Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Brian Perry

In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]

Published On
March 31, 2020

In these volatile financial markets, are you reconsidering your investing strategies? Joe and Big Al discuss where and when to invest cash, selling stocks in taxable accounts and repurchasing them in tax-deferred accounts, doing nothing and staying globally diversified, writing an investment policy statement, rebalancing more frequently, and doing Roth conversions, as well as fixed indexed annuities (AKA equity-indexed annuities). Also: international and emerging market stocks, the Coronavirus stimulus package, inflation and much more.

Subscribe to the YMYW podcast

 Subscribe to the YMYW podcast newsletter

FOLLOW US: YouTube | FacebookTwitter | LinkedIn

Free Financial Assessment

Show Notes

  • (01:40) Coronavirus Stimulus Package: We’re Buying Trillions in Bonds, What About Inflation?
  • (03:09) Volatile Market Investing Strategy #1: I Have Cash on the Sidelines. When and How Should I Invest It?
  • (06:52) The US Markets Are Down 27%, and So Is My 60% Stocks/ 40% Bonds Portfolio. Why Is This?
  • (10:50) What Percentage of a 60% Stocks / 40% Bonds Portfolio Should Be International?
  • (14:29) Volatile Market Investing Strategy #2: Should I Sell Stocks in My Taxable Account and Repurchase in My Tax-Deferred Account?
  • (18:38) Volatile Market Investing Strategy #3: Should I Do Nothing With My Globally Diversified Portfolio?
  • (22:15) Volatile Market Investing Strategy #4: Why On Earth Wouldn’t I Buy Fixed Indexed Annuities?
  • (28:58) Volatile Market Investing Strategy #5: Should I Write an Investment Policy Statement, Rebalance Frequently and Do Roth Conversions?
  • (35:05) Roth Conversions, MAGI and Affordable Care Act Subsidies

Resources mentioned in this episode:


For future market updates, Subscribe to Pure Financial Advisors on YouTube


READ THE BLOG: Understanding Annuity Retirement Pros and Cons

Listen to today’s podcast episode on YouTube:


A $2 trillion Coronavirus stimulus package has been signed. As the situation in the financial markets is rapidly changing, here at Pure Financial Advisors and Your Money, Your Wealth®, we’re changing things too in order to keep you updated. Joe Anderson, CFP® and Pure’s Director of Research, Brian Perry, CFP®, CFA, are now presenting regular market update webinars for our clients and answering their most pressing questions, and now you can watch these market updates afterwards as well on Pure Financial Advisors’ YouTube channel – you’ll find the link in the podcast show notes. We had so many great questions in last week’s webinar that we had to hold Brian Perry over to answer some of them here today. They’ll talk about what the new stimulus package might do to inflation, why a 60/40 stock/bond portfolio might be down just as much as the US markets, what percentage of that 60/40 portfolio should be in international investments, and throughout today’s episode Joe, Big Al and Brian will analyze five different strategies for all of us who are trying to figure out what to do next in these times of market volatility: where and when should you invest cash? Should you sell stocks from your taxable account and repurchase them in your tax deferred account? Is it worth it to write an investment policy statement now, rebalance more frequently and do Roth conversions? Should you continue doing nothing with your globally diversified portfolio? And yep, another champion for fixed indexed AKA equity indexed annuities comes forth to challenge Joe. I’m producer Andi Last, and here with Brian Perry, CFP®, CFA are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Coronavirus Stimulus Package: We’re Buying Trillions in Bonds, What About Inflation?

Joe: Client questions in regards to the stimulus. “So if we’re buying all these bonds- so the Fed is buying bonds, trillions and trillions of dollars of bonds, what is that going to do with inflation?” So I’m going to toss it over to Brian.

Brian: It’s a good question and a popular question and there’s a couple of things. One is inflation is kind of like the specter that never actually shows up. So we’ve been worried about that since the 70s early 80s, keep on looking for it, and I think central banks have gotten a lot better at fighting inflation. And so although people are always vigilant and a lot of investors worry about it, it hasn’t been too much of an issue over the past several decades. In the long run, what the Fed is doing in the stimulus coming from the federal government is inflationary. The more money that is printed, the more of a deficit that we have and whatnot, the more economic stimulus that there is. The higher inflation in the long run you would expect. But I think it’s important to focus on triage here. And when the patient is dying you save the patient and worry about the long term consequences later. The economy is at a full stop in a lot of regards thanks to the Coronavirus. And so the gist of what all the government is trying to do is to support the economy; get it restarted once we come out of this virus. And then they’ll worry about the longer-term consequences down the road so I’m not too worried about the longer-term consequences. I’m more worried about continuing to see aggressive actions from the Federal Reserve, from the federal government in order to support the economy until it can get started again. And then get the economy going in the right direction. Let inflation take care of itself later.

