Should I Invest in Real Estate instead of my 401(k)?

00:00:00.000 | Welcome back to Portfolio Rescue. Our inbox is always full of questions about personal

00:00:22.500 | finance, taxes, investing. Duncan, we've got our first one on leveraged ETFs in a while

00:00:27.280 | today. We're going to talk about it on the show. Remember, email AskTheCompoundShow@gmail.com.

00:00:31.480 | We're sponsored today by Future Proof. Future Proof Festival, September 10th through 13th,

00:00:37.280 | I think it is. Yep, I nailed it. Huntington Beach, California. A bunch of us from the

00:00:42.320 | firm were in Chicago this weekend, in our Chicago office, and we were talking about

00:00:46.200 | some things we're going to be doing differently at Future Proof. Last year was kind of the

00:00:49.880 | initial thing. We had fun, we figured it out, but we were still just kind of testing the

00:00:53.440 | waters a little bit. Now that we know what we're doing, it's going to be even more fun.

00:00:56.920 | It's going to be great. I have an important question. The people want to know what movie

00:01:01.580 | scene are you guys going to reenact? I know I think I asked this on a previous one, but

00:01:05.160 | have you thought about it? I don't know if we can top Rocky III. What's another good

00:01:10.080 | beach one? Yeah, I don't know. I'll have to think. All right. We'll think about it. We'll

00:01:15.360 | come up with something. All right. Let's do a question. Okay. Up first today we have a

00:01:21.000 | wedding question. So first off, congrats. I'm getting married in July and we're spending

00:01:26.640 | about $50,000 on a 150 person wedding. We booked our honeymoon in Cabo at an all-inclusive

00:01:32.360 | resort for $7,200. I'm very excited for this trip and I know that it's going to be the

00:01:36.800 | time of my life and one of the happiest things I do along with the wedding. We're in great

00:01:41.440 | financial shape and they give details and I would say very great financial shape, but

00:01:46.800 | this just seems like a huge amount of money for a trip. How do you guys go about planning,

00:01:51.000 | budgeting, and following through on big purchases? Yeah, we're talking I think someone in their

00:01:54.960 | late twenties, six-figure income combined with their new spouse, no debt, paid off student

00:02:01.680 | loans, no credit card debt, maxing out their 401k and IRAs, and setting aside money for

00:02:06.480 | a house in a taxable account. So for someone in their twenties, they are beyond prepared

00:02:11.960 | financially. The problem is there's plenty of personal finance experts out there who

00:02:16.560 | teach you how to save money, but no one actually teaches you how to spend money. That's not

00:02:20.080 | a thing anyone ever talks about, right? It's really easy to chastise someone for spending

00:02:23.980 | too much and going crazy with their credit card. Not many people spend the time to figure

00:02:29.020 | out what should you spend your money on to make you happy. And I do say now not all spending

00:02:34.860 | is bad, right? If all you do is save money but don't enjoy it now, what's the point?

00:02:39.960 | I think you have to strike some sort of balance between I'm going to delay gratification for

00:02:43.720 | future me, but I'm also going to enjoy in the present a little bit, too. You have to

00:02:47.640 | have some balance here. Obviously, for some people, it's the opposite problem. All they

00:02:51.720 | do is spend, right? But we have plenty of people like this who have that mentality of

00:02:55.720 | a saver, and that was me for the longest time. I think a lot of it, there's two parts for

00:03:00.720 | your financial habits. Part of it is the environment you grew up in, the habits you learned from

00:03:05.240 | your family or parents or friends or whatever it is, and then I think part of it is personality

00:03:09.320 | driven. I think I was just born to be a saver. I've always been a saver. So in the twenties,

00:03:15.680 | I was in a similar situation, minus the six-figure income this person has. I had to teach myself

00:03:21.700 | how to spend a little bit, right? So I think the important thing is this person is going

00:03:28.580 | to be fine. They're already maxing out their 401(k) in their twenties. Regardless, you should

00:03:32.160 | have some fun. So I do have one comment on the wedding thing first. I know a lot of people

00:03:35.920 | will, especially after you are a few years away from it and you're financially inclined,

00:03:40.040 | you look back and you say, "God, what a ridiculous way to spend your money. Why would you spend

00:03:44.560 | that much money for one single day in your life? It doesn't make any sense." The economists

00:03:49.120 | will say, "Why would you spend X thousands of dollars on a dress you're going to wear

00:03:53.120 | once and put it in your storage closet? What if we invested that money instead?" I get

00:03:57.240 | that mentality. But looking back on my wedding, now that I'm far enough away from it, I think,

00:04:02.320 | let's see, 2007, so we're getting close to... It's been a while. Closing on 20 years there.

