Afford Anything - Ask Paula: Is a Crash Coming?

Episode Date: June 22, 2022

#387: Lila is concerned about inflation and the risk of a recession. Should she invest in the stock market, despite the scary headlines? Or should she pay off her primary residence or her investment properties? Linda invested in a 529 for her son’s college, and he’ll be starting in the fall. But, the value of the plan dropped right before she was planning on using it and she is wondering how to keep from losing more money. Jen and her husband want to retire in 8 years. They’re hoping to have paid off their mortgage AND hit their net worth goals when they stop working. How should they prioritize between these two goals? Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it here and we’ll answer them in a future episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode387 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, to any limited resource that you need to manage. Saying yes to something implicitly means you're turning away other opportunities. And that opens up two questions. First, what matters most?

Second, how do you align your decision-making in the moment with that which matters most. Answering these two questions is a lifetime practice. And that's what this podcast is here to help you explore. My name is Paula Pan. I'm the host of the Afford Anything podcast. Every other week, we answer questions that come from you, the community. And my buddy, former financial planner, Joe Sal Seahy, joins me to answer these questions. What's up, Joe? Somebody while I was on the road said, hello, Joe Sal Seahy, former financial planner. I'm like, hello. stacked event attendee. I'm glad that my introduction to you surpasses this moment.

It lives on. I guess so. I don't know. Yes, somebody was echoing that. So good times. Ready for some good. These are great questions. I told you before we hit record that these are some of my favorite.

These are great planning questions. And also deal with a lot of the stuff. Believe it or not, there's some stuff going on, Paula. Oh, do you? Do you mean to tell me that there's financial news happening in this moment? Oh, there is? What would that be? Well, there is both the highest inflation in 40 years and the highest interest rate increase since 1994. And we're in bare market territory, which means the market has declined 20%.

And we may or may not already be in a recession. And if we are not, we might be heading for one. So there's a thing or two going on. Do you know, Paula, all those times that we talked about, these are not either or things. There is a power of and. This is not what we were referring to. That's true. These are not the ands that people are searching for.

If the universe was listening, we were referring to something else, universe. That said, and I wrote about this recession in my most recent newsletter, and anyone who subscribes to the show notes can get that newsletter. So go to afford anything.com slash show notes. You'll be signed up for the show notes. You'll get the newsletter. I'm writing quite a bit about the recession, the bear market, inflation. There's far more to be said about these topics than can be summarized in the introduction

to an episode in which we answer questions from this community. But the two questions that we've decided to lead with on today's episode are both questions that relate to what's happening in the broader world, but do so in a way that is personal to the person asking. So Lila, who we'll hear from first, is concerned about inflation. She has multiple mortgages, which are at a low interest rate. She locked them in when they were two to three percent, but she's wondering, should she pay them off, given that they have such a low interest rate, or should she invest in the stock market, even though we might be heading for a recession? So we're going to answer her question first.

After that, we'll hear from Linda, who invested in a 529 plan for her son's college. Her son is going to be starting college in the fall. And guess what? The value of that 529 plan has dropped. So what should she do? Finally, we'll close out with a question from Jen, who wants to retire in eight years and has two competing goals. One is a net worth goal and the other is a mortgage payoff goal.

Jen is wondering how to prioritize between these two goals. Before we buckle up and get started, a friendly but urgent reminder, if you want to enroll in our class on real estate investing, this is your only opportunity to do so this year, and your deadline is Thursday, June 30. To learn all about this class, go to afford anything.com slash enroll. There's a ton of information there, but remember, Thursday, June 30 is the deadline, and this is the one and only time this year that we will be offering this class. Learn all the details at Afford Anything.com slash enroll. I hope to see you in class. And with that said, let's kick off with this question from Lila. Hello, Paula. This is Lila from the Bay Area.

I have a question about the inflation. My husband and I are 34. We have a net worth of $1.5 million split between stocks, index funds, of about 700K. that's from retirement and a brokerage account. My brokerage account is about $370k. And the rest would be between real estate. So I owe my primary resident and I owe $700K on it. It's worth $1.2.

I did a home equity loan on it added to the primary mortgage of $290k. and I have three investment properties in the Midwest where I owe about 200k for each. The mortgage interest, sorry, I have, among all my properties are about between 2 and 3%. Monthly, I contribute about $9,000 for my brokerage. I pay all the mortgages. I'm wondering if right now, because of the crazy inflation, I should pay my primary residence first instead of continuing to contribute to my brokerage account. I am contributing to the retirement, the Roth IRA and 401K, for me and my husband. So I'm just thinking, like, should I pay my

investments first or my primary resident first or just keep them. They are all 15 years and keep investing in the stock market right now. Thank you so much for all what you're doing and thank you. Lila, such a great question and oh my, Paula, she is doing a fantastic job saving. Just a fantastic job saving. I love hearing those numbers. Obviously, Lila must have a fairly high income if she's paying $9,000 a month just to mortgage obligations. But it isn't about what you make. It's about the amount that you keep, right? There are plenty of people making lots of money that are not doing the great things with their net worth and their net worth growth that Lila is. And it's sad. I was watching a football player on a sports podcast recently, Paula, talking about the number of NFL

