Afford Anything - LIVE FROM BROOKLYN: Episode 500 with ChooseFI’s Brad Barrett

Episode Date: April 24, 2024

Enjoy Part 1 of our two-part Episode 500 special, recorded live at a comedy club in Brooklyn. Brad Barrett, host of the ChooseFI podcast, joins us on stage to talk about what financial independence ideas and practices have changed … and what ideas and practices have remained consistent, universal and time-tested throughout the years. For more information, visit the show notes at https://affordanything.com/episode500 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Welcome to Episode 500 of the Afford Anything podcast. What you're about to hear was recorded live at a comedy club in Brooklyn, in which we recorded the podcast in front of a sold-out crowd. And when I say we, it was myself and the host of the ChooseFI podcast, Brad Barrett, who came all the way up to New York City from Richmond, Virginia, to celebrate Episode 500 with the Afford Anything and ChooseFI communities. So I want to say hello and thank you to everybody who came. who joined us live in Brooklyn, and from people across the country and around the world who reached out to say that while they couldn't make it, they would be there in spirit. It was an amazing night where we got to celebrate financial literacy. We got to come together as a financial independence community because we are a community that is united by the ethos of being thoughtful about how we spend our limited resources, making sure that we prioritize and focus on what matters. We are a community that refuses to accept limiting beliefs or limiting ideas. We never say, I can't afford it. We say, how can I afford it? And we make the choices and the trade-offs that are

necessary for pursuing the best versions of our lives in whichever ways each of us define it for ourselves. You're going to hear me talk to Brad Barrett about what has changed and more importantly, what has not changed in the financial independence community? As the world has morphed around us over the past several years as we've gone through a pandemic and dramatic interest rate increase and inflation, what are the things that have changed? And conversely, what are the things that have not? What are the classic, tried and true, universally time-tested principles and values

that have remained steadfast? We discuss this and more. Now, we've broken up episode 500 into a two-part series. You're going to hear part one today. And part two, which is audience Q&A, you're going to hear on Friday. So enjoy this live recording of a sold-out, in-person podcast recording featuring the host of the ChooseFI podcast and my good friend, Brad Barrett. Welcome to the five. 100th episode of the Afford Anything podcast.

Please welcome to the stage, Paula Pant and her guest, Brad Barrett. Thank you. Thank you all for coming. Episode 500. Here we are. I want to give a shout out. I want to start by giving a shout out to a couple that came here. They're here from the UK on their honeymoon.

On their honeymoon. Can you love birds stand up? Let's give him a hand. And I also want to give a shout out. Some of Brad's high school friends are here. Yeah, we got Mark and Adam in the back there. Thanks for coming out, guys. So, yeah, I'm from Long Island, so it's great that they could make it out here.

So thanks. This is like my existential worry is, can I talk into the microphone properly? Well, how many episodes does ChooseFI done? I think we're up to about 640. Wow. Which is crazy. And so the fact that there's still this doubt of. can I talk into a microphone?

I think that says more about me and my internal state than I would care to admit. I mean, there's some imposter syndrome to unpack there. It never goes away. If you want to talk to those guys in the back, they can give you a whole lot of stories. And so what we're going to do is officially, formally, I'm interviewing you, Brad. We've both been covering personal finance and the world of financial independence for many, many years now. For me, it's been eight years. For you, it's been five, seven, seven. Okay. What has changed? And more critically, what has not changed?

Paula, I should have, puts me on the spot. I should have no softball. I know, I should have, I should have told you ahead of time. I should have, like, prepped you for that ahead of time. Here's the hardest question you could possibly get. So, okay. I've been in the financial independence world. I found Mr. Money Mustache going way back to 2013. At that point, it was largely about extreme frugality. And I think there is, has been, always will be a place in our community for frugality. And so I'm going to cheat and kind of this is going to be one answer for everything here.

Because I think we may have overplayed. going away from frugality over the last couple of years. How many times have you guys heard us say, Di was zero, right? It's you probably sick of me saying, oh, I read the book Die Was Zero, right? But that was a sea change for me. It really was.

And I think it made me realize that there are seasons of life. You don't want to wish away years. And I think that was what we saw early on in the Phi Journey. For a lot of us, it was a race to a number on a screen. And that is not a life well-lived. I think a lot of us have realized that, right? Like, money very simply does not make you happy. It adds to a wonderful life, right?

