Listener Q&A
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today, we are here with my sons, Camden and Brett.

This is episode 415, and it is a Q&A episode to start off the year. Thank you for all the listeners that submitted questions, excellent questions. We reviewed every single one. We obviously won't be able to cover every question in this episode, but a number of the questions we'll definitely address in future episodes. Well, welcome Camden and Brett to the podcast. Thank you. Happy to be back.

David Morgan

Given your age and portfolio, I assume you can self-insure. I also believe your kids are grown adults. Broadly speaking, and without getting too personal, can you speak to why someone in your position would choose to carry life insurance instead of self-insuring? It seems like it doesn't make financial sense.

In most cases, it doesn't, and including in my case. So I might, I think I talked about, I bought, we bought a couple of life insurance policies 20 years ago when Camden and Brett and their daughter were young.

The whole idea was, as we talk about on the show, is to cover expenses in case I die early. But it's a 20-year term with the idea that in 20 years, we would have sufficient assets that we could self-insure. And we do. I've just mentioned that when a 20-year policy comes up for renewal, they send a renewal rate.

And the renewal rates have been over $3,000. So not where I think before I was paying roughly $250 per year for a half million dollar policy. And so definitely are not renewing. Most people, hopefully by the time you're in your 50s, 60s, when you're retiring, or even if you're working, you're not in a position that you necessarily need life insurance. And in this case, we're talking about term life insurance.

Whole life insurance is a completely different animal where there's an investment component, and we won't get into that situation or topic in today's episode. But for traditional term insurance, yeah, it's very, very expensive to buy life insurance once you're older. And so in many cases, including ours, we'll let our policies expire because we don't need them, because we have sufficient assets to make it through.

On that note, Camden and Brett, you're young. Do you have life insurance? I do not. I think I might have had it through my last job, kind of automatically included. But at this point, I haven't really searched it out. It hasn't shown up as relevant. I live alone, which sounds very sad, but I live a rich life.

So I'm sure it'll come up at some point. It's one of those things that as an adult, you kind of slowly figure out step by step. How do I pay rent? What's a credit card? And later on, you start handling all of your different insurances and figured out renter's insurance. And coming up, I'm sure life insurance is going to be one of those that's coming up next. But as of now, most of the advice I've gotten is that I don't think I need it. Yeah, yeah, I would agree with that.

I don't have life insurance either. And I think that is more of a function of me continuing to forget to go search it out. It's been on my mind over the last probably three or four months of like, oh, yeah, I should probably get that. Like Camden, I did have life insurance once for about a two and a half month period in the summer of 2018. But no longer, I should probably get some again.

Well, and I don't think that's that abnormal. We probably should have gotten life insurance when we were in our 20s, when you guys were born, but didn't actually get it to our early 30s. So because it just it's like I think your typical person doesn't doesn't hit the radar.

which is probably why Policy Genius sponsors the podcast to remind us to go check it out and get some while you're young. And I actually have a question about that that came to mind. In my brain, when I hear life insurance, a life insurance policy is always held by the main...

income bringer in a family, which is not me, that's my spouse. And I know she has a very small life insurance policy through her work. And so maybe that's part of why I haven't thought about it is that culturally, it was always sort of like the person bringing in the most income has the life insurance policy. And I actually don't know if that is the case or not.

Well, yeah, because you want to replace income with the life insurance. So if the person generating the bulk of the income dies, again, it depends on, you know, you want to be able to cover that. But if your partner died, Brett, you would be fine because you can work. So a lot of it is you don't have children. So at that point, it's sort of being in a situation where...

The main breadwinner has passed away and there are expenses and the other person, if there is one, isn't able to necessarily work to generate that income or replace that income. And that's where life insurance can have a benefit. And that's how we've used it. Makes sense. All right. You want to lead off the next question, Brett?

Yes. So our next question is about the lack of individuals looking for jobs. And the number currently is about 6 million people. Has something fundamentally changed and we just aren't counting correctly?

And then, you know, the follow-up that the listener had was more like, who are these people that don't have jobs? So there's 6 million people with jobs. There's over 10 million jobs available. And so the question is, what are these vacancies? Is it more hotel services, restaurants? Is there a labor shortage due to lower immigration?

There's actually a monthly report that the Bureau of Labor Statistics points out. It's called the JOLT report, J-O-L-T. So I think it's the Job Opening and Labor Turnover Report.

