What’s the Best Strategy for Selling Stocks?

00:00:00.000 | (beeping)

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

00:00:12.980 | People seem to like the new name, Duncan.

00:00:14.520 | We made the switch from Portfolio Rescue

00:00:15.880 | to Ask the Compound, I don't know, a month ago, maybe?

00:00:18.080 | - Yeah, we definitely saw an uptick.

00:00:19.740 | - It makes sense.

00:00:20.580 | Plus it matched the email, so that was easy.

00:00:22.760 | Ask the Compound show at gmail.com.

00:00:25.120 | We're still inundated with questions.

00:00:27.120 | Got a lot going on here.

00:00:27.960 | Today's show is sponsored by Bird Dogs.

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00:01:43.680 | All right, we've got some great questions this week.

00:01:46.420 | We've got a great guest host, so let's get to it.

00:01:48.860 | - Okay, up first today, we have a question from John.

00:01:55.660 | My wife and I are 42 with a 13-year-old son.

00:01:59.120 | We moved to Phoenix, Arizona as immigrants seven years ago

00:02:01.800 | with just a couple thousand dollars to our name.

00:02:04.080 | Since then, we have slowly progressed in our careers,

00:02:06.680 | and at this point, we have $350,000 of combined income,

00:02:10.160 | $230,000 cash, a $530,000 mortgage with 28 years left,

00:02:15.160 | $100,000 in retirement accounts,

00:02:18.760 | and $75,000 in a brokerage account.

00:02:21.280 | We are currently saving $8,000 a month.

00:02:23.680 | We both plan to work for the next 13 years

00:02:26.300 | and then think about retirement.

00:02:28.420 | I need your suggestion on how I can better utilize our cash.

00:02:32.180 | Should I move this into ETFs or blue chips in a lump sum,

00:02:36.620 | or should I plan to invest it in real estate

00:02:38.660 | for some passive income?

00:02:40.460 | - Okay, this is one of my most favorite questions

00:02:43.020 | we've got on this show.

00:02:43.860 | I love the story.

00:02:44.980 | This is honestly what makes this country great,

00:02:46.780 | the land of opportunity.

00:02:47.700 | This is an awesome, awesome story.

00:02:49.700 | Kudos to you for saving this amount

00:02:51.100 | in such a short period of time,

00:02:52.240 | starting with $1,000, your name or whatever, coming here.

00:02:55.780 | So back of the envelope,

00:02:57.180 | it looks like they're saving almost 100 grand a year,

00:02:59.180 | which is almost a 30% savings rate based on the income.

00:03:01.940 | I'd love to see that.

00:03:03.020 | That's very nicely done.

00:03:04.260 | That's the hardest thing for most people.

00:03:05.700 | How do you get a six-figure income

00:03:07.700 | and 20 to 30% savings rate?

00:03:10.180 | That's how you earn financial freedom, right?

00:03:12.540 | But obviously, they know they have

00:03:14.180 | way too much cash on hand.

00:03:16.240 | And before we get into that,

00:03:17.080 | I see in the comments here, people watching live,

00:03:18.780 | they're wondering how they can get fashion advice

00:03:20.300 | from someone who lives in Grand Rapids, Michigan.

00:03:21.540 | I will have you know, people in the comments,

00:03:23.360 | I was voted Mr. GQ in high school yearbook, all right?

00:03:26.560 | - Oh, wow. - Just remember that.

00:03:27.700 | - That was your superlative?

00:03:29.300 | - I was, yes, I was Mr. GQ.

00:03:32.780 | Most likely to play a college sport,

00:03:34.520 | maybe something like that.

00:03:35.360 | - You know what mine was?

00:03:37.240 | Most likely to co-host a podcast with Mr. GQ.

00:03:40.880 | - All right, see?

00:03:42.060 | We had a nice yin-yang here.

00:03:45.880 | So obviously, there's way too much cash in this portfolio.

00:03:47.720 | Here's the rough asset allocation by my calculations.

00:03:50.080 | 19% in stocks, which I assume is a brokerage account,

00:03:52.840 | 25% in retirement accounts,

00:03:54.280 | and then 56, 57% or something in cash.

00:03:56.800 | That's an ungodly amount of cash to have on hand,

00:03:59.160 | especially if it's not earmarked

00:04:00.360 | for a future purchase like a house.

00:04:01.560 | And it sounds like that's not the case here.

00:04:04.040 | I would love to be able to tell you

00:04:05.160 | how to invest this money, you know,

00:04:06.560 | be it index funds or ETFs or blue chip stocks or real estate,

00:04:09.520 | but I can't really.

00:04:10.900 | You have the savings part down, but here's what you need.

00:04:12.800 | You need an investment philosophy.

00:04:14.040 | You can't just wing it and throw your money into something

00:04:16.680 | without having some sort of overarching plan,

00:04:18.360 | and it sounds like you don't really have that.

00:04:19.380 | So there was a story a few years ago.

00:04:21.320 | Remember when the Seattle Seahawks

00:04:22.840 | played New England Patriots in the Super Bowl?

00:04:24.520 | There was a story about Seahawks coach Pete Carroll

00:04:27.080 | and how in the off season, he does speaking gigs, right?

00:04:30.640 | Me and Pete Carroll are very much alike.

00:04:32.040 | Remember, I was doing a speaking gig last week.

00:04:33.400 | Pete Carroll also does speaking gigs, so we're just alike.

00:04:35.840 | In his talks, he begins with a simple question.

00:04:38.120 | He says, "Raise your hand if you have a philosophy

00:04:39.720 | "for your team or organization,"

00:04:40.840 | 'cause he talks to a lot of business leaders too.

00:04:42.600 | Of course, everyone raises their hand.

00:04:43.640 | "How could you be a leader

00:04:44.480 | "without having some sort of overarching philosophy?"

00:04:46.360 | Then he says, "Can you describe that philosophy

00:04:48.400 | "in 25 words or less?"

