Animal Spirits Podcast - Listener Mailbag (EP.206)

Episode Date: May 28, 2021

On today's show we answer listener questions on real estate, asset allocation, where to save retirement money, dealing with big gains in individual stocks and much more.   Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode of Animal Spirits is sponsored by NaviPlan by Advocent. Built on the most precise calculation engine in the financial planning market, Naviplan empowers advisors to cater their services to any client from simple goals-based assessments to advance cash flow planning analysis. To see how Naviplan helps model some of the concepts and strategies discussed on this episode, visit Advicent.com slash Animal Spirits. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching.

Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Rit Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. This is timely. I'm a 30-year-old who, with my wife, have been focused on saving for the past five years. We recently paid off student loans, congrats, cars, max out our 401ks, and are on track to save for our two kids' college education.

Every year, we have 10 to 15K left over and want to know what's the best place to put that. I've been learning a good amount about crypto and want to dip my toes in. Is that a good place to look? Do we put more money in IRAs? Ben, when did this email come in? This is pre-crypto crash. So either they're scared off now or they look at this as a buying opportunity. So the question is basically I'm responsible with my money.

I spend, I save, I invest. But I want to diversify. I don't know if this person wants to have fun or what they want to do. What else could they invest in besides your stocks and bonds? I think part of the thing here is figuring out your goals and time horizons. So they're already maxing out the 401k. If they want to supercharge their retirement accounts, they could certainly then max out their IRAs. It sounds like they're not doing that yet. But also, it's, I think, one of the harder things to wrap your head around is

like the middle goals. So the short-term goals are pretty simple. You have a savings account that's in something highly liquid and safe. Long-term, you have more risk assets that you know you're not going to touch for decades, potentially especially if this is a 30-year-old. So what do you invest in in the meantime. So there's a bunch of options. On the last listener question podcast we talked about like an HSA, that's a possibility. I think it makes sense to start a brokerage account for a lot of people, taxable brokerage account. I have not yet begun to fund an HSA. Yeah, I haven't neither, honestly. I have too many accounts as it is. But I think the next logical step is probably if you have a savings account in place and you have a 529, a taxable brokerage account. And I think

that's something where then the investments are, it's more easily where you can suit them to your needs, depending on what you're trying to save for, whether that's a down payment for a new house or vacations or whatever. And I think you can kind of suit your investments to those different time horizons. So where does Topshot fit into this? Money that you want to light on fire, I think. But then I think it's the kind of thing where eventually you can, if it works out, the markets do well and you make some money, you can use that money for something that potentially comes up. and I think a taxable brokerage account can then act as a backstop for certain things. Hey, let me ask you this.

Getting back to like the specifics of this question, I've been learning a good amount about crypto. Oh, okay. They've been learning. All right. Well, I was going to say, if somebody does want to learn about crypto, what would you even say? Where would you point them?

I don't know. Well, because somebody actually did that as this for me. It was not exactly I want to learn about crypto, but whatever. And I recommended they, this is for a job interview, actually, crypto-related. I told them to listen to Ted Cydides just did a series, I think, a three-parter. or four-parter on crypto. Patrick's Hash Power, was that name of it? A little old, but still relevant. Podcasts are probably the simplest way to learn on this space, don't you think? You know, it's funny. I was listening to Odd Lots this weekend, and they had on a yield farmer.

And Joe made such a great point. So they've been doing a lot of crypto podcast, and Joe goes, just 10 more episodes, and I think maybe I'll start to understand what the hell's going on. That's how I feel. Every time I listen to one of these podcasts, I'm like, I mean, one of the ways that people say, like, don't invest in this stuff if you don't understand it. But I'm invested in And there's still stuff I don't understand. I get that advice. That's good advice. Generally speaking, yes.

If you don't understand it, you shouldn't invest why, because inevitably when it turns out, it doesn't matter what the asset is, you're probably going to panic sell. But maybe investing a little bit is a good way to learn because I'm investing in crypto. And honestly, I still don't really understand. That's what I was going to say is that I think part of it is just putting your money in and seeing if you can actually handle the wilds. Like, in seeing your money fall 30% on a Sunday. Right?

But, I mean, a few years ago, I read the original Bitcoin white paper. It didn't help me at all. Reading that, like, I didn't come away like, oh, my gosh, it's changed my life. It didn't do that at all. That's a tough one. But I think, yeah, the best thing you can do is probably just put your money to work and see what you can do with it. Okay.

Wanted to drop a thought on a topic for a future podcast. I think y'all have briefly touched on this, but a discussion surrounding the inheritance of assets, family wealth, et cetera. I'm 30, lost a parent to cancer, and essentially took over family finance. at the age of 25. Hopefully people don't experience that situation until later in life, but it's unavoidable. I was in actually an identical situation. I think I was 26, one of my mother, passive cancer as well. And at that point in my life, I was in no position to make any sort of financial decisions. I was, but I guess talk to somebody, like get help.