00:04:09.200 | It's the only time in my entire life that everyone who mattered to me in my life was

00:04:12.800 | there on the same day. All my friends, all my family, high school friends, college friends,

00:04:16.680 | childhood friends, family from both sides of the family, wife's friends, everyone was

00:04:23.040 | in one place at the same time. That's never going to happen again. Is that the worst that

00:04:27.080 | kind of investment? I think so. Plus, it was a good party, too, right? My wife and I actually

00:04:33.400 | did Cabo for our honeymoon as well. I don't think it cost that much, but not a bad place.

00:04:39.000 | Here's what I would do to get over this hump and get out of that Saber mentality. I just

00:04:43.680 | want you to start off by picking one category that you're going to use as your spending

00:04:48.520 | thing. Your one place for safe spending. It's a safe place for spending. You're not going

00:04:52.680 | to be judged. It could be travel. For some people, it might be health and fitness, experiences,

00:04:58.640 | going out to dinner or drinks with friends, something like that. Give yourself a break

00:05:01.520 | in that just one specific category. You can set a dollar amount within reason, but I'd

00:05:05.680 | say don't question it. My first category was books. I think I mentioned before, when I

00:05:09.760 | first came out of college, I knew next to nothing besides reading a few textbooks, so

00:05:13.400 | I had to play catch up. I was doing a ton of reading. I would go to the library, because

00:05:16.800 | I was a frugal guy, but all these books would be on back order that people would have already

00:05:21.760 | signed up for. I'd wait weeks or sometimes months for a book. Finally, I said, "Screw

00:05:25.000 | this. I'm just going to buy the book." For me now, I bought a Kindle, and I never questioned

00:05:30.400 | buying books. If I see a book I want to buy, I'm going to buy it. If it looks interesting,

00:05:34.840 | I'm going to buy it. Granted, some of them sit on my Kindle forever and don't get read,

00:05:39.140 | but to me, that's a spending category that I'm okay with. I'm not going to question it,

00:05:42.960 | because that's something that I like spending money on. The way I view it is, you have to

00:05:49.720 | be selectively cheap. Unless you make obscene amounts of money and you just don't care,

00:05:55.400 | you're going to have to cut back in certain places and spend in other places. You have

00:05:58.520 | to prioritize. Here's my line of thinking on some of this. We like having a nice house,

00:06:03.680 | but we filled it with relatively inexpensive furniture. Why? Because kids destroy furniture.

00:06:08.160 | So, we don't want to spend a lot on that. I do like paying for time and convenience.

00:06:13.000 | Lawn care, snow plow, house cleaning, that sort of stuff. I'm perfectly fine paying for

00:06:18.640 | time. I don't drive luxury vehicles. My wife and I aren't big fans of fancy restaurants.

00:06:25.800 | No expensive hobbies, like skiing or golf for me. If that's your thing, that's fine,

00:06:28.800 | but for me, it's too much of a time and money suck. I know that I only have a finite amount

00:06:34.680 | of time with my kids before they're out of the house and doing their own thing and not

00:06:37.680 | wanting to hang out with me anymore. So, my wife and I prioritize spending on experiences

00:06:41.600 | with the kids. Not to brag, I like spending money on clothes a little bit. I'm not going

00:06:47.040 | to apologize for that, but I couldn't tell you the last thing I bought that wasn't on

00:06:49.400 | sale. This sweatshirt here, pretty new one, sweater. Bought it on sale.

00:06:52.800 | Is that marine wear?

00:06:53.800 | That's probably J. Crew.

00:06:54.800 | Okay.

00:06:55.800 | Yeah, I do get a lot of questions from people about my fashion choices. Maybe I should start

00:07:00.520 | my own little fashion.

00:07:01.520 | Honestly, yeah. I think you're setting the fashion trend for the compound.

00:07:06.120 | Yeah. So, I think the big thing is just prioritizing the thing you care about and then just being

00:07:10.320 | fine cutting back everywhere else. But you have to find those categories that you enjoy

00:07:13.200 | and then double down on them. So, I think start with one. Get one category, travel,

00:07:17.960 | experiences, going out, whatever it is. And I think this is definitely a psychological

00:07:21.540 | hangup for some people, but I think knowing that you have that savings taking place already,

00:07:27.800 | then you're fine and you don't worry about the other stuff. It's kind of guilt-free spending

00:07:30.880 | once you have the savings taken care of. And this person obviously has that. Duncan, what's

00:07:35.460 | something you like spending money on?

