How Should I Invest an Inheritance?

00:00:00.000 | (beeping)

00:00:02.180 | (upbeat music)

00:00:10.640 | - Welcome back to Portfolio Rescue.

00:00:19.640 | Remember our email here, askthecompoundshow@gmail.com

00:00:22.240 | for any questions.

00:00:23.180 | Today's Portfolio Rescue is sponsored by Innovator ETFs.

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00:00:34.320 | A lot of the questions we get from our audience

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00:01:19.440 | The thing is, most of the time when the stock market is up,

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00:01:22.800 | So Duncan, one of my stats from this week was,

00:01:25.400 | going back the last 100 years or so,

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00:01:46.120 | All right, Duncan, this week we had a little offsite

00:01:48.520 | and someone in the firm asked me,

00:01:50.160 | what's the most asked question we get?

00:01:52.360 | There are some usuals like,

00:01:54.320 | what to do with a lump sum is a big one.

00:01:56.240 | Should I invest in levered ETFs?

00:01:58.160 | How much should I be saving?

00:01:59.480 | How does Ben have such a wonderful Hawaiian shirt collection?

00:02:02.000 | These types of things, right?

00:02:03.560 | But if there's a single subject we get the most,

00:02:05.480 | it's about taxes.

00:02:08.080 | And last week we had Bill Arzaronian on and I asked him,

00:02:10.240 | why do you think we get so many questions about taxes?

00:02:11.920 | 'Cause I mean, it's gotta be 50% of the questions.

00:02:14.920 | And he said, probably rightly or wrongly,

00:02:16.380 | most people assume, I'm a good investor.

00:02:18.840 | I can handle this.

00:02:19.660 | I follow the markets.

00:02:20.500 | I know what to invest in.

00:02:21.320 | I got that part taken care of.

00:02:23.300 | But a lot of people really are worried

00:02:25.320 | about making a mistake with taxes, right?

00:02:27.400 | And I think a lot of times it's a mistake of omission.

00:02:29.440 | The tax code is so confusing and hard to understand

00:02:32.520 | that people assume that there's maybe a break

00:02:34.520 | that they're missing out on,

00:02:35.440 | or there's something they're doing

00:02:36.320 | that they could be doing.

00:02:37.440 | And so the other thing is people truly hate paying taxes,

00:02:40.360 | but we do get a ton and ton of tax questions

00:02:43.400 | and it makes a lot of sense

00:02:44.600 | that people just don't wanna screw things up.

00:02:46.600 | And people just really,

00:02:48.560 | I think that's something we can all agree on,

00:02:49.400 | that people hate taxes.

00:02:50.960 | - Yeah, hate them. - Correct?

00:02:51.800 | - And it's like such a complicated structure

00:02:55.520 | that I think no one really fully understands.

00:02:58.520 | - And having said that, no tax questions this week.

00:03:00.800 | - Yeah.

00:03:01.640 | - We did it.

00:03:02.480 | We got a lot of other good ones, so let's do it.

00:03:03.320 | - We saved those for the bills.

00:03:05.080 | - Okay, there you go.

00:03:05.920 | All right, let's do one.

00:03:06.760 | - All right, first up, we have a question from Jamie.

00:03:10.180 | Kind of a bummer to start.

00:03:12.120 | You know, yesterday was your birthday.

00:03:13.480 | I mentioned to you, I was like,

00:03:14.320 | "Are you sure you wanna start out the day

00:03:15.680 | on kind of such a bummer after your birthday?"

00:03:17.960 | But yeah, happy belated birthday, by the way.

00:03:21.120 | - All right, thank you.

00:03:21.960 | - So first up, we have a question from Jamie.

00:03:23.800 | Both of my parents have passed away,

00:03:25.560 | with my father passing a little over a year ago.

00:03:28.380 | He left us $263,000 in a savings account

00:03:31.360 | in my childhood home that was paid off.

00:03:33.980 | We sold the home for $550,000,

00:03:36.800 | and I paid off my home and all debt

00:03:38.520 | with $201,000 of this money.

00:03:40.820 | I started way too investing, opening a 403B in 2014,

00:03:44.680 | that I make small contributions to.

00:03:46.520 | The 403B account is at $22,000 now,

00:03:50.120 | and I have a Roth IRA with $5,000 in it.

00:03:53.020 | I have $92,000 of savings.

00:03:54.840 | I'm not sure what I should do with it.

00:03:56.720 | My wife took a year off to be with our baby boy,

00:03:58.680 | but is returning to work in September.

00:04:00.680 | I've never had much money before,

00:04:01.880 | and I feel like I need to hoard it in the bank,

00:04:04.000 | but I know I'm losing money leaving it there.

00:04:06.080 | Can you help me figure out what I should do?

00:04:08.540 | - Yeah, condolences, obviously.

00:04:09.920 | - Yeah, sorry for your loss. - Sometimes this is reality,

00:04:11.380 | right?

00:04:12.220 | It's strange to think about,

00:04:13.280 | but there's gonna be a lot of this in the coming year.

00:04:15.280 | So John, do a chart on of this population demographic here.

00:04:20.240 | There's way more older people than ever before,

00:04:22.760 | and unfortunately, that means there's gonna be

00:04:24.720 | a lot of people dying in the years ahead.

00:04:26.280 | It's kind of morbid to think about, but it's true.

00:04:28.320 | There's a lot of old people.

00:04:29.960 | A lot of baby boomers in the years ahead

00:04:31.460 | are gonna be retiring,

00:04:32.300 | and we're gonna have to take care of them,

00:04:33.540 | but also there's gonna be a lot of older people

00:04:34.760 | kind of passing away, unfortunately.

00:04:37.080 | So I think this is more of a psychological question

00:04:39.920 | than a finance question, right?

00:04:41.720 | This is a huge change in your net worth.

00:04:43.480 | It's gonna change the way you feel about money,

00:04:45.320 | the way you think about it.

00:04:46.400 | The good news is,

00:04:47.240 | it sounds like you've cleared out some debt payments,

00:04:48.600 | and you're not just blowing through this inheritance.

