How Does Compounding Work in a Bear Market?

00:00:00.000 | Welcome back to Portfolio Rescue, where, Duncan, I think the questions we're getting are getting

00:00:22.000 | more intelligent by the week. I think we've got a great lineup this week. Before we get

00:00:26.400 | started, I want to start off with going over the stock market and provide another glasses-half-full

00:00:31.720 | look from Ben. I've provided some glasses-half-empty looks in the past. So, right now, the S&P

00:00:36.200 | is down 15%. Nasdaq and Russell 2000 are down 24%. Here's the good news. Let's say this

00:00:42.960 | is where it stops. To break even, the gain for the S&P is like 18% from here. For the

00:00:48.400 | Nasdaq and Russell 2000, it's like over 30%. Now, let's say stocks go down further. They

00:00:53.080 | go down 30% from here, right? Everything's down 30% from the all-time highs. That's like

00:00:57.560 | a 45% gain to break even, almost. 43%, if we want to be technical. Down 40%, that requires

00:01:03.040 | a 67% gain. Now, you say, "Okay, that's fine. But how long did it take?" Because that's

00:01:08.800 | all that matters. John, throw up this chart here about how long it takes to break even.

00:01:11.200 | I did this in March 2020, so now we're the last one on here. The average amount of time

00:01:16.400 | from peak to trough to peak, right? You do a full round trip. Since 1928, it's 26 months.

00:01:22.880 | The longest one ever is the Great Depression, which was a little over 13 years. It took

00:01:27.240 | more than three years following the Great Recession of 2008. And then, the '73-'74 bear

00:01:31.320 | market was almost four years. The dot-com bubble was about four years, too. So, those

00:01:34.960 | are worst-case scenarios to break even. Obviously, the biggest questions are, how long until

00:01:41.680 | we bottom? Because no one knows if we've bottomed yet or if there's still way more pain to come.

00:01:45.640 | How long does it take to break even? But the thing that you remember is, if we go back

00:01:49.920 | to all-time highs, even just getting there, it's pretty good returns from here. So, if

00:01:53.400 | you're saving, that's a good thing. Your returns are going to be pretty good. Obviously, what

00:01:57.360 | they look like in terms of an annualized basis depends on how long it takes. But expect your

00:02:01.560 | returns are going up, right? Unless the world comes to an end. Then, they're going down.

00:02:06.360 | Yeah. Yeah. Then, yeah. But we have other things to worry about, right, if that happens.

00:02:11.680 | All right. And if you lost 90% in a stock, you just need like a 10-bagger to break even.

00:02:16.640 | It's nothing. Right? It's easy.

00:02:19.040 | Yeah. Yeah. No. That's staring me in the face. That's hitting too close to home.

00:02:24.240 | All right. Let's do the first one.

00:02:27.120 | Okay. Up first, we have, "Hey, Ben. I've been following your writing for years and love

00:02:32.960 | it. I just left a bank job to go to an RIA and can finally start writing. Do you have

00:02:38.120 | any writing tips, any tools to help with grammar?"

00:02:43.520 | By the way, I think the first time this question was sent, grammar was spelled wrong. But I'm

00:02:47.400 | not going to be the only person that points out grammatical mistakes of people because

00:02:50.080 | I make lots of mistakes. All right. My one book recommendation here, Steven Pressfield.

00:02:54.440 | He's an author. I think he's done some screenplays. He actually wrote the book, "The Legend of

00:02:58.040 | Bagger Vance" if you ever saw that movie. "Nobody Wants to Read Your Shit" is his book.

00:03:04.240 | Here's what he says this means. "None of us want to hear your self-centered, ego-driven,

00:03:07.760 | unrefined demands for attention. Why should we? It's boring. There's nothing in it for

00:03:10.280 | us."

00:03:11.280 | This book is really good in that it helps people understand you should probably be writing

00:03:15.520 | for yourself more than writing for other people. And if other people like it, that's fine.

00:03:19.160 | But think about that in the context of who your audience is first. I think one of the

00:03:22.920 | things you have to realize if you just start writing is you don't have to reinvent the

00:03:26.080 | wheel just because it's been said before. It doesn't mean you can't put your own spin

00:03:28.800 | on it.

00:03:29.800 | I was approached probably two years after I started my blog to write a book. And my

00:03:34.400 | first thing I said was, "Why would I ever want to write a book? Everything that I would

00:03:37.840 | want to say has probably already been said before." And I actually asked Josh Brown.

