When Should I Sell a Stock That’s Down?

00:00:00.000 | (beeping)

00:00:02.180 | (upbeat music)

00:00:12.500 | - Welcome back to Portfolio Rescue.

00:00:19.880 | This is our show where we answer questions

00:00:21.320 | straight from you, the viewer.

00:00:23.200 | Our inbox is filling up.

00:00:24.200 | Duncan and I were talking before we got on here.

00:00:27.080 | Instead of people giving us their height and their weight

00:00:28.800 | when they email us and now they give us their salary,

00:00:30.600 | their asset allocation, their stock picks, all this stuff.

00:00:33.560 | It's great, we love the fact that you guys

00:00:34.720 | are sharing so much information with us.

00:00:36.400 | Remember, if you have a question,

00:00:37.400 | askthecompoundshow@gmail.com.

00:00:40.040 | Duncan, I have one question for you.

00:00:42.000 | Is my sweater too hot for the YouTube algorithm?

00:00:45.160 | Is this pink too bright?

00:00:46.480 | - It could be.

00:00:47.320 | It might be an actual out of gamut color.

00:00:49.560 | - I didn't use my color thing today.

00:00:52.840 | All right, what do we got?

00:00:53.680 | Let's do question number one.

00:00:54.840 | - Okay, so up first we've got one

00:00:57.240 | I think a lot of people will be able to relate to.

00:01:00.000 | So you've shown time and again that owning the market

00:01:04.200 | is a better strategy than picking individual names.

00:01:07.120 | However, for people who enjoy the market

00:01:08.960 | and want to have some fun on Robinhood,

00:01:10.600 | what advice do you have for someone

00:01:11.960 | who's found themselves down 26%, now actually 28%,

00:01:15.880 | and 34% in their two biggest holdings,

00:01:18.480 | I may just keep averaging down

00:01:20.000 | but can never seem to find the bottom.

00:01:21.880 | Historically, do most stocks come back

00:01:23.280 | from this kind of decline?

00:01:24.160 | Or does the data say to cut your losses

00:01:25.920 | even when it feels this painful?

00:01:28.480 | - Duncan, this one sounds kind of personal to me.

00:01:30.840 | - Yeah, it's for me.

00:01:32.520 | - This is a question straight from you.

00:01:33.880 | - It's actually for me.

00:01:35.160 | - Which is great.

00:01:36.160 | But you're right.

00:01:37.000 | We're getting all sorts of questions from people saying,

00:01:39.280 | what to do now?

00:01:40.120 | All my stocks are down,

00:01:40.960 | even though the market is doing fine.

00:01:42.800 | I don't know what to do.

00:01:43.640 | I think part of this comes from the fact

00:01:45.080 | that a lot of people opened up their Robinhood account

00:01:46.880 | in 2020, maybe 2019.

00:01:49.200 | Things were just way too easy

00:01:50.360 | coming out of that corona crash.

00:01:51.440 | So Jason Zweig had this mind-blowing stat.

00:01:53.480 | I think we've shared it a few times on some other shows.

00:01:55.800 | From the bottom on March 23rd, 2020,

00:01:58.240 | over the next year, 96% of all stocks

00:02:00.680 | in the US stock market,

00:02:01.640 | the Wilshire 5000 were up,

00:02:03.680 | which is basically unheard of.

00:02:05.040 | That's not normal, even in a good year.

00:02:07.440 | So let's take a look at some of the stats I got here.

00:02:11.600 | So if you look at the S&P in a given year,

00:02:16.100 | so let's say last year, the S&P was up 29%,

00:02:18.560 | but 13% of the stocks in the index finished down.

00:02:20.680 | And that's in a year when the S&P

00:02:22.160 | had a 5% drawdown at the worst.

00:02:24.000 | In 2020, the S&P was up 18%.

00:02:26.120 | 1/3 of the stocks were negative that year.

00:02:28.440 | So even in a good year,

00:02:29.660 | you should probably expect anywhere

00:02:30.760 | from 10 to 30% of stocks to be down.

00:02:33.880 | And this is one of the reasons that owning the market

00:02:36.040 | or owning a fund that's more diversified is so much easier

00:02:38.640 | because you can bank on mean reversion, right?

00:02:40.920 | You don't have to worry about an index fund going to zero.

00:02:44.560 | A stock, not all stocks go to zero,

00:02:46.200 | but some of them just might not come back.

00:02:47.960 | So let's do, let's take a look at some examples,

00:02:50.360 | I think, of why it's so hard

00:02:52.120 | to figure out what to do in this situation.

00:02:53.280 | So John, let's do a chart of Amazon.

00:02:54.960 | This is the drawdown profile of Amazon.

00:02:56.280 | So obviously Amazon fell 95% in the dot-com crisis,

00:03:00.320 | which was just an unbelievable buying opportunity.

00:03:02.160 | People look at that and say,

00:03:03.600 | "Well, this is why you always

00:03:04.440 | "buy individual stocks that are down.

