Q&A | ETFs vs Mutual Funds, Asset Location, Sizing Focused Factor Strategies, Direct Indexing

[00:00:00] Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing and

[00:00:03] financial planning to help investors achieve their long term goals. Join Matt Zeigler,

[00:00:06] Jack Forehand and me, Justin Carbonneau as we cover a wide range of investing and planning

[00:00:09] topics that impact all of us and discuss how we can apply them in the real world to achieve

[00:00:13] the best outcomes in our financial lives. Justin Carbonneau and Jack Forehand are

[00:00:17] principals at Volidia Capital Management. Matt Zeigler is managing director at Sunpoint

[00:00:20] Investments. The opinions expressed in this podcast do not necessarily reflect the

[00:00:23] opinions of Volidia Capital or Sunpoint Investments. No information on this podcast

[00:00:27] should be construed as investment advice. Securities discussed in the podcast may be

[00:00:30] holdings of clients of Volidia Capital or Sunpoint Investments.

[00:00:32] So Matt, we got an interesting response to our Q&A last week. So we've decided again

[00:00:37] to do a second Q&A episode this week to cover some of the additional stuff we got

[00:00:41] in the YouTube comments or via email or also from some of our clients recently.

[00:00:45] Yeah, you got to give the people what they want, you know? I think if nothing else

[00:00:48] here we are the circuses and bread of planning and investing podcasts today. We

[00:00:54] are all about giving the people what they want. I'm actually going to enjoy this

[00:00:57] because there's some very detailed planning stuff in here so I plan on

[00:01:00] putting you under the hot lamp here and seeing what you're made of.

[00:01:03] So I am not brave enough to do this alone. I started with just me and the

[00:01:08] old BA2 plus but I can't have a Texas instrument for this. I need a

[00:01:14] Philadelphia instrument for this. I need to call it a Lifeline. Can we get

[00:01:18] Ben Tuskeye on the phone? I need to get my director of planning on the

[00:01:22] Ben, you're here for a reason. I'm here and I frequently travel with my

[00:01:29] calculator. It goes everywhere with me with my cell phone so the planning is

[00:01:35] always done. So the question is, Matt, there was that guy that went viral

[00:01:38] on Who Wants to be a Millionaire where basically he got to the last round,

[00:01:41] he phoned a friend but he just phoned the friend to tell them they knew the

[00:01:45] answer and he was gonna win a million dollars. So the question is do

[00:01:47] you know the answer here and you've just phoned Ben so you can let everyone

[00:01:52] know that you know the answer. No, not at all and not only that.

[00:01:56] I'll probably be like googling stuff off to the side in the background and

[00:01:59] Ben, I'm guessing you're too young for this but Jack I don't know if

[00:02:03] this was on your wheelhouse. As we're both holding up our calculators

[00:02:06] I'm thinking of... did you guys watch Mathnet? Is this on your radar?

[00:02:11] No. Like 80s PBS? No. This was like this 80s PBS segment. I am gonna

[00:02:17] find a YouTube clip of this and send it to you. They were like detectives but

[00:02:21] they like held their calculators like guns. This is as 80s educational

[00:02:25] programming as you get. This does not seem like it would have done well, Matt.

[00:02:29] It played well at my house. I mean, Mighty Mouse and I don't know.

[00:02:34] Detectives with calculators? Hong Kong with Fooey. It was PBS. It was safe.

[00:02:38] Like I said, it's somewhere between Hong Kong Fooey and you know

[00:02:42] Sesame Street. You got to watch detectives with calculators that

[00:02:45] would hold guns but sometimes they would hold them like guns and this was

[00:02:48] very perplexing to my Adam West Batman brain.

[00:02:52] I remember that CFA exam where I had to have like that...

[00:02:56] I had the other calculator. The one that's in landscape mode.

[00:02:59] But I moved on from that. It was too tough a period of my life

[00:03:04] to go back there. Don't forget those spare batteries, Jack.

[00:03:08] That was a big thing. You bring two calculators to that exam

[00:03:12] and I was really tempted to make the age joke there.

[00:03:15] I wasn't around for the 80s so you guys could probably enjoy this stuff on your own.

[00:03:19] Unfortunately, it wasn't alive yet. I wonder are they still using those in the

[00:03:23] CFA exam? Like are they still use those old calculators? They probably do, right?

[00:03:27] They've all been updated. I think actually the BA 2 plus

[00:03:31] business analyst professional or whatever it says in this calculator app,

[00:03:34] I think that might be the new preferred... I think I have the updated

[00:03:38] version of your old landscape mode one.

[00:03:42] Which can it do anything different? Probably not.

[00:03:45] I think it's one of those things like when a sports team,

[00:03:48] there's me begrudgingly commenting on the Phillies for a second,

[00:03:51] has an atrocious New Jersey just to sell more uniform forms.

[00:03:54] I think Texas Instruments was like, let's blow their minds with vertical.

[00:04:02] Sure guys, it's a friggin' calculator and it's not a gun math net.

[00:04:06] Take that. I think we're headed to chat GPT

[00:04:09] complete the CFA exam for me and you just go have a beer or something.

[00:04:13] So I think that's what the future holds. The C in CFA stands for mod.

[00:04:17] That's a chit chat. Right, exactly. Well, let's get down to it.

[00:04:22] Jack, I got Ben here to help me, but you are all alone.

[00:04:26] Why don't you start us off with this? We had this in the YouTube comments,

[00:04:29] which are great. Great place. Leave us YouTube comments,

[00:04:32] even ridiculous ones as some of you have to start doing.

[00:04:36] No comments back from me on this one.

[00:04:38] On the constructive comments, which some of you seem to do, Uncle Sam,

[00:04:43] I mean Jack, tell me why ETFs are more efficient than mutual funds.

[00:04:48] This is so basic and so important. Yeah, it is because in theory,

[00:04:53] I mean, it's because of the way the rules work,

[00:04:54] but in theory they shouldn't be. I mean, they're very similar vehicles.

[00:04:58] But I think the best thing to do is to talk about how mutual funds work

[00:05:01] first as a step back. So when mutual funds realize gains

[00:05:04] in their portfolio, and they usually do that in two different ways.

[00:05:06] One is they're rebalancing the portfolio and they're selling gaining positions.

[00:05:10] The other is when people sell the fund.

[00:05:12] And so when people sell the fund,

[00:05:13] the mutual fund has to return them their cash

[00:05:16] and they have to sell part of their portfolio.

[00:05:18] And some of that portfolio may have gains in there.

[00:05:20] So what happens with a mutual fund is those gains get passed on

[00:05:24] to the shareholders. And you'll see if you own a mutual fund,

[00:05:26] you'll see capital gains distributions.

[00:05:28] You know, at the end of the year, everybody hates this,

[00:05:29] but you end up with these capital gains distributions

[00:05:32] and they can be long term or they can be short term.

[00:05:34] But it's money you receive that you have to be taxed on.

[00:05:36] And so ETFs have gotten rid of that problem.

[00:05:39] And the way ETFs have gotten rid of that problem is through this

[00:05:42] mechanism called the create and redeem mechanism.

[00:05:44] And so what happens is, and I don't want to get too in the weeds here.

[00:05:47] You know, we used to run an ETF.

[00:05:48] So I had to go through all this stuff to figure out like exactly how it works.

[00:05:52] So on a basic level, what happens with ETFs is when someone buys,

[00:05:57] a market maker is out there to sell you shares of the ETF

[00:06:00] and the market maker holds those shares.

[00:06:02] And so that market maker can create or destroy those shares whenever they want.

[00:06:06] And it used to be when we did it, I think some people do it in 25,000

[00:06:09] share increments now. When we did it, it used to be it was 50,000

[00:06:12] share increments. And so the market maker can basically create

[00:06:15] 50,000 shares of the ETF.

[00:06:17] And what they do is they give the fund all the holdings of the fund

[00:06:21] an equal value of that.

[00:06:22] So the 50,000 shares and the holdings of the fund,

[00:06:25] which is all the stocks the fund holds, those are of the same value.

[00:06:28] There's a tax free exchange that goes on there.

[00:06:31] And so on the issue we talked about before with people selling the fund,

[00:06:35] causing gains distributions for other shareholders, that can't happen

[00:06:39] because when people sell the fund, that custom create and redeem

[00:06:43] mechanism works behind the scenes.

[00:06:45] There's a tax free exchange.

[00:06:46] There's no taxable implications for the people that remain in the fund.

[00:06:50] The next level of it, though, is the level that's cool.

[00:06:53] And an active ETFs actually, when we first started, couldn't even do

[00:06:55] this second thing, but now they can.

[00:06:58] This is what's called the custom create and redeem.

[00:07:00] So the idea is instead of having on the transaction before,

[00:07:03] we had 50,000 shares of the fund on one side,

[00:07:05] the entire portfolio of the fund on the other.

[00:07:08] An ETF can mess with that other side, which is the holdings of the fund.

[00:07:11] So what I give back in exchange for the 50,000 shares,

[00:07:15] that can be a specific group of holdings.

[00:07:17] So I want to rebalance my fund.

[00:07:19] What I can do is I can take positions that have gains.

[00:07:22] I can put them in the other basket and then I can exchange that.

[00:07:27] So what you basically do is you have a create and redeem

[00:07:30] that kind of happens simultaneously.

[00:07:32] And what happens is you're basically getting those gaining positions

[00:07:35] out of the fund, and you're doing it without having to sell

[00:07:39] the individual holdings.

[00:07:41] And so that function is basically what allows ETFs to be tax efficient.

[00:07:45] And so when we ran an ETF, sometimes when we would remove

[00:07:48] positions from the fund, we would just do straight trades.

[00:07:51] For instance, like a losing position or something like that.

[00:07:53] And sometimes we would use these custom create and redeems.

[00:07:56] And so the fact that you can use these custom create and redeems

[00:07:59] allows you to effectively, like a well run ETF

[00:08:02] that doesn't invest in derivatives or anything like that.

[00:08:04] Just that invests in pure equities should not have any capital gains

[00:08:07] distributions. You know, dividends should be the only thing

[00:08:09] that gets distributed to you.

[00:08:11] And that's what makes ETFs behind the scenes more tax efficient.

