December 16, 2025 • 38 mins
On this episode of Simply Money presented by Allworth Financial, Bob and Brian explore whether we’re living through another tech bubble — this time fueled by artificial intelligence. Is the massive investment in AI setting us up for a painful correction in 2026? They dig into market concentration, inflated valuations, and why companies like Nvidia, Oracle, and OpenAI are raising red flags for some investors. You’ll also hear why now is a smart time to rebalance your portfolio — but not the old way — and how high-net-worth investors are using buffered ETFs and direct indexing to level up their financial strategy. Plus, estate planning mistakes that can cost your heirs big time, and real answers in the Ask the Advisor segment — from embedded portfolio risk to downsizing dilemmas.
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Episode Transcript
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Speaker 1 (00:04):
Tonight, is there an AI bubble? And if so, could
it possibly pop? In twenty twenty six, you're listening to
Simple Money, presented by all Worth Financial on Bob's spondseller
along with Brian James. But Brian, before we get into
talking about money, which is really the purpose of this show,
I've got to ask, how was Santa Con? I heard
you had an elaborate costume, all planned out. You spent
(00:27):
the whole afternoon trudging around in six inches of snow
in downtown Cincinnati.
Speaker 2 (00:33):
Tell us about Santakan.
Speaker 3 (00:35):
Santon, how did I was incognito?
Speaker 4 (00:37):
I went as missus clause just to kind of change
things up a little bit. So I don't I don't
believe anybody spotted me.
Speaker 2 (00:43):
Though, So you you actually did go?
Speaker 3 (00:46):
No, I did not go.
Speaker 4 (00:47):
I mean what you're talking about, I'm not that Brian.
I know you're taking shots at me. I have no
idea what you're talking about to take shots to move
on beyond that.
Speaker 1 (00:57):
Okay, all right, let's get back to talking about AI
and a possible tech bubble in twenty twenty six. It
is a question that's coming up in certain media circles.
You know, fund managers are talking about rebalancing for twenty
twenty six. People just want to know, Hey, is this
bubble gonna pop? You know, we've talked about this all
(01:17):
year long, Brian, the concentration of returns so far in
twenty twenty six, and just these handful of big cap
tech tech companies that have really driven the overall performance
of the Nasdaq and S and P five hundred this year.
Is it time to just pull the plug on AI
and move elsewhere?
Speaker 4 (01:37):
Well, you know, I don't know that we could ever
get to definitively say anything like.
Speaker 3 (01:41):
That on just any particular topic. We're all just guessing.
Speaker 4 (01:43):
But the reason we're talking about this the current state
of affairs is that we've been on quite a.
Speaker 3 (01:47):
Run since twenty twenty two.
Speaker 4 (01:49):
Twenty twenty two was one of the ugliest years we've
ever had in stock market, and the last three have
been some pretty good years. So about thirty trillion dollars
has been driven by the world's biggest tech companies since then,
Alphabet which is Google, Microsoft, and firms that are that
are that are benefiting from spending on all this AI stuff.
The names you hear a lot Nvidia, Broadcom, electricity providers
(02:10):
such as Constellation Energy.
Speaker 3 (02:12):
Oracle is back in the mix. That's an old name from.
Speaker 4 (02:15):
The original Internet bubble way back when in the late nineties.
Speaker 3 (02:18):
Oracle was part of all that uh and uh.
Speaker 4 (02:21):
But now we've seen, you know, late last week we
had a sell off in Video, which has been a
darling of the stock market for the last several years,
and Oracle shares after they reported exactly how much money
they're spending on AI. And then investors are just getting
to the point where they're saying, wait, where are the returns?
You know, some of this is starting to smell a
little bit like when we came to the realization that
(02:42):
the original Internet companies weren't necessarily all going to survive,
and there was kind of a reordering of things in
the one two stock market bubble, and then when that burst,
we had we had the survivors and the ones that
didn't quite make it. And that it's starting to smell
a little bit, Bob like, that's what we're headed toward
here with AI.
Speaker 1 (03:01):
Yeah, I think the key point here is valuation. You've
got to look at the valuation of these companies, and
by valuation I mean a price earnings ratio and what
a lot of people are starting to ask, is Yep,
we've spent trillions and trillions of dollars built, building out
or investing in you know, this coming growth in AI
and the infrastructure that goes into it. When are we
(03:21):
going to see actual earnings that justify the cost of
all this infrastructure's infrastructure spending and Brian, you know, you
go through some of those companies that you listed off,
there is a tremendous difference in pe ratio between these
various tech companies, and I think that's what people are
(03:42):
starting to talk about and look at and to say
nothing of the debt structure. You know, you look at
a company like open Ai, you know, the creator of
chat GPT, they continue they they have never had positive earnings, profits,
positive cash flow of kind. They continue to hemorrhage money
(04:02):
and they're they're funding this future on the come growth.
Speaker 2 (04:06):
Based on debt.
Speaker 1 (04:07):
And it's some At some point people are gonna want
to see, you know, a return on investment in the
form of positive earnings and.
Speaker 2 (04:14):
Positive cash flow.
