Loading summary
Transcript235 lines
- [00:00]
A
Welcome. This is Ask the Compound, the show where you ask and we answer. I am Ben Carlson. A lot of people are fairly certain this AI Capex boom is a bubble. Let's say you feel this way too, but you want to go along for the ride anyway and you want to find an off ramp when things turn. How would you go about this? Stop loss orders, trend following momentum indicators. We're going to explore that on today's show. Please stick around. Someone in the live chat says that's a toppy title for today. Fair. Ask the compound showmail.com if you're in the live chat, give us a Give us a question. We'll take it live on the air. On today's show, we discuss questions directly from our audience at the Compound about getting out before the AI bubble pops. Filling up your Roth IRA five years before retirement, Buying your dream home. How much is too much? How to utilize capital loss carryforwards in your portfolio from Oatley or other stocks. Should you prioritize saving for Retirement or your Children's529 plan first? And then should you buy a vacation home for estate planning purposes?
- [01:02]
B
Since you mentioned it, they reported earnings today. You know. So how do we do EBITDA growth? Some good revenue in Europe and China. US lagging behind, but yeah, some good stuff. The stock is down.
- [01:19]
A
Okay, that's all I wanted. You said EBITDA first. That's what I knew. It was a bad quarter. All right. Today's show is sponsored by Public. Public is the investing platform for those who take investing seriously. You can build a multi asset portfolio of stocks, bonds, options, crypto and more on Public. 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 is not just a feature, it's woven into the entire experience. You get portfolio insights, you get earnings call recaps. Public gives you smarter context at every touch point. Plus earn an uncapped 1% match when you transfer your portfolio. This includes IRA transfers, rollovers, even initial contributions. Fund your account in 5 minutes or less. Visit public.comatc that's public.com atc paid for by Public Investing. Full disclosures in the podcast description. All right, we got a full show for today. Duncan, I think your background is growing. It looks very nice.
- [02:13]
B
Oh thanks. Yeah, I need to fill it out still. I'm trying to come up with some some stuff to, to fill it in.
- [02:19]
A
And we're both wearing plaid shirts. I believe that's that's fall for us.
- [02:23]
B
It's cold. It's cold.
- [02:25]
A
All right.
- [02:25]
B
Yeah.
- [02:26]
A
Question.
- [02:27]
B
Speaking of OA on earnings, I was going to ask you, this might be more of an accounting question for Bill, but what does adjusted EBITDA mean instead of just eida?
- [02:35]
A
It just means they add in these expenses and take these ones out and hey, this is not recurring and this is, you know, they try to, try to make it look more normal. It's just the way for them to make it look better. How's that sound?
- [02:46]
B
I figure that's most earnings reports. Everything is to make it look better.
- [02:50]
A
X this, X that. Yeah, it's only down two and a half percent. You're not doing too bad.
- [02:56]
B
All right. Up first today, we got a question from Bill. Could you talk about how to use momentum indicators and stop losses to profit from an AI bubble? Having been an investor during the 90s, this feels like the early innings of a bubble. If this is one, that's a Grand Rapids hedge, right? Yeah, I think, I think there may be relatively low risk way to profit without picking individual winners or timing the top by using momentum indicators and trailing stop loss orders on broad based passively managed ETFs.
- [03:28]
A
All right. I'll be honest, I don't have a ton of experience with stop loss orders. I think it can make sense in the right place. Hey, 5% below, 10% below and you keep moving it up as the market goes higher. Right. So you get that trigger.
- [03:39]
B
For our young and new people here, that just means you're, you're limiting how much you can lose. Basically. The stock.
- [03:43]
A
Yeah, the stock 10% trigger hits you sell. Yeah. You can do that automatically on most brokerages. So you just have to move it up. You also have to be comfortable with the fact that you could get taken out from a short little correction, then the market moves higher. So you have to be comfortable with that risk. So not a lot of experience for me with stop losses. I do have experience with trend following. We utilize a trend following strategy. It really holds for our clients. I personally have 10 to 15% of my portfolio in this strategy that we call goaltender. I'll give you a quick history of trend following using some stuff from Mev Faber. So in the spring of 2006, Meb Faber, friend of the show, published a research paper called the Quantitative Approach to Tactical Asset Allocation. Not the greatest title in the world, but it worked. So the idea was you use a 10 month moving average. So if you're familiar with the 200 day moving average, it's pretty similar. That's about 10 months. So basically that moving average dictates whether you're in risk assets like the stock market or cash like T bills. So the rules are pretty simple at month end. So this is a monthly indicator. Some people look at it daily, weekly, monthly tends to work best because it smooths out a lot of the back and forth. So if the current price is greater than the 10 month moving average price, right. You just take the previous 10 months, average them. Right. If the current price is higher than that average, you, you stay invested in the risk asset. If the current price is lower than that 10 month moving average, you invest in cash. And that's your signal, right? If it's below, you either sell or stay in cash. If it's above, you either buy or stay in stocks. So the idea is that if you're in an uptrend, you buy or stay invested. Because in an uptrend good things can happen, right? If you're in a downtrend, you sell or stay in cash because there's a bigger, wider range of outcomes that can happen in a downtrend. People freak out, they panic more for there's more volatility. That's the idea. So, and the idea behind the strategy overall is you're trying to dampen volatility and really avoid the risk of a severe market drawdown in risk assets. So we're talking like 40, 50%. You're trying to take that off the table. Right. And the timing for MEB could have been better. He published it, I think in May of 2006 was like the working paper. I think it got published in one of the journals of financial something in 2007. And so a little more than a year after he first published, the stock market peaked from the onset of the great financial crisis and fell almost 60%. And so a few years later in 2012, MEB redid the paper and said, hey, how did it look going back after we have actual data? So how do we take the back test, see what it looks like in real time. All right, Daniel, let's do a chart on here. This is the s and P versus the timing indicator again using a 10 month moving average. You can see in 2008, that flat period of going to cash when the stock market totally fell out of bed. And the timing indicator worked pretty good actually. Right, next chart. These are the long term return profile for trend following versus buy and hold. You can see the returns are pretty similar over time. Volatility is lower. So I say it's about a third lower for timing.
