Show Notes

• (01:04) Is Too Much Portfolio Diversification Possible? (Wyatt, Fargo, ND)
• (09:40) Thoughts on Target Date Funds? (Sally, Waukesha, WI)
• (15:16) How Will Ownership Inequality in the Stock Market Impact Future Returns for Most Investors? (Karmen)
• (18:58) Understanding Dividends, Diversification, and Net Unrealized Appreciation (Wade, CA)
• (28:31) Should I Invest Extra Cash in Annuities or Bonds? (Ted, San Diego)
• (32:38) Are Long-Term Treasuries the Best Way to Balance Equities in a Portfolio? (podcast survey)
• (35:08) How to Determine your Risk Tolerance (podcast survey)
• (37:42) How to Manage the Buckets of Money Investing Strategy (podcast survey)
• (39:21) Build Back Better Roth Provisions Gone, Then Back. House Vote This Week (David, NYC)

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Transcription

Today on Your Money, Your Wealth® podcast #352, Joe and Big Al are answering your retirement investing questions: can your portfolio be over diversified? How do dividends and net unrealized appreciation or NUA work? How will ownership inequality in the stock market impact future returns for most investors. And what do the fellas think of target date funds? Plus, partway through this episode we start something new and exciting: the YMYW podcast is now on video! Don’t just listen, now you can watch Joe and Big Al answer your questions on investing extra cash in annuities or bonds, long-term treasuries, figuring out your risk tolerance, and the buckets of money investing strategy. Oh boy, better get my makeup on straight. Click the link in the description of today’s episode in your podcast app to go to the show notes, see the new video clips, subscribe to the podcast on YouTube, and to Ask Joe and Big Al On Air. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Is Too Much Portfolio Diversification Possible? (Wyatt, Fargo, ND)

Joe: We got Wyatt, writes in from North Dakota.

Al: I like the name Wyatt.

Joe: Wyatt Earp.

Al: Yeah.

Joe: I wonder how many times he hears that.

Al: Daily.

Joe: “Hi, Andi, Big Al and Joe. I’m a big fan of your podcast and look forward to new episodes each week. I’m a longtime listener, first-time caller. I have a question that I haven’t heard covered in your previous shows. Is there a point where you become too diversified in your portfolio?” So over diversification Wyatt’s worried about. “Twenty seven years old from the frozen tundra up in Fargo, North Dakota.” My brother-in-law is from Fargo, North Dakota.

Al: Oh, really? Wow. OK.

Joe: Our new hire, Dominic, is from Fargo.

Al: Yeah, there you go.

Joe: Just keep it in the Midwest. “I drive a 2004 Chevy Silverado and prefer bourbon and an old fashion, but can never turn down a cold Busch latte. My question revolves around being too diversified in my portfolios while I’m still at a younger age. I feel like I’m going against the adage of concentration creates wealth, diversification preserves it. My portfolio breakdown is as follows: my allocation is 100% in equities. You can disclose these amounts on your show, if you want.”

OK. He’s got a 401(k) of about $50,000, and he has an S&P 500 2060 target date fund, large cap growth fund, small cap index fund, total international fund. He’s got a Roth IRA. Same thing. Large cap, got a couple of bucks in individual stocks and small cap, then large cap international. Then he’s got a bridge account, non-qualified brokerage. It’s called a bridge account, I guess.

Al: Yeah.

Joe: So again, he’s fully diversified.

Al: He’s got probably eight positions on a $4,500 account. That might be a bit much.

Joe: It could be.

Al: To try to keep track of all that.

Joe: And then he’s got another brokerage account and he’s got a couple of funds there. “I know there’s a lot of information within this question, but would really appreciate your thoughts on this topic. Looking forward to future episodes, as always. All the best, Wyatt from Fargo.” Cool. Thanks Wyatt. OK, over diversification, so he does have a point. The best investment in the world is in individual stock.

Andi: I thought it was an investment you make in yourself?

Joe: It could be that too.

Al: That too. But besides that. The best investment you could ever make is in an individual stock, IF you pick the right stock. That’s the hard part, because that’s concentration.

Joe: Or, an investment you make in yourself and you build a very successful business, and then you sell it.

Al: Yeah, that works, too.

Joe: But those are highly concentrated.

