Welcome back to our show, Portfolio Rescue. This is our show where we answer questions directly from you, the viewer. I am Ben Carlson. Joining me, as always, is our producer, Duncan Hill. Quick reminder, this show is for informational purposes only. It should not be relied upon for innovative decisions.

We have to get that out of the way. Remember, we're just providing context and perspective here. If you have a question, email us, askthecompoundshow@gmail.com. We got a ton of good emails last week. I think we're going to be full up for a long time. And remember, this is not just going to be me answering questions here.

Each week, I'm going to be bringing on an expert, and I have an expert waiting in the wings here who's going to help me with some questions later on. But first, Duncan, what's going on? Question number one. Hey, Ben. Good morning, everyone. So first up today, we have the following.

So first up, I have a question about saving versus investing. I'm a 26-year-old medical student and my wife and I are looking to buy a house in the next year or two. She's a teacher and makes around $50,000 pre-tax. I will be a resident next year and will make around $55,000 pre-tax.

We currently have about $5,000 in a Roth and $11,000 in a Marcus account. My wife has $7,000 in her 403(b) and we have no kids. Should I risk more of my savings in Marcus and invest it given how low rates are? Maybe a higher dividend ETF short-term? Okay, so this is a question that we get in some form or another dozens of times every month.

It's partially because of the low-rate environment we're in, right? If you go to a savings account, so I also have an account at Marcus. They are currently paying 0.5%, half a percent in interest. So it's not like you can just get in your money market or savings account 4% or 5% like you could in the past.

The way that I look at this is, what's your upside and what's your downside? Because we know risk and reward are attached to the hip. So let's say you go out and take a little more risk and you can earn 5% extra per year as you're saving for down payment over the next year, two, three years.

On $10,000, that's an extra $500 a year. So that's your upside if you can increase by 5%. Obviously, if you can increase by more than that, it's more. So if you're saving for a $20,000 down payment, we're talking $1,000 a year that you could get extra by investing that money.

So that's the upside. What's the downside? All right, Duncan, put up the S&P 500 table here that shows the amount of times it's positive and negative. So what I did here, I took the S&P 500. So let's say you want to take more risk. Put this money in stocks instead of cash.

I looked over one, three, and five-year time horizons, rolling returns going back to 1926. So on one-year basis, roughly three-quarters of the time, you're going to see positive returns historically. Three years, it's almost 85%. Over five years, you're getting closer to 90% of the time. So the odds are in your favor that if you hold even for five years if you're saving for a down payment, it's pretty good odds that you're going to see a positive return.

Unfortunately, the downside here is, I looked at the worst returns in these periods, so the times you did have negative returns. The worst one-year return in history for the S&P 500, -68%. Over three years, you could have lost 81%. Over five years, 61%. Now, to be fair, those returns are from the Great Depression.

It's not exactly the best analogy here. That's the worst, worst, worst-case scenario. So let's say if you look more in modern times. This is since 1960, what I'll call the modern stock market. The worst one-year return was -43%. Over three years, the worst return was -41%. Over five years, still, you lost close to 30% in the worst return.

So, stocks are still risky. If you want to spend that money when you need it and the stock market is crashing, you're kind of out of luck. So let's say, instead of the S&P 500, we looked at a 50/50 portfolio. So now I took the returns of the S&P 500, put them against the five-year Treasury, which is just an intermediate term government bond, and looked at a 50/50 portfolio.

Now things look a little better. So you split the difference. You do some in a safe bond. You do some in the stock market. Over one year, you're positive 82% of the time. Over three years, 93% of the time. And over five years, you're only down roughly 4% of the time.

So your odds increase more, kind of splitting the difference here. Again, you can have bad returns, though, in those negative times. The worst one-year return was 38%. The worst three-year return was a loss of almost 50%. And over five years, you still could have seen a 25% loss in a 50/50 portfolio.

Again, that's all Great Depression stuff, so let's look at the more modern times. Since 1960, the worst one-year return for a 50/50 portfolio was close to 20%. Over three years, 8%. And surprisingly, over five years, you've never seen a down year for a 50/50 portfolio over a five-year period since 1960.

