Is It Time to Sell Bonds? | Portfolio Rescue

00:00:00.000 | Welcome back to Portfolio Rescue. Today's show is sponsored by Innovator ETFs. Before

00:00:22.440 | we got on today, I was explaining to Duncan how these buffered ETFs work. So, what they

00:00:27.400 | have is three different buffers, a 9%, a 15%, and a 30%. Basically, what you have is that's

00:00:34.120 | how much protection you get to the downside. So, let's say the market is down 20%-ish now.

00:00:38.120 | If you had a 9% buffer, you'd be down 11%. If you had the 15% buffer, you'd be down 5%.

00:00:44.380 | If you had that 30% buffer, right, you're still protected. But I think it protects you

00:00:49.020 | from -5 to -35. Anyway, each of them, the bigger the buffer, the lower your cap is on

00:00:54.840 | the upside. Interestingly enough, though, they make these strategies using options.

00:00:59.480 | And the more volatile the market, the better priced your options can be, right? So, actually,

00:01:03.720 | your cap is a little higher these days, Innovator tells me. So, if you want to learn more about

00:01:07.560 | them, they have a tool on their website, actually, that you can go price these things out. You

00:01:10.820 | buy them on the first of the month because that's when they roll over. Go to innovatoretfs.com

00:01:16.360 | to learn more.

00:01:17.360 | Yeah, they sound - the reason I had so many questions, they sound like too good to be

00:01:21.600 | true, you know? That's why I had a bunch of questions.

00:01:24.800 | It's interesting, yeah. Again, listen to our old animal spirits with Bruce Bond, we kind

00:01:26.760 | of go through them back and forth. But they're going to be sponsoring the show for a while,

00:01:29.440 | so we'll kind of go through some of the pros and cons of those things. But it's an interesting

00:01:32.900 | way to define a range of outcomes. Okay, YouTube comments from last week since I talked about

00:01:37.360 | the housing market a little bit. Someone said, "Okay, Ben, you're kind of pessimistic about

00:01:41.280 | what's happening in the housing market right now. What's the best case scenario?" Okay,

00:01:45.880 | so let me lay out the glass cephal. Higher rates cause prices to stall out for a bit,

00:01:50.880 | especially in places like Boise and Austin that have these really hot housing markets.

00:01:56.200 | Let's say inflation comes in a little bit, the Fed tightening slows things down. Mortgage

00:02:00.440 | rates can come back to a more normal level for people, which I don't know what normal

00:02:03.640 | is these days, but I don't know, call it 4 or 5%. Millennials are still in their household

00:02:08.320 | formation years, so they're going to be buying houses. And maybe things just get back to

00:02:12.240 | where supply and demand are a little bit more in balance. But the question really depends

00:02:17.120 | on what kind of perspective you're talking about. First, a homebuyer or someone who owns

00:02:22.680 | a home? Because obviously, if you're a current homeowner, you want things to keep going higher,

00:02:25.880 | but that's not very fair to other people. So, for everyone involved, I would just like

00:02:29.720 | to see more homes being built. So, John, pull up this chart that I created a while ago.

00:02:33.120 | Number of homes built by decade. You can see the 2010s was by far the lowest of any decade

00:02:37.960 | since the 1970s. This is really what we need to do. Unfortunately, it's probably a pipe

00:02:43.280 | dream because, as we can see with how cyclical things are, homebuilders are probably not

00:02:48.640 | going to do this unless they're incentivized. So, David Halberstam has this book called

00:02:51.620 | The 50s. I've referenced it a bunch on my blog and on Animal Spirits before. And he

00:02:57.160 | talks about how the Great Depression and World War II really crushed the housing market.

00:03:01.920 | They just didn't have enough houses. They estimated when people got back from World

00:03:04.540 | War II, all the soldiers came back, they needed over 5 million homes. You know what the government

00:03:08.040 | did? They rushed this federal housing bill through, and it had very little in the way

00:03:12.140 | of controls. So, it basically, they did this federal insurance program to protect builders

00:03:17.200 | by any means. And they offered, like, mortgage guarantees, and the builders just went crazy.

00:03:21.840 | So, they said in 1944, there was 100,000 new homes being built. By 1950, it was 1.7. So,

00:03:28.560 | they built a bunch of homes. There was one thing in the book where they said down payments

00:03:32.280 | were either negligible or $1 for a new home. So, and they were selling $11,000 houses.

00:03:38.520 | That's like $133,000 in today's dollars. So, unfortunately, that's the pipe dream. I honestly

00:03:46.300 | think the only hope we have is, say, by the end of the decade, the baby boomers all begin

00:03:50.780 | to downsize and sell their homes. And that brings supply and demand a little bit more

00:03:54.380 | into balance. Obviously, if rates stay high here for a while, I think that's gonna help.

