Should I Average Down on Losing Investments?

00:00:00.000 | (upbeat music)

00:00:02.580 | - Welcome back to Portfolio Rescue.

00:00:19.400 | I'm on location today in the home office in New York City.

00:00:23.240 | I'm actually in the office with Duncan today.

00:00:25.220 | - Yeah.

00:00:26.060 | - Duncan, I need to offer-

00:00:26.880 | - Not in the same room again though.

00:00:27.720 | We can't make that same mistake again.

00:00:29.300 | - No, we learned our lesson.

00:00:31.240 | I need to offer a mea culpa from last week.

00:00:33.340 | So last week we talked about Series I savings bonds.

00:00:36.480 | There was some very strong proponents

00:00:38.500 | of Series I savings bonds,

00:00:40.040 | and a lot of people put me in my place.

00:00:41.760 | They told me, I think I said,

00:00:43.740 | "It's not as easy to just automate investments through those."

00:00:46.160 | A lot of people put me in my place and said,

00:00:47.940 | "Actually, you can.

00:00:48.960 | "You can automate Series I savings bonds.

00:00:51.200 | "Credit to me for admitting my mistakes when I'm wrong."

00:00:53.960 | - Yeah, yeah, I mean-

00:00:54.920 | - So that is something you actually can do.

00:00:56.680 | I think you can do it on a monthly or quarterly basis.

00:00:59.620 | - As long as you can give a treasury direct site to work.

00:01:01.820 | - So here's what I remember.

00:01:02.700 | So I actually, yes,

00:01:03.540 | I actually had some Series I savings bonds.

00:01:05.620 | I set it up on an automatic thing, autopilot,

00:01:07.980 | five minute wait to talk to someone.

00:01:10.060 | And they don't even have the option to hit a button

00:01:12.260 | to say, "We'll call you back."

00:01:13.180 | It's just like, "Just wait here like an idiot

00:01:15.660 | "and see what happens."

00:01:16.900 | - Right.

00:01:17.740 | - So yes, they still, I was right on that one.

00:01:19.740 | They still are a little antiquated

00:01:21.340 | in how they help with customer service.

00:01:23.180 | The website stinks.

00:01:25.160 | - Yeah.

00:01:26.000 | I saw someone actually was like complimenting

00:01:28.060 | their like bare bones website.

00:01:29.540 | So I mean, I guess, you know, that's like you say,

00:01:31.860 | that's what makes a market, I guess.

00:01:33.340 | - It looked like the original Amazon one

00:01:34.700 | from like when Bezos was in his garage.

00:01:37.220 | All right.

00:01:38.060 | Remember, if you have a question for us,

00:01:39.100 | askthecompoundshow@gmail.com.

00:01:40.700 | We'll be pulling questions from the live chat too.

00:01:43.500 | I always see we get some good ones in the YouTube chat,

00:01:45.420 | all that stuff.

00:01:46.260 | We'll find them if you send them to us.

00:01:48.020 | Let's do the first one.

00:01:49.260 | - Okay.

00:01:50.580 | So up first, we have some long ones today.

00:01:52.820 | So hang in there, hang in there.

00:01:55.260 | Okay.

00:01:56.100 | My wife is 26 and graduating in May

00:01:57.360 | to become a nurse practitioner.

00:01:59.200 | I'm 28 and a mechanical engineer.

00:02:01.280 | We have $265,000 in retirement accounts

00:02:04.440 | and $35,000 in taxable accounts.

00:02:07.240 | All in the Vanguard Total World Index Fund.

00:02:10.280 | We have $33,000, 10% of our portfolio

00:02:14.320 | and alternatives like Bitcoin, Ethereum, USDC

00:02:17.420 | and whole life insurance.

00:02:18.860 | And we have $20,000 in cash,

00:02:20.640 | which covers four to five months of expenses.

00:02:23.040 | We're moving back near our family in rural Minnesota.

00:02:26.220 | First baby on the way in a week.

00:02:28.620 | And due to the hot housing market,

00:02:29.980 | we'll leave Wisconsin with $165,000 of cash

00:02:33.240 | from selling our house.

00:02:34.900 | With retirement accounts maxed out,

00:02:36.300 | here's my plan for the cash.

00:02:37.940 | Put $50,000 into a down payment

00:02:39.740 | for an old $150,000 farmhouse within our family.

00:02:43.180 | Use $70,000 to pay off student loans

00:02:45.660 | and put $10,000 into I-bonds.

00:02:47.500 | Shout out you guys.

00:02:49.020 | What do I do with the remaining $35,000?

00:02:51.100 | No other debt, cars run well,

00:02:53.000 | new house meets all of our needs.

00:02:55.280 | This sounds like a good problem to have.

00:02:56.920 | - Well, yes, for people in their late 20s,

00:02:59.120 | they have things figured out pretty well

00:03:00.360 | as far as their finances go.

00:03:01.200 | Obviously, also the government should be giving us

00:03:03.000 | a kickback, I think, for all the Series I savings bonds

00:03:05.260 | that we've sold on their behalf.

00:03:06.100 | - Exactly, yeah.

00:03:07.200 | - So, you know, with the caveat that we don't know

00:03:09.640 | exactly what you're doing with this money

00:03:11.080 | and the time horizon, risk profile, yada, yada,

00:03:13.120 | we've talked about in the past.

00:03:15.080 | I'm gonna focus in on the child part here.

00:03:17.340 | So they said they're having a baby in a week.

00:03:18.560 | Maybe we got this before and they already had the kid.

00:03:20.120 | Congratulations, very exciting.

