How Does the 4 Year Rule Work?

Summary

Ask The Compound – "How Does the 4 Year Rule Work?"

Podcast: Ask The Compound
Date: November 26, 2025
Hosts: Ben Carlson, Duncan Hill
Guest: Corey Hoffstein (Newfound Research)

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Main Theme / Purpose

In this episode, Ben Carlson and Duncan Hill tackle listeners’ questions on portfolio leverage, return stacking, the rationale behind index investing over individual stock picking, the practical workings of the "Four Year Rule" for retirees, leveraging buy now/pay later, and setting and sticking to long-term investment plans. Special guest Corey Hoffstein helps break down the complexities of return stacking and responsible leverage.

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Key Discussion Points & Insights

1. What Is Return Stacking and Responsible Leverage?

With Guest: Corey Hoffstein, Newfound Research [03:00 – 12:48]

• Definition & Origins:

  • Return stacking is using modest leverage to add multiple sources of return (e.g., stocks + bonds) on top of a base portfolio, increasing expected returns but potentially reducing risk if done with diversifiers.
  • Coined by Rodrigo Gordillo, the concept is similar to “portable alpha” used by institutions since the 1980s. [03:13]
  • Example set up: $1 investment gives $1 equity + $1 bond exposure via futures.
    • "You are inherently using a modest amount of leverage to try to introduce diversifiers into your portfolio." – Corey [03:40]

• How It Works and Use Cases:

  • Leverage can be acquired cheaply via futures; cost of leverage is typically close to T-bill rates.
  • Two main applications:
    • Adding more diversification to an otherwise concentrated (e.g., 100% equity) portfolio.
    • Freeing up capital to add alternative assets (gold, managed futures, etc.) on top of a base allocation.
    • “More diversification plus a little bit of leverage is better than concentration.” – Corey [05:47]

• Fund Structures & Choosing Diversifiers:

  • Not all return stacked funds are the same; some combine equities with alternatives, others just stack stocks and bonds as a “choose your own adventure” base for advisors.
  • Emphasis on “liquid diversifiers” with real expected returns above cash and low correlation to stocks/bonds.

• Risks & Addressing Leverage Fears:

  • Leverage is not inherently bad, but excessive, illiquid, or concentrated leverage is dangerous.
  • Good practice: Use moderate amounts, in liquid markets, to add true diversifiers.
    • "If we look at every major financial catastrophe, leverage is there at the scene of the crime, but it's rarely alone. It's there with typically excess and illiquidity." – Corey [08:31]

• Bond Market Environment Impact:

  • The cost of leverage (the yield curve) affects returns. Flat/inverted curves can mean borrowing costs exceed bond returns, but using the yield curve as a market-timing signal is unreliable.
  • Proper stacking means the “cost to stack” often nets out if done correctly, especially when overlaying alternatives.

• Biggest Benefit:

  • Flexibility and the ability to add alternatives without sacrificing core index exposures.
  • “It allows you to incorporate these alternatives without having to sacrifice the core stocks and bonds that you know and love.” – Corey [11:44]

Resources Mentioned:

• Corey’s fund suite: returnstack.com or returnstacketfs.com
• Paper by Cliff Asness, AQR, and follow-up by Jeremy Schwartz (WisdomTree)

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2. Why Ben Avoids Individual Stock Picking

[13:51 – 20:32]

• Temptation & Trade-offs:

  • Ben shares both the attraction and downsides of stock picking.
  • Offers examples of blue-chip stocks (Nike, Boeing, Pfizer, Intel, Disney, Oracle) suffering drawdowns of 36–65% even while the S&P was barely off all-time highs. [15:04]
  • “That’s the trade-off by mostly indexing and staying diversified: I give up on the home runs, but I avoid striking out.” – Ben [16:23]

• Behavioral Advantages:

  • Indexing = less “brain damage” from constant monitoring, less emotional volatility.
  • Even though Ben occasionally dabbles (tiny positions in Nvidia, Nike), his core portfolios are boring and mostly indexed.
  • “Sure, it’s boring, but I like me. My portfolio likes me. I like being boring. It suits my investment process.” – Ben [17:45]

• Stock Picking as Entertainment/Education:

  • Duncan compares it to fantasy sports: fun and educational but not an optimal long-term wealth strategy.
  • Ben echoes that he avoids it in part because he already tracks markets so closely—it would be too stressful otherwise.

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3. The Four Year Rule in Retirement

[21:13 – 25:14]

• Origin Story:

  • Listener asks Ben for details about the “Four Year Rule” he’s alluded to.
  • Ben recounts learning about it from reader John Thes, who retired at the 2000 dot-com bubble peak. [21:23]
  • “He based it on the idea that major stock market downturns last 8 to 24 months. … Five years before retiring, I accumulate a cash reserve … four years of living expenses net of any pension or Social Security income. … In a downturn, you take from cash. When the market recovers, you replenish cash from stocks.” – Ben paraphrasing John

• Mechanics:

  • Maintain 4 years’ expenses in cash or equivalents.
  • Withdraw from cash during stock market downturns; replenish after sustained upturns.
  • Not optimal for everyone, but psychologically and practically resilient—especially rewarding for those who retire at “bad times.”
  • Ben plans to publish the full method on his Wealth of Common Sense blog.