00:04:50.160 | So you're off to a good start.

00:04:51.120 | You're being thoughtful of it.

00:04:52.040 | And considering you got a late start for retirement,

00:04:53.680 | and your balances are still relatively low,

00:04:55.480 | especially if you compare them to the value of your house

00:04:57.240 | that's now paid off,

00:04:59.060 | you have a chance to right the ship here.

00:05:00.200 | So I think it's totally understandable.

00:05:01.560 | You have some fears about what to do with it.

00:05:02.880 | It's a lot of money.

00:05:03.720 | You don't wanna screw it up.

00:05:05.360 | Plus, there's probably a lot of emotional baggage

00:05:06.840 | tied to this, since this money came from your parents.

00:05:08.640 | Well, here's the first step that's a no-brainer, I think,

00:05:11.080 | before we even get to the lump sum.

00:05:13.160 | You can bump up your retirement contributions in a big way.

00:05:15.400 | If you paid off your house, your credit card, and your car,

00:05:18.160 | we're probably talking thousands of dollars a month

00:05:19.880 | that you've freed up in cashflow, right?

00:05:22.040 | Now, you can take some of that disposable income.

00:05:23.760 | My rule of thumb is,

00:05:25.040 | you should try to save at least half of every raise.

00:05:26.720 | And I consider debt repayment,

00:05:28.080 | when you pay your debt off, that's a raise.

00:05:29.680 | Student loans get paid off, that's a raise, right?

00:05:31.660 | But save at least half of it.

00:05:32.960 | So that way, you give yourself a little bump

00:05:34.200 | in the standard of living,

00:05:35.340 | but then you're also saving,

00:05:36.180 | and you don't see that money hit your checking account ever,

00:05:38.080 | and it just goes straight to it.

00:05:38.960 | So figure out how much you're saving each month

00:05:41.000 | from those debt payments that are not going out anymore,

00:05:43.080 | and save at least half of that.

00:05:44.280 | That's a huge win right there.

00:05:45.520 | And that's dollar cost averaging into the market,

00:05:47.200 | so that can maybe, you know,

00:05:48.680 | assuage your fears a little bit about being worried

00:05:50.440 | about what's gonna happen in the market.

00:05:51.760 | So that should help supercharge things,

00:05:53.600 | especially since you're slowly averaging into the market,

00:05:55.520 | and you have some relatively smaller retirement balances.

00:05:58.200 | Step two is you have that $92,000 in a lump sum.

00:06:01.240 | Now, here's the thing, you're house rich.

00:06:02.720 | So you probably could level off

00:06:04.600 | your retirement savings a little bit,

00:06:05.800 | and kind of play catch up a little bit.

00:06:07.140 | The first thing I think you should do, though,

00:06:08.800 | carve out a piece of that money,

00:06:10.020 | whatever it is, a percentage or an amount,

00:06:11.840 | and enjoy yourself.

00:06:13.080 | Go on a vacation, go for a really nice meal

00:06:15.240 | at your parents' old favorite restaurant.

00:06:17.720 | Buy something you normally wouldn't do

00:06:19.000 | with disposable income.

00:06:20.080 | Like, treat yourself a little bit, splurge on yourself.

00:06:21.800 | I'm guessing it'll make your parents happy

00:06:23.000 | to know that you took that money

00:06:24.440 | and did something enjoyable with it.

00:06:26.040 | You could also pre-fund some future goals, right?

00:06:28.000 | Maybe daycare, since your wife is going back to work,

00:06:29.760 | you have a new baby.

00:06:31.080 | Maybe it's a future family vacation.

00:06:32.500 | Maybe it's a 529 plan for your son.

00:06:34.320 | Maybe you wanna shore up your emergency fund.

00:06:37.040 | Yeah, some of that money should probably go

00:06:38.900 | into your retirement account,

00:06:40.440 | because you have to make up for some lost time

00:06:42.320 | since you started late,

00:06:43.160 | and you said that your balances are relatively low.

00:06:45.440 | So you come up with some sort of allocation,

00:06:47.160 | emergency fund, 529, family vacation,

00:06:49.640 | splurge, and then retirement.

00:06:51.620 | Break it up how you want,

00:06:52.960 | and then slowly put it to work.

00:06:53.980 | You don't have to do it all at once, right?

00:06:55.460 | But don't leave it all in the bank either.

00:06:57.360 | Like, you should do something

00:06:58.380 | because you have a chance to sort of right the ship here,

00:07:00.720 | and using that lump sum can help.

00:07:02.280 | But I think the biggest thing really is

00:07:03.920 | you paid off those debts, that's good.

00:07:05.560 | Now take that income that you freed up

00:07:07.680 | and increase your savings rate,

00:07:08.840 | and then you're helping yourself for the future

00:07:10.540 | 'cause you're saving more and more each month.

00:07:12.740 | Thoughts? - Yeah, I feel like,

00:07:15.040 | for fun, you could even do that grand tour

00:07:17.400 | of the whole world, Viking cruise thing.

00:07:20.000 | I don't know if you've seen that,

00:07:20.840 | but it's literally, it's like 40 days or something.

00:07:23.840 | I think you could do that for that.

00:07:24.680 | - I thought the pandemic kinda canceled cruises, no?

00:07:26.760 | - Oh, no. - People are still

00:07:27.600 | doing that? (Duncan laughs)

00:07:28.420 | - No, I think they're roaring back, but yeah.

00:07:31.000 | Just kidding, though. - Yeah, try a little bit.

00:07:31.840 | - I think that would use up the full amount of savings.

00:07:33.840 | So just kidding, don't do that.

00:07:34.680 | - Okay, that should've been your honeymoon, Duncan.

00:07:36.360 | All right, let's do the next one.

00:07:38.260 | Okay, up next, we have a question from Don.

00:07:41.560 | I'm in my early 50s with a net worth

00:07:43.360 | of around $2 million and a nice salary.

00:07:45.520 | My expenditures are very low,

00:07:46.980 | no mortgage or other large outlays.

