Does FIRE Make Sense for Me?

00:00:00.000 | (upbeat music)

00:00:02.580 | - Welcome back to Ask the Compound.

00:00:13.440 | Remember our email here is askthecompoundshow@gmail.com.

00:00:16.660 | It's a new year, same old questions.

00:00:18.540 | We even got a bunch of questions over the holidays.

00:00:20.660 | People still care about their finances over the holidays.

00:00:22.460 | Maybe there was some deep introspection.

00:00:24.380 | Duncan is calling in today from Disney.

00:00:26.720 | World, land, I always get 'em confused.

00:00:28.960 | What's one in Florida, World?

00:00:30.120 | - Disney World.

00:00:31.160 | - Okay.

00:00:32.000 | - Yeah, I ran a 5K at 5 a.m. this morning.

00:00:34.440 | - Why so early?

00:00:35.760 | Was it like through Disney?

00:00:36.900 | - Because they want everyone done before the parks open.

00:00:40.080 | - Okay, let's get into Disney in a minute.

00:00:41.440 | First, today's show is sponsored by Rocket Money.

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00:01:39.520 | All right, Duncan, what's the heat check at Disney?

00:01:42.240 | - Well, yeah, I messaged you the other day.

00:01:47.480 | I was like, I gotta ask you some questions

00:01:48.940 | about Disney stock.

00:01:50.120 | I don't understand.

00:01:51.000 | I'm a long-term shareholder, I think, like you are.

00:01:54.160 | I don't understand how so many people are here

00:01:57.080 | and spending so much money

00:01:58.800 | and the stock still looks the way it does.

00:02:01.300 | I guess it's streaming.

00:02:04.000 | Is that maybe the answer?

00:02:05.520 | What's your explanation?

00:02:07.480 | - It would be interesting to see

00:02:08.760 | if we could do the counterfactual of Disney,

00:02:11.080 | if they never did Disney+.

00:02:12.480 | 'Cause at the time, it seemed like a home run.

00:02:14.080 | They had so many people sign up

00:02:15.440 | and I think they just didn't realize

00:02:16.920 | how much they were really putting themselves

00:02:20.280 | on the hook for spending money.

00:02:22.400 | And it is all streaming.

00:02:24.020 | I think all the streamers

00:02:25.400 | and all the entertainment companies

00:02:26.920 | got whacked besides Netflix.

00:02:29.000 | And I guess it doesn't matter how much people spend.

00:02:31.720 | The movies have also been underperforming as well.

00:02:34.120 | They haven't been doing as well.

00:02:36.000 | We watched the new "Indiana Jones" with my son last week.

00:02:39.360 | I don't know.

00:02:40.660 | Did that need to be made?

00:02:41.860 | Probably not.

00:02:42.700 | I don't know, they spent a couple hundred million dollars

00:02:43.960 | on it, so.

00:02:44.800 | - I didn't even know it had come out.

00:02:45.620 | - Yeah, it's on Disney+ now.

00:02:47.100 | Unfortunately, yes, I bought Disney for my kids.

00:02:50.660 | So hey, let's buy some shares

00:02:52.600 | and teach you up the stock market.

00:02:54.080 | I taught them right.

00:02:56.020 | I think they're only down 40% or so.

00:02:57.880 | So yeah, people keep spending at the park.

00:03:01.960 | If it would have just been the park--

00:03:02.800 | - Should have called them a Target Dave Fund.

00:03:04.280 | - Yeah, and merchandise,

00:03:06.240 | maybe Disney would be doing better.

00:03:07.880 | But alas.

00:03:09.720 | - Hey, up first today we have,

00:03:10.880 | hey guys, I figured I'd present a scenario

00:03:12.680 | for normal folk like myself for the not-to-brags.

00:03:16.240 | I like the idea of a modified version

00:03:18.040 | of the fire movement-- - He's an anti-not-to-brag guy.

00:03:19.180 | - Known as Coast Fire,

00:03:20.660 | where you hit a principal savings goal

00:03:22.360 | and then never have to save a dollar again for retirement.

00:03:25.300 | For example, currently I have no debt

00:03:27.600 | and $50,000 earmarked for retirement.

00:03:30.320 | I'm 30 years old and it's highly unlikely

00:03:32.440 | that I would never contribute to this portfolio again.

00:03:35.020 | If I added $200 a month between my wife and I

00:03:37.920 | for the next 35 years, word willing,

00:03:40.320 | at a 7% return, I get a balance of $935,000.

00:03:44.800 | Why is it that so many people think

00:03:46.300 | you need one to $3 million in retirement?

00:03:49.000 | When to me, assuming a 7% return

00:03:51.240 | is already more on the conservative side

00:03:52.920 | and obviously Social Security will most likely be around.

00:03:56.720 | What am I missing?

00:03:57.920 | - One of the few young people

00:03:59.840 | who actually think Social Security is gonna be there.

00:04:01.400 | I tend to agree with Andrew here.

00:04:03.400 | This Coast Fire strategy makes sense in theory,

00:04:06.600 | in the fact that if you front load

00:04:07.900 | your retirement contributions,

00:04:10.140 | then compound interest will do the heavy lifting

00:04:12.480 | for you on the back end, right?

00:04:14.040 | That would mean less money you have to put in

00:04:15.880 | to save for the future.

00:04:17.480 | I do like some of the ideas behind the fire movement.

00:04:20.000 | It's financially independent, retire early,

00:04:22.280 | it's a high savings rate.

00:04:23.800 | People are very good at long-term planning for this.

00:04:25.600 | There's discipline involved.

00:04:26.940 | Other parts I don't care for,

00:04:28.640 | delayed gratification is fine,

00:04:31.100 | but I'd rather have you enjoy some of this stuff now.

00:04:33.420 | I think that's what this Coast strategy is.

00:04:35.680 | It's listen, I'm gonna front load everything

00:04:40.040 | and then if I don't have to save it as much,

00:04:42.060 | I can spend some now and then in retirement,

00:04:43.760 | I'll have this nest egg.

00:04:44.960 | To each their own.

00:04:45.800 | There are no perfect retirement strategies, obviously.

