B (2:17)

Last week I asked you and you wouldn't say.

A (2:19)

You're like, you're mysterious. Duncan. Okay, this is like a J. Crew sweater. This is come out. Nothing special. All right.

B (2:27)

Okay.

A (2:27)

All right, let's do a question.

B (2:28)

All right. Up first, we got one from Paul today. I'm a Bogle DIY investor with most of my money in total US and foreign stock index funds. But I also have sprinkled in some smaller allocations to small cap value, emerging markets and bonds. Everything outside of US stocks has been sucking wind for the past decade until the past 15 months. Ben, is it finally time for diversification to pay off? Please say yes.

A (2:52)

Someone said my sweater looks like Freddy Krueger.

B (2:55)

I can see it.

A (2:56)

That's fair.

B (2:56)

Yeah.

A (2:59)

Yeah, yeah. Just a little style. This has certainly been a running topic on this show. Over the years we've gotten tons of questions from people, international stocks and just anything outside of the US People asking should I just go all in on large cap US because it's the only thing that works. Should I for sake diversification, Should I go all in on everything else because I'm worried about the S and P. So remember last week's show we looked at the longer term trend that shows large cap US stocks have destroyed international stocks and pretty much everything else over 10 years. Right. We looked at the rolling 10 year returns. I like to zoom out like that. But let's zoom in a little bit. So chart on please. This is 2025 asset class returns. You can see all the way to the left. Emerging markets developed. International stocks crushed it both up 30%. Large cap stocks still did pretty well. They're up 18%. But you finally had some other stuff working. Even bonds had a pretty good year for the first time in a while. Now let's do the next one. 2026. Obviously we're a month in. This is very short term. But this year you're seeing emerging markets and international stocks doing well again outperforming but also small caps are doing well. Mid caps are doing well. REITs are doing okay. So again we're less than a month in. So take it for what it's worth. This is 13 months. But other stuff is finally working a little better. 13 months is not a long term trend make right. And I think there are some trends in place that could help these other asset classes continue this cycle of outperformance. The Dollar continues to go down. That's good for international stocks if you're a US investor, right? This could be good for bonds as well. If rates fall, so good for gold and other hard assets, obviously they're doing really well. If rates fall further, that could be good for small mid cap stocks because they had a hard time funding themselves with higher rates. Large caps still have the AI thing going for them. But AI could also lever the playing field, right? Smaller corporations can make them more efficient, improve their margins. So you could make the case that these trends could stay in place. Now you could also make the case that hey dummy, the biggest best corporations in the world are still in the S and P, right? This could all be a blip. I like to utter the three wisest words any investor can say. I don't know. I don't know if this is going to be the trend. Like if you knew it was going to happen, you don't diversify in the first place. You just put all your money in the thing that's going to outperform. So the only reason diversification works, quote unquote, is because you don't have to determine the winners in advance. If you hold a diversified portfolio that includes the S and P and also some of these other asset classes, like our person asking the question here at Boglehead, you know, then you're going to be covered regardless of what happens next. So if S and P comes back and turns around and outperforms again, you have that. If this other stuff starts working, that's a great. And then you rebalance and back to normal. That's why you diversify in the first place. You give up on the home runs, but you also avoid striking out. Right? Clip those singles and doubles. But this is the first meaningful length of time that we've had for an outperformance by international.

B (5:54)

Is it safe to say though if, if now you're thinking like, oh, now I should diversify that you maybe kind of already missed the bus of the point of diversification.

A (6:06)

I don't think so. Because listen, if, like I said, a.

B (6:08)

Lot of people right now are probably, are probably, you know, diving into international stocks that have been very heavy.

A (6:13)

No, you definitely haven't missed out. I mean this is, this is a blip in the long term trend. So if you've been all us up at this point, you've done way better than anyone who's diversified. So count yourself you missed the turn. Oh no. But if you, if you feel you need to get diversified now because you're Worried about AI bubble blowing up or whatever and large cap stocks just being overvalued, then. Yeah, you rebalance and diversify that. I don't think you've, you've missed the boat by any means.

