What’s in Ben’s Portfolio?

00:00:00.000 | (beeping)

00:00:02.180 | - Welcome back to Ask the Compound.

00:00:13.340 | Our email here is askthecompoundshow@gmail.com.

00:00:16.500 | I'm here with the brightest man in America today, Duncan.

00:00:20.180 | Nice to see you.

00:00:21.620 | - I admit, it's not the best color combo.

00:00:23.340 | I should have probably looked in the mirror

00:00:24.500 | before I left the house.

00:00:25.980 | - I'm not one to talk about colors.

00:00:27.980 | I don't mind having some bright colors, I think it looks good.

00:00:29.820 | - I just got excited, you know,

00:00:30.800 | we were at the NASCAR museum for the live recording,

00:00:33.540 | so I had to wear a NASCAR hat today.

00:00:35.420 | - You do look like you're at a NASCAR event.

00:00:38.280 | Today's show is sponsored by Rocket Money.

00:00:40.580 | I've been using Rocket Money lately.

00:00:41.720 | I am a set it and forget it kind of guy

00:00:44.620 | when it comes to finances and other parts of my life.

00:00:47.220 | Like last night, I got home pretty late, I was on a trip,

00:00:49.580 | and I got an alert on my phone saying,

00:00:51.340 | "Take the trash out."

00:00:52.460 | I would have forgotten,

00:00:53.300 | 'cause they come really early in the morning

00:00:54.440 | to pick up the trash, and so I like alerts.

00:00:56.660 | And the cool thing about Rocket Money

00:00:58.060 | that I've been using it is

00:00:59.700 | it gives you these alerts all the time.

00:01:00.980 | "Hey, there's an unknown transaction here.

00:01:03.420 | "It's a pretty big one.

00:01:04.480 | "Make sure this is legit."

00:01:06.260 | And I get probably one or two of those a week,

00:01:08.580 | and most of them are fine,

00:01:10.420 | but some of them could be like an erroneous transaction.

00:01:13.980 | It's kind of great,

00:01:14.820 | and it also talks about upcoming recurring payments.

00:01:16.900 | So I still, I like to feel like the '90s sometimes,

00:01:20.060 | like the pre- and post-internet era.

00:01:22.040 | I still get GQ Magazine.

00:01:23.740 | It said, "Hey, your GQ Magazine is coming up."

00:01:26.160 | I like the physical magazine,

00:01:29.160 | and it said, "Your GQ Magazine is coming up,"

00:01:31.400 | and the price is like $33 a year,

00:01:33.240 | and I'm like, "I can get it for like six."

00:01:34.560 | So I go in there, and Rocket Money helps me.

00:01:36.940 | It's great.

00:01:37.780 | They try to lower your bills.

00:01:39.400 | RocketMoney.com/ATC to learn more.

00:01:42.000 | It's a really great way to manage your money,

00:01:43.700 | and I think they're shutting down

00:01:45.360 | these other personal finance sites,

00:01:46.440 | so Rocket Money's like the last one standing.

00:01:49.040 | I like it.

00:01:49.880 | - I guess everyone else is giving up.

00:01:51.560 | They can't do it as well.

00:01:52.840 | - All right, let's do it.

00:01:54.560 | - All right.

00:01:55.740 | - Wait, so who's the NASCAR driver in your head?

00:01:58.080 | - So this is actually a Dale Jr. hat,

00:02:00.400 | so it was like a throwback to one of his dad's cars,

00:02:03.480 | a Dale Earnhardt car that had the SunDrop.

00:02:05.800 | SunDrop, which apparently is a North Carolina soda.

00:02:08.360 | I'd never even thought about that, but yeah.

00:02:10.360 | - In Michigan, we call it a pop.

00:02:11.680 | In North Carolina, you call it a soda.

00:02:13.640 | - Maybe.

00:02:14.920 | I think everyone calls it everything.

00:02:16.240 | A lot of people call it Coke,

00:02:17.520 | like any kind of soft drink.

00:02:19.000 | - That's a Southern thing,

00:02:20.040 | where you call any sort of soft drink a Coke.

00:02:22.840 | - Yeah, even though Pepsi's better, but you know.

00:02:25.360 | - All right.

00:02:26.200 | - Just kidding.

00:02:27.020 | - Agree to disagree.

00:02:27.860 | - Okay, okay.

00:02:29.200 | First up today, we have,

00:02:31.320 | "Can you please explain why financial media personnel

00:02:33.480 | "keep saying the 60/40 is dead,

00:02:35.800 | "but they are not saying target date funds are dead?"

00:02:38.880 | - This is a great, this is actually a really good question,

00:02:40.520 | because I've been kind of thinking about this lately.

00:02:43.520 | It seems like the financial media

00:02:45.240 | loves to pour dirt on the 60/40,

00:02:47.040 | and a lot of it is recency bias.

00:02:49.440 | Last year was one of the worst years ever

00:02:50.600 | for a 60/40 portfolio.

00:02:51.760 | John, do a chart on here.

00:02:53.240 | These are the 10 worst calendar year returns

00:02:55.440 | for a portfolio compromising the S&P 500,

00:02:58.400 | 60% of which, and 40% in 10-year treasuries.

00:03:00.640 | 60/40, rebalance every year.

00:03:02.800 | Going back to 1928, by my calculations,

00:03:05.600 | 2022 was the third worst year ever.

00:03:07.760 | And the worst year ever was in the Great Depression in 1931.

00:03:10.240 | Second worst year ever was also in the '30s in 1937.

00:03:12.560 | So that's a pretty bad year.

00:03:13.480 | This was even worse than the worst downturn in the 1970s.

00:03:16.600 | Maybe it would be worse then on a real basis,

00:03:18.040 | but that's pretty bad.

00:03:19.280 | The third worst year in 95 years.

00:03:21.440 | But, I don't know, bad things happen

00:03:23.360 | in every asset class and strategy.

00:03:24.680 | They're called risk assets for a reason, right?

00:03:26.480 | I don't think one year is enough

00:03:29.040 | to throw a strategy out the window

00:03:30.200 | unless it completely blows up.

00:03:31.960 | So, I think a lot of people like to say,

00:03:35.040 | well, the 60/40 is broken 'cause bonds got killed,

00:03:38.040 | and it's not gonna work going forward,

00:03:39.200 | and correlations are higher.

00:03:40.640 | So ditch the simple and go with the complex.

00:03:42.400 | I do think that's part of it,

00:03:43.720 | is that the financial media complexity sells

00:03:46.440 | way better than simplicity, right?

00:03:49.040 | You get way more eyeballs by selling something

00:03:51.400 | that's complicated and saying the simple thing

00:03:53.800 | just doesn't work because, put this other one up, John.

00:03:57.160 | So the media's been planning a funeral

00:03:58.280 | for the 60/40 for years.

00:03:59.280 | I wrote this piece in like 2017

00:04:01.840 | and found all these stories going back to 2012

00:04:03.600 | about why balance portfolios aren't gonna work anymore,

00:04:06.240 | 60/40 is dead, it's dead and buried.

