When Should You Sell Your Beaten-Down Stocks?

00:00:00.000 | (projector whirring)

00:00:03.160 | - Welcome back to Portfolio Rescue.

00:00:17.220 | We missed the music today 'cause Duncan's not here

00:00:18.980 | and everything's just all over the place.

00:00:20.360 | But Bill is sitting in today.

00:00:23.300 | Duncan's a little under the weather.

00:00:24.780 | Bill Sweet, regular of the show.

00:00:26.760 | Remember, we always appreciate your questions,

00:00:28.320 | comments, feedback, askthecompoundshow@gmail.com.

00:00:31.800 | Bill, the stock market is up today

00:00:33.000 | so everyone in the chat room is happy.

00:00:34.540 | - Yeah, I'm feeling good.

00:00:35.640 | Ben, the sun is shining.

00:00:36.880 | It's 70 degrees in Grand Rapids, as they tell me.

00:00:40.000 | It's a good day.

00:00:41.500 | - We'll take it.

00:00:42.340 | The funny thing is, so the inflation rate is still 7.7%

00:00:47.000 | year over year.

00:00:47.840 | Seems bad, right?

00:00:48.680 | 40 year, it's still higher than it's been

00:00:50.920 | in 40 years or something.

00:00:52.560 | And the funny thing is,

00:00:54.520 | when we first passed this level in February,

00:00:56.560 | I think in February, it was like 7.8%.

00:00:58.840 | And the stock market got killed.

00:00:59.840 | It was down 2%, the day it happened.

00:01:02.280 | The next day, it was down 2% again.

00:01:03.760 | Like three days later, it was down another 2%.

00:01:05.480 | Stocks got killed.

00:01:06.720 | So we've been, the inflation data gets released

00:01:08.880 | on Thursdays when we do this show.

00:01:10.360 | We've had a lot of bad days this year.

00:01:11.520 | And of course, today, the inflation rate came out

00:01:14.960 | and it was better than expected and stocks are up 4%.

00:01:17.720 | The NASDAQ's up 6%.

00:01:19.380 | Everything's screaming higher.

00:01:20.840 | - Yeah, go back a year ago and inflation printed 7%

00:01:24.120 | and investors rejoice, right?

00:01:25.800 | - Yeah.

00:01:26.640 | - How do you make any sense of that?

00:01:27.520 | - This is why it's so funny,

00:01:28.360 | because the markets run on not good or bad,

00:01:31.160 | but better or worse.

00:01:32.320 | And better or worse than expected,

00:01:33.400 | especially in the short to intermediate term.

00:01:34.720 | Obviously, over the long term, fundamentals matter.

00:01:36.860 | But in the short to intermediate term,

00:01:38.440 | if you're confused, it's because better or worse

00:01:41.120 | matters more than good or bad.

00:01:42.360 | And this, today, was better than expected.

00:01:44.960 | And so investors are rejoicing.

00:01:46.560 | I don't know what this means going forward.

00:01:48.360 | Maybe we get rugged like everyone else

00:01:50.240 | and things go back to being bad again.

00:01:51.780 | But for today, we'll take it.

00:01:53.200 | It's a nice reprieve.

00:01:55.440 | - I'll take it too.

00:01:56.500 | I just wish Duncan was feeling better.

00:01:57.960 | That's the thing.

00:01:58.800 | I would trade the market returns today

00:02:00.760 | for a healthy Duncan every day of the week, Ben.

00:02:02.940 | - Yes.

00:02:03.780 | - Feel better, feel better, my man.

00:02:05.440 | - Yes, all right.

00:02:06.280 | Let's do the first question.

00:02:07.200 | - Let's do it.

00:02:08.040 | Okay, Ben, for the average investor

00:02:11.720 | who's looking for a mix of stocks and bonds,

00:02:13.820 | should they use a simple heuristic for bond allocation,

00:02:17.000 | such as bond percentage, 10 times interest rate,

00:02:20.320 | a max up to 50%?

00:02:22.320 | If not, how should they know when to shift

00:02:23.920 | to that relative allocation?

00:02:25.340 | Another rule of thumb that I'm aware of, Ben,

00:02:27.580 | just you subtract, I think, 50 minus your age

00:02:30.120 | or 100 minus your age, something like that.

00:02:30.960 | - Yeah, that's a John Bloga one.

00:02:32.640 | So I want to start this one with this.

00:02:33.480 | So this question was an obvious follow-up

00:02:35.160 | to the one last week where someone asked us,

00:02:36.540 | how do you know when to change your asset allocation?

00:02:38.220 | So the starting question for this one was,

00:02:39.560 | how do you know when to,

00:02:40.880 | like what to start with at the beginning?

00:02:42.120 | And so I want to tell a story here.

00:02:43.800 | Not too long after I started my blog,

00:02:45.800 | Wealth of Common Sense, I think it was like 2014,

00:02:48.440 | someone reached out to me and said,

00:02:49.800 | hey, I'm a retiree.

00:02:51.720 | I send out an email newsletter to young people

00:02:54.400 | and people who are a little older

00:02:55.680 | who aren't really prepared for retirement.

00:02:57.560 | I'm trying to help them.

00:02:58.400 | Can I include some of your blog posts?

00:02:59.960 | And this was a retired gentleman named John,

00:03:02.320 | really nice guy.

00:03:03.480 | And I said, sure.

00:03:04.300 | And I kind of drew up a email correspondence,

00:03:06.880 | friendship with this guy.

00:03:07.880 | We became email pen pals, basically.

00:03:10.080 | And older guy, and he decided,

00:03:11.960 | he said, can I send you my strategy

00:03:13.920 | for asset allocation in retirement?

00:03:15.120 | I want to see what you think.

00:03:16.160 | And I, sure, let's have at it.

00:03:17.680 | So he sent it to me and he called it the four-year rule.

00:03:20.040 | So he had his own rule of thumb, right?

00:03:22.120 | And it went something like this.

00:03:23.320 | And this is for someone who's in retirement.

00:03:24.880 | And he said, this is the strategy I use

00:03:26.680 | for spending down my assets and setting my asset allocation.

