Is a 90/10 Portfolio Too Risky For Retirement?

00:00:00.000 | (beeping)

00:00:02.180 | (upbeat music)

00:00:11.180 | - Welcome to Portfolio Rescue.

00:00:20.280 | This is our show where we answer questions

00:00:21.800 | directly from you, the viewer.

00:00:23.640 | And I want to say thank you to everyone who emailed in.

00:00:26.220 | Our inbox is overflowing with good questions from people.

00:00:29.320 | Duncan and I have been going through those

00:00:30.480 | for the past couple of weeks.

00:00:32.200 | All great questions, so we're pretty much never

00:00:34.040 | gonna run out of stuff to talk about on the show, right?

00:00:36.460 | Duncan, topics are never-ending.

00:00:37.960 | If you, remember, if you have a question,

00:00:39.600 | email us, askthecompoundshow@gmail.com.

00:00:42.280 | Quick disclaimer, this show is for informational purposes

00:00:44.520 | only, should not be relied upon for investment decisions.

00:00:47.080 | We're just providing context and some help

00:00:49.480 | to help you through decisions here.

00:00:51.240 | Remember, it's not just gonna be me and Duncan here

00:00:53.120 | at all times, we're gonna bring some experts on,

00:00:55.000 | maybe multiple experts today, hint, hint.

00:00:58.360 | Duncan, let's get into it.

00:00:59.200 | What's the first question?

00:01:00.320 | - Okay, good morning, everyone, and hey, Ben.

00:01:03.120 | First, I did want to mention, some of you might have tuned

00:01:05.640 | in thinking we were gonna do your question today.

00:01:08.160 | Don't worry, it's gonna be next week now.

00:01:09.520 | We rearranged things a little bit, so.

00:01:11.880 | - We're breaking hearts, Duncan.

00:01:12.840 | - Yeah, yeah, exactly so.

00:01:14.040 | - We had something planned, it didn't work out,

00:01:16.800 | and we're gonna do it in the next couple weeks, so.

00:01:19.600 | - Yeah, we'll get to it, so yeah.

00:01:20.760 | - It happens.

00:01:21.920 | - Okay, so first up, our first question today

00:01:26.320 | comes from Billy, and so Billy writes,

00:01:29.160 | I'm 61 years old, and I've been retired for two years.

00:01:34.160 | I have a 90/10 portfolio, and my friends

00:01:36.360 | and no-fee financial planner advise me

00:01:38.440 | that I'm too aggressively invested,

00:01:40.280 | and that I should have more bond exposure.

00:01:42.560 | You've won the game, why take a risk at this point,

00:01:45.560 | is what they've told him.

00:01:47.000 | They seem to have totally bought into the 60/40 portfolio,

00:01:49.480 | but I don't see it that way.

00:01:50.760 | At my current spending, I don't use any of my portfolio.

00:01:53.720 | Even doubling my expenditures,

00:01:55.080 | I would still have 10 years of income to pull

00:01:58.880 | from the fixed income assets alone,

00:02:01.560 | and then Social Security would kick in.

00:02:03.840 | What would you advise someone in my financial situation

00:02:06.160 | to do regarding bond allocation?

00:02:07.960 | I think I have enough.

00:02:09.080 | - All right, so before we get into some of the

00:02:11.840 | nitty gritty here, John, play my favorite

00:02:14.000 | George Carlin clip here real quick.

00:02:16.600 | - Have you ever noticed when you're driving

00:02:18.160 | that anyone who's driving slower than you is an idiot,

00:02:21.800 | and anyone driving faster than you is a maniac?

00:02:24.960 | (audience laughing)

00:02:26.880 | - Say, look at this idiot here,

00:02:28.280 | will you just look at this idiot just creeping along?

00:02:31.000 | Whoa, look at that maniac, go!

00:02:33.240 | (audience laughing)

00:02:36.240 | - Perfect.

00:02:38.320 | All right, this is the way that I view

00:02:40.320 | when you have people look at your asset allocation

00:02:42.080 | versus other people, because the secret is

00:02:44.640 | there's no perfect portfolio, right?

00:02:46.080 | It's all about striking the right balance

00:02:47.320 | between your willingness, need, and ability to take risk.