players who go broke because they make tons of money while they're working. The average length of stay in the NFL for a player is fairly short, right? And they immediately adopt this bagillionaire lifestyle and don't have the discipline that Lila has. And many, many, many of them end up going bankrupt after they leave the NFL because they can't undo that lifestyle once they start it. So start good savings habits no matter of what you're doing, work on and increasing your income and then do what legal is doing. But I love her question because this is exactly what we're all thinking. We're fed a steady diet right now, Paula, of doom and gloom and all the bad things that are happening. And you think, what is something that I can control? You know what I can

control? I can control my debt payoff. And statistics will show you that even though the mathematicians would agree that a mortgage at two or three percent over a long period of time is very, very beatable that people who are millionaires and above pay off their debt. They mostly don't use as much leverage as you think that they would. There are some that do and they do it very successfully, but the vast majority of wealthy people and happy people in their retirement years have paid off their debt early without regard to the math. So in a normal circumstance, I love that. But here is my problem with Leila doing that right now. I think I know where this is going.

We're in a time where we have interest rates higher than they've been in forever. You already introduced this. I'm just going to replay it for everybody. We have a time where the stock market has gone down a ton. In fact, there was a guy who I otherwise think of as a responsible individual on Twitter. One of the good voices on Twitter who said, no, no, no, no, no. this isn't a pullback in the stock market. This is a full-on crash.

He called it a crash on social media. People retweeted it all over the place. So there's panic in the streets. You've got the Federal Reserve that says not only are we doing stuff now, this three-quarters of a point interest rate bump, we're going to do it again. There are already signaling that they're going to do it again and maybe even faster. Right, right. There's talk of another 1.75% increase.

by the end of the year. Yeah, it's a lot more. Holy cow, it's a ton more. So we go from the Fed just over a year ago saying this is transitory and it's all going to go away to. Oh, yeah, remember those days. Yeah, yeah. We were young, naive. We thought this was transitory to my bad. Right. Exactly. So I know exactly where this is going. The stock market is down, which means stocks are on sale. There's a 20% sale on stocks right now relative to what they were. And simultaneously, Lila has a fixed rate mortgage, several fixed rate mortgages locked in at 2 to 3 percent in an environment where that's not obtainable now or for the foreseeable future. And the question that she is asking ostensibly is because everything is bad, should I stop investing in the area what's bad? But that presupposes

it's going to stay bad. And it never does. Right. And everybody says, this is different than the last time. And then we get beyond that time and we find out that it's the same as the last time. And let me give you an example. This is not talking positively or negatively about crypto because I do think the crypto as a space is going to be a space. I'm just going to talk about the crypto hype. All right. I have my social media feed full of crypto guru six months ago. Where the hell of those people gone? Right. How come nobody he's talking about crypto anymore. And I heard that crypto is going to go to the moon.

It's going to happen forever. And whoa, wait a minute. Hold on. That didn't happen. It certainly went up a lot for a long period of time. But now that we have these numbers where falling back to us, not even quickly, just free fall numbers, where are the crypto gurus? Before that, it was marijuana stocks. Remember a long time ago we were talking about everybody has to buy marijuana stocks?

Like weed stock was wearing it out. Well, what happened to that? I mean, we go back and we, you know, us old people talk about beanie babies and all these. It's not even that. It's there's hot thing, hot thing, hot thing, hot thing, hot thing, hot thing, hot thing. And we always get caught up in that. Right now we're caught up in the fact that right now it's really bad. But it's not going to last forever.

Just like the crypto boom didn't last forever. Just like the marijuana stock boom didn't last forever. This will change again. And when it does, how proud of yourself are you going to be? when you continued investing as usual during this whole thing. If you're able to, listen, some of us might not be able to. A recession comes with lots of job loss, and that worries the heck out of me, people losing their jobs. And certainly, if you don't have an emergency fund, if you don't have your debt under control,

then I think that you should probably focus on debt management. But for Lila, with her high net worth, to focus on debt management at a time when you she's got monster cash flow is not what I want to be thinking about. I will never say, don't be afraid because I think that's ridiculous. I think bottling your emotions and trying to pretend that you're not afraid if you are afraid of this market is not something you should do. But that shouldn't affect what you do. What you do should be the exact opposite of your fear.

When you're fearful about the market, that's the time to invest in the market. When you are high-fiving yourself that you're a genius because your portfolio moves are 100% phenomenal, that's the time of biggest worry. Right. Courage is not the absence of fear. It is taking action despite the fear. Wow. That is profound. Oh, I'm sure I read that somewhere.

It doesn't matter. It's still profound. Well, thank you. I'm great at recall. Yes. I just think I feel the fear and I do it anyway. That is my mantra. Feel the fear, but do it anyway.

Joe, I love and agree with everything you said. I'm going to add a few additional things. Number one, it's worth noting that what happened in the last two years is that the Fed flooded the market with liquidity. $9 trillion to $10 trillion worth of liquidity. And in an environment with such excess liquidity, all assets went up, stocks went up, crypto went up, real estate went up, everything. went up because when people have money, they pile that money into assets. So it is no surprise that valuations rose at a time when our society was flooded with liquidity. And what's happening now? Now that liquidity is getting removed from the system. And so it is absolutely

reasonable that valuations for stocks, for crypto, would decline in a society. in which money is being removed from the system. The money that's being removed from the system, it's got to come from somewhere. Well, not only the Federal Reserve, but also the government. I mean, how much money did the government hand out to get people through COVID?

