The 3 Best Inflation Hedges

Summary

Ask The Compound – Episode Summary

Episode: "The 3 Best Inflation Hedges"

Date: July 8, 2026
Host: Ben Carlson
Co-host: Duncan Hill
Guest: Bill (Tax/Finance expert)

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Overview

This episode dives into pressing personal finance questions from listeners, mainly around inflation hedges—including the role of bonds in retirement, timing stock sales for big purchases, homeownership, down payments, and giving financial gifts to teenagers. The discussion centers on current market concerns like housing affordability for young people, and the evolving strategies for building wealth when traditional paths (like homeownership) are less accessible.

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Key Discussion Points & Insights

1. Do Retirees Own Too Many Bonds? (02:08–08:39)

• Discussion sparked by a Wall Street Journal article suggesting retirees may be over-invested in bonds. The question: Does a heavy bond allocation mean sacrificing long-term returns?
• Ben’s Take:
  • Historically, higher stock allocations (e.g., 90/10 stock/cash) do lead to higher returns, but large stock declines—especially in retirement—present risks that can't be overlooked.
  • Retirement only gives you "one shot" and you lack time, income, and additional savings to weather prolonged downturns.
  • Quote (Ben, 06:39):
    “You need to own stocks in retirement if you want to improve your standard of living or keep up with inflation. But it’s dangerous to take too much risk.”
  • 80/20 stock/cash may offer a better margin of safety than 90/10.
  • Risk tolerance is personal: Some in the chat cited being comfortable with much higher risk, but the context is key—risk in a bull market feels different than in a downturn.

2. Selling Stocks To Buy a Vacation Home—How to Time It? (08:57–16:39)

• Listener wants to know: Should you dollar-cost average out of stocks for a large purchase in 2–3 years, or just sell when ready, considering taxes?
• Insight (Bill, the tax expert):
  • Selling sooner than necessary reduces compounding and triggers taxes before you need to pay them.
  • Time value of money means keeping funds invested generally makes sense if the purchase timing is uncertain.
  • Quote (Bill, 13:31): “If you take money out of the market, you pay taxes—those dollars aren’t compounding in your account over the next three to five years.”
  • Consider matching asset duration to liability (e.g., putting money into 3–7 year bonds if purchase timing is clearer).
  • Logistical consideration: Banks count both brokerage and bank accounts for loan approval, but details vary.

3. Is Housing Still a Good Inflation Hedge for Younger Generations? (16:46–24:55)

• With housing increasingly out-of-reach for young people, the main financial asset for the middle class is less accessible. What now?
• Ben’s Argument:
  • For most, the three best inflation hedges are:
    1. A good, growing job
    2. A home with a 30-year fixed mortgage
    3. Stocks for the long run
  • Quote (Ben, 18:10):
    “The top 10% owns 87% of the stock market. The middle class, the bottom 90%, has the vast majority of their wealth in housing.”
  • Rise of stock market participation: More young people investing in stocks as housing becomes prohibitive.
• Duncan’s Counterpoint:
  • There’s more to life than spreadsheets—ownership carries real psychological value.
• Bill weighs in:
  • Over time, stocks usually outperform housing, but societal expectations (homeownership = success), and maintenance/ancillary costs complicate the “spreadsheet” case.
  • Demographics and declining household formation may shift the landscape further.
• Societal impact:
  • Quote (Ben, 24:55):
    “The psychic income that you get from owning a home, you can’t put a price on that.”

4. Down Payments—How Much of Your Liquid Net Worth? (25:16–32:02)

• Listener asks what percentage of liquid assets is appropriate for a first home down payment, and when is more than 20% advisable?
• Key Points:
  • 20% down isn’t a hard and fast rule—tradeoff between lower monthly payments and maintaining flexibility/cash buffer.
  • Smaller down payment (even 5–10%) is reasonable for long-term owners (5–7 year horizon) if it preserves emergency savings or flexibility.
  • Quote (Ben, 27:09):
    “You can always pay down the principal later. It’s much harder to pull the money out if you need it.”
  • Leverage is unique to real estate—banks lend for homes under government programs.
  • Maintenance, taxes, and risk of being underwater with a small down payment are realities.
  • Bill: Typically, put as little down as possible (unless facing high rates), for maximum flexibility.
  • PMI (private mortgage insurance) is relatively minor if it gets you into a home—view it as useful insurance rather than deadweight.

5. Financial Gifts for a Teenager—What’s Best? (32:12–38:44)

• Listener (Nicole) wants to give a 16-year-old $500: stocks, custodial brokerage, savings, or something else?
• Ben’s Suggestion:
  • Split: $250 into an index fund, $250 let the teen pick stocks for engagement.
  • If possible, open a Roth IRA (requires earned income).
  • Institute a “match” to foster investing habits (e.g., 20% match for every dollar saved).
  • Quote (Ben, 36:44): “You are their employer going forward...every dollar you put in, I’m putting in 20 cents—force the saving habit.”
• Bill’s Take:
  • Nothing wrong with literal cash—what’s most valuable is using the moment to open a conversation about investing and money.
  • Use the gift as a teaching tool: sit down, discuss account options, how investing works, etc. Opening “the door” is the most important step.