00:07:36.460 | I was just saying, yeah, I was saying in the chat kind of the same thing. I've never regretted

00:07:40.360 | spending money on traveling. I've gotten to go to quite a few countries in Europe and

00:07:44.840 | I've never been like, "Oh, wow, that wasn't worth it." And including when I was younger,

00:07:49.520 | I probably took out an irresponsible amount of debt on a credit card to travel and go

00:07:54.960 | on a trip to Hungary and some other countries.

00:07:57.000 | My wife and I said that too. Before we were going to have kids, we said, "Let's travel."

00:08:01.280 | So we had one thing where a friend got married in Connecticut and we went for like 36 hours.

00:08:06.880 | We flew in, hotel, partied with friends, flew back out. And the amount of money we spent,

00:08:11.640 | we spent like a couple thousand dollars probably. And it seemed ridiculous at the time, but

00:08:15.360 | we got to hang out with all of our friends for that one weekend. And it's like without

00:08:19.600 | kids, no responsibilities, it was worth it. So yeah, so I think finding some of those

00:08:23.080 | places where, yeah, you know you're not going to regret it in the future. But I do agree

00:08:26.720 | for traveling to big ones.

00:08:27.720 | Apparently it's $86 tequila drinks, you know, so teach their own.

00:08:31.720 | You only live once.

00:08:32.720 | All right, let's do another one.

00:08:33.720 | That's a reference to Animal Spirits for those of you that haven't listened yet.

00:08:38.480 | Okay. Up next today, we have a question from Brent. "Piggybacking on the Roth IRA conversation

00:08:45.120 | from last week, what are your thoughts on buying and holding a leveraged ETF and a Roth

00:08:48.640 | IRA? For example, I'm 34 years old and plan to retire at 65. Would a leveraged ETF and

00:08:53.880 | my Roth IRA likely lead to better long-term returns? I'm a very disciplined investor and

00:08:59.080 | do not make changes in my accounts. I've held SPY and only SPY since I opened the account

00:09:03.840 | 12 years ago. Thanks for all you do."

00:09:05.560 | All right, first one of these in a while, right? A lot of bond questions lately, but

00:09:09.600 | finally got a leveraged one. So this fund that they ask about, it seeks to two times

00:09:15.480 | the daily performance of the S&P 500. Some of these leveraged ETFs will kind of chop

00:09:20.440 | you up because they reset on daily basis. They're trying to get double the daily return.

00:09:24.680 | So sometimes it doesn't work out exactly what you'd think, but I looked at this one. This

00:09:28.200 | one is actually not too bad. So John, pull up the chart here. This is SSO versus SPY.

00:09:33.680 | These are the annual returns by year. This actually goes back to 2006. And you can see

00:09:37.080 | it's not exactly two times, but it's pretty darn close. The down years are really bad.

00:09:42.560 | The up years are really good. The highs are higher and the lows are lower, right? So this

00:09:47.520 | thing actually does an okay job doing this. This is ridiculously volatile, obviously.

00:09:53.640 | So let's do one more chart here. This is the drawdown profile. Now, this goes back to 2006.

00:09:58.520 | We pick up the 2008. And the 2008 crash, from 2007 to early 2009, the S&P was down 56%,

00:10:07.960 | I want to say. This thing was down almost 86%. And the difference between a 56% return

00:10:13.600 | and an 86% return is not 30%. It's way, way bigger. This is depression-level kind of stuff

00:10:19.040 | here, right? Even during the COVID crash, this fund was down 60%. When the S&P was down

00:10:24.920 | a little more than 30. The depths of the current bear market was down almost 50%. So these

00:10:28.440 | things get crushed. I know you said you're disciplined, you can hold on to the S&P, that's

00:10:33.200 | fine. I just wanted to point this stuff out there. So I don't really think the placement

00:10:38.320 | of a fund like this matters nearly as much as your ability to hold on for dear life.

00:10:41.920 | However, let's say that you want to use this as a carve-out piece for your speculation

00:10:46.760 | bucket, and you're going to keep the majority of your holdings in other stocks or bonds

00:10:51.640 | or whatever, and you have a small piece in this, 10%, 15%, 20%. You say, "I'm going to

00:10:56.560 | speculate with this, and I'm going to rebalance it occasionally, because I want to take advantage

00:11:00.600 | of this volatility. When it's up a lot, I want to rebalance out of it. When it's down

00:11:04.000 | a lot, I want to rebalance into the pain." That may be a rough make sense, if you're

00:11:07.040 | going to be doing some rebalancing and taking advantage of that volatility. But I think

00:11:10.800 | the placement of this one probably doesn't matter nearly as much as your ability to hold

00:11:15.440 | on for dear life. I guess if you think that you're going to be holding on and getting

00:11:20.400 | big gains over time, and the stock market continues to go up, yeah, Roth would make

00:11:24.080 | sense. But yeah, I think it depends how you utilize it.

