What’s the Safest Thing to Buy During a Bear Market?

00:00:00.000 | Welcome back to Portfolio Rescue. Remember, if you have a question for us, askthecompoundshow@gmail.com.

00:00:23.040 | Questions have been heating up, Duncan. I want to get into that in a minute, but first,

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00:01:21.240 | Duncan, we went through a little bit of a lull there in questions. Now, they're coming

00:01:25.620 | in hot.

00:01:26.620 | A little bit of a lull. It was bad.

00:01:29.680 | Yeah. We put out the bad signal when people came through. It's interesting to see the

00:01:34.880 | tone shift. Credit to our audience. We have people who are very smart, and they're not

00:01:39.680 | panicking, they're not freaking out. But, the tone is certainly different than it was

00:01:43.320 | in the past. Because, in the past, it was, "Listen, I have these huge gains. I don't

00:01:48.320 | want to lose them. But, if I get another 10X from here, I don't want to kick myself if

00:01:52.400 | I don't take part in that. So, what do I do? Or, should I invest in this one specific area?

00:01:57.660 | Because this is the area that's doing the best." Now, it goes to, "What about my losses?

00:02:01.740 | How do I handle these huge losses? What do I do with them? How do I make my money back?"

00:02:06.040 | This difference between bull markets and bear markets is interesting for me. So, I went

00:02:08.980 | through, and I put some things of the difference between bull markets and bear markets. So,

00:02:12.560 | bear with me here. I'm going to start going from bull to bear.

00:02:15.320 | Bull markets, you have the fear of missing out. Bear markets, you have the fear of being

00:02:18.720 | beaten. Bull markets is, "Everything I buy is going up. I'm a genius." Bear markets is,

00:02:22.840 | "Everything is going down. I'm an idiot." Bull markets, you say, "See, fundamentals went

00:02:26.940 | out." Bear markets, you say, "No, no, no. Technicals and sentiment. That's the real

00:02:30.880 | winner right here." In a bull market, you say, "Geez, I wish I had more money in stocks.

00:02:34.800 | Why didn't I take more risk?" Bear markets, you say, "Man, I wish I had cash, give me

00:02:38.000 | more optionality." Bull markets, buy and hold always wins. It always wins. In bear markets,

00:02:44.600 | buy and hold is dead. Bull markets, Warren Buffett is always washed up. Bear markets,

00:02:48.160 | "Wait, is Buffett buying here?" It's all these things. Bull markets, "I'll be greedy. We

00:02:52.560 | know those are fearful, I promise." And then, bear markets, "I lied. I'm fearful, and others

00:02:56.080 | are fearful." Bull markets are, "Buy the dip." Bear markets are, "Sell the rip." You have

00:03:00.240 | all this stuff. Bull markets, "Why didn't I invest earlier in my life? I should have

00:03:03.280 | put more in." Bear markets are, "I'll never invest again." Bull markets, "Diversification

00:03:08.360 | is for losers." Bear markets, "Geez, why was I so concentrated?" All these things. You

00:03:13.200 | feel, and bull markets are, "Markets will never fall again." Bear markets are, "Markets

00:03:19.240 | will never rise again." It's all this stuff. It's this dichotomy, and it just switches

00:03:22.720 | back and forth between the human emotions, and that's kind of how it works. It's unfortunate

00:03:27.440 | the markets are tugging at our heartstrings with this kind of stuff, but this is kind

00:03:30.600 | of the way it works, right? Unfortunately.

00:03:33.600 | Yeah. And the one that I'd never heard before for people my age in the market is, "I'm out

00:03:37.840 | of money." It's like buying the dip, people buying the dip, buying the dip, and then it's

00:03:42.240 | out. It keeps going down, and you're out of money. That's a bad thing.

00:03:47.360 | That's one of the biggest pros of just having a dollar-cost averaging strategy, where you

00:03:52.400 | take a little bit of every paycheck. It would be nice to have this cash hoard that you could

00:03:56.760 | put to work, and I'm going to wait for the fat pitch, and I'm going to swing at it. But

00:04:00.040 | most people probably can't do that or won't do that, so just putting your money in on

00:04:03.600 | a regular basis from your paycheck is probably the best way to go anyway, and it's the easiest

00:04:07.240 | one, and frankly, it's the simplest strategy, too.

00:04:09.440 | Alright, we've got some good questions today. Let's do it.

00:04:13.120 | Okay. Up first, we have a question from Australia, actually, which is pretty cool. I don't think

00:04:19.860 | it's a first, but we don't give those a whole lot. I believe it's Michael in Australia.

