Afford Anything - Ask Paula: How to Optimize Your Investments Along the Efficient Frontier (If You Dare!)

Episode Date: May 11, 2022

#380: Matt wants to optimize his portfolio and wants to know if he should invest along the Efficient Frontier – despite the fact that the asset allocation it recommends is absolutely bonkers; it’s wild and risky and tilted like nothing he’s ever seen before. Ionnie just rolled over her Roth IRA and would like to understand how to withdraw her contributions without getting penalized. Anonymous and her spouse are both in the military and about to reach retirement. They have an expensive whole life insurance policy, costing $550 per month, and wonder if they should switch to term life insurance. Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Also – we’re launching a book club!! Each month, we’ll read and discuss a book written by an Afford Anything podcast guest, starting with Morgan Housel, James Clear, Ken Honda, and Dr. Susan David. Sign up here. P.P.S. Got a question? Leave it here. For more information, visit the show notes at https://affordanything.com/episode380 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. Saying yes to something implicitly carries an opportunity cost, and that opens up two questions. First, what matters most? And second, how do you align your decision-making around that which matters most? Answering those two questions is a lifetime practice, and that's what this podcast is here to explore. My name is Paula Pan. I'm the host of the Afford Anything podcast. Every other

episode, we answer questions from you. And my buddy, Joe Sal Cahy, former financial advisor, joins me to answer these questions. What's up, Joe? What's happening, Paula? As of the time that we're recording this, you are on the road. You're still on book tour. I recently came back home after going to five cities with you. We went to five cities in six days. That was... Was that fun or what? That was awesome. So Boston, New York, D.E. see Philly and Baltimore. We're meeting so many nice people. And, you know, we've said this to the people that have come out to see us.

And I don't think we can say it enough, Paula, that, you know, you and I sit here and it's the two of us with Joffrey, your turtle, swimming in the background. But that's pretty much it. It's kind of a, I won't say it's lonely, but it is just you and me. And to realize there's other people on the other side of this is very, I'd just say, I have a heart full of gratitude right now. Yeah, absolutely. I described it to one of my friends as reinvigorating. Yes.

To be there in person to meet those of you who are listening, to look you in the eye, to shake your hand, to give you a hug, to hear your stories. There's nothing that compares to that. That's the reason that we stretch ourselves thin, going to all these different cities. It's to have those moments where we connect, face-to-face, I-R-L. Absolutely. Whether it's snowing, speaking to you, Philadelphia, isn't it always sunny in Philadelphia? That's what they claim, but it was an outdoor event and it definitely started like flurrying a little bit. Still great, but the chicken pot pie afterwards was that much more heartwarming. Exactly, exactly. Speaking of heartwarming.

Oh, nice. Look at you, ninja. that transition, we've got some amazing questions today. An anonymous caller and her spouse have whole life insurance and they're considering switching to term life. But they've been in these policies for a long time and they're also right on the verge of retirement. So is it a good plan? Meanwhile, Matt wants to optimize his investment portfolio and he wants to know if he should

be investing along the efficient frontier. Finally, Ione just rolled over her Roth IRA and would like to understand how to withdraw her contributions without getting penalized. We're going to tackle all of these questions right now, starting with Anonymous Joe, we give every anonymous caller a nickname. Do you have any suggestions for this first one? I just finished the last season of The Marvelous Mrs. Maisel on Amazon video. And I kind of agree with the review that I read just before I gave it my own review, which was no longer marvelous. Now it's the very good, Mrs. Maisel, but no longer marvelous. But I will say that so the first three seasons are amazing.

The fourth season, very uneven, but the last episode was so good. It was so good. It may have been, and isn't this always the case? When a series has an uneven season, there's one episode that almost makes it worth. it. And the last episode was like that. But Mrs. Maisel's name is midge. That's what everybody calls her is midge. So I think it should, I think this should be midge. All right. Well, then our first question comes from midge. Hi, Paula and Joe. Thank you for taking my question. I've been listening to your podcast for almost two years now, and I've learned so much. Thank you. My spouse and I have been

investing since 2002 with a financial advisor. Although we knew it was important to invest and we did so monthly, we were fairly disengaged as neither of us had the time or energy to devote to learning about investing ourselves. However, after discovering the FI community and getting educated, we made the decision to remove all of our financial investments from this particular company, which was charging some pretty impressive fees, and switched to low-cost index funds with Vanguard this year. The reason I'm calling is because we also have a significant amount of whole-life insurance with this company. I've tried to listen to applicable podcast on this issue and do other research, but haven't heard about anyone paying for whole life insurance for close to two decades trying to switch to term.

To give you more background, I am active duty military 39 years old and I will be eligible for a full active duty retirement in three years. My spouse is a military reservist 40 years old and will be eligible for retirement in two years. After our military service, we may continue working or may just retire and travel and do meaningful volunteer work. We have three children all in elementary school and hope to leave them some inheritance. Right now, our total net worth is approximately $1.3 million, and we continue to invest aggressively over 50% of our paychecks every month, maxing out our TSP's, IRAs, and contributing the rest to taxable brokerage accounts and 529s for our children. Combined, we have seven years of our GI bills to pass to our children

for college education. We each also have $400,000 worth of term life insurance through S.G. the military life insurance. Estimating our fine number is complicated, as we're not sure exactly where we will end up when we retire. But with my military retirement, I am estimating we will need approximately $1.3 million to retire, and my spouse's military retirement will be a nice bonus at 60 years old. In total, I have $400,000 in whole life insurance, and my spouse has $550,000 in whole life insurance. Our children each have $50,000 rider policies, which cost $45 total monthly. The cash value of their policies is about $1,500 altogether. My husband and I, we are paying over $550 per month for our whole life insurance separate from our military SGLI, which costs each of us only $25

monthly. The current cash value of my whole life insurance policy is $25,000, and my spouses is $31,000. My question to you is, would you continue to pay for whole life insurance for the duration of your life at a much higher cost, or would you switch to term life insurance and invest the difference? If we switch to term life insurance, should we keep our children's policies? Are there any major tax implications if we do cash out the cash value? Our financial advisor tried to explain the benefits, but I found myself not being able to trust what he was saying because I felt taken advantage of previously with our other investments. Any advice would be appreciate. I truly value your opinions. Thanks so much for what you do. It means a lot. Midge, thank you so much for that question.

First of all, congratulations on everything that you've built and everything you're doing. Thank you and your spouse for your service. And congratulations on building a net worth of 1.3 million. That's incredible. The fact that you are investing over 50% of your paychecks every month. And you're doing this with three children. You are a huge inspiration to everyone who's listening around very smart money management principles. And the fact that you are about to retire or at least could retire if you so chose to do so is a testament to how well you have managed your money consistently over the years.

