How Do I Buy During a Bear Market?

00:00:00.000 | (beeping)

00:00:02.180 | (upbeat music)

00:00:10.760 | - Welcome back to Portfolio Rescue,

00:00:19.460 | the show where we take questions from you, the viewers,

00:00:21.740 | at askthecompoundshow@gmail.com.

00:00:24.660 | Duncan, question number one, how do I look for the tan?

00:00:27.660 | - You look really good.

00:00:28.740 | - Thank you. - It's a good tan.

00:00:29.580 | - Yeah. - All right.

00:00:30.560 | I was in the sun for a few days in Florida.

00:00:33.500 | - Which was more relaxing, the Miami Vices or the sun?

00:00:36.880 | - Miami Vices in the sun, I think, was a nice,

00:00:41.180 | that's like a balanced portfolio right there.

00:00:44.180 | Yeah, I didn't think about the markets very much at all.

00:00:45.860 | But if you go through,

00:00:47.260 | I've been catching up on our inbox here.

00:00:49.620 | It's interesting because during a bear market,

00:00:52.100 | there's two types of questions.

00:00:53.740 | One is, what's my strategy for catching the bottom

00:00:56.860 | or what do I do during this bear market?

00:00:58.420 | How do I take advantage?

00:00:59.620 | And two is basically,

00:01:01.460 | I need to blow up my whole financial plan

00:01:03.140 | or I don't have one.

00:01:04.260 | And I think that's the dichotomy right now is,

00:01:07.100 | oh no, I thought I knew what I was doing

00:01:08.620 | because I was in a bull market and now I don't

00:01:10.420 | and now what do I do?

00:01:11.700 | So there's a lot of that

00:01:12.880 | and then there's a lot of what do I do?

00:01:13.860 | So that's the theme today, right?

00:01:17.340 | Blow up my financial plan

00:01:18.600 | or how do I handle this bear market?

00:01:21.100 | So let's do it.

00:01:22.540 | - Okay, actually, before we do that, though,

00:01:24.500 | John, let's share that photo,

00:01:26.580 | that great photo of Ben enjoying,

00:01:28.220 | what is, is this a margarita?

00:01:29.660 | This isn't a Miami Vice, right?

00:01:31.140 | - No, that's a margarita.

00:01:32.340 | I saw a giant margarita cup

00:01:35.500 | and I told my wife, I'm like,

00:01:36.380 | well, I have to order one because look at it.

00:01:38.620 | It's, you know, it's a giant margarita cup, so.

00:01:40.940 | - I'm jealous.

00:01:41.760 | I think we should kick off next week

00:01:42.660 | with margaritas and Miami Vices.

00:01:44.420 | - All right, I think that's what people in the chat

00:01:46.060 | were saying, basically, if everyone's ready.

00:01:48.980 | We're at the drinking stage of the bear markets.

00:01:50.540 | All right, let's do the first question.

00:01:51.940 | - Okay.

00:01:52.760 | So up first, we have--

00:01:54.620 | - By the way, there was no bottom in that margarita either.

00:01:57.380 | It was bottomless, just like the stock market.

00:01:59.740 | - That's, yeah, I would probably be dead.

00:02:02.500 | I'd be dead.

00:02:03.860 | Okay, so up first.

00:02:05.460 | I think the correct answer is that anyone

00:02:07.540 | with a 15 to 30 year time horizon should DCA and chill,

00:02:11.560 | but is there a case for going to cash

00:02:13.700 | and then lump summing into a bottom

00:02:15.380 | that you would be comfortable with?

00:02:17.220 | My current philosophy is to put 10% into my 401k

00:02:20.940 | with an additional 3.5% company match,

00:02:23.780 | $500 a month into a Roth, $50 a day into a trading account,

00:02:28.760 | and to not touch money I have in a TSP.

00:02:31.340 | I don't know what a TSP is.

00:02:32.940 | I wish I had started this earlier,

00:02:34.860 | but better late than never, I guess.

00:02:36.900 | It just seems like every time I'm close

00:02:38.580 | to getting everything sorted financially,

00:02:40.380 | the market gods look down and say,

00:02:41.940 | "Not today, not on my watch."

00:02:44.660 | - All right, we gotta add this one to your list of acronyms.

00:02:46.540 | TSP is Thrift Savings Plan.

00:02:48.140 | That's the government's retirement plan,

00:02:49.980 | which is honestly one of the best retirement plans

00:02:51.860 | that there is, my brother works for the government,

00:02:53.900 | and all of the funds are index funds,

00:02:56.900 | and they all cost like two to five basis points

00:02:59.160 | 'cause it's all the federal government.

00:03:00.740 | - I remember you discussing this

00:03:01.740 | on Animal Spirits a long time ago.

00:03:03.100 | - Yeah, it's a very good one.

00:03:05.000 | So all right, Bernard Baruch was this

00:03:07.940 | really well-known investor who made a ton of money,

00:03:09.700 | who ended up being one of the wealthiest men

00:03:11.460 | in the world in the early 1900s.

00:03:12.980 | He actually made it, of all things,

00:03:14.460 | speculating in the sugar markets

00:03:16.020 | when he got a seat at the New York Stock Exchange.

00:03:18.620 | And even though he called a few tops in his day,

00:03:20.100 | I think he actually called the 1929 top pretty good,

00:03:22.900 | he said, his famous quote is,

00:03:24.380 | "Don't try to buy at the bottom or sell at the top.