00:03:59.420 | I really wish there was a way to make it more affordable for more people to buy homes. And

00:04:04.140 | I think building is the answer. But unless the government steps in and really does something

00:04:08.420 | and I'm not holding my breath on that, I don't know that there's a very good answer here.

00:04:12.520 | Unless rates just stay higher for a while and just keep people on the sidelines.

00:04:15.680 | Yeah, I mean, you look at the calculators now of how much home you can afford, and yeah,

00:04:21.040 | it's gotten worse. Last year, it already felt, or months ago, it already felt pretty bad.

00:04:25.240 | But yeah, with mortgage rates going up, it's worse.

00:04:27.320 | Yeah. And I do think, hopefully, having rates be much higher will at least put a cap on

00:04:31.560 | those prices. And maybe, especially in the busiest and hottest housing markets, will

00:04:35.600 | bring it down a little bit. So, we'll see. That's, unfortunately, my best case scenario.

00:04:39.160 | Still not very great. But that's where we are. All right, let's do the first one.

00:04:44.000 | Okay, up first today, we have a question from Adam, who writes, "In the era of free money,

00:04:49.480 | having 2% to 3% interest debt for things like a car and a house were easy to take on because

00:04:55.000 | your investment returns made it worthwhile. However, in the current economy, should I

00:04:59.160 | use money I would be putting into a brokerage account to pay off my house and car early?

00:05:04.440 | Even at 2.8% interest, that's way higher than what stocks are paying right now. And real

00:05:09.440 | estate has been a great hedge against inflation in the current market."

00:05:12.060 | All right. This, again, depends on what perspective you're looking at it from. So, this is from

00:05:17.280 | Adam. And I think Adam is saying he already has a house loan and a car loan, right? So,

00:05:22.200 | if you have those loans already, I look at it the opposite way. If you still have debt

00:05:26.040 | costs that are 2% to 3%, that's even more valuable now that rates are higher and inflation

00:05:30.200 | is higher, right? I will personally be paying off my 3% mortgages as slow as possible. If

00:05:34.920 | they said, "Ben, we're going to take your 3% mortgage and allow you to pay it off over

00:05:38.880 | 50 years instead of 30," I'd take them up on that offer. I'm going to hold on to that

00:05:42.240 | 3% mortgage for dear life. It's tax advantage. It's more than 5% lower than inflation right

00:05:47.680 | now. Why would I pay that off? Inflation is a bad thing for spending purposes, but it's

00:05:51.760 | awesome for people who hold debt. Why? Because if you're making fixed payments over time,

00:05:56.440 | those payments are worth less and less over time. So, let's say you took out a $350,000

00:06:00.440 | mortgage last year with a 30-year fixed rate of 3%, which is around what it was. With inflation

00:06:04.560 | running at 8% over the last year, it's actually, whatever, 8.6%, your $1,475 monthly payment

00:06:11.720 | would now be running around $1,350. In real terms, right? Based on last year. And even

00:06:18.400 | if inflation going over the next five years was 3%, let's say it comes back down, that

00:06:23.240 | $1,350 now is equivalent to $1,165 in five years. Right? Because that's maybe the one

00:06:31.460 | silver lining of inflation, that it eats up debt. And I know a lot of people are worried

00:06:34.780 | about our government's huge debt problem. It's kind of weird to think that inflation

00:06:40.240 | is actually a solution for it, but it is. Inflation is actually eating away at government

00:06:43.960 | debt. So, that's a good thing for people who hold debt.

00:06:46.920 | So, you're saying this could all be part of the master plan?

00:06:49.680 | Lewis: It's possible. But, the other way is, if you're taking out new loans. Now, let's

00:06:55.040 | say you're taking out a new loan, and you're paying 6% mortgage, and you're paying 5% on

00:06:59.280 | your car loan. I think that's a much different story, where you can start to think, well,

00:07:05.080 | that's almost a guaranteed return on that money, paying it back. And it's a much higher

00:07:08.240 | hurdle rate. And I think then, the calculus changes on that. Obviously, we've talked about

00:07:13.760 | this before, the question of whether to pay off debt or not is a personal one. It doesn't

00:07:17.560 | always come down to hurdle rates or inflation calculations, and sometimes people really

00:07:20.720 | want to pay it off. But, I think if we're comparing 2-3% borrowing rates to stocks and

00:07:24.560 | bonds today, financial assets are much more appealing to me than paying off 2-3% debt,

00:07:29.600 | especially when it's tax advantaged. Bond yields are much higher than they've been for

00:07:32.440 | a long time. The last year, 10-year Treasuries were this high, it was like 2011. I know they're

00:07:37.400 | falling a little bit today. And I know it doesn't feel like it, but stock market returns

00:07:42.000 | are going up, as stocks are going down. Expected returns are going up. So, as long as you have

00:07:46.440 | the ability to service your debts, I see no reason to pay them off if your bogey is the

00:07:50.160 | stock and bond markets right now, and if you have those lower interest rates. If you have

00:07:53.280 | higher interest rates now, I think that's a different question.