00:03:40.560 | I said, "Josh, you've written a book. What's the point of me writing a book?" And he's

00:03:43.840 | like, "Don't care what -- who cares what people before you have said? Not that many people

00:03:47.600 | read books, first of all. And second of all, you can put your own spin on it and say what

00:03:53.200 | you want to do and put your own personal experiences in it."

00:03:55.000 | And so I think that you have to remember that. There's this book called "How History Gets

00:03:58.280 | Things Wrong" by Alex Rosenberg. He had some crazy stats in here. "Abraham Lincoln's been

00:04:03.040 | the subject of 40,000 books. In 2014 to 2016 alone, there was eight books written on the

00:04:10.140 | Battle of the Bulge from World War II."

00:04:13.040 | There's new ways to spin old things if you want to. I think one thing you have to do

00:04:17.360 | to become a better writer is just make it a habit. I think writing a little bit every

00:04:20.320 | day, even if it's not that good, is important because you don't have to publish everything.

00:04:24.360 | I have -- Duncan, I think our tech people told me I've got to delete some of them. I

00:04:29.320 | have 150 unposted drafts in my blog that I've never put out there because I started writing

00:04:34.000 | them and I didn't like it and I just let it go.

00:04:35.960 | So I think writing is like a muscle that you have to exercise. I think you have to write

00:04:39.200 | about stuff that you personally care about and not worry so much about pandering to the

00:04:42.420 | audience because people can tell if you're kind of going through the motions and you

00:04:44.800 | don't really care about it. It has to be something that you have strong feelings about or you

00:04:48.320 | really feel like you have something to write about.

00:04:50.520 | I think the other thing that really helps is just reading a lot. I think if you read

00:04:52.960 | a lot of other smart people, it helps you make better points and you can comment on

00:04:56.440 | the work other people have already done. You don't have to come up with something that's

00:04:59.680 | -- there was this -- I think Charlie Munger said this. People don't go to church to hear

00:05:03.520 | the 11th commandment. They already hear the 10. Reemphasize the points that people already

00:05:08.600 | made before.

00:05:09.600 | I think especially in finance, this is tooting our own horn here, but answering people's

00:05:13.200 | questions is very helpful, right? Especially if you're writing for your clients. There's

00:05:17.680 | going to be certain questions that come up over and over again depending on the environment

00:05:22.220 | or the time and it's just going to be those things are different. But you can create your

00:05:24.880 | own library to show that you've thought about this stuff.

00:05:27.280 | And finally, I think you've got to keep it short. So Duncan, you've seen A River Runs

00:05:30.240 | Through It. That's a film, right? Not a movie.

00:05:31.920 | It's been a long time.

00:05:32.920 | You've probably seen that one.

00:05:33.920 | Yeah, yeah.

00:05:34.920 | Okay. So there's this scene where young Norman, who's the older brother, he's played by Joseph

00:05:39.320 | Gordon-Levitt and his preacher father is Tom Skerritt, who's the guy from the original.

00:05:44.080 | And he's sitting at his desk and he's writing a paper and he brings it to his dad and he

00:05:47.160 | says, "Take a look, Dad."

00:05:48.160 | And his dad crosses out a paragraph, crosses out a paragraph, says, "Shorter. Do it again."

00:05:51.720 | And he goes through it like three times. "Shorter. Do it again." And every time, and then at

00:05:55.360 | the end, I think he says, "Good. Now throw it away." But his point was like, you have

00:05:58.180 | to have it keep brevity because people don't have the attention span to read something

00:06:01.160 | really long.

00:06:02.160 | So I think write what you want to say, then go back and try to trim the fat because time

00:06:06.600 | is a valuable commodity. I guess the only grammar thing I would have, there's this program

00:06:09.920 | called Grammarly. You can put on your website, that'll find some errors for you. But I can

00:06:15.360 | say-

00:06:16.360 | I've heard of that, yeah.

00:06:17.720 | It helps out with misspellings and sometimes helps you restructure a sentence. But if there's

00:06:23.680 | two words that are spelled differently and mean different things, I mix those up all

00:06:27.440 | the time. And I can read something a hundred times and miss a completely, an error that's

00:06:31.520 | just staring you in the face, and someone new looks at it and they see it immediately.

00:06:35.440 | So I think having a fresh set of eyes can help too.

00:06:37.920 | Yeah, definitely. And I think sometimes people get too caught up on making mistakes. Hopefully

00:06:43.180 | Twitter has helped everyone not be as concerned about that. But yeah, I'm all the time, I'm

00:06:47.400 | one of those people, I'm a pretty good proofreader and I'm always reading books. And there are

00:06:51.920 | mistakes in big time books. It's not the end of the world.

