Welcome back to Portfolio Rescue, our show where we take questions straight from the audience. Askthecompoundshow@gmail.com is the email. Duncan, last week, I laid it out in the field and I talked about my daycare expenses. We have an international audience here for the show. Had some people chiming in from Germany saying I pay $100 a month, just sort of rubbing salt in the wounds.

Someone from Sweden said they pay $1,000 a year for child care. That's great. Thanks everyone for sharing. Makes me feel even worse about it. I thought you were going to say the opposite, because I did see a couple of people say that they actually spent a whole lot themselves, so I thought maybe you got some consolation.

Yeah, but people around the globe, they sort of have a speed, I guess. Maybe they're paying it, making up for it in taxes. So anyway, a lot going on in the market. I was going to do a little intro here about the correction and going on, but we have some questions about that, so we're going to get into it, so let's just get right into it.

Okay. So first up, I have about $69,000 left of my original student loan of $110,000. The interest on the loan is 2.95 and the monthly payment is approximately $750. At that rate, I have 105 more payments. For the past two years, I've been paying an additional $500 a month, which decreases the payments from 105 to 60.

I hate having debt over my head, but I know that this is not the best use of the $500 and it could be more advantageous to invest it long term. Even when I do basic calculations with very conservative annual returns, it seems like investing is the right answer. I know you've covered this topic ad nauseum, but I'm hoping that you can piece together some charts or data that would give me the final push to commit.

Okay. Let's spreadsheet this thing, okay? So you're paying an extra $500 a month for five years. That would mean you're forgoing $6,000 a year of saving over that five years, 30K total, right? Because you could pay it off in five years. Let's assume, you know, an 8% annual return in the stock market, and unfortunately that's not usually a realistic comparison because the stock market doesn't give you the same return year in and year out, right?

Like it's not a retirement calculator. But if it was, an extra five years of compounding, especially for a young person, that could be worth close to $60,000 over 10 years, $120,000 after 20 years, and $260,000 after 30 years, assuming an 8% annual return, right? So that five years of compounding is big.

I mean, simplifying things here, you don't even have to take it to the spreadsheet. 3% basically is your hurdle rate, right? Can you earn higher rates of return in the financial markets than 3%? I hope so. If you can't, that's not great. But it's not the case over every five-year period that you're going to do great.

So over the past hundred years or so, the U.S. stock market has been positive in 88% of all rolling five-year periods. But actually, if you're going to take that $500 instead of paying down the debt and invest it, you probably want the market returns to be lower over that five-year period because that means you're buying at lower prices for longer, right?

You're -- It's foreshadowing for an upcoming question. Yeah. I think another way to think about this, if you're one of these people that just wants to pay the debt off, let's say you keep paying that extra $500 a month for your debt, pay it off faster. So after that five years, you now have $1,250 a month to save, right?

Because you have the $750, which is the original payment, and the extra $500. And now almost four years sooner, you can start putting that money to work and saving and investing. I guess having said all this, like, maybe you don't want the spreadsheet answer. Maybe you just want to pay it off.

And guess what? That's fine, too, right? It doesn't really matter. So I think the calculus is pretty easy. Can you earn high returns, and can you allow your money to compound faster? So I had some student loans. I think my interest -- I had some deal where if I paid them off a certain amount of months in a row, like 15 months in a row when I started, it got lowered.

So I think my final rate was like 2.25%. Michael would say that's like two and a quarter. Yeah. Two and a quarter. So I didn't see any need, even if I could, to pay it off earlier. Like, especially in an -- I think maybe in a higher inflationary environment where that debt is being slowly inflated away, it makes sense.

But again, some people's brains don't work that way. So if you want to make it easy on your brain, and you really hate that debt, but you also understand like I'm giving up and compounding here, and inflation is good for debt because it inflates my payments, pay an extra 250 a month and then invest the other 250.

Like, split it in two, right? Because there's no right or wrong reason here, or right or wrong answer here, right? It's just -- it's kind of what you want it to be. You probably -- this person knows the spreadsheet answer. They know what it is. They can't bring themselves to do it.

I don't know. Cut the baby in half. Cut the baby in half. What do you think? Yeah. No, I mean, this is one that we get a lot of questions about, you know, all the time because, yeah, some people -- this person even said it's their personality, they hate debt.

