I Sold My Stocks. What Now?

00:00:00.000 | (beeping)

00:00:02.160 | - Welcome back to Ask the Compound.

00:00:13.140 | Every week people email us at askthecompoundshow@gmail.com.

00:00:16.100 | Duncan, I was looking this week

00:00:17.080 | and we have 43 pages of questions to go through.

00:00:20.280 | - Yeah.

00:00:21.240 | - A lot of details, we don't mind those details sometimes.

00:00:23.040 | Could use a TLDR sometimes,

00:00:24.460 | but we like the fact that people share everything with us.

00:00:26.760 | So gotta have a good question

00:00:28.120 | if you wanna make it to the top of the heap, right?

00:00:29.840 | - That's true, yeah.

00:00:30.680 | - Today's Ask the Compound

00:00:31.980 | is sponsored by Foundation Source.

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00:00:37.740 | We don't talk much about giving back though.

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00:01:18.760 | Really cool, really cool, cool organization.

00:01:21.720 | - Yeah, very cool.

00:01:23.400 | - All right, I am doing today's show live from Montreal.

00:01:26.720 | I spoke for a banking conference this morning

00:01:30.480 | in front of a few hundred bankers.

00:01:32.300 | You know, the stereotype of Canadian people is true.

00:01:34.600 | Just some of the warmest, nicest people in the world.

00:01:37.200 | They really are, you know.

00:01:38.200 | I come from the Midwest

00:01:39.040 | where people are generally pretty nice.

00:01:40.440 | People in Canada just blow us out of the water.

00:01:43.240 | I've never been to Montreal before

00:01:44.660 | and dunk in my one way of figuring out

00:01:46.680 | when I come to a new city, I wanna explore a little bit.

00:01:48.880 | I walked around and had dinner last night.

00:01:51.040 | And this morning I went for a jog.

00:01:53.480 | And anytime I go for a run in a new city,

00:01:55.200 | it's a way to explore,

00:01:56.560 | but it's also a nice way to find water

00:01:58.480 | and find if there's a good trail.

00:01:59.480 | And they have a trail right along the water, beautiful,

00:02:01.920 | just a gorgeous city, really clean too.

00:02:04.480 | That's what I like about it.

00:02:05.360 | So I double thumbs up for Montreal.

00:02:08.320 | - Have you heard a lot of people say eh?

00:02:10.040 | Is that a real thing?

00:02:11.120 | - Well, people have the French here

00:02:13.000 | because we're in Quebec, so it's more French.

00:02:15.640 | There's a lot of French and yeah,

00:02:16.960 | it's a very beautiful, beautiful city.

00:02:18.880 | So let's get into questions for today.

00:02:21.880 | - Okay, up first today, we have a question from Doug.

00:02:26.040 | After living through 0% interest rates for years

00:02:28.440 | and being a relatively risk-averse 62 year old

00:02:30.840 | approaching retirement,

00:02:32.160 | I was thrilled to see 5% T-bill yields this year.

00:02:35.600 | I de-risked my portfolio from roughly 75/25 stocks to bonds

00:02:39.480 | to more like 60/40 late last year.

00:02:41.960 | Now the stock market is up double digits this year

00:02:44.000 | and I feel like I made a terrible decision.

00:02:46.160 | Help talk me off the ledge here

00:02:47.320 | so I don't regret making an asset allocation change

00:02:49.680 | at the wrong time.

00:02:51.360 | - All right, Doug, I'll talk you off the ledge.

00:02:53.600 | I don't find much fault in here.

00:02:56.160 | There were definitely a lot of people

00:02:57.200 | when it was 0% interest rates who said,

00:02:58.960 | "Geez, I should be 60/40, but I'm gonna go 75/25

00:03:02.360 | 'cause I'm getting nothing from my bonds."

00:03:03.760 | And that made sense.

00:03:05.400 | The two things you could have done back then

00:03:06.720 | were make a change to your portfolio allocation

00:03:08.360 | or just change your expectations.

00:03:10.200 | And I feel like, but this is a good segue

00:03:12.680 | into understanding the two reasons

00:03:14.240 | that market timing is hard.

00:03:16.080 | One is, of course, you could be wrong, right?

00:03:18.280 | You could make a decision, the market goes against you.

00:03:20.400 | If you go all in and the market falls,

00:03:22.440 | you feel like an idiot.

00:03:23.600 | If you go out of the market, the market rises,

00:03:25.920 | you feel like an idiot, or you could be right.

00:03:27.800 | Then what, right?

00:03:28.680 | Then are you stuck in cash forever?

00:03:30.360 | It's hard to get back in?

00:03:31.280 | Like, what is your time to get back in?

00:03:32.680 | That's one of the reasons market timing is so hard, but--

00:03:35.520 | - That's the title of today's show.

00:03:37.000 | - That's right.

00:03:37.840 | And we heard from a lot of people

00:03:39.280 | that they were really excited about 5% T-bill yields.

00:03:41.560 | Again, we got so many questions on this

00:03:43.720 | and a lot of people asked us what made sense.

00:03:45.120 | Should I shift some of my equity allocation?

00:03:46.400 | And I said, you know, that sounds good in a world

00:03:49.320 | where the stock market isn't a bear market, we're down 20%.

00:03:51.600 | When the stock market is up 20%,

00:03:53.040 | those 5% T-bill yields don't sound quite as good.

00:03:56.080 | So this is why I wasn't a big fan

00:03:58.600 | of making a sweeping change to your portfolio.

00:04:00.480 | Now, what Doug did here, that's different, right?

