A (2:19)

Can you imagine being against Italy?

B (2:22)

No, no, I can't, I can't. Okay, up first we got one from Mark. Every bull market there are people who like to remind us that valuations are high and unsustainable. They point out that the historical average pe ratio is 15 to 20 depending on how you calculate it. We're getting a good taste of this now. The S&P 500's PE is quite high and doomers are predicting trouble on the horizon. However, in my opinion, comparing today's valuations to historical averages requires a bit of nuance. While it's true that the long term average PE for the S and p is about 17, the average since 1990 is significantly higher than that. So have we been in a 35 year bubble that's destined to pop or is there a legitimate reason valuations have been higher since 1990 that is this time is different. Ben loves digging into market history, so I'd like to hear his thoughts.

A (3:11)

I do like digging into market history. You do, they know you, they know us. This is also a relevant question when we look at like valuations that are at nosebleed levels, right? Because I think people are, people have been concerned for a while, but I don't think it's, it's right to just completely sweep this under the rug. So the greatest book ever written about the concept of risk was against the Gods by Peter Bernstein. Duncan, you ever read it? He's put it in the chat GPT for a. So he has this entire chapter on regression of the mean that I think applies here. So in the book Bernstein writes about this Sir Francis Galton who did experiments with pea pods and he would take planted seeds of different sizes, right? Small, medium and large, just to see how it impacted the size of their offspring. And what they found was that the offspring of very large seeds tended to be a little smaller and then the offspring of smaller seeds tended to be a little larger. It wasn't a complete regression of the mean, but it was, that was kind of the whole experiment behind the idea. It's enough to be noticeable. And so investors have been wondering the same for years now. Like when does the regression finally hit the US stock market? When do returns come back down? And especially when do valuations come back down? So here's the monkey wrench. Bernstein writes about why regression to the mean can be so Tricky, especially outside the realm of science when you're dealing with human nature. So Bernstein writes, there are three reasons why regression to the mean can be such a frustrating guide to decision making. First, it sometimes proceeds so slow a pace that a shock will disrupt the process. Second, regression may be so strong that matters do not come to rest once they mean once they reach the mean. Rather they fluctuate around the mean with repeated irregular deviations on either side, meaning the pendulum swings from one direction to the other. Finally, and I think this is the most important point here, the mean itself may be unstable. So that yesterday's normality may be supplanted today by a new normality that we know nothing about. New normal. Heard of it? So I think the last point is the one I want to pull on a little more. So let's do a chart on first check out the CAPE ratio going all the way back to when Francis Galton was still alive in the 1800s. Okay. The long term average is 17.6. It's been rising. But look at this 30 year average closer to 30. Now obviously today's not be levels. We've seen these, these levels exactly three times in history. Now the last time it happened in 2019 or whatever. Things worked out fine. We're up 14% per year since then. But the question is what's more relevant, a full 150 plus year history or the past 30 years? All right, let's do the next chart. Here's another way of looking at the evolution of values over time. So this just shows kind of the, the change in the average over time. And this is like a shorter term average and how it. So you can see in the 80s the long term average is way longer and it's been going up and to the right ever since here. So I think one of the main reasons to keep it open minded railroad.

B (5:48)

Businesses are different than semiconductors.

A (5:50)

Well that's funny because last week we talked. You can do chart off real quick. Last week we talked about how the S and P used to be filled with railroad companies and industrials. They were capital intensive businesses, low margins. So today's companies have more intangible assets. Right? They're far more efficient. So good. Geez, Duncan, that was a good lead in. Look at the next chart. Look at the average margin. And this only goes back to 1990s. This is the average margin by decade. Now obviously it fluctuates, but you can see that the averages go up every decade. Right. Even in the 2000s when we had two recessions.

B (6:19)

This is super impressive to me, isn't it?

A (6:22)

Right. So this was supposed to be the. This people have said this is the most mean reverting series in all of finance. Why? Because if a company has high margins, competition will come in. Those margins will compress Economics 101. It makes sense in the real world. Maybe not. They were wrong.

B (6:39)

A lot of this also is SaaS, right? SaaS companies have crazy margins.

A (6:42)