00:06:54.920 | And some people-

00:06:55.920 | Yeah, and some people get really mad about it.

00:06:56.920 | This whole book is discredited because they misspelled a word halfway through the book

00:07:00.080 | or something.

00:07:01.080 | Well, I had that happen to me where someone said, "I put the book down after page two."

00:07:04.120 | And you're going to get people like that? And my only advice is don't worry about people

00:07:07.800 | like that. If they really care that much, then you're never going to please them probably.

00:07:11.160 | But yeah, I think the biggest thing is just making it a habit and turning it into a routine

00:07:15.360 | and doing it, I don't know, once a week or once every two weeks, whatever it is, find

00:07:20.280 | a cadence so people get used to your writing coming out. And whether it's a newsletter

00:07:23.880 | to your client in an email or a blog or whatever it is, get on a regular routine.

00:07:27.600 | Yeah, no, that's good advice. Also, do you plan to ever release all of your unpublished

00:07:32.960 | drafts? That'd be an interesting book. We could have your archive.

00:07:36.440 | Yeah, they're not very good. Obviously, I didn't put them out as a blog post, but yeah.

00:07:40.920 | Nope, they're into the ether forever. They're lost.

00:07:42.800 | I bet there's some good stuff in there.

00:07:43.800 | Maybe on a blockchain someday. All right, let's do another one.

00:07:47.800 | Okay. Up next, we have a long one, but it's a good one. It's also a sad one, but we're

00:07:53.880 | here for some optimism today. I'm 33 years old, married and make $75,000 a year. My rent

00:07:59.400 | just went up 21% to $3,300 a month, and I got outbid $100,000 on a home. I'm in desperate

00:08:06.300 | need of a new car, but there are no deals and there's no inventory. And I already spend

00:08:10.520 | a lot more than I make. Due to the sell-off in equities, I recently upped my 401(k) contribution

00:08:15.040 | to 15% from what was originally just the company match of 5%. This leaves my take-home net

00:08:21.640 | pay about $2,000 a month less than what I spend, but I'm using reserves to cover the

00:08:27.320 | difference. Not including my brokerage account and cash accounts, I have about $95,000 in

00:08:32.280 | IRAs. I have about $10,000 cash in my Rollover IRA and $6,000 cash in my Roth. I also, deep

00:08:39.480 | down in my gut, don't think I'm going to live past 60 due to medical issues. But nothing

00:08:44.440 | officially life-threatening yet, just a feeling. Besides the match amount, should I be contributing

00:08:50.080 | to my 401(k) at all or just using the cash balance in my IRAs first? How should my life

00:08:57.120 | outlook impact my retirement investing choices? Man, that's a bummer.

00:09:01.680 | We could have done a whole episode on this question, but there's the old Charlie Munger

00:09:05.580 | quote where he says, "Tell me where I'm going to die so I don't go there." If this person

00:09:13.240 | does the Babe Ruth and points to the outfield and calls her own death, that's actually pretty

00:09:16.520 | impressive. I don't know where to go with that one. I guess you have to learn how to

00:09:21.840 | balance between now and later, and understanding your time horizon. Maybe it's one of those

00:09:27.680 | things where we've had emails from people who watch our stuff, who have said that saved

00:09:34.280 | our whole life and then got into retirement and my husband died. Or, we just decided to

00:09:40.640 | sail around the world and at 40 years old someone had a heart attack and corrupted us.

00:09:44.640 | There are things like that. Maybe you just learn how to enjoy things. But I think this

00:09:49.440 | whole question is a perfect example that, for the majority of the population, personal

00:09:53.460 | finances is way more important than your portfolio. Because all this stuff is personal finance-related.

00:09:58.880 | It has nothing to do with investing. I like the idea that you're trying to save more in

00:10:03.080 | your 401(k) now because stocks are down. But by saving more in your 401(k) and then pulling

00:10:08.440 | from your IRAs, you're essentially moving money from your left pocket to your right

00:10:11.200 | pocket. Because you said you're underwater every month, you're going $2,000 in the hole

00:10:17.840 | by drawing from those IRAs. I think you have to ask yourself, is that really a good trade-off?

00:10:23.320 | Especially if you don't plan on living that long, what good is a 401(k) now anyway? I'm

00:10:29.080 | going to say, maybe as a hedge to living a little bit longer. Maybe if medical technology

00:10:34.120 | turns your forecast of an early death, makes it a moot point, you might want to hedge and

00:10:39.680 | keep that 401(k). But at least keep getting the match.

