Welcome back, Portfolio Rescue. We're on a little later today because Duncan is basically running a TV studio at our New York headquarters today. He's been a busy man, so we're here. Remember, if you have a question for us, askthecompoundshow@gmail.com. Last week, I mentioned a book by a quote by a guy named Myer Stattman, who is a behavior psychologist.

And I mentioned his book, and a bunch of people asked. It's called What Investors Really Want, really highly underrated. And I kind of forgot about it until I mentioned it last week. And I went through, he's got a ton of these little anecdotes that I've never really heard on other books before.

So I wanted to go on. He found this book called Watch Your Margin. An Insider Look at Wall Street in 1930 from an anonymous trader, which is great, perfect title for today. But in the book, he gave a back and forth between two guys. And one of the guys said, why do people speculate in stocks?

And the other guy said, well, of course, to make money. And he said, no, no, not at all. They do it because they want a thrill. That is why we drink bootleg whiskey. This was written in Prohibition. Kiss girls and take new jobs. We want thrills. It's perfectly human.

But Wall Street is a poor place to look for thrills for the simple reason that thrills in Wall Street are very expensive. Kind of funny how that's sort of, it's as old as the hill, Sunken, as they say, speculation, right? >> Yeah, no, I mean, yeah. That's quite a throwback to bring up Prohibition, yeah.

>> All right, yeah, what investors really want. That's a good one. All right, first question. >> Okay, first today we have one that people might recognize from what are your thoughts, but we're gonna dig a little deeper into it today. So there's still lots here. I have a question for all the people who have had respectable gains in cryptocurrencies.

I got into crypto during the COVID crash and I've had some great gains. Some of my trades were Bitcoin at 8,500 and Ethereum at 1,300. However, I started with a 10% allocation to cryptocurrencies, which grew to 20%, and I didn't change it. Then it went from 20 to 30, and I trimmed it to 20.

And long story short, it just keeps taking on a larger and larger portion of their portfolio. So they wanna know, should they stick to their plan and trim back their allocation, or let their winners run and only allocate into stocks and bonds from here on out? >> Yeah, this was a question that we received, obviously, towards the peak.

So that 50% is probably, I don't know, 30% now, depending on what else they're investing in. Obviously, this stuff is much easier to do when stuff is going to the moon. Now, Bitcoin and Ethereum, I think, are both down 45%. Solana is 60% off its highs. So this is the idea of, do I bank on mean reversion, or do I just let my winners ride?

So I wanna give a little story from my first book about rebalancing. And it was a study of a prison in the Midwest, because I like these flyover states, Duncan. And this prison guard was noticing that all the inmates who were there for like six months or less were gaining an average of like 20 to 25 pounds in prison.

And the guy said, this doesn't make any sense. Why would people gain weight in prison? They have the exercise yard, you can't get access to a ton of food. You kinda eat a little bit, but what is it? And they figured out the problem was the orange jumpsuits they wear, cuz they're really baggy, they don't have a belt.

And it's not like they're wearing a pair of jeans where they put it on, everybody can feel it getting tighter. So the reason that they were doing it is cuz they're incrementally gaining weight. And they couldn't figure out that they were gaining weight because they had so much extra room.

They had no benchmark or anything to really let them know that, you're gaining weight. And they said, so without these clothes, it was hard to tell that they were adding these unnoticed pounds. So this is the idea of rebalancing, right? It allows you to avoid parts of your portfolio getting overweight.

See what I did there, Duncan? >> >> So I think this is the idea, investing is always this form of regret minimization. Am I going to regret it if this thing goes to the moon and I sell a little bit too early? Or what happens if this thing goes to the floor and I held on to it?

But let's give a simpler example, let's say at a 60/40 portfolio. Ten years ago you started 60% stocks, 40% bonds in the United States. Because gains in stocks have been so much more than bonds, you'd be at an 85/15 portfolio now. Now you'd probably say, great, I did awesome.

If I would have kept trimming back the whole way through, I would have made much less money. The other side of that is your losses are going to be bigger now, but why did you create that 60/40 portfolio in the first place? It's like, what's the point of an allocation?

So there's this difference between having a portfolio and having a plan, right? Having a portfolio is like, I go to the Golden Corral Buffet, and I grab a little of this, and I grab, that one looks good too, and I want some of that. And you put it on your plate, and then you realize, this isn't a meal, this is just a bunch of mishmash of foods, and they don't really all go together very well.

