Joe, how many funds are in your portfolio? I have eight. Eight fund portfolio. That's it.
But you know, that's the question that's on everyone's mind. How many funds should be in a portfolio? Should it be a two fund portfolio, four fund, eight fund, ten fund? Is there an optimal number of funds? Oh, we can answer that. We sure can, because that is a question that one of our callers has. And she also has the question, I believe the bigger question behind that, what should she do if she has a 401k with a crappy fund selection? Interesting.
Right? That's the frustrating and limiting thing when you're dealing with a company 401k. A hundred percent. The efficient frontier shows you that we should go and do XYZ fun, but I don't have that fun. What do I do now? Exactly. We're going to answer a question from a caller who has that dilemma. And within that answer, we're going to be deep diving into how to triple what your portfolio might make over the span of your life. Triple.
Triple. Welcome to The Afford Anything podcast. This show that understands you can afford anything, but not everything. Every choice carries a trade-off. And that applies not just to your money, but to your time, your focus, your energy, your attention to any limited resource you need to manage. This show covers five pillars. Financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double-eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia.
Every other episode, I answer questions that come from you. And I do so with my buddy, the former financial planner, Joe Salcy. Hi, what's up, Joe? Paula, it is snowing in Texarkana. This happens maybe two days a year. Schools are closed. It's a snow day, but you know what? Just like the US Postal Service, there is no snow day for the afford anything community. We're here. We're excited and it's going to be a lot of fun. Absolutely. And we're going to kick off with our first question today, which comes from Kelsey.
Hi, Paula and Joe. Thank you so much for all of the discussion around the efficient frontier and how to take that next step to optimize your portfolio after having gotten started with VTSAX. It's been really eye opening and caused me to do a deep dive into my own portfolio. One question I have, and I would guess that this may be a problem for others, is how to work around limited fund options and employer sponsored 401ks.
I found my desired asset allocation based on the efficient frontier and the level of risk I'm willing to take. Based on this, I am aiming to move my funds to a mix between a large cap growth index fund, a mid cap growth index fund, a mid cap value index fund, and a small cap growth index fund. However, my 401k does not have all of these as options.
I recently switched jobs, so right now I have two 401ks open since I have not yet consolidated them. The first 401k offers the S&P 500 and a limited set of fidelity index funds. It does not have funds that track large cap growth or either mid cap growth or value. It does have the Fidelity Small Cap Growth K6 Fund, FOCSX,
However, it seems better to invest in the Fidelity Small Math Growth Index Fund, F-E-C-G-X, if that were an option. My second 401k only has two equity options, one that tracks the total stock market and another that tracks the SMP600. Between me and my husband, we have quite a few accounts for multiple 401ks, Roth IRAs, HSA's brokerage account,
But my 401k has about one-third of the total. I can't decide if I should invest in the small cap growth K6 fund FOCS X in the first 401k, even though I would have preferred the fidelity fund FEC GX, and then use other accounts to reach my desired asset allocation
or be keep my 401k in total stock market, even though that was not part of my desired asset allocation, and then go back to the efficient frontier to see what it looks like when I require 35% of my portfolio to be in the total stock market. I also had not planned to roll over my old 401k to a traditional IRA because I do a backdoor Roth IRA every year. Really appreciate any insight you all may have about how to navigate the efficient frontier with limited fund options available from employers. Thank you.
Kelsey, thank you for the question. And it's a question that a lot of affortors share, which is how do you construct an ideal portfolio if your options are limited due to being in employer sponsored accounts? It's so frustrating when, you know, she's clearly embraced all this work that we've talked about Paula over the last few months and dives in and she goes to her 401k and I can just imagine how excited she is and stuff isn't there.
What, what? Yeah, exactly. So, what do we do? Well, maybe, Paula, we need to back up a little bit, don't you think?
Absolutely, because, you know, Kelsey, we will answer your question, but we also first want to broaden this out for the sake of everyone who's listening, because we understand that some people who are listening have not been privy to the past few episodes and need a refresher from the beginning of what it is that we're talking about. What is the efficient frontier? What are we optimizing for? And so we're going to establish that for the sake of everybody who's listening.
And then we will lead into the specific answer to your question, which is what do you do in the event that you come up with an ideal portfolio that follows the efficient frontier, but the choices that you have are limited. Absolutely. So why don't we start at the beginning then, I guess. What is the efficient frontier? How about if we just begin there? Right.
And for those of you listening to the audio version of this episode, I strongly recommend that you watch this on YouTube. We're going to put a link in the description because what's about to happen right now is Joe is putting up some slides. Oh, hey, we're going to be looking at some charts. So if you are listening to the audio version, please head over to YouTube. Look at the charts as Joe maps this out.
Don't worry, though, if you're walking the dog or you're commuting, the YouTube will still be there for later, and I'm going to try to make sure that we sound out all the slides as much as possible for our audio-only audience. Exactly. All right, Joe, take it away. All right, so this gentleman, Dr. Harry Markowitz,
Discover the efficient frontier. He's actually looking at different things. He was helping the US Army with troop movement is my understanding, but he saw that the efficient frontier is a device which helps you figure out the most efficient way to meet your financial goals. For any journey that we're on, there's a most efficient way and your money's on a journey to reach your goals.
He looked at three different factors, he looked at your timeframe, how long is it until you're going to have this goal occur, whether it's retirement or a new house or all the different goals that our borders have. Second, what level of risk we heard from Kelsey, she said there was a risk level that I was looking for.
