Show Notes

• (00:37) In Which Sectors Besides the S&P 500 Should I Invest For the Long-Term? (David, MO)
• (04:41) Are Gold, REITs, International, or Small Value Good Inflation-Hedging Investments? (Rikki, NJ)
• (09:14) Should I Invest in a Brokerage Account for Tax Planning Purposes? (Tim, MA)
• (13:58) Should I Be Buying Bond Funds in 2021? (Brian, Albany)
• (21:26) How Should an 18-Year-Old Invest in a Roth IRA? (Jane, MI)
• (26:54) How Can I Get Out of My Non-Qualified Annuity? (Diane)

Free resources:

The Outlook for Inflation and What to Do About It

READ THE BLOG | What Is Asset Allocation?

WATCH | Asset Allocation Vs. Asset Location

How to Invest Using Strategies Based On Academic Research | Q1 2021 Financial Market Recap

WATCH | Should You Own Bonds?

Listen to today’s podcast episode on YouTube:

Transcription

Today on Your Money, Your Wealth® podcast #324, Joe and Big Al answer your investing strategy questions: what sectors or asset classes should you invest in for the long term besides the S&P 500? Should you be buying bond funds in 2021? How should an 18 year old invest the money in their Roth 401(k)? How can you get out of a non-qualified annuity? And, are investments like gold, real estate investment trusts or REITS, international and small-cap value funds good inflation hedges? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

In Which Sectors Besides the S&P 500 Should I Invest For the Long-Term? (David, MO)

Joe: David from Missouri writes in, “Yo Joe, Andi, and Al. Little recap here from David. He’s married; gross income of $300,000; maxing out both 401(k)s, $19,500 each; maxing out the backdoor Roth, $6000 each; has two rental properties in Missouri; and he’s also maxing out an HSA health plan, $7100. He’s also got two cats. But I’m sure Andi has already found them on Google. You kind of spying on David from Missouri?

Andi: That’s what you’ve got him thinking.

Joe: I guarantee you probably know what his cats’ names are because it’s right here. It’s Knight and Wade.  Do you still hack Facebook accounts, Andi?

Andi: I do not. I gave that up a long time ago.

Joe: Really?

Andi: Yeah. It just doesn’t pay as well.

Joe: “I’m sure you noticed, but I didn’t list the impressive Kia Optima Hybrid, it’s because it’s gone. Joining the big boys in the non-qual zone with a brand new Tesla.” Wow.

Al: Model S, that’s the good one.

Joe: What’s he got a Model S for? Back to “joining the big boys in the non-qual zone.” What’s a non-qual zone? What the hell is this all about, Al?

Al: Not sure.

Joe: “Al mentioned that some markets aren’t high like the S&P 500 is reported right now. I’m purchasing mutual funds in my brokerage account and have only been targeting S&P funds. Are there other sectors or areas I should be investing in if I want to let them sit for the long-term, 20 or 30 years? Which areas should I be investing in or what are low right now? You’re all great. I look forward to the show each week.” Thank you. He wants us to expand two times a week there Al.

Al: Yeah, I gather that. So I guess since he’s commenting on my comment, I will answer. First of all, I’m really not a market timer, so I’m not the best person to ask what’s low, what’s high, the price-to-earnings ratios, the keep ratios, all that. I’m a long-term investor. I’ll put it that way. So I like to invest in a globally diversified portfolio. And so S&P 500 is a great asset class, but there’s others, too, like small companies in the US and value companies in the US, mid-sized companies. S&P tends to be more large growth. There could be some large value in there, too, but larger companies. I like international as well because they tend to go up and zig and zag at different times than the domestic market. I like emerging markets because-

Joe: You like everything. It’s like you’re-

Al: Oh, pile it on man. Pile it on.

Joe: – like you’re in an ice cream shop. Oh, I like chocolate. I like strawberry.

Al: But I will say – so going back to my original comment. The S&P 500 has done rather well the last several years and certain other asset classes have not done as well, like small companies, value companies. Now in the last 6 to 9 months, that’s turned around a little bit. We’ve actually seen some improvement in those segments. I wouldn’t look at it in terms of trying to get the cheapest buy. What’s on sale right now? I would look at getting a diversified portfolio and then let it ride for 20, 30 years, rebalance as appropriate, and just enjoy the ride.