00:03:05.480 | "Look what happened.

00:03:06.320 | "It's one of the greatest performing stocks of all time."

00:03:07.800 | Let's do the Netflix one next, John.

00:03:10.000 | Netflix was down over 70% twice.

00:03:13.120 | Duncan, remember that time that Netflix decided

00:03:15.080 | to send DVDs and split their company

00:03:18.400 | into we're gonna do DVDs and then we're gonna do streaming.

00:03:20.400 | This is before streaming became huge.

00:03:21.520 | And Netflix fell 80%.

00:03:23.220 | That was in like 2013, it wasn't that long ago.

00:03:25.600 | And so you look at these examples and you say,

00:03:27.600 | "Well, I have to buy then."

00:03:29.120 | Because the only thing to do is stock is down is buy.

00:03:31.480 | Let's do the next one.

00:03:32.840 | Let's look at Citigroup and AIG.

00:03:34.680 | This is like the other side of that of,

00:03:36.320 | you know, when things don't go back.

00:03:37.320 | This is Citigroup and AIG.

00:03:38.160 | You can see those huge spikes

00:03:39.840 | into the 2000s and financial crisis.

00:03:41.560 | And then it's huge drop off

00:03:42.800 | and they've just never come back.

00:03:43.640 | These stocks are still down 90% from all time highs.

00:03:46.600 | Now, these are obviously extreme examples,

00:03:48.600 | but I just kind of wanted to show what can happen.

00:03:49.720 | Now let's do like a more middle of the road, I guess.

00:03:51.960 | Well, maybe this is extreme,

00:03:52.840 | but let's look at Apple's price return here.

00:03:55.760 | So this is Apple over the last 10 years.

00:03:57.120 | This is a stock that's up 1,200% over the last 10 years.

00:04:01.040 | It's experienced by my count

00:04:02.120 | seven different double digit drawdowns,

00:04:03.880 | including four separate losses of 25% or more.

00:04:06.640 | And this is in time when the S&P was down 25% just once.

00:04:09.320 | So even the best stocks are gonna get dinged at times.

00:04:12.880 | So unfortunately, if you're owning individual stocks,

00:04:15.840 | you just have to expect this to happen.

00:04:17.800 | The problem is, like I've never read a good book

00:04:21.960 | on when to sell a stock.

00:04:23.520 | There's plenty of books about Warren Buffett

00:04:25.640 | bought American Express after the salad oil scandal,

00:04:28.480 | or Benjamin Graham bought Geico.

00:04:29.960 | And you hear all these stories about like,

00:04:31.200 | when to buy a stock.

00:04:32.620 | And unfortunately,

00:04:33.800 | especially when you have more of a fun portfolio.

00:04:35.860 | So Duncan, you said this is like,

00:04:36.960 | I'm playing around, I'm having fun, I'm enjoying this.

00:04:39.800 | I think it's hard-

00:04:40.640 | - Was enjoying this.

00:04:41.460 | - Well, was at one time.

00:04:43.580 | I think the reason this is so hard is because,

00:04:45.840 | let's say you're a fundamental analyst

00:04:48.520 | who's looking at stocks for your mutual fund,

00:04:50.880 | your hedge fund, your professional,

00:04:52.520 | or your technical analyst,

00:04:53.720 | or you're a quant and you have these rules.

00:04:56.080 | You have rules for when to buy and when to sell, right?

00:04:58.220 | If you're a technical analyst,

00:04:59.720 | you buy when it's in an uptrend,

00:05:00.960 | you sell when it's in a downtrend.

00:05:01.800 | That's pretty simple.

00:05:02.640 | The variations of that can be different.

00:05:04.660 | But if you're a quant,

00:05:05.840 | you have these fundamental numbers where,

00:05:07.320 | if it hits your screen, you're in.

00:05:09.320 | If it's not in the screen anymore, you're out.

00:05:11.280 | It's pretty easy, right?

00:05:12.120 | Even a fundamental analyst can look at

00:05:13.800 | all sorts of different financial statement stuff.

00:05:15.700 | But I'd say most people who are screwing around

00:05:17.840 | in the Robinhood account are probably buying stocks

00:05:20.140 | because it's something they use,

00:05:22.080 | it's something they like, it's a name brand.

00:05:24.800 | And maybe it's just something that they enjoy.

00:05:26.440 | And so I think that's why a lot of people buy these stocks.

00:05:28.640 | And when you don't have a good reason like that,

00:05:30.160 | it's hard to know when it takes a dump, what do you do?

00:05:34.560 | It's just harder to know when to cut bait.

00:05:37.120 | So here's a stock that I own that's on a severe rollercoaster.

00:05:40.000 | The name is not important

00:05:41.960 | because no one comes for my stock picks.

00:05:43.600 | I basically get all my stock picks from Josh anyway.

00:05:45.720 | So the name's not important.

00:05:46.680 | But I bought this stock in July.

00:05:48.860 | It had a really nice run.