• Value Proposition:

  • “Framing your retirement cash as years of spending makes it far less scary than optimizing for maximum returns.”
  • “The person you are in your late 30s is not the same person you were in your early 20s and 30s. … Your plans are going to change.” – Ben [31:12]

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4. Leveraging Buy Now, Pay Later for Investing

[25:17 – 29:46]

• Listener Victor:

  • Asks about using buy now, pay later (BNPL) to invest the freed-up money in the market.

• Hosts’ Analysis:

  • Duncan finds the concept logical and recalls using 0% credit card balance transfer offers similarly.
  • Ben is skeptical;
    • The period for BNPL is short—outcomes are too dependent on short-term stock returns.
    • BNPL won’t build credit like a traditional credit card; taxing gains can eat up the advantage.
    • Suggests using credit card rewards (3% cash back, etc.) for purchases and investing those rewards instead for less risk.

• Key Warning:

  • Both hosts stress never to carry a credit card balance because of high interest rates compounding against you.
  • “That’s Ben’s number one rule of personal finance: do not carry a credit card balance.” – Ben [29:32]

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5. "Just Keep Investing" — Advice for a Late Starter

[29:48 – 32:18]

• Listener Luke:
  • Turned things around mid-30s, now working an “easy” job, investing consistently in a Roth IRA (Target Date Fund) and brokerage ETFs. Should he stick with this plan? Would $900k at 65 be enough?
• Hosts’ Take:
  • Ben: “You’re not alone. … Your plans will change as you age, but if you keep saving, you’re doing great.”
  • Stresses flexibility, the value of compounding, and the inevitability of future lifestyle/investment plan changes.
  • Encouragement: Plenty of people never turn things around. Luke should feel good for starting, regardless of age.
  • “Keep funneling money into those Vanguard funds and you’ll be fine.” – Ben [32:18]
  • Duncan and Ben reminisce about their own early, low-financial periods.

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Notable Quotes & Timestamps

• On Return Stacking:

  • "More diversification plus a little bit of leverage is better than concentration." – Corey Hoffstein [05:47]

• On Stock Picking:

  • "Sure, it’s boring, but I like me. My portfolio likes me. I like being boring. It suits my investment process." – Ben [17:45]

• On the Four Year Rule:

  • "Maintain 4 years’ expenses in cash or equivalents. Withdraw from cash during stock market downturns; replenish after sustained upturns." – Ben paraphrasing John Thes [23:30]

• On Credit Cards:

  • "That’s Ben’s number one rule of personal finance: do not carry a credit card balance." – Ben [29:32]

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Timestamps for Key Segments

• [03:00] Guest Corey Hoffstein joins for return stacking discussion
• [11:44] Flexibility and selection of stacking strategies
• [14:16] Ben describes why he prefers index funds over individual stocks
• [21:23] Ben explains the Four Year Rule and shares John Thes’ story
• [25:48] Does it make sense to use buy now, pay later to invest?
• [30:34] Young investor asks about "catching up" and long-term plan advice

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Episode Tone & Language

• Conversational, light, sometimes humorous (references to Thanksgiving movies, ‘making my own quote’ from John Candy, gentle ribbing about indexing vs. picking vs. fantasy leagues)
• Direct, practical advice—relying on personal anecdotes and lived experience as much as textbook finance
• Encouraging and supportive, particularly for listeners unsure or starting late

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Summary Takeaways

• Return stacking (or moderate, responsible leverage) can be a valuable portfolio tool for adding diversification rather than maximizing risk—but must be used with caution, liquid assets, and a clear plan.
• Index investing may not deliver “home runs,” but it sharply reduces the risk of big, permanent losses and emotional stress. If you pick stocks, do so for fun not with your main portfolio.
• The Four Year Rule is a practical method for retirees to weather bad drawdowns by holding cash for lean years, then replenishing as markets recover.
• Don’t overthink short-term financial arbitrage via BNPL or similar products—the “juice isn’t worth the squeeze” versus straightforward, consistent saving and rewards credit card usage.
• Starting late is better than never—just keep saving, stay flexible, and be ready for your goals to shift as life evolves.
• Personal finance wisdom: Never carry a credit card balance!

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For deeper dives (including the full text of the Four Year Rule), check Ben’s companion blog post at Wealth of Common Sense.

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For More

• Guest resource: ReturnStack ETFs
• Send your questions: askthecompoundshowmail.com

Happy Thanksgiving! Keep investing, and remember: boring can be very, very good.

Transcript

[A]

Welcome back to Ask the Compound, the show where you ask and we answer. I'm Ben Carlson. Is it possible to use leverage in your portfolio in a responsible manner? Can leverage actually give you an even more diversified portfolio? How does return stacking work? We're going to cover these questions and more on today's show. Stick around. Our email here is ask the compound showmail.com we usually do these shows live. Today we're pre recording because I'm in modern day Clark Griswold taking my family to Disney for the week.

[B]

What's the best Thanksgiving movie I know you've got one.

