Ep 6 - Mike Taormina - Cutting Through Crypto Noise, and a Case for Active Portfolio Management

Hello, friends. This is Tyler Gardner welcoming you to another episode of your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing.
So let's get started and get you one step closer to where you need to be. Back in 2003, I met this guy at the London School of Economics.
If you had told either of us then that we'd still be in touch decades later, let alone traveling the world together annually, we probably would have laughed it off. Well, I probably would have laughed it off as I remember turning to him right before we left for the year and saying, well, I'll never see you guys again because that's usually how life had worked for me.
Luckily, we've stayed in touch. And here we are, bonded by years of debates, deep dives into finance, and is unshakable, sometimes questionable, devotion to the Mets, the Jets, and Georgetown basketball.
Mike Taormina isn't just a diehard sports fan with an encyclopedic knowledge of crypto. He's the co-founder and CEO of Vault, a fintech company that enables lenders to extend credit backed by digital assets.
Before that, he co-founded Common Bond, which helped originate over $5 billion in student loan refinancing, and Alluvial, the team behind the Liquid Collective, a decentralized Ethereum staking protocol for institutions. And he's got a credential or two to back it up.
MBA from Orton, finance background from Georgetown and LSE. Oh, and he's a CFA charter holder.
That said, his single greatest credential has nothing to do with where he attended some classes or listened to some people talk. But rather, the number one reason why I wanted to bring Mike on the show is because of his lifelong devotion and his ongoing patience teaching others why crypto matters for the future of transparency and efficiency in finance.
The best part, he makes all this complex crypto stuff actually somewhat interesting and engaging. But obviously, I will let you be the judge of that.
So without further ado, a conversation with Michael Taormina. Mike, appreciate your joining me today.
You started your professional career, your traditional finance career at J.P. Morgan, and then you spent years learning more and more about decentralized finance and how it pertains to our current practices and modes of being.
Could you start by telling us just a little bit about how this all came together for you personally and professionally, and what led you to where you

are, an incredibly accomplished finance professional, about to embark on yet another venture? This will be my fourth startup. My first startup was a lender.
We built a lending company. This goes back to late 2011.
I actually met my co-founder, Nate, in 2012. He helped with the corporation, he became our first employee.