00:05:50.560 | And then it went like parabolic

00:05:51.920 | when Facebook announced all this metaverse stuff.

00:05:54.160 | And it was up 100% in like five months.

00:05:56.360 | Like awesome, I'm the greatest trader in the world.

00:05:58.960 | And then since the end of November, it's down 50%.

00:06:01.640 | So I did 100% up, 50% down, I'm back to where I was.

00:06:05.480 | And you're kind of like, what the, what was that?

00:06:08.360 | Now what do I do?

00:06:10.080 | I'm right back where I started,

00:06:11.040 | which is better than a loss on an absolute basis,

00:06:13.000 | but it's kind of hard to know.

00:06:14.240 | And I think when you're an investor,

00:06:16.120 | there's a really fine line between discipline and insanity.

00:06:18.780 | And discipline is sticking to something

00:06:19.960 | where you're buying it on the way down,

00:06:21.000 | you're averaging in.

00:06:22.560 | And insanity is you're losing all flexibility

00:06:25.480 | and now what am I gonna do, right?

00:06:27.180 | So it's hard to know because we don't know the future.

00:06:31.080 | Like which, even though all stocks get dinged a lot,

00:06:33.240 | especially on individual names,

00:06:35.240 | we don't know what's gonna happen

00:06:36.080 | and which stocks are gonna work and which ones aren't.

00:06:38.040 | So I think I have some questions

00:06:39.300 | you can at least ask yourself.

00:06:40.360 | Like what's my threshold for pain as an individual investor?

00:06:43.720 | Is it 30%, 40%, 50%?

00:06:46.120 | I mean, if you're owning an individual stock,

00:06:48.580 | you should expect a minimum to see it get cut in half,

00:06:50.760 | once every few years, probably.

00:06:52.960 | Not every stock, but most stocks,

00:06:54.120 | especially if they're like smaller

00:06:55.240 | and you're trying to catch a trend.

00:06:57.360 | Would I be thrilled to buy the stock at lower prices?

00:06:59.920 | Duncan, you said, well, I've been buying in

00:07:01.400 | and averaging down, but I can't find a bottom.

00:07:04.800 | - Yeah, it's like, because my mentality

00:07:06.740 | is that old mentality of like, well, I liked it back,

00:07:08.960 | you know, when it was at 20, now it's at 15, you know?

00:07:11.680 | - And I guess as long as the story hasn't changed too much,

00:07:14.520 | you know, that kind of makes sense.

00:07:15.520 | I think you could probably set yourself some rules.

00:07:17.920 | I'm gonna buy it when it is down 30% from where I bought it.

00:07:21.280 | Then I'm gonna buy it when it's down to 40%.

00:07:22.840 | So you can kind of not try to guess.

00:07:24.040 | Think you can take the guessing games

00:07:25.000 | out of it a little bit.

00:07:26.120 | And then the other thing is just like,

00:07:27.100 | do you have better investment opportunities elsewhere?

00:07:29.480 | Right, there's this mentality of,

00:07:31.580 | I'm just gonna wait until it gets back to break even,

00:07:33.480 | and then I'll sell, and then I'm done with this thing,

00:07:35.320 | and it's out of my hair forever.

00:07:37.280 | But, you know, it's always much easier to sell a stock

00:07:40.080 | when you have a gain,

00:07:40.920 | 'cause you can at least lock in profits.

00:07:41.740 | Selling when your stock is down is much harder,

00:07:43.160 | because no one wants to look like an idiot

00:07:45.320 | for giving up on the stock that's the next Netflix,

00:07:47.400 | or Apple, or Amazon.

00:07:49.320 | On the other hand,

00:07:50.160 | you also don't want to be in the next Citigroup.

00:07:51.280 | So I would look at it as an opportunity cost thing of,

00:07:55.040 | is there something else that I wanted to own that's better,

00:07:56.960 | or am I really happy this is down 30% or 40%,

00:08:00.400 | and I can buy it on sale,

00:08:01.960 | and see what happens to give myself a longer runway,

00:08:03.640 | and what kind of time horizon am I thinking about here?

00:08:06.360 | - Yeah, and I mean, I guess selling at a loss,

00:08:08.120 | you at least can harvest some tax losses, right?

00:08:10.720 | That's the upside maybe?

00:08:12.440 | - There you go, tax planning.

00:08:14.040 | But yeah, but it's, again,

00:08:16.000 | there's no good books on this.

00:08:17.440 | Like, when to sell a stock that's down?

00:08:18.720 | Like, really, no one knows.

00:08:20.280 | And so I think a lot of it has to do with other opportunities

00:08:24.160 | why you got into it in the first place,

00:08:25.840 | and how much pain threshold you can really handle.

00:08:28.900 | - Yeah, no, that's good advice.

00:08:30.480 | - Let's do another one. - Okay.

00:08:32.240 | So up next, we have the following.

00:08:36.180 | I'm a 25-year-old currently maxing out my 401(k)

00:08:39.960 | in Roth IRA.

