Rich Habits Podcast - 83: Is Art Investing Legit?

Episode Date: September 23, 2024

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz explore the world of contemporary artwork. They're joining by Scott Lynn, CEO of Masterworks, to learn more about the asset class' historical returns, how their pieces are sourced, stored, as well as insured. With the recent volatility in the month of September (especially the first 10 days), having exposure to an uncorrelated asset class could be a great idea. Both Robert and Austin invest into fine art through Masterworks. ---Skip the waitlist and invest in blue-chip art for the very first time by signing up for Masterworks: ⁠⁠https://www.masterworks.art/richhabits⁠ ⁠Purchase shares in great masterpieces from artists like Pablo Picasso, Banksy, Basquiat, and more.See important Masterworks disclosures: ⁠⁠https://masterworks.com/cd⁠---⭐️ Become a smarter investor in just 5 minutes with Moby, click here!---⭐️ Learn more about NEOS' ETFs at NEOSFunds.com---⭐️ Join 45K other investors and sign up for the Rich Habits Newsletter. Click here!---⭐ Download our FREE Budgeting Template – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⭐ Earn 5.1% on your savings with a High-Yield Cash Account – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⭐ Trade stocks, options, music royalties and crypto on Public – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⭐ Get a $35 bonus when you start saving & investing with Acorns – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⭐ Automatically buy stock where you shop with Grifin – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⭐ Protect your family with term life insurance from Suriance – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⭐ Use code “Spotify” for 15% off our 4-module video course – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⭐ Optimize your portfolio with Seeking Alpha – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠---👤 Explore everything Austin does – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠👤 Explore everything Robert does – ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠❓ Ask us questions for our Q&A episodes – @richhabitspodcast on Instagram📬 Inquire about working together – [e-mail]---Hankwitz Group LLC has an existing business relationship with NEOS Investment Management LLC. The opinions expressed are those of the author, and the author owns several NEOS ETFs.

Hey everyone and welcome back to the Rich Habits podcast, a top 10 business podcast on Spotify. My name is Austin Hankwitz, and I'm joined by my co-host, Robert Croke. Robert is a seasoned entrepreneur in his 50s with lifetime revenues of over $300 million, and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known fintech companies around the world. As the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives.

One from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. So, Robert, what are we going to be talking about in today's episode? Given the recent market volatility we've seen in September, we've had dozens of podcast listeners ask us about diversification. Not just buy gold, but truly uncorrelated returns to the stock market, so we're doing just that. We've invited Scott Lynn, the founder and CEO of Masterworks on, to explain to all of our listeners how artwork investing actually goes down. The true behind the scenes look into how everyday investors like Austin and myself are able to gain exposure into artwork that has historically seen strong uncorrelated returns when compared to the stock market. As you all know, I began investing with Masterworks in 2018 after I saw an advertisement for their offerings on Morning Brew. I set up a call with one of their investment professionals to learn more about my options as a retail investor looking for some diversification, and they made the art buying process incredibly simple.

So we want today's episode of the show to act sort of as an opportunity to pull back the curtain on what's actually going on at Masterworks, just like we've done with Jay Jacobs from BlackRock and their Bitcoin ETF in the past. We're going to discuss how they source new pieces, how they securitize them, right, allow everyday people to invest in them, where the artwork gets physically stored with the insurance processes like and many more in-depth topics about art investing. So Scott, thanks for joining us on this week's episode of the Rich Habits podcast. So give yourself a quick introduction, talk about Masterworks a little bit and then we'll dig into the questions. Yeah, thanks for having me. So as you guys mentioned, my name's Scott Lynn. I'm the founder of Masterworks. Unlike your guys' introductions, I'm not going to say my age.

But I appreciate you having me on. So let's dive in. Okay, Scott. So now speaking to tens of thousands of retail investors, entrepreneurs, and forever learners, a lot of them have heard about index funds, ETF, and other longstanding investment vehicles, and have done a great job building those well-diversified portfolios around those things. So explain to us, Austin and I, all of our listeners, what is investment grade artwork, number one, and why would someone want to add that to their already well-diversified portfolios?

