Welcome back to Ask the Compound. A show where you, the audience, provide the questions, we try to provide the answers. I gotta give the audience credit, I laughed at a few of the questions this week. People are being creative, funny. Yeah, we got a good crowd. Today's show is sponsored by Fabric by Gerber Life.

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Okay. Let's do some questions. Okay. Up first today we have a question from-- That's why you drink oat milk because it keeps you healthier and keeps you away from the doctor. I mean, it's probably not because of that necessarily, but, yeah, I definitely try to stay out of the doctor.

Okay. So up first today we have a question from Pete. Ben, I love reading your work. Stocks, bonds, and cash are categories to compare, but it hit me. As a retired boomer, what about home ownership as a comparison? Stay warm. I'm trying to stay warm. It's so cold here.

I think one of the things in middle age is that I've learned to appreciate the seasons more, though. Every year around February or March when there's still snow in Michigan, I complain, but we had our first big snowfall the past week or so, like 24 inches. It was, like, 6 degrees yesterday.

It's pretty. I kind of like it. Ask me again in a month and I'll hate it. You said 6 degrees? 6, yes. It was, like, -10 wind chill. Very cold. Kids like it. They have a lot of snow days. All right. This question is in response to my recent piece on historical returns for stocks, bonds, and cash.

Aswath Damodaran has this website for NYU where he updates every year the annual returns for each. John, throw up my chart here. I update this one every year. Average returns, best return, worst return for stocks, bonds, and cash. There are typically a fair number of requests for other asset classes whenever I post this kind of data, and as luck would have it, Damodaran actually added housing and gold this year to the mix.

So I now have from 1928 to 1923 annual returns for stocks, bonds, cash, housing, and gold. Here they are. Stocks are around 10% per year. Bonds are closer to 5. Cash is 3.3%. Real estate, which is the Case-Shiller Index. John, you can do a chart off. Case-Shiller Index is 4.2% per year.

Gold is 4.9%, and then inflation of 3% per year. So you can do the real returns on your own. I don't have to do the calculations for you. So real estate is kind of between a little bit less than gold and fixed income. Not the greatest. John, do the next chart on.

I broke this down by decade because I find this stuff interesting. So I did all these asset classes again. Stocks, bonds, cash, real estate, gold, and inflation. The one interesting thing about real estate, the only down decade it's ever had was the 1930s during the Great Depression era. Every other decade has been positive, while these other categories have all had negative.

The 2020s is the aberration, right? So we've already had 10.2% annualized returns for housing. We've never had an annualized return that high before. The highest return we've ever had was the '70s when it was up 8.7% per year, but there was also 7.5% inflation during that decade. So the total return of close to 50% that we've seen in nationwide housing prices this decade is already higher than what we saw for the whole decade of the '90s, the 2000s, and the 2010s.

So we've pulled forward a lot of gains. So look at these historical returns and you think, well, wait a minute. The stock market crushes housing returns. I thought housing was supposed to be the best investment. Does this mean housing is a lousy investment? Not necessarily. The Case-Shiller Index does a good job of tracking housing prices on a national basis, but I don't think that necessarily means it's realistic for most people in terms of the proxy for their returns or housing in general.

Calculating returns on stocks, bonds, and cash is pretty straightforward. You take the starting value, the ending value, add in any cash flows. Gold is really easy. It's the starting value and the ending value, and that's your total return. None of these historical returns include taxes and fees, of course, but the frictions are so much lower these days because fees and bid-ask spreads, and that stuff's all lower, tax-deferred retirement accounts, all that stuff.

What are you chuckling about? Nicole just logged on to the compound chat handle. It's confusing because multiple people from the same account. She types in all caps. Housing is the most unique of all financial assets in a lot of ways. First of all, there's the leverage component. Sure, some people may pay cash for their house, but most people borrow.

