How Can I Hedge Falling Housing Prices?

00:00:00.000 | Welcome back to Portfolio Rescue.

00:00:19.720 | Today's show is sponsored by Innovator ETFs.

00:00:22.080 | Innovator actually has some ETFs that might be appealing for the current market.

00:00:24.920 | So they have these buffer ETFs, Duncan.

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00:00:31.460 | a cap on the upside.

00:00:32.460 | The greater the downside protection, the lower the cap you get on the upside.

00:00:35.740 | This way you can essentially put a range on your return, so you know what your returns

00:00:38.600 | are going to be depending on what happens in the stock market.

00:00:40.640 | So it's both a way to protect against further losses if the market keeps falling apart,

00:00:45.080 | or if the market actually stops going down for once and goes up, you can actually still

00:00:48.680 | take part in the rise.

00:00:50.120 | So it doesn't mean you know exactly what the return is going to be, because the market

00:00:52.520 | is still uncertain, but you can essentially put a range on your returns to know, "I'm

00:00:57.240 | protected to this amount, and I'm also capped to this amount on the upside."

00:01:00.680 | So they call them defined outcomes, so you actually know ahead of time.

00:01:03.680 | Whatever the stock market does, you kind of have a sense of what your losses and gains

00:01:07.080 | could be.

00:01:08.260 | So to learn more, go to Innovator ETFs, or actually search through Animal Spirits Archive

00:01:12.600 | and listen to Michael and I discuss their strategies with their CEO and founder, Bruce

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00:01:18.120 | Also, double promo there, they're also an official sponsor of Future Proof Festival.

00:01:22.400 | Ah yeah, so it'll be out there in September, looking forward to that.

00:01:26.920 | So I'm coming to you live today from Chicago, and if we're basing a recession indicator

00:01:33.160 | on the number of beers people drink at a Cubs game, I still say no recession.

00:01:37.100 | But maybe the opposite is true, that people just drink more when things are getting bad.

00:01:41.920 | What's a beer at a Cubs game, like $12, $14?

00:01:45.080 | Actually, inflation there was already really high.

00:01:48.280 | Like a normal New York City beer, basically.

00:01:50.780 | So this is a show where we allow the audience to dictate what we're going to talk about

00:01:53.760 | every week, right?

00:01:55.200 | And this week, people want to talk about the housing market.

00:01:57.580 | So we have a collection of your questions, and they build up over time, but we also separate

00:02:02.240 | out what are the new questions every week.

00:02:04.200 | And this week, every single new question was about the housing market.

00:02:07.640 | So we're going to get into some questions on that, but I just want to talk about this

00:02:10.680 | a little bit before we get into it, because the housing market has just utterly fascinated

00:02:14.480 | me right now.

00:02:15.480 | So coming into the year, the 30-year fixed rate mortgage was 3%, call it.

00:02:19.680 | Less than six months later, this week I saw it quoted by some sources 6.3%.

00:02:24.280 | This is just an insanely fast move, and probably one of the most important borrowing rates

00:02:28.660 | for the majority of people that are consuming debt.

00:02:33.080 | So let's look at an example to show the impact of what this means, a more than doubling of

00:02:38.160 | rates.

00:02:39.160 | So I looked at some different housing prices here, from 300 up to 700,000, and I looked

00:02:43.200 | at the monthly payment at 3%, again, less than six months ago, and the monthly payment

00:02:47.120 | at 6.3%.

00:02:48.960 | You can see it ranges from an increase of $500 to $1,200 a month, which is like a 47%

00:02:54.440 | increase.

00:02:55.440 | A year, we're talking like more than $6,000 at the low end, or $14,000 or $15,000 at the

00:03:00.280 | high end, in terms of an increase.

00:03:02.200 | So let's think about this another way.

00:03:04.480 | The median existing home price in January 2021 was like $313,000, like median amount.

00:03:10.880 | The mortgage rate at that point was 2.7%.

00:03:13.120 | Let's say you do a 10% down payment.

00:03:14.840 | I kind of used that in the other example as well.

00:03:16.720 | That's like an $1,100 monthly payment.

00:03:19.520 | Now the median existing home price is closer to $400,000, the mortgage rate, again, 6.3%.

00:03:24.520 | Put 10% down, we're talking $2,200.

00:03:26.960 | So in a little less than 18 months, the monthly payment has effectively doubled, and to make

00:03:34.960 | these monthly payments equal, with rates staying at 6.3%, that price would have to fall 45%.

00:03:43.680 | I mean, so let's say you bought a house for $500,000 three years ago, and you got a 3%

00:03:50.120 | mortgage, and you put, again, your 10% down.

00:03:52.480 | Your monthly payment at that point would be like $1,900.

00:03:54.880 | You can do a chart off, John.

00:03:55.880 | I don't need this one anymore.

00:03:57.680 | Now let's say you're forced to move and get a new job, and you say, "You know what?

00:04:00.080 | I want to keep that same $1,900 payment.

00:04:03.600 | What can I afford at a 6.3% mortgage that goes from a $500,000 house at 3% to a $340,000

00:04:11.320 | house?"

00:04:12.320 | So people didn't really have time to acclimate to this.

00:04:16.680 | It wasn't like a slow, stair-step approach to go up.

00:04:19.160 | It just, it shot up.

00:04:20.640 | I guess there was someone talking, we talked about Animal Spirits this week, 60 basis points

00:04:24.040 | in two days for mortgage rates.

00:04:27.320 | This has basically never happened this fast, where mortgage rates have doubled.

00:04:30.000 | So I'm just going to be fascinated to see what happens.