So huge congratulations to you. In fact, Steve, can we get around? of applause. Now, to your question, first of all, the military SGLI, which costs each of you $25 a month, that sounds fantastic. The other policy, however, in which you're paying more than $550 per month, I agree with your inclination that that may not be worthwhile. It sounds to me as though you have more whole life insurance than you actually need. And what I'm wondering, is if you have the type of policy, and you'll want to check the details on your policy, but there are some whole life policies that will allow you to use the cash value of the policy

to pay the premiums on what will then convert into a term policy. So in other words, the whole life policy can convert into a term policy, and rather than you having to pay anything out of pocket for it, that payment can start coming from the cash value that's been a number. amassed there. And essentially, you'll have the term policy for as long as the cash value on the whole policy covers the term of the term, which, based on the amount that both you and your spouse have, should suffice for as long as you might be concerned about needing some supplemental insurance while your children are still young. So that would be the first approach that I would look into,

And that would sidestep any questions around tax consequences associated with cashing out the cash value. I think this is even more complicated than that, Paula. And actually, by starting from a different standpoint, I think she does herself a big favor before she tries to answer this life insurance question. I think the bigger question is she talked about leaving her kids an inheritance. And I think you really have to know, let's get away from the insurance question. The big question to ask first is what do you want? Because if what she wants is a really big legacy for her kids, then maybe the permanent insurance makes sense.

And I agree that for most people, it doesn't make sense. And in this case, there's probably a, I'm going to say a 7030 that it doesn't make sense. But I wouldn't throw it out now that she has that much money sitting in it in a tax-free position. The money that's inside of that policy right now is tax. tax-free money if she uses it correctly. So I want to be really careful before I give up that tax-advantaged status. I get a little worried about that. I think the first thing is how much life insurance does she really need? And that all starts with what does she want to have happen? When she says she wants to leave an inheritance to her kids, how much money is that?

If I ask her about her community and other things she wants to do, what is that? If one of the two of them pass away where their streams of income going to come from. And then is there even a shortage? And if there isn't a shortage, then do they need life insurance at all? Like, do they feel strong enough about leaving a legacy that they need life insurance if there is no need? And a couple of those, I think we can answer right away. I don't think there's life insurance need on the kids. When you have a net worth as high as their net worth is, you could eliminate those policies. But once again, I want to be careful. And the reason is, if your child has insurance now, which is incredibly cheap because the chance of them passing away is not that much, if you get rid of it now

and your child becomes ineligible for whatever health reason for a life insurance policy in the future, you may be foregoing a benefit that a lot of children's riders and policies have, which is they may be able to convert that to a policy on themselves, later. They might be able to turn it into a full-blown adult policy their own. I don't know how the policy works, but before they cancel that policy, I would just see exactly what that, what that is. The children's rider, of everything that she described, the children's rider seems like the most attractive portion of what she currently has outside of SGLI. Seems like the least attractive to me. Seems like a waste of time to me.

Really? If it were mine, I'd totally, yeah, yeah, she doesn't need insurance on her kids. Insurance for most people's to make up for income they're bringing in. Or to cover burial costs. They have over a million dollar net worth. What's the point of spending that money on a kid when they're not bringing in any cash and they have plenty of cash in the bank? That's a waste. But the thing, if something were to happen to their kids, the parents probably would be sidelined for a little while, right? The grief that the parents would be enduring would sideline the parents. And so the kids aren't bringing in any income.

But if something were to happen to a kid, there would still probably be shockwaves to the parents' ability to be productive. Which is absolutely right. I mean, the time in somebody's life that my client became less predictable was when a loved one passed away. Somebody in the family passed away. They became very unpredictable. You and I have a friend right now who is dealing with some grief.

Right. And some people bury themselves in their work. some people go on an extended leave of absence. I mean, the funny thing is, is I saw people do all kinds of different things. And for some people turn to drugs and alcohol. Sure. Right. Like anything can happen in a situation like that. So a financial planner's job is to base future expectations on what we think you're going to do now. And that became most difficult when people pass away. But that said, Paula, I don't like the acronyms, as you already know. I can't stand all the cute words. But I think they're coast by. I think, I think at this point, they're probably, and we haven't heard about

how many expenses they're going to have in the future, so maybe they're not. Man, if they're not, they are close because to your point, they did a great job of saving. So I'm still wondering what the insurance need would be if they, if a child passed away. The only reason I wouldn't get rid of it is because of this insurability thing. And I know some people that's really important to them. to me, if I've got plenty of money in the bank and my kids have enough money with my term insurance that I have that I can even add to that until my net worth gets high enough. And that's why, by the way, I want to start with what's that legacy look like. When you say you want to leave your kids in inheritance, how much money are we talking about? Because I think that

becomes a huge issue in this whole thing. Now, but to that point, to the fact that they do want to leave their kids in inheritance, so let's look at the cost of that whole life policy. It costs them $550 per month, right? So go to investor.gov. There's a compound interest calculator, starting from zero, starting from an initial investment of $550, one month's contributions, and then amassing a monthly contribution of $550, which is the cost that they are paying for that whole life policy, do that for 40 years at an 8% interest rate, compounding annually. In 40 years, that amounts to $1.7 million. Okay.

And, you know, the value of their whole life policies currently is $950,000 combined. It will grow over time. But I think that based on the calculations from a compound interest calculator, if they were to invest that same $550. Oh, no, no, no, no, no. It's like a half argument. Go for it, Joe. How much of that $550 is cost of insurance? Some portion of it.

Yeah, we don't know. Right. We don't know. Some X portion of it. I think there's some more homework that needs to be done because we do not know. Now, there's a type of policy called a MEC, a modified endowment contract. If we can run that line, if they're running that line, modified endowment contract line, and we're keeping that cost of insurance really low, Paula, they might be putting a lot of money into that cash value.

I don't know. Now, here's the question. Is the cost of a permanent policy more expensive? than the cost of a term insurance policy. Heck yeah, it is. And the reason that cost per thousand is going to be more expensive is because as long as you keep paying, there's a hundred percent chance that you're going to have a death benefit, right?

A term policy is cheaper, not because whole life policies are ripping you off. They're cheaper because the chance that you're going to actually ever get anything back from the insurance company is incredibly small because it gets very expensive by the time the actuarial tables say that you're going to die. But if we're riding that MEC line and if they're using the type of policy that has mutual funds on the inside, I don't know. And I also don't know, by the way, if they just stop contributing to that policy and they reduce that death benefit so it does ride that MEC line. In other words, so we skimmed down the cost of insurance to be really low. Like, I don't know.

My point is there's a hell of a lot of stuff going on. that really that we don't know the answer to. And there is the quick way to just make it easy, Paula, which is your way. If you just want to make it simple, cancel the thing, there you go. If you want to do the right thing, and by the way, doing it simple, maybe 95% of the right thing. But I think there's some more questions to ask. And I like the fact they fired their financial advisor. I do like it.

But my question now is moving your money to Vanguard and index funds is great. But who's got your back now? Like who's got your back? You had a person that helped you save a bunch of money. They did it in a way with big time excessive fees, probably only 80 or 85% correct. They could have done maybe better, right? If they had saved the same amount without the advisor, Vanguard themselves say that that doesn't happen. The people save more money. They put more money. They leave it alone when they have somebody in their corner who says, you sure you want to take that out? So I think there's still some work to be done, but they need to have trustworthy people help them make those moves. Right. And that was a red flag from you when she said that she felt taken advantage of by her advisor. Exactly. So anyway, Paula, my big point was not that getting rid of it is wrong. It's that I think there's a lot more information. And if we were talking about, this is what we're talking about, by the way, with a fairly big amount of money that's sitting in a tax-free spot. But if it were in a Roth IRA and it were in the wrong funds, would we be sitting here saying, hey, rip it out of that Roth IRA?

Rip it out of the Roth IRA. We go, no, whoa, whoa, wait a minute. Let's just look at the fees first. Let's look at the consequences. Let's figure out if that's the best way. When it comes to life insurance, we don't do that. And you know why? Because there's so many rip-off artists in the life insurance industry.