So let's be clear. This is really important. But money in and of itself, you are not going to hit your financial independence number, and all of a sudden there's unicorns and rainbows. It doesn't work that way. You have to work at this. You have to work at this constantly. And I think you're going to realize that what you know about yourself is going to change all the time.

You're going to have to iterate and try new things. And you know, you always hear the silly, I don't mean silly in the sense that this is a bad idea. But the, oh, I'm going to sail around the world, right? Like, I'm going to hit my number and I'm going to sail around the world. And meanwhile, like, they've never been on a freaking sailboat. Like, I mean, come on, guys. You have to figure out, like, what does life actually look like? And that is a constant iterative process.

For a very long time, it was just, let's be as frugal as we can be. I think to our great credit, you know, I don't usually pat myself in the back, but something we've done really well, right? Both in it. Thanks, ma'am. Is change the narrative. And we've made this something that was very extreme. So even predating Pete was Jacob from early retirement extreme talking about, spending under $10,000 a year on his entire life.

I mean, do you think that's a narrative that is going to shape the world? No, of course it's not, right? Like, it's not possible because people hear that and they think that sounds freaking miserable. Why would I do that? And then even Pete. And Pete lives a wonderful life. Let's be clear. Pete is Mr. Money Mastash.

Thank you. Even Pete, I think to a lot of people, here, oh, his life costs, whatever it was back in the day, $28,000 or $35,000, how can you live a life like that? And I think Pete could explain himself very, very clearly and would have no problem with that. But to normal people, that sounds crazy. And I think something that we have done, both of our podcasts have done exceptionally well, is change that narrative that financial independence is truly for everyone. And it is essentially a universal good. And I kind of, uh, ristle when I hear, you know, all these, I'm not one of these anti-media people, but like,

you know, the media like, oh, those fire people, they tried fire and it was terrible and they came back. Like, come on. Like, I would struggle to find one human being who pursued financial independence, however they defined it and found that their life was worse off afterwards. It just simply doesn't happen. In my opinion, it is not possible because your life is better when you have more financial freedom. Hard stop, end of story. These narratives choose to focus on the RE. Because, I mean, it's like somewhat sexy, right? Like this, oh, financial independence retire early. Like there's some like panache to it. But they only focus then on the RE. And then it's, oh, these lazy people doing nothing and blah, blah, blah, blah, blah. And what's going to happen to society

if all, if everyone pursues RE? Well, I mean, that's ridiculous in and of itself, right? But like, I think what we have done is try to focus on financial independence. So this is a very long, rambling answer to, I think the fundamentals have changed. And I think how we view this entire community has changed. And this audience is a perfect example of, would you all be out here? Would you have listened to potentially over a thousand episodes of our two combined podcasts? if it was, hey, live on $8,000 a year. Right?

And like, there's no world where that would happen in New York. Right. That's one month. So it's just, it's silly. But when you change the narrative to being something that is about how you define it, wherever you live, however it works in your life, let's be clear, you have to make changes. You have to make changes and take action to. make your life better. Again, hard stop, end of story. But you get to define it, not somebody else,

not even Pete with the, you know, I always thought it was ridiculous, the riding bicycles. Like, that just didn't work in my life. And the funny thing is we actually just rode bicycles with Pete in Arizona. And it was awesome. So, so I guess, you know, jokes on me, obviously, right? But that just didn't work for my life. So if that was a tenant of financial or fire, I would have said, you know, I'm kind of peace out. That's all she wrote. But, Again, when you define it how it works for you, okay, it's a whole different ballgame. You talk about defining financial independence in a way that actually fits you, in a way that is true to your life. But a person's life is dynamic.

And so how do you balance continually updating your relationship with your pursuit of financial independence? You know, on one hand, you want to commit to a particular path, right? You want to have a strategy and you don't want to let minor aches and pain. cause you to deviate from that strategy. But at the same time, you also need to be dynamic. So how do you balance that? For me, it's understanding that there are seasons of life. I think it's understanding that you have to give yourself some grace, ultimately.

Like, this is how I say it. So life is dynamic. Life is lumpy. Things come up, right? We understand that. You're going to have random expenses that you didn't anticipate. in and it's just part of life. When you start beating yourself up because you're not hitting some elusive savings rate, like it's almost our keeping up with the Joneses, right? It's like,

oh, my savings rate is 56.25%. Last year, it was 54.76. You know, like, nobody cares, right? And you can easily devolve, right, into, oh, my savings rate is better than yours, which is just my Mercedes is better than yours in another part of the world. So you can't play the external game is how I look at it. Like, I realize that this is, this being life, frankly, is an internal, it's an internal game. A, you have to give yourself some grace. B, you have to understand that things constantly evolve, constantly. And going back to what I said before, about life is not unicorns and rainbows when you hit a number on a screen. It just simply isn't.

