How should I Invest in My 20s?

00:00:00.000 | (projector whirring)

00:00:03.080 | - Welcome back to Portfolio Rescuer.

00:00:18.440 | We always appreciate your questions, comments,

00:00:20.300 | and feedback.

00:00:21.140 | Remember our email here, askthecompoundshow@gmail.com.

00:00:23.920 | As always, thanks to all the little viewers

00:00:25.880 | in the chat here watching live.

00:00:27.300 | We appreciate it.

00:00:28.600 | Today's Animal Spirit, or today, ooh, Animal Spirits.

00:00:30.860 | Sorry, Duncan. - Oh, wow, wow.

00:00:32.000 | - Wrong show.

00:00:32.840 | Portfolio Rescue is sponsored by Innovator ETFs.

00:00:35.140 | On this week's Animal Spirits,

00:00:36.200 | I talked about how everyone in the market

00:00:38.040 | wants a resolution.

00:00:38.880 | They want new highs or they want new lows, right?

00:00:41.360 | People just aren't comfortable in the middle anymore.

00:00:43.360 | They want something to happen fast.

00:00:44.440 | But what if we just chop for a while?

00:00:45.960 | Hey, maybe some bear market rallies,

00:00:47.680 | mix in with some corrections.

00:00:49.600 | What if you think we're going 10 or 15% somewhere,

00:00:52.440 | but you don't know which way?

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00:01:06.800 | So you basically have 15% on the upside,

00:01:08.880 | 15% on the downside.

00:01:10.400 | So you have some downside protection,

00:01:11.720 | but some room to the upside if things happen.

00:01:13.740 | So you're basically giving yourself a range

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00:01:23.600 | - Yeah, I'd say along with taxes,

00:01:25.080 | another thing people hate is uncertainty, right?

00:01:27.720 | - Yeah, so this is giving you some kind of definitions

00:01:30.220 | and bookending things.

00:01:31.060 | All right, last week we had a question from a viewer

00:01:33.500 | who asked, I have a sub 3% mortgage rate.

00:01:36.700 | If I move to a bigger house 'cause I have three kids now,

00:01:39.000 | it's gonna be closer to six.

00:01:40.800 | Lots of good feedback and opinions on this one.

00:01:42.280 | Some people very certain, right?

00:01:43.760 | So some people said,

00:01:44.840 | there is no way you can get out of that mortgage.

00:01:46.760 | Do whatever you can, renovate, add a bedroom,

00:01:49.480 | make the kids sleep in bunk beds,

00:01:51.260 | which doesn't seem to happen much anymore.

00:01:52.900 | You do everything you possibly can

00:01:54.260 | to keep that mortgage, right?

00:01:55.900 | Then we had other people say, no, no, no.

00:01:57.740 | It doesn't matter, family Trump spreadsheets.

00:02:00.020 | Who cares about the low mortgage rate?

00:02:01.240 | If you can afford it, you move.

00:02:02.900 | I think both valid arguments.

00:02:04.620 | Here's the thing,

00:02:05.460 | neither argument is necessarily right or wrong, right?

00:02:08.500 | It's all circumstantial, right?

00:02:10.140 | And the problem is most big financial decisions like this

00:02:13.100 | exist in the gray area where it's very difficult.

00:02:16.300 | And the problem is we don't have a lot of practice

00:02:18.260 | with big financial decisions like this.

00:02:20.440 | It's sort of like we have a couple opportunities to do it.

00:02:23.560 | You don't get to practice over and over again.

00:02:24.760 | So I just wanted to offer a friendly reminder

00:02:26.280 | that these decisions aren't often easy

00:02:28.200 | and often require trade-offs.

00:02:29.560 | And what's right for you and your family

00:02:30.960 | could be completely wrong for someone else

00:02:33.000 | and their family or their financial circumstances.

00:02:34.640 | A lot of it is circumstantial.

00:02:36.320 | And most of the time, there's no right or wrong answer here.

00:02:38.840 | It depends on what works for you.

00:02:40.880 | - I will say though, I'm a big fan of bunk beds.

00:02:43.000 | I think they're underrated.

00:02:44.800 | - It's true.

00:02:45.640 | - Yeah, I always enjoyed climbing up on the top one.

00:02:48.280 | It's fun.

00:02:49.120 | - All right, let's get to, I was a bunk bed kid

00:02:51.240 | for the first 10 years of my life, probably.

00:02:53.440 | Top bunk guy here.

00:02:54.360 | All right, let's do some questions

00:02:55.320 | from our wonderful audience.

00:02:56.880 | - Okay, so up first today we have,

00:03:01.280 | "Hey guys, can you please explain

00:03:02.700 | "how an inflation-linked bond could have lost money

00:03:04.920 | "this year with inflation at 9%?"

00:03:07.180 | Good question.

00:03:08.020 | - We've got a lot of questions like this from people

00:03:09.920 | because, John, let's do a chart on a 2021 performance.

00:03:13.600 | So what this is showing is the iShares tips bond ETF,

00:03:17.000 | TIP versus the aggregate bond.

00:03:19.640 | So that's basically the total bond fund.

00:03:21.040 | You can see in 2021, tips outperform, they're up almost 6%.

00:03:24.800 | The regular bond fund, the bond market was down 2%,

00:03:27.520 | call it, right?

00:03:29.000 | So everyone says, all right,

00:03:30.240 | inflation's gonna keep going up, let's load up on tips.

00:03:32.280 | John, let's do 2022 now.

00:03:35.000 | Okay, the aggregate bond market is down 10%,

00:03:38.280 | but wait a minute, tips are down 7%.

00:03:39.880 | How could this be, right?

00:03:41.740 | Over the past year, inflation is 8.5%, tips are down 5%.

00:03:46.800 | Well, so these treasury-protected securities or tips

00:03:49.760 | are one of the most peculiar assets

00:03:51.100 | in the whole investment universe.

00:03:52.720 | They're also relatively new.

00:03:53.640 | So I think a lot of people probably don't understand

00:03:55.800 | how they work.

00:03:56.680 | They've been in the UK since like the '80s.

