(beeping) Welcome back to Ask the Compound Show. This is our last show of the year. Duncan wore a Dundon Miffler sweater for us. Remember our email here, askthecompoundshow@gmail.com. We love all the emails. Personal emails, personal responses, as Michael says. Today's show is sponsored by our friends at Bird Dog.

I just had a comment from a friend today saying, Ben, thank you, I bought one of the Bird Dog polos. It's amazing, the material. They like it, they said I'm gonna have to get another one. I think it's too late to buy Bird Dogs for people for Christmas. Unless you wanna give something late, but you can still get a gift card.

I actually ordered from Bird Dogs a pair, remember I found those new pairs of shorts, new colors. I bought two pairs of shorts and they gave me a free t-shirt. A little pocket tee, it was nice. And we're still giving away the free hats. Duncan wants one of these so bad.

The dad tag hat. One day, one day. Birddogs.com/ATC or enter the code promo code ATC when you check out. Remember they have shorts, polos, khakis, joggers. I've been wearing the joggers a lot lately. Very comfy, very stretchy. I don't think it's too late either. You get it and you just tell your family, hey, supply chain issues.

That's true. You'll get 'em sometime soon. That's fair. Before we get into the show, we wanna shout out one of our loyal viewers, listeners, Dave at Brewery424, my favorite brewery in Holland, Michigan. We're at the college. Big listener, huge contributor to the Animal Spirits Discord over the years. Dave has actually sent us some gear and some beer before.

Every holiday season, Dave actually organizes a charity raffle. I guess he's given over like $30,000 to various charities. We're gonna partner with Dave this year to help him out. So make a donation to No Kid Hungry, save your receipt, send it to Dave at thecompoundcharity@gmail.com. That's thecompoundcharity@gmail.com. And he'll give you one entry into this raffle for every $20 you donate.

Very cool. And the prize is a package from him and it's gonna have some stuff from the compound. Yeah, so he's gonna pick two winners and he's gonna send a brewery prize pack, which I think could be some clothes, maybe a case of beer, something like that from 424.

And then we're also going to send some free compound gear from idontshop.com. So it's thecompoundcharity@gmail.com with your receipt. That email is not affiliated with us at all, so don't try to get ahold of our team that way, but that's going to Dave and who's a good guy. So we're just trying to spread the good word here on the holidays.

Yeah, just to reiterate, no one will check that email after this. So just forget it after you send your receipt. But 'tis the season, if you are doing well, and a lot of the people who listen to our show are. Not to brag. If you're able to give back, try to do so.

Yeah. Yeah, No Kid Hungry, we've supported them a lot in the past. So yeah, great charity and looking forward to being able to support them some more. 424 is great beer. It's true. I enjoy it. Even for a guy who doesn't like IPAs, I like the beer. I've liked everything that Dave's sent me.

Yeah. He even sent me one that was like, it felt like it was a prank. It was like 11% alcohol or something, or 10%. It was like really strong. Still liked it. He didn't get me. Put you down for the night. All right. Let's do some questions. Okay. Up first today, we have a question from Mark.

My portfolio is still below its highs due to the sell-off in bonds. Could you do a piece on how far we are below the bond market peak? All right. This was a response to, I wrote last week, the stock market had round-tripped. It was almost two years. We had to, in the S&P, we were down 25%.

The NASDAQ I think was down 34% in the 2022 bear market. Back to break even with dividends reinvested, pretty good. So the question is, what about bonds? And bonds had a bear market of their own in a lot of cases. You can't really say you've made your money back in bonds yet.

So the thing is, there's really no Dow or S&P when it comes to the bonds. So I guess the best proxy is something like the Barclays aggregate, which is, you could look at total bond market. The next one, so John, throw up the chart here. I got a ton of charts.

The AG, and this is total returns with income reinvested and yields with bonds, 'cause you can't just look at prices on bonds. It was down nearly 19% of the lows. Now we've shot back up. And these numbers are through the close of the day on Wednesday. It shot back up a lot lately as rates have fallen.