00:02:50.000 | And obviously, this is a little different

00:02:51.680 | because this person is in retirement,

00:02:53.120 | and they're thinking about,

00:02:53.960 | well, how do I allow my portfolio to make it?

00:02:56.000 | And they did give us a few more tidbits here.

00:02:58.200 | We couldn't include 'em all

00:02:59.040 | 'cause this is a very long question, but--

00:03:01.080 | - Yeah, lots of detail.

00:03:02.160 | - Yeah, but they said they're basically taking 1%

00:03:04.040 | from their portfolio, because they have Social Security,

00:03:05.960 | because they have other income coming in,

00:03:07.600 | they're not taking much from their portfolio, 1% every year.

00:03:10.320 | And so, while some people would say that's insane,

00:03:12.640 | why would you take a 90/10 portfolio in retirement?

00:03:14.760 | You have no savings coming in.

00:03:16.280 | If there's a nasty bear market,

00:03:17.720 | you might not be able to make it back.

00:03:19.140 | If you have, if you're taking 1% from your portfolio,

00:03:21.560 | and you have 10% in fixed income,

00:03:22.720 | that's 10 years worth of spending, right?

00:03:24.560 | I mean, not adjusted for inflation,

00:03:26.840 | but pretty darn close.

00:03:28.880 | So, while it seems crazy,

00:03:32.080 | based on this person's circumstances, it might not be.

00:03:34.560 | The thing is, there's a difference between

00:03:38.000 | do you need to take risk and do you want to take risk, right?

00:03:40.320 | So, there's two hugely wealthy families

00:03:43.320 | in Western Michigan that I know of

00:03:44.600 | that have family offices, both billionaires.

00:03:47.040 | And one of the billionaire families

00:03:48.720 | has all of their money in private equity.

00:03:51.220 | They have the ability to take risk.

00:03:53.360 | They don't need to take risk,

00:03:54.240 | but they have the ability, so they do it.

00:03:55.800 | The other family, and I know people

00:03:57.400 | who have helped to manage this money,

00:03:58.920 | have the entire portfolio in bonds.

00:04:00.900 | This is a billionaire.

00:04:01.740 | They don't need to have their money in bonds and safety.

00:04:03.120 | They can take as much risk as they want,

00:04:04.760 | but they don't want to take risk.

00:04:06.040 | So, a lot of it comes down to what you need

00:04:08.400 | and what you want, and I guess a lot of this comes down

00:04:11.200 | to how flexible can your spending be, right?

00:04:13.880 | Because a lot of times, we see these 4% rules

00:04:15.560 | or 3% rules for taking money out of a portfolio.

00:04:19.080 | And no one actually does that on a year in and year out

00:04:21.420 | basis without making some changes based on circumstances.

00:04:25.460 | So, if we did have a nasty bear market,

00:04:27.060 | are you willing to cut back your spending potentially

00:04:29.140 | because you don't want to sell down your stock portfolio

00:04:31.980 | when the crap hits the fan, right?

00:04:33.980 | So, and I guess are you willing to, worst case scenario,

00:04:38.820 | spend down your whole bond portion of your portfolio

00:04:41.420 | and maybe not have much dry powder left

00:04:42.980 | to buy stocks when they're down?

00:04:44.060 | So, I think as long as your income needs are being met,

00:04:47.500 | can you do a 90/10 portfolio?

00:04:49.600 | Sure.

00:04:50.440 | Are you gonna be able to sleep at night better than someone

00:04:51.720 | who had more of a 60/40 or a 70/30 or 80/20?

00:04:55.000 | That's a question a lot of people are asking themselves

00:04:56.440 | these days because bond yields are so low.

00:04:57.960 | But again, that right balance is never,

00:05:01.160 | they're never gonna be a perfect equilibrium for everyone.

00:05:04.520 | But if you don't need to take risk and you want to take risk

00:05:07.360 | and you're willing to understand those,

00:05:09.000 | the potential downsides, I don't think it's necessary

00:05:13.520 | to take a conservative portfolio if you don't need one,

00:05:16.040 | especially if your spending is in line

00:05:17.640 | with what you understand your needs to be.

00:05:20.920 | - Yeah, and I mean, you guys have talked about this before,

00:05:24.520 | you and Michael, just how in our current environment

00:05:27.680 | over the recent years, yeah, it's hard to make the argument,

00:05:30.240 | but the future doesn't look like the past always, right?