[A]

Planes transit. All movies obviously. That's right. I got something to map for today. On today's show we're answering questions straight from our Compound inbox. As always on how to use leverage in your portfolio responsibly. Why doesn't Ben, that's me Pick individual stocks anymore? How the four Year Rule Works A young guy asks if it makes sense to use Buy Now Pay later from a time value of money perspective. And then does it make sense to just pour your money into a Target date fund in a handful of Vanguard ETFs and call it a day? Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build a multi asset portfolio of stocks, bonds, options, crypto and more. You can also access industry leading yields like the 3.8% APY you can earn on your cash with no fees or minimums. But what sets Public apart AI isn't just a feature, it's woven into the entire experience. Josh actually just talked to the two founders of Public about their new AI trading platform on the Compound. Check that out. From portfolio insights to earnings call recaps, Public gives you smarter context at every touch. Plus earn an uncapped 1% match when you transfer your portfolio, including IRA transfers, rollovers and even contributions. Fund that accountant at public in five minutes or less by visiting public.comatc that's public.comatc paid for by Public Investing. Full disclosure is in the podcast description.

[B]

Those new agentic features are gonna be really cool. I think they launch in January, but.

[A]

Yeah, it's pretty neat. Yeah, starting to see the AI stuff actually come to light here.

[B]

Also, you're gonna go to Disney, have a great time and you're gonna buy Disney stock. So you're going to be back into single stocks. I can feel it.

[A]

I sold it. I owned it forever and I decided to own Disney. I'm like hey, I'm going to Buy some shares and tell my kids, like, this is how we learn about the stock market. And it fell like 50%. So they learned about the stock market the hard way. Sounds good. Sounds great. Sounds great.

[B]

Okay, up first today, we got a question from Bruce. Hey, gang, Are you familiar with return stacking? I'm looking for increased returns without those silly 2 times bull ETFs. Notice they didn't say 3 times. Return stacking is the practice of using modest leverage to wear multiple sources of return on top of a traditional portfolio, typically composed of stocks and bonds. The goal is to increase expected returns while maintaining or even reducing overall portfolio risk. For example, 90% equities and 60% treasury futures for 150% notional exposure. These practices didn't work for the last five years since bonds have been in a bear market, dragging down nearly all of return stacking ETFs available. But now it seems like bonds might finally have found a 4 since the yield to maturity on TLT is below the fed funds rate. What do you think?

[A]

All right, we have the perfect person to help answer this, Mr. Corey Hofstein from Newfound Research.

[B]

Hey, Corey.

[C]

Thanks for having me, guys.

[A]

Corey, did you actually coin the term return stacking or has it been around for a long time?

[C]

I wish I could take credit for it. It was my colleague Rodrigo Gordillo who did come up with it though. So this is actually a new term for something that has been around forever in the institutional space. As I'm sure you're aware, Ben called portable alpha going back to the 1980s with Pimco.

[A]

Right. So, yeah, the return stacking does seem pretty new. I've heard it from you for the first time. So what do you think about our guys, Bruce? Bruce's question, did he kind of. Did he explain it well enough for you? Is there anything you want to poke holes in?

[C]

No, I think the original explanation is the right way to explain it, that you are inherently using a modest amount of leverage to try to introduce diversifiers into your portfolio. A lot of what we're ultimately trying to solve is how do we get investors to introduce things like gold or managed futures or long short equity or alternative investment strategies that have historically diversified but are hard to hold on to when things like stocks and bonds are just non stop going up. And so return stacking is one way to do that.

[A]

The general idea is like, listen, I want to carve out a sleeve for some of these other different asset classes, but I'm having a hard time figuring out what to carve out and what to take out and maybe I don't want to do that and this is a different way of doing it. So, so how does it work? What is the, what does the leverage look like?

[C]

So it really, that's a big open ended question and I'm going to try to keep it as concise as possible. It really depends on the product. But in the example that, yeah, that.

[A]

9060 was given, the 96, if it's.

[C]

Okay, I'm going to just use a 100, 100 because a little bit easier. For every dollar you invest, you're going to get a dollar, say of, of equities plus a dollar of bonds. And the way a strategy like that is going to work is it's going to get exposure to something like the bonds through futures markets and futures markets are derivatives and they're going to give you the total return of the bonds minus the cost of leverage. The reason this strategy works is because to get say $100 of exposure to bonds, you might only have to put up five, five dollars of collateral and then you get that full 20, you know, $100. But there is an embedded cost of leverage there. And as the writer of the email correctly points out, it's, it's about the fed funds rate or short term T bills.

[A]

Okay. And the idea is yes, you're using leverage here, but since you're doing it to buy bonds, it's not like you're, you're like going crazy here, right? You're not borrowing to buy Bitcoin or something. And then the idea is you have this excess money. If you want to keep it at 100% notional, then you can invest in something else essentially. Right?

[C]

Yeah, there's, there's two ways to think about this, right? There's the I'm a, I'm a 100% equity investor and do I just want to add, diversify some other diversifying asset to my portfolio? Right. This is actually goes back to a paper that Cliff Asness from AQR wrote back in the early 1990s. Why not 100% equities? And that paper actually showed that if you took a 6040 portfolio and levered it 1.5 times, you got the same risk as equities but a much better return because it was more diversified. Jeremy Schwartz from WisdomTree about 20 plus years later replicated that and found out a sample that held true that again, this idea is more diversification plus a little bit of leverage is better than concentration. So that's one use case. The second use case though And I think this is really important is, is that you can use these tools to actually free up space in your portfolio and not have to sacrifice exposure to stocks and bonds, but then introduce these diversifiers as a layer on top without having to manage any of the leverage yourself. So they're really distinct cases. And I think it got maybe a little bit muddied in the question, but I think it's worth pointing out.

