AI Bubble Strategy: The show explores how to ride the AI capex boom while preparing an exit, using rules-based approaches rather than picking individual winners.
Trend Following Approach: A 10-month moving average on broad ETFs is highlighted to stay invested during uptrends and shift to cash/T-bills in downtrends, aiming to capture most of the upside while avoiding major drawdowns.
Historical Context: Examples from 2000 and 2008 show the method missed the peaks and bottoms but avoided the bulk of severe declines, producing stock-like returns with lower volatility over time.
Risks and Limitations: Whipsaws in choppy markets and very fast crashes (e.g., 1987, early COVID) can reduce effectiveness, and stops may trigger on temporary dips before rebounds.
Stop-Loss Use: Trailing stop-losses (e.g., 5–10%) can be layered to cap downside, but investors must accept the risk of being stopped out during minor corrections.
Tax Considerations: Frequent trading in these strategies can create short-term gains; using tax-deferred accounts can mitigate tax drag, while taxable accounts may face higher liabilities.
No Single-Stock Pitches: The discussion avoids naming specific AI companies or tickers, focusing instead on systematic ways to gain exposure to the AI theme via broad, passive vehicles.
Overall Perspective: Treat the approach as a behavioral and risk-management tool—an “insurance policy” to participate in AI-driven upside while having a rules-based off-ramp.
Transcript
Welcome. This is Ask the Compound, the show where you ask and we answer. I am Ben Carlson. A lot of people are fairly certain this AI capex boom is a bubble. Let's say you feel this way too, but you want to go along for the ride anyway, and you want to find an off-ramp when things turn. How would you go about this? Stop-loss orders, trend following, momentum indicators? We're going to explore that on today's show. Please stick around. [music] Someone in the live chat says that's a toppy title for today. Um, fair. Ask the Compound Showgmail.com. If you're in the live chat, give us give us a question. We'll take it live on the air. On today's show, we discuss questions directly from our audience at the compound about getting out before the AI bubble pops. Filling up your Roth IRA five years before retirement. Buying your dream home. How much is too much? How to utilize capital loss carry forwards in your portfolio from Oley or other stocks? Should you prioritize saving for retirement or your children's 529 plan first? And then should you buy a vacation home for estate planning purposes? >> Since since you mentioned it, they reported earnings today. How do we do >> uh Ebidoth ibidog growth uh some good revenue in uh Europe and and China US lagging behind but uh yeah >> how the stock some good stuff the stock is down >> okay that's all I wanted you you said EBIDA first that's what I knew was a bad quarter all right today's show is sponsored by public is the investing platform for those who take investing seriously you can build a multi-asset portfolio of stocks bonds options crypto and more on public. 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 is not just a feature. It's woven into the entire experience. You get portfolio insights. You get earnings call recaps. Public gives you smarter contexts at every touch point. Plus, earn an uncapped 1% match when you transfer your portfolio. This includes IRA transfers, rollovers, even initial contributions. Fund your account in 5 minutes or less. Visit public.com/ATC. That's public.comc. Paid for by public investing. Full disclosure is in the podcast description. All right, we got a full show for you today. Duncan, I think your background is growing. It looks very nice. >> Oh, thanks. Yeah, I need to fill it out still. I'm trying to come up with some some stuff to to fill it in. >> And we're both wearing plaid shirts. I believe that's that's fall for us some match because it's cold. >> It's cold. >> All right. >> Yeah, let's do a question. Speaking of Oivo on earnings, I was going to ask you, this might be more of an accounting question for Bill, but what does adjusted Ibida mean instead of just Ebida? >> It just means they add in these expenses and take these ones out and hey, this is not recurring and this is, you know, they try to try to make it look more normal. Uh, it's just the way for them to make it look better. How's that sound? >> I figure that's most earnings reports everything is to make it look better. >> X this, X that. >> Yeah. Gotcha. All right. It's only down two and a half%. You're not doing too bad. All right. Question. Not too bad. Okay. Uh, up first today say we got a question from Bill. Could you talk about how to use momentum indicators and stop losses to profit from an AI bubble? Having been an investor during the 90s, this feels like the early innings of a bubble. Uh, if this is one, that's a Grand Rapids hedge, right? >> Yeah, fair. Uh, I think I think there may be relatively low-risk way to profit without picking individual winners or timing the top by using momentum indicators and trailing stop-loss orders on broadbased passively managed ETFs. >> All right, I'll be honest. I don't have a ton of experience with stop-loss orders. I think it can make sense in the right place. Hey, 5% below, 10% below, and you keep moving it up as the market goes higher, right? So, you get that trigger. Obviously, >> for our young and new people here, that just means you're you're limiting how much you can lose. basically the stock >> the stock falls 10% >> trigger hits you sell. >> Um you can do that automatically >> on most brokerages. Um so you just have to move it up. You also have to be comfortable with the fact that you could get taken out from a short little correction then the market moves higher. So you have to be comfortable with that risk. So not a lot of experience for me with stop losses. I do have experience with trend following. We utilize a trend following strategy at RI holds for our clients. I personally have 10 to 15% of my portfolio in this strategy that we call goldender. Um, I'll give you a quick history of trend following using um, some stuff from Mev Faber. So, in the spring of 2006, Meb Faber, friend of the show, published a research paper called the quantitative approach to tactical asset allocation. Not the greatest title in the world, but it worked. So, the idea was you use a 10-month moving average. So, if you're familiar with a 200 day moving average, it's pretty similar. That's about 10 that's about 10 months. So, basically, and that dictates that moving average dictates whether you're in risk assets like the stock market or cash like T bills. So the rules are pretty simple at month end. So this is a monthly indicator. Some people look at it daily, weekly, monthly tends to work best because it smooths out a lot of the back and forth. So if the current price is greater than the 10-month moving average price, right? You just take the previous 10 months, average them, right? If the current price is higher than that average, you stay invested in the risk asset. If the current price is lower than that 10-month moving average, you invest in cash. And that's your signal, right? If it's below, you either sell or stay in cash. If it's above, you either buy or stay in stocks. So, the idea is that if you're in an uptrend, you buy or stay invested because in an uptrend, good things can happen, right? If you're in a downtrend, you sell or stay in cash because there's a bigger wider range of outcomes that can happen in a downtrend. People freak out. They panic more. There's more volatility. That's the idea. So, and the idea behind the strategy overall is you're trying to dampen volatility and really avoid the risk of a severe market draw down risk asset. So, we're talking like 40 50%. You're trying to take that off the table, right? Um, and the timing for MEB could have been better. He published it, I think, in May of 2006 was like the working paper. I think it got published in one of the journals of financial something in 2007. And so, a little more than a year after he first published, the stock market peaked from the onset of the great financial crisis and fell almost 60%. And so, a few years later in 2012, Meb redid the paper and said, "Hey, how did it look going back after we have actual data? So, how do we take the back test? See what it looks like in real time. All right, Daniel, let's do a chart on here. This is the S&P versus the timing indicator again that using a 10-month moving average. You can see in 2008 that flat period of going to cash when the stock market totally fell out of bed and the timing indicator worked pretty good actually, right? Uh, next chart. These are the long-term return profile for trend following versus buy and hold. You can see the returns are pretty similar over time. Volatility is lower. So, I say it's about a third lower for timing. >> Wow, that max draw down though. >> Yeah, the max draw down's still there, right? Like you I think I think that would happen in the 30s, right? Because there are some whipsaw periods where you have a big up and a big down. I'll get to that in a minute. Um the point though is that it's you're you're hoping for stock-like returns with less volatility, which sounds like it's almost fake, right? And I'm going to get to some of the downsides. Let's do one more though. Um next chart. This is from Meb's paper. He looks at the worst years in the S&P versus the trend following system. You can see this is really where this strategy shines in those really really bad years. Um not too shabby, right? Um all right, chart off. So that's the idea and it worked. The timing of MEB's paper again couldn't have been better. Uh put the guy in the map. It's, you know, kudos to him and I So I wanted to look at this and show kind of a different way of visualizing it. So Daniel, let's do a chart onto the GFC one. So this is this is a GFC and this is a simple 200 day moving average. Again, 10 months, 200 day, pretty similar. Sean, a research analyst, did this for me. Now, what this shows is the the red line is the moving average, the blue line is the S&P at month end. Okay? So, if you looked at this on a daily basis, you probably have a lot more in and outs. So, you have that that's like the trade-off. Um, so you look at this on a monthly basis, you can see this the sell signal there, I think, happened. You were down probably 8 to 10%. In 2007, the downtrend set, and then there was a couple times when it almost came back, but it never did. and you had just this waterfall lower and it stayed out the whole time. And then you can see there's a big huge comeback. I think stocks were up, I don't know, 20 to 30% eyeballing it before you got back in, but you missed a huge huge part. So you didn't get out of the peak, you didn't get into the bottom, which is obviously impossible, but you you missed the majority of that crash chart off. So that's a pretty that's pretty good for that kind of severe correction, right? So let's look at the dot bubble now because this is for severe market corrections, right? put the next chart on. Um, this is heading up to the.com bubble. You can see there's a couple times where we had false positives, right? You sold in 98, got back in. You sold at the end of 99, got back in. Right? The red is sell, green is buy again. But in 2000, you got out again. 