So we're still 10% down. So we're still in a correction there. Do the next one, John. 30-year treasuries. TLT, 20 to 30-year treasuries. At the lows, it was down nearly 50%. It's still down 37%. So you've seen a nice snapback rally. Rates have fallen. If you've been holding on for the past three or four years, you're still down a lot.

Next one, IEF. This is seven to 10-year treasuries. At the lows, we were down 24%. We're now down a little less than 17%. Still pretty good ding for 10-year treasuries. Last year was the worst year for 10-year treasuries on history. Next one, three to seven-year treasuries, IEI. This is down 9%.

It was down 15% or so. At the lows, not too bad. So that's mostly treasuries. Barclays AG also has some mortgage bonds. Let's look at corporate bonds. LQD. This is the biggest ETF for corporate bonds. It was down 25% at the lows, now down 12%. Finally, high-yield bonds. This one is kind of crazy.

High-yield bonds were only down 17% at the lows, now down a little less than 2%. Now, this seems weird because how could high-yield outperform these other bond areas because it's more risk? Well, high-yield acts more like equities than bonds. And so that's one of the reasons that we saw high-yield not go down as much and then also rally a lot more.

You didn't really have spreads blow out. So something like high-yield actually is outperforming the bond bear market, which seems crazy to think about because usually if there's a bear market, high-yield is gonna get crushed. In 2008, it was down 40% or 50%. Knowing what you know about my risk tolerance, which bond fund do you think I have the most of in my portfolio?

You just hold a single Oatly corporate bond and it's trading for 12 cents on the dollar. I probably would, but no, it's junk bonds, you know? Okay, so you're doing pretty well. And if you're in T-bills, obviously you didn't have to worry about losses. If you're in short-term treasuries, one to three year or something like that, you really didn't have to worry about losses.

And so it really depends. How you feel about bonds depends on where you are. And if you're in zero-coupon bonds, which is, Duncan, that should be you, zero-coupon bonds, that we're talking 50 to 60% losses and they've shot back up, it's still down a lot. - I like to give those a look.

- But yeah, the total bond market's still technically in correction territory. So you've got some work to do. And that's gonna be made up by rates would have to fall a lot more to get out of correction territory or the yields are higher now, so you're gonna make it up over the course of, you're just gonna have to wait.

But it's coming, we're getting there. Stocks round trip before bonds. - You have hope. - Next question. - Okay, Travis writes in, "I'm a big fan of the show "and have been listening for the last two years. "I'm 26 with a net worth of about $135,000 "and no debt, not to brag.

"I have investments in a Roth IRA and a brokerage account. "I regularly hear how you and Michael "are 100% in stocks because you guys "are still relatively young. "Middle age is still young, right?" - Shot's fired. - "Hearing you guys say this inspired me "to sell the bond portion of my portfolio, "which was 10%.

"I invested this in the Q's, "but 70% of my portfolio is invested in the S&P 500. "So my current portfolio is 70% S&P, "20% international stocks, and 10% triple Q. "Does this allocation make sense? "I'm relatively young with $73,000 invested in the market "and don't plan to sell anytime soon.

"Is investing in the Q's and the S&P 500 redundant? "If the S&P goes up, so will the NASDAQ, "but the NASDAQ gives me more exposure to tech, "AI, and the giant innovative juggernaut country. "Companies." - So let's play a new round of Ben's favorite game, Am I Diversified? - Am I Diversified?

- So 70% in the S&P, 20% international, 10% NASDAQ. You're diversified, kind of. Like if we're doing a one to 10 here, you're at a six maybe. You have a heady concentration of growth stocks. And the question is, are you comfortable with that? I actually wrote a piece this week called A Short History of NASDAQ 100 Returns.

John, throw the table up here for me that shows the NASDAQ, S&P, and Russell. And I looked at these different time frames. The NASDAQ 100 goes back to late 1985. So 1986 is the first year. I looked at these different periods, 1986 to 1990. And then you had this huge run up in 1991 to 1999.

The NASDAQ 100 was up 38% per year, up over 1,700% in total, as the S&P was up 440%. And I compared the small caps here too. Then you had this period from 2000 to 2011. So we're looking at a 12 year period where in total the NASDAQ 100 was down 36%.