They show, the most recent one, 10.3 million job openings, and they do what's called the job openings rate. And that's calculated by taking the number of job openings on the last business day of the month, and what is that as a percentage of the total employment plus job openings. So it's sort of a...

It's not really an unemployment rate. It's essentially the number of people looking for jobs that are unemployed by the number of jobs available. So that overall national rate is 6.3%.

three percent. So one way to think about that is there's 0.6 unemployed individuals for every job available. So that would be sort of a labor shortage because there's more jobs than people seeking jobs. And so I looked through that report just to see, you know, what are the areas? You know, one of the biggest ones is health care and social assistance. So there's two million job openings

And the job opening rate is about 9%. So the higher the rate, the more job openings there are and not enough people. The other area is accommodation and food services, which is sort of the listener was referring to. 1.4 million job openings. That job opening rate is 9.2%. But there's also jobs that take more skills. So professional and business services, 1.8 million job openings, 7.4% rate. And so it isn't just...

more unskilled labor. There's also job openings in skilled labor. Information services, that job opening rate is 6.9%. The one that I found the lowest was really in the government, specifically state and local education. So there's 330,000 job openings there. The rate's only 3%, and so within that area. So when we think about it, it isn't just services.

or lower skilled jobs. It's across the spectrum of job openings. And we think about the reason why is many workers have, you know, after the pandemic, they prefer a gig working jobs, temporary jobs. They're working for themselves. They like the flexibility having worked from home. Sometimes there are certainly people aren't seeking jobs because of health concerns with COVID and

not having child care, affordable child care keeps people out of the workforce. And a lot of people just retired. They retired early. They liked that flexibility, found more interesting things to do. So I don't think there's one reason. It isn't one area of the market. It is a broad spectrum, and it's been a fundamental change in the employment sphere. So our next one is kind of two questions about making portfolio changes and also about the U.S. stock market. And the first part is,

David, you offer insights that we can use to make decisions about changing asset allocation. For example, you described the rationale behind reducing credit risk, duration, and quality a bit over a year ago. I missed that info originally, and when I picked up on it, there had already been an impact. So I thought, I missed an opportunity. That segment continued to lose ground. In that scenario, how do we decide if we make a move out of an investment versus holding on for the long haul?

The additional question that goes along with that kind of the part two is the U.S. stock market has had an outsized return compared to foreign markets. There is no guarantee that this trend will continue. What is a good way to diversify one's retirement portfolio to ensure you invest in the right growing market?

That is really kind of the bread and butter of what we teach on Money for the Rest of Us, in that we don't know what the right market's going to be. But what we can do is we can look at the market's temperature. We can look at what drove performance.

And in the case of the credit opportunity, what we saw was very narrow or very, very low incremental yields for non-investment grade bonds. And so investors were pricing junk bonds, high yield bonds, as if there wasn't going to be any hiccup in the economy, that the economy was going to continue to go well and the default rates would stay low. And so that was really a risk. You know,

especially not getting compensated for that. And what we've seen is that those spreads have widened, but also rates went up. That's sort of looking at where are we today and then projecting returns. And the same thing can be done with the stock market. In Plus episode 14, we looked at this with Latin America emerging market stocks. And we looked at here's a segment of the market that's done incredibly poorly the last decade.

10 years. It's lost negative 1.1% annualized. And one of the things we teach on the show as plus members, we talk about in my book is a building blocks approach to estimating returns. And that same building blocks approach can be used to deconstruct returns. So if we look at, and the three building blocks are for stocks, it's the dividend yield. So what's the cashflow? How is that cashflow growing in terms of earnings? And

and what are investors paying for the cash flow now versus, let's say, 10 years ago or what they might pay in the future. And so if we just do that simple analysis with emerging markets, Latin America stocks,

They had a negative 1% return over the past decade. 3.5 percentage points was due to the dividend yield. Their earnings growth grew at 3.6%, but the stocks got incredibly cheap. A decade ago, the price-to-earnings ratio, what investors were willing to pay for a dollar's worth of earnings, was 15.7%.

Now it's down to seven. And so that big drop in valuations led to about a negative 8% decline. And so most of the underperformance relative to the U.S. stock market is because those stocks got cheaper. And so if we wanted to forecast out, we want to kind of do the same thing. We can assume a dividend yield of around 3%. Earnings growth, very, very conservative assumption of around 2.5%.