00:03:21.660 | Before we get to like the allocation side of things

00:03:24.320 | and what it means financially to have a kid,

00:03:26.800 | there was a, you get a lot of advice when you're a parent

00:03:29.900 | or just about to become a parent

00:03:30.880 | from people who already are parents.

00:03:32.160 | And they tell you exactly,

00:03:33.000 | here's what you need to do for sleep training.

00:03:34.200 | This is the kind of food you need to feed.

00:03:35.960 | By this age, they should be doing this.

00:03:37.480 | And most of that is worthless

00:03:38.720 | because all kids are different.

00:03:40.280 | So I have twins and I know for a fact

00:03:42.720 | this nature versus nurture thing.

00:03:44.320 | I would like to think that my wonderful parenting skills

00:03:47.440 | are going to help them be the people

00:03:49.440 | that they're gonna become.

00:03:50.680 | But I have a boy and girl who couldn't be more different.

00:03:53.520 | They don't look alike, they don't act alike.

00:03:55.900 | They're totally different.

00:03:57.480 | And so a lot of it is just the kid is the way they are,

00:03:59.920 | I think.

00:04:00.760 | I'm sorry to break some, pop some bubbles there.

00:04:03.520 | So all the other, that type of parenting advice,

00:04:06.160 | here's what I wish I would have known.

00:04:07.920 | First of all, don't waste your money on nice furniture.

00:04:10.720 | Kids get everything dirty.

00:04:12.280 | So if you're gonna get some furniture,

00:04:13.520 | make sure it's leather because it cleans up easier.

00:04:16.080 | Get rid of every single lamp you have in your house

00:04:18.320 | that's on an end table because it will get broken

00:04:20.680 | or the bulbs will get broken.

00:04:22.520 | I also think consider getting rid of any sharp coffee tables

00:04:26.920 | get those like fabric ottomans

00:04:28.920 | because the coffee tables,

00:04:29.800 | once they start to pull themselves up and walk

00:04:32.080 | like the corners, you're just looking for a head injury.

00:04:35.620 | Here's another one.

00:04:36.760 | Get yourself a good cordless vacuum cleaner.

00:04:39.160 | We shelled out for a Dyson, not to brag, right?

00:04:42.440 | It's kind of a high-end model,

00:04:43.600 | but we tried some other ones and they kept breaking.

00:04:45.760 | In the Dyson, we've probably put, I don't know,

00:04:48.260 | if it's a car, we put 120,000 miles on that.

00:04:50.480 | I use it like six times a day and it's amazing.

00:04:53.600 | You have to have a cordless one too

00:04:54.880 | 'cause you're pulling it out to use it all the time.

00:04:56.900 | Here's another one.

00:04:57.740 | Don't skimp on a nice washer, dryer, dishwasher.

00:05:00.420 | So if you need to upgrade a little bit in the house,

00:05:01.800 | that's probably not a bad idea.

00:05:02.680 | We probably use ours every day.

00:05:04.000 | We do so much.

00:05:04.840 | We have three kids, so we do a ton.

00:05:06.320 | Here's one more.

00:05:07.400 | I was gonna invent this

00:05:08.400 | and do it on Shark Tank to Mark Cuban.

00:05:10.400 | Multiple blades for a pizza cutter.

00:05:12.980 | I want like five of them when I'm cutting up quesadillas

00:05:15.700 | and I'm trying to cut off the edges

00:05:17.200 | on a peanut butter and jelly sandwich, that's helpful.

00:05:19.300 | So get multiple of those.

00:05:21.440 | And finally, the Mr. Clean magic erasers

00:05:23.600 | for when they put their little grubby hands

00:05:25.320 | all over the wall and they get older.

00:05:26.720 | They really are magic.

00:05:27.960 | All right, so here's something else

00:05:28.920 | I wasn't prepared for as a parent.

00:05:30.320 | The cost of childcare is insanely high.

00:05:32.760 | Duncan, before we got on,

00:05:33.600 | you were complaining about your rent in Brooklyn.

00:05:35.800 | Your rent might cover childcare.

00:05:38.720 | Now, this can be a contentious issue for people

00:05:40.960 | because you have some people who say,

00:05:42.720 | how could you possibly let other people raise your children?

00:05:46.040 | Which is always an argument to me

00:05:47.760 | because you send your kids to school and they have teachers.

00:05:50.360 | Like, are the teachers raising them?

00:05:51.560 | - Unless you have to school 'em until they go off to college.

00:05:54.320 | - But then you have other people who say,

00:05:55.480 | how could you give up your career for your children?

00:05:57.440 | What kind of example are you setting?

00:05:58.800 | And so this is one of those things

00:06:00.200 | that you're never gonna win.

00:06:01.800 | And it's whatever you do, like someone might judge you,

00:06:04.960 | but it's totally a personal decision.

00:06:06.680 | We decided to, my wife wanted to keep working.

00:06:09.800 | She went down to part-time and we sent the kids to daycare.

00:06:13.600 | Some people, obviously, the other one

00:06:14.800 | is you're lucky enough to have family around to help,

00:06:16.720 | but that's a big ask for grandma and grandpa, right?

00:06:19.080 | So we think it's been worth it

00:06:20.640 | because they learn to socialize, they learn.

00:06:22.320 | Like the other day, my twins started singing a song

00:06:24.920 | in Spanish out of nowhere.

00:06:26.400 | And I'm like, how do you guys know Spanish?

00:06:27.680 | Oh, we learned it at school.

00:06:28.760 | They get some independence, they make little friends.

00:06:30.280 | My eight-year-old daughter,

00:06:31.560 | her two best friends in the world,

00:06:32.800 | she met 'em when she was three months old in daycare.