00:04:04.240 | Doug sounds to me like he took a look at his risk profile

00:04:07.960 | and time horizon asset allocation and said,

00:04:10.640 | now that I'm earning some yield,

00:04:11.640 | I think I'm gonna go back to where I should have been.

00:04:13.240 | So that makes sense to me.

00:04:14.720 | And I think you have to think in terms of process

00:04:17.880 | over outcomes when making these kinds of decisions, right?

00:04:21.000 | What if you make a decision to buy or sell stocks

00:04:24.440 | or bonds in your portfolio

00:04:25.640 | because of your circumstantial change

00:04:27.280 | and not because of the market?

00:04:28.120 | 'Cause you can never time these things perfectly, right?

00:04:30.560 | As long as you went from 75 to 25 to 60, 40

00:04:34.280 | for the right reasons, that's fine,

00:04:35.360 | but you can't go 75, 25, 60, 40, 75, 25, 60, 40.

00:04:40.320 | Oh no, I did something wrong again.

00:04:41.280 | That's the problem.

00:04:42.120 | If you're going back and forth,

00:04:42.960 | if you're gonna stick there because your risk profile,

00:04:45.400 | time horizon or circumstances or goals changed,

00:04:48.480 | that to me is not timing the market.

00:04:49.920 | That's just timing your own life.

00:04:51.600 | That makes sense to me.

00:04:52.880 | I mean, the one way you could do it

00:04:54.320 | to maybe ease a little of the pain and the regret

00:04:56.320 | is slowly do it instead of doing it all at once.

00:04:59.200 | But then you could still be wrong there because, well,

00:05:02.040 | I look back and I dollar cost average out of the market,

00:05:04.120 | but now what if I would've just done it on one lump sum?

00:05:07.440 | I would've been better.

00:05:08.280 | So it's always making these high probability decisions

00:05:11.360 | when understanding that you can and will be wrong.

00:05:13.280 | Sometimes the market just goes against you.

00:05:15.040 | It's not very much fun.

00:05:15.880 | So I think everyone is wrong at some point.

00:05:19.160 | When investing, I think the best you can do

00:05:20.440 | is just plan for a wide range of outcomes.

00:05:22.400 | That's why I think it's so important

00:05:23.840 | to give every asset class or strategy in your portfolio

00:05:26.240 | a job in the first place.

00:05:27.820 | So when you have some cash come in,

00:05:30.120 | you don't have to think about it.

00:05:31.400 | You just know, okay, I'm putting cash

00:05:33.960 | based on this asset allocation

00:05:36.240 | and I'm putting it in there now

00:05:37.200 | and I'm not thinking about it.

00:05:38.040 | So you don't have to get,

00:05:38.880 | you have a cash for some reason, a bonus,

00:05:41.160 | or you sold something and you sold a house

00:05:43.120 | or whatever, you have money.

00:05:44.400 | You're not thinking, jeez, should I,

00:05:46.080 | what's the best investment opportunity?

00:05:47.360 | T-bills or bonds or stocks.

00:05:49.200 | If you have a plan in place already,

00:05:50.920 | you don't even have to think about it.

00:05:51.920 | You just do it.

00:05:52.920 | That's the whole reason you have a plan in the first place.

00:05:55.720 | - Yeah, I made a note here,

00:05:56.640 | but it kind of reminds me exactly what you're talking about.

00:05:58.880 | It reminds me of driving on snow or ice

00:06:01.360 | and how where you really get into trouble is snap steering

00:06:04.100 | and trying to like over-correct.

00:06:05.720 | That's what causes wrecks and crashes.

00:06:07.760 | - The very first time I drove in snow,

00:06:09.680 | I had a 1989 Honda Accord.

00:06:11.920 | Tires were basically bald,

00:06:13.240 | which was great for driving on Northern Michigan.

00:06:15.320 | And I didn't have anti-lock brakes.

00:06:16.620 | They didn't exist on that car yet.

00:06:18.520 | And the first time we had a light dusting,

00:06:21.120 | I slammed the brakes and went right into a ditch.

00:06:23.320 | Very first time.

00:06:24.960 | I was like a block from home.

00:06:26.320 | - You're basically an F1 driver if you don't have,

00:06:28.920 | if you don't have anti-lock brakes.

00:06:29.760 | - Yeah, I'm, yeah.

00:06:31.700 | All right, next question.

00:06:32.720 | So yeah, Doug, I don't think you market time.

00:06:34.280 | I think you made the decision

00:06:36.000 | with all the information at the time that you had.

00:06:39.000 | I'm sure you're kicking yourself off.

00:06:40.280 | I would've just waited a little longer,

00:06:41.280 | but the reason you set an asset allocation

00:06:42.920 | in the first place is because you want to stick with it.

00:06:45.360 | - Yeah, good advice.

00:06:46.440 | Okay, up next, we have a question from Chris.

00:06:51.220 | Does rebalancing essentially lock in losses?

00:06:54.560 | I have a robo-advised Roth IRA

00:06:57.120 | that seemingly rebalances every other day.

00:06:59.760 | Will I ever get back to break even?

00:07:01.760 | And when do I stop buying the stock market on sale?

00:07:04.580 | - Rebalancing is actually supposed to be

00:07:08.200 | more of a value type of strategy.

00:07:09.760 | It's like counter-cyclical approach to investing.

00:07:11.640 | So it's a process of trimming some of your winners

00:07:13.760 | to buy some of your losers, right?

00:07:15.260 | That's the whole idea.

