A (2:21)

Great question. There's a lot of studies that show about mutual funds and ETFs that over and underperform. And we're going to get to that a little bit too. But I never looked at this over a five year period. So I punched this into Y charts. They have this cool portfolio analyzer tool. So over the five year period from 2016 to 2020, the S&P 500 was up a little more than 1%. Okay. And over the past five years, and I'm counting this year as a whole year, we're almost there. Since 2021, the S&P is up like 92%. Both very good returns. Right. We've essentially doubled both of the last five year periods. So how many stocks actually outperformed over those periods? Duncan, how many do you think outperformed from 2016 to 2020? Out of the S&P 500, how many stocks outperformed the index?

B (3:02)

200.

A (3:03)

Yeah, it's 150ish. So like 30% of the total. And there's a caveat here that some stocks have moved into and out of the index over time. So the numbers aren't perfect. So, so I think it's like 2 to 4% annual turnover of stocks coming in, stocks going out. So in the last five years, starting in 2021, 241 stocks outperformed the index. So that's more like half. Hang on. Chart off real quick. It's a lot of the names you would expect. Microsoft, Google, Nvidia, Broadcom, Facebook. Sorry, this is. I got ahead of myself. So how many stocks have outperformed both periods? Remember, 150 in the first five years, 240 in the next five years. So it's like 30%, 50%. It's about 41 stocks that have outperformed in both periods. And it is the stocks you would expect. Microsoft, Google, Nvidia, Broadcom, Facebook. There were some surprising names here. Hilton Hotels, which is surprising because hotels got dinged so bad at the outset of COVID Caterpillar, Decker Outdoors, which is like Uggs. And I think my daughters are keeping Uggs.

B (4:02)

Hoka. Right.

A (4:03)

I think Hoka shoes. Yeah. If you're a middle aged dad, you know what Hoka shoes are? I love H Ta. Right. If, if you've been to Burning man, you've. You've worn some Tevas before. Walmart is on the list for both. So yeah, so it's some surprising name. Some, some of you think and it's interesting. I know the stock market is getting more concentrated by the year, but the number of stocks that outperform is higher than I thought initially. So let's do a chart on now. Chart kit. Matt did this one for me. This is the number of companies outperforming on an annual basis going back to 1990. So the average is 239 stocks. So it's almost half of the stocks outperform the the actual total return of the index in a given year. It's kind of funny because it's like an ominous sign. These numbers dropped really, really bad in the 1998, 1999 period, just like they did in 2023 and 2024. And of course the end of the 90s was the end of the dot com bubble. So take for that what you will. So anyway, I think the number is higher than people assume, especially since the stock market is so concentrated. This is surprising, right?

B (5:02)

Yeah.

A (5:03)

Chart off surprises me. All right, now here's the thing. Yeah.

B (5:08)

I'm actually surprised that there's that many of it outperformed over both periods. That's way higher.

A (5:12)

Yeah, it was higher than I thought too. I wonder if this last 10 year period is actually the outlier there. It would be a ton more work in data to look over these other five year periods. We'll see. It sounds fun to do, but I'm not going to do it. I'm sorry, but I would imagine that's pretty high. Yeah, but again, it's a lot of them, the tech stocks that you would assume. The funny thing is that picking the stock pickers that outperform might be even harder. So Spiva does this thing every year. They call that their persistent scorecard. Right. They have one at the year end, 2024, and they look at how many mutual fund managers that outperformed over a certain period. They look five years outperformed over the next five years. So let's show the chart here. This is just the top half. So 2% of all large cap equity funds remained in the top half over the five year period after they were in the top half before the previous five years. Okay. And that's just the top half. Very small number among top quartile funds as of December 2020 that had outperformed in the top quartile. Not a single fund remained in the top quartile over the next four years. Okay. And none of the top quartile funds from 2022 maintained their position in the top quartile for the subsequent two years. And they said if it was just a random chance, it should have been at least like 6 or 7%. Start off, please. So I think, I think the takeaway here is just that buy and hold in individual stocks is probably your best bet. The people that try to pick the stocks and jump in and out, they do way, way worse and it's really hard for them to outperform. So I do think that you're probably your best bet is going to be buy and hold stocks, even though that's.