But then if the stocks get more expensive, so let's say the PE goes from 7 to 11, that could add 4.5 percentage points per year to the return, taking the potential return up to 10%.

Now, we don't know if that's going to happen, but it's helpful to have those building blocks to come up with some reasonable assumptions. Because there's political risk in Latin America right now. There's definitely, you know, Brazil's economy has struggled. Analysts are estimating earnings growth will actually fall in the next year, you know, especially if we get a type of global recession. So there's all these things we don't know. But we know the starting point. And we know that Latin America is cheap. We know what the dividend yield is, the cash flow. And then we come up with an assumption for earnings.

This listener was similar with U.S. market because U.S. market has done incredibly well over the past decade. The MSCI USA index has returned 12.6% annualized. So it's outperformed emerging markets by almost 14%. But we can kind of go through that same deconstruction analysis and see, well, the dividend yield was 1.9 percentage points. Stocks got more expensive. So they went from a PE of 14.5% to 20%.

That added three and a half percentage points. But the biggest element was the earnings growth, 7.4% earnings growth because the companies were growing earnings, but they also were buying back a lot of stock in the market. So buying stock, reducing the number of shares, so the earnings per share was growing over 7%. And so we know the U.S. market outperformed significantly other areas.

It was because the U.S. market got more expensive, but also because earnings grew faster than any other area in the world driven or certainly partially driven by the buybacks. So then when we go forward, what do we assume? Well, we can do that same approach. We can assume dividend yields of 1.6%. We assume earnings growth around 5.5%, so higher than the rest of the world.

But if stocks basically didn't get, they stayed at a PE of 20, we would see a return over the next decade of about 7% annualized. But if stocks got cheaper, like I'd say the PE fell to 17, then the return would be close to 5.7%. But again, we don't know. But the point is, how do we know whether to hold on to something or to sell it is come up with reasonable expected returns.

and compare that to other opportunities. And it also depends on, you know, our approach to investing. A lot of people just want to buy one ETF. They just want to buy the global stock market and not worry about trying to move in and out of various asset classes. As investors, we sort of gravitate to the approach that tends to fit our personality the best.

All right, our next question is about the strength of the dollar. In your recent episode 404, why is the US dollar so strong? You discussed the limitations on investing internationally as the strong dollar restricts returns. My question is, does a strong dollar create an opportunity for new investment, given the relative purchasing power of the dollar internationally, because one could buy more shares per dollar than before?

We addressed this back in PLUS episode 407. And in that episode, I mentioned, Camden, that you were in Japan taking advantage of a strong dollar. Did you find, because you've been to Japan numerous times, did you notice a difference that things seem cheaper when priced or converted to U.S. dollars?

I think in a lot of ways it definitely did. I remember the first time that you and I went to Japan, I think it was back in September of 2010, and it was the reverse situation. And even though at the time I was younger, I was just really excited to be in Japan for the first time. But I remember that at that point, the yen was, I think, the strongest it had been to the dollar at

in something like two decades or something. So things were very expensive. And I remember we talked a lot about kind of that expense. I think at the time it was maybe one US dollar got you about 77 yen or

And this time going back, I think it was like one US dollar was getting me like 134 yen. So it was a pretty big difference. And I did actually notice it a lot because the last time I had been to Japan three years ago before the pandemic, I was living there. And so I was earning everything in Japanese yen. And now I was going back and I actually could tell

not only did I have higher earning power because one I wasn't making as much money living in Japan and then before that I was just kind of a poor college student wandering around staying in hostels it did make a I think it did make a difference and I and I was paying more attention to the fact that I was making certain choices like oh I can I can stay in maybe a nicer hotel one because I make more money now than I did when I was in college but two I

The prices were working out more in my favor. Thinking about, you know, renting cars, I could add like an extra day on there if I wanted to rent a car. Or I could look at, you know, I could get some more interesting meals online.

But it was interesting because you could watch the amount be flexible while I was there too. I wasn't always reading the news to see when things changed, but I would go and when I'd pull more cash out of the ATM, I'd see that the exchange rate had changed. I was like, oh, I didn't get quite as much that time for my US dollar. And it was interesting just kind of way that that affected it. But I would say the other interesting thing about it is that it also just made me more prone to want to

buy my friend's dinner who were still living in Japan. I was like, no, no, I've got this. I have a strong dollar on my side.

