(beeping) (upbeat music) - Welcome back to Portfolio Rescue. This is our show where we answer questions straight from you, the viewer. Our inbox is filling up. Duncan and I were talking before we got on here. Instead of people giving us their height and their weight when they email us and now they give us their salary, their asset allocation, their stock picks, all this stuff.

It's great, we love the fact that you guys are sharing so much information with us. Remember, if you have a question, askthecompoundshow@gmail.com. Duncan, I have one question for you. Is my sweater too hot for the YouTube algorithm? Is this pink too bright? - It could be. It might be an actual out of gamut color.

- I didn't use my color thing today. All right, what do we got? Let's do question number one. - Okay, so up first we've got one I think a lot of people will be able to relate to. So you've shown time and again that owning the market is a better strategy than picking individual names.

However, for people who enjoy the market and want to have some fun on Robinhood, what advice do you have for someone who's found themselves down 26%, now actually 28%, and 34% in their two biggest holdings, I may just keep averaging down but can never seem to find the bottom.

Historically, do most stocks come back from this kind of decline? Or does the data say to cut your losses even when it feels this painful? - Duncan, this one sounds kind of personal to me. - Yeah, it's for me. - This is a question straight from you. - It's actually for me.

- Which is great. But you're right. We're getting all sorts of questions from people saying, what to do now? All my stocks are down, even though the market is doing fine. I don't know what to do. I think part of this comes from the fact that a lot of people opened up their Robinhood account in 2020, maybe 2019.

Things were just way too easy coming out of that corona crash. So Jason Zweig had this mind-blowing stat. I think we've shared it a few times on some other shows. From the bottom on March 23rd, 2020, over the next year, 96% of all stocks in the US stock market, the Wilshire 5000 were up, which is basically unheard of.

That's not normal, even in a good year. So let's take a look at some of the stats I got here. So if you look at the S&P in a given year, so let's say last year, the S&P was up 29%, but 13% of the stocks in the index finished down.

And that's in a year when the S&P had a 5% drawdown at the worst. In 2020, the S&P was up 18%. 1/3 of the stocks were negative that year. So even in a good year, you should probably expect anywhere from 10 to 30% of stocks to be down. And this is one of the reasons that owning the market or owning a fund that's more diversified is so much easier because you can bank on mean reversion, right?

You don't have to worry about an index fund going to zero. A stock, not all stocks go to zero, but some of them just might not come back. So let's do, let's take a look at some examples, I think, of why it's so hard to figure out what to do in this situation.

So John, let's do a chart of Amazon. This is the drawdown profile of Amazon. So obviously Amazon fell 95% in the dot-com crisis, which was just an unbelievable buying opportunity. People look at that and say, "Well, this is why you always "buy individual stocks that are down. "Look what happened.

"It's one of the greatest performing stocks of all time." Let's do the Netflix one next, John. Netflix was down over 70% twice. Duncan, remember that time that Netflix decided to send DVDs and split their company into we're gonna do DVDs and then we're gonna do streaming. This is before streaming became huge.

And Netflix fell 80%. That was in like 2013, it wasn't that long ago. And so you look at these examples and you say, "Well, I have to buy then." Because the only thing to do is stock is down is buy. Let's do the next one. Let's look at Citigroup and AIG.

This is like the other side of that of, you know, when things don't go back. This is Citigroup and AIG. You can see those huge spikes into the 2000s and financial crisis. And then it's huge drop off and they've just never come back. These stocks are still down 90% from all time highs.

Now, these are obviously extreme examples, but I just kind of wanted to show what can happen. Now let's do like a more middle of the road, I guess. Well, maybe this is extreme, but let's look at Apple's price return here. So this is Apple over the last 10 years.

This is a stock that's up 1,200% over the last 10 years. It's experienced by my count seven different double digit drawdowns, including four separate losses of 25% or more. And this is in time when the S&P was down 25% just once. So even the best stocks are gonna get dinged at times.

So unfortunately, if you're owning individual stocks, you just have to expect this to happen. The problem is, like I've never read a good book on when to sell a stock. There's plenty of books about Warren Buffett bought American Express after the salad oil scandal, or Benjamin Graham bought Geico.

And you hear all these stories about like, when to buy a stock. And unfortunately, especially when you have more of a fun portfolio. So Duncan, you said this is like, I'm playing around, I'm having fun, I'm enjoying this. I think it's hard- - Was enjoying this. - Well, was at one time.