And that's not, by the way, an indictment on what they did. I remember being in many discussions where, you know, we were screwed no matter what we did. If you didn't give people money, you would end up giving them money later. or if you did give them money, we would have possibly inflation.

So it was an area where looking back in the review mirror, I don't think there's any Monday morning quarterback that you can do where you would play that differently. But there's also that on top of the federal liquidity. We were all being handed checks. Right. And absent any judgment, one way or the other, if we simply stick to the facts,

what we know is that the time, when we received stimulus checks correlates with the GameStop AMC, meme stock craze. Those happened at precisely the same moment. What we know is that the massive run-up in crypto correlates with stimulus payments,

PPP loans, enhanced unemployment benefits, an eviction moratorium. What we know is that at a time, when cash was rampant, a lot of money flooded into specifically stocks and crypto. You can see this, by the way, Paula, exactly what you're saying in the credit markets. I just had the opportunity to speak with Charlie Wise, a senior vice president at TransUnion. And Charlie talked about how during the heaviest of the COVID period, when there was lots of

stimulus coming in, the number of people taking on new credit shrank enormously. But not only that, people not only weren't taking out new credit applications. They also were paying down their credit at one of the fastest rates in history. So people were making themselves, their balance sheet whole. What scares Charlie now and TransUnion and also is frightening, should be frightening to all of us, now there are more credit card applications and more new loan applications than there has been in recent history. A lot of people now, as this money is being sucked off the table to your point, we're seeing all of this stuff happen. The people that are struggling the most are already beginning to turn to credit, which means this is going to get ugly. We're going to see it in housing.

We're going to see it all over the place. Right. There are certain imagined risks to the system, and there are certain real risks to the system. And let me address specifically the consumer credit bubble and housing, because these are two, and I know, Lila, this is not your question, but. But like so often we do. Exactly. These are points that are worth addressing. In fact, I was thinking about it this morning. I almost recorded a special bonus episode to make a couple of the points that I'm about to make right now. So here we go.

Number one, one of the questions that I most frequently get, this came up on a Zoom call last night that I did with people who are on the VIP list of my email newsletter. The question that I continually hear in this moment is, won't housing prices tank due to the fact that as interest rates rise, fewer people will be able to afford those higher priced homes and therefore sellers, will need to lower the price of their homes to meet what buyers are able to pay. That is the assumption that I hear over and over and over. People assume that higher interest rates correlate with a decline in housing prices. Now, number one, if you look at the K-Shiller Index, which is a nationwide index of home prices, and you compare that to interest rate increases, you will see that there is no historic correlation between the two. So unless you imagine that what is about to happen right now is different somehow

than other points in history when we have had interest rate increases, because guess what, this is not the first time in our nation's history that interest rates have gone up. Unless you assume that this is going to be an aberration from historic norms, then no, that hypothesis does not hold water. That's point number one. Point number two, What we have seen in high cost of living cities, like New York or L.A., is that when housing becomes less affordable, that doesn't lead to sellers dropping their prices so that homes can become more affordable. It simply changes the composition of who's buying.

In New York, for example, home prices are incredibly unaffordable for lots of people. That doesn't mean that home prices in New York are tanking to meet what buyers can pay. It means that there are some very high-income people who are still able to buy or who buy multiple properties. They'll have their primary home and then they'll have their second home. Or there will be overseas buyers, buyers from Saudi Arabia, buyers from China, who come in and purchase properties. Right? The composition of who buys changes. but sellers don't drop prices as a public service.

So this speculation that home prices are going to tank, based on the fact that interest rates are rising, there's little to no precedent to that. When we enter recessions, typically recessions correlate with high unemployment. We saw this in the Great Recession of 2008, where there was a lot of unemployment. If we are entering a recession, we are entering this recession with record low unemployment.

And yes, unemployment will climb, but we are starting from a place of record low unemployment. So this recession, if we enter one, will feel very different than the last because home prices are likely to remain strong because it is still the case that demand for housing exceeds supply. We have massive supply chain shortages in lumber, in baby formula, in popcorn. I mean, the supply chain is in trouble in many areas, and lumber specifically dominates such a big component of housing prices that as long as there is a supply chain shortage in lumber, that will have an effect on construction costs and renovation costs. And as a result, it means fewer builders are building and the cost that builders bear is higher than it was before, significantly so. And then the fuel required for transporting materials, I mean, these are real costs that go into the cost of constructing or renovating a home. And that is a basic reality of the supply chain right now. For all of those reasons, if we enter a recession, it will not look like the recession of 2008.

But, and here's the but, here's the risk. And Joe, this goes to the point that you made about. consumer credit, we are potentially heading for a consumer credit bubble. The amount of credit card debt that the average American household is shouldering is rising at an incredibly rapid rate. It's low right now, but it's rising quickly. And, Joe, to your point, new applications for credit cards are also substantially on the rise. So is the average American going to be going to to be impacted by a crashing housing market? No, there's no evidence to back that. Is the average American going to be impacted by the inability to find a job due to high unemployment?