00:07:56.040 | Yeah, that makes sense.

00:07:57.600 | All right, let's do another one. Speaking of bonds, let's do a bond one here.

00:08:03.840 | Okay. So, up next, we have a question from Mike. "I'm 49 years old, high earner, high

00:08:09.720 | savings rate, $1 million in retirement accounts, and $2 million in property. I have historically

00:08:15.240 | maintained an allocation of 35% US index, 33% international index, 30% bond funds, and

00:08:21.880 | 2% speculation in stocks. Bonds have been getting crushed. Should I continue to hold

00:08:26.720 | this allocation knowing that this portion is definitely going to drop in value? I'm

00:08:30.800 | thinking about moving a portion of my bond allocation to some strong companies that have

00:08:34.640 | been clobbered but pay 2-3% dividends. I've been thinking my bond allocation is too high

00:08:39.600 | given investments in property. Thoughts?"

00:08:42.920 | All right, it is true. Bonds have been getting crushed. But it's not been an even distribution.

00:08:46.560 | So, John, throw up this chart here of bond returns. This is bond drawdowns. And I went

00:08:50.880 | across the spectrum. So, the longest duration, which is zero coupon. Then I looked at the

00:08:55.320 | 20 to 30 year treasury, all the way down to one to three year treasury. You can see zero

00:08:59.720 | coupon bonds and 20 to 30 year treasuries are down even more than the stock market.

00:09:03.980 | And these are from the lows in March 2020, actually, when weights went really, really

00:09:07.960 | low. But you can see even the U.S. aggregate, which is like a bond index fund. It's in a

00:09:14.600 | 12 or 13% drawdown right now. Three to seven year treasuries are down 10%. And then you

00:09:19.280 | look at one to three year treasuries, not down as much, 4%. So, it really depends on

00:09:23.440 | what kind of bonds you're talking about here in the duration. But I can't say for certain

00:09:29.960 | that this viewer thinks bonds are going to continue to get crushed. We don't know that

00:09:34.120 | for sure. Interest rates could continue to go higher. But here's the thing that's different

00:09:38.560 | this time around. Because rates are now higher, you actually have a little bit of a cushion

00:09:42.040 | for once. It's not like treasuries are coming from 50 basis points all the way up and you

00:09:46.440 | have no yield to protect you. So, bonds getting crushed means bond returns in the future are

00:09:51.800 | higher. Because starting yield really matters. And because if you look at expected returns,

00:09:57.880 | bonds are guided by math. Not over the short term, but over the long run. So, stocks, their

00:10:02.360 | yes fundamentals like earnings growth and dividend yield, these things matter. But the

00:10:06.440 | other piece of stock market returns is, what are investors willing to pay for them? We've

00:10:10.200 | been seeing this year, not only have stocks been coming down, but P/E ratios have been

00:10:13.640 | coming down even faster, right? And P/E ratios are really, evaluations of all kinds, are

00:10:19.240 | really emotions. Like, what are people willing to pay for stocks or the stock market? Bonds

00:10:23.460 | are guided by math. So, let's, John, throw up this first one of five year treasury yields

00:10:26.720 | versus one year returns. So, this is a starting five year treasury yield going back to the

00:10:31.400 | 60s. And then, the orange line there is forward one year returns. You can see they're all

00:10:36.360 | over the map. It's kind of in the same general direction over time, the highs and lows. But

00:10:42.560 | it's way, way wider than the ranges. So, the correlation here between five year yields,

00:10:46.960 | starting yields and one year returns is like 0.6. It's got a relationship, for sure, and

00:10:50.920 | it's positive. But it's not perfect. So, now let's go out a little further. Let's go to

00:10:54.800 | three year returns, right? This is starting five year treasury yields versus three year

00:10:58.720 | forward returns. Now, we're looking a little closer here, right? The correlation is closer

00:11:02.480 | to 0.8. You can see, but there's still some wide swings where returns get a little wider

00:11:08.000 | than or lower than the actual starting yield. And now, let's do the last one. Five year

00:11:12.240 | yields versus five year returns. Now, we're pretty close. The correlation here is like

00:11:15.680 | 0.92. So, this is a very strong relationship where your starting yield is going to determine

00:11:21.760 | your longer run returns and bonds. So, if bond yields right now are 3%, I feel pretty

00:11:26.800 | good saying, you know, five to seven years, maybe ten years, if you're using intermediate

00:11:30.320 | term bonds, you're probably going to get roughly 3% returns, give or take. Because obviously,

00:11:34.400 | the interest rates move a little bit. That can change things. But no one knows what's