00:04:32.360 | Will people with 3% mortgages just simply never move?

00:04:35.360 | Will, like, buyers decide to say, "No, thank you"?

00:04:37.640 | Will the housing market, like, grind to a halt?

00:04:40.360 | I honestly don't know.

00:04:41.920 | I mean, obviously people still need to buy a home if they want to settle down and have

00:04:46.080 | a family and own their own place and move for a job or whatever the reason.

00:04:49.240 | But I'm just fascinated to see what will happen here, because I don't think people thought

00:04:54.120 | through the ramifications, and Powell talked about it a little bit at his press conference

00:04:57.400 | yesterday for the Fed, and how we need to slow the housing market.

00:05:00.520 | But this is, to me, kind of a careful what you wish for situation.

00:05:03.560 | I think this is going to be not great.

00:05:05.840 | Yeah, it's all relative to you, right?

00:05:08.040 | Because like you're saying, you know, rent is continuing to go up too, right?

00:05:12.240 | So yeah, I mean, housing has gone up and buying a house is more, you know, unaffordable than

00:05:17.280 | in a long time.

00:05:18.280 | But yeah, if your rent is also skyrocketing, then yeah, I guess it's kind of a relative

00:05:22.840 | thing.

00:05:23.840 | Yeah.

00:05:24.840 | We've got a few questions on that.

00:05:25.840 | Remember, if you have a question, askthecompoundshow@gmail.com.

00:05:26.840 | We're going to get into some questions like that.

00:05:27.840 | Someone in the chat asked where I am.

00:05:29.800 | I am in the West Loop in Chicago.

00:05:32.440 | So got the L train behind me, right?

00:05:35.120 | It's a, by the way, one of the best summer cities in the country, easily, Chicago is

00:05:40.480 | just gorgeous.

00:05:41.480 | All right.

00:05:42.480 | Let's do first question.

00:05:43.480 | Yeah, I love the architecture there, especially the Hancock building.

00:05:46.240 | That's a cool building.

00:05:48.400 | Okay.

00:05:49.400 | Here's our first question, or yeah, here's our next question.

00:05:53.120 | Is there a way to hedge the price of my home?

00:05:55.280 | It has appreciated a lot over the past couple of years.

00:05:58.320 | And my hunch is that its value will pull back in the coming months.

00:06:01.360 | I had a similar hunch about interest rates a year ago, and there are products, TBT, I

00:06:06.240 | don't know what that is, to bet on treasury selling off.

00:06:09.320 | This year, the no-brainer trade is housing prices dropping.

00:06:12.040 | How do I play it?

00:06:13.040 | All right.

00:06:14.040 | So the TBT is you could do like an inverse treasuries.

00:06:16.240 | If you thought rates are going to rise, treasuries are going to go down, you could bet against

00:06:18.880 | them.

00:06:19.880 | There really aren't many products like this for housing.

00:06:23.000 | And obviously, based on the examples that I just gave, maybe some people think, well,

00:06:26.240 | housing prices are going to have to fall.

00:06:27.600 | I still don't know if that's a foregone conclusion.

00:06:29.840 | It's certainly a possibility.

00:06:30.840 | I do think some people are just going to say, I'm not putting my house up for sale, and

00:06:33.960 | it's just going to be like this.

00:06:35.760 | The supply is going to be really low.

00:06:37.640 | So maybe you could see some of the ones that sell go for lower prices.

00:06:41.440 | And I would be shocked if we didn't see a ton of price cuts in the months and weeks

00:06:44.080 | ahead from people saying, listen, it's got to be lower because my mortgage rates are

00:06:47.280 | higher.

00:06:48.280 | But does that mean that nationwide housing prices have to fall 10% or 15%?

00:06:50.640 | I don't know.

00:06:52.000 | It's possible.

00:06:53.320 | But I still think people could just sit it out.

00:06:54.800 | Well, let's say you're right.

00:06:55.800 | Housing prices fall 5% or 10% from here.

00:06:58.200 | Let's say, again, the median existing home price is $400,000.

00:07:01.920 | We're talking $20,000 to $40,000 loss, right?

00:07:04.600 | You want to protect that.

00:07:05.880 | I'm going to ignore the big short type of trades where you buy credit defaults like

00:07:09.680 | Steve Eisemann or whatever.

00:07:12.000 | I'm sure you could come up with a bunch of sector bets that would maybe benefit if the

00:07:16.760 | housing market fell.

00:07:18.320 | But I think timing this stuff is just as hard as figuring out the direction of the trade.

00:07:23.320 | You could be directionally right, but timing is wrong.

00:07:25.240 | So here's some simple hedges you could do.

00:07:28.040 | Right now, you could just take out a home equity on a credit and pull some of that off

00:07:31.400 | the table, right?

00:07:33.680 | You're taking cash out.

00:07:34.960 | You're lowering your exposure to the housing market.

00:07:36.520 | You could put that money elsewhere and diversify.

00:07:38.080 | Now, obviously, borrowing rates for HELOCs are going to be much higher now.

00:07:41.560 | That stuff is going up.

00:07:42.840 | But that seems like a good way to diversify your personal balance sheet.

00:07:45.360 | You could sell your home, unfortunately, as the examples I already gave.

00:07:50.120 | Downsizing might not help.

00:07:51.120 | You could say, "I'm going to downsize," but with mortgage rates double, downsizing might

00:07:55.600 | give you the same monthly payment as a more expensive home right now, which is kind of

00:07:59.080 | crazy.

00:08:00.080 | And obviously, as you mentioned, Dunkin' rents are rising.

