Brakes, Balance & $5 Million

SPEAKER_01 0:05

We're gone to a really great financial future. Tom and Don are talking

Money Matters Daily

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real money.

SPEAKER_03 0:11

You know, when you boil life down to its essence, what it really comes down to is pretty much daily financial dealings, doesn't it? I mean, almost every day. You may not be thinking about investing every day, but you're always dealing with money in one way, shape, manner, or form. And that's why a program like this, I feel, is just really important. Because there aren't a lot of places where you can go and get what most of the time is unquestionably decent advice, straight answers without a hidden agenda. Okay. Yeah, you may want to imply an agenda because we are part of a registered investment advisory firm, but let me tell you, that's the only way to make money doing financial uh doing financial advice. Um I I used to just do it on the radio. I wasn't an investment advisor, and you know, way back when I made money from it. But generally speaking, everybody who's on the airwaves these days is selling something. I don't I honestly do not believe there's a single financial radio show out there that isn't um paying for its time in one way, shape, or form. I never did. I got paid for being on. So now I get paid. I get paid by Apella. Tom gets paid by Apella. We make a decent living. We're not certainly not getting rich like we would be if we were selling indexed annuities, but it's great that I mean, I feel good that I can be here answering your questions, and I really feel good when you send in all the questions. And wow, have we gotten a lot of questions lately? I mean, holy cow. Tom's got about 40 written ones, which means three or four a day for the uh Monday through Thursday podcast. And then for the Friday podcast, I'm I'm still doing eight a day now. Based on where we are. Now, that may drop back a little bit in the future, but if the questions keep up, these are going to be some busy QA episodes on Fridays. So keep those questions coming in at talkingrealmoney.com. Click on the microphone button in the corner and ask your question just like this.

Bond Fund Tradeoffs

SPEAKER_03 2:30

Hi, Don.

SPEAKER_05 2:31

I asked this question a few weeks back, but I sense from your response that maybe I didn't ask it clearly enough. My question relates to fixed income investing in a portfolio. When you buy a bond ETF like BND, which seems to be one of your preferred holdings for fixed income, because it's an intermediate-term bond fund with maturities of like five to seven years, they tend to be a bit more interest rate sensitive and not as, for example, stable as a shorter term fund like BSV might be. Admittedly, on average and over time, one might do better in a longer maturity bond fund like BND. However, it was always my impression from listening to you and to Paul Merriman that the bond portion of a portfolio should be sort of like the brakes in a car or protective portion that should have relatively low chance of losing value in comparison to the more risky stock allocation. Therefore, my question is, why do you not recommend shorter-term bond allocations for the fixed income portion of a portfolio rather than BND? If the goal is not to make a lot of money on the end of the portfolio with bonds and it's more for capital preservation, wouldn't a shorter term fund be better, or perhaps just putting the money in CDs where there are guaranteed returns? Thank you very much.

SPEAKER_03 3:48

Love the show. All right. I don't remember what I originally said because I didn't go back and try to find the original question, but uh it's a good question. It deserves an answer, and it's different for everybody. Uh as a matter of fact, it's even different. The answer is different between me and Tom, or Tom and me, to say that correctly. I tend to lean more toward shorter-term bond funds. Actually, I lean more toward laddered certificates of deposit or laddered treasuries than Tom does. Tom is a bigger fan of the yield stability of a BND. You see, there's two components to bond funds. There's the yield and there's the return. The return fluctuates a little bit based on interest rates and credit quality. Credit quality is not a worry when it comes to BSV or BND. So we don't worry about that. Now what we're dealing with is maturity, uh, the the the time to maturity and the interest rate volatility. In 2022, the worst year the bond market ever had, and it was due to a combination of events that all came to a head at the same time. But the biggest one that led up to that was years and years and years of low to no interest rates. So any interest rate on bonds was going to cause the value of the old bonds to decline. And we saw BND decline by about 13% in 2022. However, BSV declined by over 5% in 2022. So it declined too, just not as much. However, BSV sees its yield fluctuate more. So if rates continue stable or they go down, BSV's return is going to decline. Whereas BNDs, as new bonds come into the portfolio and that uh they're going to slightly go down, but because of those older bonds, they're going to maintain a slightly higher yield. So it's all of this is trade-offs and it is all very, very personal. I am comfortable having both. I just split the baby. I have BND in my portfolio, and I have laddered treasuries for the uh the ultimate safety, as long as I never sell them. So uh there's not a universally correct answer. One of the reasons I think you hear BND a lot is because we're trying to simplify it for the majority of our listeners, and it's a nice because a lot of people complain, well, I don't want CDs, they're not earning anything, or I don't want uh a short-term bond fund, they don't earn any anything. Yeah, BND earns a little bit more, so it kinda it's kind of a way to make everybody happy. It's a middle-of-the-road idea, a middle-of-the-road suggestion, but not for everybody. Thanks