And so some people, you know, have that like Dave Ramsey type mentality that debt is evil and they have to get rid of it as soon as possible. And then other people are like, yeah, why would I pay it off any faster than I have to, you know, especially if the rate's low?

It seems so personal to most people. >> I also think my relationship with debt has changed where rates got so, so low that I think that changed the calculus for me, and especially with inflation being higher, that made me rethink the repayments. But again, for some people, they don't care about that spreadsheet answer.

It's just let it -- and again, if this person does pay it off four years early, they can immediately take that money and then start saving it then. So either way, this person is -- if they're paying extra, they're probably going to do fine either way because they're putting some extra money in.

>> What are your thoughts on -- I know this is a hot topic right now because of how long the payments have been suspended for federal student loans. Should people be paying during this entire time, or is that silly considering they're not accruing interest during this time? Do you have any thoughts on that?

>> The interest just kind of gets pushed to the end, right? It gets kind of pushed to the end, or -- I mean, I guess as a young person, you want to spend -- you're going to need that money more when you're young than when you're older. So yeah, I guess if the government is giving you a freebie here, it probably makes sense again, unless you really want to get rid of it.

But yeah, I see no problem with delaying it, especially if it helps you in other ways, especially with inflation being so high. >> Right. >> All right. Let's do another one. >> Okay. So up next -- and that question was from Colin. So up next we have, as the NASDAQ has had a rough start to 2022 and high multiple names have been crushed, and the street view seems to be that Cathie Wood stocks are essentially going to keep crashing with rates and inflation being what they are, I wanted to see if there was a contrarian take.

If one has a five-year or 10-year horizon, would these innovation technology plays not be the perfect companies to have in a portfolio? Should one not be slowly buying into these names as the prices keep dropping? >> All right. Let's put a little meat on the bones here. The NASDAQ composite is down like 20%, bear market basically.

But there's more than 4,700 stocks in this exchange. Over 60% of them are down 20% or more. More than 40% of them are down 40% or more. And almost a third of them are down 60% or worse. Like there is some serious carnage out there. There is someone who I've looked at before and does a lot of writing on this topic that talks about a lot of these innovation names.

So we're going to bring in a new guest here, Brian Faraldi from The Motley Fool, a new author. We're going to talk about his book in a little bit. Brian, I've seen you write about a lot of these companies, Tesla and Shopify and some of these other more innovative companies.

What do you think about the question here that our person is at least trying to have a long-term time horizon and not think I'm going to make all my money back in three months? A lot of these stocks, really well-known name brand stocks are down 60%, 70%, 80%. What are your thoughts here about like picking through the rubble?

>> Yeah, it's been trying times to say the least. I mean, if you rewind the clock to 2020, it was like Cathie Wood could do no wrong and over the last 18 months, it feels like she can do no right. And in truth, I like this question. The questioner is saying, shouldn't we be digging through these companies, digging through this carnage?

And if you have a long-term time horizon, wouldn't now be a good time to start easing into these companies? I can tell you that's what I've personally been doing with my capital. And if you're going to buy individual stocks or especially high-growth ones like the one the questioner is talking about here, you really need to have a multi-year time horizon in mind with each of these stocks.

If you look back at any of like the best performing stocks over any long period of time, 10 years, 20 years, 30 years, you get companies like Apple, like Amazon, like Netflix, et cetera. And without exception, every single one of them has gone through periods like this where they just fall hugely peak to trough.

And this actually happens on a regular basis. The tricky part about that is so do all the worst stocks over that long period of time. They also fall peak to trough huge. And it's really tricky in real time to figure out, well, is this just a temporary downturn or is something more long-term impaired?

How do you think about the psychology between you own a stock that's down 50% or 60%? You've held it because you're a buy and hold investor and you have to think, I'm either going to put more money in or I'm going to cut bait and put my money somewhere else versus buying a new stock where you see it's down 80% and you go, I'm going to take a flyer on this one.

How does the psychology of holding it change? Because at that stage, a lot of people have this mentality of I'm going to wait until it breaks even or I can't let go now because I'm selling, well, it's down. How do you think about that calculus? Yeah, that's a really hard question to answer.