If you know that unfortunately one of your family members and if you're going to be inheriting the assets is sick and death is unfortunately imminent, I would recommend talking to someone. anybody, anybody. Maybe not anybody. Get professional help. Because it's a weird thing to think about it. It's a morbid topic. But when did you start talking about it? Well, after the fact before, when does that conversation even come up? So for me, so my mother knew, she knew that she wasn't going to live forever. And so we spoke about the will, the house, assets. And we spoke about these things when she was very much, well, when she was healthier way before the end. So we did definitely plan for this stuff. But I guess it also depends on what stage in life you're at. There's a big difference

mentally, financially, emotionally between losing a parent when you're in your 20s and completely incapable of dealing with everything that comes with it and when you're already an adult. And it's never easy, but sometimes it's a little bit less catastrophic than others. I also think the family dynamics around money are bizarre because a lot of times like there's certain things with my parents that I'm on the exact same wavelength financially and other things that were just generationally completely look at things totally different. So I think that having those conversations can be bizarre in a lot of ways because you might see the world differently in terms of money. It's tough. I would say that you have to take care of this stuff before things go south.

I mean, how many families have been destroyed by these arguments? And then, yeah, if you wait too long and then you're trying to repair it on the fly. That makes it even worse, I'm sure, especially when emotions are so high in a situation like that. Okay, let's go to the markets one. I'd be curious to hear your opinions on the market pre-COVID. If not for COVID, would the government have stepped in with stimulus and programs for businesses? It seems like that would not have happened for an equal market crash due to a normal bubble burst situations. Rates staying low seem to indicate that fragility existed. Now with the Fed saying they may raise rates at some point, did COVID actually save the markets in the long term?

That's interesting. It's hard to play counterfash, so I guess there's a lot in here. would the Fed and the Treasury Congress have responded the way they did absent COVID? I can't imagine that they would have responded as aggressively. I would say absolutely no way in heck. Run of the mill recession, no way. I do think something would have been done. I don't know what they could have done with rates where they were. It wouldn't have been as much money given out to people in unemployment help. But on the other hand, things would not have gotten nearly as bad and not as many people would have lost jobs. And so you're right, the counterfactuals don't apply, but we're going to look back at COVID in a number of years and realize that the economic

regimes and the way things happen there because of this are completely different than they ever would have been otherwise. And I think it's also possible, especially if you look at tech stocks, would probably not be nearly as high as they are, even after the recent growth stock slowdown, were it not for the pandemic, which is kind of hard to wrap your head around. I think maybe Apple and Facebook would be, but you're talking about like the zooms of the world. And like NASDAQ going up 50% last year, whatever it was, a NASDAQ 100. was up 48%, I think. True, that probably, yeah.

So is the market in a better place because of COVID? Is the economy going to be in a better place because of COVID, potentially? We could have the highest economic growth in a long, long time that wouldn't have happened without that. How's this? Can you please discuss the reason investors should or should not align themselves with analysts ratings? Frequently, the analysts disagree with each other and if they're wrong or right, who cares?

Are they held accountable if they are on the wrong side? Do they get a bonus that their price target has hit? What is the general time frame? I mean, yeah, listen, it's 2021. Nobody needs to listen to what analysts say, not because they're not bright, but because their job is impossible. It's an impossible job. Well, the price target stuff is the buy, sell, hold, that's impossible, as is price targets

or market targets. Yeah, I guess, well, that's a good point. It's their research. Exactly, yeah. When we talk about analysts, we're talking about price targets, which is just one part of their job. And unfortunately, it's the part of their job that gets all of the attention. But sell side research, there's some good stuff.

out there. So that was my very first internship in finance as a sell side research. I'm sure I've told this story before. I think I wrote about it in my book, maybe even. I was an intern for this cell side analyst who worked in like the tech space. This is back in like early 2000s. And there was a meeting of all the analysts at the firm. So they all cover these different industries and sectors. And the guy who's running it, the manager says, listen, we have, I can't remember what the number was, 108 buy ratings, 50 hold ratings, and three sell ratings. He's like, can we please put some more sell ratings on these stocks. And all the analysts said, we can't do that. We have relationships with the management of these companies and we need to get information from them.