But there also are tax consequences when it comes to this, too, that are similar to. of the Roth. And I don't know what the right strategy is, but I think I want to know those numbers before I just take the money out. For you, how important would it be the question of what percentage of their monthly cost goes into the cash value? Like, is there a dividing line at which the scales tip towards a yes or a no? Like 50%. It isn't a percentage. There is a line that the government has given to life insurance contracts for that money to remain tax-free. And it's called the modified endowment contract, and that is a sliding scale. And so my question would be, how much money am I putting into this versus how much money is max funding it? You know how we got

a max fund number for your 401K? We have a max fund number for life insurance as well. So I want to know, based on my death benefit, what's that max fund number that's going into the cash? I want because, and the reason I want that is because then I'm buying very little life insurance, right? The more money she has in cash, If she's using this correctly, the more money she has in cash, the less life insurance she's buying. As an example, if she is a $100,000 policy and she's a $50,000 cash value, now she's only buying $50,000 of life insurance because $50,000 is going to be a return of her money, where the other $50,000 is going to be on the life insurance company. So she's a $100,000 death benefit is not $100,000 of life insurance money. it's life insurance money plus your cash value equals the death benefit. Given that her cash value is relatively small, as compared to her death benefit, doesn't that indicate that most of the monthly cost is not going towards the cash value?

Look at her age. Permanent life insurance at her young age is still going to be really cheap. So initially, when you set up the policy, if you set it up correctly, you're setting up a policy based on the whole need. that somebody has and maybe that $550 is calibrated so that she's taking best advantage. The quick answer, Paul, is I don't know. I don't know because insurance, even permanent policies, if you start funding them at a young age and if she's had this for a while, she might have a pretty low cost of coverage at this point.

I don't know. I just think there's some more questions to ask before she rips it out. Or if she just wants to keep it easy, I will say, if you just want to make it easy, I will say, If you just want to make it easy, yes, take it out. Take it out. But that legacy question really drives me nuts when it comes to this. I want to leave my kids in inheritance. How badly do you want to do that?

And how guaranteed do you want that inheritance to be? Because the number one way to guarantee somebody gets an inheritance is by buying life insurance. And you can't do that with a term policy, right? If you want to guarantee somebody has a $300,000 inheritance and you spend every dollar of the money that you have yourself, you go buy a $300,000 life insurance policy and name your kid as beneficiary, and they will have a $300,000 inheritance no matter what you spend. So I'm not sure. What should her next steps be?

I think she's got to find out how efficient that is, and that is that modified endowment contract. How efficient is this policy? Now, the way to do that is to get what's called an in-force illustration from the provider. She doesn't have to go to the agent. the insurer, by the way, will tell the agent, but if she's already burnt that candle, if she's already lit that,

who cares what the agent thinks? But call the 1-800 number, ask for an in-force illustration, and ask, how much money can I put in this, the way that it is now, how much money can I fund this with maximum and not have it be a modified endowment contract? Modified endowment contract just means

the Roth IRA part of this, which I think is the lingo that we all understand, right? The tax-ery part of this is no longer Roth IRA-ish. It now is a tax nightmare. So the question is, is how much money can I put in this per month and have it not be a modified endowment contract? If it's any number than what she's putting in it now, then she knows she's using it wrong.

She can also see how efficient it is. As an example, she's putting $550 into this. If they come back and say, 900, she got screwed. and the policy is very inefficient. If they say 560, 570, it's a good chance that cost of insurance per month is low. Another question she can ask is, what is my cost of insurance this month? What was my cost of insurance last month? With a permanent policy, unless it's a whole life policy, if it's a universal, variable

universal, a policy that generally these advisors will use, you can pull it apart and you can see the guts. So ask what is my, what was my cost of insurance last month? So how much money went into my investment last month? Of that 550, how much went into the investment? How much paid for insurance? And then we get the real number because the initial thing that most people think is $550 for insurance. That's crazy. And I know $550 is not what she's paying for insurance. She might be paying $40 for insurance. I don't know. Which for a second, can we talk to everybody else? Yeah, absolutely. See how frustrated I got there? I love it. This is. great radio. That is why you don't buy this crap in the first place. And it's not because it's bad,

Paula. It's because it is confusing. It can be phenomenal. It can be really, really good. It usually isn't because the advisor's being paid a commission to lock you into this thing. They don't care if you use it right or not. It can be fantastic. People as smart as Ed Slot use this type of insurance policy all the time to help people build wealth. It isn't the devil. The devil. The devil is that it just took me 15 minutes to explain all the crap you got to ask to make this work. So the reason you stay away from this is not that it's bad, which is what I hear on the internet all the time. It's bad.

Don't buy it. That's not it. It's complicated. And for most of us, we don't have that one line that midge said. And that one line is, I want to make sure my kids get an inheritance. If she didn't say that and she was just worried about protecting. her family to make sure they had enough income coming in, enough assets to live the rest of their life,

like 95% of the people living this, by term insurance. So much easier. Joe, I've never heard you get so fired up about a topic. Insurance frustrates me. It so frustrates me. But I also enjoy talking about it because so many people use shorthand

in an area where we could do a much better job. But thank you. Thank you, Midge, for asking that question. Yeah, thank you very much. for that question, Midge. What a great planning question. And also, Paula, it shows how we're all different. We're all after different things. And it seems like every week we find that some of the big, straightforward things we hear from some of the biggest voices are not 100% correct. I mean, they're talking to millions of people. So they do things that are 95% correct for 95% of the people.

And it makes sense that they do that. Just often they're not talking specifically to you. One thing I want to go back to, though, that Midge said was early on we hired a financial advisor because we didn't have time or energy to go into this ourselves. I like the idea of delegating, but you can't abdicate this. You have to only have advisors that will make you smarter, which infers one thing, Paula, that you're smart about this. You cannot have a financial advisor and say, hey, take this and then come back six months later and go, hey, hey, you screwed me. People do that all the time. And I think that's the worst relationship that you can have with an advisor.

I think you still have to go to Camp Fi. You know, you still have to listen to the podcast. You still have to, you know, go to the economy conference. You still go to, you surround yourself with people. You read books and listen to podcasts and become a knowledgeable client. Yes. Is what you're saying? All that stuff.

And you're, because your advisor job is to make you smarter. It's not to do the thing that you need to do. I do agree with you're my mutual friend who I'm sure you have at speed dial Susie Orman. You and her BFFs, I know. Totally. Taking shots every weekend. Susie says this is important enough that you need to do it yourself. It is important enough you need to do it yourself.

The area I disagree with Susie is that Susie then says that you should do it yourself and not have advisors. And I think that is horrible. Now, your advisor could be just people around you that really know money, right? And also know you. It can't be people that know money. Don't get me wrong. I think Facebook groups have a place. But I think that taking your questions to a Facebook group doesn't represent an advisor.

An advisor knows you and how you're different. We just answered that question differently for Midge because she gave us a hint that if she took it without that one hint to an online community, they would give her the wrong information. but somebody that knows you, I think, is a super important thing. Of course, you know, you get into certified financial planner, fiduciary, all those checkboxes that we talk about. But even before that, I just think having people that make you smarter is the key to having good success. And that does mean advisors. But I think, Paula, I look at that a little differently than a lot of people do. And I think you make an important distinction when you talk about the difference between delegating and abdicating.

