How Do You Protect Against a Bear Market?

Summary

Podcast Summary: Ask The Compound

Episode: How Do You Protect Against a Bear Market?

Date: April 15, 2026
Hosts: Ben Carlson & Duncan Hill
Featured Topics: Risk management in bear markets, bond diversification, market volatility, consumer health, alternatives in client portfolios, and lessons from wealth management.

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Episode Overview

This episode tackles a wide range of investing and personal finance listener questions submitted via email and social media. Ben and Duncan dig deeply into bear market protection strategies, particularly the classic 60/40 portfolio split, market volatility, the state of consumer finances in the U.S., the role of alternatives in advisor-managed portfolios, and personal lessons learned from working in wealth management. The tone is candid, educational, and peppered with the hosts' humor and experience.

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Key Discussion Points & Insights

1. Can a 60/40 Portfolio Protect You Against a Bear Market?

[02:47 – 07:51]
Q: Charles, age 70, asks if he needs to hedge further if he’s concerned about inflation and a 20% equity downturn.

• Ben: The 60/40 (stocks/bonds) portfolio has historically provided decent downside protection, although it doesn’t work every single time (e.g., 2022 when both fell).
  • “I still think bonds can act as a shock absorber… on average, when stocks are down, bonds are up a little, around 4%.” – Ben ([04:32])
• Diversification within the bond allocation (e.g. including TIPS, T-bills, corporates) is increasingly important in a regime where rates and inflation are variable ([05:27]).
• Adding small positions in gold or similar hedges: Only large enough allocations move the needle; very small percentages don’t offer meaningful protection ([06:19]).
• Gold’s historical pattern: Over very long periods, gold returns have been closer to bonds than stocks, but gold’s volatility is higher ([06:47]).
  • “It can make sense on a portfolio management protect-yourself perspective, but the volatility’s much higher than bonds.” – Ben ([06:55])
• The right mix depends on personal risk tolerance, sleep-at-night factor, and diversification comfort.

Memorable Moment:
Duncan and Ben joking about bond skepticism, with Ben teasing:
“You and bonds have a complicated relationship. Just stick to safe investments like triple-levered ETFs and Olin.” ([03:40])

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2. Why is the Market so Volatile in the Short Term if Long-Term Investing Works Best?

[08:00 – 12:32]

• Listener Megan: If buy-and-hold is best, why so much daily volatility?
• Ben:
  • "Because people are crazy and emotional. Right. We're the ones still moving the markets." ([08:32])
  • Diversity of market participants and goals—algos, funds, pensions, individuals—all with different timelines and motivations.
  • Even passive vehicles (like SPY) are traded actively, with turnover every 13 days ([09:34]).
  • Trading is incentivized by high potential returns for outperformers (e.g., hedge funds).
  • Robert Shiller’s research: Actual stock price volatility far exceeds the volatility of fundamental cash flows—it’s driven by investor sentiment ([10:25]).
• Volatility is the price that long-term investors pay for higher average returns:
  • “If the stock market didn’t move around so much, you wouldn’t get such good returns... It would essentially be risk-free.” ([11:13])
• Time horizons matter—at any moment, someone’s “long-term” becomes “today,” leading to real selling for retirement, not just panic-selling ([11:36]).

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3. How is the U.S. Consumer Holding Up?

[12:46 – 20:36]

• Mike (Twitter): What's up with high debt levels and constant spending—where’s the “canary in the coal mine”?
• Ben walks through multiple data points and charts:
  • Consumer assets still vastly outweigh liabilities ([13:06]).
  • U.S. debt service ratio (debt payment/after-tax income) remains low; total consumer debt has grown but not explosively ([13:06], [14:25]).
  • Only around 30% of available consumer credit is being used—nowhere near line-of-credit ceilings ([14:52]).
  • Home equity balances are strong—$35T in home equity provides a significant backstop ([15:18]).
  • Delinquencies: Some increases in student loans and auto loans, but mortgage and foreclosure rates remain low ([16:57]).
  • Greatest net worth gains since 2019 have been among the bottom 50% and next 40%—rapid wealth gains off a lower base ([17:04]).
• "Consumers are spending money because they have money... There's so much wealth gained this decade." – Ben ([17:13])
• Major change likely only comes with job loss—consumer behavior has been robust even through high inflation ([18:36]).
  • “The economy has been pretty indestructible this decade. I know that sounds toppy to say, but it’s true.” – Ben ([19:24])
• Duncan: Observes a disconnect between doom-and-gloom discussions and continued consumer spending ([18:12]).

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4. Do Advisors Need to Add Alternatives for Clients?

[20:40 – 27:04]

• Anonymous young advisor: Should they include alternatives like private credit, or are public ETFs/mutual funds sufficient?
• Ben:
  • Alternatives can enhance portfolios for certain investors, but the problem is manager selection and wide dispersions of returns.
    • “Manager selection is very, very important because there’s such a wide range of outcomes in [alternatives].” ([24:26])
    • Private investments: Top-quartile returns can be very high, but if you’re not in the right funds, the downside can be sharp ([24:52]).
  • Liquidity is a real constraint—interval funds help but can't remove all illiquidity.
  • Investor expectations must be managed; getting locked up in private or poorly-performing funds can have major client service consequences ([25:53]).
    • “It took us five years to get the money back [from a failed fund].” – Ben ([24:26])
  • For advisors with little experience: Use trustworthy, vetted platforms to help with manager selection and allocation—"This is not a DIY thing."