[00:08:14] It's so interesting because on a client level, like for us as allocators,

[00:08:21] it's such a no brainer to own ETFs in most of your equity holdings now

[00:08:25] because you actually want this structure playing to your advantage.

[00:08:30] Knowing that you have this control through this process

[00:08:33] and part of your management vetting to understand how the managers

[00:08:35] of the funds are going to treat this thing, because there's nothing worse.

[00:08:39] I mean, Ben, like getting a capital gain distribution in a down year

[00:08:44] or having like your you did the Roth conversion

[00:08:48] and you're all the way up to the limit.

[00:08:51] Horror stories, you got any?

[00:08:54] I mean, it's part of the reason that we wait.

[00:08:57] I mean, in the raw scenario is why we wait till the end of the year,

[00:09:00] because if you own any active funds, we can't know 100%

[00:09:06] throughout the year what's going to happen.

[00:09:08] And depending on the manager that you own,

[00:09:10] you may not even know until December.

[00:09:12] Some of them just report some of that information very late

[00:09:15] and can really derail a tax plan.

[00:09:18] But there's too many horror stories with that come to mind,

[00:09:22] especially when you think about, we're just talking broadly about capital gains.

[00:09:27] But within each of those are two different segments,

[00:09:30] short term capital gains and long term capital gains

[00:09:33] that are taxed differently.

[00:09:34] So when you receive those from at the fund level

[00:09:37] and at the personal level, when you make sales,

[00:09:40] you have to be conscious of what you're doing.

[00:09:42] So if you're selling a fund to avoid a capital gain,

[00:09:45] you could actually be incurring a larger penalty of taxes.

[00:09:49] So it's just some of these things that you have to think about before,

[00:09:53] you know, choosing the investment vehicle that you're choosing.

[00:09:55] It's so weird because it's easy to forget how important,

[00:09:59] especially we're talking about mutual funds in taxable accounts right now, basically,

[00:10:04] but just how important taxes are as a component of your return,

[00:10:08] the money you keep.

[00:10:09] And it's not saying that all mutual funds are bad

[00:10:12] or all mutual funds and taxable brokerage accounts are bad.

[00:10:14] There's reason to use traditional 40 funds at times for certain strategies.

[00:10:18] It's just the advantages that many ETFs have operating in this space

[00:10:23] because of these tax advantages, those basis points add up fast.

[00:10:28] That's right.

[00:10:28] And the big horror stories with this are the funds that have massive redemptions.

[00:10:32] So like if you have a fund that has a lot of gains in their portfolio

[00:10:34] and other people start selling the fund in mass,

[00:10:37] if you're one of the people left,

[00:10:38] you get this massive gains distribution.

[00:10:40] You did nothing.

[00:10:41] You know, just all these other people sold the fund

[00:10:43] and you get this massive gains distribution.

[00:10:44] It's not a frequent thing,

[00:10:46] but you hear horror stories of that where people didn't realize that was possible.

[00:10:49] And you never want to be in a situation where the actions of other investors

[00:10:53] can have all these negative impacts on you.

[00:10:54] And that is the case in certain mutual funds.

[00:10:57] So our next topic, this is actually really interesting because I,

[00:11:01] you know, I took the CFP exam.

[00:11:03] I've been getting more involved in planning,

[00:11:04] but I always come across these scenarios where it's something

[00:11:07] that makes me think deeply about what you guys are doing on a regular basis

[00:11:11] and all the different parts that go into it.

[00:11:13] And I had someone contact me the other day who had,

[00:11:16] who basically has made it all the way to retirement

[00:11:18] and has zero assets in retirement accounts.

[00:11:21] So nothing in Ross, nothing in traditional IRAs,

[00:11:23] but it saved up many millions of dollars in taxable accounts.

[00:11:26] And it got me thinking about like the pros and cons of that

[00:11:31] relative to having money in retirement accounts.

[00:11:34] I mean, we'll talk later about like people who are younger

[00:11:37] and there's probably like a blended strategy that makes the most sense for them.

[00:11:40] But once you're already there, this is what you have.

[00:11:43] Like there are some advantages of having a taxable account.

[00:11:45] Obviously, you can withdraw your principal

[00:11:47] without having to pay tax versus the traditional IRA.

[00:11:49] There's disadvantages as well, though, as my money grows over time,

[00:11:52] depending on how tax efficient what I invest in is, you know,

[00:11:55] I'm going to have to realize tax on a regular basis.

[00:11:57] But it just seems to me like there's a lot of moving parts to this.

[00:12:00] And so it got me thinking about this issue of when you get to retirement,

[00:12:04] like if I could have all my assets in one of the three things,

[00:12:08] like which one is better?

[00:12:09] Like what are the pros and cons of each one?

[00:12:11] I mean, I would think off the top of my head,

[00:12:13] I would want to if that had to be the situation I was in,

[00:12:16] I'd want it all on a Roth because I could grow my money tax free

[00:12:19] and I could take it out whenever I want tax free.

[00:12:21] But relative to the other two, it seems like there's pros and cons.

[00:12:24] So I want to get your guys thoughts on that.

[00:12:26] I'm thinking of like the Corleone family, like 401K that never exists.

[00:12:31] It's just like the money just keeps rolling up and piling up in places.

[00:12:35] And on one hand, it's great if it's all like,

[00:12:39] and I'm sure whoever this is, is completely above the line on all the activities.

[00:12:44] On one hand, it's great because you already paid tax on the money,

[00:12:46] but then you have other embedded tax problems that start to become actually

[00:12:50] start here, Ben, like what would you say?

[00:12:54] Magic wand scenario.

[00:12:55] Somebody comes in there like, actually, Ben,

[00:12:58] I've saved millions and millions of dollars and they're all entirely in Roth.

[00:13:03] What would you make of that person?

[00:13:04] Both the choice to get there and the reality that they're in right now.

[00:13:09] I would say, well, how you got there is the important part.

[00:13:13] If you are just the world's best trader and you invest it $7,000 and

[00:13:19] turned it into $7 million, then I would say you won, you won the game.

[00:13:24] However, if you saved every year in a Roth, what you're doing is

[00:13:29] incurring taxes to be able to get to that position.

[00:13:32] If you're saving millions, the odds are you were making substantial

[00:13:37] amount of money on the ride up in that Roth IRA, which means you

[00:13:41] are on the upper side of the tax bracket, which means you are prepaying

[00:13:46] your taxes in years now where you're potentially at a lower tax bracket.

[00:13:51] So you lost that tax arbitrage by doing all wrong.

[00:13:56] Now we're already past that point.

[00:13:58] So like we don't have to sit and cry over spilled milk.

[00:14:00] But because now you're going to live on tax-free income for the rest of your life.

[00:14:04] However, you're also going to forego a standard deduction.

[00:14:08] So that's why this balance is important.

[00:14:10] You get a free standard deduction every year.

[00:14:12] So that means you could take out $27,000 for a very couple out

[00:14:16] of a traditional IRA and never pay a dollar in taxes as long

[00:14:19] as that's your only taxable income.

[00:14:22] And that's those conversations when you start to get layers

[00:14:24] and layers deeper into the old Roth.

[00:14:27] There is a huge difference between the two.

[00:14:29] There is a huge crowd out there that talks about only Roth.

[00:14:33] And that's where those arguments and the stance starts to have cracks in it.

[00:14:39] This is interesting because this is exactly what I was thinking

[00:14:41] about in terms of the person who has all the money in the taxable account is.

[00:14:44] If this is done properly, they have the standard deduction.

[00:14:47] They have exemptions.

[00:14:48] They have the 0% long-term gains rate to use.

[00:14:51] So I think some people, like if their income basically shuts off,

[00:14:55] which is going to happen here and they'll have social security at some point,

[00:14:57] like you can get almost like six figures out of these accounts

[00:15:00] without incurring any tax, right?

[00:15:03] Absolutely.

[00:15:04] Yeah.

[00:15:04] So you can actually get, I think the number was posted yesterday.

[00:15:08] I think you could pull out if it's only capital gains, long-term

[00:15:11] capital gains we're talking about.

[00:15:12] It's $124,000 is what you could pull out.

[00:15:15] Now don't quote me on that number.

[00:15:16] It's just roughly estimating.

[00:15:18] And that's you deduct the state of deduction.

[00:15:21] And then that's very finally jointly where the 0% capital

[00:15:24] gains rate goes up to.

[00:15:26] So that's a really good scenario to be in.

[00:15:29] You could sell $124,000 for many people that's sufficient enough

[00:15:34] to have an adequate lifestyle.

[00:15:37] And anything above that, maybe then you're paying a 15% gain on,

[00:15:42] but again, 15% on maybe another 10, 20, $50,000 is still

[00:15:47] a great scenario to be in.

[00:15:49] Social security plus that, not a bad scenario.

[00:15:51] And you got to remember these all stack.

[00:15:54] So it's like every source of income you have or in capital gains and

[00:15:58] losses get included to this, this all stacks.

[00:16:01] But yeah, to your point, Jack, that's a pretty good starting

[00:16:05] position to find yourself in.

[00:16:07] Yeah.

[00:16:07] And obviously if you've gotten to a point where you have no money

[00:16:10] in retirement accounts and your retirement age, you've made

[00:16:13] some mistakes along the way.

[00:16:14] I mean, you could have realized a lot of tax savings, especially

[00:16:17] if you're in the top tax bracket, which this person was, you could

[00:16:20] have, you've made some mistakes along the way, but once you're there,

[00:16:22] it's not a terrible place to be in, I don't think.

[00:16:25] And like, I was thinking there's at least an argument that you'd

[00:16:27] rather have that say $5 million, like in a taxable account than

[00:16:32] you would in a traditional IRA.

[00:16:34] I'm not really sure about that because as the account builds over

[00:16:37] time, I mean, I'm going to be taxed on the gains, but like

[00:16:40] if, like you said, I have the ability every year to take some

[00:16:43] money without tax, like you could argue I'm in a better position

[00:16:46] then than I would if I had all the money in a traditional IRA.

[00:16:49] Certainly more flexibility.

[00:16:51] And that's like, that's the key.

