Afford Anything - First Friday: How April’s Tariffs Changed the Economy

Episode Date: May 2, 2025

#604: The biggest trade shake-up in 135 years is happening right now. April brought tariff levels that economists say haven't been seen since the 1890s, creating ripple effects throughout the economy. We're seeing a stark disconnect between official economic data and how people feel about their financial future. While the economy added 177,000 jobs in April — beating forecasts — consumer confidence has plummeted to alarming levels. Almost 70 percent of Americans now expect higher unemployment ahead, despite the strong job numbers. The tariffs have triggered some unexpected behaviors. Companies rushed to import goods before prices increased, which ironically pushed the trade deficit to record levels. Consumers went on buying sprees for cars, computers, and other expensive items, fearing they'd soon cost much more. Meanwhile, inflation expectations have surged to their highest levels in decades. What does this mean for investors? Bond markets reacted dramatically, with Treasury yields posting one of the sharpest spikes on record mid-April before settling back down. The dollar weakened significantly, and economists have raised recession probability to 45 percent — up from 30 percent just last month. Small businesses are feeling the uncertainty too. After initial optimism about potential tax cuts and deregulation, their expectations have soured amid concerns about how tariffs might hurt smaller firms disproportionately. Market volatility has hit retirement savers particularly hard. We take a call from a listener named Johanna who shared that she lost 30 percent of her portfolio due to recent tariff-related swings. She’s wondering whether she’s still "Coast FIRE" — even when market shocks alter her retirement math. Join us as we break down April's economic data, explain what's behind the market volatility, and discuss what these historic tariffs might mean for your money in the months ahead. Timestamps: Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. (00:00) The Economic Experiment (02:00) April 2025 Job Gains (05:41) Interest Rate Forecast (07:04) Benefit of Roth Conversions during market declines (08:17) Tariffs and the Smoot-Hawley Tariff Act (13:23) The Bond Market (17:49) The Dollar’s Decline (19:31) Economist's Recession Predictions (22:20) Consumer Sentiment (25:29) Consumer Spending Rises (27:13) Is Johanna still FIRE after the drop? For more information, visit the show notes at https://affordanything.com/episode604https://affordanything.com/episode604 Learn more about your ad choices. Visit podcastchoices.com/adchoices

We're living through an economic experiment that hasn't been seen in over a century. April brought us to highest tariff levels that we've seen in over a century since 1890, the steepest in modern American history, and it triggered these big economic shockwaves across markets. The stock market is volatile, the bond market is sending mixed signals, the trade deficit exploded to record levels as companies' frantically stockpiled imports, bond yields spiked in one of the sharpest jumps ever recorded, and the dollar posted its weakest performance in decades.

Yet, the economy added 177,000 new jobs in the month of April. That's data that came out this morning from the Bureau of Labor Statistics, beating all forecasts and all expectations. Unemployment has stayed within a very narrow band between 4% to 4.2%. It stayed within that band since May of 2024. And we have higher rates of labor force participation. So employment is strong, but the mood is sour. nearly 70% of Americans now expect higher unemployment ahead.

Inflation expectations have surged to their highest level since the early 1980s, and small business sentiment has soured dramatically. We're going to talk about all of that in today's upcoming episode, and we're also going to answer a question from an afforder from one of you who says, hey, my portfolio has tanked. Am I still fie? Joe Saul-Sehi is going to join me in the second half of the show, and we're going to tackle that question together.

Welcome to the Afford Anything Podcast, the show that understands you can afford anything but not everything. Every choice carries a trade-off. This show covers five pillars, financial psychology, increasing your income, investing, real estate and entrepreneurship. It's double-eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia.

Once a month, on the first Friday of the month, we release a monthly economic update. So welcome to the May 2025, First Friday, economic episode. We'll start with the breaking news. The U.S. added 177,000 new jobs in the month of April. This exceeded forecasts. It beat expectations and therefore stocks jumped on the news.

Some of the job gains are predictable. There were 11,000 new jobs in the construction sector. We expect that at the beginning of spring because better weather means this is construction season. But the sectors with the biggest gains continued to be health care, which added 51,000 new jobs in April, which is about the same as their average monthly gain of 52,000 new jobs over the prior per month over the prior 12 months. Similarly, we saw gains in transportation and warehousing, 29,000 new jobs in April, and financial activities, 14,000 new jobs. And if you have listened to our previous First Friday episodes, you're going to recognize the names of these

sectors. These are consistently the sectors that post the highest job growth gains. Now, many of you were wondering what's going on with federal government jobs in the wake of Doge and many highly publicized layoffs? Well, federal government employment declined by 9,000 jobs in the month of April and is down in total by 26,000 jobs across year to date, across 2025. That being said, I'm going to put a big asterisk here, employees that are on paid leave or that are receiving ongoing severance are counted as employed. So we will not. We will not. have a clear picture of how big the declines are in federal government employment until paid leave or severance runs out, which is to say around September we'll start seeing

