How Do I Lock In Higher Yields on My Cash?

00:00:00.000 | I think we're actually live.

00:00:12.180 | Welcome back to Ask the Compound, where we just did 10 minutes of a show for no one,

00:00:16.160 | because technology wasn't working.

00:00:18.200 | I think we're back now.

00:00:19.920 | All right.

00:00:20.920 | Yeah, I think it's working now.

00:00:22.400 | I think it's working now.

00:00:23.400 | All right.

00:00:24.400 | Welcome back, everyone.

00:00:25.400 | And welcome back, Duncan, from a trip to Germany.

00:00:27.680 | Yeah, I'm having deja vu.

00:00:30.040 | I feel like we already did this.

00:00:32.160 | Yeah, it's like we already talked about it.

00:00:33.160 | All right.

00:00:34.160 | Yeah, thanks, everyone, for coming out.

00:00:35.160 | Good to be back.

00:00:36.160 | I already have been chatting about this now, but, yeah, got to drive on the Audubon.

00:00:40.320 | Had a lot of fun.

00:00:41.320 | Drove a M-series BMW.

00:00:42.320 | Hit, like, 118 miles an hour.

00:00:43.320 | It was a lot of fun.

00:00:44.320 | Happy to be back on the show with Ben there.

00:00:48.120 | I was jealous last week seeing you on with Bill, so.

00:00:51.600 | Did you get to watch from Germany?

00:00:52.840 | Yeah.

00:00:53.840 | Yeah, I watched some of it.

00:00:55.200 | Okay.

00:00:56.200 | All right.

00:00:57.200 | Welcome back, everyone.

00:00:58.200 | This week on The Compound is brought to you by Bird Dogs.

00:00:59.680 | John, go ahead and throw up our Bird Dog picture from Future Proof a few weeks ago.

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00:01:30.960 | October and I've still been wearing my Bird Dog shorts.

00:01:33.080 | I thought I'd have to change over to ... I mean, before the world comes to an end, I

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00:02:08.040 | Okay.

00:02:09.040 | Thanks to everyone in the live chat for sticking around.

00:02:12.120 | You missed a live show with Duncan and I just for the two of us for 10 minutes.

00:02:16.040 | Yeah.

00:02:17.040 | You had a really good answer to that first question too, so yeah, we'll do it again.

00:02:20.400 | I got a lot of practice.

00:02:21.680 | Let's run it back.

00:02:22.680 | We'll do it live.

00:02:23.680 | Okay.

00:02:24.680 | Let's do it live though, because it feels disingenuous to do it more than once because

00:02:28.120 | you feel like you're not giving it your all.

00:02:30.240 | I could never be an actor and do multiple takes.

00:02:31.880 | I would have to be in only Clint Eastwood movies because he only does one take, right?

00:02:35.080 | Yeah.

00:02:36.080 | That's it.

00:02:37.080 | Yeah.

00:02:38.080 | He's famous for that.

00:02:39.080 | Yeah.

00:02:40.080 | I know.

00:02:41.080 | It feels weird.

00:02:42.080 | It feels weird.

00:02:43.080 | Also in the chat, the chat was going great.

00:02:44.080 | Everyone's talking.

00:02:45.080 | I thought we were live.

00:02:46.080 | I had no idea.

00:02:47.080 | They were conversing like nothing was wrong.

00:02:48.080 | All right.

00:02:49.080 | Let's do it.

00:02:50.080 | All right.

00:02:51.080 | Here we go.

00:02:52.080 | First today, we have a question from Kevin that I feel extra good about reading now.

00:02:53.680 | Kevin writes, "I've always wanted to do my own Not to Brag, so here it goes.

00:02:56.800 | I'm 33 and have $300,000 spread between a Roth IRA, Roth 401k, and a taxable account,

00:03:02.520 | all in VTI and VOO.

00:03:04.240 | I own my home and have $75,000 cash.

00:03:07.160 | I don't really understand bonds other than when rates go up, they go down in price and

00:03:10.720 | vice versa.

00:03:12.280 | TLT, the 20-year bond ETF, has crashed since rates started going up in 2022.

00:03:18.600 | Assuming we're near the end of the rate increase cycle, even if rates stay higher for longer,

00:03:23.640 | why shouldn't I put $50,000 in TLT?

00:03:26.560 | If I hold it for a few years, it stands to reason that rates will be cut when inflation

00:03:30.520 | concerns are behind us or the Fed has to respond to a true recession.

00:03:34.200 | How high can rates actually go from here?"

00:03:36.080 | And then they say, "This just doesn't seem that risky long-term."

00:03:38.920 | All right.

00:03:40.360 | Famous last words from Kevin here.

00:03:42.000 | Nice job on the Not to Brag.

00:03:43.960 | Let's look at the chart, John.

00:03:45.040 | Long-term bonds have crashed in a big way.

00:03:47.560 | This is TLT, the 20- to 30-year Treasury bond ETF.

00:03:50.640 | It's down over 46%.

00:03:52.220 | This includes income, which hasn't been very much in the past few years, by the way.

00:03:55.240 | If you include inflation on here, we're talking about like a 60% crash, 60% plus in about

00:04:01.360 | three years, which is kind of crazy because the period from like 1950 to 1981, long-term

00:04:06.540 | bonds were down, I think, 70% on a real basis, inflation-adjusted basis.

00:04:10.360 | That took 30 years.

00:04:11.840 | We've done what happened in 30 years in about three years.

00:04:14.440 | And if you look at this chart, I counted, I think, seven separate corrections of 10%

00:04:17.720 | or worse since the inception of this fund in the early 2000s, and interest rates were

00:04:21.200 | falling for most of that period.

00:04:22.520 | So long-term bonds are no joke in terms of volatility.

00:04:25.520 | Obviously, the crash right now is another way of saying that yields have gone up.

00:04:29.200 | And so if we look at the characteristics of this fund, John put that on, this is the characteristics

00:04:33.840 | of TLT.

