Episode 59. 98% of our net worth is in real estate. Are we in trouble?

Georgia and James bring a different problem to the table than we’re used to hearing about. In this one, we zoom in on where, exactly, their net worth has come from… and the real risks of these decisions.

Having done well in the real estate market, Georgia and James just closed on a fourth property. The glaring issue is that they’re all located in the same neighborhood, amping up the risk of this investment class quite considerably.

Georgia is becoming increasingly anxious in the shadow of this risk, urging a diversification from their overloaded 98% commitment to housing. James is not unwilling to hear the argument, which makes this episode more direct and tactical—I love it. There’s a lot to learn here.

The biggest question we can ask in this case: Why are they even doing this? What is the end goal? Their answer paints a clear picture of what they need to do.

Tools mentioned in this episode


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Ramit Sethi:  [00:00:01] What is the percentage of your portfolio that is in real estate right now?

Georgia:  [00:00:06] 98%, all within just a couple miles of each other. We have all of our eggs in one basket, and it makes me feel exposed. The intention is to balance the diversification of our investments. 10 years ago, we were getting our groceries at the food bank. I don’t want to be there again, and I don’t want my kids to have to be there.

James:  [00:00:29] I’m not totally convinced that at least right now it makes the most sense for us to transition the equity in a property into an index fund. I very often tend to ignore the risk altogether.

Georgia:  [00:00:45] It makes me feel entirely responsible for being the person to clean up messes if they happen, to plan for them, to try to buffer for them, and it’s really hard to plan for managing risk with a partner who doesn’t see risk. I don’t feel like I’m being honored in how we’re investing right now.


Ramit Sethi:  [00:01:12] How do you handle your investments if you and your partner think about risk differently? Meet Georgia and James who both own four properties. Now, I’ve been accused of hating real estate, but that’s not really true. Today’s episode is not going to be Ramit hates real estate. I rent by choice in LA, and what I actually tell people is to run the numbers before you buy. 

Georgia and James have run their numbers. You’re going to hear them. They’re very confident when they talk about their investments. And they’ve done well. I actually have a lot of respect for how Georgia and James have approached their investment philosophy. They’ve purchased four properties and taken together, their investments have been very profitable for them.

But Georgia is worried that they could lose it all. She knows they aren’t diversified since 98% of their portfolio is in real estate and it’s all in the same area. And she’s right. Real estate is full of risk, especially when you’re in the same asset class and same location. So this conversation is going to be a little bit more advanced than some prior episodes. But I think you’re going to love it because we’re going to hear Georgia and James disagree. 

But we’re also going to hear a great example of how to listen to your partner when you’re not on the same page. We spent this conversation talking about diversification and risk and investments because it is critical. And these are the type of questions that will be worth millions of dollars to you over the course of your lifetime. I’m Ramit Sethi, and this is the I Will Teach You to Be Rich podcast.


Ramit Sethi:  [00:02:55] Georgia, what do you wish that James would hear you say when it comes to your money?

Georgia:  [00:03:06] That we need to assess risk more appropriately, and decide really mindfully, how much risk we’re willing to take at any given point in our financial journey.

Ramit Sethi:  [00:03:20] That sounds pretty good, pretty academic. What do you really want him to know?

Georgia:  [00:03:25] I want him to know that I’ve always had financial insecurity. I tried really hard to build financial security as a young person. I think I started off on the right path. I had a financial advisor at 21 because I had seen my parents file for bankruptcy, have horrible divorces. My stepdad stole my mom’s entire retirement fund. And I was like, that’s not going to happen to me. And then when we got together, a whole series of things happened and we ended up right there in pretty serious financial insecurity. And I don’t want to be there again, and I don’t want my kids to have to be there.

James:  [00:04:06] I guess what I’d like is for her to maybe trust my thought process surrounding it a little bit more. She is very intelligent and has got a near photographic memory, whereas I do things a lot by my gut. But I feel like I have listened to 100-plus hours of podcasts surrounding finance and real estate, read a couple of books at least, and have got what I think is a strong intuition for good moves, even if they may be riskier than many people might be comfortable before. So I just wished that maybe she could trust me a little bit more when it comes to those things.

Ramit Sethi:  [00:04:49] How many properties do you own?

Georgia:  [00:04:51] We currently own our primary residence and two rental properties and we’re actually about to close on a new primary, so then our current primary will convert to a rental.

Ramit Sethi:  [00:05:04] So you’ll have three rentals and one primary?

Georgia:  [00:05:06] Mm-hmm.

Ramit Sethi:  [00:05:06] What’s the total value of all of these houses?

James:  [00:05:11] 1.8 million total market value, Ramit.

Ramit Sethi:  [00:05:14] So has it been a good investment for you?

Georgia:  [00:05:17] Yes, absolutely. 10 years ago, we were getting our groceries at the food bank.

