(beeping) - Welcome back to Ask the Compound, where we've gotten 734 questions this year. I made that number up, but it's gotta be pretty close. - Okay, I was about to say, wow, you counted. - It's probably pretty close. I bet we get five or six questions a week.

Remember, it's askthecompound@gmail.com, askthecompoundshow@gmail.com. - That's it. - Getting all these emails mixed up. Today's Ask the Compound is brought to you by our friends at Bird Dogs. Duncan, big news in Bird Dogs this week. I noticed, they sent me an email. I'm on the email list, obviously. They know me.

They've got some new colors. My favorite kind of shorts are, they have the gym shorts, they have the khaki shorts. These are the khakis, 'cause they have the little belt loops. I haven't had to use the belt loops yet. But new colors, so we have three of 'em. I liked the mint green, and I don't know, is it salmon?

It's called orange blossom. - Oh, wow, that's bold. That's bold of you. - I don't mind taking bold colors in the summer. - I like the blue, the blue's my favorite. - The blue's nice, too. I got a pair of the green and the orange. I'm a sucker for new colors.

They're very, you know, I'm stocking up now for the summer, for spring break, all that kind of stuff. It's great. Also, still, and I think I got a free T-shirt out of the deal, too. I don't know how I, by two pairs, I don't know what the deal is.

But with us, you can still get the free white Tech Dad hat. I still got it here. So put an ATC in the code, or just go to birddogs.com/ATC. My wife is saying that my closet is overflowing with bird dogs. I can't help it. They're everywhere. - Yeah, you know, on Thanksgiving, I actually was talking about bird dogs with someone.

Someone, for real, like completely unprompted, was like, "Are those bird dogs?" Or I guess they saw the logo on what I was wearing. And I told 'em, I was like, "Yeah, they sponsor our podcast." And they're like, "Oh, I keep getting targeted advertising "on social media for them." And I've thought about trying 'em.

Real conversation. - Get a free hat out of the deal. All right. You wanted to spike the ball real quick on a stock pick, or not yet? - Oh, that can wait a second. First, I just wanted to say, it's that time of year, Spotify, Wrapped, share with us any of your compound podcasts that are coming up in your top 10.

We love to see that. So, share that with us. I think we're gonna be doing-- - Yeah, we've been getting a lot of that on social media, that people share it. It's pretty cool how that works. - Yeah, it's very cool. And yeah, we have, even the Ask the Compound is the youngest show.

So, we're still small and growing fast, but we had hundreds of people with us in their top 10, and top five, that kind of thing, which is very cool to see. So, really appreciate that. Our best show of the year, do you have any guesses? - Oh, I have no idea.

Our best show of the year was, Is It Crazy to Be 100% Invested in Stocks? - Oh, interesting. Okay, I would have never even guessed what it could be. Okay, good question, I remember that one. - Yeah, yeah, so that was it. But yeah, thanks to everyone for listening.

And yeah, if Apple has a similar thing, then share that too. - I think they do. - I know they do for music. I don't know about for podcasting, but yeah. And then, the next thing I was gonna say is just because it's become like a tradition where we make jokes about everyone's favorite oat milk stock, I just wanted to say, it's been a pretty good month.

So, John, if you could chart on of, this is the way over the last month. - So, 80% in a month. - Yeah. - That's not bad. All right, John, show the year-to-date return, though. So, before the show, Duncan actually asked John to pull up the chart of Oatly on a year-to-date basis, and he looked at it, he said, "Wait, wait, wait, this is not what I wanted to see." Still down 35%.

Pull a good chart, and it's over the one month. Oh, no. - Okay, that's all time. - All time, so this is down 94% from the IPO. It spiked after the IPO, as well. - Oh, I was buying it. - Oh, on the IPO? Okay. - Oh, yeah, yeah.

I basically bought it every point along that. - Amazon was down 95% at the tech bubble. I mean, same thing. - Yeah, give me hope. Help me rationalize holding on. - All right, first question. Up first today, we have-- - I'm surprised we haven't gotten anyone who's written in and said it.

I'm with Duncan here. I've gotten crushed on Oatly, as well. - Oh, I've heard it. Yeah, I've had multiple people reach out and be like, not just Oatly, but on other things, yeah. There's camaraderie there. So, up first today, we have a question from Dave. I'm still new to bonds, so forgive me if you've covered this before, but what are the various outcomes for bonds if rates rise or fall from here?