00:04:49.580 | And then basically, everyone's hand goes down, right?

00:04:51.820 | He's also, I guess, been known to use this

00:04:53.160 | as an interview question for assistants,

00:04:54.840 | and he's not really looking for like,

00:04:55.760 | "Here's the perfect philosophy."

00:04:57.520 | It's like, "Do you have one?"

00:04:59.120 | That's the whole point.

00:04:59.960 | So maybe we can try this with my philosophy,

00:05:02.080 | and I don't think you have to keep it 25 words or less.

00:05:03.920 | That's probably a little too much,

00:05:04.800 | but let's try it with mine.

00:05:05.920 | So I believe less is more, costs and taxes matter,

00:05:10.320 | predictions are very unreliable,

00:05:11.880 | performance is mean reverting.

00:05:13.520 | I believe risk and reward are attached to the hip,

00:05:15.800 | time horizon is your friend,

00:05:17.560 | investing must be tied to goals to work effectively,

00:05:20.280 | and I really believe that behavior

00:05:22.400 | will determine your success or failure as an investor.

00:05:24.560 | That's kind of my overarching philosophy.

00:05:26.000 | Might have missed a few things there,

00:05:26.840 | but that's pretty close.

00:05:27.660 | So I just view investing philosophy

00:05:29.760 | as like the simple set of principles

00:05:31.720 | that guide your actions

00:05:32.560 | to get you to a yes or a no quicker.

00:05:34.120 | The whole idea is like,

00:05:34.960 | you make a few big decisions up front,

00:05:37.000 | so you don't have to make a bunch

00:05:37.840 | of minor decisions along the way.

00:05:40.040 | So I think without, the whole idea is,

00:05:42.240 | philosophy is required before you get to strategy.

00:05:44.760 | Like, what should I invest in?

00:05:45.660 | Well, I don't know,

00:05:46.500 | what's your philosophy in the first place?

00:05:47.320 | So the way I see it,

00:05:48.880 | there are really like four kinds of investors in the world.

00:05:51.880 | So there's people who have no strategy at all,

00:05:54.520 | and they're probably either going to give up

00:05:56.240 | or lose most of their money in the markets, unfortunately.

00:05:58.120 | For every winner, there has to be a loser.

00:06:00.400 | The second kind of investor is people

00:06:01.980 | who just chase fat investments

00:06:03.120 | and no coherent plan beyond the short term.

00:06:05.800 | Third type of investor, I have a plan,

00:06:08.560 | I have an asset allocation, I have a strategy,

00:06:10.620 | but you pretty much fail to follow it

00:06:12.840 | when markets go haywire.

00:06:13.960 | You get really greedy at the top

00:06:15.240 | or really fearful at the bottom and you give up,

00:06:16.960 | and a plan that you give up on

00:06:20.400 | is no different than no plan at all, I think.

00:06:22.800 | And finally, there's those

00:06:23.760 | who have a comprehensive investment plan

00:06:25.520 | and the ability to stick with it

00:06:27.240 | in manias, panics, and everything in between, right?

00:06:30.500 | So this isn't really the answer you want to hear,

00:06:32.400 | but to put that cash to work,

00:06:34.080 | you have to have that overarching philosophy.

00:06:36.080 | So here's where I would start with this person,

00:06:37.720 | if you're sitting on a huge pile of cash

00:06:38.840 | and you don't really know what to do,

00:06:39.840 | don't have a philosophy, don't have a strategy.

00:06:42.060 | First of all, make sure those future savings,

00:06:44.140 | you're doing almost 8,000 a month

00:06:46.440 | or whatever it sounds like,

00:06:47.440 | automate into your 401ks, IRAs, brokerage accounts, 529s,

00:06:50.700 | whatever it is, automate them, right?

00:06:52.760 | Get them automated so you don't have to have this problem

00:06:54.800 | again in the future with future cash piling up.

00:06:57.720 | Number two, just start with a target date fund.

00:07:00.040 | Match it to your retirement date,

00:07:01.720 | either at the date, plus or minus five years,

00:07:03.640 | whatever it is in terms of your risk profile.

00:07:06.120 | Target date funds are not perfect by any means,

00:07:08.120 | but I think it's one of the simplest ways

00:07:09.440 | to just access a broadly diversified exposure to the market.

00:07:12.880 | It rebalances professionally,

00:07:14.240 | it glide paths you closer to a more conservative portfolio

00:07:17.600 | as you reach retirement age.

00:07:19.080 | And then in the future--

00:07:19.920 | - How do you not have a branded target date fund

00:07:21.880 | by this point?

00:07:22.900 | I just don't understand how there's not a Bing Carlson

00:07:24.960 | target date fund out there now.

00:07:26.520 | - That's a good question.

00:07:28.320 | Yeah, I'm gonna get it tattooed on my back

00:07:29.920 | like Bill with the Roth stuff.

00:07:31.680 | So I think perfect is the enemy of good here.

00:07:33.900 | And then with the rest of that cash,

00:07:35.920 | I would, most people think probability-wise,

00:07:39.060 | investing it in a lump sum is your best bet.

00:07:41.520 | And we're gonna have someone on the show later

00:07:42.640 | who has done a lot of work on that.

00:07:45.160 | But I think, especially when you're sitting

00:07:46.840 | in a huge pile of cash like this,

00:07:48.200 | for most people, I think,

00:07:49.680 | to go with the regret minimization framework

00:07:52.040 | that you dollar cost average it in over some period,

00:07:55.600 | weekly, bimonthly, monthly, quarterly, whatever it is,

00:07:58.900 | pick a strategy and stick with it

00:08:00.080 | and just get that cash invested.

00:08:01.520 | And again, stick to something simple

00:08:03.160 | like a target date fund right away.

00:08:04.540 | And if you want to branch out from there eventually,

00:08:07.600 | that's just a good way to get started.

