Matt is a graduate of the University of California, San Diego with a BS in Mechanical Engineering. After 10 years as an engineer, Matt decided to pursue a long-held passion and shifted his career to finance. He attained his CERTIFIED FINANCIAL PLANNER™ designation and the Accredited Investment Fiduciary designation. Prior to becoming a fee-only advisor [...]

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
September 3, 2019

Back to investing basics with Matt Balderston, CFP® from Pure Financial Advisors: what makes for a wise investing philosophy while on the market volatility roller coaster? Plus, answers to your money questions: How do you find a financial fiduciary? How do you avoid people with bad financial intentions? What is a good investment policy statement? How do you figure out the annual percentage rate on an IRS payment plan? When should a teacher retire, and what should she do with her pension? Plus some Roth conversion talk, as you’d expect.

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Show Notes

  • (00:49) Matt Balderston’s Investing Primer: Market Volatility & Asset Allocation
  • (20:32) How Do I Find a Financial Fiduciary?
  • (23:26) How Do I Avoid People With Bad Financial Intentions? With Brian Perry, CFP®, CFA
  • (32:38) What is a Good Investment Policy Statement?
  • (37:28) Strategies If You Have a Pension and Can’t Contribute to a Traditional IRA?
  • (41:21) How to Figure Out APR?
  • (44:11) When Should I Retire and What Should I Do With My Teacher’s Pension?

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Today on Your Money, Your Wealth®, we’re getting back to investing basics with an army of smart fellas from Pure Financial Advisors and me, producer Andi Last. First, Matt Balderston, CFP® lays out what makes for a wise investing philosophy on the market volatility roller coaster. Brian Perry, CFP®, CFA shares tips for avoiding people with bad financial intentions, and Joe Anderson, CFP® and Big Al Clopine, CPA go over finding a financial fiduciary, drawing up a good investment policy statement, and figuring out the annual percentage rate on an IRS payment plan. Joe and Big Al also do some math – just a little, mind you – to figure out when a teacher should retire and what to do with her pension, and of course the fellas throw in some Roth conversion talk too. Here to kick things off for us are Big Al Clopine, CPA and Matt Balderston, CFP®.

00:49 – Matt Balderston’s Investing Primer: Market Volatility & Asset Allocation

Al: Matt, I want to talk to you about investing in these crazy markets and actually markets are always crazy, Matt. It’s hard to think of when they’re not crazy. I think by definition the truth is I mean you can go back to virtually any year, any decade, and there are all kinds of things that happen that you would say, man, you shouldn’t necessarily be invested right now because of. And yet if you took that attitude you would never get anywhere in your portfolio.

Matt: The analogy I like to use is if you got on a roller coaster and then when you got off you were mad because it went up and down too much, then you didn’t understand the ride.

Andi: That is a great analogy. I’ve never heard anybody use that before.

Al: That’s perfect.  I like that. How do you even know if you’ve got the right portfolio in the first place?

Matt: There are so many different variables associated with that. A lot of the things that we like to do is look at how much do you need to draw from the portfolio. You know if you’re only drawing 1% or 2%, or nothing from the portfolio, then in a sense if you have heirs that you hope to pass it on to, you’re investing for them. That’s one really good way of looking at it. In which case you can think of a time horizon of 50 or 60 years and then what does one year mean? What does one month mean?

Al: So you might be 85 years old, but if the money’s for the kids. If it’s for their inheritance, you’re kind of looking more at their timeframe than yours.

Matt: And so I actually have a lot of people that have more stock in their portfolio than you might think of based on their age. But I think age is one of the least important variables in determining a portfolio. It’s what are you doing with the money? What are the draw rates? How likely is it that that money will last, even if it loses 25% in the short term? And if statistically, you’ve got a 98% chance of your money lasting, then why not take a little extra risk and build for your heirs.

Al: So let’s talk about this. Maybe a 60-year-old individual, you might have two different 60-year-old individuals, and one might be very aggressive and one might be conservative and what are some of the considerations there that you might pick one portfolio over another?

Matt: For the most part it is draw rates. That’s a huge part of it. So if someone does have a fairly small portfolio value relative to how much they’re drawing, then I want to take on less risk, because a short term drop in the market could cause you to draw from those assets that aren’t able to rebound. There’ve been plenty of studies done that showing that if you have a big drop in the market early in your retirement, you may not be able to recover from it, if those ratios are a little too close. Where another 60-year-old may be drawing only a little bit because they have pensions or just don’t have that expensive a lifestyle, in which case they can afford tremendous volatility.

Al: So I’m reading between the lines, it sounds like you’re creating your portfolio based upon your own goals. And some people only need about 1% withdrawal rate from their portfolio. Some people don’t need anything. Others might need 4% or even a little bit more, depending upon what your needs are and goals are is going to determine what type of investment strategy, what sort of allocations. And why don’t we talk a little bit about that, in terms of how you start to think about allocating your portfolio.

Matt: OK. The first step is stocks versus bonds. Most people are aware of at least that division of how a portfolio works. And the more aggressive you are, the more willing you are, or more able you are to take on that volatility that the market gives us, the more stocks you would have in your portfolio. Once you have determined that, then you can actually start splitting up both the stock and bond components into smaller pieces because there are different types of stocks and different types of bonds. There are small companies versus large companies. There are international companies versus domestic companies. There are value companies versus growth companies, etc. And so each one has its own characteristics and you want to put those together in such a way that it provides you with a rate of return relative to the risk you’re willing to take.