8 to 10% below the high. There was in 2002, you had a slight ramp up. You got back in, and you got back out immediately. Um, but then you missed again most of that big downturn which was like 50%. Chart off. So the question Duncan is why would you ever invest in anything else if you have this strategy that doesn't time things perfectly because nothing does but it gets you out of the meat of these huge I say it takes away 70 to 80% of these big corrections of the last two huge ones that we've had. Why would you ever invest in anything else? Here's the thing. Trend following is a wonderful hedge against these severe market downturns. Again, these were both 50% plus crashes, but these severe market downturns don't happen that often. Crashes are rare, right? Let's look at 2022. >> Well, and in general, do you know, not to put you on the spot, but in my, you know, fairly limited experience being invested in the stock market, paying attention, it seems like the crashes happen really fast and corrections the same. It's like before you even have a chance to react, it's already down 20% or something or 18%, you know? It's >> that's the hard part. If you if you have a 1987 crash situation where the stock market fell 20% a day, guess what? This strategy is not going to get you out. >> Right. >> Right. Co is pretty fast, too. I think this stuff triggered at the end of February and COVID, so you miss a lot of the March stuff. Um, but you're right. If it's a if it's a really fast crash, unless you're looking at this on a daily basis, which means more transactions is tough. So, let's look at this on a let's let's look at the downside of this. Let's look at 2022. I not the downside, but just when you have a bare market, but it doesn't completely crash. So, you missed a decent chunk of the volatility, but look at how many times you get in and out. You get out, then you get back in, then you get out, then you get back in. And it's hard because you get, they call it a whipssaw, right? When you have volatile markets, you could have a really big down month and you get out and then the next month comes back really quick and you get back in. And they call that a whipssaw. >> That's why I use 10-minute moving averages. >> Yeah. Seven minute abs, right? um chart off please. So again this this is the type of strategy that typically will sell when you're down call it 10 to 12%. It'll buy after the market rallies 10 to 20% maybe you know typical but again you you mentioned if markets move faster it doesn't necessarily work. So that's the point there are downsides to this. It's an insurance premium you're paying because most of the time when the stock market falls 20% it doesn't fall 30 or 40%. Most of the time when the stock market falls 10 it doesn't fall 20 30 50%. those are rare. Um, so you're most so you don't buy insurance on your house hoping that it burns down, but sometimes the stock market does burn down and that's when trend filing can protect you. So those this is why people really liked it after 2008 because listen, I don't want to sit through a 60% decline. This is nuts. So a lot of people use it as a behavioral release valve, an insurance policy. Um, and the other side of that insurance policy is if as long as stocks are in an uptrend and going up, you stay invested. So, that's one of the really good things about if you're trying to ride this this bubble higher, if that's what it is. Um, that's the thing. The other part of it is though, you better do that. You should probably do this in a tax deferred account because if you're going to be jumping in and jumping out, you're going to have short-term capital gains potentially. >> Granted, I guess then you lose tax loss harvesting ability, right? >> Yeah. And that that's the problem is the taxes can get you. So, you probably want to do this in a tax deferred account unless you're willing to pay those unless the behavioral piece and that's what we tell our clients is that this is a behavioral release valve for your portfolio. If you have a strategy like this as a portion of your portfolio, we don't use it for all of a portfolio, then it allows you to stick with the rest of your portfolio. Then it's done its job, right? It's it's the volatility reducer. But to your point, if it's a very swift decline, it's not going to catch everything. And again, if you had a down 20% month and you got out and the next month it's up 20%. While you're out, now you hit the decline and you miss the upside. So, there are periods where this thing, even though the long term looks pretty darn good, um there are going to be situations where this thing doesn't work and you're on both of the wrong sides. And that's when that's when you get dinged. And I think that's what happened with a 50% crash and that big draw down over time. Um I do have a blog post on this if you want a more deep dive on trend following that I call my evolution on asset allocation. I have links to tons of research papers in there from not only MEP Faber, but Alpha Architect and AQR and all these places. Um, I know there's a lot of people who follow us who say, "I I would never do anything like this. I don't need it. I can sit through stack and steady-handed. I don't need it." Other people say, "Wow, this is great. It's again a behavior release valve. Um, I like having the volatility protection. I like having that insurance policy." Um, it's not for everyone, but for people who understand how it works, I think it can be a good compliment as like a way to diversify across market environment as opposed to market, you know, uh, asset class or strategy or whatever. >> I'm going to ask Charit Matt to run this, but instead of just buying and selling, it's going to be buying the, uh, triple levered S&P and selling uh, I mean, and then buying the inverse triple levered. >> Okay. you want you want the more extreme interesting to see to see now again >> to some investors this is antithetical like I could never imagine trying to time the market like this um >> now I think because it's a rules-based system and I think you're you're diversifying by uptrends and downtrends uh maybe you'll quibble with the timing stuff but it's not like you're just guessing when the market's going to go down you're you're you have to follow this thing to the rule of the law you can't say like well it says I should get out but I'm not going to or it says I should get back in but I don't feel like it that you can't do that you have to follow the rules to a tea. Come hell or high water. >> And you're you're against market timing, but I'm guessing you would you would uh give your blessing to buying whenever the market's down 20%. Right. Like that's historically buying buying in corrections and buying in crashes has been a winning strategy. >> Yeah, of course. That's the best time to buy. Yeah, of course. >> Also, Me Favor uh grew up down the street from me. Winston Salem, North Carolina. >> Oh, yeah. He seems like he should be a California guy because he lives there now, but he like he's a Virginia guy, right? or what did you say? Carolina, >> North Carolina. >> From Virginia. >> Uh maybe originally. I just know he went to high school and went to Salem. >> Oh, okay. All right. Next question. >> Okay. Up next, we've got a question from Mark. Bill recommends that we go Roth IRA as much as possible, but we've been above the Roth income limit uh for the past decade or so and have been pouring money into our 401k instead because it helps with our current tax liability. Recently, we started to split our 401k contributions between traditional and Roth. We live in Oregon and probably have five to seven more years of working. Household income is $350,000. We have $2 million in two rollover IAS and another 800,000 in our 401ks with maybe 5% of that Roth net worth of 3.2 million. Uh do you think this is the correct strategy at this point in our working lives? If not, what do you recommend? >> All right, David in the live chat just said Bill three times and just like Beetlejuice, that means he has to appear. >> It's true. There he is. >> All right. [clears throat] Hey, >> I want to thank uh Rholswwell colleague Daniel Perah. Uh because as you gentlemen know, I have a face for radio and uh he really helped me out here. >> Yeah, you're >> looking good in looking good in the studio. >> I didn't get the pled memo though. >> Yeah, sorry Bill, you're you're all green. Uh a lot of questions directed towards Bill Sweet lately. So, um Rob Pasarella on our team uh is doing a project for the show where he's uploading all the questions into like an AI and we're going to try to do something with it. But he then took all these questions we've looked at over the years and did a word cloud. And can you guess the finance word that's been used more than any other in our questions? Bill >> internal revenue code >> taxes. >> Taxes more than more than anything. Um people >> guarantees in life. Yeah. >> Yeah. I think this is a loss aversion thing because people there's an old Jay Moore bit about when he got married to his wife. Um it wasn't that they they got along because of the things that they both liked. They got along because of the things they both hated, right? And I think that's that's why that's a tax thing. People don't like saving on taxes, they just hate paying them. >> Yeah. Right. And like Jay Moore, I have a hate hate relationship with my spouse. Um but yeah, scare scariest uh costume though. I was thinking IRS agent. Like where where are you guys for Halloween on Friday? Because that that's where I'm going. >> I mean, you should do that every year, right? >> Yeah. To your jack practice. >> Yeah. Death and taxes. Um Ben, I love I love Mark's question. Uh Mark to me gentleman is right on the cusp between when a traditional makes sense a Roth would make sense. He's right in in square in the middle of a 24% tax bracket. The only question I would love to ping back to Mark who gave us a lot of information by the way is are we going to stay in Oregon? Oregon secretly is a very high income tax state. You're at 9.9% once you cross roughly $200,000. >> Wait, what do you consider a high rate for state taxes? >> A high rate I would say is anything above seven. That that's that's it for me. Yeah, I think >> what I'm at what I'm at in Michigan. >> Uh you're Yeah, you're like high sixes in the best. >> What about Connecticut? >> Connecticut about the same relatively high e coast state. Yeah, 7 8 n it ticks up. Uh but New York, California, the People's Republic out there, uh 12.3 and only the only higher state tax is New York City at roughly. >> So Phil in the Phil in the live chat says, "I live in Oregon. It's not a secret here." Uh >> yeah. Yeah. And they're looking for new new ways to tax people. So back to our friend Mark. Can we chart on here, Daniel? One of the things I I like to do is take an illustration like visuals pay the bills. And if you look at our big bloody red mark symbol again, he's right in the middle of the 24% tax bracket. We're roughly five to seven years until retirement. In my view, I'm not sure I would leverage and go long Roth here because ultimately the window between now when he's at probably the highest earnings of his career relatively tight relative to when we're going to drop down the income ladder. So, it's a bit of a judgment call. I think for me though to answer Mark's question directly, if 95% of your assets are in traditional and if you're not planning on moving out of the People's Republic of Oregon, I would probably favor more Roth because only 5% of Mark's assets are in Roth today. >> So would it make more sense to do it when he retires potentially? >> So that's the other that's the other angle. Can we chart off is that if we're moving lower in the tax brackets, right? If we stop having all that earned income and we have a couple of years basically when we before we stop working before RMDs kick in at age 73 before social security kicks in at age 70 at the maximum those are great years to fill up low tax brackets with a Roth conversion and particularly to move the needle if you're planning on moving from Oregon let's say you're saying on the west coast to Nevada a lower a zero tax state or maybe a lower tax state I think that would make a lot of sense for Mark and spouse >> is one of those states that we all say wrong isn't isn't like actually pronounced really weird like Nevada >> organ like where where would you go with this >> orgon or something? >> Oh, I don't know. I don't know. We'd have to ask friend and colleague. >> Yeah, Phil. Phil Phil in the chat tell us. >> Okay. Yeah. Friend and colleague Joey Fisherman would would be able to tell us. He just calls it a ripoff. Um that's that's where that's where he goes. >> Yeah, Duncan. I You're way off there. No way. It's Oregon. >> Well, same with Nevada. People actually say Nevada or something weird, right? >> You say Nevada. I see Nevada. Let's call the whole thing off. So someone else in the chat says no income in no tax no income tax in W in Washington. So you just move up one state. >> Yeah, no income tax in Washington. Great point. Yeah, forgot all about that, Ben. Not all of the West Coast is uh pilfering their citizens. So good call. >> All right, >> Adam Adam in the chat says above 250,000 in Canada federal and provincial is 53%. >> Yikes. >> And they're still really nice in Canada, you know, >> and and tariffs. Yeah. So that's closer to 70% once you bake it all in. Yeah, but they get the flat blue moles and Canadian >> and they tied the Dodgers in LA last night. Yeah. Yeah. We'll see. TBD. >> I watched that one. All right. Another question. >> Okay. Duncan's favorite long one of the day. >> Yeah. Up next, we got a two-parter from Alex. >> I may have the opportunity to buy my parents house, a newer 3200 square foot, four bed, three bath home with office, threecar garage, pool, and big yard in probably the nicest gated neighborhood in my area near St. Petersburg, Florida. It's one mile from our current home, so life stays the same, but it would be a huge quality of life upgrade for our family and perfect for raising kids and entertaining. We're 31 with two kids, about 1.15 million saved between real estate, brokerage, and retirement accounts. We have a good income with upside potential. The house is 1.375 million, so we'd need about $500,000 down. This would cut our savings rate significantly, but we'd still have $650,000 or so left invested, which likely grows to 6 million by age 67 with a modest savings rate. More uh more than enough for a secure retirement. Our current home is great with a 2.8% mortgage and high savings potential. Financially, staying put is