I think the reason this is so hard is because, let's say you're a fundamental analyst who's looking at stocks for your mutual fund, your hedge fund, your professional, or your technical analyst, or you're a quant and you have these rules. You have rules for when to buy and when to sell, right?

If you're a technical analyst, you buy when it's in an uptrend, you sell when it's in a downtrend. That's pretty simple. The variations of that can be different. But if you're a quant, you have these fundamental numbers where, if it hits your screen, you're in. If it's not in the screen anymore, you're out.

It's pretty easy, right? Even a fundamental analyst can look at all sorts of different financial statement stuff. But I'd say most people who are screwing around in the Robinhood account are probably buying stocks because it's something they use, it's something they like, it's a name brand. And maybe it's just something that they enjoy.

And so I think that's why a lot of people buy these stocks. And when you don't have a good reason like that, it's hard to know when it takes a dump, what do you do? It's just harder to know when to cut bait. So here's a stock that I own that's on a severe rollercoaster.

The name is not important because no one comes for my stock picks. I basically get all my stock picks from Josh anyway. So the name's not important. But I bought this stock in July. It had a really nice run. And then it went like parabolic when Facebook announced all this metaverse stuff.

And it was up 100% in like five months. Like awesome, I'm the greatest trader in the world. And then since the end of November, it's down 50%. So I did 100% up, 50% down, I'm back to where I was. And you're kind of like, what the, what was that?

Now what do I do? I'm right back where I started, which is better than a loss on an absolute basis, but it's kind of hard to know. And I think when you're an investor, there's a really fine line between discipline and insanity. And discipline is sticking to something where you're buying it on the way down, you're averaging in.

And insanity is you're losing all flexibility and now what am I gonna do, right? So it's hard to know because we don't know the future. Like which, even though all stocks get dinged a lot, especially on individual names, we don't know what's gonna happen and which stocks are gonna work and which ones aren't.

So I think I have some questions you can at least ask yourself. Like what's my threshold for pain as an individual investor? Is it 30%, 40%, 50%? I mean, if you're owning an individual stock, you should expect a minimum to see it get cut in half, once every few years, probably.

Not every stock, but most stocks, especially if they're like smaller and you're trying to catch a trend. Would I be thrilled to buy the stock at lower prices? Duncan, you said, well, I've been buying in and averaging down, but I can't find a bottom. - Yeah, it's like, because my mentality is that old mentality of like, well, I liked it back, you know, when it was at 20, now it's at 15, you know?

- And I guess as long as the story hasn't changed too much, you know, that kind of makes sense. I think you could probably set yourself some rules. I'm gonna buy it when it is down 30% from where I bought it. Then I'm gonna buy it when it's down to 40%.

So you can kind of not try to guess. Think you can take the guessing games out of it a little bit. And then the other thing is just like, do you have better investment opportunities elsewhere? Right, there's this mentality of, I'm just gonna wait until it gets back to break even, and then I'll sell, and then I'm done with this thing, and it's out of my hair forever.

But, you know, it's always much easier to sell a stock when you have a gain, 'cause you can at least lock in profits. Selling when your stock is down is much harder, because no one wants to look like an idiot for giving up on the stock that's the next Netflix, or Apple, or Amazon.

On the other hand, you also don't want to be in the next Citigroup. So I would look at it as an opportunity cost thing of, is there something else that I wanted to own that's better, or am I really happy this is down 30% or 40%, and I can buy it on sale, and see what happens to give myself a longer runway, and what kind of time horizon am I thinking about here?

- Yeah, and I mean, I guess selling at a loss, you at least can harvest some tax losses, right? That's the upside maybe? - There you go, tax planning. But yeah, but it's, again, there's no good books on this. Like, when to sell a stock that's down? Like, really, no one knows.

And so I think a lot of it has to do with other opportunities why you got into it in the first place, and how much pain threshold you can really handle. - Yeah, no, that's good advice. - Let's do another one. - Okay. So up next, we have the following.

I'm a 25-year-old currently maxing out my 401(k) in Roth IRA. This leaves little access in the budget for other savings, emergency fund not included. While I feel great about funding my retirement so strongly at this age, I have some concerns about being able to save up for big ticket items like a home, a car, et cetera.

Is there a point where I should consider reducing my tax-deferred contributions to bolster my taxable savings investments for these types of expenses, perhaps lowering my contribution to my employer's match? - First of all, kudos to this person for maxing out their IRA and 401(k) at 25. That's pretty well done.