00:07:49.240 | My 24-year-old son has a disability,

00:07:51.200 | but limits his income potential.

00:07:53.220 | I like working and don't plan on retiring early.

00:07:55.880 | Does it make sense to think about my investment horizon

00:07:58.020 | from my son's perspective rather than mine?

00:08:00.280 | In other words, instead of rebalancing

00:08:02.040 | into a more conservative portfolio as I age,

00:08:04.560 | should I stay invested in riskier assets

00:08:06.900 | so that he and his trust may reap the benefits

00:08:08.840 | long after I'm gone?

00:08:09.880 | - He's certainly thinking about this in the right way.

00:08:12.800 | This is the right way to think about it.

00:08:13.880 | Like, does your time horizon change?

00:08:15.760 | I think everyone has different time horizons and goals.

00:08:18.180 | And even if retirement is one of the biggest ones

00:08:19.720 | for most people, you still have to balance out

00:08:21.040 | your short-term needs with your long-term desires

00:08:22.800 | to keep up with your standard of living.

00:08:24.400 | It's one pool of money, so this is essentially

00:08:26.560 | a form of mental accounting, but I think it can help

00:08:28.240 | to break this up into different buckets.

00:08:29.560 | I've talked about this before.

00:08:30.680 | But your glide path might be differently.

00:08:32.200 | So you're 50 years old with $2 million now, right?

00:08:35.240 | Let's say you work until you're 65.

00:08:36.600 | If you save nothing else and just manage

00:08:38.120 | to grow your net worth at 5% a year,

00:08:39.720 | we're talking $4 million by age 65.

00:08:42.200 | So you're in a pretty good spot.

00:08:43.920 | But you have to build your son's needs

00:08:45.320 | into your financial plan, it sounds like.

00:08:46.640 | So are you investing the money for when he retires someday?

00:08:49.240 | Are you investing the money for when you pass away someday?

00:08:51.960 | Is he gonna need some more money to live on?

00:08:53.400 | Are his insurance needs being met now?

00:08:55.060 | And would that change if and when you do pass away?

00:08:58.120 | So I think thinking through this

00:08:59.460 | can help answer this question.

00:09:01.040 | And it depends on kind of when you need that money.

00:09:03.600 | But I think everyone's time horizon risk profile

00:09:06.720 | is different depending on their goal.

00:09:07.800 | So I think you can have different streams

00:09:09.600 | in your portfolio that you're using for different goals.

00:09:11.760 | It's just one big bucket.

00:09:12.840 | But I think if you break it up like that

00:09:14.560 | and you set a pool of capital aside

00:09:16.400 | that's gonna be for your son

00:09:17.860 | and invest it based on his goals and his time horizon,

00:09:20.560 | that makes sense.

00:09:21.400 | Again, it's mental accounting.

00:09:22.700 | It's a way of bucketing within your one big pool of assets.

00:09:26.900 | But I think that, yeah, that makes sense

00:09:28.940 | that part of that capital is gonna be invested way longer.

00:09:31.600 | It's just like people who say I have enough money for myself

00:09:34.800 | and the next few generations

00:09:36.200 | I'm investing for the grandkids.

00:09:37.880 | Yeah, then you leave that money

00:09:38.720 | in the stock market longer probably

00:09:39.600 | 'cause you have more decades to invest.

00:09:40.880 | But it depends.

00:09:41.800 | It always depends on when your son

00:09:43.080 | is gonna need that money

00:09:43.920 | and when are you gonna need that money.

00:09:45.320 | - Yeah, it seems like such a kind of freeing idea

00:09:47.480 | in a way, right?

00:09:48.320 | Because it's, yeah, the time horizon

00:09:50.200 | is pretty much limitless

00:09:52.080 | instead of constantly being concerned with, yeah.

00:09:54.200 | - But that can take away some of the worries though

00:09:57.040 | 'cause that's one of the worries

00:09:58.080 | for a lot of people in retirement

00:09:59.500 | is I can't have as long a time horizon anymore

00:10:01.760 | because I need to spend a lot of this money.

00:10:03.220 | But yeah, if part of that money,

00:10:05.140 | if you can take a certain percentage of it

00:10:06.540 | and keep it in the stock market longer for your son,

00:10:09.500 | yeah, it can be a little freeing

00:10:10.460 | so you don't worry about it as much.

00:10:11.840 | - Right.

00:10:13.060 | - Let's do another one.

00:10:14.000 | - Okay, so up next we have,

00:10:16.700 | I have a house with the low interest rate of 2.75%

00:10:20.260 | that I refinanced a year ago.

00:10:21.900 | My family has grown, three kids,

00:10:24.160 | and it might be time to get a bigger house.

00:10:26.100 | My problem is that mortgage rates have skyrocketed

00:10:28.540 | and now I could probably get a 5.75% rate.

00:10:32.460 | Is there anything I can do with this low rate asset

00:10:34.900 | or am I stuck selling my house at 2.75%

00:10:37.540 | and financing at the higher rate?

00:10:39.780 | How much would you value that change in rate

00:10:42.140 | assuming both houses are $500,000?

00:10:44.600 | Is there a way to calculate that?

00:10:47.100 | - There is a way to calculate that

00:10:47.940 | and I think this is something millions of people

00:10:49.660 | may be going through in the years ahead.

00:10:50.660 | Now I've talked before, it's quite possible

00:10:52.680 | rates come back down the next time we go into recession

00:10:54.700 | and the Fed lowers rates,

00:10:55.540 | that mortgage rates could come down.

00:10:57.360 | It's also possible that sub-3% mortgages

00:11:00.480 | are a thing of the past

00:11:01.500 | and that was just this one 18 month window that we had

00:11:04.660 | and maybe it's never coming back.

00:11:07.040 | I don't know.

00:11:07.880 | My wife and I actually went through the same exercise

00:11:09.540 | when we had twins.

00:11:10.440 | We realized immediately

00:11:11.980 | that our house was way too small for three kids.

00:11:14.620 | It just wasn't gonna work.