00:05:34.160 | - Yeah, so I think it just depends how flexible

00:05:35.840 | you can be and everything's not set in stone.

00:05:37.560 | All right, let's do the second question here.

00:05:39.600 | - Okay, so next up, we have a fun one.

00:05:43.240 | So this question is, we are a couple of millennials

00:05:46.080 | that have not been able to buy a home

00:05:49.200 | because of the barrier to entry being too high.

00:05:52.100 | We live in the California Bay Area

00:05:53.900 | where housing is extremely competitive.

00:05:56.380 | We've been creative and to save on costs,

00:05:58.400 | we moved into this small but lovely travel trailer

00:06:01.200 | earlier this year.

00:06:02.400 | We own the trailer, which we can later sell

00:06:04.280 | to partially fund our down payment on a home,

00:06:06.640 | or we can rent it out as a side hustle.

00:06:08.800 | We currently pay $700 a month to rent the space

00:06:11.240 | where we are parked and about $100 a month for utilities.

00:06:14.880 | We love our little trailer,

00:06:16.120 | but we can't wait to own our own home

00:06:17.840 | and begin putting equity into it.

00:06:19.720 | We think we can buy a house big enough

00:06:21.020 | to convert one to two rooms into short-term rentals

00:06:23.760 | like on Airbnb.

00:06:25.600 | That should be another profitable side hustle for us

00:06:27.880 | because we live in wine country

00:06:29.520 | and we're looking to buy near a local college.

00:06:31.820 | All that said, we are probably a good one to two years away

00:06:34.160 | from being able to qualify for the mortgage we want.

00:06:37.680 | I've got, then they go on to say that, sorry.

00:06:42.680 | So basically what it comes down to

00:06:44.320 | is they're debating buying an older home

00:06:45.880 | versus a new construction home,

00:06:47.480 | keeping in mind that new construction

00:06:48.960 | will take nine to 12 months to build.

00:06:50.880 | There are a lot of factors for us to consider

00:06:52.680 | and we are wondering if you all can help us

00:06:55.200 | evaluate this choice from an investment standpoint.

00:06:57.640 | - All right, so basic gist of it is

00:06:59.440 | we have two millennials here living in a trailer,

00:07:01.240 | which we got a picture of the nice trailer too.

00:07:03.440 | They could rent it out a little bit,

00:07:04.480 | maybe help them, they're a couple years away,

00:07:05.680 | they're saving, especially 'cause they live in California.

00:07:08.480 | I want to bring in my favorite person

00:07:10.240 | to go back and forth with on real estate on this,

00:07:11.720 | my Animal Spirits co-host, Michael Batnick.

00:07:14.680 | You're gonna help me out with this one, Michael.

00:07:16.680 | - Wait, I thought you were bringing a bill on this one.

00:07:18.840 | Threw me for a loop.

00:07:19.760 | All right, what are we talking about here, real estate?

00:07:21.800 | - Yes, so basically what are the pros and cons

00:07:25.240 | of buying an older home in a more established neighborhood

00:07:27.600 | versus buying new?

00:07:29.880 | So I'm making an assumption here.

00:07:32.920 | Most of the homes in New York area,

00:07:34.320 | probably in the suburbs are older homes

00:07:35.960 | 'cause they've been there for a while

00:07:36.800 | and there's not a lot of land anymore.

00:07:38.040 | So maybe you can talk about that side of things.

00:07:39.480 | - Correct. - So the pros and cons

00:07:40.440 | of buying an older home.

00:07:42.160 | - Okay, when it comes to doing anything handy,

00:07:46.680 | I'm worse than useless.

00:07:49.860 | I can't do anything.

00:07:51.280 | So I really wanted to buy a house

00:07:53.960 | that was pretty much move-in ready.

00:07:56.320 | So even with the house that I bought,

00:08:00.480 | which was, I guess it was demolished in Hurricane Sandy,

00:08:05.480 | but the infrastructure of the house was there.

00:08:08.760 | So they built up on top of it.

00:08:10.440 | Everything was brand new.

00:08:11.960 | And even still, there was issues with the home.

00:08:16.120 | During the first rainstorm, I see Robin calls me.

00:08:21.120 | I got trickling down.

