- Welcome to Portfolio Rescue. I am joined today, as always, by Duncan Hill. Duncan, you look like you're using a switchboard at Santa's secret workshop. - Yeah. - Looking good. - Basically what I'm doing. - We have a show every week where we answer questions from you, the viewer.

If you have a question, remember, askthecompoundshow@gmail.com. Duncan, let's do it. - Okay. So, first up today, we have a question regarding our recent Tom Lee video. So, for The Compound and Friends. So, if you haven't seen that yet, go and watch it after this, obviously. But, so, this question is, "I watched The Compound and Friends where Tom Lee discussed his prediction about demographic effects on the S&P 500's performance.

As a Gen X-er who got burned in the GFC, I'm happy to ride the wave with millennials, even if S&P 19,000 for 2029 seems ambitious. I also heard on CNBC that millennial millionaires hold 25% of their wealth in crypto. My question is whether the potentially limitless supply of cryptocurrencies might divert millennial investments away from the S&P and impact performance.

While there have always been alternatives to the stock market, they existed in more finite supplies, like real estate, art, gold. Could the supply of cryptocurrency and millennial adoption derail the S&P market wave?" - A lot going on here. I like this one. If I was on a podcast, I would say there's a lot to unpack here.

But I'm not, so I'm not gonna say that. All right. I did a little research here. Total financial assets held by individuals, this is excluding real estate, excluding liabilities, at the end of 2020 was around $250 trillion. So, crypto right now makes up around $2.2 trillion in market cap.

That's all of crypto. So, that's like 0.5% of global financial assets. On the one hand, very, very small in the grand scheme of things. On the other hand, it's really only been a financial asset for, I don't know, five years, legitimately. And all the money from actual wealth managers is only now coming in.

So, obviously, you could make the case that's going to grow in the years ahead. Here's the way I'm thinking about this, as a way to be a stopper for the stock market. Millennials really won't have much of an impact for a while, for the simple reason that they don't have a ton of assets right now.

So, John, let's do a chart on here of wealth by generation. So, this shows baby boomers hold 53% of financial assets right now. This is in the U.S. Gen X holds 26%. Millennials have less than 5% of financial assets. Obviously, eventually, a lot of that money from the boomers, if they don't spend it all and go to Vegas and blow everything before their kids get it, a lot of that money will be passed on to the next generation.

But it's going to happen at a glacial pace. It's going to take a while. And obviously, you have the fact that millennials are coming up, and they're going to be in their peak earnings years, and they're going to be saving more. So, they could divert some more money to crypto.

But it's going to be a while. I would actually be far more worried about other asset classes before I got to worry about the stock market. Gold is the easiest one, right? I actually think millennial/Gen Z digital gold is probably the most compelling investment thesis for Bitcoin at the moment.

So, gold is $9-10 trillion, depending on how you count it. Is it possible that Bitcoin and all crypto could get there? I think that's, especially for Bitcoin, as the digital gold, I think that makes sense. Next we have money markets or savings accounts. How many young people these days love having their money in a bank savings account that earns 10 basis points?

Or a money market account at a brick-and-mortar bank? Even if you go to an online bank account, you're talking 50 basis points. Let's say interest rates remain low. That's a possibility they could remain low for a long time. If they're not going to rise now, when economic growth is going crazy and inflation is going crazy, I really don't know when they're going to rise.

So, could you see things like stablecoins take the place of money markets, or at least for young people? Or savings accounts? Now, obviously, stablecoins will probably need some sort of regulation first. They don't have the FDIC insurance on them. They're paying much higher yields than anywhere else. You can get 8-10% in a stablecoin right now.

Obviously, if there is some regulation and more people pile in, those rates' yields have to come down. But let's say in the future you could get 4-5% in a stablecoin as a savings account vehicle, versus less than 1%, less than 50 basis points in a savings account with a bank.

I think that's way more compelling to me. How about this? A status symbol for a lot of boomers starting in the '90s, really ramping up in the 2000s, and then the 2010s for sure after the global financial crisis was hedge funds. If you count the number of Wendy's and Chipotle's in the United States right now, there are more hedge funds than those two combined.

There's 10,000 hedge funds in the world right now. Will millennials really want to put their money there when they can have maybe something more exciting in crypto, especially with the abysmal returns we've seen in hedge funds, especially with the fees they charge? I still think that all those other avenues would probably be disrupted much faster than the stock market assets.