00:03:28.760 | He said, before retirement,

00:03:30.520 | I accumulated four years worth of cash that I kept in,

00:03:32.960 | money market CDs, some sort of cash equivalent,

00:03:34.960 | savings account, whatever.

00:03:36.560 | The rest is held in stocks.

00:03:38.040 | And then when I retire, if the market's up,

00:03:40.940 | I'm taking no money for spending from stocks.

00:03:43.240 | If the market's down, I'm taking from the cash portion.

00:03:46.160 | And then if we get back into a bull market,

00:03:47.960 | I'm replenishing that cash

00:03:49.160 | and getting it back to four years

00:03:50.720 | and then sort of going from there

00:03:51.760 | and using that as the heuristic, right?

00:03:53.960 | And obviously, there's more give and take to that.

00:03:56.680 | That's the gist of it.

00:03:57.560 | And the thing I liked most about John's strategy

00:03:59.440 | is that he reverse engineered the problem, right?

00:04:01.480 | He started with his goal in mind,

00:04:03.520 | and then he figured out

00:04:04.360 | that's going to lead to the asset allocation.

00:04:05.560 | Now, some people could look at this and say,

00:04:07.200 | well, that's way too conservative.

00:04:08.280 | You don't need that much in cash.

00:04:09.120 | Or some people could say, that's not conservative enough.

00:04:10.920 | I need more there.

00:04:12.640 | So the point is, it depends on your risk profile.

00:04:17.600 | And I was reminded of John's strategy this week

00:04:20.120 | for the first time in a while,

00:04:20.960 | because sadly, his wife informed me

00:04:23.160 | he had an incurable disease and he passed away recently.

00:04:25.480 | - Oh. - Really nice guy.

00:04:26.320 | Yeah. - Oh no, RIP.

00:04:28.000 | - Anyway, wanted to give him a shout out.

00:04:29.120 | One of the nicest guys I've interacted with.

00:04:30.640 | And I posted this on my blog in 2014,

00:04:33.280 | and I posted his four-year rule.

00:04:34.880 | And I still to this day get people asking,

00:04:36.480 | can you send it to me?

00:04:37.320 | 'Cause he gave me his whole rundown on it anyway.

00:04:40.000 | So anyway, really nice guy.

00:04:40.960 | One of the nicest people I've interacted with

00:04:43.680 | for all my contacts I've had with people on the blog.

00:04:46.680 | So back to the original question about this rule.

00:04:48.880 | I've never heard of the rule

00:04:49.760 | about multiplying by the bond interest rate.

00:04:52.560 | My worry there, it kind of makes sense, I guess.

00:04:55.320 | My worry there is that it's very volatile.

00:04:57.280 | So if you did that this year,

00:04:59.080 | you start off the year at 10% bonds,

00:05:00.720 | 'cause rates were 1% if you're using the 10-year.

00:05:03.280 | Now rates are at 4%, you're up to 40%.

00:05:05.240 | What happens if they scream higher to six?

00:05:06.720 | You go to 60, or they go back to two,

00:05:08.480 | you go back down to 20.

00:05:09.320 | It seems like, I guess you're thinking there

00:05:11.840 | as you're using valuations, but it's very volatile.

00:05:14.840 | So you mentioned Bogle's rule.

00:05:16.320 | He said the age that you're at is how much you have in bonds.

00:05:20.680 | So if you're 25 years old, you have a 75% stock, 25% bond.

00:05:24.960 | If you're 65, it's 35% stock, 65% bonds.

00:05:27.840 | Some people have said you could also subtract 10 or 20

00:05:30.520 | from that using a starting point.

00:05:32.280 | It's a pretty decent rule of thumb.

00:05:34.120 | I think my way of thinking about this is there's no

00:05:37.400 | such thing as a perfect asset allocation for anyone.

00:05:40.080 | There's a lot of factors.

00:05:41.280 | You have to figure out where you're at in your life cycle.

00:05:42.720 | Are you accumulating assets in your 20s and 30s?

00:05:45.240 | Are you mid-life like us?

00:05:46.440 | I hate to break it to you, Bill, but we're in our 40s.

00:05:49.040 | It's weird, right?

00:05:49.880 | - I think about that every morning, yeah, yeah.

00:05:51.400 | - We're in the weird stage of life

00:05:52.720 | where we've accumulated assets.

00:05:54.840 | So we're doing way better than we were in our 20s.

00:05:57.000 | We're making more money.

00:05:58.520 | So we have these financial assets,

00:05:59.800 | and it stings a little bit when we get into bear market.

00:06:02.120 | But we're also, we have a few decades left

00:06:04.680 | until we're gonna retire, hopefully.

00:06:06.040 | But we're also like, we see this faint little light

00:06:08.480 | at the end of the tunnel of retirement.

00:06:09.760 | It's like, oh, it's not like four decades away anymore.

00:06:11.840 | It's a couple decades potentially.

00:06:13.160 | So you're in that weird balance phase, right?

00:06:16.120 | I think that's a strange one to be in.

00:06:18.360 | - Yeah, I had an advisor today in our group

00:06:20.640 | throughout thinking about retirement.

00:06:22.440 | I think it's just 'cause he had a rough week,

00:06:23.960 | and I was thinking, man, you're not ever retiring

00:06:26.440 | this fancy or the other.

00:06:28.240 | No, but I think back to the question,

00:06:30.080 | like what I like about your answer, Ben,

00:06:31.840 | like let me throw this at you.

00:06:33.360 | It probably doesn't matter what your heuristic is

00:06:35.240 | as long as you have something that you can stick with,

00:06:37.080 | right, that obviously works for you.

00:06:39.520 | So yeah, I don't like that volatile,

00:06:41.760 | like using the interest rate, right?

00:06:43.240 | 'Cause how do you adjust for inflation, et cetera?

00:06:45.800 | But no, I think that's a great answer.

00:06:46.640 | - Yeah, it moves around a lot.

00:06:47.480 | And like the most subjective factor of all

00:06:48.920 | is your behavior, right?

00:06:49.760 | 'Cause there are things in your life,

00:06:51.480 | whether they're world events or things that happen

00:06:52.920 | in your personal life that are gonna impact your behavior

00:06:55.240 | in ways that you have no idea,

00:06:56.680 | that you just can't predict them ahead of time, right?

