Q&A: Should You Cash Out Your ETFs? The Hidden Consequences of That Decision …

28:40You know, one of my biggest clients, my wealthiest clients made stop signs for a living, made stop signs. And you know what was cool, Paul? Part of the reason he made so much money was there's not a lot of competition because there's not a lot of people going, you know what I'm going to college for? I want to make a stop sign. Cody Sanchez talks about this. She was a previous guest on this podcast and she advocates for buying what she calls main street businesses. But often these are dumpster rollaway companies or porta potty companies or laundromats. Yeah. Her first business acquisition was a laundromat.

29:17It is, for me, a way better approach to life than chasing something that seems on paper to be really easy and isn't. And I'll point directly at it, Paula, because you and I were at a conference together last year where our friend Nathan Berry talked about the fact that the biggest thing high schoolers want to be right now is an influencer. And yet when you talk to them about what an influencer really does behind the scenes, high schoolers don't want to do any of that. Do not want to do that. I live in Texarkana, Texas. You know what's on the shelf at my local Target and Walmart? What's that? Ring lights.

29:56Right. Ring lights in Target. That shows how many people are chasing this, quote, dream of doing what I'm passionate about. Which means if the market isn't oversaturated, which by now it probably is, that the money is in manufacturing and selling ring lights. Yeah, good point. Right? During a gold rush, sell shovels. Yeah, we actually did a historical episode last year talking about Deadwood. And the people in the Wild West who made money were the people mining the miners. Right. The miners weren't making money. The people mining the miners were making money. Right. And Cal Newport, who's also a previous guest on this podcast, he's actually been on multiple times.

30:38I'll link in the show notes to our episodes with Cody Sanchez and with Cal Newport. But Cal Newport has one of the best and most nuanced takes on this topic. He says that the notion of following your passion is a little too one dimensional. It's a little too reductive. and that what a person needs to do is follow their curiosity, not their passion, but their curiosity. And assuming that they have minimum viable curiosity about a given subject matter, then as they dive more deeply into that subject matter, they will naturally become more passionate about it. Because Dunning-Kruger effect, when you are on the outside of an industry, if you don't know anything about that industry.

31:30You don't know what you don't know. And as you start to dive into that space, you then become aware of what you don't know, which triggers curiosity because as you become aware of what you don't know, you want to learn about all of these many things that you are suddenly aware that you don't know. And so assuming minimum viable spark, the process of diving into a new subject matter is what engenders that what ultimately a person would call passion. So passion is therefore the result, the consequence, and not the cause of going into a field. And while we're on this topic, an offshoot of this, Paula, also for the part of the audience that is looking at retirement, this even translates into retirement because the happiest retirees volunteer with three community organizations and officially belong to one, either a religious organization or the Kiwanis, the Lions Club, whatever it might be, the Rotary.

32:34They belong to some community club where they pitch in. And a lot of people have given me the feedback. I don't know what I'm passionate about. Like, why would I join Rotary? I don't know anything about it. And to your point in the Newport research, once you get in and you start exploring, you'll find out very soon whether it actually resonates with you or not. When I first got involved with charitable giving, I felt really bad because I wasn't really passionate about anything. It sounded horrible. I'm like, I want to give my time and my effort because I see successful people do that and they're in their community.

33:07So I'm going to model that behavior, but I don't know anything. I had a client that was the president of the Arthritis Foundation. My mom has some arthritis. So I just volunteered for one of their events. And then I started going to a couple of meetings that I found out about juvenile arthritis and how horrible it is for kids that have arthritis. And then I found out the research that's happening in the world of arthritis. So you see exactly what you're talking about is happening even with charitable giving. I went down the rabbit hole a little bit. I found my passion by just lacing up my shoes and joining the organization.

33:42Right. And so to Lucas's situation. Lucas is like, what does that do with me? Yeah. Lucas, we will get to your question. I promise. But to Lucas's situation where he talked about how he and his spouse, neither of them are really in love with the work that they do. The question that it brings up in me is, is it the subject matter itself, IT consulting, or is it the specific circumstance of the company that he's working for and the supervisor or the manager that he's reporting to, that he and his spouse are both reporting to. Because what we know is two things. Number one, we know that if you can isolate a person's probability of liking or disliking their work, a person's feelings about their direct supervisor is the one single isolated variable that has the greatest degree of correlation with whether they like or dislike their work.