00:06:35.200 | And they're still best friends to this day,

00:06:37.040 | but it is very expensive.

00:06:38.340 | So I was doing my taxes.

00:06:40.120 | Bill Sweet, who's been on the show a bunch of times,

00:06:41.760 | he actually does my taxes.

00:06:42.920 | But I, listen, I lend a helping hand.

00:06:45.600 | I get it ready for him and leave it on a silver platter

00:06:47.860 | from TurboTax.

00:06:48.700 | - I think you have to say not to brag

00:06:50.040 | because that's like having LeBron James

00:06:52.300 | do your basketball lessons, you know?

00:06:53.680 | - This is true, yeah.

00:06:54.520 | I have my own tax consultant, Bill Sweet,

00:06:56.880 | and I get it ready for him on TurboTax

00:06:58.960 | and get it as far as I can take it and he finishes it.

00:07:01.280 | And it asks, like, what did you pay for childcare?

00:07:03.000 | So I added it up and I thought, you know,

00:07:05.780 | my daughter's eight, my twins are gonna be five soon

00:07:08.960 | and they're gonna be in kindergarten.

00:07:09.960 | So I'm almost done.

00:07:11.040 | Eight years worth of paying for childcare.

00:07:13.320 | So I thought, like, what if I went through

00:07:14.720 | and looked at my old spreadsheets and added it up?

00:07:17.200 | And so I go through and add up eight years of childcare.

00:07:20.560 | Now, obviously it's on and off a little bit

00:07:22.020 | from the pandemic.

00:07:23.480 | There was two years where we overlapped.

00:07:25.080 | We had three kids in it.

00:07:26.320 | And I kind of had an idea, but I figured out the number.

00:07:31.320 | It was huge.

00:07:32.700 | We basically put the kids through college.

00:07:34.320 | So we're in the trust tree here.

00:07:36.600 | I can tell the number to people.

00:07:38.080 | - I think so.

00:07:39.320 | - It was close to $170,000.

00:07:42.500 | - Imagine if you'd put that in the arc.

00:07:46.920 | - And we live in Michigan where, like,

00:07:48.340 | it could be worse in other states.

00:07:49.280 | So obviously, again, we had three kids.

00:07:52.000 | A lot of the time they were going full-time.

00:07:54.120 | And so it worked out roughly like $20,000 a year.

00:07:56.960 | So we didn't have time.

00:07:59.160 | Like, we didn't have 18 years to prepare

00:08:01.480 | like you do for college to save in a 529 plan.

00:08:04.000 | This was just kind of thrust upon us.

00:08:05.400 | And I knew it was gonna be expensive.

00:08:07.000 | And having three kids, don't tell my kids this,

00:08:10.360 | having twins was not really in the plan.

00:08:12.240 | So having three was not really ever,

00:08:14.720 | that was kind of a...

00:08:16.680 | But it's so much more expensive than...

00:08:19.440 | So obviously, the trade-off being,

00:08:21.080 | unless you have someone who can help and do it for free,

00:08:23.440 | either someone's gonna have to give up their income,

00:08:25.560 | potentially, in their career,

00:08:27.080 | or you're gonna have to pay for childcare.

00:08:28.640 | So either way, it's going to be expensive.

00:08:30.120 | We had one friend who actually,

00:08:32.320 | his wife worked on the weekends.

00:08:33.480 | He worked during the week.

00:08:34.760 | And they just never saw each other.

00:08:36.160 | And they like trade it off.

00:08:37.160 | So it's not easy.

00:08:38.880 | So I would say,

00:08:40.520 | this is on the 2021 cost of childcare survey.

00:08:43.840 | They said 85% of parents they surveyed

00:08:46.760 | spend more than 10% of their household income,

00:08:49.200 | average being about 10 grand a year.

00:08:50.800 | And they said that's actually more expensive

00:08:53.320 | than the average annual in-state cost of college.

00:08:56.060 | So it costs more to send your child to daycare

00:08:57.720 | than it does.

00:08:58.560 | And there's a reason for that expense,

00:08:59.980 | because they have to have a certain amount of teachers.

00:09:01.820 | Like if they're an infant,

00:09:02.660 | they need like, I think one teacher

00:09:04.400 | for every three or four kids.

00:09:05.440 | And there's more teachers involved.

00:09:07.400 | It's all this stuff.

00:09:09.000 | But in the nine months leading up to having twins,

00:09:12.400 | I saved every extra cent I could for childcare.

00:09:15.840 | And I wanted to have like at least one year's worth

00:09:17.600 | paid for, so we didn't have to worry about it at the time,

00:09:19.360 | 'cause I knew it was gonna be expensive.

00:09:20.600 | I think I looked, our most expensive year,

00:09:22.600 | we spent almost $40,000 on childcare.

00:09:25.160 | It's just a huge,

00:09:26.000 | like we literally put these kids through college almost.

00:09:28.160 | So I would say my advice would be as you're having a kid,

00:09:30.920 | I don't know what your plans are gonna be.

00:09:32.580 | It's not a bad idea to give yourself a little bit of cushion

00:09:35.040 | if you don't have those plans worked out right now.

00:09:37.540 | - Sounds like good advice.

00:09:41.320 | I have one follow-up question.

00:09:42.800 | Can you use credit cards at least to get some points?

00:09:45.680 | - Yes, I did use credit cards to get points.

00:09:47.680 | So that helps a little bit.

00:09:49.300 | And again, I'm not like asking people to feel sorry for me

00:09:52.920 | and complaining, because I think it worked out.

00:09:54.880 | And I think our kids, like they enjoy,

00:09:57.360 | like they love going to school.