00:04:24.640 | They write, "As a long-term investor in my late 20s, the general advice seems to be that

00:04:29.040 | I should buy in this environment because it's cheap, and in the long-term, it should return

00:04:33.120 | the most. However, at the same time, we consistently talk about the fact that the majority of stocks

00:04:37.720 | won't return to bear highs. Isn't it possible that I could buy the wrong stocks and miss

00:04:42.040 | out on the returns I'm supposed to see in the long run because the stocks never return

00:04:46.080 | to their previous levels?"

00:04:47.300 | Those Aussies are pretty smart. This is a very astute observation. And as someone in

00:04:51.360 | their 20s, it's hard to consider yourself a long-term investor yet, because you still

00:04:55.720 | have a much longer time to go, but I hope you stick with that. And yes, if you're a

00:04:59.200 | young person, you should get on your hands and knees and pray for bear markets. This

00:05:02.920 | is a good thing. You're buying at lower prices, lower valuations, higher dividend yields.

00:05:08.240 | It doesn't feel like that because you see your portfolio value sinking, but if you're

00:05:11.400 | a young person and you have years or decades ahead of you, yes, you should be hoping for

00:05:15.040 | this. This is a good thing.

00:05:16.360 | Now, this observation about stocks versus the stock market is a good one, because I

00:05:21.400 | have a lot of faith that the stock market is going to come back from mean reversion.

00:05:24.320 | If the stock market doesn't come back, then we have probably bigger problems on our hands.

00:05:27.800 | But I can be sure that a lot of stocks themselves won't come back. This is from a McKinsey report

00:05:32.560 | from a few years ago. "In 1958, a company could expect to stay in the S&P 500 for about

00:05:36.920 | 61 years. Today, it's more like 18 years." And I'm guessing that number is just going

00:05:40.400 | to continue to go down. "Of the Fortune 500 companies in 1955, only 61 were still on the

00:05:45.380 | list in 2014." That's a 12% survival rate. The other 88% went bankrupt, merged, or basically

00:05:51.720 | just fell from the list because of underperformance.

00:05:54.340 | It's hard for a company to -- I've looked at the top 10 stocks every five years, going

00:05:58.400 | back to 1980. And there's some in 1980 that you just never heard of before, like Atlantic

00:06:02.720 | Richfield and some of these oil companies that have either gotten taken over or merged

00:06:05.760 | that you've just never heard of before. John threw up the first chart of GE here. GE was

00:06:09.660 | the biggest stock in the S&P 500 in 1995, 2000, and 2005. This company peaked in 1999

00:06:15.880 | or 2000. It hasn't come close to getting back there since. I remember I had a buddy after

00:06:20.360 | 2008 say, "I'm going to buy this stock. It's down so much, because it has to come back."

00:06:26.880 | It hasn't quite worked out. I think the stock is down 85%, and dividends have been cut along

00:06:30.720 | the way. Cisco Systems. Cisco was the biggest stock by market capitalization on the planet

00:06:36.000 | in 1999 and 2000. Still well below those levels. Probably 50% down from 1999-2000 levels.

00:06:42.840 | How about a more recent example? Bed, Bath & Beyond. Peaked in 2013. It's down 94% ever

00:06:47.960 | since. That's like a lot of 20% coupons. Right, Duncan? Citigroup. Top five biggest stock

00:06:55.280 | in the S&P 500 in 2000 and 2005. Peaked in '99, 2000. Almost made it back by 2006. It's

00:07:02.760 | now a shell of its former self. How about Bank of America? Made it back to its 2006

00:07:07.040 | highs, but still well below those levels. AT&T is another big name. Peaked in 2000.

00:07:12.800 | Still well below those levels. Some of these stocks have paid out dividends, so you've

00:07:15.240 | probably done okay, paid to wait. These are huge brand name stocks that have never come

00:07:19.560 | back in decade-long periods. It can happen. How about a success story? Microsoft. Easily

00:07:25.520 | one of the most successful companies of all time. Peaked in 2000. Took 16 years to reach

00:07:31.280 | that level, following the dot-com bubble bursting. It can take a long, long time, even the success

00:07:37.800 | story. So, you can be waiting a long time, a lot longer than the stock market itself,

00:07:41.280 | if we have a comeback.