Value Versus Growth

SPEAKER_03 6:44

for your question. We have another, of course, because we got a lot of them.

SPEAKER_05 6:47

Hi, Don and Tom. You and Tom speak a lot about AVGE as a set it and forget it stock allocation to a portfolio because it's broadly diversified, is simple, and inexpensive with a value tilt. Alternatively, one could use VT, which is similarly inexpensive and broadly diversified and simple, but is more map but is more market cap weighted and so more growth oriented. I know that this question is almost certainly overcomplicating things, but my question is, is there an argument to be made to have both so that when growth stocks are in the lead, the portfolio will have a slight weighting towards that, and similarly when value stocks are in favor, we'll have that tilt. I understand that since value seems over long periods of time to be superior to growth, that one might be lowering the overall long-term returns. But is it possible that by combining a value tilted ETF with a growth tilted portfolio, it might lower volatility slightly and make the ride a bit less bumpy?

SPEAKER_03 7:51

Thanks so much. You're right. You you're overthinking. You're overthinking, and I don't think you're thinking about it right either. Here's the problem. AVGE gives you exactly what you're saying you want. It giv a very large portion of AVGE is in growth stocks by definition. It's just that they overweight value. So what you're saying is, well, give me VT and then I'll add some value. Now you could do that by using uh the you know Vanguard's value fund, you could use uh uh an Avantis value fund, you could use a dimensional value fund, and you could have VT and a value fund and do your own overweighting. The thing is that AVGE does that for you without having to do anything. You see, it's the simplicity that matters. And there is no historical precedent for overweighting growth over a hundred years. The evidence still points to, at least based on past performance, a bit of an advantage to value and a bit of an advantage to small. But we're not saying just go all small and all value. AVGE gives you all of that. DFAW gives you all of that. Or you could go to Vanguard and get VT and I'm I'm trying to remember the symbol for their their value fund, their small cap value. You could throw in, what is Vanguard small cap value? Now I have to look it up while I'm doing the thing because I don't edit a lot of this stuff. I just let you listen as I'm typing. VBR, VBR, done.

unknown 9:37

Gosh.

SPEAKER_03 9:38

So you could do VT and VBR, but VBR isn't going to get you international. So then you have to get an international small cap value fund. And then you have to rebalance those funds. Well, why not just use Avantis's or Dimensional's total global funds, AVGE or D FAW, because they do give you growth. It's just we're we're misperceiving, I think. We're thinking, well, AVG is all AVGE is all value. It's not all value. It's just slightly tilted to value more than VT is, because it's the whole market. Thanks for your question. Here's the next one that came in at talkingrealmoney.com with that little green microphone button in the

Converting Real Estate

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corner.

SPEAKER_04 10:22

Hi, my name is Stephanie, and I really enjoy your show. Thank you so much. I have been a real estate investor for 30 years. I flipped homes, had a great time, uh, but I've retired and don't want to flip homes anymore because of the cruise and the time needed. And so I've accumulated five million dollars and I'm trying to figure out how to convert that into the stock market. I have virtually almost ignored the stock market for 30 years because I was flipping homes and needed the money to do that. Anyway, so I have this money. I've retired, and I'm not sure what to do with it or how. Um, and I don't know if I should dollar cost average or exactly how to convert a lot of money into the stock market at this late date. I'm 60 years old, I've retired, I sold all my homes. I'm renting, deciding what my next steps are, and wanting to travel and no longer want to do real estate. Okay, thank you so much. I really appreciate you and have a beautiful day. Bye-bye.

