Afford Anything - Q&A: Which Investments Should Go Into Which Accounts?

Episode Date: July 2, 2025

DOWNLOAD the FREE Cheat Sheet: ASSET LOCATION MADE SIMPLE at affordanything.com/assetlocation #621: Jared is attracted to the favorable terms of the annuity plan that his employer offers, but he’s hesitant to pay the opportunity cost of locking up his money now. What should he do? An anonymous caller is struggling to find the efficient frontier with only three funds to choose from in his Thrift Savings Plan. Is there any hope for him? Jack feels great about the funds in his portfolio, but he’s losing sleep over how to apportion them between his taxable, pre-tax and Roth accounts. What’s the best tax strategy for him? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail Learn more about your ad choices. Visit podcastchoices.com/adchoices

In honor of today's episode, we made a free cheat sheet called Asset Location Made Simple. It's four pages long with actionable shortcuts and tips that you can use as you're rebalancing your portfolio. Download it for free at affordanithing.com slash asset location. That's affordanithing.com slash asset location. Hey, Joe, what's one of your favorite takeaways from seven habits of highly effective people by Stephen Covey? Don't drink your bathwater. Well, he doesn't say that. Oh, personally, I really like the three buckets, the things that we can control, the things we can influence, and the things that we can neither control nor influence.

And most of us spend most of our time on things we can't control or influence. I really like reminding myself of that. That's my favorite part of it, too, although I don't think of it as three buckets. I simply think of it as locus of control. Is this in my locus of control or not? Yeah, that's a good one. There's another one that you cite often. and one of our callers calls you out on it.

Oh, hey. Yeah, we're going to hear which one that is in a moment. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. 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.

Every other episode-ish, I answer questions from you, and I do so with my buddy, the former financial planner, Joe Sal C-high. What's up, Joe? Oh, man, I'm so excited about today. We've got some fun questions. Yeah, great questions. Let's start with this first question, which comes from Jared. Good morning, Paula and Joe. Jared here, long-time listener, second-time caller. My question is, to what extent should I consider TIAA traditional as part of diversifying my portfolio? I am currently 45 years old. I am my net worth is approximately 1.5 million. and I am 92% allocated into stocks. I am currently comfortable with that risk profile, and I have not panicked sold or anything like that with the volatility of spring 2025. As part of looking into this option,

I have uncovered TIAA traditional as something my employer provides. As I understand it, this is a two-part product. On the front end, I put money in now. I get a minimum guaranteed return of 3% in practice based on historical data. It's closer to 4 to 6% per year. Then on the back end, I can convert to cash value into a fixed income annuity, which over the last couple of decades has been a conversion rate of approximately 8%.

Based on my research, it seems as if TIAA is well regarded and respected in this space, is rather secure as an insurance company providing annuities, and provides more generous conversion rates and guaranteed income rates than other companies. That said, this is not a traditional product for reducing volatility in terms of common research into bonds or bond funds or those types of assets. The research I have looked at, including listening to some of the guests on this podcast, suggests that annuities can be a very healthy part of a diversified portfolio, However, this is not just an annuity product.

Accordingly, I'm curious what your two thoughts are. I think that Paula's going to focus on opportunity costs and the extent to which I, at 45, want to pre-commit my 65 or 70-year-old self to an annuity in this way, especially when we don't know what conditions will be like in 20-plus years from now. Paula tends to privilege flexibility and adaptability over long-time horizons and unnoticed. conditions. I predict that Joe is going to talk about picking up both ends of a stick, and while the annuity product would probably be healthy in a diversified portfolio, all told, the other end of the stick in this case is the below market returns, which for someone at my age,

I could really be losing out on a lot of returns over the next 20 years. Should I invest this money separately and then convert later, even if that conversion rate is going to be lower than what T-I-A you might provide. Thank you both in advance for your time. I look forward to your answer. Jared, I love the question and you nailed what. Oh, no, no, no, Paula, not at all. I was going to talk about opportunity costs, Jared, and I'm upset that you assign that to Paula. He nailed it, but also the portion of Jared's prediction in which he said, Joe, that you would talk about the loss, what he could otherwise make if he were to invest this in the market, that's probably what I would lead with, even beyond flexibility.

There, you got us mixed up. No, but he also, he nailed the prediction of me valuing flexibility over a long time horizons. He nailed it. Yeah, and he's not wrong about how I would have answered it. Yeah, exactly. Damn it. He should start a betting site for how you and I are going to answer these questions because that was a really good guess as to exactly what we were going to say. Okay, so can we go on to the next question then?

We should probably elaborate out on that answer. And actually, I do have more. I think he is partially off on what my answer would be. Oh, where do you get it wrong? I don't think he got it wrong at all. I think you can do better. And I appreciate that he understands that, which makes this juicier. Because as I've also said in the past, the key to any great strategy is knowing where the Achilles heel is.

if you think your strategy doesn't have an Achilles heel, you just haven't found it yet because everyone does. So he knows he's giving up some potential returns. However, he does, and I love that he recognizes this in his mid-40s, because an annuity does give him some other benefits that he is embracing. The first one that he talks about is this guaranteed income stream. If he built it now, rather than worry about bonds in his portfolio, he can build this guaranteed income stream. That also is a positive and a negative. Let's talk about the positive first, because there's some positives that we never talk about when it comes to annuities and annuity payouts.