00:04:09.240 | I even wrote a eulogy blog post for 60/40 back in 2019.

00:04:13.200 | So, it's something that I think,

00:04:16.160 | it's just a stand-in for a simple portfolio

00:04:19.120 | 'cause there's just not much going on with it.

00:04:20.960 | It's very simple.

00:04:22.400 | It's also important to note that,

00:04:24.200 | I don't know if I've ever met anyone

00:04:25.600 | who actually has all of their money,

00:04:27.760 | 60% stock and 40% bonds, and that's it, right?

00:04:31.440 | Most people probably--

00:04:32.280 | - That would become active trying to maintain that, right?

00:04:35.240 | Because it changes so much.

00:04:36.920 | - Yeah, it's hard.

00:04:37.760 | But I mean, most people have some cash.

00:04:39.080 | They probably own some real estate.

00:04:40.600 | They may have some REITs or foreign stocks

00:04:42.760 | or foreign bonds or high yield or corporate bonds

00:04:44.800 | or munis or value stocks or momentum stocks

00:04:48.000 | or quality or dividends, whatever it is.

00:04:50.200 | There's all these other strategies.

00:04:51.280 | And I think that's, in that sense,

00:04:53.040 | most regular portfolios are probably more

00:04:54.920 | like target date funds than anything else.

00:04:56.320 | And the other thing is, the difference is,

00:04:57.480 | target date funds actually change allocations over time.

00:05:01.000 | And so, I don't think they're as easy as a target

00:05:02.680 | 'cause there is some activity going on there.

00:05:04.280 | So, I think that that's the thing.

00:05:06.040 | Activity and complexity sell better for financial media.

00:05:08.880 | So, it makes sense that the 60/40

00:05:10.840 | is like the straw man or whatever.

00:05:12.720 | I also think we live in a world where pundits

00:05:15.160 | become famous for predicting a top or a bottom.

00:05:18.320 | Like, this is the bear market.

00:05:19.520 | This is the bull market.

00:05:20.520 | This is the end.

00:05:21.340 | This is the beginning.

00:05:22.180 | It's gotta be a point in time, right?

00:05:24.720 | This thing is just getting over with.

00:05:25.960 | It's gonna fall off a cliff.

00:05:26.800 | This thing is just getting started.

00:05:28.920 | You're never gonna hear a headline about like,

00:05:30.720 | a boring diversified portfolio does well most of the time,

00:05:33.920 | but not all the time.

00:05:34.740 | That's not a very good headline, right?

00:05:37.000 | There's also this contingent of financial pundits

00:05:39.440 | who like to say that, listen,

00:05:41.000 | the only reason a 60/40 portfolio has worked so well

00:05:43.760 | over the past 40 plus years is because

00:05:45.880 | inflation has been falling

00:05:47.080 | and interest rates have been falling.

00:05:49.120 | And that certainly was a tailwind,

00:05:50.920 | especially the bond side of the portfolio,

00:05:52.560 | 'cause you had such high starting yields.

00:05:54.040 | But I looked at the period of 41 years from 1981 to 2021,

00:05:59.040 | which is basically the top in rates.

00:06:01.800 | Rates were falling most of that time

00:06:03.180 | and inflation was falling.

00:06:04.120 | We were in a disinflationary environment.

00:06:05.840 | And then I looked at the previous 41 years

00:06:07.480 | from 1940 to through the end of 1980.

00:06:09.600 | So John filled this up for me.

00:06:11.080 | Returns were certainly better

00:06:13.800 | in the period from 1981 to 2021.

00:06:15.720 | 10.5% per year for a 60/40 annually rebalanced,

00:06:18.580 | which is just an amazing return.

00:06:20.280 | It's basically like the historical long run

00:06:21.800 | for the stock market.

00:06:23.160 | But 1940 to 1980 had almost 8% annual returns.

00:06:26.880 | So it was worse, but it wasn't that much worse.

00:06:29.360 | And the biggest part was 10-year treasuries

00:06:31.560 | did almost 8% annually in the '81 to 2021 period.

00:06:36.240 | Bonds were only up 2.5% per year from 1940 to 1980.

00:06:40.320 | So if we look at the previous 95 years,

00:06:43.760 | Demoderan has this website I use all the time from NYU.

00:06:47.240 | From 1928 to 2022, a 60/40 portfolio was up 8.1% per year.

00:06:51.580 | So it's not like that environment pre-1980

00:06:54.300 | was that much worse.

00:06:55.140 | It was right around average, right?

00:06:56.780 | And the crazy thing about the 2022 period

00:06:59.060 | being the third worst year ever for 60/40,

00:07:01.340 | the 10 years ending in 2022.

00:07:03.780 | So add the nine years before 2022

00:07:05.860 | and average returns for a 60/40 were almost 8% per year.

00:07:08.820 | So even with one of the worst years ever,

00:07:10.740 | it still was pretty good.

00:07:12.160 | And I can't promise what those returns

00:07:15.220 | are gonna be going forward

00:07:16.300 | 'cause I don't know what stock returns are gonna be.

00:07:17.780 | I don't know what interest rates are gonna be,

00:07:19.700 | but we're in a pretty good place now

00:07:20.820 | 'cause you can get 4% to 6% in your bonds depending.

00:07:23.940 | Like we're gonna talk about that in a little bit here,

00:07:25.400 | but if bonds are yielding 5%

00:07:29.060 | and the historical equity risk premium

00:07:30.360 | is 3% to 4% above bonds or cash,

00:07:32.940 | we're talking, I don't know, 8% to 9% for stocks

00:07:35.400 | is not out of the realm of possibility.

00:07:36.780 | So that's 7% for a 60/40 portfolio almost, 6%.

00:07:41.420 | - Junk bonds, you can get even closer to like 9%, right?

00:07:44.480 | - Yeah, I mean, those are more equity-like,

00:07:46.320 | but so if you want it,

00:07:47.600 | that'd be more of an equity-like portfolio.

00:07:49.820 | I mean, you call it 60/40, but it's really 100.

00:07:52.080 | - Yeah.

00:07:52.920 | - So I just, I can't guarantee

00:07:55.860 | what these returns are gonna be,

00:07:56.700 | but you're in a better place now

00:07:57.540 | than you were before 2022 after you ripped the Band-Aid off.

00:07:59.960 | And so I just say, stop listening to the people

00:08:02.080 | who say 60/40 is dead.

00:08:03.640 | It's lazy analysis.

00:08:04.560 | Saying 60/40 is dead is like saying diversification is dead.

00:08:07.740 | And if that happens,

00:08:08.640 | then maybe just haul me out to and bury me

00:08:11.100 | because if diversification dies,

00:08:12.920 | I've got nothing to live for.

00:08:14.520 | - Oh my God, this got real.

00:08:16.740 | (laughs)

00:08:17.580 | - I'm just kidding.