00:08:09.480 | Cliff in the chat says the Bend Forever Fund.

00:08:12.480 | That's not bad.

00:08:14.080 | - I like that.

00:08:15.160 | Yeah, yeah.

00:08:16.280 | It would be a target date funds of target date funds.

00:08:20.640 | - Yeah, a fund of funds.

00:08:22.000 | - A fund of funds, that's it, yeah.

00:08:23.800 | - Right, next clip.

00:08:24.680 | But also, just awesome story

00:08:26.320 | that these people came to this country,

00:08:28.360 | what, seven years ago, they said,

00:08:29.560 | with not much to their name.

00:08:30.840 | They built up this huge saving.

00:08:32.000 | That's awesome.

00:08:32.840 | Love to hear it. - Yeah, good job, John.

00:08:33.920 | Oh, one follow-up I have there that I just noted

00:08:36.480 | is they mention blue chips.

00:08:39.960 | That's just a concept that I hear a lot of,

00:08:41.680 | especially people new to investing talk about.

00:08:44.080 | And they seem to think that,

00:08:45.640 | oh, if you invest in blue chips,

00:08:47.060 | yeah, your returns might not be as good,

00:08:48.600 | but they're super safe.

00:08:50.180 | And I was just gonna ask you your take on that.

00:08:53.280 | Today's blue chips versus a decade or two decades ago.

00:08:55.920 | - That's funny, yeah.

00:08:56.760 | - They change, right?

00:08:58.040 | - A lot of people would think that Dow stocks

00:08:59.720 | are blue chip stocks,

00:09:00.560 | maybe dividend stocks are blue chip stocks.

00:09:02.240 | It could change where companies like Apple and Microsoft

00:09:05.700 | and maybe Google are now considered blue chips eventually,

00:09:08.080 | or they will once they mature.

00:09:09.880 | But yeah, just because you invest in a stock

00:09:11.960 | that pays a dividend

00:09:12.840 | doesn't mean there's no risk there at all.

00:09:15.420 | But it does sound very comforting.

00:09:16.800 | We say, ah, just invest in blue chips.

00:09:17.800 | It's easy. - Right.

00:09:18.840 | Like GE would have been a blue chip at one point, right?

00:09:21.200 | - Yes.

00:09:22.040 | GE was definitely a blue chip.

00:09:23.680 | And it got crushed.

00:09:25.360 | - Okay. - All right.

00:09:26.200 | Next question. - Up next,

00:09:27.020 | we have a question from Mark.

00:09:29.320 | I'm 28 years old and self-employed living in South Carolina.

00:09:32.900 | I have saved around $11,000 across all accounts.

00:09:36.560 | Roth IRA, my wife's as well.

00:09:38.320 | SEP IRA, self-directed 401k, HSA, physical gold,

00:09:42.720 | silver, and other regular brokerage accounts.

00:09:45.340 | Sadly, I spent a month in the hospital earlier this year

00:09:49.000 | and have been dealing with the bills.

00:09:50.880 | I used to put aside at least $400 a month

00:09:54.200 | for savings or investing,

00:09:55.840 | but now I'm saving no less than 10% of my income

00:09:59.400 | for savings.

00:10:00.460 | My question is how I should tackle

00:10:02.360 | the interest-free hospital bills.

00:10:04.160 | Should I just ride them out and pay in time

00:10:07.240 | or try to zero it out sooner than later?

00:10:09.240 | - He might want to try to see

00:10:11.520 | if they'll take physical gold or silver.

00:10:13.160 | I've never heard physical silver before.

00:10:14.560 | That's an interesting one.

00:10:17.040 | First of all, sorry to hear this.

00:10:18.340 | This is kind of a crappy situation.

00:10:19.920 | Here's a depressing stat for you.

00:10:21.640 | According to one study,

00:10:22.960 | medical bills reported to be the number one cause

00:10:25.040 | of bankruptcies in this country,

00:10:26.320 | causing more than 60% of all bankruptcies.

00:10:28.960 | - Crazy.

00:10:29.800 | - I had a friend from college who did this

00:10:30.760 | who didn't get a job right out of school.

00:10:32.400 | She got very sick and racked up

00:10:35.620 | these enormous medical bills

00:10:36.840 | and had to declare bankruptcy at like 22,

00:10:39.300 | which is like on your credit report forever, right?

00:10:41.200 | It's crazy.

00:10:42.280 | Some other stats to consider here.

00:10:44.200 | Per capita healthcare spending has quadrupled

00:10:45.960 | since 1980 in this country.

00:10:47.720 | Spending on healthcare now makes up 20% of GDP.

00:10:49.860 | John, do a chart on here.

00:10:51.360 | This is employer and worker contributions

00:10:55.040 | to healthcare plans.

00:10:57.360 | Employer contributions are up 43% since 2012.

00:11:00.720 | Employee contributions are up 41%, which is a lot.

00:11:04.560 | It's crazy that you have to pay this much more.

00:11:06.420 | And it's not just you are paying more,

00:11:07.720 | your employer's paying way more too,

00:11:09.720 | which is kind of crazy to think about.

00:11:11.440 | Healthcare is part of your compensation

00:11:13.560 | if we're including benefits here.

00:11:15.080 | So I like to think that people's wages

00:11:18.220 | would be a lot higher if we didn't have to pay

00:11:19.440 | so much for healthcare.

00:11:20.800 | I mean, I think the number is like 50 to 60% of workers

00:11:23.640 | are covered by a plan from their employer.

00:11:26.380 | - It is a little wild, but it's tied to your employer, yeah.

00:11:28.960 | - It is, yeah.

00:11:29.800 | There's a weird backstory there

00:11:31.440 | where this happened in World War II

00:11:33.200 | where they put some price controls on

00:11:34.640 | and people couldn't pay higher wages.

00:11:36.400 | So companies actually had to start offering healthcare

00:11:38.600 | as a benefit to give people more money.

00:11:40.400 | And then it kind of stuck from there.