I'm trying to figure out the right maturity for diversifying into treasuries, and want to understand the risks. - All right, we've still been getting a heavy influx of questions about bonds and yields. It's still a ton of questions, right? It's plateaued a little bit, for sure, but I think a lot of people are slowly but surely preparing themselves for the idea that the Fed might cut rates in 2024, which could mean lower cash rates, CD rates, money markets, savings accounts, all those things will go down.

So, I think people who've made that move into cash, and it went from earning 10 basis points at their big bank to at least earning four or five, maybe more, percent in T-bills or savings account or money markets, they've made that leap, but now they're saying, okay, maybe it has to be more fixed income so I can actually lock in some.

So, our friends at the US Benchmark Series of ETFs send us this monthly update, which is pretty cool. John, throw this chart up here. So, this is an interest rate scenario analysis tool. And, of course, different bonds have different maturities and different durations, and the yield curve never moves exactly the same.

You don't have a 1% move in every single maturity. A lot of times these bonds move in different forms and the interest rate, the magnitude of the change is different. So, what Benchmark Series did for us is they looked at what would happen over a 12-month period to these bonds, and they show the two-year, three-year, five, seven, 10, 20, and 30-year treasuries, right?

So, a bunch of different maturities. What would happen if rates rose 50% or fell 50 basis points? What if they rose 1% or fell 1%? So, as an example, we'll show here. So, the 30-year treasury, if rates were to fall 1%, is up over 20%, right? 22% or so over a year.

If rates were to rise 1%, it's down a little less than 10%. Now, there's this funny term in the bond market land for this called convexity. I won't bore you with the details there because that sounds like a very scientific word, but all that means is most of the time, if bond yields fall, your price is gonna rise more than if bond yields rose, the loss.

So, the gain outweighs the loss. It's not a one-to-one thing. But the other thing, throw this back up here, John. The other thing to look at is a shorter-term bond, if rates were to fall 1%, you can see the two-year, it rises 5%, and most of that is the yield right now.

So, you're not gonna get as big a bang for your buck if yields were to fall in something of a shorter-term bond, just like you're not gonna see as big of losses, right? You're not gonna see a loss because the yield's gonna make up for it. So, you do have this interesting dynamic now, though, where if rates rise, your loss is gonna be not that bad, and if rates fall, your gain is gonna be pretty good, which was the opposite of what things were like a few years ago during the pandemic when rates were so low.

So, you have higher yields now. You have this convexity piece where if yields fall, you're gonna get a pretty big gain in your bonds, and if rates rise a little bit, you're still, you have some shock absorbers there. - So, wait, you're saying I should tax-loss my OBLY and buy up a bunch of long bonds?

- Yeah, if you wanna nail, I mean, rates have already fallen a little bit, but this is the problem with trying to guess this is we don't know if interest rates fall, how much are they gonna fall in the third year versus the two year versus the five, we don't know what the magnitude of that fall is going to be 'cause the variables there are what's the Fed doing, what's the economy doing, what's inflation doing, what are bond traders doing, where are bond people moving your money?

So, the helpful thing about a chart like that is it shows you what the potential outcomes can be, and it gives you a range of expectations, but you just don't know what the magnitude of those rate changes is going to be. But that's the idea. So, if you want bigger bang for your buck if rates fall, you go further out on the yield curve, but that means way more volatility, too, and if rates rise a little bit, you're gonna ding more, and if you want some more stability, you stay on the shorter end of things.

That's the idea. - I think people sometimes paint the bond market as being very mathematical and easier to predict than the stock market, but this doesn't really sound like it if it comes down to-- - No, it is because-- - Someone picking rate times to hike or cut or pause.

- But it is, bond market is more math because over the long term, call it five to seven years, your starting yield is gonna explain 90 to 95% of your gain. So, these are the short-term moves, and so you kind of know what's gonna happen based on where rates go from here.

You just don't know where rate's gonna go. That's the hard part in the short term. If you're trying to guess the bond market, you're guessing interest rates, and that's really, really difficult to do. So, I talked about this earlier this week on my blog. The 10-year treasury went from a low to 3.3% this year, then it shot up to 5% in a matter of months, and then in the past month, it's gone from 5% to 4.1%, and no one could have predicted that path of rates.

If you tried to guess that somehow because you're trying to guess inflation or economic growth or whatever, good luck with that. That's why bonds are generally for longer-term people that want less volatility, and so if you're trying to guess this and be like a hedge fund manager, yeah, it's gonna be a lot harder to do.