And we went from three guys living in the back of the office to an origination machine. We did over $5 billion of refinanced student loans over a 10-year-plus period.
And so we're bringing that experience to bear here. I've also worked in digital assets.
A few years ago, and I did this also in concert with Nate, we started digging into decentralized finance. And so this term refers to financial transactions that take place on a blockchain.
Lending, it's trading, it's insurance. And we went way down the rabbit hole.
There's a lot of innovation going on. There's also a lot of noise.
We came out of that experience very mindful of the noise, but also mindful of the opportunity. And that is that there's a technology at its core that offers unique benefits that can be applied to traditional commerce.
We're not going to be the lender. We're going to be the infrastructure and allow them to offer up a loan that can be partially collateralized by the applicants, Bitcoin or Ethereum.
Why would you want to do that? Today, if you went to a fintech lender and you were getting an unsecured loan because you want to consolidate your credit card debt, they will only look at your underlying credit fundamentals. They'll look at your credit score.
They'll look at your income. But that's it.
It's really hard to use anything that you own personally outside of a car or a home as collateral for a loan. You end up getting an interest rate that reflects that reality.
And what if I offered you the opportunity to take an asset that you already have, as so many Americans are increasingly owning the coin or Ethereum, that's the bulk of the digital asset market, and actually put it to use so you can post some of your digital assets and actually have the opportunity to lower your interest rate and improve your financing? It's funny because when I went to apply for my first mortgage, the lender wanted my father to actually co-sign because my income at the time wasn't making her quite comfortable. And I go, but look at my investable assets.
And she said, Tyler, not sure if you know what we've been through since the subprime housing crisis, but I don't care about your investable assets. So this model sounds appealing on many levels, but you also mentioned you had to work to separate the noise from the opportunity here.
How do you propose doing that? By focusing on the very few quality assets and the very few benefits that a blockchain can provide, The ability to send money to someone else and have it show up within seconds is not something you can do with the traditional banking system, but you can here. We're often within our national borders where a Venmo or a PayPal work just great.
So we don't really need to do that as individuals, but you can imagine the benefit that this would have for the global financial system that you can use this ledger, not just to keep track of information, but also to move money. And can you tell me a little bit more about what the underlying technology both is, and then obviously what it is that makes it so incredibly valuable to the world of finance moving forward.
It's a database that is accessible and transparent. We use databases without even thinking about it, but we're unable to see what that database stores because it's behind gates, that there's some centralized entity that has control of the database and controls access to the database.
And this is just one in which it's completely transparent and it's constructed in such a way where you can't manipulate the information that's already in it. It's impossible for that transaction to be modified.
And so we can have trust that that actually happened. How does that happen? It's by having the network and all the information that's being processed, spread across hundreds of thousands of independent computers.
And it starts with Bitcoin in 2009. It says, we're going to be decentralized money and we're going to use this approach that is a blockchain to keep track of who owns what.
It says, okay, Tyler's wallet over here has this many Bitcoin and Mike has this many Bitcoin and this much was moved from point A to point B, point C to point D. And it just keeps track of that.
That's really all that it does. Seeing this innovation, you saw other blockchain networks come to the market.
The second biggest network would be Ethereum, where Vitalik, the founder or the main founder of Ethereum, saw the benefit of allowing blockchains to do computer programs. So you can actually program the blockchain to do if this, then that transactions.
So you get an un-attracted language, basically. Exactly.
Exactly. And so that allows for more complexity than the Bitcoin network does.
And those two digital assets are about 70% of the market. And what about the other 30%? Can you tell me a little bit about the 30% noise that we're just bombarded by that has unfortunately decreased my desire to learn much of anything about the productive 70%.
In an effort to find utility on blockchains, you have mean coins, a lot of nonsense that's happening on that. I don't think really has any value at the end of the day.
I've made peace with it because I think some of these projects are attempting to be innovative and some of those projects will find something useful, and it's just part of the innovative process. This is all very opaque.
In this ecosystem, everything is so out in the open that the failures, the nonsense is just a lot easier to see. So we're kind of bombarded with the noise in a way that we have with other areas of innovation and technology.
But make no mistake, Most of it is nonsense. And do you worry at all about our collective education or should I say lack thereof about this burgeoning asset class and what we hope to do with it going forward? Absolutely.
Two things are happening at once. You have institutions of the highest levels.
We're talking the Black Rocks of the

world, the wisdom trees of the world, JP Morgan. They're setting up digital asset teams.
They see the value in this and they're seeing how they can offer their products and services and utilize a blockchain to do so. That's going to continue.
That's why the likes of Citigroup, ECG also had or report out estimating the size of the tokenization opportunity. You can use this public database and put stocks and bonds and other financial assets onto it so that we can all keep track.
And the idea is that it will bring transparency. These systems go beyond any one nation's border.
So now you've created a very global system. And they don't look at the ups and downs of where Bitcoin or Ethereum went.
They are just focused on this larger opportunity and working towards it. So where does Vault fit into this conversation? Where do you feel like you have an opportunity to make an impact in decentralized finance going forward?

