Withdrawal Strategies: Discussed optimal withdrawal rates for retirees aiming to deplete their savings by the end of life, highlighting the traditional 4% rule and its variations.
Stock Performance: Analyzed the percentage of stocks outperforming the S&P 500 over consecutive five-year periods, noting that only a small fraction consistently outperform.
Investment Diversification: Emphasized the importance of diversification, despite recent S&P 500 outperformance, and the historical benefits of international diversification.
Dave Ramsey Portfolio: Evaluated Dave Ramsey's investment strategy of equal allocation across four mutual fund types, concluding it's a reasonable approach if adhered to consistently.
529 Plan Strategy: Suggested a gradual transition from a 100% S&P 500 allocation to a target date fund as college approaches, to manage risk and ensure funds are available when needed.
Market Challenges: Highlighted the difficulty of consistently outperforming the market, even for professional fund managers, reinforcing the value of a buy-and-hold strategy.
Investment Flexibility: Stressed the importance of flexibility in retirement spending plans, adjusting for market conditions and personal circumstances over time.
Transcript
Welcome back to Ask the Compound, the show where you ask and we provide the answers. I am Ben Carlson. Let's say you have $3 million stashed away for retirement. No heirs, no one to leave the money to. You want to spend it all and die with zero. What should your withdrawal rate look like? How much should you spend each year? How much can you spend each year? We're going to answer these questions and more on the show today. Stick around. [Music] [Music] All right, our email here is askthecompoundshow@gmail.com. Send in your questions if you're in the live chat on YouTube. If you're in the live chat on Twitter, send us your questions there. We'll take them live. On today's show, we will be answering straight uh answering questions straight from our compound viewers about how many stocks outperform the market. What should your spending rate be if you want to die with zero? How diversification works in practice? What do I think of the Dave Ramsey portfolio? And then when should you begin diversifying your 529 account to spend for your kids college fund? Um, >> how much uh how much of an allocation to Beyond Meat does he recommend? >> Oh, for for my 529 plan? >> No, no, no. For Dave Ramsey's portfolio. >> Yeah, negative 5%. It's a put option. All right. Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build a multi-asset portfolio of stocks, bonds, options, crypto, and more. You can also access industry leading yields like the 3.8% APY you can earn on your cash with no fees or minimums. But what sets public apart? AI isn't just a feature. It's woven into the entire experience from portfolio insights to earnings call recaps. Public gives you smarter context at every touch point. Plus, earn an uncapped uncapped 1% match when you transfer your portfolio. That includes RAIA, IRA transfers, rollovers, and even contributions. Fund your account in 5 minutes or less. Visit public.comc. That's public.comc. Paid for by public investing. Full disclosure is in that podcast description. Hit the link. >> Nice disclaimer, Reed. I like that. >> Thank you. Let's do it. >> All right. Up first today, we got a question from Coleman. Could you guys talk about what percentage of stocks that are beating the S&P over the last 5 years also beat the S&P the five years before that? I'm curious what names appear on both lists, pre and postcoavid and pre and post AI boom. I'd like to hear how stocks that beat the S&P over a 5-year window tend to fare over the next 5 years on average. Great question. There's a lot of studies that show about mutual funds and ETFs that over and underperform. And we're going to get to that a little bit too, but um I never looked at this over a five-year period. So I I punched this into Y charts. They have this cool portfolio analyzer tool. So over the 5-year period from 2016 to 2020, the S&P 500 was up a little more than 1%. Okay? And over the past 5 years, and I'm counting this year as a whole year, we're almost there since 2021, the S&P is up like 92%. Both very good returns, right? We've essentially doubled both of the last 5-year periods. So how many stocks actually outperformed over those periods? Duncan, how many do you think outperformed from 2016 to 2020 out of the S&P 500? How many stocks outperform the index? >> 200. Yeah, it's 150ish. Uh, so like 30% of the total. Um, and there's a caveat here that some stocks have moved into and out of the index over time. So the numbers aren't perfect. So I think it's like 2 to 4% annual turnover of stocks coming in, stocks going out. Um, so in the last 5 years starting in 2021, 241 stocks outperformed the index. So that's more like half. Hang on, chart off real quick. Um, it's a lot of the names you would expect. Microsoft, Google, Nvidia, Broadcom, Facebook. Um, sorry, this is I got I got ahead of myself. So, how many stocks have outperformed both periods? Remember, 150 in the first five years, 240 in the next 5 years. So, it's like 30% 50%. It's about 41 stocks that have outperformed in both periods. And it is the stocks you would expect. Microsoft, Google, Nvidia, Broadcom, Facebook. >> There were some surprising names here. Uh, Hilton Hotels, which is surprising because hotels got dinged so bad at at the outset of CO. Uh, Caterpillar, Decker Outdoors, which is like Uggs and I think my daughters are keeping Uggs. >> Uh, Hokah, right? I think >> Hoka shoes. Yeah, the if you're a middle-aged dad, you know what Hokah shoes are. >> Um, tea, right? If if you've been to Burning Man, you've you've worn some teas before. Walmart is on the list for both. Um, so yeah, so it's some surprising names. Someone some of you think. Um, and it's interesting. I know the stock market is getting more concentrated by the year. Um, but the number of stocks that outperform is higher than I thought initially. So, let's do a chart on now. Chart Kadat did this one for me. This is the number of companies outperforming on an annual basis going back to 1990. So the average is 239 stocks. So it's almost half of the stocks outperform the actual total return of the index in a given year. Um it's kind of funny because it's like an ominous sign. It these numbers dropped really really bad in the 1998 1999 period just like they did in 2023 and 2024. And of course the end of the '90s was the end of the dotcom bubble. So um take for that what you will. Uh so anyway, I think the number is higher than people assume, especially since the stock market is so concentrated. This is surprising, right? >> Yeah. >> Chart off. Surprises me. All right. Now, here's the thing. >> Yeah. I'm actually surprised that there's that many outperformed over both periods. That's uh that's way higher. >> Yeah, it was higher than I thought, too. I I wonder if if this last 10ear period is actually the outlier there. It would be a ton more work and data to to look over these other 5year periods. Um we'll see. It sounds fun to do, but I'm not going to do it. I'm sorry. Uh but I I would imagine that's pretty high. Yeah. Like but again it's a lot of them the tech stocks that you would assume. The funny thing is is that picking the stock pickers that outperform might be even harder. So SPA does this thing every year. They call it their persistence scorecard, right? They have at the year end 2024 and they look at um how many mutual fund managers that outperformed over a certain period. They look five years outperformed over the next five years. So let's show the chart here. um two this is just the top half this isn't so 2% of all large cap equity funds remained in the top half over the five-year period after they're in the top half before the previous five years okay uh and that's just the top half very small number among top quartortile