Afford Anything - Ask Paula: Will the Stimulus Cause Massive Inflation?

Episode Date: April 20, 2020

#252: The government issued a $2 trillion stimulus. How will that affect the economy? Could we endure massive inflation or hyperinflation? Bradley kicks off today’s Ask Paula episode with this timely question. What inflation rate will we see in 2020, and how can we prepare? How should we hedge against hyperinflation? Anonymous Retiree (whom we call Sequencing Sally) is 64 and retired last year. She lives off of monthly withdrawals from a Vanguard portfolio. Given the bear market, should she leave her portfolio alone and spend from an emergency fund? Additionally, her target allocation is off-kilter. Should she rebalance now or later? Jay wants to reach financial independence in five years, but she’s in a job that will pay her $270,000 student loan balance if she stays there for another 17 years. Should she stay, or quit and face the balance? Jan has $500,000 in a managed fund with a three percent annual fee. He wants to move his funds into his Vanguard personal brokerage account, without incurring a ton of taxes from the sales of his holdings. How can he accomplish this? My friend and former financial planner Joe Saul-Sehy and I answer these questions in today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode252 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. Saying yes to one thing implicitly means that you're saying no to 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 that you need to manage and budget. That leads to two questions. Number one, what matters most to you? Number two, how do you align your daily decision-making in a way that reflects that?

Answering these two questions is a lifetime practice, and that's what this podcast is here to explore. My name is Paula Pant, I'm the host of the Afford Anything podcast, and former financial planner Joe Sal C-Hiehye joins me today to answer questions that come from you, the community. Hey, Joe. Hey, Paula. I just did the most amazing thing. I went to the most phenomenal restaurant yesterday. Was it called your kitchen table? It was called my kitchen table.

It was all home-cooked meals. It was incredible. Wow. Yeah, yeah, good stuff. Did you leave him a Yelp review? I should have. One star, not that good. The chicken taste of microwaved.

I saw somebody posted online. They were like, I'm leaving 2020, the world's worst Yelp review. Have you seen the, we can talk about all the fun memes forever, but did you see the woman who is talking to her future self? the woman in May of this year came back to talk to a woman herself in January. And the woman in January is like, oh, I think 2020 is going to be defined by these Australian wildfires. Woman from May goes, I forgot all about those. Well, we have several questions today, including a mix of questions that relate to the current situation, the pandemic, the bare market, questions that pertain to. questions that pertain to right now. And then we have those evergreen questions that, you know,

they don't just disappear. They don't just go away because we're in the middle of a pandemic. The classic questions that you might have heard in 2019 or 2018, those are still on many people's minds. So we're going to be answering a mix of both today. And I love those questions, Paula, that I call them evergreen questions. Because what we find during times like now is that it still comes back to the fundamentals. Like people think the fundamentals don't matter. Why do I have to have money in emergency fund? Well, now we know. Why do we say to use index funds and to make your investments boring? Well, now we know. So you're not caught up in the excitement, right? The fundamentals matter more

now than ever. Right. Exactly. So with that said, let's go to our first question, which comes from Bradley. Hi, Paul. This is Bradley from Los Angeles. I have a few questions I've been hoping you or Joe can provide insight into. The first is regarding the potential impact of quantitative easing, record high unemployment claims, and disruptions in global supply chains. These are, of course, very complex issues on a massive scale that just simply aren't easily understood or predicted. Given these issues, I am wondering how valid the risk of mass inflation or hyperinflation might be and how to effectively hedge against that risk. I'd also like to know how much physical cash on hand you'd advise keeping for emergencies, where the thought process you'd have to

have to make that decision, as it will obviously be different for someone with $1,000 in their account versus a million dollars. While it is my understanding that nobody has lost a single penny from an FDIC insured bank account since its founding in 1933, I have, however, seen reporting on panic people withdrawing their cash, which could lead to capital controls if it got out of hand. What risk, if any, are there? And how does cash on hand factor into hedging against those risk. And last but not at least, how do we make educated decisions to hedge risk without participating in fear-induced decisions that become a self-fulfilling prophecy like bank runs of past economic downturns? Thanks for all you do. Oh, Bradley, heavy-duty economics. Here's the thing,

though, Paula. You listen to people, and I try to listen to smart people like Ray Dalio. He brings up a lot of these same issues that Bradley brings up. So you have very smart Wall Street people. You have very smart, Wall Street people asking these same questions, people that have a history of not being far off the mark. So while some people might go, oh, Bradley, come on. There's very smart people saying, oh, Bradley, in a whole different way. So all these things could happen. So your question about hedges is one that I think that we should think through. If things go poorly, what is my strategy? You and I have talked before here, Paula, about having an investment policy statement and sticking with it. This is a very important time to have an investment policy so that no matter what your emotions are, you're still working off that same sheet, right?

This is how I manage my money, and that's going to get me through it. And Joe, to clarify, if a person were to write an investment policy statement today, what are the questions that they should answer on this document? Like, you open up a word document on your computer. you start writing your statement, what should you put down into digital ink? What is my investment allocation? What investments am I using? How am I choosing those investments? What's the filtering system I use to choose investments? During what conditions do I decide to change those investments and how exactly would I change them so that you have this unemotional roadmap of how you drive the car? That doesn't mean, by the way, Paula, that you don't

ever change that. But instead of making emotional decisions based on today, you're busy working on the machine. An example, a business owner will tell you that it's much better to think about the policies of a company and the strategy of a company than to just every day go, well, I guess we'll open up today. No, we don't just open today. We open at 9 a.m. If we open, we open it this specific time. And that's in the manual. And before 9 a.m., I come in a half hour early and these are the five tasks I do before I open. And sometimes you're going to find that a task isn't in the manual. So you can either go, oh, I've got to sweep the floor before I open or I can put it in the manual that from here on out, I'm going to sweep the floor before I open. The investment policy statement is

that manual. So if you go, you know what, I totally didn't think about X thing. Instead of making a one-time decision then, you change your investment policy statement that this is what we're going to do forever. So you're always working on your engine. to manage your money more effectively. So some of those investment policy statements include hedges, Bradley, to bad things. But before we get to that, the run on the bank thing, if there were going to be a run on the banks, we would have seen it back in 2007, 2008. We had a huge banking crisis.