So, I would think about it more from the perspective of a long-term investor 'cause no one can predict interest rates. That's the point. - Got it, makes sense. - All right, next one. - Okay, up next, I wonder, actually, question on that. Do you think we're gonna get as many bond questions in 2024, or do you think we're gonna see a shift, a turning point in this?

- That'd be interesting. I guess it depends where yields go. But obviously, yields getting to 5% is one of the things that cause a lot of people to write us in about bonds, but it has slowed down a little bit. - Yeah, yeah, I'm curious. - We're doing an ask the compound sentiment indicator.

- Yeah, exactly. Okay, up next, we have a question from Tim. Sure, it's great that S&P 500 is up 20% this year, but aren't we just pricing in the inevitable Fed rate cuts in 2024? Should we really expect the market to go up again next year after surprising the upside this year?

Color me skeptical. Full disclosure, I'm naturally bearish and take a bit of an anti-bin stance about the markets. - Wow. - I kinda like the anti-bin thing here. This one made me laugh a little bit. Do you remember Garth Brooks, I think I've told you this before, was the greatest selling album musician of all the '90s, which is very surprising.

- I remember that from the Chuck Klosterman book, which still boggles my mind. - But do you remember, I think he was at the height of his powers, it was like 1998 or 1999, and he did this, he tried to have a rock star persona of Christopher Gaines. John, show this up here.

This is when Garth, he did the little mini goatee thing, and he put a wig on and had his hair go over his eyes, and he looked a little goth, and he changed into Chris Gaines, and everyone's kinda like, "Wait, what?" And this was his rock star persona. So I'm thinking maybe I should do that as the anti-bin, and this is my Doomer personality, where I have some sort of anti-bin who's always glass and full optimistic, and I think of it like his name was Chris Gaines, I could be Chris Loss, right?

Or Chris Bear, something like that. - I'm liking it a lot. - I turn into a perma-bear, I don't know, once a week. It'd just be fun to try, like the dollar is going to crash, there's flames all around me, and the United States financial system, as we know it, is over, hyperinflation is coming.

I'm gonna try it. - I think I would pay money to see this, so I think this is something I need to do. - I'll start a newsletter, just full-time perma-bear. Okay, maybe not. But this is what makes the market, I guess. This person is anti-bin. I appreciate that, if that's your natural inclination, that's fine, whatever works for you.

Maybe the stock market is pricing in Fed cuts, 'cause it is forward-looking, after all. That's what people like to say. I do like to look at historical market returns to think about something like this, 'cause I think what this person is asking is, okay, sure, the market is up 20% this year, but what happens after a year is up 20%?

So I like to look at this. One of my favorite all-time stats of the market is the fact that over the past 100 years or so, you've been more likely to see a 20% gain in a calendar year than a loss. So not including this year, there's been 34 gains of 20%.

This is them on the screen right now. There's only been 26 total down years. Okay, so what happens the year after a 20% or more gain, going back to 1928? You can see there's way more green on this screen than there is red. So John, keep this up here for a second, and I'm gonna go through the stats.

So 22 out of the 34 years that we experienced a 20% gain, the next year was also a gain. So that's 65% of the time. Stock market was down 12 out of 34 years. That's 35% of the time. The average return was roughly 9%. Average gain when the market was up was 19%.

The average loss was 9%. There was 19 double-digit up years following a 20% gain. You remember the late '90s? It was 1995 to 1999. Every single one of those years was a 20% gain. That's probably part of this. There were just two double-digit down years following a 20% gain.

One of them was in 2022. So 2021 was a big, I think we were up 28 or 29%. We were down pretty big the next year. So we are teetering on the edge of a 20% gain this year. We'll see if Santa comes through by the end of the year or not and hold onto it, but you can do the chart off, John.

So the returns after a 20% up year are actually pretty decent, and I guess kind of average, if you wanna look at it. There's actually a few more losses in there than gains. So the other question is, does one year really impact the next year? Like, is there a correlation there?

So John, throw up my next chart. I looked at the average return from one year to the next when stocks are up, when stocks are down. When stocks are up big, so call it 15% or more. And then when stocks are down big, call it a loss of 15% or worse.

And the average returns are all 10, 11, 12%. So there's really not much signal here. There's more, you know, one year doesn't impact the next. I'm sure you could slice and dice the data a little bit and try to find something in there, but that's mostly data mining probably.