00:11:27.960 | I have to be honest. This one hits home for me, because I started to buy into all the

00:11:33.440 | questions we were getting back a couple years ago. Why wouldn't everything just be triple

00:11:38.360 | levered? The market is still going up, and look at this past performance. I've gotten

00:11:44.280 | kind of torn up on the triple levered cues.

00:11:47.680 | Okay, triple levered. So, it's down, what, probably 80%, 70%?

00:11:54.080 | I think I was top-ticking it, basically. I've averaged into it, but it's been a rough position.

00:11:59.840 | And you're going to hold on to it?

00:12:01.120 | Yeah.

00:12:01.600 | The thing is, when it comes back, the gains will be good, but that's the thing.

00:12:04.640 | It's only got, what, like a 1.2% fee or something?

00:12:08.920 | You're paying for that leverage, I guess.

00:12:10.960 | Yeah, it's rough.

00:12:13.060 | It's tough. I mean, the good thing is, I guess in a fund like this, you're not going to get

00:12:17.080 | like a traditional margin call or something. So, I get it. I would say just position size

00:12:21.440 | correctly, because this thing will rip your face off.

00:12:23.960 | Yeah. And yeah, stocks go down. Who knew?

00:12:27.160 | All right, let's do another one.

00:12:29.400 | Okay, question three from Charles. "As a retail investor, how does one go about assessing

00:12:34.560 | the investment performance of a security or index fund beyond looking at the historic

00:12:38.400 | performance, which Ben Carlson recently described as chasing performance? On this note, can

00:12:43.720 | you please explain a backtest in simple terms? What is a good way for an average investor

00:12:48.140 | to do a backtest?" This one, I don't really understand the backtest thing, not being a

00:12:53.160 | finance person. It sounds really cool, though.

00:12:55.200 | Well, the idea is, there's a few different ways to look at a backtest. A backtest could

00:13:01.240 | be you look at some sort of stock picking strategy. I'm going to pick only stocks with

00:13:05.400 | this type of P/E ratio or this type of momentum, or whatever the case may be. You put it into

00:13:10.880 | a backtest, you say, "I'm going to do the top 30 holdings," or whatever, and then you

00:13:14.760 | run it, and then it looks amazing. The problem is that you can torture the data to say anything

00:13:20.600 | you want it to say in a backtest. So, I'm not sure what performance chasing comment they're

00:13:25.680 | talking about here. I do like to use my full name here. You know the only time people really

00:13:30.080 | use full names is in rom-coms. If it's a Matthew McConaughey movie, whatever his name is, they'll

00:13:36.080 | say the full name. No one ever says your full name first and last in real life, right? It's

00:13:40.040 | only in movies or TV shows.

00:13:42.280 | Or when you're in trouble.

00:13:43.640 | Yes. I do agree that making an investment decision is based on short-term outperformance

00:13:48.180 | tend to lead to disastrous outcomes for investors. It's not just individual investors. This is

00:13:51.720 | not just retail. Institutional investors as well. John, throw this up there. This is from

00:13:55.280 | my Organizational Alpha book. A team of researchers looked at the outperformance one, two, and

00:14:02.800 | three years before these pensions and endowments and billion-dollar funds decided to hire a

00:14:08.720 | manager, and then what happened after they hired them. So, the one, two, three years

00:14:12.040 | before, they were performing like crazy, right? And then the one, two, three years afterwards,

00:14:16.680 | of course, they underperformed. So, you know, you make your decision based on short-term

00:14:20.800 | performance, probably not going to work out too well. Same thing with individuals.

00:14:25.800 | The good news is that individual investors have never had better access to backtesting

00:14:29.200 | tools, right? Most of them for free. I've always enjoyed Portfolio Visualizer. It's

00:14:33.080 | a pretty good one if you want to do mutual funds, ETFs, individual stocks. You can do

00:14:36.920 | a backtest and look at the performance and the drawdown profile and all that stuff. I

00:14:41.080 | do have a lot of thoughts on backtests, because I've performed many of them in my career.

00:14:43.640 | So, I think we need to Charlie Munger this thing and invert it. So, not looking at what

00:14:48.000 | you can get out of a backtest. Here's what you can't get, right? No matter how good it

00:14:51.520 | looks on paper. One of the problems is like the data availability and frictions of the

00:14:55.880 | past. You can run a backtest back to 1920, but if you were armed with today's level of

00:15:00.840 | knowledge and information, you'd probably go back and clean up in the 1920s, right?

00:15:04.360 | It's kind of like if you took the seventh best man on an NBA roster and put him back

00:15:07.560 | in like the 1940s, they would clean up in the NBA, right? It's the same thing. So, because

00:15:12.600 | they knew nothing at the time.