00:07:42.280 | Let's look at current Russell 3000 levels. So, I looked at, put this into Y charts, all-time

00:07:45.840 | high levels, and then their drawdown from there. 30% of stocks in the Russell 3000,

00:07:49.960 | this is like 2,800 stocks. It's called the Russell 3000, but there's not that many stocks

00:07:53.760 | anymore. 30% of them are down 70% from all-time highs. And a lot of those all-time highs did

00:07:58.640 | not come in 2020 or 2021. They came way before that. 20%, one in five, is down 80% from all-time

00:08:04.820 | highs. And then 11% or one in ten is down 90% from all-time highs. And again, a lot

00:08:09.160 | of these all-time highs took place a long time ago. You could see a long time for this

00:08:14.960 | to happen. It's not out of the realm of possibility. So, the index itself right now is down 20%.

00:08:20.440 | I have faith that a broad index of U.S. stocks is going to come back at some point. I don't

00:08:23.840 | know when. I don't know how much further it could have to fall. I don't know how long

00:08:26.520 | it's going to take to break even. But I'm pretty certain that U.S. stocks, a broad basket

00:08:30.360 | of them, are going to come back at some point. Again, if it doesn't happen, we have bigger

00:08:35.080 | problems. But, that's just, betting against U.S. corporations is a bet against innovation.

00:08:39.880 | It's a bet against human profits. It's a bet against human desire. I just, this desire

00:08:44.320 | to get better, I just have no idea which stocks will lead the way. I don't know which ones

00:08:49.000 | are glorious buying opportunities right now, and I don't know which ones will never recover

00:08:51.540 | from their losses, because it's really hard to tell. So, you could get much higher rewards

00:08:55.360 | if you pick the right stocks right now. But you could also have much higher risk and see

00:08:58.440 | much bigger losses, or just never make your money back if you pick the wrong ones. Stocks

00:09:02.680 | can and will go out of business. An index fund, I'm pretty sure, is not going to go

00:09:05.120 | out of business. That's the way I look at it. It's much safer to buy an index fund right

00:09:08.800 | now if you want to earn your money back. You can see much higher reward if you buy the

00:09:11.760 | right stocks. That's the way to look at it. Yeah, I know. That makes sense, yeah. Diversification

00:09:15.760 | for the win. Not to brag, but you know, the first stock I ever bought was, I was in college

00:09:19.920 | back in 2008. I bought Microsoft, and I still have it in that account.

00:09:24.640 | Seriously? Yeah.

00:09:25.640 | That's pretty good. Okay, so you bought it, because it came back a little bit, and then

00:09:29.720 | 2008 crashed again. So, you're probably making some stupid names on it, too.

00:09:32.320 | I hope that I literally forgot about the account for years. But, yeah, it's still there.

00:09:37.160 | That's the key. See? Not bad. And, you have to live through a lot of those losses along

00:09:41.740 | the way, right? Not bad.

00:09:42.760 | It's true.

00:09:43.760 | Not to brag. Alright, next question.

00:09:45.760 | Okay. Up next, we have, "Hey, Ben and Duncan. I'm 32 years old and have a stable career

00:09:51.680 | making $70,000 a year. First of all, I should preface this. They go into a lot of detail

00:09:56.440 | that might not be necessary, but I think it's kind of interesting. I own a six-bedroom home

00:10:01.120 | and house hack it. I live in one bedroom but rent out the other five bedrooms. I've owned

00:10:06.280 | it for three years and I average $3,500 a month in gross rent. After everything is paid

00:10:12.000 | and I set some money aside for CapEx and vacancies, I cash flow $750 a month. The only debt I

00:10:18.340 | have is a stupid 401(k) loan that I took out two summers ago to complete a basement renovation.

00:10:24.420 | The balance on the 401(k) loan is $10,000, which is the only debt I have outside of my

00:10:28.500 | mortgage. I have a solid emergency fund, contribute 10% to my 401(k), max out a Roth IRA, and

00:10:35.460 | have a brokerage account for individual stock and index fund investing. My question is,

00:10:39.840 | should I invest the $12,000 cash I currently have or pay off my 401(k) loan?"

00:10:44.340 | First of all, six bedrooms. How much would a six-bedroom place be in New York, Duncan?

00:10:48.260 | About $13 million?

00:10:49.900 | Probably.

00:10:51.020 | Personally, you could not pay me to live with five unknown roommates in a house, but if

00:10:57.860 | you're willing to do that, that's not a bad way to build equity and some cash flow. So,

00:11:01.100 | nicely done. I give you credit for that, even though I personally would not be able to do

00:11:04.340 | it. I guess I do have three little roommates and my wife, so I'm close.

