(beeping) - Welcome back to Ask the Compound. Our email here is askthecompoundshow@gmail.com. I'm here with the brightest man in America today, Duncan. Nice to see you. - I admit, it's not the best color combo. I should have probably looked in the mirror before I left the house. - I'm not one to talk about colors.

I don't mind having some bright colors, I think it looks good. - I just got excited, you know, we were at the NASCAR museum for the live recording, so I had to wear a NASCAR hat today. - You do look like you're at a NASCAR event. Today's show is sponsored by Rocket Money.

I've been using Rocket Money lately. I am a set it and forget it kind of guy when it comes to finances and other parts of my life. Like last night, I got home pretty late, I was on a trip, and I got an alert on my phone saying, "Take the trash out." I would have forgotten, 'cause they come really early in the morning to pick up the trash, and so I like alerts.

And the cool thing about Rocket Money that I've been using it is it gives you these alerts all the time. "Hey, there's an unknown transaction here. "It's a pretty big one. "Make sure this is legit." And I get probably one or two of those a week, and most of them are fine, but some of them could be like an erroneous transaction.

It's kind of great, and it also talks about upcoming recurring payments. So I still, I like to feel like the '90s sometimes, like the pre- and post-internet era. I still get GQ Magazine. It said, "Hey, your GQ Magazine is coming up." I like the physical magazine, and it said, "Your GQ Magazine is coming up," and the price is like $33 a year, and I'm like, "I can get it for like six." So I go in there, and Rocket Money helps me.

It's great. They try to lower your bills. RocketMoney.com/ATC to learn more. It's a really great way to manage your money, and I think they're shutting down these other personal finance sites, so Rocket Money's like the last one standing. I like it. - I guess everyone else is giving up.

They can't do it as well. - All right, let's do it. - All right. - Wait, so who's the NASCAR driver in your head? - So this is actually a Dale Jr. hat, so it was like a throwback to one of his dad's cars, a Dale Earnhardt car that had the SunDrop.

SunDrop, which apparently is a North Carolina soda. I'd never even thought about that, but yeah. - In Michigan, we call it a pop. In North Carolina, you call it a soda. - Maybe. I think everyone calls it everything. A lot of people call it Coke, like any kind of soft drink.

- That's a Southern thing, where you call any sort of soft drink a Coke. - Yeah, even though Pepsi's better, but you know. - All right. - Just kidding. - Agree to disagree. - Okay, okay. First up today, we have, "Can you please explain why financial media personnel "keep saying the 60/40 is dead, "but they are not saying target date funds are dead?" - This is a great, this is actually a really good question, because I've been kind of thinking about this lately.

It seems like the financial media loves to pour dirt on the 60/40, and a lot of it is recency bias. Last year was one of the worst years ever for a 60/40 portfolio. John, do a chart on here. These are the 10 worst calendar year returns for a portfolio compromising the S&P 500, 60% of which, and 40% in 10-year treasuries.

60/40, rebalance every year. Going back to 1928, by my calculations, 2022 was the third worst year ever. And the worst year ever was in the Great Depression in 1931. Second worst year ever was also in the '30s in 1937. So that's a pretty bad year. This was even worse than the worst downturn in the 1970s.

Maybe it would be worse then on a real basis, but that's pretty bad. The third worst year in 95 years. But, I don't know, bad things happen in every asset class and strategy. They're called risk assets for a reason, right? I don't think one year is enough to throw a strategy out the window unless it completely blows up.

So, I think a lot of people like to say, well, the 60/40 is broken 'cause bonds got killed, and it's not gonna work going forward, and correlations are higher. So ditch the simple and go with the complex. I do think that's part of it, is that the financial media complexity sells way better than simplicity, right?

You get way more eyeballs by selling something that's complicated and saying the simple thing just doesn't work because, put this other one up, John. So the media's been planning a funeral for the 60/40 for years. I wrote this piece in like 2017 and found all these stories going back to 2012 about why balance portfolios aren't gonna work anymore, 60/40 is dead, it's dead and buried.

