(beeping) (upbeat music) - Welcome to Portfolio Rescue. This is our show where we answer questions directly from you, the viewer. And I want to say thank you to everyone who emailed in. Our inbox is overflowing with good questions from people. Duncan and I have been going through those for the past couple of weeks.

All great questions, so we're pretty much never gonna run out of stuff to talk about on the show, right? Duncan, topics are never-ending. If you, remember, if you have a question, email us, askthecompoundshow@gmail.com. Quick disclaimer, this show is for informational purposes only, should not be relied upon for investment decisions.

We're just providing context and some help to help you through decisions here. Remember, it's not just gonna be me and Duncan here at all times, we're gonna bring some experts on, maybe multiple experts today, hint, hint. Duncan, let's get into it. What's the first question? - Okay, good morning, everyone, and hey, Ben.

First, I did want to mention, some of you might have tuned in thinking we were gonna do your question today. Don't worry, it's gonna be next week now. We rearranged things a little bit, so. - We're breaking hearts, Duncan. - Yeah, yeah, exactly so. - We had something planned, it didn't work out, and we're gonna do it in the next couple weeks, so.

- Yeah, we'll get to it, so yeah. - It happens. - Okay, so first up, our first question today comes from Billy, and so Billy writes, I'm 61 years old, and I've been retired for two years. I have a 90/10 portfolio, and my friends and no-fee financial planner advise me that I'm too aggressively invested, and that I should have more bond exposure.

You've won the game, why take a risk at this point, is what they've told him. They seem to have totally bought into the 60/40 portfolio, but I don't see it that way. At my current spending, I don't use any of my portfolio. Even doubling my expenditures, I would still have 10 years of income to pull from the fixed income assets alone, and then Social Security would kick in.

What would you advise someone in my financial situation to do regarding bond allocation? I think I have enough. - All right, so before we get into some of the nitty gritty here, John, play my favorite George Carlin clip here real quick. - Have you ever noticed when you're driving that anyone who's driving slower than you is an idiot, and anyone driving faster than you is a maniac?

(audience laughing) - Say, look at this idiot here, will you just look at this idiot just creeping along? Whoa, look at that maniac, go! (audience laughing) - Perfect. All right, this is the way that I view when you have people look at your asset allocation versus other people, because the secret is there's no perfect portfolio, right?

It's all about striking the right balance between your willingness, need, and ability to take risk. And obviously, this is a little different because this person is in retirement, and they're thinking about, well, how do I allow my portfolio to make it? And they did give us a few more tidbits here.

We couldn't include 'em all 'cause this is a very long question, but-- - Yeah, lots of detail. - Yeah, but they said they're basically taking 1% from their portfolio, because they have Social Security, because they have other income coming in, they're not taking much from their portfolio, 1% every year.

And so, while some people would say that's insane, why would you take a 90/10 portfolio in retirement? You have no savings coming in. If there's a nasty bear market, you might not be able to make it back. If you have, if you're taking 1% from your portfolio, and you have 10% in fixed income, that's 10 years worth of spending, right?

I mean, not adjusted for inflation, but pretty darn close. So, while it seems crazy, based on this person's circumstances, it might not be. The thing is, there's a difference between do you need to take risk and do you want to take risk, right? So, there's two hugely wealthy families in Western Michigan that I know of that have family offices, both billionaires.

And one of the billionaire families has all of their money in private equity. They have the ability to take risk. They don't need to take risk, but they have the ability, so they do it. The other family, and I know people who have helped to manage this money, have the entire portfolio in bonds.

This is a billionaire. They don't need to have their money in bonds and safety. They can take as much risk as they want, but they don't want to take risk. So, a lot of it comes down to what you need and what you want, and I guess a lot of this comes down to how flexible can your spending be, right?

Because a lot of times, we see these 4% rules or 3% rules for taking money out of a portfolio. And no one actually does that on a year in and year out basis without making some changes based on circumstances. So, if we did have a nasty bear market, are you willing to cut back your spending potentially because you don't want to sell down your stock portfolio when the crap hits the fan, right?

So, and I guess are you willing to, worst case scenario, spend down your whole bond portion of your portfolio and maybe not have much dry powder left to buy stocks when they're down? So, I think as long as your income needs are being met, can you do a 90/10 portfolio?

Sure. Are you gonna be able to sleep at night better than someone who had more of a 60/40 or a 70/30 or 80/20? That's a question a lot of people are asking themselves these days because bond yields are so low. But again, that right balance is never, they're never gonna be a perfect equilibrium for everyone.

But if you don't need to take risk and you want to take risk and you're willing to understand those, the potential downsides, I don't think it's necessary to take a conservative portfolio if you don't need one, especially if your spending is in line with what you understand your needs to be.

