The PAYE Mess + Are U.S. Stocks About to be Dethroned?

Hello and welcome to another episode of the Steel One Planner Podcast. Today I thought I would talk a little bit about investing, a little bit about what's been going on in the world with that, and also talking about a little bit about the pay and ICR mess and the service room mess and just what we might see next. I think I probably will start with the pay and the ICR mess. So we did see sort of a last second announcement for the holidays. They were going to reopen the pay and the ICR plans. They've already claimed that they've done that. The pay and the ICR plans are plans that were created from the ICR statute. To be able to help borrowers make reasonable monthly payments. Why are they opening these plans up again? Because with the SAFE plan, the payments were so low that these other plans were kind of really not that much of a point to having them, and so they locked them down to new people signing up. But when the SAFE plan's existence became in doubt, they realized, oh wait, any borrower that took out a loan between 2007 and 2014 is going to have to pay 15% of their income instead of 10, literally because of what we did. And so also borrowers that don't have the ability to sign up for a plan without a payment cap, like a SAFE plan has no payment cap, right? So you can always sign up for it even if your income's high. But with the IVR plan, you cannot sign up for it if your income is too high because you have to have what's called a partial financial hardship, which means your IVR payment has to be below the standard tenure for your loan amount. And so if you don't have that partial financial hardship, you're screwed in a world without SAFE or repay because you couldn't get a low enough payment to be able to qualify for IVR, which means you might not even be able to get PSLF or forgiveness at all. And so the ICR plan was reopened because of these kind of edge cases of high-income people. A very typical example of this is a high-income physician who needs a partial financial hardship to get one more year of PSLF credit and would not be able to get PSLF at all if they didn't have access to that. So that's the reason for reopening the ICR plan to people outside of Parent PLUS borrowers who've always had access to it. And so these plans are open until mid- 2027 now, and the question is, will Trump honor it? I think that we have to see what the Eighth Circuit rules, and if the Eighth Circuit says that these plans are illegal, then all this might be for nothing. I think they'll probably stick around though. I think that they're not going to strike down pay in ICR. I think they're just going to strike down the SAVE plan exclusively, and this is going to be a very helpful way for borrowers that have unique circumstances to be able to get payments that are as low as possible. So now I want to talk a little bit about investments because I think that's frankly very interesting too. So I wanted to talk a little bit about the dominance, and when I say dominance, I mean the absolute dominance in U.S. stock market performance since 2008. Now if I look at 2008 to 2024, U.S. stocks outperformed in every single year compared to international stocks except for 2009, 2012, 2017, and 2022. So when we think about those years, the outperformance of international stocks in those only four years when they outperformed was 8%, about 2%, about 6%, about 3.5%. In other words, the outperformance of international stocks the few times they did outperform was very low. Now compare that to U.S. stocks. The past year, for example, U.S. stocks have turned in roughly 27-28% at the time I recorded this on the December 20th. So you think about 28% compared to about 8% for international stocks again recorded on a certain date. The numbers as we end the year will be slightly different. Now that kind of a difference in performance, almost a 20% performance difference for international stocks that outperformed, that's enormous. That is huge. That is more outperformance in one year than all of the outperformance of international stocks in the four years they outperform U.S. stocks. Now if you look back historically at the past years, really since 2008, I'm going to just literally put in some math real quick just to see how bad this performance really was. So if you take just a dollar, let's say you have a dollar that you invested in the total U.S. stock market and let's say that it happened, you put that investment in in the beginning of 2008, let's say, and then let's say you took a dollar that you invested in the broad international stock market and then if you did that, the question is, you know, how much money would you have at the end of the period, right? Keep in mind this is just for illustrative purposes only. All right, so this is wild. So if you had a dollar and you put it in the broad U.S. stock market in 2008, today you'd have five dollars, about five dollars, about 5x as much. If you had a dollar that you put in international stocks in the beginning of 2008, today you'd have about $1.60. So if you think about that relative performance, you know, you would have had three and a half times as much money almost as in U.S., if you put it all in U.S. stocks compared to international. So you might say, wow, oh my gosh, there's zero reason why anybody in the world would want to own international stocks in their portfolio. You should just VTSAX and chill. VTSAX is the broad U.S. stock market index fund that's so popular at Vanguard among investment forum types. Now the problem with that reasoning is if you look at 2002 to 2007, which is the immediate period before this long window of time that I described, international stocks outperform U.S. stocks in every single one of those six years. You know, U.S. stocks dominated in the boom, right, which makes