Is 75/25 the New 60/40? | Portfolio Rescue

00:00:00.000 | A lot of fun. Yesterday was fun for a few minutes.

00:00:16.280 | All right. So last Thursday, the S&P 500 was up 2.5 percent. All right. We're feeling good.

00:00:21.680 | Friday, it was down 3.6 percent. Yesterday, S&P 500 up 3 percent. Today, down 3 percent

00:00:28.260 | and going lower faster at a fast pace, right? The crazy thing is, this is actually kind

00:00:33.840 | of normal for a downturn. John, put the chart on of this volatility chart here. So what

00:00:39.360 | this shows is like the rolling 30-day volatility. Think of this as like the VIX. You see the

00:00:44.160 | dotted line there, Duncan. That's the average. You can see any time you see a big spike,

00:00:49.280 | you see these green and red dots on this chart. Now, what this is is the 25 best days since

00:00:55.080 | 1990 and the 25 worst days in the market since 1990. And what you'll notice is they all happen

00:00:59.760 | at the same time. They all happen when volatility spikes. When volatility spikes, you see big

00:01:05.040 | up days and big down days. Now, this is nothing like we saw in March 2020. We saw a string

00:01:09.240 | in March 2020 of minus 8 percent, plus 5, minus 5, minus 10, plus 9, minus 12, plus

00:01:17.200 | 6, minus 5 in consecutive days, right? So this back and forth, back and forth, right?

00:01:22.880 | It's the Michael Scott snip-snap, snip-snap. So why does this happen, right? Why, when

00:01:28.280 | we see a downturn, does this happen? Because we're human. Phil Perlman had this quote today.

00:01:33.320 | I think it was an old tweet of his. He said, here's the thing about behavioral finance.

00:01:36.680 | People are crazy. And losing money is no fun. And losing money drives people crazy, right?

00:01:42.440 | So people panic when they're losing money. So they panic buy and they panic sell, which

00:01:46.080 | leads to these huge wild swings in price in both directions. Now, you could say, hey,

00:01:50.280 | it's the algos fault, right? But the thing is, this has been happening in every bear

00:01:52.760 | market in history. The algos just might be speeding up and making it go a little faster.

00:01:56.920 | But unfortunately, this is the way that it works.

00:01:59.760 | Sorry, Duncan. That's all I got.

00:02:03.480 | I was about to say, so it seems like we just need to look at that chart and you just figure

00:02:08.320 | out when you buy and sell based on where those dots are, right? So you just map that to future

00:02:14.400 | moves.

00:02:15.400 | Yeah, sure. That's the problem, is that no bear market in history is going to tell you

00:02:18.440 | like the entry point of, okay, now it's over. Because these things that have never happened

00:02:22.560 | before continue to happen all the time. People said in March 2020, we bottomed on like a

00:02:26.040 | 9% up day or something. And people said, you don't bottom on days like this. Those big

00:02:30.300 | up days like that doesn't happen. And that was the bottom. And so good luck guessing

00:02:34.160 | is my only words of comfort.

00:02:35.680 | Remember, if you have a question, askcompoundshow@gmail.com. One of these weeks, we're gonna have more comfort

00:02:40.880 | for you. All right, let's go to the first question here. I think this is probably a

00:02:45.320 | position a lot of people are in right now, as they look at their stock portfolios.

00:02:48.720 | Yep. So this person, shout out Nick Majulie right off the bat. I was reading Nick's book,

00:02:53.560 | Just Keep Buying, and the chapter on why you shouldn't buy individual stocks reinforced

00:02:57.200 | my recent feeling that I need to change up some of my investments. In my workplace retirement

00:03:02.080 | account, I have 50% of my balance, about $200,000 in a brokerage link account where I own a

00:03:07.720 | number of individual companies. Some have been winners, but recently a lot have been

00:03:11.640 | losers. We all feel you there, I think. I have learned my lesson that picking winners

00:03:16.000 | is hard. Do you have any recommendations on a strategy to rebalance my account into ETFs?

00:03:21.940 | Is it best to just sell everything and buy new?