And you also have to understand that, like, how, what you want out of life constantly evolves. And that's okay. You don't set a plan when you're 26 and life looks exactly. exactly the same at 56. It just doesn't work that way. We should all understand that from our lived experiences, right? Like, think about just my life alone. And obviously, I have this bizarre podcast thing that I could have never envisioned in a million years.

But 10 years ago to the day, I was sitting in an office in Richmond, Virginia, doing corporate state tax returns. Can you imagine a worse job than doing corporate state tax returns? over and over is Groundhog Day every single year, just over and over for 15 years. It's a nice career and, you know, it paid the bills, yada, yada, yada. But to imagine in 2014 that my life would be where it is now is laughable. Our lives are all different. Think about where you were 10 years ago. Could you have envisioned where you are today?

I suspect some of you can, could have, but many of us, life looks dramatically different, and that is okay. That is the same thing on your path to financial independence. It is part of life. There's not something special and different about this. It's part of life. And, you know, again, going back to the Diva Zero is also understanding there truly are seasons of life. And depending on where you are in your life, for me, I have two almost teenage girls. So I have a 15-year-old and a 12-year-old.

And this is a rapidly closing season of life. What I do now, it's almost like a memento-mori type thing, is remember there's an end. So literally, every single day, when I turn my computer on, I open up Microsoft like notepad or whatever, just like a little notes thing. And I have a countdown. down. So this is to August 15th, 2026, and August 15th, 2030, which is when my older daughter goes to college and when my younger daughter goes to college. And this is a very visceral thing that I, I get automated, obviously, I'm sure all of you are yelling at me for, come on, like, you got to be doing this

automated. But I literally, every single day, change that number. And for my older daughter, it is Somewhere in the vicinity of 870 days plus or minus, when that clock ticks down to zero, it's over. Not that our lives are over and our relationship's over, but her sitting on that couch every single night, in my case, her wanting to talk to me about roller coasters, which is her like favorite thing. She's a certified roller coaster enthusiast. So this is like a real thing. When I want to go to sleep at 915, because that's, yeah, I'm old and that's kind of my thing. Like, she wants to talk about roller coasters. You know, the honest truth is, on August 16th, 2026, I will give anything to have her sitting on that couch wanting to talk about roller coasters.

And she's not going to be there. And what that does is, it helps inform how I live today. Because when she wants to talk, and it's not always about roller coasters, right? Sometimes it's about other things in life. But when she wants to talk, there are sometimes where I'm like, okay, August 16th, 2026, it's coming. So that actually helps inform my decisions. And so, yeah, again, another very, very long answer, Paula, but it's just understanding that life changes and that is okay. But you have to also understand that there is a finite nature of some things, and we need to try to really grab hold of it.

What relationship does money have with, you know, what you've talked about, sitting on your couch, talking to your daughter about roller coasters? I can visualize it, right? It's such a, I don't even know what your daughter looks like, and I can, I can, nor do I know what your couch looks like, you know? It's a very nice couch. But I have an imagination of what I think it looks like. Actually, honestly, in my imagination, I've just imagined my parents' couch. To a person who's unacquainted with a financial independence podcast, they might wonder, wait a minute, how did we get from a conversation about money to a conversation about Momento Mori? How do we trace money through this very critical reevaluation of what you're talking about, our priorities, our deepest values?

You know, they say time is money, money is time. Both are just limited resources. That's really what this is about is the allocation of incredibly limited resources. I think this is something that, again, we've all realized with the kind of the evolution of FI, which is that money allows you to spend on things that you value. And again, this goes back to it being a very personal, personal thing, where I think, and I always hate to, like, paint with a broad brush in like a negative sense of, like, regular people, you know, non-fi people, because it sounds ridiculous. Default world people. A little leitist. But, you know, I think there are normal status games that go along with middle class or upper middle class life.

And, you know, we can all fill in the blanks for whatever that looks like, you know, the cars, the houses, the private schools. And that's not to say that any of those things are inherently bad. It is to say that I think most people do it on autopilot. and they don't ever think about what they actually value. That is the issue, as far as I see it, that you need to get off autopilot and say, what do I want my life to look like? What do I actually value?