And if you look at crypto, it's still five to six times more volatile than stocks. You still can't put crypto in a 401(k). Maybe that's coming eventually. You can't do it now. I suppose you could make the argument, "Well, listen, young people have grown up with crypto. They don't care that it's five to six times more volatile.

They're used to the 24/7 markets. What's the Bain quote, Duncan? You think darkness is your ally. You merely adopted it. I was born into it. Molded by it. Is that right?" Something like that. So, you could make that case. But I still think that all these other things, crypto has a much better chance of disrupting them than the stock market.

And I think crypto and stocks could actually go hand-in-hand in a portfolio. That makes more sense to me. Getting back to the unlimited nature of crypto, it is kind of funny that there's this abundance of scarcity. The initial draw to Bitcoin, especially, was scarcity. And now we have a million different coins.

And this person is right. You can keep creating coin after coin after coin. But I think, eventually, that's all going to go away. So, the analogy I want to make here is the automobile. The first car manufacturing company I think came out in 1895. Cars really ramped up. By the 1900s, from 1900 to 1910, you had 250 new automakers came on board as new companies.

From 1910 to 1920, you had another 150, 160. Apparently, this is Wikipedia, so take it for what it's worth, but there's been 3,000 car companies founded in the United States since then. 3,000. By 1950, there were three of them, basically. Ford, Chrysler, and General Motors. You had the big three.

Now, maybe -- and they had that for, I don't know, 10, 20, 30 years by the time Honda and Toyota started really making some headway in the 1970s, 1980s. Now, maybe you have eight to 10 car manufacturers that control the entire market share. I think you're going to see that same dynamic play out in crypto, where, eventually, a lot of these ones that just, for a while, you realize there's no use case for them.

There's something better that comes along. A lot of the smaller ones just drop off or go nowhere. I think you're going to have a few use cases where you have these certain protocols that are actually useful when these use cases come about. You'll have a handful of crypto projects that dwarf the other ones by far.

Those ones take this unlimited nature of it, and they make it so, why do you need to have so many of them? They can just dwarf them and get rid of them. That's kind of where I come on. I'm not worried about crypto taking headway from the stocks. I think that transformation could take a long, long time, even if millennials start doing it.

You start at, I don't know, a 5% to 10% allocation for most people that aren't totally crypto evangelists. That's kind of the way I'm looking at it. It's kind of funny that you have this divergence of people who are going into stable coins for the yield, but then, traditionally, people have been in crypto to try to get 1,000 X or something.

It's kind of interesting to see that playing out. Right. It's funny because money markets actually helped bring about Vanguard back in the day. That was their big asset. I actually think for adoption, for getting people who aren't in crypto right now, I think that's actually a pretty good use case as stable coins are the money market of crypto.

I think that's a good way to get people in. Alright, let's do the next one. This is one of our favorite questions we've got in a while. This is a fun one. I like this one a lot. This question is from Chris. "Let us know in the chat if you're a Magic the Gathering fan." Chris writes, "I have a massive Magic the Gathering collection and I'm looking to move it into something more liquid.

My collection was worth about $600,000, but I sold 170K worth of cards in 2021. I spent a large chunk of that on enjoying life and put the rest into savings and a munibond fund. I'm considering selling another large chunk of my collection in 2022. If I sell, what's the best way for me to put that cash to work?" Then the second part of that is, "Or do you think they should even sell given how the collectibles market is looking right now?" $600,000 worth of Magic the Gathering.

Wow. Duncan, what is your experience with Magic the Gathering? Dungeons and Dragons, basically? There's definitely a lot of overlap there. I'm not an expert in Magic by any means. I was more of a Pokemon person. I do have a starter set. I have a starter pack of Magic from when I was in high school that I still have somewhere, so I should probably pull that out.

Chris also shared this site that allows you to get real-time pricing on Magic cards. There's this entire site dedicated to that. They have a ticker showing prices. There's a few things happening in the collectibles market. One was, the pandemic happened and people got bored. The other thing was, though, that the internet has really just made a market for this stuff that didn't exist in the past.

You can go look on eBay. You can go look on this site that you found and see what the prices are in real-time, which is kind of cool. I guess the one thing you have to be careful of here is the endowment effect, where you feel like things that you own are worth more simply because you own them, and you want to hold on forever.

I think, especially with something tangible like this, it's probably more of an emotional investment than anything, because you can see it and feel it. You're probably not picking it up too often, because you don't want to mess it up. It's probably in the packaging still, if it's worth that much.

But I think this huge collectibles boom in the market that we've seen since the pandemic, some people say, "Well, this is Beanie Babies, and look what happened then. It crested and it broke." And other people say, "No, we're actually making a market for these things. We can fractionalize them and sell shares in them." I don't know.