00:15:13.600 | It's kind of like how LeBron's better than Michael Jordan. Is that what you're saying?

00:15:17.880 | Not quite. Well, hey. I was just in Chicago. You can't say it's blasphemous there. Discounted

00:15:24.920 | cash flow analysis, I think, was first created in like the 1930s. They didn't know anything

00:15:28.520 | back then. So, I think a lot of backtests failed to consider the information people

00:15:32.280 | knew at the time, as well as the cost to trade, right? So, you could look at this wonderful

00:15:36.520 | backtest of small caps, but realize that half of these stocks didn't trade back in the day,

00:15:40.360 | because they were microcaps and they had no liquidity. So, I think backtests can provide

00:15:43.680 | context, but you have to think through how realistic it would have been at the time.

00:15:46.760 | The other thing, a backtest cannot tell you how you would have felt at the time, right?

00:15:49.800 | The 1987 crash looks like a blip on any long-term stock market chart, but it felt like the second

00:15:54.160 | coming of the Great Depression at the time. So, backtests are like extremely unemotional.

00:15:58.720 | They follow the rules no matter what. Human beings don't always have that same level of

00:16:01.880 | self-control, right?

00:16:03.200 | Duncan, if you did a backtest of your TQQQ, past you on the spreadsheet is going to hold

00:16:08.560 | that thing forever. Present you, when you're 90% drawdown, might say, "I don't know if

00:16:13.320 | I can do this anymore."

00:16:14.320 | Yeah.

00:16:15.320 | I mean, it's all darkness, right?

00:16:17.360 | Well, sure. Backtests also don't tell you what the future will look like. I think this

00:16:19.680 | is the Michael Batnick line I'm seeing here, but he said there's no such thing as a front

00:16:22.800 | test. So, you see all these strategies with these indexes that are created, and there's

00:16:26.200 | a wonderful backtest. If you would have just done this, you would have knocked it out of

00:16:29.160 | the park. And then, these things go live in an ETF, and they stink. It happens all the

00:16:33.520 | time. So, I think it's easy to look at a backtest, and a lot of times, you never know how many

00:16:38.360 | different tests and variations they did before they settled on this one strategy. Sometimes,

00:16:43.080 | these strategies get arbed away. They may have worked in the past, and they don't work

00:16:45.800 | anymore. Sometimes, they go away because premiums are there, and then money rushes in, and size

00:16:51.160 | is the enemy of all performance. So, I think there's countless strategies that can look

00:16:54.600 | good in a backtest, but they put it in an ETF, it stops working magically, and that

00:16:59.320 | sort of happens all the time. So, what good is a backtest? I do believe that one of the

00:17:02.880 | big traits you need to have as an investor is understanding financial market history.

00:17:06.640 | I think you have to, if you want to be successful in the long term. Studying the past doesn't

00:17:10.880 | really help you predict the future, but I think it can provide context in terms of the

00:17:14.320 | relationship between risk and reward. I think that's the big thing. John, throw my other

00:17:16.920 | chart up here. I think we've used this one in the past. Stocks, bonds, and cash. Annual

00:17:20.160 | returns back to 1928. This shows the average return in the middle there, in blue. High

00:17:25.040 | for a year, low for a year. You can see the stock market when you could drive a truck

00:17:28.000 | through it, right? Then, it narrows a little for bonds, even narrower for cash. It's not

00:17:32.680 | the only reason, but one of the big reasons that the stock market is the best-performing

00:17:35.560 | asset class is because of the variance of returns. You should expect a wide range of

00:17:39.960 | potential outcomes, especially in the short run. I do think that risk is a lot easier

00:17:44.200 | to predict than returns going forward. I think a general understanding of volatility and

00:17:48.280 | drawdown profile in the risk of loss is probably the biggest thing historically. I think anyone

00:17:53.680 | can create a back test that looks wonderful in terms of past performance. What you need

00:17:57.200 | to understand is the risk involved and how reality can differ from the spreadsheet.

00:18:01.260 | Good advice. Sorry, I'm laughing because I just triggered a bunch of people by saying

00:18:08.620 | that Shaq was the true GOAT.

00:18:10.620 | Okay. All right. You spent way too much time online, Duncan. You just know what'll get

00:18:15.660 | people. All right, let's do another one.

00:18:18.620 | Okay. Up next, we have a question from Allison. "I know it's frowned upon, but I'm thinking

00:18:23.700 | about taking out a 401(k) loan to help with a down payment for my first house. Here's

00:18:28.260 | my thought process. My husband and I don't have enough for a big enough down payment

00:18:32.140 | to qualify for a loan, so we need the money. It's basically a loan to myself. I understand

00:18:36.660 | the problem with pulling money out of the market, but the rates are so high right now,

00:18:39.980 | I'm not quite as worried about this. As long as I pay it back in a few years, this should

00:18:43.740 | work, right?"