An annuity payout is great because when we get Social Security, for example, Paula, we don't really think about that money. We just spend it. that's the first money in your budget in retirement. So you get your social security check, use that for groceries, use that for gasoline for the car. That is base level spending and you don't question it. Should I have used that money or not? You just use it. And a problem that a lot of people have with their portfolios, study after study shows, is that we accumulate all this money and we're great savers and then we're afraid to spend it. What ends up happening is we do less and we have less

happiness and we worry more because I'll tell you as a former financial planner, I could tell you all day over and over that even though that graph is showing you with less money every month as you're spending it down, you're still going to be okay. People still tend to freak out when the graph goes down. Yeah. After spending an entire lifetime knowing that you have an income stream, right, knowing that your whole life, starting from the age of 12 when you begin your paper route or babysitting, or 15 maybe, when you get your first job at McDonald's, starting from early adolescence and then throughout your entire life, you're used to money always coming in the door. And so even as you spend, you know that's going to be offset by the fact that new money

is still going to be flowing in. And it's incredibly hard to suddenly, in your 60s or 70s, wrap your head around the idea of spending with nothing new flowing through. And I love how your afforders are recognizing that. We had that call recently from the gentleman was like, do I put it in the Roth IRA? Because I'm afraid that I'll be afraid to take it out. Yeah. Like people get that. I got this money in the tax shelter and I love the tax shelter so I don't want to take it out. And he already knows that is the wrong answer, not taking it out. So the great thing about the annuity is that when that becomes an income stream, you just

Spend it. Just spend it, which is great because it's going to add to your lifestyle. It's going to give you some freedom from worry. That is awesome. So the answer is on paper, can you do better by not doing the annuity? A hundred percent. And by the way, there's a reason for that. And this is not annuity companies ripping you off. That's the reason we hear all the time is annuity companies ripping you off. Let's talk about what an annuity is. And Jared also referenced this. Jared said, he recognizes this is different than a bond. It's an insurance policy. An annuity is an insurance product.

And whenever you take control away from you, you decide not to insure, in this case, aka invest in a diversified portfolio for myself to insure my future. And I'm going to hand that over to an insurance company who's going to insure my future income streams. They're going to get paid.

They're going to get paid. And they're going to make sure that, You win, but they win too. So it is the necessary evil of getting a guaranteed payout every month. TIA very respected. He doesn't get this wrong. TIA, very respected company, one of the best in the annuity business. I love TIA.

I do too. In a disclosure in the past, I've had a relationship with TIA where they paid me. But I was gleeful that TIA wanted to work with me because they're a kick-ass company. Gleafleafle. I was gleeful. I've never heard anyone say that word. I think I've only ever read it. I skipped a mom's basement to the microphone every day because TIA is great.

And by the way, TIA works with some of the smartest people in America. TIA is the main provider of college campus retirement funds. So smart people hire TIA. I'm a client of TIA. I'm not compensated by them in any manner, but I am just a regular run-of-the-mill individual client. Yeah, I haven't been compensated by them in seven years. years maybe and I still love them. But anyway, so if you're going to pick an annuity provider, TIA is a fine one, but they're going to get paid. Now the other downside, and this is a big

downside that I really want to ask you about, Jared, which is tell me about your family. Tell me about your wishes beyond you. Because the big thing about annuity payouts is that there are ways that you can take this annuity payout later where some might be left for your beneficiaries. However, in most cases, the annuity dies with you. So while it can make sure that your life is free of worry, you're going to have more happiness, you're going to spend money the way that you want to without thinking about where this money's coming from because this is just a guaranteed paycheck. At the end, your beneficiaries, I want to be clear, this is a wild generality.

And I get that there are ways to make it so your beneficiaries get something. But just wide brushstrokes, they get very little or not. nothing. So you're making a trade also on the intergenerational wealth building when you choose an annuity. So I'd ask about that ahead of time. I don't think this is a bad way to go. I agree, Jared. This is not a bond replacement. This is just a guaranteed income stream. You can certainly say, I'm not as worried about needing money tomorrow so I can put more of my money in a 10-year-plus bucket because I have more of a guaranteed income stream coming in, which means I can be more aggressive with my stock portfolio, which is your 92% stock, so that's great already.

So I'm on board with the strategy. I think it's conservative. It's beatable, but it's not bad. Yeah. And you know what I like, Jared, about your approach is that you're offsetting being more aggressive with your asset allocation. You're offsetting having a very high equities allocation with something that on the other side is quite conservative, which is an annuity. And I generally like, even though technically it's not

what is commonly referred to as a barbell allocation, it has the ethos, the spirit. It kind of is. Right? Yeah. It has the ethos of a barbell allocation, which is also what I use and what I really like. I like the two ends of the extreme, highly conservative on one side and then highly aggressive on the other side. So, Jared, did we surprise you? That's what I want to know. Because what I really want is didn't expect that. Joe, I think we are just predictable. That's so annoying. No, it's great.

We provide continuity in people's lives. And it shows moral consistency, intellectual consistency, right, that we would apply the same consistent principles to a variety of applications, to a variety of life applications. You're saying that Jared can be assured we don't have a dartboard that we, used to answer these. Because if you're saying that, I got to take the dartboard down. I do think he asked about build it elsewhere. Don't do that. Don't build it out to elsewhere and then move it to TIA later.

Just build it at TIA. In terms of behavioral stuff, the juice ain't going to be worth the squeeze to build up a pot of money over here and then move it to TIA later. Don't. Just build it now. By the way, if anyone who's listening wants a. deeper dive into annuities. If there's people who are listening to this going, wait, what's an annuity, who, what, where, when why? We're going to link in the show notes to a couple of episodes

that we've done that are deep dives on annuities. So that'll be there for anyone who wants that background primer. But for the most part, annuities are not something that I proactively would ever suggest to anyone, but for somebody like Jared who clearly has done his research, he knows his stuff, he knows the pros and cons, he's thought about it, and this is the path that he wants. I think that's great. Me too. Thank you, Jared, for the question. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens.

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That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big Bank muscle, fintech hustle. That's your commercial payments of fifth third better. Welcome back. Our next question comes from Jack. Hi, Paul and Joe. Jack here.

