(upbeat music) - Welcome back to Portfolio Rescue. I'm on location today in the home office in New York City. I'm actually in the office with Duncan today. - Yeah. - Duncan, I need to offer- - Not in the same room again though. We can't make that same mistake again.

- No, we learned our lesson. I need to offer a mea culpa from last week. So last week we talked about Series I savings bonds. There was some very strong proponents of Series I savings bonds, and a lot of people put me in my place. They told me, I think I said, "It's not as easy to just automate investments through those." A lot of people put me in my place and said, "Actually, you can.

"You can automate Series I savings bonds. "Credit to me for admitting my mistakes when I'm wrong." - Yeah, yeah, I mean- - So that is something you actually can do. I think you can do it on a monthly or quarterly basis. - As long as you can give a treasury direct site to work.

- So here's what I remember. So I actually, yes, I actually had some Series I savings bonds. I set it up on an automatic thing, autopilot, five minute wait to talk to someone. And they don't even have the option to hit a button to say, "We'll call you back." It's just like, "Just wait here like an idiot "and see what happens." - Right.

- So yes, they still, I was right on that one. They still are a little antiquated in how they help with customer service. The website stinks. - Yeah. I saw someone actually was like complimenting their like bare bones website. So I mean, I guess, you know, that's like you say, that's what makes a market, I guess.

- It looked like the original Amazon one from like when Bezos was in his garage. All right. Remember, if you have a question for us, askthecompoundshow@gmail.com. We'll be pulling questions from the live chat too. I always see we get some good ones in the YouTube chat, all that stuff.

We'll find them if you send them to us. Let's do the first one. - Okay. So up first, we have some long ones today. So hang in there, hang in there. Okay. My wife is 26 and graduating in May to become a nurse practitioner. I'm 28 and a mechanical engineer.

We have $265,000 in retirement accounts and $35,000 in taxable accounts. All in the Vanguard Total World Index Fund. We have $33,000, 10% of our portfolio and alternatives like Bitcoin, Ethereum, USDC and whole life insurance. And we have $20,000 in cash, which covers four to five months of expenses. We're moving back near our family in rural Minnesota.

First baby on the way in a week. And due to the hot housing market, we'll leave Wisconsin with $165,000 of cash from selling our house. With retirement accounts maxed out, here's my plan for the cash. Put $50,000 into a down payment for an old $150,000 farmhouse within our family.

Use $70,000 to pay off student loans and put $10,000 into I-bonds. Shout out you guys. What do I do with the remaining $35,000? No other debt, cars run well, new house meets all of our needs. This sounds like a good problem to have. - Well, yes, for people in their late 20s, they have things figured out pretty well as far as their finances go.

Obviously, also the government should be giving us a kickback, I think, for all the Series I savings bonds that we've sold on their behalf. - Exactly, yeah. - So, you know, with the caveat that we don't know exactly what you're doing with this money and the time horizon, risk profile, yada, yada, we've talked about in the past.

I'm gonna focus in on the child part here. So they said they're having a baby in a week. Maybe we got this before and they already had the kid. Congratulations, very exciting. Before we get to like the allocation side of things and what it means financially to have a kid, there was a, you get a lot of advice when you're a parent or just about to become a parent from people who already are parents.

And they tell you exactly, here's what you need to do for sleep training. This is the kind of food you need to feed. By this age, they should be doing this. And most of that is worthless because all kids are different. So I have twins and I know for a fact this nature versus nurture thing.

I would like to think that my wonderful parenting skills are going to help them be the people that they're gonna become. But I have a boy and girl who couldn't be more different. They don't look alike, they don't act alike. They're totally different. And so a lot of it is just the kid is the way they are, I think.

I'm sorry to break some, pop some bubbles there. So all the other, that type of parenting advice, here's what I wish I would have known. First of all, don't waste your money on nice furniture. Kids get everything dirty. So if you're gonna get some furniture, make sure it's leather because it cleans up easier.

Get rid of every single lamp you have in your house that's on an end table because it will get broken or the bulbs will get broken. I also think consider getting rid of any sharp coffee tables get those like fabric ottomans because the coffee tables, once they start to pull themselves up and walk like the corners, you're just looking for a head injury.