00:18:45.460 | Good question. All right. Let's bring on someone who actually has done this both professionally

00:18:49.740 | and personally now. Blair Duquene. Blair wrote a great post on this at The Bell Curve.

00:18:54.340 | Hey, Blair.

00:18:55.340 | Hey, guys.

00:18:56.340 | Good to talk to you. Blair, you wrote a great post about a month ago about your personal

00:18:59.860 | experience with a 401(k) loan. Why don't you tell us some of your experiences with this?

00:19:05.980 | I've never done this before. Tell me how this works, and then we can maybe get into some

00:19:09.420 | of the nuts and bolts of it. I want to hear your story about why you did this.

00:19:12.620 | Absolutely. I am a recent convert to the idea of the 401(k) loan. I used to be very anti,

00:19:18.600 | and I'm anti for the reasons that were mentioned in the question, but I just want to run through

00:19:23.180 | them. When you take money out of your 401(k) in a loan, it comes out of the market, which

00:19:27.420 | means that money is not growing if the market's going up. In a year like 2022, it would have

00:19:32.420 | been a great thing to have taken a loan because the market went down.

00:19:35.420 | The second thing is you may not be able to continue saving because now you have a new

00:19:39.300 | loan payment. It's very important to think about what your cash flow is going to be while

00:19:43.140 | the loan is out. Are you still able to contribute at a minimum to get your employer match? I

00:19:47.380 | think that that's important.

00:19:49.220 | The third thing is, and this is the biggest risk of all, is if you leave your company

00:19:52.940 | for any reason by your choice or not, that loan is going to become payable in about three

00:19:57.700 | months on average. If you can't come up with the cash to pay it back, that's going to be

00:20:02.340 | treated as a taxable distribution from your 401(k). That can leave you in a really bad

00:20:06.820 | position.

00:20:07.900 | You thought of all these cons, so what's the pro that talked you into doing this then?

00:20:11.900 | What are the benefits here?

00:20:13.660 | In my situation, I bought a new home, and it's going to be a few months before I put

00:20:18.700 | my old home on the market. I'm using this as a bridge loan. The home equity in my current

00:20:24.420 | home is a big part of what was going to help me with that very large down payment. In the

00:20:28.740 | meantime, I took a 401(k) loan knowing that hopefully in just a few months, I'm going

00:20:33.580 | to pay it back.

00:20:34.880 | Now I'm paying myself back with interest. By the way, it's an 8% interest rate, not

00:20:39.380 | a low interest rate, but that money is going back into my 401(k). I'm hoping that I'll

00:20:43.620 | still be able to max my 401(k) this year, so I'm going to even be able to put more than

00:20:47.860 | the max in my 401(k) if I pay back the interest and still max out my contributions.

00:20:53.420 | I thought of it as a temporary lending solution. It doesn't count against the debt ratios that

00:20:58.700 | the bank used to analyze how much of a mortgage I could qualify for, so that was another benefit.

00:21:04.620 | I think in this questioner's case, the first-time homebuyer, I think it also makes sense. Our

00:21:09.380 | colleague Emily Johnson reached out to me and told me she used a 401(k) loan for her

00:21:12.780 | first-time home purchase as well. The median home price is getting up close to $400,000.

00:21:18.260 | Most people have to put 20% down. That's a really large number, $80,000. Most people

00:21:22.940 | cannot save that in even five or ten years from regular earnings.

00:21:28.460 | Yes, you're paying yourself back if you can do it and also make at least contributions

00:21:34.060 | to get your employer's match because that's additional compensation to you that you'd

00:21:37.540 | be leaving on the table. I think it can be a great option. A home is, for most Americans,

00:21:43.100 | the largest part of their net worth. Getting into home ownership, if that's what you want

00:21:47.300 | and there's a lot of debate around rent versus buy, but if it's a goal of yours and you're

00:21:52.280 | able to make it work from a cash flow basis and a budget basis, I'm actually in favor

00:21:56.660 | of it now. I think it can be a great option.

00:21:58.780 | You said in your post that you're still saving your 401(k). Essentially, this 8% that you're

00:22:03.620 | paying back is almost forcing you to increase your savings rate in some way.

00:22:07.460 | It is. It is in a way, yeah. I'm paying back interest and I'm contributing to the 401(k).

00:22:13.460 | There are apparently some 401(k)s that won't let you contribute while you're paying back

00:22:16.980 | a loan. I think that's unfortunate. The loans can be taken out for a year, three years.

