Should I Pay Off My Mortgage or Invest in Stocks?

00:00:00.000 | (beeping)

00:00:02.180 | (upbeat music)

00:00:08.880 | - Welcome back to Portfolio Rescue.

00:00:19.240 | We had a week off last week, 'cause I was on spring break,

00:00:21.720 | and so we have a ton of questions built up.

00:00:23.500 | Today's Portfolio Rescue is sponsored by Bird Dogs.

00:00:26.480 | Duncan, when I was away in my office,

00:00:29.020 | I got a new shipment of these bad boys, right?

00:00:31.160 | - Nice.

00:00:32.000 | - Now, I was in Florida for a week,

00:00:33.600 | and all I wore all week was Bird Dogs,

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00:00:36.760 | they have this nice little side pocket,

00:00:38.480 | they have the liner in here, right?

00:00:40.700 | You tried it for the first time.

00:00:41.540 | I've been wearing these for years,

00:00:42.900 | but especially in the summer, they're great,

00:00:44.480 | because you can wear them for working out,

00:00:45.780 | you can wear them for walking,

00:00:47.180 | you can wear them in the water, it's great.

00:00:50.080 | They really are the sort of short for everything

00:00:53.540 | you can do in the summer.

00:00:54.660 | I have two main things I look for

00:00:56.380 | when I'm thinking of fashion.

00:00:58.020 | One is style, I gotta be a little stylish,

00:01:00.180 | and the other one is comfort, right?

00:01:01.700 | I've gotta be comfortable,

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00:01:21.020 | - Yeah, and you weren't lying about the side pocket.

00:01:22.980 | It's much more comfortable for your wallet.

00:01:25.020 | - Right, yes, and it's not gonna fall out,

00:01:27.460 | and if you're not sitting on it,

00:01:28.900 | yeah, that can lead to problems down the line.

00:01:30.860 | You get into middle age, right?

00:01:31.940 | That's tough.

00:01:32.780 | - Yeah, yeah. - All right.

00:01:34.300 | One of the features we've been talking about a lot

00:01:36.260 | on Portfolio Rescue is iBonds.

00:01:38.480 | Got a ton of questions on these.

00:01:39.940 | The rate topped out at 9.6%.

00:01:43.100 | The new rate comes every six months.

00:01:45.140 | The next one down, inflation came in a little bit,

00:01:46.980 | it was down to 6.9%.

00:01:48.360 | Now today, Bloomberg tells us 3.8%.

00:01:51.680 | So we had this huge rush into iBonds.

00:01:54.940 | Maybe it could go back up if inflation rises again,

00:01:56.660 | but it seems like the really great returns on iBonds

00:01:59.460 | and the great yields is, that time has passed.

00:02:02.020 | It's over.

00:02:02.860 | - Yeah, yeah, I went ahead and redeemed.

00:02:07.660 | I told you it felt like a Winnie the Pooh meme thing.

00:02:10.220 | It seems like it should just say withdraw,

00:02:12.560 | but instead of withdrawing your money, it's redeeming.

00:02:14.700 | So I went ahead and redeemed mine.

00:02:16.400 | Not just because I'm a great market timer

00:02:19.820 | and that kind of thing,

00:02:20.660 | but also because we just moved into a new place,

00:02:22.600 | and so there was a lot of cash needed for deposits

00:02:25.580 | and that kind of thing.

00:02:26.660 | - So using the Treasury Direct website was fine?

00:02:29.620 | It wasn't a problem?

00:02:30.460 | - It actually, yeah, it was like a couple of clicks,

00:02:33.220 | and yeah, in like two or three days,

00:02:34.820 | I saw the redemptions hitting my account.

00:02:38.740 | - I have a feeling now that rates are lower,

00:02:40.220 | we're not gonna hear anything else about these

00:02:41.660 | for a long, long time.

00:02:42.620 | - Yeah, I feel like they're probably gonna lose

00:02:45.260 | a lot of their shine now.

00:02:46.620 | - All right, let's do a question.

00:02:48.140 | - All right.

00:02:49.060 | Up first today, we have, hey, lads.

00:02:52.200 | - This has gotta be from someone either--

00:02:53.940 | - It's a lad rush.

00:02:55.460 | - This has gotta be someone from Australia or England, right?

00:02:58.180 | - Yeah, it makes me feel cool.

00:03:00.660 | - I can't pull off lads.

00:03:02.540 | - No.

00:03:03.380 | Hey, lads, I'm a huge fan of the pod

00:03:05.620 | and one of the knife catchers who purchased a house in Q1.

00:03:08.820 | As someone with a 6 1/8% mortgage

00:03:11.460 | from a recent home purchase,

00:03:13.060 | I'm weighing my allocation to stocks

00:03:14.940 | versus early mortgage payoff.

00:03:16.940 | I have a long time horizon as someone in my mid-20s

00:03:19.700 | and a needlessly large savings account, not to brag,

00:03:22.500 | I've been waiting to deploy.

00:03:24.260 | Do I look at early mortgage payments

00:03:25.940 | like a 6% or so tax-free bond

00:03:28.340 | or should I ignore the idea

00:03:29.700 | and just buy equity indices as usual?

00:03:32.140 | Their background is $200,000 income,

00:03:34.900 | which they say is about $47,000 in New York dollars,

00:03:38.860 | very high risk tolerance, they own another home,

00:03:41.540 | and five-figure 401(k) in their mid-20s.

00:03:45.380 | Wow.

00:03:46.220 | - Very, yeah, this is a not to brag

00:03:47.940 | and also a very nicely,

00:03:49.460 | they got a lot of inside jokes here.

00:03:51.460 | From a hurdle rate perspective, yes,

00:03:52.780 | early mortgage payments these days

00:03:54.460 | can compete with bonds again, right?

00:03:56.100 | If you're talking 6 1/8, they're using fractions

00:03:58.780 | because that's what Michael likes to do.

00:03:59.940 | I'm a decimal point guy.

00:04:01.140 | You know, U.S. Treasury yields as of this week

00:04:03.900 | are in the 3 1/2 to 5% range, depending on the maturity,

00:04:07.460 | so you probably get a little higher yields

00:04:09.340 | than the corporate bonds or junk bonds maybe,

00:04:11.260 | but six and change is a pretty high hurdle rate now.

00:04:14.460 | So, but I'm not a huge, that's on a rate thing,

00:04:17.520 | but I'm not a huge fan

00:04:18.480 | of comparing early mortgage rates to bonds.

