Investment Strategy in a Bubble: The podcast discusses strategies for investing during perceived bubble conditions, particularly in the context of the current AI boom, comparing it to historical bubbles like the railway and dot-com bubbles.
Market Timing Challenges: Emphasizes the difficulty of market timing during bubbles and suggests diversification as a strategy to mitigate risks while still participating in potential market gains.
Portfolio Management Options: Discusses different approaches to managing investments, including going on the offensive, playing defense, diversifying, or doing nothing, each with its own risks and benefits.
Role of Financial Advisors: Explores when it might be beneficial to engage a financial advisor, weighing the costs against the value of expert advice, especially in complex financial situations.
Home Equity in Retirement Planning: Addresses how home equity can be utilized in retirement planning, including downsizing, home equity loans, and reverse mortgages, while considering the emotional and financial implications.
Spending vs. Saving Philosophy: Discusses the balance between saving and spending, advocating for enjoying wealth while maintaining financial security, especially in light of personal experiences and life stages.
Defining Upper Middle Class: Analyzes the perception versus reality of what constitutes the upper middle class in America, highlighting discrepancies in income and lifestyle expectations.
Transcript
Welcome back to Ask the Compound, the show where you ask and we answer. I am your host, Ben Carlson. The AI boom is sure starting to feel like a bubble to a lot of people. If I'm being honest, this sheer level of overinvestment is starting to feel like a bubble to me as well. So, what do you do as an investor if you think we're in a bubble? How do you invest in this type of environment? We'll answer that question and more questions directly from you, the audience, on today's show. Please stick around. Thank you. Our email here is ask the compound showow@gmail.com. On today's show, we're answering questions straight from our compound viewers about investing in the AI boom times. How should you utilize home equity in your retirement planning? Am I a die with zero kind of guy? How do I personally balance saving and spending? When is it worth it to pay for a financial adviser? How much should you pay? And who is in the upper middle class in America? How do you even define that? Okay. Plus, we'll also be taking questions from the live chat. As always, thanks everyone for coming out. Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build multi-asset portfolio of stocks, bonds, options, crypto, and more. You can also access industryleading yields like the 3.8% APY you can earn on your cash with no fees or minimums. But what sets public apart? AI isn't just a feature. It's woven into the entire entire experience. From portfolio insights to earnings call recaps, public gives you smarter contacts at every touch point. Plus, earn an uncapped uncapped 1% match when you transfer your portfolio, including IRA transfers, rollovers, and even contributions. Fund your account in 5 minutes or less. Paid for by public investing. Full disclosures in the podcast description. All right. >> Hey, Ben. >> Let's do it. Duncan, how we doing? >> Good. Good. How are you doing? >> Coming to us straight from Boston, Massachusetts. >> Yep. Yep. We got a a special show coming this Friday. People are gonna like it. So, >> yes, big name. All right, let's do first question. >> Hey, up first today, we got a question that is kind of an amalgam of questions, uh, including one that I asked you. So, >> yes, we got we got a bunch of questions about this this week. So, I I put a bunch of stuff together into one. >> Yeah, >> we up first. We got you said you think AI is some sort of bubble. Bubbles eventually pop. What can investors do if they agree with you and want to prepare for that pop? or is there nothing you can do but ride the wave? Even if a bubble is obvious, what can you do about it? >> Okay, so pull up my blog post about this this past week. I called it the weirdest bubble ever. Listen, I've you can take it off now. Uh I've read a ton of market history, not to brag, and the insane amount of spending going on right now for the AI buildout sure feels like the railway bubble of the 1800s. I wrote about that in my book, Don't Fall It. They laid down railroad tracks to places where towns didn't even exist. But and the railway stocks went nuts. Speculation was off the charts. They spent way too much money. They overleveraged it. Then it all came crashing down because there was too much spending and too much hype. But that bubble put England way ahead of the rest of the world when it came to this new form of transportation. It transformed the the country in a lot of ways, right? People could live in the country and take the train and go from town to town. And people just had to lose their shirts to get there to get all that track laid down. Same thing with the do-com bubble. We laid an insane amount of fiber optic cable, most of which sat dormant for years after the bubble burst, but that laid the foundation for the tech boom that was to come and all the great and not so great internet things we have these days. We just had to live through the dot bubble and bust to get there. So, this feels a lot like those previous instances. If I've read all this history and I didn't see the the similarities, I'd be nuts, right? The problem is everyone knows when we're in a crisis. That's easy. No one knows exactly when we're in a bubble. So, I want to read you something from Jeremy Grantham, a self-p profofessed bubble expert. Okay. The long, long bull market since 2009 has finally matured into a full-fledged epic bubble featuring extreme overvaluation, explosive price increases, frenzy issuance, and hysterically speculative investor behavior. I believe this event will be recorded as one of the great bubbles of financial history, right alongside with the South Sea bubble, 1929 and 2000s. These great bubbles are where fortunes are made and lost and where investors prove their metal for positioning a portfolio to avoid the worst of a pain of a major bubble. Breaking is likely the most difficult part. But this bubble will burst in due time no matter how hard the Fed tries to support it with consequent damaging effects on the economy and portfolios. Uh make no mistake, for the majority of investors today, this could very well be the most important event of your investing lives. Scary, right? >> Sounds a little dramatic. >> He wrote this in January of 2021. Okay. As the meme stock was starting to go crazy, the S&P 500 up 90% since he wrote this. The NASDAQ 100 has doubled. That's 15% annualized returns. >> Wait, just to be clear, you're saying 2021, not 2020 when March when everything went to hell with co you're talking about. >> No, he he wrote this he wrote this in like the meme stock, right? When the meme stock stuff was taking off. Okay. So again, the stock market has essentially doubled since he wrote this. So again, he is a self-professed bubble expert. All right. So, I just want to caution people who think this 100% is or is not a bubble. We can't say for sure. Okay, I think it feels like a bubble in a lot of ways, but come on. I who knows this stuff. Um, but for argument sake, for this question, let's say this is a bubble. Let's say you really feel strongly that, yeah, I think this is a bubble and it's going to end badly. I've seen this movie before, right? The way I see it, you have four options. One, you could go on the offensive. You could do that. You could George Soros this thing. He said, when I see a bubble forming, I rush to buy adding fuel to the fire. Right? He thinks, why not make some money if there's going to be a bubble? So, you could try to be Soros and ride the wave. Who knows how far this ASF could go? Could we see Nvidia at a $10 trillion market cap before this is all said and done? I wouldn't predict that, but could it happen? Sure. I wouldn't, you know, crazier things have happened. Um, so this type of strategy can work gloriously until it doesn't, of course, right? So, you need an exit strategy, right? Or or the ability to live through insane volatility. That's that's the hard part. Um, two, you could do the Grandm thing and play defense, right? You could go to cash. You could go to bonds, you could buy puts, you could invest in hedging strategies, maybe some of the buffer ETFs, right? So, you have have some sort of guardrails on your portfolio. The problem with this strategy is that market timing is always hard, but I think it's even more so in a bubble situation. You don't know how far the pendulum is going to swing from one end to the other, right? What if you melt a miss a meltup, right? And stock market doubles again from here. What if you are you comfortable dealing with that FOMO? That's the hard part of playing defensive. Like, how and when will you know you're wrong? Because if you go get to cash now and the market goes up 50% from here, then what do you do, right? You need a pretty decent drop just to get back to the point where you already timed the market and went to cash. So, I think that's a hard one. Number three and four are probably the ones that I lean more towards. So, three is you can diversify. So, even if you're 100% certain we're in a bubble, there's no rule that says you have to go all or nothing, right? You don't have to go all in cash and say, "I'm out. I'm hedging. That's it." You don't have to put all your chips in the center of the table. uh you can always overrebalance your allocation one way or the other depending how comfortable with risk you are in an environment like this. So let's do a chart on Daniel coming out of the.com bust. This is after the 2000 uh to 2002 bare market value stocks and bonds did really well. Even at the NASDAQ 100 got crushed. Now this is through the end of 2002. The Nasdaq 100 was down over 70%. The S&P was down almost 40% at that time. Uh bonds were up almost 30%. Small cap value stocks were up 20% or so. and they were up even more than that before they they finally fell in 2002. So, there are other areas of the market that end up doing okay. Daniel, let's do the next chart, please. This is one of my favorites. This is the returns from the last decade of 2020 when the S&P was down 9% in total. It lost 1% a year, even worse after inflation, obviously. European stocks, midcaps, high yield bonds, uh, bonds, uh, aggregate bonds, small caps, emerging markets, and REITs all did pretty darn well considering we had two 50% plus crashes in the S&P 500 and the NASDAQ 100 fell 85%. Like great depression level fall. So, wow, look at REITs, >> right? So, I'm not chartoff. I'm not saying this is necessarily going to happen again, but listen, there's a bunch of other places right now that haven't kept up. You could pick, throw a dart at the wall. Dividend strategies, high quality stocks, international stocks, emerging markets, right? Bonds, REITs, all these different areas, midcaps, small caps, pick something besides mega cap stocks, tech stocks, and it probably has underperformed and the valuations aren't nearly as high. So, if you want to diversify, I think that's a pretty good way to play it. Now, if there's a huge crash, will these stocks and strategies fall as well? Probably, just not not as much. Um, >> well, I saw Scott Galloway recently pointing out that uh he he was making a bit of a prediction about, you know, markets in the US being flat for the next decade or something, but he was talking about how many European stocks are singledigit pees. Um, so, you know, yeah, I guess there there are things out there. If you're one of those people talking about everything being overvalued right now, it's not every stock in the in the world market. >> It's just the biggest