00:03:24.240 | All right, so we did have Nick on the show a couple weeks ago and talked about how tough

00:03:28.440 | it is to pick winners. I think one of the stats we didn't talk about at the time, Sam

00:03:31.480 | Rowe at the TKer, he's been a guest on the Compounded Friends before. He had this great

00:03:35.820 | stat a couple weeks ago, said that since January 1995, 728 tickers have been added to the S&P

00:03:40.960 | 500, while 724 have been removed. And I honestly think this is one of the reasons that the

00:03:46.560 | stock market itself is so hard to beat. It's not like an index fund is anything special.

00:03:51.800 | It's tax efficient, it's low cost, it's low turnover, but it also holds the winners and

00:03:56.440 | it gets rid of the losers. And I think people have a hard time doing that in their brains.

00:04:00.320 | So the fact that people finally realize, "Okay, I'm going to make a C change. This is it.

00:04:04.560 | I realize stock picking is not for me." The only advice I would give off the bat is don't

00:04:10.680 | get into this habit of changing your financial plan every time things are going well. So

00:04:15.760 | in 2020, stock picks are looking good, so I'm just going to funnel all my new retirement

00:04:19.560 | money into stock picks. And now when it's looking bad, I'm just going to funnel all

00:04:22.640 | my money into index funds and ETFs. I think you just have to pick one and stick with it.

00:04:26.080 | Pick an allocation, give yourself an allocation to stock picking if you still want that, but

00:04:30.080 | don't change it willy-nilly all the time. So the options are, you rip the bandaid off

00:04:33.720 | and you just do it. The good thing about this is that it's in a workplace retirement plan.

00:04:38.280 | Typically selling in a brokerage account involves thinking about taxes, right? And in this case,

00:04:41.840 | if you had losses, you could just take some of those and offset the gains. The fact that

00:04:45.560 | it's going through a brokerage-linked account to a retirement account makes it easier because

00:04:48.760 | you're not having to worry about taxes. So you could just sell it all at once. Put that

00:04:52.200 | money into four or five low-cost ETFs. Could be a target date fund, maybe like one of those

00:04:55.560 | Vanguard lifestyle strategy funds where they handle the asset allocation and rebalancing

00:04:59.440 | for you. I mean, check the options at your 401(k) provider first. The most important

00:05:03.720 | determinant of success for these things is typically all else equal. Choose the funds

00:05:06.880 | with the lowest fees. That's going to be your highest predictor of success. And the other

00:05:10.880 | option would be, so if that's the case, I'm totally out of picking stocks, right? I think

00:05:14.940 | I retired, what, three months ago, Duncan, from picking stocks?

00:05:18.240 | Something like that, yeah.

00:05:19.240 | I put my retirement in. I might do a Michael Jordan comeback at number 45 at some day.

00:05:22.840 | I'm still holding some individual stocks.

00:05:24.480 | When Zillow comes back, you're going to be a champion.

00:05:27.120 | I might have one stock that's up this year. All the other five of them are getting smoked.

00:05:31.460 | So I'm with everyone else here, my stock picking. But I put like five or 10% of my portfolio

00:05:36.080 | into this, and I have fun and it's entertaining. And I know that's what it's for. Everything

00:05:39.760 | else is automated, rules-based. So I think you can give yourself some play money if you

00:05:43.480 | want to keep 5, 10, 15%, whatever it is, and hold on some of those stocks you want to keep

00:05:47.760 | as winners so you don't kick yourself if you sell them. Just, again, don't get in the habit

00:05:51.720 | of going all in and all out.

00:05:53.440 | So I do think this is a good lesson for a lot of people, though, that 2020 was an aberration,

00:05:57.680 | and picking stocks wasn't as easy as it looked back then.

00:06:00.200 | Yeah, I mean, there was a time when it was just like a strategy. People were just buying

00:06:05.180 | every stock before earnings, and they were all just going up after earnings pretty much.

00:06:10.480 | I love this company. I'm going to buy this stock. Hey, look, it did well. It doesn't

00:06:13.720 | always work that well, unfortunately. It's always not going to be that easy. So yeah.

00:06:19.400 | It's just, yeah. Probably rip the bandaid off and do it.

00:06:22.400 | I have a little follow-up to that, which is you always hear about the virtue of patience

00:06:27.440 | in the market. So what's a good indication of when you know you need to make a change?

00:06:32.680 | When should you let something ride versus when should you make changes?