00:08:41.040 | This leaves little access in the budget

00:08:42.540 | for other savings, emergency fund not included.

00:08:45.680 | While I feel great about funding my retirement

00:08:47.520 | so strongly at this age,

00:08:48.840 | I have some concerns about being able to save up

00:08:50.720 | for big ticket items like a home, a car, et cetera.

00:08:53.360 | Is there a point where I should consider

00:08:54.760 | reducing my tax-deferred contributions

00:08:56.680 | to bolster my taxable savings investments

00:08:59.120 | for these types of expenses,

00:09:01.440 | perhaps lowering my contribution to my employer's match?

00:09:04.280 | - First of all, kudos to this person for maxing out

00:09:07.680 | their IRA and 401(k) at 25.

00:09:10.040 | That's pretty well done.

00:09:10.960 | I'm guessing that you're in the minority there.

00:09:14.800 | I do think it's tough if you're spreading yourself too thin

00:09:17.360 | with money that's not gonna be touched for decades.

00:09:19.640 | I get the idea of, like I've been a big proponent of,

00:09:22.480 | invest early and often and let compound interest

00:09:24.480 | be the wind at your sails, right?

00:09:26.120 | But it can be tough if you're trying to save

00:09:29.560 | for a wedding or a down payment or something

00:09:30.960 | and all your money's going to retirement.

00:09:32.600 | I think especially if you've already done it,

00:09:34.560 | there's no shame in cutting back your max

00:09:37.280 | because you can always go back to it,

00:09:38.520 | especially if you're saving for a down payment

00:09:39.960 | and you're gonna save for two, three, five years.

00:09:42.720 | If you've already built those good saving habits,

00:09:44.700 | I'm not that worried about going back to them

00:09:45.960 | because you can just take that money you were saving

00:09:47.440 | and plow it right back into the 401(k) or IRA

00:09:49.380 | when you're done and you hit your goal.

00:09:51.880 | So John, put up this chart here that I created for my book.

00:09:55.640 | I looked at what does it take to become a millionaire

00:09:58.480 | if you're maxing out your 401(k).

00:09:59.680 | Now this assumed the 19,500 max.

00:10:02.520 | I think it's now 20,500.

00:10:03.800 | They upped it for the last couple years,

00:10:04.920 | so I wrote this a couple years ago.

00:10:06.400 | You can see how low the returns are

00:10:07.520 | if you start at an early age.

00:10:08.360 | This is even at 30 where our listener here is 25.

00:10:11.340 | If you max out your 401(k) every year,

00:10:13.480 | and this isn't even including the IRA,

00:10:14.800 | it would take a 2% return over 35 years

00:10:17.220 | to get a million dollars.

00:10:18.380 | Obviously a million dollars is no magic number.

00:10:20.660 | In 35 years it's not gonna be worth as much.

00:10:22.260 | This was just trying to show big round numbers.

00:10:24.300 | It doesn't take that much if you're maxing out your account.

00:10:26.300 | You don't need huge returns.

00:10:28.140 | So I think if you've already done it

00:10:29.180 | and you front loaded some of your retirement

00:10:31.180 | objectives and savings,

00:10:32.860 | I think putting it off for a few years

00:10:34.540 | is not gonna be that big of a deal

00:10:36.540 | because you know you can go back to it.

00:10:38.620 | And there's also this thing of in your 20s,

00:10:40.220 | you don't want to have everything go towards your future

00:10:43.180 | if you can help it.

00:10:44.020 | You should have some money bucketed aside

00:10:46.200 | to travel and have fun and go out

00:10:48.320 | and not have everything go to retirement.

00:10:49.800 | So I love the fact that this person

00:10:51.400 | is maxing out their retirement at an early age.

00:10:54.640 | But yeah, if you cut back a little bit,

00:10:55.860 | I think you've shown good saving habits.

00:10:57.200 | There's no reason you can't go back to it later.

00:10:59.400 | - Yeah, and they mentioned getting the employer match,

00:11:03.880 | which you guys always talk about

00:11:04.920 | being such a important thing.

00:11:07.320 | - Yeah, if you wanted to use that as your floor,

00:11:10.280 | that's probably a good place to go

00:11:11.520 | where you're still getting the 100% return from your match.

00:11:13.800 | Yeah, always, always, always get the match.

00:11:15.360 | But otherwise, I think cutting back is not a big deal.

00:11:17.780 | If you've already shown you can max out your 401k and IRA.

00:11:21.120 | All right, question three.

00:11:22.480 | - Okay, so up next we have a question from Josh who writes,

00:11:26.120 | "I'm in the lucky situation to have an income

00:11:27.940 | "of around $200,000.

00:11:29.820 | "I'm going to receive my annual bonus in January

00:11:32.200 | "with which I would be able to fully fund my 401k

00:11:35.140 | "for the year.

