A lot of fun. Yesterday was fun for a few minutes. All right. So last Thursday, the S&P 500 was up 2.5 percent. All right. We're feeling good. Friday, it was down 3.6 percent. Yesterday, S&P 500 up 3 percent. Today, down 3 percent and going lower faster at a fast pace, right?

The crazy thing is, this is actually kind of normal for a downturn. John, put the chart on of this volatility chart here. So what this shows is like the rolling 30-day volatility. Think of this as like the VIX. You see the dotted line there, Duncan. That's the average. You can see any time you see a big spike, you see these green and red dots on this chart.

Now, what this is is the 25 best days since 1990 and the 25 worst days in the market since 1990. And what you'll notice is they all happen at the same time. They all happen when volatility spikes. When volatility spikes, you see big up days and big down days.

Now, this is nothing like we saw in March 2020. We saw a string in March 2020 of minus 8 percent, plus 5, minus 5, minus 10, plus 9, minus 12, plus 6, minus 5 in consecutive days, right? So this back and forth, back and forth, right? It's the Michael Scott snip-snap, snip-snap.

So why does this happen, right? Why, when we see a downturn, does this happen? Because we're human. Phil Perlman had this quote today. I think it was an old tweet of his. He said, here's the thing about behavioral finance. People are crazy. And losing money is no fun. And losing money drives people crazy, right?

So people panic when they're losing money. So they panic buy and they panic sell, which leads to these huge wild swings in price in both directions. Now, you could say, hey, it's the algos fault, right? But the thing is, this has been happening in every bear market in history.

The algos just might be speeding up and making it go a little faster. But unfortunately, this is the way that it works. Sorry, Duncan. That's all I got. I was about to say, so it seems like we just need to look at that chart and you just figure out when you buy and sell based on where those dots are, right?

So you just map that to future moves. Yeah, sure. That's the problem, is that no bear market in history is going to tell you like the entry point of, okay, now it's over. Because these things that have never happened before continue to happen all the time. People said in March 2020, we bottomed on like a 9% up day or something.

And people said, you don't bottom on days like this. Those big up days like that doesn't happen. And that was the bottom. And so good luck guessing is my only words of comfort. Remember, if you have a question, askcompoundshow@gmail.com. One of these weeks, we're gonna have more comfort for you.

All right, let's go to the first question here. I think this is probably a position a lot of people are in right now, as they look at their stock portfolios. Yep. So this person, shout out Nick Majulie right off the bat. I was reading Nick's book, Just Keep Buying, and the chapter on why you shouldn't buy individual stocks reinforced my recent feeling that I need to change up some of my investments.

In my workplace retirement account, I have 50% of my balance, about $200,000 in a brokerage link account where I own a number of individual companies. Some have been winners, but recently a lot have been losers. We all feel you there, I think. I have learned my lesson that picking winners is hard.

Do you have any recommendations on a strategy to rebalance my account into ETFs? Is it best to just sell everything and buy new? All right, so we did have Nick on the show a couple weeks ago and talked about how tough it is to pick winners. I think one of the stats we didn't talk about at the time, Sam Rowe at the TKer, he's been a guest on the Compounded Friends before.

He had this great stat a couple weeks ago, said that since January 1995, 728 tickers have been added to the S&P 500, while 724 have been removed. And I honestly think this is one of the reasons that the stock market itself is so hard to beat. It's not like an index fund is anything special.

It's tax efficient, it's low cost, it's low turnover, but it also holds the winners and it gets rid of the losers. And I think people have a hard time doing that in their brains. So the fact that people finally realize, "Okay, I'm going to make a C change. This is it.

I realize stock picking is not for me." The only advice I would give off the bat is don't get into this habit of changing your financial plan every time things are going well. So in 2020, stock picks are looking good, so I'm just going to funnel all my new retirement money into stock picks.

And now when it's looking bad, I'm just going to funnel all my money into index funds and ETFs. I think you just have to pick one and stick with it. Pick an allocation, give yourself an allocation to stock picking if you still want that, but don't change it willy-nilly all the time.

So the options are, you rip the bandaid off and you just do it. The good thing about this is that it's in a workplace retirement plan. Typically selling in a brokerage account involves thinking about taxes, right? And in this case, if you had losses, you could just take some of those and offset the gains.

