How Often Does the Stock Market Crash?

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00:00:11.380 | - Welcome back, Portfolio Rescue.

00:00:18.680 | Each week we get tons of questions from YouTube viewers

00:00:21.120 | and podcast listeners and blog readers.

00:00:23.320 | And this is a show we created to answer those questions.

00:00:25.440 | Remember, if you have one, askthecompoundshow@gmail.com.

00:00:29.660 | Duncan, we're in a nice little correction here.

00:00:31.960 | So, last year, peak to trough,

00:00:34.200 | worst drawdown on the S&P 500, 5.2%.

00:00:36.720 | As of the close on Wednesday, yesterday,

00:00:40.040 | the S&P was down 5.5%.

00:00:41.880 | That doesn't sound too bad.

00:00:43.480 | We look at other areas of the market,

00:00:44.520 | NASDAQ 100 was down 9.2%

00:00:47.200 | and small cap stocks were off almost 16%.

00:00:50.640 | So there is a market getting dinged right now.

00:00:52.200 | I don't think our inbox reflects this quite yet.

00:00:53.840 | We did get a couple questions on corrections.

00:00:55.400 | We're gonna talk about that a little this week.

00:00:57.200 | How are you feeling?

00:00:58.680 | - I mean, things have only gotten worse

00:01:00.160 | for my robin hood since last week.

00:01:02.500 | But the good news is I feel like

00:01:05.080 | I'm a little more numb to it now.

00:01:07.120 | - I mean, that was the one thing

00:01:08.640 | that all these other stocks are getting killed

00:01:10.080 | and the stock market's still at all time highs.

00:01:11.760 | That had to be the big worry of,

00:01:13.580 | okay, but what happens when the market rolls over?

00:01:15.420 | It's not like these stocks are gonna start going up

00:01:16.840 | when the market goes.

00:01:17.920 | So, who knows?

00:01:19.400 | We're gonna talk a little bit today

00:01:20.420 | about how long corrections take

00:01:22.440 | and we'll get to that in the second question.

00:01:23.840 | But why don't we do the first one here

00:01:25.120 | and try to think more positively?

00:01:27.080 | - Yeah.

00:01:28.040 | Okay, so first up today we have,

00:01:31.660 | so I know it's a little bit of Michigan bias

00:01:35.000 | in the questions this week,

00:01:36.440 | but that's cool, that's cool.

00:01:38.320 | So, first, is it just me or does everyone hope

00:01:40.720 | to run into Ben whenever they're in Grand Rapids?

00:01:43.560 | Second, we all know Buffett's feelings on the S&P.

00:01:46.760 | Kramer says to put your first 10K

00:01:48.600 | into the index every year and so on.

00:01:50.840 | Does S&P 500 provide enough diversification

00:01:53.400 | over a 20 plus year time horizon?

00:01:55.720 | If I want to set it and forget it from age 30 to 50,

00:01:59.160 | do I really need anything more than to automate into VOO?

00:02:02.360 | And VOO is the world market index?

00:02:05.600 | - No, VOO is the Vanguard S&P 500 ETF.

00:02:08.180 | So, there's a million S&P 500 ETFs.

00:02:09.920 | He's basically saying one of those Vanguard S&P 500 ETFs.

00:02:13.400 | And by the way, thank you to our flyover state questions

00:02:16.560 | here, I appreciate it.

00:02:18.560 | Someone coming from West Michigan, not a coastal elitist.

00:02:21.640 | I know you're more prone to these New York questions,

00:02:23.460 | Duncan, but it's nice to know

00:02:25.000 | the West Michigan faithful's here.

00:02:26.980 | John, let's throw up the first chart.

00:02:28.140 | So, this person's asking, 20 years,

00:02:29.780 | how can I reasonably feel good about the S&P?

00:02:31.740 | This is the rolling 20 year returns,

00:02:33.420 | going back to the 1920s for the S&P 500.

00:02:36.020 | You can see there's a wide range of results.

00:02:38.220 | The good news here, there has never been

00:02:40.900 | a single 20 year rolling period in the S&P 500

00:02:44.420 | to start at any month you want that has been negative.

00:02:47.420 | Not one, obviously this doesn't include things

00:02:49.020 | like taxes and transaction costs and all that stuff.

00:02:53.140 | Or inflation, but still, pretty impressive.

00:02:54.820 | There's never been a 20 year period

00:02:56.520 | with a loss over the last 100 years or so.

00:02:59.140 | But, that's a wide enough range between the best

00:03:01.700 | and the worst that you could drive a truck through it.

00:03:02.940 | So, the best 20 year return, it was 18% per year,

00:03:07.060 | ending in 2000, so you had this wonderful run

00:03:09.100 | in the 80s and 90s, 2700% return in the S&P.

00:03:14.100 | The worst return, you had a total return with dividends

00:03:18.380 | of 45%, that's like 2% per year for 20 years.

00:03:20.940 | Of course, that started in 1929.

00:03:23.180 | So, you invest in September 1929, over the next 20 years,

00:03:26.580 | not only are you experiencing the bone crushing crash

00:03:28.940 | of the Great Depression, then another 50% crash in 1937,

00:03:32.580 | but you're getting 45% in total.

00:03:35.020 | And basically, your whole return there

00:03:36.780 | and then some comes from dividends.

