Afford Anything - Ask Paula: How Can I Minimize My Taxes?

Episode Date: April 6, 2022

#374: Andy in Palm Springs wants to create an income stream through a taxable brokerage account. What strategy should he use to minimize the tax impact of withdrawing his gains? Jake wants investment cash flow until he’s eligible for his military pension in 10 years. Should he buy small multifamily properties right now, wait a few years and invest in syndications or should he invest in index funds through taxable accounts? Anonymous is a US Citizen, lives in London, and can’t invest in index funds. How can he invest while reducing his risk? Former financial planner Joe Saul-Sehy and I tackle these questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, any limited resource that you need to manage. There is an opportunity cost to everything, and that opens up two questions. First, what do you value most?

What are your priorities? Second, how do you align your decision-making around that which matters most? Answering these two questions is a lifetime practice, And that's what this podcast is here to explore and facilitate. My name is Paula Pan. I'm the host of the Afford Anything podcast. Every other episode, we answer questions from you, the community.

And my buddy, former financial planner Joe Saul Seahy, is here to answer these questions with me. What's up, Joe? How are you? I am fantastic, fantabulous. You sound fantabulphoric. Tabeloscious. Yes. That almost came out wrong.

But yeah, and so am I. You're in Seattle right now, as of the time that we're recording. I am in Seattle, and I love meeting so many of the afford anything family. It's been great. Everybody asks me over and over what it's like working with the amazing Pallopant. They do not. They totally do. And what do you tell them?

I pinch myself like every three minutes that I get to hang out with you. No, you tell them it's sheer and abject horror. You have no idea. Yes. Well, speaking of sheer and abject horror. Let's hear from Andy. Andy's got a great question. We're kidding, Andy. We're starting with Jake's question, actually. Jake's, all of these questions are the opposite of horror.

These are people who have done some amazing things and are totally on the right track. Jake has no debt, half a million dollars in index funds, an amazing savings rate. He and his wife saved between $90,000 to $100,000 per year on a combined salary of $175,000. I won't spoil any more of his question. I'm just totally impressed by everything that he's achieved. Let's hear his question. This is Jake. Hi, Paula and Joe.

First off, thank you for taking my question, providing all the resources you have through afford anything. My question today revolves around the gap between early retirement and age 59 and a half. My wife and I, ages 29 and 30, currently have about 500,000 in index funds, with about 300 of that in retirement accounts and 200 in a taxable brokerage account. We do not have any debt, we do not own any real estate, and we make about 175,000 combined living in California. I'm in the military and have 10 years left until I'm eligible for the pension. My wife is a nurse. When we move to a different state, I also expect our income to decrease.

based on an 8% return in our current savings rate, about 90 to 100,000 per year, I expect to cross the million dollar mark in about four years. This will become important for later on in the question. Lately, I've been interested in adding real estate to my portfolio to diversify and provide cash flow that is successful. I am currently in the education phase, but I'm considering either getting into small multifamily investing now, or waiting until I'm an accredited investor to invest in syndications. If we do neither and just continue investing in index funds, we will be five before I exit the military, which would be the ultimate goal as long as I can access any necessary funds. I know that all three options will get me there, and none are wrong.

I am just looking for your opinion and guidance through this thought process. Do I start buying rental properties now? Do I wait a few years in investment syndications? Or do I just keep throwing everything into index funds? If taking the latter, at what point do I stop contributing to retirement account, and only use the taxable account so that the funds are easily accessible. Is there a good way to calculate a safe withdrawal rate for the taxable account with a timeline of 20 years to cover the gap to 59 and a half

versus the typical 30 used by the 4% rule? If I have an accurate safe withdrawal rate, I can work backwards to determine how much I need in the account. We currently put 53,000 into retirement accounts through the TSP, a 401k, and two Roth IRAs, and put 36,000 into a taxable account. Thank you for your help. Jake, thanks so much for the question.

And by the way, Paula will verify that as we listen to your question, I just kept going, wow. Wow. Wow. The things you two are doing are phenomenal. It's one thing to make good income, Paula, like Jake and his spouse do. It's another to keep it, right? So many people think the key to success is more and more and more and more money. The key to success is not that.