It's a great question. So to answer the question, maybe it's helpful to just take a step back and understand the macro dynamics of the R market, right? When you think about the R market today, it's a roughly $1.7 trillion asset class. That's a number of the Deloitte publishers. I like to compare and contrast that to venture and private equity, which is roughly a $3 trillion asset class. So it's roughly half the size of venture and private equity. each year, about $60 billion in art changes hands. Now, the interesting thing about those stats,

and it gets to your question around what is investable art, is out of that $60 billion that changes hands, approximately 64% is from the top 100 artists. And most of these top 100 artists are no longer living. So these are artists like Pablo Picasso, Bosquiat, Banksy, Andy Warhol, household names that many of your listeners have probably heard of. Those artists have enough data to really conclude

that over time their prices are appreciating at predictable rates, right? They have a low degree of volatility. So these are definitely not artists where, you know, you walk down the street in your hometown, you go into a gallery and you buy a painting for $10,000. We liken, you know, that sort of artwork sort of as to like buying a lottery ticket. You should buy it because you love it. You shouldn't buy it for investment purposes. So when we talk about investment grade artwork, it's really these artists that have existed for decades

or in some cases centuries, and there's very long track records around their prices that they've achieved over time. Got it. And so then, I guess back to that second question, why would someone want to add that to their already well-diversified portfolio? I always think of this conversation I had with one of the heads of research at a major private bank. And he said there's two very simple criteria for including an investment in your portfolio.

One is that the investment must outperform inflation. And two is it must lack correlation to everything else you're investing in. By lack correlation, I just simply mean if the stock market goes up, that new investment doesn't also go up and vice versa. So the interesting thing about art is when you look at contemporary art, which is really art created after World War II, that segment of the art market almost has zero correlation to every other asset class. I think the highest correlation is actually gold, which is roughly 0.2, which isn't that correlated. So independent of the appreciation rate of art, it acts as a really good diversifier as part of a portfolio. I love that. And it's probably one of the

things Austin and I speak about the most is diversification, because you know, you and I are scout are both old enough to have been through a few ups and downs in the market. And, you know, a lot of people out there just have never seen the 2009, 2010s in some of the 1990s of what happened when people get wrecked in the markets. And so that's why I'm a big fan of diversification and always been a huge fan of art just because I think the lack of correlation to the stock market and the crypto markets and all the other markets makes it such a great investment strategy to get that diversification you want. So let's say, talk now a little bit about the sourcing process. According to your website, your team at Masterworks

have purchased over 450 pieces of investment grade artwork. So what goes into identifying those 450 pieces and why do you choose those specific pieces over others? Because you made a great point is you see all of these galleries with unknown artists with 10 and $20,000 price points. And I always say the same thing too. That's like buying a lottery ticket because you don't know if any of those artists are ever going to reach that level of the Baskiats or the banksies to where the real value is there and is going to be determined over time. And I really like that part of what you said. So dig into the sourcing process and where do the metrics come from for this? Yeah. So maybe let's just start with like how is their data on the art market. So the interesting

thing about the art market is that art has been traded publicly at auction for literally centuries. Sotheby's was a publicly traded company up until I think four or five years ago and the New York Stock It was actually the oldest publicly traded company on the stock exchange. I think it's now 270-something years old. So art literally has been traded between collectors before modern-day financial markets existed. So when we talk about analyzing data, we really talk about analyzing that auction data over many decades within the ARP market. So our research team goes out. We look at literally millions of data points on paintings that have been bought and sold over time to try to understand which artist markets are appreciates.

are appreciating at the best risk-adjusted returns. That's really critical, right? Because you can see artist markets that skyrocket right away, but they don't necessarily have predictable returns in the future. So we're always trying to focus on which artist markets produce the best risk-adjusted returns. Once we have that list of artist markets, we basically hand off the list to our acquisitions team, which in today's world is the biggest buyer of the art market,

and they go out and they source paintings within those given artist markets. So to give an example, in the Bosquiat market, which is one of the artist markets that we buy, there's roughly 1,100 paintings that Basquiat painted during his lifetime. There's six or 700 paintings that are kind of available in private collections, and we've been offered over the course of the last five years,

about 300 of those paintings. Out of those 300 paintings that we've been offered, we've purchased, I'll get the exact number wrong, but somewhere around 15. So we're incredibly selective, not only the artist markets that we select, but also in the paintings that we buy after we look at those artist markets.