Because like Paul said, time is money. So in essence, you have given up some of your life energy to earn that money and to spend it on something that you don't value just because you think it's going to impress somebody else. It seems like the height of folly to me. So there clearly is a time to spend, though. And I think this is where our community went wrong in the early days.

Again, it was all about frugality and just racing to a number, but giving up years of our lives, in essence. And you understand really quickly that money allows you to do really cool things sometimes. That's fun, and we shouldn't feel bad about it. when you are living intentionally. If you're just sleepwalking, you need to wake up. But when you're living an intentional life and you're spending on things you want to spend on, well, that's wonderful.

And nobody, and if it's any of the, even, like, again, I just painted this broad brush of, of cars and houses and whatever. If you're a car person and that is something that really lets you up, spend freely. That's perfectly fine. Not that you need my permission, obviously, but like spend, that's wonderful. Do your thing. But like for me, it's about experiences. And it's about spending time with people that you want to spend time with.

Like, I didn't think twice about coming up here to New York for less than a 48-hour trip. Because this is amazing. And this is life-giving to be here in front of 60-plus people and to hang out with Paula. And this was a no-brainer, right? Like, I didn't think about this for more than one second. It was just an auto, yes. Yeah. And, you know, if I did, which I have not, if I tallied up with this cost,

it's not an insubstantial amount of money to travel up and hotels and y'all, y'all, but like, who cares? Who cares? I think about that when it comes to trips, especially in this season. Like, again, with the roller coaster, and I do have a younger daughter who's wonderful, and I don't talk about her nearly enough. She's amazing. We're going to Europe this summer. And it's this amazing dad and daughters trip.

we're going to remember forever. We're going to see Taylor Swift in London, which is amazing. And there are audible gasps in the room. And then it winds up that their second favorite singer is this girl, Olivia Rodriguez. I don't know if okay. So no audible gas, but we have lots of affirmation. She, just by sheer happenstance, is playing in Barcelona three days before. So we're like, oh, yes, please. That'll work. Right. So we're flying into Barcelona. We're going to see Olivia. Then we're flying over to London, going to see Taylor.

And like, that is something that if we had not pursued financial independence would be impossible. Simply impossible. And that is a trip that obviously by any definition is going to cost a lot of money. But who cares? I didn't think about it twice. I think that's the answer to the question is it gives you options and it gives you the ability to spend and what you value. You know, the mission of afford anything and choose FI is to spread the message of financial independence and to teach financial literacy and to make that accessible to everyone at no cost. Please join me in supporting the sponsors who make it possible for us to do so.

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The holidays are right around the corner, and if you're hosting, you're going to need to get prepared, you need bedding, sheets, linens, maybe you need servware and cookware, and of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving that's in the entryway, in the bathroom, very space saving. I have a daybed from them that's multi-time. purpose. You can use it as a couch, but you can sleep on it as a bed. It's got shelving. It's got drawers underneath for storage. But you can get whatever it is you want, no matter your

style, no matter your budget. Wayfair has something for everyone. Plus, they have a loyalty program 5% back on every item across Wayfair's family of brands. Free shipping, members-only sales, and more. Terms apply. Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-F-E. A-I-R-com. Sale ends December 7th. In the early days when a lot of people were really hyper-focused on frugality, there was a sense in the community of we're living for tomorrow.

We are deferring all joy today for the sake of a better tomorrow. And like really to the extreme, we saw counter examples in the rest of the world of people who spent everything today and had zero savings for tomorrow. And, you know, we had a community where, I'll just speak for myself. There was definitely a period of time where I wasn't just planning for the future. I was living in it and living for it. Do you think in terms of the journey that this whole community kind of collectively has taken out of hyper frugality and into a more balanced approach, do you think the fact that we had an 11-year bull market influenced that? Yeah. I mean, it certainly didn't hurt. Let's be clear. But I mean, there have been. a lot of ups and downs even amidst like roller coasters even she's good she's good the running theme of

the evening I mean how many articles did you see in 2020 though is the fire movement dead right it's easy to say that the community has been successful because of the stock market and I mean we're not going to lie obviously it's helped right But how I look at financial independence is basically, if you can build a life where you have a significant savings rate, however you define that, again, we're not getting into the tit for tat, you know, mine's 52 point, whatever.

But, you know, like, and I'll bring it back to my daughters, which seems to be what I bring everything back to at this point. But like, I tell them, in essence, if you can more or less find phi, They have a little unfair advantage, obviously. But if you can find FI before you've made any mistakes or got it into debt in any way, and you save 50% of your income, you can gleefully spend every other dollar, and you are basically barring a zombie apocalypse going to be financially successful.