It's building a wall in the amount that you spend and then making more so you can capture it. Right. And building a good budget and then make more. So congratulations on everything, Jake. But I am very curious, Paula, to hear what you're going to say here because the idea of small multifamily or wait for syndications, that question I definitely have thoughts about. But I really want to hear your thought there when it comes to investing in real estate. Which one of those do you like better? Do the small family now or wait for syndication?

Between the two, I'm a much bigger fan of investing in small multifamily properties. Bam. Yes. Me too. 100%. Even without the now and later, I just think that learning to do this yourself is not that hard. And investing in syndications where somebody else is in charge, maybe a fine idea if you're in the right syndication. but I just don't like it as much just generally.

Exactly. In a syndication deal, you give up what I think is one of the most compelling reasons to go into real estate, which is that real estate investing is a hybrid between making an investment and running a business. And when you are the direct owner of income producing real estate, you get to exercise control over that investment. you're in the driver's seat and you get to make all of the operational choices about how to handle that investment. And that's something that you don't get when you invest in index funds because the underlying companies are going to run how they're going to run. And you also sacrifice that when you invest in syndications or go into crowdfunding or REITs or any of those other incarnations of real estate investing.

And the reason that matters is because when you're in the driver's seat, you have the capacity to improve your returns. That is inside of your locus of control. And so the residual income that you continue to collect throughout the years will be a reflection of the good decisions that you've made. And I think there's something incredibly powerful about that. That being said, Jake, of the three options that you gave, I'm all. I'm also a fan of continuing to invest in index funds. Of those three options, small multifamily, syndications, or continuing with index funds, both small multifamily and continuing to invest in index funds, I think those are my top two for sure. On the other side of this question about timing and when, I kind of like the approach of keeping both of those faucets on together better.

but in terms of knowing how much money is enough, I think the way that I would do that, there are calculators at most of the, well, really all of the really big asset management sites. And I might put Paula the date that he can get at his qualified monies, his money that's trapped inside of an IRA or the TSP, as the date that he does.

in the calculator. Ouch. So that the money runs out. No, just so that the money runs out. He wants to time it so that the money runs out beyond that. So this is kind of like his minimum viable product if he's creating an income stream. What's the minimum viable income stream he needs per year to get there? And then make it so that income stream is enough that it runs out then.

And then obviously he's going to pad it beyond that number. So how much money does he want to live on between now and 59 and a half? and then second, how much of that is not going to be covered by the pension, right? Because he's going to have money, a stream of income coming from there. And then the amount that he needs coming in per year, creating that income stream now until 59.5 and just run it as if that's the amount of time that he's going to, quote, live, even though it's not. And then pat it, pad it substantially beyond that. I think that's how I would look at that without having to get in the weeds too much with a much more complex calculator of, you know, that separates qualified and non-qualified investments. And obviously when he talks about income streams, Paula, the reason he's buying real estate is to create an income stream.

So he'll need to factor in not just the pension. Now that I think about it, he'll also need to factor in what income stream he's getting from that real estate. And whatever number, because he hasn't started yet, whatever number he expects from his real estate, I'm, you know, be conservative. And I might make it a half or a quarter of the number that he expects because especially since he's just an education mode, every real estate investor that I know has some bumps along the way, especially if they take your advice and learn how to, well, no, boy, that went south. that was not what I meant. Oh, that's awesome. Let me finish the, before I insult you,

let me finish that thought. If they take your advice and they actually learn to quote run the company because as you know, when you first run the company, no matter how much great advice you get from Paula Pant, who's amazing,

you still are going to have some bumps in the road with your first property. Absolutely. And that's okay. First property is the training wheels property for sure. Yeah. And Jake, the last thing I'll say about your question about whether to start buying rental properties now, we've already talked about syndication, meh, rental properties versus index funds. What I like about buying rental properties is that it provides some diversification. You already have half a million dollars in index funds. Now you can have another component of your portfolio that's diversified away from index funds. So you'll be able to hold it. both, that would be the advantage to buying rental properties over index funds, overthrowing everything into index funds. The disadvantage, of course, is going to be the amount of time,