I have a question about asset location. I feel pretty good about my wife and I's asset allocation, you know, what funds we've chosen to buy. But I try to do a deep dive into where we should be holding each of these funds, you know, across taxable, pre-tax, Roth. And it's got my head spinning just a little bit. Big picture backing up, we really only have variants of three funds. I say variance because I don't want to differentiate between VTI and VTSAX, for example. So I'm just going to give the three big. picture variance. We have what I'll say, just domestic, think VTI, Vanguard Total Stock Market Index.

We have International, the Vanguard Total International Stock Market Index, VXUS. And then from before we married, my wife has a sizable position in Fidelity, Blue Chip Growth. And I guess the big picture question here really is, where should we be placing each of these three? Should VXUS be in taxable? should VTI be in Roth, that sort of thing. It seems that if you expect VTI to grow the best, which who knows, I guess it trades back and forth between domestic and international performing and outperforming each other and whatnot, but you would want the ones that are going to perform the best in Roth, right?

But then if we don't know what's going to happen in the future, should I just put half of Roth as VTI and half of Roth as VXUS? or should I bet on one or the other? And then when it comes to the international, it gets a little bit more gnarly because you've also got this foreign tax credit. So I guess the foreign tax credit cuts in favor of keeping VXUS in taxable accounts.

Otherwise, you forfeit the tax credit. It's free money you're forfeiting. But on the other hand, VXUS is less tax efficient than VTI. So presumably, based on tax efficiency, VXUS should be in your pre-tax accounts. And then, of course, we've got this fidelity blue-chip growth here, which I don't really want to sell. I should say my wife and I don't really want to sell.

It's my wife's. It's up to her what she does with it. I'll play her any response that you give us. But it seems to me that that's the least tax efficient of all. So if we want to keep that, we should do what we can to move it into some form of tax-advantaged account. Anyway, this is kind of a big picture question, and I'd be curious for your answer on how best to go about doing this. I appreciate your time. Jack, thank you for the question. So first of all, just to summarize your question, you've got essentially three major asset classes, really two. You've got Fidelity Fund, which is a large cap growth fund. You've got a total stock market fund, which is really a large cap growth fund as well. It's the total stock market, but overall, that's also very much a large cap growth-oriented fund in aggregate. And then you've got an international fund.

Between the three, the Fidelity Fund is, as you've said, the least tax efficient. So that should absolutely be in a tax-advantaged account. The international fund, you mentioned the foreign tax credit. The foreign tax credit is simply there to offset any taxes that you pay to a foreign country. So the foreign tax credit is there in order to... keep you from double taxation, but it isn't a tax advantage in any other sense of the word. You're paying taxes to a foreign entity and you simply get the tax credit in order to not be double taxed. So it wouldn't harm you to hold an international fund in a tax advantage to count because

it's leveling the playing field. It's not advantageous like a Roth IRA makes it more advantageous. Right. Exactly. It just makes it not suck as bad. Yeah, exactly. I think that's what the pros say. Yeah, precisely. It's not a tax credit in the it's going to lower your taxes, sense of the word. Technically, it will lower your taxes, but only because you're already paying taxes to another country. So all it does is equalize.

So where I would start with is of the three asset classes that you named, if you've got to hold something in a taxable brokerage account, which one would you most want to hold in there? And of the three that you've mentioned, VTSAX or VTI is the one that I think is, is the one that I think is. most taxable brokerage friendly. So I'd start with that as the fundamental route. I would with one caveat, Paula. The only caveat I would put on that is I want to know what part of the game he's playing because if he's playing, it's time to begin with drawing money. I think I start from a whole different rubric.

But I think that if he's in asset accumulation phase, then we can really focus on just getting real. of the friction of taxes because my thinking is going to be different. If you're taking money out, I'm not going to worry as much about taxes because I'm much more worried about making sure that there's more money in the right place, that it's easy to grab. But if he's an asset accumulation phase, 100%, just line these up with the most efficient things outside in the brokerage. And then really, to me, how do you feel about the Roth and the pre-tax? The Fidelity Fund has 22% turnover. I looked it up. The Fidelity Fund has high turnover. It seems to me as though of the three that he's mentioned, that is likely the least tax efficient holding. So that's the one that I would bias towards putting into the Roth. It's also a large cap growth fund. Why parsing the Roth versus the pre-tax? To his point, we historically, at least in the last 10 years, we have not seen a whole lot of appreciation come from international stocks.

To a certain extent, it's a guessing game as to how well international will perform over the next 20, 30 years for as long as he's in the accumulation phase. And even once he enters the drawdown phase, he's still going to be holding it for another 20, 30 years. So over the span of their investable lifetime, there's a guessing game of how well international stocks will perform. But if we operate on the assumption that a large cap growth fund, whether it's an index fund like VTSAX or ETF like VTI, or whether it's the Fidelity Fund, I would want that large-cap growth fund to be placed in a Roth. And given that he has two large-cap growth funds, he's got, I'll just say VTSA-X-V-T-I, and then he's got Fidelity. Then the question is, which one of these two should go Roth, and then which one of these

two should go taxable? And between the two, I would go VTSA-X-V-T-I-Taxable and VTSA-S-A-S and Fidelity, ROT. I see. You're not thinking Roth versus pre-Texemptive. I'm like sure as I can Roth versus taxable. Yeah. Yeah, agreed. Yeah, because with Roth, and just to widen this out so that everyone understands the logic behind this,

with a Roth account, all your growth, all your appreciation and your dividends and your capital gains are all tax exempt. So whatever is going to grow the most is what you want in that Roth. And with a taxable account, you pay taxes on the turnover. You pay taxes on that churn. So whatever is going to generate the least amount of turnover and churn, you want to put in the taxable. And that's why of the two large-cap growth funds, the one that creates the least amount of turnover in churn, which is VTSA-X-V-T-I, that one goes in the taxable account. Large-cap growth is likely going to see the greatest rise in value over time. So the other large-cap growth fund, the one that has more turnover and more churn, which is fidelity, that goes in Roth.