James:  [00:05:22] My mother loaned us just under $20,000 to put a down payment on our first house, which at that point, we assumed would just be the house that we always lived in. That house is worth twice that now.

Georgia:  [00:05:38] It was six years ago.

James:  [00:05:41] After living in that home for a few years, we saw what was happening and just like, oh, my God, the equity in his home is going so fast. This could be a really good investment for us. And through some luck, and some out of the box– well, not out-of-the-box things. I thought it was such a great idea that I actually emptied out my stock portfolio and my 401k in order to buy our second property. And it also has done really well for us. But it was certainly by luck. We would not maybe have been able to buy a house at all had that not happened, and certainly, we would not have been able to buy the second or third one if we hadn’t seen the value there.

Ramit Sethi:  [00:06:27] You were getting food from the food bank 10 years ago. She offered you this money, which has dramatically changed the trajectory of your lives.

Georgia:  [00:06:37] Absolutely, yeah.

Ramit Sethi:  [00:06:39] And you’re here today. You have three rentals, one primary house, portfolio of around $2 million. How old are you both?

Georgia:  [00:06:49] I’m 36.

James:  [00:6:50] 41.

Ramit Sethi:  [00:06:51] Okay. So from the way that both of you talk, I can tell that you’ve run your numbers. And I can also tell that you acknowledge you had a lot of luck involved. You had help with the downpayment, you’re in a hot area. So despite being as savvy as you are, you also know that it’s not a sure thing. It’s not just like plug the numbers in, and it’s magic money.


Ramit Sethi:  [00:07:15] Notice that they acknowledge their hard work, but they also acknowledge luck. I find that the most successful people are very, very open in acknowledging how their success is due, yes to their hard work but also due to luck. That luck could be being born in a certain country, being born to loving parents, or someone taking a chance on them, even writing them a check. I believe that a rich life is never built alone. And so I’m glad to hear Georgia and James acknowledge that. I think it’s a really positive sign for the rest of our conversation.


Ramit Sethi:  [00:07:52] What is the percentage of your portfolio that is in real estate right now?

Georgia:  [00:07:57] 98%.

James:  [00:07:59] I’d say something like that, yeah, almost everything. It’s a handful of dollars not in real estate.

Georgia:  [00:08:05] And that’s what I mean when I say I feel really exposed.

Ramit Sethi:  [00:08:10] So these three rentals and one primary, are they also in the same city?

Georgia:  [00:08:14] Yes.

Ramit Sethi:  [00:08:15] Oh, that’s good.

Georgia:  [00:08:17] Oh, within just a couple miles of each other.

Ramit Sethi:  [00:08:20] So you have 90-plus percent of your portfolio in one asset class in the same location.


Ramit Sethi:  [00:08:30] Let’s talk diversification for a second. First of all, I was trying to make a joke when I said, “That’s good,” because it’s really not good. Unfortunately, my jaw bond. Listen, having multiple properties in one location is not diversified. Now, it’s certainly better than having 98% of your net worth in one property, which is actually how most people think about their primary residence. But if you are a real estate investor, like Georgia and James, and if you own multiple properties in the same city, you’ve exposed yourself to risk. 

Think about it. What if your city suffers a natural disaster? You won’t just lose one property, you might lose them all. Or what if the city simply becomes uncool, and people flee and it becomes this downward spiral? Well, this has happened to several famous cities in just the last 10 years. Again, you wouldn’t just lose money on one property, you could lose a huge percentage of your net worth. 

I’m sharing this because beginners focus on questions like $3 lattes and Target runs. But advanced investors focus on questions about asset allocation and diversification. They elevate their focus to these really big questions. Right now Georgia and James are overweighted in one asset class– real estate, and they are under-diversified in their location. This is a problem and Georgia recognizes the risk they’re in. It is very smart to raise the red flag and make changes before something bad happens.


Georgia:  [00:10:07] The intention is to balance the diversification of our investments. There’s a pattern of behavior in our relationship where I’ll say something and his knee-jerk reaction is to disagree with it. And then I’m automatically defensive. And it erodes trust. The first probably three or four times that I suggested that we sit down and look at what it would look like to sell a property and convert that equity into index funds, the automatic response was, I don’t think so. Or, I’m not sure about that, which in his language means no, or I don’t want to look at it, or I’m not going to give you the time of day to analyze this with you.

