Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:05):
Tonight, conflict in the Middle East, what it means for
our economy, gas prices and your investments. You're listening to
simply Money presented by all Worth Financial. I'm Bob Sponseller
along with Brian James.
Speaker 2 (00:18):
Well.
Speaker 1 (00:18):
Obviously a lot has transpired in the world since we
last spoke to you. Let's get right into it with
all Worst Chief Investment Officer Andy Stout. Andy. Obviously, the
big news from the weekend was that the US launched
a strike on Iranian nuclear sites, and now there's concern
about what's going to happen in the oil fields, specifically
(00:40):
the Straits of Hermus in that area. Bring us to
be what's going on with the price of oil and
everything else in the economy as a result of what
happened over the weekend.
Speaker 2 (00:50):
Yeah, so there was certainly a lot of speculation as
to how markets would open and when you initially saw
the bombings, or at least for me, when I initially
saw the bombings and heard about it, you know, that
was you know, one of my first thoughts was what's
the market reaction going to be? How should we be
thinking about this in terms of portfolio positioning and possibly
(01:13):
any sort of adjustments, and you know, the most logical
way to think about it is to look at prior
instances of similar types of circumstances where you've seen volatility
in the Middle East and conflict there, and usually what
you see is maybe a quick knee jerk reaction, but
(01:36):
typically nothing lasting. Now, in terms of what's going on
this time around with Iran, I think there's two ways
to look at it from an economic perspective. The first
is what does Iran produce in terms of crude oil
supply and how does that compare to what the rest
of the world uses. So when you look at Iran's
(01:59):
actual oil production, it's around three point three three point
four million barrels a day. To put that into perspective,
it's roughly four percent of crude oil production, so it's
really not that big. And by the way, for another perspective, US,
we're the top oil producer with about thirteen point four
(02:20):
million barrels a day. That's about sixteen percent of worldwide
oil production. Now, the other question is, because that's why
Iran's kind of a small piece. They don't mean I
don't want to say they don't really matter, but they
don't really matter in terms of no production, especially when
you consider about ninety five percent of their oil exports
(02:40):
ended up in China.
Speaker 1 (02:42):
So if you think about it.
Speaker 3 (02:43):
How does that that's all fracking? Right? Is that why
the United States is suddenly in a stronger position because
I feel like, you know, ten fifteen years ago, we'd
be having a very different conversation about this.
Speaker 2 (02:53):
That's certainly part of it. But we also have you
know a lot of traditional oil you know, production in
the Golf I guess, the Gulf of America, uh, and
the in Texas and Oklahoma and all the all the
usual suspects. But fracking has certainly introduced a lot of
additional opportunities that kind of did catapult us there, to
(03:16):
your point. But the bigger question for Iran and the
U will in the world wide market. It is that
straight up Hoar moves and Iran's parliament back the closing
of it. But that doesn't really mean much, I mean,
because they're not really a parliamentary country, uh that has
(03:36):
any sort of real power. Uh So when you think
about what Iran might do, I don't think, you know,
even if there is some sort of closing or positioning
like they're doing right now, I don't see it as
the last thing. I mean, really, what's going to happen.
Iran's going to be shooting themselves in the foot. I mean,
when you look at the amount of oil that goes
(03:58):
through the Strait, which is, you know, twenty percent of
global oil transportation, Iran would really be hurting themselves most.
They wouldn't be able to shift to China, they would lose,
they would really take a big economic hit, and it's
going to be pretty tough for them to actually implement that.
At least from a large scale perspective. What I could
(04:21):
see them doing, as opposed to trying to stop the
traffic flow would be to maybe disrupt shipping through some
other ways. I mean, there's already been some reports where
they're doing some GPS jamming, there's some drone activity, and
just some random harassment. Now here's the bigger thing, which
(04:41):
again I don't think any sort of straight up her
moves closing, even if it happened, wouldn't be lasting. Would
be Iran leaning on proxies like the Huthis or Hezbola
to stir up regional instability.
Speaker 1 (04:56):
Well, those little satellite terrorist groups have doing their thing
here for months and years now so and the market
hasn't moved a whole lot. But let's talk the talk
candy about the worst case scenario. And I hate to
put you on the spot here, but I love to
do it. Worst case scenario here in the short term,
based on our little dust up with the Ran over
(05:17):
the weekend and the potential for oil disruption, what should
investors be prepared for, if anything here in the short term.
Speaker 2 (05:26):
Worst case scenario would be a prolonged closing of the
strait of horror moves, which would probably push oil into
the eighty to ninety dollars range, and in turn that
would lift headline or total inflation up about point three
zero point four percent, lifting gas prices as well at
(05:46):
the same time. So that's kind of the worst case
scenario right now in the near term. But remember when
I'm talking about inflation, that's not the same as a
structural inflation problem, because with the Federal reservol of is
core inflation, which excludes volatile food and energy prices, and
that would barely move. So while gas prices, you know,
(06:07):
would obviously pinch consumer to higher gas prices, the FED
isn't likely to react unless it really turns into a
sustained energy spike.
Speaker 1 (06:18):
You're listening to Simply Money, presented by all Worth Financial.
I'm Bob Sponseller along with Brian James, joined by our
Chief investment Officer, Andy Stout. Andy, you mentioned the Fed.
Let's shift gears and talk about the Federal Reserve. Obviously,
last week there was no surprise at all on the
interest right front, as the Fed held rate steady and
(06:38):
now they're talking about the infamous dot plot that is
now officially scattered all over the place. Some FED members
see no cuts, others want two cuts by the end
of the year. What's happening behind the scenes here and
what are you seeing, because I know you get access
to a ton of economic data. What's going on with
the Fed?
Speaker 2 (06:57):
Andy, Well, you look at the Federal Reserve. Obviously, as
you mentioned, they left interest rates alone, so they control
the what's called the FED funds rate, which is overnight rates,
and they left those in a range of four and
a quarter to four and a half percent, and that
was pretty much one hundred percent certainty heading into the meeting.
What was less certain, though, was what the Fed would
(07:21):
do with their economic projections and that dot plot. As
you mentioned now the dot plot and the economic projections.
They only released those on a quarterly basis, so that
made this meaning a little bit more entertaining, at least
from my perspective. And when you look at the dot
plot what it shows. It shows where each FED member
thinks interest rates should be at the end of upcoming
(07:43):
calendar years and where we've seen it in March compared
to today. It's different, and it's not different. It's not
different in that the median dot or the middle dot
still shows two cuts. What's different is the dispersion. You
have almost half of the FED members seeing no cuts
(08:08):
this year and half seeing two cuts. If just one
of those dots would have moved, uh, then the medium
would actually be at one cut. So it's a it's
a it's really two camps. When you look at this,
you got the no cut camp and you got the
two cut camp.
Speaker 3 (08:23):
And historically, how how do they does that this? I mean,
obviously we wouldn't be talking about the dot plot. I
know it's one of your favorite things in the world.
I think you giggle yourself to sleep thinking about the
dot plot. But but obviously we wouldn't be using it
if it wasn't reliable. What what does history say when
we when we seem to be divided like this?
Speaker 1 (08:40):
Does it?
Speaker 3 (08:40):
Does it tend to play out? Because even Chairman Powell
himself was kind of downplaying a little bit about the
don't hang too much on the dot plot. It kind
of is what it is. It's just opinions as of
right now, not actually reality.
Speaker 2 (08:52):
Yeah, so I think the dot plot it's not a
perfect predictor by any stretch of the imagination. But what
it shows it shows where where the FED is thinking
at this point in time based on the current data.
And you know, as Powell said, you know it's a
it's a set of educated guesses and right now, he
also said that no FED member really has any conviction
(09:15):
in their dots, so it's it's pretty fluid. So basically
they might be saying, you know, it's it's more of
a guest than other dot plot iterations that come out.
So you see this.
Speaker 1 (09:26):
Change a lot.
Speaker 2 (09:28):
But it's really important though, because we it gives us
a clue as to the potential path of interest rates,
and it does help you know, analysts and Wall Street
and you know, investors like us essentially map out those
paths and determine portfolio position, because what you want to
(09:49):
look at, just from a technical perspective is what the
market's pricing in than where you believe the rates might
actually have any sort of difference there. That's that alpha
opportunity or the opportunity to outperform based on your differing
views relative to the market expectations.
Speaker 1 (10:08):
All right, sounds good, Andy, Thanks as always for all
your help. Here's the all Worth Advice. Geopolitical shocks like
what's happening with the RAN grab headlines, but unless the
fundamentals change your long term investment plan definitely should not.
Coming up next our take on a new warning about
a fast growing corner of the investing world. You're listening
(10:30):
to Simply Money, presented by all Worth Financial on fifty
five KARC, the talk station. You're listening to Simply Money
presented by all Worth Financial. I'm Bob Sponseller along with
Brian James. If you can't listen to Simply Money live
every night, subscribe and get our daily podcast. You can
(10:52):
listen the following morning during your commute or at the gym.