companies, right? And and I I'm not pounding the table that these stocks are really overvalued. They're way higher value than the rest of everything else pretty much though. Okay. So, obviously the timing on these moves will get you too if you diversify more. I think you just have to weigh the trade-offs in terms of what are you going to regret more? Missing out on further gains if we do get a meltup or taking part in big losses if god forbid this is the peak, right? So, obviously life would be easier if you could just ride the AI wave higher and then step right off when it's about to crest. But that's not a realistic strategy as we all know. There's a fourth strategy you could do. This is the Ben Carlson method. You do nothing. >> I thought you were going to say give you give you our money to manage for us. >> Right. Well, I'm saying you could you could invest based on your personal risk profile and time horizon. If you already have an asset allocation place that you're comfortable with in bull markets and bare markets, in bubbles and busts, I think doing nothing is is a decision and the right one most of the time for most investors as long as they have a plan in place. Like you're not a hedge fund manager. You don't have to try to time these cycles perfectly. Um, you just have to be sure you have an asset allocation and investment strategy you can stick with come hell or high water, right? So, I think you need to be comfortable sitting through draw downs and volatility and avoiding FOMO and all that stuff if you're not changing your portfolio all the time. Um, but I think you have to balance your desire for growth with your ability to sleep soundly at night. And doing nothing is a simple strategy that's not by any means easy. But what am I doing to prepare for an AI bubble? Nothing. Right? I'm making no allocation changes. I'm staying diversified. I'm re rebalancing on occasion. I'm continuing to make contributions to my various accounts. If it's a bubble or something, >> I was going to ask you, do do you change how you rebalance based on if you think we're in a bubble or, you know, approaching one or >> I at the extremes especially I maybe I'll overreal like if we're in a big bust, I'm going to put more money into stocks, right? And and take out of cash. I think um you could you could do the same thing if instead of trying to go all cash like let's if you're in an 8020 portfolio and you want to go to a 7525 or 7030 that to me makes more sense or 6040 even than trying to time it and go all in cash because I just think going to the extremes eventually your emotions are going to get the best of you because the market is not going to cooperate you're not going to go to cash and yay the market's going to fall magically the next day it doesn't work like that so >> what about this advice is always long you or you know this this idea not advice not advice this idea is always like more long-term. What what would you say to someone who's right around retirement or in retirement? Um you know how should they think about it differently if they're already at age where they're maybe, you know, not going to have income anymore. >> Yeah. At that point, you you better be diversified and have some sort of liquidity strategy whether it's whether it's cash or bonds or some other thing you can because you don't want to sell stocks when they're down. That's the thing. I'm sure there are some people who still have 100% of their portfolio in stocks when they're retired and they say, "I don't care. I can live through it." But you just don't want to be selling stocks when they're down 20, 30, 40%. And locking in the losses. You want something else to carry you through. That's so how many every year's worth of cash or bonds or whatever something relatively safe. You you want to have that anchor in your portfolio that it's more important than ever when you're when you're in retirement because you said you don't have the income and human capital to keep buying. Yeah. So, you're right. the the risk is different to people at different stages of their life. Jerry Jerry Seinfeld when Ser um you have to find the torture you're comfortable with. That's investing, right? He was talking about careers, but that that's investing. Someone someone in the someone in the chat said, "Does Riddle do this with their clients? Do they make adjustments to allocations?" Uh sure, we occasionally make adjustments to allocations. Uh and we have a tactical strategy that that is rules based that will we'll make changes depending on the market environment. And um it's not for everyone, but enough of our clients are in it. And but most of the time the allocation changes come from um they're very few and far between, but a lot of times it'll be because of something changing in the client's life, not necessarily the markets. That's that's more regular in terms of changing than like us making a pulling a huge lever and making a big change. It does happen, but it's just not very often. All right, next question. >> All right. And yeah, before we leave that topic, last thing I'll say is the point that you guys always make that I think is just so fundamental to this is it's not about like pulling your money out because you feel safe and you can sleep at night. It's getting the money back in the market that is is the problem, right? >> That's the hard part. It's it's two it's two decisions. So, what are you going to do? You going to George Soros this thing and just keep doubling down your triple leverage ETFs? >> Uh, I mean, I'm doing I'm making some trades. I'm making some trades. But I'll tell you what I'm not doing this time is I'm not going to be buying like inverse stuff and trying to play anything like that. I've been many times >> because the timing it's the timing on those things that gets you every time. >> Yeah, I've been burned. >> You you you missed by a week or something and and the trade is is useless, right? That's the hard part. >> Yeah, >> it's the timing and the magnitude. All right, next question. >> All right, up next we got one from Todd. I listened to your video with the 4% rule guy. Can home equity be used in the 4% rule calculation? I typically carry a very low loan to value and have even owned one home free and clear before we moved. I always have a hard time figuring out how to use this home equity and retirement planning. I'll always need a place to live, but we'll downsize eventually. I guess I could just assume a certain level of appreciation, but it would be easy to just throw this into the 4% rule. >> All right, so he's talking about on talking wealth recently. We talked to Bill Bangan, which is great. He's a creator of the 4% rule. really good conversation if you want to listen to that. Um, my general rule of thumb for housing is that it should appreciate roughly in line with the rate of inflation. Obviously, that depends on where you live and the economic environment and such, but um, and it's probably a better rule of thumb for people who live in their homes and own them outright versus people who have leverage, but 40% of people own their homes right now and most of those are retirees obviously or people approaching retirement. So, I think that's a decent baseline. So, how the question is, how do you use your equity in retirement planning? Now, he mentioned downsizing potentially. So, that's a good one. You could sell and move to a smaller or cheaper home. Pocket the difference. Um, most baby boomers actually say in surveys that they're never going to sell. Um, right. I'm never leaving. But I wonder how many will choose this route when they realize like, oh, there's so much equity there to choose. Now, obviously, you could also sell your home in rent, but that's a different lifestyle choice as well. Um so um obviously the the benefit there is there's no new debt and it's a lower housing cost but then you have to move which can be emotionally difficult for people who've lived in a house for 10 20 30 years. Um home equity loan or home equity line of credit or cash out refinances that is something you borrow against the equity in your home. Um the great thing is you can access cash while you still live there but the downside is payments are required like monthly payments to pay it off. uh you know, you could be able to pay make the payments right out of there because it's such a big amount, but the problem with the heliloc that I've talked about in the past is it's it's floating rates. You can do a home equity loan, which isn't taking the loan they have right the rate we have right now, which is not great, but um that's a good way to stay in your home and just borrow against the equity, but again, you have to make the monthly payment still, unfortunately. Now, a lot of people turn to reverse mortgages, too. Those are a little more complicated. So, it's homeowners, I think, 62 and and above. Um the lender pays you based on your equity and you can do it I think in a monthly payment or a lump sum or a line of credit um and then the loan is repaid when you sell, move out or die essentially, right? So there's no monthly mortgage payments required. You get the payments, but then they get the house eventually or can sell it. So essentially the loan comes due when you when you die. Uh these things are rather complicated and difficult to understand. There's a lot of paperwork and fine print and such, but and it's not great for the kids, but hey, it's your equity, right? Screw them kids. Uh, or if you don't want to screw the kids over, you could use the equity for estate planning. Like, home equity is the inheritance for your children. I'm going to spend all my liquid assets and the kids get the house and they get that step up cost basis. You know how this works, Duncan? >> Yes. >> When you die, right, if if you bought your house for 30 grand and now it's worth 500K, um, that's a that's a big capital gain, right? But if your children take it over after you pass, they get the the new level as their cost basis. They can sell it immediately, pay no taxes essentially. >> Can't you also do that while you're still living by using a trust? Can't you put put the home into a trust? Isn't there something like that? I feel like I've heard that. >> Maybe don't come to me. Don't come to me for estate planning advice. Uh but I guess this question is a good advertisement for not being house rich, right? Like that equity is certainly worth something. peace of mind for some uh it can help you buy a new house and use it as a down payment, but you need more liquid assets when it comes to financial planning. A house is not a great thing to use for financial planning. It's just not because it's too liquid and it's it's hard to get the money out unless you just sell it. >> Yeah. You know, you know, my latest uh why I hate renting situation is I'm four days shy of being without AC for a month. So, >> you know, if your landlord doesn't care about fixing your AC, then you know, you just don't have AC. So, it's been 84 in my uh in my place quite a few days. >> CTV, that's worth like 40% of rent right there. You should get 40% knocked off your rent because AC is that important. >> 40%. Yeah. I mean, it fuel is pretty important. >> Yeah. Not everyone has it, but it's definitely part of what you're paying for if you >> My thought is before air conditioning existed, and I wrote a whole thing in one of my books about the history of AC, um, that people must have just been sweaty and smelly all the time. >> Oh, yeah. >> Like, everyone just must have stopped. >> I mean, you do get a you get used to a certain level. So, like now 77 doesn't feel that bad to me in the place. Um, but like Yeah, you're still like it's muggy and Yeah. It's it's uncomfortable. >> It happened in my office a few times. It's not fun. Yeah. >> All right. Good. Next question. >> Okay. Up next, we got one that came in from Twitter. Are