James:  [00:10:57] I still am just not clear on when it comes to the type of investments that Georgia feels really comfortable with like index funds, or Roth’s, and how they’re affected by market changes and how much control you can have over where those investments are actually put. If we were to sell a property and profit $300,000, could we actually turn around and buy two more homes with that, which in turn would snowball into the same thing and provide us potentially far greater returns than putting that $300,000 into an index fund would? And I just want to make sure that we go down that path also to see is it the right thing. It’s that bold move that we want to make to make sure that we actually are able to enjoy the money that we’re going to be hopefully making in the next decade or so. And so–


Ramit Sethi:  [00:11:52] 98% is a very high number to have in one asset class. I also want to point something out. People will often use nice-sounding words to cover up huge psychological blind spots. For example, they’ll say, I’m not cheap. I’m just selective. Here, James says he wants to be bold, which is really code for he wants to pile on risk, probably unnecessarily. I remember my trainer once telling me that at a certain point, you don’t need to keep adding on weight for your squat. And he said, unless you’re competing, or you have a very specific reason, there’s a point where the risk outweighs the benefits.

And what that really opened my eyes to is that more risk is not always good. That’s something to remember in life, in lifting, and certainly with your money. If you are just getting started with investing, stacking on risk like this is definitely not the strategy I would recommend. You want to start off simple and then you can add on complexity as you are ready for it. If you want to know how to do that with your money, you can get my ultimate guide to personal finance for free at iwt.com/episode59.


Ramit Sethi:  [00:13:09] You could buy more houses, maybe they would outperform the market. It’s possible. Sometimes it happens. Maybe not. That also happens. But does it fit your investing goals to buy more property? How do you make that decision?

Georgia:  [00:13:23] I think buying more property over the long term definitely fits both of our investing goals. But I think the thing that I want to make sure it’s not being forgotten is that we do actually need to diversify. In my mind, regardless of what the market is doing because of where we’re at in our lives right now, it’s a perfect time for us to actually do this, to move some chess pieces around and be really intentional about where they’re going instead of just throwing them on the board and they land wherever. 

If I had to crawl inside his head, I feel like he thinks that sacrificing equity is not the smartest move. Sacrificing equity that has outperformed the market by more than double over the last few years, I think he thinks it’s too big of a sacrifice and he doesn’t want to see that potential upside just squirreled away somewhere.

James:  [00:14:37] I don’t think right now with the way that interest rates look to be continually going up that it’s even the best time to be purchasing more real estate. So now’s a perfect time for us to take that money we would be saving to maybe buy another property and put it into the index funds or something else. But I’m not totally convinced that at least right now it makes the most sense for us to transition the equity in a property into an index fund. But that’s not to say that I also don’t see the value in your comfort level being met.

Georgia:  [00:15:27] When I crunched the numbers on a specific property that I’m thinking about, there’s a lot of maintenance for that property right now. It’s a lot to keep up with. We obviously do keep up with it. We want to be really good property owners and really good landlords. But with that specific property, selling it and converting it to index funds, when I’m looking at our total portfolio, that would give us almost a 50/50 balance. That’s a pretty good balance to strike from where we’re at now to where I think we would be managing risk better.

But I don’t know that I can prove it to you. I don’t know if there’s any way of proving it because I think you said earlier you like to go off of gut feeling. We bring very different perspectives and I would like to strike a balance between the two. And I felt like we’re so heavily weighted in almost entirely making decisions around his gut feeling. And I felt like my analysis strategic thinking has gone completely to the wayside. And I don’t feel like I’m being honored in how we’re investing right now.

James:  [00:17:02] I’m not opposed to making that transition. I think that there is value in doing it, especially for the income, the cash flow that is really passive. I just want to be sure that we’re timing it in the way that’s going to serve us best. And I just want to make sure that we’re getting a certain level of return on those homes so that it really makes a bang in those index funds.

Georgia:  [00:17:32] I don’t disagree with that. And when you say timing, you mean timing, when and how we sell?

James:  [00:17:39] When and how we sell.

Georgia:  [00:17:41] And which property.

James:  [00:17:43] I obviously want you to feel safe, and I want you to feel comfortable. I just also want to make sure that we are– we lost so much time at the beginning of our lives that could have been spent doing the things that we’re doing now that I’m feeling like we’re behind. And if we don’t make aggressive and bold plays that we are going to not be able to meet our goals until later in our lives than I would like.

Georgia:  [00:18:16] I just want to make sure that the aggressive and bold plays are also balanced by thoughtful, calculated rational moves because if we only make aggressive and bold plays, we’re exposing ourselves to more risks than is necessary. And right now, we’re only making aggressive and bold moves aside from your 401k–

James:  [00:18:43] I hear you.

Georgia:  [00:18:44] Which isn’t adequate, really. That doesn’t even come close to the level of investing we need to be doing.

Ramit Sethi:  [00:18:54] That was cool. I really enjoyed watching the two of you talk about that. It sounds like you are in the same universe. You’re both talking about risk. I mean, it’s cool. I am serious. I really enjoyed it. You’re both talking about risk. You’re both willing to see the other person’s perspective. You asked for clarification, hey, what do you mean by timing? I thought that was amazing, very healthy conversation about money. It’s possible you could make more money in real estate. Is making more money the goal of your investing strategy?