Al: Yeah. And in many cases, that fails because you are concentrated. But see, that’s the thing about concentration of your assets. If they do well, you make a lot. Or, you could lose it all. It just depends if you pick the right one.

Joe: Do I feel that Wyatt is overly diversified? I think overly diversified is probably not the right answer, but I think it’s too over the top.

Al: Too many funds.

Joe: A lot of funds. There’s a lot of overlap here. It’s not over diversified, there’s overlap.

Al: I think the idea of 100% allocation towards equities at age 27, I’m all for that. As long as you understand it’s going to go down, it’s going to go up. But over the long term, you’re going to do better having all stocks. So I like that. I think, Wyatt, you have more different funds than you need. But the fact that you’re hitting on all the major asset classes, as long as these are low cost index type funds or ETFs, you’re on the right track. And here’s how I think about concentration, instead of trying to pick the next Google, which is almost impossible. Concentration happens when you buy a property, or when you start a business, or you’re working in a successful business and you get stock options. To me, that’s where concentration really works well. To try to find the next gold mine stock is almost impossible.

Andi: Isn’t this also where asset location would come in? He’s kind of equally diversified across both his 401(k) and his Roth IRA and his brokerage, wouldn’t it make more sense to have his more volatile assets in the Roth IRA?

Joe: It could, but he’s 27. So as you get older and you need the money from the portfolio, then that’s when we would probably look at asset location a little bit. But he’s 100% stocks. So there’s more bonds in the portfolio than you would probably look at that, but you’re right, Andi. If this was me, I would have three funds. I would have a total U.S. stock market fund. I would have a total international stock market fund. And I would have a small cap value fund, if I wanted to stay 100% equity.

Al: Yeah, and I might add a fourth one. Emerging market. Just a little bit. And then if I didn’t want to be 100% equities, then I might have 10% bonds or 20% or whatever, just to try to temper the downturns.

Joe: Because you’re overlap city here. Because you’ve got the S&P 500 index fund and then you’ve got a large cap growth fund. If you look at the large cap growth fund and you look at the S&P 500 index fund, I would imagine most of the stocks that are in the large cap growth fund are in the S&P 500.

Al: It’s almost the same. Now, there is a target date fund, which actually will have some fixed income. Not very much, but some.

Joe: But the target date funds, you should only use one fund. If you have a target date fund, that’s the fund. You picked that, you don’t select any other fund.

Al: It’s not a diversification, is what you’re saying.

Joe: The fund is diversified itself.

Al: Agreed. So, I would get rid of that one. But you could do this in three or four or five different funds and call it good.

Joe: Going back to the target date fund, people will go like, “hey, I got a 2060 fund, I got a 2040 fund and I have 2070 fund, I’m diversified.” No, it’s not a diversification.

Al: That means you’re retiring 3 times.

Joe: Don’t you just want to retire once?

Al: I might retire in 2025, it might be 2035, it might be 2045.

Joe: No, it’s not diverse. If you want to retire in 2060, and you want to use a target date fund, then 100% of your assets go into the 2060 target date fund.

Al: Yeah. The way I think of target date funds is that’s what you do when you don’t know what you’re doing. You just pick, I want to retire in 2060, boom, I put all my assets in there. Someone else figures it out.

Joe: Yeah, and they work fine. But where they don’t work out great is when you start needing to create income from the portfolio. Because you might want to sell certain funds that are up or down, tax loss, harvest, manage it and things…

Al: Especially if you have money outside of retirement accounts.

Joe: Right. But, I think for our friend Wyatt, there’s nothing truly wrong with what you’re doing, it’s just a ton of overlap and it’s kind of overkill. Especially this bridge account. I don’t know what a bridge account is. I know it’s a non-qualified brokerage account, but it sounds almost like an emergency fund. That should be cash or money market. You shouldn’t have individual stocks in a bridge account. What would you call it?

Al: A bridge account? Well, like I said, there’s like eight positions in this $4,500 account. So that means each position is $200-$300.

Joe: Yeah, he’s got individual stocks, too at 12%. So I don’t know how many stocks he’s got, what’s 12% of $4,000? You might have some penny stocks.

Al: Maybe. Maybe that’s his concentration, that one of those might hit.

Joe: Hopefully, that helps. But thanks for your email.