00:11:42.880 | I don't know what Marco's insurance situation is,

00:11:44.720 | but obviously he's feeling some pain

00:11:45.800 | if it's eating into his monthly savings.

00:11:47.440 | My advice here, if you said it's an interest-free loan

00:11:51.080 | they're basically giving you,

00:11:51.900 | I would be in no hurry to pay it off

00:11:53.160 | because why would you when it costs nothing?

00:11:56.040 | It costs so much to borrow on other stuff these days

00:11:57.840 | and inflation is so high, right off the bat,

00:12:00.600 | you're doing way better if they'll let you borrow at 0%

00:12:03.040 | and just pay it off slowly.

00:12:04.600 | I'd pay minimum payments for as long as I could

00:12:06.440 | unless this debt's just hanging over you.

00:12:08.520 | I'd make those minimum payments

00:12:09.440 | if they're gonna give it to you at 0%.

00:12:10.800 | That's an amazing deal these days.

00:12:12.520 | Alternatively, you could try to negotiate with them, right?

00:12:15.480 | Tell them your situation.

00:12:16.380 | Here's what I have, here's what I can afford.

00:12:17.820 | Can you work with me?

00:12:18.660 | What if I made smaller payments

00:12:21.440 | or maybe you cut some of it off because I can't.

00:12:23.520 | It's worth a shot.

00:12:25.200 | The other thing is what if I just paid it off now?

00:12:27.400 | I paid it in a lump sum, could I get some sort of discount?

00:12:30.680 | Most people just hate negotiating

00:12:32.320 | and I was one of those people too until I tried it.

00:12:34.600 | And so I do the same thing with banks

00:12:37.120 | and credit card companies and cable TV providers, of course.

00:12:39.880 | - Now you enjoy it, it's like a hobby, right?

00:12:41.640 | - It's kind of fun because what's the worst

00:12:43.840 | that can happen?

00:12:44.680 | They can say no, right?

00:12:45.840 | You try to negotiate with them and they say no.

00:12:48.500 | So I would at least try that,

00:12:49.880 | talk to the hospital administrators or whoever's,

00:12:52.200 | or insurance company, whoever is dealing with these bills.

00:12:55.360 | They would rather get something from you than nothing

00:12:57.760 | if you tell them you're in a hard spot.

00:12:58.800 | So I would at least try to negotiate.

00:13:00.240 | Otherwise, keep paying the minimum payments for 0%

00:13:03.720 | and hopefully once it's all gone,

00:13:05.080 | then you can start saving that money again.

00:13:07.080 | - Yeah, and having you even said before

00:13:08.480 | that you can even think of as inflation eating away

00:13:11.480 | that interest-free balance.

00:13:13.760 | - Exactly, that's one of the great parts about,

00:13:16.120 | holding a bunch of debt is not a great situation,

00:13:20.320 | but if inflation is much higher than those future payments,

00:13:24.080 | you're paying back on a real basis lower and lower amounts.

00:13:26.760 | That's why owning a home and having a fixed rate mortgage

00:13:29.560 | is such a great inflation edge

00:13:30.680 | 'cause the one you're paying back

00:13:32.040 | is less and less especially.

00:13:34.040 | I mean, the Fed this week held rates at what,

00:13:36.560 | 5% or whatever, 5.25% which is still two percentage points

00:13:41.000 | higher than my mortgage rate.

00:13:42.680 | Why would I pay it off in that instance, right?

00:13:45.000 | When the prevailing rates are so much higher.

00:13:48.200 | - Yeah, that makes sense.

00:13:49.440 | - All right, next question.

00:13:51.920 | - Okay, up next we have a question from David.

00:13:55.040 | Ben, you've mentioned-- - Speaking of housing.

00:13:56.920 | - Yeah, exactly, nice segue.

00:13:59.080 | Ben, you've mentioned that you tapped

00:14:00.520 | your home equity in the past.

00:14:01.980 | This is something I've never considered doing.

00:14:04.000 | Despite being fortunate, not to brag,

00:14:06.000 | to be sitting on a lot of it,

00:14:07.440 | it's 19% of my net worth,

00:14:10.560 | which I track on Excel file stay true, Ben.

00:14:14.000 | So, you have a-- - I track my finances

00:14:16.360 | in Excel as well.

00:14:17.320 | - Yeah, even when rates were low, I didn't see the point.

00:14:21.200 | If I can't pay cash for something, we don't buy it.

00:14:23.640 | Cars, cash, landscaping, cash, you get the point.

00:14:27.280 | I want to redo our laundry room,

00:14:28.960 | what Michael would call a mud room,

00:14:30.560 | but I don't want to do it until we have the cash.

00:14:34.480 | Am I missing something?

00:14:36.120 | When would you advise tapping your home equity and why?

00:14:38.980 | Yes, I'm sitting on a lot of home equity, so what?

00:14:41.560 | I'll realize that gain if and when I sell the house

00:14:44.240 | and it'll be deployed about time.

00:14:46.280 | - So, the way we get growth as an economy,

00:14:49.080 | I know a lot of people don't like to think this way,

00:14:50.960 | but the way the pie gets bigger

00:14:52.880 | is people borrow money now and invest for the future.

00:14:56.480 | They build houses, they build buildings,

00:14:58.760 | they start businesses.

00:15:00.160 | That's how things grow and expand.

00:15:01.840 | If we didn't have the ability to borrow, we never would.

00:15:04.980 | Obviously, paying for big ticket items in cash

00:15:07.760 | is a pretty good strategy if you can do it

00:15:09.760 | because it's kind of balancing saving now

00:15:12.960 | versus saving in the future.

00:15:15.120 | The one thing is that it requires more patience, obviously.

00:15:18.080 | You could potentially divert money away

00:15:19.480 | from making investments now

00:15:21.320 | because you're building those cash piles.

00:15:23.320 | So, why would you do this?