Let's say you put 20% down, dunk it on a $450,000 house. Then it subsequently rises 20%, 25%. You have a house that's worth $560,000, $2,000, and $500. What's your return on that asset? It's up 25%. Oh, I don't know. I was just thinking about what year I'd have to time travel back to to find a house for that price.

Okay, what if it's actually 125%? Because you put 20% down, that's $90,000. Your house went up by over $100,000. Technically, the money you put down is a 125% gain. So maybe housing is even better than most people think. Well, it depends. In the life of your loan, you have to pay interest expense, insurance, property taxes, maintenance, upkeep, people refinance, which costs money.

Wait, I'm sorry. Did you just say interest expense? Well, the interest expense on your loan. Oh, okay. I thought you meant there was another mortgage insurance type thing, another fee. It's a secret. Well, there's a lot of other bank fees you have to pay when you buy that they kind of make up.

Plus, like I said, the bid-ask spread for ETFs and index funds are infinitesimally small these days. For the housing market, the frictions are still really high. So moving costs, closing costs, inspections, title insurance, and all these other fees that banks more or less make up. Selling your house requires these same fees along with realtor costs.

So there's a lot of ancillary costs as well. So even if you were the kind of person like me who would track all these expenses in a spreadsheet -- I don't actually do this, but someone like me probably does. Even if you had all of these expenses to tell at your true cost of home ownership, right?

I have everything. I know my outlays for my mortgage, for insurance, for all this stuff. If you weren't paying your mortgage, you'd be renting somewhere, and you have to live somewhere. So how do you calculate the difference between, well, what I'm paying in my mortgage versus what I would be paying in rent, plus the inflation component of that?

So adding it all up -- and I don't think there's a single person in America who knows what their actual return on their house is. I think it's basically impossible to calculate. So I don't think you'd have to make so many assumptions to come up with the actual number.

You can look at the price numbers. Sure, it's 1% or 2% above inflation, but the Robert Shiller numbers are probably directionally right, but that says nothing about the actual return most homeowners get because of leverage and all these other costs and stuff. If you're buying and selling rental properties, it's probably easier.

To track your expenses, you know what's coming in for rent, and you can net it out. I think you can calculate what the return is. For some people, it's probably much higher than they assume, because, again, if you're doing it out of that initial investment and there's leverage involved, even a small, steady stream of returns, when you have that leverage and you're only putting 20% down, that can juice those returns big time.

For a lot of people, it's probably worse than they think because they don't realize the frictions for buying and selling. They put too much in for renovations. They buy in the wrong location, all this stuff. So I don't think we should be comparing the roof over your head to a Vanguard S&P 500 Index Fund.

Vanguard doesn't give you a place to live. Vanguard does not provide mudrooms or open spaces to entertain or walk-in closets. If I had to guess, it's probably closer to the stock market than the bond market for true returns for most people, but I think it's far too circumstantial to put an actual number on it.

So I'd like to look at my house as more of a home than a financial asset, but it does provide a really nice hedge against inflation because my mortgage is fixed, and then I can borrow against it if need be. And for most people, it's just really a form of forced savings because most of the middle class, that's their biggest financial asset by far.

But I don't think you compare it to stocks or bonds or crypto or anything like that. I think housing is so much more of an emotional asset that it's impossible to gauge what that actual return really is. Do most people who seriously invest in real estate, do they have some equation where it breaks down with square footage and how much they expect to have to pay in general upkeep and maintenance?

Well, the biggest thing is they call it the cap rate. But yeah, you could put a number on it like the fees are going to be 1% to 2% a year of the cost or whatever. You could estimate that somehow depending on the location. And yeah, someone who's doing rental properties, that's much easier.

They look for a cap rate on what they're getting and what they're netting out, and then I guess you could add some equity in there somehow. But yes, it's way more complicated than most people think. So I don't think there really is a number. I don't think you can just take the price you paid for it and then the price you get when you sell, and that's your return.