00:07:17.080 | So let's look at an example

00:07:18.160 | to see how rebalancing works in practice.

00:07:20.040 | So let's say you took 60% of your money

00:07:23.000 | and you put it in stocks in the US stock market,

00:07:25.520 | 40% of your money in 10-year treasuries.

00:07:27.560 | So if we go back,

00:07:28.480 | if we look over the longterm, the past 95 years,

00:07:31.200 | 1928 to 2022, S&P 500 did 9.6% per year.

00:07:37.320 | 10-year treasuries did 4.6%, right?

00:07:40.560 | So if we simply took 60% of the stock market return

00:07:43.400 | and 40% of the bond market return,

00:07:45.000 | we get 7.5% per year roughly, right?

00:07:48.800 | Not bad.

00:07:50.120 | But what if we take the actual returns on an annual basis,

00:07:52.920 | not just the average,

00:07:53.760 | and we rebalance back to 60/40 once a year?

00:07:56.640 | Now our annualized return is more like 8.2%.

00:07:59.960 | So how did we get 70 basis points more of return

00:08:04.600 | than what you would expect just based on the averages?

00:08:06.400 | Well, it's the rebalancing bonus, right?

00:08:07.720 | So over the past 95 years,

00:08:09.480 | the stock markets outperformed the bond market 60 times

00:08:13.400 | on calendar year basis,

00:08:14.240 | meaning the bond market is outperforming

00:08:15.840 | the stock market 35 times.

00:08:17.200 | So those years when stocks are doing better than bonds,

00:08:18.720 | you're trimming your gains,

00:08:19.560 | which doesn't feel that good

00:08:20.440 | if the stock market keeps going up,

00:08:21.920 | but if it goes down, you're doing great, right?

00:08:23.240 | And those years when bonds do better than stocks,

00:08:25.920 | you're redeploying some of that dry powder

00:08:27.400 | from bonds into stocks.

00:08:28.600 | So it's not a perfect strategy by any means,

00:08:30.120 | but I think it's a way to keep yourself honest

00:08:31.960 | and stick with that asset allocation as I talked about.

00:08:35.280 | Is daily rebalancing an overkill or every other day?

00:08:38.240 | That does seem a lot to me.

00:08:40.880 | And it might not be bad for your portfolio,

00:08:43.480 | but it might not be good.

00:08:44.320 | So Vanguard actually looked at the data

00:08:45.720 | in a research piece last year.

00:08:46.800 | John, do a chart on for me.

00:08:48.640 | Also, I just have to say, keep the chart on.

00:08:51.040 | I was giving my talk today and I have a chart on sticker

00:08:53.800 | that we have.

00:08:54.640 | I don't know if we sell that one anymore, Duncan,

00:08:55.920 | but we have a chart on sticker.

00:08:56.760 | We never did, it's a one of a kind.

00:08:58.600 | And someone, I can't believe it,

00:09:00.440 | they were unfamiliar with my work,

00:09:02.080 | and they said, "Are you a technical analyst?"

00:09:04.400 | Because I said, "What do you mean?"

00:09:05.680 | They said, "We have a chart on sticker on your..."

00:09:08.120 | - And you just said, "Yes, yes I am."

00:09:09.360 | - Yeah, good enough.

00:09:11.160 | So anyway, Vanguard actually looked

00:09:12.600 | at a global 60/40 portfolio and found too frequent

00:09:16.100 | or too infrequent is not a good idea.

00:09:17.680 | So you can see from this chart,

00:09:18.880 | it says daily is actually the worst.

00:09:21.400 | Annual is optimal, but then if you never rebalance

00:09:23.880 | or wait two and a half years to rebalance,

00:09:26.080 | then you start losing some positive benefits

00:09:29.320 | from rebalancing.

00:09:30.660 | So daily probably is a little too much

00:09:33.920 | because you want to have some drift in your portfolio

00:09:36.400 | to allow the assets that are doing well

00:09:37.840 | to continue working at least for a time.

00:09:39.580 | So I think once every six, 12, maybe 18 months at the most,

00:09:43.640 | it seems reasonable to me.

00:09:45.500 | I guess you could also do some sort of threshold

00:09:47.200 | where I have a 10% allocation to this asset class,

00:09:50.040 | but if it goes 20% above or below that, I could rebalance.

00:09:53.600 | Or you could have periodic, I'm gonna rebalance annually,

00:09:56.040 | but if I breach those thresholds in the meantime,

00:09:59.200 | then I'm gonna rebalance.

00:10:00.480 | That all makes sense to me.

00:10:01.400 | My view on this is it's horseshoes or hand grenades, right?

00:10:03.840 | Close enough does the trick.

00:10:06.000 | Now onto the question about locking in the losses.

00:10:07.600 | I like the idea behind rebalancing

00:10:10.040 | to sell some of your winners, buy some of your losers,

00:10:11.640 | especially when stocks are down, right?

00:10:13.440 | And so if you're still making contributions

00:10:16.000 | and your portfolio is not fully funded,

00:10:19.140 | you want to keep buying stocks on sale.

00:10:20.640 | That's a good thing.

00:10:21.680 | So I think as long as you're doing that,

00:10:23.020 | you don't want stocks recovering.

00:10:24.080 | The stock market has recovered quite a bit.

00:10:25.600 | It's still down.

00:10:26.440 | I think the S&P is down 10% from all-time highs

00:10:27.900 | after being down 20% at one point.

00:10:30.440 | But if you're still making contributions,

00:10:32.520 | yeah, you're not locking in losses.

00:10:33.960 | You're just, you're continuing to buy stocks.