00:03:26.440 | "It can't be done except by liars."

00:03:28.380 | And here's the problem with market timing.

00:03:31.760 | It's a gateway drug to either a cash addiction

00:03:34.520 | or future market timing, right?

00:03:36.060 | Because you have to be right twice,

00:03:37.300 | once on the way out and then once you need to get back in.

00:03:39.620 | I actually received an email from a reader a few years ago

00:03:42.580 | who said that he got out at the top at the end of 1999,

00:03:46.620 | like probably one of the biggest peaks

00:03:49.580 | in stock market history, right?

00:03:51.220 | Dot-com bubble was just about to crash.

00:03:53.420 | He told me in 2015, he was still sitting in cash since 1999.

00:03:57.440 | Now, this guy nailed the top

00:04:00.460 | and then sat in cash for almost two decades.

00:04:02.100 | So I wrote him back and I said, why did you do this?

00:04:04.080 | Like, what do you think the reasoning is?

00:04:05.780 | I'm trying to get behind the psychology of this.

00:04:07.160 | He wrote me back and he said, there's three things.

00:04:08.900 | One was fear.

00:04:09.820 | He was just scared

00:04:10.700 | that he was gonna put all his money back in

00:04:12.420 | and then the market was gonna fall further

00:04:14.260 | because something else was gonna happen.

00:04:15.620 | Two, he said it was arrogance.

00:04:17.300 | He thought that he could do this kind of thing

00:04:18.740 | without incurring the emotional costs of timing the market.

00:04:21.740 | And three, he said he had this loss of confidence

00:04:24.300 | in most asset classes because of government spending

00:04:26.580 | or whatever, one of these macro fears.

00:04:30.100 | And his quote was, I'm living proof

00:04:32.460 | that the challenge in timing the market is being right,

00:04:35.060 | both in getting out and getting back in,

00:04:36.380 | plus having the courage and confidence to take action.

00:04:38.960 | 'Cause I think anytime you do this,

00:04:40.060 | one of the worst things that can happen

00:04:41.180 | is you actually get it right.

00:04:42.940 | You either put money in at the bottom

00:04:44.740 | or you take it out at the top

00:04:45.580 | and you think, well, I should just do this again.

00:04:48.220 | This was easy, right?

00:04:49.620 | Then you kind of think, well, wait, maybe I should,

00:04:52.300 | once I got out, I should wait a little longer.

00:04:54.380 | Stocks keep dropping.

00:04:55.340 | Maybe I should wait a little longer.

00:04:57.380 | There was a study done by Peter Lynch back in the '90s.

00:05:00.100 | He looked at this three-year window from 1965 to 1995.

00:05:04.100 | And he found that if you were able to nail the bottom

00:05:06.740 | every single year in the lowest of the stock market,

00:05:09.220 | the lowest point of the year every single year

00:05:10.900 | over this 30-year window,

00:05:12.260 | you would have had returns of like 11.7% per year.

00:05:15.160 | But if you just put your money to work

00:05:17.380 | on the first day of the year and not tried to guess anything,

00:05:19.200 | you would have had returns of 11% per year.

00:05:21.700 | So you got less than 1%

00:05:23.780 | for nailing the bottom every single year.

00:05:26.420 | And by the way,

00:05:27.660 | nailing the bottom every single year is basically impossible.

00:05:30.940 | So, I mean, just like the simple strategy is just,

00:05:33.260 | I'd say don't overthink it.

00:05:34.580 | No one can pick tops or bottoms.

00:05:36.800 | It's almost impossible to do.

00:05:38.420 | And this person already has a good strategy

00:05:40.160 | of putting money in their foreign K,

00:05:41.560 | putting money in their Roth,

00:05:42.760 | putting money into their trading account.

00:05:45.340 | Have yourself a little speculation account.

00:05:47.340 | Maybe you can try to do it there,

00:05:48.860 | but trying to do it for your whole portfolio

00:05:50.540 | and lump summing in and trying to nail the bottom.

00:05:53.420 | I just don't see the point of putting yourself

00:05:55.460 | through like the emotional ringer in rollercoaster

00:05:57.660 | that you go through of trying to do that

00:05:59.720 | and all the stress involved if you're right

00:06:01.740 | or if you're wrong.

00:06:02.580 | It's just, it's not worth it to me.

00:06:04.480 | - Yeah, I mean, I feel like personally,

00:06:06.340 | I'm pretty good at picking the tops and buying the tops,

00:06:09.580 | but yeah, the bottoms are much harder, it seems like.

00:06:13.700 | - The anti-dunking strategy.

00:06:14.540 | - You guys have talked a lot about before

00:06:16.260 | how the biggest up days are in the middle

00:06:18.780 | of some of the worst, craziest times in the market, right?

00:06:22.020 | So, it's one of those things like, yeah,

00:06:23.580 | it doesn't even behoove you that much

00:06:24.940 | to really mess with it and try to pick the perfect entry.

00:06:29.160 | - And right when you put that lump sum to work,

00:06:30.780 | you're just gonna be a wreck because you're gonna think

00:06:33.420 | that you're gonna regret your decision for doing it.

00:06:35.620 | I just don't see what the point is

00:06:38.220 | of putting yourself through that

00:06:39.620 | because at the end of the day,

00:06:40.580 | is it really going to change your finances that much?