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Notable Quotes & Moments

• Buffett Wisdom:
  “Why would you risk what you need and have for what you don’t need if you’re already rich?” — Ben quoting Warren Buffett, 06:39
• On the Value of Flexibility:
  “You can always pay down the principal later. It’s much harder to pull the money out if you need it.” — Ben, 27:09
• Psychic Income from Homeownership:
  “There’s the psychic income that you get from owning a home. You can’t put a price on that.” — Ben, 24:55
• On Mortgage Leverage:
  "It's one of the few places where you can actually apply leverage...and the primary reason is the federal government backstops all of this." — Bill, 28:41
• On Teaching Teens Finance:
  “Open the door, right? That’s what people need—a lot of times, just somebody to kind of open the door.” — Bill, 37:54

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Important Timestamps

• 02:08–08:39: Bonds vs. stocks in retirement portfolios
• 08:57–16:39: Timing stock sales for a property purchase, compounding, and tax efficiency
• 16:46–24:55: Is housing still a good inflation hedge for young people? Shifts in wealth-building
• 25:16–32:02: Down payment strategies and the flexibility/PMI tradeoff
• 32:12–38:44: Best financial gifts for teenagers; fostering investing habits

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Tone & Language

• Patient, educational, and conversational with some humor and real-world anecdotes
• Ben and Duncan keep the mood light, occasionally poking fun at industry jargon and each other
• The hosts consistently ground financial advice in personal experience and behavioral realities, not just “spreadsheet logic”

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Takeaways

• Inflation hedging isn’t just about assets, but about strategy, flexibility, and personal risk tolerance.
• The traditional path to middle class wealth—buying a home—is increasingly challenged, but investing remains a powerful alternative.
• In complex decisions, like timing a big expenditure or choosing a portfolio in retirement, behavioral factors and margins of safety are as important as historical averages.
• For young or first-time investors, simplicity and habit-building trump chasing perfect strategies.

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For further questions, tune in, send your queries to askthecompoundshowmail.com, and check out the merchandise at idontshop.com.

Transcript

[A]

Welcome to Ask the Compound, the show where you ask and we answer. I'm Ben Carlson. Housing affordability is making it much harder for young people to afford buying a house today. This is a problem because a home tends to be by far the biggest financial asset for most middle class households. It's a form of forced savings. Right. So what happens to the millions of young people who are now effectively priced out of the housing market? How do they build wealth? We're going to answer this question and more on the show today. Let's do it. Our email here is askthecompoundshowmail.com Duncan, how long have we been doing this show for? I don't even know, 20. 20.

[B]

Today is 230 episodes, I think.

[A]

Okay. 230 episodes of the show. 230 weeks. We have yet to ever have a week where we didn't get at least a handful of questions. Yeah, they keep pouring in. So even the people who don't get their questions answered. We appreciate you. We love the questions. We keep sending them.

[B]

We keep them in a doc.

[A]

We do. I have a doc full of questions. And sometimes our advisors, our financial advisors go through those questions to think, see, like what are people asking about these days? Yeah, it's good to keep your finger on the pulse. As always, all of our questions come straight from the compound audience on today's show answering questions about do retirees own too many bonds? How to time the sale of your. Your stocks to buy a vacation home? Is housing still a good inflation hedge? How should you, how big your down payment be on a house? And finally, what financial gifts can you give a 16 year old? Today's show is sponsored by the compound merch at I don't shop.com. we got t shirts there. We got towels. We have hats, lots of hats. Dad hats, trucker hats. What do you call Josh's hat? The flat brimmed hat. Right. It's too big for my head. I can't do the flat brim. Yeah, I have one of them.

[B]

I can't wear them.

[A]

My kids were using the compound towels this week for the fourth.

[B]

Nice.

[A]

Which we got a lot of compliments on. So I don't shop dot com. Oh, Duncan's got a lot of them. I have, I've gifted the trucker hat. The compound trucker hat to many friends and I see people wearing it. They wear it all the time. It's a great hat.

[B]

Yeah, it's a bestseller.

[C]

We've restocked.

[A]

I don't shop dot com for all of your compound merch needs. All right, all right, we got a lot of questions. Let's do it.

[B]

Yeah, let's jump right in. All right. Up first today we've got one from. Who is this one from? I don't see. Hey, I'd like your opinion on a recent Wall Street Journal article titled you'd're probably over invested in bonds. My question focuses on the following paragraph from the article. Plenty of people should hold bonds. If you are retired and subsisting on your investment income or if you would have to sell a significant chunk of your investments to cover living expenses in a bad year, you should have more in high quality bonds. But that probably isn't true for two large groups. The 6 million to 7 million Americans with $1 million or more in investable assets and and other households with more than $100,000 in investable assets whose non investment income covers their cost of living. Part 2. My wife and I are retired and in our early 70s. We fit this description. We have traditionally had a 8020 stock cash split and haven't held bonds. What do you think of Mr. Posen's conclusions? 8020 stocks to cash? No, not even bonds.

[A]