00:22:22.780 | I think the max is five years. Your payment's going to be higher if you take out a three-year

00:22:26.260 | loan versus a five-year loan. That's important to think about as well.

00:22:31.220 | If the budget works out and you're able to pay yourself back that loan over the next

00:22:34.860 | three or five years, I really am in favor of using this responsibly. Just know that

00:22:39.620 | there is a risk that if you get laid off or decide to change jobs, you're going to need

00:22:43.180 | to pay that loan back to avoid paying tax on the distribution.

00:22:46.540 | Duncan asked us a couple weeks ago if he should slow his 401(k) contributions to save for

00:22:50.300 | down payment. Duncan, what do you think about the 401(k) loan as a possibility here to help?

00:22:54.380 | That's exactly what I was just thinking. This would be the argument to just keep contributing

00:22:58.580 | and then whenever you need it, to pull it from your 401(k), right?

00:23:02.280 | It could be one way. In a perfect world, you would have the full down payment in your savings

00:23:06.280 | account. That's not reality for most people these days with home prices as high as they

00:23:09.920 | are.

00:23:10.920 | Right.

00:23:11.920 | Perfect.

00:23:12.920 | Unless we get a nice big pullback for those of us interested in buying, right?

00:23:15.880 | There you go.

00:23:16.880 | All right.

00:23:17.880 | Demographics say differently, but maybe not those high prices that we saw in 2021 for

00:23:21.800 | sure.

00:23:22.800 | So this is a great segue to the next question. So Bella writes, "This one's going to trigger

00:23:28.760 | some people probably." Oh, no. The firearms going off.

00:23:32.320 | Uh-oh. Live television.

00:23:35.080 | Hopefully it's a test. I'm not leaving regardless, but we're only on the 15th floor.

00:23:40.600 | This is your Wolf of Wall Street moment here.

00:23:43.840 | Yeah. "I know that y'all advise to take advantage of an employer's 401(k) match. However, what

00:23:49.280 | would your rebuttal be to those who say hope is not a strategy and that it's better to

00:23:53.320 | have control of what you're invested in? I'm young and I've heard horror stories of those

00:23:58.320 | that lost meaningful amounts of their savings during the last downturn. I understand that

00:24:02.360 | the market tends to go up over time, but I do worry that in the future I won't be able

00:24:06.040 | to retire when I want to because of the way the market is behaving at that particular

00:24:09.960 | time. It seems like I would be better off passively investing in multifamily real estate

00:24:14.560 | as everyone will always need a place to live. For the time being, I've decided to stop contributing

00:24:19.320 | to my 401(k) so that I have enough to invest in a different manner, in things I can control."

00:24:24.240 | So I just, I'm not the finance person here, so I'm curious to hear what you guys say,

00:24:28.240 | but like, can you control the real estate market and multifamily housing?

00:24:32.520 | I agree that hope is not a strategy. They are right there. Also, Blair, this had to

00:24:36.560 | be from someone in the South because they put y'all in here, right? And I know that

00:24:39.280 | as someone in the North, I don't feel comfortable ever using that term.

00:24:44.000 | I don't even use y'all. I need to get better at using y'all. It's actually a better way

00:24:47.900 | of saying you guys.

00:24:50.640 | But my thinking here is shifting your investment strategy from financial assets like stocks

00:24:53.980 | and bonds in a 401(k) to multifamily real estate is simply trading one risk for another,

00:24:58.040 | right? I'm not saying you can't find success as a real estate investor. Like Blair, you

00:25:00.920 | and I both know people, clients that have been very successful real estate investors.

00:25:05.200 | It can happen, but there are unique set of risks to that strategy. And I know there's

00:25:09.480 | a lot of investors that view real estate as like this tangible thing, so they think they

00:25:13.440 | can control it better because it seems like stocks feel like this just intangible thing

00:25:17.200 | that's out kind of in the ether, that you're like, you have no control over those corporations,

00:25:20.800 | or if investors get spooked or interest rates or whatever. But a lot of those other risks

00:25:25.100 | of owning single family or multifamily housing are just kind of different and idiosyncratic

00:25:30.600 | to those different areas. So, Blair, thoughts on some of the risks involved here?

00:25:34.360 | I absolutely agree with that assessment. There's two parts to this question. One, that you

00:25:38.520 | don't have control over the investments in your 401(k). That's really not true. You can

00:25:43.000 | decide if you want to be in stocks, bonds, some combination of both. If you want in large

00:25:46.880 | cap stocks, small cap stocks, there's a menu of options available to you to build a diversified

00:25:51.400 | portfolio and you can go in and trade that account. Some of them limit it to two or three

00:25:55.880 | times a year and you don't want to be actively trading, but you do have some level of control.