It's almost impossible to screw up your life if you have a 50% savings rate. And then we can dial it back from there. Like, by no means is this the, you have to have a 50% savings rate to succeed community. I mean, that wouldn't, it just wouldn't be possible. And it's not possible in, I mean, we're in a high cost of living area right now in New York. Like, is it 50% savings rate possible for most people? I don't, I don't think so. It wouldn't have been for me.

And yet, here you are. Right? And it is a very personal thing. it's easy to always kind of wish away. It's almost like the, oh, this is for somebody else. There's always an excuse. There's always an excuse why that works for somebody else, but it doesn't work for you.

It's just in life. I feel like it's always some elusive they, right? And in this case, the they is, oh, they succeeded because the stock market's been on fire for 11 years. Well, no, I think they succeeded, they being us, they succeeded because they reordered, oriented their lives around what they value. And they understand that saving money is really, really critical.

And that means both a combination of frugality and earning more. And I think this is something, you know, going back to your very first question, Paula, is something that we missed in the community at the beginning to our great detriment of, right, earning more money. And you're huge about this. Yeah, yeah. Well, I'm huge about it because it's oftentimes when I'm speaking, I'm giving advice to the younger version of myself.

Like, I'm just saying all of the things that I regret that nobody told me when I was 22. You know, I'm speaking to the 22-year-old version of myself. In my 20s, I was like just reading everything I could about managing money. And I kept reading the idea that, oh, you know, if you earn more, you're just going to spend more. So don't even bother focusing on the earning side of the equation. Just focus on save, save, save. In retrospect, that's a very reductive and destructive. misive attitude towards earning more. Like, if you earn more, it doesn't necessarily follow that

you'll spend more. If you earn more, then you could spend less. You could spend the, like, right? There is no if then that in which the then is necessarily that you would spend at the level of your income. To prescribe that as the only path, or, you know, to assume that that's the only path is misguided. But yet that seemed to be the dominant narrative in the early days. But again, You know, I do wonder, like, we talk about the early days as 2012, 2013. I mean, we had just come out of the Great Recession at that point. We had just seen housing values crash and the stock market crash. Like, we had just gone through the greatest economic upset since the Great Depression.

And I think that that had to have some type of an impact on collective psychology, you know. And similarly, I'm. mentioned an 11-year bull run, but even when that 11 years got interrupted, the bull market ended in 2020 in March of 2020 for a month, and then it went right back to bull again, you know? So we're now in these, like, amazing economic headwinds, and it just, the party just doesn't stop. Like, invidia just keeps going.

You know, a year ago, I was like, that's, that's, it's overblown. it's still going. The ship is to hell in the year ago. Yeah. And so now I think that what I hear so often is a fear of heights, right? I hear people say the market is at all-time highs, I don't want to get in. But people have been saying that now at this point for years, because we've just been at new all-time highs. And I see people and everyone here is nodding their heads.

This is resonating. So what do we do now in an environment where we're just in consistent all-time highs? Just like always with financial advice is, you know, this is not advice for anybody in particular, obviously. Learning the simple path to wealth was one of those lighting bolt moments in my life where I don't know about you guys, but it was always investing always seemed impossible. It always seemed like something that you needed some expert or you were missing something or you needed to study for years and years and years. And it's one of the most important aspects of your financial life, certainly if not your life. But yet it is this odd system where the simplest version is if you were a betting person, it is essentially the highest likelihood of success. And that is really a bizarre aspect of life.

And I don't think we talk about that enough of just like how odd it is that turning off your brain, in essence, and just saying I'm going to invest in low-cost, ETFs and index funds, in my estimation, gives you the highest likelihood of success over a 30 to 50-year period, which is what we're looking at. So net of fees, net of everything. That's really wonderful to essentially not need to know anything. That was like a sea change moment for me, a lightning bolt moment of, oh, I can actually sleep at night. And I'm a CPA. Like, in theory, I should have had some knowledge. And, like, it always seemed like a black box to me. Buying VTI, Vanguard's total stock, total ETF is, you know, essentially I'm buying a little piece of 3,000 companies. And the ingenuity and hard work of 100 million plus American workers and people all around

the world, like, that feels pretty good. You know, I'll take being. essentially the owner of a tiny, tiny, tiny little piece of 3,000 plus companies and 100 plus million American workers, that'll work for me. You could have said that at any point over this last 11 years, and where would you be if you sat on the sidelines? You'd be a lot less well off, certainly. All of us would be. I think it's easy to come up with a narrative of why we know better, or you listen to somebody on CNBC who had some like macro take like anytime you hear the word macro run as far as fast as you possibly can these people are complete morons and know nothing nothing we cannot we cannot know this I look at the world as like a series almost of like bets so what gives me the highest likelihood of success the highest likelihood of success for me is not trying to time the market on both sides the in and the out I can't do it. You all can't do it. The macro guy can't do it. There's no world.

