(beeping) - Welcome back to Ask the Compound. We're joined today by Gandalf. Still wearing his California hat, couldn't get out of the California mood. Wanted to thank everyone for coming out to Future Proof. We even had a handful of people come up to us and say, "Hey, you answered my question on the show before." - Yeah, that was cool.

- Everyone was out in full force. And we're all kind of just getting home, people playing catch-up, so it's just me and Duncan today. No guests. I picked five questions. Remember, askthecompoundshow@gmail.com is our email here. - To me, I feel like I'm half a person today because half my voice is still gone.

- Okay. Duncan lost his voice literally the first day of the event. - Yeah. - So it didn't last long. - We talked to a lot of people, though. That's what's always so fun about Future Proof. - It was, yeah. - Got to meet so many cool people, talk with a lot of people.

- It was great. Yeah. - Great time. - People who listen to and watch our shows, a ton of people, so yeah, it was a lot of fun. Let's do it. - Okay, so up first today, we have a question. I'm gonna not save a name because it's a little specific.

But they write in and say, "I recently started looking "at my mother-in-law's retirement account. "She's been with an advisor since late 2010 "and has a 2.61% annual return. "According to their chart, the S&P 500 "had a 12.95% annual return during the same period. "I know she shouldn't expect a return equal to the S&P "since she has a 60/40 portfolio, "but it's frustrating how much she's underperformed.

"She has a new advisor at," and it's the same place, but redacted, "that has her in a few mutual funds "but has 60% of her equity exposure in seven stocks "that he changes two to four times a year. "I spoke with him and he's insistent "on keeping seven stocks to 'juice' her returns.

"Should I cut her losses and move her IRA "to an account where she can be in a target date fund "or a Bogle three-fund portfolio? "Is there any reason she should stay "with her current advisor? "Am I crazy for thinking that 60% of your equity exposure "in seven stocks is way too risky for most people?" And maybe you can also hit on what the Bogle three-fund portfolio is.

I actually don't even know what that is. - I got it, I got it, I got you covered. I'm usually a fan of ignoring short-term performance with the understanding that long-term returns are the only ones that matter, but in this case, I think we've got a long enough sample size.

Reminded me of an old neighbor I once had. This guy was out in his garden all the time. My wife and I would always see him working in the backyard, in the garden, and we couldn't really figure out what he was doing back there, though. I'm hoping he wasn't burying bits and pieces of body because his landscaping always looked like crap.

He's out there for hours and hours, every weekend, every night, he's out in his garden doing something. But there would always be tons of huge weeds in the mulch and in the rocks. There's these spotty grass areas, overflowing flower beds. And maybe he just wanted to be outside, that's fine, but I always said to my wife, it would be nice if he was actually making it look better while he's out there, right?

It would be nice if he's putting in the hard work and actually seeing some results. And it sounds to me like this financial advisor is kind of like this guy's mother-in-law's, the financial advisor is kind of like my old neighbor. I guess if we want to take this analogy a step further and make a dad joke, we could say that he's been leaving a lot of weeds in his garden, too, based on the stocks.

I mean, seven stocks is pretty crazy. The juicier returns thing, that's like doubling down on a mistake. Like you made one mistake and for whatever reason they underperformed and now trying to juice the returns to make up for that shortfall, that's just like a recipe for disaster. So I think that's just compounding things.

My rule number one for financial advisors is do no harm, especially to people who have already built up enough money and saved. This advisor is not following that rule. So the Vanguard three fund portfolio is just total stock market US fund, total international stock market index fund, and total bond market index fund, right?

So John, do a chart on here. I looked at the Vanguard three fund portfolio. It's like 35% US stocks, 25% international stocks, and 40% bonds for a 60/40 portfolio. Since October, 2010, it's more than doubled and we're talking about like a 6.1% annual return. So versus a 2.6% for the mother-in-law.

So John, put the next one on. Let's say your mother-in-law had $500,000, right? I put this into the wife charts machine, starting off with the $500,000 rebalance on an annual basis. And we're talking a little less than $1.1 million if she would have had her money in the Vanguard portfolio.

