When Should You Pay Off Your Mortgage Early?

00:00:00.000 | (beeping)

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

00:00:13.520 | where we've gotten 734 questions this year.

00:00:16.520 | I made that number up, but it's gotta be pretty close.

00:00:18.560 | - Okay, I was about to say, wow, you counted.

00:00:20.640 | - It's probably pretty close.

00:00:21.480 | I bet we get five or six questions a week.

00:00:23.720 | Remember, it's askthecompound@gmail.com,

00:00:26.840 | askthecompoundshow@gmail.com.

00:00:29.040 | - That's it. - Getting all these emails

00:00:30.760 | mixed up.

00:00:31.600 | Today's Ask the Compound is brought to you

00:00:34.960 | by our friends at Bird Dogs.

00:00:36.720 | Duncan, big news in Bird Dogs this week.

00:00:39.400 | I noticed, they sent me an email.

00:00:41.200 | I'm on the email list, obviously.

00:00:43.080 | They know me.

00:00:44.200 | They've got some new colors.

00:00:45.040 | My favorite kind of shorts are,

00:00:46.840 | they have the gym shorts, they have the khaki shorts.

00:00:48.640 | These are the khakis, 'cause they have the little belt loops.

00:00:51.640 | I haven't had to use the belt loops yet.

00:00:53.880 | But new colors, so we have three of 'em.

00:00:57.120 | I liked the mint green, and I don't know, is it salmon?

00:01:01.280 | It's called orange blossom.

00:01:02.320 | - Oh, wow, that's bold.

00:01:03.600 | That's bold of you.

00:01:04.560 | - I don't mind taking bold colors in the summer.

00:01:05.400 | - I like the blue, the blue's my favorite.

00:01:07.400 | - The blue's nice, too.

00:01:08.240 | I got a pair of the green and the orange.

00:01:11.640 | I'm a sucker for new colors.

00:01:13.180 | They're very, you know, I'm stocking up now

00:01:14.960 | for the summer, for spring break, all that kind of stuff.

00:01:18.840 | It's great.

00:01:19.680 | Also, still, and I think I got a free T-shirt

00:01:22.440 | out of the deal, too.

00:01:23.840 | I don't know how I, by two pairs,

00:01:25.160 | I don't know what the deal is.

00:01:26.160 | But with us, you can still get the free white Tech Dad hat.

00:01:29.360 | I still got it here.

00:01:30.360 | So put an ATC in the code,

00:01:33.220 | or just go to birddogs.com/ATC.

00:01:35.900 | My wife is saying that my closet

00:01:39.080 | is overflowing with bird dogs.

00:01:40.320 | I can't help it.

00:01:41.160 | They're everywhere.

00:01:43.080 | - Yeah, you know, on Thanksgiving,

00:01:44.760 | I actually was talking about bird dogs with someone.

00:01:47.360 | Someone, for real, like completely unprompted,

00:01:49.420 | was like, "Are those bird dogs?"

00:01:53.040 | Or I guess they saw the logo on what I was wearing.

00:01:56.040 | And I told 'em, I was like,

00:01:56.960 | "Yeah, they sponsor our podcast."

00:01:59.520 | And they're like, "Oh, I keep getting targeted advertising

00:02:01.760 | "on social media for them."

00:02:02.800 | And I've thought about trying 'em.

00:02:04.720 | Real conversation.

00:02:06.400 | - Get a free hat out of the deal.

00:02:08.720 | All right.

00:02:09.960 | You wanted to spike the ball real quick

00:02:11.920 | on a stock pick, or not yet?

00:02:13.800 | - Oh, that can wait a second.

00:02:15.880 | First, I just wanted to say,

00:02:17.640 | it's that time of year, Spotify, Wrapped,

00:02:20.000 | share with us any of your compound podcasts

00:02:23.360 | that are coming up in your top 10.

00:02:25.080 | We love to see that.

00:02:26.400 | So, share that with us.

00:02:27.240 | I think we're gonna be doing--

00:02:28.080 | - Yeah, we've been getting a lot of that on social media,

00:02:29.840 | that people share it.

00:02:30.680 | It's pretty cool how that works.

00:02:32.080 | - Yeah, it's very cool.

00:02:33.460 | And yeah, we have, even the Ask the Compound

00:02:36.640 | is the youngest show.

00:02:37.640 | So, we're still small and growing fast,

00:02:41.200 | but we had hundreds of people with us in their top 10,

00:02:44.480 | and top five, that kind of thing,

00:02:45.760 | which is very cool to see.

00:02:46.800 | So, really appreciate that.

00:02:49.160 | Our best show of the year, do you have any guesses?

00:02:52.760 | - Oh, I have no idea.

00:02:54.000 | Our best show of the year was,

00:02:56.320 | Is It Crazy to Be 100% Invested in Stocks?

00:02:59.200 | - Oh, interesting.

00:03:00.040 | Okay, I would have never even guessed what it could be.

00:03:02.440 | Okay, good question, I remember that one.

00:03:03.920 | - Yeah, yeah, so that was it.

00:03:05.580 | But yeah, thanks to everyone for listening.

00:03:08.480 | And yeah, if Apple has a similar thing,

00:03:10.800 | then share that too.

00:03:11.720 | - I think they do.

00:03:12.560 | - I know they do for music.

00:03:13.400 | I don't know about for podcasting, but yeah.

00:03:16.660 | And then, the next thing I was gonna say

00:03:17.960 | is just because it's become like a tradition

00:03:20.440 | where we make jokes about everyone's favorite

00:03:23.400 | oat milk stock, I just wanted to say,

00:03:25.960 | it's been a pretty good month.

00:03:28.080 | So, John, if you could chart on of,

00:03:30.920 | this is the way over the last month.

00:03:33.800 | - So, 80% in a month.

00:03:35.560 | - Yeah.

00:03:36.680 | - That's not bad.

00:03:37.520 | All right, John, show the year-to-date return, though.

00:03:39.800 | So, before the show, Duncan actually asked John

00:03:43.000 | to pull up the chart of Oatly on a year-to-date basis,

00:03:45.520 | and he looked at it, he said,

00:03:46.360 | "Wait, wait, wait, this is not what I wanted to see."

00:03:48.240 | Still down 35%.

00:03:51.200 | Pull a good chart, and it's over the one month.

00:03:54.760 | Oh, no.

00:03:55.600 | - Okay, that's all time.

00:03:57.360 | - All time, so this is down 94% from the IPO.

00:04:01.840 | It spiked after the IPO, as well.

00:04:04.320 | - Oh, I was buying it.

00:04:05.560 | - Oh, on the IPO?

00:04:06.680 | Okay.

00:04:07.520 | - Oh, yeah, yeah.

00:04:08.360 | I basically bought it every point along that.

00:04:10.080 | - Amazon was down 95% at the tech bubble.

00:04:13.840 | I mean, same thing.

00:04:15.000 | - Yeah, give me hope.

00:04:15.840 | Help me rationalize holding on.

00:04:17.560 | - All right, first question.

00:04:19.480 | Up first today, we have--

00:04:21.200 | - I'm surprised we haven't gotten anyone

00:04:22.400 | who's written in and said it.

00:04:23.440 | I'm with Duncan here.

00:04:24.520 | I've gotten crushed on Oatly, as well.

00:04:26.760 | - Oh, I've heard it.

00:04:27.600 | Yeah, I've had multiple people reach out and be like,

00:04:29.520 | not just Oatly, but on other things, yeah.

00:04:31.600 | There's camaraderie there.

00:04:33.960 | So, up first today, we have a question from Dave.

