(beeping) (upbeat music) - Welcome back to Portfolio Rescue. This is our show where we take questions from you the viewers. Every week our inbox is full of questions from you. A lot of good ones, sometimes we get them from the chat. We had a bunch of live people in the chat here today.

Thanks everyone for joining us. Remember if you have a question, askthecompoundshow@gmail.com. Duncan, it's been a kind of a rough year for US stocks and bonds. So John, let's throw up the chart here just to show. This is a year to date returns for the S&P 500 and the Barclays Aggregate Bond Index.

S&P's down 6% or so. Bonds actually down worse than stocks right now. They're also down a little more than 6%. This is pretty rare. So I looked back until the 1920s. When does this happen that stocks and bonds in the US are down in the same year? It's happened four times in history since the late 1920s.

1931, 1941, 1969, and 2018, just barely. Bonds were down just a smidge. I actually wrote a eulogy for the 60/40 portfolio back in 2019 because it's getting killed every year since 2008 basically. Is the 60/40 dead, is it dead? And I always say, if the 60/40 is dead, that means diversification is dead.

So people say, all right, this year it's really dead, right? It's gotta be dead. Well, my counterpoint to this is diversification might not protect you over days, weeks, months, or even years, but long-term returns of the owns that matter and the long-term returns for a 60/40 portfolio have still been pretty good.

I looked it up today, 60/40 portfolio in the US over the last 10 years, up 10% per year, including this year. - Pretty good. - I'm sorry, but you don't get 10% a year for a decade and not expect to see something like this where you get a 5% drawdown in a few months.

That's how this works. There has to be the risk of a year like 2022 to get decent returns over the long haul, right? I think it just has to be this way. So I don't think that this year means the markets are broken. It means we're in kind of a strange environment.

Interest rates are rising at the same time stocks are falling and maybe stocks are falling because rates are rising, but I think this is just the way it has to be. You have to have this short-term risk to get the long-term gains over the long-term. That's how it works.

- Yeah, I mean, your chart that you shared the other day in an article was what, a savings account is yielding 0.06% on average or something, yeah. - Right, yeah, so unfortunately, with rates still being relatively low, even in bonds, you're gonna have to accept some volatility or in returns over the long-term.

That's like the trade-off right now. All right, let's do our first question here. - Okay, so up first, we have a short and sweet one. Is there any way to prep for stagflation? Any actionable ideas? - Duncan, do you know what stagflation is? It's like a bachelor party, right?

- Not well enough to explain it well. - All right, Larry Summers said this the other day of social network fame. The Fed's current policy trajectory is likely to lead to stagflation with average unemployment and inflation, both averaging over 5% over the next few years and ultimately a major recession.

This is basically the 1970s scenario. Stagflation is when you have high inflation mixed with growth that doesn't go so much in the U.S. economy, right? So you have sort of a sputtering growth that doesn't do that much. You have low growth and you have high inflation, right? Because most of the time, when you have high inflation, you have high economic growth.

That's what's happening right now. A lot of people don't feel that way, but nominal growth last year in the U.S. economy before inflation was like 11%, right? So we had a booming economy, but we also had high inflation. Now, the worry is, okay, that inflation is gonna get so high, it's gonna impact growth and spending and growth is gonna come down, but inflation is still gonna be there.

So again, this is the 1970s, so this is a scenario. So honestly, the '70s are the only scenario we have here for an example. And I wanna show some differences. First of all, let's look at the inflation in the '70s, John. That's the first chart. Throughout the '70s, the average inflation rate was a little over 7%.

It had also started the decade. It was already rising in the 1960s at like 5% or 6%. So it was already pretty high going in. Now let's look at the 10-year Treasury. This is the biggest difference between now and then. The 10-year Treasury averaged almost 8% in the 1970s.

It got as low as five and about as high as 11. So rates were much, much higher back then than they are now. Let's look at the Fed funds rate next. This is the federal funds short-term interest rate. You see it got as low as 2.25% in the early '70s, got as high as 17.6% by the end as they were trying to stave off inflation.

So interest rates were much higher. Inflation is about what it is right now, but it was like that for a decade, whereas we've been using it, we've been experiencing it for about a year. So the question is, how do we prepare for it? If we're thinking about your portfolio, the easy answer for back then was commodities.

