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- [00:00]
A
Welcome back to Ask the Compound, the show where you ask and we answer. I'm your host Ben Carlson. It is estimated that there is $84 trillion that will change hands in the coming years. The baby boomer generation slowly dies off and spends their money. So will the baby boomers crash the stock market when they all go to sell? Will there finally be more houses for sale? How will the great wealth transfer play out? We answer these questions and more on today's show. Please stick our email here is ask the compoundshowmail.com on today's show we answer questions straight from our Compound audience about how to diversify away from your real estate property empire. How you should think about RSUs when it comes to your financial plan. When is it okay to cut your annual savings in half to enjoy life a little bit and buy a house? What if the great wealth transfer isn't so great? And finally, how do I personally think about emergency savings funds? And when is it okay to let your cash position drift a little higher when you're worried about the market? Usually we do this show live. We're pre taping today because we will be in Huntington Beach, California for future proof. Yeah, can't we? Yeah, I'll be in the live chat anyway. Today's show is brought to you by Rocket Money. I personally use Rocket Money to track our spending, keep a lid on our subscriptions because they keep growing budget for any outcome expenses, and keeping tabs on any out of the ordinary purchases that my wife makes. With prices going up on just about everything lately, dealing with money can be stressful. Trying to manage subscriptions, track spending and cut costs can feel overwhelming. Luckily, Rocket Money can relieve some of that stress and help you feel confident in the financial decisions you make. Rocket Money is a personal finance app that helps find and cancel your unwanted subscriptions, monitors your spending, and helps lower your bills so you can grow your savings. If you've got a goal you'd like to save for, Rocket Money can analyze your accounts to find the best time each month and put extra money aside. Get alerts if your bills increase in price, which happens to me all the time, if there's an unusual activity in your account, and if you're close to going over budget even when you're doing a Good job. Rocket Money's 5 million members have saved a total of $500 million in canceled subscriptions subscriptions, with members saving up to 740 a year when they use all the app's premium features. Cancel all your online subscriptions and reach your financial Goals faster with rocket Money. Go to RocketMoney.com ATC today. That's RocketMoney.com ATC or you can just download the app right from your phone. All right, before we get to questions today, we got an update from Andy. Remember the guy who wanted to move the Philippines? And I told him, just do it. Don't wait, Andy. So he gave us some more background. He says as a foreigner, permanent residency is only possible through marriage or by investing €75,000 in a local business. Now he tells us he does have a girlfriend in the Philippines. I don't know if this is one of those things like, I have a girlfriend in Canada, I swear. But no, Andy says he's got a girlfriend in the Philippines. He's had her for two years. He does say that while living costs are much cheaper in Belgium, a durable house that is earthquake and typhoon resistant is pretty expensive in the Philippines.
- [02:48]
B
I mean, is that really necessary?
- [02:50]
A
I didn't. Hedging against a typhoon, I think it's pretty, pretty good risk. He also said job opportunities for foreigners are limited. So he said the only path for him is building some sort of online income stream or starting his own business. So that sounds like what he wants to do. He said he wants to do something in tourism like an eco resort or diving tours. I guess it must be good diving stuff over there. So that's why he's aiming for the higher range of his savings.
- [03:15]
B
So.
- [03:16]
A
So anyway, yeah, sounds like he's on the right path. He's thought about this way more than we have. So I told him to give us an update when he moves to the Philippines.
- [03:24]
B
Yeah, he's serious. I like that.
- [03:25]
A
All right. Yeah. All right, so let's do some questions. Oh yeah, how about not the brags today?
