(beeping) - Welcome back to Ask the Compound. You have questions, we have answers, we have experts, we have me and Duncan. Ask the Compound show at gmail.com is the email. Today's show is sponsored by our friends at Bird Dogs. Duncan, I have a family trip planned for tomorrow. We're going up to beautiful Mackinac Island, kind of an annual tradition for us now.

You have to take a ferry to the island and there's no cars on the island. Right? - Sounds nice. - It's on a horse and carriage, but there's also a lot of bikes. You bike around, it's pretty beautiful. You go all the way around the outside of the island.

But I have to figure out what I'm wearing, right? I'm checking the weather. And so I'm packing last night and guess what I packed? All Bird Dogs for my lower half. Bird Dog shorts, Bird Dog pants. And because I'm thinking I'm gonna be on a bike, I'm gonna be a little active.

But then I also have to dress nice because my mother's birthday is this weekend. So we're going out to a nice dinner. So I have the nice seersucker ones, right? Then of course, when I'm on the bike, I don't wanna be uncomfortable and have the George Costanza with a wallet that I'm sitting on.

So the wallet's on the side. So Bird Dogs has me hooked up. I have a full suitcase, full of them. I'm ready to go to be biking, walking, versatile, but stylish, right? So if you go to birddogs.com/atc for ask the compound, obviously. Get yourself one of these free tumblers, Bird Dog tumblers, right?

Pretty nice. - You know what I did in my Bird Dogs other day? Some shorts. Went for a run. They were great. - I've been working out of them this summer too. It is, it's nice. It's breathable, it's stretchy, right? It's very nice. Birddogs.com/atc. All right, a lot of questions today.

Let's do it. - Okay, so first up, we have the following. Can you guys speak to if you think the market is skewed towards benefiting the large players more than the small players, if not being downright rigged against the small players? - Get this question a lot. So they're pulling up here.

There was a movie coming out this fall about the GameStop saga. Seems like it happened pretty quick. They pulled it together. It's called "Dumb Money." I watched the trailer. It actually looks pretty good, I think. - Yeah, I thought it looked good, yeah. - So, and they have like a pretty good cast.

So Seth Rogen plays Gabe Plotkin, the guy who shorted GameStop. It's kind of funny. In the past, he definitely would have been on the other side of this, but now he's playing the man. Paul Dano is Roaring Kitty. Remember that guy, the YouTube guy who bought GameStop. Pete Davidson is his brother.

I don't know if he actually had a brother. They made it up for the movie. Shanley Woodley is his wife. Nick Offerman is playing Ken Griffin, which I never really would have thought, but based on the trailer, the premise here is the stock market is rigged against the little guy and in favor of the big whales, like hedge fund managers like Ken Griffin and Steve Cohen and Gabe Plotkin.

Vincent D'Onofrio as Steve Cohen. That was interesting, too. But this is the story, a heartwarming tale, about the little guy finally taking down the big guy, right? David beat Goliath. And I'm sure the movie would be fine, if not a little bit embellished, because it's the same guy who wrote the movie, or the book that the Social Network was based on.

It's called The Accident of Millionaires, that Ben Mezrich guy. Pretty good books, actually. They're a little embellished. So the problem is, Goliath is still doing pretty well these days. I saw the following headline just last month on CNBC. Michael Jordan is selling his stake in the Charlotte Hornets. He's probably gonna bet it all on the golf course, and Blackjack Tables, I think he spent $275 million for it, and he made $3 billion or something.

So I look in the fine print down there, and wait, who's buying his stake from him? Gabe Plotkin is poised to become a majority owner, pending league approval. So the guy who got taken down by the GameStop, Reddit people, is literally gonna be an NBA owner. He's probably still worth hundreds of millions, or maybe a billion dollars.

They did force him into shutting his hedge fund down, but it does feel like one of those, oh wait, the guy lost a bunch of money on GameStop, but he got to keep all the fees that he already made from his two and 20 hedge fund, and they didn't get clawed back.

So it does feel a little bit like, heads I win, tails you lose type of situation. Even though in this situation, the little guy won, the big guy still won. They're fine. I'm not sure that's gonna make it into the movie. That probably wouldn't help with the story, but it does kind of feel like the market is stacked against little guys in some ways.