The Fault actually started as an incubated idea at a venture capitalist fund. Most of the time, the entrepreneurs come up with an idea and then they work on getting some initial traction, go to investors and say, we need some capital to breed life into this.
in some cases, in a subset of cases, it's actually the venture capitalists who say, hey, that's a great idea. I know this market broadly.
This is a good idea. We're venture capitalists.
We're not going to do it. We need to find a founder to run with this.
And that was the case here. And it made sense.
One of the best signs so far is that when we talk to folks, we find that they come along for the ride with us and get more excited about what this can mean. And we think it really can be transformational for lending.
Now, I want to pivot away just a little bit to reflect on your time at Wharton. And I only I'm really interested in this primarily because I'm pretty sure that was where you first came up with some of the idea behind Common Bond, a loan originator primarily for MBA students at Wharton.
So could you reflect a little bit on how that idea helped drive your thinking forward in all of this? The main benefit that I got was that the initial idea was very much born of personal pain of going to Wharton. My co-founders and I, we get into school, we find out what the current rates are for student loans, and it's seven and eight percent.
And I remember looking at that and thinking, that's terrible. But also, well, I guess that's what you did.
My co-founder, Dave, Dave Klein, he looked at it and said, no, that is going to be a better way. I think I should be getting a better rate than what the generic government rate is.
He wanted to throw a website up where you could fund my MBA. And that was the initial name of the company.
I immediately understood the pain point. And I remember there was a Forbes article when we got in.
As incoming class 2013, Forbes had an article, the class that the student loans fell on. We were going to leave with an aggregate estimated $100 million of debt.
So this is a problem that had metastasized just an unbelievable level. It's both in part because education costs were rising, but then financing that became really tough after the financial crisis.
All the banks kind of pulled that. And in my second year, trying to get a student loan, having saved up while I was at J.P.
Morgan prior to Wharton, and Chase declining me for the loan because of my income. And I said, well, of course, I'm a second year MBA.
I'm going into my second year. I'm not making any money.
I said, man, this is completely broken. So that was it.
And that was an indication at that point to move forward with Combine deal. Another was as I was launching the company, I was taking a class about launching a company.
So I was able to take some of the lessons and immediately apply it to what we were doing. I'd also be interested to hear what lessons you learned at Wharton that worked in practice, but also could you reflect a little bit on anything you learned theoretically that when you put it into practice, it didn't quite add up? The prevailing wisdom at the time was you were starting a company, you should definitely do an LLC because there's a tax benefit as an LLC.
As founders, you would get to write that off and you wouldn't if it was a sequel. And so we start the company as an LLC, but as soon as that idea made contact with reality and as we tried to raise money from VCs, they were like, no, absolutely not.
And the reason, a little nuance nuance is that pension funds invest in VCs,

pension funds can't have exposure to unearned business income. And so that structure does not

work with VCs. And so they push you to convert it to a C-corp.
And so we had to do all this

unnecessary headaches. And so my advice to any founder is, if you think that you're going to

raise from a venture capitalist, and most of the time, that's a yes, if you're doing a tech startup, then immediately just do a C Corp. But for what the students were actually doing, it was appropriate.
Well, and one of the reasons I'm interested in your time at Wharton is I also want to know where on earth people learn about personal finance and investing,

if not from one of the world's most well-established MBA programs. And I don't

know if you remember when I called you up as a naive or to reframe in a more positive light,

an aspiring investment manager, and I wanted you to help me put together my first allocation

strategy. I wasn't obviously one of your 1% clients.
I wasn't someone who was going to give