00:04:19.900 | Here's why.

00:04:20.740 | Bonds are a financial asset.

00:04:21.940 | They have liquidity.

00:04:23.020 | If you own a bond ETF, you can trade it pretty easily.

00:04:26.160 | It's very liquid.

00:04:27.540 | It costs you pennies on the dollar.

00:04:29.740 | I guess you can use bonds to rebalance your portfolio.

00:04:33.220 | You can use them for spending purposes.

00:04:34.500 | You can't spend your house.

00:04:35.500 | So yes, you can borrow against it, I guess, in a pinch,

00:04:37.860 | but there's not nearly as much liquidity

00:04:39.140 | from early mortgage payments

00:04:40.100 | as there is from bonds or a bond fund.

00:04:42.220 | I guess you could look at paying down your mortgage

00:04:44.060 | as a form of personal balance sheet rebalancing,

00:04:47.840 | but I just don't see it.

00:04:49.340 | I mentioned this before, I think,

00:04:50.340 | but we lived in our first house for 10 years

00:04:51.660 | and I made extra payments.

00:04:52.500 | Every time we refinanced,

00:04:53.500 | I just kept paying the same exact amount as I paid before.

00:04:56.220 | By the end, I was making double payments.

00:04:57.720 | And after 10 years in the house,

00:04:59.340 | we moved on because we needed a bigger place

00:05:01.020 | 'cause we had twins.

00:05:02.300 | And I looked at that, those early payments,

00:05:04.020 | and I thought, what good were those?

00:05:05.860 | I guess it helped me make a little bit

00:05:07.240 | of a bigger down payment on the new place

00:05:08.700 | 'cause they had some equity,

00:05:09.520 | but it felt kind of useless in my 20s and early 30s

00:05:13.540 | to be making those extra payments.

00:05:15.100 | So obviously we've talked about

00:05:17.660 | the personal preference angle here on many occasions.

00:05:19.620 | Some people simply hate debt with a passion,

00:05:21.500 | just wanna get rid of it, no matter the opportunity cost.

00:05:23.580 | And that opportunity cost equation is different now.

00:05:25.740 | It's a lot different at 6% mortgage rates

00:05:27.260 | than 3% mortgage rates.

00:05:29.220 | I do think you need to consider

00:05:30.520 | the impact of inflation over time, too,

00:05:32.340 | when it comes to holding an asset like this, right?

00:05:34.220 | If you can get comfortable holding a mortgage

00:05:35.700 | and you're not so averse to debt,

00:05:37.160 | which is something that took some time for me,

00:05:39.080 | it can work in your favor.

00:05:39.920 | So this person talked about being in Brooklyn,

00:05:43.860 | and so I guess they're not,

00:05:45.940 | unless maybe they're from England.

00:05:47.340 | If they have an accent, they can say it loud.

00:05:48.460 | I don't know, otherwise I just can't do it.

00:05:50.780 | - Yeah, I don't think you can just be

00:05:51.900 | walking around Brooklyn saying lads.

00:05:53.700 | - Duncan, you moved out of Brooklyn recently,

00:05:57.820 | and I looked up the median home sale, just Google,

00:06:00.500 | and they had it pegged at like

00:06:02.180 | anywhere in the 7.30 to 7.50 range, right?

00:06:04.860 | So New York is kind of an expensive place to live,

00:06:07.340 | you know, newsflash.

00:06:09.060 | So let's say you put 10% down in a 7.50 place,

00:06:12.460 | 30-year fixed rate mortgage at six and change,

00:06:14.740 | like this person has.

00:06:15.580 | We're talking payments around $4,100 a month, right?

00:06:18.300 | And that's before taxes, which is kind of tough.

00:06:20.440 | I don't want to rub it in here,

00:06:21.540 | but that same 7.50K price tag at 3% rates

00:06:25.220 | would be a monthly payment of $2,800.

00:06:27.900 | So $1,300 more just because rates are higher, which is tough.

00:06:32.900 | - Also keeping in mind that average Manhattan rent now

00:06:35.500 | I think is $4,500 a month.

00:06:37.060 | - Yeah, that's tough.

00:06:39.660 | So people always say location is everything in housing,

00:06:42.040 | but I think in this cycle it's more about timing and luck

00:06:43.940 | than anything else in rates, obviously.

00:06:46.900 | Hopefully those people locked in the 6% mortgage rates

00:06:49.180 | or 7% will be able to refinance in the coming years.

00:06:50.940 | And I think they will,

00:06:51.780 | but maybe next time we have a mom, we can ask Bill

00:06:54.760 | if the government would consider raising

00:06:56.420 | the mortgage interest rate deduction

00:06:57.660 | for people who have six and 7% mortgage rates,

00:06:59.580 | because that's ridiculous.

00:07:01.740 | So let's say inflation averages 3%

00:07:03.980 | over the life of that loan, right?

00:07:05.060 | Which is the average inflation rate, give or take,

00:07:07.100 | over the last a hundred years or so.

00:07:08.500 | On an inflation adjusted basis,

00:07:09.980 | that $4,100 payment will be worth the equivalent

00:07:12.700 | of roughly $1,650 in 30 years time, right?

00:07:16.300 | Just using that 3% inflation to eat it up.

00:07:18.860 | Add in some tax benefits from the mortgage interest deduction

00:07:21.180 | and that's even more savings over time, right?

00:07:23.780 | I'm not saying that holding mortgage debt

00:07:25.180 | is always the right thing to do,

00:07:26.020 | but I think for someone in their 20s,

00:07:27.600 | unless you have a real aversion to debt,

00:07:29.940 | having that payment locked in

00:07:32.260 | and having the ability to have it as,

00:07:34.720 | not only housing as an inflation hedge,

00:07:36.800 | but having that fixed rate mortgage

00:07:38.360 | and knowing what the payment's gonna be,

00:07:40.220 | and having the ability to refinance over time,

00:07:44.040 | I just think that in your 20s,

00:07:45.500 | the benefits of compounding in the stock market

00:07:47.380 | far outweigh the benefits of paying down your mortgage.

00:07:49.900 | That's where I stand.

00:07:50.740 | Not everyone agrees with me, that's personal preference.

00:07:53.960 | - Yeah, yeah, I mean, that makes sense to me.