The fact that it's going through a brokerage-linked account to a retirement account makes it easier because you're not having to worry about taxes. So you could just sell it all at once. Put that money into four or five low-cost ETFs. Could be a target date fund, maybe like one of those Vanguard lifestyle strategy funds where they handle the asset allocation and rebalancing for you.

I mean, check the options at your 401(k) provider first. The most important determinant of success for these things is typically all else equal. Choose the funds with the lowest fees. That's going to be your highest predictor of success. And the other option would be, so if that's the case, I'm totally out of picking stocks, right?

I think I retired, what, three months ago, Duncan, from picking stocks? Something like that, yeah. I put my retirement in. I might do a Michael Jordan comeback at number 45 at some day. I'm still holding some individual stocks. When Zillow comes back, you're going to be a champion. I might have one stock that's up this year.

All the other five of them are getting smoked. So I'm with everyone else here, my stock picking. But I put like five or 10% of my portfolio into this, and I have fun and it's entertaining. And I know that's what it's for. Everything else is automated, rules-based. So I think you can give yourself some play money if you want to keep 5, 10, 15%, whatever it is, and hold on some of those stocks you want to keep as winners so you don't kick yourself if you sell them.

Just, again, don't get in the habit of going all in and all out. So I do think this is a good lesson for a lot of people, though, that 2020 was an aberration, and picking stocks wasn't as easy as it looked back then. Yeah, I mean, there was a time when it was just like a strategy.

People were just buying every stock before earnings, and they were all just going up after earnings pretty much. I love this company. I'm going to buy this stock. Hey, look, it did well. It doesn't always work that well, unfortunately. It's always not going to be that easy. So yeah.

It's just, yeah. Probably rip the bandaid off and do it. I have a little follow-up to that, which is you always hear about the virtue of patience in the market. So what's a good indication of when you know you need to make a change? When should you let something ride versus when should you make changes?

This is why rules of thumb are so hard in the markets, because you hear like, "Listen, to be like George Soros, you have to be flexible and make changes all the time." But it's like, "No, to be like John Bogle, you have to stick with your plan no matter what, come hell or high water." And then it's like, "The first loss is the best loss," right?

Then it's like, "No, no, no. You have to stick with everything no matter what." So everything in investing is kind of counterintuitive and sort of offsets one another. A lot of it depends on what you want to get out of this strategy. And if you really think you have an edge in picking stocks, or again, if you're just doing it for fun.

So are you doing this your entire portfolio? Then you better have a damn good strategy and reason for it and reason to stick with it and discipline. And the idea of, "Okay, if I'm going to stick with this strategy, you should probably be willing -- like, would you be willing to plug your nose and put more money into these stocks now?" Or you're like, "I'm just going to wait and see." Maybe you don't have enough faith in your own system to keep following it.

And I think that's a big part of it, too, is understanding if your own system -- like, everyone's strategy is going to go through periods of rough performance. There's no denying that. Everyone does. Warren Buffett does. Cathie Wood does. Every great investor in history has a bad period. I think you just have to figure out, "Are you willing to stick through?" That's probably the biggest thing Buffett has done over the years.

He has a strategy he sticks with, come hell or high water. He got a lot of flack for selling off airlines back during the pandemic, right? But now, I guess, it seems like people are kind of over that. Yeah. And to his credit, he came back and Berkshire is doing one of the best-performing stocks this year.

Yep. Let's do another one. Okay. Up next, we have, "Me and my wife have an apartment in the city center, which we bought three years ago. We are currently renting it out and we're able to buy a house and cover both mortgage payments with the rent money. However, due to a crazy housing market, we could sell our apartment, pay off all mortgages, keep our house mortgage-free, and pocket an extra $100,000 in profits to invest.

Which is better, continue with the rental and have others pay for our mortgage, but deal with all the risks that come with renters and renovation, or invest in ETFs and be exposed to market volatility?" It's interesting. The first question dealt with changing a financial plan because big losses. This is, "Should we change our financial plan because we're dealing with big gains?" I think it's interesting.