Well, and especially because a lot of my friends that are international and are working there as teachers, a lot of them are planning on going back to their home countries or coming back to the U.S. when they're done. And so they're definitely worried right now about bringing their savings over. They have all their savings that they've earned in Japanese, and it's just its value relative to the dollar just keeps fluctuating. And so they're really worried about bringing that back and being able to use it.

you know, to effectively set up their next stage of life or pay off student loans. So it was interesting to see the different perspectives on that.

I remember the 2010 trip. So Camden speaks Japanese passably. I would say fluently, but he wouldn't. But he speaks very well. But in 2010... At the time, I definitely didn't. When we went in 2010, I could say like, hello and thank you. And we pointed at stuff. We knew nothing. So we read guidebooks. I spoke Spanish. I live in Mexico. So I was very sensitive to when we traveled around, like, how do you get a check?

If you're eating in a restaurant, how do you get them to bring a check? Because in Mexico, you actually have to ask for the check for them to bring it to you. So we read the guidebooks and somehow I cut on that you had to do some symbol with your hands to get the server to bring you a check. And we were at this restaurant and it was more of a modern day restaurant and the server's not bringing the check and we don't know how to ask for it and they didn't speak English. And so...

We're over there making our hand signals to bring them the check, and they're not reacting to it. And we try to do it even more obviously. And finally, the survey came over, and we tried to explain we wanted the check. And she pointed out that it was in a little wooden box at the end of the table and had been sitting there the entire time. We just had to pick it up. So our subsequent trips to Japan have gone much more smoothly. And that's the thing about travel. You learn more about the culture, you get better at it.

But to the question, when we're traveling overseas and our home currency is stronger, we can buy more. But it's different when we're investing because if we have a strong currency, we buy a meal, we consume it, and the transaction's done.

But when we invest overseas and let's say our home currency is strong, we can actually buy more shares. But then future fluctuations of that currency can impact return. So an investor that felt like the Japanese yen was weak,

at the beginning of the year relative to the U.S. dollars invested in the Japanese stock market. They were hurt because the dollar continued to strengthen throughout the year. But now we've had a reversal of about 10%. And so the way really to be able to ignore currency fluctuations is to buy a currency hedged version of the U.S. dollar.

of a particular ETF. So there are, for example, ETFs that invest in the Japanese stock market on a hedged or currency hedge basis, and they're just not impacted by currency fluctuations. Most international ETFs, though, are actually unhedged. And so a portion of their return will be driven by fluctuations in currencies. Before we continue, let me pause and share some words from this week's sponsors.

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All right, let's go to the next question, Camden. Our next question is pretty straightforward, and it's just what has been the most profound and influential book you've read? And it doesn't need to be money related. I think my most influential book has been Walden by Henry David Thoreau.

And, and part of that is just because of how many times I've read it throughout my life. So I first read it when I was 15 in school and absolutely hated it. I was like, this man's a hypocrite. He's egotistical. Like he doesn't know what he's talking about. The best part is when he describes the fight between ants. And a few years after that, I read somewhere online, somebody that was like, I've read the same book multiple times throughout my life to see how my perspective changed.

And at like 17 or whenever I read that, I was like, oh, that's a really cool idea. Like I should do that. What book could I do that with? And I was like, well, Walden's supposed to be this great influential book. How will it be different when I'm 20? And so I did go back and read it when I was 20. I turned 21 when I was reading it.

And I absolutely loved it. My perspective had changed completely. I think it just hit me at the right time of life that I just ate it up and it really gave me a lot of foundation to living a life intentionally. I had been thinking about how I wanted to live my life and I had observed a lot how other people had lived theirs. And so it just came at a really good time for me and was sort of my introduction to intentional living.

And then I just reread it about two years ago when I was 25. And it was really interesting that time. I didn't get as much out of it that time. And I was reading it with my friends and we had a book club and that was really nice. So I learned new things. But what was most interesting was reading through Walden and being able to realize that I really had internalized some of those principles.

that there were things that I now did and thought subconsciously that while reading Walden, I was like, oh, this is where this idea comes from. This is where this belief comes from. I still think Thoreau was rather egotistical and at sometimes hypocritical, but that doesn't necessarily make it not valuable and influential to me. So that's my answer.