This is kind of like crypto, where there's so much stuff now, and it really depends on who's in the market for this and how much money they want to spend. I guess the bull case here is that there's so much money sloshing around, it doesn't matter. I think if you have a chance to cash out at a much, much higher price on this, and that's going to diversify you more.

For this person's portfolio, I think he said he has $1M in retirement accounts and $600K in Magic the Gathering cards. So, you have a huge, huge concentrated position in this one collectible that has some liquidity, but it's not as liquid as a financial asset. So, I think if you can diversify, that's just me.

Boring old me would rather diversify. And if there's a specific piece that you want to hang on to, that you think, "I think this is going to be worth so much more," or, "It just has special meaning to me," you can hang on to it. As far as what you want to put your money towards, this is why you have a preset asset allocation depending on your time horizon.

Then you don't really have to think about this question. If this is money that you know is going to be invested for a certain amount of time, then you have an asset allocation where you say, "My mix between stocks, bonds, cash, whatever, real estate, other investments, is going to be like this." And then you invest based on your asset allocation.

You don't try to overthink it and think, "Well, should I try to off that, or should I put this in some sort of fund?" Look at your asset allocation and what you have now, and then use that as your guidepost for this. I did get one other thing on this.

I actually asked a regular on the show, Bill Sweet, who's our tax expert, "How do taxes work on something like this?" Because taxes on collectibles are different. He said that there's actually a maximum rate. It doesn't work like just selling capital gains on a stock. There's a maximum rate of 28% on these, depending on your income level.

So, think through the tax implications of selling this as well, which is kind of crazy. It has its own little market, but that's the way things work. Kudos to you for holding this whole time. I'm sure he's seen a massive increase in this, and held it for a long time.

Wathen: We should also add that Chris mentions that they still play, still love Magic. They still have a collection of cards that they're keeping. These are other cards that they're getting rid of. So, yeah, pretty cool. That's something that you enjoy over the years. I'm guessing probably for a very long time, could actually end up paying off in that regard.

Lewis: If you do sell, let us know what you get for this stuff. Please don't come back and blame me if it's worth way more than 20 years. But, that's my thought on it. Alright, let's do the next one. Wathen: Up next, we have a question from a young financial advisor.

"I'm a new financial advisor at 25 years old, and I'm at an independent financial planning firm in California. I'm on a contract where I have to produce X amount of insurance in three years. I'm finding it difficult to build a client base and get assets under management early on.

I've built great relationships with centers of influence and receive referrals somewhat consistently. However, the lack of pay from insurance and the non-existent AUM is making me second guess where I am career-wise and financially. Is it worth going to a discount brokerage and getting a salary and incentives, or should I look into buying another book of business, or should I just stick it out for a few more years?" I should also mention, we covered this question on another show a couple months back, but we wanted to dive a little deeper into this one.

Lewis: Yeah, I want to go a little deeper, because I've never done the eat what you kill kind of thing, but we have some people in our firm. Jonathan Novy, who's our resident insurance expert, grew up in the insurance industry, and I'm sure you know a lot about this.

I've had friends who've had these jobs, especially right out of school, like this young person, where it's basically like, go through your list of contacts, find your friends and family, sell them insurance. I think my brother-in-law, as a single guy in his 30s, was pitched from a friend for life insurance.

But I guess that's how it works, and if you don't know how this works, why don't you explain from your perspective how this stuff works in the insurance industry and why this could be potentially difficult for this young financial advisor? Steele: Sure. First, I want to say to him, you're not alone.

I mean, hell, Josh wrote a book about the incentives, or how incentives in this business are not necessarily aligned for the end user. But first thing to consider with this is, I know it's hard to realize this, but you're not at an independent financial planning firm. You're at a place that requires you to sell insurance.

I'm not saying it's bad. I'm saying just understand what it is that you're doing. And I was at a place like that. I started at an insurance company, broker/dealer, back in 2007 when I got in this business, as my colleague Brian Rosen, who's with us now. Maxfield And I assume they gave you quotas, probably?

Steele So your benefits and your payouts were based on how much of the proprietary crap that you sold, whether it's insurance products or annuity products or whatever. So it didn't take us long to realize then that we were at a place where the incentives weren't aligned for the end user.

And that's the story of learning how to be in this business for a very, very long time. You're not alone who sent this question in. It used to be a long time ago that if you wanted to get into what was then the brokerage business, you went to some wire house and you got hired because your family had connections and they figured you could sell your dad's friends some stuff.