00:06:35.520 | This is why rules of thumb are so hard in the markets, because you hear like, "Listen,

00:06:39.960 | to be like George Soros, you have to be flexible and make changes all the time." But it's like,

00:06:43.320 | "No, to be like John Bogle, you have to stick with your plan no matter what, come hell or

00:06:46.120 | high water." And then it's like, "The first loss is the best loss," right? Then it's like,

00:06:50.080 | "No, no, no. You have to stick with everything no matter what."

00:06:51.800 | So everything in investing is kind of counterintuitive and sort of offsets one another. A lot of

00:06:57.040 | it depends on what you want to get out of this strategy. And if you really think you

00:07:01.240 | have an edge in picking stocks, or again, if you're just doing it for fun. So are you

00:07:05.560 | doing this your entire portfolio? Then you better have a damn good strategy and reason

00:07:09.500 | for it and reason to stick with it and discipline. And the idea of, "Okay, if I'm going to stick

00:07:14.920 | with this strategy, you should probably be willing -- like, would you be willing to plug

00:07:18.280 | your nose and put more money into these stocks now?" Or you're like, "I'm just going to wait

00:07:21.600 | and see." Maybe you don't have enough faith in your own system to keep following it. And

00:07:24.680 | I think that's a big part of it, too, is understanding if your own system -- like, everyone's strategy

00:07:30.040 | is going to go through periods of rough performance. There's no denying that. Everyone does. Warren

00:07:35.520 | Buffett does. Cathie Wood does. Every great investor in history has a bad period. I think

00:07:39.480 | you just have to figure out, "Are you willing to stick through?" That's probably the biggest

00:07:43.240 | thing Buffett has done over the years. He has a strategy he sticks with, come hell or

00:07:47.760 | high water.

00:07:48.760 | He got a lot of flack for selling off airlines back during the pandemic, right? But now,

00:07:52.880 | I guess, it seems like people are kind of over that.

00:07:57.200 | Yeah. And to his credit, he came back and Berkshire is doing one of the best-performing

00:08:01.600 | stocks this year.

00:08:02.600 | Yep.

00:08:03.600 | Let's do another one.

00:08:04.600 | Okay. Up next, we have, "Me and my wife have an apartment in the city center, which we

00:08:09.560 | bought three years ago. We are currently renting it out and we're able to buy a house and cover

00:08:15.560 | both mortgage payments with the rent money. However, due to a crazy housing market, we

00:08:19.600 | could sell our apartment, pay off all mortgages, keep our house mortgage-free, and pocket an

00:08:24.160 | extra $100,000 in profits to invest. Which is better, continue with the rental and have

00:08:29.040 | others pay for our mortgage, but deal with all the risks that come with renters and renovation,

00:08:34.060 | or invest in ETFs and be exposed to market volatility?"

00:08:36.720 | It's interesting. The first question dealt with changing a financial plan because big

00:08:41.200 | losses. This is, "Should we change our financial plan because we're dealing with big gains?"

00:08:45.800 | I think it's interesting. Sometimes, circumstances change and the financial markets force your

00:08:50.720 | hand to make a decision like this. And I think for a lot of people, this has to be very tempting.

00:08:53.920 | If you own a rental property and you have all this equity built up, it's got to be very

00:08:57.640 | tempting to cash out and do something else with this. I think the biggest question is,

00:09:01.760 | "What's your tolerance for complexity here?" The good news is you already know what it's

00:09:04.880 | like to be a landlord, but have you experienced the downside of that? Having the hot water

00:09:09.040 | heater break, having the high cost of maintenance, property taxes go up, that sort of thing.

00:09:14.480 | Maybe all that stuff doesn't matter when you consider how much equity you've earned, but

00:09:18.240 | I guess there are some pros to owning real estate. I think people have figured out. There's

00:09:22.880 | low volatility in the price. There's no flash crashes in housing. There's no daily market

00:09:26.360 | prices to check. You could check on Zillow, but it's not like it changes the stock market.

00:09:29.680 | You're not going to be up 5% one day and down 5% the next day. It's just tangible assets.

00:09:34.080 | I think some people are just more comfortable with that, whether that makes sense or not.

00:09:38.400 | And then you have regular income potentially coming in if you have tenants locked in. And

00:09:41.560 | then, of course, the equity piece, if housing prices continue to rise, you could continue

00:09:45.680 | to make more money and do it on a levered basis. The cons here, you have these really

00:09:49.840 | high idiosyncratic risks. You could lose your tenants. You could have damage to the property.