B (6:36)

Okay. It's called a rotation.

A (6:38)

Asset allocation is for long term people, not it's for patient people.

B (6:42)

Nice.

A (6:43)

All right.

B (6:43)

Yeah. I think now, now's the time we're going to see a lot of people caring about other stocks outside the US.

A (6:49)

I think if international stocks continue this outperformance, that's when the money's going to start moving. Like one year. People say, oh, it's one year, two years. I think that's when people start perking up a little bit. Yeah, we'll see if it holds. Question two.

B (7:02)

Okay, up next, we got one from Alex. My wife and I are in our late 20s with household income around $300,000.

A (7:10)

That's not to brag.

B (7:11)

Yeah, not to brag, man. Our net worth is heavily concentrated in tax advantaged retirement accounts. After saving very heavily early on, we now target around 25% after tax savings. Since we both love our jobs and don't want to retire early, the problem is between 401, Roth, HSA and Mega backdoor contributions, that 25% gets filled up with just retirement accounts. Should we ignore contributing to a brokerage account and only contribute to retirement? We've used brokerage funds twice to pay for a down payment. And while we don't plan on doing that again anytime soon, it feels odd to only funnel money into accounts that we can't touch for decades. That said, it also feels bad to leave tax advantage space on the table. What are your thoughts?

A (7:53)

All right, so it is funny that 25% is like their lower number. So they're obviously going for flare before. That's still pretty high. That's a pretty good. They're doing well, right? Remember our colleague and past guests on the show, Nick Magulia came on here once and said that you should max out your 401 plan. And it was kind of controversial at the time. His take is that you just give up too much flexibility by putting all your eggs in the tax deferred retirement basket. And when he said this, I thought he was kind of nuts. Like, what are you thinking, Nick? Like, I like the fact that it's not easy to get your money out of retirement plans, that it forces you to hold those assets for the long run. Now, you can get on if you want, but it just. You're paying a penalty in taxes and all these things. And with a Roth ira, you can take out your contributions without penalty, but just not the investment earnings. We know that. But I am coming around to the idea, Nick's idea, that you don't necessarily want all your eggs in that one basket. You. Because I think the flexibility piece is really important to a lot of people. One of the reasons is it's not just the flexibility of I need to take the money for a down payment or whatever. You can't borrow against your retirement accounts. So a lot of people these days are using margin loans because they don't want to sell and pay taxes, but they want to use that money for something you can borrow against your taxable brokerage accounts. And so I was kind of this way. I was a lot like these people. All the money I had was going into tax retirement accounts. I barely put any money in a taxable brokerage account. And I've kind of remedied that situation in the past few years because I realized that having that taxable money and having the diversification of those accounts actually makes a lot of sense. I've said before, I don't use an HSA here because, like, I don't need that many tax deferred retirement accounts. I max up my 401 and my SEP IRA. Like, I don't need these other. I don't need all these other accounts. You know, we're putting money in the kids 529. Like, we. We have plenty of tax deferred money funneled there. Like having the taxable account account actually helps you a lot in ways that you might not think from that flexibility. So Nick is. Nick is right. I think you want. But you want to be more diversified. You don't want to have all your eggs in one basket.

B (9:41)

Yeah, that makes sense. How.

A (9:43)

Two questions on diversification today, right?

B (9:45)

How does the mechan mechanism for actually withdrawing your contributions from a Roth work? Like if I have a Roth on Robin Hood or, you know, whatever platform, you know, does it. Does it show you how much you can take out or you just have to have kept track of that math.

A (9:58)

Do you know, you probably have to. I'm sure that there's a. If you've done it through them, I'm sure they have your contributions listed in your statement somewhere. I've never actually taken money out of a retirement account, so I don't know how the process works, but yeah, yeah, most people haven't. That's a Bill Sui question.

B (10:11)

Yep. Okay.

A (10:13)

All right.

B (10:13)

Up next, we got a question from Chris. Not sure how hot or Timely a topic this is, but I would enjoy hearing the fellows talk about emerging markets. I've owned an EM ETF for five years and it hasn't gone anywhere in all that time. Even going back to 2017, it's flat. How does anyone invest in emerging markets and actually make money?