00:11:38.360 | going to happen with bonds in the short term. Interest rates can move and fluctuate. But

00:11:41.760 | over the long term, the starting yield is the thing that matters. That's why I was so

00:11:45.000 | worried about bonds in March of 2020, because rates were so low. So, you can't exactly live

00:11:48.920 | off the interest right now. But it's much better than it has been. And so, even if things

00:11:53.720 | get dicey for the next 6 to 12 months, if rates could go higher from here and inflation

00:11:57.640 | stays high, sure, bonds could continue to get hurt. But you're in a much better place

00:12:02.380 | than you were. Now, having said all that, this doesn't necessarily mean you have to

00:12:06.000 | invest in bonds. This viewer asked if they really need bonds because of real estate investments,

00:12:09.680 | right? Yeah, there's high allocation of real estate. Some people think that real estate

00:12:13.920 | holdings are like a form of debt, so that makes it kind of like bonds, right? Where

00:12:18.000 | you have a hurdle rate, which we talked about in the last question. I think a lot of this

00:12:21.040 | depends on how you think about portfolio management. Like, did you invest -- why did you invest

00:12:24.640 | in bonds in the first place? Did you invest in them because they're a form of dry powder?

00:12:29.240 | Because sometimes they are not as volatile when stocks go down. That's not the case this

00:12:32.800 | year, but most of the time it is. You can't really rebalance a real estate property, right?

00:12:37.240 | If you were using bonds to rebalance your stock portfolio, you can't do that with real

00:12:41.040 | estate. A house is not liquid. You can't spend it. So, this answer really depends on your

00:12:44.520 | ability to live with 100% stock in a real estate portfolio and not have some sort of

00:12:49.800 | liquid savings that you can use to potentially rebalance and have diversification.

00:12:54.440 | So, I don't know. Does a stock market real estate portfolio make sense to you? I guess

00:12:58.840 | for the right type of investor, they understand those risks. Bonds haven't helped much of

00:13:02.920 | late, but that doesn't mean they won't in the next downturn. So, do you want to get

00:13:06.120 | out of bonds because you've experienced some losses and you're just ready to pull the ripcord,

00:13:09.800 | or just because they don't fit your personality and you want something else? But, yeah, having

00:13:14.720 | that real estate exposure, that opens you up to a bunch of other different risks. So,

00:13:18.800 | I think you've got to define what you want to get out of it and why do you have it in

00:13:22.400 | the first place.

00:13:23.920 | What do you think could be the long-term ramifications of so many people souring on bonds now, being

00:13:28.840 | like, "They didn't protect me when I thought they were supposed to protect me," et cetera?

00:13:34.360 | It is interesting, the psychological scars that markets can -- because after 2008, no

00:13:39.880 | one wanted to touch the stock market forever, right? Everyone thought the stock market was

00:13:42.840 | a casino and a roller coaster, and guess what? The stock market did wonderfully for the next

00:13:48.080 | 10 to 12 years. That's the thing with bonds now, is that bond yields are higher, again,

00:13:52.940 | meaning expected returns are going higher, but people look in the rearview mirror and

00:13:56.200 | see losses. So, yeah, I think you're right. There could be a psychological component where

00:13:59.640 | people say, "I'm not going to wait around to see that happen again." But then that pushes

00:14:04.920 | you out of the risk spectrum, right? And makes you take more risks. So, yeah, maybe that

00:14:09.000 | is a possibility.

00:14:10.000 | Yeah, the chat's not having it. 77% of people said no, they do not have a meaningful bond

00:14:15.480 | allocation in their portfolio. That's 57 votes, but still, maybe significant.

00:14:22.480 | We are an anti-survey show, but we'll take it. Let's do another one.

00:14:27.640 | Up next, we have a question from Jolie. They are based in Hong Kong. "I'm turning 24 in

00:14:37.120 | a few days and I'm from Hong Kong. Happy birthday." I don't know when this came in, but happy

00:14:41.520 | birthday anyway. "I make around $40,000 a year, currently have around $60,000 saved,

00:14:47.560 | half equity, half cash, savings insurance, retirement account, and other stuff. Due to

00:14:52.800 | the extremely high cost of living, the most expensive housing in the world for more than

00:14:56.600 | a decade, and the worsening political situation here, many Hong Kongers are considering migration.

00:15:03.080 | Most of my friends are moving to the UK or Canada. I'm qualified for the UK's high potential

00:15:08.600 | individual visa, and Canada has a similar visa for degree holders. My big question is,

00:15:13.760 | how should people my age plan before moving to another country? Should I bear a few more

00:15:17.600 | years to save enough money, since Hong Kong is good for saving and I don't need to pay

00:15:21.620 | rent, then move with less pressure?" So, a couple questions built in here.