00:15:25.960 | Because you're impatient and you don't want to wait around

00:15:28.880 | and you have the ability to maybe pay it back

00:15:30.880 | in two or three years

00:15:31.720 | as opposed to paying it off in 30 like a mortgage.

00:15:33.680 | So, the only borrowing my parents ever really did

00:15:37.400 | was their mortgage and a HELOC.

00:15:39.920 | And their home was built in the '70s.

00:15:42.040 | We moved in in the early 1990s.

00:15:44.000 | They still live in the same house, 30 plus years later.

00:15:46.800 | So, over the years, it's a 50 plus year old home.

00:15:50.160 | They've had to do some big renovations.

00:15:51.720 | New windows, new roof, new deck.

00:15:54.200 | They probably could have built a whole new house

00:15:55.920 | for the money they spent on this stuff.

00:15:57.160 | Don't tell them that.

00:15:58.720 | But every time my dad said the way that he did it

00:16:00.360 | is he took a little money out of his HELOC

00:16:02.480 | because he had the mortgage paid off

00:16:03.600 | and used it as collateral.

00:16:04.840 | And then he'd pay it off over the course of

00:16:06.880 | one, two, three years.

00:16:08.200 | Like slowly pay it off in monthly increments.

00:16:11.280 | And in that case, the interest rate

00:16:14.060 | doesn't matter as much, right?

00:16:14.960 | 'Cause you're not holding the debt for very long.

00:16:18.400 | So, I think you're borrowing against a financial asset

00:16:20.680 | to make that financial asset more attractive.

00:16:22.600 | Plus, HELOC interest, as long as you use it

00:16:25.680 | to fix up your house for renovations,

00:16:27.360 | that interest is tax deductible.

00:16:28.960 | And Bill Sweet notes that there's a cap on that.

00:16:31.760 | So, you're limited to $750,000 of borrowing total,

00:16:34.640 | including your primary mortgage.

00:16:35.700 | That's like the cap.

00:16:36.740 | So, Bill did tell me that.

00:16:37.800 | So, I like the flexibility HELOC offers

00:16:40.240 | in that you can pay it back in your own terms.

00:16:41.480 | And the bank allows me to borrow for 10 years.

00:16:43.800 | I can write checks on that, pay it back,

00:16:45.320 | write more checks, and then after 10 years,

00:16:47.080 | you have to pay the principal and interest back

00:16:48.440 | over the course of 15 years, kind of like a mortgage.

00:16:50.360 | Now, this was a much sweeter deal

00:16:51.480 | when my HELOC was 3%.

00:16:53.320 | I checked the rate today, and it's effectively eight.

00:16:56.280 | It was actually 7.99% on my website.

00:16:59.120 | So, I wonder if it was really 8%,

00:17:01.520 | and then some manager said,

00:17:03.000 | "Hey, can you just knock that down a basis point?"

00:17:05.080 | 7.99 looks way, way better than eight.

00:17:07.560 | So, I like to use my home echo line of credit in a pinch

00:17:12.080 | if I'm ever writing a large check for something,

00:17:13.960 | because then I don't have to shift money around

00:17:16.220 | from other savings accounts or brokerage accounts

00:17:18.080 | or whatever and interrupt those accounts.

00:17:20.000 | And I can always pay off the balance

00:17:21.440 | if I want to move things around from other sources,

00:17:23.000 | but listen, if your strategy is to pay

00:17:26.160 | for everything in cash, that's fine.

00:17:27.640 | I just think HELOCs offer some financial flexibility,

00:17:31.280 | and especially for a financial asset

00:17:32.840 | that's illiquid like a house.

00:17:34.600 | Like, it's more flexibility

00:17:36.040 | where you can provide yourself some liquidity,

00:17:38.520 | even if you're having to borrow money

00:17:40.000 | and pay little interest.

00:17:41.200 | - See, I'm literally the opposite.

00:17:44.400 | I'm like, how can I pay for everything with a credit card,

00:17:47.080 | get those points?

00:17:48.280 | You know, I'm like, that coffee, that $2 coffee,

00:17:50.480 | no, it's gotta be on a credit card, I need those points.

00:17:53.040 | - Yeah, I wish I could get some points

00:17:54.400 | for borrowing from a HELOC.

00:17:56.280 | Again, the rates today make it not quite as good of a deal

00:17:59.360 | as it was a few years ago,

00:18:01.000 | but I still think if you're gonna pay it off

00:18:02.960 | in a relatively short amount of time,

00:18:04.440 | the interest that you're gonna pay on it is not that much,

00:18:06.080 | and it gives you some more flexibility,

00:18:08.820 | especially if you want that mudroom or laundry room now,

00:18:13.200 | and you're not gonna wait three years to save up for it,

00:18:15.840 | you can borrow now, build it, right off the interest,

00:18:19.360 | it's gonna help a little bit,

00:18:20.780 | and then you have that and you can pay it off

00:18:23.080 | slowly over time for that savings

00:18:24.500 | you were gonna make anyway.

00:18:25.620 | That's the whole point of borrowing.

00:18:27.080 | - Yeah, you make a compelling argument,

00:18:28.480 | and you get to be using that laundry/mudroom in the meantime.

00:18:32.240 | - Exactly, you just, it's, yeah.

00:18:34.000 | We don't like to delay gratification in this country,

00:18:36.800 | so that's what a HELOC line of credit is for.

00:18:38.640 | - Yeah.

00:18:39.480 | Okay, up next we have a question from John,

00:18:43.920 | another John, two Johns,

00:18:45.400 | and we have John in the background here

00:18:46.960 | working on the show, a lot of Johns today.

00:18:49.160 | Okay, has there ever been a study of the optimal time

00:18:52.120 | to take a distribution in retirement?

00:18:53.940 | For instance, does it make sense to withdraw the cash

00:18:56.360 | you need monthly, or take a full year

00:18:58.440 | and park the excess cash in laddered bills

00:19:00.760 | for monthly income?