Al: Got it. OK. Well, stocks are more risky than bonds. But they’re more volatile. So if you only need a 2% rate of return then just invest in bonds and then you got a nice safe ride.

Matt: Yeah you do. You do. I tend to push people beyond that. I joke a bit with my clients, that I look at their money like I look at my kids, I hate to see wasted potential.

Al: That’s true. You’re just full of sayings.

Andi: Maybe we should get rid of Joe.

Al: Yeah

Matt: Those are the only two I have. So I’ve just used them up.

Al: Well you could use them every show. Because my memory is not that great. It would be brand new.

Matt: But the point is that if you don’t need to draw from the money, I hate to see people just getting a 2% if they actually could afford 5% or 6%. And risk tolerance has something to do with it. If you’re the kind of person that seeing it drop 1%, you’re gonna be on the phone instantly, then maybe we do need to leave you in bonds. But that’s also part of my job is to help talk people through that and ultimately get them used to that volatility and again accept it, as I said before. Because that even when young people come in, kids of our clients, I tell them the first and most important thing they can get out of meeting with me is accepting the ups and downs of the market and not worrying about them.

Al: So let’s get into some of the stock categories. Domestic versus international. Which is better? Or why do you need one versus the other? Or should you have both?

Matt: I don’t necessarily consider one better than the other. I think all asset classes are important parts of an overall portfolio. International though, because that means countries other than the U.S., there are additional risks in investing in them. There’s the political risk, there’s currency risk, conversion risk, that kind of thing. So I do tend to try to weight a little more of clients’ portfolios toward the U.S. since that’s the country we happen to live in.

Al: But why have any international?

Matt: Well like any asset classes, they perform differently under different circumstances. There are years where international dramatically outperforms the U.S. and vice versa. And so gambling on which one is going to be better from one year to another is dangerous and would actually increase the volatility where if you have some of both, they tend to balance each other out and you’ll get the best of both worlds and you’ll accept the bad years of both worlds as well.

Al: And what’s interesting is sometimes they kind of move in tandem and other times they’re actually fairly far apart. I mean you can go back to 2000 to 2010, we call that the lost decade. Because the S&P 500 actually went down about 9% over a 10 year period

Matt: First time that had ever happened.

Al: Right. In other words, you couldn’t make any money but yet international stocks, it was a completely different experience.

Matt: It was. And in general, some of the data that we have and a mix of 60% stocks, 40% bonds, and the exact mix would have some effect on this. You probably got 60%, 70% growth over those 10 years where the S&P 500 by itself was down 9%. Like you said.

Al: Small versus growth.

Matt: Small vs. large.

Al: I will get there. Small versus large. Thank you.

Matt: Yes, the small companies versus large companies. You know, smaller companies tend to be riskier because they have a lot more, the forces working against them are a little harder, they can’t overwhelm problems with money, they are riskier. But boy, when the good ones hit, you can make a fortune off of them. Larger companies are a lot more stable. They’re still stocks, so they still do move dramatically. But the two categories don’t move exactly the same. I mean small company stocks historically, after nearly a century worth of academic research, have shown to have a premium. They do tend to perform better over the long term.

Al: And not necessarily year in, year out though.

Matt: Absolutely not. It’s actually kind of interesting that it’s almost a coin flip which does better on an annual basis. But once you start projecting out to 5, 10 or 15-year windows, you get to the point where small will win 80+% of the time. And if you’re designing a portfolio that has the best odds of a client making the most money, adding a little bit extra small-cap stock to your portfolio has a high probability of providing that.

Al: So I think small versus large, that’s easy to conceptualize. Smaller company, larger company. Value versus growth is a little bit more tricky.

Matt: This one I always have to spend a little extra time on with people. Hopefully, most people have heard the terms value and growth but it’s based to a degree on how much the stock is worth compared to how much all of the company’s assets are worth. Their inventory, their buildings, their intellectual capital, all those other kinds of things. If the stock value is very close to that underlying value of the company, that means that not a lot of profit has been priced in. All that the stock is pricing in is those underlying assets. That’s a value stock. Nobody thinks it’s going to make money, but at least you could break it up for the pieces. A growth stock has a tremendous much higher value of the stock relative to the underlying assets because people are pricing in future profits and they think that those companies will be extremely profitable. Well value companies, if they don’t right the ship those could go away, so there’s extra risk associated there. But boy, if they do right the ship, there’s enormous upside potential there and historically, value has done much better than growth.  Now you don’t invest in 2 value stocks because they could go away. But if you invest in 1,000 of them, it’s OK if a few go away, because the ones that come back will help to outperform the growth. Statistically again, over that almost a century worth of data, that’s been the case.

Al: And I think that’s well said, because investing needs to be long term and smaller companies and value companies, we really haven’t seen some of those premiums in the last few years. It doesn’t mean that doesn’t work, it just means there’s been a period of time where the growth stocks and the larger companies stocks have done a little bit better. But that’s not to say it’s not going to turn around at some point.

Matt: Right. No, it’s certainly not unprecedented. Back in the 90s, there was a whole period of time where there were huge value managers that just quit the business because they went through a long period where value was out of favor. And then when the tech bubble burst in 2000, value came roaring back and just destroyed the growth numbers and supported that long term average of value outperforming growth.