So it's certainly possible that we're pulling forward 2024 returns 'cause the Fed is gonna cut and the stock market is getting ahead of it. But I just think you can't really be smart enough to say, just because the stock market's up this year means it's gonna be down next year.

And we're gonna see a Chris Gaines phenomenon where anti-Benn is going to be right. I think the thing to remember about historical return numbers is that they're helpful to set expectations, but it's also true that things that have never happened before in the stock market seem to happen all the time.

So I think it's just important to prepare yourself for a wide range of outcomes. That's my whole thinking with looking at returns like that is there's a lot of big up years and there's a handful of down years and that's the best I can do for you is most of the time the stock market goes up, but sometimes it goes down.

- Do you think perma bears always pick the underdog? Like if the Panthers are playing the Ravens, are they going Panthers? Like are they, is that in their just nature? - I mean, I've basically been a perma bear my whole life if I'm rooting for the Lions then, right?

- Okay, so when it comes to sports, you're a perma bear. - I guess I had to be. - All right, good. I'd like a little pushback. That's a fair question. Let's do another one. - Hey, up next we have a question from John. Before 2022, I was adamant about not paying off my mortgage.

I thought it was a mistake to pay off my previous home in a low rate environment, but now with nearly 8% interest rates and the Tax Cuts and Jobs Act in effect, I've had a change of heart. The higher interest rate makes each payment more costly and I doubt I can consistently be 8% returns on investments.

The Tax Cuts and Jobs Act, especially for folks in high tax states like me, pushes us towards the standard deduction instead of itemizing, making the mortgage tax deduction less beneficial. I'm curious to hear Bill Sweet's thoughts on all of this. When you ask for Bill Sweet. - Ask and you shall receive.

Bill gets called out by name here a lot. Bill, I think this email was actually came to my inbox and it was, I wrote a blog post a couple of weeks ago saying that I'm just not a big fan of paying off a mortgage early. It's tax advantaged. It's a good inflation hedge.

What do you think in terms of the tax part of it here? 'Cause a lot of this seems to make sense to me. - Yeah, Ben, you're a homeowner and John, I mean, great, great thought. Really, John's question has to do with tax deductions rather than mortgage interest. And Ben, I find that mortgage interest deductions for tax purposes, they're generally overrated and John kind of alluded to why in the question.

So I wanna talk through a little bit of how it works to kind of set the table. John, can we throw the chart up that we slapped together before the show? So let's start from left to right here. For those at home, the 2017 standard deduction was $12,000. This year, that's gonna come in for married filing joint couples at $27,000.

And what that means is in order to realize any tax deductions relating to mortgage interest or property taxes or the like, you need to exceed that hurdle. And so due to that Trump era tax cut that happened back in 2017, the hurdle's just much higher today than it was at any time in recent history.

And to illustrate why on the right side, I say, look, if we're capped at the $10,000 state and local tax deduction, we would need to deduct more than about $13,000, $24,000 to $23,000 of mortgage interest in order to exceed that standard deduction threshold. In other words, for this example I've illustrated here, you're paying $24,000 of mortgage interest, which at 8%, that's a $300,000 loan.

You're only able to deduct the last $6,000 of mortgage interest. And to put that into terms, John, can we kill the chart? To put that into dollar amounts, that's only worth about $2,000. So Ben, what John's getting at is, I'm gonna borrow 300K and pay $24,000 to do that, and I really only get a $2,000 tax break for it, right?

So this is the SALT thing, especially people on the coast complain about, people with high incomes. What does SALT stand for again? - State and local tax deduction. Yeah, throw it up on the whiteboard behind me. - Okay, but so let's say this thing runs up and that comes back into play.

Is it a better deal then? - Yes, on a relative basis, right? Because ultimately, everybody gets a standard deduction for free. You don't have to do anything to earn that standard deduction. So it would increase the relative tax deduction of the mortgage interest, but you're still paying that money out of pocket.

Like, I guess that's the issue. And just to frame it again in terms of percentages, we have an 8% pre-tax mortgage rate, Ben. If we include that $2,000 of tax reduction, what that's worth when you actually do the math, that only decreases the mortgage rate to 7.3%, right? So you're still paying after taxes 7.3%.