funds uh as of December 2020 that had outperformed in in the top quartile not a single fund remained in the top quartile of the next four years okay um and none of the top cortile funds from 2022 maintain their position in the top cortile for the subsequent two years and they said if it was just a random chance it should have been at least like six or 7%. Um chart off please. So I think I think the takeaway here is just that buy and hold in individual stocks is probably your best bet. The people that try to pick the stocks and jump in and out they do way way worse and it's really hard for them to outperform. So, I do think that your probably your best bet is going to be buy and hold stocks, >> even though that's not nearly as much fun, but >> right. Yeah. >> Uh, in the chart in the chat, someone says, "It sounds fun to do, but I'm not going to do it." The Ben Carlson chart philosophy. >> That's fair. That's why we hired chart kit so I don't have to do it anymore. >> That's true. >> All right, next question. >> Okay, up next, we got one about the 4% rule. I understand the >> people love the 4% rule. We get close to this all the time. >> Yeah, I I've only I hear it more and more I feel like every year. Yeah, let's look at it. Dan, >> I understand the 4% rule, the riskadjusted guard rails by kitsis, uh, etc. I started my life as an investment banker at Goldman so I can manipulate a spreadsheet, though I'm rusty. Here's my question. I assume I'll have $3 million squirreled away in investment accounts by 2026. That's not to brag. Y >> leaving any tax implications aside, this would give me $120,000 per year, assuming the 4% rule, I don't want to leave any money behind as I can't take it with me. So, if I die with zero, uh, so if die with zero is the plan, what would a safe withdrawal rate be? >> Great question. Here's a guy who has no trouble spending his money, right? >> Yeah. >> I'm guessing he said no no one to leave behind, right? So, he's got no kids or heirs or anything or he's just gonna say screw the kids, I guess. Um, can't take it with you, right? So, all right. So, Bill Bangan is the father of the 4% rule. He has a new book out. Uh, show that here. It's called A Richer Retirement: Supercharging the 4% Rule. I read the book recently. He was on our Talk Your Wealth YouTube channel about I don't know a month or two ago. And I and it's on podcast form now, too. So, check out Talking Wealth and podcast. And I interviewed him about, you know, all about the 4% rule. Um, in this book, he goes through a million different examples about the 4% rule. Now, just as a reminder, what is it? Your 4% rule looks like this. You take your starting portfolio value and day one in retirement, take out whatever percentage withdrawal you decide on. If it's 4%, let's say it's a million dollar portfolio, you take out $40,000. In the next year, if it's 5%, it's 50,000, right? So on the next year, you slap on your inflation rate of choice. Let's say it's 3%. That in year two, your money would go, your spending would go from 40,000 to 41,200 or something. In year three, it's like 42,500. So, you're not just taking a percentage of the portfolio each year because that'd be too volatile. If the portfolio is up and down big, you you don't want your spending you want your spending to remain relatively constant, right? Most people do, right? Because they're used to that with their with their income. Um, all right. So, that's the 4% rule. Now, this is the money chart for the book. Let's do a chart on here. He has a million charts in the books, but this just shows your initial withdrawal rate and your percentage uh of success over time. He goes back to 1926 in the book. So, it is important to understand what the safe means in terms of withdrawal rates. here he's talking about worst case scenario. So he says now the the safe withdrawal rate the safe max he calls it is 4.7% and that just means it never failed historically. The other ones still have a high probability you could go out to 6% and it's 75%. 7% is like 50% or so. Um chart off please. So he says when he did his initial work he said by safe I meant that 4.145% which is the original number even though people call it the 4% rule represented the worst case scenario and this happened one time in October of 1968. He did it on like a monthly basis right and that was because the inflation rate was so high in the 70s that and the returns were so low that it just inflation swamped your spending. So he said it happened literally one time, but he said he also said if a retiree indiscriminately used this safe max rate for their withdrawal plan, they'd be sacrificing on average 35% each year in withdrawals. A considerable reduction in lifestyle. So he's saying like, yeah, this is the really safe choice, but come on people. Like that's the worst of the worst of the worst case scenario. It's not going to happen for everyone. >> That's what he's saying. >> Yeah. Yeah. So pull the chart back up real quick. So I think for the die with zero strategy here, I think I'd be comfortable 7%ish. I think that's about a 5050 chance. I think if if you really want to roll the dice, I think that's that's a pretty good spot to be in. Half the time it fails, half the time it it does just fine. I think that's okay. Um >> Well, because you're saying you would adjust year to year. So if if the market drops drastically, that impacts how much you take out. >> I'll try it off. Well, >> no, you're not the 4% rule. You're not supposed to adjust each year. You just adjust by inflation. That's how it works. If if you do adjust by the market value of your portfolio, your spending is going to be all over the place. Now, you could say, listen, >> the whole point is your life isn't like the 4% look of spreadsheet. You're going to have to be more flexible. So, >> you could always cut back later in life. Maybe you spend more upfront in your 60s and 70s. Cut back in your 80s and 90s because you're not going to have as much. Your health is going to be worse. Probably you're not going to have as much energy. Or if things are looking better than expected, you can bump it up. Right. Hey. >> Right. That's what I was thinking is he does 7% like you're saying one year and then there's a big crash, you know, in stocks and the next year like I'm just going to do 4%. >> Yeah. The biggest thing for retirees is is probably sequence of return risk. So if there's a big bare market right at the outside of your retirement, then you should probably pull back a little bit and like okay I I this and then you can always increase it in the future if things come back. So and it's also important to remember he uses a 65355 portfolio. So it's 65% stocks, 35% bonds, 5% cash. He looks through all these different scenarios in the in the book about different asset allocations, different inflation rates, all this stuff. So there's a million different things you can do. I think flexibility is the key here though, right? So I think that's the that's the point. You're right. It's if things go way better than expected, turn the dial up and spend way more. If things go way worse than expected, especially right at the outset of recession of a of your retirement, then I think you got to like chill a little bit. Uh Stephen in the chat says, "What happens when AI allows us to live to 200?" Um, I'm not gonna want to live at 200. Sorry. I That sounds awful to me. >> Well, hey, how much money do you need uh in retirement if your brain is in a vat? You know, >> compounding can just go forever, right? Yeah. The government would be paying us all anyway to not work anyway. So, um, but I just think good on this the Goldman Sachs banker here. Good on you for enjoying your wealth. Uh, it's I think it's nice to go from delaying gratification to actual gratification. So, >> also I can hear some people in the chat saying like, you know, sounds stingy. Leave money to charity. Well, he's not saying he's not gonna