What’s the Worst Case Scenario for Stocks?

00:00:00.000 | Welcome back to Portfolio Rescue, where it feels like there are an endless number of

00:00:19.440 | portfolios that need to be rescued, maybe including my own. We always appreciate your

00:00:24.240 | questions, comments, and feedback. Remember, email here is AskTheCompoundShow@gmail.com.

00:00:28.400 | Today's Portfolio Rescue is sponsored by Liftoff, our automating investing platform,

00:00:32.880 | sponsored by Betterment. This is from Investopedia this week, Duncan. "Usage of digital advice tools

00:00:37.360 | dipped for the first time this year to 21%, down from 28% in 2021, according to Parameter Insights.

00:00:43.360 | The biggest shift took place among investors with high levels of net worth. People with a net worth

00:00:47.040 | of over $500,000 declined from 38% to 15%. Even those with $50,000 of assets, it went from 24%

00:00:54.160 | to 21%. So, the reason people gave was that they want personal advice. They want to talk to someone.

00:01:01.360 | They don't just want digital. Which makes sense, especially in a bear market. And as luck would

00:01:06.960 | have it, for our automated platform, we have advisors on staff that talk to people. So,

00:01:11.520 | Matt Lorius, who's been on this show before, he'll be on the show again in the future,

00:01:14.880 | he heads this up for us, and he talks to all the people in Liftoff. Some people don't really want

00:01:18.480 | to. He reaches out to everyone and talks to them if they have questions about their finances,

00:01:21.680 | their venture plans. So, it's not just automated investing. There's also a component where you can

00:01:24.960 | talk to someone. So, go to liftoffinvest.com to learn more. And Matt's great. Shout out, Matt.

00:01:30.000 | Yeah, great guy. He was on this show when I lost power in my office.

00:01:34.000 | That's why I told him he can never come back. He's bad luck.

00:01:38.000 | I was talking to an investor this week just about what's going on in the markets. And

00:01:41.520 | long-term investor, he says, "Listen, I'm not looking to panic and sell.

00:01:44.320 | I understand that this happens." But he said something along the lines of this. He said,

00:01:48.720 | "Listen, I'm not going to sell. I'm a long-term investor. I know that sometimes you just need to

00:01:53.040 | hang on during these periods. I'm just really sick and tired of losing money." And this is

00:01:58.720 | the problem with prolonged bear markets, is they just slowly but surely beat you down. And sometimes

00:02:03.440 | you just have to be patient. So, I think especially with this, John, throw up the inflation chart.

00:02:07.440 | This is the last time the Fed put us into a recession. Inflation got to almost 15% in early

00:02:13.280 | 1980. And I looked back at the monthly inflation figures from then. So, it peaked at like 14.76%.

00:02:19.120 | We're going out two decimal places, because that's what we do here. The next month, it came in at

00:02:23.760 | like 14.73%. Then the month after that, it was 14.4%. Then 14.4% again in June. So, four months

00:02:30.880 | after the peak, inflation was still pretty high. And that's kind of where we are now. I think it's

00:02:35.040 | been three or four months. And it seems like it's just going down dreadfully slow, right?

00:02:39.280 | It was 9.1%, and then it's like 8.6%, and 8.2%, and it's really, really slow. And eventually,

00:02:44.880 | in the '80s, inflation started falling in chunks, but it took a while. It didn't go below 4% for

00:02:50.160 | three years after the peak. So, it took a long time. So, I mean, it's possible we have to be

00:02:55.600 | patient. The bear market right now is approaching 10 months, right? It peaked on the very first day

00:03:00.080 | of the year. For many individual stocks, it's longer than that. There's this overly scientific

00:03:05.280 | term called time dilation. And I think that applies here. It's just that your sense of time

00:03:10.320 | changes based on specific events. And I think when you have actual money at stake,

00:03:15.760 | the time -- because if you look back at any historical market data or backtest,

00:03:20.560 | like a three-year bear market looks like a blip. 1987 crash looks like a blip. All this stuff over

00:03:25.360 | 50, 60, 70 years looks like a blip. But when you're living in it, 10 months can feel like

00:03:29.600 | 10 years, right? So, I mean, patience is always a virtue for long-term investors.

00:03:34.400 | But I think that patience is seriously put to a test when you have a prolonged bear market.

00:03:38.400 | Like, the March 2020 crash was bad, but it lasted a month. This one's going on month 10.

00:03:43.760 | And the problem is, I am confident this one is going to come to an end. They all do. Every bear

00:03:47.920 | market in history has come to an end. I just don't know when that will be, and that's the hard part

00:03:50.880 | for long-term investors right now. You just don't want to get to the point where you just throw your

00:03:54.240 | hands up and say, "That's it. I'm done." And that's what happened to a lot of people in 2008.