more accurate numbers. But overall, zooming out, the jobs report is strong. It shows a lot of resilience within our economy. It shows resilience within our businesses and our job sector. There's a great quote from Olusonola, the head of U.S. Economic Research at It ratings who said, quote, the R word that the labor market is demonstrating in this report is resilience, not recession, end quote. I do want to make a note here about the jobs report. The U.S. economy is highly oriented towards services, the service sector. This constitutes about 70% of commercial activity in the U.S. And services are, of course, not directly impacted by tariffs. There is or can be an indirect impact in that if prices overall go up, that has a reverberating

impact on all sectors. But as we talk through what the economic impact of tariffs are going to be, and we're going to discuss that more in just a moment, it's worth noting that the majority of commercial activity comes from services rather than goods. And it's also worth noting that a minority of U.S. manufacturers only 40% rely on imported components, imported parts, or imported finished goods. That's not to underplay the importance of goods in the U.S. market. It still makes up a big, big chunk of both household spending and business spending. But for those of you who are scratching your head at the jobs report going, wait a second, all I saw in the headlines through the entire month of April was Armageddon,

why is the jobs report so good? Well, because tariffs are not, people still need health care. Now, the decline in manufacturing employment in the April jobs report, there was a very, very, very minimal decline. It was mostly flat. But this is going to be the key sector to watch in the coming months. If you're wondering if your interest rate's going to decline,

it's probably not. Because given how good the jobs report is, and how strong labor is, the Fed has no reason to lower interest rates. Remember, the Fed's dual mandate is to manage both inflation and unemployment. So they want to manage inflation, but not in a way that creates so much austerity that we have high unemployment, right? They want to balance those too. But given the fact that we have historically very low unemployment, and it's been steady,

like I said, unemployment has hugged this extremely narrow band of between 4% to 4.2% for over a year. Given how steady that's been, the Fed right now is not concerned about unemployment, which means their chief concern is inflation, which means they're going to keep interest rates likely locked where they are without any reduction. The Fed is meeting again on May 7th, and they are widely expected to hold interest rates where they currently stand, which is a range of 4.25 to 4.5% for the federal fund. rate. What that means for you is that if you're buying a house, buying a car, taking out any kind of a loan, don't expect prevailing interest rates to drop anytime soon.

Ooh, but before we jump into an analysis of the economic news of the past month, I do want to offer one tidbit of advice to anybody who is interested in making a Roth conversion. Do it when the market's down. Because one of the benefits of a stock market decline, It's not only that for those of you who are long-term investors, you get to buy in at cheaper rates, but also for those of you who want to make a Roth conversion, when the stock market declines and your portfolio balance has dropped, you can make a Roth conversion at that time, and now you're paying taxes because you pay tax on the converted amount. So you're paying taxes on a smaller portfolio balance because that market has declined, that balance, because the market has declined,

and therefore your balance has declined. And so you take it a advantage of that, make the Roth conversion at the time that your balance is low. And then when the recovery happens, that recovery will happen in a Roth account where all of your gains are tax exempt forever. All capital gains, all dividends are tax exempt once they're in a Roth account. So for anyone who's listening, who is planning on making a Roth conversion, do it when your portfolio balance is down. That's my tip of the day. All right. Back to an economic analysis. One of the funny parts of doing these episodes only monthly is that today is May 2nd and talking about the tariffs that were announced on April 2nd, literally one month ago, feels like ancient history because so much has happened since that initial announcement. But since these first Friday episodes are monthly economic reports, all right, let's start.

at the beginning of the month. Let's start at the beginning of April. The scale of the tariffs that President Trump announced is the highest since 1890. People in the mainstream media have often compared these tariffs to the Smoot-Hawley Act. The Smoot-Hawley Tariff Act was passed in 1930, and it is widely blamed for exacerbating the Great Depression. But the Smoot-Hawley Tariff Act is not really a good comparison for a number of reasons. First of all, unemployment was 8% in 1930 when Smoot-Hawley was enacted. And that particular act, Smoot-Hawley, targeted specific industries, which is different from what the current administration is doing, in which the current administration is targeting countries rather than industries.

That being said, many countries did enact retaliatory tariffs in response to Smoot-Hawley. In that time, think about the strength that Europe had or lack thereof in the 1930s. They were recovering from World War I, or as it was called back then, the Great War. They were recovering from the Great War. The system of global trade was not as robust as it is today. through the retaliatory tariffs, U.S. exports dropped and global trade overall diminished. But the thing about Smoot-Hawley is that the tariffs weren't even that high. It was about on par with where our tariff levels were at pre the Great War in 1913 when federal income tax was first ratified.

