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Welcome. This is Ask the Compound, the show where you ask and we answer. I am Ben Carlson. Mortgage rates are much higher than they were just a few short years ago. Let's say your rate is 6% or higher. Should you invest money in the stock market or pay down your mortgage? Early valuations are also higher though. How should you factor that into your decision? I'm going to answer these questions and more on today's show with questions straight from our viewers at the Compound. Stick around. Let's do it. All right. I am flying solo today. Duncan is in Japan. We actually pre recorded an episode and guess, guess what? We checked last night and the download wasn't there. So I'm flying solo today. Give me my castaway thing. That's me. I'm going solo today. Me and Wilson Duncan on the ball. That's good. I don't ask for much from our production team. I just ask them to do give me a castaway thing. So yeah, we're doing it again. Email us askthecompoundshowmail.com Every week we have questions that come into us via email, YouTube comments, Twitter, messenger pigeon, maybe a message in a bottle. On this week's show we're answering questions from our Compound audience about how to think about S&P 500 valuations and dollar cost averaging. Should you pay down debt? Invest in the stock market. How use it's work if you're overseas. Is home equity a false kind of wealth? What's your strategy if you only want to own your home for five or 10 years? And then how you should invest your 401k? But first, today's show is sponsored by Public. The investment platformer takes it seriously. On public you can build a multi asset portfolio. Stocks, bonds, options, crypto and more. And now generated assets which allow you to take any idea and turn it into an investable index. With AI it all starts with zero. Your prompt. From renewable energy companies with high free cash flow to semiconductor suppliers growing revenue over 20% per year. You can literally type in any prompt to put the AI to work. Screens thousands of stocks, builds you a one of a kind index and lets you back test it against the S&P 500. Then you can invest in a few clicks. Generated assets are like ETFs with infinite possibilities, completely customizable and based on your thesis. Not someone else's. Pretty cool idea. Go to public.comatc and earn an uncapped 1% bonus when you transfer in your portfolio. That's public.comatc paid for my Public investing Full disclosure in the podcast description. I just realized with Duncan not here, I have to read the questions, man. All right, let's do it. Question one, John. All right, I kept them short and sweet today, which I thanks to everyone who wrote in. Given the high valuations, should I pause my DCA into the S&P 500? In a word, no. Please don't. Don't try to time the market using valuations. Every quantum history has tried doing this and coming up with a strategy to time the market, and they're almost always wrong. Valuations are not a timing indicator because valuations change over time. Let's show my story. I wrote this in March of 2017 for Bloomberg back in the day when I used to write for them. What to make of these twice in history S&P 500 valuations. The whole idea was the CAPE ratio had never been this high before. Give me the next chart. Twice in history, 1929 in the dot com bubble. That was it. That was the only time we'd seen valuations this high. People were saying, oh my gosh, what is going to happen? What did happen next? Chart. The S&P 500 was up 230%, almost 15% annually since we hit that. That level that only been reached twice in history. Okay, chart off. Valuations don't work as a timing indicator. They can help you set expectations, maybe a range of returns. But even then I, I made a point a few years ago. Valuations don't matter as nearly as much as we think. People said, ben, what are you talking about? You're crazy. Of course they do. Can you use them to time the market? I don't think so. When you should invest, when you should not invest. So here's a question. When should you turn off dollar cost averaging into the market? When you have other savings goals that require capital, like a down payment or a wedding or a home renovation, or paying down credit card debt? That's a big one. When your risk profile or time horizon has changed, when your spending needs have changed, and then when you reach your goals. Valuations. No stock market crash, no bull market. No, no, no, no. That's not why you turn this stuff off. I guess the whole point of dollar cost averaging too is that it takes away the need to guess what's going to happen next. It allows you to diversify across time and environment. You're investing in different types of markets. So don't overthink it. Keep it simple. Okay, that's it. Live people in the live chat. Give me your questions. I'm going to fire them