00:11:10.580 | Retirement plan sounds good to me, too. I have my one rule of thumb. I wrote about it

00:11:12.980 | in my retirement book. The only thing I care about, I want people to have for their goal,

00:11:17.380 | double-digit savings rate percentage of your income. Double-digit, that's the goal. And

00:11:22.220 | this person says they do 10% of their 401(k) plus their Roth IRA. So, I think if you calculate

00:11:27.860 | it out, if my math is right here, we're talking like an 18% to 20% savings rate for this person,

00:11:31.980 | and that's not even getting into what they put into their taxable account. So, kudos

00:11:35.060 | on the retirement plan. Right? I really like this. This is good. I sign off on that.

00:11:39.300 | Listen, the 401(k) loan, we've all made stupid decisions in the past. There's nothing wrong

00:11:43.100 | with that. And a 401(k) loan is not the end of the world. We talked about this with Taylor

00:11:47.280 | Hollis a couple weeks ago on this show. 401(k) loans, like, the biggest risk is your job

00:11:51.220 | safety. If you lose your job, then you don't want to hold that loan and have to get in

00:11:54.300 | a situation where you have to pay it off really quickly. But the fact that you have the cash

00:11:57.380 | right now, I think this one is fairly easy. So, you gave us two options. I want to put

00:12:01.900 | the money to work in the markets or I want to pay off the 401(k) loan. Why don't we do

00:12:05.260 | both? Okay? So, borrowing from your 401(k) enacts an opportunity cost where you're missing

00:12:11.420 | out on those gains from what you're borrowing from. Right? So, you could do some tax stuff

00:12:17.420 | on the spreadsheet and probably calculate it down to the last penny. But you have the

00:12:21.340 | money and you already have realized you're kicking yourself because it's a mistake and

00:12:24.740 | you didn't want to do it, even though, you know, whatever, you made your basement renovations

00:12:27.660 | and probably helped out your tenants a little bit. You pay it off and you're not only paying

00:12:32.100 | yourself back the interest on the loan, but now those investments can be put to work again

00:12:35.380 | and you're right back in the market. Right? This is one of those, I think, don't overthink

00:12:39.580 | it. Don't try to calculate it down to the last penny and what my hurdle rate's going

00:12:42.460 | to be. This is a win-win. You pay off your 401(k) loan and now you get to start growing

00:12:46.140 | your retirement savings for that amount again. Do it. You have the money, you have the cash.

00:12:50.900 | Pay it off. You're putting money to work back in your tax-deferred retirement account. Let's

00:12:55.220 | do it. Right? That's easy. Yeah. That makes sense to me. All right. And so just to elaborate

00:13:02.580 | a little bit, the reason that a 401(k) loan is, in general, a bad idea is, what did you

00:13:09.380 | mean by if you lose your job, you have to pay it off right away or something? If you

00:13:13.340 | lose your job, you have to pay it off right away, yeah, because you're not part of that

00:13:16.300 | work, your retirement plan anymore. So you technically have to pay it off right away.

00:13:19.860 | So there's some risks there, especially if, you know, the economy is slowing down and,

00:13:23.140 | you know, it depends on how safe your job is. But, yeah. By the way, that person with

00:13:27.700 | a six-bedroom house had to be in the Midwest, right? This is a flyover state person. Yeah.

00:13:31.740 | I mean, yeah. When I read that, I had to do a double-take. And I was thinking the same

00:13:35.420 | thing as you. Like, man, you don't even have a majority in your own house then, right?

00:13:39.780 | They can, like, you know, vote you out, essentially, on decisions in the house, right? I mean,

00:13:45.100 | yeah. Yeah. Hopefully it's not a Dow because that person's out of luck. All right. Let's

00:13:50.340 | do the next one. Okay. Up next, we have a question from William, who writes, and this

00:13:56.540 | is one I think a lot of people can probably relate to in the world, over the last year.

00:14:01.220 | I'm a millennial who got lucky in 2021 and realized large gains that I paid taxes on

00:14:05.580 | back in April. I used leverage, and it bit me in 2022. I'm down $200,000 a year today,

00:14:11.900 | and I have $50,000 left. It doesn't seem reasonable for me to take a $3,000 capital loss deduction

00:14:18.020 | in a year, so I feel like I need to continue to bet until I make it back. What are your

00:14:23.380 | thoughts? This is giving me flashbacks to my FanDuel account, before I basically ran

00:14:28.180 | it down to zero. You know, I kept trying to make it back.