And if you'd think your friends or family could use
some financial advice, tell them about us. As well, just
search simply money on the iHeart app or wherever you
find your podcast. Should you never take social security early
if you can afford to wait? Is that factor fiction?
(11:14):
We're gonna tackle that and other questions straight ahead at
six forty three. All right, Brian, we've got another reason,
yet another reason why having social Security as your main
source of income is a dangerous proposition. What are we
talking about today on this topic, Brian?
Speaker 3 (11:32):
A couple moving parts here, But yeah, for those of us,
you know, who may be thinking that social Security is
all I need for retirement, that's really not case anymore.
Maybe back in the way, way back in the day
when it was the difference between that and between you know,
living in a home and being on the street. Nowadays
it's more of a supplemental income just because of the
cost of living. So, speaking of cost of living, the
(11:54):
projected COLA cost of living adjustment that's what COLA stands
for for twenty twenty six is projected to be betwe
between two point two and two and a half percent.
That's the smallest increase we've had since twenty twenty one.
That goes hand in hand of course, with inflation. Inflation
has been somewhat tamed from the days of the eight
nine percent increases. Right as I remember, you know, sitting
(12:15):
here on these airwaves and doing financial plans for folks.
Everybody was angry that we had eight nine percent inflation,
but thrilled the death that we got an eight percent
or nine I think it was nine and a half
something like that bump in social security back in those days.
Well those days are gone. Now we're back to two
point two to two and a half percent. That's an
average monthly benefit increase of only forty five to fifty
bucks and that's not going to move the needle a
whole heck of a lot.
Speaker 1 (12:35):
Is about No. Forty or fifty dollars isn't a big change.
But again to your point, inflation really has come down,
you know, significantly since those days, you know, right after COVID,
So it stands to reason that the the increase in
our monthly benefit is going to go down. So I
guess the message here is plan accordingly everyone. And just
(12:56):
as a point of confirmation here, the official COLDA for
Social Seksecurity for twenty twenty six will be announced sometime
as always, during the month of October.
Speaker 3 (13:06):
And one other quick thought on SOB security too, Bob.
Another announcement came out recently pushing the or actually pulling
in the year that the Social Security Trust Fund is
going to be depleted. The year we're shooting for now
is twenty thirty three. But what I want to be
super clear if with everybody on is that does not
mean that Social Security goes away.
Speaker 2 (13:27):
Right.
Speaker 3 (13:27):
We hear that all the time when people expressing concerns
about Social Security, that oh, social Security is going to
be bankrupt, there will be none That's not the case.
You're still going to have FIKA taxes taken out of
your paychecks if you're still working. I know I will
be in twenty thirty three. There will still be money flowing.
But the estimates now, after the tariffs and inflation and
all those kinds of things and the fiscal policy we've
been pursuing, those benefits are going to drop somewhere between
(13:49):
seventy five to eighty percent. Well, they'll drop by about
twenty percent, So you might only be receiving seventy five
to eighty percent of what's your report shows, not zero.
Speaker 1 (13:58):
Well, and like everything else that Congress does or doesn't do,
they'll wait till this becomes a potential catastrophe at the
eleventh hour, and then they'll probably get together and do
something about it. But we'll have a whole lot of
weeping and gnashing of teeth between now and then. So yep,
stay tuned. Hey, here's some other news we are following.
Moody's is raising concerns about the growing trend of individual
(14:21):
investors that are entering private equity and private credit markets. Brian,
We've talked about this topic here over the last couple
of months, this whole private equity private credit stuff. What
are some of the concerns that Moody's has and some
concerns that investors should have out there about these kind
of financial instruments.
Speaker 3 (14:41):
Well, first let's lay out some terminology here, Bob. So
when we think about our our four one k's, I
raise our investments and so forth, we are normally, you know,
ninety nine percent of the time we're talking about public markets,
publicly traded stocks, publicly available bonds, mutual funds, those kinds
of things. What we're talking about now is private. Obviously,
the difference betwe in public and private private can be
(15:02):
just the you know, maybe you met somebody in your neighborhood,
who is starting a restaurant, you want to invest in it.
That's private equity if you throw them some money to
help them start their business or whatever.
Speaker 1 (15:10):
Uh.
Speaker 3 (15:11):
These have always been there, but there's more and more
focus as technology makes it simpler for somebody to gather
all these different shareholders, these different investors and keep track
of things. That The challenge here though is it's really
in the valuation of these firms. So in other words,
if you're gonna invest your IRA, you have to know
what the thing you invested it is worth on occasion.
(15:32):
These are not liquid investments, right, so you're not gonna
have evaluation. You know, you know you're not. You don't
check what it's worth before lunch and then at the
end of the day like you might your four oh
one K. You get a report on these types of
private investments maybe twice a year if you're lucky, sometimes
only once. So that means you're not going to be
able to withdraw a couple hundred bucks to make the
ends meet. And that's one of the concerns, right. So
(15:52):
these are if we're going to hold these available to
the general public, people have to understand what they're getting into,
which is generally that these this money is locked up.
It is not a liquid investment.
Speaker 1 (16:01):
Well, and sometimes sometimes folks are not aware of that
before they buy these things, and sometimes these things are
sold by commission based folks, and things are not disclosed
about liquidity. Somebody can put some money into this, and
I think what mood is concerned about more money as
a percentage of their total net worth than they should
put into something like this, and then lo and behold
(16:24):
they have a liquidity event, they need access to their money,
they can't get to it, and whili, you've got some
credit problems, right, Brian.
Speaker 3 (16:32):
Yeah. And one of the other concerns here, these are
again not publicly traded, they're private. This is a free country.
You can invest in whatever you darn well please for
the most part. But these things are outside of the
auspices of the government, agencies, of finra, of the sec
that kind of thing. They're not as on the radar,
So there can be all kinds of things going on
under the hood here. Just because you've found something that
(16:53):
not many people know about, it doesn't mean it's a
good idea. One of the reasons they may exist is
because these the companies and opportunities cannot get traditional financing
banks don't want to talk to them. They might be
able to get traditional investors to play ball, so the
meaning the underwriting is a little more lack. So really,
really be careful of what you're getting into and understand
(17:16):
why they're willing to take your money as an individual
as opposed to the money of a larger bank or
a bigger investment firm.
Speaker 1 (17:23):
Well, and I'll just add here, I think for most
people out there, not all, but most, getting involved in
these things is not a do it yourself proposition. And
this is where a good fiduciary advisor can walk you through.
What are the fees, what are the lock up periods?
How does this fit into your overall portfolio from a
potential risk and return standpoint. So everybody goes into these
(17:45):
things with eyes wide open, so there are no surprises
down the road.
Speaker 3 (17:50):
Eighty percent of businesses fail, Bob, and these are some
of the examples that a lot of that happens in
the private sector. So you've got to be super careful
what you're getting into, and remember those eighty percent that fail.
You're not gonna hear about him. We only hear about
the smashing success stories, the twenty percent that makes us
all feel like we are missing out. So go in,
eyes wide open.
Speaker 1 (18:09):
Great point. Here's the all Worth advice. If you already
own private funds, this isn't a panic moment, but it
is a time to review the liquidity, the risk exposure
of what you hold and whether these investments still fit
with your overall financial plan. Coming up next, all Worth
chief investment Officer Andy Stout is in with some strategies
(18:30):
for the investor who wants to be tax efficient. You're
listening to Simply Money, presented by all Worth Financial on
fifty five KRC, the talk station.
Speaker 3 (18:44):
You're listening to Simply Money, brought to you by Allworth Financial.
I'm Brian James and I'm joined by Andy Stout, chief
investment officer for Allworth Financial. And contrary to the music
we just heard, or in parallel to the music we
just heard, he is the best around. Today we're going
to talk about something called tax alpha.
Speaker 1 (19:01):
Uh.
Speaker 3 (19:02):
There's a lot of words and uh catch words and
phrases and jargon gets thrown around on the investment industry.
And there's a whole bunch of Greek letters attached to them.
So sometimes you run across something called beta, which is
just comparing an investment to a benchmark, and it has
a beta one point two or point nine or whatever,
and that's just kind of relative to a specific benchmark.
Alpha is slightly different. Alpha is something that we look
at in terms of managing, you know, a specific management
(19:24):
strategy and what the whatever the unique factors is around
are around those that strategy that causes it to do less,
to perform, outperform an index or underperformed.
Speaker 1 (19:35):
What are the.
Speaker 3 (19:35):
Reasons behind it? So specifically, we're going to talk about
tax alpha, which has what is the after tax impact
of investment strategy? So Andy, tell me a little bit
about how can you control the tax alpha of an
investment strategy.