Speaker 1 (04:16):
And I think that's what people are starting to talk
about here heading into twenty twenty six, because there are
going to be some winners and losers and probably some
elevated volatility as we turn flip the calendar to twenty
twenty six.
Speaker 4 (04:31):
That and competition is heating f too. So Alphabet has
a Google. Alphabet is Google, and they've got their own
Gemini model for AI and open ai themselves. They're planning
to spend one point four trillion in the coming years,
and you know, so, so the the concerns.
Speaker 3 (04:47):
There and open Ai is kind of the bellwether.
Speaker 4 (04:49):
That's chat GPT, that's the company behind chat GPT, which
is the most well known name, I think in.
Speaker 3 (04:53):
All of this.
Speaker 4 (04:55):
But they're they're that company expects to burn about one
hundred and fifteen billion dollar dollars over the next four
or five years before generating actual green profits in twenty
twenty thirty, which was that came from a report back
in September. But right now they're generating way less revenue
than their operating costs are coming in. They haven't had
any problem though, getting generating that excitement right. The stock
(05:17):
market does love a bubble. We love something to get
super wound up about. And so they collected more recently
forty billion dollars from an investment group out of Japan
called soft Bank and some other investors earlier this year.
In Vidia, as for their part, they pledged to invest
as much as one hundred billion dollars in September. And
so remember in Nvidia it makes the hardware that open
(05:38):
AI uses to create the artificial intelligence and bring that
to end users. So in Nvidia obviously has invested interest
in this is going well, and they've been throwing money
at the at the companies that are making the bridging
the gap between the end user and the hardware, and
so that there are some concerns that maybe they're throwing
a little bit too much money out there across too
many different players and that could create some circular financing
(06:02):
out there in the industry.
Speaker 2 (06:03):
Though.
Speaker 1 (06:04):
Yeah, I think one thing to look at going into
twenty twenty six is, you know, AI is starting to
become ubiquitous everywhere. You don't have to be in an
AI or chip company to benefit from the whole topic
of AI. What I mean there is you're going to
start to see companies who invested properly and wisely in AI,
(06:27):
and I don't care what sector they're in.
Speaker 2 (06:29):
Hopefully you're going to start to.
Speaker 1 (06:30):
See these companies benefit from that in the way of productivity.
And if you have interest rates continuing to come down,
you know, you're starting to see financial companies benefit, You're
starting to see small cap companies benefit. There's going to
be some profits made from this, and the profits might
come in unsuspecting places in twenty twenty six. And I
(06:51):
think the real message we're trying to send home here,
and Brian, you and I have been talking about this
for weeks now, is make sure you're diversified, make sure
you trim some of these gains when you've had them,
and position yourself accordingly to maybe bring down the overall
valuation of your portfolio, because there will be some good
(07:11):
values here coming in twenty twenty six.
Speaker 2 (07:14):
You know, as we have interest rates.
Speaker 1 (07:16):
Come down, regulation come down, that can all be a
great environment for stocks as long as you don't pay
up too much for earnings. And that's really the message
of this segment is some of these things have gotten
way out of whack in terms of you know, forward
looking pe and diversification needs to take place here. If
(07:37):
you haven't done it already or don't have a good
fiduciary financial advisor that's doing this on an ongoing basis,
you know, just rebalancing and looking for value and good
places to invest moving forward.
Speaker 4 (07:50):
Yeah, and I think we're starting to see that that
happening at the business level of this industry as well.
So the reason Oracle is in the position that's been
in is because there behind they made a huge pivot
to cloud computing kind of seeing this coming. What their
goal was was to rely on the infrastructure that they
had already built over decades and build these cloud computing
services because AI, of course, this isn't something that lives
(08:12):
inside your laptop you've got on your desk. It lives elsewhere,
and that's where the data processing happens. So Oracle is
building up that sort of infrastructure to do that out there,
and so of course they need to build a lot
more data centers. That's going to require a lot of money.
That then Oracle is financing that by selling bonds. Selling
a bond is debt if you're a company that's basically
(08:33):
borrowing money from investors. So that's going to put pressure
on any company because now the bondholders have to be
paid interest on a schedule, unlike equity investors who basically
throw hope to throw a bunch of money in on
the ground floor and then get back out, you know,
get out of the elevator when it's on the hundredth
floor or something like that, versus debt, which will require
cash flow to pay the interest on. So that part
(08:55):
of that is the reason that Oracle stock took a
hit last week after they reported significantly higher capital expenditures
than we're expected because of these types of investments.
Speaker 3 (09:04):
So Oracle is making a big bet on AI.
Speaker 4 (09:07):
They think that's where everything's going to be, but they
are doing in a way that's going to require their
customers to be gendered to be cash flow positive a
lot sooner than we were really anticipating.
Speaker 1 (09:17):
Yeah, and we want to reiterate here, this is not
the same thing as the dot com bubble we saw
back in the late nineties early two thousands. I mean,
even today big tech valuations they're high, but the magnitude
of these gains from AI are nothing like what happened
during the development of the Internet. Case in point, if
you take a look at the tech heavy Nasdaq one
(09:39):
hundred index right now, it's priced at about twenty six
times projected profits. According to the last research and data
we looked at.
Speaker 2 (09:48):
From Bloomberg.