SPEAKER_03 11:26

Uh, you you did what a lot of smart people do, Stephanie. You you poured your money into your business because you had control over your business. See, that's it's different than investing just in real estate. You were an active participant in real estate. You created value, which is what makes uh uh most of the very successful people in this world very successful, is creating wealth, building wealth. You built wealth. Now you're tired of building wealth. Smart, smart, smart to rent if you want to travel. If you look at real estate values lately, oh, if you look at them over 100 years, unless you were adding value to them, they barely outperformed inflation. Again, unless you're adding value, you made it a business. That's awesome. Now, you're gonna diversify. Smart move. Now, logically, I should say put all of it in a portfolio that is properly diversified based on your risk profile, which requires a plan. You are at the point where a financial plan is absolutely called for. Absolutely called for because you need to determine what your needs are. How much money are you going to need this money to make for you in retirement? Then you have to build a portfolio that is designed to accomplish that within risk parameters. First, it's your tolerance for volatility. Second, it's your need to take it. If the five million at 4% a year is going to be adequate for your needs, you don't need to take much risk. But if you need more like 5% or 6% from that, then you may need to take more risk. If you want it to grow, you may need to take more risk. You need to start asking yourself some questions, but you also really need to get a great fee-only advisor to help you write a plan. I would say the most sensible thing to do, because remember, stocks go up in three out of four years, or have in the past gone up in three out of four years. So that's a great argument for putting it all in. And pretty much anybody worth their salt in this industry would say, yeah, you want to have it invested rather than sitting in cash unless it's in cash for a short-term need or for volatility reduction. So figure out what your asset allocation is and get it all invested. However, you also need to ask yourself, gee, if I put this five million dollars into stocks and bonds, and the stock portion of the portfolio declines by a million dollars. How am I gonna feel if that happens like the day after I do it? If you're gonna panic, if you're gonna be very concerned, that is the only case for gradually getting it invested. But you need to get it invested and you need to have a plan to do so. This is the point in life when pretty much all of us need to have some idea of what we're going to need in the future and how we're going to get it. And you have this wonderful lump sum when added to Social Security that can fund your lifestyle. What's that lifestyle going to cost? Figure that out, then start getting it invested. If not, invest it all at once if you can handle the risk. Thank you so

Emerging Market Warning

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much. More calls await.

SPEAKER_08 14:52

Hey, Don, Tom from Ohio. Love the show, been listening since the first Clark Howard advertisement you guys had. Hey, my question today is about a letter I got from Fidelity about a fund that I have in my Roth 401k. Uh the fund is the Fidelity Emerging Market Index Fund, FPADX. So the letter from Fidelity says that a non-diversified fund may invest a greater portion of its assets in securities of a smaller number of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in the share price than the normal. So, from what I get from this, is my fund used to be diversified and now it's going to become non-diversified. And I don't know what that means. And once I know what that means, after you tell me, what should I do with that information? Thanks, Don.

SPEAKER_03 15:51

Well, this is a this is a unique situation. And uh and uh I didn't know this was going on, but it makes perfect sense. Fidelity Emerging Markets Index Fund is an index fund. It's not becoming something other than an index fund. And yet, being an index fund in emerging markets because of the current climate. Remember, the two largest, I mean, two of the largest markets in the world now, I think they're number two and number three, are the Taiwan stock exchang and the the South Korean stock market. And what is the behemoth of the Taiwanese stock market? Taiwan semiconductor. What's the behemoth of the South Korean? Samsung. Well, this fund owns the index. And those two companies make up a gigantic portion of the index. The rule states that uh 75% of a fund's assets, no matter what kind of fund, have to be invested so that no single company exceeds five percent of the fund's assets, and they can't own more than 10% of that company's voting stock. Well, in this case, because so much money is pouring into technology, particularly semiconductor technology, right now, right now, about twenty, what is it? Let me just double check the number. Yeah. About twenty-five percent of this fund is in Taiwan Semiconductor and Samsung. Just those two. A quarter of the portfolio. They went from being, quote, legally diversified to possibly being illegally diversified, in other words, undiversified, even though they're diversified. So they have to let you know that they're not meeting those standards, but it's not due to anything they did, it's due to what the market did. Fascinating. Absolutely fascinating. I mean, Taiwan SEMI is now about 15% of the assets alone. Come on, this is a crazy situation. Yeah, it's it's good for the investors, but I don't know how sustainable it is. Well, that's why I don't buy sectors. So, yeah, it's nothing to worry about. You can keep the fund as part of your well-diversified portfolio. And thanks for the question that was sent in at talkingrealmoney.com using the little microphone button, just like this one was.