00:11:16.020 | And so we actually, side note,

00:11:17.820 | had our twins in May, I think this was 2017,

00:11:20.380 | and we moved into our new house in June.

00:11:21.860 | So that was a busy month in the household

00:11:24.500 | or hectic time in the Carlson household.

00:11:27.060 | I wish I had better news for this person.

00:11:28.420 | Unfortunately, you're kind of out of luck

00:11:30.000 | when it comes to that mortgage rate.

00:11:31.500 | Now, right now, here's the thing.

00:11:32.460 | You're borrowing at a lower rate

00:11:34.140 | than the federal government, right?

00:11:35.700 | If we look at all the rates,

00:11:36.820 | the 12 month T-bill rate is like 3.2%,

00:11:39.820 | two year, 3.2%, the five years, 3%,

00:11:42.980 | the 10 years, 2.85 and the 30 years, 3.1.

00:11:46.020 | So your 2.75% mortgage you've refinanced into,

00:11:49.500 | you're borrowing at a lower rate

00:11:50.460 | than the federal government,

00:11:51.380 | which is going to be very hard to get rid of.

00:11:54.240 | So let's assume you have a five,

00:11:55.960 | you said $5,000 house, right?

00:11:57.940 | At a 20% down payment, 2.75% mortgage rate,

00:12:02.040 | we're talking about like a little over $1,600 a month

00:12:04.480 | that you're paying, no taxes or anything on there.

00:12:07.920 | If we bump that same level up to 5.75%,

00:12:10.800 | now we're talking about over $2,300.

00:12:12.760 | So we're talking $700 a month in higher payments.

00:12:16.720 | What's that, $8,400 a year?

00:12:18.300 | It's tough.

00:12:20.380 | So here's the options as I see them.

00:12:22.160 | You just suck it up and buy a bigger house.

00:12:24.440 | It's probably gonna make you happier.

00:12:26.240 | It stinks, but what are you gonna do?

00:12:28.640 | Would you rather stay in the old house and save some money?

00:12:30.960 | You can't live in a spreadsheet, right?

00:12:32.640 | So, and again, it's possibly gonna be able to refinance

00:12:35.200 | in the years ahead as rates come down.

00:12:36.380 | You could always take some money out of your current home.

00:12:38.400 | You probably have some good equity in it.

00:12:40.200 | Renovate your current home.

00:12:41.560 | I don't know, add another bedroom somewhere.

00:12:43.960 | Maybe do a Mike Seaver above the garage.

00:12:46.440 | Is that one too old?

00:12:47.280 | Growing pains?

00:12:48.300 | Duncan, is that over your head?

00:12:49.140 | - Yeah, that was over my head.

00:12:50.640 | I didn't watch that one.

00:12:51.480 | - Okay.

00:12:52.300 | You could look at some other forms of financing.

00:12:53.760 | I mean, maybe, I was gonna say an adjustable rate mortgage,

00:12:56.420 | but I looked at them this morning.

00:12:57.920 | A five-year arm is 5.7.

00:12:59.580 | It's higher than the 30-year fixed, which is 5.5 right now.

00:13:02.000 | So that's out the window.

00:13:03.580 | Maybe a higher down payment because of your current equity.

00:13:06.040 | Maybe a 15-year mortgage.

00:13:07.480 | The problem is all of these options

00:13:08.680 | are gonna cost you one way or another.

00:13:10.240 | So the only thing that matters is,

00:13:11.240 | is it worth it to find a new house for your family?

00:13:13.240 | So these are the kind of problems that are solved

00:13:15.520 | qualitatively, not quantitatively, unfortunately.

00:13:18.360 | And it's gonna be really, really painful

00:13:21.200 | to let go of a sub-3% mortgage.

00:13:22.900 | I can say, there's no way I can sugarcoat that.

00:13:24.720 | But if you have to move, sometimes you just have to move.

00:13:27.620 | - Right, yeah.

00:13:29.360 | This is about more than just the money, right?

00:13:30.920 | If it's a growing family, that's kind of--

00:13:33.120 | - Unfortunately, and again,

00:13:33.960 | I think there's gonna be a lot of people

00:13:35.240 | that are gonna be making this,

00:13:36.960 | having this debate in the coming years.

00:13:38.580 | It's going to be tough.

00:13:39.960 | Hey, see, someone in the Slack,

00:13:42.040 | someone in the comments got my Kirk Cameron reference there.

00:13:44.920 | He lived in the apartment above the garage

00:13:47.160 | on growing pains, which was also--

00:13:48.840 | - Oh, so yeah, like the Fonz.

00:13:51.280 | - Yeah, so also growing pains,

00:13:53.420 | possibly the greatest intro song of any 1980s show.

00:13:58.420 | Look it up sometime, Duncan.

00:14:01.880 | All right, let's do another one.

00:14:02.760 | - Okay, I'll take your word for it.

00:14:04.800 | Okay, up next, we have a question from Devin.

00:14:08.260 | And this one starts out with a nice not to brag.

00:14:12.280 | I'm a high-income earner, married with no kids,

00:14:14.720 | 30 years old and no debt.

00:14:16.400 | I live in Manhattan and have been considering purchasing

00:14:18.640 | a home in New York City.

00:14:19.640 | My budget is around $1.2 to $1.6 million

00:14:22.240 | for a two or three bedroom.

00:14:23.840 | This breaks down to an $8,000 to $11,000 mortgage

00:14:27.240 | plus fees all in for a monthly payment.

00:14:30.000 | Wow.

00:14:31.320 | For each of the buildings,

00:14:32.360 | we have been evaluating both co-ops and condos.

00:14:34.840 | The returns, even over the past 10 to 15 years,

00:14:37.100 | appear to be absolute dog excrement, benchmark to S&P.

00:14:40.960 | Broadly speaking, the units were $950,000 to $1 million

00:14:45.000 | in 2010 and now sell for $1.3 million.

00:14:48.080 | The returns on these units make zero sense

00:14:50.440 | when you factor in yearly maintenance fees, et cetera.

00:14:53.240 | It seems like owning your unit in a high-cost living city

00:14:57.200 | is simply paying a premium to have security.