[A]

So for your funds, how do you determine what that other piece is going to be? Is that based on investor preference, like you say, using alts? That could be a lot of different things. Like how do you determine what's the reasonable thing to put the rest of your money in that you have to play with now?

[C]

Yeah. So we offer a suite of funds, return stacked ETFs. We have seven different funds. Some of them are what we would call prepackaged alternatives. So just as an example, we have a fund rsst. You invest a dollar, you get a dollar of equities plus a dollar of managed futures. But we have another fund that is a stocks plus bond fund. Every dollar you invest, you get a dollar of global equities plus a dollar of Treasuries. Rssb. And. And that fund isn't really meant to be used to say, let me add bonds on top of my portfolio. That fund is really meant to be used as a choose your own adventure to say, there are alts that I like as an allocator, and all I want to do is figure out what I want to stack on top. Now, what is critical for us as we consult with all of our clients is that we're always advocating for them to choose liquid diversifiers, that they really have strong conviction and not only will have positive returns above cash over time, but will also be uncorrelated to stocks and bonds.

[A]

Right. So, yeah, you're not putting it in something illiquid. That's going to completely be a mismatch. And that makes sense. What do you do when someone is just deathly afraid of leverage? And hey, I heard a Charlie Munger quote about how leverage can, can crush you. Like, how do you, how do you explain it to people that, like, you're doing so in a responsible manner?

[C]

Yeah. So people are rightfully afraid of leverage. Right. If we look at every major financial catastrophe, leverage is there at the scene of the crime, but it's rarely alone. It's there with typically excess and illiquidity. And so one of the things we often talk about is with leverage, we want to avoid lice. Leverage that is illiquid, that is concentrated, and that is excessive. So for example, we don't want to use leverage to take someone who's in a 6040 portfolio and just add more stocks. Right. Or just add more bonds. We want to use leverage to introduce diversifiers that can fill some of the holes in their portfolio. I think, for example, 2022 made it apparent that a stock bond portfolio is pretty sensitive to inflation risk. What can we add that might help serve as a ballast in that sort of environment? And then make sure we're using a modest amount of something that is highly liquid so we can easily rebalance our portfolio and that, that's the key to us.

[A]

Okay, so one more thing from me here on this, Bruce, in the question asked about like the changing nature of the bond market and how that can impact this, what does that do to, to this strategy is the, is if the bond market changes, does that make this strategy more or less beneficial to investors?

[C]

Yeah. So at the risk of oversimplifying, right. We're just saying the cost of leverage is basically T bills. And so when you talk about a standalone product that is giving you stocks plus bonds layered on top and you have a flat or inverted yield curve, you're actually paying more for the leverage than you're earning in the thing that you're stacking. And so a lot of people look at that and say, well, it's not a good time to stack. What I would respond is, well, what you're implicitly saying is that the shape of the yield curve is, is a market timing signal for duration. Do you really believe that? Do you believe that you can time bonds based only on the yield curve? Some people might say yes, some people might say no. My empirical evidence suggests it's not a very good market timing signal. So if you are just thinking about stacking bonds strategically, I don't worry too much about the timing. That's the first use case. The second use case that we're using a tool like this to free up capital, it doesn't really matter, right? If we say have a 60, 40 and we sell 10% of our stocks and 10% of our bonds to buy 10% of say our RSSB product, that's going to give you the stocks and bonds back. That bond overlay is going to have a leverage cost of T bills. But if we take the freed up 10% that we now have and invest it in T bills, well, those cost net out. And so then if we take that freed up capital and we can either leave it in Cash to deploy opportunistically or tactically allocate it, or we could invest it in a diversifier. Then all we're really saying is it's not that we need the bonds to beat cash. We were just using the leverage to get our bond exposure back. We need that alternative to beat cash, I. E. Our cost of leverage and.

[A]

Which hopefully a lot of those alt strategies are like a cash plus, right? They kind of. Yeah. Which. Which makes sense. So I guess the biggest selling point of these return stacking funds that you use is just. It offers you more flexibility.

[C]

I would say it offers you more flexibility and. And it allows you to incorporate these alternatives without having to sacrifice the core stocks and bonds that you know and love.

[A]

Right.

[B]

It also sounds like it simplifies. Right. You don't have to hold as many things to get the same thing in your portfolio. Kind of is that.

[C]

Yeah. In some cases, like with prepackaged return stacked, you know, beta plus alternatives. Yep. You get them. You get one.

[A]

Okay, so talk Duncan off the ledge because he's like a three times NASDAQ 100 guy.

[C]

Listen, here's what I'll say. If you've got three times NASDAQ 100 and you put one third of your portfolio in it, you now have 100% NASDAQ 100 with 2/3 of your money sitting in cash. That you can do with whatever. Now you got to keep practicing that. But hey, that's not. That's not, you know, a horrible use of capital.

[A]

Yes, but. But that's the idea, right? Is that a lot of people could put more than that in and. Okay. All right. All right.

