May Questions

SPEAKER_00 0:05

We're gonna do a really great financial feature. Tom and Don are talking real money.

Welcome to Q&A Friday

Don's Upcoming Book Release

SPEAKER_01 0:11

You know, I could record this episode pretty much anytime I wanted, but I record this episode on a Friday for the authenticity, for the real Friday feel, so that I'm feeling Friday just like you're feeling Friday, because Friday is QA day here on Talking Real Money, as you're probably aware if you've been listening for more than a week. It's what we do. Why? Just what we do. I don't know. A long time ago, we decided we'll do some questions on Friday, and it stuck. And it's been popular, so we're gonna keep doing it, but only as long as you keep sending in questions or actually speaking in questions at our website, talkingrealmoney.com, on the contact form or the ask a question form. You just talk. You record your voice, and then I go into a magical program, and I make it sound even better, and then I put it on this podcast, and it plays the Friday after I record it, usually. Unless I'm doing something else, you know, but generally speaking. Hi, I'm Don. Welcome to the program. Glad you could listen. Uh, I hope that we answer some things that will help you or at least entertain you, just a smidge. I'm personally really excited because it's just one week till I see if anybody wants to read my book. Now, I know, I know independent book sales are gonna be pathetic. I am not expecting to make any money off this. It's one of those, I don't know, it's one of those projects I've always thought about doing. You know, I just thought about it for years and years and years. And as I'm growing older, I went, I'm running out of time to do these things. So I stopped doing voice work for a while. I just cut way, way back on my voice work. Way back. Uh, and used that time to work on a novel that's been rattling around in my brain for a long, long time. I mean, a long time, ever since I walked the uh the National Monument in uh Andersonville, Virginia, or Georgia, uh, because my great-great-grandfather was imprisoned there, and he wrote a letter about it, and I carried the letter and read it as I walked through there and was very moved by it. So I wanted to do something, and then I decided I just don't know enough about him. There wasn't enough information to write something nonfictional, and I love historical fiction, so I worked really hard on a historical fiction novel called The Line Uncrossed. And uh it's gonna be in bookstores, well, not in bookstores, but you know, the online stuff, on the 22nd, which I thought was really appropriate because Memorial Day weekend was started in the wake of the Civil War to memorialize the Civil War dead, and it was called Decoration Day. So I decided to release it on Memorial Day weekend to the general public. However, since you're a listener, if you want to get a copy early, you can get an e-book copy with a bonus of a couple of short stories for just five bucks if you go right now to donmcdonald.com. That's donmcdonald.com, and just uh order the book right there. Okay, let's do this thing we do. Let's start with uh, well, how about our first question? Here it is.

SPEAKER_02 3:38

Hi, Tom. Hi, Don. Just thought I would give you a holler. I've never done this before, but it's not painful. Um, I have a quick question in regards to strategy. Um I have an 84% or 84% rating on the risk uh test that was taken, and I am pretty well diversified. Um I'm pretty skilled at uh uh doing my own investments. The big deal is um I'm 61 and I want to avoid RMDs in the future. With the end in mind, I be tempted to take half of my portfolio, which is about 4.1 million, and convert all of that, that's right now it's intraditional, to raw thyra. And I realize it'll be a big chunk of change. Um, first question is is it 37% the maximum tax rate? So I understand it's a big chunk to the IRS, but the money then grows tax-free and it probably alleviates the need for an accountant, because it's all tax-free income, and uh no RMDs. So it solves a whole bunch of issues. And uh I really want to know, is this a smart thing to do? And two, is the tax rate really 37%? I mean, that doesn't sound like a lot compared to what I hear, but um that's my ordinary income tax rate, I think, maximum for an individual. Uh I did get married, but we'll probably file independently our taxes, so it won't impact my spouse.