00:26:00.280 | Now if the question is I don't feel in control over stocks versus having real estate in my

00:26:04.600 | hand that I feel this sense of control over, just consider the fact that you also want

00:26:08.920 | a diversified portfolio. Maybe investing in multifamily real estate is a great option

00:26:13.540 | for you, but you wouldn't want to put all your eggs in that one basket. I think about

00:26:17.440 | living here in New Orleans. What if I had a portfolio of rentals here and we have another

00:26:23.280 | hurricane that displaces people for months? That's a huge risk. Having tenants move out,

00:26:28.480 | not being able to re-rent the place, having to evict people. If it's development of multifamily

00:26:33.360 | homes, those are really risky. They're taking a lot of leverage with high interest rates.

00:26:38.720 | So all investments incur a certain amount of risk. Even if you can't touch or feel bonds,

00:26:42.920 | you do have some control over your asset allocation in the 401(k).

00:26:45.800 | Lewis: I think the concentration is the biggest one. It's much harder to be diversified in

00:26:49.600 | real estate. So I think having that other piece is helpful. Also, you have liquidity

00:26:54.360 | risks where you can't exactly spend a home. Yes, you get monthly cash flows, but who knows

00:26:57.880 | how much that is covering what your costs are. It also could be more expensive than

00:27:04.020 | you assume, right? Because borrowing costs have gone up and the costs of upkeep and maintenance

00:27:09.600 | and taxes and all this stuff. If you have to replace a roof or find tenants. It is true

00:27:14.680 | that everyone always needs a place to live, but I don't think that necessarily means that

00:27:17.840 | people are going to have to live right exactly where you buy. So the location could just

00:27:21.940 | be wrong. Like you said, there's other big risks that come. I wouldn't try to talk anyone

00:27:26.080 | out of investing in real estate. It's just a totally different set of risks if you don't

00:27:30.520 | know what you're doing. Because you're competing against people who really do know what they're

00:27:33.400 | doing. And even for them, it's not that easy. Exactly. So think of your 401(k) as part of

00:27:40.640 | your compensation. If you don't at least do that, you're taking a pay cut. So I think

00:27:45.600 | it's worth always doing the match at a minimum. Whether or not you don't want to lock up money

00:27:50.880 | that you can't spend until retirement or not is a different conversation. And there are

00:27:54.040 | reasons to save cash outside of the 401(k) as well. But at the end of the day, there's

00:27:58.520 | nothing inherently -- it's not just hope if you're investing in a 401(k). A long-term

00:28:03.160 | diversified strategy will do well for you. All right. If you're investing in real estate,

00:28:06.840 | you're hoping that you have income coming in and that it's going to grow over time.

00:28:10.540 | And if you're investing in the stock market, you're having profits come in and dividends

00:28:13.400 | come in, and that's going to grow over time. Kind of the same thing. It's not any less

00:28:17.440 | real than investing in real estate. It's just more spread out. And imagine the people -- imagine

00:28:22.040 | if you owned the apartment building that I was living in back at the end of 2022. 30

00:28:27.240 | units, one person lets a pipe bust because they turned their heat off, and you're out

00:28:33.960 | of eight units. Eight units and the common areas all needed a ton of work. So, yeah.

00:28:39.080 | There's definitely stuff out of your control.

00:28:41.120 | Wathen: Yes. There's other risks there. Yep. Okay. So, I want to thank Blair for coming

00:28:44.920 | on again, sharing her experience.

00:28:45.920 | Lapera: Thank you for having me.

00:28:46.920 | Wathen: I appreciate that. I love when someone takes a general rule of thumb that people

00:28:50.880 | think in finance exists and then show an exception. Because I think there always are exceptions

00:28:54.400 | to these rules, right?

00:28:55.960 | Lapera: 100%.

00:28:56.960 | Wathen: If you have a question for us, email us. Askthecompoundshow@gmail.com. Leave us

00:29:01.880 | a comment in the YouTube section. Thanks for everyone for tuning in live. Everyone really

00:29:06.400 | wants to see the Ben fashion blog. I think we're going to have to go for it, Duncan.

00:29:09.800 | Duncan: Let's do it.

00:29:10.800 | Wathen: If you're watching on YouTube, remember, become a subscriber for us so you can be part

00:29:14.120 | of this chat. Compound merch, idontshop.com. Tomorrow, new Compound and Friends. We'll

00:29:20.360 | see you next week.

00:29:38.640 | [music]

00:29:43.400 | you

Should I Invest in Real Estate instead of my 401(k)? | Portfolio Rescue 66

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