00:15:26.880 | All right. So, Visual Capitalists actually did this infographic where they looked at

00:15:31.060 | the least affordable housing markets in the world. And I think number one was Duncan's

00:15:35.080 | neighborhood in Brooklyn when he re-ups his lease this year.

00:15:38.440 | Yeah. Definitely.

00:15:39.440 | Pretty close. Actually, Hong Kong is the worst. So, they calculated this by looking at median

00:15:43.600 | house price divided by median household income. And they say anything above five is severely

00:15:48.200 | unaffordable. You can see a lot of them are actually in the US, mostly in California.

00:15:51.240 | It's LA, San Francisco, San Jose, then Honolulu, Vancouver, and Toronto around there, Sydney.

00:15:57.960 | But Hong Kong is the worst one. Now, this person says they don't need to pay rent. So,

00:16:03.200 | maybe they're just worried about buying a house in a few years. Which makes sense to

00:16:08.480 | me.

00:16:09.480 | Isn't that stat on there crazy? 7% of Hong Kong is zoned for housing? I saw that on their

00:16:14.840 | infographic. It's crazy.

00:16:16.320 | Yeah. That makes sense. So, the good news is at 24, you have the ability to take some

00:16:20.900 | risks and try things out. So, I think as long as you're comfortable moving to a new country,

00:16:24.080 | I say, yeah, go for it. Why not, right? Live in a new city, meet new people, try new things.

00:16:28.360 | You said you had some friends that are moving to these places. If it doesn't work out,

00:16:31.680 | you can always try to move back to Hong Kong or try somewhere else, right? You talked about

00:16:35.280 | going to London or the States.

00:16:37.800 | I think if you have no responsibilities holding you back, now is the time to do something

00:16:40.680 | like this. And this seems like the kind of thing to me where there probably doesn't have

00:16:44.720 | to be a whole lot of planning involved. As long as you have your career stuff figured

00:16:48.660 | out and you can find a job where you go and you can find a place to live, I think this

00:16:52.400 | is one of those regret type situations where in, I don't know, 20 years when you have more

00:16:57.360 | responsibilities and you're more settled down and maybe you have a family or something or

00:17:00.520 | you own a house and you're putting down roots, I don't know, are you really going to regret

00:17:04.520 | trying to move and live in a new city and try something new?

00:17:07.320 | Again, you can always move back if it's an obvious mistake. The good news is when you're

00:17:11.560 | young you have a lot of time ahead of you to make up for mistakes, both in the form

00:17:15.640 | of decades ahead of you plus human capital savings. I think, and moving out of the least

00:17:22.200 | affordable city in the world and moving somewhere more affordable means financially it should

00:17:26.120 | be easier. And it sounds like you have your finances in order for a 24-year-old, right?

00:17:30.340 | When I was a senior in college, I lived in Philadelphia for a semester. Between my sophomore

00:17:35.500 | and junior years, our small tiny liberal arts college in West Michigan would send 60 kids

00:17:41.960 | to Vienna for a summer program every year. I went there. Those are some of the greatest

00:17:45.280 | memories I have in my life. So I think going somewhere else and trying it out and trying

00:17:50.360 | a new culture and a new place, I think if you're adventurous enough and you're willing

00:17:53.480 | to do it, I see no reason not to as a young person. Again, you can always move back if

00:17:58.120 | you need to.

00:17:59.120 | Yeah, and they mentioned the political situation there. So it seems like they have more on

00:18:02.260 | their mind than just the financial. So that's something that is kind of hard to quantify.

00:18:06.540 | Yes. Yes. Something that, yeah, I know we complain about politics here, but yeah, something

00:18:11.500 | like that, that's probably much scarier. And I agree. Let's do another one.

00:18:18.060 | Okay. Up next, we have a question from Michael. And so this is one that our regular viewers

00:18:24.420 | are going to recognize from a couple of weeks back on what are your thoughts, but we had

00:18:27.420 | to do a deeper dive because it's just too-

00:18:28.980 | This is one where it came in and we were all passing it around, me and you and Michael

00:18:34.060 | and Josh and everyone and kind of going, "What? What?" So we wanted to go over this one in

00:18:39.860 | a little more detail.

00:18:40.860 | Yeah, it's very cinematic. So yeah, this one, okay, I'm not going to say her name actually,

00:18:44.860 | but okay.

00:18:45.860 | Wait, Duncan.

00:18:46.860 | Yeah.

00:18:47.860 | Do you say cinema instead of movies?

00:18:48.860 | I use them kind of interchangeably, but yeah, I mean, cinema would be, I guess, the next

00:18:54.660 | level, right? You have film.

00:18:55.660 | For me, the Pooh meme is movie, film, cinema.