We had Lehman Brothers go under, Bear Stearns go under, companies that people thought, no way ever will the government let those companies go under. And they were gone. Remember Washington Mutual? Yeah. Yeah. There's a name you haven't heard since 2008? No.

I mean, IndyMac, what are some of the other mortgage companies that went under? It's just, yeah, some big companies that went by-bye. So when we saw people beginning to pull their money out then, you saw the controls that were in place were incredibly effective. In fact, following the FDIC through that period was a really, really. interesting case study. So while I don't discount the fact that there might be a run on the bank, at this point in the game, I'm not worried about that. Your money is far safer in the banking system than it is in your mattress under a floorboard, someplace in your house. Do not do that. Do not pull your money out of the bank. Yeah. Absolutely. And it's true, Bradley, as you mentioned,

we are seeing news reports right now of a few people who are pulling their money out of banks. But those news reports are highlighting that because it's sensational. It's what I call the man bites dog story. You know, if a dog bites a man, it's not a new story. If a man bites a dog, because that's so unusual. That's what makes it appear in the headlines. And so, sure, there's a small minority of people who are pulling their money out. But overall, consumer trust in the banks, public trust in the banks and in our financial institutions is still high.

Well, and even Paula, without trust, I just wonder what you would do with it. Because these are the people that end up on the news later that some relative found out that they hid money in their house. And it just doesn't end well. Someone comes by and steals everything. Yeah. Oh, I heard this very sad story about a woman in China who lost her. her life savings because rats chewed through it. That's what happens when you keep your money in literal cash, physical cash. If rats chew through it and it's at a bank, it's their problem.

Exactly. That's the moral of that story. Hedges, though, are interesting because back when I was a financial planner, I would put hedges in portfolios as an example, much like you'll put just a little chili powder in the chili, but you don't want too much, I would have a little allocation of commodities in a portfolio. And I found that while commodities could be volatile, the volatility profile of a commodity was so different than the volatility profile of the stock market, that it had this really neat effect of calming down the portfolio without losing most of the upside. That said, a big hedge paula is not gold, please do not hedge using gold. Gold is so unpredictable.

Gold also, I have talked to so many people who say, well, I don't really like the volatility of the stock market, so I put my money in gold. Gold is eight times more volatile than the stock market. And most of that volatility ends up in a rate of return that's horrible, horrible, not even bad. It is horrible. Do not use gold as a hedge. The only way that you win in gold is if the entire economy disintegrates and you need to go find a cave and a tent out in the woods, then maybe gold's going to be your savior. But I just think hedging with gold is a horrible idea.

For a context, Joe, when you talk about adding a small portion of commodities to a portfolio, in order to smooth out the volatility. What you're describing is what's referred to as low correlation assets. So stocks or equities moves as it does, and your commodities allocation moves as it does. And because those two don't tend to move in tandem with one another, they may both be quite volatile, but they don't correlate in the way in which they're volatile. So it's called low correlation, and that's how it's smooth. without the ride. I just wanted to explain that context for anybody who's wondering why. Well, what's super exciting, Paul, about what you're talking about, if we're going to get

super nerdy about this for just a second, is that if anybody wants to go Google something called the Efficient Frontier, what you'll find if your assets are efficiently allocated, you can actually historically have rates of return that are higher with less risk just by adding investment types with different risks to a mix, even if those risks are greater than what you're adding to. So as an example, international funds have been beaten up over the last few years versus U.S. stocks. Over longer periods of time, however, if you add international stocks to your portfolio with large cap stocks, and then let's get crazy, let's add some small companies in there, which are even riskier than both of those, we just added two areas to the pie.

that are riskier than what we had when we had just large company U.S. stocks, historically over long periods of time, returns are better and your risk is lower. Just by having all three, we added riskier stuff, and we still are taking less risk and we look at the whole portfolio together.

So that's why, but when I say a small amount, Paula, I'm talking about less than 5%, and usually closer to 2 or 3% of the portfolio. Just a little bit of pepper in your chili goes a long way.

Don't dump it in there. The other thing that's horrible, not always horrible, by the way, but horrible right now are bonds. If you're hedging, if you're hedging with bonds, bonds work on what's called a teeter-totter. That's the technical term. I'm kidding, but it's great to think of it this way. When bond prices are low, interest rates are high. Interest rates are high. Bond prices are low.

So right now, we have low interest rates, which means bond prices are high. if the interest rates come up, I would suggest they can't go much lower. So if interest rates come up and they're going to come up, it is a guaranteed loss in bond positions, which, and you see people right now running in droves to treasuries, right? I don't care if I lose a little money guaranteed, lock it in, baby. I really don't like that. That's another bad hedge. So gold bonds, not good hedges.

I'll tell you my two favorite hedges, Paula, are these. proper asset allocation, which we were talking about earlier, is a phenomenal hedge because you're not taking one risk, you're taking all the risks or lots and lots of different risks. And what's cool about great asset allocation, and we'll answer a question about this later from Anonymous, is that you can do something called rebalancing your portfolio, which takes advantage of buy low, sell high. So we'll get into that more later. But asset allocation lets you do this cool rebalancing thing, which is a low risk, higher reward way of making sure that you do the right thing. And Paula, you don't have to bet on where the market is today or where the

market's going tomorrow. And behaviorally, we always get that wrong. So we protect ourselves against ourselves. We're highly allocated to a bunch of different risks. And then we rebalance. I think that is your A number one hedge. The one other comment that you made, Bradley, that I wanted to address is you asked about hyperinflation or mass inflation. And yes, it is true that historically, we have seen periods of high inflation that have resulted from the government printing money. But it's also the case that there are 152 million workers in America. And in the last four weeks, 22 million of them have lost their job. So this new. This new. infusion of money may not trigger hyperinflation, I believe it won't, because it's replacing a lot of income, a lot of wealth that evaporated. When you think about the way in which spending has dried up, there's a distinction between deferred or delayed spending versus spending that disappears entirely.

