(sound of clock ticking) (music) Welcome back to Portfolio Rescue. Duncan, I would wish you a happy New Year, but I'm not a happy New Year kind of guy. I don't do it. Nothing against people who do it, it's just not my thing. I don't say it. Maybe this is kind of like my Larry David thing, but I'm just not a happy New Year kind of guy.

No problem that people will say it, but that's just me. Kind of like investing. It's just as important to define what you won't invest in as what you will invest in. Today's show is sponsored by, yes, Liftoff Invest. That's our automated platform that is run through Betterment's technology. Duncan, I was looking at my Liftoff account.

I have one account, but I have four goals under there. One of them is for me and my wife, just a general investment account. The other one, each one for three of our kids. I was looking, and surprisingly, the investments were down this year, but my market values were up.

Why? Because I increased my savings rate. I think especially for young people, that's a really big thing these days. Yes, it hurts to see the value of your portfolio go down, but if you bump up your savings rate, especially when you're just starting out, that's where most of your gains are going to come from.

They're not technically gains, but if you want to see growth in your portfolio, it's going to come from putting money to work. Go check out LiftoffInvest.com to learn more. Duncan, you told me that you finished my most recent book. It's a pretty short one. How many pages is that, 140?

Let's see. I have it right here. It's like 116 pages. It's a short book, everything you need to know about saving for retirement. I wrote it for people with 401(k)s or 403(b)s who are just getting started. Maybe some of our clients' kids have read it, some people in our 401(k) plans.

You told me that you finished reading and had some questions or had some thoughts. Yeah, I've had a lot of thoughts. I was like, "I wish I did a podcast with Ben because then I could ask him these questions." And then, yeah, it worked out. First of all, I just wanted to say, on behalf of a lot, we had a lot of people writing in and commenting, "We're all sorry for you getting so robbed of your take." Michael took your Bezos take and just got famous off of it.

It was on TV yesterday, talking about it and stuff. He's going to be the new Michael Burry because he leased one of my takes about Jeff Bezos coming back to take over Amazon. That's the kind of podcast co-host and friend that I am. I'm willing to give my takes away to other people.

I have too many of them. Very generous, very generous. But yeah, so a couple of things I just thought of that I noted down that I wanted to ask you about. They're very basic probably, but I think people would be curious to hear, or a lot of our younger people especially.

But so, you're known as the target date guy. You're a target date expert, connoisseur. What happens to them when they hit their date? I mean, do they just go 100% bonds and stay that way forever? Does it just disappear into the ether? What happens there? Well, I looked at the Vanguard 2020 fund today.

So, someone would have set that 10, 15 years ago and said, "I'm going to retire in 2020. This is going to be my glide path to that point." It's in roughly 45% stocks, 55% bonds right now. So, your investing lifecycle doesn't stop just the moment you retire. You still could have two, three decades.

It just moves into a different phase. We actually have a question about this for today's show, which we'll get into more detail. So, yeah, it just gets more conservative over time. But yeah, still some stocks in there because you still need some growth in your portfolio. Okay. So, they don't end or anything like that or go away?

No, it keeps going and it keeps going the glide path. It'll probably get more and more conservative the further you get away from that date, but there's still some stocks in there. Okay, cool. Good to know. Okay, another thing I was going to ask, you talk a lot about having to, you know, a huge part of the book is withstanding volatility, withstanding downturns in the market and just sticking with it.

Have computers and algorithms and modern technology and retail traders, all of the stuff that we think about when we think about the market today, have they made the market less volatile and susceptible to downturns or more or not really impacted it? Overall volatility, like if you measured by standard deviation, is probably pretty similar, like annualizing that number.

But the speed of the volatility has increased. I remember there was an interview with a guy who was a fixed income manager for Vanguard and he was retiring. And he said he started in the early '80s. And he said back in like 1981, when a news event occurred, you had time to actually sit and think about it.

If something happened overseas, it might not affect the US market until like the next day. Now everything is instantaneous. Like you don't have time to think through these things. So I think the speed of volatility has certainly increased. Computers and stuff makes, you know, if there's a piece of news or economic data that hits, it immediately hits the stock market.

I don't think that was the case in the past. You would have to get some of your news from the market over the radio back in the day instead of seeing it in real time. So I think the overall volatility is probably pretty similar, but the speed of the volatility and the speed of the moves is probably much faster.