- [03:30]
B
Yeah, yeah. Today's action packed. Today we got one. Starting off from Spencer. My wife and I are 27. I started in sales at a large healthcare company, did really well for my age, and now I'm in management with a steadier, non commission driven salary. My wife has been a serial entrepreneur and now she runs our real estate business that we built since 2020 by Living Way below our means and working nights and weekends on our own renovations. Note, we got married weirdly young and started buying houses as soon as we graduated from an SEC school. Hey, it worked for us. That real estate business now owns 21 houses worth about 4.5 million. We owe 2.4 million and it cash flows a little over six figures a year. When the portfolio is paid off, it will be three times the cash flow now. Around a year ago, we also started a design build company that's growing faster and more profitably than I ever imagined. Part 2 Due to my salary, we don't plan to take money from it for a while and still live well below our means not taking distributions from either business. We also own a few vacant lots and could self develop multi family properties at below market costs. However, we see that our net worth is getting very concentrated in real estate. Should we double down on real estate development's steady 20% plus returns and pay off our portfolio over the next six to eight years? Or diversify into the market for longevity and compounding? I already maxed out my 401k. But will I kick myself in the future when we see a major correction in real estate or when we want.
- [05:03]
A
To stop working Big Ten at the Brag? 27 years old. We were trying to figure this out because 21 houses at four and a half million. What's that, $190,000 a house or something?
- [05:13]
B
Yeah, that's an empire by the way. That's a housing.
- [05:15]
A
Yeah, that's definitely empire building at 27, that's pretty good. So I was figuring this is an SEC school. We're probably talking Alabama, Mississippi, something like that area. Because you were trying to figure out where do they. Can they afford these houses? So that's what I'm thinking. Maybe, maybe Spencer can let us know. So I guess get married young kids because. And go to an SEC school because that's how you build a real estate employer. So the boring financial planner didn't say what school either.
- [05:40]
B
Usually SEC people are so proud. You know, I feel like that's true. Pumping up their school.
- [05:45]
A
I'm guessing he has shaggy hair and wears short shorts, right?
- [05:50]
B
Shorts with patterns of little logos all over them.
- [05:53]
A
I can't. I can't judge. I have those two. All right, so the boring financial planner answer here is like you need to diversify your investments. You're highly concentrated in real estate. Real estate has idiosyncratic risks and there's leverage involved, blah, blah, bl. And I'm sure that he's saying 20% plus returns. I'm sure that's because of the leverage, obviously. Otherwise that doesn't really make sense. So there's a decent case to be made for the boring answer. But here's the thing. You and your wife are 27. You already have another job to fall back on. She is entrepreneurial, as you say. You started multiple businesses and cash flow streams. You live way Below your means, it sounds like, because obviously you've built up this empire, and so you had to buy them somehow. So my view is this is a stage in your life where you can take risks. If you do experience some sort of major correction at some point, just extend your time horizon. You're young still. Or sell at lower levels. Right. You can get out. I say put your foot on the gas pedal and see what happens. Could it blow up in your face? Yeah, it could. We could go into recession. Your local real estate market could experience a downturn. It makes it harder to find tenants and raise rents. And there are obviously risks here, and I'm sure you know exactly what they are. But you already have 2 million bucks in equity. You're in your late 20s, your cash flow positive. You have a salary in another business that's taking off. I say give it some time and see how far you can take it. I don't think you'll regret it if you do. It's not like you're 55 and approaching retirement. You're still young. This is the time you want to take risks. Put your foot on the gas pedal, man. I say let it rip.
- [07:14]
B
Wow.
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A
That's not usually me, Right?
- [07:16]
B
Yeah. That's not even a Grand Rapids hedge.
- [07:18]
A
No. You're just driving in. Yeah. You're not gonna regret that. It sounds like they've already started multiple businesses. He already has another job to fall back on.
- [07:27]
B
This gives me a headache just imagining running 21.
- [07:31]
A
That's a lot. So what was he saying? They do a lot of the renovations themselves, so they. They might be managing these properties themselves, too. So. Yeah, it's got to be a lot. And maybe that's part of the calculus, too, is eventually you hire a property manager because it's getting that big, and they have vacant lots and all this stuff, but. Yeah. Could this thing blow up in their face? Absolutely. But you're young enough to, like, take the risk and at least try. And obviously you can. If the. As the cash flow grows, then you can diversify that way into stocks and other asset classes.