B (6:49)

Not nearly as much fun.

A (6:51)

Right, right.

B (6:52)

Yeah.

A (6:53)

In the charts, in the chat, someone says it sounds fun to do, but I'm not going to do it. The Ben Carlson chart philosophy. That's fair. That's why we hired Chart Kit, so I don't have to do anymore.

B (7:01)

That's true.

A (7:01)

All right, next question.

B (7:03)

Okay, up next we got one about the 4% rule.

A (7:07)

I understand the four people love the 4% rule. We get pushed to this all the time.

B (7:11)

Yeah, I, I've only, I hear it more and more. I feel like every year. Yeah, let's look at it, Dan. I understand the 4% rule. The risk adjusted guardrails by Kitsis. Etc. I started my life as an investment banker at Goldman, so I can manipulate a spreadsheet, though I'm rusty. Here's my question. I assume I'll have $3 million squirreled away in investment accounts by 2026. That's not to brag. Leaving any tax implications aside, this would give me $120,000 per year, assuming the 4% rule. I don't want to leave any money behind as I can't take it with me. So if I die with zero. So if die with zero is the plan, what would a safe withdrawal rate be?

A (7:52)

Great question. Here's a guy who has no trouble spending his money, right?

B (7:56)

Yeah.

A (7:57)

I'm guessing he said no one to leave behind, Right? So he's got no kids or heirs or anything. Or he's just going to say screw the kids, I guess. Can't take it with you, right? All right, so Bill Bengan is the father of the 4% rule. He has a new book out show that here. It's called A Richer retirement supercharging the 4% rule. I read the book recently. He was on our Talk your Wealth YouTube channel about, I don't know, a month or two ago and it's on podcast for him now too. So check out Talking wealth and Podcast. And I interviewed him about, you know, all about the 4% rule. In this book he goes through a Million different examples about the 4% rule. Now, just as a reminder. What is it? Your 4% rule looks like this. You take your starting portfolio value on day one in retirement, take out whatever percentage withdrawal you decide on. If it's 4%, let's say it's a million dollar portfolio. You take out $40,000 in the next year. If it's 5%, it's 50,000, right? So on in the next year, you slap on your inflation rate of choice. Let's say it's 3%, that in year two, your money would go, your spending would go from 40,000 to 41,200 or something. In year three, it's like 42,500. So you're not just taking a percentage of the portfolio each year because that'd be too volatile. If the portfolio is up and down big, you don't want your spending, you want your spending to remain relatively constant. Most people do. Right, because they're used to that with their income. All right, so that's the 4% rule. Now this is the money chart for the book. Let's do a chart on here. He has a million charts in the books, but this just shows your initial withdrawal rate and your percentage of success over time. He goes back to 1926 in the book. So it is important to understand what the safe means in terms of withdrawal rates. Here he's talking about worst case scenarios. So he says now the safe withdrawal rate, the safe max he calls it, is 4.7%. And that just means it never failed historically. The other ones still have a high probability. You could go out to 6% and it's 75%. 7% is like 50% or so. Chart off, please. So he says, when he did his initial work, he said by safe, I meant that 4.15%, which is the original number, even though people call it the 4% rule, represented the worst case scenario. And this happened one time in October of 1968. He did it on like a monthly basis. Right. And that was because the inflation rate was so high in the 70s that and the returns were so low that it just inflation swamped your spending. So he said it happened literally one time. But he said, he also said if a retiree indiscriminately use this safe max rate for their withdrawal plan, they'd be sacrificing on average 35% each year in withdrawals, a considerable reduction in lifestyle. So he's saying like, yeah, this is the really safe choice. But come on, people. Like, that's the worst of the Worst of the worst case scenario, it's not going to happen for everyone.