00:04:36.160 | I'm still new to bonds, so forgive me

00:04:37.760 | if you've covered this before,

00:04:39.240 | but what are the various outcomes for bonds

00:04:41.000 | if rates rise or fall from here?

00:04:43.060 | I'm trying to figure out the right maturity

00:04:44.680 | for diversifying into treasuries,

00:04:46.200 | and want to understand the risks.

00:04:48.480 | - All right, we've still been getting a heavy influx

00:04:51.240 | of questions about bonds and yields.

00:04:53.960 | It's still a ton of questions, right?

00:04:56.000 | It's plateaued a little bit, for sure,

00:04:57.360 | but I think a lot of people are slowly

00:04:59.320 | but surely preparing themselves for the idea

00:05:01.400 | that the Fed might cut rates in 2024,

00:05:03.880 | which could mean lower cash rates, CD rates,

00:05:06.560 | money markets, savings accounts,

00:05:08.080 | all those things will go down.

00:05:09.520 | So, I think people who've made that move into cash,

00:05:12.440 | and it went from earning 10 basis points at their big bank

00:05:16.340 | to at least earning four or five, maybe more, percent

00:05:19.320 | in T-bills or savings account or money markets,

00:05:21.800 | they've made that leap, but now they're saying,

00:05:23.060 | okay, maybe it has to be more fixed income

00:05:24.940 | so I can actually lock in some.

00:05:26.380 | So, our friends at the US Benchmark Series of ETFs

00:05:29.700 | send us this monthly update, which is pretty cool.

00:05:32.060 | John, throw this chart up here.

00:05:34.340 | So, this is an interest rate scenario analysis tool.

00:05:37.540 | And, of course, different bonds have different maturities

00:05:40.580 | and different durations,

00:05:41.980 | and the yield curve never moves exactly the same.

00:05:45.340 | You don't have a 1% move in every single maturity.

00:05:48.340 | A lot of times these bonds move in different forms

00:05:51.740 | and the interest rate,

00:05:52.740 | the magnitude of the change is different.

00:05:54.180 | So, what Benchmark Series did for us is they looked at

00:05:57.060 | what would happen over a 12-month period to these bonds,

00:06:00.700 | and they show the two-year, three-year,

00:06:02.020 | five, seven, 10, 20, and 30-year treasuries, right?

00:06:04.780 | So, a bunch of different maturities.

00:06:06.340 | What would happen if rates rose 50% or fell 50 basis points?

00:06:11.340 | What if they rose 1% or fell 1%?

00:06:13.340 | So, as an example, we'll show here.

00:06:15.300 | So, the 30-year treasury, if rates were to fall 1%,

00:06:19.020 | is up over 20%, right?

00:06:20.540 | 22% or so over a year.

00:06:23.180 | If rates were to rise 1%, it's down a little less than 10%.

00:06:27.340 | Now, there's this funny term in the bond market land

00:06:30.780 | for this called convexity.

00:06:32.260 | I won't bore you with the details there

00:06:33.620 | because that sounds like a very scientific word,

00:06:35.820 | but all that means is most of the time,

00:06:38.680 | if bond yields fall, your price is gonna rise more

00:06:42.300 | than if bond yields rose, the loss.

00:06:44.340 | So, the gain outweighs the loss.

00:06:46.060 | It's not a one-to-one thing.

00:06:47.860 | But the other thing, throw this back up here, John.

00:06:49.940 | The other thing to look at is a shorter-term bond,

00:06:52.660 | if rates were to fall 1%, you can see the two-year,

00:06:55.500 | it rises 5%, and most of that is the yield right now.

00:06:58.380 | So, you're not gonna get as big a bang for your buck

00:07:00.660 | if yields were to fall in something of a shorter-term bond,

00:07:03.940 | just like you're not gonna see as big of losses, right?

00:07:06.100 | You're not gonna see a loss

00:07:07.020 | because the yield's gonna make up for it.

00:07:08.460 | So, you do have this interesting dynamic now, though,

00:07:12.780 | where if rates rise, your loss is gonna be not that bad,

00:07:17.460 | and if rates fall, your gain is gonna be pretty good,

00:07:20.140 | which was the opposite of what things were like

00:07:22.460 | a few years ago during the pandemic when rates were so low.

00:07:24.860 | So, you have higher yields now.

00:07:26.940 | You have this convexity piece where if yields fall,

00:07:29.820 | you're gonna get a pretty big gain in your bonds,

00:07:32.900 | and if rates rise a little bit,

00:07:34.060 | you're still, you have some shock absorbers there.

00:07:37.620 | - So, wait, you're saying I should tax-loss my OBLY

00:07:39.660 | and buy up a bunch of long bonds?

00:07:42.540 | - Yeah, if you wanna nail,

00:07:43.860 | I mean, rates have already fallen a little bit,

00:07:45.860 | but this is the problem with trying to guess this

00:07:47.700 | is we don't know if interest rates fall,

00:07:52.260 | how much are they gonna fall in the third year

00:07:53.700 | versus the two year versus the five,

00:07:54.940 | we don't know what the magnitude of that fall is going to be

00:07:58.420 | 'cause the variables there are what's the Fed doing,

00:08:00.980 | what's the economy doing, what's inflation doing,

00:08:03.020 | what are bond traders doing,

00:08:04.220 | where are bond people moving your money?

00:08:05.780 | So, the helpful thing about a chart like that

00:08:08.420 | is it shows you what the potential outcomes can be,

00:08:11.700 | and it gives you a range of expectations,

00:08:13.780 | but you just don't know what the magnitude

00:08:16.540 | of those rate changes is going to be.

00:08:18.700 | But that's the idea.

00:08:21.480 | So, if you want bigger bang for your buck if rates fall,

00:08:23.820 | you go further out on the yield curve,

00:08:26.540 | but that means way more volatility, too,

00:08:28.700 | and if rates rise a little bit, you're gonna ding more,

00:08:31.920 | and if you want some more stability,

00:08:33.300 | you stay on the shorter end of things.

00:08:35.700 | That's the idea.

00:08:36.540 | - I think people sometimes paint the bond market

00:08:38.940 | as being very mathematical and easier to predict

00:08:42.740 | than the stock market, but this doesn't really sound like it

00:08:45.820 | if it comes down to--

00:08:47.160 | - No, it is because--

00:08:48.000 | - Someone picking rate times to hike or cut or pause.

00:08:52.300 | - But it is, bond market is more math

00:08:54.100 | because over the long term, call it five to seven years,

00:08:58.220 | your starting yield is gonna explain 90 to 95% of your gain.

00:09:02.260 | So, these are the short-term moves,

00:09:04.420 | and so you kind of know what's gonna happen

00:09:06.740 | based on where rates go from here.

00:09:07.980 | You just don't know where rate's gonna go.

00:09:08.900 | That's the hard part in the short term.

00:09:10.140 | If you're trying to guess the bond market,

00:09:12.420 | you're guessing interest rates,

00:09:13.340 | and that's really, really difficult to do.

00:09:14.660 | So, I talked about this earlier this week on my blog.

00:09:17.440 | The 10-year treasury went from a low to 3.3% this year,

00:09:21.900 | then it shot up to 5% in a matter of months,

00:09:24.940 | and then in the past month, it's gone from 5% to 4.1%,

00:09:28.140 | and no one could have predicted that path of rates.

00:09:30.940 | If you tried to guess that somehow

00:09:33.060 | because you're trying to guess inflation

00:09:34.380 | or economic growth or whatever, good luck with that.

00:09:36.740 | That's why bonds are generally for longer-term people

00:09:41.420 | that want less volatility,

00:09:42.940 | and so if you're trying to guess this

00:09:43.900 | and be like a hedge fund manager,

00:09:44.740 | yeah, it's gonna be a lot harder to do.