00:03:58.720 | I think they didn't come around until 1996 or 1997

00:04:01.000 | in the US, so they're still relatively new.

00:04:02.600 | The way that they work,

00:04:03.440 | the principal value of the bond is tied to inflation.

00:04:06.480 | Inflation goes up,

00:04:07.320 | the principal value of the bond goes up as well.

00:04:09.320 | So whatever interest rate you have on that

00:04:11.040 | goes up with principal, right?

00:04:12.480 | So that makes sense.

00:04:13.320 | The problem is you don't get paid that higher principal

00:04:16.200 | until maturity.

00:04:17.040 | So from now into maturity, a lot of things could happen,

00:04:20.120 | right?

00:04:20.960 | So there's two main reasons for the losses this year.

00:04:21.960 | One, tips can help protect, excuse me,

00:04:25.520 | tips can help protect investors

00:04:26.600 | against unexpected inflation.

00:04:29.960 | So if inflation has already baked into the pie

00:04:32.120 | in those rates, it doesn't help much.

00:04:33.960 | So in 2021, we got unexpected inflation, tips did well.

00:04:37.160 | In 2022, investors said, okay,

00:04:39.120 | we're building inflation into these expectations

00:04:41.720 | and the yields went down, right?

00:04:44.080 | Number two, sometimes tips act like inflation hedges

00:04:47.520 | and sometimes they act like bonds.

00:04:48.720 | When interest rates rise, tips act like bonds.

00:04:51.320 | So rates went from, I think the 10-year went from 1.5%

00:04:54.760 | at the beginning of the year to 3% now.

00:04:57.140 | So rates doubled.

00:04:58.440 | When that happens, tips are gonna act more like bonds

00:05:00.780 | than they are an inflation protection hedge.

00:05:02.860 | So the TIP ETF, this is the biggest one that I share as fun

00:05:06.400 | that everyone always talks about.

00:05:07.740 | It has an average maturity of like seven and a half years,

00:05:09.760 | an average duration of seven years.

00:05:12.360 | Duration is simply a way

00:05:13.280 | to measure interest rate sensitivity.

00:05:14.680 | So interest rates go up or down 1%.

00:05:17.480 | You expect the price of the bond or bond fund

00:05:19.520 | to go up or down 7%.

00:05:20.560 | So interest rates rise 1%.

00:05:22.280 | You would expect the bonds to go down 7%,

00:05:24.440 | which is kind of what happened this year, right?

00:05:26.100 | So tips have sold off.

00:05:27.560 | The good news for investors from here

00:05:28.920 | is you now have higher rates.

00:05:30.640 | Real rates are actually positive

00:05:31.780 | for the first time in a while.

00:05:32.620 | The bad news is you had to eat some losses

00:05:33.960 | to get to this point.

00:05:35.440 | So I think there is one other way

00:05:38.680 | investors can potentially make it

00:05:41.000 | so the inflation protected hedge is a bigger part of it.

00:05:43.720 | And that's short-term tips.

00:05:45.240 | So John, throw up the next chart

00:05:46.980 | of the Vanguard short-term tips fund here.

00:05:50.040 | So this is inflation really took off in April of 2021.

00:05:53.400 | It's the first time it went above 3%,

00:05:54.680 | which is the long-term average.

00:05:55.880 | And this is the performance since then of the VTIP fund,

00:05:58.360 | which is Vanguard short-term tips versus the TIP fund.

00:06:02.080 | You can see short-term tips have outperformed

00:06:04.400 | and they've done so as much less volatility.

00:06:06.760 | And the reason is because that fund

00:06:08.860 | is not nearly as sensitive to interest rate changes.

00:06:11.320 | The inflation kicker matters more for short-term tips.

00:06:13.660 | So that's one way that you can actually protect a little bit

00:06:16.140 | and kind of have that inflation hedge

00:06:18.580 | be a bigger part of it than the interest rates.

00:06:20.100 | So longer-term tips are gonna have a lot more volatility.

00:06:23.180 | So if you wanna narrow down more to that inflation piece,

00:06:26.860 | that's how you do it.

00:06:27.700 | And I'll be remiss if I didn't mention

00:06:29.460 | Series I savings bonds,

00:06:30.540 | which we spent a whole episode talking about here,

00:06:32.700 | one of our favorites.

00:06:33.560 | There's a capital I want you to put in those.

00:06:35.380 | Though that is the best one-for-one inflation hedge

00:06:38.120 | you can get 'cause you have no interest rate risk.

00:06:39.860 | So short-term tips still have a little bit

00:06:41.180 | of interest rate risk,

00:06:42.260 | but Series I savings bonds have none.

00:06:44.300 | So find that episode, we talked about that.

00:06:46.280 | I know it's confusing,

00:06:47.120 | but it's kind of important to understand all the risks here

00:06:49.060 | where you have these securities

00:06:50.220 | that can act like two different things at once,

00:06:51.820 | and sometimes one thing matters more than the other.

00:06:54.760 | - Yeah, bond math is one of the more confusing things

00:06:57.260 | I've ever looked into.

00:07:00.240 | - It is, so yeah.

00:07:01.080 | So I think short-term tips are probably a good solution

00:07:03.660 | for people who are worried about TIPs losing money right now

00:07:05.300 | if rates continue to go higher.

00:07:06.500 | All right, let's do another one.

00:07:07.920 | Okay, up next we have a question from Scott.

00:07:10.980 | My wife and I are in our early 60s.

00:07:13.080 | My wife is retired and I plan to retire in about five years.

00:07:16.020 | Our retirement savings are pretty solid

00:07:17.660 | relative to our anticipated expenses,

00:07:19.780 | and my wife also receives pension income.

00:07:21.920 | My question is about how to invest the bond portion

00:07:24.000 | of my 401k, especially as I get closer to retirement.

00:07:27.400 | It's 50/50 now.

00:07:29.360 | We also have Roth IRAs and are 100% equity in those

00:07:33.660 | because we're targeting those accounts

00:07:34.940 | for our longer-term needs.

00:07:36.500 | The fixed income portion of my 401k

00:07:38.700 | is in an intermediate-term core bond fund.