00:11:35.980 | "Normally, I would fully fund it

00:11:37.160 | "and then continue to contribute on each paycheck

00:11:39.460 | "via the mega backdoor Roth,

00:11:40.980 | "which I feel like needs some explaining.

00:11:43.640 | "Would you recommend continuing to fully fund the 401k

00:11:45.920 | "with my bonus in January,

00:11:47.160 | "or would it make more sense to dollar cost average

00:11:49.100 | "throughout the year?"

00:11:50.260 | - All right, so this is essentially a question

00:11:53.580 | about lump sum investing or dollar cost averaging.

00:11:56.160 | Most people dollar cost average

00:11:57.680 | because they get paid on a set pay schedule,

00:12:00.120 | whether it's weekly, monthly, bi-weekly,

00:12:01.840 | or bi-monthly, whatever,

00:12:03.160 | and they just pay out of their paycheck.

00:12:04.180 | So lump sum thing doesn't matter.

00:12:05.400 | But this person got a bonus and they can say,

00:12:06.600 | "Hey, I can fund it up front."

00:12:08.880 | Doesn't make sense to do that.

00:12:10.320 | I've written about this in the past.

00:12:11.700 | We get questions like this all the time

00:12:13.180 | from people who get an inheritance

00:12:14.740 | or get some sort of lump sum with a bonus.

00:12:16.780 | And even though I've written about this,

00:12:18.540 | I always refer people to a post from "Dollars and Data"

00:12:22.060 | by our own Nick Majulie.

00:12:23.380 | So I thought I'd bring Nick on to talk about this

00:12:25.660 | because he wrote what I think

00:12:27.060 | is probably one of the definitive guides.

00:12:28.500 | He even calls it the definitive guide.

00:12:30.880 | So let's bring Nick on to hear what he kind of found

00:12:33.020 | on this sort of lump sum versus dollar cost averaging thing.

00:12:36.140 | - Hello.

00:12:36.980 | - Nick, you've done the definitive guide.

00:12:40.020 | You've looked at this from a number of different places.

00:12:41.860 | I think you looked just the stock market.

00:12:43.140 | You looked at like a 60/40 portfolio,

00:12:45.380 | all these different things.

00:12:46.940 | What did you find in terms of what's the best route

00:12:49.500 | for people most of the time based on the baselines?

00:12:52.620 | - I mean, yeah, most of the time,

00:12:54.140 | the trade-off you're looking at

00:12:55.380 | is risk versus return, obviously.

00:12:57.260 | So in this case, this person's trying to max their 401k.

00:13:00.940 | The max right now is like, let's say it's 20,500.

00:13:03.500 | Let's just say 20,000 for a round number.

00:13:06.180 | And in the post, I talk about like,

00:13:08.380 | if you were to first investing right now,

00:13:10.620 | all that 20,000 versus taking,

00:13:13.060 | investing over 24 months,

00:13:14.380 | so dividing that into 24 equal payments,

00:13:16.780 | a little under a thousand bucks each,

00:13:18.940 | you would have underperformed on average by about 9%.

00:13:21.460 | So that's over two years, but this is a one-year case,

00:13:23.940 | 'cause he's like, do I max now or just for the next year?

00:13:25.780 | So in a one-year case,

00:13:27.220 | you're looking at four to 5% difference in return.

00:13:29.980 | So on 20 grand, that's like $1,000.

00:13:32.580 | On average, $1,000 you're gonna be out

00:13:35.060 | if you wait to go in versus if you just put it all in now.

00:13:38.260 | And that's on average, of course, but that's the question.

00:13:40.700 | So to the reader, to the person who asked the question,

00:13:42.700 | like, are you okay underperforming $1,000

00:13:45.140 | to average in and reduce your risk a little bit?

00:13:47.380 | If you are, then go ahead and go for it.

00:13:49.060 | If not, that's, but you can obviously underperform more,

00:13:52.140 | but that's kind of the main,

00:13:53.300 | that's the way I would think about it.

00:13:54.420 | It's like 5% in a year, about 9% in two years.

00:13:57.820 | As you go further and further, you wait five years,

00:13:59.700 | the underperformance gets really, really bad on average.

00:14:02.100 | So- - I guess the thing,

00:14:03.700 | the thing that you're trying to say

00:14:04.620 | is most of the time stocks go up.

00:14:06.500 | - Yeah, that's basically it.

00:14:08.020 | So I mean, every, on average, over the last 100 years,

00:14:10.900 | stocks are up three out of every four years.

00:14:12.460 | So if you can use that as your baseline,

00:14:13.620 | like 75% of the time,

00:14:15.180 | the stock market is gonna be higher in a given year.

00:14:17.940 | So that's the basic idea here, right,

00:14:20.140 | is that stocks mostly go up.

00:14:20.980 | I guess the psychological component here is

00:14:23.740 | everyone always thinks to themselves,

00:14:25.220 | well, great, that data's fine on average,

00:14:27.620 | but I know I'm gonna be the person who puts my lump sum in

00:14:30.900 | and then the stock market's gonna roll over

00:14:32.340 | and I'm gonna look like an idiot.