00:03:38.140 | The price was still not back at those levels.

00:03:40.740 | So, I know a lot of people think that these days,

00:03:43.700 | the S&P must be enough because listen,

00:03:45.800 | it's a globalized world, the S&P now gets something

00:03:48.260 | like 40% of its cash flows or its revenue from overseas.

00:03:52.940 | I guess the problem with this in terms of diversification,

00:03:55.920 | there's a few things.

00:03:56.760 | So, John, let's put the next chart up of the decade return.

00:03:58.580 | So, this is returns by decade in the U.S. stock market.

00:04:01.540 | And you can see the 1930s, we had sort of a lost decade.

00:04:05.380 | The 2000s, you had this lost decade.

00:04:08.220 | And then, of course, you have your good times,

00:04:09.340 | like the 1950s, the 1980s, the 1990s.

00:04:11.700 | 2010s were great as well.

00:04:14.120 | But it's not like those are consistent

00:04:17.620 | from decade to decade.

00:04:18.620 | So, you can have these bad times.

00:04:19.580 | So, let's do one more chart here, the lost decade.

00:04:23.460 | So, this is the total returns from 2000 to 2009.

00:04:27.020 | S&P 500 at a total return basis was down 9%.

00:04:30.900 | But then you have all these other components of the market,

00:04:32.860 | European stocks, mid-caps, high yield,

00:04:35.580 | the aggregate bonds, small caps, emerging markets, REITs,

00:04:38.260 | all did so much better.

00:04:39.100 | So, you had this lost decade in the S&P 500,

00:04:42.740 | but everything else seemed to do just fine in that time.

00:04:45.460 | So, you had all these other sectors picking up the slack.

00:04:47.460 | And now, of course, we're seeing the reverse,

00:04:49.500 | where the S&P is doing so much better

00:04:50.880 | than these other components,

00:04:52.180 | and these other ones are lagging.

00:04:53.780 | So, I guess from a diversification perspective,

00:04:56.500 | one of the ways to think about this is,

00:04:57.940 | could you hold the S&P 500 for 20 years and do fine?

00:05:00.900 | Probably.

00:05:02.260 | The problem is, could you live through

00:05:04.180 | a really terrible decade to see what happens?

00:05:07.860 | Like, can you handle that?

00:05:09.260 | So, from a diversification basis,

00:05:11.420 | you're basically putting all your eggs

00:05:12.740 | in one basket of large cap stocks.

00:05:14.820 | So, in the top five for the S&P 500,

00:05:17.940 | it's 23% of the total, okay?

00:05:20.800 | For the top 10, it's 31% of the total.

00:05:24.260 | The top 25 is 43% of the total,

00:05:26.220 | and the top 50 is 56% of the total.

00:05:28.980 | So, you're putting a lot of eggs

00:05:30.380 | in these one segment of the market,

00:05:32.020 | these large cap US corporations,

00:05:33.680 | which, to be fair, have done amazing

00:05:36.180 | over the past 10, 12, 13 years.

00:05:39.420 | But I think, not diversifying enough beyond that,

00:05:41.980 | for me, personally, I would have a hard time doing that.

00:05:44.780 | - Yeah, do you think, looking,

00:05:47.380 | I'm looking at those returns over the years,

00:05:50.060 | do you think people's expectations now,

00:05:51.760 | after the last couple years, are set so high,

00:05:53.940 | especially young investors, that, like,

00:05:55.780 | having a 7% return is gonna seem like a bad year?

00:05:59.540 | - Yeah, and I do think that there's this thing

00:06:01.300 | where you see international stocks,

00:06:04.020 | and you go, why would I ever want to own those?

00:06:07.040 | US stocks give me everything.

00:06:08.780 | I get all the tech stocks.

00:06:09.740 | I get everything that's going well.

00:06:11.760 | So, I get that feeling.

00:06:14.140 | I just think you're setting yourself up

00:06:15.660 | for a potential concentration risk.

00:06:17.500 | Even though the S&P is a diversified holding of US stocks,

00:06:20.380 | it's specifically US large cap stocks,

00:06:22.740 | and then, going one step further,

00:06:23.780 | it's mostly US large cap growth stocks,

00:06:25.860 | because it's so heavily weighted

00:06:27.920 | towards those biggest names.

00:06:28.940 | So, that's the way I think about it,

00:06:30.100 | in terms of, could you add a little more

00:06:31.860 | diversification in there?

00:06:32.700 | I think it probably makes sense.

00:06:34.260 | - Cool.

00:06:36.980 | So, up next, oh, that question, by the way, was from Ken.

00:06:39.900 | So, Ken might find you in Grand Rapids at some point.

00:06:42.660 | - All right.

00:06:43.500 | - And, yeah, y'all will have a good time.

00:06:44.320 | - If I'm with three screaming kids,

00:06:46.660 | you know that just, it's not my day.

00:06:50.180 | - Yeah, I was wondering if there's a place

00:06:52.480 | you wanted to tell everyone that you hang out all the time,

00:06:54.280 | that they could find you or something.

00:06:56.120 | - Home, I guess.

00:06:57.340 | - Okay, so, up next, we have the following.

00:07:03.800 | I just started investing in 2020,

00:07:06.240 | and this is my first real correction.