00:08:23.000 | I'm like, oh, fuck.

00:08:24.880 | And it's not just that.

00:08:28.440 | There have been, not that I got a lemon,

00:08:30.480 | but just shit happens with houses.

00:08:32.280 | And the older your house,

00:08:34.360 | the more likely you are to have expenses and pains.

00:08:39.000 | So you might think that it makes sense financially

00:08:45.120 | to buy a smaller home, an older home.

00:08:47.520 | But I don't know if that's necessarily

00:08:50.080 | a wise financial decision.

00:08:52.720 | - So I think there are some pros about building new.

00:08:55.160 | We built a new house in 2017.

00:08:57.180 | You have better materials that can potentially last longer.

00:09:00.480 | And like you said, fewer repairs.

00:09:02.160 | With a lot of new houses,

00:09:03.000 | you get some sort of warranty

00:09:03.920 | that could be 12 or 24 months,

00:09:05.240 | or if something goes wrong,

00:09:06.120 | and even little dings in the wall,

00:09:07.560 | they'll come fix them after a year.

00:09:08.400 | - What if there's a line in your home?

00:09:10.440 | - What if there's a line on your TV, right?

00:09:12.440 | - Wait, but hold on.

00:09:13.280 | But most people, well, it depends where you live.

00:09:15.640 | Where I live, the idea of building a home

00:09:18.920 | and helping design it or pick out stuff,

00:09:21.600 | is that what you did?

00:09:22.420 | You picked out materials?

00:09:24.000 | - That's one of the potential downsides.

00:09:25.040 | The potential upside is you get to make it your own.

00:09:27.000 | The downside is there are so many decisions

00:09:29.700 | you need to make.

00:09:30.540 | I didn't know you had to make the decision,

00:09:32.060 | well, what color is the grout gonna be between the tiles?

00:09:34.860 | And what kind of light switches do you want?

00:09:36.660 | There are so many.

00:09:37.500 | So if you're a person who doesn't like that,

00:09:39.100 | that could be a downside.

00:09:40.780 | - But that, where I live,

00:09:42.420 | is not in the cards for most people.

00:09:44.060 | Certainly wasn't for me.

00:09:45.100 | - So yeah, if you could--

00:09:46.660 | - No, I'm saying financially.

00:09:48.100 | - Oh, right, financially.

00:09:49.340 | - Like to build a home and start picking stuff out,

00:09:52.800 | I don't, I mean, that's very, very rare where I live.

00:09:55.460 | Most of the time, it's a builder,

00:09:57.360 | and you go into the house and it's done,

00:09:59.340 | and then you can do what you want.

00:10:00.180 | - And I think one of the upsides

00:10:01.760 | in this current real estate market,

00:10:03.400 | if things remain hot,

00:10:04.640 | is if you buy new, you're not outbidding anyone.

00:10:06.840 | You're not gonna get outbid, potentially.

00:10:08.360 | Like, you know going in.

00:10:09.840 | Like, so if you put a deposit down to build a new house,

00:10:12.900 | no one's gonna come out and outbid you

00:10:14.080 | like you would for a single-family home

00:10:15.960 | and an existing family home that you could get outbid on.

00:10:18.880 | - The question here,

00:10:21.420 | the question here is what's gonna hold more value, I think.

00:10:25.360 | Is it buying an old home in an established neighborhood

00:10:28.700 | or building a new home in a newish neighborhood?

00:10:32.000 | Was that the gist of the question?

00:10:33.600 | - Yeah, and I would think holding value-wise new, probably.

00:10:36.320 | A lot of it depends on your style, too,

00:10:37.800 | 'cause some people like the charm of older homes

00:10:39.360 | that you don't get anymore.

00:10:40.400 | They don't want the modern stuff.

00:10:42.520 | - Not to pull a Ben Carlson,

00:10:43.640 | but don't you think the answer to this question

00:10:45.100 | is it depends?

00:10:46.240 | It depends on the neighborhood.

00:10:47.680 | - Yes, I will say from personal experience,

00:10:49.440 | buying a new home,

00:10:50.440 | I think it saves you a lot of years of headache and pain

00:10:54.480 | of having to fix stuff.

00:10:56.200 | There's a lot of stuff you just don't have to worry about

00:10:58.140 | for a long time.

