Why Is the Stock Market Going Up?

Hinzugefügt: 2026-05-14

[00:00:00]Welcome back to Ask the Compound, the show where you ask and we answer. The stock market in the United States just keeps on keeping on. The S&P 500 is up 32% over the past year, 86% over the past 3 years, and a whopping 320% over the past 10 years. Good enough for annual returns of 15.5% per year. Does any of this make any sense considering the geopolitical situation, government debt levels, or general market fundamentals? We're going to answer that today. Is a stock market detached from reality? Let's do it. Our email here is ask the compound [email protected]. We're live from the Compound studios right across the street from Bryant Park. Duncan even did his hair for us today.

[00:00:46]>> It's good to see you in person.

[00:00:47]>> I know. I >> It feels so weird.

[00:00:48]>> I haven't been to New York in a while, so we're doing it live. Uh not live with the audience. Uh we have other things going on today. So, we're doing this now. On today's show, we're answering questions straight from our viewers and our listeners about why the stock market is up this year. Uh the best one-year return of the past 50 years, is a consumption tax inevitable in America.

[00:01:08]How you can take advantage of foreign tax credits. How to save for college tuition in a flexible manner. How to save for retirement as a small business owner? And finally, how to sell appreciated shares of applied materials.

[00:01:17]We got a ton of questions today. All right, first today's show is sponsored by the Compound Insider. So, we're in the Compound studio. Subscribe to the latest episode drops, show events, live updates, announcements, merch releases, weekly guest reveals for the Compounded Friends, and more. Comes to your inbox once a week. Go to the compoundnews.com/subscribe.

[00:01:36]We to do a ton of content here. So, it's a great way to keep up with everything we do. Get the latest updates there. The compoundnews.com/subscribe.

[00:01:45]All right. Uh, quick intro. I have a new book out. It's one of the reasons I'm here. It's called Risk and Reward.

[00:01:50]Daniel behind the scenes did the cover for me. Looks excellent.

[00:01:53]>> Look at the gold the gold uh detail.

[00:01:56]That's so nice.

[00:01:56]>> It is really cool. Yes, it turned out great. I love the way it looks. Uh Chart Kid Matt helped me with all the charts in here. I looked I kind of think there's 52 charts or tables in here. So, it's very visual visually stimulating book. I would say not to toot my own horn. Uh I want to do a book giveaway exclusively to our audience here at the comp ask the compound. Um so here's the deal. I'm going to give away 10 signed copies of the book. for a chance to win one. What you have to do is send us a question to ask the compound show atgmail.com in the next 10 days. Okay?

[00:02:25]So, we're going to do pick 10 questions in the next 10 days. I hand select the questions every week, right? Um, my assistant does actually know. I do it.

[00:02:34]If I pick your question, someone from our team will reach out, ask for your address. Bonus points to Duncan for keeping your question to one paragraph or less.

[00:02:41]>> Right. All I ask in return is that you leave a review for me on Amazon. Is that fair?

[00:02:46]So, if you're holding on to a good question, send it in now. 10 questions for the next two weeks worth of shows.

[00:02:51]If you send us a really good question and I'll send you a signed copy of my new book, Risk and Reward. Fair.

[00:02:56]>> Also, if you love Ben's voice, which I'm guessing most people listening do, uh, you do the audio book.

[00:03:01]>> Yes, I did do the audio book myself. It was two full days in a recording studio.

[00:03:06]My brain felt like mush afterwards, but I got it done. It was kind of fun.

[00:03:10]>> Yeah. All right, questions. Let's do it.

[00:03:12]>> All right. Okay. Up first today, we got one from Eric. I know this is one of the impossible questions, but this market seems so disconnected to what's happening on the ground right now. Uh, is this the euphoria we'll later look back on and go, "Oh, yeah, we were in a messy war and the stock market kept going up. Is it disconnected? Are there fundamentals supporting the S&P 500 at nearly 7,400?"

[00:03:35]>> Okay, so this is a common question in recent weeks from investors and like pundits and financial media members alike. How is it possible for the stock market to keep going up in the face of a war, spiking oil prices, rising energy prices? Uh, it's a fair question.

[00:03:49]Sometimes there are no obvious answers to the short-term movements in the market. Like, the market just gets ahead of things. And you're like, what? Why is it doing this? I have no idea. The answer to today's question is pretty straightforward. The market is not detached from the fundamentals. It's following the fundamentals. The fundamentals are the main driver of the market today. Let's do charts. I got a bunch of charts. Chart Matt, help me out here. So, first one, actual reported earnings growth. This is for the first quarter of 2026. For the S&P 500, 25% year-over-year earnings growth. For technology and communication services, it's 45% and 54%.

[00:04:22]>> Remind me what's what's the biggest waiting uh in communication services.

[00:04:26]Why is that? So, >> it's it's basically it's it's meta and Google.

[00:04:29]>> Okay.

[00:04:30]>> So, it's it's it's just like tech. Even consumer discretionary is 35% year-over-year earnings growth. Do the next one. This is blended revenue growth. So, this is like actual and estimates.

[00:04:40]uh double digits across the board essentially, right? For most, >> wow, look at technology, >> right?

[00:04:46]>> 30% almost revenue growth.

[00:04:49]>> One more next one. This is from Faxet.

[00:04:52]They look at the change in forward 12-month EPS versus the change in prices over the past 10 years. Not a perfect relationship. Sometimes earnings are higher, sometimes stock prices are higher, but the trend is what you want to look at here. Okay. And according to Faxat too, this is the sixth consecutive quarter of double-digit year-over-year earnings growth. So earnings just keep it's not like this is a situation where earnings are flatlining and prices are going nuts. Earnings are accelerating.