Sometimes, circumstances change and the financial markets force your hand to make a decision like this. And I think for a lot of people, this has to be very tempting. If you own a rental property and you have all this equity built up, it's got to be very tempting to cash out and do something else with this.

I think the biggest question is, "What's your tolerance for complexity here?" The good news is you already know what it's like to be a landlord, but have you experienced the downside of that? Having the hot water heater break, having the high cost of maintenance, property taxes go up, that sort of thing.

Maybe all that stuff doesn't matter when you consider how much equity you've earned, but I guess there are some pros to owning real estate. I think people have figured out. There's low volatility in the price. There's no flash crashes in housing. There's no daily market prices to check. You could check on Zillow, but it's not like it changes the stock market.

You're not going to be up 5% one day and down 5% the next day. It's just tangible assets. I think some people are just more comfortable with that, whether that makes sense or not. And then you have regular income potentially coming in if you have tenants locked in. And then, of course, the equity piece, if housing prices continue to rise, you could continue to make more money and do it on a levered basis.

The cons here, you have these really high idiosyncratic risks. You could lose your tenants. You could have damage to the property. You could have just your neighborhood that you're in or the local economy goes bad, even if the rest of the country does fine. And you can't really spend rental property besides your income.

And the returns are probably lower than you think when you count property taxes, maintenance, upkeep, property management, borrowing costs, all these things. And then, of course, if you're owning one rental property, your diversification is basically nil. You have an apartment and a house. So I'd like to think of investing through this regret minimization framework.

What would I regret more, paying off the mortgage and missing out on potentially more equity or paying it off, having that feeling of being free, having some extra money, and then not having to worry about finding tenants ever again? I doubt many people regret paying off their mortgage, even if it's a very low hurdle rate.

And if you put it in a spreadsheet, it doesn't make sense. I'm not sure how many people would say, "I paid off my mortgage. I'm free and clear of debt, but I really regret it." I don't think people do that. So, yes, rates are low, but it's probably hard to have that peace of mind.

I think as long as you're up -- you're okay foregoing potential price gains and living with more volatility in the financial markets, this is probably about as good as time of any to do something like this and take it off the table and make your life maybe a little easier.

>> Yeah. No, that makes sense. One thing on that note, though, you know, I try to make myself feel better being a renter and not owning property. My wife and I moved to a new neighborhood last year, and we loved that there was this cool, like, little bar and cafe on the corner.

And they're now literally destroying the building, and that entire block is gonna be under construction for the next couple of years. And so, I was like, "Oh, I guess that's the advantage of renting. We can just move away." >> Yeah. Yeah, you have the flexibility of your lease is up.

You go somewhere else, right? So, I do think there's a big piece of that flexibility. And I think potentially paying off your mortgage is another way to get more flexibility as well. >> Yeah. >> All right. Let's do one more. >> That's good advice. Okay. So, up next, "I'm 63, retired, and living on a meager pension and Social Security.

Doing okay now, but counting on my IRA in a few years. I currently have a diversified 60/40 portfolio of domestic and international stocks and bonds. I'm not thrilled with the returns that bonds are giving me, but I don't know if there's a viable alternative. Can I find attractive risk return in REITs or high-dividend stocks without sacrificing capital, or should I accept the bond portfolio for what it is and ride it out?" >> This is a question we've been getting a lot in recent years.

John, throw up the first chart here that just compares the S&P 500 with the Vanguard REIT ETF and the Vanguard Dividend Appreciation ETF. Oh, no. Do you have the white charts one here? Yeah. Never mind. My chart was going to show that dividend stocks and REITs are down just as much as the S&P.

Dividend stocks are a little less than the S&P, but REITs not down as much. I don't blame John for this. I probably forgot to include the chart. So, this is my bad. >> I'm not seeing it. But, yeah, we'll have to wink to this. >> It's fine. Basically, dividend stocks are still stocks.

They may not fall as much, and they're not falling as much right now. They're down 20% less than the stock market. But they're still going to fall. And so, there aren't many good alternatives right now. So, I think you're going to have to accept some volatility. In 1989, Peter Bernstein, the legendary investor who wrote Against the Gods, which is an amazing book on risk, laid out this idea in some investment research journal type of periodical.