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5. Lessons Learned: Personal Finance from “Outsiders”

[27:11 – 32:49]

• Dave (chat): What have non-advisor firm employees learned from being around the wealth management business?
• Duncan:
  • The straightforward value of indexing and owning the total market—“it’s boring, but it works” ([27:56]).
  • Early personal interest in investing began with fantasy baseball’s stats approach, but direct stock-picking is not a wise main strategy.
  • Importance of not sacrificing all quality of life in the name of extreme saving—a common message in personal finance podcasts but not one they endorse ([28:55], [29:56]).
    • "Money is for living and enjoying your life. You’re setting yourself up to have a miserable life if you pinch every penny." – Duncan ([29:56])
• Ben:
  • He learned the same lesson: Real clients often need permission to spend, not just save.
  • Wealth management is about much more than portfolio management—planning (estate, tax, insurance, spending) becomes central as clients’ lives get more complex ([30:08]).
  • Worry never disappears, regardless of the amount of money:
    • “There’s always some worry with money... The worries never go away. They just change shape.” – Ben ([32:14])
  • Practice “selective frugality”—prioritize what brings you joy rather than cutting costs on everything.

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Notable Quotes & Moments

• Ben ([08:32]): “Because people are crazy and emotional. Right. We're the ones who are still moving the markets.”
• Ben ([04:32]): "Bonds can act as a shock absorber... on average, when stocks are down, bonds are up a little, around 4%."
• Duncan ([29:56]): “You’re setting yourself up to have a miserable life if you pinch every penny and don’t actually ever use your money to enjoy life.”
• Ben ([19:24]): “The economy has been pretty indestructible this decade. I know that sounds toppy to say, but it’s true.”
• Ben ([24:26]): “Manager selection is very, very important because there’s such a wide range of outcomes in [alternatives].”

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Timestamps for Important Segments

• 02:47 – Can a 60/40 portfolio protect against a bear market?
• 05:27 – Diversifying within the “40” (bond) side of the portfolio
• 06:47 – Should gold or metals be considered ‘risk-off’ assets?
• 08:00 – Why is the market so volatile if buy-and-hold wins?
• 11:13 – Volatility as the price for long-term returns
• 12:46 – Is U.S. consumer debt worrisome? Economic snapshot
• 14:52 – Home equity and consumer credit trends
• 16:57 – Delinquencies and bankruptcies
• 17:04 – Wealth growth by income group since 2019
• 18:36 – Why U.S. consumer spending remains strong
• 20:40 – Should advisors add private investments/alternatives?
• 24:26 – Dispersions of return in private/alternative assets
• 25:53 – Managing illiquidity and client expectations
• 27:11 – Biggest personal finance lessons learned at RWM
• 30:08 – Wealth management: Beyond portfolio, focus on planning
• 32:14 – “Worry never goes away; it just changes shape.”

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Episode Tone and Approach

• Candid, conversational, and approachable with plenty of humor and self-deprecation.
• Ben brings insights from history, charts, and practical wealth management experience.
• Duncan offers relatable, non-expert perspectives as someone who learned finance from working at the firm.
• Both hosts emphasize balanced, practical approaches over gimmicks and fear-based narratives.

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Useful Takeaways

• Diversification is about comfort and risk management—more isn’t always better if it complicates your sleep.
• Market volatility is rooted in human nature, not just numbers—accept it as the price of long-term return.
• Most U.S. consumers are still in strong financial shape, but monitoring for job losses is key.
• Alternatives can add value, but only with skill and platform support—bad manager selection can be disastrous.
• Personal finance is about choices: Spend on what matters to you, don’t deprive yourself, but plan prudently.

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For more or to submit your questions:

Email: askthecompoundshowmail.com
Podcast disclosures: https://ritholtzwealth.com/podcast-youtube-disclosures/

Transcript

[A]

All right, we are back. AskTheCompoundShowMail.com is the email. Thanks to Bill Sweet for filling in for me last week. Even during tax season. He did it.

[B]

It's true. And he got Bill Arts.

[A]

Yeah. So you guys had, you guys had a really good crew of people. I enjoyed it. I was on vacation. Bill said it was. It was nerve wracking, but he did a great job. I, um. And I am coming to you live from Duncan's old stomping ground in Washington D.C. how long were you here for, Duncan?

[B]

Uh, I lived there for probably five or six years combined.

[A]

Okay, and you were a professor here?

[B]

I taught at American University there, yeah. What do they call it?

[A]

What did your students call you usually?

[B]

Professor.