Here's another one. Get yourself a good cordless vacuum cleaner. We shelled out for a Dyson, not to brag, right? It's kind of a high-end model, but we tried some other ones and they kept breaking. In the Dyson, we've probably put, I don't know, if it's a car, we put 120,000 miles on that.

I use it like six times a day and it's amazing. You have to have a cordless one too 'cause you're pulling it out to use it all the time. Here's another one. Don't skimp on a nice washer, dryer, dishwasher. So if you need to upgrade a little bit in the house, that's probably not a bad idea.

We probably use ours every day. We do so much. We have three kids, so we do a ton. Here's one more. I was gonna invent this and do it on Shark Tank to Mark Cuban. Multiple blades for a pizza cutter. I want like five of them when I'm cutting up quesadillas and I'm trying to cut off the edges on a peanut butter and jelly sandwich, that's helpful.

So get multiple of those. And finally, the Mr. Clean magic erasers for when they put their little grubby hands all over the wall and they get older. They really are magic. All right, so here's something else I wasn't prepared for as a parent. The cost of childcare is insanely high.

Duncan, before we got on, you were complaining about your rent in Brooklyn. Your rent might cover childcare. Now, this can be a contentious issue for people because you have some people who say, how could you possibly let other people raise your children? Which is always an argument to me because you send your kids to school and they have teachers.

Like, are the teachers raising them? - Unless you have to school 'em until they go off to college. - But then you have other people who say, how could you give up your career for your children? What kind of example are you setting? And so this is one of those things that you're never gonna win.

And it's whatever you do, like someone might judge you, but it's totally a personal decision. We decided to, my wife wanted to keep working. She went down to part-time and we sent the kids to daycare. Some people, obviously, the other one is you're lucky enough to have family around to help, but that's a big ask for grandma and grandpa, right?

So we think it's been worth it because they learn to socialize, they learn. Like the other day, my twins started singing a song in Spanish out of nowhere. And I'm like, how do you guys know Spanish? Oh, we learned it at school. They get some independence, they make little friends.

My eight-year-old daughter, her two best friends in the world, she met 'em when she was three months old in daycare. And they're still best friends to this day, but it is very expensive. So I was doing my taxes. Bill Sweet, who's been on the show a bunch of times, he actually does my taxes.

But I, listen, I lend a helping hand. I get it ready for him and leave it on a silver platter from TurboTax. - I think you have to say not to brag because that's like having LeBron James do your basketball lessons, you know? - This is true, yeah. I have my own tax consultant, Bill Sweet, and I get it ready for him on TurboTax and get it as far as I can take it and he finishes it.

And it asks, like, what did you pay for childcare? So I added it up and I thought, you know, my daughter's eight, my twins are gonna be five soon and they're gonna be in kindergarten. So I'm almost done. Eight years worth of paying for childcare. So I thought, like, what if I went through and looked at my old spreadsheets and added it up?

And so I go through and add up eight years of childcare. Now, obviously it's on and off a little bit from the pandemic. There was two years where we overlapped. We had three kids in it. And I kind of had an idea, but I figured out the number. It was huge.

We basically put the kids through college. So we're in the trust tree here. I can tell the number to people. - I think so. - It was close to $170,000. - Imagine if you'd put that in the arc. - And we live in Michigan where, like, it could be worse in other states.

So obviously, again, we had three kids. A lot of the time they were going full-time. And so it worked out roughly like $20,000 a year. So we didn't have time. Like, we didn't have 18 years to prepare like you do for college to save in a 529 plan. This was just kind of thrust upon us.

And I knew it was gonna be expensive. And having three kids, don't tell my kids this, having twins was not really in the plan. So having three was not really ever, that was kind of a... But it's so much more expensive than... So obviously, the trade-off being, unless you have someone who can help and do it for free, either someone's gonna have to give up their income, potentially, in their career, or you're gonna have to pay for childcare.

So either way, it's going to be expensive. We had one friend who actually, his wife worked on the weekends. He worked during the week. And they just never saw each other. And they like trade it off. So it's not easy. So I would say, this is on the 2021 cost of childcare survey.