00:09:58.740 | On the weekends, they'll be like,

00:09:59.580 | "When do we get to go back to school?"

00:10:00.400 | They like, they have little friends.

00:10:01.880 | They've learned a lot.

00:10:02.720 | So I think it's been good for us and it's worked for us.

00:10:06.000 | To each their own is my kind of way of thinking about it.

00:10:07.760 | But it is, it's a huge cost

00:10:09.840 | and probably a bigger cost than most people realize.

00:10:11.760 | - Yeah, yeah.

00:10:12.600 | No, that's, I think most people

00:10:14.360 | would definitely guess less than that.

00:10:16.280 | But yeah, I've heard from other people and from friends

00:10:18.760 | about how expensive childcare is.

00:10:20.360 | It's incredible.

00:10:22.040 | - All right, let's do the next one.

00:10:23.160 | - Okay.

00:10:24.240 | So up next, is it premature to panic

00:10:27.760 | about yield curve inversion?

00:10:29.580 | What does the inversion actually mean?

00:10:31.420 | I understand that it's more economical

00:10:33.160 | to win for shorter periods of time,

00:10:35.140 | but what does it mean

00:10:35.980 | in the broader context of the economy?

00:10:38.560 | - All right, so the risk reward relationship

00:10:41.280 | should look like this.

00:10:42.120 | Longer term bonds, bonds that mature

00:10:44.240 | over a longer timeframe, call it 20, 30 years,

00:10:46.240 | should have higher yields than shorter term bonds,

00:10:48.520 | call it five years or less.

00:10:50.180 | Just because there's more interest rate uncertainty,

00:10:52.000 | which means more volatility.

00:10:53.080 | So John, pull up this, do a chart on for this first one.

00:10:55.800 | These are the drawdowns for TLT,

00:10:57.920 | which is a 20 plus year treasury bond ETF,

00:11:00.560 | and IEI, which is a three to seven year bond ETF.

00:11:03.400 | And TLT is down like 28% right now,

00:11:05.600 | whereas IEI is down more like 10.

00:11:07.680 | And the yields on these products

00:11:10.280 | are fairly similar these days,

00:11:12.640 | but the losses in long term bonds are way higher

00:11:16.160 | 'cause volatility is way higher.

00:11:17.000 | So you think if you're gonna accept that volatility,

00:11:19.100 | you wanna be paid to take that risk.

00:11:21.300 | Now, bond yield spreads are typically used

00:11:23.560 | to gauge the health of the economy.

00:11:24.900 | So let's say wider spreads indicate

00:11:27.480 | between long and short term bonds.

00:11:28.720 | So long term bonds are yielding way more

00:11:30.260 | than short term bonds.

00:11:31.440 | That's called an upward sloping yield curve.

00:11:33.040 | That would indicate a healthy economic prospects

00:11:35.040 | 'cause you're thinking there's probably gonna be

00:11:36.640 | more inflation and more growth in the future.

00:11:38.780 | That's what the bond market is telling you.

00:11:40.960 | Narrower spreads, whether it's flatter or inverted,

00:11:44.520 | indicates poor economic prospects,

00:11:46.360 | most likely lower growth and inflation

00:11:48.620 | because people aren't worried about long term,

00:11:50.080 | they're worried about it more short term.

00:11:51.800 | And so you can think of the yield curve

00:11:52.960 | as a way to gauge sentiment in the economy.

00:11:55.220 | Now, this as a signal is still relatively new.

00:11:58.280 | Campbell Harvey is a professor, I think he's at Duke now.

00:12:01.940 | He's credited with discovering this in his dissertation.

00:12:04.620 | I think Josh talked to him a couple years ago.

00:12:06.340 | - Yeah, we've had him on twice.

00:12:08.180 | - Okay, so he did his dissertation

00:12:10.180 | at University of Chicago back in 1986

00:12:11.860 | and he kind of discovered this signal.

00:12:14.980 | And so he said that people become worried about the economy.

00:12:17.480 | The 10 year treasury is like the benchmark.

00:12:19.880 | People think of this as like the safest bond in the world.

00:12:22.220 | People purchase this bond and that drives rates down

00:12:25.680 | and it brings other rates up

00:12:26.620 | and it kind of puts it all in.

00:12:28.140 | So let's look at this, the yield of the 210 spread.

00:12:30.680 | So this is the 10 year treasury

00:12:32.800 | minus the two year treasury.

00:12:34.260 | And you can see every time it hits that line

00:12:37.000 | or goes negative, that just means that the two year

00:12:39.060 | is about to surpass the 10 year in yield.

00:12:41.380 | You can see the gray lines after it is a recession.

00:12:44.780 | I think Harvey actually used a 10 year

00:12:46.660 | in the three month T-bill yield,

00:12:48.140 | but it's pretty much the same thing as short term.

00:12:50.380 | Now, he did say like in his dissertation

00:12:52.820 | that the yield curve has to be sustained,

00:12:54.580 | this inversion has to be sustained for a full quarter,

00:12:56.620 | not just a couple of days.

00:12:57.980 | So in every time we've had a recession

00:13:01.420 | going back to like the 1960s,

00:13:03.260 | an inverted yield curve has preceded it.

00:13:05.180 | So it's a pretty good signal.

00:13:07.900 | I don't know if you wanna do the correlation causation thing

00:13:09.860 | where interest rates are predicting a recession

00:13:11.740 | or it's just, it's happening because of that.

00:13:14.220 | Now, I do wanna look at the other side of this

00:13:16.380 | 'cause, and I know every time you do that,

00:13:18.540 | people say, "Oh, so you're saying it's different this time."

00:13:20.780 | No, but the market's changed.