34:40If you like your direct supervisor, you are far more likely to also enjoy your day-to-day work and vice versa. That's one well-documented piece of research when it comes to career satisfaction. And so one question that I have is, is it that they dislike IT consulting? Lucas, is it that you and your wife dislike IT consulting? Or is it that neither of you are particularly fond of your direct supervisor? because those are very different problem sets to solve. The other question that I have is one other thing that we know from the research is that autonomy, mastery, and purpose. Those three variables, those three qualities have a huge degree of correlation with job satisfaction.

35:28So in the specifics of the day-to-day work that you do and in the company that you work for in the way that all of that is structured and set up? How much autonomy do you have? How much mastery do you feel that you can develop? And how much purpose do you think that this work contains? And again, can you do this work in a way that optimizes for those variables? And there's a reason directly to Lucas's problem, Paula, that I think this is material, which is I think the goal here based on his lack of satisfaction, his spouse's lack of satisfaction is to be what people call coastify so that he has saved enough.

36:18He's wrong enough out of this job that he no longer has to save to reach his long-term goals. The reason that your question becomes material in the math is this, if it's the nature of the beast, meaning it's not the employer, it's not his direct work culture, but it truly is what they do that they don't love, then I'm going to want money that's readily available much more closer to today, which means that I am taking less risk with my assets and thereby I'm using probably a lower rate of return assumption because of that. If it can be solved with culture and if Lucas talked about maybe going out and getting work, working in something that does light him up, if he's has some degree of certainty on that and he knows that he's going to continue to bring in income for X number of years, then he can invest more aggressively and then use maybe a more robust, still conservative, but more robust rate of return than he would if it just is the nature of the work and he's not sure if he's going to bring in money or not in his new pursuits.

37:34Given that most of his money is invested, on one hand, he wants to have a work optional setup, but given that most money is invested. He's got$40 ,000 in cash. That's an emergency fund. That's a very reasonably sized emergency fund. Beyond that, everything else is in predominantly S &P 500 index funds, is in long-term investments. Lucas, even though you say that your objective is to become work optional, it sounds, based on the asset allocation, like the design of what you're building is, let's optimize for 20 years from now, which is fine. But I'm just making that observation. Well, it's fine until it's not fine.

38:20Right. Which means that all of a sudden he needs to tap the money today. And at the same time, the market's down. And then you start running into sequence of returns issues. Yeah. But Lucas, I mean, two things that he's got going for him. One is that he's in a dual income household, which offsets some of that risk, right? Good point. Because it's unlikely that both of them will lose their jobs simultaneously. Well, unless they decide to willfully do it, right? Right. I mean, if they decide to will, which was my point, Paula, if they decide that they're going to both enjoy time together pursuing whatever the next thing is, then they could do what you're talking about, which is stagger it if one of them enjoys the work more than another one or one wants to get started on whatever they're going to do next, whatever the case may be.

39:03Yeah, it seems to me that it's unlikely that they would both voluntarily quit without reallocating some of their portfolio towards cash and cash equivalents. Sure. Otherwise, it seems to me, given the dual income nature, that they would stagger it because dual income is one of the best defenses against these types of risks. You have that natural diversification in income sources. You have multiple streams of income because you have multiple income earners in the household. Well, and at the very least, if he wasn't considering that, he definitely should be. I don't know, outside of getting granular about how much money he thinks he's going to spend and setting money up according to the way he thinks he's going to spend money, Paula.

39:54I don't know that I have any advice over and above what we've talked about so far. The only other piece of advice that I may have is right now, shovel as much money away as you possibly can. I look at his numbers and they look fantastic. They have nearly half a million dollars in a traditional 401k. Their home is paid off free and clear. They have no debt. They have money in an HSA. They have money in a 529. Their child is very young. And so relative to that child's age, to have$15 ,000 in a 529 already is amazing. That's fantastic. And given that the benefit of a 529 is that tax-deferred money is able to grow and compound, prioritizing that 529 now as early as possible is absolutely the name of the game.