We've been getting lots of questions from retirees on how to handle their fixed income allocation in retirement. Remember we got the one a couple weeks ago. Hey, should I have 100% in stocks in retirement? Can I do that? So this is something people are thinking a lot about. And the idea here. I read the article and I read it. We actually got a couple questions on this article. So people are thinking about it. The idea is 60, 40 gives up way too much on the upside. So he's saying 90 stocks, 10 cash. All right, now here's the big reason he gives for this. Stock declines are relatively infrequent and typically are followed by increases or recurring pattern over the past 60 years. Fair. By my count there have been 39 double digit stock market corrections on the S&P 500 since 1950. That's one every two years on average. Let's see, chart on this is all of those corrections, all the double digit corrections. You can see the bear markets are in red there. Why do we call a bear market 20% down or more? I don't know. There's been handful of 19% and change. We don't call those bear markets. Why not? I don't know. I feel we could do the SNL George Washington bid on that. A bear market is a 20% decline. Why? I don't know. The average drawdown for The S&P 500 is kind of funny. The average drawdown over these 39 double digit drawdowns that that go from 10% to almost 60% is 20%. Exactly. Kind of funny. The average peak to trough decline took 193 days on average. Chart off. So that's not the end of the world, right? That's what he's saying. In most cases if you held a 9010 portfolio in retirement you'd probably be fine and you would end up with way more money too. That's his biggest point. Like you're leaving money on the table by not having more money in stocks. Here's the problem. You have a much smaller margin of safety in retirement. No more income from your job, not nearly as much time to wait out a painful bear market and no new savings to buy stocks when they're down. That those are three big things, right? Retirement is a different ball game. So you don't get to run your retirement glide path through like a Monte Carlo simulation where you get 10,000 paths and I'm going to pick the best one that looks the best. You get one shot at it. So if you get hit with a long bare market at the wrong time, you're screwed. Second turn on. This is just the bare markets, right? Just the red, just since 1950. 20% decline or worse. The A average is about 35% drawdown lasting 381 days. Peak to trough. Okay. The longest one on here you can see is the.com bubble. 929 days that 20002002 bear market after the dot com bubble blew up. To reiterate, these numbers are peak to trough. They don't include the ramp up just to break even. So that's even longer obviously. Chart off. The question is can a 10% allocation in money markets see you through an extended bear market like that? I guess it depends how much you're spending out of your portfolio. Here's the other piece to remember though when building a portfolio in retirement. The portfolio management piece. If you spend that piece, the 10% to see you through. So you don't sell stocks down now, you have to replenish it because now you're 100% in stocks. If you sold that 10% to see you through a really long bear market you need to replenish. So now you're having to sell stocks potentially when they're down to replenish your cash piece. So I think I understand the logic here. A 9010 portfolio has a higher expected return than 6040 or 7030 or 8020 and I agree with the author that retirees now have much longer to grow their portfolio and try to beat inflation over 20 years. 20, 30 years. Right. It's a longer retirement. People are living longer. So people probably need more equity exposure than the textbooks would tell you. I just think it's dangerous to take on too much risk at the worst possible time when you don't have more money to put to work in the market or wait at a prolonged bear market. And I quote Warren Buffett, okay. As I've been apt to do before, he told this to a bunch of college students once. He said, anyone who has become rich twice is dumb. Why would you risk what you need and have for what you don't need if you're already rich? There's no upside to taking a lot more risk. But there is disgrace in the downside. So my point is you need to own stocks in retirement if you want to improve your standard of living or keep up with inflation. But it's dangerous to take too much risk. And I actually think our reader here, 80, 20. I'd be way more comfortable with that than 90 10. I mean, listen, it depends how much you have. He says a million dollars or more. I think for some people, 90 10, that's a lot. 80, 20 would make me feel a little bit better. If you're spending 4% rule. Right. That's five years of spending. That makes me. That gives you a much bigger margin of safety than 90 10. Anyone in the chat. Cliff, Dave, could you guys handle 9010 in retirement? I bet a lot of the people here would say yes. But this is also a bull market story. You don't see this in a bear market ever. No one says you need 9010 in a bear market. Nope, no one says that.

[B]

Is it also bad that I'm so jaded from being so heavily in tech stocks and microcaps that 35% down doesn't. That's just like a Thursday or something, you know, that's not.

[A]

Yeah, well, what if you had to spend the money of your profile? That's. That's, that's the different ballgame.

[B]

Yeah, yeah. I'm talking brokerage account, not. Not retirement.

[A]

Yeah, it's totally different. Someone in the chat says they're pedal of metal. 100 0, 100. Cliff says 9010 if he had $5 million. Dave says he's 100% in stocks, but he has some dividends. It looks like.

[B]

Anyone. 130%. Right.

[A]

That'll be you someday. All right. We have people who have a High risk tolerance. Listen, I personally do, too, and I think. I just think your risk tolerance changes as you get closer to that day. But we shall see.

[B]

I think I even have a little bit of bonds in my 401k. I think I'm 5 or 10%.

[A]

I just like the idea of having a margin of safety in retirement. And 10% might be enough for people, depending on how much they spend. I think for most people it's probably not enough. Another question.

[B]

Okay, up next, we got one from Will. I know the advice is to lump some into the market. However, I'm taking gains off the table from a taxable brokerage account and buying a vacation property for my family. It could be as long as three years before I'm serious about it. Let's say for the sake of simple numbers that I have $100,000 in VT and I want to get $50,000 out, but I have no timeline. Does it ever make sense to dollar cost, average out or just sell it all when I'm ready to make the large purchase? Capital gains is a question. Long and short holdings and tax. Dragon. I like this one.

[A]

First of all, Will, good on you. Best decision I ever made was buying a vacation property for my family. Let's bring in our tax guy here because there's investment implications and taxes here.

[C]

Taxation with representation today, gentlemen.

[A]

Yeah. Mr. Ralph Ira himself is here. All right, Bill, the way that I see it, the math would tell you buy fast, sell slow. Right? Because the market generally goes up. Correct. Lump sum gives you max certainty. Right? Like that on the outside, like taking it at the very end, like. Or if you did it right now. But does the calculus change when you have a goal in mind in terms of taxes? Like, should the goal knowing, hey, I have the 50k now, should that change how you think about taxes? And just saying, hey, I would rather have the certainty than thinking like, how do you think about this in terms of taxes in terms of the lump sum versus dollar cost?

[C]

Averaging out the bird in hand, huh?

[A]

Yes.

[B]

Well.

[C]

Well, Ben, let me ask you. Do you believe in the time value of money?

[A]

I do. That's why I invest my capital.

[C]

I do, too. So there's this concept in physics that I'd like to relate to. It's called time dilation. But more accurately, it's a reality that the rate of time is not constant.

[A]

Is this an interstellar thing?

[C]

Yes, it is. That's where I was going Exactly. Is Matthew McConaughey. But time is relative. The faster you go, the slower time moves on a Relative basis. And the slower you move, the faster time is on a relative basis. To illustrate this, I prepared a chart. And this is from a famous twin study, right? I have a hypothetical twin study that if you have two twins and one of them goes roughly 90% of the speed of light, it takes them about 15 years to go a couple of light years, 16, 17 light years. And they come back and the twin on Earth is age 35 years, whereas the twin in space is age 15 years.