Joe: Sure. David, targeting S&P, that’s fine. You got 20 or 30 years. You’ve got to think longer term, in a sense, is that you buy high today. Do you think it’s still going to be high for 20 or 30 years from now? It doesn’t matter what the price is today.

Al: It doesn’t really matter. And like I said, that’s one asset class. There’s lots of good ones.

Joe: There’s all sorts of good ones. And there’s bad ones.

Al: I named a few.

Joe: Good ones. You have a good asset class? I don’t know if they’re good or bad. They’re asset classes.

Are Gold, REITs, International, or Small Value Good Inflation-Hedging Investments? (Rikki, NJ)

Joe: We got “Hi, guys. It’s Rikki from New Jersey.” Rikki’s back. Hey, Rikki. “And I am a dude.” Oh, Rikki.

Al: I think- how many times did we call Rikki ‘she’? So now we know better.

Joe: I don’t know. Rikki runs real fast. “My mom is Filipino. Didn’t know Rikki was a girl spelling of the name-

Andi: R I K K I –

Joe: – R I K K I – was a girl spelling of the name and my dad, being a good husband, didn’t argue with her. Incidentally, the drummer from Poison spells it the same way. Rikki Rocket.”

Al: You’re in good company, Rikki.

Joe: Wow. “I felt like I was Pat from Saturday Night Live.” Well, we thought you were Pat too, Rikki. And I thought you were like Ricky Henderson the whole time. I was just thinking Ricky, Rikki. Rikki saves money. Rikki wants to save money in Texas.

Al: Ricky Henderson was with the Oakland A’s, but he played for a while with the Padres, San Diego Padres. So we got to hear him a lot. And he did some good things for the Padres and every single time. Yeah, Ricky runs fast, Ricky stole a lot of bases this game. Ricky hit a home run. Ricky feels good about that.

Joe: Ricky, Ricky loves Ricky. “Thank you for answering my question, by the way. My new question has to do with different asset classes and inflation. Where did this rumor come from that gold is an inflation hedge? Did it historically keep up with inflation at some point past a period like in the ‘70s? Is it really true that one ounce of gold can buy a nice men’s suit now similar to 300 years ago?” Yes, that is true. One ounce of gold 300 years ago could buy a nice suit. And today one ounce of gold can buy a nice suit. But that is an inflation hedge, right? One ounce of gold. You could buy the same thing as- it kept up with inflation.

Al: Yeah, that’s the point.

Joe: That is the point. I think people use that stupid line that it didn’t grow any value, but it kept its value, which is –

Al: It’s kept its purchasing power, we’ll put it that way. And inflation is an average let’s call it 3%, 3.5%, whatever. So that’s what it’s kept. Isn’t that a great rate of return? No, not particularly. Does it always go in step with inflation? Absolutely not.

Joe: No.

Al: It’s pretty unpredictable really.

Joe: It’s pretty volatile. “Can REITs act as a good asset class to hedge against inflation given rents, real estate costs tend to adjust for inflation?” Yeah, real estate’s a decent hedge against inflation. Stocks are good hedge against inflation. “How about investing internationally as a hedge against inflation-?” Rikki really likes to talk about inflation.

Al: Rikki likes inflation. Rikki wants to know about inflation.

Joe: Rikki’s really scared. Rikki really scared of inflation. Should I buy gold? Should I buy real estate? Rikki needs to know right now. What should I do? What should Rikki do?

Al: That’s perfect, Joe. You’ve got that to a ‘T’.

Joe: “- as inflation in the US doesn’t necessarily happen at the same time as other countries. Finally, what would smaller value companies do better in an inflationary environment? Thank you, guys. Rikki.”

Al: What do you think? Are all those things inflation hedges?

Joe: Yes, they are. International companies, small companies, value companies, stocks, REITs, International, gold. Yes, they’re all inflation hedges. Cash is not.

Al: They’re not fixed income.