00:14:30.460 | Well, talking about betting until you make it back, that's my first problem with this

00:14:34.180 | question, is that I don't want people to look at the stock market investing as betting,

00:14:37.940 | right? There's a difference between speculating and investing. And I think if you look at

00:14:41.380 | it from a speculation standpoint, you're probably not going to come out ahead. Because if you

00:14:44.980 | look at that high number, your high watermark in 2021 or whenever it was, and you say, "I'm

00:14:49.060 | going to get back to that, and I'm going to do whatever I can," just because you want

00:14:52.480 | to get back to that level and you decide, "I'm going to take a lot of risk to get there,"

00:14:54.980 | doesn't necessarily mean it's going to happen, right? These returns aren't promised to you

00:14:59.500 | just because you want or need them. So, I think maybe take a step back first and reassess

00:15:04.140 | your plan, because using leverage sounds great. There's all these academic studies that say,

00:15:08.780 | "Young people probably should use leverage for their retirement because they have so

00:15:10.980 | much human capital and time ahead of them in savings." But, I don't know, 0.5% of the

00:15:15.540 | population could maybe handle that as a strategy. So, that's what I want to talk about first.

00:15:20.660 | But for the tax side of things, we'll bring in an expert here. Bill Sweet. Probably our

00:15:26.140 | most recurring guest here.

00:15:27.340 | Bill, I just want to say, I quoted you to my wife this week.

00:15:31.700 | Wow.

00:15:32.700 | Okay? So, we recently had talked about, we sold an investment property. You helped me

00:15:36.540 | figure out what the capital gains taxes were going to be on that. I shared that amount

00:15:39.980 | with my wife. She was taken aback by the fact that we were going to have to hand over such

00:15:45.240 | a large amount to Uncle Sam. What do you always say about paying capital gains taxes? It means

00:15:50.340 | you won, right? Isn't that what you tell people? It stinks, but it means you won.

00:15:54.140 | Yeah. People hate paying taxes more than they like making money. That's my general observation

00:15:59.380 | here. I guess first off, really strong name from William. Really the best name if you

00:16:04.140 | sit down and think about it. Get out of here with these Liamson bills. That's very strong.

00:16:08.820 | His question was, is the $3,000 capital gains limit against ordinary income reasonable?

00:16:13.740 | I mean, no, it doesn't seem reasonable. Just like me, that's a relic of the 1970s. That's

00:16:19.200 | been set since 1978. Ben experienced inflation when he sold his property and had to write

00:16:24.580 | that tax check, which that was the subject of many tears last week. But the price of

00:16:29.480 | gasoline was 65 cents in 1978, and that hasn't been adjusted. Adjusted for inflation would

00:16:34.260 | be $16,000 today. But what I want to highlight, Ben, is exactly the point that you made. William

00:16:39.660 | is letting a tax benefit, a minor one at that, drive his decision to potentially invest for

00:16:44.780 | the short term in a way that I would agree, he phrased as gambling. But secondly, with

00:16:48.860 | leverage, which only exacerbates the ups and the downs, which he just experienced. He's

00:16:54.500 | down $200,000 here to date. I don't think it makes any sense. You cannot control the

00:16:59.140 | $3,000 capital gains limit. Any amounts that you don't use in 2022 will be carried forward

00:17:04.180 | indefinitely. God bless you. I hope you have some capital gains at some point in the future.

00:17:09.220 | I would focus on what you can control here. Don't let the tax tail wax the tax dog. Be

00:17:14.140 | like Ben. Love paying taxes, just like you like making money.

00:17:18.220 | Lewis: The other thing is, let's say he looked out and had some -- let's say in another world,

00:17:23.280 | he's the one who sold the investment property. I'm not trying to rub it in his face or that

00:17:26.660 | I did this. So, let's say he had some gains. If he takes these losses, he could use them

00:17:31.580 | to offset some of that gain, if he had gains elsewhere. He could use some of those losses

00:17:35.260 | to net out, correct?

00:17:36.340 | Brokamp: Yep. And there's that Midwest bias, just looking down on us, on us humble people

00:17:40.380 | who can't time the market. But yes, you're exactly right. I couldn't have phrased it

00:17:45.100 | better. Exactly.

00:17:46.100 | Lewis: All right. Let's do another one, Duncan.

00:17:49.300 | O'Reilly: Okay. By the way, Bill, people like your backyard setup there.

00:17:53.460 | Brokamp: Ah! It's hotter than a blowtorch out here. You see the sun baking down on me?

00:17:58.140 | I refuse to drive into New York City until $5 gasoline is a thing of the past. So, let's

00:18:02.740 | get working on that.