- [06:36]
B
Wow. That max draw down though.
- [06:38]
A
Yeah, the max drawdown is still there, right? Like you, I think, I think that would happen in the 30s. Right. Because there are some whipsaw periods where you have a big up and a big down. And I'll get to that in a minute. The point though is that it's, you're, you're hoping for stock like returns with less volatility, which sounds like it's almost fake. Right. And I'm going to get to some of the downsides. Let's do one more though. Next chart. This is from meb's paper. He looks at the worst years in the S and P versus the trend following system. You can see this is really where this strategy shines in those really, really bad years. Not too shabby, right? All right, chart off. So that's the idea. And it worked. The timing of meb's paper again couldn't have been better. Put the guy in the map. It's, you know, kudos to him and I did. So I wanted to look at this and show kind of a different way of visualizing it. So Daniel threw a chart onto the GFC one. So this is, this is a GFC and this is a simple 200 day moving average. Again, 10 month, 200 days, pretty similar. Sean, a research analyst did this for me. Now what this shows is that the red line is the moving average. The blue line is the S and P at month end. Okay. So if you looked at this on a daily basis, you probably have a lot more in and outs. So you have that, that's like the trade off. So you look at this on a monthly basis, you can see this, the sell signal there I think happened. You were down probably 8 to 10% in 2007, the downtrend set. And then there was a couple times when it almost came back, but it never did. And you had just this waterfall lower and it stayed out the whole time. And then you can see there's a big, huge comeback. I think stocks were up, I don't know, 20 to 30% eyeballing it before you got back in. But you missed a huge, huge part. So you didn't get out of the peak, you didn't get into the bottom, which is obviously impossible. But you, you missed the majority of that crash. Chart off. So that's a pretty, that's pretty good for that kind of severe correction. Right. So let's look at the dot com bubble now because this is for severe market corrections. Right. Put the next chart on this is heading up to the dot com bubble. You can see there's a couple times we had false positives. Right. You sold in 98, got back in. You sold at the end of 99, got back in. Right. The red is sell, green is buy again. But in 2000 you got out again 8 to 10% below the high there was in 2002. You had a slight ramp up. You got back in and you got back out immediately. But then you missed again most of that big downturn, which is like 50% chart off. So the question, Duncan, is why would you ever invest in anything else? If you have this strategy that doesn't time things perfectly? Because nothing does, but it gets you out of the meat of these huge. I say it takes away 70 to 80% of these big corrections. So the last two huge ones that we've had, why would you ever invest in anything else? Here's the thing. Trend following is a wonderful hedge against these severe market downturns. Again, these were both 50% plus crashes. But these severe market downturns don't happen that often. Crashes are rare. Right. Let's look at 2022 in general.
- [09:32]
B
Do you know, not to put you on the spot, but in my, you know, fairly limited experience being invested in the stock market and paying attention, it seems like the crashes happen really fast and corrections the same. It's like before you even have a chance to react, it's already down 20 or something or 18%. You know, it's, that's the hard part.
- [09:49]
A
If you, if you have a 1987 crash situation where the stock market fell 20% a day, guess what? This strategy is not going to get you out.
- [09:56]
B
Right?
- [09:56]
A
Right. Covid is pretty fast too. I think this stuff triggered at the end of February and Covid, so you missed a lot of the March stuff. But you're right if it's a, if it's a really fast crash, unless you're looking at this on a daily basis, which means more transactions, it's tough. So let's look at this on, let's look at the downside of this. Let's look at 2022. And this was a downside, but just when you have a bear market, but it doesn't completely crash. So you missed a decent chunk of the volatility. But look at how many times you get in and out. You get out, then you get back in, then you get out, then you get back in. And it's hard because you get, they call it a whipsaw. Right. When you have volatile markets you could have a really big down month and you get out and then the next month comes back really quick and you get back in and they call that a whipsaw.
- [10:36]
B
That's why I use 10 minute moving averages.
- [10:38]
A
Yeah, 7 minute abs. Right. Chart off, please. So again, this is the type of strategy that typically will sell when you're down. Call it 10 to 12%, it'll buy after the market rallies. 10 to 20% maybe, you know, typical. But again, you mentioned if markets move faster, it doesn't necessarily work. So that's the point. There are downsides to this. It's an insurance premium you're paying because most of the time when the stock market falls 20%, it doesn't fall 30 or 40%. Most of the time when the stock market falls 10, it doesn't fall 20, 30, 40, 50%. Those are rare. So most. So you don't buy insurance on your house hoping that it burns down. But sometimes the stock market does burn down and that's when trend following can protect you. So those. This is why people really liked it after 2008, because listen, I don't want to sit through a 60% decline. This is nuts. So a lot of people use it as a behavioral release valve, an insurance policy. And the other side of that insurance policy is if as long as stocks are in uptrend and going up, you stay invested. So that's one of the really good things about if you're trying to ride this, this bubble higher, if that's what it is. That's the thing. The other part of it is though, you better do that. You should probably do this in a tax deferred account because if you're going to be jumping in and jumping out, you're going to have short term capital.
- [11:50]
B
Gains potentially granted, I guess then you lose tax loss harvesting ability, right?