00:04:34.840 | I highlighted two variables here.

00:04:36.820 | One is average yield maturity, which is now over 5%, which seemed unfathomable, I don't

00:04:41.640 | know, 24 months ago that you'd go from 1% to 5%, which is kind of crazy that you can

00:04:46.200 | lock that in.

00:04:47.600 | The other one is effective duration.

00:04:49.600 | So Kevin is right.

00:04:50.600 | If bond yields rise, prices fall.

00:04:53.080 | If bond yields fall, prices rise.

00:04:55.040 | So what duration tells us is that relationship between interest rates and bond prices.

00:04:59.640 | So with an effective duration of 16.3 years, what this would tell us is basically for every

00:05:05.480 | 1% move in this bond, rates up or down, it's going to move 16%, 16.3% or so in price.

00:05:12.260 | Not exactly precise, but pretty close.

00:05:14.660 | So rates fall 1%, you're up 16% plus whatever yield you're getting, which is pretty good,

00:05:19.120 | right?

00:05:20.120 | So rates fall 1%, we're talking about like a 20 some percent gain.

00:05:23.400 | Now, if rates were to rise 1%, you're down 16%, right?

00:05:27.200 | So I guess it is worth pointing out that the maturity for this is a long time.

00:05:32.920 | That's part of the reason the duration moves so much.

00:05:34.960 | But here's what I say.

00:05:38.000 | This seems like a nice setup for bonds.

00:05:40.200 | Rates have come up a ton off of zero to five.

00:05:42.920 | If we go into recession or the Fed cuts rates or economic growth slows or inflation keeps

00:05:47.040 | coming down, you would expect rates to fall.

00:05:49.320 | The timing is the thing that can bite you on this one, though.

00:05:51.440 | What if, I don't know, what if economic growth keeps coming in hot or people decide the world

00:05:56.120 | is burning and I'm selling treasuries because government debt is spilling out of control

00:06:01.020 | and rates go to seven before they drop back down to three, right?

00:06:03.520 | Can you sit through a 35% drawdown in the meantime?

00:06:06.320 | You can just get smashed.

00:06:07.320 | And what happens when yields do drop?

00:06:08.960 | Do you sell out after they hit 4% or wait until they get three?

00:06:12.360 | What's your out on this?

00:06:14.000 | That's the difference between a trade and an investment, right?

00:06:16.580 | TLT rates kind of stay where they are, they stay in a range, but TLT is very volatile

00:06:21.000 | in the meantime.

00:06:22.000 | So I just think, I understand the thinking behind the trade.

00:06:25.720 | I just don't think it's as easy as it sounds.

00:06:27.420 | So one of my favorite books, Winning the Loser's Game by Charlie Ellis, who is one of my favorite

00:06:33.580 | communicators in all of finance, he had this analogy that investors, there's a difference

00:06:38.700 | between pros and amateurs, and he used tennis as an example.

00:06:42.720 | So there was a study done that showed most tennis players, right?

00:06:46.300 | They strike the ball down the line, they have this laser-like precision, and there's these

00:06:49.940 | long rallies, and finally someone hits it in, or there's an unforced error.

00:06:53.180 | But most of the time, professional tennis players don't make errors.

00:06:55.500 | And in fact, he said that it's been estimated 80% of the time, they hit winners, the professionals.

00:07:01.020 | But amateur tennis players, they're double faulting it into the net, they're hitting

00:07:04.080 | it over, they're hitting it across the line, 80% of the time, when they lose a point, it's

00:07:08.900 | because of an unforced error, they hit out of bounds, or they made a mistake.

00:07:12.240 | And that's the idea, is that minimizing mistakes is just as important as hitting winners in

00:07:16.980 | investing, especially for people who aren't professionals, aren't hedge fund managers.

00:07:20.980 | So the point is, how do you avoid beating yourself as an investor?

00:07:23.960 | Personally, I like to have rules in place to guide my actions.

00:07:27.020 | I try to minimize mistakes by avoiding market timing, I don't like to make short-term bets

00:07:31.320 | on the market and try to predict what's going to happen in the short-term, and then I just

00:07:34.660 | don't like to have investments in my portfolio that don't fit my personality or investing

00:07:38.180 | style.

00:07:39.180 | And one of those is, I've never been a fan of owning long-term treasuries.

00:07:41.180 | I've looked at the historical data.

00:07:43.500 | They had a wonderful run from 1980 to 2020, as rates were falling, and they were one of

00:07:48.300 | the better investments.

00:07:49.580 | You got almost the same return as you did in the stock market, with way less volatility.

00:07:53.580 | It's been a wonderful bond bull market.

00:07:56.040 | And if we see double-digit yields again, like we had in the '80s, I'd be happy to take part

00:07:59.860 | in those again.

00:08:00.980 | I just don't think it's worth the volatility.

00:08:03.580 | I'd rather be paid for volatility, where it makes sense, and that's in the stock market,

00:08:07.260 | as opposed to the bond market, where I think, for me, that's keep it safe, have some income.

00:08:11.900 | And you can also earn higher yields in intermediate-term bonds right now, and I'd have to try to nail

00:08:15.820 | the trade of directions of interest rates.

00:08:17.640 | So if we look at the historical returns for long-term bonds, the case becomes far less

00:08:22.340 | compelling.

00:08:23.340 | So this is annual returns going back to 1926.

00:08:24.940 | So this includes the bond bull market.

00:08:27.420 | Even with the bond bull market from 1980 to 2020, annual returns for long-term government

00:08:33.980 | bonds are 5% per year.

00:08:35.620 | For 5-year treasuries, far less duration risk, far less volatility and drawdown risk.

00:08:39.820 | It's 4.8% annually.

00:08:41.420 | You get double the volatility in long-term bonds in basically the same returns.

00:08:45.740 | So John, if we look at the next one that shows the drawdown profile, this is just since the

00:08:49.860 | mid-2000s, early 2000s, you get way bigger drawdowns in long-term treasuries than you

00:08:54.500 | get in these 3- to 7-year treasuries, which is essentially 5 years.