Volatile Market Investing Strategy #1: I Have Cash on the Sidelines. When and How Should I Invest It?

Joe: Next question is that “if you have cash sitting on the sidelines, how do you decide when to get back in? How do you get back in? Where to invest even though we all know it’s impossible to time the market?” We can all take a stab at that but go ahead, Brian.

Brian: Sure. If you just ran the numbers and kind of did a Monte Carlo simulation I would say put the money to work today because you expect over time markets to go higher and you’d be better off. That’s in a vacuum. I think it depends on what else you have invested. Is this all the money in the world that you have? Or is this just a portion of your wealth? If it’s all the money in the world and it’s going to be difficult to sleep at night if you put it to work maybe a dollar-cost averaging. That can sometimes be effective. If it’s just a sliver of what you’ve already got invested maybe you put it to work today, taking advantage of depressed valuations. And chances are if you’ve got a diversified portfolio and you have not rebalanced, which you should be rebalancing. But if you haven’t, you’re probably underweight stocks. And so I would be looking for whatever stocks you can buy in this environment while those prices are beaten down to put that money to work.

Joe: Al, what do you think?

Al: I would say- I’ll just go to my own experience, Joe. I bought a piece of property last fall and I had to liquidate some assets to do that. And I refinanced another property because I wanted to buy the current property with cash. So I ended up with a pile of money that I have been investing, and at this point, I had planned to invest it but it got into Christmas and all that and I just didn’t have time. And then when this market hit, I’ve invested four times in this down market and I will continue to. So my feeling is there’s no way to find the bottom. But anything lower than all-time highs is a better place than I would’ve been just kind of by dumb luck. But to me, the point- I personally want to be invested at all times. I have tremendous confidence in the market long term. Short term is a whole another matter. But I don’t worry too much about what’s going to happen next week or next month or next quarter or even a year from now. What I’m concerned about is what’s going to happen 10 years, 20 years from now. And stock prices are certainly lower than they were. So I wouldn’t feel bashful about investing. But it’s to your own emotions. How much can you handle? So for a lot of people that have a pile of cash maybe it’s prudent to invest a little bit now, a little bit later and just do it gradually.

Joe: I think you’re right on. I think if you look at academic studies being fully invested now is probably the best move. But emotionally it’s so hard to do. It’s like oh my gosh you know the market’s gonna- the whole- with these huge swings too, people got upset- oh man I should’ve invested yesterday. And I got out. And now the market’s up 11%. I mean you’re going to beat yourself silly. It’s just really impossible to do it. So I like the dollar-cost averaging method too. So you slowly- but you want to make sure that you have a process. I have $100,000 that I want to invest. Maybe you put $10,000 a month, $10,000 a week, whatever and make sure that you continually do what your process or what your investment policy is stating to do. Then the discipline takes over where your emotions- because you’re gonna have certain days where it’s like, oh, I don’t know if I should invest today because the market’s up or down or whatever. And then you’ll change the whole motivation to begin with.

Al: One thing Joe that tends to happen is there’s no way of knowing when the bottom is going to hit. But one thing we do know from history when the bottom actually does hit the increase or the spike up can be dramatic. And in a lot of cases- we saw this during the Great Recession, is people were out and they were glad they were out, and they waited and they waited and they waited. The market started going up and they thought it was temporary and went up some more. Well, that can’t be. And a lot of people never got back in. And they missed probably the greatest bull market in our lifetime. So you just want to make sure you have a process. I agree with ya.

The US Markets Are Down 27%, and So Is My 60% Stocks/ 40% Bonds Portfolio. Why Is This?

Joe: OK. We got one more question and then we’ll cut Brian loose. “U.S. markets are down, 27% from the highs. My account is down about the same. Why is this with the 60/40 split? 60% stocks. Thank you.” So a really good question. So it’s like ok, the markets are down. The U.S. markets are down 27%. I’m down 27%. But I only have 60% of my money in stocks. What the hell are you doing?

Brian: So then the question is why are my stocks falling more than the market? And I’m going to assume that the questioner is defining the market as the S&P 500 or the Dow Jones. And here there you’re talking about large U.S. growth companies which is just one small subset of the global markets. And it happens to be the subset that’s done the best. It did the best in the up run that we had over the last several years and it kind of hung in there a little bit better than some in the downturn.

Joe: When you look at that asset class, U.S. large growth for instance. That’s probably the safest stock that you can own.

Brian: Until it isn’t.

Joe: Well no. I mean if you’re comparing stocks- if I look at large growth stocks to small value stocks, which are safer?

Brian: Fair point.

Joe: In the stock universe all stocks are risky but there are variances- all stocks aren’t created equal. So if I’m looking at large growth stocks vs. any other type of category of stocks, would you say that those are the safest of all stocks in the universe?

