Mindy:
On today’s episode, we are answering newbie money questions. We asked you to send us the questions that you had early on in your money journey and the ones that might seem obvious to everybody else, but you still have questions

Scott:
About. Yeah, and it’s totally okay to have newbie questions using air quotes here because there’s a lot of big, advanced philosophical questions that we like to get into and that Mindy and I probably gravitate towards because we’ve been studying personal finance for decades. But it’s always good to go back to basics and revisit the fundamentals, and there are no dumb questions. Everybody starts with something new. And today we’re going to cover the basics, including questions like how do you actually mechanically withdraw money when you retire early, or how many bank accounts did you set up? And what does good look like in terms of structuring your personal finances? So I think it’s going to be a fun discussion and look forward to getting into it with you today. Mindy,

Mindy:
I am super excited. Scott, let’s jump in. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen, and with me as always is my money savvy co-host, Scott Trench.

Scott:
Thanks, Mindy. Great to be here with my questioning co-host Mindy Jensen. As always, we’re here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re

Mindy:
Starting. Alright, Scott, our first question comes from our producer who says her brain needs to sort things out in small compartments in order to function. Her question is, how many bank accounts should I have? Is it better to keep it simple and have one checking and one high yield savings account? Or should I be keeping one checking account for all my necessary bills and another for all the additional monthly expenses and how should I split out my savings between retirement, which obviously goes into their own specific accounts and other fun stuff that I’m saving for like a future trip? Help me so I know exactly where my mind is going. As soon as I read this question, Scott, I want to hear from you first.

Scott:
Yeah, well, I’ll answer it by starting off with what I do personally, right? I have three bank accounts. One is my checking all of my day-to-Day spending all of my income sources, everything. It moves through this checking account. I have a savings account where I have one year of cash of my annual spending set aside in a high yield savings account with Ally Bank. All these accounts are with Ally Bank, no financial affiliation with BiggerPockets and Ally just like ’em, and they tend to have high yield savings. And then I have a third bank account, which I do for tax purposes with my side, with my business interests, I have to pay estimated quarterly taxes, and so I like to have an amount there that I know is very conservative each year come tax time, and I deplete that balance once I’ve paid my annual taxes.
So I would only use two if I didn’t have that. I think keeping it really simple is really important. I do have another bank account, however, for my rental business, which I do not consider a personal part of my portfolio and would only take distributions from that and put it into my checking account. Now, there’s all sorts of trade-offs and there’s no right answer. I’m looking very much forward to hearing Mindy’s answer, but I do want to caveat that while I have this very simple banking structure between me and my wife, I also go through the rigor of categorizing my expenses. I used Mint for a very long period of time. Now I use Monarch money. Again, no affiliation with BiggerPockets money here for any of these products. Just ones that I like and use and that allows me to keep tabs on where my money is coming in from and where it’s going out across various different sources.

Mindy:
One question about your specific situation, Scott, do you have all of your accounts in the same bank?

Scott:
All three of my bank accounts are with Ally Bank, yes, I guess I technically have another bank account with Schwab where I keep most of my investments. Okay,

Mindy:
Now I am separating regular day-to-day spending saving from investments. So for this question, yes, you have them all in the same bank account. This question immediately threw me back to episode 1 51 with Tony Robinson where he shared that he and his wife have 24 different bank accounts for all of their different buckets that they are saving for, and that when he said that, I was like, oh my goodness, that gives me such heebie-jeebies. But the benefit of personal finance being personal is that Tony and his wife can do whatever they want, whatever works for them, and Carl and I can do whatever works for us. So the question or the correct answer here is how many do you think you need? I think Scott has a great handle on this. He’s got his everyday spending, his one year savings, and then the royalties, taxes.