Thoughts on Target Date Funds? (Sally, Waukesha, WI)

Joe: Sally from Waukesha.

Andi: Sally has emailed us before.

Al: Yeah, well, you can’t forget Waukesha.

Joe: “Love Tito’s and Tonic”? I thought that said, love tattoos.

Andi: No, that’s me.

Joe: Ahh. “Love Tito’s and tonic and Spotted Cow.”

Al: Love Spotted Cow.

Joe: “And like to use percentages, as you found from my prior question. I listen to podcasts faithfully, either while walking the dog or while trying to fall asleep.”

Al: Our first honest listener, after all these years. I use this to fall asleep. Actually, I’ve been having trouble sleeping lately. I’m going to try it. See if I fall asleep on my own show.

Joe: Instead of a sleeping pill, just throw this garbage on.

Al: Put this on and see if it works.

Joe: “I’m currently 50 and hope to retire at 55 when I’ll use my tax deferred to live. I’m trying to tie employee savings accounts that are highly significant and target date funds to an overall allocation for all my other accounts, HSA packages, and brokerage cash. What do you think about target date funds? You have to dive deep to get the overall allocation by large, mid, small bond’s, and growth value. I’m trying to optimize and get to that level of detail. I assume it changes if there is a glide path as I approach the date, so I’m not sure how often I have to update the percentage. If I want to get out of it now, do you suggest I move it all to a brokerage link option in my plan and use ETFs to get my desired allocation? As I do for my taxable brokerage? Or, to the other fund options? Besides 13 target date funds, diversified fund, small cap, mid-cap S&P 500 and so on? Thanks for the spitball.”

OK, so Sally from Waukesha, she has all of her money in a target date fund. She wants to retire in five years. That’s in her 401(k) account. Should she take it out of the target date fund and create her own allocation? Al, what do you think?

Al: Well, we don’t really know, Sally, how much you have in a brokerage account, but the target date funds, they’re actually a fine vehicle when you don’t really know how to do this. Because the allocation keeps getting more conservative as you get closer to retirement. I kind of like that. But, when you have a lot of other assets and you don’t fit into the so-called “norm” of people retiring, which no one does because it’s just an average of what people need for retiring. Maybe your needs, Sally, are completely different than an average retiree and your investment should be very different. That’s where, if you have a little bit more sophistication, like maybe you’re doing in your brokerage account, then maybe you do go ahead and invest it. And I would probably just stay in the current 401(k). You could do a brokerage link if you want to get more sophisticated, but you already have many of these options in your current account. I’d probably just do that for the next five years.

Joe: Yeah, Sally’s sophisticated. She’s already going into small cap, mid-cap, growth… She’s trying to get deep and understand the glide path. If you know the term glide path, you should not be in a target date fund. Period.

Al: Well, you might have heard it, but not know exactly what it means.

Joe: Glide path?

Al: It’s a safe landing to retirement.

Joe: Right. If it’s $100,000, stay in it. Don’t worry about it. But if it’s a little bit more, where you want to…

Al: Have more control.

Joe: More control, I would definitely get out of it and create more of your own portfolio, very similar as you did with the brokerage account.

Al: Yeah, it’s something that fits you better.

Joe: Yes, but you also want to look at asset location too, Sally. So if you remember, if you’ve listened to the show, you’ll want to keep asset classes in your brokerage account that have a higher expected rate of return. Just because of the tax treatment of those accounts, they’re taxed at capital gains. Plus, you can tax harvest those accounts. You want to keep your more conservative investments in your retirement account. Of course, it depends on what your mix is of stocks versus bonds, and it also depends on how much money you have in qualified versus non. But, I think I would much rather control my allocation versus the target date fund, especially if you’re five years from retirement.

Al: Yeah, I would, too. The reason why I like target date funds is when you really don’t have the knowledge, but it seems like Sally does. So I like that.

Find out exactly how your retirement portfolio should be invested by scheduling a free financial assessment with a CERTIFIED FINANCIAL PLANNER™ professional on Joe and Big Al’s team at Pure Financial Advisors. They’ll take a close look at not only your current financial situation, but also your ability to tolerate risk, your specific retirement needs and goals, your tax liability, and many other factors. They’ll help you develop a comprehensive financial plan to reduce your taxes and make the most of your retirement. Click the link in the description of today’s episode in your podcast app to go to the show notes and click Get an Assessment to schedule a no cost, no obligation financial assessment at a time and date that’s convenient for you.

