How to Build an Investment Strategy for Financial Independence

22:45Doesn't the market know there's a war going on and gas prices are at record highs and yet we still seem to be hitting new all-time highs in the S &P 500. It feels like, holy cow, there's a crash coming right around the corner, right? So I will get this idea in my own head and I'll go to Amy and I'll say, you know what, maybe we should dial back to 70, 30, and maybe we should, you know, we keep 3 % in cash. Maybe we should just double that up to 6 % in cash. Like maybe that would be a good idea. I just want to like, you know, take a little money off the table. This is kind of our insurance policy, right?

23:15Like we have, we already have enough. Like why don't we de-risk a little bit? Right. And Amy will, you know, very confidently say to me, well, yeah, I mean, why don't we take a look at our investor policy statement and see what the investor policy statement says in the asset allocation section. So we'll pull it out, right? And we have it printed up and we have it in Google Docs so we can pull it up electronically or on paper. And she'll say, well, what's it say? And I'll say, well, it says 80 % VTI, 17 % BND, and 3 % cash. And she'll say, well, how much do we have? Can you look and tell me where we are right now?

23:46And I'll say, well, it's about 80 % VTI and maybe we have 17.5 % in BND, let's say, and we have two and a half percent cash. And she's like, well, there you go. Like you said, 3 % cash. So go ahead and sell some of those bonds and plus up our cash position so we can reallocate and get back to the right asset allocation. And obviously it sounds kind of tongue in cheek and kind of funny, but it really does. It's like, well, we put this plan in place seven years ago. We've made some slight tweaks to it over time, but nothing major. And it's like, this document has just helped us stay the course. And once again, to refer back to Morgan's book, The Psychology of money, it's not having the best asset allocation.

24:26It's just having the one that we can stick through over the long term that'll get us there. So I wouldn't argue with you at all if you think that Frank Vasquez's portfolio is the right portfolio for you. I mean, I've considered it. I talked to Frank a bunch at Economy this year. I just think that whatever it is that you go with, the best thing you can do is choose that asset allocation and then just try to stick to it, set it and forget it for the long term. So Bob, life sounds very good on the other side of the investor policy statement. Just refer to your investment policy statement and make your changes.

24:57I think that's what we all aspire to here listening to this podcast. What is the practical advice we can make to actually build that investor policy statement, the investment philosophy and the asset allocation that derives from that as a next step here? And to Mindy's point, maybe if you're feeling bad about things, this could be your first draft. You can just sit on it for a while and call it a draft. I find that that's very helpful to me when I'm trying to do some big project that's going to be very meaningful the rest of my life. It's a simple document, but I'll spit on a draft, bad first draft, get it done.

25:28What's a good template for that or process? Yeah, yeah. That's an interesting question. So I think Charlie Munger would always talk about invert, right? Always invert. So one of the ways that I've thought about doing this for folks that might be in that situation is to just look at it from the bottom up. So start with where you are today. Go look at what your asset allocation is today. Document where you are today. Maybe that matches what you want to have your asset allocation at. Maybe it doesn't, but at least that'll give you a point of reference to see where you've at least felt comfortable to this point in time.

26:05And then once you've looked at that asset allocation, then you can probably derive from that, you know, to your point, Scott, am I a Bogleheads, like two fund or three fund portfolio guy or a simple path to wealth guy? Or am I a Frank Vasquez, you know, guy or Paul Merriman, you know, small crap value kind of guy or what have you. And you can basically say, okay, how did I get to, how did I make the decision to get to the asset allocations that I'm in and then document the upstream? Like here was my thought process here, here are the, you know, whether it's the simple path to wealth or whether it's risk parity radio, like this is the source of my investment philosophy and document what you think that is.

26:46And then that'll give you at least a point of reference to say, okay, here's where I am today. Does that still, do I still feel the same way today? And to Mindy's point, we're in the middle of a war. Maybe that's not a good proxy. Or maybe you can say, you know, if I thought back to a time where I felt like everything was going well in the markets and I was happy with, you know, my asset allocation and everything, where where was my head then, right? When you're kind of saying this is it, you wanna make the decision with a strong intellectual exercise, not an emotional exercise to the best that you can.

27:16I am picking up that you are a very simple Bogle head portfolio, maybe you have the home equity, something like that in there, but your position is very simple, very clean, very pure in the portfolio design space. Is that correct for you? It's correct in terms of the target and you're hitting in on one thing that, you know, when you design your investor policy statement and you've put down your philosophy and you've put a matching asset allocation to it, you know, just be cognizant that that's your target. Of course, for any of the 401ks or 403bs or IRAs, all of your retirement accounts, you could instantly make those changes to your portfolio without any sort of tax implication.