give money to charity. Maybe he just wants to like do that while he's alive. >> This is just how much he's taking out of his portfolio. Yeah, that could be part of his budget. >> So, yeah, exactly. Yeah, >> agree. But yeah, you're right. It's something not a lot of people talk about in the finance world, but it Yes, that that that's something you could spend on. All right, let's do another one. But I like the mindset, the die with zero mindset. I like it. >> Yeah. I mean, I think everyone likes it except for rich kids probably, >> right? >> Yeah. But maybe >> they don't want to hear their parents. They don't want to see their parents with that book. Yes, that is true. You don't get your parents to die with zero um as they're reaching their 70s and 80s. >> Yeah. Yeah. All right. Up next, we got one from Gareth. Uh which is very British sounding. Very British sounding. >> Isn't that the name of the Dwight guy in the British version of the office? Gareth, >> I believe. Yeah, I believe so. I think that's right. >> Okay. At 18, I built a simulated portfolio and compared it to the S&P 500 over the past decade. To my surprise, the S&P 500 outperformed my diversified portfolio by over 2.5% annualized. Uh, I had always assumed that more strategy and diversification would produce better long-term results. Why does simply investing fully in the S&P 500 appear to outperform more complex approaches? Is this truly a superior strategy for long-term growth? >> All right, 18 years old. I am constantly impressed by the number of young people who are interested in the markets. It's really cool. Yeah. Um, >> love to see. >> Hang on. JC in the chat asked, "What if a pension is involved for the 4% rule?" Okay. Um, the spending your from your portfolio is after all other income sources, right? So, how much do you need to spend? Does it come then does it come from a pension, social security, and then your portfolio? How much of a gap do you need to fill? That's the part of it that that matters. Um, all right. So, here's the thing, Gareth. He's looking at the last 10 years. Diversification doesn't always work. The past 10 years, the S&P 500 has beaten pretty much every other traditional asset class. It's not always like this. So let's do a chart on. I created this earlier this year. This is the benefits of international diversification. And my whole point here is that it's the decades that matter. And this shows developed country stock markets going back to the 1970s. And you can see in the 1970s and the 1980s, the US is actually towards the bottom of the rankings. Um the 1990s, US did better. 2000s much worse. 2010s, 2020s, US is at the top. So, the fact that the US has outperformed over the last 10 years, that doesn't happen all the time. Let's do the next chart. This is one of my favorites. I've used it a million times. It's the last decade from 2000 to 2009. The S&P 500 lost 1% per year, including dividends. International stocks, midcaps, high yield bonds, small caps, emerging markets, rates, all did much better in the last decade. If you diversified, you felt really, really, much better about yourself than people who had all their money in the S&P 500 and large cap stocks. Um, try it off, please. So, the point is that, yeah, sometimes diversification doesn't work. The S&P 500 does have an awesome long-term track record. You don't have to diversify if you're 18 years old. Um, I do because I know those lost decades can and will happen. I I think the biggest thing for you is to keep investing and allowing your money to compound in the stock market because you're way ahead of the game at 18. You probably don't need to diversify that much, but um that's that's why you do it. >> Those laws can and will happen. It is funny to me being someone who, you know, came from from film and and the arts. It's very funny just watching people time and again try to beat the market like and I mean professionals, right? Of course, you know, individual retail people have fun, but but yeah, watching professionals try over and over and over again and just seems like 90% of them fail. It's just kind of bizarre. It doesn't matter how smart you are. It doesn't matter what a great plan you have. It just seems like the the market just keeps keeps winning in general. So when I first started my career, one of my roles was helping to pick the managers for our for our portfolios, right? And we would interview these managers and they they were all they all have an amazing background, right? It was all IV the people like very impressive individ individuals, super smart. They would talk to the different supply chains. They would talk to competitors. They would talk to company management. They knew these companies inside and out. And to your point, most of them still underperformed. And that's when I thought like what chance do I have to outperform if these really smart people can't do it? What chance do I have? Um and so I kind of went down the same path. Now there have been plenty of retail people this cycle who have done it and and good on them for doing it. Um but it's very hard. I I agree. >> And I think most retail people that have made a lot of money recently would admit that they're probably not going to be able to keep it up for 10 years, you know. >> Yeah. Most people understand. Yeah. A lot of the people we talk to say, "Hey, listen. I >> I hit the lottery. I hit the jackpot with a couple individual stock picks. Now I know I need to diversify. So that that's kind of cool to see that people that understand like this. I know this I can't consistently keep hitting home runs like this. It's not going to last forever. >> Yeah. So be careful out there. All those young people watching today because you're uh playing meme stocks. Be careful. >> Yeah. All right. Uh someone asked is Ben one of those retail people. I own like two individual stocks. No, I don't think I can call myself a I I own index funds pretty much. >> I've outperformed over the last year. Not to brag. So, >> Duncan, a year. Come on. Get out. Get Get out of here. Next question. A year. Here's nothing. Next question. >> Just don't look at five years. Okay. Uh, up next, we got a question from Nick. >> What are your thoughts on the Dave Ramsey investment strategy? Uh, which includes investing equally across four types of mutual funds. 25% in growth in income, which is large cap, 25% in growth or midcap. 25% in aggressive growth, meaning small caps, and 25% in international funds. >> All right. Uh, credit to me for not doing the Dave Ramsey meme, which has been going on, uh, social media lately. Have you seen these? >> Uh, I've seen a lot of Dave Ramsey memes. >> He kind of has his arms crossed and he's he's not happy with what the people are telling him. Listen, I thought about going to portfolio visualizer or Y charts and running this portfolio through a back test, but then I realized it doesn't really matter. Like, there are plenty of different asset allocations that can work. a portfolio of small caps, midcaps, large caps in international stocks. Like to me, that's a fine allocation. I have I have I see no problems with it. I'm sure some people could quibble if they wanted to. What about 10% more in this? What about 5% less in this? Why don't you include this? What about this strategy? There's always a million little ways you can tinker, but I think getting the the big pieces right up front, it's the like the whole idea that perfect is the enemy of good. So, um I think this allocation is fine. I I think the biggest thing that matters with allocations because there are so many other things to invest in these days is you're always going to be tempted to add something else or take something away. Like why do I own this piece of junk? It's underperformed for three years. Get it out of there. I'm putting this thing in that did really well. I think that's the problem. It's just the allocation probably matters less if you as long as