How Will Ownership Inequality in the Stock Market Impact Future Returns for Most Investors? (Karmen)

Ownership Inequality in the Stock Market (awealthofcommonsense.com)

Joe: “Dear Joe and Al, the charts in this post beg a number of questions as it relates to the government’s 10 year rule. It would seem that very large withdrawals from the market for inheritors of the top percent will negatively impact future returns for the remaining 90% in the market. Any insights on the future impact with larger than previously seen withdrawals? Thanks, Karmen.”

So Karmen, she sent us an article that Al and I…

Al: We skimmed. With Andi’s help. The article is called Ownership Inequality in the Stock Market and was written by Ben Carlson in 2021.

Joe: OK. Andi, give us a lowdown of the article, since you read it.

Andi: At the top of it, they talk about the difference in assets held by the wealth percentile of U.S. households. Talking specifically about the housing market, where the top 10% owns 45% of the housing market, the bottom 90% owns 55% of the real estate in this country. Then it goes on to ownership of financial assets in the United States, and it shows a similar amount of wealth inequality.

Joe: So the top 1% owns a lot, and everyone else owns a little.

Al: Yeah. So the article basically is saying that when the wealthiest people pass away their heirs are going to inherit all this money, they’re going to spend it, there’s going to be lots of withdrawals from the stock market, it’s going to cause a reduction in the stock prices.

Joe: And that’s going to blow up the price. And there was an argument here with the Baby Boomers. Remember this quote? That 10,000 Baby Boomers are retiring every day?

Al: Yeah. I’ve heard that.

Joe: How many times have we…

Al: I’ve even said that.

Joe: 10,000 Baby Boomers are retiring every day. For the next, like 50 years.

Al: So listen up.

Joe: But the tsunami is coming! The market is going to blow up because all these baby boomers are retiring and they’re taking money from their portfolio! As they sell stocks, it’s going to reduce prices and it’s going to be a calamity!

Al: Yeah, we’ve heard this for decades.

Joe: Your boy, Dent.

Al: Oh, Harry Dent. I got to see him live.

Joe: Yeah, the age wage.

Al: I watched him blow up. Although, he doesn’t think he did.

Joe: So, let’s say, if they inherit the money, is the assumption that the inheritors are not going to save it, they’re just going to spend it?

Al: They’re going to spend it all.

Joe: But if all of that money goes into the economy… what’s going to happen in the market?

Al: It’s going to blow up and do well.

Joe: It’s going to do all right.

Al: Plus, you’re talking about the wealthiest people. There’s no way to spend that much. Are you going to buy a house every minute? Let’s say, I want to buy a house in La Jolla for $20,000 right now. Oop, now I want one in Rancho Santa Fe for $16,000,000. You can’t spend… and you’re absolutely right. If it’s spent, it goes back into the economy. Don’t worry about it.

Joe: Yeah, I would not.

Al: That’s our opinion, Karmen.

Joe: Yeah, we could be dead wrong. We are not economists.

Al: This is not any kind of prediction whatsoever. But here’s why I feel confident in my opinion: we’ve heard this before for decades and it’s never come true.

Joe: But this time is different, though.

Al: Yeah, I know. This time is different.

Understanding Dividends, Diversification, and Net Unrealized Appreciation (Wade, CA)

Joe: We got Wade, he writes in from California. “Hi all. I have a few questions I was hoping you can assist with.” We’re here to assist. Any time. “The first question is regarding people who talk about living off of dividends in retirement. I agree with you that receiving or creating your own synthetic dividend is essentially the same. My thought is that people in the accumulation phase should most always reinvest dividends, capital gains, etc. But what about those spending from their taxable accounts? If I’m paid a dividend, then I reinvest it, and then later, I sell shares for living expenses, would I be in a worse after tax position than if I just paid the dividends or just put the dividend into cash? In other words, I paid tax on the dividend that I reinvested and then also paid cap gains on the shares I sold. Assuming you didn’t specify selling the shares that you purchased by reinvestment dividend itself. How do you guys structure this when people are living off their taxable dollars? Do you always pay dividends to cash in retirement?”