S&P was up 7% over that period. And the Russell 2000 small caps was actually up over 70%. And then you have the cycle from 2012 to 2023 where the NASDAQ's up 19% per year, totally outdoes the S&P 500. So the way I like to think about it is, and by the way, these start and end dates are cherry picked.

I did this for a reason, but I think it's helpful for a question like this. The NASDAQ 100 is the S&P on steroids. It's higher highs and lower lows. Both indexes are concentrated more in large cap growth stocks, but the NASDAQ is so on a much bigger scale. So the S&P 500, the top 10 stocks make up 30% of the total.

For the NASDAQ 100, it's more like 50%. So a lot more concentration, a lot more bang for your buck. The losses are gonna be bigger. The gains tend to be bigger as well. The question is, can you stick with a strategy of investing in large cap growth stocks? I think it's probably gonna be an okay strategy over the longterm, but can you deal with the time when that strategy doesn't work?

Because looking at the last 10 years or so, you'd look back and go, why would I invest in anything else? This makes no sense. We don't have to go back that far in history to find a period where this strategy didn't outperform. John, chart on again, asset class returns, 1999 to 2009.

So this is from the end of 1999. So the first decade of this century, NASDAQ 100 in total over this 10-year period was down 48%. S&P had a lost decade as well, down about 10%. In that same time period, mid-caps were up 85%. Small-caps were up 85%. International stocks were up almost 20%.

Emerging markets were up 160%. So all of these areas that have underperformed in the last decade or so outperformed the NASDAQ by a lot in the first decade of the century. John, throw the next one up. This is the following. Give me a, John, can you go back and forth a few times?

See, that one, there we go. Now stick on this one. You can see the difference. We went worst to first for the NASDAQ 100, and we went first to worst for emerging markets. Small-caps and mid-caps actually did okay for both of the first two decades of the century. S&P had a strong comeback as well.

So I think this is a, I love showing this example because it shows, proves the power of diversification as a risk mitigation strategy and not going to extremes. Those extremes are really fun when the NASDAQ 100 is up a lot, like it has been for the past 12, 13, 14 years.

But you had that 12 or 13-year period to start out the decade where the NASDAQ got just crushed coming out of the dot-com bubble. Obviously, it should be noted diversification isn't perfect. When you diversify, you're guaranteed to hold the losers, but you're also guaranteed to hold the winners. The point is, it blunts the impact of the losers.

So you're not just getting crushed. So if you can stick with a strategy that's gonna underperform by a lot at certain periods, that's fine. I think diversification helps it. So when you have those periods of underperformance, you also have something else that lifts it up a little bit and you can rebalance.

And it's kind of a pick-your-poison kind of thing. You could invest in large-cap growth stocks like the S&P and stick with it. I'm sure it'd be a pretty decent strategy. It has been for the past 100 years or so. It's just, can you stick with it when it's going to underperform?

And it will at some point. I don't know when, but it's going to. - And just for the record, when you and Michael talk about being 100% stocks, you're talking about your retirement. - Yeah, we're talking about retirement. I also have a lot of... I mentioned this from a barbell person.

I have plenty of liquid cash on hand for other stuff, and that's what allows me to leave that retirement stuff alone. So yeah, you're right. It's 100% of stocks for things like retirement accounts, not stuff that I need to spend on that's going to be in the near intermediate term.

- Right. You have to be crazy to do that, right? - Yeah. You're what, 115% in stocks? - Probably. - All right. - Okay. - Next question. - Up next, we have a question from Chris. What would you advise as an alternative to getting on the real estate ladder, saving and waiting for lower interest rates or investing in the market until you can put down a larger down payment?

- All right. Each week, there's a question where I kind of do a deeper dive than usual. This is my deep dive one. The thing is, offering advice on something like a home is even harder than offering someone advice, personalized advice on your portfolio, because there's so many idiosyncratic risks.