[B]

Yeah, that's cool. Got my wheels turning. I didn't know anything about this completely new return.

[A]

Tell people where they can go to learn more. Corey, since you're here. Yeah.

[C]

Returnstack.com or returnstack ETFs.com.

[A]

All right. Appreciate it, Corey.

[C]

Thank you for the time.

[B]

Thanks so much.

[A]

Thanks.

[B]

See ya. Okay.

[A]

That's pretty interesting, right?

[B]

Yeah, I read that question. I was like, return stacking. I have no idea what that.

[A]

I'm constantly commenting that, like, the. The amount of options that individual investors have today in funds is just so much more than they could have ever imagined. You know, in the past, this stuff was really only for institutions, that institutions were paying up to their eyeballs for this stuff, you know, now you can get it in like an ETF structure for a relatively low cost. You have to understand what you're doing, obviously, but it's pretty amazing that Individual investors now have these kind of things in, like a tax aware strategy.

[B]

I've been doing a deep dive into like all the different active ETFs out there. And because there, like you're saying there's so much cool stuff, what I worry about is are there going to be too many ETFs where they can't get enough, you know, assets to actually make them viable long term? You know, that's what could be.

[A]

And part of that is, yeah, investors are just tempted to jump from this to this to this.

[B]

Right, right. But yeah, this is the kind of.

[A]

Strategy you have to. I mean, this is more of a portfolio management strategy that you have to stick with.

[C]

Right.

[A]

You can't just jump in and out because you feel like it.

[B]

Right? Right. Yeah.

[A]

All right, let's do another one.

[B]

Okay. Up next, we got a question from Dan. Ben has said on multiple occasions that he only buys ETFs and doesn't buy individual stocks. I largely agree with that long term strategy. How does Ben resist the urge to buy stocks that seem like a great value or are temporarily mispriced? This is a good question because, I mean, this is your life. Like you're following the market all the time, you know, like you gotta feel, you gotta feel some temptation to buy, buy stocks here and there.

[A]

Yeah. And I think this guy too, we, we try to shorten these questions sometimes. He talked about how Google, he said he made good money buying it in 2023. And it is funny to think that there was this period of time for a few months where people thought Google was toast. Right. It's like, why do we need Google anymore when ChatGPT exists? That was a worry. Google fell almost 20% in early 2023. Did I put the chart in here for this? Dan, give me a chart on. Since then, Google is up over 230%. It now appears they're winning the AI race, which is, I'm sure that narrative will change at some point too.

[B]

Yeah. Now people use it interchangeably. It's like, oh, I ran out of my free ChatGPT, I'll go use Gemini.

[A]

Yeah, yeah, exactly that. People are probably going to have multiple models. I think at first everyone thought there's only one winner. Now there's probably going to be multiple ones. Right? Like, oh, this one can't do this for a little, but I can do this. Or I'm going to have all four of them working at once to see what happens. So do I miss out on stuff like that by not being a stock picker Yeah, I do. But you know what else I miss out on? The ginormous losses. All right, so chart on here. This is. I just pulled up a handful of blue chip names. I ran it through a screener on Y trc like some, some large drawdowns. So this is showing, this is from all time highs. Nike is 65% off all time highs. Boeing is down 60%, Pfizer is 60% off all time highs. Intel's 50%, Disney like I mentioned before, is down 50% and Oracle's down almost 36%. These are big, you know, blue chip names. These aren't like small random meme speculative stocks, right.

[B]

The crazy part about this list to me is how many people 10 or 15 years ago do you think would have guessed that these would lose this much?

[A]

Oh, never, right. If you would have said, give me a bucket of these blue chip stocks. They all kind of pay a dividend too. Sign me up. You can chart off, Dan. The S and P is down less than 5% as of this recording. Okay, Again, these stocks are down 60%. This is like a 2008 level crisis, right? For these stocks from all time highs, the S and P is down less than 5%. So listen, that's the trade off by mostly indexing and staying diversified. I give up on the home runs, but I avoid striking out. Plus the way that I look at it is there's far less brain damage in my investment process. So I never had a huge piece of my portfolio for stock picking. It was never my thing. I was never that guy. I clung to index funds pretty quickly. That made sense to me right off the bat. But I did have a Robinhood account that made up like 10% of my portfolio that was mainly used for crypto and stock picking. The problem is I spent 90% of my time worrying about 10% of my portfolio. Checking the prices, checking the quarterly earnings calls. It just was not worth it to me personally. Some people love that game, I don't. I still dabble here and there. After Liberation Day, I bought a little bit of Nvidia because it's down 35 or 40%. Okay? I bought Nike recently trying to catch a falling knife. I think those are the only two stocks I own at the moment. But these are tiny, tiny positions. Even my brokerage account. Now it's basically all index funds. I'm so boring. And since it's Thanksgiving week, I gotta kind of semi quote the immortal John Candy in Planes, Transit, Automobiles when he says, yeah, and I'll kind of. I'm Making my own quote on this. Sure, it's boring, but I like me. My portfolio likes me. Right. I like being boring. It suits my investment process. It's okay I miss out on the huge gainers, but guess what? I own a bunch of total stock market index funds. I own NASDAQ 100 index funds. The winners end up there eventually, even if I don't see the individual ones. I'm okay with that. I think as an investor, you just have to be okay with all the trade offs. If you're a stock picker, the trade offs are like a way wider range of returns. Right. You can be down 20% on a day. You can be down 60% in a year when the market is going up. You could be up 300% in a year when the market is going down. Those are the trade offs. That's my trade offs that I'm willing to accept.