[00:05:17]Do the next chart. This is from exhibit A chart. Matt made this one. This is S&P 500, 400, and 600. So that's large cap, small cap, midcap. Look at the top one.

[00:05:27]And I mean small caps and midcaps are growing too, but earnings are accelerating for the large largest stocks. They're not just they're not just going up a little bit. They're accelerating. Now, one more. Let's look at valuations. Okay, so this is forward PE again for large caps, small caps, and midcaps. But if you look at the S&P 500, you can see that it's actually fallen in recent years. So the stock market since the start of 2025 is up almost 30%. And in that time, the PE ratio has fallen.

[00:05:54]What does that tell us? Fundamentals are growing faster than prices.

[00:05:59]>> It's kind of insane when you think about it. It is. We have a lower PE ratio today than we did at the start of 2025.

[00:06:04]>> I've heard that about Nvidia, right?

[00:06:07]>> Right. They they keep like growing into it. Do one more, Daniel. This is net profit margins from faxet. Uh again by sector tech is like 30%, communication services is 20%, finance like all the biggest waitings have huge profit margins.

[00:06:23]So basically we could do chart off AI and earnings matter way more than geopolitics at the moment.

[00:06:31]>> Yep. That's what I was about to ask you.

[00:06:32]How much of this is AI? I mean is this completely an AI story?

[00:06:35]>> A lot of it. I mean Google and Amazon and Meta like they all blew out earnings. So the question is like does the stock market always track fundamentals? No. Prices and fundamentals can and will diverge. It just so happens that now they're kind of following each other. And I look at this as almost like the stock market is not being crazy. is not being detached from reality. It's actually in line with reality and you would think in the past it would have detached from reality and the the headlines would have caused things to but no it's the fundamentals that matter more like that's actually a good thing. So the question is like well what if the implied expectations are wrong and people are over their skis like that could be something but I I think the my takeaway is the stock market is right far more often than pundits who try to predict it. Like when the stock market bounced in April 2020, everyone is going, "Oh my gosh, you can't spend your way out of a out of a pandemic, there's no way that was low.

[00:07:27]This is a deadcat bounce." The stock market was right when inflation was 9% in October of 2022 and there was a 100% certainty we're going into recession and the stock market bounced. Everyone said there's no way this is going to last.

[00:07:38]The stock market was right again. It's not always right. Like there's that old saying that the stock market has predicted nine of the past five recessions. But um I agree it's it seems somewhat surprising that there's a war in the Middle East and oil prices are spiking and energy costs are higher and gas is like $5 a gallon. But the stock market is heartless. All it cares about its earnings above all else and that's what's driving the market right now.

[00:07:58]>> Does this mean that the risk of just you know falling off a cliff is much higher though whenever the market gets like this?

[00:08:04]>> Well, if earnings rolled over then yes.

[00:08:06]But if earnings stay higher, then I think that there's probably, assuming the valuations don't go sky-high, there's probably a margin of safety in the market. So, you're right. But this is a good thing. If it's tracking fundamentals, I think that's that's what you want to see.

[00:08:19]>> Yeah.

[00:08:20]>> It's like you guys often say the the economy is different than the stock market, too, right? So, some of this stuff, I guess, the economy could start to weaken in ways, but it doesn't necessarily mean that Google's going to be making less money.

[00:08:31]>> The stock market is like 50% tech stocks. The economy is not 50% technology, >> right?

[00:08:35]>> Yeah. All right, let's do another one.

[00:08:37]>> Hey, up next we got one from Mark. I calculated my net worth over the last year and found it to be an interesting exercise. I asked AI if last year's S&P 500 return of 30.6% is one of the largest. It was not most likely seven or eight. Either way, this is rarified air and it seems like we aren't even at the peak given recent earnings reports. What does your data say?

[00:08:59]>> So, we're getting more and more questions from people who ask say, "I asked AI this. Can you fact check AI for me?" So, I guess my job our job here is safe for now at Ask the Compound. Um, I Mark knows me. I I love a good research project like this. So, I took the Let's take the data back to 1975 cuz I like round numbers like everyone else. So, from the start of 1975 through the end of April, annualized returns for the S&P 500 were your guess.

[00:09:24]>> Wait, say that again.

[00:09:25]>> Since 1975, what's the annual return for the stock US stock market? The S&P 500?

[00:09:29]>> Uh, 7.5%.

[00:09:32]>> Not even close. 12.5% per year since 1975. Unbelievable. $10,000 invested in the S&P 500 in 1975 is worth $4.2 million today. $10,000 turned into 4.2 million over 50 plus years.

[00:09:50]>> But but don't advisers use like seven as a as a number when they're calculating?

[00:09:54]>> Well, if you want to be conservative, yes, you always want to like set expectations low, right? Um so let's dig into the one-year returns now, which is what they're looking at. So, I looked at the rolling 12-month total returns in the S&P going back to 1975. All right.

[00:10:08]Last year, Indeed has seen returns like 31%. Not bad. So, where does it rank?

[00:10:13]Okay. The highest ever was actually 61%.

[00:10:16]That was that's the best 12-month gain.

[00:10:18]I use these these are starting these are monthly returns. Okay. That occurred in the early 1980s at the start of that bull market because we had backto-back Fed induced recessions 1981 and 1982 and the the stock market took off like a rocket ship. The worst 12-month return was a loss of 43%. Took place in the great financial crisis. That one's pretty obvious. So, the 31% return of the past 12 months, Daniel next chart ranks in the 88th percentile of one-year returns since 1975.

[00:10:44]This is returns from high to low, right?

