Afford Anything - Ask Paula: I’m an Investor Who likes Volatility; What Should I Buy?

Episode Date: December 29, 2020

#292: Three Kids, FI has an all-equities broad stock market index portfolio that he’s held for years. He’s confident he can handle maximum volatility, so what investments can he lean into to that will provide him with great long-term returns? Jordan is a new listener and he has three questions: should he use $100,000 to buy more rental properties or invest in a brokerage account? Should he and his wife upgrade their home and buy a property that’s worth double their current home? And finally, how can self-employed individuals who earn more lower the cost of health insurance? Alex’s wife lost her job due to the pandemic. They live in Washington state and are married filing separately due to his wife’s student loans. Can he use half of his income to qualify her for Roth IRA contributions? Sarah rounds out this episode with a concern: a financial advisor told her that investing in VTSAX over-indexes her in large cap funds and technology stocks. Is this true, and what should she do about it? I answer these four excellent questions on today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode292 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, anything in your life that's a scarce or limited resource. And that opens up two questions. Number one, what matters most to you? Not what does society say should matter, but rather what is genuinely a priority in your

life? Where do you want to direct your extremely limited money, time, and energy? Number two, how do you actually execute that? How do you align your daily and weekly and monthly and yearly goals and subsequent actions to reflect that? Now, answering these two questions is a lifetime practice. And that's what this podcast is here to explore. My name is Paula Pan. I am the host of the Afford Anything podcast.

And today, I am answering the following four questions. Number one, an anonymous caller who is 38 years old with three kids. has noticed that he is very comfortable with stock market volatility. Given this, what investments should he be choosing? Jordan is 28 years old. He and his wife have a two-year-old daughter and two rental properties. He has three questions. Number one, should he invest in another rental property

or should he direct his money towards index funds in a taxable brokerage account? Number two, should he upgrade to a nicer home? And number three, what should you do about health insurance? Alex and his wife have been married for two years. They file taxes separately, and he has some questions about IRA contributions. Finally, Sarah has heard that funds such as VTSAX, the Vanguard Total Stock Market Index Fund, are overweighted in large-cap funds and technology stocks. Is that true?

And if so, what, if anything, should she do about it? We're going to tackle all four of these questions right now, starting with three kids in pursuit of FI. Hello, Paula. If my voice sounds familiar, I have been mistaken for that guy from episode 159, that 36-year-old with three kids hoping for FI. To be clear, I'm not that guy. That guy had no idea what he was doing. I, however, am a 38-year-old with three kids planning towards FI, and unlike that other guy. I've listened to The Amazing Afford Anything, and for some reason, stacking Benjamin's for three years, and our family's financial position has strengthened immeasurably because of it. Context.

We're now non-mortgage debt-free, have an emergency fund, Max Trad-401K, maxed HSA, Max Roth IRA, and it started an online side business last year that is small but growing. We don't believe in fully funding college education, but we do contribute monthly to $3.5.29 to give our kids a head start. While we certainly lean towards the fat-fire side, our 38% savings rate with three kids is something we are proud of. My question.

Some guy with a bag on his head once told Joe that it was easier to handle a downturn when your portfolio was 60k than when it was 600K. I've written in all equities broad stock market index portfolios since I was my young 20s, and I went through the Great Recession without ever touching it, but I always remembered that quote and wondered if I could do it when the numbers got bigger. I know 2020 has been very difficult economically for many,

but we were blessed to have the chance to prove our resolve. For the last decade, whenever I've looked at my portfolio, I wouldn't in my mind take that number and imagine it dropping by 47% and staying there for years, like the Great Recession. That mental exercise was validated when our portfolio, lost and regained $180,000 over the course of three months and I didn't blink an eye. With 15 years as an all-equities investor backed by cash, I now think I've proven to myself

that I can handle the roller coaster and an unconserved volatility. How can I now use this mental surety to maximize my returns? Put another way, if you aren't concerned about volatility at all, what can you lean into that provides the best long-term return? Joe's uncle's new restaurant doesn't count since I prefer an index, so emerging markets? Frontier markets? Reeds? I would rather eat one of those furry house centipedes and sell a lot. on a downtrodden portfolio. So if it's not going to zero and the only concern

is the nausea of the ride, sign me up. Sincerely, Three Kids, FI. Three Kids FI! So awesome to hear from you. I love the 38% savings rate. To have such a high savings rate with three kids is incredible.

In fact, Steve, I think this deserves a round of applause. What do you think? Now, I am thrilled to hear that listening to the Afford Anything podcast and to the Stacking Benjamin's podcast has improved your financial financial life. That's amazing. In my perfect world, in my ideal world, I would have aired this question on an episode that I'm doing with Joe for various scheduling reasons. We couldn't do that. So I would do my best to take the place of that guy with the bag over his head, the character, OG, from the stacking Benjamin's podcast. I will do my very best to channel all of that energy into a conversation about volatility. Because that's fundamentally what your question is about, which is really a topic that I'm excited to kind of deep dive into.