Okay. And I think that's probably gonna continue. Yeah, I was wondering because the behavioral aspect you would think would be getting better with all the automation and stuff like that. So in my head, I was thinking like, I wonder if that has made the market a little more stable.

Well, on the other hand, it's never been easier to pay attention than ever before, right? Right. To have that long-term mindset 'cause you're being force-fed everything in the short term over and over again. It's harder to think and act for the long-term because you can see everything happen on a minute-by-minute basis.

True, true. So along kind of a similar thread, one of my favorite stats in there was nearly 29,000 companies traded on the US stock market from 1950 to 2009. Almost 80% were gone by 2009. So my question for you is, do you think that we'll lose 80% of companies over the next 59 years?

Or has that changed? Is the business world more resilient now? I don't know if your oat milk company is still gonna be in business by then. And so I think I got the stats from "Scale" by Jeffrey West, which is a really good book. And I actually think technology's only gonna speed this up.

Companies of old required way more upfront investment in actual physical assets. Michael had a good one. I'm gonna steal this from him. He said like the first billion-dollar corporation ever was US Steel in 1901. And they had 170,000 employees and like $3,300 in sales per employee, right? And that's still like 90,000 in today's dollars.

But today they have over 500,000 per employee because they've gotten more efficient. Technology has gotten better. Software makes it easier than ever to start businesses. I just think, I look at this as a good thing too. I think it's creative destruction where the quicker these old companies are being pushed out and the new companies are coming in, I think that's a good thing.

And the one great thing about owning a diverse set of companies in the stock market is eventually those ones that rise to the top are gonna show up in your portfolio. I think the first trillion-dollar company, it's possible it hasn't even been created yet. And it's gonna be created in the future to solve some big problem that we don't even know yet.

- All right. - So I think this is a good thing. - That makes sense. All right, so last but not least out of these, I just wrote down, what's a simple way for a young person to assess their risk tolerance? You talk a lot about risk tolerance and knowing your risk and different phases of life.

How does someone figure it out? - One of the hardest things to do, it's probably the only thing you can do is have experience. I know people say, "Oh, put together a paper portfolio. "Pretend like you're trading, you've no money." Unfortunately, it's difficult to say how you'll react until you actually do it with someone, see your life savings get chopped in half.

One of my favorite books of all time is this, "Where Are the Customers?" by Fred Schwed. It's, I think it was written in the 1930s or 1940s. He had this great quote that I use all the time. He said, "Like all of life's rich emotional experiences, "the full flavor of losing important money "cannot be conveyed by literature.

"There are certain things that cannot be adequately explained "to a virgin either by words or pictures." And so I think sometimes you have to just live through it and see, I can keep 100% of my portfolio in stocks. I think I can. I have a high risk tolerance. But until you actually do it and go through something like last year and see that money fall, I think you have to kind of play it by ear and experience it.

And the good thing about if you're a young person investing is that you probably aren't gonna have a huge amount of capital when you're learning these things, right? So you learn and make your mistakes or you kind of change the dial a little bit when you are young. - Right.

And you write about this some, right? That a 50% loss when you have a couple thousand in the market starting out isn't nearly as bad as 50% loss when you have a much larger portfolio. - Yeah, or 20% loss could be more painful if you have more money 'cause it's more dollars going out of your account than even getting chopped in half when you don't have as much money.

- Right, right. - Good plug for my book there, Duncan. Way to go. - Yeah, and I had one quote I wanted to share with people that I think, especially again, for everyone, but especially our younger and new investors. You say, or you have in there, your actions during down markets have a larger say in your success or failure as an investor than how you act during rising markets.

So I think that's a good thing for everyone to acknowledge right now. - Giving up on an investment plan is no different than failure, right? Because if you give up and you just throw your arms up and you sell when things are down just because you can't take it anymore, that giving up on your plan is no plan at all is my way of looking at it.

- Yeah, I like that. Cool, yeah. So strong recommendation, I enjoyed it. And I've been soaking in all the knowledge from all of you guys for years now and I still learned some stuff and still got a lot out of it, so yeah. - Perfect, all right, let's get into a question.

- Okay. So first up today, we have 2022 was all about inflation. Now people are talking about peak inflation and possible deflation. What does deflation look like? Why do people say it's worse than inflation? Also, why do they say tech is deflationary? - All right, it does appear inflation is peaked for the time being.

