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)

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.

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)

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.

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]

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]

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.

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]

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

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

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!

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

For More

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

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

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)

Main Theme / Purpose

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)

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.

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]

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]

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.

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]

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

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

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!

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

For More

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

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

wavePod

How Does the 4 Year Rule Work?

Summary

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

Main Theme / Purpose

Key Discussion Points & Insights

1. What Is Return Stacking and Responsible Leverage?

Resources Mentioned:

2. Why Ben Avoids Individual Stock Picking

3. The Four Year Rule in Retirement

4. Leveraging Buy Now, Pay Later for Investing

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

Notable Quotes & Timestamps

Timestamps for Key Segments

Episode Tone & Language

Summary Takeaways

For More

Transcript

Summary

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

Main Theme / Purpose

Key Discussion Points & Insights

1. What Is Return Stacking and Responsible Leverage?

Resources Mentioned:

2. Why Ben Avoids Individual Stock Picking

3. The Four Year Rule in Retirement

4. Leveraging Buy Now, Pay Later for Investing

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

Notable Quotes & Timestamps

Timestamps for Key Segments

Episode Tone & Language

Summary Takeaways

For More