Now, that's based on a measure of customs duty revenues as a percentage of goods imported. according to data that comes from a combination of the U.S. Treasury, U.S. Census Bureau, and the Budget Lab at Yale, and it was reported by Bloomberg. So if you want a better analog, the more accurate comparison was the Tariff Act of 1890. People refer to those as the McKinley tariffs, even though McKinley was not the president at the time, Benjamin Harrison was the president. But that's the better analog because it raised rates to a comparable amount as to what the White House announced at the the beginning of April. The Tariff Act of 1890 collected a duty on imports of around 25% across the board and targeted certain industries even higher, up to 50%. And that set of tariffs had mixed results. For a while, they were quite popular. Remember, William McKinley was not the

president. He was a congressman at the time that he pushed this Tariff Act forward. And he was later elected. He called himself the Napoleon of Protection, and certain industries like the tinplate industry did flourish in the United States as a result. Likewise, the Tariff Act of 1890, it raised tariffs on wool, including carpet wool, to such an extent that the U.S.,

look at Dalton, Georgia, has a booming carpet manufacturing industry. And so we did see some large industrial producers enjoy benefits that came from these protectionist tariffs. We also, however, saw U.S. consumers overall and farmers in particular get harmed by the Tariff Act of 1890. And the tariffs were widely unpopular. They were a huge issue in 1890s congressional elections and had the effect of swinging Congress at

the time. And so I think when we look to history, we should look not to Smoot Hawley, but rather to the McKinley tariffs as the best historical precedent for what we are currently experiencing. But, I'll asterisk here, that said, obviously there are massive differences between 1890 and today. The world, of course, is far more globalized, far more mobile, and we face steep competition from China and need to weigh our domestic interests alongside our desire to remain, as we have been since World War II, the world's foremost superpower. The very fact that investors flock to treasuries at times of global uncertainty, the very fact that the U.S. dollar is the World Reserve

currency, that provides us with a level of economic power today that makes any historical comparison difficult. And that leads to a look at the bond market because the rate on a 10-year treasury note posted one of the sharpest spikes that we have ever seen in the beginning of April. It climbed close to 4.6%. Remember, bond prices and bond yields move inversely to one another. So the spike that we saw in early April was concerning because it showed that investors have less confidence in U.S. assets. And that has long been our strength, knowing that our bonds always have buyers. In fact, if you want to know the strength, I firmly believe if you want to know the strength of the economy, don't look at the stock market, look at the bond market.

Now, the good news is that post that spike in early April, yields have gone down since then, meaning prices have risen, which is great. So bonds right now are trading at about roughly where they were trading around the time of last year's election. But what we really want to be watching is the strength and stability, not of the stock market, but of the bond market. Because the stock market, in the short term, represents fear and greed. In the long term, it represents the present value of future dollars. In the long term, it represents a weighing a machine, but in the short term, it's a voting machine. That's a quote from the investor Benjamin Graham. Now, interestingly, when

we talk about the stock market and the short term being a voting machine, the Vanguard S&P 500 ETF, the ticker symbol VOO, it is the biggest ETF in the world. And it saw record inflows in the month of April, nearly $21 billion invested in Vanguard's S&P 500 ETF in the month of April alone. And that happened in a month when the S&P 500 was incredibly volatile. So interestingly, investors might be souring on U.S. bonds, but they're bullish on the U.S. Broad Market Index, which is a particularly interesting story because generally that's not what happens. Generally, when things go volatile, people flock to the safety of treasuries. So we saw some abnormal investor behavior in the month of April. And it's too early to speculate on what that means or if there are enduring long-term consequences. Remember, it's a risk to try to make declarations too soon. You remember at the beginning of COVID when everybody was talking about, quote, unquote, the death of cities, right? Beginning of COVID, all of a sudden, knowledge workers could work remotely in mass,

and everyone was saying, oh, that's it. No one's ever going to live in a city again. These big cities, they're done, right? We were all collectively having that conversation in March, April, May, June. of 2020, and that, in hindsight, was premature and short-sighted. My point in bringing that up is that any time that we see a notable new trend, it might just be a point-in-time movement, or it might be symptomatic of something bigger. But when we first observe it, it's too early to know. And so what we saw in April was unusual investor behavior. Is that simply a point-in-time aberration?

or is it the beginning of something bigger? It's too early to say. That is the measured approach that you don't hear in the mainstream media. That's the measured approach that doesn't lend itself to clicks and likes and shares, right? Warnings of Armageddon tend to get shared more, but they're not as honest. And they can incite unnecessary panic. The reality is, we don't know if there's weakness in the bond market. We saw a hint of weakness in the bond market in the first.

half of April. And that is worth noting, which is why we're noting it. But we then also saw the bond market normalized in the second half of April. Was it just a blip? Or is it the beginning of something bigger? We don't know. But it's something that we're going to continue to watch. And we're going to do that in the context of knowing that the bond market is perhaps the single most accurate indicator of the strength of the overall economy, much, much more so than the stock market. There's another indicator as well, and that is the strength of the U.S. dollar. The dollar slid significantly over the last 100 days. It has posted the biggest slide at the beginning of a given administration since President Nixon in the 1960s. The question is,

is that good or is that bad? There are actually mixed results. A weaker dollar is beneficial to exporters. Think about it. If you manufacture something inside of the United States and you want to ship it overseas, if the dollar is weak relative to the country that you're shipping that product to, well, that's going to benefit you as the domestic manufacturer. So a weaker dollar helps U.S. exporters, and to that extent, it might offset some of the damage done by retaliatory tariffs. On the other hand, the dollar's strength and the dollar's relative stability is a big piece of why we are the world's reserve currency. And as you recall from previous First Friday episodes, there have been efforts to unseat the U.S. dollar as the world's reserve currency. The BRICS. nations tried to develop some alternate currency that could be used as the reserve standard.