00:08:57.940 | So I just don't think it's worth it for that volatility risk for me.

00:09:01.900 | Now, I'm not going to try to talk you out of a trade if you're going to go into it with

00:09:06.300 | eyes wide open.

00:09:07.300 | It's just, it's entirely possible long-term bonds are setting up for a great trade here.

00:09:11.240 | The Fed pushes too hard, we go into recession, whatever it is, but I think you really have

00:09:14.540 | to nail the timing for a trade like this to work.

00:09:17.180 | I guess the good news is that you don't have to participate in every trade or invest in

00:09:20.460 | opportunities because it seems so juicy.

00:09:22.660 | What's the point of this money in the first place?

00:09:25.020 | I'm taking 50 grand and I'm going to put it out here just to make, what's your end game

00:09:29.620 | for the investment, I guess?

00:09:30.660 | What's your time horizon and risk profile?

00:09:32.860 | Not just, is there a great opportunity?

00:09:34.540 | You could have a great investment opportunity, but if it doesn't fit your personality or

00:09:38.460 | your investment plan, I don't know, I think it's tempting fate to try to time something

00:09:42.860 | like this.

00:09:44.120 | It opens you up to more mistakes and unnecessary risks than you probably think.

00:09:49.000 | I have a couple of follow-ups here.

00:09:51.460 | Kevin says, "How high can rates actually go?"

00:09:56.620 | What do you think?

00:09:58.180 | What's the answer to that?

00:09:59.180 | The TLDR to that?

00:10:00.180 | I mean, the thing is, if nominal growth is going to be 5% or 6%, 5% or 6% yields in 30-year

00:10:05.780 | bonds are not out of the ordinary.

00:10:09.100 | It really depends on ... We had this period in the '80s and '90s where rates were much

00:10:13.100 | higher than inflation or growth.

00:10:14.940 | Obviously, the difference then is that they're coming down and now they're going up.

00:10:18.140 | It feels a lot worse.

00:10:21.220 | I don't know.

00:10:22.220 | I never say never in the markets.

00:10:24.180 | I would have never expected yields to go from 1% to 5% so fast, but could the economy continue

00:10:29.800 | to be strong and the government spends a lot of money still and we get 6% nominal growth

00:10:35.460 | with 3% inflation?

00:10:36.460 | Then, I don't know, could rates stay at 5% or 6% for a while?

00:10:39.700 | It's possible.

00:10:40.700 | I guess you never throw these things out, I guess.

00:10:43.020 | Do you think that people should stop calling bonds the safe part of your portfolio?

00:10:48.780 | People like me, non-finance pros, people have always said, "You ask 9 out of 10 people what's

00:10:53.820 | the point of bonds in a portfolio, they're going to say, 'Oh, that's the safe part of

00:10:56.980 | your portfolio.'"

00:10:58.440 | After this recent chaos in the bond market, does that really need to be restated or rethought?

00:11:05.560 | It depends what kind of bonds we're talking about.

00:11:07.080 | I think that's what people have realized is that, "Oh, wait, yeah, long-term bonds are

00:11:10.840 | great when you have a rush to safety or a recession and yields are falling, but when

00:11:15.560 | yields rise, yeah, these are not safe because the duration is 30 years.

00:11:20.220 | The maturity is 30 years.

00:11:21.220 | The duration is 16 years or whatever.

00:11:22.420 | That's a long time.

00:11:23.820 | So, short-term bonds, yeah, they're still pretty safe.

00:11:26.060 | I think anything less than one to two years is still pretty darn safe in terms of volatility

00:11:32.660 | and losing money, but for longer duration assets, yeah, there is a risk there of inflation

00:11:38.140 | and higher interest rates.

00:11:39.860 | But no, certain types of bonds and cash, and I think that's the thing people have to realize

00:11:43.460 | that maybe you just have to be a little more conservative and not go so far out on the

00:11:46.340 | risk curve.

00:11:47.340 | Yeah.

00:11:48.340 | I think a lot of young people bought TLT back a couple years ago and were like, "Oh, that's

00:11:53.100 | my responsible money.

00:11:54.700 | The rest of it I'm putting in all these risky stocks," and then they're like, "Wait, I got

00:11:58.540 | cut in half.

00:11:59.540 | It's a safe part of my portfolio."

00:12:00.540 | Yeah, when you see how volatile this stuff, and again, I was saying this before we had

00:12:05.540 | a huge crash that these bonds are too volatile for me, so we should mention that the doc

00:12:11.660 | this week for questions was bonds, bonds, bonds, yield, yield, yield.

00:12:14.780 | People are really into this stuff right now and really curious about it, which makes sense

00:12:19.040 | because I think it's more exciting and interesting than the stock market right now.

00:12:22.820 | That's for sure.

00:12:23.820 | Okay.

00:12:24.820 | Speaking of which, here's another one.

00:12:25.820 | Yep.

00:12:26.820 | Up next, another bond question.

00:12:29.340 | I'm a married 30-year-old who is just a normal IT guy.

00:12:32.740 | I max out my 401(k) and Roth 401(k), but I like to invest in things that reward me on

00:12:37.780 | the other side.

00:12:38.780 | I use betterment to do this.

00:12:40.420 | For example, I allocate money every week to hopefully buy a vacation home in five to seven

00:12:45.420 | years.

00:12:46.420 | I'm interested in your bond discussion from Animal Spirits as my whole life has been stocks,

00:12:50.260 | stocks, stocks to this point.

00:12:52.620 | I'm not sure how to buy bonds or if I should.

00:12:55.580 | Could I buy bonds to achieve yield on my money for goals that have different timelines?

00:13:00.820 | I love the idea of regularly saving like this, like the whole idea of like not just I'm going

00:13:05.820 | to invest for 40 years down the line.

00:13:07.700 | I think that's one of the reasons young people have a hard time saving for retirement in

00:13:10.860 | the first place.