00:07:56.620 | I think for a lot of people,

00:07:58.100 | they just have an aversion to having any debt,

00:08:00.900 | even in a case like that, where it seems to make sense.

00:08:04.420 | Also, keeping in mind,

00:08:05.300 | I realize a lot of people don't know this.

00:08:07.680 | In New York City, to rent a place,

00:08:10.080 | you have to, the standard is,

00:08:11.940 | you have to make 40 times your monthly rent in salary

00:08:16.940 | to be able to be qualified.

00:08:18.340 | Most landlords won't let you move into a place

00:08:19.940 | unless you make 40 times monthly rent.

00:08:22.100 | So for that $4,500 average rent,

00:08:25.200 | that's what, $180,000 a year that you have to make?

00:08:28.440 | And if you need a guarantor, it goes up to 80 times.

00:08:31.400 | If you have a guarantor,

00:08:32.720 | they have to make 80 times your monthly rent in annual salary.

00:08:35.960 | Isn't that insane?

00:08:36.860 | - Yeah, but the benefit is,

00:08:39.140 | you get to live in a place that's 300 square feet.

00:08:41.500 | So-- - It's true.

00:08:43.140 | It's true. - I mean, all right.

00:08:44.940 | Let's do another one.

00:08:46.460 | - Okay, up next, we have a question from Sam.

00:08:49.600 | I have a question about what to do

00:08:50.820 | in a very specific black swan event,

00:08:54.500 | or in the event of this situation.

00:08:57.940 | And they think that this is gonna happen.

00:09:00.260 | It's just a question of when.

00:09:01.740 | Let's say one day there's breaking news

00:09:03.320 | that China is invading Taiwan,

00:09:05.140 | which probably means our stock market is going to crash.

00:09:07.500 | How should an investor react to news of the invasion?

00:09:09.840 | A, take all their money out of the stock market.

00:09:12.180 | B, take some of their money out of the stock market.

00:09:14.180 | C, wait and see what happens.

00:09:16.100 | Or D, don't do anything and write it out.

00:09:19.000 | They're saying it like it's a done deal,

00:09:21.140 | that the market would definitely crash in that case.

00:09:23.580 | - Yeah, I mean, it certainly seems like

00:09:26.140 | China's been circling Taiwan for some time now.

00:09:28.500 | I'm no geopolitical expert.

00:09:30.320 | I read a lot of people that are.

00:09:32.700 | Maybe it is a question of when, not if here.

00:09:35.540 | But the assumption would be,

00:09:37.500 | well, the algos would immediately sell off,

00:09:39.260 | and this would be bad for the stock market.

00:09:40.380 | But the stock market has a very counterintuitive

00:09:42.220 | relationship with war and geopolitical conflict

00:09:44.420 | over the years.

00:09:45.260 | There's this wonderful book on the stock market

00:09:47.020 | and how it reacted to World War II by Barton Biggs

00:09:49.880 | called Wealth, War, and Wisdom.

00:09:51.700 | And for any market geeks out there,

00:09:53.700 | market historian geeks, I highly recommend this one.

00:09:56.220 | I read it in the last couple years.

00:09:57.700 | I know it's a cliche at this point

00:09:59.780 | to be a middle-aged guy who's into studying World War II,

00:10:02.940 | but I'm totally there.

00:10:04.060 | And to be fair, I got into it in college.

00:10:06.060 | I was traveling Europe in college,

00:10:07.860 | and after being in Europe

00:10:09.500 | and seeing some of the things there,

00:10:10.700 | I read every book I could get my hands on.

00:10:11.900 | I still think Band of Brothers

00:10:13.860 | is my favorite book I've ever read of all time.

00:10:16.900 | For some reason, that book just resonated with me.

00:10:19.000 | So Biggs uses the stock market

00:10:20.340 | to describe what was happening in the war years.

00:10:22.220 | I wanna read this one part from the book.

00:10:23.660 | So he says, "By 1942, a map of the world

00:10:25.420 | showed Germany in control of most of Europe

00:10:26.980 | with its fierce hegemony and stretching from the North Sea

00:10:29.840 | to the very gates of Moscow and Leningrad.

00:10:31.500 | At the peaks of expansion across Asia,

00:10:33.500 | Japan controlled 10% of the land mass of the world

00:10:35.980 | and much of its most precious natural resources."

00:10:38.340 | Now, his point was 1942, at this point,

00:10:41.220 | was like, this was like the worst of the worst.

00:10:43.560 | It seemed like all the allies were teetering on the edge

00:10:46.780 | and Germany and Japan were sort of, it's a done deal.

00:10:49.660 | And he wanted to describe just how bleak things were.

00:10:51.940 | And guess when the stock market bottomed?

00:10:54.200 | 1942, John, show this chart here.

00:10:55.980 | This is the Dow in 1942.

00:10:58.580 | Now, after the Great Depression,

00:10:59.660 | the stock market kind of just went along.

00:11:02.380 | There was a couple other crashes.

00:11:03.420 | It didn't really come close.

00:11:04.780 | And then in 1942, the stock market bottomed

00:11:07.260 | and just took off.

00:11:08.080 | It doubled off the lows from 1942.

00:11:09.980 | The war didn't end until 1945.

00:11:11.420 | And by then, the Dow had almost already doubled.

00:11:13.860 | I've written a lot about this over the years.

00:11:15.020 | There's tons of other examples where the stock market

00:11:16.780 | didn't really react how you'd think

00:11:18.020 | in the face of geopolitical conflict.

00:11:19.380 | So in the six month following the onset of World War I

00:11:22.660 | in 1914, the Dow fell 30%.

00:11:24.620 | And then they actually had to close the market

00:11:25.940 | for like six months because their liquidity

00:11:28.420 | just dried up across the globe.

00:11:30.700 | And then in 1915, it reopened

00:11:32.280 | and the Dow had its best year ever.

00:11:34.020 | The Dow was up, I think, 88% in 1915.

00:11:36.860 | That's a year that's never been topped.

00:11:38.320 | So during the war, I think throughout the entirety

00:11:41.340 | of World War I, the Dow was up 43%,

00:11:43.660 | around 9% in total, or annually, I should say.

00:11:46.780 | Same thing in World War II.

00:11:47.820 | I think the Dow rose, let's see,

00:11:50.640 | the Dow was up 50% throughout World War II

00:11:52.580 | from 1939 to 1945, 7% per year.