easy, but this opportunity offers a dramatic lifestyle upgrade. I'm weighing whether it's worth pursuing, spending more now and saving less for the sake of a higherend home and life for our family. >> I >> This one seems pretty cut and dry to me, but I'm curious to hear what you guys say. >> You think so? Okay. I think it's basically impossible to put a price on the feelings you get from a home you truly love. Um, so it sounds to me like this is a dream forever home. I think that's a big part of the equation. Are you can you see yourself being here for 10, 15, 20? >> We have a a chance to upgrade our life significantly and we can afford it. Should we do it? Right. >> Right. And they have and they have obviously great amount of assets. They're millionaires by in their early 30s. You're moving from a liquid to an illquid asset. So that's that's one thing, but it's not this is not like blowing your money on something. This is moving from one financial asset or a group of financial assets to another. Um, and you could have lower returns on the house at the stock market. Um, I have a couple questions. Why does the down payment have to be so large? They said 500k down payment on like a uh what a 1.4 $.4 million house. That's 35% or so. I don't know why can't he put 20 down or 10% down. Um, also this is a this is coming from the parents. I hope the parents are giving them a good deal on the house, right? Uh, below Zillow asking. >> Yeah. At least 1% discount, right? >> Bill, is there a better way to transfer this asset from parent to child or is it if the parents need the money, they need the money and sorry, that's it. Like is there is there a better way to do this? >> In order to be able to answer this question, I'm going to need more information from Alex. If he could write six more paragraphs about all the details about the house, I think we'd be in a better position to answer the question. >> Or do you do you leverage the grandkids against the grandparents to say, "Hey, give us the house or you never see your grandkids again." >> Yeah. Drop them off. >> Yeah. I I think you Duncan, I'm with you. This is a kind of a slam dunk no-brainer. Uh particularly if you're buying the house from mom and dad. I mean, already you're getting a 5% discount because you're not paying a real estate commission on a million-dollar home. I would guess you're not going to close through a realtor. This is going to be a drug deal between parent and child. Yeah. Yeah, I mean there's a lot of flexibility. You could you could do a mortgage with mom and dad, right? You could just make the payments to mom and dad presuming they still own the house. There's a lot uh that you can >> Yeah. They might have a low rate on the house, right? So you could effectively transfer it over somehow, right? >> Yeah. To be 31 with a million dollars of savings. Like this is this is a slam dunk no-brainer quality of life issue. I'm wondering what they're doing with mom and dad. Are they shipping them to El Salvador? Like what is what is happening here for them to benefit from from >> No, mom and dad are buried in the basement right now. Wait, [laughter] what if what if that's Wow, that's a Halloween comment. What if uh what if what if their their condition is they get to continue living there in the house? >> Yeah. Homestead act. Yeah, Florida has a pretty generous homestead act. >> Here's the only here's the only potential awkward situation. You move in and you like renovate the kitchen. And mom and dad go, "Whoa, whoa, whoa, whoa. Hey, we like the kitchen. >> We really like that teal and the the eggshell." >> Well, but don't they save it as a newish house? >> Yeah, newish house. I This does seem a little bit strange to me, but it seems like a match made in heaven. I mean to me, right, cuz Graham, you get to keep the house and the family the whole thing. So, two things. One is that yes, you could do some family drug deal, like presuming that mom and dad don't need the money and are going to not need the down payment somewhere else. You could definitely do something familyto family and and do a transfer. There's there's nothing illegal or wrong with that because ultimately this isn't a business property, right? I mean, this is a personal transaction. Um, second thing that I would like to just throw in, Daniel, if we could chart on the house that you own with a 2.8% mortgage, that is like 3% below burough interest rate. And I just did a quick analysis of what it would cost to own a 30-year mortgage on a 2.8% loan compared to market rate at 6%. You're talking about $400,000, Ben and Duncan, of interest that you would otherwise not be paying. >> So, wait, is this you playing devil's advocate here? >> I'm throwing it out that like why do you need to sell the house like in the first place, right? I mean, that could flip into a rental property or again, chart off mom and dad need someplace to live and you have a great great property to do that. Like, you could just do a swap. >> You're trying to get them to lever up on tons of real estate now. Hey, Florida real estate's never going >> and dad's home. Keep your old home >> as far as I'm aware. But no, my point is there's a lot of flexibility for Alex. But I just I would I would be doing this deal tomorrow. Keep the house in the family and and have a good good life by the poolside. >> So yeah, if if mom and dad need the money, they could essentially just move in and pay them rent. >> Yeah. >> For the foreseeable future. >> It seems like everyone in the chat is basically saying, "Do it. Why would you not do this? You have to do this." Um I tend to agree like the the comment of, "Hey, listen, you're still young. You're going to be look even if this is a more expensive house, you'll grow into it. your your assets will grow, your income will grow. >> I especially if this is a dream home situation, if you can get in your dream home in your early 30s, like do it. You have to do this. >> Totally. And I have family nearby, too. Just love to have some extra child care. I think we're very fortunate to be in the position that we're all in. But yeah, I was not 31 in this position. So, good for us. >> And you already and you know the pros and cons of this house cuz there's sometimes you move into a house and you don't know like, oh gosh, we did not plan for this at all. I can't believe in the backyard or the the loud neighbors or whatever it is. You know, all the bad stuff probably. >> Very good point. And there's never been a weather situation to upset anybody in Florida. So, yeah, I think it's a win-win all around. >> That's true. Hurricanes are fake, just like birds. All right, next question. >> Oh my god. Okay, up next, we got an anonymous one. Uh, I have a capital loss carryover of around $90,000. I know you can deduct a maximum of $3,000 each year. Besides the obvious, making some gains to offset the losses, are there any ways to claim more than $3,000 per year on my filings? Or barring a policy change, am I stuck waiting out the roughly 30 years it'll take to use them up? >> All right, this is an anonymous question, but this is really Duncan with his Oolie shares. Um, [laughter] >> no, this is this is uh further than further than I would ever go. >> All right, I think Bill, we've talked about this before. That 3,000 number always seems so low to me. I don't know why it doesn't increase. Whatever. I'll put it in my complaint jar and burn it. Um, but this is your time to shine. What's the best way to accelerate these use of losses? Let's do it. >> Great question. So, just to lay down first, what do you think they did to lose this much in the market guess? >> Uh, some some crypto thing. I mean, that would be my guess. >> Oh, crypto. Okay. I was going to say an altcoin or Yeah. meme stock from 2021. There's a lot of stocks that are down like >> company stock. Yeah. Yeah. Because this is the idiosyncratic risk, right? We all we all like to talk about the stocks that go up, but they're forever. >> Well, there there's a company today, Fizerve. It's in it's in the S&P 500. It's down 42% today or it was at one point. It's down 70% from the highs and this is in a bull market. So, yeah, these individual stocks, who knows? Yeah. >> Yeah. So, section 1211 has been in the tax code since 1978, Ben, uh roughly the year that I was born. And when the geniuses back in the 70s wrote that into the tax code, they did not adjust that number for inflation. >> You would have think in the 70s they would have thought of inflation. Hey, it was kind of running a rampant at the time, right? Um, but yeah, but for 78 for for 45 years, 46 years that uh can we chart on here, Daniel, just to show the people that number would be $15,000 today had it been adjusted for inflation. To to me, my point is this is the tyranny when you have these these pensions that don't have a cost of living adjustment sounds really good, right? To get a fixed number. But if you fast forward 10, 20 years at 5, 6, 7, 8% inflation per year, it erodess purchasing power and it erodess a tax deduction. Hence, count deduct law is here, >> right? So, what do they So, what do they do? Like he he said besides the obvious of making some gains, but yeah, is this just um the sale of a house, the sale of a business, like what exactly are we talking here? >> Yeah. So, to hit on an question, I'm going to call him Steve for the purposes of this conversation. Steve, you got a couple of options, but basically, it's it's limited to to to what you can do on the capital side. The IRS roughly recognizes the tax code recognizes five flavors of income. You have your ordinary income, wages, you have interest income from dividends, you have uh capital gains, which is the bucket that you'd focus on, and then like passive rentals, IRA, annuity distributions. There's really only one that you can apply here. There are a couple of things that you might be able to investigate. For example, you can look at business gains if you happen to run a business or have some property. Something that comes up a lot is if you depreciate uh let's say section 12 uh 121 uh 1231 property, those gains can be rolled in. If you happen to have a rental car, >> Bill could easily make up numbers and we wouldn't be able to call on it. This is section 20112. >> Hey, my tax heads know. My tax says know what's up. In fact, Bill Arts, shout out to Bill Arts. He's always like, how do you remember all these things in the tax code? It's our it's our business. This is the business we chose, gentlemen. Um, but yeah, partnership gains or installment income. The one thing that comes to mind is just purchasing, let's say, a broad basket of stuff because if you happen to buy 10 stocks, half of them go up. You can effectively gain harvest, right? which is an interesting thing to do to help to whittle down to the deduction. But yeah, you're basically stuck at capital gains. That's really all you can do. >> So if he has a if if Steve has a brokerage account and wants to sell it because he's going to use to buy a car, take a vacation or something. >> Yeah. Take it from whatever the biggest gain is and then offset the loss. >> Take it taxree and then sit down and write your congressperson that's not at work right now because the government's shut down, but when they come back, this this would be something that I would love to see addressed in the tax code. Can can I ask someone who's definitely benefited from uh being able to write off losses, not to brag, um but like why is this even a thing though? Isn't it kind of encouraging like speculation and sometimes bad behavior? Would that be your argument? >> You want you want risk takingaking, right? I think it's a good thing. So people >> No, I think it's a good thing. I'm just saying the other I'm saying from a policy standpoint like why would they want to to do that? >> Yeah. I benefited from it. I like it. But >> $3,000. Yeah. No, this came up recently. Connor at Bloomberg wrote a great great piece about like Texas real estate and one of the things that Texas has people think Texas is a no tax state and it's a no income tax state. Property taxes are pretty high in Texas and one of the things that's been driving uh rent prices down and property prices keeping a cap on them has been the high property tax with high carrying cost and so different taxes have different flavors and come in different ways. I kind of agree Ben with your point. You would want an efficient use of capital and if you happen to have a tax laws you'd want to be able to book it and not kind of hold on to it forever, right? So, I do think giving people the incentive to realize losses, redeploy that capital more efficiently would be good tax policy. It's just our our Congress folks, our folks in Congress, they don't legislate based on what makes sense, Duncan. They legislate based on look what looks good on TV, unfortunately. And that's the reality of >> part of it is like we do it this way because we've always done it this way. >> Yeah. Yeah. Which is the worst way to do something. >> When