00:14:34.260 | Right? - Yeah, that can happen,

00:14:35.580 | but here's the flip side to that.

00:14:37.660 | Let's say you start averaging in, right,

00:14:39.500 | and the stock market really starts to tank

00:14:41.300 | like it did in early 2020.

00:14:43.780 | Are you gonna be able to keep averaging

00:14:45.220 | while the market's dropping?

00:14:46.180 | Are you gonna panic and say, you know what, I don't?

00:14:47.740 | So the only time when DCA beats lump sum

00:14:50.700 | is the time when you're precisely least likely

00:14:53.060 | to wanna keep investing 'cause the market's crashing.

00:14:55.180 | You feel like you're gonna, you're just throwing,

00:14:56.980 | you know, good money after bad as it keeps going down.

00:14:58.940 | So if you're someone who's like,

00:15:00.180 | yeah, I can keep buying when it's crashing,

00:15:01.580 | then go ahead.

00:15:02.420 | But most people are gonna be like,

00:15:03.340 | oh, you know, maybe I should wait,

00:15:04.460 | and then you're gonna sit in cash.

00:15:05.620 | And we've had, you know,

00:15:06.740 | I've talked to people that, you know,

00:15:08.220 | that have done this, that were like,

00:15:09.340 | they were in cash March 2020,

00:15:10.660 | and they were still in cash now,

00:15:11.980 | or they were in cash for a year or something.

00:15:13.540 | It's like they just, everything came back.

00:15:15.740 | - Yeah, it becomes addicting.

00:15:16.820 | And I think the other point is,

00:15:18.220 | if you're saving your 401(k),

00:15:19.060 | and you have decades until you're touching this money,

00:15:21.580 | guess what?

00:15:22.540 | That lump sum versus dollar cost average,

00:15:24.100 | even if you make a bad lump sum payment,

00:15:26.660 | and you put it right in before market peak,

00:15:28.220 | you're gonna be fine decades into the future, right?

00:15:30.380 | It's not going to hurt you.

00:15:31.260 | So most of the time, you're gonna do better.

00:15:33.100 | And even if you have the horrible luck,

00:15:35.500 | over the longterm,

00:15:36.340 | it's gonna kind of shake out over the averages

00:15:38.140 | where you're gonna be fine

00:15:39.180 | as long as you don't touch that money.

00:15:40.860 | - Yeah, and the differences are small.

00:15:42.180 | I'm saying that the shorter the difference,

00:15:43.660 | like, let's say we said,

00:15:44.500 | okay, I'm gonna put it all in this month,

00:15:45.540 | or I'm gonna average over two months.

00:15:46.860 | The difference is so small,

00:15:47.820 | we shouldn't even waste our time discussing it.

00:15:49.660 | And even over the course of a year, 5%,

00:15:51.340 | like, that's a decent amount of money,

00:15:53.020 | but you know, 1,000 bucks.

00:15:54.180 | So for this person who's maxing,

00:15:55.740 | is doing mega backdoor raffle,

00:15:57.100 | it probably doesn't make a difference for them.

00:15:58.580 | So just do what's gonna make you sleep at night better.

00:16:01.860 | For this person in particular,

00:16:03.060 | that's what I would say,

00:16:03.900 | you know, the numbers say to just put it all in now.

00:16:06.860 | - Right.

00:16:07.700 | Duncan, we'll save the mega backdoor off stuff

00:16:09.180 | for Bill Suite for tax time, okay?

00:16:10.860 | - Okay, yeah, I have no idea what that means.

00:16:12.620 | So yeah, at some point we'll have to dive into that.

00:16:15.900 | - All right, one more question.

00:16:17.420 | - Okay, so this last one's kind of a fun one,

00:16:20.420 | because it's a challenge.

00:16:21.740 | Convince me that leveraged ETFs like SPXL and TQQQ

00:16:26.740 | are not better holds than SPY and QQQ.

00:16:30.060 | I understand there's way more volatility both ways,

00:16:32.500 | but I cannot find a timeframe greater than a few months

00:16:35.220 | where they're not massively outperforming.

00:16:37.900 | Can you talk me off the leveraged wedge?

00:16:39.900 | - All right, I looked these up on Y charts,

00:16:43.940 | and when I looked at these graphs,

00:16:45.100 | I wanted to punch myself in the face,

00:16:46.620 | Edward Norton style from Fight Club.

00:16:47.900 | So John, show the, this is the SPXL versus SPY.

00:16:52.420 | So this is a three-time levered versus the S&P 500.

00:16:54.940 | The SPXL, which is three times levered S&P,

00:16:58.940 | is up 3,000% since it's launched in late 2009.

00:17:03.700 | The S&P 500 is up like 400%.

00:17:07.700 | Oh my Lord.

00:17:08.660 | Now look at the drawdowns in the next one.

00:17:10.300 | So this shows a drawdown.