00:13:22.100 | I'm saying markets evolve and like maybe

00:13:23.900 | the Fed's involvement in the credit markets

00:13:25.620 | has changed things.

00:13:26.780 | Maybe it means people think the Fed

00:13:28.300 | is gonna keep raising rates

00:13:29.420 | 'cause they say they're going to keep raising rates,

00:13:31.580 | but people don't really expect inflation

00:13:33.220 | to be a problem in the long term.

00:13:34.700 | So the short term yields are coming up a lot.

00:13:37.140 | The only thing I really know is that interest rates

00:13:39.740 | are really screwed up right now.

00:13:40.900 | So I don't know if it's gonna cause a recession or not.

00:13:43.020 | The thing is, even if it does, let's look at the lag.

00:13:44.980 | John, throw up this first table.

00:13:46.180 | This shows like the start of a yield curve inversion

00:13:48.500 | and then the start of a recession.

00:13:49.660 | You can see it's an average of like,

00:13:51.140 | call it 16 or 17 months.

00:13:53.580 | It's when it happens.

00:13:54.740 | And then let's put the next table up

00:13:56.220 | just to show the stock market correction.

00:13:59.180 | You can see there's a lag for stock market corrections too.

00:14:01.300 | Sometimes it happens pretty quick.

00:14:02.340 | Sometimes it takes a while to happen.

00:14:04.620 | I don't know if I'd use this data to say,

00:14:06.260 | "All right, well, we have free and clear for 16 months

00:14:08.860 | because people know things now

00:14:10.580 | and maybe it'll happen faster

00:14:11.540 | or maybe it won't happen at all."

00:14:12.500 | So it is a pretty good signal

00:14:15.580 | that people are worried in some context.

00:14:18.780 | It doesn't make sense.

00:14:19.740 | Like that relationship is screwed up right now.

00:14:21.660 | Does that mean we're for sure gonna go into a recession?

00:14:23.940 | I would never say 0% or 100% about anything,

00:14:27.020 | but I think it does say that credit markets

00:14:28.980 | are pretty screwed up right now.

00:14:30.300 | That's about as far as I'll take it.

00:14:32.100 | - Yeah, and with a lot of this stuff,

00:14:33.220 | you guys have talked about this before,

00:14:34.500 | but it's kind of what people make of it too, right?

00:14:37.660 | If everyone thinks that it's gonna cause a certain result,

00:14:40.220 | then they can make it.

00:14:42.140 | - I do wonder that.

00:14:42.980 | But yeah, people say, "But look at the track record.

00:14:44.580 | It's predicted every..."

00:14:45.420 | So you gotta give it the benefit of the doubt, I guess.

00:14:48.500 | But with the caveat that the Fed has really stepped in

00:14:52.140 | more than they were in the past in these things,

00:14:53.940 | and maybe that screws things up.

00:14:55.060 | I don't know.

00:14:56.260 | - We'll find out. - All right.

00:14:57.220 | Let's do one more.

00:14:58.860 | - Okay.

00:15:00.500 | So up next, "My question comes from a discussion I had

00:15:03.660 | with an older coworker about his thoughts on risk.

00:15:06.540 | Since IRA funds are considered more valuable

00:15:08.700 | than funds in a taxable account, generally speaking,

00:15:11.100 | most people think they should take less risk with them

00:15:13.300 | because you don't want to mess those decisions up.

00:15:17.180 | My coworker had the opposite thought

00:15:18.740 | and said that he viewed those funds

00:15:20.420 | as the longest-term funds he had,

00:15:22.240 | so he takes a small portion, not the whole portfolio,

00:15:24.980 | and swings for the fences every once in a while.

00:15:27.900 | He doesn't check those accounts nearly as often

00:15:29.580 | as his taxable ones, so he's not as tempted

00:15:31.900 | to sell out if it goes south.

00:15:33.580 | It got me thinking, is this actually the right way

00:15:36.120 | to think about funds in IRA or Roth IRA accounts?"

00:15:40.420 | - So we're talking about asset location here in psychology.

00:15:43.100 | Now, I wanna bring in someone

00:15:44.100 | who's had a hot take about this before,

00:15:46.340 | Nick Majulie has came on the show before and said,

00:15:51.020 | "Don't max out your 401(k)."

00:15:52.700 | That was Nick's hot take before for asset location

00:15:54.580 | 'cause it gives you more flexibility.

00:15:56.340 | Nick, what do you think about this?

00:15:57.380 | Do you think it makes sense to,

00:15:59.220 | if you're gonna take a swing somewhere,

00:16:01.200 | you're gonna speculate, does it make sense to do so

00:16:03.660 | in a tax-deferred account?

00:16:05.280 | Because then you're not, if you, God forbid,

00:16:08.260 | it works out, you're not paying taxes on those gains

00:16:10.660 | if you have huge gains.

00:16:11.920 | What do you think?

00:16:12.760 | - Yeah, I mean, the optimal thing to do

00:16:14.500 | if you know kind of like your high,

00:16:16.620 | you want all your high growth investments

00:16:18.420 | to be in a non-taxable account, right?

00:16:21.140 | Even if you're saying like, well, if you have bond,

00:16:23.860 | people say, "Oh, you should put bonds

00:16:24.940 | in your non-taxable accounts

00:16:26.940 | 'cause they're paying you interest throughout the year

00:16:29.100 | and you're gonna have to pay taxes on that."

00:16:30.540 | Well, that's true.

00:16:31.380 | But actually, if you just look at the math,

00:16:32.500 | like the highest growth assets you want tax shielding from

00:16:35.380 | 'cause the long-term capital gains

00:16:36.980 | will completely destroy that,

00:16:39.300 | any sort of like dividend income or, sorry,

00:16:41.180 | interest income you get from the bond.

