Ep. 1972: Your Questions, No Detours

SPEAKER_08 0:06

Bring me the question, you carry away. The one that gets heavy at night Nothing's too small and nothing's too strange. We'll hold it up to the light. Ask it out loud. We'll answer your plane. Making money makes sense. Making money makes sense. We're talking real money. Yes, talking real money.

SPEAKER_03 0:51

I'm still having fun. I hope you are. It turns out that apparently most of you are. We got a few who are grumpy about the new music. And um, well, all I can say to you guys is on most of the players, there is

Music Complaints and Updates

SPEAKER_03 1:07

a fast forward button for you know 30 seconds. You can hit that once or twice, and most of the song will go away. And I know when I am putting trying to put up every imaginable genre of music as an intro at some point. Every imaginable genre. They're very bizarre. Uh there is going to be something you hate. I promise that. Uh, but the problem is somebody else loves it. One one listener said, I hated the opera. Whereas Tom said, you know what my favorite jingle is? The opera. So, you know, there's a lot of us. But have I told you lately how much I love you guys, by the way? Uh you really responded with with questions. When when I said, Wow, we're getting low on questions, now we have a lot of questions, holy cow, that have been uh recorded and they're all really good. Thank you. Thank you for your responsiveness. I have been, I tell you, at an age when probably most people are retired, I am having so much fun doing things creatively and and creating this show and and answering your questions and doing

New Album Announcement

SPEAKER_03 2:30

these jingles. And I mean, recently just a little update before we get to the questions, a couple of things. One, my fictional book, the Civil War book, The Line Uncrossed, has been submitted to Audible and should be published within a couple of days of this podcast airing, within a few days. The Line Uncrossed should be on Audible within a few days. That's one. Two, while I was making these jingles, which run between about 50 seconds and a minute and 30 seconds, a while back, a month or so ago, I thought I'm just gonna make a couple of long-form ones. And you may have heard one. I put one at the end of an episode. Um actually two. Two have been at the end of episodes. And but I played with a few more on financial themes that I thought were important. I kind of wrote up some lyrics and then played with the music prompts in Suno. They're made in Suno, but I create the lyrics and I usually to get a song, not a jingle, but a song. The jingles probably are five to six iterations before I get one I like. But with these songs that I created, these full four, five-minute songs, I probably did 10 to 20 iterations before I got the song that I went. Yes, that really feels right to me. And I got to eight of them just playing around in my spare time. So I decided, why not? It's totally allowed, why not submit it as an album to Apple Music and Spotify and YouTube Music and Amazon and iHeart and all of those? Now, some of them won't take AI Music, Pandora won't, but it's on now. I I created an album that is now up on Apple Music and actually getting listened to because it's a very rare album. It's an album all about financial responsibility and sensible investing and money management, but in catchy songs that I think have some great hooks, just really great hooks. So check those out. If you have one of the streaming music services, you can go right now. The album name is Let the Boring Money In. And my artist, my artist, my alter ego is called The Financial Physicist, spelled with an F instead of a PH. The financial physicist, like financial physics. Uh, check it out and let me know what you think. So, a little bit of news, a little bit of stuff going on. Thanks for listening. And by the way, I'm gonna put one of those songs from that new album at the end of this episode so you can hear one of

Taking Listener Questions

SPEAKER_03 5:12

the other ones. Now, what we're gonna do is take some of these calls, and we've got a bunch today, including one that is AI red, but uh the rest are from you calling in at talkingrealmoney.com calling in. I'm gonna call it calling in. It's not calling, it's pressing the mic button and speaking into your computer mic or your iPhone mic or your Android mic. So let's get to the first one.