00:10:59.680 | - Yeah.

00:11:00.520 | - A new roof, a new water heater,

00:11:01.360 | all that kind of stuff you don't have to worry about.

00:11:03.080 | - Am I getting kicked out now?

00:11:04.280 | - Yeah, see you later.

00:11:05.240 | - All right, bye.

00:11:06.080 | - Duncan, it's question three.

00:11:07.600 | - Okay, so next up we have one from Alex,

00:11:12.100 | and so Alex is writing in about municipal bonds.

00:11:14.720 | He says, "One asset class that I haven't wrapped my head

00:11:16.760 | "around is municipal bonds.

00:11:18.380 | "Are they important, a good addition to the portfolio?

00:11:21.560 | "If so, what are the metrics

00:11:22.900 | "that I should be looking for as an investment?"

00:11:25.680 | - All right, yeah, we have the wrong one up there.

00:11:26.520 | - Oh, sorry, yeah, that's the wrong question

00:11:28.280 | popping up there.

00:11:29.120 | - Whatever. - Yeah, there we go.

00:11:29.960 | - All right, simple one.

00:11:30.780 | So I wanna bring in,

00:11:32.480 | because municipal bonds have some tax benefits,

00:11:36.680 | I wanna bring in our tax expert here, Bill Sweet,

00:11:39.360 | who we've had on the show before,

00:11:40.960 | to talk about some of the tax benefits of muni bonds.

00:11:43.120 | Bill, here's what I know about muni bonds.

00:11:46.240 | So thinking through the tax equivalent yield,

00:11:49.740 | and we use muni bonds for client portfolios,

00:11:51.760 | and some of the benefits there,

00:11:53.920 | you can also create a bespoke portfolio

00:11:55.400 | depending on what state you're in.

00:11:56.560 | So what are the thought process here

00:11:58.320 | of creating a muni bond portfolio?

00:11:59.920 | - Yeah, last time I was on the show, Ben,

00:12:01.680 | you said I had Roth IRA conversion tattooed to my back.

00:12:05.640 | It's actually tax equivalent yield.

00:12:07.640 | - All right. - And that's the topic here.

00:12:09.640 | Let's start with a bond.

00:12:11.060 | What's a bond do?

00:12:12.440 | You give somebody $100,000, let's say, a treasury,

00:12:15.080 | they pay a 3% coupon, that's $3,000 of interest.

00:12:18.400 | Problem with that type of investing,

00:12:20.200 | if you're in a non-qualified account,

00:12:21.900 | so not an IRA, not a 401(k),

00:12:24.360 | you gotta pay income tax, ordinary income tax,

00:12:27.000 | on that coupon yield.

00:12:28.440 | And so let's just say somebody's at 33%,

00:12:31.040 | federal and state combined,

00:12:32.480 | they're giving back 1,000 out of that $3,000

00:12:35.160 | of interest annually in taxes.

00:12:37.560 | And that means their tax-adjusted yield

00:12:39.320 | is only 2% of a 3% bond.

00:12:42.100 | Municipals have this really, really neat feature,

00:12:44.560 | which is tax exemption.

00:12:46.160 | And so you do not have to pay federal income tax

00:12:48.360 | on just about every type of municipal bond

00:12:51.160 | because of the way that the federal system works,

00:12:53.720 | is that there are certain revenues

00:12:55.080 | that are tax-exempt at the federal level

00:12:57.040 | and vice versa at the state level.

00:12:58.880 | And so that 3% coupon bond, if it's a municipal,

00:13:02.000 | you're not paying tax on it,

00:13:03.200 | you get to keep all $3,000 of that interest.

00:13:05.640 | There's no tax.

00:13:06.560 | - And are there certain states where you're better off,

00:13:08.920 | like in a high-tech state like California, New York,

00:13:10.560 | you're better off with muni bonds, technically?

00:13:12.480 | - Yeah, I mean, I think so.

00:13:13.740 | And there are certain time periods

00:13:15.000 | when that's true and it's not.

00:13:16.320 | And I think right now, there's some harmony,

00:13:19.240 | but certainly like back in 2017,

00:13:21.120 | we saw yields on municipals like nationally about 3%.

00:13:24.800 | And a 10-year treasury would get you somewhere around two.