[00:16:52] That's one of the names they gain later on in life.

[00:16:55] So flexibility is a premium there.

[00:16:59] Sure.

[00:16:59] And again, we can always talk about like the most optimal

[00:17:03] scenarios over a 30 to 40 year time horizon today, looking back,

[00:17:07] it's like, yeah, the hindsight's 20-20.

[00:17:09] However, to look at the tax situation that we just went over

[00:17:13] capital gains wise, the only other thing that you need to consider

[00:17:16] is there's likely some ordinary income if you have a diversified

[00:17:20] portfolio, that's where you start to think about, okay, we have

[00:17:23] fixed income that's kicking off ordinary income on a five to

[00:17:28] $7 million portfolio.

[00:17:30] That can start to be substantial when we look at the interest

[00:17:32] rates scenario with where we are today.

[00:17:35] That's taxed, that's stacked as well as your capital gains,

[00:17:38] social security.

[00:17:39] So that starts to, and that's taxed differently, it's ordinary

[00:17:42] income levels.

[00:17:43] It's not a bad scenario, but it's just other things that

[00:17:45] need to be considered there.

[00:17:46] Yeah.

[00:17:46] You're not going to be able to avoid tax, I don't think with

[00:17:48] that level of portfolio, because like you said, there's got to be

[00:17:50] some ordinary income, which you can use your standard deduction and

[00:17:53] exemptions again.

[00:17:54] Social security is going to be with that level of income is going

[00:17:56] to be 85% taxable, I believe.

[00:17:58] So once you take social security, that add, that piles on as well.

[00:18:02] And then you've got your long-term gains, you know, you can use so

[00:18:05] that there's probably going to be some tax there, I would think.

[00:18:09] Absolutely.

[00:18:09] And the other thing to remember is the key flexibility here is not

[00:18:15] just like the amount that you're taking out.

[00:18:17] It's when you take it out.

[00:18:19] This person that we're talking about could be 50 years old.

[00:18:22] They have unlimited flexibility.

[00:18:24] That is the ideal scenario.

[00:18:26] If this was all in a traditional IRA, there is ways to get it out

[00:18:29] penalty free, but you have to abide by a couple of rules and those

[00:18:34] rules can really dictate how you're distributing the money, when you

[00:18:38] distribute the money, how many years you have to distribute until

[00:18:42] you get the age 59 and a half.

[00:18:44] So this person, he or she or they, they don't have to worry about that.

[00:18:47] They have that flexibility.

[00:18:50] Do you guys know when I asked Claude and I was unhappy with Claude's

[00:18:53] answer to this, do you know when Bill Bang did his work around the 4% rule,

[00:18:58] like what did he assume in terms of like what kind of account

[00:19:01] the money was coming out of?

[00:19:03] Do you know anything about that?

[00:19:06] So my assumption on memory, which is terrible, but at least as good

[00:19:11] as Claude, cause Claude can't look back as far as when that paper was written.

[00:19:15] Wasn't it all, was it just in a taxable account?

[00:19:17] I thought that was the part of the assumption.

[00:19:19] Yeah.

[00:19:20] I don't know the answer to that.

[00:19:21] So we can look it up, but it's interesting because when you think

[00:19:25] about like rules, like this is why general rules aren't great.

[00:19:28] Like if you think about general rules, like the 4% rule, well, what

[00:19:31] I, my safe withdrawal rate, if I have all my money in a Roth and I

[00:19:33] have it all on a traditional IRA, if I have it all on a taxable account,

[00:19:36] those are probably different numbers.

[00:19:38] Um, like it's just, it's interesting to think about like how that, where,

[00:19:41] where the money is plays into when you think about some general rule,

[00:19:45] like the 4% rule, which we know nobody actually uses in practice.

[00:19:49] And a big part of this is like on the five, like talking

[00:19:53] about the $5 million person.

[00:19:54] So you got $5 million.

[00:19:56] That's all in after tax stuff.

[00:19:58] It's really frigging hard to save $5 million.

[00:20:01] Like we have the data 99% of Americans are not going to get to $5 million.

[00:20:07] I think of that old, the old blues guy joke, the, uh, I may not have

[00:20:10] a million dollars, but I sure have spent a million dollars.

[00:20:14] You might spend 5 million and you're probably not saving 5 million.

[00:20:17] If you can save 5 million and you paid taxes, I bet you had some

[00:20:21] pretty frigging high tax years where you cursed at the IRS all the way

[00:20:25] to waiting for that check to eventually be cashed.

[00:20:27] So financial planning is really all about financial flexibility.

[00:20:33] It's really all about how can I make sure tomorrow or in three years or in

[00:20:38] five years, or 30 years, I am going to have flexibility to deal with whatever

[00:20:43] new policies and new things exist.

[00:20:45] Whoever the next guy is who says, you know, I'm sure Dave Ramsey is not

[00:20:50] replacing the 4% rule with his 12% from my fund withdrawal rate, but I

[00:20:56] am sure that our thinking on things like the 4% rule are going to continue

[00:21:00] to evolve if nothing else, because you know, interest rates and bond returns

[00:21:04] have this weird smiley now piece in the middle where bonds were zero for so

[00:21:08] many years.

[00:21:08] So it's, it's quirky.

[00:21:11] I should have asked you about Ramsey's assumptions when he came up

[00:21:13] with the 12% rule in terms of account location.

[00:21:15] This wasn't your friend.

[00:21:16] I'm sure he did some detailed research when he, when he came

[00:21:18] up with that, um, yeah, my friend is Dave Ramsey.

[00:21:25] So when we flip this around, so let's, let's just talk about the

[00:21:28] B I made an assumption earlier that, you know, if you were talking to

[00:21:31] someone younger in their thirties or something like that, you probably as

[00:21:34] a general rule, this is obviously different for every person would

[00:21:37] suggest some sort of money, probably in all three of the different types

[00:21:40] of vehicles, but how do you think through that process?

[00:21:43] Like, how do you think about like, should people usually have money

[00:21:45] in all three types of things?

[00:21:47] And what are the main criteria you look at when you determine that?

[00:21:51] I it's always idea.

[00:21:53] It's ideal, right?

[00:21:54] Again, we just talked about that and we, we have a slide that we

[00:21:58] always talk to clients about, which is your balance sheet

[00:22:00] summary to show a pie chart.

[00:22:03] And depending on what type of client, you know, you own a business,

[00:22:06] you're W2O employee, like the pie chart's always going to look different.

[00:22:10] But we have clients that they make a million dollars a year.

[00:22:13] All right.

[00:22:13] Well, you're not going to use a Roth 401k when you make

[00:22:18] a million dollars a year, you're just, you're getting hemorrhaged

[00:22:21] in taxes even further than you already are.

[00:22:23] Like let's at least get a little bit of tax savings when you

[00:22:26] hit the $23,000 cap if you're under age 50.

[00:22:30] But once we go past that point, because of your income's high enough,

[00:22:33] you're always pretty much going to max out 401k.

[00:22:36] Then we start to think through where can we then utilize Roth or after

[00:22:41] tax savings when we don't really have a, you know, an option anymore.

[00:22:44] And that's where a backdoor Roth can help start to bridge some of that gap.

[00:22:49] And then after that, your retirement options are somewhat limited.

[00:22:53] Then we're talking about brokerage accounts.

[00:22:55] Again, for that flexibility, you know, not everyone who wants to work till 65.

[00:22:59] And depending on what politician you listen to, who knows if retirement

[00:23:03] age is going to be 65 forever.

[00:23:05] So that flexibility is where we start to have that conversation because

[00:23:10] retirement funds for high income earners are limited, but that pie

[00:23:15] chart, depending on your income, just as that's what's going to

[00:23:18] drive the conversation, income and taxes.

[00:23:21] We always frame this in that CCBS, calendar, cashflow, balance sheet.

[00:23:26] Know those three things.

[00:23:27] You can put all this stuff together and a lot of it comes down to on

[00:23:30] the cashflow thing, we're looking at money in versus money out.

[00:23:34] So in this calendar year, what's the money that came in?

[00:23:38] What's the money go out?

[00:23:38] Great.

[00:23:39] You're in a million dollar a year.

[00:23:40] Great.

[00:23:40] You're in $10,000 this year.

[00:23:43] Did you pay taxes?

[00:23:44] Did you not in what amount?

[00:23:45] If you save money and jacked your point.

[00:23:47] So it goes onto the balance sheet.

[00:23:49] You put some in traditional, you put some in Roth, you put some in savings.

[00:23:53] Great job.

[00:23:54] But now we want to take that calendar and play it way forward, which is part

[00:23:58] of the idea of this balance sheet exercise, this pie chart that we show

[00:24:01] clients that Ben was just talking.

[00:24:03] Or we go, okay, if you continue on this path, here's what that balance

[00:24:07] sheet ends up looking like later.

[00:24:09] And the reason we always talk about them together is because well, later,

[00:24:12] if you stopped working, if you stopped making a million dollars a year, if you

[00:24:15] went from $10,000 up to a million dollars, now you're going back to 10,000

[00:24:18] again, you might need or might be forced.

[00:24:22] Policy requirement of distribution, stuff like that to convert from balance

[00:24:27] sheet back into some form of cashflow in a future calendar year, the more,

[00:24:32] again, financial flexibility is the name of the game for financial planning.

[00:24:37] So knowing that in an unknown future environment, this is potentially the pie

[00:24:41] chart that I'm dealing with of assets.

[00:24:43] If I need to convert that back into cashflow because I'm 30 years old, I have

[00:24:46] no idea what 72 looks like at this point.

[00:24:49] Here's some ways to think about how much flexibility is that going to afford me

[00:24:54] under whatever my assumption set is.

[00:24:58] This like zooming out aspect to put these things into context.

[00:25:02] It's just hard to do.

[00:25:04] I mean, like Jack, like, do you ever think about this?

[00:25:08] I know you think about this, but I think you also know how hard it is to

[00:25:11] actually step back and have this perspective.

[00:25:14] Yeah, no, I do.

[00:25:15] I mean, I don't think about it as much as you guys.

[00:25:16] And, you know, I think Ben's point is really important too, in terms of like,

[00:25:20] this is not an ideal world where you could be like, what is my ideal

[00:25:23] breakdown between Roth and traditional and taxable?