00:07:08.120 | I know downturns are inevitable,

00:07:09.480 | but how much longer do you think this could last?

00:07:11.760 | Should I change the way I invest now

00:07:13.480 | that my portfolio is getting killed?

00:07:16.260 | - All right, so we talked a little bit

00:07:18.240 | about the correction at the start here.

00:07:20.540 | Especially as a young investor,

00:07:22.520 | if you've ever been through this,

00:07:23.840 | you just have to understand that this is a feature,

00:07:26.080 | not a bug, of markets.

00:07:27.000 | So, John, let's do the quick chart here.

00:07:29.160 | So, I look back from 1928 to 1921,

00:07:31.760 | and this is intro year for a calendar.

00:07:34.160 | How often do we experience a correction?

00:07:35.840 | So, basically, every year you see a 5% correction.

00:07:38.120 | It's very rare that doesn't happen.

00:07:39.960 | 10% correction happens roughly 2/3 of all years.

00:07:43.200 | You're likely to see a bear market one out of every four

00:07:45.720 | years, and then a 30% correction,

00:07:47.160 | maybe one out of every 10 years.

00:07:49.240 | 40% is a little harder to come by.

00:07:51.580 | That's more like one out of every 20 years.

00:07:52.760 | And, of course, these are averages,

00:07:54.920 | so it doesn't mean they happen on a set schedule like this.

00:07:57.740 | This is just the average over the long term.

00:08:00.500 | Now, as a young person, I'm not quite a young whippersnapper

00:08:05.560 | like I used to be.

00:08:06.480 | I turned 40 this past year.

00:08:08.280 | According to Social Security, like the actuarial table,

00:08:11.080 | I should live to be 79 years old

00:08:13.040 | based on where I am right now.

00:08:15.000 | Let's say, take a higher end of that.

00:08:16.920 | Let's say, you know, Ben's in pretty good shape,

00:08:18.840 | eats well, works out a little bit.

00:08:20.800 | Maybe I'll live 'til I'm 90 or 100.

00:08:22.960 | So, I potentially have four or five decades

00:08:25.680 | left ahead of me.

00:08:26.720 | I mean, realistically, I'm planning on, I don't know,

00:08:29.960 | eight to 10 more bear markets, five or six market crashes,

00:08:33.280 | and what I constitute like a market crash,

00:08:34.520 | like maybe 30, 35% or worse.

00:08:37.160 | I don't know, seven or eight recessions in my career.

00:08:39.480 | So, if you're 20, you know, add a few on to that.

00:08:42.200 | This is just something that's going to happen.

00:08:43.620 | So, I did look back.

00:08:44.640 | So, the first data I showed there was from 1928.

00:08:47.940 | If you include the 1930s, there's way more corrections

00:08:50.640 | 'cause the market was just getting drilled all the time

00:08:52.640 | after the Great Depression, but if we go back modern times,

00:08:54.880 | let's say 1950, post-World War II era,

00:08:57.040 | it's like 72 years of data.

00:08:59.240 | There's basically been a correction,

00:09:00.680 | and what I define a correction as is 10% every two years.

00:09:03.720 | A bear market once every seven years,

00:09:05.720 | and a crash of 30% or worse once every 12 years.

00:09:09.080 | So, obviously, a correction is way more likely

00:09:13.600 | to happen than a crash.

00:09:14.520 | Crashes seem like they happen all the time.

00:09:15.880 | It's really quite rare.

00:09:18.440 | Now, if we go to something a little more volatile,

00:09:20.560 | like the NASDAQ, again, a correction probably once

00:09:23.080 | every two years, and this is since 1970,

00:09:25.400 | a bear market once every four years or so,

00:09:27.720 | and then a crash once every seven years,

00:09:29.720 | and in the NASDAQ, crashes are way worse.

00:09:31.320 | So, the NASDAQ data goes back to 1970.

00:09:34.160 | The first big crash then was 1973, '74 bear market.

00:09:38.200 | The S&P fell like 48%.

00:09:40.000 | The NASDAQ was down 60.

00:09:41.640 | Then we have the dot-com blow-up.

00:09:43.440 | Tech stocks did way better in the run-up,

00:09:45.520 | but when the S&P fell 50%, the NASDAQ fell 80%.

00:09:49.080 | So, a lot of these times,

00:09:50.320 | you're gonna get maybe better returns,

00:09:51.480 | but it's gonna be more volatile, more corrections.

00:09:53.320 | Same with the Russell 2000.

00:09:54.440 | The Russell 2000, since 1979, it goes back to,

00:09:57.320 | it's seen a correction once every two years,

00:09:58.600 | a bear market every four years,

00:10:00.240 | and a crash once every six years,

00:10:02.040 | and since 2008, the bottom,

00:10:04.880 | the S&P has had one bear market of 20% or worse.

00:10:07.960 | That was last year in a corona crash.

00:10:10.640 | The Russell 2000 has seen that four times.

00:10:12.800 | So, again, depending on how diversified you are

00:10:15.600 | and what you own, the type of stocks you own,

00:10:18.160 | you should expect to see these corrections and crashes.

00:10:21.080 | It's just gonna happen.