Brian: I would. But I want to make an important caveat is that it depends on the starting price. And so they are the safest stocks. But if you bought them in the early 2000s or around the year 2000 after they’d had a tremendous run-up they weren’t the safest stocks because they were overvalued. It turned out at that point that the value stocks, although in a vacuum they’re riskier, actually were safer just because of valuation matters.

Joe: So when you’re looking at US stocks are down 27%, his portfolio is down. Why?

Brian: It’s because of a tilt toward smaller companies and more value-oriented companies which haven’t done as well recently. And it’s also because of global diversification and a big factor there is the dollar. So some of the international markets have done okay in local currency. But if you’re a U.S. investor the movement in the dollar to 17-year highs given the flight to quality, the panic to own dollars has depressed returns in international stocks for U.S. investors.

Joe: So if this individual was invested 60% in U.S. large growth stocks and 40% in our bond portfolio and the market’s down 30% he would not be down 30%.

Brian: No, he’d probably down 20% or something like that.

Joe: Maybe even less than that. But because of the equity component of the overall portfolio, it’s globally diversified. So you’re looking at apples and oranges in a sense where this is the S&P 500. And you’re comparing it to emerging market stocks. You’re comparing it to international stocks. You’re comparing it to small company stocks, and the like, that they have various degrees of risk.

Brian: Yep.

Joe: So when we have times like this when correlations go very close to one another, and all stocks drop, what we’re seeing that global diversification works but in a short period of spurts. Sometimes it looks like it doesn’t.

Brian: Exactly right. But you need to focus on a strategy you think will work for the long term. We think global diversification is the best approach for the long term.

More on global diversification and international exposure in that 60/40 portfolio in just a moment. Watch Brian and Joe’s latest market update webinar for Pure Financial Advisors’ clients, read about Pure’s ongoing response to the COVID-19 Coronavirus pandemic, and subscribe to Pure’s YouTube channel to catch all of our future market updates. You can do all of that in the podcast show notes at YourMoneyYourWealth.com just by clicking the link in the description of today’s episode in your podcast app. If you’re not a client but you have money questions, as always, you can click the Ask Joe and Al On Air banner in the show notes to send them in as a voice message or an email to be answered on YMYW. I promise we will get to all of your questions in upcoming episodes, but today we’re going to continue with the questions that have been pouring in regarding down market investing strategies.

What Percentage of a 60% Stocks / 40% Bonds Portfolio Should Be International?

Joe: Got Steve, writes in from San Diego. He goes “I have a 60/40 balance with stocks and bonds. Can you advise me on what percentage of this should be invested in international stocks and bonds?” Good question. How we look at it is that the markets are a world market and that you want to have international exposure in your overall portfolio. If you look at the global market capitalization the U.S. is only what right now, probably 50%, Al? A little bit more than that?

Al: I would even say that maybe a little under, but close to 50%.

Joe: Maybe it’s even 40%.

Al: I think it’s 40%ish. Somewhere in the 40s.

Joe: So you’re missing 60% of the global market cap. So we absolutely truly believe in globally diversified portfolios. So let’s say you have 60% of that stock we would recommend probably at least 30% to 50% of your equity exposure in foreign stocks and that would be a mix of international and emerging markets. So you would want large-cap, small-cap, value growth, international and emerging within the stock component. Because in most cases over time they zig and zag. In times like this when you have a global pandemic, the correlation goes to one. But yeah we believe that globally diversified is the best way to go for true diversification. And then out of those positions probably anywhere from 30% to 50% of the allocation should be international.

Andi: What about bonds? He’s also asking about if they should be an international bond

Joe: Same same.

Andi: Okay.

Al: And I agree with that too. Case in point. You look at stocks from 2000 to 2010 and that’s when the S&P actually went down. Over a 10 year period, it went down 9% over a full10 year period. So it lost money. They called that the Lost Decade if you recall. International stocks at that time, depending on the category, were up 120%, 150%, 200% in the case of emerging markets. And if you had a globally diversified portfolio, you did just fine. Now if you look from 2010 to 2020 almost the exact opposite thing happened although international stocks did not go down. They did not go up as far as U.S. stocks. And so that’s why it’s not that you make more money and international company stocks, it’s just that they tend to kind of zig and zag as you said Joe in different periods of time. And I think maybe for the average person you might want to slant it a little bit more U.S. than international just because we get so focused on the Dow Jones and the S&P. And if you’re too high end international you might be just disappointed when international stocks do not do as well. So maybe in my view may be closer to the 30%, 35% of international of your total stocks might be something you might be more comfortable with unless you’re used to and happy looking at the world stock market indexes. And if you understand that, then you could go 50/50.

Joe: I think all of us have such a home bias.