00:18:59.140 | Right, exactly. Yeah, yeah. Kurosawa is cinema, right? Yeah. Okay. I'm a 40-year-old tennis

00:19:05.460 | coach in California. Our tennis club is a registered nonprofit and I'm grateful that

00:19:09.460 | they offer a 401(k) with a 4% match. Unfortunately, the general manager's spouse manages the plan.

00:19:15.980 | He is not a CFP, charges 1.22% management fee, actively picks stocks and provides zero

00:19:22.060 | transparency with my 401(k) balance or his returns. I only know how much I've contributed

00:19:27.380 | and the company match, including vesting. Obviously, this is a conflict of interest,

00:19:31.780 | even though he isn't technically a fiduciary. I don't think it's a Ponzi scheme, but I'm

00:19:36.580 | only contributing the 4% to get the match instead of the max amount. I'm maxing out

00:19:40.660 | my traditional IRA since I make too much for the Roth and I invest in real estate and have

00:19:44.780 | a brokerage account. Thoughts, suggestions?

00:19:48.100 | Alright, so the person that we went to on this internally is Dan LaRosa, who works at

00:19:53.460 | Ritual Wealth Management. He helps manage our corporate retirement plans. Dan has worked

00:19:56.620 | with a lot of 401(k) plans over the years.

00:19:58.460 | Hey, Dan.

00:19:59.460 | Alright, Dan. When you saw this one, is this the most shocking 401(k) plan you've ever

00:20:04.140 | seen? And then, what is going on here? And also, for people who aren't quite this crazy,

00:20:10.140 | but maybe kind of crazy, what do you even do when you see a 401(k) plan that has obvious

00:20:14.460 | flaws in it?

00:20:15.620 | Yeah, this is a tough one. I was actually pretty furious when I first read this and

00:20:20.340 | I think my response to Sean was a 7,000-word email, breaking it down. But go to management,

00:20:29.180 | first off. Talk to somebody. I know he said it would be uncomfortable. The general manager's

00:20:34.380 | husband is managing the account.

00:20:37.100 | By the way, how often do you see that? Because I feel like a lot of times you would hear

00:20:40.620 | with small businesses, "Well, the reason we chose this 401(k) plan is because my brother-in-law

00:20:45.060 | uses it," or knows someone. Isn't that how this technically works for a lot of places?

00:20:48.780 | It's not uncommon at all. It's really not. And that by itself wouldn't be necessarily

00:20:53.300 | a problem. But there are nine other items here that when combined with the fact that

00:20:59.580 | the general manager is his wife, it's not really a good look.

00:21:05.540 | But talk to management. You've got to keep in mind, the people that have, in most cases

00:21:09.860 | or usually, the people that have the larger balances in these retirement plans are management.

00:21:15.020 | It's the owners. It's the people that maybe are making decisions on the retirement plan.

00:21:19.060 | So any suggestions you're making to lower the costs or increase the investment quality,

00:21:25.460 | whatever it is, is probably going to have an outsized impact on those individuals.

00:21:31.340 | Do you think that there's any ... Is this the type of situation where regulators need

00:21:35.060 | to get involved or could be brought in somehow?

00:21:36.940 | This is my question for you guys. Just from a non-financial professional perspective,

00:21:41.580 | it sounds like something that would be illegal.

00:21:45.260 | Based on what he said here, I don't see anything necessarily illegal. Are there red flags?

00:21:49.940 | Yeah, there's red flags all over the place. But it's not a Ponzi scheme. I don't see anything

00:21:55.460 | necessarily illegal. But we also don't have all the details of what's going on here.

00:22:02.060 | The biggest thing here is this is not at all your traditional 401k plan, right? Most plans,

00:22:06.900 | the plan that we're in, the plan that most people are in, they're participant directed.

00:22:11.580 | That just means that participants can make their own investment decisions. Within the

00:22:16.100 | confines of the plan, you can pick and choose how you want your money invested. You can

00:22:19.620 | make changes to it whenever you want.

00:22:21.780 | This sounds like a single pooled account where this advisor is managing the retirement plan's

00:22:28.380 | money in one single account for all the participants. It's not popular or common at all. I don't

00:22:34.380 | know why they would opt into this sort of setup, other than maybe the nice fat management.

00:22:41.500 | What was your advice to check to see, just to make sure there's nothing nefarious going

00:22:45.900 | on here, to make sure that this plan is kind of legit? What do you even do?

00:22:52.500 | Well, actually, the fact, I mean, the management fee, okay, yeah, it's high. The biggest thing

00:22:59.180 | here, and I think where he could maybe, the part that I would lean on, is no transparency.

00:23:05.220 | All retirement plans are required to provide participants at least annually, normally quarterly.

00:23:11.820 | I think even these pooled plans, it's once a year, you have to get a 401k statement.