00:13:27.480 | And so if I'm a high-income taxpayer, you're exactly right.

00:13:30.440 | If I'm in New York, if I'm in New York City,

00:13:32.600 | and I'm paying 14% of my income tax to the state level

00:13:36.160 | in addition to the federal,

00:13:37.520 | and I buy a New York bond, right?

00:13:39.320 | So that's part of the problem

00:13:40.440 | is you need to sort of look in state

00:13:42.440 | to get that state, that triple tax exemption

00:13:45.080 | at the federal, state, and local level.

00:13:47.680 | That can save a taxpayer a lot, as much as 50% on that side.

00:13:51.520 | And so if I can keep all of my 3% yield,

00:13:53.880 | the tax-adjusted yield on that,

00:13:55.760 | assuming a 50% tax rate, is actually 6%.

00:13:59.080 | And so if I'm out there, my choices are 6% out there,

00:14:01.960 | a 3% municipal, that's equivalent.

00:14:03.720 | But if my choice is three or three,

00:14:05.680 | I'm much better off the municipal bond.

00:14:07.360 | Again, assuming this is a non-qualified account.

00:14:09.960 | This doesn't apply to IRAs, 401(k)s.

00:14:12.400 | - Right, and I think getting to the point

00:14:14.080 | where people become concerned,

00:14:15.960 | and I think in recent years, especially after 2008,

00:14:17.960 | people were worried, well, if I buy these muni bonds

00:14:19.640 | and my tax or my state or city defaults, I'm screwed.

00:14:23.480 | I think actually at this point,

00:14:24.560 | you have to feel a little better about them

00:14:25.640 | 'cause all the states and municipalities

00:14:27.600 | seem to be in better shape because of the pandemic,

00:14:29.320 | all the fiscal support that they got.

00:14:31.080 | - Yeah, I agree. - They're coming out

00:14:31.920 | of this thing better than they were before, right?

00:14:33.160 | - Yeah, and you're seeing retail sales rebound, et cetera.

00:14:35.720 | It's important when you're looking at these things,

00:14:37.400 | assuming you are looking at individual bonds,

00:14:39.840 | there are two real types.

00:14:40.920 | One is GO, general obligation,

00:14:43.120 | and that's exactly, Ben, what you're talking about.

00:14:44.960 | That's generally supported by the revenue,

00:14:46.600 | sales taxes, mortgage taxes, et cetera,

00:14:49.360 | of your local municipality.

00:14:50.680 | However, there's another type of bond,

00:14:52.600 | a sort of special purpose bond

00:14:54.160 | that's tied to a revenue source.

00:14:55.440 | So where I live, I'm about 10, 12 miles

00:14:57.960 | from the New York State Thruway.

00:14:59.320 | The Thruway collects tolls, and New York State sells bonds.

00:15:02.080 | The Thruway Authority sells bonds

00:15:03.320 | that are supported by those tolls.

00:15:05.000 | Pros and cons of each, you have to evaluate them.

00:15:07.240 | We have a third-party manager do that for us,

00:15:09.360 | and they're great at it.

00:15:10.960 | But very generally, I think it's a great consideration

00:15:13.720 | if you're a high-income taxpayer,

00:15:15.680 | if you're looking for a way to pick up a little bit of yield.

00:15:18.120 | I think they're a great complement to other fixed income.

00:15:21.400 | - And I agree that you want a funder or professional

00:15:23.000 | doing this, 'cause they're liquid,

00:15:24.200 | they're hard to understand.

00:15:25.240 | Buying bonds, you know, is not easy.

00:15:27.480 | Duncan, next question.

00:15:28.400 | We got one more.

00:15:29.360 | - Okay.

00:15:30.960 | So our last question is I'm 46 years old,

00:15:35.960 | and I want to be financially able to retire at 55,

00:15:40.380 | but won't be able to until I'm 62.

00:15:42.920 | In 2015, I opened a TD account and took $50,000

00:15:46.320 | and bought 100 shares of Google.

00:15:48.320 | Last summer, I took another 401(k) account that I had

00:15:51.480 | to move since I was changing jobs

00:15:53.000 | and bought $20,000 of CrowdStrike.

00:15:54.960 | Thanks, Josh, they put.