OK, that’s a very interesting question, because dividends are taxed at a capital gains rate. However, let’s say if you had capital losses, the dividend still is taxed at capital gains. It doesn’t really offset. So that’s why Al and I talk about a synthetic dividend, and what that means is that you’re just selling a share. Let’s say you have a stock of $10 and it gives you a dollar dividend. Your stock price goes down to $9.

People are going to bitch about this, aren’t they? Oh my God, it’s been a while since we talked about dividends and stock prices.

Al: I know, right?

Joe: “My stock doesn’t do that!” Well, probably because the stock went up that day that the dividend came out. Who knows?

Al: Right. There’s other factors.

Joe: If we just look at this in a vacuum, you got $10, $1 dividend. You receive $1. You pay tax on that dollar and then you reinvest it and now you’re back to $10. Or less if you paid the tax with the dividend, but let’s say you had outside money. If you didn’t necessarily need the money, you didn’t need the income, so you have another investment that doesn’t pay a dividend and it’s worth $10 a share. So you don’t pay tax that year because there was no dividend. So, we’d like to create a synthetic dividend. What that means is that let’s say a stock doesn’t pay a dividend, or a mutual fund or investment doesn’t pay a dividend, you just sell a dollar of it to get your dollar. Then you pay tax whenever you create your own income. So what he’s asking us is that if a dividend is paid out with a stock, do we reinvest it or do we go into cash? It depends on the goal of the client.

Al: Yeah, but I want to add one point, Wade, that I think you’re missing. When you have a dividend and reinvest it, that increases your basis in the stock. So in other words, you spend $5 for a stock and it’s worth $10. If you sold it, you’d have a $5 gain. Then all of a sudden you get a dividend for a dollar and you pay tax on it and you reinvest it. Now it’s as if you spent $6 for that. You sell it for 10, now you have a $4 capital gain because you paid a dollar of dividend, which is at the capital gain rates. It actually works out the same, same, same.

Joe: So if someone was trying to create income, it’s not like going to cash and keep it into cash. No, you would always want to reinvest that.

Al: But I think that’s what he was missing. He was thinking, “Well, if I’m already paying tax on it… “

Joe: Then I’m going to get double taxed.

Al: That I get double taxed. And that’s not true because your tax base keeps increasing when you pay tax on dividends that you reinvest. It’s like you took the dividend and you bought more stock. That’s why your cost basis increases.

Joe: It’s called reinvesting. Or, buy more stock.

Al: You could do that, too.

Joe: “My second question is about NUA. The situation is I know someone who has $16,000-“ he knows someone. What, it’s his brother? Or my neighbor.

Al: I might know someone.

Joe: I might know someone “that has $16,000 in basis in an employer’s stock in an ESOP with the current market value of $2 million. To some people, this may seem like a no-brainer NUA scenario, but this person has nearly 100% of his assets in the stock. It could benefit greatly from diversification in an IRA. Maybe it would be best to do a partial NUA with $300,000 of this so there are assets outside of retirement accounts for emergencies and diversification with the rest of the IRA? How do you think about NUA scenarios? If there is ever a time that you would recommend people take advantage of it? I know some that say it’s never worth it, and others say do it when there’s a low basis. What are your thoughts?”

OK, NUA, Net Unrealized Appreciation. What that means is that in this scenario, an individual has company stock inside their retirement account. The balance of the company’s stock is $2 million. The cost basis is $16,000. So if you sell inside the retirement account, there is no tax. So you could sell the stock, diversify, get stocks, bonds, mutual funds-whatever you want, instead of getting out of that concentrated position and pay zero tax. But you’re going to be taxed at ordinary income rates of every dollar that comes out of the IRA.

Another strategy is Net Unrealized Appreciation. Where you take the stock out of the retirement account. So you get it out of the shell of the retirement account, you pay ordinary income tax on the basis. The basis in this scenario is $16,000, so you pay ordinary income tax on $16,000. Now you have $2 million sitting in a brokerage account that’s going to be subject to capital gains rate. However, if this individual diversifies, he’s going to have to pay capital gains rates to diversify versus if he keeps it in the IRA. There is no tax to diversify. The question is, I want to diversify. Do I diversify in the retirement account or do I do an NUA and then diversify out there?