What return do you need to reach that goal? So given those three things, and they're actually even as a fourth one, Paula, which is tax consideration. So you can even make this based on whether this is going to have the friction of taxes.
every year or not because outside of a thing like a 401k or an IRA, something that throws off a lot of dividends is going to be a lot less efficient than something that doesn't. We're inside a 401k or an IRA. You really don't have to worry about dividends because you're not going to have to pay any of those taxes along the way.
Right. Tax advantage to counts are either tax deferred or tax exempt, so you don't really have to worry about it. But if it's a taxable brokerage account, then you can get hit with this tax bill for unrealized gains, which kind of sucks. So what Markowitz did was he created this grid, this chart. And North-South, he shows returns, low returns at the bottom and high returns at the top. So that's his x-axis.
That's his y-axis. Sorry. That's his y-axis. That's funny. His x-axis, I guess I'm cutting the chase, aren't I? His x-axis is risk. So as he sees returns go up, he sees risk go to the right. And of course, that means that if we look at cash in CDs, that's going to be low and left, right, low return. And then it's going to be left on the risk axis because
really no risk in an FDIC insured cash account. But if we look at, let's say, collectibles, collectible things, whether they're trading cards or some of the crazy things people collected over the years. Beanie Babies? Beanie Babies, right. Those will be way up on the potential return, but also really, really far to the right on the risk scale. I mean, Beanie Babies, to your point, Paul, at one point, worth a gajillion dollars. And now,
There's a lot of people, Beanie Babies, their mom's basement, and they're worth nothing. Right. So Beanie Babies are high risk, high return.
So what he did next was he looked at different asset classes, all the different things, large company stocks, small company stocks, US government bonds, international, I mean, he looked at all the different investment types and he put them as different dots on this chart. And what he noticed was
If he's got, let's say, 50% large US stocks and 50% corporate bonds, it's going to land somewhere in the middle of the dots. And then, Paula, he gets excited. He pours himself a glass of wine. He puts on some berry white because this is very sexy stuff. And he's like, whoa, wait a minute. What does this mean?
This is your efficient frontier fan fiction. He's getting so in the mood and he's like, wait, what does this mean? What it means is if his dot is in the middle of the dots, there is a line that there's no dots north of it and there's no dots to the left of it, right? Yeah.
What does that mean? That means what we're all looking for. We're all looking for this one dot that is way up and way to the left. I want something that's high return, no risk or low risk.
Right, I'm sorry, low risk, yes. I was much risk as I could take. Super low risk, super high return, it doesn't exist. When he looked at all the factual data, that unicorn, that holy grail is not a, it doesn't exist. There is a most efficient mix of investments. So getting back to that 50-50 split of US large companies and corporate bonds, it means that for all of us,
If we have that allocation, we could just move it left to that line that's called the efficient frontier. What does that mean? That means that I am going to get the same exact return over the span of time it takes me to reach my goal, but I'm going to take a lot less risk.
getting there. My portfolio is going to bump around a lot less, which is really cool. I can sleep better at night. I get the same results with less risk. Sign me up. But if you're sleeping well at night and you're okay with the risk that you've taken, it also says that you could go up.
And if you go straight up, well, you'll find a different mix of investments. In this case, and by the way, if you're watching this, I put some different investment choices up here. These are just made up for illustration sake. I'm going to show you later on exactly what the efficient frontier looks like because we're going to build it here later in the show. But I said, okay, maybe it's 30% large.
US stocks, 10%, small US stocks, 10% real estate, 50% bonds. And you are taking the same risk you're taking now, but you're getting a hell of a lot higher return. And if you're sleeping well at night, why wouldn't we do that? Like, why wouldn't we get closer to the efficient frontier?
So essentially just to summarize this for, especially for the audio audience that can't see the visual, we've got a graph that's essentially a giant scatter plot. But if we try to put some shape towards that scatter plot, there is this curved line. And as you said, Joe, the curved line is shaped such that all of the dots are underneath it and to the right.
And by the way, a piece of this research that we've all heard before is the law of diminishing returns. And that line initially goes nearly straight up. It only goes a little bit to the right, but the further out you go, the more it begins to flat line. Right. And so you can try to squeeze more and more juice out of this, but Marco, it's proved that sometimes taking a lot more risk is not worth that squeeze.
Exactly. So what we're seeing within this scatter plot with the curved line, this curved line acting as the roof of the scatter plot, the ceiling of the scatter plot, is that beanie babies in this instance, wouldn't it?
actually make a whole lot of sense because you're so far over on the risk side of the spectrum that you're deep into the law of diminishing returns. You could more assuredly get 99.5% of that return taking a lot less risk.
So why not go with a ninety nine point five unless risk to get it exactly so that's the concept of the efficient frontier. Now I plotted Paula two dots one that's to the left of our imaginary dot and one that is straight up but truly. And I want to focus on this.
That's not where your dot's gonna be. Where I like to start is what is my goal? What is the timeframe? And then what return do I need to reach that goal based on the amount that I'm able to save in my budget? That's gonna give you the return that you need. And then that will produce the dot. So I'm not gonna do either one of those two things. I'm gonna start off with what's most efficient based on my goal.
which I believe is exactly what Kelsey said. She's like, okay, I know the risk I need to take to reach my goal. And so I looked at the efficient frontier. My 401k doesn't have those funds. We'll get back to that in a second. But to go to the next step, a guy named Paul Merriman, who was recently Paula on the show again. Yes, he was on the Afford Anything podcast. I actually flew out to
Minneapolis to interview him in person and we will also link in the show notes to that episode as well. A guy named Paul Merriman has done a lot of the research around funds that are closer to the efficient frontier.