00:09:46.260 | So, I would think about it more from the perspective

00:09:48.820 | of a long-term investor

00:09:49.700 | 'cause no one can predict interest rates.

00:09:51.660 | That's the point.

00:09:52.500 | - Got it, makes sense. - All right, next one.

00:09:56.580 | - Okay, up next, I wonder, actually, question on that.

00:10:00.740 | Do you think we're gonna get

00:10:01.580 | as many bond questions in 2024,

00:10:03.280 | or do you think we're gonna see a shift,

00:10:05.060 | a turning point in this?

00:10:06.580 | - That'd be interesting.

00:10:07.420 | I guess it depends where yields go.

00:10:10.100 | But obviously, yields getting to 5%

00:10:11.940 | is one of the things that cause a lot of people

00:10:13.500 | to write us in about bonds,

00:10:14.740 | but it has slowed down a little bit.

00:10:16.020 | - Yeah, yeah, I'm curious.

00:10:16.860 | - We're doing an ask the compound sentiment indicator.

00:10:18.700 | - Yeah, exactly.

00:10:20.100 | Okay, up next, we have a question from Tim.

00:10:22.740 | Sure, it's great that S&P 500 is up 20% this year,

00:10:26.020 | but aren't we just pricing

00:10:26.980 | in the inevitable Fed rate cuts in 2024?

00:10:29.980 | Should we really expect the market to go up again next year

00:10:33.300 | after surprising the upside this year?

00:10:35.080 | Color me skeptical.

00:10:36.360 | Full disclosure, I'm naturally bearish

00:10:38.020 | and take a bit of an anti-bin stance about the markets.

00:10:41.060 | - Wow.

00:10:41.900 | - I kinda like the anti-bin thing here.

00:10:43.660 | This one made me laugh a little bit.

00:10:45.420 | Do you remember Garth Brooks,

00:10:46.980 | I think I've told you this before,

00:10:48.300 | was the greatest selling album musician of all the '90s,

00:10:52.340 | which is very surprising.

00:10:53.180 | - I remember that from the Chuck Klosterman book,

00:10:54.380 | which still boggles my mind.

00:10:55.900 | - But do you remember,

00:10:56.740 | I think he was at the height of his powers,

00:10:57.940 | it was like 1998 or 1999,

00:11:00.220 | and he did this,

00:11:01.460 | he tried to have a rock star persona of Christopher Gaines.

00:11:05.100 | John, show this up here.

00:11:06.600 | This is when Garth,

00:11:07.440 | he did the little mini goatee thing,

00:11:10.880 | and he put a wig on and had his hair go over his eyes,

00:11:12.960 | and he looked a little goth,

00:11:14.440 | and he changed into Chris Gaines,

00:11:15.960 | and everyone's kinda like, "Wait, what?"

00:11:17.400 | And this was his rock star persona.

00:11:18.720 | So I'm thinking maybe I should do that as the anti-bin,

00:11:23.280 | and this is my Doomer personality,

00:11:25.680 | where I have some sort of anti-bin

00:11:27.480 | who's always glass and full optimistic,

00:11:29.720 | and I think of it like his name was Chris Gaines,

00:11:32.520 | I could be Chris Loss, right?

00:11:34.800 | Or Chris Bear, something like that.

00:11:36.740 | - I'm liking it a lot.

00:11:37.860 | - I turn into a perma-bear, I don't know, once a week.

00:11:39.940 | It'd just be fun to try,

00:11:40.860 | like the dollar is going to crash,

00:11:42.400 | there's flames all around me,

00:11:44.220 | and the United States financial system, as we know it,

00:11:47.260 | is over, hyperinflation is coming.

00:11:49.620 | I'm gonna try it.

00:11:50.460 | - I think I would pay money to see this,

00:11:52.220 | so I think this is something I need to do.

00:11:53.060 | - I'll start a newsletter, just full-time perma-bear.

00:11:55.220 | Okay, maybe not.

00:11:56.140 | But this is what makes the market, I guess.

00:11:57.500 | This person is anti-bin.

00:11:58.460 | I appreciate that, if that's your natural inclination,

00:12:01.220 | that's fine, whatever works for you.

00:12:03.720 | Maybe the stock market is pricing in Fed cuts,

00:12:06.220 | 'cause it is forward-looking, after all.

00:12:08.060 | That's what people like to say.

00:12:09.800 | I do like to look at historical market returns

00:12:11.880 | to think about something like this,

00:12:12.800 | 'cause I think what this person is asking is,

00:12:14.340 | okay, sure, the market is up 20% this year,

00:12:16.500 | but what happens after a year is up 20%?

00:12:18.860 | So I like to look at this.

00:12:20.640 | One of my favorite all-time stats of the market

00:12:22.540 | is the fact that over the past 100 years or so,

00:12:25.540 | you've been more likely to see a 20% gain

00:12:27.700 | in a calendar year than a loss.

00:12:29.780 | So not including this year, there's been 34 gains of 20%.

00:12:33.420 | This is them on the screen right now.

00:12:34.700 | There's only been 26 total down years.

00:12:36.740 | Okay, so what happens the year after a 20% or more gain,

00:12:40.800 | going back to 1928?

00:12:41.900 | You can see there's way more green on this screen

00:12:44.200 | than there is red.

00:12:45.040 | So John, keep this up here for a second,

00:12:46.580 | and I'm gonna go through the stats.

00:12:47.740 | So 22 out of the 34 years that we experienced a 20% gain,

00:12:52.580 | the next year was also a gain.

00:12:54.580 | So that's 65% of the time.

00:12:56.480 | Stock market was down 12 out of 34 years.

00:12:58.500 | That's 35% of the time.

00:12:59.620 | The average return was roughly 9%.

00:13:02.200 | Average gain when the market was up was 19%.

00:13:05.180 | The average loss was 9%.

00:13:07.260 | There was 19 double-digit up years following a 20% gain.

00:13:11.860 | You remember the late '90s?

00:13:13.300 | It was 1995 to 1999.

00:13:15.340 | Every single one of those years was a 20% gain.

00:13:17.300 | That's probably part of this.

00:13:19.060 | There were just two double-digit down years

00:13:20.920 | following a 20% gain.

00:13:22.180 | One of them was in 2022.

00:13:23.580 | So 2021 was a big, I think we were up 28 or 29%.

00:13:27.260 | We were down pretty big the next year.

00:13:31.100 | So we are teetering on the edge of a 20% gain this year.

00:13:34.720 | We'll see if Santa comes through by the end of the year

00:13:36.160 | or not and hold onto it, but you can do the chart off, John.

00:13:37.960 | So the returns after a 20% up year

00:13:42.960 | are actually pretty decent, and I guess kind of average,

00:13:46.120 | if you wanna look at it.

00:13:48.000 | There's actually a few more losses in there than gains.

00:13:50.760 | So the other question is,

00:13:52.140 | does one year really impact the next year?

00:13:54.480 | Like, is there a correlation there?

00:13:55.480 | So John, throw up my next chart.

00:13:57.120 | I looked at the average return from one year to the next

00:14:00.640 | when stocks are up, when stocks are down.

00:14:02.520 | When stocks are up big, so call it 15% or more.

00:14:05.320 | And then when stocks are down big,

00:14:06.800 | call it a loss of 15% or worse.

00:14:09.160 | And the average returns are all 10, 11, 12%.

00:14:12.320 | So there's really not much signal here.

00:14:15.520 | There's more, you know, one year doesn't impact the next.