And every company is unique in that respect. Personally, what I always try and do is I always go back to the most recent earnings report, the most recent conference call, and what I'm trying to ask myself here is, is this a broken stock? Is valuation the problem? Is sentiment the problem?

Or is this a broken business? Is there something fundamentally wrong with the business or my assumptions about the company moving forward? That chart you just showed is great because if you look at companies like, say, Shopify and Zoom, those businesses are still growing. They're still growing quite nicely. Teladoc is too.

I think Netflix is a bit of a different scenario because they reported a year-over-year decline in number of subscribers. And the real hard question you have to ask yourself right now is, is that a temporary thing? Is that something that they can work through? Or have they reached peak subscribers?

And is the growth here going to be low single digits moving forward or even potentially negative given the ability to switch back and forth between these things? This is why investing is hard. Lewis: Yeah. You talked about doing some homework on these companies, too. I think the hard part for a lot of people is, what is the right multiple for a growth stock?

Because some of these companies are still growing, but their multiples were so high that they couldn't possibly live up to the expectations. So how do you think through the fundamentals on one hand, but the expectations on the other hand, which rarely are in line with one another? Feroldi: Yeah.

And you just said it. I mean, there's no doubt that these companies were trading at very high multiples in 2020, and those multiples have been compressed. But even still today on some of these stocks, you still can't call them classically cheap. Like even Shopify, which is down 60-something percent, it still trades at a very high multiple to profits and free cash flow.

So these are absolutely the kind of questions you need to think through as an investor. And personally, when I'm investing in companies like this, not only am I trying to buy spaced out over different time periods, I'm also trying to invest during different cycles of the market. High growth stocks were in vogue 18 months ago.

Now nobody wants to own them. And the question here is worried that there could be further big drops ahead. That's entirely in the realm of possibility. But I think if you're going to own some of these companies, companies like this with a multi-year time horizon, you have to just stay focused on the business and just know that you're going to pay high valuation sometimes, low valuation sometimes, and that long term the business results are going to drive returns.

All right. Okay. Let's do another one about another company that's getting smoked lately. Okay. So up next we have, "I started investing in Square in 2019 when shares were about $65 a share. During the Corona crash, I was able to scoop shares around $40, which brought my cost basis way down.

I continued to buy the entire way up, and with the recent pullback, I'm now pretty much even, even though the stock has done well on the chart." By the way, I'm not exactly sure when this question came in, so it might have been a while. "How do you accumulate gains while dollar cost averaging?

And how do you measure performance? Money-weighted return or actual return? Let's also assume one's pay is going up each year, so as you average in, you're making larger purchases. If the market goes up more than it goes down, aren't we buying more shares when they're most expensive?" All right.

Let's put the chart of Square on here. By the way, I'm sick of all these tech companies changing their name. I went to look for this today on YCharts, and it's called Blocknow. Jack Dorsey said he's the blackhead. Stop changing your names, people. Keep it the same. It's too hard to understand.

All right. Anyway, Square is down, or Block, whatever it's called, well over 60%. This person says they've been dollar cost averaging in. Now, if you're a long-term holder, that's technically what you want. This is the Warren Buffett school, right? If a stock is getting crushed, you want to be buying when it's lower because everything is on sale.

And this is also an interesting question from the idea of, does dollar cost averaging into individual stocks actually make sense? Because if we're talking about an index fund or an ETF, you can be pretty sure it's not going to go to zero or go away, right? And so buying when it's going lower makes a lot of sense because you can be pretty sure that it's probably going to be doing much better in the years ahead.

The same is not true of individual stocks. You talk about all those worst-case stocks where we have some survivorship bias. They don't always come back. So what do you think about doing some sort of dollar cost averaging into an individual stock to start a position? And at what point do you get too worried to say, all right, I think I've made a terrible mistake here?

Yeah, that is, again, a really hard question. And I think you just brought up an excellent point. Dollar cost averaging into the S&P 500, the Nasdaq, even the Dow, that makes a whole lot of sense because over the long periods of time, those indices will go up because you're buying huge swaths of the economy, a huge number of growing profitable companies.

And while some of them will certainly fail, on the whole, you can be pretty sure that over long periods of time, the market will go up. Individual stock investing is an entirely different category. And to his point, he seemed to be getting in in 2019 at some pretty good prices.