Scott:
Yeah, just the taxes. I do not want to have tax time come around and have to deplete my emergency reserve in order to pay my tax bill. I consider them very separate there. That’s not what the purpose of it is. It’s for an emergency, not for planned tax bills,

Mindy:
And that’s perfect. That works for you. 24 bank accounts works for Tony. I would say, what are your goals and how good are you at separating your saving for the future versus your spending right now? Some people, and this is no judgment, this is just a statement of fact, some people are like, Ooh, there’s a hundred dollars in my bank account. I can spend that a hundred dollars and without thinking, Ooh, I want 50 of that to go towards my trip to Italy. So if you can separate that out, then I would say as few as possible to get what you need accomplished. If you can’t separate that out, if having all your money commingled makes it difficult for you to not spend it, then absolutely pull those out and have different savings goals.

Scott:
I do want to make one point in response to what you said there, which is that you do take on some risk by having as many bank accounts as Tony does, right? Because 24 bank accounts, if you are not maintaining minimum balances that may be required by the bank, if you are ever seeing one of those bank accounts go below zero, for example, you may get dinged with ticky tack bank fees. And so for that reason, I like to have the minimum number of bank accounts to keep my position streamlined and then use other tools to manage and actually control my spending and my budget, for example. That may not work for everyone. Personal finance is personal. Just know that if you do go the complexity route with many bank accounts, you do risk those overdraft and other ticky tax fees by not having direct deposits or whatever it is with that bank.

Mindy:
That is a really great point, Scott, and what I am doing in the stage of life that I’m in now is trying to simplify things. So having more bank accounts than I absolutely need is too much mental headspace for me. So I don’t think there’s a real easy answer for this. Oh, just have one. I mean, yeah, you could just have one and there you go. But it’s more nuanced than that, and I would say as many as you need, but as few as you can would be the best. Yeah,

Scott:
I love

Mindy:
It. Now that we’ve discussed the ideal number of bank accounts to have, we’re going on a quick ad break when we’re back, we’ll discuss questions about real estate investing and retiring early. So stay with us.

Scott:
Welcome back to the show. We’ve got a question coming up about our favorite topic, the 4% rule. Once again, don’t know what that is. We’re going to break it down. But first, let’s answer a question about real estate investing. All right, the next question here is coming from our Facebook group. I used to think that the only way to invest in real estate was to buy a property most likely with your own cash, and then repeat that over and over and over again. Now, I know that that’s not the only way, but can you tell me some of the other ways we can invest in real estate and what their pros and cons are? So Mindy, do you want to list some of the other ways to invest in real estate? And we can have a discussion here?

Mindy:
Ooh, there are so many ways to invest in real estate. You can do, Scott and I could buy a house where Scott is doing all the work, but since he’s poor and I’m rich, I lend him the money. And then we are partners on the deal. He’s the managing partner and I’m the money partner. I consider that to be a way to invest in real estate. REITs or real estate investment trusts are another way to invest in real estate, syndications, wholesaling, house hacking, flipping. There’s a website called biggerpockets.com that has a lot of different ways to invest in real estate, and I say that a little bit tongue in cheek. There’s so many different ways to invest. Scott, why don’t we define these different ways to invest? I did the one, the cash investor partner, Scott, would you consider private lending to be investing in real estate? I’m on the fence about this one.