00:08:02.120 | So I think you could also say, "I'm going to pay my mortgage off as slowly as possible.

00:08:06.720 | I'm not going to make any extra payments.

00:08:08.440 | There's no reason for me to pay it off if I have this low mortgage rate."

00:08:13.040 | And finally, you could just do nothing, right?

00:08:15.480 | You could ride it out.

00:08:16.480 | You don't have to be a hedge fund manager with your house, right?

00:08:19.840 | Just live in your home for more than five to seven years.

00:08:22.640 | Guess what?

00:08:23.640 | In that time, the price is probably going to be higher than it is today, and you don't

00:08:27.000 | have to think through that.

00:08:28.000 | So I wish I had a sexy answer here for how to hedge the housing market, but I think your

00:08:32.640 | own personal house, there's really not much you can do besides just have a longer time

00:08:37.560 | horizon.

00:08:38.560 | And if there are some fluctuations in the next year or 18 months or 24 months, it's

00:08:43.000 | not going to impact you anyway because you're living there, right?

00:08:46.000 | It's not like you have to sell.

00:08:47.000 | And it's not like you see the price fluctuate every day like you do in the stock market.

00:08:50.360 | So this is the kind of thing where I don't think you have to have an answer for this

00:08:54.320 | kind of thing.

00:08:55.320 | >> It also, it kind of reminds me of our question from last week about hedging medical costs

00:09:00.240 | for the future.

00:09:01.240 | Someone was asking if they should buy health care stocks to hedge against rising health

00:09:06.080 | care costs.

00:09:07.080 | It's like, think about if you'd bought Zillow and a bunch of housing-related stocks to try

00:09:10.760 | to hedge the housing market.

00:09:12.800 | It just wouldn't have worked out very well, I guess.

00:09:16.320 | And that was like the opposite, where the housing market was doing great and you bought

00:09:19.360 | Zillow and like, hand up, I'm an idiot over here who did that, and it didn't work out.

00:09:23.720 | So yeah, so that's the thing.

00:09:24.720 | You could be directionally right about the housing market going down and still not get

00:09:27.840 | the hedge right because the market doesn't react in the way that you think it will.

00:09:30.920 | All right, let's do another one.

00:09:33.080 | >> Okay.

00:09:34.080 | Up next, we have my wife and I are six and a half.

00:09:38.400 | >> By the way, good fugitive joke in the chat here.

00:09:40.760 | >> Good fugitive joke?

00:09:41.760 | >> Well, because he was in Chicago on the train.

00:09:44.360 | Not bad.

00:09:45.360 | >> Yeah, that's an old one.

00:09:46.360 | I haven't seen that in forever.

00:09:47.360 | >> Yeah, good one.

00:09:48.360 | >> Okay, my wife and I are 68 and have been retired for 15 years.

00:09:51.240 | We have a net worth of $6 million, of which about $4.4 million is liquid, and the remainder

00:09:57.480 | is equity in our two homes.

00:10:00.080 | We are both on Social Security of $44,000 per year combined, have zero debt, and spent

00:10:05.200 | about 2% of our portfolio last year.

00:10:08.360 | We have had a diversified portfolio and 60/40 asset allocation since we retired.

00:10:13.040 | We're moderately aggressive investors and are both in good health.

00:10:16.080 | I would like to think we have another 20 years in retirement.

00:10:19.720 | Our required minimum distributions will be quite large when we hit 72, but we are maximizing

00:10:25.000 | our Roth conversions based on tax brackets and remaining in the lowest Medicare premium

00:10:29.040 | bracket.

00:10:30.320 | My question is regarding our 60/40 asset allocation.

00:10:33.340 | As we continue to age, does it make sense to de-risk our portfolio by decreasing equity

00:10:37.720 | exposure since we don't have the years to recover from serious market downturns?

00:10:42.480 | We've been buying in the current down market, doing early Roth conversions and tax-loss

00:10:46.680 | harvesting.

00:10:47.680 | There's a lot there.

00:10:48.680 | There's a lot there.

00:10:49.680 | Yeah.

00:10:50.680 | Well, first off, again, this is our weekly nicely done, right?

00:10:52.600 | This person seems to have their finances in order.

00:10:54.960 | I think many investment advisors would be salivating at numbers like these.

00:10:58.520 | I think a lot of people would offer you a solution saying, "Yeah, yeah.

00:11:00.720 | You need to put your portfolio into this fund and that fund and that product, and here's

00:11:03.680 | the allocation you need, and look at how smart I am."

00:11:06.480 | With information like this, I have one simple question like, "What's the end goal here?"

00:11:10.360 | It's like a squishy question, but that's the right place to start because it's really impossible

00:11:14.240 | to offer investment advice without attaching it to your goals.

00:11:16.080 | It's like, "What do you want to get out of your money?"

00:11:18.040 | You already said you don't spend that much.

00:11:19.440 | You're spending 2% a year, but do you plan on spending it all before you die?

00:11:22.960 | Do you want to give it away to charity?

00:11:24.400 | Do you have kids that you're looking for and offer an inheritance so maybe you could even

00:11:28.280 | make your portfolio riskier?

00:11:30.400 | It sounds cliche to say it's really difficult to offer portfolio management to someone without

00:11:33.640 | understanding their risk profile and time horizon, but you can't just enter this stuff

00:11:37.560 | into a spreadsheet and spit out an allocation.

00:11:40.120 | Also, how much do you want to de-risk?

00:11:42.000 | John, throw up this first chart here.