that just leaves international left over and it leaves the pre-tax position left over. I think the interesting part of this, and this is going to come as a shock to no one, is looking at the future, like where do we end up with these things? And if we don't want to predict, then having international and the U.S. large company in both the Roth and in the pre-tax makes perfect sense to me to have some of both. However, obviously, the more you do that, the more that increases complexity. We don't know. because it's ahead of time how much that juice is worth the squeeze. I'll tell you in 20 years, whether it was worth it or not to put those in the same account so that I have the same asset

allocation in both. I would certainly introduce more of that complexity when I'm putting my withdrawal strategy together during my retirement years. Then I think it's just a necessary evil. But ahead of time, do you do it? Do you not do it? I can go either way on that, Paula. Yeah. He sounds like he and his wife are both going to be earning an income for quite a while. The impression I got from the question is that they're nowhere near even thinking about withdrawals. But I can still see doing that. I can still see putting them both in because the goal is going to be to give ourselves tax flexibility later. And if one of these accounts outgrows the other by a ton, then I end up with less flexibility to do whatever the heck I want. My strategy becomes pretty apparent just based on whatever serendipity happened in the markets.

But given the fact that there are some stringent contribution limits on how much you can put into a Roth, and there are, relatively speaking, more generous contribution limits as to how much you can put into pre-tax positions. You're assuming that he can't do the Roth as a workplace retirement plan. Well, even if he could do 401K Roth, like a Roth I-401K, for example, or a Roth 401K, even if he could, the employer position, the employer match is still going to go pre-tax. Pre-tax, right. So he's still going to have some pre-tax. Yeah, exactly. So given the restrictions around how much a person can put into Roth, it makes sense that you would want to drive as much growth in Roth as possible because your ability to grow that account through contributions is so limited. Whereas you have many more options to grow your accounts in a pre-tax position and you have no restrictions, of course, on growing your accounts in taxable position. So from the contribution side, he can, over time, redirect where he makes new contributions if the Roth starts outpacing things and he wants to catch up more in some of the other positions in pre-tax or taxable.

During retirement years, and we're both assuming, Jack, that this is not your question, but during retirement years, I just don't start from here. My goal is to start with the strategy that is an all-weather portfolio, that I can be assured that I'm going to do the least damage to my portfolio when I'm taking money out. And then step two is I'm going to make that as tax efficient as possible. And that's going to change from person to person. And we covered that on a previous episode, much more in depth. But I go back and listen to that. Our discussion about how to set that up. I should say that as we have this discussion over Jack's asset location, we don't know the size of each of these positions.

And we don't know what his ability or his desire is to switch money around between different types of accounts. We're talking about three assets, one of which is VTSAXVTI, one of which is total international, and one of which is this. Fidelity Fund, which is a large growth fund. So we're talking in broad strokes about three different types of investments and three different types of accounts. But we're having this discussion without knowing how much he can place in each account. So we're having the discussion broadly in a manner that assigns one to one. And so to your point, Joe, to the extent that he can split some of these up, that's even better. But I think to start, since his question was about asset location, We start with this initial framework of one-to-one, just to get a sense of all else being equal.

We like this type of asset in this type of account. We'll start with pairing the puzzle pieces together, red pairs with blue, yellow pairs with green. We'll start with just pairing these together. And then, to the extent that you can split that. We'll fancify it. Yeah. And now red pairs with mostly blue but a smidge of green. yellow pairs with mostly green but a smidge of purple.

So I say that just to be clear that we're not advocating only holding one type of asset and one type of account. It's just an initial framework in order to establish the preferences. Thank you, Jack, for the question. Joe, you've developed a bit of a reputation on this show for being Mr. Efficient Frontier. Oh, boy. Yeah, it's true, it's true. And we were talking earlier about the term efficient frontier can be a little off-putting

to a beginner. A little? Oh, yeah, a lot. A lot. A fish and frontier. Yeah, it feels weighty, right? It's horrible. Right?

I listen to anybody talking about a fish in frontier and I immediately go, oh, man. Right. That sounds complicated. Exactly, exactly. It sounds off-putting. It's a terrible name. But once you grasp the concept, it's not nearly as difficult. Exactly.

It's a beautiful concept with a terrible name. But anyway, our next question is about the official frontier. Exactly. That is what we're going to address coming up right after this. Welcome back. Our final question today comes from Anonymous. Good morning, Paula and Joe. I just want to ask a question related to the Efficient Frontier.

I know you've covered a lot about it, and I've been trying to figure out how to merge the Efficient Frontier with the TSP-3-7s plan for the... the government employees and military. We only have a very limited amount of funds or ETFs, equivalent funds that we can invest in. And I can't seem to find anything or any way to reduce risk without reducing the return significantly by combining the C fund, the F fund and the I-F fund. Basically, we have a fund that tracks the SMP 500.

We have a fund that tracks international except for China, and we have a fund that tracks small cap. The C fund would be the S&P 500, the S would be the small cap, and the I would be international. I try going in through the efficient frontier, as Joe showed and suggested. and couldn't figure out how it could possibly improve. I currently have 60 in the C-Fund, 20 in the I-Fund, and 20 in the S-fund, and believe that's a pretty good mix, but wanted to ask you guys, how would you suggest or how would you see about evaluating the correct mix of these

funds in order to approach a more efficient outcome? Thank you. All right, Paula, we want to have some fun? Yeah, let's do it. Let's do it. Step one, we got to give Anonymous a name. Oh, we do. Do you got one?

So the concept of the efficient frontier came from a guy by the name of Harry Markowitz. Oh, this is great. I like where you're going. I think it would be very funny if Harry was asking us questions about how to do his thing. So Harry Markowitz is an economist who in 1952 won the Nobel Prize for his development of modern portfolio theory, and the Efficient Frontier is a big cornerstone of modern portfolio theory, the thing for which he won the Nobel Prize. In the Efficient Frontier, there's a graph, there's a hyperbola, and that hyperbola is actually referred to as the Markowitz bullet. So, in honor of Harry Markowitz, who developed the efficient frontier and modern portfolio theory, I'd like to name this caller, Harry.