00:04:47.680 | So Andrew's in pretty good shape.

00:04:50.240 | $50,000 saved, no debt, 30 years old.

00:04:53.300 | It's possible this strategy will work out,

00:04:55.240 | but I think there's some questions

00:04:56.560 | you should ask yourself before totally banking

00:04:58.640 | on something like this.

00:04:59.480 | What if returns are lower?

00:05:01.240 | So sure, if you grow that $50,000 at 7%,

00:05:04.220 | by my calculations after 35 years, we're talking 530K,

00:05:07.840 | add in the $200 a month and yeah,

00:05:11.200 | you're already close to 900 or something I got.

00:05:13.720 | If returns are actually 8%,

00:05:14.920 | that 50K would turn into 740,000 over 35 years.

00:05:17.800 | That's pretty good, right?

00:05:19.680 | Now add the $200 a month in at 8%,

00:05:21.800 | we're talking, you know, 900K to a 1.1 million.

00:05:25.120 | It's actually not bad.

00:05:26.040 | But what if returns are 6%?

00:05:27.960 | John will do a chart on here of this growth of 50K

00:05:29.920 | over 35 years.

00:05:30.760 | I looked at 6%, 5%, 7% and 8%

00:05:33.720 | and that 5% returns grows $50,000 to 275,000.

00:05:38.720 | At 6%, we're talking 384,000.

00:05:41.520 | So now that's much lower.

00:05:44.520 | That totally changes the idea here,

00:05:47.480 | if you were really banking on that money being there.

00:05:50.540 | Maybe social security can fill the gaps

00:05:52.720 | and that's enough for you,

00:05:53.540 | but lower returns could severely crimp that lifestyle.

00:05:55.480 | So I think you also have to think about

00:05:57.500 | what if your lifestyle changes?

00:05:59.440 | So there's a road that runs by my office

00:06:02.200 | and it was really bad and it goes to a bunch of businesses,

00:06:06.760 | but it was two lanes going each way

00:06:09.640 | and then a median where you could do turns, right?

00:06:12.320 | And for years, there was huge potholes

00:06:14.200 | and they needed to fix it.

00:06:15.040 | And then one summer, they ripped it all up and redid it.

00:06:16.920 | They put in those, you know, those turnaround things,

00:06:19.280 | that's a circle, what do they call them?

00:06:21.420 | Where everyone has a yield and no one knows what to do.

00:06:24.080 | - A roundabout?

00:06:24.920 | - Yeah, people just blow through the yields.

00:06:26.280 | And so they put some of those in so it looks nicer.

00:06:28.280 | And then instead of having the turn lane in the middle,

00:06:31.200 | what they did is they put a median in.

00:06:32.800 | So they added a curb and then they put some grass

00:06:35.280 | and some trees in there.

00:06:36.120 | And then instead of having it be a turn lane,

00:06:38.020 | they added these small turn lanes

00:06:39.560 | so you could turn in the middle, right?

00:06:40.640 | There'd be one, there'd be holes in the median

00:06:42.720 | where you could turn in.

00:06:44.400 | But they made the roads very narrow

00:06:45.880 | and they didn't think through the design

00:06:48.080 | of all the businesses.

00:06:49.880 | So there's like a Best Buy and a Nordstrom Rack

00:06:51.680 | and all these businesses in a sports store, right?

00:06:55.140 | All these trucks that have to deliver inventory

00:06:56.900 | to these buildings and these businesses,

00:06:59.640 | they didn't have enough room to turn.

00:07:01.560 | So within the first week of this new design being done,

00:07:03.920 | it looks great, all the trucks are driving on the lawn

00:07:07.420 | and they totally ripped all the medians up

00:07:09.320 | because the trucks couldn't fit.

00:07:11.020 | So the designers didn't leave a big enough margin

00:07:13.680 | for safety.

00:07:15.020 | And the funny thing is,

00:07:15.860 | is that there's actually a story about it.

00:07:16.880 | They had to come back months later

00:07:18.480 | and tear up part of the median to make the turns wider,

00:07:20.800 | make the entrances wider.

00:07:22.600 | And they still didn't do it perfectly

00:07:23.780 | because there's still trucks that drive on the lawn.

00:07:25.900 | And they interviewed the designers and said,

00:07:27.400 | "What happened here?"

00:07:28.240 | And they're like, "Oh, it's a good design.

00:07:29.780 | "We just had to make some tweaks."

00:07:31.200 | But they didn't leave themselves a margin of safety.

00:07:33.160 | And that's the problem here with this idea, I think,

00:07:36.000 | is that you can create a retirement plan

00:07:37.760 | that looks really good in a spreadsheet,

00:07:40.080 | but I think you have to give yourself some wiggle room

00:07:42.120 | in case things change.

00:07:43.840 | Life in your 30s is gonna look way different

00:07:45.600 | than life in your 40s and 50s and 60s.

00:07:48.560 | You might take on some debt, you might have some kids,

00:07:50.560 | you might go back to school,

00:07:51.900 | you might decide the fire movement isn't for you.

00:07:53.720 | Like, plans could change.

00:07:55.760 | So I think that you add in a margin of safety

00:07:58.640 | to account for that.

00:07:59.620 | So I think that you just have to give yourself

00:08:02.620 | some breathing room if your preferences change,

00:08:04.160 | 'cause they probably will.

00:08:05.000 | The other thing is, what about inflation?

00:08:06.680 | Sure, one to $3 million seems too much, and I can--

00:08:10.040 | - Yeah, I was gonna say,

00:08:10.880 | what about impending hyperinflation?

00:08:12.200 | - Well, it doesn't have to be hyperinflation.

00:08:14.320 | The inflation rate in the US over the past 100 years or so

00:08:17.880 | is roughly 3%, it's a little more than that,

00:08:19.360 | but let's call it 3%.

00:08:20.800 | Over 35 years, 3% inflation turns $1 into 37 cents, right?

00:08:25.800 | 2% inflation cuts your money in half over 35 years.

00:08:30.400 | Bump it up to 4%, and $1 becomes 26 cents.