I'm guessing that you're in the minority there. I do think it's tough if you're spreading yourself too thin with money that's not gonna be touched for decades. I get the idea of, like I've been a big proponent of, invest early and often and let compound interest be the wind at your sails, right?

But it can be tough if you're trying to save for a wedding or a down payment or something and all your money's going to retirement. I think especially if you've already done it, there's no shame in cutting back your max because you can always go back to it, especially if you're saving for a down payment and you're gonna save for two, three, five years.

If you've already built those good saving habits, I'm not that worried about going back to them because you can just take that money you were saving and plow it right back into the 401(k) or IRA when you're done and you hit your goal. So John, put up this chart here that I created for my book.

I looked at what does it take to become a millionaire if you're maxing out your 401(k). Now this assumed the 19,500 max. I think it's now 20,500. They upped it for the last couple years, so I wrote this a couple years ago. You can see how low the returns are if you start at an early age.

This is even at 30 where our listener here is 25. If you max out your 401(k) every year, and this isn't even including the IRA, it would take a 2% return over 35 years to get a million dollars. Obviously a million dollars is no magic number. In 35 years it's not gonna be worth as much.

This was just trying to show big round numbers. It doesn't take that much if you're maxing out your account. You don't need huge returns. So I think if you've already done it and you front loaded some of your retirement objectives and savings, I think putting it off for a few years is not gonna be that big of a deal because you know you can go back to it.

And there's also this thing of in your 20s, you don't want to have everything go towards your future if you can help it. You should have some money bucketed aside to travel and have fun and go out and not have everything go to retirement. So I love the fact that this person is maxing out their retirement at an early age.

But yeah, if you cut back a little bit, I think you've shown good saving habits. There's no reason you can't go back to it later. - Yeah, and they mentioned getting the employer match, which you guys always talk about being such a important thing. - Yeah, if you wanted to use that as your floor, that's probably a good place to go where you're still getting the 100% return from your match.

Yeah, always, always, always get the match. But otherwise, I think cutting back is not a big deal. If you've already shown you can max out your 401k and IRA. All right, question three. - Okay, so up next we have a question from Josh who writes, "I'm in the lucky situation to have an income "of around $200,000.

"I'm going to receive my annual bonus in January "with which I would be able to fully fund my 401k "for the year. "Normally, I would fully fund it "and then continue to contribute on each paycheck "via the mega backdoor Roth, "which I feel like needs some explaining. "Would you recommend continuing to fully fund the 401k "with my bonus in January, "or would it make more sense to dollar cost average "throughout the year?" - All right, so this is essentially a question about lump sum investing or dollar cost averaging.

Most people dollar cost average because they get paid on a set pay schedule, whether it's weekly, monthly, bi-weekly, or bi-monthly, whatever, and they just pay out of their paycheck. So lump sum thing doesn't matter. But this person got a bonus and they can say, "Hey, I can fund it up front." Doesn't make sense to do that.

I've written about this in the past. We get questions like this all the time from people who get an inheritance or get some sort of lump sum with a bonus. And even though I've written about this, I always refer people to a post from "Dollars and Data" by our own Nick Majulie.

So I thought I'd bring Nick on to talk about this because he wrote what I think is probably one of the definitive guides. He even calls it the definitive guide. So let's bring Nick on to hear what he kind of found on this sort of lump sum versus dollar cost averaging thing.

- Hello. - Nick, you've done the definitive guide. You've looked at this from a number of different places. I think you looked just the stock market. You looked at like a 60/40 portfolio, all these different things. What did you find in terms of what's the best route for people most of the time based on the baselines?

- I mean, yeah, most of the time, the trade-off you're looking at is risk versus return, obviously. So in this case, this person's trying to max their 401k. The max right now is like, let's say it's 20,500. Let's just say 20,000 for a round number. And in the post, I talk about like, if you were to first investing right now, all that 20,000 versus taking, investing over 24 months, so dividing that into 24 equal payments, a little under a thousand bucks each, you would have underperformed on average by about 9%.

So that's over two years, but this is a one-year case, 'cause he's like, do I max now or just for the next year? So in a one-year case, you're looking at four to 5% difference in return. So on 20 grand, that's like $1,000. On average, $1,000 you're gonna be out if you wait to go in versus if you just put it all in now.

And that's on average, of course, but that's the question. So to the reader, to the person who asked the question, like, are you okay underperforming $1,000 to average in and reduce your risk a little bit? If you are, then go ahead and go for it. If not, that's, but you can obviously underperform more, but that's kind of the main, that's the way I would think about it.