That makes a ton of sense. you're saying is that just like the stock market, there are thousands and thousands and thousands of things to invest into, right? With the stock market, it's companies, with the art market, it is actual pieces, right? There's so many different pieces out there. But you're saying, instead of investing kind of the stock market, instead of investing into some random penny stock or some random company, let's figure out sort of these secular growth trends that are happening that some these more successful companies are operating inside of. And we've seen some really cool data points to prove that. Let's go identify what those data points are now in the art market. And those

trends could be specific people. Maybe there are other specific data points that you said that you had mentioned that you guys are following closely. And then from those, you guys are really digging deep and figuring out, okay, of the 300 that we can, you know, sensibly invest into, these 15, those seem the best to us. So I'm curious. I mean, that is the 5% conversion. Is there any specifics that you can share with us as to what, you know, that 5% really turns into? It's very small. It's far less than 1% because if you think about the artist markets that we're buying today, we're active in about 70 artist markets. There's more than 1,000. So that alone is less than 1%. And then when we source works in each of those markets, we buy, you know, depending on the market, anywhere

between 2 and 5% of what we see. So we're really buying a very, very, very small portion of the our market overall. Makes a lot of sense. Well, now let's talk about your track record, right? Your website says that you've distributed $60 million plus back to your investors as cash profit proceeds. So walk our listeners through the entire timeline now of investing into art. work from sourcing it to holding it and then distributing those proceeds maybe talk about the insurance process i mean i'm an investor on the platform i see my unrealized returns of 34% on a specific investment so like use me as an example maybe so the process is relatively straightforward for people that understand how companies go public we go out we go through the process that we just talked about we find a

painting that we want to buy we purchase the painting with their own capital and when we file it as a public offering with the SEC so the exact same process more or less that a company company goes public, we go through, you know, if you're listeners or finance geeks and they want to see what one of these looks like, you can go to scc.gov, search for Masterworks and you'll see literally thousands of public filings on all of these different paintings. So once we file it as a public offering, we then start selling shares in the painting. The offering closes. We distribute shares to all of the investors, which you can see the number of shares that you want in your account. We appraise those shares on a quarterly basis. And then we tell people to think of these as three to 10 year illiquid investments, right? So when you're thinking about what percentage of a portfolio should you allocate to art, she always be thinking about that is a very long-term investment. This really shouldn't be capital that you need access to tomorrow because they are long-term investments. And then we have a separate team, a private sales team that operates out of a gallery in uptown New York that is responsible for selling that painting at the right time back into the art market. And we then distribute proceeds to people then. In definitive that, we have secondary

markets where people can trade shares on those secondary markets, but I always at least personally tell investors to assume that these are long-term investments and you shouldn't have to use the secondary market. You can opportunistically, but it's really a fallback position to a longer-term hold. I think it makes a ton of sense. And so kind of going back, though, to like the sourcing and the holding process, where do you guys store the pieces? Well, I mean, don't give me specific coordinates. I don't want anyone to let go, like, get too excited and try and break in somewhere. But how do you guys store them? And then, like, what's the insurance process like? I mean, I'm sure these are all insured pieces as well. Yeah, so we have, I think, one of the largest insurance policies,

of not the largest with Boids of London, a policy that's well over a billion dollars. So every vehicle is fully insured. The paintings are stored in the state of Delaware, actually, because we avoid sales and use tax when we acquire and subsequently sell paintings. And that doesn't sound like a huge deal, but when you actually factor that into the total returns, you know, it's quite significant for investors, you know, depending on what that actual tax rate is. So that's just a strategy to maximize returns ultimately.

But yeah, they're all kept in Delaware. I love it. Yeah. I talk about it's not what you make. It's what you keep all the time. So I'm sure our listeners love the fact that you guys are looking out for every single dollar because, you know, a lot of times you can have all this money changing hands, but if the profits aren't there for investors, it's going to hurt you long time.

So let's get into that part of this. Your website claims investment grade artwork outperforms the S&P 500, and you have a chart that we'll show on the screen that shows from January of 2000 how the S&P 500 has only returned 250% while investment grade artwork has returned over 700%. So let's walk the listeners through. Why is that? Artwork doesn't have a dividend. It doesn't have profits. It doesn't have customers. It doesn't sell anything. Why does artwork go up so much in value? It's a great question. And I think it's probably very similar to any other asset class. Like the chart that you're referring to is called the Art Price 100. You can access that index at artprice.com.

You know, I think when we think about supply and demand in the art market, there's something that's very unique about art as an asset class that's different than almost every other asset class. When you think about the demand side, I think it's relatively straightforward. Demand is driven by ultra high-not-worth people living around the globe, you know, that are interested in buying these paintings. And the more high-not-worth people there are, arguably the more demand there is within the asset class. The thing that's very different, however, is actually the supply side of the art market. And most people don't totally appreciate the value of this dynamic. So when collectors buy paintings, an artist is living, the artist paints paintings, then they sell paintings in a gallery, collectors start collecting the paintings.