Al: Right. And for me, the answer is I usually like to do a partial because it depends how old you are. Like, let’s say he’s 10 years away from retirement, I would be diversifying some of the IRA right now. Just for diversification I’d be taking the rest out, if I could, on an NUA. And then sell as I could with my tax bracket. So it’s not all or nothing. And usually when you look at this carefully, there will be a scenario that makes sense for you. But yeah, I do like NUA’s, but not necessarily the whole thing.

Joe: I would do 100% of this thing. All day, every day. And I would diversify out of it. But I would also put a costless collar on the position to protect myself from the downside. So you can still diversify out, take advantage of the capital gain rates. This $2 million, $3 million, or whatever, we don’t know how old this individual is. And it’s like this guy’s buddy down the street. You know, “I know someone.”

Al: Well, and the other thing is that NUA may not be available depending upon his age or her age. And so then you might want to diversify some in the IRA because you can’t do it.

Joe: Or you have to diversify within the company plan because NUA doesn’t work in an IRA.

Should I Invest Extra Cash in Annuities or Bonds? (Ted, San Diego)

Joe: We’re taping the show in the TV studio.

Al: Yeah, it’s kind of fun.

Joe: It’s hot.

Andi: You say that about using my studio, too, so apparently it’s no different.

Al: I have been cold the last couple of weeks, so I appreciate the heat.

Joe: These lights are just super annoying.

Andi: Your idea, Joe.

Joe: It was not my idea, it was Aaron’s, our TV producer.

Andi: Oh, OK.

Joe: I was begging them to come in the studio and put makeup on me and sit in this room.

Al: You love the lights and the makeup.

Andi: Are you wearing makeup? Really?

Joe: No.

Al: No. We do for the TV show, though.

Joe: Yeah. Now we cover Big Al’s Hawaiian tan.

Al: Well, it helps the imperfections.

Joe: Got it. You don’t have much. I’ll tell you that.

Al: Neither do you.

Joe: I know

Al: It’s a very light touch.

Joe: Just a light touch up. Ted from San Diego. Ted writes in, “Hey, I’m 60 and I’m getting $250,000 cash from my recent divorce. Don’t know what to do with it. I have $1.3 million in 401(k), in IRA, $750,000 in stocks of a military retirement. I max out my 401(k) contributions, I anticipate working another 68 years, not looking for big risk, but I’m wondering about annuities or bonds? Maybe a mix of aggressive and safe.”

Ted…Ted, Ted, Ted. OK.

Andi: That was 6 to 8 years that he’s going to be working, not 68, which is what it sounded like you said.

Al: I concur, it did sound like 68. I’ve got to work until I’m 118.

Joe: “I anticipate working another six to eight”.

Andi: There you go.

Al: Yeah. I had one time when I had a tax practice, when it was a question about what a certain complex tax return would charge. And I said four to five thousand. And they thought I said 45,000. They said, “wow, that’s a little… pricey”

Joe: A little rich there, Al. So, this is a really good question, because here’s what the problem is with Ted’s thought process. Nothing against you, Ted. He’s looking at his investments in different compartments.

Al: Yeah, yeah. In a bubble or however you want to say it.

Joe: So let’s say his $1.3 million in his TSP or 401(k) plan is a 60/40 portfolio, and then he’s got a brokerage account of $750,000. And then all of a sudden he gets another $250,000. He’s like, “now what do I do with this? I don’t know how to invest it.” Well, you’re already investing. What is the overall strategy of the wealth that you currently have?

Al: Of all the money, not just this one component. And Ted, you’re about 60% in stocks. Maybe that’s the right answer for you. Maybe not. But if it is, then do the same with this $250,000. Or, maybe 60% stocks is too much because you have a military retirement and I don’t know what your spending is or how much you need from the portfolio. Maybe you don’t need to take as much risk. On the other hand, maybe your military retirement is very good. You don’t need to take a lot from your portfolio, but you want to grow this for whatever, for kids, for charity, or just in case.

Joe: Right. And I think this is a problem with people that don’t necessarily have a financial strategy. Write: “Here is my financial strategy. Here’s the wealth that I have. Here are my goals. And how I’m going to fund the goals is with these assets.” So your goals could be retirement income, it could be passing wealth in the next generation. It could be paying off debt, it could be paying for kids’ college. It could be a number of things. So writing down the goals is kind of the first step and then creating the strategy on how you want to accomplish it. So any dollar that comes into the household, you already know where to place it.

