(beeping) (upbeat music) - Welcome back to Portfolio Rescue, a show where we take questions straight from you, the viewer, from all of our different content we produce. Duncan, we took a week off because I was in Disney. I learned a valuable lesson about the difference between a trip and a vacation.

A family trip is one where everyone goes to bed at 9 p.m. 'cause you're all tired from all the activities during the day, and a vacation is where you stay up late and party and have fun, and that was not what we were on. - I'm kind of surprised you're not wearing Mickey ears, you know?

Thought you might come back with some of those. - I was the only crank in the family who didn't have, like, head-to-toe Mickey Mouse or Disney gear. Anyway, right before the show, I actually got a, I've given some book recommendations before. Poor Charlie's Almanac. This is something I read early on in my career.

We actually had a relative of the person who worked on editing this book, and it's all of Charlie Munger's different speeches he's given over the years, sent me a signed copy. I think he sent a signed copy to the office, too, for Josh and Barry and Michael and some other people, which I thought was very cool.

It's a very good book, and this guy is 98 years old now, and he was out there spitting fire yesterday calling Bitcoin a venereal disease, and I just hope I make it someday to that age where I think it's basically 80 plus where you just stop caring at all what you say and what people think of you.

It's wonderful, so I would like that. I just want to say real quick, so remember, if you have a question, email us, askthecompoundshow@gmail.com, and you can also leave some feedback there as well. So we got a feedback. Last time, someone asked, "Hey, I want to YOLO into a rental property "in Austin, Texas.

"I want to cash out my 401(k)." We think he was cashing it out and not doing a loan, didn't really specify, but someone said, "Hey, I'm surprised you guys "didn't talk about the fact that there's a tax issue here, "so if you cash out your 401(k), "you're paying taxes on it, "and then a 10% penalty for early withdrawal." Now, this person who wrote us in may have been taking that into account, right?

They may have thought about that ahead of time and netted that out, but that's a good thing to think about. It's something that we didn't mention, so thanks to the audience for pointing it out. Always, again, send your feedback or leave them in the YouTube comments. All right, what do we got this week?

- Okay, so first up, we have a question from Victor. "I'm saving to build a house in early 2023. "I have around $18,000 saved "and anticipate saving at least an additional $9,000 "before I build. "Gemini offers a yield of 8% APY on its stable coin "and is considered one of the safest "crypto exchanges or platforms.

"Should one consider using stable coins "to generate greater savings for things like a down payment "or other non-emergency savings?" - Get a lot of questions about this, because you're seeing 8%, and then even for an online savings account, you're earning 50 basis points, maybe, right? Half a percent, and the finance people look at this and say, "This doesn't make any sense.

"How could you earn 8%? "This doesn't, it just doesn't compute." Actually, I wrote a piece last year comparing stable coins to MoneyMarkt, and I actually think this is kind of off-topic. Stable coins could be the gateway drug for a lot of people into crypto. I think stable coins could be huge, especially since it's a global asset and people could use it as dollars, potentially, and earn a lot of money on that.

Separate topic. So, first of all, why do stable coins earn such high rates of interest? So, we talked to Zach Prince from BlockFi about this a number of times. You may have heard of BlockFi. They're the company that got fined $100 million by the SEC this week. We went into this on depth on Animal Spirits this week.

- Yeah, you did a good segment on that. Everyone should listen to Animal Spirits. - Yeah, kind of felt like they were the sacrificial lamb here. It wasn't like they were doing anything nefarious, but the way I equate it is, they were kind of like Uber and Airbnb, just going into these markets before regulations existed.

Like, the SEC didn't really have regulations. They said, you know, "Stable coins are unregulated securities," and they had to pay this fine. Now they're gonna be regulated. Setting aside all the boring regulatory talk, first of all, one thing to understand here is that there are no traditional forms of finance in crypto.

Like, there's no banks that are doing any sort of lending. If you wanna borrow against a stock or a stock portfolio from basically any brokerage on the planet, you can do so at a very low interest rate. We've talked about that a few times. People borrowing against their portfolio because you can do so at, I don't know, 2% to 3%.

Maybe those rates are going a little higher now because interest rates are rising. But there's just not as many options for borrowing against crypto. So if you're a person who got in early on Bitcoin or Ethereum or something, you've made millions of dollars, and your significant other says, "Hey, I wanna build a new kitchen "or buy a new car with that money." And you say, "No, no, no, I'm a hodler.