00:15:56.760 | These are my retirement investments,

00:15:58.120 | $350,000 in a Target Date Fund,

00:16:00.400 | and a 401(k), 35(k), and a 403(b) Target Date Fund,

00:16:04.240 | 100 shares of Google, 175 shares of CrowdStrike.

00:16:07.480 | My concern is that I have about $700,000

00:16:10.040 | in 403(b)/401(k), with half being in two stocks.

00:16:14.560 | At what point do I need to redistribute

00:16:16.200 | my retirement accounts?

00:16:17.860 | - Great question.

00:16:18.700 | Let's bring Michael back in here, too,

00:16:19.520 | 'cause this is something we deal with a lot,

00:16:21.000 | and Michael, I know, has dealt with this, too,

00:16:23.200 | on our direct indexing platform.

00:16:24.800 | - Very common question.

00:16:26.540 | - Yeah, this is, and I guess, so this is the whole thing,

00:16:29.620 | like, yeah, you concentrate to get rich,

00:16:31.120 | but you diversify to stay rich.

00:16:32.220 | So I think people know they need to do this at some point,

00:16:36.000 | but, Michael, you've talked to a lot of clients, too,

00:16:37.480 | on this, that they go, well, I don't want to sell early.

00:16:39.440 | What if it keeps going up, right?

00:16:41.240 | So it's like, how do you work through this decision

00:16:43.160 | when someone knows they have to diversify,

00:16:45.160 | but they have potential tax implications,

00:16:47.400 | and then they also have potential regret

00:16:49.440 | that comes from this?

00:16:50.260 | - Yeah, yeah.

00:16:51.100 | So two things I'll say.

00:16:52.080 | One is a nice framework to work through this

00:16:55.240 | is regret minimization.

00:16:56.600 | You're obviously not gonna sell at the top, right?

00:16:58.440 | Probably not.

00:16:59.440 | So what feels worse is that you start to sell,

00:17:03.800 | and the stock continues higher without you.

00:17:06.240 | Yeah, it sucks.

00:17:07.360 | Or you decide not to sell, and the stock drops.

00:17:12.280 | You're gonna feel like an absolute asshole.

00:17:14.080 | Like, in my opinion, this is an easy decision.

00:17:17.520 | But it's not an easy decision,

00:17:19.480 | because Google and CrowdStrike,

00:17:22.320 | and ostensibly any other stock that somebody's asking about

00:17:24.800 | that they're having difficulty parting ways with,

00:17:27.220 | has done incredibly well,

00:17:28.960 | so they feel some sort of affinity to it, as they should,

00:17:31.560 | and they're worried that, A,

00:17:33.480 | what are they gonna put their money into?

00:17:35.000 | What's gonna do better than Google?

00:17:36.280 | What's gonna do better than CrowdStrike,

00:17:37.360 | or pick your stock?

00:17:39.000 | But to me, the risks are asymmetric to the downside.

00:17:44.000 | This is very clear.

00:17:46.160 | So, okay, if you're wrong,

00:17:47.720 | listen, it's not gonna feel good.

00:17:50.200 | But there's too much on the line to tie your future

00:17:54.060 | to the fate of two stocks.

00:17:55.640 | I don't care what stocks they are,

00:17:57.800 | 'cause for every Tesla and CrowdStrike and Google,

00:18:00.760 | there are millions that have met the dustbin.

00:18:05.640 | - There's also a certain point where I'm gonna say,

00:18:07.440 | you kind of already won

00:18:08.280 | because you picked these stocks when you did.

00:18:10.040 | You've done great.

00:18:10.880 | If they keep doing well, that's too bad.

00:18:11.720 | But Bill, what do you think about the tax implications

00:18:13.280 | of this?

00:18:14.120 | 'Cause it sounds like these are in taxable accounts,

00:18:14.940 | so you've got big gains you're dealing with.

00:18:16.500 | How do you think about that?

00:18:17.440 | - Yeah, it's a great question.

00:18:18.360 | But to echo your point,

00:18:19.560 | if you've won the game, stop playing.

00:18:21.360 | So that's number one.

00:18:22.600 | That said, this client is nowhere near retirement,

00:18:24.920 | this listener.

00:18:25.780 | And so, if that's the case,

00:18:27.280 | it's not an all-or-none thing.

00:18:29.440 | Taxes are a big consideration.