B (10:26)

That's what he's saying. Yeah, yeah.

A (10:29)

So pull the chart back up real quick. So I think for the die with zero strategy here, I think I'd be comfortable. 7% is, I think that's about a 50, 50 chance. I think if, if you really want to roll the dice, I think that's, that's a pretty good spot to be in. Half the time it fails, half the time it, it does just fine. I think that's okay.

B (10:52)

Well, because you're saying you would adjust year to year, so if, if the market drops drastically, that impacts how much.

A (10:59)

You take out chart off. Well, no, you're not the 4% rule. You're not supposed to adjust each year. You just adjust by inflation. That's how it works. If you do adjust by the market value of your portfolio, your spending is going to be all over the place. Now you could say, listen, the whole point is your life isn't like the 4% like a spreadsheet. You're going to have to be more flexible. So, so you can always cut back later in life. Maybe you spend more up front in your 60s and 70s. Cut back in your 80s and 90s because you're not going to have as much. Your health is going to be worse, probably you're not going to have as much energy or if things are looking better than expected, you can bump it up. Right. Hey, right.

B (11:30)

That's what I was thinking is he does 7% like you're saying one year and then there's a big crash, you know, in stocks, and the next year we're like, I'm just going to do 4%.

A (11:38)

Yeah. The biggest thing for retirees is probably sequence of return risks. So if there's a big bear market right at the outside of your retirement, then you should probably pull back a little bit and like, okay. And then you can always increase it in the future if things come back. And it's also important to remember he uses a 65, 355 portfolio. So it's 65% stocks, 35% bonds, 5% cash. He looks through all these different scenarios in the book about different asset allocations, different inflation rates, all this stuff. So there's a million different things you can do. I think flexibility is the key here though. Right. So I think that's the, that's the point. You're right. It's. If things go way better than expected, turn the dial up and spend way more. If things go way worse than expected, Especially right at the outset of recession of a. Of your retirement, then I think you gotta like chill a little bit. Steven in the chat says what happens when AI allows us to live to 200? I'm not gonna want to live at 200. Sorry, I. That sounds awful.

B (12:32)

Well, hey, how much money do you need in retirement if your brain's just like that?

A (12:37)

You know, compounding can just go forever. Right? Yeah. The government be paying us all anyway to not work anyway, so. But I just think good on this, the Goldman Sachs banker here. Good on you for enjoying your wealth. It's. I think it's nice to go from delaying gratification to actual gratification. So.

B (12:51)

Also I can hear some people in the chat saying like, you know, sounds stingy. Leave money to charity. Well, he's not saying he's not gonna give money to charity. Maybe he just wants to like do that while he's alive.

A (13:00)

Yeah. This is just how much he's taking out of his portfolio. Yeah, that could be part of his budget, so. Yeah, exactly, agree. But yeah, you're right, it's something not a lot of people talk about in the finance world. But yes, that, that's something you could spend on. All right, let's do another one. But I like the mindset, the die with zero mindset. I like it.

B (13:15)

Yeah. I mean, I think everyone likes it except for rich kids probably, right?

A (13:20)

Yeah.

B (13:21)

But maybe they want to hear their parents. They don't want to see their parents with that book.

A (13:26)

Yes, that is true. You don't get your parents to die with zero as they're reaching their 70s and 80s.

B (13:31)

Yeah. Up next, we got one from Gareth which is very British sounding. Very British sounding.

A (13:38)

Isn't that the name of the Dwight guy in the British version of the Office?

B (13:41)

Yeah, I believe so. I think that's right. Okay. At 18, I built a simulated portfolio and compared it to the S&P 500 over the past decade. To my surprise, The S&P 500 outperformed my diversified portfolio by over 2.5% annualized. I had always assumed that more strategy and diversification would produce better long term results. Why does simply investing fully in The S&P 500 appear to outperform more complex approaches? Is this truly a superior strategy for long term growth?