27:56Amy and I had quite a bit of individual stocks before I found the financial independence community. I was like doing horse races between, you know, me picking stocks versus having a couple of different advisors versus having some robo advisors like Wealthfront and Betterment. It was a mess. I had so many different funds, so many different individual stocks. It was kind of crazy. So over the last seven years or eight years, I guess, since we found the simple path to wealth, I've been unwinding a lot of that, but I haven't unwound at all. So while the 80, 17 and three of VTI, BND, and cash is my target.

28:31We still have some individual stocks that have an extremely low cost basis that would be painful to kind of sell in our taxable brokerage account. So another component that we actually have kind of in our other considerations in our investor policy statement is we occasionally do a bunching strategy to give a bunch of that appreciated stock into our donor advised funds. So we just did that last year. We took$35 ,000 worth of, I think it was Oracle and Broadcom stock that had like a$2 ,500 cost basis, but a$35 ,000 market value and put 100 % of that into our donor advised fund. So I didn't have to sell it, pay taxes, and then give the money to charity.

29:13I gave all the money to charity. Of course, the charities get a step up in basis and then you get a nice tax right off the year that you do the bunching strategy. So that's another component where you can unwind some things that might take some time, but you still are maintaining, you know what your target is. You're not matching your target because of tax purposes. Well, I'd put that in the constraints column, right? I have my goals and objectives and I have my constraints. There are also another category I forgot to mention here when I'm setting goals, which is our advantages, right? What are my unique advantages?

29:45And one thing that we've observed pretty overwhelmingly here at Bicker Pockets Money is that a lot of the literature in accumulation and decumulation starts from the assumption that the portfolio is in a Boglehead investment portfolio and ends in a one, two, three fund investment portfolio. And we find that this is overwhelmingly not the case for impractical real life for people because, you Pick any one of these. Each one may be low probability in isolation. But if you talk to 100 people in the fire community, more than 50 of them will have one of such advantage. That could include rental properties.

30:25It could include a side business. It could include a working spouse. It could include a pension or military benefits. It could include an inheritance that's coming. It could include a second home that's used for Airbnb, not quite a rental property, but not quite an investment property. It could include a large stock position. It could include an LP or alternative investment in some kind of syndication or business partnership that they've had there. We find here, at least in BiggerPocketsMoney, those to be overwhelmingly common. And that changes, I think, the way you think about your investor policy statement because that has to work together, right?

30:59It can be very defensible for somebody like you with a relatively simple position. I got to work towards cleaning up a few positions that are not in line with my thesis long term as the tax opportunities come. But we have a very clean framework. I think that it changes meaningfully if you have a$5 ,000 pension coming into play. Now, all of a sudden, you do something different with your portfolio. Or if you have three rental properties that are in various stages of being paid off that have different cash flow components, you're going to assume for that. How do you think about incorporating those into an investor policy statement or whatever they may be?

31:32Yeah, yeah. No, that's a great point, Scott. And I think you're right. There are as many different people that you talk to, even if on the surface they might have the Bogleheads portfolio. Yeah, they might have a pension. They might have a working spouse. Carl always tells me a wife with a job is the best kind of Wi-Fi. That's fantastic. I steal his joke repeatedly all the time. So sometimes I cite them, sometimes I don't. Yeah, obviously, especially in the BiggerPockets community, having investment real estate property is pretty common, right, for a lot of folks that are BiggerPockets listeners.

32:07So yeah, I think you're 100 % correct. I mean, I haven't thought through about this as much because our circumstance is relatively simple in that I don't have any of those special things that you mentioned. The only residential real estate we have is our primary home. And obviously that's not an income producing asset. So it's totally excluded from anything in our investor policy statement. But for those that have investment real estate or have an Airbnb business with, you know, multiple Airbnbs or that kind of thing, I think it is important to have that in there from an asset allocation perspective, because those are assets that do produce income.

32:43And, you know, I think when it comes to, you know, going down the line, thinking about for someone in this community that might say, you know what, I want to retire early, or maybe it's just as simple as I want to retire my wife so she can stay at home with the kids, right? We don't want to be, you know, a two income household anymore. We just want to be a one income household. And how do we do that? Well, it can be done pretty rapidly as you wrote in your book, Scott, with house hacks and doing it with real estate, I think is a fast way because doing it on cash flow, most of the young retirees that I've met have done it primarily through house hacks and residential real estate investments.

33:22So I think as far as your asset allocation would be concerned, I guess you would just document what component, what percentage you're actually investing in real property or businesses, for example, LPs, and then what percentage you have in a paper portfolio. And I know there are some folks in this community that go all the other way. So they're 180 degree opposite of Amy and I, and they have very little, if no paper portfolio at all. And they're just like, nope, I have 38 doors and I'm financially independent on my cashflow every month. And I think that, yeah, it makes sense to document that. I don't know exactly what the mechanics of that look like just because we don't have any residential real estate.