James:  [00:19:30] I think the real goal, Ramit, is to create stability and legacy for our children and to allow Georgia and I to hopefully have more time earlier than we would with money available to us to earn that time back.

Ramit Sethi:  [00:20:00] Okay, Georgia, what’s your goal?

Georgia:  [00:20:06] My goal is to get to a place where we have more time to spend with each other and with our kids, where we don’t get to– Jame’s mom is 66, has been re-diagnosed with cancer for the second time in a year, and is still having to work. And I don’t want to get to that place.

Ramit Sethi:  [00:20:30] Then I have a question for you. You both mentioned time. So in this scenario where you sold a property and made 300k, if you were to reinvest that in two properties, would that support your goal of more time or less time?

James:  [00:20:50] Potentially, in the short term, it would give us less time, Ramit, because we actively manage those properties. We do as much of the maintenance as our skill level will allow. So in the immediate, it would add on to our current workload. Hopefully, what it would do, though, is reduce the number of years that we’d have to work a normal 9:00 to 5:00 would be the goal there, but you’re right, in the immediate it adds to the workload.

Georgia:  [00:21:23] I feel like especially in the immediate, less time because I know how much time we’re already spending on just the communication, the maintenance, everything involved with owning and managing your own properties.


Ramit Sethi:  [00:21:37] Wait a second, wait a second. How can that be? Because on Tik Tok everybody tells me real estate is passive. You fucking lunatics running around telling people real estate is passive. “Oh, I just put 3% down and every year I buy three houses. And then I use the cash flow to buy three more houses. And soon I have two other properties. And it’s all passive, free money.” And then when I point out, “Have you considered certain costs such as vacancies, unexpected maintenance?” They says, “Oh, you don’t need to worry about all that. You just hire a property manager.” Just one problem, Chet, who manages the property manager? And how much does that cost? I started destroying this terrible advice on Tik Tok. You can find me @ramit.sethi. It’s fucking good.


Georgia:  [00:22:27] As anybody knows, there’s risk in real estate. We live in a very stable market, a very high-value market that we don’t foresee going down at any point in time in the future. Real estate does go up and down. One of our rentals, in particular, we’ve seen the value of it wobble, whereas the other ones have basically shot straight up. But I’m getting a little overwhelmed by the maintenance involved. Our property taxes are climbing. I think they’re probably going to go up pretty rapidly here in the near future, just to help control some of the growth of our market. And I also know that one of the best ways to manage financial risk in terms of investing is to diversify. And right now we have all of our eggs in one basket, and it makes me feel exposed.

Ramit Sethi:  [00:23:24] How much do you think about things going right versus things going wrong, James?

James:  [00:23:31] I think that I majority think about things going right.

Ramit Sethi:  [00:23:39] So bold investing, we can squeeze out higher returns from this thing, and if we play our cards right, six years from now, 10 years from now, we’re in this amazing position. That sound familiar?

James:  [00:23:54] That’s definitely the way I kind of look at it is the way that I think about it often is that the biggest hurdle to making things like this happen is just believing you can and taking the step.

Ramit Sethi:  [00:24:14] Making things like what happen?

James:  [00:24:16] Building a real estate portfolio that will allow you to retire early or accumulating wealth. Risk in George’s eyes definitely is like it’s always there in the back of her mind when we’re talking about these type of things. And this is where some of the conflicts can come in because I’m like, oh, here’s this plan that I’ve got. It’ll be simple. We wait three years, we sell a house, we turn it into two. And she’s like, yo, like, what about all these other things that could happen along the way? You’re just manifesting this out of nowhere. We need to do homework and that’s part of where some of our inability to see things the same way comes in is that she will put some of the risks at the forefront and I very often tend to ignore the risk altogether.

Georgia:  [00:25:11] It makes me feel entirely responsible for being the person to clean up messes if they happen, to plan for them, to try to buffer for them, and it’s really hard to plan for managing risk with a partner who doesn’t see risk.

Ramit Sethi:  [00:25:34] It sounds like a high emotional burden.

Georgia:  [00:25:37] Yes.

Ramit Sethi:  [00:25:38] It sounds like a high financial burden.

Georgia:  [00:25:41] Yes.

Ramit Sethi:  [00:25:44] And it explains why, Georgia, you’re creating all these spreadsheets. It doesn’t really do anything.

Georgia:  [00:25:54] No, it doesn’t do anything.

Ramit Sethi:  [00:25:56] I promise, risk is just a word until it happens to you. And suddenly, it’s not just the word risk anymore, is it? It’s bankruptcy, it’s recession, it’s all of these things you never wanted to be in that position to before. So I just say, let’s not even get into that neighborhood at all. 


Ramit Sethi:  [00:26:10] I remember, I want to ask people on Twitter, if you want $20 million, how would you change your investments? Would you become more aggressive, or less aggressive? And the majority of people were like, “I’d become more aggressive.” And I was like, “What the hell are you talking about?”

