Why You Should Buy Quickly & Sell Slowly

00:00:00.000 | Welcome back to Portfolio Rescue. If you have a question, email us at askthecompoundshow@gmail.com.

00:00:23.360 | Today's Portfolio Rescue is brought to you by Innovator ETFs. Duncan, one area where

00:00:27.320 | investors haven't really had to think about protecting themselves to the downside is bonds.

00:00:31.320 | Now that interest rates have risen quite a bit, people are finally saying, "Oh wait, bonds

00:00:34.380 | can actually fall in price a little bit." This is especially true for long-duration bonds.

00:00:38.680 | One of the reasons that certain investors like to hold long-duration bonds is because

00:00:42.480 | they tend to give you more bang for your buck during a recession. If interest rates fall

00:00:45.440 | and we go into deflation, all else equal, higher-duration bonds will have greater sensitivity

00:00:49.360 | to changed rates. When rates rise, prices fall more than shorter-term bonds, but when

00:00:54.960 | rates fall, those prices tend to rise more. So, let's look at the TLT as the 20-year Treasury

00:01:00.640 | ETF. In 2019, it was up 14%. In 2020, it was up 18%. In 2022, it's down 22%. So, Innovator

00:01:07.220 | has this TLT ETF that has a buffer to the downside. So, it protects you with 9% buffer,

00:01:14.200 | meaning the first down 9%, if you start from zero, you're protected. But it also has a

00:01:19.080 | cap of 27%. So, your defined outcomes are, you can earn as much as 27%, and your first

00:01:24.800 | 9% is capped for losses. Now, the thinking here would be, okay, we could see inflation

00:01:31.120 | remain stubbornly high, and that could see rates rise even further on the high end, right?

00:01:35.000 | And that would crush them some more. So, we want to protect on the downside. Alternatively,

00:01:39.640 | the Fed could get its way, raise rates enough where the economy slows, and we actually do

00:01:43.700 | get some disinflation, or maybe even deflation, and rates fall again. And then, you don't

00:01:48.080 | want to miss out on those gains. So, the way you use these defined outcomes ETFs is that

00:01:51.640 | you have a cap on the upside, but you have some buffer to the downside. Pretty interesting.

00:01:55.760 | So, no matter what happens, you're kind of okay. And that's why they have these defined

00:02:00.520 | outcomes, so you have the ranges to know. To learn more about this and other ETFs from

00:02:03.520 | defined outcomes, go to InnovatorETFs.com.

00:02:07.200 | It's like you can see the future.

00:02:09.080 | Well, you can at least give yourself some markers, so you know, over here I'm okay,

00:02:13.960 | and over here I'm okay, and I know what I'm going to get, depending on what the market

00:02:16.480 | does. All right. So, I was looking at the drawdowns today. John, throw up this chart.

00:02:22.120 | This is the Dow and the S&P. Look at this morning. Dow is down from the highs 17%. The

00:02:26.280 | S&P is down 21%. Duncan, wouldn't you say vibes alone, it feels like twice as bad as

00:02:32.240 | this? I know this is not great. We're in a bear market. The Nasdaq is down more. A bunch

00:02:37.100 | of people are going to be in the comments saying, "Well, look at the individual stocks

00:02:41.120 | I own. They're down 50%, 60%, 70%."

00:02:42.120 | Well, yeah. That's what I was about to say. I'd love to have those returns right now.

00:02:47.640 | The stock market itself, though, it's not necessarily in a crash, even though sentiment

00:02:52.020 | feels like we're in a crash. So, I don't know if that's good news or bad news. Because,

00:02:56.500 | good news, maybe things haven't gotten as bad as people think. Obviously, you could

00:02:59.520 | adjust these for inflation and say they're a little worse. Bad news is, we have more

00:03:03.080 | room to fall. So, I guess it depends if you're a glass is half-full, glass is half-empty

00:03:07.040 | kind of guy.

00:03:08.040 | When have you ever seen sentiment this bad before?

00:03:11.240 | I mean, 2008, for sure. At the end, people just kind of gave up. The stock market peaked

00:03:21.400 | in October 2007. We didn't bottom until March 2009. If you think about it, all that stuff

00:03:26.800 | that happened with Lehman Brothers and AIG and all the bank blowups, that was in September

00:03:31.960 | and October of 2008. And the market didn't bottom until March 2009. So, that lasted so

00:03:38.160 | long that people, at the end, had kind of just thrown up their hands and given up. So,

00:03:42.680 | that, for sure, was just as bad. But, back then, you didn't have social media throwing

00:03:48.000 | it in your face every day. That's part of the problem. If you're on that as much as

00:03:52.240 | people like we are, you probably assume the sentiment is worse than real life. When you

00:03:56.640 | go out into the real world, and a restaurant's full of people spending money, and the subway's

00:04:01.380 | full and all this stuff, it doesn't feel as bad there as it does when you're paying attention

00:04:07.440 | to this stuff as much as we do. So, for us, maybe that sentiment is amplified, actually.