[A]

Professor Hill. Okay, I like it. All right, today's show, we're discussing questions that can go straight through the compound. Email, inbox, YouTube, Twitter, carrier pigeon, all those things. Can a 6040 portfolio protect you against a bear market? Why does the market move so much in the short term if it goes up in the long term? How is the consumer doing? Do advisors need to use private investments for their clients? And finally, is cash and alternative bonds? No, wait, we're going to do one where I ask Duncan what he's learned about personal finance and some of the things I've learned about personal finance from wealth management. But first, today's show is sponsored by Public, the investing platform for those who take it seriously. On Public, you can build multi asset portfolios of stock, bonds, options, crypto and more. And now generated assets, which allows 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 semiconductor suppliers growing revenue over 20% year over year, you can literally type any prompt and put AI to work. Screens thousands of stocks, builds one of a kind index and lets you back test it against the S&P 500. Then you can invest in it in a few clicks. Generate assets like ETFs with infinite possibilities, completely customizable, based on your thesis, not someone else's. Go to public.com atc. Earn an uncapped 1% bonus when you transfer your portfolio. It's public.com atc paid for by Public Investing. Full disclosure in the podcast description. All right.

[B]

Wow, you talk fast.

[A]

Well, I do what I can. When I did my audiobook for my new book that's coming out, they had to remind me many times to talk slower. So.

[B]

And remind everyone. When's that book coming out?

[A]

Just about a month. May 12th. I'll be doing plenty of push for it. But yes, it's a risk reward is called if you want to pre order, you can pre order now. Yes.

[B]

Okay.

[A]

I did the audiobook. There's a Kindle paperback, all that stuff. Thanks everyone in the live chat. As always. I'm coming to you live from a WeWork today. I didn't know WeWork still existed. My hotel wasn't ready in Washington, D.C. i had to act on the fly. I found a WeWork to rent for two hours. Here I am. Thank you.

[B]

Adam Newman, the one near Bryant park is now gone, I think. But yeah, I guess some made it.

[A]

I'm walking around in bare feet just as a tribute to Adam Newman. All right, let's do some questions.

[B]

All right. Up first day we got a question from Charles. I'm in my 70s with a million dollars in a 6040 portfolio. I'm worried about inflation but don't own any gold or precious metals. Do I need to play defense more? Does one need to hedge to account for a possible 20% downturn in equities in a 6040 portfolio?

[A]

All right, great question. Fair enough. I think a lot of people have been asking this in recent years, especially since bonds went through their worst period ever in the early 2000s, the bond bear market. Do I need something else to protect me? And I think a lot of people learned interest rates themselves aren't necessarily the biggest risk for bonds. It's inflation. When inflation spikes, rates are going to follow. That was a huge risk and it was the biggest losses we've ever seen in bonds. Like long term bonds are still nowhere close to even coming back from where they were. You've been questioning bonds for years, Duncan. Like, I don't get it. Why do I need these things? They don't protect me. Yeah, right.

[B]

Yeah.

[A]

We have a complicated relationship, you and bonds. Yeah, yeah, yeah. Just stick to safe investments like triple levered ETFs and Olin.

[B]

You don't have to tell me.

[A]

All right. So can a 6040 portfolio protect you? Like, do you need more? I guess is the question. It's funny, no one, I think I mentioned this before when I went to buy a boat, the guy selling me the boat said no one needs a boat. No one needs anything extra on a boat. It depends what you want. I think a diversified portfolio of stocks and bonds can still work. Yes, I do. Do you need more? It depends on what you're trying to hedge against, what the risks are that you are worried about, how diversified you want to be. I still Think bonds can act as a shock absorber? Put my chart up on here. Chart on. So this just shows 10 year treasuries versus the S& P. This is every down year in the S and P going back to the late 1920s. That's in red, obviously. And the next column is what 10 year treasuries did in those same years. You can see there's been some down years. Obviously the most recent one in 2022 is the one that sticks out in everyone's mind. But before that, any of the down years in bonds. There was only four times that stocks and bonds fell in the same year in 2018. Bonds were essentially flat. It was close enough. So nothing works all the time. But the average return for bonds. And let's put that chart back up for one more time. The average returns when stocks are down is a, is a return of negative 13.5% or so. In those same years, bonds are up a little around 4%. So you're outperforming by like 18% in down years on stocks on average. Obviously it doesn't always work, but most of the time it does chart off.

[B]

And when people say bonds like in a 60 40, is the bond portion a nice diversified portfolio of municipal, long term, short term, everything, or is it one typically like just long term or just medium term?

[A]

Well, that's what we've been, we've been talking about in this show for a while is I think bond investors learned in 2022 they needed to be more diversified. So maybe a portfolio of fixed income now includes tips and T bills and maybe some corporate bonds. There's a million different ways you can invest in fixed income. I think it was so easy for so long because rates just went down, down, down. It didn't really matter what you put your money in for bonds. And I think now investors are learning in a little bit of a different economic regime. You have to account for inflation and potentially rising rates. And so I think, yeah, being more diversified on the bond front can help. But now the question is for having an inflation diversifier. You want to own precious metal stocks or you want to own gold or something else. I guess you have to ask yourself how much of a portfolio position is going to make a big enough change. Right. A 2% position in something else is not going to move the needle very much. Right. If you want to protect against that. So it really depends on what you're trying to get out of it. Again, I don't think you need all the bells and whistles. It depends like how diversified do you want to be? And what is like what's the diversified spot where you're going to be able to sleep at night and be okay with your portfolio?