So there are some ways it is, right? So you're never gonna, as a little guy, and I'm using this as just regular normal, I'm a little guy too, right? - Right. - Literally-- - I'm definitely a little guy, and a much smaller guy after my 25% loss in early today.

- Tough break for you, Duncan. You're in a bull market too. So the things of being a little, you're never gonna get the sweetheart deals like Warren Buffett got in the financial crisis with the Goldman Sachs and Bank of America deals. You're not gonna be able to invest in the best hedge funds or venture capital deals or private equity deals.

You're not gonna be able to get two and 20 and keep that 20, even if you lose half of your investor's money. If you try to take on Ken Griffin in the high-frequency trading, no matter which way your position goes, you could lose 25% notely, or you could make 25%.

Ken Griffin's probably gonna make money either way. So in that sense, it does feel like the markets are stacked against the little guys. - We couldn't even buy the Constitution, you know? You had to come in and sweep in and take that, buy that. - I forgot about that, yeah.

- You couldn't let the little guys have one win. - It feels like the big guys win all the time. But in other ways, the individual investor has all sorts of advantages over Wall Street, right? You get to invest in index funds, if you want to, with low fees that basically guarantees that you're gonna outperform 75 to 90% of professional investors in the stock market.

You can ignore short-term performance numbers if you want. When I worked in the endowment industry, these funds, foundations and endowments, were set up, in most cases, in perpetuity. They wanted to last forever and leave a legacy. So their time horizons were measured in multiples of decades, yet they obsessed over monthly and quarterly performance numbers, right?

As an individual investor, you don't have to have some made-up benchmark that you have to try to beat every month. Your only benchmark that matters is, are you on track to achieving your financial goals, right? There's no investment committees to answer to. There's no outside investors that are breathing down your neck because you underperformed for a quarter or two.

There's no alumni or donors that are forcing you to make investments in managers that they roomed with in college because they want to keep things on the up and up. So you can set it and forget it and ignore macro predictions and stop looking at your statements if you want to, right?

Professional big guys cannot do that. So I think probably the biggest advantage you have is just keeping a long time horizon. So I use this in some of my presentations. My time horizon, on a daily basis, the market is up a little bit more than it's down. 56% of all days, the stock market is up.

44% it's down. But if you extend your time horizon one, five, 10, 20, 30, 40 years, you know, the probability of seeing a gain goes up. And I love this chart because it shows that like Wall Street wants to play in the short-term sandbox. You have the ability to play in the long-term sandbox.

Right? So I just, I think that's your advantage as the little guy in the markets. If you try to play the short-term game of Wall Street, unless you get lucky, let's be honest, the Roaring Kitty guy got lucky. He made a great pitch on this stock, but he got lucky.

Throw up the chart here. GameStop? - Well, that's the thing about Roaring Kitty that I actually always found interesting is if you look, he was much more nuanced. Like his initial reason that he was buying a stock was like based on fundamentals and things. - Yes, it wasn't a meme stock thing.

- He did a bunch of research. He wasn't just like, I randomly picked a company, you know. - The funny, so throw up the chart. The funny thing is since pre-pandemic days, even though it's down 75% from the highs of a meme stock mania, it's still up like 1400% since the start of the pandemic.

So it's still, I think he took a bunch of chips off the table. I hope he did. So anyways, in some ways, like the market's always gonna seem unfair and biased towards billionaires who seemingly win no matter what. But I think that's just certain areas of life that's always going to happen.

But in other ways, I really do think that the little investor has the upper hand because you have the ability to invest in strategies and not pay two and 20 and be more tax efficient and not trade short-term all the time if you don't want to. So I still think that you have an upper hand if you're willing and able to use it.

If you try to play the short-term game, they're probably going to beat you either through taking your fee, either through taxes or some other way. But over the long-term, if you're willing and able to play the long game, that's where Wall Street has a hard time sticking with that type of strategy.

- Right. I feel like it's also gotten fair for the little guy with free trading, right? I mean, imagine back in the day, like I remember when I was first buying stocks back in college, I was paying like $8 to buy like one share of Microsoft or something. You know what I mean?

It's like, that's stupid. - You can buy fractional shares now. Yeah. You can put anything you want in the market now. - The barriers for entry are way smaller now than they would have been in the past. So in that way, it's not really stacked. I think things have gotten appreciably better for the individual investor over the last 20 years than they have for the professional investor.