SPEAKER_10 5:34

Tom and Don. I keep thinking Bob and Tom and the Mr. Obvious show, but I don't think that reflects well on me. Anyway, here's my question. My wife and I have each worked at our respective companies for over 35 years and have been diligent savers in our work 401ks and Roth IRAs. Our Roth IRAs are over five years old. Both companies only recently began offering Roth 401ks, so about 90% of our retirement is in pre-tax 401ks. Assuming normal market growth, our RMDs will put us into much higher tax brackets. So we plan on starting Roth conversions once we retire, staying within our current tax bracket. But here's my question. Logically, to me, we would make a single large withdrawal covering our yearly expenses and the conversion amount from our pre-tax 401k, converting it all at once into one of our Roths. The part that would be for conversion and long-term investment would immediately go into equities, and we would put the amount needed for our yearly distribution into a money market and probably something like a 11-month treasury or CD ladder to simulate a monthly paycheck. The plan would be to completely consume our after-tax brokerage and emergency funds to pay for the taxes and shift our savings emergency funds to our Roth accounts. We'd keep our normal bank accounts for monthly expenses. I've not heard anyone directly mentioning the strategy of using your Roth for most of your banking/slash emergency funds. Am I missing something?

SPEAKER_03 7:02

Thank

Roth Conversion Strategy

SPEAKER_03 7:03

you. Thanks for the Mr. Obvious comment. Uh well, the obvious answer is just obvious. Um I had to go back and listen to your question again because I didn't fully grasp what you were asking. But what there's no benefit in converting your annual spending money into a Roth and then immediately withdrawing it in that coming year because it does nothing. Um because you're you're paying taxes on it either way. There's no benefit to you in having it in the Roth for those months that you're withdrawing it. So I don't yeah, I mean, the Roth can hold your emergency money, but I don't see why. I would just take your annual spending money directly from your pre-tax account and only convert what you intend to keep in the Roth invested for the long haul. That's the only part that gets converted. That's the only part. Because you're gonna pay taxes on the other as it comes out anyway, but then wait to pay those taxes. I I don't see how it accomplishes anything. Now remember, just some things. You you you can only put your 401k into your Roth. IRAs cannot be jointly owned, so it's each of you. And uh don't take the money out. You got to be very careful so you don't get withholding on it. Just do a direct transfer from trustee to trustee. Um, but no, I don't see why. I don't see that you need to do this. Don't bother. Thanks for the question. Let's grab the next one, shall we?

ETFs in Retirement Plans

SPEAKER_07 8:46

Hello, guys. My name is John. I work in Texas for a 5013C private research facility that has a 403B retirement plan through TIAA. Recently I asked a question to our retirement staff that oversee the plan. Why we don't have access to ETFs? And I was told that they're restricted from 403B plans and also ETFs are restricted for 401k plans. So doing some cursory ins inspecti uh review, I found out that is the case for 403B plans. But not actually the case for 401k plans. So my question is, is it true that 401ks do allow ETFs? If the plan administrator sets up a self-directed brokerage window to allow investments through that uh access.

SPEAKER_03 9:33

Yeah, you look you have two questions. So let's get this first one out of the way. They're wrong. They're just wrong. 401ks can, can, as long as the plan allows it and they have the right kind of account, as you mentioned, so that the you have to have a brokerage account so that you can buy and sell ETFs. They can be allowed. There's no reason they can't be. It's perfectly acceptable. The IRS has no rules against that. Now to the next part of your question.

SPEAKER_07 10:01

The other question is: being a 501c entity, uh can we switch from a 403B plan to a 401k plan? As I understand that is a case based on the fact that Bill Clinton signed in 1996 an act uh called the Small Business Job Protection Act. So those are my two questions. Thank you.

SPEAKER_03 10:23

Well, you got your history right. You're absolutely right that the uh Small Business Job Protection Act of 96 got rid of the restriction and allows tax-exempt organizations. Used to be you had to have a 403, now they can establish a 401k for for uh any plan years that began after 96. So um, but it's not easy for your employer. It's not easy. I mean, a a conversion means they have to either freeze or terminate the existing 403B, adopt a 401k, come up with new vesting requirements, you got to handle the old assets, move them into the new prep plan. Um boy, it can be complicated, but yeah, uh a 401k then can offer ETFs directly. Actually, I think they can offer them directly without a brokerage, but I'm I'm not 100% pretty sure. Um and they can do a 401 at a 501c3. So I hope that answers your question. And we have more questions that have come in from people clicking that microphone button at talkingrealmoney.com.

Rollover to Schwab?

SPEAKER_00 11:33

Hello, Don and Tom. This is Mike from Pittsburgh. I currently have a 401k with Vanguard. I recently retired at the end of April, and my financial planner has asked me to convert that over to a Vanguard IRA before we transfer things over to the other IRA accounts at Schwab. Wondered why that would make life easier for him. Perhaps you could explain the logistics associated with that. I have to wait until the end of the year in order to receive a profit sharing distribution from my former company. Thank you and look forward to hearing the answer.

SPEAKER_03 12:13

Yeah, the only answer that makes any sense to me whatsoever is that there is something about the process of doing that direct rollover from the 401 to Vanguard that is easier for the advisor than going directly to Schwab, because I can't see anything that benefits you in all this. And to me, it adds a level of complexity. I mean, at least your advisor wouldn't be doing it, but it adds a level of complexity, uh, another opportunity for a mistake to be made. So I think it's probably it has to be an administrative thing of which I'm not aware, but it's certainly not any kind of wacky requirement. And I would ask your advisor, why can't the 401k go directly to Schwab? What what's what are they avoiding? Um, and you know, I I'd be really tempted to wait for your year-in profit sharing contribution so you get one simple, clean, direct rollover or direct transfer instead of two that you're gonna have to do. I I don't understand the thinking. I'm I maybe I'm missing something, but I there's no benefit to you. And I don't know what the hurry is. Is he just trying to get it under his control so that he can collect an AUM fee on it? Or see, there's the skeptic in me again. I don't know, but I don't see why this is necessary. But thank you for your question. It's a unique one.

Active Investing Abroad

SPEAKER_03 13:47

We still have more to come.

SPEAKER_01 13:49

Hi, Don and Tom. Your advice has helped me make better investment decisions, but I'm still skeptical of one claim that passive investing consistently beats active management. I've heard that active managers may have an advantage in international markets where securities receive less analyst coverage. To investigate, I examined Morningstar's 15-year returns through May 2026. Domestic category indexes generally beat their fund category averages. Internationally, however, the results were reversed surprisingly often. In categories including European stocks, foreign growth, international small and mid-cap funds, China, Japan, and Asia excluding Japan, the average fund appeared to beat its corresponding Morningstar index. Does this provide genuine evidence for active international management, or am I misreading Morningstar's data? For example, are failed and liquidated funds excluded, creating survivorship bias? What happens when funds change strategies or categories? Since category averages include both active and index funds, are they even a valid active versus passive comparison? And could active international funds appear better simply because they held some strongly performing U.S. stocks? What evidence would you use to evaluate whether active management has actually succeeded internationally?

SPEAKER_03 15:18

This was a question I had to edit down like crazy, because it had a whole list of funds in it, just way too you everybody would have tuned tuned away. But here's the thing: I get what you're saying, but Morningstar is not your best source for determining whether or not active management beats passive management, because the Morningstar category average contains both active and passive funds. The and the category index may not match the fund's exact geography, style, currency exposures, that kind of thing. And yeah, it is also affected by survivorship, category changes, share classes. It's it's not meant to be an active versus passive comparison. You need to actually get data that accounts for all of those facts. And one of the great sources of that data is Standard and Poor's. Standard and Poor's twice a year does a scorecard. Their 2026 mid-year scorecard should be coming up anytime now in the next couple of months. The the end of the year 2025 scorecard, which is the it's the standard and poor's indexes versus active management, apples to apples. And they have consistently found that even in international and global categories, over a long period of time, active funds fail. Not just a little, they fail a lot. They fail consistently. Now, the failure rate is lower in international small caps. Let me just give you some of the numbers. And let's look at just let's just look at 15 years, because that's really where we start getting into relevant time frames, significant time frames that really when you when you're talking about data, you need to go out as far as you can. So uh an international, the average of international funds versus their international index, the number of funds that outperform the active funds that outperform the index just over seven percent. In other words, about 93% of actively managed funds fail to beat just owning the index. When it comes to international small cap, the number is much better, but still pathetic. I mean, it's uh 21%. What are the odds you're gonna pick the 21%? So I would look at at resources that are designed specifically to look at this on an asset-weighted basis, apples to apples. The because the Morningstar is not designed to do that. It it is not it's not a clean active versus index comparison. Speva is a much, much, much, much, much better comparison. And their data is well respected in the industry because it is standard and poor. That's all they do is crunch numbers. That's really their job. Thanks for the question, though. Really appreciate it. And now we

Treasuries, CDs, and Yield

SPEAKER_03 18:38

have another.

SPEAKER_02 18:39

Uh this has to do with more cash-like securities, the difference between money market accounts, CDs, and treasuries. And I wanted to know if there's something that I'm missing here. Um, primarily, it seems like you can get higher yields on treasuries or CDs than you can in typical money markets or high yield savings accounts. Um, but with those comes a little bit of liquidity issue. Um, in particular, this is talking about Fidelity. I'm assuming uh Schwab and some of the others are the same. But if I buy a brokered CD on Fidelity, it seems like it's pretty hard in order to move that. If I need to, say if for some reason I bought a three-year CD and then all of a sudden needed the money selling that, I'm probably going to take a pretty good haircut on the value. However, treasuries that I've been playing with lately seem like they might provide a little bit more yield, and I can sell out of those pretty quickly. Um, I've only sold small amounts of them so far, probably up to $25,000, $30,000 worth, but utilizing those more as a higher yield savings than a traditional money market account or high yield savings account. Uh just curious what your thoughts are on that. And the other side of the Treasury's coin, we had a year this year where we had a little bit more income due to capital gains selling to purchase new land and noticed that we could get 0% coupon rate treasuries that would push the entirety of the interest into next year when we'll be in a lower tax bracket. So I do know that this feels like it's chasing yield just a little bit, but I actually get a lot of joy out of um trying to optimize every last little penny. So it's probably a ton of effort to buy treasuries instead of using a money market for you know a quarter of a percent interest increase. But um I find it fun. So have that caveat for whenever you answer this question.

SPEAKER_03 20:43

Well, uh you're very self-aware. Uh you you enjoy it. Um you you are just chasing a little tiny bit of yield around the edges that really doesn't mean that much. I mean, if if you can pull off an extra quarter of a point consistently, it's two hundred and fifty dollars on a hundred grand. I mean, you know, it's a nice dinner once a year. But but I I get it. You enjoy it, there's no reason to criticize it. Um I mean, it's like you win a little bit of money and the ladder building is entertainment. But remember, you you gotta be consistent about this. And all of your extra quarter of a percent or whatever it is could be wiped out if for some reason you have to sell a treasury bill at a loss at some point in the future because of an emergency or something. But otherwise, no, I mean, fine. Chase them. I don't think that sounds like fun, but if it's fun to you, I believe in having fun. That's why I'm putting music on the shows. It's fun for me, and apparently. Apparently it's fun for about 90% of listeners from the responses and the comments we've gotten online. Most people seem to like them, and they're even requesting special formats now, by the way. So I've got those, I'm working on those. Metal had a request for barbershop quartet. We take requests. We still take questions, too. We've got more in this episode. Here's another

Dividend Reinvestment in Retirement

SPEAKER_03 22:25

one.

SPEAKER_06 22:25

Hey Tom and Don. I think I heard you mention something about turning off reinvesting dividends and capital gains in mutual funds once one is retired. I hadn't thought about that. I think it was y'all who said it. Um if it wasn't, uh what do you think about that? I don't remember anybody else ever really mentioning that on the other uh finance podcasts I listened to. Um so would you expand on that and uh discuss it a little more? Thanks.

SPEAKER_03 23:00

Yeah, actually, I think it's a really good idea because now you're in the withdrawal phase. There's no point in reinvesting. There's just no point. You use the withdrawals now to rebalance the portfolio, so you'll take from the things that are overweighted. And just taking out that having that dividend and capital gains go into a money market account or some sort of a cash account for spending purposes just sort of simplifies the process of what to sell and when. And you it's otherwise you'd be using it to purchase additional shares that could throw your balance off and are going to be longer term when you're in a decumulation phase. So turning off that that uh reinvestment just lets that money flow into the the the accounts from which you can pay expenses and saves you from selling some other things potentially, since those are being distributed in any way. You're paying taxes on them anyway. So I think it's a great idea. I really do. And I I think it was us who said it, but I'm sure somebody else said it somewhere. Thanks for your question. Is this the last one coming up? Yeah, this is the last one for the day, but hey, that was a really good day of

Variable Life Policy Cash-Out

SPEAKER_03 24:15

questions.

SPEAKER_05 24:15

Hi, Tom. Don, thank you for all the work you do. I really appreciate all the great advice you give me over the last couple of years. I promise I will not ask a question about a bond to three-dimensional funds. I tried to submit this question before, but for some reason I could not get it to go through or it was not received. I'm 49 years old, plan to work for about 15 more years, maybe longer, but I'm still having fun. I have a MetLife group variable universal life policy through my employer. They pay the premiums and I pay the taxes. Currently, the policy has a death benefit of about two billion dollars with a cash value of about two hundred thousand. I'm able to use this like an investment account, with limited options though, through MetLife, or just take four percent a year guaranteed. My understanding is that when I retire, assuming I do not die before then, I will cash this out and only pay taxes on the growth, but it will be taxes ordinary income. They also tell me I have the option to withdraw to the level of the premiums, which is about 170,000, at any time without paying taxes, since they've already been paid. As far as I can tell, since my re employer continues to pay the premiums, this will only decrease my death benefit by about the amount I withdraw, and I don't feel I need that much, or more as it keeps increasing, given that I have a separate life term term life insurance policy as well that will expire at 62. I was thinking of withdrawing a significant portion of the cash value, moving that to a brokerage account where I can have better investment options, and perhaps more importantly, I would only pay capital gains taxes on those growths rather than ordinary income. I will have a solid pension in my retirement and some other retirement accounts, so I think that the income tax, especially if it's all at once, would be significantly more than the capital gains tax on my growth. Am I missing something, or does this make some sense? If so, would you recommend putting it all into AVGV or AVGE? Just kidding. Again, I appreciate all the help that you have provided me and so many others. Please keep it up.

SPEAKER_03 25:58

Okay. Uh I I I love the fact that they're paying your premium. That's nice. Uh really, it depends on your need for a big death benefit. If those who depend upon you for income could use the two billion, actually, I it sounded kind of like billion, but I think that was a glitch. I'm really sure it's a death benefit of two million. I can't imagine you have a two billion dollar death benefit. Um but uh if if if there are those people in your life who could use that if you died now, then I might just keep the policy for a while. Uh for as long as someone needs that money. But if you have investments that will more than take care of your significant others, then maybe you don't need it. I I the the investment choices in whole life policies, or I'm sorry, universal life policies, even variable universal life policies, tend to be not great and tend to be pretty expensive and tend to be products that haven't made as much money as the a comparable mutual fund or ETF might make without the insurance wrapper. So from a making future money standpoint, you will probably make more money. The question really comes down to do you need the death benefit? If you do not need that death benefit, nobody needs that death benefit, then yeah, you're right. You're probably not making as much as you could on the $170,000, and you could get some preferential tax treatment in the capital gains tax rate as opposed to the income rate, because anything that that is made in an insurance policy and taken out is taxed as ordinary income. So you're not missing anything. It just comes down to personal need, want, and uh your situation. But if you don't need the death benefit, then take the cash and go invest it, maybe even in A V G E. Not A V G V, I don't think. Anyway. That was excellent. Thank you all for sending those in at talkingrealmoney.com by clicking on that mic button and then speaking. And then I clean them all up and make them sound better anyway. So you don't have to worry about how you sound. You I'll make you sound great. And speaking of sound, coming up here at the end of the program, I'm going to share with you, right after I get done, I'm going to share with you one of the big hit songs from the recently published album, Let the Boring Money In by the incredible AI band The Financial Physicist, spelled with an F, available on most of the major music platforms for your listening pleasure. But here's a little tease. Here's one of those songs.

SPEAKER_09 29:28

It was always about being right. Everyone has a system, a friend, a feeling. And the feeling is the oldest animal there is.

SPEAKER_08 30:18

Before it was ever told, it all did all.

SPEAKER_04 34:36

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. Please see Appello Wealth's ADV Part 2A on our website for information regarding Appello's fees and services. Apello Capital, LLC, DBA Appello 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 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. And the lawyers get richer.