00:16:42.460 | And especially with yields as low as they are,

00:16:43.820 | there's absolutely almost no reason

00:16:45.100 | to put bonds in a non-taxable account.

00:16:47.060 | However, in this case, I think it makes perfect sense

00:16:50.060 | to like swing for the fences.

00:16:51.000 | I mean, think about what,

00:16:52.060 | didn't Peter Thiel get like private stock in an IRA

00:16:54.660 | and then it grew to like $5 billion tax-free?

00:16:56.640 | It's like one of the greatest schemes ever.

00:16:57.480 | - Yeah, he's got a $5 billion Roth IRA as well.

00:16:59.260 | - Yeah, it's like that's the type of stuff

00:17:01.180 | where you can get really high growth assets

00:17:02.740 | or early equity into one of those things.

00:17:04.140 | That thing could be a miracle if it works out well.

00:17:06.340 | I personally don't do that.

00:17:07.980 | I like just 'cause this, I like to rebalance.

00:17:09.740 | So all of my accounts are carbon copies of each other.

00:17:12.540 | So like the stock bond mix, everything,

00:17:14.220 | I try to make them identical across everything.

00:17:15.900 | So when I rebalance, I can just rebalance within accounts.

00:17:17.900 | - So you don't think about like having more of something

00:17:20.860 | in one account and then rebalance between accounts.

00:17:23.140 | I guess that simplification.

00:17:24.580 | I also think the psychological aspect of it.

00:17:26.660 | So they asked about like people think

00:17:29.340 | they can look more long-term in their long,

00:17:31.120 | and that's what I think too.

00:17:32.180 | Like if you're, I don't necessarily swing for the fences,

00:17:34.820 | but I know that I have, I don't know, three decades or so.

00:17:37.580 | So I'm gonna touch that money.

00:17:39.040 | So to me, it's almost out of sight, out of mind.

00:17:41.500 | So all of my retirement accounts

00:17:43.360 | are completely in risk assets.

00:17:46.100 | There's no reason for me to, so I take risk there.

00:17:49.060 | And then I think if I slowly but surely

00:17:52.220 | de-risk my portfolio as I get close to retirement

00:17:54.500 | or whatever I'm gonna do,

00:17:55.700 | then I would add those other funds

00:17:58.440 | that I'm gonna be using into taxable accounts

00:18:00.700 | because again, I'm gonna let those other ones keep flying.

00:18:04.200 | - Yeah, I agree.

00:18:05.040 | I think this makes complete sense

00:18:06.560 | on a behavioral perspective and just technically

00:18:08.820 | it's optimal from like a returns perspective as well.

00:18:11.420 | So keeping those things like out of sight, out of mind,

00:18:13.460 | it makes perfect sense.

00:18:14.300 | So I agree with that.

00:18:15.620 | - All right, let's do the next one.

00:18:17.700 | - Okay.

00:18:19.260 | So up next, with individual stocks,

00:18:21.540 | I never average down because I tend to think

00:18:23.340 | the market knows more about individual companies

00:18:25.140 | than I ever could.

00:18:26.180 | And companies go bankrupt all the time

00:18:27.780 | or at least become low valuation junk companies

00:18:30.340 | and stay that way for years or decades.

00:18:32.380 | However, with ETFs, especially index diversified ones,

00:18:36.220 | I feel like averaging down is often a great move

00:18:38.180 | in the longterm.

00:18:39.200 | I'd like to think that a well-constructed equity index

00:18:41.620 | isn't going to zero unless the world collapses

00:18:44.080 | and we'd have a lot more to worry about

00:18:46.100 | than our P&L in that case.

00:18:47.980 | Am I missing something?

00:18:49.940 | - Nick, we set it up for you perfectly here.

00:18:51.620 | I got a copy right here, Nick's new book.

00:18:54.100 | Just keep buying.

00:18:54.940 | Before we set it up here,

00:18:55.760 | I wanna talk about like the individual stock side of things.

00:18:57.540 | So I look, Nick,

00:18:58.380 | have you read the Jeffrey West book "Scale" before?

00:19:00.620 | - I'll quote it.

00:19:01.700 | I'm ready.

00:19:02.540 | I already know exactly what you're,

00:19:03.580 | 'cause I've quoted, I think in the book,

00:19:05.220 | but I already kind of know the-

00:19:06.260 | - Okay, so I think I, yeah.

00:19:07.900 | So his stat was like 29,000 companies

00:19:11.460 | in the stock market from 1950 to 2009.

00:19:13.540 | 80% of them were gone by 2009

00:19:15.540 | from bank buyouts or bankruptcies or mergers.

00:19:18.820 | He's saying fewer than 5% of companies

00:19:20.700 | in the stock market remain over 30-year periods.

00:19:23.220 | And the estimated half-life of U.S. public companies

00:19:25.300 | is 10 1/2 years,

00:19:26.220 | meaning half of all companies that go public

00:19:28.300 | in any given year will be gone in 10 1/2 years.

00:19:30.420 | So this line of thinking,

00:19:32.420 | it's antithetical to Warren Buffett

00:19:35.540 | and that sort of thing of like buying a stock

00:19:37.740 | when it's on sale.

00:19:38.560 | But I think for individual companies,

00:19:39.460 | if you're not really sure

00:19:41.420 | that you have these concentrated companies

00:19:43.260 | that you're as sure about as Mr. Buffett is,

00:19:45.580 | then yeah, the individual stock side of things,

00:19:47.540 | a lot of them just don't come back.