Al: That’s right. And that’s one of the things that we have a lot of international stocks in our portfolios. And everyone looks at S&P 500 or Dow Jones and so we’re constantly explaining why you did better or worse than your point of reference. So we call this tracking error. If a tracking error is going to be a problem because you’re looking too much at the S&P 500, then slant it a little bit more that way. But definitely have some international exposure, probably 30% might be a good place to start.

Volatile Market Investing Strategy #2: Should I Sell Stocks in My Taxable Account and Repurchase in My Tax-Deferred Account?

Joe: We got Rich writing in from Chicago. “Hi, guys. I want to say thanks for putting up with our dumb questions by asking you another one. Knowing that you should not sell stocks in a down market, if someone with only stocks in his taxable account were to sell some stocks in the down market but then turn around and by the same amount back in a tax-deferred account, would he be violating the “don’t sell stock in a down market” rule? In other words, a retiree needed $60,000 for the year and only had stocks in a taxable and the market sucks. He sells stocks to get the $60,000. But at the same time, he rebalances in his tax-deferred account to bring his stock shares back to where they were. Would this be the same as if he were able to just sell bonds in a bad market? Thanks. Locked in my house in Chicago. Rich.” Is he talking wash sale rules Al? Or is he just saying don’t sell stocks-? He’s selling stocks but then buying stocks in the deferred account because he wants to create his income from the taxable account?

Al: I think he could be asking either. So I’ll start with the wash sale rule because I think a lot of people don’t really understand it that well. Because the rule is simply this, that you can sell your stock in a non-retirement account or a mutual fund or bond or whatever. And if it’s at a loss you will get a capital loss. And that loss goes against any other capital gains you have in your non-retirement account on your tax return. And as it is available if you don’t use them all you get to take another $3000 against ordinary income and then the balance of that loss carries over. So that’s a good thing. And what we’re encouraging folks to do is to sell let’s say a mutual fund but you can’t buy the same mutual fund. You have to wait 30 days, 30 plus 1 days, so 31 days, to buy that same mutual fund without violating the wash sale rules, which simply means you don’t get to take that deduction if you bought the stock within 30 days. So what we recommend is folks sell mutual fund A and buy mutual fund B. That might be similar; not exactly the same but similar. Maybe you would sell an S&P 500 index fund and buy a Wilshire 5000 stock fund or something like that. It doesn’t really matter what you buy, but you’re still in the market. But there is a question- what if I sell my investments and then I buy the same exact investments in my IRA or retirement account? Does that violate the wash sale rules? And the answer is yes, it does. So you’re not allowed to do that. I would honestly say it would be very hard for the IRS to track that because it’s in an IRA versus a non-retirement account. But that is the rule. You can’t- if it’s in any of your accounts, you can’t buy the same position.

Joe: Another way that I’m reading this too Al, is that he could- let’s say he’s taking advantage of asset location. Which means he’s putting asset classes with a higher expected rate of return in his trust account or taxable account. And his bonds or safer investments in his tax-deferred account. And so right now, he doesn’t want to touch the tax-deferred accounts just because maybe he’s under 59 and a half, he doesn’t want to pay the tax. I have no idea. But he’s taking distributions from his non-retirement account that is all stocks. So he’s selling those stocks and then selling bonds in his retirement account just to get the balance correctly is what it’s- So he’s rebalancing within the IRA. Then to buy back the stocks to keep the balance of let’s say 50/50 stocks versus bonds appropriate. Yeah, you can do that Rich. But just be careful. If you’re selling the stock at a loss and you’re buying stocks back in your retirement account, that they can’t be identical or even very similar. So just be careful with the wash sale rule as you’re rebalancing selling stocks. But I would look at a totally different retirement income strategy if you are selling stocks right now. Because there could be an alternative way to keep the portfolio intact not necessarily selling stocks in a down market and still be able to get the income that you need.

Volatile Market Investing Strategy #3: Should I Do Nothing With My Globally Diversified Portfolio?

Joe: OK we got John. He’s writing in. He’s saying “So far I have not moved any investments in my 401(k) or IRAs. My thought is to ride this out and not sell anything while it’s low. Any feedback on this strategy would be appreciated.” I think you’re doing a good job, John.

Al: Yeah, best not to look at it right?

Joe: I haven’t looked at my accounts.