00:11:44.520 | This shows the difference between ... I did a globally diversified 60/40, 50/50, and 40/60

00:11:49.240 | portfolio this year, and these are the drawdowns as of yesterday.

00:11:52.560 | You can see it's 18%, 17%, 16% call it.

00:11:56.200 | There's not much difference because bonds are selling off too.

00:11:58.520 | Now, let's do the next one, John.

00:12:00.200 | This is obviously a little bit of a crazy market because bonds are falling.

00:12:05.000 | This is actually during the corona crash in March 2020.

00:12:07.520 | You can see there's a little bit more of a difference, so a 40/60 portfolio fell 15%,

00:12:13.320 | or 50/50 fell almost 18%, and then a 60/40 fell more than 20%.

00:12:18.720 | You can see a little difference there.

00:12:21.840 | I think figuring out what de-risking means, how much is that going to help you and how

00:12:28.960 | much of that change is really going to ... I think to really de-risk and see a huge change,

00:12:32.600 | you're going to have a 20/80 or 30/70 kind of portfolio.

00:12:38.040 | If that makes sense, fine, or do you want to just hold more cash to see you through

00:12:42.280 | this stuff?

00:12:43.280 | You said you're still buying.

00:12:44.280 | They seem to be handling the bear market okay.

00:12:47.560 | I just think you have to think through what are you trying to do here, and when is this

00:12:54.880 | money going to be spent, and then you can figure out, okay, does it really make sense

00:12:58.360 | to do?

00:12:59.360 | Obviously, a lot of the target date funds, they do a glide path where they slowly de-risk

00:13:02.160 | over time.

00:13:03.440 | That certainly makes sense, but I think you have to think through what change does it

00:13:09.080 | actually make if I go from 60/40 to 40/60, or what can actually have a big impact on

00:13:14.200 | that returns, and what are you trying to get out of it?

00:13:16.120 | Are you trying to reduce drawdowns?

00:13:17.120 | Are you trying to reduce volatility?

00:13:18.560 | I'd think of it through that way.

00:13:20.200 | Yeah.

00:13:21.200 | It sounds like, like you said, it sounds like they've done pretty well to date.

00:13:25.080 | Yeah.

00:13:26.080 | They're doing something right, I guess.

00:13:27.720 | Let's do another one.

00:13:29.920 | Okay.

00:13:30.920 | Up next, we have a question from someone from New Zealand, which immediately makes

00:13:34.640 | me think of "Fly the Conchords," which is one of my all-time favorite shows.

00:13:38.000 | I can see that.

00:13:39.000 | I can see you liking that show, Duncan.

00:13:40.000 | I love that show.

00:13:41.000 | Yeah.

00:13:42.000 | I recently started watching "What We Do in the Shadows," which has some of the same

00:13:44.480 | people.

00:13:45.480 | So, good show.

00:13:46.480 | I'm 30 years old, living in New Zealand.

00:13:48.840 | The New Zealand housing market has taken a rocket during the pandemic.

00:13:51.600 | I guess that's like a New Zealand phrase, taken a rocket during the pandemic.

00:13:56.200 | I'm going to steal that one.

00:13:57.200 | Yeah.

00:13:58.200 | I like that.

00:13:59.200 | The New Zealand housing market has taken a rocket during the pandemic and has an average

00:14:02.760 | house price of over $1 million across the country.

00:14:05.500 | I live in Auckland, where this is even higher.

00:14:08.200 | The median salary is $70,000.

00:14:10.360 | My partner and I pull in roughly $170,000 to $190,000 annually.

00:14:15.480 | We rent, have approximately $70,000 to $80,000 of savings and assets, and save about $400

00:14:21.840 | a week between us.

00:14:23.400 | Do we enjoy our very first overseas experience, get away for a month and reset mentally?

00:14:29.380 | Do we improve our living conditions and buy some nicer furniture, eat out, go to gigs,

00:14:35.100 | and just enjoy living while slowly adding to savings?

00:14:38.660 | Do we tighten everything up, invest everything we can, and focus on buying a home over the

00:14:42.760 | next two years?

00:14:44.420 | Another option is to try to move to a cheaper city in New Zealand to buy a home for $700,000

00:14:49.160 | but finding a good job in smaller cities may be difficult.

00:14:53.600 | All right.

00:14:54.600 | If you think housing prices are crazy here, John, let's do a chart on of this is real

00:14:59.300 | housing prices versus real disposable income in New Zealand, and now let's show the US.

00:15:05.600 | Housing prices are in blue.

00:15:07.280 | Income is in red.

00:15:08.280 | You can see housing prices are far above disposable income.

00:15:10.640 | Now, let's show the next one, John, to show the US.

00:15:12.840 | All right.

00:15:13.840 | I'm going to flip back a couple of times.

00:15:17.640 | New Zealand is just off the charts.

00:15:19.400 | The United States is actually real disposable income and real housing prices are pretty

00:15:23.120 | close to each other.

00:15:24.440 | In New Zealand, it's just off the chart.

00:15:26.200 | I definitely feel for our New Zealand person here.

00:15:30.000 | Sometimes we have to shorten these questions because they give so much information.

00:15:31.960 | I actually said their rent is about $650 a month, so they're not paying a ton.

00:15:35.560 | I actually like the way that they're thinking here.

00:15:37.600 | It's like, do I put my life on hold financially and experience-wise and save a ton just so

00:15:43.720 | we can afford a house?

00:15:45.720 | Or do we just ignore that?

00:15:48.000 | We don't have to buy a house because we feel peer pressure, and we can just enjoy the flexibility

00:15:52.480 | of renting.