They said 85% of parents they surveyed spend more than 10% of their household income, average being about 10 grand a year. And they said that's actually more expensive than the average annual in-state cost of college. So it costs more to send your child to daycare than it does. And there's a reason for that expense, because they have to have a certain amount of teachers.

Like if they're an infant, they need like, I think one teacher for every three or four kids. And there's more teachers involved. It's all this stuff. But in the nine months leading up to having twins, I saved every extra cent I could for childcare. And I wanted to have like at least one year's worth paid for, so we didn't have to worry about it at the time, 'cause I knew it was gonna be expensive.

I think I looked, our most expensive year, we spent almost $40,000 on childcare. It's just a huge, like we literally put these kids through college almost. So I would say my advice would be as you're having a kid, I don't know what your plans are gonna be. It's not a bad idea to give yourself a little bit of cushion if you don't have those plans worked out right now.

- Sounds like good advice. I have one follow-up question. Can you use credit cards at least to get some points? - Yes, I did use credit cards to get points. So that helps a little bit. And again, I'm not like asking people to feel sorry for me and complaining, because I think it worked out.

And I think our kids, like they enjoy, like they love going to school. On the weekends, they'll be like, "When do we get to go back to school?" They like, they have little friends. They've learned a lot. So I think it's been good for us and it's worked for us.

To each their own is my kind of way of thinking about it. But it is, it's a huge cost and probably a bigger cost than most people realize. - Yeah, yeah. No, that's, I think most people would definitely guess less than that. But yeah, I've heard from other people and from friends about how expensive childcare is.

It's incredible. - All right, let's do the next one. - Okay. So up next, is it premature to panic about yield curve inversion? What does the inversion actually mean? I understand that it's more economical to win for shorter periods of time, but what does it mean in the broader context of the economy?

- All right, so the risk reward relationship should look like this. Longer term bonds, bonds that mature over a longer timeframe, call it 20, 30 years, should have higher yields than shorter term bonds, call it five years or less. Just because there's more interest rate uncertainty, which means more volatility.

So John, pull up this, do a chart on for this first one. These are the drawdowns for TLT, which is a 20 plus year treasury bond ETF, and IEI, which is a three to seven year bond ETF. And TLT is down like 28% right now, whereas IEI is down more like 10.

And the yields on these products are fairly similar these days, but the losses in long term bonds are way higher 'cause volatility is way higher. So you think if you're gonna accept that volatility, you wanna be paid to take that risk. Now, bond yield spreads are typically used to gauge the health of the economy.

So let's say wider spreads indicate between long and short term bonds. So long term bonds are yielding way more than short term bonds. That's called an upward sloping yield curve. That would indicate a healthy economic prospects 'cause you're thinking there's probably gonna be more inflation and more growth in the future.

That's what the bond market is telling you. Narrower spreads, whether it's flatter or inverted, indicates poor economic prospects, most likely lower growth and inflation because people aren't worried about long term, they're worried about it more short term. And so you can think of the yield curve as a way to gauge sentiment in the economy.

Now, this as a signal is still relatively new. Campbell Harvey is a professor, I think he's at Duke now. He's credited with discovering this in his dissertation. I think Josh talked to him a couple years ago. - Yeah, we've had him on twice. - Okay, so he did his dissertation at University of Chicago back in 1986 and he kind of discovered this signal.

And so he said that people become worried about the economy. The 10 year treasury is like the benchmark. People think of this as like the safest bond in the world. People purchase this bond and that drives rates down and it brings other rates up and it kind of puts it all in.

So let's look at this, the yield of the 210 spread. So this is the 10 year treasury minus the two year treasury. And you can see every time it hits that line or goes negative, that just means that the two year is about to surpass the 10 year in yield.

You can see the gray lines after it is a recession. I think Harvey actually used a 10 year in the three month T-bill yield, but it's pretty much the same thing as short term. Now, he did say like in his dissertation that the yield curve has to be sustained, this inversion has to be sustained for a full quarter, not just a couple of days.

So in every time we've had a recession going back to like the 1960s, an inverted yield curve has preceded it. So it's a pretty good signal. I don't know if you wanna do the correlation causation thing where interest rates are predicting a recession or it's just, it's happening because of that.

Now, I do wanna look at the other side of this 'cause, and I know every time you do that, people say, "Oh, so you're saying it's different this time." No, but the market's changed. I'm saying markets evolve and like maybe the Fed's involvement in the credit markets has changed things.