you a die with nothing guy? How much do you need to save? What if you live until 100? Yes, enjoy life, but you need to save. Okay, so I kicked the hornets a little this week. Put my tweet up here. Um, I said, "Personal finance people are great at giving advice about saving and paying down debt. Do not, repeat, do not listen to their advice about spending money. They want you to delay gratification for the rest of your life until you have a big portfolio and are miserable because you never get to enjoy it. Um, maybe hyperbolic a little bit, but I I honestly believe a lot of this that personal finance people are really good at getting people started and paying off big amounts of debt and getting you to be frugal so you can set money aside, but a lot of them like hate spending money and they their whole thing is just you never spend money, you never enjoy yourself. And I think that's someone recently commented I'm the patron saint of spending your money and enjoying it. I'll take that crusade and I'm I am on a crusade against hoarding all of your money. But that's a personal thing for me because everyone's spending saving debt relationship is impacted by their lived experiences. Like how could they not be right? So I'm approaching this topic from hundreds and hundreds of conversations I've had over the years with people who have more than enough money but cannot force themselves to spend and enjoy it. And I think that's a sad way to go through life. I don't think I like what's the point of the money. So I'm also something of a born again spender. Like I was a super frugal guy in my early days. I was always a saver. So also before you said like risk means different things to different people depending on what stage of their investing life cycle they are, right? Like young people should get on their hands and knees and pray for bare markets. You can buy at lower prices. Older people who are retired, they want nothing to do with bare markets. Like that that's a terrible for them. So it's obviously like your income and your job prospects and your net worth and your place in life that all has a big bearing on should you spend or should you save more, right? Someone who's in debt up to their eyeballs should have a different spending plan than someone who has a se seven figure net worth and no debt. Right? Okay. Caveats out of the way. Get them out of here. Check out this tweet from this week. Show this next one. So, this guy says he's got 9.8 million in his 401k. I don't know if he put it all in Nvidia or what. He has 3,000 in his checking and $296 in his saving. He's got it all in the equity market, right? His wife wanted to go on vacation. He said, "I can't. We're broke." If you understand this, >> wait now. This could be engagement bait, of course. >> How do you end up with that much in a 401k? Are there 401ks where you can pick individual stocks? I thought they were all pretty much fund based. >> It must have been something like that. Um, and maybe this guy is is rage baiting engagement rage baiting people, >> right? >> Um, >> well, always. Yeah, we're always just taking people at face value with with >> Yeah, yeah, you kind of have to. But this is just dumb. Take your wife on the vacation. Your 401k will not give you cherished memories, right? Who cares, right? This is the kind of thing I'm talking about. Life is short. If you have money, you should enjoy some of it. That's what it's for. Now, there will always be people who like cannot make themselves spend money. It could be a personality thing or something handed down by their parents or maybe a life-changing event, right? Um my father, if he could have boughten one pair of clothes for work and one pair of clothes for outside of work and lived with them for the rest of his life, he would have done that, right? He we cannot force him to spend his money. Uh and that's just the way he was. It's something of the way he was brought up, his personality, whatever it is. Now, I'm not going to be a die with zero guy, but I'm going to be more I'm more in line with the die with zero camp than the fire camp that says you should like make very do with very little. Have you read die with the Joe yet or not? By Bill Perkins. >> I have not. No. >> So, he essentially says, you know, your net worth should peak in your 50s and then it should be downhill from there because you should be spending your money while you still have your health, right? What's the point of saving it until your 70s and 80s and 90s when you don't have the health and you can't really enjoy it as much? you should you should enjoy it more while you're here. You know, he talks about throwing big 50th birthday comeing. A lot of people come back to this though and say like, "Yeah, I I had a family member end up in a in a horrible like nursing home. I want to make sure I have great end of life care, you know? What do you say to that? How do how do you die with zero if you're trying to plan for that?" >> Yeah. The robots will take care of us at that point anyway. It'll be fine. No, I I get that. That's why that's one of the reasons that people have this mindset like what happens if there's a healthcare problem or I fall and I break my hip or whatever it is. I so I I get that. Um I just, you know, I just think that you should enjoy your money while you still have some health. And you know, my mindset has been totally changed because having kids and then watched my brother pass away in his 40s, right? It just completely changed my mentality. So again, this is a personal thing for me. But so this year, I've spent more money than any year in my entire life. Uh my savings will probably be down from last year to this year for the first time ever. and the personal finance spending scolds would blush at the stuff that I'm spending money on. We're taking more vacations. We did a big renovation on our house. I'm probably going to buy a new boat this year, but I don't need one. I want a bigger motor. Okay, sue me. Uh, these things make us happy. Now, part of the reason we could do this is because we saved diligently for 20 years in the first place. But that's the switch that a lot of people have a hard time doing is going, "Hey, I I saved. Now I can't turn it around." So, I'm um living proof that you can do that. Um, I I I just view it as like I I have like this revolving relationship with money that's changed a lot over time. It doesn't work for everyone. Um, but I've just had countless conversations with people over the years, clients and people in my inbox and family friends who have no idea how to spend their money once they build an est. So, I could never be a die with zero guy fully because I have kids. Like, I don't want them to grow up entitled and spoiled, but I couldn't possibly go through retirement without having some sort of backs stop for them, like something. >> I mean, you're you're not telling people to take all their savings and go to the casino. You're saying like make great family memories on a vacation or buy a vacation home that is by the way an asset, right? That one day you'll probably sell and make money off of, you know, stuff that you prioritize. >> Yes. Yeah. Take the stuff you prioritize and be okay with spending money on that. And if you want to like mercilessly cut costs everywhere else, then do that. If they this stuff doesn't make sense to you, I just think I'm all about seeking balance in life. So, I diet and exercise so I can feel okay drinking beer and eating pizza, right? I I work hard, but I don't I don't want to miss any of my kids sporting events, right? I save and invest so I can spend the rest and not have any guilt about buying shoes or a new shirt or taking a trip with my family. And I I do feel no one has this stuff perfectly figured out like what's the right exact. So I but I think trying to have some balance is the key. At least for me. >> Yeah, makes sense. Makes sense to me. >> All right. Jay Luther in the chat says, "Maybe leaving a large inheritance is what makes some people happy, Ben." It does. Then I think that that is a very much a baby boomer mentality. But I tell you what, your children would be way happier getting that money at 30 or 40 than 60 or 70. I can guarantee you they need that money more when they're younger than when they're older. >> Yeah. >> Full stop. >> All right. Next question. >> Okay. Up next, we got a question uh from anonymous. Uh I was lucky enough to be an early employee who had a substantial exit during the froth of 2021. I didn't sell at all. Who knew what 2022 would bring? But I sold enough and slowly unwound the position into a diversified set of investments that are now worth about 5.5 million. I'm single. Not to brag. >> Yeah, not to brag. Uh I'm single, don't own a home, and I'm in my early 40s. The economic whipsaw of the past few years along with some questionable business decisions have driven repeated layoffs at my job. And much of what I've loved about the company is in the past. I'm considering taking a break and perhaps firing. Part two. I currently work with a fee only adviser who doesn't manage my assets. The arrangement has been fine. I pay a relatively modest monthly fee. They prepare my taxes and they've done a thorough diligence on my fire scenarios. That said, I'm not particularly thrilled with the firm. Since I feel comfortable manage my managing my own money, the idea of paying $50,000 or more per year for full service asset management is hard to justify. My question is when does it make sense for a client to hand over portfolio management to a firm? What uh key factors should drive that decision and can an RAIA realistically provide enough value to justify such a significant fee? >> All right, we get questions like this all the time. I had I had a conversation with a prospect yesterday this same question. Especially when you're dealing with people who are good with numbers and spreadsheets like they they run the numbers and they go, I want to do a cost benefit here. Does this actually make sense? So thing is there there's no perfect business model. I think someone will always be questioning your worth when you're providing a service and they should. There's this great book called Selling the Invisible by Harry Beckwith and it's about marketing and sales in service-based businesses where listen when you're selling a service, especially in financial services, you're not there's no assembly line that goes down and makes this product and in the end it's like here here's your beautiful product, here's your end widget. That doesn't happen, right? It's a service that's ongoing. So it's it's hard to see the end product since it's an ongoing thing. So he says like when you're a service based business, he says if no one complains your price is too low if everyone complains your price is too high obviously. So he says um how much your resistance is just right. He says 10 to 20% is just about the right level of push back. He says 10% or so of people will complain about any price they have to pay because they always want a deal. Others have a budget in mind and any deviation from that price they see is wrong and still others will negotiate every price because it's how they're hardwired. says setting your price is like setting a screw. A little resistance is a good sign. So I think that so it's like can an RAIA justify their fees? Well, they manage something like $144 trillion. So obviously some people are fine paying them, but there are certainly people like this who question it. Um and I think more people in their like who've had it struck at rich like this in an early age probably think more closely about this because they have so long to like grow their assets and compound like in your 40s, right? you're doing the math in your heading, oh my gosh. Um, so I think if you're questioning while you're already in this relationship, not just thinking about getting