- [07:59]
B
Well, I mean, in a. In a housing, you know, recession, I guess, yeah, it's hard to sell the house, but people still have to live somewhere, so I guess rent.
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A
Yeah.
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B
You know.
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A
Yeah. Like I said, you might not be able to raise rents. It might be harder to find tenants, but, yeah, people have to live somewhere.
- [08:13]
B
Yeah.
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A
All right, do another one.
- [08:15]
B
I like it. A bold bin.
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A
Yeah, that's right.
- [08:19]
B
Go and get it.
- [08:20]
A
All right.
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B
Okay. Question two comes from uni I believe I recently accepted a job at a large publicly traded travel company and will receive a significant amount of RSUs as part of my compensation. The vesting schedule is over one to four years, and even without appreciation, the company would become the largest holding in my portfolio outside of S and P index funds and some retirement accounts. How would you think about diversifying this and RSUs in general? I realize my labor income and significant amount of capital are now tied to one company. I could buy other public travel companies to diversify some competitive risk. But there's also general recession risk causing a downturn in the travel market, which I realize would likely affect most stocks, including the S and P. Alright, well.
- [09:06]
A
Let'S bring our resident stock option expert, Mr. Joey Fishman from Management, Oregon.
- [09:11]
B
Hey, Joey.
- [09:12]
A
Joey. You've spent a lot of time going over RSUs and such with clients. It can be an overwhelming process for anyone who hasn't gone through it before. So I'm just curious, how do you think about it in general? Because that's what they're asking. Like this sounds like a new thing to them. I don't know. I'm guessing we're talking a job at Airbnb or Expedia or something. How do you help people understand how these fit within a general financial plan?
- [09:37]
C
Roger that. So it really is going to depend on where you are in your financial life cycle. It sounds like this is relatively early on. So for this person, I would first look at the opportunity set that's ahead of them. What's the probability that a publicly traded travel company is going to 10x from here? It's kind of unlikely. Maybe a 2 or 3x, knock on wood. I probably advise against taking the proceeds and diversifying amongst the other travel company holdings. Everybody knows this. When markets roll, correlations go to one. So he'll be taken out.
- [10:12]
A
That's more concentration. You don't diversify outside of the travel industry.
- [10:15]
C
Definitely. Definitely. So if it's early on, you definitely want to eat your vegetables. So maxing out all your tax deferred accounts, finding tax efficiency within the spirit and intent of the law is the best that you can. And then once you're stable enough where you could vaporize these RSUs and it won't affect your financial plan, then you kind of step to another phase of life where most folks these days, instead of retirement being the goal, they want to have enough money by a certain age so that they have the option but not the obligation to tap out. So we'll run something that we call 2 in 10 or 1 in 10, which is how do we raise $2 million in the next 10 years assuming 5% appreciation. Like what kind of savings rate is going to be required to do that? You can do it with 1 million as well. But essentially what they're trying to do or what we're trying to help them do is get them to a place where they can write their own ticket, should they. So, you know, if they want to.
- [11:13]
A
How about it seems like more and more people are coming to us and understanding this concentration risk. And it's like the old adage of you concentrate to get rich, you diversify to stay rich. But a lot of people are understanding that like my, my whole livelihood is already tied up into this job, my income.
- [11:29]
C
Yeah.
- [11:30]
A
If, you know, I don't want to be completely tied to the stock as well with the understanding that like, well, this is still a great opportunity for me. So how do you help people balance the fact that you're right, they're not going to be expecting a huge return here, probably, but balance the fact that they're going to have a lot of money in this, but they also need to think about diversifying. So balancing out like the growth, but also the tax bill, potentially.