00:14:19.280 | I'm sure you could slice and dice the data a little bit

00:14:21.060 | and try to find something in there,

00:14:22.360 | but that's mostly data mining probably.

00:14:24.460 | So it's certainly possible

00:14:26.840 | that we're pulling forward 2024 returns

00:14:30.080 | 'cause the Fed is gonna cut

00:14:30.960 | and the stock market is getting ahead of it.

00:14:32.760 | But I just think you can't really be smart enough to say,

00:14:35.680 | just because the stock market's up this year

00:14:37.080 | means it's gonna be down next year.

00:14:38.920 | And we're gonna see a Chris Gaines phenomenon

00:14:41.040 | where anti-Benn is going to be right.

00:14:44.240 | I think the thing to remember

00:14:46.200 | about historical return numbers

00:14:47.560 | is that they're helpful to set expectations,

00:14:49.960 | but it's also true that things

00:14:51.080 | that have never happened before in the stock market

00:14:52.920 | seem to happen all the time.

00:14:54.720 | So I think it's just important to prepare yourself

00:14:57.960 | for a wide range of outcomes.

00:14:59.560 | That's my whole thinking

00:15:00.400 | with looking at returns like that

00:15:01.520 | is there's a lot of big up years

00:15:03.320 | and there's a handful of down years

00:15:04.560 | and that's the best I can do for you

00:15:05.960 | is most of the time the stock market goes up,

00:15:08.160 | but sometimes it goes down.

00:15:10.120 | - Do you think perma bears always pick the underdog?

00:15:13.120 | Like if the Panthers are playing the Ravens,

00:15:15.080 | are they going Panthers?

00:15:16.360 | Like are they, is that in their just nature?

00:15:19.040 | - I mean, I've basically been a perma bear my whole life

00:15:21.160 | if I'm rooting for the Lions then, right?

00:15:23.360 | - Okay, so when it comes to sports, you're a perma bear.

00:15:27.400 | - I guess I had to be.

00:15:28.840 | - All right, good.

00:15:29.880 | I'd like a little pushback.

00:15:30.920 | That's a fair question.

00:15:32.120 | Let's do another one.

00:15:33.240 | - Hey, up next we have a question from John.

00:15:37.320 | Before 2022, I was adamant about not paying off my mortgage.

00:15:41.340 | I thought it was a mistake to pay off my previous home

00:15:43.440 | in a low rate environment,

00:15:44.920 | but now with nearly 8% interest rates

00:15:47.160 | and the Tax Cuts and Jobs Act in effect,

00:15:49.960 | I've had a change of heart.

00:15:51.640 | The higher interest rate makes each payment more costly

00:15:55.200 | and I doubt I can consistently be 8% returns

00:15:57.760 | on investments.

00:15:59.480 | The Tax Cuts and Jobs Act,

00:16:01.120 | especially for folks in high tax states like me,

00:16:04.240 | pushes us towards the standard deduction

00:16:06.120 | instead of itemizing,

00:16:07.460 | making the mortgage tax deduction less beneficial.

00:16:10.360 | I'm curious to hear Bill Sweet's thoughts on all of this.

00:16:13.360 | When you ask for Bill Sweet.

00:16:15.120 | - Ask and you shall receive.

00:16:16.640 | Bill gets called out by name here a lot.

00:16:19.400 | Bill, I think this email was actually came to my inbox

00:16:23.120 | and it was, I wrote a blog post a couple of weeks ago

00:16:25.520 | saying that I'm just not a big fan

00:16:26.980 | of paying off a mortgage early.

00:16:28.600 | It's tax advantaged.

00:16:29.720 | It's a good inflation hedge.

00:16:31.880 | What do you think in terms of the tax part of it here?

00:16:34.440 | 'Cause a lot of this seems to make sense to me.

00:16:37.240 | - Yeah, Ben, you're a homeowner and John,

00:16:39.360 | I mean, great, great thought.

00:16:41.640 | Really, John's question has to do with tax deductions

00:16:43.720 | rather than mortgage interest.

00:16:45.120 | And Ben, I find that mortgage interest deductions

00:16:47.480 | for tax purposes, they're generally overrated

00:16:50.280 | and John kind of alluded to why in the question.

00:16:53.120 | So I wanna talk through a little bit of how it works

00:16:55.320 | to kind of set the table.

00:16:56.200 | John, can we throw the chart up

00:16:57.520 | that we slapped together before the show?

00:17:00.360 | So let's start from left to right here.

00:17:02.840 | For those at home, the 2017 standard deduction was $12,000.

00:17:07.400 | This year, that's gonna come in

00:17:08.640 | for married filing joint couples at $27,000.

00:17:11.760 | And what that means is in order to realize

00:17:14.000 | any tax deductions relating to mortgage interest

00:17:16.440 | or property taxes or the like,

00:17:18.480 | you need to exceed that hurdle.

00:17:20.360 | And so due to that Trump era tax cut

00:17:22.840 | that happened back in 2017,

00:17:24.480 | the hurdle's just much higher today

00:17:26.520 | than it was at any time in recent history.

00:17:29.160 | And to illustrate why on the right side,

00:17:30.960 | I say, look, if we're capped at the $10,000

00:17:34.200 | state and local tax deduction,

00:17:35.820 | we would need to deduct more than about $13,000,

00:17:39.160 | $24,000 to $23,000 of mortgage interest

00:17:41.200 | in order to exceed that standard deduction threshold.

00:17:44.400 | In other words, for this example I've illustrated here,

00:17:47.240 | you're paying $24,000 of mortgage interest,

00:17:49.340 | which at 8%, that's a $300,000 loan.

00:17:52.980 | You're only able to deduct the last $6,000

00:17:56.300 | of mortgage interest.

00:17:57.600 | And to put that into terms, John, can we kill the chart?

00:18:00.360 | To put that into dollar amounts,

00:18:01.940 | that's only worth about $2,000.

00:18:03.840 | So Ben, what John's getting at is,

00:18:05.860 | I'm gonna borrow 300K and pay $24,000 to do that,

00:18:10.220 | and I really only get a $2,000 tax break for it, right?

00:18:13.100 | So this is the SALT thing,

00:18:14.340 | especially people on the coast complain about,

00:18:15.940 | people with high incomes.

00:18:16.940 | What does SALT stand for again?

00:18:18.420 | - State and local tax deduction.

00:18:20.100 | Yeah, throw it up on the whiteboard behind me.

00:18:22.300 | - Okay, but so let's say this thing runs up

00:18:26.540 | and that comes back into play.

00:18:27.940 | Is it a better deal then?

00:18:29.500 | - Yes, on a relative basis, right?

00:18:31.440 | Because ultimately,

00:18:32.580 | everybody gets a standard deduction for free.

00:18:34.440 | You don't have to do anything

00:18:35.420 | to earn that standard deduction.

00:18:37.020 | So it would increase the relative tax deduction

00:18:39.600 | of the mortgage interest,

00:18:40.460 | but you're still paying that money out of pocket.

00:18:41.980 | Like, I guess that's the issue.

00:18:43.300 | And just to frame it again in terms of percentages,

00:18:46.060 | we have an 8% pre-tax mortgage rate, Ben.

00:18:49.020 | If we include that $2,000 of tax reduction,

00:18:52.980 | what that's worth when you actually do the math,

00:18:55.420 | that only decreases the mortgage rate to 7.3%, right?

00:18:58.380 | So you're still paying after taxes 7.3%.

00:19:01.220 | Ben, to answer your question,

00:19:02.540 | that would drop the effective mortgage rate

00:19:04.160 | to about 6.8, 6.7%.

00:19:06.480 | But you're still paying after taxes

00:19:08.140 | that amount to borrow money.