Maybe it means people think the Fed is gonna keep raising rates 'cause they say they're going to keep raising rates, but people don't really expect inflation to be a problem in the long term. So the short term yields are coming up a lot. The only thing I really know is that interest rates are really screwed up right now.

So I don't know if it's gonna cause a recession or not. The thing is, even if it does, let's look at the lag. John, throw up this first table. This shows like the start of a yield curve inversion and then the start of a recession. You can see it's an average of like, call it 16 or 17 months.

It's when it happens. And then let's put the next table up just to show the stock market correction. You can see there's a lag for stock market corrections too. Sometimes it happens pretty quick. Sometimes it takes a while to happen. I don't know if I'd use this data to say, "All right, well, we have free and clear for 16 months because people know things now and maybe it'll happen faster or maybe it won't happen at all." So it is a pretty good signal that people are worried in some context.

It doesn't make sense. Like that relationship is screwed up right now. Does that mean we're for sure gonna go into a recession? I would never say 0% or 100% about anything, but I think it does say that credit markets are pretty screwed up right now. That's about as far as I'll take it.

- Yeah, and with a lot of this stuff, you guys have talked about this before, but it's kind of what people make of it too, right? If everyone thinks that it's gonna cause a certain result, then they can make it. - I do wonder that. But yeah, people say, "But look at the track record.

It's predicted every..." So you gotta give it the benefit of the doubt, I guess. But with the caveat that the Fed has really stepped in more than they were in the past in these things, and maybe that screws things up. I don't know. - We'll find out. - All right.

Let's do one more. - Okay. So up next, "My question comes from a discussion I had with an older coworker about his thoughts on risk. Since IRA funds are considered more valuable than funds in a taxable account, generally speaking, most people think they should take less risk with them because you don't want to mess those decisions up.

My coworker had the opposite thought and said that he viewed those funds as the longest-term funds he had, so he takes a small portion, not the whole portfolio, and swings for the fences every once in a while. He doesn't check those accounts nearly as often as his taxable ones, so he's not as tempted to sell out if it goes south.

It got me thinking, is this actually the right way to think about funds in IRA or Roth IRA accounts?" - So we're talking about asset location here in psychology. Now, I wanna bring in someone who's had a hot take about this before, Nick Majulie has came on the show before and said, "Don't max out your 401(k)." That was Nick's hot take before for asset location 'cause it gives you more flexibility.

Nick, what do you think about this? Do you think it makes sense to, if you're gonna take a swing somewhere, you're gonna speculate, does it make sense to do so in a tax-deferred account? Because then you're not, if you, God forbid, it works out, you're not paying taxes on those gains if you have huge gains.

What do you think? - Yeah, I mean, the optimal thing to do if you know kind of like your high, you want all your high growth investments to be in a non-taxable account, right? Even if you're saying like, well, if you have bond, people say, "Oh, you should put bonds in your non-taxable accounts 'cause they're paying you interest throughout the year and you're gonna have to pay taxes on that." Well, that's true.

But actually, if you just look at the math, like the highest growth assets you want tax shielding from 'cause the long-term capital gains will completely destroy that, any sort of like dividend income or, sorry, interest income you get from the bond. And especially with yields as low as they are, there's absolutely almost no reason to put bonds in a non-taxable account.

However, in this case, I think it makes perfect sense to like swing for the fences. I mean, think about what, didn't Peter Thiel get like private stock in an IRA and then it grew to like $5 billion tax-free? It's like one of the greatest schemes ever. - Yeah, he's got a $5 billion Roth IRA as well.

- Yeah, it's like that's the type of stuff where you can get really high growth assets or early equity into one of those things. That thing could be a miracle if it works out well. I personally don't do that. I like just 'cause this, I like to rebalance. So all of my accounts are carbon copies of each other.

So like the stock bond mix, everything, I try to make them identical across everything. So when I rebalance, I can just rebalance within accounts. - So you don't think about like having more of something in one account and then rebalance between accounts. I guess that simplification. I also think the psychological aspect of it.