- [11:53]
A
Yeah. And that's the problem is the taxes can get you. So you probably want to do this in a tax deferred account. Unless you're willing to pay those. Unless the behavioral piece, and that's what we tell our clients, is that this is a behavioral release valve for your portfolio. If you have a strategy like this as a portion of your portfolio, we don't use it for all of a portfolio, then it allows you to stick with the rest of your portfolio, then it's done its job. Right. It's the volatility reducer. But to your point, if it's a very swift decline, it's not going to catch everything. And again, if you had a down 20% month and you got out and the next month it's up 20% while you're out now you hit the decline and you miss the upside. So there are periods where this thing, even though the long term looks pretty darn good, there are going to be situations where this thing doesn't work and you're on both of the wrong sides and that's when you get dinged. And I think that's what happened with a 50% crash and that big drawdown over time. I do have a blog post on this if you want a more deep dive on trend following that I call my evolution on asset allocation. I have links to tons of research papers in there from not only MEB Faber but Alpha Architect and AQR and all these places. I know there's a lot of people who follow us who say I would never do anything like this. I don't need it. I can sit through stacking steady handed. I don't need it. Other people say, wow, this is great. It's again a behavioral release valve. I like having the volatility protection. I like having that insurance policy. It's not for everyone but for people who understand how it works I think it can be a good compliment as like a way to diversify across market environment as opposed to market asset class or strategy or whatever.
- [13:24]
B
I'm going to ask Charcutematt to run this but instead of just buying and selling, it's going to be buying the triple levered S and P and selling, I mean and then buying the inverse triple levered.
- [13:36]
A
Okay, you want the more extreme to see. Now again, to some investors this is antithetical. Like I could never imagine trying to time the market like this. Now I think because it's a rules based system and I think you're diversifying by uptrends and downtrends. Maybe you'll quibble with the timing stuff, but it's not like you're just guessing when the market's going to go down. You have to follow this thing to the rule of law. You can't say like, well it says I should get out but I'm not going to her. It says I should get back in, but I don't feel like it that you can't do that. You have to follow the rules to a T from hell or high water.
- [14:09]
B
And you're against market timing. But I'm guessing you would give your blessing to buying whenever the market's down 20%. Right? Like that's. Historically buying in corrections and buying in crashes has been a winning strategy.
- [14:23]
A
Yeah, of course. That's the best time to buy. Yeah, of course.
- [14:27]
B
Also, MEB Favor grew up down the street from me, Winston Salem, North Carolina.
- [14:31]
A
Oh, yeah. He seems like he should be a California guy because he lives there now, but he, like, he's a Virginia guy, right? Or what did you say? Carolina.
- [14:36]
B
North Carolina. He's from Virginia, maybe originally. I just know he went to high school and Winston Salem.
- [14:41]
A
Oh, okay. All right, next question.
- [14:43]
B
Okay. Up next, we've got a question from Mark. Bill recommends that we go Roth IRA as much as possible. But we've been above the Roth income limit for the past decade or so and have been pouring money into our 401k instead because it helps with our current tax liability. Recently we started to split our 401k contributions between traditional and Roth. We live in Oregon and probably have five to seven more years of working. Household income is $350,000. We have $2 million in two rollover IRAs and another 800,000 in our 401ks with maybe 5% of that Roth net worth of 3.2 million. Do you think this is the correct strategy at this point in our working lives? If not, what do you recommend?
- [15:26]
A
All right, David in the live chat just said Bill three times. And just like Beetlejuice, that means he has to appear.
- [15:30]
B
It's true. There he is. Boo. Hey, Bill.
- [15:33]
C
I want to thank Reynolds wealth colleague Daniel Pera, because as you gentlemen know, I have a face for radio. He really helped me out here.
- [15:41]
B
Yeah, you're looking good.
- [15:42]
A
Looking good in the studio.
- [15:43]
C
I didn't get the flight member dolphins.
- [15:46]
A
Yeah, sorry, Bill, you're. You're all green. A lot of questions directed towards Bill Sweet lately. So Rob Passarella on our team is doing a project for the show where he's uploading all the questions into like an AI and we're going to try to do something with it. But he then took all these questions we looked at over the years and did a word cloud and can you guess the finance word that's been used more than any other in our questions, Bill.
- [16:06]
C
Internal Revenue Code.
- [16:08]
A
Taxes. Taxes. More than. More than anything people.
- [16:12]
C
Guarantees in life.
- [16:13]
A
Yeah, Yeah. I think this is a loss aversion thing because people. There's an old J. Moore bit about when he got married to his wife. It wasn't that they, they got along because of the things that they both liked. They got along because of the things they both hated. Right. I think that's, that's why that's a tax thing. People don't like saving on taxes. They just hate paying them. Yeah, right.
- [16:34]
C
And like Jay Moore, I have a hate, hate relationship with my spouse. But yeah. Scariest costume, though. I was thinking IRS agent, like, where are you guys for Halloween on Friday? Because that's where I'm going.
- [16:46]
A
I mean, you should do that every year, right?
- [16:47]
C
Yeah.
- [16:48]
A
To your exact point. Death tax practice.
- [16:49]
C
Yeah, Death and taxes. Ben. I love Mark's question. Mark, to me, gentlemen, is right on the cusp between when a traditional makes sense, a Roth would make sense. He's right square in the middle of a 24% tax bracket. The only question I would love to ping back to Mark, who gave us a lot of information, by the way, is are we going to stay in Oregon? Oregon secretly is a very high income tax state. You're at 9.9% once you cross roughly $200,000.
- [17:13]
A
What do you consider, what do you consider a high rate for state taxes?
- [17:16]
C
A high rate, I would say, is anything above seven. That, that's, that's it for me. Yeah. I think.
- [17:21]
A
What do I add? What am I in Michigan?
- [17:23]
C
You're.
- [17:23]
A
Yeah.
- [17:24]
C
You're like high sixes in the best.
- [17:26]
B
What about Connecticut?
- [17:27]
C
Connecticut, about the same. Relatively high eco state. Yeah. Seven, eight, nine. It ticks up. But New York, California, the People's Republic out there, 12.3. And the only higher state tax is New York City at roughly.
