(projector whirring) (upbeat music) - You know it's real when you edit it. - We're good? - Yeah, we're good. - Welcome to Portfolio Rescue. Usually I'm 750 miles away from Duncan. Today I'm 75 inches away. We're at the headquarter, the Compound headquarters in Manhattan. Nice to be here. Duncan, how we feeling?

- I'm stressed. I'm feeling pretty stressed today. - It's my tea issues, but hey, we're past that. We're ready to answer some questions. Remember, our email here, askthecompoundshow@gmail.com. Let's do it. - Okay, and in our defense, this is a tight turnaround. You guys saw from we were doing CNBC with Josh to this, so we apologize for the delay.

But yeah, we're here now. So up first today, we have the following. I like my idea of investing every day. My OCD took off and I figured out that investing $25 a day over 260 weekdays in a year would roughly equal my IRA limit of 6,500. The investing platform I use allows me to automate this task over a basket of stocks and ETFs.

My question is, some of my $25 a day investment equates to only a couple dollars per share/ETF. Does payment for order flow negatively impact my smaller trades more than if I made larger weekly or monthly trades? Is this impossible to quantify with fluctuations in the markets? Should I just take a deep breath and not be all OCD about it?

- I like the idea here. So one of the biggest benefits of dollar cost averaging is just that you're diversifying over time, right? You avoid that single point of failure where you take the big lump sum and you put it to work and it happens to be at an inopportune time.

So I do like the idea of breaking down the max IRA contributions into various timeframes. Technically, there's 252 trading days in the year because of holidays. So if we're splitting hairs here, we're talking about $26 a day. If a man really wants to max out that IRA, which he does, it sounds like, close enough.

Or you could go, I figured, at $125 a week, $540 a month. So I think any of those times, honestly, if you're breaking them down into those levels, even if you did it monthly, if you did one lump sum, your market impact is gonna be so minuscule of the trillions of dollars that are moving all the time that it's probably not going to matter.

So I think they probably are overthinking things. I just don't see how you can get taken advantage of any more at $125 a week versus 25 a day or $540 a month. I think at these levels, you're not gonna be any better or worse off. Ken Griffith is not going to take any more pennies from you.

It kind of just scales, I think. So we did talk about mental accounting though last week. And I do think the idea of someone thinking through their savings as $25 a day is easier to stomach psychologically than $540 a month for certain people. So even though it's the same thing in the end, I actually like the idea of doing it this way.

So I think investing this way could provide some sort of double psychological boost in terms of dollar cost averaging and spreading it out over tons of different markets. And I've shared this stat before. I think since 1928, the win-loss ratio for the stock market on a daily basis is 55% up days, 45% down days.

So $25 a day, you're actually giving yourself that opportunity to buy when the market is down a little bit. But as an individual investor, the trading cost thing, it's not like it's gonna scale any better. And it's not like you're gonna get the scale of an institutional investor by moving millions or hundreds of millions of dollars.

Either way, so I think, yeah, you're probably overthinking it. - And so for payment for order flow, I mean, we are talking about like pennies and fractions of pennies, right? We're just to be queer for people. - And yeah, we're talking about a drop in the bucket though, a drop in the ocean here in terms of that $25 a day.

It's not gonna be any better, even if you put that $6,500 max IRA contribution to work all at once. - I've never seen a dude dollar cost average daily. It's the first time I've thought about that. I think it's kind of fun. It's like paying a bill, right? Buy your coffee, fund your IRA.

I dig it. - Yeah, let us know in the chat. I'm not looking at the chat right now, but let us know, Nicole's in there. So let us know if you dollar cost average on a daily basis. - Let's do another one. - Yeah, up next we have bonds versus money markets.

I manage my investment portfolio largely with a mix of very boring funds, U.S. index fund, international index fund, and a total bond fund. Looking at the yield on my bond index fund, it looks like I may be able to get a better yield in a money market fund. Is there any reason to keep my bond allocation where it is rather than moving into a money market fund?

- First of all, kudos on a three fund portfolio. I love this. The total stock market index funds, the U.S., international, and bonds. Listen, the yield on the 10 year treasury is like 3.6% right now. So you can get four to 5% in most money market funds. Three to six month treasuries right now are yielding around 5%.