[A]

I gotta tell you, I read all about the speed of light in Project Hail Mary. Like the author explained it perfectly. And I still can't wrap my head around it.

[C]

Right.

[A]

Because still don't get it.

[C]

It's not intuitive. That's where I'm going at that. Like the speed of light is constant. So Dan, can we chart on. It's actually more complex than that. Space and time are actually the same thing. Space, time, just by large physical objects distort both space and time.

[A]

If you remember, this picture looks like it's from weird science in 1984.

[C]

Exactly. Anne Hathaway on the wave planet. Right? And she's stuck there. And for every minute on. On that planet, seven years goes by on Earth. But so more accurately, the speed of light is a spacetime exchange rate.

[B]

How many. I can hear the viewers clicking off.

[C]

Can you exchange per unit of time? But where I'm going with this, the point is that time has a money value. That time is money. It's literally the same thing. And can we chart my second chart? The value of the dollar is not constant. And I think this is where I'm going conceptually. So people don't quite understand this. It's not intuitive. But like the time, what a basket of goods and services. We expect to cost more money over time. Therefore, time is literally money. And unlike the space time rate, which is constant, we have a name, Ben, for the exchange rate of money and time. It's called interest. Right. And we experience this every day. So if I'm making a $50,000 distribution, what logic is there? Can we chart off to take the money out of the market? Right. Uncertain when we're going to buy the property. Could be three years, could be five, could be 10. And basically slow that that exchange rate.

[A]

Right.

[C]

I'm basically trading. I'm trading dollars that are invested that are growing for something that's constant now that will ultimately start to lose value. And that doesn't make any sense.

[A]

How about we try to match the li. The asset with a liability. So we say, hey, I'M going to put my money in a three to seven year bond fund because that's the time I'm going to potentially buy this. And then at least I try to keep up with the inflation rate because the bond market is pretty good about that, forecasting inflation and kind of. Right. I'm earning 4% of my money right now instead of leaving it in stocks or something. That to me makes more sense.

[C]

Yeah, you can get certain outcome and that's what differentiates fixed income, right. It has a limited duration versus stocks or an infinite duration. But Ben, I'll tell you the reason why. VT is up 20% this past year, right? So therefore that $100,000 theoretical account is $50,000 distribution.

[B]

VT, for those that don't know, is just the world index, right?

[A]

Vanguard All World.

[C]

Yep, that's correct. It's done tremendous in the past year and has done even better over the last five years and 10 years. But Ben, the problem is if you take money out of the market, you do what, what happens when you, when you realize those gains, pay the taxes, you generate a tax bill. And so you would not want to do that, in my view, three years in advance because that means those dollars are not going to be, they're going to be at the irs. They're not compounding in your account over the next three to five years. That would be. My primary argument is that conceptually it would make sense, right? I agree. In a perfect world, if it was an IRA and there wasn't any tax, great. You match your asset with your liability, you get the duration, you lock that all in. But I don't think it makes any sense to pay taxes now on something that I might do in the future. Generally, Ben, I would argue that's not a great move because generally stock markets to go up and I wouldn't pay a sale. Now what I would do is think about it, the year of sale, you would want to make that happen like in January, January of 2027 for a purchase because then you can push the taxes theoretically all the way out until April of 2028. Right. You have 15 months, a 15 month duration, time value, money.

[A]

And again and again and again. I like that. Giving yourself a 15 month window to plan for taxes. That makes sense.

[B]

What if they have some system or they develop, you know, some framework and say my, my stocks that have doubled, I'm going to go ahead and start trimming, you know, something like that. Would that, would that make it more okay for you? If they wanted to start trimming right now, sure, Yeah.

[C]

I just. I don't know. I just wouldn't pay taxes based on something I might do in the future. That doesn't make a ton of sense to me.

[A]

As someone who likes taking risk, I like the bird in the hand theory. I would rather know that money's there because if I have to pounce on a property, I agree with you, like, hey, $50,000 an hour for a down payment in three to five years might not be enough. Maybe you need 60 then, because the price of the house has gone up. If I need to pounce soon, I want to make sure that money's there. And obviously there's time. In between buying a house and signing the paperwork and getting like you, there is time. So I don't, I really don't mind having the money and putting it in. In something that's relatively safe, knowing it's there even though you're taking the compounding off the table.

[B]

That's my other question on this is if you're trying to get pre approved, does a bank care about how much you have in a brokerage versus your bank? They want to see money in your bank account. Probably, right?

[A]

I think they're probably pretty similar.

[B]

Okay, right. Yeah.

[C]

Assets are assets. Yeah, they total all the assets. Duncan.

[A]

I mean, I guess the point here is that there is no right answer.

[B]

I just didn't know if the bank was like, I mean, it could be cut in half next week. We don't care about your brokerage account. You know, I didn't know if they. They cared.

[A]

I don't think the bank is making stock market forecasts.

[C]

Yeah, no, typically. Yeah, they look at a number and that's the number.

[B]

All right, Good to know.

[A]

Yeah, but if they're looking at. Duncan, if you're filling out forms and you have all your money in tqqq, yeah, they're going to like, this guy's going to.

[B]

I mean. Yeah, that's kind of what I'm saying. What if, what if you have like almost nothing in your bank account because you've invested every dollar in brokerage, you've

[C]

done really well over the last few years.

[B]

Are they going to care about that? Yeah, no, it's. It has worked as a strategy, but yeah, I'm just wondering if they care about that. Yeah.

[C]

Since 1776. So, yeah, underwriters, please jump in the

[A]

chat and yeah, when they, when they see oatly on your paperwork, a big alarm goes off, you know, don't land at this guy.

[C]

Way too woke.

[B]

Had some good green days recently. Got to tell you.

[A]

All right, next question.

[B]

Question three is from Hugh. Given how different the current real estate paradigm is. That's a good word. Paradigm is from the late 20th century.