will we get to write off unrealized losses? [laughter] >> The inverse of a wealth tax. Yeah. I I don't know if you want to open that Pandora's box, my friend. >> Yeah. I know. >> All right. Next question. >> All right, up next we got uh Dan's in on Slack here uh making a good point. He said, "Wouldn't that money technically be coming back to you one day in the previous question if you're paying your parents for the house?" Technically, >> that's true. That's what I would say. Just write it off, Mom. Dad, it's part of my inheritance. Don't charge us anything basis. Yeah. >> Yeah. Yeah. >> Yeah. Alex, that's >> good point, Dan. >> All right. And the next question is from another Dan. >> The last few years, my wife and I have been fortunate enough to max out our 401k and Roth IRA contributions. However, we're now expecting our first child, and I'm seeing a tough decision in the near future. Do we save for our retirement or save for our child's education. If we max out on retirement contributions, we won't have much left for a 529 account. >> My wife and I are likely are likely to hit the MAGI, is it magi? >> Mi cap. >> It is today. >> Okay. Are likely to hit the magi cap for Roth IAS in the next few years. So maybe it makes more sense uh to max our retirement accounts while we can and switch to loading up the 529 account in a few years. >> My usual advice on this is put your oxygen mask on first, right? You don't know what college is going to be like in the in 18 years. Uh the other piece is you don't have to go all or nothing. You could you could start off low with your 529 contributions. Do a 100 bucks a month, right? Do 150 bucks a month. It doesn't have to be a lot of money. over 18 years. The compounding. My oldest daughter is 11. And the the amount of money I put in is is tiny compared to how big her account is because I've done it since she the day she was born. Every single month I put it I put an amount. It's a few hundred bucks. I think a couple hundred bucks. It's not a big amount. And I can't believe how much bigger the account size is. So I think part of it is just starting. You don't have to start with a big amount. You can you can increase it over time. Maybe in a few years once you hit that Roth cap then you decrease those and then you increase the 529. But it doesn't have to be all or nothing here. >> Yeah, Dan is on to something here. Obviously, if you had the choice, you would just fund everything, right? You max fund all your accounts. But in my opinion, Ben, if you have to choose, I would start with the retirement assets. And exactly like you're saying, a small drip into a 529 does make a lot of sense. But I think if you have to choose, I would prioritize retirement savings. Ben, what if I told you that there's a type of account that you can fund with after tax dollars and then you can take distributions and get your basis back taxfree 18 years in the future, maybe when your kid goes to college. Ben, would you have an idea of what type of account this is? >> Does it have numbers in it? >> It does have numbers and it is a Roth IRA. Um, but you can also if you're funding traditional IAS and if you do a 401k rollover, you can wave the 10% penalty on distributions for education. So to me, a retirement account, one of the special purposes can be things like education for you or your child. Therefore, I would prioritize those types of accounts, Dan, if you have to choose. >> All right. Someone in someone in the chat said, "Put your oxygen mask on first." So, they nailed it just like me. Um, >> yeah, he uh Akbar actually said that right before you said it, so you were like, "Yeah, great." >> The other the other piece is you can turn a 529 into a Roth if you don't use that money. >> It's true, >> right? >> That's true. For the benefit and I talked about this last Yeah. for for So, but yeah, I >> yeah, a lot of options. Yeah, but I think looking at the state, Dan didn't mention which state that he's in, I don't believe. No. Um, and therefore, I I would look there because if you do get a tax deduction for the state, I does I do think that helps move the needle a little bit towards the 529, but very generally, yeah, because a 529 can really only be used for college outside of the $35,000 rollover. Again, I would always prioritize the the the retirement account. >> All right, we talked about the step-up basis. We have a question on that. Actually, one more. Let's do it. >> Let's do it. >> I like this question. Okay, last but not least, we got one from Rich. I'm trying to talk my wife into buying a vacation home in Florida. Florida >> and want to use Bill's expertise as a way to persuade her. We already own a primary residence, have a not to brag level of net worth, and plan on >> What do you think that is? Like 2 million and higher. Not to brag. >> Yeah, probably. Right. Florida. Yeah, >> depending on your age. >> Yeah, I mean, actually, yeah, in Florida it could be even lower, I guess. Pretty low cost of living overall, right? Other than Miami, I guess. Uh, let's see. And planning to retire in 4 to 5 years. I want to buy now so we can enjoy the place while we're still relatively young, late 50s, early 60s. She's worried it's too much of a financial commitment. I'm trying to close the deal by showing her this will be great for estate planning someday for our kids. When they inherit the place in 30 years or so, God willing, they get uh they get the step up basis on the home. Buying a vacation home is good for the next generation, right? Does this argument hold water? Please say yes. Great question. Really, really, really good writer. Uh, so, all right. I This kind of makes sense to me, but like what types of assets or accounts do you actually get the step-up basis for, Bill? Because the step-up basis is if if Rich died and his vacation home was worth a million bucks in Florida, >> but he paid 500 grand for it to for his kids, the cost basis is a million, not 500 grand. Correct. That's how it works. Step-up basis work. >> That's correct. >> So, what else do you get a step-up basis for? Very generally, it's it's more useful to talk about what you don't get a step up in basis on, Ben, because it's retirement accounts. >> Yeah. Anything except for retirement accounts, IAS, other tax qualified accounts, uh annuities, you do not get a step up in basis on or if you set up a a non-grant trust, uh a trust that is not part of your gross taxable estate, meaning non-revocable. Uh those are not part of your estate and therefore they do not get a step up. But just about everything else does, >> right? Um you could make this case though, I think, if you wanted to. Hey, it's going to be worth more in 30 years as long as Florida's not underwater. Um, so I I think it's a I think it's a I got to give him credit for using he's going to bring you as in as the mediator. >> I know. >> Um, >> but I I guess it makes but the other thing is like you make the case that listen, this is a place for 30 years we're going to spend time with family. We're going to get to the kids and the grandkids can come visit us in Florida, wherever they live now. Um, that's the case you make. You make the family case, not the financial case, because guess what? The financial case is not going to win you any points. It never I' I've used those kind of arguments before. Never works. Yeah. >> Wait, what if you what if you let your kids manage it as an Airbnb when when you're not using it and that teaches them responsibility and gives them like a first kind of job? [laughter] >> Yeah. My answer is pretty clear. Rich, Mrs. Rich, it sounds like you've been successful. Your your husband's a great writer. And my opinion, just reading a paragraph here, not advice. You're probably going to run out of time before you run out of money. So, I I do it. You know, life is short, Ben. something you've written very eloquently on through the years. I'd pull the trigger and figure it out later. That'd be my advice. >> We're just giving a blanket pardon to everyone on today's show. [laughter] >> Exactly. >> You get a house. You get a house. You get a house. >> All All in the Fort Lauderdale area. However, I I will mention, Ben, we did have a conversation with a client yesterday, me and Handsome Jay. Tiny, uh, here in the office, and one of the things that they benefited from in a situation like this, they moved from Minneapolis to Fort Lauderdale. they they figured out after renting a property for the last year that they do not want to live in Fort Lauderdale. Um so one of the things I would generally always recommend and this goes back to a client in roughly 2011. Uh this was a priest actually. I was looking at retirement home in in Delaware. Uh the community they were looking at they ended up under help partly by my advice not buying the property. Hurricane Irene came in and leveled that whole town. Right. So that would have been a really emotionally distressing event. I I think generally, Ben, it's not it's not financial advice, but I would generally always live somewhere for what do you say a uh six months, maybe nine months, maybe a year, >> more than a week vacation. I agree that you want to make sure >> priest I was thinking exorcism. I thought that's where you were going with that, but >> Right. Yeah. They they avoided the storm, Duncan. So, uh somebody's looking out for him upstairs. >> Yeah. No, that's good. My We we we went to beautiful Ann Arbor, Michigan over the weekend. My wife said, "Man, the downtown here is bustling. Why don't we like retire to a place like this for a little while?" I said, "Why don't we like rent here for a while first?" Yeah. >> And then see if you want to live somewhere because that you have to get a sense of I agree the sense of the area and community and what you like and don't like. That's good advice. >> Yeah. I I think from afar it's very difficult, right? You're you're house hunting on Zillow. You're trying to picture, okay, how long is it going to take me to get little things like how far is this supermarket? But Duncan was talk bemoning the quality of bananas before. What if what if John Grayson is getting, you know, New York quality bananas? Like that might be really important to you if you're a banana head like Duncan. >> Yeah. I mean, I'm just saying the bananas have gotten worse over the last year. I don't know. >> Do they make banana milk? How far do we want to take this? >> I think there actually is something that Yeah, but yeah, that's it's not it's not milk, though. It's not as good. Uh, I have a question. >> Duncan's a Duncan is just as bad of a banana picker as is a stock picker. How do bananas get worse? Come on. >> Yeah, avoid the brown ones. >> I'm saying you buy now you buy a bunch of bananas and they look perfectly fine. You get them home and half of them are bad on the inside. What's crazy to me, pumpkins, pumpkin prices just haven't gone up for the last month, and I just think it's time, right, to buy pumpkins right now. And the price will never go down, right? >> And and uh coffee. Coffee is going up. >> Uh I I have a 529 question. Going back to question five for a second, I just became an uncle, not to brag. >> Congratulations. >> And so I was thinking about like if I wanted to gift some shares of Oakley, can I do that in a 529 or is it just like you you have access to certain funds like mutual funds and Do you want to bring the pain on your new niece or nephew? Um, imagine. >> Exactly. What if they're allergic to oats? Yeah. >> Why do you want to bring them into your world of pain? >> Yeah. Each each state manages their own 529, Duncan. And very generally, I've never seen a 529 that allows individual stock investments. Mostly because they're trying to keep that crap out of people's. >> So, not even like a 3x levered ETF. >> So, ask ask your is it your sister or your brother who had the child? >> It's it's my wife's brother's wife's. >> Okay. So ask them to give you a link every year on their birthday. They'll give you a link where you can make a contribution and every year on their birthday make a 529 contribution. You'll be the favorite uncle. >> Exactly. >> Exactly. >> They they can send you a link and it allows you to It has their account number. All you have to do is say, "Hey, I'm going to give a hundred bucks or 50 bucks, whatever it is." And it's really easy to do and you can make the contribution on their behalf. It's a great feature. >> Not to brag, I I don't I don't have a modest house. It's relatively I enjoy where I live. I'm very privileged and very very grateful for for the hard work and hard work and clients. >> That might be a first a big time not to brag from Bill. >> Yeah. But but where I'm going is a lot of generous people have gifted us a lot of things to the kids throughout the years. I would avoid large large pieces of plastic because where that all ends up is the basement and then the landfill. So Duncan, I think what I'm trying to say is I think education is probably the most important, you know, thing that we can we can do is promote education for kids. So any amount that you're donating to your family's education is is very much well worth it. Seth in the in the chat says that the child is going to community college thanks to Oatley. [laughter] >> Cursed. >> That's pretty good. >> Yeah. >> Hey, hey, trades are in. Trades are big. >> Thank you everyone in the live chat as always. We appreciate your comments, your jokes, your questions. If you have a question for us, ask the compound show@gmail.com. If you have a question for Bill, put his name in in the uh right in the introduction there. >> Three times and I appear. That's right. >> All right. And we will see you next time. Thanks everyone. >> See you everyone. >> [music] [music]