Thank you. management manager and I wanted you to help me put together my first allocation strategy.
I wasn't obviously one of your 1% clients. I wasn't someone who was going to give JP Morgan multi-million dollars worth of business.
Absolutely. So I do remember that.
I was thinking about it knowing that we would speak. Like that's where this all kind of goes back to.
For background context, I worked at JP Morgan in the private bank and I worked on both the investment strategy team and then I have my own book of clients. Now, these clients were some of the most sophisticated that the bank covers.
They set up this desk specifically for them. So we did some stuff that we wouldn't do with a retail investor.
But the experience working on the strategy team, it was how do you put together a portfolio in a reasonable way for a new client that shows up to the bay? And the principle that I took to that conversation with you was, let's look for low cost options. Now, let me interject.
Was that a principle that you just applied to me because I was your friend? Or was that a principle that was pervasive for the private? Oh, yeah, no, that's a good point. That's a good point.
That was a consideration for the funds that the bank would have in its option set. And to its credit, they would have both JP Morgan funds, but then also outside funds.
So it was who's really good at managing money for a particular strategy. And didn't just push you into jp morgan specific funds there's a whole team that would monitor the performance of all the funds and just because you're with jp morgan monopsy did not mean you were going to get on to what we called the the model portfolio so that's new money's coming in it was like someone shows up i swear with 25 million dollars that's how they think about it.
Back then, this was like 20 years ago. How are we going to manage that money? How are we going to allocate it? Which funds we put it in? What percentage? And that was, you know, based on the manager's performance and then future outlook, the fee structure.
What was the historical performance relative to other asset classes because we cared about diversification. So all of that goes into the strategy that you and I put together, which for someone in his 20s who's based in the US, we over-indexed for sure.
We could mostly get there with just ETS. I didn't know what that was or what it meant, what an ETF was at the time, but I knew it made me want to learn.
Had you been interested in investment management before working for JP Morgan? I was a finance major and I took a principles of investment class with Professor James Angel. And it's interesting because nowadays you see a lot of people going into engineering or STEM fields at that time, or starting companies, right? At that time, everyone was trying to work in an investment bank.
Everyone was trying to work at Goldman, JP Morgan, et cetera. And it was mostly in investment banking.
That did not appeal to me, both the work that was being done and the lifestyle that I heard about. But what I did hear from my friend Scott was that he had interned at the private bank and said, you should take a look at that.
And that was basically being a portfolio manager and having a relationship with someone at the end of the day. And I thought that would have been such a better fit for me than going down the investment banking path.
For me, like an obvious choice to go that direction versus what everyone else in my class was doing. One of the biggest debates that I get into with people on these social platforms is always, you know, active management versus passive management.
And to this day, we have a thriving community and industry that is built on active management. So, you know, 50 some odd years after Bogle creates the concept of the index fund, but we still have this incredible industry devoted to active management.
Did you guys tackle that in this class? And if so, what was the takeaway? Did you guys leave thinking, yes, the market can be beat and here's how you do it? Well, a combination of things. We dug into the efficient market hypothesis.
So the price of Apple already reflects everything that could possibly be known about it. As a result, it's really, really hard for any manager to consistently beat the index.
So in the case of a U.S. fund manager, mutual fund manager, can they do better than the S&P 500? And plenty of research has shown this is exceptionally hard to do.
That doesn't stop people from trying. So what do you do with that information? You could bet on one of these managers or you can simply just say, I'm not going to get blown up.
I'm not going to lose. I'm just going to put my money in and earn as close to that benchmark by putting it in a low-cost diversified fund.
Done. What do you do these days, if you don't mind my asking personally? Would you put it into venture capital? Would you put it into private equity? Or would you go for the set it and forget it, buff it concept of a couple funds and call it a day? Similar to how the portfolios were managed when I was at J.P.
Morgan, it was a combination of the two. You'd be putting it in sometimes into ETFs because that was, in their estimations, the best vehicle to get exposure to a given strategy, while at the same time they had this entire platform of hedge fund, VC, and private equity managers that they were putting money, because getting access to private deals, which the private equity and the VC investors couldn't get access to, like that was how you would implement that strategy.
You're not able to do that by buying an ETF. So if you're really having a balanced portfolio and you can meet all the minimums, like there aren't a ton of people that can do this, can do this, but accredited investors can start to think about deploying into some of these riskier, but potentially higher return strategies.
So what are you personally currently invested in at this point in your life? I have my IRA, which has taken in any 401ks that I've gotten over the years, or if I've been consulting, I've rolled in capital into that sort of a SEP IRA. It's had a robo-advisor, diversified.
I kind of just set it and forget it. I've done my fair share of individual stocks and options.
And one of the takeaways is that while I could give you good advice almost 20 years ago in setting up your first portfolio, it's really hard for someone to do well on their own. It's smart to put this in someone else's hands that doesn't have the emotional trappings with their own money.

I want you to expand on that because you're not selling my audience your services right now, right? That's right. And so the only, and I'm, and as anyone listening knows, I'm highly cynical when it comes to

the idea of active management for a percentage of assets under management. As someone who has been in the industry, has worked with ultra high net worth individuals, ultra high net worth institutions, VC, private equity, tell me the benefits for someone who right now just says, I'm still thinking about working with a planner or an investment manager.

What you and I learned when we were at London School of Economics from a theoretical standpoint in the textbooks, what's one of the most common assumptions that they make when you start off a new topic?

They say, assume everyone is rational. It's insane because it's so not true, right? The second that that concept has contact with reality, it goes off the rails.
Not entirely off the rails. It doesn't mean that we just give zero value to some of these economic and financial

concepts, but there's a behavioral and emotional aspect that you have to consider and take in

tandem with this. This is theoretically how it should work, right? I'm a CFHR holder.
I worked

at JP Morgan. I studied finance.
I know financial markets super well. I know how the ins and outs