[00:25:25] Like there's rules as to how much, especially for high income people, as

[00:25:28] to how much you can actually get into these things.

[00:25:30] And going back to my example before, I mean, that was one of the reasons

[00:25:32] all the money's in taxable is the person I'm talking about was self-employed

[00:25:36] with like five or six employees.

[00:25:38] And like, so too much money to contribute to IRAs, too much income.

[00:25:42] And then looked at like the retirement plans for the company.

[00:25:45] And if you start those retirement plans, there's all these rules in terms of how

[00:25:49] much the high income person can be contributing relative to the other people.

[00:25:52] And it just would be like too much.

[00:25:54] And so I'm like, forget about it.

[00:25:55] I'm just going to put it all in these taxable accounts.

[00:25:57] So like we don't live in the ideal world.

[00:25:59] Like we live in a world where you've got to like work through issues like

[00:26:01] that and sometimes you end up with all your money in a taxable account,

[00:26:04] you know, when you retire.

[00:26:07] Nobody gets to pick to win the lottery.

[00:26:10] And nobody gets to pick how to do this stuff.

[00:26:11] You don't know how it's going to turn out.

[00:26:13] So you do the best you can.

[00:26:14] And part of doing the best you can is you, you spread things out or

[00:26:19] tis the season for going to Lowe's and getting gardening stuff.

[00:26:23] Like nobody goes like, Oh, we're going to get the garden together.

[00:26:25] And you're like, and we're only going to plant carrots.

[00:26:28] Like unless you're a carrot farmer, like you probably want

[00:26:31] a bunch of different stuff.

[00:26:33] So when you're thinking about saving, when you're thinking about

[00:26:36] accumulating things like, yes, sometimes this stuff is confusing,

[00:26:39] but if you want flexibility later, treat it like going to Lowe's and

[00:26:44] getting this or whatever your gardening place of choice is.

[00:26:47] Like getting, getting a diversified basket, which perfect segue,

[00:26:51] diversified basket what's up with water down factor exposure?

[00:26:55] This is a great question.

[00:26:56] I love this.

[00:26:57] Water down factor exposure versus focused at smaller percentages.

[00:27:01] So you did this stuff, you got the money into savings.

[00:27:04] It's on your balance sheet.

[00:27:06] You've heard about this value investing thing.

[00:27:08] Do you tilt a little at the index?

[00:27:11] Do you go all crazy balls to the wall, complete insane value

[00:27:15] factor focus, or do you go, I'm going to have mostly my S and P 500

[00:27:20] index funds and whatever else.

[00:27:22] And then like, I'm going to carve off 10% and go with the high

[00:27:26] octane value or momentum or whatever.

[00:27:28] How do you think about this, Jack?

[00:27:30] Well, this is the question we get, we get a lot because we run focus

[00:27:32] factor funds and there's a lot of focused ETFs out there.

[00:27:35] And the idea is a lot of people, the majority of people shouldn't probably

[00:27:38] be investing in those things in large percentages because they are,

[00:27:41] they're very volatile and as much as investors say, you know, I can,

[00:27:43] I can stay the course, a lot of them can't.

[00:27:45] And so I think like as, as a massive investment is a huge force

[00:27:49] to your portfolio, those are not the greatest things that are out there.

[00:27:52] But people kind of think there's the decision between I like allocate

[00:27:55] aggressively to these things or I just don't have them.

[00:27:58] And so what happens a lot of times is people will not invest in those

[00:28:01] types of factor funds, but they will invest in like the, you know,

[00:28:04] the watered down factor fund offered by the major provider that is,

[00:28:08] you know, the S and P 500 with the slightest tilt towards value.

[00:28:11] And they think, well, that's, that's all I can tolerate.

[00:28:13] So that's what I need to invest in.

[00:28:15] And what I think people miss sometimes with that is sizing is such

[00:28:18] an important part of this, like anything, I don't want to say

[00:28:21] anything because I wouldn't recommend like sizing Dogecoin did a small

[00:28:25] location or something like that, but, but most things that make sense over

[00:28:28] the long term, like you can deal with the fact that they're more volatile

[00:28:31] by sizing them and also by looking at how they are correlated with

[00:28:35] the rest of the things you're doing.

[00:28:36] And so sometimes these factory ETFs, sometimes the better way to do it is

[00:28:40] not necessarily to have the watered down factory ETF in the large position.

[00:28:44] Sometimes the better way to do it is to have the reduced position

[00:28:47] in the more aggressive factory ETF.

[00:28:48] And you're actually getting more value exposure for your money that way,

[00:28:52] even though sometimes the, you know, the more aggressive one usually has

[00:28:54] a higher fee, but you're, you're getting way more octane for that fee.

[00:28:58] So I think in a lot of cases, that's something people miss is the idea

[00:29:01] that maybe I can't take the ride of these more aggressive factor

[00:29:05] funds and a lot of people can't, but there's ways to use them

[00:29:07] intelligently, like within a portfolio where you can still use them.

[00:29:11] And I think in many cases, you get better value that way than

[00:29:14] you do buying like the watered down index hugging factor fund.

[00:29:18] There's so many things where just position sizing solves the problem.

[00:29:22] And in cases like this, and especially where, cause you're not, you're likely

[00:29:27] not going to have a focused factor fund or something like this,

[00:29:29] unless you believe in it.

[00:29:31] It might be because your allocator or your investor, the person you

[00:29:34] hire believes in it and that's why they're doing it too, but likely

[00:29:38] you have something that you're like, Oh, I get this.

[00:29:41] I just also get why this might not be a good idea for everything I do.

[00:29:47] Actually getting something that accomplishes what you want it to do,

[00:29:50] that gives you the exposure and then understanding how to size it.

[00:29:53] Like that's, that's most of the battle.

[00:29:55] And I love what you said, especially on like a fee adjusted basis

[00:29:58] and everything else too, Jack.

[00:30:00] Yeah, it's, it's everything in investing.

[00:30:02] I mean, it's always like these hard and fast rules usually don't work.

[00:30:05] It's like, you have, you have to think through all the details

[00:30:08] and all the nuance behind the scenes.

[00:30:09] And you know, I'm a big believer.

[00:30:10] I'm a big believer that a lot of people should just index their money.

[00:30:12] And you know, as much as I think factor tilts will add value over, over

[00:30:16] time for some people that just the ups and downs of that are too much.

[00:30:20] But I think just saying like, well, I can't take the focus fund.

[00:30:23] So therefore I shouldn't have it is not the right way to look at it.

[00:30:25] I think, I think in general, you want to look broader that and say, well,

[00:30:28] what would be the circumstances under which I could fit this into my portfolio?

[00:30:32] You know, inside of the risk constraints I want to live with.

[00:30:34] And a lot of times you can just by sizing them smaller.

[00:30:38] Yeah.

[00:30:38] It's a really interesting conversation, especially when you get

[00:30:41] into quirky stuff people want to own.

[00:30:44] All right.

[00:30:45] Another terrible segue.

[00:30:47] Let's get into really quirky stuff.

[00:30:49] Go ahead, Jack.

[00:30:49] We got a question.

[00:30:50] This is a Ben question.

[00:30:52] Yeah.

[00:30:52] Well, I know Matt with you having billions of dollars in various trusts,

[00:30:55] and see you were very concerned about what might be happening going

[00:30:57] forward here with the tax law estate planning, obviously you've got a lot.

[00:31:01] You've got a lot of things on your mind right now.

[00:31:02] So I don't want to put you under the stress of having to answer this

[00:31:05] while you're dealing with those kinds of problems.

[00:31:07] Listen here at here at match here Hathaway where we set up a

[00:31:11] private holding company could have no 401k or savings.

[00:31:14] No, no.

[00:31:15] Yes.

[00:31:15] Please don't put me under the stress.

[00:31:16] Get that calculator gun ready, Ben.

[00:31:18] Cause we've got a question about taxes for you.

[00:31:21] I hear there's some 2026 tax changes coming and as the poet philosopher

[00:31:28] Michael Stipe once said, it's the end of the world as we know it,

[00:31:31] but I feel fine.

[00:31:32] Why do you feel fine?

[00:31:35] I mean, it is the end of the world.

[00:31:36] It's the end of the tax world that we've been living in as we know it.

[00:31:41] So yeah, so there's a variety of layers to this just like there is anything.

[00:31:45] So the estate tax exemption is what we're obviously referring to here.

[00:31:48] That sunsets at the end of 2025.

[00:31:51] So in 2026, those numbers will effectively be cut in half.

[00:31:56] So today the joint exception is somewhere in the

[00:32:00] ballpark of 25 to 26 million.

[00:32:02] So for many clients or investors, you're not even worried about that.

[00:32:07] However, once that number goes from 25, 26 million down to 13 or 14

[00:32:12] million joint, you start to open up a wider range of investors that are going

[00:32:18] to fall into this estate tax complication category.

[00:32:21] And you have to keep in mind estate taxes, not just your

[00:32:25] investable accounts, it's life insurance payouts.

[00:32:28] It's your home, maybe rental properties added to investable

[00:32:33] accounts, cars, other assets, maybe doing a boat or something like that.

[00:32:36] So the value of the business is a lot of one is one people

[00:32:38] miss a lot of the time.

[00:32:39] Huge.

[00:32:40] Like if you've got a business, you don't think about that, but

[00:32:42] if you've got a business that makes a lot of money, like, and you value

[00:32:44] that, that could be a big, that could be a big hit towards the estate tax.

[00:32:47] It's massive.

[00:32:48] I mean, we have clients that'll have, you know, a 10 or a 12 million dollar

[00:32:51] business and, but they have a $2 million of investable assets and

[00:32:56] you start to do the math, you're like today, sure, there's no problem.

[00:33:00] In just 18 months from today, we have a problem.

[00:33:04] So we can't bank on, yeah, I know we're in an election year.

[00:33:09] We can't bank on politics and legislation to save you.

[00:33:12] So we have to start to put the plan together ahead of time.

[00:33:15] I think it's really interesting too.

[00:33:17] Uh, I want to relate this to the 30 year old versus the 60 year old.