Al: Sure, it’s the same.

Joe: It’s the same. Because here’s the goal. Here’s the portfolio that needs to generate, you know, X return for me to accomplish the goals that I’ve set out.

Al: With one exception, Joe. And that is, if you get a big lump sum, then maybe you don’t need to take as much risk if your goal doesn’t change.

Joe: Yeah, then you change your entire strategy. So let’s say, instead of $250,000, he got $2 million. And now what do I do with it? Well, then you look at your entire wealth again and say, Well, what is the risk tolerance or target return that I need? And then you change your…

Al: And, do I want to increase my spending? And if you do, great, then your portfolio should reflect that. Or if I don’t want to increase my spending, then you should have less risk.

Joe: Right. We get the question, “I have $50,000. What do I do with that? I got $100,000.” Well, what are you doing with your other assets? Are you investing that? “Well, I don’t want to take on that much risk.” Why are you taking on that much risk in the first place? It doesn’t make any sense, right? So you just want to look at things in its entirety.

Are Long-Term Treasuries the Best Way to Balance Equities in a Portfolio? (podcast survey)

Joe: Next, this is a podcast question.

Andi: Yeah, we’ve got a few questions still that remain from the podcast survey that we did back in August when people sent us their questions.

Joe: Why do we want to answer every single one of these questions?

Andi: You don’t think they’re good questions?

Joe: If someone gives us a question, we have to answer it. It’s like Andi just puts “when was the last time you went to the bathroom?” Well, we got to read it on the air.

Andi: Oh, come on now. These are questions about investing in withdrawal strategies. It’s all relevant stuff.

Al: OK, but we don’t have a name. And we don’t know what kind of car they drive or what their pet is.

Joe: “During retirement, is long term treasuries the best way to act is ballast to the…”

Andi: “Is long term treasuries the best way to act as ballast to the equity portion of your portfolio, given its lower correlation to other bond sub asset classes.”

Joe: See, this is a terrible question. I can’t even read it.

Al: But it said “is ballast”, so you actually read it as it was written.

Joe: Yes, that’s what I do. I’m pretty good at that. First of all, ballast.

Andi: That sounds like a Brian Perry word.

Al: Yes, so that’s just to eliminate some of the volatility. So I would answer the question this way. Long term treasuries are sensitive to interest rates going up more than short term, and since interest rates are at all time lows and perhaps over the next few years, two years, five years, ten years, they’ll probably go up. So your long term treasuries would actually essentially go down in value. Now if you hold them to maturity, no problem, but I would say no. I would actually say shorter term treasuries would be a better bet.

Joe: Well, yeah, I guess I don’t know what other bond subclasses are. Is he talking corporates? Is he talking high yield? Is he talking…

Al: And I actually don’t really care what class, as long as they’re not junk bonds, as long as they’re shorter to mid-term. I think that’s a better bet than the long term right now.

Joe: Yeah, if you’re really taking a look at safety. But if you want diversification, you probably want to have a little bit of all sorts of different asset classes.

How to Determine your Risk Tolerance (podcast survey)

OK. Got another one of these podcast questions. “How does one figure out your risk capacity as you approach retirement if you have always been aggressive and have a high risk stock allocation?”

Al: What do you think?

Joe: We need to know so much more. I don’t know. What’s your fixed income? How much money are you spending? How old are you? When do you want to retire? What is your timeline from retirement to transitioning from a high risk portfolio to a lower risk portfolio? You want to have a portfolio based on… Risk capacity is one thing versus risk tolerance. And let me explain the two. Risk tolerance is these questionnaires that you get. And they help a little bit, but they’re so biased on how that person’s feeling on any given day because you’re answering questions. What would you do if the market dropped 10%? Well, the market’s up 30%, and I’d be like, “I’m fine, I’m going to hold on.” But if the market’s down 20%, you answer that same question, you’re like, “Oh, I already lost 20%, now I’m going to be down 30%? No way, I’m going to sell out.” So that’s your risk tolerance. And then what advisors do with risk tolerance is they try to max out your risk tolerance. So your risk tolerance questionnaire gives you a score of this, so I’m going to build a portfolio. Well, that’s my highest level of risk tolerance. So why are you building it around that? It doesn’t make a lot of sense.