Saving for Grandkids

SPEAKER_03 18:21

Hey, Tom and Don.

SPEAKER_06 18:22

It's always a pleasure listening to your you guys' broadcast. Uh, this is Ian, and my wife and I are thinking of contributing to each of our grandkids uh in account. So we're thinking at uh on their day of birth, we are going to contribute ten thousand dollars in a non-taxable uh account, and then on uh every single birthday up to the age of eighteen, we'll contribute another thousand each birthday into their account. Uh currently I'm thinking of putting it into a 529 account where it's gonna continue to grow tax-free. And then if they choose to use it for their education, they can withdraw it and use that for their education. But if they choose not to, because of the Secure Act 2.0, um, they can actually convert that into a Roth IRA and and that account can continue to grow tax-free right up to their return age. Um we do have a trust account, a trust that that a family trust that has been set up. And uh I'm not sure if that's something that will be a better avenue or tool to use so that this uh the money that's been put aside can be uh can grow tax-free. But uh I'm not sure if there's any other tools or products available out there, but I'm thinking 529, and then if they choose to, they can convert it into an involved IRA. Or if there's any other way of doing this that it will allow them to continue to grow their account tax-free right up to their retirement age. Anyways, thank you very much for your input. Looking forward to hearing from you guys.

SPEAKER_03 20:02

Well, this is really a great plan. I just the fact that you're gonna start putting money away for the kids truly powerful gift. Uh and the Roth IRA conversion potential is just a nice little kicker. But remember, 529s were designed to provide tax-free growth for education. Not just college, though, it can be any kind of uh uh primary or secondary education. It can be trade schools, it can be all kinds of things. So that's what sh that's what it should be used for first. Then the Roth is a nice secondary benefit, but remember, only $35,000, and if you're gonna put money in over many years, there should be more than $35,000 in this account. Only $35,000 can be converted to a Roth. So it can't be the whole thing that grows tax-free to retirement. And there really aren't great vehicles for growing from childhood tax-free to retirement. $529 is the best. And $35,000 is nothing to sneeze at. What you you already have a trust, which is not going to give you any tax breaks, but it gives you control. That's nice. You can also, once the kids get older, instead of putting all the money into the $529, since you will have built up a fairly large chunk of change when they're young, when they start getting jobs, start directly funding a Roth IRA up to the max, up to their, you know, if they if they earn up to the max. So that's a secondary way to save money tax-free long term for their retirement. So there are a couple of ways to do it. And I think that uh probably doing a little of both. When they're little, do the 529. When they're in their teens, they're working part time, help them with a Roth. Then they can add to that Roth later when if they don't use all the money for education. Hopefully, maybe they use it all for education. And the other Roth is helping. We don't know what the future's going to bring, but based on what we have right now, I think you're doing all you can possibly do. And what you're doing makes great sense and should make a huge difference in their life. Good job.

Roth Conversion Planning

SPEAKER_03 22:16

Next question's coming up. Here it is. Hi, Don and Tom.

SPEAKER_07 22:20

This is Joe from Huntersville, North Carolina. Longtime listener. So I'm confused about Roth conversions. My wife and I are in our mid-sixties and have retired this year. I have over a million in traditional IRAs. My wife has over a million as well. I have over three quarters of a mil in Roth IRAs, whereas my wife has over a half a mil. Watching retirement this year really got me concerned about the Irma penalties. Does it make sense to do some Roth conversions before RMD makes us take out the a sizable chunk, putting us in that Irma penalty box? Thank you very much. Love the show.