It's more efficient, it's technology. Right. And so put that chart up real quick. Just one thing I wanted to know on a side note. It's crazy that we've dealt with a pandemic. Supply chain shocks, 9% inflation and now tariffs. And yet margins are still higher this decade than they were last decade. It's, it's, it's kind of unbelievable. Good luck. Betting against American corporations, I guess, is a good thing. So do chart off. Now here's the thing. Even if we agree that the past 30 years is more indicative of current stock market characteristics, even today's valuations probably require more context. So the J.P. morgan Guide to the markets has some really great charts on that. So let's go to these next. So let's do another chart on this shows the S and P at different inflection points. And it shows the forward PE ratio, the dividend yield and the 10 year treasury at these different times right before a peak. Right. 2000, 2007, 2020 and 2022. The interesting thing about that is that the great financial crisis is the biggest crash on here. And the forward PE was 15 times. Like you couldn't say that valuations were crazy. Like it started at relatively muted valuation levels. It's just that no one saw that earnings were about to fall off a cliff. All Right, next chart 4 P E ratio. So 1994. This also shows the CAPE ratio, the dividend yield and then the EY spread, which is just the earnings yield minus corporate bond yield. And you can see they show the 30 year average along with current readings. Now obviously the current readings are higher than the 30 year average, right? So it would be hard to argue that the US stock market is not highly evaluated at this point. But here's the thing. Chart off. The US stock market should be highly valued right now. We have the biggest, best companies. We're on like a, we're on like year 16 of a massive bull market. It would be even weirder if the stock market wasn't overvalued right now. Right? The fact that these companies are so efficient. However, it should be pointed out most of this Overvaluation exists in the mega cap tech stocks. Let's do one more chart. On lots of charts today, this is another one from JP Morgan that shows the valuations of the top 10 stocks in the S&P versus the remaining stocks. So the 490ish and then the whole S&P 500. And you can see again, both of them have elevated levels compared to their averages since the 1990s. But the highest amount of valuation comes in those top 10 stocks. And guess what? That's those big mega cap hyperscaler stocks. And so those stocks should be expensive, right? So 21 times earnings for the rest of the market, 22 times for the whole market is certainly at the high end of the historical range. It's not like outside the realm of possibilities. So I think on a scale of like dollar tree to Disney World in terms of valuations, we're obviously closer to Disney World, right? That's expensive for those people who don't know chart off. But are we at like lightning lane Premier passes yet? I don't know. I honestly think it's possible we could see even higher valuations from here, especially if rates fall and people just continue to lose their minds.

B (9:33)

You know what else it reminds me of is the housing market. People like me for the last five years being like, I'm going to wait until prices come back some and they just keep going up to the right most places.

A (9:42)

Dave in the chat says, what's the 1990 stock equivalent of Apple, Google, Microsoft or Nvidia? It's true that they didn't have companies like this. So I guess where I really fall on this question is that yes, this time is definitely different. We have never seen companies like this before that are so big and efficient with such high profit margins. But the thing is the market knows this now and it sure seems like it's more or less priced in. Right? So if these companies continue to grow and either meet or exceed expectations, things should be fine. Like you can, you can live at these valuation levels, but there is very little margin for error if they stumble or if they fail to meet the now lofty expectations. So I guess my Grand Rapids hedge here is this time definitely is different. But trees still don't grow to the sky. How's that makes sense to me in good luck trying to Predict like is 25 the time? No, actually 26 is the level that there is no line in the sand here that that makes the most sense in terms of what's going to happen.

B (10:34)

When our show has a nice diverse audience. Of people that are market professionals and then people that are completely new to investing. So I can see people completely new to investing probably being like, why wouldn't you just buy the ones that are cheaper? But the whole idea of the market is people are always going for the future, right? They, they think that a company is going to grow their revenue, you know, at an insane clip. And so they're willing to pay more today for the future. Right? Like that's the whole idea. People are always.

A (10:59)

Jeremy Siegel, Jeremy Siegel has a really good book out called the Future for Investors. And the whole crux of the book is that expectations, especially in the short to intermediate term, matter more than anything. And so it's not necessarily the growth rate that matters. It's the is it better or worse than expected? And that's what for as high as these growth rates have been and the expectations have been ratcheted way up. But I think even the expectations were too low for these companies because we've never seen anything like them before. So that's the thing. It's better or worse. So you could have a really low valued company that just does a little better than expected and it could do really well and really highly valued company that's growing at, you know, 25%, but we thought it was going to grow 30%. So that, that's kind of where, and that's the hard part to. Well, what is, what is the, what are the expectations being built in right now? And that's the thing that's hard to quantify.

B (11:47)

When I first got into the market, I bought a bunch of single digit P stocks.

C (11:50)

Yeah.

B (11:51)

Of course, a lot of them did not do very well.

A (11:53)

I'll buy all the stocks under five bucks. They're cheap, right? Yeah.

B (11:56)

There you go.

A (11:56)

All right, let's do another one.

B (11:57)

Okay. Up next we got a question from M. Why are Roth contributions so low compared to 401k balances going? To keep it simple and not put my tinfoil hat on. Hope Mr. Bill Sweet can chime in. All right, so is there a conspiracy?

A (12:11)

Is that, I don't know, the tin foil hat thing is here, let's do Roth IRA for life and bring him in.

B (12:18)

Yeah.

C (12:18)

What's crazy this question is coming from a person with a single initial.

A (12:21)

Mr.

B (12:22)

Right.

A (12:22)

Yes.

C (12:23)

That is some wild stuff.

A (12:24)

Yeah, That's a baller move.

C (12:25)

Exactly.

