How Do You Invest in a Bubble?

Summary

Ask The Compound – "How Do You Invest in a Bubble?"

Podcast: Ask The Compound
Episode Date: October 1, 2025
Hosts: Ben Carlson & Duncan Hill

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Episode Overview

In this episode, Ben Carlson and Duncan Hill tackle some of the hottest and most challenging questions on investing in the current AI boom – a period many are viewing as a potential market bubble. The hosts break down how investors should approach markets that feel speculative, especially given historical precedents. Other topics include how to use home equity in retirement planning, philosophies around "dying with zero", the value of hiring a financial advisor, and what truly constitutes "upper middle class" in today’s America.

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Key Discussion Points and Insights

Are We in an AI Bubble? How Should Investors Respond?

• Ben’s Historical Take: Ben draws parallels between today’s AI frenzy and past manias, like the 1800s railway boom and the 1999 dot-com bubble ([02:17]).
  • Past bubbles led to overinvestment and losses, but also laid crucial technological foundations.
  • “They laid down railroad tracks to places where towns didn't even exist... That bubble put England way ahead... It transformed the country in a lot of ways.” – Ben ([02:30])
• Difficulties of Bubble Spotting:
  • “Everyone knows when we're in a crisis. That's easy. No one knows exactly when we're in a bubble.” – Ben ([03:05])
• Quote from Jeremy Grantham ([03:19]):
  • "The long, long bull market since 2009 has finally matured into a full fledged epic bubble... This could very well be the most important event of your investing lives."
  • Ben notes Grantham wrote this in Jan 2021, and markets have since nearly doubled, highlighting how tough bubble timing is.
• The Four Strategies for Bubble Environments ([04:42]):
  1. Go On Offense (Soros Method)
     • "When I see a bubble forming, I rush to buy, adding fuel to the fire." – Ben quoting Soros ([04:50])
     • Ride the momentum but have a clear exit or high risk tolerance.
  2. Play Defense (Grantham Approach)
     • Shift to cash, bonds, or hedging.
     • Difficult due to the risk of missing ongoing upside; “Market timing is always hard, but even more so in a bubble.” ([05:36])
  3. Diversify
     • Don’t go all-in or all-out; adjust allocations and include undervalued or less-speculative areas (value stocks, bonds, REITs, non-tech sectors).
     • “There are other areas of the market that end up doing okay. ...Pick something besides mega cap stocks, tech stocks.”
  4. Do Nothing/Stick to Your Plan (“Ben Carlson Method”)
     • Stay diversified, rebalance occasionally if needed, keep contributing as usual.
     • “Doing nothing is a decision, and the right one most of the time for most investors, as long as they have a plan in place.” ([09:30])
     • “You have to be comfortable sitting through drawdowns and volatility and avoiding FOMO.” ([09:55])

Adjusting Rebalancing for Bubbles

• Ben is open to “over-rebalancing” in extreme markets (e.g., shifting slightly away from stocks if valuations get extreme), but opposes “all or nothing” moves ([10:36]).

Special Advice for Retirees

• For retirees, being diversified and maintaining a liquidity cushion (cash, bonds) is vital – “You don’t want to sell stocks that are down. ...You want something else to carry you through.” ([11:34])

Behavioral and Emotional Angles

• "Find the torture you're comfortable with. That’s investing." – Ben, quoting Jerry Seinfeld ([12:13])

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How Should Home Equity Factor Into Retirement Planning?

Question from Todd ([13:47]):

• Housing typically appreciates with inflation, but is illiquid and hard to count in spending rules like the 4% rule.
• Options for using home equity:
  • Downsizing: Sell, move to a smaller home, pocket the difference.
    • "Most baby boomers say they're never going to sell. ...But I wonder how many will choose this route when they realize ...there's so much equity there." ([14:45])
  • Renting After Sale: Lower cost, but emotional hurdle.
  • Borrowing Against Equity:
    • Home Equity Line/Loan – accessible but requires payments, often at floating rates.
    • Reverse Mortgage – available post-62, no payments, settled upon selling or death, but complex and not always family-friendly.
  • Inheritance/Estate Planning:
    • Allow home equity to pass to children, who benefit from stepped-up cost basis.
    • "Home equity is the inheritance for your children. ...but you need more liquid assets when it comes to financial planning. A house is not a great thing to use for financial planning." ([17:14])
• Fun aside: Duncan’s complaints about renting and lack of AC highlight practical downsides versus home ownership ([17:38]).

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“Are You a Die with Nothing Guy?” – Philosophies about Saving and Spending

Prompt inspired by Bill Perkins’ “Die With Zero” ([18:38]):

• Ben critiques extreme frugality in personal finance:
  • “Do not, repeat, do not listen to their advice about spending money. They want you to delay gratification for the rest of your life... and are miserable because you never get to enjoy it.” ([18:49])
• On the trap of oversaving:
  • “I’ve had countless conversations ...with people who have more than enough money but cannot force themselves to spend and enjoy it. And I think that’s a sad way to go through life.”
• Personal evolution: Ben, former frugal saver, now embraces enjoying wealth after diligently saving.
  • “I’m more in line with the die with zero camp than the fire camp that says you should make do with very little.” ([22:01])
  • “My net worth will probably peak in my 50s and then it should be downhill from there because you should be spending your money while you still have your health.” ([22:01])
  • He recalls the impact of family loss to underscore prioritizing enjoyment with family now ([22:35]).
• On balance:
  • “I am all about seeking balance in life. ...I save and invest so I can spend the rest and not have any guilt about buying shoes or a new shirt or taking a trip with my family.” ([24:20])
• Notable Quote:
  • “Your 401k will not give you cherished memories. ...Life is short. If you have money, you should enjoy some of it.” ([21:12])

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Is Hiring a Financial Advisor Worth It?