00:13:11.860 | It's like I'm going to let future me worry about that, not present me, so I love the

00:13:14.660 | idea of saving for a goal like this for five to seven years.

00:13:17.180 | I think from experience, I can say you're not going to regret saving for a purchase

00:13:20.180 | like this.

00:13:21.180 | The thing is, you have options galore when it comes to yield these days.

00:13:24.020 | We talked a lot about Series I savings bonds in the past.

00:13:27.380 | Throw those out the window now.

00:13:29.260 | Yields are like 4.3%.

00:13:31.180 | You can do a lot better.

00:13:32.180 | I think a lot of people, too, who put their money into these Series I savings bonds are

00:13:35.140 | taking them out now and paying a yield penalty, so it probably wasn't even worth it to begin

00:13:39.540 | with, especially when you consider the website and stuff.

00:13:43.380 | I made it 13 months with mine.

00:13:45.140 | Okay.

00:13:46.140 | So you paid a little penalty.

00:13:47.980 | You could also do T-bills, which are still paying 5.5% or so, or an online savings account

00:13:52.060 | like Marcus.

00:13:53.060 | Mine's 4.4%, which still feels low considering the yield environment.

00:13:55.500 | I'm waiting for a bump from them again.

00:13:57.780 | However, this person has a defined time horizon of five to seven years.

00:14:01.660 | These short-term solutions come with a reinvestment risk.

00:14:03.540 | T-bills and online savings account rates could fall in the short end, and then you're stuck

00:14:06.420 | missing out on today's current high yields.

00:14:07.860 | You want to lock them in.

00:14:08.860 | You actually can lock in higher rates, which is like an asset liability match.

00:14:13.620 | I want to invest for five years, so I checked bank rate today, and I'm seeing five years

00:14:17.900 | CDs for like 4.5%.

00:14:18.900 | So you can lock them in for five years, get 4.5%.

00:14:21.980 | Not a lot of liquidity in CDs.

00:14:23.140 | You can take them out early, and again, like iBonds, you'll have to pay a penalty.

00:14:27.580 | But that's not a bad case.

00:14:30.020 | Five-year Treasuries, as of this morning when I checked, are yielding 4.7%.

00:14:33.580 | Seven-year Treasuries are about the same.

00:14:35.100 | You could get a three-year Treasury for like 4.9%.

00:14:38.300 | I think if you really wanted to lock in and match it up, the five-year probably makes

00:14:41.260 | the most sense.

00:14:42.260 | You could buy these through a broker, or Treasury Direct is pretty simple.

00:14:45.700 | I've never personally purchased individual bonds, just because I think it's easier to

00:14:48.780 | buy ETFs.

00:14:51.180 | It's less work.

00:14:52.180 | You don't have to think about it as much.

00:14:55.220 | You could buy the three- to seven-year ETF we talked about in the last question.

00:14:58.340 | It yields around 4.9% yield to maturity.

00:15:00.900 | Any total bond market index fund right now that tracks the aggregate is like 5.5% to

00:15:06.620 | 5.6% average yield to maturity.

00:15:08.220 | That's pretty good.

00:15:09.220 | The one problem here is that these are constant maturity funds.

00:15:11.180 | So a three- to seven-year Treasury ETF is going to stay three to seven years.

00:15:14.780 | So as you approach your goal and get closer, your risk and duration is a little further

00:15:19.780 | out.

00:15:20.780 | So it's away from your desired goal.

00:15:22.780 | So I think the good news with a fund like this is rates can go higher, which you'd

00:15:26.740 | see that price decline, but then you'd also immediately reinvest into those higher rates

00:15:30.660 | as those bonds come off.

00:15:33.100 | This is why some people prefer individual bonds.

00:15:35.660 | The thing is, there are now ETFs that you can buy that act like individual bonds.

00:15:40.660 | So iShares has an item called iBonds, which sounds like something Apple created.

00:15:44.540 | But you can actually pick the maturity of the bond line.

00:15:46.740 | They actually have a thing where you can set up a bond ladder.

00:15:49.260 | So it matures every year, every 24 months, or every 36 months or whatever.

00:15:53.740 | And you can line it up with, I'm going to buy this vacation home five years from now,

00:15:57.500 | so I'm going to buy the bond that matures in five years, or seven years and it matures

00:16:00.020 | in seven.

00:16:01.100 | And so you could do that, or you could build a ladder and buy them as you are saving on

00:16:05.140 | a weekly basis.

00:16:06.140 | You can slowly but surely build it up.

00:16:09.660 | So if you just search iBond ladders, it's a pretty cool little tool and website that

00:16:12.860 | they have.

00:16:14.100 | I don't really think you can go wrong in today's yield environment, whatever you choose.

00:16:17.500 | But if you wanted to lock it in, that's probably the thing, so you don't have to worry about

00:16:20.820 | short-term rates falling if there is a recession or the Fed cuts or whatever.

00:16:24.340 | I just think you have to understand the tradeoffs with options like CDs and short-term bonds

00:16:27.940 | and T-bills and then longer-term bonds.

00:16:29.580 | But you have options galore these days that you didn't have in the past.

00:16:34.100 | I didn't know about this.

00:16:35.100 | Yeah.

00:16:36.100 | That's interesting.

00:16:37.100 | I didn't realize they'd be able to do stuff like that in the mechanics of an ETF.

00:16:40.740 | Yeah, it's kind of cool.

00:16:41.820 | So I think they have one.

00:16:42.820 | I don't know if it's every six months or every 12 months, but you can sort of pick the end

00:16:44.980 | date and invest in it as you get close.

00:16:47.260 | So there's one that's probably like, I don't know, 3.75 years or something right now, whatever.

00:16:50.780 | So it's a pretty cool option if you know the end date of your goal where you have to spend

00:16:55.340 | it.

00:16:56.340 | That's like matching your assets and your liabilities.