It's funny because Jal Collins, who I love when it comes to beginning investors and using the total stock market index, Jal Collins knows his audience really well and knows that a one fund approach is a way to just get people so they don't panic and they get started. It's perfect to start there.
Nick Mijuli said it best in his book. Nick said that when you get to roughly $100,000, it makes sense to then look at getting a little more analytical. So what Merriman did was he proved that if we start with where jail Collins starts and where you and I think people should start, which is by the total stock market index, either ticker symbol, VTI or VTSAX. A one fund portfolio, VTSAX.
When you look at that on the efficient frontier, which anybody can do, you will see that that dot in our scatter chart, there's room to the left of it, meaning there are portfolios that are less risky that historically have gotten you the same return.
You can also go up from that, meaning, and this has always been my point, you can get a much higher return using more of a merriman approach or even better. I like your own efficient frontier based on your own goals approach than using just VTSAX. So whether you invest in the total stock market index or the S&P 500,
If you put $10,000 back in 1970 into either one of those two positions and you rolled that out to 2022, you would have, and by the way, Paula, think about 2023 and 2024, right? If I had the last two years on here, this number would have been even bigger.
But that $10,000 would have grown to $1.89 million given 52 years. What does that mean? That means, Paula, that JL Collins is 100% right. When you start out, if you're freaking out about what to invest in,
You can invest in just the total market or invest in the S&P 500 and you're going to be okay. You will be okay. You will have enough for 99% of our audience's goals. This is a way that you will have enough.
Right, put $10,000 into the stock market in 1970 into VTSAX or the S&P 500. 52 years later, it'll be $1.89 million. That's amazing. You will be fine. Right. Merriman compares that with using a 10 fund portfolio that's closer to the efficient frontier. So he's now looking at being more efficient using 10 funds to do it.
$3.74 million. Right. Remarkable. That is nearly double. Nearly double. Now, some people say, well, 10 funds, Paula, that's a lot of work.
Merriman heard that. So he had a wonderful gentleman named Chris that he worked with. And he said, Chris, for the people that don't want to invest in 10 funds, can we do this with just four funds? Let's try to get close to the efficient frontier with just four funds. So Chris goes out and researches it. Merriman's like, oh, this is going to stink. And oops, Chris comes back and we made an extra $200,000, Paula.
Mmm, with a four-fund portfolio rather than a ten fund. The four-fund all-world Merriman portfolio over that same 52 years goes to 3.94 million instead of 3.74 million. Right. And then Merriman starts hearing from other people. Yeah.
And I should add, what we're looking at right now is the historic performance from 1970 through 2022. That doesn't mean that the next 52 years will be exactly like the last 52 years. Great point. Which is to say that we're not making the claim that a for fund portfolio
is in all cases necessarily going to be better than a 10 fund portfolio. We're not making that case. We're saying, look at the 10 fund portfolio, look at the four fund portfolio. These two portfolios, this time span that we're looking at, have resulted in a $10,000 initial investment, growing to a final investment of between 3.7 to 3.9 million.
So either one, whether you go four fund or ten fund, is a great option and certainly a much better option than simply a one fund VTSA X portfolio.
Yeah, I love that you make that point because truly the point that I wanted to make when I first brought this up was that getting a little more scientific can have big results, period. And the thing that we know, and this is why I am more interested in us understanding the efficient frontier than I am, us just purely investing in a merriment portfolio.
is because this drifts every year, Paula, it does drift a little bit. And so if it's planning and not a plan, and if we're not static, but we are moving with the efficient frontier a little bit every year, we're going to stay fairly efficient because we know how it works. It's important to know how this works if you really want to get as much juice out of this as you possibly can.
I love Merriman's research because it saved me so much time and showing why the juice is there.
So, Merriman, of course, starts hearing in his head all the pundits again, going, all world, not investing internationally. Paul, I don't think I want to invest internationally. I'm just going to invest US. So he looks at Chris, again, and he goes, Chris, why don't we do this? Let's see how much it's going to cost us if we just keep this to the United States only over those last 52 years. So he does that and Chris comes back and goes, whoops, it's 4.09 million. We actually made more money by staying in the US with these four funds.
rather than an international component. Yeah, and so Merriman goes, okay, well, how this can be? His head hurts, right? This is, again, Joe's fantasy fiction.
His head hurts. He's like, why can this be? And he, uh, looks into it. And this is not fiction. This is actually what Paul wrote was that he dives in. He goes, Oh, most of this historically came from value. So for truly looking at the efficient frontier, I'm noticing that there's a lot more value than growth. Now we're going to stop here for just a second because I want people to know what's the difference between value and growth. If you're new to all this, let's say Paul is a growth investor and I'm a value investor.
Paula looks at the company as a growth investor, and she's looking at, can this company take over the world? How fast are they going to grow? Can they dominate their market? What are the things that this company's doing that are really a rocket ship to the moon?
Right. It's the year 2000 and I want to find Amazon. Right. Yes. And me, I'm looking at Amazon and Amazon's a great one here, Paul, because I'm looking at Amazon. I'm like, OK, if we take Amazon and we just trade it for parts.