Thank you. I worked at JP Morgan.
I studied finance. I know financial markets super well.
I know how the ins and outs of how these things work. And sometimes that's to your disadvantage if you're using it to manage your own money.
And so I would do some crazy things having done it for my clients, but in a very emotion free way. But when emotion comes into play play because it's your money, you start doing some stupid things.
You start making mistakes. And so some advice early on was, do not try to do this on your own.
Hand the reins over to someone who is going to, in the same way that I did it with you, we looked at, okay, what makes sense? I took in some information about your specific situation. We put together something that made sense.
I knew it wasn't going to blow you up. You may have done something much riskier.
We never went down that path. What we came out with was something that worked really well because I was just following the sound principles and taking into account your specific situation and preventing you, this was the key part we wouldn't have talked about, but preventing you from doing some crazy stuff.
It's funny. Three years ago, I found myself in the same position that you had been in as a mentor to me, but I was now mentoring someone who actually had much more experience in finance than I had at the time when you were helping me.
And we put together a portfolio of individual stocks. He was really excited about it.
The market tanked. Three days later, he sold it all and locked in a 10% loss.
So I remember pausing at that moment and being like, okay, well, if this guy can't figure out his emotions and locks in the 10%, the 1% might've been worth it. And of course, as a good friend would, I called him and gave him a hard time about it.
But he said, look, if and when you ever have kids, he said that was the moment where actually investing became very different to him because now all of a sudden he had multiple people relying on this income and on these investable assets. So it was a good lesson for me just as far as my own empathy for people who do need a coach on the side.
But getting back to your investing, again, as someone who is highly experienced and knowledgeable in this field, you said you now invest with a robo advisor. Can you tell me a little bit about why you, someone again who knows so much about what the right thing to do is, would possibly pay 0.25 to 0.5% to have an algorithm do this stuff for you.
What I was doing before was I had an e-trade account and it was a combination of stocks and then unfortunately options. I'd seen some super rich people become even richer, incredibly so, by using options.
I got to experience how they function how a little bit of premium up front can explode if you if you hit the timing right i've seen the good but most of the time most people who trade options it's a losing game it's because the swings are so volatile that i think the emotions become that much more magnified.

And so I'm doing all this like individual stuff. I'm paying way too much attention to what's going on in my portfolio.
All of this is very toxic behavior. And so I finally move over to a robo-advisor.
I was working with the executive coach. I'm like, you're talking through this.
And he's like, what are you doing to yourself? And I agree with that. So I just basically shut the account down.

I prevented myself from being able to trade more of the stuff and moved my remaining capital to a robo advisor and it's just gone up over time i don't have the headaches that i used to subject myself to on a on a daily basis um at this point I've gotten to see what are weaknesses on my end. And everyone's got something when it comes to personal finance.
And you got to identify what it is. And hopefully you don't lose too much money in the process.
Can you tell me a little bit more about your desire to work with an executive coach? Because I feel like there has to be some overlap between these two things. Absolutely.
It's very similar. It's just applying it to the rest of your life.
You want someone who has a more objective look on things that are happening in your life, whether they be personal, whether they be work-related, financial advice, or just life advice. So that's what it meant for me.
I worked with someone for about seven or eight years. It was invaluable.
What would you say to someone who is trying to figure out whether it's worth it for them? What are the questions that they have to ask themselves or the experiences that they have to go through to figure out whether or not it is worth that price point to get someone else to come in and either help or to take over altogether. Similar to how we were thinking about it, what are our goals here? And are there any big expenditures on the horizon that we need to factor in? One thing I've always thought about in a given year, there's your personal income statement, and then there's your personal balance sheet.
And so for me, I've always thought about in a given year, there's your personal income statement and then there's your personal balance sheet. And so for me, I've always tried to make it so that my income, this sounds very simple, but I don't think everyone gets this.
Your income is more than your expenses, than your run-in-the-mill expenses. Sorry, could you say that one more time? You'll want your income to be more than your expenses.
You want there to be something at the end of the year. Now, that's not always going to be the case because you may need to make an investment.
That was the case for me when I went to graduate school. So, okay, we're going to borrow money and we're going to use that to make an investment that will pay off over many years.
But that's a balance sheet item. And then if something goes on the balance sheet, I don't want to have to touch it.
I don't want to get in the business of pulling from it. I want my personal income sheet to finance all that stuff.
That includes vacations. Like I don't really look at a vacation as something that you should be pulling from your balance sheet from.
You should save up for that. And that allows you to get to whatever your financial goals are.
If you're not touching the balance sheet too much outside of investments in yourself, we're trying to understand all of those issues and And I would be promoting, and I know you do all the time, low cost options, diversification. You can really get there with just a handful of names to get the exposure that you need.
And if you're not checking obsessively, if you're not freaked out when the market inevitably goes down 5% to 7%, then you may be a candidate for doing this on your own. You're trying to temperature check this.
Maybe it's going through the experience and seeing how you react to it. And if you're doing it early on, you're probably playing with the smallest amount of chips you will ever play with.
So if you bang your head because the market tanks a bit, you're not out of the game and it'll allow you to understand yourself better. Is it possible to do it by yourself? Yes.
You have to find out a little bit about yourself before you really know for sure. I can think of no better learning, obviously, and this seems like an obvious statement, but it's worth reiterating always than my own firsthand experience, right? When I was in my 20s, I made so many boneheaded investing moves, but they were priceless.
Because just as you're saying, even though I lost a lot of money, it was the least amount of money I'd ever lose, if you will. But what I gained was then a very realistic sense of exactly what my risk profile was for the rest of my life.
One of my old mentors said it best when I would make a mistake from which I obviously could come back, and he would just look at me and say, expensive lesson cheaply learned. So I do hope everybody gets this expensive lesson as early in their lives as possible.
We talked a little bit about my own experiences, but others where there's some people who never move off the block. They're way too conservative.
And I'm thinking of someone who had saved up maybe $60,000 over the course of several years and the practical reality is there was a strong reluctance, a strong hesitation to dip toes into the stock market, even if it was done in a really diversified way. And as a result, they had missed out on years of compounded growth.
If they had consistently invested over the long term, they would have, I would imagine, at least double the assets than they had. Situations where you're not taking enough risk, as well as when you're taking too much risk, and it's just like, how can you find that balance? Another reason why working with a third party can help.