- [11:54]
C
Yeah. I mean, there's no really hard and fast rules. I mean, there's two things that I probably, depending on the situation would recommend, and that is never sell into a hole. So like, if your RSUs are going to vest after the stock like has been cratered for like, you know, a poor news announcement or something that's, you know, just cratered the stock, I wouldn't sell into a hole. I mean, obviously you're going to have to pay taxes when those RSU's vest, but maybe wait a little bit for the stock to recover and then liquidate. The other thing too is like, if prices are trading like two or three standard deviations between, like where they normally do towards the upside and your shares vest, I would take that as the opportunity to sell all of it. Those are the only times when I have some kind of active discretionary inputs when it comes to liquidating those RSUs. But by and large, what you generally want to do is sell them down as much as you can so it doesn't threaten your overall financial plan. And then ideally you're increasing your savings by 5% every single year. And if RSUs end up being the source of proceeds to facilitate and make that happen, then that's fantastic. You know, the, the, it's a, it's a very rare set of circumstances where People actually, you know, get RSUs, NSOs, or ISOs, end up having like the games that like the apples of the Nvidias of the world. So having a sober mindset and having like a really clear set of expectations about the opportunity set in front of you is, is, is key to the whole thing.
- [13:21]
A
Do, do people treat this from a psychological perspective as almost like a bonus or do they look at this as like kind of an extension of their 401k? Like how do people, how do people treat these when it comes to their finances?
- [13:31]
C
As a bonus. That's a good one. As a bonus. So ideally, you know, throughout the course of the year, your income, you're living well enough below your means that you're able to max out all of your qualified accounts, you know, your HSA, your 401k, God willing, your Mega Roth, which is a fantastic opportunity. I think, you know, at this stage of the game I would probably avoid IRAs just because, you know, at the end of the day it's going to grow tax free, but when it comes out, it's going to be taxed ordinary income. The only time that it really makes sense is to use an IRA as if you make $10 and maybe you spend 50 cents, then maybe, you know, when you're drawing on it, then your tax rate will be well below what you currently are being taxed on now.
- [14:14]
A
Okay, good stuff. Because again, I think a lot of people get into these things and really don't understand. We've talked to many companies, right. Where the employees are like, this is so far over my head and outside my air expertise. And if there is someone within your company that they have attached to it they can talk to or an advisor, it's really helpful because these things can be very overwhelming and challenging for people.
- [14:34]
B
Yeah, I think some of the concentration risk, you know, attention today is maybe because I've heard from a lot of baby boomers over the years who were like all in on the company they worked for and didn't go well, like AT&T back in the 90s or whatever, you know, like so Kodak George.
- [14:51]
A
Yeah, you hear the success stories, but there's a lot of other times where it didn't work out.
- [14:55]
B
So I feel like their kids and grandkids now are thinking like, yeah, I think people.
- [14:59]
A
Yeah, I realized, I agree, people are smarter about this. They understand concentration can help you get wealthy, but there are a lot of risks to it.
- [15:06]
C
There are, yeah. Eventually this bull market's going to end. Eventually.
- [15:10]
A
I know it has to work. It Feels like it won't, but it will.
- [15:13]
B
Give us a day.
- [15:14]
A
Yeah, he'll be riding, he'll be riding his bikes at that point. All right, Joey, we appreciate it as always. Thanks for coming on, man.
- [15:21]
B
Thanks.
- [15:21]
C
Thanks, guys.
- [15:22]
B
See ya.
- [15:23]
A
All right. Get that, Duncan. Don't sell into a hole when Oatley's in a hole. Don't sell into a hole.
- [15:28]
B
Hey, I mean, Oli Oe has been my champion as of late, so.
- [15:31]
A
All right.
- [15:32]
B
By the way, that question was from Ben. I got my, my questions mixed up.
- [15:36]
A
Yes.
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B
All right, the next question is from uni. Okay. Long time listener, first time writing in. My husband and I always tune in to ask the compound on our Wednesday drive home from work. Thank you, that's nice to hear. I mentioned to him that I rarely hear questions from women on your show, but he disagrees, so I'll let you be the judge. I mean.