Right? We pull it apart and I sell off the pieces like some venture capitalists would do. What would I get for the pieces? Because a value investor truly is looking for that discount, right? The holiday sale or president's day mattress. I'm looking for that in the stock market.
Yeah, the value investor is looking for the undervalued gem. What's funny is we all know how amazing Amazon did, but you won't find Amazon in value portfolios. While Amazon did really well, the problem with the growth portfolio is that the swings are much bigger because for every Amazon, there's going to be a lot of overvalued companies that investors are going to bet on that don't do
what they think they're going to do. But huge investors like Peter Lynch have said in the past, he's like, I only need one Amazon to make up for 15 of the non-Amazons. Well, and I should add, that's why there are legendary investors who are growth investors, and there are legendary investors who are value investors. So if you look at Philip Fisher and Benjamin Graham, you've got one is growth, one is value, they are both
classic Hall of Fame, you know, eternally remembered for their prowess as investors. And they come from two
different philosophies. So you can do well in either camp. We're not claiming one is superior to the other in all instances, but for the average individual investor who is not doing this full-time and who is trying to build a portfolio that will give them residual income as you focus on your day job as a teacher or a firefighter or a doctor,
Yeah. For the average person, the average individual investor, a value orientation tends to do better, historically speaking. Sure. Yeah. Growth investing will get you there. It's going to be a bumpier ride. Right. I mean, and on all the metrics around risk, prove that out. Tyrell Price, Paula, is a big name of a guy historically who was a wonderful growth investor, went a long way with Gross. Looking at value then,
So the next thing that he did, he goes, OK, well, if it's just value that did it, go find me just something that focuses on value. And let's see if we can squeeze more out of this by going from four funds to five funds now. So we added a fund here.
Chris comes back with the research and his five fun worldwide value goes from 4.09 all the way up to 5.34 million dollars. He adds 1.25 million dollars.
So by expanding this to a five fund portfolio and reincorporating international equities. But mostly emphasizing value. He has now added another. And then of course he goes, okay, well, are we going to lose money if we go US only? And you guys already know the answer to this. He does not lose money. He goes all the way up to 6.43. He adds another million dollars.
And so if we just pause and take a look at the outcomes here, so using this particular historic time period of 1970 through 2022, if we start with an initial investment of 10,000 and we follow J.L. Collins' advice of putting everything into VTSAX. So we have a one fund, VTSAX and Shill Portfolio.
over this 52 year time span we have 1.89 million. But over that same 52 year time span with a US all value, we have 6.43 million. So we have tripled, tripled the value of the portfolio and
in the spirit of the efficient frontier. Again, if you think of that scatter plot with a line that runs up and to the right, we have not only tripled the value of the portfolio but we have done so without
Taking on undue levels of risk, we have done so in a risk-managed manner. And that is, I'm glad you said that because that is definitely the next question. Well, Paul and Joe, how much more risk did we take getting to this portfolio? I dove into Merriman's research on this. And the answer is yes, there is more risk. During those 52 years, the S&P 500 slash total US stock market index went down 11 of those years.
This US all value fund went down 12. I don't think anybody's going to look at the difference between 11 losing years and 12 losing years and go, I can't stomach the difference between those two forget it. I also know that the worst year for either of those was a negative 37. The worst year for that US all value was a negative 38.8.
So, Joe, what you're saying is that the risk levels are within a rounding error of each other. Yes. If you're in VTSAX right now, talking to everybody who's in VTSAX, I think you're the same person that can stomach the ups and downs of his USL value or any of these portfolios that we've shown.
Let's talk about this, though, because one thing that you and I have heard, Paula, when I started really going on my rant about this, is I have enough money. I have enough. So my question is, what would you do with an extra $4.5 million? You're talking about the delta between the two outcomes. Yeah. What would I do if I had that extra for now? Because people rightfully so goes, VTSX will get me there.
It will get me there. And this was really the height of my rant before $4.5 million is going to go a long way toward doing beautiful things in the area that you live. An extra $4.5 million can truly do a ton of good for the people around you. And for me, that's really, Paula, what this is all about.
Right. Yeah. Exactly. You can, if you feel as though you have enough, you're welcome to give that extra four and a half million to charity. It's so fantastic. Right. So what we've done up to this point, Joe, is we have established for the sake of the entire audience,
we have established this conversation around what is the efficient frontier and why does it matter? What we need to do next is answer Kelsey's specific question, which is, all right, I absolutely agree.
that I should have the efficient frontier in my portfolio. However, I have an employer sponsored 401k and I have limited selection inside of that 401k. Now that we have taken this time to establish the background for the sake of everyone who's listening, the next thing that we need to do is answer Kelsey's question, which is how do I deal with the limitations of my employer sponsored
offerings. And so Kelsey, the answer to that is up next. Personally, I love New Year's resolutions and I think it's a very natural time to set really ambitious goals, big goals. The thing about new goals in the new year is that sometimes you might set a goal and you're not quite sure of how to achieve it because it's just something that you've never dealt with before.