00:10:22.680 | Now, as to should you change your portfolio

00:10:26.400 | or your investment plan based on a market downturn,

00:10:30.180 | I mean, I could count on one hand

00:10:32.020 | the number of people I know that can do that,

00:10:33.540 | that can say, I can change the way I invest

00:10:35.420 | from a bull market to a bear market and be fine,

00:10:37.620 | do it consistently and do it well.

00:10:39.580 | I just think it's really hard.

00:10:41.100 | It's really hard to do.

00:10:42.260 | So, I think the idea here,

00:10:43.580 | especially for a young person who's decades ahead of them,

00:10:45.820 | you build your portfolio with downturns in mind.

00:10:47.660 | So, the understanding that downturns can and will happen

00:10:50.180 | in your portfolio or your saving strategy

00:10:52.100 | just has to be durable enough to survive those periods.

00:10:54.620 | So, either emotionally or asset allocation-wise,

00:10:57.260 | where you hold more cash or bonds

00:10:59.100 | to be able to see through that.

00:11:00.160 | That's the idea here,

00:11:01.000 | but I think trying to change your strategy

00:11:02.780 | just because something's going down,

00:11:04.140 | you just have to basically live with it,

00:11:05.940 | especially with a long time horizon.

00:11:07.780 | - Yeah, I found the stat of 10% of years

00:11:11.860 | having a 30% drawdown or worse,

00:11:14.140 | I found that pretty surprising.

00:11:15.720 | I thought that was more rare than that,

00:11:17.820 | but that kind of put it in perspective.

00:11:20.580 | - Well, yeah, I still think,

00:11:21.820 | I mean, so that's one out of 10 years, though,

00:11:23.380 | if you think about it.

00:11:24.220 | - It's true, it's true.

00:11:25.040 | But yeah, it just sounds so drastic.

00:11:26.420 | But yeah, I guess we had it in just March of 2020, right?

00:11:29.380 | - Yeah, so, I mean, we kind of,

00:11:30.980 | so there was one in 2007 to 2009,

00:11:34.220 | and not quite, you know, 12 years later,

00:11:36.860 | we had one again in 2020 or 10, 11 years later.

00:11:39.040 | So, that one actually came kind of right on schedule.

00:11:42.240 | But the other thing is, like,

00:11:43.080 | the 50% crashes are even more rare,

00:11:45.100 | but we had two of those in seven years or eight years

00:11:48.580 | to start of the century.

00:11:49.420 | So, it's hard to say.

00:11:51.500 | But yeah, I think this is just,

00:11:52.580 | this is part of investing, unfortunately.

00:11:53.940 | Sometimes you just have to, like,

00:11:54.860 | learn to eat your losses, unfortunately.

00:11:57.700 | - Yeah, I'm glad I missed those 50% ones.

00:11:59.700 | Would have been a good entry, though, right?

00:12:01.660 | - Yeah, honestly, the best purchases I ever made

00:12:04.260 | were just plowing money into my 401(k) in 2008.

00:12:07.660 | I think those are probably the best purchases

00:12:08.980 | I'll ever make as an investor.

00:12:10.500 | Okay, let's do the next one.

00:12:12.100 | - Okay.

00:12:13.500 | So, up next, we have a long one, but a good one.

00:12:16.100 | I think it's gonna need some clarification,

00:12:18.100 | but on some of these acronyms, especially.

00:12:20.380 | I wanted to email you about paying off a mortgage early

00:12:22.540 | when you have kids entering college.

00:12:24.220 | I've been considering paying my 3.25% mortgage off early

00:12:27.940 | as I have children entering college

00:12:30.220 | and I'll have them in college for at least 10 years straight.

00:12:32.860 | I report assets for FAFSA starting next year

00:12:35.220 | and have been thinking about

00:12:36.100 | my expected family contribution.

00:12:38.180 | I've been thinking of a mortgage payoff

00:12:39.980 | as a return of 8.25%, which is very solid historically.

00:12:44.300 | I would have to sell stock to make this move,

00:12:46.420 | but should be able to minimize the taxes.

00:12:48.420 | Am I making too much of the expected family contribution,

00:12:51.260 | EFC, number on the FAFSA?

00:12:53.700 | Could you ask your college savings expert

00:12:56.180 | how important, to the bottom line, the EFC is?

00:12:58.860 | I don't understand much of that question,

00:13:01.340 | I have to be honest, so I hope you can explain.

00:13:04.180 | - I think I can walk it.

00:13:05.020 | So, the thing is, so this guy said he's got 10 years straight

00:13:08.780 | of putting his kids through college,

00:13:09.700 | and I thought, oh man, that's tough.

00:13:11.220 | But then I realized my daughter is seven

00:13:12.820 | and my twins are four, so I'm gonna have eight straight years

00:13:15.260 | of putting kids through college.

00:13:17.460 | Jeez.

00:13:18.740 | So, honestly, a lot of this stuff is kind of foreign to me

00:13:21.620 | 'cause I haven't got there yet.

00:13:22.980 | But we do actually have a college saving expert on our team,

00:13:26.100 | Tony Isola, who is one of our financial advisors

00:13:28.860 | and specializes in this.

00:13:30.420 | Tony himself was a teacher, not in college,

00:13:33.140 | but Tony knows all this stuff and helps people

00:13:34.580 | and helps some of our clients work through this stuff.