So they asked about like people think they can look more long-term in their long, and that's what I think too. Like if you're, I don't necessarily swing for the fences, but I know that I have, I don't know, three decades or so. So I'm gonna touch that money. So to me, it's almost out of sight, out of mind.

So all of my retirement accounts are completely in risk assets. There's no reason for me to, so I take risk there. And then I think if I slowly but surely de-risk my portfolio as I get close to retirement or whatever I'm gonna do, then I would add those other funds that I'm gonna be using into taxable accounts because again, I'm gonna let those other ones keep flying.

- Yeah, I agree. I think this makes complete sense on a behavioral perspective and just technically it's optimal from like a returns perspective as well. So keeping those things like out of sight, out of mind, it makes perfect sense. So I agree with that. - All right, let's do the next one.

- Okay. So up next, with individual stocks, I never average down because I tend to think the market knows more about individual companies than I ever could. And companies go bankrupt all the time or at least become low valuation junk companies and stay that way for years or decades.

However, with ETFs, especially index diversified ones, I feel like averaging down is often a great move in the longterm. I'd like to think that a well-constructed equity index isn't going to zero unless the world collapses and we'd have a lot more to worry about than our P&L in that case.

Am I missing something? - Nick, we set it up for you perfectly here. I got a copy right here, Nick's new book. Just keep buying. Before we set it up here, I wanna talk about like the individual stock side of things. So I look, Nick, have you read the Jeffrey West book "Scale" before?

- I'll quote it. I'm ready. I already know exactly what you're, 'cause I've quoted, I think in the book, but I already kind of know the- - Okay, so I think I, yeah. So his stat was like 29,000 companies in the stock market from 1950 to 2009. 80% of them were gone by 2009 from bank buyouts or bankruptcies or mergers.

He's saying fewer than 5% of companies in the stock market remain over 30-year periods. And the estimated half-life of U.S. public companies is 10 1/2 years, meaning half of all companies that go public in any given year will be gone in 10 1/2 years. So this line of thinking, it's antithetical to Warren Buffett and that sort of thing of like buying a stock when it's on sale.

But I think for individual companies, if you're not really sure that you have these concentrated companies that you're as sure about as Mr. Buffett is, then yeah, the individual stock side of things, a lot of them just don't come back. - Yeah, so I mean, I think the West stat about like half of all public companies are gone every 10 years.

Just think every 10 years, like half the companies are gone and some brand new half and then another half, right? That just keeps happening. And then so that's why you have very few companies that make it 50 years. I think the other thing that's too, I think I put it in the book was like, by the end of 2020, there was not a single company still in the Dow Jones Industrial Average that was in there a hundred years prior.

I think GE was the last one and they had just fallen out, right? I mean, technically Standard Oil became, but even Standard Oil wasn't really in it until after 1920. So it's like no company has been in there a hundred years. And if that doesn't show you kind of like nothing lasts forever, then I don't know what will.

But yeah, I definitely think like individual stocks, they come and go. I think I also had, there's a stat in there. I had like OSAM, they have all this data from like the 1970s for Compustat. I said, give me the one year median return for any individual stock. Let's say you picked a stock at random out of a hat and like, or you sorted all the one year returns of all history of all individual stocks and you just pick the middle one.

The answer is like 6.3% and the one year median return on the index is like 9%. So in expectation, if you just got a random individual stock you're gonna underperform the market, right? And of course there's those exceptional stocks that just crush everything else, but there's a lot of stocks that have less than 6.3% one year return.

So it's still a positive return, but it technically doesn't beat the index, right? - What if you're someone like me who has a process? - I'm saying for some people it works, but like, I mean, there's some studies that show only 10% of people have skill, right? - But I think this idea of like thinking more in terms of momentum for individual stocks, but value for indexes makes sense.

So he's asked, this question is asking, and I agree like an index is not gonna go to zero. And if it does, then I don't know, aliens attacked or something. But I think if aliens attacked, it would actually be positive for the market 'cause there'd be huge infrastructure spending.

But let's say there is a case where like the whole stock market just, like that is when you buy it. That's the whole point of your book, right? Is like, especially if you're young and you're a net saver over any period, five, 10 plus years, and indexes are falling, like you want them to fall 'cause you get to buy at lower valuations and higher dividend yields and lower prices.