So let's get started. First of all, let's zoom out, discuss what volatility is and is not. Because volatility is one of the most misunderstood concepts in the world of investing. A lot of people use the word volatility as a synonym for risk, but they are separate concepts. Risk is something that exists on multiple dimensions. There's leverage risk. There's industry risk. There's market risk. There are all kinds of different forms of risk. Volatility, specifically, is simply the range of of price changes that a given asset or security experiences over a given period of time. So that fluctuation, that roller coaster ride, that is volatility, which is an aspect of risk. It's sort of related to risk, but it is conceptually different from risk itself.

Now, if the overall market is volatile, that typically means that there's a high volume of trading going on. Hence, the wild price fluctuations. But even at times, when the overall market is or is not volatile, there are also specific assets or asset classes which tend to be more volatile than others. And you were sort of alluding to that in your question when you asked about emerging market funds or frontier market funds, when you asked about what types of more specific investments you should be looking at, given that you are comfortable with volatility. And what's interesting about that question is that I'm going to expand it out because that question could really be taken in two ways. There's the question that

you asked of what assets should you be going into, but then there's also the question of what time frame should you be looking at. And a comfort with volatility could lead you down either of those two rabbit holes. So we're going to explore both of them. First, let's talk about assets. So there are certain sectors in the market that are considered more volatile than others. The way that that is measured is through what the nerds refer to, a standard deviation. And so by looking at the standard deviation of sector-specific indices, we can see which sectors are more volatile than others. So energy is perhaps unsurprisingly the most volatile sector. Over the last decade, it's had standard deviation of around 20% based on returns from the Energy Select Sector Index, a ticker symbol, X-L-E.

The commodity sector has the second highest standard deviation coming in at about 18.5%. And then following that, the financial sector, the tech sector, the consumer discretionary sector, that's the sector that's comprised of all of the things that consumers, ordinary consumers, give up when we need to tighten our belts, things like luxury goods, retail, apparel, hotels, restaurants, leisure. I think you really could have gone through all of 2020 with a bag over your head and still have noticed that that was a sector that got very disrupted. this year, and that typically does get disrupted from time to time and does have high volatility

from time to time, depending on what's going on with employment, depending on whether or not we're in a recession, depending on overall economic factors and how that affects consumer confidence. So energy, commodities, finance, tech, and consumer discretionary, those are the five most volatile sectors as measured by standard deviation over the last decade. And then rounding it out with three more. After that comes communication services, a lot of the last decade. like phone services, wireless communications, cable providers, followed by health care, followed by utilities. Oh, and by the sources that we're using for all of this data and any other data that I provide in this episode, those sources will be linked to in our show notes, and that's

available at afford anything.com slash episode 292. So with that said, those are the eight most volatile sectors, and really you can focus on the top five, five to eight most volatile sectors of the economy. And so when you ask about what can I invest in, if I am comfortable with volatility and I want to invest in a way that recognizes that, well, those are certainly some sector-specific bets that you could place. That being said, the existence of volatility is not necessarily the same thing as a likelihood of higher returns. If you're looking for that likelihood of higher returns, for that I might look at the efficient frontier. So the efficient frontier is an investment portfolio that is, in theory at least,

exists in the most efficient part of that risk-reward spectrum, meaning that it gives you the highest expected return relative to that same standard deviation, that same level of volatility. So it's possible that if in theory you wanted to construct a high volatility portfolio, it could be possible that you would be constructing a portfolio that may have a level of volatility that is not commensurate with the expected return. And if that were the case, then it would be suboptimal with regard to the efficient frontier. For that, I would go to a website like Portfolio Visualizer, where you can enter in specific asset classes,

so you can enter in a hypothetical portfolio that is comprised of some of those higher volatility sector-specific funds, a portfolio that's comprised of some emerging markets or even some frontier markets, a portfolio that has some small-cap funds, small-cap index funds. You can construct hypothetical portfolios

that have some of these higher-volatility types of asset classes in there and a given hypothetical allocation and then you can plot the efficient frontier based on the parameters that you put into this tool. And they also have an efficient frontier forecast tool in which you can try to forecast expected future returns for various asset classes, assuming the same historical correlations, meaning that if you assume that in the future, things will move in tandem in the way that they did in the past. So if in the past two asset classes had a high correlation with each other, if you make the

assumption that that correlation will remain the same in the future, and if you make the assumption that volatility in the future will also be reflective of what it was in the past. So if you use that historical data and extrapolate it to the future, you can then use this calculator, use this tool to forecast where that efficient frontier will be in your portfolio. moving forward. And of course, you can see how many assumptions this is all based on. But it is a way for you to take some of those higher volatility asset classes, whether that's with regard to geography, such as international funds, emerging markets, whether that's regard to market capitalization, such as small cap, or whether that's with regard to the sector specificity, such as energy,