Using that 2.6% annual return you gave me would be more like $740,000. So that's a huge shortfall, right? I'm guessing a target date fund would be pretty similar to the Vanguard three fund portfolio, maybe a little more diversification, plus or minus, but pretty close. I'm not saying that Vanguard is always the answer and just put it in a simple portfolio.

But I would also ask the mother-in-law, what else are you getting out of this relationship, right? If the advisor is only helping her with investment management and picking stocks, they're basically a stockbroker when there are a ton of other ways they could add value. So I think there's a lot that goes into an advisor besides just portfolio management, financial planning and tax planning, insurance planning, state planning, withdrawal strategies, budgeting, helping people make better decisions, all this stuff.

- That's something that's wild to me about the finance industry is that it seems like almost anyone can just call themselves an advisor. - Yes. - Different people have different understandings of what that even means. - And unfortunately for some people who just don't know any better, I'm guessing the advisor has been making up excuses along the way or painting a different narrative, whatever they're doing.

But I also think that you have to approach this conversation very delicately because this was an expensive mistake. It was during a raging bull market and the returns have been awful. People don't like talking about their financial mistakes. And I think it's one of the reasons why there's so much inertia with decisions like this and people just kind of keep the status quo because they don't want to think, "Well, if I already made mistakes, "what if I change and it's even worse?" So there's a good chance that the mother-in-law didn't know how bad things were.

So don't make her feel bad here, right? Help her learn from the mistake, work with her to help find someone who can right the ship, diversify the portfolio more. Seven stocks is ridiculous. Warren Buffett holds way more than that and he has way more diversity in his portfolio. You want to find someone who's going to manage risk a little more prudently.

I would just suggest you help her find someone who can create a comprehensive plan, set realistic expectations, and then maybe be more transparent with how they're managing the money. So the idea is that you can outsource your money management to someone else if you want, but you have to understand what's going on in the portfolio and why, and I'm guessing this place didn't do a very good job of setting those expectations up front.

I would get her out of there as quickly as possible. Don't stop it, go. - Yeah, I mean, and if he's really looking to juice the portfolio, then that advisor should be trading options and stuff in there, right? - Zero day? Yeah, I mean, that's just, I mean, talk about a huge rip.

- I just love that term. He used it as a quote, so I'm guessing the advisor literally said, "Juice the returns." - And obviously, these advisors don't want to see the money go out the door, so they're going to do everything in their power to talk you into it.

I would get her out of it immediately and find someone else who can help. - Yeah. I mean, this one came in. You feel horrible for these situations, right? Because my whole thing is always, you get one investing life cycle and time horizon and timeline. You don't get to choose when it starts, when it ends.

If you miss out on a 10, 12-year period of returns, that is really difficult to make up. - And playing devil's advocate or being like giving the benefit of the doubt, what would you say to this advisor if they're like watching this show? - Find a new line of work?

(laughs) I mean, that's just, it's a horrible way to manage risk. It sounds like, I mean, it's gambling. It's speculating. I had a friend who, we would play blackjack, and every time he'd lose, he'd go, "I'm just going to double my bet. "That way I can't lose," right? Which works until it doesn't, obviously.

The whole doubling down and trying to make up for past mistakes, the market's not going to give you those returns back just because you want them. - Yeah, makes sense. - Let's do another one. - Cool, thanks for the question. Okay, up next we have a question from Mitch.

Love the show, finally have something worth asking about. I'm 26, live in Southwest Michigan, single, no kids, income $180,000 to $250,000 a year, depending on bonus, currently renting as I plan to move closer to home in no less than two years from now. I have always been a good saver and made some decent stock picks a few years ago.

My $450,000 brokerage account is now 100% invested in the S&P 500 with a slightly lower cost basis than today's price. However, I'm contemplating purchasing a vacation home up North for around $350,000 and paying cash for it, leaving about $100,000 in retirement, but still saving 70 plus percent of my take home.