energy, mental bandwidth that it would take. So make sure that you're ready for that. Because particularly in the beginning, it's a time-consuming process. It's a process in which you front-load the workload in order to enjoy the residual income for years into the future. So make sure that you're, if you do go into that, you're ready to frontload that workload. So thank you, Jake, for asking that question. We're going to take a quick break for a word from the sponsors who make this show possible. When we come back, we're going to answer a question from Andy in Palm Springs. Andy wants to create an income stream through investments in a taxable brokerage account.

So he asks a question about tax optimization and we answer, by exploring the relationship between tax optimization and investment volatility. Stay tuned for that. Also, later in the show, we talk to a U.S. citizen living in London who is thinking about emulating the index fund experience by directly buying a large number of individual stocks. All of that is coming up right after this. The holidays are right around the corner, and if you're hosting,

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our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments of fifth third better. Our next question comes from Andy. Hey, Paula and Joe, it's Andy from Palm Springs, California. We miss you out here, Joe. I have a question for you two today about taxable accounts. I'm already maxing out my tax-advantaged accounts, and now I want to build a taxable brokerage account that will eventually kick off a decent stream of income for me. That said, I'm wondering if tax-inefficient funds, like bond funds or high-dividend equity funds or even REITs, could ever be a good fit in a taxable account for somebody looking like I am for a stream of income. or would it be smarter to just hold tax-efficient funds in my taxable account and then occasionally

sell off those assets as they appreciate and qualify for long-term capital gains? I hope you two are great and thank you. Andy, thank you so much for calling with that question. My inclination, and Joe, I'm very curious to hear what you think, but my inclination is that your hunch about asset location. is correct. It would be smarter to hold tax-efficient funds in a taxable account and tax-infficient funds in tax-advantaged accounts.

Joe, do you, I'm curious. Do you agree? You know, it's funny. What I think, Paula, is that all three of these scenarios have significant downsides, and it's much more about picking which one your most cost. comfortable with, bonds, reits, or purchasing stocks, a selling stocks off and using a capital gains approach to sell off. So which one of those sell-offs is going to be more attractive was what I was talking about. All three of them have downsides and upsides. And so I think,

I think it's less about which one's best because they all work and much more about understanding what the downsides are of each of those approaches. Ah, okay, you and I are answering kind of different questions. Oh, hey. Yeah, the question that I was addressing was the broader question of, does it make sense to hold tax inefficient funds in a taxable account? And my answer is, if you can avoid doing that, then it's best to avoid doing that. But here's the problem, is that if he makes it more tax efficient and he would draw some more

tax-efficient stuff, and this is, I guess, we are answering the same question, but I think that when you move to more tax-efficient investments, there's a different downside. So you know how Stephen Covey famously said that when you pick up one end of the stick, you also pick up the other. There's another side you pick up and you always want to know what the other side of the stick is. There's another side of the stick. So while he's getting more tax-efficient as an example, the most tax-efficient of these is by owning stocks. However, when you own stocks, you increase the standard deviation, which is the variability of the investment so much that there's the potential. I mean, imagine if you're withdrawing from stocks right now, hugely tax efficient, but also

hella volatile. So you're withdrawing from a much more volatile position, which if we get a significant downturn and he's withdrawing during then, it's the opposite of dollar cost averaging. It will deplete your investments way, way faster, possibly if we get a black swan event. reits, by the way, are in the middle. And when he said something tax and efficient like a reed or a bond, I differentiated those two, Paula, because reeds are hell of more efficient than bonds are. They can spin off also a reet can spin off a dividend check that is very similar to a bond. However, again, the volatility is going to be not as volatile on the day to day as stocks are, but still pretty volatile.