Speaker 2 (19:49):
Yeah, that's a great question, and it's uh might sound confusing. Oh,
tax off a one point two percent?
Speaker 1 (19:55):
What does that mean?
Speaker 2 (19:56):
Well, let's just take a step back even from that.
Let's say you own two stocks, Procter and Gamble and Kroger.
Let's say one of those stocks you bought and has
a thousand dollars gained, one of them has a thousand
dollars loss. Without tax planning, Let's say you happen to
sell the one that has a thousand dollars gain and
you keep the one with a thousand dollars loss. What
(20:19):
happens is that you owe taxes on that gain, so
you might end up paying you know, three hundred bucks.
But if you had some tax aware planning or did
some tax los harvesting, what you would do is you
would also sell stoff be the one with the loss,
and essentially the loss would offset the gain and you
would owe no taxes in your portfolio value overall would
(20:41):
still be the same. So tax alpha is really just
the extra investment returned by minimizing taxes just through you know,
smart planning strategies.
Speaker 3 (20:51):
Okay, so is this something I would be doing with
my mutual funds or my four toh one K or
where are the specific places that this is impactful?
Speaker 2 (21:00):
Yeah, that's a great question and really impactful and taxable accounts.
You don't want to do it in your four O
on K because it's not even possible from the I
R s's perspective, So don't worry about that. But what
you want to be focused on is if you have
a trust account or a joint account or an individual account,
those are the accounts. Typically there are others, but those
are the main ones that where you can employ these
(21:22):
tax alpha strategies to sentially reduce the amount of money
you pay the IRS. I mean, that's what we all
want to do anyway.
Speaker 3 (21:30):
Okay, so that's starting to make some more sense. But
it sounds like this is something where I really you know,
if I have a diversified portfolio of mutual funds, I
may or may not be able to benefit too much
from that, even if it is an a taxable account.
Is that right?
Speaker 2 (21:43):
Well, now, if it's not a loss or I have
a gain in other air, if you have a gain
in the mutual fund, you could possibly if you want
to get out of that, sell that and look for
losses in other areas. Or maybe that mutual f one
has a loss. It's really just whether or not that
investment has a gain or a loss in how you
can offset that in other areas. What you know, we
like to focus on a lot our tax loss harvesting
(22:04):
strategies where you're looking at individual positions. Those could be
mutual funds, could be exchange trade of funds or ETFs.
It could also be individual stocked or individual bonds as well,
really any security that's in a taxable count and we're
looking specifically at those investments and sometimes what's called at
lot levels, because you could buy maybe Procter and Gamble
(22:25):
and on one day and then buy it on another day.
You could sell from those specific lots. If one of
them happens to be a higher cost basis, meaning you
might have a lower or an increased loss, you could
sell from that specific one. And it's really just being
laser focused on the ability to target specific securities and
(22:47):
specific lots to harvest losses. And here's the key brind
while still maintaining your overall investment exposure and not deviating
from your broad strategy. So by harvesting those losses, we
can offset gains in other areas, allowing your portfolio to grow,
you know, in a tax free way. And if you
(23:07):
do take on more losses than gains, you have a
couple of other options, which is really great. Well, you
can take basically three thousand dollars and use that to
offset your income overall to lower that but probably more
importantly as you can carry over as many losses in
one calendar year and use them in the future. So
if you happen to have banked maybe tens or hundreds
(23:29):
of thousand dollars of losses, and.
Speaker 1 (23:30):
You didn't use them all in one year.
Speaker 2 (23:32):
You can use them in another year.
Speaker 1 (23:33):
You've got to keep track of it.
Speaker 3 (23:35):
Okay, So this sounds like I don't want to root
for losses, but since they're kind of inevitable and they
happen from time to time, this is kind of like
it almost sounds like this is kind of a silver lining.
It's things to go through, that kind of thing. But
at the same time, as long as I know how
the tax code works, it can be kind of beneficial. Now,
I think, aren't there other you know, it seems like
there are other things involving charities. Are there other ways
that I can add some a positive tax return to
(23:57):
my portfolio?
Speaker 2 (23:59):
Yeah, there's a few things you can do. Let's just
say you have a bunch of individual stocks and you're
charitably inclined instead of donating cash, look for the stocks
that have the highest appreciation so with the largest gains,
and you can donate those. You get a tax right off,
and then guess what, you didn't pay any taxes on
those gains, and you're still in the same position you were,
(24:19):
Whereas if you would have donated the cash and then
you sell the stocks later, all of a sudden you're
paying taxes on those gains. You can avoid that all
together just by donating your most appreciated stocks. So that's
another really good strategy. You combine that with tax loss harvesting,
and you can do that through a variety of methods.
One's called a direct index, which basically tries to match
(24:42):
an index return but provide that tax alpha. So when
you marry those two things of the charitable donation with
the act of tax sauce harvesting, it's a really powerful
tool that you can have in your tool belt to
lower the amount that you pay the I R S.
Speaker 3 (25:00):
That's great, that's fantastic information. None of this is new.
This is just the tax code. This isn't financial products
or anything like that. This is just how the tax
code works and understanding how to apply it to your portfolio.
So super helpful information from Chief investment Officer Andy Stout.
I'm Brian James, and you'll be listening to Simply Money
on fifty five KRC, the talk station.
Speaker 1 (25:25):
You're listening to Simply Money presented by all Worth Financial
on Bob' sponseller along with Brian James. Do you have
a financial question for us? There's a red button you
can click while you're listening to the show right there
on the iHeart app. Simply record your question and it
will come straight to us. All right, it's time to
play some financial factor fiction. Brian. Let's start off with you.
(25:47):
Factor fiction. You should never, and I say never, take
social Security early if you can afford to wait. Factor fiction, Brian.
Speaker 3 (25:56):
You know, Bob, there are some words that I hate
when they come up in a financial planning discussion, and
those words are always and never. There are no rules
of thumb. Everybody's got a different puzzle to put together,
everybody exactly. Yeah, you got to deal with your own
situation anyway. So this one's fiction. There are reasons to
take social security early, if you know. Some of the
(26:17):
sadder stories I've ever heard in my life is where
you know, a married couple is getting ready to retire,
and they're excited about going forward and so forth, and
then all of a sudden, one of them comes down
with something super significant and serious. Forget the math, forget
the spreadsheet, forget the you know, the snowball effect, that
that's when you need to take control of the time
that you have left and go in and a lot
of times that does involve turn on the Social Security spigot.
(26:38):
Don't worry about those eight percent increases. But on the
other hand, there are some others where if there's plenty
of resources out there, you know, and you then you
could benefit significantly from those eight percent increases and push
it out till seventy Most of us are going to
be somewhere in the middle. All right, my turn, Bob,
Fact or fiction, Bob spond seller. As state taxes can
still apply at the state level even if you're below
(26:59):
the federal exemption.
Speaker 1 (27:00):
We you think, well, this is a fact, and it
depends on what state you die in and where your
airs are. And let me give you an example. In Ohio,
there is no a state tax at the state level.
In Kentucky, on the other hand, it's a little more
jumbled up mess. You know, if you leave assets to
let's say, your spouse or child or grandchild, no estate taxes.
(27:24):
But if you get into some other airs, there's a schedule,
you know, put out by the state of Kentucky where
there's exemption amounts. There's different percentages that the person inheriting
the money has to pay depending on what the dollar
amount is. So be careful to check the state you
live in, in the state you think you're going to
die in and leave money in, because things can change
(27:45):
depending on where you live.
Speaker 3 (27:47):
Sounds like job security for lawyers and accounts.
Speaker 1 (27:49):
Yep, all right, Brian. If I'm maxing out my four
oh one K, I'm saving enough for retirement. Fact or fiction.
Speaker 3 (27:57):
It's another declarative statement that I ever like. So I'm
gonna call that one fiction because maybe you know it
depends on your other situation. Maxing out your four oh
one K, that's one thing that's good. I mean, obviously
it's gonna give you the a bigger pile of money.
The more you put in, the more it's gonna grow.
Eventually you'll come to a situation of, Okay, should I
be paying down my mortgage? You know, maybe, And that's
(28:17):
a that's a decision that's a lot of people run
into when they're in the maybe like the last three
five seven years of retirement, where there might be already
a good chunk put into the four oh one K,
And in that case it may be okay to drop
from the twenty fifteen percent or whatever they're putting in
their four oh one k, drop it back to a
certain amount to a lower percentage, and then reroute those
savings toward that toward that mortgage. But that's just one example. Again,
(28:39):
it's all about puzzle pieces. Everybody's puzzle pieces look different,
but they all do fit together one way or another.
You gotta figure out what you want your puzzle to
look like. Factor fiction Bob Spondseller. Tax loss harvesting in
a direct indexing portfolio can improve after tax returns even
if the market is flat or only up a little bit.
