(beeping) (upbeat music) - Welcome back to Portfolio Rescue, the show where we take questions from you, the viewers, at askthecompoundshow@gmail.com. Duncan, question number one, how do I look for the tan? - You look really good. - Thank you. - It's a good tan. - Yeah. - All right. I was in the sun for a few days in Florida.

- Which was more relaxing, the Miami Vices or the sun? - Miami Vices in the sun, I think, was a nice, that's like a balanced portfolio right there. Yeah, I didn't think about the markets very much at all. But if you go through, I've been catching up on our inbox here.

It's interesting because during a bear market, there's two types of questions. One is, what's my strategy for catching the bottom or what do I do during this bear market? How do I take advantage? And two is basically, I need to blow up my whole financial plan or I don't have one.

And I think that's the dichotomy right now is, oh no, I thought I knew what I was doing because I was in a bull market and now I don't and now what do I do? So there's a lot of that and then there's a lot of what do I do?

So that's the theme today, right? Blow up my financial plan or how do I handle this bear market? So let's do it. - Okay, actually, before we do that, though, John, let's share that photo, that great photo of Ben enjoying, what is, is this a margarita? This isn't a Miami Vice, right?

- No, that's a margarita. I saw a giant margarita cup and I told my wife, I'm like, well, I have to order one because look at it. It's, you know, it's a giant margarita cup, so. - I'm jealous. I think we should kick off next week with margaritas and Miami Vices.

- All right, I think that's what people in the chat were saying, basically, if everyone's ready. We're at the drinking stage of the bear markets. All right, let's do the first question. - Okay. So up first, we have-- - By the way, there was no bottom in that margarita either.

It was bottomless, just like the stock market. - That's, yeah, I would probably be dead. I'd be dead. Okay, so up first. I think the correct answer is that anyone with a 15 to 30 year time horizon should DCA and chill, but is there a case for going to cash and then lump summing into a bottom that you would be comfortable with?

My current philosophy is to put 10% into my 401k with an additional 3.5% company match, $500 a month into a Roth, $50 a day into a trading account, and to not touch money I have in a TSP. I don't know what a TSP is. I wish I had started this earlier, but better late than never, I guess.

It just seems like every time I'm close to getting everything sorted financially, the market gods look down and say, "Not today, not on my watch." - All right, we gotta add this one to your list of acronyms. TSP is Thrift Savings Plan. That's the government's retirement plan, which is honestly one of the best retirement plans that there is, my brother works for the government, and all of the funds are index funds, and they all cost like two to five basis points 'cause it's all the federal government.

- I remember you discussing this on Animal Spirits a long time ago. - Yeah, it's a very good one. So all right, Bernard Baruch was this really well-known investor who made a ton of money, who ended up being one of the wealthiest men in the world in the early 1900s.

He actually made it, of all things, speculating in the sugar markets when he got a seat at the New York Stock Exchange. And even though he called a few tops in his day, I think he actually called the 1929 top pretty good, he said, his famous quote is, "Don't try to buy at the bottom or sell at the top.

"It can't be done except by liars." And here's the problem with market timing. It's a gateway drug to either a cash addiction or future market timing, right? Because you have to be right twice, once on the way out and then once you need to get back in. I actually received an email from a reader a few years ago who said that he got out at the top at the end of 1999, like probably one of the biggest peaks in stock market history, right?

Dot-com bubble was just about to crash. He told me in 2015, he was still sitting in cash since 1999. Now, this guy nailed the top and then sat in cash for almost two decades. So I wrote him back and I said, why did you do this? Like, what do you think the reasoning is?

I'm trying to get behind the psychology of this. He wrote me back and he said, there's three things. One was fear. He was just scared that he was gonna put all his money back in and then the market was gonna fall further because something else was gonna happen. Two, he said it was arrogance.

He thought that he could do this kind of thing without incurring the emotional costs of timing the market. And three, he said he had this loss of confidence in most asset classes because of government spending or whatever, one of these macro fears. And his quote was, I'm living proof that the challenge in timing the market is being right, both in getting out and getting back in, plus having the courage and confidence to take action.