How to Time the AI Bubble
Summary
Transcript
Welcome. This is Ask the Compound, the show where you ask and we answer. I am Ben Carlson. A lot of people are fairly certain this AI capex boom is a bubble. Let's say you feel this way too, but you want to go along for the ride anyway, and you want to find an off-ramp when things turn. How would you go about this? Stop-loss orders, trend following, momentum indicators? We're going to explore that on today's show. Please stick around. [music] Someone in the live chat says that's a toppy title for today. Um, fair. Ask the Compound Showgmail.com. If you're in the live chat, give us give us a question. We'll take it live on the air. On today's show, we discuss questions directly from our audience at the compound about getting out before the AI bubble pops. Filling up your Roth IRA five years before retirement. Buying your dream home. How much is too much? How to utilize capital loss carry forwards in your portfolio from Oley or other stocks? Should you prioritize saving for retirement or your children's 529 plan first? And then should you buy a vacation home for estate planning purposes? >> Since since you mentioned it, they reported earnings today. How do we do >> uh Ebidoth ibidog growth uh some good revenue in uh Europe and and China US lagging behind but uh yeah >> how the stock some good stuff the stock is down >> okay that's all I wanted you you said EBIDA first that's what I knew was a bad quarter all right today's show is sponsored by public is the investing platform for those who take investing seriously you can build a multi-asset portfolio of stocks bonds options crypto and more on public. 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 is not just a feature. It's woven into the entire experience. You get portfolio insights. You get earnings call recaps. Public gives you smarter contexts at every touch point. Plus, earn an uncapped 1% match when you transfer your portfolio. This includes IRA transfers, rollovers, even initial contributions. Fund your account in 5 minutes or less. Visit public.com/ATC. That's public.comc. Paid for by public investing. Full disclosure is in the podcast description. All right, we got a full show for you today. Duncan, I think your background is growing. It looks very nice. >> Oh, thanks. Yeah, I need to fill it out still. I'm trying to come up with some some stuff to to fill it in. >> And we're both wearing plaid shirts. I believe that's that's fall for us some match because it's cold. >> It's cold. >> All right. >> Yeah, let's do a question. Speaking of Oivo on earnings, I was going to ask you, this might be more of an accounting question for Bill, but what does adjusted Ibida mean instead of just Ebida? >> It just means they add in these expenses and take these ones out and hey, this is not recurring and this is, you know, they try to try to make it look more normal. Uh, it's just the way for them to make it look better. How's that sound? >> I figure that's most earnings reports everything is to make it look better. >> X this, X that. >> Yeah. Gotcha. All right. It's only down two and a half%. You're not doing too bad. All right. Question. Not too bad. Okay. Uh, up first today say we got a question from Bill. Could you talk about how to use momentum indicators and stop losses to profit from an AI bubble? Having been an investor during the 90s, this feels like the early innings of a bubble. Uh, if this is one, that's a Grand Rapids hedge, right? >> Yeah, fair. Uh, I think I think there may be relatively low-risk way to profit without picking individual winners or timing the top by using momentum indicators and trailing stop-loss orders on broadbased passively managed ETFs. >> All right, I'll be honest. I don't have a ton of experience with stop-loss orders. I think it can make sense in the right place. Hey, 5% below, 10% below, and you keep moving it up as the market goes higher, right? So, you get that trigger. Obviously, >> for our young and new people here, that just means you're you're limiting how much you can lose. basically the stock >> the stock falls 10% >> trigger hits you sell. >> Um you can do that automatically >> on most brokerages. Um so you just have to move it up. You also have to be comfortable with the fact that you could get taken out from a short little correction then the market moves higher. So you have to be comfortable with that risk. So not a lot of experience for me with stop losses. I do have experience with trend following. We utilize a trend following strategy at RI holds for our clients. I personally have 10 to 15% of my portfolio in this strategy that we call goldender. Um, I'll give you a quick history of trend following using um, some stuff from Mev Faber. So, in the spring of 2006, Meb Faber, friend of the show, published a research paper called the quantitative approach to tactical asset allocation. Not the greatest title in the world, but it worked. So, the idea was you use a 10-month moving average. So, if you're familiar with a 200 day moving average, it's pretty similar. That's about 10 that's about 10 months. So, basically, and that dictates that moving average dictates whether you're in risk assets like the stock market or cash like T bills. So the rules are pretty simple at month end. So this is a monthly indicator. Some people look at it daily, weekly, monthly tends to work best because it smooths out a lot of the back and forth. So if the current price is greater than the 10-month moving average price, right? You just take the previous 10 months, average them, right? If the current price is higher than that average, you stay invested in the risk asset. If the current price is lower than that 10-month moving average, you invest in cash. And that's your signal, right? If it's below, you either sell or stay in cash. If it's above, you either buy or stay in stocks. So, the idea is that if you're in an uptrend, you buy or stay invested because in an uptrend, good things can happen, right? If you're in a downtrend, you sell or stay in cash because there's a bigger wider range of outcomes that can happen in a downtrend. People freak out. They panic more. There's more volatility. That's the idea. So, and the idea behind the strategy overall is you're trying to dampen volatility and really avoid the risk of a severe market draw down risk asset. So, we're talking like 40 50%. You're trying to take that off the table, right? Um, and the timing for MEB could have been better. He published it, I think, in May of 2006 was like the working paper. I think it got published in one of the journals of financial something in 2007. And so, a little more than a year after he first published, the stock market peaked from the onset of the great financial crisis and fell almost 60%. And so, a few years later in 2012, Meb redid the paper and said, "Hey, how did it look going back after we have actual data? So, how do we take the back test? See what it looks like in real time. All right, Daniel, let's do a chart on here. This is the S&P versus the timing indicator again that using a 10-month moving average. You can see in 2008 that flat period of going to cash when the stock market totally fell out of bed and the timing indicator worked pretty good actually, right? Uh, next chart. These are the long-term return profile for trend following versus buy and hold. You can see the returns are pretty similar over time. Volatility is lower. So, I say it's about a third lower for timing. >> Wow, that max draw down though. >> Yeah, the max draw down's still there, right? Like you I think I think that would happen in the 30s, right? Because there are some whipsaw periods where you have a big up and a big down. I'll get to that in a minute. Um the point though is that it's you're you're hoping for stock-like returns with less volatility, which sounds like it's almost fake, right? And I'm going to get to some of the downsides. Let's do one more though. Um next chart. This is from Meb's paper. He looks at the worst years in the S&P versus the trend following system. You can see this is really where this strategy shines in those really really bad years. Um not too shabby, right? Um all right, chart off. So that's the idea and it worked. The timing of MEB's paper again couldn't have been better. Uh put the guy in the map. It's, you know, kudos to him and I So I wanted to look at this and show kind of a different way of visualizing it. So Daniel, let's do a chart onto the GFC one. So this is this is a GFC and this is a simple 200 day moving average. Again, 10 months, 200 day, pretty similar. Sean, a research analyst, did this for me. Now, what this shows is the the red line is the moving average, the blue line is the S&P at month end. Okay? So, if you looked at this on a daily basis, you probably have a lot more in and outs. So, you have that that's like the trade-off. Um, so you look at this on a monthly basis, you can see this the sell signal there, I think, happened. You were down probably 8 to 10%. In 2007, the downtrend set, and then there was a couple times when it almost came back, but it never did. and you had just this waterfall lower and it stayed out the whole time. And then you can see there's a big huge comeback. I think stocks were up, I don't know, 20 to 30% eyeballing it before you got back in, but you missed a huge huge part. So you didn't get out of the peak, you didn't get into the bottom, which is obviously impossible, but you you missed the majority of that crash chart off. So that's a pretty that's pretty good for that kind of severe correction, right? So let's look at the dot bubble now because this is for severe market corrections, right? put the next chart on. Um, this is heading up to the.com bubble. You can see there's a couple times where we had false positives, right? You sold in 98, got back in. You sold at the end of 99, got back in. Right? The red is sell, green is buy again. But in 2000, you got out again. 8 to 10% below the high. There was in 2002, you had a slight ramp up. You got back in, and you got back out immediately. Um, but then you missed again most of that big downturn which was like 50%. Chart off. So the question Duncan is why would you ever invest in anything else if you have this strategy that doesn't time things perfectly because nothing does but it gets you out of the meat of these huge I say it takes away 70 to 80% of these big corrections of the last two huge ones that we've had. Why would you ever invest in anything else? Here's the thing. Trend following is a wonderful hedge against these severe market downturns. Again, these were both 50% plus crashes, but these severe market downturns don't happen that often. Crashes are rare, right? Let's look at 2022. >> Well, and in general, do you know, not to put you on the spot, but in my, you know, fairly limited experience being invested in the stock market, paying attention, it seems like the crashes happen really fast and corrections the same. It's like before you even have a chance to react, it's already down 20% or something or 18%, you know? It's >> that's the hard part. If you if you have a 1987 crash situation where the stock market fell 20% a day, guess what? This strategy is not going to get you out. >> Right. >> Right. Co is pretty fast, too. I think this stuff triggered at the end of February and COVID, so you miss a lot of the March stuff. Um, but you're right. If it's a if it's a really fast crash, unless you're looking at this on a daily basis, which means more transactions is tough. So, let's look at this on a let's let's look at the downside of this. Let's look at 2022. I not the downside, but just when you have a bare market, but it doesn't completely crash. So, you missed a decent chunk of the volatility, but look at how many times you get in and out. You get out, then you get back in, then you get out, then you get back in. And it's hard because you get, they call it a whipssaw, right? When you have volatile markets, you could have a really big down month and you get out and then the next month comes back really quick and you get back in. And they call that a whipssaw. >> That's why I use 10-minute moving averages. >> Yeah. Seven minute abs, right? um chart off please. So again this this is the type of strategy that typically will sell when