Currently, there's no evidence to back that. So in both the realm of housing and in the realm of employment, the next recession, if we enter one, will not have the housing crash or the high unemployment of the recession of 2008, but it is entirely possible that the average American household will have excess credit card debt, that we will be in a consumer credit bubble, and that that is the risk that the average household faces. And any second order risks that reverberate out to the rest of the economy that comes from households having too much credit card debt. That's the actual risk that we face. You know, it's interesting me as you're talking. I'm thinking that severe money nerds

out there may have noticed that mortgage-backed securities, as we're recording this, are falling, meaning that the pros out there think that there will be defaults, Paula. But I think, once again, this gets to two different issues. You've people that were already struggling that owned houses that are now going to no longer have streams of income coming in, and now they're applying for debt in a panic. And when they run out of those lines of credit, they will default on their mortgages. So I do think that defaults will go up. But to your point, defaults going up is something that's happened a ton. Defaults have been very low lately because of all of the stimulus money, right? And so,

a return to normalcy means that mortgage-backed securities go back to where they are. So to your point, this is not the same. Even mortgage-back securities going down is not a harbinger of bad things to come in the real estate sector when it comes to housing prices. And there's a distinction between defaults increasing and home prices tanking. Right. The speculation that I hear over and over is this completely illogical if-then statement. if interest rates increase, then home prices must decrease. There's no teeter-totter there at all.

Exactly. Exactly. They are not inversely correlated. It's like people who think stocks go up, bonds go down, that teeter-totter that doesn't exist. Same thing. Stocks go down, bonds go down. It can happen.

Interest rates go up, bonds go down, bond prices go down. That is the teeter-totter. That's a real one. But the one you're talking about and the stock bond one, not a thing. Exactly. Exactly. Yeah, the real inverse correlation is bond prices and bond yields. We are still not done answering Lila's question.

We have expanded this conversation out to a broader, zoomed-out macroeconomic lens. We're going to take a quick break right now to hear a word from the sponsors who make this podcast possible. And when we come back, we will continue diving into the specifics of Lila's question. Stay tuned. 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. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine.

That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big bank muscle, fintech hustle. That's your commercial payments. A fifth, third, better. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware.

And, of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving that's in the entryway, in the bathroom, very space-saving. I have a daybed from them that's multi-purpose. You can use it as a couch, but you can sleep on it as a bed. It's got shelving. It's got drawers underneath for storage. But you can get whatever it is you want, no matter your style, no matter your budget. Wayfair has something for everyone. Plus they have a loyalty program,

5% back on every item across Wayfair's family of brands. Free shipping, members-only sales, and more. Terms apply. Don't miss out on early Black Friday deals. Head to Wayfair. Now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-F-A-I-R.com. Sale ends December 7th. So, back to Lila's question. You know what strikes me is that in her question, she mentioned that she was worried about inflation,

but then the question that she asked was whether or not she should prioritize investing in the stock market. Stocks historically, stocks in real estate both, historically, do well in inflationary periods, specifically value stocks. Growth stocks don't do as well. Tech stocks tend to not do as well. But value stocks and tangible assets like real estate, art, jewelry, commodities, those do well in inflationary periods historically.

And so if she's concerned about inflation, then that would not be a reason to avoid the stock market. it would be a reason to avoid cash and put more money into assets. But what I think she's really worried about is not inflation, it's recession. And I get that concern. But I think it's for all the reasons I just outlined, worth noting that if we enter a recession, which we may or may not already be in, a recession is defined as two consecutive quarters of negative economic growth as measured by GDP, which means that by definition,

we can only know if we are in a recession in hindsight. So we may or may not already be in one. If we're in one or if we enter one, it's critical to not fall prey to recency bias or the availability heuristic or salience bias. These are cognitive biases that lead us to assume that the situation that is most salient, most easily recalled, that is most recent, and that is most notable, and easy to come to mind,

these are the situations that are cognitive biases overweight. And given that the Great Recession of 2008 fits all of those characteristics, it was recent, it's easy to recall, it's salient, it was a very extreme economic circumstance, and therefore imprints on our minds, because of that, it is easy to assume, to fall prey to fall prey to these cognitive biases and assume that the next recession will look and feel just like the 2008 recession. But for all the reasons I just outlined, the characteristics of this next recession are going to be very different.

Taking a wider lens, they're always different. Right. And I think it's because they're always different that young journalists fall prey to this time. It's really different. It's really, really, really different. Meaning that we may not recover or that we may not, that things may not. Because part of me reacts cynically when I read these things about, oh, they're just feeding the machine and they need clickbait, which to some extent that's true. But I also know a lot of well-meaning journalists that I think. think print things that they wholeheartedly believe that this time it is different. And it's true that it is different. But it always ends the same, Paula. We recover. We always recover. And if we don't recover, if we want to go down that road, down the we don't, well then why are we investing in the first place? We must recover. Yeah. We recover because we must. And we recover because it is times of crisis that create opportunity. Think of how many companies were started during the Great Recession. Uber, Airbnb, during the Great Recession, because we had

record high unemployment, we were in a situation in which companies could hire skilled talent at rates that were affordable for a startup or a small business. We were in a situation in which capital allocators, venture capitalists, were not just burning and churning money, funding any startup with a compelling slide deck. They were demanding that the startups they invest in be default alive, meaning that their revenue would at least match their burn rate. And so in the last recession, VCs had high. higher expectations of the companies that they funded.