00:10:36.120 | That, you know, I mean, if you're an individual stock, sure.

00:10:39.080 | Are some of them never gonna go back?

00:10:40.160 | Probably.

00:10:41.040 | But if you're in an index,

00:10:42.400 | can I guarantee they'll come back?

00:10:43.560 | No, but I can be pretty certain

00:10:45.600 | that losses are probably gonna be temporary

00:10:47.680 | and that buying into losses,

00:10:49.560 | especially if you're a younger person,

00:10:50.560 | you're still making contributions, is a good thing.

00:10:52.920 | Be thrilled to be buying stocks on sale.

00:10:53.760 | - Wait, so you're saying my individual stocks

00:10:54.780 | aren't all gonna reach their previous highs necessarily?

00:10:58.640 | - I mean, I,

00:11:00.080 | yes. - Holding out.

00:11:00.920 | - Probably not. - Holding out hope.

00:11:02.320 | - I, yes, the probabilities are not with you, unfortunately.

00:11:07.000 | - Okay, well, that's depressing.

00:11:08.740 | - You know, they say hope is not a strategy in investing,

00:11:12.760 | but I think we're all have a little bit of element of hope,

00:11:16.320 | but you keep buying and hoping, Duncan.

00:11:18.880 | - Yeah, yeah, I will.

00:11:20.780 | - Okay. - Okay.

00:11:21.840 | Up next, we have a question from Bill,

00:11:26.240 | a question from Bill for another Bill,

00:11:29.600 | which is kind of cool.

00:11:30.440 | So, "If Bill's suite is going to be on,

00:11:32.480 | "please ask if he knows of a way

00:11:34.840 | "to move some of my assets into my son's names

00:11:37.260 | "without tax consequences.

00:11:39.060 | "I already fully fund Roth accounts

00:11:40.760 | "for each of them and their wives."

00:11:42.820 | Wow, this is a really nice dad.

00:11:44.920 | - Yeah, it is, nice parent here.

00:11:47.020 | We get questions addressed directly to Bill now,

00:11:49.880 | probably as many as are coming directed to me.

00:11:51.440 | So let's bring the Roth man on the show.

00:11:54.240 | Bill, we have a question for you coming in hot

00:11:57.200 | because you're now getting questions asked to you.

00:11:59.160 | Someone asked on our team this morning,

00:12:01.000 | "How many Ask the Compound shows has Bill appeared on?"

00:12:04.320 | What do you think?

00:12:05.160 | The numbers surprise me.

00:12:06.600 | - Wow, that's a-- - Drop numbers in the chat.

00:12:08.320 | I'm curious to see guesses.

00:12:09.320 | - Yeah, that's a great question.

00:12:10.480 | So do you want me to answer,

00:12:11.560 | or are we pulling the audience here?

00:12:12.880 | What are we doing?

00:12:13.880 | - Yeah, let's pull the audience

00:12:14.840 | and we'll answer after this question.

00:12:16.040 | - Okay, I have a guess.

00:12:16.880 | I'll write it down.

00:12:17.840 | What's crazy, too, not to interrupt,

00:12:19.360 | but there's two Bills, too.

00:12:20.520 | You've had multiple Bills on the show.

00:12:22.120 | So this Bill specified Bill's suite out of all the Bills.

00:12:25.440 | - It's true. - So I'll take it.

00:12:26.280 | Thank you.

00:12:27.480 | So this person wants to,

00:12:28.800 | they don't wanna go around the U.S. government,

00:12:31.160 | the IRS, obviously,

00:12:32.000 | but they wanna figure out how do I leave more money

00:12:33.760 | to my heirs before I pass, I guess.

00:12:37.200 | What are the gifting consequences here

00:12:39.440 | from a tax perspective?

00:12:40.520 | - Right, so this is, Ben,

00:12:41.520 | this is a great not to brag question

00:12:43.280 | 'cause it's kind of subtle and embedded.

00:12:45.140 | I'm gonna assume that Bill

00:12:46.360 | isn't talking about income tax here

00:12:48.140 | because, Ben, as you know,

00:12:49.400 | and Duncan, I'm sure you know, too,

00:12:50.800 | there's no income tax consequence for transferring assets.

00:12:54.160 | As a matter of fact, the cost basis tends to transfer

00:12:56.680 | and therefore the tax consequences are the heirs.

00:12:58.840 | Ben, if you're gonna give away

00:13:00.120 | your $179 Apple stock to your kids

00:13:02.320 | that you bought for a dollar,

00:13:03.440 | the income tax is the kid's problem, not yours, right?

00:13:05.680 | So I'm assuming they're talking about gift tax,

00:13:08.260 | which is a totally separate tax regime

00:13:10.500 | than income tax entirely.

00:13:11.680 | We've all kind of heard of it, right?

00:13:12.920 | If you're conservative, death tax.

00:13:15.100 | If not, it's this sort of tax on millionaires.

00:13:18.240 | And ultimately, the gift tax would only kick in

00:13:20.640 | if you're gifting more than $17,000 of assets

00:13:23.880 | to any single person in any single year.

00:13:25.960 | Bill sounds like a great dad,

00:13:27.160 | so I'm assuming he's talking about limits ahead of this.

00:13:30.140 | Bill, if you happen to be married,

00:13:31.300 | your gift limit if you split gifts with your spouse

00:13:33.280 | is actually $34,000.

00:13:35.080 | - Oh, it's one per person, okay.

00:13:36.320 | - Per person, correct.

