Welcome back to Portfolio Rescue! Coming back to you a little later today, because I was traveling this morning. You could think Duncan is very accommodating. Remember, our email here is AskTheCompoundShow@gmail.com. Today's show is sponsored by Liftoff, our automated investing platform powered by Betterment. Duncan, you know the greatest thing about Liftoff is, especially for this year?

What's that? It's all asset allocation-based. You're not picking stocks. You don't have to see any individual names down 80%, 90%, because you hold index funds in these portfolios. Automated, rules-based. That's a good thing, because we're going to get into it here. One of my most strongly held financial beliefs is that investing is simple, but not easy.

In fact, I think successful investing can be very difficult, especially when we're talking about stock picking. So, take Facebook as a perfect example today. Coming into today, Facebook -- and I'm sorry, I'm never going to call it meta. It's not going to happen. Yeah, same. I can't. So, coming into today, the stock was down 66% from all-time highs.

Those all-time highs happened a little more than 13 months ago, September 2021. So, this is pretty recent. Today, the stock alone at one point was down 22%. Hadn't looked at it in a couple hours. That's good enough for a peak-to-trough drawdown of 75%. Three-quarters of the value of the stock, gone.

So, John, do a chart out of the market cap loss of Facebook. This thing peaked at $1.1 trillion. It's now down to $273 trillion. So, we've lost more than $800 billion in this in 13 months. This is by far the greatest dollar loss in a company ever, and I don't think there's even a close second.

To put this into perspective, $800 billion, that number of lost market cap value, is greater than every single company in the S&P 500 right now, save for Apple, Microsoft, Google, and Amazon. This is just a massive amount of wealth that's just gone. The last time the stock was at this level was in late 2015.

The total revenue for Facebook was $18 billion. Last year, Facebook brought in almost $120 billion. So, Facebook went public in the spring of 2012. From that point through the highs of September of 2021, it was outperforming the S&P by 800%. It was easily one of the best-performing big stocks of the decade, up that, not even close.

John, do a chart out of the performance of the stock through today, since inception. Facebook is now underperforming from its IPO price, the S&P 500, on a total return basis. So, that's 800% of outperformance gone. The S&P is now outperforming by more than 25%. So, this is just a very not-so-gentle reminder that stock picking is extremely difficult, even over the long run, even for one of the best-performing stocks of the past 10 years.

And the hard part is, from here, you think, well, okay, the hard stuff is over, because the stock has already fallen 75%, but there's like two paths, I think, from here. One is, Facebook is just a broken company. They made a pivot to the metaverse at the worst time, and it could be a declining social network, and maybe it's just never going to regain those highs.

The other thing is, you could say, well, this is a stock that is still just bringing in cash flow, the metaverse thing is going to work. They just added legs to the metaverse. I mean, that's got to be worth something. What if this is a generational buying opportunity? And honestly, neither outcome would surprise me at this point.

And I give it up for people who want to make that call right now. I don't know if I could, but this just shows the perils of stock picking. And trust me, I still pick some stocks. I have a fund portfolio, but I still do this. It's really, really difficult.

Yeah, I mean, you just have to sell it at that peak, though. That's all you have to do. Of course, yes. Just sell in September 2021. It was easy to see that it was going to happen. 13 months ago, it was going to peak. And, ooh, boy. Mine that looks like that is Oatly.

It looks about the same. Okay, what is this? I've never heard of this company before. It's Oatmilk. So, I was Peter Wenching, buying what I know, kind of thing. Oh, Oatmilk. Yeah, it's not gone well. Is it supposed to be healthier for you? What's the story there? I mean, it's supposed to be pretty healthy.

It's good for the environment, blah, blah, blah, all that kind of stuff. It's like almond milk. Yeah, it's non-dairy. Okay, gotcha. Yeah. Okay. Can't believe that stock is not holding up better. Yeah, yeah. Easy to say now. Okay, all right. Let's do our first question of the day. Okay.

Actually, first up, I want to say happy birthday to Chris Vinh, our colleague here at the firm at Rihls, and also my mom. They share a birthday. So, happy birthday, mom and Chris. I don't know your mother, but I'm sure she's great. She produced a fine gentleman as a son, and Chris is one of the best people I know in wealth management.

Happy birthday, Chris. Yeah, yep. Okay. All right. So, up first today, we have a question from Bob. Wow. Unusual year with both stocks and bonds both down at the same time. I'm in my early 60s and still five to seven years from retirement. The current market environment has me wondering which is the better position to be in when interest rates inevitably peak and begin to fall and stocks rebound.

Down 18% and sitting in bonds, or down 25% and sitting in stocks? What do you think? I like Bob's line of thinking here, because a lot of investors in today's environment are viewing losses through the prism of, "This is a nasty risk, and this is awful," instead of through, "Hey, this is actually an opportunity.

Those losses are sunk costs. They happened already. There's nothing you can do about them." So, let's look at the relative attractiveness of both. So, let's start with bonds. Interest rates for bonds are now better than they've been in years, maybe decades. So, John, do the table on here. This is just different types of bonds, short-term government bonds.

The aggregate bond index is like a total bond index, corporate bonds, and then high-yield bonds. So, we're talking anywhere from, call it 5% to 9% for yields in bonds, average yield to maturity. That's not bad, right? And I actually think these yield levels are more important right now to the stock market than inflation of the Fed, potentially, because for the first time in a long time, stocks have some competition in terms of, they're providing a decent yield in bonds that give stocks some competition for allocation.

So, the stock market has done just fine with rates at these levels in the past, but we've never seen the relative attractiveness of bonds change so fast. So, I think investors finally see, even in short-term bonds and cash-like securities, that you can earn 4% to 5%. That has to change the equation in terms of allocation for people.

So, the question is, from bond investors, what happens here? So, Bob asks, "What happens if rates fall?" But I think, if we're doing a scenario analysis here, there's really only three options for bonds, from what can happen in terms of a variability, volatility standpoint. So, one, rates fall. Two, rates stay put, or just stay range-bound.

And three, rates rise. Inflation is obviously the wild card here for real returns, but let's look for the possibilities. So, rates fall. That's what Bob is thinking is going to happen. If you have any duration in your bonds, they're going to do better than any sort of long-term duration, or are going to do better than short-term duration, because if yields fall, prices rise.

And the more duration you have, all else equal, the better your bonds are going to do in terms of prices. So, rates could fall because the Fed decides to pivot in lower rates, or inflation could peak, or we go into a recession, or maybe all three of those things.

And even during the '70s, John put a little chart on here, even in the '70s, rates typically fall during a recession, even if they pick up their upward climb after that. So, I actually think rates falling a substantial amount would be the worst-case thing for fixed income investors, especially over the long term, because that means returns are going to be lower.

They'll be better in the short term, but over the long term, you're going to lose that yield. So, what happens if, let's say Bob is wrong and rates continue to rise? Prices would certainly fall again, for all bonds. They'd fall a little less for short-term bonds, and more for long-term bonds.

And I think if rates do continue to go up, you're going to get a little more short-term pain. The thing is, this time around, there's a much bigger margin of safety for bonds, because you actually have that 4-5% yielder sitting on, whereas before, the rate-hiking cycle happened when yields and bonds were like 0-1%.

So, that's why bonds got killed so bad. There was no yield to cushion the fall. So, I actually think if rates rose a little bit more from here, that's not the worst thing for bond investors, because again, those higher yields eventually turn into higher returns in the future. It's just a little short-term pain to get there.

And then, the other scenario is, let's say rates just stay range-bound, like 4-5% for a while. I actually think this is probably the most welcome thing for bond investors, even if you don't get that price kicker. You can kind of just clip your coupon. I mean, that's not always the case in corporates and high yield, because you have to talk about defaults and credit risk.

But if we're talking about just government bonds, if you just clip that 4-5% for a while, rates stay where they are, in a range, maybe. That's not the worst case, because bonds are supposed to be the boring part of the portfolio, right? Now, so, that's bonds. I think, say, two out of those three scenarios are pretty good for bonds, in the short-to-intermediate term.

One of them is better in the long-term, if rates rise. So, let's look at stocks now. So, interest rates roll over. Bob's right. You would assume the stock market would be doing better. So, John, let's do a chart on here. This is just, I've looked at this before, how the stock market performs when inflation is rising, falling, and then interest rates are rising or falling, using the 10-year yield.

You can see when rates are rising or falling from year to year, the returns for stocks are pretty much the same. It's like 9-10% average for both rising and falling rate environments. But if inflation is falling, the stock market has above-average returns, talking like 15% per year. If inflation is rising, we're talking more like 5-6% per year.

So, stocks definitely do better when inflation is falling or rising, and there's not as much of a relationship if interest rates are falling or rising. However, I think you would assume if inflation is falling, at some point, rates are probably going to come down a little, too. But the thing is, what if inflation and rates are falling because we go into a recession?

Does that mean stocks are going to rise? I don't know. Maybe. Maybe people think that bad news in the economy is good news for the stock market, but I can't guarantee that. So, it's possible, but I have no idea. So, either way, whatever the reason is, we know that buying stocks when they're down 20-30%, historically, over the long term, has worked out pretty good for you.

So, John, do another chart on here. I've showed this before on other shows, and people are probably getting sick of hearing it from me, but hey, if you buy when the S&P 500 is down 25% from all-time highs, looking out 1, 3, 5, 10 years, the results are pretty darn good.

The average returns are pretty good. The batting average is pretty good. The past is no guarantee of future performance and all that, the usual disclaimers here. But it makes sense if you're buying stocks when they're down 1/3 or 1/4. Over the long term, you're probably going to do okay, as long as the world doesn't completely fall apart.

So, now what do we think? If I had to bet my life on it, gun to my head, all that stuff, bonds are probably a higher probability bet over the short-to-intermediate term for giving investors better returns. That seems to make sense, especially with yields so high. And then stocks are probably the better bet over the long term, which is not exactly going out on a limb here.

But the good thing is that you don't have to bet your life savings with a gun to your head. That's not an actual thing. So, you can diversify, especially if you're 5-7 years from retirement. I go to the extremes and pick one or the other. Right? The great thing about diversification is you don't have to pick a winner in advance.

Your portfolio is going to have it either way. And I think especially with yields higher, if you're approaching retirement, yeah, it stinks you're sitting on losses. But from here, from this point, the way things are setting up with higher yields for bonds and lower valuations for stocks, I think there's a high probability of pretty decent outcomes for both from here, even though things have been really terrible this year.

I really like something you just said I wanted to mention on Animal Spirits yesterday. You guys were talking and you were talking about wanting to see someone do the research on stocks that have come back from being down 90% and have hit new highs. I would like to see that, because I think that'd be really interesting.

Yes. How about when a stock loses $800 billion of market cap? That too? But I do think, again, people have been saying this, 60/40 portfolios, that if you've been in a traditional portfolio of stocks and bonds this year, you've had a rough year. There has been nowhere to hide this year.

Even if you were in cash, you're losing to inflation. So it's been a tough year for investors. I think you do have to turn it around and try to change the mindset to thinking like, okay, this is also an opportunity. It's hard to think that way. Things could always get worse.

That's a caveat here. But I think we're in a pretty good position. Yes. Makes sense. All right. One more. Let's do it. Up next we have a question from Ramachandran. I'm a 28-year-old single male from the Greater Detroit area, Michigan. I'm maxing out my 401(k) and IRA, and today have almost $47,000.

My goal is to save $1.8 million in index funds before retiring around 65. Once my contributions reach $175,000, 30 more years of compounding at 8% annually will get me to my goal. Should I reduce my contributions at that time to save for other financial goals, such as a house and education expenses for kids?

I like this. They're looking so far ahead. 28 and single looking for that. Yes. I love the forward thinking here. Shout out to my guy here from the Detroit area. I lived in Detroit area for a couple of years. That's where I actually learned how to drive. People over there are nuts on the highway.

I think I increased my speed by 10 to 15 miles per hour on average. It's Motor City, right? Yes. Yes. And if you drive a car that's not from Detroit, you get shunned over there. Definitely. I was glad I had my Ford Taurus when I was there. All right.

So I love the forward thinking. I feel like thinking this way leads me to believe this person has read a personal finance blog post or three, maybe even one of mine, because you've heard me give this example before. Like if you start saving at 25, you save for 10 years, you get 8% returns, blah, blah, blah.

You're going to do better than someone who starts saving at 35 and goes till 65 because you get so many more years ahead of the compounding, right? So it appears that's what the thinking is here. So I get to $175,000 by the time I'm 30 or 35, and in 30 years from there, I can count on almost $1.8 million.

And it's true. I ran the numbers here. He's spot on. $175,000 over 30 years at an 8% annual return year in and year out is going to be like $1.75 million. It's hard to believe, because our brains don't think exponentially. So, John, do a chart on here. This is just the charts.

This is just average returns, annual returns, and what they lead to over 30 years. So you can see an 8% return is like 900% in total. 9% return is over 1,200%. 10% return is 1,600% over 30 years. Even 6% is close to 500% total returns. So this is the power of exponential thinking and compounding, and it's pretty darn good.

And the other thing is, if you look at the history of the stock market, your worst case scenario historically, so John, put the next chart up. This is the rolling 30-year annual average return. I only did this for 2020 because this is an old chart, but it is what it is.

The worst you've ever gotten is right around 8% investing at the peak in 1929. September 1929, you invest, you lose 85% of your money in the Great Depression. Over 30 years, you still get close to 900% in total return and 8% annually. Something like that. I think it's like 8.50, a little less than 8.

So that's the worst case you've ever gotten. Now, can we promise this is going to happen going forward? Of course not, right? Again, the past performance is no predictive future performance. That's a pretty good track record over three decades. The problem is, what if you're wrong? That's the thing.

There's no margin of safety here if you don't get 8%. So if you get 7%, you go from 1.75 million to 1.3 million. So you're almost 400 grand short. 6%, we're now looking at right around a million dollars. 5%, we're talking 750K. So you're a million dollars short of your goal.

Right? That's kind of tough. If your entire financial plan is based on hitting a specific return target and a specific dollar amount, you could be disappointed if the market doesn't cooperate. That's a big risk. The other thing is, what if the sequence of timing returns doesn't come in right?

So you could say, "You're still going to get your 8% return, but what if all those really high returns come early on in your career, and you get crappy returns towards the end of your career?" The sequence of returns, you could still get 8%, but do much worse, because you retire right when the market crashes or something.

So the stock market returns are lumpy. You don't get 8% year in and year out. Inflation is the other big one. What if you hit your 1.75 million dollar goal in 30 years, but your standard of living is different, or that money doesn't go as far? So no one really knows what their life is going to be like in 30 years.

I like the idea here. And obviously, there's a finite amount of savings for each person in terms of the goals they have. So if you want to cut back a little bit to buy a home and save for kids and whatever else you need to do, of course that's fine.

Your money can't go everywhere if you don't make a ton of money. But I like the idea of at least continuing to get that company match in the 401(k) and save for those goals. Once you hit those goals, I'd be a little nervous if I'm completely giving up on retirement saving just because I'm going to have compounding do it all for me.

I like the idea. I still think you should probably throw in a little margin of safety and just keep saving. Maybe you could decrease your savings rate once you hit that goal, but I'd keep saving. At least get your free match and go from there. Right. Yeah. The match is free money, right?

It is. But yeah, this person has obviously done a lot of personal finance research. And this is like, I always say a lot of these spreadsheet answers, like no one actually does this. This person is trying to do like a personal finance book. And I would say, it's really intelligent, but also you want to leave some room for any mistakes or errors or the potential for your life to be different in three decades.

No one knows what their life is going to look like in three decades. I don't know what my life is going to look like in three weeks sometimes. Right. Yeah. Or three days, right? True. Okay, cool. So up next, we have a question from Scott. I hope you don't think I cheated on you with another podcast, but I heard a tax expert on stacking Benjamins.

Excuse me, sir. Yeah. Ed Slott on October 10th episode said everyone should go all in on Roth instead of traditional across the board, including their 401k contributions. One of his arguments was that tax rates will be higher in the future, which I agree makes sense if you're in a low tax bracket.

However, not to brag, but I'm in the 24% marginal federal tax bracket. I have a hard time believing that my cumulative tax rate in the future will be higher than my current marginal rate. Do you think I'm wrong? Well, hold on. We have a second part to this question.

Yeah, there we go. Another argument was that you won't have to pay taxes on your investment gains with a Roth while all withdrawals from a traditional account are taxed as ordinary income. Anecdotally, his arguments make sense. However, I feel he's neglecting the time value of money, i.e., the upfront benefit of the deduction now versus the tax savings in the future.

I'd love to see Ben put what he has learned from the CFA to work and crunch some numbers. I realize that you might need to break out a crystal ball to predict investment returns in future tax brackets, but I'm wondering if there's a break-even marginal rate, tax rate, where traditional 401k contributions make more sense than Roth.

I've often wondered this, so I like this question. There's a lot going on here. This is our first not to brag about a tax rate before, and I feel like that's a niche joke for 5% of the audience that will get that. I think Scott is smarter than I am here.

He asked me to take my CFA hat out and fix this. Here's what they don't teach you in the CFA. Instead of crunching the numbers yourself for tax questions, bring on an expert who knows how to do it better than you. I didn't learn tax in the CFA, so let's bring on a fan favorite here, Bill Sweet.

Gentlemen. Bill, tax man. You're my tax expert. Good to be back. Bill, through the magic of airplanes, I was in New York with you yesterday, hung out all day. We went out to a nice, fancy dinner together, and now I'm back here in Michigan, and here we are over the Zoom.

Yeah. So Scott has, I think in our Google Doc here that we share with each other, you said this is a fantastic question. It's an intelligent question. Scott obviously has thought long and hard about this. Okay, what are we doing here? He wants to know, okay, I get the generalized thoughts about Roth, but what about my personal situation?

So how does this factor in, since we know you're a big Roth guy? Yeah, first off, Ed Slott is a walking legend. The man walks on water in the tax world. You can cheat on me with Ed Slott any day of the week. Ed Zollers is my other main Ed in the tax land.

He's a CPA. Ed Zollers, can you beat that name? There's only one name, I think, Bill Sweet. That's better than that. Tony Dindi and Jeff Levine, they surround out my Mount Rushmore. But Ben, did you know that the high marginal tax rate in 1945 was 94%? Okay. So if you're bragging about your 24% tax bracket to your grandpa who landed on Omaha Beach, you might want to hold that in because he cackles at your 24% tax rate.

If I had a 94% tax rate, I'm pretty sure I would be doing some illegal stuff and not paying my taxes. Well, hopefully, no illegal stuff. We're an NSEC registered firm. But that was for somebody earning more than $200,000, right? And if you adjust that for inflation, it's about $1,000,000 in today.

But still, thinking about earning an extra $100 and only getting to keep six, again, we have 2020 problems over here. We might have recessions in inflation, but it was nothing like that. So another stat I want to share with you guys is for the fiscal year ending August 30th for the US federal government.

The US federal government received $4.8 trillion of receipts. That's pretty solid in the grand scheme of things. We might be in a recession, but $5 trillion of tax revenue. The problem is we spent $5.8 trillion in the trailing 12 months for that extra trillion dollar gap, right? So my point here is I enjoy this question.

I think it's a good one. But Scott, you are living in low tax nirvana right now, and we just don't know it. John, can you pull up that chart, the chart I slapped together two minutes before broadcast, by the way. Here's a quick look at historical US high and low marginal tax rates.

And so right now we're at 10 and 37. And again, that's no fun. But like compared to history, we're in a pretty low tax rate. Really, like it was Ronald Reagan who came along in 1986 and said, enough of this 50 plus percent tax rate. And we really never looked back.

Of course, budget deficits and everything like come with that. But I really want to turn this question around, Ben, because ultimately, I think sometimes in this show, we spend a little bit too much time trying to game things, right? I mean, you try to be a winner with your investments, right?

You've successfully timed Michelin star restaurants, ordering chicken fingers and asking for ketchup there. I timed when to get out of the Michelin star restaurant. It was a good move, but you missed the celebrity chef who came a couple minutes later. But leaving that aside, with perfect knowledge, knowing how the next 30 years of investment returns are going to pan out, future tax rates, and your life expectancy, yes, we can perfectly game this.

But the future is not just unknown, Ben. It is unknowable. And I think it makes sense to optimize, but only up to a certain extent. And so, Ben, let me magically retire you in 2050 or so. If you're looking back, I think the goal is we want tax diversification, right?

We don't necessarily want to win, but we want to have a bucket of Roth, a bucket of pre-tax, a bucket of non-qualified assets. So, when we go out and spend money, we can pick and choose where that comes from to maximize our future tax rates. So, Scott, that's the frame I'd like you to think of.

And Ben, when is the time when you might want to contribute to a Roth IRA compared to a traditional? Like, when in your life cycle? When you're young, right? When you're young, right? And so, Scott didn't give us his age, but ultimately, if he's in the 24% federal tax bracket, assuming that that doesn't jump up substantially, my guess is still probably pretty early in life.

Now's the time to max fund a Roth. And I think somewhere around mid-career, you flip that switch and then you try to game it that way. Yes. And the point is, too, optimization only works for the benefit of hindsight. You can't optimize for the future because we don't know about it.

So, that's the point of diversification. So, diversification in asset classes and how you save and when you save, and also your tax rates, right? Yes. And I would listen to the legend, the man, the myth, Ed Slott. He knows what he's talking about. What would you say to someone who's young and who's like, "I'm at a relatively low salary compared to what I'll be making down the road.

And so, this extra money in my pocket right now could be really beneficial." Yes. Again, that makes sense to me, Duncan. But I think you really have to balance that out between the power of compounding, right? And so, $1,000 today, you leave that alone for 30 years at 8%, like the questioner, the second questioner.

That becomes worth $8,000 to $20,000, right? Depending on how long your time horizon is. So, yes, you could use that money today, but you probably really want that tax-free compounding asset in the Roth. So, it's a balancing act, but I don't know. Bill is going to shame every young person into investing in a Roth.

Yes. That's my goal here. Well, now I'm thinking, what about that $8 coffee from Blue Bottle? No, I don't do that. I don't do avocado toast. Yeah. All right, let's do another one. That's like 2015 bullshit. We don't need to play that game. Okay. Up next, we have a question from Willie, who I like to think is going to be Willie Nelson.

Yeah. "I sold my rental property this year, like Ben, and had about $125,000 of long-term capital gains. I invested the proceeds in a few ETFs and now have some short-term losses. I'm a bit confused about how to deal with the wash/sell rule. If I take the loss to lower the hit of my capital gain, in theory, I can't invest in a similar ETF for 30 days.

I don't want to be out of the market, and I really don't want to substantially change what I'm invested in for 30 days if I'm just going to switch back 30 days later and potentially have short-term capital gains. Am I looking at this the wrong way? Is the tax-loss harvesting even worth the trouble?

Can I go from VTI to SPY, or is that too similar?" These are questions you ask during a bear market. No one talks about tax-loss harvesting during a bull market. Bill, let's start with an explanation. Also, good job, Willie, selling your rental property when you did. Pulled a Ben Carlson up in here.

It would be a little harder to do right now. Let's start with a short explanation of tax-loss harvesting and then the wash/sell rule and how this works and why this is a rule. Yeah, so just very quickly, Willie sold a property. He realized a gain of $125,000, a taxable gain.

At the end of the year, if he does nothing, let's say he's at 20% tax bracket, 15% federal, he's going to own about $25,000 right to the IRS. So that clock's ticking. The gain's been realized. So Willie's question is, "OK, cool. I now have capital losses in the assets that I reinvested in." Let's say he has a $60,000 loss.

He has the opportunity then to cut his loss in half, right? Because he realized a gain earlier. Now he has a loss. At the end of the year, 12/31, at midnight, magically, the IRS ferry declares capital gain season over, and everything gets netted out throughout the year. So Willie's got an interesting opportunity here, and I would suggest that he acts.

Right, so use those losses to your advantage here, right? Yep, precisely. And the whole wash sale thing is basically just so you can't sell a stock at a loss and buy it back immediately because the IRS is-- you're just kind of locking in those losses, and they don't want you to be able to easily do that.

Unproductive economic activity. Yeah, I think that's the rationale. And these rules date back to the Securities and Exchange Commission Act of this year. Although you can technically do that in crypto right now, right? That's what I was about to ask, if you could still do that. Because cryptocurrency is not a security, right?

So all these SEC rules that were written in 1925, they apply to securities. But for reasons that are a little confusing and not the subject of this question, cryptocurrency is not considered a security, but an ETF, a stock is. So what is a wash sale rule? The 30-day wash sale rule is exactly like you described, Ben.

You're not allowed to book a loss for security that you sell and you rebuy it instantly or within 30 days. And it's actually a 60-day window. Because if you buy a security, let's say he just goes out and buys another ETF a day before, and then books the loss and just has that extra capital lying around.

He's done that within 30 days prior to the sale. And so that loss would be disallowed as well if it's a substantially identical security. And so that language is really important. The tax code says it cannot be substantially identical. But nowhere in the tax code can you find out what substantially identical actually means.

But luckily, throughout the last 100 years or so, some morons decided to push the issue all the way to the tax court. And some judge ruled a couple of rules and a couple of basic rules that follow. So substantially identical security is obviously the same security. Another thing, if you have a different share class-- so Google trades two different share classes right now.

Berkshire A, Berkshire B, that's substantially identical. It's the same company. It's the same underlying asset. The other thing, options, calls, puts, those are considered to be substantially identical. So you cannot buy a call option, sell the stock, and then a day later exercise that call option, just rebuy it whatever price.

That is substantially identical. Another thing to keep in mind, thou shalt not buy this stuff in IRAs too. So if you have an automatic purchase of your company stock, Exxon Mobil, whatever else, in your 401(k) or in your retirement plan, that is also considered a wash sale. And what happens is if you trigger these wash sale rules, like the universe doesn't end, you don't divide by zero, and your piece of paper, your computer melts down, what happens is your basis just carries forward.

And so you basically paid that trading commission, or you exercise that bid-ask spread. And ultimately, it just carries forward. So what's the solution here? Any ideas, Ben? So riddle me this. If he sells his S&P 500 ETF and buys a total stock market ETF, it's kind of different, right?

Right. So that's the key, substantially identical. And there's been no case law on this, but generally practitioners, Ed Slott among them, say that if you buy a security that is tracking a different index, and so like the S&P 500 is a large cap US index, the crisp US total stock index, which happens to be one of the indices that the ticker that he mentioned follows, that is, in my opinion, substantially not identical.

And it's a facts and circumstances test. But ultimately, if you're buying something that is the total US stock market versus the top 500 companies by market cap, that's substantially different. And he got mid-cap and small caps in there. What if Duncan sells oat milk, and he buys almond milk?

Does that count? I would say both are disgusting, and I would disqualify them from the wash sale rule. Come on. We already did a poll. People love almond milk. I think that would work out. It was actually split, and there was no cow. There was no organic cow listed there.

So I throw that poll out. I thought this was an anti-poll show. One thing worth mentioning is that DRIP can mess this up too, right? If you're auto-reinvesting dividends. Yeah, that's what I was getting at before, Duncan. Precisely. So if that's happening in a different account, or even let's say you have a Liftoff account, because I'm a company man, and that is doing loss harvesting for you, you might have a buy in a certain security, and then you're trying to do this in your account.

So you do. You have to take a holistic look. And again, it's actually a 60-day rule. 30 days before, 30 days after. But I would do it, because ultimately, if you can cut your tax loss in half, that's money in your pocket. You realize that economic loss, and all you have to do is just buy a substantially not-identical security, and then you don't miss out on any of the market appreciation that may be coming in the future.

All right. Duncan, one more question. OK. Last but not least, we have a question from Kyle, who writes, "I hit my 401(k) pre-tax limit for the first time in my life last month as a result of a bit more aggressive saving this year." Congratulations, Kyle. Not to brag, Kyle.

Nice. Yeah, not to brag. Good work, Kyle. Close to 15%. "My company matches 7%. Backdoor Roth already maxed at $6,000, and my HSA contribution is maxed. I aim to go mega backdoor the rest of the year, but it sounds like the provider won't let me with my after-tax contributions.

Now I'm stuck in a pickle. Keep after-tax 401(k) contributions up to keep getting the company matched for the rest of the year, or cut back on the after-tax 401(k) contributions and maybe allocate to something else, like my after-tax brokerage bucket. Thoughts?" OK. So a good problem to have here.

So Bill, I don't know why they wouldn't let him do the mega backdoor, but what are the options here? So ultimately, option one is I speed dial our company. I'm going to call the CFO or whoever's in charge of the money and get that 7% match. That's tasty. We don't have that, but the solution here, I would like to think about it this way.

What is the order of operations of savings, right? And so where do you get the best bang for the buck or the most preferential tax treatment? I would start then, and you've advocated this in the past, for that company match, right? So whatever you need to contribute, I don't think you can necessarily call it free money, but if you're getting a 7% match, it makes sense just to contribute that 7%.

It's a 7% rate. Yeah, I'll get the match. That's it. So that's the ground floor, and now we're on the ground floor. Let's go to floor two. Big fan of HSAs. The listener maxed out his HSA. That's awesome, but ultimately, HSA is the potential to be triple tax exempt, but that's not the question here.

Next level, Roth IRA. Why? IRA. You can get your basis back from an IRA tax-free at any point, right? You're not going to deal with penalties, and ultimately very flexible. I think that's the place to go for the next level. That's been maxed out. Now we're going Roth 401(k).

$20,500 is the limit that you can do with your own savings. So ultimately, we hit this this year. Great. Now we're moving to the next level, after-tax 401(k). And what that is, that's that mega, super, whatever it is, backdoor Roth. Ed Slott's talked about this in the past, the namesake of this show, apparently.

And ultimately, I think that's a cool thing to do, but that option is closed. Not every employer offers this thing. I think Bill drafted Ed Slott in his tax fantasy week this year. He is the number one draft pick, right? Year after year. But yeah, the mega backdoor is not available to everybody because it's super complex, right?

And ultimately, the plan sponsors, they don't want to get into waging war with the IRS over this stuff. There's stringent testing requirements. We had to go to our plan provider, and it took us about two years in order to get them to play ball with us there, and many threats of leaving.