40:51It makes it so much easier later. Right. Just so much easier. Let the market do the heavy lifting. Joe, I agree with you. It seems to me that Lucas is on the right track. I don't see any major changes that he should make other than if at some point in the future, either he or his wife decide that they want to exit out of the work that they're currently doing, then they would need to reallocate their positions accordingly. but assuming that they both plan on continuing to work, then keep on keeping on. The time that I would make a change would be the time that they decide that they have some type of an exit date.

41:30I guess if we're going to get granular at all on where he's saving because he really wanted to know about the taxable brokerage. What's funny, Lucas, is you want to know about the taxable brokerage? I want to know about the tax shelters. And the reason I want to know about the tax shelters is I want to know that I've got those later years taken care of with the money that I've saved there so that I can feel very comfortable about not saving more money into those spots as much while I chase the taxable brokerage more. So I think that's just a good piece of retirement planning software, Paula, and looking at the ages 55 and after, and then comparing that number with what's a good conservative amount of money that the money inside the tax shelters will reach.

42:21And then I know that when I put money toward the taxable brokerage account, that I'm safe to use that money earlier, that it's 100 % flexible. And then I'm not worried about age after 55. I've got that taken care of. And this, again, I think is where the nebulousness of the what is Lucas going to do next really plays into this. because ostensibly you could take everything that I just said, be a little less efficient and just sock money into the taxable brokerage account. Cause now I have it for now or later, right? I've got no restrictions, but knowing that I'm going to need money for later, no matter what, but he's got half a mil in the 401k.

43:07Yeah. My gut says that might be enough. Yeah. That might be, but I don't know what his expense, what his goals are. So I think it's worth, you talked about earlier with Debbie doing just a little bit of math. It's fairly easy. Grab a calculator online and do some pretty simple calculations around retirement expectations. And then give that money the seal of approval that you're good. I also think there's not that much money in the HSA. And if he has the ability to put money in the HSA, that would be great. because no matter what happens, if he needs to spend that money sooner, he can spend it sooner.

43:47If he needs to spend it later, if he doesn't need it, he can save it for later. Exactly. In a way, for me, it's better than taxable brokerage account because you know he's going to need the money for health concerns at some point anyway. Right. Yeah. And I was wondering about that as well. I don't know if they're still eligible to put money in an HSA. When I saw that they only had 10 ,000 in an HSA, my immediate assumption was maybe there was a point in time in which they were eligible to make those contributions. Some legacy thing. Right. Yeah. Maybe five years ago, they had a high deductible health plan that was HSA compatible, but maybe they no longer do.

44:24Sure. Yeah. Well, if that's the case, Lucas, then forget it. Right. But no, Joe, you're right. That was an unstated assumption on my part. So if you are still eligible to make HSA contributions, then absolutely do that. But do not go into a high deductible health plan purely for the sake of getting HSA eligibility. Don't let the HSA eligibility wag the choosing a plan dog. We're going to see how far we can stretch that out. Don't let the make a podcast tail wag the financial advice dog. I don't know what that means. And Lucas, I want to commend you on the fact that your investments are allocated along the efficient frontier.

45:09That is a fantastic way of allocating your assets at this juncture. So assuming that you and your wife will continue to work, it sounds as though you're doing everything right. So keep on keeping on. Oh, and speaking of efficient frontier. Right. Oh. So Lucas, thank you for the question and congratulations. And Joe, to your point, speaking of the efficient Frontier. We're going to have a discussion about that next. This Friday, the NBA on Prime tips off with their debut doubleheader. First up, Boston brings the action to the Garden as the Celtics face the New York Knicks. Then out west, it's a battle of the superpowers as the Lakers try to poster the relentless pace of the Minnesota Timberwolves.