00:13:37.280 | And Ben, and Bill mentioned in his email

00:13:39.080 | that he's been sort of helping his sons

00:13:40.800 | and their daughters out with forming a case,

00:13:43.120 | his daughter's-in-law.

00:13:44.000 | So ultimately, if it's couple to couple,

00:13:45.400 | that's all the way at $68,000 per couple per year, right?

00:13:48.280 | So you get to stack these-

00:13:49.120 | - Oh, so that's a pretty high threshold then.

00:13:50.960 | - Pretty high threshold, no gift tax consequences at all.

00:13:53.600 | However, it sounds like Bill's trying to think ahead.

00:13:56.080 | He's maybe thinking about some estate planning.

00:13:57.960 | If you give anybody in excess of that,

00:13:59.720 | you need a file form 709, and that's a gift tax return.

00:14:02.840 | But for the most part, you probably don't need tax.

00:14:06.160 | Ben, do you have any idea why you would no tax

00:14:08.200 | if you're above the exclusion amount?

00:14:10.640 | - No, I'm trying to figure out the gift tax stuff here.

00:14:12.660 | I'm lost, what do you got?

00:14:13.500 | - Okay, cool.

00:14:14.320 | Okay, everyone, you, me, Duncan, John,

00:14:17.480 | everybody listening on this call today

00:14:19.400 | is a $12.92 million lifetime gift and estate exclusion

00:14:23.800 | at the federal level.

00:14:24.880 | And so that means there's no gift tax

00:14:26.440 | until you've exhausted that entire limit.

00:14:28.800 | And that limit does adjust for inflation.

00:14:30.480 | It does change over time.

00:14:32.040 | Famously in 2010, the year George Steinbrenner died,

00:14:34.480 | the gift exemption was unlimited.

00:14:36.320 | Like there was no gift tax at all.

00:14:37.840 | So it does kind of move around a bit.

00:14:39.440 | But ultimately, if we're talking about amounts below that,

00:14:42.560 | there's not gonna be any gift tax consequences either.

00:14:44.760 | You just kind of need to do some estate planning.

00:14:46.440 | And this would really-

00:14:47.280 | If Bill has a big amount of money,

00:14:50.720 | talking to an advisor or estate planner

00:14:52.440 | is probably not a bad idea.

00:14:53.280 | - And that's when you hire an attorney.

00:14:54.520 | And if you're above that 12 million,

00:14:56.640 | 13 million individual, $26 million for a couple situation,

00:15:00.160 | again, God bless you, that's a real serious, not to brag.

00:15:03.120 | That's the type of client you would-

00:15:03.960 | - Or start a foundation.

00:15:04.780 | I have one other suggestion for Bill here.

00:15:06.880 | Spend some of that money with your kids now.

00:15:08.800 | Don't just give it all to them.

00:15:10.280 | Spend some money, take them on a trip,

00:15:11.920 | maybe an extravagant dinner, instead of leaving it all.

00:15:14.600 | Like experience, they're gonna appreciate those experiences

00:15:17.400 | and memories way more than they are gonna,

00:15:19.680 | getting a lump sum of the day you buy.

00:15:20.520 | - And start a family business together with that money.

00:15:21.920 | - I love it, I dig it.

00:15:22.880 | Yeah, Ben Duncan, I was gonna go into a Gratz,

00:15:25.400 | grant a retained annuity trust.

00:15:26.960 | I was gonna go into family, into partnerships.

00:15:28.760 | But Ben, you hit the nail on the head.

00:15:31.140 | That experience you have with your children,

00:15:32.960 | you can't replicate that.

00:15:34.080 | Young parent here, I'm with you.

00:15:36.120 | You stole my thunder, man.

00:15:37.640 | Good job.

00:15:38.480 | - All right, next question.

00:15:40.280 | I think we have another one addressed to Bill.

00:15:41.960 | - Let's reveal the number of times that Bill's been-

00:15:44.320 | - Oh yeah, how many times has Bill been on the show?

00:15:45.880 | What do you got?

00:15:46.720 | - I'm gonna guess 15, 15.

00:15:48.640 | Coming in high.

00:15:49.520 | - What was it?

00:15:50.360 | - 21?

00:15:51.200 | - 21 today, today is the 21st.

00:15:53.720 | - Wow, I can legally buy beer today.

00:15:55.600 | That's awesome.

00:15:56.440 | Congratulations, guys.

00:15:57.840 | Wow, that's amazing.

00:15:59.120 | - Yeah, we'll give you something.

00:16:00.120 | Maybe we'll send you a sticker in the mail, Bill.

00:16:01.920 | - Great, great show.

00:16:02.840 | It's my favorite part of my whole week.

00:16:05.120 | When you guys bring me out of the box.

00:16:06.600 | - Let's do another one.

00:16:07.440 | I can get another one addressed right to Bill.

00:16:08.900 | - Yeah, let's do it.

00:16:09.960 | - Here we go.

00:16:11.440 | Okay, up next we have a question from Nicole.

00:16:14.040 | Not our Nicole though.

00:16:15.480 | I got excited earlier this year

00:16:17.160 | when Bill spoke about the new tax change,

00:16:19.200 | especially the benefit of 100% contribution to a Roth 401k.

00:16:23.520 | It made me wonder, what will next year's filing look like

00:16:27.260 | after increasing my income?

00:16:28.720 | They got a pay raise, congrats.

00:16:30.960 | And they're doing 100% Roth contribution

00:16:32.640 | with no current tax break.

00:16:34.600 | I'm taking advantage of a Roth

00:16:36.120 | as I see the benefit of being taxed on my income now.