Where you live, what the local real estate market looks like, the number of houses that are available for sale and the supply, like your tastes and preferences for a house, your financial situation, your budget, all these things. So I'm gonna look at this from a perspective of what would I do if I was forced to buy a house right now?

I have a career change. I have to move, family, whatever the reason is. In 2017, when we had my twins, we could have made it work, I guess, but our old house, it wasn't set up for twins. We had two bedrooms upstairs and two bedrooms downstairs, and we had an older daughter as well.

And so the layout of the house just never would have worked. For the first month we were there, we had the twins in cribs sleeping in my office because it was on the same floor. So we had to move, we had to get a bigger house. So we were kind of forced to do it, right?

That's what happens. Okay, housing is so unaffordable right now and no one's ever gonna move again, but people are going to because life gets in the way. So I'm looking at it if that was my situation 'cause I can't look at it from other people's, this is just me, okay?

Activity in the housing sector is down, but there's still activity happening. So John, throw up existing home sales. They've been crashing, but we're at a run rate over the last 12 months of 3.8 million. It's the lowest it's been since the depths of the 2008 financial crisis, but there's still housing changing hands.

Now show new home sales, John. It's actually been rising. It fell, but throughout 2023, even with 8% mortgage rates, new single family houses sold rose. So now let's do the next one. This shows the breakdown of new versus existing home sales. In the existing home sales, obviously dwarf it, but back in the 2000, early 2000s housing bubble, we got to about 15 or 16% of all sales were new homes.

They were building a lot and we actually had oversupplied. And that's one of the reasons that housing markets ramped up and then they crashed in 2008. It got to the lows 'cause all the builders pulled out and they're like, screw this, we're out of here. We're not building any more houses.

So it got down to 5% of the total by 2010. John, throw that chart back up there one more time. It's now falling, the existing home sales, so new home sales are rising. It's back up to 15 or 16%. So there's a lot more new home sales going in than there were for the past decade or so.

So how is this the case in a world of higher inflation, meaning higher input costs, now you can do chart off, John, and higher mortgage rates? Because home builders own the land, right? They're not gonna just sit there like a homeowner who has a 3% mortgage locked in and most of those homeowners say, I don't need to move.

I can wait. Home builders are incentivized to sell. So surprisingly, costs have gone up. Remember when lumber was the biggest thing? Everyone on social media had a picture of people on a date sitting next to lumber at Home Depot and said, take me somewhere expensive, and it was lumber.

So you had all these costs go up. So home builders raised their prices, but then, hey, the cost of lumber fell and all these other costs fell, but home builders didn't then lower their prices. They took it to margins. So I had our research analyst, Sean, look at this.

John, throw up, this is gross margins. At the beginning of the pandemic, for the five biggest publicly traded home builders in the United States and through the latest numbers in Q3 2023, across the board, we've seen a 25% average increase in home builder margins, which sounds crazy. Again, in the highest inflation we've had in 40 years, how do they improve their margins?

'Cause they raise prices faster than costs went up. And when costs went down, they took that to the bottom line, right? So the thing they can do though, because most home builders don't wanna lower prices, 'cause if I lock in a price for a new home, and then a month later, some other person comes along and locks in a price that's lower than me, I'm gonna say, whoa, whoa, whoa, stop building my house.

I want that lower price. So they're not gonna really lower prices like that. What they can do is buy down mortgage rates. So I looked on Pulte Homes website this week. They say 30 year fixed rate mortgage at 5.75%. They just buy down the mortgage rate for you. - Wait, can you explain that?

I don't quite understand what you're saying. - So anyone could buy a mortgage down. You just pay more money up front and you basically buy points, they call it. So you pay money up front to have a lower mortgage rate. Right? - Interesting. - Yeah, instead of paying the interest out over the course of the loan, you pay to lower it.

Lenar has one that says they have a fixed rate for 4.5%. So how is that possible if the mortgage is for 7%? 'Cause they're buying it down for you. So that's how they make it cheaper. So these home builders can incentivize you to build now by offering you lower rates.