[A]

Should not be spelled like that though, right?

[B]

I kind of like it. It feels really like refined.

[A]

Paradigm feels nice.

[B]

Real estate paradigm is from the late 20th century. How do you view the massive opportunity cost of housing for Gen Z and millennials? We're trying to match the wealth creation curves of past generations. Not trying to question the main point from your book. You did make the case for the value of housing versus inflation in the circumstances you described. Just exploring this one avenue of thought about housing that I think deserves some attention. It sounds like you're beating around the bush. Rather than calling you out.

[A]

Well, well, no, I cut this question down. We often cut this question down because we don't want Duncan to have to read a whole book. So there's a whole big diatribe before because there is a chapter in my book, the three best hedges against inflation. Three best inflation hedges. Okay, let me read them to you. And he's the guy talking about Bill. You can let me know what you think. The three best hedges against inflation for most people are good job, homeownership and stocks for the long run. Okay, now I said basically a good job that you can increase your income. Right? That's a good hedging. It's inflation. A home with a 30 year fixed rate mortgage because I think that allows you to lock in. And housing is a good hedge against inflation and then stocks for the long run. And Hugh here is basically saying let's assume many young people are boxed out of the housing market. They can't afford anymore. It's too unaffordable. What happens to housing being their biggest wealth building machine? Like how does that impact young people? And I think it's a legitimate worry. Do a chart on here of chartcad. Matt just updated this for me today. So this shows stock and housing ownership. The Fed has a great data on this. Now you see that the top 1%, the top, really the top 10% has most of their assets, financial assets in stocks. The middle class, the upper middle class, the lower middle class, really the bottom 90% has the vast majority of their financial assets in housing. The top 10% owns 87% of the stock market. So the middle class really own. That's the house is what they're banking on. And it's, it's buying a home is a home. It's a form of forced savings. You build equity by Paying down your mortgage and have some price appreciation. Okay, chart off, please. So that's the question, is, are, are there going to be young people that fall behind financially? And unfortunately, it's going to happen to certain people because we simply, we didn't build enough houses. But the silver lining here, Duncan, we've talked about this, you and me. Many young people have turned from the housing market to the stock market. There's more young people buying stocks than ever. Daniel Chardon. The value of money in stocks for people under the age of 40 has tripled since 2020. Look at this.

[C]

Wow, that's amazing.

[A]

That is a little off the long term trend line. Right? The Wall Street Journal had an article a few weeks ago that said the share of IRA accounts held by those under 30 has nearly doubled in the last 10 years. Okay, so way more people. The share of people under 40, the share of stocks that they own, it's still relatively low compared to older people, obviously, but it's doubled since 2020. So a lot of young people who've decided, I can't afford a home, I don't want to buy a home. It's too expensive. Mortgage rates are too high. Housing prices are too high. Instead of saving for down payment, instead of paying for property taxes and all the ancillary costs that come with homeownership bill, you and I know what they are. I just had to guess. What. We had moles in our garden this week.

[C]

Oh, my God.

[A]

Had to pay for a mole remover. Wow.

[C]

Did you call the CIA? How do you get rid of moles?

[A]

I gotcha. That was a good one. So I'm taking all those ancillary costs and it's cheaper in many big cities to rent than it is to buy. And they say, I'm going to buy stocks instead. You could make the claim that, that young people who are forsaking housing and using that money to invest in the stock market are going to come out better in the future than if they would have bought a house. Right. From a financial perspective.

[B]

Can I just come in off the top rope on this though, for a second and just say, but this is literally living in a spreadsheet like you, you tell people not to.

[A]

Yes, I was getting there, Duncan. So because I said the third, the third inflation hedge is buying stocks for the long run. So if, if young people are starting to invest in the stock market earlier, and all the data says that they are earlier than previous generations, that means compounding will lead to even larger portfolios for them in the future. If they don't interrupt the compounding. Right. The question is, will young people be happy about this? Probably not, because society says no, when you're young, the next step is to buy a home. So you still get the inflation hedge. And I would argue you get a much better inflation hedge in the stock market over the long run that are much better returns than in the housing market. But is this a good outcome? What say you, Bill?

[C]

Yeah, I don't know. I look back on it, I think I can say with certainly what happened, Ben, and I would agree with you on any, just about any timeline. Like you can see that US stocks have outperformed housing, right? So like. But I think that's not the question that, you know, Hugh was asking. He was just saying, like, what, what happens to the wealth creation curve? And Ben, I really like your point that like, ultimately instead of putting money into real estate, right, which is what probably people did in the 80s and 90s, household formation was a lot higher, people a lot more mobile, right? So you could move around back then and it was, was not as expensive on a relative basis. If those dollars are going to the market and we do expect a higher return over time, that probably will increase the wealth inflation curve or more accurately, they'll have more assets like when, when time comes. But yeah, Ben, the thing I keep thinking about was kind of what you zeroed in on, which is the actual cost of, of real estate, right? And that ultimately it's, it's. You're not paying rent, right? You're paying a mort. Great. You're paying real estate taxes, you're paying the mortgage interest, you're paying insurance, the whole ball of wax. And ultimately nobody ever tells you. And I don't think the data accurately capture the maintenance costs and the toilet's breaking and the moles that pop up in your garden and eat all of your plants and I'm sure cut your power lines in the middle of the night. So yeah, Ben, I don't know, but I think the net will be interesting and we'll go through a cycle. I'm sure you know too, what is happening with demographics, right? There's less babies being born on a percentage basis than at any time in U.S. history. And that, that will have an impact at some point because there'll be less household formation. I do wonder what will, what, what impact will that have on, on housing as well? I, I don't know because the future is unwritten. But I, I don't think you can look at the past and necessarily just predict that this is all going to happen on, on repeat again.