[B]

As someone who loves trying to pick stocks and having very mixed success with it, I feel like I end up in the same place over the long run. It's just I have a lot more fun in between, you know what I mean? Like, I get some big winners, I get some big losers. Maybe they kind of are.

[A]

You actually found checking your portfolio, benchmarking it correctly? Because I think most individual stock pickers are not actually benchmarking correctly to their to like what they could have gotten in an index.

[B]

I look at different timeframes and I pick the one that's green. If I'm talking about my portfolio, that's what I do. Yeah.

[A]

All right.

[B]

On this note, I was, you know, I was asking you offline earlier today, you know, like, is, is now a time to panic. And the reason I'm being a little facetious, but either you or Josh or someone has talked about before if you are going to panic, if you are feeling like you're going to get shaken out of the market, you should do it earlier rather than later. Is is now. I mean, we've had a pretty rough week in the market. Nvidia, you know, blew out earnings and proceeded to sell off. Like these don't seem like to someone like me that is not a market expert by any means, these things seem like a bad sign.

[A]

What would you say Thursday, Thursday felt crazy. Was like the market was up. Nvidia's up 5%. Then it rolled over and everyone's going, oh my gosh, this seems bad. My back to my boring style. Like there's never a time, there's never a good time to panic. Okay. Never. I don't think it ever makes sense to panic as an investor, unless you think you're going to get blown out of these, these stocks or these triple leverage whatevers when the stock market falls, then yeah, sure, it makes sense to panic early and sell. But if, if you have the ability to stick with your plan and then there's never time to panic. How's that? All right, listen, I don't, I don't. And I don't care about, I don't mind people who pick stocks and stuff. I understand it. I get it. It's interesting. I still follow a lot of this stuff. I just for me being on autopilot and, and not. And just give my brain a break from that be partially because I follow the market so closely. Right, right. You know, it's like I don't want that extra piece of it to like have this pain. It was funny. Like I'd have one stock that on. On earnings day was up 20% and the same day another stock reporter earnings day was down 20%. And guess which one carries more mind share. The down 20%. Right?

[B]

Yeah.

[A]

You don't, you don't like celebrate the up 20%. You, you ah, the down. What? It's true.

[B]

It's true. But you know, I'll, I'll keep doing it and I'll keep things.

[A]

You're right. It is, it is, it is fun. It is kind of entertaining for people and it, it's a way to like stay in touch with these companies and stay like. I think you can learn a lot about the economy from some of these companies by following them. So I think it is, it is interesting, but it's not for me anymore.

[B]

I've said this before. I used to be super into fantasy baseball. Like I'd be in multiple leagues and actually like managing the teams to a ridiculous amount of, you know, detail. And, and I basically quit doing that and decided that the stock market was more fun for doing research and trying to pick things. And, and you actually can make money instead of just being for fantasy that baseball.

[A]

That's why you should know that I would never be a stock picker because I've never played fantasy anything in my life.

[B]

But, but you, you do sound like a real big on base percentage guy, you know, for real. That's what you care about. You know, you're talking about your, your strategy is very on base percentage, moneyball type thing instead of like slugging percentage or swing for the fences, you know?

[A]

Yes, yes, I'll agree with that.

[B]

All right, all right, let's do Another one up next. We got one from Craig. Ben has mentioned the four year rule a couple of times on the podcast and offered to share the full strategy. Can you share with me?

[A]

Okay, let's do a story time here. I think I've kind of mentioned this before in bits and pieces, but when I first started the blog, you know, I get these, these random people that will reach out and ask questions and offer stuff they're doing. And I got this email from a guy named John Thes who said, hey, I try to help young people and I teach a class to young people and try to help them save and invest. And I like the way that you present this stuff. Can I use some of your blog posts to send around to my email list of these young people? I said, sure. He teaches young people and he also helped old people in retirement and he was retired himself. And he shared his own story with me. And he shared this story that he retired in the spring of 2000 at the very tippy top peak of the dot com bubble, which is as far as I'm concerned, the worst entry point in stock market history so far. Even worse than the 1929, like in terms of valuations, worse than that. And he shared with me and so I said, well, how did it go? Like it's been 15 years or whatever, how. Because this is 10 years ago when I talked to him and he said, let me share with you what we did. And he said he had this four year rule and he based it on the idea that major stock at market downturns last eight to 24 months. That's kind of the range upturns last four to eight years. These are his baselines he's using. Obviously there's a range of outcomes, but these are the baseline. So he says five years before retiring, I accumulate a cash reserve that goes into money market or CDs or T bills or some sort of cash, whatever, high yield savings account. And you accumulate four years of living expenses net of any pension or Social Security income you'll receive right when you retire, if there is a stock market upturn, you just take your money out of the stock market. If there's a downturn, you take it out of the cash. And then he has these specific time frames. Like if you're taking it out of the cash, you wait for the stock market to turn back up and run for about 18 to 24 months and then you replenish your cash because eventually you have to replenish it. That was his idea. And he said that's what we did, we retired at the worst possible time. The stock market went into a three year bear market and we took from our four year bucket and then waited for the stock market to turn up again and did the same thing in 2008. And it was very hard but they survived. And so I shared his story a bunch of times and every time I shared it because he has this big long piece that he wrote that has even more color and context and background to it and I told people I'll send it to you. And so I think what I'm going to do instead of sending people a word doc now after every one of these ask the compounds I do like a companion blog post about something and do a deeper dive. Right. Add some more charts or perspective.