- [17:38]
A
So fill in the live chat says I live in Oregon. It's not a secret here. Yeah, yeah.
- [17:43]
C
And they're looking for new, new ways to tax people. So back to our friend Mark. Can we chart on here? Daniel? One of the things I like to do is take an illustration like visuals, pay the bills. And if you look at our big bloody red Mark symbol again, he's right in the middle of the 24% tax bracket, roughly five to seven years until retirement, in my view. I'm not sure I would leverage and go long. Roth here because ultimately the, the window between now when he's at probably the highest earnings of his career, relatively tight relative to when we're going to drop down the income ladder. So it's a bit of a judgment call, I think for me, though, to answer Mark's question directly, if 95% of your assets aren't traditional and if you're not planning on moving out of the People's Republic of Oregon, I would probably favor more roth because only 5% of Mark's assets are in Roth today.
- [18:27]
A
So would it make more sense to do it when he retires? Potentially.
- [18:32]
C
So that's the other. That's the other angle can we chart off is that if we're moving lower in the tax brackets. Right. If we stop having all that earned income and we have a couple of years basically when we. Before we stop working, before RMDs kick in at age 73, before Social Security kicks in at age 70 at the maximum. Those are great years to fill up low tax brackets with a Roth conversion and particularly to move the needle. If you're planning on moving from Oregon, let's say you're saying on the west coast to Nevada. A lower. A zero tax state or maybe a lower tax state. I think that would make a lot of sense for mark and spouse.
- [19:03]
B
Is Oregon one of those states that we all say wrong? Isn't. Isn't it like actually pronounced really weird.
- [19:08]
C
Like Nevada or like where would you.
- [19:11]
B
Go, Oregon or something?
- [19:13]
C
Oh, I don't know.
- [19:14]
B
I don't know.
- [19:14]
C
We'd have to ask friend and colleague.
- [19:16]
B
Phil in the chat tell us. I'm not sure.
- [19:17]
C
Okay. Yeah, friend in college, Joey Fishman would. Would be able to tell us. He just calls it a ripoff. That's. That's where, that's where he goes.
- [19:24]
A
Yeah, Duncan, you're way off there. No way.
- [19:26]
B
Well, same with Nevada. People actually say Nevada or something. Weird. Right?
- [19:30]
C
You say Nevada. I see Nevada. Let's call the whole thing off.
- [19:33]
A
So someone else in the chat says no income. No. No income tax in Washington. So you just move up one state.
- [19:38]
C
Yeah, no income tax in Washington. Great point. Yeah, forgot all about that. Ben. Not all of the west coast is pilfering their citizens, so good call.
- [19:45]
B
All right, Adam, Adam in the chat says above 250,000 in Canada. Federal and provincial is 3, 53%.
- [19:52]
C
Yikes.
- [19:53]
A
And they're still really nice in Canada.
- [19:55]
C
You know, and, and tariffs. Yeah. So that's closer to 70% once you bake it all in.
- [19:59]
A
Yeah, yeah. But they get leblat blue moles and.
- [20:01]
C
Canadian and they tied the Dodgers in LA last night.
- [20:04]
A
Yeah.
- [20:04]
C
Yeah, we'll see. Tbd.
- [20:06]
A
I watched that one. All right, another question.
- [20:08]
B
Okay.
- [20:09]
A
Favorite long one of the day.
- [20:11]
B
Yeah. Up next, we got a two parter from Alex. I may have the opportunity to buy my parents house. A newer 3200 square foot, four bed, three bath home with office, three car, garage, pool and big yard in probably the nicest gated neighborhood in my area near St. Petersburg, Florida. It's one mile from our current home, so life stays the same. But it would be a huge quality of life upgrade for a family and perfect for raising kids. And entertaining. We're 31 with two kids. About 1.15 million saved. Between real estate, brokerage and retirement accounts, we have a good income with upside potential. The house is 1.375 million, so we'd need about $500,000 down. This would cut our savings rate significantly, but we'd still have $650,000 or so left invested, which likely grows to 6 million by age 67. With a modest savings rate, more than enough for a secure retirement. Our current home is great. With a 2.8% mortgage and high savings potential, Financially staying put is easy. But this opportunity offers a dramatic lifestyle upgrade. I'm weighing whether it's worth pursuing spending more now and saving less for the sake of a higher end home and life for our family. This one seems pretty cut and dry to me, but I'm curious to hear what you guys say.
- [21:30]
A
You think so? Okay. I think it's basically impossible to put a price on the feelings you get from a home you truly love. So it sounds to me like this is a dream forever home. I think that's a big part of the equation. Are you, can you see yourself being here for 10, 15 years?
- [21:43]
B
We have a chance to upgrade our life significantly and we can afford it. Should we do it?
- [21:48]
A
Right, Right. And they have obviously great amount of assets. They're millionaires by in their early 30s. You're moving from a liquid to an illiquid asset. So that's, that's one thing, but it's not. This is not like blowing your money on something. This is moving from one financial asset or group of financial assets to another. And you could have lower returns on the house at the stock market. I have a couple questions. Why does the down payment have to be so large? They said 500k down payment on like a, what, a $1.4 million house? That's 35% or so. I don't know. Why can't you put 20 down or 10% down? Also, this is coming from the parents. I hope the parents are giving them a good deal on the house. Right below Zillow asking.
- [22:31]
B
Yeah, at least 1% discount.
- [22:32]
A
Right. Bill, is there a better way to transfer this asset from parent to child or is it. If the parents need the money, they need the money and. Sorry, that's it. Like, is there, is there a better way to do this?
- [22:41]
C
In order to be able to answer this question, I'm going to need more information from Alex. If he could write six more paragraphs about all the details about the house. I think we'd be in a better position to answer the question.