It's like 5% in a year, about 9% in two years. As you go further and further, you wait five years, the underperformance gets really, really bad on average. So- - I guess the thing, the thing that you're trying to say is most of the time stocks go up. - Yeah, that's basically it.

So I mean, every, on average, over the last 100 years, stocks are up three out of every four years. So if you can use that as your baseline, like 75% of the time, the stock market is gonna be higher in a given year. So that's the basic idea here, right, is that stocks mostly go up.

I guess the psychological component here is everyone always thinks to themselves, well, great, that data's fine on average, but I know I'm gonna be the person who puts my lump sum in and then the stock market's gonna roll over and I'm gonna look like an idiot. Right? - Yeah, that can happen, but here's the flip side to that.

Let's say you start averaging in, right, and the stock market really starts to tank like it did in early 2020. Are you gonna be able to keep averaging while the market's dropping? Are you gonna panic and say, you know what, I don't? So the only time when DCA beats lump sum is the time when you're precisely least likely to wanna keep investing 'cause the market's crashing.

You feel like you're gonna, you're just throwing, you know, good money after bad as it keeps going down. So if you're someone who's like, yeah, I can keep buying when it's crashing, then go ahead. But most people are gonna be like, oh, you know, maybe I should wait, and then you're gonna sit in cash.

And we've had, you know, I've talked to people that, you know, that have done this, that were like, they were in cash March 2020, and they were still in cash now, or they were in cash for a year or something. It's like they just, everything came back. - Yeah, it becomes addicting.

And I think the other point is, if you're saving your 401(k), and you have decades until you're touching this money, guess what? That lump sum versus dollar cost average, even if you make a bad lump sum payment, and you put it right in before market peak, you're gonna be fine decades into the future, right?

It's not going to hurt you. So most of the time, you're gonna do better. And even if you have the horrible luck, over the longterm, it's gonna kind of shake out over the averages where you're gonna be fine as long as you don't touch that money. - Yeah, and the differences are small.

I'm saying that the shorter the difference, like, let's say we said, okay, I'm gonna put it all in this month, or I'm gonna average over two months. The difference is so small, we shouldn't even waste our time discussing it. And even over the course of a year, 5%, like, that's a decent amount of money, but you know, 1,000 bucks.

So for this person who's maxing, is doing mega backdoor raffle, it probably doesn't make a difference for them. So just do what's gonna make you sleep at night better. For this person in particular, that's what I would say, you know, the numbers say to just put it all in now.

- Right. Duncan, we'll save the mega backdoor off stuff for Bill Suite for tax time, okay? - Okay, yeah, I have no idea what that means. So yeah, at some point we'll have to dive into that. - All right, one more question. - Okay, so this last one's kind of a fun one, because it's a challenge.

Convince me that leveraged ETFs like SPXL and TQQQ are not better holds than SPY and QQQ. I understand there's way more volatility both ways, but I cannot find a timeframe greater than a few months where they're not massively outperforming. Can you talk me off the leveraged wedge? - All right, I looked these up on Y charts, and when I looked at these graphs, I wanted to punch myself in the face, Edward Norton style from Fight Club.

So John, show the, this is the SPXL versus SPY. So this is a three-time levered versus the S&P 500. The SPXL, which is three times levered S&P, is up 3,000% since it's launched in late 2009. The S&P 500 is up like 400%. Oh my Lord. Now look at the drawdowns in the next one.

So this shows a drawdown. So this is like the downside of this. So you can see that the downside, the S&P fell 34% in a corona crash. The three times levered fell almost 80%. So that's your downside. Now let's look at this next one, which honestly kind of blew my mind.

This is a three times levered NASDAQ 100. It was launched in like 2010. It's up 17,000% and the NASDAQ 100 is up 800%, 17,000%. Oh Lord. So look at the drawdown on this one now just to show, even though it was down 70% in the lows. Nick, you've looked into this stuff too.

I have some thoughts on this, on what could potentially go wrong, but what do you say to these people that, and I honestly, Duncan and I get one to two questions like this every single week, easily. People, especially from young people, why shouldn't I just do this? So what is your take on these leveraged ETFs?

- I have two thoughts on this. The first thought is leveraged ETFs are great if you're lucky. So if you get lucky and you don't experience a 2008 scenario, a 1929 scenario where the market's down, you know, 50, 60 plus percent, then you're gonna be, look, it went down 33 and what was it, down 75, 80%?