So for me, it's just every two weeks or whenever money starts rolling in, I continue to purchase my total stock market funds. That helps me sleep at night because I'm playing a 50-year game. I'm not playing a five-year game. I'm not playing a, oh, Morningstar gave this a five-star rating last quarter game, right? Like, we are not playing short-term games. We're playing long-term games. And I think that is something that sets our community apart. The risk with long-term games, at least psychologically, is oftentimes good things happen slowly over time. Bad things happen in an instant.

So good things compound and grow and over the span of a time. a dozen years, there's a steady upward trajectory. But then when there's a negative event, you look at the big shocks that have happened. Pearl Harbor, 9-11, the pandemic. Like, these are things that no one could have predicted, quoting heavily from Morgan Housel here. These are things that nobody could have predicted. And they happened in an instant and they shook everything up, you know? And we see that with like very sudden market crashes as well. I actually want to throw this back on you because I think the all-time high question is incredibly interesting. What do you think about all time highs? Whenever I start to feel a fear of how it's come up

and myself, I will go back and I will look at what happened if you put a huge lump sum of money into the market at the end of 2007 or at the end of 2006. If you'd put a giant lump sum in the market right before the Great Recession, you think of recessions in terms of there's duration, there's severity, and there's frequency. In terms of severity, hopefully the Great Recession will be the most severe recession that we will ever experience. Certainly over the span of the last hundred years, it was other than the Great Depression, it was the second most severe. So what would have happened if you would put in a huge lump sum of money right before such

a severe recession? Well, if you'd put that in and you just left it, then today in 2024, you'd be great. You'd still be great. And so that's very much how I calm myself when I start to think of that fear of heights is, hey, even the person who invested at the peak of 2006, 2007 would still be great today. Right. So literally worst possible timing. Yeah, exactly. Yeah, we should all, we can run the numbers when we get home and maybe edit it in. If you put in $100,000 at the worst possible time, what would it be worth today? We'd be sitting happy today still. I take a lot of comfort in that. Hey there. So after we recorded episode 500, I came home and crunched the numbers. What would happen if you put $100,000 into the market right before the Great Recession began? And there are a variety of answers depending on what set of assumptions you use. Let's pause for a moment and acknowledge the sponsors who allow us to bring you more than 500 episodes at no cost to you. Once we've heard from them, let's really walk through the math of this because it's fascinating. And understanding what those numbers look like could help reshape the feelings that you have about taking risks within your own investment portfolio.

Welcome back. Okay, so let's elaborate on the very last piece of that discussion, which is what would happen if you put $100,000 into the stock market right before the Great Recession began? The first step in answering this question is to establish the date at which the Great Recession began. Proceeding that, there is the underlying question, which source do you use? in order to obtain that data. The Federal Reserve Bank of St. Louis has an economic research branch that includes a team that documents Federal Reserve history. And so I'm using this Federal Reserve history, which comes from the Federal Reserve Bank

of St. Louis, as the defining source. According to Fed history, the Great Recession began in December 2007. However, we should note that December of 2007, there was a lot of data that was still relatively good. Real GDP peaked in Q4, 2007, and some of the biggest upsets that took place during the Great Recession did not happen until 2008. In fact, in many cases, it happened late in 2008. For example, on September 29, 2008, the stock market fell by 777 points, which at the time was the biggest point drop in the history of the market. Now again, that was September 29, 2008. And that particular decline took place two weeks after the government bailed out the insurance company AIG by virtue of buying 80% of it.

It took place two weeks after the government declined to bail out Lehman Brothers, which went bankrupt with $613 billion in debt. It took place three weeks after the government seized control of Freddie Mac and Fannie Mae, which had guaranteed millions of bad real estate loans. and it took place two and a half months after the subprime mortgage lender IndyMac collapsed. So all of those things, all of those events took place between July and September of 2008. And that was a particularly tumultuous and shocking time within the markets. So I think in order to run this scenario, what would happen if you invested $100,000 at the worst possible time? I do think it is appropriate to run scenario A in which you invests. this money in December of 2007, which is officially when the Great Recession began.