A (10:32)

Okay, so we actually went to the, the old questions for this one and Chris wrote this question in 2024. Okay, so looked at the numbers from 2010 to 2023, almost a decade and a half, emerging markets from the perspective of an US investor were up 3% per year. So you basically got cash like returns. Not bad if your dollar cost averaging into that. Right. But not great if you're looking for some sort of returns. Now the thing is, emerging markets have this enormous boom bust cycle. So before that period they went nuts. So let's chart, please. The MSCI Emerging Market Index goes back to 1988. So I put the boom bust cycles in here versus the S& P. Now this is a diversified asset. From 1988-93, emerging markets crushed US stocks. From 94 to 98, it was the opposite. There was an emerging market crisis. The US stock market crushed emerging markets. Then from 1999 to 2010 it flipped back and emerging markets smoked. The US stock market from 2010 to 2024 reversed again. US stocks crushed. Now, starting in 2025, as we learned in question one, emerging markets are outperforming by more than 25% in the last 13 months or so. So not, not bad. Is this a contin. I don't know if this is the start of a new trend, but the point here, give me that chart one more time. It's a boom bust cycle. That's what happens with these. And unfortunately, if you invest in an asset like this, you're going to deal, deal with those periods of underperformance. But look at the US Stock market. Same thing. Relative underperformance in a large number of these periods for a decent amount of time. Right. 99 to 2010, 27% total returns. You earned over 400% in emerging markets. That's why you diversify. And this whole cycle of the US Stock market can't last forever. It just can't chart off. Could it last five more years? Can last forever? No.

B (12:30)

Yeah. I got to be honest, the main period of time that I've been paying attention to, the stock market, they've been pretty bad.

A (12:36)

So like the funny thing is, when I first started investing and coming out of the great financial crisis, everyone loved emerging markets. Why? Because the past returns were so good. The whole 2000s. They did amazing. Everyone was saying, listen, the US isn't going to grow coming out of the great financial crisis. Unemployment is still high, growth is slow. You want to invest where the growth is, put your money in bricks, put it in emerging markets. And they've sucked ever since then. Now what's everyone say? Emerging markets stink. I want all my money in U.S. stocks. Look at how great the returns have been. It's the same thing. Flip and have another huge outperformance for emerging markets. I don't know, is there a specific.

B (13:11)

Definition of what emerging markets are or does each like fund company get to kind of just make up whatever they, they want?

A (13:18)

Well, there's the index that has. But yeah, each company can because.

B (13:21)

Yeah, I'm just always surprised. So China and.

A (13:23)

Oh yeah, that's the thing. The weights might be different with the countries. Yes, you're right, the weights are different and what country constitutes. But like I wouldn't think of Korea.

B (13:30)

As being an emerging market personally, but I'm not an economist. But you know, it doesn't seem. Yeah, I don't know, I'm always surprised to look down the list and see.

A (13:38)

It'S kind of like small and mid cap definitions that they're kind of always changing. Right. And some of these countries. Yeah. Move in and out. So.

B (13:44)

Yeah.

A (13:45)

But it's important to understand this boom bust cycle is like part of the the game. Which is, which is why investing can be painful. Even diversified investing can be painful. All right, let's do another one.

B (13:56)

Okay. Up next, we got a question from Jay. I own a home in the suburbs of Chicago that I purchased in 2022 for $655,000. At 3.5%. Not bad. My all in mortgage payment is about $3,500 a month. the time of purchasing a new home, I expect to have $425,000 in equity. Assuming an $850,000 sale price, my current home could rent for about $6,000 a month. The new home would be a million dollar property in a nearby community where we plan to stay for 20 plus years and raise our kids through high school. If I roll the $425,000 of equity into a new purchase, the monthly payment would be about $5,200 at a 6% rate. If I keep the existing home as a rental, the down payment would need to come from brokerage accounts, which would reduce my nest eggs. The core question is whether to rent the existing home or roll the equity the main reason I'm considering renting is the 3.5% mortgage rate, which may not be available again anytime soon.