Exploring 529 and UGMA Accounts

SPEAKER_01 5:23

Oh my gosh, you need some planning. Oh my goodness gracious sakes alive. You need uh some financial help from someone who is experienced at financial planning and taxes, because I heard you say married filing separately. That tends to be a disaster. Uh that just makes both of you pay more. I'd have an accountant look at that. Um, and the rip the band-aid off approach, oh wow. I mean, yeah, 37% is the top bracket. But 37% on$4.1 million, and you didn't say where you are. So if you're in a state tax place, could be even worse. You could be giving up almost half your money to the governments. And then there's that 3.8 investment tax that kicks in over$125,000 if you're married filing singly. So you're gonna have have that on any other in any investment uh income or capital gains. Uh you got to think this out. You really, with if you have that much money, you can and must pay someone to do a tax plan. This sounds, on the face of it, a little foolish, but I don't know all the other details of your life. But you really, you, you need really in-depth work. Somebody who can go over the whole portfolio, the whole tax situation, and then kind of extrapolate out decades into the future because you're 61. You won't be getting hit with RMDs until you're 73 or 5. I don't remember what the rule is for you youngsters at 61, but at least 73. Um no, no, no, I'm I'm not, no, not a fan. Definitely not a fan. Maybe doing it slowly, and that's only if you expect your tax bracket in the future to be higher than your tax bracket now. But I don't see many scenarios in which with the conversions your brackets are going to be lower now than in the future. RMDs aren't bad. They're not inherently bad. Uh they just force you to take money out, but it's over your life expectancy. It's not a bunch all at once. No, no, no, no, no. No. If there was ever anyone who needed a professional to guide you in this particular scenario, I don't know about your investment prowess, but in this case, you absolutely need someone to help you out. Absolutely must. I I I don't think it's even an option. Thank you for thank you for uh stopping by for calling in. Uh you can call in. Oh well, call in. You can leave your questions at talkingrealmoney.com on the contact form. We love it when you do that. I love it when you do that. I love it when you speak them. Tom likes it when you type them. And uh here's another one.

SPEAKER_05 8:15

Hey, Tom and Don. Recently we're talking about 530A accounts, and Don specifically noted they're silly, wondering what their use case was. And I myself have struggled with this. 529, Ugma Utma, Kids Roth IRAs. They all seem to have their uh place. And it's only recently that I uh read something about a 530A being convertible into Raw. And so that is what has piqued my interest because I would be able to contribute money without uh needing earned income for a child that they could later convert to a Roth. And so I'm just checking in to see the TRM folks think about that strategy.

unknown 9:08

Thanks.

Understanding Options Strategies

SPEAKER_01 9:09

Again, this is a thing that doesn't exist yet. When I said it was silly, I meant the concept was silly, that we didn't need another account for kids. We had 529s, and you can do custodial Roth IRAs for them if they have earned income. I I just didn't see why it was necessary, and I truly feel like it was it was a bit of political pandering. And both parties do political pandering. They do. I don't like it in either case. Um but I understand it. And hey, if they exist, you'd be dumb not to take advantage of it. Really? They're still in the planning phase, though. So how it goes, we don't know. But it it appears that because they're treated like an IRA, they're tax-deferred growth, that they should be convertible into a Roth IRA after paying the taxes at the kid's lower tax rate. So that would make them an even potentially better thing. So yeah, would I use one if I had a kid that could use one? Well, of course. You're foolish not to take advantage of it. You're absolutely foolish not to take advantage of it. So yeah, um political, whatever the political ramifications, it is what it might be, or it might be what it might be, or it will be. I don't know. It's not it's not a thing yet. It's not a thing yet. So when it's a thing, okay. Thanks for the question. Appreciate it. Let's do another.

SPEAKER_06 10:44

Hey, Tom and Don, question for you uh uh regarding uh getting into uh uh any of these positions. So uh really appreciate your guys' advice. Um I I can say that it it's uh it's made my investing a lot less harebrained over the last couple years. But uh thinking in terms of uh anything that could help at all, I know you guys hate options, and I was curious, um, what's the reason? You know, my own looking into it and and covered calls, for instance. Uh things are you know, if you were to look at a long-term call, you'd be looking at uh capping yourself at say 10%. Makes sense since you guys generally say we expect 10% return year over year. So why uh why take all that risk? But on the flip side of of getting into a position, you know, some people like to uh sell a put in order to either keep some of that premium or or just buy the stock and hold on to it. So just wonder what your guys' thoughts are on on anything that uh gives a small egg up without being complicated. And I know you guys pretty much don't like anything complicated, so let me know.