34:04Oh, so I think the big picture where I was going with is, you know, obviously if you want to, if you have an intermediate goal before retiring fully or say just retiring your spouse or going part-time or something like that, you would figure out the cashflow need of how much you need. And cashflow needs are very easy to fill with those income producing assets, like you're saying, like real estate and a little bit more tricky to do with the paper portfolio. I mean, do you use the 4 % rules at 4 %? Is it 4.7? Is it 3.65? I mean, who knows, right? But when you have those cashflow producing assets, I think it might make the exercise even a little bit easier, especially to hit the intermediate goals.

34:40Let me push back on that. So this is wonderful. I think we're now at the edges, at least as far as I can tell, of current thinking for what a good investor policy statement looks like. So here's a challenge with real estate, for example. So there's a very common situation. Suppose you have a$500 ,000 duplex and it's got a$300 ,000 mortgage on it. It produces a small amount of cashflow. It's called 500 bucks a month today and you're about 20 years away from paying it off what do you think about that right that there's a 200 000 equity do you include that in your fire portfolio you have your 500 a month in cash flow that's nothing right uh relatively speaking you need a lot of those to stack up and many people have one two or three of those and that's nice but when that thing is paid off in 20 years you're gonna get you know 40 grand in noi 30 to 40 grand in noi that's a big deal right that makes a big difference in inflation adjusted noi right you stack three of those together.

35:31Now you got 90K or 100K of cashflow. That's very realistic and reasonable to rely on. So you have a ramp with that cashflow from today until it's paid off. That's how things ought to work in a smooth appreciation curve. That's a pretty complex position. I got to think about that in the context of my stock bond portfolio or the pension that may or may not be part of what I'm doing here, my Wi-Fi situation over here, and think about how that all interplays. I think that's the challenge. And I think, you know, this sounds like an ad, I guess, for Boglehead philosophy, because it's so simple and clean for you.

36:04It literally takes just a few, you know, I think many people could get to a very good draft in just a few minutes from that perspective. But I think the reality of many other people who are listening and finding this overwhelming exercise is there's a lot of intellectual work that needs to be done to really defend the position of how you think about these alternatives or the messy realities of the rest of your life in the context of your portfolio. And then how you move from where you are today to where you want to be in a tax advantage way without making mistakes that you really be consequential.

36:34Is that a fair way to frame it? Yeah, I mean, you're definitely hitting it. As you're talking, I'm getting heart palpitations and I'm like, this is why I'm not a real estate investor. The complexities just seem mind boggling to me. I've met significant wealth from this activity set and significant challenges in actually finishing the play to an intellectually pure situation that I can defend and really sit comfortably with for decades. That's the real challenge I'm going through personally with this exercise. Yeah. So I think the way that I would frame it, again, this is as someone that's not an investment or real estate person at all.

37:12But the way I would kind of think about it is, as far as the investor policy statement is concerned, I would just be concerned with kind of documenting what my desire was in terms of how much of my total net worth or of my total investable portfolio, if you will, do I want to have in real estate? Is it 20 % of my portfolio? Is it 50 % of my portfolio? Right? Right. And then as far as the complexities, like to your point of, you know, it's only making$500 in cashflow now, but 20 years from now, it's going to be making a whole lot more when the mortgage is paid off. Then you can use something like Big Earn has a case study spreadsheet where you can actually model out, you know, future income inflows and changes in those over time.

37:54You know, it's funny. I know Big Earn gets kind of a bad rap is kind of like being the Grinch of the fire community. Like it's not 4%, it's 3.5 or, you know, whatever. I think that guy has done really good work, by the way. I think that there's a gift there as well that he's giving to the fire community that's disguised as Grinchiness with all that work. I completely agree with you, Scott. I think, obviously, the guy is brilliant. And the irony is, although he seems to have that reputation as being the Grinch, if you take a look at his backlog of case studies that he's done, almost in every case, he gave whoever it was that was coming to him with their case, he gave them four plus percent withdrawals that of their portfolio for one reason or another, right?

38:38Whether it was, you know, a lot of people just discount social security, for example, like I'm not even going to count it because it won't be there. Well, it probably will be there. Maybe it'll be reduced. Maybe it'll be means tested, but it'll be there when Big Earn goes through and actually is meticulous about documenting every single dollar that's coming into your life. He often finds that people can sustain much higher than that 4 % withdrawal rate or the 3.5 or 3.75, whatever at the current Cape ratio he says it's going to be. So we had the privilege in the last year of talking with the conflicting opinions of the brilliant bigger in Karsten Jeske, Frank Vasquez, and then Ben Felix recently.

39:14And I think learning, it's really powerful learning when you hear these three guys disagree, you know, and Paul Merriman and many others as well in there. And when you hear the different disagreements, these people who are really conducting pretty original thought in these areas have, I think that's where you actually get better as an investor. And then of course, that's, that's the challenge. That's the blocker people have about building these investor policy statements is they're, they're done at now. And I've made, I don't feel ready now to finish this play. And then I got to stick with it for a lifetime.