Yeah. That's a beautiful way to phrase it. I've for years have had a more verbose phrasing of that same concept where I've talked about how you can outsource tasks, but you cannot outsource your brain. You can't outsource the actual decision making, only the execution of said decision. And you can get input on those decisions, which is what advice is. An advisor gives you advice, which is input on the decision, but ultimately the decision making is yours. But that's a very long way of saying what you beautifully said in three words. Delegate, don't abdicate.

TM. We got to trademark that. Joe, thank you for all of that insight. Let's take a quick break to hear a word from our sponsors. And when we come back, we will answer Ione's question. Ione just rolled over one Roth IRA into another Roth IRA. and she has some questions about what happens next. We're going to answer her question,

and then after her question, we're going to dive deep into the weeds with a question from Matt about the efficient frontier and the sharp ratio. Stick around. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology, built to evolve with your business.

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Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's done. W-A-Y-F-A-I-R-com. Sale ends December 7th. Our next question comes from Ione. Hey, Paula and Joe, I have a quick question. When you roll over one Roth IRA into another Roth IRA, what becomes the new basis of your contribution and how does your custodian, the financial company,

keep track of the difference between your contribution amounts and your growth? Here is the scenario. I have a Roth IRA at Vanguard, and for the past 10 years, I have contributed $3,000 a year, totaling $30k, and the account is now worth $100k. This year I transferred a Fidelity Roth IRA worth $20k into my Vanguard Roth IRA. At Fidelity, the account was also 10 years old. I contributed 10k and it made 10k. Therefore, the question is, can I pull out 50K from the Vanguard Roth IRA under the assumption that 50K was my contribution the 30 plus the 20 or is my actual contribution only 40k, the 30 plus the 10? When I pull out the contribution only amounts from my Roth IRA, what type of tax form am I looking to receive and what boxes should be checked on that

tax form in order to ensure that I don't get penalized and I don't pay taxes? Assume that I am under 59.5. This question is really to just understand how to withdraw contribution-only amounts from the Roth IRA without getting penalized. Thanks so much in advance. Ione, thank you so much for your question. First of all, congratulations on how much your accounts have grown. You contributed $30,000 into your Roth IRA at Vanguard, and it more than tripled in value. It's now worth $100,000. And that happened in the span of a decade. That's amazing. Great growth. And same thing with Fidelity. you contributed $10,000 and it doubled in the span of the last decade. So huge congrats on all of the growth that you have achieved in both your Vanguard and

your Fidelity Roth IRAs. Now, your question is, you've transferred that Fidelity Roth IRA into the Vanguard Roth IRA, so now they're combined into the same account, and you want to pull out your original contribution. Your original contribution is going to be your cost basis. So, $30,000, which was the amount that you contributed to Vanguard, plus $10,000, the amount that you initially contributed to Fidelity, that's your cost basis on the investments. That's the amount that you can pull out. So your actual contribution is $40,000. The rest is growth. And that holds true, regardless of who the custodian was, at the time in which that growth took place.

Which is also, Paula, why you want to make sure that when you transfer money from one custodian to another, in this case from Fidelity to Vanguard, that you know how much of that money you had put in because once the money leaves Fidelity, it might be difficult for you to go back to Fidelity and figure that out. And even though they may have a record, I would not trust that that record is still going to be there. So I would make sure that whatever my basis had been at Fidelity when I move it to Vanguard, that I keep note of that. And in fact, there is a form whenever you put money into a Roth IRA that you are sent by the provider.

The form number is 5498. And if you just keep your 5498s, as we say in the business, no, I don't know. We don't really say that. You say keep your 5498s in the business? Hey, keep your 5498s to yourself. I've literally never heard anyone say that. Well, then you're not. Hashtag never have I ever.

You are not running in the right circles then, Paula. You want to be in the true tax nerd circles. Then they sent me a 5498. Another round, everybody. But 5498 is what they send you. And to answer the last question, if you do take that distribution, how do you show the IRS? That form number is 8606. So fill out an 8606 and you're good.

Let me hasten to add a disclaimer here that none of this is tax advice, none of this is legal advice, none of this is considered financial advice of any type. This show is for entertainment purposes only. Consider us a comedy show. Consider us the least funny comedy show you've ever heard. And don't regard this as anything other than that. That's my legal disclaimer. Because, you know, when we get to the stage where we are yelling out the numbers of tax forms or, you know, one of her questions. of us which boxes should be checked, that gets dangerously close to a device. And what we have to do in a mass communication medium is provide entertainment and provide general mass education, but we cannot do something that is as specific or that could be construed as a device. And something that's as specific as which form do I fill out, which boxes do I check, that gets dangerously, dangerously close to what might be construed as advice, so I want to make a big disclaimer here that we are not giving advice. This is just a comedy show that you are listening to. Not sure I'm clear about what you're saying, Paula. This is the world's worst comedy podcast show.

We're just cracking jokes about the 8606. I think in the right circles, pretty hilarious, pretty funny. I will also, Ione, zoom out. and question the premise of your question, which is why is it that you want to pull out the contributions, the initial principal contributions that you've made into your Roth IRA? And is there any way that that could be avoided? I don't know the purpose of pulling out the contributions. I don't know any of the story behind it.

And there might be a very, very good reason why you want to do so. But if there is any way to avoid it. doing that so that those initial contributions can stay in your Vanguard Roth IRA and can continue to grow and continue to compound because throughout your life it's always the last doubling. It's always that last compounding that is the most significant. So for as long as you can hang on in order to get that last doubling of your money, the bigger your stack will grow. And if we assume that you're under 59 and a half, that means you've got many decades ahead during which you'll be happy to have a bigger balance if that's possible. And again, I don't know the story behind it. So maybe

this can't be avoided. But if it can be, do everything in your power to keep that money inside the Roth. Let me also take a moment to sing the praises of the Roth IRA and all types of Roth accounts, Roth 401k's also fall under this purview, all of the growth that you enjoy under a Roth account is tax exempt, all dividends, all capital gains, all that growth is tax exempt. And that is one of the most significant tax advantages that the IRS gives us. It is, in my view, heads and tails above any type of tax deferred account. You know, when you get a tax deferred advantage, I mean, great. You get that upfront benefit in the year that you make the contribution, but you are still paying hefty taxes on the back end when it comes time to withdraw that money.

You're paying hefty taxes on all of the growth, the capital gains, the dividends, everything that that account has amassed over decades. And so the value of your portfolio in a tax deferred account is not nearly as big as it seems to be. But in a Roth account, the story is the opposite. In a Roth account, what you see is what you get, thanks to that tax exemption. And so particularly for money that's inside of a Roth account, the longer you can keep it in there, the more you're collecting tax-exempt growth. And that is a very rare and very special type of tax treatment. So thank you, Ione, for asking that question.

And congratulations on all the growth, the double-es-old. of the value of your Fidelity account and the tripling of the value of your Vanguard account, that is a testament to the power of investing over a decade plus and to the strength of the bull market that we've seen and that we will hopefully continue to see. Our final question today comes from Matt, and his question relates to both the efficient frontier and the sharp ratio. before we play his question, Joe, so that the people who are listening are able to understand the question that he's asking, would you like to explain what the efficient frontier is and what the sharp ratio is? I'd like to have this explanation in advance of playing his questions so that everyone is able to understand his question when they hear it asked.