00:09:53.680 | You could have just your neighborhood that you're in or the local economy goes bad, even

00:09:58.320 | if the rest of the country does fine. And you can't really spend rental property besides

00:10:03.520 | your income. And the returns are probably lower than you think when you count property

00:10:07.920 | taxes, maintenance, upkeep, property management, borrowing costs, all these things. And then,

00:10:11.600 | of course, if you're owning one rental property, your diversification is basically nil. You

00:10:15.480 | have an apartment and a house. So I'd like to think of investing through this regret

00:10:21.200 | minimization framework. What would I regret more, paying off the mortgage and missing

00:10:24.920 | out on potentially more equity or paying it off, having that feeling of being free, having

00:10:32.080 | some extra money, and then not having to worry about finding tenants ever again? I doubt

00:10:36.760 | many people regret paying off their mortgage, even if it's a very low hurdle rate. And if

00:10:41.680 | you put it in a spreadsheet, it doesn't make sense. I'm not sure how many people would

00:10:44.280 | say, "I paid off my mortgage. I'm free and clear of debt, but I really regret it." I

00:10:48.400 | don't think people do that. So, yes, rates are low, but it's probably hard to have that

00:10:53.660 | peace of mind. I think as long as you're up -- you're okay foregoing potential price gains

00:10:56.720 | and living with more volatility in the financial markets, this is probably about as good as

00:11:00.240 | time of any to do something like this and take it off the table and make your life maybe

00:11:03.800 | a little easier.

00:11:04.800 | >> Yeah. No, that makes sense. One thing on that note, though, you know, I try to make

00:11:10.120 | myself feel better being a renter and not owning property. My wife and I moved to a

00:11:14.640 | new neighborhood last year, and we loved that there was this cool, like, little bar and

00:11:18.400 | cafe on the corner. And they're now literally destroying the building, and that entire block

00:11:23.120 | is gonna be under construction for the next couple of years. And so, I was like, "Oh,

00:11:27.000 | I guess that's the advantage of renting. We can just move away."

00:11:29.880 | >> Yeah. Yeah, you have the flexibility of your lease is up. You go somewhere else, right?

00:11:33.720 | So, I do think there's a big piece of that flexibility. And I think potentially paying

00:11:37.680 | off your mortgage is another way to get more flexibility as well.

00:11:40.200 | >> Yeah.

00:11:41.200 | >> All right. Let's do one more.

00:11:42.200 | >> That's good advice. Okay. So, up next, "I'm 63, retired, and living on a meager pension

00:11:48.320 | and Social Security. Doing okay now, but counting on my IRA in a few years. I currently have

00:11:53.520 | a diversified 60/40 portfolio of domestic and international stocks and bonds. I'm not

00:11:58.200 | thrilled with the returns that bonds are giving me, but I don't know if there's a viable alternative.

00:12:03.680 | Can I find attractive risk return in REITs or high-dividend stocks without sacrificing

00:12:08.560 | capital, or should I accept the bond portfolio for what it is and ride it out?"

00:12:13.080 | >> This is a question we've been getting a lot in recent years. John, throw up the first

00:12:16.380 | chart here that just compares the S&P 500 with the Vanguard REIT ETF and the Vanguard

00:12:22.160 | Dividend Appreciation ETF. Oh, no. Do you have the white charts one here? Yeah. Never

00:12:29.320 | mind. My chart was going to show that dividend stocks and REITs are down just as much as

00:12:34.760 | the S&P. Dividend stocks are a little less than the S&P, but REITs not down as much.

00:12:41.400 | I don't blame John for this. I probably forgot to include the chart. So, this is my bad.

00:12:44.120 | >> I'm not seeing it. But, yeah, we'll have to wink to this.