'Cause they, again, they have larger margins so they can afford it. So it's pretty good. So another benefit to the new home sale thing is that there's been an increase in it and they build more smaller homes. So John, throw up my chart from Fred here. This is a median sales price for new houses sold in the United States.

You can see it's crashing. And a lot of people were commenting on this on social media a couple of weeks ago saying, how is this possible? The median price of a new home has gone from $500,000 roughly to 409,000. How is that possible if housing prices are at all-time highs?

Well, it's not because new home prices are crashing. It's because we're building smaller homes. So the next one, John, this is the median square foot of a new home. It's falling. So this is a good thing. Remember for years we talked about how no one was building starter homes anymore?

Because new home builders have stepped in to pick up this vacuum where people aren't buying and selling existing homes anymore, we're making more starter homes. So you have a low supply in existing home sales. Demand still exceeds supply. And if mortgage rates fall, I think we're gonna have more demand come in.

So if I were in the market for a house, I'm putting a bow on this here, okay? I would skip the existing home market altogether and I would build. You can get a lower mortgage rate. You can find a house that fits your needs and desires. Anecdotally, I'm seeing new houses go up in every nook and cranny in my area.

That wasn't happening a decade ago. Anywhere they can find land, they're putting up houses. They're knocking down trees. They're putting up houses. Now, I have gone through the building process multiple times before. There are pros and cons to it. The pro is you get to pick out the house exactly like you want it.

It's brand new. So it means your maintenance costs going forward are much lower. There's no bidding wars. There's no back and forth with realtors, any of that stuff, which is good. Get a lower mortgage rate, as I mentioned, which is probably more true with national builders and local builders.

So that kind of depends. And then you get time to figure stuff out. 'Cause it could be, I don't know, 12, 18 months until the house is done. So you don't have to be in a rush. - That's what I was about to ask, what the average time range is.

- You don't have to be in a rush. It probably was six to nine months in the past, where now with labor shortages and supply shortages, it might be more like 12 to 15 months. The cons include the cost would probably be higher than you think, because a lot of people will do add-ons.

It's gonna be more, you're gonna want more stuff once you start getting through the process. The number of decisions is mind boggling. It just melts your brain. - I want solar shingles. - It's fun to go through like, hey, countertops and cabinets, that's cool. But then you get to like, I got to pick out the doorknob colors and the cabinet things.

And wait, I have to pick out the color of the grout. Do you want it light gray or off gray? Or do you want, it's like mind boggling the number of choices you have to make. It can take longer than you think, and you obviously can't get in a house right away.

And the other problem for most people is, is there land available where you want to build? But, you know, like most financial decisions, there's trade-offs involved. But if I was doing it personally, and I didn't want to deal with a crazy home market where there's not a lot of supply, I would build.

Obviously, the big thing is, can you afford it? You can always save for a bigger down payment and keep renting if you can't. But my biggest advice to anyone is, don't try to time the housing market. If you can afford to buy a place, buy it now and worry about the rate stuff later.

If you can't afford it, then obviously it's not a great time to buy a house ever. I just don't see the idea of, I'm going to try to thread the needle and time it perfectly and buy this house when they're down 7%. Like, I don't think that way. You can afford it, buy it.

If you can't afford it, don't buy it. - You've sold me, you've sold me. I have a question. Do you think that we're going to see more rent-to-own situations because of the housing market? - Yeah, I think it makes sense. I think that's what all the institutions are going to do.

Although, they're pulling back right now, too, because rates got so high for them, it made their hurdle rate even higher for their cap rates on what they're making on these houses. - Because, yeah, I remember years ago, there's a company called, like, Bizuto, I think. And if you rented an apartment from them, they also had communities with houses.

Something about, like, $1,000 a month of your rent, they put aside for, you know, if you ever wanted to buy a Bizuto home down the road. And I've just been curious, because I haven't seen much more of that. But, yeah, it seems like that would be getting more and more popular now.

- Yeah, it makes sense. But I don't know how many places they're going to want to sell those houses right now, but, yeah. - True, yeah. - All right, another question. Right from the live chat from last week. - Yep, our very own Dave Airy. So Dave said, "Why not ask Blair, or Taylor, "or Tony Izola, or other RWM CFPs "about what questions one should ask "a prospective financial advisor?" - All right, ask by name, and we shall make it happen.