00:08:18.400 | I just, saying it, it's just lazy analysis

00:08:20.720 | and it has no basis in reality.

00:08:22.160 | 60/40 is alive and well, and it always will be.

00:08:25.160 | - Yeah, it makes me want to buy 60/40 more, you know?

00:08:28.720 | It makes me more bullish to hear everyone saying that's dead.

00:08:32.320 | - Yeah, I don't get it.

00:08:33.360 | I think it's a sort of a stand-in for simplicity

00:08:38.040 | and it's an easy, it's like easy whipping boy.

00:08:40.600 | All right, let's do another one.

00:08:41.560 | All right, that question was from Jacob, by the way.

00:08:43.240 | So up next, we have a question from Billy.

00:08:45.340 | "I know the running joke is that Ben

00:08:48.520 | "is Mr. Target Date Guy,

00:08:50.020 | "but in a recent episode,

00:08:51.140 | "he mentioned that he rebalanced

00:08:52.460 | "to pick up more small cap value.

00:08:54.520 | "Is he a Fama French guy instead?

00:08:56.860 | "I was wondering what Ben's portfolio for investing,

00:08:59.420 | "not trading, looks like from an asset class perspective.

00:09:02.600 | "Secondarily, how often does he rebalance it?"

00:09:05.480 | A little hurt they didn't ask about my portfolio, but.

00:09:07.520 | (laughs)

00:09:09.840 | - We already know what it is, Oatly.

00:09:10.680 | - Oatly reported earnings today.

00:09:12.880 | - 60% Oatly and 40% some EV stock.

00:09:16.380 | So two questions in a row about target date funds.

00:09:19.360 | So I guess I am, my reputation does precede me.

00:09:22.400 | My first ever investment was in a target date fund.

00:09:25.880 | So that's where I get this reputation from.

00:09:28.120 | My dad helped me open up an IRA when I got my first job.

00:09:31.640 | My first job didn't have a 401k.

00:09:33.600 | And so I had to open up my own IRA

00:09:34.960 | and I put money in like a T-Roll price target date fund.

00:09:37.320 | I think the only target date funds I own now

00:09:38.760 | are my kid's college funds for 529 plans.

00:09:41.160 | So based on the stage of life where I'm at now,

00:09:44.200 | I'm a barbell investor.

00:09:45.480 | That means on one side, on the safe side,

00:09:48.240 | and my barbell is safety and risk, right?

00:09:50.520 | So on the safe side, I have a slug of cash

00:09:52.440 | for vacations and emergencies

00:09:54.760 | and stuff that comes up with kids

00:09:56.620 | and other intermediate term goals that we may have.

00:09:59.480 | And the other side of that barbell is risk

00:10:01.600 | and that's stocks, basically.

00:10:03.320 | So I have a pretty high talents for risk.

00:10:05.260 | All my long-term capital is invested in the stock market.

00:10:08.080 | I'm not gonna touch most of it for decades.

00:10:09.760 | So that's 100% in the stock market.

00:10:11.800 | Now I am a bogel head at heart, right?

00:10:14.620 | My biggest holding in any of my accounts

00:10:18.240 | is a total US stock market index fund, right?

00:10:22.360 | Very cheap, market cap weighted.

00:10:25.320 | But I also like to diversify into other areas.

00:10:29.520 | So I do have a little fond of French.

00:10:30.480 | I have the small cap value piece.

00:10:32.800 | I have some momentum funds.

00:10:34.240 | I have some higher quality funds

00:10:36.280 | and I have international stocks.

00:10:37.600 | I diversify there too by some value stocks

00:10:40.640 | and small caps there.

00:10:41.560 | So I do have some diversification.

00:10:43.720 | The index funds are the biggest, like the building block.

00:10:45.940 | And then I have these satellites or diversification there.

00:10:50.200 | And I don't hold these kind of factor funds

00:10:52.160 | for outperformance or anything like that,

00:10:54.280 | which is kind of laughable to anyone

00:10:55.560 | who's looked at them in the last 10 or 12 years

00:10:56.920 | 'cause none of those other strategies have outperformed.

00:11:00.400 | But I just don't think market weighted index funds

00:11:03.600 | are gonna outperform every single cycle.

00:11:05.640 | And so I have these other funds

00:11:06.680 | so I can rebalance into them and diversify

00:11:09.120 | and have these other parts of the portfolio

00:11:10.480 | that'll hopefully hold up well

00:11:12.240 | if and when the index funds don't do well.

00:11:14.880 | I did mention that I, on Recent Annual Spirits,

00:11:19.480 | that I over-rebalanced recently.

00:11:21.120 | I have three main rebalancing strategies.

00:11:22.840 | One, I said in the opener, I'm a set it and forget it guy.

00:11:25.200 | So when I 401k, that kind of account,

00:11:28.240 | I automatically rebalance.

00:11:29.720 | I have it set to do once a year on a certain date.

00:11:32.860 | I don't know when the date is.

00:11:33.700 | I set it and I forget about it.

00:11:35.920 | The other one is if asset weights get too far out of whack.

00:11:40.360 | And that's usually in a--

00:11:41.200 | - Wait, what's the best day of the year to rebalance?

00:11:44.040 | I'm just--

00:11:44.880 | - I'm sure someone has that data.

00:11:46.400 | I've seen people look at it.

00:11:47.680 | It's like it's in April, October for tax reasons.

00:11:50.720 | I don't know.

00:11:51.560 | I don't think that far into it.

00:11:56.080 | The other one is if asset class weights

00:11:57.720 | get too far from the target.

00:11:58.960 | If something really outperforms

00:12:00.200 | and something really underperforms,

00:12:01.460 | maybe I'll get in there.

00:12:02.300 | That'd happen in maybe like a bear market

00:12:04.360 | or like a rip-roaring bull market.

00:12:07.040 | And then another way is last week

00:12:09.240 | I made a pretty sizable contribution to my SEP IRA.

00:12:13.000 | Bill Sweet would be happy with me about that.

00:12:15.120 | It's gonna help my taxes.

00:12:16.160 | And I over-rebalanced into some areas

00:12:18.680 | that had underperformed.

00:12:19.800 | So I used contributions to rebalance as well.

00:12:22.480 | So I don't know.

00:12:24.140 | I don't know if that having these other areas

00:12:26.280 | of the market will help my returns over time.

00:12:28.200 | I do like the idea of making contributions to those areas.

00:12:31.240 | So I'm making more contributions to the places

00:12:32.860 | that have not run as high in recent years.

00:12:35.720 | But I don't see the point of having an asset allocation

00:12:38.560 | if you're not going to rebalance back

00:12:39.760 | to target weights eventually.

00:12:41.200 | I think that's the whole point.

00:12:42.840 | So I think a great litmus test for a lot of people

00:12:45.000 | for their investment strategy is,

00:12:46.640 | are you willing to double down and lean into the pain

00:12:48.900 | when it is underperforming?