Yeah, it's really great stuff and it is frustrating because, you know what I've found is that the most convoluted things, about the efficient frontier, Paula, is the name. The name makes it seem unapproachable, makes it seem difficult. And certainly, as we'll hear Matt's question, that deciding what to do with the efficient frontier can be hours of entertainment. Actually, actually what the efficient frontier is should be much easier than it was if we just came up with a better name. So here's what happened. A guy named Dr. Harry Markowitz won the Nobel Prize for the Efficient Frontier. And what this means is based on any tax consequence, any time frame, there is historically a most efficient way that you would have reached your goals. Now, we've all heard the phrase the past does not equal

the future. And certainly past results do not indicate future results. But we can learn a ton by looking at the future. And over time, what's also interesting is- You mean by looking at the past? By looking at the past, yes. Or if you're Michael J. Fox and the movie is back to the future, looking at the future. But Paula doesn't even know what that movie is. Oh, no, I did watch, I think I saw both part one and part two. What?

Who are you? What? I know, right? Man. Right. So the way that the efficient frontier works is this. If you take all the different types of investments that are out there, you can plot them. on a grid. And so the x-axis going left to right, the y-axis going up and down, the x-axis represents

on the far left, represents no risk, and on the far right, it represents a lot of risk. So as an example, cash will be the furthest left, and then furthest right will be things like collectibles. And, well, and of the investments that we use a lot of the time, you're going to hear Matt talk about microcap stocks, like these really, really tiny stocks can be incredibly aggressive and all over the place. Those will be on the right. But we also know, and Markowitz proved this when he was working through this, this idea of diminishing returns. We can take more and more risk, but it might not give us more juice. It might not make things better for us. So we show returns on the y-axis from zero at the bottom to high returns on the top. So as an example, a collectible,

might have monster returns, cash will have very low returns. So generally, collectibles will be up and right and cash will be low and left. And if we look at large company stocks as an example, the S&P 500, the Dow Jones Industrial average, that'll be kind of in the middle of that field. Small companies will be further right. So would it be accurate to conceptually state that if you were to draw a diagonal line across this graph, that diagonal line would represent, broadly speaking, a risk-reward spectrum. It does, but what's really cool is that initially, as you're toward the low-risk portfolio, Paula,

low-risk portfolios, that line goes way more north-south. It follows the y-axis a lot. Right. Steep trajectory. Yeah, and it slowly then moves to the right, and then the further you go out when it comes to risk, the more it then barely goes up return-wise. So you can keep taking more and more and more and more risk and not get a lot more return. And it looks, I kind of think about it as the start of the Nike swoosh. The start of the Nike swoosh, that kind of is the way that the efficient frontier looks. Because what happened was, was that Markowitz started looking at different diversification. So if you have all large company stock as an example, if you put some small company stock in that portfolio and some international stocks in those portfolio, there is a good chance that depending on

the percentage of those allocations, you might actually take less risk and expect higher returns than if you just had small companies or international by themselves or even large companies by themselves. Having the three together is better than just having one from a risk standpoint and a return standpoint. If you're 50% bonds, 50% stock versus 30% bonds, 70% stock, how is that going to change? So what happens is, is that when you look at the efficient frontier, you start off with the portfolio you have now and you plot it. And generally speaking, you're not going to be on the efficient frontier. And you look at a couple things. This is what Matt's going to be looking at. He looks at,

If he moves left to that, I want to call it the swoosh now, if he moves left to that line where there's no dots north of that line, it is impossible to have dots north or left of that line. If he moves it to the left, he can get the same returns but take a lot less risk. Or if he's sleeping good at night, he's fine with the amount of risk that he's taking. He can move it straight up to the line, take a similar amount of risk, but get a much higher rate of return historically over his time frame. Right. Where you sit is actually not going to be either one of those, Paula. The first place to start with the efficient frontier is what return do I need? And then historically, what mix of assets got us there. So that's the efficient frontier. And then he talks about, he's going to talk about the sharp ratio next. Right. And before we go into the sharp ratio, just as a clarifying point for everyone listening, the graph of the efficient frontier ascends quickly. It gets vertical in a hurry. and then kind of plateaus a little bit. Yeah, barely goes up. The further out risk-wise you get, it just goes up a tiny, tiny amount later on.

Assuming that you want maximum reward relative to the level of risk, it's right at that point where the vertical starts turning horizontal. It's right around the point of that curve where you get what historically have been the best risk-adjusted rewards. And of course, that being said, asterisk, the way to think about it is, what do I need? Because you don't want to take on more risk than you need to. But if you're looking for the optimized best risk-adjusted reward, it would be right at the point where that graph curves. Well, and a lot of the time, and this is where that's frustrating, is if you look at an efficient frontier graph for a reasonable time frame, let's say a 15-year graph or a 20-year graph of the efficient

frontier, you're going to find that that really starts to move more left, right, than north-south at about the eight and a half to nine percent return mark. Once you get to eight and a half, nine percent return, it really begins to go further right and less up. And there's a lot of investors that think they can do a lot better than that, which also leads back to the same indexing idea, right? Right. The idea of indexing that once we get past eight and a half, nine percent expectation on our

money, you know, now you're. increasingly throwing darts, which is where that risk idea comes in. And that's where the sharp ratio, frankly, comes in. And a couple other measures. He mentioned sharp ratio, but is a way to get there, Paula, just for a second. I want to talk about a couple others that I really like. All right. Go for it.

Because to calculate the sharp ratio, we need to know what standard deviation is. And to keep it really, really simple, I know it's more mathematical than this. But in a normal market, when you look at the number that's the standard deviation, that is on most days, you will find that your position will move, whatever that percentage is, up or down from what you're expected return is. As an example, if we have an investment that we expect to do 8%, and the standard deviation is 14, that means it is perfectly normal for that investment to be at negative 6 sometimes, because it's 8 minus 14. And it's also perfectly normal for that to be at plus 22. So standard deviation shows us what pros call the wiggle.

Nobody calls it the wiggle. Joe calls it the wiggle. But it is the wiggle. It shows you what type of roller coaster you're going to be on. And when I was a planner, I like looking at that to tell people there's going to be times when this is down 6%. And you know what? That is normal. That's what this normally does. And so that is one standard deviation is that number. Now, there's people yelling at their device, that it's more mathematical than that. It certainly is, but I think we're trying to keep this on a beginner level in a normal market if you look at it that way. Another one that I like, and you can look at this if you have mutual funds, is something

called beta. And the beta of a mutual fund is how much it's going to vary against the index it's being compared to. So as an example, if the beta, the index it's compared to is a one, they call, they use the number one to represent that index. So if the index is the S&P 500, and we have a fund that is a mix of the S&P 500 and something else, and it is a bait of 1.1, that is roughly 10% more risk you're taking than the S&P 500. So if it beats the S&P 500, that helps you ask yourself, well, is it beating the S&P 500 because

the market's up? Because if this fund takes 10% more risk, in an up market, it should do better. And also, by the way, if the market's down and it's getting cream versus the S&P 500 and the beta's 1.1, well, I would expect it to get cream more than the S&P 500 because it takes more risk. What Sharp does is tries to put all of this together. So the goal of Sharp is to compare two investments specifically to see if we add something to our portfolio, does it really help with a risk-adjusted return? the equation that we're working is you take the return you think you're going to get and you minus out the what's called the risk-free return. And the risk-free return would be what would I get if I were in cash? And some people might even use a treasury in a normal market as that.