That's a portfolio. Plan is like something that's really well thought out. You take into account expectations, and probabilities, and you have a process. And I think if you don't have these rules in place ahead of time to guide your actions, you're always going to be playing catch up to whatever the price is doing.

So when things are going really well and things are going up, you're going to think, I don't want to trim now, what if it keeps going up? Then when things are going down, you're going to go, well, I can't buy now, because what happens if things go down further?

So that's why you need to have a rebalancing policy in place and asset allocation to guide your actions ahead of time. Because in the moment, it's going to be so much harder to do. Now, could you have a type of buy and hold forever kind of thing for some portion of a portfolio?

Sure, because there's a buy and hold forever, there's a buy and hold and rebalance, maybe there's a buy and hold and reassess. But I think investing is always about trade-offs. So especially when you get into concentrated positions, it's wonderful on the way up, but so much more painful on the way down.

So I think you have to find a balance where you set some thresholds in place. And every time this position gets to 10% or 20%, I'm going to trim a little bit. And every time on that way down, it gets to 5% or 10% or whatever it is, I'm going to add back.

And I think if you don't have that discipline in place, you're basically just guessing. And you're trying to follow the ways of the wind or something. And you're putting your finger in the air and going, wait, you have no idea. So I think you have to have those guidelines and rules in place.

Otherwise, you're just going to be lost. >> Yeah, no, that sounds like good advice. To run with your analogy, if your stocks are kind of like the inmates in that prison, Facebook's a pretty dangerous prisoner today, right? >> Facebook got shanked today, big time. >> >> Oof, that's tough.

My diversification thing, though, I put this on Twitter this morning. Facebook is down 24%. That's the fifth biggest stock in the S&P 500, down 24% in one day. That's basically a Black Monday 1987 crash. The S&P, when I looked this morning, was down 1.2%. So this is why you diversify, and having a concentrated position like that, it's great when Facebook is going up.

Now I looked at it, Facebook is underperforming the S&P 500 over the last like six or seven years now. After all those gains basically wiped out in a matter of hours, I guess. Yeah, it's crazy. All right, let's do the next one. >> Okay, so up next, I'm 38 years old, married with three kids, aged five and under, and I have five 29s for each.

And a take home salary of $400,000 in Austin, Texas. Primary home is 1.5 million, just moved in, and we're house poor at the moment, maybe forever. Neighbors, I feel like this is kind of a stream of consciousness, but neighbor's house on the block is going for 900,000, and it's a rental gold mine, consistently rented for the last ten plus years.

I'd like to go for it, but need to take out about 500,000 of my 401(k) to make the rental cash flow positive. Do I stay the 401(k) course, or YOLO this rental property? I like YOLO being a verb there. >> Yeah, you're gonna be surprised here, but I don't think I would ever use YOLO as a part of financial advice.

That's never really reasonable. I understand the idea here, like, have someone else pay for your mortgage, the equity's going up, Austin is this really hot housing market, like how can you lose? Pull up this Austin chart here, Duncan. Let's do a chart on for Austin over the last year.

Housing, this is from Zillow, the average housing price in Austin is $625,000. It's up 40% over the last year, it's basically one of the hottest housing markets in the world. We pulled some data from apartmentdata.com that shows rent year over year up 25% in Austin. The months of inventory in the Austin real estate market is like 0.8, which is well, well under the rest of the country, which is having a short of its own.

So you probably think to yourself, everyone wants to come here, all these people are leaving Silicon Valley and all these other places and moving to Austin, like it's this great place, it makes sense. And so you think, well, I don't have this concentrated, because that's the big problem, right?

You have concentration risk, you're two biggest assets on the same block. What happens if the, forget the national market, the local real estate market, their slows or the local economy, for whatever reason, slows. No, you say, whatever, Austin's going to be hot forever. Sure, you might be right, it's going to be the new Silicon Valley.

But, like, what happens if something happens to the house, right? You need a new roof, you need a new air conditioner, a new water heater. There goes like months of profit, potentially. And the other problem is you can't spend your house, right? You could take out some home equity line of credit.