'Cause I think anytime you do this, one of the worst things that can happen is you actually get it right. You either put money in at the bottom or you take it out at the top and you think, well, I should just do this again. This was easy, right?

Then you kind of think, well, wait, maybe I should, once I got out, I should wait a little longer. Stocks keep dropping. Maybe I should wait a little longer. There was a study done by Peter Lynch back in the '90s. He looked at this three-year window from 1965 to 1995.

And he found that if you were able to nail the bottom every single year in the lowest of the stock market, the lowest point of the year every single year over this 30-year window, you would have had returns of like 11.7% per year. But if you just put your money to work on the first day of the year and not tried to guess anything, you would have had returns of 11% per year.

So you got less than 1% for nailing the bottom every single year. And by the way, nailing the bottom every single year is basically impossible. So, I mean, just like the simple strategy is just, I'd say don't overthink it. No one can pick tops or bottoms. It's almost impossible to do.

And this person already has a good strategy of putting money in their foreign K, putting money in their Roth, putting money into their trading account. Have yourself a little speculation account. Maybe you can try to do it there, but trying to do it for your whole portfolio and lump summing in and trying to nail the bottom.

I just don't see the point of putting yourself through like the emotional ringer in rollercoaster that you go through of trying to do that and all the stress involved if you're right or if you're wrong. It's just, it's not worth it to me. - Yeah, I mean, I feel like personally, I'm pretty good at picking the tops and buying the tops, but yeah, the bottoms are much harder, it seems like.

- The anti-dunking strategy. - You guys have talked a lot about before how the biggest up days are in the middle of some of the worst, craziest times in the market, right? So, it's one of those things like, yeah, it doesn't even behoove you that much to really mess with it and try to pick the perfect entry.

- And right when you put that lump sum to work, you're just gonna be a wreck because you're gonna think that you're gonna regret your decision for doing it. I just don't see what the point is of putting yourself through that because at the end of the day, is it really going to change your finances that much?

So, Jason Zweig did this thing where he interviewed these people a number of years ago, all these people in Boca Raton, Florida, which is a nice retirement community, and the quote was something like, he's sitting in all these elegant homes and manicured lawns and palm trees, and he asked the people, "To get here, "did you have to beat the market?" And some people said, "Yeah, I beat the market.

"I produced some alpha." Some people said, "I don't know." And then one guy said, "Who cares? "All I know is my investments helped me end up in Boca, "so what does it matter?" So, I think in 30 or 40 years, is it really gonna matter if you nail the bottom?

Like, is it gonna change your financial picture that much if you actually do? So, if not, what's the point? - Right. - That's the whole thing. All right, let's do another one. - Okay. So, I'm 38 years old and have accumulated a portfolio of index funds through years of investing.

I was wondering if it makes sense to hedge for downside protection so that a market crash doesn't wipe out years of investing returns. Also, what is probably the best method of doing this? Long puts, short futures. I know a perfect hedge doesn't exist and understand that hedging costs money and is not guaranteed to work as planned.

This is one our regulars will notice from. What are your thoughts? But we didn't really get to dive that deep into it, so we wanted to kind of go deeper. - John, every time I hear someone talk about hedging, I have to think of this. John, put up the commercial here from, this is a CNBC commercial from Interactive Brokers, I believe, a few years ago.

This turned into a meme pretty quick on Fintwit. She was having dinner and the market was down 2% and she said, "Excuse me, I need to play "some hedging trades." - (sighs) I don't, so after 2008, tail risk strategies were all rage. And the problem is these strategies only came into vogue after the crash had occurred.

And the idea is, right, you buy these options and then when volatility spikes, these option prices go up. And I guess the thing about it, thinking it is, well, you're paying insurance premiums 'cause those are, maybe when the bull market, you know, from 2009, 2021 or whatever, those tail risk strategies are gonna be a huge drag on you.