an adviser, like, yeah, it's likely the work that they're doing for you is probably not justifying the fees. If you if you're questioning this, cuz um, listen, when we first started out, we were essentially just doing investment management and financial planning with holds. And that's when we were tiny. Now, we quickly realized like we needed to offer a much wider set of services just for our fees. So, we added a tax practice. We added an insurance practice. We have estate planning experts. We have corporate retirement. Um, all these different things we can do. We have a dedicated financial or family office team that works exclusively high net worth people, all this stuff. So, we've heavily added to our tech stack and and made that process more seamless for people. And and we didn't raise our fees by adding all these services. It just aid into our costs. Um, and I think that's you have to decide like is my financial adviser offering everything I need in a one-stop shop to make sure the fees I'm paying are commensurate with the services. And that's true of any business. And I think the big one for a lot of our clients is that um we sometimes offer them services or advice they didn't know was out there. I think that's how you know you have a good adviser. Like, oh, I never thought about this. I never would have found this on my tax return or I never would have tried this tax strategy or I never would have thought about insurance this way to take it out. I never would have done this investment strategy or done this allocation. Um, I think the stuff that the DIY person just doesn't know or hasn't kicked the tires on, that's the stuff that makes you go, "Oh, light bulb moment. Of course, now yeah, they're they're worth their fee and more." If you've never had that light bulb, I it, you know, it might not be worth it for you, but it depends how complex your financial life is. That money might be easier for you to manage. You have a lot of tax liabilities or whatever and you don't need one. But, um, >> I I think level of assets matter a lot too, right? like at a certain point a small investment mistake or you know you you selling when you shouldn't sell could end up making that number seem really small right >> so >> exactly yeah that's part of it is have you made mistakes before how complex is your life do you need expertise in certain areas uh there is no right or wrong I don't think having a financial adviser is right for everyone but there's plenty of people who who recognize that they want to outsource their time and find expertise and work with a a team and and figure out ways to like bounce bounce decisions off of people and all this stuff. So, there's no there's no perfect answer, but um if you're not having those feelings with your current adviser, everyone's not going to love their adviser all the time, but if you don't feel like it's the right situation, you know, maybe it's not the right thing for you. >> All right, we got one more. >> Yep. Last but not least, we got one from Michael. I feel that there are many mentions of upper middle class across legacy media, financial media, and social media that challenge my definition of upper middle class. I like this question a lot. I've had this same feeling. Yep. >> Uh my assumption of upper middle class is the 50 to 75 percentile of Americans from a net worth and income perspective. I see net worth as 192,000 to 658,000 and various estimates of income around $85 to $140,000 depending on where in the country you are. Yet, many media posts mention buying a $ 1.5 million house, sending your kid to Vanderbilt, $67,000 a year, sending a kid to a $3,000 a month daycare as upper middle class lifestyle options. Am I crazy to think those three options I mentioned above are not accessible to the average upper middle class family in the US? Are people confusing the 80 to 97% who are wealthy but not rich with upper middle class? All right. I feel like we've tried to define rich here before, but yeah, this is this is certainly a good question because I think the really hard part is that we've just moved the goalpost so far and and that in terms of like how wealth is distributed in this country and what we think is rich. Uh, and I think we also have nostalgia for a past that never existed, too. So, Daniel, throw up my my meme here. You've probably seen this go around before. It goes seem to go viral like once every month or something on on Twitter. Um, you know, >> show us the why, Ben. Show us the lie. >> Once upon a time, a family could own a car and send their kids to college on one income and life was easy. Um, the problem is take, it's funny because I think in the 50s, 6% of people had a bachelor's degree in this country. Even by the 80s, it was less than 20%. Today, 36% of US adults 25 and older hold a bachelor's degree. So, it's a it's a way smaller number than you think. So, there was never a time when everyone was paying for college, right? Um, and then in 1940, less than half the country had a high school diploma still. Today, it's like 90% I think. So, you know, houses were 25% smaller back then. They didn't didn't have AC. Duncan, you're living without AC right now. Basically, no houses had that back then. You didn't have multiple bathrooms. They certainly didn't have quartz countertops and tile black spash backsplashes and you know those gold faucets now that are all the rage, right? Everyone has a gold faucet. Um I don't know. Seems a little cocaine 80s to me, but what do I know? I'm not a interior designer. >> Yeah, this is news to me. I haven't seen this. >> Oh, yeah. If you get a new house >> you mean like brass, right? >> Well, it's it's not made of gold, but yes, it's a gold color. Okay, gotcha. >> Yeah, that's that's the if you go on HGTV these days, everything's cold. Okay. >> Um I think the problem is most people in their own minds have no idea where they actually sit on the wealth scale. So here's how Pew defines it. Let's show the chart here. >> Um they say 52% are middle class, 28% are lower class, and 19% are upper class. Um they have some definitions. I can't remember exactly how they figured out. Go to the next one to show the changes over time. This is interesting. So they show 1971 the middle class was bigger, right? So that's shrunk, but we've essentially doubled the upper class and the lower income class has fallen a little bit. I think this is one of the reasons that it's so hard and this is good and bad. You can do a chart off. Um there are fewer people in the lower class. >> I'm surprised that lower class has gone from 27% to 30%. >> It's a little surprising, right? >> Yeah. >> I almost think it was like when there was a bigger middle class, it's like we're all in this together now that there's there's more people in the upper class. So it makes it feel like why aren't I in there? And also the people in the upper class think, well, there's too many of us. Like, this place is too crowded. I don't even feel rich because there's too many more pe rich people. So, I think it's good and bad. Um, so let's look at some charts from Bloomberg 2 using Federal Reserve data just to show why I think this is a problem. So, the the top 10% comprises twothirds of the net worth in this country. The top 1% holds more than 30%. And more has gone into the top 10%, but really more has gone into the the top 1% and the top.1%. The top 0.1% holds 14% of the wealth in this country, which is just insane. So that's I think one of the reasons why the middle and upper middle class don't feel like they're rich at all because the tip of the spear is so much richer. Now look at the asset composition. Show this next one. Um the top 10% owns 87% of the stocks, which is one of the reasons wealth inequality keeps getting worse. The lower middle class have played catch-up this decade, but part of it is because so much of their wealth is tied into the housing market. And we had this one-time surge in the housing home prices. And guess what? That's never going to happen again. Unfortunately, this 50% surge in like 3 years. So, I think defining it you can do chart off is hard because even people who are upper middle class most of the time don't feel like it because they're surrounded by other people in the upper middle class or people in the upper upper class. And so, and then people always say like what about where you live? If I live in San Francisco or New York and I make this, of course, I'm not upper class. And and so I think people's like positioning in life and how they feel about where they are in life has way more to do with what some numbers say from some survey organization. And I think it's tough. The other thing is, so I wrote about this in my book, Don't Fall It, okay? Research shows that over 50% of Americans will find themselves in the top 10% of earners for at least one year of their lives. More than 11% will find themselves in the top 1% at some point. And close to 99% of those who make it into the top 1% of earners will find themselves in the outside looking in within a decade. So, it's not like these things are static and everyone who's in a certain cohort will remain there for the rest of their lives. But the funny thing is is that hope springs eternal in America and we all think at some point we're going to be in the top 1%. Or maybe the top 10%. I think this delusion is one of the things that makes this country great, but also makes people miserable because by definition we can't all be in the top 10% of the top 1%. It's impossible. So, I think that's what makes it really, really hard. But the point about yes, having a $ 1.5 million house and sending your kid to Vanderbilt and a $3,000 daycare, uh, you're right, that's that's those are upper class problems. It doesn't not most people cannot afford that by, you know, obviously >> can Yeah. >> The other thing I've seen is that it's never been easier now to know how much money other people make. There are all these websites, glass door, stuff like that that tell you like how much the going rate is for whatever your job is. >> You can look up anyone's home on Zillow, right? based on location. Yeah. House prices. People on social media are constantly, especially Gen Z, they are very open about how much money they make and they will just talk about like salaries and sometimes they'll be complaining about a salary and you're like that's an amazing salary, you know? >> Well, think about the people who post their their screenshots of their portfolio value of Robin Hood on online like no one ever would have known in the past. you you could think about it and try to figure it out, but yeah, it's just more known and that makes it harder, too. Social media has just been social media is horrible for keeping up with the Jones mindset, right? It used to be the people in your neighborhood or your peers, your co-workers at work. >> Now, it's everyone out there >> and that makes it really hard. So, yeah, the the perception of wealth is way harder than it ever was in the past. So yeah, I this is a very astute question and I don't know if I really gave a perfect answer, but it's it's one of those things where it's it varies so much that it's it's really difficult to figure out exactly. >> Yep. >> Okay, we did it. Um, email us askthe compoundshow@gmail.com if you have a question. We keep getting a ton of great questions coming in. Um, again, everyone in the live chat, please give your questions. If you're on Twitter, thank you. Oh yeah, the chat was asking for your recommendations of a a finance or investing book. You read anything recently? >> Anything you like? >> Boy, it's been a while. I got to I'm going to have to look. Next week, I'll come back with a with the answer to that question. Leave us a comment on YouTube review, all that good stuff. Subscribe. See you next time. >> See you everyone. [Music] [Music] [Music]
How Do You Invest in a Bubble?