sense. U.S. stocks had a little bit of an underperformance in mid-90s and then early 90s U.S. stocks outperformed by a lot. Now in the late 80s, you could call it the Reagan second term, let's say, that outperformance of international stocks was also actually pretty enormous. Not as enormous as the U.S. stock outperformance has been, but that was over like a 16-year period. So over just a four-year period in 85 to 80, end of 88, you had international stocks basically outperformed almost more than double U.S. stocks performance. And so if you think about that, that's a performance that happened over just a four-year period. That's not a 16-year period. That's a relative outperformance of 2x over a tiny window. And so when I reflect on this a little bit about, you know, what do I see among people that invest? What do I notice in portfolios these days? Because I think it's really interesting to look at this and really reflect on why do portfolios look the way they do? Why are people giving advice the way that people are giving advice? So the thing is, in the late 80s, when international stocks outperformed U.S. stocks by over 2x over like a four-year period of time, if we had Reddit forums, if we had online investing groups, everybody in the world would have been saying, you've got to get international in your portfolio. You've got to put a ton more exposure to international stocks in your portfolio. You're gonna really hurt yourself financially if you, you know, don't add more allocation, right? Now what's going on right now is because U.S. stocks have outperformed for so long, basically everybody's saying, okay, well not everybody, but some people are saying put all your money in just one U.S. stock index fund, but they're saying that and the reason they're saying it is because the performance has been so good. So you have to think about when something is outperformed for such a long period of time, the noise to go invest more of your portfolio in it becomes deafening. So think about crypto, right? Everybody in the world is like, well again, not everybody in the world, sounds exaggerating, but a lot of people are saying, you know, oh you gotta get a big allocation of crypto, right? You know, were people talking about needing to put a huge allocation in crypto in 2018? You know, in 2018 Bitcoin turned in a negative 73% return. Were people talking about that a whole lot in that year? No, they weren't, right? So people talk about performance of an asset class when the performance has been really good relative to other things. So if you look at performance of something like a Bitcoin, right, the only years where Bitcoin turned in a negative performance, at least, you know, in the past 10 years, let's say, was in, I think, 2018. It returned negative 73%. The U.S. stock market lost 5% that year and then in 2022 Bitcoin lost 64% compared to the U.S. stocks negative 20%. So if you think about the case there, what you're seeing there basically is when U.S. stocks have a real negative price move, Bitcoin tends to have a multiple of that and a negative price move, right? But because U.S. stocks have done pretty well past couple years, you know, historically Bitcoin has a larger move compared to U.S. stocks, it's called beta. So when you talk about alpha and beta, alpha is like outperformance of the market, beta is like the relative price moves compared to the market. So when you say, you know, a small cap growth biotech company, somebody might describe that stock with having a beta of two. What that means is that price moves at a kind of an up and down like 2x on average, like the level that the U.S. Broad Stock Market Index fund does. And so, you know, basically Bitcoin behaves a lot more like a highly leveraged like growth stock in terms of like when the stock market's negative than it does as a diversifier to geopolitical risk like gold does, where the negative correlation in certain kinds of economic environments is probably lower and maybe even negative to stocks. So what am I talking about, right? First of all, kind of throw this disclosure out there that past performance is no guarantee of future results and, you know, SLP wealth and that student loan planner are owned and under common interest and this is not a kind of an offer to buy investment securities and, you know, all the disclaimers in this, you know, all investments are subject to risk of loss, right? So, you know, when I think about the lessons about U.S. stocks right now, you see a lot of people chasing performance. What I mean by that is you see a ton of like individual stock positions that are really random in people's portfolios that are like Apple, Google, Facebook, you know, like all of the tech are meta, right? All the tech or large growth stocks that outperform so much, you see people putting a lot more of their portfolios in that because they've done so well recently. And so what I'm saying is maybe people really need to pause and think about diversification in this kind of market environment. We've got a lot of big uncertainties going on right now. We've got huge tariffs that might be coming back, you know, at some point, right? That might have a big impact potentially in the world economy and the U.S. economy relative to other economies. You've got a lot of policy uncertainty. You've got a big deficit problem. You've got huge rewrites and a tax code that are coming up, you know. So far, U.S. stocks have done really well post-election simply because people are expecting, oh, lower regulation, you know, tax cut extension, corporate tax rates are not going to go up a ton. You know, people are feeling pretty happy about that lighter regulation. You know, crypto's up a ton in part because, oh, now we're not going to have anybody at the SEC that's going to be trying to regulate crypto, trying to hold it down. Now it can really