There’s a principle you need to understand, which is once you’ve won the game you don’t need to play anymore. Think about it. If you made $20 million dollars overnight, that can generate roughly $2 million in income per year, approximately. Sure, you could take on extra risk and maybe get to 100 million, but that extra risk might financially destroy you. Why don’t you just take your $2 million here and have a great rest of your life? Sometimes people don’t know how to think about– what am I talking about? Sometimes. Almost nobody knows how to think about risk. Almost nobody can predict what they will do if they have more money. And most importantly, as you become more wealthy, you have to think much more carefully about risk and about the game that you are actually playing.


James:  [00:27:26] I don’t know that I, right at this moment, can tell you yes or no, I completely agree, but I think that us strategizing and looking at when that right time might be–

Ramit Sethi:  [00:27:42] Timing comes last. You all seem to be putting timing first. Timing is last. Strategy is first. What is our strategy? What do we want to accomplish here? And then how can we do it and then, and only then, when do we do it? I don’t think you’ve both agreed on what percentage you want your portfolio to look like. I don’t think you’ve agreed on what type of lifestyle you want. So the reason that you’re both stuck is that you’re putting timing first, but timing is minor detail. It’s the strategy. Have you both agreed that you want to change your asset allocation in your portfolio? I don’t know whether you have. Watch this. James, what is your percentage of real estate in your portfolio?

James:  [00:28:35] Currently, it’s 98%.

Ramit Sethi:  [00:28:37] What should it be in your view?

James:  [00:28:41] 60/40 real estates and other stuff.

Ramit Sethi:  [00:28:45] Okay. 60/40, great. Georgia, what should it be for you?

Georgia:  [00:28:50] I’d be happy with 50/50. I think in a more ideal sense.

James:  [00:28:54] I feel like if our goal is to get closer to a 50/50 balance, I said 60/40, you said 50/50. May we do 45/55. Let’s put it somewhere. So we understand that that’s the goal. We will share that goal. Now we can talk about when do we get there? And maybe that helps lead us both in the same direction.

Ramit Sethi:  [00:28:54] Okay, let’s do it right now. You’re currently at 98% real estate, you want to get to roughly 55/45 or so. So how can you get there? What are your options?

James:  [00:29:44] My gut says we wait three years and allow a little bit more equity to build, a little bit more of the mortgage payments to drop down so that it gives us a really nice chunk that when we do sell, pay the fees, pay the taxes, we’re still left with something significant to invest into an index fund.

Georgia:  [00:30:07] I think it depends on which property we sold and how much equity was in it, and whether we were selling it as an investment or a primary.

Ramit Sethi:  [00:30:17] And maybe also the price.

Georgia:  [00:30:20] Yeah, three of our houses are within range of each other in terms of amount owed on the mortgage and market value, except for I guess two of them are in range. One of them we have a little more equity in.

Ramit Sethi:  [00:30:41] What if the price goes down?

Georgia:  [00:30:46] On one of our properties, that’s definitely potentially true. I would have a hard time. I think we took a little dip. Recently, when I gave you our numbers I went conservative and calculated that even though we just had appraisals done, I gave you numbers that are lower than those appraisals.

Ramit Sethi:  [00:31:14] What growth rate did you assume per year?

Georgia:  [00:31:16] 5%.

Ramit Sethi:  [00:31:21] That’s pretty high.

Georgia:  [00:31:23] Our market has been performing at 18% per year over the last seven years.

Ramit Sethi:  [00:31:28] Seven years? Wow, that’s pretty good. So here’s a question for you. When a market over-performs, or a stock over-performs, or a mutual fund, do you expect that to continue or to go down?

Georgia:  [00:31:44] I expect it to go down which is why I want to be having this conversation right now.

James:  [00:31:49] I wouldn’t be surprised unless– I mean, obviously, the world is in turmoil right now. So it’s hard to say exactly what might happen. But historically, the market that we’re in has been very stable even throughout 2008, 2009, 2010 was very, very stable.

Georgia:  [00:32:07] Prices did not go down here in 2008.

Ramit Sethi:  [00:32:10] In my models, I always assume A, B, and C. And the bad scenario that I assume is really bad. Why? Because you never want to be caught surprised in a bad way, ever, never, ever, at least I don’t. When I factor in how much things can go up and down, I definitely want to be super conservative. I do. I’m not saying you do. It’s your risk profile. But if I were in a market that was up 18% a year for five years, one of my scenarios would be negative 10%. That’s me. So you know your market better than I do. You’re a multi-property owner. I’m not going to tell you how to run your models.