off today. I got a million. All right, next question. There are lots of financial rules of thumb out there. Do you have a rule of thumb for when to prioritize paying down debt on a mortgage instead of investing? I think I have a rate of 6.375 that goes out three decimal points. That's a lot for $470,000. And I'm 30 years old. How should I be thinking about this? Okay, I have general rules of thumb that look like this for your mortgage. If your mortgage is under, say 4 to 4.5%, it doesn't make any sense to pay it off. Inflation is 3% right now. Throw in some mortgage interest, tax deduction and your real borrowing rate is on the floor. Okay, Then I would say anything 7% or higher, which is not many people these days, but it did get the mortgage rates got to 8%, which is kind of nuts. So there are some people who have it that high. If it's 7% or higher, you definitely consider making extra payment here or there. So that four, four and a half to seven range, I would say that's kind of the no man's line. That's dealer's choice. Okay, so this person, 6.375, they could have rounded up to 6.4. Let's do it. 6.5, sure. I created this thing on Claude. I said, build me a mortgage calculator. I don't want to do it myself. So they did this and I put like another research analyst out of business. This is AI at work already. So give me a chart on here. This is taking their $470,000 mortgage, their 6.375 rate, just putting 100 bucks extra a month. What does that do to you? See, it saves you a decent chunk on interest, right? We're talking 60 plus grand and it shaves three years off of your mortgage. That's not bad. Okay, but now what if we do a little more? John, next chart. $500 a month extra. That takes 10 years off of your mortgage and it's a ton off your total interest. Chart off, please. Now how many people actually keep their mortgage for 30 years and pay it off over 30 years and live in the same house for 30 years? I don't know. There's probably some baby boomers who have done that. Not many though. I think it would take. So at this level, it would take $1,100 of extra payments per month to turn a 30 year loan into a 15 year loan. So that's, that's kind of how you think about your break even there. So I don't know. I think the question is, like, what's your goal here? Because once the money's in the house, it's not coming out unless you sell or borrow against it. Okay. Some would say that's a benefit. Others would rather have liquidity of the stock market. Where I land on this is even if you decide to make some extra payments, it doesn't have to be all or nothing. Still put some money in the stock market, split the difference. Right. Don't completely give up on the stock market to make those early mortgage payments. Diversify your savings and do a little both if you insist on paying down the mortgage early. All right, Hank, let me look at some questions here. Dave, question for Ben. How does the USD declining 10% in 2025 impact your investment thinking for 2026, if at all? Dave, we've got a question on that today. It's coming up. Okay. Ben, why is a devaluing dollar good for markets? Michael, we have that coming up too. I'm answering all your questions on the show today, guys. This is great. Coming up. Not that kind of this one. Let's do question three. This is kind of what currencies as well. Let's do it. I'm an American expat living in Australia, also a former Marine, which hopefully will get my question answered, as I know you love answering questions from vets. We do. We thank you for your service. And in the future, all the questions on here are going to be from veterans and women because they go to the top of the list. So sorry, everyone. We discriminated in this podcast for tax and brokerage reasons. It's much easier for me to buy ASX listed US index ETFs rather than US listed versions. But I've noticed the Australian versions have performed worse recently. Can you explain why that happens? Is it currency fees, structure, tax drag? Sean, again, thank you for your service. I've always wanted to go to Australia, but we talked about this last week. I think it's like a 20 hour flight. That's a lot. I could probably, I don't know, I'd knock out how many movies. Seven movies in that time. Probably like seven beers. That actually sounds like pretty fun. So Sean is buying U Sits, which are essentially US Funds you buy in another country. Okay. A lot of people who buy U Sits in Europe. And honestly, Sean pretty much nailed the differences. Okay. It's currency fees and tax drag. So let's go these one by one. The currency effect is probably the biggest one recently. I've used these charts in the past, but let's be honest, people forget the content they consumed like three hours ago. There's no way they remember something we can we put up here three, three months ago. So let's do it. This shows the strong dollar regime versus the weak dollar regime over the past. How long ago was 1980? 