So, for example, if you need to buy a new dishwasher, you might not do that right now, because right now the economy is very unstable. But eventually you're going to replace that dishwasher, maybe in October or November. So that's deferred spending. However, if you don't go to a restaurant right now, you're not going to eat two dinners the next time you go to a restaurant. that spending that has just disappeared. And so this infusion of money that is coming into people's hands,

a lot of that money is replacing spending that has disappeared and that will never come back. You know, if you didn't go to a concert in April, you're not going to go to twice as many concerts in the fall. You'll resume your normal habits. You're not going to double up. You might have twice as many drinks at the bar, but that's a lot. a different story. You're not going to take five trips on planes to make up for the two that got canceled. Exactly. So there is genuinely a lot of spending a lot of wealth that was destroyed, consumer demand that was destroyed. And right now, the urgent objective is to get money into

people's hands in order to make up for that. The likelihood of it turning into hyperinflation based on these circumstances is, I believe, quite low. The fact that so much demand has been destroyed, that GDP has and will continue to plummet, and the fact that the bare market destroyed so much wealth, all of those are deflationary pressures on the money supply. In addition, the fact that the recovery will be slow, reopening will be slow, consumers having the confidence to spend again will be slow,

that's another deflationary pressure. In periods of high inflation, people want to spend their money, right now before it loses value. But in deflationary periods, people want to hold on to their money. And so the speed of transactions, the velocity of money slows down. So we have all of these deflationary pressures that are happening right now. The risk that we could face is massive deflation. And so the $2 trillion infusion is counterbalanced against all of the other deflationary pressures that are happening. Now, how do you tweak that balance? How do you get the seesaw just right? that's an ongoing question and it's going to largely depend on how much the GDP falls, how long it takes for consumer spending to come back to its former state, how long it takes for the stock market to recover its gains.

Those are ongoing factors that are being constantly monitored. And if it looks like conditions are tilting too far in one direction or the other, the Fed can institute quantitative easing or quantitative tightening based on current conditions. Again, we saw this in 2008. That market crash had a lot of the same deflationary pressures, and because of that, the Fed instituted quantitative easing in order to massively increase the money supply. And those two factors counterbalanced each other, such that we got through 2008 experiencing neither deflation nor runaway inflation. And so our economy passed that test a dozen years ago, and now we're being tested again. And whether or not we pass this test, whether or not we get that balance right, remains to be seen, but we have a lot of tools at our disposal.

Clearly, we don't know what the outcome is going to be completely on this. But I will say this. I wonder how people are making it anyway without this. Because if this had happened to me in 1993, Paula, I would have been screwed. I was thinking that there are plenty of people that are in the spot that I was in. I had no money. I had no reserve. I had a ton of debt. I had all these financial problems. I was already in a world of hurt. If this, if this had happened right when I was at my low point, I have no idea. No idea how it would have gotten. So even regardless of regardless of that, my, I don't know, my thought process is, man, let's get people through today, right now. Let's get through right now. And I will deal with the hyperinflation. I will, I will deal with it. If that happens, okay. We'll figure that out later.

Let's just roll the boat forward. But do you think it's going to happen? I don't. No. I mean, to some degree, I do think there's going to be held to pay. At some point, this has to be paid back. You can't just hand out money and not have to pay it back later. Well, you can, but all the ways to get out of this, none of them are great, right?

So we are forcing our hand on a series of decisions. But I go back to Stephen Covey about my time. And I've got three things I can worry about, those things that I can control, those things that I can control or influence, those things I can neither control nor influence. I'm not going to spend all my time worried about wider economic policy. The big thing is, for me, if I'm trying to pay the bills today, how am I getting to get the bills paid? How am I going to make that happen? And if the government helps me, fantastic. We'll figure the rest of that out later. Today, I got to get the bills paid. And I know that's not the Monday morning quarterback stuff that I think

that Bradley's looking for. But that's, that's my take. We'll say if we do have mass inflation, the best position to be in is to be a rental property investor who has many mortgages taken out. Because if you are a borrower, if you are a mortgage holder, then inflation is your friend. If you have a fixed rate mortgage, so assuming you have a fixed rate mortgage, you are paying back that mortgage in cheaper and cheaper dollars as inflation increases. Yeah, get in. Yeah. If you are a rental property investor and we do reach a high inflation period of time, man, that's going to be great for anybody who holds a mortgage, a fixed rate mortgage. Yeah.

If you want to learn more about rental property investing, we have a free e-book. It's called seven expensive mistakes that rental property investors make. It outlines, as the title implies, seven of the most common mistakes that I see particularly beginner rental property investors making. So you can download that for free. And once you get that, you'll also get a free. seven-day email series on rental property investing 101. So a lot of information that we're making available. You can get that for free at afford anything.com slash mistakes. That's afford anything.com slash mistakes. I do have also, Paula, one more hedge that I don't like as much, but we would use sometimes.

Setting stop losses, if you're somebody who's incredibly nervous, is not a bad thing. Stop losses, you can't place stop losses on mutual funds, but you can't place stop losses on exchange traded funds. Because mutual funds only trade once a day, you can just check those at the end of the day and see if they hit your number. With exchange traded funds, depending on your brokerage account, you can set a stop loss and it will just hold for 30 days, 60 days, 90 days, whatever amount that let you have it, have it stay there for. And it is this trade that once, and there's two different ways to set stop losses, and we're not going to go into all the details, but once the number hits that or goes below that, what they call that strike price, it will automatically trigger a trade

and then it will sell your position. So if it keeps going lower than that, it goes lower. I'll tell you what the bad news is about stop losses. You think differently about your money once you're in cash than you do when you're in investments. And whenever we'd have stop losses hit, My job as people's advisor was to tell them once we put the break on, we have to at some point put the gas back on. We had to put the money back because it doesn't belong in cash. It belongs in these long-term investments. My clients were always afraid to do that. So afraid that the stop loss didn't save the money, Paula.

A lot of the time, I couldn't convince them to put the money back until it was way too late. And the stop loss ended up killing the plan. but I also get having been through a couple of these before and not the same thing because they're always different every time but going through a stock market downturn I do know that I had some clients that would stay awake all night long and I was more worried about them than I was about their money being okay I thought their funds were going to be okay they couldn't take the roller coaster ride but they really needed to stay invested so we put stop losses on their things and I would get reports from my clients that they could sleep because they knew that if it

went below X number, it would automatically sell. Stop losses are not infallible in another way. Every strategy has an Achilles heel. And question should always be if you work with an advisor, if you're doing it yourself, whatever, what is the Achilles heel of this strategy? Because every strategy has one. There's always the downside. Another downside of stop losses. If you set the type of stop loss where it's a set number. And once the market hits that number, if the market's moving very quickly, it may never hit that number.