00:06:58.600 | And so I think, to your point,

00:06:59.960 | that the right asset allocation

00:07:01.040 | is the one you can stick with come hell or high water.

00:07:03.120 | And this is a pretty good time

00:07:04.120 | to understand what that could be.

00:07:05.640 | So I always think that like the good strategy

00:07:09.200 | you can stick with is vastly superior

00:07:10.520 | to the great strategy you can't stick with.

00:07:12.400 | And I just think you just have to figure out

00:07:14.400 | what's the one that's gonna give you

00:07:15.920 | the highest probability of reaching your goals

00:07:18.120 | that also balances out like the emotional

00:07:19.960 | and financial strain of seeing losses.

00:07:22.720 | - Yeah, I love that.

00:07:24.000 | Great answer.

00:07:25.080 | - Cool, let's do the next one.

00:07:26.400 | - Awesome.

00:07:27.240 | All right, question two for Ben.

00:07:29.760 | I am 28.

00:07:30.800 | Like many people my age,

00:07:32.080 | I got caught up in the SPAC craze of 2021,

00:07:34.640 | those heady days of last year.

00:07:37.440 | At that time, I thought to myself, I'm young.

00:07:39.000 | My Roth IRA is worth about 33,000.

00:07:41.200 | I should speculate now while I can still afford

00:07:43.360 | to lose a few bucks and make up for it later.

00:07:45.720 | So about half the portfolio goes to SPACs

00:07:48.200 | and the other half in ETFs.

00:07:49.240 | Fast forward today, I've lost 40% year to date

00:07:52.120 | on those SPAC bets.

00:07:53.400 | A couple of tickers there in the chart,

00:07:55.320 | you can look it up on YouTube.

00:07:56.760 | And I'm down about 7% from the cost basis of my ETFs.

00:08:00.120 | So in total, my portfolio is down 23% from cost basis.

00:08:03.120 | I've seen stats that you've shared

00:08:05.120 | about one year, three year, five year average returns

00:08:07.760 | from the market bottom and bear markets.

00:08:09.760 | Given them, I won't need the money for a long time.

00:08:11.280 | Should I just cut my losses on the speculative side

00:08:13.840 | and plow that cash in ETFs?

00:08:15.800 | Not to brag, but I can't continue investing my Roth

00:08:18.200 | starting in 2023 due to hitting the income limit.

00:08:20.800 | So good for you.

00:08:21.640 | That's about $128,000 individuals, about $180,000 joint.

00:08:26.000 | I still believe in one of those companies

00:08:27.680 | could kill it the next three to five years,

00:08:29.000 | but I'm trying to be a level head investor.

00:08:30.640 | Help me, Adam.

00:08:32.440 | - All right.

00:08:33.280 | I think the first question is like, okay, that's fine.

00:08:35.280 | You still believe, but is 50% really

00:08:38.120 | the right asset allocation here for SPACs?

00:08:40.520 | Not gonna lie that I don't have a 50% allocation to SPACs.

00:08:45.840 | That seems a little on the high end to me.

00:08:47.080 | So I think figure out a more reasonable level

00:08:49.680 | of what you think the SPAC could be.

00:08:50.880 | And you still wanna let these run a little bit

00:08:52.680 | if on the off chance that some of them end up doing well.

00:08:55.960 | But could you do that from 10 or 20% maybe

00:08:58.680 | and not 50% of your portfolio?

00:09:00.080 | Because the whole thing is like

00:09:01.640 | the regret minimization framework is

00:09:03.600 | how am I gonna feel if I'm wrong

00:09:04.800 | and these stocks continue to get hammered

00:09:06.480 | versus how will I feel if I'm right

00:09:07.640 | and some of these work out.

00:09:08.840 | If some of these work out spectacularly

00:09:10.320 | over three to five years and you have a smaller allocation,

00:09:12.800 | it's still probably gonna be a big help to your portfolio,

00:09:15.080 | even if it's more like 10% of your allocation.

00:09:16.960 | But what's the tax stuff here?

00:09:18.520 | I know he can't do the Roth anymore

00:09:19.640 | because he's making more money,

00:09:20.800 | but what's the tax side of things here?

00:09:23.480 | - Yeah, I was gonna,

00:09:24.840 | my point was actually not gonna be tax related, Ben.

00:09:26.960 | It was just gonna be like the losses are the losses, right?

00:09:29.280 | I mean, they're in the rear view mirror, they're done.

00:09:30.840 | So like, I think it's this investor problem

00:09:33.440 | where we always anchor to our purchase prices

00:09:35.520 | if that matters.

00:09:36.560 | I think you hit the right point is that

00:09:38.280 | do you wanna be this lever to SPACs?

00:09:40.880 | Ben, do you have any idea what the market cap is of SPACs?

00:09:43.400 | Like just as a, is that an asset class?

00:09:45.600 | Like what do you even call that?

00:09:46.600 | I have no clue.

00:09:47.680 | - It's gotta be pretty small.

00:09:50.440 | So yeah, that's a good point

00:09:52.880 | that like the overweight here is enormous.

00:09:55.440 | And your point about the losses,

00:09:56.880 | stocks are down this year and bonds are down this year.

00:09:58.720 | So this is the kind of thing where

00:10:00.320 | if you want to have a get out of jail free card

00:10:02.320 | from your portfolio, you could basically start over

00:10:05.160 | because you have the losses.

00:10:06.120 | So it's kind of like, okay, free and clear.

00:10:08.920 | If you had 100% cash today, what would you do?

00:10:11.440 | What would your portfolio look like?

00:10:12.520 | And would it still really look like this

00:10:13.800 | with SPACs that are down 40, 50%?

00:10:17.320 | Would it still look like that?

00:10:18.200 | Or are you just using the anchoring bias

00:10:21.440 | where you wanna get back and break even?

00:10:23.280 | So I think that's the kind of thing where you start

00:10:24.640 | and you go, okay, what if I started from ground zero today?

00:10:27.040 | And you can, because you have those losses

00:10:28.720 | to use potentially, would you have this same portfolio?