So you think, well, it's an insurance premium for when the world does blow up, then it's gonna happen. I will say option strategies are difficult to implement because, so this is not something you'd wanna try on your own because unless you really, truly understand how those contracts work, how they're priced, et cetera, I just don't think that that's something that you wanna be dabbling in.

And the problem with using options to hedge your portfolio at all times is that the market goes up most of the time. So John, throw this chart up from Ed Yardeni. This is just the bull market since 1928. He kind of defines this as it's reset after a bear market of 20%.

And you can see there's a lot of them. Now, I look back at this going back to just 1950. So the average bear market since 1950 is a loss of 36%. So that's what we're talking about, right? If you're up a dollar, you're back down to, call it 65 cents after the average bear market.

I guess there's different strategies to hedge if you're gonna be on something like a tail risk strategy that's done for you. I mean, the easiest one is probably just hold more cash or bonds, right? Some people would say, "Well, bonds are a terrible hedge "because they prove this year they don't work." I don't know.

I don't think one year can disprove the way fixed income securities work just 'cause rates are rising from historically low levels. But cash is a pretty easy one, right? That nominally, you're not gonna lose money. On the real basis, you are, but not nominally. Then you could look at things like commodities or managed futures, which can go long and short the markets, maybe a trend following strategy.

I think a lot of the easiest hedges are actually more personal finance related. So, just having a more patient long-term investment strategy, setting the right asset allocation ahead of time, extending your time rise in a little bit, maybe saving more money, and then just the ability to stick with your investment plan during a downturn.

So, I think the problem with hedges is they always seem more attractive after a bear market has happened. And then they seem less attractive during a bull market. And I think that's the problem, is people jump into them after stocks are down and then they wanna get out of them after stocks are up.

Could you find a strategy that you're willing to put 5% of your portfolio in? Some sort of tail risk strategy that's gonna maybe help you when everything else is going bad? Sure, but I don't know, isn't just holding a little more cash and have a little more equity probably a better option because you know exactly how that strategy is gonna perform regardless and it's not gonna surprise you at all?

- Yeah, it kind of brings to mind the phrase adding insult to injury. If you're just like, yeah, once the market's already down big, you're hedging, then the market starts to go back up at some point and you've got all these hedges on that are then moving against you.

So it's kind of like you're messing yourself up both directions. - Yeah, again, if you wanna have an insurance strategy and you understand that you're paying premiums on it, for most of the time you're paying insurance on your house and it doesn't burn down, but that's still good money, that makes sense.

But it's just something you really have to stick with and not jump in and out of. - Yep. - All right, let's do one more. - Okay, up next is a long one, so stick with us. I'm trying to figure out how to be opportunistic in a bear market.

I don't have cash on the sidelines and with five kids, I don't have much disposable income to put to work, so I'm resorting to the following moves. One, upping my 401(k) contribution to 19% from the usual 9%. I'm buying cheaper and it's these kinds of markets where the long-term money is likely made.

This will also help make up for any mistakes I make in number two below, but I can't afford this percent for long. Number two, DCA-ing into beaten up growth stocks in my IRA. I think there are some stocks that are down 40 to 70% but are great deals. It's okay if the stocks continue to go down, I'm just nibbling and will continue to nibble as prices drop.

Am I onto something or am I just excusing bad behavior? Overall portfolio, counting IRAs and 401(k) is in the $550,000 range and I'm 53 years old. - You know what I noticed? People only nibble during a bear market. There's no nibbling that's done in a bull market, right? In a bear market, everyone nibbling because they're so concerned that once you buy a stock, it's going to go down again, which seems to be happening a lot in this market.

Listen, number one, I love the strategy of increasing your savings rate if possible right now. Again, some people say, "Well, that's market timing." So what? You're buying more when the market is down, even if you don't completely nail the bottom. I like the idea. And if you say, "I can't afford it for long, "just do it for a little while," you're not going to regret those purchases.

I think it sounds like your strategy to me is something like a core and explore. And the core is your 401(k). That sounds to me like it's more long-term. You're just buying stocks, hopefully a low-cost index fund, target date fund kind of thing. And then in your other account, your IRA, you're speculating a little bit.