00:10:45.280 | The big expenses are the ones that matter. It's mortgage, rent, transportation, debt,

00:10:48.640 | income, all these things. And unfortunately, it sounds like mortgage is going up, or your

00:10:52.040 | rent is going up, transportation costs could be going up. I don't know, if you have a lifetime

00:10:55.360 | warranty on that car, I might be willing to let that beater go a little more, and see

00:11:00.780 | if we finally get some new cars, and they put the chips in those cars, and costs come

00:11:04.840 | down a little bit.

00:11:05.840 | For listeners and viewers, we abbreviated the question. They mentioned that they have

00:11:09.000 | a 12-year-old, rusty old car that has a lifetime warranty.

00:11:14.000 | And so, they're trying to deal all this up. I mean, there's two ways to get ahead financially.

00:11:19.100 | You live more frugally, or you make more money. That's it, right? Everything else branches

00:11:22.940 | off of that. And so, I guess one way to think about it, because eventually, if you keep

00:11:27.480 | pulling from your savings, you're going to deplete them over time, if you don't start

00:11:32.040 | making more money or spending less.

00:11:34.440 | So I don't know, have you looked for ways to increase your pay? Now is not the worst

00:11:38.000 | time to ask for a raise with inflation so high, right? If people are getting a cost-of-living

00:11:42.760 | inflation increase, now is the time to say, "Maybe you need to give me a little bit more."

00:11:46.680 | Have you looked at other jobs? People say, "In this economy?" Yeah, in this economy,

00:11:50.080 | the job market is booming. Now is the time to work, to look.

00:11:53.740 | It also sounds to me like you really probably need a budget, because if you're spending

00:11:57.700 | more than you're making, something is not adding up. So, John, pull up the You Need

00:12:01.380 | a Budget. I think this is a great website for anyone. It also, they have a book by the

00:12:05.960 | same name. It's called You Need a Budget. They put it down to YNAB. Jesse Meacham is

00:12:09.280 | the name of the guy. I've listened to a bunch of podcasts. His book is excellent. He helps

00:12:14.180 | people break down money into their fixed and variable expenses, and planning ahead for

00:12:17.940 | the future. It's really, really good. I honestly think this needs to be the place that you

00:12:23.020 | start, is figuring that out.

00:12:24.460 | Obviously, you've done a good job saving so far, but somewhere along the way, whether

00:12:28.100 | it's your rent increased too far, or something else happened where you're spending more money,

00:12:33.540 | your budget got away from you, and you're having to tap savings. Eventually, that's

00:12:36.700 | probably going to run out, unless you're able to make more money. I get the idea of living

00:12:42.720 | a more balanced life, where you're saving some money now and not delaying all gratification,

00:12:47.220 | but eventually, if you don't get your personal finances under control, it's not going to

00:12:50.740 | matter. Your savings are going to be gone, and then you're going to have to go into debt

00:12:52.980 | or tap your 401(k), then what?

00:12:55.020 | Yeah, it's one of the most common things I hear from young people, is, "Why? I don't

00:12:59.980 | even know if I'm going to live. My uncle died at 50. Why am I saving all this money for

00:13:04.660 | a day I might not even reach?" But, yeah, I guess that's kind of what makes life difficult

00:13:09.900 | to plan for, right? It doesn't mean you shouldn't plan at all, but yeah, shit happens sometimes.

00:13:15.300 | But, it doesn't mean that --

00:13:16.900 | All right, Duncan, if you could plan it out, what's the perfect age to die for you? This

00:13:21.300 | is kind of morbid, but --

00:13:22.300 | I mean, I guess it's all relative to in what good shape you stay. I guess maybe 97? I don't

00:13:33.620 | want to be greedy and say 100. Maybe 97 is a good age?

00:13:37.380 | 97? That seems pretty greedy to me. How many people live to 97? 85, 86, I think that's

00:13:42.780 | plenty for you.

00:13:43.780 | I would say 65.

00:13:45.780 | Well, all right.

00:13:48.220 | Yeah, 97. I'd be happy with that.

00:13:51.180 | By the way, first ever email we've got where someone predicted the date of their own death

00:13:53.860 | like decades in advance. So, kudos to you. Follow up with us in like 30 years and let

00:13:57.900 | us know if you're getting close.

00:13:58.900 | Yeah, I feel like we need to watch a good comedy or something, you know?

00:14:02.100 | Yeah, maybe lighten up a little bit. But, yeah, let's do another one.

