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- [00:01]
A
Welcome back. This is Ask the Compound, the show where you ask and we answer. The future is unknowable. No one knows what's going to happen. It's true. We live in a world with an irreducible level of uncertainty. So how does one create an investment plan in a world such as this? How should investors think about forecasts, allocations and risk when dealing with an unknown future? I'm getting philosophical today. Okay, we answer these questions and more on today's show. Let's do it. All right. Bill is back. Duncan may never return from Japan. Askthecompoundshowmail.com on today's show, we answer questions directly from our audience about managing risk in an uncertain world. Going overboard on your in plan Roth conversions. We've got Mr. Roth here to help. How the Box ETF works, pivoting later in life to a new role in your career. And how much is too much in your liquid private assets. During the live chat, as always, fire off those questions. We'll take them live. Bill's usually chopping it up in the chat while we, while we're recording, we'll do it live.
- [00:58]
B
Yeah, without Duncan. It's a little harder though. But Ben, good to be with you. Just back from a little quick trip to the Middle east over the weekend.
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A
On business, you sell the attire. All right, today's show is sponsored by Public, the investing platform for those who take it seriously. On public, you can build a multi asset portfolio of stocks, bonds, options, crypto and more. And now generated assets which allow you to turn any idea into an investable index. With AI, it all starts with your prompt. From renewable energy companies with high free cash flow to semiconductors with growing revenue over 20% year over year, you can literally type any prompt and put AI to work. It screens thousands of stocks, builds you a one of kind, one of a kind index and lets you back test against the S&P 500. Then you can invest in it in a few clicks. Generated assets like ETFs with infinite possibilities, fully customizable based on your thesis, not someone else's. Go to public.comatc and an uncapped 1% bonus when you transfer your portfolio. That's public.comatc paid for my Public investing full disclosure to hit podcast. Description. All right, Bill, what's your, what's your ETF gonna be?
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B
Etf. Oh, that's a really good one. I mean swt sweet. I don't know. You tell me. What do you think?
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A
Okay, it's just got to be tax advantaged.
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B
Can't really beat Roth. I mean, that's just such a, such a classic. William Roth, 95 Forever.
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A
Yeah, that's actually pretty good. All right, let's do some questions.
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B
Let's do it. So question one, managing risk in an uncertain environment. Richard gets points from me. Ben, if you don't see it coming, how do you plan for it?
- [02:20]
A
All right, so this is a question in response to a recent blog post I did. I wrote a Post called the 10 rules for dealing with uncertainty. Because we're dealing with AI disruption right now, we're dealing with war. We have lots of unknowns about the future at the moment. Right. So Richard wants to know, how do you plan for things that you don't see coming? So I'm a big fan of the movie the Holdovers, Alexander Payne movie directed Paul Giamatti. Have you seen it?
- [02:43]
B
I haven't, no, to be honest.
- [02:45]
A
Yeah, it's in my holiday rotation. So Paul Giamatti plays a history teacher at a boys prep school. And this line that he uses kind of has stuck with me. I wrote it down in my little notes app after I read it, heard it. He says history is not simply the study of the past, it is an explanation of the present. Very deep. Right. So obviously that quote is open to interpretation, but I think anyone who's studied a lot of history in their life has to know that the future is unpredictable. So much of that stuff that's happened, the big event in history, right. So my favorite example of this, you know you're familiar with this, this memo from Lynn Wells, who is a worked at the DOD during the George W. Bush administration. He put together this memo in April of 2001. And it goes through all the way back to the start of the 20th century. And it talks about what happened each decade. And the whole point of the article, the whole point of the memo is just that each decade something completely unpredictable on a left field happened. And then he concludes it by saying this. All of which is to say, I'm not sure what 2010 will look like. And he's writing this again in 2001. But I'm sure that it will be very little like we expect. So we should have planned accordingly. Now, this letter was sent a few months before 9, 11, right. Two wars, housing market crash, one of the biggest financial crisis since the Great Depression. Right. So it was just the timing of it. It's a great example. And the thing is, you don't have to go back like that far in history to think about unpredictable events. This whole decade has been unpredictable. Right. Think about it. So pull my next thing up here. This is from the economist that wrote this in November of 2019. What's going to happen in 2020? Obviously they wrote this in again November couple months before the pandemic totally disrupted the world. We had shutting down the economy unplugged it and we plugged it back in. Government spent trillions. Oil price went negative. Supply chain shocks, fastest market crash in recovery in history. The strongest labor market that we've seen of our lifetimes probably that we'll ever see. Right. 9% inflation that didn't lead to a recession. AI coming in to save the day. Right. As inflation was peaking. The tariff transform filed by Liberation Day. All this stuff I could keep going. Never could have predicted it. So the question is okay, fine, build me a financial plan for that world. How do you do it?