"I'm never selling." You wanna somehow unlock that newfound wealth that you've made, so you borrow against your crypto. And because there are no traditional forms of lending here, the places like BlockFi and Gemini that do allow lending can do so at a high interest rate. So I think they charge like 10% if you're gonna borrow at it since crypto is such a new form of collateral.

And oh, by the way, it's a very volatile form of collateral. So that's why they're able to charge higher prices. So I don't wanna sell my Bitcoin or whatever because I've made a ton of money on it. I don't wanna pay the taxes. I wanna borrow against it. You borrow against it.

These stable coins are paying the spread. Just like you borrow for a mortgage at 3% and the bank pays you 0.5% and they keep the spread, Gemini or BlockFi are doing the same thing where they're lending out at 10 and paying eight and keeping the difference, right? And then there's also institutional investors who are borrowing for arbitrage opportunities and market making and trying to short it.

But that's the idea here. So that's how you're able to earn these high rates. And I would say, as this stuff matures, you would expect those rates to come in a little bit, right? But that's how it makes sense. And the other risk factor here is just that you don't know.

This stuff is still so new, right? I mean, some people worry this stuff is gonna get hacked. Some people worry about the security of it. Other people worry about the counterparty risks. So the company that's actually paying the interest, that's potentially a problem. It's not FDIC assured. So that's this type of thing.

But I think about this in a few ways. So I have money in stable coins at BlockFi. But I think like, am I gonna use this money in the next, I don't know, three to 12 months for spending purposes? If that's the case, I don't think you think about this in terms of all or nothing.

Like I'm gonna put all my savings into stable coins 'cause they're earning way more interest or I'll leave all of it on that. I like to diversify and have a little bit in both. So I have money in online savings account not earning much. And I feel pretty safe about that.

It's FDIC insured, all this stuff. And I have money in stable coins earning money. I think for house down payment, especially if you've got your timeline figured out, I think you can do the calculations and figure out how much more money you'd make earning 8% versus earning less than 1% and figure out is it really worth it.

And again, maybe not do an all or nothing type of thing. But yeah, I think this is something people are still working on. We talked to Zach at BlockFi. He said, listen, if it's emergency savings, I don't think I'd feel comfortable leaving it in there. But if you're saving for a boat or something and it's down the line and it's not something that is gonna make or break your family or your finances, maybe that makes more sense.

- Yeah, I feel like diversifying with a savings account at a bank is the target date fund of this. - Yeah, because again, you're not earning those higher rates of return for nothing. There is some risk here. And BlockFi, after settling their thing with the SEC this week, said you can't put more new money in now and no one can open a new account.

So this stuff is still so new. I think that's part of the problem. So you have to have a little bit of risk appetite to earn that 8%. - Right, that makes sense. - All right, let's do the next one. - Okay, up next we have a question from, hopefully I'm pronouncing this right, but Yannick, and they write, I'm a 33-year-old movie producer in L.A.

We've had several movie industry people write in, which is kinda cool. I'm a 33-year-old movie producer in L.A. and have my own company, so no steady salary. But I will make anywhere from 40 to $150,000 this year. I currently have $125,000 saved. Personal finances are in good shape, no kids, no debt.

I'm currently renting and have a roommate and it sucks. My goal is to get a house by mid-2023 in the Valley, preferably sooner. Most of the houses are about 650 to $850,000. Do I need to put myself in a larger cash position since I want to spend the money soonish?

What's a good ratio? Should I wait until I have a big enough down payment or go for it when I find the right place? Would it be better for me to save a larger down payment since my annual income varies so much? - Now, Duncan, the Duncan High wants to know, did you ever think about going to Hollywood after going to film school?

Or you're always more of a New York independent film kinda guy? - So, I mean, my plan was to stay in Wilmington, North Carolina, which was like, you know, Hollywood East, but the film industry died there because of a bunch of convoluted tax stuff. - Oh, they had people coming there from the tax, okay.

I gotcha. You seemed like a more East Coast kinda guy to me. - Yeah, that was my plan. - All right, so this question is basically, do I wait to save for a larger down payment to buy a house? Do I just try to do it now? What do you think is a good ratio here?