I even wrote a eulogy blog post for 60/40 back in 2019. So, it's something that I think, it's just a stand-in for a simple portfolio 'cause there's just not much going on with it. It's very simple. It's also important to note that, I don't know if I've ever met anyone who actually has all of their money, 60% stock and 40% bonds, and that's it, right?

Most people probably-- - That would become active trying to maintain that, right? Because it changes so much. - Yeah, it's hard. But I mean, most people have some cash. They probably own some real estate. They may have some REITs or foreign stocks or foreign bonds or high yield or corporate bonds or munis or value stocks or momentum stocks or quality or dividends, whatever it is.

There's all these other strategies. And I think that's, in that sense, most regular portfolios are probably more like target date funds than anything else. And the other thing is, the difference is, target date funds actually change allocations over time. And so, I don't think they're as easy as a target 'cause there is some activity going on there.

So, I think that that's the thing. Activity and complexity sell better for financial media. So, it makes sense that the 60/40 is like the straw man or whatever. I also think we live in a world where pundits become famous for predicting a top or a bottom. Like, this is the bear market.

This is the bull market. This is the end. This is the beginning. It's gotta be a point in time, right? This thing is just getting over with. It's gonna fall off a cliff. This thing is just getting started. You're never gonna hear a headline about like, a boring diversified portfolio does well most of the time, but not all the time.

That's not a very good headline, right? There's also this contingent of financial pundits who like to say that, listen, the only reason a 60/40 portfolio has worked so well over the past 40 plus years is because inflation has been falling and interest rates have been falling. And that certainly was a tailwind, especially the bond side of the portfolio, 'cause you had such high starting yields.

But I looked at the period of 41 years from 1981 to 2021, which is basically the top in rates. Rates were falling most of that time and inflation was falling. We were in a disinflationary environment. And then I looked at the previous 41 years from 1940 to through the end of 1980.

So John filled this up for me. Returns were certainly better in the period from 1981 to 2021. 10.5% per year for a 60/40 annually rebalanced, which is just an amazing return. It's basically like the historical long run for the stock market. But 1940 to 1980 had almost 8% annual returns.

So it was worse, but it wasn't that much worse. And the biggest part was 10-year treasuries did almost 8% annually in the '81 to 2021 period. Bonds were only up 2.5% per year from 1940 to 1980. So if we look at the previous 95 years, Demoderan has this website I use all the time from NYU.

From 1928 to 2022, a 60/40 portfolio was up 8.1% per year. So it's not like that environment pre-1980 was that much worse. It was right around average, right? And the crazy thing about the 2022 period being the third worst year ever for 60/40, the 10 years ending in 2022.

So add the nine years before 2022 and average returns for a 60/40 were almost 8% per year. So even with one of the worst years ever, it still was pretty good. And I can't promise what those returns are gonna be going forward 'cause I don't know what stock returns are gonna be.

I don't know what interest rates are gonna be, but we're in a pretty good place now 'cause you can get 4% to 6% in your bonds depending. Like we're gonna talk about that in a little bit here, but if bonds are yielding 5% and the historical equity risk premium is 3% to 4% above bonds or cash, we're talking, I don't know, 8% to 9% for stocks is not out of the realm of possibility.

So that's 7% for a 60/40 portfolio almost, 6%. - Junk bonds, you can get even closer to like 9%, right? - Yeah, I mean, those are more equity-like, but so if you want it, that'd be more of an equity-like portfolio. I mean, you call it 60/40, but it's really 100.

- Yeah. - So I just, I can't guarantee what these returns are gonna be, but you're in a better place now than you were before 2022 after you ripped the Band-Aid off. And so I just say, stop listening to the people who say 60/40 is dead. It's lazy analysis.

Saying 60/40 is dead is like saying diversification is dead. And if that happens, then maybe just haul me out to and bury me because if diversification dies, I've got nothing to live for. - Oh my God, this got real. (laughs) - I'm just kidding. I just, saying it, it's just lazy analysis and it has no basis in reality.