00:14:05.100 | Yeah, hang in there. Okay, up next, we have a question from Joan. "I'm a 29-year-old marketer

00:14:11.340 | with a total annual comp of around $140,000. I've been aggressively investing for several

00:14:17.240 | years and maxing out my 401(k) and funding Roth IRA and brokerage accounts. I'm typically

00:14:22.980 | a buy and hold investor. But like many, I've seen a 25% decline in my total portfolio since

00:14:28.420 | December as I'm in aggressive and US-focused equities. If my portfolio declines as it has

00:14:34.020 | over the past six months, am I still getting the benefits of compounding? I don't think

00:14:38.780 | my brain fully comprehends the power of compounding." And we're here at the compound. This is perfect,

00:14:44.780 | right?

00:14:45.780 | Nice. I didn't even realize that. Great question from Joan here. I love this question because

00:14:50.940 | I think a lot of people have a hard time like figuring out compounding in their brain, right?

00:14:55.100 | We don't have the – it's not easy to think exponentially because that's really what compounding

00:14:58.820 | is. It's not just this linear thing. So, life would be much easier if we could just

00:15:03.220 | like we type into a retirement calculator and you say, "I'm going to get 9% or 10%

00:15:06.300 | per year, year in and year out, and it's never going to change, and that's just going

00:15:09.300 | to make my life easier." But it doesn't work that way, especially in the stock market.

00:15:12.260 | The worst part is that like even if you get 9% to 10%, which is guaranteed to no one,

00:15:16.760 | that's what it's been in the past. Who knows if it's going to be that in the future?

00:15:19.420 | But it's not that easy. So, John, put up this first one. I said a very simple example.

00:15:22.140 | Let's say you save $10,000 a year at the beginning of the year. You earn 10% a year

00:15:26.620 | because you put your money in the stock market. This is what it looks like on a line going

00:15:30.780 | up. And you can see the curve goes up. That's the exponential thing. But that's a really

00:15:34.460 | nice smooth line where you're just earning 10% every year. There's never any highs,

00:15:38.380 | never any lows. It just goes up. That's your retirement calculator. That's like putting

00:15:42.220 | it on a spreadsheet and life is easy, right? Unfortunately, life doesn't work like that.

00:15:46.820 | So, interestingly enough, if we look at the last 30 years, from 1992 to 2021, to the end

00:15:52.180 | of 2021, the average return in the stock market on the S&P 500 was roughly 10%. It was a

00:15:57.060 | little more, but pretty darn close to 10%. So, let's do the next chart, John. And this

00:16:01.260 | one shows the actual experience of someone putting $10,000 into the stock market every

00:16:06.420 | year and seeing what happens. And you can see it's all over the place. In the early

00:16:09.780 | part of the decade, it jumped. That was the late '90s. Then you go to 2008 and it falls,

00:16:15.460 | right? And it's way below. And you can see that it's off of trend. We're talking like

00:16:20.020 | $200,000 below trend. Then we get to even the later years. It's like $400,000, $300,000

00:16:26.620 | before trend. And then at the end, you have this 10-year period where stocks go bonkers.

00:16:31.060 | And finally, in the stock market, that 10% is high. So, why does it work like that? Because

00:16:35.460 | you got pretty much the same 10% per year, right? That's the average return. But the

00:16:39.860 | stock market actually gave you higher returns. Well, a lot of it had to do with the timing

00:16:42.440 | of it. So, like, when did you save? The returns were bad at the beginning, but really great

00:16:46.260 | at the end. And the reason for this is that the stock market is lumpy, right? So, it's

00:16:50.980 | all over the place. That compounding, it happens in bursts. It doesn't happen all at once,

00:16:55.980 | or it's not consistent. So, these results could have been different where the stock

00:17:01.020 | market could have been below trend. Because if you had bad returns at the very end, it

00:17:05.260 | could have been even worse. So, a lot of it is due to timing and luck and how much you're

00:17:08.580 | saving and when you're saving. This is a very simple example. But let's look at the drawdown

00:17:12.580 | chart. This is since 1992 again. So, the last 30 years, if you look at the S&P 500 drawdown,

00:17:17.860 | we're talking return, I got separate losses of 11%, 19%, 12%, 12%, 50%, 15%, 57%, 16%,

00:17:25.980 | 19%, 13%, 10%, 20%, 34%, and then the current one, which at the worst point was like 19%

00:17:31.700 | down. So, you have all these drawdowns, double digits. And yet, the stock market is still

00:17:37.820 | up over 10% per year. You see, if you put $10,000 in each year, you're a multi-millionaire.

00:17:42.580 | The thing is, compounding on a spreadsheet is really neat and tidy. Compounding the real

00:17:46.380 | world is very messy and lumpy. And unfortunately, it has to be this way because if there was

00:17:49.740 | no risk, there would be no returns.