00:03:57.920 | That was 18 months from peak to trough. And a lot of people who sold at or near the bottom

00:04:02.560 | in early 2009 just said, "I can't take it anymore. Day after day, month after month, I'm seeing..."

00:04:07.920 | I think the S&P 500 was down for six quarters in a row. Right now, it's down for three in a row,

00:04:12.240 | and that feels awful. So I think it's just easy to get ground down, unfortunately, in these markets,

00:04:17.120 | and that's the thing you've got to watch for these days.

00:04:19.680 | If we were on financial television, we'd say that's capitulation, right?

00:04:23.360 | Isn't that the word they always use? Yes. That's what everyone always looks for,

00:04:26.080 | is capitulation. I don't know what that actually looks like. I've never seen it before. There's no

00:04:31.040 | bell for that sort of thing, either. But that's the thing. People throw up their hands and say,

00:04:34.720 | "Alright, that's it. I'm out." And I think maybe people have been trained that they just don't do

00:04:39.280 | that as much anymore. Not everyone. A lot of investors just stay the course. It's tough,

00:04:44.720 | though. So, staying with the bad news, let's get into our first question, which is right along

00:04:51.280 | these lines. Wathen: Yeah. So, first up today,

00:04:53.680 | we have a question from Eric, who wrote, "Hey, guys. Ben comes off as a relatively optimistic

00:04:59.520 | person when it comes to the markets. Can he give us his most bearish or worst-case scenario for

00:05:03.680 | the stock market right now? I'm worried the worst is yet to come." Well, thanks, Eric.

00:05:08.320 | This is what we want to talk about today. Lewis: This is a pretty fair assessment.

00:05:11.840 | I am typically a glass-as-a-half-full kind of guy. I think it's disposition. I think a lot of

00:05:15.840 | your personality, whether you're optimistic or pessimistic, I think a lot of that comes with how

00:05:19.840 | you're born and the people you spend your time with. I've always been kind of a glass-as-a-half-full

00:05:23.200 | kind of guy. My worst fear as I grow older is becoming one of these old people, like all the

00:05:29.120 | boomers these days. The people who have been investing for 50 or 60 years, the professional

00:05:33.680 | investors, they're all just uber bearish. They have been for years. So, I hope that never happens

00:05:37.680 | to me. I don't want to become a perma-bear. I do think when it comes to long-term investing,

00:05:42.640 | you have to balance out being long-term optimistic with being short-term realistic.

00:05:46.400 | For me, that means I'm still a long-term optimist, but I have the understanding that

00:05:50.560 | things in the short-term can get really bad sometimes. Right now, they're pretty bad. That's

00:05:54.400 | just how things work. So, setting aside things like hyperinflation or the collapse of the dollar,

00:05:59.440 | or some of these crazy things, or an alien invasion, whatever, let's walk through some

00:06:04.400 | realistic worst-case scenarios right now. So, obviously, I think by far the biggest risk right

00:06:09.440 | now is a policy error by the Fed and central banks around the world. I think that's probably

00:06:13.920 | the one that has the highest probability of happening. So, there was this case study done,

00:06:17.200 | I think it was like 2011. They looked at eight Israeli judges who granted parole to people who

00:06:22.560 | were in jail, convicted felons. And the researchers found a pattern in their decisions after following

00:06:26.880 | them for a while. I think they did like a thousand cases of parole. And they said that two-thirds of

00:06:31.680 | all parole requests were granted in the morning. But then, as you got closer to lunch, it basically

00:06:36.800 | fell to zero. And then, after lunch, it went back to two-thirds. And then, by the end of the day,

00:06:41.680 | it fell to zero again. And they're thinking, "Why did that happen?" Well, before lunch, they were

00:06:46.640 | hungry. Early in the morning, they just had breakfast. They were fine. By the end of the day,

00:06:50.400 | they're probably hungry again and ready to go home. And then, after lunch -- and so,

00:06:54.720 | there are things outside of our control that can impact our decisions. We're all human. There are

00:06:59.520 | outside factors that impact our decisions. And with the Fed, I think that might mean letting

00:07:04.400 | ego get into their decisions. So, they've been getting slammed for months by pundits, saying,

00:07:07.840 | "The Fed was behind the eight ball. They missed inflation. They thought it was transitory."