60/40 is alive and well, and it always will be. - Yeah, it makes me want to buy 60/40 more, you know? It makes me more bullish to hear everyone saying that's dead. - Yeah, I don't get it. I think it's a sort of a stand-in for simplicity and it's an easy, it's like easy whipping boy.

All right, let's do another one. All right, that question was from Jacob, by the way. So up next, we have a question from Billy. "I know the running joke is that Ben "is Mr. Target Date Guy, "but in a recent episode, "he mentioned that he rebalanced "to pick up more small cap value.

"Is he a Fama French guy instead? "I was wondering what Ben's portfolio for investing, "not trading, looks like from an asset class perspective. "Secondarily, how often does he rebalance it?" A little hurt they didn't ask about my portfolio, but. (laughs) - We already know what it is, Oatly. - Oatly reported earnings today.

- 60% Oatly and 40% some EV stock. So two questions in a row about target date funds. So I guess I am, my reputation does precede me. My first ever investment was in a target date fund. So that's where I get this reputation from. My dad helped me open up an IRA when I got my first job.

My first job didn't have a 401k. And so I had to open up my own IRA and I put money in like a T-Roll price target date fund. I think the only target date funds I own now are my kid's college funds for 529 plans. So based on the stage of life where I'm at now, I'm a barbell investor.

That means on one side, on the safe side, and my barbell is safety and risk, right? So on the safe side, I have a slug of cash for vacations and emergencies and stuff that comes up with kids and other intermediate term goals that we may have. And the other side of that barbell is risk and that's stocks, basically.

So I have a pretty high talents for risk. All my long-term capital is invested in the stock market. I'm not gonna touch most of it for decades. So that's 100% in the stock market. Now I am a bogel head at heart, right? My biggest holding in any of my accounts is a total US stock market index fund, right?

Very cheap, market cap weighted. But I also like to diversify into other areas. So I do have a little fond of French. I have the small cap value piece. I have some momentum funds. I have some higher quality funds and I have international stocks. I diversify there too by some value stocks and small caps there.

So I do have some diversification. The index funds are the biggest, like the building block. And then I have these satellites or diversification there. And I don't hold these kind of factor funds for outperformance or anything like that, which is kind of laughable to anyone who's looked at them in the last 10 or 12 years 'cause none of those other strategies have outperformed.

But I just don't think market weighted index funds are gonna outperform every single cycle. And so I have these other funds so I can rebalance into them and diversify and have these other parts of the portfolio that'll hopefully hold up well if and when the index funds don't do well.

I did mention that I, on Recent Annual Spirits, that I over-rebalanced recently. I have three main rebalancing strategies. One, I said in the opener, I'm a set it and forget it guy. So when I 401k, that kind of account, I automatically rebalance. I have it set to do once a year on a certain date.

I don't know when the date is. I set it and I forget about it. The other one is if asset weights get too far out of whack. And that's usually in a-- - Wait, what's the best day of the year to rebalance? I'm just-- - I'm sure someone has that data.

I've seen people look at it. It's like it's in April, October for tax reasons. I don't know. I don't think that far into it. The other one is if asset class weights get too far from the target. If something really outperforms and something really underperforms, maybe I'll get in there.

That'd happen in maybe like a bear market or like a rip-roaring bull market. And then another way is last week I made a pretty sizable contribution to my SEP IRA. Bill Sweet would be happy with me about that. It's gonna help my taxes. And I over-rebalanced into some areas that had underperformed.

So I used contributions to rebalance as well. So I don't know. I don't know if that having these other areas of the market will help my returns over time. I do like the idea of making contributions to those areas. So I'm making more contributions to the places that have not run as high in recent years.

But I don't see the point of having an asset allocation if you're not going to rebalance back to target weights eventually. I think that's the whole point. So I think a great litmus test for a lot of people for their investment strategy is, are you willing to double down and lean into the pain when it is underperforming?