00:08:34.160 | If it's shadow stats inflation, we're talking 15%,

00:08:37.200 | I think you have negative money after 35 years.

00:08:39.560 | You owe someone else money.

00:08:42.080 | So I think the numbers your Coast Fire Plan spits out

00:08:45.840 | may seem completely doable

00:08:46.980 | based on today's current level of spending

00:08:48.640 | and the big pot of money you see,

00:08:51.320 | but what if that money doesn't take you as far

00:08:53.620 | in the future?

00:08:54.460 | Obviously, there's no guarantees in any of this stuff,

00:08:56.960 | but I think you can give yourself a margin of safety,

00:09:00.160 | and here's what I would do.

00:09:01.200 | So they're looking at the $200 of savings.

00:09:04.080 | I would move from a dollar amount

00:09:05.860 | to a percentage of your income.

00:09:07.400 | So let's say this couple, this guy and his wife,

00:09:09.760 | make 60K a year.

00:09:11.200 | If they're saving $200 a month, that's $2,400 a year.

00:09:13.920 | We're talking like a 4% savings rate.

00:09:16.200 | It's pretty low as far as I'm concerned,

00:09:17.480 | but hey, they already front-loaded it a little bit.

00:09:19.520 | I think you make it a percentage,

00:09:22.320 | and then you bump it up a little bit each year.

00:09:25.800 | And so let's say they start with that 4%,

00:09:27.960 | and they bump it up 3% a year,

00:09:29.280 | and I'm not talking going from 4% to 7%.

00:09:31.720 | I'm talking 3% in total going like 4% to 4.1%, then 4.2.

00:09:36.200 | If you just did that a little bit,

00:09:38.680 | so after 35 years of saving $2,400 a year,

00:09:41.240 | you're saving 84 grand in total.

00:09:43.320 | If you did my thing where you just bump it up

00:09:44.660 | a little bit each year,

00:09:45.500 | and you save a percentage of your income,

00:09:46.480 | and that income grows by inflation every year,

00:09:48.640 | now we're saving almost $300,000.

00:09:50.840 | So I would like if you made more of a percentage of income

00:09:54.360 | to give yourself that margin of safety.

00:09:55.800 | So as your income grows,

00:09:56.720 | so does your savings and your spending.

00:09:59.280 | You can still allow that initial investment

00:10:00.780 | to coast for you into retirement,

00:10:02.320 | but I think making some minor tweaks like this

00:10:05.320 | gives you a little bit of a bigger margin of safety.

00:10:07.120 | That's what I'm looking for for retirement savings.

00:10:09.520 | And then--

00:10:11.840 | - Yeah, that makes sense.

00:10:12.660 | - And then don't go to Disney,

00:10:13.500 | otherwise you can't save anything.

00:10:14.960 | - Yeah, I mean, yeah, there's a lot of people here.

00:10:20.060 | Okay, so up next,

00:10:23.700 | we have our first audio question in a long time.

00:10:26.880 | - I've listened to you and Batnick

00:10:28.320 | talk about inflation all year,

00:10:30.080 | especially about whether prices

00:10:31.860 | should generally revert to normal,

00:10:35.000 | and whether this is more like post-World War II

00:10:37.240 | or the '70s.

00:10:38.720 | Here's the question.

00:10:39.640 | Is it helpful or even accurate to refer to

00:10:42.720 | temporary shifts in supply and demand as inflation?

00:10:47.280 | Econ 201 taught me inflation is due

00:10:49.760 | to supply and demand of the dollar itself.

00:10:53.040 | The Fed tinkers with rates and reserves,

00:10:55.520 | and the money supply changes.

00:10:57.680 | Congress spends some money, or doesn't,

00:11:00.240 | and aggregate demand changes.

00:11:02.200 | The economic cycle goes round,

00:11:04.000 | and true inflation waxes and wanes.

00:11:06.960 | On the other hand,

00:11:07.920 | sometimes prices change for their own reasons.

00:11:10.840 | Gas goes up because of geopolitics,

00:11:13.240 | and then things settle down.

00:11:14.840 | Shipping prices go up because of supply chain issues,

00:11:18.240 | and then it gets better.

00:11:19.600 | Milk and eggs go up for agricultural

00:11:21.880 | and consumption reasons,

00:11:23.360 | and then they come back down.

00:11:25.360 | These are all round trip, transitory,

00:11:28.440 | end the roller coaster right where you started episodes.

00:11:32.460 | All these factors were strong in the last few years,

00:11:35.920 | but they are two different families of phenomena,

00:11:39.800 | yet the popular and economic press

00:11:41.640 | treats it all as inflation,

00:11:43.420 | because CPI scoops up everything.

00:11:46.780 | So, does distinguishing between

00:11:49.600 | the supply and demand of goods and services,

00:11:51.880 | which the Fed can't really touch,

00:11:54.460 | versus the supply and demand of money itself,

00:11:56.960 | does that help us understand

00:11:58.780 | which forces have been more dominant,

00:12:01.520 | and what might be likely to happen next?

00:12:04.380 | - Good radio. - Very eloquent question.

00:12:07.360 | Yes.

00:12:08.200 | My general baseline take here,

00:12:13.940 | and I wanna get into some of the technical aspects of this,

00:12:17.000 | is that there's just a lot of stuff

00:12:18.560 | that we don't know and understand about inflation.

00:12:20.960 | Even the Fed doesn't really have a good handle

00:12:24.940 | on what causes inflation.

00:12:27.040 | 'Cause if you remember,

00:12:27.880 | they wanted things to run a little hot this period,

00:12:32.700 | and then they went really hot.

00:12:34.980 | And they wanted to cool things off,

00:12:36.300 | and they did cool off,

00:12:37.140 | but I'm not sure they did for the reasons

00:12:38.740 | that the Fed said they would.

00:12:39.880 | So, let's start with some charts.

00:12:43.620 | John, give me a chart on,

00:12:44.460 | this is the US Consumer Price Index

00:12:45.960 | going back to the early 1900s.

00:12:48.860 | You can see since the 1940s pretty much,

00:12:51.680 | this just goes up and up and up and up and up.