So ultimately, if that's not an option, cross it out. I would say six is IBONZ. We've talked about them in the past, but that's a really interesting opportunity. You have until tomorrow. Yeah, you have one more day to get that 9% rate, or 9.6, and then it goes down to 6-something.

The clock's ticking. If you're listening to the show on Friday, it might be too late. But seventh would be a brokerage or tax-managed account. And so I think, ultimately, the listener here has filled up every bucket. Who is this? Kyle? Yeah, this is Kyle. Ultimately, Kyle has filled up every bucket.

And so yeah, I think the next place to go is a tax-managed brokerage account. I use Lyft Off. I'm a Lyft Off subscriber, a company man. That's where I would go. But something that can tax-manage assets, get maybe some tax losses in a year like this. So I think Kyle's got the right answer.

After all this wonderful tax talk, Kyle in the chat said, "A woman is marrying me, even though all I talk about is what you guys talk about." Easily our best backhanded compliment of the day. Hey, hiring at ritholdswealth.com. Come on, Kyle. But speaking of backhanded compliments, we did eat at a Michelin star restaurant last night, Ben, as you know.

And the specialty of the restaurant was seafood. You and Michael said no, no to fish. Michael and I are not huge seafood guys. And I think they were a little taken aback about what to do. It was a power move. I will say that. But I think they handled it.

They handled it very well. It was a French restaurant. But when the dinner came and Ben asked for ketchup, they asked us to leave politely. I'm pretty sure that was Michael, but they didn't. Yeah, the crazy thing was they gave me the Michelin star. They were like, "We can't have this anymore." Not to totally derail this conversation, but whoever decided that a tire manufacturer gets to decide the best restaurants?

Oh, it's a great history. I think it's like there was a travel guide, right? Back when these were things. The Michelin guys. Yeah, exactly. And so that was it. And it's just still here today with us. I'm happy to take all the hate from not liking fancy restaurants in the chat room.

I think you have to be selectively cheap in your life, and life is about trade-offs. And for me, that means I prefer a burger and a beer to caviar and champagne. Sorry. I'm in a flyover state. I'm not one of these East Cody elitists. I'm sorry. We don't have any French-- It was in honor of Mr.

Venn's birthday, and a good time was had by all, except for Michael and Ben, who went to a Knicks game. But God bless them, that they have this option. So thank you again to everyone watching live, everyone in the chat. Thanks, Bill, for coming on again. I got to answer a question that didn't have a Roth area conversion in it.

That's true. Get this tattoo removed. We got some good ones. Do you want to mention this email from Will before we get out of here? It's kind of nice. We get a follow-up from someone who actually asked a question before. And I think they asked us a few weeks ago.

Basically, I'm in a great financial position. I feel like quitting my job to help take care of my new newborn or new daughter or son, I think. Yeah. What was the follow-up? Yeah. So Will wrote us. And this was from episode 42. Today's episode 50. So wow. We're trucking along.

Very cool. So Will said, "Hey, Duncan. You might remember this thread. Well, I can now say that Ben Carlson made me quit my job. A big step into the void of no income, right? Well, shortly after giving my two weeks, an old employer called me up begging for help.

They want me to set my own consulting rate to do part-time work. I now have a super flexible schedule and make more per hour than I did before. My immediate worries over income were unfounded. I feel blessed, but it is also a testament to how hard I've worked in my career.

I've worked in compliance, and it's more valuable than ever because everything gets more complicated. Most importantly, my daughter is, in her own way, grateful for the extra attention. Many thanks to what you guys are doing." And yeah. So that was kind of nice to see. Very cool. Kudos to you.

I was trying to help Jerome Powell by putting some out of work, then they just go back and get another job. Right. But it's awesome. Yeah. This could have been a lot more awkward, right, depending on circumstances. The flexibility is definitely the key here. And I think what we said was if you're in a good position to do this financially and you can handle it, then yeah, do what makes you happy.

And that was spending more time with the daughter, and now another job came about it. So that's awesome. It's the stuff of life. It's more flexibility. Yes. Anyone else who's asked questions in the past, feel free to give us follow-ups. We'll shout you out on a future episode. One other thing.

We were number one investing podcast in Latvia in the last two weeks. So shout out to everyone watching in Latvia. We appreciate you. Okay. How many Mission Star restaurants do they have? A lot. All right. Remember, email us, askthecompoundshow@gmail.com, and we will see you next week. See you, everyone.

Thanks. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. (upbeat music) you