One example would be something like creating a will or a trust, right? It may feel overwhelming, but you know that it's an important thing to do. Well, trust and will makes creating your will easy, and you can get 10% off at trustandwill.com slash follow. Now, we've mentioned on this podcast many times about why estate planning is so critical, but to put it simply, you've worked your entire life to build the assets that you've built, and you want to make sure that that's going to be
directed towards the legacy that you want. With Trust and Will, each Will or Trust is state-specific, legally valid, and customized to your needs. They have a simple step-by-step process that guides you from start to finish one question at a time. There's live customer support through phone chat and email, and they have an overall rating of excellent and thousands of five-star reviews on Trust Pilot.
Check off one of your goals early this year with Trust&Will. Protect what matters most in minutes at Trust&Will.com slash Paula and get 10% off plus free shipping. That's 10% off and free shipping at Trust&Will.com slash Paula. P-A-U-L-A. This is a message from sponsor Intuit TurboTax.
Now, taxes is 100% free when you file in the TurboTax app, if you're a first-time filer or didn't file with TurboTax last year. That's right, just do your own taxes in the TurboTax app by February 18th. Had a few jobs last year? It's free. Have a lot of forms? Yep, still free. Have a bunch of new invisible crypto coins. Heads up, it's still free. Convinced you saw Bigfoot even if your friends don't believe you?
Well, that has absolutely nothing to do with taxes, but you better believe it's still absolutely free. Just download and do your own taxes in the TurboTax app by February 18th. All tax forms, all 100% free. Now this is taxes. See if you qualify in the TurboTax app. Excludes TurboTax Live must start and file in-app by February 18th.
So what can Kelsey do? Well, I want to answer one more question, Paula, which Kelsey's already navigated, but a lot of our audience probably hasn't. And that is this is going to take a lot of time and it's going to be complicated. Hmm.
I mean, this all sounds great. Sounds scientific. Ooh, it's science. I didn't do that well in science class. I don't think I want to do that going to take a lot of time. Well, Kelsey already knows because I think she went through my training 15 minutes and it's once a year for four and a half million dollars, 15 minutes for a half million dollars. Paula, I think it's 15 minutes, four and a half million dollars.
So good use of time. A tool that will show everybody, and this is where Kelsey's getting hung up is she went to a place called PortfolioVisualizer.com. Now there's a big button at PortfolioVisualizer that says get started to reach the efficient frontier. You do not want to go to the big button on the left that says get started. Do not push the big. It's visually dominating. Yes. It's this giant green button that says get started.
And by the way, there's a lot of cool things you can do if you click that button, but the first thing they want you to do is pay for it. And by the way, there's a lot of great tools here, portfolio visualizers, an amazing site worth paying for, but that's not what we're using it for today. Today, we're just going up and to the right, there's a much smaller line of links and you're looking at the tools button you're going to
open that up and you'll find the efficient frontier, but you're going to click on that. And that will lead you to a really oblique-looking page that freaks people out. And we're just going to walk through this just very, very briefly. And as a reminder to the audio audience, just make a note to yourself to watch this on YouTube because you'll be able to visually see this walkthrough of PortfolioVisualizer.com.
up at the top, but with portfolio type, it says tickers.
And with all of these boxes, we're only going to focus on what we're going to focus on that ticker box. We're going to focus on the box to the left as this ticker symbol and minimum weight, maximum weight. Those are all that you're going to need to know for today. You can dig into this even more. But to get the basics and to find your efficient frontier on a less granular level, this is all we need is these four boxes. So hopefully that reduces our freak out factor when we see this page.
We're going to shift that ticker button. We're going to click on that. And it says tickers or asset classes. We're going to change it to asset classes. If we change it to asset classes, now on the left, we can then input whatever boxes we want.
This is what I used. U.S. large cap value, U.S. large cap growth, U.S. mid cap value, U.S. mid cap growth, U.S. small cap value, U.S. small cap growth. International developed outside the U.S. market, ex-U.S. market, emerging markets, short-term treasury, intermediate-term treasury, corporate bonds, reets, and precious metals.
you can add in other asset classes if you want. But watch out because one thing I don't like about this free tool is you're going to have to pay attention when you hit the view button and we're going to get there in a second. You're going to have to look at what timeframe it gives you because Paula on some of these asset classes for whatever reason, the people at Portfolio Visualizer haven't back tested it very far.
There's other tools I've seen that has. This is the free one that's easiest to use. But if you start getting fancy with some of the other asset classes, it might only give you the last five years. And I will tell you that's not enough time. It just isn't enough time to really see an efficient frontier that matters. We want that to be 15 years, 20 years at least to see what we're looking at. Now, next up is minimum weight.
And the reason I want to focus only on minimum weight and people watching the video will see, I put 5% in each of these because I go, well, okay, you know, I want, I want to make sure that that the minimum is not that high. If you fill in anything at minimum weight,
It's going to tell the computer, oh, I need to include at least 5% for my number. Whatever number you put in here, it's going to tell you, oh, I have to include precious metals. Oh, I have to include corporate bonds. It is very important that you don't limit the computer by putting a number in minimum weight. So the only reason I filled this in for this example was to tell you, do not touch this box.
So wait, Joe, just to clarify. So the reason that you filled in minimum weights was so that you could tell the afforded community don't do what I did. Don't do what I did. Because it will say, oh, I have to have short-term treasuries. Because I've had people, Paula, fill in that box. I don't know what's going on because it's telling me in this case, I have to have a 13 fun portfolio. Well, it's because you put something in minimum weight. Right. So what you're saying is don't mandate the program to
give you a certain minimum amount of a given asset class. Make sure minimum weight is zero. Now the next line is maximum weight. Now this is going to be really important for this particular time frame. I would also posit that looking at the efficient frontier now is.
harder than almost any time we've had historically. I've gone back the past 50 years, Paula. And this efficient frontier is giving us more weirdness than ever before. And I don't know any professional that thinks it's going to continue. What I'm talking about is this.