00:19:49.360 | - Yeah, so I mean, I think the West stat

00:19:51.620 | about like half of all public companies

00:19:53.900 | are gone every 10 years.

00:19:54.900 | Just think every 10 years, like half the companies are gone

00:19:57.220 | and some brand new half and then another half, right?

00:19:59.200 | That just keeps happening.

00:20:00.040 | And then so that's why you have very few companies

00:20:01.820 | that make it 50 years.

00:20:02.660 | I think the other thing that's too,

00:20:03.620 | I think I put it in the book was like,

00:20:06.740 | by the end of 2020, there was not a single company

00:20:08.900 | still in the Dow Jones Industrial Average

00:20:10.620 | that was in there a hundred years prior.

00:20:12.180 | I think GE was the last one

00:20:13.580 | and they had just fallen out, right?

00:20:15.220 | I mean, technically Standard Oil became,

00:20:17.120 | but even Standard Oil wasn't really in it until after 1920.

00:20:19.860 | So it's like no company has been in there a hundred years.

00:20:21.740 | And if that doesn't show you kind of like

00:20:23.660 | nothing lasts forever, then I don't know what will.

00:20:25.540 | But yeah, I definitely think like individual stocks,

00:20:28.860 | they come and go.

00:20:29.700 | I think I also had, there's a stat in there.

00:20:32.300 | I had like OSAM, they have all this data

00:20:34.300 | from like the 1970s for Compustat.

00:20:36.120 | I said, give me the one year median return

00:20:38.860 | for any individual stock.

00:20:39.940 | Let's say you picked a stock at random out of a hat

00:20:41.740 | and like, or you sorted all the one year returns

00:20:44.380 | of all history of all individual stocks

00:20:45.720 | and you just pick the middle one.

00:20:47.180 | The answer is like 6.3%

00:20:48.820 | and the one year median return on the index is like 9%.

00:20:51.300 | So in expectation, if you just got a random individual stock

00:20:54.580 | you're gonna underperform the market, right?

00:20:56.300 | And of course there's those exceptional stocks

00:20:57.980 | that just crush everything else,

00:20:59.060 | but there's a lot of stocks that have

00:21:00.500 | less than 6.3% one year return.

00:21:02.460 | So it's still a positive return,

00:21:04.700 | but it technically doesn't beat the index, right?

00:21:06.780 | - What if you're someone like me who has a process?

00:21:09.320 | - I'm saying for some people it works,

00:21:12.460 | but like, I mean, there's some studies

00:21:13.620 | that show only 10% of people have skill, right?

00:21:15.900 | - But I think this idea of like thinking more

00:21:18.680 | in terms of momentum for individual stocks,

00:21:20.620 | but value for indexes makes sense.

00:21:22.580 | So he's asked, this question is asking,

00:21:25.480 | and I agree like an index is not gonna go to zero.

00:21:28.140 | And if it does, then I don't know,

00:21:29.540 | aliens attacked or something.

00:21:30.580 | But I think if aliens attacked,

00:21:32.300 | it would actually be positive for the market

00:21:33.580 | 'cause there'd be huge infrastructure spending.

00:21:35.460 | But let's say there is a case where

00:21:37.580 | like the whole stock market just,

00:21:39.340 | like that is when you buy it.

00:21:40.980 | That's the whole point of your book, right?

00:21:42.300 | Is like, especially if you're young and you're a net saver

00:21:44.580 | over any period, five, 10 plus years,

00:21:47.960 | and indexes are falling, like you want them to fall

00:21:50.460 | 'cause you get to buy at lower valuations

00:21:52.600 | and higher dividend yields and lower prices.

00:21:54.700 | That's a good thing.

00:21:55.660 | - Yeah, assuming there's a recovery

00:21:57.360 | and the world's not coming to an end, I agree.

00:21:59.700 | I think the other thing to think about here is like,

00:22:02.420 | yes, the index, the index is never the same.

00:22:04.300 | Like when we look at this, oh, S&P 500 over time,

00:22:06.180 | we think that's like the same 500 companies.

00:22:07.820 | It's obviously not because of just what we said with scale,

00:22:10.500 | right, with Jeffrey West's stuff.

00:22:11.660 | But like, because they're always changing

00:22:13.980 | the companies in there, you can,

00:22:15.620 | it looks like that thing's going up forever,

00:22:17.140 | but really this company is coming in and out.

00:22:18.580 | So really you are a momentum investor.

00:22:19.900 | If you were on the S&P 500 index,

00:22:22.060 | you're a momentum investor without realizing it.

00:22:23.860 | And that's fine.

00:22:24.700 | I don't think there's anything wrong with that,

00:22:25.540 | but I'm gonna write a post on this and say like,

00:22:27.220 | hey, it's very different owning a stock

00:22:28.540 | versus owning an index and why and why it's different.

00:22:30.620 | You really think about kind of what that means.

00:22:33.100 | - Well, and if you look at the market today,

00:22:35.300 | you saw yesterday Netflix was down like 30 or 40% in a day.

00:22:39.660 | There's all these stocks getting killed

00:22:41.180 | and the S&P is down like five or 6%.

00:22:44.260 | It's not down very much at all.

00:22:45.780 | And that's like, that's what else you get

00:22:47.280 | is just diversification is like,

00:22:49.340 | it feels like it hasn't mattered for a while

00:22:51.780 | because everyone wanted to just own,

00:22:53.100 | I just want to own tech stocks.

00:22:54.140 | But now I feel like the last two years,

00:22:55.900 | diversification is finally showing through.