[00:10:47]So, it's 73 out of 600 something. So, that's 88 percentile. So, roughly say 90% of all 12-month returns have this this period was better than.

[00:10:58]But there's been plenty of times where it's actually been a little better than this. So returns hard to believe returns of 40% or more over 12 months in this time frame have happened 22 times from a starting pick a month, right? 50% or more has happened seven times. So we've had a wonderful run. Not quite the best 12-month returns, but this kind of gets back to the first question. Is all that earnings growth now priced in? My answer, I don't know. Maybe, probably.

[00:11:22]Uh how this market is behaving, maybe not. I don't know. It seems like every time we say this, something keeps getting better. So, uh, yes, a wonderful 12 months of returns. Not the best ever.

[00:11:33]Certainly in the top decile, though, barely.

[00:11:35]>> You're saying we got more room to go.

[00:11:37]>> It's possible. You never know.

[00:11:39]>> I like that.

[00:11:40]>> Let's do another one and bring in a special guest.

[00:11:42]>> All right. Up next, we got one from Frag Bill. Uh, that's a hint, I guess. Bill, from one military guy to another. I'm worried the Roth TSP, Thrift Savings Plan, is losing its superpower status.

[00:11:56]Advise me like I was one of your troops.

[00:11:58]There's a growing movement in DC to pivot the US toward a consumption tax.

[00:12:02]My thesis, in a VAT heavy world, bad as value added tax, right?

[00:12:06]>> Yep.

[00:12:07]>> Uh in a VAT heavy world, the Roth becomes a double tax trap. Taxed on the way in as income and taxed on the way out as cash have a cash register. Does a C change in tax theory invalidate the Roth's taxfree promise? Is the traditional TSP actually the hedge we need if income taxes eventually disappear in favor of sales taxes?

[00:12:25]>> Look who we have.

[00:12:27]>> Duncan, you definitely wrote this question. This one say >> his name and he appears.

[00:12:30]>> This one is designed in a lab to to make me appear on Ask the Company.

[00:12:34]>> I mean, I couldn't make that name up.

[00:12:35]>> At first, I went, "How did you talk to your troops?"

[00:12:38]>> How did I talk to the troops? Every morning at 5:30, you have formation and you give them the general orders of the day. So, yeah, we would do it early.

[00:12:45]>> Were you pretty heavy-handed? Like you yelling a lot? No, I was more of the soft and cuddly commander.

[00:12:49]>> Did they say sir? Yes, sir.

[00:12:50]>> Uh, yes. Yeah, everybody.

[00:12:51]>> All right. So, th this is I told you this is kind of a dorm room type of question, I think. But frag seems to think like this is a possibility. So, why don't we start here? What's a value added tax?

[00:13:01]>> Yeah. So, uh value added tax uh VAT, uh it is a national sales tax. So, that's what this thing is. And if we can chart on >> I see this on like things you buy in Europe. Correct. You see a >> VA and this is very common. Yeah. In the European Union. So if you buy stuff in the US in states that have a sales tax, not every one does. Michigan does uh in New York it's by county. It's crazy.

[00:13:20]There's like 42 jurisdictions. Oh, it's insane. So if you buy something in the US and you are subject to a sales tax, you pay a sales tax based on the end product, right? So something that you buy for $1,000 or 10,000, you're going to pay a percent sales tax. And this is what I'm issuing here on the end. The incidence of the tax and the sales tax happens when you buy the product. So the retailer ends up having to collect that tax, remmit it, and everybody up and down the supply chain is more or less taxfree, right? Because they're delivering a product to the retailer of that. A value added tax, which is very common in the EU and other places, is a sales tax, but it applies across the supply chain. So if we're developing widgets, let's say that we're making financial plans, when the financial planner generates the input and passes it on, that could be a taxable event if he passes it on to the CFP. And so they would pay the $100 of sale, a VAT tax along the way. And then ultimately when the end consumer buys the product, maybe they're paying a VAT, but ultimately it's been it's been segmented along the manufacturing process. So it's a more evenly way to distribute the end sales tax. It ends up being less distortionary than a sales tax in the end, which is just applied to the gross product.

[00:14:26]>> So he but he seems to think we're going to have this in lie of maybe payroll taxes.

[00:14:31]>> Yeah. So definitely it is something that's being discussed in the DC circles and the New York Times opinion page. So that is definitely something that's happening because I don't know if you gentlemen have taken a look recently somewhere around $2 trillion budget deficit right depending on where Intel stock is this week. What would it what would I'm sure people have done run the numbers. What would it have to be to make up for income taxes?

[00:14:49]>> A very very large amount, >> right? It would have to be what a 30% or 20% or something.

[00:14:54]>> And what's really interesting about this, we ran an experiment last year on what a VAT might be. And it took the form of a tariff, right? Because what is a tariff? The goods hitting the shore, you end up applying basically a sales tax, right, before they're sold. And ultimately that was distortion on prices. Have you guys taken a look at coffee prices? I know you gentlemen don't buten >> a lot of yeah it it does show up in the supply chain it's not great for consumers it's very the terrified argue is very inefficient so >> uh frag my guy in DC I I think he's got a little bit of DC brain on this to be honest like just not to make any political statements but what member of the GOP would vote for a national sales tax right I mean that would be political death >> it would be very hard to convince people that this is a because the taxes are taken out automatically >> you know how hard it is to pay your estimated taxes it hurts writing that people had to see the taxes coming out of everything they spend. They could say, "Well, >> I don't know. It's more progressive."

[00:15:45]Maybe it is, maybe it isn't, but it's it would be it would be a big change. So, I guess maybe what we can say if we want to give him actual real world advice, like just he needs to diversify his tax base if he's really worried about this.