00:12:53.640 | The only time it really fell in the early 1920s,

00:12:57.120 | and then the late 1920s and early 1930s

00:12:59.240 | from the Great Depression,

00:13:01.000 | we don't really have much deflation anymore.

00:13:03.640 | So, to the point of this question,

00:13:05.360 | yes, some things wax and wane and come and go,

00:13:07.840 | but mostly the price goes up.

00:13:10.580 | And while inflation itself is not a good thing,

00:13:13.780 | it's the lesser of two evils,

00:13:15.120 | you wouldn't really want deflation

00:13:16.720 | because that means lower wages,

00:13:18.520 | economic pain.

00:13:19.580 | I think you can, I guess, look at the money supply

00:13:22.940 | as a way to think about this.

00:13:23.900 | So, John, do the next chart.

00:13:25.260 | This is the M2 money supply,

00:13:27.420 | and I looked at it year over year.

00:13:30.180 | And this chart goes back to the 1950s,

00:13:34.020 | and the crazy thing is is that

00:13:36.300 | it's never gone below zero until now.

00:13:40.140 | So, I guess part of that is because

00:13:42.340 | it's also never gone as high as it did before too.

00:13:44.740 | M2 money supply went up almost 30%.

00:13:47.780 | Even in the '70s,

00:13:48.620 | when that was one of the reasons

00:13:49.960 | for the inflation back in the '70s,

00:13:51.320 | it certainly wasn't the only one,

00:13:52.280 | but they were pumping up money supply.

00:13:53.760 | It got to 12 or 15%,

00:13:56.880 | but it never got as high as we did during the pandemic.

00:13:59.600 | And obviously that's because

00:14:00.480 | we were spending so much money

00:14:01.480 | to keep the economy afloat.

00:14:03.160 | Now it's negative.

00:14:04.000 | So, I guess you could say,

00:14:04.840 | well, if you saw the money supply spike so much,

00:14:07.800 | and people like Jeremy Siegel did say

00:14:09.120 | that's gonna cause inflation,

00:14:10.480 | and he was right,

00:14:11.560 | now that it's falling,

00:14:12.400 | you could say, okay,

00:14:13.220 | that must mean inflation is gonna fall as well.

00:14:15.440 | I think that would kind of make sense.

00:14:17.920 | I guess my way of thinking at this is,

00:14:24.080 | is yes, there's going to be certain things

00:14:25.920 | that come and go,

00:14:26.800 | especially for volatile things

00:14:28.440 | like the energy sector or food.

00:14:31.440 | TVs seem to get cheaper all the time.

00:14:34.200 | I still don't understand why TVs get cheaper

00:14:36.000 | every single year.

00:14:37.080 | I like it, but I don't understand why.

00:14:39.800 | I think it's interesting for people like me

00:14:41.400 | to dissect this stuff.

00:14:42.340 | I think every time we get about an inflation,

00:14:44.800 | there's going to be a different reason that comes along.

00:14:46.760 | So you could figure out,

00:14:47.840 | I know exactly why it happened in the '40s.

00:14:49.840 | I know exactly why it happened in the '70s.

00:14:51.760 | People still argue about those periods.

00:14:53.320 | And then I know exactly why it happened in the pandemic.

00:14:56.200 | Part of it was demand

00:14:57.280 | because the government spent so much money.

00:14:58.840 | Part of it was also supply

00:14:59.900 | because there was supply constraints

00:15:01.360 | because companies held back

00:15:03.800 | because they thought we were going

00:15:04.640 | into this nasty recession.

00:15:06.560 | I think your personal rate of inflation

00:15:08.560 | matters way more than the government statistic.

00:15:10.140 | That's where I come in on things.

00:15:11.880 | If you could say the housing market inflation was terrible

00:15:16.000 | because rents went up,

00:15:16.840 | but if you locked in a 3% mortgage,

00:15:18.800 | you basically experienced deflation

00:15:20.880 | over this period, right?

00:15:23.080 | I think it matters more how much your wages are growing

00:15:24.880 | and how much lifestyle creep

00:15:25.800 | you're introducing your budget every year.

00:15:27.080 | So all these things probably matter more than that.

00:15:28.640 | I don't think anyone has an economic model

00:15:31.520 | that can tell you how inflation is going to work.

00:15:33.840 | So this, usually people say econ 101.

00:15:36.480 | Our question person here asks econ 201.

00:15:40.480 | So they skipped a level.

00:15:41.780 | I feel like everything that I read and learned about

00:15:44.920 | in my econ books has been tossed out the window

00:15:46.600 | the past three years, especially.

00:15:48.140 | It started in the 2010s, right?

00:15:50.560 | The Fed lowered rates

00:15:52.460 | and the Fed printed a bunch of money

00:15:53.960 | and people thought we're going to get hyperinflation

00:15:55.880 | and it didn't happen except at Disney.

00:15:57.920 | And then, yes, the Fed lowered rates

00:16:02.820 | and printed some money or whatever you call it

00:16:04.600 | in the pandemic,

00:16:05.440 | but the government also spent a bunch of money on that.

00:16:06.840 | So I don't think there is a single model

00:16:09.520 | because every time this happens,

00:16:11.680 | there's a curve ball and something out of left field

00:16:14.320 | people couldn't possibly predict.

00:16:17.200 | So no, I don't think there's a model

00:16:18.640 | that can help us explain it.

00:16:19.560 | You could look at the money supply.

00:16:21.440 | But I don't know, if you go back to my money supply chart,

00:16:23.600 | money supply was rising in the early 2010s as well.

00:16:27.000 | People thought we were going to have big time inflation then

00:16:29.320 | and we never had it.

00:16:30.240 | Inflation was relatively calm for the entire decade.

00:16:32.840 | So no, I don't think anyone has this figured out.

00:16:35.000 | And I don't think they ever really will either

00:16:37.080 | because there's so many outside factors at play.

00:16:40.360 | - Up next, we have your recent article on NASDAQ returns

00:16:43.680 | basically describes the NASDAQ as having amplified reward

00:16:47.320 | and of course, risk as well.