00:19:02.080 | I might need a refresher on what laddered bills means.

00:19:04.760 | - Okay, well, so we, I think that the laddered bills

00:19:07.520 | they're talking about is like paying off their bills.

00:19:10.520 | This isn't like a strategy, they're saying.

00:19:11.840 | So we get a lot of questions on dollar cost averaging.

00:19:14.840 | I think this is kind of the reverse of that situation.

00:19:16.760 | So let's bring in our DCA expert, Nick Maggiuli.

00:19:19.680 | Nick even wrote a whole book about this subject.

00:19:23.440 | Just keep buying.

00:19:24.480 | Nick, a lot of people email us about the tough transition

00:19:29.120 | from going from accumulating assets,

00:19:30.760 | which is pretty straightforward, right?

00:19:32.380 | Because most people just invest out of their paycheck, right?

00:19:35.520 | So they dollar cost average, not 'cause they want to,

00:19:37.640 | because that's just the strategy they have to take.

00:19:39.800 | So this is kind of the opposite of it.

00:19:42.320 | You're sitting on a big pile of money,

00:19:43.600 | now how do you take that money out?

00:19:45.960 | And we have so many boomers that are retiring

00:19:48.120 | on a daily basis now.

00:19:49.720 | A lot of people are coming to this.

00:19:50.820 | So is it just dollar cost averaging in reverse?

00:19:53.040 | Is that the idea?

00:19:54.660 | - I mean, yeah, statistically, that's gonna be the thing

00:19:56.680 | that's gonna generate the most money for you, right?

00:19:59.560 | Like if you imagine something

00:20:00.680 | that just keeps going up over time,

00:20:02.000 | like over a very long period of time,

00:20:04.020 | you'd want to buy that thing as soon as possible

00:20:06.120 | and you want to sell it as late as possible, right?

00:20:08.120 | So in this particular instance,

00:20:09.920 | you'd have to be selling monthly.

00:20:11.120 | The problem with this though is there is more risk, right?

00:20:13.720 | 'Cause if the market goes down, something like that,

00:20:15.680 | when you go to sell, you're now selling a larger percentage

00:20:18.600 | of your portfolio, right?

00:20:19.920 | So, and it also depends on rate.

00:20:22.240 | So that's why someone brought up the ladder T-bill option

00:20:26.180 | where you're like, okay, I'm gonna take,

00:20:27.200 | I'm just gonna, let's say I need $10,000 a month.

00:20:29.640 | So you take 120K out, you sell that at the beginning,

00:20:32.200 | you invest 10,000 to a one month T-bill,

00:20:34.640 | 10,000 to a two month, right, et cetera,

00:20:36.380 | throughout the rest of the year.

00:20:37.220 | - Yeah, it's like liability, asset liability matching.

00:20:39.400 | - Yeah, yeah, and you could definitely do that.

00:20:41.320 | And so I could see how that would make income.

00:20:43.380 | And so that might make more sense and it's also less risky.

00:20:45.560 | So I, it technically, you know,

00:20:47.760 | it's better to wait as long as possible to sell,

00:20:49.920 | especially assuming this is equity risk you're taking.

00:20:52.980 | But, you know, at the end of the day,

00:20:55.480 | a lot of people are worried about risk

00:20:56.920 | and they don't know what's gonna happen with markets.

00:20:58.320 | I know we're in a new bull market now,

00:20:59.880 | but I don't think we're out of the woods yet.

00:21:01.280 | So, you know, there's, I think, you know,

00:21:03.400 | selling early and just, and doing a ladder T-bill

00:21:05.920 | given where rates are is not a bad idea right now,

00:21:08.000 | actually, when rates were at zero,

00:21:09.640 | I could have seen someone waiting,

00:21:12.020 | but because rates are higher now,

00:21:13.400 | I think it could make sense to just--

00:21:15.000 | - Okay, so maybe this person was talking about a strategy.

00:21:16.800 | Duncan, maybe you're right and I was wrong.

00:21:18.160 | But I guess, so the idea is,

00:21:19.720 | let's say you want to have a year's worth of cash

00:21:22.900 | in something and you're right in the past,

00:21:24.840 | you would have taken that year's worth of cash out

00:21:26.240 | and go, oh great, I'm earning nothing on my cash.

00:21:27.720 | Now you can earn something on it.

00:21:29.040 | So you know what your 12 months or 18 months

00:21:31.840 | or 24 months of spending is gonna be.

00:21:33.280 | You can plan that out, you know, pretty close these days.

00:21:36.480 | It's not as far out.

00:21:38.040 | Then you put that into a T-bill and as it matures,

00:21:40.080 | you kind of can spend it, right?

00:21:41.440 | 'Cause you buy the T-bill at a discount

00:21:43.040 | and then it matures at face value.

00:21:44.960 | - Yeah, exactly.

00:21:46.760 | I mean, it's a little more tricky

00:21:47.640 | because, you know, you have to like plan out

00:21:49.380 | exactly what you're gonna spend

00:21:50.600 | and spending's never so linear.

00:21:52.280 | It's usually more lumpy, right?

00:21:53.480 | So it can be difficult, but you know,

00:21:55.360 | that would definitely work, though,

00:21:56.600 | if you can kind of try and anticipate your spending a bit.

00:21:59.600 | - Yeah, and we've talked about this before

00:22:00.920 | where the way that I like to think about

00:22:03.400 | like an asset allocation in retirement is like,

00:22:05.400 | how much money do you want in safe assets?

00:22:07.080 | And that can be tied to how much,

00:22:08.280 | so if you use the 4% rule to spend

00:22:10.440 | and you have a 60/40 portfolio for current spending needs,

00:22:14.120 | you have roughly 10 years worth if you're in that 40%, right?

00:22:17.140 | If it's some sort of short-term bonds or cash

00:22:19.420 | or, you know, not long-term bonds by any means.