00:06:42.880 | So, Jason Zweig did this thing

00:06:44.780 | where he interviewed these people a number of years ago,

00:06:47.240 | all these people in Boca Raton, Florida,

00:06:48.900 | which is a nice retirement community,

00:06:50.460 | and the quote was something like,

00:06:52.500 | he's sitting in all these elegant homes

00:06:54.260 | and manicured lawns and palm trees,

00:06:56.420 | and he asked the people, "To get here,

00:06:58.540 | "did you have to beat the market?"

00:06:59.580 | And some people said, "Yeah, I beat the market.

00:07:01.060 | "I produced some alpha."

00:07:01.900 | Some people said, "I don't know."

00:07:02.720 | And then one guy said, "Who cares?

00:07:03.700 | "All I know is my investments helped me end up in Boca,

00:07:06.620 | "so what does it matter?"

00:07:07.460 | So, I think in 30 or 40 years,

00:07:10.140 | is it really gonna matter if you nail the bottom?

00:07:12.100 | Like, is it gonna change your financial picture that much

00:07:14.620 | if you actually do?

00:07:15.460 | So, if not, what's the point?

00:07:17.380 | - Right. - That's the whole thing.

00:07:18.980 | All right, let's do another one.

00:07:20.980 | - Okay.

00:07:22.500 | So, I'm 38 years old and have accumulated

00:07:24.900 | a portfolio of index funds through years of investing.

00:07:27.460 | I was wondering if it makes sense

00:07:28.540 | to hedge for downside protection

00:07:29.980 | so that a market crash doesn't wipe out

00:07:31.600 | years of investing returns.

00:07:33.100 | Also, what is probably the best method of doing this?

00:07:35.700 | Long puts, short futures.

00:07:37.780 | I know a perfect hedge doesn't exist

00:07:39.380 | and understand that hedging costs money

00:07:41.260 | and is not guaranteed to work as planned.

00:07:43.220 | This is one our regulars will notice from.

00:07:45.580 | What are your thoughts?

00:07:46.420 | But we didn't really get to dive that deep into it,

00:07:47.900 | so we wanted to kind of go deeper.

00:07:49.420 | - John, every time I hear someone talk about hedging,

00:07:51.500 | I have to think of this.

00:07:52.340 | John, put up the commercial here from,

00:07:53.980 | this is a CNBC commercial from Interactive Brokers,

00:07:56.180 | I believe, a few years ago.

00:07:57.740 | This turned into a meme pretty quick on Fintwit.

00:07:59.980 | She was having dinner and the market was down 2%

00:08:02.420 | and she said, "Excuse me, I need to play

00:08:03.420 | "some hedging trades."

00:08:05.800 | - (sighs) I don't, so after 2008,

00:08:08.000 | tail risk strategies were all rage.

00:08:09.880 | And the problem is these strategies only came into vogue

00:08:12.320 | after the crash had occurred.

00:08:13.840 | And the idea is, right, you buy these options

00:08:16.840 | and then when volatility spikes,

00:08:18.200 | these option prices go up.

00:08:19.920 | And I guess the thing about it, thinking it is,

00:08:23.440 | well, you're paying insurance premiums

00:08:24.920 | 'cause those are, maybe when the bull market,

00:08:27.240 | you know, from 2009, 2021 or whatever,

00:08:31.280 | those tail risk strategies are gonna be a huge drag on you.

00:08:33.760 | So you think, well, it's an insurance premium

00:08:35.080 | for when the world does blow up, then it's gonna happen.

00:08:37.800 | I will say option strategies are difficult to implement

00:08:41.080 | because, so this is not something you'd wanna try

00:08:43.600 | on your own because unless you really, truly understand

00:08:45.520 | how those contracts work, how they're priced, et cetera,

00:08:48.380 | I just don't think that that's something

00:08:50.260 | that you wanna be dabbling in.

00:08:52.060 | And the problem with using options

00:08:53.960 | to hedge your portfolio at all times

00:08:55.040 | is that the market goes up most of the time.

00:08:56.080 | So John, throw this chart up from Ed Yardeni.

00:08:57.980 | This is just the bull market since 1928.

00:09:02.040 | He kind of defines this as it's reset

00:09:04.520 | after a bear market of 20%.

00:09:06.240 | And you can see there's a lot of them.

00:09:07.840 | Now, I look back at this going back to just 1950.

00:09:10.720 | So the average bear market since 1950 is a loss of 36%.

00:09:14.800 | So that's what we're talking about, right?

00:09:17.280 | If you're up a dollar, you're back down to,

00:09:20.400 | call it 65 cents after the average bear market.

00:09:23.820 | I guess there's different strategies to hedge

00:09:28.960 | if you're gonna be on something like a tail risk strategy

00:09:30.940 | that's done for you.

00:09:32.760 | I mean, the easiest one

00:09:33.600 | is probably just hold more cash or bonds, right?

00:09:36.560 | Some people would say, "Well, bonds are a terrible hedge

00:09:38.480 | "because they prove this year they don't work."

00:09:40.800 | I don't know.

00:09:41.640 | I don't think one year can disprove

00:09:44.100 | the way fixed income securities work

00:09:45.720 | just 'cause rates are rising from historically low levels.

00:09:47.640 | But cash is a pretty easy one, right?

00:09:49.120 | That nominally, you're not gonna lose money.

