the most important aspects of your financial life, certainly, if not your life. But yet it is this odd system where the simplest version is, if you were a betting person, it is essentially the highest likelihood of success. And that is really a bizarre aspect of life. And I don't think we talk about that enough of just like how odd it is that turning off your brain, in essence, and just saying, I'm going to invest in low cost ETFs and index funds, in my estimation, gives you the highest likelihood of success over a 30 to 50 year period, which is what we're looking at.

33:21So net of fees, net of everything. That's really wonderful to essentially not need to know anything. That was like a sea change moment for me, a lightning bolt moment of, oh, I can actually sleep at night. And I'm a CPA. Like in theory, I should have had some knowledge and like, it always seemed like a black box to me. buying VTI, Vanguard's total stock, total ETF, is essentially I'm buying a little piece of 3 ,000 companies and the ingenuity and hard work of 100 million plus American workers and people all around the world. That feels pretty good. I'll take being essentially the owner of a tiny, tiny, tiny little piece of 3 ,000 plus companies and 100 plus million American workers, that'll work for me.

34:09You could have said that at any point over this last 11 years. And where would you be if you sat on the sidelines? You'd be a lot less well off. Certainly all of us would be. I think it's easy to come up with a narrative of why we know better. Or you listen to somebody on CNBC who had some like macro take. Anytime you hear the word macro, run as far as fast that you possibly can. These people are complete morons and know nothing, nothing. We cannot, we cannot know this. I look at the world as like a series almost of like, like bets. So what gives me the highest likelihood of success? The highest likelihood of success for me is not trying to time the market on both sides, the in and the out.

34:57I can't do it. You all can't do it. The macro guy can't do it. There's no world. So for me, it's just every two weeks or whenever money starts rolling in, I continue to purchase my total stock market funds. That helps me sleep at night because I'm playing a 50-year game. I'm not playing a five-year game. I'm not playing a, oh, Morningstar gave this a five-star rating last quarter game, right? We are not playing short-term games. We're playing long-term games. And I think that is something that sets our community apart. The risk with long-term games, at least psychologically, is oftentimes good things happen slowly over time.

35:45Bad things happen in an instant. So good things compound and grow. And over the span of a dozen years, there's a steady upward trajectory. But then when there's a negative event, you look at the big shocks that have happened. Pearl Harbor, 9-11, the pandemic. Like these are things that no one could have predicted. Quoting heavily from Morgan Housel here. These are things that nobody could have predicted. And they happened in an instant and they shook everything up, you know? And we see that with like very sudden market crashes as well. I actually want to throw this back on you because I think the all-time high question is incredibly interesting.

36:22What do you think about all-time highs? Whenever I start to feel a fear of heights come up in myself, I will go back and I will look at what happened if you put a huge lump sum of money into the market at the end of 2007 or at the end of 2006. If you'd put a giant lump sum in the market right before the Great Recession, you think of recessions in terms of there's duration, there's severity, and there's frequency. In terms of severity, hopefully the Great Recession will be the most severe recession that we will ever experience. And certainly over the span of the last 100 years, it was other than the Great Depression, it was the second most severe.

37:03So what would have happened if you would put in a huge lump sum of money right before such a severe recession? Well, if you'd put that in and you just left it, then today in 2024, you'd be great. You'd still be great. And so that's very much how I calm myself when I start to think of that fear of heights is, hey, even the person who invested at the peak of 2006, 2007 would still be great today. Right. So literally worst possible timing. Yeah, exactly. Yeah. We should all, we can run the numbers when we get home and maybe edit it in. If you put in$100 ,000 at the worst possible time, what would it be worth today?

37:44We'd be sitting happy today still. I take a lot of comfort in that. Hey there. So after we recorded episode 500, I came home and crunched the numbers. What would happen if you put$100 ,000 into the market right before the Great Recession began? And there are a variety of answers depending on what set of assumptions you use. Let's pause for a moment and acknowledge the sponsors who allow us to bring you more than 500 episodes at no cost to you. Once we've heard from them, let's really walk through the math of this because it's fascinating. And understanding what those numbers look like could help reshape the feelings that you have about taking risks within your own investment portfolio.

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41:06Welcome back. Okay, so let's elaborate on the very last piece of that discussion, which is what would happen if you put$100 ,000 into the stock market right before the Great Recession began? The first step in answering this question is to establish the date at which the Great Recession began. Preceding that, there is the underlying question, which source do you use in order to obtain that data? The Federal Reserve Bank of St. Louis has an economic research branch that includes a team that documents Federal Reserve history. And so I'm using this Federal Reserve history, which comes from the Federal Reserve Bank of St.

41:44Louis, as the defining source. According to Fed history, the Great Recession began in December 2007. However, we should note that December of 2007, there was a lot of data that was still relatively good. Real GDP peaked in Q4 2007. And some of the biggest upsets that took place during the Great Recession did not happen until 2008. In fact, in many cases, it happened late in 2008. For example, on September 29, 2008, the stock market fell by 777 points, which at the time was the biggest point drop in the history of the market. Now, again, that was September 29, 2008. And that particular decline took place two weeks after the government bailed out the insurance company AIG by virtue of buying 80 % of it.