commodities, the various sectors that we've discussed. You can input all. You can input all of these into that tool and try to forecast what that efficient frontier would look like. And so portfolio visualizer is the tool that I've played with, but there are a lot of efficient frontier calculators and efficient frontier tools online. So I'm not particularly wedded to that specific one. If there's one that you like more than portfolio visualizer, go ahead and try that one. But zooming out again, as I mentioned at the beginning of this answer, when we talk about volatility, we could be talking about either the type of asset that you invest in, or we could be

talking about the duration of time during which you invest. And so to recap, at a high level, when we talk about types of assets that have higher levels of volatility, some of those types of assets include volatility based on geography, such as domestic versus international, volatility based on market cap, such as small cap, and volatility based on sector-specific bets. So in the world of equities investing, those are some of the arenas that you can look at as you are searching for higher volatility index funds or higher volatility ETFs. Now, moving away from a discussion about asset selection and towards a discussion about duration of investment, at a conceptual level, the reason that so many of us, myself included,

practice a buy-and-hold approach is because by definition, a buy-and-hold approach is a strategy for avoiding volatility. With a buy-and-hold approach, you don't have to pay attention to any short-term fluctuations, and you can more or less just ignore the topic altogether, which is what I prefer. It's what I advocate. It's what I practice myself. The reason that a highly volatile market tends to go hand-in-hand with higher trading volumes is because higher trading volumes tend to reflect shorter holding periods. Do you remember, this is a slight tangent, but it's related. Do you remember the interview that we did with Morgan Housel in episode 284? You can access it at afford anything.com slash episode 284. In that interview, Morgan makes the observation that

bubbles form when long-term investors start taking their cues from short-term investors. In other words, bubbles are not the result of high valuations, but rather the result of compressed time periods. And compressed time periods, as we've just talked about, often coincide with high trading volume. So that's a bit of an aside, but the, no pun intended, the long and short of it is, if you have an appetite for and comfort with volatility, you could potentially, and I'm not advocating this, it's just a purely academic hypothetical, you could take a small portion of your portfolio and wade into the world of investing that is outside of the strict confines of buy and hold. Now, as a buy and hold investor

myself, I cannot advocate for that. And I will readily admit that I do have a buy and hold bias. Such thinking is certainly quite common in the fire movement, the characteristic of the fire movement. But remember, the fire movement itself is only one framework, one philosophy, among many, around the world of investments. The investing world, I mean, if you do the internet binge reading rabbit hole, the investing world has a lot of different approaches. Everything from Robin Hood bros to the Yolo crypto crowd, none of which I gel with. The fire movement is far more compatible with something more conservative, like a Boglehead philosophy. But for the sake of exploring all the options, for the sake of not hewing too closely to confirmation biases,

if your question is how do you capitalize on a comfort with volatility, I think at least as a thought exercise, if nothing else, I would be remiss if I did not at least mention that for the purpose of always maintaining a practice of questioning assumptions, the question of do you want to take a very small portion of your portfolio and explore outside of the buy and hold time frame is at least a question worth asking yourself, even though it's not one that I would recommend. So we have discussed volatility with regard to time frame, and we've discussed volatility with regard to asset selection.

And the final takeaways in terms of actionable next steps are go to Portfolio Visualizer and start playing with the efficient frontier tool. So thank you, three kids and pursuing FI, for asking that question. And congratulations on everything that you've learned and built, and for your high savings rate, for everything that you're doing to get yourself on solid financial footing. We'll come back to this episode after this word from our sponsors.

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Hi, Paula. I've been investing in index funds, but I spoke with a financial advisor who is a fiduciary, who I'm considering employing, who advised me that because I tend to use funds, like VT Sacks that I'm over-indexed in large cap funds and technology stocks versus other types of investments and other types of assets such as small cap funds and utilities and materials and other sectors that may produce good returns, but are not at the current capitalization of the large technology stocks right now. I was curious to get your thoughts on this on whether it's true that using investment tools such as BT Sacks over-index over-index you in large-cap funds and over-index you in tech.

technology funds, and if that's something that you should correct for, it would be great to hear your thoughts. You've helped so much with my own investing in strategy and would love to learn more from you. Thanks, Paula. Sarah, thank you for asking that question. And yes, what that financial advisor said is absolutely 100% true. I agree entirely and completely. The VTSAX, the Vanguard Total Stock Market Index Fund, is, by its very design, heavily, heavily

overweighted in large-cap stocks because by definition, large-cap stocks are bigger and worth more, and therefore they're going to represent a bigger slice of the pie in any index fund that pulls from large-cap, mid-cap, and small-cap in a way that reflects how big of a chunk that given stock occupies in the overall market. So right now, because tech sector's stocks are so highly valued, right now the technology sector is at this very moment way overrepresented in VTSAX as compared with other sectors. Now that doesn't mean that technology sector stocks will forever be overrepresented in VTSAX. In other words, technology itself is not overrepresented by design.

Large cap is overrepresented by design. And technology is overrepresented due to the nature of the era that we live in. So in the year 2007, hypothetically, it might be the case that consumer discretionary stocks are just the runaway blockbuster winners. And at that point in history, it might, hypothetica, I mean, who knows what's going to happen in 2070, right? At that point in history, it might be the case that consumer discretionary occupies an enormous chunk of VTSAX, the biggest chunk of all compared to all the other sectors, right?