00:17:51.460 | Right. Yeah, that makes sense. We have David, a regular, in the chat saying it only works

00:17:58.260 | though if stocks recover. But that's like we were saying, you have bigger issues, right,

00:18:04.180 | if your diversified portfolio doesn't meaningfully come back ever. Is this like a what about

00:18:10.940 | Japan?

00:18:11.940 | Yes.

00:18:12.940 | Yeah, Dave, you're blocked. Sorry. I'm kidding.

00:18:15.780 | No, we won't, Dave.

00:18:17.820 | I'm just kidding. But yeah, I think the compounding still is happening, but you better keep saving.

00:18:24.180 | If you want the compounding to happen, you better save when it's down and not just when

00:18:27.060 | it's up. Because that's when the real compounding magic happens is when you're saving when stocks

00:18:30.820 | are down. Because when you have that catch-up period we talked about, when you break even,

00:18:34.340 | if you're not saving now and you decide, okay, I'm scared, I'm not going to save anymore,

00:18:37.840 | that's when you really hurt yourself. If you're only saving when things feel good, it's not

00:18:40.420 | going to work as good.

00:18:41.420 | Yeah.

00:18:42.420 | Let's do another one.

00:18:43.420 | Okay.

00:18:44.420 | Yeah.

00:18:45.420 | So up next we have a question from Jeff. "My wife and I are 55, no debt, two private colleges

00:18:53.780 | paid for, house worth $1 million." It sounds like this is a not to brag kind of thing,

00:18:59.140 | right?

00:19:00.140 | Geez, Jeff, not to brag.

00:19:01.140 | "And $3.3 million in a 60/40 portfolio that we rebalance annually. We live below our means

00:19:06.340 | and spend about $100,000 a year. We plan to retire in two years, which means we put away

00:19:10.740 | another $280,000. Should we just go 40/60 or 30/70? Even if we're all in savings, we

00:19:18.540 | could live a long time. Add in Social Security and the fact that our kids expect nothing,

00:19:23.420 | it makes me wonder. Also, I would check with the kids, make sure they expect nothing."

00:19:27.380 | Yeah, they may want something. Keep that 60/40 going, mom and dad. This is really a financial

00:19:36.100 | planning question, because you're balancing all these things. There's the willingness

00:19:40.700 | to take risk, which is your appetite for risk. There's the need to take risk, like what returns

00:19:44.820 | are necessary to meet your objectives. Then there's the ability, like your current circumstances.

00:19:48.660 | Let's bring in a financial planner to talk this one out. Taylor Hollis, who's been on

00:19:51.540 | the show before.

00:19:52.540 | Hey, Taylor.

00:19:53.540 | Hello.

00:19:54.540 | So, Taylor, you have someone coming to you as a prospective client. They have a really

00:19:59.500 | nice nest egg. Everything sounds good. They're good at saving. They live below their means.

00:20:04.660 | This is a picture-perfect client. But they say, "OK, this client probably technically

00:20:09.420 | has the ability to continue to take risk and build their portfolio and grow it, because

00:20:12.660 | they may have a few decades to ..." But they say, "What if we don't want to take a lot

00:20:16.900 | of risk? What if we just want to be defensive and protect everything we have?" How do you

00:20:20.980 | balance that out?

00:20:22.100 | Taylor: Yeah. Well, I would first say, they obviously have put themselves in a great situation.

00:20:27.140 | They've saved a lot. They spend low relative to their asset size. So, they've put themselves

00:20:34.020 | in a great spot. This is a great "problem" to have. These are the type of scenarios I

00:20:39.620 | like to start with the end in mind. So, Duncan, you kind of alluded to it, but your kids might

00:20:46.740 | expect nothing, but does that mean that you want to leave them nothing? Is there a desire

00:20:52.020 | to leave something to future generations, maybe even your grandkids? Maybe you want

00:20:57.960 | to leave money to charity at your death. What's that kind of end goal? Sometimes it's hard

00:21:04.000 | to go there in your mind, because it feels so far-fetched. But I think that's a worthwhile

00:21:10.260 | exercise, because then you back into, "Okay, if we do have these goals to leave some sort

00:21:16.140 | of legacy once we're gone, that's going to drive how you should be allocated over these

00:21:20.440 | next 40 years or so for the rest of your lifetime."

00:21:24.100 | Lewis: At what point do you have the conversation of, "Hey, Jeff, you're doing great. What if

00:21:29.020 | you spent a little more money? What if you enjoyed yourself a little more and lived beyond

00:21:32.460 | your means a little bit? How do you bring that into this situation?"