- [04:53]
B
Yeah. Can't see what's coming. My advice to Richard Ben is kind of on that realm. The realm of the possible is nearly is very, very difficult to worry about. So I kind of exclude things I think low probability or ultimately living on cat food, stock market collapse into zero, nuclear war stuff that's just a level of planning.
- [05:14]
A
That's a good point. There's a difference between possible and probable. Like your baseline versus stuff that could happen. If you prepare for the stuff that could happen 1% of the time, all the time. That's not. Good luck with that. Right?
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B
Yep.
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A
Yep.
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B
And I just not more or less ignore but like I'm going to tackle that in another. In another era. Right. Because I think ultimately the realm of the probable is pretty hard to solve for the thing that popped into my head. Ben, if we can pull up chart number one here. John for me is just like taking a look at history like to your point. And one of the things from the Credit Suisse Global Returns yearbook stems from Marsh. They published this every year. I think it's just a fantastic read. Take a look.
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A
Favorite charts.
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B
Yeah. The long view of history here. And so chart one there at the top takes a look at the kind of the composition of the US market stock market beginning in 1900. You can see rail is the predominant player and then goes on down the line of what the other industries are compared to today. Where technology is the largest single thing and railroads are the technology of their era. Steam engines. But just how much more diversified the US is. And I've just always paired that Ben with the bottom chart showing the growth of the US relative to other markets. And this only goes back to 1900. Ben that growth would look a lot better if we went all the way back to 1776. I think the most useful thing I could tell Richard or anybody is planning that tomorrow is going to look relatively like today. Enough that I think you can solve for that problem, focus on those variables, and I think that's going to be enough to get you there.
- [06:39]
A
Yeah, my whole thing is just creating a portfolio and an investment plan that's durable enough to handle a wide range of situations. Inflation, deflation, high rates, low rates, bull market, bear market. Like these things. You don't know when they're going to happen. You can't predict the reason why they're going to happen. But you kind of are certain there's going to be a recession, eventually, there's going to be a bear market, eventually there's going to be a correction, there's going to be a bull market. I don't think. I mean, setting aside all the crazy things that happened this decade, how many people would have thought the bull market from the 2010s would continue essentially at the same pace in the 2020s? No one would have predicted that. No one. And it has. So that's the thing, is just giving yourself a wide range of outcomes. I think that's the thing. And Howard Marks always says, you cannot predict, but you can prepare. That's the thing. You don't have to predict this stuff in advance. You can still prepare for the eventuality of these things happening. But to your point, you're not preparing for the world to end every single day, because that's not going to happen. It only happens once again.
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B
I think human nature is more or less immutable. I think that really is the thing that demonstrates the difference between conservatives and liberals very generally in the spectrum is I think people are going to behave tomorrow roughly the same way they behave today.
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A
Yeah, that's a great point. All right, next question.
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B
Cool. So, Ben, our female listeners, they answered the call this week, so I'm very, very excited about this.
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A
Exactly. We're men of our word here.
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B
Exactly.
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A
We said female listeners are going to the top of the heap.
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B
Yep. Promises made, promises kept. So this question is from Rachel. So thank you for bumping my question to the top of the queue. You're very welcome. My husband and I are early 40s, investing roughly 40% of our gross income. We have about a million dollars pre tax, a million dollars in roth, and about $500,000 in a taxable brokerage account. Not to brag, my employer now allows after tax contributions and in plan Roth conversions. I want to take advantage, but this will make us cash flow negative in the short term. And for spending from our taxable account at roughly $1,000 a month to maintain our lifestyle, Mr. Rachel does not want to see the taxable account decline and would prefer to limit our mega backdoor Roth contributions instead. All the taxable Investment gains about 35%. We'd have to pay about 15% gains on sale. Is it worth paying the extra tax spend to effectively shift some of our savings from taxable account to Roth via the mega backdoor strategy from Rachel and Tayron?