00:09:50.800 | On the real basis, you are, but not nominally.

00:09:52.840 | Then you could look at things like commodities

00:09:54.160 | or managed futures, which can go long and short the markets,

00:09:57.120 | maybe a trend following strategy.

00:09:59.300 | I think a lot of the easiest hedges

00:10:01.160 | are actually more personal finance related.

00:10:02.920 | So, just having a more patient

00:10:04.560 | long-term investment strategy,

00:10:05.660 | setting the right asset allocation ahead of time,

00:10:07.840 | extending your time rise in a little bit,

00:10:09.840 | maybe saving more money,

00:10:11.840 | and then just the ability to stick

00:10:13.180 | with your investment plan during a downturn.

00:10:14.760 | So, I think the problem with hedges is

00:10:17.640 | they always seem more attractive

00:10:19.300 | after a bear market has happened.

00:10:21.680 | And then they seem less attractive during a bull market.

00:10:24.280 | And I think that's the problem,

00:10:25.280 | is people jump into them after stocks are down

00:10:27.560 | and then they wanna get out of them after stocks are up.

00:10:29.580 | Could you find a strategy

00:10:30.420 | that you're willing to put 5% of your portfolio in?

00:10:33.060 | Some sort of tail risk strategy

00:10:34.620 | that's gonna maybe help you

00:10:36.420 | when everything else is going bad?

00:10:38.220 | Sure, but I don't know,

00:10:39.460 | isn't just holding a little more cash

00:10:40.760 | and have a little more equity probably a better option

00:10:42.900 | because you know exactly how that strategy

00:10:45.340 | is gonna perform regardless

00:10:47.100 | and it's not gonna surprise you at all?

00:10:49.260 | - Yeah, it kind of brings to mind

00:10:50.460 | the phrase adding insult to injury.

00:10:52.980 | If you're just like, yeah,

00:10:54.220 | once the market's already down big, you're hedging,

00:10:56.220 | then the market starts to go back up at some point

00:10:58.480 | and you've got all these hedges on

00:11:00.280 | that are then moving against you.

00:11:02.080 | So it's kind of like you're messing yourself

00:11:03.840 | up both directions.

00:11:05.200 | - Yeah, again, if you wanna have an insurance strategy

00:11:07.680 | and you understand that you're paying premiums on it,

00:11:09.800 | for most of the time you're paying insurance on your house

00:11:12.320 | and it doesn't burn down, but that's still good money,

00:11:14.800 | that makes sense.

00:11:15.640 | But it's just something you really have to stick with

00:11:17.120 | and not jump in and out of.

00:11:18.480 | - Yep.

00:11:20.800 | - All right, let's do one more.

00:11:22.220 | - Okay, up next is a long one, so stick with us.

00:11:26.400 | I'm trying to figure out how to be opportunistic

00:11:29.080 | in a bear market.

00:11:30.280 | I don't have cash on the sidelines

00:11:32.000 | and with five kids, I don't have much disposable income

00:11:34.400 | to put to work, so I'm resorting to the following moves.

00:11:37.300 | One, upping my 401(k) contribution to 19%

00:11:40.520 | from the usual 9%.

00:11:42.460 | I'm buying cheaper and it's these kinds of markets

00:11:44.800 | where the long-term money is likely made.

00:11:47.320 | This will also help make up for any mistakes

00:11:49.160 | I make in number two below,

00:11:51.220 | but I can't afford this percent for long.

00:11:53.920 | Number two, DCA-ing into beaten up growth stocks in my IRA.

00:11:58.180 | I think there are some stocks that are down 40 to 70%

00:12:01.220 | but are great deals.

00:12:02.540 | It's okay if the stocks continue to go down,

00:12:04.720 | I'm just nibbling and will continue to nibble

00:12:06.420 | as prices drop.

00:12:08.060 | Am I onto something or am I just excusing bad behavior?

00:12:10.840 | Overall portfolio, counting IRAs and 401(k)

00:12:13.660 | is in the $550,000 range and I'm 53 years old.

00:12:16.800 | - You know what I noticed?

00:12:19.120 | People only nibble during a bear market.

00:12:21.340 | There's no nibbling that's done in a bull market, right?

00:12:23.340 | In a bear market, everyone nibbling

00:12:25.020 | because they're so concerned that once you buy a stock,

00:12:27.840 | it's going to go down again,

00:12:28.680 | which seems to be happening a lot in this market.

00:12:31.420 | Listen, number one, I love the strategy

00:12:33.260 | of increasing your savings rate if possible right now.

00:12:35.360 | Again, some people say, "Well, that's market timing."

00:12:38.100 | So what?

00:12:38.940 | You're buying more when the market is down,

00:12:40.020 | even if you don't completely nail the bottom.

00:12:42.220 | I like the idea.

00:12:43.060 | And if you say, "I can't afford it for long,

00:12:46.220 | "just do it for a little while,"

00:12:47.220 | you're not going to regret those purchases.

00:12:49.180 | I think it sounds like your strategy to me

00:12:51.420 | is something like a core and explore.

00:12:52.980 | And the core is your 401(k).

00:12:55.020 | That sounds to me like it's more long-term.

00:12:56.800 | You're just buying stocks, hopefully a low-cost index fund,

00:12:59.820 | target date fund kind of thing.

00:13:01.460 | And then in your other account, your IRA,

00:13:02.820 | you're speculating a little bit.