The reason why a reet is more tax efficient than a bond is simply because the way that a reet works, a real estate investment trust is there's a management team that's bought these properties and they will improve these properties. They'll put money into it. And so some of that dividend that you get from a reet is actually classified as a return of principle because of the tax law. So if the reed company uses part of the money that you put into the investment to maybe. put new lighting in whatever the storefront is. Let's say it's a commercial real estate and they put new lighting in. Well, that's a tax break and they pass it on to you. So a re is going to be much more tax efficient than a bond is.

But once again, you've got this volatility on a day-to-day basis, not as much as stocks, but still more than bonds. Bonds are going to be hella inefficient, but depending on the risk of the bond portfolio, going to also be much more sleepy in terms of the return. So you have to be willing to accept a much lower rate of return. So my question back to Andy would be, what rate of return on his portfolio does he need? What's his bar? And then can he make it work with a more tax inefficient approach that also is safer?

Like can he safely do that? Or does he need to mix in more tax inefficient investments, and risk a little more in terms of volatility. I don't know the answer to that. And Joe, what you just said points to the trade-off between tax efficiency and volatility, right? The dynamic relationship between these two. There is, and this is often the case, that when you make something efficient in one area, there's going to be an efficiency in another area.

So you always have to ask yourself, when I go for X, what's the X? thing that comes along with it. And in this case, it definitely is going to be a sliding scale, not exactly the opposite, but very much the opposite, that as you make it more tax efficient, you're also going to make it more volatile, just the way our tax code works. Because capital gains tax, which is what you're going to use when you use a sell-off approach, is going to be way more efficient. But just imagine being, imagine we're drawing from stocks as you and I record this and the war in Ukraine thing has been raging and gas prices up and people worried about inflation right now. There's so much uncertainty in the air and I'm pulling money out of the stock market today.

That's tough. Let's also take a moment to acknowledge the premise behind Andy's question, he's maxing out his tax-advantaged accounts, and he still has more money to invest after that. And that's the money that he's using to build out his taxable brokerage account. So I want to take a moment and give a round of applause for Andy. Steve, can we get a round of applause, please? Because that is amazing to be able to have both the income and the savings rate, the dedication to savings, to max out all of your tax-advantaged accounts. and then keep going.

Big congrats, Andy, for having that savings rate. And for anyone who's listening who at this moment is thinking, geez, I don't earn nearly enough for something like that to be realistic. For me, my message is keep going. Save whatever you can. Notch it up by 1%, and then notch it up by 1% more. look for ways to increase your earnings. This is a dynamic lifetime process. So where you are at this specific moment in time is not where you're going to be two years from today or four years from

today. You know, my book has the same editor that James Clear has. And Nina is absolutely fantastic, but I sometimes feel like the little brother who doesn't do anything while my big brother's the valedictorian. James Clear, by the way, of atomic habits because we get on a call in Nina, who's wonderful, wistfully talks about, oh, James. James is so awesome. It's incredible. And the only reason I bring that up, Paula, is that the comparison is truly the thief of joy. And I love James Clear, and he's such a great guy. And the book is fantastic.

And I'm actually, and I'm mine. And just as you know from meeting him, a heck of a great guy. Absolutely. But I say that because I remember even when I started my podcast and I would think this when people would come into my office when I was a financial planner, they would say, how am I doing versus everybody else? And you hear a story like Andy's or Jakes and you think, oh, this isn't me. I can't get there. don't compare where you are to somebody else. Don't, don't compare. Don't make that comparison. Don't compare your beginning to somebody else's middle, you know.

It was the question I struggled the most with when I was a financial planner. How am I doing versus everybody else? When really all that matters is how you're doing compared to where you were at this time a year ago or two years ago or five or ten years ago. Yeah. And while we're talking about this philosophically, I really love. like that approach, Paula. I have a coach who also says to live in the gain, not the gap. And what that means is to look back at where I was last year, look at where I was five years ago, 10 years ago,