I think it's also appropriate to run alternate scenarios, B, C, D, etc., that ask the question, what would happen if you bought during some of the highest trading days prior to December 2007? So, for example, in 2006, the Dow Jones peaked during that calendar year at 12,000, 510. That was the single highest trading day in 2006. What would have happened if you invested $100,000 lump sum on that day? And in 2007, the Dow Jones peak to the highest trading day, 14,164. What if you had invested $100,000 then? Those instances of buying at peaks, buying at all-time highs right before a major crash, let's take a look at what would have. happened had you done that, had you bought at the highest of highs before December 2007, as well as

had you bought along the way at some point in 2008? Let's trace all of them. October 13, 2006, the headline on CNN money that day is Dow hits another record high. The Dow that day was closing in on 12,000. It was 11,960. And so while the market had not yet reached its 2006 piece, it was really darn close. It was well on its way up. So this would be a point in time in which an optimistic investor, seeing that stocks are climbing higher and higher, might choose to make a big lump sum investment in the market. What would that yield? I'm running all of the following calculations using data originally from Robert Schiller's website. That is, Professor Robert Schiller from the Yale School of Management who has compiled U.S. stock market data sets from 1871 through

present. For these calculations, we're assuming that the full 100,000 was invested in the S&P 500. The following numbers that you are about to hear assumes that all dividends are reinvested and does not account for taxes, fees, or transaction costs. The calculator used in running these projections can be found on the website of dollars and data.com, which is operated by a Stanford trained data analyst named Nick Majuli. He works as chief operating officer for Ritzholt Wealth Management and is a previous guest on the Afford Anything podcast. Let's start with October of 2006.

An initial investment of 100,000 during that month, if left untouched until March of 2024, that $100,000 would have grown to $530,000. technically $530,961.31.32. and 32 cents. Now, that is an annualized rate of return of 10.06%. Now, let me note that that is what's called a nominal total return, which means that there is some inflation-related drag on that number.

If you want to know the inflation-adjusted numbers, well, I'm glad you asked, because the inflation-adjusted total return would be $3,45,000. $42,839, which reflects an annualized growth rate of 7.3%. From this point forward, by the way, because I'm going to be going through a lot of months and years, and I don't want your ears to be swimming in numbers. I'm going to talk about nominal total returns because that is the way in which stock market returns are typically discussed. So again, an investment of $100,000 lump sum, in October 2006, when the market was nearing its pre-recession peak, if you left that money alone, allowed the dividends to reinvest themselves,

and didn't touch it until March 2024, that $100,000 would have grown to $530,000, and you would have had an annualized growth rate of over 10%. Now, what would happen if you invested that money two months later at the peak of 2006, which was December 2006? That was the month in 2006 in which the market reached its absolute peak. So October represents, you know, it's 2006, but you're still on the way up. December represents like, it's 2006 and you're at the top. And it's the year before the recession begins. It's pretty much as close to a worst case scenario as you can imagine.

Well, even in that circumstance, if you put in that 100,000 lump sum in December 2006, today that money would be worth $509,000. And your annualized rate of return would be 9.9%. Now, let's move ahead one year. October 9, 2007, the market peaked. The Dow had a closing to the $14,164. Actually, let me put an asterisk there, because there's the closing peak

and then there's what's called the intraday peak. The closing peak was October 9, 2007. The intraday peak, which means that it got to a certain high during the middle of the day, but it didn't necessarily close there. That was October 11, 2007. So October 9 versus October 11, the closing peak versus the intraday peak happened 48 hours apart. So what that tells us is that October 2007 was the absolute peak. And we know with hindsight that only two months later, the Great Recession began. So what if you had put that money into the market in October 2007? Again, assuming,

the entire 100,000 got invested in a lump sum in the S&P 500, that money today would be worth $462,000. And it would have had an annualized growth rate of 9.77%. Now, that is worst case scenario. That is buying at the 2007 peak just two months before the Great Recession officially began. Now, just for fun, let's track what then happens along the way. if you bought during those first few months of the Great Recession. So if you bought in December 2007, you'd have $479,000 today,