And if the Fed raises rates at the next meeting, which most people don't think they will, but some people think it's a possibility, these rates should actually go up a little more from here. So I said on this week's Animal Spirits, I think owning ultra short term bonds is a no brainer right now.

But that's kind of how I look at fixed income as an asset class. I prefer to accept my volatility in stocks. I know the stock market is gonna fluctuate in the short term and it could have these bone crushing losses. And I look to fixed income and cash as a portfolio stabilizer.

So I think about portfolios in like a barbell approach. So on one side of the barbell is higher volatility, higher expected returns. And on the other side of the barbell is less volatility, maybe some income, but we're talking more stability for either rebalancing into the downturn in the stock market or just keeping that portfolio stabilized so you have some spending cash on part of it, that sort of bucketing approach we've talked about.

So in a recent piece, my favorite financial writer, William Bernstein, he was talking about bonds and cash versus stock. And he said, "Investing is an operation "that transfers wealth to those with a strategy "and can execute it from those who do not." Sorry, let me show that again. "Investing is an operation that transfers wealth "to those with a strategy and can execute it "from those who do not or cannot." And the idea is having some sort of short duration assets, whether it's cash or cash-like short-term bonds, CDs, money markets, online savings, whatever it is, that can help you stick with the other stuff.

So even in the last 10 or 15 years when cash or cash-like investments didn't provide much in the way of yield, the asset class still played a vital role in portfolio management if it allowed you to stay invested in stocks and avoid worrying about your short-term spending needs being met.

So the good J.P. Morgan line was always, "A bear marker is when stocks "are returned to the rightful owners." And I think most people might, what that means is the people who have money to buy stocks are on sale. And unless you have savings coming in from income, the people who have money are the people holding cash and can sort of balance into the pain.

So that's just my preference when it comes to portfolio management diversification, not for everyone. It does seem like a no-brainer to sit in these short-term vehicles right now, but there are some risks to consider before you move your entire bond exposure over. Like if you were sitting in a total bond market fund, last year you probably lost somewhere in the range of 10 to 15% in like an ag or a total bond index fund.

Interest rate risk works in both directions. So last year when rates rose, long-duration bonds got hammered. So John, do a chart on here of last year. This is bonds at different duration rates. So you can see that zero-coupon bonds, which is 25-plus years, they were down 40-some percent last year.

That's like all sorts of duration. That's all duration, basically. 20 to 30-year, kind of going on the list, then one to three-year didn't have many losses. So the further out duration, the more you lost. Now, throw this year's chart up, John. Not huge gains in bonds, but it kind of works the opposite direction 'cause rates have fallen this year.

So anything with duration did much better. So if we go into recession and the Fed cuts rates or yields in the bond market fall 'cause of inflation or whatever, the economy's slowing, which you would expect to happen, bonds with more duration will provide more bang for your buck. So making up some of those losses, if you kind of get out now, is much easier if you stay in some duration.

Some investors like this feature of bonds. When the stock market is down, usually, not last year, but usually, or when there's a recession, we see a flight to safety, people go into bonds, and bonds provide some sort of price boost and not just income. Reinvestment risk is also a potential problem here.

Let's say the Fed overplays its hand, do get even like a run-of-the-mill recession and inflation falls. I don't know, rates could go from 5% currently to 3% or 2%, maybe, depending on the severity of the downturn. In short-term bonds or cash or money markets or whatever, you don't get price appreciation from rates falling like you would in long-duration bonds.

Plus, now your 5% T-bill is now yielding 2%. So you kind of have to think, what do I do? Do I stick it out in this more stable asset or do I look for something that can potentially, in that scenario, get more yield? So I think you will have a heads-up from the Fed when time comes and rates move, but the bond market's not gonna wait around for you.

So I think you just have to figure out why you're investing in bonds in the first place. Is it more stability, like me, or are you trying to get ahead of the interest rate market and be some sort of hedge fund manager? I guess that's kind of the way I look at it.

- Have you taken a look at how much does the price appreciation help in fixed income when markets are in turmoil? - Over the long, well, so we have looked at that, and during, I think, the relative outperformance and down year in the stock market, it's like, again, stocks are down and bonds are up a little.