Scott:
Absolutely. And Mindy, I’ll just frame the discussion around all of these things in the context of what’s the best way to invest in real estate if just starting out on your journey to financial independence and what are other ways to use real estate once you’re farther along or closer to maybe retirement or fire in order to achieve your goals? And I think that when you’re getting started in real estate, we have to acknowledge that 10 years ago it was very different. I bought my first duplex and it was $12,000 down $240,000 property. My mortgage was 1500 including principal interest, taxes, and insurance, and each side rented for $1,100. That same property today, if I sold it at a 20% discount, would go for $500,000. And the mortgage alone on a house hack, loan principal and interest, I’m sorry, loan would be 3,600. Each side would rent it for 1600.
So it’s just way harder for a Gen Z or somebody that’s just getting started on their journey to financial independence to house hack. It’s not as simple as it used to be. So absolutely want to acknowledge that challenge. You’ve really got to be willing to make some sacrifices, move out of town, move to a different location, get really creative, find short-term midterm or other opportunities, maybe find consumable mortgages, those types of things to make house hacking as obvious as a win as it was for me, it can still be a much better alternative to renting or home owning, even if it is slightly negative. Okay, so that’s one on the newbie side. On the other thing that we talked about, cash investing, private lending, REITs syndication, all these other tactics, these are ways to build wealth with real estate. They typically require more cash to have a scaled result for someone’s portfolio. Some of them involve moving to different parts of the capital stack, right? As you invest in a syndication or reit, you’re typically investing in real estate equity, and if you’re private lending, you’re on the debt side. Debt often has lower total returns or promises, lower long-term total returns, but gives you more cashflow. So Mindy, anything in there that you want to react to or dive in more deeply on? Well,

Mindy:
Let’s go back to your first property that you purchased. What did you say your mortgage payment was

Scott:
Again? It was like 1550 I think with PMI, which is private mortgage insurance for those who are new to this

Mindy:
1550 with 1100 rent on each side. So you’ve got about $400 a month that you’re coming out of pocket for. I still think that house hacking is a great way to get started investing in real estate, even in today’s market, even in today’s interest rate environment. You said this would now be a $3,600 mortgage payment and each side would rent out for 1600. Great. How many properties can you buy for less than, what did you say, $550,000? There’s not that many fewer properties that you can buy anyway. So instead of a $3,600 mortgage payment coming completely out of your pocket, you could live in one side and rent out the other side and you’ve got 1600 being helped to pay for your mortgage. Or you could do what Scott did and rent out a room in your half of the duplex, let’s call it 800 for the simplicity of it.
You’re renting out half of your half the duplex, that’s 2,400 of your $3,600 mortgage payment being paid by somebody else. So it’s still reducing your living costs. It just isn’t as easy to completely obliterate your living costs as it used to be. We have a book published by BiggerPockets Publishing called The House Hacking Strategy by Craig Op, who has successfully house hacked multiple times. He’s got some pretty fun stories, and you should definitely read this book and listen to episode 35 of the BiggerPockets Money podcast where Craig shares his story about just how he did it. One way that I was able to invest in real estate getting started. I didn’t have any money, and I bought a $50,000 condo, and it was very, very ugly because even in 1998, $50,000 condos didn’t look nice, but I rehabbed it. I made it look nice because I could buy a gallon of paint.
I just couldn’t buy a hundred thousand dollars condo. When I sold it, I sold it for $75,000. I put all that money in my pocket due to the section 1 21 exclusion laws that the IRS gives you. And I have done that again now 10 times besides that first one, making a hundred thousand dollars on every property that I flip at a minimum of a hundred thousand dollars. So that’s another way. If you have rehab skills, if you know somebody who has rehab skills, you could combine these two rent out a room to your contractor friend and rehab your house on the way to making more money. Again, this is a really great strategy for when you’re just getting started. You’re buying with an owner occupant mortgage, which is a lower interest rate than an investor loan. You have a one year residency requirement before you can move out and do it again. So this is a great way to start building your portfolio when you have more time than money or when you have more skills than money.