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A
All right, so I'm going to tell, I'm going to let you cook on this one. I'm going to step back and just let you take it. But my whole thinking is I kind of agree with the husband here that her, her mega back door, like get everything in Roth. It sounds because they're selling taxable assets to do this, it sounds a little too complicated for me. That's my initial read. What do you think?
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B
I think that's the right answer. I'm going to take the other side for fun. But I think that the benefit, what Rachel is pitching to Mr. Rachel is like, look, this is a opportunity for us, right, to move assets in the taxable space into a Roth in I think mid-40s was Rachel and Mrs. Rachel. Therefore they're going to have been 40, maybe 50 years of compounding in front of of them and more if they end up passing on assets.
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A
Hey, they've got a pretty good, if we're doing a tax allocation that can be your thing, like there's asset allocation, there's tax. They have 40 and 40% in pre tax accounts, 40% in Roth and 20% taxable brokerage. That's a pretty decent breakdown.
- [09:48]
B
It's pretty awesome. And so for the low, low price bend of 15% capital gains, now I get tax free compounding for the next 50 years or more. That seems like a pretty good deal to Rachel. However, Ben, I'm going to pause. I think you're right. Ultimately what I wouldn't want to do is pay a lot of tax now. Right. Make that transition happen. I think 35% gains is on the upward limit of what I would recommend as reasonable. Right. Because ultimately you're going to be investing in the same stuff. Yes, the taxes will be higher later, but you'll be able to compound on a higher base because you're going to leave that money invested instead of sending it to the irs. Now, it's a close call, Ben, but I Think I'm with you.
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A
Yeah. I'm usually a fan of avoiding the complexity. So Dave for the last question said. Okay, Ben, so what does that portfolio look like today? Global stocks and global bonds. And what percentage, what else is needed? I just think whatever you're going to do, you have to have a plan. That's the point. I think there's a lot of different allocations you could use that'll help you survive. There's not one successful way to invest. There's a way that I think you can invest and you think we should invest. Right. But I think just having even a mediocre plan is better than having no plan. How's that?
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B
Yeah, agree, totally. And back to our first question. I mean, the investment returns have come from across the world throughout human history. There's no reason to focus drill in any one country. Seems like a relative diversified place. But I love the tax diversification question. How much Roth is too much, Ben? I don't, I don't know. I don't think there is too much Roth, but I think I, Yeah, I probably wouldn't want to pay a lot of tax to get there. So I think using the allocations, you have to kind of fill up the mega backdoor. Roth is the right strategy for Mr. And Mrs. Rachel.
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A
Rachel does sound like she was separated from you at birth. Maybe she's heavy on the Roth.
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B
Hey, woman of my own heart. And her and her husband able to save two and a half million dollars. The only problem is she's spoken for.
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A
So, yes, people, people keep harping on us about not reading so many questions with so much money. But the money, again, isn't the point. It's the decision making process that matters. Yeah, I agree.
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B
Just lop off of zero and this could be anything.
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A
And we can't help it if we have very successful people listening to the show that have done really well for themselves financially.
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B
Yeah, no, I agree.
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A
Kudos to them.
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B
I agree.
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A
Yeah, that was not to brag, even though we didn't say it. All right, next question.
- [11:57]
B
Yeah, I got a pop quiz for you before we go, John. Quiz number one. Ben. If you could trade places with another famous Ben today, who would you trade places with? Ben Folds from Ben Folds Five, son. I thought about the army. He said, son, you're effing high. Benjamin Netanyahu. Who's kicking butt in Iran? Dr. Benjamin Spock or our famous founding father, Benjamin Franklin. Who's your favorite Ben?
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A
I have seen Ben Folds Five. I saw them when I was in college. Interlock in Nishkin. Not bad. I am reading. I was currently listening, not reading, to the Ben Franklin biography Chernow by Walter Isaacson.
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B
Oh, Isaacson. Yes, yes, yes.
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A
Yeah, boy. I mean I love the way he was essentially a blogger before. It was a cool thing. He was doing the fortune cookie philosophy stuff before anyone and he had burner accounts. He was writing in his own letters under like female pseudonyms saying how great his papers were.
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B
Amazing.
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A
I'm a Ben Franklin fan.
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B
He's like Kevin durant of the 1770s.
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A
Listen, I lived in Philadelphia, not too far from Independence hall. So I would love to go back and see that at its time. I live in Philadelphia.