So if I think that I'm going to get eight and a treasury is paying three, my risk-adjusted return is five. So it's going to be the five minus three. and we take that number and we divide it by the standard deviation number that I just said. And essentially what we're coming up with, the number that once again is really around one, a lot of the time it's going to be around one. So if I have a portfolio and it's large company stocks, let's say largely, and my sharp ratio is one, and I add a fund to it, and the new fund makes,

the sharp ratio 0.9, that's a lower sharp ratio. If something has a lower sharp ratio, that means I probably shouldn't add that fund because I'm not getting more risk-adjusted return. I'm getting less. So if the second number, once you've added something to portfolio, gives you a smaller number with the sharp ratio, it means you're not adding any real value. If it makes it 1.1, now we're adding some value when it comes to the returns. Now, you have to be careful.

There's a few things here. Number one is the sharp ratio compares volatility to risk. As you and I know, Paula, there are some investments out there that have other risks outside of just volatility. Right. Exactly. And that's a good distinction to make because a lot of times people use the terms volatility and risk interchangeably when in fact they are separate concepts. Yeah. So if as an example, oil, we're seeing that right now, right?

Oil is subject to other risks on top of it. So even if it makes your sharp ratio look prettier. adding oil is going to add some different risks than just adding S&P 500 fund wood. Right, exactly. And to clarify that, so volatility is the wiggle, as you described earlier. Volatility is standard deviation, whereas risk encapsulates all of the different things that could go wrong. So with oil, for example, oil is subject to not just volatility, but also political risk. as well as many other additional risks. Yes, specific risk, right, that you're investing in one commodity.

There's specific risk there as well, among others, yeah. So you need to use the sharp ratio realizing that there is no measure that you're going to use that's infallible. Just know what the Achilles heel is of the measure before you use it. So that's the sharp ratio. It's really neat. I loved using the sharp ratio when I was, when a client and I, when I was a financial planner and we would discuss adding something to a portfolio,

we would use the sharp ratio to give us a mathematical number to show us if it really is additive. Another thing about the sharp ratio you need to watch out for, you can put something in your portfolio that will lower the return of the portfolio. The portfolio might no longer have the expected return it had, but it'll have a higher sharp ratio, because it's more efficient when it comes to risk.

And if we start off with the end of mind, we start off with this rate of return that we want, we might find that by adding an investment gives it a better sharp ratio, but now we're going to miss on reaching the goal. Because the goal is a particular type of return. Yes. That does not take on more risk than is necessary

in order to achieve said return. And so an improvement in the sharp ratio may be an improvement in performance, but an improvement in performance may not be what's desired because what you desire is to not take on excessive risk beyond what's needed to achieve the returns that you want. Exactly. And the performance that we're talking about is risk adjusted performance specifically. And I'll give you an example.

Let's say that we add, and I'm going to use a type of investment that makes people grown hedge fund. But if it's a really well-run hedge fund that does what hedge funds, hedge funds can do whatever the hell they want to do, which is why I think the term hedge fund's funny. But let's say it does, hedge risk. And it hedges it really, really well. And you have a portfolio now that's performing at an 8% rate of return. You could add a really good hedge fund that increases your sharp ratio, but because the hedge fund's designed to only do 6%, but do it all the time. And that's what it's meant to do. And that's why you buy it is so you can click through 6%, not like a CD, but hopefully

get very, very systematic returns that could increase your sharp ratio and make your expected return, let's say, 7% instead of 8, and now you're not going to reach the goal anymore. Even though the sharp ratio tells you that your portfolio is better. Right, right. On that topic, I was at Burning Man this one time with a mutual friend of ours. We're going to tie the sharp ratio to Burning Man? Of course we are. Tie everything to Burning Man.

Duh. So I was hanging out with a mutual friend of ours who shall remain nameless, but. But this super, super beautiful woman came walking along. And he managed, I was watching him, he managed to throw into conversation at least three times in the first five minutes that he runs a hedge fund. Hey, flex. And I was like, I wasn't saying anything, but internally I was just cracking up because I happened to know that running a hedge fund does not necessarily mean that your investments are even seeking alpha, right? They're not even necessarily beating the index. But most people don't know that.

But it's a cool buzzword that people think just means that you're probably loaded. Exactly. Exactly. And those of us who know better just stand around laughing at you thinking that you are such a poser. Have you seen those, you can buy those fake ATM receipts that show like a huge number. Really? Where you accidentally leave it on the bar. Or you say, oh, oh, hey, let me give you my phone number.

And you write it on the back. And you write it on. And then you go, oh, I'm sorry. That was my receipt from the ATM. And it says, you know, like $6.6 million. Which who would have that in a checking account? Right. Right.

Right. What kind of a loser are you? That's what Paula would say. She'd be like, I'm not dating you. Why do you have 6.6 in a checking account? Inflation's eight and a half, you moron. That's not even FD. DIC insured past the first 250,000.

Immediately eliminated. Exactly. Deal breaker. So that is our explanation of the efficient frontier and the sharp ratio and all of that. And also what not to say when you're at Burning Man. And all of that was the preamble, the precursor to Matt's question. So we are going to take one final break for a word from our sponsors. and when we come back, we're going to answer Matt's question.

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After years of listening, I finally took Joe's advice and looked into the efficient frontier, and I have to say, it created a lot of questions. Currently, my portfolio is pretty simple, 80% VT, S-AX, and 20% Vanguard total U.S. bond market. I went to the website Portfolio Visualizer and plotted my portfolio, along with 23 other asset classes, everything from total U.S. stock to U.S. microcap to international to reeds, as well as a handful of other fixed income assets. What I discovered is that my 80-20 portfolio sits well below the efficient frontier.

The website says that my portfolio has an expected return of 8.5% and a standard deviation of 12%. If I move straight up the Y-axis from my portfolio, the portfolio on the efficient frontier has an expected return of 11% in the same standard deviation. But that portfolio, the one on the efficient frontier, is 46% U.S. microcap, 20% REIT, and 34% long-term treasuries. This asset mix is just so different than any asset allocation I've ever heard you or anyone else talk about. Assuming I'm comfortable with my current level of risk and assuming I don't mind more complexity in my portfolio, should I be thinking about converting my current portfolio to the one on the efficient frontier. As a corollary to this first

question, I'm hopeful that you can say a little bit about the sharp ratio, which seems to come up when you talk about the efficient frontier. I have read that a sharp ratio near one is indicative of a good investment. But along the efficient frontier, it looks like the highest sharp ratios occur in the low risk, low return portion of the chart. How much weight, if any, should we place on a portfolio's sharp ratio. Sorry if this question is a little in the weeds, but you often mention the efficient frontier, and I'd love to hear a little deeper dive. Thanks for all that you both do. I love this question because partly Paula, it shows me, and thanks so much for this question, Matt, but Paula, it shows me a couple things. Number one is just how far right, how much risk

he's taking that is probably unnecessary. Right on the X-axis, you mean? Yeah, yeah. When the efficient Frontier is showing him that he could instead pair microcap stocks with treasuries and reits and think about how those kind of work together or work against it those are pulling hard against each other paula they are pulling hard against each other and he's getting a similar risk level but with with a much higher expected return because of the pops he gets from that microcap i ask a couple things there sometimes when we look at the efficient in front here, we're looking at too long of a time frame. And if he's looking 25 years out, which he probably is here, the reason he gets this

expectation is because of the fact that microcap stocks will pop 100% sometimes or 85%. Well, we couple that with the monster down years that they might have. You invest them mostly in reits and treasuries to balance out this huge wiggle that you're going to get from microcap. And you have something that gives you a lot more jet fuel. but also more certainty with the other things that are in it. So I would say when he's using portfolio visualizer, he might want to back down the number of years that he's looking at

to maybe a 10-year efficient frontier versus a longer time frame. The further out he goes, the more those anomaly years are going to play a role and the more he's going to see something like a microcap in there. Now, the other thing you can do with portfolio visualizer, by the way, is take microcap out. just take it out and go, you know what, this is not something I'm comfortable with. How do I reach the efficient frontier assuming I'm not using microcap and then see what it gives him? And it might end up with something that includes investments that will be more traditional.