Summary
Transcript
Welcome back to Ask the Compound, the show where you ask and we answer. I am your host, Ben Carlson. The AI boom is sure starting to feel like a bubble to a lot of people. If I'm being honest, this sheer level of overinvestment is starting to feel like a bubble to me as well. So, what do you do as an investor if you think we're in a bubble? How do you invest in this type of environment? We'll answer that question and more questions directly from you, the audience, on today's show. Please stick around. Thank you. Our email here is ask the compound showow@gmail.com. On today's show, we're answering questions straight from our compound viewers about investing in the AI boom times. How should you utilize home equity in your retirement planning? Am I a die with zero kind of guy? How do I personally balance saving and spending? When is it worth it to pay for a financial adviser? How much should you pay? And who is in the upper middle class in America? How do you even define that? Okay. Plus, we'll also be taking questions from the live chat. As always, thanks everyone for coming out. Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build multi-asset portfolio of stocks, bonds, options, crypto, and more. You can also access industryleading yields like the 3.8% APY you can earn on your cash with no fees or minimums. But what sets public apart? AI isn't just a feature. It's woven into the entire entire experience. From portfolio insights to earnings call recaps, public gives you smarter contacts at every touch point. Plus, earn an uncapped uncapped 1% match when you transfer your portfolio, including IRA transfers, rollovers, and even contributions. Fund your account in 5 minutes or less. Paid for by public investing. Full disclosures in the podcast description. All right. >> Hey, Ben. >> Let's do it. Duncan, how we doing? >> Good. Good. How are you doing? >> Coming to us straight from Boston, Massachusetts. >> Yep. Yep. We got a a special show coming this Friday. People are gonna like it. So, >> yes, big name. All right, let's do first question. >> Hey, up first today, we got a question that is kind of an amalgam of questions, uh, including one that I asked you. So, >> yes, we got we got a bunch of questions about this this week. So, I I put a bunch of stuff together into one. >> Yeah, >> we up first. We got you said you think AI is some sort of bubble. Bubbles eventually pop. What can investors do if they agree with you and want to prepare for that pop? or is there nothing you can do but ride the wave? Even if a bubble is obvious, what can you do about it? >> Okay, so pull up my blog post about this this past week. I called it the weirdest bubble ever. Listen, I've you can take it off now. Uh I've read a ton of market history, not to brag, and the insane amount of spending going on right now for the AI buildout sure feels like the railway bubble of the 1800s. I wrote about that in my book, Don't Fall It. They laid down railroad tracks to places where towns didn't even exist. But and the railway stocks went nuts. Speculation was off the charts. They spent way too much money. They overleveraged it. Then it all came crashing down because there was too much spending and too much hype. But that bubble put England way ahead of the rest of the world when it came to this new form of transportation. It transformed the the country in a lot of ways, right? People could live in the country and take the train and go from town to town. And people just had to lose their shirts to get there to get all that track laid down. Same thing with the do-com bubble. We laid an insane amount of fiber optic cable, most of which sat dormant for years after the bubble burst, but that laid the foundation for the tech boom that was to come and all the great and not so great internet things we have these days. We just had to live through the dot bubble and bust to get there. So, this feels a lot like those previous instances. If I've read all this history and I didn't see the the similarities, I'd be nuts, right? The problem is everyone knows when we're in a crisis. That's easy. No one knows exactly when we're in a bubble. So, I want to read you something from Jeremy Grantham, a self-p profofessed bubble expert. Okay. The long, long bull market since 2009 has finally matured into a full-fledged epic bubble featuring extreme overvaluation, explosive price increases, frenzy issuance, and hysterically speculative investor behavior. I believe this event will be recorded as one of the great bubbles of financial history, right alongside with the South Sea bubble, 1929 and 2000s. These great bubbles are where fortunes are made and lost and where investors prove their metal for positioning a portfolio to avoid the worst of a pain of a major bubble. Breaking is likely the most difficult part. But this bubble will burst in due time no matter how hard the Fed tries to support it with consequent damaging effects on the economy and portfolios. Uh make no mistake, for the majority of investors today, this could very well be the most important event of your investing lives. Scary, right? >> Sounds a little dramatic. >> He wrote this in January of 2021. Okay. As the meme stock was starting to go crazy, the S&P 500 up 90% since he wrote this. The NASDAQ 100 has doubled. That's 15% annualized returns. >> Wait, just to be clear, you're saying 2021, not 2020 when March when everything went to hell with co you're talking about. >> No, he he wrote this he wrote this in like the meme stock, right? When the meme stock stuff was taking off. Okay. So again, the stock market has essentially doubled since he wrote this. So again, he is a self-professed bubble expert. All right. So, I just want to caution people who think this 100% is or is not a bubble. We can't say for sure. Okay, I think it feels like a bubble in a lot of ways, but come on. I who knows this stuff. Um, but for argument sake, for this question, let's say this is a bubble. Let's say you really feel strongly that, yeah, I think this is a bubble and it's going to end badly. I've seen this movie before, right? The way I see it, you have four options. One, you could go on the offensive. You could do that. You could George Soros this thing. He said, when I see a bubble forming, I rush to buy adding fuel to the fire. Right? He thinks, why not make some money if there's going to be a bubble? So, you could try to be Soros and ride the wave. Who knows how far this ASF could go? Could we see Nvidia at a $10 trillion market cap before this is all said and done? I wouldn't predict that, but could it happen? Sure. I wouldn't, you know, crazier things have happened. Um, so this type of strategy can work gloriously until it doesn't, of course, right? So, you need an exit strategy, right? Or or the ability to live through insane volatility. That's that's the hard part. Um, two, you could do the Grandm thing and play defense, right? You could go to cash. You could go to bonds, you could buy puts, you could invest in hedging strategies, maybe some of the buffer ETFs, right? So, you have have some sort of guardrails on your portfolio. The problem with this strategy is that market timing is always hard, but I think it's even more so in a bubble situation. You don't know how far the pendulum is going to swing from one end to the other, right? What if you melt a miss a meltup, right? And stock market doubles again from here. What if you are you comfortable dealing with that FOMO? That's the hard part of playing defensive. Like, how and when will you know you're wrong? Because if you go get to cash now and the market goes up 50% from here, then what do you do, right? You need a pretty decent drop just to get back to the point where you already timed the market and went to cash. So, I think that's a hard one. Number three and four are probably the ones that I lean more towards. So, three is you can diversify. So, even if you're 100% certain we're in a bubble, there's no rule that says you have to go all or nothing, right? You don't have to go all in cash and say, "I'm out. I'm hedging. That's it." You don't have to put all your chips in the center of the table. uh you can always overrebalance your allocation one way or the other depending how comfortable with risk you are in an environment like this. So let's do a chart on Daniel coming out of the.com bust. This is after the 2000 uh to 2002 bare market value stocks and bonds did really well. Even at the NASDAQ 100 got crushed. Now this is through the end of 2002. The Nasdaq 100 was down over 70%. The S&P was down almost 40% at that time. Uh bonds were up almost 30%. Small cap value stocks were up 20% or so. and they were up even more than that before they they finally fell in 2002. So, there are other areas of the market that end up doing okay. Daniel, let's do the next chart, please. This is one of my favorites. This is the returns from the last decade of 2020 when the S&P was down 9% in total. It lost 1% a year, even worse after inflation, obviously. European stocks, midcaps, high yield bonds, uh, bonds, uh, aggregate bonds, small caps, emerging markets, and REITs all did pretty darn well considering we had two 50% plus crashes in the S&P 500 and the NASDAQ 100 fell 85%. Like great depression level fall. So, wow, look at REITs, >> right? So, I'm not chartoff. I'm not saying this is necessarily going to happen again, but listen, there's a bunch of other places right now that haven't kept up. You could pick, throw a dart at the wall. Dividend strategies, high quality stocks, international stocks, emerging markets, right? Bonds, REITs, all these different areas, midcaps, small caps, pick something besides mega cap stocks, tech stocks, and it probably has underperformed and the valuations aren't nearly as high. So, if you want to diversify, I think that's a pretty good way to play it. Now, if there's a huge crash, will these stocks and strategies fall as well? Probably, just not not as much. Um, >> well, I saw Scott Galloway recently pointing out that uh he he was making a bit of a prediction about, you know, markets in the US being flat for the next decade or something, but he was talking about how many European stocks are singledigit pees. Um, so, you know, yeah, I guess there there are things out there. If you're one of those people talking about everything being overvalued right now, it's not every stock in the in the world market. >> It's just the biggest companies, right? And and I I'm not pounding the table that these stocks are really overvalued. They're way higher value than the rest of everything else pretty much though. Okay. So, obviously the timing on these moves will get you too if you diversify more. I think you just have to weigh the trade-offs in terms of what are you going to regret more? Missing out on further gains if we do get a meltup or taking part in big losses if god forbid this is the peak, right? So, obviously life would be easier if you could just ride the AI wave higher and then step right off when it's about to crest. But that's not a realistic strategy as we all know. There's a fourth strategy you could do. This is the Ben Carlson method. You do nothing. >> I thought you were going to say give you give you our money to manage for us. >> Right. Well, I'm saying you could you could invest based on your personal risk profile and time horizon. If you already have an asset allocation place that you're comfortable with in bull markets and bare markets, in bubbles and busts, I think doing nothing is