SPEAKER_03 23:15

And the answer once again is it depends. Yeah. Okay. I hate to sound like broken record, but when we get to retirement age, folks, this is a fact. You need to, if you've put away a substantial amount of wealth, as Joe has, you want to make that wealth work the hardest for you. And you don't want to get all caught up in the emotion of calling it one an IRMA penalty. It's not an IRMA penalty. It is an it's an income-related surcharge on Medicare Part B and Part D. If you make a lot of money, you pay more in uh in your Medicare Part B and Part D premiums. That's what IRMA is. And you can do some tax planning to avoid it. That's what I'm getting to. You need a plan. Everybody at this point, if you've got money, you need a plan because you got to know what you're doing. And yeah, it might very well make sense to do some early Roth conversions after a careful consideration of the tax situation currently. You got to make sure you don't kick yourself into a higher bracket, which could end up being more expensive than any Irma surcharge. So a plan, a plan, a plan, a plan. Yeah, it might make sense. Make sure it makes sense. Sit down with somebody and get a plan or do it yourself. Figure out what you can convert without kicking yourself into a higher bracket. That's the key. You're uh you gotta you it depends on what your current bracket is, your expected future brackets, what your income sources is, how much room you have in your current tax bracket. Oh, and and by the way, how much extra cash you have to pay the tax because you don't want to pay the tax on the conversion from the IRA. There you go. It's not an absolute, but nothing is. How many more questions do we have? Let me look. I've I've kind of lost track. Two more! Holy cow, this is gonna be a long one.

HELOC or 401k?

SPEAKER_03 25:22

Let's get to the next one.

SPEAKER_00 25:23

Hi, Don. This is Kathy in Kentucky. I'm 58 years old and need to make renovations to my house. My options to pay for the renovations are either borrowing money from my 401k or taking a home equity loan or line of credit. I owe about $69,000 on my house with 20 years left on my 30-year loan. I have a 3.9% interest rate. I have plenty of equity as the current value of my home is between $200,000 and $225,000. My retirement account is invested in a target date fund for 2036. I am currently healthy and I plan to work at least 10 more years. But we all know how you know good plans go sometimes before I retire. Is it better to borrow from my 401k or take the equity line or loan? I heard that borrowing from my retirement funds can slow the growth of that account. And I've also heard that the pro is that I am paying myself interest. So I'm not sure which one is the best option. If you could um maybe give me some ideas or guidance on that, I would appreciate it. Thank you so much.

SPEAKER_03 26:35

I have an aversion to except in cases of emergency where there is no other option, uh, taking money out of your retirement plan because you're hurting that longer-term future that you alluded to, that that will be 10 plus plus plus years from now. And that money growing in a target date fund, which historically target date funds over the past 30, 40 years have returned seven or eight percent a year. So that and it by the way, it's tax deferred. So there's a tax advantage. Um you're on the cusp. I mean, you've got a HELOC option, which if your credit is good, you can get HELOCs in the sixes. At least I've seen some sixes lately. And the nice thing about HELOC is that it's a line of credit. It's there if you need it, but you don't have to use it. And uh it would be the first thing I would start paying down. I would start paying that off as soon as you can, adding a little extra money to that. But um, I think you're s you're likely to be a little bit better off keeping the 401k. Plus, it keeps a pile of money that is earmarked for that longer-term future. So I'd lean toward the HELOC. I wouldn't pay off the mortgage. Or I'm sorry, or sorry, refinance the mortgage, not at 3.9, did you say? That's nice. Um, so my first uh I think my first choice would be HELOC. Thanks

Converting Before Retirement

SPEAKER_03 28:05

so much. Last question. Hello, Tom and Don.