And honestly, if this person came to us and said, listen, I've got a ton of equity in my current home. I want to use some of that real estate equity, it's just sitting there. I'm going to borrow it and put it for a down payment on this new rental house.

And that's going to be an investment. Then you're essentially shifting the balance sheet from one real estate investment to another. That actually makes more sense to me than someone who says, I'm already house poor, I'm going to buy another house to be double the house poor. I don't know, so put this one up, this chart up about the middle class and their housing.

Obviously, this person has a $1.5 million house, so maybe they're not middle class. But this just shows your real estate portfolio and your primary residence to financial assets. So the top 1% has like less than 10% in their primary residence and 74% in financial assets. There's obviously a bunch of other stuff that's not in here.

The bottom 80% has 63% of their home and just 5% in financial assets. And there's a reason that the top 1% keeps getting richer and richer. Obviously, the housing market has been on fire, especially these last 18 months. But owning financial assets is probably a better thing for the majority of the population because you can diversify.

You can do so at a lower cost. I'm not even thinking through all the costs involved. And what if something did go wrong and you had to sell this rental property? All the costs involved in buying and selling it, the closing costs and the realtor fees and all this stuff.

I know it probably seems like a no-brainer. But I just think that you're putting so much risk on this one asset class, on this one block. I don't know, I'd have a hard time signing off on this, especially if you're gonna pull from your entire 401(k) and you don't just have the money laying around for a down payment or something.

>> Right, yeah, this kind of goes along with what you were saying on the first question, right, diversification, and yeah, you're kind of putting all your eggs in one basket. >> Yeah, it's boring, but I think this person kind of answered their own question when, again, yoloing into a rental.

I think that, I don't know, again, I can't get my head around that. I understand the desire to rent these days and think that the equity's gonna go up so much more. Even if they're just covering my mortgage, I'm building in that equity, I'm slowly paying it off. That makes sense in theory, but this is a very risky proposition as far as I'm concerned.

>> Yep, sounds like it. Okay, so up next, this is kind of a long one, but hang in there. We're 45-year-olds living in Ohio earning about $240,000 annually. We max out our 401(k) and HSA accounts, have $1.5 million in savings, and our house is paid off. No college savings for our two teens, but we plan to pay as they go.

Maybe that's naive. I'm worried I'm too heavily in stocks and stock funds. I want to hold the after-tax stock portfolio for five years like a boss, but I'm afraid it'll crater if the Fed raises rates quickly. I've already lost $150,000. I'm planning to work until 55 and live on one salary because my wife likes to work.

I just need some guidance on how to reduce risk. Am I taking too much? Should I stay with the stocks I've picked or migrate to a portfolio? >> There's a lot going on in this one. They actually had a lot more information here. We had to kind of trim it down a little bit.

This seems like an investing question. And this kind of happens a lot with us at our wealth management practice is people come to us and think that they have a portfolio management question. When in reality, they need to talk to a financial advisor. So we're going to bring in a financial advisor, Chris Venn, who's the head of our wealth management practice.

Chris has created hundreds, maybe thousands of financial plans over his career. >> That's fair. >> Right? So Chris, we got a lot going on here. The other one that we didn't put here is they told us that they spend like drunken sailors. Even though they're maxing out their accounts, everything else they spend like crazy.

So someone comes to you like this. They give you all this information and they say, I don't know what to do. Do I need to sell my stocks? What do I do? Where do you start with something like this? >> So first off, this sort of reads like an incomplete CFP case study, right?

There's a lot of stuff missing here. So giving direct answers to some of these questions is inherently problematic. That said, there are a few pieces I picked out of here that they can address like right off the bat. To begin with, whether or not the kids are a year or four years away from college, there's benefit to them being in an Ohio 529 plan.

In Ohio, you're able to get $4,000 state tax deduction for each beneficiary that you set up. So if there's two kids, that's 8,000 a year, like right off their state taxes. The other thing that's like an immediate takeaway, they're 45. When we're building financial plans, we're putting it out, their lifespan, out to age 100, right?

The idea is that we wanna plan for this excessive period of time. So to think about lightening up on stocks at 45, that's just silly. >> Yeah, so they say we're gonna retire by 50 or 55, but guess what? Your portfolio and your lifespan still goes after that. So you're planning your portfolio for not just the day you retire, it's while you're in retirement too, right?