00:19:09.460 | And relative to what you can get in a,

00:19:11.160 | let's say a bond fund, a treasury fund,

00:19:13.780 | or some compounding gains,

00:19:15.200 | yeah, I don't think it's as worth it as it was before,

00:19:17.620 | and the taxes are definitely part of that.

00:19:19.180 | - So my thinking was,

00:19:20.300 | I was talking more about the 80% of people

00:19:23.220 | who have a mortgage have a rate 4% or below.

00:19:25.700 | And I thought for those people,

00:19:27.220 | I can't see a world where that makes sense.

00:19:29.140 | But if you're having a 7% or 8% hurdle,

00:19:31.380 | now that makes more sense to me

00:19:33.300 | because it's a bigger hurdle.

00:19:34.660 | However, how much benefit are you really gonna get?

00:19:37.480 | Because if you have a 7% or 8% mortgage,

00:19:39.640 | aren't you hoping to refinance at 5% or 6%

00:19:41.940 | in the coming years?

00:19:42.760 | So if you're paying it off early now,

00:19:45.700 | are you really gonna get that big of a benefit

00:19:46.980 | if you're just going to refinance anyway?

00:19:48.420 | I mean, I guess it's kind of the idea

00:19:50.100 | of making a bigger down payment now for that.

00:19:52.580 | But I can see the benefit if you have a 7% or 8%

00:19:55.580 | over 30 years, the life of the loan,

00:19:57.940 | but what if you're gonna have it for two years

00:19:59.460 | and you're gonna refinance at six in a couple years?

00:20:02.380 | Does it still make sense to repay it early?

00:20:04.660 | That's where I think you can kind of think through like,

00:20:06.500 | oh, well, maybe it doesn't.

00:20:07.620 | - Yep, and so fair point.

00:20:08.860 | So I think Ben, the way to actually solve the equation,

00:20:11.540 | again, like a mortgage, typically,

00:20:12.960 | you're looking at 15 to 30 years.

00:20:14.680 | So yes, you can refinance, yes, you can move,

00:20:16.600 | but what do you know what you're refinancing to?

00:20:18.760 | I think it comes down to arbitrage.

00:20:20.240 | What can I earn on my cash or short-term investments

00:20:23.160 | in the market relative to what am I paying?

00:20:25.440 | And I think you do have to do the tax math

00:20:27.120 | on either side to get an actual answer.

00:20:29.200 | And right now it favors paying down that mortgage

00:20:31.440 | if you're, I'd say above 6%, 7%.

00:20:33.960 | - And what's your, not only the investment hurdle,

00:20:36.800 | what's your liquidity profile?

00:20:38.520 | Because putting that money into a mortgage

00:20:40.000 | means liquidity is drained and you're not gonna see it

00:20:42.940 | versus you could say, I can earn 5% in T-bills right now,

00:20:46.100 | but I get 8% in the mortgage if I'm paying it off,

00:20:47.900 | but that 5% gives me more flexibility and more optionality.

00:20:51.800 | And that could be,

00:20:52.640 | so I think that's what you have to weigh as well.

00:20:53.740 | How much liquidity and flexibility

00:20:55.380 | do you have in your finances?

00:20:56.220 | - Precisely, and so for my 15-year career, Ben,

00:20:58.180 | I usually have not been in favor of paying the mortgage off,

00:21:00.380 | but the math changed a lot this year.

00:21:02.620 | - Yeah, I agree.

00:21:03.860 | Looking at a 7% or 8% mortgage,

00:21:05.100 | I would be thinking much harder

00:21:06.660 | about making a bigger down payment

00:21:08.060 | or making bigger payments.

00:21:10.120 | - Amen, you've got it.

00:21:11.660 | - All right.

00:21:12.500 | - Sorry, guys, I zoned out there for a second.

00:21:13.720 | I'm of the generation who can only dream

00:21:15.760 | of owning a home at some point, so.

00:21:18.060 | - I was gonna say, what's anti-Duncan doing these days?

00:21:20.520 | Duncan, what's your alter ego?

00:21:21.760 | Does he eat pork and ribs and fry steak?

00:21:24.320 | Like, what does this dude do?

00:21:25.720 | - Probably, like heavily, heavily into fossil fuels.

00:21:28.720 | Yeah, something like that.

00:21:29.560 | - He's buying a stock that trades on real milk instead of--

00:21:32.080 | - Drives a Ford F-350?

00:21:33.280 | - Yeah, rolling coal in a dually or something, yeah.

00:21:35.360 | - Drinks milk directly from the cow's udder.

00:21:37.520 | - Yeah, there you go.

00:21:38.820 | - All right, next question.

00:21:40.260 | - All right, up next we have a question from Wade.

00:21:43.280 | I recently retired in my 50s,

00:21:44.820 | and while 80% of my portfolio is in index funds,

00:21:47.820 | I have a substantial amount tied up in Microsoft from RSUs.

00:21:52.280 | You guys will have to remind me what that stands for.

00:21:54.760 | This position now accounts for almost 15%

00:21:56.620 | of my total portfolio

00:21:57.820 | and a hefty 30% of my after-tax assets.

00:22:01.320 | It's a great company,

00:22:02.160 | but even great companies face challenges,

00:22:03.940 | and I'm concerned about having too much in one stock.

00:22:06.660 | The long-term capital gains on this position

00:22:09.200 | are substantial due to my low-cost basis of $60 a share.

00:22:12.820 | Wow, not to brag.

00:22:14.560 | I've been gradually selling and diversifying into ETFs,

00:22:17.260 | but the stock keeps rebounding,

00:22:18.840 | leading to an overweight position.

00:22:20.520 | I'm considering holding it long-term for heirs

00:22:23.440 | with a stepped-up basis or donating it to charity,

00:22:26.120 | but I'd like to hear your suggestions.

00:22:28.060 | - John, real quick, first of all,

00:22:29.400 | congrats to Wade for retiring in his early 50s.

00:22:31.360 | I guess that Microsoft stock paid off pretty well.

00:22:33.320 | John, show up the chart.

00:22:34.680 | Microsoft actually hit new all-time highs recently.

00:22:36.520 | The stock market is still close.

00:22:37.600 | Microsoft was there.

00:22:38.700 | - Amazing.

00:22:39.540 | - So he said he's got a $60 cost basis,

00:22:40.720 | and he's at $370 for Microsoft stocks, so not bad.

00:22:44.520 | One of the--

00:22:45.360 | - $300 per share of capital gains, yeah.

00:22:47.120 | That's great.

00:22:47.960 | - That's pretty good.

00:22:48.780 | - One of the two biggest stocks that there is.

00:22:49.840 | So it sounds like he made off pretty well here.

00:22:53.000 | I guess, first of all, 15% doesn't sound egregious to me.

00:22:56.220 | We've heard way higher numbers than that.

00:22:58.040 | We've heard people come to us with 90% of their net worth,

00:23:01.960 | liquid net worth in their company stock.

00:23:03.780 | So 15% doesn't sound terrible to me,

00:23:05.360 | but it sounds like he is just worried

00:23:07.320 | that that's still a big chunk,

00:23:09.000 | especially if you had index funds.

00:23:10.640 | Microsoft is the second largest company,

00:23:12.280 | so you already had exposure there as well.

00:23:14.280 | So maybe you don't want to overexpose yourself.

00:23:15.800 | So what are the options here?

00:23:18.160 | 'Cause it sounds like he's up for anything.

00:23:20.320 | - Yeah, and so Wade, I mean, first off, Ben,

00:23:23.120 | like you mentioned, Wade's kind of built his portfolio

00:23:25.520 | around this position.