00:14:59.320 | There's no material gain if investing is commensurate

00:15:02.440 | with the mortgage.

00:15:03.620 | Is this correct?

00:15:04.560 | - All right, so the real estate market in New York

00:15:07.560 | is frankly foreign to me.

00:15:09.120 | So let's bring in someone who has lived in New York

00:15:10.960 | his whole life, Barry Ritholtz.

00:15:13.040 | - The blog father. - Barry.

00:15:14.440 | - Hi, Barry. - All right.

00:15:17.040 | So Barry, I got this, I got this on my chart.

00:15:20.460 | John, let's do a chart on real quick.

00:15:22.240 | So Case Shiller actually has a condominium price index

00:15:24.820 | for New York.

00:15:25.660 | And I looked at this, it goes back to the '90s.

00:15:27.000 | And we're talking about like a 5% annual gain.

00:15:29.880 | But that's price only, right?

00:15:32.140 | So we're not talking about all the fees and everything.

00:15:34.520 | What do you think about the returns

00:15:36.040 | on a seven-figure Manhattan condo these days?

00:15:39.280 | Is it, does it ever make sense

00:15:40.880 | or are you just buying convenience by doing that?

00:15:44.380 | - So a couple of things.

00:15:46.080 | First, I don't know where you're getting

00:15:47.640 | a three-bedroom apartment in New York City for 1.6.

00:15:51.440 | That's, you know, I think his data is wildly off.

00:15:55.320 | So two key things.

00:15:56.840 | First, you gotta live somewhere.

00:15:59.160 | You can't live in an ETF.

00:16:00.760 | You can't live in a mutual fund.

00:16:02.680 | You have to live in an apartment.

00:16:04.600 | And there are a lot of non-financial advantages

00:16:08.880 | to owning your own space.

00:16:10.800 | No one's gonna raise the rent on you.

00:16:12.660 | No one's gonna tell you,

00:16:13.500 | "Sorry, not renewing the lease, you gotta go."

00:16:16.100 | You can paint colors other than white.

00:16:18.840 | You can redecorate, buy appliances.

00:16:21.140 | So there's a lot of trade-offs when you're a renter.

00:16:25.180 | That said, over the long periods of time,

00:16:28.980 | you know, real estate more or less returns

00:16:32.060 | zero net of inflation.

00:16:34.700 | Taxes, maintenance, all these things.

00:16:37.060 | So the idea that you're thinking about real estate,

00:16:41.900 | the way the parents of the post-war generation did.

00:16:46.900 | My parents bought a house for $38,000 and 30 years later,

00:16:51.900 | sold it for almost half a million dollars.

00:16:54.700 | And that house today is probably closer to a million dollars.

00:16:57.540 | So the baby boom and the post-war generation,

00:17:02.540 | they had an advantage that you're just not gonna get today.

00:17:07.540 | There's more people, there's more NIMBY,

00:17:10.060 | there's more regulations.

00:17:11.780 | Real estate isn't as an attractive investment

00:17:15.060 | as it once was.

00:17:16.500 | - Also, I think the last few years,

00:17:18.740 | these enormous gains we've seen in the pandemic

00:17:21.060 | are gonna screw people's thinking on this

00:17:23.840 | in the years ahead, right?

00:17:25.380 | - That's right.

00:17:26.220 | You end up with a baseline that is,

00:17:29.460 | you know, suddenly everything is really expensive.

00:17:31.660 | And if we look at real estate

00:17:33.420 | from an investment perspective and say,

00:17:35.480 | "Hey, are we buying a growth property or a value property?"

00:17:40.340 | Nothing really looks like value properties today.

00:17:42.940 | And we know what happens if you top-tick growth stocks,

00:17:46.180 | you pay a price.

00:17:48.100 | But the bottom line is you have to live somewhere

00:17:51.320 | and the quality of life that you get owning your own

00:17:54.220 | property, it might be worth the loss of return.

00:17:59.940 | - Right.

00:18:00.780 | So how, explain to me, how egregious are the fees

00:18:02.900 | that you pay in some of these condo buildings that you buy?

00:18:05.260 | 'Cause you have to pay all the upkeep and maintenance fees

00:18:07.780 | and it's like, that's part of it

00:18:09.000 | that people probably don't think about either, right?

00:18:10.580 | - So my wife and I looked at,

00:18:13.340 | we moved out to the Burbs about 20 years ago.

00:18:15.780 | I'd lived in the city for a long time.

00:18:17.820 | And the fantasy was always a pied-a-terre in the city.

00:18:22.220 | We'll get our own place, we can leave our clothes there.

00:18:24.780 | We've, you know, I'm stuck at work late at night.

00:18:26.940 | I could stay at the apartment.

00:18:29.420 | And the problem is even a modest co-op,

00:18:32.840 | you're paying $1,500 a month for co-op fees.

00:18:37.520 | And that covers the taxes, the maintenance,

00:18:39.340 | all these different things within the building.

00:18:42.260 | Well, even expensive New York City real estate,

00:18:46.020 | New York City hotels, you go to a decent hotel,

00:18:48.940 | it's four, five, $600 a night.

00:18:51.260 | If I'm paying 1,500 a month every month,

00:18:53.980 | hey, that's 36 nights in New York City.

00:18:55.940 | I never spend that much time.

00:18:57.940 | So the math didn't work.

00:19:00.300 | If you have to live in the city,

00:19:02.840 | well then you're probably gonna have more control

00:19:05.380 | and enjoy it more if you own it.

00:19:07.180 | But it's a cost, it's an expense.

00:19:09.400 | It's not an investment.

00:19:11.120 | And the people who got really lucky.

00:19:13.300 | Now, when I was in grad school,

00:19:14.740 | all the co-ops or all the rental buildings

00:19:17.940 | were converting to co-ops post '70s.

00:19:20.740 | So in the '80s and '90s, as interest rates came down,

00:19:25.420 | buildings that were once rentals became cooperatives

00:19:28.340 | and people started to own it.