I love that. Yeah, how do you use my thing? How do you use the thing I developed? That's fantastic. So do we want to do this live, Paula? Let's do it. Let's do it. So for those of you who are listening via audio, I'd encourage you to check out the YouTube video of this because we're going to be showing some images on screen.

that walk you visually through the efficient frontier. So tune in to the video. It's on YouTube, YouTube.com slash afford anything. So if you are walking the dog or out on a jog, whatever it might be, I'll just describe what we're doing. So the first thing you do, you go to Portfoliovisualizer.com. And as always, if you remember, there's a big green button over here on the left that says get started. We do not want to go there. Ignore it.

Ignore the button. You can use it later for other things. It's a great website, but we're not going there. We're going up to the upper right where there's a button that says tools. We're going to click that drop down. We're going to go right down here to a Fish and Frontier and we're going to click that. And it brings us to our configuration. Now, this is where Harry is going to input the things that are available in the Thrift Savings Plan.

The plan that he uses through the government, very simple plan is going to make this very easy to look the efficient frontier. So the first thing that I'm going to do is I'm going to click up at the top. It says portfolio type. It defaults to tickers. We do not want to use ticker symbols. We want to use just asset classes because the Thrift Savings Plan choices, IS and C that he's going to put into his configuration, those three choices are just really straight index-y kind of choices. So we're going to just do the asset classes. The second thing that we're going to do is then we're going to select the asset class. So the C fund is U.S. large cap.

The I fund is International XUS. There we go. And then the S fund is small cap. So I put those in. So for those of you who are listening via audio, Joe just selected those off of a drop-down menu. Yeah. There's a bunch of different asset classes. And I just chose those three because those are all that are available.

So here's what the software does. What I just told it is, I don't want you to give me actual funds. I want you to give me the asset class. And the I is an asset class. The S is an asset class because it's small companies. The I is international companies. And the C is big companies. So I just told it, just look at those three and make it as efficient as you possibly can.

historically from 1985 on is what this says going back up to the top. There's a drop down for start year. It put 1985. You know what, Paula? Just for fun, let's move that. Let's see if it'll give us data all the way back to 1972. Because we'll give us longer term data, that's going to be even better because it's just more.

Yeah, more data. Yeah, a lot of different markets to look at. Who doesn't like more data? Here we go. So I'm going to click down at the bottom. There's a button that says view. I'm going to click view and there it is. Now he said right now he is 60, 2020.

And so here is the efficient frontier. So we have this kind of arcing line. It doesn't arc a ton because we're just using three asset classes. We're not using any bonds. So it's going to start off at a fairly high rate of return and then go up. But if I peg this at looking for an 11% historical rate of return, there it is. He's going to be 78% U.S. large cap and 21% international. So it's going to be closer to 80, 20 and get rid of the small cap altogether.

And by the way, the reason for this is also interesting that even though this goes back to 1986, we put in 1972, but one of these portfolio visualizer only has data from 1986. So it will default to the closest year to today for whatever asset classes we look at. So I want to make sure what I'm looking at. So this is 86 to 2025. That's as far back as this goes. And as I've said before, this is a limitation of this particular program is that they have limited data sets. All the data sets for all these different asset classes don't go back as far as I would like. However, this is going to get me in the ballpark.

And so if I look at an 11% rate of return, and there it is 78 and 22%. Now, what's also interesting about this is this, even though it's 86 to 20, 25, I really like the idea of having three funds instead of having two. CFPs will tell you that for better diversification might not have been historically as efficient, but the case for small cap value, you can look at some of the research done Paul Merriman and others. The small cap value is worth being in. Right. So it doesn't give it to me on the efficient frontier. It tells me, don't be there. And I go, you know what, I want to be there.

So what I can do is I can go back up to the top. So I'm going to flip back up to where I originally put in those three asset classes. You're going to put in a minimum allocation, aren't you? And I'm going to say, let's say give me at least 10% small cap. No, I could make that. at 20. But realize, the more I tell it it has to do, it's already telling me this is not as efficient as it could be. But I'm going to tell it, let's go 10. And I'm going to view. So you put in 10% minimum. And now notice, if I use just large cap, it's telling me it's above the efficient frontier. I get it. I get it. I understand why, because I hardwired it. And now I pretty much at that 11% return number. Now I'm at 70, 2010. So I would say already, Harry, you clearly are not that far off.

70, 2010 is what I would probably use. And you're at 60, 2020. So the answer is you are pretty damn close. And the cool thing is using the science-backed approach of the efficient frontier, I think you can high-five yourself and go, are you comfortable leaving it there? Sure. If you want to put in 20%, which will be hardwired, I'm now going to change that 10 to 20. I'm going to go back in and look at the three of these together. And at 11%, it's telling me 60, 2020. It's telling me exactly what you have. So the answer is, we can get there, Harry, doing what you asked.