There's nothing about VTS that intrinsically overweights or gives priority to any one given sector. but if you think about the construction of VTSAX as a just in the way that it was built, it is a fund that has more than 3,500 stocks included in it. And yes, it's absolutely true that those stocks pull from small cap, midcap, and large cap, but it's also equally true that the large cap stocks, of the over 3,500 stocks that are inside of VTSAX, the large. The large-cap stocks are worth more and therefore occupy a bigger percentage.

So as of November 30th, 2020, tech sector stocks comprised more than 26% of VTSAX. And the 10 largest holdings, Apple, Microsoft, Amazon, Google, Facebook, Berthshire-Hathaway, Tesla, Johnson & Johnson, J.P. Morgan and Visa. as of November 30th, those were the 10 largest holdings inside of VTSAX, and those 10 companies combined comprised over 23%, 23.1% of total net assets. So it is 100% true what your financial advisor said. In fact, Vanguard's very own classification of VTSAX on its website classifies it as a large cap index fund. So given that this is the case, why do we recommend? it? Why do people recommend it, especially in the fire movement? And what should you do about it? So why people recommend it? This goes to a conversation about the trade-off between the simple choice versus the optimal choice.

Now, inside of the fire movement, the person who has the most well-known reputation for being a proponent of VTSAX is J.L. Collins. He was also a guest on this podcast. way back in episode 31. You can listen to that at Afford Anything.com slash episode 31. J.L. Collins, the book that he wrote that is very popular among people in the fire movement that strongly advocates for investing in VTSAX, the title of that book is the simple path to wealth. Now, think about that. The title is not the most optimal path to wealth. The title is not the most efficient path to wealth. The title is the simple path. And the reason that he advocates for VTSAX is because there are a lot of people who are so overwhelmed by the world of investing that they don't know where to start, they don't know what to do, and so they don't do anything at all.

And so the J.L. Collins philosophy, the simple path to wealth philosophy, is done is better than perfect. You don't need to make it optimal. You just need to get it good enough. 80, 20 it, and move on. And from that perspective, if the alternative is throw. Growing up your hands in the air in dismay because everything is so complicated that you don't feel like doing anything. I see this in the world of rental properties a lot. People overanalyze and they get into analysis paralysis and then they don't buy anything. They don't invest in any property.

Given that the alternative is to do nothing, his approach is, all right, let's just keep it simple. get one domestic large cap index fund and get one domestic bond fund and make sure that they're low cost, make sure that they're passively managed, and then buy as much of it as you can and hold it forever. And so that approach is the J.L. Collins approach. It's the VTSAX approach. And again, its benefit is not that it is optimal. Its benefit is that it is simple. And simplicity is valuable from a behavioral perspective. It is not necessarily mathematically the best choice, but it is behaviorally a pretty darn good choice.

It's for the same reason that I often recommend that people go into Vanguard Target Date funds, target date retirement funds, not because the target date funds are the most optimal necessarily, but because it's absolutely, simple. There's basically nothing that you have to do. You just choose your target date fund, put your money there, and move on. At many brokerages, target date funds can sometimes have very high expenses. At Vanguard, they are a great deal. Yeah, I can't say that about other

brokerages, but at Vanguard, they're fantastic. I've told my own parents, you know, my parents' retirement money, I've just told them, hey, keep it in a Vanguard Target date fund. You don't have to think about it. It's done for you. It's great. So I support Jim in the philosophy that most people's biggest investing challenge is not math, its behavior. And given the reality of that, the most behaviorally simple approach is the one that is likely to stick. That being said, I also agree with your financial advisor that there are inherent flaws with keeping all of your money in VTSAX, including over exposure to the tech sector right now and over exposure to large caps in general. And so the way to offset that, if you wanted to do so, would be to asset allocate beyond just

VTSAX, by small cap index funds, for example. Give yourself some exposure to international index funds, maybe even place a few sector-specific bets, go into a very, very small portion of your portfolio into some sector-specific funds. I mean, there are all kinds of different index funds that you can choose if you want to asset allocate in a way that is more sophisticated than this two-fund portfolio that J.L. Collins has put forth. So in terms of the solution, increased asset allocation is the solution to your problems. It's the solution that you're looking for.

Because as you asset allocate into other types of asset classes, based on size, based on geography, and based on sector, you will be able to use those other asset classes in your portfolio to offset some of that overexposure to large caps and a tech that exists in your VTSAX. So that is my answer to your question. Thank you so much for calling in. Thank you for asking that. Thanks for giving me an opportunity to discuss that on air.

I think that's an important thing for people to know. and it is a detail that often gets missed, particularly in the discussions around two fund portfolios or three fund portfolios. And if you want an actionable next step, personal capital is a tool that lets you see, it's kind of an x-ray tool that lets you see the asset allocation within your portfolio, including the composition of different index funds that you may be holding. you can see at a glance across all of your different investments what you're holding and what you therefore might be under exposed in and might want to shore up some of your funds in. So you can sign up for that at afford anything.com slash personal capital. That's an affiliate link, but it is at no cost to you. So afford anything.com slash personal capital.