There's so much more that goes into it than that. Do you say "ruff" or "roof"? I don't know. What did I-- "ruff"? I just corrected myself. I said "ruff," and then I said "roof." I don't even know which I'm supposed to say. Let me know in the comments. I guess I'm a "ruff" guy.

Okay. Cool. Good advice there. And that's a popular one too. I think part of what's happening just as a layman is I think a lot of people are paying up for housing right now and are trying to justify it as being like, "Okay, well, it's at least an investment." I think that's why we're seeing more and more of these questions.

And again, I think it's more of a forced savings vehicle than an investment for most people, but that can be a good thing too. I don't think it's necessarily a bad thing, but you're right. The fact that prices have been going up so much in the last couple of years, more people are looking at it that way.

And I think there's just a lot of stuff you have to take into consideration that most people don't. All right. Up next we have a question from Mike. "I've got a bunch of 2020 stocks." I can relate to this one so much it hurts. I should just say right off.

"I've got a bunch of 2020 stocks"-- may give a couple examples-- "down upwards of 70% all the way to 99% "with the losses representing maybe 8% of the value of my portfolio. "Psychologically, they bother me, but I have no immediate need to sell. "No capital gains to offset. "Is it best to hold and just see if they recover in some years "or just cut bait, take the ordinary income deduction, "prevent further losses, and reinvest the tax savings into an index fund?

"With the $3,000 win, I'd have carryover losses to claim "for a decade or more. #NotToBrag." All right. Mike here included some of the tickers, and I've got to be honest, I've never heard of this one company, SKLZ, is skills with a Z. I've heard of it, but I don't know anything about it.

My first point of advice would be never buy a company that trades out the S for the Z. There's no way that it's going to end well. SKLZ, I'm sorry. In what world is a company with a Z in the end of it instead of an S going to outperform?

That's just never going to happen. This company is down like 99%. Funny enough, the Russell 3000, which is essentially the entire liquid U.S. stock market, so that's the S&P 500 plus the small and mid-caps, there's nearly 2,700 stocks in it, which is kind of false advertising because the Russell 3000 doesn't have 3,000 stocks.

On white charts yesterday, I ran a screen for historical drawdown from all-time highs for these stocks, Duncan. Out of 2,700 stocks that make up the U.S. stock market, how many were down 70% or worse from all-time highs? What's your guess? Percentage of a total. 25%? That's actually pretty close, 26%.

He mentioned a stock, he owns stocks down 99%. Again, 25% of stocks, and we're right near the all-time highs, a quarter of stocks in the index, in the market, are 70% or worse off of all-time highs. There are more than 40 stocks that are down 99% or worse. That would put our guy Mike here in the bottom 1.5% of stock pickers, I guess we want to look at it that way, for these stocks, which is nice.

10% of stocks are down 90% or worse. One out of every 10 stocks is down 90% or worse from all-time highs. 44% of them are down 50% or more. Almost half of all stocks in the index are down 50% or more from their highs. Tons of big losers, which is a feature, not a bug, of the stock market.

One of my favorite research pieces that I come back to all the time, and I think it's worth repeating, is called "The Agony and the Ecstasy" by Michael Semblis from J.P. Morgan, who's been on the Compounded Friends before. Yeah, he was great. John threw up the first chart. I love looking back at this data.

Semblis found that more than 40% of all companies that were ever in the Russell 3000 index experienced a catastrophic stock price loss, which was defined as a 70% decline from a price in peak levels, which is not recovered. It's 70% and you don't make it back. You can see he broke it down by sector as well.

Show the next one, John. Around 40% of the time, a single stock experienced negative absolute returns, which would have underperformed a simple position in cash. So holding T-bills, 40% of stocks underperformed cash. 2/3 of the time, those stocks underperformed the actual index itself. So holding the index, you'd think, well, half of the stocks are going to do well and half of them are going to underperform.