00:16:49.320 | I've wondered this lately,

00:16:50.680 | but should very wealthy investors be allocating

00:16:53.120 | some of their assets towards investments,

00:16:54.840 | which are even riskier than total stock market indices?

00:16:58.200 | Is there even such a thing that gives

00:17:00.880 | semi-reliably better returns over the longterm?

00:17:05.160 | And is such a thing even available to retail investors?

00:17:08.320 | Margin can obviously amplify risk and reward

00:17:10.680 | and it's probably a terrible idea for most,

00:17:13.120 | but maybe it produces an expected gain over the longterm

00:17:16.520 | for those who can handle the risk.

00:17:18.760 | - Something people were not asking us in 2022.

00:17:21.120 | How do I take more risk?

00:17:23.920 | John, throw up a chart here.

00:17:25.360 | I wrote a post on this, the NASDAQ 100 versus the S&P.

00:17:28.000 | The NASDAQ 100 goes back to 1986.

00:17:31.240 | You can just eyeball this thing.

00:17:32.520 | I could give you all the volatility statistics or whatever,

00:17:34.660 | but you eyeball this and you see the highs are higher

00:17:37.000 | and the lows are lower.

00:17:38.000 | The gains are bigger, the losses are bigger.

00:17:40.360 | Since 1986, the NASDAQ 100 has outperformed.

00:17:42.760 | It's up 14% per year versus an 11% per year gain

00:17:45.960 | for the S&P.

00:17:47.020 | Now that sounds great, right?

00:17:49.060 | Oh, it's easy.

00:17:49.900 | But that includes an 80% plus drawdown

00:17:51.600 | after the dot-com bubble bursted.

00:17:53.160 | And I think you were underwater for almost a decade and a half

00:17:55.880 | it was like 13 years if we include dividends.

00:17:58.840 | And so, it's great you outperformed,

00:18:01.920 | but you would have had to hold on

00:18:03.660 | through just an unbelievably painful lost decade.

00:18:08.660 | Now, the way I like to look at it

00:18:11.140 | is risk and return are attached at the hip,

00:18:14.100 | but taking higher risk in the form of higher volatility

00:18:17.140 | does not guarantee you higher returns.

00:18:18.540 | Emerging market stocks have been far more volatile

00:18:20.260 | than the S&P over the past decade and a half or so.

00:18:22.500 | Returns have lagged meaningfully.

00:18:24.380 | So is there a way to reliably outperform the U.S. stock market?

00:18:27.500 | I mean, some people would say there's a small cap premium

00:18:30.540 | or there's a value premium or quality stocks or momentum.

00:18:34.460 | And you could look at different strategies

00:18:36.620 | and different periods and find

00:18:38.180 | when all of those strategies have outperformed.

00:18:40.540 | There's a lot of factors to choose from the strategies.

00:18:43.540 | And this whole thing like,

00:18:44.620 | is something available to retail investors?

00:18:46.900 | There's no secrets that are available

00:18:48.700 | just to rich and wealthy people

00:18:50.520 | that are institutional investors that aren't retail.

00:18:52.060 | Like everything is available to everyone these days.

00:18:54.460 | And most of the stuff the institutional investors invest in

00:18:56.620 | isn't worth the time as a retail investor anyway.

00:18:59.260 | But there's nothing reliable

00:19:01.100 | when it comes to financial markets.

00:19:02.520 | The S&P 500 and NASDAQ 100 right now

00:19:04.500 | feel like sure things.

00:19:05.340 | I can promise you these indexes, Duncan, you say indices.

00:19:08.580 | I think only British people can say that.

00:19:11.340 | - I'm pretty sure on Bloomberg they say indices.

00:19:13.340 | That's where I've heard that.

00:19:14.940 | - Yeah, but I feel like you have to be British.

00:19:17.460 | We add extra use into your words.

00:19:19.540 | I say indexes.

00:19:20.940 | These indexes will underperform

00:19:22.620 | for an extended period of time at some point.

00:19:23.900 | I don't know when, I don't know why,

00:19:25.500 | I don't know the magnitude, but it's going to happen.

00:19:27.380 | This is just how markets work.

00:19:28.880 | So I think the best strategy,

00:19:30.220 | if you're going to invest in a more volatile asset,

00:19:31.860 | whether it's small caps or the NASDAQ 100

00:19:34.540 | or leveraged funds or whatever it is,

00:19:37.900 | whatever you choose,

00:19:39.460 | I think the best way is just to rebalance regularly.

00:19:42.940 | So you lean into the pain when there's the downside

00:19:46.100 | 'cause the downside is going to be worse

00:19:47.340 | in a more volatile asset.

00:19:48.660 | And then you take some gains

00:19:49.520 | when it's volatile to the upside.

00:19:50.580 | And counterintuitively,

00:19:52.420 | a more volatile asset class or strategy

00:19:54.140 | can actually reduce overall volatility

00:19:56.660 | if you utilize it in this counter-cyclical way.

00:19:59.100 | So I think that's the way you have to think about it

00:20:01.400 | is I'm going to have a 10% position

00:20:03.460 | in this highly volatile asset class

00:20:04.940 | or 15 or whatever it is,

00:20:06.640 | but I'm going to regularly rebalance it

00:20:09.080 | every time it shoots way up or it falls down.

00:20:12.100 | So I think that's the way to lean into the pain.

00:20:13.400 | That's how you use volatility to your advantage

00:20:15.600 | is you rebalance and you don't,

00:20:17.340 | that way you're not going all in when it's up a lot

00:20:20.320 | and then getting out when it's down a lot.

00:20:22.420 | - That makes sense.

00:20:24.960 | All right, so up next we have,

00:20:26.940 | that question was from Patrick, by the way.

00:20:28.740 | So up next we have a question from Mark.

00:20:31.960 | Mark writes, "I'm 35 years old

00:20:34.100 | "and work in the hospitality industry.

00:20:35.960 | "I've just started with a new company

00:20:37.340 | "that offers a 401k program.

00:20:39.100 | "I signed up to start with a 10% contribution

00:20:41.520 | "as many recommend.