It's like almost a 20% outperformance on a relative basis for the 10-year Treasury. So you do get a bump. Like in 2008, Treasuries were up double digits. So that is something to consider. Like, what is the point of fixed income in the first place for you? - Yeah, and that would be my argument is that you will get that price appreciation from a money market fund, right?

You get yield and yield alone. - Yes, you have the stability piece and the income piece, but that's it, right? - I do think bonds have been a really tough asset class for the past 10 years or so, and I think they're pretty straightforward to me in terms of this, but that's the wrench in the equation.

- Pretty exciting right now, the last year or so, yeah. - And that's the thing. Interest rates have fluctuated so much. Maybe some people are saying, "Just get me out of this game. "I don't care. "I'm gonna lock in what I can now, "and if rates go down in the future, "we'll figure it out then." But I do think rates being at 5% in short-term T-bills is something that investors haven't had the chance for 15, 20 years at this point.

I'd say enjoy 'em while they last. - In a word, it's tasty. - I gotta be honest. I still don't understand what a money market fund really is at the end of the day. I really couldn't explain it. I have no idea. It's like a fancy bank account. - It's a fancy savings account, it really is, but you can write checks on it.

It really is a fancy savings account. This is the Winnie the Pooh meme. Savings account, money market. It's not really a savings account, but it kind of is. - Yeah, but there's a distinction between that and a money market mutual fund. - We'd have to go through the financialization history to explain it all.

- Oh, we have time. - I don't know that from Shinola. 14 minutes for this episode. - Okay, up next we have, and that question was from Michael, by the way. Up next we have a long one, but a good one. I got laid off from a tech startup in New York City.

Shocker. I'm 30, single, and have been wanting to do something on my own for years. I have experience, relationships, and a decent idea to bring a niche product to market. I need about $100,000 to live and fund the business for year one, assuming no positive cashflow. How would you approach setting up funding?

I have $25,000 cash, negligible debt, good credit, about $50,000 in a brokerage, about $75,000 in a 401(k). I'll probably never have fewer responsibilities in my life, and it feels like the right time to make a bet on myself. I've meant to, I totally forgot in all the hectic prep for this.

I was gonna read this like a shark pitch, like say, "Hey sharks, what are the pros and cons "of liquidating my brokerage account, a 401(k) loan, "taking an SBA or bank loan, "raising from angels, friends, and family?" - I like the idea here, like good for you for betting on yourself.

You definitely wanna do this in your 20s or 30s before you have more responsibilities as a single person. You don't have kids running around or a mortgage to worry about. I think that is, there's, risk means different people at different points of their life, and I think this, if you're gonna do it and you make this leap, do it.

- Obviously the caveat here is most startups fail, you know, which is tough, but I do think it's, this is the time to do this. So, Bill, you've actually been a part of small businesses over the years. Not necessarily a startup per se, but Ritholtz was more or less a startup when you and I joined seven or eight years ago.

- I think so, yeah. - There was a handful of us. - Yeah, Mr. Josh Brown, Mr. Barry Ritholtz. - Well, let's ask you this before we get into like the, weighing the pros and cons of each. Are there any tax implications here of starting a business and different kind of funding approaches?

Does that matter at all? - Yeah, there's a lot of tax implications. I was gonna suggest, Ben, that we end up ranking these, right, I mean, at the end of this, this is priorities. And before we get there, I wanna tell you a quick story. So the year's 2007, the great financial crisis is a year or two away, and I picked the perfect time to get out of the Army, leave a stable job, not unlike my friend Chris here, and get out.

I linked up with a tax practice partner, my partner Greg, who turned 78 this year, and by the way, he's still cranking out tax returns on an annual basis, that man is my hero and very much a mentor. So I go to the bank, 'cause I wanna focus on CFP, I wanna become a financial planner, work with the tax practice.

So I go to the bank and I say, what kind of deal can we work here? You know, I slip the note under the table, and then hard pass, hard pass from the bank. I go talk to the SBA. Personal guarantee, they could give me $2,000 at 12%. Not very helpful if I wanna hire somebody.