Is that truer fake?
Speaker 1 (28:59):
This is absolute fact. And this is one of my
favorite things about these tax loss harvesting strategies that are
prevalent out there, and we've got a great one here
at all Worth two. I mean, the thing you could
take advantage of, and this is one of the times
you could take a ton of advantage of short term
market volatility because these tax advantage strategies, the way they
(29:20):
work is it's an algorithm floating in the background. There's
you know, things going on that none of us are
looking at, and it's it's constantly harvesting losses when you
have them, and then immediately get into something very similar.
So you're fully invested in the market, but you've captured
that capital loss and you can use it later to
(29:42):
offset future gains. It's a wonderful strategy that works really well,
irrespective of whether the market's going up, down, sideways, or
anything in between. All right, Brian Factor fiction. Deferred compensation
plans can lower your current taxable income but create future income.
(30:03):
Timing complexity factor fiction, Brian.
Speaker 3 (30:06):
Oh, this one is fact. The deferred compensation plans are
complicated themselves, and they make other things complicated downstream. So
if you haven't heard of a deferred comp plan, then
you may not have one. These are essentially plans. This
is something beyond your four to one K, beyond your
you know, your normal retirement plans that generally everybody has
access to. If you're in an executive role or you're
(30:27):
a key employee, a highly compensated person, you're your employer
maybe offering you some kind of extra plan that you
can get access to to continue to put more money away. Now,
what this does, though, is you generally have to decide yes,
I'm gonna I'm eligible for this bonus now, but I
don't want to receive it now because I don't need
the income first and foremost currently, and I'd like to
(30:48):
defer the taxes on it. So I want to pick
a time in the future. You know, that might be five, six, seven,
could be ten years from now, depending on how your
plan works. That's up to your employer, but you're picking
a time in the future to receive those assets. Therefore,
you are deferring the compensation, hence the name. What that does, though,
is that it creates a tax overhang in that year,
and they can be a little complicated and they're very
stressful decisions because you're asking somebody, you know, to decide
(31:11):
when do I want to take this tax hit. I
don't really know what's going to go on five seven,
ten years from now, but I'll have to decide and
commit to something. And the income time and complexity of
all of that is, of course, that's going to have
an impact on your bracket that year. Well into the future,
and we don't know what the brackets are going to be.
We never know what tax is going to look like
in the future. But remember, well into the future you'll
be dealing with things such as such as IRMA. IRMA
(31:35):
is something that will you retire one year, start taking income,
and then two years later your Medicare premiums will be
calculated based on what your income was that twenty four
month period prior. So these are all things. Again you
have to kind of plan them well in the future.
You don't get a chance to, you know, really truly
understand what's coming. But again these are these are plans
that not everyone has access to. It's something over and
(31:57):
above your four oh one K to.
Speaker 1 (32:00):
The other thing. We got to watch out for there
in terms of future income, timing is required minimum distribution.
Some people think, hey, defer the income, defer the income,
defer the taxes, and you just keep putting it away,
putting it away, and then you look and lo and behold,
when you hit RMD age age seventy three, seventy five,
you got a boatload of income coming in and you
(32:21):
might get jumped significantly up in terms of tax rates.
So in some cases, not all, but in some cases
it makes sense to not defer that income now because
you could pay taxes now at potentially a lower bracket.
There's a lot to think about here.
Speaker 3 (32:36):
If I eat all my dessert. Now I got nothing
but vestibles.
Speaker 1 (32:38):
Later. You gotta spread it out, all right.
Speaker 3 (32:42):
Come in your way there, here's our last one of
the day. So, Bob, fact or fiction? Structured notes are
too complicated for most investors. What do you think?
Speaker 1 (32:50):
Well, I'm gonna say fiction. They're not like a lot
of things in life. You know, we're not trying to
talk down to people here. I think most people can
understand a lot of this stuff, and I would put
structured notes in that camp as long as they're provided
with the information. So I would say for most people
out there, structured notes are not a do it yourself
(33:10):
proposition because there's caps on what you can make, there's
different floors on what you can protect yourself from. And
all these structured notes are tied to different investment indices
or blends of different indices. So I think that's again,
that's where a good advisor if they explain this stuff
clearly to most investors. I find most investors understand this
(33:33):
stuff within five to ten minutes if we just boil
it down to plain English and tell them you know
what the deal is, and people can make an appropriate decision.
What do you think about that, Brian?
Speaker 3 (33:43):
You sound like an experienced advisor. That's mostly what we
spend our time doing is just educating on how the
tools work, on how the different moving parts work together,
and how does it apply to somebody's specific situation.
Speaker 1 (33:55):
Yeah, just taking what we do all day as we
take complex financial content and we try to boil it
down into plane English and demystify it for people. That's
what we do all right. Coming up, coming up next,
you're gonna get my two cents, uh, municipal bonds and
cash management stuff, and I'm talking about the taxes around
(34:16):
all of that. You're listening to Simply Money presented by
all Worth Financial on fifty five KRC the talk station.
You're listening to Simply Money presented by all Worth Financial
on Bob's Sponseller along with Brian James, and it's time
for my little two cent segment Brian and tonight, I
(34:36):
want to talk about an actual situation I've been dealing
with with a with a client, a fairly affluent client
that's got a bunch of money in municipal bonds and
a bunch of money in cash and we're having ongoing
conversations about because these people are very intelligent but for
some reason, they're they're having a hard time grasping the
(34:59):
concept up of before tax and after tax returns on
both the money they've got in the bank and save
these accounts and their municipal bond holdings. And in this
particular situation, Brian, I'm actually finding that the more I
dig into where the actual client's tax rate is, it
makes sense to not have all the money in municipal bonds.
(35:21):
And I'm having a hard time telling these people, hey,
it's okay to pay a little bit in taxes because
your net return is going to be higher. You ever
running into anything similar, Brian.
Speaker 3 (35:32):
Yeah, this is this is very common. I think a
lot of people are attracted to the term tax free
for obvious reasons. Right, we don't want to pay any taxes.
But the assumption is that, well, if I need bonds,
I want them to be tax free because I can
get a five percent CD from a bank. That therefore
means I could get a five percent municipal bond and
not pay taxes on it. So that's a no brainer, right, Bob.
What doesn't work that way? Of course, I'm gonna make
(35:53):
up numbers here a little bit, but a five percent
CD might might equate to, you know, maybe a three
and a half percent municipal bond. The states that issue
municipal bonds, you can be buying this from state of Ohio,
state of Kentucky. You're basically buying the debt of a
government entity, and it will be federal tax free to you.
Ohio does not tax income on its own municipal bonds
(36:16):
as well, so it can be totally tax free. But
again you're getting less. You're getting three and a half percent.
If you look at the tax free nature there that
that looks like a good deal. But if you're only
in say the twenty percent bracket, then my five percent
becomes four percent after taxes, which is a little higher
than the three and a half. So it seems to me, Bob,
you really need to be there is a wide, wide gap,
(36:37):
wider than I recall in the past twenty thirty years
between the two, and you really need to be twenty
four percent or higher bracket. That's I hate rules of thumb,
but that's a in that bracket. I think that's where
where it might start make this start to make sense
to consider tax free.
Speaker 1 (36:49):
Yeah, another thing I'm running into more often that I
used to is this dramatic difference, you know, in how
these cash interest rates float, you know, the cash interest
rate that banks are paying on deposits. I mean the
name of the game in our industry, as you know, Brian,
is assets under management au M and all the banks.
(37:11):
I mean, everybody's trying to gather assets. And what I'm
talking about here is these short term teaser rates. And
I've run into more than a few clients this year
that tell me, hey, I'm getting four point seven at
the bank, and you know, why should I invest I'm
getting four point seven percent. Well that might have been
for three months or six months, and then that rate
(37:32):
goes right back down to three and a half three
point seven percent, and it flies right on by people
unless they actually look at their statement and see what
they're earning. I'm seeing that happen more often than I
care to mention. Right now, what about you with your.
Speaker 3 (37:48):
The more bricks and mortar, the less rate of return
you're going to get. Right So, a lot of if
you look at a bank account now and you see
that it's not paying you very much, there's a chance
of two, three, four, five years ago it was some
kind of teaser rate that attracted you at the time,
and you maybe kind of forgot, which is exactly what
the bank wants. They want to pay you that teaser
ape to keep the assets after you're forgotten that. That's
the thing.
Speaker 1 (38:07):
Yeah, and I think the real point we're trying to
drive home here is just make sure you're reviewing what
you actually own, and if it's not something you want
to do or you have no interest in doing it,
get a good fiduciary advisor to sit down and look
under the hood and actually look at and tell you
what you're actually getting. Thank you for listening tonight. You've
been listening to Simply Money, presented by all Worth Financial
(38:29):
on fifty five KRC, the talk station
Tonight, conflict in the Middle East, what it means for
our economy, gas prices and your investments. You're listening to
simply Money presented by all Worth Financial. I'm Bob Sponseller
along with Brian James.