What I'd say is this, though, the exciting thing for me is not going further up, meaning getting higher return and taking the same risk. the cool thing for me for Matt is moving left you know and this is what frustrates me about people that just stop at VTSAX I think VTSAX is awesome because VTSAX for people that love and BTSAX or people who don't know is it's the total market index by Vanguard and it looks at buying just a little bit of everything I think Paula it takes out all of the worry of what do I invest in you can get there by owning just everything. You'll get a decent return and you get invested. But I think as that portfolio gets bigger,

I do think what Matt's talking about being on the efficient frontier is exciting because you'll find that VTSAX does not give you the efficient frontier. Now, it doesn't matter when you have $1,000 invested. It's much more important that you put money in and VTSAX is a great place to put money in. but when returns start mattering like fees matter, a lot of people will cut their fees, but they don't get on the efficient frontier. And I think it's a one-two punch. You can do both.

And to when returns start mattering, so this reminds me of the conversation that we had in a previous podcast episode with Nick Majuli, who talks about how if you're at the point in your income and investing journey in which what you can save in a given year exceeds the returns that your investments can make in a given year, then it makes more sense to focus on your contributions. But when you move further along that trajectory, and you're at that point where the returns on your investments exceed any amount that you could reasonably save, that's the point where you might want to transition out of VTSAX, out of the simple path to wealth, and onto a more efficient path to wealth. Yeah, absolutely. The other thing that

Matt can do with portfolio visualizers, he can cap the amount that he has in a certain asset class. So I like you, Matt, think that 46% of your investment in microcap stocks is ridiculous. And I also don't like that much in treasuries. I understand why it's happening. But the reason why that's allowed in portfolio visualizers because that standard deviation is so high. You can cap your microcap at 10%. and that will bring out other asset classes. And what that will also do is bring down the amount of treasuries it puts in the portfolio.

So you'll end up with something that looks like a more standard portfolio. One other thing that frustrates me about a fish and frontier because this is really exciting. And I don't think it's that hard, though, is that the tools that are available to you and I versus available to me when I was an advisor are not where they should be yet. And I think, Paula, though, the reason that I feel like I'm on the forefront of bringing this. up in conversations is because of the fact that it's not as hard as we think it is. And I thought when I was an advisor, it's not as hard as we think it is. And I think there's not tools that are made for consumers out there because nobody's asking this question. And this is a question that advisors have asked for a long time that I think that the average person should be asking. And while

we focus on fees, we're only halfway there. We're only partway there. We can do. We can do much better. So a portfolio visualizer, Matt, you're going to have to play with. You will have to say microcap, cap that at maybe 10%, maybe 20% if you want to get really, really exciting. But I'm much more interested in what rate of return do you need historically? Is it eight and a half? Is it 9% to reach your goals based on where you're going? And I think using a number, this is why you hear advisors talk about what's the return that you want to go for. Start with the return you want to go for and then move your dot over to the efficient frontier. Look at what that mix of assets is. And then it will easily tell you, well, I can keep these things because these are reaching my goal. And then I need to

replace these other things with new stuff to reach the goal that's going to be, in Matt's case, a little less volatile and also maybe give him a little higher return than he's getting now. He can get the best of both worlds, Paula. Less risk and a higher return over time. that's why you talk about moving further to the left on the X-axis. Yeah, left and up. Sorry. Yeah. I feel like we've touched on this in the precursor that we gave to Matt's question, but to the latter part of his question where he asked, should I be looking for a mix of investments that has a sharp ratio of one, despite the fact that those tend to be further to the left of the x-axis and lower on the Y-axis? I think we've sort of touched on that in the precursor.

or when we talked about how what you're not necessarily looking for is a sharp ratio of one, but rather the minimum amount of risk that meets your return objectives. Yeah, great point. And I'm glad you brought that up. The reason why sharp ratios tend to be higher with lower risk, lower return investments, Paul, is because they're more predictable. And the purpose of the sharp ratio, partially if you think about if we see risk as volatility, is to give you a portfolio that's more likely to reach your goals.

Because once you take out that risk-free rate of return and just focus on the risk piece of return, that equation is going to be much easier with low-risk, low-return investments than it is with high-risk, high-return investments. And notice, even now, it's so difficult to discuss risk without conflating it with volatility. I mean, we're almost doing it right here,

despite the fact that we've already established that they are separate concepts. Yeah. But I love the community knowing these terms. Because these are terms when I was a financial planner. I would teach my clients. And sometimes my clients are like, how do you know these and nobody else?

I don't read about these in Money Magazine. And then I would ask my client back. I'm like, but do they seem hard? And they're like, no. And that's why I'm wondering why it's not Money Magazine. Me too. Me too. Because I think more of us should know those three.

We should know standard deviation. We should know beta. and we should know the sharp ratio. If we just kind of a cursory, you don't have to have a PhD in it. Right. But if you just know in a cursory way what those mean,

and especially for me, standard deviation, because man, I would get so freaked out about my investments if I didn't know what the standard deviation was. Right.

It's like the pilot coming on saying we're about to have some bum. Turbulence. Yeah, turbulence in the flight. You know, to know what the turbulence is in the flight, before I invest, I think is great. I think is absolutely fantastic.

Yeah, because sometimes mid-flight, you hit a pocket of air, you ride the wave. And it's almost like, you know, people, you and I both had Annie Duke on the show. We've had other poker pros, but poker pros or anybody starting a business talks about odds, right? And I feel like standard deviation and knowing standard deviation makes me know not just what the odds are of reaching my goal, but makes me also comfortable with what the trajectory of this flight with my money's going to be. So I'm less likely to blow up my own plan, which, by the way, as you know, Paula, is the

biggest risk. The biggest risk is that I pull the plug in something that's completely normal. Oh, you know what? This is supposed to do eight. It's down six. I'm pulling the plug. Come to find out, six is normal. Right.

It's part of the flight plan. So thanks for the question, Matt. And by the way, thanks for letting me get nerdy for a minute. And by the way, between midge and Matt, I got to get nerdy about life insurance, Paula, and I got to get nerdy about the efficient frontier. There isn't, you know, I'm not going to flex about hedge funds. I'm going to flex that I know whole life insurance. You are on fire, Joe. The bad news is that if I said that to somebody at Burning Man back when I was single, that wouldn't pick. Hey, you know, I know whole life insurance of how it works.