A (12:26)

All right. I'm sure you have thoughts on the tax side of this thing. Again, I don't know the tinfoil hat thing is. But let's look at the actual number. So this is from the Investment Company Institute. And they break down like the IRA assets. All right, so let's do a chart on here. And so this is as of 2023, so should be a little higher now, but the proportion should be similar. So almost $14 trillion in IRAs. 1.4 of that is in Roth. IRAs. Carry the 4. Do the math. So it's like 10% of IRA money is in Roth. And I think there's 12 trillion or so in 401k type retirement accounts. And I'm sure the proportion there is even lower. Now, maybe the tinfoil hat thing is like, maybe the government doesn't want you to be in these things because they're such a good deal. But I think the reason is you can do chart off here is because these things just haven't been around very long. Right. You didn't have access to them. When did we get a Roth 401k option?

C (13:19)

1995.

A (13:20)

Yeah, but when did we get it personally? When did we get it individual?

C (13:23)

Geez, yeah.

A (13:24)

Two years ago maybe.

C (13:25)

Yeah, well, a little bit longer than that, but.

A (13:27)

Yeah, yeah, but a lot of the 401k plans don't have a Roth option yet. And a lot of the traditional IRA assets were there before the Roth came around. So I don't think there's a grand conspiracy theory here. Right.

B (13:42)

I agree with Dave in the chat, I was about to say, if there was a conspiracy, wouldn't it be weighted towards Roth because they get their tax money now? Wouldn't the government want that?

C (13:50)

That would be the conspiracy.

B (13:51)

Yeah.

C (13:51)

And you guys didn't get my joke. I was trying to make a Q joke. So Eminent asks, you know, why isn't there more assets in Roth? Duncan, you bring up, you bring up the interesting point, right? It hasn't been around that long. But, Ben, I want to challenge something you said. As of 2022, a Vanguard study showed that 80% of 401 plans had Roth options. And a 2025 Fidelity report showed that 93% of current plans have Roth options.

A (14:14)

Oh, that's way higher than I would have thought.

C (14:16)

Way higher too.

A (14:17)

However.

C (14:17)

However, only of that Fidelity study that happened this year, it was released in August. Only 17% are participating in Roth. So I don't think this is a conspiracy, Eminem. I think it's more of a case that people haven't really proselytized Roth. Right. This is a Rothtober to remember, gentlemen. And that's why I want to bring the message to the people.

A (14:35)

Here's the thing Though, here's what. So, yes, maybe more plants have it now, but even it being a newer thing, I think people just inertia, like, why would I change? That's fine. I got.

C (14:45)

Yeah, well, that we are an instant gratification culture, right? So if I could tell, like people that don't eat their vegetables at dinner. Do you want to take a tax deduction now or do you want to get it 30 years from now? Most commonly people are going to opt for that now option. However, again, I want to challenge M's premise. Can we chart on. One of the things I wanted to demonstrate on my chart is, hey, listen, like the traditional IRA option and a Roth IRA option are both fixed at $7,000. I think what M might have been comparing to is the IRA limits compared to the 401 limits.

A (15:13)

And.

C (15:14)

And while the traditional 401 cap for employer sponsored. Excuse me. Employee elective contributions is 23,500 per the 402 limit. You can contribute up to $70,000 as long as your employer is willing to do that. And that 10x differential is probably what em is getting at. However, like I said, Ben, in the world where 93% of 401 s have Roth options, this is just a matter of flipping a switch. And so I would say, em, join us. Let's break the conspiracy. The let's make this a Roth temper to remember and let's get the word on the street.

A (15:44)

So the thing is, if, if they magically, you know, they have the defaults, right? The default is the target day fund and saving 6% or whatever it is, if the default was turned to a Roth, you see a lot more Roth dollars. That's the thing. The defaults matter. And the thing is, I personally look at it like I'm able to put more money in because I contribute to the Roth 401K. Because most people don't take their tax savings and then invest it, right? They use that tax savings for something else or they forget about it and they take their tax refund and go spend it at Disney. I look at it as if I'm able to put the same amount in with Roth dollars versus traditional. It feels to me like I'm putting more money in.

B (16:17)

It's a lot of subliminal Disney talk today. Are you still a shareholder?

A (16:22)

I sold that piece of crap. And it's probably. And probably because we're taking the kids. We're taking the kids again in November. And I can't believe it.

C (16:28)

Oh, my God, that New York Times article. Red pilled me.

A (16:30)

Guys, can you talk about that?

C (16:31)

Yeah, like I, we were at Legoland over the weekend just before Labor Day and we were watching people march up on their fast pass and skip the line. And I have to tell you, like, I was ready to throw Molotov cocktails into that line because it was.

A (16:45)

This is where inequality finally starts to see the pitchforks. Exactly.

C (16:49)

I was mad and I consider myself a fortunate investor. But the lack of fairness. Right. That's what drove me nuts. I highly recommend that article. It's a great read.

A (16:57)

Yeah. Don't ever look at the people in first class. Right. Don't look them in the eye.

C (17:01)

Exactly. Just keep walking. However, I thought em was asking more interesting questions. So if you go back to like, why is the Roth, excuse me, the IRA limit so much smaller than the traditional 401k limit? Right. If you go back to my chart of 7,000 versus 70, it's 10x. That goes back to the original 1970s, 1980s math in that Congress capped contributions to employee elective contributions because they did not want high income people like Ben Carlson, like Bill Sweet, like Duncan Hill to be contributing their money into a tax shield, basically. And so what they wanted to do is create incentive for employers to fund contributions for the employees and that. That's the primary reason.