Speaker 2 (00:18):
Well.
Speaker 1 (00:18):
Obviously a lot has transpired in the world since we
last spoke to you. Let's get right into it with
all Worst Chief Investment Officer Andy Stout. Andy. Obviously, the
big news from the weekend was that the US launched
a strike on Iranian nuclear sites, and now there's concern
about what's going to happen in the oil fields, specifically
(00:40):
the Straits of Hermus in that area. Bring us to
be what's going on with the price of oil and
everything else in the economy as a result of what
happened over the weekend.
Speaker 2 (00:50):
Yeah, so there was certainly a lot of speculation as
to how markets would open and when you initially saw
the bombings, or at least for me, when I initially
saw the bombings and heard about it, you know, that
was you know, one of my first thoughts was what's
the market reaction going to be? How should we be
thinking about this in terms of portfolio positioning and possibly
(01:13):
any sort of adjustments, and you know, the most logical
way to think about it is to look at prior
instances of similar types of circumstances where you've seen volatility
in the Middle East and conflict there, and usually what
you see is maybe a quick knee jerk reaction, but
(01:36):
typically nothing lasting. Now, in terms of what's going on
this time around with Iran, I think there's two ways
to look at it from an economic perspective. The first
is what does Iran produce in terms of crude oil
supply and how does that compare to what the rest
of the world uses. So when you look at Iran's
(01:59):
actual oil production, it's around three point three three point
four million barrels a day. To put that into perspective,
it's roughly four percent of crude oil production, so it's
really not that big. And by the way, for another perspective, US,
we're the top oil producer with about thirteen point four
(02:20):
million barrels a day. That's about sixteen percent of worldwide
oil production. Now, the other question is, because that's why
Iran's kind of a small piece. They don't mean I
don't want to say they don't really matter, but they
don't really matter in terms of no production, especially when
you consider about ninety five percent of their oil exports
(02:40):
ended up in China.
Speaker 1 (02:42):
So if you think about it.
Speaker 3 (02:43):
How does that that's all fracking? Right? Is that why
the United States is suddenly in a stronger position because
I feel like, you know, ten fifteen years ago, we'd
be having a very different conversation about this.
Speaker 2 (02:53):
That's certainly part of it. But we also have you
know a lot of traditional oil you know, production in
the Golf I guess, the Gulf of America, uh, and
the in Texas and Oklahoma and all the all the
usual suspects. But fracking has certainly introduced a lot of
additional opportunities that kind of did catapult us there, to
(03:16):
your point. But the bigger question for Iran and the
U will in the world wide market. It is that
straight up Hoar moves and Iran's parliament back the closing
of it. But that doesn't really mean much, I mean,
because they're not really a parliamentary country, uh that has
(03:36):
any sort of real power. Uh So when you think
about what Iran might do, I don't think, you know,
even if there is some sort of closing or positioning
like they're doing right now, I don't see it as
the last thing. I mean, really, what's going to happen.
Iran's going to be shooting themselves in the foot. I mean,
when you look at the amount of oil that goes
(03:58):
through the Strait, which is, you know, twenty percent of
global oil transportation, Iran would really be hurting themselves most.
They wouldn't be able to shift to China, they would lose,
they would really take a big economic hit, and it's
going to be pretty tough for them to actually implement that.
At least from a large scale perspective. What I could
(04:21):
see them doing, as opposed to trying to stop the
traffic flow would be to maybe disrupt shipping through some
other ways. I mean, there's already been some reports where
they're doing some GPS jamming, there's some drone activity, and
just some random harassment. Now here's the bigger thing, which
(04:41):
again I don't think any sort of straight up her
moves closing, even if it happened, wouldn't be lasting. Would
be Iran leaning on proxies like the Huthis or Hezbola
to stir up regional instability.
Speaker 1 (04:56):
Well, those little satellite terrorist groups have doing their thing
here for months and years now so and the market
hasn't moved a whole lot. But let's talk the talk
candy about the worst case scenario. And I hate to
put you on the spot here, but I love to
do it. Worst case scenario here in the short term,
based on our little dust up with the Ran over
(05:17):
the weekend and the potential for oil disruption, what should
investors be prepared for, if anything here in the short term.
Speaker 2 (05:26):
Worst case scenario would be a prolonged closing of the
strait of horror moves, which would probably push oil into
the eighty to ninety dollars range, and in turn that
would lift headline or total inflation up about point three
zero point four percent, lifting gas prices as well at
(05:46):
the same time. So that's kind of the worst case
scenario right now in the near term. But remember when
I'm talking about inflation, that's not the same as a
structural inflation problem, because with the Federal reservol of is
core inflation, which excludes volatile food and energy prices, and
that would barely move. So while gas prices, you know,
(06:07):
would obviously pinch consumer to higher gas prices, the FED
isn't likely to react unless it really turns into a
sustained energy spike.
Speaker 1 (06:18):
You're listening to Simply Money, presented by all Worth Financial.
I'm Bob Sponseller along with Brian James, joined by our
Chief investment Officer, Andy Stout. Andy, you mentioned the Fed.
Let's shift gears and talk about the Federal Reserve. Obviously,
last week there was no surprise at all on the
interest right front, as the Fed held rate steady and
(06:38):
now they're talking about the infamous dot plot that is
now officially scattered all over the place. Some FED members
see no cuts, others want two cuts by the end
of the year. What's happening behind the scenes here and
what are you seeing, because I know you get access
to a ton of economic data. What's going on with
the Fed?
Speaker 2 (06:57):
Andy, Well, you look at the Federal Reserve. Obviously, as
you mentioned, they left interest rates alone, so they control
the what's called the FED funds rate, which is overnight rates,
and they left those in a range of four and
a quarter to four and a half percent, and that
was pretty much one hundred percent certainty heading into the meeting.
What was less certain, though, was what the Fed would
(07:21):
do with their economic projections and that dot plot. As
you mentioned now the dot plot and the economic projections.
They only released those on a quarterly basis, so that
made this meaning a little bit more entertaining, at least
from my perspective. And when you look at the dot
plot what it shows. It shows where each FED member
thinks interest rates should be at the end of upcoming
(07:43):
calendar years and where we've seen it in March compared
to today. It's different, and it's not different. It's not
different in that the median dot or the middle dot
still shows two cuts. What's different is the dispersion. You
have almost half of the FED members seeing no cuts
(08:08):
this year and half seeing two cuts. If just one
of those dots would have moved, uh, then the medium
would actually be at one cut. So it's a it's
a it's really two camps. When you look at this,
you got the no cut camp and you got the
two cut camp.
Speaker 3 (08:23):
And historically, how how do they does that this? I mean,
obviously we wouldn't be talking about the dot plot. I
know it's one of your favorite things in the world.
I think you giggle yourself to sleep thinking about the
dot plot. But but obviously we wouldn't be using it
if it wasn't reliable. What what does history say when
we when we seem to be divided like this?
Speaker 1 (08:40):
Does it?
Speaker 3 (08:40):
Does it tend to play out? Because even Chairman Powell
himself was kind of downplaying a little bit about the
don't hang too much on the dot plot. It kind
of is what it is. It's just opinions as of
right now, not actually reality.
Speaker 2 (08:52):
Yeah, so I think the dot plot it's not a
perfect predictor by any stretch of the imagination. But what
it shows it shows where where the FED is thinking
at this point in time based on the current data.
And you know, as Powell said, you know it's a
it's a set of educated guesses and right now, he
also said that no FED member really has any conviction
(09:15):
in their dots, so it's it's pretty fluid. So basically
they might be saying, you know, it's it's more of
a guest than other dot plot iterations that come out.
So you see this.
Speaker 1 (09:26):
Change a lot.
Speaker 2 (09:28):
But it's really important though, because we it gives us
a clue as to the potential path of interest rates,
and it does help you know, analysts and Wall Street
and you know, investors like us essentially map out those
paths and determine portfolio position, because what you want to
(09:49):
look at, just from a technical perspective is what the
market's pricing in than where you believe the rates might
actually have any sort of difference there. That's that alpha
opportunity or the opportunity to outperform based on your differing
views relative to the market expectations.
Speaker 1 (10:08):
All right, sounds good, Andy, Thanks as always for all
your help. Here's the all Worth Advice. Geopolitical shocks like
what's happening with the RAN grab headlines, but unless the
fundamentals change your long term investment plan definitely should not.
Coming up next our take on a new warning about
a fast growing corner of the investing world. You're listening
(10:30):
to Simply Money, presented by all Worth Financial on fifty
five KARC, the talk station. You're listening to Simply Money
presented by all Worth Financial. I'm Bob Sponseller along with
Brian James. If you can't listen to Simply Money live
every night, subscribe and get our daily podcast. You can
(10:52):
listen the following morning during your commute or at the gym.
