Welcome back Portfolio Rescue. This is the show where we take questions from you, the viewers. If you have a question for us, askthecompoundshow@gmail.com. I see everyone in the live stream today. Thanks for coming. If you have a question for us in the live stream, put it in there. We have someone monitoring now.

I know there were some questions last week. We didn't get to them. And this is how powerful I am. Send us a question. I will move it to the top of the list for the next couple of weeks, and we'll put it on there. So let us know what you think.

Especially if you're from Michigan, it'll go right up to the top. Yeah, I have a place in my heart for those flyover states. Duncan, anything going on in the stock market lately? Seems like it. Seems like a lot's going on. Let's do it. We got some questions on the correction again.

They're coming in hot. What do we got? Okay. First up, we have a question from Benjamin, who writes, "Since Ben is a data junkie, does he have any data or opinions on when markets hit a bottom? Does the adage 'catching a falling knife' always hold true?" Guilty. I am a data junkie.

I like looking at historical data. I don't think I do it because it tells you what is going to happen in the future. It tells you what can happen, not what will happen. It gives you this range. I have some bad news for you. You really can't call a bottom.

It's basically impossible. The problem is that fundamentals don't matter very much, especially when this is happening. Emotions grab the steering wheel. That's why markets are always way more volatile on the way down than the way up. You take this slow stare up and then an elevator down, they say.

It's because when people are losing money, they panic, and then they try to do more, and they think if they try harder, they're going to figure it out. It is funny, though, because there are all these sayings about market bottoms, right? Markets never bottom on a Friday, right? Which sounds really smart to say, because it's like people think about their losses over the weekend.

And then another one in the past has been markets never bottom on a huge up day, because the idea is when stocks get more volatile, you have these big up and down days on the same days, right? Because people are going back and forth. So March 2020, we saw up 8%, down 8%, up 9%, down 10% on a daily basis.

And so the best and worst days in history tend to cluster around these bad bear markets. Unfortunately, in March 2020, the market bottomed on an up 9.4% day. In three days, the market was up 18%, and it basically never looked back. And when it happened, everyone goes, "Okay, it's impossible.

Markets don't bottom like this." So I think even if you find something that can work, like let's say you found this secret sauce, it probably wouldn't work forever. So the only thing I've found is that we can segment corrections a little bit to figure out how long they're going to last.

So John, let's pull up this first chart. Let's do a chart on. This is the S&P 500 since 1950, and I looked at corrections when they're in a recession or caused by a recession or non-recessionary. And you can see non-recessionary corrections tend to last a little less time. They don't fall as much.

If you're in a recession, it's going to last a lot longer, closer to a year. The average downturn is like 30%. So we typically see those crashes during a recession. If it's a non-recessionary one, it doesn't go down as much. It's more of a correction. So let's take a look at the recessionary ones first.

So John, let's put this next chart up. I took the S&P since 1950. I looked at these drawdowns during recession, and then I looked at what happened at the bottom. So what's the CAPE ratio? What's the P/E ratio using trailing 12-month earnings? What's the dividend yield? I wish I could find a pattern here.

There really isn't much. The only pattern really is in the 70s and 80s, valuations were much lower, yields were much higher. Now they've been much higher and yields lower. You can see in 2009 that the P/E ratio was over 110 because earnings fell off so much. So leaning on fundamentals during a market correction is not going to help you very much.

I wish there was a line in the sand, but there really isn't. And actually during recessionary corrections, it's kind of rare when there isn't a bear market. It usually happens more often than not. It's almost always a bear. So let's look at the ones outside of a recession, because I think that's probably more apt for today, unless people think the economy is really rolling over.

So again, there's more of these. Again, the valuations and the P/E ratio and the dividend yields, there's no level you can find in the sand that's going to do something. I do have some potentially good news. Assuming this current downturn, the economy doesn't slow, we actually had GDP numbers come up this morning.

On a nominal basis, before inflation, the U.S. GDP grew like 11.7% in 2021. After inflation, it was still talking like 4 or 5%, pretty good. So let's say the recession doesn't happen and we're just a regular downturn. John, show up to the last table here. This is bear markets outside of a recession.

It basically doesn't happen. So if you're worried about this correction turning into a crash, you never say never with the markets, but really 1966 and 1987, I put these other ones up there, they were 19 and change. I really don't know who decided, who's the grand wizard who said, "All right, 20% is a bear market.

That's it." I don't know who said that, but for some reason in the 1970s and the 1990s and two times now since 2008, we've had these 19% and change that don't get to a 20% bear market on a close. I don't know if you want to call those. Duncan, what's the ruling here?

Are those bear markets or not? If they're 19.8%, do you round up? I'd call that a bear market. Okay, close enough. But it's pretty rare outside of a recession to see an all-out crash besides like a 1987. So maybe that's a feather we can hang on our hat. Obviously again, you never say never, but that's about the only thing I can think of now that, you know, obviously the other side of this, predicting recession is pretty hard too.

The last one was easy. Tom Hanks got COVID and NBA shut down and everyone was told to stay home for eight weeks. So we all knew exactly when the recession started. So that one's kind of tough, predicting recession too. But I'd say like, there's an old saying that the only people who can nail a bottom are liars and people who are lucky.

That's pretty much it. It's hard to do because there's so many emotions going on. And once stocks start falling, a lot of people will think, "Oh, they're only going to fall further." And other people are trying to catch a falling knife. So unfortunately, I can't pick a bottom for you and there's no data that will tell you that.

You look at price, but even that is an indicator that can work sometimes and not work other times. It seems like the best strategy to calling a bottom is to just continually call for one. Yes. Just like calling a crash. You call a crash every single year, eventually you're going to be right.

It's got to happen. All right. What's our next one here? Okay. So up next, we have kind of a long one, but I want to remind everyone, we also release this as a podcast on the Goldmine, and so I do need to read this for our listeners. So this question is from Brett and he writes, "I'm 25 and make about $55,000 a year.

While you guys give tremendous investing advice, you also mention the importance of gaining life experiences that make you happy. I'm planning to take a year to backpack through Europe to see friends and family. I'll have about $27,000 saved and will probably come home with around 15. The job I currently have is nothing in my field of interest and I only accepted the role during the uncertainty of COVID.

I've mentioned my plan to friends and while most are supportive, some are calling me crazy or saying this is money I could put towards a home or investing. I have a few thousand saved between my Roth and 401k. Am I crazy for doing this?" This is a good one.

I like this. Yes. This is very good. What's the Ben Stiller gif from Starsky and Hutch? Just do it. Right? Do it. And honestly, I wouldn't listen to your friends and family here. You're 25. You're young. You have no responsibilities. It sounds like no house, no kids. You will never get this opportunity again.

And I think the fact that you've already managed to save enough money and plan for this shows that as far as finances go and saving, you've already got those habits in place. So yeah, you're going to spend this money and blow it potentially and it could be, if you compounded it over 40 years, what would it be like?

But think about how those memories will compound. You will create memories on this trip that will last a lifetime and you will never, ever regret it. So I would say just completely do it. Obviously, the job situation when you come back is something you have to think about. I don't know if you're planning on working remotely or what you're doing for income in the meantime, if you're just going to live off your savings for a year.

But when you're in your 20s, do it. You're never, ever going to have an opportunity to do this again, ever. I'm not going to be one of these fire people that says, "No, you can't spend money. You can't enjoy yourself. You've saved your money. You planned it out. You can always play catch up later." Again, you've already shown that you have those habits.

So the only thing I'd be worried about is taking a year off and finding a job when you come back. But if there was ever time to do it, during a pandemic when people's lives are changing and it's a pretty decent job market, I say you're in your mid-20s, go have fun, stay in some youth hostels in Europe and enjoy yourself.

Yeah. It's like Josh said a while back that traveling at 70 isn't more fun than traveling in your 20s or 30s. No. I mean, when you're in your 20s, like when I was in college, we stayed in a bunch of youth hostels and it was so much fun because you're around all these other young people and you're at the campfire and it's kind of dirty.

But I look back at it now and I go, "I would never stay in that now. What? Are you kidding me?" But back then, you don't care, right? And you just wing it and you have these plans and you never know where you're going. I say the memories you'll get from this will compound even more than your money.

I'd say just don't listen to your friends and family. Have fun. Enjoy yourself. But make sure that you can hopefully have a decent income back and use this as an experience as a jumping off point for finding something that'll help you when you come back for your job too, I think.

Yeah. Yeah. That's good advice. Yeah. All right. Let's do another one. Okay. Up next, we have a question from Ulf. He writes, "I'm nearing retirement and have stocks with substantial gains in both my IRA and non-IRA accounts." I'm not exactly sure what he means by non-IRA, but you can discuss that, I guess.

"I need to use some of this for my retirement, but I also want to leave as much as possible to my children when I die. Which funds should I use up first, the IRA and pay income tax, but no capital gains, or the non-IRA with capital gains tax, but no income tax?" So he's talking here like he has a brokerage account, probably just a taxable brokerage.

So basically, I have this taxable money and this tax-deferred money. What do I do? We get a lot of questions like this, actually. Like, "I'm retiring. Where do I take it from to make sure that I minimize my tax bill?" So obviously, we're going to bring in our tax expert here, the one and only Bill Sweet to help with this one.

General, good to be back with you. Bill lives and breathes this stuff 24/7. I do. So Bill, obviously, this kind of thing is circumstantial depending on your income levels and what the gains are. But I think this is a good starting point for a lot of people who are near retirement and wondering, "Well, what do I do just to minimize the pain here?

Because I'm going to have to pay taxes somewhere." So what's the rule of thumb on this stuff? Yeah. So first off, shout-outs to Ulf. I think it's really awesome to think about that next generation. But what we're talking about here, Ben, is the key difference between how assets are taxed both while the primary calendar is alive and then post-mortem, right?

Because this is grim stuff, but Ulf asked the question. I think it's noble for him to think about. So while you're living, any IRA distributions that come from a bucket that involves an IRA, 401(k), 403(b), anything that's a tax-qualified account that's pre-taxed, you get taxed at ordinary income. And so you're going to pay somewhere between 10 percent all the way up to 37 percent, Ben, to your point, about where their income lies in the tax range.

And so that's criteria one for that tax-qualified asset. Bucket two would be non-qualified assets. And Duncan, like you point out, it's probably assets held in a brokerage account, so your normal taxable non-qualified assets. After you die, what happens is that basically the IRA continues to get taxed at the heirs tax rate.

And so post-2019, there's this 10-year clock that starts, and basically your beneficiaries have to take a distribution, and they have to pay the tax on that IRA within 10 years of your death. So that's something to consider. The point that I'm trying to make, though, is that somebody's going to pay tax on that IRA, either you are or your heirs are.

And so I think there's a little bit of calculus on what the tax rate is. When we switch over to the non-qualified assets, what happens is, on death, you get a step up in basis, or potentially a step down. And so if Ulf is lucky, he's had a good couple of years in the stock market, let's say, and he has a 50% gain, that gain gets erased on his death.

That means the cost basis for his heirs are going to be whatever the value is at that time, right? Correct. And so if his heirs decide they want to sell their assets right after they inherit it, in theory, they're not going to pay any income tax, which is a very cool feature.

So IRAs, somebody pays the tax. Capital gains, if you pass it on after death, and again, it requires you to die, unfortunately, to get that step up, nobody pays the tax. So that's probably the key consideration. The answer is probably a little bit of both, right? Because any gains for a single individual, assuming you have no other income under $55,000, your capital gains rate is zero, versus probably about 10%, 12% for your IRA.

So it's a bit of a calculation every year, but I think in general, I would seek to pass on the asset that would get that step up in basis, and that means the non-qualified assets would get spent last. I want to help out Ulf's children here, too. How are we able to get his kids some money now so they can enjoy it while he's here?

So what is the tax gift situation, like how much can you give to your kids without paying taxes on it? What's that deal? So I want him to give some of his kids some money now, too, not just when he dies. Yeah, that's a great question. And there's two taxes we have to worry about here, because what we've been focusing on before is income tax, but there also is a gift and estate tax.

But there is an exclusion each year, and I think, Ben, that's what you're getting at, of $16,000 per person to person. And so if you're gifting to, a married couple can split a gift and you multiply that times 2, that's $32,000, and that is gift tax-free. However, the basis continues on with the taxable gift.

And so again, back to that step-up in basis thing, that's an important consideration to keep in mind. If you pass on low-basis Apple shares that you bought at $0.20 20 years ago, your heirs are going to pay all the capital gains tax in gift, whereas if they get it through your estate, they get the step-up.

So a bit of pros and cons on each. Generally, you see gifting done in cash, unless there's another consideration otherwise. That works for me. All right. Duncan, last question. Okay. So this last question is, "I see what's going on right now in the markets, and it's making me really nervous.

It seems to me that this could get a lot worse. Should we go to cash?" All right. Hand up here. I'm going to admit something. This is a plant. We're going to try something different with this last question. I think we at Ritholtz do a really good job of putting out content and trying to put things into context and set expectations ahead of time with our clients.

But there's always a big difference between a blog post and a video and the feelings you get from seeing the money you've created in your life savings evaporate before your eyes. So there's this great quote from Mir Statman, who's got a bunch of good books on this. He's a psychologist, and he's like, "Financial advisors frame themselves as investment managers, providers of beat-the-market pills, when in truth, they're mostly managers of investors." Right?

And obviously, most people, most clients, are completely fine when something like this happens. They've done it by themselves. They've done it with an advisor. They don't really sweat this stuff. But Bill, you've been doing this a long time. You've had a lot of conversations before. What are some of the biggest problems when helping clients through this?

Because that's a different situation. You know your own personal risk tolerance, but every client has their own differences, and sometimes what you say may not be what you feel and how you act. So what is your experience dealing with clients like this, and what are some of the things that they come to you with?

Yeah. I think the key, Ben, in situations like this for advisors, if you're trying to help somebody cope with something like this, is do your best to take the emotion out of it. Recognize that it is painful to watch your assets decline. And Ben, one of the things you and I talked in the show prep was, the larger your balance gets, the larger your portfolio gets, the more pain is involved.

When you see your $1 million account balance decline 10%, that's $100,000. If you see your $5 million account balance dip, that's a half a million dollars, and so on. And so I think validating that it's no fun to look at it is step one, because you do want to recognize that this is not a fun environment when news and media are sort of so focused on it.

Especially if you're retired, that money going away, for a young person, a bear market or a correction is a blessing, because you're buying at lower prices. If you're retired and you don't have any income coming in anymore, you see that money evaporate, but you're not building it back up with savings that you're going to be buying at lower prices.

So I understand why, even when you retire, it's even more nerve-wracking. Yeah. It's the flip side of that, which is a sequence of return risk, that early in retirement, that hurts more. So once that gets recognized, though, Ben, for me, the trick is then relate it to the plan.

Because at our firm, we don't let somebody invest in any of our portfolios until they have a financial plan built, and we test through this. We have the conversation. What are you going to do? What is it going to feel like? We try to prep this. So when we're going through it in real time, it's not the first time we've had the conversation about what a 10 percent, a 20 percent, a 30 percent decline, hypothetically, might look like.

So part of our role as financial planners, as CFPs, as advisors, or even helping out your friends and family, your mom and dad, is always to make sure you're not investing in a portfolio that you can't sustain, the kind of drawdowns that we're experiencing here. And Ben, you know, this is a relatively minor situation so far, right?

We don't know what this could turn into. But we're all driving, looking at the rearview mirror. And so we only know what happens. And I think just that second part about always keeping in mind that we only know what happened last week or last month, we don't know what's going to happen next.

But here's data. And Ben, that's why I think the work that you do, that our team does, is so important to show people this is what happens next. The problem is, too, that most of the time you're in a state of a drawdown. We anchor to these higher levels.

But so the data I've found is that 5 percent of all trading days is an all-time high for the stock market, going back like 100 years. Alternatively, 95 percent of the time you're in a drawdown. And I looked at the data. We talked about it last week. In the last 70 years, one out of every other two, one out of every other year is a 10 percent drawdown or worse.

Right? So we're kind of in that now, right? And it's been, it usually doesn't work like a schedule like this, but it's been about two years since the last 10 percent correction in the S&P. And unfortunately, it is normal, but it almost feels like you need that reminder every time it happens that this is normal.

And wait a minute. You know, I saw my account balance a month ago was much, much higher at the year end. And now it's this. Oh, geez. I can't. I can't take this. Get me out. And again, we've tried to do a really good job with our clients of setting expectations, but there's always people who say like, OK, I know this is going to get worse.

Let's go to cash now. Like just let's stop. Stop the bleeding. Go to cash and we'll reassess. And that's why I like setting an asset allocation and understanding the risk profile and time horizon of your clients is so important because you have to set that ahead of time, right?

You don't make a, you don't do it while you're in battle, right? You do it before and you plan it, right? And so you figure out ahead of time and you figure, OK, what's a durable enough portfolio for me to handle these corrections and build them into the plan?

Not like hope they don't happen because we know they're going to. We just don't know when and we don't know why. Yeah, exactly. And kind of pre-mortem it. I think that's what you're getting at. Like, what, how should we react if this happens? And the answers are pretty, pretty standard.

It's rebalance. It's deploy assets that you have in cash to pick up, you know, smaller balances. But at the end of it, I think what clients really need to hear, what people need to hear, what we all need to hear is it's going to be OK. And if we have a plan going into it, going into battle, as you say, Ben, you're able to reference that and use that as your touchstone.

And if I know that, hey, this has happened several times, this on average happens every two years and it's nothing that you need to worry about. That's the message. It's going to be OK. And I think if you're, if you're an individual investor watching this and you don't have an advisor you're leaning on and, you know, plenty of individuals can do this on itself, but like even a bad plan is better than no plan, because I know there's a lot of investors right now who started a few years ago and they just decided I'm going to buy whatever works and it's going up and now it's down a lot and it's like, now what do I do?

If you didn't have a plan going into it, figuring out a plan at the time is going to be ten times harder. Like, so again, even a bad plan is better than no plan. It's a very expensive time to find out who you are. Well, and as, as a little bit of a follow up, we have probably a ton of people right now who got into the market, young people who got into the market during the meme stock mania and that kind of thing.

And so they're probably really at a loss right now, like, you know, what is going on? Like this, you know, they were seeing names double over a week or, you know, that kind of thing. And it felt really easy there for a while. And yeah, unfortunately it's not always going to be that way.

That's the thing. If you're in a more speculative part of the market, your swings are going to be even wider than a more diversified portfolio, like we use with our clients. It's tough. Like on a brighter note, everyone in the chat now is sharing like all these great places that they've traveled to.

That's awesome. It's making me jealous. When are we going to sit by a campfire? It's like six degrees and it's like six degrees in Michigan. I think we need to do this show from, you know, some exotic location or something. That sounds good. Let's do it. My backyard. I did see some questions too.

So we're going to pull those questions. We'll get them in the future. Remember, if you want to just email us and not put it in the comments here, askthecompoundshow@gmail.com. Duncan, how close are we to 100,000 subscribers now? Are we getting there? Very close, right around 94,000. So we're getting there.

That's awesome. Yeah. All right. I like those big round numbers. Duncan's going to do 100k hat when we get there. We'll do that. idontshop.com for all of your merchandise needs. I think we have a Portfolio Rescue t-shirt there. Ben doesn't drink coffee mug. The compound hoodie sweatshirt that I have, I like that.

Thank you again to Bill for joining us. Keep your eyes peeled. We might be adding some kind of headwear at some point. We haven't been happy with the tests we've done, but at some point there will probably be some headwear. Duncan is a hat guy. 95% of all market downturns, Duncan has been wearing a hat.

We'll be back next week. See you then. See you everyone.