I think that the GSCI index, which is like the Goldman Sachs Commodity Index, was up like 20% per year. Oil was up more than 800% in the '70s. Gold actually rose more than 1,000%. Now, I think that has just as much to do with the fact that Nixon broke that link of turning gold into cash, that he took that convertibility off the table in the early 1970s.

I think that has much to do with gold rising as did the commodities boom, but that certainly has something to do with it. So if you look at energy stocks since 2021, they're up 115%. So commodities, energy, if we had a stagflation, that would seem to make sense. Now, let's look at the earnings real quick from the '70s, too.

So this is S&P 500 earnings in the 1970s. Up 160%, it was actually the second biggest decade ever for earnings, so it was up 9.9% per year. So corporations did fantastic because guess what inflation means higher earnings, right? Obviously, on a nominal basis, when you take out the real, it's not quite as good because inflation was 7%.

Well, let's look at the returns. The craziest thing about the '70s, so I looked at stocks, bonds, and cash. S&P 500, 10-year treasuries, and then cash is like three-month T-bills, which is basically, think about it as a money market account or a savings account, short-term treasuries. Stocks were up 6% per year.

This is on a nominal basis before inflation. Bonds were up 5.4%. Cash was up 6.3% per year in the '70s. So holding your money in a savings account would have given you a better return than stocks or bonds in the 1970s. Obviously, that's because rates were much higher back then, what you were earning on cash, and short-term T-bills was much higher.

We don't have that now, but that's the hardest part now, is that back then you had the high inflation, but at least you had higher interest rates to help you and safe assets. We don't have that today. Bond rates are still, they've been coming up, but they're still like 2%, right?

So you don't have that cushion. That's the biggest difference. Let's show the value versus inflation one here, John. So what I did here is I looked at the outperformance of value versus growth stocks by decade. And then on the bottom there, you can see, I plotted inflation. This might be a little confusing to people, but the idea is going from left to right.

The higher the value is up until the right, that means when inflation is high and value is doing well, value stocks. And alternatively, the other way, when inflation is lower in deflation and value is underperforming growth. So the 2010s are a prime example. Inflation was really, really low and growth outperformed value by a wide margin.

You can see the one at the very top there, in the 1970s and 1940s, are the two best decades for value stocks, outperforming growth stocks. Guess what those two decades have in common? It was the two highest inflation decades we've had on record, right? So if you look at just value and growth this year alone, now again, we're two and a half or three, two and a half, three months into the year.

The Vanguard value fund is up 1% this year. The Vanguard growth fund is down 12%. Vanguard small cap value is down 2%. The Vanguard small cap growth fund is down 13%. So my takeaway from all this is that diversification probably matters more than ever when you have these changing economic environments like this, right?

In the 2010s, everyone just said, "Why don't I just own all tech stocks? "And that's gonna make my life easy." Tech stocks are getting crushed now because growth is not doing as well, 'cause inflation is higher, that favors value stocks. So if we did have a period where growth came in a little bit but inflation stayed high, you would expect that much broader diversification would help you than being narrowly focused on any one sector.

And then obviously, if you had all your money in commodities and inflation continues to stay high, you'd probably do okay. But that's the idea. I think diversification now matters more than it ever has. - Yeah, it's a huge shift, too, to go from just caring about revenue growth and things like that to commodities, right?

How do you gauge something like that? - It is bizarre because we've gone from this shift from digital is the only thing that matters and software and metaverse to, oh, I forgot, real world stuff actually matters. Commodities, these real inputs, and then supply chains and all the stuff that moving stuff around, that stuff still matters.

The physical world still matters. And I think that this last 18 months or so has been a pretty good reminder of that. - Yeah, definitely. - But I saw stagflation, it's a scary-sounding word, right? You hear that. - Very scary, yeah. - It doesn't, like global warming, actually, that's like the worst PR campaign of all time 'cause it sounds nice.

- Yeah. - Like stagflation is-- - Should have been called climate catastrophe or something like that. - Yeah, something bad. But yeah, stagflation does not sound good and it's not great either. So, all right, let's do the next one. - Okay. Up next we have, how do you find a balance between having a spiderweb of accounts for every purpose, house, down payment, fund, savings, living, giving, emergency fund, et cetera, and having everything go into one checking account with monthly ACHs to the final destinations?