- Yeah, and I mean, you guys have talked about this before, you and Michael, just how in our current environment over the recent years, yeah, it's hard to make the argument, but the future doesn't look like the past always, right? - Yeah, so I think it just depends how flexible you can be and everything's not set in stone.

All right, let's do the second question here. - Okay, so next up, we have a fun one. So this question is, we are a couple of millennials that have not been able to buy a home because of the barrier to entry being too high. We live in the California Bay Area where housing is extremely competitive.

We've been creative and to save on costs, we moved into this small but lovely travel trailer earlier this year. We own the trailer, which we can later sell to partially fund our down payment on a home, or we can rent it out as a side hustle. We currently pay $700 a month to rent the space where we are parked and about $100 a month for utilities.

We love our little trailer, but we can't wait to own our own home and begin putting equity into it. We think we can buy a house big enough to convert one to two rooms into short-term rentals like on Airbnb. That should be another profitable side hustle for us because we live in wine country and we're looking to buy near a local college.

All that said, we are probably a good one to two years away from being able to qualify for the mortgage we want. I've got, then they go on to say that, sorry. So basically what it comes down to is they're debating buying an older home versus a new construction home, keeping in mind that new construction will take nine to 12 months to build.

There are a lot of factors for us to consider and we are wondering if you all can help us evaluate this choice from an investment standpoint. - All right, so basic gist of it is we have two millennials here living in a trailer, which we got a picture of the nice trailer too.

They could rent it out a little bit, maybe help them, they're a couple years away, they're saving, especially 'cause they live in California. I want to bring in my favorite person to go back and forth with on real estate on this, my Animal Spirits co-host, Michael Batnick. You're gonna help me out with this one, Michael.

- Wait, I thought you were bringing a bill on this one. Threw me for a loop. All right, what are we talking about here, real estate? - Yes, so basically what are the pros and cons of buying an older home in a more established neighborhood versus buying new? So I'm making an assumption here.

Most of the homes in New York area, probably in the suburbs are older homes 'cause they've been there for a while and there's not a lot of land anymore. So maybe you can talk about that side of things. - Correct. - So the pros and cons of buying an older home.

- Okay, when it comes to doing anything handy, I'm worse than useless. I can't do anything. So I really wanted to buy a house that was pretty much move-in ready. So even with the house that I bought, which was, I guess it was demolished in Hurricane Sandy, but the infrastructure of the house was there.

So they built up on top of it. Everything was brand new. And even still, there was issues with the home. During the first rainstorm, I see Robin calls me. I got trickling down. I'm like, oh, fuck. And it's not just that. There have been, not that I got a lemon, but just shit happens with houses.

And the older your house, the more likely you are to have expenses and pains. So you might think that it makes sense financially to buy a smaller home, an older home. But I don't know if that's necessarily a wise financial decision. - So I think there are some pros about building new.

We built a new house in 2017. You have better materials that can potentially last longer. And like you said, fewer repairs. With a lot of new houses, you get some sort of warranty that could be 12 or 24 months, or if something goes wrong, and even little dings in the wall, they'll come fix them after a year.

- What if there's a line in your home? - What if there's a line on your TV, right? - Wait, but hold on. But most people, well, it depends where you live. Where I live, the idea of building a home and helping design it or pick out stuff, is that what you did?

You picked out materials? - That's one of the potential downsides. The potential upside is you get to make it your own. The downside is there are so many decisions you need to make. I didn't know you had to make the decision, well, what color is the grout gonna be between the tiles?

And what kind of light switches do you want? There are so many. So if you're a person who doesn't like that, that could be a downside. - But that, where I live, is not in the cards for most people. Certainly wasn't for me. - So yeah, if you could-- - No, I'm saying financially.

- Oh, right, financially. - Like to build a home and start picking stuff out, I don't, I mean, that's very, very rare where I live. Most of the time, it's a builder, and you go into the house and it's done, and then you can do what you want. - And I think one of the upsides in this current real estate market, if things remain hot, is if you buy new, you're not outbidding anyone.

You're not gonna get outbid, potentially. Like, you know going in. Like, so if you put a deposit down to build a new house, no one's gonna come out and outbid you like you would for a single-family home and an existing family home that you could get outbid on. - The question here, the question here is what's gonna hold more value, I think.

Is it buying an old home in an established neighborhood or building a new home in a newish neighborhood? Was that the gist of the question? - Yeah, and I would think holding value-wise new, probably. A lot of it depends on your style, too, 'cause some people like the charm of older homes that you don't get anymore.

They don't want the modern stuff. - Not to pull a Ben Carlson, but don't you think the answer to this question is it depends? It depends on the neighborhood. - Yes, I will say from personal experience, buying a new home, I think it saves you a lot of years of headache and pain of having to fix stuff.