Scott:
I think that’s a hundred percent correct. I think that if I was starting over today, I would be thinking about, okay, how do I find an assumable mortgage like an FHA or VA mortgage? And that means I can take over that mortgage. So maybe somebody out there bought a property a few years ago with a two or three or 4% mortgage that can really change the math on a couple of these deals. So that’s one strategy I’d be looking at. I’d be looking at relocating. What’s true in 2024 is that there’s a lot more opportunities for remote work for people, and that can allow you to choose a new location that might be more conducive to turning your house into an asset or greatly reducing housing costs. And I’d be looking to incorporate elements of the live-in flip much more strongly than my boring old fashioned long-term cash flowing duplex investment.
So I think those are the areas that I’d be looking. One area I would not be looking, and I look forward to engaging with people in the comments here on YouTube, is wholesaling, right? This is touted as a tactic for newbies and it’s just not right Wholesaling. Wholesaling is the practice of finding deals motivated sellers and then basically flipping the contract to purchase these deals to another investor. And this is not an appropriate way, in my view for most people to get started in real estate investing. Often the tactics taught by gurus in this space involve getting a fake proof of funds letter to make it seem like you actually can close on the property and then using that to get the property under contract and moving it. There’s a whole bunch of other things here. If you’re interested in getting into the real estate transaction space, my opinion is go get your license as a real estate broker and spend the hundred or whatever hours it is learning how to do it. You probably make more money in the first year than most wholesalers do. All but a very select few end it being successful in there. Yes, there are plenty of ways to ethically wholesale, not going to bash the whole profession, just a really hard way to get in there and a lot of landmines for a new investor to wade through that I think can really get into murky waters. Also, a lot of gurus out there trying to sell extremely expensive educational products on how to figure this out, not my cup of tea personally.

Mindy:
So I have a comment about this, Scott, because I am completely in agreement with you. I am a real estate agent and I live and flip when my husband and I do almost all the work ourselves. And I think that wholesaling is too much work. So for me to say this, having the real estate sales background and doing all the work on my live and flip, I would much rather do a live and flip than try to wholesale a property. This idea of finding off market properties is just thrown out there like it’s easy to do. It’s not that easy to do. Alright, next question again, comes from our producer and she says, can someone please explain to me the 4% rule in the simplest way possible? Are you withdrawing 4% every year from your retirement? Why 4%? What about the 25 x rule? What if you retire in your thirties and live to 106? So these are all really great questions because these are the same questions that pop up from so many people when they hear about the 4% rule. Scott, do you want to give a breakdown on the 4% rule?

Scott:
Yeah, and I’ll just start by saying why does the 4% rule come up so over and over and over and over and over again? Well, I believe that it’s because people are looking for an answer to the question, how much do I need to become financially independent? And so the 4% rule is the answer that is widely accepted, I think in the financial independence community, but not totally accepted, which is why there’s endless debate about and because it’s so important for people to get comfortable with the answer to the question, how much money do I need? It keeps coming up over and over and over and over and over again. Discussion. You cannot go a long time in this community without coming across this concept in some degree. So what does the rule 4% rule say? Well, it says for a 60 40 stock bond portfolio, a very typical retirement portfolio structure, if the owner of that portfolio withdraws 4% of that portfolio, they will have never run out of money over any 30 year period in history.
In some periods, they would’ve gotten close or significantly reduced the total amount of the portfolio by the end of those 30 years. But I think in like 85, 90% of scenarios, the nominal value of the portfolio actually increases over the 30 year period. So yes, there’s a possibility that if you retire in your early thirties and live to 106, you’ll need more money than the 4% rule. But the probability is acceptably small where most people who end up achieving early financial independence in their early thirties will be able to course correct or adjust their portfolios over the next 70 years so as not to run out of money. If their portfolio is obviously going down, they could return to work part-time or they could do some sort of other business interest. Also, the 4% rule is accepted as reasonably conservative because it assumes no inheritance, no part-time work ever, no adjustment for spending if things go poorly in the first few years of the hold period. No social security, no Medicaid. So you can see how it gets really conservative really quickly with this. But again, this is something that people will, and you should, if you’re listening and you’re new to the world of financial independence, spend a lot of time noodling on and perseverating on because it’s really important to internalize the answer, the question, how much do I need to retire early?