00:15:53.480 | We can get a nice Airbnb every once in a while.

00:15:55.040 | We can travel overseas.

00:15:56.280 | We can get some nice furniture.

00:15:57.280 | We can go out to eat more.

00:15:58.280 | I actually think that's not a bad way to think about this.

00:16:02.180 | Not everyone has to buy a home.

00:16:05.360 | It's not for everyone.

00:16:06.680 | Maybe instead of buying an expensive home, you travel more and you treat yourself better

00:16:10.960 | and calculate the difference between what you're paying in rent each year versus mortgage,

00:16:14.600 | insurance, taxes, and think about which scenario would make you happier.

00:16:16.920 | Some people will still feel like saving for two years and buying a home and penny-pinching

00:16:20.640 | makes sense.

00:16:21.960 | But I think a lot of this depends on how much you really want to buy a house versus how

00:16:24.240 | much you think you have to buy a house because that's the next step and everyone else is

00:16:26.960 | doing it.

00:16:27.960 | Especially in a place like that that's so expensive, I don't know, maybe resetting mentally

00:16:31.800 | and traveling overseas for the first time is gonna be more enjoyable for you than settling

00:16:35.880 | down and buying a house.

00:16:36.880 | But I think, again, I think a lot of people assume they have to buy a house because it's

00:16:40.800 | the next step or because everyone else did it and because it's the biggest investment

00:16:43.680 | you make.

00:16:44.680 | But you don't have to.

00:16:45.680 | It's not for everyone.

00:16:46.680 | - Yeah.

00:16:47.680 | Yeah, and I mean, there's obviously a lot of variables there, but to me, yeah, the idea

00:16:50.960 | of getting to travel the world, that's something that you're gonna remember the rest of your

00:16:55.880 | life.

00:16:56.880 | And so, yeah, to me, that's the thing that's appealing to me out of those options.

00:17:01.440 | But yeah, you also don't want to live in a place where you're miserable and you have

00:17:04.760 | neighbors who are super loud, keeping you up every night.

00:17:07.680 | So it's definitely, it's a complicated kind of loaded--

00:17:09.600 | - Yeah, trade-offs, as in most things.

00:17:11.560 | But I like the way they're thinking about this in terms of, well, what if I just enjoyed

00:17:14.720 | myself a little more and spent some of that money I would be saving for a house or on

00:17:17.960 | mortgage payments and property taxes and just enjoy myself in other ways?

00:17:21.160 | I think that's not a bad way to think about it.

00:17:23.120 | - Right, yeah.

00:17:24.120 | - I mean, that's like in college.

00:17:25.120 | You live in a crappy dorm, but then you have all this other stuff around you that's kind

00:17:28.140 | of fun and you handle that living situation.

00:17:31.360 | Not saying that renting in New Zealand is gonna be that bad, but I think that makes

00:17:34.240 | a lot of sense.

00:17:35.240 | All right, let's do another one.

00:17:36.240 | - Yeah.

00:17:37.240 | Yeah, I know.

00:17:38.240 | Good advice.

00:17:39.240 | Okay.

00:17:40.240 | "I'm constantly reading about how you don't need to invest in foreign or international

00:17:44.840 | stocks since S&P 500 companies do business abroad.

00:17:48.700 | On a past episode, you mentioned that it is important to hold foreign stocks.

00:17:52.080 | My question is, how much of your portfolio should be in foreign stocks?

00:17:55.760 | Do you believe half, since that's closer to the global weight?

00:17:58.680 | How much do you personally have allocated to foreign stocks?"

00:18:01.280 | - Ooh, putting it on the table here, okay.

00:18:05.440 | Let's bring in some help here.

00:18:06.440 | I have Ben Coulthard again, who's gonna come on to help us think through this one.

00:18:10.520 | - Many markets.

00:18:11.520 | - 'Cause these are questions that we have with our clients as well, like how much does

00:18:15.080 | it make sense to be allocated?

00:18:16.560 | So I actually had a conversation yesterday, and someone was saying, you know, "I read

00:18:21.400 | Ray Dalio's book, and he's making it sound like every empire eventually fails, and what

00:18:26.120 | happens if the US empire fails?"

00:18:28.520 | And I said, "Well, that would not be great, but also, diversify internationally.

00:18:33.480 | That's your, because if the US does fail, boy, this has been a depressing week, hasn't

00:18:38.480 | it?

00:18:39.480 | We're talking about the fall of the economy."

00:18:40.480 | - Yeah, you're bumming me out.

00:18:41.640 | - But if we fell from grace, guess what?

00:18:45.000 | Some other country would probably benefit from that.

00:18:46.760 | So Ben, when you talk to clients and work them through this, how do you talk about the

00:18:51.480 | allocation in terms of investing overseas versus investing in the US, and how we think

00:18:56.040 | about that?

00:18:57.040 | - Yeah, that's great stuff, and that's classic Dalio, by the way.

00:19:02.040 | I actually like to do this.

00:19:03.480 | I like to talk about real companies.

00:19:05.440 | I get the whole American companies do business overseas thing, and thus you have international

00:19:10.840 | exposure, but it works the other way, too.

00:19:13.240 | I mean, Apple, yeah, they sell phones to Korea, but Samsung sells phones here.

00:19:18.600 | BMW, Mercedes, ever heard of them?

00:19:21.720 | I got Unilever all over my bathroom in the form of Dove, which makes great deodorant

00:19:26.640 | and soap, by the way.

00:19:28.960 | Let's see, what else?

00:19:29.960 | My girlfriend's 30th birthday is coming up.