it's highly unlikely that they're going to succeed in doing so, but they're making an attempt. We'll have to continue to see, A, whether or not the dollar continues to slide, and B, how much in the coming months that helps exporters, and C, going back to our previous conversation around bonds, what that does to overseas investors who want to invest in U.S. debts. Now, with everything that's going on, economists have cut their expectations. of U.S. GDP growth for the rest of 2025. A Bloomberg survey of 74 forecasters that was done in April put the chances of a recession in the next 12 months at 45%. So economists are saying that there's a 45% chance of a recession within a year. That is up from their previous estimate of a 30% chance, which was the consensus in March. That said, it's possible that we might be in a recession in the first.

first quarter of 2025, the U.S. economy experienced negative GDP growth. We contracted at an annualized rate of 0.3%. This is the first time that we have had a contraction since the beginning of 2022, the first quarter of 2022. So it's our first pullback in three years. Remember, recessions are only declared in hindsight. So are we in one right now? It's possible. Or is just a one-quarter pullback. That's also possible. Economists gave us a 45% chance of a recession in a survey that was done in April, but that was before the Q1 GDP numbers came out. Does that increase the probability of a recession? That's likely. But the next question is, how devastating would a recession be? I mean, we all, I think, are a bit scarred from the memory of 2008,

which was a recession that had high severity, long duration, and coincided with high unemployment and high foreclosures. Those attributes of high unemployment and high foreclosures, those are not present in all recessions by any stretch. And so both the severity and the duration of any given recession, you know, the consequences of that recession for everyday people can be quite variable. And so I think when we talk about what's the probability of a recession, we also, in the same conversation, need to talk about what would be the consequences of one in the lives of ordinary Americans. And the good news is that given the high employment rate

slash low unemployment rate and the high labor participation rate, even if we do have a recession, there's a low likelihood that that recession would also coincide with significant unemployment. And given much tougher lending standards, plus the fact that a higher proportion of Americans statistically have their homes paid in full, largely baby boomers. It's also unlikely that there would be a spike in foreclosures. That was

unique to 2008. So even if there is a recession, I do want to provide some reassurance. It's not going to be 2008 again. It's going to look very different. Now, I provide reassurance precisely for the reason that there's a lot of pessimism right now. According to the National Federation of Independent Businesses, the Optimism Index, from small business owners has sharply declined since the beginning of the year. And similarly,

the outlook for business conditions, as reported by small business owners, has also seen a sharp decline. Optimism was high earlier this year on the hope that tax cuts and deregulation could spur

spending and have a positive impact on small businesses. But tariffs can be particularly hard for smaller companies, the ones that have to deal with higher prices but don't enjoy the upside of industrial production, manufacturing production. And so small business in particular, according to data from the National Federation of Independent Businesses, small business owners are far more pessimistic right now than they were a few months ago. Similarly, according to data from the University of Michigan, U.S. consumers are very worried about inflation. The expectations

around inflation from U.S. ordinary individuals, U.S. consumers, is the highest that it's been since 1981 for the year ahead. So, again, if you were to ask the average consumer, hey, what's your expectation of inflation in the next year? We're at the highest point. It's nearly 7%. So the expectation that consumers have is that prices will rise nearly 7%. And that is the highest rate that they've reported since 1981. Now, that's for how much people expect prices will rise in the next year. If you ask people, how much do you think prices will rise in aggregate over the next five to 10 years? Well, that's actually a lower number.

That's just above 4%. It's the highest reported rate since 1991. So all of that is to say that consumers are nervous about the short-term future. They're a little bit nervous about the next five to ten years, but they're especially nervous about the next year. So that comes from University of Michigan data. And then a separate study also from the University of Michigan shows that consumers are really anxious about jobs as well. Workers are very anxious about jobs. The percentage of people who expect that there will be higher unemployment in the near future is at its high.

highest level since 2009, which, if you recall, of course, was the Great Recession. And despite the fact that we have really good jobs reports data, the percentage of people who feel like jobs are plentiful has been steadily declining over the past three years. So again, we see this gap between economic data and the felt lived boots on the ground experience. The economic data says jobs are plentiful, but the lived experience, but the lived experience says, no, they're not. Ironically, part of our good economy lately might be based on the fact that both people and companies rushed to buy things because people are expecting higher prices ahead.

And what do you do if you expect that prices are going to be higher in the future? You stock up now. And so in April, we actually saw consumer spending rise while people stocked up on cars, computers, other expensive items. Now, computers have a reprieve. So when we talk about the tariffs on China, there are certain exemptions. But as you've seen, the policies change on a near daily basis. And so a lot of people, if you know that you need to buy a computer, let's say you've got like an eight-year-old computer, right? You know you have to replace it soonish. Are you going to wait until next year when it's likely going to be more expensive or at least has a decent likelihood of

being more expensive? No, you're going to do it now. And so we've actually seen a an uptick in consumer spending because the reasonable thing to do when you're anticipating higher prices is to stock up. Will this uptick remain? Probably not, but it does, at least in the short term, provide an economic benefit. Up next, we're going to answer a question from a listener who saw her portfolio decline by 30%. She was Coast 5 before her portfolio dropped. Is she still? In the context of your own life, When you watch your own portfolio drop, how do you process that? What do you make of that? And what do you do next?