00:12:50.180 | Otherwise, what's the point of investing

00:12:51.380 | in it in the first place?

00:12:52.220 | Especially if it's something like an asset class.

00:12:53.660 | If it's an individual stock,

00:12:56.360 | I'm not picking on your stock picks, Duncan,

00:12:57.980 | but if it is an individual stock like you

00:12:59.740 | and you're averaging all the way down,

00:13:01.580 | I don't have as much faith in that strategy

00:13:03.260 | as I do for an asset class or strategy

00:13:06.580 | that is more automatic and rules-based in nature.

00:13:09.780 | - Well, you know, I can't remember if it was you or Michael

00:13:11.540 | that recently said on Animal Spirits

00:13:12.900 | something about how holding individual stocks

00:13:15.500 | for the long run is actually almost certain

00:13:18.500 | to underperform for you as opposed to if you--

00:13:20.700 | - The probability goes against you.

00:13:22.420 | - Yeah, I have an IRA that I should show you.

00:13:25.580 | Definitely not sharing publicly,

00:13:26.840 | but I gotta show you that basically it's data

00:13:30.240 | that you can use to prove that.

00:13:31.760 | - Listen, I have a brokerage account at Robinhood

00:13:33.600 | and I have some stock picks.

00:13:35.040 | I basically stopped picking stocks.

00:13:36.200 | A few of them I've held onto

00:13:38.440 | and they've all done way worse

00:13:40.040 | than I would have just putting in index funds.

00:13:41.840 | It is probably a good reminder

00:13:43.520 | and I've sized it correctly.

00:13:45.520 | But yeah, that's the thing.

00:13:46.640 | The longer you're holding period

00:13:48.200 | in the stock market historically,

00:13:50.240 | the better your chance of seeing gains.

00:13:52.040 | The longer you're holding period for individual stocks,

00:13:54.400 | the worse the probability is that you will actually see gains

00:13:56.800 | which is kind of hard to reconcile in your brain.

00:13:59.760 | - I never knew that so many stocks

00:14:01.520 | could become penny stocks.

00:14:02.800 | - The other part of it is mostly

00:14:06.480 | that it's a lot of big stocks that carry the day

00:14:09.360 | and make up the bulk of the returns.

00:14:10.880 | It doesn't mean other stocks can't do well,

00:14:12.320 | especially over certain time periods,

00:14:13.560 | but it's just over the very long term,

00:14:15.420 | most stocks don't do as well as you'd assume.

00:14:17.800 | - Right.

00:14:18.640 | - All right, next question.

00:14:20.200 | - All right, up next--

00:14:21.040 | - No more Target Day Fun questions today.

00:14:22.480 | - Yeah, no more.

00:14:23.680 | Stay tuned.

00:14:25.240 | Okay, up next we have a question from Rick.

00:14:27.520 | There's been a bull market and bond questions on the show,

00:14:29.760 | so I thought I would take a stab.

00:14:31.520 | Now that yields are higher,

00:14:32.680 | I want more fixed income in my taxable account.

00:14:35.480 | We are retiring in the next five years.

00:14:37.520 | Treasuries and T-bills seem like a no-brainer,

00:14:40.240 | but what about the tax implications?

00:14:42.480 | Corporate bonds have higher yields,

00:14:44.040 | but is there a difference in how those bonds

00:14:45.920 | are treated tax-wise versus government bonds?

00:14:49.520 | - Okay, so we got kind of like a good cop, bad cop question

00:14:52.080 | here between investing and taxes.

00:14:53.540 | So I'll be the, I guess I'm the good cop,

00:14:55.420 | the bad cop will be the tax guy.

00:14:56.600 | Let's bring in Bill Sweet.

00:14:57.900 | Talk about the tax side of things here.

00:15:00.180 | - Hey, Bill.

00:15:01.020 | - Gonna be live from New York City today, gentlemen.

00:15:02.940 | How's it going?

00:15:04.020 | - Good, good.

00:15:04.860 | Sorry, I had you muted there for a second.

00:15:06.740 | - It's all good.

00:15:07.580 | It's because I wasn't wearing a Fruity Purple shirt today,

00:15:10.140 | so the devil's got stayed home.

00:15:12.100 | - Yeah, you guys are the good cop, bad cop.

00:15:13.500 | Duncan is bright, Bill is black.

00:15:15.500 | I do like this question 'cause we've been seeing

00:15:16.880 | a lot of comparisons lately of people saying,

00:15:19.460 | listen, if I can get 6% in corporate bonds,

00:15:21.940 | why would I ever invest in the stock market?

00:15:23.580 | If I can get 8% in high yield,

00:15:25.460 | and I think if you're doing that in a tax deferred account,

00:15:27.780 | that's an okay apples to apples comparison, maybe.

00:15:30.820 | But if you're talking taxable account,

00:15:32.880 | the way that taxes on bonds and stocks are treated

00:15:34.920 | is much different.

00:15:35.760 | So I think you have to be careful about that.

00:15:36.900 | And I think for most people,

00:15:38.900 | especially if you're approaching retirement,

00:15:40.180 | you want those bonds to be used for spending purposes

00:15:44.460 | or income, so you don't want them in a tax deferred account

00:15:47.380 | unless it's just for a portfolio over the longterm.

00:15:49.260 | So what do you think the breakdown of bonds is

00:15:53.220 | by tax perspective?

00:15:54.900 | 'Cause that changes the equation greatly, right?

00:15:57.340 | - Yeah, you make some great points, Ben.

00:15:59.220 | And typically, if you're going into retirement,

00:16:01.480 | you are trying to focus on income, and that's a great point.

00:16:04.600 | However, bonds have this annoying feature

00:16:06.380 | where they're getting taxed at ordinary income.

00:16:08.060 | A lot of the conversations we're having here on the show

00:16:10.740 | do deal with capital gains.

00:16:12.280 | So let's talk a little bit

00:16:13.340 | about how different bonds get taxed.

00:16:14.780 | John, can we pull up our first chart, please?

00:16:17.580 | Let's just take a quick look at how corporate

00:16:20.100 | versus treasury versus municipal bonds.

00:16:22.420 | Those are the three types of bonds you can probably go out,

00:16:24.700 | and hopefully those are the three flavors

00:16:26.560 | that are available to you.

00:16:28.300 | You can see there by the chart,

00:16:29.520 | you're exposed to both federal and state income tax

00:16:32.460 | on any corporate bonds that you're purchasing.

00:16:35.220 | And so, yes, those come with a higher yield.

00:16:37.140 | However, you are looking at the proposition of higher tax,

00:16:40.020 | and we're gonna do some math for you.

00:16:41.140 | We're gonna do some bond math

00:16:42.420 | and let you know what that looks like here in a minute.

00:16:44.420 | Moving on, treasury bonds come state tax-free,

00:16:47.280 | which is awesome if you happen to live in New York,

00:16:49.060 | like I do, me and Duncan here in New York and Connecticut,

00:16:51.960 | maybe not so much if you're in Michigan,

00:16:53.660 | certainly in California, pretty high-tax state.