John, throw up the chart here. You can see if I'm performing technical analysis on this, I can see a line and a peak and a line down. That has to mean something. It is important to remind people though that we have had inflation before these past 20 months or so of rapidly rising inflation.

Even before the current bout of high inflation, prices were still rising. They were doing so at a much more modest pace. So John, throw this other chart on. This is CPI from 2010 to 2020. It was modest. It was up like 21% in total, a little less than 2% a year.

We still had inflation. No one just, people didn't really pay attention that much to it because it was a relatively stable increase over time. There weren't any huge jumps or falls. I guess you could call that price stability. I don't know if we're gonna go from inflation to deflation.

It is a possibility if we get a nasty recession and things slow down considerably. To the point about inflation versus deflation, why wouldn't you want deflation, right? It's prices falling. Who wouldn't want that? Well, the economy for one and probably your paycheck for another. My view is not necessarily that inflation is good.

It's just that it's less bad than deflation. Deflation is like this negative, crazy negative feedback loop. So prices start to fall because people, so people stop buying today in hopes that they'll be able to buy stuff cheaper in the future. And so people stop buying stuff today. Business profits go down.

People are laid off. People get unemployed. As unemployment rate rises, people's paychecks fall. You know, it's like a death spiral of future price cuts. That's why there was huge deflation in the Great Depression. And trust me, people seeing their prices falling was not a good thing because that happened because there was 25% unemployment.

I think prices fell like 10% across the board in the US economy. So I think if we want our incomes and standard of living to rise, we're gonna have to accept some price inflation over time because that's just progress. It's a natural by-product of growth. And so we're probably always gonna have a little bit of inflation over the long term, assuming we're still advancing as a species.

So I look at rising prices as the lesser of two evils. People don't really like that, but if you wanna continue to see growth and progress in our economy, you're gonna have to accept some inflation. What we've seen this past year, year and a half is not normal, not what we'd like, but even if inflation goes down from here, it's still gonna be, prices are still gonna be rising, just not at as much of a high pace.

- Okay, yeah, I'm most familiar with it because Kathy Wood seems to talk a lot about deflationary forces in tech, right? I think that's where a lot of people- - So I mean, people think it's a risk because that would probably mean a nasty recession. And so I think if you gave me the choice of inflation, but it's with economic growth and people's wages are rising versus deflation and people are losing their jobs and it's a recession, I'd probably take the lesser of two evils and have that inflation.

- Right, yeah. - It's 'cause I'm one of the people. - AI is gonna change this, right? AI, Ben and Duncan will be doing this show in a couple of years, edited by- - Well, people ask, he asked why is technology deflationary and it's because it just makes us more efficient, right?

And back in the 1800s, 80% of us were farmers. Now, I don't know, I think the percentage of people that work on farms is like 1%. It's 'cause we have technology that's available to make it easier so people can do other jobs. People have the ability to complain on the internet all day because technology has made our lives easier.

- That's all right. - Yes, exactly. All right, let's do another one. - That question was from Yajur, by the way. And so next we have a question from Chuck. "Do you think the stock market is a form of Ponzi scheme?" And I gotta be honest, this question, I think, triggered me a little bit.

I'm sure it triggered you a little bit, but we love you, Chuck, but yeah. "Do you think the stock market is a form of Ponzi scheme? "The average dividend payout for all stocks "is a little over 1%. "Back in 1958, the average lifespan "of a corporation was 58 years, "but it's now down to around 15 years.

"So why are people investing in the stock market? "The answer is they hope to make money "from selling a piece of paper to someone else, "the greater fool, at a nice profit. "If there's no one there to buy your piece of paper, "you won't make money in the long run." Okay.

- Listen, if Charles Ponzi's scheme did what the stock market does, it wouldn't be used as a way to talk down on someone for doing fraud. It would be a good thing. So the short answer is no, I don't think the stock market is a form of Ponzi scheme.

In Ponzi scheme, old investors are paid off by new investors, investors in quotes, because there's no business plan, there's no revenues. Right, the stock market is made up of corporations, and those corporations make products, they perform services. Consumers and other businesses buy those products and services. That results in revenue.

Some of that revenue is used to pay costs of running the business, but whatever's left over is used to pay down debt or buy back shares or pay dividends out to stock investors, or be reinvested back in the business. So the profits of the business actually accrue to the shareholders, right?