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B
We made the post office. Yeah. The only man to have signed the Declaration of Independence, the United States Constitution and I believe the. Yeah. The peace treaty with Paris. So he's the only person in history to hit those three high points. I didn't realize, Ben, after reading that book how much time he spent overseas. Right.
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A
Franklin was our emissary.
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B
Right to. So yeah. Okay, so Benjamin Franklin is the answer. Great answer. Let's move on to question two. So what we have here again. Oh no. Here we go. Thanks. John, on last week's show you spoke to a gentleman from Alpha Architect regarding box spread loans. Towards the end of the segment a comment was made about the box exchange traded fund. When Alpha Architect can you comment on whether the box ETF is a good alternative to money market mutual funds? Supposedly the ETF earns treasury bill rates but instead of paying tax on dividends, you pay capital gains tax on box when you sell the fund fund if you hold for more than a year it would be long term capital gains. And that's from Curtis. From Mashad.
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A
All right, let's see. So. So Joe from last week, he wasn't from Albato, he just wrote for them. Anyway, friend of the show, Wes Gray actually came on the show a few years ago when the fund first launched and talked about this a little bit. So side note. So last week we talked about box spread financing and this is essentially the other side of it. Other side note, tune into talking wealth. Next week we're going to bring Joe Wang from Synthetic Fi to do an even deeper dive for people on these box spread loans because we we there's more meat in the bone obviously after the questions last week. So box spread loans are using the option market to essentially finance or borrow money. The box ETF is the other side of that trade. It uses options to recreate a T bill like return stream. So John, give us a chart on to show this is the box ETF boxx next to bill, which is the State Street 1-3-month T bill. Right. You can see that it's a wonderfully straight line for both of them because T bills, you know, they're not going to lose money nominally. And so you can see that Architect actually has outperformed a little bit. But the lines essentially match each other over time. Right. Since this ETF was launched in early 2023 and obviously the big piece here for people is the benefit of the tax side. So I'm going to let you handle that Bill. But I think our person in the, in the question kind of nailed it. Right?
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B
Yeah. Curtis has a really good point. The only thing I would correct Curtis on at the end, I'm going to get to that in a second. But the thing to understand about this specific fund and other funds that use option overlay strategies to generate income is that it's considered a 1256 contract in that they're going long calls on the market and they're going short puts or vice versa. Ultimately those two things offset and create a box spread. That's what these things are. Similar to the concept we talked about, box spread lending. This is taking the other side of that trade bend and what happens is the fund proceeds all get reinvested from the options contract back to the fund. Exchange traded funds have this really neat thing. It's a tax loophole where they can swap basis of the market. Effectively what they're doing is they're doing that so the fund doesn't pay any distribution. So effectively the net asset value ticks up every day that the market's trading by whatever the risk free rate is or proxy that they're going for. And at the end when you liquidate your fund, you get a 1099 and it's 60% long term, 40% short term, regardless of the holding period. The last point I want to make, there is some unsettled tax math on this. We're not totally certain. I think it depends on your CPA whether that is taxable along the way because they're effectively mark to market contracts or whether you can defer the gain until the very end. So just to clarify Curtis's point at
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A
the end, they're relatively new still, right?
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B
Yeah, relatively new and fun, fun fact. I ended up, you know, experimenting, put my toe in the water last year. I've yet to receive a Form 1099 to work it out on my own tax return. So maybe we could follow up with Curtis here in a Couple of weeks.
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A
If you own T bills or the bil etf, what are you paying in taxes?
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B
Yeah. So if you own the bill. Exactly. Or a fund or that owns Treasuries, what you're doing is you're paying ordinary income tax on the distributions of the fund. Those funds pay distributions either monthly or quarterly. I'm not totally certain. But what happens is those distribute from the fund. You can choose to reinvest them or they accumulate in your brokerage account and effectively that's taxable income. The fund does that. So it doesn't have to pay tax at the fund level, but then you have to pay that income tax at your level.
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A
So if you're at a high tax rate, the difference here, the tax equivalent yield is way higher.
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B
It could be huge. Yeah, because you're getting effectively what would be ordinary income. You're getting 60% of that long term capital gains rate either along the way or accumulated at the end, depending on how your CPA would treat a 1256.
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A
Yeah, this is like a tax deferral strategy.