00:12:48.000 | >> It's fine. Basically, dividend stocks are still stocks. They may not fall as much, and

00:12:53.240 | they're not falling as much right now. They're down 20% less than the stock market. But they're

00:12:57.960 | still going to fall. And so, there aren't many good alternatives right now. So, I think

00:13:03.040 | you're going to have to accept some volatility. In 1989, Peter Bernstein, the legendary investor

00:13:07.520 | who wrote Against the Gods, which is an amazing book on risk, laid out this idea in some investment

00:13:12.360 | research journal type of periodical. He said, "What's the difference between a 60/40 portfolio

00:13:17.260 | of stocks and bonds versus 75% in stocks and 25% in cash?" And he said, "Although cash

00:13:21.680 | tends to have lower expected returns in bonds, we have seen that cash can hold its own against

00:13:25.280 | bonds 30% of the time or more when bond prices are positive, and cash will always win out

00:13:29.520 | over bonds when bond returns are negative." And that's now, right? So, that's why people

00:13:34.360 | are probably more comfortable investing in cash right now. So, now, John, you can put

00:13:36.760 | this table that shows a 60/40 versus 75/25. And you can see -- so, I did that from 1928

00:13:43.160 | to 1921. You can see it's pretty similar. A little bit higher volatility in 75/25, but

00:13:47.600 | higher returns as well. And then I also looked at the period of 1950 to 1981 to show, like,

00:13:52.120 | what about a rising rate environment? Because the 10-year went from 2% in 1950 to 15% by

00:13:56.560 | 1981. And you can see the 75/25 portfolio actually outperformed because cash outperformed

00:14:01.280 | bonds back then. Because you get the -- because short-term rates rise and you get to reinvest

00:14:05.560 | and bonds have this interest rate risk. So, you get a little bit higher volatility having

00:14:10.720 | more stocks, but then you have this piece in cash that you know is not going to fall

00:14:14.780 | on a nominal basis, right? In cash, in this instance, I used three-month T-bills, which

00:14:18.920 | is basically like a savings account or money market. It is worth noting, Peter Bernstein

00:14:23.320 | wrote this piece in 1989. Yields were much higher. 10-year yield averaged 8.5% in 1989.

00:14:29.040 | Three-month T-bills sported an average yield of 8.4%. So, things were a tad easier from

00:14:33.480 | an income perspective back then. Right now, three-month T-bills yield about .9% or 90

00:14:38.560 | basis points, if we're talking finance-speak. But you can find higher yields in shorter-duration

00:14:42.560 | bonds today. So, the SHY that we've talked about here, Duncan, one- to three-year Treasury

00:14:45.560 | ETF, is now yielding 2.7%. So, you pair a shorter-duration bond fund like that with

00:14:51.040 | almost 3% yields with a little bit of higher proportion in stocks, I just think you're

00:14:56.320 | just going to have to -- you can't live off the income from your bonds anymore. It doesn't

00:15:00.680 | really work like that in this environment. Maybe they go a little higher and you can,

00:15:03.680 | but in 1989, you could put your entire portfolio into government bonds and earn 8 or 9% and

00:15:07.920 | have been fine. So, if you want anything approaching those levels of returns today, you just have

00:15:11.240 | to live to accept some more volatility, basically.

00:15:14.480 | >>So, you're saying those were the days, basically.

00:15:17.480 | >>Yes. How easy was it to invest in the 1980s? The stock market was up like 20% a year. Bonds

00:15:23.120 | were yielding 7 to 8%. Easiest time in history. If you want to know why a lot of the most

00:15:27.680 | famous hedge funds in the world started investing in the 1980s and why they have these great

00:15:30.880 | track records, they're really smart guys, but they also started investing in one of

00:15:34.280 | the greatest decades ever. Sorry, didn't mean to throw some shade there, but it's true.

00:15:38.120 | >>I'm sure it's a lot of skill, too. No offense to all of our hedge fund viewers.

00:15:41.400 | >>All right, let's do another one.

00:15:44.960 | >>Okay. With the recent downturn in the stock market, I've been doubling my monthly contributions

00:15:49.360 | to my Roth IRA. This means I'll be maxed out by June. I want to keep investing at least

00:15:54.440 | 30% of my income into the market, which leaves me with two choices. Contribute more to my

00:16:00.120 | 401(k) or my brokerage account. My work will not match my current 5% contribution until

00:16:06.040 | I've been with the company for a year, which will be in December. They use a target date

00:16:10.280 | fund with a 0.4% expense ratio. My brokerage account mirrors my Roth, which is invested

00:16:16.520 | in passive ETFs with an expense ratio of 0.04%. Should I increase my biweekly contributions

00:16:22.480 | to the tax advantage 401(k) even though I will not get my match and it's more expensive,

00:16:27.720 | or fund my brokerage account, which is taxable but cheaper?