I think it seems like an old wives' tale that you need to have a 20% down payment for a house. And obviously, the one biggest reason for it is because it gets you out of that PMI, the private mortgage insurance. If you have a 20% down payment, you don't have to pay that.

It's really not that much. I don't know, it's, depending on the size of the mortgage, it could be anywhere from 50 to 150 bucks a month, something like that. It's not terrible. - So 20 is the cap for, or the force of that? - Yeah, so you need to have a loan-to-value ratio of 80% to not have to pay that.

So let's do a chart on here of the median down payment. This is from the National Association of Realtors. It shows the median down payment by age. And you can see all buyers, it's like 12%. But if you're in your 20s or 30s, the median down payment is more like 6% or 10%.

You can see people who are older can afford a bigger down payment. And that makes sense because they have more financial assets. When you're younger, you don't have those financial assets. And that's the thing that's holding a lot of young people back these days, is they think, well, I can afford the down payment, even these higher-priced houses, but I can't afford, or I can afford the monthly payment, 'cause interest rates are so much lower.

I can't afford the down payment. I think that's holding a lot of people back. When we bought our first house way back in late 2007, we put 5% down. And we weren't doing it because, ah, we said let's lever up this house because it's a great deal. That was all we could afford at the time.

It would've taken us a lot longer to buy a house if we waited 'til we got 20%. So I think this person mentions they have a variable income. I think they probably have to think about what the lender will do for them and what their credit situation. It sounds like their personal finances are in good shape and they have no debt, so they should be in good shape.

Put this next one up that shows, this is from the same report, the reasons mortgage lenders rejected by applications. And you can see there's a bunch of different, debt-to-income ratio is the biggest one. So if this person has, I know it's a variable income, but they don't have any debt, they're probably in pretty good shape.

So here's what I would do if I'm in this situation. I'm thinking, well, I'm gonna buy a house in a couple years, but they already have a, they said they have a roommate and it sucks, they said, so they probably are ready to do it now. I would shop around for a lender.

I wouldn't go to one place. I wouldn't just go to my bank. I would look for a bunch of places. And the great thing about the internet is you can shop around these days, see what kind of down payment they're looking for. That way you know how much money you need and what your sort of range is in terms of the house you can get.

'Cause they'll tell you, listen, we'll lend you up to this amount and between these two amounts, that's what we can give you. So you kind of have a range. And I think then you start looking for houses because the process can take way longer than you expect, especially now with supply so low these days.

I wouldn't really wait. I wouldn't wait for a 20% down payment. I wouldn't wait for housing prices. I know people say, I'm gonna wait for housing prices to fall or I'm gonna wait for a recession. I think you find a house because you like it, it's that stage in life, you can afford it, you can service the debt, and it's something you wanna live in for a number of years.

So I think trying to time this thing perfectly is probably not a great situation, but I would definitely talk to a lot of lenders now. Don't wait to do it until you have a 20% down payment because what happens if you get to that point and then you can't find a house or they're more expensive?

I would start the process early. - Yeah, no, that sounds like good advice. You guys have talked about this before, but there's so much more of it goes into buying a house that is important to you and that you're gonna live in for a long time than just trying to make the best math decision.

- Yes, and I think as long as you're looking at it as something that I'm gonna be in this for five, seven, 10 years at least, minimum, obviously life can get in the way and change that, but from the start, if you say I'm finding a place that I'm gonna be there for a while, then I think that takes away some of the investment stuff where you can get burned by a bad housing market if you just lengthen your time horizon a little bit.

- Right. - All right, let's do one more. - Okay, so up next we have the following. This is another fun one. I'm an engineer in New York City who joined a SaaS startup a few years ago just before unicorn status. The path to IPO is underway and over half of my options have vested, but I have not executed a single one.

My equity at current fair market value will be about $1 million. I currently have $250,000 invested in the stock market. And if I come into this windfall of equity post IPO and after taxes, I'd like to know your thoughts on, and then they have a couple options here. So first, leveraging this equity for a stock secured loan to either reinvest or use for a down payment.

Selling my equity immediately despite short-term capital gains hit. This is growth tech, so it could be up 100% from the IPO or down 80%. And then lastly, what are your thoughts on using some of this windfall for a down payment in Manhattan? - Great, this is a good question.