Your stop loss might just expire because the market went so fast below it that your trade never executed. If you set it the other way where it's that number or lower and it will automatically execute in a fast moving market once again, let's say you set it at 80.

If there's a rush of people selling, you might sell it 65, I remember a couple fast-moving markets where I would have to call my client and say, we didn't get anywhere close to our stop loss. But you're out. You are out. And the rest of the down is going to be a down that you don't experience. But now we have a bigger problem. Now we have to figure out when to put it in.

And if you know statistics, you know that people's track record of picking the right time, ain't that good. Exactly. I have stop losses set up on some of my individual stocks that I trade through. Robin Hood, the Robin Hood app, my strategy with that is if I've made a significant gain on a given stock and I want to make sure that I lock in that gain, I will let that gain ride, but I'll set up a stop loss on it such that if it starts to fall, that'll trigger an automatic sell and that cell will be sufficiently high enough that I will have walked away with a significant gain. Yeah, and some companies will let you. I don't know if Robin Hood does because I don't use

Robin Hood, but a lot of companies will let you set up something called a trailing stop loss. Well, it will always trail 10% below, or you set the percentage, but a percentage below whatever the top number was that the stock went to. And then if it comes back, 10% or 5% or 3% or whatever the number is, it will sell. I'll tell you that once again, Achilles heel with everything, the big problem with trailing stop losses, people would set them too close. So what I like to do if I'm setting a trailing stop loss is I look at the daily volatility on a stock. What's the average amount of volatility it has?

And I set it just below that daily volatility. So if it's going to wiggle a little bit like it does every single day, I'm going to let it go. But if it wiggles a little more than it does any other day, I will sell it and I'm out of the position. And I alluded in a previous episode that you and I recorded together that a lot of the sell-off that we saw that took place in March, when the stock market rapidly declined, a lot of that may have been algorithm driven, and a significant portion of that may have been stop losses going into effect. People have their stop losses set up. So what we saw in March with the big sell-off may not have reflected a lack of confidence in the market.

And we're now seeing a lot of confidence being expressed in the market as of the time of this recording, which is April 16th. but a lot of that sell-off may have simply been these automations that were set up that then got triggered. Yeah. Lots of program trading happens. Yeah. And by the way, we're still on question one. That makes me think of something else, which is when you see people on the news trying to explain what happened in the stock market that day, so many of these programs are set up ahead of time. So many traders trade for so many different reasons, trying to.

rationalize why something happened is a fool's gain. You can't understand why the market does what it does. Exactly. All right. So Bradley, thank you for asking that question. And best of luck managing your investments throughout this crisis. We'll come back to this episode after this word from our sponsors. 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

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She retired last year. So she is seeing some sequence of returns risk right now. This is sequencing Sally. Sequencing Sally. Perfect. All right. Then our next call comes from sequencing Sally. Hi, Paula.

This is Anonymous, and I'm calling at the end of March. I hope you're feeling better. I hope you don't have COVID-19, but whatever it is, I hope you're on the road to recovery. I have a couple of questions given the bear market. that we're in. I don't know by the time you get to this if how things will have changed, but I retired a year ago at age 64 and I live off of a monthly withdrawal from my Vanguard portfolio. And I also have money set aside emergency fund that I could live off of for a couple of years. My question is, given the bare market, is it better to continue living off of my

portfolio, I live off of these monthly withdrawals which would be selling bonds. So is it better to be selling bonds now or to leave my portfolio alone and spend from my savings, my emergency savings? That's my first question. My second question is my target allocation at Vanguard is 45% stocks, 55% bonds, and today, at least my allocation is now 3664. Vanguard assesses the allocations on a quarterly basis, and if you're more than 5% out, then they will rebalance. I'm wondering if you think I should rebalance sooner rather than waiting for their quarterly review, which for me wouldn't be until the end of May.

So once again, I'm just wondering if I should rebalance now, or wait until Vanguard does their quarterly assessment. And then my final question is, with my 45-55 target allocation and my 36-64 current allocation, Vanguard says I have a nine-point variance, the 45-target minus the 36 current. And they'll rebalance if there's more than a point variance. But I'm thinking that nine point variance is really 20% of the 45 target allocation. So I think my allocation is off by 20%. So how do you calculate that? How do you calculate how far off your target allocation you are? Okay, that's it for now. I look forward to hearing your answer to my questions.

Sequencing Sally. Fantastic questions. Let's start with your first question, which is, should you live off of money from your portfolio or should you leave your portfolio alone and spend from your emergency savings? Before I answer this, I have one question that I want to ask back to you, which is, do you have any other sources of income? Are you collecting Social Security? Do you have a pension? If you have any other sources of income, and if it is possible to make lifestyle changes that would allow you to live on that or to majority live on that, at least for the next, at least for the year 2020, I would prioritize that first.

If you do not have any other sources of income, I absolutely would not convert paper losses into real losses. So if there is any asset in your portfolio in which you're down, you have a net loss, hold those, don't sell those off, don't convert those paper losses into real losses. If that is not the case, if you have gains, you've been holding your investments for a while, you know, you have long-term capital gains, then between the two, I am still more of a fan of pulling money out of. of your emergency fund. You mentioned you have a couple of years worth of emergency fund. I don't know if you meant couple literally as in two years or figuratively as in a few years. Could be anywhere from one to three to four maybe. Let's just assume that you have two years of emergency savings. Two years from now, our economy will most likely, and I don't want to make any market predictions, but there is a reasonable chance that within two years, or even within one year, our economy will have recovered, the markets will have recovered, maybe not to where they were in January 2019, but at least to better than where they are now.