And so it was this weird thing where it was career risk to put a sell on one of these stocks. So that's why those buy, sell, hold ratings really mean nothing. Even though sometimes the market reacts to them, it's more about the research that they get from following these companies and industry so closely. Okay, here's a crypto one. Any comment or insight to the way that the daily trends of Doge, Ethereum, and Bitcoin all look the same. It was very bullish, made some money on them, even with the crash. However, Doge is mimicking the moving in the top two crypto, seems to take away from their legitimacy, heck all of them moving in the same direction with their graphs looking the same, leaves me questioning. Is this just the whales using level

two data or selling or buying enough to trigger avoid limits, causing selloffs and buying a dip? Also, Elon being able to move all three of the tweet is laughable. I used to be a Bitcoin truth or now I love Ethereum potential as long as it can lead the way. However, the above reasons might turn me away completely. This seems like a kind of thing in a full market or a bear market. The correlations are probably always going to go to one for a lot of these things. This is the exact same thing happens in the stock market. I don't know why the fact that they're moving together would delegitimize crypto. Like if you were interested in it, but this turned you off, I'm not really sure why. I think it's just going to be like that. But some of the

gains and some of them are going to be way bigger in terms of magnitude or the losses are going to be larger, but they're probably always going to move in a similar direction. But to your point, Before the rise and the fall, there was some dispersion. They didn't all move identically. But in a crash, everything goes to one. Correlation goes to one. I was actually thinking this crypto crash that we're currently seeing, I think this is from a diversification perspective, positive for it.

Because a lot of people think, well, it's a risk asset. And when stocks crash, Bitcoin's going to crash too. And that's probably mostly going to be the case. But the fact that the stock market has been unchanged, more or less, the S&P 500 hasn't even. It's basically yawned at this whole thing. and crypto is down 30, 40, 50 percent. I think that's actually a good thing, that it's going to march to its own drummer occasionally. This is the question that was definitely on people's minds before the crash. If crypto crashes, what effect would that have on the market?

I'm pretty sure, Ben, you and I would have said probably very little, but here we are, no effect on the market. All right, let's do a real estate one. Question for you about a point you made about selling your house in a hot market and moving to another place. I understand you're also going to buy a place in a hot market if you are just selling a real estate one. I understand you're also going to buy a place in a hot market if you are just selling and buying another house, but don't current interest rate levels tip the balance towards buying a bigger house. Usually when the prices are soaring, the economy is good and interest rates are higher, right? Isn't this like a once-in-a-lifetime scenario where the economy as a whole isn't doing great? Interest rates are lower, but the housing

market is soaring. So what's the question? So we've said in the past, people who are considering selling their house because prices are rising so much, well, that's great. You can sell your house for a lot, but then you have to buy another house for a lot. This person is saying, well, actually, rates are so low. That means paying up for another house is actually not a bad thing right now. Doing the trade up is not a bad scenario because rates are so low at the same time housing is surging. That is kind of a conundrum where real estate is really hot, but interest rates aren't rising to the same degree as economic growth or housing prices right now. Don't you think a lot of this boils down to it just like your finances. If you can afford it, then that's it.

Yeah. And I do think this whole thing shows why getting into the housing market in the first place can be helpful to you because if you've seen your housing price rise and you just put in a small-ish down payment, you've seen a huge return on that equity. And so you can use that return for your down payment, even if you're going into a higher priced home. But that's just why this situation is so tough for people getting in the first time. If you've already got your foot in the door, you're in a pretty good place regardless. That's what I was about to say. The people that have gotten a raw deal in all of this are first-time home buyers. Yes. Unfortunately, yes. And it is where people keep talking about how housing is a sign

that the Fed doesn't know how to calculate inflation correctly. But if 68% of the country already owns a home, you can't say that that inflation is bad. Housing prices going up is bad for them. That's good for them. So it's only bad for a certain subset of the population who's trying to buy for the first time, basically. I guess maybe a potential bad thing is their property taxes can go up? Yeah, that's true. If they get like a reassessed, but... Spin zone, that's good for pension-funded status.

Bringing more tax revenue. My wife and I graduated in May 2019 and got married last summer. We set a plan early on to build up a safety net in our savings account to cover six months or so of living expenses. And then, after we reached that amount, we could keep building on top of it in order to save our house. We reached our desired safety net goal sooner than expected, but are now torn on where to proceed after seeing the housing market surge in the last year. We have accepted that saving

for a house may take a couple of years longer than originally anticipated. With that in mind, here's my question. Should we keep saving for a house at the same rate? Or in order to contribute to our future wealth, is it worth taking out 25% of our savings now to buy more SPY? Do you think 80% of the questions we get are some variation of this? Yeah, but I think it's a good problem to have that you are a good saver. But I think trying to figure out that next step, you know I talked and offline recently about this. There's so many different stages of being an investor. And I think once you get the basics down and you've learned how to save, then figuring out, okay, I have this whole vast number of choices in front of me. Now, what do I do? Because there are a million

different ways you could go about this. Yeah, I think especially if you're young and you guys just graduated college, not putting all of your eggs in one basket for a house is probably not a bad idea and allowing compounding in the markets to work for you in dollar cost average into those splitting things up a little bit. I think the idea of diversification can work with your savings, too, in terms of what vehicles you use and where you put that money. But yeah, those life next step questions can be overwhelming. But I think, yeah, diversifying where your savings dreams go is not a bad idea. All right, here's one for you. I think I'm a former Long Islander moved down to Florida in 2017. Older millennial 32 and regret not buying a house town here is rent

prices kept rocketing higher. Okay, former Long Islander. That's why I thought it was for you. My question is, should I take out my down payment for a house out of the market now or keep renting and let my money grow? Home prices are a good 30% higher than they should be, in my opinion, and not sure where they're headed. What do you think? Once a Long Islander, Ben, that's what we say. Florida is the only other place you can go as Long Islander, right? Florida is the Long Island at the South. So the question is... They're saving for a house in the stock market. So when do you pull a plug and... take the money out of there and have it be safe. I really feel like even uncomfortable talking about these things because this is so personal.