Not bad. I understand why people want to take more risk here when they're saving for a down payment. You think you have all this money, it's just sitting there earning nothing. But I think you have to ask yourself, is the risk of potentially having a lower down payment worth it for having a potential to have a little bit more on the upside?

If you can handle seeing that money evaporate 10%, 20%, 30% of it, when you need to spend it and have a lower down payment for the potential to have it be higher, I think that's kind of the balance you need to make. But you have to ask yourself, is it really worth it?

For me, personally, if I have something that's coming up in three or four years, I don't like to put it in the stock market, because for me, it's not worth the risk. Alright, Duncan, what have we got? #2. Duncan: I was just going to add, a while back, Nick Majuli did a good post, I can't think of the name of the title, you might remember it, but where he was breaking all this down, saving over the long haul and the best allocation.

Over the long term, you're much better off in the stock market. Over the short term, who knows? If you had to spend your money in March 2020, the stock market was down 35% in a handful of weeks, and then you're out of luck. Yeah. Alright, so next up, if I believe that the baby boomers are shifting from net investors or savers to net withdrawers, what is the investment strategy that I should take?

Should I favor bonds and gold over the stock market, or try to pick the winners that boomers will direct their money towards? Healthcare, golf courses, Russian nesting dolls, etc. I have been going through this thought experiment, but I want to see if my thinking is on the right course.

Alright, here's my next big short for baby boomers, when they're sort of out of the picture. I'm shorting whitey tighties. Duncan, do you think that there is a single male in America under the age of 60 who still wears white underwear with the blue and gold around the elastic band, right?

Yeah, I would short that. I'm going mega short on whitey tighties. Okay. For real, though, this is an interesting question, because we've never really seen anything like this. In the year 1900, there was 3.1 million people over the age of 65. By 2030, it'll be closer to 70 million, because that's the whole baby boomer generation.

By 2030, we'll be over 65. 20% of the population will be over the age of 65 by 2030. Duncan, throw up this demographic chart I got from the U.S. Census here. Look at this growth in people that are older in their years, so in the '60s, '70s, and '80s, where we're headed from 1960 to 2060.

We've just never seen anything like this before. Not only having such a large cohort of a demographic be this old, but people live this long. Here's why I'm not worried about baby boomers crashing the stock market. There's this report from Stanford Center on Longevity. They say one-third of baby boomers have no money saved for retirement.

And those who do have a positive retirement balance, the median balance is around $200,000. Baby boomers are living longer. They're going to need two, three, maybe four decades for their money to last in retirement. They're going to need to hold more stocks, because interest rates are so low. So, people are worried about them selling all their stocks.

I'm not worried about that. I think a lot of people are going to have to either work longer or invest their money more aggressively. And you have the fact that the top 10% -- there was a new study in the last couple of weeks -- the top 10% in this country own 89% of the stocks.

Unfortunately, most of that money is going to be passed down to their rich kids. It's not going to be sold. A lot of these people that own the stocks aren't going to have to sell it. And also, someone's going to have to buy those assets from the boomers that do sell.

Millennials are now the biggest generation. Gen Z is going to be bigger than the baby boomers by the end of 2030. And if we break up the population into these five-year age brackets -- the census does this -- the top 10 ages in 2030 will all be under the age of 50.

So, even though we have so many more people getting older, we also have millennials and Gen Z coming in to buy those stocks from them. So, I'm more worried about how we're going to care for this aging generation that's going to have a long retirement. Again, back in 1900, when there was only 3.1 million people over the age of 65, their retirement plan was to die on the farm.

Now, people actually have decades ahead of them in their working years, if they retire in their 60s or even 70, where they could have two, three decades ahead of them. So, I'm more worried about how we're going to take care of these people than them crashing the stock market.

I'm not that worried about that. What do you think, Duncan? How do we short whitey tighties? Is it Hanes? Yeah, I guess. But they make a lot. I feel like we could find a more concentrated bet. That's true. Plus, Michael buys all of their white V-neck, so that might offset it.

Alright, next question. Okay. So, next up. I recently secured an interest-only loan for my first home in L.A. It required 30 percent down, but I have 2.125 percent locked in for seven years. I find this attractive as I believe I can meet or beat that with returns in the stock market without having to pay down the principal yet.