[B]

If you think of it instead of 60, 40 being 60% equities and 40% bonds, but if you think of it 60% risk, 40% risk off or safer, is it okay to consider gold and precious metals part of a safer part of your portfolio?

[A]

It is interesting. A lot of people have said, can we instead of comparing gold to stocks because that doesn't really make sense, why don't we compare gold to bonds? And maybe I'll do this for a show next week. Someone actually asked me, what if instead of 60, 40, we did 60, 20, 20 and gold actually the historical returns of gold over the past 100 years or so, it's actually closer to bonds than it is to stocks. Does that make sense? I think it can make sense. The volatility gold's had way bigger ups and downs in bonds. So from a volatility perspective, I don't think it makes sense. But if you're looking for a portfolio management protect yourself perspective, it can make sense. Maybe we'll look at that next week. Yeah.

[B]

I'd be curious. Has gold ever just dropped off a cliff during a really tumultuous time or typically it's just when equities are soaring that gold kind of underperforms?

[A]

That depends how you define that. But I mean, for the all the 80s and 90s, gold was dead money for like two decades, you know, so it's like it was a bull market that did gold in and you. So yeah, you're right. What are you protecting against? And this time gold has been going up. It hasn't been, I don't know that tumultuous because stock's been going up too.

[B]

Right.

[A]

So gold's cool again. Yeah, Definitive answer there. But we'll look more into this next week. Let's do another one.

[B]

Okay. Up next, we got a question from Megan. If it's universally accepted that the best way to invest is to dollar cost average and hold for the long term rather than trying to time the market, why does the market still move so much day to day?

[A]

Great. Perfectly reasonable question. And it is funny that that is kind of universally accepted now. I think by most people the simplest way to invest is probably the best way for 95% of the population, though

[B]

I think a lot of people say that and know that, but they still don't necessarily behave that way.

[A]

Yeah. Yes. And I think in A word or in a phrase. Why does it do this? Because people are crazy and emotional. Right. And we're the ones who are still moving the markets. And if you think about it, think about all the different people that are investing and all the different goals and different opinions and different time horizons that they have from. From trading firms that are using algorithms and doing high frequency trading to hedge funds to mutual fund portfolio managers and ETFs and pensions and endowments and all these different and regular individual investors. I think everyone has an individual investor in their life that they know is just a terrible investor. Everyone knows this person. It's always someone's brother in law or cousin like that, you know, makes the biggest mistakes. And so if you think about it like, it does almost sound like a lot of the behavior has been taken out of the equation. Vanguard manages $12 trillion. I think BlackRock is something like $14 trillion. Right. But Spy is the first ever ETF in the U.S. the first one actually was in where? Duncan, Canada, 1991. First ever ETF. Canadian brethren.

[B]

Okay.

[A]

Yep. That always gets a big cheer when I do a speech in Canada. But SPY is a passive vehicle and it turns over once every 13 days for people. It gets traded like crazy. So it's a passive vehicle that can be actively traded. So I think when you include. And then the, something like the New York Stock Exchange, I think the average annual, the average daily trading volume is 1.5 billion shares. Right. People are, there's so much trading that goes on and why? Because it's a lucrative practice. Think about all the feet, think about how, how few people actually outperform the market. But if they do, they can earn insane amounts of money. Right. There's hedge funds that charge 3 and 30 still because they make people. It's, it's in. So that whole like side of the

[B]

incentive, I would only pay Jim Simons three and 30 and he's gone.

[A]

Rest in peace. Yeah. And he would never want your money.

[B]

Exactly.

[A]

No offense. Mine either. So I think that's one of the reasons. And just people are constantly trying to outguess and outsmart and think they're better than the market. And that's why it moves. Robert Shiller did this study years ago where he looked at the cash flows of the stock. Right. Because they teach you in Finance 101 that the present value of any investment is finding the present value of all future cash flows. So he did that and he said if we take the dividends and the earnings and we try to like, you know, put them on a. A line and figure out, like, how, how far does the actual price deviate from it? And he said, it's just insane how there's no way that people follow. The cash flows are not very volatile at all. It's the opinions of the investors that are volatile and people get freaked out. And when they lose money, it causes you to make crazy decisions. And that's why stocks, the stock market moves. And the thing is, if the stock market didn't move around like that, you wouldn't get such good returns. The stock, one of the reasons the stock market gives you good returns is because it's so volatile. If it was, if it was just like 8 or 9 or 10% year in and year out and you could bank on that, it would be so. Life would be so easy. You wouldn't get that amount. It would be essentially risk free and you, you couldn't earn that much. So it has to cause some pain every once in a while.

[B]

Also, on the, on the time horizon front, someone's long term ends today. Right. I mean, someone's been invested for 30 years and so they're pulling money out, you know.