you're down call it 10 to 12%. It'll buy after the market rallies 10 to 20% maybe you know typical but again you you mentioned if markets move faster it doesn't necessarily work. So that's the point there are downsides to this. It's an insurance premium you're paying because most of the time when the stock market falls 20% it doesn't fall 30 or 40%. Most of the time when the stock market falls 10 it doesn't fall 20 30 50%. those are rare. Um, so you're most so you don't buy insurance on your house hoping that it burns down, but sometimes the stock market does burn down and that's when trend filing can protect you. So those this is why people really liked it after 2008 because listen, I don't want to sit through a 60% decline. This is nuts. So a lot of people use it as a behavioral release valve, an insurance policy. Um, and the other side of that insurance policy is if as long as stocks are in an uptrend and going up, you stay invested. So, that's one of the really good things about if you're trying to ride this this bubble higher, if that's what it is. Um, that's the thing. The other part of it is though, you better do that. You should probably do this in a tax deferred account because if you're going to be jumping in and jumping out, you're going to have short-term capital gains potentially. >> Granted, I guess then you lose tax loss harvesting ability, right? >> Yeah. And that that's the problem is the taxes can get you. So, you probably want to do this in a tax deferred account unless you're willing to pay those unless the behavioral piece and that's what we tell our clients is that this is a behavioral release valve for your portfolio. If you have a strategy like this as a portion of your portfolio, we don't use it for all of a portfolio, then it allows you to stick with the rest of your portfolio. Then it's done its job, right? It's it's the volatility reducer. But to your point, if it's a very swift decline, it's not going to catch everything. And again, if you had a down 20% month and you got out and the next month it's up 20%. While you're out, now you hit the decline and you miss the upside. So, there are periods where this thing, even though the long term looks pretty darn good, um there are going to be situations where this thing doesn't work and you're on both of the wrong sides. And that's when that's when you get dinged. And I think that's what happened with a 50% crash and that big draw down over time. Um I do have a blog post on this if you want a more deep dive on trend following that I call my evolution on asset allocation. I have links to tons of research papers in there from not only MEP Faber, but Alpha Architect and AQR and all these places. Um, I know there's a lot of people who follow us who say, "I I would never do anything like this. I don't need it. I can sit through stack and steady-handed. I don't need it." Other people say, "Wow, this is great. It's again a behavior release valve. Um, I like having the volatility protection. I like having that insurance policy." Um, it's not for everyone, but for people who understand how it works, I think it can be a good compliment as like a way to diversify across market environment as opposed to market, you know, uh, asset class or strategy or whatever. >> I'm going to ask Charit Matt to run this, but instead of just buying and selling, it's going to be buying the, uh, triple levered S&P and selling uh, I mean, and then buying the inverse triple levered. >> Okay. you want you want the more extreme interesting to see to see now again >> to some investors this is antithetical like I could never imagine trying to time the market like this um >> now I think because it's a rules-based system and I think you're you're diversifying by uptrends and downtrends uh maybe you'll quibble with the timing stuff but it's not like you're just guessing when the market's going to go down you're you're you have to follow this thing to the rule of the law you can't say like well it says I should get out but I'm not going to or it says I should get back in but I don't feel like it that you can't do that you have to follow the rules to a tea. Come hell or high water. >> And you're you're against market timing, but I'm guessing you would you would uh give your blessing to buying whenever the market's down 20%. Right. Like that's historically buying buying in corrections and buying in crashes has been a winning strategy. >> Yeah, of course. That's the best time to buy. Yeah, of course. >> Also, Me Favor uh grew up down the street from me. Winston Salem, North Carolina. >> Oh, yeah. He seems like he should be a California guy because he lives there now, but he like he's a Virginia guy, right? or what did you say? Carolina, >> North Carolina. >> From Virginia. >> Uh maybe originally. I just know he went to high school and went to Salem. >> Oh, okay. All right. Next question. >> Okay. Up next, we've got a question from Mark. Bill recommends that we go Roth IRA as much as possible, but we've been above the Roth income limit uh for the past decade or so and have been pouring money into our 401k instead because it helps with our current tax liability. Recently, we started to split our 401k contributions between traditional and Roth. We live in Oregon and probably have five to seven more years of working. Household income is $350,000. We have $2 million in two rollover IAS and another 800,000 in our 401ks with maybe 5% of that Roth net worth of 3.2 million. Uh do you think this is the correct strategy at this point in our working lives? If not, what do you recommend? >> All right, David in the live chat just said Bill three times and just like Beetlejuice, that means he has to appear. >> It's true. There he is. >> All right. [clears throat] Hey, >> I want to thank uh Rholswwell colleague Daniel Perah. Uh because as you gentlemen know, I have a face for radio and uh he really helped me out here. >> Yeah, you're >> looking good in looking good in the studio. >> I didn't get the pled memo though. >> Yeah, sorry Bill, you're you're all green. Uh a lot of questions directed towards Bill Sweet lately. So, um Rob Pasarella on our team uh is doing a project for the show where he's uploading all the questions into like an AI and we're going to try to do something with it. But he then took all these questions we've looked at over the years and did a word cloud. And can you guess the finance word that's been used more than any other in our questions? Bill >> internal revenue code >> taxes. >> Taxes more than more than anything. Um people >> guarantees in life. Yeah. >> Yeah. I think this is a loss aversion thing because people there's an old Jay Moore bit about when he got married to his wife. Um it wasn't that they they got along because of the things that they both liked. They got along because of the things they both hated, right? And I think that's that's why that's a tax thing. People don't like saving on taxes, they just hate paying them. >> Yeah. Right. And like Jay Moore, I have a hate hate relationship with my spouse. Um but yeah, scare scariest uh costume though. I was thinking IRS agent. Like where where are you guys for Halloween on Friday? Because that that's where I'm going. >> I mean, you should do that every year, right? >> Yeah. To your jack practice. >> Yeah. Death and taxes. Um Ben, I love I love Mark's question. Uh Mark to me gentleman is right on the cusp between when a traditional makes sense a Roth would make sense. He's right in in square in the middle of a 24% tax bracket. The only question I would love to ping back to Mark who gave us a lot of information by the way is are we going to stay in Oregon? Oregon secretly is a very high income tax state. You're at 9.9% once you cross roughly $200,000. >> Wait, what do you consider a high rate for state taxes? >> A high rate I would say is anything above seven. That that's that's it for me. Yeah, I think >> what I'm at what I'm at in Michigan. >> Uh you're Yeah, you're like high sixes in the best. >> What about Connecticut? >> Connecticut about the same relatively high e coast state. Yeah, 7 8 n it ticks up. Uh but New York, California, the People's Republic out there, uh 12.3 and only the only higher state tax is New York City at roughly. >> So Phil in the Phil in the live chat says, "I live in Oregon. It's not a secret here." Uh >> yeah. Yeah. And they're looking for new new ways to tax people. So back to our friend Mark. Can we chart on here, Daniel? One of the things I I like to do is take an illustration like visuals pay the bills. And if you look at our big bloody red mark symbol again, he's right in the middle of the 24% tax bracket. We're roughly five to seven years until retirement. In my view, I'm not sure I would leverage and go long Roth here because ultimately the window between now when he's at probably the highest earnings of his career relatively tight relative to when we're going to drop down the income ladder. So, it's a bit of a judgment call. I think for me though to answer Mark's question directly, if 95% of your assets are in traditional and if you're not planning on moving out of the People's Republic of Oregon, I would probably favor more Roth because only 5% of Mark's assets are in Roth today. >> So would it make more sense to do it when he retires potentially? >> So that's the other that's the other angle. Can we chart off is that if we're moving lower in the tax brackets, right? If we stop having all that earned income and we have a couple of years basically when we before we stop working before RMDs kick in at age 73 before social security kicks in at age 70 at the maximum those are great years to fill up low tax brackets with a Roth conversion and particularly to move the needle if you're planning on moving from Oregon let's say you're saying on the west coast to Nevada a lower a zero tax state or maybe a lower tax state I think that would make a lot of sense for Mark and spouse >> is one of those states that we all say wrong isn't isn't like actually pronounced really weird like Nevada >> organ like where where would you go with this >> orgon or something? >> Oh, I don't know. I don't know. We'd have to ask friend and colleague. >> Yeah, Phil. Phil Phil in the chat tell us. >> Okay. Yeah. Friend and colleague Joey Fisherman would would be able to tell us. He just calls it a ripoff. Um that's that's where that's where he goes. >> Yeah, Duncan. I You're way off there. No way. It's Oregon. >> Well, same with Nevada. People actually say Nevada or something weird, right? >> You say Nevada. I see Nevada. Let's call the whole thing off. So someone else in the chat says no income in no tax no income tax in W in Washington. So you just move up one state. >> Yeah, no income tax in Washington. Great point. Yeah, forgot all about that, Ben. Not all of the West Coast is uh pilfering their citizens. So good call. >> All right, >> Adam Adam in the chat says above 250,000 in Canada federal and provincial is 53%. >> Yikes. >> And they're still really nice in Canada, you know, >> and and tariffs. Yeah. So that's closer to 70% once you bake it all in. Yeah, but they get the flat blue moles and Canadian >> and they tied the Dodgers in LA last night. Yeah. Yeah. We'll see. TBD. >> I watched that one. All right. Another question. >> Okay. Duncan's favorite long one of the day. >> Yeah. Up next, we got a two-parter from Alex. >> I may have the opportunity to buy my parents house, a newer 3200 square foot, four bed, three bath home with office, threecar garage, pool, and big yard in probably the nicest gated neighborhood in my area near St. Petersburg, Florida. It's one mile from our current home, so life stays the same, but it would be a huge quality of life upgrade for our family and perfect for raising kids and entertaining. We're 31 with two kids, about 1.15 million saved between real estate, brokerage, and retirement accounts. We have a good income with upside potential. The house is 1.375 million, so we'd need about $500,000 down. This would cut our savings rate significantly, but we'd still have $650,000 or so left invested, which likely grows to 6 million by age 67 with a modest savings rate. More uh more than enough for a secure retirement. Our current home is great with a 2.8% mortgage and high savings potential. Financially, staying put is easy, but this opportunity offers a dramatic lifestyle upgrade. I'm weighing whether it's worth pursuing, spending more now and saving less for the sake of a higherend home and life for our family. >> I >> This one seems pretty cut and dry to me, but I'm curious to hear what you guys say. >> You think so? Okay. I think it's basically impossible to put a price on the feelings you get from a home you truly love. Um, so it sounds to me like this is a dream forever home. I think that's a big part of the equation. Are you can you see yourself being here for 10, 15, 20? >> We have a a chance to upgrade our life significantly and we can afford it. Should we do it? Right. >> Right. And they have and they have obviously