I understand the reluctance to pull money out of an emergency fund because we are so trained to think that money needs to sit there always. Like that money is meant to be preserved in this fund and not be touched. And 95% of the time, that mindset is fantastic. That's the mindset that keeps us from rating our emergency fund in order to pay for frivolous items. But we are genuinely in an emergency right now. And so in order to avoid sequence of returns risk at the beginning of your retirement, in order to avoid selling off portions of your portfolio that might hamper the performance of that portfolio for the next 20 or 30 years into the future, that's what an emergency fund is for. Yeah, this certainly qualifies. You know, when you talk about other places where Sally might be able to get income, I also think that not just for Sally, but for all of us, this is a great time to experiment with your budget and see what things you really need.

which things you don't need. You know, you're at home all day. If you're 85, 90% of us, you're at home. So why not use that time to experiment with the budget, to take a fine-tooth comb to it and see if there are ways to not spend so much money now? And I think if you think of that as a slog and you think of it as, man, times are hurting and I need to do this, that's horrible. If you think of it is, I'm going to experiment and see it takes what probably is, you know, is a bad time that's horrible. It makes it a little bit of fun, you know. So I like that idea. I like that idea all the time seeing, is this a necessary expense? And then test it. What about her asset allocation? Let's talk about that. I think myself, and I don't know how you

feel about this, Paula, but I always ask this question. Well, even before I ask this question, let me tell everybody the assumption that I bring to the table. We determine asset allocation based on a goal. And that goal for most people, not for everybody, but for most people, it's being able to financially independent or get to financial independence. So that means it's I need X amount of money times Y rate of return to get that goal. So my first thought, when somebody tells me that they are 45% stocks, 55% bonds, I think, what rate of return historically would that have gotten you? and what does that return mean for the equation?

We also know that because of the fact that her portfolio has clearly sunk, because if it's now only 36% stocks, we know stocks sink more quickly than bonds do, she now has a smaller portfolio. I'm wondering if that equation works anymore. And so the first thing I think of is before rebalancing to 45-55, let's look and see what that allocation probably should be. Where should we be stocks to bonds to make sure we get where we want to go?

Because frankly, I think for most people, even during retire, and I don't know how big the portfolio is, I don't know the whole strategy. But when I hear 45% stocks, 55% bonds, I think even for retire people, there's not enough growth engine there. There's not enough money on the growth side to keep this ball afloat for a long period of time. might not be the case. Hopefully it's because Sally's got so much money, she can accept a very low rate of return.

That was my first thought about the asset allocation. Now, when it comes to rebalancing, you know, historically, the answer is yes, absolutely. Rebalance now. That makes me feel better now, and I feel like I'm getting a better price today. I'll tell you the bad news. People have done studies on this that 15 years from now,

it doesn't matter. is sticking with it and just doing it quarterly versus taking advantage of these opportunities, maybe not that worth the effort. But would I do it anyway? Hell yeah, I'd do it. The market's down. Let's take advantage of these prices. And see, I wouldn't because I have a phrase that I developed a few years ago, which is don't unautomate the system. If you've already set up an automation, Vanguard will do this for you on a quarterly basis. On automating the system, the more that you get your hands in there, the higher the likelihood that something goes wrong, that you mess something up.

Well, and the other funny thing, Paula, about what you're saying is, did you hear what I just said? When we were talking to Bradley, I said, have an investment policy statement. That investment policy statement will tell you exactly what to do. I just told Sally, who cares about the investment policy? Go do it. So of course, Paul, I think you're right on this one. I have noticed that, I've noticed inside of my business.

I have a handful of rules for how I operate and manage and deal with different things inside the business. And every now and again, somebody, a student in the course or a guest that I'm interviewing will come to me and they will ask, they'll make a request that would be, if I were to grant it, an exception to the rules about how I tend to operate. And without fail, every single time that I say yes and I grant that exception, it always blows up in my face. It is amazing. Every time. Yeah. A variety of scenarios over a wide variety of unrelated incidents, but they all share the same underlying thread, which is you break the rules and there are consequences. Oh, for me, there's always two underlying threads.

The second underlying thread is the person telling me it's going to be different this time. I promise that it's not going to work out that way. And it always does. The other question, I like Sally's thinking, by the way, that this is 20%. Because it is 20%. Because it is. Yeah. It totally is.

However, it doesn't matter. I think Vanguard, Vanguard's looking at it from a percentage of the portfolio number. So what you and I think that it's 20 is, I don't think the way they do it. The way they do it is that's a 5% different number than the other. I'll say one more thing on the topic of the previous question, that previous question being, should I manually rebalance right now or should I wait for Vanguard to automatically do it at the end of May? We do not know what the market will look like at the end of May. And so we have no idea if the result of the decision will be more advantageous if done now versus if done at the end of May.

And we can try to make guesses, but we just don't know. Annie Duke, who is a professional poker player and an author, she talks about this concept called resulting, which is the idea that most of us judge the decisions that we've made based on the result that they've produced. But that is actually not a sound way to judge our decision making because sometimes bad decisions lead to good or excellent. acceptable results. If you run a red light and you don't get into an accident, you don't get a ticket, and you reach your destination faster, does that mean that running a red light was a good idea? No. It was still a bad decision despite the fact that it had, in your case, a positive consequence. You reached your decision faster with no negative consequences. And so the way to approach decision making and to evaluate previous decisions should be based not on the results that they created,

but rather on the soundness of the decision itself. And that's why I go back to that rule of don't unautomate the system. If you've set up automated processes for yourself, let those handle it. You went through the trouble of automating the system. Don't interfere. Yeah, good advice to yourself. I think I need a tattoo. that says that. So thank you, Sequence, Sally, for asking those questions. Our next question comes from Jan. Hi, Paula. This is Jan. First time, long time. I really appreciate all your work, and I love the two

perspectives when you and Joel answer questions together. I have a question about delaying tax burdens when selling investments. A bit of background. I'm 36 with a regular job that I'd like to leave soon, four years of the max. I have 750K in investments, 250 in Vanguard indexes that are within my 401k and Roth IRAs, and 500 in a managed fund with a 3% annual fee, which is made up of various stocks and mutual funds. I also have two houses, one with a 15-year fixed and 90K in debt, and the other with a 30-year fixed and 130k in debt. They're both rented out.