And if you stuck around long enough, then you either stayed or you were gone and the "senior advisor" you work with kept the business. Maxfield So I guess you have to figure out whether you're going to be in sales or an advisor. But the thing to remember is that everyone is in sales in some aspect.

Steele Right, right. So it could be that the place is a decent place to learn. And he mentions discount brokerages in here. By discount brokerage, I'm assuming you mean things like Fidelity or Vanguard, which have actually not bad planning programs. And we have a colleague who was at Vanguard for a while, and he learned how to become a financial planner.

He got his CFP and now he works at RWM and talks to clients. So there's definitely a learning curve in this business. It could be that the place where you are isn't the worst place. And everything's a trade-off. And if you're at the point where you feel really awful about having to talk to every single person you talk to about buying an insurance product, then you shouldn't be there.

Maxfield Jonathan, you have my favorite definition of this. So tell me, tell the people again, what is your definition of insurance and kind of thinking through that way too? Steele Got it. So when it comes to insurance, this is the thing you have to realize. People buy insurance because there will be a financial impact on their family, were they to die or be disabled or need long-term care or something like that.

Our job as advisors is to figure out what that financial impact is. End of story. Measure that impact in dollars. And then if it is the kind of low probability high impact event that is a triggering event, then someone's going to insure that for you. But there is no like people don't need insurance.

People have risks that they're trying to manage. Insurance is just a tool that we use to help manage that. Maxfield I think a pretty good way of looking at this from the young person's perspective is does your insurance company expect you to sell only insurance to everyone for every single problem they have?

If that's the case, then that's probably not the kind of place you want to stick around at because insurance is not always the answer. It can be an answer for certain things, but it's not an answer for every financial problem someone has. Stewart Right. Right. And you end up at the kind of places and like the worst culprits, the places that are the guiltiest of having the really, really bad incentive structures are typically the captive insurance places where they try to convince you that you have some sort of moral obligation to sell insurance to people and that you're always doing something that's in their best interest by selling them an insurance product.

It's flat out not true. Maxfield Right. Stewart And like I said, I started at an insurance company broker-dealer back in the day, and it took us a short amount of time to realize, "Well, it's not perfect if you want to be a fiduciary." Maxfield Yeah. I think the biggest thing is this person's got to realize, "Do you want to be a salesperson that sort of eats what you kill or do you want to actually be a financial advisor?" There's nothing wrong with that.

There's great people who sell and do fine for themselves. It's just kind of getting your head around that. All right, let's do the next one. We had another insurance one for Jonathan. Okay. Up next, we have a question from Steve. "I'm 67 years old and about to retire. I live in the Midwest, have no mortgage, and have a relatively low cost of living.

I have enough savings to wait until age 70 to take Social Security so I can get the max. I own a Fidelity deferred annuity. My father forced me to invest in this account years ago when he realized I was going to be a ne'er-do-well adventurer," which sounds interesting. "The amount dropped to $299,000 in April 2020 but now stands at $461,000.

When I convert it, this annuity will provide the bulk of my retirement income so I live and die on how my money is invested at the time of conversion. I'm tempted to leave the allocation as is, 33% to 36% in bonds, 11% in international stocks, and the rest in U.S.

stocks. Is there any reason not to annuitize the account as it stands now? Am I missing something?" All right. Also, there's some stuff in here for the new boys watching. I feel like you should probably write down what kind of account he's even talking about there. Yeah, for sure.

And also, right away, Steve didn't have to tell us his age because he said "ne'er-do-well." How do you say it? Ne'er-do-well. That's definitely a boomer phrase, sorry, Steve. So the idea here, Jonathan, because an annuity is an insurance product, technically, explain to us what this is about the conversion factor.

Because even I'm a little shaky on this stuff. So how does this work? Is it in a certain account that changes over time and then you have to lock in a certain allocation and that's it for the rest of your time? Right. So it's not locking in a certain allocation.

What he means is, and let's look at annuities in general first, the specific thing that this guy's talking about. When he talks about like activating or annuitizing the contract, the cash value itself goes away for his use. So annuities, like everything else, are just a product and they allow you to engage in a series of trade-offs.

In annuitizing or activating the account, what he would get is the insurance company would pay him out a stream of payments or income every month for the rest of his life, no matter what. All right. So that lump sum is now effectively gone and it's being replaced by regular income.

Exactly. So it's akin to having a pension from years ago. I mean, I know not that many people have those anymore. The trade-off you engage in when you annuitize this kind of contract or buy something like a SPIA, a single premium median annuity, or a deferred income annuity, there's lots of this stuff swimming around in the world.