Al: The thing is you want to make sure you’ve got a good investment mix for your goals. If you’re- let’s say you’re in your 20s or 30s you can be almost all stocks if not 100% of stock type and equity-type investments. But if you’re closer to retirement you want to make sure you have a little more safety. The closer you are to needing those funds you might need more safety. And so sometimes people end up investing aggressively all throughout their working years and then lo and behold next year they’re going to retire and they still have 80%, 90%, 100% stocks that would be a reason to back off. But right now assuming John, that you’re not 100% invested in stocks and you’ve got some bonds which have held their value more than stocks, now is actually the time to rebalance and actually use some of that safe money and buy into stocks. That’s what rebalancing is, is taking the asset classes that have gone down and out of- if you’re trying to be 70/30 in terms of stocks to bonds. Or 80/20 in terms of stocks to bonds. When the stock market goes down now you might be 60% stocks instead of 80%. And so if 80% is the right number you want to be buying more stocks with your safe money to get back to 80%. We call it rebalancing but it’s really kind of a neat thing. It’s a disciplined way that forces you to buy when asset classes are down and the exact opposite when asset classes go up like when stocks do recover and they will at some point. We just don’t know when stocks do recover. And now you’ve got more stocks than you want in terms of your investment allocation. Now you’re forced to sell some to get back to the 60%, 70%, 80% whatever it is for you. So that’s how I would look at it.

Joe: I agree. Totally agree. I think he’s doing the right thing in regards to not moving any investments in his 401(k)s or IRAs. But I think if you’re going to make the moves it’s the rebalancing. It’s making sure that you’re buying low and selling high which is challenging to do because then you’re selling your winners and buying losers.

Al: And Joe I would say, how many people have we seen that come to talk to us that are close to retirement age? And the person or the couple that hasn’t looked at their investments over time, more often than not, does better than the person that’s constantly looking at it and making changes.

Joe: Oh for sure without question- I mean I wish we could bottle these emotions, Al, of what people are feeling over the last couple of weeks and what will potentially feel over the next several weeks. It’s real fear. But as soon as we get good news and as soon as things pass we tend to forget how we felt. We’re talking buy low; sell high, whatever, rebalance. When the markets are down this is a buying opportunity and everything else. But now we’re living in it. It’s totally different. We could say it until we’re blue in the face but the fear that people are feeling not only about their investments but their health and everything else it’s really difficult to do this correctly without a truly disciplined process. So I guess that’s why if you- for that don’t do anything or have a very disciplined process to keep the emotion out of it. They absolutely do a ton better.

Volatile Market Investing Strategy #4: Why On Earth Wouldn’t I Buy Fixed Indexed Annuities?

Joe: We got Rich. He’s calling in from New York. He goes “I enjoy your show and agree with your advice with one exception. Why on earth would I not buy an equity-indexed annuity? I understand it caps your upside but with everything going on with Corona having a crushing on the downside is beneficial.”

Andi: I think he means cushion.

Joe: Cushion. Cushion. “I guess I’m asking how much value do you place on peace of mind?” Well, Rich, I place a lot on peace of mind. Here’s the deal with- I don’t know how deep should we get?

Al: Well let’s not do a rant. No one wants a rant right now.

Joe: It’s fixed-indexed annuities, or equity-indexed annuities, of how they’re sold. And a lot of times people really truly do not understand how they work.

Al: Well why don’t you just explain what an equity index annuity is?

Joe: Basically it’s an annuity that is offered by an insurance company that will give you fixed like CD type returns. The returns that you receive or the interest that you receive is tax-deferred. And then when you pull that income or interest out it’s going to be taxed at ordinary income rates. So it’s very similar to a CD, but a CD is FDIC insured that’s offered through the banks. A fixed annuity is offered through insurance companies. So if I buy a fixed annuity, let’s just say they offer me 2%. So the 2% grows tax-deferred. I keep it in the annuity product they’re paying me 2% and of course, they’re investing that money and they’re trying to get 4% or 5% or 6% or 10%. They’re just working off the spread. Where a fixed indexed annuity comes into play is that now the agents that sell it are offering a lot higher expected return than I think is feasible given these contracts. So they’re sold in regards to- you could get stock market-like returns with no downside risk. Which is just not true. There’s no way that anyone can get stock market returns with no risk because right now the market’s-Yeah I get it- the markets are down. A fixed annuity, you haven’t lost any money because they’re guaranteed by the insurance company. But what they’re doing- So let’s say if the market shoots up like 12% like it did on Tuesday. Do you think that fixed index annuity went up 12%? No. It didn’t do anything close to that because they’re buying bonds and then they’re buying options on the bond. And do you think in volatile market Alan, option prices are just as volatile as stock prices? So the insurance company is packaging this product up, which is fine. But you have to hold the product for a very long time to get a moderate, pretty low expected rate of return. I’m fine with that if you truly understand that there’s going to be caps on the upside, there are spreads and there are participation rates. And then that’s variable and that the insurance company can change that at any time given where the market’s fall. Then, by all means, buy it, lock yourself up for a very long time and pay the insurance company a commission. That’s way more than that person deserves. Or you can do another strategy that is more liquid, less expensive and more tax efficient.