you get the big building blocks right than like your ability to stick with it. Right. Is a 7030 portfolio going to m be that much different materially from a 6040 portfolio? Probably not. Is a 10% allocation of small caps going to be much better or worse than a 15 or 20%? You know, no. It depends on the cycle, but probably not. So, I think it's just it's can you stick with the allocation and will you will you rebalance back to those initial targets on occasion to keep yourself honest? >> I haven't listened to him in a very long time. Um, so I'm I'm out of the loop, but I'm surprised he doesn't have any gold. He strikes me as someone who would who would be into gold. >> You know, Dave Ramsey does seem like a gold person. And um I don't I never really listen to him. I know I know a lot of people who got into the Dave Ramsey after college. >> He's usually number one on the on the business podcast chart. >> Yeah. People like his Yeah. And um he has strong opinions. He um I know a lot of people who did his envelope method for budgeting right out of college, right? That's like you food and entertainment and and you have these this money in the envelopes and like for budgeting people get on him for his investment take sometime. I think he he said he told people they could take like 8 to 10% of their portfolio for the withdrawal rate or something because if the stock market gives that percentage then you're fine. Uh so people quibble with a lot of the stuff he does. I don't know the portfolio as far as >> very anti- student loans. He basically doesn't think you should go to college if you take out loans. But yeah. >> Yeah. >> Yeah. The main thing I have a problem with is he tells people credit cards are always bad basically. And I think he he says he carries two debit cards >> uh and his concealed carry permit or something like that. That's all he has in his wallet. Um just as someone who has dealt with, you know, uh identity theft in the past and that kind of thing, debit cards are not what you should be spending all your money on because it's very hard to get your money back comparatively, right? If you spend money on a credit card, someone gets your credit card number, that's on the credit card issuer to get their money back, right? A debit card. If someone gets your debit card and spends money on your debit account, that's your money. You're having to fight with the bank to get back. So, that's my one main thing. >> If you have a if you have an errant charge on your credit card, they used to like grill you about it. Now, they don't even care like, "Yep, sure. Here >> can one's on the way." >> Very different with a debit card at most banks. So, yeah, that's my main main quibble. I would just say if you can be responsible and pay off your credit card, they have a a good purpose. Yeah. >> Yeah. Because his whole thing is is paying down debt and you have to think of the audience he's talking to. Um, but do I have a problem with his portfolio? No. As long as you can stick with it. It seems reasonable to me. I don't I don't have any huge issues. I think there's a ton of different allocations you can use. There's not like one that's like this is the one. You have to use this. >> There's a lot of them. It's just like, are you going to be willing to stick with it? That's the thing that matters, >> right? >> All right. Let's do another one. >> All right. Uh, last but not least, we got one from Brian. If you were doing a 100% S&P for a 529, at what age would you switch to a target date fund? five to seven years out from the start of college. I don't want to use a target date fund from the day they were born. That's too conservative. >> Okay. Um this is a question a lot of people ask as they approach retirement as well. Like when do I start, you know, de-risking? Because that's I I can't a lot of people just can't have all their money in stocks. There's there's a few reasons why you want to d-risk, right? One of them is is emotional volatility. You can't handle investing in all stocks. And that that doesn't matter how old or young you are. that some people just can't handle having all their money in stocks and seeing the volatility and the potential for loss. Some people want to have a safer component because they want to rebalance back into something, bonds or cash or some sort of hedge. And then other people know that the spending has to happen. So if you have spending in a certain period of time, you don't want to have to be spending stocks because they could go down in a hurry, right? So um I I I think he said five to seven years out. That seems pretty reasonable to me. like you have an 18 year time horizon or potentially 22 year time horizon, 24 year, whatever, however long the kid goes to school. I think that's pretty reasonable to start going down. And I think probably if you're worried about it, and he said he's got all the money in the S&P. I know plenty of people who do that. Uh spoiler alert, I'm a target date guy for the 529s. Always have been. Maybe have less money on the table. I'm I'm fine with that. Um >> I know nothing about 529s. Is this just like a an account that you can invest in anything in or does the issuer restrict you? They usually have fund choices for you. >> Okay. Okay. >> Depending. So I I invest. >> So you're not investing in like individual stocks usually in a 529 or anything. >> Nope. I'm invest there's there's funds. There's index funds, there's some active funds, and there's some target date funds. And I picked the target date fund. And you pick like a target date for the year of when they're going to graduate. If you want to take more risk, you can go out a little further. Uh hopefully one of my uh kids gets a full ride, then I can just roll that over to an ortho air form. Um, I think you could probably to make life easier, instead of ripping ripping the band-aid off, do it in tanches, like a reverse dollar cost averaging, right? Um, starting seven years out, I'm going to take, you know, 10% of it every 6 months or something and slowly but surely get to my goal, whatever that goal is. Maybe your goal is a 6040 or 7030 or 8020. I I like the idea of doing it slowly but surely. I think most people um it's easier for them emotionally to handle that. Plus, with the stock market, you're you're allowing it to run a little longer, too. That could set you up for more risks, obviously. But I think that that makes sense to me. So, I don't think that's too conservative. Um, I think the plan makes sense. The thing is, there's there's no perfect situation for this because you don't know what the market's going to do, right? If the market rolls over, you would have been better off ripping the band-aid off. If the market keeps going higher, you've been better off slowly but surely trunching out. >> Yeah. And if your kid looks like they're going to get a full ride, you're going to think, "Man, I could have bought that car. Could have done all kinds of cool things with that money." >> Maybe AI will just take care of them in the future anyway, you know, and there's no need for college. >> I mean, yeah, sure. It's a possibility. >> Yeah. But no, this is this is the kind of stuff you have to think about. So, um I I like the mindset. Um really good questions today. Really diverse set. I always like it. Um, if you have a question for us, remember our email here is askthe compoundshow@gmail.com. Thank you to everyone in the live chat as always. Um, I thought they were going to ask us about our questions today, but they're asking each other like what they're doing on the weekend and everyone's just uh hammering it up in there. >> It's it's a great community in the chat. >> Yeah. Appreciate all the people watching live on Twitter as well. Um, idontshop.com for all your compound merch needs. Uh, subscribe, like, review, all that good stuff. And we'll see you next time. >> See you everyone. [Music] [Music] [Music]
What is the Dave Ramsey Portfolio?