There's a lot of stuff you just don't have to worry about for a long time. - Yeah. - A new roof, a new water heater, all that kind of stuff you don't have to worry about. - Am I getting kicked out now? - Yeah, see you later. - All right, bye.

- Duncan, it's question three. - Okay, so next up we have one from Alex, and so Alex is writing in about municipal bonds. He says, "One asset class that I haven't wrapped my head "around is municipal bonds. "Are they important, a good addition to the portfolio? "If so, what are the metrics "that I should be looking for as an investment?" - All right, yeah, we have the wrong one up there.

- Oh, sorry, yeah, that's the wrong question popping up there. - Whatever. - Yeah, there we go. - All right, simple one. So I wanna bring in, because municipal bonds have some tax benefits, I wanna bring in our tax expert here, Bill Sweet, who we've had on the show before, to talk about some of the tax benefits of muni bonds.

Bill, here's what I know about muni bonds. So thinking through the tax equivalent yield, and we use muni bonds for client portfolios, and some of the benefits there, you can also create a bespoke portfolio depending on what state you're in. So what are the thought process here of creating a muni bond portfolio?

- Yeah, last time I was on the show, Ben, you said I had Roth IRA conversion tattooed to my back. It's actually tax equivalent yield. - All right. - And that's the topic here. Let's start with a bond. What's a bond do? You give somebody $100,000, let's say, a treasury, they pay a 3% coupon, that's $3,000 of interest.

Problem with that type of investing, if you're in a non-qualified account, so not an IRA, not a 401(k), you gotta pay income tax, ordinary income tax, on that coupon yield. And so let's just say somebody's at 33%, federal and state combined, they're giving back 1,000 out of that $3,000 of interest annually in taxes.

And that means their tax-adjusted yield is only 2% of a 3% bond. Municipals have this really, really neat feature, which is tax exemption. And so you do not have to pay federal income tax on just about every type of municipal bond because of the way that the federal system works, is that there are certain revenues that are tax-exempt at the federal level and vice versa at the state level.

And so that 3% coupon bond, if it's a municipal, you're not paying tax on it, you get to keep all $3,000 of that interest. There's no tax. - And are there certain states where you're better off, like in a high-tech state like California, New York, you're better off with muni bonds, technically?

- Yeah, I mean, I think so. And there are certain time periods when that's true and it's not. And I think right now, there's some harmony, but certainly like back in 2017, we saw yields on municipals like nationally about 3%. And a 10-year treasury would get you somewhere around two.

And so if I'm a high-income taxpayer, you're exactly right. If I'm in New York, if I'm in New York City, and I'm paying 14% of my income tax to the state level in addition to the federal, and I buy a New York bond, right? So that's part of the problem is you need to sort of look in state to get that state, that triple tax exemption at the federal, state, and local level.

That can save a taxpayer a lot, as much as 50% on that side. And so if I can keep all of my 3% yield, the tax-adjusted yield on that, assuming a 50% tax rate, is actually 6%. And so if I'm out there, my choices are 6% out there, a 3% municipal, that's equivalent.

But if my choice is three or three, I'm much better off the municipal bond. Again, assuming this is a non-qualified account. This doesn't apply to IRAs, 401(k)s. - Right, and I think getting to the point where people become concerned, and I think in recent years, especially after 2008, people were worried, well, if I buy these muni bonds and my tax or my state or city defaults, I'm screwed.

I think actually at this point, you have to feel a little better about them 'cause all the states and municipalities seem to be in better shape because of the pandemic, all the fiscal support that they got. - Yeah, I agree. - They're coming out of this thing better than they were before, right?

- Yeah, and you're seeing retail sales rebound, et cetera. It's important when you're looking at these things, assuming you are looking at individual bonds, there are two real types. One is GO, general obligation, and that's exactly, Ben, what you're talking about. That's generally supported by the revenue, sales taxes, mortgage taxes, et cetera, of your local municipality.

However, there's another type of bond, a sort of special purpose bond that's tied to a revenue source. So where I live, I'm about 10, 12 miles from the New York State Thruway. The Thruway collects tolls, and New York State sells bonds. The Thruway Authority sells bonds that are supported by those tolls.

Pros and cons of each, you have to evaluate them. We have a third-party manager do that for us, and they're great at it. But very generally, I think it's a great consideration if you're a high-income taxpayer, if you're looking for a way to pick up a little bit of yield.

I think they're a great complement to other fixed income. - And I agree that you want a funder or professional doing this, 'cause they're liquid, they're hard to understand. Buying bonds, you know, is not easy. Duncan, next question. We got one more. - Okay. So our last question is I'm 46 years old, and I want to be financially able to retire at 55, but won't be able to until I'm 62.