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not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments of Fifth Third Better. We turn our attention now to the tariffs and the market declines that have happened since the tariffs were implemented. And in order to address this, I want to share with you a question that came from a caller named Joanna. She left this question a couple weeks ago, and it's probably one that's on many people's minds. I will also add, she's the first person who has ever asked a question through the use of AI. So she's the first AI voice on the show. Welcome, Joanna, AI. And in order to answer her question, I've brought on special guest, Joe Saul Seahai, former financial advisor. What's up, Joe?

What's happening? We're talking tariffs. Yes, we're talking tariffs. Welcome to First Friday. This is your first, first Friday cameo. This seat feels so much better than the normal seat, I have to say. I can't believe you've kept it from you this whole time. The Friday episodes, the first Fridays are the best. I'm invading, everyone. Take it over a little bit at a time. afford anything. Well, speaking of taking over, let's listen to the AI. Oh, how's that segue? Oh, da-da-da-da-da. Hi, Paula. I was close fire until two weeks ago before Trump's tariffs. I now lost about 30% of my portfolio. Can I still consider myself close fire even if my current numbers do not say so? Thank you. Love the pie, Joanna. Joanna, fantastic question. And in the time,

you've left that question, you've seen your portfolio ride the roller coaster. You've seen not just the 30% decline, but then a recovery and then a subsequent decline and another recovery and another decline. You have seen that moment, do you remember that day when the S&P 500 looked like a meme stock because it suddenly shot up? We've seen events in the market that are complete aberrations from the norm? To your question, are you still FI or Coast FI? The short answer is yes, because by definition, designing an FI portfolio means that you've designed a portfolio that can withstand these types of shocks and risks because it is normal for the market to decline and it is normal for the market to be volatile from time to time.

It happened in 2020, but just for a month. It happened in 2008, and that lasted for a long time. Whenever we talk about market declines, there's three factors. There's severity, there's duration, and then when you're talking about multiple declines, there's frequency. So severity, duration, frequency. 2020 was high severity, short duration. 2008 was high severity long duration. And then prior to that, there was the dot-com burst of 2001.

There was Black Monday of 1987. The history of the market is littered in declines. And an FI portfolio is built to withstand those types of shocks because when you zoom out and when you take the long view, you're investing on the order of decades. I don't know how old you are, but I'm going to assume that you're under 70. And if you're under 70, heck, if you are 70, let's say you're 70 years old, you're still designing a portfolio that's supposed to last until you're 90, 95, 100. So even if you're 70 years old, you're still designing a multi-decade portfolio that's going to last for at least another

20 to 30 years. And that's assuming that your goal is to die with zero. Well, and Paula, I've worked with 80-year-olds that were designing a 30-year portfolio because it was money not based on their lifetime. It was based on their beneficiaries lifetime, right? We had two different portfolios. We had the one that was for them and then another one. So for me, age doesn't matter. If you're 40 and you fired already, it's much more when you need the money. Right. And my point is, even if you want to have zero beneficiaries, you know, you want to spend that last penny at the moment before you croak. Even if that's the case, you're still going to, you know, Betty White was 99,

shush shy of 100 when she died. Charlie Munger was 99. Yeah, for the vast, fast, fast majority you're saying we're still going to need stocks. Yeah. It makes sense to design a portfolio that will assume that you'll live to 100, even if the goal is to die with zero. And if that's the case, then even in your 80s, you're still thinking on the order of decades.

I prefer designing portfolios that way versus the opposite. My portfolio is designed because I know I got like six months left. Like a big party. And then you last too long and you go, oh, oh. Not good. Design for longevity. Right. It should be called longevity reward, not longevity risk.

The longevity high five portfolio. Yeah. I'm really focused on this idea of CoastFi. Was CoastFi, apparently according to the numbers, is not Coast-Fi, but can she still consider herself to be Coast-Fi, which truly I think, then, Paula, is the question, will it come back or do I need to do something? I think is maybe the true question that she's asking. This is why I think that it's financial planning and not a static financial plan. We often make these plans and we think that they're written in stone and every financial plan is truly written in sand because everything's going to drift tomorrow, whether it's

the S&P being a mean stock like you mentioned, or if it's just the daily usual little bit of drift that we get on a normal stock market day. If there is any such thing as normal, I love this idea of milestones toward your goal and knowing where you need to be. And if you're behind, then maybe you need to take action. And if you're ahead, there can even be a different set of actions, which is, if you're behind, now maybe I need to fill in the gap. Because the answer is, if your number said that you're not CoastFi anymore, no, I would not wait and hope that it just turns around.