Question from an anonymous listener with $5.5 million in investable assets ([25:23]):

• Ben’s framework:
  • No “perfect” fee model. The worth of an advisor depends on the services provided and the value the client perceives.
  • If you question the value, maybe the service isn’t comprehensive enough for your needs.
  • “Setting your price is like setting a screw. A little resistance is a good sign.” – quoting Harry Beckwith ([26:43])
  • Surround value not just in managing money, but offering unexpected services or advice you wouldn’t have found yourself ([28:30]).
    • "I think that's how you know you have a good advisor. Like, 'Oh, I never thought about this...'" ([28:52])
• Fee justification increases with complexity; those comfortable and competent may not need full-service management.

Duncan’s Point:

• The more assets you have, the bigger small mistakes become, possibly justifying the advisor’s fee ([29:58]).

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What Is “Upper Middle Class” Really?

Question from Michael ([30:48]):
Challenge: social/media definitions of “upper middle class” use standards out of reach for many (e.g., $1.5M homes, expensive private education, high daycare costs). Who is upper middle class?

• Ben:
  • Hardline numbers are misleading; most people don’t know where they fit on the wealth scale.
    • “I think the problem is most people in their own minds have no idea where they actually sit on the wealth scale.” ([33:15])
  • Pew/US Census data suggests 19% “upper class,” but absolute and local factors matter; wealth concentration at the top distorts perceptions ([33:54]).
  • The asset composition skews wealth inequality – the top 10% own 87% of stock ([34:30]).
  • “Hope springs eternal in America. And we all think at some point we're going to be in the top 1% or maybe the top 10%. ...by definition, we can’t all be in the top 10% or the top 1%. It’s impossible.” ([35:55])
  • Factors like visible wealth, access to information (e.g., via Zillow/Glassdoor, social media), and local comparisons drive perceptions and discontent ([36:37], [36:47]).

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Memorable Quotes and Moments

| Timestamp | Quote / Moment | Speaker | |-----------|----------------|----------| | 02:30 | “They laid down railroad tracks to places where towns didn't even exist... That bubble put England way ahead.” | Ben Carlson | | 03:05 | “Everyone knows when we're in a crisis. That's easy. No one knows exactly when we're in a bubble.” | Ben Carlson | | 04:50 | “When I see a bubble forming, I rush to buy, adding fuel to the fire.” (quoting Soros) | Ben Carlson | | 09:30 | “Doing nothing is a decision, and the right one most of the time for most investors, as long as they have a plan in place.” | Ben Carlson | | 12:13 | “Find the torture you’re comfortable with. That’s investing.” (quoting Jerry Seinfeld) | Ben Carlson | | 17:14 | “A house is not a great thing to use for financial planning. ...It's just not because it's too illiquid and it's hard to get the money out unless you just sell it.” | Ben Carlson | | 21:12 | “Your 401k will not give you cherished memories. ...Life is short. If you have money, you should enjoy some of it.” | Ben Carlson | | 24:20 | “I am all about seeking balance in life. ...I save and invest so I can spend the rest and not have any guilt about buying shoes or a new shirt or taking a trip with my family.” | Ben Carlson | | 26:43 | “Setting your price is like setting a screw. A little resistance is a good sign." (Harry Beckwith) | Ben Carlson | | 33:15 | “I think the problem is most people in their own minds have no idea where they actually sit on the wealth scale.” | Ben Carlson | | 35:55 | "Hope springs eternal in America. ...by definition, we can’t all be in the top 10% or the top 1%. It’s impossible.” | Ben Carlson |

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Timestamps for Key Segments

• 02:01 – Main bubble investment question and historical analogies
• 04:42 – Four strategic responses to bubbles
• 09:30 – The wisdom of “doing nothing”
• 11:13 – Adjusting asset allocation for retirees
• 13:47 – Home equity in retirement
• 18:38 – “Die with zero” and balancing spending vs. saving
• 25:23 – The value/fees of hiring a financial advisor
• 30:48 – Defining “upper middle class” and media misconceptions

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Summary Takeaways

• Spotting bubbles in real time is nearly impossible; diversification, discipline, and self-awareness are crucial regardless of your market view.
• Resist making extreme portfolio adjustments based solely on the fear of a bubble.
• Understand your own behavioral tendencies around saving and spending; strive for balance, and don’t let fear or social media distort your financial self-assessment.
• Home equity is a poor planning tool for daily withdrawals but can be useful through downsizing, borrowing, or legacy planning.
• The real measure of upper middle class is contextual, relative, and deeply shaped by both local economics and national wealth concentration.
• Financial advice is most valuable when it adds unexpected insight and peace-of-mind, not just numbers.

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Transcript

[A]

Welcome back to Ask the Compound, the show where you ask and we answer. I am your host, Ben Carlson. The AI boom is sure starting to feel like a bubble to a lot of people. If I'm being honest, the sheer level of overinvestment is starting to feel like a bubble to me as well. So what do you do as an investor if you think we're in a bubble? How do you invest in this type of environment? We'll answer that question and more questions directly from you, the audience on today's show. Please stick around. Thank you. Our email here is askthecompoundshowmail.com on today's show, we're answering questions straight from our Compound viewers about investing in the AI boom times. How should you utilize home equity in your retirement planning? Am I a die with zero kind of guy? How do I personally balance saving and spending? When is it worth it to pay for a financial advisor? How much should you pay and who is in the upper middle class in America? How do you even define that? Okay. Plus we'll also be taking questions from the live chat. As always, thanks everyone for coming out. Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build multi asset portfolio of stocks, bonds, options, crypto and more. You can also access 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 contacts at every touch point. Plus earn an uncapped, uncapped 1% match when you transfer your portfolio, including IRA transfers, rollovers, even contributions. Fund your account in five minutes or less. Paid for by Public Investing. Full disclosures in the podcast description. All right. Hey Ben, let's do it. Duncan, how we doing?