It's a very good, straightforward answer. I've been thinking about this over the last couple days because I knew that this question was coming and I've had a really hard time thinking of just one. And the funny thing is, it's kind of the first thing that I thought about. So I started really thinking about, well, what books were really important to me when I was younger? And it's not a specific book, but

The collections of Bill Watterson's Calvin and Hobbes, the newspaper comic he made, I think was extremely influential to me. It was teaching me a lot of words, a lot of fun and imaginative ways to look at the world, and also really helped me fall in love with art. And I think that that kind of was a basis of really learning to love to read. Thinking a little bit more over just the past couple years, two specific books that I can think about that were quite profound and interesting to me

How to Hide an Empire, A History of the Greater United States by Daniel Imarwar.

I-M-M-E-R-W-A-H-R. I thought it was a really fascinating book, just exploring kind of the United States through the era of kind of empires and colonialism pre-World War II, but especially post-World War II, its discussion on forces that changed the shape of the world. And I think its chapter on standardization of things like measurements was just fascinating. I know that that sounds really dull, but...

But that chapter, I think about a lot, just the things that we take for granted that really shape our world about how things move around. And then the second book that I read in the last couple of years that I think was really profound is called The Warmth of Other Suns, The Epic Story of America's Great Migration by Isabel Wilkerson. And that one is about the decades-long migration of black citizens from the South to Northern and Western cities. It really showed me just this amazing cultural influence and change that happened across the United States.

I don't have one profound book or influential book. So I focused on what was most profound and influential of the books I read this year. And in the books, The Dawn of Everything, A New History of Humanity, the book came out last year. I think I mentioned about a year ago on a podcast. It's a very long book and it is a difficult book.

So I have been reading it for a year. I'm going to finish it this month. It's by anthropologist David Graeber, who passed away right before the book came out, and archaeologist David Wengro. And what was influential is they go through so many examples of early cultures, groups, indigenous cultures, generations.

just so many examples with supporting their thesis is that human history doesn't go in one direction. It doesn't, we start out farming and then we have monarchies and then we get technology. That early culture spent a lot of time debating and deciding. And oftentimes they would see a group that, you know, a tribe near them and look at how they had organized their lives and decide to do the exact opposite. And so there wasn't a linear pattern to development.

And this is sheer variety, and it just came away with awe. It's like, there were so many people and cultures that all around the world, many of which we don't have a good idea on, but just the idea that we can choose. We can choose how we want to live our lives. We can choose the government or the government we want structured. And cultures have done that for years, and so there isn't one best way we can choose. All right, let's go to our next question.

Our next question is about risk tolerance. It comes from a DIY investor who asks, what is the best way to gauge my risk tolerance? I'm pretty comfortable with the ups and downs, but not sure if I should be investing aggressively or moderately. Let's first define risk tolerance. This is from John Grable, who's a University of Georgia professor of financial planning. He defines risk tolerance as someone's willingness to engage in risky behavior in which possible outcomes can be negative.

In the case of investing, that possible outcome would be losing money. And I discuss this some in my book, but it's incredibly difficult to choose an investment portfolio based on our risk tolerance because our appetite for risk changes over time. And it's based on our recent experiences after the great financial crisis or after the pandemic.

Some people came away from that with much higher risk tolerance. Like I will not allow my portfolio to suffer those type of losses again.

Whereas some people came out of the pandemic buying meme stocks, their risk tolerance completely changed because, wow, the stock market came back within two months and my investments weren't hurt at all. And now we're in a crypto winter where crypto is down 80% and that is impacting other people's risk tolerance. And so our circumstances change throughout life, our perceptions of risk changes, it's

So my approach is, and I have never taken a risk tolerance questionnaire that financial planners give out or some financial planners. And rather than focusing on what's my risk tolerance, I want to focus on the tolerance of the worst case scenario. In other words, phrase we've used, minimize our maximum regret. So make sure our decisions are done in a way that if the worst things happens, we're not destroyed.

And, you know, as a young investor, whether you're going to be aggressive or moderate, you have ample amount of human capital to make up for. And it gets back to the life insurance question, like with Brett, you're incredibly young. Camden also, you don't necessarily need life insurance because a worst case scenario, you die. Who's going to be impacted by that?