great amount of assets. They're millionaires by in their early 30s. You're moving from a liquid to an illquid asset. So that's that's one thing, but it's not this is not like blowing your money on something. This is moving from one financial asset or a group of financial assets to another. Um, and you could have lower returns on the house at the stock market. Um, I have a couple questions. Why does the down payment have to be so large? They said 500k down payment on like a uh what a 1.4 $.4 million house. That's 35% or so. I don't know why can't he put 20 down or 10% down. Um, also this is a this is coming from the parents. I hope the parents are giving them a good deal on the house, right? Uh, below Zillow asking. >> Yeah. At least 1% discount, right? >> Bill, is there a better way to transfer this asset from parent to child or is it if the parents need the money, they need the money and sorry, that's it. Like is there is there a better way to do this? >> In order to be able to answer this question, I'm going to need more information from Alex. If he could write six more paragraphs about all the details about the house, I think we'd be in a better position to answer the question. >> Or do you do you leverage the grandkids against the grandparents to say, "Hey, give us the house or you never see your grandkids again." >> Yeah. Drop them off. >> Yeah. I I think you Duncan, I'm with you. This is a kind of a slam dunk no-brainer. Uh particularly if you're buying the house from mom and dad. I mean, already you're getting a 5% discount because you're not paying a real estate commission on a million-dollar home. I would guess you're not going to close through a realtor. This is going to be a drug deal between parent and child. Yeah. Yeah, I mean there's a lot of flexibility. You could you could do a mortgage with mom and dad, right? You could just make the payments to mom and dad presuming they still own the house. There's a lot uh that you can >> Yeah. They might have a low rate on the house, right? So you could effectively transfer it over somehow, right? >> Yeah. To be 31 with a million dollars of savings. Like this is this is a slam dunk no-brainer quality of life issue. I'm wondering what they're doing with mom and dad. Are they shipping them to El Salvador? Like what is what is happening here for them to benefit from from >> No, mom and dad are buried in the basement right now. Wait, [laughter] what if what if that's Wow, that's a Halloween comment. What if uh what if what if their their condition is they get to continue living there in the house? >> Yeah. Homestead act. Yeah, Florida has a pretty generous homestead act. >> Here's the only here's the only potential awkward situation. You move in and you like renovate the kitchen. And mom and dad go, "Whoa, whoa, whoa, whoa. Hey, we like the kitchen. >> We really like that teal and the the eggshell." >> Well, but don't they save it as a newish house? >> Yeah, newish house. I This does seem a little bit strange to me, but it seems like a match made in heaven. I mean to me, right, cuz Graham, you get to keep the house and the family the whole thing. So, two things. One is that yes, you could do some family drug deal, like presuming that mom and dad don't need the money and are going to not need the down payment somewhere else. You could definitely do something familyto family and and do a transfer. There's there's nothing illegal or wrong with that because ultimately this isn't a business property, right? I mean, this is a personal transaction. Um, second thing that I would like to just throw in, Daniel, if we could chart on the house that you own with a 2.8% mortgage, that is like 3% below burough interest rate. And I just did a quick analysis of what it would cost to own a 30-year mortgage on a 2.8% loan compared to market rate at 6%. You're talking about $400,000, Ben and Duncan, of interest that you would otherwise not be paying. >> So, wait, is this you playing devil's advocate here? >> I'm throwing it out that like why do you need to sell the house like in the first place, right? I mean, that could flip into a rental property or again, chart off mom and dad need someplace to live and you have a great great property to do that. Like, you could just do a swap. >> You're trying to get them to lever up on tons of real estate now. Hey, Florida real estate's never going >> and dad's home. Keep your old home >> as far as I'm aware. But no, my point is there's a lot of flexibility for Alex. But I just I would I would be doing this deal tomorrow. Keep the house in the family and and have a good good life by the poolside. >> So yeah, if if mom and dad need the money, they could essentially just move in and pay them rent. >> Yeah. >> For the foreseeable future. >> It seems like everyone in the chat is basically saying, "Do it. Why would you not do this? You have to do this." Um I tend to agree like the the comment of, "Hey, listen, you're still young. You're going to be look even if this is a more expensive house, you'll grow into it. your your assets will grow, your income will grow. >> I especially if this is a dream home situation, if you can get in your dream home in your early 30s, like do it. You have to do this. >> Totally. And I have family nearby, too. Just love to have some extra child care. I think we're very fortunate to be in the position that we're all in. But yeah, I was not 31 in this position. So, good for us. >> And you already and you know the pros and cons of this house cuz there's sometimes you move into a house and you don't know like, oh gosh, we did not plan for this at all. I can't believe in the backyard or the the loud neighbors or whatever it is. You know, all the bad stuff probably. >> Very good point. And there's never been a weather situation to upset anybody in Florida. So, yeah, I think it's a win-win all around. >> That's true. Hurricanes are fake, just like birds. All right, next question. >> Oh my god. Okay, up next, we got an anonymous one. Uh, I have a capital loss carryover of around $90,000. I know you can deduct a maximum of $3,000 each year. Besides the obvious, making some gains to offset the losses, are there any ways to claim more than $3,000 per year on my filings? Or barring a policy change, am I stuck waiting out the roughly 30 years it'll take to use them up? >> All right, this is an anonymous question, but this is really Duncan with his Oolie shares. Um, [laughter] >> no, this is this is uh further than further than I would ever go. >> All right, I think Bill, we've talked about this before. That 3,000 number always seems so low to me. I don't know why it doesn't increase. Whatever. I'll put it in my complaint jar and burn it. Um, but this is your time to shine. What's the best way to accelerate these use of losses? Let's do it. >> Great question. So, just to lay down first, what do you think they did to lose this much in the market guess? >> Uh, some some crypto thing. I mean, that would be my guess. >> Oh, crypto. Okay. I was going to say an altcoin or Yeah. meme stock from 2021. There's a lot of stocks that are down like >> company stock. Yeah. Yeah. Because this is the idiosyncratic risk, right? We all we all like to talk about the stocks that go up, but they're forever. >> Well, there there's a company today, Fizerve. It's in it's in the S&P 500. It's down 42% today or it was at one point. It's down 70% from the highs and this is in a bull market. So, yeah, these individual stocks, who knows? Yeah. >> Yeah. So, section 1211 has been in the tax code since 1978, Ben, uh roughly the year that I was born. And when the geniuses back in the 70s wrote that into the tax code, they did not adjust that number for inflation. >> You would have think in the 70s they would have thought of inflation. Hey, it was kind of running a rampant at the time, right? Um, but yeah, but for 78 for for 45 years, 46 years that uh can we chart on here, Daniel, just to show the people that number would be $15,000 today had it been adjusted for inflation. To to me, my point is this is the tyranny when you have these these pensions that don't have a cost of living adjustment sounds really good, right? To get a fixed number. But if you fast forward 10, 20 years at 5, 6, 7, 8% inflation per year, it erodess purchasing power and it erodess a tax deduction. Hence, count deduct law is here, >> right? So, what do they So, what do they do? Like he he said besides the obvious of making some gains, but yeah, is this just um the sale of a house, the sale of a business, like what exactly are we talking here? >> Yeah. So, to hit on an question, I'm going to call him Steve for the purposes of this conversation. Steve, you got a couple of options, but basically, it's it's limited to to to what you can do on the capital side. The IRS roughly recognizes the tax code recognizes five flavors of income. You have your ordinary income, wages, you have interest income from dividends, you have uh capital gains, which is the bucket that you'd focus on, and then like passive rentals, IRA, annuity distributions. There's really only one that you can apply here. There are a couple of things that you might be able to investigate. For example, you can look at business gains if you happen to run a business or have some property. Something that comes up a lot is if you depreciate uh let's say section 12 uh 121 uh 1231 property, those gains can be rolled in. If you happen to have a rental car, >> Bill could easily make up numbers and we wouldn't be able to call on it. This is section 20112. >> Hey, my tax heads know. My tax says know what's up. In fact, Bill Arts, shout out to Bill Arts. He's always like, how do you remember all these things in the tax code? It's our it's our business. This is the business we chose, gentlemen. Um, but yeah, partnership gains or installment income. The one thing that comes to mind is just purchasing, let's say, a broad basket of stuff because if you happen to buy 10 stocks, half of them go up. You can effectively gain harvest, right? which is an interesting thing to do to help to whittle down to the deduction. But yeah, you're basically stuck at capital gains. That's really all you can do. >> So if he has a if if Steve has a brokerage account and wants to sell it because he's going to use to buy a car, take a vacation or something. >> Yeah. Take it from whatever the biggest gain is and then offset the loss. >> Take it taxree and then sit down and write your congressperson that's not at work right now because the government's shut down, but when they come back, this this would be something that I would love to see addressed in the tax code. Can can I ask someone who's definitely benefited from uh being able to write off losses, not to brag, um but like why is this even a thing though? Isn't it kind of encouraging like speculation and sometimes bad behavior? Would that be your argument? >> You want you want risk takingaking, right? I think it's a good thing. So people >> No, I think it's a good thing. I'm just saying the other I'm saying from a policy standpoint like why would they want to to do that? >> Yeah. I benefited from it. I like it. But >> $3,000. Yeah. No, this came up recently. Connor at Bloomberg wrote a great great piece about like Texas real estate and one of the things that Texas has people think Texas is a no tax state and it's a no income tax state. Property taxes are pretty high in Texas and one of the things that's been driving uh rent prices down and property prices keeping a cap on them has been the high property tax with high carrying cost and so different taxes have different flavors and come in different ways. I kind of agree Ben with your point. You would want an efficient use of capital and if you happen to have a tax laws you'd want to be able to book it and not kind of hold on to it forever, right? So, I do think giving people the incentive to realize losses, redeploy that capital more efficiently would be good tax policy. It's just our our Congress folks, our folks in Congress, they don't legislate based on what makes sense, Duncan. They legislate based on look what looks good on TV, unfortunately. And that's the reality of >> part of it is like we do it this way because we've always done it this way. >> Yeah. Yeah. Which is the worst way to do something. >> When will we get to write off unrealized losses? [laughter] >> The inverse of a wealth tax. Yeah. I I don't know if you want to open that Pandora's box, my friend. >> Yeah. I know. >> All right. Next question. >> All right, up next we got uh Dan's in on Slack here uh making a good point. He said, "Wouldn't that money technically be coming back to you one day in the previous question if you're paying your parents for the house?" Technically, >> that's true. That's what I would say. Just write it off, Mom. Dad, it's part of my inheritance. Don't charge us anything basis. Yeah. >> Yeah. Yeah. >> Yeah. Alex, that's >> good point, Dan. >> All right. And the next question is from another Dan. >> The last few years, my