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47:26Our final question today, which is about the efficient frontier, comes from Grant. Hi, Paula and Joe. My name is Grant and I've been a longtime listener. I really love all of your practical content. I have a question, though, on the efficient frontier. In listening to a lot of these past episodes, I can't help but feel like there's a whole lot of cherry picking and timing the market being implied in the way you and Joe are talking about it. specifically the number 1970 keeps coming up or I should say the date 1970 comes up and that just has red flags written all over it because for so long you all have cautioned all of us investors against thinking about a specific time frame as an arbitrary date from which somebody is going to pick their returns in this case why 54 years what is so significant about 1970?

48:31What happens if you go back to, say, 1965 or earlier? I know some of this is probably the limitations of the tools, but I would really love to hear your perspective on these things and justify it in a better way so I can help understand the efficient frontier more effectively. Thank you, and keep creating all the great content. Yeah. Grant, fantastic question. Thank you so much for the question. And I'm going to tease Grant just a little bit, Paula, by saying that, Grant, I get a nickel every time somebody uses Efficient Frontier and you're on to me. I was trying to manipulate all the data. Damn it.

49:13Your little Efficient Frontier affiliate graft. That's right. We were going to see how long we could pull this over. You're actually part owner of Portfolio Visualizer, Joe. Is that? It is so. And why did I have to say on those training sessions to go with the free part and not click that big button? Oh, foiled again. What was I thinking? And actually, Grant, I know you're not the only one that wonders that question. And when I was a financial planner, I worked with a bunch of engineers and I love your spidey sense, right? I love the fact that you're going, wait a minute. Why is he worried about 52 years?

49:52Why is he talking about, which is by the way, because the timeframe was 1970 to 2022 on that material. So why that? There's actually a very simple answer, Grant, and everybody else who's wondering this, which is when I went looking for this data, when I went looking for the fact that I knew that VTSAX and VTI were not efficient and that you could be more efficient. I wanted data that proved it. And so when I went diving into data banks, a guy that does a ton of data around this was Paul Merriman and Chris Peterson. And they run a nonprofit foundation to teach people financial literacy. So I've known Paul Merriman for a long time.

50:45I don't distrust Paul Merriman's motives. Also, Paul Merriman's repute in this community. Imagine if he were making all this stuff up. And plus, you can look at the different portfolios that he has worked through in all of his writing. And it's not all 52 years. I just cherry picked that one only to make the point to VTSAX devotees who misunderstood what JL Collins was actually saying because he wasn't saying it was efficient. He wasn't saying it was the best way. He was saying, you don't need to be neurotic about which investment to pick when you start out, pick the total stock market and you're going to be okay.

51:32And so my goal was simply to show devotees the Paul Merriman work. And it just happens that it was 52 years. Now that's not the only piece that he has, by the way, Paula, you can go into any of Merriman's huge stack of research and they have all kinds of stuff. I just focused on that one because it made the very simple point that I was trying to make. And my goal with the efficient frontier, by the way, and you know what, whether you use it or not is completely up to you. My goal was just to show our community that if you get a little bit more scientific and look under the hood, A, it's not as hard as the words efficient frontier sound like.

52:12And B, it's fairly easy to see why this won a Nobel prize. Just the fact that you can go back to any timeframe, you can go back just 10 years, look at four different asset classes and say, put these in a pile in the most efficient way over the last 10 years and it'll do it. You can exclude, you can include, you can go 52 years, you can go 26 years, you can go whatever by understanding and knowing what you have and having that money based on your goal. I think the big thing that happens then is when bad things happen in the market. And listen, every single strategy has an Achilles heel. There isn't one that has one.

52:53If you think you have a strategy that doesn't have an Achilles heel, you don't understand your strategy because there isn't one. So understanding in the case of the efficient frontier, what the volatility is on your portfolio and why you placed it with the way you placed it does the most miraculous thing I can say as a former financial planner, and that is you don't enter the nuclear codes and blow up your plan the second something bad happens. That truly is what I'm looking at. Now, to a second piece of this that I also want to comment on, I don't love the Portfolio Visualizer Tool grant specifically for what you talked about.

53:33Because if I put every asset class in there, I don't know why some of these asset classes, they only have like six years of data. I have to then exclude that asset class because this particular tool doesn't have that. And if that drives you crazy, I'm with you. I'm totally with you. I want to see 52 years. I want to see 50 years. I want to see 42 years. I want to see 40 years. I can't even look back at all Merriman's stuff using this particular tool because the tool isn't robust enough to dive completely into Merriman's research from the early years. I just know when I look at his data that I can check and knowing again, he and Chris Peterson and the work that they do, that that's been fact checked a thousand percent.