And that's definitely what I see the most and hear about the most is people being scared and erring on the side of caution at the expense of missed opportunity.

And that's completely understandable.

I don't judge.

I never will.

If someone feels more comfortable sitting on the sidelines, that's great.

What I do worry about is a culture of fear and a culture that always will attach more weight to the downside than to the upside. And I hear from a lot of people too, who are sitting on hundreds of thousands of dollars in high yield savings accounts out of fear.
And if you have an upcoming expense, as you said on your personal income statement, that's great. But if you don't, if it's an unknown fear, I can't help but reflect that we need to be pushing more risk on.
It takes personal effort to tap in and actually learn this stuff. So it's a little bit on the industry.
It's also a little bit on individuals. It's hard to get to that place where you can put this to work comfortably.
And so the assumption is, well, just go work with an advisor. Where does debt fit into this conversation? Because one of the critiques I get completely fairly is that I'm speaking to people who just have millions of dollars and I don't really talk about how to either get out of debt

or sometimes interestingly, perhaps more easily, how to get into debt. So where does debt play into your personal balance sheet and how has it impacted you throughout your life, both personally and in business? Sometimes it's necessary.
It's not a bad thing to have debt. Debt is just merely taking dollars you earn from the future and using them today, sometimes as a necessary step to achieve goals in the future.
A student loans a great example of that. So I borrowed $200,000, used that to go to Wharton, and that has paid dividends over several years.
How do you think about what debt is okay to carry and when it's time to pay it down? That's the big question. So first thing is what's the interest rate on the debt and how does it compare to what you can reasonably expect to earn in the stock market? How do you think about that when you overlay your current income situation? You don't have a job.
That doesn't mean take all your savings and pay down your debt per se. You have to manage that.
But let's say that you're good on the income front. You know, you have a job, you're paying the bills.
Great. You want to target the debt that comes with the highest interest rate.
Now, typically that's going to be your credit card bill. Your credit card is probably going to be around 30, 35 percent.
And you shouldn't expect to do better than that in the stock market. If you have free cash after paying for all of your necessary monthly expenses, you should immediately attack your credit card.
And let's assume all that's gone, okay? Another mistake that I made was paying down my student loan.

And you'd think, what?

That's like the responsible thing to do.