They have a piece of that profit. And so as sales and dividends and earnings grow over time, stocks are worth more money. It is true that dividend yields are lower than they were in the past. I'm gonna do a chart on dividend yields. This is the dividend yield on the S&P 500 since 1950.

You can see in 1950, it was like 7%. That was abnormally high, mostly because of the Great Depression and the hangover from that. But even in the '70s and '80s, we're talking three to 6% dividend yields, pretty high. Today, it's closer to like 1.6, so the trend has been down since then.

Valuations are much higher. That has something to do with it, but there's also a reason that you can see, starting in the 1980s, there was a precipitous drop in the dividend yield. You can say, "Well, that's 'cause stocks were going up." But it's also because Congress passed a law in the early '80s that made it easier for corporations to buy back their own stock.

John, do the next chart. This is buybacks and dividends. This is going back to 1988 from Yardenia Research. And I don't wanna go down the rabbit hole here, but essentially, stock buybacks and dividends are the same thing. If you understand how math works and how capital allocation works, they're essentially the same thing.

So if you combine dividends and share buybacks, the yield picture doesn't look quite so bleak. It's closer to 5% now if you combine dividends and buybacks. They have it at 4.9% here. And so the shareholder yield is actually pretty good still. So that's actually not that bad. That's part of the reason.

And actually, from a tax basis, it's actually better for investors if they do buy back their stock. So plus, you can't simply look at the yield itself to figure out the benefits. The S&P 500 has seen total dividends since that 1950 rise at an annual rate of nearly 6% per year.

Per year, that's above the 3% rate of inflation where dividends are growing above and beyond that. So it's not like that yield is just, the income is staying the same. The income is rising, but the stock market is rising a little faster. So you're getting an income stream that rises above the rate of inflation.

Earnings rise above that same level. It is true that supply and demand matter. So if more people decide they want to own shares in the stock market and they rush in to buy, the amount of investors willing to pay for them will rise. So valuations go up. If fewer people want to own stocks, then valuations will fall.

But even if fewer people wanted to own stocks in the future, it's not like profits would stop accruing. You'd probably just see more corporations buy back their own stock and whoever did own stock would just see their share of earnings and dividends and all that stuff rise. Plus money has to go somewhere.

So if everyone decided, we're taking all of our money out of the stock market, we're putting it in cash and bonds, right? I wouldn't recommend that, but if people did that, the yields would be so low that the stock market would have to look attractive on a relative basis.

So yes, there needs to be a buyer for every seller, but people aren't dumb. If the stock market continues to see profits and cash flows rise, someone is going to buy. So I think if you think the stock market is a Ponzi scheme and want to sit it out, that's fine.

More profits for us who want to own shares in the stock market. That's the way I look at it. It's, yeah, it's not a Ponzi scheme. And the way that corporations work in as big and powerful as they are, they would just use their capital allocation to buy back shares, and then they'd be the ones accruing all the gains.

The gains are going to go to someone. You might as well take a part in it. - Yeah, I think the buyback stuff is a little confusing. Yeah, I find that math a little confusing, honestly. But, and I think a lot of people think, oh, I'm buying ownership in a company, essentially with my shares.

I should get some of the profit, right? And so I think that is the mentality sometimes. - Quick example. Let's say that you, there's $100 in profits. There's five shareholders. Each of them have $20 in earnings, right? Now let's say the company buys one of those shareholders out. There's four shareholders, still $100 in profit, right?

Now those profits are shared among only four shareholders instead of five. So the profit per share goes up, right? - It's a white bull moment. - Even if the profits are the same. - Yeah, no, I haven't heard it explained that simply before. So yeah, that makes sense. - So whether they paid out dividends to people or bought back shares, the cash is gonna go out either way.

And so it's either people are gonna be paid back in cash or their earnings per share is gonna rise 'cause the share count falls. So it's the same thing. A lot of people think this is like a, it's like a weird buybacks, like this big like Illuminati thing, but it's not, it's pretty simple.

- Yeah, no, it sounds like it, yeah. Team buybacks now. - Do another one. There you go. - Up next, we have a question from Parker. I've been laid off twice, once in 2015, and again in 2020 due to COVID. I've had five jobs since then. Currently VP of sales at a logistics company.

I've got about five months of household income saved, and for a few years, it sat in a brokerage account earning zero in a stable value fund. Stupid, maybe, but it was safe. So where do you recommend people put their emergency funds? What do you think about online banks? So this is one of those common things we get asked about.