54:16Their goal is for people to have more money. I know that's an unsatisfying answer. I know that that's not what you're looking for. What you're hoping, I think, is that I'll show you 51 years of data, 50 years of data, 49 years data, 48 years data, 47 years data, and print out all the different years. and here's how volatility would have expected it. I mean, Paula, maybe we can do almost like we did with Money with Katie and have Chris Peterson or Paul join us for a discussion about their research. You know, I've spent quite a bit of time digging through the enormous trove of data on Paul Merriman's website.

54:53If you look at our YouTube video in which we interviewed Paul Merriman, and we'll link to that in the show notes as well. We on the YouTube video showed some tables, some charts from some elements of his research that we were able to find after hours and hours and hours of looking through all of his data. But he has so many tables and so many charts and such robust data on his site, that it honestly takes an enormous degree of focus and an enormous degree of expertise just to understand how to read the data that he has produced, how to read the research that he has produced. Yeah. In a way, I feel bad because I picked this particular piece of research when to your point, Paul, there's countless stuff.

55:47Now, why the one I picked happens to be 52 years and not just 50 years? That's a question for Paul and Chris that I have not asked. But I can tell you the reason that I picked it. The reason I like this study is it kind of shows Merriman and Peterson retooling and going, okay, let's see if we go from 10 funds to only four. Oh, we accidentally made more money. Let's see if we go from those four funds being worldwide and US to just US. Oh, we made more money. Let's see if we go. Well, it looks like value was, has been closer to being more efficient in what we're looking for. Let's see if we skew more toward value.

56:31And you can see then Paula, them tweaking and tweaking and tweaking, which is why I like that specific piece of research because it shows, Hmm, what if we did this? What if we did this? What if we did this? What if we do this? Now, the fact that that's coupled with 52 years, I don't know. So the question that I have, Joe, is as I listen to your answer, if I were a college professor whose job was to deconstruct an argument, the first thing I would do is I would pull out anything within your answer that says Paul Merriman has a great reputation in this community. Paul Merriman is a trusted source.

57:08Like, okay, let's remove that, right? Let's make this identity agnostic so that it is not a referendum on any given individual. Let's also remove the component in which we talk about the fact that it won a Nobel Prize. The research, not Paul Merriman himself, but the research around the efficient frontier from Harry Markowitz won a Nobel Prize. Let's pull that out as well, right? Let's pull out any appeal to authority as a corroborating construct. And let's look in an isolated way purely at the data. The question then that I have is, is there some type of tool or method that Grant or any average individual could use in order to replicate this research on their own?

57:59Because in the scientific method, a thing is proven if it's replicatable? Your answer is this. It is out there. I don't know where to find it for a person who is not a professional. What is the distinction between tools available to professionals versus tools available to lay people? Because the tools available to lay people don't go back that far, and I have no idea why. Not every asset class goes back that far. So my problem with replication using Portfolio Visualizer is that for some reason, any of the people that have dug into this, some of the asset classes, they only go back seven, eight years, sometimes even shorter.

58:42And that drives me crazy because there is data for these asset classes, not like somebody came up with these seven years ago. I don't know why Portfolio visualizer stopped. I don't know a better tool when I get to just the basic stuff. I can come fairly close. And I think that a lot of our people in the Ford anything community can as well, but I can't get to the exact stuff because my tool isn't robust enough. I know that when I was a pro, I had access to research a tool that frankly was easier to use. It cracks me up because you'd think it would be the other way around. It was easier to use. It was more intuitive.

59:21It was really fun. It was really fun. Portfolio visualizer was kind of fun. This tool was really fun, but I don't have access to that anymore. Because you're no longer licensed. Essentially, you have to hold a license in order to access. Yes. What was the name of that tool? It was just an efficient frontier tool that was proprietary to American Express and then to Ameriprise. So I don't have that. That piece is frustrating. I think though, diving into the research that's on Merriman's site and then corroborating that with other outside, which there's a ton. You can go to Morningstar. You can go to, you know what I mean?