Have I gone completely crazy or is this feasible? And as a Michigander, when he says up North, like does he mean up in Northern Michigan or does he mean like Canada? - I'm guessing Northern, that we say up North for Northern Michigan here. So yeah, this is our first not to brag of the week, both in terms of the affordability of housing in Northern Michigan, I guess, and the savings rate.

And so good on you, Duncan, you've heard the story about the fishermen and the businessmen in Florida before. Is this, have you heard this one? - Doesn't ring a bell. - All right, this is kind of an old one, but there's a fisherman lying on the beach somewhere and a businessman walks up to him and he says, "You're not gonna catch many fish that way." He said, "You should be working.

"What are you lying on the beach for?" And the fisherman said, "Well, what good is that gonna do me? "I have a fishing charter already. "I take some people out, but I don't work that much." He said, "Well, if you start this business "and catch a lot of fish, you can get bigger nets "and catch more fish, then you can get a fleet of boats "and catch even more fish." And the guy said, "Well, what's the point of that?" And he said, "Well, once you buy a bigger boat "and you have a bigger fleet, "you can start a whole business around it.

"You can make tons of money." And he said, "Well, what's the point of that?" He said, "Well, you'll make so much money someday "that you'll be able to lie on the beach "and do anything you want." And the guy said, "Well, I'm doing that already. "What's the point?" Right?

And so I think if you can get to the point where you've saved enough and you can enjoy the early fruits of your labor and a semi-retirement while you're young and still working, and you've already saved enough, why not do this, right? I don't think many people have ever regretted buying a vacation home, if they can afford it, right?

There obviously are other costs and stuff that come with it, but if this single person, no responsibilities, no mortgage yet, and you can do this in cash and forego the whole 7% mortgage thing, that sounds wonderful to me. I'd be curious to know where he's buying, but especially if you can easily backfill those savings as a young person, it sounds to me like they're in a pretty good place.

I mean, the most important question most people want answered when they're dealing with a financial advisor, from my perspective, is am I gonna be okay, right? If I spend this money on this house or on this car, am I gonna be okay? If this is my asset allocation, am I going to be okay?

If I take this new job or retire early or take Social Security here, am I gonna be okay? That's kind of what people want to know. That's what it sounds like he's asking here. And based on past history of savings and savings rate and income and all these things, it sounds to me like you're gonna be okay.

And I don't think this is the kind of thing where you're gonna look back in 20 years after all the memories you've created in this vacation home in one of the most beautiful parts of the world, especially in the summer, maybe in the winter too, you can become a skier, you're probably gonna be okay.

I mean, so I say, if you have the ability to enjoy some of your money now, rather than waiting to buy that vacation home when you're 65, I'd say go for it. - Yeah, I saw quite a bit of Michigan represented at Future Proof. - Not bad, a lot of Midwestern.

- Several other, yeah, several other people. - Yeah, so yeah, good on you. If you can do this, enjoy it. - Yeah, sounds good to me. - All right, let's do another one. - All right, up next, we have a question from Greg. Is the period of time when you have kids one of the most financially challenging times in your life?

We have a two and four-year-old. It has seemed as though these early years in their lives have been the most financially challenging as there are constant expenses. They need care every waking hour by somebody. They drain me and my wife's energy, which makes work harder, not to mention excelling to get any kind of promotion.

And of course, we're always going to the doctor with them, paying babysitters, childcare, activities, buying more food, et cetera. Don't get me wrong here, I absolutely love my kids, but curious to hear your take. Also, is it okay to not save or make as much during these couple of years in order to pay for more childcare to keep yourself sane?

I heard around 10 years old, they don't want anything to do with me, or they won't want anything to do with me, so maybe I can really get back to it then. - I'm guessing young people just out of college might quibble with this one. It's certainly up there in terms of like the most challenging financial years.

Young people who have student loans and paying high rent and all these things, but kids are very expensive. I've equated paying to put three kids through daycare as putting them through college without having 18 years to plan for it. It's very expensive, so the only silver lining I can think of for my having kids is just not having as much time or money to spend on yourself.