- Well, I mean, you talked about risk tolerance for investors. We talk a lot about that in the investing world. People rarely talk about tolerance for risk when it comes to personal finance. And I think this person, Parker, being laid off twice, changing jobs three other times, that's a lot.

Hopefully, they're one of these people that is changing jobs and getting paid more. That's what the stats say now. People who are changing jobs are getting much higher wages and people are sticking, staying put. But if you're going to have some sort of career where you're gonna have that much volatility, I don't know what they do or what field they're in, but then you probably wanna have a little more set aside, right?

So there's all sorts of different, should I have 12 months saved or six months or three months? A lot of it depends on your tolerance for volatility in your personal finances, but also how your career is set up. There are a lot more options these days. Like him, I had my money sitting in an online savings account for years earning nothing.

I think it got as low as 25 basis points during the pandemic in 2020, when the Fed went down to zero. I did a quick perusal of them today. So you have places like Ally, Marcus, Capital One 360, SoFi, even like Wealthfront, Betterment, Robinhood have cash management programs. I found anything in the range of 3.3% to 3.8% for these, you know, and FDIC insured and fairly safe and liquid.

You could find a one to three month T-bill ETF these days, pretty easy if you Google it, 4.3%, I think I saw this morning. I saw a money market account for a client this morning at Schwab yielding over 4%. 12 month CD, I looked today, 4.3%. Series I savings bonds, we've talked about them a lot here, still yielding 6.9% until April, at which point I would expect that number to fall quite a bit because inflation is falling.

So there are tons of options today. And in the past few years, you had to go way out on the risk curve to earn anything approaching yield. This is all relatively safe stuff. It's FDIC insured for the most part. If you're investing in short-term government bonds, the chance of default is basically nil unless we get an alien invasion.

So savers are no longer being punished by the Fed, is what I'm saying. This is one good thing the Fed is doing, I guess. I think my only rule of thumb is don't put your money into something you have to jump through a bunch of hoops through. Some of them will say you have to have a direct deposit, or you have to do like 10 transactions, or for an extra 10 basis points, to me, that's not really worth it.

I just think it should be something liquid, an easy technology interface. And one of the reasons that these online banks can offer higher yields is because the brick and mortar banks have a lot more overhead. And the banks are just kind of jerks, and they just, I think I looked at the average today, the average savings rate at an FDIC insured brick and mortar bank is like 24 basis points still.

It's ridiculous. That should be criminal. So you can get like 3.3, 3.5% at an online bank. I think my only advice is just don't try to go yield hunting and jump from bank to bank or place to place 'cause you can get an extra 10 or 20 basis points.

Just find a place you're comfortable with. Make sure they're not taking advantage of you. But I'd say nothing less than at least three, three and a quarter right now. The fed funds rate is at four, four and a half percent. So I would say anything lower than three and 3.25 is probably too low, especially in the liquid stuff.

- Yeah, it kind of reminds me of you guys talking about refinancing a house. There has to be a big enough gap for it to be worth you switching all of your stuff around. You can't just do it for like 25 basis points. - But if you have money in a big bank and it's paying you 20 basis points, yes.

Go through the process of opening a new account in the paperwork and move it over. - Right. And not to brag, but I'm getting 4.05, so. - Where at? - Enzo, so. - Okay. I'm sure I missed a ton of different ones that are out there. I know there's a lot of platforms these days.

- Yeah, yeah. There's a lot. - You had to go two decimal points out there, didn't you? Just to 4.05%. All right. - Yeah, yeah. - 0.05% is doing a lot of work here. - Hey, well, 0.05 is what I was getting at my big bank, like you're saying before.

So it's literally 4% more. - All right. Okay, so up next, we have a question from Hector. I have over 180 hours of PTO. That's paid time off, right? That will never come close to fully collecting. Those hours are equal to four and a half weeks of vacation or pay if I resign or get laid off.

Do you think it's a viable option to use my unused PTO as an emergency fund? I'm building up my liquid cash emergency fund and I have close to two months saved. If this is a viable option, two months of cash savings is all I would need to save. Thoughts?

- So I have some thoughts on this after whatever you have to say. - Can we use two questions about emergency savings funds as a way of how the market are going and potentially a recession indicator? - Yeah. - We definitely weren't getting these questions in 2020 and 2021.