00:19:31.120 | I'm probably going to have to hit Louis Vuitton because they know their fashion over in Paris.

00:19:34.680 | Probably going to have to hit a Shell gas station on the way there.

00:19:37.200 | You get the point.

00:19:38.760 | We sell to them, they sell to us, and as far as the allocation goes, I mean, my 401(k)

00:19:45.720 | is basically VT, which is the Vanguard Global Stock Market Index.

00:19:50.680 | It's like 60% US, 40% international, but how well do you-

00:19:54.440 | - Yeah, that's the global weight as far as what the market itself is.

00:19:58.320 | The US is like 60%, the international is 40%.

00:20:01.880 | I think that's not a bad place to start and figure out whether you want to shade more

00:20:05.520 | US or shade more internationally because you think the US has done so well.

00:20:09.540 | So I think that's a good starting point to figure out which way you want to go from.

00:20:13.440 | - Yeah, yeah.

00:20:14.440 | The bulk of my accounts are in a world global stock market.

00:20:19.560 | Yeah, when I'm buying Google and Tesla and the gambling, the sidecar account that we

00:20:24.480 | talked about last time, that probably tilts me a little bit more US.

00:20:29.320 | But help me out here, Smarter Ben, 100 years ago, didn't the US make up 25% or 30% of the

00:20:35.320 | global stock market?

00:20:36.320 | Maybe it was 120 years ago or something.

00:20:37.960 | - The United Kingdom was the biggest stock market in the world.

00:20:41.000 | And even 30 years ago, Japan was giving us a run for our money.

00:20:46.080 | Japan was, I've mentioned this before, was 45% of the total.

00:20:48.640 | So yeah, the US doesn't have to dominate like it has, and that doesn't mean we have to fall

00:20:53.880 | from...

00:20:54.880 | Our empire has to crumble like Ray Dalio thinks.

00:20:57.200 | It can just be that US stocks don't perform quite as well.

00:21:00.680 | Also Ben, was that a humble brag saying that you're going to go to Louis Vuitton for your

00:21:04.120 | girlfriend's birthday?

00:21:05.120 | - Yeah.

00:21:06.120 | - I think so.

00:21:07.120 | - Is that even still in?

00:21:08.120 | I actually would love some user feedback from the women in the chat, if that's the right

00:21:11.680 | move.

00:21:12.680 | - Am I doing like Balenciaga now?

00:21:14.040 | - Dude, you're losing me with Balenciaga, San Diegan.

00:21:17.960 | - All right.

00:21:18.960 | So someone in the chart asked me if I'm wearing a tie, must just be because I'm not wearing

00:21:22.480 | a tie.

00:21:23.480 | It's probably the pandemic that I threw away all my ties and I'm never wearing one again.

00:21:27.840 | - I'm actually moving into Charlestown with my girlfriend and I just threw out all my

00:21:32.160 | ties.

00:21:33.160 | So why would I ever wear one again?

00:21:34.160 | - I mean, if your neck gets cold a lot, I guess it could be useful.

00:21:38.200 | - Yeah.

00:21:39.200 | No, it's a noose, dude.

00:21:42.040 | So my approach is like, look, don't try to be a hero and make geographical calls.

00:21:45.960 | You're not Ray Dalio, neither am I.

00:21:48.160 | I actually, you know, I did own the India ETF like five or six years ago because, you

00:21:53.880 | know, I read like their middle class was going to grow into like China's or something.

00:21:58.640 | Basically dead money for three years.

00:22:00.000 | I just dumped it only to see it then go higher.

00:22:02.760 | Like, I don't know, we should just do less.

00:22:05.800 | That's primarily global market weighting is just doing less.

00:22:10.080 | My last little comment is like, as far as whether to own the world through like one

00:22:14.720 | vehicle like a VT or, you know, whether you own like separate U.S. funds and international

00:22:21.560 | funds and like do the rebalance thing, like, I don't know if you really want autopilot,

00:22:25.680 | which is what I prefer.

00:22:26.680 | Like I just let, I just own it in one vehicle.

00:22:29.480 | As Ben said, if the U.S. like grows and Europe shrinks, like it'll all be reflected.

00:22:34.200 | I understand the case for rebalancing, but, you know, look, this all gets summed up in

00:22:39.360 | a one thing.

00:22:40.360 | What if the next NVIDIA is not domiciled in the United States?

00:22:43.360 | That is why, in a nutshell, I have, you know, a meaningful enough exposure internationally.

00:22:48.440 | Yeah.

00:22:49.440 | I agree.

00:22:50.440 | And people across all across the world get up every day trying to improve their station

00:22:53.440 | in life as well.

00:22:54.440 | It doesn't mean that we're anything special here.

00:22:56.120 | So yeah.

00:22:57.120 | So to summarize, you're saying you basically just pick the country you think will surpass

00:23:01.560 | the U.S. and then bet on that one.

00:23:03.920 | Yeah, exactly.

00:23:04.920 | Yes.

00:23:05.920 | Yeah, exactly.

00:23:06.920 | OK.

00:23:07.920 | So that question was from Angel, by the way.

00:23:10.720 | So last but not least, what type of allocation changes do you make to your portfolio during

00:23:16.720 | bear markets?

00:23:17.800 | I'm in my early 40s, didn't have much to invest during the financial crisis and have only

00:23:22.440 | experienced V-shaped crashes and recoveries with real dollars at stake.

00:23:26.440 | I feel both paralyzed and compelled to take action.

00:23:28.880 | I have a feeling you're not alone.

00:23:30.320 | No, certainly not.