I don't know this person. How badly do you want to own a home? If you're cool with renting and you want to wait it out, by all means, wait it out. I don't necessarily think that you're going to get like a fat pitch at lower home prices any time in the future. But whatever. Yeah. If you think housing prices are going to fall 30% from here, I think you could be waiting

a very long time. So that's kind of a rub there. I'll go on record and say that I don't think renting is necessarily a waste of money. I don't think so either. I think renting is fine for a large number of people that don't want to deal with owning a house or don't think it makes sense financially. Also, though, if your money is in the stock market, there's a much higher probability of that money falling 30% than housing price is falling 30%. Yes. So that's a good way to think through can you ride that out and then potentially, if stocks fall 30%, is that going to dissuade you from buying a home or can you wait it out

and then buy potentially after stocks come back? I was really interested in acre. trader when you guys had the show about it. It looks like a very stable investment producing reasonable income and appreciation returns with lower risk. It's also for now and correlated to the stock market. We're always going to eat so farming as a whole isn't going anywhere. So I was thinking if I were older and wanted more stable income with less risk, this sounds like a very attractive option as compared to fixed income. Well, I will say that more stable income with less risk, I'd be careful there. I can invest in an operation which produces a valuable resource and provides employment instead of essentially lending cash. What are your thoughts about replacing bonds with

farming investments. I don't think you can do that because for one thing, your bonds are incredibly liquid. If you want to rebalance and take advantage of a market crash, you cannot do that with farmland. For another thing, what did Acre trader, what did Carter say that their income stream is that an annual? It's a one-time thing. You're not getting income the same way that you are with bonds. I just, to me, those are two completely different risk profiles. I'm not saying that farmlands are like riskiest crypto. Obviously on the spectrum, it's much, much less risk than that. But if you're getting more income, you always got to just assume that there's more risk. In this case, it's not liquid for one. So yeah, I don't know if I would go that far. And we talked about this.

I would say something like Farmland, the way that it was described to us and the way that from us reading about it, it seems, it's probably somewhere in between stocks and bonds, but shading more towards stocks in that it's because the illiquid nature of it. And it's a longer term holding. But yeah, Could it be more stable? Sure. But I think that a lot of it depends on, yeah, the bonds as a stability, not just for if you need the money, but for rebalancing. So I think the liquidity piece has to be there. This one I think is kind of similar. Okay, I've been in the market for about 10 years. Only ever buying more funds with the exception of exchanging a few funds after changing jobs, etc. I have a large nest egg of cash for emergencies and most all my assets are

an equity funds that I plan to hold for another 20 plus years. I was having a thought on rebalancing or moving my funds into a robot type to rebalance for me. Is there any research on the benefits of not rebalancing and only being a buyer for a long period of time. Logically, this makes more sense to me than realizing compounding less taxes and fees, et cetera. Yeah, of course. Let's say that you're in an 80-20 portfolio. Eventually, God willing, that will go to like 93-7.

Your portion of bonds over time will shrink relative to stocks because typically over time stocks go up and I would say bonds go sideways. But bonds have gone up too. But from these interest rates, believe me, bonds will not keep up with stocks, I hope. is going to go sideways at best, maybe go up a little bit. So the only reason to rebalance if you're a young person, and when I say the only reason, I don't mean to say it's a bad reason, is because a lot of people just can't handle the full volatility of an equity portfolio. Just rewind back to March 2020. That was scary. 35% drop in 22 days.

A lot of people just can't handle that. That's why you rebalance. If you set yourself an 80-20 portfolio, what's the reason for setting that in the first place? Because you set at 820 and you allow it to go to 95-5. What was the point of doing 80-20 in the first place? You might as well just set it at 100% equity in the first place or whatever. So if you're going to have bonds in your portfolio, you have them there for a reason because you chose that specific allocation. Now maybe that just if this person has all equity funds and you're just trying to rebalance between different types of stock funds, then maybe, yeah, that doesn't make sense. But a lot of it depends on the whole idea for asset allocation is setting your risk profile and matching your time horizon and then

rebalancing back to it because you're setting it for risk management purposes, not to like earn the highest return. So if you're just going to allow it to drift over time, you're probably better being in mostly stocks anyway. You nailed it. Asset allocation is a risk management tool. So you can go back in history and look at, there's really only one thing you need to know. What is the worst drawdown? How bad can it get and how much can I take? And look at this in dollar terms. So 100% stocks have lost 89% in depression, even if you want to take that off the table, certainly they're going to lose 60% over time eventually. So, okay, that's too much. I don't want to see my portfolio become 40 cents on the dollar. So then you look at 90, 10, what's the worst

case? Then 80, 20, 70, 30, and so on, you say, oh, here's my sweet spot. If you're 50, 50, and the worst drawdown was 28% of making that up, I think it's about, right? So, okay, I could take that. That sounds like it's right for me. So that's why you set a target, and that's why you rebalance because you never want to be in a position where, you're a forced seller because you took too much risk. Exactly. Okay, here's a philosophical one. My question at first glance seems simple.