SPEAKER_09 28:08

This is Anthony from Huntersville, North Carolina. I really enjoy your show. It's informative, and the banter and humor are like a warm breeze to my day. Now, enough of the buttering up. I do plan to let the tax tail wag the retirement dog, and you cannot talk me off of this wall. This is primarily due to the fact that I am appalled by the thoughts of RBs, mainly for my potentially widowed wife and for the inheritance of my children. Therefore, I am willing to work a year or two longer so that my tax killing plan can happen. Here's the plan, simply put. I am 57 and my wife is 55. We expect our retire in four or five years. However, starting this year, we will do small annual Roth conversions until our tax-deferred accounts are depleted. I project that the depletion will happen by the time my wife and I take Social Security at 70. While working, we will pay the taxes on the conversion from our job withholdings. We will remain well within the bounds of our existing tax bracket. But after retirement, we will keep our conversions going but below whatever the tax deduction is each year. Based on my calculations and feedback from AI and forecasting from my retirement software, we will pay minuscule to zero taxes from the time we retire and going forward. Another side bonus is that we will avoid all medical tax cliffs. I never hear anyone talking about converting while working, but it makes total sense for my tax-free future. What are your thoughts? Have any of your clients ever done a plan such as this? Thanks for your feedback, and please, please, hold the tomatoes.

SPEAKER_03 29:58

I like tomatoes too much to throw them at anyone. I'm gonna eat them. Uh I'm not gonna throw tomatoes, and I'm not gonna try to talk your dog into wagging properly. Uh the yeah, there's nothing wrong with converting early while you're still working. Uh nice part of it is you probably have money, you better have money, that you can use to pay the taxes. Just do a little planning. Basically, that's what I said earlier. And by the way, how is it we got two calls in one episode from Huntersville, North Carolina? Joe was from Huntersville. Where is Huntersville? Now I have to look it up. Huntersville, North Carolina. And I know North Carolina pretty well. Let's look where where that is. Huntersville, North Carolina. Oh, it's north of Charlotte. Okay, yeah, yeah, yeah, yeah, yeah. Okay, up near the lake. Yeah, I had a good friend who was once your superintendent of schools up there. Uh anyway, uh where was I? Oh, yeah. Plan. Just it's not it's not about uh your your annual deduction. That's that doesn't really play into it. What it what does matter is your your rate. You only want to convert up until the point where you'd kick yourself into a higher bracket. So do some tax planning. That's all. Do some tax planning. So, you know, this isn't uh this is a pretty normal thing. This is not a big deal. You're not really doing anything weird. Uh nothing that requires throwing rotten food of any kind at you, although if it's yeah, if it's rotten, I might throw it, but not good tomatoes. Uh and again, just plan. Plan, plan, plan. That was the uh the whole theme of today's show. Plan. If you plan, even if you do the plan on your own, then you're gonna have some idea how this works and it feels more structured. And keep those questions coming in. Go to talkingrealmoney.com, click on the button in the lower right hand corner, record your question. Uh, on an upcoming Friday, usually just a couple of weeks away, about three, I will answer those questions. And if you want a lot more help, like more than we do in a QA session, go to the same website, talkingrealmoney.com, click the button that says meet an advisor, and meet with one of Apella's advisors, who I promise you will provide you with some very actionable help. Not just a meeting where, oh, yeah, you better become a client. No, that's not the way we work. So anyway, go to talkingrealmoney.com. Thanks so much for listening, tell a friend or two, and uh keep joining us every weekday, except for holidays, as we are talking real money.

SPEAKER_01 32:44

The opinions and views expressed on this podcast were current on the date recorded. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and our subject change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions.

SPEAKER_02 32:57

Although information and opinions given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy.

SPEAKER_01 33:06

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SPEAKER_02 33:41

Any other website for information regarding Appellate Feeds and Services.

SPEAKER_01 33:44

Apellet Capital, LLC DBA Apollo Wealth, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in the states where it is properly registered, or excluded or exempt from registration requirements. Registration with the SDC or any State Securities Authority does not imply a certain level of skill or training. Apello does not provide tax or legal advice, and nothing either stated or implied here should be inferred as providing such advice. Thanks for listening, and please visit talkingrealmoney.com for more information and important disclosure related to performance of any specific index or fund quoted in this podcast. I think I need a nap.