39:44But I think that's a big psychological barrier that I have. Maybe other people have as well to constructing this thing in a way that you can feel ready to stick with for life. Yeah. Yeah. So give yourself the permission to know that it's not going to be perfect. you know, do the exercises if you're helping, you know, your older relatives actually do theirs, right? And know that your first draft is just your first draft, right? You know, Amy and I have, you know, we've made minor changes to ours every single year. We have, you know, we have a finance meeting every month at the end of every month.

40:14We look at our net worth and our spending. If there was any anomalies this past month, if there's anything big coming up, and then we have a big annual meeting. And at the annual meeting, we re-review the investor policy statement and say, you know, what do we need to tweak or tune? And we may have put some things in kind of the parking lot to talk about like, Hey, do we want to make this change? Do we want to make that change? But we try to make those changes to our investor policy statement just on, you know, our lives changing, like our goals changing. You know, I would encourage, you know, the, the listeners to, you know, obviously if you're getting married, if someone dies, like if your kids are going off to school, when big life events happen, you may need to make changes to your investor policy statement in service of those goals, but we shouldn't be making like changes because the CAPE ratio has hit a new high or, you know, any of the things that I would naturally be like, Oh, you know, it feels like the market's a bit scary right now.

41:05Maybe there's an AI bubble. Maybe we need to go to, you know, cap weighted index instead of, you know, it's like, or get out of cap weighted index. I was like, what do we, so yeah, I would give yourself the permission to know that your first draft's not going to be perfect and know that you can make changes to it over time. And having it done is better than having it perfect anyway.

41:23Mindy Jensen:I love that so much, Bob. In the beginning of the show, Scott was talking about the different nuances and the different segments that we put into the investor policy statement. One of them was called other conditions, which is probably super helpful, but not super descriptive. What are some of the things that go into the other considerations section of your investor policy statement? I got this from Leif Dahlien. So Physician on Fire is the one with the other bucket. Because I was like, same thing. I'm like, well, what's the other? It seems kind of random. And he's like, well, everybody's going to have these kind of one-off things that are important for them, whether they be constraints like Scott's talked about, right?

41:59Where you want to kind of document what those constraints are. Or maybe they are goals, but they're kind of more intermediate goals. You're not going to put it in the top of your investor policy statement that you're funding your kid's 529 plan of$10 ,000 a year. I don't even know what the limit is. Whatever it is, right? because you want them to go to a good college and you plan on paying for it. But you could put something like that in the other consideration. For Amy and I, for a while, we were doing Roth conversions. And that was kind of in the other considerations area. And now we've actually kind of said, you know what, we're turning off the Roth conversions and we're just doing step up in basis.

42:36So we're doing capital gains harvesting only and no more Roth conversions as of last year. We flip-flopped back and forth on that. So for those that are actually still, say, in accumulation phase, they might be doing something like backdoor Roth contributions, for example, or, you know, it's very specific to you, what you're trying to achieve, and maybe their mini goals or, to Scott's point, constraints that help you kind of hem in what you're doing in your investor policy statement.

43:04Mindy Jensen:Okay. That's really helpful. I think that those are going to be specific to every single person. I mean, the whole thing is specific to every single person, but other considerations come from your goals and objectives. I want to throw out there a link to the BiggerPocketsMoney resource page, which is biggerpocketsmoney.com slash resources. We have a goal setting worksheet that can help you in your goals because sometimes you're like, oh, I want to live a great life. OK, well, what does that mean to you? That actually gets really, really specific. And that would help you fill out your investment policy statement, which will help you then discover your investing philosophy, your asset allocation, your other considerations, blah, blah, blah.

43:45Mindy Jensen:And then last is drawdown strategy. Do you have a quick overview on drawdown strategy, Bob? Maybe back to Scott's point, this is going to be deceptively easy for Amy and I just because of the fact that we're kind of the simple path to wealth or Boglehead style investors. So in our specific case, right, what we do is I play a little bit of, you know, mental accounting tricks on myself. I thought that during the accumulation phase, you're so used to always hitting the buy button that, you know, hitting the sell button was going to be an intellectually easy, but emotionally challenging exercise, right?

44:24Like it's, it just seems like the opposite of what I should be doing. So rather than kind of framing our drawdown strategy as a drawdown strategy, we kind of frame it as just an asset allocation strategy. So we have 80 % in VTI, 17 % in BND, and 3 % in cash. And that 3%, just to be clear, that has nothing to do with like what our withdrawal rate is or anything. Amy and I often have the discussion of, you know, what are we optimizing for whenever we're making a decision? And in this case, the what are we optimizing for question is is we're optimizing for sleeping very well at night. So in our accumulation phase, we always slept really well with like 50 or$60 ,000 in our checking account.