- At that point, you might as well get a credit card. - Right, basically. Went to the Veterans Affairs, funding had dried up, again, this is 2007, not an asset-backed loan. I go to the county, I'm not adding manufacturing jobs. A finance bro, they're probably not just gonna loan you money at the end of this.

So ultimately, maybe things have changed, but I think, Chris, every note on your list involves you basically betting on yourself with your own financial resources, except for one. And that's the one that I would focus on, which is the friends and family element. That, to me, is the most interesting thing to go, because ultimately, crowdsourcing would allow other people to share in the risk that he's taking on with his career right now.

And that way, you're able to financialize it a little bit, and for tax implications, if somebody's gonna put risk in, they would also share with them a little bit of the upside in how you do that. But that's the direction I would go. - If you have trusted sources of capital that are willing to make a bet on you, and they understand the risks, that you could lose all this money, and then also, hey, I'm gonna be using some of my brokerage account here.

I'm gonna be maybe using credit card. I'm gonna bootstrap this, and I'm gonna do whatever I can. If they know that you've got skin in the game, too, where you're just not using a loan or something, I think that makes a lot of sense, too, as long as they go into it with their eyes wide open that this could be a zero for them.

- Yeah, exactly. And so, if you finance half of it with the $50,000 you have, half brokerage, half cash, if you can raise another $50,000 from friends, family, maybe it's something where you pay 'em back one-fifth a year for six years, right? And so, they get paid. They get the 20% kinda kicker there at the end if you split it up, but know that you're five, and that allows you to financialize and spread out some of the risk.

Look at a partnership LLC. That's certainly a great structure. Would Elliot have folks enter and exit the partnership with little, no tax consequences? That's where I'd go for Chris, but I'd like that crowdsourcing idea. That one stands out to me. - I'm not a big American exceptionalism guy, but I think this is one of the cool things about our country that people do try this, because I'm not, you know, again, real estate's kind of a startup here, but it wasn't like starting from the ground floor, and I think that's just a huge risk, and you have to be the right kind of person, too, and have the right personality to do something like that.

- Right, but it's capable here. Manifest destiny, and for here, you can make it. I mean, this is the American dream. - And kudos to him for giving it a try, and if it doesn't work, guess what? You work in tech startups. That's a place where you can see large amounts of people lose their job pretty quickly, and why not give it a try, and if you can, get back in with techs on the upswing again.

- Yeah, he could get an entry-level, you know, 200K job in tech or something, right, you know, if he always had, if he had to fall back. - Inflation, inflation works wonders. - All right, let's do another one. - Congrats, Chris. - Yeah, good luck. Keep us posted on how it goes.

- Yeah, let us know. Okay, up next, question four, we've got-- - Also, he's probably gonna ask us to invest. (laughing) I don't know what he said. - Oh, there's an idea, Chris. There's an idea. Okay, up next. I've gotten into dividend investing recently and need some clarification on the difference between ordinary and qualified dividends.

I want qualified dividends because of the preferential tax treatment. The IRS states that most American companies and some foreign stocks, ETFs, and mutual funds will be qualified dividends as long as you hold them for 60 days. How do you easily screen for equities that will produce qualified dividends? So he's basically looking to build a portfolio where he's getting tax advantage dividends, right?

Smart. - So, obviously, the first explanation here is qualified versus ordinary. Let's do, Ben tries to explain taxes. (laughing) Ordinary just means they're taxed at ordinary income, right? - That's it. - Qualified means you get some sort of preferential treatment at whatever, capital gains or whatever. What would be classified as ordinary?

That's like REITs. - Yeah, REITs is a good one. The most common one, I was gonna get it to the end, but you just put it first, Ben, is income from a bond fund. Income from a bond fund is typically taxed as a non-qualified dividend, but that's not what the question's trying to get at.

- Right, so they wanna know, what stocks, ETFs, and mutual funds do I invest in if I want qualified dividends? - Yeah, so first off, let's start with the why. Why, you said it, Ben. Ordinary income stings, and it can be a 0% rate, but all the way up to about 41% for investors in the highest tax brackets, making about $600,000 or more if you're married.

However, most median taxpayers are paying about 22%. Now, a qualified dividend, it's the same tax rate that you would apply to long-term capital gains. So for most investors, that's 15%. At the very high end, it ends up being 24%. And so the gap there can be pretty large. It can almost be a 15% differential between your tax rate for ordinary income versus qualified capital gains or qualified dividends.