Al: So it’d be nice if you knew when that was going to happen.

Matt: Oh boy. Yeah. Get the crystal ball out and figure that out. That would be wonderful. We just we don’t know but we have faith that it will.

Andi: It’s interesting when Matt said about value managers getting out of the business, I was thinking they’re actually market-timing their careers.

Matt: Right. And they did just when the pain got the hardest, they left and they missed out on the profit. And that’s often how investing works. It’s when things feel like you’ve made the wrong decision, that you finally give up, that it finally turns around and goes the other way and again, and I keep using this number, it’s actually more like 90 years of academic data to be more accurate, but that gives us some pretty good support that these are very valid and reasonable ways to create portfolios.

Al: So over the long term, smaller companies tend to outperform, value companies tend to outperform. So then why don’t you just go all in?

Matt: That is a great question. And even though these things do outperform over the long term, they don’t necessarily outperform over the short term. And even over an extended period of time, nothing is guaranteed in investing. I mean we have statistics to this effect and the numbers I had in my office are a couple of years old but a couple of years won’t really change the numbers too much. For example, stocks outperform bonds 69% of the time when you look at single years. Most people would probably be surprised by that because we talk about how much stocks outperform. But if you look at 15-year windows, stocks outperform bonds 95% of the time. But I didn’t say 100%.

Al: You’re right. So you could go 15 years where bonds would outperform stocks.

Matt: And so that’s a low probability and we’re not saying that they outperform by enormous amounts, but that’s why you diversify. Because if we go through one of those periods, as unlikely as it is, where bonds outperform stocks, we don’t want to have put all of our money in stocks and lost out. You know our clients will not be damaged by any reasonable measure by being in that wrong asset class. The discrepancy is a lot bigger when you get to value and small caps. So if value stocks outperform 60% of the time annually from year to year basis, but 95% of the time over 15 years again. So being more in value still makes a lot of sense. But short term, also if you’re drawing from your accounts in retirement. If you’re in one of those windows and all you have is value you could, oh my gosh, I don’t even want to imagine the impact of that.

Al: So I mean just think about that, your portfolio is tanking and you’re pulling money out at the same time.

Matt: And so you obviously don’t want that to happen and then small company stocks. It’s almost a coin flip. 57% of the time, small outperforms large on an annual basis. And over 15 years, small outperforms 82% of the time. So we’ve got a much smaller number there. So now, that’s another reason why we don’t go in. A phrase we use all the time as we ’tilt our portfolios toward these asset classes’. If we are going to change our portfolios and make them somewhat different than what the market would otherwise provide you naturally, we want to tilt toward those things that give our clients higher odds of a higher rate of return, without providing so much risk that that will jeopardize their goals if we end up in one of those longer windows where they don’t outperform.

Al:  I think that’s well said. So you figure out what rate of return you need based upon your own goals and then you kind of work backwards to figure out how much stocks versus bonds to get this rate of return. And then it’s not necessarily the broad world stock market. You’re going to make slight tilts to smaller companies and value companies so that you can get a little bit higher rate of return and maybe that allows you to actually have less stocks as a whole and have more bonds and more safety. That’s particularly important when you’re withdrawing the money in retirement.

Matt: That’s actually that’s a good point. I hadn’t thought of bringing that up today. If you take the risk where you’re rewarded for it, which is in the stocks, in the small companies and value companies, you can keep the foundation that much more secure, which is the bond portion. We like to keep the bonds in our portfolio relatively short term so that they don’t have as big of a reaction to changes in interest rates which, if you’re a radio listener, you can’t miss the fact that interest rates have been an issue for the last couple years. So by having shorter-term bonds, you have less volatility on the bond side which allows you, because longer-term bonds don’t really provide an enormous amount of additional return for the extra risk you’re taking on. Where stocks do give you the higher return for the extra risk. So by taking the risk on the stock side, the extra risk, you have a better chance of getting more reward than on the bond side. So the bonds we try to keep even more safe than normal. We keep them short term.

Al: So then you need to fill these asset classes and maybe there are 12 to 16 different asset classes, depending upon how you look at it. How do you fill them? I mean you could buy individual stocks. You can buy actively traded mutual funds where fund managers are trying to pick the best investments. You could go Index funds, ETFs. Pros and cons. What would you say?

Matt: Our philosophy is to stay as broadly diversified as possible and the best way to do that to be in mutual funds or ETFs. Individual stocks add additional risk without any actual significant difference in the long term expected return. You just end up with a much broader range of highs and lows with individual stocks, but the expected average is about the same. So if you can chop off those two crazy upside and downside tails, mutual funds provide you a much more stable ride over the long term. I believe, statistically anyway.

Al: Because you have 500 or 1,000 stocks within a single investment, instead of one.

Matt: Correct. Correct. So there are different types of mutual funds in exchange-traded funds. You mentioned index funds, which are tied to some kind of list of stocks or bonds that some third party has come up with and index fund managers have to keep the holdings in that mutual fund exactly at what the index says it should be. So there’s not a lot of flexibility and then the index providers will change that occasionally and then every company in the world that has an index based on that has to buy and sell the changes on the same day and there’s a lot of inefficiency there. There are also actively managed holding ETFs and mutual funds where you have teams of people researching every stock, all the time, looking at management changes, and future profitability, and there’s a lot of expense in that manpower and those kind of expenses have to be paid from somewhere. And that comes out of the mutual fund, so we tend not to prefer to go after that because there’s minimal academic evidence that that kind of research really translates into extra performance.