00:11:55.060 | So during the two worst wars in modern history,

00:11:57.780 | US stock market was up a combined 115%

00:12:00.140 | throughout those wars.

00:12:00.980 | Now, maybe you can say, well, it was different back then.

00:12:02.500 | There was wartime spending and this would be different.

00:12:04.580 | Sure, US troops were sent to Vietnam in March of 1965.

00:12:09.060 | The Dow was up 10% the rest of that year.

00:12:11.420 | By 1973, when we pulled the last troops out,

00:12:14.540 | the stock market was up 5% per year through Vietnam.

00:12:17.700 | Cuban Missile Crisis, this is one of my favorite ones.

00:12:20.220 | 13 days in October.

00:12:21.580 | I think that was a Kevin Costner movie, "13 Days."

00:12:23.420 | Does that sound about right?

00:12:24.380 | - I actually don't remember who was in it.

00:12:25.580 | Good movie, though.

00:12:26.700 | - In that two-week span, the Dow lost 1.2%

00:12:30.380 | for the rest of the year.

00:12:31.220 | It was over the Dow gain 10%.

00:12:32.580 | This one's kind of crazy.

00:12:33.820 | John F. Kennedy was assassinated in the early 1960s.

00:12:37.140 | The stock market opened up 5% the day

00:12:38.740 | after he was assassinated.

00:12:39.820 | Stocks finished up the next year, up 15%.

00:12:42.340 | - So wait, what's the rationale for that?

00:12:45.300 | What possible reason would the market be up the day

00:12:48.500 | after a presidential assassination?

00:12:50.940 | - Well, US invaded Iraq March, 2003.

00:12:53.300 | The stock market was up 2.3% the next day.

00:12:55.620 | Finished up the year more than 30% from that point.

00:12:58.420 | That was from the depths of a pretty bad bear market,

00:13:00.220 | but still.

00:13:01.220 | Sure, if China invades Taiwan,

00:13:03.420 | it would seem to be bad news for the markets

00:13:05.180 | and the global economy,

00:13:06.180 | but it's not a foregone conclusion.

00:13:08.220 | I mean, like, should you have a strategy in place

00:13:10.100 | to deal with potential geopolitical crises?

00:13:12.300 | My contention is you should have a strategy in place

00:13:14.380 | to deal for all sorts of crises, right?

00:13:16.660 | Even things we can't think of right now,

00:13:17.900 | 'cause splitting hairs here,

00:13:20.060 | but calling this a black swan,

00:13:21.380 | black swans are things that we don't think

00:13:23.220 | are gonna happen, or don't know are gonna happen,

00:13:24.420 | or come out of left field.

00:13:25.580 | If you're already planning-

00:13:26.420 | - This is more like a gray swan.

00:13:27.980 | - Yeah, I'm just simply not sold on the idea

00:13:29.620 | that anyone has A, the ability to predict

00:13:31.780 | such a conflict occurring,

00:13:32.940 | B, predict the timing of such a conflict,

00:13:34.780 | and C, predict what the market's reaction is gonna be.

00:13:36.780 | Right, so bad things can and will happen in the markets.

00:13:38.940 | Like, you can't get away from that fact

00:13:41.620 | that the risk assets is going to happen.

00:13:43.780 | I've yet to meet a single person

00:13:44.980 | who can sidestep this kind of event

00:13:46.900 | and then figure out when to get back in

00:13:48.780 | because of the market's reaction or whatever,

00:13:50.140 | what the response is gonna be.

00:13:51.660 | So, I think trying to plan ahead for something like this.

00:13:54.540 | I think you make your portfolio durable enough

00:13:56.420 | to handle something like this

00:13:57.300 | without trying to plan for it in advance.

00:14:00.180 | - Yeah, I have kind of a broad question for you.

00:14:03.220 | Would it be a sign to you

00:14:04.500 | that someone probably should not be in the market

00:14:07.660 | to begin with if they are considering

00:14:09.740 | whether or not they would pull all their money

00:14:11.180 | out of the market if some kind of macro event happened?

00:14:14.460 | - Yeah, that's the point.

00:14:15.700 | - Yeah.

00:14:16.620 | - I think your asset allocation should take into effect,

00:14:18.900 | like, you should own enough stocks

00:14:20.340 | that you'd be more than willing to own them

00:14:22.220 | in a bull market or a bear market.

00:14:23.860 | - Right. - If you can't, yeah.

00:14:25.100 | Because otherwise, you're gonna be hopping out

00:14:27.060 | and hopping in and that's a game that just no one can win.

00:14:31.100 | Even if you're right once,

00:14:31.980 | you're not gonna be right on a consistent basis.

00:14:34.460 | - Right, right.

00:14:35.380 | Also, remember, you and Michael have talked a lot

00:14:37.980 | on "Animal Spirits" about Ukraine

00:14:39.900 | and the Russian invasion of Ukraine.

00:14:42.500 | People thought that it was gonna lead

00:14:43.660 | to all these macro events in Europe

00:14:46.300 | that just have not happened.

00:14:47.860 | - I'm still shocked at how much lower energy prices are

00:14:50.460 | than they were after the spike from the war.

00:14:52.380 | It still doesn't, everyone thought Europe was toast

00:14:55.020 | in terms of their economy.

00:14:56.500 | - Yeah, the reaction is always much different

00:14:59.260 | than you probably expect.

00:15:01.100 | - Yeah, humans are hard. - Absolutely.

00:15:03.900 | Yeah, so events like this,

00:15:05.700 | even if you know it's gonna happen.

00:15:08.060 | - So up next, we have a question from Eric.

00:15:10.820 | I'm a 30-year-old living in Brooklyn,

00:15:12.260 | making $175,000 a year.

00:15:14.620 | I'm maxing out my 401(k), Roth IRA,

00:15:16.740 | and have $45,000 in a brokerage account.

00:15:19.140 | Being my company's ESOP, my company's stock has become--

00:15:22.300 | - Duncan, what's ESOP mean?

00:15:23.740 | You know it?

00:15:24.580 | - Company Stock Option Plan?

00:15:27.460 | - Got it, nailed it.

00:15:28.700 | - Is that it?

00:15:29.540 | Okay, yeah.

00:15:30.620 | My company's stock has become 20% of my brokerage,

00:15:32.780 | even after selling a good chunk

00:15:34.140 | over the past several years.

00:15:36.060 | I also have an RSU grant that we'll begin investing

00:15:39.780 | this year.