00:13:04.620 | I don't have a problem with that

00:13:05.780 | as long as it's sized correctly.

00:13:07.220 | I think if you want to scratch that itch and do it,

00:13:09.640 | that's fine, so it's like this core explore.

00:13:11.840 | I don't think that's big of a deal.

00:13:15.820 | As long as you understand that IRA is speculation,

00:13:18.020 | it could go really wrong.

00:13:19.380 | Some of these stocks may never come back,

00:13:20.860 | but buying down 40 to 70% probably is better

00:13:24.580 | than buying when they're up three or 400%.

00:13:26.860 | I guess the one thing you have to think about

00:13:28.480 | if you're doing this strategy,

00:13:29.980 | like what's your out if things continue to go wrong?

00:13:34.140 | When would you consider changing course?

00:13:36.300 | What's your holding period for these stocks?

00:13:38.700 | How long are you willing to be wrong, quote unquote,

00:13:40.660 | if they continue to go against you?

00:13:42.920 | That's the thing I think a lot of people

00:13:43.980 | don't really think about.

00:13:45.820 | They just think, "Well, I bought a stock down 70%,

00:13:48.220 | "so even if it gets back to break even,

00:13:50.420 | "I'm gonna do wonderfully and triple my money or whatever."

00:13:53.100 | So that's the thing is just understanding,

00:13:55.620 | like at what point do you give up

00:13:56.900 | with a speculation account,

00:13:58.020 | and at what point is it too much of your portfolio

00:14:00.900 | where it's taking away from the other stuff

00:14:02.900 | that it's just easier to do?

00:14:04.300 | - I just learned something new.

00:14:06.300 | I've heard core and explore,

00:14:07.420 | but I didn't know what it meant, so now I know.

00:14:10.080 | That's what--

00:14:10.920 | - Yeah, I mean, there's different ways of using it,

00:14:13.460 | but core and explore could be a 60/40 fund,

00:14:16.660 | but instead of 60/40, it's 55/35,

00:14:20.260 | and the other 10% is in some sort of alternative strategy,

00:14:22.420 | but this is core and explore would be,

00:14:24.700 | yeah, your 401(k) is doing the heavy lifting,

00:14:26.780 | it's doing the blocking and tackling and the boring stuff,

00:14:29.700 | and then in your IRA,

00:14:30.620 | you're using speculation a little bit.

00:14:32.380 | Again, I think for a lot of people,

00:14:34.400 | the market has made their speculation account

00:14:36.540 | much smaller than it was before,

00:14:38.460 | and it's kind of helped that,

00:14:39.340 | but if you keep it to a reasonable amount,

00:14:41.420 | and you just want to scratch that itch

00:14:43.100 | and play that game a little bit,

00:14:44.820 | as long as that lets you keep

00:14:45.780 | the rest of your portfolio untouched,

00:14:47.380 | that's fine with me.

00:14:48.540 | - Cool, that makes sense.

00:14:52.020 | - All right, let's do another one.

00:14:53.560 | - Okay.

00:14:54.400 | I'm 53 and married with two kids to put through college.

00:14:59.300 | My wife and I earn about $250,000 a year,

00:15:01.860 | and the tuitions will cost us $230,000

00:15:04.620 | over the next four years.

00:15:06.380 | I have $1.2 million in cash sitting in liquid savings.

00:15:10.300 | I had $500,000 in the stock market in my IRAs,

00:15:13.260 | but I lost $100,000 this year,

00:15:15.140 | so now it's $400,000 on paper.

00:15:17.900 | I'm seeing callable five-year CD rates hitting 3.5%,

00:15:21.380 | and it's tempting to invest about one million

00:15:23.420 | into these safe, insured CDs

00:15:25.540 | to pick up $35,000 a year in guaranteed interest income.

00:15:29.620 | Because the CDs are callable,

00:15:31.060 | the bank may decide to call away their obligation

00:15:33.700 | to pay me interest if rates were to pull back

00:15:36.140 | in 12 months' time.

00:15:37.660 | I'm tired of seeing big losses in stocks.

00:15:40.120 | I will not sell my equities in my IRA

00:15:43.360 | because I have a 20-year time horizon,

00:15:45.240 | but I'm not feeling confident

00:15:46.480 | about adding more money to equities.

00:15:48.320 | What would you do with the $1.2 million in savings?

00:15:51.680 | - All right, this, on the surface,

00:15:53.000 | sounds like an investment question,

00:15:54.360 | and there are some investing implications here,

00:15:56.080 | but really, this is a financial planning question.

00:15:58.220 | There are so many moving parts here.

00:16:00.120 | If I was a normal podcast host,

00:16:03.040 | I'd say there's a lot to unpack here,

00:16:04.480 | but I'm not, so I'm not gonna say that.

00:16:06.220 | So let's bring in a financial advisor to help out with this,

00:16:08.720 | because this really is just, there's a lot going on here.

00:16:10.880 | So Blair Ducanet, been on the show before.

00:16:13.160 | - Hey, Blair. - Hey, Ben.

00:16:14.200 | - Hey, Duncan.

00:16:15.440 | - A lot going on here.

00:16:17.000 | Now, I guess the one, maybe the layup answer here

00:16:20.040 | is we're matching assets with liabilities

00:16:22.520 | for the college fund, right?