Otherwise, what's the point of investing in it in the first place? Especially if it's something like an asset class. If it's an individual stock, I'm not picking on your stock picks, Duncan, but if it is an individual stock like you and you're averaging all the way down, I don't have as much faith in that strategy as I do for an asset class or strategy that is more automatic and rules-based in nature.

- Well, you know, I can't remember if it was you or Michael that recently said on Animal Spirits something about how holding individual stocks for the long run is actually almost certain to underperform for you as opposed to if you-- - The probability goes against you. - Yeah, I have an IRA that I should show you.

Definitely not sharing publicly, but I gotta show you that basically it's data that you can use to prove that. - Listen, I have a brokerage account at Robinhood and I have some stock picks. I basically stopped picking stocks. A few of them I've held onto and they've all done way worse than I would have just putting in index funds.

It is probably a good reminder and I've sized it correctly. But yeah, that's the thing. The longer you're holding period in the stock market historically, the better your chance of seeing gains. The longer you're holding period for individual stocks, the worse the probability is that you will actually see gains which is kind of hard to reconcile in your brain.

- I never knew that so many stocks could become penny stocks. - The other part of it is mostly that it's a lot of big stocks that carry the day and make up the bulk of the returns. It doesn't mean other stocks can't do well, especially over certain time periods, but it's just over the very long term, most stocks don't do as well as you'd assume.

- Right. - All right, next question. - All right, up next-- - No more Target Day Fun questions today. - Yeah, no more. Stay tuned. Okay, up next we have a question from Rick. There's been a bull market and bond questions on the show, so I thought I would take a stab.

Now that yields are higher, I want more fixed income in my taxable account. We are retiring in the next five years. Treasuries and T-bills seem like a no-brainer, but what about the tax implications? Corporate bonds have higher yields, but is there a difference in how those bonds are treated tax-wise versus government bonds?

- Okay, so we got kind of like a good cop, bad cop question here between investing and taxes. So I'll be the, I guess I'm the good cop, the bad cop will be the tax guy. Let's bring in Bill Sweet. Talk about the tax side of things here. - Hey, Bill.

- Gonna be live from New York City today, gentlemen. How's it going? - Good, good. Sorry, I had you muted there for a second. - It's all good. It's because I wasn't wearing a Fruity Purple shirt today, so the devil's got stayed home. - Yeah, you guys are the good cop, bad cop.

Duncan is bright, Bill is black. I do like this question 'cause we've been seeing a lot of comparisons lately of people saying, listen, if I can get 6% in corporate bonds, why would I ever invest in the stock market? If I can get 8% in high yield, and I think if you're doing that in a tax deferred account, that's an okay apples to apples comparison, maybe.

But if you're talking taxable account, the way that taxes on bonds and stocks are treated is much different. So I think you have to be careful about that. And I think for most people, especially if you're approaching retirement, you want those bonds to be used for spending purposes or income, so you don't want them in a tax deferred account unless it's just for a portfolio over the longterm.

So what do you think the breakdown of bonds is by tax perspective? 'Cause that changes the equation greatly, right? - Yeah, you make some great points, Ben. And typically, if you're going into retirement, you are trying to focus on income, and that's a great point. However, bonds have this annoying feature where they're getting taxed at ordinary income.

A lot of the conversations we're having here on the show do deal with capital gains. So let's talk a little bit about how different bonds get taxed. John, can we pull up our first chart, please? Let's just take a quick look at how corporate versus treasury versus municipal bonds.

Those are the three types of bonds you can probably go out, and hopefully those are the three flavors that are available to you. You can see there by the chart, you're exposed to both federal and state income tax on any corporate bonds that you're purchasing. And so, yes, those come with a higher yield.

However, you are looking at the proposition of higher tax, and we're gonna do some math for you. We're gonna do some bond math and let you know what that looks like here in a minute. Moving on, treasury bonds come state tax-free, which is awesome if you happen to live in New York, like I do, me and Duncan here in New York and Connecticut, maybe not so much if you're in Michigan, certainly in California, pretty high-tax state.