45 years. Geez, I'm old because I was born in 1981. So in strong dollar regimes, the US stocks tend to outperform. And weak dollar regimes, international stocks tend to outperform. Let's look at another one. Okay, next chart. When the dollar is up versus the dollar is down. When the dollar is up, US Stocks tend to outperform international stocks. When the dollar is down, foreign stocks outperform by a lot. And gold outperforms by a ton when the dollar is down. Okay, chart off. So as someone who's investing in Australia in US Stocks, you're getting the opposite of this. Okay, so we heard from a ton of foreign investors buying U.S. stocks in recent years when the dollar was strong and they got a double whammy in their favor. Double tailwind. Okay, US Stocks were outperforming and the dollar was rising. So that meant from the perspective of a foreign investor, someone in Europe, someone in Australia, someone in Asia, they outperformed by a lot because the currency was with them and the returns were with them. Now it's the opposite. Now the US Stock market is underperforming and the dollar is going down. That's a double whammy. Okay, for US Stocks, it doesn't matter. But for the currency, it does. So as investing in US Stocks in Australia, the fact that the dollar's going down means when you buy those stocks in the Australian dollar translated back into the US Dollars, it's a. It's a headwind now, okay, it's the opposite effect. So listen, from the perspective of an international, A US Investor in international stocks, it's a good thing. The opposite is not true. So if you own international stocks, if you own US Stocks, as an international investor, the weak dollar is hurting your performance. It's turned the tailwind into a headwind. Like all things in markets, these are cyclical. And there's probably also some tax drag here, so consult your local tax expert in Australia. But you could be hit getting hit with a 15% withholding tax taken out for dividends. Like, they just take it off right away. And then you'd get like a tax credit to offset that. But that could be an impacting your performance now. Okay. Again, talk to your tax person. That'd be my guess. Okay. And one other thing. Fees. Fees might play a role here, but it's like, it's tiny, it's minimal. So something like Voo is 3 basis points in the US if you bought that version and use it, you're probably paying 5 to 10 basis points. So a little bit. So yeah, add in the fees, add in that tax drag, probably. And especially the currency. That's why you're underperforming. So I guess if you had the ability to open an account in the US and fund it here, maybe that diversifies. But sounds like you already have some U.S. assets. So it sounds like me. You're diversified already. The currency stuff, over the long haul, it'll probably shake itself out. It's just impacting you now. So that's, that's how you think about it. It's a currency thing. US dollar goes back up, it's going to help you. Okay. Any other questions in the chat? No, people just talking to each other. That's what always happens on here. All right, next question. Isn't home equity a kind of false wealth? You either buy another equally inflated asset plus all costs and taxes, or you drain the asset income and unpredictable rents. I own two houses, but only one. When I calculate my net worth, I think those numbers are misleading. I don't know why you're giving yourself. You're taking off of your own net worth here. No, I, and I. This is from Jim. I have very strong feelings about this. Jim. No, I do not believe home equity is a false kind of wealth. But let's look at some numbers that show why some people think it is. Okay. Bloomberg had a piece at the end of last year. They said America is minting lots of cash trapped millionaires. So here's the numbers. They show 24 million households in the U.S. nearly one in five are millionaires. Now that's everything. That's the equity in your home. That's 401ks, liquid assets, businesses, all this stuff. Right. They're saying. But many of these are paper rich, especially in the $1 to $2 million households. Okay, so 66% of wealth for this group is met as housing and retirement. Now it's higher than that, over 70%. Right. So that means it's technically illiquid. Right. Sure, you can get money out of your retirement account. Sure you can get money your house. But it's not easy. It's not like easy to get to. Right. Even for that 2 to 5 and 5 million group. There's not a ton of liquidity. A lot of it is in tax deferred retirement accounts and illiquid houses. Chart off please. So are you really a millionaire if you can't immediately spend a million dollars? Check, check. Yes, of course you are. Come on. Being a millionaire is not spending a million dollars. It's saving and investing a million dollars. Okay. Having