00:13:36.700 | So, Tony, I think the crux of the question here is,

00:13:39.620 | when does it make sense to sort of move

00:13:41.220 | some of your assets around?

00:13:42.060 | And is paying off your house a good idea

00:13:43.660 | if you don't want it to come up

00:13:45.020 | on your financial aid package?

00:13:46.580 | 'Cause I guess the idea is certain assets can count

00:13:49.060 | for you or against you when you're trying to apply

00:13:50.860 | for financial aid.

00:13:51.700 | So what do people need to know here?

00:13:53.220 | - Well, I think what people need to know,

00:13:55.260 | I think we need to start from the beginning, right?

00:13:58.660 | Like, think about what's going on here.

00:14:00.660 | People are making this huge investment,

00:14:04.100 | the biggest investment they're gonna make

00:14:06.140 | other than purchasing a home.

00:14:07.740 | And in the end, they're not gonna know

00:14:10.100 | what the price is gonna be.

00:14:11.700 | You're gonna apply to college and you have no idea

00:14:13.860 | what you're gonna end up paying.

00:14:15.020 | That's number one.

00:14:16.300 | Number two, you don't really have anybody to help you.

00:14:19.620 | Even in the CFP curriculum, only one,

00:14:22.900 | I think it's like two pages cover paying for college.

00:14:25.780 | So that's for a CFP.

00:14:27.500 | Your college guidance counselor, okay,

00:14:30.300 | doesn't even have to take a course in financing college.

00:14:35.260 | They know nothing about this.

00:14:36.860 | So it's a wonder, like, this is like a really

00:14:40.420 | more in-depth question, but most people

00:14:42.740 | just don't have any clue where to begin.

00:14:45.460 | And that's the reason why there's a trillion dollars

00:14:48.580 | in student debt, okay?

00:14:50.820 | - So I guess if you're a parent trying to plan for this,

00:14:53.020 | when does it, like, it sounds like someone's like

00:14:55.540 | trying to hide assets in a Cayman Island offshore account

00:14:58.060 | or something, like, what can you actually do

00:14:59.780 | that can help you, or is it just context dependent?

00:15:02.500 | - It's context dependent, because let's talk

00:15:05.220 | about this question.

00:15:06.340 | There's so many nuances here.

00:15:08.340 | If you're applying to a public college, right,

00:15:13.340 | they don't count your home equity.

00:15:15.380 | So it might make sense to take some of your cash,

00:15:19.020 | which they're gonna count that a little over 5%,

00:15:21.700 | and use it to pay off your mortgage.

00:15:23.700 | Okay, let's go to scenario two.

00:15:26.460 | If you're applying to a more expensive private college,

00:15:31.220 | many of them use your home equity.

00:15:34.780 | So let's say you apply to a place like, say, Northwestern.

00:15:38.900 | They will take 5% of your home equity

00:15:42.340 | and count it towards you being able to afford college.

00:15:45.060 | So if you have $500,000 in home equity,

00:15:48.780 | they're saying, you know what,

00:15:50.060 | nevermind all the other money you might have,

00:15:52.020 | we're gonna count $25,000 right off the top

00:15:56.260 | towards you, you know, that you need to contribute.

00:15:58.300 | Like, they're expecting, this is how crazy the system is.

00:16:00.780 | - So they're effectively saying, like,

00:16:01.900 | you should be able to take that 25 out of your house

00:16:03.660 | and spend it on college.

00:16:04.700 | - You got it, in addition to other loans.

00:16:07.420 | But I mean, the school costs like 80 grand a year,

00:16:09.860 | so there's all kinds of things going on there.

00:16:11.940 | But my point is what the guy,

00:16:14.620 | he's asking like a really good question, but it depends.

00:16:17.860 | And I also think that there are many, again,

00:16:20.420 | the financial service industry, for the most part,

00:16:23.140 | is just not the most moral place in the world,

00:16:26.500 | you know, as we all know.

00:16:27.940 | And you have people out there

00:16:30.100 | really not knowing college planning,

00:16:32.580 | and all they're telling you is how to hide assets,

00:16:35.180 | where that's not really where you should be looking, okay?

00:16:37.540 | You should be looking at the colleges

00:16:40.100 | and looking at colleges who are willing

00:16:42.140 | to give you money to go there.

00:16:44.500 | And that's really a much better plan.

00:16:47.380 | - It sounds like it matters, like,

00:16:48.540 | are you sending your kids to a public or a private school?

00:16:50.500 | That's kind of like the first question, correct?

00:16:52.500 | - Yep, it's very important,

00:16:54.460 | because you could go to a very good,

00:16:56.780 | like, for instance, where you are in Michigan.

00:16:58.820 | Like, if you live in Michigan, there's one price.

00:17:01.580 | If you live outside of Michigan, and you're like,

00:17:04.180 | I wanna go to Michigan or Michigan State

00:17:06.260 | and sit in the crowd with 110,000 screaming lunatics,

00:17:09.860 | and, you know, have all this stuff,

00:17:11.500 | you're gonna be paying a lot more.

00:17:13.620 | So you need to know what's going on.

00:17:16.180 | Like, do you wanna pay more to go to a state school,

00:17:19.300 | where you can go, like, to a school in your own state

00:17:22.100 | for maybe half the price, right?