However, you do have to pay federal income tax on your treasuries, or you can look at state-issued municipal bonds. And if you're buying a municipal bond issued from the state or municipality that you happen to live in, you get this triple tax exemption where your federal, state, and local taxes are free if you're buying an in-state bond.

And so that's how those break down. John, can we flip over to chart two, please? - I like the table, Bill, that was good. Before we get into the next one, it is interesting, like the treasury part of it, I don't think a lot of people realize that, like no state tax, a lot of this is, I mean, you've said this in the past, usually when you retire, your tax rate will go down, hopefully.

So for a lot of people, maybe that helps the equation a little bit. But I think having that matrix there is a good starter for people. If you have a really ultra-high tax rate, it could change the way that you allocate your bonds, or it should, probably. - Yeah, precisely.

And I think you do have to think about that, Ben, and great lead-in, by the way. You're a great, great header for me, because you set me up, and I'll knock 'em down. A lot of this-- - I was a point guard in high school, so I like to dish out the assists.

- That's great. I got to see Victor Wembiata last night, and he could've used a point guard there for this part. So let's flip over to chart two, John, and take a look at how these bonds go from a pre-tax yield. So in the left column, a pre-tax yield, let's say 6% for corporates, 5% for treasuries, 3.5% for municipals.

These are roughly approximate to where yields are today, and this is not investment advice, so please don't act on this. However, what I did, Ben, is I broke this down and said, look, if you're a low-tax rate, if you're paying 12%, versus a mid-tax rate, paying 24% and let's say 6% for a total of 30%, versus a high-tax rate, let's say close to 50%, which is where folks are in New York City and California, at the higher end of the income spectrum, what happens to those pre-tax yields as they filter through the tax equation?

And instead of framing everything in a tax-equivalent yield, I want to talk about the yield that you take home, right? Because we do not eat pre-tax returns. So this, to me, is very important. You can see for, let's say, a middle taxpayer, a corporate bond, a pre-tax 6% yield gets cut to about 4%, a pre-tax 5% treasury yield gets cut to 3.8%, and municipals, again, assuming you're in-state, just stays at that 3.5% because they're completely tax-free.

So more or less, you can make that decision, but what I want to highlight there is the rightmost column. At some point, it begins, the higher your tax rate are, the more tasty, the more beneficial that tax-free yield is for municipals. So it really does depend. I do think you have to sit down and think about this.

Basis points are probably gonna make a huge difference, but if you're in the highest tax bracket, your yield gets cut in almost half, and I think you do have to take that into account. - So you'd probably say if you want to own corporate bonds and you're in high taxes, you should probably be owning those in a tax-deferred account, otherwise it might not really make as much sense.

- I think so, very generally. Yeah, that would be my take, because ultimately it's all tax-deferred anyway. And furthermore, again, we're talking about ordinary income tax rates, right? So compared to capital gains, compared to dividends, you're paying the highest tax rates very quickly. And so yes, I think for corporate yields, for folks in a low tax bracket, for tax equivalents, it makes a lot of sense.

Municipals, if you're in a higher tax bracket. - With treasuries, your T-bills are included in those. They're free from state taxes, right? 'Cause a lot of people have been pouring into T-bills lately. I want to get on munis, but Duncan, let's read question four first. I think that actually is a muni question and we'll get to some tax equivalent stuff, which I think is important.

- Great question from Rick, thank you. - Yeah, let's talk municipal bonds. - Okay, you've written a lot about bonds lately, but not munis. I'm looking at a muni fund with a yield of 3.8%. If I hold this in a taxable account, that's a pretty good deal, right? How do I think about munis in the context of other bonds in a taxable brokerage account?

- So I think psychologically speaking, munis are kind of difficult for people because you have to think about the tax equivalent. The way you showed a bill in your matrix was you put them on the level playing field. But if you inverted it and did it the other way, you could say, well, the nominal yield in treasuries versus munis might be similar too, but for a lot of people, that's a phantom yield because the tax stuff for a lot of people happens later.