In this case, we're all going to be impacted. I certainly will be impacted by that. But financially, we won't, nor will others. And so that's an example of minimizing the maximum regret by having life insurance.

But if you have the ability to continue to earn money, if someone dies and you have that flexibility, then that adjusts the equation. And so ultimately, there isn't a right answer when it comes to risk tolerance because it changes. So we want to focus more on minimizing our maximum regret for the worst case scenarios and building buffers and flexibility to overcome that.

So moving on to the next question, with the Fed slowing its speed of raising policy rates, how do we think about how to invest with bonds in the coming years? If the intentions of investing in bonds are not for capital appreciation but for yields, how do you achieve that with mutual funds versus direct investment in treasury or bonds? First off, I agree for most investors,

We invest in bonds for the income, for the yields. And there are earlier episodes, and we'll link to it in the show notes on why invest in bonds.

And that's really it, income. Now, some people do invest in bonds because they want the capital appreciation. And so they're going out and they're buying long treasuries, long duration bonds right now for the simple reason that they believe interest rates will fall and the value of those bonds will go up. And that's really the only reason to buy long-term bonds right now because the yield or interest rates on those bonds are lower than for short-term bonds.

So for income right now, we can earn 5%, 4% to 5% on cash. And so we don't need to own longer-term bonds. Now, whether to own mutual funds, ETFs versus owning bonds directly, generally speaking, the benefit of an ETF or mutual fund is the portfolio manager can buy a variety of bonds. And there's a great deal of options out there. We can buy individual bonds, but

because we generally want to hold them to maturity, and then we're not impacted by the change in interest rates. If you're invested in a bond ETF, you'll see the interest rates go up, the value of

those securities will fall and that ETF will fall and that ETF is always buying more bonds. And so you have to hold it for seven to eight years really to offset the impact, the price decline from rising rates. But with holding an individual bond, if you hold it to maturity, you'll get the principal back and you're not impacted by the fluctuations in interest rates like you would with a bond fund. Now, there was a follow-up question from a listener that asked about bonds

buying a U.S. Treasury through Treasury Direct or even through your brokerage. And one of the frustrating parts about that is when you buy a bond at an auction, a Treasury bond, we don't know what the rate's going to be because we're doing what's known as a non-competitive bid. So we're basically a price taker. And I've gotten this question frequently, like, well, how do we know what the price is going to be if we don't know what it's going to be? And generally speaking, interest rates don't move that dramatically in a given day.

And so when you buy at auction, you can kind of look at what is the current interest rate on similar bonds that are actually outstanding to kind of appraise where we are. And then by buying that particular bond, and then you sort of know, okay, here's what the yield is going to be on the bond so you can be comfortable buying at auction. And that's what I've done and members have done is just kind of looking at what is the current yield to maturity or interest rate on bonds.

bonds of a similar credit quality and maturity. And then by buying at auction, the yield ended up being fairly close to that.

There's a follow-up question on that, as long as we're talking about bonds on treasury inflation protection securities. And the listeners, we asked, why do tips stink? And this particular listener was thinking about adding treasury inflation protection securities to his portfolio and then looked at the returns. Tips, like the iShares tips ETF is down 11% year-to-date. And these are supposed to be bonds to protect against inflation. And

And this listener was shocked to see how poorly tips have done in this environment because returns of bonds are driven by math. And so when interest rates go up, even if it's an inflation-protected bonds, it can fall.

Now at TIPS, the principle is adjusted by what the rate of inflation is. So you benefit from that. But what we've seen with TIPS this year is we began the year, the yield on TIPS was negative 1% for the 10-year TIP. Now it's 1.4%. And so we've had about a 2.5 percentage point move in TIPS. And as that has occurred, the price has fallen 17% for TIPS.

And then the inflation adjustment is added another 6% to 7%, bringing the total loss down to 10%. And there's a guide on the website, free guide on investing in treasury inflation protection securities that will go into that in much more detail.

But the time to invest in tips is when yields are high. So last month I bought at auction a treasury inflation protection security because the yield was 1.4%. I will hold that bond to maturity and then I'll earn 1.4% plus the rate of inflation

And so now is a better time to buy tips than when the yield was negative at the beginning of the year. And it goes back to our earlier point. Look at what the market temperature is, deconstruct the returns, understand what the return drivers are, and come up with reasonable assumptions, and then make our allocation decisions.