Al: It’s interesting when you look at the academic studies, what tends to happen over the long term is those funds earned the market rate return, minus those costs.

Matt: You’re just kind of giving that up. So what we try to do is something somewhere in the middle, by using more asset-class-based funds. So the funds tend to have a specific asset class within them. All the stocks in them have to do with a certain asset class. But the fund companies that manage them don’t tie themselves to an index. But they also aren’t actively following what those stocks are doing. It really is just based on trying to own every stock that’s within that asset class, with some minor deviations. And so that keeps costs low because you’re just buying the stocks that are in that asset class, while not tying yourself to the inefficiencies of an index telling you when to buy and sell things. And their institutional funds usually fall under that category and so that tends to be our preference.

Al: So I’ve got one other question I’ve got to ask you. A globally diversified portfolio and different asset classes tend to go up and down at different points and one of the benefits of a globally diversified portfolio, as you just mentioned, is it stays within a little bit tighter band than if you just bought like a single stock, which could be really good or really bad. And part of the benefit of a globally diversified portfolio is you hope to get some downside protection when the market goes down, you’re not necessarily going to participate in that. But that’s not necessarily always the case.

Matt: You are correct. Last year was one of those situations, at least in our case. Because all of these tilts that we have in our portfolio, happened to all be out of favor at the same time. We hadn’t experienced that in the 11+ years we’ve been here, but statistically, it will happen occasionally. So there wasn’t as much downside protection as we might have thought. But we’ve also had years where a balanced portfolio actually outperformed stock indexes because the tilts did work. And so if you look at the last 10 years, which I’m fortunate enough to have some evidence of, you still end up in about the range that you expect between stocks and bonds. But on individual years the range can be a little different.

Al: So I guess maybe another way to say this, is that there are no guarantees in investing.

Matt: Never in investing.

Al: I mean it’s all about increasing your probabilities.

Matt: Yes that’s definitely how I like to describe it.

Al: Man, great information, Matt.

In times of financial uncertainty – which is basically always – it’s good to have a reminder handy to help you avoid common investing pitfalls. We happen to have such a reminder available for you to download for free, just click the link in the episode description in your podcast app. Keep a copy of 9 Investment Pitfalls All Investors Should Avoid on your phone, print it out and stick it to the fridge, commit it to memory, and chant it when you feel like calling your advisor and telling him or her to move your entire portfolio to cash. 9 Investment Pitfalls All Investors Should Avoid. Download it at the link in your podcast app or go to the show notes at YourMoneyYourWealth.com.

Sticking to the theme of investing basics, let’s answer some questions about the fundamentals of getting started managing your personal finances. If you’ve got a money question, whether basic or advanced, go to YourMoneyYourWealth.com and scroll down to “Ask Joe & Al On Air” to send it in as a voice message or an email and get it answered here on YMYW.

How Do I Find a Financial Fiduciary?

Joe: Let’s go with Chaz.

Andi: Chance.

Joe: Chance, from Utah. He goes first off, I want to say you guys are great. Thank you, Chaz.

Andi: Chance.

Joe: Chance.  I like Chaz too.

Al: Yeah, Chaz is a good name.

Joe: Chance.

Andi: Joe is changing your name, Chance.

Joe: That’s a cool name.  I like Chance. Gotta take chances. “You make financial literacy enjoyable.” Well, look at that, Alan. “I could make a long-winded request that would eat up a month’s worth of air time. Instead, could you tell me how to find a true financial fiduciary? I’ve done my due diligence in setting up a financial plan, but I do not want to fall into an unavoidable pitfall.” So here’s how you find a fiduciary. You want to find a fiduciary that is 100% of the time acting as a fiduciary. So what that means is that someone might say that they’re a fiduciary for part of the conversation that they’re having with you.

Al: Because they’re what’s known as a hybrid.

Joe: Yes.

Al:  Hybrid firm that does commission products, as well as being a fiduciary.

Joe: I would go to NAPFA. That’s the National Association of Personal Financial Advisors. NAPFA. That is the fee-only network of financial advisors. You can find them there. That’s a pretty good start and you could plug in Utah and where you live in Utah. You say these people are kind of close to me. He’s 29, lives in Utah, what’s your familiarity with helping people with accumulation. This is my situation and you can find someone that maybe specializes in what you’re trying to accomplish. Another good source is XYPlanning Network. You can go on that XYPlanning Network and again, plug in Utah and then there will be a list of individuals. It’s usually small practices, individual advisors. They might charge by the hour. They could charge a percentage of assets or whatever that you’re looking for. But those are two resources that you could look at. I would highly suggest that if you hire an adviser, you look to make sure that they act as a fiduciary in writing and ask them to put that in writing. And both of you sign off on it. Those are two good resources that I would look at. You can look at the CFP® Board. CFP®s act as a fiduciary but they might still sell you product. Hopefully, that’s a good start. If that doesn’t help you, Chance, then you just give us a call back and we’ll help you out some more.

How Do I Avoid People With Bad Financial Intentions?

Andi: We got a bunch of questions from the podcast survey and GreyHK asked this question: How does a savings/investing enthusiast avoid the landmines of people with bad intentions? High fee base, high transaction base, commission, high loads, Ponzi schemes, fake charities and paying for just receiving plain bad financial advice. What are the correct filters to be using?