Ben, to answer your question, that would drop the effective mortgage rate to about 6.8, 6.7%. But you're still paying after taxes that amount to borrow money. And relative to what you can get in a, let's say a bond fund, a treasury fund, or some compounding gains, yeah, I don't think it's as worth it as it was before, and the taxes are definitely part of that.

- So my thinking was, I was talking more about the 80% of people who have a mortgage have a rate 4% or below. And I thought for those people, I can't see a world where that makes sense. But if you're having a 7% or 8% hurdle, now that makes more sense to me because it's a bigger hurdle.

However, how much benefit are you really gonna get? Because if you have a 7% or 8% mortgage, aren't you hoping to refinance at 5% or 6% in the coming years? So if you're paying it off early now, are you really gonna get that big of a benefit if you're just going to refinance anyway?

I mean, I guess it's kind of the idea of making a bigger down payment now for that. But I can see the benefit if you have a 7% or 8% over 30 years, the life of the loan, but what if you're gonna have it for two years and you're gonna refinance at six in a couple years?

Does it still make sense to repay it early? That's where I think you can kind of think through like, oh, well, maybe it doesn't. - Yep, and so fair point. So I think Ben, the way to actually solve the equation, again, like a mortgage, typically, you're looking at 15 to 30 years.

So yes, you can refinance, yes, you can move, but what do you know what you're refinancing to? I think it comes down to arbitrage. What can I earn on my cash or short-term investments in the market relative to what am I paying? And I think you do have to do the tax math on either side to get an actual answer.

And right now it favors paying down that mortgage if you're, I'd say above 6%, 7%. - And what's your, not only the investment hurdle, what's your liquidity profile? Because putting that money into a mortgage means liquidity is drained and you're not gonna see it versus you could say, I can earn 5% in T-bills right now, but I get 8% in the mortgage if I'm paying it off, but that 5% gives me more flexibility and more optionality.

And that could be, so I think that's what you have to weigh as well. How much liquidity and flexibility do you have in your finances? - Precisely, and so for my 15-year career, Ben, I usually have not been in favor of paying the mortgage off, but the math changed a lot this year.

- Yeah, I agree. Looking at a 7% or 8% mortgage, I would be thinking much harder about making a bigger down payment or making bigger payments. - Amen, you've got it. - All right. - Sorry, guys, I zoned out there for a second. I'm of the generation who can only dream of owning a home at some point, so.

- I was gonna say, what's anti-Duncan doing these days? Duncan, what's your alter ego? Does he eat pork and ribs and fry steak? Like, what does this dude do? - Probably, like heavily, heavily into fossil fuels. Yeah, something like that. - He's buying a stock that trades on real milk instead of-- - Drives a Ford F-350?

- Yeah, rolling coal in a dually or something, yeah. - Drinks milk directly from the cow's udder. - Yeah, there you go. - All right, next question. - All right, up next we have a question from Wade. I recently retired in my 50s, and while 80% of my portfolio is in index funds, I have a substantial amount tied up in Microsoft from RSUs.

You guys will have to remind me what that stands for. This position now accounts for almost 15% of my total portfolio and a hefty 30% of my after-tax assets. It's a great company, but even great companies face challenges, and I'm concerned about having too much in one stock. The long-term capital gains on this position are substantial due to my low-cost basis of $60 a share.

Wow, not to brag. I've been gradually selling and diversifying into ETFs, but the stock keeps rebounding, leading to an overweight position. I'm considering holding it long-term for heirs with a stepped-up basis or donating it to charity, but I'd like to hear your suggestions. - John, real quick, first of all, congrats to Wade for retiring in his early 50s.

I guess that Microsoft stock paid off pretty well. John, show up the chart. Microsoft actually hit new all-time highs recently. The stock market is still close. Microsoft was there. - Amazing. - So he said he's got a $60 cost basis, and he's at $370 for Microsoft stocks, so not bad.

One of the-- - $300 per share of capital gains, yeah. That's great. - That's pretty good. - One of the two biggest stocks that there is. So it sounds like he made off pretty well here. I guess, first of all, 15% doesn't sound egregious to me. We've heard way higher numbers than that.

We've heard people come to us with 90% of their net worth, liquid net worth in their company stock. So 15% doesn't sound terrible to me, but it sounds like he is just worried that that's still a big chunk, especially if you had index funds. Microsoft is the second largest company, so you already had exposure there as well.