is a decision and the right one most of the time for most investors as long as they have a plan in place. Like you're not a hedge fund manager. You don't have to try to time these cycles perfectly. Um, you just have to be sure you have an asset allocation and investment strategy you can stick with come hell or high water, right? So, I think you need to be comfortable sitting through draw downs and volatility and avoiding FOMO and all that stuff if you're not changing your portfolio all the time. Um, but I think you have to balance your desire for growth with your ability to sleep soundly at night. And doing nothing is a simple strategy that's not by any means easy. But what am I doing to prepare for an AI bubble? Nothing. Right? I'm making no allocation changes. I'm staying diversified. I'm re rebalancing on occasion. I'm continuing to make contributions to my various accounts. If it's a bubble or something, >> I was going to ask you, do do you change how you rebalance based on if you think we're in a bubble or, you know, approaching one or >> I at the extremes especially I maybe I'll overreal like if we're in a big bust, I'm going to put more money into stocks, right? And and take out of cash. I think um you could you could do the same thing if instead of trying to go all cash like let's if you're in an 8020 portfolio and you want to go to a 7525 or 7030 that to me makes more sense or 6040 even than trying to time it and go all in cash because I just think going to the extremes eventually your emotions are going to get the best of you because the market is not going to cooperate you're not going to go to cash and yay the market's going to fall magically the next day it doesn't work like that so >> what about this advice is always long you or you know this this idea not advice not advice this idea is always like more long-term. What what would you say to someone who's right around retirement or in retirement? Um you know how should they think about it differently if they're already at age where they're maybe, you know, not going to have income anymore. >> Yeah. At that point, you you better be diversified and have some sort of liquidity strategy whether it's whether it's cash or bonds or some other thing you can because you don't want to sell stocks when they're down. That's the thing. I'm sure there are some people who still have 100% of their portfolio in stocks when they're retired and they say, "I don't care. I can live through it." But you just don't want to be selling stocks when they're down 20, 30, 40%. And locking in the losses. You want something else to carry you through. That's so how many every year's worth of cash or bonds or whatever something relatively safe. You you want to have that anchor in your portfolio that it's more important than ever when you're when you're in retirement because you said you don't have the income and human capital to keep buying. Yeah. So, you're right. the the risk is different to people at different stages of their life. Jerry Jerry Seinfeld when Ser um you have to find the torture you're comfortable with. That's investing, right? He was talking about careers, but that that's investing. Someone someone in the someone in the chat said, "Does Riddle do this with their clients? Do they make adjustments to allocations?" Uh sure, we occasionally make adjustments to allocations. Uh and we have a tactical strategy that that is rules based that will we'll make changes depending on the market environment. And um it's not for everyone, but enough of our clients are in it. And but most of the time the allocation changes come from um they're very few and far between, but a lot of times it'll be because of something changing in the client's life, not necessarily the markets. That's that's more regular in terms of changing than like us making a pulling a huge lever and making a big change. It does happen, but it's just not very often. All right, next question. >> All right. And yeah, before we leave that topic, last thing I'll say is the point that you guys always make that I think is just so fundamental to this is it's not about like pulling your money out because you feel safe and you can sleep at night. It's getting the money back in the market that is is the problem, right? >> That's the hard part. It's it's two it's two decisions. So, what are you going to do? You going to George Soros this thing and just keep doubling down your triple leverage ETFs? >> Uh, I mean, I'm doing I'm making some trades. I'm making some trades. But I'll tell you what I'm not doing this time is I'm not going to be buying like inverse stuff and trying to play anything like that. I've been many times >> because the timing it's the timing on those things that gets you every time. >> Yeah, I've been burned. >> You you you missed by a week or something and and the trade is is useless, right? That's the hard part. >> Yeah, >> it's the timing and the magnitude. All right, next question. >> All right, up next we got one from Todd. I listened to your video with the 4% rule guy. Can home equity be used in the 4% rule calculation? I typically carry a very low loan to value and have even owned one home free and clear before we moved. I always have a hard time figuring out how to use this home equity and retirement planning. I'll always need a place to live, but we'll downsize eventually. I guess I could just assume a certain level of appreciation, but it would be easy to just throw this into the 4% rule. >> All right, so he's talking about on talking wealth recently. We talked to Bill Bangan, which is great. He's a creator of the 4% rule. really good conversation if you want to listen to that. Um, my general rule of thumb for housing is that it should appreciate roughly in line with the rate of inflation. Obviously, that depends on where you live and the economic environment and such, but um, and it's probably a better rule of thumb for people who live in their homes and own them outright versus people who have leverage, but 40% of people own their homes right now and most of those are retirees obviously or people approaching retirement. So, I think that's a decent baseline. So, how the question is, how do you use your equity in retirement planning? Now, he mentioned downsizing potentially. So, that's a good one. You could sell and move to a smaller or cheaper home. Pocket the difference. Um, most baby boomers actually say in surveys that they're never going to sell. Um, right. I'm never leaving. But I wonder how many will choose this route when they realize like, oh, there's so much equity there to choose. Now, obviously, you could also sell your home in rent, but that's a different lifestyle choice as well. Um so um obviously the the benefit there is there's no new debt and it's a lower housing cost but then you have to move which can be emotionally difficult for people who've lived in a house for 10 20 30 years. Um home equity loan or home equity line of credit or cash out refinances that is something you borrow against the equity in your home. Um the great thing is you can access cash while you still live there but the downside is payments are required like monthly payments to pay it off. uh you know, you could be able to pay make the payments right out of there because it's such a big amount, but the problem with the heliloc that I've talked about in the past is it's it's floating rates. You can do a home equity loan, which isn't taking the loan they have right the rate we have right now, which is not great, but um that's a good way to stay in your home and just borrow against the equity, but again, you have to make the monthly payment still, unfortunately. Now, a lot of people turn to reverse mortgages, too. Those are a little more complicated. So, it's homeowners, I think, 62 and and above. Um the lender pays you based on your equity and you can do it I think in a monthly payment or a lump sum or a line of credit um and then the loan is repaid when you sell, move out or die essentially, right? So there's no monthly mortgage payments required. You get the payments, but then they get the house eventually or can sell it. So essentially the loan comes due when you when you die. Uh these things are rather complicated and difficult to understand. There's a lot of paperwork and fine print and such, but and it's not great for the kids, but hey, it's your equity, right? Screw them kids. Uh, or if you don't want to screw the kids over, you could use the equity for estate planning. Like, home equity is the inheritance for your children. I'm going to spend all my liquid assets and the kids get the house and they get that step up cost basis. You know how this works, Duncan? >> Yes. >> When you die, right, if if you bought your house for 30 grand and now it's worth 500K, um, that's a that's a big capital gain, right? But if your children take it over after you pass, they get the the new level as their cost basis. They can sell it immediately, pay no taxes essentially. >> Can't you also do that while you're still living by using a trust? Can't you put put the home into a trust? Isn't there something like that? I feel like I've heard that. >> Maybe don't come to me. Don't come to me for estate planning advice. Uh but I guess this question is a good advertisement for not being house rich, right? Like that equity is certainly worth something. peace of mind for some uh it can help you buy a new house and use it as a down payment, but you need more liquid assets when it comes to financial planning. A house is not a great thing to use for financial planning. It's just not because it's too liquid and it's it's hard to get the money out unless you just sell it. >> Yeah. You know, you know, my latest uh why I hate renting situation is I'm four days shy of being without AC for a month. So, >> you know, if your landlord doesn't care about fixing your AC, then you know, you just don't have AC. So, it's been 84 in my uh in my place quite a few days. >> CTV, that's worth like 40% of rent right there. You should get 40% knocked off your rent because AC is that important. >> 40%. Yeah. I mean, it fuel is pretty important. >> Yeah. Not everyone has it, but it's definitely part of what you're paying for if you >> My thought is before air conditioning existed, and I wrote a whole thing in one of my books about the history of AC, um, that people must have just been sweaty and smelly all the time. >> Oh, yeah. >> Like, everyone just must have stopped. >> I mean, you do get a you get used to a certain level. So, like now 77 doesn't feel that bad to me in the place. Um, but like Yeah, you're still like it's muggy and Yeah. It's it's uncomfortable. >> It happened in my office a few times. It's not fun. Yeah. >> All right. Good. Next question. >> Okay. Up next, we got one that came in from Twitter. Are you a die with nothing guy? How much do you need to save? What if you live until 100? Yes, enjoy life, but you need to save. Okay, so I kicked the hornets a little this week. Put my tweet up here. Um, I said, "Personal finance people are great at giving advice about saving and paying down debt. Do not, repeat, do not listen to their advice about spending money. They want you to delay gratification for the rest of your life until you have a big portfolio and are miserable because you never get to enjoy it. Um, maybe hyperbolic a little bit, but I I honestly believe a lot of this that personal finance people are really good at getting people started and paying off big amounts of debt and getting you to be