00:07:11.520 | They've been getting crushed. And so, if you don't think that they're going to look back and say,

00:07:15.280 | "Well, we're going to show them. We're going to prove our credibility here," and that they could

00:07:18.960 | overstep their bounds and raise rates too high, or take us into a nasty recession just because

00:07:25.040 | they've been getting crushed, I mean, that's a human thing to show. No, we're going to show you

00:07:30.000 | who's boss here. So, I think a policy error is a real possibility. Something that goes hand-in-hand

00:07:35.680 | with that would be if interest rates and inflation keep rising. Obviously, we're recording this on

00:07:39.840 | Thursday morning. Inflation came in higher than expected, again, today. If rates shot up

00:07:45.280 | immediately, the stock market went down, who knows how that'll all shake out. All else equal,

00:07:49.520 | my research shows the stock market tends to see above-average returns when inflation is either low

00:07:54.000 | or falling. It shows below-average returns when inflation is high or rising. If we get another

00:07:59.680 | inflation print where things aren't getting better, that's a real risk. And if inflation

00:08:04.320 | continues to stay high, and that forces the Fed's hand to increase rates even more, that's certainly

00:08:09.360 | a risk. And I think the other one is just something geopolitically that no one expects.

00:08:14.240 | They say during a bull market, the market climbs a wall of worry. I think it's much easier to shake

00:08:20.000 | things off when things are going well. But in the midst of a bear market, investors are on edge

00:08:24.000 | and just looking for a reason to hit that sell button. So, consider the 2000 to 2002 bear market.

00:08:28.800 | John, throw this chart up. The S&P peaked in early 2000. This is after the dot-com crash. It was down

00:08:34.880 | almost 30%. This is right up until September 10th. Then 9/11 happened, and we had this huge fall from

00:08:42.080 | there. And the S&P fell an additional 33% from 9/11 on. Now, to be fair, stocks got hammered

00:08:47.120 | right after 9/11. Then they staged a vicious bear market rally and fell again. And you also had a

00:08:51.600 | recession there, and WorldCom and Enron, those scandals. So, it was like you already had the

00:08:56.320 | implosion of the dot-com stocks, but then you added on 9/11. You added on WorldCom and Enron.

00:09:02.400 | And then, of course, a mild recession. So, I think adding even more panic or uncertainty

00:09:06.720 | to an already panicky market is a problem. Now, you could say the war in Ukraine was that

00:09:12.400 | outside event. It already happened, right? Maybe it wasn't going to be as bad, and then that

00:09:16.480 | happened, and that made inflation worse, and that pushed the Fed's hand, and all these other things.

00:09:20.160 | So, now, since I am a glass-half-full guy, people always think a black swan has to be this negative

00:09:26.960 | situation. Unexpected. What if we have a positive black swan? What if inflation just falls off a

00:09:31.680 | cliff in the coming months? What if somehow the Fed is able to thread the needle and orchestrate

00:09:35.600 | a soft landing? I'd put that in the low probability category, but you never know. What if earnings

00:09:39.920 | don't fall as much? What if the war abruptly comes to an end? So, I think all these things

00:09:45.920 | could lead to better-than-expected outcomes. So, it's not just good news that causes a bear market

00:09:49.920 | to come to an end. It's better-than-expected news, or just less worse news. So, I had to bring it

00:09:54.000 | back to glass-half-full, because that's who I am. But those would be my biggest worries right now,

00:09:57.760 | is that inflation stays high, the Fed pushes way too far, interest rates keep rising,

00:10:02.240 | and that keeps hammering the stocks, and we see a 12-18-month bear market instead of a

00:10:07.040 | 10-month bear market.

00:10:08.460 | Is it an oversimplification to say that if inflation on the next print backs off a bit,

00:10:14.240 | that the market's going to turn around? Based on that data?

00:10:18.400 | I mean, it depends how off-size investors are and what the expectations built in are.

00:10:23.360 | Obviously, last month, when inflation came in hotter and the stock market fell 4-5%,

00:10:28.080 | people were expecting it to be a bunch better than that. So, a lot of it is,

00:10:30.800 | I don't know, maybe at this point, people just have decided maybe inflation will stay high,

00:10:35.520 | and it'll take a little bit of an improvement to see that. So, a lot of it depends on

00:10:39.040 | what the expectations are that are built in at this point. So, it's difficult to say.

00:10:43.360 | But, I mean, we've been having so many big down days lately. The best and worst days always happen

00:10:50.160 | in a bear market. So, it's not going to surprise me if a little bit of better data sees a 4-5%

00:10:54.560 | one-day rally. That typically doesn't mean good news, but that's the kind of thing I think we're

00:10:58.240 | probably setting up for.

00:11:00.320 | Got it. So, there's hope.

00:11:02.960 | Sure. Sure. Yeah. Like you talk about capitulation, they never ring a bell at the bottom.

00:11:13.360 | There's never a headline that says, "Oh, the bear market's going to be over now because this

00:11:16.720 | happened." Even in March 2020, when things turned around, people were saying, "There's no way all

00:11:20.720 | this government spending can stop a pandemic," and blah, blah, blah. So, even if the government

00:11:25.920 | did do something and the Fed did pivot, or whatever it is, a lot of times people are going to be

00:11:29.520 | trying to talk you out of it at the moment because it feels better to be negative during a bear

00:11:33.680 | market. It always does.