But yeah, the childcare thing is very expensive. Either you have to pay a lot for it, or someone has to step back in terms of one of the spouses has to step back and maybe not work as much, or both of you just don't have as much time or energy to, as you said, put your foot forward in terms of your job.

I actually did talk to someone this week about Future Proof, about kids, and people were asking me, one of the things was, is it weird that people know all about you and your kids because you're on a podcast and stuff all the time? I said, whatever. But my kids are, twins are six, and my oldest daughter is nine, and I was talking to a guy, and he said, "My kids are 17 and 14 now." And he said, "It is kind of weird "because they get to the teenage years," and everyone says this, right?

Your kids don't want anything to do with you anymore. They just want to hang with their friends, or they want to be in the room, or you just don't see them as much. You don't have to be, you know, helicoptering around them as much. And he said, "It's opened up a whole new life for me again.

"I can go hiking in the morning. "I can go out to get drinks with my friends more. "I can go out to dinner." Because the kids are always doing their own sort of social thing. So he did say it kind of opens up. And the thing is, people are saying, is just savor this time with your kids 'cause at a certain point, it's gonna go away, which I do take to heart.

So I think you can look at your finances in the same way. You just might have to supercharge your savings rate after the kids are off your payroll. Now, that might take some more time. I don't know if all of a sudden at age 10 or in their teenagers, they're gonna need less money.

In some ways, it could be just more money, actually. But I have heard a lot of people say, like, listen, that's why it's so beneficial to have that catch-up savings for your IRA and 401(k) that the government allows you in your 50s is because maybe that's the time that you have to do it, is when the kids are out of the house and they're off their payroll, and they're through college, or whatever they're doing with their life, and they're out of the house, then that's when you can supercharge your life a little bit.

The other thing is just, I think time management is more important than ever when you have kids because you don't wanna miss anything, but you also wanna keep this part of your life going. So some stuff has to fall by the wayside, right? I think Ryan Holiday, if you've ever read any of his books, he says there's three things that you can have.

You can have family, you can have work, and you can have the scene. And the scene is what he calls going out and partying. He's like, pick two because you can't have all three. So you're gonna have to just learn to prioritize a little bit better, and maybe some of the stuff you used to do in your life you're not gonna be able to do anymore if you want to have the work and family life work out for you.

- So I don't have kids, but it seems to me like you could save a little money by picking which sport you funnel them into. Soccer has to be a lot cheaper than lacrosse or football, right? It would seem like it at least. - Yeah, or hockey because of all the...

The great thing about soccer, which I was never a soccer player growing up, I always did other stuff is-- - I was big into soccer. - You know that the game's gonna start here and it's gonna end here. There's no timeouts. It's just there's a halftime and it's just free.

That's one of the things I love about it. Unfortunately, my son is getting into baseball, which means like double headers in three-hour games. And so I'm trying to steer him clear of that, but it's not working. But yeah, I think it's okay to... I think you just have to make sure you're planning ahead for other points of your life when you're gonna be able to backfill a little bit and supercharge it when you can prioritize that.

And if sometimes a family comes first, then so be it. You're gonna have to just give up on other parts of your life. - Yeah, that makes sense. - But I totally get it. This is the stuff lots of parents talk about. You know, I'm tired all the time of running around.

I'm dealing with... It's certainly a lot. I think you just have to understand that, yeah, sure, there's gonna be times where you wish you could save more, but I mean, the kids kind of come first for a lot of people. - Yeah, makes sense. At some point, you can put 'em to work for you, you know, once they're old enough.

Get the Roth or tax advantage account you can get if your kid works for you. - I just thought you meant put 'em to work on YouTube and have them work for you. - That was weird too. - All right. - Okay, up next, we have a question from Bill.

I'm 28 and have recently become very interested in sports gambling and trying to beat the books. This is a great question, I like this. This year, I've made about $5,000 from gambling, which is about double my starting bankroll. Much of that is attributable to new player promos that I cannot do again, and some luck.