So maybe you don't want to overexpose yourself. So what are the options here? 'Cause it sounds like he's up for anything. - Yeah, and so Wade, I mean, first off, Ben, like you mentioned, Wade's kind of built his portfolio around this position. I think that's the intelligent thing. Wade's done a lot, I think, to kind of help with this.

But the reality has been, as far as index funds, Microsoft makes up 7% of the S&P 500 index today and 10% of the NASDAQ composite. And so it's not just the stock that he owns directly, but if you own an index passive weighted portfolio, you own more. But again, Wade, you've done-- - Also, Duncan, sorry, RSU, Restricted Stock Unit.

- Yeah. - Yeah, actually, Wade's in the chat. Wade just answered my question. - He answered your question. Wow, a listener question. Wade's gonna answer your question, Duncan, during the show today. - For the record, that was gonna be my guess. - Great, great, yeah. - I just couldn't remember if it was restricted or registered.

- Yeah, so he got paid in company stock. And again, that worked out tremendously. And congrats, Wade. 'Cause ultimately, this is what victory looks like, Ben. I mean, this is what you would want your portfolio to look like. These are problems that I want to have, right? - The other side of the equation is, I had 15% in this stock, and it crashed, and now it's 3%.

- Yeah, and there's that famous Reddit post of ExxonMobil. You can go through the names of companies that were the largest, Kodak, Eastman, et cetera. So I think this would be my order of operations for Wade in the chat. Number one, I would decide what percentage are you comfortable with, and let that be your North Star, and let that be the thing that you're building towards.

And if that's 10%, I think that's completely reasonable. To your point, Ben, 15% doesn't sound that crazy to me. So I don't think you're far away from what I would recommend. Now, and that might be 5% though. You might not want to take on that risk going into retirement.

I think you'd have to sit down, maybe with a competent certified financial planner at Real Wholesale Wealth Management, or otherwise, I'm a company man, and whittle that down. So that brings us to number two. How do you start to whittle this thing down? Wade kind of hit, for me, the number one option, and he mentioned it in his question, which is charitable donations.

Ben, a donation to a donor advised fund in property, you do not have to pay the capital gain on the transaction. So Wade would say for each share he donates, he's saving $300 of capital gains income, and that probably translates to $600 of tax. However, you also get to take a deduction at the market value.

And so at $370 a share, he's able to not only avoid capital gains, but then he gets the deduction too. So just hypothetically, if he's paying, if he donates $10,000, let's say, he would avoid a $2,000 capital gains tax, and he would get a $3,000 tax deduction. So $10,000-- It's like a double whammy, avoiding paying taxes and saving taxes.

Double benefit, I wouldn't even call it a whammy, Ben. Yeah, double whammy. It's like a double boost. But to think about it conceptually, Wade would donate $5,000 after taxes, right, to be 10K on the transaction, but after the tax benefits, he'd still have 5K net market value, but the charity would get the full $10,000.

So it's basically a way to turn 5,000 into 10 for the charity. I think that's a great way to play the game. And the way I would do that, Wade, is bunch. So if you're gonna think forward, bunch all your charitable projections, the money you're gonna give to your church, to your charity, to the local library, do that all for five years.

Do it in one tax year. Take all that tax deduction up front. Once the transaction occurs through donor-advised fund, you can sell that position capital gains tax-free and effectively rebalance that portfolio with now a large charitable component. Now, what if Wade is not Mother Teresa and doesn't wanna just give away his wealth?

Yeah, yeah. Yeah, so totally. So Wade might need it. And so I think that the next thing for me would be, again, over time, to look for ways to offset gains with losses. So Wade mentions he's running an index-based portfolio. I would probably- How about 10% of your portfolio, let Duncan manage it.

(laughing) I'll add in some tax loss. Yeah. Put it in a not-cow stocks. Yeah, and then, but ultimately, yeah, I would seek ways to potentially realize some capital losses, right, and offset those gains with losses over time. And again, if he's at 15, and he said he'd make a target of 10%, over the next three tax years, Wade mentioned he's thinking about retirement, so income should be lower today than maybe it was two years ago, three years ago.

Begin to whittle that down in chunks, right? So you don't have to do it all in one year, but in January, realize a bunch of capital gains and then seek opportunities with that capital that you reinvested to look for tax losses throughout the rest of the year. That's probably the game to play.

And look, if the markets go up and you don't get those tax losses, again, you won the game then twice, Wade. So, and for me, Ben, if you won the game, it's time to stop playing. - Right, and you always say, like, listen, it's no fun to pay those taxes, but it also means that you won.