00:17:24.260 | So there's lots, there's so many things.

00:17:27.260 | I think if we could bring up that, the first chart,

00:17:30.500 | where it shows the sticker price and the net price,

00:17:33.220 | this is what's going on here.

00:17:35.140 | Like, you're kind of, to pay the full price in college

00:17:39.060 | is just silly.

00:17:40.900 | - This one kind of blows my mind,

00:17:42.420 | because people think that college

00:17:44.300 | is so ridiculously expensive, but to your point,

00:17:46.500 | like, the majority of people aren't paying

00:17:47.940 | that actual sticker price because either a financial aid

00:17:50.500 | or some sort of ability to negotiate, right?

00:17:52.540 | - Right, right.

00:17:53.620 | Like, here's the deal.

00:17:55.860 | Basically, most schools, other than maybe the top 1%,

00:18:00.420 | have trouble filling their freshman class.

00:18:02.900 | And what they wanna do is offer you,

00:18:05.460 | they call it merit aid, it's really a discount.

00:18:08.300 | So it's almost like, you know, they charge you a lot,

00:18:12.460 | and then they know they're gonna cut the price.

00:18:14.500 | So people, it makes people feel good.

00:18:16.900 | It's almost like bait and switch, right?

00:18:18.460 | - It's like JCPenney, like,

00:18:19.660 | everything was on sale all the time.

00:18:20.980 | - Right, right.

00:18:22.020 | So they're like, okay, it costs 80 grand to go here,

00:18:25.180 | but you know, you're probably gonna, you know,

00:18:26.740 | they know in the end you're probably gonna end up paying,

00:18:28.500 | you know, 30 or 40, and then the people who get that

00:18:32.500 | feel really good, right?

00:18:33.700 | 'Cause it's like, oh, we got a scholarship

00:18:36.100 | or whatever they're gonna call it,

00:18:37.700 | but in all, in reality, it's more of a discount,

00:18:41.580 | and it's kind of a game.

00:18:43.380 | And every year, this game changes.

00:18:45.660 | They look for different things.

00:18:48.020 | So I'll give you a hint for your readers, for your listeners.

00:18:51.900 | Most kids, 90, over 90% of kids go to college

00:18:58.260 | within 500 miles of where they live, right?

00:19:01.940 | So just by applying to a college that's further away,

00:19:05.700 | you're probably gonna get more of a break

00:19:07.700 | because the schools wanna have diversity,

00:19:10.740 | say, in their student body.

00:19:12.220 | So you're gonna be a better candidate.

00:19:14.460 | Like, you might have the same grades

00:19:16.500 | as someone from that state,

00:19:18.380 | but they're probably gonna look at you differently

00:19:20.180 | 'cause they're like, hey, we wanna have a representative

00:19:22.700 | from New York or Connecticut.

00:19:24.340 | - So I guess instead of trying to figure out some way

00:19:26.500 | to beat the system and move your assets around,

00:19:28.780 | it's more important to have a discussion

00:19:30.100 | with your children about,

00:19:30.940 | where do you wanna go to school?

00:19:31.780 | And then let's target a strategy to that specific school

00:19:35.180 | instead of trying to game the system somehow.

00:19:37.660 | - Totally right.

00:19:38.500 | And let's take a look at that second chart with the map.

00:19:41.540 | Most people, too many people don't even fill out

00:19:46.540 | the federal financial aid form.

00:19:48.220 | And it's just silly because some schools actually

00:19:51.180 | use that form to provide merit scholarships.

00:19:55.220 | A few, not too many.

00:19:56.460 | But the other thing about the financial aid form

00:19:59.700 | is you cannot get the best student loans,

00:20:02.540 | which is the federal direct student loans

00:20:04.860 | if you don't fill out the financial aid form.

00:20:06.940 | They have the lowest interest rates.

00:20:08.340 | They tend to have, they definitely have the best terms.

00:20:11.580 | And if you don't fill out the financial aid form,

00:20:13.780 | you're not eligible for them.

00:20:15.780 | And a second thing is like, again, these are simple things,

00:20:18.500 | like just fill out the form.

00:20:19.980 | You might not be eligible for financial aid,

00:20:22.900 | but say you lose your job

00:20:24.260 | and some bad things happen in your family.

00:20:27.460 | If you didn't fill out the financial aid form,

00:20:29.940 | you're not eligible now to like appeal and say,

00:20:32.300 | hey, look, my situation changed.

00:20:34.180 | What can be done?

00:20:35.500 | So it's like a no brainer to fill it out.

00:20:39.980 | - So this is obviously something people

00:20:42.060 | don't go through very often.

00:20:43.260 | Obviously this guy is with 10 years of colleges.

00:20:45.300 | I think this price,

00:20:46.540 | the price you pay for college by Ron Lieber,

00:20:48.620 | it's probably a good starting point for a lot of people

00:20:50.620 | because this is a very complicated process

00:20:52.700 | and they don't make it easy for people.

00:20:54.300 | So that's probably the first place to start.

00:20:56.980 | All right, so Tony, thanks for that one.

00:20:59.780 | Let's go on to the next question, guys.

00:21:03.380 | - Okay, so next up, another Michigan one.

00:21:06.740 | Hi, Ben, longtime listener from Grand Rapids.