Obviously a good problem to have, but this person is going from a quarter million dollars to well over a million dollars in net worth, assuming that their IPO price doesn't fluctuate too much more. So this is definitely more of a financial planning question than an investment question. So I'm gonna bring in Blair Duquene, who's been on the show before to help answer this one.

Hey Blair. - Hey man. Hey Duncan. - Obviously, there's no right or wrong answer here. They give a lot of options and I think they're thinking about this the right way, but how do you approach a situation like this when your net worth, basically overnight, grows in multiples? How do you help someone think through this decision?

- Yeah, well, first of all, congratulations, right? Making money off of working for a company that's very successful is one of the fastest ways and you've gotten lucky, so congratulations to you. One thing to keep in mind, and you hit the nail on the head, this could be up 100% or down 80% after the IPO.

Right now is sort of not a great environment for IPO stocks. And I actually put together a chart of some of the recent names that we've seen go public, right? So this is what you're looking at with single stock security risk, whether it's like a Robinhood or a Rent the Runway down over 60% since their IPO price, or even a Coinbase down 40%, Bumble down 44%, right?

So this is the environment we're looking at for IPOs. So your question about should I leverage this stock with a securities-backed loan, absolutely not. You really do not wanna lend against, borrow money against something that's volatile. I'd be surprised if they lend you even 25%, right? And keep in mind that if the stock is down 60, 65%, you're getting close to the point at which you're gonna have to sell the stock and pay off the loan and you've completely wiped out all of your equity.

- Yeah, I agree with you. Take that off the table, that makes no sense. If you do that, you do it for a diversified portfolio. But how do you deal with the psychology here of someone thinking like, we're gonna IPO, but what if this thing grows even bigger from here?

So how do you deal with the psychology of, listen, I know I need to diversify, it's smart, it makes sense, but what if I'm just worried that I'm gonna regret this decision and I wanna hold on to some of it? How do you deal with that? - Yeah, this is a tough one because if you sell and the stock goes up, you're always gonna do the math in your head about how much you could have been worth.

But what you have to decide, knowing that the future is unknown, is how much are you not willing to risk in the stock? How much do you wanna go ahead and take off the table? Now, you mentioned taxes as well. If you do not have longer than a one-year time holding period you are gonna owe short-term capital gains tax, which is generally at a higher rate than long-term.

So you're gonna have to play all of these factors. I would say, come up with a number in your head. What's a number that I'm not willing to go below in net worth? Probably sell that immediately. Come up with a number. What's a number of shares that I wanna hold forever, just in case the company does really well?

And put those aside. And then maybe the remainder you sell over time after you have long-term capital gains treatment. There's no perfect answer. And you're always gonna go back and play mental games and do the calculations. But you have to make the best decision without having the information about what's gonna happen to the stock in the future.

- And I do think your point about the ones, the stocks that have crashed recently from IPOs is a good one that people are kind of coming to reality and thinking like, okay, in the past, I would wanna hold onto these forever because look, they all went up for years and now they're coming down.

I think that's put a dose of reality for people on this type of stuff. - Exactly. The last point of his question though was, should I put this down on Manhattan real estate? So, I would never bet against the city of New York. Obviously, there can be periods of softness in Manhattan real estate.

I'm hearing that condos are-- - Are you saying James Altucher was wrong? No way. - 100%. I'm having my Jerry Seinfeld moment here. Why would you bet against New York? If you wanna live in New York for at least the next seven to 10 years and that's where you're gonna make your home, absolutely, use this money for a down payment.

But if you're buying it for an investment as an investment and don't expect it to do better than the stock market, we've talked ad nauseum about real estate as an investment. But as a home, 100%. I'd love to see you in your dream Manhattan apartment. - Yeah, especially since the net worth is multiplying so much, like using that as a down, I think that makes a lot of sense 'cause you're diversifying your balance sheet then.

All right, Duncan, we got one more. - I have just a quick new boil question there. So is there always a lockup for all employees of a company when it goes public or is that just for certain employees? - It depends. Some companies have that and others don't. So that's something that's worth knowing.

But yeah, that depends on the company, I think. - Gotcha, okay. - Exactly. Nothing you can do about that though. - Right. - Yeah, exactly. Okay, so up next we have a question from Mark who writes, "I have two 529 plans to pay for the college expenses "of my two kids that are six years apart.