frugal so you can set money aside, but a lot of them like hate spending money and they their whole thing is just you never spend money, you never enjoy yourself. And I think that's someone recently commented I'm the patron saint of spending your money and enjoying it. I'll take that crusade and I'm I am on a crusade against hoarding all of your money. But that's a personal thing for me because everyone's spending saving debt relationship is impacted by their lived experiences. Like how could they not be right? So I'm approaching this topic from hundreds and hundreds of conversations I've had over the years with people who have more than enough money but cannot force themselves to spend and enjoy it. And I think that's a sad way to go through life. I don't think I like what's the point of the money. So I'm also something of a born again spender. Like I was a super frugal guy in my early days. I was always a saver. So also before you said like risk means different things to different people depending on what stage of their investing life cycle they are, right? Like young people should get on their hands and knees and pray for bare markets. You can buy at lower prices. Older people who are retired, they want nothing to do with bare markets. Like that that's a terrible for them. So it's obviously like your income and your job prospects and your net worth and your place in life that all has a big bearing on should you spend or should you save more, right? Someone who's in debt up to their eyeballs should have a different spending plan than someone who has a se seven figure net worth and no debt. Right? Okay. Caveats out of the way. Get them out of here. Check out this tweet from this week. Show this next one. So, this guy says he's got 9.8 million in his 401k. I don't know if he put it all in Nvidia or what. He has 3,000 in his checking and $296 in his saving. He's got it all in the equity market, right? His wife wanted to go on vacation. He said, "I can't. We're broke." If you understand this, >> wait now. This could be engagement bait, of course. >> How do you end up with that much in a 401k? Are there 401ks where you can pick individual stocks? I thought they were all pretty much fund based. >> It must have been something like that. Um, and maybe this guy is is rage baiting engagement rage baiting people, >> right? >> Um, >> well, always. Yeah, we're always just taking people at face value with with >> Yeah, yeah, you kind of have to. But this is just dumb. Take your wife on the vacation. Your 401k will not give you cherished memories, right? Who cares, right? This is the kind of thing I'm talking about. Life is short. If you have money, you should enjoy some of it. That's what it's for. Now, there will always be people who like cannot make themselves spend money. It could be a personality thing or something handed down by their parents or maybe a life-changing event, right? Um my father, if he could have boughten one pair of clothes for work and one pair of clothes for outside of work and lived with them for the rest of his life, he would have done that, right? He we cannot force him to spend his money. Uh and that's just the way he was. It's something of the way he was brought up, his personality, whatever it is. Now, I'm not going to be a die with zero guy, but I'm going to be more I'm more in line with the die with zero camp than the fire camp that says you should like make very do with very little. Have you read die with the Joe yet or not? By Bill Perkins. >> I have not. No. >> So, he essentially says, you know, your net worth should peak in your 50s and then it should be downhill from there because you should be spending your money while you still have your health, right? What's the point of saving it until your 70s and 80s and 90s when you don't have the health and you can't really enjoy it as much? you should you should enjoy it more while you're here. You know, he talks about throwing big 50th birthday comeing. A lot of people come back to this though and say like, "Yeah, I I had a family member end up in a in a horrible like nursing home. I want to make sure I have great end of life care, you know? What do you say to that? How do how do you die with zero if you're trying to plan for that?" >> Yeah. The robots will take care of us at that point anyway. It'll be fine. No, I I get that. That's why that's one of the reasons that people have this mindset like what happens if there's a healthcare problem or I fall and I break my hip or whatever it is. I so I I get that. Um I just, you know, I just think that you should enjoy your money while you still have some health. And you know, my mindset has been totally changed because having kids and then watched my brother pass away in his 40s, right? It just completely changed my mentality. So again, this is a personal thing for me. But so this year, I've spent more money than any year in my entire life. Uh my savings will probably be down from last year to this year for the first time ever. and the personal finance spending scolds would blush at the stuff that I'm spending money on. We're taking more vacations. We did a big renovation on our house. I'm probably going to buy a new boat this year, but I don't need one. I want a bigger motor. Okay, sue me. Uh, these things make us happy. Now, part of the reason we could do this is because we saved diligently for 20 years in the first place. But that's the switch that a lot of people have a hard time doing is going, "Hey, I I saved. Now I can't turn it around." So, I'm um living proof that you can do that. Um, I I I just view it as like I I have like this revolving relationship with money that's changed a lot over time. It doesn't work for everyone. Um, but I've just had countless conversations with people over the years, clients and people in my inbox and family friends who have no idea how to spend their money once they build an est. So, I could never be a die with zero guy fully because I have kids. Like, I don't want them to grow up entitled and spoiled, but I couldn't possibly go through retirement without having some sort of backs stop for them, like something. >> I mean, you're you're not telling people to take all their savings and go to the casino. You're saying like make great family memories on a vacation or buy a vacation home that is by the way an asset, right? That one day you'll probably sell and make money off of, you know, stuff that you prioritize. >> Yes. Yeah. Take the stuff you prioritize and be okay with spending money on that. And if you want to like mercilessly cut costs everywhere else, then do that. If they this stuff doesn't make sense to you, I just think I'm all about seeking balance in life. So, I diet and exercise so I can feel okay drinking beer and eating pizza, right? I I work hard, but I don't I don't want to miss any of my kids sporting events, right? I save and invest so I can spend the rest and not have any guilt about buying shoes or a new shirt or taking a trip with my family. And I I do feel no one has this stuff perfectly figured out like what's the right exact. So I but I think trying to have some balance is the key. At least for me. >> Yeah, makes sense. Makes sense to me. >> All right. Jay Luther in the chat says, "Maybe leaving a large inheritance is what makes some people happy, Ben." It does. Then I think that that is a very much a baby boomer mentality. But I tell you what, your children would be way happier getting that money at 30 or 40 than 60 or 70. I can guarantee you they need that money more when they're younger than when they're older. >> Yeah. >> Full stop. >> All right. Next question. >> Okay. Up next, we got a question uh from anonymous. Uh I was lucky enough to be an early employee who had a substantial exit during the froth of 2021. I didn't sell at all. Who knew what 2022 would bring? But I sold enough and slowly unwound the position into a diversified set of investments that are now worth about 5.5 million. I'm single. Not to brag. >> Yeah, not to brag. Uh I'm single, don't own a home, and I'm in my early 40s. The economic whipsaw of the past few years along with some questionable business decisions have driven repeated layoffs at my job. And much of what I've loved about the company is in the past. I'm considering taking a break and perhaps firing. Part two. I currently work with a fee only adviser who doesn't manage my assets. The arrangement has been fine. I pay a relatively modest monthly fee. They prepare my taxes and they've done a thorough diligence on my fire scenarios. That said, I'm not particularly thrilled with the firm. Since I feel comfortable manage my managing my own money, the idea of paying $50,000 or more per year for full service asset management is hard to justify. My question is when does it make sense for a client to hand over portfolio management to a firm? What uh key factors should drive that decision and can an RAIA realistically provide enough value to justify such a significant fee? >> All right, we get questions like this all the time. I had I had a conversation with a prospect yesterday this same question. Especially when you're dealing with people who are good with numbers and spreadsheets like they they run the numbers and they go, I want to do a cost benefit here. Does this actually make sense? So thing is there there's no perfect business model. I think someone will always be questioning your worth when you're providing a service and they should. There's this great book called Selling the Invisible by Harry Beckwith and it's about marketing and sales in service-based businesses where listen when you're selling a service, especially in financial services, you're not there's no assembly line that goes down and makes this product and in the end it's like here here's your beautiful product, here's your end widget. That doesn't happen, right? It's a service that's ongoing. So it's it's hard to see the end product since it's an ongoing thing. So he says like when you're a service based business, he says if no one complains your price is too low if everyone complains your price is too high obviously. So he says um how much your resistance is just right. He says 10 to 20% is just about the right level of push back. He says 10% or so of people will complain about any price they have to pay because they always want a deal. Others have a budget in mind and any deviation from that price they see is wrong and still others will negotiate every price because it's how they're hardwired. says setting your price is like setting a screw. A little resistance is a good sign. So I think that so it's like can an RAIA justify their fees? Well, they manage something like $144 trillion. So obviously some people are fine paying them, but there are certainly people like this who question it. Um and I think more people in their like who've had it struck at rich like this in an early age probably think more closely about this because they have so long to like grow their assets and compound like in your 40s, right? you're doing the math in your heading, oh my gosh. Um, so I think if you're questioning while you're already in this relationship, not just thinking about getting an adviser, like, yeah, it's likely the work that they're doing for you is probably not justifying the fees. If you if you're questioning this, cuz um, listen, when we first started out, we were essentially just doing investment management and financial planning with holds. And that's when we were tiny. Now, we quickly realized like we