00:23:31.920 | And that could be people who this is their first bear market, real bear market, I guess,

00:23:36.080 | if you want to say, or you've been through a bunch of them.

00:23:39.080 | It doesn't make it any easier.

00:23:42.040 | I will say, here's the way that I look at this.

00:23:46.320 | You build your portfolio and investment plan to withstand bear markets and recessions and

00:23:50.680 | inflation and deflation.

00:23:52.120 | The whole point is having a durable enough plan that you don't have to try to guess it

00:23:55.520 | in advance.

00:23:56.520 | And I think the idea that you're going to change your portfolio in a bear market and

00:24:00.040 | make the right call and the right hedges and all these things, it sounds great in theory.

00:24:05.420 | It rarely works in practice, even for the people that do this for a living and they're

00:24:09.460 | hedge fund managers.

00:24:10.460 | A lot of times those people can't.

00:24:11.460 | So Ben, let's say you have a younger client come to you and say, "This is my first experience

00:24:17.480 | with this.

00:24:19.480 | I had some savings.

00:24:20.480 | I'm seeing real dollars fall."

00:24:21.480 | That's one of the problems with growing your savings over time is that the bear gets, even

00:24:25.920 | for a lower percentage decline, it's a much bigger money.

00:24:30.000 | It's the dollars and cents versus percentage.

00:24:32.040 | So people who have these real dollars at stake, how do you handle that with people who are

00:24:35.300 | going through this for the first time as someone who's on your level in that similar younger

00:24:39.740 | age group?

00:24:40.740 | Well, I say I feel you.

00:24:43.040 | This market has me both nauseous and giddy at the same time, too.

00:24:46.400 | You'd actually have to be a sociopath from one of those true crime Netflix documentaries

00:24:50.040 | if you don't feel anything.

00:24:52.500 | We are still those same animals from 20,000 years ago running around the Serengeti.

00:24:58.280 | You hear a noise in the bushes, you're taken off.

00:25:00.840 | I didn't read the book Sapiens.

00:25:02.400 | I glanced at it.

00:25:03.400 | I get the gist.

00:25:04.400 | By the way, you can't own crypto until you read it.

00:25:08.080 | Sorry.

00:25:09.080 | That's a rule.

00:25:10.080 | Yeah.

00:25:11.080 | That was also a little Don't Jump reference from Wedding Crashers.

00:25:13.320 | I glanced at it.

00:25:14.560 | But yeah, look, the noisy bushes, to continue the metaphor, are all around us, the TV, the

00:25:20.280 | phone.

00:25:21.280 | I got group chats going off, wanting to go to cash.

00:25:23.800 | I can blow out of my entire portfolio right now, Ben, with a few clicks, whilst live on

00:25:27.600 | YouTube, I can go to 100% cash.

00:25:29.760 | So you have that, then you consider that losing money feels twice as bad as making money feels

00:25:35.640 | good.

00:25:37.640 | When I was up 1,000% in Tesla last year, not a big deal.

00:25:41.600 | That was almost like, yeah, that's why I bought it.

00:25:44.120 | But now when it retraces 40% this year, it's like the Happy Gilmore, like here comes the

00:25:47.720 | putter throw.

00:25:48.720 | So I don't know, this mental civil war that's going on is even why the simplest investing

00:25:55.120 | is hard.

00:25:56.120 | If it were easy, everyone would be rich, right?

00:25:58.240 | This is the price you pay for those long-term returns.

00:26:01.280 | And I think that the hard thing to wrap your head around, this is a very obvious statement,

00:26:05.760 | but if you look back historically over the last hundred years, the US stock market is

00:26:09.160 | up nine or 10% per year, right?

00:26:11.460 | And that includes depressions and wars and inflation and deflation and nasty bear markets

00:26:17.400 | and crashes.

00:26:18.400 | It includes all of that.

00:26:20.160 | And so sticking with a plan and sticking with your investments through a bear market, that's

00:26:24.640 | just a requirement to earn those long-term returns.

00:26:26.720 | And it really stinks because this market just feels, it's just brutal, right?

00:26:30.480 | It's almost soul sucking in a lot of ways, because it just feels like you feel like it's

00:26:33.560 | never going to get better.

00:26:35.520 | You feel like it never stops going down.

00:26:37.720 | There's barely reprieve and then it just goes down again.

00:26:41.560 | But it's always felt like that.

00:26:42.800 | And you look back historically and you go, oh, of course, that one was a great buying

00:26:45.360 | opportunity.

00:26:46.360 | That was a great buying opportunity.

00:26:47.360 | And I should have held through that one.

00:26:48.760 | But it's a lot harder to do it in real time because we don't know the end date.

00:26:51.880 | We don't know when it's going to be over.

00:26:53.560 | And so I think the whole point is, everything in life revolves around trade-offs.

00:26:58.880 | And I think just having some balance and understanding this is going to happen, and especially if

00:27:02.800 | you're 40 years old and this is retirement savings, you're not going to be touching it

00:27:05.560 | for three or four decades, potentially.

00:27:08.920 | I think you have to understand that you're going to have a lot of these in the years

00:27:12.040 | ahead.

00:27:13.040 | And you either figure out an asset allocation that can see you through them, or just get

00:27:18.320 | better at dealing with the pain because it's not going away.

00:27:21.200 | Yeah, as you said, this century, frankly, is a kick-walk compared to last century.

00:27:27.080 | The Dow has still gone from 30,000 to 30,000 over the last 120 years, despite everything.

00:27:31.900 | So I boiled all this down to two rules for literally anyone at any age when we're in

00:27:38.320 | a situation like this.