42:36It took place two weeks after the government declined to bail out Lehman Brothers, which went bankrupt with$613 billion in debt. it took place three weeks after the government seized control of Freddie Mac and Fannie Mae, which had guaranteed millions of bad real estate loans. And it took place two and a half months after the subprime mortgage lender Indie Mac collapsed. So all of those things, all of those events took place between July and September of 2008. And that was a particularly tumultuous and shocking time within the markets. So I think in order to run this scenario, what would happen if you invested$100 ,000 at the worst possible time?

43:20I do think it is appropriate to run scenario A, in which you invest this money in December of 2007, which is officially when the Great Recession began. I think it's also appropriate to run alternate scenarios, B, C, D, etc., that ask the question, what would happen if you bought during some of the highest trading days prior to December 2007? So for example, in 2006, the Dow Jones peaked during that calendar year at 12 ,510. That was the single highest trading day in 2006. What would have happened if you invested$100 ,000 lump sum on that day. And in 2007, the Dow Jones peaked to the highest trading day, 14 ,164.

44:10What if you had invested 100 ,000 then? Those instances of buying at peaks, buying at all-time highs right before a major crash, let's take a look at what would have happened had you done that, had you bought at the highest of highs before December 2007, as well as had you bought along the way at some point in 2008. Let's trace all of them. October 13, 2006. The headline on CNN Money that day is Dow Hits Another Record High. The Dow that day was closing in on 12 ,000. It was 11 ,960. And so while the market had not yet reached its 2006 peak, it was really darn close. It was well on its way up.

44:59So this would be a point in time in which an optimistic investor, seeing that stocks are climbing higher and higher, might choose to make a big lump sum investment in the market. What would that yield? I'm running all of the following calculations using data originally from Robert Schiller's website. That is, Professor Robert Schiller from the Yale School of Management, who has compiled U.S. stock market data sets from 1871 through present. For these calculations, we are assuming that the full$100 ,000 was invested in the S &P 500. The following numbers that you are about to hear assumes that all dividends are reinvested and does not account for taxes, fees, or transaction costs.

45:48The calculator used in running these projections can be found on the website of dollarsanddata.com, which is operated by a Stanford-trained data analyst named Nick Majuli. He works as chief operating officer for Ritz-Holt Wealth Management and is a previous guest on the Afford Anything podcast. Let's start with October of 2006. An initial investment of$100 ,000 during that month, if left untouched until March of 2024, that$100 ,000 would have grown to$530 ,000, technically$530 ,961.32. Now that is an annualized rate of return of 10.06%. Now, let me note that that is what's called a nominal total return, which means that there is some inflation-related drag on that number.

46:39If you want to know the inflation-adjusted numbers, well, I'm glad you asked, because the inflation-adjusted total return would be$342 ,839, which reflects an annualized growth rate of 7.3%. From this point forward, by the way, because I'm going to be going through a lot of months and years, and I don't want your ears to be swimming in numbers. I am going to talk about nominal total returns because that is the way in which stock market returns are typically discussed. So again, an investment of$100 ,000 lump sum in October 2006, when the market was nearing its pre-recession peak. If you left that money alone, allowed the dividends to reinvest themselves and didn't touch it until March, 2024, that$100 ,000 would have grown to$530 ,000 and you would have had an annualized growth rate of over 10%.

47:36Now, what would happen if you invested that money two months later at the peak of 2006, which was December 2006? That was the month in 2006 in which the market reached its absolute peak. So October represents, you know, it's 2006, but you're still on the way up. December represents like it's 2006 and you're at the top and it's the year before the recession begins. It's pretty much as close to a worst case scenario as you can imagine. Well, even in that circumstance, if you put in that$100 ,000 lump sum in December 2006, today that money would be worth$509 ,000 and your annualized rate of return would be 9.9%.

48:19Now, let's move ahead one year, October 9, 2007. The market peaked. The Dow had a closing to$14 ,164. Actually, let me put an asterisk there because there's the closing peak and then there's what's called the intraday peak. The closing peak was October 9, 2007. The intraday peak, which means that it got to a certain high during the middle of the day, but it didn't necessarily close there. That was October 11, 2007. So October 9 versus October 11, the closing peak versus the intraday peak happened 48 hours apart. So what that tells us is that October 2007 was the absolute peak. And we know with hindsight that only two months later, the Great Recession began.

49:06So what if you had put that money into the market in October 2007? Again, assuming the entire$100 ,000 got invested in a lump sum in the S &P 500, that money today would be worth$462 ,000, and it would have had an annualized growth rate of 9.77%. Now, that is worst case scenario. That is buying at the 2007 peak, just two months before the Great Recession officially began. Now, just for fun, let's track what then happens along the way if you bought during those first few months of the Great Recession. So if you bought in December 2007, you'd have$479 ,000 today, an annualized rate of return of 10.13%.