He said, "What's the difference between a 60/40 portfolio of stocks and bonds versus 75% in stocks and 25% in cash?" And he said, "Although cash tends to have lower expected returns in bonds, we have seen that cash can hold its own against bonds 30% of the time or more when bond prices are positive, and cash will always win out over bonds when bond returns are negative." And that's now, right?

So, that's why people are probably more comfortable investing in cash right now. So, now, John, you can put this table that shows a 60/40 versus 75/25. And you can see -- so, I did that from 1928 to 1921. You can see it's pretty similar. A little bit higher volatility in 75/25, but higher returns as well.

And then I also looked at the period of 1950 to 1981 to show, like, what about a rising rate environment? Because the 10-year went from 2% in 1950 to 15% by 1981. And you can see the 75/25 portfolio actually outperformed because cash outperformed bonds back then. Because you get the -- because short-term rates rise and you get to reinvest and bonds have this interest rate risk.

So, you get a little bit higher volatility having more stocks, but then you have this piece in cash that you know is not going to fall on a nominal basis, right? In cash, in this instance, I used three-month T-bills, which is basically like a savings account or money market.

It is worth noting, Peter Bernstein wrote this piece in 1989. Yields were much higher. 10-year yield averaged 8.5% in 1989. Three-month T-bills sported an average yield of 8.4%. So, things were a tad easier from an income perspective back then. Right now, three-month T-bills yield about .9% or 90 basis points, if we're talking finance-speak.

But you can find higher yields in shorter-duration bonds today. So, the SHY that we've talked about here, Duncan, one- to three-year Treasury ETF, is now yielding 2.7%. So, you pair a shorter-duration bond fund like that with almost 3% yields with a little bit of higher proportion in stocks, I just think you're just going to have to -- you can't live off the income from your bonds anymore.

It doesn't really work like that in this environment. Maybe they go a little higher and you can, but in 1989, you could put your entire portfolio into government bonds and earn 8 or 9% and have been fine. So, if you want anything approaching those levels of returns today, you just have to live to accept some more volatility, basically.

>>So, you're saying those were the days, basically. >>Yes. How easy was it to invest in the 1980s? The stock market was up like 20% a year. Bonds were yielding 7 to 8%. Easiest time in history. If you want to know why a lot of the most famous hedge funds in the world started investing in the 1980s and why they have these great track records, they're really smart guys, but they also started investing in one of the greatest decades ever.

Sorry, didn't mean to throw some shade there, but it's true. >>I'm sure it's a lot of skill, too. No offense to all of our hedge fund viewers. >>All right, let's do another one. >>Okay. With the recent downturn in the stock market, I've been doubling my monthly contributions to my Roth IRA.

This means I'll be maxed out by June. I want to keep investing at least 30% of my income into the market, which leaves me with two choices. Contribute more to my 401(k) or my brokerage account. My work will not match my current 5% contribution until I've been with the company for a year, which will be in December.

They use a target date fund with a 0.4% expense ratio. My brokerage account mirrors my Roth, which is invested in passive ETFs with an expense ratio of 0.04%. Should I increase my biweekly contributions to the tax advantage 401(k) even though I will not get my match and it's more expensive, or fund my brokerage account, which is taxable but cheaper?

>>Okay. A good financial planning question here. So, let's bring in Kevin, our financial planner here, who's been on this show before. Kevin, how's it going? >>Good, guys. How are you? >>Hey, Kevin. >>All right. Here's the thing. Why do companies do this where they don't give you a match for a year?

Is that just companies nickel and diming people? Is there an actual reason for this? >>So, it's mostly just because they're worried that somebody comes in, they stay for six months, they give them the free match, and then they leave. And so, honestly, it's just the corporation kind of just trying to, or a corporation, any business, right, just trying to keep costs a little lower from an overall compensation standpoint.

They want to incentivize you to stick around. >>I would like to see some backfill on that match. So, I guess the question here is, okay, I don't get the match. Does it still make sense even though the fees are a little higher to invest in the 401(k) or just put it all in the brokerage account?