00:15:40.620 | RSU, what's that one?

00:15:41.780 | I don't remember.

00:15:42.600 | I've known it at one point.

00:15:43.800 | - Restricted Stock Unit, I guess.

00:15:46.060 | Yeah, it's a restricted stock, basically.

00:15:48.980 | - It's considered a stable dividend growth stock,

00:15:51.420 | which I have a question about that phrase,

00:15:53.980 | but not one that I have extremely high conviction

00:15:56.240 | for long-term.

00:15:57.200 | My plan is to sell significant portions

00:15:58.900 | to tax-loss harvest over the next two years

00:16:00.780 | and reallocate those funds to broad-market ETFs.

00:16:03.660 | When I view my portfolio collectively,

00:16:05.580 | I feel like I'm well-diversified,

00:16:06.780 | with broad ETFs making up about 80% of my holdings.

00:16:09.660 | But when I view my brokerage in isolation,

00:16:11.420 | over 50% is allocated to individual stocks.

00:16:14.080 | Should I be viewing these buckets,

00:16:15.420 | retirement and brokerage, as separate,

00:16:17.420 | given the relative time horizons,

00:16:18.980 | or collectively as my overall asset allocation,

00:16:21.940 | or as a mix of both?

00:16:24.240 | - Good question.

00:16:25.440 | Touches on a lot of Ben topics here,

00:16:26.840 | asset allocation and behavioral finance,

00:16:28.720 | and all of these things.

00:16:29.540 | The simple answer is yes.

00:16:30.380 | You wanna view your portfolio

00:16:31.840 | from the perspective of an overall portfolio.

00:16:34.000 | Like, the parts should be moving differently

00:16:36.160 | at different times.

00:16:37.180 | The whole point of putting an asset allocation together

00:16:38.840 | in the first place

00:16:39.680 | is that you'll have different pieces of the portfolio

00:16:41.480 | performing differently at different times

00:16:42.880 | during different market and economic environments, right?

00:16:44.800 | One of the biggest benefits of diversification

00:16:46.480 | is that it allows you to prepare

00:16:48.300 | for a wide range of outcomes

00:16:49.380 | without having to predict those outcomes in advance.

00:16:51.680 | So I think to do this successfully,

00:16:53.240 | you have to size your allocations such

00:16:55.080 | that certain asset classes or strategies,

00:16:57.440 | you'll be willing and able to stick with them

00:16:59.140 | even at their worst times.

00:17:00.100 | So this is like a summarizing a Cliff Asness statement,

00:17:04.000 | but he says that like the greatest investment strategy

00:17:05.840 | in the world is pointless

00:17:06.680 | if you put too much of your portfolio in it

00:17:08.200 | and bail out the first sign of trouble.

00:17:09.360 | So I do, however, believe that there are some benefits

00:17:12.660 | to a potential bucketing approach, right?

00:17:14.800 | So the behavioral bias Eric is explaining here

00:17:17.000 | is called mental accounting.

00:17:18.320 | It's just the idea that we have a tendency

00:17:19.800 | to mentally sort our money into separate buckets

00:17:22.760 | when it comes to spending or saving.

00:17:23.880 | So my favorite example of this,

00:17:25.880 | I think this was from a DVD extra

00:17:27.200 | or an interview for some movie they were in together,

00:17:29.320 | Gene Hackman and Dustin Hoffman talking about

00:17:31.400 | back in the day when they lived together,

00:17:32.640 | a struggling actors and didn't have a lot of money.

00:17:34.040 | So John, cue this one up for me.

00:17:35.480 | I love this clip here.

00:17:36.760 | I go over to Dusty's little apartment in Pasadena one time

00:17:39.640 | and he says, "Hey, can you loan me some money?"

00:17:41.920 | I said, "Yeah."

00:17:42.760 | My wife was working.

00:17:44.920 | I wasn't working, but my wife was working.

00:17:46.720 | So I said, "How much do you need?"

00:17:48.440 | He said, "I don't know, five bucks or whatever."

00:17:50.120 | - More than that.

00:17:50.960 | - So I go into his kitchen

00:17:52.560 | and he has these Mason jars up on a ledge.

00:17:56.680 | And one of them says rent.

00:17:57.880 | One of them says entertainment.

00:17:59.320 | One says books.

00:18:00.240 | One says, about five of them.

00:18:02.040 | - Full on electric.

00:18:03.320 | - And they all had money in it

00:18:04.400 | except the one that said food.

00:18:07.800 | And that didn't happen to have any money.

00:18:10.040 | So I said, "Dude, you don't need any money.

00:18:11.560 | You got money."

00:18:12.400 | He says, "I can't take the money out of the other jars."

00:18:14.600 | (laughing)

00:18:16.840 | - I love it.

00:18:17.680 | It is crazy that these two legendary actors

00:18:21.760 | live together, right?

00:18:22.640 | Especially when Hackman was married.

00:18:23.800 | - It is, yeah.

00:18:24.920 | - I actually think there are some benefits

00:18:26.720 | when you're thinking of budgeting

00:18:28.040 | to separating and giving each of your dollars.

00:18:30.000 | It's one pile of money,

00:18:30.960 | but giving each of your dollars a job.

00:18:32.300 | This one is for rent.

00:18:33.140 | This is for saving.

00:18:33.960 | This is for food, whatever.

00:18:34.800 | This is for utilities.

00:18:36.260 | My savings account is one big pool of money

00:18:38.040 | in the same account,

00:18:38.880 | but I have different goals labeled in that account, right?

00:18:40.500 | There's a travel one.

00:18:41.400 | There's a general savings.

00:18:43.000 | That's just kind of for unexpected events.

00:18:44.720 | There could be other things that come up

00:18:45.860 | like big events for the kids coming up

00:18:48.000 | or holidays or whatever it is, wedding trips.

00:18:50.880 | So I also think that there's benefits of bucketing

00:18:53.560 | in things like retirement.

00:18:54.400 | We've talked before about something like the four-year rule

00:18:57.120 | where you take your relatively safe assets,

00:19:00.000 | whether that's cash or highly liquid securities,

00:19:02.380 | and you put them in a certain percentage

00:19:04.300 | and you figure out,

00:19:05.140 | let's say I'm gonna spend 4% of my portfolio.

00:19:06.960 | If you have 40% of your assets

00:19:08.420 | in something that's relatively safe,

00:19:10.040 | you can think, well, that's 10 years worth

00:19:11.480 | of current spending needs

00:19:13.800 | in something that's relatively safe

00:19:15.400 | that I could get access to pretty quickly.