00:23:16.620 | That has to show not just what you've contributed and what the match was. You can find that

00:23:20.780 | out on a pay stub, but it has to show the breakdown, how that money's invested, a beginning

00:23:25.540 | balance and an ending balance. The fact that he's not getting that, that's the biggest

00:23:30.140 | red flag for me. He said it would be an uncomfortable conversation and I appreciate that, but I

00:23:36.820 | think you still need to have it. This is where I would try and dig in, even if he says something

00:23:42.260 | like I'm working with an advisor and he or she was asking or requesting about information

00:23:48.660 | on all of my outside accounts, how that money's invested. Well, you need to have that, so

00:23:52.940 | maybe the request for this information can come from a third party.

00:23:58.060 | Douglass: Unfortunately, sometimes in life you have to have uncomfortable conversations

00:24:02.020 | and this is one of those times where it certainly makes sense. All right, Duncan, let's do

00:24:06.620 | one more.

00:24:07.620 | Duncan: Okay, yeah. Thanks for doing a deeper dive on that one. One follow-up on that I

00:24:12.220 | just wanted to mention for the new whales in the audience. You mentioned that management

00:24:16.020 | fee and they allude to the fact that it's really high. What's a more reasonable fee

00:24:21.300 | that you would expect to see on a plan like that?

00:24:23.660 | I mean, anything north of 1% is usually ... In a 401(k) plan, it's usually going to be half

00:24:29.900 | a percent. Something like that would be reasonable. Again, we don't know anything, any specs of

00:24:33.740 | the plan. We don't know how large it is, how many people there are. We know he's actively

00:24:37.140 | picking stocks, which is ...

00:24:38.460 | So, it's significantly higher than you would expect.

00:24:41.220 | Yeah, sounds like it.

00:24:43.020 | Okay. Last but not least, I have a HELOC with a variable interest rate of 6.5% and a balance

00:24:51.180 | of $39,000. I also have an unsecured line of credit with a balance of $9,500 and an

00:24:57.220 | interest rate of 14.2%. I was quite surprised that the interest rate jumped so high. I pay

00:25:02.500 | both monthly, but these payments are only covering the interest. I'm considering taking

00:25:06.460 | a loan for my 401(k) plan to pay down the highest interest debt and make it more manageable.

00:25:11.260 | What are your thoughts?

00:25:12.260 | Also, you might remind people what a HELOC even is.

00:25:15.500 | Yeah, home equity line of credit, and that's using your house as security for that debt.

00:25:21.300 | Obviously, as mortgage rates rise, those rates can rise a little, too. I'm guessing the unsecured

00:25:26.420 | line of credit is something similar to a credit card, would make sense to me. I don't know

00:25:30.780 | exactly what it is. But, Dan, this is essentially a personal balance sheet move, where you use

00:25:37.180 | the 401(k) balance to pay it off. I'm trying to think if there's better ways to do this,

00:25:42.540 | but why don't you kind of compare and contrast taking the 401(k) loan to some kind of other

00:25:46.460 | debt consolidation? What are the pros and cons of the 401(k) loan to get yourself out

00:25:50.900 | of debt elsewhere?

00:25:52.540 | Yeah, so basics on 401(k) loan. Generally, you can borrow up to $50,000. The loan has

00:25:58.780 | to be repaid normally within five years under most circumstances. You do pay interest on

00:26:03.940 | this, but it goes back into your 401(k) account. The interest rate is prime plus one, sometimes

00:26:09.680 | prime plus 2%. Prime right now is 4.2%.

00:26:13.020 | That's the one that's never really made sense to me. Why do you pay interest to yourself

00:26:17.340 | on these? What's the point of that?

00:26:20.580 | Basically, I think the idea is, okay, taking money out of your 401(k) is a horrible idea.

00:26:26.060 | You shouldn't be doing it, for obvious reasons. That's where the magic happens in any 401(k)

00:26:30.700 | loan. You take a retirement account with compounding, and when you take a loan out, that goes directly

00:26:35.300 | against it. You're taking money out of the market and still paying it back. If you have

00:26:39.660 | interest repayments going back into your 401(k) account, that helps make up for it a little

00:26:44.260 | bit. I think that just kind of lessens the blow of taking the money out.

00:26:50.100 | Okay, that makes sense.

00:26:51.100 | Again, loan repayments and interest, again, are going back into your 401(k) account. Generally

00:26:55.540 | speaking, I'm really anti 401(k) loan. I feel more of these types of questions than you

00:27:01.820 | would think. Actually, just a couple of hours ago, I spoke to someone in a somewhat similar

00:27:05.820 | situation, doing a home renovation and wanted to know about his 401(k) loan. Again, you're

00:27:12.300 | taking money out of the market. You're kind of defeating the purpose of the 401(k), and

00:27:17.980 | then couple that with the fact that we're in the midst of a 20 plus percent drawdown.