Summary
Transcript
Welcome back to Ask the Compound, the show where you ask and we provide the answers. I am Ben Carlson. Let's say you have $3 million stashed away for retirement. No heirs, no one to leave the money to. You want to spend it all and die with zero. What should your withdrawal rate look like? How much should you spend each year? How much can you spend each year? We're going to answer these questions and more on the show today. Stick around. [Music] [Music] All right, our email here is askthecompoundshow@gmail.com. Send in your questions if you're in the live chat on YouTube. If you're in the live chat on Twitter, send us your questions there. We'll take them live. On today's show, we will be answering straight uh answering questions straight from our compound viewers about how many stocks outperform the market. What should your spending rate be if you want to die with zero? How diversification works in practice? What do I think of the Dave Ramsey portfolio? And then when should you begin diversifying your 529 account to spend for your kids college fund? Um, >> how much uh how much of an allocation to Beyond Meat does he recommend? >> Oh, for for my 529 plan? >> No, no, no. For Dave Ramsey's portfolio. >> Yeah, negative 5%. It's a put option. All right. Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build a multi-asset portfolio of stocks, bonds, options, crypto, and more. You can also access industry leading yields like the 3.8% APY you can earn on your cash with no fees or minimums. But what sets public apart? AI isn't just a feature. It's woven into the entire experience from portfolio insights to earnings call recaps. Public gives you smarter context at every touch point. Plus, earn an uncapped uncapped 1% match when you transfer your portfolio. That includes RAIA, IRA transfers, rollovers, and even contributions. Fund your account in 5 minutes or less. Visit public.comc. That's public.comc. Paid for by public investing. Full disclosure is in that podcast description. Hit the link. >> Nice disclaimer, Reed. I like that. >> Thank you. Let's do it. >> All right. Up first today, we got a question from Coleman. Could you guys talk about what percentage of stocks that are beating the S&P over the last 5 years also beat the S&P the five years before that? I'm curious what names appear on both lists, pre and postcoavid and pre and post AI boom. I'd like to hear how stocks that beat the S&P over a 5-year window tend to fare over the next 5 years on average. Great question. There's a lot of studies that show about mutual funds and ETFs that over and underperform. And we're going to get to that a little bit too, but um I never looked at this over a five-year period. So I I punched this into Y charts. They have this cool portfolio analyzer tool. So over the 5-year period from 2016 to 2020, the S&P 500 was up a little more than 1%. Okay? And over the past 5 years, and I'm counting this year as a whole year, we're almost there since 2021, the S&P is up like 92%. Both very good returns, right? We've essentially doubled both of the last 5-year periods. So how many stocks actually outperformed over those periods? Duncan, how many do you think outperformed from 2016 to 2020 out of the S&P 500? How many stocks outperform the index? >> 200. Yeah, it's 150ish. Uh, so like 30% of the total. Um, and there's a caveat here that some stocks have moved into and out of the index over time. So the numbers aren't perfect. So I think it's like 2 to 4% annual turnover of stocks coming in, stocks going out. Um, so in the last 5 years starting in 2021, 241 stocks outperformed the index. So that's more like half. Hang on, chart off real quick. Um, it's a lot of the names you would expect. Microsoft, Google, Nvidia, Broadcom, Facebook. Um, sorry, this is I got I got ahead of myself. So, how many stocks have outperformed both periods? Remember, 150 in the first five years, 240 in the next 5 years. So, it's like 30% 50%. It's about 41 stocks that have outperformed in both periods. And it is the stocks you would expect. Microsoft, Google, Nvidia, Broadcom, Facebook. >> There were some surprising names here. Uh, Hilton Hotels, which is surprising because hotels got dinged so bad at at the outset of CO. Uh, Caterpillar, Decker Outdoors, which is like Uggs and I think my daughters are keeping Uggs. >> Uh, Hokah, right? I think >> Hoka shoes. Yeah, the if you're a middle-aged dad, you know what Hokah shoes are. >> Um, tea, right? If if you've been to Burning Man, you've you've worn some teas before. Walmart is on the list for both. Um, so yeah, so it's some surprising names. Someone some of you think. Um, and it's interesting. I know the stock market is getting more concentrated by the year. Um, but the number of stocks that outperform is higher than I thought initially. So, let's do a chart on now. Chart Kadat did this one for me. This is the number of companies outperforming on an annual basis going back to 1990. So the average is 239 stocks. So it's almost half of the stocks outperform the actual total return of the index in a given year. Um it's kind of funny because it's like an ominous sign. It these numbers dropped really really bad in the 1998 1999 period just like they did in 2023 and 2024. And of course the end of the '90s was the end of the dotcom bubble. So um take for that what you will. Uh so anyway, I think the number is higher than people assume, especially since the stock market is so concentrated. This is surprising, right? >> Yeah. >> Chart off. Surprises me. All right. Now, here's the thing. >> Yeah. I'm actually surprised that there's that many outperformed over both periods. That's uh that's way higher. >> Yeah, it was higher than I thought, too. I I wonder if if this last 10ear period is actually the outlier there. It would be a ton more work and data to to look over these other 5year periods. Um we'll see. It sounds fun to do, but I'm not going to do it. I'm sorry. Uh but I I would imagine that's pretty high. Yeah. Like but again it's a lot of them the tech stocks that you would assume. The funny thing is is that picking the stock pickers that outperform might be even harder. So SPA does this thing every year. They call it their persistence scorecard, right? They have at the year end 2024 and they look at um how many mutual fund managers that outperformed over a certain period. They look five years outperformed over the next five years. So let's show the chart here. um two this is just the top half this isn't so 2% of all large cap equity funds remained in the top half over the five-year period after they're in the top half before the previous five years okay uh and that's just the top half very small number among top quartortile funds uh as of December 2020 that had outperformed in in the top quartile not a single fund remained in the top quartile of the next four years okay um and none of the top cortile funds from 2022 maintain their position in the top cortile for the subsequent two years and they said if it was just a random chance it should have been at least like six or 7%. Um chart off please. So I think I think the takeaway here is just that buy and hold in individual stocks is probably your best bet. The people that try to pick the stocks and jump in and out they do way way worse and it's really hard for them to outperform. So, I do think that your probably your best bet is going to be buy and hold stocks, >> even though that's not nearly as much fun, but >> right. Yeah. >> Uh, in the chart in the chat, someone says, "It sounds fun to do, but I'm not going to do it." The Ben Carlson chart philosophy. >> That's