So that's step one. What do you get from that? So now, how do you get a qualified dividend? There's really two conditions you need to hit. Number one, it needs to be a U.S. company. That's task number one. However, counted in that qualified dividend for U.S. purposes are countries that we have a favorable tax treaty with.

Ben, what countries do you favor when it comes to your tax treaties? - Saudi Arabia? - That is actually one, yes. - Is it really? - That's a really good one. Yeah, 'cause they're friends. They're friends of the United States, definitely. But yeah, Japan. - What about Ireland? - Ireland, big one.

Yep, big up there on the list. I mean, I can give you a full list. The list is longer than a list of not. - Could you give us your picks? - Sure. (laughs) - That's what everyone's waiting on. - I'll give you my qualified dividend list, which is Canada, Mexico, UK, Germany, China, Japan, Switzerland, India, South Korea, Italy, and the list goes on and on and on.

A lot of the developed world. What's interesting is if you look at the countries that are not included in the qualified dividend list. I'll give you one, Taiwan. This is a country, by the way, but Taiwan is not included because we don't have a favorable tax treaty. Taiwan Semiconductor, one of the 10 largest companies in the world, dividend rate about 2.5%.

Sorry, you gotta pay full freight of U.S. taxes. It's not qualified. Another example, Singapore, Colombia, Iran. Not really good friends with Iran right now, but the differences can just be in that tax treaty thing. - So it's pretty easy to find qualified dividends. - It is, it is. And the second thing you need to hit is a holding period.

And the holding period is super funky. Don't wanna get too much into details, but you basically need to hold the stock for a 61-day period at least 60 days prior to the dividend being held. And so the holding period test goes all the way back six months, and you basically have to hold the stock for about two months, at least two months before the dividend.

So we're looking at a long timeframe. And what this prevents, Ben, is people buying a company that's about to issue a dividend and then they sell it later. So you have to hold this as a long-term investors game, and if you meet those criteria. - Right, I hope you're not day-trading dividend stocks.

That's not the point. - Day-trading dividend stocks turns out not to be a great strategy. - Now let's take this one step further. Since I wanna do dividends, do you think it almost always makes sense to hold dividends in a tax-squared account, if you can? If this person is saying, I wanna be a dividend investor, obviously, they're obviously asking for a taxable account here, but would it be better for them to hold it in a Roth or an IRA?

- It's really interesting, 'cause tax location, I think, is all of a sudden back in vogue. 'Cause all of a sudden, if you can get 4%, 5%, we talked about treasury rate, a money market rate of 3%, that does change the math and equation a little bit. Tax location, a really good idea.

I'm not, I think at higher levels of dollars, that makes a lot of sense. I think for solving for a portfolio question like this, I would just stick to the basics. It's really just, you need to hold your stocks for a long period of time, and you're good to go.

- Okay, that's easy. Cool, keep it easy. - All right, last question, Duncan. - Okay, so last but not least, I work at a company that offers a 401(k) with no match and a tax-deferred Supplemental Executive Retirement Plan, or SERP, that's how I'm going to say it. I don't know if that's right.

Not to brag. They recently added the option to contribute to an after-tax 401(k) with automatic conversion to a Roth 401(k). - I think about three people listening got that not to brag. - Yeah, exactly. So yeah, they recently added the option to contribute to an after-tax 401(k) with automatic conversion to Roth 401(k), as well as the option to do an in-plan rollover of existing traditional 401(k) funds to Roth 401(k).

I'm 38 and in my high-earning years. If I did the mega back to a Roth, I would be paying tax on the conversion while in this high tax bracket. Wouldn't it make more sense to contribute as much as possible to the SERP in order to max out pre-tax retirement savings and pay tax on withdrawals from the SERP during retirement when I'm in a lower tax bracket?

I understand there's a risk of losing funds in a SERP if the company files for bankruptcy, but my employer is owned by the world's largest asset management firm, so I see little risk of that happening. Wow, they're feeling pretty good, feeling pretty good about themselves. - So the executive retirement plan is probably not all that well-known, so why don't you explain to us that one and why it's contributing to income inequality.