A (14:57)

All right. It's funny, when I was growing up, a million dollar house would seem like it's. They don't exist. Right. Right now it seems way more commonplace.

B (15:05)

It was like the biggest house in town kind of thing. Yeah.

A (15:07)

I think the number is like 10% of all housing sales are a million dollars more now, which is nuts. Right. And I'm sure with. By you in the Northeast, that's way more commonplace. Right.

B (15:17)

Yeah. We saw a house that we were like, oh, that's a cool house. And it's just went on the market in our neighborhood or a couple of neighborhoods over. But we were on a walk and. And we looked it up and it's $2.1 million. And we looked, we looked it up on Zillow and it was under a million, like not that long ago.

A (15:35)

Yeah.

B (15:35)

It's crazy.

A (15:36)

Yeah. And you look at something, you go, that can't be a million dollar house. But it is. Someone in the chat said $6,000 rent. Geez. Yeah, that sounds like a lot. Listen, a lot of people have done this and people have asked us about this in the past three to five years. Right. I know people have done this and become landlords and rented out their house because why would you ever. And I've talked a lot over the years. How big of an asset that 3 1/2 percent, 3% mortgage is like, that's a huge financial asset for you. It's a great inflation hedge. Will we get borrowing rates back there someday? Possibly. What happened soon? I don't know. But I don't like it in this situation. Because you're buying a million dollar house. You're talking about, you're rolling the equity. That's fine, that's great for the down payment. But you're also saying you need to take some of the money for the down payment if you're going to keep the old one from a brokerage account and other investment accounts, it would hurt your nest egg. So you're just concentrating more and more on real estate here. And have you ever been a landlord before? Do you know what that entails? Some people can handle that. Some people are very good at it. I have a friend who has like seven Airbnbs and he goes, and he fixes all stuff that breaks and he tends to them and he mows the lawn and like, that's part of his job. He, like, he's a landlord for these Airbnbs but it's a lot of work and if you just do this once as a one off and it's not your full time job or you don't have an operational company doing it for you, that's a lot of work. Now you think you can get $6,000 but can you get the tenants to be there all the time and stay rented?

B (17:03)

What do you think the market to the, to the person's comment in the chat? I think it was James, like what is the market for people who can afford $6,000 rent and want to rent a house?

A (17:14)

Well, I guess a lot of people now who just don't want to buy but because if you, I guess if you do the math and assume current mortgage prices and current housing prices, that $6,000 is probably about right compared to what he'd be paying for that old house. But I don't know. Unless you're really.

B (17:31)

Sounds like a ton.

A (17:32)

Yeah, yeah. It just seems like a lot of work to be a, to be a. You can't half ass being a real estate investor. Right. You can't just say I'll just rent it out, it'll be fine. Like you have to actually know what you're doing and be able to understand that market if you don't. And again I just think the concentration of real estate here, if you keep the other one just, just for that rate, I don't think it's worth the headache and taking money out of your other accounts to concentrate more into a house. That's a lot of money in two houses, especially when you're drawing down from your other accounts. Yeah, I'd have a hard time doing that even though I love low rate debt like that.

B (18:08)

Well yeah, because part of what you're looking at here too is having to withdraw that money from your savings.

A (18:14)

Yeah.

B (18:15)

What that could grow to in the future, you know.

A (18:16)

Exactly. Opportunity cost.

B (18:18)

Yeah, that's it. That's the term.

A (18:21)

All right, all right, we got one more up next.

B (18:23)

We got one from.

A (18:24)

Oh wait, sorry. Someone in the, someone in the chat did after the emerging markets one asked less than a year is a trade, is more than a year a trend? Getting close. I don't think we can quite call it a trend yet, but getting close. Remember we did the question about cyclical versus secular a few weeks ago. A few months ago maybe.

B (18:44)

Yeah.

A (18:44)

Like this is a cyclical move. If it's a secular move where em outperformance for seven to 10 years or something, that's a different story. Too early to tell now all Right. We got one more.