- [22:51]
A
Or do you leverage the grandkids against the grandparents to say, hey, give us the house, or you never see your grandkids again?
- [22:56]
C
Yeah.
- [22:56]
A
Drop them off.
- [22:57]
C
Yeah. I think you. Duncan, I'm with you. This is kind of a slam dunk, no brainer. Particularly if you're buying the house for mom and dad. I mean, already you're getting a 5% discount because you're not paying a real estate commission on a million dollar home. I would guess you're not going to close their realtor. This is going to be a drug deal between parent and child. Yeah. I mean, there's a lot of flexibility. You could do a mortgage with mom and dad. Right. You could just make the payments to mom and dad, presuming they still own the house. There's a lot that you can.
- [23:22]
A
Yeah, they might have a low rate on the house. Right. So you could effectively transfer it over somehow. Right?
- [23:26]
C
Yeah. To be 31 with a million dollars of savings like this is. This is a slam dunk, no brainer. Quality of life issue. I'm wondering what they're doing with mom and dad. Are they shipping them to El Salvador? What is happening here for them to benefit from?
- [23:39]
A
No, mom and dad are buried in the basement right now.
- [23:41]
B
Wait, what if that's. Wow, that's a Halloween comment. What if their condition is they get to continue living there in the house in old age?
- [23:50]
C
Yeah, it's homestead act. Yeah. Florida is a pretty generous homestead act.
- [23:53]
A
Here's the only potential awkward situation. You move in and you like renovate the kitchen and mom and dad go, wait, whoa, whoa, whoa. Hey, we like the kitchen.
- [24:00]
C
We really like that teal and the eggshell.
- [24:03]
B
Well, but don't they say that it's a newish house?
- [24:05]
C
Yeah, newish house. This does seem a little bit strange to me, but it seems like a match made in heaven. I mean, to me.
- [24:10]
A
Right.
- [24:10]
C
Because Graham, you get to keep the house and the family, the whole thing. So two things. One is that, yes, you could do some family drug deal like presuming that mom and dad don't need the money and are going to not need the down payment somewhere else. You could definitely do something family to family and do a transfer. There's nothing illegal or wrong with that because ultimately this isn't a business property. Right. I mean, this is a personal transaction. Second thing that I would like to just throw in, Daniel, if we could chart on the house that you own with a 2.8% mortgage that is like 3% below borrow interest rate. And I just did a quick analysis of what it would cost to own a 30 year mortgage on a 2.8% loan compared to market rate at 6%, you're talking about $400,000, Ben and Duncan, of interest that you would otherwise not be paying.
- [24:51]
A
So is this you playing devil's advocate here?
- [24:53]
C
I'm throwing it out that like, why do you need to sell the house like in the first place? Right? I mean that could flip into a rental property. Or again, chart off. Mom and dad need someplace to live and you have a great, great property to do that. Like you could just do a swap.
- [25:05]
A
You're trying to get them to lever up on tons of real estate now.
- [25:07]
C
Hey, Florida real estate's never gone.
- [25:09]
A
Buy mom and dad's home, keep your.
- [25:10]
C
Old home, as far as I'm aware. But no, my point is there's a lot of flexibility for Alex. But I just, I would be doing this deal tomorrow. Keep the house and the family and have a good life by the poolside.
- [25:19]
B
So yeah, if mom and dad need the money, they could essentially just move in and pay them rent.
- [25:23]
C
Yeah.
- [25:24]
B
For the foreseeable future.
- [25:25]
A
It seems like everyone in the chat is basically saying, do it. Why would you not do this? You have to do this. I tend to agree. Like comment of. Hey, listen, you're still young. You're going to be. Even if it's a more expensive house, you'll grow into it. Your, your assets will grow, your income will grow. Especially if this is a dream home situation. If you can get in your dream home in your early 30s, like do it. You have to do this.
- [25:46]
C
Totally. And I have family nearby to just love to have some extra childcare. I think we're very fortunate to be in the position that we're all in. But yeah, I was not 31 in this position, so good for us and.
- [25:56]
A
You already and you know the pros and cons of this house because there's sometimes you move into a house and you don't know, like, oh gosh, we did not plan for this at all. A new roof or something in the backyard or the loud neighbors or whatever it is, you know, all the bad stuff. Probably.
- [26:08]
C
Very good point. And there's never been a weather situation to upset anybody in Florida. So yeah, I think it's a win win all around.
- [26:14]
A
That's true. Hurricanes are fake, just like birds. All right, next question.
- [26:20]
B
Oh my God. Okay, up next, we got an anonymous one. I have a capital loss carryover of around $90,000. I know you can deduct a maximum of $3,000 each year. Besides the obvious making some gains to offset the losses, are there any ways to claim more than $3,000 per year on my filings? Or barring a policy change, am I stuck waiting out for roughly 30 years it'll take to use them up?
- [26:46]
A
All right, this is an anonymous question, but this is really. Duncan with his oatly share.
- [26:52]
B
This is further than. Further than I would ever go.
- [26:55]
A
All right. I think, Bill, we've talked about this before. That 3000 number always seems so low to me. I don't know why it doesn't increase. Whatever. I'll put it in my complaint jar and burn it. But this is your time to shine. What's the best way to accelerate these use of losses? Let's do it.
- [27:09]
C
Great question. So just to lay it down first.
- [27:11]
B
What do you think they did to lose this much in the market? Guess.
- [27:15]
C
Some crypto thing. I mean, that would be my guess.
- [27:17]
B
Oh, crypto. Okay, okay.
- [27:19]
A
I was going to say like an altcoin or. Yeah. Meme stock from 2021. There's a lot of stocks that are down.
- [27:23]
C
Like company stock. Yeah, yeah. This is the idiosyncratic.