That's not the case at all. It's mostly mega-winners, which they define as these huge, huge winners, and there's 10% of them since 1980 that are defined as mega-winners in the Russell 3000. So most stocks don't do very well. John, one more. Show the next one. Wait, why don't we just focus on buying the mega-winners?

Yeah, that's it. So it's 10% of them. John, fill that chart back up. The winners generate these enormous returns, but the median stock ends up underperforming the index itself. So that's the thing. If you were the world's greatest stock pick, you'd say, "I'll just hold the best stocks. Good luck with that." The problem is, what if you own some of these stocks that end up being mega-winners?

Amazon was down 95% during the dot-com bubble and it recovered. One of the biggest, best stocks ever. NVIDIA was down almost 70% at one point in 2022. Facebook, not meta. I'm never going to call it meta. Just like Google is not alphabet and Twitter is not X, I will not call them that.

It's Facebook. Facebook was down 70% in 2022 and recovered all its losses. Netflix has experienced three separate 70%-plus drawdowns in its history. Career? Yeah, it works. It's recovered from the first two. It's still 30% away from the most recent highs in the new one. But history says you're better off just cutting bait, right?

Do you actually believe in any of these companies? I don't know. Maybe you could hold on to one of them as a lottery ticket or as a reminder. I have one stock in my fund portfolio account in Robinhood that I picked. I'm not going to name names, but someone at our company actually recommended it to me.

It immediately went up 100% and now it's down 75% from where I bought it. I think I have the same one. I think I know who you're talking about. It didn't kill me because it's such a small percent. I kind of hold it there just as a reminder of just keep buying index funds, Ben, because the big winners will be in there and the losers won't matter.

So I prefer index funds because it is extraordinarily difficult to pick stocks. But it's probably just best to move on. I don't think you'll regret it. If one of these really turns around after falling 99%, it'll be a miracle. Unless you think that it's literally going to be the drink of the future or something, I see no reason to hold on to something when you're down big.

What was Oatly down from all-time highs at the worst point? Like 98% probably. If I pull up the chart, basically, yes, you can't even see it. It's pretty brutal. If you get cut in half and cut in half, you're approaching zero, but you can never actually hit zero, that's Oatly.

Yeah, that's what it feels like. Something on this note that is kind of funny is back when I was in college, in like 2008, I guess, 2008, the market wasn't doing so well. And so I was like, "I should buy some stocks." And so I took a little bit of money and bought a couple of things.

I bought Microsoft, which I still own, the same share. I bought one share of Microsoft. And then I bought some shares of a company called Hemp that was supposed to be like weed stock and, "Oh, this is the future," which is what people are still saying. No, no, no, it was supposed to be like cannabis, I guess.

Microsoft, that's a pretty good purchase, though. Microsoft has worked out great. Hemp did not work out. And several others that I bought did not work out. Kudos on the Microsoft purchase. That data, though, for real, that's basically an argument for cap weighting versus equal weighting, right? Yes. I mean, equal weighting, I guess, it's diversification.

The whole point about cap weighting is that the mega winners really help offset the losers. Right. Equal weighting is the kind of strategy, though, that just has a little more turnover, probably. But it can still make sense, too. All right, next question. Up next, we have a question from James.

I'm in my late 20s, married, and expecting our first child this year. I have over $100,000 cash saved, but over $50,000 in student loans with a 4% rate. I have a large bonus coming in Q1, greater than my student loan amount. My bonus is nearly half of my total compensation, making traditional budgeting difficult.

I'm doing my best to max 401(k), IRA, HSA, and 529, but I really want to put my family in a house that is more comfortable and safe, even though it wouldn't be the end of days if we stay where we are. I'm having difficulty balancing my desire to super save and pay off debt with my desire to get a house I truly feel like my family needs.

On top of this, I would like to be charitable and help those who are not as fortunate. How do I balance all these desires when I'm not quite at the level where my total compensation is large enough to just do it all? As a podcast host, I'm legally obligated here to say there's a lot to unpack here.