00:07:41.260 | Is that a reasonable place for these funds,

00:07:42.860 | or should I consider diversifying across different funds

00:07:45.500 | or individual bonds?

00:07:46.860 | I currently plan to delay Social Security until age 70,

00:07:49.980 | so we may need somewhat higher withdrawals from my 401k

00:07:53.780 | to cover expenses in the first few years of a retirement.

00:07:57.180 | Would it be worth considering a bond ladder approach?

00:07:59.260 | How easy is that to manage within a 401k account?

00:08:02.540 | And I gotta be honest, it sounds cool,

00:08:03.940 | but I don't know what a bond ladder is.

00:08:06.420 | - Two questions about bond funds.

00:08:08.540 | We're coming in hot today, right?

00:08:10.220 | - Right.

00:08:11.340 | - I think fixed income was probably

00:08:12.820 | one of the easiest asset classes to allocate to

00:08:14.580 | for the last 40 years or so

00:08:15.860 | because you basically put your money in anything,

00:08:18.200 | a core bond fund, U.S. Treasuries, whatever.

00:08:20.740 | It did fine.

00:08:21.580 | Interest rates fell.

00:08:22.700 | Corey Hofstein actually wrote this piece in 2017

00:08:24.740 | that has kind of stuck with me ever since,

00:08:26.580 | and he said from 1981 to 2017,

00:08:30.100 | 10-year U.S. Treasury went from 15% to 2%.

00:08:33.860 | By my calculations,

00:08:34.780 | the average annual return there was 7 1/2%,

00:08:37.300 | which is phenomenal for bonds

00:08:38.580 | or these boring bonds over four decades.

00:08:40.580 | I think the worst year ever was down 11%,

00:08:42.940 | and that was 2009 after bonds sold off

00:08:45.140 | following the Great Financial Crisis.

00:08:46.180 | So that 40-year bond bull market

00:08:48.260 | might go down as one of the greatest in history,

00:08:50.140 | but most people assume the reason bonds did so well

00:08:52.820 | is 'cause interest rates fell the whole time.

00:08:55.020 | And Corey said, "Well, let's look at the attribution here

00:08:57.180 | "and figure it out."

00:08:58.020 | Duncan, if you had to guess,

00:08:58.940 | so there's two components to bond fund returns.

00:09:01.500 | One is basically the starting yield.

00:09:02.740 | The other one is interest rates rising or falling, right?

00:09:05.580 | So if you had to guess over that 40-year period,

00:09:07.660 | how much did falling rates have to do

00:09:09.460 | with the total return for 10-year treasures over that time?

00:09:13.020 | I'm going to say a lot.

00:09:15.260 | Okay, less than you'd think.

00:09:18.060 | 3/4 of the total return came from the starting yield.

00:09:21.580 | Only about 25% came from falling rates.

00:09:24.420 | So falling rates helped,

00:09:25.540 | but it was basically you had high starting yields

00:09:27.820 | that entire time.

00:09:29.300 | So anything you can put your money in in terms of bonds

00:09:32.180 | was fine.

00:09:33.020 | You could buy a core bond fund,

00:09:33.980 | government bonds need to be fine.

00:09:35.580 | Now, right now, it's a lot harder

00:09:37.340 | because you have much lower rates

00:09:38.820 | and things are choppier and more volatile in interest rates,

00:09:40.940 | and that means things move around a little more.

00:09:42.620 | So you could simply let a bond fund manager

00:09:44.540 | choose where to put you in,

00:09:46.060 | which segment to invest in, what duration.

00:09:48.100 | The problem is a lot of these core bond fund managers

00:09:50.620 | have some caps on things like maturity and duration

00:09:53.660 | that they can invest in.

00:09:54.500 | So I think more interest rate volatility

00:09:56.780 | means it's probably more important than ever

00:09:58.220 | to diversify your bonds,

00:09:59.100 | which is something most investors didn't have to do.

00:10:00.980 | So that could be, we talked about tips today,

00:10:03.100 | short-term bonds, corporates.

00:10:05.020 | If you're in a 401(k), maybe a stable value fund.

00:10:07.500 | If you're out of a 401(k),

00:10:08.340 | that could be some more cash

00:10:09.940 | than series I savings bond you mentioned.

00:10:11.380 | So I think there's no guarantee

00:10:13.220 | that broader diversification

00:10:14.340 | is gonna improve your risk-adjusted returns

00:10:16.580 | or whatever you wanna think about it or your income even.

00:10:18.980 | But I think that helps make sure you don't put your money

00:10:21.820 | in the wrong segment of fixed income

00:10:23.580 | or the wrong bond fund manager who really screws things up.

00:10:27.180 | The other thing is if you don't have a lot of good options

00:10:29.460 | in your 401(k), you can always, when you retire,

00:10:31.420 | roll it over into IRA,

00:10:32.460 | which will have tons of options for you.

00:10:34.140 | So I do think that diversifying in bond funds

00:10:36.540 | is something investors haven't had to think about

00:10:38.060 | for a long time.

00:10:39.380 | And that's something people are gonna have to think about

00:10:41.180 | now for sure.

00:10:42.580 | - It's kind of funny that we've come so far

00:10:44.540 | that we're talking, we're getting all these questions

00:10:46.220 | about bonds and bond funds

00:10:47.500 | when it was like triple-levered ETFs and crypto,

00:10:50.580 | you know, like a year and a half ago.

00:10:51.940 | - Still a bear market, right?

00:10:54.100 | But it makes sense that people wanna figure out,

00:10:56.260 | especially getting close to retirement,

00:10:58.820 | you know, how to protect their capital a little bit.

00:11:00.700 | - Right.

00:11:01.540 | - Let's do another one. - Smart.

00:11:02.780 | Okay, up next we have a question from Charlie.

00:11:05.820 | I live in Nashville, Tennessee

00:11:07.060 | and run a successful financial advisory practice here.

00:11:09.860 | When I look at my client base, the average age is 61.

00:11:12.540 | I'm 39 and I'm wondering what suggestions you would have

00:11:16.160 | for marketing my services to younger clients,

00:11:18.100 | as I don't have that many.