00:19:17.360 | And I think that can help retirees figure out

00:19:19.320 | the balance between risk assets

00:19:21.160 | and then other assets that are relatively safe

00:19:23.740 | in the short term.

00:19:24.580 | So I do think this specific scenario

00:19:27.400 | that we're talking about here for Eric

00:19:28.580 | with his company stock options,

00:19:31.220 | you have to look at this from a portfolio perspective.

00:19:32.940 | I don't think you can just look at your brokerage account.

00:19:34.560 | So if those shares were 50% of your entire portfolio,

00:19:38.600 | that's way over-concentrated.

00:19:39.840 | I'd be really nervous.

00:19:41.400 | 20% might be high in individual shares for certain people,

00:19:43.980 | but I think this guy still has a right idea

00:19:46.320 | in terms of he's already trying to sell.

00:19:48.540 | And I don't know how great of a thing it is

00:19:51.120 | that he doesn't really have a lot of faith

00:19:52.400 | in his company's stock.

00:19:53.260 | He said it's a stable dividend.

00:19:54.600 | So I'm guessing that means it's more of a--

00:19:57.480 | - Well, I was gonna ask you, what do you think it is?

00:19:59.400 | What's a stable dividend growth stock?

00:20:01.760 | - Okay, like a Procter & Gamble

00:20:03.500 | or one of these consumer staples.

00:20:05.080 | So I guess it's not a great--

00:20:05.920 | - You call them a growth stock though?

00:20:07.440 | That's what I was thrown off by,

00:20:08.800 | is the growth and the dividend.

00:20:10.640 | - I guess I'm thinking growth

00:20:12.640 | in terms of the dividend is growing,

00:20:13.980 | not the company.

00:20:14.820 | - Oh, oh, oh, gotcha, gotcha.

00:20:16.280 | - So it's not a great thing, I guess,

00:20:18.720 | that you're not feeling great

00:20:20.260 | about the prospects of your company's stock.

00:20:22.300 | Maybe that could be just because it's in the midst

00:20:23.980 | of a drawdown.

00:20:25.040 | But yeah, the fact that he already has a plan

00:20:27.500 | to diversify it, that's great.

00:20:28.740 | I still think 20% or so might be high for some people,

00:20:31.100 | but I think 80% of your portfolio

00:20:33.140 | are pretty diversified in index ETFs, that sort of thing.

00:20:36.540 | But I do think that the overall portfolio

00:20:38.180 | is the only thing that matters

00:20:39.180 | when it comes to managing risk

00:20:40.300 | or setting expected returns, all that stuff.

00:20:41.980 | I would only use the bucketing approach

00:20:43.540 | when it helps you from a psychological perspective,

00:20:45.600 | but it seems like in this case,

00:20:47.140 | it's probably gonna hurt you.

00:20:49.540 | But if you still feel like you're more concentrated

00:20:51.660 | than you need to be, then stick with your plan

00:20:53.440 | of getting rid of some of the individual shares

00:20:54.860 | and diversify more.

00:20:55.700 | But it sounds like he's on the right path here.

00:20:57.620 | - Yeah, yeah, they seem to, yeah.

00:21:00.420 | Again, probably isn't a great feeling

00:21:02.260 | working for a company where you're like,

00:21:03.340 | "I feel like I have too much stock

00:21:05.040 | "in the company I work for."

00:21:06.180 | But I know that's also a common financial planning thing,

00:21:08.660 | right, you don't wanna have all your eggs in one basket.

00:21:10.660 | - And that is a question we get from a lot of people,

00:21:12.100 | "Hey, I have 20, 30, 40% in my company's shares.

00:21:15.640 | "How should I feel about this?

00:21:16.460 | "How do I diversify it?

00:21:17.340 | "How do I deal with taxes?"

00:21:18.380 | It's a question, it's like,

00:21:19.820 | for a lot of people to think,

00:21:20.660 | well, that's a good problem to deal with,

00:21:21.800 | but it's a problem nonetheless,

00:21:23.400 | because the company that's paying your salary

00:21:27.340 | is the same one that you're dealing with for retirement.

00:21:29.280 | You don't wanna have a situation

00:21:30.820 | where Enron goes out of business

00:21:32.300 | and your retirement is gone just like your paycheck.

00:21:35.380 | - Right.

00:21:36.540 | Dave in the chat just said it could be Apple.

00:21:38.660 | I didn't think about that.

00:21:40.100 | - That's a stable dividend growth stock.

00:21:43.020 | - I'd feel okay about Apple.

00:21:45.780 | - Yeah.

00:21:46.740 | All right, so up next we have a question from Guy.

00:21:50.180 | "Nicely done on your debunking of random stats

00:21:53.480 | "that make the news and scare everyone.

00:21:55.340 | "I would like to see you do an overview

00:21:56.860 | "on using trust in estate planning.

00:21:58.860 | "Can one save on taxes using trust?

00:22:01.120 | "Where does one even begin

00:22:02.120 | "when thinking about this decision?"

00:22:04.760 | - Good one, okay.

00:22:05.600 | I can't do a lot of debunking here,

00:22:06.580 | 'cause I don't have a lot of expertise in trust,

00:22:08.820 | but we do have someone with more experience using them.

00:22:12.180 | So let's bring in Taylor Hollis,

00:22:14.740 | who's an advisor with us at Riddles Wealth.

00:22:17.700 | - Hi. - Taylor, welcome back

00:22:18.540 | to the show.

00:22:19.420 | You've worked with trust a lot over the years.

00:22:22.100 | I wish I had the ability to explain these things simply,

00:22:25.820 | but it is a question that's come up,

00:22:26.980 | and we've had a lot of specific questions,

00:22:28.380 | but I like the idea that this one is just saying,

00:22:30.880 | what are they for?

00:22:33.460 | Who should think about them?

00:22:34.540 | What are the situations?

00:22:35.620 | Maybe you could help simplify this for us here.

00:22:38.140 | - Yeah, I liked his question, too,

00:22:39.740 | about specific tax benefits,

00:22:42.540 | because I think that has been thrown around a lot

00:22:46.540 | when it comes to trust.

00:22:47.820 | I'll just say off the bat,

00:22:50.420 | if you're thinking saving on income taxes,

00:22:53.020 | trusts typically don't really help you out

00:22:55.460 | very much with that.