He added on the way down. And then he was also adding at the highs last year. I think Square was up to like $289, was like the peak price, now down to $100. So net-net, his total position is about even. And that's what you need to look at. When I'm buying an individual company, I care about the total amount invested and the total amount that I have.

I don't care that some of my purchases were in the green and some of them were in the red. I want to know if the money I'm putting into this company, am I doing well over time? But it is worth noting that those purchases that were in the green, that's because he purchased them three plus years ago.

And you won't know if those purchases you made in 2021 are going to be in the green at any point until the business has a time to continue to execute. So if he stopped adding today, the time to really judge is this company doing well or has it done well is in 2023, 2024, even 2025.

But to your point, but to your point, Ben, Square the business is far more dynamic, right? The fundamentals of Square are changing far, far faster than they are at the S&P 500. And this is why you really have to focus on the fundamental growth drivers of the business. If you're happy with how Block is performing in the long-term trajectory of the business, then yes, I think dollar costing averaging in can be a viable strategy.

However, that could turn on a dime if Block's business headed south. So far, though, the company continues to execute, although it is worth noting that their Bitcoin, their involvement with Bitcoin, have made their financials pretty tricky to actually dig through, like their revenue is actually no longer a good number to judge the company by.

All right. Brian, I refuse to call it Block. I'm still calling it Square, just like Facebook has never met me, Google is not Alphabet. This question brings up another point about you start earning more income over the years. And do you keep putting the same amount of money in something?

I think that's actually a good time, if you start earning more, to maybe use that extra cash to rebalance in certain places, or potentially diversify even further if you start making more money. So I think that as you change and make more money, it's obviously a good problem to have.

But that is an interesting thing to think about in terms of dollar cost averaging and how that changes it. So I think we have one more that's kind of similar. So let's do the next question, Duncan. Okay. So up next. Do you have any advice for someone who has a large sum of money to invest right now?

So this makes me think back to Nick Majulie, you know, having Nick on the show. It's interesting to think about investing a large sum right now. Because especially when markets are going down, people panic a little easier. And everyone thinks that there's this Murphy's Law sort of thing where anything that can go wrong will go wrong, especially when I'm going to do this, right?

So if I put a big slug of money to work right now, it's going to fall further and stocks are going to fall another 20%, and I'm going to totally mistime it. So this is the psychological aspect. Even though, whatever, three out of every four years in a stock market, you're going to be positive, right?

Because 75% of the time, historically, you have the probability of seeing a gain. But people don't think that way when stocks are going down. So how do you think about this, Brian, in terms of deploying cash right now if you have some? Yeah. To your point, this is more of a psychological question than it is a mathematical question.

I mean, the math that I've always seen on questions like this is, it always makes sense to put all your money in right away. But that is psychologically hard to do. If you do that, and then, to your point, the stock market continues to fall another 10 to 20%, of course, you're going to feel stupid for doing so.

So the way I would approach a problem like this is, personally, I wouldn't want to put it all in at once, even though, mathematically, I know that that's the right thing to do. So a simple solution is just to create a really simple table, a schedule for yourself, and to invest that money in a fixed schedule, say, over the next six months or a year or whatever it is.

And if you want to take that strategy to the next level, one way that you can take advantage of market declines is to create that schedule for yourself and then also make a simple rule, like, OK, if the market falls x percent, say, 5%, I'm going to accelerate my next monthly investment early, and that's going to be the new starting date.

And you could keep doing that again and again and again, so you're buying at lower and lower prices. Or if you're lucky enough to start investing and the market just stays flat or going up, just stick to the schedule. So that's one way that you can kind of take that money and put it in at better and better prices over time.

But I think sticking to a schedule and just thinking through how you want to invest that ahead of time will really pay dividends down the road. I agree that you have to have a plan that's almost written out and follow it to a T and have some if-then rules.

But the thing is, you can show people all the data you want about how putting a lump sum in makes more sense. Some people would just rather have that dollar cost average. That would make them feel better about putting it to work just because they don't know, and that uncertainty really nods at people.

And they can say, "The data's fine, but this is me here and this is my one time to do this." That kind of reminds me of on the recent The Compound Friends where Josh was talking about his DCA on steroids strategy, where he's looking at the VIX and adding more as the market goes down and that kind of thing, doubling his contribution.