fair. That's why we hired chart kit so I don't have to do it anymore. >> That's true. >> All right, next question. >> Okay, up next, we got one about the 4% rule. I understand the >> people love the 4% rule. We get close to this all the time. >> Yeah, I I've only I hear it more and more I feel like every year. Yeah, let's look at it. Dan, >> I understand the 4% rule, the riskadjusted guard rails by kitsis, uh, etc. I started my life as an investment banker at Goldman so I can manipulate a spreadsheet, though I'm rusty. Here's my question. I assume I'll have $3 million squirreled away in investment accounts by 2026. That's not to brag. Y >> leaving any tax implications aside, this would give me $120,000 per year, assuming the 4% rule, I don't want to leave any money behind as I can't take it with me. So, if I die with zero, uh, so if die with zero is the plan, what would a safe withdrawal rate be? >> Great question. Here's a guy who has no trouble spending his money, right? >> Yeah. >> I'm guessing he said no no one to leave behind, right? So, he's got no kids or heirs or anything or he's just gonna say screw the kids, I guess. Um, can't take it with you, right? So, all right. So, Bill Bangan is the father of the 4% rule. He has a new book out. Uh, show that here. It's called A Richer Retirement: Supercharging the 4% Rule. I read the book recently. He was on our Talk Your Wealth YouTube channel about I don't know a month or two ago. And I and it's on podcast form now, too. So, check out Talking Wealth and podcast. And I interviewed him about, you know, all about the 4% rule. Um, in this book, he goes through a million different examples about the 4% rule. Now, just as a reminder, what is it? Your 4% rule looks like this. You take your starting portfolio value and day one in retirement, take out whatever percentage withdrawal you decide on. If it's 4%, let's say it's a million dollar portfolio, you take out $40,000. In the next year, if it's 5%, it's 50,000, right? So on the next year, you slap on your inflation rate of choice. Let's say it's 3%. That in year two, your money would go, your spending would go from 40,000 to 41,200 or something. In year three, it's like 42,500. So, you're not just taking a percentage of the portfolio each year because that'd be too volatile. If the portfolio is up and down big, you you don't want your spending you want your spending to remain relatively constant, right? Most people do, right? Because they're used to that with their with their income. Um, all right. So, that's the 4% rule. Now, this is the money chart for the book. Let's do a chart on here. He has a million charts in the books, but this just shows your initial withdrawal rate and your percentage uh of success over time. He goes back to 1926 in the book. So, it is important to understand what the safe means in terms of withdrawal rates. here he's talking about worst case scenario. So he says now the the safe withdrawal rate the safe max he calls it is 4.7% and that just means it never failed historically. The other ones still have a high probability you could go out to 6% and it's 75%. 7% is like 50% or so. Um chart off please. So he says when he did his initial work he said by safe I meant that 4.145% which is the original number even though people call it the 4% rule represented the worst case scenario and this happened one time in October of 1968. He did it on like a monthly basis right and that was because the inflation rate was so high in the 70s that and the returns were so low that it just inflation swamped your spending. So he said it happened literally one time, but he said he also said if a retiree indiscriminately used this safe max rate for their withdrawal plan, they'd be sacrificing on average 35% each year in withdrawals. A considerable reduction in lifestyle. So he's saying like, yeah, this is the really safe choice, but come on people. Like that's the worst of the worst of the worst case scenario. It's not going to happen for everyone. >> That's what he's saying. >> Yeah. Yeah. So pull the chart back up real quick. So I think for the die with zero strategy here, I think I'd be comfortable 7%ish. I think that's about a 5050 chance. I think if if you really want to roll the dice, I think that's that's a pretty good spot to be in. Half the time it fails, half the time it it does just fine. I think that's okay. Um >> Well, because you're saying you would adjust year to year. So if if the market drops drastically, that impacts how much you take out. >> I'll try it off. Well, >> no, you're not the 4% rule. You're not supposed to adjust each year. You just adjust by inflation. That's how it works. If if you do adjust by the market value of your portfolio, your spending is going to be all over the place. Now, you could say, listen, >> the whole point is your life isn't like the 4% look of spreadsheet. You're going to have to be more flexible. So, >> you could always cut back later in life. Maybe you spend more upfront in your 60s and 70s. Cut back in your 80s and 90s because you're not going to have as much. Your health is going to be worse. Probably you're not going to have as much energy. Or if things are looking better than expected, you can bump it up. Right. Hey. >> Right. That's what I was thinking is he does 7% like you're saying one year and then there's a big crash, you know, in stocks and the next year like I'm just going to do 4%. >> Yeah. The biggest thing for retirees is is probably sequence of return risk. So if there's a big bare market right at the outside of your retirement, then you should probably pull back a little bit and like okay I I this and then you can always increase it in the future if things come back. So and it's also important to remember he uses a 65355 portfolio. So it's 65% stocks, 35% bonds, 5% cash. He looks through all these different scenarios in the in the book about different asset allocations, different inflation rates, all this stuff. So there's a million different things you can do. I think flexibility is the key here though, right? So I think that's the that's the point. You're right. It's if things go way better than expected, turn the dial up and spend way more. If things go way worse than expected, especially right at the outset of recession of a of your retirement, then I think you got to like chill a little bit. Uh Stephen in the chat says, "What happens when AI allows us to live to 200?" Um, I'm not gonna want to live at 200. Sorry. I That sounds awful to me. >> Well, hey, how much money do you need uh in retirement if your brain is in a vat? You know, >> compounding can just go forever, right? Yeah. The government would be paying us all anyway to not work anyway. So, um, but I just think good on this the Goldman Sachs banker here. Good on you for enjoying your wealth. Uh, it's I think it's nice to go from delaying gratification to actual gratification. So, >> also I can hear some people in the chat saying like, you know, sounds stingy. Leave money to charity. Well, he's not saying he's not gonna give money to charity. Maybe he just wants to like do that while he's alive. >> This is just how much he's taking out of his portfolio. Yeah, that could be part of his budget. >> So, yeah, exactly. Yeah, >> agree. But yeah, you're right. It's something not a lot of people talk about in the finance world, but it Yes, that that that's something you could spend on. All right, let's do another one. But I like the mindset, the die with zero mindset. I like it. >> Yeah. I mean, I think everyone likes it except for rich kids probably, >> right? >> Yeah. But maybe >> they don't want to hear their