00:10:31.600 | And a lot of people probably wouldn't say yes.

00:10:33.600 | - Yeah, I think that's great.

00:10:34.840 | And 40% SPAC losses,

00:10:36.760 | that makes the cryptocurrency position

00:10:38.480 | look like a bargain right in the grand scheme of things.

00:10:41.280 | Like FTX investors are calling, they want these SPAC losses

00:10:44.720 | 'cause ultimately that is a chance to recover.

00:10:47.600 | But no, but I think that's it.

00:10:48.440 | And I think you hit the point is that,

00:10:50.360 | do you still believe in this investment now?

00:10:52.480 | My other thing, Ben, just correct me if I'm wrong here,

00:10:54.840 | like you kind of have to be all in

00:10:56.280 | on these volatile investments or not.

00:10:57.720 | Like you can't let the like one year of volatility

00:11:00.800 | make or break your decisions here

00:11:02.320 | because you're just always gonna sell when they decline.

00:11:04.240 | Right, and you're always gonna hold when they--

00:11:05.760 | - And if that one year can make or break your decisions,

00:11:08.080 | then you're obviously too overweight there.

00:11:10.320 | Yeah, right size the ship.

00:11:12.080 | I don't know, if you speculate with 5% of your portfolio

00:11:14.440 | and it turns out to be a grand slam,

00:11:16.160 | it's still gonna be such a meaningful amount

00:11:17.800 | that you're gonna be fine.

00:11:19.240 | - Yep, yep.

00:11:20.080 | So I would argue, Adam, at age 28,

00:11:21.920 | you just paid some tuition to the market to learn a lesson.

00:11:25.400 | And ultimately, yeah, if you still believe

00:11:27.320 | in these companies, I would argue now is not the time,

00:11:30.160 | but I wouldn't look at the loss that happened

00:11:32.560 | and let that drive your decision going forward

00:11:34.400 | 'cause what happened is over

00:11:35.840 | and the future is not just unknown, it's unknowable.

00:11:38.640 | - Yeah, all right, next question.

00:11:41.040 | - So this question from Michael for Ben.

00:11:43.880 | A little curious here, a big fan of everything you do.

00:11:47.360 | Peloton is a pretty common topic of conversation

00:11:50.920 | and I look forward to their earnings.

00:11:52.400 | So Michael can be in complete shock to how the stock reads.

00:11:55.720 | My question is, what do you think about Netflix

00:11:57.680 | buying them, them being Peloton?

00:11:59.800 | No FTC concerns, adding that subscription tiers

00:12:02.120 | easily integrated and they can start having workout videos

00:12:04.520 | in separate session on their platform.

00:12:06.680 | My wife does most of her home workouts

00:12:08.280 | based on some YouTube videos

00:12:09.640 | and she would be all over this.

00:12:11.360 | Am I crazy thinking that this has been overlooked

00:12:13.720 | and could be a slam dunk for Netflix?

00:12:16.360 | With love, Michael.

00:12:18.040 | - All right, I'm not really an M&A expert here,

00:12:20.240 | but Ben's rule of thumb when it comes to all things fitness.

00:12:23.520 | Every exercise routine and diet at some point

00:12:26.360 | is going to end up being a fad.

00:12:28.160 | And that's like the biggest reason I never,

00:12:30.480 | I'm not trying to pat myself on the back,

00:12:31.680 | but that's a bigger reason I never really bought the,

00:12:33.400 | thought to buy the stock,

00:12:34.240 | even though I really enjoy the product.

00:12:35.440 | I use the product, the Peloton product all the time.

00:12:38.200 | And I think that the reason is a lot of people

00:12:40.160 | use the analogy that personal finance

00:12:42.600 | and staying fit physically is a very good analogy

00:12:46.200 | for the same thing, right?

00:12:47.040 | They're both simple, but not easy, right?

00:12:48.520 | To stay fit, you eat healthy

00:12:49.840 | and you exercise on a regular basis.

00:12:51.760 | And then to build wealth, you spend less than you earn

00:12:53.800 | and you invest the difference, right?

00:12:55.000 | It's simple, but not easy.

00:12:56.280 | But I've used this analogy before, it's a great one,

00:12:58.760 | but I've come around to the idea that like,

00:13:00.400 | I kind of disagree with it now

00:13:01.600 | because you can automate a lot of your finances, right?

00:13:04.960 | You can automate your contributions,

00:13:06.640 | you can automate your rebalancing, tax loss harvesting.

00:13:09.440 | When you make sales, all this stuff,

00:13:12.120 | you can automate so much of it

00:13:13.440 | and get it out of sight, out of mind,

00:13:14.920 | which I think is one of the best ways

00:13:15.960 | for the majority of people to invest their money.

00:13:18.720 | Staying physically fit requires you to actually put it,

00:13:20.880 | do it day in and day out, right?

00:13:22.320 | You have to choose what you eat every day.

00:13:23.720 | - You have to put the work in.

00:13:24.560 | - You have to actually like get changed in the gym,

00:13:27.120 | start working out, go running, whatever.

00:13:29.160 | You actually have to do it.

00:13:30.120 | So you have to make all those little decisions.

00:13:32.240 | So that's my end of diatribe on personal finance

00:13:34.640 | versus staying physically fit.

00:13:36.240 | But the wreckage in Peloton stock is just a sight to behold.

00:13:38.880 | John, do a chart on of the coming up the drawdown.

00:13:41.960 | So it's like 95% from the high.

00:13:44.160 | Show the next one, which is just the market cap,

00:13:46.200 | which was close to $50 billion in January of 2021.

00:13:49.280 | Now it's more like $3 billion.

00:13:50.920 | Just a massive destruction of wealth.

00:13:53.480 | My favorite line from Peloton is the former CEO says,

00:13:56.280 | "I see this as clear as day.

00:13:57.480 | "This thing is going to be one

00:13:58.680 | "of the few trillion dollar companies in 15 years."

00:14:01.080 | And he said his board told him to stop saying that

00:14:02.720 | 'cause they said eventually you're gonna sound like an idiot

00:14:04.840 | and obviously he did.