You remember Nick and he were about to fight over it. Yeah. Sorry, Josh. I was on Nick's side here because that's harder to do. There was a value averaging strategy where you do that, where you're putting more money in when things are down and putting less in when things are up.

I think, to Brian's point, picking a set amount and just doing it and then letting the market dictate that for you. So when stocks are going up, you're buying fewer shares. Stocks are going down, you're buying more shares. That's way easier to me. I think the more complex you make this, the harder it is to stick with it.

So I think the simpler the better is usually my way to think about this. This reminds me of Colin's question, by the way. It's like, "What do I do? Do I drop that? Do I invest now?" The answer is merely, this is more your personal preferences than anything else.

There's the mathematical answer and then there's the emotional answer. Which one you choose is totally depending on you. Yeah. And the thing is, the biggest thing is you do something you can stick with. You could pick the perfect strategy in the world and if you can't stick with it, it's basically going to be a failing strategy.

It's not going to work. So you have to just pick something. Even if it's suboptimal for a spreadsheet, if you can see it through, that's the one that makes sense. All right. Last question. Okay. This is a nice short and sweet one. Why does the stock market go up over the long term?

All right. And if you could, just keep this brief. Just explain. Yeah. Sure. This was a plant. So this is, Brian has a new book out, Why Does the Stock Market Go Up? Everything you should have been taught about investing in school but weren't. It's a great guide for beginners, intermediate people, even people like us that have been doing this for a while.

So I'm curious how you thought through this because there are a lot of people who think that the stock market is just this thing that's rigged against them by wealthy people in the Illuminati or they think that it's a casino. And so I think there's a lot of people out there who don't really try to take a step back and think like, "Wait.

Why does the stock market go up over time and why does it get high returns than most other financial assets?" So how did you approach this question? Yeah. Or I asked that question on Twitter and the people on Twitter, a ton of answers I got was the Fed. Like that was the only answer was the Federal Reserve means they go up.

And to be fair, this is a question that is actually, this perplexed me personally for years and if you look at the chart of the S&P 500 or Dow over long periods of time, it's as clear as day what the long-term trend is. It's like up and to the right.

But what I think is such a mystery is people that are looking at the stock market, what is the only data or the data that gets 99% of the headlines? Price. Just price. That's the only information that we have. We never see the thing behind the data that's actually driving stock price returns over long periods of time.

Yeah. The news at 5 o'clock never says the S&P 500 paid out $100 million in dividends this quarter or something. No one cares about that. Exactly. And to me, before I really understood why the market went up, I really wanted to answer why does an individual stock go up?

I really think because those are the building blocks of the indices, right? So just as a simple example, I had heard for years, Starbucks, great investment, right? It'd been a great investment. I was like, "Well, I don't understand why. There's a Starbucks that I go to regularly. Why has it been a great investment?" But if you look back, Starbucks came public in 1992 at a split adjusted price of $0.35 per share.

Today, it's worth $76 per share. Why? Why did the company go up so much in value? Well, in 1992, the company had 154 stores and generated $92 million in revenue. Last year, they had 34,000 stores and they generated $29 billion in revenue. With Starbucks, the business became far more profitable and far bigger.

Stock market works exactly the same way. All of the components in the S&P 500 and in the Dow, they're working to increase their revenue, increase their profits. In turn, their businesses as a group become more valuable over time. And that is a factor that drives the stock market higher over time.

But that is something that is not obvious. That is something that I've never seen taught in schools or anything like that. So I wrote the book to just make the very basic connection between what the business community's profits does and what the stocks does and kind of give people a framework for thinking about why the market goes up over time.

One of my favorite stats that I've found, I think over the last 100 years, the dividends paid on S&P 500 stocks has gone up like 5% a year. So that's actually cash coming out of the business, that's investor shares of profits. And you're right, people don't really think about the fundamentals of that.

They think, "I kind of like this brand and this celebrity person seems to like this company, so I'm going to invest in it." And you're right, like there are these fundamentals and obviously in the short term, those fundamentals of the stock market and those companies can get way out of whack with one another.