And it gives me more flexibility to potentially move in seven years if this isn't my forever home. Assuming the ROI on appreciation would be greater than the interest paid during this window. What are your thoughts on interest-only mortgages versus building equity in a traditional 30-year mortgage? Alright, I personally have always been a fixed-rate guy, because I'm a planner.

But I'm going to bring in someone else here. So, one of our financial advisors, a member of our investment committee, Blair Ducanet, to help me on this. Because I know she's talked about interest-only loans. She's worked with this. She's talked to clients about this. Blair, what are some pros and cons of the interest-only loan versus a fixed loan?

That's the only thing I really have experience with personally. Yeah, absolutely. Hey, guys. Great to be here. Thanks for bringing me in. Duncan, good to see you. Yes, absolutely. Interest-only loans get a really bad rap because a lot of people got into trouble in 2008-2009 when home prices declined.

But putting 30 percent down gives you a really nice cushion in equity. And with rates so low and the fact that home prices, yes, they've had a big jump recently. But over the long term, we expect home prices to kind of match the rate of inflation, not necessarily keep pace with inflation.

A lot of people are asking, "Why would I park more of my capital in home equity if I expect other things to grow faster?" Right. So, the idea is you literally are only paying the interest, right? You're not paying down the principal at all. Exactly. So, you're not building equity.

But then maybe your payment is a little smaller, so you can put that money to use elsewhere. That's kind of the idea here, right? Yes. We have to stop putting our net worth into different buckets. It's all one balance sheet. And if your idea, if your goal is to increase your net worth, you might not want to be parking more and more of your capital into home equity with the expectation that home prices are going to basically increase with the rate of inflation.

So, 30 percent down gives you a very nice cushion. Your home price would have to decline by more than 30 percent for you to "lose money on the sale." And this questioner points out another good point, which is the seven-year time period is the average holding period for a house.

Very few people are staying in a house for 30 years. So, this 30-year fixed-rate mortgage really doesn't make sense for a lot of people. And I want to give you a personal example. I am, this actually tomorrow will be seven years since I purchased the current house I live in.

I knew it was not my forever house. It's a smaller home. I thought that I would be moving to a bigger house now. It might be a year from now. I did a seven-year adjustable rate mortgage. So, I got a lower rate than the 30-year rate at that time, fixed for seven years.

And oh, by the way, it's adjusting next month and it's adjusting down over one percent because interest rates went down. Now, that's the thing. If you looked historically, you would have been better off doing this almost every year. Duncan threw up the chart on mortgage rates because all they've done is go down, right?

So, you'd have been better off doing this in recent years, correct? Now, I'm not saying that I knew what interest rates were going to be doing. In fact, I kind of baked in the fact that I thought interest rates would be higher in seven years. However, the interest that I have saved over the last seven years would more than make up for paying a little bit more, right?

Because remember, that seven-year adjustable rate that I got seven years ago was lower than the 30-year fixed rate, right? So, I've already saved the money. Even if I pay a little bit more for the next two years, I don't have a crystal ball. I do have a magic eight ball.

So, if you guys want to ask a yes or no question about interest rates, we can. Nobody knows the future, but when you're shopping for a mortgage today, generally, you get a lower rate on interest only. You get a lower rate on adjustable rate loans. Be realistic about your holding period for this house and be a little bit more sophisticated with your choice in interest in mortgage loans.

Yeah. So, obviously, pros and cons. I do like the idea of if you know you're a younger person you're going to be trading up in a number of years. This seems to make more sense because most of that mortgage payment is going to go to interest in the first few years anyway.

So, that makes sense. Correct. All right. Duncan, what do we got next? Okay. So, last question. So, question four. This is an interesting one, and I'm going to ask you to explain to everyone what this acronym even means after I read this. But, "I work for an employee-owned company with an ESOP benefit and may generously give each employee 10 to 15 percent of their salary in company stock/shares each year.

It varies every year, but it's typically at the higher end of that range. So, if I'm making $100,000 in salary, my employer will give me around $10,000 in stock on top of that. I also have the option of contributing to a 401(k), which I do. Assuming the ESOP contribution from my employer will be taxed after retirement, would you recommend that I put all of my 401(k) contributions in after tax?" Okay.

So, ESOP stands for Employee Stock Option Plan. And this is, if you have the ability to work for a company that pays out stocks, this is nice. I just had a family member recently start working at a new public company, and she told me, "They're going to offer me a 10 percent discount off of my shares in the company." So, what's the mix I go between my 401(k) and company stock?

So, Blair, what are the things that you should be looking for here? What are the considerations when thinking through this idea of splitting between a 401(k) or taking stock in the company? Yeah. So, it sounds like in this case, the employee doesn't have a choice. They're going to receive 10 to 15 percent of their salary in employer stock.

Generally, an ESOP plan is for a private company, and it's a very tax-efficient way for the owners to sell off a portion of their shares and also, by the way, enrich their employees. So, it's a wonderful benefit if the company is successful. I've actually seen this work out to clients' favors many times, and they end up with a net worth much higher than they ever would have assumed just from saving on their own.

So, this is a wonderful benefit. You are right. All of your shares in the employee stock ownership plan, the ESOP, will be taxed when you take it out later in retirement. You have no Roth option here. We always talk about in financial planning building these different buckets of savings, and by buckets, we mean regular, deferred, going to be taxed when you take it out in retirement, Roth after tax, free and clear, no tax inside the account and no tax when you take it out later, and after tax savings, no deferral of any income.

You pay taxes on the interest that comes in along the way. So, the question is getting to building the different buckets here. The Roth option in the 401(k) may be the right decision to try to build more of that Roth bucket because you have no choice in the employer stock option plan.

Right. So, the Roth offsets the stocks you're getting, which, again, I think is a good problem to have if you're someone who's getting this, because, as you mentioned, this isn't something everyone can receive, whether you're for a public or private corporation. This is a good problem to have. But yeah, you're looking at an offset, right?

Because you know you're going to be paying taxes on the stock for the company, which is a good problem to have if that grows, you're doing great and you're working out better than most people, but you still want to have some sort of an offset, so you're not paying taxes on the Roth 401(k).

I told, in our last episode, I told Bill Sweet, our CFO and tax expert, he talked me into switching to a Roth this year for the first time because I have more traditional retirement assets. So, it seems to make sense to have -- the way I look at it, you talk about buckets, it's like diversifying your tax base, right?

You have some options. Yep. It gives you more flexibility in retirement as to where to take your income. The questioner also noted their age, which is important. The younger you are, the more beneficial to making the Roth contributions, because keep in mind, when you make a regular 401(k) contribution, you take a tax deduction this year.

You get a tax write-off, you get that benefit, right? With a Roth, you don't. You're paying the tax up front today, and you need more time for those dollars to grow, so it is important. It makes less sense as you get older. It also makes less sense if you have a really high income, you're in the top federal bracket, maybe you also live in a high state income tax state, so you also have to look at what's your income tax rate today, what is it likely to be in the future.

Again, we can ask the eight ball. We don't know, so there is a trade-off there, but generally, it's a good idea to be building these three buckets, regular deferred, Roth, and after-tax savings. Perfect. By the way, in the comments here, someone says that Duncan still has the newly-wed glow.

Duncan, one of these episodes, we're going to have to do some financial advice for newly-weds here. For coming on the show and helping us out here. Yeah, thanks for having me. It's a fun time. These questions are a little outside of my area of expertise. Duncan, as always, remember, if you have some thoughts about the questions today, leave us a comment below.

I personally read everyone, even the ones that call me an elitist. If you have a question for the show, email us, askthecompoundshow.com. My seven-year-old said, "It's really thirsty if you ask people to subscribe and like your channel," but I don't care because that's how I find life validation, so subscribe, hit the like.

Check out idontshop.com. We've got this new sweatshirt here on the compound logo. Duncan, what's the guy's name? The artist? Peter Paid. Peter Paid. This is a sweet, new champion hoodie. Thanks, everyone, for joining the live stream. Feel free to ask questions in the chat sometime. Maybe we'll get to those even live sometime.

We'll see you next time. Thanks, everyone. See you.