[00:33:21] If you're a 60 year old and you've got a landscaping business you've built

[00:33:25] up for the last, you know, 40 years or something, or a contractor business

[00:33:28] or pick, pick whatever stuff we don't think you didn't, Oh, I'm sorry.

[00:33:33] You're not Mark Zuckerberg.

[00:33:34] You didn't found Facebook, but you have a successful business,

[00:33:37] a doctor's practice even.

[00:33:39] You got this thing that's actually worth something.

[00:33:42] If you're 60 years old and you've built this thing, this is another asset.

[00:33:46] You need some methodology for valuing or understanding your exit from in

[00:33:51] now policy and future policy.

[00:33:53] And it's really, really worth thinking about because how big these

[00:33:56] tax dollar differentials might be.

[00:33:59] Likewise, if you're the 30 year old and you're starting something and

[00:34:02] Ben, we have this conversation a lot too.

[00:34:05] You have no money in taxable savings.

[00:34:07] There's no money left over for it, but you're building that business.

[00:34:11] Those investments into that personal business.

[00:34:13] That's part of your balance sheet.

[00:34:15] If you're building one of these more practical things, again, you're not

[00:34:18] building a tech startup that's going to go to zero it's no, I do this job.

[00:34:21] People give me money and I have to buy equipment and grow this thing.

[00:34:25] Similarly, you have to understand all these levers because of the

[00:34:29] income tax changes and the other stuff that's right around the corner here.

[00:34:32] It's this affects everyone who pays taxes.

[00:34:36] Absolutely.

[00:34:37] I would, it's so often it's talked to in our industry about the estate tax.

[00:34:41] Uh, but the other areas that are, it's going to affect more Americans is

[00:34:46] the state of deduction gets cut in half.

[00:34:48] We've been living in this beautiful land of if you're not itemizing,

[00:34:52] you still have this massive state of deduction that we've got that was

[00:34:55] doubled, that's going to be cut in half and then obviously a

[00:34:57] juxtaposition for inflation.

[00:34:59] Then you have the brackets.

[00:35:01] The tax brackets going to revert back to the 2017 era.

[00:35:04] So most, most Americans taxes are likely going upwards depending on more people

[00:35:11] will go back to itemizing because you'll have the access to your state

[00:35:16] local taxes again and real estate taxes via sole and, but these are

[00:35:20] the things that we had to start thinking about heading into 2026.

[00:35:23] Should we be adjusting paycheck with holdings?

[00:35:25] How is that going to impact your cashflow back to the CCBS comments

[00:35:30] that Matt had earlier?

[00:35:30] So a lot of important layers to be discussing within taxes as well.

[00:35:34] And how about the, I think it's called the QBI, the qualified business.

[00:35:37] Is that going away as well?

[00:35:39] That's going on yet.

[00:35:39] So that'll be discontinued again.

[00:35:41] This is all if nothing happens, but so that, and that one for business

[00:35:44] owners has been such a relief, especially for those that have gone over

[00:35:48] to maybe an S corp and they're collecting a wage as well as the

[00:35:52] business distribution during this QBI era or qualified business deduction

[00:35:57] era, you've, you've been able to take more wages and have a larger deduction.

[00:36:03] You may pay a little bit more in FICA tax, but there's a balancing effect.

[00:36:08] Now people are going to be, you know, I think probably pushed back to taking

[00:36:11] a larger business distribution because of the taxation of benefits there.

[00:36:15] So yeah, there's, there's a list of changes that are, that are coming.

[00:36:19] And is the time free money income tax stuff the same as the estate tax stuff?

[00:36:23] It's, uh, everything is set for 1231, 2025.

[00:36:29] And how do you guys, this is something I always think about, like, how, how

[00:36:31] do you guys think about like potential tax changes because we don't know for

[00:36:35] sure.

[00:36:35] I mean, it seems in this case, I mean, I don't, I don't want to say

[00:36:39] it's likely because we don't know who's going to win the election.

[00:36:41] So, you know, the election is kind of a toss up at this point.

[00:36:43] Like if, if Trump were to win the election, the odds are obviously much

[00:36:46] stronger, but this stuff continues.

[00:36:48] If Biden wins the election, I think he said there's no chance that

[00:36:51] it continues.

[00:36:52] I mean, unless they've overrode a veto or something like that, which doesn't

[00:36:54] seem like that's going to happen.

[00:36:55] So like, how do you guys think about that when you plan for people?

[00:36:58] Cause you have to plan for this unknown scenario where you just don't

[00:37:01] know what's going to happen, but like certain things could happen and

[00:37:04] have major negative, negative consequences for somebody.

[00:37:07] Well, first and foremost, anything a politician says is a promise that

[00:37:12] we know they'll he read my lips.

[00:37:17] No new taxes.

[00:37:18] Yeah.

[00:37:19] Uh, I remember that still.

[00:37:21] I'm old enough to remember that.

[00:37:23] Uh, I will go to a younger example for bed of the spirit.

[00:37:27] Every time any of shows just modern last five year trauma of anything.

[00:37:32] I don't think that was probably based on where we are right now.

[00:37:35] If that's just saying, I think he's seeing those pretty much

[00:37:39] on a daily basis at this point.

[00:37:40] It's a glorified thing.

[00:37:42] I think it's, this is one of those.

[00:37:45] A financial plan as a, not a static, but a dynamic document that you

[00:37:51] have to map these things out forward is what I mean, this is what like

[00:37:56] we've, we've built a business just on this concept of being since

[00:38:01] you don't know what happens yet.

[00:38:02] You don't not only do you not know when the next recession or bear

[00:38:05] market or the next time your job's going to all of a sudden you get

[00:38:08] laid off or the next time your business goes in the crapper or the

[00:38:11] next time you start a business and it goes to the frigging moon or your.

[00:38:16] You know, example from a couple of years ago where it's like,

[00:38:18] Oh, I dated this guy years ago.

[00:38:20] He was really into tech programming.

[00:38:21] He told me to buy this thing called Bitcoin.

[00:38:23] I heard it's worth a lot.

[00:38:24] What do I do with this now?

[00:38:27] Life is weird.

[00:38:28] So just having a framework for how you think about it that goes

[00:38:31] from what's on the calendar that matters to me, basic real life

[00:38:35] stuff, what's the cashflow in a given calendar year under what we

[00:38:38] know to be true today about tax code and things like that.

[00:38:42] Then what's the impact on the balance sheet over time?

[00:38:44] Do I have assets in different places, Afrin's assets with

[00:38:47] different tax treatments, whatever else.

[00:38:49] What would it mean if I ever wanted to take money out of those?

[00:38:52] If I have this document, I can at least say based on what we know

[00:38:56] now, what does this look like?

[00:38:59] It's no different changing tax code than having like a giant bear market.

[00:39:04] What's going to happen is if the tax stuff all does change in

[00:39:08] 2026, the very, very end of 2025, then that means we're just going to take

[00:39:13] this stuff, we're going to update assumptions and we're going to go.

[00:39:16] It's the map in the mall all over again.

[00:39:18] Just where are we now?

[00:39:19] This is what we think is in the mall.

[00:39:21] We think this has been updated.

[00:39:23] These are the stores that are there.

[00:39:24] I'm really killing Ben with 80s references in this thing.

[00:39:27] Compared to the beach.

[00:39:29] What's appealing miserably.

[00:39:30] What's a mall go watch stranger things.

[00:39:33] But the idea of like, you just got to know where you are now on the map

[00:39:37] and then how you're going to get there.

[00:39:38] You got to tell the GPS, hit the little button that says, here is where I'm

[00:39:42] located now reroute me to where I'm going from where I'm located.

[00:39:47] That's the whole point of doing any planning in the first place.

[00:39:51] Short that path back out of this thing.

[00:39:54] Ben, what else do you say when people are like, how much time and energy

[00:39:58] and effort should I invest in this right now to think about all these 2026

[00:40:02] scenarios?

[00:40:05] Yeah.

[00:40:05] Projecting out like what might happen.

[00:40:08] It's always the fringe cases that you probably just want to make

[00:40:11] sure it's like on your radar.

[00:40:13] Yeah.

[00:40:14] In the obvious scenario where, okay, income is going up in somebody's career

[00:40:19] and we know that it's likely that tax cuts are going to change.

[00:40:22] Maybe we pull forward some taxes to pay it at a lower rate.

[00:40:26] We would do that in any scenario though, like regardless of what

[00:40:29] legislation is coming down the pike.

[00:40:32] Other than that, as far as the estate tax side of this conversation, if

[00:40:37] somebody is young or in their 40s, I will say here, and is it a potential

[00:40:42] estate tax problem, we're already probably talking about this regardless

[00:40:47] of what happens because if you're 40 with $20 million, the odds of you

[00:40:53] being 60 with $50 million is pretty high.

[00:40:57] So we already needed to start the, you know, engaging a client on

[00:41:03] irrevocable trusts or whatever the strategy is going to be at that point.

[00:41:07] Yeah.

[00:41:07] It seems like it's a balance between like odds and severity to some degree.

[00:41:10] Like you have to look at what are the odds of something happening, but

[00:41:12] also like if the severity is really, really bad, even if the odds aren't

[00:41:16] that high, you've still got to be thinking about it from a planning

[00:41:18] perspective, if this person is going to suffer a terrible like catastrophe,

[00:41:21] if certain thing goes through, then you've really got to be thinking about it.

[00:41:24] Yeah, you can think about it as like the same way as like, what do you

[00:41:28] think about life insurance or ensuring anything is yeah, low risk, high

[00:41:34] severity, low severity, high risk is where do you want to fall on that

[00:41:38] that risk spectrum?

[00:41:39] And yet it's one off cases.

[00:41:42] I wouldn't say that there's like, there's no like blanket guidance,

[00:41:45] but these are things that like, you probably need to be

[00:41:47] engaging most clients with.

[00:41:49] And it's also, we've talked about this matter on our Breaking News

[00:41:51] podcast, like it's also important to keep in mind that regardless of

[00:41:54] which side of the aisle you're on, basically right now, what everybody

[00:41:57] is proposing has nothing to do with actually solving any kind of problems.