How do you define what a... No, there is no heaven. All right. How do you define what a portfolio is? Basically, I'm trying to figure out exactly which assets qualify to be in your portfolio. For example, obviously it includes balances that your brokerage accounts, but what about retirement accounts? Normally, I'd think, obviously, yes, but I have 5% of my portfolio in crypto.

Should that 5% of your combined brokerage and retirement account balances count, basically they're asking, what is we're able to think about this? I think of my portfolio is my liquid funds and brokerage accounts, crypto accounts, savings accounts, etc. But the term liquid doesn't admittedly work great for alternative assets like art or sports cars, for example, if one that's my portfolio. I think this question is more about your whole financial plan. I think it's probably a little bit of semantics and splitting hairs here in terms of like, what is my portfolio? What is my funds? Like it's all one bucket. It's just a form of mental accounting to break them up. There's two things. There's like asset classes. So

stocks, bonds, alternatives, and alternatives can be a million different things. And then parallel to that, there's liquid and illiquid. And I think you should have a handle on both of those things. And I think you should assume your 401k and IRA are illiquid, that you don't tap those. And that's a good way of looking at them. I actually think one of the best things to come out of a 401k is the fact that you have to pay withdrawal penny to get it out because it makes it like a private equity type investment. Yes, you can see the price is moving, but people don't typically raid, what did we find? Four to five percent of people raided it during the pandemic was a fairly small number. So I think, yeah, splitting them up into liquid and illiquid, I think can help

understand and set your time horizon in the right way. I'd like to hear your thoughts on using a low-cost active fund versus an index fund for the international portion of one's portfolio. While the numbers are still not great, I looked at some morning start data that shows that the 10-year success rate of outperformance to the 2019 and international large-cap funds was significantly higher than domestic. This is a place to go active in your portfolio. All right, listen, I feel like we've definitely spoken about this in the past. I don't care.

The Tommy Lee Jones Giff, I don't care. And what I mean by that is, let's just say that international stocks offer an 8% return going forward. Maybe they do, maybe they don't. But let's just use 8%. And you're in an active fund. You underperform by a little. You outperform by a little.

Now, I'm making the assumption, of course, that you're not like in a crazy strategy that blows up. But when I say why I don't care is because a lot of these things end up looking like index funds anyway, closet index funds. So if you're in an international large cap fund, it's probably assuming that they're not doing anything crazy again. It's going to look relatively similar. So I'm just saying that part of it doesn't matter. As long as you stay invested, you don't jump in and jump out, you get index fund returns, you do a little better, a little worse. You're going to be fine as long as you save and you stay the course.

If you were in an active fund over the last year that has underperforming the index, it's probably still up a lot. But if you went to cash in March 2020, then you've been screwed. And you stayed there, you're screwed. So yeah, you're right. That's the more important decision. Here would be the risk. If you do choose an active fund, you have to make sure that you can stick with them through thick and thin. If you're going to bail outperference, don't even bother. Because even the funds that do outperform over the long term, I think Vanguard has a stat like over a 20 year period, only 14% of funds outperform. Three quarters of those 14% underperformed for three years in a row. And three years in a row is an eternity of underperformance. So if you can't stick with that, then don't even

bother. Okay, here's a good one. I own Cisco and Intel stocks that were purchased in the 1990s of unrealized gains of 3,700% and 500% respectively. Man, not to brag. Wow. Think about sitting through those two stocks after the dot com bubble blew up. I mean, they were down probably 80, 90% apiece. The rest of my holdings are ETF and index funds purchased in the mid-2000s of the present. two stocks account for half of my portfolio. So I'm concerned about the allocations. This is not my retirement account. Rather, it's an investment account focused on dividends. Should I diversify out of these stocks? And if so, is there a good way to do it without major tax penalties? What's the yield in this person's investment? I don't know. Because at one point, Cisco was the biggest stock in the

world in 1999. And I think it's still underwater since then. All right, listen. So this person has two stocks at a half of their portfolio. In almost all cases, I would say that that doesn't make sense. you would certainly not start a portfolio from scratch today picking two stocks. That being said, this person has obviously showed an ability to sit through a massive amounts of pain. Now, I don't know why you would expose yourself to that, but I haven't looked at a history of Cisco and Intel's dividends. I would assume they're fairly stable. And if that's the play at this point in this person's life and it's their taxable money, it's not all their money, again, I wouldn't necessarily recommend it. But for this person, I think it's borderline acceptable.