00:22:57.940 | And that's the great thing about the S&P as well

00:22:59.780 | is that we're showing even when these big tech stocks fall,

00:23:02.620 | other stocks come up and pick up the slack.

00:23:04.780 | It doesn't always work like that,

00:23:06.120 | but sometimes that diversification

00:23:07.900 | is the best part of it too.

00:23:09.700 | - Yeah, completely agree with that.

00:23:11.340 | - Okay, so again, check out Nick's book, "Just Keep Buying."

00:23:15.420 | He's been on a book tour big time.

00:23:17.780 | Are you dead at this point?

00:23:18.620 | - Over 30, yeah, I think this is like my 33rd podcast.

00:23:21.460 | I don't know.

00:23:22.300 | - You answered it, you answered it.

00:23:23.420 | I did a poll in the chat of if you'd been on more

00:23:27.060 | or less than 20 podcasts recently.

00:23:29.300 | - Oh, okay.

00:23:30.140 | - So yeah, definitely over.

00:23:31.380 | - All right, so best and worst part about writing a book.

00:23:33.540 | Final question here.

00:23:34.660 | - I think the best part for me

00:23:37.100 | was just kind of like organizing my thoughts.

00:23:38.620 | It's like, what's your, it's like my investment philosophy,

00:23:40.580 | like an introduction to investment philosophy.

00:23:42.140 | That was kind of the best part.

00:23:43.700 | Worst part, I think it's just like the whole like,

00:23:47.860 | there's a supply chain thing.

00:23:49.340 | And like, there's just a lot of stuff

00:23:50.780 | that's happening in the world

00:23:51.780 | and like kind of dealing with all that.

00:23:53.180 | And like, it's like, I wanted to,

00:23:54.260 | I originally wanted out by Christmas last year.

00:23:56.060 | I was like, oh, it'll be a great Christmas gift

00:23:57.340 | and it happened and then we had to push it.

00:23:59.020 | And then supply chain pushed it further.

00:24:00.580 | So I think that was the only part.

00:24:01.820 | And it was out of our control.

00:24:02.940 | It's not my publisher's fault.

00:24:03.780 | It's no one's fault.

00:24:04.620 | It's just things you can't control.

00:24:05.940 | - That is tough.

00:24:06.780 | When you have the book totally done

00:24:07.980 | and there's no more edits,

00:24:09.620 | that time and the time it actually gets to people

00:24:11.980 | is a lot longer than people think.

00:24:13.380 | So that is--

00:24:14.220 | - Yeah, it was done last July, right?

00:24:15.100 | And then the other thing too,

00:24:15.940 | so the worst, actually the worst part for me was,

00:24:17.740 | so in there I'm talking about inflation a little bit,

00:24:19.460 | but remember all the data I had for the book

00:24:21.260 | ends in, you know, end of 2020 and inflation was still low.

00:24:23.740 | So I'm saying like, hey, historically inflation has been low

00:24:25.860 | and now it's 8.5%.

00:24:27.020 | People are reading this like this guy's an idiot.

00:24:28.620 | Like, well, I didn't know it was gonna go to 8.5.

00:24:30.540 | Like, I obviously don't know.

00:24:31.540 | And I still think it's timeless regardless,

00:24:33.180 | but I'm saying like, hey, inflation's historically been low.

00:24:34.980 | Of course it can go up again.

00:24:36.020 | I talk about how to hedge against inflation and all that,

00:24:37.660 | but like, I just look stupid

00:24:39.180 | because like the data I had at the time

00:24:41.140 | when I was writing this is not the data

00:24:42.780 | that people are reading now, right?

00:24:44.340 | 'Cause there's like a huge lag, right?

00:24:45.620 | - That just means in 10 years you can do second edition

00:24:48.060 | and update the numbers.

00:24:48.900 | - Yeah, exactly, and add that, yeah.

00:24:49.900 | - Perfect.

00:24:50.940 | - You always gotta leave room for a sequel.

00:24:52.900 | - Yeah.

00:24:53.740 | - There you go.

00:24:54.580 | Thanks to Nick for coming on.

00:24:56.060 | Check out the new threads we got.

00:24:57.340 | Duncan just updated the compound store.

00:24:59.580 | I got a new T-shirt today.

00:25:00.580 | Very nice, high quality.

00:25:02.740 | I love it.

00:25:03.560 | We just got some portfolio rescue towels in the office.

00:25:06.780 | I think they look like flags, so you can hang 'em up.

00:25:08.260 | - I didn't even realize we did, oh my God.

00:25:09.660 | - Yeah, we've got blue and red portfolio rescue towels.

00:25:13.460 | Got one, Duncan?

00:25:14.340 | Pretty sweet, actually.

00:25:17.020 | They're very nice.

00:25:18.340 | High quality, I like 'em.

00:25:19.500 | I'm gonna buy some of those for the lake this summer.

00:25:23.420 | - Can't wait, so check out idontshop.com.

00:25:25.780 | We also have the Ben Doesn't Drink Coffee mug,

00:25:27.800 | I think it's called there, right?

00:25:29.120 | - Yep, that's always there.

00:25:29.960 | - Keep those comments and questions coming.

00:25:31.580 | Remember, pick up a copy of Nick's book.

00:25:33.780 | Amazon, anywhere you can find it, just keep buying.

00:25:36.020 | Have a question, askthecompoundshow@gmail.com,

00:25:38.700 | and we'll be answering your questions again next week.

00:25:40.540 | See you then.

00:25:41.460 | - See ya.

00:25:42.300 | (upbeat music)

00:25:45.920 | (upbeat music)

00:25:48.500 | (upbeat music)

00:25:51.080 | [Music]

Should I Average Down on Losing Investments?

Chapters