It's better than the alternative. So if he wants it or needs to use it or whatever, and he actually said in the chat here, he's looking for a 10% overall target. So take it down five more percent. So if you have to pay those taxes, that's also paid. So you could do a combination there too.

You could give some to charity. You could sell some of them off to lock in the gains to more diversify. - Exactly. - He also says his main holding is BTI. Is there an easy way for people to be able to see the overlap and like what their actual percentage of a holding like that?

- Just Vanguard.com. I mean, yeah, that would be it for me. - But I mean, to see your portfolio and see across all of your ETF holdings and your single stock. - Yeah, portfolio. X-Ray Morningstar had a product a couple of years ago that was free for subscribers. - Yeah, there's a few free stuff that you can do there.

- The other thing, and again, I'm a company man, so I need to mention this, but there are companies that'll do tax-less harvesting for you, right? So Ritholtz Wealth Management, we have a partnership with O'Shaughnessy Asset Management at Canvas. We run, I mean, my portfolio is at Liftoff, which is a Ritholtz Wealth platform that's run through Betterment.

And tax loss has happened while I sleep for my portfolio. - Hold that thought. Next question is right on this. That's a cool transition. - Let's do it. - Bill says Ritholtz Wealth Management. One more time, he turns into a pumpkin. - I'm a company man, though. - All right, next question, and we'll talk a little bit about this other option of direct investing.

So let's do it. - Let's do it. - Last but not least, we have a question from Sam. I'm 38 and have $175,000 in a brokerage account, mostly in U.S. large-cap index funds. My federal tax rate is close to 35%. An advisor suggested an SMA that does tax-less harvesting to boost returns while being tax-efficient.

Is this a good idea? Can it consistently outperform the market after accounting for taxes? The fees are 10 to 15 times higher than low-cost ETFs, but I'm tempted if it can help my long-term savings. What do you think about this strategy? - Okay, so the fees sound high, but VTI is three basis points, so we're talking 30 to 45 basis points, whatever, for this SMA.

- Also, sorry to interrupt, but that's a separately managed account, right? I hear this term thrown around a lot. What exactly does that mean, the cliff notes of that? - So it's like you're buying and selling the actual individual holdings yourself as opposed to buying an ETF for a mutual fund.

So Bill mentioned, we do direct indexing, and one of the reasons we do it for is people who have a large position with a gain, and then what you do is you turn up the dial on tax-loss harvesting to try to offset some of those gains, and you can't always do it one for one, but that's the goal.

And then so the question is, for Sam here who asked the question, is it worth it to pay higher fees? Does the tax-loss harvesting piece more than make up for those higher fees? So for people who aren't aware, direct indexing is essentially, instead of buying an S&P 500 index fund, an SPY or VTI, that sort of thing, from iShares or Vanguard or Charles Schwab, I'm gonna have this company buy all 500 stocks for me in proportion to the way that they are, and they can also do some tax-loss harvesting 'cause in that 500 mix, some of those stocks are gonna go down each year, and we're gonna sell off the losers to lock in those gains as losses, and that's how tax-loss harvesting works.

- Yep, precisely. - What did I miss, Bill? - Yeah, that's it, and that did directly bend your point. We segued directly in this from Wade's question. This is one way to potentially solve a concentrated position, and that if you have an algorithm that's trading to mimic an index for you, you can effectively set the dials such that you can lock your capital gains.

You can tell the algorithm what you want your capital gains to be, and it'll figure it out over the course of a year if you give it enough time. - Right, you're essentially creating a customized index fund with a tax-loss harvesting piece on top of it. - Yep, so yeah, I think concentrated positions make a lot of sense.

If there's a lot of capital gains activity, let's say, elsewhere in your portfolio, if you're a real estate manager or you're buying and selling properties, there's sometimes a lot of gains, depreciation, recapture going out there. And I guess the question, can a strategy outperform is unanswerable, right? A lot of strategies outperform, a lot of strategies underperform a baseline index.

I think for us, Ben, kind of our philosophy is, don't make things too complex, right? And so most of our exposure is index-based. I think that's the way to go. However, O'Shaughnessy, other companies, they do have specialties, and so they might factor weight is a great example to get a little bit of active passive exposure.

And that does help a lot. Another really neat application of directing indexing through an SMA is you can effectively screen out portfolios. So in our example, you would not, for Wade, in the previous question, buy additional Microsoft stock, right? So instead of shorting it or some other instrument, you just use the direct index.