Speaker 1 (09:51):
Going back to the early two thousands, we got to
an eighty times pe multiple of the Nasdaq one hundred
before the whole thing came crashing down during the dot
com bubble. So we're speaking in broad brushes here overall.
You know, if you look at it, I don't think
this market is really super inflated.
Speaker 2 (10:10):
I think you just got to be choosing in what
you look at.
Speaker 1 (10:12):
For example, you look at a company like Palanteer Technologies,
this thing is trading at one hundred and eighty times
estimated profits right now. You can find much better value elsewhere.
You know, even Navidia, Alphabet, Microsoft companies that you've already
talked about in this segment, Brian, they're all trading at
multiples below thirty times earnings.
Speaker 2 (10:34):
That's not cheap, but it's not nearly.
Speaker 1 (10:36):
At bubble type you know, valuations that we saw back
before the tech bubble in the early two thousands.
Speaker 2 (10:44):
So again it's just you.
Speaker 1 (10:45):
Got you gotta kind of do some stock picking here,
and that's what you rely on good managers to do.
Speaker 2 (10:51):
Uh, we're just calling out here, you know.
Speaker 1 (10:53):
As overall reallocation, don't get don't let your portfolio get
hits to these wagons that have been going straight up
in twenty twenty five, and assume that's going to go
on forever, because you might be in for a rude
awakening if and when we get a little pullback here
in the overall market.
Speaker 2 (11:12):
Yeah.
Speaker 4 (11:12):
I think the other interesting thing that's happening is these
countries companies are investing in infrastructure. You also have the
rising depreciation expenses, so you build these data centers, and
of course they did everything depreciates and that does result
in an expense that ultimately does hit the income statement.
So put some numbers behind that, Google, Microsoft, and Meta,
which is Facebook. They combined for about ten billion dollars
(11:35):
in depreciation costs in the final quarter of twenty twenty three,
and then that went to twenty two billion dollars in
the quarter that just ended here in this past september.
That's expected to be about thirty billion by this time
next year. And so what happens the end result of
all of that is that puts pressure on buybacks and
dividends because the stockholders are going to want to want
their cash back to reflect that reality. So in twenty
(11:56):
twenty six, both Facebook and Microsoft are expected to have
negative cash for negative free cash flow once they've accounted
for their shareholder returns at Google might break even on this,
but regardless, that could be a little bit of a
breather for all of this based on the.
Speaker 3 (12:11):
Growth we've seen in the last ten years.
Speaker 2 (12:13):
Here's the all Worth advice.
Speaker 1 (12:15):
AI isn't going anywhere but heading into twenty twenty six,
make sure your portfolio is nice and diversified so it
can capitalize on that future growth and be protected from
any potential downturn. Coming up next, why worldwide portfolio growth
might be hiding some risks and why now's the time
(12:36):
to check in on your personal financial plan. You're listening
to Simply Money presented by all Worth Financial on fifty
five KRC the talk station.
Speaker 2 (12:50):
You're listening to Simply.
Speaker 1 (12:51):
Money presented by all Worth Financial on Bob's sponseller along
with Brian James. From emotions clouding, downsizing decisions to high
income investors, hying tax efficiency to cash flow rental properties
in Northern Kentucky, We're going to try to tackle all
of that and more straight ahead at six forty three.
There's a stat that caught our eye here recently, global
(13:14):
assets under management. That's all the money managed by investment
firms has hit a record high of one hundred and
forty seven trillion dollars, and that's trillion with a T, Brian,
It stands to reason to me, at least, you know,
the market's at all time highs, so maybe assets under
managed management should be at all time highs as well.
Speaker 2 (13:35):
Is there anything to worry about here, Brian?
Speaker 4 (13:38):
Well, there's always another side to every story we look at,
right So on the surface, that looks like a win
for everybody. That means portfolios are up, our four O
and k's are growing markets basically at an all time high.
The AI fuel tech rally has lifted a lot of boats.
But here's the other side of this, the surge and
assets under management. That's not really just about the market performance.
It also reflects how much money is chasing returns right now.
Speaker 2 (13:59):
We see this.
Speaker 4 (13:59):
Every time the market does hit a new high, people
assume that it's going to continue on forever. And you
know they were that was right two years ago, it
was right one year ago, which means to be seen
what will happen now? But that is a human reaction.
We do see how much we do see more money
flowing in it sort of uh becomes a self fulfilling prophecy,
but that introduces risk, especially if you're not regularly rebalancing
(14:21):
or revisiting that financial plan.
Speaker 2 (14:24):
I'm always you know, going off popic here a little bit.
Speaker 1 (14:27):
I'm always interested in how this quote unquote assets under
management number is even calculated. Case in point, if you've
got a you know, fiduciary financial advisor that manages client assets,
they're going to count up the assets they manage. Well,
they put those assets into ETFs or mutual funds or
annuity sub accounts, and those firms all count those assets
(14:50):
as assets under management. So, Brian, don't you think this
one hundred and forty seven trillion dollars represents assets that
are maybe double or triple counted Because everyone wants to
talk about how much money they manage or assets under management.
Everybody wants to rack up that number and talk about
how big it is.
Speaker 2 (15:08):
Am I am I off base there?