Right, because that's what you say when you host a podcast. There's a variable income component, student loans, buying a house, tax-deferred retirement accounts, charitable giving. This is certainly a financial planning question with a little bit of everything, so let's bring in an expert who's used to helping people make better financial decisions, Mr.

Kevin Young. Hey, Kevin. Kevin's a CFP. Hey, guys. Kevin, I think there's this idea that once you have some money or make a good income, your financial problems magically disappear, but it's much like investing where you can never completely take risk away. Risk just changes shape. That's the same thing when it comes to finances.

I think all this stuff can be overwhelming. So where to begin? I guess how do you help people rank order their financial goals and decisions? Because as with a lot of this stuff, there's no right or wrong answer here. A lot of it just depends on what you want to focus on.

Yeah, I think for me the thing that popped out was what he mentioned about buying a house. That seemed to sort of be the top of mind. And the other thing to consider is where you are in your life, right? Our colleague Nick Maggiuli, yeah, he talks about just keep buying, but he also talks about flexibility.

He wrote a blog post, I think it was last year or maybe the year before, talking about not maxing your 401(k) and sort of how that kind of flies in the face of conventional financial planning 101. But for this person, if he's got other goals and he's in his late 20s, you've got plenty of time to max out your 401(k).

So maybe it makes sense to not max out the 401(k) and give yourself a little bit more flexibility by saying, "Hey, instead of putting away $23,000 in the 401(k) this year, maybe I'll put away $17,500, or maybe I'll put away $15,000, or I'll match what my company puts in." I do think there's a big psychological hurdle for that because if you max out your 401(k) and then you pull it back, you feel like you're doing less or you're losing something.

So I think it's really hard for people to go backwards after you've crossed that line in the sand. It is. And I always say that with the caveat that you've got to be purposeful with the money that you're not contributing, right? So if you are getting an extra couple hundred bucks in your paycheck, are you just spending that or are you putting it into the account that you're going to use to put the down payment on in your house?

Right. You're still getting ahead financially if you're using that money for something else. Absolutely. As long as you're not blowing it on something, then you're still saving. Absolutely. And he also mentioned an IRA. I was definitely not maxing out my 401(k) and an IRA when I was in my 20s.

So, I mean, frankly, I'm not even doing it now, but that's another story. Kids are expensive, right? So there's all these different things, and that's actually part of it, right, is that maxing out an HSA is great if you're starting a family. Doctor's appointments are insane. So all these things that he wants to accomplish, I think-- and, again, I just leaned towards the house because he mentioned it.

If the house is something that really will give you a lot of peace of mind and you'll feel really good about that, then it's okay to say, "Hey, I'm not going to put $23,000 away in my 401(k) or $30,000 combined between the 401(k) and the IRA." Especially with that first kid coming along, you know that the house is such an important piece of the family and not just a financial plan.

And he talks about paying off the student loans. The rates are still relatively low. To your point about flexibility, I don't see the need to pay those off, especially if you have all these other goals. I think that one in the hierarchy of the goals, if you said the rates were 8%, maybe I would reconsider.

But at 4% rates, I think you push that one down, and that's one of the last goals you have to worry about. 100%. Yeah, I wonder if they refinanced to get that low. 7% is around where mine are. Sounds like you need to email James back. Yeah, luckily I don't have a massive amount.

But yeah, and then the other thing is the charitable giving. I guess the thing is, yeah, give yourself a little bit of a break. If you're in your 20s and you've got all this stuff figured out already and you're maxing stuff out and you're trying to buy a house, give yourself a break if you're not completely optimizing everything perfectly and there's going to be some give and take and some course corrections along the way.

And sometimes if you have a huge goal like this, like buying a house, the other goals have to take a back seat for a while. And then the house is purchased and you're done saving for the down payment, now you can shift things around. And it's okay to make those changes.