wife and I have been fortunate enough to max out our 401k and Roth IRA contributions. However, we're now expecting our first child, and I'm seeing a tough decision in the near future. Do we save for our retirement or save for our child's education. If we max out on retirement contributions, we won't have much left for a 529 account. >> My wife and I are likely are likely to hit the MAGI, is it magi? >> Mi cap. >> It is today. >> Okay. Are likely to hit the magi cap for Roth IAS in the next few years. So maybe it makes more sense uh to max our retirement accounts while we can and switch to loading up the 529 account in a few years. >> My usual advice on this is put your oxygen mask on first, right? You don't know what college is going to be like in the in 18 years. Uh the other piece is you don't have to go all or nothing. You could you could start off low with your 529 contributions. Do a 100 bucks a month, right? Do 150 bucks a month. It doesn't have to be a lot of money. over 18 years. The compounding. My oldest daughter is 11. And the the amount of money I put in is is tiny compared to how big her account is because I've done it since she the day she was born. Every single month I put it I put an amount. It's a few hundred bucks. I think a couple hundred bucks. It's not a big amount. And I can't believe how much bigger the account size is. So I think part of it is just starting. You don't have to start with a big amount. You can you can increase it over time. Maybe in a few years once you hit that Roth cap then you decrease those and then you increase the 529. But it doesn't have to be all or nothing here. >> Yeah, Dan is on to something here. Obviously, if you had the choice, you would just fund everything, right? You max fund all your accounts. But in my opinion, Ben, if you have to choose, I would start with the retirement assets. And exactly like you're saying, a small drip into a 529 does make a lot of sense. But I think if you have to choose, I would prioritize retirement savings. Ben, what if I told you that there's a type of account that you can fund with after tax dollars and then you can take distributions and get your basis back taxfree 18 years in the future, maybe when your kid goes to college. Ben, would you have an idea of what type of account this is? >> Does it have numbers in it? >> It does have numbers and it is a Roth IRA. Um, but you can also if you're funding traditional IAS and if you do a 401k rollover, you can wave the 10% penalty on distributions for education. So to me, a retirement account, one of the special purposes can be things like education for you or your child. Therefore, I would prioritize those types of accounts, Dan, if you have to choose. >> All right. Someone in someone in the chat said, "Put your oxygen mask on first." So, they nailed it just like me. Um, >> yeah, he uh Akbar actually said that right before you said it, so you were like, "Yeah, great." >> The other the other piece is you can turn a 529 into a Roth if you don't use that money. >> It's true, >> right? >> That's true. For the benefit and I talked about this last Yeah. for for So, but yeah, I >> yeah, a lot of options. Yeah, but I think looking at the state, Dan didn't mention which state that he's in, I don't believe. No. Um, and therefore, I I would look there because if you do get a tax deduction for the state, I does I do think that helps move the needle a little bit towards the 529, but very generally, yeah, because a 529 can really only be used for college outside of the $35,000 rollover. Again, I would always prioritize the the the retirement account. >> All right, we talked about the step-up basis. We have a question on that. Actually, one more. Let's do it. >> Let's do it. >> I like this question. Okay, last but not least, we got one from Rich. I'm trying to talk my wife into buying a vacation home in Florida. Florida >> and want to use Bill's expertise as a way to persuade her. We already own a primary residence, have a not to brag level of net worth, and plan on >> What do you think that is? Like 2 million and higher. Not to brag. >> Yeah, probably. Right. Florida. Yeah, >> depending on your age. >> Yeah, I mean, actually, yeah, in Florida it could be even lower, I guess. Pretty low cost of living overall, right? Other than Miami, I guess. Uh, let's see. And planning to retire in 4 to 5 years. I want to buy now so we can enjoy the place while we're still relatively young, late 50s, early 60s. She's worried it's too much of a financial commitment. I'm trying to close the deal by showing her this will be great for estate planning someday for our kids. When they inherit the place in 30 years or so, God willing, they get uh they get the step up basis on the home. Buying a vacation home is good for the next generation, right? Does this argument hold water? Please say yes. Great question. Really, really, really good writer. Uh, so, all right. I This kind of makes sense to me, but like what types of assets or accounts do you actually get the step-up basis for, Bill? Because the step-up basis is if if Rich died and his vacation home was worth a million bucks in Florida, >> but he paid 500 grand for it to for his kids, the cost basis is a million, not 500 grand. Correct. That's how it works. Step-up basis work. >> That's correct. >> So, what else do you get a step-up basis for? Very generally, it's it's more useful to talk about what you don't get a step up in basis on, Ben, because it's retirement accounts. >> Yeah. Anything except for retirement accounts, IAS, other tax qualified accounts, uh annuities, you do not get a step up in basis on or if you set up a a non-grant trust, uh a trust that is not part of your gross taxable estate, meaning non-revocable. Uh those are not part of your estate and therefore they do not get a step up. But just about everything else does, >> right? Um you could make this case though, I think, if you wanted to. Hey, it's going to be worth more in 30 years as long as Florida's not underwater. Um, so I I think it's a I think it's a I got to give him credit for using he's going to bring you as in as the mediator. >> I know. >> Um, >> but I I guess it makes but the other thing is like you make the case that listen, this is a place for 30 years we're going to spend time with family. We're going to get to the kids and the grandkids can come visit us in Florida, wherever they live now. Um, that's the case you make. You make the family case, not the financial case, because guess what? The financial case is not going to win you any points. It never I' I've used those kind of arguments before. Never works. Yeah. >> Wait, what if you what if you let your kids manage it as an Airbnb when when you're not using it and that teaches them responsibility and gives them like a first kind of job? [laughter] >> Yeah. My answer is pretty clear. Rich, Mrs. Rich, it sounds like you've been successful. Your your husband's a great writer. And my opinion, just reading a paragraph here, not advice. You're probably going to run out of time before you run out of money. So, I I do it. You know, life is short, Ben. something you've written very eloquently on through the years. I'd pull the trigger and figure it out later. That'd be my advice. >> We're just giving a blanket pardon to everyone on today's show. [laughter] >> Exactly. >> You get a house. You get a house. You get a house. >> All All in the Fort Lauderdale area. However, I I will mention, Ben, we did have a conversation with a client yesterday, me and Handsome Jay. Tiny, uh, here in the office, and one of the things that they benefited from in a situation like this, they moved from Minneapolis to Fort Lauderdale. they they figured out after renting a property for the last year that they do not want to live in Fort Lauderdale. Um so one of the things I would generally always recommend and this goes back to a client in roughly 2011. Uh this was a priest actually. I was looking at retirement home in in Delaware. Uh the community they were looking at they ended up under help partly by my advice not buying the property. Hurricane Irene came in and leveled that whole town. Right. So that would have been a really emotionally distressing event. I I think generally, Ben, it's not it's not financial advice, but I would generally always live somewhere for what do you say a uh six months, maybe nine months, maybe a year, >> more than a week vacation. I agree that you want to make sure >> priest I was thinking exorcism. I thought that's where you were going with that, but >> Right. Yeah. They they avoided the storm, Duncan. So, uh somebody's looking out for him upstairs. >> Yeah. No, that's good. My We we we went to beautiful Ann Arbor, Michigan over the weekend. My wife said, "Man, the downtown here is bustling. Why don't we like retire to a place like this for a little while?" I said, "Why don't we like rent here for a while first?" Yeah. >> And then see if you want to live somewhere because that you have to get a sense of I agree the sense of the area and community and what you like and don't like. That's good advice. >> Yeah. I I think from afar it's very difficult, right? You're you're house hunting on Zillow. You're trying to picture, okay, how long is it going to take me to get little things like how far is this supermarket? But Duncan was talk bemoning the quality of bananas before. What if what if John Grayson is getting, you know, New York quality bananas? Like that might be really important to you if you're a banana head like Duncan. >> Yeah. I mean, I'm just saying the bananas have gotten worse over the last year. I don't know. >> Do they make banana milk? How far do we want to take this? >> I think there actually is something that Yeah, but yeah, that's it's not it's not milk, though. It's not as good. Uh, I have a question. >> Duncan's a Duncan is just as bad of a banana picker as is a stock picker. How do bananas get worse? Come on. >> Yeah, avoid the brown ones. >> I'm saying you buy now you buy a bunch of bananas and they look perfectly fine. You get them home and half of them are bad on the inside. What's crazy to me, pumpkins, pumpkin prices just haven't gone up for the last month, and I just think it's time, right, to buy pumpkins right now. And the price will never go down, right? >> And and uh coffee. Coffee is going up. >> Uh I I have a 529 question. Going back to question five for a second, I just became an uncle, not to brag. >> Congratulations. >> And so I was thinking about like if I wanted to gift some shares of Oakley, can I do that in a 529 or is it just like you you have access to certain funds like mutual funds and Do you want to bring the pain on your new niece or nephew? Um, imagine. >> Exactly. What if they're allergic to oats? Yeah. >> Why do you want to bring them into your world of pain? >> Yeah. Each each state manages their own 529, Duncan. And very generally, I've never seen a 529 that allows individual stock investments. Mostly because they're trying to keep that crap out of people's. >> So, not even like a 3x levered ETF. >> So, ask ask your is it your sister or your brother who had the child? >> It's it's my wife's brother's wife's. >> Okay. So ask them to give you a link every year on their birthday. They'll give you a link where you can make a contribution and every year on their birthday make a 529 contribution. You'll be the favorite uncle. >> Exactly. >> Exactly. >> They they can send you a link and it allows you to It has their account number. All you have to do is say, "Hey, I'm going to give a hundred bucks or 50 bucks, whatever it is." And it's really easy to do and you can make the contribution on their behalf. It's a great feature. >> Not to brag, I I don't I don't have a modest house. It's relatively I enjoy where I live. I'm very privileged and very very grateful for for the hard work and hard work and clients. >> That might be a first a big time not to brag from Bill. >> Yeah. But but where I'm going is a lot of generous people have gifted us a lot of things to the kids throughout the years. I would avoid large large pieces of plastic because where that all ends up is the basement and then the landfill. So Duncan, I think what I'm trying to say is I think education is probably the most important, you know, thing that we can we can do is promote education for kids. So any amount that you're donating to your family's education is is very much well worth it. Seth in the in the chat says that the child is going to community college thanks to Oatley. [laughter] >> Cursed. >> That's pretty good. >> Yeah. >> Hey, hey, trades are in. Trades are big. >> Thank you everyone in the live chat as always. We appreciate your comments, your jokes, your questions. If you have a question for us, ask the compound show@gmail.com. If you have a question for Bill, put his name in in the uh right in the introduction there. >> Three times and I appear. That's right. >> All right. And we will see you next time. Thanks everyone. >> See you everyone. >> [music] [music]