Those paintings are circulating privately within the market. Most collectors, over time, particularly after one or two generations past, wind up donating those paintings to museums. That's how museums acquire most of their collection. So, you know, an example of this is an artist named Jackson Pollock who I know well. You know, in today's world, there's less than 20 Jackson Pollock drip paintings in private collections. He's the artist that, you know, dripped all over the canvas, his paintings, Best paintings are worth over $200 million. You know, he painted hundreds of paintings during his lifetime, but now there's only roughly 20 left that you can buy.

And honestly, the 20 that are left that you can buy, there's a couple of A examples, but they're mostly B and C examples. And the B or C examples sell for $30 million because that's all that's left. So that dynamic of continuously decreasing supply when artists become more and more well-known and effectively canonized in a lot of our history books and culture generally is what probably causes prices to rise. And I want to jump in with one quick question, Austin, and I know you've got a good point to talk about, but one quick question that you alluded to is walk me through and the listeners, because I'm really intrigued. It doesn't seem like there's a lot of these new

banksies and Jackson Pollocks and all of these names that are building up in the art mark, which then I believe would add to more and more scarcity in the market itself. So how often do you see a new artist that really just rises to the top, becomes famous, and then their pieces then follow along in price, you know, appreciation. That's a great question. You know, I guess it depends what the definition or what the threshold of, you know, quote unquote, famous is. But it's very rare. I mean, in terms of artists that we add to our list that are what we would consider mid-career living artists, you know, we might add a couple a year, a couple every other year. You know, it's definitely infrequent. So what it sounds like then is kind of back to your

answer to the previous question was that demand stays steady, if not rises over time as people want exposure to these artwork pieces while the supply continually goes down because more and more people are just gobbling them up and they just don't sell them. And so Masterworks now is a part of that demand and you guys are purchasing artwork on behalf of people like me who don't have $200 million to go buy a drip painting. But so allowing us to normal retail investors the opportunity to have some exposure to that in our portfolios so that as the demand increases and supply decreases, therefore economics 101 tells us prices go up, we can then realize that in our own portfolios. That's exactly the thesis.

So in general, we encourage, from an investing perspective, our listeners to sort of build their base of $100,000 invested into longstanding index funds that we all know and love like the S&P 500 or the NASDAQ, things like that, before investing into alternative asset classes, including artwork, also cryptocurrency, things like that. Then once they're ready to start investing, maybe allocate 15 to 20% of their net worth to these alternative asset classes, including crypto and gold and collectibles, things like that.

So personally, I'm like a 2% of my net worth invested into artwork, but I'm curious, what sort of trends are you seeing as it relates to artwork allocation in a net worth or a portfolio? Are you seeing people allocate that single digits? Are we in the double digits? Are we above 15, 20,000? What are the trends that you're seeing, Scott? Yeah, I mean, I think the trends that we're seeing tend to be lower single digit percentages,

not dissimilar to yourself, but we see people growing those pretty rapidly over the course of a number of years, right? So if someone starts out at 2%, a year later, that might be 4%, a year later, they might be 6%. But we did, for those listeners that are familiar with Mercer, we did work with a firm called Mercer as a large consultant that advises a lot of asset managers. I think they advise more than like a $10 trillion, $40 trillion, some huge number in assets. And we spent over a year working with them to try to think through what is the right asset allocation model for art. And very broadly, I would say, if you're a conservative investor, it's somewhere between 5 and 10 percent.

Again, over a long period of time where you get comfortable with the asset class and you're confident that you can hold an investment for 3 to 10 years, and then 5 or 10 percent more depending on how aggressive you get on that scale. And a lot of that is just driven by the fact that when you look at contemporary art historically, it's outperformed public equities and it has low correlation. So it acts as this very interesting diversifier while still producing good returns. But again, you know, the caveat is being able to hold that long term over a, you know, three to 10 year horizon.

Last question, Scott, is do you see a world or is it already in the works where we're going to see liquidity platforms based on blockchain and NFTs? to where people would have liquidity auction opportunities in this type of investing if they needed to get out of it and didn't have a way to put liquidity into their investment. If they got in a pickle and needed to get some money out, do you see a world where blockchain and NFTs are going to, you know, kind of resolve that liquidity issue? I guess there's a couple of questions there. So we do operate a secondary market so people can trade shares on our secondary market and sell shares in their secondary market.