There is one asset class to rule them all, like the one ring in the JR Tolkien books, right? One asset, large cap growth, right? Which is why we have the magnificent seven stocks. They are dominating so much that if we don't give it a maximum weight, it's going to say, hey, put all your money in large cap growth. Period. Just absolutely do it. Well, think about
how ridiculous that is and what that truly does to the science. And do I want to have a portfolio that's invested in one fund? I do not. I don't want to take that risk.
So for me, I'm going to cap any asset class at 30%. I don't want to go. I don't want more than 30% of my money in one fund. You can make that whatever you want, but I don't know any pro that goes over 30%, but you can. So set your maximum waiting. And for the case of what I've built here, 30% is the number that I used.
Okay. So minimum zero, maximum 30. Yes. I hope people understand why though. All right. Once we've done those, we hit that little blue button on the bottom and this is where it's exciting. And I actually made a video of me doing this and you'll see for people that are listening to the audio, I'm just running this down and it's showing me what investments are on the efficient frontier.
given those. And now you'll also notice for some of these, it's showing me some investments that maybe two or 3% sometimes are 14.85. You don't need to be that cranial. If it tells you 14.85, go 15%, right? If it tells you 2%, feel free to get rid of it. You'll also notice that there are dots north of this line. Joe, you said there would be no dots north of the line. Well, Paula, do you know why there's a dot north of this line?
Why is that, Joe? Because I said 30%. And what the computer's telling me is, Joe, if you hadn't constrained me to 30% and put it all in large cap growth, you would have been above the line. And I go, yes, computer, that now has a voice. Yes, computer, I know that, but I'm not going to fall into that trap because what goes up comes down and we've had a hell of a run.
in large cap growth for the last decade, and I don't want to get caught in that mess, which we know always hits very, very quickly. So I'm not going to do that. But that gives me the efficient frontier. So that's where we are now. So now to answer Kelsey's question, I'm going to backtrack because Kelsey, what you do is I put in
My favorites list, right? You don't need to do that. What you do instead is go to your 401k and you look at the investment types. It should give you the exact investment. And then it should tell you the asset class that that investment is in. Once you find that,
just put that asset class into the sufficient frontier and only use those asset classes. Because the other constraint I'm giving it, Paul, is I'm not giving it every single asset classes. I've handpicked 13 of these. You can handpick whatever's available to you in your 401k. This is my suggestion if you have a place like Schwab or Vanguard or Fidelity where you have pretty much unlimited choices.
Let's use these 13. This is a good place to start. Play around with other ones if you want to. That's all fine. But if you're just starting out and you don't want this to be your career, these 13 are going to get you where you want to go. But if you don't have those available, right? For Kelsey, Kelsey doesn't have those available.
Yeah, Kelsey, what you did was you started with my training, which is brilliant. Go back to these and eliminate these and start with what's available in your 401k. And it will, it will still, when you hit that view button, leaving the minimum at zero, the maximum at 30 and whatever's in your 401k, boom, it's still going to give you an efficient frontier just based on what's available, which is pretty damn cool.
Oh, I have a question, Joe. Should Kelsey be putting in the asset classes that are available in her portfolio? Or should she be actually putting in the specific funds? Because she mentioned in her voice note that for some asset classes, she has two funds that are available that represent that given asset class.
Right. The answer is yes, she can. She can then go back where I said asset class and instead put ticker symbol. Now, what I want to watch for is on the page that has the efficient frontier line, it tells you the time frame.
And this is where we could run into trouble if we put in all the ticker symbols. If a ticker symbol hasn't been around that long, Paula, it's going to give you whatever that short timeframe is. So you'll see that the efficient frontier I've created here using my mix is 2003 to 2024. This was the most efficient given my constraints.
You want a longish. That's 21 years. You want a longish time frame. So you're going to have to play around with it a little bit if you're going to use the actual ticker symbols and it doesn't give you long enough time frame. But heck, I would start there because it's going to tell me the actual funds I should be in.
To summarize, Joe, what Kelsey should do, given the constraints of her portfolio, is put in the actual ticker symbols of what's available, and then run Portfolio Visualizer with those ticker symbols in place.
and watch out for the timeframe it shows on the bottom. And if that's not a solid 20 years, then I need to maybe go back to asset classes. And then I'll use a second tool like Morningstar to AB test. Look at these two funds side by side and just make a decision. You know, what's funny is one thing that was part of this research that Markowitz did, he proved that the asset class is far more important than the fund.
Which, you know, goes back to another rant. You know, I've had Paula is everybody's worried about fees, fees, fees, fees, fees. Well, you could be in the cheapest fund that's not on the efficient frontier and you're not going in the right direction. You could be in an expensive fund that's on the efficient frontier. You're going to go much, much, much further. So are fees important? Absolutely. They're important.
But is it where I start? Not in a million years. I'm going to start with this. I'm going to start with figuring out what's here. And then if I've got two fun choices and one fund is much cheaper than the other, I'm going to go with with a fund that is lower fee.