00:11:19.420 | I would be perfectly fine to accept smaller accounts,

00:11:21.940 | but I don't love pitching close friends and family.

00:11:24.780 | What methods besides this would you recommend?

00:11:27.320 | - Good question.

00:11:28.160 | You don't have to brag.

00:11:29.000 | Successful financial advisory.

00:11:30.300 | Good job.

00:11:31.140 | - Yeah, good job.

00:11:31.960 | - Let's bring in the person I know

00:11:32.800 | who knows more about financial advisory business

00:11:34.740 | than anyone I know.

00:11:36.220 | Josh Brown.

00:11:37.060 | - Hey, Josh. - Hey, Josh.

00:11:39.580 | - Hi, everybody. - All right.

00:11:41.580 | All right, this is a younger person.

00:11:42.420 | - Thanks for having me on the show.

00:11:43.240 | Wait, can I do, I have bunk bed material.

00:11:45.540 | - Okay, yeah, let's hear it. - So I can't believe,

00:11:46.780 | I'm sorry, I can't believe like the obvious,

00:11:49.340 | neither one of you,

00:11:50.400 | we were talking about the merits of bunk beds.

00:11:53.600 | So much room for activities.

00:11:56.300 | I don't know.

00:11:57.260 | No stepbrothers fans here?

00:11:58.900 | I thought that was a layup.

00:12:02.380 | I was muted.

00:12:03.220 | I was trying to get in.

00:12:04.140 | - It's been too long since I've seen that.

00:12:07.220 | - All right, fine.

00:12:08.420 | - All right, so you have a young person

00:12:09.520 | wants to bring in younger clients.

00:12:11.780 | The funny thing is usually young clients

00:12:13.420 | have a hard time working with older clients, right?

00:12:15.820 | Because an older client sometimes doesn't wanna work

00:12:17.820 | with someone who's younger.

00:12:18.660 | So how do you figure out a way to break through

00:12:21.980 | and sort of change the sales cycle here?

00:12:26.180 | - This is not gonna be a satisfying answer.

00:12:28.920 | The truth is that you really can't

00:12:31.220 | because you wanna work with young people,

00:12:33.980 | but young people are not looking for retirement solutions.

00:12:37.220 | And I think as an advisor,

00:12:39.280 | your sweet spot for financial planning work

00:12:42.940 | really doesn't come until like after 35.

00:12:45.380 | And even then, it's mostly like how many kids do you have?

00:12:48.940 | Do you have life insurance?

00:12:49.940 | Like that's the extent of the hardcore financial planning

00:12:53.720 | that someone would need.

00:12:54.780 | What people need prior to that age

00:12:56.580 | is asset allocation really.

00:12:58.700 | They just need like an easy, systematic way

00:13:02.100 | to continuously put money aside that they're not spending.

00:13:06.780 | Like they don't really need

00:13:09.540 | a lot of financial planning work.

00:13:11.260 | So it's gonna be really tough to attract clients

00:13:16.040 | in a demographic that are like way before

00:13:18.780 | they actually need your help.

00:13:20.320 | So a couple of things I would consider.

00:13:24.720 | The first is like just accept the fact

00:13:28.120 | that if you're gonna do content marketing

00:13:30.080 | to that demographic,

00:13:31.800 | you have to count on there being a really long tail.

00:13:34.440 | And like a lot of these people will come to you way later

00:13:38.640 | than when you're actually reaching them for the first time.

00:13:41.360 | So not only do you have to reach them

00:13:42.880 | and get in front of them somehow and get their attention,

00:13:45.320 | you have to like hold their attention.

00:13:47.640 | So you can do that with email, newsletter type of thing

00:13:52.640 | or have them follow you on social media.

00:13:55.400 | And then you just have to like make that mental investment.

00:13:58.320 | Like, all right, I'm getting to young people

00:14:00.840 | through the platforms they like,

00:14:02.560 | whether it's TikTok or Instagram or LinkedIn.

00:14:06.160 | And then like I can't make them all of a sudden

00:14:10.200 | wanna hire a financial advisor.

00:14:12.320 | Like one day something's gonna happen in their life

00:14:15.280 | where they need one.

00:14:16.620 | Maybe they got married, maybe they got divorced,

00:14:18.760 | maybe they are about to launch a company

00:14:20.920 | and leave a steady income behind.

00:14:22.520 | Maybe they started a company and they're about to sell it.

00:14:25.280 | Maybe they just got a huge raise.

00:14:26.960 | Maybe a father or a mother or a grandfather

00:14:29.600 | or a grandmother passed away and left an inheritance.

00:14:32.700 | That's the moment that somebody in their 30s says,

00:14:37.560 | "I need a professional now to help me."

00:14:39.900 | You can't manufacture that.

00:14:42.160 | You just have to be front of mind

00:14:44.280 | so that when that moment happens

00:14:46.600 | to the people who are aware of you,

00:14:48.840 | you're the person that they wanna call.

00:14:50.720 | - Well, I think the way to do that

00:14:52.200 | is probably to find a niche.

00:14:54.520 | So you wanna be the person that I help young people

00:14:57.800 | invest their inheritance, right?

00:14:59.800 | Or I help people who, young people who are doctors.

00:15:02.160 | Or I think you have to find some sort of,

00:15:04.040 | we have people who, so like Doug Bonaparte,

00:15:06.360 | who is a friend of the show,

00:15:07.940 | he works with high earning millennials

00:15:10.080 | who are going to have, who don't have a lot

00:15:11.380 | of financial assets now but are going to.

00:15:13.320 | I think you have to have some sort of way

00:15:14.620 | to specialize in a certain group of people

00:15:16.920 | if you want them to seek you out.

00:15:18.580 | It can't just be general financial planning.

00:15:19.420 | - The millennials are, right, the millennials are 40 now.

00:15:22.720 | - Right, yeah, I just turned 41.

00:15:24.840 | I'm the oldest millennial in the world, right?

00:15:27.240 | - It's nice to meet you, I'm the youngest,

00:15:30.640 | I'm the youngest Gen X in the world.