But just to think about what risk can mean because there’s a lot of people who go, yeah, it might level up. I just heard you say that. But what if it actually gets worse than that? What does it mean? Because if you both decide to wait three years in order to sell the house and then get to 50/50, what if that stuff doesn’t pan out? You’ve got a cascade of issues here.


Ramit Sethi:  [00:33:24] Damn, I am impressed at how much Georgia knows her numbers. No matter what I point out to her, she’s ready with a response. And she’s right, very impressive. I will say, I do disagree with her in one main area. I think she’s being overly optimistic with her assumptions. She’s assuming that in her bad-case scenario, she is going to get 5% annual appreciation. 

In my opinion, that is way too hopeful. And that single assumption could cost both of them a lot of money, which is why I always like to have a very, very conservative scenario for when things go really wrong. My principle here is I never ever want to be surprised about money in a bad way. And I certainly never want to end up with my back against the wall. Also, just out of curiosity, does she really want to keep 98% of their portfolio in real estate for three more years?


Ramit Sethi:  [00:34:26] Do you want to wait three years in order to rebalance your portfolio?

Georgia:  [00:34:28] Not necessarily because I also know what the stock market is doing right now. And I know people are panicking, but I think right now is a really, really good time to be buying into the stock market because we have more purchasing power right now.

Ramit Sethi:  [00:34:52] How can you guys talk so much about timing? Have you ever heard the phrase don’t time the market? Has anyone here ever heard that phrase yet we’ve spent the last one hour talking about timing shits. What the hell’s going on right now?

Georgia:  [00:35:07] I think it’s a decoy. I think it’s a decoy for us.

Ramit Sethi:  [00:35:11] What does that mean?

Georgia:  [00:35:13] I think it’s a way for us to not have to come to an agreement right in this moment.

Ramit Sethi:  [00:35:17] Exactly. And truthfully, it’s not just mathematical, it’s not just because of the research that I know on time in the market, it’s emotional. Because, Georgia, you’ve told me you don’t feel safe and you’ve had bankruptcies in the family. And so I don’t really believe that you would be emotionally willing to wait three years to rebounce a 98% weighted portfolio. That seems crazy to me. Am I reading this situation wrong?

Georgia:  [00:35:42] No.

Ramit Sethi:  [00:35:43] Can I just point out that there’s a very obvious principle here? It’s the same as crypto guys who were going around telling everyone, oh my god, this is so genius while it was going up 2, 3, 4,000%, which is quite amazing. A seasoned investor looks at that and says, there’s no way that can continue, ever. So it’s awesome you happen to ride on a rocket ship. That’s amazing. You should decide on your own risk profile, and do you want to take chips off the table. But any seasoned investor looks at things like that and says, it can’t last.

I talk to a lot of crypto people. Well, I don’t talk to them. I talk at them because they mostly just insult me. Although to be fair, I am making fun of them 99% of the time. So I had a recent hilarious interaction on Twitter. I posted some comment many, many months ago. And here’s the thing. I love making jokes about horrible investors, but I also love being vindictive with a fully automated system. So I posted this thing, and this guy wrote a tweet saying remind me three months. I said, I’m glad you’re sending that note. I set a note for myself to check in on this about six months later. This is the problem when you love logistics, and you have a vindictive streak.

So in the time that this tweet he posted it, Bitcoin went down 35%. Now I got my reminder popped up to me. I’m sitting there in the morning drinking my coffee. I see this reminder. I said, this is going to be good. I click the link. He deleted his tweet.

Georgia:  [00:37:29] Of course.

Ramit Sethi:  [00:37:30] Of course, because when things are good, everybody talks about it. And when things go bad, what happens?

Georgia:  [00:37:36] We save face.

Ramit Sethi:  [00:37:38] They all disappear, fucking crypto speculators. It’s basically MLM for men, astrology for people who think they’re too smart for astrology. Every one of their reasons for things like Bitcoin to exist has been dashed. So what do they do? Let’s just name them. It’s not a stable currency. It’s actually been outperformed by cash in recent months. They recently discovered that 50% of trades on exchanges have been shown to be fake. It’s actually more centralized than fiat currency. And Shall I continue? I can.

So what happens when yet another data point shows crypto going down? They simply vanish. Notice these guys on Twitter who used to post 30 times a day about Bitcoin. Suddenly, they change their avatars, they no longer have those bright shiny lights in their eyes, and they’ve become very somber economic commentators who are suddenly very concerned about inflation. People love to brag when they’re up. But when their investments go down, they get quiet. And the more they go down, the more people retreat, like a little animal burrowing away and hiding from the sunlight. Good riddance.

Also, I’m going to post screenshots of this guy on my Twitter account soon. They vanish. Classic survivorship bias. You only hear from the winners. And I want to point that out because real estate has been on an incredible historic tear. And it’s fantastic. If you happen to own properties, you have fantastic returns. As a seasoned investor, you might look at that and say, okay, something is not right here, or it can’t last. And then you start to say, okay, well, what are we going to do about it? 