Investing in Emerging Markets

SPEAKER_01 12:05

Well, uh option strategies are, by their very nature, complicated. Uh and by the way, we we don't hate options, we just hate buying options. Buying options is a terrible idea uh because buying options means you're gambling, you're betting. But you this is the other side of the coin. Covered call writing is when you own the stock and then you sell someone the right to buy it within a short period of time, usually nine months or less. And for that, they give you a little tiny premium because they want to buy the stock, but uh they want to wait a little while. They're using leverage, they're betting on the stock going up. And I to be perfectly frank, I when I was a young broker, I did a lot of covered call writing. And it worked for a while until it didn't. And then it didn't. So the reason is it sounds like there's a free lunch. I can get pretty close to the return of the stock market, but I've got downside protection. It's not making money. What you're doing is you're selling away to someone else the potential upside of your stock for some cash today. And it works really well in very flat or slowly rising stock markets. Um as I've said before, you know, they look great right up until they don't. They look brilliant right up until the markets either rise suddenly or plunge suddenly. And in a bear market, that protection you think you're getting is tiny. You know, these little premiums don't help you if your, you know, the portfolio goes down 50% or your stock goes down 50%. And by the way, that happens. Uh, and selling puts gets even more complicated. So, you know, you I you you think I wanted to buy, so why don't I get you know paid while waiting? Well, what you're really doing is with puts is taking on the downside in exchange for a little premium. It's this whole thing is it the it is complex. We you're right, we don't like complexity. Tax-wise, it's a pain in the neck. You got trading that you've got to do with commissions involved. Uh, you've got to make these decisions and you've got to make them with the drag of human emotions. And historically, the long-term returns have been lower than simply buying and holding a globally diversified portfolio of equities. Historically, so markets are too efficient for these kinds of things to work well. I I would suggest against it. I think most good advisors would also suggest against it. It's a gaming strategy that feels like it's disciplined, but it's really hard to pull off. Thanks so much for your question. We've got more coming up, like, well, this one.

SPEAKER_04 15:01

Hey, good morning. Listen to your podcast where you're talking about emerging markets. I'm making sure we have some of our money invested there, about 10% of the convention. And again, you mention Avantis funds and dimensional funds. But make no mention of other funds. And I've asked you this in the past. And you say you don't get any compensation for mentioning those two particular investment firms, but it sure seems like you're killing those two companies more than any other company, despite their high fee structure. That's what I don't understand. If you keep pushing those two type funds or two investment firms, yet their fees are extraordinarily high compared to other funds like Vexus, for instance, VXUS invests in emerging markets. About 20 to 25% is covered if we just have VXUS and have the entire international market, um, but is a heck of a lot cheaper than the dimensional or Avantus funds. So I don't know, from just a listener standpoint, I just get the impression that uh I don't know, something's going on with those Avantis and Dimensional funds for you guys to be mentioning them all the time in just about every podcast or they're pushed. And even the the callers questions talk about those funds almost as if it's a stage thing. I don't know. More of a comment than a question, I guess. Thanks.