00:15:32.380 | Very nice to meet you. - State planning,

00:15:33.320 | and yeah, I don't know.

00:15:34.240 | - Is there an advisor focusing on Instagram

00:15:36.840 | and TikTok influencers?

00:15:38.320 | - Listen, I'm just like,

00:15:40.680 | this is something that I know really well.

00:15:42.480 | I'm just gonna tell you, the strategy has to be,

00:15:46.160 | I'm going to reach these people,

00:15:48.160 | I'm going to become relevant to these people,

00:15:50.840 | and I'm going to be patient as catalysts

00:15:55.840 | arise in their lives.

00:15:58.240 | And it'll happen on a different schedule

00:16:00.040 | for whatever fan base that you manage to build

00:16:02.920 | or whatever influence you manage to have.

00:16:05.780 | It's like, you're gonna sit back

00:16:07.880 | and no one's gonna need you, no one's gonna need you.

00:16:10.280 | I'm reaching out, I'm doing this, I'm doing that,

00:16:13.120 | I'm taking lunches, I'm speaking at events.

00:16:15.740 | And then it'll be a trickle at first.

00:16:18.420 | Somebody will say, "Hey, you and I had lunch

00:16:21.620 | "a few years ago and I wasn't a good fit at the time,

00:16:23.700 | "but here's my situation today."

00:16:25.640 | I mean, that is like a long-term investment.

00:16:28.780 | If you really want to reach a younger clientele,

00:16:31.720 | that's a long-term investment

00:16:33.100 | that you're gonna have to make in somehow,

00:16:35.660 | A, getting their attention for the first time,

00:16:37.980 | and B, maintaining it for all of that period of time

00:16:42.800 | before they actually need your help.

00:16:45.040 | When I first started getting into the content game,

00:16:46.460 | that's the one thing I under-appreciated

00:16:47.940 | is the fact that I assumed,

00:16:50.120 | okay, I'm gonna join Riddle 12,

00:16:51.600 | I'm gonna work with Josh and Barry and Michael,

00:16:53.320 | and everyone who's reading my stuff

00:16:54.700 | is gonna come on day one

00:16:55.860 | that wants to work with a financial planner.

00:16:57.900 | But it was the opposite.

00:16:58.780 | It's like a long burn.

00:17:00.040 | People don't come just because, hey, they know you.

00:17:01.760 | They come because they have something happen in their life

00:17:04.300 | that makes them need to get financial advice.

00:17:06.840 | And that's the thing I didn't appreciate.

00:17:08.900 | - Right, and you can't manufacture that moment.

00:17:10.860 | Like, you're not gonna write the blog post

00:17:13.500 | or do the podcast appearance or whatever

00:17:16.440 | where people are like, that's the guy.

00:17:19.000 | Like, that's not how it works.

00:17:21.520 | What ends up happening is real-life events occur

00:17:26.220 | that prompt somebody to say,

00:17:28.500 | okay, I now need a professional.

00:17:31.440 | Or I have somebody managing my money,

00:17:34.840 | but I don't think they're up to the challenge

00:17:36.840 | of what is currently going on for me.

00:17:39.060 | Like, that's the catalyst that you can't bring about.

00:17:43.200 | You just have to be there.

00:17:44.600 | So it's not a, you know, I wish I could say,

00:17:47.880 | go do X, Y, and Z, and all of a sudden,

00:17:50.400 | all these people in their 30s are gonna start calling you.

00:17:52.400 | It's just not how it works.

00:17:54.360 | - Yeah, it's gonna take some time.

00:17:55.480 | All right, Duncan, next one.

00:17:57.560 | - Okay, up next, we have a question from John.

00:18:01.520 | Four years ago, I invested in a stock

00:18:03.400 | that has since increased more than 10 times.

00:18:05.600 | All things considered, it has held up relatively well

00:18:07.860 | during the market downturn.

00:18:09.480 | I believe even more strongly in this company

00:18:11.520 | than I did four years ago, but the unrealized gains

00:18:14.000 | would be enough to pay off my wife's $200,000

00:18:16.360 | in medical school debt.

00:18:17.780 | When her student loan repayments resume,

00:18:19.400 | the interest will be around 8%.

00:18:21.480 | Do I stay true to my convictions and hold the stock

00:18:23.560 | and try to refinance my wife's student loan debt

00:18:25.720 | at a lower rate while we still can,

00:18:28.080 | or do I sell the stock and pay off the loans?

00:18:30.640 | I'm early 30s and have a relatively high risk appetite,

00:18:33.480 | but I hate debt and paying high interest rates.

00:18:35.960 | What are your thoughts?

00:18:37.560 | - We gotta know the stock here.

00:18:38.560 | I can't believe he didn't tell us the stock.

00:18:39.760 | - I know, I know.

00:18:40.600 | It's Tesla. - It's in the box.

00:18:41.600 | - It's Tesla.

00:18:43.200 | There's a very small list of stocks

00:18:46.120 | that are up 10X in that period of time.

00:18:50.000 | I mean, it's not a big list.

00:18:51.000 | It's like Chipotle, Tesla, Netflix, maybe.

00:18:55.340 | - Netflix has not held up relatively well, but.

00:18:59.520 | - Yeah, but it's still up, like, it's still up huge.

00:19:02.520 | - So we got the student loan stuff yesterday.

00:19:04.840 | He has a few more months to make this decision

00:19:07.080 | 'cause we have the moratorium extended

00:19:08.360 | 'til the end of the year.

00:19:09.780 | Assuming you're not over the income threshold,

00:19:11.920 | you're getting $10,000 knocked off that 200K.

00:19:14.320 | That's not gonna help a whole lot.

00:19:15.980 | My first thing here is I think that 8% on a loan

00:19:19.900 | is ridiculous for student loans.

00:19:22.300 | I don't wanna get into the whole student loan thing here,

00:19:24.380 | but my whole idea was just cancel the debt

00:19:26.380 | or cancel the interest.

00:19:27.480 | Don't charge anyone interest.

00:19:29.160 | Make 'em pay their principal back.

00:19:32.420 | But I calculated this.