00:16:39.840 | However, I'm a little nervous about my 2023 tax burden.

00:16:44.380 | - All right, a lot going on here.

00:16:45.760 | Yeah, good little not to brag,

00:16:46.800 | but I think a lot of people probably in this

00:16:48.760 | because inflation has been so high.

00:16:50.000 | People are getting raises now, right?

00:16:51.320 | Labor market is tight.

00:16:52.560 | So what's the big worry here, Bill,

00:16:56.240 | in terms of the pay raise?

00:16:57.160 | Just 'cause this seems like we get this question

00:16:59.520 | all the time of I'm close to that Roth limit.

00:17:02.080 | I don't know what it's gonna look like.

00:17:02.960 | What's the worry here?

00:17:04.660 | - Yeah, so the worry is that Nicole's gonna

00:17:06.800 | make more income good for Nicole.

00:17:08.560 | Ben, keep in mind, the tax brackets

00:17:10.160 | are adjusting for inflation too.

00:17:11.560 | So ultimately, if you're just getting

00:17:13.000 | an inflation-adjusted raise,

00:17:14.120 | hopefully you're just keeping pace.

00:17:15.120 | But the fear is the more that you sort of

00:17:17.880 | deposit into that Roth bucket, vice traditional,

00:17:20.320 | the higher your income tax is in the present, right?

00:17:22.720 | And we all know I'm pro-Roth.

00:17:24.240 | I mean, Sean and Dave in the chat were like,

00:17:27.440 | "Hey, should I just ever go 100% Roth?"

00:17:29.600 | I think maybe my Roth stance

00:17:31.120 | has been a little too overstated.

00:17:32.820 | I do love Roth.

00:17:33.820 | I think Roths are underutilized,

00:17:35.320 | but 100% Roth--

00:17:36.160 | - Are you saying you never go full Roth?

00:17:37.320 | - You never go full Roth.

00:17:38.360 | That's exactly what I'm trying to say.

00:17:39.680 | You beat me to the punch.

00:17:40.680 | And so I wanna quote a couple of things

00:17:42.480 | from an academic paper, Edward Ricquari.

00:17:45.200 | Great, great, great academic paper.

00:17:46.760 | I shared it there in the chat if you wanna check it out.

00:17:48.760 | But two quick quotes from when and for whom

00:17:51.680 | are Roth conversions most beneficial.

00:17:53.600 | Quote number one, "In temporal,

00:17:55.240 | "tax arbitrage proceeds inch by inch.

00:17:57.420 | "It's a slow process that takes decades to ripen.

00:18:00.300 | "And furthermore, Roth conversion always pays off

00:18:03.360 | "if the time span is long enough."

00:18:05.000 | Unfortunately, Ben, on a long enough timeline,

00:18:07.640 | we're all dead, right?

00:18:08.520 | So like, really, you get to add 10 years after your passing.

00:18:11.880 | And I think that kind of nails it.

00:18:13.280 | So what Nicole is getting at is do I wanna pay tax now?

00:18:16.000 | So John, can we pull up a chart

00:18:17.280 | and maybe take a look at this?

00:18:19.040 | So instead of thinking it like Roth, Roth, Roth,

00:18:21.080 | we want Roth everywhere,

00:18:22.160 | what I'm showing the listeners on the YouTube channel

00:18:24.280 | is the 2013 marginal tax rates.

00:18:26.720 | And here you can just see,

00:18:27.840 | if you visualize it, close your eyes,

00:18:29.160 | you can see a stair step up.

00:18:30.760 | And it goes from 10% to 12% to 22%.

00:18:33.360 | That's the first very big jump.

00:18:34.880 | And if you look directly in the middle of the chart,

00:18:36.800 | the 24 to 32% jump is the next big jump.

00:18:39.960 | And the two big jumps happen

00:18:41.440 | at roughly about $58,000 of gross income

00:18:44.440 | and about $195,000.

00:18:46.400 | So Nicole, if you're around there,

00:18:48.280 | instead of thinking all Roth or no Roth,

00:18:50.560 | for me, if you're contributing below that 22% bracket,

00:18:54.480 | it probably makes sense,

00:18:55.840 | assuming that you have 30 years of competing ahead of you.

00:18:58.240 | John, can we flip to the next chart, please?

00:19:00.520 | To break this into three chunks,

00:19:02.520 | my opinion is you wanna Roth that piece

00:19:05.140 | if you're in the 10 or 12% tax bracket, right?

00:19:07.600 | So again, a single individual of $58,000 or less.

00:19:10.320 | There's this gray area, Ben, 22, 24%.

00:19:13.520 | That's probably gonna be the distribution tax rate

00:19:15.620 | for most taxpayers, assuming they have social security,

00:19:19.000 | assuming they have some savings.

00:19:20.540 | But for me, that 32% jump on the right,

00:19:23.100 | to your point, Ben, you never go full Roth.

00:19:25.040 | And I would not be doing Roth 401ks

00:19:27.920 | or heavy Roth conversions at 32% or higher.

00:19:31.460 | So that's generally the general rule of thumb.

00:19:33.980 | But Ben, as you might know, everything depends.

00:19:35.720 | State taxes throw a wrench into things, too.

00:19:37.900 | But I think maybe my stance on Roth IRAs

00:19:40.180 | after all this time has been a little overstated.

00:19:42.420 | You're present for being on the show 21 times

00:19:44.160 | as we're gonna get you a tattoo removal

00:19:45.360 | and take that Roth tattoo off your back.