B (18:57)

Last but not least, we got one from Jeff. I always Hear about the 4% rule and how you should take 4% from your portfolio each year and add for inflation going forward. Would it be better to start at 4% and just take 4% of the existing portfolio going forward with maybe a limit to upside in really good years? In up years, that may mean a bit more money and down less. Is this a good way to be flexible and make sure you don't run out of money? We just retired at 57 and are fortunate in that we only need about 3.5% withdrawals to maintain our lifestyle. Our interest and dividends cover most of our annual budget. Seems like this may be a good withdrawal method, although we may not need to implement it.

A (19:36)

I don't really want to point out. I. I got you, Duncan. I just want to point out I think Jeff has asked the most questions of any audience member we've ever had. Guys constantly firing off questions at us.

B (19:47)

We gotta get him a jacket.

A (19:48)

Yeah, he's keeping that inbox full. So I've been talking all about retirement withdrawal strategies over at our Talking wealth channel for financial advisors. That's YouTube and now available in podcast form. In fact, I was on talking wealth 2 hours ago live talking to Mike Piper about Social Security benefits. So check that out. So just search talking wealth on YouTube. But I've done a couple episodes. I did one with Bill Bengan this past summer. Who is the father of the 4% rule. People love talking about the 4% rule. I think it's just the name kind of rolls off the tongue. And then a couple months ago.

B (20:19)

People love that video. That video did really well.

A (20:21)

Yeah, people. Yeah, because he had a new book out. And then a couple months ago, I talked to Stefan Sharkansky, who wrote a new paper called the only other spending rule article you will ever need. This is. And his whole thing was, hey, I can beat the 4% rule. Okay, so he does a nice job of like, outlining the potential limitations of the 4% rule. You can take it off now. In most environments, you'll end up not spending enough. So, Duncan, wait. You do the 4% rule. You take your portfolio. Today you have a million dollar portfolio. 4% of that is 40 grand. All right? That's my spending each year. I'm gonna increase that by inflation, right? I'm gonna add 3%, 2%, whatever. My inflation rate is 5%. So my portfolio value in the future doesn't matter. It's just that initial starting portfolio value and the reason that's conservative for a lot of people because that's trying to save you from the worst case scenario of ridiculously high inflation or a great depression like crash or whatever. In most environments you end up not spending enough your money and your portfolio balance grows way higher because it's very conservative. So Sharkansky said, I'm going to have a little bit of the 4% rule, but also a little bit of this more flexible rule that Jeff talks about. So there's a growth bucket, which is just investing in stocks, and there's a spending bucket which is a ladder of tips. Treasury inflation protected securities. We've got a lot of questions on those over the years. Maybe we'll talk about them in the future again. So you get this stable inflation protected income from the bonds and you're split between stocks and bonds is how many years worth of spending do you require in fixed income? Right. So you have a five year ladder. You have a one year bond, a two year bond, three, four, five. In year one, one of those bonds matures and then the other bonds are a year older. Right. And then each year you have one bond maturing and that's your spending, that's your like, that's your steady income. And then you take a percentage. And he has a formula for it. You can listen to the video for more, but there's a formula for taking out from the stock piece. And if the stock market is going up, you end up taking more out. If the stock market is down, you're taking less out. That's kind of what Jeff is talking about. And so there's a variable component too. That variable component is important because when the stock market goes up and your portfolio is going up, you want to be able to spend more money and enjoy it more. You don't want to just let it sit there and grow and grow and grow. So that's what Jeff is asking about. So my point is you could take a little bit of each. Jeff, you don't have to say, I'm just going to do the 4% rule and follow it. And I don't know that anyone actually does this, the actual 4% rule, and follows it to a T. I think you have to be kind of flexible with this. Depending on what the environment is, what you're retiring into, the timing of bear markets, the sequence of returns, all this stuff. Like you have to be flexible.

B (22:42)

Are most people doing that on their own or is that something people have an advisor doing?