Mindy:
I think people hear the word rule and think this is a carved in stone rule that is hard and fast and there’s no room for interpretation. And this is a rule of thumb, not a hard and fast rule. But also Bill Benen is a rocket scientist, a literal rocket scientist, and he went through and he did all sorts of calculations. He didn’t just guess the original people will call it the Trinity Study. Trinity came out after Benin. So Benin made it first. Trinity just confirmed it. Michael Kitsis reconfirmed it. West Moss re reconfirmed it. It’s been looked at by many, many really intelligent people who have a complete understanding of the financial system, but it is based on past performance of the stock market because nobody has a crystal ball to tell them what’s going to happen in the future. Rob Berger illustrated exactly how you’re supposed to withdraw your funds.
In an article on forbes.com, he says, the 4% rule is easy to follow in the first year of retirement. You can withdraw up to 4% of your portfolio’s value if you have a million dollars saved for retirement. For example, you could spend 40,000 in the first year of retirement following the 4% rule, beginning in year two of retirement. You adjust this amount by the rate of inflation. For example, if inflation were 2%, you could withdraw $40,800 or 40,000 times 1.02. In the rare cases when prices went down by say 2%, you would withdraw less the following year, $39,200 in our example, or 40,000 times 0.98 in year three, you take the prior year’s allowed withdrawal and then again, adjust that amount for inflation. So yes, you’re withdrawing 4% of your portfolio every year or up to 4%. You also should have a good idea of what your expenses are.
I postulate that if you have gotten to the point of early retirement, you are somebody who checks in on your finances frequently or frequently enough for your own mental wellbeing. So let’s say you could take out $40,000, but you’re only spending 36. Well, then you’d take out 36, or maybe you’d take out the 40 just to have a little bit of a buffer for the next year in case inflation goes up. Now, do you have to take out four? No. I’ll give you a personal example. 4% of my portfolio is way more than I am going to spend in a year simply because I don’t spend that much money. So I would look at what my expenses were, what my income for that year was, what tax advantages I could take advantage of, and I would allow that to dictate what I was pulling from. And since I do have real estate agent income, I’d probably wait until the end of the year and withdraw that amount more for the following year than for the current year. But I think a great person to talk to is your financial advisor, your CPA, your tax professional, so that they can look at your specific situation and give you a more personalized approach to how to handle your finances after you have retired.

Scott:
Look, this rule is so important. Again, I can’t keep emphasizing it enough. How much do you need to retire? You got to get comfortable with that in order to back into financial independence and feel good about it. Now, the 4% rule is I think the right answer to this question from a mathematical perspective, and these names that Mindy just dropped, bill Bangin, the inventor of this 4% rule, Michael Kitsis, perhaps the world’s leading expert or nerd, whatever he wants to title himself there on the math of retirement. Both of them have been on this show BiggerPockets money to this topic at length for over an hour each. We have Bill Bangin on episode 1 53, and we have Michael Kitsis on episode one 20. So this has been exhaustively discussed, and it should be, and you should go back and listen to it and make your own conclusions.
But I want to tee up the next question here because there’s a paradox that goes along with the 4% rule, despite the fact that the math has been time tested and well proven over and over and over and over again. This is a question from our Facebook group. It says, when you’re actually ready to retire, what do you do? How do you pull from your investments? At what interval? Do you get automatic payments each month, or do you have to manually initiate them? How do you decide which investments to pull from? Mindy partially answered this question just now, but I want to preempt this discussion with the idea that guess what? The 4% rule is the right answer. It’s good math. Nobody uses the 4% rule to retire early. Every single, how many people do you know, Mindy, that are financially independent here? And none of them, you cannot name a single one who has retired off of the 4% rule.
Some truly do have stock portfolios that they withdraw from or whatever, but they all have much more than the 4% rule. Everybody’s got an ace in the hole, whether it’s way more wealth than the 4% rule calls for relative to their spending, whether it’s a pension plan, whether it’s a side business, whether it’s real estate paid off house, whether it’s some combination of all of the above. So in practice, despite the fact that this is the answer to the question of how much you need to retire early, it’s the beginning of the end for everybody I’ve ever met in the financial independence world on here. Mindy, is that true for you as well?