"I've saved enough over the past 12 years "to cover private school for both kids "and my expected annual returns "have been a modest 7% or higher. "I don't use target date funds." I don't know if that's a slight to you or not, Ben, "but I'm about two years away from my first tuition bill "and I want to start planning my drawdown strategy.

"Do you recommend allocating a year's worth of tuition "at a time into a more conservative fund "as the bills come due? "Would that ensure that the short-term bills can be paid "while still letting the longer-term investments "grow more aggressively?" - By the way, for my kids' 529 plans, I actually do use the target date fund options.

For this reason, I don't have to do it. It does the glide path for me. So, we have a lot of haters out there on target date funds. But, Blair, I think that the idea here is, especially from a financial planning perspective, accumulation is way easier for most people than going through withdrawal.

Because it requires, accumulation is easier because you're just setting your savings rate and you're hoping it grows and the market does what it does. Withdrawal strategy is a little different, especially for something like college, because I think, actually for college, it might be a little easier because, versus retirement, you have a much longer time horizon.

For college, you have these four years and you kind of know what it's going to be. But as you approach that level, what's the point where you start saying, "All right, I'm completely shutting off "the market risk here and getting out." So, how do you approach that one? - Yeah, and this reader has done a great job of saving because I'm hearing that private schools today are costing anywhere between $60,000 to $80,000 a year.

So, kudos to you for doing that saving and investing. Your time horizon now is between two and six years, at least on the child who's older. Longer, obviously, if your children are six years apart. So, think of it in terms of time horizon. I also use the Target Date Fund because I don't want to have to go in and make changes as my kids get older.

And I looked up, in the state of Louisiana, my Target Date Fund, even on the aggressive side, goes 100% in short-term bonds and cash when the child turns 16. - Oh, really interesting. - Yeah, that might be a little bit too much on the conservative side, because if you're thinking about that fourth year of college it's still six years away, you could make the argument that even if the market were to sell off now, it may, it will probably have recovered.

But think in terms of three years, right? You're gonna be making that second year payment. I'll give you two three-year examples, August 2007 to August 2009, great financial crisis in between. You really don't wanna see your hard-earned savings be worth less after you've already won. You know, 2000 to 2002 is another three-year example.

So maybe 50% or more should be in fixed income at this point. Go ahead and lock in those gains. - Right, yeah. Because essentially, again, you have the end date. When you're retiring, you could have two, three, four decades ahead of you. So like that stock bond balance makes more sense to like overweight it to stocks potentially, depending on your resources and stuff.

But if you have a four-year period, like you said, start thinking about it two years before, like you know your end date, right? So taking too much risk of that just doesn't make a lot of sense. - Yeah. - Okay. - Absolutely. - Perfect. So I did see we had someone in the comments suggest that our Hollywood producer look for a credit union.

I think that's a great idea. I actually use a credit union for my mortgage. They actually offer better rates on the savings and checking accounts too. I get like 3% on my checking account, not bad. So we appreciate the feedback. Again, have some thoughts on the questions today. We always appreciate the feedback.

Leave us a comment below. You can come in for the live show like all the people here. We're getting very close to Duncan's big round number of 100,000 YouTube subscribers. I think next week we're going to do a t-shirt giveaway. We're going to figure something out there, right? We have our Portfolio Rescue t-shirts.

- From the chat right here, we're going to do a giveaway. So yeah, tune in for that. - So anyone who's not here live, check in live. We're going to be doing a giveaway here on the live chat. Thanks again to Blair for joining us as always. - Thanks for having me.

- Yep, remember, askthecompoundshow@gmail.com if you have a question and we will see you next week. - Also, one other thing. We're watching Portfolio Rescue's now its own podcast. So if you ever miss a live, then you can find this on whatever platform you use to listen to podcasts. - I don't know, Duncan.

They say I have a face for YouTube. So people should really watch it on YouTube. I know a lot of people prefer to have it on podcast. So we're going to have their own Portfolio Rescue feed and we're going to put it up the same day, I think, right?

- Yes, same day. - All right, thanks everyone. - See ya. (upbeat music) (upbeat music) (upbeat music) (soft music)