00:11:35.440 | Right. Right. Yeah. I mean, it doesn't make me feel great. I don't know what you're seeing in

00:11:39.360 | Michigan, but here in New York, I mean, people are raising prices, but restaurants and bars are

00:11:44.000 | still very full. I went somewhere recently that jacked up prices by 20% and made a dent in their

00:11:50.000 | business.

00:11:50.880 | When I go to the apple orchard on the weekend with my kids, it doesn't feel like a recession.

00:11:54.880 | It's packed with people. Restaurants, too. Yeah, you're right. It's still...

00:11:58.560 | I thought that was a joke, but you're being serious.

00:12:01.280 | I'm being serious. This is what you do in the fall. These farms all get you to spend an ungodly

00:12:06.720 | amount of money on apples and cider and God knows what else. Instagram photos. All right,

00:12:11.680 | let's do another one.

00:12:12.320 | Okay. Up next, we have a question from Charlie who writes, "Does the 40 and the age-old 60/40

00:12:17.760 | equity bond portfolio mean only real bonds? Would an equity dividend-producing portfolio

00:12:22.880 | that provides supplemental income work for the fixed income side of the portfolio? Are there

00:12:27.040 | any situations that come to mind where this strategy would be recommended over the traditional

00:12:30.960 | 60/40 portfolio?"

00:12:32.160 | Good question. This one comes up a lot, especially from retirees in recent years.

00:12:36.080 | First of all, there are no hard and fast rules in this. I don't think anyone,

00:12:38.880 | there's no real person alive who has their entire net worth in a 60/40 portfolio.

00:12:43.680 | It's just, I think it's kind of like a straw man thing. It's an easy benchmark and something

00:12:47.040 | to talk about, but no one actually has that. People also hold cash. They have real estate.

00:12:51.200 | They have other kinds of stocks. They have value stocks and growth stocks. A few people actually

00:12:55.120 | own US stocks and US bonds in a 60/40 portfolio. So sure, a dividend strategy could make sense

00:13:00.160 | as part of that allocation if you understand the pros and cons. So you should have higher

00:13:04.480 | expected returns with a dividend portfolio than bonds, but expected is not the same thing as

00:13:08.880 | guaranteed, but you get the point. Unlike fixed income where the income is, well, fixed, dividends

00:13:15.200 | can increase over time. So you could see an inflationary bump in your income, which is nice.

00:13:18.960 | In fact, there's a bunch of blue chip corporations and they call them the

00:13:22.000 | dividend aristocrats. So I think that's if you increase your dividend without fail for

00:13:26.640 | 25 years in a row. So a company like Procter & Gamble has done this for like 66 years in a row.

00:13:31.440 | 3M I think is 64. Coca-Cola is 60. Johnson & Johnson is 60. Pepsi is 50. Colgate-Palmolive

00:13:37.760 | is almost 60. So it's companies, and these companies are loathe to cut because they think

00:13:42.960 | that that sends a wrong message to investors that, oh, the cashflow is not there in these businesses.

00:13:47.440 | So I think if you add in some price appreciation, that sounds like a pretty good deal. The problem

00:13:51.120 | is, dividend stocks are still stocks. So when the stock market falls, these stocks tend to fall as

00:13:57.040 | well. So John, throw up the chart of dividends. I looked at the four biggest dividend funds, ETFs,

00:14:02.800 | and looked at where they stand in comparison to the S&P and the NASDAQ this year. So the NASDAQ

00:14:07.600 | is down 34%, S&P's down 24 or something. All these dividend funds are down less than the market.

00:14:14.160 | There's varying degrees because some of these strategies are different in how they orchestrate

00:14:18.800 | these. Some of them pick dividends that are growing. Some pick dividends that have been

00:14:22.080 | growing for a certain amount of years. Some of them pick certain yields. But they're all doing

00:14:24.640 | better. So the good news is, a dividend strategy, if you're picking a basket of dividends, tends to

00:14:29.760 | fall less than the market when the market is going down. On the other hand, it goes up less than the

00:14:34.080 | market when the market is rising. So you'd expect to have the lower beta. That's what we call that

00:14:38.960 | in finance terms. So I just think it's important to remember that this is for a diversified

00:14:44.640 | approach. If you pick any one stock, we've talked about GE here in the past, AT&T, a company like

00:14:48.480 | Verizon. These are higher yielding stocks that have gotten hammered for the price and so it

00:14:52.320 | didn't matter what the dividends were. So I've, sure, I've seen many investors in recent years

00:14:56.400 | use dividend as a go-between for stocks. So they may take 5 to 10% from stocks and 5 to 10% from

00:15:01.920 | bonds and have a 10 to 20% allocation to dividends. I just think you have to understand that the

00:15:08.480 | dividend stocks are still stocks. So while they have some characteristics they share with bonds,