And if you'd think your friends or family could use
some financial advice, tell them about us. As well, just
search simply money on the iHeart app or wherever you
find your podcast. Should you never take social security early
if you can afford to wait? Is that factor fiction?
(11:14):
We're gonna tackle that and other questions straight ahead at
six forty three. All right, Brian, we've got another reason,
yet another reason why having social Security as your main
source of income is a dangerous proposition. What are we
talking about today on this topic, Brian?
Speaker 3 (11:32):
A couple moving parts here, But yeah, for those of us,
you know, who may be thinking that social Security is
all I need for retirement, that's really not case anymore.
Maybe back in the way, way back in the day
when it was the difference between that and between you know,
living in a home and being on the street. Nowadays
it's more of a supplemental income just because of the
cost of living. So, speaking of cost of living, the
(11:54):
projected COLA cost of living adjustment that's what COLA stands
for for twenty twenty six is projected to be betwe
between two point two and two and a half percent.
That's the smallest increase we've had since twenty twenty one.
That goes hand in hand of course, with inflation. Inflation
has been somewhat tamed from the days of the eight
nine percent increases. Right as I remember, you know, sitting
(12:15):
here on these airwaves and doing financial plans for folks.
Everybody was angry that we had eight nine percent inflation,
but thrilled the death that we got an eight percent
or nine I think it was nine and a half
something like that bump in social security back in those days.
Well those days are gone. Now we're back to two
point two to two and a half percent. That's an
average monthly benefit increase of only forty five to fifty
bucks and that's not going to move the needle a
whole heck of a lot.
Speaker 1 (12:35):
Is about No. Forty or fifty dollars isn't a big change.
But again to your point, inflation really has come down,
you know, significantly since those days, you know, right after COVID,
So it stands to reason that the the increase in
our monthly benefit is going to go down. So I
guess the message here is plan accordingly everyone. And just
(12:56):
as a point of confirmation here, the official COLDA for
Social Seksecurity for twenty twenty six will be announced sometime
as always, during the month of October.
Speaker 3 (13:06):
And one other quick thought on SOB security too, Bob.
Another announcement came out recently pushing the or actually pulling
in the year that the Social Security Trust Fund is
going to be depleted. The year we're shooting for now
is twenty thirty three. But what I want to be
super clear if with everybody on is that does not
mean that Social Security goes away.
Speaker 2 (13:27):
Right.
Speaker 3 (13:27):
We hear that all the time when people expressing concerns
about Social Security, that oh, social Security is going to
be bankrupt, there will be none That's not the case.
You're still going to have FIKA taxes taken out of
your paychecks if you're still working. I know I will
be in twenty thirty three. There will still be money flowing.
But the estimates now, after the tariffs and inflation and
all those kinds of things and the fiscal policy we've
been pursuing, those benefits are going to drop somewhere between
(13:49):
seventy five to eighty percent. Well, they'll drop by about
twenty percent, So you might only be receiving seventy five
to eighty percent of what's your report shows, not zero.
Speaker 1 (13:58):
Well, and like everything else that Congress does or doesn't do,
they'll wait till this becomes a potential catastrophe at the
eleventh hour, and then they'll probably get together and do
something about it. But we'll have a whole lot of
weeping and gnashing of teeth between now and then. So yep,
stay tuned. Hey, here's some other news we are following.
Moody's is raising concerns about the growing trend of individual
(14:21):
investors that are entering private equity and private credit markets. Brian,
We've talked about this topic here over the last couple
of months, this whole private equity private credit stuff. What
are some of the concerns that Moody's has and some
concerns that investors should have out there about these kind
of financial instruments.
Speaker 3 (14:41):
Well, first let's lay out some terminology here, Bob. So
when we think about our our four one k's, I
raise our investments and so forth, we are normally, you know,
ninety nine percent of the time we're talking about public markets,
publicly traded stocks, publicly available bonds, mutual funds, those kinds
of things. What we're talking about now is private. Obviously,
the difference betwe in public and private private can be
(15:02):
just the you know, maybe you met somebody in your neighborhood,
who is starting a restaurant, you want to invest in it.
That's private equity if you throw them some money to
help them start their business or whatever.
Speaker 1 (15:10):
Uh.
Speaker 3 (15:11):
These have always been there, but there's more and more
focus as technology makes it simpler for somebody to gather
all these different shareholders, these different investors and keep track
of things. That The challenge here though is it's really
in the valuation of these firms. So in other words,
if you're gonna invest your IRA, you have to know
what the thing you invested it is worth on occasion.
(15:32):
These are not liquid investments, right, so you're not gonna
have evaluation. You know, you know you're not. You don't
check what it's worth before lunch and then at the
end of the day like you might your four oh
one K. You get a report on these types of
private investments maybe twice a year if you're lucky, sometimes
only once. So that means you're not going to be
able to withdraw a couple hundred bucks to make the
ends meet. And that's one of the concerns, right. So
(15:52):
these are if we're going to hold these available to
the general public, people have to understand what they're getting into,
which is generally that these this money is locked up.
It is not a liquid investment.
Speaker 1 (16:01):
Well, and sometimes sometimes folks are not aware of that
before they buy these things, and sometimes these things are
sold by commission based folks, and things are not disclosed
about liquidity. Somebody can put some money into this, and
I think what mood is concerned about more money as
a percentage of their total net worth than they should
put into something like this, and then lo and behold
(16:24):
they have a liquidity event, they need access to their money,
they can't get to it, and whili, you've got some
credit problems, right, Brian.
Speaker 3 (16:32):
Yeah. And one of the other concerns here, these are
again not publicly traded, they're private. This is a free country.
You can invest in whatever you darn well please for
the most part. But these things are outside of the
auspices of the government, agencies, of finra, of the sec
that kind of thing. They're not as on the radar,
So there can be all kinds of things going on
under the hood here. Just because you've found something that
(16:53):
not many people know about, it doesn't mean it's a
good idea. One of the reasons they may exist is
because these the companies and opportunities cannot get traditional financing
banks don't want to talk to them. They might be
able to get traditional investors to play ball, so the
meaning the underwriting is a little more lack. So really,
really be careful of what you're getting into and understand
(17:16):
why they're willing to take your money as an individual
as opposed to the money of a larger bank or
a bigger investment firm.
Speaker 1 (17:23):
Well, and I'll just add here, I think for most
people out there, not all, but most, getting involved in
these things is not a do it yourself proposition. And
this is where a good fiduciary advisor can walk you through.
What are the fees, what are the lock up periods?
How does this fit into your overall portfolio from a
potential risk and return standpoint. So everybody goes into these
(17:45):
things with eyes wide open, so there are no surprises
down the road.
Speaker 3 (17:50):
Eighty percent of businesses fail, Bob, and these are some
of the examples that a lot of that happens in
the private sector. So you've got to be super careful
what you're getting into, and remember those eighty percent that fail.
You're not gonna hear about him. We only hear about
the smashing success stories, the twenty percent that makes us
all feel like we are missing out. So go in,
eyes wide open.
Speaker 1 (18:09):
Great point. Here's the all Worth advice. If you already
own private funds, this isn't a panic moment, but it
is a time to review the liquidity, the risk exposure
of what you hold and whether these investments still fit
with your overall financial plan. Coming up next, all Worth
chief investment Officer Andy Stout is in with some strategies
(18:30):
for the investor who wants to be tax efficient. You're
listening to Simply Money, presented by all Worth Financial on
fifty five KRC, the talk station.
Speaker 3 (18:44):
You're listening to Simply Money, brought to you by Allworth Financial.
I'm Brian James and I'm joined by Andy Stout, chief
investment officer for Allworth Financial. And contrary to the music
we just heard, or in parallel to the music we
just heard, he is the best around. Today we're going
to talk about something called tax alpha.
Speaker 1 (19:01):
Uh.
Speaker 3 (19:02):
There's a lot of words and uh catch words and
phrases and jargon gets thrown around on the investment industry.
And there's a whole bunch of Greek letters attached to them.
So sometimes you run across something called beta, which is
just comparing an investment to a benchmark, and it has
a beta one point two or point nine or whatever,
and that's just kind of relative to a specific benchmark.
Alpha is slightly different. Alpha is something that we look
at in terms of managing, you know, a specific management
(19:24):
strategy and what the whatever the unique factors is around
are around those that strategy that causes it to do less,
to perform, outperform an index or underperformed.
Speaker 1 (19:35):
What are the.
Speaker 3 (19:35):
Reasons behind it? So specifically, we're going to talk about
tax alpha, which has what is the after tax impact
of investment strategy? So Andy, tell me a little bit
about how can you control the tax alpha of an
investment strategy.