45:04I know Carl sounds like he feels good with$1 ,000 in his checking account. And that would make me crazy. It's like, holy cow, I have no money. Like what's going on here? So this is just one of those things that I could have picked a dollar amount. We could have said 100 grand in cash, whatever. We just picked 3%, right? So in early retirement, just like during our working years, we live on cash, right? So every month we just spend what's in our checking accounts. And on a monthly basis, we move in any interest or dividends that we get in our taxable brokerage account over into our checking accounts.

45:38And then every month I look at our asset allocation. That doesn't mean I make any changes or I plus anything up. We have about half a percent trigger, I'll say. So if we have 3 % cash now, and then I look at the numbers at the end of the month and we're at 2.89%, that's fine, right? But when we get down to about 2.5%, which happens about once a quarter-ish, depending, I will go ahead and sell either bonds or equities. In this case, because the asset location for all of our bonds is in our retirement accounts, we're selling equities every time in our taxable brokerage account just to plus up or reallocate to cash.

46:16And on average, we end up doing that about once a year. and when I say cash, we are keeping the vast majority of that really in a money market fund, a Schwab money market fund that's currently yielding about 3.8 % or so. And that's about it. So it's just a very simple, spend cash, move the interest in dividends monthly. And then once we get to about 2.5 % plus up another half percent by selling whatever we don't want to own. So we're still doing that unwinding I was telling you about. So sometimes we're still selling some of those stocks that we quote unquote don't want to own because they don't fit our asset allocation.

46:52So when it comes to decumulation, I think the framework I would suggest for people to think about is first, remember you have a standard deduction, right? That's$32 ,200 every year. You want to make sure you use all of that, right? Like that's certainly the Roth conversion floor. Then there's long-term capital gains and qualified dividends, which stack on top of that. The biggest constraint that you need to be aware of in early retirement is the Magi cliff for ACA subsidies, right? So that's modified adjusted gross income. When you go above that, you hit a cliff, and that dramatically increases your spending, which requires you to withdraw more, which requires you to pay more taxes, and you get yourself into a circularity problem.

47:30So I would suggest that people bias towards thinking about doing the big moves at the end of the year in 2026 in particular while we're in this situation. So they can control exactly how much income they trigger if you have that capacity. If you have other streams of income like rental income, for example, that's where you got to be more careful because rental income is ordinary income, right? You know, it's offset by depreciation, those types of things. Your cash flow could be higher than your taxable income. But you want to be very thoughtful about what that's going to look like and really have your projections nailed before you do things like Roth conversions to move over these cliffs.

48:05So decumulation is, I think, one of those areas where you can do it yourself. There's a great book on it in Tax Planning to and Through Early Retirement by Sean Mullaney and Cody Garrett, who we've talked to on BiggerPocketsMoney here. But if you start layering in this additional complexity, that's where maybe it's time to think about getting a professional to help you out because you want to be aware of these things, at least in the first year, so you don't put yourself over a cliff or cost yourself 15, 20 grand in additional healthcare subsidies or put yourself into a tax bracket. Or maybe you're thinking about Roth converting aggressively and you go over the net investment income tax threshold.

48:39These are all considerations that are not obvious to you if you haven't been doing this for a while. I'm here to second the tax planning to and through early retirement. That's an excellent book. And actually, that's what got me to change, you know, doing the Roth conversions back to doing the long term capital gains harvesting. My wife and I took Sean out to breakfast at the Bogleheads conference last October and had a detailed conversation with him about it. And he's like, yeah, I had already kind of come to that conclusion. But then once I read his book, him and Cody's book, I was like, yeah, this is this is going to be the right way to go.

49:08which, you know, here's the other thing just to take a giant step back. And because I talked about the Bogleheads Conference, it just popped into my head. You know, Rick Ferry was the host this year. He said something very interesting that I kind of like was it was a bit of an aha moment. He said that, you know, the financial press comes out with, you know, thousands of articles and stories and, you know, rules of thumb and this kind of thing on a daily, weekly, monthly basis. Right. You just have to look at Yahoo Finance or Forbes magazine to see all that. And his point was that in almost none of those things, almost none of those rules of thumb apply to anyone that is sitting in the room.

49:43In this case, it was at the Bogleheads conference. But I would say that to the entire audience that's listening to this podcast, right? All of these rules of thumb are built for the median American, right? And no one that's listening to this podcast or that's in the FI community are the median American. So take that for what it may. But I think it was a great piece of advice from Rick. You said something earlier about how the intellectual work needed to get to a defensible investment philosophy for me with my complex real estate and syndication and alternative assets and, you know, bigger pockets equity and those types of things is just overwhelming to you.