Is there a specific system that you suggest to start with when it comes to automating your finances? I could use this one. I feel like I have, like, way too many accounts. - All right, yeah, I think that's a problem for everyone because there are so many, it's so much easier to have accounts these days 'cause there's all these different investing platforms and things to do, so people tend to dabble.

John, put up the little chart here of my system that I created a couple years ago. I showed this in a blog post a while ago. The easiest, I do use my checking account as the hub. The only thing that comes off the top is 401(k) and my wife had a 403(b) plan.

That would go off right before you even see it and that makes it easier, I think. But the other stuff, it's all automated and the checking account acts as the big hub and that's where all the different stuff comes out of. I don't know if it really matters all that much.

It depends how much you can automate. And the great thing about these different accounts these days is that you have the ability to set this stuff on autopilot. But I think the places that you start are things like taking your credit card balance and paying it off in full each month.

You can set that in an automatic checkbox. I'm gonna pay it off in full each month so you're not paying interest and extra stuff on there. I think the bill pay automatically is easy so that's either through the bank or recurring payments at the companies. So hopefully you can do that for your mortgage or rent, your utilities, subscriptions, car payments, insurance, phone, cable, all that stuff.

For me, that's all on autopilot. I never wanna think about it. It's great because that means you don't pay interest to credit cards, which is really high and can just punch you in the face. You don't have to deal with late payments and overdrafts and all this stuff. - Yeah, talk about interest rates that never change.

Like 29.9% APR on a credit card. - Yes, I saw a news story the other day saying, the Fed's raising rates, this is gonna impact your credit cards. It's like, guess what? Rates came down, credit card rates never came down. Those ones are set in stone basically. Yeah, they don't.

The other thing, I have automated charitable contributions. We're gonna talk about those a little bit later today, I know, but I mentioned this on the compounded friends a few months ago, but charities love it when you have this set up on autopilot so they can plan their budgets out a little better.

I also think that one of the things you can do automatically is save for infrequent purchases that you know will happen on occasion, right? So things like car repairs, you know they're gonna happen at some point, you don't know when, you don't really know the magnitude. So you can set up an automatic deposit from your checking account to go into online savings that for 50 bucks a month to cover a car payment, that car repair payments, you know it's gonna happen.

I think a lot of it just depends like how psychologically important it is for you to have that one hub versus having a bunch of different accounts and putting them together using something like Mint. I just think that the automation thing is key because having to worry about all that and write a check for everything or track down and pay each bill each month, it's gonna be easy to forget and miss some of those.

So something that's simple for us is, I mentioned this before, I think my wife had like a $50 coming right out of her paycheck to a Disney fund. She set it up like three years in advance 'cause she knew where we were going. I do think the great thing about a 401k or a 403, like a workplace retirement account is that it never hits your account in the first place.

You never have to see that money hitting your account and then see it go back out. I think for some people that like loss aversion type of thing, seeing the money leave is harder. So the fact that you never see it, I think that makes sense. But the other thing is I treat savings like a bill payment.

So if it's the 529 for my kids or for some people it's an HSA or the 401k, I think if you treat that like a bill payment and assume it's just not gonna be there, that helps you figure out your spending on the backend a little easier and you just kind of let that stuff go and don't touch it.

And as long as it's automatic, it makes it easier to not worry about it. And you think, okay, this is a bill that's gonna be paid each month. I'm not having to worry about it. - At what point do you think Disney will allow people to pull money out before taxes on their paychecks?

- I can't believe they haven't gotten to the point where people are fighting back yet. It's still the busiest place on earth. And yeah, their inflation has got to be doubled the average for the country, easily. - Yeah, seems like it based on animal spirits. You guys discussed that.

- And one more thing, I think once you do automate all this stuff, it probably makes sense to at least check it like once a year because you could have subscriptions you're paying for magazines or gyms or streaming services that you don't use anymore. So I think it makes, and for them, that's perfect.

That's recurring revenue. That's what they hope for, right? I have a Planet Fitness gym by me and it's 10 bucks a month. And I always think, how in the hell does this business model work? And oh yeah, it works because people sign up for it. It's automatically taken from their checking account.