[00:15:54]Is that what he's looking for? And my point to frag would be look if a Roth IRA is potentially you know uh going to be tax inefficient in three ways like guess what a traditional IRA distribution would be then you're paying income tax and VAT and consumption tax.

[00:16:07]So so it's not like you're solving any problems by going traditional Roth. I think this is really interesting theoretically but like one of the things in my view gentlemen who that separates the US competitively is you go to Europe and like it is expensive as hell right to fill up your gas tank to buy anything and the VAT is a big tax. Exactly. and taxes upon taxes upon taxes in my view.

[00:16:25]Not not a great way to to run to run a country, but that's a political argument.

[00:16:29]>> Yeah, but they they have different they have the metric system over there. So you're pay you're buying liters of gas.

[00:16:34]So it doesn't feel as bad.

[00:16:35]>> So yeah, it's more affordable. That was the big shack joke, right? When gas was $5 a gallon. He's like, just fill it up a quarter way, you know, put $20 in as if that right.

[00:16:43]>> Um but I have a question for vets. So Frag Frag is in DC. Which license plate gentleman goes hardest? And so we have uh up for grabs the Washington DC license plate. Duncan knows this guy.

[00:16:54]Taxation without representation. Yeah, that's it. How about New Hampshire? Live free or die. Which one would you gentlemen take?

[00:17:01]>> I like the DC one.

[00:17:02]>> The DC.

[00:17:02]>> I'm biased. I used to live there. So >> live free or die hard, then I go New Hampshire.

[00:17:05]>> Live free or die is pretty hard in the mountains. I'll tell you what's at the bottom of the list. The P yellow license plate for New Jersey.

[00:17:11]>> That one and Connecticut's are both pretty bad.

[00:17:13]>> At least it's not the color of urine.

[00:17:15]>> Fair. Fair. New Jersey.

[00:17:17]>> I was going to say champagne, but >> Yeah.

[00:17:18]>> Yeah. There you go.

[00:17:19]>> So, you know things are looking up when you're driving and you see a sign that says you're now leaving New Jersey.

[00:17:23]That's a good That's a good sign.

[00:17:25]>> No offense to our New Jersey audience out there.

[00:17:27]>> No, we love the Garden State >> and John's clapping off camera.

[00:17:30]>> That's where Alexander Hamilton throwing him under the bus, too. Jersey. Um, regarding the the VAT though. Yeah. So, at the end of the day, the average consumer, it would just make um prices for things higher. It wouldn't increase the tax they pay at the register. What some people would some people would say is that well you'd pay a higher price because it's added on but some people would say well the people who pay the like if the top 10% is spending all the money then they're going to be taking the brunt of this tax that's what people would say right >> I guess so but >> it seems like a tax on the middle class especially right I mean when you look at who's doing the most spending >> probably if everyone's paying if everyone's paying the same rate too then yes >> higher consumption taxes yes so reduce consumption so I guess that's good but again Americans like to drive big trucks and eat big macs and get their giant fill in so like I know necessarily culturally that's a great fit. I think the key problem is it's it's adding a burdensome tax regime, right? The IRS is 40% down in staff this year and they are barely able to process income tax returns and in theory like throwing this thing at them. I think it would increase costs and increase uh friction in the economy. It's like throwing a bunch of sand in the gears. And back to Ben's point in the question one that the US economy is on fire. Like I do not understand why we would want to be throwing burdensome taxes. That was going to be my next question is what European country do you think politicians are looking at and saying we should be more like them? I mean for real if we're talking about something >> I mean a lot of folks that are suffering in the healthare system they would point to a Sweden Scandinavian country and say yeah but I just don't think you can do that at this scale right I understand like a homogeneous ethically centric smaller country yeah maybe you can do this because everyone's there a lot of what's going on in Minnesota right now again not to take any political stance but like it's not good what's going on there and I think a lot of it is that they're trying to implement these Scandinavian style welfare programs and unfortunately there are individuals that will take advantage of that so I don't I just don't I don't know I don't think they're easy answers to these questions.

[00:19:18]>> Very theoretical.

[00:19:19]>> We should do some field trips.

[00:19:20]>> Let's go.

[00:19:20]>> Let's do an actual real world question now.

[00:19:22]>> Okay. Up next, we got a question from Andrew. I'm 31 and my wife is 30. We're currently invested in 50% VTI and 50% VXUS. Does it make sense to hold the VXUS in in a taxable brokerage account to take advantage of the foreign tax credit or to go 50/50 in all accounts since we don't know what the performance of each will be? For reference, we have about $600,000 invested, not to brag, of which about half is in the taxable brokerage and half is in various IRA and Roth IRA accounts.

[00:19:50]>> All right. First of all, credit to Andrew to his wife. That's a extremely simple portfolio.

[00:19:54]>> Yeah, it's great.

[00:19:55]>> Very simple.

[00:19:55]>> Nice.

[00:19:56]>> All right. So, the question is, what is the deal with the foreign tax credit?

[00:19:59]Like, how does it work? What is it? So if you Ben Carlson if you're traveling to Europe and you well this is not for an investment account but let's just say hypothetically and you pay a tax on your dividend income from Europe the United States government will give you a tax credit for the taxes you paid to the foreign government. And so what our question is is where should I hold foreign assets? If you hold foreign assets in a non-qualified brokerage account, a taxable account, you can claim those tax credits you're paying to these Scandinavian countries that are just taxing their people left and right.

[00:20:29]And the only the only company that comes out of there is Spotify or Nokia or whatever, >> right? They're taking their bit before it gets to you.