Early 2000, Cisco hit $560 billion market cap. What do you think it is now? Cisco, 280. 225-ish. So it's been more than cut in half market cap-wise since the dot-com bubble collapsed. Shameless plug here, I guess. We work with Oshonnessy asset management at Canvas. This is one of the things they do is work on a tax budget for something like this.

But this is, in terms of lowering your tax budget on this, it's not very easy to do on your own, probably. You either diversify and suck up and pay them or you get into some sort of tax lost harvesting program like that where you can set some sort of internal tax budget and work with a planner, I guess. So shameless plug, we can help. If you want to reach out, we're happy to trap. Here's one. I'm 31. And from the time I started investing, I want heavy allocation of equities. Since bonds are yielding close to 0%. How would you suggest going about limiting my equity risk? I would say that since you're 31, you probably shouldn't worry about limiting your equity risk. Well, getting back to again, not knowing them, yeah, probably true. I think one of the simplest ones in terms of young people, if you've decided like bonds aren't yielding much, I'm not going to do them because I don't need them or it doesn't make sense, is having more of a barbell approach and you have cash and stocks or cash and whatever other risk assets, real estate, crypto stocks, whatever it is.

I think that that's not a bad way to do it, where you have to have that cash. And this gets back to what is the portfolio kind of thing, is your cash part of it? or is that just part of your personal finances? But that seems to be the easiest way to diversify for me because then that cash can be used so you don't have to sell your stocks in a pinch if you have financial difficulties or potentially if you're doing fine during a downturn, you can use that cash to buy more stocks. So how do you limit equity risk, if not in bonds? I think we're at a point now where you don't have to look at it as eliminating risk. Josh talks about this all the time, Josh Brown that we work with, about how Wall Street

has always tried to sell you this. We're going to give you the same return with lower risk and less downside and a better sharp ratio or whatever. And sometimes you just have to learn to accept risk. And that's one of those times where especially when rates are so low on fixed income, I think you just have to be more comfortable accepting risk and understanding what that point is for you. And then taking intelligent risks with your money and figuring out what that level of volatility is that you can be willing to accept. I don't think you can just completely eliminate risk these days, especially the rate so low? There is a whole spectrum of risk. And on the one hand, all the way on the right to your barbell, I guess, you've got people who take way too much risk

and don't really realize the risks that they're taking, or maybe they do. Then on the other hand, you have people that are definitely afraid of risk. And their risk is that they're afraid to take risk. So you have to find your sweet spot. And there's no way for everybody to limit their equity risk. I mean, the thing that's stating the obvious. kind of the same. But again, I just think, and it could be like this for a long time, who knows, that I think you just have to be willing to accept some form of volatility, because you just can't ever get rid of risk. And that's more true now than ever. Do you think that people have to go through an acceptance stage where they think that they can protect themselves, whether it's

through put options or tail risk strategies or buying VIX, like, you think somebody just needs to like go through the ringer a little bit? And I'd be like, oh, yeah, I was trying to protect myself. It ended up just costing me money in the end. Probably. I think that's one of the harder lessons to learn is that risk never completely goes away. It just like changes shape, no matter depending on what stance you take. It's always there in some form. An American living in Eastern Europe with my investment account still in the U.S., so I watch the dollar pretty closely. My question is, what's the relationship of the dollar to foreign companies? I've read about this a few times. It's kind of living in the United States,

the movement of the dollar basically matters nothing to us. People talk about it all the time, but it doesn't matter to you unless you go to a different country to do something, but it does matter for markets. And so I've looked at this before. If you want to figure out one reason why the U.S. stocks are out performing foreign stocks or vice versa, the dollar is typically a pretty good reason why. So I had this chart a while ago. In the 80s, if you look at, in the movement of the dollar is not that large over time usually. If you go back to the 70s, it's basically done a round trip and gone nowhere versus a basket of other currencies. But So in the 80s, the dollar was down slightly. Foreign stocks outperform U.S. stocks by five percent

a year. In the 90s, the U.S. dollar was up against the foreign currencies. U.S. stocks outperformed big time. 2000s, dollar was down 20 percent. Foreign stocks outperformed. 2010s, the dollar was up like 20 some percent. U.S. stocks outperformed. I think that's a pretty good way to look at it in terms of that relationship. If you hold international stocks, you're buying them in those foreign currencies and translating them back into U.S. currency. And it would be the same thing if you an international holder owning U.S. stocks. So that's kind of the relationship. And again, over the long, long, long run, it's probably going to even out. But over the different cycles, that's probably a pretty good tell in terms of what is going to outperform. And naturally, Bitcoin fixes

this. Because it's not tied to anything, right? Right. Okay. So price it all on Deutsche coin, and should be fine. We are joined today by Tony Steak, chief operating officer for advice Tony, thanks for coming back on. Thank you for having me, Michael and Ben. Glad to be here. All right. We were talking about this one earlier. I wanted to get your thoughts. So 30-year-old with a wife who's been focused on savings, they paid off their student loans, their cars, they maxed out the 401Ks. They're already saving for their kids 529. They basically have 10 to 15,000 left over every year. They want to know what to do with it.