- Yeah, I have precisely one client with a SERP. So this is a rare-- - Really, okay. - Yeah, this is a rare advantage. - I have not heard much about these, I gotta be honest. - Very cool, but they've fallen into this bucket of non-qualified retirement plans, and ultimately, it is just a compensation structure.

The company's giving you an IOU, and they're saying, "Instead of paying you now, "is it cool if we pay you later?" That's what's going on here. And part of the qualification rules are that the company's only allowed, due to U.S. Department of Labor rules, to fund a certain amount for certain people at certain times, and this allows them to go beyond that.

But as a condition of that, the SERP is not, they don't set the money aside. They cannot budget the money and put it into an account for you. It's literally an IOU from the company saying that, "We're promised, don't worry about it. "We're gonna pay you later." I think for highly compensated executives in a large, stable firm, it's a really valuable option, something to consider, especially sometimes there's not a choice.

It's like, look, this is part of your compensation package. This isn't an optional plan. But the downside is, as Martin gets to, is if the company goes under. Big companies have failed, Ben. General Motors, we're talking about Xerox. Like, big companies have gone under. - So if it goes under, that IOU is worthless.

- That IOU could be worthless. It really depends on the courts. And in bankruptcy, we're finding out with Silicon Valley Bank, it's not always what it seems. But ultimately, you can expect your money to be about 10 up for a lot of time. - Jim Carrey said IOUs are just as good as money.

(laughing) - That's the famous-- - So I know you're a big Roth guy. - Yeah. - But does he have a point here? He says he's in his highest earning years and highest tax bracket. Does it make sense for him to hold off on making those Roth conversions since he's paying big taxes now?

- Yeah, I think so. And Martin, I don't know which state Martin's writing from, but let's presume it's New York. Let's presume it's New Jersey. Maybe in California, large asset manager. I'm guessing that's not gonna be in Florida. It could be, but I doubt it. I think so, yes.

I think ultimately, Roth conversions are great. Roth IRAs are fantastic. They're a fantastic vehicle. But if you're at the highest possible tax bracket, that's probably not the primary vehicle for you. Martin's got his head in the right place here. - Okay. But he's talking about making contributions to these SERPs.

So that's just, he's making a contribution. So are they making IOUs to each other? - It sounds like it's elective, yes. He basically says, instead of getting my money today, please pay it to me later. And then he gets to defer the tax on that. - Okay, and it allows you to make a bigger contribution, I would assume.

- More or less, yeah. But again, not a contribution because it's not in an account, it's not in a fund. It's literally a promise for a future account. - I feel like we're usually teaching Duncan about these acronyms. I learned something today. - Yeah, I had no idea. I'd never, never heard of that.

Never encountered that. - Yep. - Okay. - Yep, but it's good stuff. They do track a value. Again, it's just not immediately accessible. - Okay. Good stuff. - I'll take your word for it. - All right, cool. - We appreciate the audience, everyone in the live chat for sticking with us.

We got a little bit of a late start today, but we had to do it from the compound here and Duncan was unplugging things, plugging things in. - It's always exciting. And anyone who's watching right now, that's the true hardcore audience. So thank you, listener. - Sure, yes. - Thank you.

- Someone in the chat says that we need to give Duncan a Serp. Just for- - Give me a Serp. I still don't quite understand. - Just for today. - Sure, sounds good. - No, we always appreciate your comments and feedback. If you're watching on YouTube, leave us a question or a comment in the feed.

I always go through all the comments. I'm a man of the people. If you have a question for us, email us, askthecompoundshow@gmail.com. What else? We need a review. - Yeah, we need everything. Give us everything. - Give us a subscription. - We also want you to go to the shop.

We have a shop. Also, I wanted to say thanks to John, who you can't see on camera, but he's been running the show, basically, behind the scenes today. So I basically threw this in his lap and said, good luck. So thanks, John. - John is the man. We appreciate everything.

Remember, send us an email, askthecompoundshow@gmail.com, and we'll see you next time. - See you, everyone. - All right. (upbeat music) (upbeat music continues) (upbeat music continues) (upbeat music continues) (upbeat music continues) (upbeat music)