[00:20:34]>> That's correct. And the US does this too, by the way. So if you were investing in the US, like we do apply 20% foreign tax withholding unless you're a US taxpayer, unless you swear on a stack of Bibles, yes sir, I will file my income tax return. So the question is, can I claim those credits?

[00:20:47]Can you recapture them? The answer is yes. If you are in a non-qualified account and you're honing your VXUS or other fund there, you can claim those credits and ultimately offset some of your US tax. So if you're holding those assets in a qualified account, Roth, traditional, 401k, you're not able to claim those credits because by definition those are tax free or tax deferred.

[00:21:06]>> Question is, does this actually move the needle?

[00:21:08]>> So the answer is no. That's to to be direct to skate around some of the nuance. Can we chart on? Let's take a look at US versus XUS yields. Let's start there. There are >> And for people who don't know, VXUS is just it's a fund that has no US experience.

[00:21:22]>> That's correct. It's the world stock market minus the United States.

[00:21:25]>> Correct. Or very little. Yields are higher outside of the US. very generally and so depending on what type of income you're looking for that can be good it can be bad. I take more of a total return approach. U you know price ratios are lower outside the US. So that partly explains yield but regardless you do get a higher yield. The percentage of qualified though is really important and this is the other distinction. We haven't even gotten to foreign taxes yet. In the US generally any companies are US-based you're getting a qualified dividend treatment. And that means you're getting 15% or up to 20% of tax plus net investment income tax on qualified dividends which are basically in a US company and companies from outside the US that we have a favorable tax treaty to. So comparing these two funds generally the qualified ratio for outside the US is roughly 60%. So 60% of your dividends on a higher yield qualify for lower tax treatment but 40% you're paying ordinary income on. So there is some tax arbitrage there because yes, you're getting more yield, but you're also paying a higher rate on 40% of your income. So the non-qualified ratio there is just the inverse. The foreign tax credit ends up being roughly, depending on the country, 7% on average of what you're paying in foreign taxes. So you put this all in a blender and unfortunately the answer is it depends because if you're paying high taxes, those credits don't go as far. The credits are fixed. The taxes are variable, right, based on your income.

[00:22:41]So somebody in a lower tax bracket would probably benefit from holding this stuff up to the US. To answer Ben's question, does any of this matter? Who knows? It all depends. I think this is paralysis by analysis. It's a little bit too much to think about. I would just split it 50/50 and move on down the road, >> right? They might be overthinking it and like the b the cost benefit is not there.

[00:22:58]>> Yeah. And again, my total return thoughts, Ben, I don't know how you feel about this, but like I don't really want dividends. Like there are some really crazy ETFs and funds right now that are like not doing dividends at all. all the like reinvesting dividends in my account. I love that.

[00:23:11]>> That's a psychological thing. I I agree.

[00:23:13]And they don't do as many buybacks overseas. That's one of the reasons the dividend yields are higher. I don't buy >> shares and and prices are lower, right?

[00:23:18]Price to earnings ratio generally is lower outside the US. So, we're we're at this this sort of peak of the market, but I want lower yield stuff. So, I would probably today just based on my tax rate, I'd rather have the XUS stuff in a in a non in a qualified account.

[00:23:31]But the big issue is how do you how do you switch the how you can't switch this every year, right? Because you're paying taxes, capital gains. I I frankly don't think about it. I don't think about it too much.

[00:23:40]>> Yes.

[00:23:40]>> All right.

[00:23:41]>> It's a great question.

[00:23:41]>> I always say if you're getting down to this level of detail in a question, you're probably doing okay with yourself.

[00:23:45]>> Yeah.

[00:23:46]>> Right.

[00:23:46]>> Yeah.

[00:23:47]>> Yeah.

[00:23:47]>> I think so.

[00:23:48]>> All right. Let's do another one.

[00:23:49]>> All right. Up next, we got one from Matt. I have two kids, ages eight and six, and have been focusing on saving for college using 529 plans with target date funds since they were born. My plan is to aggressive aggressively fund each 529 up to $50,000 over the next 1 to three years and then shift to a strategy where most new contributions go into a taxable brokerage account in my name so I can invest more aggressively and maintain flexibility if college plans change. Does it make sense to frontload 529s to a certain level and then pivot to taxable investing? What do you think about the trade-off between tax advantages of 529s versus the flexibility and potentially higher equity exposure in taxable accounts? I currently maximize contributions to my Roth 401k, IRA, and HSA. So, saving for college is not impacting my ability to save for retirement or healthcare needs.

[00:24:38]>> I think we have a lot of middle-aged people that write us in because this flexibility theme is something we run into again and again this year. Like, okay, I took advantage of tax retirement accounts, but they're not very flexible.

[00:24:49]I get the tax benefit, but I want to have this other piece where I can do some other stuff with it.

[00:24:54]>> Yeah. Can't touch the money till you're 60. Also, you were telling me 529's usually it's it's predetermined what you can invest in. You don't I I thought you could pick whatever like an IRA or something. It's there's only certain things you can >> state and the some plans are better than others.

[00:25:07]>> There's a lot of uncertainty in college savings right now. There always is like how much is it going to cost? People ask us this. It's like I don't know. We'll see.

[00:25:14]>> Yeah. A lot be a million dollars a semester in 10 years.

[00:25:16]>> I showed a chart the other day actually in the last 10 years inflation is running way higher overall inflation CPI than college inflation. It surprised you. slow down finally. The other the other question is like will AI change the game completely? Like will my kids even have to go? I feel like that's those are the people that just don't want to save for college like listen AI is going to take it all away. I'm not reason.