00:16:55.340 | However, you do have to pay federal income tax

00:16:57.580 | on your treasuries,

00:16:58.900 | or you can look at state-issued municipal bonds.

00:17:01.100 | And if you're buying a municipal bond

00:17:03.060 | issued from the state or municipality

00:17:04.540 | that you happen to live in,

00:17:05.620 | you get this triple tax exemption

00:17:07.140 | where your federal, state, and local taxes are free

00:17:09.700 | if you're buying an in-state bond.

00:17:11.460 | And so that's how those break down.

00:17:13.220 | John, can we flip over to chart two, please?

00:17:14.900 | - I like the table, Bill, that was good.

00:17:16.300 | Before we get into the next one,

00:17:18.040 | it is interesting, like the treasury part of it,

00:17:20.600 | I don't think a lot of people realize that,

00:17:21.560 | like no state tax, a lot of this is,

00:17:23.620 | I mean, you've said this in the past,

00:17:24.920 | usually when you retire,

00:17:25.880 | your tax rate will go down, hopefully.

00:17:28.440 | So for a lot of people,

00:17:29.280 | maybe that helps the equation a little bit.

00:17:30.880 | But I think having that matrix there

00:17:34.320 | is a good starter for people.

00:17:36.480 | If you have a really ultra-high tax rate,

00:17:38.240 | it could change the way that you allocate your bonds,

00:17:40.400 | or it should, probably.

00:17:41.640 | - Yeah, precisely.

00:17:42.480 | And I think you do have to think about that, Ben,

00:17:44.120 | and great lead-in, by the way.

00:17:45.640 | You're a great, great header for me,

00:17:47.060 | because you set me up, and I'll knock 'em down.

00:17:49.400 | A lot of this--

00:17:50.240 | - I was a point guard in high school,

00:17:51.120 | so I like to dish out the assists.

00:17:52.960 | - That's great.

00:17:53.800 | I got to see Victor Wembiata last night,

00:17:55.120 | and he could've used a point guard there for this part.

00:17:57.900 | So let's flip over to chart two, John,

00:17:59.300 | and take a look at how these bonds go from a pre-tax yield.

00:18:02.680 | So in the left column, a pre-tax yield,

00:18:04.520 | let's say 6% for corporates, 5% for treasuries,

00:18:07.840 | 3.5% for municipals.

00:18:09.360 | These are roughly approximate to where yields are today,

00:18:12.640 | and this is not investment advice,

00:18:13.840 | so please don't act on this.

00:18:15.460 | However, what I did, Ben, is I broke this down and said,

00:18:18.080 | look, if you're a low-tax rate, if you're paying 12%,

00:18:20.680 | versus a mid-tax rate, paying 24% and let's say 6%

00:18:23.560 | for a total of 30%, versus a high-tax rate,

00:18:26.080 | let's say close to 50%, which is where folks are

00:18:28.760 | in New York City and California,

00:18:30.120 | at the higher end of the income spectrum,

00:18:31.800 | what happens to those pre-tax yields

00:18:33.800 | as they filter through the tax equation?

00:18:36.320 | And instead of framing everything

00:18:37.640 | in a tax-equivalent yield,

00:18:38.680 | I want to talk about the yield that you take home, right?

00:18:40.600 | Because we do not eat pre-tax returns.

00:18:42.840 | So this, to me, is very important.

00:18:44.720 | You can see for, let's say, a middle taxpayer,

00:18:47.820 | a corporate bond, a pre-tax 6% yield gets cut to about 4%,

00:18:51.900 | a pre-tax 5% treasury yield gets cut to 3.8%,

00:18:55.340 | and municipals, again, assuming you're in-state,

00:18:57.060 | just stays at that 3.5% because they're completely tax-free.

00:19:00.580 | So more or less, you can make that decision,

00:19:02.180 | but what I want to highlight there is the rightmost column.

00:19:04.820 | At some point, it begins, the higher your tax rate are,

00:19:07.980 | the more tasty, the more beneficial

00:19:12.160 | that tax-free yield is for municipals.

00:19:14.060 | So it really does depend.

00:19:15.120 | I do think you have to sit down and think about this.

00:19:17.100 | Basis points are probably gonna make a huge difference,

00:19:19.860 | but if you're in the highest tax bracket,

00:19:21.500 | your yield gets cut in almost half,

00:19:22.940 | and I think you do have to take that into account.

00:19:23.780 | - So you'd probably say if you want to own corporate bonds

00:19:27.260 | and you're in high taxes,

00:19:28.100 | you should probably be owning those in a tax-deferred

00:19:30.220 | account, otherwise it might not really make as much sense.

00:19:32.580 | - I think so, very generally.

00:19:34.340 | Yeah, that would be my take,

00:19:36.460 | because ultimately it's all tax-deferred anyway.

00:19:38.700 | And furthermore, again,

00:19:39.540 | we're talking about ordinary income tax rates, right?

00:19:41.340 | So compared to capital gains, compared to dividends,

00:19:43.860 | you're paying the highest tax rates very quickly.

00:19:46.260 | And so yes, I think for corporate yields,

00:19:48.540 | for folks in a low tax bracket, for tax equivalents,

00:19:51.420 | it makes a lot of sense.

00:19:52.440 | Municipals, if you're in a higher tax bracket.

00:19:53.900 | - With treasuries, your T-bills are included in those.

00:19:56.900 | They're free from state taxes, right?

00:19:58.300 | 'Cause a lot of people have been

00:19:59.340 | pouring into T-bills lately.

00:20:00.340 | I want to get on munis,

00:20:01.220 | but Duncan, let's read question four first.

00:20:03.300 | I think that actually is a muni question

00:20:04.780 | and we'll get to some tax equivalent stuff,

00:20:06.620 | which I think is important.

00:20:07.460 | - Great question from Rick, thank you.

00:20:08.460 | - Yeah, let's talk municipal bonds.

00:20:10.900 | - Okay, you've written a lot about bonds lately,

00:20:14.300 | but not munis.

00:20:15.200 | I'm looking at a muni fund with a yield of 3.8%.

00:20:18.420 | If I hold this in a taxable account,

00:20:20.260 | that's a pretty good deal, right?

00:20:22.020 | How do I think about munis in the context of other bonds

00:20:24.420 | in a taxable brokerage account?

00:20:26.140 | - So I think psychologically speaking,

00:20:28.100 | munis are kind of difficult for people

00:20:29.780 | because you have to think about the tax equivalent.

00:20:31.980 | The way you showed a bill in your matrix

00:20:33.620 | was you put them on the level playing field.

00:20:36.100 | But if you inverted it and did it the other way,

00:20:38.660 | you could say, well, the nominal yield in treasuries

00:20:41.020 | versus munis might be similar too,

00:20:42.500 | but for a lot of people, that's a phantom yield

00:20:44.420 | because the tax stuff for a lot of people happens later.