- [27:27]
A
Great.
- [27:27]
C
We all, we all like to talk about the stocks that go up, but they're forever.
- [27:30]
A
Well, there's a company today, Fiserv. It's in. It's in the s and P500. It's down 42% today, or it was at one point. It's down 70% from the highs. And this is in a bull market. So yeah, these individual stocks, who knows? Yeah.
- [27:40]
C
Yeah. So section 1211 has been in the tax code since 1978, Ben. Roughly the year that I was born. And when the geniuses back in the 70s wrote that into the tax code, they did not adjust that number for inflation.
- [27:52]
A
You would have thought in the 70s they would have thought of inflation.
- [27:54]
C
Hey, it was kind of running a rampant at the time. Right. But. Yeah, but for 78, for. For 45 years, 46 years, that. Can we chart on here, Daniel, just to show the people. That number would be $15,000 today had it been adjusted for inflation. To. To me, my point is this is the tyranny. When you have these, these pensions that don't have a cost of living adjustment. Sounds really good, right? To get a fixed number. But if you fast forward 10, 20 years at 5, 6, 7, 8% inflation per year, it erodes purchasing power and it erodes a tax deduction. Hence count deductiola is here.
- [28:25]
A
Right. So what do they. So what do they do? Like he said, besides the obvious of making some gains. But is this just the sale of a house, the sale of a business? Like what exactly are we talking here?
- [28:37]
C
Yeah. So to hit on Anant's question, I'm going to call him Steve for the purposes of this conversation. Steve, you got a couple of options, but basically it's limited to what you can do. On the capital side, the IRS roughly recognizes the tax code recognizes five flavors of income. You have your ordinary income, wages. You have interest income from dividends. You have capital gains, which is the bucket that you'd focus on. And then like passive rentals, IRA annuity distributions. There's really only one that you can apply here. There are a couple of things that you might be able to investigate. For example, you can look at business gains. If you happen to run a business or have some property, something that comes up a lot is if you depreciate, let's say section 1212, 1231 property, those gains can be rolled in. If you happen to have rental property.
- [29:18]
A
Bill could easily make up numbers and we wouldn't be able to call on it. This is section 2011 12.
- [29:22]
C
My tax heads no, my tax has no. What's up? In fact, Bill Arts. Shout out to Bill Arts. He's always like, how do you remember all these things in the tax code? It's our, it's our business. This is the business we chose, gentlemen. But yeah, partnership gains or installment income, the one thing that comes to mind is just purchasing, let's say a broad basket of stuff because if you happen to buy 10 stocks, half of them go up. You can effectively gain harvest. Right. Which is an interesting thing to do to help to whittle down to the deduction. But you're basically stuck at capital gains. That's really all you can do.
- [29:51]
A
So if Steve has a brokerage account and wants to sell it because he's going to use to buy a car, take a vacation or something. Yeah. Take it from whatever the biggest gain is and then offset the loss.
- [30:02]
C
Take it tax free and then sit down and write your congressperson that's not at work right now because the government's shut down, but when they come back, this would be something that I would love to see addressed in the tax code.
- [30:11]
B
Can I ask, as someone who's definitely benefited from being able to write off losses, not to brag, but like, why is this even a thing though? Isn't it kind of encouraging like speculation and sometimes bad behavior? Wouldn't that be an Argument.
- [30:24]
A
No, you want, you want risk taking, right? I think it's a good thing. So people.
- [30:27]
B
No, I think it's a good thing. I'm just saying the other, I'm saying from a policy standpoint, like, why would they want to do that? Yeah, I'm benefited from it. I like it.
- [30:35]
C
But $3,000. Yeah. No, this came up recently. Connor Sen. At Bloomberg wrote a great, great piece about like Texas real estate. And one of the things that Texas has. People think Texas is a no tax state. It's a no income tax state. Property taxes are pretty high in Texas. And one of the things that's been driving rent prices down and property prices keeping a cap on them has been the high property taxes, high carrying cost. And so different taxes have different flavors and come in different ways. I kind of agree, Ben, with your point. You would want an efficient use of capital, and if you happen to have a tax loss, you'd want to be able to book it and not kind of hold onto it forever. Right. So I do think giving people the incentive to realize losses redeploy that capital more efficiently would be good tax policy. It's just our Congress folks, our folks in Congress, they don't legislate based on what makes sense, Duncan. They legislate based on what looks good on TV, unfortunately. And that's the reality of 2024.
- [31:21]
A
Part of it is like, we do it this way because we've always done it this way.
- [31:24]
C
Yeah, yeah. Which is the worst way to do something.
- [31:26]
B
When will we get to write off unrealized losses?
- [31:30]
C
The inverse of a wealth tax. Yeah. I don't know if you want to open that Pandora's box, my friend.
- [31:34]
B
Yeah.
- [31:35]
A
All right, next question.
- [31:36]
B
Okay, up next, we got Dan's on slack here making a good point. He said, wouldn't that money technically be coming back to you one day? In the previous question, if you're paying your parents for the house, technically that's true.
- [31:48]
A
That's what I would say. Just write it off. Mom, dad, it's part of my inheritance.
- [31:50]
C
Don't charge us anything basis. Yeah, yeah, yeah, yeah, Alex, good point.
- [31:55]
B
And the next question is from another Dan. The last few years, my wife and I have been fortunate enough to max out our 401 and Roth IRA contributions. However, we're now expecting our first child, and I'm seeing a tough decision in the near future. Do we save for our retirement or save for our child's education? If we max out on retirement contributions, we won't have much left for a 529 account. My wife and I are likely to hit the magi. Is it Magi? Magi.
- [32:22]
C
Sure it is today.
- [32:23]
B
Okay. Are likely to hit the magi cap for Roth IRAs in the next few years. So maybe it makes more sense to max our retirement accounts while we can and switch to loading up the 529 account in a few years.