[B]

Good, good. How are you doing?

[A]

Coming to us straight from Boston, Massachusetts.

[B]

Yep, yep. We got a special show coming this Friday. People are gonna like it.

[A]

So yes, big name. All right, let's do first question.

[B]

All right. Up first day we got a question that is kind of an amalgam of questions including one that I asked you.

[A]

So yes, we got, we got a bunch of questions about this this week. So I put a bunch of stuff together into one.

[B]

Yeah. So we'll try this up first. We got you said you think AI is some sort of bubble. Bubbles eventually pop. What can investors do if they agree with you and want to prepare for that pop or Is there nothing you can do but ride the wave? Even if a bubble is obvious, what can you do about it?

[A]

Okay, so pull up my blog post I did about this this past week. I called it the weirdest bubble ever. Listen, I've. You can take it off now. I've read a ton of market history, not to brag. And the insane amount of spending going on right now for the AI buildout sure feels like the railway bubble of the 1800s. I wrote about that in my book, Don't Fall for It. They laid down railroad tracks to places where towns didn't even exist. But. And the railway stocks went nuts. Speculation was off the charts. They spent way too much money. They over leveraged it. Then it all came crashing down because there was too much spending and too much hype. But that bubble put England way ahead of the rest of the world when it came to this new form of transportation. It transformed the country in a lot of ways, right? People could live in the country and take the train and go from town to town and people just had to lose their shirts to get there, to get all that track laid down. Same thing with the dot com bubble. We laid an insane amount of fiber optic cable, most of which sat dormant for years after the bubble burst. But that laid the foundation for the tech boom that was to come. And all the great and not so great Internet things we have these days, we just had to live through the dot com bubble and bust to get there. So this feels a lot like those previous instances. If I've read all this history and I didn't see the similarities, I'd be nuts. Right? The problem is everyone knows when we're in a crisis. That's easy. No one knows exactly when we're in a bubble. So I want to read you something from Jeremy Grantham, a self professed bubble expert. Okay. The long, long bull market since 2009 has finally matured into a full fledged epic bubble featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior. I believe this event will be recorded as one of the great bubbles of financial history. Right alongside with the south sea bubble, 1929 and 2000s. These great bubbles are where fortunes are made and lost, and where investors prove their mettle for positioning a portfolio to avoid the worst of the pain of a major bubble breaking is likely the most difficult part. But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and portfolios. Make no mistake, for the majority of investors today, this could very well be the most important event of your investing lives. Scary, right?

[B]

Sounds a little dramatic.

[A]

He wrote this in January of 2021, okay? As the Meme stock stuff was starting to go crazy. The s and P500 up 90% since he wrote this. The NASDAQ 100 has doubled. That's 15% annualized returns.

[B]

Wait, just to be clear, you're saying 2021, not 2020, when. March, when everything went to hell with COVID You're talking about.

[A]

No, he wrote this. He wrote this in, like, the Meme stock, right? Where the Meme stock stuff was taking off. Okay? So again, the stock market has essentially doubled since he wrote this. So again, he's a self professed bubble expert. All right? So I just want to caution people who think this 100% is or is not a bubble. We can't say for sure. Okay? I think it feels like a bubble in a lot of ways. But come on, who knows of this stuff? But for argument's sake, for this question, let's say this is a bubble. Let's say you really feel strongly that, yeah, I think this is a bubble and it's going to end badly. I've seen this movie before, right? The way I see it, you have four options. One, you could go on the offensive. You could George Soros this thing. He said, when I see a bubble forming, I rush to buy, adding fuel to the fire, right? He thinks, why not make some money if there's going to be a bubble? So you could try to be Soros and ride the wave. Who knows how far this AI stuff could go? Could we see Nvidia at a $10 trillion market cap before this is all said and done? I wouldn't predict that. But could it happen? Sure. I wouldn't. You know, crazier things have happened. So this type of strategy can work gloriously until it doesn't, of course. Right? So you need an exit strategy. Right? Or. Or the ability to live through insane volatility. That's. That's the hard part. Two, you could do the Grantham thing and play defense, right? You could go to cash, you could go to bonds, you could buy puts, you could invest in hedging strategies, maybe some of the buffer ETFs, right? So you have heavy. Have some sort of guardrails on your portfolio. The problem with this strategy is that market timing is always hard. But I think it's even more so in a bubble situation. You don't know how far the pendulum is going to Swing from one end to the other, right? What if you miss a melt up, right? And stock market doubles again from here. What if are you comfortable dealing with that fomo? That's the hard part of playing defensive. Like how and when will you know you're wrong? Because you go to cash now and the market goes up 50% from here, then what do you do? Right? You need a pretty decent drop just to get back to the point where you already timed the market and went to cash. So I think that's a hard one. Number three and four are probably the ones that I lean more towards. So three is you can diversify. So even if you're 100% certain we're in a bubble, there's no rule that says you have to go all or nothing, right? You don't have to go all in cash and say I'm out, I'm hedging. That's it. Don't put all your chips in the center of the table. You can always over rebalance your allocation one way or the other, depending how comfortable with risk you are in an environment like this. So let's do a chart on Daniel coming out of the dot com bust, this is after the 2000-2002 bear market value stocks and bonds did really well even at the NASDAQ 100 got crushed. Now this is through the end of 2002, the NASDAQ 100 was down over 70%. The S&P was down almost 40%. At that time bonds were up almost 30%. Small cap value stocks were up 20% or so and they were up even more than that before they finally fell in 2002. So there are other areas of the market that end up doing okay. Daniel, let's do the next chart please. This is one of my favorites. This is the returns for the lost decade of 2000 to 2009 when the S&P was down 9%. In total it lost 1% a year. Even worse after inflation, obviously. European stocks, mid caps, high yield bonds, bonds, aggregate bonds, small caps, emerging markets and REITs all did pretty darn well considering we had two 50% plus crashes in the S&P 500 and the NASDAQ 100 fell 85% like Great Depression level fall. So wow, look at REITs, right? So I'm not chart off. I'm not saying this is necessarily going to happen again. But listen, there's a bunch of other places right now that haven't kept up. You could pick, throw a dart at the wall, dividend strategies, high quality stocks, international Stocks, emerging markets, right. Bonds, REITs, all these different areas. Mid cap, small caps. Pick something besides mega cap stocks, tech stocks. And it probably has underperformed and the valuations aren't nearly as high. So if you want to diversify, I think that's a pretty good way to play it. Now, if there's a huge crash, will these stocks and strategies fall as well? Probably just not as much.