00:19:33.660 | If you paid this off over 10 years, 200K,

00:19:35.280 | that's at 8%, that's $90,000 in interest costs alone.

00:19:38.400 | So this is a ton of money,

00:19:40.880 | and I'm a huge believer in regret minimization,

00:19:43.520 | and I just don't know that you're going to regret

00:19:46.160 | paying off this debt and being free and clear of it

00:19:49.280 | even if the stock continues to go up.

00:19:51.480 | - Well, wait a minute,

00:19:52.320 | but let's define continues to go up.

00:19:55.160 | What are the chances, probabilistically,

00:19:57.480 | based on everything we know about stock market history,

00:20:00.540 | that a stock that's just gone up 10X

00:20:02.600 | in a relatively compressed period of time

00:20:04.960 | can go up another 10X?

00:20:07.360 | So could the stock double from here?

00:20:09.720 | Totally, and you'll be really upset.

00:20:12.200 | But is it gonna do another 10X?

00:20:14.000 | It's definitely not.

00:20:15.440 | So the mental calculus has to change here.

00:20:20.340 | - 8% is a very high hurdle rate, too.

00:20:23.120 | - Yeah. - That's right.

00:20:24.080 | It's not right.

00:20:24.900 | It's not the risk-free rate.

00:20:25.740 | It's not a 3% two-year treasury.

00:20:29.320 | - So what's the next 10X they should move to, you think?

00:20:32.900 | - Right, that's what you wanna do, actually.

00:20:34.720 | You wanna switch into the next stock that's gonna 10X.

00:20:37.160 | - No, but just probabilistically,

00:20:39.560 | how many companies have 10X and then 10X'd again?

00:20:43.000 | It's not a big number.

00:20:45.360 | It's probably a much higher number

00:20:47.300 | of companies that have 10X'd, matured,

00:20:49.920 | and maybe went on to do okay or poorly,

00:20:53.040 | but the same opportunity does not currently exist

00:20:57.840 | as the opportunity that you've already had.

00:21:00.640 | So congratulations, you're one of the few,

00:21:03.820 | the proud, the many. - You've won.

00:21:05.640 | - Now do something with it. - Let's see if it's held up.

00:21:07.080 | - And the other thing is,

00:21:07.920 | you hear from a lot of doctors who say,

00:21:09.440 | I have all this debt around me.

00:21:11.120 | It's like I'm wearing a weight around my,

00:21:13.160 | it's just, it consumes me.

00:21:15.520 | And then I go to residency

00:21:16.560 | and I don't make very much money.

00:21:17.720 | And so the reason a lot of doctors

00:21:18.880 | don't have as much money as you think

00:21:19.920 | is because they have this ball and chain

00:21:22.040 | just stuck to their leg for years and years.

00:21:24.240 | You can totally get rid of that

00:21:25.960 | and have that free and clear.

00:21:27.920 | I can't imagine regretting that decision.

00:21:30.120 | - Right.

00:21:31.080 | - Last thing, I get you're in love with the stock

00:21:34.340 | and you're even more bullish on it now.

00:21:36.360 | Everybody is even more bullish on the thing

00:21:38.280 | that just made them a ton of money.

00:21:39.920 | - Of course.

00:21:41.120 | - Everybody is because there's something called the,

00:21:44.880 | is it the, I got company.

00:21:48.200 | There's something called the--

00:21:49.840 | - Get this beer.

00:21:50.680 | - Get the fuck out of here.

00:21:51.920 | - There's something called the endowment effect

00:21:54.120 | where, I forget the full story,

00:21:56.280 | but a professor gave coffee mugs to half the class

00:22:01.280 | and then the other half the class didn't have coffee mugs.

00:22:04.360 | And then there was, they asked the people that had the mug,

00:22:07.080 | how much would you sell it for?

00:22:08.760 | And the people that didn't have the mug

00:22:10.800 | were asked how much would you bid for the mug?

00:22:13.800 | And there was a big gap between what the person

00:22:16.320 | who had it was willing to sell it for

00:22:18.320 | versus what the people who wanted to buy it

00:22:20.360 | were willing to buy it for.

00:22:21.800 | And I think they call that the endowment fund.

00:22:23.600 | It's like, all right, I already have this thing.

00:22:25.720 | Therefore, I think it's a lot more valuable

00:22:27.520 | than I otherwise would think if I didn't have it.

00:22:30.680 | I don't know how fully that applies here,

00:22:32.440 | but like, I don't know what the fuck I'm talking about.

00:22:35.400 | This kid just totally distracted me.

00:22:37.200 | (laughing)

00:22:39.000 | I'm gonna let him have it later.

00:22:41.240 | - If you're really that worried

00:22:42.880 | about another 10 bagger from here,

00:22:45.040 | take all of your gains off the table

00:22:46.480 | and leave the cost basis and then let it run again.

00:22:49.400 | And then you pay off the majority of that loan.

00:22:51.520 | - Yes, why does it have to be all or nothing?

00:22:54.160 | - Yeah, do some of it.

00:22:55.120 | Pay off the majority of this loan.

00:22:55.960 | - Because we're a polarized society.

00:22:57.160 | Everything has to be one way or the other, right?

00:22:59.440 | - It doesn't have to be all or nothing.

00:23:01.720 | Yeah, but pay off a decent amount.

00:23:03.640 | All right, Duncan, last question.

00:23:05.320 | - Okay, last but not least is a question from David.

00:23:09.480 | I'm 22 years old and got my first real job at a large bank.

00:23:13.360 | In setting up my 401(k),

00:23:14.640 | I was given a bunch of options to choose from.

00:23:16.760 | Among the options were target date funds,

00:23:18.600 | various equity and bond funds, mutual funds, the works.

00:23:21.720 | As a financial advisor, I felt the impetus

00:23:23.920 | to allocate some percentage to bond funds

00:23:26.440 | to have some fixed income exposure.

00:23:28.520 | But then I thought, why would I, a 22-year-old

00:23:30.720 | with potentially 40-plus year time horizon,

00:23:33.280 | buy bonds right now?