00:21:09.140 | I'm thinking about opening a savings account

00:21:11.220 | for my kids who are one and three years old.

00:21:13.500 | We already have a 529 for each of them.

00:21:15.700 | What's the best tax advantage account?

00:21:17.500 | Custodial brokerage, trust fund?

00:21:19.780 | Would love to hear your thoughts.

00:21:21.380 | - If you think mentioning my hometown

00:21:22.900 | is going to get people to get their question on the show,

00:21:24.740 | then you are absolutely correct.

00:21:26.060 | I'm just kidding.

00:21:27.580 | So when my kids were born,

00:21:29.820 | I opened a 529 and all their names,

00:21:32.020 | started funding it right away.

00:21:33.340 | But I also had this idea a few years later of,

00:21:35.700 | well, eventually when these kids are older

00:21:37.780 | and they're going off to college

00:21:38.860 | or don't have high school and wanna do something with their life,

00:21:40.780 | they're gonna need some money for a down payment

00:21:43.020 | for their first house or a wedding

00:21:44.780 | or maybe just a deposit for their first apartment.

00:21:47.340 | So I said, I wanna start an account for them.

00:21:49.100 | So I just did it through

00:21:50.340 | our Simple Liftoff program with Betterment.

00:21:52.380 | And through that, you can open one account

00:21:53.620 | and then you can fund each different goal.

00:21:55.900 | And I just named each goal for one of my kids.

00:21:57.940 | So I did that.

00:21:59.220 | Tony, what are some other things you can do?

00:22:00.540 | Because I know, unfortunately, you can't really open

00:22:02.820 | a Roth IRA in your kid's name

00:22:05.100 | if they don't have any earned income,

00:22:06.060 | but what are some other ways you can do this?

00:22:08.180 | Well, I think you can't open, say,

00:22:11.100 | the Roth IRA in your kid's name,

00:22:13.500 | but you could certainly fund it

00:22:15.060 | and give them the money each year when they need it.

00:22:20.060 | I think it's now at $16,000 a year that you can give out,

00:22:23.380 | and you could give more.

00:22:24.620 | So I guess having it in their name

00:22:25.820 | is not that big of a deal

00:22:26.740 | if you're gonna give it to 'em anyway, right?

00:22:28.060 | No, and I really like the idea of the Roth

00:22:30.580 | because it's like a flexibility thing, right?

00:22:33.860 | Like if the kids don't need the money,

00:22:36.980 | you now have this extra retirement money

00:22:39.780 | that you're going to get.

00:22:41.020 | You know, it's gonna grow tax-free,

00:22:42.420 | and you're gonna be able to withdraw it tax-free.

00:22:45.060 | So I really like, as a secondary option,

00:22:48.060 | to the 529 is the Roth IRA.

00:22:53.100 | Even though it's not in the kid's name,

00:22:54.560 | there's no law that says you can't take

00:22:56.820 | any of the principal you put in over the year

00:22:59.700 | and no tax consequences, give it to your children.

00:23:03.580 | So that's a big thing.

00:23:05.980 | And I think if we look at the other,

00:23:07.980 | the total savings chart that I had given out,

00:23:11.120 | it's unfortunate, but many people,

00:23:13.740 | like here's how we pay for college.

00:23:15.740 | I think 529s are by far the best way.

00:23:18.700 | But you see, many people don't even know what a 529 is,

00:23:23.020 | and there's a lot of misinformation.

00:23:24.700 | Oh, what happens if my kid doesn't go to college?

00:23:28.100 | Well, first of all, you know,

00:23:30.460 | you can use it for trade school.

00:23:32.760 | You could use it for anything

00:23:34.940 | that's eligible for federal loans.

00:23:36.740 | So if your child wants to be a chef

00:23:39.340 | or an electrician or a plumber, you can use 529.

00:23:42.180 | - Well then, worst case scenario,

00:23:43.020 | you just end up paying the taxes after the fact, right?

00:23:44.780 | - Yeah, and all you do is pay taxes on the earnings, right?

00:23:49.100 | Whatever you, it's just the earnings.

00:23:50.720 | And most people, let's look at, you know, the next chart.

00:23:54.420 | What do people have saved?

00:23:56.060 | Like, what are you really worried about?

00:23:57.660 | You know, like the average person has saved,

00:24:00.740 | that's one year of public school, right?

00:24:05.740 | A private school tends to cost

00:24:08.020 | between, you know, 60 and $80,000 a year.

00:24:11.380 | So a public school, you know,

00:24:12.980 | tends to cost between like maybe 22 to 27.

00:24:16.460 | So, you know, people are like worrying about these things

00:24:20.020 | that like they're gonna have like millions of dollars

00:24:22.420 | in this account, like, you know, like you said, Ben.

00:24:25.600 | Secondly, you can change the beneficiary.

00:24:29.140 | So you can use that money yourself

00:24:31.620 | if you want it to further your education,

00:24:33.620 | or if your kids have kids, your grandchildren,

00:24:36.740 | you could use it for them.

00:24:38.580 | So I really don't see how people get these insane ideas

00:24:42.620 | that if you fund the 529 plan,

00:24:45.340 | there's going to be no use for the money.

00:24:47.900 | And like I said, it's not like they're putting in

00:24:49.800 | like $200,000 a year.