It doesn't happen right now. And so they look and say, why would I take a 3.5% or 4% yield in munis when I can get 5% or 6% in these corporate bonds or treasuries or whatever, and it doesn't make sense. So it's hard to put those on equal footing.

But as you said, especially if you're in a high tax bracket, the municipal yield on a tax equivalent basis might be even better. - Yeah, could not agree. And that would be the great title for a new "Star Wars" movie, "The Phantom Yield." I do like that, Ben, I'm gonna have to think about that.

But as you guys might imagine, we have a chart about this. So John, can you pull up chart three? So this just illustrates the point, and again, that we were making before, and sort of connecting the dots between the questions. Jim is questioning, why would I consider municipals? Again, it sets us higher tax rates.

That to me is where it starts to make sense in that you can see there, if we kind of, again, look at pre and low and mid and high tax yields, how that plays out, municipals are gonna be dead even, but the tax bite takes a higher hit out of those higher yield corporates and treasuries.

And so that, to me, is where that flip happens. And Ben, I think municipals really start to make a lot of sense to me, roughly around the 35% tax bracket. That's when the game changes. Because around there, assuming you're in a high tax state, that's when your tax rate is pushing 40%, 42% all in, and that's when that thing flips.

And if you kind of look at this from the outside, from an outside basis, the type of account, the type of title makes a lot of sense. You would not, for example, Ben, wanna own municipal bonds in a tax deferred account, in an IRA or 401k, right? Because you're accepting a lower yield, but you're getting this tax deferral benefit there anyway.

So Jim's question is spot on, and this is why I think looking at this in not just the tax equivalent angle, but where you're gonna hold asset location is so, so important when you're doing asset allocation. - So I feel like we're getting closer to Bill's rules of thumb.

We have a Roth IRA cutoff, we have a Muni bond cutoff. We're getting there, right? Depending, again, you have to actually know what your tax rate is, which a lot of people probably don't. But there is a financial planning element to owning bonds that you probably didn't have to think about before.

And again, I think this is probably more important for retirees or people who are using bonds for income. If you're using bonds in a 401k plan because you want diversification or you don't wanna take as much equity risk, this equation doesn't matter. Then look at the nominal yields. But I think for a lot of people, and especially retirees, they are looking at these.

And I think that the handoff probably couldn't have gone better for retirees. Yes, people were complaining in the 2010s 'cause yields were low and bonds weren't doing much. And then you had 2022, what we talked about earlier, where bonds got killed. But you had stocks that totally picked up the slack and more than made up for the bond returns.

And now you have this situation where you can de-risk the portfolio and you have these nice yields. And you just do have to be a little thoughtful about the way that you implement it. Because to your point, you don't wanna have the wrong asset location and then eat into a lot of your yield unnecessarily.

- Yeah, we've been in this higher interest rate environment, higher inflation environment, been for, I don't know, 18, 24 months at this point. I gotta be honest with you, I'm still adjusting. I came into this industry in 2007, fresh out of the Army, coming into tax. And from that point forward, we've had sub-2% yields, sub-2% inflation.

So I'm still getting used to all this. And that's why, Jim, I think your question is very appropriate. And this is the type of thing that the world changed in the last two years. So I think your portfolio should potentially change along with it. - Yes. - I think you probably just have to be a lot more thoughtful about how you allocate your fixed income as well.

It's not a one decision asset class, really. You have to kind of think through. And maybe for some people, it's a little bit of corporate bonds and a little bit of treasuries and a little bit of munis depending on the way they have their money. But you just have to think through before you pull the trigger there.

- Right, amen. - Duncan, what are oldie bonds paying these days? - Probably a lot. - 27%, that's gotta be a high yield. - Probably a lot, yeah, I don't know. I mean, they technically, the earnings wasn't terrible. - Okay, but I'm glad we talked about this in terms of taxes, because again, people who are making these stock versus bond comparisons, it really depends where those assets are located.