00:15:12.720 | there's still some risk there. I do think one of the best parts about a dividend strategy is

00:15:16.560 | it's just simple. It's easy to understand. These are big blue chip companies. They pay out dividends

00:15:20.640 | on a regular basis. Those dividends could increase. You just have to remember that they're still

00:15:25.280 | stocks. So yeah, I mean, if you can understand the pros and cons, I don't see why not, why you

00:15:29.600 | can't add an allocation to them. Yeah, I guess the aristocrat, the beauty of that is that they

00:15:35.280 | know they'll be dropped from some ETFs and things like that if they ever, if they cut or if they

00:15:39.280 | break that pattern. Yeah, these companies, they'll borrow to pay dividends so they don't have to cut

00:15:43.520 | because that is, they could lose an investor base that relies on them to, and I think some people

00:15:49.920 | also say, "I'm just going to focus on the income from these companies because it's not going to

00:15:53.280 | drop as much during a recession or if earnings drop." But yeah, I know a lot of, no one in 2021

00:15:59.760 | wanted to own dividend stocks. This year they do. Yeah, yeah, that's why I was just saying in the

00:16:03.920 | chat, they're suddenly very popular again, it seems like. All right, next question.

00:16:07.760 | All right, up next we have a question from Corey. "My wife and I are in the process of

00:16:11.920 | saving up to buy our first home. I hate myself because obviously I wish we would have bought

00:16:16.000 | something 12 months ago when mortgage rates and housing prices were lower. I find myself

00:16:20.160 | constantly checking mortgage rates and I just don't understand why they keep going up so much.

00:16:24.560 | Last time I checked, the 10-year was still below 4%, but the 30-year mortgage rate is above 7%.

00:16:30.160 | Why are mortgage rates so much higher than bond yields?" I think last week someone called

00:16:34.320 | themselves an idiot for buying a house right now and this week someone says they hate themselves.

00:16:37.920 | Yeah, just remember, this is not your fault. The timing is just awful, unfortunately.

00:16:44.400 | I've been thinking about this one too, though. We were talking about this internally a couple

00:16:47.040 | weeks ago. So interest rates are up across the board, but it feels like mortgage rates have

00:16:51.040 | gone up way faster and way higher than government bonds or anything else. So John, let's do a chart

00:16:55.360 | on, I looked back at 10-year treasury yields versus 30-year mortgage rates and these definitely

00:17:00.560 | have a relationship. You can see they follow a pretty close pattern there. Mortgage rates are

00:17:04.960 | higher than treasuries, there's a spread there, but it's a pretty strong relationship. So the

00:17:10.960 | average spread over the past 50 years or so, this is going back to 1971, is 1.7%. So 30-year

00:17:15.760 | mortgages average 1.7% higher than 10-year treasury yields. So the 10-year right now is

00:17:21.760 | right around 4%. So in an average environment, you would expect to see mortgage rates at 5.7%

00:17:26.960 | if we're tracking that long-term average. They're actually more than 7%. So they're

00:17:32.160 | way higher. We're talking like a 3% difference right now. So why is this the case? Why are

00:17:38.080 | mortgage rates so much higher than treasury yields? We don't know for sure, but I have some

00:17:42.400 | thoughts. I think one of the problems is the volatility of rates is making things way worse.

00:17:46.480 | We're seeing these massive swings day-to-day because of the Fed policy and the macro environment

00:17:52.240 | and the Fed pulling back from buying bonds. So that's certainly not helping here. In fact,

00:17:55.760 | the highest and lowest this spread has ever been actually came during the last time the Fed was

00:17:59.840 | hiking so aggressively. So in 1980, for about a week, because rates were moving so much and

00:18:04.240 | they were trying to throw us into a recession, 10-year yields were higher than mortgage rates

00:18:07.760 | by a couple basis points. Ten weeks later, mortgage rates were 6% higher than the 10-year.

00:18:13.120 | So that's when mortgage rates were almost 16% and the 10-year was 10%.

00:18:17.840 | It tells you how different things are from today. So interest rate volatility isn't helping matters.

00:18:22.640 | The other thing is, the Fed was buying mortgage-backed bonds. And they were effectively

00:18:27.520 | directly buying these mortgages through bond purchases. And them getting out of that market

00:18:31.680 | in the past few months has to have a huge impact on the volatility of these mortgage rates,

00:18:37.680 | the speed of which it's going up. And unfortunately, with today's inflation print,

00:18:42.640 | I think we could probably see 8% mortgage rates. I think that's probably coming. 7% happened pretty

00:18:48.400 | quick. These are longer-term rates, so they're front-running the Fed a little bit. I think 8%

00:18:54.160 | is probably not out of the realm of possibilities. Obviously, 3% mortgage rates led to a lot of

00:18:59.280 | unhealthy behavior in the housing market, and that was unsustainable. If I was like the housing czar,