We've seen that happen. 2020 was an example to the upside, 2022 might be an example to the downside. It's never going to match. But over the long term, like it all sort of seems to work itself out and shake out in your favor where I think investing in the stock market is your way to take part in innovation from businesses and profits over time and the growth in that.

And that's what it is. You're investing in global corporations that earn profits and are motivated to continue to grow those profits and make themselves bigger and more profitable over time. But again, that fact is hidden from view because everything is focused on just price. That's the only information that you get is just price.

And if you're only looking at price and you have no idea it's attached to anything else, of course, you're going to come away and say it's rigged or it's just a big gambling machine because you don't understand what you're actually buying. All right. I think I've shared this before, but when my wife and I were going to get married, we had like a financial talk because I'm a huge nerd.

And I came prepared and I told her, "Listen, 100% of our retirement savings are going into the stock market." And she said, "That seems crazy to me. That seems dangerous. Aren't we going to lose our money?" And she kind of had some of these myths perpetuated by TV shows and movies and stuff that like the stock market is a place you go to have people take advantage of you and obviously that can happen.

But it's also this place like that you can, that real people can play in the same marketplace as the professionals, right, and invest alongside of them and invest in these huge corporations and buy a piece of them. And that to me is like one of the most wonderful things about it.

So I really get upset when people try to scare people out of the market. Like I think what we should be doing is getting more people involved. And I think that's what you're trying to do with the book, right? Very, very much so. And to your point, what are the most popular movies about investing that have ever existed?

It's like the Wolf of Wall Street or Wall Street or Margin Call. That is how a lot of people get their perception of the market is through movies that are just Wall Street preying on everyday people. So it totally makes sense why so many people have that perception. I think it's also taken for granted like you're saying just what a tool this is for the average person really in the scheme of things to actually build and accrue wealth that, yeah, there used to be this mentality of the stock market's just for the people who already have a bunch of money.

And, you know, especially in the commission-free world now, it's like, no, it's everyone's like tool that everyone can use and even the little guy can. And I think even the information that we have accessible to now, right, we can listen to conference calls. We can get financial data. We can get SEC filings like instantaneously.

All of that was incredibly hard just like 30 years ago. Right. Yeah. And I think another, what's going on in the market right now, like why does the stock market go up? Because sometimes it goes down too. Like that's part of it too. There's risk involved. And so you wouldn't earn higher returns if there wasn't some risk involved.

So I think that's something that people have to realize too that this year is not like some sort of watershed moment where the stock market is reminding people that like it's not that easy. Like that's part of it. But also the stock market has to go down so it can go up over time.

That's part of it too. And the funny thing about that is I think if you ask somebody why does the stock market go down, that's at least intuitive, right? Inflation right now. Rates are going up. There's a war. It makes sense why the market is going down, right? 2008, people are losing their houses.

Market down. 2000, dot-com crash. Market down. Totally makes sense. Never made sense to me. Well, why does it come back up? Why does that happen? That never made sense to me. Yeah. Because it's a process and not an event. So again, check out Brian's new book, Why Does the Stock Market Go Up?

Somewhere you get your books. Anything else to plug, Brian? That's it. Thank you so much. You get the floor. All right. Thanks for coming on. I have something to plug. What's up, Duncan? Everyone should go read your piece, It's Okay to be Confused, right now. Okay. Yeah, I put that on yesterday.

Because that's on a lot of the same kind of stuff. I think a lot of the cross-currents in the economy and the markets are very confusing. And I think it's okay to admit that sometimes that you just don't know what's going to happen and what's shaking out. I do think this is one of the more interesting periods that we've had, especially since the pandemic.

There's all this stuff going on. It's kind of fun. It's scary. It's scary right now. Check out Brian. Follow Brian on Twitter. He's always got some great stuff to post. Charts, thoughts, quotes. Remember, idontshop.com for your compound merch needs. Duncan looking good in the racing hat and jacket today, I've got to say.

A lot of people in chat blowing it up. Askthecompoundshow@gmail.com if you want to ask us another question. Our questions are overflowing right now. We're going to have to do another lightning round. But no ticker this time, Duncan. Okay. Okay. We'll see everyone next week. Sounds good. Thanks, everyone. Thanks for having me, guys.

I'll see you next time. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye.