Penny Wise?

SPEAKER_02 0:05

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

SPEAKER_00 0:12

Big picture. Big picture. I need you to listen carefully. Big picture. Focus on the big picture. We have minds that go off in a ton of different directions that are always moving faster than the world around

Big Picture Taxes

SPEAKER_00 0:31

us. We're overthinking things, we get caught up in the minutiae. Let me give you an example. Vanguard funds, less than one tenth of one percent. Cheap, cheap, cheap, cheap, cheap. Avantis funds, less than three-tenths of one percent. Dimensional funds, less than three-tenths of one percent. You guys freak out at the difference. Well, we want to talk about things that are much more impactful to your portfolio that you don't think about as much on this edition of the Talking Real Money Podcast. Hello, everyone. Don McDonald here in Florida, Tom over there in the Seattle Metro area, the greater Puget Sound area, to try to make this whole process of managing money a lot more understandable. And uh this was a great article from our friend Jason Zwag a few weeks back, uh talking about the big picture, really, the things we focus on. We get all freaked out about expense ratios when today, unless you're buying some stupid ETF or active fund, you're paying very little in fees and expenses, and there are bigger fish to fry.

SPEAKER_01 1:43

Yeah, your partner uh in Washington called the federal government. This is a shocking number, frankly. Um, I think this is a hundred years of data, right? 1926 through the end of 2025. Isn't that a hundred years of the year?

SPEAKER_00 1:55

That is a hundred years of data, yes.

SPEAKER_01 1:57

According to Jason, the U.S., the total U.S. stock market returned an annualized average of 10 and a half percent. That's a lot of money to make. I mean, darn that compound. But you knew there was a butt coming after tax. According to a new study, that return drops to 7%. Wow. Um, but since the 1980s, he says federal tax rates have fallen. Yes, that's true. But taxes still hacked away between one and a half and almost two percent of the market's 10% annual performance, more than one-sixth of the total return.

SPEAKER_00 2:34

Now hold on to a minute. I want to hold at this point right here, because remember, we get a lot of calls from people going, well, why do I want those Avantis or dimensional funds when they cost me three times as much as four times as much as Vanguard? We're talking about pennies on the dollar when we're talking about expense ratios anymore. Here we're talking about dimes on the dollar. There's a big, huge difference, and we're ignoring some of these tax benefits. And Avantis or a dimensional, they also tend to manage a little bit to reduce taxes because they keep things in their portfolio longer than a lot of other portfolios. And you could end up with a smaller tax liability just using ETFs.

SPEAKER_01 3:17

And the turnover is lower because they're not tied to an index. Just think, for example, coming up soon, any index that you're in, they're going to be adding a large space outfit of some kind called SpaceX. Um, that means somebody goes out, that means taxes are paid, et cetera. But most of this comes from taxes on dividends and periodic capital gains within that index fund as membership has changed. Now, I always forget the rate on dividends is what? It's not regular income tax.

SPEAKER_00 3:51

It it depends on whether they're qualified dividends. Uh, but the rate on dividends is generally the same as your income rate.

SPEAKER_01 4:02

Okay. Your regular income tax rate. By the way, this does not account for state or local taxes when you have clients who live in New York and it gets it, can't believe that. But um capital gains are taxed.

SPEAKER_00 4:18

Like capital gains. Okay. Uh and dividends from uh not all dividends are qualified. If you if you're getting a dividend from a REIT, uh a limited partnership, uh money market funds, those kinds of things, those are not qualified. If they're coming from a stock, they're qualified, so they get that lower treatment. But remember, with capital gains also might come if you're a high-income investor, the the net investment income tax of 3.8 tacked on.

SPEAKER_01 4:51

In addition to the long-term rate of 15 and the short-term rate of twenty. So you could be paying us up m up up to twenty-five percent, pretty close to it, for those short-term capital gains.

SPEAKER_00 5:03

So and and qualified dividends are taxed at zero, fifteen, and then when your income is over six hundred thousand jointly, then those are taxed at twenty.

SPEAKER_01 5:14

Yeah. Then you really start paying a lot. So and and remember, what we're talking about here is if you owned a fund where they're picking stocks or you're picking your own stocks, then you could be paying a lot more in taxes. But this is for the cheaper version. I you know, here's the from 1996, he says through the end of last year, U.S. stock market return, and I hate to throw too many numbers here, 9.9% pre-tax, but less than 8.3% after tax. And again, big difference. Big, big, big difference. This is something actually to pay attention to. Well, and he makes a good point, by the way, because generally people select funds what? Based on return. Then they look at expenses and they really don't think about taxes. That's how people end up owning things like the and please don't buy this, the yield max MSTR option income strategy, which sounds amazing because We've talked about these funds before.

SPEAKER_00 6:10

These are covered call writing kind of funds.

SPEAKER_01 6:13

February 2024 through the end of 2025, so just shy of two years, they reported an annualized average return of forty-one percent uh wait pre-tax. Then they buried on page 12 of the prospectus, which I'm sure you all read very carefully, the annualized return for the same period after taxes, 16.3%. Uncle Sammy reports earn more than the fund's investors, which is really shocking.

SPEAKER_00 6:42

That's a huge difference. And and but it's because it's a very tax inefficient fund. That that that's the reality, is that you know, funds like this, and that's another reason we don't like them. Not only are they expensive, and I'm just curious how expensive this is, in addition to its incredibly high tax rate, which is above 50 percent.

SPEAKER_01 7:04

Yes, it is. That's worth paying attention. But they don't care about that. They're just trying to make the wrong money. There you go. So you're paying the one to them, then you're paying Uncle Sam all that. I mean, it just this is this is uh crazy. So um, but uh to go back to your situation, we know you don't use funds like this, right? Well, some of you do, because they you call me and you say I'm in this XYZ fund, and what should I do? And you know my advice is gonna be get rid of it. Um but back to where and and by the way, this is all of these short-term trading funds, exotic funds that have high expense ratios and are horribly tax inefficient, they don't care about tax, they're not paying attention to taxes at all.

Tax-Efficient Investing

SPEAKER_01 7:47

Um and and but let's just you you made a really good point at the beginning, Don, and that is big picture. Let's talk about the big picture rather than diving into the smaller things. First of all, you mentioned exchange traded funds. In your taxable account, if you can use ETFs, it makes a ton of sense. Because of the capital gains, the way that they're built, the way they're operated, your capital gains sure are going to be pretty small in any ETF versus a mutual fund where there could be quite large. Um, and this is a really just big picture item. So if you can move to ETFs in those taxable accounts, that's a pretty smart move because that that's gonna save you right there substantially in capital gains taxes.

SPEAKER_00 8:34

Exactly. And these can be, I mean, really, the the these can make a big difference. So you want to tax manage your portfolio. Again, you don't want to get obsessed with taxes, but I think we've gotten too obsessed with fees sometimes, and we have too, uh, to some extent, ignoring the real danger and damage done by taxable income and taxable returns if your accounts are not in the right, or if your uh assets are not in the right accounts.

SPEAKER_01 9:04

Yeah, which brings me to number two, knowing the laws around taxation, the how much you're paying on dividends, how much you're paying on capital gains, and how much you're paying for regular income. Um you need to know those things because that's going to help you build the right portfolio. It's going to help you withdraw money correctly, all of those things. The tax sort of treatment of anything is an incredibly important part of portfolio design and management that really doesn't get the attention it deserves. Because I think people just don't like to talk about taxes until they're paying more than they think they should. So that's another one for me. Um, and then there's in addition to the ETFs and a taxable account, there's some other, you said it, big picture things, and yes, this seems very obvious, but to most people they don't think about it much. And that is, for example, stocks, well, stocks really should be more in that taxable account, right? If you got to own fixed income, that should be really in your IRA and 401k because the the interest that gets paid there just gets reinvested and you're not paying tax on it all the time the way you might be in a taxable account. So some pretty basic things. And then really, Jason, what he's trying to tell you is don't buy this junk. Don't buy this stuff that's uh that may feel great until you get to the bottom line, you find out that the government's taking out more than you made in the actual fund. It's shocking.

SPEAKER_00 10:26

I found out why the Yield Max MSTR option strategy ETF is such a bad one tax-wise. I I I actually figured out what they do. What do they do? I'm not familiar with this ETF. But you're gonna you're gonna be shocked.

SPEAKER_01 10:45

Stand by May is Junior, yes.

SPEAKER_00 10:48

Yeah, um I I didn't realize I didn't MSTR is not an abbreviation for I didn't know what that was. It's uh uh strategy. MicroStrategy. The stock.

SPEAKER_01 11:00

Oh, our good friends at MicroStrategy, of course, trading.

SPEAKER_00 11:03

The Michael Saylor stock. So uh in addition to that number that Jason Zweig quoted on the 41 percent getting down to what 16? Yes, sixteen. Well now the total return because of the downturn in Bitcoin. Oh no. Yeah Not only did you get tax distributed along the way, but your portfolio uh for the last year is down forty plus percent.

SPEAKER_01 11:32

Wow. That's taking a lot of things.

SPEAKER_00 11:33

So you got a forty plus percent loss and you had all those taxable gains. And that's just insult heaped upon injury.

SPEAKER_01 11:44

Yeah. And this is what when you buy, you know, silly ideas, when you buy things like this that make it look like you're gonna make easy money, you can pay a real price. And that clearly that's what's happened here, right?

SPEAKER_00 11:56

Yep. And here's

Focus on What Matters

SPEAKER_00 11:57

the thing the moral of our story is focus, focus, focus on the big stuff. And there are big things. The plan, big thing. Your portfolio allocation, big thing. Rebalancing, big thing. Portfolio location, big thing. Income planning, big thing. Tax planning, big thing. Ignore the little things. You'll be a lot happier because our brains do not have time for all of those things. Despite the fact that they are big brains.

SPEAKER_01 12:30

No, they are big brains.

SPEAKER_00 12:31

They're not that big.

SPEAKER_01 12:32

I tell you what we do have time for. Your questions. And you've been so prolific here the last few days, so thank you for that. Because, you know, I like killing a tree as much as well.

SPEAKER_00 12:42

And we still have to we still have to stock up on a few conversations between you and our lovely listeners, but we're working on that because you've sent in more questions. So we'll have some of those coming up very soon. But for now, these questions came in at talkingreal money.com on the ask a question button that's there, and you typed them in Tom Killed a Tree just for you. How about that? This is your memorial tree killing.

SPEAKER_01 13:03

Well, you know, it's 'tis the season, and uh some of those trees are getting pretty big. So it's time they take them down a notch or maybe two notch.

SPEAKER_00 13:10

They always get big in the Pacific Northwest.

SPEAKER_01 13:12

God, they're massive. Uh from Longmont, Colorado. Do you know Longmont?

SPEAKER_00 13:18

Yeah, it's up uh northern Colorado. Okay. Uh Dave writes us and north of Denver.

SPEAKER_01 13:24

Yeah. First thing he says, yes, Don, Colorado misses you.

SPEAKER_00 13:28

Oh, that was kind of I miss you guys too.

SPEAKER_01 13:31

Yeah. The snow, the cold, the change of weather. I was getting amazed when Denver's like winter, though. 70 what 70 degrees one day and then the next day it's like 20 below. I was like, come on, really? Anyway.

SPEAKER_00 13:41

Yeah, but the Broncos are going to be getting a domed stadium soon, so it won't matter.

SPEAKER_01 13:45

Wait, they still have a team there? Come on.

SPEAKER_00 13:47

Um there was one uh power ranking that came out recently that had them rated number one. I think it was CBS, had them rated number one in the NFL.

SPEAKER_01 13:58

I thought the number one team in the NFL was a certain local bunch of the Trevor Burrus.

SPEAKER_00 14:02

They had the Broncos rated ahead of the Seahawks.

SPEAKER_01 14:04

Rated, but not actually when it comes to playing the game.

SPEAKER_00 14:07

We don't know because we there's a new season in the fall.

SPEAKER_01 14:10

There's always a new season. Um okay, Dave, to your question. Springs Eternal.

Morningstar Index Concern

SPEAKER_01 14:17

Dave writes, hi Tom. I had a question that really doesn't have much to do with daily investing. Just wondering about maintaining independence with indexes tracked and the companies that follow them. Morningstar, as you know, acquired the CRSP brand indices and will now be rebranded as Morningstar. Vanguard has also recently started a closer relationship to Morningstar as all or most of attract indexes were CRSP. I did look into that. Morningstar added it to, has been added to 13 of the index funds of around $3.2 billion. So not a huge amount, but but it's it is significant. And then he kind of goes into some other uh non-sequitur? I think I think you could say he says, as President Eisenhower once warned, beware of the military-industrial complex. Now, okay, but he says, should this be applied to large industrial side companies glomming into each other as interlocking business interests? Beware of the drifting vanguards, beware of the drifting vanguard moral compass. Will this affect their funds? Will will ultimately perform over time if Morningstar starts tinkering with the index makeup, or all is this just more noise, noise, moise, moise, moise, noise, noise, noise, noise.

SPEAKER_00 15:33

Noise, noise, overthinking, thinking, thinking, thinking, overthinking, overthinking in Colorado.

SPEAKER_01 15:38

Yeah.

SPEAKER_00 15:39

Overthinking a lot. Okay, one, uh an index pretty much is an index, unless it's particularly these kind of indexes that are based on market capitalization. They are purely market cap indexes. They're not they're not like the S P 500, where there's a bit of a decision process or the Dow where it's 100% people picking them. Uh these are the SP, as we pointed out. That's why I say the SP can be a little manipulated. These indexes, I mean, could they? I guess if they totally change the nature of the indexes, but anybody who was going to use them in academic research, and these really are popular with academics, Fama and French use the CRISPR resources. These are these are normal because they are consistent. And Morningstar is unlikely to mess with something that consistent. Plus, there's just not much money in licensing fees for an index like that. It's not a big money maker. Uh and here's the other thing. The only if Morningstar and Vanguard, for example, let's just say they merged, which they haven't. We they haven't. They're just having sort of an advertising kind of sponsorship relationship because Morningstar has to make money. Yep. Okay? They gotta make money. Everybody has to make money. It's called capitalism. Even in other systems, funny, people still need to make money and they want to do it. Uh the only thing Morningstar really could do that would be even slightly suspicious would be to give Vanguard a higher star rating.

SPEAKER_01 17:12

I was waiting for that. Yes, of course. But but let's assume they do.

SPEAKER_00 17:16

We don't believe in paying any attention to their star ratings. And neither should you, by the way. Uh-uh. So I think this is the proverbial tempest in a teapot. Again, back to our big brains. They like to think up things. And this this goes to our our crazy need for some of us, many of us, to default to conspiracy theories and suspicion and skepticism, all of and me included. I I'm a skeptic. Trevor Burrus, Jr. You're not a conspiracy guy, though. No, I'm not a conspiracy industrial. I'm an Occam's razor guy.

SPEAKER_01 17:52

Where are you on the military industrial complex just so we clean up everything? That's a real thing. Trevor Burrus, Jr.

SPEAKER_00 17:59

It exists, and it's it it often, I believe, looks to profit from war. Sure. It's a military industrial complex. Right. They only do well when you're blowing their stuff up.

SPEAKER_01 18:11

And if you don't believe me, go back and look at uh where we are with the Navy, for example, 200 years ago. Quite a different situation there in terms of What Navy?

SPEAKER_00 18:20

It's like three ships. Exactly.

SPEAKER_01 18:22

The size, the money spent, and everything. And then look at it today. I'm watching a series on the Navy, which I'm really enjoying. Ah, that's Tom, history? I know. Surprise. Hard to believe. Really surprising. By the way, if you're into such things right now, it's a good time to watch all the football, not just the current games being played in the World Cup, but all the sp they're rolling back out all of the documentaries about uh football over the last ten years.

SPEAKER_00 18:49

The only thing I can think of that's more boring than watching a football match aka soccer, is watching a documentary about football matches. You thought it was bad, now this is really bad. I can't even imagine. And this is why this is And here's an example of why these men love to play a sport where you never score.

SPEAKER_01 19:10

By the way, somebody wrote me one of the questions said, keep the war stuff coming, Tom. I like it.

SPEAKER_00 19:15

So You know what I discovered the other day? I went with some friends to a happy hour at a uh place STK. There's one in Bellevue. Uh and uh we were at the bar and they had a TV on. It was a Saturday, and there's a football game.

SPEAKER_01 19:30

Yeah. Football. Like football. Like American football.

SPEAKER_00 19:33

Like American football. And I look up and it it's it's somebody uh from Birmingham and Houston, and I'm going, Birmingham, huh? Didn't know that. And then I realized it was the UFL, which I didn't even Yeah, they're back. I I did not even realize Orlando has a team. There you go. I live here, I didn't know we had a team. I see Orlando's in the playoffs, and I went, Oh, I maybe I should go see the playoff game. Then I looked, and this is where it ties back into what you're talking about, because they're not real popular, kind of like soccer, they play in the Orlando soccer, the Orlando City soccer field.

SPEAKER_01 20:13

Which is a nice facility.

SPEAKER_00 20:14

But it's small. It's like, you know, it's like an 18,000 seat stadium. So they play there. Well, they're in the playoffs for the UFL. Nobody planned for this, and the Orlando City team is playing at those dates. That's gonna be tricky because Orlando play their UFL game there. They're going to Ohio. Well, that's very close, as you know, to Orlando.

SPEAKER_01 20:40

Ohio, Orlando.

SPEAKER_00 20:41

It's actually a summer game. They probably stand a better chance in Ohio.

SPEAKER_01 20:45

That's a good point.

SPEAKER_00 20:47

Can't imagine playing. Oh man. It's probably gonna

Roth IRA Question

SPEAKER_00 20:50

be 95-95 as we call it. 95 degrees, 95% relative humidity.

SPEAKER_01 20:55

All right. Anyway, you got another question? Military yes, military industrial crowd. Another one from um Augusta, Kansas. Chris says, I'm retired, but working four to twelve hours a week at $17 an hour as a favor. It's a favor to me, too, says Chris, but because it's getting me out of the house. They're paying Kansas taxes, but opt out of federal. They gave me the impression I'm not making enough for federal taxes. Can I still put these small checks into my Roth IRA? Yes. Yeah. By the way, looked it up. Do you know how much you have to make to have to file a tax return?

SPEAKER_00 21:30

It's more than the the the five to ten thousand he's making.

SPEAKER_01 21:35

Yeah. Married, thirty one thousand five hundred. Single, if you're over sixty five, seventeen thousand seven hundred fifty. If you're under sixty five, you young crazy kids, fifteen thousand seven hundred and fifty.

SPEAKER_00 21:47

So even if no it doesn't matter. No matter what age, at that at seventeen dollars for a part time job, you don't pay any taxes.

SPEAKER_01 21:58

So they're doing it right, but that you can't

SPEAKER_00 22:00

That is income and you can definitely Now I I hopefully they're taking out Social Security and Medicare, because those are still required. Yes, they are. At any income level. That's right. Even if you're collecting Social Security. That's right. Guess what? You're doing both. How about you? I'm going, I'm pay I'm taking it in and I'm paying it out. Very confusing.

SPEAKER_01 22:24

But you're getting that check every month. Is it monthly? How often do you get your money?

SPEAKER_00 22:28

What are you? I'm putting it out there. I'm kidding.

SPEAKER_01 22:33

Yes.

SPEAKER_00 22:34

I was hoping for you. Every month on the third Wednesday.

unknown 22:37

All right.

SPEAKER_00 22:37

So I'll come by. By the way, it's not a check. It's just magic money that appears at your bank. Love those magic things. You got another question that came in and talked about real money?

SPEAKER_01 22:49

That's all. Anything else? Two taste treats and one. Yeah, keep them coming. Questions for Don, you can voice them. Questions for me, you can type them.

SPEAKER_00 22:57

And on the new website, it's so much easier. You just go to the lower right-hand corner and there's a microphone button. Push it. Record your question. Push it. Then you can listen back and go, yeah, okay, I sounded stupid. I'll do it again. But if you think the quality isn't good, don't worry about that. If you listen, you go, it was terrible quality. Don't worry, Don has a magic, magic machine that uh turns it into really high quality audio.

SPEAKER_01 23:25

Where were you in the early part of my broadcast career? I could have really used that.

SPEAKER_00 23:28

I'm telling you No, not I I did find Although I had some actualities when I was a news guy that could have stood for a little of that. You know, I was an early uh digital edge.

SPEAKER_01 23:38

Actuality is let's that that's a little bit of uh jargon.

SPEAKER_00 23:41

You mean an actuality is a uh uh uh an insert in the news.

SPEAKER_01 23:47

It's like a voice from someone else.

SPEAKER_00 23:49

Someone else, where you you got an interview with somebody and you add their voice in. That's an actuality. It means it actually happened, as opposed to the newscaster who is a figment of your imagination. I don't know that, but okay. I'll go with it. We're we're imaginary. We could be with AI, we could be imaginary. We could be totally fake. That's probably coming, so don't don't don't imagine.

AI Voice Outro

SPEAKER_00 24:11

Not many would know the difference. As a matter of fact, wait, before we go, let me just give you Don McDonald announcing where you can go to uh meet with an advisor via my AI voice. Okay, so here's the deal. If you would like one of our 100% fiduciary advisors to help you understand your portfolio better or see if you're on track for a comfortable retirement, you can meet with one of them for free for nothing just by going to talkingrealmoney.com and clicking on the button that says meet an advisor. You'll get help, but here's what you won't get a bill, any kind of obligation, or high pressure sales pitch. None of those things. What you are getting right now is a very fake me, but derived from the real me, so it kind of sounds like me, but it kind of misses some of the I don't know, inflection stuff, I'm guessing. We'll find out as soon as it's done. So anyway, go to talkingrealmoney.com, click on that button that says Meet an Advisor. That's meet an advisor, talkingrealmoney.com, and I'm now done. Or at least my robot's done. Okay, that wasn't as good as actual me.

SPEAKER_01 25:24

I know the inflexion. I don't think it has quite the same ring to it, but okay.

SPEAKER_00 25:27

No, no, no, no. It's missing the the it's you can tell it's definitely missing the emotional The intonation is just not there for me. Look at you with the big word. Spell it.

SPEAKER_01 25:40

I think that's a pretty easy one.

SPEAKER_00 25:42

Okay.

SPEAKER_01 25:42

Intoning. Doesn't mean you're smart, as one teacher told me once.

SPEAKER_00 25:49

You could be a bumblebee.

SPEAKER_01 25:50

Exactly.

SPEAKER_00 25:51

Or ant bee. Or a doobie. Oh, that you know what that's from? Do a be a doobie, not a don't be. What's that from? I do. You don't know the show that's from? No. The show called Romper Room.

SPEAKER_01 26:07

Yeah, I remember Romper Room the show, of course. Yeah.

SPEAKER_00 26:09

It was you doob.

SPEAKER_01 26:10

So they were handing out doobies to all these kids? Doobies? I don't remember that part. I tuned in the wrong day or something. So too bad.

SPEAKER_00 26:19

It was it was uh yeah, early enablers. All right. Thank you. Thank you. Thank you for being here for talking real money. I'm Don. This is me. And that guy over there, that's Tom. And uh five days a week or so, we're talking real money.

SPEAKER_02 26:35

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 subjects change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions.

SPEAKER_03 26:49

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_02 26:58

Information presented on the podcast is not personalized investment advice from Oppello Wealth. The views and strategies described may not be suitable for everyone. This podcast does not identify all the risks, direct or indirect, or other considerations which might be material to you when entering any financial transaction. Past performance does not guarantee feature results, and profitable results cannot be guaranteed. We hope you realize that the information provided on Talking Real Money is for informational, educational, and hopefully enjoyable purposes only. The podcast is not trying to get you to buy or sell any financial products or securities. Instead, the program is provided as a public service by Appello Wealth, a fee-only registered investment advisor.

SPEAKER_03 27:31

See Appello Vote, ADB, to any other website for information regarding Appellate's fees and services.

SPEAKER_02 27:36

Apellet Capital, LLC, DBA Apello 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 requirement. Registration with the SEC 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.