00:22:57.020 | They're more for potentially saving

00:22:58.900 | on estate and gift taxes.

00:23:00.380 | So those savings come for people

00:23:03.540 | that have taxable estates,

00:23:06.700 | and those kinds of concerns.

00:23:08.820 | Now, typically, the most common trusts that we see

00:23:12.660 | are what's called a revocable trust,

00:23:14.500 | which is what people set up while they're alive.

00:23:17.540 | Revocable, meaning they can change it at any point,

00:23:19.780 | and it's basically a will substitute.

00:23:22.540 | And the main benefits that we see to that

00:23:25.020 | are it affords you some privacy,

00:23:27.540 | you can avoid some probate fees

00:23:29.580 | when you pass and your estate's settling.

00:23:32.140 | So those are typically the most common

00:23:34.460 | if you want to get into more of those

00:23:36.100 | estate and gift tax savings,

00:23:37.740 | you'd be looking at making some gifts

00:23:39.700 | to a revocable trust during your lifetime.

00:23:42.220 | - Sorry to cut in here.

00:23:43.180 | So is the idea basically,

00:23:45.380 | people with a decent chunk of change

00:23:47.260 | that know that it might be kind of tricky

00:23:50.100 | when they're giving up the money for their kids

00:23:52.300 | or their spouse or whoever,

00:23:54.140 | or charities when they pass,

00:23:56.220 | and they wanna make sure that everything

00:23:57.780 | is buttoned up and ready to go,

00:23:59.780 | and there's not gonna be a big mess after they pass.

00:24:02.540 | Is that the idea?

00:24:04.580 | - Yes, that's a good way to put it.

00:24:06.500 | And I think there's room for using trust

00:24:09.860 | in estate planning for people that have a lot of assets

00:24:13.620 | and maybe people on the lower end,

00:24:16.180 | because again, you can use revocable trust

00:24:18.660 | really no matter what your asset size is

00:24:20.540 | for those same benefits of privacy, avoiding probate,

00:24:24.660 | just makes it easier on whoever's settling your estate.

00:24:27.220 | There's a lot of benefits to doing that.

00:24:29.140 | But then I think the real power behind them

00:24:33.260 | and a lot of that tax savings

00:24:34.740 | that I think he's asking about

00:24:35.980 | come with when you have a taxable estate

00:24:38.580 | and you're using trust and planning for those things,

00:24:40.540 | whether it be during your lifetime, which you can do,

00:24:43.140 | or once you're gone.

00:24:45.100 | - Do you look at it more in terms of

00:24:47.260 | how complicated the scenario is

00:24:49.700 | or how much money they have?

00:24:51.540 | In terms of figuring out--

00:24:52.380 | - Typically they go hand in hand.

00:24:54.380 | - Okay, true.

00:24:55.220 | More money, more, yeah, okay.

00:24:56.700 | That makes sense.

00:24:57.540 | - More money, more problems, that's right.

00:24:58.380 | - I feel like there was a song written about that.

00:24:59.740 | - Okay, so I guess as you kind of move up the scale

00:25:04.740 | and you have seven figures in assets,

00:25:08.460 | eight figures as assets,

00:25:09.420 | that's when you start thinking,

00:25:10.260 | okay, it's worth it for me to talk to an expert

00:25:12.340 | on this matter, basically.

00:25:13.660 | - Sure, yeah, yeah.

00:25:14.700 | And I think, too, it's important to remember that

00:25:17.060 | while you might not technically qualify

00:25:20.180 | as having a taxable estate today,

00:25:23.340 | you take into account future growth of assets.

00:25:26.420 | It could be that hopefully by the time

00:25:29.020 | that you or your spouse passes away,

00:25:31.140 | you might have a taxable estate,

00:25:32.540 | and so there's a lot of planning that you can do

00:25:34.980 | ahead of that to try to mitigate that.

00:25:37.980 | - Perfect, okay.

00:25:40.060 | Duncan, let's do another one.

00:25:40.900 | One more.

00:25:42.060 | - Okay, last but not least,

00:25:43.380 | we have a Tennessee-specific question just for you, Taylor.

00:25:46.580 | My wife and I want to buy a bigger house in a few years.

00:25:50.020 | I'm a high school teacher and football coach in Tennessee,

00:25:52.460 | making $60,000, but I just got a new job

00:25:54.900 | that will pay $70,000.

00:25:56.180 | Congratulations.

00:25:57.660 | My wife is going to take off work

00:25:59.540 | for the next three to four years with our first baby.

00:26:01.980 | I'm 33 and she's 29,

00:26:03.460 | and we have $380,000 saved up for retirement.

00:26:06.620 | We have about $100,000 in equity in our current townhome

00:26:09.300 | and $35,000 in savings.

00:26:11.420 | It will be tough for us to afford the mortgage payment

00:26:13.260 | on a larger home without a significant down payment.

00:26:15.740 | Is it okay to pause contributing to our Roth IRAs

00:26:18.420 | for three to four years as we continue to save

00:26:20.380 | for a larger down payment?

00:26:21.900 | We usually try to max them out every year,

00:26:23.580 | so it feels wrong to stop.

00:26:25.100 | This is similar to what I was asking you recently, Ben,

00:26:27.180 | about whether it made sense to quit contributing

00:26:30.300 | to your retirement to save up.

00:26:31.860 | - It sounds like they're in a very nice place here.

00:26:35.500 | Taylor is our resident Tennessee expert here,

00:26:37.500 | so that can help.

00:26:38.500 | But it sounds like they're really good savers.

00:26:42.100 | They're working on increasing their income.

00:26:43.480 | That's great.

00:26:44.320 | First child on the way,

00:26:45.140 | that's going to be more complexity and maybe expenses.

00:26:48.420 | But I do think there's a psychological thing

00:26:50.940 | where if you've been a saver,

00:26:52.460 | we've dealt with this with retirees before, right?

00:26:54.900 | It's hard to go from decades of savings

00:26:57.060 | and then flip the switch and then turn into a spender.

00:26:59.580 | But I think for some people too,

00:27:00.700 | it's the same thing with life goals.

00:27:02.120 | When life gets in the way and it causes you to save less,

00:27:04.540 | people feel like they're doing something wrong.

00:27:07.460 | When in reality, this is what happens in financial planning.