- No. - Four and a half weeks of pay is certainly a nice fallback plan. This depends on how you define emergency, I think. So I don't know, how easily could you cash in on that vacation paying and get it in a pinch if you really needed it? Like, would it take some time for a company to pay it out?

Are you sure that money's coming to you if you get laid off? I just, I'm not questioning your company, but I would feel safer if that money was in my checking account or savings account and doing something for me. Maybe if you can cash it out every six months or 12 months, just in case.

Again, I think a lot of it comes down to what you consider an actual emergency, like versus infrequent expenses. So some people plan for car expenses and home maintenance and healthcare expenses, and those aren't actual emergencies. Those are things that happen infrequently, but they're expenses you can plan on.

An actual emergency is when the apartment above you leaves their windows open and turns their heat off and the pipes freeze, and then it floods your apartment, like you, Duncan, right? That's an actual emergency that you'd wanna have a fallback plan for, right? Which is why you're a vagabond right now and have nowhere to live.

Losing your job is obviously an emergency. I think it also depends on what other kind of backup plans you have, like do you have a home equity line of credit or a taxable investment account that you could sell a Roth IRA contributions that you'd wanna tap? Maybe like a 0% credit card, something that could bridge the gap if you really need that money until you could get those four and a half weeks paid off.

What do you think? What are your reservations here? - Yeah, no, I was gonna say basically the same thing. I was just gonna say, yeah, in my situation with an apartment being flooded, yes, we have renter's insurance. They're gonna cover most everything outside of the deductible, obviously, but we're having to pay out of pocket, right?

And so there are a bunch of huge expenses upfront, like getting an Airbnb in Brooklyn or somewhere around New York City, ranges like I'm seeing 8,000, 10,000 plus for a month, that kind of stuff. And so yeah, just having like a fund that you can pull that from would be much more helpful than probably being like, oh, I would have to quit my job to get my PTO and be able to have this cash up front.

'Cause I don't think most places will give you money for your PTO until you literally are leaving, right? It's not like you can cash it out, I don't think. - Right, it could be that. So if that's what your biggest worry is, losing your job, then maybe it's it.

But I think if I'm talking about an actual emergency savings, I want it to be liquid and I wanna get it within 24 hours or so. I want it to be relatively easy to get most online savings accounts. You'll have the money if you put in for a transfer withdrawal within that day or the next day.

It doesn't take all, if you have, even if you have an ETF that you have it in short-term cash, it'll settle in a couple of days. So yeah, I'd be worried about using this as an actual emergency. But maybe if your emergency you're planning for is losing your job, then it makes sense.

- Right, and yeah, and just a PSA, if you live in an apartment, be a good neighbor and don't leave your windows open and heat off when it's below zero outside, you know? But yeah. - That's rough. They should have to do the walk of shame and just out of the building.

- They should, they really should. Okay, so-- - We got one more. - Yeah, last but not least, we have a question from Tom. I'm in my mid-60s with retirement coming very soon. There's a lot of doom and gloom for people in my position with the market dropping just as we're retiring.

However, I hope to be in the market 20 years from now and still see myself as a long-term investor. Even after retirement, we're still investors, right? - Excellent point here, Tom. - And congrats-- - Great question. - Congrats on retiring, yeah. - Yes, now there's two ways to look at that.

It stinks that you're retiring right when markets are dropping, but also you had 10 years of fantastic returns to get your portfolio to a level that made it sting when it dropped. So it's kind of a double-edged sword there, where you were doing pretty good up until this point, and your portfolio would not have been as high if we didn't have the gains that preceded this bear market.

And it's possible the only reason stocks are falling a lot is because they went up a lot in the first place. So the average American now retires at 62. 100 years ago, the average American died at 51. Most people worked until they died. According to the Social Security Administration, they actually have this cool longevity thing.

You can put in your age or your spouse's age and see how long your life expectancy is, based on some averages. A couple retiring today has a 50% chance at least one of them will live into their 90s. So most people want a retirement where they can relax and enjoy themselves, and most people probably retire quicker than they would have assumed.

People think, oh, if I don't have enough money, I'll just keep working until retirement. A lot of times, your health won't allow for it, or just when you get to that age, you're just, I'm done with it, I'm ready to be done. So that could mean two to three decades of investing after retiring.