Discussing Avantis Management Fees

SPEAKER_01 16:49

Enjoy listening to the show. Thanks for that. Uh you you're uh you're a man after my own heart, a cynic, a skeptic. I don't belong. I don't mind, I I do understand. I totally get it. Here's the deal. Um, if it wasn't for uh the existence of Avantis or Dimensional, and by the way, Dimensional started all this. If you'd listened to us 10 years ago, you would have gone, well, all they like is dimensional. Well, we're okay with Vanguard or with the spider ETF that uh that invest in whatever market we're talking about emerging or whatever. We're okay with those, they're fine. We have just studied the data, the academic research. I mean, both Tom and I have been carefully studying this data, oh my gosh, since the early 90s, I think is when it was first brought to my attention. The research by people like Fama and French that showed there were factors of returns in the market, that you could create a rules-based portfolio that, based on historical data, should outperform just owning the stocks in that particular market. Because it is a more complicated portfolio to run than a portfolio that buys the whole market, their fees are going to be higher. Now, on a dollar basis, it's not a big deal. On a as a pure index fund is going to cost you, you know, eight dollars on every$10,000 invested, whereas the Avantis or the dimensional emerging markets are going to run you about$33,000 or$39 per$10,000 invested. So the question really comes down to is it worth that additional money? We think that it should be and that it historically has been. And we don't have long periods of time to compare because the ETFs are relatively new, but over the past three years, the dimensional emerging markets fund has outperformed the index product, the spider index product, by 1.6% a year, which is far and away more than the extra fee. And we believe that these should be worth that extra fee. Do we get compensated? Absolutely not. We get nothing from dimensional Oravantas. Nothing. Nothing. Not even free dinners or anything. We don't get anything from them. We're doing this because we believe they have the potential to be better. Now, is the Vanguard or the Spider Emerging Markets Fund good enough? Yeah, sure. But if we're going to suggest the ones that we believe have the best potential, we're going to tell you that we believe the best potential lies in these factor-based products, again, based on reams of historical data. And you can find that research online. Just look up Fama and French research. You can read all of it. There's tons of it and tons of related research from other academics. So we're doing it because we believe in them, not because we're being compensated by them. I don't know how I verify that, how I prove that to you, but I'm telling you that and putting it out in a public forum where if I lied, I'm gonna get called on it. And I'm, you know, I uh anyway, I'm not lying about this stuff. I'm just not. You could think that, and I understand why, but I'm not. Uh I think we're to our last question of the day. Yeah, we are. Here's the last one.

SPEAKER_03 21:05

Hi, Don. This is Vince from Illinois. Had a question. I recently got a couple of semi-annual shareholder reports from Avantis investors, one for Avantis International Equity ETF, AVDE, and the other for Avantis U.S. Small Cap Value ETF, AVUV. My question is this. So the management fees paid for the last half year from September to February for AVUV is twenty four million nine hundred and twenty-three thousand six hundred and seventeen. Similarly, the management fees paid for the AVDE, the International Equity ETF, is twelve million eight hundred thirty seven thousand nine fifty nine. I'm shocked at how expensive fees are. Is that how much they're paying their individual managers for these funds? Or or who all is encompassed in those payments? Just trying to learn more about the industry. Thanks, Don. Keep up the great work.

Closing Thoughts and Resources

SPEAKER_01 22:21

Well, these are big companies that manage these ETFs. Avantis is not as big as a standalone is dimensional, but Avantis is part of a much bigger company called American Century that manages mutual funds, and Avantis happens to be a subsidiary of it. So that expense ratio covers the costs of well, the managers, the people who manage the portfolio who make sure that the rules are being followed correctly and implemented, the traders, the people who are buying and selling the stocks in the portfolio, the support people who take the phone calls and answer the emails and send out the statements and send out the disclosure documents, the lawyers of whom there are many because the regulatory requirements for an ETF or a mutual fund are dramatic. They're astronomical. They are as an investment advisor. It's not a business I would enter into lightly because the compliance costs are just out of sight. I guarantee you they spend millions of dollars a year just on lawyers. It's not going to one manager. That I can tell you. I am confident that uh money is not going to one manager. It really is. It's a big fund. Avant's uh small cap value, AVUV, is a$27 billion fund. So that$24 million is really quite small in relation to the billions they manage. It is large, of course. If it was my money, I would feel like I was very wealthy. But that's uh they're on a different scale than us. So it's reasonable. It pays a lot of people, a lot of people. I mean, I haven't been to Avantis's offices, but I've been to Dimensional's offices both in California and in Texas, and those are giant operations with hundreds of people. There are a lot of mouths to feed and people to take care of who make these things work. It's a big deal. It's a big deal. As anyone who runs a business will tell you, there's a lot more than just the one owner. There are people working all kinds of jobs. Thanks so much for all of your interesting questions today. Please keep sending them in at talkingrealmoney.com on the contact forum, and I prefer you speak them, please. All right. Thanks for listening. Please tell a friend or two. And um if you need uh more help, you want to really have someone dig into your portfolio in more than just a quick question. We do offer free help from real-life fiduciary advisors who are uh not paid to help you out, but they do it out of the goodness of their heart because we believe in helping everybody. Uh they'll help you for free, no obligation, and you won't get a high-pressure sales pitch, I promise. Just go to talkingrealmoney.com and click on the button that says meet an advisor and meet with one of the advisors, including Tom, if you want. And keep listening to Talking Real Money.

SPEAKER_00 25:28

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