00:04:11.280 | Alright. Let's do a question.

00:04:14.760 | Okay. So, up first, we have, "I'm a 31-year-old financial planner married with two young kids.

00:04:22.920 | My wife and I just sold our house to move school districts and we'll rent for the next

00:04:26.600 | year. We will clear $70,000 from our house. Our goal is to buy our forever home within

00:04:31.840 | the next year. With where Bitcoin is sitting," I can't wait to see the comments on this

00:04:37.560 | one. "With where Bitcoin is sitting, I'm very tempted to put $10,000 to $50,000 of

00:04:41.720 | our $70,000 cash into Bitcoin and wait a year to see what happens. My wife would definitely

00:04:47.120 | not like this, and I know as a financial planner that the responsible answer is, 'Hell no,'

00:04:52.080 | or maybe just 5% of our cash. But I can't help but think that if Bitcoin returns to

00:04:56.560 | its high of $67,000, I could double or triple our cash for purchasing a forever home. I

00:05:02.880 | have a guaranteed salary of $90,000 and my wife makes $40,000 a year. We have no debt

00:05:08.000 | and I save 10% of my income for retirement."

00:05:11.420 | So I don't like the idea of timing the housing market, but it sounds like these people timed

00:05:14.920 | the housing market pretty well. They sold their house, they're gonna wait a year. I

00:05:17.400 | think waiting a year in the housing market right now could be okay if rates stay high

00:05:20.880 | for a while, that it could slow down. Obviously, initial blush, if we're being honest here,

00:05:26.360 | Ben's initial reaction is, "This is a ridiculous idea. Do not do it." But let's just look at

00:05:30.440 | the cost-benefit just to see. Okay, you said you have $70,000 in cash. Let's assume that's

00:05:34.280 | your entire down payment. You're going to do a 20% down payment. That would be 20% of,

00:05:39.040 | for a $70,000 down payment, is a $350,000 house. $280,000 mortgage. I don't know if

00:05:44.240 | you're going to put more cash down and maybe have a smaller percentage, but let's just

00:05:47.040 | go with this for illustrative purposes here. $350,000 house with a $70,000 down payment

00:05:53.320 | is a mortgage of $280,000, using a 5% fixed rate mortgage. Who knows where mortgage rates

00:05:57.600 | will be in a year? We're talking, in a 30 fixed rate mortgage, a monthly payment of

00:06:01.760 | like $1,500 a month. Right? Still with me, Duncan? Now, let's say you went up to your

00:06:06.480 | max limit and you put $50K into Bitcoin. You kept $20,000 out and you put $50K in there.

00:06:10.960 | And it snaps back. Maybe it doesn't even reach those all-time highs, because that's asking

00:06:14.440 | a lot, probably. Let's say it just doubled. We go from $20K to $40K. Now, you take your

00:06:20.600 | $50K, you've doubled it, you have your extra $20K, you have your $120,000 put down. That

00:06:24.720 | would drop your monthly payment to like $1,230 a month if you used all of that for your down

00:06:28.640 | payment. Right? So, you're saving like $270 a month. Right? That's real money for people.

00:06:33.960 | But what if you're wrong? What if Bitcoin goes back to $5,000 like it did in March 2020?

00:06:38.080 | What if it keeps crashing? We have Coinbase blows up or some other thing and Sam Bankman

00:06:42.720 | Freed can't save everyone. It's not out of the realm of possibilities. Right? Now, that

00:06:48.920 | $50K gets crushed and now you have $12,500. Right? And you can only make a down payment

00:06:54.680 | of less than 10%. Right? Because you lost a good chunk of it. In that case, we're talking

00:06:59.360 | about a monthly payment of $1,700 a month or $200 more. So, obviously, these are the

00:07:04.240 | extreme examples. You do really well, you do really poorly. There could be a middle

00:07:08.560 | ground there. But I wanted to look at the extremes, because I think especially the downside,

00:07:11.880 | that's what you want to think about in these cases. Here's the thing. Do you want to bet

00:07:14.720 | your forever home on crypto? Can you imagine how angry your wife would be if you lost a

00:07:19.000 | bunch of this money and you tried to pull this off and it doesn't work? I mean, newsflash,