I don't have a problem with that as long as it's sized correctly. I think if you want to scratch that itch and do it, that's fine, so it's like this core explore. I don't think that's big of a deal. As long as you understand that IRA is speculation, it could go really wrong.

Some of these stocks may never come back, but buying down 40 to 70% probably is better than buying when they're up three or 400%. I guess the one thing you have to think about if you're doing this strategy, like what's your out if things continue to go wrong? When would you consider changing course?

What's your holding period for these stocks? How long are you willing to be wrong, quote unquote, if they continue to go against you? That's the thing I think a lot of people don't really think about. They just think, "Well, I bought a stock down 70%, "so even if it gets back to break even, "I'm gonna do wonderfully and triple my money or whatever." So that's the thing is just understanding, like at what point do you give up with a speculation account, and at what point is it too much of your portfolio where it's taking away from the other stuff that it's just easier to do?

- I just learned something new. I've heard core and explore, but I didn't know what it meant, so now I know. That's what-- - Yeah, I mean, there's different ways of using it, but core and explore could be a 60/40 fund, but instead of 60/40, it's 55/35, and the other 10% is in some sort of alternative strategy, but this is core and explore would be, yeah, your 401(k) is doing the heavy lifting, it's doing the blocking and tackling and the boring stuff, and then in your IRA, you're using speculation a little bit.

Again, I think for a lot of people, the market has made their speculation account much smaller than it was before, and it's kind of helped that, but if you keep it to a reasonable amount, and you just want to scratch that itch and play that game a little bit, as long as that lets you keep the rest of your portfolio untouched, that's fine with me.

- Cool, that makes sense. - All right, let's do another one. - Okay. I'm 53 and married with two kids to put through college. My wife and I earn about $250,000 a year, and the tuitions will cost us $230,000 over the next four years. I have $1.2 million in cash sitting in liquid savings.

I had $500,000 in the stock market in my IRAs, but I lost $100,000 this year, so now it's $400,000 on paper. I'm seeing callable five-year CD rates hitting 3.5%, and it's tempting to invest about one million into these safe, insured CDs to pick up $35,000 a year in guaranteed interest income.

Because the CDs are callable, the bank may decide to call away their obligation to pay me interest if rates were to pull back in 12 months' time. I'm tired of seeing big losses in stocks. I will not sell my equities in my IRA because I have a 20-year time horizon, but I'm not feeling confident about adding more money to equities.

What would you do with the $1.2 million in savings? - All right, this, on the surface, sounds like an investment question, and there are some investing implications here, but really, this is a financial planning question. There are so many moving parts here. If I was a normal podcast host, I'd say there's a lot to unpack here, but I'm not, so I'm not gonna say that.

So let's bring in a financial advisor to help out with this, because this really is just, there's a lot going on here. So Blair Ducanet, been on the show before. - Hey, Blair. - Hey, Ben. - Hey, Duncan. - A lot going on here. Now, I guess the one, maybe the layup answer here is we're matching assets with liabilities for the college fund, right?

We know that that's a liquid thing they need in the next four years, that's easy, but a prospect comes to you, and by the way, good for this person. I don't know what they did to get this liquid savings, whether they sold a house or sold a business, or they're just really good savers.

Obviously, that side of things, they're pretty good at, but the investing side of things, it sounds like they might need a little help with, because they're scared of the stock market, they don't know what to do with the cash, they wanna just take this one fell swoop and put it all in CDs.

What do you do when you get someone here who just decides, all right, a bear market has caused me to totally change the way I view the stock market, I'm in search of safety now, that's it. Like, where do we start here? - Yeah, you hit on a lot of the key points here, Ben.

The key thing here is this listener needs a financial plan. This is all about time horizon, what's the money for, when are you gonna need to spend it? We know about the college savings, and kudos to you for saving enough to pay for college, it's very expensive these days.

Maybe that's where the CDs make sense. Go ahead and get the 3.5%, I know they're callable, but you'll at least start out at that rate. You know there's a short time horizon, you don't need to take risk with the money that you have saved for college, because it's coming up right now.