>> Yeah, and that's just some of the immediate things that jumped out to me. Answering this question, it's not the question they're asking. The question they're asking is, I've done well and I'm nervous that the stock market's gone down. What they should be asking is, do I need a detailed financial plan?

And obviously the answer is yes, right? To be able to contextualize what it is that they're saving for, what these various goals that they have to accomplish over half a lifetime, right? Like that's the way they should be looking at this, not whether or not during a downturn they should lighten up on stocks.

That's literally one of the primary value adds that we talk about when building plans for people. It's like, you're gonna run into situations that are just gonna make you uncomfortable. And if you rely on how you're doing versus the stock market, you're gonna get uncomfortable and make the worst decision.

That's just the way it's gonna go. >> And this kinda gets back to the first question about a plan versus a portfolio, right? These people have done well, they've accumulated assets. They've put together a portfolio. >> House is paid off. >> Right, yeah, they've done really well personal finance wise.

Obviously, they save a lot of money. They said they spend like drunken sailors too, which I think is fine as long as you're saving. They're maxing everything out, that's good for them. But I think you're right, what they need now, especially, and this happens to us a lot with clients that come to us, right?

Is that, I'm approaching retirement, I'm approaching some life event. Now, help me put a plan together to figure out what to do with it all now that I have it, right? >> And it sounds like their life event is they participated in the bull market and made a bunch of money.

And it's like, look, I applaud them. They point out that they over the past six years have visited 33 national parks. That's a really serious financial planning conundrum, is getting people to do that kind of stuff and enjoy their life while they can. But what you don't want to do is make those decisions at the detriment of your future liabilities, right?

>> Yeah, so they come to you and they say, we want to continue to travel and put this together. So it's like build a plan that takes that into account, right? Help our kids pay for college, help us go to all these national parks, and also help us not worry about a portfolio crashing all the time if and when it does.

>> Yeah, I mean, that's when you first sent me this question, Ben, my immediate response was like, this is literally a commercial for why you need to work with financial planner to think through this stuff. It really is. I mean, again, just like I cherry picked the example of the 529s and the age, but there's 100 other pieces of this that we could pick apart.

But I really think that the most important takeaway that the question needs to be given as far as an answer is, no, you should absolutely not be thinking about lightening up, but it sounds like they're picking individual stocks. And he looks like he's interested in migrating towards some sort of a more diversified approach to invest, and clearly, that's what they should be doing.

>> Right, all right, Duncan, we got another one? >> Yep, so this next one's from Chris, and Chris writes, I'm a 40-year-old government worker at a state hospital in California. I have a solid pension that will be worth 2 to 3 million when I retire. I max out my 403(b) and 457 and backdoor Roth for 6,000, and they give how much they put into their 403(b) and 457.

Also have two rental properties that are not in California, and 200,000 in brokerages and savings. Should my pension be treated like the bonds in my retirement portfolio, and should I put 100% of my other retirement investments in an index fund? >> First of all, this person is in a good position, obviously, to actually have a pension.

Not many people have that. My brother works for the government. I think the only reason he's staying in that job is because he's gonna get a pension in his 50s. It really- >> Makes sense. >> Yeah, this person put a dollar value on it. They didn't tell us how much they're gonna get.

But how does having that income stream change things if someone comes to you from a financial planning perspective? They say, all right, here's my portfolio, and then I have this income stream on top of it. What does that do to your ability or need to take risk? >> Ben, in 15 years of doing this, anyone I've seen come through the door who's got a pension as part of the financial plan is infinitely more comfortable from their own perspective on their finance.

It doesn't matter how many millions they have. It doesn't matter what else they've gone on. Knowing that there's a pension, if it's coming from, if it's a state pension, if it's a teacher pension, if it's coming from a solid company. Obviously, like you said, there just aren't many of these left.

So that's a small group of people. But for those who are fortunate enough to be in that position, it changes the entire game. Now, when you're thinking about like bucketing out what that pension serves versus like any other investments you have, the only way to answer that question is to look at it through what your actual need is, right?

So if you've covered, if he's covered his basic spending need with a pension, that makes everything else a little more creative, right? Like you can look at it from a goal to goal perspective. So I don't think it's binary, is what I'm saying. I don't think it's, all right, I have the pension figured out.