00:07:24.320 | you can't live on the blockchain. Right? And if, let's say, rates continue to go higher

00:07:29.120 | in the mortgage market and your monthly payment is even higher now, and that down payment

00:07:33.920 | would help you a lot. Listen, what would I do? Take $20,000 of this, put it into Series

00:07:41.520 | I savings bonds. You're earning 9% annualized right now. Put the rest of it in short-term

00:07:46.720 | bonds or online savings account. You can earn 1-3% in there. It's not life-changing money,

00:07:51.360 | but it's much better than it was in the recent past. If you want to get cute with this, maybe

00:07:55.760 | take $5,000 to $10,000 and speculate. Let's say you take $10,000 of the $70,000. You still

00:08:00.360 | have $60,000 for a down payment. That's not going to change your life all that much. Let's

00:08:04.720 | say Bitcoin does go back to all-time highs and you turn $10,000 into $30,000. That can

00:08:10.680 | mean something.

00:08:11.680 | And you still get to look like a genius to your friends.

00:08:14.160 | Yeah. And you don't look like as much of an idiot if it doesn't work. Here's how you think

00:08:19.660 | about a down payment. At 5% interest over 30 years, every $5,000 equates to $30 a month

00:08:27.120 | for your mortgage. Thinking about the upside and the downside there, it's not going to

00:08:33.400 | help you a ton if it works out to be right. I know it seems like a lot of money, but I

00:08:39.040 | understand the human desire to speculate. I just think speculation should always be

00:08:42.760 | sized appropriately, especially when dealing with a goal that's important. I would rather

00:08:46.920 | have no speculation at all when dealing with something like a house down payment. If it's

00:08:50.200 | something else, if you've got $5,000 saved and you want to buy a boat, have at it. Put

00:08:54.800 | it in Bitcoin if you want. I just don't know if I'd ever be comfortable taking a chance

00:08:58.320 | with something that important, especially when your wife is already against it. I don't

00:09:04.200 | see the upside and downside. We're not talking about an asymmetric upside bet here. The symmetry

00:09:10.240 | is to the downside. Yeah. And it's a slippery slope, right? They

00:09:15.120 | could start getting into altcoins and be like, "Oh, well, maybe I could have X return more

00:09:20.440 | than Bitcoin, even. Or maybe I could have a basket of altcoins." So it's just where

00:09:27.720 | this could end up in a bad place, I guess. If you're right, you think, "Okay, well, I'm

00:09:32.480 | just going to pull all the equity out of my home and put it into something else, and that's

00:09:35.160 | going to work next time." Unfortunately, every once in a while, one of these speculations

00:09:39.040 | is not going to work, and you don't want it to be on a house when maybe the bank says,

00:09:43.000 | "You need this down payment to qualify for this mortgage," and now you don't. I wouldn't

00:09:48.140 | play around here. Fun question, though.

00:09:50.480 | Let's do another one. This next one's kind of a long one, but I wanted to include a lot

00:09:53.960 | of it because it's interesting to hear the thought process some people go through on

00:09:57.000 | this stuff. So let's do it.

00:09:58.600 | Yeah. So this is a two-pager, for those of you watching. Is there ever a time where you

00:10:03.720 | would say, "Damn the company match," and stop investing in your 401(k)? Here is my situation.

00:10:09.360 | I live in high-cost Chicago suburbs. Wife and I are both 44. We have two grade school-aged

00:10:16.520 | boys, good salaries, and low-rate mortgage debt. We have $400,000 in Roths and $1.2 million

00:10:22.560 | in 401(k), but only $33,000 in taxable accounts. We backdoor Roth every year. My wife is a

00:10:29.900 | partner in her firm and required to max out her 401(k) in pension. That kind of confused

00:10:34.400 | me. I've never heard of that "required to max out," but we can talk about that later.

00:10:38.320 | I guess the pension is a big part of it, but yeah.

00:10:41.320 | She is a couple of years from investing in a pension that will pay her six figures annually

00:10:45.200 | in retirement. My company match is 1.5% of my salary, and I only contribute enough to

00:10:50.280 | give a 6% match. Neither of us wants to work until we are 65. Fifty-five would be ideal.

00:10:57.160 | We currently do not contribute to our taxable accounts due to a massive home renovation

00:11:00.840 | we are about to undertake, but will allow us to comfortably stay in place for the next

00:11:06.800 | 15 years or so until we move away from Chicago to the mountains somewhere. Once the remodel

00:11:11.640 | is paid for, we will be directing excess funds towards taxable accounts. We have anywhere

00:11:17.140 | from 11 to 15 years to bulk up our taxable accounts to put us in a position to bridge

00:11:21.320 | the early retirement gap to retirement fund pension age. The conclusion I keep coming

00:11:26.480 | to is it's not worth giving up $2,000 in free money just to put money into our taxable accounts.