00:14:07.000 | It does feel like they could be a prime takeover candidate

00:14:09.120 | because of the technology, they have the recurring revenue.

00:14:11.120 | People pay them, I don't know,

00:14:12.080 | it's like 40 or 50 bucks a month for the classes.

00:14:14.640 | I guess it would be interesting

00:14:16.400 | if Netflix had a Peloton channel.

00:14:17.840 | You could watch Netflix at the same time

00:14:19.140 | as you're working out.

00:14:22.200 | I don't know, this would be a shift

00:14:23.400 | from software to hardware for Netflix.

00:14:25.080 | I kind of also think like Apple and Nike

00:14:27.200 | make a lot of sense here.

00:14:28.520 | But I guess this is kind of one of the fun things

00:14:30.880 | about bear markets is you can start thinking about this.

00:14:32.680 | Unfortunately, I feel like most of the good takeover ideas

00:14:36.320 | that people have never come to fruition, unfortunately.

00:14:39.240 | - Yeah, and good point about bear markets

00:14:41.240 | providing opportunity.

00:14:42.480 | I just keep thinking of the Lindy principle.

00:14:44.280 | Are you familiar with this Lindy thing, Ben?

00:14:46.280 | Does that ring a bell at all?

00:14:48.040 | - Yes, all the cool kids say it these days.

00:14:50.000 | - Yeah, and I think it died.

00:14:52.040 | Well, the idea is stuff that lives for a long time,

00:14:55.360 | thousands of years is permanent.

00:14:57.180 | So like walking is something that's been with us

00:14:59.080 | for all of human history.

00:15:00.440 | Beer and wine are good

00:15:01.800 | because they've been around for a while.

00:15:03.560 | And yeah, that's my thing about any exercise

00:15:06.380 | is that it's fats.

00:15:07.480 | I think even the subscription service models

00:15:10.160 | are just really, Matthew Ball's thing

00:15:12.160 | is the repackaged, packaged ideas

00:15:14.840 | that comes up with Derek Thompson from time to time, right?

00:15:17.120 | That we're just re-bundling the bundles

00:15:18.760 | that were de-bundled a year ago.

00:15:20.480 | And it would be really interesting to me

00:15:22.080 | if Netflix becomes this new cable service provider.

00:15:24.840 | You get your work out there along with everything else.

00:15:27.360 | - I do think the biggest problem

00:15:29.200 | for seeing some of these takeovers,

00:15:30.280 | and we have stocks that are down 90,

00:15:31.400 | like there's a ton of stocks down 90% and you go,

00:15:33.680 | why wouldn't these companies all just start

00:15:35.120 | getting taken over by the war chest of cash

00:15:36.920 | that tech stocks have?

00:15:38.120 | Well, all these huge tech companies are laying people off

00:15:40.280 | because they think a recession is coming.

00:15:41.840 | And are you really gonna buy another company

00:15:44.040 | if you think there's potentially another leg down?

00:15:45.800 | So that's, I mean, I thought in 2008,

00:15:48.720 | we were gonna see a ton more takeovers and mergers

00:15:52.040 | from the bank.

00:15:52.880 | I mean, there's a few banks that got taken out,

00:15:54.040 | but not nearly as many as I thought at the time.

00:15:56.160 | And I think that's just because a lot of people

00:15:57.680 | don't wanna sell at the bottom unless they really have to.

00:16:00.160 | You have to be forced into it, basically.

00:16:01.960 | - Right, right.

00:16:03.520 | But from crisis comes opportunity.

00:16:05.520 | - Yeah, not a bad idea though, Peloton and Netflix.

00:16:08.320 | I like it.

00:16:09.160 | All right, let's do another one.

00:16:10.560 | - Okay, question four.

00:16:12.160 | My wife is a high-income physician, not to brag,

00:16:15.160 | and I make no money and stay at home with our daughter.

00:16:18.200 | Our finances are in great shape,

00:16:19.640 | thanks to advice from folks like you.

00:16:21.880 | My parents are both 65, recently retired,

00:16:24.040 | and live with us in a separate in-law suite.

00:16:26.320 | They cover the electric bill

00:16:27.480 | and they help out with the baby.

00:16:29.160 | Their expenses are fully covered by Social Security.

00:16:31.760 | They have about $200,000 in 401ks

00:16:33.800 | and about $120,000 in checking.

00:16:36.520 | Unfortunately, they know nothing

00:16:37.720 | about where to put that money,

00:16:38.840 | and they think that they can beat inflation

00:16:40.200 | by putting money under the mattress.

00:16:42.000 | How should I propose to allocate their money for them

00:16:44.320 | in a simple, low-risk way, 30% stocks, 70% bonds?

00:16:47.920 | If I can't explain it in a few sentences,

00:16:50.120 | they'll just use the mattress.

00:16:51.520 | Sam.

00:16:52.360 | - Okay, the other not to brag here

00:16:55.480 | is he's got free babysitters all the time.

00:16:57.160 | - That's what I was gonna say.

00:16:58.520 | - Right? - It's a dream.

00:16:59.360 | - That's why I'm, that's like the one thing

00:17:01.360 | you have to have your parents live with you.

00:17:02.360 | On the other hand, you got free babysitting.

00:17:03.840 | - It's a dream for middle-aged dads, yeah.

00:17:05.840 | - Yes, that's the, and kudos to you

00:17:07.800 | for staying home with your daughter

00:17:08.720 | and letting her wait for it.

00:17:09.560 | - I think that's awesome.

00:17:10.480 | - I do too.

00:17:12.200 | So, I think giving advice to a family member

00:17:16.520 | is 10 times harder than giving advice

00:17:18.080 | to like a prospective client in wealth management.

00:17:20.000 | You may, I don't know if you agree with me there.

00:17:22.320 | It's very difficult because if something goes wrong,

00:17:26.040 | they're probably gonna blame you.

00:17:27.800 | But obviously, like your parents need to do something.

00:17:30.200 | Right?

00:17:31.600 | Maybe.

00:17:32.440 | It says they're living with you.

00:17:34.040 | They pay the electric bill.

00:17:35.800 | That's about it.

00:17:36.640 | They're paying utilities.