And Canvas, the name says it all. It's a blank Canvas. And so you can paint the picture-- - And you can basically X out. I want S&B 500 X Microsoft, if you want it. The other thing is, what I wanna ask here for Sam is what are the cases where, okay, 'cause a lot of people come to us who have complicated tax pictures or state planning or whatever, and Canvas makes a lot of sense to them.

When does this type of strategy not make sense? Is there a tax rate or an amount of money? Where do you go? You know what, it's not worth the hassle. - Yeah, I think one big thing that comes to mind, Ben, if most of your assets are in tax-qualified accounts, like you're not gonna get any benefit from tax-less harvesting.

You would get benefits from factor weighting and other methodologies. But yeah, investing is more or less a problem that's been solved, specifically through the vanguardization, lower-cost active exposure. So I think the other primary factor would simply be a lower-asset portfolio, right? So if and when, until we have fractional shares available, you know, buying a share of Microsoft, as we discussed in the last question, is going to cost you $370.

So to replicate that for a $10,000 portfolio is nearly impossible. So that's why fractionalization does occur with ETFs and other accounts. But yeah, for me, it's a cost-benefit. Are the benefits I'm gonna get from tax-less harvesting and other factors, are those gonna outweigh the additional cost that Sam lays out, that I'm gonna pay a manager to manage this for me?

And again, I think that typically happens, Ben, at higher tax rates. So we're talking higher-income folks and higher dollar amounts. Fortunately or unfortunately. - So him, in this question, he said we're up near the 35% range. That's probably a pretty good candidate for tax-less harvesting. - I would think so, especially if he's in a high-tech state like our guy, John, in the first question, right?

So unfortunately, it depends. But that's the sketch that I'd play. And again, I can't say it more strongly. Like, we are playing this game for our clients. So we do think that there's a lot of value here. - And I think this, the hard thing for a lot of people who are retail investors is, this is really more of a financial planning tool than it is an investment tool.

It can help with investing, but I think you need someone helping you with it who knows what they're doing. Because it'd be hard to do something like this on your own and know when to turn that dial up and turn it down, depending on your tax situation. It's financial planning software, even though it's really applied to investments.

- Just to give our guys on the team a big shout out, Patrick Haley, Dylan Klonder, Alex Messer, Nick Gomes, the folks that put this together for us on our company, they're the ones who implement this. And what we learned over the last three, four years of working with Canvas, looking at our Shaughnessy, a lot of work has to go in upfront to get this right, to fine tune all the dials.

And it does take that amount of expertise. And so some advice is worth paying for, in my opinion. - Right, it's run by an algorithm, but there's a lot of heavy lifting manual labor that's done upfront to make sure that algorithm is doing what you want it to do.

- I'm not gonna say the company we work for again, 'cause Duncan will jump out of a New York City window, but you know what I'm talking about. - Everyone knows, everyone knows. Speaking of algorithms, though, you just made me think of something John was just telling, John, our chart on John was just telling us about the other day.

He went somewhere in New York City that has coffee that's served by a robot. And I jokingly asked, did it ask for a tip? And he was like, yes, actually. On the screen, it asked if I wanted a tip. What part of the economy, you know, like what part of the cycle are we at when we have robots asking for tips and people giving them, apparently?

- I mean, Robert Cialdini is gonna be running these things and people are gonna be just handing their money over. - I'm not tipping a Keurig, Duncan, if that's where you're going. Like, that coffee tastes like ass, so I'm not doing it. - Well, this wasn't that. This was like an actual robotic arm that like moved the cup over and put it down on the counter for him and stuff.

It was kind of cool. - If you don't drink coffee, you don't have to tip. That's my strategy. - Hey, those GPTs don't pay for themselves, you know. - It's true, that's true. - All right, thanks as always to my personal tax consultant, Bill Sweet. - Got your back.

- Appreciate it. Thanks to Duncan for sharing his portfolio once again. Oatly's gonna have a Santa Claus rally, Duncan. It's coming. - We'll see. - Remember, email us, askthecompoundshow@gmail.com. Thanks to everyone in the live chat. That was nice. We had Wade in here listening to his own question today.

That was fun. Subscribe, rate, review, all that kind of stuff. If you're watching on YouTube, leave us a comment or a question in there. We always appreciate it. And we'll see you next week. - Thank you. - See you, everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music)