I know for people who are blinders on with the financial stuff, it can be tough to make those changes. But that's the whole point of a financial plan is that it's going to change. Yeah, perfect is the enemy of good, right? And so we come across this a lot with people trying to optimize every single thing that they do.

And it can cause more stress than is good for you. So I think your advice of just kind of taking the big goal first and then trying to kind of waterfall it down from there. Yeah. And my thing on the charitable giving side of things, I treated it like it was a dollar cost average where I put it on automatic every month I give to a couple organizations.

And then once a year, usually around Christmas time, I'll look at that again and change it and increase it a little bit. But I think that's the kind of thing too that you can put just like your contributions where you can kind of put it on automatic and not have to think about it all the time.

Yeah. And if there's some part of you that just feels like you should be doing something from a charitable sense, maybe it's not writing a check. Maybe it's writing a smaller check and volunteering. There's a lot you can do that isn't necessarily writing a check when it comes to charitable endeavors.

So that might be a good proxy for now while you're feeling like the dollar should be going elsewhere. Cool. And I also noted here, is there anything else that they're not thinking of that they should consider with a child on the way, financial tips or any planning they should do?

Just be ready to throw your financial plan out the window multiple times with kids because Kevin's right, kids are expensive. When I told my brother out we were having twins, he had twins six months before us and he laughed and he said, "Yeah, throw your financial plan out the window because kids are expensive." So I think you have to be a little more – be willing to be more flexible.

The good thing about kids is that you spend way less money on yourself because you have no time to spend on yourself anymore. It's the beginning, right? There's always another expense coming up that you didn't think about. Yes. And at what age can you get them going with an IRA if they do something for you?

You can do that, right? You've talked about it before? Yes, I think they technically have to have some type of income, right? Ben had talked about how people have their kids – I've heard people who work around – there was a blogger I knew who would show pictures of his kids in his blog and pay them an income.

I don't know how the IRS feels about that. There you go. Probably not good. Yes. I don't know if my kids are cracked up for that yet. I don't know if they – Well, and remember, now the 529 rules, right? You can eventually convert that to a Roth if it goes unused.

Yes, 529 is actually pretty – all right, let's do another one. Good to know. Okay, up next we have a question from Harry. I was let go from my construction job in October, but I landed on my feet and was back to work in November. What should I do with my old 401(k)?

It seems like you can roll it into another account or do a cash withdrawal. Are there penalties associated with each? If I do a rollover, should I open a new IRA or just move it to my existing Roth IRA? We own our home, but this could be a good down payment for the lot behind our house, especially if there are no tax penalties.

We're young newlyweds and very financially secure. I feel like you don't hear that phrase a lot. I have a feeling the answer is to wait and roll half to my new 401(k) when it's open and take the resting cash for an emergency or down payment. But I would love to hear your thoughts.

You usually don't hear that from someone who's just let go from their job too, so kudos for being – and this also shows how dynamic the U.S. economy is, right? This person was let go from their job one month. The next month found another one is already thinking. I do think there's another psychological component to this where you leave a job and you have some 401(k) money and you look at it and you say, "Well, I've been saving for a few years." It's almost like found money.

People treat it differently than they would otherwise. If they would have stayed at this company and kept putting money into the 401(k), they would never think about pulling it out. But now that it's there and it's like, "Well, you know, it's just like $15,000. What if I just pulled it out and used it to make a down payment or change it to this?" I take a pretty hard line on retirement savings, like using for other purposes.

Unless there's an emergency or there are no other options, if it's earmarked for retirement, keep it for retirement. I think, Kevin, you can correct me if I'm wrong. If he's taking it out for a down payment for something, there's going to be a penalty on it. There's going to be some taxes to pay.

Yeah, you're going to get hit with taxes and penalties on that unless it's a first-time home purchase and there's some rules around that. It doesn't sound like that's the case here if you're just buying another lot. Yeah, so you're going to pay ordinary income tax on that plus a 10% penalty.