00:11:32.480 | Also, based on our time frame of 11 to 15 years, I know rate of contribution is more

00:11:37.200 | important than returns, so I feel like I'm just spinning myself into the ground, weighing

00:11:42.840 | the pros and cons.

00:11:47.480 | Ben's rule number one of retirement savings is you always get the match. If you don't

00:11:50.240 | get it, you're turning down free money. I understand the thought process here. You already

00:11:53.400 | have a big allocation to tax-deferred retirement accounts. You do have the pension coming,

00:11:57.760 | which is nice, and a lot of people don't. I guess this certainly falls in our not to

00:12:01.240 | brag category. Andy and his wife are doing pretty well here, so kudos to you for that.

00:12:07.320 | Listen, I understand the idea it makes sense to build up your taxable account since you're

00:12:10.920 | going to retire early and don't want to pay penalties on early withdrawals. The idea of

00:12:15.000 | diversifying your tax base makes sense, too, so you can have a little give and take when

00:12:18.600 | you do take those withdrawals from your retirement accounts. I guess your 1.5% that you're receiving

00:12:26.120 | on your match is not life-changing money, but it's free money nonetheless, and I can

00:12:29.560 | see why people wouldn't want to turn it down.

00:12:31.280 | Let's work through some options before we go canceling that $401K match. I've done some

00:12:36.240 | remodeling in the past. It always takes a lot longer than you think and costs, I don't

00:12:39.560 | know, 20-40% more than you assume it will. But you said these payments will be done in

00:12:44.080 | a couple of years, and you plan on throwing them in your taxable account. You can do some

00:12:47.880 | simple back-of-the-envelope calculations. I think someone's been reading Ben's Everything

00:12:50.960 | You Need to Know About Saving for Retirement book, because they said they know that their

00:12:54.120 | contributions matter more than their returns over 11-15 years, right? So, they've been

00:12:57.880 | paying attention. I think you can do some pretty simple back-of-the-envelope calculations

00:13:01.360 | to see where those savings will get you in 11-15 years. You could also see how much you

00:13:06.200 | can set aside in that taxable account for a few years before canceling. Give it a couple

00:13:09.600 | years and see how much progress you're making. And if it's not where you think you'd like

00:13:13.640 | to be at for a few years, you can always rethink that $401K match.

00:13:17.520 | But how about that money in the Roth? One of the great features of having a Roth is

00:13:21.200 | that you can pull out your contributions penalty and tax-free. You can't take the investment

00:13:25.960 | earnings out penalty and tax-free, but you can take the contributions. So, if you're

00:13:28.800 | doing that back-to-Roth every year, you can take out the contributions tax-free. So, if

00:13:32.720 | you want to bridge that gap between $55K and $65K, and you don't have enough in your taxable

00:13:36.720 | account, maybe the Roth contributions can make up some of it.

00:13:40.480 | The good news is, it sounds like you and your wife are great planners, and this is a relatively

00:13:44.180 | small decision in the grand scheme of things. Getting to this level, and you're niching

00:13:47.840 | it down to this much, you're doing pretty good. And who knows what will happen. Maybe

00:13:51.160 | you'll reach $55K and realize one or both of you don't want to retire. You want to work

00:13:55.600 | a little longer, and then it won't matter as much, and you can prolong that. Maybe you'll

00:13:59.280 | have saved more than expected. Maybe you'll save less than expected. You just have to

00:14:02.720 | work. The good news with these kinds of decisions, it's not set in stone. You can always change

00:14:05.760 | your mind later. But, I think you give it a couple years, see how long this renovation

00:14:09.960 | takes, and once you get there, you can kind of have an idea of the money. But, yeah, does

00:14:14.180 | it always, always make sense 100% of the time to take the match? Maybe it's 99% of the time.

00:14:19.320 | I could allow for 1% where it doesn't make sense. But, I'd say give it some time and

00:14:24.040 | see how much money you can start building up the taxable account first, before you shut

00:14:27.060 | that off. Because it is, again, it's turned down free money.

00:14:29.680 | - Yeah, yeah, free money. There aren't many opportunities for that. So, sounds good.

00:14:35.000 | - Yeah. But, yeah, you're in a pretty good place. All right, let's do another one.