Al: That’s an excellent question, a loaded question. I think we can take that a lot of directions. But Brian, why don’t you get us started?

Brian: Yeah and you’re right. There’s a lot of different ways to go with that. I think at the most basic level it’s, if it sounds too good to be true, it probably is. I mean common sense. But a lot of times people, if you think of every get rich scheme almost in history, a lot of times if you really look at it and somebody is promising you very high returns with very little risk, maybe you want to think twice about it.

Al: I think that’s right. And so it’s sometimes hard for people when they go to different advisors and a lot of advisors kind of say the same thing even though they might be pretty different. So maybe why don’t we talk about different kinds of advisors? I mean there are advisors that are fiduciaries and there are advisors that operate under a different standard called the suitability standard. So why don’t you get us up to speed on that.

Brian: And that’s really important is that fiduciaries are legally obligated to act in their client’s best interest. Somebody operating under a suitability standard doesn’t have that same obligation. If they have comparable products and one of them pays a higher commission, they’re free to sell the product with a higher commission. Now, this is my personal opinion, but when I look at retirement planning or any financial planning it’s really difficult. I mean when you think about all the things that are unknown about the future from investment returns to inflation to taxes it’s very hard to achieve financial success. And it’s even more difficult if the person that’s working with you doesn’t have your best interest in mind. So when I look at it, I think that it makes all the sense in the world to work with a fiduciary you know. Obviously, at Pure Financial we’re fiduciaries, but I don’t think that that’s self-serving because there are lots of fiduciaries out there. And I think that there are enough of them that almost every listener should be able to find somebody that’s legally obligated to act in their best interest, to help them meet their financial goals.

Al: So fiduciary means that the adviser has to give advice that’s in the client’s best interests, at least to the best of their knowledge and ability. Now the other kind of advisor is under the suitability standard. So what does that mean?

Brian: That means that a product needs to be broadly suitable for a class of people. For instance, mutual funds are broadly suitable for people planning for retirement. If I’m working under that standard I can then pick a mutual fund that has a, what’s known as a load or a commission to sell. Most mutual funds don’t charge an upfront sales fee, some do. So if I’m working under that standard I have all the freedom in the world to sell a mutual fund that charges a commission that then goes in my pocket.

Al: So there may be multiple mutual funds that invest in large company stocks in the US for example, which might be like an S&P 500 index type fund. And so the adviser under the suitability standard if that’s what’s called for in the portfolio could say we can fill that piece with this low-cost index fund. Or I’ve got this other fund that may have high commissions and may be paying me something upfront.

Brian: And the problem is that they don’t always have to disclose all of that. So they can just say I think this is the best for you and position that. And in a lot of products there aren’t any implicit commissions. So for instance, if you think about buying individual bonds, the average markup for an investor on an individual municipal bond according to the Federal Reserve a couple years ago, was about 1.7% to buy $10,000 worth of bonds. That was in an environment where a municipal bond might only be returning 2%. So you’re giving up almost an entire year’s return in fees to the broker. And yet the broker is free to say that there are no commissions attached to their product because technically it’s not a commission. It’s a markup. And so you see all these people and I’ve met thousands of them over the course of my career that say I have a bond portfolio but I don’t pay any commissions and then you look and they’ve actually paid above and beyond what fair market value was hundreds or even thousands of dollars in these markups.

Al: So for an individual consumer then, probably one of the things that they want to ask potential advisors, are you a fiduciary? And the answer is yes or no. And another good follow up question is how do you get paid? And I think that helps answer that question. If a fiduciary generally gets paid directly from the client and that’s the only source a person under the suitability standard might get paid through a commission or some other sort of arrangement. But it gets a little tricky sometimes because some advisors are both, they’re what we call hybrid. So if you might ask him that question, are you a fiduciary? They might say yes, even though they might also be selling products. So any words of caution there?

Brian: Yeah. Be cautious. It’s tough because sometimes they can switch hats. So those individuals actually have a couple different hats they can wear and they don’t always necessarily make it clear when they’re switching from one hat to the other. So I think going with somebody that’s fee only as opposed to fee-based is sometimes important terminology. Fee-only means that there are no commissions charged.

Al: So what about Ponzi schemes. How do we avoid Ponzi schemes?

Brian: A couple of things. One would be, if it’s too good to be true. And if you think about Bernie Madoff is probably the most famous Ponzi scheme there was. And the problem there was that the returns were too good and too consistent. And Bernie Madoff was a well-known person on Wall Street, well-respected had a lot of high profile individuals, who maybe didn’t look under the hood to the degree that they should have. And they wound up getting taken. And so a lot of times if returns are too consistent or too good or too guaranteed, that might be a sign. But one important thing that you should always do is make sure that the person giving you financial advice and the person holding your assets are not the same. And that refers to a custodian. A custodian as basically the person that hold your investments. Think about him like the supermarket. And then somebody can give you advice on your investments but the assets aren’t held there and that prevents a Bernie Madoff type situation. Because the person giving your advice can tell you what the portfolio’s worth. But then you have the ability to independently go out and doublecheck that by going to the custodian and seeing what they are valuing the securities at.

Al: To me that’s such a key point because Bernie Madoff in effect through his companies was both the advisor and the custodian. So in other words, he had your money and he also had the advis0rs. So he was able to essentially control what your rates of return were without an independent third party. That’s one of the best things that a custodian does. It’s an independent third party that’s going to report on what’s going on in the portfolio. And so if the advisor wants to do their own reporting and it’s different it’s like what’s up. Why is that different? So at any rate, I think that’s something to be aware of.