Al: Yeah I agree with all that. I guess if you kinda take a step back these kinds of products are quite appealing in markets like we have right now just as they were during the Great Recession and the dot com bust and the recession in 1992, 91, 92, and all kinds of recessions we’ve had before that. But here’s the thing, is if you take any 20 year period of time, including recessions, you do actually much better doing it on your own than in a product like this. So that’s why we don’t necessarily recommend it is you actually do better as long as you can manage your peace of mind quotient. I’m not going to discount that. There’s certainly peace of mind not losing your principle. But I guess what I’m saying is in spite of very poor markets which we’ve seen in recent times with the dot com bust and the Great Recession you did much better just investing it on your own.

Joe: I would just buy a fixed annuity versus a fixed index annuity. I guess that’s my answer.

Al: And what I was going to say was if you’re interested in equity-type returns if they’re an equity index annuity or fixed index annuity, then you’re for sure paying ordinary income taxes on it instead of capital gains if you actually own the equities yourself. So it’s not tax-efficient either.

Joe: I think fixed indexed annuities are sold. I think there’s a lot of bells and whistles that most people do not understand. If I have a straight fixed that’s going to be guaranteed by the insurance company and it’s paying me 2% because I know a fixed index annuity is not going to pay me that much more than a straight fixed annuity that I have liquidity that I can get out any time, I like that option better if you like guarantees. Or just buy a CD. I mean there are other options in regards to that. Because the insurance company, they’re just packaging the product and then the insurance people are selling them. So if you truly understand Rich, what you’re getting into and you totally accept that and you say this gives me peace of mind, then by all means then that’s the appropriate investment. The investments stinks. Sucks. Don’t do it.

Al: Let me just say one more thing. And that is a lot of these equity-indexed annuities, fixed index annuities, whatever you wanna call it, they have surrender periods and so you can get locked in for 5 years, 7 years, 10 years. We’ve seen more than 10 years and just be aware of what you’re getting into.

Joe: Yeah. The lock-in year period- I’ve seen 18 years Al.

Al: I have too.

Joe: So you can get out of the product without any type of charges or penalties for 18 years. There’s a reason for it. Because they need to keep you in the product for the product to actually perform any type of return.

Obviously Joe is not a fan of fixed indexed annuities. If you’ve managed to miss his legendary rants on the topic, you’ll find some relevant links in the podcast show notes at YourMoneyYourWealth.com. All this discussion of investing strategy and portfolio rebalancing and diversification illustrates how important it is to have a financial plan for retirement in place, especially now when the markets are so unpredictable. To have a certified financial planner from Pure Financial Advisors take a deep dive into your retirement readiness, just sign up for a free two meeting assessment, right there in the podcast show notes. Just like we’re recording this podcast with each of us in a different location during this time of social distancing safety, your free, face to face, two meeting assessment with one of our financial advisors can happen via video conference as well. Click the link in the description of this episode in your podcast app to to go the show notes and sign up for your free financial assessment.

Volatile Market Investing Strategy #5: Should I Write an Investment Policy Statement, Rebalance Frequently and Do Roth Conversions?

Joe: We’ve got Kevin. He writes in from Colorado. “To start, your show’s awesome.”

Andi: Penchant is the word you’re looking for Joe. “Joe’s penchant for Roth conversions.”

Joe: OK. Thank you very much. What the hell- “Joe’s penchant-

Andi: Yes. You like Roth conversions.

Joe: Yes I’m very penchant about them.

Al: You never knew you were but apparently you are.

Joe: “-for Roth conversions, Big Al’s thoughtful advice, and Andi’s ability to frame the question after Joe flounders his way through reading it, is why I keep coming back. There isn’t a better podcast out there. I’ve been giving quite a few a listen, only to delete them from my saved shows. The humor of your podcast is what makes listening to your financial “advice”, whoops, I mean financial banter, so enjoyable. Thanks in advance for taking the time to read and respond. I have two questions and have provided some background.” Thank you very much, Kevin. “I don’t have an Investment Policy Statement so we’re trying to maintain a strategy that hasn’t been committed to paper has been problematic during the recent market volatility. It seems like an inopportune time to develop one. But I want to establish some guidelines to help me stay the course. I’m 57 years old, buy and hold guy, with 65% to 35% stock to bond ratio, hoping to retire in 6 years. I’ve historically rebalanced twice a year, July and January. What are your thoughts on rebalancing more frequently to maintain my preferred ratio? I was considering a 5% deviation as the trigger to rebalance versus my historic biannual calendar-based approach.” All right Kevin. No, it’s never too late to write down an Investment Policy Statement. You can always change the Investment Policy Statement. But I think you’re right. You want to make sure that you have something committed to paper. And it needs to be logical, not emotional. But Al, do you disagree that this is not the right time to at least establish an IPS?