[00:42:00] Like both candidates are proposing things that are going to get

[00:42:02] themselves elected right now.

[00:42:04] So you have to kind of take it with a grain of salt to some degree.

[00:42:06] Like they may have this crazy proposal, but they're not, they're

[00:42:09] not creating that proposal like with the help of economists right now.

[00:42:12] They're creating it with the help of their campaign team who is going

[00:42:14] to tell them like, here's how you get elected.

[00:42:16] And then what we see after the election might be very different.

[00:42:18] The only market that really matters to them are the voting markets.

[00:42:22] And granted, those voting markets are tied back to real markets

[00:42:24] and things like this, but it's seeing things through that lens is

[00:42:28] tremendously useful and probably helps to restore just the slimmest

[00:42:31] shred of sanity because if you just, again, if you're taking politicians

[00:42:36] at trust value on these things, you're probably going to, you're

[00:42:41] going to start imagining a lot of fringe cases that you're,

[00:42:43] you're going to be overinsured.

[00:42:45] You're going to be that person who buys the, the crazy life insurance

[00:42:49] policy to borrow against and never pay DAX for the rest of your life.

[00:42:52] And there's better ways to get scammed out there.

[00:42:55] Trust me on this one.

[00:42:56] Then, uh, for that, Hey, speaking about totally not a scam, Jack

[00:43:00] investing in AI, um, I mean, we just saw Nvidia earnings.

[00:43:05] This is, this is clearly the way don't invest in anything ever

[00:43:08] aside from AI and maybe even let AI to do it for you.

[00:43:12] What's what do you see it in that space in the quant world?

[00:43:16] Is it AI all the way down?

[00:43:17] The first thing is like the quant world is like the least applicable to this,

[00:43:20] which is interesting.

[00:43:21] Like we can't as a quant investor, if you ask me to like, find you

[00:43:24] a basket of AI stocks, like there's nothing that works because ultimately

[00:43:29] they're, they're the numbers just aren't there on these kinds of

[00:43:31] companies, so you have to be, you know, you have to be the venture

[00:43:34] capitalist who actually looks at the business without the quant tools and

[00:43:37] figures out like what has the most potential, like what would have told

[00:43:40] me Nvidia was going to do this?

[00:43:42] Like what, what could I have pulled out of the balance sheet

[00:43:44] in the income statement?

[00:43:45] You know, by the way, Nvidia had like the year before this happened,

[00:43:48] they had like flat earnings.

[00:43:49] Like not much was going on there.

[00:43:51] And then suddenly, you know, they start doubling and tripling their earnings.

[00:43:54] So there was, there was nothing, you had to be a person

[00:43:57] analyzing the company to do it.

[00:43:58] So it's interesting because this is like where my skills are the least

[00:44:02] applicable is in these new cutting edge technologies, because you can't use.

[00:44:06] At least right now, I mean, maybe, you know, with whatever, you know,

[00:44:08] chat, GBT or something, maybe you can eventually, but right now you

[00:44:11] can't use these plot tools, but, but in general, it's a question we get a

[00:44:14] lot because people want to participate in this kind of stuff.

[00:44:16] So, you know, you saw the internet back in the late nineties.

[00:44:19] You've got AI now we know we're at a pretty high level of certainty.

[00:44:23] This stuff's going to change the world.

[00:44:24] We also know there's going to be companies that come out of this

[00:44:26] that were going to be like, why the hell did I not invest in this thing?

[00:44:29] Like this thing, you know, if I had put, if I had put all my money

[00:44:31] in this, this stock, I would be whatever sitting on a beach and,

[00:44:33] you know, wherever the Virgin islands right now or something like that.

[00:44:36] Amazon and pets.com are both amongst us right now.

[00:44:41] And that is an old reference, but hopefully not too old.

[00:44:44] But like, there will be the thing that you're like, I've had how many chances

[00:44:47] to buy Amazon like in size over the last 20 odd years, and if you had a

[00:44:52] couple of chances to buy pets.com before it completely blew you up, we

[00:44:56] are living in the AI version of that potentially.

[00:44:58] And what's interesting from this perspective, just to show, and no

[00:45:01] one should obviously ever do this, but just to show the impact of like

[00:45:04] these big positions like Amazon, you know, what was a great portfolio?

[00:45:08] 50% Amazon, 50% pets.com.

[00:45:10] That was a tremendous portfolio in terms of where you at the

[00:45:14] returns you got longterm, obviously it's over concentrated and nobody

[00:45:16] would actually do it, but it just shows like you can lose all your

[00:45:19] money in one position in these types of spaces.

[00:45:22] And the big gainers will make up for it depending on how blended

[00:45:27] you are across all the other names.

[00:45:28] And that's, that is the challenge of this.

[00:45:29] And that's the challenge from a factor investing standpoint.

[00:45:32] Like if you look at growth investing in general, you'll find two things.

[00:45:35] One is if I buy a basket of growth stocks, my performance

[00:45:38] over the longterm is horrible.

[00:45:39] Like O'Shaughnessy showed this in what works on Wall Street.

[00:45:41] He looked at like high price to sale stocks.

[00:45:43] That's a bad portfolio, but within that portfolio will be the best

[00:45:47] performers in the market typically.

[00:45:48] So when I look back and I say, these are the companies I should have

[00:45:50] invested in, they come from the growth for the growth, you know, what

[00:45:53] we call the growth decile, the top 10% of the growth stocks.

[00:45:56] Um, but you know, if you invest in all those stocks, you would lose money.

[00:46:00] And that, that is the challenge of investing in AI.

[00:46:02] It's the challenge of investing in anything is the big winners will be

[00:46:05] in there, but most of the companies will be losers and how do I invest

[00:46:09] in such a way that I spread my bets so that I get the big winners, but

[00:46:12] they're not offset by all the other companies.

[00:46:14] And I don't know the answer to this.

[00:46:15] It's very challenging.

[00:46:16] Like we had, uh, we had Quayn Nguyen from a research affiliates on our

[00:46:20] live stream and she actually said like the best way to do it is to

[00:46:24] invest in a basket of AI stocks, which kind of surprised me to some

[00:46:27] degree because typically investing in a basket of those types of stocks.

[00:46:32] You know, the ones that don't work out may offset the big winners,

[00:46:36] but it's just very hard.

[00:46:37] Like if obviously if you're a growth investor and you're an expert in this

[00:46:40] area, you're an expert in AI and you can pick winners and you can make a 20 stock

[00:46:43] portfolio that eventually includes the ones that are the huge winners.

[00:46:47] You're going to do really, really well.

[00:46:49] The problem is if you're not that, if you're your average investor,

[00:46:52] like, and you buy the ETF that has all the names associated with AI,

[00:46:56] like are those big winners going to offset the ones that don't work out?

[00:46:59] It's hard to say.

[00:47:00] And it's why these hard tech, these new technologies are

[00:47:02] really, really hard to invest in.

[00:47:03] It's also interesting because it reminds me of like, this is a version

[00:47:07] of the market cap weighted argument.

[00:47:09] Like you have to buy this basket, but then you kind of have to see it out too.

[00:47:13] And that means letting some stuff fall off and go to zero, but also like

[00:47:17] committing to letting some of those, those proverbial winners run.

[00:47:22] And that's, this is not a risk control conversation when we're asking,

[00:47:26] how do I invest in these companies profitably or, or is it a risk

[00:47:30] control conversation?

[00:47:31] How do you think about that part, Jack?

[00:47:33] Yeah, it's interesting.

[00:47:34] And I was just thinking when you were saying that about like, one of

[00:47:36] the key points for people to understand is you do get, you typically do get

[00:47:39] these big winners in index funds.

[00:47:41] Um, that is so one way you can benefit from AI is you can buy index

[00:47:45] funds and whoever it is that wins, you know, I mean, obviously if you

[00:47:48] bought index funds a long time ago, you've benefited from Nvidia, you

[00:47:51] benefited from Amazon now you haven't benefited to the degree if you would,

[00:47:54] you know, put a 20 stock portfolio together with all of them in there.

[00:47:57] But the question is, if you would put the 20 stock portfolio, would they

[00:48:00] have even been in there in the first place?

[00:48:01] Because it's very easy to look back, you know, and say, here's Amazon,

[00:48:06] what it is today.

[00:48:07] If you look back at what Amazon was, there were periods where it was like,

[00:48:10] this thing's not going to make it.

[00:48:11] This thing's a catastrophe.

[00:48:12] This thing's just a bookseller.

[00:48:14] You know, there's all kinds of things that were, where people just

[00:48:16] doubted Amazon all along the way.

[00:48:18] And it overcame that now there's also a lot of companies like the

[00:48:21] pets.com where people doubted them along the way and they were 100% right

[00:48:25] about doubting them because it completely collapsed.

[00:48:27] And that is the challenge of this.

[00:48:28] Like, so there's, there's this continuum from index fund.

[00:48:32] I'm going to get the benefits of these.

[00:48:33] I mean, I probably won't get them in early stages.

[00:48:35] If I buy the S&P 500 fund because they won't be in there, but

[00:48:38] eventually they'll be in there and eventually I'll get the benefit of it

[00:48:41] to the other side, which is, you know, I build this concentrated portfolio.

[00:48:44] And the problem with the concentrated portfolio side is you have to know

[00:48:47] what you're doing and the statistics would say, even the professionals are

[00:48:51] going to have a hard time doing that.

[00:48:52] Your average investor's never really hard time doing it.

[00:48:54] So it's this blend.

[00:48:56] I mean, if you're going to invest in this stuff, you want it as

[00:48:58] part of a basket, the basket might be an index fund that has all of it.

[00:49:01] The basket might be something a little bit tighter.

[00:49:03] But it's just, you have to think about, and you've talked about this

[00:49:06] in other podcasts, Matt, like understanding your edge and investing.

[00:49:09] And the question for your average investor is if I'm going to invest

[00:49:13] in AI, do I have an edge where I think I could do better than just

[00:49:16] buying an index fund where the AI stocks will eventually be in there?

[00:49:19] And, you know, for most people, the answer to that is no.

[00:49:21] For some people, the answer to that is yes.

[00:49:23] And everybody's got to kind of make that decision on their own.