00:19:47.380 | I'll take it, I'll take it.

00:19:48.660 | 'Cause it's time, it's time to get real.

00:19:51.200 | So unfortunately, guys, with all things, it depends.

00:19:53.840 | And that's not a fun question for Ask the Compound,

00:19:56.800 | but it's the real life question.

00:19:58.680 | I just think Roths are underused.

00:20:00.280 | And so I encourage you while you're young

00:20:01.720 | and you're not making a ton of money,

00:20:02.860 | just fill those buckets up.

00:20:03.700 | Yeah, but maybe if you are getting up there

00:20:05.120 | and you're closer to it, then rethink it.

00:20:07.140 | That makes sense.

00:20:07.980 | Yep, 100%.

00:20:08.820 | All right, let's do another one.

00:20:09.800 | Great.

00:20:10.640 | Cool, okay, up next we have a question from Evelyn.

00:20:14.700 | I'm 32 years old and hoping to retire.

00:20:17.060 | They put retire in quotes, so I'm not sure what that means.

00:20:19.400 | But hoping to retire before 59 and a half.

00:20:22.280 | I'm planning on using investment accounts

00:20:24.160 | to supplement my income until I can withdraw

00:20:27.000 | from retirement accounts penalty-free.

00:20:28.800 | Since capital gains taxes are 15%,

00:20:31.200 | does it make sense to max out my Roth IRA

00:20:33.320 | and assume a 10% penalty on early withdrawals

00:20:35.700 | before investing in a traditional brokerage account?

00:20:38.160 | Bill, I think I've asked you this before.

00:20:39.640 | What's the half about?

00:20:40.560 | Why do we do the half?

00:20:42.040 | The half is nuts to me.

00:20:43.020 | The only people who will celebrate half birthdays

00:20:44.560 | are my six-year-olds.

00:20:45.760 | Why do we do this?

00:20:46.780 | I mean, speak for yourself.

00:20:48.000 | And the internal revenue service, right?

00:20:50.440 | No, it's completely insane.

00:20:51.520 | Can we just make it 60 or 59 even?

00:20:53.760 | Right.

00:20:54.600 | Make the math easy for me when I'm calculating it, yeah.

00:20:57.200 | So a great question from Evelyn.

00:20:58.980 | And this gets to me--

00:21:00.200 | Hang on, before you answer,

00:21:01.720 | I'm going to throw out my--

00:21:03.360 | Is a taxable account the simple answer here?

00:21:05.720 | I mean, yes, it is.

00:21:07.160 | I think so.

00:21:08.160 | And ultimately, again,

00:21:09.000 | you don't want all your assets in one bucket, right?

00:21:10.760 | You do want diversification.

00:21:12.360 | But to flip the switch completely on my prior comment,

00:21:14.800 | one of the benefits of a Roth IRA in retirement

00:21:17.600 | is you get this favorable distribution in distributions,

00:21:21.120 | this favorable taxation.

00:21:22.580 | You always get your contributions back tax-free.

00:21:25.360 | And so if you've been funding diligently a Roth IRA

00:21:27.480 | for years, for years, for years,

00:21:28.860 | and then you begin distributions at 55,

00:21:31.200 | more than likely, unless you're taking a full distribution,

00:21:34.000 | the first X amount of earnings that's going to come out

00:21:35.960 | is going to be your contributions.

00:21:37.320 | You're not going to pay any income tax.

00:21:38.840 | So that to me lends it

00:21:40.320 | to this type of early retirement scenario

00:21:42.560 | where, okay, I've got a big traditional bucket.

00:21:44.820 | I've got a Roth bucket, but I'm 57.

00:21:46.800 | I need money for the next two years.

00:21:48.640 | Take it from the Roth, right?

00:21:50.080 | Because you're just going to get your contributions

00:21:51.840 | back tax-free.

00:21:52.680 | So some sort of combination of a Roth

00:21:54.040 | and a taxable account gives you pretty good

00:21:55.940 | for early retirement to then do the IRAs

00:21:59.240 | and 401ks later, the traditional ones.

00:22:00.520 | - Exactly, and so the new back tattoo

00:22:02.320 | is going to be tax diversification with representation

00:22:04.960 | or something of that nature.

00:22:06.080 | Duncan, I need your help to war game this thing

00:22:08.200 | before I put you into skin.

00:22:09.040 | - I used to live in D.C.

00:22:09.880 | That was basically our license plate.

00:22:11.400 | - It's great.

00:22:12.240 | - Taxation without representation.

00:22:13.060 | - It's very powerful.

00:22:13.900 | Live free or die, I think Vermont.

00:22:14.720 | That's news number two.

00:22:16.240 | - If you go to prison with that tattoo,

00:22:18.720 | you are immediately Andy Dufresne.

00:22:20.320 | - A lot of prison talk on the last two

00:22:22.280 | Ask the Compound side.

00:22:23.600 | - I think then you tell people, "EY Roth."

00:22:26.360 | You're referring to EY Roth.

00:22:28.160 | - I mean, this is kind of talking our own book a little bit

00:22:31.480 | but it is a lot of these questions remind me

00:22:33.280 | that when you get to a certain point

00:22:34.960 | and you ask these questions and they are so circumstantial

00:22:37.220 | to your point, Bill, that's when it probably makes sense

00:22:39.940 | to talk to someone and get more clarity

00:22:42.960 | and not try to do anything.