[B]

When I saw Scott Galloway recently pointing out that he was making a bit of a prediction about markets in the US being flat for the next decade or something, but he was talking about how many European stocks are single digit. PS so yeah, I guess there are things out there. If you're one of those people talking about everything being overvalued right now, it's not every stock in the world market.

[A]

It'S just the biggest companies. Right. And I'm not pounding the table that these stocks are really overvalued. They're way higher value than the rest of everything else pretty much though. Okay. So obviously the timing on these moves will get you too if you diversify more. I think you just have to weigh the trade offs in terms of what are you going to regret more, missing out on further gains if we do get a melt up or taking part in big losses if God forbid, this is the peak. Right. So obviously life would be easier if you could just ride the AI wave higher and then step right off when it's about the crest. But that's not a realistic strategy as we all know. There's a fourth strategy you could do. This is the Ben Carlson method. You do nothing.

[B]

I thought you were asking. Give you our money to manage for us.

[A]

Right. Well, I'm saying you could invest based on your personal risk profile and time horizon if you already have an asset allocation place that you're comfortable with in bull markets and bear markets in bubbles and busts. I think doing nothing is a decision and the right one most of the time for most investors, as long as they have a plan in place. Like you're not a hedge fund manager, you don't have to try to time these cycles perfectly. You just have to be sure you have an asset allocation and investment strategy you can stick with come hell or high water. Right. So I think you need to be comfortable sitting through drawdowns and volatility and avoiding FOMO and all that stuff if you're not changing your portfolio all the time. But I think you have to balance your desire for growth with your ability to sleep soundly at night. And doing nothing is a simple Strategy that's not by any means easy. But what am I doing to prepare for an AI bubble? Nothing. Right. I'm making new allocation changes. I'm staying diversified and rebalancing on occasion. I'm continuing to make contributions to my various accounts. That's a bubble or something else.

[B]

Do you change how you rebalance based on if you think you we're in a bubble or, you know, approaching 1.

[A]

Or I @ the extremes, especially I. Maybe I'll over rebalance. It's like if we're in a big bust, I'm going to put more money into stocks. Right. And, and take out of cash. I think you could, you could do the same thing. If instead of trying to go all cash, like if you're in an 8020 portfolio and you want to go to a 75, 25 or 70, 30, that to me makes more sense or a 6040 even, than trying to time it and go all in cash. Because I just think going to the extremes, eventually your emotions are going to get the best of you because the market is not going to cooperate. You're not going to go to cash, and yay, the market's going to fall magically the next day. It doesn't work like that. So what about.

[B]

I think this advice is always long, you know, or you know, this, this idea. Not advice, not advice. This idea is always like more long term. What, what would you say to someone who's right around retirement or in retirement? How should they think about it differently if they're already at age where they're maybe not going to have income anymore?

[A]

Yeah. At that point, you better be diversified and have some sort of liquidity strategy. Whether it's cash or bonds or some other thing you can. Because you don't want to sell stocks that are down. That's the thing. I'm sure there are some people who still have 100% of their portfolio in stocks when they're retired. And they say, I don't care, I can live through it. But you just don't want to be selling stocks when they're down 20, 30, 40% and locking in the losses. You want something else to carry you through. That's so how many every year's worth of cash or bonds or whatever, something relatively safe. You, you want to have that anchor in your portfolio that it's more important than ever when you're, when you're in retirement. Because you said you don't have the income and human capital to keep buying. Yeah. So you're right. The, the risk is different to people at different stages of their life. Jerry. Jerry Seinfeld once told Howard Stern, you have to find the torture you're comfortable with. That's investing, right? He's talking about careers, but that's investing. Wait, someone in the chat said, does Ritholts do this for their clients? Do they make adjustments to allocations? Sure, we occasionally make adjustments to allocations, and we have a tactical strategy that is rules based, that will make changes depending on the market environment. And it's not for everyone, but enough of our clients are in it. But most of the time, the allocation changes come from. They're very few and far between. But a lot of times it'll be because of something changing the client's life, not necessarily the market's. That's. That's more regular in terms of changing than like us making it, pulling a huge lever and making a big change. It does happen, but it's just not very often. All right, next question.

[B]

All right. And yeah, before we leave that topic, last thing I'll say is the point that you guys always make that I think is just so fundamental to this is it's not about, like, pulling your money out because you feel safe and you can sleep at night. It's getting the money back in the market that is. Is the problem.

[A]

That's the hard part. It's two. It's two decisions. So what are you going to do? You going to George Soros this thing and just keep doubling down your triple leverage ETFs?

[B]

I mean, I'm doing. I'm making some trades. I'm making some trades. I'll tell you what I'm not doing this time is I'm not going to be buying like, inverse stuff and trying to play anything like that. I've been shorting it.

[A]

Yeah, because the timing. It's the timing on those things that gets you every time.

[B]

Yeah, I've been burned.