00:23:34.600 | Even with rising rates, it doesn't seem to make sense

00:23:36.640 | for me to allocate to something

00:23:37.840 | that's going to get eaten by inflation

00:23:39.640 | and deprive me of capital appreciation.

00:23:41.960 | I ended up allocating 100% to equity funds.

00:23:44.440 | What are your thoughts on this?

00:23:45.480 | I kind of like they already did it,

00:23:47.120 | and now they're asking your thoughts on it.

00:23:49.000 | - Yeah, do you want to--

00:23:49.840 | - Make me feel better about it.

00:23:50.880 | - Yeah.

00:23:51.800 | - I mean, young people for their retirement portfolios

00:23:54.040 | probably should have 100% in equities.

00:23:56.480 | Unless you need an emotional hedge

00:23:58.480 | or an emotional crutch from bonds or cash or something.

00:24:01.320 | In that 401(k), I mean, I guess a target date fund

00:24:04.480 | probably has five to 10% in bonds.

00:24:07.080 | But I think just because you're a financial advisor,

00:24:10.120 | maybe you recommend bonds to some of your clients.

00:24:12.120 | As a 22-year-old, risk means different things

00:24:14.800 | to different people.

00:24:15.680 | And people who are older and retired

00:24:18.000 | probably need some bonds for either an emotional hedge

00:24:20.240 | or just to help out the volatility

00:24:22.960 | of their retirement portfolio

00:24:24.440 | when things get hairy in the stock market.

00:24:26.000 | But if you're young, textbook says 100%,

00:24:29.440 | and I think as long as you can handle it, stomach it,

00:24:33.480 | you have to do it.

00:24:34.520 | - This gets back to what we were talking about

00:24:38.680 | with the financial advisor

00:24:39.880 | who wants to reach more young people.

00:24:42.740 | What are you going to tell a 22-year-old

00:24:45.680 | about asset allocation?

00:24:46.880 | It should be, you're 22,

00:24:49.960 | focus on getting a girlfriend or a boyfriend.

00:24:53.920 | Like that's not, don't, your asset allocation

00:24:56.760 | should be the furthest thing from your mind.

00:24:58.680 | Like be in the gym, go to clubs, experience life,

00:25:03.040 | go to Ibiza, like do those things.

00:25:05.880 | Your asset allocation doesn't matter.

00:25:08.080 | And pray to God the stock market falls.

00:25:10.440 | - Yes, you should hope it falls.

00:25:11.280 | - 22, what's the difference?

00:25:13.040 | Listen, we had a client, we had a client,

00:25:15.840 | it was a long time ago, it was like 2011, 2012,

00:25:18.840 | very smart kid, worked in finance.

00:25:20.760 | I think he worked, he was like one of the last employees

00:25:23.400 | of Lehman Brothers, if you could believe that.

00:25:25.680 | So like there was like a section within Lehman Brothers

00:25:28.720 | that was doing electricity trading

00:25:30.840 | and they couldn't shut that down during bankruptcy,

00:25:33.000 | they had to keep it going

00:25:34.440 | 'cause they were like counterparties

00:25:36.420 | with people that had long-term contracts on electricity.

00:25:39.560 | I think he was like one of the last 50 people

00:25:42.160 | to work at Lehman Brothers.

00:25:43.760 | And he was making a lot of money

00:25:44.820 | and he had tons of companies

00:25:45.960 | that were ready to hire him immediately

00:25:48.040 | as soon as he was done, like he would be fine.

00:25:51.120 | And I remember like in 2011

00:25:53.320 | when like the European debt crisis

00:25:55.140 | was causing huge volatility in the stock market,

00:25:57.360 | he's like, "I wanna take 20% and go to bonds."

00:26:02.360 | I'm telling you, this kid was like 25 years old or something.

00:26:05.680 | He's like, "I wanna take a big chunk of my portfolio,

00:26:09.080 | "I can't take this anymore, I'm gonna go to bonds."

00:26:10.520 | I'm like, "Listen to me, here's what you're gonna do.

00:26:13.840 | "I'm gonna hang up the phone with you,

00:26:15.060 | "take a deep breath, we're gonna talk tomorrow.

00:26:17.580 | "And just like go to sleep tonight, right?"

00:26:20.300 | Like the VIX was 60, it was just an out of control period.

00:26:24.520 | I'm like, "We're gonna talk tomorrow,

00:26:25.600 | "but here I'm telling you sneak preview,

00:26:27.320 | "here's what I'm gonna tell you tomorrow.

00:26:29.200 | "Not only am I not gonna do that,

00:26:31.520 | "I want you to think about where the rest of your money is

00:26:34.000 | "that you could send me right now.

00:26:35.520 | "I'm gonna buy even more stocks for you."

00:26:37.580 | And that's if I'm your advisor,

00:26:39.180 | you're paying me for my advice.

00:26:41.440 | When you see a VIX at 50,

00:26:43.680 | I don't want you to think about, should I go to cash now?

00:26:46.160 | I want you to think about,

00:26:47.480 | how can I get Josh even more money

00:26:50.120 | to put into, and this is an IRA.

00:26:52.720 | Like you can't have it anyway.

00:26:54.360 | - You can't touch it, right.

00:26:55.400 | - What the hell are we talking about?

00:26:57.040 | You're gonna use this money in 40 years.

00:26:59.600 | I want you to go to sleep tonight

00:27:00.720 | thinking about how you can get me

00:27:01.880 | even more money to put to work.

00:27:04.760 | And I don't know if that's gonna look smart

00:27:06.620 | for six months or for six years,

00:27:09.320 | but what's the difference?

00:27:11.160 | Don't tell me you wanna swing the bond.

00:27:13.080 | What are you gonna do with the bonds?

00:27:14.760 | Besides lose money in real terms.

00:27:16.700 | - I probably didn't start saving my 401k for real

00:27:18.740 | until 2006, 2007.

00:27:21.200 | And I had a colleague in 2008 who said,

00:27:23.000 | I'm putting everything into money markets

00:27:24.240 | because the financial system is blowing up.

00:27:26.140 | I think you should put all of your 401k contributions

00:27:28.320 | into money markets.