parents. They don't want to see their parents with that book. Yes, that is true. You don't get your parents to die with zero um as they're reaching their 70s and 80s. >> Yeah. Yeah. All right. Up next, we got one from Gareth. Uh which is very British sounding. Very British sounding. >> Isn't that the name of the Dwight guy in the British version of the office? Gareth, >> I believe. Yeah, I believe so. I think that's right. >> Okay. At 18, I built a simulated portfolio and compared it to the S&P 500 over the past decade. To my surprise, the S&P 500 outperformed my diversified portfolio by over 2.5% annualized. Uh, I had always assumed that more strategy and diversification would produce better long-term results. Why does simply investing fully in the S&P 500 appear to outperform more complex approaches? Is this truly a superior strategy for long-term growth? >> All right, 18 years old. I am constantly impressed by the number of young people who are interested in the markets. It's really cool. Yeah. Um, >> love to see. >> Hang on. JC in the chat asked, "What if a pension is involved for the 4% rule?" Okay. Um, the spending your from your portfolio is after all other income sources, right? So, how much do you need to spend? Does it come then does it come from a pension, social security, and then your portfolio? How much of a gap do you need to fill? That's the part of it that that matters. Um, all right. So, here's the thing, Gareth. He's looking at the last 10 years. Diversification doesn't always work. The past 10 years, the S&P 500 has beaten pretty much every other traditional asset class. It's not always like this. So let's do a chart on. I created this earlier this year. This is the benefits of international diversification. And my whole point here is that it's the decades that matter. And this shows developed country stock markets going back to the 1970s. And you can see in the 1970s and the 1980s, the US is actually towards the bottom of the rankings. Um the 1990s, US did better. 2000s much worse. 2010s, 2020s, US is at the top. So, the fact that the US has outperformed over the last 10 years, that doesn't happen all the time. Let's do the next chart. This is one of my favorites. I've used it a million times. It's the last decade from 2000 to 2009. The S&P 500 lost 1% per year, including dividends. International stocks, midcaps, high yield bonds, small caps, emerging markets, rates, all did much better in the last decade. If you diversified, you felt really, really, much better about yourself than people who had all their money in the S&P 500 and large cap stocks. Um, try it off, please. So, the point is that, yeah, sometimes diversification doesn't work. The S&P 500 does have an awesome long-term track record. You don't have to diversify if you're 18 years old. Um, I do because I know those lost decades can and will happen. I I think the biggest thing for you is to keep investing and allowing your money to compound in the stock market because you're way ahead of the game at 18. You probably don't need to diversify that much, but um that's that's why you do it. >> Those laws can and will happen. It is funny to me being someone who, you know, came from from film and and the arts. It's very funny just watching people time and again try to beat the market like and I mean professionals, right? Of course, you know, individual retail people have fun, but but yeah, watching professionals try over and over and over again and just seems like 90% of them fail. It's just kind of bizarre. It doesn't matter how smart you are. It doesn't matter what a great plan you have. It just seems like the the market just keeps keeps winning in general. So when I first started my career, one of my roles was helping to pick the managers for our for our portfolios, right? And we would interview these managers and they they were all they all have an amazing background, right? It was all IV the people like very impressive individ individuals, super smart. They would talk to the different supply chains. They would talk to competitors. They would talk to company management. They knew these companies inside and out. And to your point, most of them still underperformed. And that's when I thought like what chance do I have to outperform if these really smart people can't do it? What chance do I have? Um and so I kind of went down the same path. Now there have been plenty of retail people this cycle who have done it and and good on them for doing it. Um but it's very hard. I I agree. >> And I think most retail people that have made a lot of money recently would admit that they're probably not going to be able to keep it up for 10 years, you know. >> Yeah. Most people understand. Yeah. A lot of the people we talk to say, "Hey, listen. I >> I hit the lottery. I hit the jackpot with a couple individual stock picks. Now I know I need to diversify. So that that's kind of cool to see that people that understand like this. I know this I can't consistently keep hitting home runs like this. It's not going to last forever. >> Yeah. So be careful out there. All those young people watching today because you're uh playing meme stocks. Be careful. >> Yeah. All right. Uh someone asked is Ben one of those retail people. I own like two individual stocks. No, I don't think I can call myself a I I own index funds pretty much. >> I've outperformed over the last year. Not to brag. So, >> Duncan, a year. Come on. Get out. Get Get out of here. Next question. A year. Here's nothing. Next question. >> Just don't look at five years. Okay. Uh, up next, we got a question from Nick. >> What are your thoughts on the Dave Ramsey investment strategy? Uh, which includes investing equally across four types of mutual funds. 25% in growth in income, which is large cap, 25% in growth or midcap. 25% in aggressive growth, meaning small caps, and 25% in international funds. >> All right. Uh, credit to me for not doing the Dave Ramsey meme, which has been going on, uh, social media lately. Have you seen these? >> Uh, I've seen a lot of Dave Ramsey memes. >> He kind of has his arms crossed and he's he's not happy with what the people are telling him. Listen, I thought about going to portfolio visualizer or Y charts and running this portfolio through a back test, but then I realized it doesn't really matter. Like, there are plenty of different asset allocations that can work. a portfolio of small caps, midcaps, large caps in international stocks. Like to me, that's a fine allocation. I have I have I see no problems with it. I'm sure some people could quibble if they wanted to. What about 10% more in this? What about 5% less in this? Why don't you include this? What about this strategy? There's always a million little ways you can tinker, but I think getting the the big pieces right up front, it's the like the whole idea that perfect is the enemy of good. So, um I think this allocation is fine. I I think the biggest thing that matters with allocations because there are so many other things to invest in these days is you're always going to be tempted to add something else or take something away. Like why do I own this piece of junk? It's underperformed for three years. Get it out of there. I'm putting this thing in that did really well. I think that's the problem. It's just the allocation probably matters less if you as long as you get the big building blocks right than like your ability to stick with it. Right. Is a 7030 portfolio going to m be that much different materially from a 6040 portfolio? Probably not. Is a 10% allocation of small caps going to be much better or worse than a 15 or 20%? You