00:21:35.140 | Jones: Right. That's kind of option two. Again, you're in this great situation. Theoretically,

00:21:41.420 | you could really ratchet down the risk on this portfolio. You could earn just 3% per

00:21:45.900 | year on this $3.3 million, and that gets you close to what you're spending each year. So,

00:21:52.220 | you have an ability to really ratchet down the risk. But, are there things that you would

00:21:57.340 | want to do more during your lifetime? Maybe you want to take your family on a big vacation

00:22:02.400 | every year. I don't know if there's grandkids in the picture yet, but if they come along

00:22:07.300 | one day, those family vacations might sound pretty nice. Maybe you want to ratchet up

00:22:10.980 | the charitable gifting during your lifetime. So, you're in a great spot with a lot of fun

00:22:16.820 | but difficult decisions to make. And that should drive, I believe, how you're allocated.

00:22:21.560 | Lewis: And maybe you just shade a little bit. You go, "Instead of $30.70 or $40.60, let's

00:22:25.900 | go $50.50." You split the difference and see how that goes, right?

00:22:29.940 | Flippen: Yep. Not all or nothing. As we all know, it's dynamic, it's fluid. It sounds

00:22:33.760 | like you're rebalancing annually anyway, so you know that. And your goals might change.

00:22:38.640 | A 40-year time period, and I'm using that number loosely, a lot's going to change in

00:22:43.040 | those 40 years. It's just about how you react to it.

00:22:46.000 | Lewis: And the very question we're asking tells us a bit about their risk tolerance,

00:22:48.960 | right? It's kind of indicative of what they're thinking.

00:22:51.840 | Fletcher: Yeah. Sometimes I think that's the job of financial advisors, understanding

00:22:55.280 | your client and understanding if they really can't handle taking that risk, or they just

00:22:59.560 | don't want to, then it's your job to find a portfolio that works for them.

00:23:02.600 | Lewis: Right.

00:23:03.600 | Fletcher: Do another one, Duncan.

00:23:04.600 | Duncan: We have people laughing in the chat about, like, "Oh, what a nice problem."

00:23:09.520 | Fletcher: Yeah. First world problems, but hey, everyone's different. Also, Jeff has

00:23:15.880 | no idea when he's going to die, so he could have a really long time around. He could live

00:23:19.080 | to be 97 like Duncan wants to, and then he does have 40 years.

00:23:22.420 | Duncan: It's true. And these things are applicable to others, right? Not just people with that

00:23:27.960 | much money.

00:23:28.960 | Fletcher: Right.

00:23:29.960 | Duncan: Even people that don't have that much money, they still may say, "I can't handle

00:23:33.000 | taking so much stock market risk. I need a more diversified portfolio, or defensive portfolio."

00:23:37.360 | What does that look like?

00:23:38.720 | Fletcher: Right.

00:23:39.720 | Duncan: All right, let's do another one.

00:23:43.760 | Wathen: I like this one, because it has a compliment in it. "I'm a financial professional

00:23:49.200 | in my late 20s, and I just enrolled in my company's stock purchase plan. Their plan

00:23:53.240 | allows me to purchase stock at a 10% discount. I want to invest 20% of my paycheck and reduce

00:23:57.840 | it over time into the purchase plan. As I'm at a point where I'm financially confident

00:24:03.300 | to give up this much of my pay, does this seem wise? Should I drip the dividends, or

00:24:07.560 | use the dividends to buy other stock in my individual account? Thanks for all the quality

00:24:11.800 | content."

00:24:12.800 | Fletcher: All right. Compliments will get you everywhere, right, Duncan?

00:24:16.880 | Duncan: Right.

00:24:17.880 | Fletcher: This is a good one, because I think this is a hard one, because a lot of people

00:24:20.980 | think -- we always talk about the 401(k) match, and if you don't get that, you're leaving

00:24:24.360 | money on the table. But this is, "I have this discount in my company's stock plan at 10%,

00:24:29.120 | so why wouldn't I take as much as I can?" So, this person is going to save 20% of their

00:24:32.040 | paycheck. I don't know if they're going to do the 401(k) or not. But I guess the thought

00:24:35.280 | process here, Taylor, is thinking through, how much risk is too risk if you're working

00:24:38.320 | at the company and taking the stock? And then, how do you balance that discount, which is

00:24:43.560 | like, why would I turn that down, versus the need to diversify potentially?