That's for sure. - Right. And also when a retail person goes up 80% on their small account, they're not like buying a Ferrari. You know what I mean? But like Ken Griffin can buy a Ferrari with his winnings. And so I think it's more like ostentatious and showy. I think that's what people hate is they just see these people that they see as like Wall Street succeeding and doing really well.

- Yes. - And even if they do well, it's not gonna compare, right? Because the scale is so different. - Yes. Which unfortunately is probably always gonna be the case. - Right. - Right. Let's do another one. - Okay. Up next we have a question from George. How do you know- - Great name.

- Yeah. - It's my son's name. - Oh, right. And my favorite Beatle. Okay. How do you know when US government bonds are cheap? I bought some during the US debt ceiling brinksmanship or brinkmanship. I haven't heard that word. I think it was a good time to buy when others were fearful, but they have gone down more.

Also, I noticed on Fred that from 1871 to 1932, US stocks were flat. Same with the German market from 1872 to 1913. And of course, Japan since 1990. I think I've been lucky but foolish the last 41 years being 100% stocks. Thoughts? - This is a loaded question. A lot to go on here.

Lots to unpack here, as I say on podcasts. - Yeah, I feel like he's subtweeting you a little bit because you've said a lot about long-term horizons and things being good, but he's showing us a 41 and 61 year horizon that- - You don't think I came prepared here, Duncan?

Come on. So the first one is fairly simple. No one knows except at the extremes. So I wrote a post in March 2020 saying, I was way more worried about bonds than stocks, but that was pretty easy because rates were zero to 1% for treasuries. That was pretty simple, right?

I didn't know how it was gonna play out, but you knew that things in bonds, the outcomes weren't gonna be that great, right? Look at that. Timestamp. I didn't know that they were gonna go from 0% to 5% in a year, but you knew it was unhealthy. I guess my problem with this question is that you're trying to play the bond market in the short term.

And bond market, it's way easier to predict the bond market in the long term because you take your starting yield, especially in government bonds, and that'll get you something like 95% of the way there for long-term returns, call it five, seven, 10 years. But in the short run, you're dealing with changes in interest rates and inflation and GDP growth and Fed policy and expectations and all this stuff.

Unless you're a hedge fund manager, I would not think of bonds being cheap or expensive, especially if you're buying them for the yields now where you're getting five or 6% or whatever it is. I wouldn't worry much about the short-term fluctuations 'cause the yield is gonna win out over the long-term.

I think bonds are for patient people. Bonds are not for like, are they cheap or expensive? I'm gonna be greedy even though there's a fear for whatever. Like that doesn't work as well in the bond market as it does in the stock market. For the second question, I will summarize what he said here in a few short words.

Stocks are risky, right? I'm not surprised at all that US stocks went nowhere from whatever, 1871 to 1932, because the year ending 1932, the stock market had fallen 85% from the highs in 1929, right? That's pretty, it had to be down after that, right? And there's plenty of periods where the US stock market has gone nowhere.

We talked about the lost decade a couple of weeks ago, but from the start of 1998 through February of 2009, the S&P 500 had a total return with dividends invested of negative 9%. So that's like 11 years and change where stocks went nowhere. All your returns back to 1998 were gone, right?

That's pretty recent. The total return for the MSCI Emerging Markets Index since the start of 2008 through this year is up just 28%. Essentially a lost decade and a half. S&P is up 330% by comparison, just so you know. So you don't earn the risk premium without the risk, right?

I do wanna mention something about the Japan situation because it always irks me. Every time I post a stat about buying hold or stocks for the long run, someone always shows up looking like Leonardo DiCaprio, like this, scratching their chin saying, "Now show Japan, I got you, I'm so clever." Right?

I wanna debunk this. MSCI Japan Index, 1990 to today is up 40% in total, 1% per year. So three decades and change where you lost out to T-bills. I think T-bills were up 2.5% per year over that time. So Japanese stock investors underperformed over three decades. And people say, "See, stocks for long and ha, ha, ha." But is it a myth, right?

These are the total returns from 1970 to 1989 for the MSCI Japan Index. 6,000% total returns, 22.9% annual returns for two decades. $10,000 in 1970 invested in Japanese stocks is worth $616,000 by 1989. Easily, I think the biggest financial asset bubble in history. We can mash these two together.