Joe: Cash is not an inflation hedge. So, yes, Rikki, globally diversified asset classes that have some risk to it, other than the risk-free rate, would be an inflation hedge.

What is the outlook for inflation, and will it affect your finances this year? Learn about inflation, asset allocation and asset location from all the financial resources waiting for you in the podcast show notes at YourMoneyYourWealth.com. Click the link in the description of today’s episode in your podcast app to access them and to download our guide on Why Asset Location Matters for free. If you’re one of those people who just has to hear it applied to your own situation, you can always click “Ask Joe and Al On Air” in the podcast show notes to send in your money questions and comments.

Should I Invest in a Brokerage Account for Tax Planning Purposes? (Tim, MA)

Joe: We got Tim from Massachusetts. “Hey, Joe, Big Al and Andi, thanks for all you do. I’m 38 and work as a police officer in Massachusetts. My wife is 29 and works in investing and finance.” Police officer, thank you for all you do, Tim. “Total gross income, including VA disability, and annual tax-free gifts from my in-laws is about $265,000; debt free, aside from the house. Currently maxing out two Roth IRAs-” Got an income of $265,000, maxing out Roth IRAs, maybe gifts, that’s probably what it was – “- and my wife’s Roth 401(k). She doesn’t have a post-tax option to it. No Megatron backdoor at the moment.”

Andi: Thank you, Marcus.

Joe: Megatron. What’s that, that stupid giant backdoor?

Andi: Yeah, that was a garage door.

Al: That was your term. I think you came up with that.

Andi: No, Marcus came up with that.

Al: Oh, Marcus.

Andi: He called it the Megatron. Yes. And it stuck, apparently.

Joe: People love it. People are loving the Megatron backdoor. “I will also have a pension through the state. I have an option to contribute to a government tax-deferred 457 plan. However, I’m thinking it’s better to invest approximately $30,000 annually in a taxable brokerage account instead. Reasons being, I plan on retiring from the police department at age 55 with a 50% pension, but also plan on continuing to work another low risk job career.

My wife will only be 46 when I retire, and we stand to inherit a significant wealth from family. Wife could be inheriting $5,000,000 plus; myself, about $7.50-”

Al: That’s $750,000.

Joe: He’s just killing the game. $750,000, sorry.

Andi: $750,000.

Joe: OK, whatever. Killed my joke.

Al: He was making a joke.

Joe:  “- with most of it, not all of the money in tax-deferred accounts.”

Andi: Most, if not all.

Joe: Most, if not all-

Andi: There you go.

Joe: “- in tax-deferred accounts. If my understanding, tax planning correctly, is the taxable brokerage account a better, albeit small way, to reduce our future tax burdens with factors like my wife will still be earning ordinary income for years following my retirement, as well as taxes that will be due on inherited IRAs, now that the stretch IRA is gone? Thank you in advance. Love the show.” Tim, love you for writing in. Yeah, I think so. I mean, $5,000,000. You got to get that thing out in 10 years or less. That could be a pretty big, healthy paycheck. She’s still work in working in finance and investing, so I don’t know what that means, but I would imagine it’s a decent income. And I would probably put it as much as you can in non-qual or Roth, and I think that’s what he’s doing.

Al: Yeah, I think he’s maxing out Roth opportunities. I agree with that, too. If your wife inherits a $5,000,000 IRA, let’s say, and who knows what it will be then. But let’s just say $5,000,000 and you’ve got to pay that thing out in 10 years now, with the stretch IRA gone. So that’s $500,000 a year. Or you could do like nothing, in year 10 you could do $5,000,000. But boy, what a tax bracket that would be. So it’s I think you’re- the idea is right, because you kind of would like to keep your other taxable income as low as possible, anticipating a large inheritance in a retirement account. So. Sure.

Joe: I think your tax planning is right on. He’s going to have a pension. He’s going to have- the wife’s going to inherit a big chunk of money there. She’s still going to work. He’s probably going to work still. And so that’s going to be ordinary income. So most of the income, I think, is going to be taxed at ordinary. He’s 46. He’s got $265,000 of income. But some of that’s gifts. So we don’t really know. And he’s got a VA disability in there that’s tax-free. So we don’t know really what his tax bracket is.