49:54Next, let's skip ahead a few months and let's go to April of 2008. The Great Recession has officially begun, but the big scary headlines haven't happened yet. The bank collapses haven't happened yet. If you put a$100 ,000 lump sum into the S &P 500 in April of 2008, that investment would be worth$513 ,899 today. And again, let me put an asterisk. When I say today, I'm referring to March of 2024. Now let's skip ahead another couple of months. As you'll recall, in July of 2008, that's when IndieMac collapsed. That was when the first really big scary headlines started to happen. And with the benefit of hindsight, that was actually a pretty good time to invest because $100 ,000 in the market then would be worth$557 ,000 today.

50:47That's an annualized growth rate of 11.59%. And now for those of you who are contrarians and you're interested in catching the bottom, let's say that you were to have put that money into the market in September of 2008. As you'll recall, that is the month in which Lehman Brothers, AIG, Freddie Mac, and Fannie Mae all began dominating the headlines with either collapses or government takeovers. $100 ,000 in the market in September 2008 would be worth$573 ,000 today with an annualized growth rate of 11.93%. Now for the real contrarians who are wondering, all right, what if I was lucky enough to catch the bottom?

51:26What if I was lucky enough to put my money in the market in March of 2009? Well, you are very lucky because that would be worth$906 ,000 today, technically$906 ,553.38. And the annualized growth rate would be 15.83%. What's interesting, let me pull back for a second here. What's interesting to me about this is that the range of returns of annualized total returns that we are talking about actually occupies a relatively narrow band. If you had been fortunate enough to invest$100 ,000 into the market at the absolute bottom, March 2009, we're talking about an annualized growth rate of 15.8 % versus if you had put that money into the market at the worst time, October 2007, which was the 2007 peak, the absolute highest of highs in 2007, if you caught the top of the market and then got slammed with immediate sequence of returns risk, which thank God would only be theoretical because you are not withdrawing this money, right?

52:42But you were slammed with an immediate haircut. You invest at the peak and instantly it crashes. We're still talking in that case about an annualized growth rate of 9.77%. So that range, 9.7 through 15.8, I mean, certainly it's a significant amount of money. We're talking about the difference between your investments growing to$906 ,000 versus your investments growing to$462 ,000. So I don't want to underplay the range. I mean, yes, the difference between 9.7 % and 15 % is absolutely a lot of money, but it isn't the catastrophic, woe is me, I'm never going to recover from this type of situation that many people fear.

53:34An annualized growth rate of 9.77 % is still pretty darn good. Turning$100 ,000 into$462 ,000, which is what would have happened if you bought at the absolute peak in October 2007, still pretty darn good. And while, yes, being lucky enough to catch the bottom in March 2009, yes, that would yield you, in this example, an additional$444 ,000, essentially doubling your money. What we know historically is that with enough time in the market, your money will double and double again and then double again and then double again. And it is always that last doubling that matters the most. And you get that last doubling by increasing the amount of time that you have in the market.

54:26Time in the market, not timing the market. And while many people are tempted to hear that and then kick themselves for not having started when they were two, the reality is you and I will never be younger than we are today. Today, we are younger than we will ever be for the rest of our lives. And so even if you haven't invested a penny yet, guess what? Today, you are relatively young relative to the age that you are going to be tomorrow. And so given that you are relatively young, today is the best day to invest. I hope that hearing those numbers and hearing that range of possible outcomes, the worst case, the best case, a bunch of middle cases in between, I hope that now that you've heard that range of potential outcomes, you're feeling even more confident, even more empowered to go out there and invest your money and watch it grow.

55:26Watch it compound. Watch it double and then double again and then double again. And I can't think of any more important message to close out episode 500 with. So thank you for listening to episode 500, part one. This is episode 500, part one. Part two of episode 500, which is audience Q &A, we're going to air that on Friday. We're going to air that in two days. So make sure that you're following this podcast and your favorite podcast player so that you hear live audience Q &A that comes from episode 500 and share this with a friend. That's the most important thing that you can do to spread the message of financial literacy and financial independence.

56:08I also want you, I have an episode 500 favor to ask of you. If you are not yet subscribed to the show notes, I want you to go to affordanything.com slash show notes. I want you to subscribe. It's free, absolutely no cost to you. Subscribe to our show notes. And then when you get that very first email from us, I want you to hit reply. Hit reply to that email and tell me what it is that you enjoy about this podcast and what you would like to hear from us in the future. What do you want the next 500 episodes to discuss? Subscribe to our show notes, hit reply to any of the emails that we send and let us know.

56:46Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything Podcast. You're listening to part one of a two-part episode that we recorded live in Brooklyn. On Friday, you'll be hearing part two, which is when Brad and I take questions from our live audience. And thank you for being part of this community. Thank you for being dedicated to financial literacy and financial independence. Thank you for embracing the ethos of investing. and beyond that, the ethos of being thoughtful and deliberate about how you want to live your life because that is ultimately what this is all for.

57:27So with that said, thank you for being part of this community. My name is Paula Pant. This is the Afford Anything Podcast. Make sure you're following us on Apple Podcasts, on Spotify, and on YouTube, and tune in in two days' time to hear live audience Q &A from episode 500. I'll meet you in the next episode.