money locked up in an illiquid home and taxed for determine accounts that make it hard to spend the money is how many of these people got rich in the first place? If it was easy to access, they probably would have done something with it. They would have sold their house, they would have sold their investments and changed it. Just because you can't spend your house does not mean it doesn't have value as a financial asset. I can't believe I even need to say this, but having a ton of home equity is a very valuable commodity. So the biggest one I think is you can use your equity as a down payment for a new house. You sell your old house, buy a new one. Well, yeah, but the other house is just as expensive. Guess what? You don't have to save for like a first time home buyer has to do today. A down payment. That's one of the reasons it's so hard to buy a house as a first time homebuyer these days. Because down payments are so much higher. You don't have to do that. If you have 40% equity in your home, 50% equity because the house is up so much, that's a huge benefit. You don't have to. You could save that money in the stock market because you're not saving for a down payment in T bills or something. Right. You could also open up a home equity line of credit or do a cash out refinance. Listen, most of the wealthy people we work with has made me realize, working with so many wealthy people has made me realize that, that rich people borrow way more than you think. I know you think like, no, you get rich because you pay off your debt. No using assets to borrow against. So you borrow against your portfolio, borrow against your house, you don't have to sell them and pay taxes. That's a huge advantage of being wealthy. So I think the intelligent use of debt, especially if it allows you to avoid selling your assets can be helpful. Obviously you could live somewhere else and rent it out or trade down, but no, home equity is not a fake amount of wealth. If you have equity there, like count it against your net worth. Definitely end of story. It's a piece of wealth, Definitely. All right, Dave's asking more questions here. What else do we got? Sorry, Dave, I lost your question. Fire it again. Give me another one, John. Let's do it. All right. How much do interest rates and mortgage term length matter if you only plan on living in the house for five to 10 years? Other Today's question. This is kind of a housing one too. What percentage should your home be paid off in terms of a percentage of your net worth when you retire? Oh, I don't know. I think I do like the idea of shooting for a paid off house when you retire. That's like the only time I think it's, I'm fine with it. Like you're not going to have any more debt payments. Pay off the house. Sure. All right, so how much do rates and mortgage term length if you only want to live in a house for five to 10 years? I love it when people define their time horizon when investing because that's a huge part of the investment process. Most people fail to consider, I don't know, rates in a mortgage term length probably don't matter that much at that short of a time horizon. Okay, so I built another mortgage tool on Claude. I just put another research analyst out of business. Thank you. AI. Let's show this here. This is a 30 year mortgage payment breakdown on $500,000 at a 6% rate. You can see most of that money is going to pay down interest. Okay. Not a lot is going to principal. In year one, you're paying more than 80% of your payments. Monthly payments go towards interest. Even by year 10, it's over 70% that's going to interest. So you're not paying that much off in principal from your monthly mortgage payments. It's a little bit, it's not much. Give me my next chart, John, just to show why a 3% mortgage I think is such a huge asset because so much more of that money goes towards paying down your principal. It's less than 60% in year one and now we're talking about less than 50% by year 10. So it's a big difference. Okay, chart off. So most of your payments go towards principal early on loan. Now here's the thing. I think what this question is really asking that they didn't ask is like three other directions that you can go. So one, should you avoid paying down your mortgage early if you don't plan on living in the house very long? Yeah, I think so. What's the point of paying it down early if you're Going to move in five years. Two, should you consider an adjustable rate mortgage? If you don't care about building equity, do you take out a five year arm, seven year ARM to match that? That rate is probably a little lower than a 30 year fixed rate mortgage. It kind of makes sense, right? And three, should you have a lower down payment on the house? Okay, this is a possibility too. So that kind of depends on the monthly payment you're comfortable with, obviously. But I guess on the one hand it's