The Most Controversial Topics in Personal Finance (and What We Think)

Introduction – Spicy Personal Finance Topics (0:00)

Brian: We’re breaking down some of the spiciest topics in personal finance. We’re going to tell you what the data says and what we really think about each one of these topics. With that, let’s jump right in.

Topic 1: Dividend Investing (0:10)

Brian: The first claim is about dividend investing. Now, we love when folks get excited about putting their money to work and building financial independence through their army of dollars. But many proponents of dividend investing think that it’s the only way to go. There are countless subreddits, blogs, YouTubers, books, you name it, selling investors on the idea that this is the only way to go. It makes sense why this is an attractive strategy for a lot of investors. First of all, it’s a very tangible idea, especially for newer investors. It teaches people in a very digestible way about how investing in cash flow assets can contribute to their financial independence. For example, if you have one share of stock that pays a $2 dividend and you spend $2,000 a month, you can quickly do the mental math to realize that 1,000 shares of that asset and stock would mean you could fund your lifestyle off of that one investment. That simple connection, plus the shiny label of financial independence, makes the thought quite attractive.

Why Dividend Investing Seems Less Risky (1:10)

Brian: Dividend investing is also regarded by many to be less risky than other strategies for two key reasons. First, because many dividends are distributed as a fixed dollar amount per share, the cash flow provided by dividends is thought to be more consistent and less likely to fluctuate from month to month, offering a sense of stability to investors. Second, a company’s willingness to issue dividends has long been regarded as a sign of financial stability. So those two factors together paint a best of both worlds picture, affording investors the growth potential of stocks and the fixed income element of more risk-off assets.

What the Data Actually Shows (1:45)

Brian: The data however tells a little bit of a different story. In a 1993 paper by Eugene Fama and Kenneth French showed that differences in stock returns associated with dividend paying companies largely disappear once broader market size and value factors are taken into account. In plain terms, what that means is that chasing dividends has not consistently proven to be the most optimal strategy. Not to mention, you run the risks that come with individual stock picking. Structurally, dividends are also as a whole less tax-efficient than capital gains. Ordinary dividends are taxed at your standard federal income tax rate. And while qualified dividends receive also a favorable tax rate, just like capital gains, you cannot control the timing of the distributions. This can create a tax situation where your taxable income is pushed into a higher tax bracket, triggers additional taxes like the net investment income tax, or even phases you out of certain tax benefits if you’re not careful.

The Tax Control Problem (2:41)

Brian: I’ve been a financial adviser for about 30 years. And there is a key principle among us CFPs. Control of timing is control of taxation. Dividends complicate this idea because they force you to pay taxes on a schedule set by the fund or stock, not when it’s best for your own tax situation. To be clear, we’re not anti-dividend. If dividend investing provides you some peace of mind, more power to you. An investment strategy you can stick with through good times and bad is often more powerful than doing what’s optimal. However, don’t chase trendy investment strategies thinking they’re the silver bullet many make them out to be. Our preference is buying the broad markets with index funds instead of trying to beat the market. You get to be the market. It’s generally more tax efficient and likely captures the gains of companies that are focused on growth rather than issuing dividends.

Topic 2: The 8% Withdrawal Rate (3:36)

Brian: Next up, that 8% withdrawal rate. This topic sends shock waves through the personal finance space and for good reason. The theory assumes a 12% annualized portfolio return, subtract out 4% for inflation, and claims you can safely withdraw 8% of your portfolio in retirement each year. That amount is inflation adjusted, meaning if you retire with $1 million, you can retire with an inflation adjusted $80,000 every year from then on. It seems simple, right? What could go wrong? Proponents claim that good growth stock mutual funds can achieve these type of returns, making 8% withdrawals seem feasible. But the data tells a completely different story.

Why 8% Doesn’t Work (4:15)

Brian: The market doesn’t return 12% every year. The S&P 500 has averaged just below 10-12% over the last 30 years. That might sound close enough to 12%, but over 40 years, that’s a massive gap. Plus, returns fluctuate wildly, and negative years can completely derail your entire plan. The Trinity study found that an 8% withdrawal rate has at best a 74% chance of success over 30 years, meaning a one in four chance of failure. And that’s in the most aggressive portfolio. Most scenarios showed only a 42% to 63% success rate if you went with a more balanced portfolio structure.

Sequence of Returns Risk (4:57)

Brian: This high failure rate is due to sequence of returns risk. What is that? That means actually the early losses have an outsized impact on your portfolio. Experiencing the average market decline of 14% in year 1 means you’d run out of money in just 21 years, even assuming a full recovery and 12% returns afterwards. Experience that decline anytime in the first 9 years and your money still won’t last 30 years. So, what’s our take on withdrawal rates? The Trinity study found that a four to 5% withdrawal rate is much more likely to create lasting success through retirement.

Personal Finance Is Personal (5:32)

Brian: But remember, personal finance is very personal. Your ideal withdrawal rate depends on your unique situation and may even change from year to year. As financial advisers, we work with this stuff all the time, and we know there’s not a one-size-fits-all answer. Your account structure, your risk profile, and your goals make your plan unique. We spend considerable time stress testing our clients’ plans to ensure that investment risk like sequence of returns don’t derail decades of hard work and diligent savings.

Topic 3: 100% Equity Portfolios (6:05)

Brian: But the last topic we’re going to discuss is around 100% equity portfolios. This means your entire portfolio consists of only stocks. Some folks even take it a step further with the VOO for life trend, investing solely in the S&P 500. That’s the ticker symbol VOO if you’re wondering where this VOO comes from for their entire investment life. This strategy appeals to many because the S&P 500 provides strong long-term returns and simplifies investing into one decision. Not to mention, many investors feel like more conservative assets means that they’re missing out on returns and investing solely in the S&P 500 means they don’t have to do that.

The Big Risks of All-Equity Portfolios (6:46)

Brian: But the data shows some big risks with this strategy. Yes, a 100% equity portfolio offers larger return potential, but also larger drops that take years to recover. During the last decade, it took the S&P 500 12 years to return to its late 2000 strength. Many investors focus on risk tolerance, and that’s how much volatility they can handle emotionally. But the real concern in retirement especially is risk capacity. Whether your assets will be there when you need them or if you’ll lack the time for recovery. The average investor has a poor track record with market volatility. Dalbar’s analysis consistently finds that average investors underperform their investments due to poor timing. Morningstar’s Mind the Gap shows similar results from emotional selling. Even if VOO for Life was mathematically optimal, most folks can’t stomach the big swings.

Risk Tolerance vs. Risk Capacity (7:42)

Brian: Most investors overestimate their risk tolerance and have a complete blind spot towards risk capacity. Returns aren’t everything. If you’ve built financial independence, why take on so much additional risk and run up the score when you’ve already won the financial game of life? At some point, there needs to be a balance shift from accumulating wealth, the growth side of things, to wealth preservation as your assets grow and your financial life requires more risk mitigation.

Closing – Don’t Chase Trends (8:12)

Brian: Ultimately, a lot of what we’ve talked about today comes down to not chasing the trends, knowing the data specifically to your personal financial situation, and knowing yourself as an investor. These three things are great tools on the long journey to financial independence. If you want a full breakdown of the 8% withdrawal rate, I want you to click right here. And as always, keep building towards your great big beautiful tomorrow.01