00:19:29.780 | And I know people who bought apartments for 20, 50,

00:19:32.220 | $100,000 and sold them for millions.

00:19:35.220 | That's done, that was a once-in-a-lifetime thing.

00:19:39.060 | And that's not gonna happen again.

00:19:40.600 | - Aren't A2/A3's essentially like paying rent

00:19:43.380 | on top of your mortgage?

00:19:45.320 | - You're an owner of the building.

00:19:46.160 | - 'Cause they can grow up forever, right?

00:19:47.540 | - Right, so you're the owner of the building,

00:19:49.700 | you pay all the salaries, you pay all the maintenance,

00:19:52.300 | and that's assuming that the elevator didn't die

00:19:55.500 | and there's a one-time special assessment

00:19:57.900 | that's $4 million divided by 200 residents,

00:20:01.600 | or the roof needs to be replaced,

00:20:03.300 | or the building exterior has to be cleaned,

00:20:04.820 | or the windows need to be upgraded.

00:20:07.060 | You're an owner, the difference with a homeowner

00:20:09.460 | is you decide when you replace your windows.

00:20:12.180 | The board decides when they're gonna do it,

00:20:14.540 | and if it's inconvenient to you, too bad.

00:20:17.700 | - Yeah, and I agree with you that the comparison

00:20:20.420 | of an S&P 500 return versus a house,

00:20:23.220 | that shouldn't go into this, that's a different story.

00:20:26.620 | - You gotta build in rent.

00:20:29.020 | - Exactly, you have to live somewhere.

00:20:29.860 | - You have to pay in rent and all that other stuff.

00:20:31.620 | - Right, and I think the average rent in Manhattan right now

00:20:34.860 | is $4,000 a month, I think I saw that recently in an article.

00:20:37.780 | - For a one-bedroom, so I don't know where anyone's

00:20:40.860 | buying a three-bedroom for 1.6, that's--

00:20:43.300 | Hey, if you find a three, Devin,

00:20:44.660 | you can find a nice three-bedroom for 1.6, grab that.

00:20:48.420 | - Probably should.

00:20:49.340 | All right, let's do the next one, Duncan.

00:20:50.940 | - Okay, we have a question from Joshua.

00:20:54.220 | My grandma is 85 and has about $350,000 to $400,000

00:20:58.860 | in an account that an advisor at a big bank manages.

00:21:01.820 | Ideally, we would take it out and diversify

00:21:04.580 | with index funds, as you guys have talked about,

00:21:06.820 | but I don't think this is an option.

00:21:08.380 | My grandma does not know anything about the market,

00:21:10.420 | and to complicate things, I'm a co-trustee with my aunt

00:21:13.660 | over the money and other assets.

00:21:15.700 | She does not like the advisor we currently have,

00:21:17.820 | so I found a highly reputable local wealth management

00:21:20.060 | company that is fee-only and charges $3,000 a year

00:21:22.780 | to manage a portfolio.

00:21:24.460 | When I brought it up, she declined and said,

00:21:26.220 | "Let's just leave it where it's at."

00:21:28.140 | She will be visiting in December.

00:21:29.420 | Any advice on how I can help her see the value

00:21:31.300 | in a fee-only service?

00:21:32.900 | And can you kind of just briefly describe

00:21:35.160 | what this even means for our younger and newer investors?

00:21:38.060 | - Yeah, so like fee-only versus,

00:21:40.420 | like the old world is brokerage where you're paid

00:21:43.540 | based on commissions for selling products,

00:21:46.100 | and then fee-only would be, this one sounds like a flat fee,

00:21:49.020 | or it could be a percentage of assets,

00:21:50.340 | or some people do an hourly fee.

00:21:52.180 | That's the idea.

00:21:53.780 | You know, having financial conversations with your family

00:21:56.140 | is never easy, but it shouldn't be a taboo subject.

00:21:58.860 | But Barry, this is a tough one

00:22:00.780 | because when my grandma got into her 80s,

00:22:02.980 | she was so set in her ways,

00:22:04.300 | changing her mind about anything

00:22:05.380 | was probably non-existent, it's not gonna happen.

00:22:08.060 | But with anyone like this in your family,

00:22:09.640 | I have these conversations all the time.

00:22:11.180 | There's some people who just,

00:22:12.340 | they know nothing about the financial world, the markets,

00:22:14.580 | and maybe they don't want to.

00:22:15.640 | How do you even start that conversation

00:22:18.060 | with someone who just knows nothing?

00:22:20.140 | - So first, grandma's 85.

00:22:22.760 | She has less than half a million dollars in assets.

00:22:25.860 | She's paying what looks like a 1% fee,

00:22:29.500 | which normally includes a whole umbrella of services,

00:22:32.580 | estate planning, tax planning, financial planning.

00:22:35.720 | I get the sense Joshua's grandma doesn't really need that.

00:22:39.700 | So she would be, I think she would be better off

00:22:42.600 | with a simpler, less expensive approach.

00:22:46.420 | To answer your question, Ben,

00:22:48.040 | how do you bring this to someone who's set in their ways?

00:22:51.980 | You could say, hey, you know,

00:22:53.340 | we could go to self-directed or Vanguard,

00:22:56.440 | and you have the Vanguard total market,

00:22:59.320 | and maybe a Bloomberg Barclays Ag bond fund

00:23:03.700 | and an overseas fund,

00:23:05.220 | and those three holdings are all you need,

00:23:08.420 | and we'll save you $3,000 a year.

00:23:10.540 | You don't have to pay for this.

00:23:11.980 | So that's one approach.

00:23:13.380 | I'd rather not see you--

00:23:14.780 | - My problem there, though, is that if something goes bad

00:23:17.500 | and you say, you know, I'm just gonna take this over for you

00:23:18.940 | and put in index funds, when the market goes down,

00:23:20.820 | you're getting blamed instead of the advisor.

00:23:22.900 | And that could make it contentious in the family.

00:23:25.180 | - Well, you could, you then have to keep a spreadsheet

00:23:28.220 | and say, hey, you would have gone down even more

00:23:31.460 | if you left it where it was,

00:23:32.820 | plus we're saving you $3,000 a year.