A (14:11)

All right, 18 years old. I am constantly impressed by the number of young people who are interested in the markets. It's really cool. Yeah, love to see it. Hang on. JC in the chat asks, what if a pension is involved for the 4% rule? Okay. The spending from Your portfolio is after all, other income sources. Right, so how much do you need to spend then? Does it come from a pension, Social Security? And then your portfolio, how much of a gap do you need to fill? That's the part of it that matters. All right, so here's the thing, Gareth, he's looking at the last 10 years. Diversification doesn't always work. The past 10 years, the S&P 500 has beaten pretty much every other traditional asset class. It's not always like this. Let's do a chart on. I created this earlier this year. This is the benefits of international diversification. And my whole point here is that it's the decades that matter. And this shows declaration developed country stock markets going back to the 1970s. And you can see in the 1970s and the 1980s the US is actually towards the bottom of the rankings. The 1990s US did better. 2000s, much worse. 2010s, 2020s US is at the top. So the fact that the US has outperformed over the last 10 years, that doesn't happen all the time. Let's do the next chart. This is one of my favorites. I've used it a million times. It's the lost decade. From 2000 to 2009, the S&P 500 lost 1% per year, including dividends. International stocks, mid caps, high yield bonds, small caps, emerging markets, REITs, all did much better. In the last decade, if you diversified, you felt really, really much better about yourself than people who had all their money in The S&P 500 and large cap stocks. Chart off please. So the point is that yeah, sometimes diversification doesn't work. The S&P 500 does have an awesome long term track record. You don't have to diversify if you're 18 years old. I do, because I know those lost decades can and will happen. I think the biggest thing for you is to keep investing and allowing your money to compound in the stock market because you're way ahead of the game at 18, you probably don't need to diversify that much, but that's why you do it as lost, that it's can and will happen.

B (16:08)

It is funny to me, being someone who came from film and the arts, it's very funny just watching people time and again try to beat the market. Like, I mean professionals, right? Of course, you know, individual retail people have fun. But. But yeah, watching professionals try over and over and over again and just seems like 90% of them fail, it's just kind of bizarre. It doesn't matter. How smart you are, it doesn't matter what a great plan you have. It just seems like the. The market just keeps. Keeps winning in general.

A (16:37)

So when I first started my career, one of my roles was helping to pick the managers for our. For our portfolios. Right. And we would interview these managers, and they. They were all. They held an amazing background. Right. It was all Ivy League people, like, very impressive individual individuals, super smart. They would talk to the different supply chains, they would talk to competitors. They would talk to company management. They knew these companies inside and out. And to your point, most of them still underperformed. And that's when I thought, like, what chance do I have to outperform if these really smart people can't do it? What chance do I have? And so I kind of went down the same path. Now, there have been plenty of retail people this cycle who have done it, and good on them for doing it, but it's very hard. I agree.

B (17:19)

Right. And I think most retail people that have made a lot of money recently would admit that they're probably not going to be able to keep it up for 10 years. You know what I mean?

A (17:26)

Yeah. Most people understand. Yeah. A lot of the people we talk to say, hey, listen, I hit the lottery. I hit the jackpot with a couple individual stock picks. Now I know I need to diversify. So that's kind of cool to see that. People that understand I know this consistently keep hitting home runs like this. It's not going to last forever.

B (17:41)

Yeah. So be careful out there. All those young people watching today, because you're playing Meme stocks. Be careful. Be careful.

A (17:48)

Yeah. All right. Someone asked, is Ben one of those retail people? I own, like, two individual stocks. No, I don't think I can call myself a. I own index funds pretty much.

B (17:57)

I've outperformed over the last year. Not to brag.

A (17:59)

So, Duncan, a year. Come on, get out of here. Next question. A year is nothing. Next question.