00:16:58.300 | Since we have bonds on the brain today, is it true that you should never own bonds in

00:17:03.420 | a taxable account?

00:17:05.100 | No, because if you need to spend the money, then you don't want to put them in a tax-deferred

00:17:09.740 | account.

00:17:10.740 | So, I mean, you're paying income on those bonds, of course.

00:17:13.300 | Yeah, I guess you could think of munis as well if you want to have the taxes not take

00:17:18.100 | as big of a bite out, but the yield kind of is taken into account there.

00:17:23.060 | But no, if you want to spend the money, then you don't have to put it in taxable.

00:17:25.700 | Right.

00:17:26.700 | Okay.

00:17:27.700 | Yeah.

00:17:28.700 | That's just another thing that I've heard people say before is like, oh, yeah, don't

00:17:29.700 | hold them in a taxable account.

00:17:30.860 | Another bond one.

00:17:31.860 | And this next one is one I think we've never gotten before.

00:17:33.740 | So this is an interesting one.

00:17:35.100 | Yep.

00:17:36.100 | Okay.

00:17:37.100 | So this one is from Paul.

00:17:38.480 | You guys have talked about the statistical facts and the human factors of what to do

00:17:42.780 | with a lump sum if the ultimate goal is to get into the stock market.

00:17:46.980 | But what about bonds?

00:17:47.980 | I have about $30,000 to put towards a house and a car down payment that I won't use until

00:17:53.100 | spring or summer of 2026.

00:17:55.340 | If I plan to use a few assorted bond ETFs, would I be better off putting it all in ASAP

00:18:00.500 | or dollar count cost averaging?

00:18:02.140 | All right.

00:18:03.140 | Let's bring our resident DCA expert in here.

00:18:05.020 | You hear dollar count cost averaging and lump sum and you immediately know.

00:18:07.580 | That's true.

00:18:08.580 | Nick Majulie, who writes our wonderful blog of dollars and data, the book Just Keep Buying.

00:18:11.460 | Hey, Nick.

00:18:12.460 | I don't think you've even ever written about this.

00:18:13.780 | Have you, Nick?

00:18:14.780 | You think you've done a piece about diversified portfolios with lump sum or dollar cost averaging.

00:18:18.300 | Have you looked into bonds before?

00:18:20.020 | Yeah.

00:18:21.020 | I did this for like basically every asset class.

00:18:23.060 | I did it for Bitcoin, gold, bonds, and basically across the board, like going earlier generates

00:18:28.020 | a higher total return.

00:18:29.380 | I mean, this has been true across every asset class.

00:18:31.500 | I mean, you assume-- I mean, for risk assets, at least, you assume they're going up over

00:18:35.380 | time.

00:18:36.380 | If that's the whole reason you're investing, why would you be putting money in something

00:18:38.900 | you expect to go down?

00:18:39.900 | It doesn't make sense.

00:18:40.900 | So if you're expecting something to go up over time, the sooner you do it, on average,

00:18:44.260 | you tend to outperform.

00:18:45.260 | It's about 80% of the time, et cetera.

00:18:46.980 | Probably even more so with bonds, though, right?

00:18:48.700 | So I looked at this before, and the S&P over the last 100 years is up like 300 every four

00:18:52.940 | years on average.

00:18:54.100 | I think I found for five-year treasuries, it's like 88% of all calendar years are positive,

00:18:59.260 | which makes sense, because bonds don't go down as much, because they don't go up as

00:19:02.460 | high as stocks.

00:19:03.460 | And you're just clipping the yield and income.

00:19:07.180 | So most of the time, bonds are up in a given year.

00:19:10.540 | So it would make sense that you wouldn't want to overthink this, and you just want to put

00:19:13.060 | the money into that bond and start earning the income.

00:19:15.060 | Yeah.

00:19:16.060 | I think in this particular question-- let's say I was in this person's shoes.

00:19:18.780 | The only thing I'm actually slightly worried about, in just the smallest way, is we know

00:19:24.060 | the debt ceiling is good through, I think, January 2025.

00:19:27.180 | And this guy's talking about, I'm just going to lock my money up till, whatever, spring

00:19:30.140 | 2026.

00:19:31.460 | In the event that the US actually defaults and there's madness, that's the only real

00:19:35.620 | risk I see of this strategy.

00:19:38.220 | Outside of that--

00:19:39.220 | Do you want to make a call, Nick?

00:19:40.220 | No.

00:19:41.220 | I'm not making a call.

00:19:42.220 | I'm just saying--

00:19:43.220 | Well, can't we--

00:19:44.220 | I'm only buying treasury bills--

00:19:45.220 | --in the next 45 days.

00:19:46.220 | --through-- yeah.

00:19:47.220 | I'm only buying T-bills through next December.

00:19:48.220 | I mean, there aren't any that are for next December yet, because they're only one year.

00:19:51.140 | But once my T-bills roll over this December, I'm buying them through next December and

00:19:54.980 | then playing a wait-and-see game, because after that, I have no clue what's going to

00:19:57.860 | happen.

00:19:58.860 | Well, the other thing is, in the last question, I talked about the options you have now for

00:20:01.900 | yield.

00:20:02.900 | If you're really worried about something like that, you could diversify your yield sources,

00:20:04.860 | right?

00:20:05.860 | I have some in an online savings account.

00:20:06.860 | I have some in T-bills.

00:20:07.860 | I have some in a bond ETF, or whatever it is, that is corporates or munis or something

00:20:11.420 | else.

00:20:12.420 | So I think you can, if that's really a worry, that the money's not going to be there for

00:20:15.580 | a T-bill.

00:20:16.580 | And hopefully, if that ever really did happen, and I don't know, maybe--

00:20:19.020 | I think we have bigger problems on our hands, honestly, if the US defaults.

00:20:22.580 | But it's--

00:20:23.580 | And you'd--

00:20:24.580 | Yeah.

00:20:25.580 | I would put it in now.

00:20:26.580 | Here's the thing.