00:19:04.720 | I would like to see them at 5.5%, more like that long-term average. If they hug the 10-year a

00:19:09.120 | little bit, that would make more sense to me. Maybe if I got rehired by the Fed after they fired me,

00:19:15.120 | I would say, "Let's just make it 1.5% higher than the 10-year for mortgage rates. We're

00:19:18.800 | setting that. That's it. That's the line. 1.5% higher. Whatever the 10-year does,

00:19:22.960 | mortgage rates are going to track." So yeah, I'm obviously worried about what it's going to do to

00:19:27.520 | the housing market. But I feel for people who are constantly tracking these and worried about

00:19:31.200 | what's going to happen and how far they're going to go. Your best hope, which I've been saying for

00:19:35.920 | months now, is unfortunately a recession where you can then refinance at lower rates. It just

00:19:40.000 | depends on how high they go and then how low they go, if that happens. Yeah, I mean, the mortgage

00:19:44.480 | aspect, I think, is where it impacts the most people in a very, very tangible way compared to

00:19:50.400 | a lot of what we talk about. Yeah. Unfortunately, it means a huge number of people are being boxed

00:19:58.800 | out of the housing market right now, because housing prices are up and rates are so much

00:20:02.400 | higher that it's just a double whammy upon affordability. Also, it looks like the market

00:20:07.440 | just went green. So, that's good news. No, never mind. Any bottom calls or anything you want to say?

00:20:18.560 | Lewis: Just remember, the feeling you have today of this massively bad, negative news, pessimism,

00:20:25.520 | everyone is bearish. That's what you feel when markets are -- this is the feelings you're going

00:20:31.760 | to get. You're never going to know. I mean, would 10% or 15% more from here surprise me? No. But

00:20:36.400 | if this is peak pessimism and the market kind of peters out for a while and goes back up,

00:20:40.560 | that wouldn't surprise me either. These are the feelings you get during a bear market,

00:20:43.760 | and they just compound interest. They build on each other, and it just gets worse and worse.

00:20:47.360 | What did you say before we got on here? You said, "I'm not having any fun."

00:20:50.080 | How many people are having fun right now?

00:20:51.520 | Hall: Yeah. No. No. For sure. Okay. Let's see. Up next, we have some college questions.

00:21:00.560 | My daughter is a high school senior that just got accepted into her first choice for college.

00:21:06.240 | Congratulations. We're very proud of her, but now we have to start thinking about filling out all

00:21:11.040 | the FAFSA forms and such for student loans. I don't have a financial advisor, so I'm feeling

00:21:15.200 | pretty overwhelmed by the process. Where do I even start? What do I need to know to make sure

00:21:19.440 | we don't miss out on something that could help cover some of her tuition bill?

00:21:22.400 | Lewis: All right. Thanks to the viewers for providing some good news here. Got into college.

00:21:27.120 | Guess what? His daughter is not worried about a recession right now. Honestly,

00:21:30.320 | I don't think I even realized that the economy existed when I was in high school or college.

00:21:33.840 | I paid attention to nothing. I didn't know what was going on in the stock market.

00:21:37.680 | I was just blissfully ignorant.

00:21:39.840 | Hall: I graduated into the GFC, so I was aware.

00:21:42.960 | Lewis: Okay. I think I graduated in 1999. 2000, I guess. So, I top-ticked the market pretty good.

00:21:49.680 | We've shared this before from Ron Lieber that the average discount for a first-year full-time

00:21:54.960 | student is more than 50% off the list. But I have no idea how you get to that point where

00:21:58.880 | you get those discounts. Let's bring in someone who actually does know what they're talking about

00:22:01.280 | here. Tony Isola. Tony works with us at Ritholtz. Tony is our expert in education, 529 plans,

00:22:08.640 | and all these things. Tony, I've got to be honest. I don't even know what FAFSA means.

00:22:12.720 | I just know it deals with student loan paperwork. So, where does this person start if they have no

00:22:17.680 | idea what they're doing? Tony Isola

00:22:18.800 | Well, first of all, I think this is a cool thing to talk about because unlike the markets and the

00:22:24.400 | day-to-day nonsense that goes on, there's a lot of things you can control with college planning.

00:22:30.800 | A lot of things. And the problem is, people don't know the rules of the game. And they play

00:22:36.800 | by someone else's rules that's designed to extract a lot of money from them.