B (18:07)

Just don't look at five years. Okay. Up next, we got a question from Nick. What are your thoughts on the Dave Ramsey investment strategy, which includes Investing equally across four types of mutual funds? 25% in growth and income, which is large cap, 25% in growth or mid cap, 25% in aggressive growth, meaning small caps, and 25% in international funds. All right.

A (18:30)

Credit to me for not doing the Dave Ramsey meme, which is going on social media lately. Have you seen these?

B (18:36)

I've seen a lot of Dave Ramsey memes over here.

A (18:38)

He kind of has his arms crossed and he's not happy with what the people are telling him. Listen, I thought about going to Portfolio Visualizer or Y charts and running this portfolio through a back test, but then I realized it doesn't really matter. There are plenty of different asset allocations that can work. A portfolio of small caps, mid caps, large caps and international stocks. To me, that's a fine allocation. I see no problems with it. I'm sure some people could quibble if they wanted to. What about 10% more in this? What about 5% less than this? Why don't you include this? What about this strategy? There's always a million little ways you can tinker, but I think getting the. The big pieces right up front. It's like the whole idea that perfect is the enemy of good. So I think this allocation is fine. I think the biggest thing that matters is allocations because there are so many other things to invest in these days is you're always going to be tempted to add something else or take something away. Like, why do I own this piece of junk? It's underperformed for three years. Get it out of there. I'm putting this thing in that did really well. I think that's the problem. It's just the allocation probably matters less as long as you get the big building blocks right, then your ability to stick with it. Is a 7030 portfolio going to be that much different materially from a 6040 portfolio? Probably not. Is a 10% allocation of small caps going to be much better or worse than a 15 or 20%? No. It depends on the cycle, but probably not. So I think it's just. Can you stick with the allocation? Will you. Will you rebalance back to those initial targets on occasion to keep yourself honest?

B (20:03)

I haven't listened to him in a very long time, so I'm out of the loop. But I'm surprised he doesn't have any gold. He strikes me as someone who would. Who would be into gold.

A (20:11)

You know, Dave Ramsey does seem like a gold person. And I don't. I never really listened to him. I know. I know a lot of people who got into the Dave Ramsey after college.

B (20:19)

He's usually number one on the. On the business podcast charts.

A (20:22)

Yeah. People like his. Yeah. And he has strong opinions. He. I know a lot of people who did his envelope method for budgeting right out of college. Right. That's like you food and entertainment and you have this money in the envelopes and look for budgeting. People get on him for his investment take. Sometimes I think he said he told people they could take like 8 to 10% of their portfolio for the withdrawal rate or something. Because if the stock market gives that percentage, then you're fine. So people quibble with a lot of this stuff. He does. I don't.

B (20:50)

The portfolio, as far as I'm concerned, student loans. He basically doesn't think you should go to college if you.

A (20:55)

He's not a debt guy.

B (20:56)

Loans. But yeah, yeah, yeah. The main thing I have problem with.

A (20:58)

Is I'm fine with that.

B (20:59)

He tells people credit cards are always bad, basically. And I think he. He says he carries two debit cards and his concealed carry permit or something like that. That's all he has in his wallet. Just as someone who has dealt with, you know, identity theft in the past and that kind of thing, debit cards are not what you should be spending all your money on because it's very hard to get your money back comparatively. Right. If you spend money on a credit card, someone gets your credit card number that's on the credit card issuer to get their money back. Right. A debit card. If someone gets your debit card and spends money on your debit account, that's your money you're having to fight with the bank to get back. So that's my one.

A (21:36)

Funny how if you have a. If you have an errant charge on your credit card, they used to like grill you about it. Now they don't even care. Like, yep, sure, here. Just immediately canceled. New ones on the way.

B (21:45)

Very different with a debit card at most banks. So, yeah, that's my main and quibble. I would just say if you can be responsible and pay off your credit card, they have a good purpose.