00:14:39.720 | - Okay, so up next. "I'm in retirement and using the 4% rule to fund my lifestyle. My

00:14:45.640 | question is, is it better to sell 4% of my portfolio at the beginning of the year, or

00:14:51.320 | sell throughout the year, as I need the money? Which strategy leads to more wealth in the

00:14:55.520 | long run? Assume you are invested 100% in U.S. equity index funds."

00:14:59.760 | - All right, we've gotten a lot of questions like this lately from people who want to know,

00:15:02.520 | "How do I spend money in retirement? I'm nervous. We're in a bear market. What does this mean?"

00:15:07.200 | This is basically an opposite. This is a reverse dollar-cost averaging situation. So, my person

00:15:12.440 | I lean on, my expert for dollar-cost averaging, the great Nick Maggiuli, he writes at Of Dollars

00:15:17.040 | and Data. He works with us at Red Hat Wealth Management.

00:15:18.960 | - Just keep buying.

00:15:20.040 | - New book, Just Keep Buying. So, Nick, this is the opposite. And when this question came

00:15:23.640 | in, I immediately sent it to you. I said, "Have you ever done anything like this?" And

00:15:26.240 | I think your tagline to me was, "Buy quickly, but sell slowly." Right? Is that the idea?

00:15:32.440 | - Yes, exactly. So, I actually wrote about this in the book. And I think the main thing

00:15:38.760 | to think about when you're thinking about buying and selling, I mean, there's one core

00:15:41.840 | idea here, which is the market tends to go up over time. And so, given that, just imagine

00:15:46.880 | a series that just keeps slowly increasing over time. You'd want to buy sooner, so you

00:15:51.240 | get in on that appreciation. And then, given that it's going up over time, you'd also want

00:15:55.200 | to sell more slowly, right? You want to buy more quickly and sell more slowly because

00:15:58.980 | of this appreciation, right? And I've actually run the numbers on this. I did a whole blog

00:16:02.800 | post on this just on sell slowly. I kind of dug into it a little bit more, kind of related

00:16:07.600 | to blackjack and stuff, looked at the edge that you have by following a strategy where

00:16:11.840 | you sell, let's say, each quarter over the course of a year versus selling right at the

00:16:15.520 | beginning of the year. And honestly, the percentage is small. It's not like you're making a huge...

00:16:20.580 | If you do this over one year, you're going to probably outperform by like 20 bps on average.

00:16:25.280 | So it's like 20 basis points, 0.2%. It's not a lot. But if you do this over a long period

00:16:29.880 | of time, let's say your entire retirement, the quarterly withdrawals is going to outperform

00:16:33.200 | by a bit more, right? And you annualize that 20 bps, it adds up to a bit more money. So

00:16:39.320 | that's kind of the main takeaway there. I think that's the thing that I would think

00:16:42.240 | about when doing that, right?

00:16:43.600 | When you say you ran the data, I'd believe anything you say next.

00:16:47.200 | Just ran the numbers on this.

00:16:50.660 | It makes sense, though. And you showed, John, throughout the chart here that shows how often

00:16:54.620 | quarterly withdrawals beat beginning of year withdrawals. You can see it goes up over time

00:16:57.420 | much like the stock market. So it makes sense that if you slowly but surely withdraw instead

00:17:01.980 | of taking a big chunk out at the beginning of the year. Now, some people would say psychologically,

00:17:05.100 | "I want that number at the beginning of the year no matter what happens in the market

00:17:07.780 | because then I know that is locked in." But the way I look at this is, you're kind of

00:17:12.540 | diversifying your withdrawals, right? Because a lot of people ask us the lump sum and dollar

00:17:18.200 | cost averaging question going in. There aren't as many easy strategies to follow when getting

00:17:23.180 | out. And obviously, the other part of this is, and I'm sure you've written about this

00:17:26.740 | too, Nick, is the sequence of return risk, right? If you start taking your money out

00:17:31.120 | and there's a huge bear market that hits, that can really alter your portfolio going

00:17:34.540 | forward. And I think actually having some diversification beyond asset classes and strategies

00:17:39.100 | and diversification in your withdrawal strategy actually can probably help a little bit too.

00:17:43.140 | Because even when markets are falling, they're very volatile, right? And you could see these

00:17:46.980 | snapback rallies, even if you happen to retire in a bear market, where taking it out over

00:17:50.640 | time is probably going to help you. Because obviously, if you take it out right before

00:17:54.280 | a bear market, you'll feel better. But eventually, you're going to have to hit and take some

00:17:57.700 | out then. And you looked at this for a 100% stock portfolio. In a balanced portfolio,

00:18:02.720 | the good thing is, you may be allowed to rebalance your portfolio as you make withdrawals as

00:18:06.980 | well, by taking from places that aren't getting hammered as much as the stock market.