[00:25:36]>> Uh I actually sidebar I think AI will make the college experience far more important in the future not less like going to college with in an AI world where people are more attached to their screens inside more often not going out and doing stuff as much college experience is going to have a bigger premium. Anyway, what do you think about this idea of frontloading your 529 plans, >> Ben? I don't like it.

[00:25:56]>> No. Okay.

[00:25:57]>> I love it.

[00:25:58]>> Oh, >> I think it's great. Cuz ultimately, if you're taking dollars that you would otherwise be saving and you're putting them into a tax shielded vehicle, >> such a dad joke.

[00:26:06]>> I got you.

[00:26:06]>> Such a showman.

[00:26:08]>> I got you though. Uh, putting that in a tax deferred vehicle for the benefit of your kids, right? I mean, ultimately, if you kind of rank, you know, priorities, I'd put the kids at the top of the list.

[00:26:15]>> Plus, the idea of frontloading is you're getting more compounding.

[00:26:18]>> Correct. And then you're compounding ultimately, Ben, to your point, cost of college, you know, your chart shows that it's, you know, increasing at a rate of inflation less than broad CBI, but it's still increasing and it's exorbitant. I mean, I what 30 grand a year is what I paid. I think it's closer to 70 now at the college I went to. I mean, it's obscene. So, if >> it is worth noting >> the average cost people actually pay from the sticker is like 50% off.

[00:26:38]>> Right. Right. Right. Totally.

[00:26:39]>> Most people don't pay stickers.

[00:26:40]>> You play the game. So, but if you have a bucket of assets that is tax deferred and tax compounded to your point, Ben, I have seen clients take 529 distributions where something like 90% of the distribution was earnings, meaning that they got a 90% discount on college tuition from what they paid due to the market because they got started early.

[00:26:58]And that is a very very very powerful thing because it ends up at least in New York in certain states if you take tax deduction upfront and then you get taxfree distributions on the back end.

[00:27:06]The only thing like that is a health savings account, an HSA. It's tremendous. So frontloading the 529 makes a lot of sense. Creates a shield.

[00:27:12]And your point, Ben, you get taxfree compounding. It's awesome.

[00:27:15]>> All right. And the flexibility of the tax tactical brokers, you don't have to do anything with it after the fact if they don't use it.

[00:27:20]>> Yep. In the last two years, you can do a roll over to Roth for up to $35,000 per beneficiary.

[00:27:24]>> What do you think about moving to a state that has like free instate tuition? Uh >> Georgia seems like the system. Totally.

[00:27:31]>> Housing is very affordable right now in most states. So like California.

[00:27:34]Totally.

[00:27:36]>> I totally recommend this.

[00:27:38]>> Of course. Okay.

[00:27:41]I thought it was a good idea.

[00:27:42]>> I love it.

[00:27:43]>> I Yeah. Unless you're West Gray, you don't move somewhere because of taxes, >> right?

[00:27:47]>> How's that? Yeah.

[00:27:48]>> He He did it big. Yeah.

[00:27:49]>> Puerto Rico, right?

[00:27:49]>> Definitely.

[00:27:50]>> Yeah.

[00:27:50]>> All right. Let's do another one.

[00:27:51]>> All right. Up next, we got one from Kevin.

[00:27:55]I work for a family business with less than five employees. 10% of my net worth is in a Roth IRA. The rest of my investments go into a taxable brokerage account. I max out my Roth IRA every year, but I feel like I'm not optimizing for tax efficiency. What other retirement accounts would you recommend for somebody in my situation?

[00:28:11]>> All right, this will be the shortest answer ever. SE IRA, solo 401k.

[00:28:15]>> I dig it, >> right? Is that it?

[00:28:16]>> Yeah. Oh, that that's where I'd start.

[00:28:18]Yeah. Can we chart on, Daniel?

[00:28:20]>> Wait, what what is a SE SER?

[00:28:22]>> Uh, a SE Let me uh It's a simplified employee pension and it's a small business 401k plan. So, yeah, if we chart on and you ignore the typo because I forgot to put a D under tax advantage.

[00:28:31]We're starting with an IRA for my guy.

[00:28:33]And so, that's a great place to start.

[00:28:34]You can save up to $7,000 a year. It's awesome. And then Ben, you're right.

[00:28:38]Next, I would lock lock in to a retirement plan. So, we mentioned family business, right? Five other employees.

[00:28:43]That those are the facts and circumstances. The big thing to keep concerned though on the SEP and the solo K plan, or not even a solo K plan, is you're going to need to fund a retirement plan for your employees, too.

[00:28:53]Right.

[00:28:53]>> Right. So, that's the big issue that that you'd have with a small business.

[00:28:56]So, SE IRA Duncan would follow on that.

[00:28:59]That's a very easy way to fund, but you need to do that as a percentage of income. And so that can be up to $72,000 and business owners can put in roughly 17 18%. I would also point uh Matt to an HSA, health savings account. I mentioned those before. Requires you to have an HDHP, a high deductible health savings plan. Uh but you can put up to $4,400 per year into an HSA now. Distributions come out taxfree if they're used for medical expenses. And new for this year, a 538 Trump account, which will launch in July. Uh but that's that's for more for kids.

[00:29:28]>> I know they had a number on it. 53A.

[00:29:30]Okay.

[00:29:30]>> 53A. Yep. That's what I'm calling them.

[00:29:32]>> We've complained before about the fact there's so many accounts. Why is there a SE IRA and a solo 41k? I don't get that.

[00:29:38]They seem very similar to me.