an annualized rate of return of 10.13%. Next, let's skip ahead a few months, and let's go to April of 2008. The Great Recession has officially begun, but the big, scary headlines haven't happened yet. The bank collapses haven't happened yet. If you put $100,000 lump sum into the S&P 500 in April of, 2008, that investment would be worth $513,899 today. And again, let me put an asterisk

when I say today I'm referring to March of 2024. Now let's skip ahead another couple of months. As you'll recall, in July of 2008, that's when IndyMac collapsed. That was when the first really big, scary headlines started to happen. And with the benefit of hindsight, that was actually a pretty good time to invest because $100,000 in the market then would be worth $557,000 today. That's an annualized growth rate of 11.59%. And now, for those of you who are contrarians and you're interested in catching the bottom, let's say that you were to have put that money into the market in September of 2008, as you'll recall, that is the month in which Lehman Brothers, AIG, Freddie Mac and Fannie Mae all began

and dominating the headlines with either collapses or government takeovers. $100,000 in the market in September 2008 would be worth $573,000 today, with an annualized growth rate of 11.93%. Now, for the real contrarians who are wondering, all right, what if I was lucky enough to catch the bottom? What if I was lucky enough to put my money in the market in March of 2009? Well, you are very lucky because that would be worth $906,000 today. technically $906,553 and $38.

And the annualized growth rate would be 15.83%. What's interesting, let me pull back for a second here. What's interesting to me about this is that the range of returns, of annualized total returns that we are talking about actually occupies a relatively narrow band. If you had been fortunate enough to invest $100,000 into the market at the absolute bottom, March 2009, we're talking about an annualized growth rate of 15.8% versus if you had put that money into the market at the worst time, October 2007, which was the 2007 peak, the absolute highest of highs in 2007. If you caught the top of the market and then got slammed with immediate sequence of returns risk, which, thank God, would only be theoretical because you are not withdrawing this money, right? But you were slammed with an immediate haircut.

You invest at the peak and instantly it crashes. We're still talking in that case about an annualized growth rate of 9.77%. So that range, 9.7 through 15.8, I mean, certainly it's a significant amount of money. You know, we're talking about the difference between your investments growing to 906,000 versus your investments growing to 462,000. So I don't want to underplay the range. I mean, yes, the difference between 9.7% and 15% is absolutely a lot of money.

But it isn't the catastrophic, woe is me. I'm never going to recover from this. type of situation that many people fear. An annualized growth rate of 9.77% is still pretty darn good. Turning 100,000 into 462,000, which is what would have happened if you bought at the absolute peak in October 2007, still pretty darn good. And while, yes, being lucky enough to catch the bottom in March 2009, yes, that would yield you in this example an additional 400,000. 44,000 essentially doubling your money. What we know historically is that with enough time in the market, your money will double and double again and then double again and then double again.

And it is always that last doubling that matters the most. And you get that last doubling by increasing the amount of time that you have in the market, time in the market, not timing the market. And while many people are tempted to hear that and then kick themselves for not having started when they were two, the reality is you and I will never be younger than we are today. Today, we are younger than we will ever be for the rest of our lives. And so even if you haven't invested a penny yet, guess what? Today, you are relatively young, relative to the age that you are going to be tomorrow. And so given that you are relatively young, today is the best day to invest. I hope that hearing those numbers and hearing that range of possible outcomes, the

worst case, the best case, a bunch of middle cases in between, I hope that now that you've heard that range of potential outcomes, you're feeling even more confident, even more empowered to go out there and invest your money and watch it grow. Watch it compound, watch it double, and then double again, and then double again. And I can't think of any more important message to close out episode 500 with. So, thank you for listening to Episode 500, Part 1. This is Episode 500, Part 1, Part 2 of Episode 500, which is audience Q&A. We're going to air that on Friday.

We're going to air that in two days. So make sure that you're following this podcast and your favorite podcast player so that you hear live audience Q&A that comes from episode 500, and share this with a friend. That's the most important thing that you can do to spread the message of financial literacy and financial independence. I also want you, I have episode 500 favor to ask of you.

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And thank you for being part of this community. Thank you for being dedicated to financial literacy and financial independence. Thank you for embracing the ethos of investing. And beyond that, the ethos of being thoughtful. and deliberate about how you want to live your life, because that is ultimately what this is all for. So with that said, thank you for being part of this community. My name is Paula Pant. This is the Afford Anything podcast.

Make sure you're following us on Apple Podcasts, on Spotify, and on YouTube, and tune in in two days' time to hear live audience Q&A from episode 500. I'll meet you in the next episode.