I would figure out what my strategy is to become CoastFi again. So I think that that's the bad news that we don't want to hear is if the number say I'm not coast five, then no, I'm not. I'm not coast five. And that doesn't mean it's not going to come back. But I think that what it means is you're in the driver's seat and you're going to take control and I'm not going to wait for the market to do it for me. Because the market's going to act in ways that you don't know that you can't predict. And when you try to predict or you try to hope. I always felt like as a financial planner, that's when things would go against us. When I was in the driver's seat and I knew that I was behind by X amount of money for my coast fine number, then I would put a plan together that was based on me and what I needed to do. Then I knew what the drivers were to make that a success. And I knew what the weaknesses were going to be that would keep me from my goal. I prefer that type of planning.

So I'm going to disagree with you a bit, Joe, because here's the issue that I have. It sounds to me like Joanna's doing a point in time analysis based on current position. When it comes to something like portfolio value or the stock market, you can do a point in time analysis that changes literally within fractions of a second. And it's going to. It always will. And so it seems to me as though when you're evaluating for a long-term goal, doing a point, point in time analysis at random intervals based on if the market's low, you're feeling glum, if the market's high, you're feeling euphoric. The randomness of when you choose to do those point and time analyses, that seems to me to be scattered. If instead you took stock of where your

portfolio is, let's say, on January 1st of every year, or pick any arbitrary date, July 15 of every year. And you keep that point in time analysis to some routine, periodic, preset date. Maybe you could do two a year. Heck, maybe you could even do it quarterly. I don't think I would go more than quarterly. But to me, that gives you a more accurate picture of how your portfolio was really doing, as opposed to panicking when your portfolio was down. I don't think we need to panic. Number one, number two, is when my client and I would set up milestones back when I was a financial planner, we would look at them twice a year. So to your point, I do like looking at it on set dates. However, I think from a practical planning perspective, maybe what I'm getting at, maybe what in an advisory role, I would say if I knew Joanna and I was an advisor, which I'm not, this is for entertainment only. But I would say, Paula, if the line is that close, we're on an arbitrary day. you're back under the line, you're too close to the line. Because if it's close now, when you get to the point that you're creating a portfolio to begin spending that money,

there's a good chance it's still going to be too close. I don't like a plan that has no cushion built in. I think it's easier when you're younger to create more wealth than it will be later on. So if I take that point of view, and the cool thing is, is if I'm already, working a coast-fi lifestyle that doesn't mean I need to go back to work full-time. It means that I may need to find some time-to-time income opportunities to give myself a little more cushion. So much like in a true Coast-Fi world, we are going to do the things that we love, but we're not going to touch the money. I'm going to do the things I love, but maybe 5% of the time, I will create a little more money that I can invest. I don't need to wholesale, just panic, go back to work. I'm in a full-time

job that I hate. I don't think I need to do that. But I do think that if you're asking this question, you might be too close. But at the time that she asked the question, her portfolio was down 30%, which the likelihood of a portfolio declining 30% and then staying there as the new normal is quite low, right? That's a significant decline. It's not like her portfolio declined 5%, and that was too close. It was a 30% decline, which happens periodically, but those steep declines often come back. Historically speaking, over the long term, they come back in droves, even if you were to make a lump sum investment on January 1st, 2008, right? That money would have taken a while to recover, but certainly you would be far ahead, even 10 years later, right? By January 1st, 2018,

you would be far ahead. So you're saying it's 1987. We just had what, seriously, if you're a historian at all, go back and look at this. It was a knife, right? Went down and back up. You're saying she's looking at the bottom of the knife, at the tip of the knife. Yeah, yeah, exactly. And I think if a 30% decline means that you don't have enough, I don't think that necessarily. leads to the conclusion that she's playing it too close to the margins because a 30% decline is substantial. But it's unprecedented for a 30% decline to just remain in place as the new normal over a prolonged time span. Do you know how many times in history since 1929 we've had at least two years in a row of stock market declines? Let's see. The Great Recession ended in March of

2009, and it started probably in fall of 2007. So I don't think that would have been a full two years of decline. Believe it or not during that time frame, and that's the one everybody answers, oh, that was the last time. It didn't happen then. Right. We did not get two down years at that point. So I would guess, and we didn't have two down years, 2000, 2001. We actually had three then. 2000 ended up slightly down. 2001 was horrible. I think. I think it's when I began losing hair. And then 2002, they finished the job. So three years.

And often when a market goes down two years, almost half the time it went down three years. All right. And then I would guess that probably in the 1970s, there would have been a decline, a multi-year decline. We had a general belays during the 70s. Right. The answer is seven. we've had this happen seven times and so i still think she's too close paula because while in your jackknife analogy i'm 100% with you i'm there if i get a general decline of three years and

she's close to the this is the problem we don't know when she needs the money right yeah because if she needs the money 10 years from now i think she's too close if she needs the money 25 years from now i go yeah, Paula, you're 100% right. So I think our perspectives might be based on just the general assumption that you or I would have about when she's going to go grab the cash. I also think that at the time this came in and the fact that it had gone down, you know, she talked about being down for two weeks and had gone down so quickly that I really think her asset allocation is probably really skewed toward the U.S. stock market because if she had

some international in her portfolio, she didn't have that. She still had in the 20s. So it wasn't a dance party. She wasn't super excited. But she wasn't down a third. You were down a third if you were largely U.S. only. Right. I had that same thought as well when she said that she was down 30%. I was like, that sounds to me like an asset allocation problem. Yes. That means she needs to work on her investment policy statement where she creates a more well-rounded portfolio and then keeps it a little more balanced than it's been. This is a good lesson for a lot of people that haven't done that. Right. Yeah. And having some small allocation in commodities as well can soften that volatility in a portfolio. Really, we've talked about the efficient frontier many times on previous episodes.