00:16:31.200 | >>Okay. A good financial planning question here. So, let's bring in Kevin, our financial

00:16:37.560 | planner here, who's been on this show before. Kevin, how's it going?

00:16:40.560 | >>Good, guys. How are you?

00:16:42.160 | >>Hey, Kevin.

00:16:43.160 | >>All right. Here's the thing. Why do companies do this where they don't give you a match

00:16:47.300 | for a year? Is that just companies nickel and diming people? Is there an actual reason

00:16:50.240 | for this?

00:16:52.160 | >>So, it's mostly just because they're worried that somebody comes in, they stay for six

00:16:58.240 | months, they give them the free match, and then they leave. And so, honestly, it's just

00:17:03.320 | the corporation kind of just trying to, or a corporation, any business, right, just trying

00:17:07.540 | to keep costs a little lower from an overall compensation standpoint. They want to incentivize

00:17:12.840 | you to stick around.

00:17:13.840 | >>I would like to see some backfill on that match. So, I guess the question here is, okay,

00:17:17.320 | I don't get the match. Does it still make sense even though the fees are a little higher

00:17:20.200 | to invest in the 401(k) or just put it all in the brokerage account? I guess a lot of

00:17:24.480 | this depends on if you really care about that tax break. So, why don't you run through how

00:17:27.120 | to think about this?

00:17:28.120 | >>Yeah. So, the 401(k) versus the brokerage, that's exactly what it is. It's a tax play.

00:17:33.800 | So, in the 401(k), even though you're not getting the match right now and your expense

00:17:38.040 | ratio is higher, this is just a bet that your taxes today are higher than they will be in

00:17:45.600 | retirement, right? That's the cleanest way to think about it. And so, if right now you're

00:17:51.320 | in the, let's just use simple made up numbers, you're paying 30% income tax now because you're

00:17:57.240 | earning an income, you're earning a salary. In retirement, maybe you're living off of

00:18:01.120 | just Social Security and some withdrawals from your brokerage account and your tax rate's

00:18:06.120 | 15%. Well, it makes a lot of sense to defer that income until later. That's really kind

00:18:12.240 | of the tax strategy. Of course, the big variable there is we have no clue what the tax code

00:18:15.960 | is going to be when you retire, whether that's 5 years from now or 35 years from now. So,

00:18:22.120 | that's kind of the tax side of things.

00:18:24.800 | I also think the behavioral side of things here is setting up your 401(k) just to have

00:18:28.920 | it come right out of there. It comes out of your paycheck. You never see it hit your account.

00:18:32.160 | I think it's just easier from a psychological perspective. And maybe if you put into a brokerage

00:18:35.660 | account, you might be more tempted to use that money now. I know you can still take

00:18:39.200 | it out of your 401(k), but you have to pay some penalties and jump through some more

00:18:41.600 | hoops to do it. So, I think from a behavioral perspective, putting it in the 401(k) actually

00:18:46.600 | makes sense. And then you're already set up with it. And so, when that match does kick

00:18:50.000 | in, then it's already there. You don't have to do anything else, right? It's easy. I

00:18:52.760 | think that's the biggest benefit of the 401(k) is just that it's easy.

00:18:56.440 | Yeah. The automated savings piece is absolutely huge because we've talked about this on the

00:19:01.800 | show and pretty much every show that we have, is that so much of this is just making mistakes

00:19:08.180 | from a psychological perspective, not setting yourself up for success with investing. And

00:19:12.840 | that automated every two weeks it's going in is so important. If you can do that in

00:19:18.320 | the brokerage though, in this particular situation, and you want to wait until you really can

00:19:22.620 | get that full match, we're talking what, six months from now? So, it's not six, seven months

00:19:28.040 | from now. It's not that big of a deal if you take the next six, seven months, front load

00:19:32.480 | the money into the brokerage, if you can be programmatic and responsible with it. And

00:19:37.640 | then once the match is fully there, great, you can start putting some money away. That

00:19:43.920 | I think is the best thing to do. Also, maybe check with your HR department because you're

00:19:47.460 | getting absolutely robbed on fees if you're paying 40 basis points for basically a target

00:19:53.160 | date fund.