00:24:47.760 | Taylor: Right, right. First, I want to applaud this listener on just the capacity that they

00:24:53.800 | have to save. I think that's great. Once again, a great problem to have, right? These stock

00:24:59.960 | purchase plans are really great benefits that some employers provide. And the first thing

00:25:05.080 | that I always caution people with on these is concentration. And Ben, you alluded to

00:25:09.560 | it a little bit. I'm not just talking about building up a significant stock position in

00:25:15.440 | one individual stock, but recognizing that your paycheck is coming from the same company

00:25:21.640 | that you're building a big stock position in. And if you're in your late 20s, your biggest

00:25:26.760 | asset right now, likely, is your human capital, your ability to earn an income for a significant

00:25:32.280 | period of time. And right now, that income's coming from the same company. So, just being

00:25:38.180 | very mindful of that concentration, both in your portfolio and in your income source.

00:25:44.760 | But you alluded to it again, Ben, is the 10% discount feels like an immediate return. And

00:25:51.160 | in some ways, it is. But one thing, well, another thing to be mindful of is the tax

00:25:56.760 | implications of this. These stock purchase plans can have some pretty complex tax planning

00:26:03.100 | needs around them. Typically, you're looking at, on average, a two to three year holding

00:26:08.520 | period with these things to get the most tax benefit out of them before selling. Always

00:26:14.480 | consult with a CPA, with your tax professional, before making any moves. But if you're looking

00:26:19.480 | at this as a way to buy the stock, recognize that immediate 10% return, so to speak. Just

00:26:25.960 | know that there's a lot of tax implications if you were to turn around and sell it right

00:26:29.680 | away.

00:26:30.680 | Right. So, this isn't as easy as, from a tax perspective, as a 401(k) plan.

00:26:35.520 | Absolutely not. No. Not a set it and forget it kind of thing.

00:26:39.220 | Right. And the other thing is, you're earning a 10% discount. We've seen, in this past 18

00:26:43.840 | months or so, stocks can go down 10% in a day. Individual stocks, right? You can see

00:26:48.280 | that where that 10% discount is gone in a hurry. So, let's say this person, the only

00:26:54.760 | 20% they're saving for retirement is this money. Just splitting it down the middle,

00:27:00.440 | maybe do 10 in this and get your discount, and put the other 10 in your 401(k), at least

00:27:04.140 | to have some semblance of balance. Because, you're right, if you're getting your income

00:27:07.960 | from them, it would be like owning your house and then buying shares in your house again.

00:27:12.600 | You're doubling up, and it just seems like a lot of risk for your own local, personal

00:27:17.760 | economy.

00:27:18.760 | Exactly.

00:27:19.760 | And then, if you get fired, then what?

00:27:24.240 | Then what? Something else to think about is, if this 20% wiggle room that you have is after

00:27:31.560 | you are already saving in your 401(k) up to the match, maybe split the difference between

00:27:36.040 | this purchase plan and just investing in a general, taxable, diversified account to offset

00:27:43.320 | this concentration that you might be building. And to further diversify your tax buckets

00:27:49.360 | too.

00:27:50.360 | I have a question. Is there a lock-up when you're doing an employee purchase plan like

00:27:54.400 | this? Because otherwise, wouldn't someone figure out a way to arbitrage this, if you're

00:27:58.080 | getting a discount, and then you could just sell it on the market?

00:28:02.240 | I think that's why there's so many tax issues, is because they're trying to incentivize you

00:28:08.040 | not to do that. And I think each plan is a little different in how they're structured

00:28:12.520 | and the rules around them. So, you'd have to look into the plan specifics.

00:28:15.760 | Yeah, unfortunately, the taxes would eat up that discount pretty quickly.

00:28:19.120 | Yep.

00:28:20.120 | I'm always looking for an arbitrage opportunity.

00:28:21.760 | Duncan's running a hedge fund on his company's retirement plan. Alright, keep those questions

00:28:28.200 | and comments coming. Remember, idontshop.com, we have the Portfolio Rescue Towels, red and

00:28:33.000 | blue. Right, Duncan?

00:28:34.000 | Right, yeah.

00:28:35.000 | Yeah. I've been out in the lake all summer. I've got to get mine. I haven't used them

00:28:40.240 | yet. Duncan's going to go get it. Remember, if you have a question, askthecompoundshow@gmail.com.

00:28:44.320 | We always appreciate everyone in the comments. Look at that.

00:28:46.840 | Ah, there it is.

00:28:47.840 | Nice. You got it backwards. That's pretty nice. It looks like a flag. It's very nice.

00:28:53.680 | It's soft. I like those. Remember, askthecompoundshow@gmail.com. Thanks, Taylor, again, for coming out and

00:28:59.120 | helping. Thanks, Duncan, as always. And we will see everyone next week.

00:29:01.720 | Thanks, everyone.

00:29:02.240 | [Music]

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