Al: During a recession that tends to change. Right?

Joe: Yes, right. So risk capacity is really to determine what target rate of return that you need to accomplish your goals and then building that portfolio around that target rate of return. And this is the capacity of risk that you probably need to take for you to accomplish your goals.

Al: And can you? So you got to check that.

Joe: So, you check two boxes. It’s like, you need to get a 6% rate of return over the next 30 years to accomplish your goals. But if you’re in CDs and your true risk tolerance is that I cannot take any volatility whatsoever or because I’m going to sell, I’m going to freak and I’m going to lose sleep… Well, then you have to adjust your goals.

Al: Yeah, you have to lower your expenses. Now here’s another thing. After you do that, then take a look at what your fixed income or what your spending is minus your fixed income. So you’re spending $80,000. Your fixed income, Social Security and pension is $50,000. So you need $30,000 from your portfolio. And we would say have at least 5 or 10 years of $30,000. So that’s $150,000 to $300,000 in fixed income, in safe assets. So that’s another way to see, are you OK?

Joe: Got it.

How to Manage the Buckets of Money Investing Strategy (podcast survey)

Joe: OK, “What are the nuts and bolts of how to manage the buckets of money method?” Oh, God.

Al: Well, that refers to another advisor’s book.

Andi: I can help you out with that one, if you’d like.

Joe: That got him in a little bit of trouble.

Al: It did, because it wasn’t properly back tested.

Joe: The SCC didn’t care for that.

Al: No, not really.

Joe: No.

Al: But the concept is you get three buckets of money: short term, mid-term, and long term. The short term is what you’re going to be spending over the next three years, I think. And then three to seven or nine years as midterm and then longer than that’s long term. And so the idea is that the short term bucket you invest in safe assets like short term bonds or cash. The mid bucket you invest in stuff that’s more aggressive but not super aggressive. The long term is more aggressive because you’ve got time to ride out the market.

Joe: Instead of a standard asset allocation of saying 60% stocks, 40% bonds, the bucket of money strategy is looking at, “what are your income needs?” Just like we talked about. If your income need is X dollars, you might want to have five to ten years of X dollars in safe money. That’s the same thing as the bucket of money strategy. But the whole bucket strategy was your first three years should be in cash and CDs, your midterm should be maybe an annuity or an untreated ret, and then the final strategy would be an equity portfolio. So in one instance, I loved the concept. And the other aspect of it, it was a really good way to sell product.

Al: Yeah, how they filled the second bucket was questionable.

Joe: Sure.

Build Back Better Roth Provisions Gone, Then Back. House Vote This Week (David, NYC)

Biden package boots many retirement, tax changes worrying advisers (InvestmentNews)

Joe: David, New York City, Big Al.

Al: OK, let’s hear about it.

Joe: He sent us an article. “This article below appeared in my email inbox today.”

Andi: Today being October 29th.

Joe: Got it. “If this is fact, then the backdoor Roth regular and mega will be alive and well, at least for now. Haven’t seen this reported elsewhere. Have the YMYW crew heard this? Thanks, David.” Yes, David, we have heard this.

Al: Yeah, we have. And now it’s different, again. So on November 3rd is when they added it back in and November 5th, they’ve made more changes, but it’s still in there. Stay tuned. So the current proposal states that the back door Roth and the mega backdoor Roth will be gone starting next year.

Joe: So basically, any after tax contributions converted to a Roth IRA will be no longer.

Al: Yeah, disallowed. So if you have after tax contributions, particularly in a 401(k), make sure you get that converted this year if you can. Some plans don’t allow conversions if you’re under 59 and a half. But some plans do, especially if they have a Roth option.

Joe: Right. A lot of you might have bases too in IRAs. “Hey, you know, I made some contributions.” Then you look at their tax return on the 8606 form in the back, you see that maybe $20,000 of it is after tax rate. So there’s a lot of opportunity for a lot of you to really take a look, a hard dive, in your overall tax return, in your investment statements to see if you have any after tax. If you are usually making back door Roth IRA contributions, get them in before year end.

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