[A]

You miss by a week or something. And the trade is useless. Right? That's the hard part. Yeah, it's the timing and the magnitude. All right, next question.

[B]

All right, up next, we got one from Todd. I listened to your video with the 4% rule guy. Can home equity be used in the 4% rule calculation? I typically carry a very low loan to value and have even owned one home free and clear before we moved. I always have a hard time figuring out how to use this home equity in retirement planning. I'll always need a place to live, but we'll downsize eventually. I guess I could just assume a certain level of Appreciation. But it would be easy to just throw this into the 4% rule.

[A]

All right, so he's talking about on talking wealth. Recently we talked to Bill Bengen, which is great. He's a creator of the 4% rule. Really good conversation if you want to listen to that. My general rule of thumb for housing is that it should appreciate roughly in line with the rate of inflation. Obviously that depends on where you live and the economic environment and such, but. And it's probably a better rule of thumb for people who live in their homes and own them outright versus people who have leverage. But 40% of people own their homes right now, and most of those are retirees, obviously are people approaching retirement. So I think that's a decent baseline. So the question is, how do you use your equity in retirement planning? Now he mentioned downsizing potentially, so that's a good one. You could sell and move to a smaller or cheaper home pocket the difference. Most baby boomers actually say in surveys that they're never going to sell. Right. I'm never leaving. But I wonder how many will choose this route when they realize like, oh, there's so much equity there to choose. Now obviously you could also sell your home in rent, but that's a different lifestyle choice as well. So obviously the, the benefit there is there's no new debt and it's a lower housing cost. But then you have to move, which can be emotionally difficult for people who've lived in a house for 10, 20, 30 years. Home equity loan or home equity line of credit or cash out refinances, that is something you borrow against equity in your home. The great thing is you can access cash while you still live there. But the downside is payments are required, like monthly payments to pay it off. You know, you could be able to make the payments right out of there because it's such a big amount. But the problem with the HELOC that I've talked about in the past is it's, it's floating rates. You can do a home equity loan which isn't taking the loan that have the rate we have right now, which is not great, but that's a good way to stay in your home and just borrow against the equity. But again, you have to make the monthly payment still. Unfortunately, now a lot of people turn to reverse mortgages too. Those are a little more complicated. So it's homeowners, I think, 62 and above. The lender pays you based on your equity and you can do it, I think in a monthly payment or a lump sum or A line of credit and then the loan is repaid when you sell. Move out or die, essentially. Right. So there's no monthly mortgage payments required. You get the payments, but then they get the house eventually or can sell it. So essentially the loan comes due when you, when you die. These things are rather complicated and difficult to understand. There's a lot of paperwork and fine print and such, but. And it's not great for the kids, but hey, it's your equity, right? Screw them kids. Or if you don't want to screw the kids over, you could use the equity for estate planning. Like home equity is the inheritance for your children. I'm going to spend all my liquid assets and the kids get the house and they get that step up cost basis. You know how this works, Duncan?

[B]

Yes.

[A]

When you die, right. If you bought your house for 30 grand and now it's worth 500k, that's a big capital gain. Right. But if your children take it over after you pass, they get the, the new level as their cost basis. So they could sell it immediately, pay no taxes, essentially.

[B]

Can't you also do that while you're still living by using a trust? Can you put the home into a trust? Isn't there something like that? I feel like I've heard that maybe that's.

[A]

Don't come to me, don't come to me for estate planning advice. But I guess this question is a good advertisement for not being house rich. Right? Like that. Equity is certainly worth something. Peace of mind for some. It can help you buy a new house and use it as a down payment. But you need more liquid assets when it comes to financial planning. A house is not a great thing to use for financial planning. It's just not because it's too liquid and it's hard to get the money out unless you just sell it.

[B]

Yeah. You know. You know, my latest why I hate renting situation is I'm four days shy of being without AC for a month. So, you know, if your landlord doesn't care about fixing your AC, then, you know, you just don't have AC. So it's been 84 in my. In my place, quite a few days.

[A]

See, to me that's worth like 40% of rent right there. You get 40% knocked off your rent because AC is that important.

[B]

40%? Yeah. I mean, if fuel is pretty important. Yeah. Not everyone has it, but it's definitely part of what you're paying for. If you have my thought.

[A]

My thought is before air conditioning existed and I wrote a whole thing in one of my books about the history of ac that people must have just been sweaty and smelly all the time.

[B]

Oh, yeah.

[A]

Like, everyone just must have stunk.

[B]

You do get a. You get used to a certain level. So, like, now 77 doesn't feel that bad to me in the place. But, like, yeah, you're still, like, it's muggy and. Yeah, it's uncomfortable.

[A]

Yeah, it happened in my office a few times. It's not fun.

[B]

Yeah.

[A]

All right, next question.

[B]

Okay, up next, we got one that came in from Twitter. Are you a die with nothing guy? How much do you need to save? What if you live until 100? Yes, enjoy life, but you need to save.

[A]