Speaker 3 (15:10):
Now that's a great point.
Speaker 4 (15:11):
Yeah, Because we manage assets for people, we sometimes use
exchange traded funds.
Speaker 3 (15:16):
And those are run by asset managers.
Speaker 4 (15:18):
So yeah, it's potentially could be double counting some things
out there.
Speaker 3 (15:21):
I hadn't thought about it that way.
Speaker 4 (15:22):
I think that's a great thought worth poking around at.
But I think I think that the larger point remains
the same, which is we know that that that when
the market hits an all time high several years in
a row, more and more money just tends to flow
into it right up until there's it's time to take
a step back. And you know, we don't see anything,
you know, on the horizon imminent. But at the same time,
the whole point is we never really see it on
(15:43):
the horizon.
Speaker 3 (15:44):
That doesn't work that way.
Speaker 4 (15:45):
We have to be prepared for what the market's going
to give us when it decides it wants to take
a pullback, and that does not entail let's try to
dodge the oncoming train.
Speaker 3 (15:53):
Things don't work that way.
Speaker 1 (15:54):
Yeah, let's get back to some practical advice here. What
we're really talking about is rev it your financial plan.
Look at what your cash flow needs and wants are,
what your money needs to do for you and when,
and just make sure you have a strategy heading into
twenty twenty six that accomplishes that even if and when
we get a little bit of portfolio volatility. Let's talk
(16:17):
about some ways to do that. Brian, what are some
practical steps here heading into the new year to make
sure our financial plan is up to date regardless of
what happens in the short term with market volatility.
Speaker 4 (16:29):
Well, rebalancing, that's what it's like a drum beat around here.
Speaker 3 (16:32):
We say this all the time.
Speaker 4 (16:34):
But when that market gave you gives you gains, that
smart move is to rebalance. Treat that as a non
optional thing.
Speaker 3 (16:40):
You have to do.
Speaker 4 (16:41):
And so the whole point of that is trimming back
what has grown too fast and then taking those dollars
and putting them into areas that haven't grown as much.
That so basically what you're literally doing there is you're
selling at the high and buying at the low, moving
across those different assets lids.
Speaker 3 (16:55):
It's really all a rebalance is.
Speaker 4 (16:57):
But if you don't do it, then you're you're just
simply allowing your portfolio to run itself. Your portfolio maybe
three or four years ago might have been sixty forty,
but there's a sixty percent stocks and forty percent punds.
There's a good chance with this rally that you might
be more like seventy five twenty five.
Speaker 3 (17:12):
Now, you didn't choose to make your portfolio more aggressive.
Speaker 4 (17:14):
But that's the way the asset allocation drove it, and
so that might not be the That might be too
much of a roller coaster for you. And if you're
the thought against that sometimes as well, this is winning
and I don't want to sell what's winning.
Speaker 3 (17:26):
And that makes sense.
Speaker 4 (17:26):
But now you're talking, you're thinking with emotion, you're not
planning for things. The one guarantee that we can give,
one of the very few guarantees that we get to give, ever,
is that the market is going to step back. We
will will will will lose money at some point. That's
going to happen, and it's going to hurt a lot
more if you if you felt like if you felt
like we had somehow exited the risk of that and
(17:47):
that wasn't a problem anymore, versus anticipating it and being
ready to pivot when that when, when that happens. So
now is the time to go ahead and take some
of the risk off the table, to take it out
while it's there, right where the market is at an
all time high.
Speaker 3 (18:00):
This is the time to rebalance. If you have not
done so recently.
Speaker 1 (18:04):
Yeah, let's face it, behavior here still matters, and recency.
Speaker 2 (18:08):
Bias is a real thing.
Speaker 1 (18:10):
In other words, people look at their statements heading into
the end of the year and maybe things that they've
owned to your point in the prior segment, going back
to you know, twenty twenty two, we've had a heck
of a run in a lot of these companies, and
people are very reticent to make any change, and they
just assume that what has worked over the last three
years is just going to keep on humming along unabated.
(18:32):
And that's really what we're calling about calling out here.
It never works that way, Brian. There's always kind of
a reversion to the mean, and that's why you might
want to not only rebalance, but maybe look at some
asset classes that you had not considered in the past.
A good example of that is international stocks. Nobody wanted
to talk about that, you know, for probably five years
(18:55):
heading into twenty twenty five.
Speaker 2 (18:56):
Lo and behold, it's been the best performing asset class
this year.
Speaker 1 (19:00):
Some other things that you know, we talk to folks about,
maybe consider some private equity, some private credit, some buffered strategies,
things like that that are kind of not front and
center here and haven't been talked about in the financial media,
but can make an awful lot of sense to building
a truly diversified and protected portfolio heading into the new year.
Speaker 3 (19:22):
Yeah, I couldn't agree more. I think this is really
a great time of year to.
Speaker 4 (19:26):
Take stock of all these different things and make sure
that you're doing what you need to do.
Speaker 1 (19:30):
Here's the all Worth advice. A rising portfolio can create
hidden risks. Smart planning keeps your goals ahead of the
headlines coming up next. Why just rebalancing could be holding
your portfolio back. You're listening to Simply Money presented by
all Worth Financial on fifty five KRC, the talk station.