00:20:42.920 | "However, with a preexisting Roth IRA

00:20:45.260 | "and a betterment brokerage,

00:20:46.660 | "I found myself saving too much money.

00:20:49.520 | "Would you be able to give some guidance

00:20:50.740 | "as to which would be the best two

00:20:53.080 | "to keep depositing money in

00:20:54.540 | "and what I should do with the money

00:20:55.820 | "in the account I'm pausing investing in?"

00:20:58.040 | - Sounds like Mark gave himself a margin of safety here.

00:21:00.440 | Not to brag, Mark.

00:21:01.940 | I would be curious in how he's determining

00:21:03.320 | he's saving too much, but let's,

00:21:05.600 | this is definitely a financial planning question

00:21:07.680 | versus an investment question,

00:21:08.920 | so let's bring in a financial planning expert,

00:21:10.960 | Mr. Nick Sapienza, coming to us straight from Louisiana.

00:21:14.680 | Nick, how do you think about the hierarchy here?

00:21:17.380 | So we've got a 401k plan, we've got a Roth IRA,

00:21:20.360 | we've got a brokerage account.

00:21:22.280 | How do you rank these?

00:21:25.240 | I mean, for me, this is like trying to figure out

00:21:27.420 | who my favorite child is.

00:21:29.380 | - Yeah.

00:21:30.220 | - It's really hard.

00:21:31.220 | - Yeah, I mean, in Mark's case,

00:21:33.060 | like he kind of left out some key details

00:21:35.100 | of what his goals are.

00:21:36.340 | So like the simple answer for me

00:21:37.740 | is if I'm looking at Mark and just saying,

00:21:39.660 | you know, he's 35, he potentially has maybe 30 years

00:21:42.740 | 'til where he retires and maybe he lives

00:21:44.260 | for another 30 years, so he's got a 60-year runway,

00:21:47.180 | simply prioritizing tax deferral and tax diversification.

00:21:50.580 | So that's the 401k and the Roth,

00:21:52.320 | if he's trying to narrow it down to two, those are the two.

00:21:55.920 | But I wanted to take it a little bit further.

00:21:57.160 | - You always want to get the 401k match first.

00:21:59.040 | He's got to match.

00:21:59.880 | That's the easy decision.

00:22:02.400 | I agree the Roth is good.

00:22:03.780 | Bill Sweet would tell a special young person to do that.

00:22:07.120 | Nick Magiulli, on the other hand, would say,

00:22:08.560 | listen, a brokerage account is actually more flexible,

00:22:10.400 | especially if you're younger and want to spend some of it.

00:22:12.160 | So that's your point about the goals is,

00:22:15.100 | it should maybe we keep all three of these

00:22:17.040 | and even if you have to decrease some of the contributions

00:22:19.880 | to one or the other, does it make sense

00:22:21.200 | to give yourself some more options

00:22:23.400 | by having all three accounts?

00:22:24.920 | - The way I break it down is,

00:22:26.640 | and I don't know if his 401k has a Roth 401k feature,

00:22:29.640 | if it has an after-tax feature.

00:22:30.920 | I don't know how much money he makes,

00:22:32.220 | what his tax situation is like,

00:22:33.440 | but let's just say there are three different scenarios

00:22:35.400 | that we could target.

00:22:36.920 | The first is Mark retires at 65, a normal retirement maybe.

00:22:41.540 | The second is an early retirement at 55

00:22:43.660 | and the third is some sort of mixture of early retirement,

00:22:47.080 | fat fire, you know, coast fire, whatever,

00:22:49.200 | or like a sabbatical and a delayed retirement,

00:22:51.560 | something like that.

00:22:52.760 | Then that, they're almost all the same

00:22:56.160 | in terms of how I would prioritize them,

00:22:58.080 | except for the sabbatical, of course.

00:22:59.920 | For normal retirement, you know, you're really,

00:23:02.360 | you want to look at the 401k first,

00:23:04.280 | again, match other features

00:23:06.480 | and then move on to the Roth,

00:23:08.280 | maxing out that Roth option.

00:23:09.920 | The split as far as if it should be 50/50

00:23:13.880 | or some other combination, again,

00:23:15.240 | depends on his income, depends on his tax situation.

00:23:18.880 | So there's a, maybe, you know,

00:23:20.640 | a need for some tax planning there.

00:23:21.800 | - I like the idea of looking at this

00:23:22.960 | from retirement scenarios, 'cause you're right.

00:23:24.720 | The time horizon probably comes into play here,

00:23:28.320 | depending on how much flexibility you need.

00:23:29.600 | And obviously the Roth gives a little more flexibility too,

00:23:31.320 | 'cause you can take those contributions out without penalty,

00:23:34.320 | but I like the way of looking at it.

00:23:35.600 | - That's the key thing that I wanted to point out

00:23:37.200 | is you can take those contributions out at any time

00:23:39.640 | without penalty or without tax.

00:23:41.760 | So maybe that frees up an additional 6,500 bucks

00:23:45.440 | or whatever his basis is at that point.

00:23:49.360 | The second scenario is early retirement.

00:23:51.600 | So if he retires at 55, the rule of 55 applies.

00:23:54.560 | So the year in which he turns 55,

00:23:55.880 | he can start withdrawing from his 401k.

00:23:57.560 | Key thing here, Mark, is like, leave your 401k alone.

00:24:00.840 | Don't roll it over or roll it into a new 401k

00:24:03.400 | if you choose to move.

00:24:05.200 | The prioritization, it kind of comes back

00:24:07.720 | to the financial planning thing of what we don't know

00:24:09.920 | is like how much money you're gonna need to spend

00:24:12.080 | between ages 55 until you start social security.

00:24:15.160 | Can you survive on the basis of that Roth

00:24:17.320 | or do you need to tap into that brokerage account?

00:24:19.400 | And also you can use that, he asked another question.

00:24:22.160 | What do I do with the brokerage account?

00:24:23.480 | In the meantime, obviously either leave it invested

00:24:25.680 | or you can use money from the brokerage account

00:24:28.320 | to fund your Roth IRA contributions.

00:24:30.480 | So you can sort of like siphon that money

00:24:32.640 | into the Roth from that point.