run free, right? But there was an interesting article in the Wall Street Journal, I think it was a few weeks ago, where it was talking about how the young male portfolio has really outperformed everything else as of late. When I say young male, like, so, I mean, think about the most, like, risky, heavy crypto, you know, kind of more gambly kind of stocks, right, that young men disproportionately invest in. Not all, of course. I'm not trying to say that crypto is a male thing, but taking huge bets, you know, on some of these random asset classes compared to, you know, what you would see in the average portfolio is disproportionately a young male thing to do, right? And so I think that what was interesting to me is people behaviorally kind of look at, you know, loading up on large-cap U.S. growth stocks in a time when they've outperformed for a huge length of time when, if you believe in reversion to the mean, that might mean there's more risk in U.S. growth stocks than there are in other asset classes. Not that you can't guarantee that, but that's what you'd think. And there are people who are not worried about that risk, but they're terrified of the risk of starting a second dental practice location when you can't have a ton of competition because of state licensing rules and you're already making two or three hundred thousand dollars in profit a year in your first location, and you could start a second location with a 97 percent or above probability of success, and people want to gamble on Ethereum. And if you think about, if your goal is to grow wealth, you cannot go and buy, you know, crypto or, you know, at six hundred dollars a coin, and you can't go back and buy U.S. stocks at 2008 levels. You have to buy in today's dollars, like at the current market levels, you know, and then you're saying, well what is the value of this asset that I'm investing in? What is the value of what I'm putting my money in? Does it have intrinsic value? Well, the stock market's basically a future stream of earnings from corporations, so it has value. It might be overvalued, but it still represents value. You know, something like gold or bitcoin is valuable because we say it's valuable, and if gold has a 17 trillion dollar market cap and bitcoin has about a two trillion dollar market cap, could bitcoin become the level of gold? Well, gold is, you know, used to back a lot of international currencies, right? So you'd have to have bitcoin become this thing that would back a lot of international currencies, like, you know, the El Salvador is the world kind of thing. I've already kind of experimented with this a little bit, and so you'd have to have a widespread adoption of, like, bitcoin becoming a global reserve currency for it to grow a ton more, probably, right? And so then it's like, well, what are you buying? What are you investing in? Well, you know, in terms of success for your family, I would much rather have an investment in a physical profession-specific type of investment that you have a competitive edge in, like a practice, like a veterinary physician practice, or maybe, you know, some sort of, like, device company that you're a partner in, right? Those all have much higher rates of, like, upside, I think, relative to the risk you're taking compared to a lot of the stuff people like to kind of gamble on. So these are just some reflections, right? And even when you do invest in things, keep in mind that you have the superpower that other people don't have. You have a high level of professional education, in most cases, for people listening to this podcast. What that means is that you can keep investing even when the economy is not doing so hot. You can not just keep investing, you can probably keep investing at a similar level to what you would do when the economy is hot, and what that does is dollar-cost average the price of what you're investing in to a much, much lower level than you even realize. And so that's incredibly powerful for wealth growth, but the problem is, like, people take risk in these areas where it doesn't pay off as high. The expected payoff to the risk you're taking is not as much, and so then people don't grow wealth as fast as they could. So I'll say personally, right, of all the investments I've ever made, the best one ever has been my business. That's not to say that everybody should be a business owner. I don't think that that's a good idea, and a lot of people being a, you know, a wage earner is actually a much smarter decision for your family. And maybe it's an even better financial decision for your family because it's a, you've got a great, you know, job at a high-paying hospital that would be really difficult to start a private practice in, you know, for your specialty, let's say, right? But in terms of returns, you know, that's being, you know, some sort of business owner, you're doing something that you have a competitive edge in, is one of the best ways to grow wealth quickly. Now, you can also grow wealth in a medium, long-term sense from the stock market very well. Historically, you have been able to. Obviously, no guarantee of future results, but, you know, I really like the idea of a diversified portfolio of assets for somebody with a professional education, regardless of how much student loan debt you have, because you can make your student loan debt a tax in your head instead of a debt, because it's really an income tax. And the only question is, is like, does the tax go up or down, depending on the administration? And then if it, you know, becomes less generous compared to what you wanted, then you can always pay it back if your income's high enough to justify it, right? So then the world's your oyster. You have your professional degree, you've got a more stable income than other people have, even during economic downturns, you can have money to