go to portfolio visualizer and play with the efficient frontier. It's amazing how depending on your goal, so that may show just literally a two or three percent allocation in commodities, which worked so often during my career in portfolios. I think of it as a little bit of chili powder in the mix, you know, just a little goes a long way. Right. You know, 20% gold is ridiculous. It's horrible for your portfolio. 10% gold is horrible for a portfolio.

But 2% has added because of the nature of gold and the fact that it is a non-corollary investment, meaning it can go down at the same time that the stock market goes down. But because the correlation isn't there, you will often find gold go up while the stock market goes down. I want to get back to a core part of my answer as well, though, Paula, because I feel like I know what I'm thinking and I will sometimes use shorthand because I know what I'm thinking. But I think explaining it to everyone in our community goes a long way. This idea of timelining your goal and building milestones along the way, here's what it does. If I were your financial planner and you walked into my office, it happens to be the day we meet and you're down 30%.

the first thing you want to talk about is tariffs, the economy, the Fed, the administration, the effect on all these companies, what people are saying on CNBC, what they're saying on Fox business. What I love about timelining is part of timelining means we set these milestones along the way of where we need to be. And when you look at successful people, Stephen Covey says in Seven Habits of Highly Effective People, he talks about the fact that we have these three pots. We have what he calls pot one, pot two, pot three. Pot one are things that we influence and control. Pot two are things that we may influence, but we don't control. And pot three are things that we don't influence and don't control. So when you walk into my office and you want to talk to talk.

about tariffs, administration, effects on companies, the Fed, the economy, all this stuff. Which pot are we in? We are way outside of our locus of control. Yes, we got a little pot two. We can vote, right? We can vote. We got a tiny bit of pot two, but it's mostly pot three. But if you come into my office and I say, Paula, based on what's happened, our milestone

for you to reach those goals that you set. We need to be at $125,000. And right now we're at $110,000. What do you want to do? All that stuff goes out the window. It doesn't completely go out the window. It's going to affect our decision making. So if we go, well, okay, let's look at the portfolio first.

We look at the portfolio. I don't know what's going to happen with tariffs. But I think my portfolio is designed correctly. So I'm not going to do anything with my portfolio. I'm going to continue to work the portfolio. portfolio the way that I have in the past. So that piece of my plan I think is solid. I'm going to keep that. I still have to come up with $15,000. Or maybe I don't, right? Maybe I go, you know what? I'm going to wait six more months and maybe I get further behind. Maybe. I'll take that risk.

But I'm happy taking that risk. And I will decide. I won't have it decided for me. I will decide that I'm going to take that risk that this is a jackknife and it's going to come back. And that's great. That's fantastic. Or I go, you know what? This fire goal of age 50 is not that important to me. Let's go to 51 because this difference maybe is a year when I extrapolated out to later days. So maybe I'm just going to go, okay, I'll just lower the goal. Not a big deal. Or I will save more money. I'll figure out a way to save money that I wasn't saving the next few months. or I will increase the standard deviation on my portfolio. Since the market's down,

I'm going to accept more risk in my portfolio, looking for aversion to the mean. Now, you can see how this could be a gigantic disaster, but I'm going to play more aggressively now. Look at all these decisions, though, Paula, before you go, I just want to point out to everybody, this is where my decision making comes from. This is what I'm thinking about is,

I want to play the pot one game. I don't want to play the pot two, pot three game. And whenever things like this happen, we get into this what's happening to me. And what happens to me is happening to all of us. I want to talk about what are we doing about it? What are we going to do? And there's so many different scenarios that we just talked about. It takes this negativity and it puts you back in the driver's seat.

and suddenly this powerlessness that we all feel. And part of it you're going to feel anyway, and you can't make that feeling go away. Part of it, though, comes back and we feel a little bit stronger. There are things I can do. I do have some agency. I can make some decisions.

So that's what's going on behind the scenes when I say that I wouldn't just sit back and say that I'm coast-fi. You can't coast on. coast five. I just don't think coasting on your financial plan is it going to, don't get me wrong. You don't want to spend a lot of time, you know, this idea that's discipline is ridiculous, right?

It's systems. But twice a year, get in the driver's seat and go, am I harder behind? And how does it affect my goal? Now, let's talk about the other side. Let's say that I'm ahead, Paula. I'm ahead of the game. We're getting this awesomeness we've had the last several years. Am I going to speed the goal up?