(19:55):
You're listening to Simply Money presented by all Worth Financial
on Bob Sponseller along with Brian James.
Speaker 2 (20:00):
Well, you've probably heard it before. In fact, we just
talked about it a few minutes ago.
Speaker 1 (20:05):
Make sure you rebalance your portfolio once or twice a
year and you'll be fine.
Speaker 2 (20:10):
And for the average investor, that's usually decent advice.
Speaker 1 (20:14):
But if you've got a little bit more money here,
and you've got specific tax plans or liquidity needs or
what have you coming up in twenty twenty six, rebalancing
is just maintenance. It might not be the optimal strategy.
And while it keeps your portfolio aligned to your risk
target allocation, it doesn't help you adapt to new tools,
(20:37):
new risks, new ways to be more tax efficient. And
that's what we want to get into you here, Brian,
the nuances on how.
Speaker 2 (20:45):
To rebalance, how to restructure your portfolio.
Speaker 4 (20:48):
Let's talk about what rebalancing does and doesn't do. But
so first we got to give it some credit. So
re rebalancing does prevent you from taking on way too
much risk when the market runs, because when stocks go
way up, it dudges you back towards that original mix
as you're taking profits out of one area and putting
it into areas that haven't done as well. That's just
good discipline, but it's also reactive. It's based on what
already happened. You're looking at the past and saying this
(21:10):
thing has grown too big and this thing is not enough.
So what it doesn't do is help you take advantage
of today's landscape or plan for what's coming next. So
let's talk about the tools. What can we do about this?
What resources do we have now that maybe we didn't
have in the past. So the portfolio has evolved, there
are new options out there. If all you're really doing
is rebalancing a sixty forty portfolio with the goal of
(21:32):
reducing the level of risk and reducing the volatility to
something you're more comfortable with, then perhaps buffer ETFs could
be a better example for you. These are things that
are designed to let you participate in equity growth but
have some built in a downside protection in terms of
mitigating some of the roller coaster ride that the stock
market can be, or better yet with One of my
(21:52):
favorite things to think about is direct indexing. That's huge
right now for high net worth investors. So instead of
buying a single exchange traded funder mutual fund, you literally
hold hundreds of individual stocks that represent whatever index a
given fund or ETF might be following as well. So
this gives you the ability to harvest tax losses at
the individual security level. Because you literally have all these
(22:14):
individual securities in your account, you can customize the exposure
and you can be a lot more strategic about the holdings.
Speaker 3 (22:20):
This used to be very labor.
Speaker 4 (22:22):
Intensive, and there's nothing magical that wasn't happening before, but
it's something that can be delivered at scale now nowadays,
as opposed to in the past when it was a
lot more work and just way too expensive for any
company to kind of keep track of all the different
accounts with that many positions sitting in there.
Speaker 1 (22:39):
Yeah, Brian, let's dig into that a little further here,
because this literally, literally is an.
Speaker 2 (22:44):
Evolution in the asset management business.
Speaker 1 (22:47):
You know, over the last several years, you know, gone
to the days where we just rebalance a sixty forty
mutual fund portfolio because you you know, and we talk
about this all the time, you lose a lot of
tax control by just sitting there in a mutual fund portfolio,
even if you do rebalance. The name of the game
here is to have some tax lost harvesting going on,
(23:09):
you know, behind the scenes in your taxable accounts. Using
an ETF portfolio is one way to do that. But
you know, to your the point you just made, if
you get into a direct indexing situation, you can do
tax loss harvesting literally on steroids by owning the individual
stock positions in that portfolio and those you know, by
(23:30):
having all those things going on in the background, it
can it can add something we call tax alpha to
a portfolio that has nothing to do with the actual
return of the stock market or the individual stocks in
the portfolio. It's just taking advantage of the tax code
in a very proactive way. And that that is a
huge evolution from just setting a calendar based, you know,
(23:53):
quarterly or semi annual rebalancing situation on your old mutual
fund account that you've owned for four years.
Speaker 4 (24:01):
So let's take a take a real life example through this.
So let's picture somebody worth maybe about six million dollars
rebalancing like clockwork every six months, just staying disciplined and
doing what they were taught to do over the years.
But that but they feel like that wasn't helping them
reduce volatility or increase income in retirement. Not to mention,
the tax burden kept going up as well, obviously not
not really having the impact that they want. So what
(24:22):
they could do there is use that custom index portfolio
to generate the tax losses to off offset gains they're
having elsewhere. That would help with the tax burden and
reallocating to those buffer dtfs could protect them better when
the market ultimately turns down eventually. That's not just rebalancing,
that's a conscious, educated decision to put a strategy in place.
That will directly address some of the bigger concerns that
(24:44):
they've had. So let's talk about when when can rebalancing
work against us? Well, let's not forget rebalancing. Of course,
what we're doing is we're selling something that has done
well well. Guess what if it's a taxable account, that
means we're gonna pay a little bit of taxes. So
that's why we need to be smart about how and
when we do this. You know, so time matters, and
you can combine different goals. For example, if you are
planning a large charitable gift or maybe a donor advised contribution,
(25:07):
that might be a better time to pair that with
a sale of some of these appreciated positions. If you
don't donate the appreciated positions themselves outright, rebalancing before that
and not having an offsetting tax type of a transaction
may cost you a lot of money unnecessarily. So make
sure you understand how all these different strategies work together,
charitable donations and portfolio rebalancing, and you can do it
(25:29):
almost for.