00:22:21.640 | But I think that's kind of a way to think about it.

00:22:23.820 | And then getting into your micromanaging is,

00:22:26.700 | then how do I deal with this short-term cash?

00:22:28.280 | And I'd love to see a study on how many people actually do.

00:22:30.880 | I'm guessing most people sell

00:22:32.040 | at the beginning of the year, right?

00:22:33.160 | Or the end of the year.

00:22:34.240 | Some periodic time point where they lock in

00:22:37.440 | and say, I'm gonna have my spending there

00:22:39.880 | 'cause I don't want it to move around in the meantime.

00:22:42.440 | - You actually know what most people do?

00:22:43.900 | They've done a study on this.

00:22:44.960 | So people with portfolios, right?

00:22:46.440 | So 40% of retirees don't even have a portfolio.

00:22:48.520 | They basically, Americans,

00:22:49.820 | they just live off social security, right?

00:22:51.320 | Which is unfortunate in its own right.

00:22:52.720 | But of those that have portfolios, the other 60%,

00:22:55.920 | you know, five and seven

00:22:57.200 | actually never touch their principal balance, right?

00:22:59.760 | They actually just live off their investment income.

00:23:02.320 | So it's a very simple rule.

00:23:03.760 | It's like, okay, if my investments

00:23:05.000 | are bringing in X dollars a month,

00:23:06.520 | I live off of that basically.

00:23:07.860 | And the principal balance usually keeps growing.

00:23:09.560 | So they never spend,

00:23:11.020 | very rarely do people spend down principal.

00:23:13.000 | It's a very small percentage of retirees

00:23:14.720 | that are actually spending down principal.

00:23:15.560 | - And this is the hot take from your book

00:23:17.400 | where you said most people, if you're a big saver,

00:23:20.320 | you're probably saving way too much money.

00:23:22.000 | And because of this idea that most retirees never spend it

00:23:25.400 | because they can't force themselves to spend it.

00:23:26.840 | So spend more now.

00:23:28.200 | - Yeah, that's exactly it.

00:23:29.320 | So it's kind of, it's not die with zero,

00:23:30.960 | but I'm saying die with zero is like directionally accurate.

00:23:33.080 | I actually hadn't read the book at the time

00:23:34.360 | or otherwise I would have thrown it in there.

00:23:35.440 | But yeah, it's like, it's moving towards that idea.

00:23:38.240 | - Your book would be like die with 25%.

00:23:40.200 | - Yeah, exactly.

00:23:41.400 | I think die with zero is a little rough

00:23:44.360 | for a lot of people.

00:23:45.200 | So I think there's some negative reactions to it,

00:23:46.880 | but I think he's directionally accurate.

00:23:48.460 | Like we are just like moving too much

00:23:50.280 | in one direction versus the other, right?

00:23:52.200 | And I think one more, one quick thing.

00:23:53.940 | Michael Kitsies did this study, right?

00:23:55.240 | He found that over, you know, over a 30 year time period

00:23:57.440 | using the 4% rule on a 60/40,

00:23:59.540 | you're more likely to 4X your portfolio

00:24:02.120 | than to go below the beginning balance.

00:24:03.840 | So if you start with a million dollars,

00:24:05.160 | you're more likely to have $4 million in 30 years

00:24:07.480 | than you're to be below a million.

00:24:08.760 | So, and that's with you spending money in everything, right?

00:24:11.200 | So I just, upside surprises happen.

00:24:13.400 | And I think people don't realize that

00:24:14.820 | when they go into retirement.

00:24:15.920 | - Well, people don't realize that also,

00:24:17.140 | like the 4% rule studies,

00:24:18.800 | those are looking at worst case scenarios, right?

00:24:21.040 | So you're right, that's on like the extreme left tail.

00:24:24.240 | Most of the time you're going to grow your money

00:24:26.920 | because most of the time markets go up, right?

00:24:29.920 | Okay, since we have Nick here, let's do a,

00:24:31.440 | we put him to work here.

00:24:32.400 | Let's do a more data-heavy one as well.

00:24:34.400 | - Okay, up next we have a question

00:24:37.680 | from McFly_Marty, so I'm guessing this is social media.

00:24:42.680 | - Great Twitter handle there.

00:24:44.320 | - Yeah, does the S&P 500 dividend yield keep pace

00:24:47.920 | with short-term treasury interest rates

00:24:49.700 | during a Fed hiking cycle?

00:24:51.800 | One would think that these corporations

00:24:53.640 | have to compete with the government

00:24:55.100 | to attract investment dollars,

00:24:57.440 | and there should be a correlation.

00:24:59.600 | - I like this, I like this question.

00:25:00.840 | I put this one in here because

00:25:02.320 | I've never really thought about it,

00:25:03.160 | but it makes sense.

00:25:04.000 | So John, do a quick chart on here.

00:25:05.520 | This is stock bond and cash returns by decade.

00:25:08.220 | I just have this chart,

00:25:09.060 | but it also shows earnings growth,

00:25:10.160 | annualized earnings growth.

00:25:11.500 | And you can see 2010s were great,

00:25:13.800 | which wasn't a lot of inflation or interest rates hiking,

00:25:15.980 | but the other high decades were the 1970s and 1940s.

00:25:20.200 | So what those two decades have in common

00:25:22.000 | is inflation was high and interest rates were rising.

00:25:24.520 | So it would make sense to me

00:25:26.840 | that if earnings are rising,

00:25:28.040 | that dividends will be rising too,

00:25:29.400 | but I've never really looked into this.

00:25:30.280 | So Nick, we put you to the test here.

00:25:33.200 | What did we find?

00:25:34.920 | - Yeah, so I did a quick analysis on this,

00:25:37.520 | and basically it's a difficult question

00:25:39.920 | because there's a lot of moving parts,

00:25:41.280 | but generally when the Fed goes to hike really quickly,

00:25:44.360 | like stock prices do drop a little bit.