what you just said? But what do we do? We don't do that. We look at the horizon. And we think, how come I'm not closer to the horizon? The horizon, as you know, we're never going to get there. And yet a lot of people live their whole life there. If I just do one more thing, if I do this thing that's that's, I'll finally be happy. I'll finally get there. I'll finally, no, you never will. You have to live in the gain. You cannot live in the gap and be happy. How does that philosophy work if you've regressed, if where you are now is worse than where you were a year ago or two years ago? Do you live in the loss? Live in the loss and not the, well, well, I think number one, you still can't look at the horizon. I mean, I think the horizon's out. So I take that part of,

that philosophy away because looking at the horizon is never helpful it is never you get on a treadmill to nowhere but i think instead of looking at the gain i think what you have to do then is is be kind to yourself that life is about setbacks and you know it's an interesting stat that i see time and again that the time that a true fan of a business is it's not when the business has done everything right from the outset, Paula. It's when the business has really screwed something up and how they save the relationship. That is either the best time for the business or the worst time for the business. So I don't think it's about the setback as much as it's about how you respond. And studies show that you will be a bigger fan of the business, a bigger fan of the restaurant,

on a bigger fan of whatever it is if they respond in a way that makes it right. Everybody knows things go poorly. And to think that in the last year that I'm going to have a time when during a 12-month period that things won't go poorly, I think is not being realistic. Of course, you're going to have sometimes when things go backward. But I think it's how you respond to that. That's the time that you really create meaningful change. What do you think? I'm not your guru. You're the guru here.

I'm not a guru. I take a guru-free philosophy. There are no leaders. We are all looking for answers together. But what do you think? Do you buy what I just said? I think that if you find that you've regressed, whether it's in terms of your finances, your career, your happiness,

your mental health, if you find that you're in a worse place now than you were in previously, the key is not to compare yourself to those earlier, happier or wealthier days, but rather to look at what you've done today to be a little bit better than where you were yesterday. Live in the gain, but make that gain one day at a time. or if need be one hour at a time. I love the Tony Robbins phrase that the past doesn't equal the future, that the second that we make the change right now, we can do something different than we did a moment earlier.

And I think that we think that what we did yesterday is what we have to do tomorrow, that there's this continuity, which if you think about it, that's not really fair to our being fair to ourselves, our ability to create and innovate and do something on a completely different course is something I don't think we appreciate often enough. And the idea that the past is not the future, it works in both directions. A broken past does not necessarily equal a broken future, but an accomplished past does not guarantee a successful future.

you can neither rest on your laurels nor quit before you ever began. Joe, at a meta note, one thing that I love about this podcast is that Andy called in with a question about the tax efficiency of asset location. And we just went there. But that does circle back to us just saying Andy's done a nice job. And these are fantastic questions to have. Absolutely. Absolutely. Jake has done an amazing job as well. Jake, too. Yeah. Nice job. I think we can go three for three.

I think we can. We're going to take one final break for a word from our sponsors. And when we come back, we are going to answer a question from an anonymous caller, a U.S. citizen living in London, who is trying to mimic the index fund experience through some creative methods. Stay tuned. Black Friday is here. IKEA, and the clock is taking on savings you won't want to miss. Join IKEA family for free today and unlock deals on everything from holiday must-haves to cozy at-home essentials,

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Okay, okay. Try the season's hottest flavors from the PC Holiday Insiders Report. Please feast responsibly. Our final question today comes from an anonymous caller and Joe, as you obviously recall, we give every anonymous caller a nickname. We do? We do. I got to tell you when it comes to all this naming stuff, I am tired of carrying that load, Paula.

I'm very, very tight. Look at me. I am exhausted. I know, you look exhausted. From having to do that all the time. Bags under your eyes. It's like the hardest part of the show. Yes.

Beard hair going gray over this. That's the only reason is going gray. It was fine. Yeah, yeah, flicks of gray in the eyebrows even. I'm seeing it. Horrible. Horrible. But I think you need to do it.

You need to help a guy out. All right. So what's his name going to be? Okay, well, he is a U.S. citizen who currently lives and works in London. So he's going to be either William or Harry. Let's go with Harry. So our question comes from Harry. Wait a minute.

Let me do that again. So our final question comes from Harry. Great inflection, Joe. Where'd you learn that? Does that sound like Paula? Yes, that, yeah, exactly. You have that, that inflection, the, that, the pause. Our final question comes from Harry.