00:23:35.140 | So that's absolutely a risk.

00:23:38.340 | But, you know, I like to get value for what I pay for.

00:23:43.340 | I don't mind paying my accountant a lot of money

00:23:46.700 | if he can, you know, maximize my tax circumstances

00:23:50.200 | like you guys were talking about earlier.

00:23:52.340 | I don't get the sense that she's really getting value

00:23:55.340 | for the 3,000 a year.

00:23:57.460 | Even a robo-advisor, I don't know if that's best

00:24:00.140 | for grandma, who probably isn't gonna wanna log in online

00:24:02.780 | constantly at 85, but saying,

00:24:05.620 | we're just gonna buy the whole market and you're good,

00:24:09.060 | and we're saving you three grand a year,

00:24:10.900 | I think that's the most persuasive approach with us.

00:24:14.360 | - Yeah, and the other thing is,

00:24:15.300 | if they really want to go into a fee-only service,

00:24:17.820 | I think you as a co-trustee, you take that meeting,

00:24:20.620 | and then you hear it all out, and you lay it out to grandma,

00:24:24.100 | here's what you're gonna get,

00:24:25.420 | and here's what's gonna happen with this money,

00:24:27.540 | here's how it could benefit you.

00:24:28.980 | And I think you lay it out,

00:24:29.820 | you kind of give her those two options maybe.

00:24:31.900 | We could make it easy, we could put you in two index funds

00:24:34.940 | and make your life easy and move the cash around for you,

00:24:37.620 | or we could have this fee-only service do it

00:24:40.180 | for a pretty low fee,

00:24:41.300 | and here's all the things they can do as well.

00:24:42.900 | And just kind of show her what she's not getting right now.

00:24:45.460 | - The key question is,

00:24:46.620 | how much does she need to draw down each month from that?

00:24:49.980 | And if she doesn't, well, that makes it even easier.

00:24:52.540 | That's the biggest complication.

00:24:54.220 | If she says, "Hey, I'm taking 1,000 a month out of this,"

00:24:57.660 | or 2,000 a month,

00:24:59.100 | well, then it's gonna make it a little more complicated,

00:25:02.460 | but you go to Vanguard, you go to Fidelity,

00:25:05.140 | you can automate that also.

00:25:07.260 | So it's really just the initial setup for her.

00:25:09.820 | - Yeah, so we talked earlier

00:25:11.100 | about the most asked questions we get here.

00:25:12.940 | That's another one that's big for a lot of retirees

00:25:15.020 | that listen to the show is,

00:25:16.660 | how do I begin to take money out?

00:25:18.220 | A lot of people just,

00:25:19.420 | accumulation is a lot easier for some people

00:25:21.660 | than actually taking it out,

00:25:22.500 | 'cause that's another emotional cost of,

00:25:24.660 | well, I'm taking away my life savings.

00:25:26.100 | How do I spend this down correctly?

00:25:27.900 | - That's a tough pivot for people

00:25:29.620 | who've spent their whole lives working

00:25:31.900 | to turn around and say,

00:25:33.020 | "Okay, now I'm free to travel, to spend,

00:25:34.940 | "to give money away."

00:25:36.540 | Emotionally very challenging.

00:25:39.140 | - Yep, all right, Duncan, last question.

00:25:41.100 | - Okay, also, Joshua, show your grandma this episode.

00:25:45.380 | Have her watch some "Portfolio Rescue."

00:25:46.820 | And hey, Joshua's grandmother, if you watch this.

00:25:50.300 | Okay, so last but not least, we have a question from Eric.

00:25:54.460 | "I'm 50 and have $750,000 in my 401(k)

00:25:58.220 | "and $500,000 equity in my house.

00:26:00.760 | "I was thinking about taking a HELOC out for $250,000

00:26:04.200 | "and putting half of it in Google

00:26:05.640 | "and the other half in Apple.

00:26:07.100 | "Does this sound like a feasible plan?"

00:26:09.060 | - So my initial thought is no, not a great plan.

00:26:14.380 | That's the initial thinking.

00:26:16.980 | But I mean, how do you even think about

00:26:18.220 | taking some sort of massive risk like this

00:26:20.300 | and position sizing?

00:26:21.940 | And I understand the idea of,

00:26:23.940 | I have a lot of equity in my home,

00:26:24.960 | I want to take it out and do something else with it

00:26:26.520 | and maybe put it into the market.

00:26:28.340 | I think maybe the line of thinking here is,

00:26:31.140 | if you're investing in some sort of index,

00:26:33.400 | if it's a NASDAQ 100,

00:26:34.620 | you already got a lot of these names in there.

00:26:36.980 | Even if it's an S&P 500 index fund,

00:26:39.100 | you're probably going to have a lot of exposure

00:26:40.660 | to these companies.

00:26:41.740 | What's the point of making such a huge concentrated bet

00:26:44.860 | in two companies like this?

00:26:47.020 | - Right, no doubt.

00:26:48.140 | There's a little survivorship bias there.

00:26:49.780 | You're looking at the ones that have already done well.

00:26:53.100 | But it's always a bad idea to leverage yourself up

00:26:58.100 | to invest in the stock market.

00:27:01.140 | Because if the market ends up going down,

00:27:04.560 | now you're paying a monthly amount on your HELOC

00:27:09.140 | for a not especially diversified portfolio.

00:27:13.440 | If Eric would have said,

00:27:15.580 | I'm thinking about taking a HELOC and every year,

00:27:19.940 | renovating part of my home to make it more valuable

00:27:22.900 | and then paying it down.

00:27:24.520 | And this year I'm replacing the windows

00:27:26.860 | and next year I'm replacing the roof,

00:27:29.160 | like the person in the co-op.

00:27:31.100 | All right, I could live with that.

00:27:32.740 | That's a good use of the equity in your home

00:27:35.600 | to make that home more valuable if you're managing it.