needed to offer a much wider set of services just for our fees. So, we added a tax practice. We added an insurance practice. We have estate planning experts. We have corporate retirement. Um, all these different things we can do. We have a dedicated financial or family office team that works exclusively high net worth people, all this stuff. So, we've heavily added to our tech stack and and made that process more seamless for people. And and we didn't raise our fees by adding all these services. It just aid into our costs. Um, and I think that's you have to decide like is my financial adviser offering everything I need in a one-stop shop to make sure the fees I'm paying are commensurate with the services. And that's true of any business. And I think the big one for a lot of our clients is that um we sometimes offer them services or advice they didn't know was out there. I think that's how you know you have a good adviser. Like, oh, I never thought about this. I never would have found this on my tax return or I never would have tried this tax strategy or I never would have thought about insurance this way to take it out. I never would have done this investment strategy or done this allocation. Um, I think the stuff that the DIY person just doesn't know or hasn't kicked the tires on, that's the stuff that makes you go, "Oh, light bulb moment. Of course, now yeah, they're they're worth their fee and more." If you've never had that light bulb, I it, you know, it might not be worth it for you, but it depends how complex your financial life is. That money might be easier for you to manage. You have a lot of tax liabilities or whatever and you don't need one. But, um, >> I I think level of assets matter a lot too, right? like at a certain point a small investment mistake or you know you you selling when you shouldn't sell could end up making that number seem really small right >> so >> exactly yeah that's part of it is have you made mistakes before how complex is your life do you need expertise in certain areas uh there is no right or wrong I don't think having a financial adviser is right for everyone but there's plenty of people who who recognize that they want to outsource their time and find expertise and work with a a team and and figure out ways to like bounce bounce decisions off of people and all this stuff. So, there's no there's no perfect answer, but um if you're not having those feelings with your current adviser, everyone's not going to love their adviser all the time, but if you don't feel like it's the right situation, you know, maybe it's not the right thing for you. >> All right, we got one more. >> Yep. Last but not least, we got one from Michael. I feel that there are many mentions of upper middle class across legacy media, financial media, and social media that challenge my definition of upper middle class. I like this question a lot. I've had this same feeling. Yep. >> Uh my assumption of upper middle class is the 50 to 75 percentile of Americans from a net worth and income perspective. I see net worth as 192,000 to 658,000 and various estimates of income around $85 to $140,000 depending on where in the country you are. Yet, many media posts mention buying a $ 1.5 million house, sending your kid to Vanderbilt, $67,000 a year, sending a kid to a $3,000 a month daycare as upper middle class lifestyle options. Am I crazy to think those three options I mentioned above are not accessible to the average upper middle class family in the US? Are people confusing the 80 to 97% who are wealthy but not rich with upper middle class? All right. I feel like we've tried to define rich here before, but yeah, this is this is certainly a good question because I think the really hard part is that we've just moved the goalpost so far and and that in terms of like how wealth is distributed in this country and what we think is rich. Uh, and I think we also have nostalgia for a past that never existed, too. So, Daniel, throw up my my meme here. You've probably seen this go around before. It goes seem to go viral like once every month or something on on Twitter. Um, you know, >> show us the why, Ben. Show us the lie. >> Once upon a time, a family could own a car and send their kids to college on one income and life was easy. Um, the problem is take, it's funny because I think in the 50s, 6% of people had a bachelor's degree in this country. Even by the 80s, it was less than 20%. Today, 36% of US adults 25 and older hold a bachelor's degree. So, it's a it's a way smaller number than you think. So, there was never a time when everyone was paying for college, right? Um, and then in 1940, less than half the country had a high school diploma still. Today, it's like 90% I think. So, you know, houses were 25% smaller back then. They didn't didn't have AC. Duncan, you're living without AC right now. Basically, no houses had that back then. You didn't have multiple bathrooms. They certainly didn't have quartz countertops and tile black spash backsplashes and you know those gold faucets now that are all the rage, right? Everyone has a gold faucet. Um I don't know. Seems a little cocaine 80s to me, but what do I know? I'm not a interior designer. >> Yeah, this is news to me. I haven't seen this. >> Oh, yeah. If you get a new house >> you mean like brass, right? >> Well, it's it's not made of gold, but yes, it's a gold color. Okay, gotcha. >> Yeah, that's that's the if you go on HGTV these days, everything's cold. Okay. >> Um I think the problem is most people in their own minds have no idea where they actually sit on the wealth scale. So here's how Pew defines it. Let's show the chart here. >> Um they say 52% are middle class, 28% are lower class, and 19% are upper class. Um they have some definitions. I can't remember exactly how they figured out. Go to the next one to show the changes over time. This is interesting. So they show 1971 the middle class was bigger, right? So that's shrunk, but we've essentially doubled the upper class and the lower income class has fallen a little bit. I think this is one of the reasons that it's so hard and this is good and bad. You can do a chart off. Um there are fewer people in the lower class. >> I'm surprised that lower class has gone from 27% to 30%. >> It's a little surprising, right? >> Yeah. >> I almost think it was like when there was a bigger middle class, it's like we're all in this together now that there's there's more people in the upper class. So it makes it feel like why aren't I in there? And also the people in the upper class think, well, there's too many of us. Like, this place is too crowded. I don't even feel rich because there's too many more pe rich people. So, I think it's good and bad. Um, so let's look at some charts from Bloomberg 2 using Federal Reserve data just to show why I think this is a problem. So, the the top 10% comprises twothirds of the net worth in this country. The top 1% holds more than 30%. And more has gone into the top 10%, but really more has gone into the the top 1% and the top.1%. The top 0.1% holds 14% of the wealth in this country, which is just insane. So that's I think one of the reasons why the middle and upper middle class don't feel like they're rich at all because the tip of the spear is so much richer. Now look at the asset composition. Show this next one. Um the top 10% owns 87% of the stocks, which is one of the reasons wealth inequality keeps getting worse. The lower middle class have played catch-up this decade, but part of it is because so much of their wealth is tied into the housing market. And we had this one-time surge in the housing home prices. And guess what? That's never going to happen again. Unfortunately, this 50% surge in like 3 years. So, I think defining it you can do chart off is hard because even people who are upper middle class most of the time don't feel like it because they're surrounded by other people in the upper middle class or people in the upper upper class. And so, and then people always say like what about where you live? If I live in San Francisco or New York and I make this, of course, I'm not upper class. And and so I think people's like positioning in life and how they feel about where they are in life has way more to do with what some numbers say from some survey organization. And I think it's tough. The other thing is, so I wrote about this in my book, Don't Fall It, okay? Research shows that over 50% of Americans will find themselves in the top 10% of earners for at least one year of their lives. More than 11% will find themselves in the top 1% at some point. And close to 99% of those who make it into the top 1% of earners will find themselves in the outside looking in within a decade. So, it's not like these things are static and everyone who's in a certain cohort will remain there for the rest of their lives. But the funny thing is is that hope springs eternal in America and we all think at some point we're going to be in the top 1%. Or maybe the top 10%. I think this delusion is one of the things that makes this country great, but also makes people miserable because by definition we can't all be in the top 10% of the top 1%. It's impossible. So, I think that's what makes it really, really hard. But the point about yes, having a $ 1.5 million house and sending your kid to Vanderbilt and a $3,000 daycare, uh, you're right, that's that's those are upper class problems. It doesn't not most people cannot afford that by, you know, obviously >> can Yeah. >> The other thing I've seen is that it's never been easier now to know how much money other people make. There are all these websites, glass door, stuff like that that tell you like how much the going rate is for whatever your job is. >> You can look up anyone's home on Zillow, right? based on location. Yeah. House prices. People on social media are constantly, especially Gen Z, they are very open about how much money they make and they will just talk about like salaries and sometimes they'll be complaining about a salary and you're like that's an amazing salary, you know? >> Well, think about the people who post their their screenshots of their portfolio value of Robin Hood on online like no one ever would have known in the past. you you could think about it and try to figure it out, but yeah, it's just more known and that makes it harder, too. Social media has just been social media is horrible for keeping up with the Jones mindset, right? It used to be the people in your neighborhood or your peers, your co-workers at work. >> Now, it's everyone out there >> and that makes it really hard. So, yeah, the the perception of wealth is way harder than it ever was in the past. So yeah, I this is a very astute question and I don't know if I really gave a perfect answer, but it's it's one of those things where it's it varies so much that it's it's really difficult to figure out exactly. >> Yep. >> Okay, we did it. Um, email us askthe compoundshow@gmail.com if you have a question. We keep getting a ton of great questions coming in. Um, again, everyone in the live chat, please give your questions. If you're on Twitter, thank you. Oh yeah, the chat was asking for your recommendations of a a finance or investing book. You read anything recently? >> Anything you like? >> Boy, it's been a while. I got to I'm going to have to look. Next week, I'll come back with a with the answer to that question. Leave us a comment on YouTube review, all that good stuff. Subscribe. See you next time. >> See you everyone. [Music] [Music] [Music]