Hey, I can explain standard deviation to you. You should associate me with the word beta. You increase my sharp ratio. Is that a good pickup line? There was a, there were a series of tweets going around, like hashtag FinCon pickup lines in honor of this personal finance conference. And the only one that stands out in my mind was, hey, baby, what's your number? 850? it's my credit score.

Three years to five. You know what I think we should do that, Paula? I think we should create a hashtag and people should share their best money pickup lines. All right. What are your best money pickup lines? What's it going to be? Okay, Twitter. Let's see it.

Hashtag money pickup lines. Yes. All right. On that note, Joe, thank you for joining us once again. Thank you for having me again, Paula. in a couple weeks, I'm ending this tour, but we still have some big cities that we're coming to. In a month, I'm taking a month away,

but then June 21st, I'll be in Denver, 22nd, Longmont, 23rd, Salt Lake, 24th, Phoenix, and we're ending the tour with a bang, the 25th of June in Vegas. That's going to be epic. Stackingbedjamins.com slash stacked. If you're in any of those cities and come join me. I think we're going to have a lot of fun. I can't wait. The final five days of the Stack Tour.

Awesome. And congratulations on such an amazing tour and such an amazing book, especially page 13, best page in the book. I like how when people were doing signatures, Emily and I would sign the book in the cities that Emily was in. But Paula, you would sign page 13. I sure did. And I would sign congratulations on finding the book.

best page in the book. Yes. And from the Stacking Benjamin show, Joe's mom's neighbor Doug, my mom's neighbor Doug would sign congratulations on meeting me, which was equally as as apropos. It was great. It's been so fun. And thanks to everybody who came out and met us, it's been just a thrill and a good time. 40 cities, Paula. I might do fewer next time. Oh, you more next time. No. More next time. I might do fewer. I was talking to her, mutual friend, Grant Sabadié, as we recorded us, I was talking to him yesterday. I'm like, how many cities did you do? He goes, he goes, well, I had like 80 events. And I gave him an impolite gesture. Did it involve one of your five fingers? It did. Yes, it did. And he and I had a good

laugh because just when you think that 40's a big number, Mr. Sabati. But then he said he did three events sometimes in a city. He said he didn't think he went to 40 cities. So I don't know if I'd rather do more events, fewer cities, or it was fun. We'll leave it there. Yeah, it was a lot of fun. And meeting you all, hearing your stories, there's nothing that compares to that. It's so reinvigorating and it just so reminds me of why we do this. Yeah. Hey, so we have some super exciting news. We are starting a book club. We've had a ton of amazing guests on this podcast who are authors of great books. We've interviewed them. We've talked about the concepts and ideas in their book, but we have never formally come together as a community and started a book club in which we read books

written by former guests on this podcast. So we're doing that now. We're launching the book club officially as of today. The first book that we're going to be reading is the Psychology of Money by Morgan Housel. Morgan Housel has been a two-time guest on the Afford Anything podcast. He is a brilliant writer and thinker in the world of money and investing. And his book, The Psychology of Money, is absolutely fantastic. So that's the first book that we're going to be reading in our book club this month. So come join. You can talk about the book with me. I'll be right there in the book club with you, commenting on different passages, different paragraphs, different key ideas that have stood out. And of course, you can talk about it with everyone else who's a member of the club. So the

Psychology of Money, that's our selection for this month. We're also going to be reading Atomic Habits by James Clear, Emotional Agility by Dr. Susan David, Happy Money by Ken Honda. If you're a longtime listener of this show, you recognize these names. These are all former guests on the Afford Anything podcast, and we are now launching this book club where we're going to come together as a community, me included, and read and discuss these books. So here's how you sign up.

There are two different ways that you can sign up, and it's kind of confusing. So let me walk you through this. So we are hosting this book club through Fable. Fable is an organization that hosts a lot of different book clubs. For example, LeVar Burton, he's an actor. He was in Star Trek. He has a book club on Fable. Jim Beaver, he's also an actor.

He's on HBO's Deadwood. He also has a book club on Fable. And so basically, you've got two choices. If you download the Fable app and you try to join the Afford Anything Book Club through the app alone, you will be prompted to get a membership that gives you access to all book clubs, like unlimited access to all of the book clubs on Fable. So if that's something that you're interested in, then you can download the Fable app and get unlimited access to all clubs and join Afford Anything's Club as one of them.

But if you're not interested in that, if you want to join only Afford Anything's Book Club, you don't think you want to join any of the other ones, then the way to do that is by using a browser window, like a desktop or a laptop browser window, where you can have the option of joining just one single book club, which is in this case the Afford Anything Book Club. So we are going to put a link in our show notes to the page that you can access on any desktop or laptop browser

that will get you directly to the Afford Anything Book Club. and that will give you the option to sign up just for the Afford Anything Book Club, if that's what you want to do. And then, of course, once you sign up, you can download the app, and you can take part in the conversation through the app, all of that. But just the sign up for a single book club alone, that sign up process, if you only want to join the Afford Anything Book Club, that sign up process specifically has to be done on a browser window.

That's just the way the technology works. So anyway, all of that is to say, I'm very, very excited about this. Look in the show notes for the link to sign up for our book club. I look forward to chatting with you in there about these awesome books written by former guests on this show. So again, the link is in the show notes. That's where you can sign up. And I'm really looking forward to kicking this off with our discussion around the Psychology of Money by Morgan Housel.

So I'll see you in there. Thank you for tuning in. This is the Afford Anything podcast. If you enjoyed today's episode, please do three things. Number one, share it with a friend or a family member. That's the single most important thing that you can do to spread the message of financial literacy of sharp ratios and standard deviation of the efficient frontier. Better life insurance choices. Exactly. Of what to do with your Roth IRA and why the Roth is so great. More people need to know this so that they can know how to manage their money, how to build wealth, how to retire. So share this with someone you love or someone you at least tolerate. And that's the single most important thing that you can do. Number two, open up whatever app you're using to listen to this show and hit the follow button so that you don't miss any of our amazing upcoming episodes. And number three, while you're in there, please leave us a review.

If you want to chat about today's episode with members of the community, head to Afford Anything.com slash community. And to subscribe to the show notes, go to Afford Anything.com slash show notes. My name is Paula Pant. You can find me on Instagram at Paula Pant, P-A-U-L-A-P-A-P-A-N-T, and I will catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the Internet, hear on a podcast, see on social media that relates to finance.

All of this is financial media. That includes the Afford- Anything podcast, this podcast, as well as everything Afford- Anything produces, and financial media is not a regulated industry. There are no licensure requirements. There are no mandatory credentials. There's no oversight board or review board. The financial media, including this show, is fundamentally part of the media. And the media is never a substitute for professional advice.

That means any time you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, tax professionals, certified financial planners or certified financial advisors, always, always, always consult with them before you make any decision. Never use anything in the financial media, and that includes this show, and that includes everything that I say and do, never use the financial media as a substitute for actual, professional advice. All right, there's your disclaimer. Have a great day. Joe, I've never heard you get so fired up about a topic. Insurance frustrates me. It so frustrates me. But I also enjoy

talking about it because so many people use shorthand in an area where we could do a much better job. But thank you. Thank you, Midge, for asking that question. Midge is like, who peed and that dude's Cheerios? And then after her question, we're going to dive deep into the weeds with a question from Matt about the efficient frontier and the sharp ratio. Stick around. That's must-hear fucking radio. Yeah.