A (21:53)

Yeah. Because his whole thing is paying down debt. And you have to think of the audience he's talking to. But do I have a problem with his portfolio? No, as long as you can stick with it. It seems reasonable to me. I don't have any huge issues. I think there's a ton of different allocations you can use. There's not like one that's like, this is the one. You have to use this. There's a lot of them. It's just like, are you going to be willing to stick with it? That's the thing that matters, Right? All right, let's do another one.

B (22:16)

All right. Last but not least, we got one from Brian. If you were doing a 100% S&P for a 529, at what age would you switch to a Target Date Fund? 5 to 7 years out from the start of college. I don't want to use a target date fund from the day they were born. That's too conservative.

A (22:35)

Okay. This is a question a lot of people ask as they approach retirement as well. Like when do I start, you know, de risking? Because that's. I can't. A lot of people just can't have all their money in stocks. There's a few reasons why you want to de risk. Right. One of them is, is emotional volatility. You can't handle investing in all stocks and that that doesn't matter how old or young you are, that some people just can't handle having all their money in stocks and seeing the volatility and the potential for loss. Some people want to have a safer component because they want to rebalance back into something bonds or cash or some sort of hedge. And then other people know that the spending has to happen. So if you have spending in a certain period of time, you don't want to have to be spending stocks because they could go down in a hurry. Right. So I think he said five to seven years out. That seems pretty reasonable to me. Like you have an 18 year time horizon or potentially 22 year time horizon, 24 year, whatever. However long the kid goes to school, I think that's pretty reasonable to start going down. And I think probably if you're worried about it and he said he's got all the money in the S and P. I know plenty of people who do that. Spoiler alert. I'm a target date guy for the 529s, always have been. Maybe I've lost money on the table. I'm fine with that.

B (23:45)

One thing about 529s, is this just like an account that you can invest in anything in or does the issuer restrict you to.

A (23:52)

They usually have fund choices for you depending on. So I invest in.

B (23:56)

So you're not investing in like individual stocks usually in a 529 or anything?

A (23:59)

No, I'm invest. There's funds, there's index funds, there's some active funds and there's some target date funds. And I picked the target date fund and you pick like a target date fund for the year of when they're going to graduate. If you want to take more risk, you can go out a little further. Hopefully one of my kids gets a full ride and then I can just roll that over to an ortho air for him. I think you could probably, to make life easier, instead of ripping the band aid off, do it in tranches. Like a reverse dollar cost averaging. Right. Starting seven years out I'm going to take 10% of it every six months or something and slowly but surely get to my goal, whatever that goal is. Maybe Your goal is a 60, 40 or 70, 30 or 80, 20. I like the idea of doing it slowly but surely. I think most people, it's easier for them emotionally to handle that. Plus, with the stock market, you're allowing it to run a little longer too. That could set you up for more risks, obviously. But I think that makes sense to me. So I don't think that's too conservative. I think the plan makes sense. The thing is, there's no perfect situation for this because you don't know what the market's going to do. If the market rolls over, you would have been better off ripping the bandit off. If the market keeps going higher, you've been better off slowly but surely tranching out.

B (25:06)

Yeah, and if your kid looks like they're going to full ride, you're going to think, man, I could have bought that car. Could have done all kinds of cool things with that money.

A (25:14)

Maybe I will just take care of them in the future anyway, you know, and there's no need for college.

B (25:20)

I mean, yeah, sure, it's a possibility.

A (25:24)

Yeah. But no, this is, this is the kind of stuff you have to think about. So I like the mindset. Really good questions today. Really diverse set. I always like it. If you have a question for us, remember our email here is askthecompoundshowmail.com thank you to everyone in the live chat, as always. I thought they were going to ask us about our questions today, but they're asking each other like what they're doing on the weekend and everyone's just hamming it up in there.

B (25:48)

It's a great community in the chat.

A (25:50)

Yeah. Appreciate all the people watching live on Twitter as well. I don't shop.com for all your compound merch needs. Subscribe like, review all that good stuff and we'll see you next time.

B (26:00)

See you 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 Management may maintain positions in the securities discussed in this podcast.