But the rest of the money, sounds like this is long-term money that's for retirement, you're both working, and at the end of the day, there are benefits, especially right now, you've got a huge call option on the market, you've got a bunch of money in cash. Now, I hear from the question that there's some serious risk aversion here, and I understand it's scary to invest money for a long-term.

But if you have a financial plan, particularly if you engage with a financial planner, that person can show you projections of what your portfolio could be worth in 10, 20, 30 years, when you're actually gonna be spending the rest of this million, million and a half dollars that you have saved for retirement.

So don't think of these losses as actual losses, and you said that they're on paper, that's true. This is just fluctuations in the market. And keep in mind, the expected return for stocks goes up when the market goes down. So this may be an opportune time to get a plan together, to understand the risks that you're gonna take and the rewards for taking it, and go ahead and invest some of this money for the long-term in a diversified portfolio, doesn't have to be 100% stocks.

You can pick something that matches your risk tolerance, some mix of stocks, bonds and cash that'll work for you, that you'll be comfortable with. I think the most important thing is that you're gonna build this all-weather portfolio that will help you go through not only this bear market, but there's going to be more in your lifetime.

When those storms come, the most important thing is that you stay on the boat, right? If the boat's gonna make it through the storm, you can't be saved if you jump out. So I think with a little financial planning, you have a huge opportunity to have a very meaningful and sizable portfolio that you can spend on the things that you wanna do in the future.

So that's my biggest piece of advice is you need a financial plan. - I do, yeah, for sure. They need an asset allocation and investment plan, and I think you're right. You don't have to put all the money into stocks, right? You build the plan based on what your liquidity needs are now, and obviously the big one is college, but you're also gonna have who knows what else coming ahead in the years ahead.

So it could be you take this risk aversion, and let's say, Blair, you have a client coming to you with this sort of risk aversion and telling you, "I'm scared, stocks are bad." How do you put that into what an asset allocation should be in terms of thinking, all right, well, we're gonna have to balance this a little more for this client because they're obviously gonna need some sort of more stability in terms of bonds or cash to balance out the stocks if they can't handle being fully invested in equities.

- Yeah, I call this the Goldilocks scenario. Not too much, not too little risk. And we have expected returns. They're just expected returns, but they're based on very reasonable, conservative expectations for what a mix of stocks to bonds could earn over time. And we can look at what would it be if your portfolio was only 50% in stocks, 50% in bonds?

What would that look like in 30 years, most likely, with a range of scenarios? What would it look like if you had 60% or 70% in stocks? And then the client has the data that they need to make the right decision. This feels too hot, this feels too cold, this one feels just right, and we can make that decision that way.

- Right, I do think, yeah, there has to be some sort of coaching involved, though, to understand that, yes, it feels scary right now, and it's painful to see the market value of your portfolio going down. But this really is the Carl Richards, his thing, where it's greed, buy, fear, sell, repeat until broke.

And again, this person, obviously he's done something right. They've amassed seven figures in liquid wealth that they're just sitting on, and now is not the time to run away from that. Now is actually the opportune time to go, oh, wait, I have liquidity. I should put some of that to work in the stock market because in 10, 20 years, I'm not going to regret that decision.

And if I do, something else is really wrong with the world where maybe it's not gonna matter anyway. But I think that's the idea. But yeah, you're right, the nail on the head financial plan. Yeah, they need to talk to an advisor, potentially, to just get a better idea of, instead of just putting it in that release valve, that CD sounds so, Duncan, this is the cash addiction, right?

That CD sounds so comforting right now, and getting your money and just not seeing it go down. But you're gonna regret that decision down the line because you didn't put it in stocks when they were a buying opportunity. - Yeah. - I agree. - Let's do another one. - Speaking of comfort, we have our old friend, iBond, in the next question.

So up next, I spoke with my financial advisor today about iBonds. He was telling me that the composite rate for an iBond is 9%, but this is only for the first six months. Thus, I would likely get 4.5% for 12 months. Is this correct? Is this assuming inflation would decrease after October of 2022?