Long shot tennis futures, whatever that means. However, I do think that if I put in the time, I could be profitable and outperform traditional equity investments. Am I an idiot if I move money out of my traditional investments into sports books? I view it as a business rather than gambling, but that may just be the degenerate gambler in me talking.

- All right, many of the questions that we get exist in a state of gray. Like, there's few black or white answers, and it's like, you could do this and you'd be okay, or you could do this and you'd be okay. Not this question. Do not do this, do not even think about doing this.

No, sports gambling is a form of entertainment. It is not a business, and yes, you are a degenerate gambler if you're thinking about doing this. And he even admitted that he hit on some long shot tennis futures, and he had some sign up promos, and the people who actually do this for a living, like, they understand how Vegas sets the lines, right?

They understand that, like, the tendencies of teams to perform based on certain circumstances, like, after a back-to-back game on the road, this team typically will underperform the spread by one and a half points or whatever. It's, the people who do, and there's quantitative models, if you, I mean, the, trust me, Vegas, the house will always win in this scenario, and the assumption that, well, I'm gonna hit a parlay once every three months, and that's gonna bankroll me for the rest of the year, no.

If you wanna put some money into this and have this be your entertainment budget, I am fine with that, but you wanna take your money out of your retirement accounts, your investment accounts for this, I say no. This is way better business for FanDuel or DraftKings. You know, when you hear a podcast advertised for FanDuel or DraftKings, that the fine print that they have to read afterwards is always 10 times longer than the actual ad itself, and they read it, like, a million miles an hour?

- Yeah. - There's a reason for that. This, it's, no one comes and cleans the house with that. The people who do this for a living have way more money and way more knowledge, and they have systems in place, and they're not hitting long shots and player promos and getting lucky.

No, do not do this with your investment account under no circumstances. - And for the record, you're not, like, against sports gambling or anything. You like-- - Oh, it's fun. - You like doing this for fun and stuff, but-- - Yeah, and I love going into a casino. I haven't been in a while, but I'll go play blackjack, but the money that I take out to play blackjack, I assume it's going to be gone by the end of the night.

If I win money, that's a benefit, it's a bonus, but if I lose any money, I look at that as, like, paying money to go to a concert. It's like, that money is a form of consumption. That is entertainment that is not investing, because there's no way that you understand how this stuff works as well as the professionals do, and even them, it's very difficult.

- Yeah, and I've kind of done the opposite of this, honestly. I've lost, like, every penny that I've ever done on FanDuel, that kind of thing, so I was just like, I'm just gonna put it in the market and just, like, buy penny stocks and have fun that way.

To me, that's more fun than gambling on sports, personally. - That way, you don't have the double whammy of your team losing and your bets losing, right? - Right, exactly, yeah. - Although, I've done the emotional hedge. I, like, I bet against my team sometimes, but that feels gross, too, you know?

Like, I know if my team loses, at least I'm gonna-- I can't do that either, so that feels kind of gross as well, but I'd kind of shy away from this one and lean towards, yes, you're a degenerate gambler. Keep, put some money in there, but under the assumption that you're not going to win in the long run.

- Yeah, have fun, but don't mess up your retirement, probably. - No. - Yeah. Okay. - And guess what? The worst thing that can happen is you hit another long shot and you go, oh, I'm good at this. I can do this, right? The people who hit the parlays are so lucky.

Sorry, you're not good at it, you're lucky. - That's why I lost all my money on Marist, because I just love doing the insane parlays. - Yes. Bet on the Super Bowl or something, occasionally, but don't make it your retirement plan. - Good advice. Okay, so last but not least, we have a question from Mike.

I'm 62 and planning to retire at 65. My current retirement portfolio is about 55%, or $370,000 in equities, primarily S&P 500 index funds, and the remaining 45% is in long-term CDs with a remaining seven-year term at 4.25%. I've never owned any bonds and consider the CDs the safe part of my portfolio.