I guess a lot of this depends on if you really care about that tax break. So, why don't you run through how to think about this? >>Yeah. So, the 401(k) versus the brokerage, that's exactly what it is. It's a tax play. So, in the 401(k), even though you're not getting the match right now and your expense ratio is higher, this is just a bet that your taxes today are higher than they will be in retirement, right?

That's the cleanest way to think about it. And so, if right now you're in the, let's just use simple made up numbers, you're paying 30% income tax now because you're earning an income, you're earning a salary. In retirement, maybe you're living off of just Social Security and some withdrawals from your brokerage account and your tax rate's 15%.

Well, it makes a lot of sense to defer that income until later. That's really kind of the tax strategy. Of course, the big variable there is we have no clue what the tax code is going to be when you retire, whether that's 5 years from now or 35 years from now.

So, that's kind of the tax side of things. I also think the behavioral side of things here is setting up your 401(k) just to have it come right out of there. It comes out of your paycheck. You never see it hit your account. I think it's just easier from a psychological perspective.

And maybe if you put into a brokerage account, you might be more tempted to use that money now. I know you can still take it out of your 401(k), but you have to pay some penalties and jump through some more hoops to do it. So, I think from a behavioral perspective, putting it in the 401(k) actually makes sense.

And then you're already set up with it. And so, when that match does kick in, then it's already there. You don't have to do anything else, right? It's easy. I think that's the biggest benefit of the 401(k) is just that it's easy. Yeah. The automated savings piece is absolutely huge because we've talked about this on the show and pretty much every show that we have, is that so much of this is just making mistakes from a psychological perspective, not setting yourself up for success with investing.

And that automated every two weeks it's going in is so important. If you can do that in the brokerage though, in this particular situation, and you want to wait until you really can get that full match, we're talking what, six months from now? So, it's not six, seven months from now.

It's not that big of a deal if you take the next six, seven months, front load the money into the brokerage, if you can be programmatic and responsible with it. And then once the match is fully there, great, you can start putting some money away. That I think is the best thing to do.

Also, maybe check with your HR department because you're getting absolutely robbed on fees if you're paying 40 basis points for basically a target date fund. Yeah. And unfortunately, a lot of the HR departments, they don't really know what they're doing in a lot of these instances because they don't have the investment acumen or experience to do this.

And they go with someone they heard of, their brother-in-law, whoever does a 401(k) plan. So, all right, let's do another one, Duncan. Okay. So, last but not least, my wife and I have about $170,000 in our brokerage account that we intend to use for a house down payment. We contribute to retirement accounts and save quite a lot of money.

I work in real estate, and given current house prices, we are biding our time until there's a correction. In the meantime, and for future finances, we want to invest the money for the long term. I recently learned about securities-backed lines of credit, SBLOCs, and they seem like an attractive option.

I understand their risks, but I would like to hear your thoughts. Additionally, with this growing sum of money, what would be the best option for investment? Wump sum seems dangerous in this environment and for our purposes. So, maybe some sort of DCA, dollar-cost averaging, perhaps a wump sum of $50,000 and then a weekly contribution.

So, this is a question, as people, our regular viewers are saying, this is a question we get a lot, but it's important, but this idea of wump sum versus DCA and different time horizons. I do want to say, I understand the desire to be patient. No one wants to buy a house right now because house prices are up and mortgage rates are up, but it's not a foregone conclusion housing prices are necessarily going to fall.

The gains could slow and they could certainly fall at some point with higher rates, but it doesn't mean they have to. So, I just want to point that out. Interest rates are rising everywhere else, Kevin, so are these SBLOC rates rising? How long does it take for those to start rising?

I've seen them, in places like Robin Hood, I get emails saying they've raised rates from, I think, 2% to 3.5% this week. So, are we seeing this in a lot of the bigger brokerages as well? Yeah, typically, and we talked about this on my last appearance, actually, so I guess I'm the SBLOC guy now.

But right now, most SBLOCs are based off of what used to be LIBOR. It's now SOFR, Secured Overnight Funding Rate, I think, which is basically just, it's a rate that is used by the Treasury to figure out how much it would cost to borrow Treasuries on an overnight basis.

So, that's not, I actually had a client ask me this yesterday, "Hey, just saw rates going up 50 basis points. Is my loan going to go up 50 basis points?" It's not tied directly, but just given that rates generally are rising, you're going to see a raise in that rate as well.