- Do you have those numbers in yen though? Can we have those in yen? - I did not do the currency calculation, sorry. I'm pretending we're hedged here. If we go from 1970 to today, we're talking an 8,600% total return or 8.7% per year. Guess what stocks for the long run in Japan worked?

You just had to go really long, right? And the reason that stock returns have been so awful there from 1990 is 'cause they were so unbelievable and you pulled forward all those returns and the P/E ratio got to 150 or whatever it was, or 100, and the bubble just ate up all the future returns.

And so you had this period of 30 years where you had to work off that bubble. The long, long returns are still pretty darn good, almost 9% per year in Japan, right? Stocks for the long run worked there. It just depended on when you started. Now, back to the question at hand.

If you've been investing for 40 years, as George said, and portfolio has been 100% in stocks, he's done pretty well for himself, right? In the 40 years leading up to 2022, this doesn't even include this year where we've got a snapback. The S&P 500 was up 11.1% per year.

MSCI World XUS was up 9% per year. So whether it was lucky or foolish or whatever for keeping all your money in stocks, at this point, you probably won the game and it makes sense to diversify your portfolio. That could be as simple as holding some cash, maybe some short-term bonds, just to see you through a few years worth of spending.

You could obviously hold some other asset classes or strategy, but the whole point is you've picked out these periods where you see the stock market can be very risky. And I'm not here to pretend that I know if or when that's gonna happen again, but the whole point of diversification, especially when you're retired, is to avoid bad things happening at the worst possible moment.

And history has shown that bad things can and will happen in the stock market on occasion. That's why you diversify and hold some other sort of asset class or something to see you through if you happen to be unlucky enough to live through one of those periods. - Yeah, yeah, well, and like they point out, the market was all over the place throughout that time.

So that was a very, very cherry-picked, as you guys say, but fair, fair for them to point out. But yeah, it all happens, right, on when you would have been retiring, when you would have been withdrawing. And yeah, scary still to think about. But yeah, that's why you diversify.

- Give a shout out to Duncan's mom in the chat again. Pam, welcome. And all the other regulars, we always appreciate it. Everyone likes your new hat today, Duncan. I didn't know we had more new hats. - This is a one-of-one. It didn't come out quite how we were wanting, so.

- Oh, okay. So you're kind of like the team that lost in the NBA finals when they sent the shirts to Africa. - Right, exactly, yeah, yeah, yeah. We do have a new teacap hat, though. It's a black hat with the full-color stitching. So that's the one you can actually pick up.

- All right, next one. - Okay, next one. I'm gonna omit the name here just because of the nature of the question. But we've gotten questions from them before, so thanks for writing in again. I'm 33 years old and have accumulated $1 million of SPY. I can live a modest life on $40,000 a year here in Lithuania.

I've almost paid off my mortgage and have no other debt. Thinking about the 4% rule, can I retire? I'm not saying I will, but is this an option? - I'm impressed. This is the not-to-brag-of-the-day, obviously. - I was just asking myself this question the other day, you know, I was just wondering.

- So $1 million in an S&P 500 ETF. We don't know what else they have, but this is impressive. So I could run all the numbers on the 4% rule that you want. And if you wanna search 4% rule on my blog, you can. I've written about it a number of times.

But I think this idea goes beyond the idea of investing. Obviously, the returns and stuff are gonna be important, but I think a lot of it is also the financial planning aspect of retiring early. And there's a lot more boxes you have to check off if you're gonna retire early at that age, at 40, than otherwise.

So let's bring a financial advisor into the chat here. Nick Sapienza, who is an excellent financial advisor for us at Riddles. - Hey, Nick. - Representing Bayou down in Louisiana for us. - Yep. - Nick, there's obviously all sorts of different things you have to think through when you retire, but I think the calculus is a lot different if you're going from age 60, 65, 70, versus age 40, right?

So what are some of the other, if you're a financial advisor and someone sits you down and says, "Here's the pile of money I have. "Here's kind of how much I spend." And it just so happens that this person can live on the 4% out of the million dollars.

What are your thought process when you're having the conversation with someone where they basically say, "Am I gonna be okay if I do this? "If I take this leap, what do you think? "Can I do it?" - Yeah, I mean, I'm gonna go through the trade-offs first and some of the things that he might not be thinking about.