00:16:23.860 | We know that that's a liquid thing they need

00:16:26.620 | in the next four years, that's easy,

00:16:28.040 | but a prospect comes to you, and by the way,

00:16:31.840 | good for this person.

00:16:32.680 | I don't know what they did to get this liquid savings,

00:16:34.340 | whether they sold a house or sold a business,

00:16:35.760 | or they're just really good savers.

00:16:37.320 | Obviously, that side of things, they're pretty good at,

00:16:39.720 | but the investing side of things,

00:16:40.920 | it sounds like they might need a little help with,

00:16:42.280 | because they're scared of the stock market,

00:16:44.320 | they don't know what to do with the cash,

00:16:45.680 | they wanna just take this one fell swoop

00:16:47.800 | and put it all in CDs.

00:16:49.160 | What do you do when you get someone here

00:16:50.380 | who just decides, all right, a bear market has caused me

00:16:53.880 | to totally change the way I view the stock market,

00:16:57.000 | I'm in search of safety now, that's it.

00:16:59.600 | Like, where do we start here?

00:17:01.780 | - Yeah, you hit on a lot of the key points here, Ben.

00:17:04.960 | The key thing here is this listener needs a financial plan.

00:17:09.440 | This is all about time horizon, what's the money for,

00:17:12.240 | when are you gonna need to spend it?

00:17:13.880 | We know about the college savings,

00:17:15.520 | and kudos to you for saving enough to pay for college,

00:17:18.040 | it's very expensive these days.

00:17:19.740 | Maybe that's where the CDs make sense.

00:17:21.920 | Go ahead and get the 3.5%, I know they're callable,

00:17:24.460 | but you'll at least start out at that rate.

00:17:26.280 | You know there's a short time horizon,

00:17:27.720 | you don't need to take risk with the money

00:17:29.240 | that you have saved for college,

00:17:30.440 | because it's coming up right now.

00:17:32.280 | But the rest of the money,

00:17:33.640 | sounds like this is long-term money that's for retirement,

00:17:36.000 | you're both working, and at the end of the day,

00:17:38.400 | there are benefits, especially right now,

00:17:41.880 | you've got a huge call option on the market,

00:17:44.480 | you've got a bunch of money in cash.

00:17:46.240 | Now, I hear from the question

00:17:47.720 | that there's some serious risk aversion here,

00:17:49.840 | and I understand it's scary to invest money for a long-term.

00:17:53.080 | But if you have a financial plan,

00:17:54.520 | particularly if you engage with a financial planner,

00:17:57.240 | that person can show you projections

00:17:59.360 | of what your portfolio could be worth in 10, 20, 30 years,

00:18:02.920 | when you're actually gonna be spending

00:18:04.760 | the rest of this million, million and a half dollars

00:18:06.720 | that you have saved for retirement.

00:18:08.240 | So don't think of these losses as actual losses,

00:18:11.440 | and you said that they're on paper, that's true.

00:18:13.480 | This is just fluctuations in the market.

00:18:15.760 | And keep in mind, the expected return for stocks

00:18:18.600 | goes up when the market goes down.

00:18:20.880 | So this may be an opportune time to get a plan together,

00:18:23.960 | to understand the risks that you're gonna take

00:18:26.120 | and the rewards for taking it,

00:18:27.760 | and go ahead and invest some of this money

00:18:29.520 | for the long-term in a diversified portfolio,

00:18:32.360 | doesn't have to be 100% stocks.

00:18:34.320 | You can pick something that matches your risk tolerance,

00:18:37.360 | some mix of stocks, bonds and cash that'll work for you,

00:18:40.440 | that you'll be comfortable with.

00:18:41.680 | I think the most important thing

00:18:43.600 | is that you're gonna build this all-weather portfolio

00:18:46.280 | that will help you go through not only this bear market,

00:18:49.320 | but there's going to be more in your lifetime.

00:18:51.960 | When those storms come, the most important thing

00:18:54.800 | is that you stay on the boat, right?

00:18:56.720 | If the boat's gonna make it through the storm,

00:18:58.680 | you can't be saved if you jump out.

00:19:00.520 | So I think with a little financial planning,

00:19:02.360 | you have a huge opportunity to have a very meaningful

00:19:06.360 | and sizable portfolio that you can spend

00:19:08.440 | on the things that you wanna do in the future.

00:19:10.760 | So that's my biggest piece of advice

00:19:12.160 | is you need a financial plan.

00:19:13.880 | - I do, yeah, for sure.

00:19:15.000 | They need an asset allocation and investment plan,

00:19:17.280 | and I think you're right.

00:19:18.680 | You don't have to put all the money into stocks, right?

00:19:21.080 | You build the plan based on

00:19:23.080 | what your liquidity needs are now,

00:19:24.360 | and obviously the big one is college,

00:19:25.760 | but you're also gonna have who knows what else

00:19:27.160 | coming ahead in the years ahead.

00:19:28.560 | So it could be you take this risk aversion,

00:19:30.760 | and let's say, Blair, you have a client

00:19:32.400 | coming to you with this sort of risk aversion

00:19:34.640 | and telling you, "I'm scared, stocks are bad."

00:19:37.360 | How do you put that into what an asset allocation should be

00:19:39.960 | in terms of thinking, all right,

00:19:41.000 | well, we're gonna have to balance this

00:19:41.960 | a little more for this client

00:19:42.800 | because they're obviously gonna need

00:19:43.760 | some sort of more stability in terms of bonds or cash

00:19:47.320 | to balance out the stocks if they can't handle

00:19:49.160 | being fully invested in equities.