like, why do you want to buy a house in the first place if you don't really want to build any equity? Maybe you just want to make it your own. You want to live in the kind of place you want to live in, whatever. But if you don't care about building equity and you're putting down a lower down payment, you're using an arm. You're probably really just hoping for house price appreciation there. And that's kind of asking a lot because you're still going to pay the frictions. So I usually tell people, yes, seven to 10 years should be your minimum holding period for a house. I'd say if you're going to do this though, if you're going to do a lower down payment, you're going to do an arm, you're not paying down much equity, you better put your savings somewhere else then. If you don't care about putting, having your home be this form of for saving and building equity, do something else with that money then. I think that's kind of the idea. But yeah, the 15 year loan versus a 30 year loan, your payment's going to be way higher on a 15 year, obviously. And if you're going to leave after five or 10 years anyway, what's the point is my question. So, yeah. All right, we got one more, one more question and then fire away in the chat as always. All right, look at how, look at how short these questions are. I did this just so Duncan didn't ask all the short ones, so I got to do it. What's your response when someone asks what they should invest in their 401k? Okay, I think this one came into us from Twitter. I like this question because it allows me to pontificate on the process of investing. Okay. Most people just want you to tell them, put into this stock, put it into these funds, put it into that fund. Okay. And frankly, for most people in a 401k, picking a target date fund is a great starting point. Right. I'm 25 years old, I'm going to retire in 2070. What's the math in 2070? Whatever, plus or minus five years. I'm going to do the 2065 Fund or the 2075 Fund, whatever it is. And that's simple enough just to start. And that's what they default to. Right? That. That's pretty easy. So here's. I would actually answer this question, though. Okay. What's your risk? And. And people that I know in my life, my loved ones get annoyed me when I do this. But you have to. What's your risk profile and time horizon? If you're young, you have the ability to take a lot of risk. Like young people should accept a ton of equity risk. But do you have the willingness to take a lot of equity risk? That really depends on your relationship with losses and volatility. Can you handle taking a lot of risks like most people can? Some people can't. If you're older, you should probably have a more balanced portfolio, but that really depends on when you plan on spending the money and how close you are to reaching your financial goals. Like, there's a lot that goes into this. This is like the. It depends that a lot of people get annoyed with. But it's true. So my point here is you can't simply hand someone a fund or a list of funds or an asset allocation and say, here's what you should invest in. Go do it. Like, I can't offer you specific investment advice if I don't understand your goals, your risk profile, your time horizon, and your emotional makeup. And so I think this is also a great reminder of taking specific advice from talking heads in the financial media. Right. Or billionaires offering their takes on the market or securities or whatever. They don't know your goals or circumstances. How could they possibly know? So I think there are plenty of reasonable portfolios or allocations I could offer you, depending on your age. But investment success is really more about your ability to stick with a portfolio than the individual investments that make them up in the first place. So I'd say the good enough portfolio, you can stick with this vastly superior to like this perfectly optimized portfolio that you can't stick with. Okay. All right, questions from the chat. Sean, what is a better strategy? 60, 40, 50, 30, 20 YOLO into Oatley Money under a mattress or Target Date Fund taking shots at Duncan. I can see that's fair. Doesn't matter. Whatever works for you. Okay. All right, I see no more questions in here. Keep sending us your questions. All right. I managed on my own today with Wilson and myself. Duncan is gonna be gone for a couple weeks in Japan on vacation. Bill Sweet will be filling in forms of my copilot. So send us our usual Bill Tax Roth questions, anything else you want to hear from Bill and learn. We'll also bring in an expert or two to help with all your questions in the weeks ahead. Remember our email here. Askthecompoundshowmail.com thanks to everyone in the live chat as always on YouTube. Thanks for everyone for watching live on Twitter. Thanks to everyone listening on the podcast, watching on YouTube all that stuff. See you next time. Thanks.