00:17:37.600 | So obviously, their cost of living expenses are low,

00:17:39.240 | so they can be covered by social security.

00:17:41.340 | What do you do with, in this situation?

00:17:44.600 | I guess now makes it a little easier

00:17:46.040 | where they don't have to take a ton of risk

00:17:47.760 | if they don't want to

00:17:48.600 | because interest rates are now higher.

00:17:50.080 | So, do you like tone the water into, you know,

00:17:53.400 | just some really low volatile short-term bonds,

00:17:56.480 | money market CDs, that stuff,

00:17:57.520 | so at least earning something?

00:17:59.680 | - Yeah, that's where I was gonna go.

00:18:00.940 | But I guess to hit your point, Sam,

00:18:03.080 | if you, I think the first thing is

00:18:04.720 | that you would need to sort of gain some trust, right?

00:18:07.000 | And ultimately, if whatever plan you give them goes wrong,

00:18:10.180 | you've potentially not just lost your in-laws,

00:18:12.600 | you've lost, or your parents, you've lost a babysitter.

00:18:14.680 | And so, and a roommate.

00:18:16.040 | So nobody wants that.

00:18:17.840 | But I think I would move beyond that

00:18:19.280 | and just sort of think about this

00:18:20.640 | from a financial planner standpoint.

00:18:22.580 | I think, like layer one would be,

00:18:24.400 | probably want to hire somebody

00:18:26.240 | to professionally help them, right?

00:18:27.440 | To give them advice.

00:18:28.920 | But assuming that they would listen to you, Sam,

00:18:31.160 | the thing I would think about is,

00:18:32.680 | yeah, I think, Ben,

00:18:33.600 | the market's given us a massive gift here this year.

00:18:36.200 | If you go back and look at, let's say,

00:18:37.420 | the one-year treasury or six-year treasury,

00:18:39.360 | just pick your duration.

00:18:40.680 | A year ago, we were talking like 0.1%, right?

00:18:44.060 | And today, you can get close to 4% a year

00:18:46.880 | of state income tax-free U.S. treasury interest,

00:18:50.560 | and the market defines that more or less

00:18:52.400 | as a risk-free rate.

00:18:53.600 | And so, you mentioned it at the top,

00:18:54.960 | inflation 7%, that stinks.

00:18:57.420 | But I would sort of frame this as,

00:18:59.840 | the first step for any financial person

00:19:02.440 | would be do no harm.

00:19:03.660 | And if they're mostly in cash

00:19:05.280 | and assuming they're conservatively managed 401ks,

00:19:07.160 | I would just start easy.

00:19:08.400 | And if you can get 4% from a simple allocation

00:19:11.680 | of treasury bonds, I'd start there

00:19:13.480 | and then start layering things on top of that,

00:19:15.220 | because that would get them

00:19:16.800 | to start to think about inflation on the long run

00:19:19.080 | and then maybe put a plan in front of them and say,

00:19:21.060 | hey, if your spending can't keep up with inflation,

00:19:23.960 | your expenses are covered now,

00:19:25.180 | what happens when the medical expenses increase, right,

00:19:27.960 | in the future?

00:19:28.840 | What happens if we want to take some vacations

00:19:31.120 | and do some time?

00:19:31.960 | Ultimately, I think that I would sit them down

00:19:34.240 | and try to talk about their goals,

00:19:35.740 | but I think the market's given us a gift

00:19:37.160 | and I would just start

00:19:38.000 | with something relatively conservative.

00:19:39.520 | Rates are high, why not just get started there?

00:19:42.040 | - Do you think people actually put money

00:19:43.400 | under their mattress anymore?

00:19:45.160 | I know it's a saying,

00:19:46.040 | but is that someone actually doing this?

00:19:47.800 | - I don't have kids that have lost teeth yet,

00:19:49.600 | but apparently I do need to start thinking about this.

00:19:52.620 | There are fairies involved,

00:19:54.240 | but I would say no, ultimately.

00:19:57.200 | But it is nice to see yield come back.

00:19:59.560 | Like, I get excited right now, right?

00:20:01.640 | - Especially for fairies.

00:20:02.880 | I know people say like,

00:20:03.720 | well, it's still below the rate of inflation,

00:20:05.000 | but so what?

00:20:06.280 | It's better than nothing.

00:20:07.800 | It's so much better.

00:20:09.960 | Also, the tooth fairy thing,

00:20:12.120 | my daughter lost a bunch of teeth right in a row.

00:20:14.560 | - I'm sorry to hear that.

00:20:15.400 | You should have seen the other girl.

00:20:16.920 | - Oh yeah, well no, she had the two front teeth gone

00:20:18.840 | and just a huge gap.

00:20:20.400 | But so she lost a tooth

00:20:21.960 | and my wife only had a $20 bill and we forgot, you know?

00:20:24.760 | So we put a 20 under there,

00:20:25.800 | which is way more than you should.

00:20:27.680 | And the next day she lost another one.

00:20:29.560 | So then she expected another 20, right?

00:20:32.920 | So.

00:20:33.820 | - Thanks Biden.

00:20:34.660 | Yeah, there's inflation right at you.

00:20:36.400 | Stick it.

00:20:37.240 | - I think I may have reused the same 20.

00:20:38.680 | - Cost of living adjustments for the tooth fairy

00:20:40.560 | are out of control these days.

00:20:41.680 | It's nuts.

00:20:42.600 | - Seriously.

00:20:43.440 | All right, we got one more question.

00:20:44.920 | - All right, question five.

00:20:47.520 | We moved our joint account and rollover and Roth IRAs

00:20:50.640 | from an advisor to a self-managed account.

00:20:52.720 | We are a military family, big shouts, big ups,

00:20:55.400 | and our advisor is not able to advise us

00:20:57.400 | in the current state we live in.

00:20:59.040 | I'm now managing my rollover IRA

00:21:00.520 | and I want to rebalance into a blend of index funds

00:21:02.600 | from individual stocks.

00:21:03.920 | From many of the stocks,

00:21:04.960 | it was easy to sell because they were up.

00:21:07.160 | The question I has is what should I do

00:21:08.480 | with the others that have had major losses?