- [15:56]
A
No, she's right.
- [15:57]
B
Yeah, we definitely don't get that many questions. I mean, to be clear, we're not like filtering out questions from women, obviously, but yeah, we definitely get like 80% of our questions.
- [16:06]
A
No, here's the thing. I wonder if part of the reason is because women don't obsess about this stuff as much as men because the studies all show women are better investors than men because they thicken act for the long term where men are constantly tinkering in their portfolios and making changes. And so I wonder if that. If that's one of the reasons that men are obsessed about. Like we have a few people who ask us questions all the time. Two or three people email us obsessively. Guess what? It's not women, it's men. But having said that, you don't need.
- [16:32]
B
To watch ASPA Compound. I don't know. I don't like that.
- [16:35]
A
No, they definitely. But any women who write into the show will have their questions go straight to the top of our list. You can. You heard it here first. That's a Ben guarantee. Alright, back to the question.
- [16:43]
B
Okay, okay. And then, yeah, there's a smiley face. We're in our early 40s and live in Texas with two kids in public school. We began saving for retirement five to six years ago and our portfolio is now around 1.5 million. Wow. That's not to brag. We currently spend 120 to $150,000 a year and save $170,000 after taxes. If all goes well, we should hit our 2.5 million dollar goal within the next three years. Fingers crossed. Since we're here on work visas, we'll likely continue working until we obtain permanent residency, probably 20, 34 or later. Once we reach our 2.5 million dollar milestone, I'm tempted to splurge on a house since we've never owned a home in the US that would cut our annual savings in half, but it would allow us to spend more on housing, travel and other lifestyle upgrades we've put off so far. Does that sound like a reasonable shift once we've hit our number?
- [17:38]
A
This is one of the more impressive questions we've gotten because the numbers are. So they obviously got a late start because they said. What did she say? They're in their mid-40s. And it sounds to me if I'm doing the back of the envelope math, if they're saving 170 a year. So they're, they're saving more than half of their income. They have two kids and they're essentially doing like a fire strategy. So they are really, really prioritizing saving for whatever reason. Maybe they went to school raking in the dough.
- [17:59]
B
That's what they're doing.
- [18:00]
A
Yeah, they're raking in the dough. They're also saving a lot of dough. And so by my like back of the envelope math, they've probably saved a million dollars in the last five or six years. Ish. And they've made 50% or whatever on that. So they've done okay investing as well. So they're doing great in my opinion now. Yeah. Going from 0 to 1.5 million in 5 to 6 years is insane. I like that they have a goal in mind. So I like the fact that you have the 2.5 million as a number. Here's my question for you though. And I guess maybe this is what you say, I'm blowing it out, Ben. Or something.
- [18:34]
B
Bold, Ben.
- [18:35]
A
You're bold, Ben. All right, here's my question. Why do you have to wait? You're already saving a ton of money. Is your life really going to change all that much if you go from 1.5 to 2.5 million in the next three years? What would change about your lifestyle if you cut your savings in half, bought a house, go on some of the trips, upgrade your lifestyle a little bit. House is also a financial asset. So it's not like you're. So let's say you go from 170 in savings annually to 85 or 90. Right. You cut it in half. You're in your mid-40s. If you saved $85,000 a year for the next 20 years and earned 8% on that initial $1.5 million, you'd probably have something like $10 million in 20 years. So the fact that you've already saved so much and that assumes no increase in your savings, which I'm sure the fact that they've saved so much, they obviously will. So you're in a great place, but life is also short. Like enjoy some of that money. You, you just, whatever you just compressed into five or six years. I'm sure that a lot of that was very painful. Like that couldn't have been easy to save 50 to 60% of your income. I don't think you'll regret it. If you buy a house, upgrade your lifestyle a little bit, you're still saving, you know, 30% of your income at that point. You're still doing better than 95% of all Americans. I don't think you'll regret it. If you like, upgrade a little bit and sacrifice some sort of compounding for a few years down the line, I don't think you're gonna regret that. Yeah, the hard part's already done. You're a millionaire.