This just verified that you're pretty damn close. So here's a question, Joe. In Harry's case, he has limitations on the asset classes that he can invest in. what would a person do if they are invested in Vanguard where they have just a wide array of asset classes that they can choose from? Sure. Then I go back to what we did during our training. And hopefully, Paul, you can link to that. But what I generally like is large value, large growth, instead of just large cap, to use both of those, let's put in mid value, mid growth, small value, small growth. We're going to put in commodities. I can use commodities,

precious metals or gold of those three I can use any of the three I want. I'm going to go with commodities. Simply because it's the biggest, widest ranging. It is the widest ranging, but that will include gold and precious metals. We're going to put in real estate in the form of a reet. And then I'm going to put in, of course, my international developed ex-US. And then I'm going to put in emerging markets. And in other places, by the way, you can see we can get as granular as we want. In other places, I've said that you could just use eight different choices because a lot of people here will take out commodities and they'll just use international by itself instead of international and U.S. markets and then you have eight. I will often default to nine because I love

emerging markets myself. So I'll put those in as a different asset class. And then I will use the long-term treasury market, corporate bonds and high-yield bonds. Because I, high-yield bonds will act like a hybrid between stocks and bonds. So where's my high-yield corporate bonds? There it is. And now I have 13 asset classes, which is generally the widest that I get. Oh, but 13's an unlucky number, Joe. Oh, no. What about total international? So I'm curious as to why you chose international developed X U.S. rather than total international, which includes U.S. Because I've already got U.S. up here with large cap, mid-cap, and small cap. I've already taken the U.S. market and I've parsed it out to be six things and I don't want overlap.

Cool. I want to keep my meat from touching my potatoes. All right, here we go. And now I view, now it says I've repeated large cap growth. Where have I done that? Oh, I accidentally did that. I like that it pointed that out. So let's go midcap growth, midcap value.

There we go. Now I've got it right. And we click the button. And now look at what we've got. Look at that. A much more robust graph. And if I go up here to the same spot, 11% return, 77% large cap growth, 23% treasuries.

That's a big treasury allocation. But what's interesting, Paul, you know how you like the barbell? Yeah. It's telling us barbell's efficient. Arbell's a great way to go. Stick with the U.S. growth as your driver of growth. And then during the downtimes, use the treasuries. Now, of course, a CFP looks at that and goes, I'm not going to bet everything on large

cap growth. And I know that the U.S. market by a lot of different factors right now is pretty heated. What this is also telling me, though, that the last 10 years are factored in. So a CFP will then begin putting in a few minimums on some of these. So again, I can go to this small value, let's say, and put in a 10. And I can go to the developed markets and maybe put in international developed markets and put in a 20. Emerging markets, I like a number that's either five or ten. I'm going to add in those. You could, again, do whatever you want.

Back when I was designing portfolios professionally, I actually found that we got a calmer ride by even putting 5% commodities into the market. 5% gold. I hate gold as an asset class, but it really calmed down the portfolio. Carson, Big Earn, he in his safe withdrawal rate series, did a study on what would happen if you added gold to your portfolio. His bias was that he thought it

would make it worse. That was his hypothesis going in. And it actually turned out it made it better. If you want to read that, it's Carston's Safe Withdrawal Rate Article No, 34 on the Safe Withdrawal Rate series. And here you'll see, it gives me an efficient frontier that really rides those guardrails, 2010, 10, now we're down to 15% treasuries and 40% large cap. Right. But a much more rounded out, less bumpy ride. If you look at the standard deviation on this portfolio, however, standard deviation goes down, but look what else went down. The expected return went way down.

Yeah. Joe, on this hyperbole, the Markowitz hyperbole that we're looking at, what portion of the hyperbola do we want to be on? Great question. We want to begin with the end of mind. So for me, starting with an 8% return or 9% return versus the more delicious 11, really for me is a better place to be, but part of that's because I'm 57 years old, right? If I was younger, I would go higher up.

But I think if I start with what return do I want to set my goal at and then work from there backward, I think is the way to be. So before I hit the efficient frontier, I go, you know what? I'm looking for eight. And then I go to eight and I see what eight gives me. So I don't begin with a fish and frontier. I begin with my financial plan and what rate of return. Because if you remember, for people that have heard me talk before about this, there are three different levers that I have.

Lever number one is how much money am I going to save? Lever two is what return do I expect that money to earn? Lever three is how much money do I need for the goal? And I can adjust either any of those levers. And frankly, part of that, how much money do I need is also the timing of the goal, right? So I can push the timing back on that goal. I can pull it forward that's going to make me need to save more aggressively or get a higher rate of return. I can lower the amount that I need overall.

I'm only going to buy X house versus Y house that was bigger. I'm going to lower what the goal expectation was. Or I raise the goal. I can save more. I can save less. I can look for a higher return or a lower return. And each of those have problems, right? If I raise the amount that I need to save, then I'm living on less today.

day and it truly is about, I don't know if I'm going to show up 20 years from now. Why am I going to save all my money for a future that I don't know is going to exist? When it comes to the return portion, if I set my expectation at 10, look at the standard deviation goes up, which means there's a bigger chance I won't get that. I'm throwing darts at a much wider dartboard that I am as I go down. The efficient frontier, my standard deviation is less and less and less. So there it is. the efficient frontier in action. Actually, what it shows me is that Harry is not wrong. Harry, you're not far off. You're very close to what I would do. I would be more of a 70, 2010, but 60, 2020, 20, 20. Yeah, okay. Great.

Joe, conceptually, as we look at this graph, and again, for those of you who are listening via audio, I encourage you to check out the YouTube video. Joe, visually, as we look at this graph, if there are some asset classes that are above the efficient frontier, others are below the efficient frontier, what does it mean for an asset class to be above or below this hyperbola? Left to its own devices without any input from my hand, if I just put everything in the efficient frontier, Paula, no asset class is above the efficient frontier. There is no such thing. So if I just let the software do what it will do, they'll all be below. The only time you will, see an asset above the efficient frontier is when I've put, nope, I want a minimum weight like we did

of 10% into small cap. I'm telling the software to do that. When the software then gives me back then a return that shows something then in that graph above the efficient frontier, it's literally the software going, in this case, it truly is literal. The man's holding me down. The man being Joe Sal C-Hai is holding me down because the software is telling me, I think this historically has been more efficient if you didn't do the small cap or if you didn't do the international to that degree or the bonds or whatever it is. But CFPs looking at reversion of the mean, looking at point in time, looking at a safer withdrawal strategy. Because we'll look at other things, not just efficiency as we get closer to retirement. And so as we put these constraints in, it literally, in this case is saying the man's holding me down.