Our next question says, I think a lot of professionals get the impact of inflation wrong. For example, I have a portfolio of $10 million and withdraw $400,000 a year inflation adjusted and can earn 5% a year fixed on my portfolio for the next 30 years. So I earn $500,000 a year and spend $400,000 a year, which means I can add 100,000 back into my portfolio and that 100,000 also earns 5%.

Let's say inflation is 5% in the second year. So the second year, I withdraw $420,000. But remember, I now earn interest on the additional $80,000. So I'm earning 5% on a large amount, my portfolio, and have to add 5% on a small amount, my annual savings.

In this scenario, I take zero stock market risk, sleep very well at night, and I don't run out of money for at least 30 years. Why would I want to invest in a diversified portfolio that is subject to sequence of return risk and that may not last 30 years? This is an interesting question in the sense that it depends on what that rate of inflation is. So the listener is talking about using basically the 4% rule.

So, in the first year of retirement, he spends 4% of his $10 million portfolio, so $400,000. The next year, he'll increase that rate of spending by the rate of inflation, and he's correct. If the listener is earning more on their portfolio than their rate of inflation, then the portfolio can last a while, but it really depends on the rate of inflation.

On the Money for the Rest of Us website, for Money for the Rest of Us Plus members, there's an online retirement spending calculator, and I actually went through some scenarios. And in the way this calculator works, you can actually see a table. We have the $10 million starting portfolio, the $400,000 in spending. We see that at the end of the first year after the spending, the portfolio has grown to $10,080,000. And even as we go through year eight,

As we increase the spending amount, we're taking a larger percent of the overall portfolio, but it's still over a $10 million portfolio. What happens, though, is because we're increasing the amount we're spending by the rate of inflation, if inflation stays at 5%, by year 15, we're now spending 12% of our portfolio value each year.

And so the portfolio has dropped to close to $5 million. And so you can kind of see that. So if the inflation rate stays at 5%, that portfolio is only going to last 22 years. If inflation is 3%, same scenario, still earning 5%, then the portfolio lasts 28 years. If the inflation rate is 2.5%, then indeed it'll last 30 years. The challenge though, and we saw this three years ago,

is you couldn't earn 5% on a portfolio without taking some type of volatility.

And so the expected returns on bonds can be impacted by what the yields are and what inflation is. So ideally, I agree. If you can earn 5% to 6% in your portfolio and you're spending 4% and you can lock in that 5% to 6% without taking any real risk of losing money, then your portfolio lasts 30 years and you can sleep well at night.

The problem is that the math doesn't always work out because sometimes we can't get that higher return without taking risk. And sometimes the inflation rate, if it's much higher, the portfolio won't last as long. In this particular example, with a $10 million portfolio, hopefully you have the flexibility to reduce spending. So if portfolio returns aren't as high, you cannot spend as much and then allow the portfolio to last longer. And that's where modeling out retirement can be really challenging sometimes.

to thinking, well, what's going to happen over the next 30 years? And that's why I prefer a safety first approach to get some guaranteed income sources to cover most of the expenses if possible. And then we can take more risk with the rest of our portfolio. Because even a safe portfolio that's entirely dependent on investing, it can be challenging based on what interest rates are and based on what inflation is.

Moving on to the next question, and I personally really like this one. Investing in personal finance can get really into the weeds trying to maximize every decision. How do we know what's good enough?

We don't, nor should we optimize. We live in a world of radical uncertainty. And in that type of world where there are so many different inputs, so many things are changing, we can't optimize a decision. Just like in the example we gave with the retirement portfolio, we can't optimize it. We can't find the answer that we know is absolutely correct.

And we have to make good enough decisions. We have to decide, make a choice. So in this retirement example, the listener decides, okay, right now I can earn 5% on a risk-free basis. And I'll start out spending 4% of my portfolio. And then as we go through time, things might change. And so we might have to tweak the portfolio.

We try to make a good enough decision, the best decision we can under the circumstances, recognizing that we don't know if it's the optimal decision because there's too many inputs and we don't know what's going to happen in the future. So we do our best to make a good enough decision and then build in enough of a buffer and flexibility to be able to adapt and adjust over time. And again, harking back to one of our earlier things,

protect the downside so we're not destroyed by something that could not be foreseen. So minimize that maximum regret and build in those buffers so that we don't make decisions that if it moves against us, that we could be financially destroyed.