Oh, let's hear you do it. It's like, this is fun. This is an imitation of me. Our final question comes from Harry. Oh, man. I never speak like that normal life. I'm never like, I never walk into a Chipotle and go like, I will have. The Steak Burrito.

My meal this evening shall be. But our final question does come from Harry. Hello, Paula. My girlfriend is a big fan of your program and suggested that I reach out. I am a U.S. citizen living and working in London, and I'm a pretty high earner.

Outside of maxing out my 401k each year, however, my income savings is mostly just sitting in a bank account, and I don't know what to do with it. I would like to invest in index funds, but the UK and US tax laws make it functionally impossible for me to invest in index funds or even hedge funds or any other bundle of securities. Also, I'm not sure exactly when I will move back to the U.S., so I'm not really comfortable in purchasing any real estate at this time. The best option for my situation seems to be investing in individual stocks. I know this is risky, but I also know that I can reduce the risk by diversifying,

for example, by investing equally in the top 25 or 50 stocks from the S&P 500. Does this sound like a good move to you? Are there any other good investment opportunities for my situation that I might be missing? Thank you, and I will really look forward to your answer. Harry, thank you for the question. My first question back to you is to question the premise. I am obviously not an expert in UK tax law, but I don't understand why you wouldn't be able to invest in index funds. If that is the case and your premise is correct, then the workaround, given that you can invest in stocks, would be to invest in an ETF because an ETF trades like a stock on the open market.

So an index fund is an index mutual fund. An index fund is a type of mutual fund, which means that the transaction happens once a day rather than in real time. And it trades, the technical trade is different than that of an individual stock, which trades in real time when the market is open. But an ETF, even though an ETF is a fund, an ETF trades like a stock. And so if you can invest in individual stocks, then you should also be able to invest in ETFs. And you can use an ETF or a basket of ETFs as a proxy for index funds. So you can invest in an S&P 500 ETF, for example. Yeah, I also have worked with, and I haven't been a financial planner, Paula, for a while, but I can find nothing that says that he wouldn't be able to at least invest in an ETF, which to your point is substantially the same thing, really, as an index mutual fund.

So I think you should be able to do that. However. Joe, as a financial planner, I assume you worked with clients who lived overseas. Did any of them have restrictions against investing in index funds if they were U.S. citizens? Yes. If they were U.S. citizens that have moved overseas permanently, then there are all kinds of of laws about knowing your client and many firms worry about money laundering. So because of that, a lot of the time, I personally was not able to work with them and their

account transferred to whatever the brokerage firm was that we were using. Right. So finding people that work with expats, if you're working with advisors that know those laws, but still, even in those cases, I would still correspond with those people from time to time. And they were still able to hold those. at the very least, I thought, if for some reason he can't buy them in the United States, he may be able to buy them using the British pound. So he may be able to purchase ETFs locally.

You mean index funds? ETFs or index funds. Let's say that it does include ETF. So he might be able to buy them there. From all of the expats and the people who are geo-arbitraging, the digital nomads, I haven't heard of any restriction stating that. If you're an expat overseas, you couldn't invest in index funds. Yeah, definitely not my area of expertise, but I've never seen it.

Never, never have seen it. So I would love to hear more about that. Which, by the way, brings up a cool philosophical argument, which is, let's just say that he's correct. And he had to build his own diversified approach. As an academic hypothetical? Yes, absolutely. Let's do that because I think that would be fun. This is what money nerds do.

You know, we grab some foamy beverages while everybody else is talking about sports or the latest movie or whatever else. We get together and we like, let's say you had to design your own diversify portfolio. Bartender, two more drinks, please. Because this is going to be a throwdown. Like, how do you do it? What's enough diversification for you? So under this academic hypothetical, we're also going to. assume that you can't invest in

ETFs because that's the real answer. The real answer is get an S&P 500 ETF. Yes. Or get a basket of various broad-based ETFs. So that's the actual answer. But in an imaginary world in which you also couldn't do that and you had to construct this

out of individual stocks, I suppose the question is how many stocks are, quote, unquote enough, I would say at a minimum the stocks that comprise the Dow 30. So the Dow Jones Industrial Average is comprised of 30 stocks. They're referred to as the Dow 30. At a minimum, I would hold those so that you're mimicking the Dow. I think you could actually use less, fewer than that. Really?