A (22:46)

Well, this is what people are trying to figure out. This is A huge topic. This is why people watch those videos so much. Because this topic is huge for DIY people and financial advisors alike. They're trying to figure it out. All these baby boomers have all these unknowns. How long am I going to live? What are tax rates going to be? What's inflation going to be? What are interest rates going to be? What are, what's the market going to do? How do you know how to spend how much your money? What's healthcare going to cost? I don't know. I don't want to live my money. So I like the idea of having a more flexible approach where you could take a little bit of the 4% rule and have one piece that's kind of bucketed to like this is kind of stable income. Every year we're going to increase it by inflation. It's going to stay stable. And that could be in bonds or cash or whatever you want. Kind of like that four year rule we talked about. Remember, there's a lot of rules here. And then the other piece could be more flexible. That fluctuates as your portfolio fluctuates. And so you're doing a little bit of each. So I think that makes sense to me where you're being more flexible.

B (23:36)

Dave in the chat is making this even more complicated. Do you use CPI or do you calculate your personal inflation?

A (23:42)

That's a good question. A lot. So for the spreadsheet warriors and personal finance, they probably use cpi. I think for most people you probably understand your own inflation, your personal inflation rate. Right? That makes sense to me. But that's why this is so challenging for people and why you have to be a little more flexible and you can't just have it set in stone. And I'm gonna follow this regardless of what happens. You have to take into account what's going on. You set out a plan, but then you update it as things come into play. So yeah, you're right. This is a huge topic right now that people argue about and people, should I do 4% or should I do 4.125% or like. You don't need to get into that specific. But I think you need to be flexible and make changes occasionally. Okay, does anyone in their chat know what their personal inflation rate is? Probably not.

B (24:27)

I would be very impressed.

A (24:28)

Right. Maybe a couple DIYers do, but I would guess no one really does. No one ever believes the CPI number, but also no one ever knows what their personal inflation rate is, is either, right? No, no one has. No one knows that. So you Guess that's the secret about financial planning. No one wants to admit there's a lot of guessing that goes on.

B (24:47)

Right.

A (24:48)

But that guessing can be done intelligently in a reasonable manner. And also, you update your priors as the real world becomes those expectations. That's the idea. Someone in the chat said 8 to 10%.

B (25:03)

That's what I would guess. Mine. Mine was. That's what I would just completely estimating. But coffee's gone.

A (25:10)

Disney inflation is at least 25% per year.

B (25:12)

Yeah, yeah, there's that.

A (25:14)

I got to text my wife this morning, hey, why don't we just go back to Orlando next year and go to Universal instead? I said, nope. Nope. Sorry, I need a break.

B (25:21)

You got to go. You got to go do the Hagrid Haggard ride at Harry Potter World. That looks cool.

A (25:27)

Yeah, I'm good now. I just watched the last one last week with my son. I'd never see the movies. He watched all seven of them, like, in like, three weeks.

B (25:34)

Oh, nice.

A (25:35)

Seven or eight? I don't know.

B (25:36)

I think it's eight because the last one's two parts. Right?

A (25:40)

You think Voldemort had a runny nose a lot. You know, that was. I was thinking. Yeah, I appreciate that one. All right, so remember, check out Talking wealth if you want to learn more and get into more detail on that 4% rule stuff. People really do seem to like that, and we get a lot of questions on it. Email us ask the compound showmail.com thanks, everyone in the live chat. As always, we're firing off your questions. I want some people to calculate their annual inflation rates. Next week, everyone's favorite Mr. Bill Sweet will be back talking taxes, Roth IRAs, usual stuff.

B (26:11)

Also, thanks to the market for being fun again, you know.

A (26:15)

What do you mean, you know? This is just.

B (26:17)

I told you the other day, this is the kind of market where I'm just buying stocks that are going up in the morning and then they continue to go up, and then you sell them. You know, it's a fun, fun environment.

A (26:27)

This is the top. See you next week.

B (26:28)

See you, everyone. Thanks for listening to Ask the Compound. All opinions expressed by Ben Carlson, Duncan Hill, and any of their guests are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.