Taylor Hollis. - Hey, Taylor. - Hi. - How's it going, Taylor? - Good. - Welcome back to the show. - Good to be back. - All right, so this is a good question. Because I think a lot of people get overwhelmed by this process. 'Cause it's not something you, kind of like buying a house and selling a house, you don't do it very often, right?

You go through the process of vetting financial planners. A lot of times, the people with the best sales pitch are the ones that get you. So what do you think are some good questions to ask when vetting financial advice? - I think certainly the questions that we've kind of all heard of.

Are they a fiduciary? Meaning, are they required to legally put the client, you, your best interest ahead of theirs? How are they-- - Which is certainly a new topic in the last, I don't know, 10 or 15 years. It wasn't asked in the past, probably. - Sure, right, right.

- Just a question on the fiduciary thing. As a non-financial professional, I'm always confused by this. I mean, it is just a word, right? Like, they can always just say, yes, I'm a fiduciary, right? There's no, like, credential they show you or something to prove they're a fiduciary, right?

Like, how do you actually know someone's not just telling you that, but then they're not actually gonna abide by the fiduciary? - Well, the follow-on questions would be, how are you paid? How are you compensated? Are you, do you have any affiliation with other financial firms? Are there any conflicts of interest?

Are you paid based on the products you sell? Or are you paid specifically from the client? And, or, you know, are there any other ways that you make money? I think you can kind of drill down to that to understand. - Right. - What are you incentivized to do for me?

And how do you get paid? - How do you get paid is a big one that I think a lot of people go in thinking to ask. That's kind of front of mind. You know, making sure that interests aligned, right, is important. I think some that aren't as widely known, one that I really like is ask about the team that you would have access to.

Are you dealing with a one-man show or woman show? Are you dealing with, you know, a whole firm of resources? You know, if you have tax questions or estate planning questions, you know, who do you have access to as part of what you would be paying as a fee?

So I think knowing that there's a team behind one face is very important. - That takes away the key person risk too of getting hit by a bus, right? If you're dealing with... I know plenty of solo practitioners who are very good at what they do and they can wear all those different hats, but it's also a risk of if something goes wrong or that person decides to retire or walk away or whatever.

So I think another, yeah, another good question is like, what services do you provide? Is this just, 'cause some people just do asset allocation and portfolio management. Other people do financial planning and tax planning and estate planning and insurance planning. So that's another good one is what exactly can you do for me, even if I don't need it now, maybe I'll need it down the line.

- Right, another one I really like is, you know, what is your investment philosophy and how are investment decisions made, right? It's one thing to just look at past performance. You might like what you see, but how are they making decisions? Are they going off their gut? Are they sticking with rules-based investing?

Just having a good grasp of the overall investing philosophy I think is very important. - Yeah, that's a big one. I think it's also fair to ask, how do you personally invest your assets? You might not have the same allocation or plan as me, but do you follow the similar philosophy and values that you're purporting to the rest of your clients?

I think another good one is, is what is the client experience like? How often are we communicating? What's the tech stack or whatever I'm using? How am I getting my information? I think that's something that's important to answer too, is the upfront stuff is good, but how will this relationship look going forward?

How are we gonna work together? - Right, right, agreed. I like that one. Duncan, what do you want to ask to a financial advisor? - Yeah, no, I mean, I think these are all good things. I guess I would probably ask like favorite bands, some things like that. - I would also ask that, that is important.

- I think that, yeah, a lot of people just have no idea where to begin. And yeah, I think this area is very easy to be taken advantage of, especially for people who don't follow finance and don't really know that much about it. - It is, 'cause oftentimes the person who's the best salesperson might not have your best interests in mind.

So I think you want to know, most people want to know, am I gonna be okay? So it's like, how are you gonna create a plan that helps me accomplish my goals? Like, what are we gonna do to get to that point? I think that's what most people want to know.