So thank you, Sarah, for asking that question. Best of luck with your investing choices and your investing journey in the future. Our next question comes from Alex. Hi, Paula. This is Alex from Seattle, Washington, and I'm calling with a question about how community property laws apply to Roth IRA contributions, particularly backdoor Roth IRA contributions. My wife and I got married about two years ago. We have been married filing separately for student loan purposes. She's almost at her forgiveness point, a student loan. student loan for giving this point. And she was laid off due to the coronavirus closing the business she worked at. And so she has not earned enough income to make a backdoor Roth IRA contribution with her own income. However, we live in Washington State where there's community property laws. And when we file our taxes, married filing separately, we effectively split our income between the two of

does that also apply, like, could we consider half of my income to be hers for the purpose of qualifying to make a traditional IRA contribution to then roll it into an IRA contribution? Or is that off the table? Thank you. Alex, thank you so much for asking that question. The good news is that there's at least a possibility that the answer might be simpler than what you are suggesting. So you mentioned that your wife was laid off due to the coronavirus.

pandemic, which means that she was laid off in March or after. I don't know what her income is, but there seems like there's a reasonable likelihood, and you'll want to talk to your tax preparer about this, but there's a reasonable likelihood that her modified AGI, her modified adjusted gross income might be less than $10,000. Maybe. Again, I don't know what she makes. I don't know if she's had any other sources of income, but assuming that she worked in January-February, assuming, again, I guess I can't make too many assumptions about other sources of income, but by the nature of your question, it sounds as though she hasn't made a whole lot this year. And so if that is the case, and if her modified AGI is greater than zero, but less than

$10,000, then she may be able to contribute a reduced amount into a Roth IRA. So zooming out and explaining a little bit of the context for the sake of everybody who's listening, the rules on contributions to both traditional and Roth IRAs differ depending on if you're married filing jointly or a qualifying widow or widower. If you are single, head of household, and if you are married filing separately, and actually the IRS makes a distinction between people who are MFS, married filing separately, who live together at any point during the year, versus people. who are MFS and don't live together at any point during the year. And so in your case, Alex, you are married filing separately and you lived together throughout the year. And that makes you subject to a very specific set of IRS guidelines around both traditional and Roth IRA contributions. Now, whether or not you can contribute, and if so, how much and how much of that contribution is deductible, if any, if you went the trad route, and how much of that contribution is

available to you, if any, if you went the Roth route, all of that is governed. Under the set of assumptions that your MFS and you live with your spouse, all of that is governed based on what your modified AGI is. And for a thorough explanation of this, including detailed charts that show how different AGI brackets will impact both the contribution limit and the deductibility, if applicable. All of that is available in IRS publication 590-A. That's what I'm going to refer you to. I will link to it in the show notes. Show notes are available at afford anything.com slash episode 292. But to provide a long answer to your short question, Alex, you'd asked about a backdoor Roth, it might, and again, not knowing how much your spouse made, I don't know what

your modified AGI is going to look like. But it may be the case that she can just walk right through the front door. Given such a prolonged period of unemployment, it may be the case that her modified AGI is low enough that she can make a contribution or a reduced contribution to a Roth IRA. So what I would do, if I were in your shoes, are two things.

First, go to your tax preparer. Find out what her modified AGI will be. And based on that, cross-reference that with IRS publication 590A. And you can find out what limits you're subject to. And also, I should also add, to further complicate something that's already complicated, that IRA eligibility is also influenced by whether or not a person or their spouse is eligible for a workplace retirement plan.

So this is absolutely a conversation that's going to have to involve your tax preparer. Ideally, you've got a CPA because all of these variables, your income, your living arrangement, whether or not you're covered by a workplace plan, all of these variables, plus the modified adjusted gross income all go into determining which IRAs are better for you, what you qualify for, if any. And if it turns out to be the case that she can make a reduced contribution to a Roth IRA, then you would need that tax preparer to calculate specifically what is the amount of that reduced contribution? What is the reduced contribution amount? If you don't have a CPA, you absolutely should get one. I will, in the show notes, I will link to the one that I use.

I'll just tell you right now, Fusion CPA. They're based in Atlanta, but they work with clients nationwide. They're great. I'll throw in a link to them in the show notes. Tell them I sent you, I don't get anything for it. I don't get any sort of benefit or kickback or anything like that. But I've been working with them for many, many years. They're absolutely fantastic. You might know somebody locally in your area. If so, go ahead and use them. Referrals are some of the best ways to get to know CPAs. I'm sure there's plenty in the afford anything community. So if you're part of the community, There might be somebody in that community in the Washington area as well. But essentially, these are questions that you should be discussing with your CPA. The reason for that is not to deflect the question. The reason for that is that any broad mass market, mass communication, generalized advice that you hear on any podcast or that you read in any blog or that you read on any website or that you pick up in any book, that is by its very structure and by its very definition, intended for a mass market audience and cannot, by its very nature, take into account all of the

specificity of your particular situation. So at a high level, when you think about what is the purpose of listening to a personal finance podcast, the purpose is essentially to learn high level concepts that can better inform the conversations that you have with experts. And meanwhile, the conversation with experts that you have is to, you have to, you know, be able to flesh out highly specific questions that relate to the particulars of your situation. So in your case, as I mentioned, all of these different variables which change year to year are going to impact the eligibility that you have and if it's a reduced eligibility, what that reduced amount is.