00:20:46.460 | It doesn't happen right now.

00:20:47.700 | And so they look and say,

00:20:48.540 | why would I take a 3.5% or 4% yield in munis

00:20:51.660 | when I can get 5% or 6% in these corporate bonds

00:20:54.200 | or treasuries or whatever, and it doesn't make sense.

00:20:56.420 | So it's hard to put those on equal footing.

00:20:58.520 | But as you said, especially if you're in a high tax bracket,

00:21:01.340 | the municipal yield on a tax equivalent basis

00:21:03.180 | might be even better.

00:21:04.460 | - Yeah, could not agree.

00:21:05.380 | And that would be the great title for a new "Star Wars"

00:21:07.340 | movie, "The Phantom Yield."

00:21:08.580 | I do like that, Ben, I'm gonna have to think about that.

00:21:11.420 | But as you guys might imagine, we have a chart about this.

00:21:14.140 | So John, can you pull up chart three?

00:21:15.900 | So this just illustrates the point,

00:21:17.980 | and again, that we were making before,

00:21:19.680 | and sort of connecting the dots between the questions.

00:21:23.100 | Jim is questioning, why would I consider municipals?

00:21:25.600 | Again, it sets us higher tax rates.

00:21:27.100 | That to me is where it starts to make sense

00:21:29.060 | in that you can see there, if we kind of, again,

00:21:31.360 | look at pre and low and mid and high tax yields,

00:21:34.080 | how that plays out, municipals are gonna be dead even,

00:21:37.160 | but the tax bite takes a higher hit

00:21:39.940 | out of those higher yield corporates and treasuries.

00:21:42.460 | And so that, to me, is where that flip happens.

00:21:44.540 | And Ben, I think municipals really start

00:21:46.940 | to make a lot of sense to me,

00:21:48.140 | roughly around the 35% tax bracket.

00:21:50.100 | That's when the game changes.

00:21:51.900 | Because around there, assuming you're in a high tax state,

00:21:54.740 | that's when your tax rate is pushing 40%, 42% all in,

00:21:58.020 | and that's when that thing flips.

00:21:59.300 | And if you kind of look at this from the outside,

00:22:01.660 | from an outside basis, the type of account,

00:22:04.260 | the type of title makes a lot of sense.

00:22:05.700 | You would not, for example, Ben,

00:22:07.120 | wanna own municipal bonds in a tax deferred account,

00:22:10.140 | in an IRA or 401k, right?

00:22:11.860 | Because you're accepting a lower yield,

00:22:13.620 | but you're getting this tax deferral benefit there anyway.

00:22:16.180 | So Jim's question is spot on,

00:22:17.700 | and this is why I think looking at this

00:22:19.420 | in not just the tax equivalent angle,

00:22:21.760 | but where you're gonna hold asset location

00:22:23.500 | is so, so important when you're doing asset allocation.

00:22:25.740 | - So I feel like we're getting closer

00:22:26.860 | to Bill's rules of thumb.

00:22:28.460 | We have a Roth IRA cutoff, we have a Muni bond cutoff.

00:22:31.960 | We're getting there, right?

00:22:32.800 | Depending, again, you have to actually know

00:22:34.380 | what your tax rate is, which a lot of people probably don't.

00:22:37.460 | But there is a financial planning element to owning bonds

00:22:41.500 | that you probably didn't have to think about before.

00:22:42.820 | And again, I think this is probably more important

00:22:44.340 | for retirees or people who are using bonds for income.

00:22:46.900 | If you're using bonds in a 401k plan

00:22:49.500 | because you want diversification

00:22:51.060 | or you don't wanna take as much equity risk,

00:22:53.140 | this equation doesn't matter.

00:22:54.580 | Then look at the nominal yields.

00:22:56.380 | But I think for a lot of people,

00:22:57.340 | and especially retirees, they are looking at these.

00:22:59.740 | And I think that the handoff

00:23:01.380 | probably couldn't have gone better for retirees.

00:23:03.660 | Yes, people were complaining in the 2010s

00:23:06.060 | 'cause yields were low and bonds weren't doing much.

00:23:08.820 | And then you had 2022, what we talked about earlier,

00:23:10.740 | where bonds got killed.

00:23:12.080 | But you had stocks that totally picked up the slack

00:23:14.380 | and more than made up for the bond returns.

00:23:16.380 | And now you have this situation

00:23:17.980 | where you can de-risk the portfolio

00:23:19.620 | and you have these nice yields.

00:23:21.440 | And you just do have to be a little thoughtful

00:23:24.420 | about the way that you implement it.

00:23:26.340 | Because to your point,

00:23:27.620 | you don't wanna have the wrong asset location

00:23:29.620 | and then eat into a lot of your yield unnecessarily.

00:23:32.620 | - Yeah, we've been in this higher interest rate environment,

00:23:35.380 | higher inflation environment,

00:23:36.260 | been for, I don't know, 18, 24 months at this point.

00:23:38.540 | I gotta be honest with you, I'm still adjusting.

00:23:40.300 | I came into this industry in 2007,

00:23:43.060 | fresh out of the Army, coming into tax.

00:23:45.060 | And from that point forward,

00:23:46.860 | we've had sub-2% yields, sub-2% inflation.

00:23:49.420 | So I'm still getting used to all this.

00:23:50.580 | And that's why, Jim,

00:23:51.420 | I think your question is very appropriate.

00:23:52.700 | And this is the type of thing

00:23:53.820 | that the world changed in the last two years.

00:23:56.000 | So I think your portfolio

00:23:57.320 | should potentially change along with it.

00:23:59.820 | - Yes.

00:24:00.660 | - I think you probably just have to be

00:24:02.620 | a lot more thoughtful

00:24:03.460 | about how you allocate your fixed income as well.

00:24:05.620 | It's not a one decision asset class, really.

00:24:08.220 | You have to kind of think through.

00:24:09.560 | And maybe for some people,

00:24:10.400 | it's a little bit of corporate bonds

00:24:11.980 | and a little bit of treasuries

00:24:12.820 | and a little bit of munis

00:24:13.640 | depending on the way they have their money.

00:24:15.100 | But you just have to think through

00:24:16.260 | before you pull the trigger there.

00:24:17.740 | - Right, amen.

00:24:19.140 | - Duncan, what are oldie bonds paying these days?

00:24:21.500 | - Probably a lot.

00:24:23.420 | - 27%, that's gotta be a high yield.

00:24:25.980 | - Probably a lot, yeah, I don't know.

00:24:28.620 | I mean, they technically, the earnings wasn't terrible.

00:24:31.980 | - Okay, but I'm glad we talked about this

00:24:33.300 | in terms of taxes, because again,

00:24:34.880 | people who are making these stock versus bond comparisons,

00:24:37.580 | it really depends where those assets are located.

00:24:39.500 | You can't just say, well, bonds are paying six,

00:24:41.260 | so why would I,

00:24:42.240 | if I could get six in the stock market, I'd be fine.