00:24:51.620 | What the average person is probably putting in

00:24:53.420 | $100, $200 a month, right?

00:24:56.380 | - Good point.

00:24:57.220 | - Yeah, I think 529s are, I was just gonna say,

00:25:00.140 | they seem way more versatile than I think a lot of people,

00:25:02.460 | like Tony's saying, think.

00:25:03.540 | A lot of people, I think, think that it's only

00:25:05.540 | for like a four-year university and, you know,

00:25:08.020 | that kind of thing.

00:25:08.860 | - And it's graduate school.

00:25:10.580 | Graduate school too, 'cause then people are like,

00:25:13.120 | well, what happens if we get a full scholarship?

00:25:15.180 | Again, like 1% of the people get full scholarship, right?

00:25:18.300 | They always come up with crazy scenarios.

00:25:20.300 | - That's a good problem to have, right?

00:25:21.540 | - Of course, it's a good problem.

00:25:22.820 | And how about this, let's take this one step further.

00:25:26.420 | If you're that smart that you're gonna get

00:25:28.900 | a full scholarship, right?

00:25:30.080 | You're probably gonna go to graduate school,

00:25:31.680 | don't you think?

00:25:32.520 | Like law school or medical school.

00:25:33.340 | - It's like it is a fact, yeah.

00:25:34.180 | - And now you use it for that.

00:25:35.620 | And they don't give out scholarships for the most part

00:25:38.060 | like they would in, you know, in a four-year school,

00:25:40.540 | in graduate school.

00:25:41.780 | It's much harder to come by the money.

00:25:43.860 | So again, it's like, you know, people just say,

00:25:47.420 | they just say crap that's just not true.

00:25:49.820 | You know, they tell people don't fill out

00:25:51.380 | the financial aid form, don't put, you know,

00:25:53.540 | like there's just so much misinformation that's out there.

00:25:57.380 | This is why we have a disaster, quite frankly,

00:26:01.140 | with people paying for college

00:26:02.860 | because they don't have the right expectations.

00:26:05.860 | And then there's the guilt factor.

00:26:07.880 | Oh, my son or daughter got into Cornell or something.

00:26:11.220 | We didn't really save enough, but we're not eligible for aid

00:26:13.940 | 'cause we're kind of middle-class.

00:26:15.300 | So now we're on the hook for $320,000 a year.

00:26:18.860 | And no one thought about like that.

00:26:21.080 | What happens if they get in and we get nothing?

00:26:23.740 | You understand?

00:26:24.580 | So like we have major situations here

00:26:26.940 | where people end up spending enormous amounts of money

00:26:30.540 | they don't have, so they have to borrow

00:26:32.420 | because they didn't set the proper expectations.

00:26:35.060 | That's what we try to do.

00:26:36.100 | Like when we talk to clients and stuff and tell them,

00:26:38.060 | look, here's, you need to know this before you apply

00:26:42.540 | what you're gonna end up spending.

00:26:43.860 | But the problem is like, I have software,

00:26:46.140 | I have all kinds of tools to do this.

00:26:48.020 | The average person is like, is completely unarmed.

00:26:52.060 | - Yeah, and if anyone wants to check it out,

00:26:53.540 | go to tonyisola.com.

00:26:55.340 | That's his blog, A Teachable Moment.

00:26:57.700 | Find his email there and shoot him an email.

00:26:59.660 | I'm sure he will be happy to answer your questions.

00:27:00.820 | - Yeah, sure.

00:27:01.660 | Any questions you might have, absolutely.

00:27:03.140 | - And Tony, I do see you have a Giants sweatshirt on there.

00:27:05.820 | - Yes, I do.

00:27:06.660 | - I just wanna say, I'm kind of sick of you New Yorkers

00:27:09.020 | complaining about the Giants.

00:27:09.940 | You've won two Super Bowls in the last like 15 years.

00:27:12.460 | - Oh, yes.

00:27:13.300 | - The Lions are the worst professionally run organization

00:27:16.220 | in the world.

00:27:17.060 | I'm sick of hearing you Giants fans complain.

00:27:19.540 | You won two Super Bowls in the last 15 years

00:27:21.260 | and we've won one playoff game in the last 40.

00:27:23.620 | - Yes, but on the other hand,

00:27:25.820 | the Lions were like the 86 Bears this year

00:27:28.540 | compared to the Giants.

00:27:29.620 | So we have to look at the recency effect also is in play.

00:27:33.700 | So there's always that going on.

00:27:35.900 | - If you have some thoughts about any of the stuff

00:27:37.300 | we talked about today, Tony's 529 stuff.

00:27:39.340 | Tony is very pumped up about this, if you can't tell.

00:27:42.220 | Leave some comments, let us know what you think.

00:27:45.660 | Question for the show, email us,

00:27:47.260 | askthecompoundshow@gmail.com.

00:27:49.960 | Remember to subscribe, like, all that good stuff.

00:27:53.180 | Shop, what's our shop called?

00:27:55.180 | idontshop.com.com. - idontshop, yeah.

00:27:57.060 | - You can get a Ben doesn't drink coffee mug there,

00:27:59.140 | which is still true, I still don't drink coffee.

00:28:01.540 | And we will see you next week.

00:28:03.580 | - See you, everyone.

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