[B]

Well, that's the chicken egg thing too, Right. People don't want to have kids that are renting in a small apartment in a city. Right. So if they can't afford houses, they're going to put off having kids. That's just the way it is.

[C]

Yeah. And I think we are seeing it. It is all local. Right. So it really all depends on the local market. But I had a client who bought a rental property in Nashville back in 2022, 2023 timeframe, and that market's been so hot.

[A]

Right.

[C]

We had Handsome Dick Friedman, one of our great investment advisors, moved down to hang out with Taylor Hollis down there recently. And it's a great, great state, but he, he took a bath on it. Our guy sold the property at a pretty big loss this, this week to, to kind of move along. So I think.

[A]

Because they actually build housing. They build housing there.

[C]

I think that's why. And if you look Austin, Texas, like they're, they're down 20 or 30% over where they were on a relative basis five, six years ago. So, yeah, I think it all is local and I don't think we can make broad proclamations. But Ben, I like your point about if the dollars are making way to the stock market, I think that will have a net positive effect.

[A]

I wonder if it, if it means people are going to. There's going to be a lot of these people who are buying a house in their 40s for the first time. Right. And we are. Some of the data says that it's not as bad as people say. But yeah, the people are pushing it out, obviously. Yes. I think the societal cost here is higher than.

[B]

It's a political nightmare. Because I can tell you, speaking from experience and just the zeitgeist, young people are very resentful of the fact that they can't buy homes and it's not going to go well in the future. And I think most millennials and most Gen Z would trade their brokerage account for a nice house in a heartbeat.

[A]

There's the psychic income that you get from owning a home. You can't put a price on that. Dave asked when Taylor's going to be coming back and ask the compound. Listen, she was on maternity leave for a while and so now she's back in the swing of.

[C]

Yeah, she's back. She's back working with clients every day. So, yeah, she'll, she'll.

[A]

We have gotten a lot of estate planning questions lately, so we'll, we'll have Taylor on for sure. All right, let's do another question.

[B]

Okay. Up next, we got one from Josh. Hi, guys. Big fan of the show. What percentage of your liquid net worth would. Would you be comfortable spending on a down payment for your first home? As a first time home buyer, when does it make sense to put more than 20% down with the goal of reducing monthly payments? I'm 27 and plan to buy a house in the next five years. I live in a very high cost of living city and plan to buy in a medium or high cost of living city. I'll likely switch jobs and take a pay cut from $400,000 to $250,000. Should I save up for a sizable down payment to buy our ideal house and make monthly payments more manageable on the lower income and. Or should we adjust our expectations and buy a more affordable place based on the future lower income?

[A]

Duncan, that was a pro how you handled all those acronyms. Yeah. Wow. Nailed it.

[B]

Yeah. Muddled 30.

[C]

It's like you do this for a living.

[A]

Good question. Some of the questions I would ask first is like, how much do you have in savings? Like, what's Your financial backstop? 20% down is not a rule of thumb. I don't know how it got to that point. Just like a bear market, I guess. 20% is just the line of sandwich. Yeah, you're right. Yeah, the PMI. But that's for my first house, I did 5% down because that's all we could afford at the time. And then we had to pay the pmi. And so I did to the point where. Or maybe they did a HELOC for the. Or a home equity line for the other end of it. Something. There was some other piece we had to do to get to that point. So I get that. I'd say as long as you plan on living for the house for a minimum of five to seven years, a smaller down payment is not the end of the world. Right. I think it'll be okay. Personally, I would go for a smaller down payment even if it means a slightly higher monthly payment just for the fact that you're going to a smaller income. I would prefer the flexibility over a lower monthly payment of having that backstop of cash. You can always pay down the principal later. Right. So it's much harder to pull the money out if you need it. That's kind of where I land. And then of course, the big thing is you always have to run the numbers. So I did a little. My friend Claude, the little French guy keeping my Computer.

[C]

He wears a beret, croissant.

[A]

So I said, okay. He's gonna be in a kind of a high cost of living city. I said, $650,000 house, 6.5% mortgages. Right? Now, I looked at the down payment from 5 to 30% and what that would do to your monthly payment. So if we did 20, if you go from a 20% down payment to a 5% down payment, that's like a $600 difference in your monthly payment. 20% to 10%. We're talking $400 difference. And then going from 20% to 30%, that's, you know, $400 as well. $500, something like that. 400, I think. So there's a difference. But you're also. It's the opportunity cost of that capital of putting 30% down on a house. I just think I would be. Especially since you're going to a lower salary. I would. I think the flexibility is a way you're moving. You're, you know, who knows what the cost of moving are going to a lower salary, the cost of living. You're gonna have to get used to it in a new place. I would be very careful about putting too much down on this house, given your circumstances.

[C]

Yeah, Ben, I would totally agree. The flexibility is huge. The down payment for me to be as little as possible for Josh Duncan, have you ever walked into a bank and asked to borrow $350,000? What do they tell you?

[B]

I have not.

[C]

Yeah. But you know what you can do that for when you buy a house. Right. It's one of the few places where you can actually apply leverage in the market. Right. As a regular homeowner. And the primary reason is the federal government backstops all of this. I don't know if you guys all know that, but, like, it's just a giant vacuum cleaner, Fannie Mae and Freddie Mac that kind of suck in all these loans. And that's why the banks do it. They get a fee, basically for creating. And it's one of the few places where you can apply leverage and basically take a liability against that asset, then you own the asset. Ben, I like your rule of thumb. I think five to seven years is roughly the payoff, to reference the prior question. You buy a property In Nashville in 2022, you're taking a loss when you sell it now. Right. It does take time to mature, and flexibility is huge. You can always pay the loan off early. Right. The bank will take your money at any time. It's one of the cool things.

[A]

Yes. Principal Only payments. It's pretty easy.