50:20But I'll also say this, I'm 35 and I have great problems in the context of this. And many other people who are listening may have that as well. And that real estate portfolio or that business that greatly complicates this situation relative to Bob's may be what got you to this position or maybe the collection of bets, even if a few of them didn't work out, got you to the position of having this privilege early in life. And now you got to work with those as advantages or weirdo wacky things that change the rules of thumb for you in these situations. I think that's the hard work and that's all the more reason to tackle it.

50:50It's more important probably for me than for a Boglehead's adherent to build one of these investor policy statements, even if it's easier for the Boglehead. Yeah, I think that's a great point, Scott. You know, it's one of the things that I also, you know, take 10 giant steps back, right? We're talking about the challenges of doing this or the problems with kind of figuring this all out. And it's like, man, if only everyone could have these problems, right? Like we have such first world problems in this community. You know what I mean? Like it's, yeah, it's such a good position to be in. So recognizing that, I think it's really great to be in this community and to have these types of problems.

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52:34In 15 years, the mortgage is going to be smaller and the kids are almost launched. So instead of buying one giant 30-year policy you'll overpay for, you stack a few, say a 10-year, a 20-year, and a 30-year layer. So your total coverage steps down as your actual obligations step down. You only pay for what you actually need when you need it. Ethos is a platform that helps you find life insurance 100 % online. You can get a quote in seconds and apply in minutes. There's no medical exam. You just answer a few health questions online. You can get up to$3 million in coverage. Some policies are as low as$30 a month.

53:03That makes building a ladder genuinely fast. Get your free quote at ethos.com slash bpmoney. That's E-T-H-O-S dot com slash bpmoney. Application times may vary and rates may vary. If you can get this done early, I think it will greatly simplify things for you at the end and save you a lot of money and trouble. Because if you don't do this, my position is sprawling, not necessarily because I had an incoherent strategy. I bought rental properties and I invest in stocks. That was it. And I had a couple of other nice boosts that were not really investments, but were boosts to my position here. I know other people who have really created a sprawling hodgepodge portfolio, one opportunistic bet at a time across very different strategies.

53:47And now they've got a real mess to unwind with a couple of big winners that have huge tax hits and that kind of stuff. So that's another situation there. If you can think about the end of mine at the beginning, you can greatly simplify, maybe speed your path there and make this exercise all the more easy at the end. So if you're not at the point where an investment philosophy for drawdown makes sense, maybe that will help you. Thinking about it now may save you a lot of time in five, 10 years when you get there.

54:10Mindy Jensen:Yeah. And perfect example is Bob, who said that when he first retired, he had a bunch of stuff everywhere and he's simplifying it. Would Would you still have owned the assets in your after-tax portfolio if you had had an investor policy statement? Or do you think you might have put those in different types of accounts or just not even had it at all? Yeah. So I think both, Mindy. It's a great point. So there are things that I own that I don't think I shouldn't have been owning at all. There were precious metal funds and stuff like this. And it's like, what are we doing with that? I mean, that's just nonsense, right?

54:43I shouldn't own that at all. But then there was a good chunk of fixed income that was throwing off dividends and interest in my taxable brokerage account when we were at very, both my wife and I were very high earnings years. So we were paying 35 or 37 cents on the dollar for stuff that we should not have had in our taxable brokerage account at all. So yeah, it's an interesting intellectual exercise to think back like what would have been if I knew about the investor policy statement, if I met Leaf 20 years ago, but then I don't want to think

55:16Mindy Jensen:about it because it's like, no, never do that. Look at all the mistakes I have made. Look at how much it costs me. That is an exercise in horribleness. Don't ever do that. And then, you know, like, like, let's say you're building a diversified portfolio. Like there's so many little things that you're going to have to evolve over time, right? Like you put a REIT in your after-tax brokerage account instead of in your retirement account. It doesn't even occur to you to think about, oh, qualified versus unqualified dividends on the distributions for that. So Those things matter, like the REIT should go in the retirement accounts for that reason, right?

55:46Because it's going to be ordinary income to you, not a qualified long-term capital gain or qualified dividend. Those are all these little things that you pick up over the years on this. And that's going to be just a hobby, I guess, across a lifetime, I think, if you want to get good at this, to pick up all of these things and make these decisions for yourself.

56:03Mindy Jensen:Bob, you say you revisit this about every year with your wife. How frequently do you think people should be revisiting their investor policy statement? Do you think once a year is enough, especially if they're just creating it? Or do you think once a year is like too much if they've just created it? Yeah, it's an interesting thought exercise, right? I think that for us, the year has been about the right cadence. And we're doing it, you know, kind of late December, early January, you know, as we're doing all our other like year-end tax planning and kind of, you know, just wrapping up our finances and projecting for next year.