And that's going to be an answer that changes year by year depending on the specifics of your situation. And so knowing that, like knowing that that is how the system is set up, that's the type of broad information that I think podcasts are very well suited for. But when it comes to strategizing around how to best handle the particulars of your year-by-year financial details, I mean, that is what experts are for. That's the reason that you have them in your corner. And that is the reason why inherently those one-on-one conversations that happen with financial planners or with CPAs are, by their very nature, very different than the types of conversations that you will have and that you will hear on any mass market platform. And not just talking about my podcast, but any podcast, any book, any website is, by its nature going to be educational rather than directional. So thank you for asking that question, Alex.

Best of luck with both the calculations that you make and the strategy that you end up taking. We'll return to the show in just a moment. Our final question today comes from Jordan. Hey, Paula. My name is Jordan, and I've been listening to your podcast for about a month now, and I greatly appreciate all of the information you were putting out there. I listen to every new podcast and I'm working my way back through all of your other podcasts. It's helping me tremendously.

Here's some of my background information for you. I'm 28 years old, married with an almost 2-year-old daughter. I'm a real estate broker. I also own two rental properties, a single-family home and a duplex. We have a goal to eventually own 20 rental homes. We ultimately want to have all of our monthly living expenses paid for through rental properties. I currently make anywhere from $100 to $150,000 in income through being a real estate agent, but have only been a full-time agent for a little over two years now.

The rental property income we do not touch and just let that. account grow. We have no debt besides our mortgage and now have right around $100,000 to invest, and that's not including the six-month emergency fund for personal and a six-month emergency fund for my real estate business as an agent that we already have saved up. Being in real estate and at the moment a single household income, I wanted to have about a year in emergency fund saved up. With that background in place here, my three questions. Should I currently invest into a taxable brokerage account or purchase more rental properties? Currently, I don't have any properties that I'm very interested in to purchase, so I don't know what I should do with the funds

in the meantime. It's a good problem to have, but never sure of which way to go. Also, number two, how do you advise, especially people young in their career in making financial decisions when income can fluctuate so wildly with sales, commission, self-employed jobs, etc. We very much want to upgrade our current home, which is worth about $250,000, and we have approximately $90,000 in equity. We would like to purchase a $400,000 to $500,000 home. However, I don't want to make a decision based off the fact I've had a couple of good years in real estate and then the coming years I don't make as much. And number three, lastly, on off topic a little bit, regarding health insurance. What is your recommendation for self-employed families that earn too much to obtain health

insurance for the marketplace? Are there any options for us for insurance that doesn't cost $15,000 to $20,000 per year? I do have a pre-existing condition. We make too much to be able to use the marketplace, but we do not make enough to be willing to pay $15,000 to $20,000 a year in health insurance. Thank you again so much for all of your help. Jordan, first of all, congratulations on everything that you've built. You're 28. You have a single family home and a duplex, so you've got three rental units at the age of 28, which is a tremendous accomplishment at that age. Plus, you also have a daughter. You've done quite a lot.

You have a very successful company. You are a real estate broker. You clearly have a lot of success at a very early age. So huge congratulations to you for all of that. Let's tackle your three questions. So first of all, what's interesting to me about question number one, you have $100,000 to invest, but you're not sure whether to put it into a taxable brokerage account

or to use it to purchase more rental properties. What's really interesting to me about that question is that you asked that immediately after telling me that your plan is to own 20 rental properties that provides sufficient cash flow to cover your living expenses. So the first thing that you did was you stated that 20 rental properties and higher cash flow is the goal. And then, and you didn't mention any goal related to a portfolio size around index funds, you may have one. That's not saying that you don't, but it's notable to me that you didn't start the

by saying, hey, our goal is to have 20 rental properties and a $1 million stock portfolio. Maybe that's what's in the back of your mind, but it wasn't what came from you. Instead, what you said is, here's the goal. The goal's 20 rental properties with sufficient cash flow to cover our living expenses. And here's the question, do we use our money to buy rental properties or do we pursue this other thing that is not a stated goal? And so my question back to you would be if you were to use that $100,000 to make investments in a taxable brokerage account, to what end would you be doing that? Is that a goal or is it a distraction?