00:19:54.160 | Yeah. And unfortunately, a lot of the HR departments, they don't really know what they're doing

00:19:57.760 | in a lot of these instances because they don't have the investment acumen or experience to

00:20:01.280 | do this. And they go with someone they heard of, their brother-in-law, whoever does a 401(k)

00:20:04.960 | plan. So, all right, let's do another one, Duncan.

00:20:09.120 | Okay. So, last but not least, my wife and I have about $170,000 in our brokerage account

00:20:15.940 | that we intend to use for a house down payment. We contribute to retirement accounts and save

00:20:20.580 | quite a lot of money. I work in real estate, and given current house prices, we are biding

00:20:27.140 | our time until there's a correction. In the meantime, and for future finances, we want

00:20:32.220 | to invest the money for the long term. I recently learned about securities-backed lines of credit,

00:20:37.180 | SBLOCs, and they seem like an attractive option. I understand their risks, but I would like

00:20:41.660 | to hear your thoughts. Additionally, with this growing sum of money, what would be the

00:20:45.940 | best option for investment? Wump sum seems dangerous in this environment and for our

00:20:50.700 | purposes. So, maybe some sort of DCA, dollar-cost averaging, perhaps a wump sum of $50,000 and

00:20:56.540 | then a weekly contribution. So, this is a question, as people, our regular viewers are

00:21:01.460 | saying, this is a question we get a lot, but it's important, but this idea of wump sum

00:21:06.020 | versus DCA and different time horizons.

00:21:08.820 | I do want to say, I understand the desire to be patient. No one wants to buy a house

00:21:13.140 | right now because house prices are up and mortgage rates are up, but it's not a foregone

00:21:17.300 | conclusion housing prices are necessarily going to fall. The gains could slow and they

00:21:20.540 | could certainly fall at some point with higher rates, but it doesn't mean they have to. So,

00:21:23.860 | I just want to point that out. Interest rates are rising everywhere else, Kevin, so are

00:21:28.700 | these SBLOC rates rising? How long does it take for those to start rising? I've seen

00:21:32.060 | them, in places like Robin Hood, I get emails saying they've raised rates from, I think,

00:21:35.380 | 2% to 3.5% this week. So, are we seeing this in a lot of the bigger brokerages as well?

00:21:39.860 | Yeah, typically, and we talked about this on my last appearance, actually, so I guess

00:21:43.980 | I'm the SBLOC guy now. But right now, most SBLOCs are based off of what used to be LIBOR.

00:21:54.580 | It's now SOFR, Secured Overnight Funding Rate, I think, which is basically just, it's a rate

00:21:59.660 | that is used by the Treasury to figure out how much it would cost to borrow Treasuries

00:22:03.860 | on an overnight basis. So, that's not, I actually had a client ask me this yesterday, "Hey,

00:22:11.140 | just saw rates going up 50 basis points. Is my loan going to go up 50 basis points?" It's

00:22:15.140 | not tied directly, but just given that rates generally are rising, you're going to see

00:22:19.980 | a raise in that rate as well. I think probably three months ago, these things are quoted

00:22:25.780 | on a spread versus that SOFR rate. So, three months ago, if the reference rate was 10 basis

00:22:34.180 | points, it might be something like 60 today. And again, that's not necessarily just because

00:22:39.540 | Jay Powell said, "We're going up 50 bps." It's just what the market is determining.

00:22:42.780 | Got to remember, though, he said we're not going to raise it by 75 bps next time. So,

00:22:47.780 | that's good news.

00:22:48.780 | Right. Maybe he needs to come out today and remind everybody.

00:22:50.740 | The stock market failed to get that message today. I will say, in terms of what to invest

00:22:55.020 | in, a lot of this depends on, are you still going to use this for a down payment? So,

00:22:59.060 | let's say you just extend it and you say, "Okay, we're not going to buy a house today,

00:23:01.660 | but maybe in three years or five years." So, I think you have to tie that time horizon

00:23:04.380 | to this to figure out what you want to put it into. And that means something that's probably

00:23:08.160 | relatively safe, even three to five years. As we've seen this year, we're four months

00:23:12.340 | into the year and the stock market's down, I don't know, 14 or 15 percent. Some other

00:23:16.300 | stock market's down much more. So, if you want to take that risk of, let's say you had

00:23:20.820 | to do your down payment now and you had a lot of that money in stocks, if you have 15

00:23:24.540 | percent lower down payment because all your money's in stocks, I still think you have

00:23:27.100 | to think of something that's a little safer and more defensive here for this kind of thing.