as I just got married and now live in my wife's condo, which holds 230k in debt. I also have about 360K in cash, which I'm holding because I'm looking to leave my job to teach at a Catholic school and start a community toolshed for elderly men. I currently make about 130K per year at my job, and my wife no longer works. I mentioned this to ask how to go about transitioning my managed fund into my Vanguard personal brokerage without incurring a ton of taxes from the sales of all the holdings in it. I'm trying to get away from the managed fund fees and the average performance, but I want to time it so that I am not getting kicked in the pants by the IRS. I believe I still get taxing the gains at sale, even if I put it back directly on the market. So how can I go about decreasing my tax burden? Should I just stay with my fund manager until I quit so that it counts

as my only income for the year? Should I put my salary in the deferred compensation plan for a year and then sell all the holdings? Thanks for the advice, and I hope it helps anyone else out there who might be in a similar scenario. Jan, first of all, congratulations on everything that you've built up. So between the value in your investment accounts

plus the cash that you're holding, just those two things alone add up to a net worth of $1.1 million, and that does not include the equity in all of your homes combined. So to be third, 36 years old and to have built that much already. That's very impressive. So big congratulations to you for having accumulated all of that by your mid-30s. Yeah, I totally agree, Paula. I love the fact, mostly though, that Jan seems to be going to the thing that he really wants to do. And I love it when people say, not what should I do in a perfect world where I don't have any emotions, but how do I do the thing I really want to do?

do. And I find that exciting. There's a simple mechanism, Jan, to be able to do this. It's called an ACAT transfer. So you just ask the place that you're going to move it for that you want to move everything in kind. And what that will do is you'll move over the account and you'll move over all of the stocks, all the positions. And it will just, it'll scrape off the manager and that fee that you don't like. That's a good news thing and a bad news thing. The good news is you don't have the anymore. The other good news is you're not going to have any tax implication. The bad news is you don't have any basis information about those stocks. And number two is you no longer have any guidance about when to sell these positions because the reason that they had them in the first place wasn't to have

a garden of stocks. It was to have a single strategy that the manager was putting together and now we don't have that anymore. So here's the way to mitigate both of those. The first one is before you move the money, make sure that you get the cost basis on every single position you have. Usually you can get that online ahead of time, just get copies of all of that stuff so that you know that before you move. Then once the things move over, while you're in the process of having it move, decide ahead of time, what's the maximum tax bite that I can handle and sell as many positions is possible. So you get down from, you know, Paul, a lot of these managers will own 100, 200, maybe even 250 different stocks. You can get it down to a much more manageable number, 40 or 50 stocks,

maybe, a much smaller number so then you don't have to watch everything and then decide when you sell all those different positions. We also talk then about trailing stop losses. At this point, you could probably set stop losses on the positions and then sell them at opportune times for each of those those positions. So those help with both things. I personally, I heard that there were mediocre results. Mediocre results are absolutely what you're going to get from an index. I would want to know more about who the manager was and exactly what the strategy was before I thought that was a good idea. So I'm just going to assume that it is a good idea because it's what you want to do. But I would actually have a lot more questions before I made that sale.

So what about the aspect of his question in which he asks, should I put my salary in a deferred compensation plan for the year and then sell all my holdings? Well, here's what I don't like. We are in an economic downturn, Paula, and deferred comp is in most cases still subject to bankruptcy, meaning it isn't sheltered like your 401K plan may be sheltered and separated. So it depends on that deferred comp. I don't get excited about putting money into a deferred comp position. And I mean, we don't know who the survivors are going to be. We have no idea how bad things are going to get for the economy. If his deferred comp works a way most deferred comp works, which means it's a non-qualified retirement plan, meaning that he's basically sheltering his income this year so he doesn't have to worry about making so much so he's able to move over this money in the manager program and pay all those taxes. I don't think I do it. I really don't think I do it.

I think I would just transfer them over and sell a little bit more selectively. And then for the winners that he has, maybe wait till January 1st and spread the pain over two years instead of one. Thank you, Jan, for asking that question. We'll return to the show in just a moment. Our next question comes from Jay.

Hi, Paula. My name is Jay. I am 40 years old and I live and work in Thailand. Shortly after discovering your fantastic podcast, I found out that I could reach financial independence in five years. I have no personal or asset debt, no family member I have to take care of. I only have to look after myself. Now to my question, I have student loan that I have to repay by working a certain number of years at the institute that gave out the loan. If I stay at my current workplace, I do not have

to pay any money back. But if I quit that, I have to pay back the money as a penalty. Each year that I stay at the institution, the payback sum will be $22,000 less. If I quit after the year 2037, I do not have to pay back anything. I don't hate my job, but I also not in love with it. I would love to have an option to quit and explore something else, especially after I reach everything. I. In 2025, I will have a total saving of $520,000 with an annual expense of $12,500. If I quit my job, the penalty will be around $270,000. I could pay that back in catch right then, but I am not sure whether it is a wise move. I could also pay by installments with 7% and annual interest. I would love to hear your advice on what I should do. Thanks for everything

you do for the community. I love your no-nonsense and very precise approach. Your podcast shows how will you prepare and research before recording. Keep on great work and thank you. Bye. Jay, thank you for asking that question. And I love the fact that you have your site set on reaching financial independence within the next five years. You mentioned that five years from now, you project that you will have $520,000 saved, and your annual expenses are $12,500, which means that you will have 41 times your annual expenses saved. That is an amazing position to be in. However, if you quit your job in five years, then you have this $270,000 obligation that you need to satisfy. There are two routes that we can travel down.

As you mentioned in your voicemail, we can either look at the option of making a lump sum payment or taking out a loan and making installment payments. If you were to make a lump sum payment, then five years from now, instead of having $520,000, you'll have only $250,000. Unfortunately, that's only 20 times your annual cost of living. And that leads to a lifestyle question of, once you quit your job, what would you want to do next? Because quitting your job with 20 times your annual cost of living saved, you can look at that in one of two ways. The bad news is it's not enough money if your goal is the cessation of income producing activity for the rest of your life. But of course, that is a very strict and narrow view of the concept of retirement. And I don't hear within your question that that is your goal.