00:18:04.180 | Lewis: Okay. Up next, we have a question from Jack. "I'm hoping you can explain the difference

00:18:09.620 | between a robo-advisor and automated monthly purchases of something like a target date

00:18:13.580 | fund. I'm 30 years old, and the sample portfolios for robo-advisors don't seem very different

00:18:19.180 | than the holdings of a target date fund. I see tax-loss harvesting and automated rebalancing

00:18:24.140 | listed as benefits of a robo, but doesn't the target date fund also rebalance? And if

00:18:29.260 | I'm selling losing investments to offset capital gains whenever I realize them in the future,

00:18:34.020 | doesn't that handle the tax-loss harvesting?"

00:18:35.660 | Brokamp, this is a good question.

00:18:37.660 | Lewis: Yeah, it is. I'm a noted target date fund guy.

00:18:40.420 | Brokamp: Yeah, I figured you lit up when you heard this.

00:18:43.340 | Lewis: Well, you said your first purchase was a Microsoft shares. My first purchase

00:18:46.580 | ever was a target date fund. I think a 20 to 55 fund. My dad helped me set up my first

00:18:50.620 | IRA out of school. I think setting up target date funds as a default option for corporate

00:18:56.900 | retirement plans was one of the best innovations we've seen in retirement for the past two

00:19:00.180 | to three decades. The fact that people are easily able to do it with one fund in a simple

00:19:04.380 | diversified manner and not have to make those choices themselves, I think it's huge.

00:19:07.940 | Now, there is a little more customization you can get in a robo-advisor. As a shameless

00:19:12.780 | plug here, if you use our Liftoff service, we use Betterment, but we also have advisors

00:19:16.260 | you can talk to, so that's a little bolt-on there. You can actually talk to someone, and

00:19:19.220 | maybe that's a little help. But, Bill, what are the pros and cons from a tax perspective

00:19:22.380 | of having this one-stop retirement fund in a target date fund versus having 8 to 10 funds

00:19:27.900 | in a robo-advisor?

00:19:29.540 | Lewis: Yeah, I really like this question. It's in the weeds. It's nuanced. It's kind

00:19:33.140 | of nasty. I like to get down here and talk about this stuff. The first thing, a target

00:19:37.900 | date fund, you get low cost, broad exposure. You can choose a fund to match your timeline.

00:19:41.820 | For Ben, that's 2055. If I'm retiring next year, it might be 2023, 2025. That's great.

00:19:46.900 | That's awesome. A robo-advisor allows you, in contrast, to custom. You get the same low

00:19:52.020 | cost, broad exposure. You're probably going to pay a little bit more in fees, but you

00:19:56.260 | can customize a strategy to match your timeline. The key difference from a tax standpoint,

00:20:01.340 | which is why you guys call me here, that's why I keep coming on this show, is what happens

00:20:05.340 | when you have gains or losses. When there's a gain or loss in a target date fund, the

00:20:10.460 | fund realizes that gain or loss, with an exception I'm going to talk about in a second. When

00:20:14.220 | that happens in a robo-advisor account, that gain or loss gets realized on you, on your

00:20:18.380 | personal balance sheet. For a 401k, there's no difference. Everything just gets deferred.

00:20:23.020 | Let's just focus on non-qualified accounts. The key difference is the tax effects you

00:20:27.380 | get. You get in the present with a robo. For a target date fund, you get to push them out

00:20:31.020 | in the future. The other key thing, in addition to this internal/external difference between

00:20:35.900 | where the gains get realized or losses, is that a target date fund does need to distribute

00:20:41.340 | gains, but they usually do it at the end of the year. Ben, Duncan, have you seen those

00:20:45.220 | notorious capital gains distributions that happen towards the end of the year? Vanguard

00:20:49.180 | has a lot of them last year, really nasty due to some things that they did internally

00:20:53.440 | in the company, some decisions they made. With a robo-advisor, that's all happening

00:20:57.140 | in the current year. With a TDF, it's happening once a year when you see that gain. That's

00:21:02.020 | the key difference. You don't have a lot of control over what happens with that target

00:21:06.100 | date fund. It's much more about when the other investors in that fund decide to move or get

00:21:11.060 | out. That's what nuked a lot of Vanguard investors last year.

00:21:14.420 | Lewis: Then, obviously, with a robo-advisor, some of that tax-loss harvesting can hopefully

00:21:19.540 | offset some of those gains if you have some, and dividends and that sort of thing, right?