Andi: I got a question. So if you’re trying to navigate this landmine as GreyHK says, how do you find somebody that is fee-only? How do you find somebody that is a fiduciary? Is there a single source where you can find that person?

Al: It’s a good question. You may have a CPA that can refer you to somebody. You may go to a site like NAPFA

Andi: NAPFA.org

Al: Joe can say what that stands for, I sort of forget, but that has to do with fee-only advis0rs are allowed to join that. I know there are other websites. I know Joe has answered that on other podcasts.

Andi: NAPFA is the National Association of Personal Financial Advisors. So there you go.

Al: There you go. Perfect. But I think in a lot of cases, it’s just when you see someone that you really think you might want engage. It’s asking him some questions on what kind of advisor, are you fiduciary? Will you put that in writing? And how do you get compensated? I think that will answer a lot of stuff just right there.

Brian: And I’ll throw in one more too, is check for somebody that’s a CERTIFIED FINANCIAL PLANNER™, or CFP® designee, or that has some sort of credentials and there are lots of credentials in the financial industry. But if somebody has a CERTIFIED FINANCIAL PLANNER™ designation it shows that (a) they’ve taken a lot of effort to learn and hone their craft, but also they’re held to a fiduciary standard through their CERTIFIED FINANCIAL PLANNER™ Board.

Andi: One other thing that GreyHK asked about was fake charities. Do we actually know what he’s referring to there?

Al: What he’s referring to, particularly in times when there’s some kind of disaster, like an earthquake somewhere or a hurricane somewhere, and legitimate charities are trying to get donations. And then fake charities or individuals probably is another way to say that, pose as charities and they start calling people and trying to get you to send money to them. And that’s a tricky thing because a lot of people get taken by that. And I think one of the best things that you can do there is maybe just contact the charities that you know. Maybe you’ve heard them on the radio that they have this certain drive and so forth, but maybe contact them directly instead of someone that says they are them.

Andi: There’s also an organization called CharityNavigator.org and they will give you the stats on charities to tell you whether or not they’re legit, how they handle their money, all that sort of thing.

Al: It’s actually a pretty common issue when there’s a disaster. So just be aware of that.

What is a Good Investment Policy Statement?

Joe: Oh let’s play Jeff from… somewhere.

Andi: Redding.

Joe: Redding.

Jeff: “Hi Andi. This is Jeff from Redding, California calling. Love listening to your podcast and everything. A suggestion as a topic, could you and your two associates go in-depth on what a good investment policy statement is in the personal finance world. I know with mutual funds, they have a financial policy statement like what the mutual fund is going to do. But I’ve never ever heard it covered on any podcast. And I’d like to hear somebody really cover it in depth. The only time I’ve ever seen any literature was a book I read a long time ago. I actually copied it and I was looking at it the other day. Now I just want to let you know that you do a great job with the podcast and keeping it on track and moving forward and everything. So thank you for taking my message. Bye-bye.”

Joe: Wow. Big fan of Andi.

Al: Yeah.

Joe: We’re just two associates.

Al: We didn’t even get names.

Joe: I know. Those two schmucks that answer all the questions.

Al: There’s that mellow one and that aggressive one. I don’t even remember what their name are. Anyway, I guess we’re talking about an investment policy statement. Internally, we call that an IPS.

Joe: Did he say financial policy statement?

Andi: He said investment policy statement.

Joe: IPS, ok.

Al: IPS, for the personal finance world.

Joe: He read in a book and he copied it. What the hell are you doing?

Al: So how would you start that?

Joe: Go for it.

Al: I would say this. An investment policy statement is how you are going to invest your assets to achieve whatever goal you set out to achieve. And I guess the way we think of it is when we meet with a client we do a lot of financial planning and tax planning to figure out what rate a return does an individual or a couple need to be able to achieve their goals. So we do that first. You could call that a family index or you could call that a rate of return or whatever it may be. And then you sort of work backwards and think of how do you design a portfolio to achieve that rate of return that’s the safest possible. And so usually stocks earn more, have more growth potential than bonds, but they’re more volatile. So you kind of figure out the stock and bond mix. So that’s part of your investment policy statement is to figure out what the mix should be. Then when you should trade. In other words, when it gets out of balance. When stocks go up more than bonds, you might want to sell some stocks to get back to bonds. That’s reallocation, rebalancing.

Joe: But I guess a broader stroke on this, is that you want to make sure that you have a written organized process and how you’re going to manage the money in any circumstance. Because emotions come into play when markets get volatile as we’ve seen. And so what you want to make sure that you have a process of looking, like with us, as an investment advisor, we have certain boundaries. This is the role of the advisor. This is the role of the custodian. So we want to make sure that that is clearly defined of who’s responsible for what? Who is responsible for reporting? Who’s responsible for this and that? So it’s clearly defined by both parties on who’s doing what.

Al: And then you have a certain discipline that you stick with it. And here’s the biggest problem that individuals have. We’re emotional and we tend to buy when things are high because it seems like the market’s doing well and we sell and we get scared when it’s down. So what have we done? We bought high and sold low. It’s not a good recipe. Investment policy statement will sort of tell you, remind you, when you should be buying and selling and how you should be rebalancing and tax loss harvesting and all this stuff.