00:18:10.860 | Yeah, exactly. Right. And so I think the effects are even, the less volatile your portfolio,

00:18:15.900 | the smaller these impacts are. So like, we're already talking about a small difference now,

00:18:19.540 | so I wouldn't sweat the small stuff on this. It's really not that big of a difference whether

00:18:22.900 | you do beginning of year or quarterly. But technically, quarterly will outperform, especially

00:18:26.900 | over like a, you know, multi-decade retirement time frame.

00:18:30.460 | Yeah. And there's other people who will say, "I'm going to keep two to three years as a

00:18:34.700 | cash cushion in case the stock market falls, and I'm going to use that kind of break in

00:18:39.440 | case of emergency kind of thing. Maybe this is the kind of emergency I want to use that

00:18:42.580 | for." But yeah, your whole thought process there makes sense. Buy quickly, put the money

00:18:47.280 | to work, because stocks usually go up. It doesn't feel like it this year, but most of

00:18:50.140 | the time, stocks go up. And I do think your book here, Just Keep Buying, I'm actually

00:18:57.820 | glad it came out during a bear market, because that's when you need to hear this message

00:19:02.100 | more than during a -- it's easy to keep buying during a bull market, right? When it's a bear

00:19:05.800 | market and you want to stick to that plan, that makes more sense, right?

00:19:08.180 | Yes, of course. Okay, let's do another one, Duncan.

00:19:13.580 | Okay. Up next we have, "When making a retirement portfolio, what would you use for real return

00:19:19.400 | of bond and equity allocations? Would using zero for bond and 2% for equity be conservative,

00:19:25.580 | realistic enough?" No, real return, not nominal. For new whales and young people and stuff,

00:19:30.820 | can you explain this a little bit? Because I'm having trouble.

00:19:33.880 | This is asking for return expectations, net of inflation, right? On a real basis, standard

00:19:40.540 | of living, what can you expect your retirement portfolio to do over the long term? So, John,

00:19:44.260 | fill up the first table here. I took this from Assaf Damodaran at NYU, and stocks, bonds,

00:19:49.620 | and cash going back to 1928. I looked at nominal returns. Those are the actual compounded returns.

00:19:54.740 | Then, over that same time frame, inflation was roughly 3% per year. So, you can see that

00:19:58.940 | the real returns go down by that inflation rate. You can see stocks have a real return

00:20:02.940 | of 7% or so. Bonds are close to 2%, and cash is pretty close to zero. So, based on market

00:20:10.380 | history, 2% real and 0% real are conservative. But, I think when setting expectations for

00:20:15.940 | the future, you have to take the present into account, right? So, one of my favorite ones,

00:20:19.180 | Nick, I'm sure you've seen this, is the John Bogle expected returns formula. So, he takes

00:20:22.580 | the dividend yield plus earnings growth plus or minus the change in P/E ratio. Current

00:20:27.380 | dividend yield for the U.S. stock market is 1.7%. Dividends have grown 2% over the

00:20:32.540 | rate of inflation over the last 100 years. Historical earnings growth is 3% real. So,

00:20:37.100 | let's call it 5% as your baseline, right? And then, no one can predict the change in

00:20:43.620 | P/E ratio, because that's how people feel. No one knows what people are going to be willing

00:20:46.880 | to pay for stocks in the years ahead, right? But, do you think that 0% for bonds as a real

00:20:53.980 | is realistic? Do you think that's too low, or do you think that's about right?

00:20:57.340 | I mean, it's tough to say. Like, right now, maybe it is. But, like, over the long term,

00:21:01.260 | I expect there to be some real return there. I expect it to be like, you know, I think

00:21:04.660 | most of history was like, you know, 1% to 2%. You were looking at 2% to 4% nominal,

00:21:08.340 | probably 1% to 2% real. And so, 0% to 1% right now is probably what we'll expect going forward,

00:21:15.380 | but I don't know. I mean, it's really time period specific, right? So, I want to hope

00:21:19.940 | that there's going to be some real return there, but there's no guarantee. And then,

00:21:23.660 | on equities, yeah, I think I usually plan for 4% to 5% real, and there's a lot of data

00:21:28.500 | that shows that across countries, even. Across a lot of other countries, you'll see like

00:21:31.620 | 4% to 5% real is probably a fair estimate.