[C]

Exactly, exactly. But it's somewhat difficult, particularly if your market value can fluctuate up, down, left, right. And it certainly did in 0708 09. You had decreases of 30 or 40% depending on what market you are to get the money back out. So I've always looked at it as a one way street. Anytime a client has said, hey, should I be paying off my mortgage early? My general answer is no, unless you're having just some exorbitant interest rate in the 7, 8, 9, 10%. So Josh, I would go as low as possible.

[A]

Yeah, I think you and I are more comfortable with housing market debt.

[C]

For sure.

[A]

I borrowed a lot of money when it was a 3%. I wish I would have borrowed more.

[C]

Yeah. Well, obviously back to truck up, right? You go back to 20, 21. Yeah.

[B]

I think a lot of people need to hear you guys discussing this, especially younger people, because I think a lot of people think not just that you have to have 20% down, but that it means you can't afford a house if you can't get 20%. You know what I mean?

[A]

So, oh again, you could be underwater on a home if you put only 5 or 10% down if the price goes because of the leverage. Right. You could be underwatering your down payment really quickly. The question is how long you own the house for. That's why I think you need to have a longer time horizon to own it.

[C]

Yeah, longer time horizon to lower down work. And I think that's what leads to, in my opinion, the misperception that people think that housing outperforms just about any other asset class because they're comparing it over usually long time periods. Right. People, I think the median time you spend in a, in a house in the US is like seven and a half years. And if you look at any seven half year time period, usually you're going to do better off even in bonds a lot of the time, but certainly in stocks. But regardless of that argument, it's more of the fact that you can't apply this type of leverage somewhere else. Right. And so it really becomes down to what you can afford. Right. And it's less about like, it's sort of like that trick they play at the, at the car dealer. They want to talk you to monthly payment. Right. Not focus on the sticker price. What's the price of the vehicle that you're buying? What's the price of the house? Ultimately that's the first and only question. And then you can figure out how to finance it. And this is a financing question.

[A]

So the double MVP in the chat on YouTube says, as a young person, 20% seems like the bare minimum, but mainly because that makes the monthly payments affordable.

[C]

That's right.

[A]

That's true. You have to figure out how the monthly payments that work for you. That's.

[C]

Yep.

[A]

That is the thing that matters at the end of the day.

[C]

Yeah. And then the having cash in the balance sheet.

[A]

Right.

[C]

If you have some dollars saved, that allows you then to survive that decrease in work. If your spouse loses a job, if the real estate market suffers for a little bit, like it did for my friend in Nashville, he's got to put money in to get out of the property, and that stinks. And those are conversations you don't usually have with people because nobody's bragging about how they lost 50 or $70,000 on a piece of property.

[A]

Right.

[C]

They're only telling you the success stories about when they won. So, yeah, the information environment is very asymmetric.

[A]

Duncan, what would you be comfortable with for down payment?

[B]

For down payment, percentage wise?

[A]

Yeah.

[B]

I mean, 10%, I think. Yeah, 10 or 15 minimum. But I mean, yeah, 20, 20 feels a lot better not having the PMI. To me, that's just a mental block.

[A]

PMI is very. PMI is pretty small, though. Just for a couple hundred bucks a month.

[B]

It feels like a penalty.

[A]

It feels like a waste. I agree. It feels like a waste. Yeah.

[C]

It's insurance. If you don't have any to pay for an insurance, it's like car insurance, you know, if you don't use it, that's great, that's good news. Same thing for the life insurance, too. I hope everybody lives a long life. Ben. For me, it's zero. Like one option for anybody that's open. You know, enlist in the US Armed Services, spend four years, get a VA loan. You can basically buy a house without any money down. The VA will come in and guarantee it for a small fee. So there are. Duncan, to your point, there are other options. I'm not trying to advocate for enlistment, but there are other options to purchase real estate.

[B]

Some military do podcasts.

[C]

I hope not. I hope they're focused on what's going on in Iran and protecting our country and not talking to each other.

[B]

John Carlo of a chat says, what's the advantage of having banks be the middleman when the government does it all?

[C]

Anyways, this is a great question. Yeah. Private public.

[A]

You want the government to be issuing mortgage loans?

[B]

Well, Dave Airey says because we privatize gains and socialize losses for banks.

[C]

I mean, he is very, very accurate with that. And if you go, gentlemen, we've talked about this in the past, but if you go to other countries, you look at Canada, if you look at Germany, there's no 30 year loans. They don't exist because there's no government backstop there to allow this to happen. Everything is variable rate and usually they're five to seven year amortization. And if you think the price of real estate in the US is bad, just go to Vancouver, Right? Go take a look at Berlin.

[A]

When there's a financial crisis, Duncan, we need someone to blame. Not the politicians, it's the bankers.

[C]

All right, we need to blame Dave Airey for dropping facts on us in the chat.

[B]

Also speaking of Dave's, Dave Ramsey I think is the one that says you should do a 15 year mortgage, right?

[C]

Sure, if you can afford it, that's great, Wonderful.

[B]

Yeah, I guess I'm not, I don't know exactly all of his thinking behind that, but yeah, I guess just not having as much debt. Right.

[C]

Leverage cuts both ways. Yeah. Buy what you can afford.

[A]

Disagree. Next question.

[B]

Okay, up next, up next we've got an in house question from yesterday's birthday girl, Nicole Dan.

[A]

She loved, she, Nicole leveraged her birthday to get a question on the show.

[B]

She did, she reached out.

[C]

She, she works for this guys, you know, she deserves it.

[B]

She reached out and asked if we could do this one. If you had $500 to gift a 16 year old, would you buy them stock, open a custodial brokerage account, contribute to a savings account or do something else entirely?

[A]

Listen, first of all, I love the idea because this is the kind of gift that this 16 year old is absolutely not going to appreciate in the moment. But 20 years from now they're going to, they're certainly going to appreciate it. Okay, first of all, the, the custodial brokerage accounts have the worst names in history. What is it? An UTMA and ugma.