And for some people, they’re a little overweighted in real estate. They go, oh, my normal allocation is 35%. I happen to be 50%. It’s a little higher than I’d want, but that’s fine. But anyone looking at 98% in one asset class in one city, says, oh, that’s amazing when it’s working right. But when it stops, it’s like a ton of bricks that hits you. And I believe both of your parents went through bankruptcies, correct?

James:  [00:39:58] Yeah.

Georgia:  [00:39:59] Yes. James’s mom is facing medical bankruptcy again right now.

Ramit Sethi:  [00:40:04] But we never want to let you both get in a position where you’re exposed to that much risk because if it goes wrong for you, it goes wrong all at once.

Georgia:  [00:40:17] Yeah. That’s exactly what I’m worried about.

Ramit Sethi:  [00:40:22] In investing, your asset allocation is more important than any individual investment. It’s really important to remember. So if you’re writing a book, it’s the table of contents that matters more than any individual page.

Georgia:  [00:40:38] I would actually like to make a date with James to sit down and look at our recent appraisals, look at the exact dollars and cents of what we owe, look at neighborhood performance for the properties that we own, the amount of equity in them and come up with a strategy, what are our next three steps to get our portfolio rebalanced and what are the tools we need to get there?

James:  [00:41:05] I believe I see the value here. I do. I think that I don’t want to stop pursuing investing in real estate, especially because I think that we understand how to do it in a great way, but I definitely think that reallocating some of our current investments into something more stable and more passive is probably the right move for us.

Ramit Sethi:  [00:41:34] You know the crazy thing? It’s not like you’re taking the money from a house and putting it in cash to just sit there. Index funds make a lot of money. Do y’all know that?

Georgia:  [00:41:46] Yes, and it’s not dumping $500 a month. Starting from zero is not the same thing as starting from $300,000 and then continuing to add to it. I’ve crunched the numbers that’s why I think it’s really important to utilize the tools that we’ve created together to rebalance and diversify our portfolio. We have a huge opportunity to be very strategic about how we move forward. And I am worried about watching this opportunity go by us and then running into some crazy risks. And that’s a very real possibility that I used to feel like I’m the only one that’s taking it seriously in our relationship.

Ramit Sethi:  [00:42:43] James.

James:  [00:42:46] I mean, yeah, that’s fair. That’s a fair assessment, I think. I don’t look at risk the same way that you do, but I think that I’m absolutely willing to have a date with you and strategize on which of our properties makes the most sense to move forward with converting into index funds. I think that that makes sense for a lot of reasons.

Georgia:  [00:43:33] I think part of the thing that’s holding us up is that it’s not like we’re these incredible real estate investors. I think we still see ourselves as very green even in that type of investing, but we know what we’re doing. We know how to do that. We don’t even know how to buy index funds. I know what they can do. I’ve crunched the numbers. I’ve used your calculator, but I don’t know the steps from here to there. And I think that that’s also part of what’s holding us up because we can’t lay those bricks together.

James:  [00:44:14] I don’t know that I see any reason from what I’ve heard about index funds that we would want to choose a Roth over an index fund. So maybe we do index funds, real estate.

Ramit Sethi:  [00:44:24] Georgia is about to really– she’s literally biting her lip right now [Inaudible 00:44:28]] Go ahead, Georgia. Clarify the difference for all of us, please.

Georgia:  [00:44:31] We were talking about this earlier. I was just going to ask James, is that a question you want to ask Ramit while we’re here because–

James:  [00:44:31] I’d love to understand. I don’t know why we do it because if index funds have an average 10% return, that seems far beyond what a Roth would generally give you. So why would you put your money in a Roth?

Ramit Sethi:  [00:44:52] Okay, this is a good question for a lot of people to understand. So imagine a house. A Roth is a room in a house. But within that room, you have to choose what type of bed you’re going to get. The room is the Roth, the bed is the investment. So you invest in an index fund within a Roth. You also can invest in an index fund within a 401k. And then, because the two of you’re going to have so much money, eventually, you can invest in an index fund in just a normal taxable account, not a tax-advantaged account like a Roth, IRA, or a 401k.

Georgia:  [00:45:37] That’s what I’ve struggled to illustrate is the strategy behind utilizing those accounts for the advantages that they were built for.

Ramit Sethi:  [00:45:48] In the beginning, it doesn’t seem like that much. We’re compounding on 5,000, or 15,000. But those numbers grow really fast. And once they start to grow, with your cash flow, which can be quite rapid, especially if you start with 300k, you start to go, “Oh, my God, we made more in this account in a year than we made working all year.” 