00:17:11.500 | So this is like the downside of this.

00:17:13.580 | So you can see that the downside,

00:17:14.820 | the S&P fell 34% in a corona crash.

00:17:18.020 | The three times levered fell almost 80%.

00:17:20.900 | So that's your downside.

00:17:21.780 | Now let's look at this next one,

00:17:22.780 | which honestly kind of blew my mind.

00:17:25.260 | This is a three times levered NASDAQ 100.

00:17:28.660 | It was launched in like 2010.

00:17:31.300 | It's up 17,000% and the NASDAQ 100 is up 800%, 17,000%.

00:17:36.300 | Oh Lord.

00:17:40.660 | So look at the drawdown on this one now just to show,

00:17:42.820 | even though it was down 70% in the lows.

00:17:46.060 | Nick, you've looked into this stuff too.

00:17:47.500 | I have some thoughts on this,

00:17:49.340 | on what could potentially go wrong,

00:17:50.880 | but what do you say to these people that,

00:17:52.740 | and I honestly, Duncan and I get one to two questions

00:17:56.340 | like this every single week, easily.

00:17:57.820 | People, especially from young people,

00:17:59.140 | why shouldn't I just do this?

00:18:00.060 | So what is your take on these leveraged ETFs?

00:18:02.620 | - I have two thoughts on this.

00:18:04.120 | The first thought is leveraged ETFs are great

00:18:07.020 | if you're lucky.

00:18:07.900 | So if you get lucky and you don't experience

00:18:10.020 | a 2008 scenario, a 1929 scenario where the market's down,

00:18:13.140 | you know, 50, 60 plus percent,

00:18:15.220 | then you're gonna be, look, it went down 33

00:18:17.100 | and what was it, down 75, 80%?

00:18:18.780 | - Yeah, don't you think in 2008,

00:18:21.860 | if it's down 50% it's probably down 95, I guess,

00:18:24.180 | the three times levered, don't you think?

00:18:25.020 | - Yeah, it's basically wiped out, yeah.

00:18:26.180 | So I think even, I think that's basically

00:18:28.140 | like a death scenario where it's just over.

00:18:29.980 | So that's the first thing, like if you're lucky,

00:18:31.640 | if you think you're gonna be lucky

00:18:32.620 | and we won't experience another 50, 60% plus drawdown,

00:18:36.520 | then it's great.

00:18:37.540 | So that's the first thing I'm gonna say,

00:18:38.940 | which is obviously kind of ridiculous.

00:18:40.780 | The second thing I'm gonna say is, okay,

00:18:42.180 | if you're gonna lever, maybe do a little bit less,

00:18:44.980 | not do a three X, do something a little bit less.

00:18:46.860 | And why do I say that?

00:18:47.860 | So AQR, the quantitative investment management firm

00:18:50.480 | wrote this paper, put out this paper called Buffett's Alpha.

00:18:52.900 | And they looked at like Warren Buffett,

00:18:54.620 | like one of the greatest investors of all time.

00:18:55.820 | He did use leverage with the insurance flow and all.

00:18:57.860 | I don't wanna get into all that, but he borrowed a little.

00:18:59.820 | He basically had money he could borrow to invest.

00:19:02.500 | And the highest his leverage ever got was 1.7 to one.

00:19:05.860 | So he never went to three X.

00:19:07.220 | So even if Warren Buffett,

00:19:08.940 | let's just say 1.5 to make the numbers round.

00:19:10.940 | If Warren Buffett went to 1.5 on his leverage,

00:19:13.840 | why would you wanna be going to three or even two?

00:19:16.140 | So if there's something that's like a little levered, okay.

00:19:19.060 | I think like that's not the worst thing.

00:19:20.860 | It's probably unlikely to go to zero.

00:19:22.240 | But if you do a three X, I think you're asking

00:19:24.820 | for some tough times ahead.

00:19:25.940 | So that's the only thing I'm gonna say about that.

00:19:28.700 | - This is like the Gillette thing from the Onion.

00:19:30.620 | It was like, "F it, we're gonna do five blades."

00:19:33.120 | Right? - Exactly.

00:19:33.960 | - And I agree.

00:19:35.700 | So yeah, you're right.

00:19:36.540 | The worst case, also bull markets,

00:19:39.260 | there's very little volatility.

00:19:40.500 | And these things reset on a daily basis.

00:19:42.540 | What they wanna do is they wanna capture three times

00:19:44.540 | on a daily basis, then they reset.

00:19:46.500 | And you get the daily basis.

00:19:47.340 | And the reason that these ones work better

00:19:48.780 | than like a volatility one,

00:19:50.220 | like there's some of these volatility VIX indices

00:19:52.780 | that they follow.

00:19:53.620 | Those things can get crushed.

00:19:54.500 | A lot of those are down like 99% from their highs

00:19:56.580 | because that churning of volatility,

00:19:58.940 | you sort of lose something there.

00:19:59.940 | But it doesn't happen with the stock market as much

00:20:01.980 | because that's resetting.