You can't just say, well, bonds are paying six, so why would I, if I could get six in the stock market, I'd be fine. It's a totally, what did you say yesterday to me? Bonds, you pay taxes now, stocks, you pay taxes later. - Yeah, and that brings up a good point about compounding, Ben, not only are you looking at a higher interest rate, or a higher tax rate for ordinary income, which most bonds are taxed at, but furthermore, there's some advantages to things like dividend yield.

Assuming, again, you're comparing apples to apples, which you're not, but in the case that you are, and assuming you could predict the future path of stock returns, stock gains are usually deferred, right, because you're paying capital gains, but you choose that moment when you sell and realize those gains.

And so if you're able to defer that two to five to 10 years, that compounding effect all happens within your portfolio relative to the bond income that you're paying tax on right now. And so even if you're reinvesting, let's say, into a bond fund, assuming you're compounding that way, you're still paying tax at a higher rate with a bond fund today.

It's not apples to apples anyway, but yeah, there are some built-in advantages to tax deferral that come from stocks and come from tax-qualified dividends, which you're paying at lower tax rates. - Duncan, Cliff in the chat says that you should be drinking a Coors based on your NASCAR gear.

I think that actually fits. - Yeah, I'm drinking this tea, but I think it kind of would look like a beer can maybe. - He's a man of the people. - One day, one day, that'll be the show. - We got one more. - Okay, last but not least, we have a question from John.

I was wondering if you could comment on the nuances of purchasing a home in a very high cost of living real estate market, like New York City, San Francisco, LA. I'm not sure how expensive San Francisco is. - Did you get that on this first try, Duncan? V-H-C-O-L there?

- It took me a second, but yeah, at first I was thinking like an EV toll, but yeah, this is different. Okay, I'm coming from a more affordable area and I feel like the game in these places is vastly different. The biggest thing I struggle with is how much to put down without feeling foolish.

Am I crazy for putting 60 to 70% down on a New York City property? I'm envisioning modest mortgage payments due to the 60 to 70% down payment, which could put me into a building where others only put 20% down or less, have to be earning at least two times or more what we would.

It's a little confusing, but I think I get what they're saying. The usual net worth statistics of not being so tilted into real estate don't seem to apply in very high cost of living areas. If we put 70% down, our net worth breakdown would be something like 60 to 70% into our primary residence real estate.

- Good question. First of all, I think there's like an imposter syndrome thing going here where if I put 60 to 70% down and other people there aren't because their salaries are different, I think it might be part of what we took out. I would get rid of that immediately because if you can afford to put 60 or 70% down in a New York City house, apartment, condo, whatever, you're in a pretty good position, right?

Do you agree, though, Bill, that the high cost of living areas are a totally different ballgame from a real estate perspective? - I don't necessarily, yeah. My observation here with most real estate investors generally, Ben, is that they hate paying taxes more than they like making money. And real estate involves this tax deferral I was just talking about a minute ago with capital gains and deferrals.

But to me, this isn't necessarily a tax question. It's a concentration question, Ben. And that's sort of what I think you're getting at. If you are dumping 60 to 70% of your current net worth into a single property, in a single city, in a single building, literally, a lot could go wrong with that, right?

We have lived in a world, most of my career, where real estate prices go up and they go up and they go up, and everybody thinks that's probably gonna happen going forward. But I think the risk you're taking on by putting that amount of capital into one single asset, to me, is a lot.

And yes, you do get a lower mortgage, you do pay less interest, you are gonna have a lower payment, and maybe, therefore, you can afford to live a little bit grander. But it's a lot of risk. It's a lot of risk to take on, Ben. - My whole thing about risk is that there are necessary or unavoidable, and then there are avoidable or unnecessary risks.

And if you wanna make money, you can't avoid something like volatility, or there's some drawback. And I think dumping all of your money into a single asset is an unnecessary risk, especially something like that, that's the roof over your head. And if you can afford a down payment that high, you can probably afford the mortgage payments as well.