What that reminds me of is a phrase that I was introduced to a couple of years ago is that there are no solutions, only trade-offs. And so there's no right answer to things. You just, you have to find which mix of trade-offs is the one that you're the most comfortable with and then commit to it and move forward. Right. I left my investment job at 45 and for a while there called myself retired and

I just couldn't think in 30-year time horizon, 40, in that case, 50-year time horizon. You just couldn't do it. But I can think in terms of a year. It's like, this is my portfolio this year.

And I'm comfortable with it based on the various inputs, expected returns. And we'll see what it looks like three years from now. But I just take it one year at a time. Don't try to, one of my former partners used to tell me, don't try to get too cute with your portfolio. So don't, it was a way of saying, don't try to optimize it because you can't. And I, and I agree.

All right, so we are at our last question, which is, if you were to do more episodes on the how to live without worrying about it aspect of money, what topics would you include?

That's a challenging one because when we do investing topics, more people listen to the podcast than when we do invest into episodes on how not to worry about money, unless it happens to be an episode on retirement investing. So philosophical episodes, I like to do them. I find them enjoyable. I like them better when I can combine them with an investing aspect.

But we're definitely open to suggestions on things to cover on how to worry less about money. I think some of the things that we discussed in this episode, minimizing our maximum regret, not trying to optimize, having a good enough portfolio,

Hopefully having a lot of things to do apart from investing. I know Camden Brett, you just interviewed a number of our plus members about how they go about approaching their portfolio. And if I recall, one of the takeaways was we're just looking at interviewing various members. Some are spending a great deal of time on the portfolio, but many just aren't. And we kind of have to define that.

that mix. So what would be some, any topic suggestions from you, Brett and Camden, or thoughts?

I think some of the most fun topics, because we know a lot of our listeners really like those more sort of philosophical, how not to worry about it episodes. But I think the best ones sort of come with serendipity. They kind of come when we experience something in life. And when I say we, when David experiences something or reads an interesting book and is sort of musing on those things, it's

They're not often planned. They just kind of happen. So it can be a little hard to look forward to them. But we are definitely open to suggestions, as you said. No, that's absolutely correct, Brett. This is our first episode of the year, Q&A episode. If we look at our content calendar for the year, we know which weeks we've sold ads so far for sponsorships. I have no idea what the episode is going to be on the second week of January. And I think

In some ways, it's analogous to trying to plan out the future. Like the idea that we have to come up with 50 episodes next year and 50 after that could be terrifying.

But knowing that, well, we have figured out how to come up with episodes for approaching a decade now, or I guess approaching nine years. Just knowing that, all right, something will cross our radar, it'll be interesting to do an episode on in January. We have a list of potential topics that we always keep. And then...

Depending on the week and what's going on, yeah, it's very serendipitous. Like this week, we're going to cover this. And that's why I'm always hesitant when we get listener suggestions to commit to actually doing an episode because we'll say we'll add it to the list, but it's got to be the right topic at the right time and a topic that we're interested in covering because

Because if we're not interested in covering it that week, then it won't be a very good episode. It's got to be something we're really engaged with. And that's kind of how we approach it.

I think one of the most interesting things with watching the development of episodes, because I've given David a lot of episode ideas over the three, four years that I've been working with him. And he'll usually, if he takes my idea, he always presents it in a different way than I was thinking, which is sort of fun to watch is that I'll be like, oh, here, I have this idea. And he'll be like, that's great. And he'll take it and use it in some other way. And that's kind of fun. Like the, I know a pretty popular episode was why are some countries wealthier than others?

And that actually, I had been doing a bunch of research on that topic. And then it just so happened that David was in Mexico at the time and was asked that question by somebody he'd met there. And so he took all of the information that I had been researching and compiling and used it in a way that I wasn't expecting. And through what had been sort of a serendipitous conversation with somebody else. And so that can be interesting to watch how that evolves.

All right. Well, that's a Q&A episode for today. Thanks for listening. Any comments, Camden or Brett? Happy to have been here and ready to kick off the year. All right. Well, as always, everything we've shared in this episode, it's been for general education. We've not provided investment advice. We've not considered even the specific questions like the retirement question. It was not specific advice for that individual. This is all general education. Please take it in that vein. Thanks for listening.