00:23:26.960 | I think that's the intelligent thing.

00:23:28.160 | Wade's done a lot, I think, to kind of help with this.

00:23:30.720 | But the reality has been, as far as index funds,

00:23:33.180 | Microsoft makes up 7% of the S&P 500 index today

00:23:36.560 | and 10% of the NASDAQ composite.

00:23:38.400 | And so it's not just the stock that he owns directly,

00:23:41.480 | but if you own an index passive weighted portfolio,

00:23:43.960 | you own more.

00:23:45.180 | But again, Wade, you've done--

00:23:46.020 | - Also, Duncan, sorry, RSU, Restricted Stock Unit.

00:23:48.760 | - Yeah.

00:23:49.600 | - Yeah, actually, Wade's in the chat.

00:23:50.560 | Wade just answered my question.

00:23:52.160 | - He answered your question.

00:23:53.000 | Wow, a listener question.

00:23:54.560 | Wade's gonna answer your question, Duncan,

00:23:56.280 | during the show today.

00:23:57.120 | - For the record, that was gonna be my guess.

00:23:58.760 | - Great, great, yeah.

00:23:59.580 | - I just couldn't remember

00:24:00.420 | if it was restricted or registered.

00:24:01.560 | - Yeah, so he got paid in company stock.

00:24:03.740 | And again, that worked out tremendously.

00:24:05.180 | And congrats, Wade.

00:24:06.180 | 'Cause ultimately, this is what victory looks like, Ben.

00:24:08.400 | I mean, this is what you would want

00:24:09.460 | your portfolio to look like.

00:24:10.500 | These are problems that I want to have, right?

00:24:13.200 | - The other side of the equation is,

00:24:14.340 | I had 15% in this stock, and it crashed, and now it's 3%.

00:24:17.700 | - Yeah, and there's that famous Reddit post of ExxonMobil.

00:24:21.020 | You can go through the names of companies

00:24:22.600 | that were the largest, Kodak, Eastman, et cetera.

00:24:25.740 | So I think this would be my order of operations

00:24:28.780 | for Wade in the chat.

00:24:29.900 | Number one, I would decide

00:24:31.160 | what percentage are you comfortable with,

00:24:32.560 | and let that be your North Star,

00:24:34.080 | and let that be the thing that you're building towards.

00:24:36.040 | And if that's 10%, I think that's completely reasonable.

00:24:38.960 | To your point, Ben, 15% doesn't sound that crazy to me.

00:24:42.000 | So I don't think you're far away

00:24:43.200 | from what I would recommend.

00:24:44.880 | Now, and that might be 5% though.

00:24:46.840 | You might not want to take on that risk

00:24:47.960 | going into retirement.

00:24:48.920 | I think you'd have to sit down,

00:24:50.100 | maybe with a competent certified financial planner

00:24:52.080 | at Real Wholesale Wealth Management,

00:24:53.200 | or otherwise, I'm a company man, and whittle that down.

00:24:55.960 | So that brings us to number two.

00:24:57.840 | How do you start to whittle this thing down?

00:24:59.520 | Wade kind of hit, for me, the number one option,

00:25:02.140 | and he mentioned it in his question,

00:25:04.100 | which is charitable donations.

00:25:06.040 | Ben, a donation to a donor advised fund in property,

00:25:08.880 | you do not have to pay the capital gain on the transaction.

00:25:12.080 | So Wade would say for each share he donates,

00:25:13.840 | he's saving $300 of capital gains income,

00:25:16.440 | and that probably translates to $600 of tax.

00:25:19.800 | However, you also get to take a deduction

00:25:22.880 | at the market value.

00:25:24.000 | And so at $370 a share,

00:25:25.920 | he's able to not only avoid capital gains,

00:25:27.680 | but then he gets the deduction too.

00:25:29.340 | So just hypothetically, if he's paying,

00:25:31.120 | if he donates $10,000, let's say,

00:25:33.120 | he would avoid a $2,000 capital gains tax,

00:25:35.440 | and he would get a $3,000 tax deduction.

00:25:37.320 | So $10,000--

00:25:38.160 | It's like a double whammy,

00:25:39.240 | avoiding paying taxes and saving taxes.

00:25:41.800 | Double benefit, I wouldn't even call it a whammy, Ben.

00:25:43.520 | Yeah, double whammy.

00:25:44.840 | It's like a double boost.

00:25:45.820 | But to think about it conceptually,

00:25:47.560 | Wade would donate $5,000 after taxes, right,

00:25:50.800 | to be 10K on the transaction,

00:25:52.560 | but after the tax benefits,

00:25:54.000 | he'd still have 5K net market value,

00:25:56.240 | but the charity would get the full $10,000.

00:25:58.400 | So it's basically a way to turn 5,000 into 10

00:26:00.640 | for the charity.

00:26:01.480 | I think that's a great way to play the game.

00:26:03.340 | And the way I would do that, Wade, is bunch.

00:26:05.300 | So if you're gonna think forward,

00:26:07.220 | bunch all your charitable projections,

00:26:08.520 | the money you're gonna give to your church,

00:26:10.300 | to your charity, to the local library,

00:26:12.100 | do that all for five years.

00:26:13.540 | Do it in one tax year.

00:26:14.500 | Take all that tax deduction up front.

00:26:16.660 | Once the transaction occurs through donor-advised fund,

00:26:18.700 | you can sell that position capital gains tax-free

00:26:20.780 | and effectively rebalance that portfolio

00:26:22.620 | with now a large charitable component.

00:26:24.780 | Now, what if Wade is not Mother Teresa

00:26:26.300 | and doesn't wanna just give away his wealth?

00:26:27.940 | Yeah, yeah.

00:26:28.780 | Yeah, so totally.

00:26:29.600 | So Wade might need it.

00:26:30.440 | And so I think that the next thing for me would be,

00:26:32.420 | again, over time, to look for ways

00:26:34.540 | to offset gains with losses.

00:26:36.180 | So Wade mentions he's running an index-based portfolio.

00:26:40.220 | I would probably-

00:26:41.060 | How about 10% of your portfolio, let Duncan manage it.

00:26:43.640 | (laughing)

00:26:45.900 | I'll add in some tax loss.

00:26:47.680 | Yeah.

00:26:48.520 | Put it in a not-cow stocks.

00:26:49.780 | Yeah, and then, but ultimately, yeah,

00:26:51.940 | I would seek ways to potentially realize

00:26:54.100 | some capital losses, right,

00:26:55.620 | and offset those gains with losses over time.

00:26:57.660 | And again, if he's at 15,

00:26:59.060 | and he said he'd make a target of 10%,

00:27:01.020 | over the next three tax years,

00:27:02.180 | Wade mentioned he's thinking about retirement,

00:27:03.580 | so income should be lower today

00:27:05.300 | than maybe it was two years ago, three years ago.

00:27:07.580 | Begin to whittle that down in chunks, right?

00:27:09.280 | So you don't have to do it all in one year,

00:27:11.180 | but in January, realize a bunch of capital gains

00:27:13.620 | and then seek opportunities with that capital

00:27:15.700 | that you reinvested to look for tax losses

00:27:19.460 | throughout the rest of the year.

00:27:20.320 | That's probably the game to play.

00:27:21.540 | And look, if the markets go up

00:27:22.960 | and you don't get those tax losses,

00:27:24.420 | again, you won the game then twice, Wade.

00:27:26.340 | So, and for me, Ben, if you won the game,

00:27:28.820 | it's time to stop playing.

00:27:30.500 | - Right, and you always say, like,

00:27:32.540 | listen, it's no fun to pay those taxes,

00:27:35.140 | but it also means that you won.