Al: No. I think anytime especially if you don’t have one. You need to establish it. Although I will say for those that already kind of have a game plan, that’s what IPS or Investment Policy Statement is. It’s kind of how you’re going to do things in spite of the market. So right now it would be nice to already have one. So you kind of try to take the emotions out of what’s going on. But nevertheless, no, if you don’t have one, go ahead and set one up. And as far as the rebalancing, looks like Kevin is doing it twice a year. And I think quarterly is probably for many people that’s probably fine. I might do it quarterly. That 5% deviation, that means you’re going to be constantly doing calculations and unless you’ve got a lot of extra time and you enjoy doing it, I wouldn’t worry too much about that. Now we at our firm we actually look at this daily but we’ve got the systems to do all the calculations for us. But I think for the person that’s managing their own portfolio, maybe looking at this each quarter is probably fine.

Joe: We use 20% bands.

Al: We do. And I think when you think 5%, I’m thinking maybe when it gets to 70% stocks, I’m not really sure. But anyway, we do use 20% bands. But we usually have 15, 16 different investments. And so what a band means- like large company stock maybe we might say 10% of your portfolio and then if it deviates 20% from that, in other words, 20% of 10% is 2%. So now if large-company stocks are more than 12% of your portfolio, you’re selling some to get back to 10% or if it goes down below 8%, 10% minus 2%, then you’re buying and that’s how we look at it. But, I don’t know, I think for the average person unless they’re an engineer or an accountant and want to do this calculation all the time, I would just look at this quarterly.

Joe: So I think with your IPS Kevin, to help you out with that, you really truly need to figure out first, what target rate of return do you need to generate? Is it 4%? Is it 6%? Is it 8%? Is it 3%? And then you devise a portfolio that is going to minimize the risk to try to get that target rate of return. So that’s your Investment Policy Statement standpoint. Our risk tolerance is completely different emotionally today than it was let’s say even two months ago. When things are rosy, it’s like it’s all good. But when all of a sudden when things are bad it’s like oh I want to just hide – put everything in cash or I don’t want to lose any money because I’ve already experienced the loss of my money. You have to figure out from a planning perspective of what target rate of return that you need to generate. Formulate your portfolio from that and then go from there. That’s how I would create the overall IPS. So you do that now. I mean anytime that you possibly can. “With the down market, it would seem we could get a whole lot more bang for the buck doing a Roth conversion in 2020. I want to convert the entire amount of my wife’s IRA of $78,000 which would result in a $46,000 taxable event, thanks to the non-deductible contributions we made over the years. This rollover will push us into the 24% tax bracket and ultimately cost us $14,000 in additional tax. As a side note, last year we were just below the income contribution so we had $14,000. We added $14,000 into our Roth IRA accounts. Now the quandary, does it make sense to spend $14,000 to get $78,000 tax-free for the rest of our lives? Or should we just save additional $14,000 to our Roth IRAs? There’s only enough money to do one or the other without tapping into our emergency fund.” Absolutely. This is a no brainer. Spend the $14,000 to pay the tax to get $80,000 tax free.

Al: Yeah. That’s an easy question. You only got $14,000. Let’s do the one that gets you $78,000 in the Roth. Not that gets you $14,000 in the Roth.

Joe: Right. And that $80,000 is on sale at this point. Absolutely.

Al: Perfect time to do it.

Joe: Perfect, perfect time to do it. So Kevin, yes. Convert the entire amount. Pay the $14,000 additional tax and then you’ll be happy you did so.

Roth Conversions, MAGI and Affordable Care Act Subsidies

Joe: We got Tony. He writes in from San Diego. “Hi everyone. We are early retired for a year or so now at age 54 and 58. Our question is around ACA subsidies versus Roth conversions. Right now we are able to keep our MAGI, modified adjusted gross income, low enough to qualify for $1200 a month in premium subsidies. We have about $750,000 in a rollover IRA and plenty of taxable funds to meet our needs until Social Security kicks in. If we convert some of the IRA money to Roth, we will lose our subsidies. Perhaps make it up later when we withdraw those funds. Our long term withdrawal rate is projected to be under 2% so I’m not convinced we will need all of our IRA money before the grim reaper shows up. We have no debt, $1,000,000 in real estate, roughly $1,300,000 in IRAs and taxable. Are we on the right path? Thank you.” OK. So he’s trying to keep his modified adjusted gross income low enough where he can then participate in the Affordable Care Act subsidies for health insurance. Right now he’s getting $1200 a month in premium subsidies because his income is so low that nothing showing up on the tax return. The government is giving them subsidies because of his income. The subsidies apply to only income, not necessarily net worth. Because he’s got, it sounds to me like a $2,500,000 estate but his income is low enough where he can apply and get the subsidy. So the question then is that if I’m in these low tax brackets does it make sense for me to do a Roth conversion because I’m in such a low bracket I can convert quite a bit and pay 10 or 12%? But the problem is is that he loses the subsidy because now they’re going to be taxed it shows up as income. And then the subsidy is going to be lost. So this isn’t-

Al: You and I might have a different answer on this.