- [20:02]
B
You gotta be at one of these big companies that's landed in Austin, Texas or something, right?
- [20:06]
A
I was thinking maybe a tech. That's why I wonder if they started late because they went to school for some sort of technical degree and now they work for a tech company and supercharge their earnings and their savings. So again, the hard part is over. You already did it. The compounding from here is going to take you most of the way. I'm giving you permission to enjoy it a little bit. Buy that house. It's still a financial asset. You're going to be building equity. And you also have two children. Like they're, they're not going to regret having their own rooms at a house that you call your own.
- [20:35]
B
At least buy a $20,000 Porsche.
- [20:37]
A
There you go. Do it. No, not for. Not with kids. Can't do it. All right, next question.
- [20:42]
B
Okay, up next, we got one from Rick. Big fan of a show. My wife always asks why I'm, why, why I'm laughing. Listening to a financial podcast. By the way, I think this might have come into the Animal Spirits inbox. So I can't take credit for this.
- [20:55]
A
You're not giving yourself enough credit, Duncan.
- [20:57]
B
I'm a financial planner at a big firm and I work with the high net worth individuals. Five plus million. A big talking point amongst clients as well as colleagues is the great wealth transfer. According to the World Wealth Report 2025 by Capgemini there will be $83.5 trillion passed on to younger individuals by 2048. While that number is staggering annualizing that is roughly 3.6 trillion a year. Currently in the US there's anywhere from 1.5 to 2 trillion dollars being passed to descendants annually. Decedents. Decedents. Is the great wealth transfer actually great? Obviously an increase of roughly $1 trillion per year, as Michael would put it, is a face melting number. But if you account for asset values increasing during that time and people living longer, is it really great? Would love to hear your thoughts from a guy that is representing the Grand Rapids Hedge out in Phoenix, Arizona.
- [21:54]
A
All right, we got to have Nicole send this guy a Grand Rapids Hedge shirt because that's a great question. See that thing there? It is limited edition. Remember, I don't shop dot com. Look at the other stuff we got though. We got new hats too. Put it up there. New hats.
- [22:05]
B
Yeah.
- [22:05]
A
Not to brag. That was my idea. We had to do the still Patagonia and the towels have been great this summer. Yeah, I love the Chukar hats. Okay, Rick makes a great point here. It's not like all this money is going to change hands all at once. Short of a disease that immediately kills 70 million baby boomers, that'd be. That seems unlikely, right? It could happen. This is why I'm not nervous about baby boomers crashing the stock market. This is a question that we've received a number of times over the years and it doesn't pass the smell test. The top 10% owns 87% of the stock market. Right. They aren't going to need to sell all their stocks at once to fund their lifestyle because most of that top 10% has other assets and or there's so much money in those stocks that they're not going to sell at all. My guess is most of that money just gets passed down to the next generation and they get a step up in basis or whatever it is if it does get spent. To Rick's point, it happens over the course of two to three decades in drips and drabs. The same is true of the housing market. So Freddie Mac did the study last year that tried to forecast how many houses will change hands between now and 2035 when older baby boomers turn 90. Right. So they're either going to sell the downsize or they're going to die off or whatever. Right. So they estimated there are 69 million baby boomers and they account for 21% of the population, but 38% of total households in the U.S. right. Homeowner households. So here's a chart. Chart on, please. Based on historical selling patterns and life expectancy, this shows the estimated change in the number of baby. Oh, sorry. This is. This is the homeownership rate by age. My bad. And this just shows that, like, obviously, the older you get, the more homeownership there is. So, like, the people in the 60s and 70s is like 80%. Right? So that makes sense that a lot of boomers own their