59:58The year by year. So I can go to a Morningstar chart. I can look at what Merriman inputted and I can make sure those two numbers align. That's actually easy to do and definitely can be done. If somebody knows of an available tool, because I know we've got some phenomenal money nerds here that I have not been able to find, I would love to hear about other efficient frontier tools that I could go dig into as well. At one point, Paula, I was working with a tech guy on seeing what it would cost to build it myself. There's a quote from Buckminster Fuller in which he says, if you want to teach people a new way of thinking, don't bother trying to teach them.

1:00:41Instead, give them a tool, the use of which will lead to new ways of thinking. And what that tells me is that if a person wants to learn the efficient frontier, the best way to do so is to play with tools that teach the efficient frontier. That is so much more effective than hearing anyone talk about it. Right now, Portfolio Visualizer, despite all of its limitations, is the best tool that I am aware of that the average layperson can access that will help you learn the efficient frontier. And so for any questions that you have around the historical record and how far it goes back, I mean, just really for any questions that you have about the efficient frontier at all, go play with Portfolio Visualizer.

1:01:36Friday night with a beer, just sit down and seriously have some fun messing around with the variables in Portfolio Visualizer. and I think that will show you a lot. But you're right, the limitations, the data set limitations there are frustrating and I don't know of any better tool. You know, this is interesting, Paula. I don't have an answer, so I probably shouldn't say this. But one question, and I've said this before on the show, always ask who, not how. And so I just put it out there, like who are my who's that might know this? I actually know a couple of who's and I'll get back with everyone on a future episode.

1:02:16too. Is this a cliffhanger, Joe? Unintentionally. I should just shut my mouth, but I really, really want to solve this riddle of finding a better tool. And if there is one, then I just thought of a couple of leads that are people I probably should ask before this. All right. Well, stay tuned for a future episode in which we pull the minds of some of our frontieriest friends. So Grant, thank you for the question and have fun playing with Portfolio Visualizer. Joe, we've done it again. All that in one episode. So much. I didn't think we could do it and we did. Oh, we can always do it. We can do anything, just not everything, but anything.

1:03:05Oh, where have I heard that before? It kind of sounds familiar. Joe, where can people find you if they'd like to hear more? You will find me at the Stacking Benjamin show every Monday, Wednesday, Friday. It's a variety show about money. It's meant to be a you can do this show, a confidence boost and hanging out with friends like Paula Pant. And that's on our Friday shows. Monday, we have our Mentor Monday and Wild Wednesday where we have our TikTok minute where we look at some hilariousness on TikTok and we dive into a headline about you and your money and some of the people who might be doing things that might separate you from your money.

1:03:44We've done lately, we've talked about some of the rash of layoffs, Paula, in the tech industry and what happens if you get laid off. What should you have prepared even if you think your job is safe? We talked about a lawsuit against a major brokerage firm where the firm really did everything correctly, quote unquote, by the book and still lost a lawsuit because an older person got scammed and they didn't ask enough questions. Oh, so how do you fight these battles? We take headlines like that one and talk about here's what the standard is. Here's what your advisor should be asking. If you have advisors, here's what you need to do to keep your money safe.

1:04:26So we take different headlines and do things like that at Stacking Benjamins. Amazing. Well, thank you for spending this time with us, Joe. And thanks to all of you for being part of the Afford Anything community. You can chat about this episode with other fellow peers inside of our community by going to affordanything.com slash community. If you enjoyed today's episode, please do three things. First and foremost, share this with your friends, family, neighbors, colleagues, your dog walker, your pet sitter, your barista. Share this with all of the people in your life. Second, subscribe to our newsletter, affordanything.com slash newsletter.

1:05:03It is up and kicking again, and we send amazing stuff there that we do not put anywhere else. So for exclusive content delivered to your inbox for free, affordanything.com slash newsletter. Thank you so much for tuning in. This is the Affording Thing Podcast. I'm Paula Pant. I'm Joe Salcihai. And we'll meet you in the next episode.