00:24:34.520 | I've already, this has been double-checked

00:24:38.000 | by Bill Arturonian, so it's not,

00:24:41.120 | you're not doing anything wrong from that standpoint.

00:24:43.760 | But you can also free up some cash flow

00:24:47.280 | and that creates maybe another scenario there.

00:24:49.560 | The last one is-- - And the other thing is,

00:24:51.040 | sorry, the other thing is I'm a big proponent

00:24:53.400 | of young people enjoying their money and spending it.

00:24:55.840 | But to your point of if there is any inkling

00:24:58.720 | of I wanna retire early, maybe you don't decrease

00:25:00.840 | your savings at all and keep putting the money

00:25:03.920 | in your, putting into these.

00:25:04.760 | - Well, it goes back to the first or the second question

00:25:06.840 | that you answered, which was about the margin of safety.

00:25:08.440 | It's just creating that scenario for what if?

00:25:11.520 | What if things change?

00:25:12.440 | And yeah, I mean, some people just aren't

00:25:13.800 | into spending money like others are.

00:25:16.320 | They have a very low bar in terms

00:25:18.960 | of what they get enjoyment out of.

00:25:20.440 | So where else should that money go?

00:25:22.600 | And just save it into the brokerage account

00:25:24.120 | so that you do have more flexibility

00:25:25.320 | if that's the scenario that Mark's in.

00:25:27.280 | And then if you're in a sabbatical situation

00:25:29.560 | where you wanna take a break, have your Walter Mitty moment,

00:25:32.160 | then I'm still looking at 401(k) up to the match.

00:25:35.440 | And then from there, I'm looking at brokerage or Roth,

00:25:38.440 | depending on how much I'll need to spend

00:25:40.880 | during that period that I'm--

00:25:42.080 | - Walter Mitty, not a bad movie.

00:25:43.880 | - Yeah.

00:25:44.720 | - That was underrated.

00:25:45.680 | - Yeah, like that one a lot. - Never saw it.

00:25:48.280 | - Every time I hear the name Mark though,

00:25:49.400 | I think about that pregame speech with the basketball team.

00:25:51.880 | He's like, "We're rocking with Mark

00:25:52.920 | 'cause Mark's rocking with us."

00:25:53.880 | Have you seen that?

00:25:54.720 | (laughing)

00:25:55.560 | - No. - It's hilarious.

00:25:57.000 | - All right, one more question, Duncan.

00:26:01.120 | - All right, last but not least,

00:26:02.880 | we have a question from Rob.

00:26:04.920 | I have two stocks I've held since the late '90s,

00:26:07.120 | Cisco and Intel.

00:26:08.800 | They were originally bought by my father

00:26:10.280 | as part of my college savings,

00:26:11.520 | and I'm assuming he never sold them

00:26:13.080 | since I was in college during a dot-com crash.

00:26:15.440 | They make up 23% and 16%

00:26:17.720 | of my investing account, respectively.

00:26:20.040 | This account is separate from my wife's

00:26:21.880 | and my retirement accounts, which we max out.

00:26:24.640 | The remainder of the account is in a range of ETFs.

00:26:27.400 | Cisco and Intel have not performed great,

00:26:29.720 | and I'm concerned about not being diversified.

00:26:32.160 | Is it better to dollar-cost average

00:26:34.760 | out of these two stocks or sell all at once

00:26:36.800 | so I can diversify immediately?

00:26:38.520 | Love the show and your movie recommendations

00:26:40.440 | heavily influence our nightly movie selection.

00:26:42.920 | - There we go.

00:26:44.120 | I just gave Rob Walter Mitty, underrated movie.

00:26:46.800 | - Those are two rough stocks to have held for that long.

00:26:49.840 | - I'm surprised.

00:26:50.680 | So yeah, John, if you throw up the chart--

00:26:51.520 | - Props to Rob Sr., or whatever Rob's dad's name is,

00:26:54.640 | Diamond Hands, Rob Sr., for holding on for that long.

00:26:58.040 | That's impressive.

00:26:59.000 | - It really depends when they bought them.

00:27:00.440 | So John, if you throw up the chart here,

00:27:01.880 | on a price basis alone, Cisco and Intel are still,

00:27:04.960 | they're both at the same place.

00:27:06.200 | They're roughly 37, 38% below the highs from 1999.

00:27:10.840 | Now, it really depends if Rob's dad bought them

00:27:13.320 | in '97, '98, or '99, how they're doing,

00:27:16.280 | 'cause you probably did pretty good if you set the run-up.

00:27:18.400 | But these stocks have underperformed massively

00:27:20.680 | on the next chart, John, the S&P 500 since 1999.

00:27:24.400 | The S&P's up 400%, Intel's up 100,

00:27:27.880 | and this is with dividends.

00:27:29.160 | Cisco's up 37%.

00:27:31.040 | Now, these stocks have done a little bit better lately,

00:27:34.720 | but you went through a huge period,

00:27:36.800 | and I'm guessing Rob probably never even looked.

00:27:39.480 | That's right, that was such a big part

00:27:40.440 | of his brokerage account, got 'em handed down.

00:27:42.600 | I wonder, Nick, before we get into

00:27:44.360 | the financial planning aspects of this,

00:27:46.240 | how much does psychology play a role

00:27:48.580 | between if you bought these stocks

00:27:50.200 | versus someone else bought 'em?

00:27:51.160 | Because I feel like if these coming from someone else,

00:27:54.200 | it's a lot easier to rip the band-aid off

00:27:55.560 | and just get these out of my face,

00:27:57.360 | I'm done with them, they're losers,

00:27:59.680 | versus I bought them, I have to wait

00:28:01.840 | 'til they come back for us.

00:28:02.680 | Is there a psychological element there?

00:28:04.080 | There is, and it's more of not selling than to sell,

00:28:07.840 | because it was a gift, or also because,

00:28:10.480 | I can't tell you how many conversations

00:28:11.760 | I've had with people around here

00:28:13.440 | who have inherited the stock of an oil company,

00:28:16.760 | and it's just, I mean, it's crushed 'em,

00:28:19.800 | or it's just held them back,

00:28:21.320 | and they can't get themselves to sell it.