Joe: And it’s done prior to any of the collapse or the boom of any type of market you have that process in place, so you will follow that discipline and you will be a better investor.

Andi: And this is something that you actually do with your financial advisor and both parties sign off? Is that my understanding?

Joe: Yeah, or you make your own investment policy statement.

Al: You do it yourself.

Joe: If you’re investing for yourself, I encourage you to do that as well.

Investment Policy Statement Resources from Morningstar:

How to Create an Investment Policy Statement

Making your Investment Policy Statement

Investment Policy Statement Worksheet (PDF)

Retirement Policy Statement Template

(hat tip to listener William in Chicago for the links!)

So, we’ve covered how to find a fiduciary, how do avoid the cheaters and scammers, what makes a good investment policy statement, and what makes for a sound investing philosophy. If you’re a regular YMYW listener, you probably already know all of this. Now take a second and think: who do you know that really needs a basic primer on investing, or who makes avoidable money mistakes? More financial literacy helps us all. So do them and all of the rest of us a favor: Go to the description of this episode in your podcast app. Copy the show notes link you see there and send it to those people. It contains this podcast episode, the transcript of the episode, and a bunch of free financial resources. Pass it on in an email or share it on social media and help make the world a little bit more financially wise.

Strategies If You Have a Pension and Can’t Contribute to a Traditional IRA?

Joe: We got Rob in Santa Clarita. That’s where our buddy… What’s his name? Every time I see that name.

Andi: Meir Statman.

Joe: Yeah. Meir Statman, there it is.

Andi: Now that’s how I know every time because Rob emails us quite frequently.

Joe: Answered the podcast survey and I had some questions.

Andi: He actually had three different questions. And some suggestions.

Joe: Sounds good. Thanks, Rob. Appreciate that. “What are some strategies for someone who has a pension, so can’t contribute to a traditional tax-deferred IRA? Makes too much to put into a Roth. I don’t know, should I keep put money into ETFs and mutual funds and use long term equity tax strategy? Though the tax laws could change on this.” Rob, if you’ve been listening to our program for any length of time, if you have a pension you could still contribute to an IRA.

Al: You can’t necessarily take a deduction, which is what he called it tax-deferred IRA, which actually didn’t say tax-deductible. Yeah, you can. Anyone that has earned income can contribute to an IRA, as long as they’re under 70 1/2.

Joe: Do you think he meant to say tax-deductible IRA?

Al: I don’t know. Maybe, maybe not.

Joe: I don’t know. So you can put it into an IRA. You could convert it to a Roth.

Al: So that’s called a Backdoor Roth. And the best practice there is if you don’t have any other IRAs, then you can do that. You can put $6,000 into an IRA and then you can immediately convert it. Or if you’re 50 and older, you can put $7,000 into an IRA and convert it. If you have other IRAs then it gets much more complicated and it’s not as great a benefit.

Joe: So what do you think he’s saying here? I could just keep putting money into ETFs, mutual funds and use long term equity tax strategy. The tax laws could change though.

Al: They could.

Joe:  What is he saying, like the capital gains rate you think is gonna go up?

Al: I think so. I think he’s saying he could put money into a non-qualified or non-retirement account.

Joe: Or brokerage account.

Al: And a long term equity tax strategy. I don’t know, is he talking about tax last harvest thing. I’m not sure what he’s talking about. Though the tax laws could change on this. I guess in my entire career, which is now fairly lengthy being that I started as a CPA in 1984. You do the math. So there’s always been capital gains. Although there was a period of time under George Bush Sr., where the capital gains rates, they still had capital gains, but the rates were the same as the ordinary rate because he brought the maximum rate down to 28%. That didn’t last very long. But you may remember when he was challenged about that and the country was not bringing in enough tax revenue. And he said ‘read my lips no new taxes’. And lo and behold he did raise the taxes. And consequently did not get re-elected. But anyway, I guess I’m not expecting capital gains rates and preferential treatment to ever go away.

Joe: Read my lips.

Al: Remember that?

Joe: I do.

Al: You were a little kid.

Joe: I was a child. I was barely in a crib. What year was that? Late 80s, early 90s?

Al:  Exactly. Because that would have been Reagan. Reagan was 80 to 88. So Bush was 89.

Andi: 1988 is when he said it.

Joe: I was just a very young lad. Rob’s got another question. We’ve got a couple of minutes here.

Al: Okay.

How to Figure Out APR?

Joe: Let’s see. Which is the easier question to answer?

Al: One’s for you and one’s for me.

Joe: I know.  But let’s see. We’ve got three minutes. Al, I’m going to give it to you. Now I have an IRS payment plan going on, a divorce and some written off debts. Long story. Those are the stories that I wanna hear, Rob.

Al: That’s what we want.

Joe: That’s it. It was like “I was married and then this happened. I walked in and she was doing this. And boom.”

Al: Or she walked in.

Joe: Oh whatever. Let’s get some juice Rob, what goes on up there in Santa Clarita with you and Meir Statman doing some stats? He pays $450 a month and it goes down by $100 “and my current balance is about $17,500.” He’s trying to figure out the APR to see if it makes sense to get a loan from Allied Bank or Marcus or something like that. “The breakdown on penalties and interest is confusing. I looked online and there’s no backwards way to find this out. Well because he’s missing another variable Rob. We need to know the payment and the timeframe and the balance. Then you could solve for what interest rate that you’re paying.