00:21:34.860 | Yeah. So, John, throw this on the table. A lot of people say, "Well, all the returns

00:21:39.260 | on financial markets has come because of disinflation and interest rates falling since 1980." So,

00:21:43.060 | I looked at 1928 to 1980. What did stocks, bonds, and cash do? You can see it was a little

00:21:48.880 | over 5.5% real for stocks, and bonds and cash were actually about the same, and they were

00:21:53.620 | about 0% real. Now, it's important to remember that this is during a period that includes

00:21:58.460 | the Great Depression and World War II and the war in Vietnam and all sorts of other

00:22:01.140 | crashes and recessions in bear markets. So, I wanted to look at a period where things

00:22:05.100 | were pretty nasty, and you had literally the worst crash in the history of the United States

00:22:09.460 | stock market, and you still got almost 6% real in stocks. So, I know people are very

00:22:13.640 | bearish right now and don't feel very good, but maybe that time period is a little more

00:22:18.180 | representative of considering the starting valuations and interest rates and all that

00:22:22.260 | stuff. I actually do think simply keeping up with the inflation rate for bonds is not

00:22:27.260 | a bad deal, because I think you can't expect to earn the kind of returns we've earned in

00:22:31.820 | bonds for the last 40 years or whatever. That's probably not happening again. But yeah, I

00:22:36.300 | think to your point, 5% in stocks and 0-1 for bonds on a real basis, just keeping up

00:22:42.020 | with inflation, that makes sense to me, right? I'd sign off on that.

00:22:46.260 | Lewis: Sounds good to me.

00:22:47.900 | Lewis: I mean, for most people, I think being a little conservative in your planning is

00:22:51.380 | probably not the worst thing in the world, because most people are probably too aggressive.

00:22:54.580 | You've seen those surveys, right, Nick? Where people think they're going to earn 12% a year

00:22:57.980 | or whatever it is. And maybe some people will say, "Well, if I'm earning 0% real, I don't

00:23:03.460 | want to own any bonds. I'll just have a little cash." But yeah, this is probably a good experience

00:23:12.520 | for people to go through to think through this stuff, because I'm sure a lot of people

00:23:14.540 | don't really even think through this stuff. They just kind of hope their returns will

00:23:17.060 | be great and not worry about the downside.

00:23:18.700 | Wathen: Yeah, I agree.

00:23:20.220 | Lewis: Seems like this kind of goes back to that Bitcoin question, too, where a lot of

00:23:24.580 | it is just about, are you going to kick yourself more for being too aggressive or for not being

00:23:29.900 | aggressive enough? And I guess that depends on risk tolerance and personality, right?

00:23:34.060 | Wathen: Well, real returns for Bitcoin, I'm expecting like 98% a year, give or take. Something

00:23:39.180 | like that. Maybe not.

00:23:40.580 | Lewis: Not investment advice.

00:23:41.820 | Wathen: Not quite. Alright, let's do another one.

00:23:45.660 | Question. "I put $500 a month into a taxable account at Fidelity. In this account, my target

00:23:52.060 | allocation is 50% SPY, 40% QQQ, and 10% TLT. Is there any actual difference if I invest

00:23:59.300 | my $500 according to those percentages each month, 250 SPY, 200 QQQ, and 50 TLT, versus

00:24:07.980 | breaking down the $500 into appropriate levels in order to maintain the account's 50/40/10

00:24:13.420 | allocation? The scenario goes as follows. All three equities have gone down over the

00:24:18.340 | past few months, but QQQ has outpaced the declines. Should I be putting more than the

00:24:23.660 | 40% of my monthly investment into QQQ, given its recent performance, in an attempt to hit

00:24:28.820 | the 40% allocation, or should I just rebalance the entire portfolio twice a year on January

00:24:34.300 | 1st and July 1st?"

00:24:35.900 | Lewis: Good question here. The idea is, should you use your contributions to rebalance as

00:24:40.620 | you go, or should you just make it easy, automate it, and rebalance along the way? Nick, have

00:24:47.220 | you ever done any work on this, or do you have any thoughts?

00:24:49.300 | Nick: Yes, I have. I did talk about this. I've also talked about this in the book as

00:24:53.220 | well. Basically, because it's a taxable account, if this was a non-taxable account, you can

00:24:58.420 | rebalance as often as you want, there's no tax consequences. But because it's a taxable

00:25:02.060 | account, I do not recommend selling things and then buying something else, doing an actual

00:25:06.140 | rebalance, because it's a taxable event. So I do recommend doing what the person recommended,

00:25:12.780 | which is like...

00:25:13.780 | [beep]

00:25:14.780 | [beep]

00:25:15.780 | [beep]

00:25:16.780 | [beep]

00:25:17.780 | [beep]

00:25:18.780 | Lewis: Oh, we lost you, Nick. That's a new one.