00:22:42.000 | So, first of all, with the federal financial aid form, that's what this FAFSA thing is,

00:22:46.240 | you fill it out, right? A lot of people will say, "I'm not going to get any money." No,

00:22:52.240 | you fill it out. Here's why. Number one, it doesn't matter how much money you make,

00:22:58.080 | you're automatically eligible for the best loans out there, which are the direct student loans from

00:23:03.440 | the government. They have the best terms. So, even if you have a lot of money, you might want to save

00:23:08.640 | that money for graduate school, right? Like you want to manage your debt properly. There aren't

00:23:13.520 | many good loans out there for graduate school. So, if you can use these good loans for undergrad

00:23:19.440 | school, even if you have money, it still makes sense to save that cash for the more expensive

00:23:24.880 | things to come. That's number one. Number two, if you want to bring up the chart, I gave a chart.

00:23:33.280 | There you go. Basically, what they look at, and we'll just look at the federal method because

00:23:38.400 | there's another method, but I don't want to get into that. Basically, the biggest thing for these

00:23:43.040 | loans are your income. If you have a lot of income, you're not going to get what they call

00:23:49.680 | needs-based money, which means money that you need because you don't make a lot of money.

00:23:55.920 | But the good thing is most schools, it's a buyer's market. Most schools offer merit aid,

00:24:03.600 | which means, "Oh, I have a high SAT, ACT, whatever," and they will give you money.

00:24:09.120 | They don't fill their classes for the most part. They need to entice you.

00:24:14.160 | Right. Sorry to jump in here. My dad is on the board for his local college that he went to in

00:24:19.760 | Grand Rapids here, Aquinas, and he says that they're looking at the demographic trends and

00:24:23.280 | seeing fewer and fewer high school seniors graduate every year. Colleges, you're right,

00:24:26.720 | they're competing for people these days. Absolutely. Here's the deal. You could

00:24:32.400 | flex on the financial aid form. It sounds obnoxious, but if you put that you have a lot of

00:24:38.640 | assets and wealth, what they do, here's how they look at it. The system is messed up,

00:24:45.120 | I mean seriously messed up, but the way they look at it is, "Wow, these people couldn't afford it.

00:24:50.560 | We would rather give $10,000 to five rich kids than $50,000 to one poor kid," right?

00:24:59.360 | Yeah, which is unfortunate. Do you think that it's worth it if you're confused here and you

00:25:04.960 | know your daughter has three choices or whatever, or she figured out which place she's going to go,

00:25:10.640 | you call them up and say, the Office of Financial Aid, and say, "Can you help us here?"

00:25:13.760 | This is what you do. Most people, what they don't understand is, like a portfolio,

00:25:19.440 | you need to create a diversified list of schools. I have software where I can basically tell you how

00:25:27.200 | much you're going to get. Even if you apply to a school that you don't want to go to,

00:25:32.480 | but you know you're going to get a lot of money from them, you could use that as leverage.

00:25:36.880 | Now you can go to your top choice school and say, "Hey, I love you guys, but Mount Holyoke or

00:25:43.680 | whatever offered me $25,000 a year to go. How could I turn that down? You guys offered me $15,000.

00:25:50.320 | Is there anything you can do to help?" And guess what? It works. My two sons are in college right

00:25:57.520 | now. Last year, when we filled out these forms and did all this stuff that the questionnaire asked,

00:26:04.080 | I did the same thing. We went back to a school. I would say within a half an hour, I sent an email.

00:26:12.240 | They gave us $5,000 more. $5,000 a year is $4,000. My whole thing is people hate negotiating because

00:26:19.120 | it makes them uncomfortable, but that's the thing you have to do, right? No, but here's the deal.

00:26:22.400 | You don't say you're negotiating because that's kind of obnoxious. So what you do is you call up

00:26:29.040 | and you kind of attach the award letter from the other school and just kind of be super nice about

00:26:36.000 | it and say, "You know, it's a game. They kind of know you're going to do that, but you don't want

00:26:42.480 | to come too heavy-handed like you're buying a car." Come on, Tony. I get my cable bill decreased

00:26:48.560 | every year. I know how to negotiate. Yeah, yeah. So you'd be nice about it.

00:26:53.200 | I knew you were going to say that. Yeah, and the point is there's a ton of money

00:26:58.320 | out there and people don't understand. For instance, they'll chase private scholarships.

00:27:03.440 | The average private scholarship might be $3,000 or $4,000, and it's for one year. You have schools

00:27:08.880 | out there. If you do the research- So you're saying that you get a better

00:27:12.880 | discount with a public university? Well, it depends. The public schools

00:27:18.800 | are cheaper to begin with, so I would say the opposite. I would say when you look at those

00:27:26.880 | private universities that have that ... No one pays the sticker price. They do that on purpose.

00:27:34.000 | Like I said, it's a 50% discount. So, Duncan, let's do the next question that is kind of on

00:27:40.080 | the other end of the spectrum here. Yeah.

00:27:41.280 | Okay. Looks like that question was from Steve, by the way. This one's from Mark.

00:27:48.080 | "My wife and I are about to have our first child, but we're starting later than most.