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B
It really is. There is some nuance though. One more thing I want to throw here is that the treasury income bend. So income from U.S. treasury bonds that is usually state tax free, state tax exempt. Because of federalism, the states cannot tax federal income and vice versa. Well, wouldn't that be nice? The states wouldn't anyway. But the states usually don't tax federal income. And it's not clear to me whether you get that same exemption. I'm guessing not. Because the income you're earning through a box spread or any type of ETF in this structure, that's not treasury interest. Right. So I think they're losing states.
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A
Our service members that always email us in. That means they cannot be taxed at the state level, Is that what you're saying?
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B
No treasury interest. So that's. Any US Taxpayers not. Yeah, Federal treasury if you have a Treasury bond.
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A
Okay.
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B
Yeah. Not taxable at the state level usually.
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A
All right. I'm trying to hook them up. I guess not. All right, cool.
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B
Okay, pop quiz number two. So number two, Ben. I'm still riding high from the Olympics. I'm just having fun. I'd like to know which female Olympian, which female champion would you like to grab a beer with? So let's start at the top left with Katie Ledecky, swimmer. I think she's the most decorated US female Olympic athlete. Top right is Simone Biles. Got to see her with my daughter about a year ago in Madison Square Garden. Really, really enjoyed the show I think she's tops. Definitely the most famous female gymnast in the world. Bottom right. From track and field, we have Allison Felix. I believe she's the most decorated. And then Michelle Kwan, my wife's heart. I don't know if you saw Aaliyah Liu win the gold medal with your family, but that was a great, great show, and I really loved that there was some pick me up at the end there for skaters. So, Ben, which female Olympian would you grab a beer with this weekend?
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A
So my son got huge into the Olympics, which was a surprise to me. He got. He had my wife get, like, all this USA gear, and they did one of the days they had off of school for some reason. They did, like, an Olympics party. So they're all decked out in USA stuff and they're celebrating. They had, like, USA candy and all this stuff, so he really got into it. And, well, Katie, isn't she the one who can balance a glass of milk on her head while she's swimming because she moves it so little?
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B
I don't know.
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A
I don't know. So that's a pretty good parlor trick. I kind of like that one.
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B
Do that with the beer. Is that what you're saying?
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A
Yeah. Yeah, right. You know, I'm a track and field guy. I did track in high school. So I'll go. Allison Felix.
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B
Allison Felix. Yeah. She seems super cool. Super chill.
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A
Yeah.
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B
Great. Okay. Great choice. Great choice. All right, next actual question.
- [19:39]
A
Bill, how much time did you put into these quizzes? I want to know.
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B
I was up well past midnight last night. Then I take this very, very seriously.
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A
ChatGPT is for they don't.
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B
You guys don't let me in my cage very often. So. Question 4. I have a question, and I'm hoping it gets chosen because I'm a woman and I'm soon to be single mom. Congratulations. Extra credit for women and moms. So if I plan to go back to school and get a degree at age 48, should I put my money in a 529 for myself? I'm wondering if this will provide financial protection so I won't have to divide this asset with my spouse during the divorce. And if I set aside money for career reentry into the workforce, I definitely need to work to support myself and get medical insurance after the divorce. I've taken many years off to raise kids and be our primary parent. Also, my previous career as a magazine writer editor is pretty much obsolete. I'm thinking if I don't spend all the money on schooling, I can maybe transfer 529 funds to an IRA, thanks to new guidelines. What do you think of this plan from Kerry, from Tabriz? Ben, what do you think of this plan?
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A
All right, first of all, single parents are superheroes in my book. I don't know how single parents do it. It's hard enough with two. Okay. I've, you know, first of all, good for her for going back to school. That's impressive at that age. I've honestly never thought about using a 529 like this before for someone who goes back to school later in life. I guess I'm not a divorce expert. I'm not positive that a 529 is sheltered from that. I don't know if you know that, but I think if that's the only reason you're doing it, I don't think necessarily you're safe, correct?
- [21:07]
B
Yeah. I think, Kerry, great idea, like on the premise, but unfortunately, yeah, the 529 with you as a beneficiary, that's going to be your asset. I'm not an attorney, Ben. This is not legal advice. But my understanding is any asset you control, that's fair game for the court,
- [21:23]
A
right? Yeah, I think so. So the question is, is it useful for like a tax advantaged account for someone at this age? And again, I've only thought about it for, for children before. Does it, would it make sense at all? Is there any, you know, if you're going to go to college right away, you're putting the money in and you're spending it, like, does it even make sense to do it?