Mindy:
Well, yes, because we retired under the guidelines of the 4% rule, but I still generate enough income from my job at BiggerPockets, my real estate agent job, that I don’t need to pull anything from my retirement accounts right now. So I’m trying to think of anybody that I know from the point of retirement on has either had more money than they needed, has generated some form of income during retirement, or they’re not just pulling their $40,000 or 4% and calling it good. And I think that this is going to hold true for almost everybody listening. If you are in a position to allow yourself to save enough money that you can retire from your traditional employment and you don’t have to work anymore, you’re also going to be so ambitious that it’s not going to prevent you from doing other work that may generate income. It might not generate at the same level of income that you did before. I just spoke with a friend named Todd on our fire series, on our YouTube channel where he is still working a little bit, he’s doing things that he enjoys. He’s not making the same kind of income that he was making before, but he doesn’t care. He doesn’t need to, and he’s pulling some from his retirement accounts, but he’s not living off of his retirement accounts. It’s a combination.

Scott:
Yeah, so I think this is the interesting paradox, right? So this person is asking mechanically, how do I access my money? And I think the answer is nobody actually moves into early retirement with a 4% rule allocation and a tiny minority, maybe one to 5% of very notable people will actually with sell off stocks in small components to sustain their lifestyle. But for most, I think that’s very uncomfortable. I mentally would have a problem selling off chunks of my equity positions to fund my lifestyle. I’d want a larger cash cushion. I’d want real estate rental income and profits and cashflow, or I’d want enough dividends to cover my lifestyle expenses. And I know that about myself. And so I’m building a portfolio and I’ve built a portfolio and I’ve backed into a portfolio that generates the income that I need in excess of my lifestyle, not one that is a 60 40 stock bond portfolio based on the 4% rule.
So despite, again, agreeing completely with the math, and this is not just me, like everybody is doing this, right? Every single person in the financial independence space to the point where Bill Bangin, the literal founder and inventor of the 4% rule who we interviewed three years ago, two years ago, panicked or had a new opinion about the market, whatever it was, and moved out of his 60 40 stock bond portfolio personally and into 70% cash. I don’t know what he’s in now, but this was a huge headline that he talked about. He’s the guy who invented and did all this math in the first place, and that’s not what he does personally. So it’s good math, it’s the right answer to how much you need to retire early from an overall net worth perspective, but you’re going to need to be thinking about what you want your portfolio to look like and what you as an individual, as a human being who’s reasonable, not rational or whatever, who’s reasonable is going to need to feel comfortable in early retirement.

Mindy:
Yeah, there’s another option available, and David Boyer on his Forget About Money podcast did an episode with Eric Cooper about 72 t the rule of 72 T, which says that you can withdraw separate but equal periodic payments, and I believe that means every year you have to take out X amount. So Eric took out, I believe it was $20,000 and at the end of 2023, so every year from now until retirement age, he has to take out $20,000 and he’s not paying penalties on this. That’s a way to access your money early without having to pay fees and things like that. It’s a really great episode of the Forget About Money podcast where he really dives deep into the concept of 72 T. There’s lots of different ways to access your money, and it’s really boils down to what makes you comfortable. Early retirement is supposed to be so you get money out of the way and live your best life. Oh God, that sounds familiar, Scott. So if you want to stress about money, then early retirement’s not for you if you want to have a nice cushion so you can do what you want in your early retirement years.

Scott:
Absolutely. Now, if there’s an exception to the rule I just stated, please reach [email protected] and tell me we want to interview you on the BiggerPockets Money podcast. Someone who’s in their thirties, forties, who has truly retired on the 4% rule and has no other ace in the hole. I want to meet you because you’ll be, you will inspire a lot of people and make the theory come true in a real sense. But until that happens, I believe this is a fictional, idealistic state that the fire community puts forth and not a real tangible human being. Alright, we’re going to take one more quick break, but stick around. You won’t want to miss this question about how to pick individual stocks.