00:27:29.160 | And I'm thinking to myself,

00:27:30.480 | even though I didn't know as much back then,

00:27:32.680 | I'm never gonna have the opportunity

00:27:33.960 | to buy at prices this low again in my life.

00:27:35.720 | These are gonna be the lowest prices I will ever see.

00:27:37.960 | The other thing for young people,

00:27:39.120 | if you, I've calculated this

00:27:40.880 | using some conservative estimates before.

00:27:43.100 | If you figure out how much money

00:27:44.440 | you put into your retirement accounts

00:27:45.720 | versus how much you're getting kicked out

00:27:46.920 | by investment gains, it's not until like age 45 or 50

00:27:51.000 | that the gains become a bigger part of the portfolio

00:27:53.060 | than the amount you put in.

00:27:53.900 | - It starts to matter.

00:27:54.920 | - Yeah, so the stuff you, the savings you put in

00:27:58.440 | matters way more than your investments.

00:28:00.940 | And so you have to just keep putting money in,

00:28:02.480 | putting money in.

00:28:03.320 | And you said, if you're a young person,

00:28:04.400 | you should get on your hands and knees

00:28:05.480 | and pray for lower prices

00:28:06.680 | because that's a good thing for you.

00:28:08.240 | You're gonna have seven or eight bear markets

00:28:09.860 | in your career that you're gonna have

00:28:11.000 | to keep investing through.

00:28:12.980 | - My 401k is 100% stocks.

00:28:15.800 | - Me too.

00:28:16.640 | - There's no cash and there's no bonds.

00:28:18.120 | It's the same strategies we own for clients,

00:28:20.820 | but I pulled out the fixed income because I'm 45

00:28:25.160 | and I can't touch it for 20 years.

00:28:27.520 | So in 10 years, it might be a different allocation.

00:28:29.680 | But if I have a 20 year time horizon,

00:28:32.580 | what good is that current income doing for me?

00:28:35.280 | I don't want it.

00:28:36.120 | And I'm still adding.

00:28:37.560 | I'm still investing into the 401k.

00:28:40.280 | So like, I don't root for the market to go down,

00:28:42.480 | but when it does, the last thing I'm thinking is,

00:28:45.360 | all right, let me now go to bonds.

00:28:47.280 | I'm thinking, all right, cool.

00:28:49.520 | I'm making more contributions for the balance this year.

00:28:52.020 | See, a lot of this, Ben, and you know this,

00:28:55.080 | but the audience might not.

00:28:57.160 | The architecture of just like the financial media

00:29:00.720 | and the wealth management businesses

00:29:03.320 | is still so geared toward boomers

00:29:05.440 | because that's the horse that brought them here.

00:29:10.080 | Like the boomer audience, it's different for them.

00:29:13.880 | But like when you're on financial television,

00:29:16.760 | it's like, oh, the market's down, that's terrible.

00:29:18.720 | Terrible for who?

00:29:20.640 | Terrible for the 50% of the audience that's in retirement,

00:29:24.680 | but for the other 50% of the audience

00:29:26.560 | that's making ongoing retirement account contributions,

00:29:30.400 | it's great.

00:29:31.660 | But it's hard to conceptualize

00:29:35.720 | that everyone in the audience has different circumstances.

00:29:39.200 | - And risk means different things to different people.

00:29:40.820 | The risk of a bear market is totally different

00:29:42.760 | for someone who's 65 versus someone who's 25.

00:29:45.160 | It's completely different. - Obviously, right.

00:29:46.960 | So to the 22-year-old, no bonds.

00:29:50.400 | - Right. - No bonds.

00:29:51.480 | You might be mad at me in six months for saying that,

00:29:54.640 | but you're gonna be very happy with me in 10 years

00:29:57.560 | and you're 22.

00:29:59.120 | What are you even thinking about this for?

00:30:00.720 | - In 50 years, you're gonna be really happy.

00:30:02.960 | - Don't you TikTok audience, dude.

00:30:04.760 | That's what you need to be doing right now.

00:30:06.520 | - Giancarlo in the chat has a funny comment.

00:30:08.680 | They say, "I have more gold bond than actual bonds."

00:30:11.400 | (laughing)

00:30:13.360 | - Big surprise, the episode I'm on went over time.

00:30:15.560 | Look at that.

00:30:16.480 | - All right. - Can't believe it.

00:30:17.320 | - Thanks to Josh for joining us.

00:30:18.480 | We appreciate it.

00:30:19.620 | Thanks for everyone watching live.

00:30:20.460 | - Thank you guys, you do a great job every week.

00:30:22.080 | You do a great job every week, thank you.

00:30:24.040 | - A lot of great comments.

00:30:25.480 | Thanks to Duncan.

00:30:26.320 | Duncan, is that a soccer jersey today?

00:30:28.040 | - It is, I got this in Glasgow.

00:30:29.640 | It's a Glasgow Celtic jersey.

00:30:32.600 | - Oh, nice.

00:30:33.440 | I'm still waiting for my present from your honeymoon.

00:30:35.360 | Remember, if you're listening in podcast form,

00:30:36.920 | leave us a review.

00:30:38.200 | If you're watching on YouTube,

00:30:39.080 | Duncan wants you to hit that subscribe button.

00:30:41.040 | Keep those comments coming.

00:30:42.280 | We might have some new t-shirts coming to idontshop.com

00:30:44.720 | in the coming weeks.

00:30:45.540 | I don't want to make any promises,

00:30:46.440 | but we're getting there. - Stay tuned.

00:30:48.120 | - Remember, have a question,

00:30:49.520 | askthecompoundshow@gmail.com

00:30:51.520 | or leave a comment in the YouTube for us.

00:30:53.240 | See you next week.

00:30:54.140 | (upbeat music)

00:30:58.100 | (upbeat music)

00:31:00.680 | (upbeat music)

00:31:03.260 | (upbeat music)

00:31:05.880 | (upbeat music)

00:31:08.460 | (upbeat music)

00:31:11.040 | (upbeat music)

00:31:13.620 | [MUSIC PLAYING]

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