00:27:09.820 | So Taylor, how do you help clients see through this

00:27:12.420 | from a psychological perspective

00:27:14.100 | to help to give them the shove, I guess,

00:27:17.140 | to say that it's okay to do this

00:27:19.500 | as long as you're still saving and planning ahead

00:27:21.620 | and sometimes you just have to do this kind of thing

00:27:23.060 | and put things on hold.

00:27:24.500 | - Yeah, yeah, agreed.

00:27:25.700 | I mean, there's the textbook answer

00:27:28.460 | and then there's the real life answer.

00:27:30.140 | And like you said, real life happens,

00:27:32.180 | first kid on the way, you need a bigger house,

00:27:34.540 | all these things that I think make

00:27:37.580 | putting those things on pause very worthwhile.

00:27:40.460 | It's your quality of life.

00:27:42.220 | It's where you're gonna raise your family.

00:27:44.020 | These are all important factors

00:27:47.420 | that we can't really quantify

00:27:48.780 | the way that we can quantify

00:27:50.100 | contributing to Roth every year.

00:27:52.580 | So I think giving yourself the peace of mind

00:27:55.500 | and the okay to pause is good.

00:27:58.500 | And also remember, you're not pausing to throw money away.

00:28:03.500 | You're still technically investing in an asset.

00:28:07.180 | It's just a little different, right?

00:28:08.620 | You're saving for a home that you're gonna buy

00:28:10.860 | and that's still an asset on your balance sheet.

00:28:12.740 | So I think that, like I said,

00:28:17.300 | taking into account those personal factors,

00:28:19.540 | far outweigh whatever the textbook answer would be.

00:28:21.940 | - That's a great point.

00:28:23.100 | You're not putting your retirement savings on hold

00:28:24.780 | so you can go to Hawaii for a five month vacation.

00:28:28.260 | You're doing it for a good reason

00:28:29.380 | and it's still a financial asset.

00:28:30.660 | It's just gonna, like I said,

00:28:32.020 | it's gonna shift your personal balance sheet a little bit

00:28:33.980 | and now you have a bigger investment in that house.

00:28:36.380 | But then as, I think one of the best parts

00:28:38.820 | about having a fixed payment for your house

00:28:41.140 | is if your income grows

00:28:42.940 | and most people do see their income grow over time,

00:28:44.900 | then you grow into that payment a little more

00:28:46.740 | and then eventually, now that that payment is fixed,

00:28:49.140 | you have the ability to save a little more each year

00:28:51.060 | as you get used to living in that house

00:28:53.060 | and it's gonna feel more affordable over time, hopefully.

00:28:56.460 | And I think that's the idea here, to your point.

00:28:58.540 | Yeah, you're still making an investment.

00:28:59.980 | It's just in something else.

00:29:01.540 | - Right, right.

00:29:02.500 | And at their age, there's plenty of time to catch up.

00:29:05.740 | I mean, they're already, I think, well ahead of the curve

00:29:08.420 | and they've done a great job.

00:29:10.140 | - Totally, yeah.

00:29:10.980 | You're in a good place already.

00:29:11.820 | It's not like they're starting from zero.

00:29:12.780 | They're in a good place.

00:29:14.820 | - And they're insuring

00:29:15.660 | that they don't have a Brooklyn landlord

00:29:17.020 | who's gonna raise their rent 25% year over year.

00:29:19.980 | - Yep, probably a little cheaper in Tennessee.

00:29:21.820 | A little more space, more area for the kids.

00:29:24.300 | - Depends where they are in Tennessee.

00:29:25.940 | - That's true.

00:29:26.780 | Nashville is the new Brooklyn, I think.

00:29:28.580 | We do love our audience.

00:29:31.060 | Questions, comments, feedback.

00:29:32.220 | We actually, I think we heard from this person before,

00:29:33.960 | I think a year ago, Brett asked us,

00:29:35.940 | "Hey, I work in tech.

00:29:37.700 | "I have a bunch of money saved.

00:29:39.660 | "I'm never gonna be able to get this opportunity again.

00:29:41.740 | "I wanna take off for a year and go backpacking in Europe."

00:29:44.660 | And I think we said, "If you have your money saved,

00:29:46.260 | "you're in a good profession to do it."

00:29:48.080 | Just got a follow-up from him.

00:29:49.520 | Said he wanted to follow up

00:29:50.360 | and say he completed one year of backpacking

00:29:52.060 | and traveling throughout Europe.

00:29:53.020 | Best decision I ever made.

00:29:54.620 | If anyone has the opportunity to do the same,

00:29:56.300 | I highly recommend it.

00:29:57.300 | I was able to land a job for a new tech startup

00:29:59.780 | and start next week very quickly.

00:30:01.940 | Even able to keep up with a show while traveling.

00:30:04.580 | Thanks for the update.

00:30:05.420 | We appreciate it. - Wow, that's awesome.

00:30:06.240 | - It's funny because anytime you make

00:30:07.120 | these types of financial decisions,

00:30:08.920 | you're always dealing with the same level

00:30:10.300 | of irreducible uncertainty, right?

00:30:12.340 | No one ever knows how these things are gonna work out.

00:30:14.380 | It's typically, especially something like that.

00:30:16.820 | But it's always nice to hear when someone makes a decision

00:30:19.640 | for the right reasons and it works out for them.

00:30:21.460 | So kudos. - Yeah, great to hear it.

00:30:22.740 | - We always appreciate the feedback.

00:30:24.300 | - That's awesome.

00:30:25.340 | - Thanks, as usual, to everyone in the chat.

00:30:27.740 | We always appreciate it.

00:30:29.540 | Someone says I need to get a CFP designation like Taylor,

00:30:33.560 | but that's why we have experts that I can bring on the show.

00:30:37.100 | I don't need one.

00:30:37.940 | If you have a question for us,

00:30:39.940 | askthecompoundshow@gmail.com.

00:30:41.660 | Leave a question or comment for us on YouTube.

00:30:43.940 | Hit that subscribe button.

00:30:45.020 | Duncan, what are we up to now?

00:30:46.940 | - Subscribers, 119,000, we're approaching.

00:30:50.240 | - All right, nice, 120,000, all right.

00:30:52.320 | If you're listening to a podcast, forum,

00:30:53.520 | leave us a review, all our compound merch, idontshop.com,

00:30:57.160 | and we will see you next time.

00:30:58.420 | - Thanks, everyone.

00:30:59.360 | (upbeat music)

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