00:21:10.600 | I'm not sure if I should hold these for a while

00:21:12.320 | and wait for them to come up

00:21:13.560 | or just rip the Band-Aid off with 29% losses.

00:21:16.000 | I am 40, my husband's 44,

00:21:18.080 | so we have a long time horizon before we retire,

00:21:20.280 | but with some of the stocks,

00:21:21.120 | I'm worried they just might continue to drop.

00:21:23.000 | Dicks, a couple of companies that she mentions.

00:21:25.440 | A question comes from Sarah.

00:21:27.480 | So Ben, what should Sarah do with her individual stocks?

00:21:31.200 | - First, so she's a military family.

00:21:33.040 | Any special considerations here because of that?

00:21:35.920 | - I mean, just number one, first and foremost,

00:21:37.760 | thank you, that's awesome.

00:21:39.720 | I mean, the question that Duncan had was,

00:21:41.720 | are there advisors that can work with folks

00:21:43.640 | in different states, right?

00:21:44.600 | Because ultimately if your advisor is from one home state

00:21:47.960 | and it really depends on the advisor, right?

00:21:49.480 | We happen to be registered SEC wise.

00:21:52.240 | But no, I think that the concerns and sort of tribulations,

00:21:56.400 | the challenges that face military families

00:21:58.000 | are very similar to everybody else.

00:22:00.520 | Hopefully there's a military pension involved,

00:22:02.240 | but ultimately I give Sarah a lot of credit

00:22:04.600 | because she's thinking long-term

00:22:06.080 | and she's looking to invest for the future.

00:22:07.960 | So I think that advice would stand military or not.

00:22:10.440 | And I give her a lot of credit for thinking about that.

00:22:13.080 | - Right, but I think like, again,

00:22:15.240 | if you know that you have a portfolio

00:22:16.920 | that you wanna get to someday,

00:22:18.560 | the ripping a bandit off makes the most sense to me,

00:22:20.640 | especially in an environment like this,

00:22:21.880 | and especially if you're using tax deferred accounts.

00:22:24.480 | You know, in the back of our heads, we're always thinking,

00:22:27.320 | well, what if I'm selling Amazon that was down 90%

00:22:30.640 | or whatever, and it's come back to be

00:22:31.480 | one of the greatest stocks of all time?

00:22:33.480 | There's always going to be that in the back of your head.

00:22:36.200 | But I think if you have a portfolio that you wanna get to,

00:22:38.160 | I don't see the need to wait,

00:22:39.320 | unless you're thinking through something like taxes

00:22:41.000 | or costs or something like that,

00:22:42.440 | that is gonna be prohibitive.

00:22:44.160 | And if it's not, then I think you just do it

00:22:46.520 | because the longer you wait,

00:22:48.640 | the better the chance of something potentially going wrong.

00:22:51.840 | And I think that this year's a great example of,

00:22:54.720 | I'm always preaching the benefits of diversification,

00:22:57.080 | but this year shows if you have concentrated investments

00:23:00.680 | in the wrong area of the market,

00:23:01.880 | and you got in at the wrong time, you can be crushed.

00:23:04.440 | I mean, certain people are sitting,

00:23:05.760 | certain people feel their portfolio

00:23:07.000 | is like a depression right now, right?

00:23:08.520 | - Yeah, yeah.

00:23:09.360 | - It could be down 60, 70, 80%

00:23:10.720 | if you put all of your money in the wrong stuff,

00:23:12.760 | whereas the market itself is down,

00:23:14.400 | the Dow is down 7% this year, the S&P is down 15.

00:23:18.440 | You know, that diversification is,

00:23:22.600 | especially in times like these,

00:23:24.920 | I don't think you can calculate

00:23:25.760 | how much better it makes people feel.

00:23:27.800 | - Yeah, the key to me was companies

00:23:29.160 | I've never heard of, right?

00:23:30.440 | So if you have a stock or a company in your portfolio

00:23:33.440 | that you've literally not taken the time to research,

00:23:36.200 | it probably has no place in your portfolio.

00:23:38.360 | Sarah mentions in the question,

00:23:39.640 | just clarified it reading it through,

00:23:41.080 | that she's looking at a role of IRA, right, Ben?

00:23:43.400 | So within an IRA, if you sell a stock, a company at a loss,

00:23:46.760 | there's no tax effect.

00:23:47.840 | So like the only reason you would hold something in an IRA

00:23:51.120 | would be if you expect long-term growth.

00:23:53.080 | And I would say for a Dick's

00:23:54.720 | or one of these companies that she mentions,

00:23:56.160 | or you mentioned Amazon, Ben,

00:23:57.620 | if you have a diversified index fund,

00:23:59.280 | you're gonna enjoy the future appreciation

00:24:01.360 | of a company like that,

00:24:02.600 | especially a company that has a large market cap.

00:24:04.880 | So I would just, again, the losses are in the past.

00:24:08.740 | They're done, they're over with.

00:24:09.720 | You can't do anything about them.

00:24:10.760 | So like, don't let that dictate your decisions going forward.

00:24:13.640 | What's the portfolio you want?

00:24:14.880 | How do you wanna make this stick?

00:24:16.240 | And I think a blend of index funds is a fantastic way to go

00:24:19.160 | for any investor, military or not.

00:24:21.040 | - And we've gotten questions like this a lot recently,

00:24:23.680 | obviously, and it just shows how quickly

00:24:25.900 | the sentiment has changed from a couple of years ago

00:24:27.760 | of people wanting to be,

00:24:28.600 | "I wanna be in triple lever to this and I can handle it,"

00:24:30.720 | to, "No, now I've seen individual selection."

00:24:33.760 | I think that this is a lesson

00:24:34.760 | sometimes that you have to learn.

00:24:36.000 | Like, sometimes people will scold you and say,

00:24:38.420 | "You shouldn't take so much risk

00:24:39.640 | when market's growing up."

00:24:40.480 | And that's the last thing that you want to hear

00:24:42.680 | because you're seeing everyone else get rich

00:24:43.840 | and you have FOMO and all these things.

00:24:45.600 | And I think if you,

00:24:47.400 | this is the time to understand and learn your risk tolerance.