And it might be the case that that is an unstated goal. And perhaps it's a goal that you may not have even necessarily articulated to yourself or maybe you have. But it may be that somewhere in the back of your mind, you do have an unstated goal of having a $500,000 or a $1 million portfolio and that you like the idea of having that diversification. And if that is the case, then I would want you to explicitly clarify that before you start investing six figures of money towards that goal. And so this goes back to the investor policy statement that practically. of sitting down prior to making any decisions and asking yourself, all right, what is the ultimate end goal? As Josal See High often says, start with the end in mind. So what is the ultimate end goal? And once you've clearly and explicitly identified that, then you can work

backwards to figure out what the next steps are. So if it is the case that your ultimate end goal is to have the 20 rentals that you described in addition to X amount of money in a taxable brokerage account, which is invested in assets that typically have a low correlation with real estate values. If that is the case and you want that in order to provide diversification into your overall portfolio, that's great. If that's the goal, then I fully support that, but you need to make that clear. Not to me. It doesn't matter what I think, but to yourself and to your spouse.

By contrast, if that is not the goal, if the goal truly is 20 rental properties and you're not worried about diversifying your assets by having a portion of your portfolio in index funds or in a taxable brokerage account because you plan on getting diversification through the array of properties that you buy. For example, maybe you want to buy an array of properties in multiple cities. Maybe you want to buy an array of properties in different parts of the city that you're currently in so that you've got a mix of Class A, Class B, Class C. You know, there are many ways to achieve diversification inside of the real estate asset class rather than having to go beyond it. So if that's the way that you want to diversify, that's great. Again,

make it clear. It all goes back to writing out that investor policy statement and making clear what the end goal is, what the end vision is. And once you've expressly identified that, then you'll know where to put the next 100,000. There is another option as well. And this ties in with your second question. You mentioned that you and your wife want to move to a nicer home, but one of your hesitations is the fact that you are a single-income household and that single-income can fluctuate, and so out of a desire to be prudent, to be cautious, to play a good defense, you want to make sure that you're not over extending yourself, you're not over leveraging yourself, because if there is a year in which your income drops, which it very well may,

well, it's hope not, but it might happen, you certainly don't want your family home to be at risk. Now, an option that has not yet been discussed is that you could use this hundred thousand plus the 90,000 in equity that's in your current home, assuming that you were to sell your current home, both of those combined lead to about $190,000, not, you know, excluding closing costs and other transaction costs. With that $190,000, you could have a nearly 50% down payment on a $400,000 home, which means if you were to upgrade your home into the $400,000 price point level, assuming that you, let's say, for the sake of example, you could put down $190 or even $200,000 on that home and borrow the other $200,000, I'm guessing, and I don't know

the original size of your mortgage. I know the value of your home is $250,000. I don't know what the original mortgage size was. But assuming that your original mortgage for the current home that you're living in was around $200,000, you could use this to make a much bigger down payment. so that the new home that you purchase will also have a loan amount of $200,000. Because ultimately, what's going to matter when it comes to your monthly cash flow is not the value of your home. It is the value of the loan size.

So if you have a $200,000 loan on a $250,000 house and or you have a $200,000 loan on a $400,000 house, your monthly payments are going to be approximately the same. property taxes are going to make the $400,000 home a little bit more expensive. Same with homeowners insurance. That's going to be a little bit higher. But with the exception of some nominal changes with regard to property taxes and homeowners insurance, for the rest of it, your monthly payment's going to be about the same, which means that if you feel comfortable at the mortgage level that you currently have with your current home,

you could use this $100,000 to maintain a very similar monthly payment, but be in a nicer home. Is that the best investment decision? Technically no, in the sense that any personal expense is by its very nature, not an optimal investment decision, but might it be the best decision for the quality of your life? That's something that only you can answer. And that goes back to how highly do you value wanting to trade up to a nicer home relative to the goal of purchasing another rental property. Like let's hold those two things up as examples. Let's say that with this $100,000, you could either use it to level up into a nicer home

or just let's just say hypothetically, you could buy a single family home or perhaps even a duplex in cash or with a very sizable down payment. If you were to compare those two options, option A and option B, using the same bucket of $100,000, which of those two is more appealing? Would you rather defer the acquisition of another rental property so that you can instead prioritize up-leveling into a nicer home? Or vice versa. Would you rather stay in the home that you're currently in so that you can acquire one or more properties more quickly than you otherwise would. When you're making this comparison, it's no longer a math question. It's a values question. It is, at its core, a question of priorities. If you decide to invest

this $100,000, either in a rental property or in a taxable brokerage account, and you still want to level up your home and trade up into a nicer home, then my recommendation would be that before you do so before you trade up, do two things. Number one, calculate what that higher monthly payment would be, assuming that you were living in that nicer home. Calculate that number. Number two, start making regular monthly payments of that amount so that you can do a practice run of what it feels like to make that monthly payment. And the way that that's going to look is that your current mortgage payment is X, and that higher monthly payment will be X plus Y, that difference from what you're currently paying to what you would be paying, that amount Y, take that money every single