Speaker 2 (19:49):
Yeah, that's a great question, and it's uh might sound confusing. Oh,
tax off a one point two percent?
Speaker 1 (19:55):
What does that mean?
Speaker 2 (19:56):
Well, let's just take a step back even from that.
Let's say you own two stocks, Procter and Gamble and Kroger.
Let's say one of those stocks you bought and has
a thousand dollars gained, one of them has a thousand
dollars loss. Without tax planning, Let's say you happen to
sell the one that has a thousand dollars gain and
you keep the one with a thousand dollars loss. What
(20:19):
happens is that you owe taxes on that gain, so
you might end up paying you know, three hundred bucks.
But if you had some tax aware planning or did
some tax los harvesting, what you would do is you
would also sell stoff be the one with the loss,
and essentially the loss would offset the gain and you
would owe no taxes in your portfolio value overall would
(20:41):
still be the same. So tax alpha is really just
the extra investment returned by minimizing taxes just through you know,
smart planning strategies.
Speaker 3 (20:51):
Okay, so is this something I would be doing with
my mutual funds or my four toh one K or
where are the specific places that this is impactful?
Speaker 2 (21:00):
Yeah, that's a great question and really impactful and taxable accounts.
You don't want to do it in your four O
on K because it's not even possible from the I
R s's perspective, So don't worry about that. But what
you want to be focused on is if you have
a trust account or a joint account or an individual account,
those are the accounts. Typically there are others, but those
are the main ones that where you can employ these
(21:22):
tax alpha strategies to sentially reduce the amount of money
you pay the IRS. I mean, that's what we all
want to do anyway.
Speaker 3 (21:30):
Okay, so that's starting to make some more sense. But
it sounds like this is something where I really you know,
if I have a diversified portfolio of mutual funds, I
may or may not be able to benefit too much
from that, even if it is an a taxable account.
Is that right?
Speaker 2 (21:43):
Well, now, if it's not a loss or I have
a gain in other air, if you have a gain
in the mutual fund, you could possibly if you want
to get out of that, sell that and look for
losses in other areas. Or maybe that mutual f one
has a loss. It's really just whether or not that
investment has a gain or a loss in how you
can offset that in other areas. What you know, we
like to focus on a lot our tax loss harvesting
(22:04):
strategies where you're looking at individual positions. Those could be
mutual funds, could be exchange trade of funds or ETFs.
It could also be individual stocked or individual bonds as well,
really any security that's in a taxable count and we're
looking specifically at those investments and sometimes what's called at
lot levels, because you could buy maybe Procter and Gamble
(22:25):
and on one day and then buy it on another day.
You could sell from those specific lots. If one of
them happens to be a higher cost basis, meaning you
might have a lower or an increased loss, you could
sell from that specific one. And it's really just being
laser focused on the ability to target specific securities and
(22:47):
specific lots to harvest losses. And here's the key brind
while still maintaining your overall investment exposure and not deviating
from your broad strategy. So by harvesting those losses, we
can offset gains in other areas, allowing your portfolio to grow,
you know, in a tax free way. And if you
(23:07):
do take on more losses than gains, you have a
couple of other options, which is really great. Well, you
can take basically three thousand dollars and use that to
offset your income overall to lower that but probably more
importantly as you can carry over as many losses in
one calendar year and use them in the future. So
if you happen to have banked maybe tens or hundreds
(23:29):
of thousand dollars of losses, and.
Speaker 1 (23:30):
You didn't use them all in one year.
Speaker 2 (23:32):
You can use them in another year.
Speaker 1 (23:33):
You've got to keep track of it.
Speaker 3 (23:35):
Okay, So this sounds like I don't want to root
for losses, but since they're kind of inevitable and they
happen from time to time, this is kind of like
it almost sounds like this is kind of a silver lining.
It's things to go through, that kind of thing. But
at the same time, as long as I know how
the tax code works, it can be kind of beneficial. Now,
I think, aren't there other you know, it seems like
there are other things involving charities. Are there other ways
that I can add some a positive tax return to
(23:57):
my portfolio?
Speaker 2 (23:59):
Yeah, there's a few things you can do. Let's just
say you have a bunch of individual stocks and you're
charitably inclined instead of donating cash, look for the stocks
that have the highest appreciation so with the largest gains,
and you can donate those. You get a tax right off,
and then guess what, you didn't pay any taxes on
those gains, and you're still in the same position you were,
(24:19):
Whereas if you would have donated the cash and then
you sell the stocks later, all of a sudden you're
paying taxes on those gains. You can avoid that all
together just by donating your most appreciated stocks. So that's
another really good strategy. You combine that with tax loss harvesting,
and you can do that through a variety of methods.
One's called a direct index, which basically tries to match
(24:42):
an index return but provide that tax alpha. So when
you marry those two things of the charitable donation with
the act of tax sauce harvesting, it's a really powerful
tool that you can have in your tool belt to
lower the amount that you pay the I R S.
Speaker 3 (25:00):
That's great, that's fantastic information. None of this is new.
This is just the tax code. This isn't financial products
or anything like that. This is just how the tax
code works and understanding how to apply it to your portfolio.
So super helpful information from Chief investment Officer Andy Stout.
I'm Brian James, and you'll be listening to Simply Money
on fifty five KRC, the talk station.
Speaker 1 (25:25):
You're listening to Simply Money presented by all Worth Financial
on Bob' sponseller along with Brian James. Do you have
a financial question for us? There's a red button you
can click while you're listening to the show right there
on the iHeart app. Simply record your question and it
will come straight to us. All right, it's time to
play some financial factor fiction. Brian. Let's start off with you.
(25:47):
Factor fiction. You should never, and I say never, take
social Security early if you can afford to wait. Factor fiction, Brian.
Speaker 3 (25:56):
You know, Bob, there are some words that I hate
when they come up in a financial planning discussion, and
those words are always and never. There are no rules
of thumb. Everybody's got a different puzzle to put together,
everybody exactly. Yeah, you got to deal with your own
situation anyway. So this one's fiction. There are reasons to
take social security early, if you know. Some of the
(26:17):
sadder stories I've ever heard in my life is where
you know, a married couple is getting ready to retire,
and they're excited about going forward and so forth, and
then all of a sudden, one of them comes down
with something super significant and serious. Forget the math, forget
the spreadsheet, forget the you know, the snowball effect, that
that's when you need to take control of the time
that you have left and go in and a lot
of times that does involve turn on the Social Security spigot.
(26:38):
Don't worry about those eight percent increases. But on the
other hand, there are some others where if there's plenty
of resources out there, you know, and you then you
could benefit significantly from those eight percent increases and push
it out till seventy Most of us are going to
be somewhere in the middle. All right, my turn, Bob,
Fact or fiction, Bob spond seller. As state taxes can
still apply at the state level even if you're below
(26:59):
the federal exemption.
Speaker 1 (27:00):
We you think, well, this is a fact, and it
depends on what state you die in and where your
airs are. And let me give you an example. In Ohio,
there is no a state tax at the state level.
In Kentucky, on the other hand, it's a little more
jumbled up mess. You know, if you leave assets to
let's say, your spouse or child or grandchild, no estate taxes.
(27:24):
But if you get into some other airs, there's a schedule,
you know, put out by the state of Kentucky where
there's exemption amounts. There's different percentages that the person inheriting
the money has to pay depending on what the dollar
amount is. So be careful to check the state you
live in, in the state you think you're going to
die in and leave money in, because things can change
(27:45):
depending on where you live.
Speaker 3 (27:47):
Sounds like job security for lawyers and accounts.
Speaker 1 (27:49):
Yep, all right, Brian. If I'm maxing out my four
oh one K, I'm saving enough for retirement. Fact or fiction.
Speaker 3 (27:57):
It's another declarative statement that I ever like. So I'm
gonna call that one fiction because maybe you know it
depends on your other situation. Maxing out your four oh
one K, that's one thing that's good. I mean, obviously
it's gonna give you the a bigger pile of money.
The more you put in, the more it's gonna grow.
Eventually you'll come to a situation of, Okay, should I
be paying down my mortgage? You know, maybe, And that's
(28:17):
a that's a decision that's a lot of people run
into when they're in the maybe like the last three
five seven years of retirement, where there might be already
a good chunk put into the four oh one K,
And in that case it may be okay to drop
from the twenty fifteen percent or whatever they're putting in
their four oh one k, drop it back to a
certain amount to a lower percentage, and then reroute those
savings toward that toward that mortgage. But that's just one example. Again,
(28:39):
it's all about puzzle pieces. Everybody's puzzle pieces look different,
but they all do fit together one way or another.
You gotta figure out what you want your puzzle to
look like. Factor fiction Bob Spondseller. Tax loss harvesting in
a direct indexing portfolio can improve after tax returns even
if the market is flat or only up a little bit.
Is that truer fake?