I think probably three months ago, these things are quoted on a spread versus that SOFR rate. So, three months ago, if the reference rate was 10 basis points, it might be something like 60 today. And again, that's not necessarily just because Jay Powell said, "We're going up 50 bps." It's just what the market is determining.

Got to remember, though, he said we're not going to raise it by 75 bps next time. So, that's good news. Right. Maybe he needs to come out today and remind everybody. The stock market failed to get that message today. I will say, in terms of what to invest in, a lot of this depends on, are you still going to use this for a down payment?

So, let's say you just extend it and you say, "Okay, we're not going to buy a house today, but maybe in three years or five years." So, I think you have to tie that time horizon to this to figure out what you want to put it into. And that means something that's probably relatively safe, even three to five years.

As we've seen this year, we're four months into the year and the stock market's down, I don't know, 14 or 15 percent. Some other stock market's down much more. So, if you want to take that risk of, let's say you had to do your down payment now and you had a lot of that money in stocks, if you have 15 percent lower down payment because all your money's in stocks, I still think you have to think of something that's a little safer and more defensive here for this kind of thing.

I don't like the idea of taking a lot of risk of this. You could put it into more, we talked in the past about maybe more diversified portfolio, something that's like 50/50 or 40/60 or something. But I think in terms of the lump sum, the first question is, what is your allocation going to be and how defensive do you want to go with this money?

Yeah, I think, you know, you're actually maybe even a little better place now with rates rising because you can go buy a shorter term Treasury ETF and actually get some yield for it. If that down payment is going to happen in the next 18 months to three years, that might not be a bad place for it.

And for the longer term stuff, you know, we're not trying to time the market right. If this really is long term money and we're talking 30, 40 years, lump summing it today versus dollar cost averaging it over the next six months, it's probably not going to make a huge difference.

But psychologically, if the dollar cost averaging feels better to you, sort of similar to the last question, just be programmatic about it and say, OK, I'm going to put X in today and once a month it's going to move in another 5 or 10 percent or whatever it is.

And don't try to get cute with, oh, it's down big. Let me accelerate. Just do your thing. That'll make it less of an emotional decision for you. So that's kind of how I would think about it. I know, obviously, our colleague, Nick Maggioli, you guys mentioned him earlier, has written a lot on the merits of lump summing versus dollar cost averaging.

That's something good to check out of dollars and data, his blog or his book. Duncan, I think we need SHY to sponsor this show because we've mentioned it every week for three. But you're right, Kevin, you get almost three percent in a short term Treasury and that still has a little bit of interest rate risk with rates rise.

But those are so short term and the rates have already risen so much that that is a really good option for people saving for a down payment right now that want to earn a little bit of money. And they really couldn't have it in the past. I think it got down to, I don't know, 25 basis points or something ridiculous in the pandemic.

And it's been it's finally risen for the past six or nine months. So you finally have some yield you can earn. And for people with a few years of a horizon, I mean, our old friends, I bonds come back in the picture, right? I mean, yes, I know it's capped, but yeah, 10,000.

That's come on. Where's the White House with this? Increase the cap on I bonds. What are you waiting for? Right? You should start a campaign. Twenty five grand, make it twenty five. And people, the people, the people, the viewers love the I bonds, don't they don't? I guess they're afraid that someone's going to start a hedge fund of I bonds that maybe it's got to be the best for my two best performers this year, I bonds in my house.

So those are the only things that I have that are positive this year, I think maybe some values that we should have something. All right. Thanks again to Kevin Young for coming back on. We always love Kevin's advice. He's an advisor for us at Riddles. Keep those questions and comments coming.

Remember, I don't shop for all of your needs, shopping needs. I was in New York a couple weeks ago and they had a portfolio rescue towel. We have it in blue and red. Right, Duncan? They were sweet. I love them. They're cool. Yeah. Josh said it's more of a pool towel.

It's not quite as thick as a beach towel. So just FYI, if you know your towels, it's a little on the thinner side, I guess. But yeah, I like them. I think they're good. It's fine. If you have a question, ask the compound show at Gmail dot com and we will see you next time.

See you, everyone.