[00:29:39]>> Yeah. I think because back in the 1970s, '8s, 90s, like just like the Roth, some senator came up with a plan, you know, to to save the American investor and like rolled forward and stuck their name on it. And right there at the bottom, you see it happen again and again and again. And we just keep bolting stuff onto the tax code. So, >> this has to get consolidated at some point in the future, right? There has to just be like this is your social security number. It doesn't seem like it should make sense. Well, it doesn't seem like it should make sense that someone is able to put 70 grand into their text for retirement account and someone else in in a Roth is able to put like seven.

[00:30:09]That doesn't make any sense to me.

[00:30:11]>> And the sweet Carlson plan for 2028 when our platform is universal savings accounts. We just open it up tsp to the mass.

[00:30:17]>> Remember how Ryan on the office had the WFA, what's it called?

[00:30:20]>> W uh Woof.

[00:30:21]>> Woof. Yeah. It went to every one of your social media accounts and it faxed. Like that's going to be our plan. Yes.

[00:30:25]>> For these accounts where it's going to be one account under a big umbrella.

[00:30:28]>> Simplify the tax code. Put it on a postcard. That's That's our pitch.

[00:30:32]>> I like it.

[00:30:33]>> Yeah.

[00:30:33]>> All right. We got one more.

[00:30:34]>> All right. Last but not least, we got one.

[00:30:36]>> This is a record for questions, I think.

[00:30:37]>> Oh, it's exciting.

[00:30:37]>> Yeah, I think it might be. It might be.

[00:30:39]We've We've definitely done seven before, though. Okay.

[00:30:41]>> Uh Okay, >> this one's from John. I like this question a lot.

[00:30:45]>> My father-in-law has one remaining individual stock position. Applied materials. That's AAT, I think.

[00:30:51]>> Uh he bought it at $4 a share in his brokerage account decades ago, and today it's $440 a share. here. Not to brag.

[00:31:00]>> Yeah, not to brag. So, he's sitting on about $700,000 in capital gains. He wants to start trimming his position.

[00:31:07]Are there any good sellown strategies he can use to limit his capital gains? He has two children and three grandchildren he could gift it to. And one of the grandchildren has special needs. Are there trust or other options? Any advice from you, Bill, or anyone else is greatly appreciated.

[00:31:21]>> Right. Credit to his his dad for doing this.

[00:31:24]>> Holding on to that. Yeah, that's >> I can't even imagine what the uh the draw downs on that stock would have been. Probably massive. This is this is somewhat of a bull market question, but sometimes people just do like we've had people come to us who say, "Hey, my grandfather put money into Intel and IBM and Microsoft in the 1980s or something is still and has them at like cents in the dollar or something for cost basis.

[00:31:47]What do I do?"

[00:31:48]>> I mean, that's a huge capital gain.

[00:31:50]>> Yeah.

[00:31:51]>> Right. There are ways to offset that through we've talked about direct indexing and tax harvesting.

[00:31:56]>> Probably not the whole thing would be my guess.

[00:31:59]>> Yeah.

[00:31:59]>> What say you?

[00:32:01]>> Yeah. Couple of options. I think the straightforward I'm going to end here too is just early in the tax year. What I would recommend is you bite off a big chunk and you basically pay out, you know, realize all the gains in January and February and then that buys you time. You have then a slug of cash and you diversify and you can buy a bunch of stuff. You can even just do this with ETFs and if you get any draw downs in individual positions or broad markets, you can liquidate those during the tax year to offset the loss that excuse me the gain that you took in January and potentially net out the effects. But what I like about that is in January you have 11 months more or less of tax planning in front of you. If you pull the trigger right now, which might be the thing to do from a market perspective, right? If you take a look at that chart, it probably looks like >> Yes, it's vertical.

[00:32:41]>> Okay, great. So I I mean I think at this point there's still enough time. So, I probably would recommend that because ultimately something that can double, triple, quadruple, or or 100x that can get cut in half at any point.

[00:32:52]>> Well, I'm looking at the draw down chart here. In the combination of the dot bubble blowing up and the great financial crisis, this stock was down 86%.

[00:32:59]>> Yep.

[00:32:59]>> In let's see, 2022, it was down 50%. Uh, Liberation Day, it was down 43%. So, this thing has gotten hammered a bunch.

[00:33:08]>> Can you imagine what the VAT would do to this sucker?

[00:33:11]>> The fact that his dad held on to the shares is kind of amazing. What if they're just waiting for it to hit an even million though? You know, >> just wait cuz Yeah, once you get to that.

[00:33:19]>> So, what about He asked about like children, grandchildren, gifting? Yeah.

[00:33:22]>> I guess the other thing is charitable giving. Yep.

[00:33:25]>> That's a That's another way to do it, right?

[00:33:26]>> Yeah. Donating those shares means you don't have to realize the gain.

[00:33:29]>> Well, giving to children or grandchildren. Is there a step up in basis when you >> There would not be. No, that requires somebody to die, which I would not wish.

[00:33:35]>> I remember we had the Intel person last week saying, "Hey, you'd miss this.

[00:33:38]Someone someone got Intel shares for their wedding uh wedding present.

[00:33:43]>> Awesome.

[00:33:43]>> And it just went bonkers and now Yes.

[00:33:45]They they're like, "No, we still have to pay the taxes."

[00:33:47]>> Right. Exactly. Helping to reduce American taxes, too, because we own what 10% of Intel as a country. But uh moving forward, yeah, that's another way to do it is charitable deductions, contributions to offset the gain that you're realizing. That's another great strategy. I've got some crazy ones to throw at you guys if you want speed round. We can look at a variable forward prepaid contract, right? And that basically is an agreement to sell the stock at a future date. and you can kind of see what happens. Let's say 18 months, two years in advance and play that game. It's a really long way to go.