Speaker 3 (25:29):
Free with the right type of situation.
Speaker 1 (25:32):
No great point. Here's the all worth advice. Rebalancing keeps
you honest. Rebalancing with an actual strategy keeps you ahead
of the game.
Speaker 2 (25:41):
Coming up next, are ever popular? Ask the advisor segment.
Speaker 1 (25:45):
You're listening to Simply Money presented by all Worth Financial
on fifty five KRC the talk station. You're listening to
Simply Money presided by all Worth Financial on Bob'sponseller with
Brian James. You have a financial question you'd like for
us to answer. There is a red button you can
(26:05):
click if you're listening to the show on the iHeart app.
Simply record your question and it will come straight to us.
All right, Brian. Leading us off tonight is Tom from Marymont.
He says, our advisor said, we have quote unquote embedded
risk in funds that look diversified. How do you uncover
those risks that don't show up until the market drops?
Speaker 2 (26:28):
Great question from Tom.
Speaker 4 (26:30):
Yeah, So when an advisor says there is embedded risk
in a portfolio, they're referring to something that looks diversified
on paper but behaves very differently when markets fall. And
so here's how you can spot that these risks that
only show up during the bad times under stress. So
first off, look at factor exposure, not just tickers these
two funds with different names may may both load up
heavily on the same risk factors.
Speaker 3 (26:51):
They could be all.
Speaker 4 (26:52):
Growth, all tech, or all small cap or something like that.
And twenty twenty two, for example, investors learns that a
lot of quote unquote diversified growth funds were a e
actively the same trade, and if you looked at the
factors underneath them, you would have seen that these funds
would really move basically in the in the in the
same direction. So you look at the correlations and down
markets too, not just average correlations. Things that seem uncorrelated
(27:14):
in normal times often snap together and all move the
same direction whenever the panic hits. So these I would
look at historical stress tests using periods like two thousand
to two thousand and two that was the Internet bubble
eight and then March of twenty twenty and just understand
what that portfolio had did did in those types of timeframes,
and that'll give you a much better feel for whether
it's really going to provide you the diversification that you're
(27:36):
that you're seeking. There, all right, so let's move on
to a Brian and for Thomas Brian says, we finally
added bonds back to our portfolio after a long I
guess a long period of sitting out on the sidelines there.
But he's concerned about credit risk versus interest rate risk, Bob,
how do you balance the two without guessing at.
Speaker 1 (27:52):
That, well, two totally different things, and let's get into it,
you know, because a lot of folks continue to be
confused about how bonds work. So credit risk, Brian, is
basically just the the risk that the company or the
government entity is not going to be able to make.
Speaker 2 (28:10):
Their interest payment.
Speaker 1 (28:11):
So you do want to look at credit quality of
the underlying bonds in your portfolio. Hopefully you have a
good fiduciary advisor helping you do that. That's really what
credit risk is. And if you if you get attracted
too much to the yield on these corporate bonds and
don't look at the underlying credit rating, you know, you
couldn't could be in for a surprise, you know, because
(28:32):
sometimes these high yield bonds can can act more like
stocks than bonds, and the in the more uh less
volatile asset class that I think you're seeking. You know,
people tend to go into bonds because they want less
volatility and they like that yield on that regular interest
interest payment. So that's what we're talking about with credit risk,
(28:53):
the interest rate risk that is a function of the
movement up or down of interest rates, which all all
of us have far less control over. So my advice
there is to you know, this is where you'll hear
the term laddering a bond portfolio. Don't put all your
eggs in one basket and guess which way interest rates
are going to move in the short term, because as
(29:15):
a reminder, the price of bonds moves inversely to the
movement of interest rates, and that's why people like to
use a laddered bond approach. Spread out your interest rate
risk over time. Have a little short term, have a
little intermediate term, have a little longer term debt, and
the yield will change a little bit with you know,
(29:36):
how you position that bond portfolio, and then you've kind
of kind of revolving maturity of those bonds over time,
and that helps spread out that interest rate risk and
hopefully that helps define the terms here that we're dealing with.
And again, bond portfolios, if you get into bonds, make
sure you have somebody helping you here so you don't
(29:57):
get whipsawed around and buy something or too more such
of one thing that might create, you know, more volatility,
which is what most people are trying to avoid in
the first place by venturing into bonds. Hope that helps,
all right, David and Hamilton Brian. He says, we're thinking
of downsizing, but the emotional attachment to our home is
(30:17):
very strong. How do you waive a lifestyle shift against
the financial benefit of downsizing.
Speaker 4 (30:24):
Well, yeah, that's a that's a great question. I think
all of us will go through this at some point. So, yeah,
what you're running into is, I think a lot of
us function from, you know, without stopping to think, uh
that that we operate from the assumption that, well, I
could save a little money if we downsize the house,
and that is almost never ever true. So uh but
that but regardless, Uh, you know, here's the components that
go into this decision. Having walked a lot of people
(30:46):
through it and really just kind of listened as they
talk themselves through it, that that's rarely about square footage,
and a lot of it can be about identity, the routine,
the memories you have. So it's it can be challenging
to separate the emotional value from the economic value that move.