[A]

Yeah. The baby boomers are going to be selling and. Yeah. And it's not always people selling because they're freaking out or panicking. Sometimes you sell because you have a different time h than someone else. You need to spend the money. Yes. And you need to de risk or to pay taxes. Yes. Jamie, in the chat, I was talking about baby boomers versus millennials on Animal Spirits this week. And I said Gen X had the easiest about anyone. And Jamie said, no. Gen X had it hard. Jamie, I don't believe you. Gen X said it easier than anyone. They made up their own problems. Let's be honest. It's the forgotten generation,

[B]

Joshua. Like that.

[A]

I have a foot in the door, though. I'm, I'm, I'm the oldest millennial that's around, so I'm, I'm technically have a foot in each. I'm kind of in the middle. You know, I'm between two of them, so I can speak for both groups.

[B]

That makes sense, right? Sure. We all good?

[A]

All right, next question.

[B]

Okay. The joys of broadcasting from a wework. Okay, up next, we got a question from.

[A]

There was a guy who forgot his tools in here. Had to come get him.

[B]

Gotcha. Okay. I thought he was asking you for alpha. Okay, this one's from Mike on Twitter says, what is consumer debt doing? All this bad news and people are still spending like drunken sailors. Where is the canary.

[A]

All right, there's not one yet, it seems like. Let's do chart. I got a bunch of charts here, so we're going to run through them. Okay, let's do the chart on first one. This is from JP Morgan guide to the markets. And they look at total assets. Total liabilities of consumers and assets dwarf the liabilities by quite a bit. Right. 205 trillion. Kind of big number. Like it's 2. 21 trillion of. Of liabilities, assets, liabilities. They also look at the debt service ratio. Right. That debt payments as a percentage of disposable income. Still pretty low off the lows from 2020, but still pretty low. Delinquencies. We're going to talk about that in a minute. That, that's actually rising for some things. So the New York Fed puts out this household debt and credit report. So I'm going to run through some charts from that, see how we're doing. All right, first chart. Let's do it. So this is total debt balance and composition. So what you're looking at in the different colors is mortgages and revolving loans for home equity and auto loans. And so mortgages make up like 70% of total debt. Student auto loans are 9%, student loans are 9% and credit cards are on 7%. You can do chart off. And that, that ratio is actually pretty. Been pretty standard in recent years. So. And it's not like that put the chart up one more time. I guess it's not like it's gone vertical. You know, it's just, it's a slow rise higher. And it actually fell a little bit, obviously after the great financial crisis, because people have blown up, but it hasn't like taken off and gone crazy. I know $19 trillion in debt sounds like a lot of money, but it's not. When you compare to the assets, it's not that bad. All right.

[B]

The student loan debo is only going up. You know, Gen Z is going to have more of the millennials and Gen Alpha will have more than them.

[A]

Obviously people are paying more, but part of that too is that more people are going to college. So that's. So that, that going to college and

[B]

then graduating and fighting AI for a job.

[A]

Yes. Yeah. All right, next chart. All right. Did I another before this mortgage one. All right, this one. All right, so this shows, this is interesting because it shows the credit limit for people of credit cards. You can see that's. That's rising like crazy versus the amount of money, the balances for the credit card. Okay, so there's 1.3 trillion DOL in credit cards outstanding. Remember when credit cards hit $1 trillion and people freaked out? It's actually only about 30% of available credit outstanding. So the amount of credit people have to use, so they're not even coming close to using it. That's actually around average for the past 25 years or so. That's like 40% following GFC. So it's not that bad. And then you can see home equities. That's the bottom one. The home equity balance has actually been falling as the amount of people are borrowing versus the limit kind of going up. And this doesn't even take into account the fact that you can do chart off. There's $35 trillion sitting in home equity right now, up from 18 trillion at the end of 2019. So if people do have a problem, there's a huge, huge backstop, right, like of money that people can rely on. There's credit limits that they can hit and there's home equity balances. Okay, now everything's not perfect. I mentioned delinquencies. Let's do this chart. This is the percentage of loans that are 90 plus days delinquent by loan type. Okay. You can, you can see student loans shot up, but that's because they effectively were turned off during COVID Right. So now they're kind of back to where they were before. Trend auto loans are rising a little. Obviously home equity is not because no one's borrowing money from that and credit cards are rising too. So I guess if you wanted to worry, it's. There are certain segments of the population that are having 90 plus day delinquents. However, let's do the next one. This is the number of consumers with foreclosure, new foreclosures and bankruptcies. And this is still about as low as it's been. Right? The foreclosures are very low and the so are the bankruptcies. Especially historically this, these numbers are not high compared to what they were in the 2000s. 2010s they're a slight uptick. Still doing okay. All right, you want one more, Duncan?

[B]

Of course.