[00:34:12]Yeah, you have to pay like a margin fee.

[00:34:14]It's not free. But ultimately, if the taxes on this thing are so high, that might be a really interesting way to go.

[00:34:18]What I like about that is gives you optionality. You can either exchange the shares at the time that the gains realized or if the stock continues to go thermonuclear, then you can actually realize cash. So like liquidate half your gain. Another option would be to deploy tax loss harvesting. We have these long short programs that are all over the market right now. Now we're talking about >> you can turn the dial up on them.

[00:34:37]>> Exactly. And you can >> But I mean that does require losing money to offset.

[00:34:41]>> Correct. But if you're diversifying enough and you're taking short and long positions through a professional manager, I wouldn't recommend doing this at home.

[00:34:47]>> And usually the reason you do this is because you want to diversify.

[00:34:49]>> That's correct. So it's more or less instant diversification knowing that you have a gain and you have time to whittle it down. The other option would be an exchange fund. There are funds that big providers offer that they form partnerships and they say, "Hey, this dude has applied materials. Let's take this Micron guy. Let's take this Bitcoin dude. Let's take this gal who has a bunch of Intel stock and they put them all together in a fund and you basically get diversification through the fund.

[00:35:11]The problem with those, you got a seven-year holding period, right?

[00:35:14]>> So, they're trade-offs. There's no good solution.

[00:35:17]>> What's that called again?

[00:35:17]>> That is called an exchange fund.

[00:35:19]>> Okay.

[00:35:19]>> You for the these options, you want to talk to a financial adviser. Yep.

[00:35:23]>> These are very complicated, hard to understand, very hard to do yourself.

[00:35:27]You want to talk to a professional.

[00:35:28]>> Huge amount of downside, too. And ultimately, yeah, you're going to pay a little bit to a professional manager to help you solve the tax problem, but if that's less than what you would pay in tax, maybe it's worth it. And we do this to have work for our clients every day.

[00:35:39]>> Not not financial advice obviously, but uh what would you guys do if you were in this position?

[00:35:45]>> Probably sell I'd sell a gift. I like that gifting idea just because ultimately the children, grandchildren would probably have a lower tax basis depending on whether kitty tax applies or not, lower tax rate. So I do actually love that idea because ultimately you just say, "Hey, here's $20,000, but you have to pay the tax." So that's on you.

[00:36:00]I don't think that's a bad trade-off.

[00:36:01]But I love the idea, like I said, of real realizing the gains early, doing tax loss harvesting, and if you get to December, you still have a huge capital gain. That's a great place to donate to a public library. Do that through a donor fund.

[00:36:12]>> Bucket few of the options. I wouldn't do it all because I don't think you can do it all.

[00:36:15]>> But I think the bigger picture is look, these are all tax questions and you shouldn't let the tax tail wag the dog.

[00:36:20]You if you won the game, it's time to stop playing. Like that would be my advice to just about anybody because the the bottom can get pulled out of any single stock at any time. General Motors, Xerox, these are some of the largest companies. G General General Motors back in back in 1980s and they got cut to 90 90% losses.

[00:36:35]>> The stock is up 155% in the last year.

[00:36:38]>> Yeah, I think I'd sell at least a third.

[00:36:39]>> This stock could fall 20% in a single day and it wouldn't surprise me every day. So again, it could keep going up too. So >> yeah, it would make them sick if it just kept going vertical.

[00:36:47]>> But that's why you want to probably break it up some. You don't do it all.

[00:36:50]Yeah.

[00:36:50]>> If it was me. If it was me. Not >> exactly. But I think people make this mistake. Duncan, you said it before.

[00:36:54]They index to a number. They're like, "Ah, if it just goes over a million dollars, I'll be good." And what if it never gets there, right?

[00:36:59]>> And then you'll look back and and live your life.

[00:37:01]>> That's the whole thing. I I I'm going to sell these this stock that's down a lot.

[00:37:04]I'm going to sell it when it breaks even again. Like, that's not a way to That's not a way to make an investment.

[00:37:08]>> Terrible. Don't let the market make those decisions for you. Don't be Leo at the end of Inception, an old man living his life in regret. That's my advice to you, Duncan. Wild Maine today. You look like a cowboy. Has Have the listeners seen you in your full glory?

[00:37:20]>> I don't think so. I don't think I've ever been hatless.

[00:37:22]>> Yeah. I didn't know we were having Keith Urban on the show today. This is because we have we have an event today. I'm not just dressed like this.

[00:37:27]>> Nicole Nicole Kidman right here.

[00:37:28]Amazing.

[00:37:29]>> That's right. We Yeah, we are. We'd have a nice fun event tonight. Um, all right.

[00:37:32]Fun to do this in studio. First time in a long time. Great to see you guys in person.

[00:37:36]>> Can I give a shout out to my man Ben Carlson? This is book number five for Mr. Ben. Ben, do you love your books like children? Do you love them all equally and that nonsense? Or which one's your favorite? You can answer honestly.

[00:37:45]>> Two of them like stepchildren because they were self-published. Those don't count. Uh, this my third published one of the publishers. So anyway, we're giving away 10 free signed copies. All you have to do is send us a question.

[00:37:56]ask the compound [email protected] in the next 10 days.

[00:37:59]>> Yeah, I can't wait. Can't wait to read it. I'm going to have a lot of questions for you.

[00:38:03]>> All right.

[00:38:04]>> Got a long way to go to grow my hair out, but I'll be there soon.

[00:38:08]>> I like it. I like it.

[00:38:09]>> All right. Thanks, everyone. We'll see you next time.

[00:38:28]Heat.