A (17:38)

And there should also be a rule though, if you don't have one at your job, your limit should go up. Yeah, that seems like a simple fix.

C (17:44)

And we talked on our last show last time I was here, about three weeks ago about the Carlson Suite 2028 platform, which is combine all this stuff into one big account. Like I don't need my TSB, my 403B, my 457. Exactly.

B (17:56)

Yeah. How many people end up with, with accounts they completely forgot about? It seems very likely given like how disparate a lot of this is. I am.

C (18:05)

Yeah. I think a lot of the value that we add as financial planners is bringing everything in one house. Right. So we can look at it all. But one of the things, Duncan, that sticks with me, it might be an apocryphal Fidelity study that came from General Shaughnessy, but the two types of accounts that outperformed everybody else were one, people who changed their address and they didn't update it. Right. So they weren't monitoring their account. And the second one was dead people, which is a great way to outperform the market. And basically the message is, don't mess with your investments.

A (18:27)

As a tax person, Bill, you're going to hate me for this. And the personal finance people will come at me, but I don't have an hsa. And the only reason is because I don't feel like adding another account to my, my buffet of accounts. I just, that's, I just, it feels like too much of a pain in the ass.

C (18:39)

I don't want to bridge too far. Yeah, no, I, I, that's a personal decision then. Yeah, I wouldn't, I wouldn't throw, I wouldn't throw rain on you for that one.

A (18:46)

All right, let's do another one. Let's, let's dream a little bit here.

B (18:48)

Okay. Up next, we, we have a question from Andrew.

A (18:51)

I gotta admit, this is a guy hoping not to brag.

B (18:54)

Yeah, I've never bought a Powerball ticket in my life. I used purely into scratch offs because I like the instant.

A (19:00)

Instantaneous scratch off is the best stocking stuffer that there is.

C (19:02)

Great Christmas gift.

A (19:03)

Agree.

C (19:04)

Top of the list.

A (19:05)

If someone gives everyone a scratch off ticket at Christmas. Wait, who's got coins? Who's got coins? That's a great gift.

C (19:10)

Yep.

B (19:10)

Yeah, I think some people are just lucky with them too. Like, my wife has gotten like 50 bucks off of one before. I think I've pretty much always just.

A (19:18)

Lost or gotten like, my kids get so excited, they win $2. Yeah, it's the best. All right.

B (19:24)

Okay, so Andrew writes, as of today, the Powerball jackpot is at $950 million with a cash value of 428,900. I mean, 428.9 million.

C (19:38)

In the actual email, it calculates this to the decimal point. It's very impressive.

B (19:41)

Oh, my God. Okay, this is one of those things where you can take it over the rest of your life or take a lump sum. Is that the idea? Okay. It will likely be even higher by the time they do the drawing on Saturday. And if it makes it to your recording next Wednesday, it will be well over $1 billion. I know lottery tickets. Yeah, I know lottery tickets are a total waste of money and I rarely buy them, but sometimes paying $20 to fantasize about what I would do with all that cash can be a good value. Let's say I win Saturday's drawing. I'm in Texas, so if my math is right, my after tax take home would be a little over $270 million. If I win $270 million, I'm going to need some help. How would RWM approach a new client that had that kind of money? And what unique considerations come from that scale? P.S. i've long had a deal with myself that whenever I get some type of windfall, I take 10% to use for fun money and invest the rest. Do you have a similar approach?

A (20:38)

So lottery is one of those things that it's just totally irrational. But I think the funniest, most irrational thing about it is people play the lottery more and the Powerball grows to a large number. It's like, listen, if it's at 300 million, I'm not playing, but if it gets to a billion, then I'm in. Like, like I can't, you can't bother me for 300 million, but a billion, then I'm in. Okay, I, I do think I do like the fun money approach. Taking any sort of bonus or windfall and, and spending, enjoying it on yourself, vacation, spending on the kids, whatever. Take yourself out and get a new hat for Duncan or new shoes. So we get a, we get a client this size that comes to riddles wealth. They're in our multifamily office group, right? It's ultra high net worth people. They, the estate planning, insurance planning, tax planning with the bills. The funny thing is that from an investment management perspective, these types of clients are either the easiest or the hardest. So a couple weeks ago, I have had a pontoon for a few years now, right? I mentioned this before, showing some pictures on the show. I think I'm ready for a larger motor, right? I've got a 150cc. I think I can get to like 2, 250 now that I'm more comfortable driving this boat. And so I called the dealership and I said, what, what are my options here? And the guy, the first thing the guy says to me, he says, here's the thing with it. When it comes to a boat, you don't need anything. There are no needs here. It's what do you want? Right? And I think that's the same thing with someone with this much money. They don't need to invest in anything without. You could put it on T bills, you could put it on uni bonds, you could put it on stocks. Either way, you're going to be fine. Your kids are going to be fine, your grandkids are going to be fine, right? So that almost makes it harder to offer advice because it's like very freeing but also scary. So you need to have some sort of limitations on yourself so you don't drive yourself crazy. I also think the way that I used to think about this with institutional investors, I managed money with these large endowments and foundations. They had hundreds of Millions or even billions of dollars. And I always said that it's just a few extra zeros. The evergreen principles still apply. You still have to account for your risk profile and your time horizon when making investment decisions. So that's kind of my theory. Bill, what do you think? What would your advice be when someone comes to you with this much money?