- [21:40]
B
Yeah, I mean, I think so. I think so, Ben, really depends a little bit on the facts and circumstances. So like I said, I don't think you'd be able to shield that asset in the event of a separation, unfortunately. Carrie, I never know whether to say congratulations or I'm sorry about somebody getting divorced because it's either good or bad news. Maybe it's both. But I think the concept of, hey, I'm going to reboot my career, right? I'm going to go back to college and is this a way to save a little bit of money doing so? Ben, I'm totally into that. A lot of states will offer a state level tax deduction on your state income tax for contributing to A529. So particularly if this is something you're going to build to over the course of a couple years, you would benefit both from potentially that state tax deduction. Depending on the state. In New York, it's $10,000 a year, it's not nothing. But if you build that up over two to three or four years, even if you're invested in, you know, let's say a bond fund, a low risk fund, that income that the 529 is earning is shielded from income tax if you spend it on college is tax free. So I think this is a great plan for care.
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A
So maybe, maybe it helps a little bit.
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B
I think so. I think so. Yep. Yep, totally. And again, I think the. One of the great avenues for anybody to kind of get back into the workforce, I think, is this college route, Ben. I mean, I just think about who I was from age 18 to 22. Even though I was an ROTC guy, I supposedly had my stuff together. I was a little turd. I didn't take it seriously. I was doing my. I was like prepping for this show. I was doing my homework at midnight the night before. I would just take things so much more seriously as an adult and I would just love the hell of it. I'd be quoting that Isaacson biography of Franklin to my history teacher and I'd be having a blast. So I think that lifetime opportunity to then reinvest in yourself and then get back into the workforce, I think it's a great move for Carrie.
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A
I think that I always tell young people that I would study for sure is psychology, and that because I was more focused on the numbers stuff in college that just understanding human nature and that. I feel like I tried to give myself a self education in that after school, but that's the kind of stuff that I would be way more interested in if I. If I had to go back. All right. Someone in the, someone in the chat asked, what was your hundred meter time, Ben? Yeah. Now what is it? I was not a burner, so I was. So a bunch of the guys on the football team ran track. You know, the guys that didn't play baseball. We ran track to stay in shape. Right. So, yeah, yeah, it was funny. We all ran the hundred and the two hundred and then the, the relays for that and we would all be in first place at 40 meters. Right. Like the 40 yard dash. That was. We were really great there. Yeah. And then they'd pass us at the end and so I think I ran like. I think I ran like an 11 7. So I again, I was at a 40.
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B
Okay. And a 40.
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A
100 meter, 11.7. So I was like a 4. Yeah. 4 7, 4 8, 40.
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B
Oh, interesting.
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A
So I was better at the 40 that I was more lateral Guiding as opposed to like breakaway speed.
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B
Ah, okay. You were that shifty, like Kyron Williams on the Rams. Just left, right. Okay.
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A
I got caught a few times.
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B
I was a distance guy. So the short, the shortest track I ran was 400 meters. I think I ran 62 point something. I bet. Yeah, I mean, I felt okay about it, but dudes are running in the, in the, in the low 50s, so I was getting smoked by 10 seconds. 800 bend was my favorite. That was always my favorite race to run because ultimately if you're a distance guy, that's like a walk in the park. I think I was at 206 and my best mile was somewhere around 5:40 something sub 6.
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A
That's pretty good.
- [24:39]
B
Yeah, I felt good about it at age 18 and I would come nowhere near that. Not even close. I think I'm talking eight minute miles today in my, in my, my mid-40s. So not.
- [24:47]
A
You're a distance guy. All right, give me a quiz. What do you got now?
- [24:49]
B
Okay, great. So next up, we talked about the ladies last time, John. So out of the famous, famous Twitter, formerly artist, normally Twitter financial authors that I am personally a big, big fan of, I need you to choose between your children. So you have to go to Puerto Rico with one of these gentlemen. Ah, that's the wrong. That's the wrong place to go. Let's say Colombia, let's say Iran. You have to go to Iran. Do you choose between Wes Gray, Puerto Rican resident Wes Gray, famous software architect, come up a lot during this show. Right. It's kind of weird that he was ready to go in, waiting in the wings. Do you choose Colin Roche? Great. Great dude. I did a march for a fallen with him and Nick Magi, which still sticks in my mind coming out of COVID Do you choose famous author Morgan Housel, a friend of the firm. I think he was the first Animal Spirits guest after me, so he and I have a place in the pantheon. Or our friend, our main man from New York City, Doug Bonaparte and his wife Joelle. Which, which author do you choose?