And there's nothing to say that if you hold back and you just do a 30 or 40% down payment, there's nothing to say that you can try it out for a little while and see how you can afford it, and then dump the money in in a few years, potentially, and pay the principal down.

But if you put all the money in, then you're gonna have to borrow against the place to get it out, so it's much harder to spend that place after the money's already in there. So I don't see the rush to make such a huge down payment, especially if it's gonna concentrate you so much.

It just seems unnecessary to me from a risk perspective. - Yeah, I think I generally agree, Ben. The other thing I'd sort of counsel anybody thinking about this on is that primary real estate, especially if it's a personal loan, jumbo loan or not, that is one of the few places, Ben, where you can apply leverage effectively, I think, as a taxpayer, in that there's this giant subsidized mortgage complex out there that's keeping real estate interest loans.

- You would never, it would never be wise to take that much leverage out in a stock market. - Yes. - But in the housing market, we freely tell people to do it, have at it, right? - Right, and effectively, what you're doing in that scenario, in some form or fashion, is you're transferring some of that risk to a bank.

And so that, to me, is one way to potentially de-risk. Ben, you hit the other nail on the head, which is that it's not a one-way street. If you get frustrated at that higher mortgage rate, you can always pay it down, right? You can always refinance down the road with cash.

That's always an option. And it more or less keeps some powder dry. And so I think I would consider that. And I've always just considered that leverage play to be, again, one of the few places, that if you could go out and buy a million-dollar building and only put, let's say, $200,000, $300,000 down, that, to me, seems like a pretty good deal, even if my monthly payments are higher.

The additional cash that I'm holding back on, and let's say investing in municipals, right, to earn some income, some revenue with, I can use that to help decrease the mortgage, right? And so it ends up being in the leverage play. - The only argument I could see for actually doing this kind of thing would be, listen, mortgage rates are 7.5%, and I'm gonna put it down, and then if rates go back down to five, I'm gonna cash out refi and pull some of that back out.

That's a tough, that's like a market timing kind of thing as well, so that's difficult. But you'd have that built-in equity, where you could do that if you wanted to, or take out a home equity line, or whatever, if rates fall, but that's a timing thing, and if you really need the money, it could be that banks don't wanna give you a loan at that time, so that's a little bit of a riskier strategy.

- But there is a tax angle I do wanna mention, in that there are three itemized deductions that are available to individual taxpayers for their primary residence right now, right? It's charitable contributions, it's property taxes, but that's limited to $10,000, which, in a city like New York, or VHOCL, I think that was the acronym.

- Yeah, thanks. - Yeah, they're astronomically high. But the third is mortgage interest, right? And so, effectively, if you're able to tax-deduct your mortgage interest being paid, that effectively reduces the borrowing rate, right? So if you're at a 30% tax rate, that brings your tax-equivalent mortgage interest yield from 7% to 5 1/2, right?

And so maybe that's not worth writing home about, that's nothing compared to two years ago, but we live in the world that exists now, and that is something, once you account for a standard deduction, that you can take advantage of, potentially. - Yeah, good question, I just, it just seems unnecessarily risky to me to put that much in, if you don't have to.

- I think I generally agree. - Yeah. - Make the bank do it. - I think I generally agree, too. I don't have a strong opinion. - Duncan is like a chameleon, he goes from F1 guy to NASCAR guy so seamlessly, right? - I mean, you know, they're cars.

- It is impressive, yeah. Motors, engines, yeah, it's good. - Four wheels, okay. Great questions this week, as always, we appreciate everyone. - It was fun. No Roth Area conversions, what am I even doing here? - I know, nothing, we went in another direction. Thanks, as always, for the questions.

Leave us a comment on YouTube. Thanks, everyone, in the live chat, as usual. Remember, our email here is askthecompoundshow@gmail.com. We'll see you next time. - And thanks to Rocket Money again, yeah. - Rocket Money. - Appreciate it, as always. - For all my free alerts. - Yep, see you, everyone.

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