And so it's definitely, unless you really need it, which sounds like you don't, the options are, yeah, you're either going to roll it into your new company's 401(k). If they have a decent plan, that's probably a perfectly fine option, generally going to be really low cost. You can borrow against it if you really needed to access it.

Again, that wouldn't be the first place to go for liquidity. Or you're right, you could roll it into an IRA, whether it's a Roth or a traditional, depending on how the 401(k) is set up. But those would be the two options. I would really try to avoid cashing it out because you're going to pay quite a bit.

Yeah, you probably give yourself more options by just rolling it over into an IRA. And I don't think you have to be in a rush, too. A lot of companies will let you keep it there for a while. And as long as the costs and fees are not egregious, you can keep it there while you try to figure out what you're going to do with it.

Yeah, I mean, most 401(k)s are not going to boot you off the platform. They're happy to have your assets and cliffhanger basis points. Yeah, they don't want you to leave, probably. I feel like I have heard there that sometimes they start charging you an additional fee if you're no longer employed.

I feel like I've heard that. Good point. Yeah, that can happen. And, you know, I would just take a look at what the, you know, some company 401(k) plans are not as good as others. I mean, there might be the only options you have in the new company 401(k) might be really expensive mutual funds.

And in that case, you'd be better off just putting into a self-directed IRA and buying low-cost ETFs. Or they might only have a couple options to invest in. But again, you cannot take a loan against an IRA. You can take it against a 401(k). So there's one little piece that the 401(k) might make some more sense if you ever think, you know, you might need to borrow against it.

Yeah, but Harry's saying that he's financially secure. I would just roll it over. Don't overthink it. Probably best to have the control than anything else. Is there any reason to roll his traditional 401(k) into a Roth IRA? Or is that not worth the taxes that they would end up paying on that?

Or should I just open a traditional IRA? Yeah, well, it sounds like you might have a Roth, given the question. Or maybe there's a combination of the two. A Roth 401(k) potentially? Yeah. But, you know, yeah, you could. But just generally speaking, you could do a conversion. Again, you're going to pay taxes to do it.

But, you know, the gamble on that is that you are paying, you know, if you're in a lower tax bracket now, it's less painful to do. And that money is going to be tax-free in the future. But, you know, if he is, you know, on the upwards trajectory in his career, it could be a good time to take advantage of that.

But, you know, given that we obviously don't know what tax rates are going to be, it's probably fine to just keep it as it is. Congrats on finding a new job so quickly. But I would not treat this as found money. It's set aside for retirement for a reason.

Keep it there. Good advice. All right. One more. Okay. Last but not least, we have a question from Nick. I'm a 40-year-old investor with roughly $2 million in investable assets split evenly between a typical assets under management wealth advisor and my own self-managed personal accounts. When looking at annual performance, the AUM wealth advisor accounts averaged about 13% gains, mostly in individual stocks and the taxable account, whereas on my own, largely through low-cost broad market ETFs, I averaged 23% returns in 2023.

This pattern has held for the last few years. So my question is--this gets fiery. So my question is what in the actual expletive is the point of using an AUM advisor? What would be the actual valid reasons to use an AUM wealth advisor? I'm not looking for a sales pitch.

I'm looking for the actual point of using one. I'm leaning towards just moving all into my own personal accounts. Our first not to brag of the day and our first four-letter word that we had to bleep out-- listen, if they're simply investing your money for you and they're just picking stocks, they are not a financial advisor; they're an investment advisor.

Now, I'm not saying that there's anything wrong with outsourcing your investments for some people. Some people need that. But if you're just paying them to allocate or pick stocks, that's a different thing than a financial advisor. So I would--and this is obviously the thing you want to do up front, so maybe they're realizing this after the fact.

Performance is not the only reason that you have this kind of change of heart, but it's certainly something to think about. So if they're doing something for you besides asset allocation, security selection, or fund selection, I would have that conversation to help understand that. So Kevin, when you're talking to prospects or clients, how do you try to tell them the things that you're doing for them beyond just investing?