[B]

So I think I'm just gonna publishwealthofcommonsense.com.

[A]

Yeah, so I'm just gonna publish his whole four year rule on there for people if they wanna go see it. Sadly, I think it was last year his wife emailed me and said, hey John, always loved corresponding with you. Just wanna let you know he got a really bad disease, incurable HEPA fast and he passed away. So he passed away. But he helped a lot of people. And Bill Sweet and I kind of looked him up and he had a, the guy was a great guy and lived a great life. And anyway a really cool correspondence. But his strategy, while not. I'm. I'm sure some people would quibble with it or find holes. Like I, I love the idea of thinking through your spending in retirement, like your bond or cash piece in terms of the number of years that you have to spend. So like if you have a 6040 portfolio and you spend 4% of your portfolio in year one, you have 10 years worth of savings. And that, that framing it that way makes it so much easier for people to go, oh, okay. So as long as we're not set up for a 10 year bear market, I think I'm going to be going to be okay for a while. Even if I retire into the teeth of something nasty. I just, I love the way that he frames it in terms of spending instead of like trying to optimize some weird stock market return. Whatever. So it's a, it's a really cool idea and a lot of people I think have got a lot of use out of over the years. So I'll, I'll publish that for everyone. But I really like the idea.

[B]

Yeah, it makes a lot of sense to me.

[A]

Yeah. All right, let's do another one.

[B]

Okay. Up Next, we got one from Victor. I'm a 20 year old college student about to make a decently sized purchase of a couple thousand dollars, upgrading my iPhone and Apple watch. If stocks return 10 to 11% a year on average, would it be smart to use buy now, pay later as a way to increase my leverage through a big purchase? If I can spread the payment out over a year with no interest, I can invest that money now and reap the difference. Essentially, I'm looking to make the difference from a time value of money principle.

[A]

All right. Last week, last week in the comments we kind of got roasted because we had too many not to brags and so I got a few. I picked a few questions by young people. Yeah, I like it.

[B]

Yeah, yeah, it's nice. Mixing it up. I wasn't done. All right. Essentially I'm looking to make the difference using time value of money. Could you share some thoughts on this strategy's effectiveness and risk? What investments would be most ideal? Should I just use a cash back credit card and scrap the idea entirely?

[A]

Okay. I'm curious what you think about this.

[B]

It makes a lot of sense to me. I've said to you before, I've used credit card balance transfer things to kind of do the same thing where trying to kind of. I don't know if that's arbitrage or not, but trying to play the difference and being able to get some kind of return. Usually it doesn't end up being a big savings or anything, but it's worked relatively well for me when I've done stuff like this.

[A]

I like the fact that he's trying to game the system, but I'm not sure that buy now pay later is the way to do it. Okay. I think he's right. I would probably scrap this idea entirely because the buy now pay later happens over the course of a few months. You pay it off. I've done it a few times just to try it.

[B]

It depends on how big the purchase is. Right. You can do a year if it's something like an iPhone, I think.

[A]

Yeah, but. But even a year, if he's talking about the stock market, you don't want to like do buy now, pay later. They're going to pay off in the year, put it in the stock market and hope that that money's there in a year plus plus you have to pay taxes on it like that. That seems just like a step too far to me. I think you're probably better off using a rewards credit card because one with a buy now, pay later you're not developing the credit part. You get in a credit card. Right. As far as I. As far as I know. So the FICO score piece is better if you use a credit card. And in a credit card ward, you know, Robinhood does the 3%. Most of the sapphire or whatever, American Express gold, platinum, silver, bronze, whatever color they are, will give you something 3%. And also some other perks. I think you're probably better doing that and then investing the cash. And there are, there are credit card rewards that will put money right into your Fidelity account or your bank of America account or your Robin Hood account. Right. And then use that money to invest. I think that's probably less. Again, getting back to my stock pick thing, less brain damage. So I think I would be more apt to do that.

[B]

Well, because the buy now, pay later thing sounds like if you, if that's your mentality and that's your philosophy, then why wouldn't you do that? For everything, literally anything you could ever buy now, pay later for, you're technically keeping more money in your bank account today.

[A]

Yeah.

[B]

So that, that time value of money, you know.

[A]

Yeah. And I mean, I. I put literally every purchase I can on my credit card. And that for me, for us, that's like 95% of. Of all of our purchases. Besides, like my mortgage, I read a check for. Yeah. And the credit cards are floating me for a month, essentially because I pay off the balance every month. Right. So that's. It's kind of the same idea. It just gives you some sort of buffer. But yeah, I think a credit card is probably where to go. And if you're a young person, like, and you can take out, like you said, a zero percent credit card because of a big purchase. Like, I remember when I was first out of college and the brakes in my car went out and I literally graduated with zero savings. I had no money. And it like, I'm like, this is going to bankrupt me. So I use a credit card and I paid it off over time. Like, if you could do something like that to get you by when you need to, that makes sense to me. I don't think like taking the.