And then a lot of them just never go. And it just takes that out all the time. So it makes sense to at least review this stuff, I'd say, on an annual basis. - Cool, good advice. - All right, let's do another one. - Okay, question three is, as a single 34-year-old male with about $500,000 in net worth, should I be looking into establishing a living trust?

I have no idea what this means, so I'm looking forward to this one. I have no kids or wife and no major concerns of passing on my wealth other than the beneficiaries assigned to my accounts. If I were to start one, what should I expect to pay for a living trust in California or just in general?

- Duncan, Portfolio Rescue is great for you 'cause I feel like at least once a week there's a question where you say, I don't know what this is. - Yeah, all the time. - Right, it's perfect. So I am not a trust expert, but we do have a trust expert on our team here.

Let's bring Taylor Hollis in. She is one of the newest members of Richardson Wealth Management. - Hey, Taylor. - Hello. - An advisor just came to us from Nashville. Taylor has worked with trust in her career. So first of all, before we get into like, does this person really need one, tell us what is a trust?

What are some of the reasons that someone would look to have one and what the benefits are? - Yeah, so I think trust a lot of times get kind of a smoke and mirrors reputation. So I'll kind of boil it down. I think in simplest terms, I like to think of a trust as a box.

So it's literally just a separate entity that you can put assets in. And sometimes it's its own separate tax reporting entity. Sometimes it's files back to your own personal tax return. In the case of the living trust, they're asking about in the question, that's also known as a revocable trust, which is essentially just an extension of yourself.

So as long as you are serving as the trustee of your revocable or living trust, then it'll flow through back to your tax return. And it's one entity as far as the IRS and the government's concerned. - So what is the protection you're looking for by setting up a trust?

Like what are you trying to protect your money from? - So talking about a revocable trust, which is what his question is, or a living trust, is kind of different than talking about an irrevocable trust. If you're setting up an irrevocable trust, you're typically trying to protect from creditors, potentially future ex-spouses, just future kind of family concerns that might be on the horizon.

But with a revocable trust that he's asking about, I think the main benefits to setting that up are that when you pass away, you bypass probate. So probate is the term for the court proceedings that your estate has to go through when you die. So when you pass away, you have all your assets, investment accounts, maybe a house, those kinds of things.

And it, under normal circumstances, has to go through this probate process through a court. And so, but by setting up a revocable or living trust, that is totally bypassed and everything goes according to how you've designated it in the trust document. - It's not as messy, right? - Not as messy.

Not as messy, not as much of a burden on your family members that are likely settling your estate. And another main benefit to setting up a revocable trust is privacy. That's something a lot of people like about it. Whether it's if you buy a home and you put it in the name of the trust, not everyone can see that John Smith bought this house.

It might just be the Smith Living Trust and they don't know exactly who it was. It's also, from a privacy standpoint, beneficial for your heirs who's inheriting your assets because maybe you don't want everyone to know that your son or daughter inherited a million dollars when you passed away.

And if your estate goes through probate through a will, that's all public record. So anyone can walk up to the courthouse and look up wills and look up probate proceedings. - So how about this example where we have a 34-year-old single male, no kids. 'Cause I've heard examples in the past of life insurance and I've had friends who were single at the time and they said, "Hey, someone's trying "to get me to buy life insurance." And I said, "You're single, what does it matter?" Does that same apply for a trust or do you think there are cases where this makes sense to just make it easier and pass it along if something should happen to them?

- Yeah, I don't think in this particular case it's absolutely necessary. But I do think that if it's something that they're thinking about, setting it up now will only make their life easier in the future. So he mentioned he doesn't own any real estate, but when the time comes, if you're planning on purchasing a house, you already have that revocable trust set up and you can just buy the house in the name of the trust instead of having to quit claim the deed later on and so on and so forth.

So it still gives you full control over your assets, even though you don't have kids, but it still would give you control to say who those assets go to if something untimely happened at such a young age. So again, I don't think it's absolutely necessary, but you're definitely not going to harm anything by setting it up now and just having it in place for future.

- Are trusts set up in old English in the 1700s? Because I feel like revocable and irrevocable are words that I would stumble over all the time and I would have a hard time spelling every time I had to do it. - Yes, yes. And they sound so much alike that it's easy to misunderstand.