00:20:27.580 | Here's the worry about putting it in now.

00:20:28.580 | You're going to see rates go up more.

00:20:29.580 | Now your bond is-- you have a crappy bond.

00:20:31.300 | There's better bonds you can buy, so the price of your bond goes down.

00:20:33.900 | But that's OK, because you can sell that crappy bond and reinvest it at the higher rate.

00:20:38.100 | So you're still going to get the same return.

00:20:39.700 | So if you have a bond that's paying 5%, you're going to get 5%, even if you sell early.

00:20:43.820 | But you just have to reinvest that money, right?

00:20:45.580 | So bonds are all mathematically, I would say, perfect in that way, that you're going to

00:20:49.260 | get--

00:20:50.260 | Whatever you buy, you're going to get that return if you just wait through the end of

00:20:52.860 | it, right?

00:20:53.860 | You don't want to wait for that.

00:20:54.860 | That's it.

00:20:55.860 | You're going to deal with that volatility in the interim.

00:20:56.860 | And especially with a shorter-term goal like this, I would think DCA would be your enemy

00:20:59.660 | as opposed to your friend.

00:21:01.460 | Because unless you invest in something that's really risky and it crashes in the short term,

00:21:06.940 | your goal is not that far.

00:21:07.940 | So you shouldn't be taking that much risk anyway.

00:21:09.980 | Yeah.

00:21:10.980 | Yeah.

00:21:11.980 | You don't DCA bonds.

00:21:13.020 | I could see the arguments for stocks and risk assets, and we can get into that.

00:21:16.340 | But for bonds, no.

00:21:17.620 | There's no need for that.

00:21:18.620 | Yeah.

00:21:19.620 | OK.

00:21:20.620 | All right.

00:21:21.620 | Let's do another one.

00:21:22.620 | All right.

00:21:23.620 | Thank you.

00:21:24.620 | I was looking at my personal balance sheet the other day and thinking about whether my

00:21:26.940 | personal leverage ratio, total debt to net worth, is at an appropriate level.

00:21:32.620 | To clarify, I'm not just referring to leverage in an investment portfolio, but overall leverage,

00:21:40.100 | mortgage debt, auto loans, student debt, margin loans, et cetera.

00:21:44.700 | In the financial planning world, is this ratio something you look at with clients?

00:21:48.700 | And if so, would you consider a healthy range?

00:21:51.300 | For context, my leverage ratio is currently about 0.6 to 1, and my only debt is my mortgage.

00:21:58.580 | Is this too low?

00:21:59.580 | Do I have room to lever up a little more?

00:22:02.420 | I've never actually thought about this before.

00:22:04.580 | Yeah.

00:22:05.580 | Same.

00:22:06.580 | So they asked about how it works in the financial planning context.

00:22:10.300 | I think in the financial planning world, you look at income to debt, maybe, in terms of

00:22:13.300 | how much you're spending out of your portfolio, how much money you're making, and it's like,

00:22:16.100 | how much do you bring in and then how much do you spend?

00:22:18.420 | And your debt service ratio or your debt payments fall into that second category, and it's just

00:22:23.100 | does your income, is your income big enough to cover your debt payments?

00:22:26.620 | That's the only thing I'd be worried about, not what is your debt to your assets or net

00:22:30.140 | worth or whatever.

00:22:31.140 | Yeah, I agree.

00:22:32.140 | This feels like a good time to say shout out to all my fellow student loan people making

00:22:37.620 | payments again.

00:22:38.620 | So.

00:22:39.620 | Yeah.

00:22:40.620 | I mean, the good news is you're paying that off and it'd be going down.

00:22:43.900 | But John, throw up the chart here that shows U.S. household debt service as a percentage

00:22:47.440 | of disposable income.

00:22:48.440 | The average since, I don't know, the 80s is like 11 percent.

00:22:50.980 | It's much lower than that now.

00:22:51.980 | It's a little below 10 percent.

00:22:53.860 | So I don't know, Nick, have you ever looked into this?

00:22:56.380 | Like what what is a reasonable ratio?

00:22:59.020 | Yeah.

00:23:00.020 | So I haven't, but I agree with it's all about the income, right?

00:23:03.460 | You're looking because what is debt that you have to make payments on, right?

00:23:05.900 | You make payments on your debt.

00:23:06.900 | And the question is, like, the risk you run into is not being able to make payments and

00:23:10.420 | defaulting and it hurts your credit score, all the nasty things that happen there.

00:23:13.820 | Right.

00:23:14.820 | So the real issue is like, I don't care about your debt ratio.

00:23:17.320 | It's like you could have a debt ratio of 10 percent.

00:23:19.880 | But if you have really high interest rate debt, that could be worse.

00:23:22.200 | And you have a higher payment than someone who has 50 or 60 percent mortgage rate debt

00:23:26.320 | or debt, maybe say from a mortgage.

00:23:28.080 | It's a really low rate.

00:23:29.080 | So you've got to it's the rate that matters and the size of the debt.

00:23:32.120 | It's kind of there's multiple variables here that are moving together.

00:23:34.840 | So I would say, like, I wouldn't focus on whether you should lever up more.

00:23:38.360 | It's like, think about how much risk you're taking now with like your debt payments relative

00:23:42.360 | to what your income is and look at that and what's the right ratio.

00:23:46.940 | This is going to be different for every person.

00:23:48.640 | Are you single?

00:23:49.640 | Do you have low liabilities?

00:23:50.640 | Do you have a family, a large family of take care of a lot of other liabilities like all

00:23:54.200 | those things affect how much risk you want to take.

00:23:56.760 | So I'm generally not a fan of debt.

00:23:58.680 | Of course, like I think there's like mortgage that's useful.

00:24:01.840 | I think education that can be very useful if you can get if you can get into a job that

00:24:05.840 | ends up benefiting you.

00:24:07.280 | But it's it's always case specific.

00:24:09.080 | You have to look at it individually.