But first, I just wanna start off with some context about the 4% rule and it'll kind of lead into this. So it kind of starts off with a story. The 4% rule is an assumed withdrawal rate that should survive the worst possible 30-year period of market conditions. I think that's what a lot of people don't realize when the first study was done to show what's the floor here, not the average situation, but the 4% was used as this would allow you to see through the 1930s or whatever, whatever the worst possible, like we talked about earlier.

That's what it can see you through. - Yeah, exactly. The example that Kitsis uses, so I go to basically Kitsis for a lot of research on the 4% rule or the 3.5% rule or the 3% rule, which will kind of tie into this. But if you think about that, whether or not you wanna trust the data from this time period, you can say the world is different, but he uses the 1890s as an example, as a starting point.

In that 30-year period, there's a lot of differences in the world today, but maybe human nature is a constant. There were two financial panics, a severe depression, the assassination of a president, the Spanish flu, the entirety of World War I. And at the same time, we had no central bank.

We were still backed by the gold standard. So less stability, more volatility, more bank runs. You can read more from Jamie Catherwood on that. It's a pretty fascinating topic. But regardless, the 4% rule still worked in the most severe economic and financial times. The average rate of return on that time period was actually like 4.7%.

So yes, technically 4.7 versus four, the rule will still work but there's an extremely high possibility for failure. And when you go more into the data, like for in this guy's case, he's 33 years old. He has an extremely long runway. As Paul Zoettner likes to say, more people die on the way down from Everest than on the way up.

And I think he stole that from "Into Thin Air," but the same is true. Like he's got one skillset for accumulation and it's a different skillset for decumulation, especially when it comes to how diversified his portfolio is. So what matters above- - The funny thing too that I like about this example is I've done examples on my website where I talk about if you had a million dollars in the stock market, would it work?

And most people don't actually have that. This person actually does literally have a million dollars in the S&P 500. So the diversification- - He's the textbook example. - Yeah, the diversification piece obviously kind of worries me here that maybe you want to have some more diversification. But the other piece is if you try out 40, the 4% rule is looking at like 30 year time periods, right?

You may have to let this last, you know, 50, 60, 70 years potentially. So I think that's what we have to think about is the time. - Just imagine if they were leveraged, you know what I mean? - Yeah, exactly. - I mean, well, to use a more relevant, a more recent example, you can look at .com.

Like if you retired at the peak of the market in 2000, which is everyone's greatest fear, right? You would have, in his case, you would have run out of money following the 4% rule in I think like 15 years. So mistakes compound, right? There's no, the savings spigot is turned off.

There's no additional shot. There's no extra time to recoup. It's, he's basically effectively like in 2000, 2003, he might've even doubled his withdrawal rate. So having 100% of your money. - If you're selling when stocks are crashing and you're keeping your amount of spending just as high, you're right.

You could easily spend all your money. I think that's the biggest thing here is that this is why I think the financial planning aspect is so important because you have to be very flexible, I think. And so if it's a really bad year or a bad stretch in the markets, you may have to rein it in a little bit and dial down your spending.

And maybe when things are up and you have a great bull market, then you can go back a little bit. That's hard for people to do, I'm sure though, is have volatility in their spending, just like in the markets. - And look, people will make adjustments, but to cut to the chase, like, which is to the point that you're getting at, the earlier you retire, the lower that withdrawal rate needs to be just to give you more flexibility.

So in his case, like he's really towing the line, a million dollars, 4% rule, can live on $40,000 a year, but we're not accounting for taxes. I don't know if Lithuania, I think they have like some sort of social security system in place, or maybe some sort of pension benefit, or maybe it's just for elder care and you're below the poverty level, not a person nailed down on that.

But the bottom line is like, he has such an extremely long runway. There's two things, and Kitsis highlights this pretty well. Like there's a, maybe a 10% chance that he retires and he's not prepared, and he doesn't make any adjustments, and he retires into a secular bear market. Okay, and his sequence of returns, like the order in which he got that bear market, it's not a matter of if he's gonna experience a bear market, it's just a matter of when, or a period of like flat returns or sideways markets, it's when.

And if he front loads that, that's an extreme disadvantage for him, so he has to make adjustments. So the key takeaway to answer this question is that he needs to start off with possibly, like he can do it. It's not a matter of if he can, it's a matter of how.