I think they actually date back to the medieval ages, but that's for a different episode. We don't need to go there. - It seems intentionally confusing. - Yes. - All right, let's do another one. - Okay. So last but not least, we have, I'd appreciate some insight on donor advised funds or DAFs.

Considering all of the donations going to a crisis right now, this seems like a good opportunity to go over what they are and the pros and cons. I'm looking to donate 50 to 100 bucks a month towards a charity, but first I wanted to learn about DAFs. - I think this is the second question we've gotten on this in as many weeks, which is good to see.

People are trying to get back and figure out ways to do it. So first of all, Taylor, we'll go over what is a donor advised fund, when it makes sense, and then what are some of the potential benefits and when it doesn't make sense. - Yeah, so donor advised fund, actually kind of similar to a trust, is a separate entity.

So it's a charitable giving vehicle that individuals or married couples can set up to fund their charitable intentions out of. Some people might be familiar with foundations. Those are kind of on a typically a grander scale. Donor advised funds, I like to think of as just a simplified foundation.

And I think they really came about in popularity after the 2017 Tax Cuts and Jobs Act passed because that significantly increased the standard deduction amount, and which is good for a lot of folks, but it raised the threshold of charitable donations and their benefit to you from a tax standpoint.

So donor advised funds became very popular out of that because you have the ability to, what I call bunch donations. So you're essentially pre-funding your charitable giving. So instead of giving away $10,000 each year because there's not a huge benefit to you from a tax standpoint of that 'cause you're still under that standard deduction, but you can instead one year decide to put $50,000, call it, into a donor advised fund, you get a much more significant tax deduction by doing that, and you've essentially pre-funded all your future charitable gifting.

So then going forward, you can gift charitably out of this donor advised fund. - And it seems like these are the type of funds too where people will donate a mutual fund or a stock or something like that, right? Where it's a lot of times you're donating securities into these things.

How does that work? - Right, right. So if you own securities with a very low cost basis, a lot of times there's a kind of double tax advantage to donating that to your donor advised fund because A, you get the deduction for the charitable gift, but also you're not having to recognize those gains on your personal return, right?

So you're avoiding gains and getting a deduction at the same time. So a lot of times those appreciated securities are a great option to put into the DAF. - What do we think, Duncan? You got it now? - I think so. I'm seeing a lot of people didn't know what they are, so it makes me feel better that, you know, I just learned about these last week, so.

- It is one of these things that seems like this secret little thing if you'd ever heard about it, but again, I think it's a great thing. People are thinking about more intelligent ways to give, and this seems like one that makes a lot of sense for people, especially if you have some securities that you're willing to donate, right?

- Right, right. And I like to, it's a good idea to be strategic about it. So if you have a big income year, let's say you sell, you know, investment property or you just make a lot of money one year, it's a great option to try to look at funding a DAF in that same year to help offset some of that income from a tax standpoint.

- And this is like, we talked about with Bill last week, Duncan, right? Like, when does it make sense to have a tax advisor or someone that's looking this stuff over for you when you don't know this stuff and you need real help? - Yeah, exactly. Yeah, this kind of stuff, it seems, yeah, so complicated, pretty hard to do on your own.

- Right. Okay. - Yep. - I think that's all the questions for this week. Thanks to Taylor. - Yeah. - Taylor. - Thanks for having me. - Thanks, Taylor. - Welcome to Riddholtz. You've been here for four weeks now. - Four weeks. - Yep, and already on Portfolio Rescue.

Good job. - Here we are. - Everyone keep those questions and comments coming. We have a new "Compound & Friends" tomorrow going up, right, Duncan? - Yes, we have Nick Kolas on. - Oh, very good, from Data Trek. Yeah, his research is always good. We'll have a new "Animal Spirits." We have a new one coming Saturday, discussing some NFTs that Duncan actually helped us create, which are pretty cool.

And it's also gonna be a charitable component there. We'll have a new one Monday and Wednesday as well. And then, what are your thoughts on Tuesday? So thanks, everyone, for tuning in. As always, send us your questions. Askthecompoundshow@gmail.com, and we will see you next week. - Thanks, everyone. (upbeat music) (upbeat music continues) (upbeat music continues) (upbeat music)