Al: But even if his tax bracket’s $200,000, he’ll be in let’s just say he’s in the 24% tax bracket. And what will they be in later when they receive the inheritance? A lot higher than that.

Joe: OK, very good.

Should I Be Buying Bond Funds in 2021? (Brian, Albany)

Joe: Brian from Albany writes in, “Hi, Joe, Big Al and Andi. Love the podcast, particulary- particulary- ”

Al: particularly?

Joe: -particularly?

Andi: There you go.

Al: Close enough.

Joe:  “- the way you break down investment concepts into simple common-sense explanations. Here’s my non-Roth question.” All right. Thanks, Brian from Albany. Stop with the big ass words, though.

Andi: What, particularly?

Joe: Seems very hard to say. Say it like 5 times.

Al: Actually, that is kind of a hard word to say, I agree with you.

Andi: Ok.

Joe: “Here’s my non-Roth question. Should I be buying bond funds in 2021?” I guarantee people that are listening to this right now are saying particularly, it’s pretty easy to say, particularly.

Al: Who are those stooges? They can’t say a simple word. I’m not even going to try to say it because I’ll blow it.

Andi: Especially.

Joe: Here’s the non-Roth question. “Should I be buying bond funds in 2021? I’m likely to retire in about a year. I have been gradually rebalancing my retirement portfolio from mostly stocks to include more bond funds. My bond investments are down slightly year-to-date and about flat for the year. If these were stock funds, I would consider it a buying opportunity. Does the same applies for bond funds? Or will Treasury rates or other factors keep the bond funds stagnant this year? If bond funds are going nowhere or even falling in 2021, would it be better just to put these dollars in CDs with no risk until the bond fund or the bond market stabilizes?” I wish I had that crystal ball, Brian from Albany.

Al: It does require that we know actually what happens in the future.

Joe: Yes it does. We can speculate, but speculating- So we get this question quite a bit. Interest rates are really low. And it’s like, should I invest in bonds? What the hell am I doing in these bonds? And then, I’m losing money in bonds, the losing purchasing power and bonds. Bonds suck. What else are people saying?

Al: It’s like why do it? Interest rates are nothing. So and they’re probably at some point going to go up. And bond funds tend to go down when interest rates go up, although there doesn’t seem to be- we’ve been saying that for a long time. Eventually they’re going to go up, I think, for the last 15 years, Joe, as long as you and I’ve been on the air together. So I don’t say that anymore. I have no idea.

Joe: I have no idea either. And here’s how we look at bonds: bonds are the safety net of your overall portfolio so you can take the appropriate amount of risk in your stocks. You first have to figure out, Brian, what target rate of return are you trying to accomplish from the overall portfolio? I mean, real simple things. You need a 6% return, 8% return, 4% return, whatever, then that’s going to dictate how much money that you want to have in stocks versus safe money. If you’d rather go in CDs versus bonds, then by all means go in CDs. CDs is still a cash equivalent. We feel that short-term bonds or treasuries are kind of in the same asset class, but bonds will probably give you a little bit higher expected return. We want to go short-term, high quality on our bonds anyway because we’re not trying to time the bond market. It’s almost impossible. That’s where all the big money is anyway. And it’s there just for, like I said, a safety net. So maybe you want 60% stocks, 40% bonds. And if you want to put half of the bonds in the CDs and the other into the treasuries, it’s all good. But by the time interest rates go up and then also bond yields start recovering, you’re going to be too late to the party. You’re going to buy in. And it’s already happened.

Al: We get that comment. As soon as the market recovers, that’s when I’ll get in. It’s like, really? You’d like to get in when it’s lower. But I agree with you, Joe. Bonds are not terribly fun right now. But the reason why you have bonds versus cash, to me, two reasons. One is they generally have a little bit higher return, although they can temporarily go down. So there’s some risk there, but they generally have a higher return than CDs. And secondly, when stock markets correct, bond funds tend to go up because there’s a flight to safety, investors are now putting their money into bonds because they’re afraid of stocks. And we’ve seen this many times when a market corrects, bond funds go up and it helps mitigate the losses on the stock. So that to me, that’s why you do bonds. I like bonds. I don’t like the return. No one likes the return right now. But I don’t really look at them. I don’t really focus on, what’s my return on the bonds? I look at the overall portfolio and, what are bonds in there for? And it’s to help stabilize the portfolio, to have less volatility and to mitigate some of the losses. So if stocks go down, bonds, not always, but generally often go up a little bit.