56:40And in most years, I mean, when I say we've changed, like we've changed a couple words here and there, this was a big change for us this year to say, we're not doing Roth conversions anymore. We're only going to do capital gains harvesting in our taxable brokerage account. And that's because the market's gone so crazy that, you know, our basis just keeps getting lower and lower and lower. And we don't want to get to the point where we pretty much have gotten to the point where we don't want to let the tax wag the lifestyle dog, right? So like if we want to spend$120 ,000 a year and to Scott's point earlier, now like taking 120K out of our portfolio is going to push us over the subsidy cliff for, you know, premium tax credits or something like that.

57:22We don't want to say, oh, well, we won't do that trip or we're not going to, we're going to cut back on something because of the tax implications. So in order to kind of try to keep up as best we can with the falling basis relative to the total value in our taxable brokerage account, we're just going to focus on doing the capital gains harvesting going forward and resetting that basis. But yeah, I think annually has been good for us. And I don't think it's one of those documents that you want to change much more than that. Like I said, unless it's your life circumstances are changing that fast, right?

57:53Maybe you have a death in the family and then you have some other major event. Like around those things, it makes sense to revisit and change. But even that, I think I was talking to Mark Troutman about this. You know, there's the mindset that says, you know what, whatever things you don't want to make any changes after a death in the family for like a year or two and make sure that you're clear headed and everything that you're doing after that as well. So I think annually is good. Well, Bob, thank you for sharing all this with us today. This has been really powerful learning exercise. And again, I think that what this shows is the first components of this can be very simple.

58:25if you prescribe to a Bogleheads philosophy or that's most of your portfolio, fairly simple. Once we get into mechanics of actually decumulating, even then there's gonna be a pretty good complexity here. You're gonna have to roll up your sleeves and really figure out what you wanna do and put together a plan. And the consequences are meaningful if you kind of blow it. So be smart about that and put in the work if you're gonna DIY the drawdown piece. And then I think it sounds like you kind of agree with me that this is a vastly harder exercise for a complex portfolio that has lots of alternative assets in it.

58:57And that's a real blocker to getting it done. It probably makes it more important. So I need to do this personally, but it sounds like you're acknowledging the difficulty for the more complex crowd. Yeah, I know. I totally agree with you. And I think that might be one of those things. We don't currently use a financial planner, but I've been considering doing the fee only. I know Jeremy has that Nectarine platform, which is fee only financial advisor. So this might be one of those things where you want to actually pay for professionals' help to go through it. And then, of course, once you have it developed, you can make your little tweaks over time.

59:28But yeah, it's definitely much more difficult for someone like yourself with all the various types of investments that you have than a Bogleheads or Simple Path to Wealth investor like Amy and I are.

59:40Mindy Jensen:But that doesn't mean that complicated financial position holders shouldn't do an investment policy statement. You should absolutely do it. Honestly, you should probably do it more because you have so many complicated things. And maybe doing this investor policy statement will show you that you need to maybe uncomplicate your life. I am also in that position, Bob, where we're like uncomplicating our life as we go. That makes sense. Bob, where can people find out more about you? So I don't really have much of an online presence, but I do post fishing and landscape photos over at my Instagram account at RJ Haynes.

1:00:17Mindy Jensen:Bob lives near an ocean and he goes fishing on the ocean all the time with his dad. And these pictures are really cute. And when he's not fishing, he posts the images of the ocean behind him in his office and remind himself of the ocean, which is steps from your house. Is that right, Bob? Yeah, yeah. We're four houses to the bay and three blocks to the beach. We're super blessed. Yeah. Well, thank you for sharing your wisdom here today, Bob. Really appreciate it. And fantastic discussion. I appreciate the because I'm struggling with this problem in real time right now. And I'm going to use what I've learned from you today.

1:00:48And the biases I had, I think, were in some cases confirmed. In some cases, I need to go back and revisit them about the challenges this is for the non-pure fire Boglehead portfolios. Thank you. Yeah, thank you. Thanks for having me on. This is a lot of fun.

1:01:01Mindy Jensen:Bob, it is always a delight to see you again. Thank you so much for sharing this with us. And we will talk to you soon. Sounds good. Bye, guys. OK, Scott, that was Bob Haynes. And that was fantastic. I heard Bob talking about his investor policy statement a few months ago, and I said, I need to have him on so he can share this with our audience. Because I think you're right. At the beginning of the show, Scott, you said something about only like 0.1 % of all people in the world have an investor policy statement. I think that's being really generous. I don't know anybody besides Bob and Leaf that actually have a statement written down, filled out.

1:01:39Mindy Jensen:And of course, everybody who did day five of the 31 day challenge that we had back in January. It's just something that you know you need and you don't think about. What did you think of Bob's statement since you are still working on your investor policy statement yourself? I think the power of what Bob brings here is here's what good looks like in the context of a simple investor policy statement. And I think simple investor policy statement is doing a lot of work because that comes from a position of a very simple investment philosophy in the Bogleheads community, for example, that is doing essentially all the heavy lifting downstream.