00:19:51.920 | - Yeah, I call this the Goldilocks scenario.

00:19:54.280 | Not too much, not too little risk.

00:19:56.360 | And we have expected returns.

00:19:58.360 | They're just expected returns,

00:19:59.560 | but they're based on very reasonable,

00:20:02.160 | conservative expectations for what a mix of stocks

00:20:04.480 | to bonds could earn over time.

00:20:07.360 | And we can look at what would it be

00:20:08.880 | if your portfolio was only 50% in stocks, 50% in bonds?

00:20:12.560 | What would that look like in 30 years, most likely,

00:20:14.920 | with a range of scenarios?

00:20:16.360 | What would it look like if you had 60% or 70% in stocks?

00:20:19.840 | And then the client has the data that they need

00:20:23.520 | to make the right decision.

00:20:25.000 | This feels too hot, this feels too cold,

00:20:27.160 | this one feels just right,

00:20:28.360 | and we can make that decision that way.

00:20:30.480 | - Right, I do think, yeah,

00:20:31.480 | there has to be some sort of coaching involved, though,

00:20:33.080 | to understand that, yes, it feels scary right now,

00:20:35.880 | and it's painful to see

00:20:37.760 | the market value of your portfolio going down.

00:20:39.760 | But this really is the Carl Richards, his thing,

00:20:42.920 | where it's greed, buy, fear, sell, repeat until broke.

00:20:47.000 | And again, this person,

00:20:48.320 | obviously he's done something right.

00:20:49.680 | They've amassed seven figures in liquid wealth

00:20:52.000 | that they're just sitting on,

00:20:53.360 | and now is not the time to run away from that.

00:20:55.600 | Now is actually the opportune time to go,

00:20:57.040 | oh, wait, I have liquidity.

00:20:58.440 | I should put some of that to work in the stock market

00:21:00.280 | because in 10, 20 years,

00:21:02.420 | I'm not going to regret that decision.

00:21:04.320 | And if I do, something else is really wrong with the world

00:21:06.560 | where maybe it's not gonna matter anyway.

00:21:08.160 | But I think that's the idea.

00:21:09.360 | But yeah, you're right, the nail on the head financial plan.

00:21:12.480 | Yeah, they need to talk to an advisor, potentially,

00:21:16.360 | to just get a better idea of,

00:21:18.400 | instead of just putting it in that release valve,

00:21:21.120 | that CD sounds so,

00:21:22.560 | Duncan, this is the cash addiction, right?

00:21:24.760 | That CD sounds so comforting right now,

00:21:27.080 | and getting your money and just not seeing it go down.

00:21:29.960 | But you're gonna regret that decision down the line

00:21:32.640 | because you didn't put it in stocks

00:21:33.680 | when they were a buying opportunity.

00:21:35.560 | - Yeah. - I agree.

00:21:37.640 | - Let's do another one. - Speaking of comfort,

00:21:39.520 | we have our old friend, iBond, in the next question.

00:21:43.600 | So up next, I spoke with my financial advisor today

00:21:47.400 | about iBonds.

00:21:48.960 | He was telling me that the composite rate for an iBond

00:21:51.640 | is 9%, but this is only for the first six months.

00:21:54.640 | Thus, I would likely get 4.5% for 12 months.

00:21:57.920 | Is this correct?

00:21:58.840 | Is this assuming inflation would decrease

00:22:01.280 | after October of 2022?

00:22:03.360 | Maybe a review of what exactly composite rate means

00:22:05.640 | would be helpful.

00:22:06.480 | I agree, I have no idea what composite rate means.

00:22:07.920 | - Good idea.

00:22:08.760 | These iBonds are hot.

00:22:09.600 | So there was a Washington Post story last week

00:22:12.080 | saying that there's been such high demand for these things

00:22:14.880 | that it crashed the Treasury Direct website.

00:22:17.080 | I personally tried to call in,

00:22:18.600 | and the wait holding time was like two hours.

00:22:20.240 | So I wish they would just, I don't know,

00:22:22.080 | turn this into an ETF to make it easier for people

00:22:24.040 | to invest in these things.

00:22:24.880 | I know it's difficult.

00:22:25.720 | But yeah, Blair, let's explain how these work.

00:22:27.560 | We've talked about this a little bit here,

00:22:29.040 | but not really how the meat and the bones in terms of this,

00:22:31.600 | 'cause basically every six months, the rate gets re-rated.

00:22:34.920 | So that 9% is an annualized return, right?

00:22:36.920 | How does this work?

00:22:38.280 | - Right, exactly.

00:22:39.200 | So iBonds, not a very popular quarter

00:22:43.160 | of the investing market, but they got a lot of attention.

00:22:45.800 | Cover of the Wall Street Journal yielding 9.62% as of May,

00:22:50.800 | and essentially risk-free

00:22:52.400 | if you think the United States government

00:22:53.760 | is a risk-free asset.

00:22:55.440 | So I dived in a little bit to what are the,

00:22:57.760 | dove into the details of how does this really work?

00:23:02.160 | And you're right.

00:23:03.320 | The rate is set every six months.

00:23:05.880 | Every May and November, the Treasury comes out and says,

00:23:08.360 | "Here's the rate for iBonds."