Start off with like a 3% withdrawal rate, have a higher cash buffer, but also part-time work. Like I like the idea, I'm not big on the idea of fire, lean fire, fat fire, but coast fire is kind of a new one, and that's where you would basically-- - I've never heard of this, what does that mean?

- So you retire, you have a job that you don't necessarily like, you're not gonna do it forever. It's not, you know, it's just a means to an end. You retire early, but then you go and you like start a vegetable garden, sell it out at a farmer's market-- - Kind of like how all the fire people just start a blog and live off the blog.

- Exactly. Exactly right. - The other thing is, this person has accumulated a million dollars in 33-- - It's impressive. - At 33, and if they're talking about retiring at 40, they still have some time to save and invest and maybe grow that nest egg a little larger as well.

I think that-- - Yeah. - So they obviously have very good financial habits. - Yeah. - But yeah, kudos to them anyway. - Dynando's one, Dynando's chart, I didn't hear it referenced specifically. - Yeah, chart on, there we go. - I got this, yeah. - Growth of a million dollars in retirement, so this is breaking down the fact that he has a 10% chance of running out of money, and this is over a 45 year, or I'm sorry, 50 year time horizon, so I think he's even a little further out, but a 10% chance that he runs out of money, but there's an equal chance that he ends up with 9.3 times what he started with, so he ends up with $9.3, and so you have to manage that upside risk too of all this money unspent and kind of towing it too close to the line.

So in his case, that dynamic withdrawal strategy is a fancy way to say that you just make adjustments every year or maybe even every quarter. If the markets are up, you can maybe spend a little bit more or save a little bit more, put a little extra pay in the barn.

If markets are down, you cut back, and ideally you cut back permanently. I don't like the psychology behind that of kind of your lifestyle ebbs and flows with the market, but that seems to be a reasonable adjustment to make an alternative that I've done with some clients as well is you look at the balance.

This is a guardrail strategy, so you look at the balance at the end of the year, beginning of the year. What can we spend? What's sort of the ceiling and the floor? So we end up with a range rather than a hard and set 4%. Well, 4% is just the starting point.

It's good that he knows about it, but his situation's gonna be much more nuanced than that. - I like it. - It's kind of like how Buffett gets a different breakfast sandwich depending on what the market's doing that day, right? - That's the exact analogy that I used, yeah, exactly.

The Buffett withdrawal strategy. - All right, next question. - Okay, up next we have a question from Jacob. The worst-kept secret in my industry at the moment is that the private equity-owned tech company I work at is about to be sold. Rather than granting RSUs or ISO or NSOs, like many companies, my company grants an instrument called profit interest, PIUs.

I'm granted these at a basis of $0, and I understand there's some tax advantage to this particular type of grant upon sale with some or all units being taxed at the long-term capital gains rate. However, I find research on the internet to be very unqueer because they just aren't very common.

Can you help a confused tech worker understand his tax implications this year? - The chat right now is going nuts for people coming with different names for FIRE, so anyway, all right, I gotta be honest here. I've never heard of the PIUs before either. Obviously, the cost basis of zero sounds appealing to me, but, and this person thinks that this company is about to be sold, so I'm sure they're starting to count these as well.

So what are we dealing with here? - So this is an interesting thing. We have a client right now that we were just working through this with, profits interest units. So it's common in like RIAs, law firms, REITs, in this case, an up REIT. So imagine that you own a real estate portfolio and that rather than selling it and realizing taxes, you can exchange it for units in the company in this capital account that has a zero balance.

So it's effectively worth $0 and you can defer taxes or get creative with your tax situation there. In another way, it's a way to turn what would normally be compensation. Like say that you make $500,000, you're a highly compensated executive at a publicly traded company, a REIT, for example, and 200 of that is in the form of PIUs.

There's some risks associated with that, but you can effectively turn that compensation into capital gains. So that's the advantage. And it follows under the carried interest rule because you own an interest in the future appreciation, potential appreciation of the partnership. So there's other risks as well. - See, this is why the big guy always wins.

- Yeah, exactly. They can sell their real estate portfolio to an up REIT and also their step up in basis. - So that sounds, so you're going to capital gains taxes as opposed to income tax. So that sounds like a pretty good deal then, obviously. - It's a pretty sweet deal if all goes well, if you hit the performance metrics or time metrics and so on and so forth.