Because we've had plenty of clients come to us who assume, "Listen, you're managing my portfolio, you're managing my investments," and that's a big part of what we do, but it's not the only thing. I actually had a conversation with a client this week who, after the meeting, emailed us and said, "Listen, I thought the investments were the important thing, but now I realize it's so much more than that.

It's taxes and insurance and estate planning and financial planning and all these other things you do that I didn't even realize before." So I think that--so how do you communicate that to people? Yeah, so I tell potential clients all the time, "Do not hire somebody for performance," because as many times as you hear it on the TV ads or see it in print, it does not mean you're going to have success in the future.

And also just think about--yeah, to your point, what does this person think that they're doing for you? If you hire them purely to manage their money and invest it for you and try to get an outsized return, I could see why you have a gripe. But please note that beating the index is really, really, really difficult, which is why index investing has become so popular.

Because over time, I think it's something like 90% of professionals don't beat their benchmark. So if they don't have a shot, why--if you can't beat them, join them. And it's worth understanding what your allocation with them-- if they have more cash or bonds or national stocks or alternatives, whatever it is, that's fine.

But if they're investing your money in a way that you don't agree with, that's not going to work, right? Exactly, exactly. And for your personal accounts to return 23% last year, I'm guessing you're mostly large-cap U.S. The advisor or the AUM person might have been investing in small caps and international and emerging markets.

And maybe against their benchmark, they did perfectly fine. I'd also say, well, okay, that's last year. What happened in 2022? It's easy to think it's simple when the markets are up. Yes, exactly. And so to your point, Ben, you mentioned all those things earlier. If you are looking for somebody purely to grow your portfolio as fast as possible, risk management be damned, then, yeah, maybe you want somebody who's going to just try to shoot the lights out on returns.

But what we talk about a lot is that we're wealth managers. We are here to literally manage your money. You've become wealthy in some way, shape, or form. Our job is to keep you that way. And so focusing on the emotional components, right? What did you do in March of 2020?

Did you sell everything? What did you do in the taper tantrum? What did you do in '08? So getting a sense of that behavioral management, getting a sense of what their goals are, understanding how to invest which dollars for what event in life. And if this guy doesn't have a very complex situation, maybe he doesn't need it.

We have plenty of people who, in our audience, who are DIY investors and they do it all themselves. And that's fine. Not everyone needs an advisor. But if he has a complicated enough financial life where he's dealing with estate planning and insurance and taxes and needs someone to stand between him and making a mistake, that's a financial advisor you're looking for.

So maybe you just have the wrong one or maybe you realize, "I don't need one." Yeah. Yeah, I would actually bet that the vast majority of our clients were former do-it-yourselfers and they found us by watching this show or listening to Josh or Animal Spirits or whatever it is and said, "Hey, I was fine doing this on the way up, but now I'm getting ready to retire and there's so much about the distribution aspect that I don't understand and taxes and all the other things." And that's where it might make sense to say, "I want to enjoy my retirement.

I don't want to sit at a computer all day and watch my stock portfolio." I agree. So I think peace of mind is a big thing. But if you're happy doing it yourself and you've got a good process and, you know, Ben, you've written on this before, like write down your investment policy statement and make sure that you stick to it.

And there's a lot you can do in that area and save yourself the fee. So, yeah. And the point of AUM is there's an incentive to grow the pot, right, to grow the wealth, right? That's the idea there. That'd be the hope. Yeah. Yeah. Yep. Great questions this week.

Thanks to Kevin for coming in and helping us. We always appreciate it. If a guy wears a quarter zip like that, you know that he knows what he's doing, okay? That's the truth, right? Email us your questions, askthecompoundshow@gmail.com. Leave us a comment. Leave us a review. Hit that Like button.

Leave us a comment on YouTube if you're watching there. And we'll see you next time. See you, everyone. Thanks, guys.