C (22:52)

I think that you adequately answered that question, Ben. So I'd like to answer a different question, which is, should you play the lottery? And I would say never. Never, ever, ever.

A (23:01)

Mark Twain. You don't think it's okay to pay it to dream for entertainment purposes? Listen, I don't. I don't play it either. But I. I can sort of see the. Let's just. I. Because I know people love doing that.

B (23:11)

Yeah. If you're not like, addicted to it. I know there are people that get addicted to it, but if you're not addicted to it, I just have to say, like, yeah, if you're spending $20 to go to a movie or $20 on. On a lottery, like, what is, what is the difference?

C (23:22)

Why not methamphetamine if you're not addicted to it? Like, I. I get the point. But my problem is it's an empty dream. Like, you're buying an empty promise. The. The statistical odds of winning the lottery are 1 in 238 million. Like, that is the thing. So, like, no matter how much you multiply the amount of chances you get, statistically, nobody wins the lottery. I know that they roll somebody out every year and they show you all the great and wonderful things that they're doing. They ignore what happens over the next 10 years because it's actually very bad people that come up with that money.

A (23:50)

Most people who. My favorite stat is that the neighbors of lottery winners are more likely to go bankrupt because they see them spending money, so they try to keep up.

C (23:58)

Yeah. So it's grim. So Mark Twain said the lottery is a tax on those port math. And that is what I advocate to people. I think it's a completely empty dream. And I'll share two more statistics for you guys. One is that only 45% of wagers from lottery tickets end up as winnings. So they're literally taking half of the money that people are wagering. And they're only return. And they're keeping half of it.

A (24:17)

Right.

C (24:17)

And some of that goes to government programs, but most of it goes to administrative support. It pays the shop owner. Like, there's stuff going on. Let's compare that to other forms of fun. I would Say entertainment casinos pay roughly $9.90 on the DOL.

A (24:30)

Right.

C (24:30)

So I just don't think it's a very efficient way of gambling. And the last point is.

B (24:33)

But you're supporting schools in a lot of places.

C (24:36)

I don't know if you are. Yeah, with. Make a donation to the school if you want to feel good about yourself. But the other thing, guys, it's a government monopoly. And this has always kind of freaked me out is like, where are the private menop. Where are the private lotteries? Like, why can't. Why. These odds are so terrible. Why are they so terrible? It's because it's a monopoly. And I don't. I just don't think it's a good way to tax people. I would much rather. I understand it's voluntary, but it's selling you an empty promise. And I want to chart on really quick. You know what's better than throwing $20 a week away? Stick that into an index fund.

A (25:04)

Right.

C (25:04)

And so over a hypothetical 30 year investment, you'll end up with $114,000. God willing. This is not an actual investment, but it's much more likely that if you invest that $20 into literally anything else, you're going to be better off than throwing it away in the lottery.

B (25:19)

Yeah. I mean, this is not investment advice, obviously, but your odds of striking it big with a super risky option contract would be four. Far better than probably the Powerball. Not probably. Definitely.

A (25:32)

And one in two crushing dreams out here, Sean.

B (25:35)

And Machat's not happy.

C (25:36)

I'm not. Because they're not real. They're not real dreams. But here's the thing. If you play this every week, your statistical chance goes to one in every five million years. Right? That's not good enough for me, guys.

B (25:46)

Okay, but wait. What if you get together with everyone at your work and you all go into.

C (25:50)

On board. On board because. Well, no, no, with each other. That I can win within my pool. I always support those. Like office lotteries.

B (25:58)

Oh, no, no. I meant everyone in and buys power roll tickets.

C (26:01)

No, because still your chances of winning.

A (26:02)

It'S going to end up in court.

C (26:03)

Duncan, your chances of winning are zero. Exactly. And then you sue the pants out of each other. There's no upside. I don't understand the point.

B (26:09)

Okay, well, let's have a little bit of fun for people that are here for fun police.

A (26:12)

Of course, the tax would be the fun police.

B (26:15)

What would you do if you won 200 and however many million dollars?

C (26:19)

Half goes to municipal bonds, the other half Into a broad basket of tax managed exchange funds and ETFs and canvas where they're fine folks at Reyults with a midriff.

B (26:30)

Wait, no, no. Fun. You wouldn't like have you have that much money private jet. You couldn't do four if you tried and you wouldn't have any fun with that.

C (26:38)

I think everything becomes fun at that point. I think I'm fortunate where I am in life where like if, if I really, really want something, I don't want a private jet. That sounds lovely but like no, I don't think my life would change at all.