[A]

Let's do one more. All right, next one. This is growth in US household net worth by wealth group. Okay. Claude created this for me. So it's not big enough to read. I'm going to read it for you. The greatest increase in net worth since the end of 2019 is by the bottom 50%. It's up 130%. The next 40% is up 67%. And then the second biggest group is the top point 1%. But it's funny, the, the bottom 40 and the bottom 50% have grown their net worth by higher rates than the top 10%. Now obviously that's coming off of a lower base. Chart off, please. So I guess what I'm saying is consumers are spending money because they have money. And I know things are cost more, but there's been so much wealth gained this decade. Obviously this is not everyone, but most people. The unemployment rate is still sub 5%. My contention is people will continue spending until they lose a job. I think that's what has to happen to get people to stop, is people start losing their jobs and they see their peers and their coworkers lose jobs and then they decide, all right, I'm tapping on them out. But until then, I don't see what stops people because they still have the ability to borrow to keep this lifestyle good going. We haven't even gotten to the borrowing phase of this cycle yet where people decide to keep it going when they shouldn't.

[B]

Yeah, that's why I've been so surprised by, is I hear from a lot of people who talk about how horrible the economy is and how everyone, you know, at their place of employment is, you know, tightening their purse strings and that kind of thing. But you just, you don't really see it. It seems like, it seems like people are saying that as they continue to go out to eat and order DoorDash for a 20% premium and all these things. You know, it's, it's interesting.

[A]

The airports are still full, the restaurants are still full. People are traveling, people are spending money. It's, yes, it's easy to complain about it, but people aren't changing their habits. And it's funny, that hasn't happened all decade. You know, I, I thought, let's wait to see what happens with inflation. We hit 9%, will people slow down? But no, they just barreled through it and kept spending. Retail sales continues to go up. So there's not a. And again, everyone is not doing great. There's always pockets of the economy that people are slowing. And that will happen too. It'll be interesting to see if, if gas prices stay higher for a while, if that'll hurt people or people just kind of keep spending through it. I don't, because I think it's kind of like you have to prove beyond a reasonable doubt that the economy is in bad shape because every time something's been thrown at, keeps going, and obviously there's probably a lower margin of safety now because of the length of the cycle, but it's. The economy has been pretty indestructible this decade. I know that sounds toppy to say, but it's true.

[B]

It is probably worth mentioning though. This stuff changes fast. Right. So it only takes like one report of unemployment ticking up drastically and suddenly people are going to have a very different mentality about spending in the economy.

[A]

It's possible, but again I think they need to see it like themselves as opposed to just a data point. Yeah, right. Like again, you see your co workers not getting raises or bonuses anymore. You see people in your company getting laid off. Yeah. And again that could be happening. Maybe AI is the trigger for that. It's possible.

[B]

These software companies have to be weighing people off. Right when their stocks are down 60%.

[A]

Jack Dorsey's company Black, which used to be square, laid off 40% of the labor workforce. I mean if you worked at companies like that, that your whole life, you know, is. Oh my gosh, this is existential for me. So yeah, a lot of those people

[B]

are high net worth people. Like that's going to are people who spend a lot. So that, that would have a, an outsized impact on the economy. Right.

[A]

People working in places like that, Silicon Valley. Right. But. But they got all the AI money coming too. So yeah, nothing stops this train for now.

[B]

All right. Famous last words.

[A]

Always.

[B]

Up next. We got one. I'm going to keep anonymous because I don't want people to know who they are in case it gets them in trouble at work. I'm a young advisor on an independent team at my broker dealer. I co run my team and the investments we use with our clients are largely left to our discretion. Building our model portfolios for clients with the backdrop of things like private credit fears has led me to think deeply about all of the potential risks that my clients face. While we avoid closing funds for the vast majority of our clients and typically run ETF and mutual fund portfolios, I conceive argument for having alternative sleeves and portfolios. Am I protecting my clients if I avoid some of these alternative strategies or am I holding them back from superior portfolios? And I should mention they sound like a great advisor thinking all the right things. I didn't want to get them in trouble because some firms have rules about writing in questions to stuff like this.

[A]