- [32:37]
A
My usual advice on this is put your oxygen mask down first. Right? You don't know what college is going to be like in the. In 18 years. The other piece is you don't have to go all or nothing. You could, you could start off low with your 529 contributions. Do 100 bucks a month, right? Do 150 bucks a month. It doesn't have to be a lot of money over 18 years. The compounding. My oldest daughter is 11 and the amount of money I put in is tiny compared to how big her account is because I've done it since the day she was born. Every single month I put an amount. It's a few hundred bucks, I think couple hundred bucks. It's not a big amount and I can't believe how much bigger the account size is. So I think part of it is just starting. You don't have to start with a big amount. You can, you can increase it over time. Maybe in a few years once you hit that Roth cap, then you decrease those and then you increase the 529. But it doesn't have to be all or nothing here.
- [33:26]
C
Yeah, Dan is onto something here. Obviously, if you had the choice, you would just fund everything, right? You max fund all your accounts. But in my opinion, Ben, if you have to choose, I would start with the retirement assets. And exactly like you're saying, a small drip into a 529 does make a lot of sense. But I think if you have to choose, I would prioritize retirement savings. Ben, what if I told you that there's a type of account that you can fund with after tax dollars and then you can take distributions and get your basis back tax free 18 years in the future, maybe when your kid goes to college. Ben, would you have an idea of what type of account this is?
- [33:59]
A
Does it have numbers in it?
- [34:00]
C
It does have numbers and it is a Roth IRA. But you can also, if you're funding traditional IRAs, and if you do a 401 rollover, you can waive the 10% penalty on distributions for education. So to me, a retirement account, one of the special purposes can be things like education for you or your child. Therefore, I would prioritize those types of accounts, Dan, if you have to choose.
- [34:22]
A
All right. Someone in the chat said, put your oxygen mask on first. So they nailed it. Just like me. Yeah. He.
- [34:28]
B
Akbar actually said that right before you said it. So y' all were like. Yeah.
- [34:32]
A
The other. The other piece is you can turn a 529 into a Roth if you don't use that money. That's true, right?
- [34:36]
C
That's true. For the benefit of the.
- [34:37]
A
You and I talked about this last. Yeah. For the benefit. So. But yeah, I. Yeah.
- [34:41]
C
A lot of options. Yeah. But I think looking at the state. Dan didn't mention which state that he's in. I don't believe. No. And therefore, I would look there, because if you do get a tax deduction for the state, I just. I do think that helps move the needle a little bit towards the 529. But very generally. Yeah. Because a 529 can really only be used for college outside of the $35,000 rollover. Again, I would always prioritize the. The retirement account.
- [35:03]
A
All right, we talked about the step up basis. We have a question on that, actually. One more. Let's do it.
- [35:06]
C
Let's do it.
- [35:07]
A
I like this question.
- [35:08]
B
Okay. Last but not least, we got one from Rich. I'm trying to talk my wife into buying a vacation home in Florida.
- [35:15]
C
Florida.
- [35:15]
B
And want to use Bill Sweet's expertise as a way to persuade her. We already own a primary residence, have a not to brag level of net worth, and plan on recovering.
- [35:24]
A
What do you think that is? Like 2 million and higher. Not to brag.
- [35:27]
B
Yeah, probably.
- [35:28]
C
Yeah. In Florida. Yeah.
- [35:29]
A
Depending on your age.
- [35:30]
B
Yeah. I mean, actually, yeah, in Florida it could be even lower, I guess. Pretty low cost of living overall, Right. Other in Miami, I guess. Let's see. And planning to retire in four to five years. I want to buy now so we can enjoy the place while we're still relatively young. Late 50s, early 60s. She's worried it's too much of a financial commitment. I'm trying to close the deal by showing her. This will be great for estate planning someday for our kids when they inherit the place in 30 years or so, God willing, they get. They get the step up basis on the home buying. Vacation home is good for the next generation. Right. Does this Arima hold water? Please say yes.
- [36:06]
A
Great question. Really, really, really good writer. So, all right, this kind of makes sense to me, but, like, what types of assets or accounts do you actually get the step up basis for, Bill? Because the step up basis is if Rich died and his vacation home was worth a million bucks in Florida, but he paid 500 grand for it. For his kids, the cost basis is a million, not 500 grand. Correct. That's how it works. Step up basis works. That's correct. So what else do you get a step up basis for?
- [36:35]
C
Very generally it's more useful to talk about what you don't get a step up on basis on, Ben, because it's.
- [36:39]
A
So what is it? Retirement accounts?
- [36:40]
C
Yeah, anything except for retirement accounts, IRAs, other tax qualified accounts, annuities. You do not get a step up in basis on. Or if you set up a non grantor trust, a trust that is not part of your gross taxable estate, meaning non revocable, those are not part of your estate and therefore they do not get a step up. But just about everything else does.
- [37:00]
A
Right. You could make this case though, I think, if you wanted to. Hey, it's gonna be worth more than 30 years as long as Florida's not underwater. So I think it's a. I gotta give him credit for using. He's gonna bring you as media. Yeah, exactly. The hammer. I know, but I guess it makes. But the other thing is like you make the case that, listen, this is a place for 30 years. We're gonna spend time with family, we're gonna get to the. The kids and the grandkids can come visit us in Florida, wherever they live. Now that's the case you make. You make the family case, not the financial case. Because guess what? The financial case is not going to win you any points. I've used those kind of arguments before. Never works.
- [37:37]
B
Wait, what if you. What if you let your kids manage it as an Airbnb when. When you're not using it, and that teaches them responsibility and gives them like a first kind of job?