00:20:03.180 | And it's a different structure, basically.

00:20:06.060 | But in a more volatile market,

00:20:08.240 | even if you move sideways and we get a ton of volatility,

00:20:11.140 | or we go down a little bit,

00:20:12.340 | again, these things in a more volatile environment,

00:20:14.420 | 'cause in a bull market,

00:20:15.400 | things are very little volatility,

00:20:17.140 | stair step up, things are okay.

00:20:19.240 | When there's more volatility,

00:20:20.220 | these things could get crushed even in a market

00:20:22.060 | that doesn't go down that much.

00:20:23.780 | So I think this was the best case scenario for these funds.

00:20:27.700 | So when they rolled these funds out,

00:20:29.620 | it was probably the best timing ever.

00:20:31.060 | And I still can't get over that NASDAQ 100,

00:20:32.980 | three times number, 17,000%.

00:20:35.620 | I would love to see if there's like one person

00:20:37.300 | who's held on that whole time.

00:20:38.660 | But it's, yes, a more volatile market

00:20:42.540 | could screw you over with one of these.

00:20:44.620 | And maybe you talk about sizing it right.

00:20:47.380 | Maybe instead of like replacing,

00:20:48.740 | if you're a person who's at a really ridiculously

00:20:51.140 | high risk tolerance,

00:20:52.820 | don't replace your whole S&P 500 holding with this.

00:20:56.020 | Take a small percentage and do it

00:20:57.380 | and try it out a little bit

00:20:58.220 | and see if you can handle the wild swings

00:21:00.420 | because they're going to happen.

00:21:01.740 | So that would be my, again,

00:21:03.620 | we get this question all the time.

00:21:05.940 | I think it's easier to say

00:21:07.340 | you have a high risk tolerance for this stuff

00:21:08.740 | when we're in a bull market.

00:21:10.480 | Talk to me when we're in a bear market

00:21:11.620 | and if you can really hang on

00:21:12.540 | for a 70, 80, 90% decline in these,

00:21:15.020 | 'cause that is not out of the realm of possibilities

00:21:17.800 | at all for this stuff.

00:21:19.860 | - Yeah, I mean, I think it reminds me

00:21:21.460 | of the Taleb's Turkey problem, right?

00:21:23.340 | It's like the longer you,

00:21:24.300 | like you're getting more evidence.

00:21:25.660 | All these people are like, "Convince me not to do it."

00:21:27.100 | You have, every single day,

00:21:28.260 | you're getting more and more evidence

00:21:29.460 | why they should invest in it.

00:21:30.540 | But one day, sometime in the future,

00:21:32.780 | I don't know when, could start tomorrow,

00:21:34.180 | could start 10 years from now,

00:21:35.660 | there's going to be a massive crash.

00:21:37.180 | And a lot of these people are going to get

00:21:38.980 | very close to basically all wiped out.

00:21:41.100 | And that's going to change everything, right?

00:21:43.660 | Turkey gets more confidence in their caretaker

00:21:46.100 | until the day they're killed, right?

00:21:47.340 | It's the same type of thing going on, so.

00:21:49.460 | - Yeah.

00:21:50.300 | Someone who says, "Talk me off the ledge,"

00:21:51.540 | probably doesn't really want to do it,

00:21:53.140 | if we're being honest.

00:21:54.180 | Okay, Nick, one more question.

00:21:56.380 | How are the supply constraints going for your book?

00:21:58.580 | Are we on time?

00:21:59.620 | When's the release date?

00:22:00.460 | - I think, yes, I think we're April 12th.

00:22:02.420 | We're on time now.

00:22:03.300 | Sorry, we had a two-month delay,

00:22:04.460 | but it will be out April 12th.

00:22:06.060 | Just keep buying, very easy to remember, so.

00:22:09.060 | - All right, and where can people go

00:22:10.060 | to sign up for your newsletter?

00:22:12.540 | - Just my website, dollarsindata.com,

00:22:14.300 | and you'll see on the nav bar, it says newsletter,

00:22:17.140 | and you can sign up there, so.

00:22:19.180 | - All right, awesome.

00:22:20.460 | We'll have Nick back on when his book comes out, for sure.

00:22:22.780 | Check out Of Dollars and Data for everything Nick's write.

00:22:25.080 | He's one of the smartest investment writers out there.

00:22:27.180 | Duncan's gonna be filling us in

00:22:28.500 | in the weeks and months ahead on his Robinhood portfolio

00:22:30.900 | to see how things are going.

00:22:32.380 | If you have a question for the show,

00:22:33.640 | askthecompoundshow@gmail.com.

00:22:36.300 | Help us subscribe, like, all that good stuff,

00:22:38.820 | and we'll see you next week.

00:22:41.060 | - See ya.

00:22:41.900 | - Thank you.

00:22:43.500 | (upbeat music)

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When Should I Sell a Stock That’s Down? | Portfolio Rescue

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