00:24:50.160 | Maybe some people can have a concentrated portfolio

00:24:52.240 | and can have 50 or 60% of their portfolio in this.

00:24:54.940 | And if you can handle that and you can do the work

00:24:57.000 | and you understand these stocks, that's fine.

00:24:58.800 | But if you're someone who's just kind of willy-nilly,

00:25:01.040 | like, "I liked these stocks and I put money in them

00:25:02.840 | because they were going up,"

00:25:04.340 | and you don't have a plan on the other side

00:25:05.720 | for when am I gonna sell them

00:25:06.920 | and when is the business turnaround

00:25:08.100 | and what's the difference between a good business

00:25:09.520 | and a good stock,

00:25:10.720 | or potentially now a bad business and a bad stock,

00:25:13.660 | this is your out.

00:25:16.280 | This is the time to reassess and understand,

00:25:18.360 | "Okay, this is my true risk profile.

00:25:21.320 | And now I actually understand.

00:25:22.920 | And I'm gonna build a portfolio that I can stick with

00:25:24.640 | through bull markets and bear markets

00:25:25.940 | and not just when things are going up."

00:25:27.720 | - Yeah, and the data on your side.

00:25:29.000 | John, can we pull up the chart that I put up?

00:25:30.920 | Yeah.

00:25:31.760 | So this is a study.

00:25:32.580 | It was a 25-year sample period, '83 to 2007,

00:25:35.320 | where some gentleman from Blackstar Funds,

00:25:37.720 | they renamed him a couple of times to Longboard,

00:25:39.160 | they're still in existence.

00:25:40.360 | But this chart is burned into my brain.

00:25:42.020 | And they took a look at not just the stocks

00:25:44.040 | in the Russell 3000,

00:25:45.480 | but every stock that had been in an index,

00:25:48.760 | in that index for a 25-year period.

00:25:51.220 | And you can see the distributions of returns here

00:25:53.280 | relative to the index.

00:25:54.860 | Only 36% of the universe of stocks

00:25:58.120 | outperformed the index during that time period,

00:26:00.560 | with fat tails on either side.

00:26:02.460 | So just in a random sample in a Burton Malkiel,

00:26:05.560 | monkey throwing dart scenario, you pick 100 stocks,

00:26:08.240 | the data show that about two thirds of those

00:26:10.080 | are gonna perform the index.

00:26:11.180 | And this to me is the triumph of indexing,

00:26:13.360 | that you don't have to pick the winners and losers.

00:26:15.480 | It doesn't matter if you get the right ones right or wrong.

00:26:18.320 | It's the capitalism distribution that matters.

00:26:20.600 | And you will enjoy the next Amazon,

00:26:23.200 | the next Microsoft, the next Google,

00:26:24.680 | if you have a broad enough portfolio.

00:26:26.580 | And if you're paying basis points

00:26:28.580 | to outsource that management, that decision-making,

00:26:31.060 | you're probably coming out ahead

00:26:32.100 | relative to trying to do it yourself.

00:26:34.040 | - And I'm fine with people speculating

00:26:35.780 | as long as you right-size it.

00:26:37.180 | There's nothing wrong with wanting to pick stocks

00:26:38.820 | and pick, like I like paying attention to stuff.

00:26:40.380 | I have a fun portfolio at Robinhood that I pick stocks with.

00:26:43.460 | It's gotten destroyed this year.

00:26:45.060 | I have one boomer stock that pays dividends,

00:26:47.100 | that's doing okay.

00:26:48.060 | Everything else has gotten mangled for the last 18 months.

00:26:51.140 | - Yeah, I got that all out of my system two recessions ago.

00:26:54.880 | - I right-size, it's like five or 10% of my portfolio.

00:26:57.480 | It's fun money.

00:26:59.220 | It's kind of over here.

00:27:00.600 | And then everything else is on autopilot

00:27:02.340 | and everything else is not being touched.

00:27:04.160 | And that's the idea.

00:27:05.000 | And I think people just have learned

00:27:06.580 | it's time to right-size this stuff.

00:27:07.840 | And I think this is the time that you do that.

00:27:09.520 | - Yep, I agree.

00:27:10.360 | So best of luck, Sarah.

00:27:11.500 | Thank you very much for you and your husband's service.

00:27:13.560 | We appreciate your service to our great country.

00:27:15.680 | And just send us a quick email

00:27:17.640 | if there's anything we can help you with.

00:27:18.760 | We appreciate it very much.

00:27:20.720 | - Yes, so thanks for hopping in here, Bill.

00:27:23.720 | - Yeah, it was great.

00:27:24.640 | Where's the music?

00:27:25.480 | We need the tunes back.

00:27:27.040 | John, I was about to start beat boxing.

00:27:28.880 | - Duncan will be back.

00:27:30.280 | We have some holidays coming up.

00:27:31.720 | So we'll have some days we're not on

00:27:33.080 | and around Thanksgiving and Christmas maybe, but-

00:27:35.480 | - Two weeks.

00:27:36.320 | - Duncan will be back.

00:27:37.140 | Yeah, we're getting there.

00:27:38.200 | I'm already ready to tell people

00:27:39.840 | circle back in the new year.

00:27:41.160 | - Yeah.

00:27:42.000 | - Already, right?

00:27:42.840 | - I don't know.

00:27:43.660 | We've got some runway.

00:27:44.500 | We've got some work to do, Ben, between now and 1231.

00:27:46.600 | - If you're listening to this in podcast form,

00:27:48.680 | leave us a review, watching on YouTube.

00:27:51.120 | You're not a subscriber, hit that subscriber button.

00:27:52.680 | Make Duncan feel better when he's sick.

00:27:54.960 | Leave us a comment or a question.

00:27:56.800 | If you have a question, askthecompoundshow@gmail.com

00:27:59.560 | and we'll see you next week.

00:28:00.760 | - Feel better, Duncan.

00:28:01.840 | (silence)

00:28:04.840 | (silence)

00:28:07.000 | (silence)

00:28:09.160 | (silence)

00:28:11.320 | (silence)

00:28:13.480 | [BLANK_AUDIO]

When Should You Sell Your Beaten-Down Stocks? | Portfolio Rescue 52

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