00:18:31.300 | And so, if you've held those stocks for less than a year,

00:18:33.480 | you're looking at short-term capital gains.

00:18:35.360 | I'm not interested in that.

00:18:36.440 | I don't think people are generally.

00:18:38.040 | So I definitely wait a year,

00:18:39.240 | but my advice would be it doesn't need to be all-or-none.

00:18:41.760 | And so, if a tax strategy might be,

00:18:43.520 | let's look at the tax brackets.

00:18:44.840 | When do I hit the next capital gains tax bracket?

00:18:47.760 | Am I earning less than $52,000?

00:18:50.260 | Therefore, some of my capital gains might be at 0%.

00:18:53.520 | Maybe use the tax code as a way to sort of solve

00:18:56.360 | for the behavioral problem that Michael indicates.

00:18:58.480 | And it doesn't have to be all-or-none,

00:19:00.280 | but this listener needs a plan.

00:19:01.780 | You gotta get out of those stocks.

00:19:02.800 | You gotta diversify.

00:19:04.380 | If not now, when?

00:19:06.000 | - And one of the ways we do this, right,

00:19:07.080 | is sometimes we do people,

00:19:09.120 | it's like the opposite of dollar-cost averaging.

00:19:10.720 | We leg them out of the position instead of legging in.

00:19:13.440 | So it takes a while, right?

00:19:14.600 | - Exactly, exactly.

00:19:16.360 | - I just wanted to add,

00:19:17.200 | didn't one of you on a recent Animals Period

00:19:19.000 | say something about the percentage of stocks

00:19:20.960 | that are down every year?

00:19:22.680 | - It's like 30%.

00:19:23.760 | - Yeah, so it's--

00:19:24.600 | - Even in an up year, there's stocks that get,

00:19:26.680 | we've learned in the last few weeks,

00:19:27.960 | there's stocks that get crushed even during a good market.

00:19:29.840 | - And there's that great longboard asset management study

00:19:32.520 | that shows that something like 90% go to zero,

00:19:35.160 | not all at once, right, but over time.

00:19:37.040 | Think about the S&P 500 of 50 years ago.

00:19:39.600 | How many of those stocks survived today?

00:19:40.960 | What is the, what's the survivorship rate?

00:19:43.000 | - I don't know what those numbers are,

00:19:44.160 | but 2/3 of every stock underperforms the index.

00:19:47.380 | - Right.

00:19:48.220 | - Crazy.

00:19:49.040 | - And the ones that do outperform give, you know,

00:19:51.280 | typically do so with a very bumpy ride

00:19:53.080 | that you don't need to expose yourself to.

00:19:54.720 | - Diversify or die, listener.

00:19:57.120 | - Yes, it's unfortunate.

00:19:58.400 | You give up the home runs,

00:19:59.440 | but yeah, you're preventing yourself from the strikeout.

00:20:02.120 | Okay. - Yep.

00:20:03.480 | - Anyone have any thoughts today?

00:20:04.880 | I know we have some people in the live stream.

00:20:06.960 | Leave us a comment.

00:20:08.320 | Michael's ego is a little too fragile to read the comments.

00:20:11.000 | I still read them. - Sure.

00:20:12.120 | - Right, it's okay.

00:20:13.800 | But I sent him the good ones that you wrote about him.

00:20:15.760 | - I will like every single comment that you post.

00:20:17.960 | I will hit like on it.

00:20:19.000 | - Yes, I have a question for the show.

00:20:20.400 | Email us, askthecompoundshow@gmail.com.

00:20:24.800 | Hit the subscribe and like button

00:20:26.000 | 'cause that's like an adult report card for us.

00:20:27.380 | That's how we get our A's.

00:20:28.880 | Don't forget to check out idontshop.com

00:20:30.680 | for all your compound needs.

00:20:31.880 | Compound shopping needs.

00:20:33.000 | My favorite one, I think, is Ben doesn't drink coffee mug.

00:20:35.760 | Right, it's an Animal Spirits coffee mug.

00:20:37.080 | - That's a good one.

00:20:38.080 | - Yeah, we'll see you next time.

00:20:41.000 | - Thanks, everyone. - Thanks, guys.

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Is a 90/10 Portfolio Too Risky For Retirement? | Portfolio Rescue

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