So, but it is being scrutinized or it has been, at least it was under the Inflation Reduction Act. I guess we'll see where that ends up. But so you own these units with a $0 balance and then whatever that appreciates to, and it can be exchanged for cash or stock.

In his case though, he's wondering, if the business gets sold this year, what happens to my PIUs? And you're not finding it on Google because you're looking in the wrong place. Where you need to be looking is your plan document. You can probably download this from, or get this from HR, for example.

Just open it up, search acquisition and see what that document spells out. If it's not there, it might be in the other documents from the sale of the business or potential sale. So I would talk to people there and see how that's going to transpire because the worst case scenario is that your PIUs are forfeited because of that acquisition.

- That would be tough. - Yeah, that would kind of suck. I mean, he didn't pay anything for them though. And hopefully he filed an 83B to kind of mitigate some of these risks of forfeiture and like he started the clock early. But, and sometimes you're forced to file the 83B.

But in his case, worst case, forfeiture. Other cases, which would probably, I would hope would be the situation was that you get to exchange them for either more PIUs, but potentially that might restart the clock. Or you get to exchange it for stock. And then how that's taxed is depending on how that all goes through.

If it's going to be a capital asset or if it's going to be income. - You want to talk to an expert here. - Yeah, you want to download this document and send it over to your CPA and say, "Help me interpret this." Because yeah, there's a lot of jargon in there.

- For our younger and new investors, can you just briefly explain why a company would issue these? What's the idea behind these? - With PIUs, so you don't have to come out of pocket for them, they're granted to you. It's kind of like a stock appreciation, right? They're granted to you at $0.

You can file an 83B and pay zero tax. You just pay postage to send it in through certified mail. And then after three years, and it has to be three years instead of two, after three years, you can sell at a capital gains rate. And it's based on essentially, I think like the spread.

So whatever that capital account balance is, if it's stock, if it's dividends, income, or just appreciation and growth, so it ties into performance. - So the company's giving you a priority. - Or tax deferred capital, right? - Yeah. - It's another form of conversation that can help you defer some taxes.

And it sounds like a sweet deal. - Especially if you're recruiting somebody from Zillow to come over and you work for a REIT and you say, "We'll pay 30, 40% of your compensation "in the form of PIUs and it'll be taxed at capital gains." - Gotcha. - So Gabe Plotkin paying 15% carried interest on his 20% performance fees.

- Yeah, can Gabe use these to buy the Hornets? I'm just trying to understand this. - Pretty sweet deal, unless you work for maybe Oatly. - Yeah. - Sorry, sorry Duncan. - All right, twisting the knife. All right, last question. - Okay, last but not least, we have a question from Colin.

"My wife and I bought our home in 2020 "and walked in a low-fixed 30-year mortgage "for first-time homebuyers. "We've been paying down the mortgage at a rate "where it would be off the books in 20 years "so we'd be mortgage-free at 45. "With lower returns in traditional markets expected, "does this make sense or does it make more sense "to pivot and invest that additional amount "in our retirement accounts?

"We've been fortunate enough to max out our Roths and HSAs "but haven't reached the max on our 401(k) contributions. "We don't view our home as an investment "but we do view our time as one." - Yeah, I like that last line there. That's pretty good. So, low-rate mortgage, they wanna know if, they're thinking lower expected returns in the stock market going forward because of valuations.

I don't know what the stock market returns are gonna be in the future, nor does anyone else. I can give you educated guess based on current valuations and dividend yields and historical earnings growth, but the people who were doing those calculations in the 2010s were wildly off on what the returns would be.

So, Nick, I think one of the most important jobs for a financial advisor is setting expectations for future returns, especially when thinking through something like this, because you have not only the hurdle rate potential where you're saying, "Well, you probably have a three "or 4% mortgage, so it's a pretty low hurdle rate "to get over, and the house is illiquid, obviously," but there's also the idea of setting expectations for like, "We have to plan about this "without knowing what the future returns are going to be." So, how do you handle this when dealing with clients in terms of setting expectations?

You want it to be reasonable, but we don't know what they're going to be for sure. - Yeah, I like to just be really clear and about what you could potentially see. So, kind of stemming from the first question of there were these periods in the market where you had flat or negative returns, right?