[B]

Those are, those are never free. It's usually like 3 or 4% that you pay up front to do to get like a balance transfer.

[A]

Well, that's about. I'm saying if you take out a 0% credit card, then use the credit card.

[B]

Right.

[A]

And you're not paying a balance for a year. But yeah, the buy now, pay later of investing the money in stocks that's like an asset liability mismatch. That. That time frame is way too short for me. Okay. I don't think you're really. Yeah, that's too short.

[B]

And for our young people watching that are still, you know, learning about the finance world, Never carry balance on a credit card. That is. That's always a losing proposition, right? I mean, that's.

[A]

Yes. That's like you got to pay off Warren Buffett level anti compounding against you. Yes. That's. That's Ben's number one rule of personal finance. Do not pick. Do not carry a credit card balance.

[B]

Yeah. They're great tools, but not if you carry a balance.

[A]

Yeah, it's about the worst thing you could do.

[B]

Yeah.

[C]

All right, one more.

[B]

Last but not least, we got one from Luke. I'm in my tw. Sorry. In my 20s and 30s, I spent a lot of time screwing off and not really thinking about the future. Since 2020, I've turned that around. I work a pretty low paying but easy job at a golf course. And I invest consistently mainly in Vanguard Target date funds. In my Roth IRA, plus a brokerage account with other index ETFs. I've got about $21,000 in the Roth and $35,000 in the brokerage. I'll pare down my ETF holdings in the brokerage at some point. My question is, should I just stick with this Setup until I'm 65 to make up for lost time? The investment trackers I've used say I could end up with around $900,000, assuming a 7 to 9% return. Does that sound rational? I'm not asking for instructions on what to do, just your thoughts on the long term plan.

[A]

So, Luke, you're not alone in screwing off in your 20s and 30s. That happens a lot of people it. For now, though, the fact that you turned it around and you're saving sounds like a perfectly reasonable strategy to me. But I think just as you are now in a different place than you were in your 20s and early 30s, like at some point your plans are probably going to change. You become a different person. Maybe you want a different job, maybe a job that's not as easy, you want a harder job, maybe you want to relocate, maybe you find you need more than $900,000 to retire, maybe it's less. Who knows, Depending on what you're doing and how much you're spending. I think the main thing is you just keep saving and you probably try to find ways to increase your savings over time. But the person you are in your late 30s is not the same person you were in your early 20s and 30s. It's not going to be the same person in your 40s or 50s. Your plans are going to change. So I think you just want to give yourself a buffer. But, I don't know. Kudos and congrats for turning it around. Some people we mentioned on last week's show, some people don't ever turn it around. We all know people like this. So the fact that you did and, yeah, you got it out of your system sounds like you went through, like, your ski bum phase a little bit. Yeah. You're doing good. Keep shoveling money into those Vanguard funds and you'll be fine.

[B]

What do you think they do at a golf course? It sounds kind of like a fun place to work.

[A]

Caddy, maybe work at the bar, grounds crew. I don't know. What do you think?

[B]

Yeah, Yeah, I was thinking. Yeah, I was thinking maybe, like, working at the driving range or something.

[A]

I mean, usually the beverage person is a female. Almost always.

[B]

Well, I was a poolside server at a country club when I was in college, so.

[A]

Okay. But, yeah, working outside on the golf course is probably. Hopefully they give you free rounds. Probably not a bad. Probably not a bad gig.

[B]

Maybe some free golf.

[A]

Yeah, yeah. So. But, yeah, keep funneling money in, man. You're doing good.

[B]

Yeah, Yeah. I mean, I. Before this job, I. I was an adjunct professor with no benefits and no. No retirement from the schools that I was teaching at. So.

[A]

Really, they didn't have any retirement benefits at the schools?

[B]

No.

[A]

I didn't know that.

[B]

Adjuncts don't get any. Any benefits, period, at most schools. So it's why all the schools are moving to using primarily adjuncts or as many as they can. So.

[A]

Yeah, that's nice.

[B]

That's.

[A]

Yes.

[B]

Yeah.

[A]

All right, well, so it's Thanksgiving week, so I just want to take a minute and give thanks to all of our wonderful viewers and listeners for sending in questions every single week. We started this show, I worry that eventually people might stop writing in or that we just kind of run out of questions. And the longer we do this show, the more questions we receive, which is great. So we here at the compound appreciate you all for that. Keep sending us your emails to askthecompoundshowmail.com Happy Thanksgiving to all, and we'll see you next time.

[B]

And safe travels. A lot of people are probably traveling right now, so. Yeah, stay safe.

[A]

Me, I'm gonna be traveling.

[B]

Yeah. Yeah. Have fun in Disney World. Also, just wanted to say thanks to John, Nicole, Dan and Travis. You know my team. I'm thankful to have the best team in podcasting. In my opinion, I'm biased, but they are the best.

[A]

We appreciate it. Thanks everyone.

[B]

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