Okay, so I kicked the hornets test a little this week. Put my tweet up here. I said, personal finance people are great at giving advice about saving and paying down debt. Do not, repeat, do not listen to their advice about spending money. They want you to delay gratification for the rest of your life until you have a big portfolio and are miserable because you never get to enjoy it. Maybe hyperbolic a little bit, but I honestly believe a lot of this, that personal finance people are really good at getting people started and paying off big amounts of debt and getting you to be frugal so you can set money aside. But a lot of them hate spending money and their whole thing is just, you never spend money, you never enjoy yourself. And I think that's. Someone recently commented, I'm the patron saint of spending your money and enjoying it. I'll take that crusade. And I am on a crusade against hoarding all of your money. But that's a personal thing for me because everyone's spending, saving, debt relationship is impacted by their lived experiences. Like, how could they not be right? So I'm approaching this topic from hundreds and hundreds of conversations I've had over the years with people who have more than enough money but cannot force themselves to spend and enjoy it. And I think that's a sad way to go through life. I don't think, what's the point of the money? So I'm also something of a born again spender. I was a super frugal guy in my early days. I was always a saver. So also before you said, risk means different things to different people depending on what stage of their investing life cycle they are. Young people should get on their hands and knees and pray for bear markets. You can buy at lower prices. Older people who are retired, they want nothing to do with bear markets. That's terrible for them. It's obviously like Your income and your job prospects and your net worth and your place in life. That all has a big bearing on should you spend or should you save more? Right? Someone who is in debt up to their eyeballs should have a different spending plan than someone who has a seven figure net worth and no debt. Right? Okay, caveats out of the way. Get them out of here. Check out this tweet from this week. Show this next one. So this guy says he's got 9.8 million in his 401. I don't put it on Nvidia or what. His 3,000 in his checking and $296 in savings. He's got it on the equity market, right? His wife wanted to go on vacation. He said, I can't, we're broke. If you understand this. Wait now how this could be engagement bait.

[B]

How do you end up with that much in a 401k? Are there 401ks where you can pick individual stocks? I thought they were all pretty much fund based.

[A]

It must have been something like that. And maybe this guy is rage baiting engagement. Rage baiting people, right? Well, always.

[B]

Yeah, we're always just taking people at face value with tweets.

[A]

Yeah, you kind of have to, but this is just dumb. Take your wife on the vacation. Your 401k will not give you cherished memories. Right? Who cares, right? This is the kind of thing I'm talking about. Life is short. If you have money, you should enjoy some of it. That's what it's for. Now, there will always be people who like, cannot make themselves spend money. It could be a personality thing or something handed down by their parents or maybe a life changing event, right? My father, if he could have bought one pair of clothes for work and one pair of clothes for outside of work and lived with them for the rest of his life, he would have done that, right? We cannot force him to spend his money. And that's just the way he was. It's something of the way he's brought up his personality, whatever it is. Now, I'm not going to be a die with zero guy, but I'm going to be more. I'm more in line with the die with zero camp than the fire camp that says you should make very do with very little. Have you read Die with a Zero yet or not by Bill Perkins?

[B]

No, I have not. No.

[A]

So he essentially says your net worth should peak in your 50s and then it should be downhill from there because you should be spending your money while you still have your health, right? What's the point of saving it until your 70s and 80s and 90s when you don't have the health, you can't really enjoy it as much you should, you should enjoy it more while you're here. You know, he talks about throwing big 50 a lot of parties. Come back to vacationing.

[B]

A lot of people come back to this though, and say, like, yeah, I, I had a family member end up in a, in a horrible, like, nursing home. I want to make sure I have great end of life care. You know, what do you say to that? How, how do you die with zero if you're trying to plan for that?

[A]

Yeah, the robots will take care of us at that point anyway. It'll be fine. No, I get that. That's why, that's one of the reasons that people have this mindset, like, what happens if there's a healthcare problem or I fall and I break my hip or whatever it is. So I get that. I just, you know, I just think that you should enjoy your money while you still have some health. And, you know, my mindset has been totally changed because having kids and then watch my brother pass away in his 40s. Right. It just completely changed my mentality. So again, this is a personal thing for me, but. So this year I've spent more money than any year in my entire life. My savings will probably be down from last year to this year for the first time ever. And the personal finance spending scolds would blush at the stuff that I'm spending money on. We're taking more vacations. We did a big renovation on our house. I'm probably gonna buy a new boat this year, but I don't need one. I want a bigger motor. Okay? Sue me. These things make us happy. Now, part of the reason we could do this is because we saved diligently for 20 years in the first place. But that's the switch that a lot of people have a hard time doing is going, hey, I saved. Now I can't turn it around. So I'm living proof that you can do that. I just view it as like, I have this revolving relationship with money that's changed a lot over time. It doesn't work for everyone. But I've just had countless conversations with people over the years. Clients and people in my inbox and family, friends who have no idea how to spend their money once they build a nest egg. So I could never be a dialed zero guy fully because I have kids. I don't want them to grow up entitled and spoiled. But I couldn't possibly go through retirement without having some sort of backstop for them. Like something.

[B]

I mean, you're. You're not telling people to take all their savings, go to a casino. You're saying, like, make great family memories on a vacation or buy a vacation home that is, by the way, an asset. Right. That one day you'll probably sell and make money off.

[A]

Exactly.

[B]

You're not.

[A]

The stuff that you prioritize.

[B]

Yeah.

[A]

Yes. Yeah. Take the stuff you prioritize and be okay with spending money on that. And if you want to, like, mercilessly cut costs everywhere else, then do that. If this stuff doesn't make sense to you, I just think I am all about seeking balance in life. So I diet and exercise so I can feel okay drinking beer and eating pizza. Right. I work hard, but I don't want to miss any of my kids sporting events. Right. I save and invest so I can spend the rest and not have any guilt about buying shoes or a nude shirt or taking a trip with my family. And I do feel no one has this stuff perfectly figured out. Like, what's the right exact. But I think trying to have some balance is the key, at least for me.

[B]

Yeah, makes sense. Makes sense to me.

[A]

All right. Jay Luther in the chat says maybe leaving a large inheritance is what makes some people happy. Ben. It does. And I think that that is a very much a baby boomer mentality. But I tell you what, your children would be way happier getting that money at 30 or 40 than 60 or 70. I can guarantee you they need that money more when they're younger than when they're older.

[B]

Yeah, it's true.

[A]

Full stop. All right, next question.

[B]

Okay, up next, we got a question from Anonymous. I was lucky enough to be an early employee who had a substantial exit during the froth of 2021. I didn't sell it all. Who knew what 2022 would bring? But I sold enough and slowly unwound the position into a diversified set of investments that are now worth about 5.5 million. I'm single.