Joe: Good point. You can’t look at your portfolio as a collection of investments. You have to look at your portfolio as one. Because he’s looking at bonds. Well, bonds aren’t paying this. And stocks are paying this. So maybe I don’t go into bonds and I’ll go into CDs. And then when bonds recover, I’ll go back in. He’s looking at the like return of each of his different investments. I think you look at the total return of your portfolio to see if it’s still on track to whatever goals that you’re trying to accomplish and then go from there. Because I have very little bonds in my portfolio, but it’s not like I look at, oh, what did my bonds do in my portfolio? What have my stocks do? I just look at what rate of return that I generate this quarter on my portfolio? All right. I’m still on track. So if I’m not a track, then I got to adjust some things. I probably going to save more, spend less. You know, there’s other things that you can move that you can have absolute control over. But trying to time when the bond market is going to recover, you’re going to be late to the party. It’s like, oh, I want to get to the party when it’s really happening. OK, well, what time is that? You know, then you get to the party and everyone’s wasted. Well, then that was a blow up.

Andi: That’s a party at Joe’s garage.

Al: You got there too late.

Joe: You got there a little bit too late. See, if you go to a party at my house, you’ve got to get there early because that’s when the fun happens. If you show up too late, everyone’s crashed out. You go to Al’s house, parties don’t start until 10:00 p.m.

Al: And we haven’t drank all the beer yet.

Joe: Because you’re drinking tea and being vegans.

Al: That’s right.

Joe: All right, hopefully that helped Brian from Albany.

So grab a beer and pull up the podcast show notes, particularly if you want to learn more about the role of bonds in your portfolio, and about Joe and Big Al’s investing philosophy at Pure Financial Advisors. It’s the idea of creating a strategy, underpinned by academic research, that takes the least amount of risk possible to help you meet your financial goals and plans for retirement. Pure’s Director of Research and resident bond geek, Brian Perry, CFP®, CFA® presented a webinar just last week on the topic, which you can watch in the podcast show notes. You might recognize the moderator. Click the link in the description of today’s episode in your podcast app.

How Should an 18-Year-Old Invest in a Roth IRA? (Jane, MI)

Joe: Jane writes in. She goes “Hi, Andi, Al and Joe. Thank you for your clear, simple, straightforward answers to complex tax and investment questions. You are a perfect trio on the air.”

Andi: Thanks Jane.

Joe: Yeah, Jane. “I honestly didn’t think you could understand, let alone answer my last question I sent in and you explained it perfectly. Thank you. Thank you. Thank you. You guys are the best. Now, a new question.” Do you remember what Jane’s question was, first of all? Not a clue.

Al: No.

Joe: “My son has roughly $40,000 in his Roth IRA. He is 18 old but he has worked and filed taxes since he was 13. I made a deal that I will match his earnings if he never touches this account until he’s 65 years of age or older. He had money invested in a target date fund. With advice, we moved it all into FTGRX.” I’m guessing that is a Fidelity Growth Fund.

Al: That’s what I would guess too. That would be Fidelity, GR…

Andi: You would be correct. Fidelity Growth Company Fund.

Joe:  Fidelity Growth Fund. “I understand from all I’ve learned that money should be in all super growth type stocks. If you were 18 and had your knowledge now, where would you consider investing this money? I was thinking something simple, low cost, super risky. So greater returns with time. P.S. I’m from Michigan and drive a 2015 Chevy Tahoe.” That’s kind of cool. So Jane’s a badass in the Tahoe.

Al: That’s a big vehicle.

Joe: I like Tahoes.

Al: Do you?  Well you’re from Minnesota. I’d rather do a smaller car.

Joe: Yeah. Well that’s your personality.