00:27:23.700 | You're really selling low here, and then you're slowly reinvesting over time. You're missing

00:27:28.100 | out potentially, I don't know what markets are going to do, but missing out potentially

00:27:31.860 | on a lot of tax-deferred growth.

00:27:33.820 | That's a good point. With stocks being down so much that you're taking this loan at a

00:27:37.620 | really unopportune time. You're saying in terms of different places to do debt, 401(k)

00:27:44.860 | loan should probably be one of your last options.

00:27:46.620 | That's what I usually say. It should be emergency only.

00:27:50.340 | It makes sense to me.

00:27:52.500 | Something people don't often think of, your 401(k) loan, your 401(k) is an employer-sponsored

00:27:57.780 | plan. The biggest risk with the 401(k) is what happens if you leave your job? If you

00:28:05.180 | leave voluntarily or you get fired, whatever the case. If I take out a $10,000 loan today

00:28:10.380 | and I leave next week, I'm on the hook. Normally, you have 90 days to pay back that loan. If

00:28:17.620 | you don't, the loan defaults. It's deemed a distribution, which means you pay tax on

00:28:23.420 | the outstanding balance. You also pay a 10% early withdrawal penalty if you're not age

00:28:28.020 | 59.5. There is that job security risk, as well, that you want to take into consideration.

00:28:34.020 | Lewis: Yeah, which is really good consideration right now. If the Fed's trying to slow things

00:28:37.780 | down and throws us into a recession, unemployment rate increases, that's another good point.

00:28:43.860 | I would start with the unsecured loan, that 14.2%. Talk about a hurdle rate. There's a

00:28:50.140 | couple things you do. Some sort of debt consolidation, I would talk to one of those places. But also,

00:28:54.100 | try to negotiate it. Say, "I can't pay more than the interest rate on this. I'm going

00:28:58.980 | to eventually have to default on this," or something. A lot of these places will actually

00:29:02.540 | negotiate with you. They would rather get something rather than nothing. The HELOC is

00:29:07.340 | a different story, but I would start with that 14.2%, that $9,500, and I would talk

00:29:12.520 | to them and see if they're willing to negotiate. They might not make it out there with anything.

00:29:17.220 | That makes sense. I do like the idea of having that hierarchy of loans and having the 401(k)

00:29:22.300 | be that last, last, last line of defense. You're right, there's a lot of factors right

00:29:26.460 | now that go into it. Stocks are down, and maybe the economy slows and some people lose

00:29:30.780 | their jobs. That's a double whammy if that happened to you.

00:29:34.980 | Lewis: So, you're saying play it hardball, then.

00:29:38.020 | Maxfield: Yeah. But honestly, if you call financial institutions, a lot of people hate

00:29:41.800 | negotiating. Listen, Duncan, I was on the phone with AT&T this morning. Every 12 months,

00:29:47.960 | my teaser rate goes away and my cable bill goes up. What do I do every 12 months? "Hey,

00:29:54.680 | AT&T, I'm going to leave. Give me the retention department." "No, no, no, sir. We'll give

00:29:59.440 | you $50 off and bring you right back down to where you were." People hate negotiating

00:30:03.760 | in this country. You have to. Let's say you're wonderful with your bank and your credit cards

00:30:11.600 | and all that stuff, you pay stuff on time. Let's say you accidentally missed a payment

00:30:14.200 | and you didn't have it automatically for some reason, and they charge you a late fee. Call

00:30:17.520 | them up. Tell them, "Listen, I've been a great customer with you for seven years. Can you

00:30:21.960 | take that off for me?" Nine times out of ten, they will do that.

00:30:24.440 | Niu: I do that every time, and they take it off every time.

00:30:26.560 | Lewis: What if you are an investor in AT&T? Can you pull that card? Can you be like, "As

00:30:30.640 | a shareholder..."

00:30:31.800 | There you go. Just saying. Negotiating is not something I'm very great at, but you have

00:30:39.040 | to try it. Remember, if you have any questions on credit cards, travel hacks, airline rewards,

00:30:45.920 | all that stuff, shoot us a question. Next week, we're having Chris Hutchinson, who is

00:30:49.680 | a travel hack connoisseur. If you're listening to this in podcast form, go leave us a review,

00:30:54.960 | even if you're not. If you're watching this on YouTube and you're not a subscriber, Duncan

00:30:58.560 | wants you to click that subscribe button. Do it for him, not for me.

00:31:01.080 | I need you to click that subscriber button.

00:31:04.320 | If you want some Compound merch, we're at idontshop.com. Keep those questions and comments

00:31:08.760 | coming. Remember, askthecompoundshow@gmail.com. I want to thank Dan LaRosa for joining us

00:31:12.800 | today and helping us sort through a messy 401(k), and we will see everyone next week.

00:31:16.840 | Thanks, everyone.

00:31:17.680 | [Music]

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