00:24:44.500 | It's a totally, what did you say yesterday to me?

00:24:46.800 | Bonds, you pay taxes now, stocks, you pay taxes later.

00:24:49.860 | - Yeah, and that brings up a good point about compounding,

00:24:51.700 | Ben, not only are you looking at a higher interest rate,

00:24:54.900 | or a higher tax rate for ordinary income,

00:24:56.820 | which most bonds are taxed at,

00:24:58.180 | but furthermore, there's some advantages

00:24:59.740 | to things like dividend yield.

00:25:00.940 | Assuming, again, you're comparing apples to apples,

00:25:03.180 | which you're not, but in the case that you are,

00:25:05.820 | and assuming you could predict

00:25:06.860 | the future path of stock returns,

00:25:08.540 | stock gains are usually deferred, right,

00:25:11.140 | because you're paying capital gains,

00:25:12.260 | but you choose that moment when you sell

00:25:14.480 | and realize those gains.

00:25:15.820 | And so if you're able to defer that two to five to 10 years,

00:25:19.380 | that compounding effect all happens within your portfolio

00:25:22.220 | relative to the bond income

00:25:23.760 | that you're paying tax on right now.

00:25:25.420 | And so even if you're reinvesting,

00:25:26.900 | let's say, into a bond fund,

00:25:28.140 | assuming you're compounding that way,

00:25:30.380 | you're still paying tax at a higher rate

00:25:32.040 | with a bond fund today.

00:25:33.140 | It's not apples to apples anyway,

00:25:34.540 | but yeah, there are some built-in advantages

00:25:36.580 | to tax deferral that come from stocks

00:25:38.420 | and come from tax-qualified dividends,

00:25:40.100 | which you're paying at lower tax rates.

00:25:42.260 | - Duncan, Cliff in the chat says

00:25:43.460 | that you should be drinking a Coors

00:25:44.740 | based on your NASCAR gear.

00:25:46.600 | I think that actually fits.

00:25:48.260 | - Yeah, I'm drinking this tea,

00:25:49.280 | but I think it kind of would look like a beer can maybe.

00:25:52.220 | - He's a man of the people.

00:25:53.060 | - One day, one day, that'll be the show.

00:25:55.680 | - We got one more.

00:25:56.820 | - Okay, last but not least,

00:25:57.940 | we have a question from John.

00:25:59.940 | I was wondering if you could comment

00:26:01.260 | on the nuances of purchasing a home

00:26:02.900 | in a very high cost of living real estate market,

00:26:06.400 | like New York City, San Francisco, LA.

00:26:09.060 | I'm not sure how expensive San Francisco is.

00:26:09.880 | - Did you get that on this first try, Duncan?

00:26:11.700 | V-H-C-O-L there?

00:26:12.820 | - It took me a second, but yeah,

00:26:14.180 | at first I was thinking like an EV toll,

00:26:15.900 | but yeah, this is different.

00:26:17.740 | Okay, I'm coming from a more affordable area

00:26:21.100 | and I feel like the game in these places

00:26:22.980 | is vastly different.

00:26:24.300 | The biggest thing I struggle with

00:26:25.500 | is how much to put down without feeling foolish.

00:26:28.100 | Am I crazy for putting 60 to 70% down

00:26:30.420 | on a New York City property?

00:26:31.860 | I'm envisioning modest mortgage payments

00:26:33.700 | due to the 60 to 70% down payment,

00:26:36.180 | which could put me into a building

00:26:38.160 | where others only put 20% down or less,

00:26:41.940 | have to be earning at least two times or more

00:26:44.820 | what we would.

00:26:45.660 | It's a little confusing,

00:26:46.500 | but I think I get what they're saying.

00:26:47.780 | The usual net worth statistics

00:26:49.340 | of not being so tilted into real estate

00:26:52.100 | don't seem to apply in very high cost of living areas.

00:26:55.820 | If we put 70% down,

00:26:57.260 | our net worth breakdown would be something like 60 to 70%

00:27:01.160 | into our primary residence real estate.

00:27:03.760 | - Good question.

00:27:05.740 | First of all, I think there's like

00:27:06.580 | an imposter syndrome thing going here

00:27:07.860 | where if I put 60 to 70% down

00:27:10.580 | and other people there aren't

00:27:11.940 | because their salaries are different,

00:27:13.620 | I think it might be part of what we took out.

00:27:15.120 | I would get rid of that immediately

00:27:16.180 | because if you can afford to put 60 or 70% down

00:27:19.020 | in a New York City house, apartment, condo, whatever,

00:27:22.300 | you're in a pretty good position, right?

00:27:24.740 | Do you agree, though, Bill,

00:27:26.860 | that the high cost of living areas

00:27:29.240 | are a totally different ballgame

00:27:30.320 | from a real estate perspective?

00:27:31.860 | - I don't necessarily, yeah.

00:27:34.820 | My observation here with most real estate investors

00:27:37.580 | generally, Ben, is that they hate paying taxes

00:27:39.720 | more than they like making money.

00:27:41.440 | And real estate involves this tax deferral

00:27:43.740 | I was just talking about a minute ago

00:27:45.140 | with capital gains and deferrals.

00:27:46.580 | But to me, this isn't necessarily a tax question.

00:27:48.880 | It's a concentration question, Ben.

00:27:50.660 | And that's sort of what I think you're getting at.

00:27:53.380 | If you are dumping 60 to 70% of your current net worth

00:27:56.700 | into a single property, in a single city,

00:27:59.700 | in a single building, literally,

00:28:01.580 | a lot could go wrong with that, right?

00:28:04.260 | We have lived in a world, most of my career,

00:28:06.340 | where real estate prices go up

00:28:07.620 | and they go up and they go up,

00:28:08.780 | and everybody thinks that's probably

00:28:10.180 | gonna happen going forward.

00:28:11.480 | But I think the risk you're taking on

00:28:13.180 | by putting that amount of capital

00:28:15.020 | into one single asset, to me, is a lot.

00:28:17.480 | And yes, you do get a lower mortgage,

00:28:19.580 | you do pay less interest,

00:28:20.740 | you are gonna have a lower payment,

00:28:21.940 | and maybe, therefore, you can afford

00:28:23.260 | to live a little bit grander.

00:28:25.180 | But it's a lot of risk.

00:28:26.180 | It's a lot of risk to take on, Ben.

00:28:27.900 | - My whole thing about risk is

00:28:30.900 | that there are necessary or unavoidable,

00:28:34.460 | and then there are avoidable or unnecessary risks.

00:28:36.900 | And if you wanna make money,

00:28:39.580 | you can't avoid something like volatility,

00:28:41.340 | or there's some drawback.

00:28:43.880 | And I think dumping all of your money

00:28:46.220 | into a single asset is an unnecessary risk,

00:28:49.240 | especially something like that,

00:28:50.400 | that's the roof over your head.