00:23:10.120 | And that rate is based on a fixed rate

00:23:12.720 | plus the current rate of inflation in the market.

00:23:15.360 | That's why we're seeing a high rate right now.

00:23:17.280 | We have historically high inflation.

00:23:19.160 | The current bonds, the ones that you would buy right now,

00:23:21.720 | have a fixed rate of zero plus the inflation rate.

00:23:25.320 | So it is conceivable that as inflation comes down,

00:23:28.120 | if inflation actually hit zero again,

00:23:30.040 | these bonds for a certain period of time

00:23:31.880 | could actually yield zero.

00:23:33.280 | Probably unlikely.

00:23:35.080 | So you're right.

00:23:36.320 | The 9.62% annualized is guaranteed

00:23:40.520 | just for the first six months.

00:23:42.040 | If inflation comes down, that yield will come down,

00:23:45.000 | but there's still gonna be some yield there.

00:23:48.560 | The other thing to note about iBonds

00:23:49.960 | is they're really meant to be long-term investments.

00:23:53.840 | So you have to hold them for at least 12 months.

00:23:56.120 | And if you sell them anytime before five years,

00:23:58.560 | you actually lose the last three months of interest.

00:24:01.400 | So iBonds really meant to be long-term investments.

00:24:04.520 | They are safe.

00:24:05.520 | They are earning a great rate right now.

00:24:07.040 | You should expect the rate to go down over time

00:24:09.080 | if inflation gets under control.

00:24:10.920 | And a couple of other things to note.

00:24:12.560 | You have to buy them directly on the Treasury's website,

00:24:15.080 | which we heard was overloaded with interest.

00:24:18.240 | I also was unsuccessful in opening an account online.

00:24:22.440 | The max that any one person can invest in iBonds per year,

00:24:25.680 | $10,000.

00:24:27.080 | That's per social security number and per EIN.

00:24:30.320 | So you and your spouse can both put 10,000.

00:24:33.120 | If you have children, you can actually open custodial accounts

00:24:35.960 | for each of your children, 10,000 for each of those.

00:24:38.560 | If you have LLCs and business entities

00:24:40.600 | or trusts that have a separate identification number,

00:24:43.040 | you can also invest 10,000 in those.

00:24:45.320 | And one thing that people don't also understand is

00:24:48.520 | there is a way to get around the 10,000.

00:24:51.560 | If you have a tax refund when you file your taxes,

00:24:54.920 | you can choose to have that tax refund

00:24:57.320 | invested in iBonds above the 10,000.

00:25:00.600 | So this can be a great, safe, long-term investment

00:25:04.840 | for sort of that liquidity cash bucket

00:25:09.400 | that you can build over time.

00:25:10.720 | But it is a variable rate.

00:25:12.040 | It will change every six months.

00:25:14.040 | - Yeah, so they asked if they get 4.5% for 12 months.

00:25:16.920 | It's actually they get 4.5% more or less for six months.

00:25:20.040 | And then if inflation goes down to 5%

00:25:22.160 | and that's what the new rate is,

00:25:23.320 | then they get that 2.5% for six months.

00:25:25.560 | So that's kind of how it works.

00:25:26.520 | So your annual return would be probably closer

00:25:28.760 | to like 6% or 7% if that's the case.

00:25:31.080 | If inflation stays high, these rates will stay high too.

00:25:33.080 | So yeah, maybe our one in the last question

00:25:36.040 | should be looking more at iBonds rather than CDs.

00:25:38.400 | But yeah, getting back to the TSP thing, Duncan,

00:25:42.560 | the Thrift Savings Plan, they have like a government bond.

00:25:45.040 | It's called like the G Fund.

00:25:46.160 | My brother always says this to me.

00:25:48.280 | They basically have their own sort of treasury fund in it.

00:25:50.440 | It's no interest rate risk.

00:25:51.760 | So it will not lose money.

00:25:53.400 | And so I think they need to make an iFund for the iBonds

00:25:56.400 | so people can just invest in a fund of this

00:25:58.600 | and make it easier for people.

00:26:00.480 | I don't know.

00:26:01.320 | Again, I've been telling people

00:26:02.800 | to take the cap off of these things.

00:26:04.920 | No one's listening to me.

00:26:05.960 | - Yeah, we need to start the chant again.

00:26:08.000 | - You can't make all into the Fed?

00:26:10.560 | - I've been trying.

00:26:11.560 | Yeah, I'm saying I'd like to see

00:26:12.480 | a triple levered ETF of iBonds.

00:26:14.840 | Someone can figure that out, right?

00:26:17.320 | - Duncan.

00:26:18.160 | - Getting a lot of money.

00:26:19.240 | All right, remember, keep those questions and comments coming.

00:26:22.320 | If you have a question for us,

00:26:23.160 | email us at thecomponentshow@gmail.com.

00:26:26.120 | I wanna thank Blair for helping out with her financial ace.

00:26:28.720 | We appreciate it.

00:26:30.680 | As always, Duncan was the finest hat for us again today.

00:26:34.200 | Remember, ask@thecomponentshow@gmail.com

00:26:36.200 | and we will see you next time.

00:26:37.520 | - Bye.

00:26:38.360 | (upbeat music)

00:26:40.940 | (upbeat music)

00:26:43.520 | (upbeat music)

00:26:46.100 | (upbeat music)

How Do I Buy During a Bear Market?

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