00:27:40.160 | Number one, cash feels like a nice, warm blanket right now.

00:27:44.640 | But in the long run, it is a coffin, all right?

00:27:48.160 | Quote that.

00:27:49.160 | That's like some Morgan Housel stuff right there.

00:27:50.880 | I'm down for an emergency savings blanket, even a queen-size one if you have a family

00:27:55.720 | to provide for.

00:27:57.760 | As a strategic allocation, that's a no for me, dawg.

00:28:00.880 | Cash is a tool to acquire things, whether that be dinner tonight, whether that be five

00:28:05.680 | shares of SPY.

00:28:07.800 | But if you're sitting on a huge cash hoard, you better be about to buy a house or pay

00:28:12.000 | for a wedding or something.

00:28:13.960 | If you're waiting for a real crash or waiting for the dust to settle, you need to lose your

00:28:18.160 | account password.

00:28:19.160 | All right?

00:28:20.160 | Or that Michael Jordan gif, the "Stop it.

00:28:23.440 | Get some help."

00:28:24.440 | I do think not looking at your 401(k) balance is about as good as you can do right now.

00:28:29.880 | But yeah.

00:28:30.880 | I just love my 401(k) contributions, frankly.

00:28:32.880 | Yeah, I'm not trying to look at the balance, but yeah, that's a little thing you can do.

00:28:37.640 | Rule number two, this kind of gets to what you're talking about, Ben, like putting some

00:28:41.240 | math and sobriety behind it.

00:28:43.520 | It's actually from our own Nick Magiuli, which this is a very underrated clip of him on the

00:28:48.760 | Jim O'Shaughnessy podcast, Infinite Loops.

00:28:51.440 | He's like to anyone who's panicking, he would ask this question, like, "Do you think markets

00:28:56.360 | will eventually recover?

00:28:57.360 | Do you think at some point ever again we'll be at all-time highs?"

00:29:01.540 | If the answer is no, don't invest then.

00:29:03.920 | Go buy a bunker and fill it with cans of Chef Boyardee.

00:29:06.600 | Enjoy your life.

00:29:08.200 | If you do, okay, well then, you know, over what time frame?

00:29:12.360 | Maybe two years?

00:29:13.360 | Like, fine.

00:29:14.360 | We're in a 20%-ish drawdown right now.

00:29:18.280 | If it takes until the summer of 2024 to get back to new all-time highs, that's a 12% annualized

00:29:24.120 | return from here, regardless of the path, even if we go down another 10.

00:29:28.040 | If you're telling me we're at new highs in the summer of 2024 from here, that's 12% from

00:29:33.320 | here on out, above market average.

00:29:36.200 | Let's say we end up falling 33%, like we did in 2020, and say it takes five years to get

00:29:41.960 | back.

00:29:42.960 | Summer of 2027, you're still getting a 9% return each year from here.

00:29:48.220 | That's like market average.

00:29:49.220 | It's above average.

00:29:50.220 | So, like, it's hard, like I said, to keep that sober math in mind, but frankly, as simple

00:29:54.840 | as the leaner the recent returns, the fatter the future returns.

00:29:57.840 | Yeah, it's hard to think, but expect returns are going up as stocks are going down.

00:30:01.240 | It's no fun.

00:30:02.240 | Duncan, I have one final question for you.

00:30:05.240 | This week on Slack, you shared a picture of you as an extra in a movie with Ben Stiller,

00:30:09.040 | and you said you were also on One Tree Hill.

00:30:11.240 | How did you become an extra in movie and TV shows?

00:30:13.040 | Was this a film school thing?

00:30:14.240 | Yeah, yeah.

00:30:15.240 | So, I went to film school at UNC Wilmington, and so Wilmington had tons of productions

00:30:19.660 | filming there at the time, and so it was just like a part-time job.

00:30:22.900 | You just, like, you put in your headshot and stuff at a casting agency, and then anytime

00:30:29.540 | they just need extras, they call you up, and it, you know, it paid, oh, God.

00:30:34.700 | It paid pretty well.

00:30:35.700 | It was like, you know, you got, like, a hundred bucks a day just for, like, coming and standing

00:30:39.140 | around in the background.

00:30:40.140 | This one was a little more.

00:30:41.140 | I'm going to need to see this headshot at some point, you know.

00:30:43.540 | Oh, God.

00:30:44.540 | I'm sorry.

00:30:45.540 | I think they literally, they took them all, like, on campus.

00:30:46.540 | They just, like, they had, like, a booth, you know, and you, like, walked in.

00:30:47.540 | Oh, okay.

00:30:48.540 | So, you didn't get, like, a professional headshot with, like, a jacket slung over your shoulder

00:30:52.660 | or something like that?

00:30:53.660 | No, no.

00:30:54.660 | I never did that.

00:30:55.660 | No, I didn't really want to be an actor.

00:30:56.660 | Yeah.

00:30:57.660 | All right.

00:30:58.660 | All right.

00:30:59.660 | Ben, thank you for your help, as always.

00:31:00.660 | Thank you, Ben.

00:31:01.660 | Duncan, appreciate it.

00:31:02.660 | Remember, askthecompoundshow@gmail.com.

00:31:03.660 | Keep those questions and comments coming.

00:31:05.500 | Any other questions on bear markets for next week, we'd love to hear them.

00:31:08.220 | Again, askthecompoundshow@gmail.com, and we will talk to you next time.

00:31:24.620 | Bye.

00:31:25.620 | Bye.

00:31:26.620 | Bye.

00:31:26.620 | (upbeat music)

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