I think you could probably get away with doing it with 10. Wow. See, my criticism of what I just said, my criticism of the last words that came out of my own mouth is that even with the Dow 30, number one, that's not that many. And number two, you're very large cap tilted. Yeah. And so if you reduce that number even further, like down to 10, you'd be even more large cap tilted. No, but it doesn't have to be. I mean, if I want diversification, I think I can do it with 10 stocks, but I don't think it has to be large cap. I think then I could put just a couple of small mids, make sure I have maybe three or four multinational companies. So I get some international exposure there. Maybe one that is strictly international, that may be a multinational X, U.S. do that homework. And then, a couple in the midcap area. And I think that I get, I think I get, I would be very interested to see. And this is the kind of stuff that when I had that super powerful software, when I was a financial planner, I would waste hours, Paula, doing this. I would seriously waste hours because then I could compare the volatility of these 10

stocks to the volatility of like VTSAX, the total market portfolio or, you know, whatever. You'd look at it all day. but I think you might be able to do it with 10. So I like the idea of creating, if you were forced to do this with individual stocks, of creating the diversification that comes from mid-cap, small-cap, and international stocks. But I wouldn't do that unless I at least had the Dow 31st represented, which means that there would have to be more than 30 stocks. stocks, maybe 50, let's say, in order to add those other components.

I think then it becomes impossible to monitor and weed, which when you create your own, and by weed, I mean weed your garden, which is what a lot of individual stock investors forget they have to do. Because when you're creating your own index, you know, the index is consistently monitored and they use, they use, I mean, it's all automatic, but they have percentages is based on what percentage of the Dow this actually represents. And that may change from time to time. So you have to do a lot of that manual work yourself. And I think when you get beyond, man, you get beyond 10 to 15, I think that you create a lot of inefficiency and a lot of headaches for yourself. So I couldn't imagine owning 50 individual stocks.

The cognitive overhead would be too high is what you're saying. But I also think, I love that phrase too. Cognitive overhead? No, absolutely. Thank you. Well, because, you know, the visual I get when you say cognitive overhead is like the storm cloud in my brain, right? Because I can't put my arms around what I do with these different things. But I also think that I have to think about weighting. Like I don't think I do, if I do 10 to 15 stocks, I don't think I equal weight them either. I think I have to have a stronger weighting toward those large companies. If I'm going to use fewer of them, make those a little bit oversized and then when I'm putting in my small cap company, it's much more like a little pepper, like a little pepper goes a long way in my soup.

So we definitely come down on different sides there. We do. I see your point about the added workload associated with tending the garden. I think that if you're going to construct a portfolio out of purely individual stocks, which is not something I would ever recommend, that's par for the course for this type of activity. Yeah, because to your point, my portfolio has hell of volatility compared to. If you go down to 15 stocks, you can imagine the bouncing around that's going to do versus the S&P 500 or the Dow. Right, exactly.

But again, this is purely an academic hypothetical because the real answer is invest in broad-based ETFs. We are trained professionals talking about this. Do not try this at home. You're a trained professional. I'm just someone with access to the internet. I used to be a trained professional. We've got one former trained professional and one former journalist. One former financial advisor and one former journalist. That's who you're listening to. Together we make a show. And there it is. Two current entertainers, entertaining ourselves.

Exactly. So thank you, Harry, for asking that question. Enjoy your time in London. Joe, we did it. We are, we're so happy that all three of these questions were great. They were fantastic. Really, really kind of complex questions. A lot of planning questions today, Paula.

Absolutely. And that's what I like. They're big picture, how do I move forward? Questions. Thank you to everyone. listening for being part of this community. If you want to talk to other members of this community, head to Affordanithing.com slash community.

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