Joe: Yeah, you know how I feel about that.

Al: Let me give my answer then you can do your opinion. So I would say for the average person it does not make sense to do Roth conversions when you’re in this situation. Because when you look at the amount of subsidy that you’re losing it becomes a really high tax rate. And the way I look at it is I just do a projection with and without the Roth conversions. And look at the difference in the subsidies which basically increases your tax. And then you can figure out what tax rate you’re in. And when we’ve done this for others, a lot of times the tax rates 50% or more. Sometimes quite a bit more depending upon where you are on the scale. Because when you get to 400 times the poverty level in terms of your income then you go up this cliff to where you don’t get any subsidies. So I would say for the average person I don’t think it makes sense to be Roth conversions while you’re getting subsidies. But I will say one other thing is with our new tax law in 2018 we have a really high bracket to get to the top of the 24% bracket for married couples which is about $325,000 of taxable income. So if you’re going to do a Roth conversion and you’re getting subsidies now you would have to go big to make this worth your while. And then, again you still compute the loss of the subsidy which is extra tax. You look at your overall rate to figure out whether it’s worth it. So, Joe, that’s my numerical answer. But what’s your response to that?

Joe: No. Because- Let me help explain what Al’s doing here. Tony is getting $14,000, $14,500 roughly a year in subsidies. Call it $14,000. It’s more than that, $14,400, $14,000. If he does a Roth conversion and let’s say he converts to the top of the 12% tax bracket. So that is $80,000 of conversion. And so that $80,000 is going to be income on his tax return even though the conversion is only going to cost them 12%. So I guess his effective rate, let’s just call it 10% just to keep the math simple. So he does a conversion of $80,000 the effective rate on that is going to be $8000 in tax. But then you lose the subsidy. So what Al is saying is that ok, you pay the tax to do the conversion but you lose $14,000 of the subsidy. So then you add the two together. So that is going to be the total cost of doing the $80,000 conversion. You take that total cost, divide it to find your effective rate and he’s saying it’s way too high. The tax rate if you combine that the subsidy dollars as a tax, an additional tax because you lose that benefit, the tax rate is too high. And it’s probably not going to make any sense. If you’re going to do a conversion, do a conversion that’s going to be very big, over the 24% tax bracket. If you feel that you’re going to be in a higher bracket later, which he may or may not be. So numerically I think I agree with you 100%. You have to do the math that way to make sure numerically it makes sense.

Andi: The end.

Al: No rebuttal? I was trying to egg you on, but that’s okay.

Joe: It’s like the Affordable Care Act was not necessarily-

Al: Designed for this?

Joe: -designed for people that have millions of dollars in net worth. I get it. Take advantage of whatever you can. But whatever.

Al: We do have this discussion and I would say we don’t know a lot about Tony’s situation. But at age 54 and 58 let’s say these subsidies go on all the way until age, till Medicare which is age 65, then at least you guys would have 5 years, or actually 7 years now, to do Roth conversions before RMDs, required minimum distributions. So that there’s still time.

Joe: He could basically get 100% of his retirement accounts in a Roth IRA given tax rates that are all-time lows. Al, a $2 trillion stimulus package. What do you think is going to happen to tax rates in the future?

Al: They’re going to ultimately have to go up to pay for all this. Right?

Joe: Right. So it’s like well we’re at all-time low tax rates. You’ve got very low tax brackets in the history of the tax code. You’ve got millions. Do you do a conversion? In my opinion, you convert all day long. You’re tripping over dollars to pick up pennies. If you did the math, I think given the 30% haircut, the prices, maybe they were overvalued or whatever. But they are definitely on sale today. So if you do a conversion with all of these things in your overall analysis I think- I don’t know, I would do the conversion.

Al: So I’ll do a rebuttal on myself. So let’s just say on the $1,300,000, let’s say $1,000,000 is an IRA. So maybe you do a third, a third, a third over the next 3 years, you stay in the 24% bracket roughly. And then at least you do that this year. Maybe you do right now, while the market’s really low. And so then you get all that recovery when it does eventually happen in the Roth IRA. So you go big. But I would not mess around with this. If you want to do the Roth, you’ve got to go big for this to make any dollars and cents sense at all. Otherwise, if you just do little ones here and there the tax rate is going to be too high because you’re losing that subsidy.


Subscribe to the YMYW podcast

 Subscribe to the YMYW podcast newsletter

FOLLOW US: YouTube | FacebookTwitter | LinkedIn


Your Money, Your Wealth® is presented by Pure Financial Advisors. Sign up for your free financial assessment.

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.