Jason is confused by the recent discussions about the efficient frontier and Paul Merriman’s four-sector strategy. It seems a lot like another form of stock-picking. What’s the difference?
Michelle straddles the Roth income threshold and is frustrated that she never knows if she’ll qualify for a Roth contribution until tax season. Is her current savings plan too complicated?
Evan has $100 to spend on personal finance books for his high school’s library. What books would Paula and Joe put on this limited shelf space?
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it here.
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Jason asks (at 03:08 minutes): I’ve enjoyed your recent discussions about the efficient frontier and the merits of diversification compared to the “VTSAX and chill” strategy.
Like you and many of your guests, I agree that actively managed funds tend to underperform, and stock-picking is a losing game—even for highly paid Wall Street professionals.
But here’s where I’m confused. While I understand that strategies like Paul Merriman’s four-fund portfolio focus on diversifying across asset classes, isn’t that just another form of stock-picking?
And if we agree that beating the market is statistically unlikely, why not consider alternative investments like real estate, which offers unique advantages?
I’ve personally shifted toward real estate syndications, and they’ve been outperforming both VTSAX and the Merriman approach in my experience. Here’s how:
• Tax advantages: With bonus depreciation, I’ve been able to deduct up to 60 percent of my initial investment in the first year. For example, a $50,000 investment could yield a $30,000 deduction, saving me $10,000 on taxes (though limited to investment income since I’m not a real estate professional).
• Passive income: Syndications provide annual distributions of four to eight percent while offering returns of 1.5x to 3x the original investment over three to five years.
• Diversification: Real estate’s risks differ from those of the stock market, which adds a layer of portfolio diversification.
Once I’ve done the upfront due diligence, syndications are as passive as holding VTSAX or a diversified stock portfolio.
If we’re going to encourage stepping away from VTSAX and taking on more risk, why not advocate for options like real estate, which offers strong tax benefits and steady returns?
Michelle asks (at 41:24 minutes): My husband and I are in a constant struggle with the income limits for Roth IRA contributions and every year, we’re right on the edge of the adjusted gross income (AGI) threshold.
For the past two years, we’ve contributed to our Roth IRAs monthly, only to find out at tax time that we’ve exceeded the limit. Each time, we’ve had to recharacterize those contributions to a traditional IRA and then convert them to a backdoor Roth IRA the following year.
This process creates an issue: we’re left with gains from the year that exceed the Roth contribution limit. These gains need to be rolled over to our 401k, which will be taxed upon withdrawal in retirement.
So I’ve been considering other strategies:
1. Contribute directly to a traditional IRA monthly and immediately perform a backdoor Roth conversion. This ensures gains grow tax-free, but monthly conversions are an administrative hassle.
2. Make a single annual contribution to the traditional IRA and convert the whole sum to a backdoor Roth. This simplifies the process but we’d miss out on dollar-cost averaging and potential gains throughout the year.
I also worry about what happens if the account loses money in a year—something we haven’t faced yet but could in the future.
What’s the most efficient way to handle this process? Should we stick with monthly contributions, switch to an annual contribution, or try a different approach?
Evan asks (at 57:25 minutes): I’m a high school teacher, and I’ve just received approval to spend $100 on personal finance books for our school library.
As a fan of your philosophy—”you can afford anything, but not everything”—I’d love to hear which books you think would make the cut if you were in my shoes.
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