00:21:22.940 | Rubin: Precisely. Yeah. I think they accomplish the same thing, but the path that they take

00:21:27.220 | is a little bit different. If you have other active trading activity, the tax-loss harvesting

00:21:32.300 | feature of robo-advisor is very, very attractive. I would look at that if you have some other

00:21:38.020 | activity going on elsewhere in your portfolio. But if you're looking for simple, set it,

00:21:42.260 | forget it, the fee difference is real and meaningful. A target date fund offers a lot

00:21:47.300 | of great solutions. But I think for a non-qualified account, if all we're looking at is taxes,

00:21:51.580 | I would look at the robo assuming everything else is equal. Then, Ben, I'm a company man

00:21:55.660 | just like you. With Liftoff, you get to talk to an advisor at least once a year. I think

00:22:00.380 | there's an advantage there that you're probably not going to get choosing a TDF.

00:22:03.580 | This is how you know we're in a bear market. We're debating target date funds and robo-advisors.

00:22:09.300 | No one cares about this stuff in a bull market. In a bear market, "Oh, I'm going to lean on

00:22:12.180 | my target date fund a little bit," right?

00:22:14.060 | Yeah. One other thing I was going to add that I thought was cool with robo-accounts, I have

00:22:19.900 | a Liftoff for Aubrey that I've looked at.

00:22:22.180 | Duncan, a company man. I love it.

00:22:24.500 | Yeah, exactly. It shows you, you link all your other outside accounts and stuff. Just

00:22:28.420 | the organization like that can be nice for some people, just being able to see all of

00:22:31.980 | your accounts and have everything linked together in one place is kind of a nice thing.

00:22:35.260 | They have a better user experience, for sure. I'd say a place like Spiderman or Wealthhunt.

00:22:40.340 | That's kind of a nice thing about it. One other question on that, Bill, that is important,

00:22:44.940 | to make sure that you're not doing something that messes up your tax-loss harvesting, right?

00:22:48.980 | You want to make sure it's all kind of integrated so you're not selling something in one account

00:22:53.060 | and buying in another account and ruining your tax advantage.

00:22:56.620 | That's exactly it, Duncan. The better robo-platforms, they allow you to do that. If you happen to

00:23:01.540 | have a stock, let's say Duncan's got his big Microsoft gains he's walking around town

00:23:05.180 | with in New York City this week, what you wouldn't want to do is sell Microsoft at a

00:23:09.300 | loss somewhere else, right? Because that loss is going to get stopped on a gain somewhere

00:23:12.660 | else. That coordination is very, very important. I would agree with that premise, Duncan, that

00:23:17.940 | the technology that you're going to get from a typical robo-advisor is going to be better.

00:23:21.940 | If you live your life on your phone, that's a great thing to look at.

00:23:24.940 | Last but not least, we have a question from Matt. "I'm 35 years old and married with

00:23:32.940 | two kids. We have a decent amount saved in pre-tax 401ks, approximately $400,000 between

00:23:38.760 | my wife's account and mine. We file MFS due to student loans. I'm in the 24% tax bracket

00:23:46.540 | and my wife is in the 32% bracket. What are your thoughts on converting these to Roths

00:23:51.900 | during this market downturn?" Also, what is MFS?

00:23:55.900 | I actually know what this means. Married Filing Separately, right, Bill?

00:23:58.900 | True. Yep.

00:23:59.900 | We've got another academic for you, Duncan.

00:24:02.540 | I got in a giant fight with my wife this weekend. That's the first step to divorce when you

00:24:06.340 | put that on your tax form, actually. An attorney calls you a week later.

00:24:11.540 | So before we get into this Roth conversion, which I know you're a big Roth guy, what are

00:24:15.740 | the best reasons for filing this way in the first place? Because I've always heard getting

00:24:19.140 | married, the whole thing about it is having tax breaks and filing together. What would

00:24:22.700 | be the reason for filing separately when you're married?

00:24:24.900 | Yeah, I think he gets at it. There's something weird going on here that I do want to comment

00:24:28.580 | on at the end. He's getting at the tax differential. If he's at 32, his wife's at 24, potentially

00:24:35.140 | they could pay a lower overall income tax with the two separate returns versus adding

00:24:40.100 | them together on the joint side, where I'm guessing --

00:24:41.980 | Oh, maybe doing a weighted average or something?

00:24:43.500 | Yep, more of your income is going to be subject to the higher rate. That's one big reason.

00:24:47.260 | Another reason might be healthcare, health insurance. Another reason, which somewhat

00:24:50.720 | times is common, is if one spouse has a debt or something like that. Let's say somebody's

00:24:55.060 | chasing them on a credit line. You wouldn't want to file a joint return. A joint return

00:24:58.340 | can never be separate. Once you file jointly, if me and Duncan get married, which has been

00:25:02.400 | discussed in the past, and we file a joint return, we cannot undo that in the future.

00:25:06.860 | Meanwhile, two married filing separate returns can be combined if there's reasons to do so.