- Yeah, don't you think in 2008, if it's down 50% it's probably down 95, I guess, the three times levered, don't you think? - Yeah, it's basically wiped out, yeah. So I think even, I think that's basically like a death scenario where it's just over. So that's the first thing, like if you're lucky, if you think you're gonna be lucky and we won't experience another 50, 60% plus drawdown, then it's great.

So that's the first thing I'm gonna say, which is obviously kind of ridiculous. The second thing I'm gonna say is, okay, if you're gonna lever, maybe do a little bit less, not do a three X, do something a little bit less. And why do I say that? So AQR, the quantitative investment management firm wrote this paper, put out this paper called Buffett's Alpha.

And they looked at like Warren Buffett, like one of the greatest investors of all time. He did use leverage with the insurance flow and all. I don't wanna get into all that, but he borrowed a little. He basically had money he could borrow to invest. And the highest his leverage ever got was 1.7 to one.

So he never went to three X. So even if Warren Buffett, let's just say 1.5 to make the numbers round. If Warren Buffett went to 1.5 on his leverage, why would you wanna be going to three or even two? So if there's something that's like a little levered, okay.

I think like that's not the worst thing. It's probably unlikely to go to zero. But if you do a three X, I think you're asking for some tough times ahead. So that's the only thing I'm gonna say about that. - This is like the Gillette thing from the Onion.

It was like, "F it, we're gonna do five blades." Right? - Exactly. - And I agree. So yeah, you're right. The worst case, also bull markets, there's very little volatility. And these things reset on a daily basis. What they wanna do is they wanna capture three times on a daily basis, then they reset.

And you get the daily basis. And the reason that these ones work better than like a volatility one, like there's some of these volatility VIX indices that they follow. Those things can get crushed. A lot of those are down like 99% from their highs because that churning of volatility, you sort of lose something there.

But it doesn't happen with the stock market as much because that's resetting. And it's a different structure, basically. But in a more volatile market, even if you move sideways and we get a ton of volatility, or we go down a little bit, again, these things in a more volatile environment, 'cause in a bull market, things are very little volatility, stair step up, things are okay.

When there's more volatility, these things could get crushed even in a market that doesn't go down that much. So I think this was the best case scenario for these funds. So when they rolled these funds out, it was probably the best timing ever. And I still can't get over that NASDAQ 100, three times number, 17,000%.

I would love to see if there's like one person who's held on that whole time. But it's, yes, a more volatile market could screw you over with one of these. And maybe you talk about sizing it right. Maybe instead of like replacing, if you're a person who's at a really ridiculously high risk tolerance, don't replace your whole S&P 500 holding with this.

Take a small percentage and do it and try it out a little bit and see if you can handle the wild swings because they're going to happen. So that would be my, again, we get this question all the time. I think it's easier to say you have a high risk tolerance for this stuff when we're in a bull market.

Talk to me when we're in a bear market and if you can really hang on for a 70, 80, 90% decline in these, 'cause that is not out of the realm of possibilities at all for this stuff. - Yeah, I mean, I think it reminds me of the Taleb's Turkey problem, right?

It's like the longer you, like you're getting more evidence. All these people are like, "Convince me not to do it." You have, every single day, you're getting more and more evidence why they should invest in it. But one day, sometime in the future, I don't know when, could start tomorrow, could start 10 years from now, there's going to be a massive crash.

And a lot of these people are going to get very close to basically all wiped out. And that's going to change everything, right? Turkey gets more confidence in their caretaker until the day they're killed, right? It's the same type of thing going on, so. - Yeah. Someone who says, "Talk me off the ledge," probably doesn't really want to do it, if we're being honest.

Okay, Nick, one more question. How are the supply constraints going for your book? Are we on time? When's the release date? - I think, yes, I think we're April 12th. We're on time now. Sorry, we had a two-month delay, but it will be out April 12th. Just keep buying, very easy to remember, so.

- All right, and where can people go to sign up for your newsletter? - Just my website, dollarsindata.com, and you'll see on the nav bar, it says newsletter, and you can sign up there, so. - All right, awesome. We'll have Nick back on when his book comes out, for sure.

Check out Of Dollars and Data for everything Nick's write. He's one of the smartest investment writers out there. Duncan's gonna be filling us in in the weeks and months ahead on his Robinhood portfolio to see how things are going. If you have a question for the show, askthecompoundshow@gmail.com. Help us subscribe, like, all that good stuff, and we'll see you next week.

- See ya. - Thank you. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music)