[A]

Not to brag, not to brag.

[B]

I'm single, don't own a home, and I'm in my early 40s. The economic whipsaw of the past few years, along with some questionable business decisions, have driven repeated layoffs at my job. And much of what I loved about the company is in the past. I'm considering taking a break and perhaps firing part two. I currently work with a fee only advisor who doesn't manage my assets. The arrangement has been fine. I pay a relatively Modest monthly fee, they prepare my taxes, and they've done thorough diligence on my fire scenarios. That said, I'm not particularly thrilled with the firm since I feel comfortable managing my own money. The idea of paying $50,000 or more per year for full service asset management is hard to justify. My question is, when does it make sense for a client to hand over portfolio management to a firm? What key factors should drive that decision? And can an RIA realistically provide enough value to justify such a significant fee?

[A]

All right, we get questions like this all the time. I had a conversation with a prospect yesterday, this same question. Especially when you're dealing with people who are good with numbers and spreadsheets, they run the numbers and they go, I want to do a cost benefit here. Does this actually make sense? So the thing is, there's no perfect business model. I think someone will always be questioning your worth when you're providing a service. And they should. There's this great book called Selling the Invisible by Harry Beckwith, and it's about marketing and sales in service based businesses where, listen, when you're selling a service, especially in financial services, you're not. There's no assembly line that goes down and makes this product. And in the end it's like, here, here's your beautiful product, here's your end widget. That doesn't happen, right? It's a service that's ongoing, so it's hard to see the end product since it's an ongoing thing. So he says, like when you're a service based business, he says if no one complains, your price is too low. If everyone complains, your price is too high, obviously. So he says how much resistance is just right? He says 10 to 20% is just about the right level of pushback. He says 10% or so of people will complain about any price they have to pay because they always want to deal. Others have a budget in mind and any deviation from that price they see as wrong. And so others will negotiate every price because it's how they're hardwired. He says setting your price is like setting a screw. A little resistance is a good sign. So I think that. So it's like, can an RIA justify their fees while they manage something like $144 trillion? So obviously some people are fine paying them, but there are certainly people like this who question it. And I think more people in their like who've had it struck it rich like this in an early age probably think more closely about this because they have so long to like grow their assets in compound like in your 40s. Right. You're doing the math in your heading. Oh my gosh. So I think if you're questioning while you're already in this relationship, not just thinking about getting an advisor, like, yeah, it's likely the work that they're doing for you is probably not justifying the fees. If you're questioning this. Because listen, when we first started out we were essentially just doing investment management and financial planning at Ritholtz and that's when we were tiny. Now we quickly realized like we needed to offer a much wider set of services just for our fees. So we added a tax practice, we added an insurance practice, we have estate planning experts, we have corporate retirement, all these different things we can do. We have a dedicated financial or family office team that works exclusively with high net worth people, all this stuff. So we've heavily added to our tech stack and made that process more seamless for people. And we didn't raise our fees by adding all these services. It just aid into our costs. And I think that's what you have to decide, like, is my financial advisor offering everything I need in a one stop shop to make sure the fees I'm paying are commensurate with the services? And that's true of any business. And I think the big one for a lot of our clients is that we sometimes offer them services or advice they didn't know was out there. I think that's how you know you have a good advisor. Like, oh, I never thought about this. I never would have found this on my tax return or I never would have tried this tax strategy or I never would have thought about insurance this way to take it out. I never would have done this investment strategy or done this allocation. I think the stuff that the DIY person just doesn't know or hasn't kicked the tires on, that's the stuff that makes you go, oh, light bulb moment. Of course not. Yeah, they're worth their fee and more. If you've never had that light bulb, it might not be worth it for you. But it depends how complex your financial life is that money might be easier for you to manage, you know, a lot of tax liabilities or whatever and you don't need one.

[B]

But I think level of assets matter a lot too. Right. Like at a certain point a small investment mistake or you know, you selling when you shouldn't sell could end up making that number seem really small.

[A]

Right. So yeah, exactly, yeah, that's part of it is have you made mistakes before? How complex is your life? Do you need expertise in certain areas? There is no right or wrong. I don't think having a financial advisor is right for everyone, but there's plenty of people who recognize that they want to outsource their time and find expertise and work with a team and figure out ways to like bounce decisions off of people and all this stuff. So there's no, there's no perfect answer. But if you're not having those feelings with your current advisor, everyone's not going to love their advisor all the time. But if you don't feel like it's the right situation, you know, maybe it's not the right thing for you. All right, one more.

[B]

Yep. Last but not least, we got one from Michael. I feel that there are many mentions of upper middle class across legacy media, financial media and social media that challenge my definition of upper middle class. I like this question a lot. I have the same feeling. My assumption of upper middle class is the 50 to 75 percentile of Americans. From a net worth and income perspective. I see net worth as $192,000 to $658,000 and. And various estimates of income around 85 to $140,000 depending on where in the country you are. Yet many media posts mention buying a $1.5 million house, sending your kid to Vanderbilt, $67,000 a year, sending a kid to a $3,000 a month daycare as upper middle class lifestyle options. Am I crazy to think those three options I mentioned above are not accessible to the average upper middle class family in the US are people confusing the 80 to 97% who are wealthy but not rich with upper middle class?

[A]

I feel like we've tried to define rich here before, but yeah, this is, this is certainly a good question because I think the really hard part is that we've just moved the goalpost so far and, and that in terms of like how wealth is distributed in this country and what we think is rich. And I think we also have nostalgia for a past that never existed too. So. Daniel, throw up my my meme here. You've probably seen this go around before it goes seem to go viral like once every month or something on. On Twitter.

[B]

Show us the why, Ben. Show us the why.