Thinking about crypto, there may be IRAs. What do you think in terms of what to do with some extra money? Well, this is a great question. And I saw this one, and it was very intriguing to me. So first things first, after you max out your 401K, hopefully you're in HSA as well to max that out at $7,000. But then I would encourage the IRA contributions for both of you and your spouse up to $6,000 a year so that you can max out there, depending on your income. If you make too much money, you're not allowed to use those RAs. But there's an old saying that you don't hear a lot, especially with financial plans and advice. Spend it. Have some fun.

Relax. If you are maxing everything out, if you have your kids' colleges lined up, if you're maybe saving a little bit for those milestones like maybe a wedding or a second home, if those are all covered, spend that money. That's why you're making it. Have some fun. But make sure you max out that Roth, that IRA. Make sure you max it at 401 pay. And then if you're in NHSA, get in that as well. I will say that's like one of the biggest mindset changes I've gone through over the years is I was always the saver who penny pinched my whole life when I was growing up. And then at a certain point, it's like, well, what's the point? You have to have a little fun too and spend your money. You can't just save it all. That's not fun. You can't take it with you. And obviously you want to set up a legacy for your children.

Legacies are important, especially as you accumulate that wealth, but you must enjoy it as well. If you don't enjoy money, that's a bad relationship with money. You need to enjoy it. So I say spend it. Make sure you max those things out, but then spend that. that money. I love that advice. This person does enough kids. So yeah, if not now, when. All right. Next question. I am 26. Work in sales at a large technology company maxed out his Roth since 2018, putting 5% into his 401K. And he has a ESPP with work as well. That is 10%

pre-tax, not bad. Been doing Roth on my personal contributions to the 401K because I expect my income to go up. Personally, I think taxes will go up in the long one. And regardless, I want to protect as much growth as possible from tax. Rizzi got married. in a promotion at work, so his income went up. If I exceed my sales quota, I get multipliers that can really make some commissions quite large. So my question is, given that I am in sales and my income is upside, I can potentially move my wife and I out of the Roth IRA eligibility, doesn't make more sense to change my

401K contributions to pre-tax and increase the amount to try to lower my taxable income and try to assure we can contribute to our Roth IRAs, or should I keep doing the Roth 401K contributions is a win until the end of the year to see if we can make the Roth IRA contributions. Sorry, this is going long. In which case, if I'm over, should I just do an IRA rollover? I have been dollar-cost averaging and don't love the idea of just doing all 12k at once for both accounts. There's a lot to this question.

It's really hard unpack because this, quite frankly, this is the kind of validation of why you should hire an advisor. Tony, hold on, just sorry to jump in, but it's so true. When you get questions like this, I just want to be like, I don't know, like let's have a cup of coffee. Like, this is such a detailed personal question. You're not just going to snap your fingers and answer this for them. There's so many things going on, Tony.

And that's what I was thinking myself, because it sounds like he's doing a lot of things right, but I would always encourage what's critical here is to max out that 401K, get that maxed out and then go into the IRA. You shouldn't worry about commission multipliers and kind of exceeding those brackets because, quite frankly, you don't control that until it actually happens. So if you were to max out the Roth IRA and then you have overachieve your compensation goals, you would simply have to take that money out. That's just how it works.

But this is a complex question that just hire an advisor for Pete's sake. That's what they do. That's their job to look at these complex situations, understand it better. But first thing to first, max out that 401K. I don't know why he's leaving money on the table there. I think if you're getting down to the minutiae like this, you've already kind of won in some ways. So you're ahead of the game. All right.

Wondering if you can talk about your thoughts or experience of the clients tapping into retirement funds early for other investments or to help find a new business opportunity. I think people are thinking about this in terms of like taking their retirement funds and buying a house too. They're saying paying the 10% penalty is not ideal, but is there an amount that would be considered okay to risk if you took a certain percentage of your value out of your retirement accounts to fund something new? This is why I like not being a financial advisor. I play one on TV and a podcast. I'm not a financial advisor. 10 out of 10 advisors would tell you, do not touch that money.

They would say, do not take that money out. So now he or she announcing their question that they pay that 10% penalty. They failed to mention that they also pay the tax on that, the income tax on that. And if that money is older, you're probably in a higher income tax bracket, which means it's more punitive to you. So I would discourage that personally, but all advisors would hands down. 10 out 10 to 10, they'd say no. There's a few options you have. The biggest one I would say is a 401K loan.