It doesn't sound to me like you want to stop earning an income forever. It sounds to me like you just want to do something different. Try different things. Start some new line of work. Maybe go into a different career. And if that's your goal, quitting your job while you have a 20, 20-year runway, wow. If you look at it from that perspective, you're in an amazing position because you have 20 years worth of living expenses saved, which you can fall back on as you try new

careers as you figure it out. And it's not going to take you 20 years. I'm guessing after one or two years, you'll have found something that ignites you, something that sparks your curiosity, something you want to work on. And that next career that you find will pay you an income, perhaps pay you a higher one than what you're making right now, which will allow you to continue growing the pot, continue growing that portfolio. Now, if you were to make a lump sum payment of that $270,000

and then look at the remaining $250,000 as a 20-year runway, if you were to make that framework shift, then that would have implications for the way in which you invest that money. I don't know how your investments are currently set up, but you would want your asset allocation to be fairly conservative, and you would want to be holding several years worth of cash in order to account for the fact that you're planning on withdrawing this money, relying on this money, living on this money, for the foreseeable future. So you don't want it tied up in equities or other high-risk investments, which are only appropriate for a longer time duration. So what that means is, if we shift the framework and think of this as a 20-year runway and correspondingly shift your asset allocation, then you'll want to make different assumptions, different projections about the rate of return of your overall portfolio because it'll be tilted into a much more conservative manner, a much more conservative investment strategy, at least until you start making money again at whatever you do next. Now, with all of that being said, I know the premise of what I have just talked about is based on a scenario in which you make a $270,000 lump sum payment in 2025. But I am not necessarily advocating for that because, as I said, when we began, there are two routes that you could go down, the lump sum payment or the installment payment.

And so we've just explored the implications of the lump sum payment. That would be one route that we could travel down. And then the other route that we could travel down is if you were to take on this installment payment plan, over how many years would that be spread out? Once we have that number, once we know the number of years and the payment that you have to make annually, then we know what your new annual expenses are because then your annual expenses are not going to be 12,500 anymore. there'll be 12,500 plus the annual payment that you have to make on this balance. So either way, whether we're looking at reducing the lump sum or whether we're looking at increasing our understanding of your annual expenses, either way, that informs the question of what are my annual expenses, how much money do I have in my portfolio, and am I ready to retire?

or am I ready to live the FI lifestyle? My only add on, Paula, is just this. I like starting from the position of what do you really want to do and start from there. And the reason why I like that best is because this is such a difficult financial question. I think if you get too wrapped up in the financial part, of course you're going to stay. But if you stay, if you stay in the job and you, for only financial reasons, you lose years of your life that you can't get back. And so I just wonder about your headspace. I'm not sure how long you could afford to stay there, which is clearly going to have a financial number added to it.

I guess the other piece of math, too, on top of your math, Paula, is how much more money do I need to earn doing something else? that makes it worth my well. Because if it's 22,000 more that I earn, right? Who cares? If I can keep the same lifestyle and I earn the money to pay the penalty, then it doesn't matter, does it? Exactly. Right. Because Jay, if you stay in this job until the year 2037, then you won't owe anything. You're 40 years old. If you stay until 2037, you'll be 57 years old. And to lose that time, to lose your 40s and the majority of your 50s by staying in a job that you're not excited about staying in, that's not a great use of your time or your talent. So I love the idea of you quitting and exploring something else.

And if that can come in the form of higher paying work, then you've had the best of both worlds. Jay, thank you for asking that question and best of luck with the decision that you make. I'd also like to share this success story that comes from April. Hi, Paula, it's April from California. I wanted to call in and tell you a success story from having enough cash reserves on hand. I have a special needs son who gets a lot of help at school. And as soon as they turned our school environment into an online-only environment, I was able to immediately realize that they were going to cut special education services,

which is against the law. and I was able to file a 10-day notice with our school, which basically tells them they have 10 days to start up the services again, or I will file against them and make them pay for private school, which they know I can afford because I've been very open about the fact that we're heading for financial independence. And because we had that cushion, if you will, I was able to get special education started up in my district for everyone, not just for my son, by basically raising a ruckus nicely, and getting them to follow the law. So because of my and my husband's financial knowledge from you, basically, we were able to get special education back in our district within 10 days of the school school online only. So thank you for all your advice.

I hope that you are well, and I love your podcast. April, congratulations for you and for everybody who has benefited from the fact that you're able to get special education moving again, after 10 days, that's incredible. So huge congratulations to you. And thank you so much for calling in and sharing that story with the whole community. When people ask, why does this money stuff matter? That's why.

You know, because of the impact that we can make, each of us can make in our communities. And this is another part of finance being personal, not just personal in terms of how do these rules work out for me, but very intensely personal on. on how we're going to use them. We talked to Jay about her personal situation. It's completely different story for April. And the consequences, by the way, around financial independence, also different for each of us, which is, which is cool. Yeah. We talk about it often as if it's one thing. Financial independence is this one idea, this one thing and we're all, you know, which is, which is kind of why I get frustrated when I hear people kind of overgeneralize about a movement or a thing. It's an intensely personal journey. And by the way, if we remembered it was an

intensely personal journey, I'd see probably about one eighth of the fights online people have that are ridiculous than we see today. If we remember that what it means to you does not mean what it means to me. But it's much more exciting seeing a different fabric, hearing about how you used your independence differently. Maybe you used it to retire early. Maybe you used it to keep doing the thing you wanted to. Maybe you moved into a small house. Maybe you moved into a huge house. Maybe you decided to adopt some kids. Maybe you decided to never have kids. Maybe you decided to live alone on a mountain top. Maybe you decided to live in the middle of your favorite city. Like it's so incredibly different for everybody. It truly is an exciting thing to talk about. And I have to

tell you, while I would never want to be a financial planner again, and that's probably a whole different podcast. The one piece I do miss is, man, Paula, when we would reach a goal, when we would reach some of these intensely personal goals for people, and I get to see the finish line, which, you know, it took me being a seasoned advisor for that, just to be friends with people long enough and help them long enough to see that finish line. It was so exciting. It was so cool. That was my favorite part. Yeah, that sounds incredibly gratified. It completely was. It was so great. And that's kind of what I like about what you and I get to do is we hear people's success stories like April's. And I think I keep all the good pieces without the bad stuff. So if you have a success story, please call in and share your success story with us. Affordainthing.com slash voicemail. We would love to share your story with the community in order to highlight why this money stuff matters.