invest, you can invest in real estate, you can invest in the stock market, you can invest in bonds, you can invest in businesses, you can invest in your own practice. Any of these decisions are great decisions. It's really, and within all those decisions you could make, just be thinking about like, okay, is this entertainment or is this really investing, right? Because when you're putting, you know, money into something with a variance that is like triple the U.S. stock market, like crypto, that's gambling, because what can have a huge variance on the upside can have a huge variance on the downside, because that's just how probability and standard deviations and stuff like that work, right? So in 2025, I guess I would just reflect on, are you diversified? Do you have your assets located in the most tax-efficient spot? Do you have your, you know, more tax-efficient assets in your brokerage, your less tax-efficient assets in your retirement? Because if you're paying, you know, a big chunk of your income and income taxes as an accumulator, and you also have a 10% student loan IDR hit too, if you distribute any capital gains, if you distribute any dividends, because you're not really closely paying attention to that, you could lose half or even two-thirds of your income that you realize from investments to taxes and student loan payments. So it's real important to pay attention to that. So one kind of way to think about this is you probably want to have more of your tax-efficient U.S. stocks and your growth stocks in your brokerage account, more of your less tax-efficient, you know, stuff like your dividend-paying stocks, your value stocks, your national stocks in your retirement accounts. So that's like asset location, that's more of an advanced investing strategy of trying to make sure you don't get hit with as much in taxes by putting stuff in the more optimal spots. I'll probably go into a lot more of this stuff in a future podcast, it might be too wonky for some people, but I thought it might be kind of interesting. You know, I even made a mistake, personally, I'll just share it with investing back in 2022, I didn't realize it at the time, but I went to do a taxless harvesting transaction, and what I did is I did it on mutual funds, and the average default method for mutual funds for the past 50 years has been average cost, and that's basically because of just the lack of computers back in the 70s, that's just how they did it, and so the industry has never changed this average default method, and so if you have Vanguard mutual funds, you go in to make a sale order or an exchange order from one mutual fund to another, if you are not really careful, and you do not make really sure to change that average cost method to, you know, specific identification of shares, what happens is it wipes out all of your cost basis information when you do the exchange, and now your average cost paid per share is all a single number, and that's really bad, and the reason it's really bad is when you go to sell, you could have sold, if you need, say, a hundred thousand for a down payment for your dream house on the beach, right, you could have gone for a hundred thousand and pulled out the share lots, which was like the different times you made investments, you can go sell the shares that you bought when the prices were higher, and have a much lower gain if you do specific identification of shares, and then when you go donate to charity, if you're charitably inclined, if you have specific identification of shares, you can also find the stocks that have the lowest cost basis, that means the lowest price you paid for the stocks, because that has the biggest gains, and it gets you the biggest tax deduction, so if you compare, you know, giving a thousand of cash to giving stock that's worth a thousand that has like, you know, that's doubled in price, it's got a five hundred dollar gain, you want to donate the stock because you can get that gain out of your portfolio, and then when you go and you need a thousand dollars, you can just, you can take that thousand dollars cash and just invest it instead, and then now you can pull that thousand out and not pay taxes on any of that five hundred dollar gains, that's so powerful, powerful stuff that can be done with investments that has nothing to do with, you know, these, you know, random asset classes that people talk about, right, none of the worrying about growth versus value, I mean, I think a lot of times people just need to think, okay, diversification, paying attention to taxes, if you do only those two things, and you also have that awareness of like, if I'm interested at all in business related to my profession, I should think about pursuing it, if you just kind of think about those two or three things, you're going to be really, really wealthy one day, I can't guarantee it, but with a very high probability, I think you will be, so those are just some Travis rants, I figured, you know, hey, it's probably a safe time to do some Travis rants during the holidays, right, because maybe nobody's listening to this, but maybe a few people are, so thank you for you if you're listening to this, and yeah, so we'll have probably a little bit more wealth growth content for you in the next few weeks, I hope you enjoy it, I hope you've enjoyed your holidays, deeply appreciate you listening to this podcast, and those of you that have been with us for a long time, it's really fun to get to go through life together, so thank you for listening to this podcast, especially for the loyal folks that have been listening for years, thank you, and I hope you had a lot of restful time with your family, I hope you have a really good rest of your holiday, and then I hope you have a wonderful, prosperous 2025. Thanks so much, and until next time, I'm Travis for The Studio and Planner.