00:24:10.320 | So I can't I will say generalize answer my my outlook on debt totally changed in the

00:24:15.480 | in the early 2020s.

00:24:17.240 | I took it as much debt as it possibly could when rates were 3 percent or whatever.

00:24:21.320 | And I think I'm glad I did.

00:24:22.560 | But again, I had to think in terms of payments and there's this old budgetary rule that's

00:24:26.320 | like the 50 30 20 rule.

00:24:28.080 | And it's like 50 percent of income should go into necessities, which is basically housing,

00:24:31.920 | transportation, health care, that sort of stuff.

00:24:34.280 | Other regular bills, 30 percent on wants and then 20 percent on savings or paying off debt

00:24:38.840 | or whatever.

00:24:39.840 | So I think what is it?

00:24:40.840 | 30 percent for housing is typically a pretty good rule of thumb.

00:24:44.680 | Like that's what you want to pay.

00:24:45.680 | And I think you can think of that in terms of debt, too.

00:24:47.440 | I would look at it more in terms of your budget as opposed to your net worth, because you're

00:24:52.340 | right, the high the high cost of debt right now has to be taken into account way more

00:24:57.600 | than the actual amount of the debt.

00:24:59.760 | Exactly.

00:25:00.760 | I agree in New York, I think housing is more like 80 percent of the budget, you know, you

00:25:06.240 | don't need a car.

00:25:07.240 | So you're fine.

00:25:08.240 | Yeah, that's that's how you make it make sense.

00:25:11.280 | All right.

00:25:12.360 | Last question.

00:25:13.360 | All right.

00:25:14.360 | Last but not least, we have a question from Stefan.

00:25:17.740 | I've heard you discuss dollar cost averaging DCA is how we're going to abbreviate it.

00:25:22.280 | The easy scenario to discuss is the 401k IDCA because I get paid and contribute monthly.

00:25:28.520 | The more complex scenario deals with a self-directed IRA with an established balance where taxes

00:25:33.680 | and cost of transactions are not an issue.

00:25:36.420 | If we take the current bear market and compare two situations or portfolios, Portfolio A

00:25:42.320 | has two hundred thousand dollars fully invested.

00:25:45.200 | Portfolio B has two hundred thousand dollars with one hundred thousand invested and one

00:25:48.320 | hundred thousand in cash.

00:25:50.920 | An advisor might tell Portfolio A to sit tight.

00:25:53.760 | You can't time the market.

00:25:55.140 | Safe advice.

00:25:56.240 | An advisor might tell Portfolio B to start DCA-ing that one hundred thousand dollars

00:26:01.160 | over the next six months or year because you can't time the dip.

00:26:05.000 | Safe advice again.

00:26:06.000 | Here is the rub.

00:26:07.900 | With one costless trade, Portfolio B could look exactly like Portfolio A, be fully invested

00:26:13.320 | and be told to sit out the market swoons.

00:26:15.840 | With one costless trade, Portfolio A could go to 50% cash and look like Portfolio B and

00:26:22.200 | start to dollar cost average.

00:26:23.920 | I've never heard of someone selling half their portfolio just to start dollar cost averaging

00:26:27.880 | it back in.

00:26:29.200 | If that is the best financial advice, then why not go all cash and start dollar cost

00:26:33.760 | averaging back in?

00:26:34.760 | I love this question because it feels like a logic puzzle and I'm pretty sure that it

00:26:38.320 | might be a syllogism.

00:26:39.320 | I remember that from college.

00:26:40.880 | It is kind of like a dorm room discussion if you ever talked about markets when you

00:26:44.120 | were in college, I guess.

00:26:45.800 | I think he's twisted his brain into a pretzel a little bit here overthinking this.

00:26:49.320 | So the Charlie Munger rule number one of compounding is never interrupt it unnecessarily, right?

00:26:53.560 | And Nick, of course, your work has shown that dollar cost averaging works over the long

00:26:57.440 | term and is a pretty good strategy, but lump sum beats it.

00:27:00.380 | So the point is you don't want to take a portfolio that's fully invested and sell out of it

00:27:04.680 | to dollar cost average because the market might do A, B or C over the next few months.

00:27:09.080 | The point is to keep that money in and let it compound no matter what happens.

00:27:12.280 | So I think he's overthinking it here.

00:27:14.480 | You don't do dollar cost averaging because it's a better strategy.

00:27:17.360 | You do it because you kind of have to or you have behavioral reasons for it.

00:27:21.680 | Yeah.

00:27:22.680 | I think the other thing here too is, yeah, the other thing to think about with regards

00:27:26.720 | to this is like, okay, it's not a costless trade.

00:27:29.920 | I mean, it costs nothing because there's no transaction costs to move into like to go

00:27:33.240 | from 100% stock to 50/50 stock and cash.

00:27:37.160 | But like with that same argument, why don't you just go 100% cash?

00:27:40.280 | Why don't you go and take out debt and lever?

00:27:42.680 | I mean, you could take this.

00:27:44.360 | I mean, I don't think it's a costless trade in that sense.

00:27:46.120 | You are making a pretty big statement about the future, right?

00:27:48.220 | When you go from 100% stock to 50% stock, 50% cash, you're basically market timing.

00:27:53.420 | That's what you're doing, right?

00:27:54.420 | You're saying, hey, I think the market's going to go lower, right?

00:27:57.360 | That's the only way.

00:27:58.360 | DCA only outperforms or what I call averaging in.

00:28:00.480 | So slowly putting your money into the market only outperforms in cases when the market's

00:28:04.440 | dropping, right?

00:28:05.440 | So if you had 100K in cash and 100K in stock, I would say on average, the right thing to

00:28:13.160 | do across history is you put that 100K cash in right now because on average, the market's

00:28:16.560 | going to go up and 80% of years, you'd be right, right, versus putting it in every month

00:28:20.240 | over the next year, right?

00:28:21.840 | However, the only time where that's not right, where that would have been the wrong move

00:28:25.080 | is when the market goes down.