So am I going to make the goal come sooner? Am I going to make the goal bigger? Instead of spending X amount of money, I'm going to spend X plus per year. Am I going to stop saving money now? Let's say you're not CoastFi yet. Am I going to become Coast Phi because of this great planning that I've done and the fact that the winds have been strong in my favor? It's the same in reverse. I don't think coasting during those meetings either way is a good idea.

even though I know you were joking. I love that. And that made our meeting so fun. It made him so fun. And I think fun is the right word. Because you could see people get back in the driver's seat. And I'm like, yeah, what are we going to do about tariffs? I don't know.

But it's amazing what would happen to my client's brains because they were smart people. When I said we're $15,000 behind, all of a sudden, their brains start working on how are we going to solve this. So stay inside your locus of control. It's super, super important. That was one of my favorite elements of the book Seven Habits of Highly Effective People. Although I don't remember, I don't remember specifically him talking about pots. I remember at least the way I understood. It was just the Venn diagram intersection.

Maybe pots are what I called them. Yeah. Maybe that was my thing. I call it pot one, pot two, pot three. Yeah. I think we had different visuals of it because I always saw it in my head as a Venn diagram where you have on one side, in one circle, everything that you could possibly be concerned about. Tariffs, taxes, inflation, nuclear war, AI, everything that you could possibly be concerned about is in that circle of concern.

And then there's that Venn diagram intersection. And then there's a different circle. And it's the circle of things that you can directly influence. Or directly control. And then influence between the two. Yeah, exactly. Influence is the Venn diagram intersection. And then control is the, right? Yeah. And so staying inside of that locus of control is what effective people do. And by virtue of staying in that locus of control or that locus of influence, you over time get to control or influence more and more.

I mean, think about the relative level of power that you have when you're 17, versus when you're 37. For most people, you have much more power as you age because of the fact that you've been operating inside of your locus of control for longer. Prior to the age of 17, most of your decisions are made for you and you don't really have a whole lot of autonomy over your life. Then you turn 18, and from that point forward, officially, your decisions are your own.

And you do that for two decades. And if you've stayed inside of your locus of control for that period of time, you've amassed a heck of a lot more power, a heck of a lot more influence by the time you turn 37, you know, by the time you're 20 years away. I remember advice that I had early on in my career, which was don't think about all the doors, the big doors way further on in my career. Just walk through the next door. Think about this door and this next door.

and this next door. And, you know, which also that was important because you find these inflection points in your career where you're afraid to walk through a door because you see that there's three different doors. And if I walk through this one, you think that it takes away those other two. And so you decide not to make a decision. And I've always found that to be a trap. And I've had mentors tell me that that's a trap. Because if you open up a door, the doors that are in the next room along that trajectory are far more badass and way more fun and you're in more control and things are better that sitting in a room not making a decision because you're afraid to get rid of these other two doors this idea of saying no right some opportunities can open up so many doors

yeah follow the the tree as it branches yeah you know and the subsequent branches become so much more interesting. And a piece of advice that's not the same, Paula, but it's very congruent that I got that was also huge, was in life we're also going to often have two doors. One says opportunity and the other one says security. In most instances, almost always, if you open the security door over the opportunity door, you get neither. The security door is not as secure as you think that it is. And you also give up opportunity in exchange for this feeling of security. Right.

Yeah. I think a lot of W2 workers are finding that out right now to go back to current events. Well, I was, and I was frustrated. I mean, let's just go right to Amazon. I was reading a piece last week about the CEO of Amazon talking to his people that he wants them to do more with less. he wants them to think like an owner. He wants them to cut their team size and make better decisions.

And you know what's funny, Paula, is that on one hand, I'm like, everybody needs a paycheck. Oh, and also the teams they're competing against are working 12 hours a day. And the implication was he wasn't telling his people to work 12 hours a day, but the implication was you should probably work more. Well, in China, the workday, for a lot of people, the workday is 9-9.6, 9 a.m. to 9 p.m. six days a week. That's that's the Chinese ethos. I thought about that. And I thought about if I'm going to do all that, why wouldn't I do that for me instead of building it for you? And don't give me wrong, I understand there's a bunch of bridges you have to cross to get there, right? You've got to have the emergency fund. You've got to have a low burn rate in terms of your spending. You have to,

there are bridges and people need a paycheck. And it's not as easy as I don't want that to sound flippant. but I did hear the CEO of Amazon say, I want everybody to be an entrepreneur. If I'm going to be an entrepreneur, maybe I start thinking about becoming an entrepreneur. Entrepreneurship is where the opportunity happens. But that all said, we have strayed far from Joanna's question. Yes, because there was another piece of that. That actually is the other part of the puzzle, which is just that I do think there are people who are entrepreneurs who do very well at a W-2 job because of their entrepreneurial

nature. They get the paycheck, but they're able still to dictate a lot of their terms, and that could be a nice sweet spot for some people to be. But you're right. We're on a whole different tangent. A whole different tangent. Coast-fi. I wouldn't coast on Coast-Fi, I think, is your best takeaway, Paula. Oh, thank you. Well, Joanna, thank you for the question. You're the first AI caller that we've ever had. Thank you, Joanna. Did that sound like AI? That sounded like you, Joe. Oh, crap. That is the May 2025 first Friday update.

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