00:27:36.500 | It's better than the alternative.

00:27:38.140 | So if he wants it or needs to use it or whatever,

00:27:41.260 | and he actually said in the chat here,

00:27:42.660 | he's looking for a 10% overall target.

00:27:44.100 | So take it down five more percent.

00:27:45.900 | So if you have to pay those taxes, that's also paid.

00:27:47.980 | So you could do a combination there too.

00:27:49.860 | You could give some to charity.

00:27:50.820 | You could sell some of them off to lock in the gains

00:27:53.540 | to more diversify. - Exactly.

00:27:54.380 | - He also says his main holding is BTI.

00:27:58.620 | Is there an easy way for people to be able to see

00:28:00.860 | the overlap and like what their actual percentage

00:28:03.180 | of a holding like that? - Just Vanguard.com.

00:28:05.100 | I mean, yeah, that would be it for me.

00:28:07.060 | - But I mean, to see your portfolio

00:28:08.580 | and see across all of your ETF holdings

00:28:10.740 | and your single stock. - Yeah, portfolio.

00:28:11.740 | X-Ray Morningstar had a product a couple of years ago

00:28:13.980 | that was free for subscribers. - Yeah, there's a few

00:28:15.260 | free stuff that you can do there.

00:28:16.620 | - The other thing, and again, I'm a company man,

00:28:17.980 | so I need to mention this,

00:28:18.820 | but there are companies that'll do tax-less harvesting

00:28:20.880 | for you, right?

00:28:21.720 | So Ritholtz Wealth Management,

00:28:22.900 | we have a partnership with O'Shaughnessy Asset Management

00:28:25.480 | at Canvas.

00:28:26.460 | We run, I mean, my portfolio is at Liftoff,

00:28:28.720 | which is a Ritholtz Wealth platform

00:28:30.420 | that's run through Betterment.

00:28:31.380 | And tax loss has happened while I sleep

00:28:33.540 | for my portfolio. - Hold that thought.

00:28:35.180 | Next question is right on this.

00:28:36.840 | That's a cool transition. - Let's do it.

00:28:37.680 | - Bill says Ritholtz Wealth Management.

00:28:38.940 | One more time, he turns into a pumpkin.

00:28:41.060 | - I'm a company man, though. - All right, next question,

00:28:42.380 | and we'll talk a little bit about this other option

00:28:45.160 | of direct investing.

00:28:46.060 | So let's do it. - Let's do it.

00:28:46.900 | - Last but not least, we have a question from Sam.

00:28:49.740 | I'm 38 and have $175,000 in a brokerage account,

00:28:52.940 | mostly in U.S. large-cap index funds.

00:28:55.400 | My federal tax rate is close to 35%.

00:28:58.260 | An advisor suggested an SMA that does tax-less harvesting

00:29:02.760 | to boost returns while being tax-efficient.

00:29:05.180 | Is this a good idea?

00:29:06.720 | Can it consistently outperform the market

00:29:08.540 | after accounting for taxes?

00:29:10.060 | The fees are 10 to 15 times higher than low-cost ETFs,

00:29:14.100 | but I'm tempted if it can help my long-term savings.

00:29:17.620 | What do you think about this strategy?

00:29:19.780 | - Okay, so the fees sound high,

00:29:21.360 | but VTI is three basis points,

00:29:23.200 | so we're talking 30 to 45 basis points,

00:29:25.780 | whatever, for this SMA.

00:29:26.620 | - Also, sorry to interrupt,

00:29:27.580 | but that's a separately managed account, right?

00:29:29.900 | I hear this term thrown around a lot.

00:29:31.380 | What exactly does that mean, the cliff notes of that?

00:29:33.700 | - So it's like you're buying and selling

00:29:35.100 | the actual individual holdings yourself

00:29:36.700 | as opposed to buying an ETF for a mutual fund.

00:29:38.780 | So Bill mentioned, we do direct indexing,

00:29:40.740 | and one of the reasons we do it for

00:29:42.620 | is people who have a large position with a gain,

00:29:45.860 | and then what you do is you turn up

00:29:46.940 | the dial on tax-loss harvesting

00:29:48.260 | to try to offset some of those gains,

00:29:51.100 | and you can't always do it one for one,

00:29:52.740 | but that's the goal.

00:29:54.620 | And then so the question is,

00:29:56.920 | for Sam here who asked the question,

00:29:58.820 | is it worth it to pay higher fees?

00:30:01.900 | Does the tax-loss harvesting piece

00:30:03.540 | more than make up for those higher fees?

00:30:06.260 | So for people who aren't aware,

00:30:07.460 | direct indexing is essentially,

00:30:09.700 | instead of buying an S&P 500 index fund,

00:30:12.500 | an SPY or VTI, that sort of thing,

00:30:15.100 | from iShares or Vanguard or Charles Schwab,

00:30:17.740 | I'm gonna have this company buy all 500 stocks for me

00:30:20.740 | in proportion to the way that they are,

00:30:22.060 | and they can also do some tax-loss harvesting

00:30:23.720 | 'cause in that 500 mix,

00:30:25.500 | some of those stocks are gonna go down each year,

00:30:28.100 | and we're gonna sell off the losers

00:30:29.460 | to lock in those gains as losses,

00:30:32.140 | and that's how tax-loss harvesting works.

00:30:34.180 | - Yep, precisely. - What did I miss, Bill?

00:30:36.820 | - Yeah, that's it, and that did directly bend your point.

00:30:39.300 | We segued directly in this from Wade's question.

00:30:41.500 | This is one way to potentially solve

00:30:43.020 | a concentrated position,

00:30:44.700 | and that if you have an algorithm

00:30:46.540 | that's trading to mimic an index for you,

00:30:49.580 | you can effectively set the dials

00:30:50.980 | such that you can lock your capital gains.

00:30:52.740 | You can tell the algorithm

00:30:53.940 | what you want your capital gains to be,

00:30:55.580 | and it'll figure it out over the course of a year

00:30:57.700 | if you give it enough time. - Right, you're essentially

00:30:58.540 | creating a customized index fund

00:31:00.620 | with a tax-loss harvesting piece on top of it.

00:31:02.700 | - Yep, so yeah, I think concentrated positions

00:31:05.260 | make a lot of sense.

00:31:06.340 | If there's a lot of capital gains activity,

00:31:08.180 | let's say, elsewhere in your portfolio,

00:31:09.940 | if you're a real estate manager

00:31:11.140 | or you're buying and selling properties,

00:31:12.980 | there's sometimes a lot of gains,

00:31:14.100 | depreciation, recapture going out there.

00:31:16.420 | And I guess the question,

00:31:18.180 | can a strategy outperform is unanswerable, right?

00:31:21.660 | A lot of strategies outperform,

00:31:22.980 | a lot of strategies underperform a baseline index.

00:31:25.700 | I think for us, Ben, kind of our philosophy is,

00:31:28.700 | don't make things too complex, right?

00:31:31.460 | And so most of our exposure is index-based.

00:31:34.540 | I think that's the way to go.

00:31:35.700 | However, O'Shaughnessy, other companies,

00:31:37.260 | they do have specialties,

00:31:38.540 | and so they might factor weight is a great example

00:31:41.340 | to get a little bit of active passive exposure.

00:31:43.660 | And that does help a lot.

00:31:44.660 | Another really neat application

00:31:46.460 | of directing indexing through an SMA

00:31:48.340 | is you can effectively screen out portfolios.

00:31:50.260 | So in our example, you would not, for Wade,

00:31:53.020 | in the previous question,

00:31:54.100 | buy additional Microsoft stock, right?