Al: We have the balance and we’ve got the payment, $450 a month. And he’s telling us that, I’m assuming this means the principal goes down by $100. So if I read this right, he’s saying the interest is $350 a month. Which is not realistic.

Joe:  Well no. Do $350 a month times 12 divided into $17,500.

Al: I already did. It’s 24%. That’s not right.

Joe: The IRS wouldn’t charge that. What are the IRS interest rates?

Al: Well that’s it. That’s how I want to answer the question. So the IRS charges 3% for interest and they charge .5% per month for late payments. So that works out to 6%. So 3% + 6% is 9%. That’s typically what they charge. Unless there are other types of penalties. Maybe there are other types of penalties, I don’t know. But those are the typical ones.

Joe: So 9% on the $17,500 balance is what he would pay on an annual basis.

Al: So that’s you know, what, $17,000. Just say something like that. And $17,000 divided by 12, that’s about close to $150 a month. So I’m not sure that the payment, that the information here is right. But if it is right, then you take $450 minus $100. You get $350. You multiply it by12 months and then you divide that figure into the principal balance and with your numbers, I get 24%.

Joe: And then you just take the square root of that. So if I’m looking at that let’s say it’s 9% is what the standard is. You might want to refinance, Rob.

When Should I Retire and What Should I Do With My Teacher’s Pension?

Joe: Michelle from California. She goes, Hello. I’m hoping you can help me with some retirement decisions. My mom listens to your radio program all the time and suggested I contact you. I’m currently a teacher in California. I plan to retire August or September of 2020. If I retire August 1, 2020, I’ll make $16 less per month than if I retire on September 1, 2020. So that’s one month. Correct?

Al: That’s one month.

Joe: $16 for the rest of your life.

Al:  $16 more for waiting a month. However,

Joe: Well $16 times 12 is what now?

Al:  Oh I don’t know, $300 something.

Joe: I kinda like to do annual.

Al: $16 times 12, $192.

Joe: OK, $200. So that’s a difference of $200 a year. So if she lives 20 years, a few thousand bucks.

Al: But read on. There’s a however.

Joe: However, if I retire August 1, 2020, I will get a 2% COLA in September 2021. If I retire September 1, 2020, I will not get the 2% COLA until September of 2022. So it’s a year.

Al: A year wait for that $52.

Joe: Year wait for a COLA. I have a feeling that we’re going to do a lot of math for like 6 cents here.

Al: I already have a sense of the answer. Keep reading. I’m not doing any math.

Joe: You know if I wait one month, I don’t get a COLA, but I get $62 extra dollars and if I lose the $50 right. Oh okay. The CalSTRS retirement will give me a guaranteed 2% COLA every year but it’s not compounded. The 2% COLA will give me an additional $52 per month. Do you think I should retire August 1, 2020, or September 1, 2020? Also, I have about $30,000 in the counselor’s supplemental account when I retire. I have the option of taking a lump sum or putting it into an IRA account or I can get a lifetime annuity of $196 per month for the rest of my life. There is also an option to get $923 a month for 3 years. What do you think is the best option? Thank you so much for any help.

Al: Good questions. I’ll tackle the first one.

Joe: Thank you, Alan.

Al:  I would retire on August 1st of 2020 because you will get a $52 bump sooner. In other words, you could get it a full year earlier. I like that better than getting $16 per month. I do. I like that better.

Joe: Oh yeah. The math sense, $52 a month, times 12.

Al: And I get that it’s not compounded and the COLA would be based upon the $16 dollars extra. This is where I don’t feel like doing all that math for six cents which is what you were getting at. I would just retire in August, you get $52 more per month, that’s $600+ per year. Done. I think that’s a good deal.

Joe: What do you think? $30,000 in the supplemental account. Roll that thing over into an IRA or do you take the pension?

Al: Well $196 a month is $2352 divided into $30,000 is a 7.8%. That’s not bad, but there’s probably no inflation or would there be inflation on that?

Joe: No no. I mean maybe CALSTRS.

Al: CALSTRS. I’m not sure. If there’s no inflation, I would do the lump sum because, inflation adjustment, because eventually over time that’s going to be a fairly low figure. If there is an inflation rider, you might want to take the payment stream. That’s what I see.

Joe: I think to make it really simple Michelle, take the annuity of $196 a month. Retire August 1st. And call it good. You know what I mean? At the end of the day, you can crunch all these numbers and everything else and it’s going to be a break-even of maybe a month of her life expectancy.

Al:  Now I agree with that. Just make it simple.

Joe: I think you make it simple. If you want to retire in August, retire in August. If you want to retire in September, retire in September. I mean it’s up to you.

Al: Now I will say one caveat. If you don’t have any other money in an IRA or savings account, I would take the lump sum, because it’ll give you some flexibility.

Joe: A little bit more liquidity. So I don’t know, hopefully, that helps. But I would just try to keep it as simple as possible. If you want to retire early or in August versus September. Go for it. Thank you so much for being a teacher and educating our youth. I wonder what school she teaches at.

Al: Somewhere in California.

Joe: Isn’t your son a teacher?

Al: Yes. He’s getting out of the profession, after four years. That’s enough already. The sixth graders drove him crazy.

Joe: All right, that’s it for us, for Big Al Clopine, I’m Joe Anderson. The show is called Your Money, Your Wealth®. Thanks a lot for listening.


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