B (26:49)

I'd buy a Ford GT40.

C (26:50)

That's a false dream. Did you drive it though? What I don't understand the people who buy those cars is they don't drive.

B (26:55)

Oh no, I would drive it.

C (26:56)

Okay, great.

B (26:56)

I would drive it.

A (26:57)

Great.

C (26:57)

Then I'm into this. Awesome.

A (26:59)

Bill's just pulling.

C (27:00)

I've got everything I want.

A (27:01)

Let's do another one.

B (27:03)

Okay, up next we've got one from. I don't see a name. Okay. Ben keeps saying it feels odd or even weird when people prefer to invest in income generating assets instead of just selling some stock to live off of in retirement. But today with tools like ChatGPT, anyone can run a Monte Carlo analysis based on age, retirement savings and annual spending to estimate the odds of running out of money. And when you do this, income based strategies almost always outperform non income approaches in terms of making the money last and even grow. Try it yourself, Ben. So Ben, why do you say income approaches in retirement are odd or a bad idea?

C (27:41)

Shots fired.

A (27:42)

We're taking my. I think we're taking this a little out of context here.

B (27:45)

This is almost like you saying that I said you could get a Porsche for $20,000.

A (27:49)

Yeah. Dave said under check if Duncan won the lottery, he'd buy a $20,000 Porsche. So my point here is that. Not that you shouldn't, you should avoid income generating assets completely. Of course not. Like my point is, and I don't know what chat. I think you're leading the witness with chat GPT there a little bit. I'd like to see this Monte Carlo analysis. My point here is that total return matters more than yield. Like so in my book. Duncan, you mentioned this A few weeks ago I brought up Annaly Capital. I actually did an update on this. So pull up the chart here. This is the.

B (28:17)

This is funny you mentioned that. That's one of those stocks I bought when I first got into the market that had a. Yeah.

A (28:21)

In the 2010s. A lot of people love these stocks. So this, this is in the low rate world.

C (28:25)

So this is a rent free in Duncan's head.

A (28:27)

It's amazing. So I wrote about this in 2015 in my book. Let's update it to the last 10 years. The average yield on Annaly Capital for the last 10 years has been almost 12%. Pretty good, right? Man, if I just clip those coupons. Now let's go to the next one and look at the actual total return. This is with the price. It's up 6% per year. So wait a minute, I clipped that 6% but. Or my 12% but I got 6% per year. How is that? Because the price went down actually on a total return basis. That's why I'm saying chart off Yield is not the only thing you should be looking at. If you say I'm just going to live off the yield, you have to look at total return. I'm not saying you should avoid income generating assets altogether. I'm saying you have to be smart about it. And you have to combine total return with yield. Right. And yield is part of total return. That's my whole point that you can't just say, oh, if I just live off the yield, I'll be fine. You have to look at everything. Right.

C (29:17)

There's a very famous Reddit post about ge, right? And the stock. I don't know if you guys know what I'm talking about, but it was the same kind of thing where like total return, ultimately it trumps everything.

A (29:26)

Yeah, that GE had a 5% yield, dividend yield probably. Right. But it was down 50% in price, so who cares?

C (29:31)

Exactly.

A (29:31)

And the thing is Bill, if you are doing an income only approach to retirement, guess what your tax bill is going to hit, right?

C (29:38)

Yep, yep, Ben. And that's what you asked me to take a look at. So again, very simplified case, but I think over indexing on income and over indexing on yield usually leads you to choose investments such as real estate or bonds that pay ordinary income. And can we chart on and just do some really quick math. $5,000 a month equals $60,000 a year. So that's on a 6%. That's roughly a million dollar portfolio. If that is all coming down in ordinary income using 2025 tax rates, I'm paying roughly $5,000 of tax on that.

A (30:06)

Right.

C (30:07)

Not a huge tax rate, but still that's one monthly payment of money that's going off to the IRS versus capital gains. Ben, in your point that are Coming tax free. And that to me is it is that not all that glitters is gold. Yield is not the determinant of success or failure. It's a part of a solution of portfolio. The second point that I would like to make Ben, is what I think questioner is talking about a sequence of returns risk, which Ben, you've written out a lot of our fol and what income allows you to do is basically get a less volatile approach to investing. If you have a steady income stream coming out of part of your portfolio, that does make it less volatile and it does reduce sequence of returns risk. However gentlemen, risk can be transformed. It cannot be destroyed. So moving from a total return to more of a fixed income approach, you give up expected returns in exchange for lower volatility. But you do still get those lower returns. And that means that you're taking on potentially purchasing power risk, inflation risk. It's just a way to transform not neither is right or wrong.

A (31:03)

Right.

C (31:03)

At the end of the day we need a mix of assets to make this all work.

A (31:06)

But make it be part of it. And maybe you keep those income producing assets in a tax deferred account and have them have the asset location where.

C (31:13)

You'Re paying ordinary income anyway. Exactly.