00:27:38.840 | But to throw it at two stocks

00:27:40.580 | that have already had legendary, spectacular runs,

00:27:44.640 | it's a bad idea from a leverage perspective.

00:27:46.880 | But even going into those two stocks is an even worse idea.

00:27:50.880 | You're just really gambling literally with your home.

00:27:55.200 | Not quite rent money, but you're gambling with your house.

00:27:57.960 | And that's rarely a good idea.

00:27:59.440 | - That's the concentration here is the most,

00:28:01.360 | even if you had, let's say,

00:28:02.360 | take out the HELOC thing out of it.

00:28:03.500 | You have a lump sum you're investing.

00:28:05.160 | Putting it into these two stocks.

00:28:06.160 | I mean, do these two stocks seem like

00:28:07.680 | they should be safe bets for the next--

00:28:09.980 | - Two, three decades. - So which two stocks

00:28:11.180 | would you pick then?

00:28:12.060 | (laughing)

00:28:14.140 | - Does VTI count?

00:28:15.240 | I mean, that's the thing though.

00:28:16.080 | I mean, in 2000, you probably would have said,

00:28:19.000 | I'm gonna put all my money in GE

00:28:20.480 | 'cause they're paying a 4% dividend

00:28:22.040 | and this company is so diversified and it can't lose.

00:28:24.940 | And it's down 80% since then or something.

00:28:26.960 | - Right, GE and Citi.

00:28:28.480 | That would have been a great combo bet.

00:28:30.200 | - Yeah. - Oh boy.

00:28:31.040 | - And I'm not saying that's going to happen

00:28:32.160 | to Apple and Google, but it exists

00:28:34.160 | where the stock market can do okay

00:28:36.320 | and concentrated positions in stocks like these

00:28:38.980 | can do horribly for you.

00:28:41.640 | So I think the concentration here,

00:28:43.980 | I mean, if you really wanna put some money

00:28:45.560 | into Apple and Google, make a much smaller bet.

00:28:47.440 | That's fine, but this is a huge,

00:28:49.640 | you're talking about taking potentially 25%

00:28:51.960 | of your portfolio into two names.

00:28:54.680 | That again, you can get a decent amount of exposure

00:28:56.440 | in these in an index fund

00:28:57.840 | and then you also spread your bets more too.

00:28:59.840 | - And don't do it with borrowed money.

00:29:02.360 | If you have to borrow money to invest in the stock market,

00:29:05.800 | what you're really saying is you can't afford

00:29:09.020 | to make this investment.

00:29:10.760 | It's one thing you have a 30-year mortgage on a house

00:29:13.140 | and you wanna fix it up

00:29:14.180 | because it's your single biggest property.

00:29:17.540 | It's the single biggest asset you have.

00:29:19.900 | That's one thing.

00:29:21.220 | But to borrow money to put it into the stock market,

00:29:25.300 | that just never works out well in the long run.

00:29:27.220 | - And you have a higher hurdle rate now

00:29:28.340 | because 12 months ago,

00:29:30.820 | you're probably talking a 3% HELOC rate.

00:29:32.420 | Now it's like five and going up

00:29:34.820 | as the Fed keeps raising rates.

00:29:35.920 | It's gonna be a higher hurdle rate too.

00:29:37.240 | All right, Barry, I have one more question for you.

00:29:39.440 | - I just have one other thing.

00:29:40.840 | If Eric did this,

00:29:41.680 | wouldn't his wife basically become

00:29:42.800 | that of a hedge fund manager?

00:29:44.280 | Isn't he gonna be tracking this

00:29:45.480 | like every minute of every day?

00:29:47.040 | - That's gonna be an uncomfortable quarterly conference call

00:29:52.920 | with the investors each three months.

00:29:55.760 | - All right, Barry, one more question for you.

00:29:58.200 | Better form jumping into your pool,

00:29:59.840 | me or your dog Teddy this week at our pool party?

00:30:03.280 | - I gotta give it to Teddy.

00:30:04.560 | Teddy flies through the air. - Yeah, I think so too.

00:30:06.240 | That's the right answer.

00:30:07.080 | - I mean, you did a killer cannonball,

00:30:09.080 | but Teddy, who's a Portuguese water dog,

00:30:12.340 | we open the pool early and keep it open late for him.

00:30:17.600 | I mean, we open in May and we-

00:30:18.840 | - I didn't know he had water dog in his name.

00:30:20.600 | That was an unfair question.

00:30:21.860 | - Literally Portuguese water dog.

00:30:24.020 | I've taken him to the beach in February,

00:30:26.460 | throw a stick in the water.

00:30:27.600 | He's in, he gets it, he brings it out.

00:30:29.680 | I have some slow-mo videos of him leaping into the pool.

00:30:33.500 | They're hilarious.

00:30:34.680 | He's a lot of fun.

00:30:36.400 | - And he eats watermelon.

00:30:37.640 | - Yes, he does.

00:30:39.880 | - That was awesome.

00:30:40.720 | I fed him some watermelon.

00:30:41.960 | - He likes watermelon.

00:30:43.200 | He likes carrots.

00:30:44.200 | He's a funny little dog.

00:30:46.480 | - As always, dogs are the best.

00:30:48.920 | Remember, if you have a question,

00:30:51.520 | askthecompoundshow@gmail.com.

00:30:53.240 | Thanks again to Barry for his help as always.

00:30:55.020 | We appreciate it.

00:30:56.480 | If you're listening to a podcast form,

00:30:57.600 | leave us a review.

00:30:58.640 | If you're watching on YouTube,

00:30:59.480 | hit that subscriber button for Duncan.

00:31:02.000 | Tomorrow, another Compounded Friends,

00:31:03.300 | I believe, Duncan, correct?

00:31:04.820 | - That is right.

00:31:06.180 | - All right, new one coming.

00:31:07.580 | Again, askthecompoundshow@gmail.com.

00:31:09.420 | Keep those questions and comments coming,

00:31:11.220 | and we will see you next week.

00:31:13.060 | - See you, everyone.

00:31:14.500 | (upbeat music)

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How Should I Invest an Inheritance? | Portfolio Rescue

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