Please bring it. That's our show for today. Joe, where can people find you if they would like to know more about you? Well, people that want more of a 24-7 look at coronavirus and the financial implications. I have a show where we look at financial headlines every day. And the bad news is you can't find headlines that aren't about the effects of that. So that show has very much turned into kind of a play-by-play. of where we headed next with a season cast of financial pros, financial commentators from all over the place, all different walks of life.

And you'll find that six days a week at a show called Money with Friends. Who are some of the people on the cast right now? Oh, man, we've got Liz Weston right now. She's a fantastic columnist who you'll see all over the place. Aaron Lowry, our mutual friend, Aaron Lowry, the broke millennial. Kristen Wong, who wrote one of my favorite financial books called Get Money a couple years ago that I thought was just amazing. Behavioral psychologist, Dr. Brad Klontz.

Oh, yeah. Behavioral investing. He's always fun to talk to. Comedian Paul Ollinger, who is a funny podcast called Crazy Money. George Kirtica from FinTech Company Joust. That guy's sitting right on top of the small businesses struggling, something you and I have talked about a lot, Paula, about the PPP program running out of money recently. Yeah. That's tragic. Yes, being refunded. He was right on top of it. Chad Parks, who had a documentary called Broken

Eggs about the retirement crisis in America. If you remember that documentary from a few years ago, he's on our cast. So clearly people from all over the spectrum. Julian Saunders from Rich and Regular, who even helped us with his background in cooking in the past. That guy amazing in the kitchen and was telling us about, you know, we're doing so much cooking during coronavirus times. How do we get that done? Oh, nice. Nice.

You know, if I had been in better health and if I had had more energy, one of the ideas that I was toying with was setting up a daily email that was for anybody who wanted this information, I was considering the idea of setting up a daily email that would go to people that would have links every single day. It would have maybe two or three links to simple recipes that don't require any type of specialized equipment. Because one of the big problems when you look at recipes online is they're like, put it in a Dutch oven or use an immersion blender, put it in a food processor. Like a lot of people don't have that stuff. I cook a lot and I don't have an immersion blender. I've watched some of these videos online by chefs who are doing some of

this stuff. Let's start off with some of the simple stuff you have around the house, like this Peruvian special spice blend. Yeah. The first thing, I'm like, okay, I'm out. Exactly. Yes. 30-year-old aged molasses and tears from a platypus. Could I substitute butter for that? Yeah. I have butter. Exactly. So yeah, I'd toyed with that idea for a while. If I hadn't gotten sick, I would have done that. Well, next coronavirus. Next pandemic. Speaking of next pandemic, there was an article that I read on CNN.

We will link to this in the show notes. And this article, the show notes are available at afford anything.com slash episode 252. That's afford anything.com slash episode 252. This article is about a guy who's 104 years old. and he just recovered from having COVID-19. I saw this story. It's amazing. So this guy lived through two pandemics.

He lived through the 1918 influenza pandemic. And then he lived through, I mean, he was a baby at the time, but he lived through it. And then he lived through the Great Depression. And then he was a soldier in World War II. He's a World War II veteran. and now he just survived COVID-19. He caught it and he recovered. It was so amazing.

I saw the, this was the one with a picture of him and I think a great, great-grandson, and they both had masks on and they're giving the thumbs up. That's adorable. So cool. We will link to that article in the show notes. But I just, I love that story, such an uplifting story in these tough times. You know, to imagine somebody who has their life bookended by two pandemics. That's crazy.

Can you, well, not necessarily bookended. Now that he lives through this, he could live a lot longer. Yeah, exactly. You'll be around in 2037. Right, right. Hopefully. Well, does that mean there's some good news here that the glass might be a quarter of the way full, Paula? I mean, there's always good news, even in the worst of times.

I've written on Instagram many times about how, how hopeful it is. is to see how kind people are being right now and how generous people are being right now. I mean, when I got sick, the number of emails and text messages, and I still haven't, I mean, more than I can reasonably reply to, just the influx of messages of support that I received was overwhelming. And then on top of that, so many friends sent me flowers. One of my friends sent me dinner rolls, like two packs of, of, you know, dinner rolls that I can warm up and eat. I had friends leave, you know, the dairy harvest

smoothies, those frozen smoothies by daily harvest. I had some friends who left a stack of those in front of my door twice. I had friends who just left food outside my door. I had friends who picked up prescriptions for me at the pharmacy when I was too sick to go out. Like, people are so kind and so generous and so willing to help. Like just the other day, one of my neighbors called, you know, and I'm recovered at this point, but she didn't know that. And so she called to say, hey, I'm going to the grocery store. Do you want me to pick up anything for you? Like, wow. You know, so the kindness of people.

And you see this at every, you know, big scales too. Rihanna donated a bunch of PPE to the state of New York. I sent you a giff of a dead horse. Oh, you did. Yeah. There you go. Didn't mention that. That's better than dinner rolls.

Except his legs were. moving. And I didn't know that when I picked it out. Yeah. Yeah. So all of the people who are looking out for one another, doing kind things, making this a little bit better, like, that's the hope and the good news in the midst of this crisis. Yeah. Yeah. Agreed. So with all of that said, we have come to the closing of today's show. Thank you so much for tuning in. If you caught our last episode, our last episode was about 31 tips to help you stay productive if you are working from home. If you haven't downloaded the free ebook that has those 31 tips, I totally recommend that you do so you can get that for free at afford

anything.com slash productive. Thanks again for tuning in. Make sure that you hit subscribe or follow in whatever app you're using to listen to this podcast so that you don't miss any of our upcoming episodes. I want to give a shout out to our sponsors for today's episode, Blinkist, Ancestry, Gusto, and Radius Bank. For a complete list of all of our sponsors and the deals, the discounts, the coupon codes, the promo codes, you can find all of that at afford anything.com slash sponsors. And if you use any of these services, please use our links. Help support the show, and I'm very grateful to our sponsors. We've had a lot of sponsors cancel. Joe, Joe, if you don't mind me sharing, we were talking behind the scenes.

I know you and basically every podcaster out there is experiencing the same thing right now where our sponsorships are a lot of them are pulling out. A lot of them are drying up. So I'm very grateful to the ones who have stayed with us who have hung in there. And if they'd like to sponsor stacking Benjamins, send them my way to. Great. Well, thank you again for tuning in. My name is Paula Pant. This is the Afford Anything podcast.

I will catch you in the next episode.