1:02:12It's just a matter of outputs and applying that philosophy as close as possible with the constraints, advantages, or a little bit of mess that is common to most financial positions. If you don't agree with that philosophy where I'm at, that's where I felt validated by Bob, frankly, in terms of there needs to be a lot more work. I also felt jealous of the Bogleheads community, and they're probably laughing at me because of the simplicity that their worldview brings to this exercise.

1:02:37Mindy Jensen:Well, you heard Bob say that he used to have a complicated financial position and he is decomplicating it. You could uncomplicate your financial position too, Scott. I don't know if I think that that presumes that I settle on simple is better, right? Simple is simpler, but what does better mean? I think that's the questions I'm really trying to answer that require a lot of thought and a lot of thinking about while on hikes and such and really doodling on exactly what you're looking for there. I kind of have what I'm looking for from a lifestyle output here, but there are other considerations with the portfolio.

1:03:11And I fear and want to be defensive in certain ways. And what does defensive mean to me? Those are all things that I'm working on with my equities portfolio, for example, that need to be figured out before I can really commit to the rest of my life with this investor policy statement.

1:03:24Mindy Jensen:Well, if you remember what Bob said earlier, he said your asset allocation doesn't have to be perfect. It just has to be something you can stick with. So maybe the all equities portfolio isn't something that is correct for you, Scott Trench, because you have this amazing ability to dive deep into what the Cape Shiller Index is saying it is, and it's too high for your comfort level. Yes, I'm capable of doing a tremendous amount of analytical work to get worse returns than the S &P 500. Just give me all your money. I'll manage it for you, Scott. We'll see. We'll see. Yeah, so far. So yeah, even Scott is struggling with this.

1:04:02Mindy Jensen:So don't feel like, oh, this is really difficult. This is something that will benefit you, especially if you struggle with market downturns, or if you are like Scott and struggle when the market is really high and are expecting a crash. Having an investment philosophy, an investor policy statement that tells you what you're supposed to be doing, that you made, you did it when the market was calm, when you had a clear head, you made this policy statement, and you stick with it. That's the one that's going to be best for you. And I'll tell you right now that the answer, I know, I know portions of this.

1:04:36I know how I think about my rental properties. I've already given the framework on the show today, you know, with the cash flow today, and the escalation over time, what's a reasonable conservative approximation of that. I know what I would value them at today. I know from an equities perspective, I know the answer involves factor tilts for me personally, and that's not a recommendation for other people. But I know it involves some of the stuff that we've heard from Paul Merriman and Frank Vasquez and Ben Felix, all of them are using factor tilts in various parts of their portfolio. That will be part of the answer for me, but how much and whether that changes or evolves over time, those are things I'm still trying to pin down.

1:05:09So I'm not totally lost in this exercise. I'm just struggling with the last bits of nailing it down.

1:05:15Mindy Jensen:Yeah. Well, and it doesn't have to be perfect. It just has to be written down on paper. And then you can iterate as you are having a clear head, having thought about it for a while. You know out of here? Let's do it. Before we do, I want to tell all of our listeners that if you want even more financial independence information, you can hop on over to our website, biggerpocketsmoney.com. Sign up for our newsletter. I send you a newsletter once a week with a couple of articles about different things to think about on your journey to financial independence. And we also have a bunch of templates and calculators and free resources that Scott has been working on, on our resource page, which is biggerpocketsmoney.com slash resources.

1:05:56Mindy Jensen:All right, we will see you on Friday's episode. And that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Middy Jensen. And now you know Bob too. If you've been putting off life insurance, I get it. The old process was miserable. Phone calls with an agent, a nurse coming to your house for a blood draw, then waiting weeks to find out what you'd pay for. That friction is exactly why so many people who should have coverage don't. Here's what I believe. Most BP money listeners need term life, and the right move is to build a ladder. A few term policies of different lengths stack together so your coverage steps down as your mortgage shrinks and your kids get closer to being financially independent or you get closer to hitting your financial independence number.

1:06:37The thing that makes that practical now is Ethos, a platform that helps you find life insurance all 100 % online. Same-day coverage, no medical exam. You just answer a few health questions online. Up to$3 million in coverage. some policies as low as$30 a month. So building a two or three layer ladder that used to take a month of appointments is something you can knock out before your coffee gets cold. Get your free quote at ethos.com slash bpmoney. That is E-T-H-O-S dot com slash bpmoney. Application times may vary and rates may vary.

1:07:08Mindy Jensen:Finding a financial professional who truly understands financial independence isn't easy. That's why Scott and I created the five friendly professionals list. This is a curated network of CXPs and tax professionals who understand the FIRE mindset, early retirement, and wealth building. We're adding more vetted experts all the time. Find someone who speaks your FI language at biggerpocketsmoney.com slash FIPRO. That's biggerpocketsmoney.com slash F-I-P-R-O.