00:28:26.400 | So you're basically saying the market's going to keep crashing, and that's why I want to

00:28:29.920 | DCA in.

00:28:30.920 | But I'm saying, if you're going to do that, why even DC-- why not just wait until the

00:28:33.760 | bottom?

00:28:34.760 | Because that's-- you're going to-- you already think the market's going to crash.

00:28:36.800 | Why not predict the bottom or something else, right?

00:28:38.440 | So it's-- you can see how the logic breaks down pretty quickly once you make a little

00:28:42.600 | bit of a sin.

00:28:43.600 | And then you start going beyond that.

00:28:44.600 | And you can start kind of getting into the space where you're now in all cash.

00:28:47.760 | And then all of a sudden, the market rips back upward, and you're not involved at all.

00:28:50.520 | And so I've seen this happen.

00:28:51.520 | We saw this happen during COVID.

00:28:52.520 | Yeah.

00:28:53.520 | And so it's rough to see that.

00:28:54.520 | You get yourself in trouble.

00:28:55.520 | And this is like, if I invert like Munger, your whole idea about spending the portfolio,

00:29:00.680 | too, is you want to put the lump sum in if you can early, but then you want to spend

00:29:04.200 | it slowly, like a dollar-cost average.

00:29:06.200 | So essentially what he's saying here is, you take a lump sum out of the portfolio.

00:29:10.200 | And that's the faulty reasoning here, is you're taking it out at one time and putting it back

00:29:14.520 | in slowly.

00:29:15.520 | The time that you take it out could be the wrong move, too.

00:29:17.920 | So I think, yes, you want to just-- if it's in there, you leave it in there, and you let

00:29:21.280 | the long-term of the market take care of it, and compound, and don't work against you,

00:29:25.560 | and overthinking it, and trying to dollar-cost average.

00:29:28.240 | Most people do that, again, because they get the money, and they put in money out of their

00:29:32.300 | paychecks, or because they do it for behavioral reasons and don't-- but mathematically and

00:29:38.200 | logically, you'd want to put the money in right away if you can.

00:29:41.240 | Yeah.

00:29:42.240 | And if you're worried about it, then take a few months.

00:29:44.320 | I mean, the difference between putting it all in now and putting it over three months

00:29:47.840 | is so miniscule, it doesn't really matter.

00:29:49.640 | It's like 2%.

00:29:50.640 | It's like, OK, $100,000, $2,000, who cares?

00:29:52.960 | But now it's less risk you're taking, so you can sleep at night.

00:29:55.840 | That's fine.

00:29:56.840 | But if you take a year, two years, five years, the longer you take to get invested, that's

00:30:00.720 | where you really start to see the pain.

00:30:02.120 | It's the foregone money you would have had, right?

00:30:03.880 | So that's where I kind of recommend people, hey, if you're taking over a year, don't do

00:30:06.640 | that.

00:30:07.640 | If you want to take a few months, even six months, go ahead.

00:30:09.040 | It's not going to really make a difference in your life.

00:30:11.280 | So--

00:30:12.280 | That's true.

00:30:13.280 | Speaking on behalf of the dumb money, I would just say I've gotten myself into more trouble

00:30:18.000 | with dollar cost averaging over the years because I don't notice how much I'm down.

00:30:24.360 | It's like I'm putting in a set amount into a certain stock, an individual stock, right?

00:30:28.240 | And I wake up one day, I'm down like 45% in a stock, whereas if I just put everything

00:30:33.480 | I wanted to put into that stock up front, I probably would have sold it when I was down

00:30:36.680 | 15%, 20%.

00:30:37.680 | Oh, because you're averaging down and your cost basis is going down?

00:30:40.160 | Yeah, it doesn't feel as bad over time.

00:30:42.480 | So I think that's another argument that I could potentially make for lump sum, kind of

00:30:46.000 | maybe saving-- it would have saved me some losses.

00:30:48.320 | Well, you're talking individual stocks here.

00:30:50.000 | We're talking about the market.

00:30:51.000 | Right, right.

00:30:52.000 | You're talking about the market.

00:30:53.000 | I'm talking about individual stocks.

00:30:54.000 | And Duncan, just a tip, Duncan.

00:30:55.000 | I recommend buying the stocks that go up.

00:30:56.320 | That usually helps.

00:30:57.320 | So--

00:30:58.320 | See, I love a good sale, you know?

00:30:59.640 | So you average all the way down and then you sell it at the bottom.

00:31:02.120 | That's--

00:31:03.120 | Right.

00:31:04.120 | That's your problem.

00:31:05.120 | That's how you tax loss harvest, right?

00:31:06.120 | Yeah.

00:31:07.120 | All right.

00:31:08.120 | Just-- all right.

00:31:09.120 | Yeah, just buy a lotto ticket, Duncan.

00:31:10.120 | That's my book.

00:31:11.120 | Just keep tax loss harvesting.

00:31:12.120 | All right.

00:31:13.120 | Can only carry over for so long.

00:31:14.120 | All right.

00:31:15.120 | All right.

00:31:16.120 | Well, thanks for answering questions, as always.

00:31:17.120 | Thanks for waiting for us through the technical difficulties.

00:31:18.680 | Nick, thank you, as always, for your help here.

00:31:21.960 | Duncan--

00:31:22.960 | Thanks, Nick.

00:31:23.960 | Welcome back.

00:31:24.960 | Yeah, thanks for having me on.

00:31:25.960 | Appreciate it.

00:31:26.960 | Leave us a comment.

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00:31:28.960 | Remember, leave us a comment on YouTube.

00:31:29.960 | We'll check some questions there, as always.

00:31:30.960 | Email us, askthecompoundshow@gmail.com.

00:31:31.960 | And we'll see you next time.

00:31:32.960 | Thanks, everyone.

00:31:33.560 | Thanks, everyone.

00:31:34.060 | [MUSIC PLAYING]

How Do I Lock In Higher Yields on My Cash?

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