That very well could happen. But what it comes down to is that the best advice is going to be the right advice for your plan and for long-term. It's not always going to look great over the short-term. So, we could say, "The best thing for you to do "in this scenario is to not pay down that mortgage "at 3% to invest," because we think long-term in an 80/20 portfolio, let's say 7% is your average.

That's a pretty good spread. And I'll take that all day. Plus, I've got the flexibility. It's not a liquid. And especially in this guy's case or girl's case, they're, what, 28 years old maybe at this point. They started the mortgage three years ago and it could be paid off in 20 years.

I would be leaning more towards that, especially if valuations are lower, returns are lackluster, it's a land grab. I'm going to accumulate as many shares of VTI or whatever you choose to invest in over that time period. But setting that expectation is to say, "Hey, there could be an extended period "where this is going to look like a really bad decision." But sticking with it long-term, it'll even itself out.

And then the growth years that follow will offset-- - The other thing is that if they, sure, they want to be out of their house at 45 and maybe retire early or something, but they can't touch the tax-deferred money anyway. So I think at that point, you want to, if we have a bad period for them in their late 20s, that's a good thing for them.

They're picking up shares at a lower price. So if they think returns are going to be lower going forward, you want to be investing that cash. And I just think for young people, unless you just have an aversion to debt that's going to make you sick to your stomach if you have it, I don't see the point of giving up that low-rate debt, considering that the rate of inflation right now at 3% over the last 12 months is equal to those mortgage rates for most people, and you're earning more money in T-bills than you were.

I mean, you can earn 5.5% in T-bills right now as opposed to paying down that mortgage. I would much prefer to let that mortgage stand and use that leverage now that we were given a gift of those low rates back then. I would be in no hurry to pay that off, especially if inflation is going to be higher and rates are going to be higher or whatever going forward.

Who knows? You could always pay it off later, but I think the compounding effects from being in the stock market over the long-term far outweigh the ability to pay it on your mortgage and have it paid off. - Yeah, I mean, so that's where you start. With every question, this was a really popular question like over the last three years, right?

So we start off with, there's an optimal versus reasonable scenario. What is optimal is going to be what I give you on this spreadsheet, and what is reasonable is going to be how you feel about debt and if you want to be financially free, or when you're 45 or if you want to retire, and then think about the difference between you're dumping, like in the scenario that I created, if the mortgage was five, if you bought a $500,000 house, put 100,000 down, and you put an extra 500 bucks a month onto the note, you'll pay it off in 20 years.

But instead of investing that 120 grand into your house, why not put it in the market? Like, look at that scenario. Like, sure, you free up cash flow, but when you're 45, but then again, wouldn't you rather have that larger balance outside with more flexibility? And maybe it's not in a tax-deferred account.

Maybe this is all in a brokerage account, so we can kind of knock down the returns a little bit than just for taxes. But still, it's an optimal versus reasonable scenario depending on what his goals are, what the plan looks like. So, that's where I end up with that one, and then just managing expectations.

Going back to sequence of returns to be specific. - I think you wanna give yourself as much flexibility as possible. If you're looking at something to do in your mid-40s or early 50s or whatever. - And so many question marks about this case, too. Like, he's planning on having, or she or they are planning on having kids.

I mean, you have two or three kids. Like, they might take all of your extra cash flow anyway. They might all go to daycare. So, this conversation is moot. And I mean, when I bought a house at 25, I wasn't thinking that I would be there for 40 years or even 20 years.

So, there's a lot of different things that could change. - Yeah, so you wanna give yourself a margin of safety. - Are houses even built the last 40 years anymore? I don't even know. - I don't think so. They discontinued the packages from Stage, right? Or not Stage, Sears.

You can't buy a house and have it charted over on a trolley anymore, and it lasts for a decade. - We'll check back in 40 years. - Century, yeah. - I sure hope so, Duncan. - Yeah, I mean, you would hope, but I'm just saying. I don't know, I have my doubts.

- All right. I wanna thank Nick for coming on and helping us with some pension planning questions. We appreciate all your questions, as usual. Thanks to everyone in the chat for coming. We had a lot of fire stuff again today. Email us, askthecompoundshow@gmail.com. Leave us a comment or a question on YouTube.

We're getting a lot of questions these days, not only in our inbox, but also on YouTube and Twitter. People yell at Duncan on the street sometimes. Remember, askthecompoundshow@gmail.com, and we will see you next time. - See you, everyone. - See you, guys. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music)