know, no. It depends on the cycle, but probably not. So, I think it's just it's can you stick with the allocation and will you will you rebalance back to those initial targets on occasion to keep yourself honest? >> I haven't listened to him in a very long time. Um, so I'm I'm out of the loop, but I'm surprised he doesn't have any gold. He strikes me as someone who would who would be into gold. >> You know, Dave Ramsey does seem like a gold person. And um I don't I never really listen to him. I know I know a lot of people who got into the Dave Ramsey after college. >> He's usually number one on the on the business podcast chart. >> Yeah. People like his Yeah. And um he has strong opinions. He um I know a lot of people who did his envelope method for budgeting right out of college, right? That's like you food and entertainment and and you have these this money in the envelopes and like for budgeting people get on him for his investment take sometime. I think he he said he told people they could take like 8 to 10% of their portfolio for the withdrawal rate or something because if the stock market gives that percentage then you're fine. Uh so people quibble with a lot of the stuff he does. I don't know the portfolio as far as >> very anti- student loans. He basically doesn't think you should go to college if you take out loans. But yeah. >> Yeah. >> Yeah. The main thing I have a problem with is he tells people credit cards are always bad basically. And I think he he says he carries two debit cards >> uh and his concealed carry permit or something like that. That's all he has in his wallet. Um just as someone who has dealt with, you know, uh identity theft in the past and that kind of thing, debit cards are not what you should be spending all your money on because it's very hard to get your money back comparatively, right? If you spend money on a credit card, someone gets your credit card number, that's on the credit card issuer to get their money back, right? A debit card. If someone gets your debit card and spends money on your debit account, that's your money. You're having to fight with the bank to get back. So, that's my one main thing. >> If you have a if you have an errant charge on your credit card, they used to like grill you about it. Now, they don't even care like, "Yep, sure. Here >> can one's on the way." >> Very different with a debit card at most banks. So, yeah, that's my main main quibble. I would just say if you can be responsible and pay off your credit card, they have a a good purpose. Yeah. >> Yeah. Because his whole thing is is paying down debt and you have to think of the audience he's talking to. Um, but do I have a problem with his portfolio? No. As long as you can stick with it. It seems reasonable to me. I don't I don't have any huge issues. I think there's a ton of different allocations you can use. There's not like one that's like this is the one. You have to use this. >> There's a lot of them. It's just like, are you going to be willing to stick with it? That's the thing that matters, >> right? >> All right. Let's do another one. >> All right. Uh, last but not least, we got one from Brian. If you were doing a 100% S&P for a 529, at what age would you switch to a target date fund? five to seven years out from the start of college. I don't want to use a target date fund from the day they were born. That's too conservative. >> Okay. Um this is a question a lot of people ask as they approach retirement as well. Like when do I start, you know, de-risking? Because that's I I can't a lot of people just can't have all their money in stocks. There's there's a few reasons why you want to d-risk, right? One of them is is emotional volatility. You can't handle investing in all stocks. And that that doesn't matter how old or young you are. that some people just can't handle having all their money in stocks and seeing the volatility and the potential for loss. Some people want to have a safer component because they want to rebalance back into something, bonds or cash or some sort of hedge. And then other people know that the spending has to happen. So if you have spending in a certain period of time, you don't want to have to be spending stocks because they could go down in a hurry, right? So um I I I think he said five to seven years out. That seems pretty reasonable to me. like you have an 18 year time horizon or potentially 22 year time horizon, 24 year, whatever, however long the kid goes to school. I think that's pretty reasonable to start going down. And I think probably if you're worried about it, and he said he's got all the money in the S&P. I know plenty of people who do that. Uh spoiler alert, I'm a target date guy for the 529s. Always have been. Maybe have less money on the table. I'm I'm fine with that. Um >> I know nothing about 529s. Is this just like a an account that you can invest in anything in or does the issuer restrict you? They usually have fund choices for you. >> Okay. Okay. >> Depending. So I I invest. >> So you're not investing in like individual stocks usually in a 529 or anything. >> Nope. I'm invest there's there's funds. There's index funds, there's some active funds, and there's some target date funds. And I picked the target date fund. And you pick like a target date for the year of when they're going to graduate. If you want to take more risk, you can go out a little further. Uh hopefully one of my uh kids gets a full ride, then I can just roll that over to an ortho air form. Um, I think you could probably to make life easier, instead of ripping ripping the band-aid off, do it in tanches, like a reverse dollar cost averaging, right? Um, starting seven years out, I'm going to take, you know, 10% of it every 6 months or something and slowly but surely get to my goal, whatever that goal is. Maybe your goal is a 6040 or 7030 or 8020. I I like the idea of doing it slowly but surely. I think most people um it's easier for them emotionally to handle that. Plus, with the stock market, you're you're allowing it to run a little longer, too. That could set you up for more risks, obviously. But I think that that makes sense to me. So, I don't think that's too conservative. Um, I think the plan makes sense. The thing is, there's there's no perfect situation for this because you don't know what the market's going to do, right? If the market rolls over, you would have been better off ripping the band-aid off. If the market keeps going higher, you've been better off slowly but surely trunching out. >> Yeah. And if your kid looks like they're going to get a full ride, you're going to think, "Man, I could have bought that car. Could have done all kinds of cool things with that money." >> Maybe AI will just take care of them in the future anyway, you know, and there's no need for college. >> I mean, yeah, sure. It's a possibility. >> Yeah. But no, this is this is the kind of stuff you have to think about. So, um I I like the mindset. Um really good questions today. Really diverse set. I always like it. Um, if you have a question for us, remember our email here is askthe compoundshow@gmail.com. Thank you to everyone in the live chat as always. Um, I thought they were going to ask us about our questions today, but they're asking each other like what they're doing on the weekend and everyone's just uh hammering it up in there. >> It's it's a great community in the chat. >> Yeah. Appreciate all the people watching live on Twitter as well. Um, idontshop.com for all your compound merch needs. Uh, subscribe, like, review, all that good stuff. And we'll see you next time. >> See you everyone. [Music] [Music] [Music]