A (31:15)

The thing that always gets me is the people who say I'm just going to live off the income and never touch the principal. And my whole point is like what's the point of saving in the first place if you're never going to touch the principal? That doesn't make any sense to me.

C (31:25)

And the really crazy thing that's going on right now and I think it's just indicative of where we are in the market cycle.

A (31:29)

Right.

C (31:29)

We've had a big run with big tech. Big tech stocks have done so well over the last 20 years. We have a of people, these embedded gains, they don't want to sell and realize the capital gains, they want to generate income. So they're going to these like covered call writing strategies and other nonsense. You know what else works? Selling the stock. Right. Because you need to get from here to there. Unless you're in a tax shielded account, you need to transition at some point. So why not just do that through disciplined sales? And I think this is the work of the financial planner to try to put this puzzle together.

A (31:55)

Right. I just think my whole point is that there's no like easy button to hit. Like oh, I'll be fine, I'll just put it in this and look at the yield. Yay, I'm done. No, it's not that easy.

B (32:03)

I mean, I'll point out, I think, Nvidia yields. I just looked 0.02% dividend. So if you're looking for dividend stocks that have a good.

C (32:12)

That's like negative 5% real, right? Yeah.

A (32:15)

All right, we got one more.

B (32:17)

All right. Up next, we got a question from Keith. The Thrift Savings Plan will start allowing roth conversions in 2026. The only thing we know at this point is that the conversion must be paid from outside money. I don't make that much. As of today, my GROSS Salary is $64,000. I'm 35, very single, no house, no kids, no debt. I file single.00. I don't know what that means. And live in Connecticut. My TSP is around. That's thrift savings plan is around $96,000 and about 55% is traditional. If you were me, would you convert 100% of that on day one or do smaller chunks throughout the year? I'm going to do at least $15,000 because I always take the standard deduction. I have around $19,000 in cash and a High Yield savings account right now.

A (33:05)

See, he's got a high yield savings account. Yeah.

B (33:07)

My plan is to accrue as much cash as possible in 2025 and 2026 to pay the tax bill that will be due in 2027. What are your thoughts? Smart, dumb. Or maybe not do it at all and have more tax flexibility in retirement. But please correct me if I'm wrong. Benjamin, do any of your clients ever say, man, wow, man, I wish I had less Roth money in retirement? I hope to hear back. I know y' all are busy. Benjamin is very formal to call you Benjamin.

A (33:34)

Yeah. Sounds like my mother. Yeah. Bill always says, no one says, I wish I had less Roth money in retirement. So I guess that the idea here. I never heard about this, that the TSP will start allowing me so just that the taxes have to be paid from outside money. You can't, like, pay it from your retirement. That's what he's saying, Correct?

C (33:51)

Yeah. And you usually wouldn't because if you did a Roth conversion. Yeah. It's almost always better to pay with outside money.

A (33:57)

Do you think that the timing on this matters at all?

C (34:00)

I do. I do. And this is the thing, is that if we pull up. Can we chart on here, my last and final chart here, if we're thinking about Roth TSP or not. One of the useful indicators that Keith gave me was his salary at $64,000. And this will be adjusted for Inflation a little bit going into 2026. But as of today, assuming a standard deduction, Keith is right at that 22% tax bracket. Like he's right on the edge. Right. And so what Keith is talking about is do I add to my taxable income this year? Right. To save in the future. Keith also gave us a couple other key points. At 35, no kids, no debt. Sounds like Keith is living just a great life. However, what I think is probably going to happen with Keith, if I could just index and Keith can write back later and tell me probably he's going to keep working his job. Right? He'll get raises, life will go on. I think Keith will do great. He'll retire at some point. TSP implies a government service job.

A (34:49)

Right.

C (34:50)

We can chart off here. So he probably is looking at a pension. He'll probably end up moving, I would guess, guys, somewhere Florida, right? Somewhere south, somewhere out of Connecticut. Because Connecticut is getting older by the day, unfortunately. And if that's the case, maybe that's.

A (35:03)

Why he's very single.

C (35:04)

Maybe, maybe he'll look for love in his 60s, but probably what'll happen for Keith. It's just my guess is that he's probably at his tax bracket right now. So it's more or less just a neutral thing. I would not be rushing to do Roth conversions where he is unless his income would dip below that $64,000 for some reason. Maybe a health savings contribution account, maybe some other reason. So what I would probably, what I'm hearing right now, what I would probably remedy. Keith, let me finish up. Is maybe just, just tweak your contributions going into the tsp, Right. I don't see the benefit of a large.

A (35:35)

So just have all the new contributions be Roth, correct?

C (35:38)

That's correct. Particularly again in Connecticut, which is not a low tax state by any stretch of the imagination. So there's nothing compelling me for Keith to Roth convert. If his income was 54k, I would say 10k makes sense, but I just, I wouldn't want to be converting too much in the 22 or 24%.

A (35:51)

So would it ever make sense for him to do these later in life then?