- [37:46]
C
Yeah, my answer is pretty clear. Rich. Mrs. Rich, it sounds like you've been successful, your husband's a great writer. And my opinion. Just reading a paragraph here, not advice. You're probably going to run out of time before you run out of money, so I. I do it. You know. Life is short, Ben. It's something you've written very eloquently on through the years. I'd pull the trigger and figure it out later. That'd be my advice.
- [38:08]
A
We're just giving a blanket pardon to everyone on today's show.
- [38:11]
C
Exactly.
- [38:12]
A
You get a house. You get a house. All.
- [38:14]
C
All in the Fort Lauderdale area. However, I. I will mention, Ben, we did have a conversation with a client yesterday. Me and Handsome J. Tinney here in the Office. And one of the things that they benefited from in a situation like this, they moved from Minneapolis to Fort Lauderdale. They figured out after renting a property for the last year that they do not want to live in Fort Lauderdale. So one of the things I would generally always recommend. And this goes back to a client in roughly 2011. This is a priest. Actually, I was looking at retirement home in Delaware. The community they were looking at, they ended up partly by my advice, not buying the property. Hurricane Irene came in and leveled that whole town.
- [38:48]
A
Right.
- [38:48]
C
So that would have been a really emotionally distressing event. I think generally. Generally been. It's not. It's not financial advice, but I would generally always live somewhere for, what do you say, six months, maybe nine months, maybe a year.
- [39:00]
A
More than a week of vacation. I agree that you want to make sure.
- [39:03]
B
I was thinking exorcism. I thought that's where you were going with that, but.
- [39:06]
A
Right. Yeah.
- [39:08]
C
They avoided the storm. Duncan. So somebody was looking out for him upstairs.
- [39:11]
A
Yeah. No, that's good. My. We went to beautiful Ann Arbor, Michigan over the weekend. My wife said, man, the downtown here is bustling. Why don't we like, retire to a place like this for a little while? I said, why don't we rent here for a while first?
- [39:21]
C
Yeah.
- [39:22]
A
And then see if you want to live somewhere. Because that you have to get a sense of. I agree. The sense of the area and community and what you like and don't like. That's good.
- [39:28]
C
I think from afar, it's very difficult. Right. You're house hunting on Zillow. You're trying to picture, okay, how long is it going to take me to get little things like how far is the supermarket? But Duncan was bemoaning the quality of bananas before. What if. What if John Grayson is getting, you know, New York quality bananas? Like that might be really important to you if you're a banana head like Duncan.
- [39:46]
B
Yeah. I mean, I'm just saying the bananas have gotten worse over the last year.
- [39:50]
A
I don't know.
- [39:50]
C
Do they make banana milk? How far do we want to take this?
- [39:53]
B
I think. Right. Actually is something that. Yeah, but yeah, that's. It's not. It's not oat milk, though. It's not as good. I have a question.
- [39:59]
A
Duncan's. Duncan's is just as bad of a banana picker as he's a stock picker. How do bananas get worse? Come on.
- [40:04]
C
Avoid the brown ones.
- [40:05]
B
I'm saying you buy now. You buy a bunch of bananas and they work perfectly fine. You get them home and Half of them are bad on the inside.
- [40:12]
C
It's crazy to me. Pumpkins, pumpkin prices just haven't gone up for the last month. And I just think it's time, right, to buy pumpkins right now. And the price will never go down. Right.
- [40:22]
B
And. And coffee. Coffee is going up. I have a 529 question. Going back to question five for a second. I just became an uncle. Not to brag. And so I was thinking about like if I wanted to give some shares Votely, can I do that in a 529 or is it just like you, you have access to certain funds like mutual funds and ETFs.
- [40:41]
A
Why do you want to bring the pain on your new niece or nephew? Imagine exactly.
- [40:45]
C
What if they're allergic to oats? Yeah.
- [40:47]
A
Why do you want to bring them into your world of pain?
- [40:49]
C
Yeah. Each state manages their own 529, Duncan. And very generally I've never seen a 529 that allows individual stock investments mostly because they're trying to keep that crap out of people.
- [41:00]
B
So not even like a 3x levered ETF.
- [41:03]
A
So ask your. Is it your sister or your brother who had the child?
- [41:06]
B
It's my wife's brother's wife's.
- [41:09]
A
Okay. So ask them to give you a link. Every year on their birthday they'll give you a link where you can make a contribution. And every year on their birthday make a 529 contribution. You'll be the favorite uncle.
- [41:19]
C
Exactly. Exactly.
- [41:21]
A
They can send you a link and it allows you to. It has an account number. All you have to do is say, hey, I'm going to give 100 bucks or 50 bucks, whatever it is. And it's really easy to do. And you can make the contribution on their behalf.
- [41:30]
C
It's a great feature. Not to brag. I don't have a modest house. It's relatively. I enjoy where I live. I'm very privileged and very, very grateful for the hard work. And hard work.
- [41:39]
B
That might be a first. A big time not to brag from Bill.
- [41:41]
C
Yeah. But where I'm going is a lot of generous people have gifted us a lot of things to the kids throughout the years. I would avoid large pieces of plastic because where that all ends up is the basement and then the landfill. So Duncan, I think what I'm trying to say is I think education is probably the most important thing that we can do is promote education for kids. So any amount that you're donating to your family's education is very much well worth it.
- [42:05]
A
Seth in the chat says that the child is going to community college thanks to Oatley.
- [42:12]
C
Cursed.
- [42:13]
A
That's pretty good.
- [42:14]
B
Hey, trades are in. Trades are big.
- [42:16]
A
Thank you everyone in the live chat. As always, we appreciate your comments, your jokes, your questions. If you have a question for us, ask the compoundshowmail.com if you have a question for Bill, put his name in.
- [42:26]
C
The written introduction there three times and I appear.
- [42:30]
A
All right, and we will see you next time. Thanks everyone.
- [42:32]
B
See you everyone.
- [42:34]
D
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 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.