00:31:56.300 | So instead of shorting it or some other instrument,

00:31:58.580 | you just use the direct index.

00:32:00.500 | And Canvas, the name says it all.

00:32:02.620 | It's a blank Canvas.

00:32:03.500 | And so you can paint the picture--

00:32:04.980 | - And you can basically X out.

00:32:05.940 | I want S&B 500 X Microsoft, if you want it.

00:32:08.780 | The other thing is, what I wanna ask here for Sam

00:32:10.700 | is what are the cases where, okay,

00:32:12.860 | 'cause a lot of people come to us

00:32:14.060 | who have complicated tax pictures

00:32:15.540 | or state planning or whatever,

00:32:16.380 | and Canvas makes a lot of sense to them.

00:32:18.060 | When does this type of strategy not make sense?

00:32:20.420 | Is there a tax rate or an amount of money?

00:32:22.900 | Where do you go?

00:32:23.740 | You know what, it's not worth the hassle.

00:32:26.180 | - Yeah, I think one big thing that comes to mind, Ben,

00:32:28.620 | if most of your assets are in tax-qualified accounts,

00:32:30.740 | like you're not gonna get any benefit

00:32:31.780 | from tax-less harvesting.

00:32:32.780 | You would get benefits from factor weighting

00:32:34.260 | and other methodologies.

00:32:35.980 | But yeah, investing is more or less a problem

00:32:38.500 | that's been solved,

00:32:39.540 | specifically through the vanguardization,

00:32:41.700 | lower-cost active exposure.

00:32:43.500 | So I think the other primary factor

00:32:45.340 | would simply be a lower-asset portfolio, right?

00:32:48.500 | So if and when, until we have fractional shares available,

00:32:51.420 | you know, buying a share of Microsoft,

00:32:52.740 | as we discussed in the last question,

00:32:53.900 | is going to cost you $370.

00:32:55.420 | So to replicate that for a $10,000 portfolio

00:32:58.100 | is nearly impossible.

00:32:59.500 | So that's why fractionalization does occur

00:33:01.780 | with ETFs and other accounts.

00:33:03.340 | But yeah, for me, it's a cost-benefit.

00:33:05.220 | Are the benefits I'm gonna get

00:33:06.900 | from tax-less harvesting and other factors,

00:33:09.300 | are those gonna outweigh the additional cost

00:33:12.020 | that Sam lays out, that I'm gonna pay a manager

00:33:15.220 | to manage this for me?

00:33:16.260 | And again, I think that typically happens, Ben,

00:33:18.180 | at higher tax rates.

00:33:19.220 | So we're talking higher-income folks

00:33:20.700 | and higher dollar amounts.

00:33:21.980 | Fortunately or unfortunately.

00:33:22.820 | - So him, in this question,

00:33:24.100 | he said we're up near the 35% range.

00:33:26.260 | That's probably a pretty good candidate

00:33:27.540 | for tax-less harvesting.

00:33:28.380 | - I would think so, especially if he's in a high-tech state

00:33:30.100 | like our guy, John, in the first question, right?

00:33:32.660 | So unfortunately, it depends.

00:33:34.900 | But that's the sketch that I'd play.

00:33:36.540 | And again, I can't say it more strongly.

00:33:38.740 | Like, we are playing this game for our clients.

00:33:40.260 | So we do think that there's a lot of value here.

00:33:41.900 | - And I think this, the hard thing for a lot of people

00:33:44.300 | who are retail investors is,

00:33:45.620 | this is really more of a financial planning tool

00:33:48.140 | than it is an investment tool.

00:33:49.260 | It can help with investing,

00:33:50.260 | but I think you need someone helping you with it

00:33:52.540 | who knows what they're doing.

00:33:53.740 | Because it'd be hard to do something like this on your own

00:33:56.540 | and know when to turn that dial up and turn it down,

00:33:58.140 | depending on your tax situation.

00:33:59.660 | It's financial planning software,

00:34:00.940 | even though it's really applied to investments.

00:34:03.380 | - Just to give our guys on the team a big shout out,

00:34:05.540 | Patrick Haley, Dylan Klonder, Alex Messer, Nick Gomes,

00:34:08.340 | the folks that put this together for us on our company,

00:34:11.020 | they're the ones who implement this.

00:34:12.420 | And what we learned over the last three, four years

00:34:14.820 | of working with Canvas, looking at our Shaughnessy,

00:34:16.780 | a lot of work has to go in upfront to get this right,

00:34:18.580 | to fine tune all the dials.

00:34:20.100 | And it does take that amount of expertise.

00:34:21.780 | And so some advice is worth paying for, in my opinion.

00:34:23.940 | - Right, it's run by an algorithm,

00:34:25.540 | but there's a lot of heavy lifting manual labor

00:34:27.380 | that's done upfront to make sure that algorithm

00:34:29.060 | is doing what you want it to do.

00:34:30.020 | - I'm not gonna say the company we work for again,

00:34:31.460 | 'cause Duncan will jump out of a New York City window,

00:34:33.300 | but you know what I'm talking about.

00:34:36.460 | - Everyone knows, everyone knows.

00:34:38.860 | Speaking of algorithms, though,

00:34:40.620 | you just made me think of something John was just telling,

00:34:43.660 | John, our chart on John was just telling us

00:34:46.100 | about the other day.

00:34:47.220 | He went somewhere in New York City that has coffee

00:34:51.020 | that's served by a robot.

00:34:53.140 | And I jokingly asked, did it ask for a tip?

00:34:56.220 | And he was like, yes, actually.

00:34:58.140 | On the screen, it asked if I wanted a tip.

00:35:00.460 | What part of the economy, you know,

00:35:01.820 | like what part of the cycle are we at

00:35:03.100 | when we have robots asking for tips

00:35:05.460 | and people giving them, apparently?

00:35:07.660 | - I mean, Robert Cialdini is gonna be running these things

00:35:10.420 | and people are gonna be just handing their money over.

00:35:12.140 | - I'm not tipping a Keurig, Duncan,

00:35:13.460 | if that's where you're going.

00:35:14.420 | Like, that coffee tastes like ass, so I'm not doing it.

00:35:17.380 | - Well, this wasn't that.

00:35:18.580 | This was like an actual robotic arm

00:35:20.140 | that like moved the cup over

00:35:21.260 | and put it down on the counter for him and stuff.

00:35:22.940 | It was kind of cool.

00:35:23.780 | - If you don't drink coffee, you don't have to tip.

00:35:24.860 | That's my strategy.

00:35:25.780 | - Hey, those GPTs don't pay for themselves, you know.

00:35:28.100 | - It's true, that's true.

00:35:29.500 | - All right, thanks as always

00:35:30.380 | to my personal tax consultant, Bill Sweet.

00:35:32.740 | - Got your back. - Appreciate it.

00:35:35.180 | Thanks to Duncan for sharing his portfolio once again.

00:35:38.180 | Oatly's gonna have a Santa Claus rally, Duncan.

00:35:39.700 | It's coming.

00:35:40.940 | - We'll see.

00:35:41.780 | - Remember, email us, askthecompoundshow@gmail.com.

00:35:44.140 | Thanks to everyone in the live chat.

00:35:45.180 | That was nice.

00:35:46.020 | We had Wade in here listening to his own question today.

00:35:48.780 | That was fun.

00:35:49.780 | Subscribe, rate, review, all that kind of stuff.

00:35:51.620 | If you're watching on YouTube,

00:35:53.140 | leave us a comment or a question in there.

00:35:54.320 | We always appreciate it.

00:35:55.540 | And we'll see you next week.

00:35:56.580 | - Thank you. - See you, everyone.

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