- [25:40]
A
Listen, I'm friends with all of these gentlemen, but you talk about a foxhole. I have to pick Wes Gray.
- [25:44]
B
I know I led you on that one. I should have, I should, I should have moved the conditions. I know Wes. We have not seen him since this weekend, so I don't know exactly what that means, but it's possible he's kicking ass and taking dames somewhere right now.
- [25:56]
A
Although Doug Bonaparte's hair is essentially like a helmet, so he could be safe
- [26:01]
B
yes, Very, very handsome. All four gentlemen. Yeah. But these are four of my favorite dudes. And I just want to give each a shout out and make you, put you in the shoes, good at content
- [26:09]
A
and good, better being people. All right, I think we got one more.
- [26:12]
B
Yeah, great. So question five. So this is from Jeremiah. My financial advisor has me in alternative assets, private equity, pe, venture capital, vc, private equity, real estate, private credit and more, totaling about 40%, Ben, of my investable assets between brokerage and IRA accounts, many are semi liquid, while others are fully liquid. I'm looking to retire in about a decade. I believe Jeremiah's in his mid-40s. What is a reasonable proportion of private assets to hold?
- [26:41]
A
All right, and it says a lot more in the brokerage than the ira, right? Which is, listen, I came from the world of institutional investors, pensions and endowments and foundations, and they were big into these. So a lot of them had 30, 40, 50% in illiquids. Right. But here's the thing, and you can back me up on this. They didn't have to worry about taxes, these things. Not only are the fees very high, not only are they liquid, but the taxes are not great on these vehicles. Correct?
- [27:10]
B
Yeah. Yeah. The primary issue that I have been from a tax perspective is these are usually reported on Schedule K1. You do not always get those before the tax deadline on April 15th. And yeah, the tax consequences are.
- [27:22]
A
These are the bane of your existence in April, right?
- [27:25]
B
Yeah. I had one client I work with, been working with the last couple years, also a friend of Ritholtz and just really, really good family. And yeah, they got slapped like a $200,000 short term capital gain that, that we didn't see coming. Right. And that was, we found out, I think on April 8th or 9th. So thank goodness there was time. But sometimes, Ben, these things don't get filed until June, July, August, you know, after the tax deadline. And meanwhile, the taxes are due back in April. And yeah, they're kind of a nightmare from a tax perspective. I don't mind, Ben. I guess my answer would be, look like if you want to pare down, I would be all for it. I think these are great vehicles for IRAs because of the tax consequences. Right. You don't have to worry about tax reporting if it's in an ira. You have to worry about distributions. That's when the tax hits. So I think a more reasonable proportion of assets would be like 10%. Because from philosophy, Ben, simple beats complex.
- [28:11]
A
I just wouldn't want to overfit 40% is really high, especially for someone who's retiring in a decade, in their 40s and is not going to be able to touch those retirement assets. Probably 40 is super high for a financial plan. And, and that's for most people that, that, that worries me. And, and maybe some of these are more like the private credit stuff where you can start slowly but surely winding down. But if it's a private credit or private equity or a VC fund, you're kind of stuck and beholden until there's a liquidity event. And who know, that stuff is unknown. So 40% is really. So Larry Fink has thrown out the idea in recent years of a 50, 30, 20 proportion instead of a 60, 40. And the 20 would be the alternative. 40% is really high. I'd have to have a really strong, long conversation with my advisor about why I have so much money in liquid assets. Am I planning to retire in 10 years? Because one of the reasons that all these endowments put their money in illiquid assets is because they're set up effectively to run in perpetuity. Like they have no end date. Their time horizon is infinite.
- [29:13]
B
Usually not a lot of tax reporting going on too.
- [29:16]
A
If it's not, worry about it, like that's the huge benefit that they have over you and I is they don't worry about this stuff. And if your time horizon is way shorter and it's already measured, that's when I start to have a conversation with my advisor about, hey, in the next 10 years, we have to look at pairing these back. Okay. And I need some more liquidity.