This worked out well during the last downturn when both stocks and bonds took a hit. What are your thoughts about my allocation? - Seven-year CDs at 425 is pretty darn good, actually. My whole take for the last five years or so has been that you have to be way more thoughtful about fixed income asset allocations than you did in the past.

In the '80s and '90s and 2000s, it was pretty easy 'cause rates were so high. Pretty much anything you put your money into was fine. There are pros and cons to using CDs. I'm sure this was a great strategy for a rising rate environment 'cause those CD rates are locked in.

So the pros is you don't have to worry about that interest rate risk. If you have current CDs and rates rise, it doesn't matter. You don't lose principal or price. You're just missing out on opportunity costs of those higher rates. But if you had these, whatever, foreign change rates locked in, that's pretty darn good.

The con is you have to worry about reinvestment risk. So I don't know if this is a laddered portfolio, but this money is all in one CD. So that's, laddering it can actually help a little bit. So you have one, two, three, four, five year CDs or something, and as they come up, that lowers your reinvestment risk a little bit.

But it's true for most fixed income investments that you have some reinvestment risk, but it's certainly true here, especially if you lock in higher rates and they're lower when you go to re-up. Another pro is that you know exactly what you're getting. The yield and maturity length are set in advance so you know that specific amount of money that you put in.

You're getting the principal back plus whatever income at maturity. So from a planning perspective, CDs are pretty good, right? Bonds, there's some uncertainty involved, but CDs, that's pretty good. The con is that they're liquid, right? So if you're thinking from a planning perspective, you wanna keep this 60/40 or 65/35 or whatever it is, rebalancing them is kind of difficult.

You can get out of a CD early, but typically it comes with an early termination penalty, kind of like those savings I bonds we talked about where they'll just take some of the income so you won't get the same rate if you wanted to rebalance or you had a liquidity event and you didn't wanna sell stocks, but you wanted to sell CDs.

So there are pros and cons here, but I think if you know that stuff going in and you wanna use CDs, I looked today, there's still six and 12 month and 18 month CDs that are close to 5%. I think going out a little further, you're not gonna find those high rates anymore.

But as long as you understand what you're going into, know what you're getting into, I don't think it's a terrible idea. I think the idea of maybe spreading your bets a little bit between CDs and T-bills and then some sort of intermediate term bonds or whatever is not a bad idea to give yourself some more diversification there.

But if you know the pros and cons going in, CDs aren't a bad deal. - Are there funds that do this laddering for you or do you have to manually do this? - No, there's some bond fund ladder. I guess a CD ladder would be kind of nice if a bank would just do it for you, but yeah, so that's the other part is that it's probably more of a manual process to do it.

And it's easier now than when I bought my first CD and I had to go down to the bank to do it and write them a check. You can just do it online now at some of these places. But yeah, I mean, it's not a horrible strategy. Again, I'm sure he felt great having this strategy when interest rates were rising and bonds were getting killed.

- Yeah. - But yeah, it's not the worst strategy. It was for sure. - Cool. - We'll take it. - Makes sense. - We got some good questions today. - Yeah, really good ones. - Rachel said she liked the range. I liked the range today too. It was good.

- We have diversification of audience, don't we? - We do. We definitely do. - I like it. Some investing, some personal finance, some housing. - And if you're here because you clicked on the thumbnail because of this stupid hat, just know I'll never wear this again, but thanks for watching.

- Did you buy that hat in California? - Yeah, at the hotel the first day we arrived. I saw it and was like, "I'm not getting sunburned this year." And I put it on, wore it the whole time. - Good idea. I didn't get a sunburn either. I had a nice tan going in.

Remember, you can email us, askthecompoundshow@gmail.com. I think we send a sticker to everyone who asks a question. Is that right? Or something? - It's true. - Yeah. - Compound sticker. - Yeah. Feel free to leave us a comment on YouTube. Make sure to subscribe to the Compound channel. Leave us a review on our podcast.

And what else? That's all I got. We'll see you next week. - That's it. See you, everyone. - Thanks, everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) you