month and move it into a savings account. And by virtue of doing so, you do two things. Number one, you get into the habit of making that payment every single month, and so you feel what that feels like, and you feel whether or not that crunches the rest of your budget. And number two, That amount, Y amount, will be accumulating in a savings account to provide even greater cash reserves to cushion you such that if you do move into that more expensive home, you will have a bigger emergency fund that represents your new six months of expenses, since the amount that you'll need every six months is going to be higher. And the benefit of this type of practice is that if you do a practice run, let's say for

six months, you practice making that higher monthly mortgage payment, and it just sucks. Like, you feel like the rest of your budget is super crunched. You're constantly stressed out. What happens if there's a bad month in business and you can't pay for it? Well, if that is the case, it's certainly better to figure that out when you're doing a practice run of making that higher monthly payment than it is, you know, six months after you get into that new mortgage. So that practice run would be the approach that I would recommend taking if you decide that you want to invest this $100,000 and you don't want to use it to supplement the down payment that you make on a nicer personal residence. But I also do think, just for the record, I do think it's an equally viable strategy. And I know that it is not from a sheer mathematical point of view.

It makes sense to bias your mortgage towards your personal residence, hold as big of a mortgage as you can on your personal residence. hold as big of a mortgage as you can on your personal residence so that that way you can use your cash to invest in rental properties, given that a primary residence mortgage is going to have much more friendly terms than any investor loan. So absolutely, I completely get that there's a strong argument to be made for if you hold any debt at all, bias that debt towards your primary residence. That being said, if concern about your ability to make payments on your personal residents does keep you up at night, then lowering that monthly bill by virtue of having a higher down payment does have value, not necessarily interest rate value. You know, it's not sheer

mathematical perfection, but it does hold value in terms of the psychological relief that comes from having that lower monthly payment on your family home. And so again here, we get into a question of priorities, a question of values. What is more important to you? Mathematical optimization or psychological relief. And there are strong arguments to be made on both sides. So those are my answers, kind of melded or blended answers to your first and second questions. And then finally, we will go to the topic change of the third question, which is about health insurance. Now, to be clear, no matter what your income level is, you are eligible to use the marketplace. You just don't get any subsidies for using it. So you and your family are absolutely eligible

to purchase, during the open enrollment period, to purchase health insurance from health care.gov. There is no income-based restriction on who can or cannot use it. The only restriction is that you won't receive any subsidies for it, so you will be paying the full amount rather than a subsidized amount. Now, in terms of lower premiums, which is essentially what you're asking about, how do you reduce your monthly health insurance premiums, the plans that you'll find there are classified as platinum, gold, silver, and bronze. The bronze plan, which is what I have, has the lowest monthly premium. It also has the least amount of coverage, meaning I have higher deductibles, it covers a reduced copay, it covers less of a copay than its

silver, gold, or platinum counterparts. But given that I'm young, given that I'm healthy, given that I want something that's HSA eligible, I personally opted for a bronze plan this year. And so in terms of shopping for health insurance plans with the lowest premium that's available out there on the market, bronze more than any other metallic level is where you're going to find that. The other thing that you can do is you can look not only on healthcare.gov, but also on other websites like PolicyGenius, which is a sponsor of the show, you're welcome to look for health insurance plants that are sold outside of the insurance marketplace.

Just be aware when you do so that there is a distinction. between what's called ACA compliant coverage versus not ACA compliant coverage. So if your health plan is ACA compliant, then it conforms to a set of regulations that is set forth in the Affordable Care Act. And those regulations govern what is covered under that plan. If a health plan is not ACA compliant, then it does not conform to those regulations that are set forth in the ACA. For example, a non-ACA-compliant health plan can discriminate against consumers with pre-existing conditions, whereas an ACA-compliant plan legally cannot. So if you shop for plans

outside of the healthcare.gov marketplace, make sure that you are aware of whether or not the plan that you're looking at is ACA compliant. And if you don't want to bother with that, if you just want a shortcut, then everything that is sold on health care.gov, by definition, is required to be ACA compliance. So that's essentially a filtering mechanism for only ACA compliant plans. Now, there are some other options as well. So for example, there are some people who use religious health sharing plans. These are plans in which members of a common faith will all pay a fixed monthly amount into essentially a giant pool of money that is meant to cost share for health-related concerns. But it is important to note that this is not health insurance.

And there are many reports, if you Google reports of religious health share plans not paying out for certain claims that have been made, there are many reports of that happening. And they have the right to do that because they are not insurance and therefore they are not governed by the laws, the regulations, the guidelines that something that is actually insurance is governed by. So these health sharing plans are meant to be a supplement to insurance rather than a replacement. So thank you for asking that question. And again, congratulations on everything that you've built and everything that you are continuing to build.

That is our show for today. Thank you so much for tuning in. My name is Paula Pant, and this is the Afford Anything podcast. If you enjoyed today's episode, please do three things. Number one, leave us a review in whatever app you're using to listen to this show. You can also go to Afford Anything.com slash iTunes, and that's going to redirect you to the page on the Apple Podcast website where you can leave us a review. Number two, share this episode with a friend or a family member.

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