The other thing that we're working on, which is, you know, there's no certainty around this. that's a year plus project, but is allowing investors the ability to open margin accounts, using their securities as collateral, to also more quickly access capital if they need to. I think in general, you know, one of the challenges of the asset class, which you can probably hear me repeating this, is just it's a long-term investment. And I think the more we can do to make that easier for people to tolerate, the more adoption there will be to the asset class overall. To your other question around NFTs, you know, I've always been, and I, like, depending on that point time I've been proven wrong, but like I've always been the anti-NFT person. And it's not that we have

anything against NFTs as the MasterWork's high level. I think the thing that we struggle with is when we look at data around NFTs, we can't really conclude that they're predictably appreciating. So if you go back to my definition of what should be included in a portfolio, it's something that beats inflation and lacks correlation. And I just don't know if you can conclude that in NFTs. They're sort of the prices are kind of all over the place. They seem highly volatile. I can't tell if they're correlated or not correlated, the data is fuzzy because of, you know, all these different trades on the blockchain. We've just never gotten comfortable having a typical investor who's investing in an IRA account allocate to NFTs, but, you know,

maybe that changes in the coming years. Got it. Scott, thank you so much for joining us on this week's episode of the Rich Habits podcast. If you're someone looking to learn more about adding artwork to your investment portfolio, be sure to check out Masterworks.com.com, front slash rich habits. Scott, thank you so much for joining. You just open my eyes up even more. I've loved art for decades, and I just love learning from people like you because with Austin and I always talking about diversification, you know, we're talking about artwork and cryptocurrency and wine and whiskey and all of these things. It's just great to dig in, get behind the curtains and really understand these markets,

not only for ourselves, but for all of our listeners. Awesome. Thanks for having me. Thanks, Scott. Dang, dude what an awesome interview with scott flynn i mean i understood how artwork investing happened right generally speaking just like i understand how bitcoin ets work with jacobs but really getting to sit down with the person who's pulling the strings behind the scenes and doing the things that they say they're doing is just so much more enlightening if that makes sense yeah i love it because we get the opportunity all the time to interview these crazy smart people that are behind the scenes like you said and we get to pull back the curtain and help all of our listeners understand more about what they're getting themselves into. What are these investment sectors? What are the best companies? How does it work? What are

the returns like? Because, you know, there's a lot of different ways through diversity to really win in the game of investing, especially during tumultuous times. So today's episode was fantastic. Well, that reminds me, Robert, that we are going to be hosting the president of Shopify on our podcast here in the next couple weeks as well. A lot of people say, hey, try and do this e-commerce side hustle. I'm trying to sell on TikTok. I'm trying to sell little things. And so we're like, all right, people trying to do these side hustles.

Let's reach out to Shopify, the side hustle online e-commerce king, and see if they want to talk to us. And they do. So stay tuned for that. And if you have any other ideas of people you want us to bring on the show to help explain things to you if they're an expert, if they own a company, you know, whatever. Just let us know because that's the whole point of this podcast, to bring to you guys the opportunities to learn from the experts themselves, as well as share our own rich habits on a twice

weekly basis. Now, before we move on, we want to give a quick shout out to one of today's episode sponsors, Moby. The Moby app provides busy professionals with a filtered view on the most important financial news of the day and latest research on profitable trends in the stock market, all with notifications straight to your phone that only takes three to five minutes to read. That's right, Austin. Moby's insights are driven by the team's experience at Morgan Stanley, Bank of America, and Goldman Sachs, making what used to be complex financial information into easy, profitable, and concise stock market recommendations for you. I personally love reading the daily email updates and their Moby stock picks have been ridiculous

over the last few years. For example, their 2023 stock picks had an average return of 30%, 20,2 stock picks an average return of 35% and 2021's picks had an average return of 28%. Well, you know, the ultimate goal of the rich habits community is to help you take back control of your money, and Moby is one of those tools that we believe will help you do just that. So check out the link for Moby Premium in the show notes below or in our stand stores. And as always, let us know if you have any questions. This episode of the Rich Habits podcast is brought to you by Neos Investments. They just launched a new addition to their high-income ETF lineup that provides

exposure to the 2000 small-cap stocks that make up the Russell 2000 index while aiming to provide tax-efficient monthly income to their investors. Their ETFs may be especially interesting for folks looking to generate passive income inside of their investment portfolios. As you've probably heard us mentioned recently, small cap stocks have historically performed well when rate cuts begin after a long period of high interest rates. So if you're looking to add passive income ETFs to your portfolio, especially as the Federal Reserve may begin cutting interest rates in the coming months, consider learning more about NEOS ETFs at neospuns.com. As with all investments, investors should carefully consider their investment.

objectives risk charges and expenses of Nios exchange traded funds before investing. To obtain a prospectus containing this and other important information, please visit NiosFunds.com. Please read the prospectus carefully before you invest. An investment in Nios ETFs involves risks, including possible loss of principle. The equity securities purchased by the funds may involve large price swings and potential for loss. Past performance is no guarantee of future results. All right, Robert, let's now jump into this episode's Q&A portion. This is my favorite part of every episode. And this question, funny enough, was left as a Spotify comment. It wasn't really a question. It was just him, as we'll see here, David G, roasting us in the Spotify comment.