Yes. And other advisors listening, maybe. I think that especially as a young advisor, it makes sense to think through these things because I think there is this idea in investing that if you invest in private markets it makes you more sophisticated I saw this firsthand. In the non profit world, if you didn't have a lot of money in alternatives, private equity, venture capital, hedge funds, you were kind of looked down upon. The endowments and foundations used to always thumb their nose at pension funds like, ha, you don't have nearly enough money in this alternative stuff. What are you doing? We love paying high fees. Do I think that these portfolios are superior? No. Can private investments work for someone? Absolutely. But here's the problem. The range of outcomes is a lot wider if you're not invested in the right managers. And here's the thing, private managers in their presentations, and they have great presentations. Let me tell you, they have the best salespeople, right? Somehow they're all attractive. I don't know how, but they find the most attractive people. They dress nice, they know how to sell, they know how to talk, okay? And they all promise you insane, high, insanely high IRRs returns, right? The problem is they can't all be top quartile, top decile. And chart on, please. I'll show you why. So this is from David Swenson did this a while ago for Yale and he shows the difference between top quartile, bottom quartile and median for stocks, bonds, leverage, buyouts, which is private equity and venture capital. Okay? And what this is showing you is the difference between the best performers and the bottom dwellers, right? And in stocks, you can see it's actually pretty close. If you invested in a bottom quartile stock per stock manager, you didn't do that much worse. Same thing with fixed income. But when you get to real assets and private equity and venture capital, if you're not in that top quartile, your returns drop off a cliff and you're from the bottom quartile. You did terribly, even though the rest of the group, the median, might have done not so bad. Chart off, please. So what this tells you is that manager selection is very, very important because there's such a wide range of outcomes in stocks. If you invested in an actively managed mutual fund that underperformed, but it was a CL closet indexer and it still charged you 1% over the past 10 years, you'd probably look back and go, ah, shoot, I regret doing that. I should have invested in index fund. But you still probably did okay, right? You earned 12% a year and 12% a year instead of 14% a year or whatever, right? You were performed, but you still did fine in one of these alternatives. The worst case scenario was much, much worse. Plus they're very operationally Challenging. Okay. The fund option has. Fund options have gotten better. When I first started, it was all capital calls. And now for wealth managers, it's interval funds where you can just put money in, but the illiquidity never goes away. Right. And they're difficult to rebalance. That. That lack of liquidity, I think, is the biggest thing. And when funds shut down, you realize how hard it is to get out of these things. We had a credit fund back in my days when of looking at hedge funds, their biggest investor was a university. The university pulled out and they said, you know what? It took so much money out of the fund. We are shutting down. And it took us five years to get the money back. And so I think that's the pro. That's one of the hard parts to get people to realize, especially clients, is that how that illiquidity risk really works. It sounds great in theory. And some people like it because it's like Schrodinger's portfolio where, like, you don't see the volatility, so you pretend it's not there. Right, right. But. And that can actually help some people. Some people like that. Like, I know there's underlying volatility, but it's like the price of my house. I don't want to see it. And if I don't see it, it's. It's like it's not there. I just think it's really hard, especially for a young advisor with no experience in this. You have to set the right expectations with your clients. You have to really know what you're doing. And I think if you try to do this yourself, you're probably going to fail. So I think you. There's a ton of platforms now that you can sign up with that will help you with manager selection. They will help you build a portfolio, a strategy. I think that's probably your best route as an advisor who doesn't do this a lot, as opposed to like trying to pick through the tens of thousands of options for funds out there and do it yourself. I don't think this is a do it yourself thing, especially. You have no experience in it. I would stay away from that.

[B]

And I guess it's just a deal where the upside can be so attractive that people are willing to take the risk. But yes, you looked at that chart of venture capital. I think a lot of people would stay away from venture capital. But yeah, I guess you just hear so many stories of people getting rich off of venture capital that you're always going to have people willing to take the Risk.

[A]

And me and Josh and Michael have been talking a lot about private credit recently and that they have these integral fund structures where you can try to get some liquidity. Right. But even there, the Blue Owl CEO said something like the industry could have done a better job of explaining the dynamics between advisors and clients. And even they're admitting, like they didn't set the right expectations. If you don't do that, you're going to have some really pissed off clients and that is not what you want.

[B]

Yeah, sounds bad.

[A]

Yeah. So anyway, I just, again, private investments can work. Obviously there's trillions of dollars invested in these things. There wouldn't be that much money if some of them didn't work and some of them didn't give you really high returns. The question is, can you access them? Do you have the ability to source them beforehand and see what they are and understand them and have your clients understand them? Because if you get your client in something. We had a client come to us with a private investment and it was basically locked up. And for five years we tried to talk to the manager about getting the money on. Oh, we're selling stuff, we're going to get it for you. And then finally they said, it's gone, there's nothing left. You're getting nothing. So I'm not saying that's the baseline experience, but that's the kind of thing that can happen to you in this space. Just be careful. I see Bill Sweet chop it up in the live chat there.

[B]

He's back. Shout out to Bill sweet talking about K1s, of course.

[A]

All right, we got one more question.

[B]

All right, last but not least, we got one from Dave, a chat regular. So thanks, Dave. There are RWM employees who are not financial service professionals, for example, Duncan, and be audio visual experts. I wonder what those employees would say they have learned about financial planning and investing from working at Reals. I like stories about people who learn about how personal finance has impacted them personally.

[A]

Did he say learn in quotes? Because Duncan doesn't learn anything. Was that a shot at Duncan, Dave?

[B]

Geez, maybe. I don't know. I don't think so. I don't think so.

[A]

You go first. Then I want to talk about some of the things I've learned about working wealth management too. So you go. I want to hear what. I want to hear what you have to say about being someone coming from the outside of finance. Totally. And then coming into this world and what you've learned.

[B]

So I mean, the, the obvious. Some of this is boring and obvious. So I'll just, I'll go over it as fast as possible. But the main thing is just indexing, right? And just owning the whole market. And the market usually goes up. So if you're invested in the whole market long term, that's generally pretty smart strategy. So that's something that really has been hammered home in the six and a half years I've been here.

[A]

Be. It's a difficult thing to come to the. To come to that realization.