00:25:25.860 | Maxfield: He's muted. All right, we'll keep going. All right, so the idea here, as Nick

00:25:31.100 | tries to figure some stuff out, because it's taxable, it matters more. When you're rebalancing,

00:25:38.940 | you're trimming some of your winners to buy some of your losers. What happens is, when

00:25:44.220 | you rebalance, you'll be locking in some gains on occasion. The idea here is, especially

00:25:48.660 | since it's a taxable account, it probably makes sense to just rebalance with those contributions.

00:25:52.060 | I do this too. Even if it's a tax-deferred account, it's just a little easier. I'll up

00:25:56.460 | some of the ones that are lagging a little bit, just because it makes sense to bring

00:25:59.140 | them up, and it's easier that way than hitting it.

00:26:01.820 | The one downside is, it requires a little more work, so it's not as easy to automate

00:26:04.500 | your investments along the way. But I think if you're willing to do this, especially in

00:26:09.820 | a taxable account, and you hate paying taxes -- and every time we talk with Bill Duncan,

00:26:14.780 | people hate paying taxes more than they enjoy seeing gains in their portfolio.

00:26:19.860 | Lewis: Yeah, it's true. I think people feel like they're winning the game when they save

00:26:26.220 | on taxes. It's kind of like, they were really smart. That's what Bill has talked about before.

00:26:31.220 | You did something really smart. You tell your friends, and they're like, "Oh, I didn't."

00:26:35.100 | Everyone understands that if you pick the right stocks, they go up. I don't think people

00:26:38.440 | ever really think about the fact that just being smart about tax strategy can actually

00:26:43.300 | end up saving you a lot of money.

00:26:46.360 | You guys have me back now? The main takeaway here is, just thinking about this, you should

00:26:54.860 | be buying the underweight asset, so in this case QQQ, instead of trying to cause a taxable

00:26:59.520 | event by selling some of the overweight and doing that. I call that an accumulation rebalance.

00:27:04.920 | You're just buying over time, you're buying into the underweight thing. I think that's

00:27:08.560 | much better.

00:27:09.560 | The other thing, just on rebalancing in general, you don't have to rebalance as much as you

00:27:12.680 | think. Everyone's like, "Oh, do I need to do it twice a year or once a year?" It doesn't

00:27:15.360 | really matter. A lot of this stuff, it's luck, really. There's so much noise, there's no

00:27:20.040 | one rebalancing period that dominates. I've even written on this before, where if you

00:27:24.120 | rebalance in January versus April or July, it's complete noise. It's very difficult to

00:27:29.440 | know when's the best time to rebalance, so just do something that works for you. That's

00:27:33.160 | what I recommend.

00:27:34.880 | And yeah, the less you can sell assets and the more you can just buy underweight assets,

00:27:39.800 | I think that's a better policy going forward, because it's just not going to create taxable

00:27:43.920 | events, and that's the key. So that's why just keep buying, not selling.

00:27:48.080 | Does anyone think that we should short Apple based on the fact that AirPods seem to die

00:27:51.680 | all the time when you're on one of these things? What do you think? Is Apple short because

00:27:55.280 | of this?

00:27:56.280 | I don't know. It's a great question.

00:27:58.160 | What do they last? 60 minutes, 90 minutes tops? Something like that? That's what it

00:28:04.040 | seems like.

00:28:05.040 | I have my AirPods hooked up to my watch, my phone, my Mac. It's constantly pinging to

00:28:09.360 | one of those. It would be nice to just make it easy. Anyway, thanks for joining, Nick.

00:28:13.880 | Remember, if you haven't read Nick's book, One More Plug, just keep buying. I love it

00:28:17.480 | because it's a mix of personal finance and investing, and I think you need both of those

00:28:21.120 | if you're going to succeed. Remember, if you're listening to us in podcast form, leave a review

00:28:25.180 | for us. Just tell us how much you like Duncan and his hats. If you're watching on YouTube,

00:28:28.800 | hit that subscriber button. Leave us a comment. Leave us a question in the comments as well.

00:28:32.320 | Thanks to everyone who followed along live. We always appreciate it. If you want some

00:28:35.520 | Compound merch, idontshop.com. We've still got five or six weeks of summer left. There's

00:28:39.480 | still some Portfolio Rescue t-shirts in there. Again, keep those questions coming. Askthecompoundshow@gmail.com.

00:28:46.120 | The Compound and Friends tomorrow. Remember, Animal Spirits should have a new video up

00:28:49.280 | today. We will see you next time.

00:28:51.520 | See you, everyone.

00:28:52.520 | Good.

00:28:53.360 | [BLANK_AUDIO]

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