So we thought we'd address it because we love being held accountable. And if you guys have a perspective that's different than ours, like let us know. So let's just kick this off. David says once again in today's episode, you all talked about the virtues of a bridge account and say that people who are IRA rich in under 59 and a half are stuck with a 10% penalty if they want to get some cash out. This is not true. First, let me say that I like bridge accounts, and I followed that ideology myself, but people who have money in a retirement account and want to take it out before 59 and a half have a way out. It's called the SEPP, which stands for the substantially equal periodic payment plan. He says the comment section is too small to detail it,

but look it up. You guys need to talk about it. Okay, so Robert, let's kind of take a step back. Explain to our listeners just a quick 15 seconds why we like bridge accounts. We like. We like bridge accounts because we want to make sure throughout your investment journey towards retirement, you have a portion of your portfolios overall money that is available to you and has autonomy to you to control it. Because remember, we talk about this all the time of people that are net worth millionaires where they have all this money in a 401k and all this equity in a home, but they don't have access to any of it without penalties or selling. And so that is why we love the bridge account. And I love this call out because I think we can kind of roast him back here because I don't feel this is a good strategy at all using an SEPP.

So I can't wait for you to break it down as to why we think it's a terrible idea unless it's an absolute emergency. So let's break that down. The substantially equal periodic payment is a method of distributing funds from an IRA or qualified retirement plan prior to the age of 59.5. that avoids incurring the IRS penalties for those withdraws. Typically, people who remove assets from a requirement plan before 59.5% pay an early withdrawal penalty of 10% of the amount that they took out. Now, the funds in the SEPP plans are withdrawn penalty-free through a specified annual distribution for a period of at least five years or until the person does turn 59.5

whichever comes later, which means, and we'll talk about how the money kind of moves around here, but let's say you're 35 or 45 years old, 45, and you want to start tapping into your retirement and use one of these SEPP plans. You can do that without paying that 10% penalty. You'll still pay taxes on it like you would if you were taking out in retirement anyway, assuming it was a normal IRA or a normal 401K. But the amount that you get paid, the amount you take out is the same every single year, and you have to do this until 59 and a half. Like if you start at 45, you to withdraw the same amount every single year for the next 15 years. You can't stop it. And if you stop it early, you got to go back and pay all the penalties, all the fees, all the interest, everything,

of the money you took out early. And if you, let's say, do this now at 58 years old, so a year before 59 and a half, what sucks is you are now locked into these same annual sort of withdraws for at least five years. So it would be 63, which is an age that you can take out any amount of money that you want from your retirement account. But you're kind of locked in now for that five-year period. So yeah, I just don't like these plans because let's say you have $250,000 in this account and you need money and you initiate this SEPP plan. You don't have any real control of how much you get for that first lump sum because that is determined by the plan. But then also don't forget the fine print. You will be required to remove withdraw for five years in a row the same amount.

You might only need this money one time, but once you enter into this plan, are stuck and bound by this plan to take it out for five years in a row. To me, that seems like a disaster because you're borrowing, you know, against your future. And I just don't like it at all unless it's an absolute desperation move. But otherwise, I wouldn't touch it especially if you're younger in your 30s or 40s. So David G, are you right? Yes, you are right. There is such thing as a substantially equal periodic payment plan, the SEPP,

which allows people to enjoy money before retirement. not pay penalties on it. Still pay the same income tax they would, but no penalties. That is correct. It does exist. The drawbacks, though, are that it is relatively inflexible. Once you begin the plan, you must stay in it for its duration, which could potentially be decades if you start in your 30s or 40s.

And during that time, you have little to no leeway, allowing you to alter the amount of money to withdraw every single year. And you can't quit the plan. Quitting the plan is not really even an option because once you do that, it imposes on you all the penalties you save from launching it plus interests. and we all know the IRS loves their interest. So does it exist? Yes.