- [29:34]
B
Yeah, right. Wrong and different. I kind of have two rules when it comes to this stuff. And again, feel free to disagree, but rule number one is that fund managers that operate these type of funds, they generally charge whatever premium, whatever alpha they might deliver over the market. So ultimately what you're signing up for is high fees and then ultimately maybe some alpha, but that just gets chewed up by the higher tax rates for usually most of these funds. And then B, the higher structure along the way. And it's not really possible, I don't think, to really tell which are the good funds and which aren't going in. Right. It's very easy to tell afterwards, right after you've had the capital calls are all done, you have the fund payouts, you're good to go. But going in, it's very difficult in my view. And ultimately diversification is not always your friend in this space. Right. Because you just end up getting a big mishmash, the K1 reporting is a pain in the ass. But the second rule is liquidity premium, I think is what you're paying for, what you're getting. Right. In most of these funds. And there's ways to do that, I think in this modern age. Relatively lower cost. You can look at microcap, you can look at smaller caps. You just don't have to go into these private vehicles and take in all the costs. So I would pare that thing down. Would be my advice to 10% or less.
- [30:40]
A
Yeah, I would need a much better story behind why this is the case. Yep. And the thing is, you learn way more about these funds when you try to get out of them than when you get it. They're pretty easy to get into, not very easy to get out. Okay, Cliff, who's a regular in the chat, just showed up late and they find him $25 in the chat.
- [30:57]
B
Wow, that's rough. Where does that go? Yeah, does that go to the bar tab in Huntington beach or, you know,
- [31:03]
A
that's right for Miami.
- [31:04]
B
Yeah, very good, very good, very good. So, okay, so two more pop quizzes left and we're going to go fast because we're here at the end. So let's pull up. Last time, Ben, we talked about states, I pulled up four states. And I want you to choose which state would be your favorite. These are relatively favorable tax states. Upper left is South Carolina, top rate of 6%. And that's been ticking down every year from 7% of the last couple years. Second, we have Iowa, a flat tax state of 3.8%. We have Idaho, flat individual tax rate of 5.3%. And last but not least, our good man Tyler Hillier of our good advice platform, West Virginia, top tax rate of 4.8%. Ben, which of these mid US states would you choose to live for the rest of your life?
- [31:44]
A
I'd probably be happy in any of them. I think most people are happy anywhere. There's the Midwest. Does West Virginia cause Midwest too, Like Iowa, I'm not sure.
- [31:51]
B
Well, South Carolina is definitely not in the Midwest. But I wanted to give you a beach option.
- [31:55]
A
That's the thing. I've lived in the Midwest my whole life. I'd be, I. It has to be South Carolina because I need some better weather. Okay, so that's an, that's an easy one.
- [32:03]
B
That is an easy one.
- [32:04]
A
Send me to Hilton Head.
- [32:05]
B
Charleston. Yeah, those are some really.
- [32:06]
A
Charleston. Yes, I do love Charleston and a
- [32:08]
B
lot of US History. Ben, to your point, I mean, those are some old cities down there. They've Been around for a long time, and, yeah, the guts are very, very cool. Last question for me, and this is the last pop quiz. Ben. We are kicking ass and taking names in Iran. So which sponsor of terrorism against the U.S. would you like to kick it ass? Next, we'll start on the upper left with Russia. We'll move to the right, North Korea. And then our friends and neighbors down there in Cuba, who are probably next. Which would you like to drop a bomb out of a B2.
- [32:37]
A
I'm pretty sure Russia has been the evil villain in more spy action movies than any other country. So I think we have to keep Russia as a villain because that's the role that they play.
- [32:48]
B
So they play a role. Yeah. I wish I'd stopped beating up on the Ukrainians. That'd be my number to take, and then we can leave them alone.
- [32:55]
A
Yeah.
- [32:55]
B
Yeah.
- [32:55]
A
True.
- [32:55]
B
Get the hell out of Keev.
- [32:57]
A
All right, I'm game of that. Great. Good pop quizzes, Bill.
- [33:00]
B
Okay, I gotta get on a plane at C5. Can't tell you why, but I'll see you in about a month. So Duncan can't come back fast enough.
- [33:08]
A
Duncan will be back. We're gonna be recording next week live from Miami, pulling in experts all over to answer questions.
- [33:14]
B
It's gonna be awesome.
- [33:14]
A
I'll.
- [33:15]
B
Cranking out tax returns, so I'll. I'll raise a beer to you.
- [33:17]
A
Yeah, Bill's going back into his cave. Numbers. Heavy question for us. Ask the compound. Showmail.com thanks to Bill for filling in for Duncan. Thanks, everyone, in the live chat, as always, and on Twitter, and we'll see you next time.