So having a structured approach really helps with it. Figure
out what what do you want? What do you want
your lifestyle to be like? But a lot of times
(31:07):
that starts with what is my lifestyle like now? And
then figure out what the next ten and fifteen years
look like?
Speaker 3 (31:12):
Mobility.
Speaker 4 (31:12):
Do you need to be close to family, What are
your travel plans going to be? How much tolerance do
you have for mowing the lawn and fixing stuff around
the house, and so forth. You know, because a house
that once fit a family lifestyle may not match that
next chapter you've got coming up.
Speaker 3 (31:25):
So the second, now that.
Speaker 4 (31:26):
You know what you're shooting for, quantify the true cost
of living that way in this same house that you're in.
So you're talking about property taxes, insurance, maintenance, utilities, and
all that kind of stuff. The capital you've got tied
up in the house. A lot of owners underestimate how
much liquidity and annual cash flow are locked in those
four walls of that house. Turning a six to eight
hundred thousand dollars house into investable capital vestable capital sometimes
(31:49):
can be a good move if you can truly find
a way to maintain the lifestyle that you want and
have less invested in the home that you're living in,
and then finally run that sostet spending sustainability tests figure
out two scenarios staying in my current home versus unlocking
that equity, lowering the ongoing expenses, and so forth, because
in a lot of cases, downsiding downsizing can extend your
(32:11):
portfolio longevity by many years, but particularly when future healthcare
or long term care costs are included. So lots of
things to think about. But that's a challenging question for
that many of us are going to run across Paul
and Anderson. Paul says they're in a high tax bracket
and their investments are generating more income than they thought
it would. So how do you build a strategy that
(32:31):
keeps those returns high but those taxes low.
Speaker 1 (32:34):
Bob Well, Paul, First of all, if your investments are
generating more income than you expected, that's on the surface
a good thing. It means you're making money, and we
should never complain about making money. But I think giving
into the whole tax efficiency topic, you know, it's hard
to tell from your question where the income is coming from.
It could be coming from you know, require minimum distributions.
(32:57):
It could be coming from taxable bonds. It could be
coming from capital gain distributions from mutual funds that we
you know, can't always control or rarely control. So I
think we got to identify where that income is coming
from first and then make some gradual adjustments to you know,
increase the after tax.
Speaker 2 (33:17):
Return of your portfolio.
Speaker 1 (33:19):
And like I said, it could be coming from a
lot of different ways. If it is an R and
D issue, you know, consider if you are charitably inclined
and give money to charities every year, you use some
of those rm ds to give money directly to the charities,
and that could lower your tax bill. If it's a
bond situation, you know, evaluate the after tax return of
(33:40):
taxable bonds versus municipal bonds. And if it is capital
gains from mutual funds, look at gradually adjusting that taxable
portfolio into more tax efficient ETFs or direct indexing strategies
like ones we've talked about earlier in the show today.
Speaker 2 (33:58):
Hope that helps.
Speaker 1 (33:59):
If if something happened to you tomorrow, would your family
know exactly what to do with your state planning documents?
This is an important topic that we're going to talk
about next because some families have all the right stuff
in place, but their airs don't know where to find
the documents that they had prepared.
Speaker 2 (34:17):
We're going to cover all that next.
Speaker 1 (34:19):
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 mob Sponseller
along with Brian James. Now, as we wrap up tonight,
just a reminder sometimes the smallest details in your financial
life are the ones that create the biggest headaches, especially
(34:43):
for those you love. Tonight's overlooked detail, do your adult
children actually know how to access your estate planning documents
if something were to happen to you, Brian, We try
to have this conversation with folks all the time. Some
people listen, some people just put it off or don't
listen at all, but it really is a thing out there.
(35:05):
You've got to make sure that people know where to
find your stuff when the day comes where the estate
actually has to be settled and assets need to be
distributed to airs. It's a very important topic to cover,
and with the holidays coming up and families getting together
here over the holidays, now is a great time to
(35:27):
make sure you have this topic covered with your family.
Speaker 4 (35:30):
Yeah, so at the end of the day, you know,
a lot of people are really worried about I want
to make sure I get my estate plan set up,
get all my documents, my will, my trust, my power returney,
all that kind of stuff when we get that in place.
But tend to forget the idea that these are just
pieces of paper. So you need to know where these
things live because somebody is going to have to go
track down that information so that they can sell your
(35:51):
state and take care of the things that the way
that you wanted them.
Speaker 3 (35:54):
So so what do we do here?
Speaker 4 (35:57):
So let's here's a quick example, real story from somebody
that we know. This client passed away very suddenly, had
everything all buttoned up legally like I just described, but
the kids didn't know the name of the law firm
that was sitting on the on the paperwork, and it
took about six months to sort out who the what
the basic access was because the law firm did not
was not aware that this person had passed away.
Speaker 3 (36:14):
It wasn't a bad plan, but no one had talked
about it.