Maybe a review of what exactly composite rate means would be helpful. I agree, I have no idea what composite rate means. - Good idea. These iBonds are hot. So there was a Washington Post story last week saying that there's been such high demand for these things that it crashed the Treasury Direct website.

I personally tried to call in, and the wait holding time was like two hours. So I wish they would just, I don't know, turn this into an ETF to make it easier for people to invest in these things. I know it's difficult. But yeah, Blair, let's explain how these work.

We've talked about this a little bit here, but not really how the meat and the bones in terms of this, 'cause basically every six months, the rate gets re-rated. So that 9% is an annualized return, right? How does this work? - Right, exactly. So iBonds, not a very popular quarter of the investing market, but they got a lot of attention.

Cover of the Wall Street Journal yielding 9.62% as of May, and essentially risk-free if you think the United States government is a risk-free asset. So I dived in a little bit to what are the, dove into the details of how does this really work? And you're right. The rate is set every six months.

Every May and November, the Treasury comes out and says, "Here's the rate for iBonds." And that rate is based on a fixed rate plus the current rate of inflation in the market. That's why we're seeing a high rate right now. We have historically high inflation. The current bonds, the ones that you would buy right now, have a fixed rate of zero plus the inflation rate.

So it is conceivable that as inflation comes down, if inflation actually hit zero again, these bonds for a certain period of time could actually yield zero. Probably unlikely. So you're right. The 9.62% annualized is guaranteed just for the first six months. If inflation comes down, that yield will come down, but there's still gonna be some yield there.

The other thing to note about iBonds is they're really meant to be long-term investments. So you have to hold them for at least 12 months. And if you sell them anytime before five years, you actually lose the last three months of interest. So iBonds really meant to be long-term investments.

They are safe. They are earning a great rate right now. You should expect the rate to go down over time if inflation gets under control. And a couple of other things to note. You have to buy them directly on the Treasury's website, which we heard was overloaded with interest.

I also was unsuccessful in opening an account online. The max that any one person can invest in iBonds per year, $10,000. That's per social security number and per EIN. So you and your spouse can both put 10,000. If you have children, you can actually open custodial accounts for each of your children, 10,000 for each of those.

If you have LLCs and business entities or trusts that have a separate identification number, you can also invest 10,000 in those. And one thing that people don't also understand is there is a way to get around the 10,000. If you have a tax refund when you file your taxes, you can choose to have that tax refund invested in iBonds above the 10,000.

So this can be a great, safe, long-term investment for sort of that liquidity cash bucket that you can build over time. But it is a variable rate. It will change every six months. - Yeah, so they asked if they get 4.5% for 12 months. It's actually they get 4.5% more or less for six months.

And then if inflation goes down to 5% and that's what the new rate is, then they get that 2.5% for six months. So that's kind of how it works. So your annual return would be probably closer to like 6% or 7% if that's the case. If inflation stays high, these rates will stay high too.

So yeah, maybe our one in the last question should be looking more at iBonds rather than CDs. But yeah, getting back to the TSP thing, Duncan, the Thrift Savings Plan, they have like a government bond. It's called like the G Fund. My brother always says this to me. They basically have their own sort of treasury fund in it.

It's no interest rate risk. So it will not lose money. And so I think they need to make an iFund for the iBonds so people can just invest in a fund of this and make it easier for people. I don't know. Again, I've been telling people to take the cap off of these things.

No one's listening to me. - Yeah, we need to start the chant again. - You can't make all into the Fed? - I've been trying. Yeah, I'm saying I'd like to see a triple levered ETF of iBonds. Someone can figure that out, right? - Duncan. - Getting a lot of money.

All right, remember, keep those questions and comments coming. If you have a question for us, email us at thecomponentshow@gmail.com. I wanna thank Blair for helping out with her financial ace. We appreciate it. As always, Duncan was the finest hat for us again today. Remember, ask@thecomponentshow@gmail.com and we will see you next time.

- Bye. (upbeat music) (upbeat music) (upbeat music) (upbeat music)