Is it smart? No, I don't think this is a good idea for anyone to go about. But, you know, theoretically speaking, yes, you're right. This is a way to get money out before 59 and a half. But you know what's a lot easier? David G. is the bridge account. And I'm glad to hear that you use the bridge account. We use bridge accounts.

We want to encourage people to have a bridge account because you can absolutely take out as much or as little and you can invest these accounts into anything you want. I mean, it is a public.com brokerage account and they are so simple and easy. So thanks for the comment on Spotob. We appreciate our audience, you know, holding us accountable, sharing their thoughts, even, you know, if it's a dig. But that's what we're here for to give you guys our perspectives on whatever's out there. Yeah, but also we have to look at it. And David, we appreciate the insight.

But we have to do what is best for our audience. Our job as educators is to flush out every opportunity, investment or otherwise in what is the best foot moving forward for our listeners. And so in this instance, we appreciate the call out, but we just don't agree with it. Yes, technically you're correct, but it's just not something we would recommend to our audience. So our next question comes from Jordan J. Jordan says, hey, Austin and Robert, I love the podcast, and I've read you guys five stars on Spotify, and I've recommended you to a couple friends and family, and they said that you are awesome. Now, Jordan's question is this. I'm 19 years old, and I'm looking to buy my first property. I have $10,000 in a high-yield savings account, $35,000 invested into

ETFs in stocks and crypto. That includes my employer's 401K. Now, my plan is to buy this property, then rent some rooms out to my friends in college, aka house hack, like you guys say. My question is, though, should I have them sign a lease or some sort of contract? I want to make sure that they pay me, obviously, but I don't want to be the bad guy and ruin our friendship. I want to make it as formal as possible without being that bad landlord or weird friend. Any perspective you guys can share is really helpful. Thank you so much. And as a quick PS, I've known these friends my whole life. Jordan, great question, but I'm going to break it to you. You have to have the contract. because if you were to think about being married, being in a business partnership,

anything else where you're combining efforts, especially living quarters, you need a contract. You need to spell out what their rights are. You need to spell out what your rights are as the landlord. You need to spell out everything financially because just like a prenuptial agreement, if they don't screw up, it's never going to be used. But if they do screw up, you want to be the one holding all the cards because you have a contract in place that gives you the rights to do what you need to do to remove them from the property, or end the lease agreement.

Because you can handshake all you want with friends, but over time, you don't know what happens. They could get a bad girlfriend, they could get a drug problem, a drinking problem. They could lose their job and just be a deadbeat because they're living for free and feel they can take advantage of you. So trust me, from someone that had let too many people and too many friends off the hook,

even with contracts in the past, don't do it. Get the contract in place. It's not going to be hard on your friendship. You're just going to say, hey, I have to have this in place. benefits both of us and you will do fine over time, but you have to have the contract. I love that perspective. I think at the end of the day, if they really are your friends, they'd understand. I mean, Austin, thanks so much for letting me live here. Yeah, man, no problem, but like, I just want to make sure that we're all on the same page on expectations. I expect

you to pitch in, you know, your share of the mortgage or the rent, whatever you want to call it, right? And then also maybe the utilities, maybe there's specific, you know, things they have to do to maintain the house, like, whatever it could be, right? But just like, use it as an excuse of like, listen, let's just make sure our expectations are completely on the table. Now that we're all living together and you're paying me money, it can be a very simple contract, but certainly make sure that you do have a contract. I think that is very, very important. Yeah, I could talk about this topic for hours, but think about it this way. Let's say one of your best friends moves into one of the rooms. You spell out the common areas.

They know what they're supposed to pay, but you don't have a contract in place and all of a sudden he moves in his girlfriend and she moves in her friend. Now all of a sudden you have two freeloaders in for the price of one or three for the price of one and you have no say of what you can do and it goes from them staying there for a few days to a few weeks to all of a sudden you have additional tenants putting a strain on your property putting a restraint on your resources so you have to understand get the contract i don't care how good of friends they are i don't care if they're family you have to spell it out contractually and legally our next question comes from andrew m Andrew says hey there my wife is 30 and i'm 32 and we recently started listening to your podcast and have been loving it

It's made us so much more excited about what we can do with our money. We make roughly $350,000 a year gross. We currently have the following investments inside of Edward Jones. 88,000 in a money market fund, 103 in a CD, 1004 in a traditional IRA, 33 in a Roth, and we've seen very moderate growth over the last three years, but just wanted to get started somewhere. Now, we also have another $102,000 in a high-yield savings account at our bank that pays about 3.5% and $23,000 in our checking account. Since listening to your podcast, we've been wondering if we should pull the money out from Edward Jones and instead invest it into the suggested index funds that you all share on public instead. We've been looking to diversify and get into real estate as we want to purchase a new home with 20% down between 120 and 160,000 in our area and then rent out our current home after that.