00:22:44.820 | I actually had a question today, Bill,

00:22:46.460 | at the conference, the financial advisors asked me

00:22:50.460 | how I manage my own money and I was talking

00:22:52.440 | and I said, "We don't have an agreement in place,"

00:22:55.160 | but I said, "Bill Sweet is technically my financial advisor.

00:22:57.680 | "If I have a financial planning question or tax question,

00:23:00.180 | "I go to you," and they all kind of said,

00:23:02.520 | "Oh, that's interesting that you have your own advisor."

00:23:06.160 | Sometimes that's, instead of trying to figure it all out

00:23:09.000 | yourself and hitting your head against the wall,

00:23:10.520 | you go to someone who has expertise and let them help you.

00:23:13.720 | - And it is an honor and a privilege,

00:23:15.600 | something I don't take lightly.

00:23:17.520 | But my question is, Ben, are we even gonna have retirement

00:23:19.920 | if this Canadian smoke monster keeps consuming New York City?

00:23:23.080 | John, can you share the photos that Duncan took yesterday?

00:23:25.740 | This is the view from my office

00:23:27.860 | and I don't know what it looks like today

00:23:29.460 | because I escaped from New York like Snake Plissken,

00:23:31.840 | I got the hell out of there, but that is some wild--

00:23:34.600 | - What's the over and under on Blade Runner?

00:23:36.320 | Blade Runner jokes being made in New York right now.

00:23:37.440 | - Why are we all in the middle

00:23:38.440 | of a Frank Miller Mad Max set all of a sudden?

00:23:40.920 | Ben, should we build a border wall

00:23:42.640 | to contain this Canadian smoke?

00:23:44.040 | You're north of the wall right now.

00:23:45.320 | What do you think?

00:23:46.160 | Like giant fans? - I think we're pretty clear

00:23:47.000 | up here, I think we need more fans.

00:23:48.600 | - Is this what the Chinese weather balloon was researching?

00:23:52.040 | My question, too, is what is wrong

00:23:53.680 | with smoke from American fires?

00:23:55.360 | Why typical Biden administration policy, Duncan,

00:23:58.000 | that we're here importing foreign smoke

00:23:59.820 | when homegrown Americans small batch smoke

00:24:02.040 | made right here in the USA, that's what I'm into.

00:24:04.240 | - You know, Nicole shared a funny meme

00:24:06.760 | or video clip from "Parks and Rec"

00:24:09.160 | where Ron Swanson is asking about writing a letter

00:24:12.440 | to Canada and he just writes, it's just an expletive,

00:24:16.160 | it's basically like F you or something, it's pretty funny.

00:24:19.040 | - So Ben, have you gone to Montreal to save us?

00:24:22.000 | That's my question.

00:24:23.440 | - I'm trying to get away from the smoke, I guess.

00:24:25.080 | Things look beautiful here, I'm fine.

00:24:27.340 | - They sent all the smoke south, they exported all that.

00:24:29.640 | - We do have plenty of Canadian viewers

00:24:31.600 | of all of our content, which we appreciate.

00:24:34.800 | - Molson.

00:24:35.880 | - Yeah, I had a Molson at the bar last night.

00:24:37.560 | They said it's the real stuff,

00:24:38.580 | not the kind of stuff you can get in the US.

00:24:40.520 | - Have you seen a moose anywhere?

00:24:42.760 | - A mountie? - No moose in the city.

00:24:44.680 | - Yeah, no.

00:24:45.520 | I have a question before we wrap up.

00:24:47.760 | I have a question that I just asked the chat.

00:24:49.560 | So you guys talked about an animal spirits bin.

00:24:51.880 | Is the bear market over?

00:24:53.040 | Can we celebrate?

00:24:53.880 | Can we do confetti?

00:24:55.680 | - Sure, let's do it.

00:24:57.360 | Then we'll celebrate again when we hit new highs.

00:24:59.280 | - Okay.

00:25:00.120 | - The bear market will end

00:25:01.000 | when the smoke over New York City clears.

00:25:02.920 | - See, I thought you were gonna hedge the ocean.

00:25:05.380 | - Yeah.

00:25:06.220 | - I thought you were gonna hedge more,

00:25:07.040 | so I didn't actually have anything ready.

00:25:08.040 | - I don't.

00:25:08.880 | It's like with the Pope dying, there's smoke in New York,

00:25:11.020 | it means the bear market is over.

00:25:12.080 | When smoke hits Wall Street, it's done.

00:25:12.920 | - There you go, they've chosen a new president of Canada.

00:25:15.980 | - If you have a question, askthecompoundshow@gmail.com.

00:25:19.200 | You gotta be on your game.

00:25:20.040 | Someone send us a video or voice recording too,

00:25:22.360 | 'cause that'll go to the top of the heap

00:25:23.800 | immediately.

00:25:24.660 | We'd love that.

00:25:25.500 | - Yeah, no one's taken us up on that yet,

00:25:27.080 | that I've seen at least.

00:25:28.280 | - Nope. - Wow.

00:25:29.120 | - Remember, hit subscribe here.

00:25:29.960 | - I'll have to do it.

00:25:31.440 | - Any questions you have, compoundmerch@idontshop.com.

00:25:34.560 | We have some new stuff coming,

00:25:35.840 | I think, soon, right, Duncan?

00:25:37.960 | - Yeah, we're doing a lot.

00:25:39.920 | - All right.

00:25:40.800 | Keep those questions coming.

00:25:41.880 | Askthecompoundshow@gmail.com.

00:25:43.240 | We will see you next time.

00:25:44.560 | - See you, everyone.

00:25:45.560 | (upbeat music)

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I Sold My Stocks. What Now?

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