Mindy:
And before we get to the next one, you’re going to want to join our Facebook group so you can participate in the next round of questions. Go to facebook.com/groups/bp money and hit join group. Alright, Scott, our last question comes from our Facebook group, and it’s a fun one. It goes, if you’re investing in individual stocks, what kind of work do you have to do to know which one to pick? Let’s say you pick a good stock. How do you know when to sell it? Do you sell it at its peak? Do you hold the way we do for index funds? I have a lot to say about this. Scott, what are your thoughts?

Scott:
Well, Mindy, I am not good at this, and I’m a big believer that the stock market is much closer to being an efficient market than the real estate market is. And so I spend all of my time and energy trying to find great deals and great long-term investments that outperform in the real estate sector, in the stock market. I’d imagine if I was going to try to repeat that in the stock market, I imagine I’d apply the same basic principles that I did for real estate. I’d find a platform that does a great job of offering tons of opinions. I’d read a bunch of books like One Up on Wall Street, the essays of War on Buffet, a bunch of those different, these wonderful investors that have been very successful over a long period of time. I’d understand the principles of value investing, growth investing. I’d learned of the theory of technical investing, even though I would probably not subscribe to it. I’d be immersed myself in one of these platforms like the Motley Fool or Seeking Alpha or these other places where people debate this stuff endlessly and really put my thoughts and ideas out there. I’d track and set up systems to track my performance relative to the benchmark if I could, and I’d go from there. But that’s the approach I theoretically take. Again, I dump it all into index funds and avoid all of that.

Mindy:
So way back when Carl and I started investing, we didn’t know about index funds, so we just did what everybody was doing and you buy individual stocks. We bought stocks that we were familiar with, companies that we were familiar with, that we liked and liked the leadership of. I know I have said this multiple times, if you want to buy individual stocks, you need to know about those companies or the sector in general. The meme stocks, remember the, what was it? A MC, theaters and GameStop. People were buying those because a Reddit sub forum was telling them to, that’s the worst way to buy stocks besides throwing a dart at the stock sheets, you need to know why you’re buying that. You need to have a reason for buying that. Otherwise, an index fund is going to be a much better option for you. So let’s look at Tesla.
Tesla we bought in 2012 originally we have purchased some shares since then when it split or when it was down, and we felt that it was going up. It is currently on the downswing. I think it was at one point it was like $250 a share this year, and now it’s down to 150 ish dollars a share. As we record today in April, we bought it for a dollar 90. So we are still up quite a bit, but we bought it because Elon Musk was going to change the world. And again, this is 12 years ago, he was going to change the world. He’s doing electric cars. That’s a really exciting thing. Climate change is real and taking out fossil fuels from the earth’s atmosphere is a great thing. So having this electric car company seems really cool. Plus it was a dollar a share.
So if it goes to zero, we didn’t buy a hundred million shares of it. I think we now have 4,000 ish shares of this stock. So it’s a significant chunk of our portfolio, but I think it’s at 12% of our portfolio right now. Do I want to sell it? I don’t really pay attention to what the stock price is doing at any given time because it’s not in my interest to sell it. I believe in the long-term viability of the stock market and in the individual stocks that I hold, however, I don’t want to have more individual stocks. So we are moving towards index funds in general.

Scott:
Mindy, you’ve now shifted your Tesla position to Rivian along with all of the cool kids, right?

Mindy:
Nope. Do you own any rivian, Scott?

Scott:
No. I just know it seems like a lot of my friends colleagues or whatever who used to really want the Tesla now want the rivian. I don’t know if that’s just my circle or whatever, but it seems it’s a trend I’m starting to observe, and I wonder if that’s part of the reason for Tesla’s woes.

Mindy:
Rivian I don’t believe is making a profit right now. And if they are, please [email protected] and tell him all about how I’m wrong. I can’t remember right off the top of my head. Okay, let’s see. How do you know when to sell it? I like Warren Buffett’s idea of my favorite holding period is forever. I have no plans to sell until I need to take the withdrawal.