00:23:31.260 | I don't like the idea of taking a lot of risk of this. You could put it into more, we talked

00:23:34.340 | in the past about maybe more diversified portfolio, something that's like 50/50 or 40/60 or something.

00:23:39.820 | But I think in terms of the lump sum, the first question is, what is your allocation

00:23:43.940 | going to be and how defensive do you want to go with this money?

00:23:47.340 | Yeah, I think, you know, you're actually maybe even a little better place now with rates

00:23:54.580 | rising because you can go buy a shorter term Treasury ETF and actually get some yield for

00:24:00.340 | it. If that down payment is going to happen in the next 18 months to three years, that

00:24:06.380 | might not be a bad place for it. And for the longer term stuff, you know, we're not trying

00:24:13.740 | to time the market right. If this really is long term money and we're talking 30, 40 years,

00:24:20.780 | lump summing it today versus dollar cost averaging it over the next six months, it's probably

00:24:25.980 | not going to make a huge difference. But psychologically, if the dollar cost averaging feels better to

00:24:31.940 | you, sort of similar to the last question, just be programmatic about it and say, OK,

00:24:35.940 | I'm going to put X in today and once a month it's going to move in another 5 or 10 percent

00:24:41.580 | or whatever it is. And don't try to get cute with, oh, it's down big. Let me accelerate.

00:24:45.380 | Just do your thing. That'll make it less of an emotional decision for you. So that's kind

00:24:51.660 | of how I would think about it. I know, obviously, our colleague, Nick Maggioli, you guys mentioned

00:24:55.460 | him earlier, has written a lot on the merits of lump summing versus dollar cost averaging.

00:25:02.460 | That's something good to check out of dollars and data, his blog or his book.

00:25:05.420 | Duncan, I think we need SHY to sponsor this show because we've mentioned it every week

00:25:10.420 | for three. But you're right, Kevin, you get almost three percent in a short term Treasury

00:25:13.980 | and that still has a little bit of interest rate risk with rates rise. But those are so

00:25:17.540 | short term and the rates have already risen so much that that is a really good option

00:25:21.260 | for people saving for a down payment right now that want to earn a little bit of money.

00:25:24.860 | And they really couldn't have it in the past. I think it got down to, I don't know, 25 basis

00:25:29.500 | points or something ridiculous in the pandemic. And it's been it's finally risen for the past

00:25:34.020 | six or nine months. So you finally have some yield you can earn.

00:25:37.660 | And for people with a few years of a horizon, I mean, our old friends, I bonds come back

00:25:42.220 | in the picture, right? I mean, yes, I know it's capped, but yeah, 10,000. That's come

00:25:48.180 | on. Where's the White House with this? Increase the cap on I bonds. What are you waiting for?

00:25:52.340 | Right? You should start a campaign. Twenty five grand, make it twenty five. And people,

00:25:58.340 | the people, the people, the viewers love the I bonds, don't they don't? I guess they're

00:26:01.140 | afraid that someone's going to start a hedge fund of I bonds that maybe it's got to be

00:26:05.940 | the best for my two best performers this year, I bonds in my house.

00:26:09.460 | So those are the only things that I have that are positive this year, I think maybe some

00:26:13.180 | values that we should have something. All right. Thanks again to Kevin Young for coming

00:26:16.900 | back on. We always love Kevin's advice. He's an advisor for us at Riddles. Keep those questions

00:26:23.220 | and comments coming. Remember, I don't shop for all of your needs, shopping needs. I was

00:26:27.260 | in New York a couple weeks ago and they had a portfolio rescue towel. We have it in blue

00:26:30.620 | and red. Right, Duncan? They were sweet. I love them. They're cool. Yeah. Josh said it's

00:26:36.820 | more of a pool towel. It's not quite as thick as a beach towel. So just FYI, if you know

00:26:41.300 | your towels, it's a little on the thinner side, I guess. But yeah, I like them. I think

00:26:45.420 | they're good. It's fine. If you have a question, ask the compound show at Gmail dot com and

00:26:49.500 | we will see you next time. See you, everyone.

Is 75/25 the New 60/40? | Portfolio Rescue

Chapters