[B]

Well, because it's boring, right? Like I've talked before, part of why I got interested in the stock market was I did a lot of fantasy baseball, and that same kind of mentality kind of got me into the market and, like, wanting to research companies and find the. Find the, you know, the diamond in the rough kind of thing. And so I enjoy that and I find that, that fun. But, yeah, I also realized that that is not the way to like, run your entire portfolio or have your retirement in a bunch of random small cap companies or something.

[A]

Right.

[B]

From, like, a more personal finance standpoint, I think one of the more important things that I've learned from you guys is just not to. Not to focus too much on saving every penny at the expense of your quality of life. Because so much of the personal finance stuff out there, a lot of the podcasts that, you know, people might listen to before or after this, you know, know, podcasts, they're telling people essentially to, you know, not buy the latte or to, you know, to not go to the movie or not go out to eat, all these things, because that's going to make a meaningful difference in how much money they have when they retire in 30 years. And I'm sure, you know, maybe there's. There's cases where people are. So are spending so much that that actually is the case. But, but you guys have done a really good job of, I think, getting across the point that the money is for living and enjoying your life. And you're setting yourself up to have a miserable life if you pinch every penny and don't actually, you know, ever use your money to enjoy life or to have fun or have experiences with friends or family. So I think that that has been. That's been a nice kind of contrast to a lot of the personal finance, you know, content that's out there.

[A]

Yeah, I feel very strongly about that because I was the one who came up on the other type of personal finance content, too, like the frugality and saving and save at all costs. And I think I really annoyed my wife the first like 10 years of our marriage with that kind of stuff. And in realizing, like, you can't always be like that. And I. One of the reasons that I've learned it is from working with wealth management clients. I've seen too many stories of someone who works their whole life and then they get a disease or they sell their business, they're going to have millions and millions of dollars to spend and then they drop dead the next week. Or like, I've seen these stories play out over and over again where you have your life totally planned out and it doesn't work as you expected and you don't get to enjoy it. So I think that's a big one. The one for me too is that being, you know, we, Josh and Michael and I are always talking about the markets, and the markets are more exciting, as you mentioned. Like, they're very exciting to follow. Like, we love finding the economy in the markets. It's. It's fascinating to me because of the human element and everything else that goes into it. But I've learned that a lot of people who come to us at wealth to work in a wealth management shop realize, like, they come to us for portfolio management, but they realize the thing they need is financial planning and, and portfolio management is a part of that. But they need insurance and estate planning and tax guidance and all these other things, a financial plan and how much they can they spend and all these other things. And some people do, like you said, need permission to spend. And that's been the interesting thing to me is the real seeing the realization from people of, oh, yeah, I came for the portfolio management, the investment stuff, but I need the financial planning stuff. And as your life gets, you know, more complicated, I've learned that too. My own life. Like, that stuff does tend to matter more.

[B]

And, and obviously we're not saying go spend $50 on lunch every day versus not, you know, like that. That could actually add up to a sizable amount of money.

[A]

Yeah, there are obviously people, but there. But it's about prioritizing what means something to you. And I, I call it being selectively cheap. Like, my wife and I don't drive luxury vehicles. We don't have like, really nice furniture. We don't like going out to really nice dinners, but we like traveling, we like spending money on our kids. And, and so I think there's. You have to just prioritize what matters to you and spend money on that and come up with a plan. The other thing too that I've learned is people, regardless of the amount of wealth you have, and we have a wide range of people as clients. There's always something to worry about. There's always some worry with money. It just. It just changes. And wealth is totally in the eye of the beholder. And we get people commenting all the time on, like, the people who ask these questions, like, have so much money and they still worry. But those worries just. The worries never go away. They just change shape.

[B]

People are talking about $15,000 Porsches in the. In the comments.

[A]

All right.

[B]

Yeah, I mean, buy the $15,000 used

[A]

Porsche and you wanted to buy a $20,000 one.

[B]

It's true, isn't it? Yeah. So this is being frugal.

[A]

Yeah.

[B]

Yeah.

[A]

Okay. All right. Good question, Dave. Keep them coming.

[B]

Yeah, that was good.

[A]

Everyone in the live chat, keep those questions coming. Thanks to Bill Sweet for joining on tax day, no less. Bill was up to the last minute doing my taxes for me yesterday. Sending me. Sending me notes. Middle of the night. The man never sleeps.

[B]

Thanks, Paul.

[A]

Thanks, everyone for tuning in live as always on YouTube and Twitter. Leave us a comment. Leave us A review would be great. Subscribe to the Compound and what else? Send us an email. Askthecompoundshowmail.com, we always appreciate your emails. See you next time.

[B]

Have fun in D.C. thank you. 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 refer to 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. You can't reason with the sun.

[A]

Trust us, we've tried. This summer, it's time to put that angry ball of fire on mute.

[B]

Columbia's Omnishade technology is engineered to protect you from the sun's harsh rays that can burn and damage your skin.

[A]

The sun is relentless, but so is our gear. Level up your [e-mail] to spend more

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time outside and less time slathering on aloe lotion.

[A]

You're welcome, Columbia.

[B]

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