Scott:
I also think that if you bought at a dollar or $2 for Tesla stock and it’s now worth 144 as of today in late April, 2024, that means that you would have $142 of capital gains on that stock. So that’s probably also a challenge. And by the way, if you invest in a lot of different things besides index funds, for example, or a dollar cost averaging approach, that’s very consistent across time. An observation I want to make here is Mindy’s situation is she bought Tesla at $2 a share, a little less than $2 a share, and it’s now worth $144 a share here in late April. So what that means is that probably a good chunk of her wealth, probably more than she really feels that comfortable with is in Tesla stock because it performed so well. Mindy, is that right? Is it a little uncomfortable how big Tesla is as a percentage of your portfolio?

Mindy:
Well, when it was a lot higher, yeah, it was a lot more uncomfortable. But now that it’s gone down a hundred dollars a share this year, it makes up a lot less of my portfolio. We used to have Apple stock that was 30% of our portfolio because it had increased so much, and that did give me a little bit of weariness, and we did eventually sell and convert it to index funds.

Scott:
Well, and look, that’s like a tricky situation that if you’re the kind of person who’s going to invest in one thing after another, experimenting across a lifetime, you’re probably going to do just fine, right? Index funds are a few points better than random stock selection for most, right? Over time, as long as you hold, right? All index funds is the aggregate of the market. So if you randomly pick 10 stocks, you’re probably going to do about as well as an index fund investor, unless you’re extremely lucky or extremely unlucky, right? So that’s where things end up. The issue is that certain outliers are going to comprise most of your portfolio like Tesla, which by the way is the same thing for my portfolio. My portfolio is dominated by the fangs, Facebook, Amazon, Tesla, Microsoft, those types of companies, because I’m an index fund investor and because they make up such a huge percentage of the total market capitalization of US stocks.
But it’s different when it’s part of your portfolio or what one company is the dominant part of your portfolio. Or if you’re like a gentleman we interviewed a while back from San Francisco where most of his net worth is in a condo he bought 20 years ago, which by the way, people love to dump on San San Francisco as this horrible place for investing. It’s like the people from San Francisco are like, my net worth is 10 million bucks and 8 million of it is in my three condos I bought 30 years ago for this. So yeah, terrible place to invest, huh? But that’s the type of problem you’re going to have if you make these one-off investments over a long period of time and unwinding from them has to be strategic, right? There are real tax consequences to actually accessing the wealth that has been generated in these huge magnitudes. And something to think about, can you create a loss event? Do you start realizing them bit by bit after you retire or whatever, but you’re going to be uncomfortable for a period of time moving into the balanced portfolio. That is your desired end state. If you’re concentrated in one position, Scott,

Mindy:
I really like what you said, unwinding from them has to be strategic. This is absolutely true. You have an investment philosophy. You need to have a drawdown strategy or a drawdown philosophy as well.

Scott:
Yeah, absolutely. And you had have a time constraint, right? Because if it takes you 10 years to unwind from your Tesla position and Tesla gets beaten up by Rivian over that time period, that would be very unfortunate. So yeah, it just creates interesting additional layers to your financial planning if you choose to invest in individual assets that are going to have highly uncorrelated performances over time, which I think will be the result for most stock pickers. Alright, Mindy, should we wrap up?

Mindy:
Yes, we should. We are looking forward to the next set of questions that we can answer for you. So please join our Facebook group at facebook.com/groups/bp money and ask a question in our forums. That wraps up this episode of the BiggerPockets Money Podcast. He, of course is the Scott Trench, and I am Mindy Jensen since we talked about going back to the beginning today, we’re going to say, see you later. Alligator BiggerPockets money was created by Mindy Jensen and Scott Trench, produced by Hija, edited by Exodus Media Copywriting by Nate Weinraub. And lastly, a big thank you to the BiggerPockets team for making this show possible.