[00:49:28] Choosing where you will express that edge and how you will continue

[00:49:32] to revisit it over time, kind of everything here.

[00:49:36] I mean, obviously I have a massive edge in AI and I've built a portfolio

[00:49:38] of four to five stocks that will be the winners, but you know, not

[00:49:42] everybody can do what I do, Matt.

[00:49:44] Well, you know, some people are just chatting with GPT instead of

[00:49:49] chatting with the old, uh, what's your middle name, Jack?

[00:49:52] We need a, the J what app.

[00:49:55] It's M.

[00:49:57] Oh, there you go.

[00:49:57] The JMF, chat JMF.

[00:50:00] The only place for all your AI investing needs.

[00:50:03] All right.

[00:50:03] Let's, Ben, I got to bring you back in on this one.

[00:50:06] The, this is another one that like there's three versions of this question

[00:50:12] that we basically got, but it's so perspective because a lot of it's

[00:50:15] domain specific, they're all around the challenges of the current housing

[00:50:19] market and it's a big part of why you're on this episode here too.

[00:50:24] Cause it's like if you own a house and it's gone up a lot in value

[00:50:27] and you're ready to retire and downsize, that's one way to

[00:50:30] think about the housing market.

[00:50:32] If you're, Hey, I moved it, you know, a year and a half ago.

[00:50:35] We want to buy a house at some point, likely in a totally different area.

[00:50:39] We, we drug our feet.

[00:50:40] The housing markets moved up a lot, starting to come back down a little bit.

[00:50:43] Just thinking about buying back in housing as a buyer and seller, not

[00:50:47] asking you for an update on the housing market, Ben, but just like,

[00:50:51] it's frigging changed a lot.

[00:50:52] It's expensive interest rates are up a ton.

[00:50:55] If you're, if you're selling a house to downsize, what are some of

[00:50:58] the things you would walk a person through?

[00:51:02] I don't want to just go back to the calendar cashflow balance sheet.

[00:51:05] Uh, but that's where I would start.

[00:51:06] I guess where I would start because when you're, this is a big financial

[00:51:11] decision that you're making and just because you're downsizing doesn't mean

[00:51:14] we're going to taking a no mortgage property and going to another

[00:51:20] no mortgage property in this scenario.

[00:51:22] Depending on where you're moving to, you may actually be picking

[00:51:25] up another line of credit by doing this.

[00:51:27] So considering that at seven and a half percent today, that's a,

[00:51:33] that's a conversation, especially somebody that's on a fixed income in retirement.

[00:51:37] So that's a consideration that we'd have to have.

[00:51:39] Um, for somebody that's younger, this is the most challenging

[00:51:45] conversation for me because I don't, I don't want to say, Oh, just wait.

[00:51:51] Cause I, and the reality is interest rates drop in the next 18 months.

[00:51:56] The amount of buyers that are going to reenter the market because of having,

[00:52:00] you know, money to be able to borrow with better rates is likely to go up meaningfully.

[00:52:06] So that means we haven't solved the supply problem because that can't

[00:52:10] be solved overnight with more houses.

[00:52:12] But the demand is continuing to creep up.

[00:52:15] I think houses are probably likely to get more expensive,

[00:52:17] which nobody wants to hear.

[00:52:19] Um, that doesn't mean that you should just go by because there's

[00:52:24] still other scenarios out there, which is renting and that's really

[00:52:28] where I'd say the common conversation goes.

[00:52:31] And I love debunking the myth.

[00:52:33] Renting is burning money that is such a fallacy and is very misunderstood.

[00:52:40] And why, why is that?

[00:52:42] Just say this out loud because I know it's, this is a pervasive,

[00:52:46] it's a pervasive myth.

[00:52:48] It's definitely partly pervasive because of the number of people who

[00:52:51] were able to buy relatively inexpensive new or homes anytime from the

[00:52:57] fifties to the eighties and saw massive increases as the new home

[00:53:01] supply kind of constrained and people moved to the suburbs and whatever else.

[00:53:05] So like, why is renting not such a bad thing?

[00:53:07] If you're 25 years old and right now you, you're not positive.

[00:53:12] You have the place where you're going to live and raise a family or something.

[00:53:14] Why is renting and especially for them a great idea?

[00:53:18] The greatest line here is rent is the most you will pay for

[00:53:22] your living situation in any month.

[00:53:24] Your mortgage, if you own a home is the least that you will pay at any given month.

[00:53:29] When you can understand that risk spectrum, then you can

[00:53:33] understand how you make that decision.

[00:53:35] I own a home my wife and I bought eight years ago in the first 18 months,

[00:53:39] we spent $30,000 on fixing the house and that's not, oh, we wanted to

[00:53:45] upgrade the kitchen, Oh, let's do the bet.

[00:53:47] No, that was like both units, HVAC units happened to die.

[00:53:52] Front door was, had a storm or storm door head ish.

[00:53:55] It just piles on.

[00:53:57] There's so many unfortunate scenarios out there that stuff happens.

[00:54:01] So that understanding that risk also understanding how long

[00:54:07] you plan to be there.

[00:54:08] If this is your dream home and you have the capital to do it,

[00:54:12] great, make the purchase.

[00:54:14] But if you're unsure of what the next six to seven years is, which

[00:54:17] is the typical window of how long you need to be there, you can't

[00:54:20] do the typical window of how long you need to be in a property before

[00:54:24] you start to build equity.

[00:54:26] Please eliminate the last four years as your example here and start

[00:54:31] to really think, okay, I'm not going to be here six years from today.

[00:54:34] The odds of me losing money on this deal when you factor in property

[00:54:39] taxes, closing costs, you need to do closing costs twice now because

[00:54:42] you're buying the property and selling, you need real estate

[00:54:45] charges as well, factor all of that in with the upkeep of a

[00:54:49] house over a six year window.

[00:54:51] See if it makes sense.

[00:54:52] There's some really good tools out there that could help you

[00:54:54] understand what maintenance costs are on your property.

[00:54:58] You don't have that with rent.

[00:55:00] So you have to start to think through this more than just the

[00:55:04] American dream and society is telling me I should own a boom.

[00:55:09] I need to go buy a house.

[00:55:10] Your home, it is an asset.

[00:55:13] It is not an investment.

[00:55:15] And if you call it an investment, it's a really, really crappy

[00:55:18] investment, the amount of money that you pop into this thing every

[00:55:21] year for it to appreciate at 3% average.

[00:55:25] That's not a good investment.

[00:55:26] I can find you better things to do with your money than that.

[00:55:28] In technical terms, I always like to say whatever can leak will leak.

[00:55:32] Yeah.

[00:55:32] Would that be the ceiling of your house?

[00:55:34] Like with water coming through, which I've had like trying to

[00:55:36] replace like a cartridge on a kitchen sink, like trying to figure

[00:55:39] out how to do that because it was leaking in the basement and causing

[00:55:41] flooding, like basically leaking of all time will be like then that

[00:55:45] would be your light if you buy a house pretty much.

[00:55:48] It's that's fatal.

[00:55:49] It's like at 2 30 in the morning when you're like, why do I hear

[00:55:54] tripping from my ceiling?

[00:55:55] Like when I went to just go to use the bathroom, like, oh geez,

[00:55:59] the wax seal broke and my basement has a hole in the ceiling.

[00:56:02] Like, yeah, that's if you're renting, that's a phone call.

[00:56:08] Somebody comes takes care of that for you and you're done.

[00:56:10] You own the home.

[00:56:11] That's your job.

[00:56:13] Which is a great piece for like the person renting made an

[00:56:17] investment in an asset that's maintenance capital intensive and

[00:56:21] has a framework, ideally their own plan around how they're going

[00:56:25] to maintain that profitably, which hopefully if you're renting

[00:56:28] from them is not ignore your call when the AC is out and it's

[00:56:31] 95 degrees or something.

[00:56:33] But yeah, there are trade-offs.

[00:56:35] You got to think about this stuff.

[00:56:36] I don't want to miss this question.

[00:56:39] I don't want to miss this question.

[00:56:41] Jack, you're going to start on this one, the pros and cons of

[00:56:44] direct indexing versus ETFs.

[00:56:48] I know we have a whole episode on this, but this one seems

[00:56:50] to keep coming back to us.

[00:56:51] What are the pros and cons?

[00:56:53] Direct indexing is becoming much, much more popular.

[00:56:56] And your average investor is being able to do it more than

[00:56:59] they could have in the past.

[00:57:00] And so the question is, you've got these two things.

[00:57:02] You've got the ETF, which is basically you, I don't pay the

[00:57:05] taxes reside in the ETF for the most part, like when they're

[00:57:08] buying and selling.

[00:57:09] And so let's just start with like an S and P 500 index fund versus

[00:57:12] an S and P 500 direct indexing strategy.

[00:57:14] So the ETF, if I buy and hold the ETF, other than like the

[00:57:17] dividends, I'm pretty much deferring the taxes for a really

[00:57:20] long period of time.

[00:57:21] Now with the direct indexing, depending on what happens, I can

[00:57:25] maybe do a little bit better than that in that I can sell

[00:57:27] the losing positions on a year by year basis.

[00:57:29] I can replace them with something that behaves similarly to them.

[00:57:33] And I can get something very close to the S and P 500 return

[00:57:36] while realizing these losses.

[00:57:38] And so the question becomes, which is better.

[00:57:40] And then the answer is like everything else in investing.

[00:57:42] It completely depends on the circumstances.

[00:57:45] Um, I tend to think the ETF is better in most cases, but the

[00:57:50] two big factors here are one is the tax rate and two is what is

[00:57:53] the return path of whatever you're investing in and those are both,

[00:57:57] you know, the tax rate can be knowable, although we talked

[00:57:59] before about like it might change in the future.

[00:58:01] So somebody in California and the highest tax bracket is going to

[00:58:05] get the most benefit from direct indexing.

[00:58:07] And like we've had some clients where we've done it for them that

[00:58:09] are in the highest tax bracket in California and they have greater

[00:58:12] than a 50% tax rate, you know, they can, they can benefit a lot

[00:58:15] from direct indexing.

[00:58:16] And the second question is the return profile.