00:25:11.180 | Credit is the other common reason.

00:25:13.700 | Okay. Yeah, I'd never heard that before. I know you're a big Roth guy. Is it true that

00:25:18.580 | -- I never realized this -- the Senator who the Roth IRA is named after is Senator William

00:25:23.980 | Roth? Is that your namesake?

00:25:25.340 | Very, very strong name. I'm afraid not. No, I'm named after my dad. Also, William the

00:25:32.180 | Conqueror, 1066. Very strong gentleman. I don't know if you've ever heard of him.

00:25:36.340 | Alright, so does the fact that the market's in a downturn make more or less sense to do

00:25:40.780 | a Roth conversion, or should that never come into play?

00:25:43.220 | No. I mean, what's the back tattoo, Ben? What's the back tattoo right here? The very first

00:25:47.180 | show I was on, I think it was the very first Portfolio Rescue, you were like, "Take your

00:25:50.220 | shirt off. The people have to see the tattoo."

00:25:51.500 | Roth for life.

00:25:52.500 | It's a Roth IRA conversion. Yeah, the listeners got it spot on. Everything's on sale this

00:25:57.540 | year. If you do a Roth conversion, you're going to pay 20% less in income tax than you

00:26:02.460 | would have if you'd done it in December of 2021, depending on your allocation. There's

00:26:06.340 | no reason if you're a long-term investor not to do that. If you have the cash to pay it,

00:26:10.380 | not from the IRA or 401(k) itself, the money's got to come from somewhere else for it to

00:26:13.740 | make sense. But absolutely, because then when the market rebounds, and it will this year,

00:26:18.220 | next year, five years, 10 years from now, when the market continues to compound at 7%,

00:26:21.900 | 8% a year as it has forever, you will get the benefit of that tax free. So I think it's

00:26:26.300 | a great opportunity.

00:26:27.300 | Yeah, that makes sense. You're paying less in taxes because the market is down.

00:26:31.440 | Yep, exactly. Can we go back to the MFS thing really quickly? Because there is something

00:26:35.180 | funky going on here. At that tax rate, given the amount of kids, like the child tax credit

00:26:39.980 | last year was like $3,600 for a child under five. And when you file marriage filing separate,

00:26:45.140 | you're not allowed to claim that credit. At that tax range, if they were at the 37% bracket,

00:26:50.080 | they wouldn't qualify for that. I would take a look at that, listener. I might email you

00:26:54.140 | after this show to be like, "Hey, let's take a look at this, bro." Because one of the things

00:26:57.900 | you might be missing out-

00:26:58.900 | So they should be filing together.

00:26:59.900 | Yeah, on like $10,000 of tax credits that weren't available. So you might be winning

00:27:03.380 | the tax bracket game. But if you're losing out on $3,600 of tax credits per kid, that

00:27:08.740 | seems like a big, big problem. But I might talk with your tax professional. There might

00:27:12.360 | be other things going on.

00:27:12.860 | I mean, that's the one reason I had three kids, so we can get all those tax breaks.

00:27:16.020 | Yeah, that's it.

00:27:16.980 | Because they're not expensive otherwise.

00:27:18.420 | I think that's why most people have kids, right?

00:27:20.820 | Yeah, $5 gasoline isn't what's pushed me outside. It's the romper room going on downstairs because

00:27:25.740 | it's July, and they're both running roughshod all over the house, breaking all of my stuff.

00:27:31.260 | Alright, turn on a sprinkler, they'll be fine.

00:27:33.060 | I love my kids.

00:27:34.700 | Alright. If you have a question for us, askthecompoundshow@gmail.com. Remember, if you're listening to the podcast

00:27:42.100 | form, leave us a review. Watching on YouTube, if you're not a subscriber, click the subscribe

00:27:45.820 | button. It'll make Duncan's day. Compound merch, idontshop.com. What else? I want to

00:27:52.020 | thank Bill for coming on, as always, answering those tax questions. He's my personal tax

00:27:55.180 | consultant, so I just wanted to share him with the world.

00:27:57.420 | I think our most common guest, right? I think he's been on now like five shows or something.

00:28:03.380 | Let's keep it that way.

00:28:04.380 | Yeah, it's like Steve Martin and Tom Hanks on SNL. He's our Steve Martin.

00:28:07.580 | I'll take my jacket any time you guys want to send it. Let's do it.

00:28:11.100 | Alright, again, send us an email. Askthecompoundshow@gmail.com, and we will see you next time.

00:28:15.500 | Thanks, everyone.

00:28:16.060 | [music]

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