Many 401k providers allow for a loan, which means you can take money out of that without penalty and pay that back over time. That's the best way to pay, for instance, a real estate asset. Now, I love the concept of diversifying into real estate. Ben, you and I will get a debate about this. Inflation is real. And the one way to hedge against inflation that the very wealthy do is real estate. So, yeah, real estate is the best protection against inflation. Think about it. Real estate rents go up with inflation. Home values go up with inflation.

So I strongly personally encourage you to diversify your portfolio into real estate when and if you have the capital. But back to the question, if you're going to try and take out money against your 401K, pay that penalty and pay that tax rate, I would discourage that and rather look for a loan, a 401k loan, or potentially leveraging your current house to fund for that real estate asset. If you had to take out money from your 401k and pay those penalties, I would just encourage you to model that out. Look at how the growth is in the real estate prices at 2 or 3% growth versus the 401k in the equities market at 7 or 8 or 9% growth. Is there ever a time where it's acceptable to take money out of your 4MK for a different investment opportunity? No. I would just say no, because that compounding growth, the fact that you'd pay those penalties, not only the 10% fee or pennsyptial. penalty plus the income taxes, it just doesn't make any sense. Find money elsewhere first. But if you need

money for a hardship reason, there are a way to get money out without paying the penalty in those hardship kind of examples. But you can loan against that. You can take a loan against your life insurance in cases. There's other ways to get capital to invest in equity market. Some people even will refy their home loan with cash out, not encouraging that, but to make those investments as well. So think very clearly, look at all your options first before making those punitive changes, like making withdrawal from your 401k. By the way, I agree with you wholeheartedly on the housing as an inflation hedge because a lot of the inflation truthers have been saying, well, housing prices going up means inflation is being understated. But if you own a home and your costs are fixed

and your asset is going up, that's deflationary to you personally. That's a good thing if you already own a home and you're not trying to buy a new one. It's true. And I mean, there's one thing that makes this more complex is the low interest rates. So we think over time they're going to go up. So there is an advantage. But it's really interesting, Ben and Michael, like if you look at interest rates and you see the actual impact for every quarter basis point or whatever, it's not necessarily very significant. So it's like you have to think about that too because you say to yourself, oh man, rates are so low. But if they crawl up 25 or 50 basis points, that's not that significant because you're not going to want to pay your home off in 30 years. You want to accelerate

that payment. You want to make that extra payment. You don't want to pay that off and pay the lifetime of interest. So be mindful of that as well because it looks attractive on paper, those lower interest rates, but they're not necessarily always going to pay up in the long run. Last question. The startup company that I work at recently announced internally that has plans to go public. By the hypothetical time the company goes public, I will have already purchased approximately 33% of my Series B options and the rest will become RSUs given to me monthly over the rest of my vesting period. My questions are, what should I do with the shares that will already be vested and can be sold right away? What about the remaining stock as it becomes

vested? Should I pay off some of my mortgage or does it invests the rest into a more diversified portfolio? What would you say to this person? Again, a very complex question. Hire your financial advisor. That's what I would say. But let me explain a few things. Paying off your mortgage is not necessarily the best idea. Think about it. If you have a very low interest rate, it's okay to have debt. People are so scared of debt. Now, there's an emotional consideration around debt, but it's also healthy to have debt, especially if, for instance, if you're paying three and a half percent on a 30 year or three and a quarter or even less than three on a 15 year, like, it's okay to pay that money. I have student loan rates. I'm 107 years old.

So I have student loan rates that are less than 2 percent. And I want to pay them off because they're so cheap, but such a low balance, but I'm like, no, it's cheaper to keep that money there and pay that monthly. So be mindful of that before paying off your mortgage. In terms of acquiring more of those series B shares, here's the thing. You might be very bullish on your company. You work there, so it's going to be the best company out there. But think about diversification. If you dump all of your money into a company, you're weighted very heavily there.

So be mindful of it. Now, I get it. The stocks are at a discount. You're going to get them lower than that. But think about diversification and how that impacts your total portfolio. I have, in my experience and career, had the opportunity to invest in the firms I've worked at. than I have, but I thought very long and hard about asset allocation and that risk tolerance and how that fits into the entirety of my financial plan. But my advice, hire financial

advisor before buying more shares. Ben, you have anything to add there? I mean, that's what I was going to say. Yeah, no, it's tough because, yeah, you think you have internal knowledge, but yeah, your whole livelihood is already tied up there. So, like, diversifying a portion of it seems like pretty prudent to me. Yeah, it does. But I guess the struggle is like at what level of a discount to the share price, would you say, you're good? I don't know what that number is, but at some point, it becomes really compelling risk, even acknowledging the risk of concentration. I agree with that. You have to do those models, which we're not built to do. We're not that intellect where we can build those models because a discount is very attractive,

but sometimes things are discounted for a reason. Tony, thanks for coming back on. Thank you for having me, Michael and Ben. Thanks to Tony for coming on. Thank you. advice and animal spirits pod at gmail.com. Go to adviceant.com slash animal spirits. We'll see you next week.