[A]

Once upon a time a family could own a car and send their kids to college all on one income and life was easy. The problem is, it's funny because I think in the 50s, 6% of people had a bachelor's degree in this country. Even by the 80s it was less than 20%. Today, 36% of US adults 25 and older hold a bachelor's degree. So it's a way smaller number than you think. So there was never a time when everyone was paying for college. Right. And then in 1940, less than half the country had a high school diploma. Still today it's like 90%, I think. So. You know, houses were 25% smaller back then. They didn't have AC. Duncan, you're living on AC right now. Basically, no houses had that back then. You didn't have multiple bathrooms. They certainly didn't have quartz countertops and tile black backsplashes. And you know those gold faucets now that are all the rage? Right? Everyone has a gold faucet. I don't know, it seems a little cocaine 80s to me, but what do I know? I'm not a tear designer.

[B]

Yeah, this is news to me. I haven't seen this.

[A]

Oh, yeah, if you get a new.

[B]

That's what you mean, like brass, right?

[A]

Well, it's not made of gold, but yes, it's a gold color.

[B]

Okay, gotcha. I gotcha.

[A]

Yeah, that's the. If you go on HGTV these days, everything's gold. Okay. I think the problem is most people in their own minds have no idea where they actually sit on the wealth scale. So here's how Pew defines it. Let's show the chart here. They say 52% are middle class, 28% are lower class, and 19% are upper class. They have some definitions. I can't remember exactly how they figured that. Go to the next one. Show the changes over time. This is interesting. So they show in 1971, the middle class was bigger. Right. So that's shrunk. But we've essentially doubled the upper class and the lower income class has fallen a little bit. I think this is one of the reasons that it's so hard. And this is good and bad. You can do chart off. There are fewer people in the lower class.

[B]

That lower class has gone from 27% to 30%.

[A]

That's a little surprising, right?

[B]

Yeah.

[A]

I almost think it was like when there was a bigger middle class. It's like we're all in this together now that there's more people in the upper class. So it makes it feel like, why aren't I in there? And also the people in the upper class think, well, there's too many of us. Like, this place is too crowded. I don't even feel rich because there's too many more rich people. So I think it's good and Bad. So let's look at some charts from Bloomberg too, using Federal Reserve data just to show why I think this is a problem. So the top 10% comprises 2/3 of the net worth in this country. The top 1% holds more than 30% and more has gone into the top 10%, but really more has gone into the top 1% of the top 0.1%. The top 0.1% holds 14% of the wealth in this country, which is just insane. So that's, I think one of the reasons why the middle and upper middle class don't feel like they're rich at all, because the tip of the spear is so much richer. Now look at the asset composition. So this next one, the top 10% owns 87% of the stocks, which is one of the reasons wealth inequality keeps getting worse. The lower middle class have played catch up this decade, but part of it is because so much of their wealth is tied into the housing market. And we had this one time surge in the housing home prices and guess what, that's never going to happen again, unfortunately, this 50% surge in like three years. So I think defining it you can do chart off is hard because even people who are upper middle class most of the time don't feel like it because they're surrounded by other people in the upper middle class or people in the upper, upper class. And so, and then people always say like, what about where you live? If I live in San Francisco or New York and I make this, of course I'm not upper class. And so I think people's like positioning in life and how they feel about where they are in life has way more to do with what some numbers say from some survey organization. And I think it's tough. The other thing is, so I wrote about this in my book, don't fall for it, okay? Research shows that over 50% of Americans will find themselves in the top 10% of earners for at least one year of their lives. More than 11% will find themselves in the top 1% at some point. And close to 99% of those who make it into the top 1% of earners will find themselves on the outside looking in within a decade. So it's not like these things are static and everyone who's in a certain cohort will remain there for the rest of their lives. But the funny thing is that hope springs eternal in America. And we all think at some point we're going to be in the top 1% or maybe the top 10%. I think this delusion is one of the things that makes this country great but also makes people miserable. Because by definition, we can't all be in the top 10% of the top 1%. It's impossible. So I think that's what makes it really, really hard. But the point about. Yes. Having a $1.5 million house and sending your kid to Vanderbilt and a $3,000 daycare. You're right. That's, that's. Those are upper class problems. It doesn't. Not most people cannot afford that. By, you know, obviously I think other can. Yeah.

[B]

The other thing I've seen is that it's never been easier now to know how much money other people make. There are all these websites, glassdoor stuff like that that tell you like how much the going rate is for whatever your job is.

[A]

You can look up anyone's home on Zillow, right?

[B]

I'm based on location. Yeah. House prices. People on social media are constantly, especially Gen Z, they are very open about how much money they make and they will just talk about like salaries and sometimes they'll be complaining about a salary and you're like, that's an amazing salary, you know.

[A]

Well, think about the people who post their, their screenshots of their portfolio value of Robinhood on online. Like no one ever would have known in the past. You, you could think about it and try to figure it out. But yeah, it's just more known and that makes it harder too. Social media has just been. Social media is horrible for keep keeping up with the Joneses mindset. Right. It used to be the people in your neighborhood or your peers, your coworkers at work. Now it's everyone out there and that makes it really hard. So yeah, the, the perception of wealth is way harder than it ever was in the past. So yeah, this is a very astute question and I don't know if I really gave a perfect answer, but it's one of those things where it varies so much that it's really difficult to figure out exactly. Okay, we did it. Email us askthecomoundshowmail.com if you have a question. We keep getting a ton of great questions coming in. Again, everyone in the live chat, please give your questions. If you're on Twitter, the chat was.

[B]

Asking for your recommendations of a finance or investing book. You read anything recently? Anything you like.

[A]

Boy, it's been a while. I'm gonna have to look next week. I'll come back with a. With the answer to that question. Leave us a comment on YouTube. Review all that good stuff. Subscribe, see you next time.

[B]

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.