Al: No, I’m just- I’m trying to-

Andi: He’s massive.

Al: I’m trying to do right by the planet.

Joe: Got it. Got it. “I listen to a podcast in my earbuds as I walk my mini-goldendoodle every day. I wish you could air a podcast 7 days a week.”

Andi: Well, we have over 300 of them. You could just listen to them all, 7 days a week.

Joe: Absolutely not.

Al: That only gets you through one year, though. What do you do the next year?

Andi: True.

Joe:  So here’s my advice to your son, Jane, who’s got $40,000 dollars in a Roth IRA. FTGRX is totally fine. I’m guessing it’s just a large cap growth fund. But that’s probably the safest stock mutual fund you could go into. Large companies are very big and large, they’re profitable, but they’re not risky. Wal-Mart is probably not going to go out of business. Target is not going to go out- GM, 3M, Colgate. These companies are big, giant companies that are very stable, that have been around forever, that are probably not going to go anywhere. Because the fact that they are large, big and safe, that means that their expected rate of return over the long-term will be lower than maybe a company that you never heard of that will be the next Wal-Mart. That will be the next Tesla. That would be the next Netflix. So how do you go about doing that without doing a ton of research and wasting your time and losing a bunch of money? Well, you can buy a fund that has just smaller companies, right? So a little bit lower price. Small companies that would be small value. So small companies that have a huge runway to grow and then that they’re a little bit more on price, you’re going to see a lot more volatility. So those are risky. But you’re going to see probably a higher expected rate of return over the long-term, then maybe a big, large growth fund.

Al: Yeah, I agree with that, or even to make it even simpler, instead of just a large company growth fund, maybe get a total stock market fund that has larger companies and smaller companies in it. And then maybe add the same kind of fund internationally, Total International Fund. Maybe you do 20% to 40% international, 60% to 80% US. That’s what I would probably tell my son at 18.

Joe: If I had a 18-year old, I’d be like I would jam that thing $20,000 dollars in small cap value, $20,000 in emerging markets.

Al: Those are asset classes that have the highest expected rate of return.

Joe: And then next year, he’s going to look at the balance and it’s going to be $20,000.

Al: Yeah, it’s volatile. And there be years where you wondered, why did I do this?

Joe: I’m down 60%. So that’s not advice, Jane. It’s just a couple of kids. So if you want super duper risky growth, that’s where I would go. If you want to do the more sensible thing, I would do what Al said, Total U.S. Stock Market Index fund, total international index fund and then 50/50, 60/40. Split it however you want.

Al: 20/80, it doesn’t matter. Just get some foreign exposure because they tend- foreign stocks don’t always step in line with U.S. stocks. And so they have a little bit of correlation benefit. Not much, but a little bit.

Joe: OK, cool. Thanks a lot. Jane, appreciate you writing in.

How Can I Get Out of My Non-Qualified Annuity? (Diane)

Joe: Diane. “Hi. I saw the YouTube video talking about annuities. I have two annuities, non-qual and one qual. Both annuities I’ve had for decades. So, past surrender charge dates. I’m 57 and a half. Can I get out of my non-qualified annuity and put it in something else where I can get growth and avoid the fees? With the qualified aspect, can I roll it into a traditional IRA like Fidelity and pay no fees?” Yes. OK, very easy. I can answer this. Appreciate the video and help in this matter.” So non-qualified annuity. No, you can’t blow it out because you’re 57 and a half, but you can do a 1031- 1035, excuse me, exchange into another low cost annuity. There’s several annuity products out there that are very low in fee. I think they’re called annuity rescue products.

Al: That’s what we call it. I don’t know what they call it.

Joe: So you could do that. With your qualified annuity, you can roll that out and put it into mutual funds. You could put it into cash, put it into CDs, you could put it into index funds, ETFs, whatever, because it’s qualified. They invested annuity inside the IRA. You could take it out of the annuity and you can invest in anything that you want at Fidelity. So go on a low cost annuity with your non-qualified, because if you take it out and cash it out, you’ll be taxed at ordinary income plus a 10% penalty because you’re under 59 and a half. And the other, easy peasy. Just do a transfer.

_______

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