That's a good thing. - Yeah, assuming there's a recovery and the world's not coming to an end, I agree. I think the other thing to think about here is like, yes, the index, the index is never the same. Like when we look at this, oh, S&P 500 over time, we think that's like the same 500 companies.

It's obviously not because of just what we said with scale, right, with Jeffrey West's stuff. But like, because they're always changing the companies in there, you can, it looks like that thing's going up forever, but really this company is coming in and out. So really you are a momentum investor.

If you were on the S&P 500 index, you're a momentum investor without realizing it. And that's fine. I don't think there's anything wrong with that, but I'm gonna write a post on this and say like, hey, it's very different owning a stock versus owning an index and why and why it's different.

You really think about kind of what that means. - Well, and if you look at the market today, you saw yesterday Netflix was down like 30 or 40% in a day. There's all these stocks getting killed and the S&P is down like five or 6%. It's not down very much at all.

And that's like, that's what else you get is just diversification is like, it feels like it hasn't mattered for a while because everyone wanted to just own, I just want to own tech stocks. But now I feel like the last two years, diversification is finally showing through. And that's the great thing about the S&P as well is that we're showing even when these big tech stocks fall, other stocks come up and pick up the slack.

It doesn't always work like that, but sometimes that diversification is the best part of it too. - Yeah, completely agree with that. - Okay, so again, check out Nick's book, "Just Keep Buying." He's been on a book tour big time. Are you dead at this point? - Over 30, yeah, I think this is like my 33rd podcast.

I don't know. - You answered it, you answered it. I did a poll in the chat of if you'd been on more or less than 20 podcasts recently. - Oh, okay. - So yeah, definitely over. - All right, so best and worst part about writing a book. Final question here.

- I think the best part for me was just kind of like organizing my thoughts. It's like, what's your, it's like my investment philosophy, like an introduction to investment philosophy. That was kind of the best part. Worst part, I think it's just like the whole like, there's a supply chain thing.

And like, there's just a lot of stuff that's happening in the world and like kind of dealing with all that. And like, it's like, I wanted to, I originally wanted out by Christmas last year. I was like, oh, it'll be a great Christmas gift and it happened and then we had to push it.

And then supply chain pushed it further. So I think that was the only part. And it was out of our control. It's not my publisher's fault. It's no one's fault. It's just things you can't control. - That is tough. When you have the book totally done and there's no more edits, that time and the time it actually gets to people is a lot longer than people think.

So that is-- - Yeah, it was done last July, right? And then the other thing too, so the worst, actually the worst part for me was, so in there I'm talking about inflation a little bit, but remember all the data I had for the book ends in, you know, end of 2020 and inflation was still low.

So I'm saying like, hey, historically inflation has been low and now it's 8.5%. People are reading this like this guy's an idiot. Like, well, I didn't know it was gonna go to 8.5. Like, I obviously don't know. And I still think it's timeless regardless, but I'm saying like, hey, inflation's historically been low.

Of course it can go up again. I talk about how to hedge against inflation and all that, but like, I just look stupid because like the data I had at the time when I was writing this is not the data that people are reading now, right? 'Cause there's like a huge lag, right?

- That just means in 10 years you can do second edition and update the numbers. - Yeah, exactly, and add that, yeah. - Perfect. - You always gotta leave room for a sequel. - Yeah. - There you go. Thanks to Nick for coming on. Check out the new threads we got.

Duncan just updated the compound store. I got a new T-shirt today. Very nice, high quality. I love it. We just got some portfolio rescue towels in the office. I think they look like flags, so you can hang 'em up. - I didn't even realize we did, oh my God.

- Yeah, we've got blue and red portfolio rescue towels. Got one, Duncan? Pretty sweet, actually. They're very nice. High quality, I like 'em. I'm gonna buy some of those for the lake this summer. - Can't wait, so check out idontshop.com. We also have the Ben Doesn't Drink Coffee mug, I think it's called there, right?

- Yep, that's always there. - Keep those comments and questions coming. Remember, pick up a copy of Nick's book. Amazon, anywhere you can find it, just keep buying. Have a question, askthecompoundshow@gmail.com, and we'll be answering your questions again next week. See you then. - See ya. (upbeat music) (upbeat music) (upbeat music)