In 2015, I opened a TD account and took $50,000 and bought 100 shares of Google. Last summer, I took another 401(k) account that I had to move since I was changing jobs and bought $20,000 of CrowdStrike. Thanks, Josh, they put. These are my retirement investments, $350,000 in a Target Date Fund, and a 401(k), 35(k), and a 403(b) Target Date Fund, 100 shares of Google, 175 shares of CrowdStrike.

My concern is that I have about $700,000 in 403(b)/401(k), with half being in two stocks. At what point do I need to redistribute my retirement accounts? - Great question. Let's bring Michael back in here, too, 'cause this is something we deal with a lot, and Michael, I know, has dealt with this, too, on our direct indexing platform.

- Very common question. - Yeah, this is, and I guess, so this is the whole thing, like, yeah, you concentrate to get rich, but you diversify to stay rich. So I think people know they need to do this at some point, but, Michael, you've talked to a lot of clients, too, on this, that they go, well, I don't want to sell early.

What if it keeps going up, right? So it's like, how do you work through this decision when someone knows they have to diversify, but they have potential tax implications, and then they also have potential regret that comes from this? - Yeah, yeah. So two things I'll say. One is a nice framework to work through this is regret minimization.

You're obviously not gonna sell at the top, right? Probably not. So what feels worse is that you start to sell, and the stock continues higher without you. Yeah, it sucks. Or you decide not to sell, and the stock drops. You're gonna feel like an absolute asshole. Like, in my opinion, this is an easy decision.

But it's not an easy decision, because Google and CrowdStrike, and ostensibly any other stock that somebody's asking about that they're having difficulty parting ways with, has done incredibly well, so they feel some sort of affinity to it, as they should, and they're worried that, A, what are they gonna put their money into?

What's gonna do better than Google? What's gonna do better than CrowdStrike, or pick your stock? But to me, the risks are asymmetric to the downside. This is very clear. So, okay, if you're wrong, listen, it's not gonna feel good. But there's too much on the line to tie your future to the fate of two stocks.

I don't care what stocks they are, 'cause for every Tesla and CrowdStrike and Google, there are millions that have met the dustbin. - There's also a certain point where I'm gonna say, you kind of already won because you picked these stocks when you did. You've done great. If they keep doing well, that's too bad.

But Bill, what do you think about the tax implications of this? 'Cause it sounds like these are in taxable accounts, so you've got big gains you're dealing with. How do you think about that? - Yeah, it's a great question. But to echo your point, if you've won the game, stop playing.

So that's number one. That said, this client is nowhere near retirement, this listener. And so, if that's the case, it's not an all-or-none thing. Taxes are a big consideration. And so, if you've held those stocks for less than a year, you're looking at short-term capital gains. I'm not interested in that.

I don't think people are generally. So I definitely wait a year, but my advice would be it doesn't need to be all-or-none. And so, if a tax strategy might be, let's look at the tax brackets. When do I hit the next capital gains tax bracket? Am I earning less than $52,000?

Therefore, some of my capital gains might be at 0%. Maybe use the tax code as a way to sort of solve for the behavioral problem that Michael indicates. And it doesn't have to be all-or-none, but this listener needs a plan. You gotta get out of those stocks. You gotta diversify.

If not now, when? - And one of the ways we do this, right, is sometimes we do people, it's like the opposite of dollar-cost averaging. We leg them out of the position instead of legging in. So it takes a while, right? - Exactly, exactly. - I just wanted to add, didn't one of you on a recent Animals Period say something about the percentage of stocks that are down every year?

- It's like 30%. - Yeah, so it's-- - Even in an up year, there's stocks that get, we've learned in the last few weeks, there's stocks that get crushed even during a good market. - And there's that great longboard asset management study that shows that something like 90% go to zero, not all at once, right, but over time.

Think about the S&P 500 of 50 years ago. How many of those stocks survived today? What is the, what's the survivorship rate? - I don't know what those numbers are, but 2/3 of every stock underperforms the index. - Right. - Crazy. - And the ones that do outperform give, you know, typically do so with a very bumpy ride that you don't need to expose yourself to.

- Diversify or die, listener. - Yes, it's unfortunate. You give up the home runs, but yeah, you're preventing yourself from the strikeout. Okay. - Yep. - Anyone have any thoughts today? I know we have some people in the live stream. Leave us a comment. Michael's ego is a little too fragile to read the comments.

I still read them. - Sure. - Right, it's okay. But I sent him the good ones that you wrote about him. - I will like every single comment that you post. I will hit like on it. - Yes, I have a question for the show. Email us, askthecompoundshow@gmail.com. Hit the subscribe and like button 'cause that's like an adult report card for us.

That's how we get our A's. Don't forget to check out idontshop.com for all your compound needs. Compound shopping needs. My favorite one, I think, is Ben doesn't drink coffee mug. Right, it's an Animal Spirits coffee mug. - That's a good one. - Yeah, we'll see you next time. - Thanks, everyone.

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