home. So now to the next chart. This one, they estimated the change in the number of baby boomer households from 2023 to 2035. And you can see it. It goes up and up and up. But in the next five years or so, we're talking 2.7 million homes that will change hands by 2035. It's a little more than 9 million. Cumulative. These are cumulative numbers. They're cumulative as they grow. So that's a big number, but not necessarily a tsunami. It happens more in stages. And they also said the whole point of them living longer and a lot of baby boomers just, like, I'm not selling. Right. They refuse to leave. And they're saying, like, if that's the case, if they live a little longer or they just decide not to downsize and go into a home or whatever, it could be lower than that. So there's going to be houses changing hands, but it's. It's. It's again, dribs and drabs as opposed to, like, this big tsunami that's going to happen all at once. So I do think the great wealth transfer is a lot of money. We've never had a cohort of people this large live this long with this much wealth. But the crazy thing is the estimates are all over the place, like 84 trillion or 100 trillion, because a lot of that money. Baby boomers right now are worth $82 trillion in the United States. But a lot of that money is just going to continue to grow and compound and get bigger and bigger and bigger. So this is going to have an impact, but I think it's more of a slow burn over a while than an event that happens all at once. And the younger Gen X and millennial households that are like, they're probably going to be waiting longer than they think for the inheritance, as we mentioned before. So baby boomers don't wait to give it all away until after you die. How about the kids and grandkids now? And the biggest impact is necessary. That's my advice. But Yeah, I think he's got a really good point that this is going, it's going to have an impact, but it's going to take a long time to play out, like two to three decades.
- [25:23]
B
I recently learned that there's like a big uptick in these kind of country club esque retirement communities we're moving to.
- [25:31]
A
That's the thing.
- [25:31]
B
It's. Yeah. Like people get on wait lists for years and like pay lots of money and they have like fancy restaurants, like.
- [25:38]
A
The 50 plus communities.
- [25:39]
B
I don't know. I don't, I don't think it's the same thing. I think this is more like an actual, like you live in a townhome on a property that has like a couple of fancy restaurants and shuffleboard courts.
- [25:50]
A
Pickleball.
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B
Yeah, exactly. Yeah. Yeah. I don't know. So. Yeah, sounds like maybe that's where a lot of people will be moving when they, when they hand over their, their house.
- [25:58]
A
Yeah, but that's expensive. So that could, that could eat into the inheritance.
- [26:01]
B
It's true. It's very expensive.
- [26:03]
A
Yeah. All right, one more question.
- [26:05]
B
Sounds like a good investment. Honestly, gotta look for some publicly traded ones. Okay, last but not least, we got one from Andy. I know it's not exactly market talk, but I would appreciate you all talking about how you personally look at emergency funds and cash equivalents. I find it extremely hard to keep cash in markets that keep going up. I know the three to six month rule of thumb, but I'm curious how you guys personally handle emergency funds.
- [26:29]
A
Okay, this actually is a market question because he's talking about how he finds it hard to keep cash in markets that keep going up. We've talked a lot about emergency funds in this show. For a while there, remember, people were asking like, where in God's name do I put this money because yields are so low. That's not questions we get anymore because yields are much higher. So that's a good thing. There's just plenty of places to park your cash, at least for now. Until Trump sets rates at negative 2%, then we'll see. I always say that this is a personal preference thing. I've seen the three to six month rule. I've seen 12 months. For some people, it really depends how stable your job is, how variable your income is, how well you sleep at night knowing cash is there in cash. How many? 12.
- [27:11]
B
I'm saying. You're saying some people keep 12 months of.