00:27:51.920 | I'll turn 40 and she'll turn 35 by the time our daughter arrives. Should I prioritize a 529 or

00:27:57.760 | making 401(k) contributions beyond my employer match? My thought is that the 401(k) funds will

00:28:04.000 | be available when I'm 59 and a half and my daughter is 19. My wife will receive a public

00:28:08.720 | sector pension a few years later. I realize that this is one of those 'already won the game'

00:28:12.560 | questions, but I can't find anything that's clear one way or the other."

00:28:15.120 | All right. So, unfortunately, Mark's daughter is going to be born into a bear market. She's

00:28:19.840 | never going to know what a bull market felt like. So, there's nowhere to go but up from here.

00:28:24.480 | So, okay, Tony. So, the thing that I've always heard here is you put your oxygen mask on first

00:28:28.640 | as a parent and you take care of yourself first. But I also know, as someone with kids, it's hard

00:28:33.840 | to tell a parent that they shouldn't put their child first. So, how does this shake out for you?

00:28:38.480 | There's a lot of things you could do. First of all, you can go in the middle. Do a Roth IRA.

00:28:43.520 | Because, A, you can take money out of a Roth for college expenses. And if you don't need it,

00:28:50.160 | you could use it for your retirement. So, you can kind of say, "All right, this is like the

00:28:54.000 | college fund, but it could also be my retirement fund if that doesn't work out." Secondly, there's

00:28:59.920 | a lot of states that offer tax breaks and offer credits and matching programs. So, like in New

00:29:08.320 | York, for instance, if you put in up to $10,000, you get a tax break from the state tax, which is

00:29:16.400 | 8%. So, it's kind of like you're getting an extra $800 to put into a college fund if you just do

00:29:21.280 | that. So, if your state is very favorable in the 529 they offer, that's another thing. And there's

00:29:28.480 | nothing wrong with doing both. You could maybe do like 80/20. "All right, 80% of my savings is

00:29:36.160 | going to go to retirement and 20% is going to go to college." And to your point, planning for what

00:29:41.920 | colleges breaks are going to be in the future is really hard. It's probably almost harder than

00:29:46.160 | planning for retirement for people. So, the Roth gives you some wiggle room. Absolutely. And it

00:29:52.640 | also could ease your conscience, right? You're kind of like, "Oh, I'm not being selfish because

00:29:57.040 | I could always take money from that Roth to give to my child." So, I think personally, that's the

00:30:03.040 | best of both worlds. And it's funny because a lot of times I get this question. I'm always like,

00:30:07.920 | "Well, what happens if we don't use all the money in the 529?" It's like,

00:30:11.360 | "Is that your biggest problem in life?" I don't understand why people are like,

00:30:14.880 | "Oh, I'm going to have to." What are you talking about? I always get that question all the time.

00:30:21.360 | I'm like, "Come on." By the way, so, Sean in the chat here says

00:30:25.040 | that I'm like the dad in the Christmas story, always trying to get a good deal on the Christmas

00:30:28.240 | tree. I'm going to have to bring those negotiating powers to the Christmas tree this year. I want to

00:30:32.320 | say one more thing here, just to mention for our audience. So, the Wall Street Journal had an

00:30:36.800 | article this week that the sky-high IBON interest rate is coming down to earth. They say it's

00:30:41.360 | probably coming down from like 9.6% to 6.4% beginning November 1st. So, that 9%. Because

00:30:46.960 | they measure it on six-month inflation, because it's a six-month at a time, and inflation actually

00:30:51.440 | over the last six months has been a little bit lower. I know you wouldn't know that from the

00:30:55.120 | headlines. But it sounds like by November 1st, it could drop a little bit. So, get those IBON

00:31:00.720 | purchases in before then if you want that 9.6%. Right, Tony?

00:31:03.600 | Maxfield Absolutely. I have some. But you know what?

00:31:06.720 | I tried to put in more, and I had to change my bank. It's a nightmare. I just gave up. I was

00:31:13.840 | just like, "I can't handle this." They were making me print out things and mail them.

00:31:18.800 | Lewis I'm glad you mentioned this. I had someone recently ask,

00:31:21.200 | "The only way you can get IBONs is through Treasury Direct, right?"

00:31:24.320 | Maxfield It's not a good user experience.

00:31:29.120 | Lewis All right. Thanks, Tony, for giving us his information on colleges. We always

00:31:32.880 | appreciate that. Next week's show, Cullen Roche is going to be on here to tell us everything about

00:31:37.440 | the Fed. I'm going to include some of my own questions there. Send us some questions. Remember,

00:31:40.800 | it's AskTheCompoundShow@gmail.com. Leave us a question or a comment in the comments here.

00:31:45.600 | Thanks, everyone, for watching live. We'll see you next time.

00:31:58.320 | [END]

What’s the Worst Case Scenario for Stocks? | Portfolio Rescue 48

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