But the rate on my student loan was fixed at 4.2%. I should be able to do better than that on average in the stock market.
So I could use the excess to eventually pay that down. And so I had this

one year where I was paying down lots of my student loan because I just, I didn't like the

feeling of having the debt. But that was an irrational move because that was a very easy bogey to beat.
But if it had been credit card debt, it makes zero sense to try and throw it in the stock market because it might go down in an even worse situation. And that debt will compound, whereas your portfolio won't compound in a way to catch up.
So that's how I think about it. It falls into two different buckets and not all debt is the same.
This might be the first that I've learned is that you're perhaps even more risk tolerant than I am. I've always prided myself on risk tolerance and investing, and I have faith in market structures, et cetera.
But my benchmark for comparing whether to pay it down or not is the risk-free asset class, not the stock market, right? So when you bring up a 4.2% interest rate on your student loans, for me, I actually probably might agree with you. I think I could find something better elsewhere than paying down the 4.2.
And this is exactly the trouble zone for people, the gray area, if you will, of that 5% to 7% debt and what to do then. Then I start getting into an area of saying, yeah, I get it.
Since the S&P's inception,

it's 7%, a little more than 7% in real terms on average. And so if back, and this is obviously

back to the beginning, if I have a long enough time horizon, right, then of course I'd be

irrational to pay down a debt if we continue to have faith in this structure. But interestingly,

I've always used the risk-free asset. I've used the 90-day T-bill as kind of my comp.

Thank you. We continue to have faith in this structure.
But interestingly, I've always used the risk-free asset. I've used the 90-day T-bill as kind of my comp of, should I do this or should I not? That's reasonable in some senses.
The reason why I would look to the equity markets is because I still believe this about myself, that I'm on the younger side. It's changing, right? You can see the hair is graying.
I hate to tell you, Mike, where's I? I'm in year 10 of the 10-year repayment plan for the student loan. So, you know, someone who's at the very beginning of their student loan journey, they should be assuming the equity markets because they're probably really young.
And so you have that whole timescale to go back to an earlier point of you can take the bumps and the bruises and you should be in more equity than credit. And over time, as you know, that's going to shift and it's going to become more and more credit because you've built up a good store and you don't want to lose it.
So the goals change. That benchmark will change, but that benchmark is nonetheless how you would decide what to pay down or not.
This is probably as good a place as any to circle back to how we started the show, which is separating noise from opportunity. And we obviously live with endless noise that tells us debt is terrible.
Whenever I turn on the new financial guru of the day, they're saying, screaming, how to get out of debt as quickly as possible, and you should be ashamed of yourself for being in debt. But the only debt that I can hop on board the toxic bandwagon with there is credit card debt.
That's it. And every other debt should be considered in a much healthier light.
But the 20 to 30 percent, absolutely. We pay that down instantaneously, no questions asked.
Because beyond that debt and what we haven't really hit on yet is not just considerations for getting out of debt, but again, getting into debt and thinking through leverage. So could you comment a little bit about how you've thought about leverage throughout your life and using debt to build wealth? Extremely wealthy people are doing that.
They're borrowing and they do the same calculus of what can I make with this money versus what is it going to cost me? You have to think about this helps extend you to get to your financial goals and some of the wealthiest people in the world are doing the exact same thing. You also want to be mindful of your debt to income ratio.
So this is an important concept from a lender's standpoint. When they go to assess you, this is one of the things that they're looking at.
When they pull your credit report, they can see every one that you owe money to, and they can also see what the monthly payment is. And they basically can aggregate that together and look at your income, which they'll also ask for verification for.
And then they'll do a quick math calculation there. And obviously the higher that is, the less likely they are to extend more credit to you.
And that's a way for lenders to assess whether or not you're in bad shape or not. And the debt to income ratio is something that people will use or that lenders will apply to individual people.
It'll affect how likely you are to get more credit if you need it. It'll reflect in your credit score.
So if you're signed up for getting regular reporting on your credit, your credit will not reflect well if a debt to income is getting into a dangerous zone, but that's why it's happening. Absolutely.
And again, laughing back to only our time when we were at London School of Economics and my debt to income ratio was less than idyllic, but again, won't go into that too much now. But seriously, thanks for obviously A, being on this show, but B, looking back so many years ago, helping me become interested in asset allocation.
It literally did change my life and it's amazing. It was one of the first times I got to apply that and really feel like I was helping a friend out with that.
I look upon it fondly as well. And I really appreciate you having me on the show.
I hope we get to do this again sometime. You'll be back because I just have, I have a feeling that at some point I am going to need to call again on you to separate the noise from the opportunity when it comes to both crypto and decentralized finance.
And there's nobody I've met yet who does it better. So thank you so much for being on the show, Mike.
And obviously I will hope to see you very soon. See you soon.
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I'm Tyler Gardner, your money guide on the side,

and I truly hope this episode got you one step closer to where you need to be.