What do you guys think about our situation? Robert, I'll let you kick this one off. Andrew, Andrew, Andrew. You are doing a fantastic job. you have conquered the hardest thing in life, how to make money. You've got that dial. But now my question is, you're 32 years old and your wife is 30. Why are you being such a scarty cat?

Everything I see here is low performance, low performance, safety, safety, safety. You're not 62. You're not 72. You should be getting out there and making sure that you are diversifying and building your base further with some real asset classes that are going to make you money. Now, totally appreciate what you've done, but you're sitting in so much cash and you're underperforming the market so poorly because you're not diversified into a basket of index funds. It doesn't sound like you have any cryptocurrency. You don't have any alternative investments into real estate or reits.

And so to me, I feel like you're playing it so safe at your age and your wife's age that you're leaving way too much money on the table. I would trim down a lot of that cash, have your emergency fund, build up your bridge account, have more diversification because you guys are crushing it. But over the next 20 to 30 years, you could really, really become multi, multi-millionaires if you put these funds to work in the right manner and have them diversified across multiple sectors of investing. I totally agree.

So just kind of breaking this out tactically, right? Have an emergency fund. For you guys, that might be $30,000. I feel like that's pretty good. Set $30,000 aside into a high-yield savings account, call that your emergency fund. Next, you want to buy a house and you want to put 120 to 160,000 down for it.

Cool. You have all of this money. You should now just take $150,000, set it in a high-guiled savings account, and then go on a mission to go buy a house because that's what you want to do. Once you've done that, rent out your current house, whatever, you guys go figure that out. But now that leaves us with $103,000 in a CD, that all needs to be invested into the S&P 500, VTI, V-V-O-O-O, V-GT, QQ-Q-Q, Mote, things like that. You need this money working for you.

You shouldn't just have it sit here making 4, 5, 6%, percent. needs to make a longstanding 8, 9, 10, 12, 13%, right? And it only sounds like 5% or 7%. But when you extrapolate that over your 30-year investment horizon, we're talking about millions of dollars here, man. So make sure your CD's invested correctly. You have 104 in a traditional IRA, make sure that that's invested correctly. We're talking about index funds here. We're not talking about international. We're not talking about anything. No target date funds. Give me the index funds, baby. And then 33K and a Roth, same deal. The 88,000 you have in a money market fund. That's just another word for a high-yield savings account. You can pull from some of that and use that as your down payment

for this house. Set that aside. 23,000 in your checking account, maybe you just haven't taken the money out yet. I think for me, a good amount to keep my checking account is about one month's worth of spending. So if you spend, I mean, you're making $350K,000. You guys are probably spending like $8 to $10,000 a month, I'd say. Roughly speaking here, I think that'd be a good range considering your income and what your existing mortgage might be. So keep maybe $8, $10, $12,000 in your checking account. But you don't need $23,000 sitting in a checking account. This doesn't make sense to me. But you also don't need just 2,000 either, right? You guys have big payments, big things that come out. Like, you guys make a lot of money. It makes sense. So just to summarize there, do it Robert said, get your money working for you. You're so young. You guys have 30, 40, 50 years of

investing ahead of you. Do not be on the sidelines. I understand that you guys are saving up all this money to go buy a house. You've done a great job saving it. You guys are obviously very high earners. Like Robert said, you got the hard part out of the way. You know how to make the money. You got a big shovel. Now it's time to put that money to work and become a multi, multi, multi, multi millionaire before the age of 65. I love it. And I'm going to say two more quick things that I talk about a lot. Parked money is dead money. So get out there. Get it active. And number two, always make your money work as hard for you as you work to get it. And you need to get that out there. Get some of that money working for you because you're just leaving too much on the table by having it parked in

all of these lower earning vehicles that you have. Really good question, Andrew, as well as a question from Jordan and our statement question from David. We appreciate everyone's questions. And don't forget to subscribe to the Rich Habits newsletter. It's our free weekly newsletter comes out every Thursday morning. We got about 45,000 people subscribed over there. We're adding about 80 to 100 new subscribers every single day. Get a lot of positive feedback on that newsletter. And if you've not yet subscribed, it's going to be in the link in the show notes below. And of course, check out the show notes below for all of our episode sponsors as well. And always remember, it helps us when you join our public lives, when you follow us on Instagram, when you give us rave reviews. If you

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