They held them to higher standards. And meanwhile, those companies were able to recruit skilled talent at rates they could pay for. And what happened? We had this massive proliferation of incredible startups that grew on to become game-changing for our society. And all of that, that innovation came out of the crisis of the life. last recession, the last major recession. That's why we recover, because crisis is the breeding ground for opportunity. You know, there are plenty of instances in past recessions that

prove your point. Many of the early 2000 collapses during the tech rack of 2000 to 2002 created many of the successful Silicon Valley and tech companies because veterans of all of these collapsed companies went out and they weren't going to stop working. They weren't going to stop innovating. These were innovators still working on the same vision that they had before, but just realizing that, yeah, we made some big mistakes like they learned from from their mistakes. Look at how strongly housing has done after 2007, 2008 and the number of phenomenal communities in housing that have come into being since that mistake. And I think that. And I think there are very few people out there that would make some of the huge mistakes that investors

made back then. And certainly the even the lending industry is way different than it was back during those days. I mean, I remember a friend of mine that I worked with needed a house to appraise for a set amount of money. We'll call it $425,000. He needed it to happen. And he's sitting on his step, Paula, with a case of beer when the appraiser shows up. And the appraiser says, hey, how you doing? You're not supposed to be here. He's like, oh, yeah, I'm just leaving. So I'll let you know it's a hot day and hear some beer here. And the appraiser goes, okay, he's like, yeah, feel free to have one. If you want, I'll just let it sit here. But it's a funny thing. I just bought this beer at the store and it cost me $425,000. And the appraiser goes, that's amazing. Wow.

That's a lot of money. He goes, yeah, yeah. was. But anyway, I'm just going to leave it there. All illegal, right? Everything that just happened totally illegal today. Happened all the time back then. I mean, you saw the big short. These guys are in a strip club talking to a woman who can't prove her income about how, no, the mortgage industry said I don't have to prove any income. Right. Those are referred to as liar loans. I know plenty of people who took out liar loans pre-2008 housing crash. Yeah, ninja loans, right? The technical term, the colloquial term is liar loans, the technical term was non-income verification loans. And those were a common

practice prior to the 2008 crash. So to your point, every crisis allows us to refine our practices to make improvements. Absolutely. And this will be the same. And also just I wonder, you know, we're talking about baby food. Now we're talking about. Right. Imagine the refinements to the upstream supply chain that will happen. Yeah, you were talking about popcorn. I didn't even know that was Yes, there's a popcorn shortage. I did not know that. But think about this. It's gone through everything, Paula.

Remember the meat shortage? The milk shortage, the toilet paper shortage. Like we have gone through the supply chain and all these different things. And that feels to me. It just feels to me like we went from a system of how much money we could expect things to, we could expect a certain velocity of money. Right. And all of a sudden, the velocity of money going.

into the system increases by a ton. Right. Then there is a wave coming out and then now a wave coming back in. And I feel like we're going to feel the aftershocks of these waves for a while. It just makes complete sense to me that this is a this is like a money supply chain issue. You know what I mean? Exactly. It is another supply chain issue, but it's, but it's hitting all of us.

So I think if you are able and if you have a. employment, which also to your point, I don't think the employment thing is that there are people, there are so many companies that need workers right now. Right. There's a huge labor shortage right now. That's what makes this recession unique if we are going into one. It is rare to have a recession and a labor shortage at the same time. Yeah.

Yeah. So thinking about that, if you keep your job, which in most recessions is more difficult than what you and I are talking about right now, but if you can keep your job and you've got cash flow coming in, this is a great time to feel the fear, but be investing. Right. We've said it every downturn, but man, does this one feel more delicious? It just feels so much more delicious. If you're able to do that, that is where I think your head should be.

Not on the fixed interest rate mortgage. I get it. It's certainty. And in a normal conversation, if this were three years ago, I might be saying something completely different to Lila. saying, you know what, if you've reached your goals financially and you want more certainty in your life or than pay off your mortgage, this is a big enough opportunity, Paula, screw that.

There's a huge opportunity. Huge opportunity. Forget about paying off any debt that's at a fixed rate. Go invest in variable rate stuff right now. The one and only, you know me, I love nuance. So the one and only asterisk that I will put there, Lila, is if there are other elements in your life in which you carry a lot of risk and you would benefit from the psychological de-leveraging, de-leveraging, exactly, then that might be a reason to pay off your properties.

And specifically what I'm thinking about is if you run a business, if you're self-employed, right, that is a high-risk type of career as compared with, let's say, if you were a tenured professor, where you have incredible job security. And so Lila as a tenured professor versus Lila as a startup entrepreneur, those are two different career risk profiles. And that might lead to different decision making when it comes to deleveraging other areas of Lila's overall portfolio. So that's the asterisk that I would put there. Well, we've answered one question.

already. I know, right? I think that was a record for us. It was good. There was a lot to say. I think this is a time when a lot of us need you and I to be saying a lot because it runs counter to the conversation you and I just had runs counter to so much stuff that you're reading right now. Right. And again, I will go back to one thing I said earlier, which is we as a society had a system that was flooded with liquidity for the last two years. And so it is no surprise that a system flooded with liquidity would have asset valuations rise. And it is also no surprise that the removal of that liquidity would correlate with asset valuations renormalizing. Eventually asset valuations will stabilize at a new normal. But right now, the gyrations in the system, that is

the collective conversation that our society is having with itself as we try to figure out what that new normal is when it comes to valuations, what should asset valuations be specifically in stocks and crypto, when those valuations are not being propped up by a whole bunch of excess liquidity. That is the cultural conversation that we are having right now, and it is taking place in the form of market volatility. And once we as a society, arrive upon a collective answer to that question, that's when we will see the new normal when it comes to stock and crypto valuations. So, Lila, for all of those reasons, I encourage you to invest in the stock market to continue investing. So thank you for asking that question.