What you just said, Jo, about people freaking out about fees while ignoring the bigger question of, am I even in the right asset classes to begin with? That reminds me of, if you make a parallel to food and nutrition, I will sometimes see people freaking out about seed oils, but they're binge drinking until they're blackout drunk every weekend, right? Yeah.
And so if you're trying to get healthy, address the big problem first. It's okay to have a little bit of canola oil if that's not the $4.5 million question that you need to be addressing right now.
And that's why I roll my eyes when I hear the fee discussions come up in online communities. It's the same thing that this person's friend, your imaginary person, it's the same thing their friends do when they hear them going on about seed oils. Really? Maybe if you took it easy on the weekend, that's more important than let's talk seed oil. It's the same thing. It's not that seed oils are not important. Of course, of course it's great. But let's start with a big picture.
Yeah, you've got a much bigger problem to solve that deserves your attention first. Glad you brought that up because this is also the reason I want to be clear. Everyone knows I do love Paul Merriman. I think he's brilliant. Too many people call him a wizard. And this is why I want people to understand our community to understand the efficient frontier versus just go to Merriman. If you don't want to do the work and you want to go to Merriman, I hope you understand
What Maryland's doing? Because if you get the why behind it, it's less magical. All Maryland's doing is getting you closer to the efficient frontier. If that's enough for you, then fine. That's great. But by understanding the efficient frontier, it's less magical. You understand that this is the most efficient or more efficient way to reach your goals. And it's also, I believe, Paula, when you're using the efficient frontier that's yours and you set the constraints and you put the funds in, it's going to be sticky.
which means it gets to the behavior. If you're using somebody's magical approach and the market goes down and you don't understand why Paul Merriman's four fund portfolio went down and you're in it, you know what you're going to do? You're going to bail because you don't get it. But if you went through the efficient frontier and you took just a few more minutes to set this up like we just did,
And then you're going to rebalance it once a year to stay on it. When the market behaves like it behaves, which is like a roller coaster, you're much more likely to stay on the roller coaster because you know the why behind what you just did. And I think that's where the power is. The power is in the why, not in the merriman.
Although I love jail Collins and Merriman, but you can see, I hope now everybody can see over the last hour really where I believe they fit. Jail Collins makes it so you don't freak out about investments. And you know what? When you graduate, you still don't need to freak out. You just go to the efficient frontier, look at what historically got you there and then rebalance every year. And then maybe once every five years, look at the drift in the efficient frontier because it's not going to move a ton.
but it will drift. And when it drifts, you just reorganize five years later to move it back to the efficient frontier, because if you leave it the same, it's going to end up being a little less efficient as things change. So this addresses not just the wider discussion about the efficient frontier for the sake of the entire affordable community, but also Kelsey, your specific question about what should you do given the constraints in your fund selection?
Yeah, and now I can see everybody running to their 401k choices. Right. I'm putting them on the efficient, which is awesome.
Yeah, exactly. Because many people inside of this community are going to have the same issue that Kelsey is facing, which is you have an employer-sponsored account with limitations in your fund selection. So what do you do? All right, watch the YouTube video so you get a visual of portfolio visualizer and then run that same exercise with the ticker symbols that are available to you.
And Kelsey and for everybody else, if you don't have an asset class that's available that you think is going to be really important, the efficient frontier changes so much because you have such crappy choices. It gets a little bit harder, but then you do what you suggested in your question, which is I overallocate in my IRA and my stuff that's outside the 401k in an area. And I did this before when I was a pro. Somebody didn't have great international choices and we needed some international exposure.
I would choose an international index in their IRA at Schwab or Fidelity or Vanguard or wherever. And then we wouldn't use international at all.
in the 401k because the 401k international choice, which is so bad, it was so expensive. But the more you do that, the harder it's going to get. It's actually way easier to just take what the 401k gives you and do the best you can there and then get more granular and be comprehensive in the other fun.
What I don't want people to do, though, is end up thinking this is going to be a big time commitment to get big results. Certainly, you'll get better results if you get more granular. No, you don't have to do that. Just do them separately. But if you want to, I'm saying, Paula, that you can go, I'm just going to not do it here, and I'll do more over there. Right. And Kelsey, this is a concept called asset location, which is simply optimizing the location of your various assets.
Traditional 401k, maybe you have a Roth 401k from a previous job, you have a traditional IRA, you have a Roth IRA, you have an HSA. Asset location is simply the practice of deciding which assets are going to go into which accounts.
Oftentimes, in a perfect world, people do this based on the tax treatment of those accounts, but another approach to that is simply based on the fund selection, the availability of those accounts, right? The constraints around each one. So that means that a given account in isolation might look unbalanced, but that account in the context of your overarching portfolio is
plays that important role in its wider context. Thank you for the question, Kelsey, and enjoy running through Portfolio Visualizer with the assets that are available to you. It is so fun, Paula. As you can see, it doesn't take as much time, which is why I don't like the name of Fish in Frontier. I firmly believe that name makes people go, oh, that sounds so hard.
Now, the reason why we are going through this exercise of getting our portfolios closer to the efficient frontiers so that over the span of our lives, we can build a higher net worth. And building a higher net worth requires net worth tracking, and that leads to a comment from Molly. That's coming up next.
Welcome back. Our final comment today comes from Molly.