The trade-off you engage in is you give up liquidity to make sure that you don't run out of money. This is flat-out longevity insurance and you're making a trade. Were he to annuitize that contract and live to be 106, he is the winner by far. But what people don't quite understand is they'll say things like, "And if he's 67 and he annuitizes that now, maybe they're going to pay him 6.5% or something of his account balance every year." You're not earning 6.5% on your money.

The first many, many years of payments, the insurance company is returning your own money to you. Right. Yeah. If he hands over 300K or whatever it is, or 500K, whatever it is, at the beginning, that's that money coming back to him because it's the money he already gave them.

Right. And it's the tax treatment of payments on annuities like this is generally pretty good because you're only taxed on what's known as exclusion ratio because basically it's a return of your own money for a lot of it. Right. But it is a trade-off. Now, the interesting part of this question to me is it allows us to kind of figure out the planning challenge of the difference between being rational and reasonable or the difference between optimizing for math and optimizing for people.

It's not just the math. The math might say to you, if you invest that money, you could earn more over time and end up with more money at the end of your life. It may say that. But if it's true, and the assumption I'm making in here is that he has extra liquidity beyond what's in the annuity.

Right. If he has a big purchase come up, he might be out of luck. Right. But yeah, you're right. The psychological component is he gets this money and it's coming to him every month and he doesn't have to have any sort of other planning. He doesn't have to figure out asset allocation, any of this stuff.

It's taken care of him. And that seems appealing to me, especially for someone who may not have a huge retirement balance and have millions of dollars to pull from. It makes a lot of sense to me. Absolutely. If this is the kind of thing that allows him to do things like invest the balance he has, because effectively what you're doing when you're locking in the stream of income, that's the equivalent of a bond portfolio.

It's not liquid, but that's the equivalent. So it changes if you're trying to think of an overall household asset allocation. This makes your asset allocation more conservative with the fixed part of what you have. So it allows you to, if you want, invest the liquidity you have. And it's also important to remember that he said he's going to wait to take Social Security.

That's basically an annuity as well. So yeah, your point is do you wait? Do you do it now? It depends how quickly you want to lock in whatever your rate is going to be, basically. And if he's able to basically accommodate all of his lifestyle expenses with the annuity, and then the assumption you make is, based on what he wrote, that when he reaches age 70, he'll have more than enough to pay his bills with Social Security and with his annuity.

That means the liquidity he has is extra. It's bonus money. So this is a personal finance question, but yeah, that makes sense to me. It's interesting. One more thing to note about annuities. They get a really bad rap in the media, and they deserve that. It's not because the products themselves are bad.

It goes to the thing we were talking about in the earlier question. It's all about the incentives that go with selling them. This annuity looks like it's pretty good. It probably doesn't come with a massive sales charge or commission to the person who sold it to him originally. Annuities themselves are great.

It's the incentive structures that are built into the sale of annuities, which give them a really, really bad rap, which they deserve, for sure. Hard to know what you're getting into. I've got one more question for Jonathan before we go. Jonathan, what is the name of the steakhouse in Chicago that you took me to that you go every year for Christmas Eve for your birthday?

Oh, we go to Joe's. Joe's Steak and Seafood. Because that's your birthday, right? It is my birthday in two days. So, I will be going back there. It's a good one. I'm turning 50 in two days, so I intend to eat and drink for my country. Oh, nice. That's a great place.

What is it like? It's like they make the most money of any restaurant per square foot of any in the country or something, right? Right. So, prior to COVID, they were allegedly the most profitable per square foot restaurant in the country. I don't know what it's like now. I intend to contribute to that on Friday.

By the way, I'm looking at the comments here. I saw someone call me Ben J. Powell for my love of the Fed. Pretty good burn. Not bad. Remember, if you have a question for us, ask thecompoundshow@gmail.com. Leave us some thoughts in the comments below. I'd love to hear people's thoughts on their collectibles.

I saw a bunch of people talking about stamps, any other magic, the gathering, Dungeons and Dragons. I have some 90s sports cards that are all probably worthless because there was no scarcity back then. Thanks to Duncan for being nice and festive today. Thanks for Jonathan for his insurance know-how.

Remember, idontshop.com for all your needs. We're going to come back in the new year, right, Duncan? 2022, taking next week off. Happy holidays. Merry Christmas, everyone. Thanks for coming along. Thanks, everyone. Cheers, guys. See you in 2022.