Speaker 1 (28:59):
This is absolute fact. And this is one of my
favorite things about these tax loss harvesting strategies that are
prevalent out there, and we've got a great one here
at all Worth two. I mean, the thing you could
take advantage of, and this is one of the times
you could take a ton of advantage of short term
market volatility because these tax advantage strategies, the way they
(29:20):
work is it's an algorithm floating in the background. There's
you know, things going on that none of us are
looking at, and it's it's constantly harvesting losses when you
have them, and then immediately get into something very similar.
So you're fully invested in the market, but you've captured
that capital loss and you can use it later to
(29:42):
offset future gains. It's a wonderful strategy that works really well,
irrespective of whether the market's going up, down, sideways, or
anything in between. All right, Brian Factor fiction. Deferred compensation
plans can lower your current taxable income but create future income.
(30:03):
Timing complexity factor fiction, Brian.
Speaker 3 (30:06):
Oh, this one is fact. The deferred compensation plans are
complicated themselves, and they make other things complicated downstream. So
if you haven't heard of a deferred comp plan, then
you may not have one. These are essentially plans. This
is something beyond your four to one K, beyond your
you know, your normal retirement plans that generally everybody has
access to. If you're in an executive role or you're
(30:27):
a key employee, a highly compensated person, you're your employer
maybe offering you some kind of extra plan that you
can get access to to continue to put more money away. Now,
what this does, though, is you generally have to decide yes,
I'm gonna I'm eligible for this bonus now, but I
don't want to receive it now because I don't need
the income first and foremost currently, and I'd like to
(30:48):
defer the taxes on it. So I want to pick
a time in the future. You know, that might be five, six, seven,
could be ten years from now, depending on how your
plan works. That's up to your employer, but you're picking
a time in the future to receive those assets. Therefore,
you are deferring the compensation, hence the name. What that does, though,
is that it creates a tax overhang in that year,
and they can be a little complicated and they're very
stressful decisions because you're asking somebody, you know, to decide
(31:11):
when do I want to take this tax hit. I
don't really know what's going to go on five seven,
ten years from now, but I'll have to decide and
commit to something. And the income time and complexity of
all of that is, of course, that's going to have
an impact on your bracket that year. Well into the future,
and we don't know what the brackets are going to be.
We never know what tax is going to look like
in the future. But remember, well into the future you'll
be dealing with things such as such as IRMA. IRMA
(31:35):
is something that will you retire one year, start taking income,
and then two years later your Medicare premiums will be
calculated based on what your income was that twenty four
month period prior. So these are all things. Again you
have to kind of plan them well in the future.
You don't get a chance to, you know, really truly
understand what's coming. But again these are these are plans
that not everyone has access to. It's something over and
(31:57):
above your four oh one K to.
Speaker 1 (32:00):
The other thing. We got to watch out for there
in terms of future income, timing is required minimum distribution.
Some people think, hey, defer the income, defer the income,
defer the taxes, and you just keep putting it away,
putting it away, and then you look and lo and behold,
when you hit RMD age age seventy three, seventy five,
you got a boatload of income coming in and you
(32:21):
might get jumped significantly up in terms of tax rates.
So in some cases, not all, but in some cases
it makes sense to not defer that income now because
you could pay taxes now at potentially a lower bracket.
There's a lot to think about here.
Speaker 3 (32:36):
If I eat all my dessert. Now I got nothing
but vestibles.
Speaker 1 (32:38):
Later. You gotta spread it out, all right.
Speaker 3 (32:42):
Come in your way there, here's our last one of
the day. So, Bob, fact or fiction? Structured notes are
too complicated for most investors. What do you think?
Speaker 1 (32:50):
Well, I'm gonna say fiction. They're not like a lot
of things in life. You know, we're not trying to
talk down to people here. I think most people can
understand a lot of this stuff, and I would put
structured notes in that camp as long as they're provided
with the information. So I would say for most people
out there, structured notes are not a do it yourself
(33:10):
proposition because there's caps on what you can make, there's
different floors on what you can protect yourself from. And
all these structured notes are tied to different investment indices
or blends of different indices. So I think that's again,
that's where a good advisor if they explain this stuff
clearly to most investors. I find most investors understand this
(33:33):
stuff within five to ten minutes if we just boil
it down to plain English and tell them you know
what the deal is, and people can make an appropriate decision.
What do you think about that, Brian?
Speaker 3 (33:43):
You sound like an experienced advisor. That's mostly what we
spend our time doing is just educating on how the
tools work, on how the different moving parts work together,
and how does it apply to somebody's specific situation.
Speaker 1 (33:55):
Yeah, just taking what we do all day as we
take complex financial content and we try to boil it
down into plane English and demystify it for people. That's
what we do all right. Coming up, coming up next,
you're gonna get my two cents, uh, municipal bonds and
cash management stuff, and I'm talking about the taxes around
(34:16):
all of that. You're listening to Simply Money presented by
all Worth Financial on fifty five KRC the talk station.
You're listening to Simply Money presented by all Worth Financial
on Bob's Sponseller along with Brian James, and it's time
for my little two cent segment Brian and tonight, I
(34:36):
want to talk about an actual situation I've been dealing
with with a with a client, a fairly affluent client
that's got a bunch of money in municipal bonds and
a bunch of money in cash and we're having ongoing
conversations about because these people are very intelligent but for
some reason, they're they're having a hard time grasping the
(34:59):
concept up of before tax and after tax returns on
both the money they've got in the bank and save
these accounts and their municipal bond holdings. And in this
particular situation, Brian, I'm actually finding that the more I
dig into where the actual client's tax rate is, it
makes sense to not have all the money in municipal bonds.
(35:21):
And I'm having a hard time telling these people, hey,
it's okay to pay a little bit in taxes because
your net return is going to be higher. You ever
running into anything similar, Brian.
Speaker 3 (35:32):
Yeah, this is this is very common. I think a
lot of people are attracted to the term tax free
for obvious reasons. Right, we don't want to pay any taxes.
But the assumption is that, well, if I need bonds,
I want them to be tax free because I can
get a five percent CD from a bank. That therefore
means I could get a five percent municipal bond and
not pay taxes on it. So that's a no brainer, right, Bob.
What doesn't work that way? Of course, I'm gonna make
(35:53):
up numbers here a little bit, but a five percent
CD might might equate to, you know, maybe a three
and a half percent municipal bond. The states that issue
municipal bonds, you can be buying this from state of Ohio,
state of Kentucky. You're basically buying the debt of a
government entity, and it will be federal tax free to you.
Ohio does not tax income on its own municipal bonds
(36:16):
as well, so it can be totally tax free. But
again you're getting less. You're getting three and a half percent.
If you look at the tax free nature there that
that looks like a good deal. But if you're only
in say the twenty percent bracket, then my five percent
becomes four percent after taxes, which is a little higher
than the three and a half. So it seems to me, Bob,
you really need to be there is a wide, wide gap,
(36:37):
wider than I recall in the past twenty thirty years
between the two, and you really need to be twenty
four percent or higher bracket. That's I hate rules of thumb,
but that's a in that bracket. I think that's where
where it might start make this start to make sense
to consider tax free.
Speaker 1 (36:49):
Yeah, another thing I'm running into more often that I
used to is this dramatic difference, you know, in how
these cash interest rates float, you know, the cash interest
rate that banks are paying on deposits. I mean the
name of the game in our industry, as you know, Brian,
is assets under management au M and all the banks.
(37:11):
I mean, everybody's trying to gather assets. And what I'm
talking about here is these short term teaser rates. And
I've run into more than a few clients this year
that tell me, hey, I'm getting four point seven at
the bank, and you know, why should I invest I'm
getting four point seven percent. Well that might have been
for three months or six months, and then that rate
(37:32):
goes right back down to three and a half three
point seven percent, and it flies right on by people
unless they actually look at their statement and see what
they're earning. I'm seeing that happen more often than I
care to mention. Right now, what about you with your.
Speaker 3 (37:48):
The more bricks and mortar, the less rate of return
you're going to get. Right So, a lot of if
you look at a bank account now and you see
that it's not paying you very much, there's a chance
of two, three, four, five years ago it was some
kind of teaser rate that attracted you at the time,
and you maybe kind of forgot, which is exactly what
the bank wants. They want to pay you that teaser
ape to keep the assets after you're forgotten that. That's
the thing.
Speaker 1 (38:07):
Yeah, and I think the real point we're trying to
drive home here is just make sure you're reviewing what
you actually own, and if it's not something you want
to do or you have no interest in doing it,
get a good fiduciary advisor to sit down and look
under the hood and actually look at and tell you
what you're actually getting. Thank you for listening tonight. You've
been listening to Simply Money, presented by all Worth Financial
(38:29):
on fifty five KRC, the talk station
Simply Money News
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy, Jess Hilarious, And Charlamagne Tha God!