00:28:53.360 | And if you can afford a down payment that high,

00:28:55.740 | you can probably afford the mortgage payments as well.

00:28:57.920 | And there's nothing to say that if you hold back

00:29:00.080 | and you just do a 30 or 40% down payment,

00:29:03.080 | there's nothing to say that you can try it out

00:29:04.540 | for a little while and see how you can afford it,

00:29:06.920 | and then dump the money in in a few years,

00:29:09.000 | potentially, and pay the principal down.

00:29:11.040 | But if you put all the money in,

00:29:12.200 | then you're gonna have to borrow

00:29:13.240 | against the place to get it out,

00:29:14.500 | so it's much harder to spend that place

00:29:16.980 | after the money's already in there.

00:29:18.520 | So I don't see the rush to make such a huge down payment,

00:29:23.520 | especially if it's gonna concentrate you so much.

00:29:25.880 | It just seems unnecessary to me from a risk perspective.

00:29:28.480 | - Yeah, I think I generally agree, Ben.

00:29:30.920 | The other thing I'd sort of counsel

00:29:32.920 | anybody thinking about this on

00:29:34.200 | is that primary real estate,

00:29:35.880 | especially if it's a personal loan,

00:29:37.240 | jumbo loan or not,

00:29:38.440 | that is one of the few places, Ben,

00:29:40.080 | where you can apply leverage effectively,

00:29:42.000 | I think, as a taxpayer,

00:29:43.460 | in that there's this giant subsidized mortgage complex

00:29:46.320 | out there that's keeping real estate interest loans.

00:29:49.400 | - You would never, it would never be wise

00:29:51.800 | to take that much leverage out in a stock market.

00:29:54.500 | - Yes.

00:29:55.340 | - But in the housing market,

00:29:56.160 | we freely tell people to do it, have at it, right?

00:29:59.300 | - Right, and effectively,

00:30:00.540 | what you're doing in that scenario,

00:30:01.980 | in some form or fashion,

00:30:03.260 | is you're transferring some of that risk to a bank.

00:30:05.300 | And so that, to me, is one way to potentially de-risk.

00:30:08.180 | Ben, you hit the other nail on the head,

00:30:10.000 | which is that it's not a one-way street.

00:30:11.880 | If you get frustrated at that higher mortgage rate,

00:30:14.060 | you can always pay it down, right?

00:30:15.780 | You can always refinance down the road with cash.

00:30:17.860 | That's always an option.

00:30:19.140 | And it more or less keeps some powder dry.

00:30:21.260 | And so I think I would consider that.

00:30:23.780 | And I've always just considered that leverage play

00:30:26.520 | to be, again, one of the few places,

00:30:28.260 | that if you could go out and buy a million-dollar building

00:30:30.180 | and only put, let's say, $200,000, $300,000 down,

00:30:33.220 | that, to me, seems like a pretty good deal,

00:30:35.180 | even if my monthly payments are higher.

00:30:37.000 | The additional cash that I'm holding back on,

00:30:38.960 | and let's say investing in municipals, right,

00:30:40.660 | to earn some income, some revenue with,

00:30:42.860 | I can use that to help decrease the mortgage, right?

00:30:45.180 | And so it ends up being in the leverage play.

00:30:46.900 | - The only argument I could see

00:30:48.020 | for actually doing this kind of thing would be,

00:30:50.100 | listen, mortgage rates are 7.5%,

00:30:52.780 | and I'm gonna put it down,

00:30:54.380 | and then if rates go back down to five,

00:30:56.760 | I'm gonna cash out refi and pull some of that back out.

00:30:59.820 | That's a tough, that's like a market timing

00:31:02.220 | kind of thing as well, so that's difficult.

00:31:04.760 | But you'd have that built-in equity,

00:31:06.280 | where you could do that if you wanted to,

00:31:08.380 | or take out a home equity line, or whatever,

00:31:10.340 | if rates fall, but that's a timing thing,

00:31:13.060 | and if you really need the money,

00:31:14.720 | it could be that banks don't wanna give you a loan

00:31:17.860 | at that time, so that's a little bit of a riskier strategy.

00:31:20.100 | - But there is a tax angle I do wanna mention,

00:31:22.100 | in that there are three itemized deductions

00:31:24.160 | that are available to individual taxpayers

00:31:25.900 | for their primary residence right now, right?

00:31:27.340 | It's charitable contributions, it's property taxes,

00:31:30.780 | but that's limited to $10,000,

00:31:32.460 | which, in a city like New York, or VHOCL,

00:31:35.460 | I think that was the acronym. - Yeah, thanks.

00:31:36.740 | - Yeah, they're astronomically high.

00:31:38.780 | But the third is mortgage interest, right?

00:31:40.340 | And so, effectively, if you're able to tax-deduct

00:31:42.900 | your mortgage interest being paid,

00:31:44.660 | that effectively reduces the borrowing rate, right?

00:31:47.060 | So if you're at a 30% tax rate,

00:31:49.560 | that brings your tax-equivalent mortgage interest yield

00:31:52.380 | from 7% to 5 1/2, right?

00:31:54.500 | And so maybe that's not worth writing home about,

00:31:56.740 | that's nothing compared to two years ago,

00:31:58.500 | but we live in the world that exists now,

00:31:59.960 | and that is something, once you account

00:32:01.780 | for a standard deduction, that you can

00:32:03.260 | take advantage of, potentially.

00:32:05.100 | - Yeah, good question, I just,

00:32:06.940 | it just seems unnecessarily risky to me

00:32:10.140 | to put that much in, if you don't have to.

00:32:12.260 | - I think I generally agree.

00:32:13.660 | - Yeah. - Make the bank do it.

00:32:16.220 | - I think I generally agree, too.

00:32:17.980 | I don't have a strong opinion.

00:32:20.300 | - Duncan is like a chameleon, he goes from F1 guy

00:32:22.300 | to NASCAR guy so seamlessly, right?

00:32:24.900 | - I mean, you know, they're cars.

00:32:27.060 | - It is impressive, yeah.

00:32:28.220 | Motors, engines, yeah, it's good.

00:32:30.180 | - Four wheels, okay.

00:32:31.740 | Great questions this week, as always,

00:32:33.300 | we appreciate everyone. - It was fun.

00:32:34.260 | No Roth Area conversions, what am I even doing here?

00:32:36.820 | - I know, nothing, we went in another direction.

00:32:40.300 | Thanks, as always, for the questions.

00:32:41.420 | Leave us a comment on YouTube.

00:32:42.620 | Thanks, everyone, in the live chat, as usual.

00:32:45.180 | Remember, our email here is askthecompoundshow@gmail.com.

00:32:48.500 | We'll see you next time.

00:32:49.820 | - And thanks to Rocket Money again, yeah.

00:32:51.980 | - Rocket Money. - Appreciate it, as always.

00:32:52.820 | - For all my free alerts.

00:32:54.220 | - Yep, see you, everyone. - Thanks, everyone.

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