My name is Molly and I'm just calling with a comment more than a question. I was just listening to your episode about the 52 tweaks and I think the second tweak is calculating your net worth a couple of times a year. And I want to point out another reason that this is so helpful is that you can actually catch some little mistakes you might not have been aware of. For example, I have a few retirement accounts and I didn't realize until I was checking my net worth.
last year that when I rolled over money from an old employer 401k into a traditional IRA, that the money hadn't been invested into mutual funds, that it was still in a money market of funds. So I needed to put that into the right asset allocation. And somehow I hadn't done that step until I did the net worth statement and realized that hadn't been done. So
Just another reason to do it manually once or twice a year. You never know what you're going to catch that you didn't see somehow. Thanks so much.
Molly, thank you for the comment, and that's a fantastic point. The practice of manually calculating your net worth creates a check and balance, a safeguard, if you will, against these errors. Yeah, I love this. This is even, Paula, why I really like tracking my money. Even if you don't have an active budget,
You know, I use Monarch money myself, but there's plenty of other ways to track your money and just having these tracking systems. I find that I trip over things like Molly's talking about.
All the time, I'm like, why did I do that? And we were talking about diets earlier. I have a great diet coach named Jesse. And Jesse says all the time, what gets tracked is respected. And I really like that because once I got this watch and it's made me start tracking my steps because Jesse said, get a watch that'll track your steps. Guess what I look at every day now, Paula?
Hmm. You look at that watch. How many steps I have just because I have the tracking. So looking at your net worth, putting it on your calendar, looking at it twice a year and going through that manually. Right. You're going to trip over stuff. I love that. Yeah. Well, because it's impossible to manually track your steps. Three, four, five.
But that's a great analogy, Joe, because there are some metrics in the health and fitness domain that you can both automatically track and manually track, not your steps, but you can pay attention to when you go to sleep and when you wake up. And you can also look at the data that comes from a sleep tracker. And so you have two different experiences of that data.
conscious thoughtfulness around that around your bedtime rituals and your wake up rituals right and you also have actual metrics around the amount of time you spent in deep sleep or REM sleep. I think it's why some of these diet apps.
have become so successful because, and it's funny, while they will tell you how to be more healthy with your diet, what's the thing they have you do, Paula? They have you record everything that goes in your pie hole.
Right. And I believe that just by taking that second and going, oh, I'm eating this, makes you think, should I be eating this? And I look at my steps, I'm like, oh, I only got 6,500 steps in my target 7,500 every day. I need to go for a walk. What's the long-term impact of that walk, by the way, if I do that twice a week, when I wouldn't have done it, it's a huge impact, maybe just a little right now, but it's great. So yeah, updating that worth, Molly, love it.
Joe, do you manually track your net worth? Is that part of your practice? I know you have that weekly 20 minute meeting where you manually review your spending for the week. I don't. I have it all for me. I have it in my app. And Cheryl and I review that on a weekly basis. We do have a, we have a one meeting a year, which is our rebalance meeting.
Oh, where it's a longer meeting usually closer to 45 minutes that we go through everything line by line on a more granular approach, but I don't take the pencil out and do it line by line. Oh, maybe I can convince you to do that this year. Oh, boy. Look at the time, Paul. I think this episode's about over.
I find it to be a moving meditation. I believe that because it is labor intensive. But when you go through that practice, it forces you to pause and think about every single number as you're going through it. You know, in the opposite approach, but that's also why I really like the 20 minute meeting.
is because of the fact that most people don't do that. If they do anything, they'll have the longer quarterly meeting or twice a year or once a year meeting. And well, that's fine. I think that the 20 minute weekly meeting has been a huge key to our success. Wonderful.
Well, thank you, Molly. Thank you so much for calling in with that comment. So great. Thank you to Kelsey for the question and thank you to all of you, the entire reporter community, for being such an amazing forward-thinking community. Joe, where can people find you if they would like to hear more?
Man, an episode I want to draw attention to this week is one that we did last Monday, Paula, because there are people who are like, man, I wish I could invest. I wish this episode applied to me, but I've got so much debt to these debt relief companies work for me.
And the answer is it is a scary industry. There are a lot of shyster companies out there. And one of the premier advocates, a woman named Natalia Brown joins us to talk about the good, bad and ugly of debt payoff systems, how it should work if it works correctly. What are the red flags? I think it's an important thing because you hear these ads on the radio all the time. You hear them just all over the place. And while, as you and I know, it can be a
very good experience for people that need help. There's so, so much ugliness in that, in that area. Right. It's an important episode for people that need to do that. So later on, they can practice the efficient frontier, hopefully sooner rather than later. Exactly. So that's the stacking Benjamin podcast everywhere where finer podcasts are downloaded. Absolutely.
Thank you so much for tuning in. This is the Afford Anything Podcast. If you enjoyed today's episode, please do three things. First and foremost, share this with your friends and family and your colleagues and your siblings. Share this with the people in your life. It's the single most important way that you can spread the message of being good with your money.
Second, please open up your favorite podcast playing app and hit the follow button so you don't miss any of our amazing upcoming episodes. While you're there, please leave us a review. Also go to YouTube, youtube.com slash afford anything. Hit the subscribe button, hit the notification bell, leave us a thumbs up, leave us a comment. We love hearing from you. So thank you so much for being part of our growing YouTube community. Third, subscribe to our newsletter, affordanything.com slash newsletter.
Thank you again for being part of this community. I'm Paula Pant. I'm Joe Salsihai. And we'll meet you in the next episode.