- [27:14]
A
I bet there's plenty of viewers of this show who do that. I always say that that's unrealistic for most of the population. Like getting there is. You'd be foregoing a lot of different other goals to get there. I look at Andy's question about the stock market as more of an asset allocation question because I think he's getting nervous about the stock market. Now I don't like the idea of trying to time the market because you're nervous. But if you can't accept the volatility of 100% portfolio in stocks, then I think it makes sense and you need to have some in cash to as a volatility hedge or an emotional hedge. I'm fine with that. So I did some work on this. Give me a chart on here. I looked at the impact of having 10% of your portfolio in cash versus having it 100% in the S&P 500. I went very long term. And this is rebalanced annually. Cash here is 3 month T bills. So that's similar to money markets. High yield savings accounts, those type of things yield wise. So going back 100 years or so, it would have taken your return from 9, 9.9% to 9.5% over the past five years, over the past 10 years, 20 years. You're giving up roughly 1% per year in annual return over the last 30, 40 years. It's like 70 basis points. So it's, it's an impact, but it's not probably not as big as you would think. Now obviously I pulled this 10% number out of thin air. I made it up. It could be 20%, it could be 5%, whatever the number is. My point is if you do hold some cash strategically, it's not the end of the world. I know that cash is not a great long term holding because it more T bills have more or less kept up with the rate of inflation over the past 100 years. Sometimes they do better than inflation, sometimes worse. Most of the time it kind of nets out to nothing. On a real basis you're earning.
- [29:03]
B
You looked at the value of a dollar versus Bitcoin over the last 10 years? No.
- [29:08]
A
I'm sure someone on Twitter will tell me though, hashtag bitcoin. So I just again, I wouldn't get in the habit of trying to do this on a regular basis just because you're nervous about the stock market. I'm more about setting an asset allocation strategically than constantly trying to time the market. I think there's a big difference there. But if you do raise cash, I don't think it's the end of the world. It's not going to completely. As long as it allows you to keep the rest of your portfolio going and not mess with it. I think raising some cash. And is now a good time to do it? I don't know. We talked a few weeks ago. Is this 1996 or 1999? We don't know. Right. How much longer this could all go for. But it's not the end of the world. If you hold some cash and you're willing to accept the trade offs that your long term returns there are going to be lower, but it allows you to sleep at night and do other things. Yeah, I'm okay with that. As long as it's strategic and not like something you're tactically trying to time here.
- [30:00]
B
Well, let me ask for your blessing on something I'm already doing. All right, how?
- [30:05]
A
Don't invest in another company called zirp.
- [30:08]
B
Okay.
- [30:08]
A
Don't do that.
- [30:09]
B
That was, that was an online bank account. How do you feel about just having more than, than two or three months or whatever in cash but having it be more in risk assets? So like having, having three or four months instead of three and having it all be in the market?
- [30:26]
A
Well, I think, didn't someone ask us this like a month ago saying, hey, what if I just kept my emergency savings in cash? Yeah, the understanding that it could lose 20% in a month. Yeah, yeah, yeah. I don't, I don't hate that idea. With if. As long as you're willing to accept the trade offs that like it was at this value and now three months later it's at this value. I know people who do that. And you have to have the right type of risk appetite obviously for that type of thing. But as long as you're willing to accept the trade offs there and you have that other cash buffer, I think that's, that's the big thing is like you don't have it all in risk assets. Right. As long as you have that other cash buffer just in case to tap. I don't, I don't have a problem with that. I don't keep, you know, I don't keep six months worth of savings in cash because I have other sources I could tap. So.
- [31:17]
B
Yeah, I can always sell my cameras.
- [31:19]
A
Yeah, yeah, there you go. Not your hat collection though.
- [31:22]
B
No, definitely not.
- [31:23]
A
All right. Okay. Send us your questions. Remember, ask the compound. ShowMail.com leave us a comment on YouTube, leave us a review. Check out ItemShop.com for those new trucker hats, that grandpa's hedge T shirt, all the other stuff. Subscribe to the Compound. We are now now well over 200, 000 subscribers, which is pretty crazy. Pretty awesome.
- [31:42]
B
Growing fast.
- [31:43]
A
We'll see everyone next time. Thanks everyone.
- [31:44]
B
And since people are going to be watching this next week on Wednesday, we should say it was great seeing everyone at Future.
- [31:49]
A
Yes, lovely. I'll see you guys in the live chat as well. Thanks. Thank you.
- [31:55]
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 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.