Yeah, you're right, there isn't really a checklist for a lot of this stuff. It's, in a lot of people, it's kind of feel and body language and these are the things that are hard to quantify. - Do you have like, is there a red flag? Is there something that people should all kind of have on their radar, if they hear, that should kind of serve as a red flag?

- I think the compensation question could certainly uncover some red flags in the conflict of interest. - And like, what would they say that would be a big red flag? - You know, if they're getting, you know, I don't want to say kickbacks, but if, you know, there's just compensation arrangements that might not jive with your best interest, if they're not compensated in a way that aligns.

- It's more transactional in nature. - Right. - I make money based on the stuff I sell you and I'm gonna be selling you a lot of stuff. So that's the kind of thing, if it's-- - Or if I invest in these things, I get paid more. - To turn the portfolio or that sort of thing.

That stuff doesn't happen as much as anymore, but it does still happen. The other thing is just, I've seen this in retail space, I've seen this in institutional space, you know, people who prescribe without diagnosing first. Like, here's what you need to be invested in right now. You need 15% in this and 20% in this without first asking why you need to be invested in something like that in the first place.

So people who just say, our investment team thinks you need 10% in gold and 5% of this without first, like, does that fit your plan in the first place? So I think if they're not asking you the right questions, that's a good red flag as well. - Makes sense.

- Good question, Dave. All right, let's do another one. - Okay, last but not least, we have a question from Alex. I follow a fairly conservative 70/30 portfolio and have some questions about how to think about risk. I work at a big tech company and stock is more than half of my compensation.

If this industry were to have troubles, my job market would get pinched. Am I doubling up on my risk by investing in a cap-weighted index that has lots of exposure to big tech? Not to brag, but I'm in the highest tax bracket and live in California. So the most tax efficient bonds I can own are California bonds.

How should I think about the risk of owning a California bond fund instead of a total US bond fund or equivalent? - Lots of good stuff in this one here. So the first one is more about risk in careers and how you backstop that. So the market cap weighting thing, it could be diversifying, as we said before, but it could also be having a less risky attitude towards financial assets.

And I don't know, having a bigger buffer of cash and bonds, if you're really that worried and so much of it is tied in the stock and something goes wrong with a company. If the stock is down, you know, we saw a lot of tech stocks down 60, 70, 80% as they were laying people off.

That's a double whammy that you do not want to find yourself in. - Well, and I saw a triple whammy in this question. You have stock as part of your compensation, which is big tech. Your compensation comes from big tech and you're invested in big tech, separate from your employer.

I'd call that a triple whammy. I mean, champagne problems, right? A good problem to have. - And if half of the compensation is in stock, that means there's a big piece of that portfolio in this company stock as well. So, and that's another question we get all the time is what's the line in the sand where I have too much?

I actually had a conversation with someone just this week saying, "Hey, I'm doing my year-end stuff." And his wife gets a 10% discount for company shares, so they buy a decent amount of it. But he's like, "What's too much?" And I think that's a question we get asked all the time as well.

- Yeah, yeah, and I've personally seen people that they receive stock compensation, and I think because it doesn't feel super tangible, it's easy to forget about. And before you know it, you look up and you own way more than you intended. So I think for anyone that receives that as a big part of their compensation, be mindful of are you overweight?

How can you get out tax efficiently? Like that needs to be, you need to thread the needle on that. - Yeah, so you hear the great stuff of Microsoft employees and Apple employees and Google employees making millions, but the other side of that is Enron and Lehman and GE in these places where people have 80, 90% in the company stock, 'cause how could it go wrong?

I know this company, that's the downside. And I think we've kind of settled on, I don't know, anything over 20, 25% is probably a little too risky, especially if you're, so figuring out ways to diversify, even if it means thinking about the tax ramifications of that. I think that makes sense.

So obviously, yeah, you're right. It wasn't just doubling up on the risk, it's tripling up. So figuring out ways to better diversify and maybe even having a bigger tax or cash buffer. The next one is interesting because we have a lot of clients who live in California and New York who end up being in that high tax bracket.