Maybe four if you live long enough. So there is less human capital where you don't have as much income coming in, you're not saving, you don't have the ability to wait out bear markets as much as you did in the past as a young person, because your biggest asset should be financial assets at this point, right?

So you're not like someone who's accumulating can take advantage of a bear market. So there's more balance involved at this stage. I just think you have to keep that balance of protecting your wealth on one side versus you need to keep up your standard of living on the other side, right?

John, do a chart on of inflation here. This is just a simple thing that we've shown over time. How long it takes for different inflation rates to cut your money in half. So 3% inflation rate is about the long-term average. It takes 23 years to cut it in half.

If you're a millionaire today, that million's worth $500,000 in 23 years. 4%, it would be 17 years, 5%, 14 years, even 2%, it's 35 years if we're using the handy rule of 72. So unless you have more money than you know what to do with, the stock market is likely gonna have to play a role in your portfolio in some fashion, because it remains the best bet for beating inflation over the long-term.

Well, the short-term, obviously, inflation can ding stocks like it has recently. So one of the ways I like to think about this is in terms of spending. So let's say you land on 4% of your portfolio each year you're gonna take out for spending purposes, right? That's how you cover your spending each year and your way of living.

If you had a 60/40 portfolio, that would give you 10 years worth of spending, right? A 40/60 portfolio would give you 15 years worth of spending in fixed income or cash or something like that. Now, this ignores inflation in your spending over time, so it's pretty back of the envelope.

But I think this is a good way to look at things in terms of getting comfortable with some balance and the understanding that you have to have accept some volatility in your portfolio if you want to beat the rate of inflation over time. So a lot of retirees are gonna wanna leave money to next generation as well.

Most retirees who have a lot of money don't end up spending at all. And so if that's the case, you're managing based on your children's or your grandchildren's time horizon and risk profile. And that's theirs, not yours. So I know it's a scary proposition once you're relying exclusively on financial assets to support your lifestyle, but you're gonna have to live to accept a little bit of volatility with part of your portfolio.

Maybe you kind of mentally bucket this. You know, this part of the portfolio, this 20, 30, 40, 50% is for the next 10 plus years. This part is for the next one to three years. This part is for the next three to seven years. Whatever you have to do to get yourself comfortable there because you're balancing out spending some now and also growing it for the future.

So that's the kind of thing where it stinks. It would be nice if you could just put your money into something that paid you 7% a year, year in and year out. It doesn't really exist, unfortunately, and you're just gonna have to live with some volatility because people are living longer.

- Right, I think I like their attitude here of thinking about, you know, yeah, still staying invested. It's not like it's a end date where you're cashing out all of your retirement plans or something. They make the point that your portfolio management is never more important than when you are retired, right?

'Cause when you're accumulating assets and you're putting money to work, your asset allocation doesn't matter nearly as much as it does when you're actually retiring. And withdrawing money and financial planning and all this stuff, there's so much more that goes into it, which is why we have a lot of clients come to us when they're approaching retirement because there's a lot more complexities involved in that.

- And that's actually what I was about to ask, if that's a popular time for people to get an advisor for the first time. It seems counterintuitive, but like when they're actually retiring. - Because financial planning and advice is so much more important. Taxes are more important. Insurance is more important.

All these things, it's definitely a mindset shift too, psychologically, to go from being an accumulator of assets to someone who's then spending it down. That can be tough for people to turn on a dime and then spend because they just want to hoard it all their whole life. And then to turn around and have to spend it, it's tough when there's not anything else coming in.

- Right. That makes sense. Cool. All right. Next week, we are going to be back going over all the changes to retirement contribution limits, tax code, everything else you need to know for the new year. So if you have any questions, remember email us, askthecompoundshow@gmail.com. If you're listening in podcast form, leave us a nice review.

Every week you can just talk about Duncan's hats, right? The guy's never without a hat. - I got some new ones for the holidays too. So keep your eyes peeled. There'll be some new ones. - Perfect. If you're watching on YouTube, hit that like button, subscribe. You can also leave us a comment or a question.

On YouTube, we always check it. I'm always in the comments battling it out with people. I don't mind heading in there. We have some nice people and they also have some good comments too. I don't mind. Keep those coming. Remember, email us, askthecompoundshow@gmail.com. We're looking forward to an awesome year here.

Let's do it. We'll have guests going forward. - Happy New Year, man. - I'm not going to say it back. And we will see you next week. - See you everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (gentle music) you