Joe's hold me down. So functionally, if something's above the efficient frontier, it means it could be more efficient. It could be that. But by virtue of putting in these additional weights, we're not getting to that most efficient place. By contrast, when something is below the efficient frontier, it fundamentally means the returns just aren't commensurate with the risk. This is inefficient. And the ones that scare me the most are when they're inefficient and right on the graph, because it means I'm getting a lot more volatility. and I'm getting risk that isn't worth the risk.

And commodities there, right? And commodities are both far on the right side of the graph, but below the line of the efficient frontier. And it's interesting because if you look long term, if you take reets, long term, the North American Real Estate Index and the S&P 500, they're not that different, which goes back to when I first introduced this on your lovely show, Paula, that the S&P 500 left to its own devices is not that efficient. The VTSAX, not that efficient. It's when you pair it with other assets that you start getting some pretty exciting results. It's funny because I love analogies.

And I remember when I was in this wine tasting class and this guy, Vincent, who owned the local wine shop, taking us through it. And he was a wonderful teacher. Vincent said, you know, this idea that drink whatever wine you want with whatever food, everybody's always, oh, pair this with this. And then there was that backlash, people going, just drink whatever the hell you want. forget about all this he goes that backlash is BS and he took a glass of wine and i don't remember what wine it was because i'm not an expert he took a glass of wine and then he gave us a green grape and he had us drink the wine with a green grape and the wine tasted awful just 100% awful and then he gave us a blue cheese with that same wine and i ate the blue cheese and i ate the blue

cheese than with that wine. And the wine was flipping amazing. It was incredible. It was so good. And I think that's what with Frank Vasquez and his obsession with risk parity, it's all about this combination of food groups, in this case, asset classes that together create this great stuff. But other asset classes together are horrible. An example, people think that stocks and bonds together make the portfolio less correlated. Stocks and bonds have a fair amount of correlation still to each other. They're not necessarily negatively correlated. So we saw this in 2007, 2008, right, when the stock market and the bond market both fell

at the same time. Now, what's interesting is that there's a much more negative correlation with the commodities market, which is why a little bit of commodity. is like a nice calming factor. This is actually a great analogy because gold eight times more volatile in an average day than the stock market. But you put a little bit of gold into a stock portfolio like we talked about earlier, Paula, it calms it down. Left to its own devices, it's not calm at all. But paired with a stock portfolio, your overall number on the top line gets smoother.

It's fascinating how you can put these things together in a way that, make sense. Just like Vincent said, do whatever you want. I feel like VTSAX is that. Do whatever you want. The experts will go, don't do whatever you want. And you told me, Joe, a sad story about someone who had been with his financial advisor invested along the efficient frontier, but then heard all of the media, the Reddit threads. In this case, it was the online communities. Yeah. People saying two things. Favorite thing people do in online communities is go, fire your financial advisor. If you say the two words financial advisor in an online forum, there will be 10 people that immediately say fire them, immediately say fire them, not even asking you, are they good,

bad, they whatever, fire them. And the straw man argument they bring up is you're smart enough to do this yourself. And I want to be clear, you are smart enough to do this yourself. They are not wrong. They are not at all wrong. But when I was a financial planner, the through line that I noticed of smart people was they surrounded themselves with really smart people. Every athlete has a coach. It is so amazing. Just surround yourself with smart people as a life guideline. It doesn't have to be a CFP where you're paying them a bajillion dollars and they're investing. Just surround yourself with smart people. So the idea of financial advisor fire them because you're smart enough. That's not a reason to fire them. Now, there may be plenty of reasons to fire them, but the fact that you're smart

enough is not the argument. Of course, you're smart enough. And then the second thing that they say is your portfolio is too complex. Just go read the simple path to wealth and VTSAX. And my response to that is VTSAX is a wonderful place to be when you're not dealing with a lot of money. When you're not dealing with bunch of money, it's a beautiful place to be. There are significant, repercussions to being in VTSAX later, aka you're losing a ton of money with almost no more work. And look at how quickly I went in and looked at Harry's asset allocation on the efficient frontier. There is a learning curve. Somebody online was busting me saying, this is very complicated.

It took Joe a while to explain it. Yes, it does. It's like driver's training takes several weeks. But once you know how to drive a car, you just jump in and go. So I agree with the person. They're like, no, this is more complicated that Joe's making it because it took him forever to explain how it were. Yes, correct. But once you know how it works, look how quickly I went, nope, nope, you know what, Harry, you got it.

You're good. You are close enough that science has proven you very right. Well, then can I ask a couple of additional follow-up questions? Oh, boy. No. I think our time is up. That's all the time of questions we had. So this is a question. It actually came in the form of a comment, but one person asks, so if you are rebalancing your portfolio along the efficient frontier, would that be 36 separate transactions across our family's accounts? So in other words, do you rebalance by individual account? Do you abalanced by total sum across all accounts? Do you have to make tons and tons of different transactions when you have, let's have, let's have.

say I think it's the same comment, Paula. I think this is a person that was telling me how complicated it really is. Yeah, because I read this one as well. And the answer is you can. If you decide to do this rebalance where you have a different efficient frontier in every single account, then certainly. Clearly, that's never been what I'm about. I'm about simplicity, right? And so if you're in asset accumulation years, then I'm going to take that efficient frontier. and then I'm going to answer Jack's question, and I'm going to look at these different asset classes and go, what goes where, right?

Where am I going to put them based on how I'm saving? And I'm going to put some here. I'm going to put some here. I'm going to put some there. And when I reallocate, I'm going to look at all these accounts, and I'm going to try to keep my portfolio as simple as possible. So if the efficient frontier is along, if I'm using 13 different asset classes, notice it didn't spit out 13.