And so the idea of just holding munis in those bonds gives you a huge buffer on a tax equivalent basis. Bill Sweet talked a couple weeks ago about how if you're buying treasuries or T-bills, you're still paying some taxes on those. With munis, you have to look at the tax equivalent yield.

So what do you think about people who live in those high tax states, but also are in the highest tax bracket? - I think that the, what you said, looking at the taxable equivalent yield of the state munis, I think oftentimes that's going to come out ahead and there's gonna be a big advantage, especially 'cause those states, they don't just have a state income tax, it's typically substantial.

And if you can avoid that, that is priority. In terms of like, are you thinking exposing themselves too much maybe to that state? - Yeah, maybe there's maybe, remember a number of years ago, Meredith Whitney put out the report that all these municipalities are gonna go under and that was a big worry for a couple of years.

I don't think that, states are actually in a much better place now than they were. I think COVID actually helped a lot there. But you're right, the tax equivalent yield, if you look at that, if you get a three or 4% immunity bond and you're in the highest tax bracket in one of these states, you could be looking at a seven or 8% tax equivalent yield.

It's phantom yield for a lot of people, you don't actually see it. It's just taxes you're not paying. But right, for a lot of people, that is the best way to go through it. It's just how do you get that exposure? Are you buying these individual bonds yourself? Are you using an ETF or mutual fund that invests directly in these?

Yeah, I think that's obviously a much easier way to go if you're looking to diversify exposure and not be stuck to any one bond or municipality or something. - Right, exactly. And I think that, kind of marrying the two questions together, because this person's compensation is stock and income from a single company, looking to further diversify their other investable assets outside of just that company is important.

I think using those state munis is a great option. - This might be a stupid question, but do you still get all those tax benefits if you're buying a municipal bond ETF? Or do you have to actually outright hold the municipal bonds themselves? - Yeah, and there are California or New York ETFs that do this.

- Right, because they're notorious for, the higher income tax states have those ETFs that you can own. - Yeah, most of those fund companies will have a Cal, yeah, so yeah, you get those state tax benefits, yes. - Okay, cool. - For buying ETFs. So yeah, that's another, yeah, potentially triple whammy 'cause it could be local, state, and federal taxes that you're saving some money on.

So yeah, it's a pretty good deal. But I think this person is thinking about things in the right way, that's a good first step. 'Cause a lot of people with the risk piece that you mentioned, they might think that they're even safer because I'm making my money in this company and I own the stock and I know it really well and I'm fine, right?

But this person I think is thinking about it the right way. - I agree. - I like it, we talked everything from junk bonds to municipal bonds today, you know? Bonds are so hot. Programming notes, we have a few. No show next week, right, we're off for the holidays.

We've hired more people on the production team. Duncan's getting some help. So going forward in the new year for this show, we are going to be airing live 'cause we have all the people in the live chat we appreciate and some people have mentioned, it's kind of hard on a 1/30 Eastern on a Thursday to get off so we couldn't do it before because production, I blame Duncan, it's Duncan's fault.

We're gonna start releasing these at 5 Eastern now which gives hopefully people more time. So the new show, I think it's January 4th, Ask the Compound will go live every Thursday at 5 Eastern and every Thursday from then on, we'll be at 5 Eastern. - But wait, there's more.

So not exactly live, we're gonna be doing live premieres so Ben and I can actually carry on my conversations in the chat and be more engaged with people in the chat than we are currently when we're actually trying to do the show. But also it will allow us to up our production value and do some cooler stuff and have a little more consistent quality and audio, things like that since we'll be recording earlier in the day.

- Yeah, it's one of the reasons we did it live like this 'cause we didn't have the resources. Now we have the resources. - Yeah, we really didn't have time to edit, yeah, basically. So yeah, exciting. - So fun stuff. Thank you to Taylor for coming back on the show.

We appreciate it. Remember, email us askthecompoundshow@gmail.com. Thanks again, everyone in the live chat for showing up. Thanks for all your emails all year long. We really appreciate it. Send us your questions about 2024 and beyond. We'll see you next year. Merry Christmas, happy holidays, and thanks for watching. - See you, everyone.

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