This seems like a good time to take a break. And when we come back, let's hear from Linda, who invested in a 529 for her son's college and the value of that plan dropped right before she's planning on spending that money. So what should she do? We'll answer her question right after this. Our next question comes from Linda. Hi, Paula. And probably Joe. I have a question on 529 plans. I don't hear them talk about too much on your show. So I'm hoping that a lot of other folks could get useful information out of this topic. My son will be a freshman in college in the fall, and we've had a 529 plan for years. We haven't been contributing for at least five years. Current balance is 149,000 as of mid-April. The highest it was was in December of 2021 at 158,000.

So we've lost a little over 10 grand. My question is, should we just let it ride? or should I cash it out, keep it in the 529 plan, but put it into money market funds to ensure I don't lose anymore. Normally, I am a buy and hold investor, but since we're so close to needing the money, I want to get your opinion. We have it invested in a Fidelity Fund. It's an age-based portfolio,

New Hampshire portfolio, 2021. That equates to 15% stocks and 85% bonds. We'd love to hear your answer, and thanks for all you do, while making the topics, well, how should I say? Not boring. Thank you. Hi, Paula. This is Linda again. I just left a 529 question and realized I forgot to tell you how much I would need per year. College is going to be approximately $40,000 per year. Just wondering, am I the only dupus to have forgotten something and called back? Linda, thank you so much for your question. First of all, I will

love the word doofus. That made both of us laugh. So thank you for, uh, for sharing such a great word. Not that you're a duphist, but that word is just so much fun. It's like whippersnapper or knucklehead, right? I heard somebody say knucklehead the other day. And I'm like, that's a great word. These knuckleheads. It is a word that Paula uses on me all the time, Linda. So we know it well. But no, you are not the only dufus. You are not a duphus at all. But you're also not the only person to have called back to leave additional information. That's happened a number of times.

And I appreciate you calling back because that is an important detail. The good news is, first of all, that the balance in your 529 at its peak was 150,000 and you've lost about $10,000, which means you still. have plenty to be able to get you through the next three years, three out of four years, which means that you have enough time to rebuild and recover. You can, if you wanted to, turn that entire balance into cash or cash equivalence, like money market funds, pay for your son's freshman, sophomore and junior year, and then have three years to figure out the senior year. And you can cover that senior year either through new contributions or through a rebound in the market.

What we know is that currently we are in a bare market. And we also know that historically, according to the National Bureau of Economic Research, which is the quasi-official entity that declares when recessions start and stop in the U.S., what we know is that historically the U.S. has been in recession 14. percent of the time since World War II. And we know that after big declines, historically, the stock market has always come back. Over 10-year periods, if you put your money into the S&P 500, over a 10-year period, you would have lost money only 6 percent of the time. And over a 20-year period, you would have lost money never. But you're not dealing with a 10-year period.

You're dealing when it comes to your son's senior year with a four-year period. I think there are definitely two things, Paula, to take from this. The first one is, and this is not for Linda, this is for everybody else, that the age-based portfolios are not infallible. This is a reason why I've railed against Target Day funds while other people have told me that this is the one area. Other, quote, experts have told me that this is why they disagree with me. I think that if you're smart enough to listen to this podcast and you're smart enough to buy a Target-Date fund, you are smart enough to create an asset allocation for yourself

that does the same thing, but the money is where you need it when you need it. Because a target date fund is going to either get, in many cases, too conservative too quickly, but in this case, didn't get conservative enough quickly enough. Now, specifically for Linda, I think there is some good news, Paula, which is that the money that she's lost, if she saved most of that money prior to a year ago, the losses that she had are minuscule compared to what she made. I would strongly believe. And I think in this case, because she needs the money, you have this bet that you have to make, which is, is it going to go up or is it going to go down? Because right now we're clearly in a spot, even with the age-based portfolio, where the risk is higher than the timeframe. We don't want to have as much risk as we have in the time frame that is left. So the easiest bet to make is to take your lumps, appreciate the fact that you did really. well the last several years before that and lock in the money so it's conservative enough that you are able to not suffer any more losses because with school being right now, I think that that is important.

Now, the second thing you can do, which is a little more creative is if you really wanted to come back and you have any cash flow at all, you could take a portion of the money and use it, supplementing that with money from cash flow. So cash flow college using $529 money for either another child. This works really well if there's another child that you may need more money for later. And you do have cash flow where you can get through this. If that's the case, then you may want to cash flow college, hold on to this money, give it time to recover, transfer the, money to another beneficiary, another child, or if you're going to take classes, somebody in your

family is going to take classes. If your children have children, you can give it to them later on. This could end up becoming the Linda Family Education Trust is a good way to think about it. It's not literally a trust, but you can transfer the beneficiary to somebody else in the family. So in a lot of ways, it works the same way as a trusted work as long as it's used for educational purposes. So I like those too. But if there isn't anybody else who's going to use the money, I think you have to think back to the last few years and how great it's been, Paula, and realize that after a huge winning streak that is far and above most winning streaks we've had in the stock market where gains were fairly easy, you threw some of it back. Yeah, exactly. And that's the thing is I'm guessing that, as you said, this is not loss of principle.