[C]

Ugma, ugma.

[A]

We couldn't do any better than that.

[C]

Yeah, yeah, yeah.

[A]

I like the idea of helping them pick a stock in some way. So if it has to be one of those custodial brokerage account, obviously Bill, you would, I'm sure you have thought about this. A Roth would be better. So if they have a job, you can help them open a Roth. If they have earned income, that's the only rule. Right. They can open a Roth. A roth at age 16 would be fantastic.

[C]

Amen.

[A]

Right. So hopefully they have W2 income.

[B]

What if they like mow mow your lawn or something?

[C]

Yeah, or self employment income. Yeah, yeah. I mean, they report it, right? You guys might. You guys might think I'm lying, but not everybody reports those gigs to the irs. It's possible.

[A]

I'm just saying I'm shocked. Here's the way that I would break. First of all, don't do a savings account. That's really boring. That's what I did as a teenager when I had a job. I think I've told this story before. My very first investment, even before Target Date Fund. I bought a CD when I was like 16 years old. I took all the savings that I made for my first job as a busboy and I put $5,000 into a CD. And then 18 months later, I got like $5,200. Whatever it was. I can't remember what the rate was. Probably 5 or 6%. That's really boring. I would say, here's what I would do with the $500. If you. Whether it's a Roth or one of those utmas or ugmas, however you open it, $250 in index fund. $250 and let them pick some stocks. Let them pick four or five stocks. Let them get interested in companies, study a little more, be entertained, whatever. And then here's how you really become. If this, like, I'm guessing maybe, Nicole, this is a cousin or a niece or a right nephew. You are the sa. You are their employer going forward. So you're gonna offer a match. Okay, you put 100 bucks in. I'm gonna match it with 20 bucks. I'm gonna match it with 25 bucks, whatever it is.

[C]

Wow, 20%, that's amazing.

[A]

Force the saving habit. Okay, maybe that, that has an end date on it. Right from now until age 18, I'm going to match every dollar you put in. I'm putting in 20 cents, something like that. Okay. Force them to have.

[C]

Can I sign up for this, Nicole? Like, how do I get 20% on my savings?

[A]

That's awesome. How do you think about this in terms of like the type of account to use for. Because it would be nice if just everyone at age, I don't know, thirteen, you can open a Roth in their name. I really wish we could make it easier.

[C]

Yeah, I love the concept, Ben. I think this is really cool. I think it's really wonderful. I got to be honest though, Nicole, what I would do, I would go to the bank, I'd get five $100 bills. I would put Them in an envelope. And I would say, congratulations on your graduation. Retirement from.

[A]

Then the 16 year old go, what am I going to do with cash? We're going to use cash, right?

[C]

And yeah, I guess I can buy three cups of coffee or like 1/1000 of a house today or for a down payment. But regardless, what I would do, honestly, though, Nicole is, I would say, listen, I want to give this to you, but I think that it would be really cool if we could sit down and talk about how to invest and how to get this right. Because I think, Ben, what people need a lot of times is just somebody to kind of open the door.

[B]

Right.

[C]

I don't know where you ended up in college, but one of the reasons I ended up entering engineering school is one of the guys that I used to run track with went there.

[A]

Right.

[C]

And I just went to go visit him, and I was like, oh, this is cool. This is awesome. I could go to college here. Open the door, right? So I like the idea, but I think rather than spending too much time thinking about it, do you know what a lot of teenagers really want, need? They want cold, hard cash. Right? So. And then. And then you can sit down and talk to them about the options available. But yeah, I wouldn't. I wouldn't spend too much time beyond it. Beyond it.

[A]

On that $100 bill, $400 in the account.

[B]

There you go.

[A]

Great.

[B]

I got to say, you could have some fun with some weeps or something in there, you know?

[A]

Oh, man.

[B]

I'm just saying it's a gift. When the asymmetrical upside. Wouldn't that be fun if it turned into like a massive amount of money

[C]

in a couple of years as opposed to like a. Like a lottery ticket, but with good odds. Yeah. Right. That's a good way to think.

[A]

Okay. We're not going to have Duncan sit them down and talk about finances. That's for sure.

[B]

Giving a fun gift versus. Yeah. Being their financial advisor.

[C]

What's your fun than Scrooge McDuck and dollars in an envelope? I think.

[A]

I got to ask, Bill. What. What. What events did you run in Track. I never knew you were a track guy.

[C]

Oh, yeah, I was a distance dude. Yeah. I ran cross country in the fall and then. Yeah, I do.

[B]

I ran cross country.

[C]

I do those two. You know, the two miles on the. On the track. I actually hated indoor track.

[A]

Right.

[C]

Because it gets really freaking boring. You get dizzy going around that track 32 or 36 times in the winter.

[A]

So.

[C]

Yeah. Yeah. And it's great for the military. Sorry to pitch folks on the army too much, but it's awesome if you've been running for four to six years and you show up, you know, first day and you're running, you know, six minute, five minute miles, right? Everybody's like, who's that guy? That guy's really fast. And it, it really does help.

[A]

So that's a big training. I like it. Okay, great set of questions this week. Appreciate it as always. Thanks everyone in the live chat.

[C]

Fun one.

[A]

Yes. Ask the compound show gmail.com. i don't shop.com for all your compound merch needs. We need to buy a compound 5K, right?

[B]

Wouldn't that be fun?

[C]

Let's do it.

[A]

Let's do it.

[C]

Let's do Forrest Gump. We can run to San Francisco from here.

[A]

I ran the 100 yard dash. It's good on the road for me.

[C]

We'll pick up Ben and Grand Rapids.

[A]

Thanks for watching. Thanks to Bill. Thanks to Duncan. Thanks everyone in the chat. See you next time.

[B]

See you everyone.

[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.