[00:58:18] And so what I mean by that is if 2022 is your first year,

[00:58:21] you start doing direct indexing, you fit a whole run because

[00:58:24] effectively you're losing money in your portfolio.

[00:58:27] You have a lot of losses to realize that's tax you're not paying

[00:58:30] in that specific year that money can now compound in the future.

[00:58:34] So in that type of case, you know, high tax bracket in California,

[00:58:37] starting in 2022, direct indexing tends to, you know, will probably

[00:58:40] do better than the ETF.

[00:58:41] But in a lot of other cases, you know, people are in lower

[00:58:44] tax brackets, the returns go work differently for the market.

[00:58:47] It doesn't work out as well.

[00:58:48] So it really, and the big equalizer here is the fees.

[00:58:51] So typically you're going to pay a higher fee for a direct indexing

[00:58:54] strategy, then you're going to pay Vanguard for their S&P 500 fund.

[00:58:57] So over time, eventually when you're realizing these losses

[00:59:01] in the direct indexing strategy, eventually, if you're, let's just say

[00:59:03] it's a simple S&P 500 strategy.

[00:59:05] Eventually there aren't any losers left to sell, you know, after years

[00:59:08] and years of doing it, you got to think most of the companies are

[00:59:10] going to be above where you purchase them.

[00:59:12] There's nothing less to sell.

[00:59:13] So then what you have is a tracking portfolio of the S&P 500

[00:59:17] where you're paying a higher fee.

[00:59:18] And so the question becomes those tax benefits I got in the,

[00:59:21] in the initial years and my ability to compound that money, does it

[00:59:24] offset the fact that eventually I have this portfolio now, and I'm not

[00:59:28] going to want to sell it because I don't want to realize the taxes

[00:59:30] and I'm paying a higher fee.

[00:59:31] And the answer is it's unclear, but I think there are, I used to be

[00:59:35] a completely pro ETF person and I think there are situations where

[00:59:38] direct indexing works better.

[00:59:40] And the other thing, and you guys can comment on this part of it.

[00:59:42] The other thing that I think is really important is a lot of people with

[00:59:45] direct indexing are being able to do more things than just

[00:59:48] harvest losses in the S&P 500.

[00:59:50] They're doing things to make their portfolio more of what they want it

[00:59:53] to be, and I think people are much more likely to stick with a

[00:59:56] portfolio over time when they've played a role in constructing it.

[00:59:59] And they've expressed their values or their beliefs about investing

[01:00:02] or whatever it is.

[01:00:02] And so that, if you put it in my spreadsheet might not make sense,

[01:00:06] but I think that is a benefit for direct indexing is the disability.

[01:00:09] You know, we're customizing everything in our lives these days.

[01:00:11] The ability to customize my portfolio might make me more likely

[01:00:15] to stick with it over time.

[01:00:16] And then that'll offset anything I could find in my spreadsheet against it.

[01:00:20] We've got, there's an interview coming out in a couple of weeks.

[01:00:22] We talked to her on the P&L for a purpose thing.

[01:00:25] Perth tolls has a way of calling this.

[01:00:28] It's portfolio construction is always some form of an expression.

[01:00:33] And I think I like that word because I like expression, how it connects back

[01:00:38] to what you're doing and what you're going to stick to and direct indexing

[01:00:41] to the degree that it's a direct expression of your views or whatever

[01:00:45] else can be a really useful tool.

[01:00:48] It can be very tax efficient.

[01:00:49] It might cost a little more than the ETF, but it might actually

[01:00:51] accomplish some greater things and on a tax adjusted basis, it might be better.

[01:00:55] All this stuff.

[01:00:57] These choices of expression, whether it's direct indexing, whether it's an ETF,

[01:01:01] whether it's even a mutual fund to express the choice.

[01:01:03] Maybe it's even interval fund.

[01:01:05] Maybe it's a private equity fund.

[01:01:07] Like these are all choices that a person gets to make to express their stuff.

[01:01:13] The real important piece of this is that you did something you can

[01:01:17] stick to and number one, you don't have a bunch of bad ideas.

[01:01:20] In which case you don't want to be proven out that like your

[01:01:23] rules basis that was idiotic.

[01:01:25] That's not a dig at value investors for way too long, but it is a dig at just

[01:01:28] the idea of like, you got to temper it against yourself.

[01:01:32] Don't be your own worst enemy.

[01:01:33] We have all these options and now we can make some really important

[01:01:36] and intelligent decisions with good options.

[01:01:40] 25 years ago, this was not really an option.

[01:01:44] And that's also pretty darn exciting.

[01:01:46] That's pretty cool.

[01:01:47] The two areas that it has really opened the door for one is actually

[01:01:51] somebody that we started the conversation with was a former Google

[01:01:55] employee who had just probably 40% of their assets tied up in Google stock.

[01:02:02] All right, we can't exit that position from a tax perspective without

[01:02:05] pink herring big gains and they're in California like, you know,

[01:02:08] Jack just went through that.

[01:02:10] The direct indexing strategy is a way for us to stay away from Google

[01:02:14] the rest of their assets and continue to build on that.

[01:02:19] Now we're obviously probably going to always be trying to sell some of that

[01:02:22] Google stock down because if something were to happen to Google, I don't foresee

[01:02:25] that happening, but it would be a major impact on their portfolio.

[01:02:29] The other one is probably what you know, is what you guys were referring

[01:02:32] to as around ESG and environmental social governance is if somebody feels

[01:02:36] like, Hey, I don't want any casinos or I don't want petty cigarette

[01:02:42] companies in my portfolio.

[01:02:44] I don't, you know, there's a way for somebody to express

[01:02:46] that in their portfolio.

[01:02:47] That direct indexing offers that without that construct, it is very

[01:02:53] challenging to go out to the market and buy individual securities

[01:02:56] and the, the headache to do it.

[01:02:59] Uh, it's hard to justify.

[01:03:01] So, but the ETF way is sorry, go ahead, Matt.

[01:03:05] No, or a, or a manager who expresses your, this is the

[01:03:09] hardest part about ESG in that whole space is you have managers

[01:03:14] are doing it in a way that they think they can sell.

[01:03:18] Right.

[01:03:18] Nothing wrong with that.

[01:03:19] We need managers to do it, but if the manager is not your exact expression,

[01:03:23] it was basically build it yourself or go home.

[01:03:26] Direct indexing has created a cottage industry around.

[01:03:29] You actually can kind of build it yourself around that expression.

[01:03:32] And so long as it's intelligently done, more power to you.

[01:03:35] You got tools to do this stuff.

[01:03:36] It's awesome.

[01:03:38] Similarly, just like managing around the concentration risk of like a

[01:03:42] Google, you could manage around the concentration avoidance.

[01:03:46] Like I don't want any tobacco or gambling, or I've got a specific

[01:03:50] thing about pharmaceuticals or something that that's again, powerful

[01:03:54] tool did not exist a handful of years ago.

[01:03:56] I was just listening to an interview, uh, Barry Riddle

[01:03:58] stayed with Jim O'Shaughnessy.

[01:03:59] And he was talking about this because they had worked with like

[01:04:01] a bunch of religious organizations and like every one of them had

[01:04:03] a different definition of ESG.

[01:04:05] And so that's kind of what they were doing with canvas is they

[01:04:07] were, they built it so you could customize it to your exact thing.

[01:04:11] Because like you said, ESG is different in the mind and the

[01:04:13] eyes of every single person.

[01:04:14] For the most part.

[01:04:15] I mean, most people have different definitions of it.

[01:04:17] So the idea that I can express that exactly the way I want to in my

[01:04:20] portfolio may not on my long-term spreadsheet may not say it adds to

[01:04:24] your returns, but I think it certainly adds to your ability to

[01:04:26] stick with your portfolio over time.

[01:04:28] Yeah.

[01:04:29] Then equity portfolio that stick to it in this is massively important

[01:04:33] because this is, it's just fraught with complexity.

[01:04:37] Like investing is fraught with complexity.

[01:04:39] Being human is fraught with complexity, but having ways to just continuously

[01:04:44] revisit the conversation and prioritize what matters, that's the name of the game.

[01:04:48] That's why we can do a question with 10.

[01:04:51] We do an episode with 10 questions and turn around and we got

[01:04:54] 30 more questions in the queue.

[01:04:58] It's amazing.

[01:04:59] And none of us are doing this alone.

[01:05:00] It's amazing.

[01:05:01] I know that's probably a good note to wrap up on.

[01:05:03] And I promise we will not, uh, hopefully people have enjoyed

[01:05:06] this and got value out of it.

[01:05:07] We will go back to our normal episodes next week.

[01:05:09] I will be droning on about value investing.

[01:05:11] Matt will be telling us how it relates to the worth of James Taylor.

[01:05:14] Um, and we will get back to our usual format, but I like doing these because

[01:05:18] it, you know, I don't even know the answers to these when we come in.

[01:05:20] Like I, like I said, in the last episode, I like thinking through

[01:05:23] these things, like the idea of the person that has the $5 million

[01:05:26] in a taxable account, like it's interesting to think through that

[01:05:28] because there's so many different levels below that in terms of how

[01:05:31] you think about that in the real world.

[01:05:32] So I think it's helpful for me just to do this, even if, you

[01:05:35] know, nobody wants to watch it, but hopefully people do.

[01:05:37] I've seen fun structures and I've seen pain.

[01:05:40] That's all I've got to say about that.

[01:05:42] Well, thank you everybody for joining us and we'll see you next time.

[01:05:47] Hi guys.

[01:05:48] This is Justin again.

[01:05:49] Thanks so much for tuning into this episode.

[01:05:52] You can follow Jack on Twitter at practical quant.

[01:05:55] You can follow me on Twitter at JJ carbonome and follow Matt

[01:05:58] on Twitter at at cultish creative.

[01:06:01] If you found this discussion interesting and valuable, please

[01:06:04] subscribe in either iTunes or on YouTube or leave a review or a comment.

[01:06:08] Also, if you have any ideas for topics you'd like us to cover in

[01:06:11] the future, please email us at access returns pod at gmail.com.

[01:06:15] We would like this to be a listener driven podcast and

[01:06:18] would appreciate any suggestions.

[01:06:20] Thank you.