This is just it's down. Mr. Gravy. Exactly. It's down off the high, but it's not loss of principle. And so what matters is not its current balance relative to its peak. What matters is, is the current balance sufficient to cover four years of college because that's the goal? And so she needs $160,000 to cover four years of college. At her peak, she had $150.

Now she has about 140. She's got enough to cover three and a half years. And she has three and a half years to figure out the remaining half year. So I think she's in a really good position. Essentially, Linda, you've got three and a half years to come up with $20,000. And that is a great situation to be in. Wow, Joe, we answered Linda's question in record time. That was not like Lila's question at all.

I know. I know. Maybe a little more straightforward, I think. even though initially when you look at the question, it seems very complex. Do I or don't I? But if your answer is in that you can't predict the future, the answer gets much more simple. I think the complexity of this market comes by trying to predict where it's going to go next. And if you take that off the table, you will never do that. Then it simply is spend the money now or find other money that maybe you can spend now. Right. Yeah. You know, I do want to address, Linda said that normally she's a buy and hold. investor, and that's great. But buy and hold is fantastic when you have a long-term trajectory. Money that you need to tap in the next five years should not be subject to investing risk. But this is what's frustrating, Paula, is that she's in an age-based portfolio, which if you read

all of the sales literature from any of these companies, and by the way, the New Hampshire 529 plan, the Fidelity plan, is a fine plan. I really like it. But any of that sales literature will tell you that this is designed for what if and making sure that you get a quote safe landing. And in this case, when everything is down, the safe landing didn't occur. Right, right, right. Yeah, no, I was not stating that as a knock on Linda at all.

Oh, I think you were. No, I mean, 15% stocks, 85% bonds. That's a conservative allocation. But I'm thinking about, and again, this relates back to the questions that I've been getting lately, there have been as a result of the long bull run. We had an 11-year bull run that lasted from 2009 to 2020. And then in 2020, we had a dip that was high severity but short duration. And so after that brief dip, we then went into another two-year bull run.

So we have, with one exception, that exception being March of 2020, we have had essentially a 13-year bull run. And as a result, it is tempting. And Linda, I'm not saying that you did this. This is general for the broader community. It can be tempting after a 13-year bull run to view the stock market as a high-yield savings account. And the reason that this comes to mind is last night, as I mentioned earlier, last night I did a Zoom call. with the people who are on my VIP list, that was another question that came up. Somebody asked, hey, I'm saving for a down payment on a property.

I want to buy this property within the next one to two years. Should I invest it? And so we talked about this last night as well, the notion that the market is not a high yield savings account. And if you want to tap money within the next two years, three years, four years, five years. It should not be subject to market risk. And that, I think a lot of us know that in principle, but after witnessing a 13-year bull run, it's hard to really internalize that message. But Linda, I can certainly sympathize with, as Joe said, the fact that it's an age-based

fund. And under the paradigm of stocks and bonds being inversely correlated, which we also discussed earlier, they're not, but many portfolios are designed in such a way that stocks and bonds are positioned as inverse correlation assets when in fact what they actually are is low correlation assets. And the distinction between the two is if something inversely correlated, it's that teeter totter, one goes up, the other goes down, like bond prices and bond yields. But if two things are low correlation, that means A does something, B does something else, and there is not much correlation between what A and what B does. And so a lot of portfolios are designed with stocks and bonds because stocks and bonds are low correlation,

but that does not mean that they're inverse. And that's a subtle but important distinction. So Linda, thank you for asking that question. I'll wrap up with the takeaway that you've got the next three and a half years covered. So move that somewhere safe, sleep soundly at night, knowing that the next three and a half years are now you've got three and a half years to come up with $20,000. And I think that you can do that. Congrats on being in that spot.

And tell your son I said, congrats on starting college soon. Our final question today comes from Jen. Hi, Paula. My name is Jen, and I live in Columbus, Ohio. My question is about early mortgage payoff. But let me give you some details and why we're considering this. I'll soon be 31 and my husband just turned 37. our incomes have gone up significantly within the past couple years to about $320,000.

We have an outstanding balance on our mortgage of about $200,000 at a 15-year loan of 2.625%. We just refinanced this within the past couple months. The house is worth currently about $300,000. We also have about $320,000 in investments, and we would like to stop working in eight years or when our investments reach $1.5 million. We would also like to have the house paid off when we stop working, and this would be to mitigate the risk of a down market in the first few years of our retirement. This would keep our living expenses low and not having the mortgage payment looming over our heads. So I would like to hear your thoughts on going with conventional wisdom and paying off the

mortgage on time in 15 years and just shoveling all of our money into our investments, or we could put extra money on our mortgage every month and have it paid off at the same time that we stop working while also continuing to invest in our 401k backdoor Roth IRA while it's still available and our taxable brokerage account. If anything catastrophic happened, we would know that we could go back to work, but we would like to not do that if at all possible. So what are your thoughts? Thank you so much. Hey, Jen, fantastic question. And how about this, Paula? How about she does both? Oh, I know exactly where. Wait. Can I tell you what you're about to say and you tell me if I'm right? Can we do that?

I just love she's asking, should I invest my money? Should I pay off my mortgage early? And the answer is yes. All right. All right, Joe, let me guess. What you're going to tell Jen is that she should put the money into a taxable brokerage account, wait until it reaches such a balance that she could pay off her entire mortgage in one lump sum. and then based on how she feels at that time, she can either pay off her mortgage in one lump sum or she can use the cash flow from her investments, the dividends and other cash flow that comes from her investments to make that mortgage payment. Is that what you're going to say? Bam. And you know what, Paula?