It didn't spit out 13 different things. It's still spit out like five. And by the way, when the efficient frontier gives me something that says you should have three quarters of one percent in small cap growth, I don't need to be that efficient. I get rid of that and I add it to another area. I also don't do 0.75 or 16.75. I go 17. Call me crazy. Or I might even go even crazier and go 15 or 20.

You round it to the nearest one number or you round it to the nearest five. Yes. I want to be close. I do not have to be incredibly scientifically specific because the efficient frontier drifts every year anyway. As we get new data, it drifts. Right now, as everybody knows, we talked about this before. If you've listened to us, you know that large cap growth has been driving the bus for the last 10 years. And so this efficient frontier tool defaults to as much large cap growth as you possibly can,

which is why we put in some minimum weights because we're already seeing this year summer version of the mean. Right. With large cap growth doing worse and international funds finally showing up. Where have you been international? But now notice what the efficient frontier is showing us now, that it didn't show us a few months ago. Hey, you're better off having a little bit of international. The answer to that is you're going to end up with five, maybe six categories. If you're in retirement, you may have more because of the fact that you're doing these separate buckets. But the answer is, yes, you can. And I think they're using hyperbole as when they're talking about the number of different transactions.

36 transactions? Yeah. Yeah. I think. I guess depending on how many, let's say you've got six different accounts with six funds in each account, say a married couple. So each individual has three accounts with six funds per account. So there's a total of 36. And my rebalancing is not going to include every single one of those.

Because what you're also going to find is, When I rebalance, I need to rebalance my large cap by, let's say, $5,000. I need to add or subtract it in whichever account makes the most sense. So I'm going to subtract it in this account. Guess what I'm going to do? I'm going to rebalance in that same account then into the other fund. So while I may have 36 different accounts, I'm only actually making the transaction in two accounts. Right. You mean you've got 36 funds, but you're only making the transaction in two of the accounts.

Yeah, because rebalancing does not mean that I'm going to have transactions in every single account. I'm going to do the rebalancing in just one place. It's a great question. And I saw that online, and I think it was on Apple Podcasts, which frustrates the hell out of me because it's the one place I can't reply. We can reply on Spotify, which I love. We have great discussions for stacking Benjamins on Spotify. People write to me. That's crazy talking to the person.

but people write to me, Joe, at Stacking Benjamin's, that ask me these questions. When I see it in our different online forums in the Afford Anything Facebook group, I've answered people directly there. Apple's the one place. I cannot answer your concern. And while you and I are different, Joe, and that you're very good at checking social media. I'm mostly off of social media, so I... Good for you.

That doesn't mean I'm good. That means I'm tortured. Because OG's done the same thing. He is largely done. Yeah, yeah. I stay off of social media for the sake of my focus, my mental health, my ability to work. But I do value it as a place to interact with the community. There's limits to what I can and can't do.

And I have chosen to mostly stay off of social media these days. Yeah. And I truly enjoy the one-on-one interactions. I frankly don't like Apple because I can't have a conversation with you. I just have to read it. go, man, I wish that you would have put this someplace where we could have a chat because this sounds like somebody that really wants to chat with me about what I really meant. But I do the feedback. I like the fact that I wasn't as thorough as maybe I should have been. And maybe I should

have explained this or used an analogy differently. So I like the feedback. I just like that I can't help you. I'm not as worried about people kicking me. Yeah, when you're in the public eye, that happens a lot. Yeah. When you do what we do, okay, people are going to do whatever. But when I saw a comment like that that I can clearly help you do this better. And I can't, because of the forum that it's in, that's when I get frustrated. So I want to be clear. I am happy for people to say they don't like me. That's fine. Well, I'm not happy. But you get what I mean. Well, I like you, Joe. Thank you. That's why I keep showing up. And I think what we're both trying to do is introduce the notion of the efficient frontier to an audience in a way that communicates that diversification in your portfolio is important.

And just VTSAX alone is not going to give you that diversification. And this really beginner process of getting comfortable with the efficient frontier can show you some cool things. Look at for Harry. Harry didn't say it this way, but Harry's, I think I'm close. Can you help me? And the answer is, yeah, you're really close. Yes. Yes.

Yeah. Which is great. It's a great feeling. And I love this when I was a financial planner. When somebody would walk in and I'd be able to say, you're doing a really great job. And sometimes people would go, you know what? I studied this and I worked really hard. And in other times, it was a complete freaking accident.

But either way. It's awesome. Yeah. It's fantastic. Joe, thank you for taking all of this time. And thank you for being Mr. Efficient Frontiers. You've become known.

Yeah. If we could just get rid of those two effing words. All right. So where can people find you if they'd like to know more? You can find me and sometimes the Paula Pant at the Afford Anything show. We call it the Greatest Money Show on Earth. It's a great... I think it's called The Stacking Benjamin Show, Joe.

Did I call it the Stacking, did I called the Afford Anything Show? You sure did. Oh my God, that's funny. I'm taken over so you can find me here. And it is now my channel. It's a Stacking Benjamin show, the greatest money show on Earth. And we call it that because of the fact that we try to surprise and delight you because it's a little bit of a financial circus there.

Everything from some great mentors, some of the top minds in the business. We've had a lot of the Rittholtz people talking about financial planning, Josh Brown and Barry Rittholtz himself, Nick Majuli on the show, some of the greatest minds in the personal finance media space, Jill Schlesinger, Gene Chatsky, some of the big-time people there, but also just great conversations on our roundtable discussions on Friday and a little bit deeper dive on Monday with Doug and my co-host OG. So come check us out.

Fantastic. And thank you to all of you for being afforders. Remember, we have a free cheat sheet based on the answers that we gave in today's episode that you can download. It lays out exactly what you need to do to rebalance in the right spots. It's the asset location made simple cheat sheet. And it is yours for free at afford anything.com slash. Asset location.

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