C (35:55)

Yeah, definitely possible. If Keith takes a year off his sabbatical, if he does some traveling or if he has a gap year, changes careers, let's say that is a perfect opportunity to Roth convert. But I don't. There's no, there's no, there's no red flashing light that says 2026 is the year. For our friend and listener, Keith, this.

A (36:11)

Was the upset of the year, Bill saying, don't go into the Roth conversion.

C (36:15)

Nuance is important. Yeah.

B (36:16)

Very surprised.

C (36:17)

Roth timber is not for everyone, guys.

A (36:19)

And I wouldn't want to see lottery tickets do come true sometimes. A lottery ticket for Bill.

B (36:23)

Louise in the chat says, imagine the lottery tickets you can buy by saving taxes by not relying on dividends.

C (36:30)

Exactly. Exactly. No, but great question. And again, Keith, there's nothing wrong with some rothification. I would just do it in an ongoing basis. I don't see any reason to wreck your tax bracket.

A (36:39)

Yeah. And so he says it's 55% traditional. That means he's probably already putting a lot of new money into the Roth and eventually swamp the traditional anyway.

C (36:46)

I mean, just. Just a Roth IRA contribution. You could just plug $7,000 in in addition to your other savings.

A (36:51)

So, hey, guess what? Take the cash you're sitting on and invest it.

C (36:54)

Exactly.

A (36:54)

Right.

C (36:55)

Exactly.

A (36:56)

If you're not. Yeah.

C (36:57)

And let that grow. You can always get your basis back tax free. If down the road, you decide to move, buy a house or something else.

A (37:01)

Yeah. So take some of that. Max your Roth out. What is it, 7,000, 7,500?

C (37:05)

7,000. 7,000 this year. Amen.

A (37:07)

If you want to do Roth dollars, just max out your Roth I. Right now.

B (37:10)

Do you think Keith is wanting our help finding someone by emphasizing very single? Should we have a. Ask the compound, like dating game or something?

C (37:19)

Keith sounds like a catch to me.

A (37:21)

I mean, we've got a lot of people with high FICO scores here. I'm sure. So that's gotta be high FICO scores. Don't play the lottery. $20,000 Porsche. That's like, that's very. That'd do well on the dating sites.

C (37:31)

No, I. I think Keith is gonna clean up later in life. So I don't. I don't think he needs a lot of help there, given. Given the facts and circumstances.

A (37:38)

Spouses dig Roth IRAs.

C (37:40)

It's a known fact that tattoo is played at the bar. Yep.

A (37:43)

It's true. All right, thank you to Bill, as always.

B (37:47)

Before we get out of here, I got. We were. I. I kind of teased this in the. The pre show, but.

A (37:52)

That's right.

B (37:52)

I tariffs. I have bad news. I. I experienced my first, like, slap in the face from. From tariffs. And I gotta say, I don't think most people are gonna like this once this starts hitting more and more people. I bought a pair of.

A (38:06)

Personally have to pay a tariff.

B (38:07)

So I bought. I. I bought a pair of shoes from Spain and they were already expensive. For me, I usually try to buy shoes on sale, but these were $126. I got some, like, ransom note from DHL saying, we have your shoes. They're ready to be delivered, but you have to pay $43 in import duty because of the tariff policy before we can deliver them to you. So I had to pay to, like, you know, I had to pay a ransom, basically, to get my shoes that I already paid for.

A (38:34)

What kind of shoes? $43. That they don't have. Are they, like, specially made? Why don't they have these?

B (38:39)

These aren't. They're vegan shoes. They're. They're, like, handmade.

C (38:41)

So you're gonna eat them.

B (38:42)

Imports.

C (38:43)

These are for consumption.

B (38:44)

They're made from, like, pineapple leather or something like that with bamboo there. They are very, very awesome shoes. I'm excited about getting them, but, like, I just. $43 on a pair of shoes that were $126. I mean, I'm not good at math, but that's a big percentage like that.

A (38:59)

So we have a big tariff on cactus these days, huh? Cacti. Is that the deal?

B (39:03)

Yeah. I don't know. I just. I was thinking, like, this feels. This feels like a tax. I know a lot of people are saying it's not a tax on the consumer, but it sure feels like a tax.

A (39:10)

The thing is, though, when you wear these shoes now, if once you pay the ransom note, you're going to have a good story every time you wear them.

B (39:16)

Sure.

C (39:16)

Yeah.

B (39:17)

And I hope to have them in time for future proof. So you'll probably see me wearing them next week.

A (39:22)

Yes. But a 40% tariff or whatever it is, that's. That seems a little high.

B (39:25)

It's. Yeah. I'm just. Yeah.

C (39:28)

Unpatriotic.

B (39:29)

Yeah. I mean, it's not. There's not an American made, like, equivalent or. I would have. Sure. I would have bought that. Maybe.

A (39:34)

But Duncan wants a GoFundMe page set up. All right.

B (39:37)

No.

A (39:37)

Email us@the compoundshowmail.com thanks, everyone in the chat, as always on YouTube and on Twitter. Thanks to Bill and Duncan and the whole production team here at the compound. And we will see you next time. Thank you.

B (39:47)

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