00:25:46.440 | And so if you think about what is a dividend yield,

00:25:48.960 | it's like dividend over price.

00:25:50.920 | So let's say if a stock was priced at 100

00:25:53.200 | and it's paying $5 in dividend per share,

00:25:55.280 | that's a 5% dividend yield.

00:25:57.000 | So if prices drop by, just because of that,

00:26:00.640 | how that ratio works,

00:26:01.680 | like the dividend yield is gonna go up.

00:26:03.160 | So generally you see,

00:26:05.200 | I know I put together a graph that looks at this.

00:26:07.200 | I looked at a bunch of different hiking cycles,

00:26:08.800 | like going back to like, I think the 1970s.

00:26:10.960 | So the Fed target rate is there on the X-axis.

00:26:14.220 | So as the rate's going up,

00:26:15.980 | so in every one of these colored things,

00:26:17.280 | the rate is going up.

00:26:18.520 | So what should we expect with dividend yield

00:26:20.880 | is like, is the dividend yield moving up

00:26:22.400 | as the dots are moving to the right within each color?

00:26:24.880 | And the answer is generally yes,

00:26:26.640 | but it's not always perfect.

00:26:27.760 | And so what you're seeing is like,

00:26:29.560 | as the Fed's raising rates,

00:26:30.880 | like dividends yield tend to go up only,

00:26:32.920 | I think some of that is because of the price impact, right?

00:26:35.400 | So yes, it's true that like, you know,

00:26:37.600 | corporations are like,

00:26:38.440 | oh, I wanna offer more dividends to be attractive.

00:26:40.860 | But the fact is if your price drops

00:26:43.120 | and your dividends don't change,

00:26:44.380 | your dividend yield has gone up, right?

00:26:46.240 | And so because of that,

00:26:47.700 | like just naturally through this process,

00:26:50.040 | and we saw this happen in this hiking cycle, right?

00:26:52.760 | Stock prices got hit as the Fed started to hike.

00:26:56.040 | And guess what?

00:26:56.880 | Dividend yields went up, right?

00:26:58.320 | Because all else equal,

00:26:59.360 | if they didn't cut dividends,

00:27:00.520 | dividend yields went up, right?

00:27:01.640 | So that's--

00:27:02.480 | - It probably operates on a lag too.

00:27:03.600 | If earnings are rising,

00:27:04.520 | it's not like companies are automatically

00:27:06.480 | increasing dividends right away.

00:27:07.520 | They do so on a very slow stair-step approach.

00:27:10.120 | They probably don't do it very quickly, right?

00:27:11.940 | - Exactly.

00:27:12.780 | I would love to look into this more,

00:27:13.600 | but you know, it's a quick analysis,

00:27:14.720 | trying to get an answer.

00:27:15.560 | But yeah, I think generally they are correlated

00:27:17.640 | just through that mechanism of like,

00:27:19.460 | as price drops,

00:27:20.400 | a dividend yield tends to go up just very quickly.

00:27:23.420 | But yeah, over the long haul,

00:27:25.160 | I don't know,

00:27:26.000 | like I don't think corporations are thinking,

00:27:27.040 | oh, treasurers are paying this,

00:27:28.400 | we have to pay more now.

00:27:29.640 | I don't think that's the,

00:27:31.080 | I don't think that's a thing that like,

00:27:33.000 | is going through a lot of, you know,

00:27:34.920 | the minds of those in corporate strategy

00:27:36.920 | and things like that.

00:27:37.760 | - It's funny because that--

00:27:38.580 | - We're gonna do what's best for the business, right?

00:27:39.420 | - That used to be the case back in like the 1920s,

00:27:41.960 | '30s, '40s is that stocks offered way,

00:27:44.080 | like five, six, 7% dividend yields

00:27:45.760 | 'cause they were competing with bonds.

00:27:46.940 | 'Cause no one knew what the actual price returns were,

00:27:49.120 | so they had to.

00:27:50.160 | And now you're right.

00:27:51.000 | They don't care about that as much anymore.

00:27:53.040 | - Yeah, the data's out there.

00:27:54.120 | And so people know that stocks generally return

00:27:55.960 | more than bonds,

00:27:56.800 | so they don't have to pay as much now to do that.

00:27:59.080 | - Yeah, well, that was a pretty chart.

00:28:00.440 | Nick makes some of the prettiest charts in all finance.

00:28:02.400 | - Thank you. - So that was nice.

00:28:03.720 | - Yeah, I was just telling everyone in the chat

00:28:05.880 | to be sure to check out,

00:28:07.000 | Nick just wrote a good piece

00:28:08.400 | about how housing prices got to where they are.

00:28:11.440 | So go check that out.

00:28:12.680 | - Thank you.

00:28:14.120 | - Perfect, okay.

00:28:15.160 | Thanks, Nick, for coming on the show.

00:28:16.200 | We always appreciate it.

00:28:17.360 | And if you haven't yet,

00:28:18.200 | check out Nick's book, "Just Keep Buying."

00:28:20.060 | He's got a really tiny copy over his shoulder.

00:28:21.880 | - I'm plugging it.

00:28:22.720 | (laughing)

00:28:23.560 | We're in the spare office.

00:28:24.840 | I'm like plugging this thing.

00:28:25.680 | - It's perspective.

00:28:26.520 | It's not a tiny copy.

00:28:27.940 | (laughing)

00:28:30.040 | - Remember, you can email us.

00:28:31.520 | Yeah, that's like the Leaning Tower of Pisa

00:28:34.280 | kind of thing.

00:28:35.120 | - Right, exactly.

00:28:35.960 | Yeah, thanks, guys, for having me on.

00:28:37.200 | It's always great.

00:28:38.040 | Always great to chat with you guys.

00:28:38.960 | - AsktheCompoundShow@gmail.com.

00:28:40.880 | Thanks again to Bird Dogs,

00:28:42.000 | and we'll see you next time.

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