And at a certain point, depending on how aggressively you invest, you might make more in a month than you make in your entire joint income in a year. I just want to point out that if you took that $300,000, just for simple math, and y’all continue to add $10,000 a year, which is not that much for you, and with 20 years to go, you’d have $1.6 million from just that money. But at 25 years, it’s 2.3 million. It starts to grow really fast, really fast. And that is income. By the way, that can be turned into income at any point you want.

Georgia:  [00:46:54] We’ve talked about this. We’ve looked at this calculator together and talked about the exponential growth pattern of compounded interest.

Ramit Sethi:  [00:47:04] It’s staggering. But the math itself for the two of you is quite simple because you understand compounding. Actually, let me not make that assumption. Georgia, I know you understand compounding. James, do you understand these concepts of compounding?

James:  [00:47:18] I do, yes. I do understand the concept. When we get into this conversation, I like to say, well, real estate does the same thing. But it is riskier. But yeah, I do understand how it works. Essentially, it’s a certain interest rate or rate of return. Every year, the interest that was gained goes to the principal, and it happens again and again. So essentially that’s it, right?

Ramit Sethi:  [00:47:48] Yeah, it’s just growing upon itself. Good. Real estate does work the same, although it’s a totally different asset class with a different risk profile. And also one of the reasons that I am critical of real estate, although I don’t mind it, is that we all forget to factor in the costs. So for example, if we were doing a true accounting, are you all factoring in how much your hourly rate would be for your maintenance?

Georgia:  [00:48:13] Not at all.

James:  [00:48:14] No.

Ramit Sethi:  [00:48:14] Yeah, if you did that your returns would change dramatically. But okay, that’s fine. But all the little things that you now know as property owners, and when you sell and all those transaction costs, and if you back them all out, you go, okay, we made a lot of money. And, however, if we weren’t so lucky to be at that time or that place, we wouldn’t have So was it skill? Was it luck? Also, could we have essentially made the same amount of money? Maybe a little more, maybe a little less, by just putting it in an index fund and never having to think about it again. No driving to Home Depot, no doing this, no calls. So James said, okay, I can see the benefit of diversifying and reallocating. Did you hear that, Georgia?

Georgia:  [00:49:04] Mm-hmm.

Ramit Sethi:  [00:49:04] She’s nodding. And, James, when you say you understand the value, now talk us through how will you get there.

James:  [00:49:12] Yeah, I mean, I think that the best thing we could do is get our spreadsheets out, look at our properties, what is making us a monthly cash return, what’s got the most maintenance cost, what we think we can get for each one and make a decision on, which one of them makes the most sense to sell and reinvest, I think is how we would do it. 

And so I think over dinner and a laptop, a glass of wine for me, we take a look at this and just come to an agreement on what that next step is. And I think that just understanding the risk involved with all of our assets being in the same asset class it– I get it. I understand why you want to diversify, and that the risk is more than– you’re comfortable with and potentially more than is wise.

Ramit Sethi:  [00:50:27] Georgia.

Georgia:  [00:50:28] That’s great. It sounds like a good plan.

Ramit Sethi:  [00:50:31] The two of you talking about and saying like, what’s our plan? Of course, we can revisit our plan every year, we can always change it, no big deal. But like, let’s make a plan, and then everything just flows from that plan. That is how I like to run the business and the personal and all of it.

James:  [00:50:47] Making the plan actually sounds like fun, Georgia.

Georgia:  [00:50:51] Yeah, it does. That appeals to me a lot.

Ramit Sethi:  [00:50:57] I received a follow-up letter from both Georgia and James. You can get the full follow-up at iwt.com/followups. Let me give you a quick excerpt from what James wrote. He says, “The thing that really stuck with me was when you said timing should be the last step in our conversation and that the reason, the principles, and the plan should be the primary driver. After that timing is simply execution of the plan. This really seemed to strike a chord with me and I began to understand part of fulfilling our vision of the future meant both of us need to feel like we are driving, and that one of our ideas does not need to exclude the other.” Again, you can get those follow-up letters from my website.

Let me just tell you what I took away from this episode, which I really, really loved. Georgia and James have both done well for themselves. Part of it very hard work, part of it luck. But regardless of how successful you have been, in fact, the more successful you are, the more you want to think about risk. You never want to have all your eggs in one basket, certainly not one asset class in one location. 

They are in a very positive place for where they’re going to go with their money. They have an amazing future ahead of them. Now it’s time to think about bigger picture, how much risk do they want to take, what type of lifestyle do they want to leave, and how can they both get educated about money so they understand all of their options? That ultimately is what I want for you. I want you to be educated so you make the right choices and live your rich life.

Thanks for listening to I Will Teach You to Be Rich. I’m Ramit Sethi. Please follow the show on Apple, Spotify, or wherever you listen to podcasts. If you haven’t read, I Will Teach You to Be Rich, my book, pick up a copy. You can get it at any bookstore or any library and it will show you the specific tactics for how to build the I Will Teach You to Be Rich system into your personal finances.