00:28:22.880 | In some cases, I've heard, not personally, but anecdotally,

00:28:25.940 | I've heard of people saying that on their deathbed,

00:28:28.520 | they said, they were told, "Do not sell this stock."

00:28:30.720 | Like, "Don't sell any of my Exxon stock,

00:28:32.320 | "or my Nivera stock, seriously, yes."

00:28:35.400 | Wow.

00:28:36.240 | So it's the opposite.

00:28:37.520 | That's gonna be Duncan with Oatley on his deathbed.

00:28:39.480 | He's gonna say, "Babe, don't sell my Oatley stock."

00:28:41.720 | 100%.

00:28:42.560 | Just don't pass it on to any children, yeah.

00:28:45.160 | Don't do that to 'em.

00:28:47.280 | So that might be Rob's scenario.

00:28:49.600 | You can't say no to that.

00:28:50.680 | You have to be diamond hands at that point.

00:28:52.400 | If you're getting a death wish from someone--

00:28:55.600 | I think there's an element of guilt involved

00:28:57.200 | in selling a stock.

00:28:58.640 | You kinda get married to the stock in that way.

00:29:00.640 | - I'm sorry, but the finance brain in me would go,

00:29:02.640 | "Sorry, Mom and Dad, I'm selling this tomorrow."

00:29:05.680 | I'm not adhering to your wishes.

00:29:07.440 | - And I would be the opposite.

00:29:08.480 | I would say, "Oh, I feel bad."

00:29:09.720 | I would maybe sell a little bit of it at a time.

00:29:13.720 | But props to him.

00:29:14.560 | I mean, especially the point of diversification,

00:29:17.400 | which we kinda talked about earlier.

00:29:19.200 | It would be impossible for me.

00:29:22.480 | Like, I could look at a chart, and like you said,

00:29:24.160 | it depends on when you bought it, right?

00:29:26.200 | You could have crushed the S&P over time period,

00:29:28.160 | but I could not stand for lagging everything else

00:29:33.160 | for an extended period of time.

00:29:36.040 | Like, several years in a row where my Cisco and my Intel

00:29:39.800 | are flat or negative, and the market's ripping.

00:29:43.160 | That would just--

00:29:44.000 | - So how do you balance the potential tax ramifications?

00:29:48.840 | I don't know if there's a stepped-up basis here,

00:29:50.840 | if you got 'em handed down.

00:29:52.160 | So maybe there aren't really losses that he's sitting on

00:29:54.960 | versus the psychology behind,

00:29:56.360 | "I just wanna get out of these."

00:29:57.200 | So how do you balance the taxes

00:29:58.600 | versus the behavioral side of things?

00:30:01.240 | - I mean, what I thought about for this situation

00:30:04.360 | was that there's maybe some reluctance to sell

00:30:08.000 | or some regret.

00:30:08.840 | I mean, clearly, this is a burden for him and he wants,

00:30:10.640 | or that's what I'm picking up.

00:30:11.720 | It's a burden for him, he wants out of it.

00:30:13.320 | The way I look at it is you're swapping one asset

00:30:15.240 | for another, maybe an index fund, let's say.

00:30:18.320 | So something more durable, more reliable.

00:30:20.400 | He's not going to cash.

00:30:21.640 | So that should lessen the regret.

00:30:23.440 | And if you think about Rob's future,

00:30:26.160 | the best portfolio is the one that has the fewest burdens.

00:30:29.840 | I would love to, in a perfect world,

00:30:31.600 | you could just sell it all at once and move on

00:30:33.400 | and put that behind you.

00:30:34.600 | But taxes may be, and guilt may be something

00:30:39.600 | that comes into the picture.

00:30:40.720 | So I think that there's just,

00:30:43.360 | Rob has to do what's best for himself.

00:30:44.960 | It's his financial plan.

00:30:46.320 | He has to, if he's not gonna do it all at once,

00:30:48.200 | if there are tax implications,

00:30:50.320 | then he can do quarterly selling,

00:30:52.520 | which is probably the most common route.

00:30:55.680 | You have a quarterly cadence where you sell

00:30:57.560 | a portion of the stock, 20, 25%.

00:31:00.120 | There's some tax planning that's involved there.

00:31:02.120 | But the other questions are,

00:31:03.360 | do you have any tax-less carry-forwards?

00:31:05.160 | Could you tax-less harvest right now?

00:31:06.480 | Do you plan to make any meaningful,

00:31:08.520 | charitable contributions this year?

00:31:10.840 | If he can combine tax planning with investment planning

00:31:14.240 | and financial planning, that's a home run for him.

00:31:16.240 | - Yeah, and I guess if you did that slower

00:31:19.040 | over dollar cost average, that gives you time

00:31:20.680 | to think about these things as well.

00:31:22.200 | Obviously, not that you can't do it,

00:31:23.520 | do all those things by selling at once,

00:31:25.440 | but I think you'd give yourself some more time

00:31:27.040 | to think through those different routes.

00:31:29.160 | - I'm not leaving you a single share of Oatly, Ben.

00:31:32.480 | - Okay. - A single share.

00:31:33.440 | - No, I don't get it.

00:31:34.600 | (laughing)

00:31:35.960 | All right.

00:31:37.520 | Thanks, as always, to Nick for coming in to help,

00:31:40.440 | to Duncan for calling in from Disney.

00:31:42.960 | We appreciate all of your questions.

00:31:45.240 | As always, remember, askthecompoundshow@gmail.com.

00:31:49.240 | It's gonna be a good year.

00:31:50.080 | We've got new guests lined up already.

00:31:51.800 | Can't wait.

00:31:52.640 | - Oh yeah, happy new year.

00:31:54.040 | - Happy new year.

00:31:55.160 | Yep, this is the last time I'll say it.

00:31:57.600 | And we will see you next time.

00:32:00.120 | - See you, everyone.

00:32:01.720 | (upbeat music)

00:32:04.300 | (upbeat music)

00:32:06.880 | [Music]

Does FIRE Make Sense for Me?

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