No, what? Here's the thing. For a lot of people in many markets, it's a lot of hassle. For some people, they don't set up the brokerage account or it's just easier to just pay it toward the mortgage. Like in a normal market, I get all those things. This is not a normal market. This is a way, way, way down market. And given an eight year time frame, I would be investing into that market.

And if her goal is eight years away, I'm pretty excited about doing it into stocks over that time frame. So I think this is very similar to what we talked about with Lila. this is a great time to be investing in the stock market. I would be very confident putting money into the stock market now, as long as she's in a broad-based index fund like the S&P 500. And then she will ride that up in eight years from now. I think she's going to do much better than if she just put it down on a mortgage that's at a very low interest rate.

And to your point, Joe, it's not an either or. the beauty of putting money specifically into a taxable brokerage account, because what you get with a taxable brokerage account is flexibility and options. Like, that's what you're trading away when you go into a tax advantage account. You're trading away some of that flexibility. And conversely, that's what you're, quote, unquote, purchasing with a taxable brokerage account. You're purchasing flexibility, right? So the beauty of taking the money that she otherwise would be chucking at her mortgage as an extra

payment, taking that money, putting it into a taxable brokerage account, and then letting it build to such a point that she could write a check and pay off the entire mortgage before she retires, that's pretty darn compelling. And it doesn't create an either-or option. You know, with an eight-year time frame as well, Paula, as you're talking, I'm thinking about eight years ago and how much my life has changed just in the last eight years. And I think that many of us can empathize with that, that things may change. And having that money in a flexible spot, if they decide that eight years from now,

they don't want to pay off the mortgage, to your point, they can do something else. So love it. Wow. We went like 45 minutes with Lila's question. And then four. Right? The next two. Seriously.

So good. Well, I think with Lila's question, we covered the ground that we wanted to cover, which was addressing this current moment in history. And so the takeaway for everyone listening is with whatever money you have available right now, buy assets, buy stocks, buy real estate, buy crypto with a reasonable allocation. Yeah, I wouldn't save 100% of this mortgage prepayment into crypto. Right, exactly. Keep your allocations of various assets aligned with your age, your time frame, your risk tolerance, all of that. But buy assets. Because recessions are temporary and the innovation and increased efficiencies at how businesses are run, both of those are positive attributes that are likely to come out of this recession that will aid in the recovery. When cash gets tight, businesses have to run leaner, more efficient operations.

And when people face problems, new ideas, new innovations, new companies arise to solve those problems. So the long-term future is going to see a lot of positive. You just need to be able to stomach the short term. All right, Joe, we have done it again. Thank you for joining us. Joe, tell us you're on book tour, correct? The never-ending book tour. The never-ending stacked book tour.

By the way, for anybody who has read the book stacked, page 13 is the best page in the book, I'll just have to say. You might recognize somebody featured on page 13. It feels like forever ago you were traveling with us. Like it feels like ages ago. Yeah, it was a book tour groupie. I like came with you on six of your stops. Dude, can we hang out after the show, after the Barnes & Noble?

So where are you headed to next, Joe? So tonight, if you're listening to this on Wednesday, I am in Denver, Colorado. And then tomorrow, Thursday, I will be in Salt Lake, City, Friday in Phoenix, and Sunday, we're wrapping it all up in Summerlin. Of course, that's Las Vegas. We'll be there at 1 o'clock in the afternoon. So come see us in Denver, Salt Lake City, and Phoenix. I believe we started 630 every night, but stacky Benjamin's.com slash stacked is the place to go. And I'd love to see as many of the afford anything family as possible. Come on out and hang out with

like-minded people. Awesome, Joe. Those are going to be a lot of fun. I am bummed that I can't be hanging out with you on these last four stops. Come on, Paula. I think it would be a bit much for me to fly out there right now. Yeah, well, and I have to tell you, five planes and a train in six days is, yeah, texting for the best of us. So I will have a smile on my face because I love meeting all of you. And it's so fun.

And we actually have a very good, about hour long, money chat, which is super fun. So come on out. But, yeah, I'm not looking for. forward to all the travel involved. Well, that's all right. You'll miss it next week. Or at least you'll miss it in hindsight at some point. It might take me a month to miss it, but I get your point.

Yeah. Come on out, everybody. Awesome. Well, thank you so much, Joe, for joining us. And thank you to everyone who's listening. This is the Afford Anything podcast. We have a course on rental property investing. It's called Your First Rental Property.

And it's available right now. And this is the only time we're currently in a window of time, June 21st through June 30th, 2022. This is the only window of time this year when you can enroll in the course. After this, we close our doors for the rest of the year. So if you want to enroll in our course on rental property investing, this is your window. This is the only time this year that you can do it. Please go to afford anything.com slash enroll for all the details. There's a ton of information there. Just go check it out, affordanything.com slash enroll.

And remember, you have lifetime access. So you can go through the course material as often as you want, whenever you want, with as many cohorts as you want. We've offered loads of resources, support. We have mastermind calls. We have study halls. We have live office hours with me on Zoom. So afford anything.com slash enroll for all the information. Thank you so much for tuning in.

My name is Paula Pan. This is the Afford Anything podcast, and I'll 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.