Let's like, let's just jam the pedal to the floor with the rest of the stuff. - Right, it could mean that you take less risk, right? Because you have that pension, you don't need to take as much risk. So it like, it's kind of like both sides, right? - It's a matter of looking at through the lens of what do you want to have happen?

I mean, this is a 40 year old, again, longevity, right? If the pension is going to be there to supply the basic living expense, and you don't have to, you know, take risks to cover your needs, then it's a matter of thinking through what exactly you want to do with the excess before you can answer that question.

You know, what are the planning needs you're solving for? Not simply, well, this is covered, let's invest in all stocks. - Yeah, and does it even open you up to the fact that like, this pension allows me to like, invest for the next generation? Like, you could be taking more risk because, yeah, maybe you're investing for years or whatever.

All right, Chris, we got one question actually from the chat here. Casey asks, and this is like asking a barber, do I need a haircut? Casey says like, how do I know if I need a financial planner? Like, what are some of the reasons people come to us because they need help?

Like, what are some of the main reasons? - I think the easiest way to look at that is we're helping people make better decisions. You know, we're not here, and we being financial planners universally, right, not just at Riddell 12. Like, universally, financial planners are there literally to help people make decisions that are not only more well-informed, but without, like, all the baggage of that, you know, oh, my God, am I doing the right thing?

You know, oh, my God, did I just like screw up my future? And that's the lens you have to look at that through. Do you have a situation where decisions in front of you are being made, you know, like, either on the fly or really uncomfortably? And if that's the case, then absolutely, start talking to someone.

Why not? You know, at least do... I can't think of someone who's going to charge for an initial consultation. You know, sit down with the firm that you're comfortable with and, you know, see if the questions that you're faced with are actually, you know, of detriment to you in the future.

So to put that in a box is really difficult, right? To say, well, you have to be this age and have this many assets or whatever. You know, I just think it's as simple as, are your future decisions or near-term decisions stressing you out to the point where you think you're going to mess something up?

- Right, yeah. Or do you just want to find a place with expertise in a bunch of different areas that can help you make better informed decisions, right? - Yeah, and that's really the value we're bringing is, like, as planners is, you know, hey, I want to make sure, like, these questions here, hey, how should I view my pension in light of the fact that I've also got 457s and 401(k) accounts?

Well, what are they for, right? I don't, you know, I don't think it's... I think most of these decisions aren't binary. - Do the flows of inquiries go up with market volatility, typically, for financial advisors? - Absolutely, absolutely. - I think especially from people who have advisors that don't have a plan, like we see that, and also people who have been doing it themselves and they go, "Okay, I've amassed enough wealth that I don't want to mess this up now and I don't have as much time as I used to have," right?

Like, those are the things that we definitely see. - And that's true at any asset level. You know, I've heard all too often people with significant amounts of money, "Oh, I don't need a financial plan." Well, what do you mean? You've got everything figured out. You know the direction of all of these assets as long as your lifestyle is covered.

Like, that's 99% of the time when you turn that question around on someone, it's like, "Well, no, I didn't think of that." - Yeah. I mean, like, if it's not fun anymore, right? Like, my Robin Hood's no longer fun, you know? - Yeah. - It used to be fun, and now it's not.

- Duncan needs a consultation, Chris. All right. Next week, we are off. I'm taking the family, my wife, three kids, the in-laws, all going to Disney. Duncan, you're a Disney guy, what are my tips here? - Oh, I mean, I always like the pools. I'd hang out at the pools.

Epcot, World Showcase. - Yeah, a pool sounds great to me. Yeah, I'd much rather be in a pool than waiting in line all day. Remember, if you have some thoughts on any of the questions here today, leave a comment for us on YouTube, have a question for the show, askthecompoundshow@gmail.com.

Duncan, are we doing a ticker yet for 100,000 subscribers? Like, the national debt level in the country? - Yeah, we're getting real close. We're getting real close. But, yeah, share with your friends. Let's get to 100,000. - If you liked Chris's compound hoodie today, go to idontshop.com. Again, we're off next week.

I'm in Disney. I'm going to be waiting in lines. It's going to be hot and sticky. I just can't wait, Duncan. We'll be back in two weeks. Thanks, everyone. - See ya. (upbeat music) you