Speaker 4 (36:17):
There wasn't a folder that says, call the ABC law
firm because they will be the ones to act as
the as the go between between the documentation in those
in those airs. But another case we had where an
executor knew exactly where the documents were, which is a
good thing, but didn't know the passwords to the financial accounts,
so tens of thousands of assets just sitting there kind
(36:39):
of locked up. Well, probate played out and because of
some things that weren't retitled, had to go through probate,
which means the bank won't talk to you know, the
the heirs until the probate process has approved who gets what?
Speaker 2 (36:51):
So how do we avoid this?
Speaker 3 (36:53):
Well, here here's the next movie. You should make.
Speaker 4 (36:55):
Set of meeting or maybe even just a casual conversation
with your adult children who are sp actually whoever your
executor is, because they're the ones who will be communicating
anyway on your behalf. Let them know where things are,
who the key contacts are, and what you want them
to understand, even putting together a letter of instruction that
lays all this stuff out. The documents are here in
this safe deposit box, or they're in this firebox in
(37:17):
the basement or whatever where the financial accounts are the
names of the professionals and organizations that you're working with.
Speaker 3 (37:23):
CPAs financial advisors and so forth.
Speaker 4 (37:26):
All that can be much more helpful than the trust
document itself, because more often than not, at least one
of those people has a copy of the document as well,
so that can be enormously helpful to getting things settled
when that time comes.
Speaker 2 (37:39):
Yeah, Brian, and you know this well.
Speaker 1 (37:40):
I mean, for a lot of our clients that we
work with, they have us manage a lot of their assets,
but some people manage some assets themselves.
Speaker 2 (37:48):
They've got some accounts, you know, they're set up with.
Speaker 1 (37:50):
Online brokerage firms or mutual fund firms that they've owned,
you know, forever, and there's passwords that are necessary to
get into those documents. We don't have those pass we're
not allowed to have them, but you better make sure
your family has them so as to your point that
you just made, those assets don't just sit there for
months and months while people figure out how to find
(38:12):
access to the accounts so they can be properly administered.
Here's the all Worth advice. Your legacy depends on more
than just your money. It depends on your proactive communication.
Speaker 2 (38:24):
Thanks for listening tonight.
Speaker 1 (38:25):
You've been listening to Simply Money, presented by all Worth
Financial on fifty five KRC, the talk station
Tonight, is there an AI bubble? And if so, could
it possibly pop? In twenty twenty six, you're listening to
Simple Money, presented by all Worth Financial on Bob's spondseller
along with Brian James. But Brian, before we get into
talking about money, which is really the purpose of this show,
I've got to ask, how was Santa Con? I heard
you had an elaborate costume, all planned out. You spent
(00:27):
the whole afternoon trudging around in six inches of snow
in downtown Cincinnati.
Speaker 2 (00:33):
Tell us about Santakan.
Speaker 3 (00:35):
Santon, how did I was incognito?
Speaker 4 (00:37):
I went as missus clause just to kind of change
things up a little bit. So I don't I don't
believe anybody spotted me.
Speaker 2 (00:43):
Though, So you you actually did go?
Speaker 3 (00:46):
No, I did not go.
Speaker 4 (00:47):
I mean what you're talking about, I'm not that Brian.
I know you're taking shots at me. I have no
idea what you're talking about to take shots to move
on beyond that.
Speaker 1 (00:57):
Okay, all right, let's get back to talking about AI
and a possible tech bubble in twenty twenty six. It
is a question that's coming up in certain media circles.
You know, fund managers are talking about rebalancing for twenty
twenty six. People just want to know, Hey, is this
bubble gonna pop? You know, we've talked about this all
(01:17):
year long, Brian, the concentration of returns so far in
twenty twenty six, and just these handful of big cap
tech tech companies that have really driven the overall performance
of the Nasdaq and S and P five hundred this year.
Is it time to just pull the plug on AI
and move elsewhere?
Speaker 4 (01:37):
Well, you know, I don't know that we could ever
get to definitively say anything like.
Speaker 3 (01:41):
That on just any particular topic. We're all just guessing.
Speaker 4 (01:43):
But the reason we're talking about this the current state
of affairs is that we've been on quite a.
Speaker 3 (01:47):
Run since twenty twenty two.
Speaker 4 (01:49):
Twenty twenty two was one of the ugliest years we've
ever had in stock market, and the last three have
been some pretty good years. So about thirty trillion dollars
has been driven by the world's biggest tech companies since then,
Alphabet which is Google, Microsoft, and firms that are that
are that are benefiting from spending on all this AI stuff.
The names you hear a lot Nvidia, Broadcom, electricity providers
(02:10):
such as Constellation Energy.
Speaker 3 (02:12):
Oracle is back in the mix. That's an old name from.
Speaker 4 (02:15):
The original Internet bubble way back when in the late nineties.
Speaker 3 (02:18):
Oracle was part of all that uh and uh.
Speaker 4 (02:21):
But now we've seen, you know, late last week we
had a sell off in Video, which has been a
darling of the stock market for the last several years,
and Oracle shares after they reported exactly how much money
they're spending on AI. And then investors are just getting
to the point where they're saying, wait, where are the returns?
You know, some of this is starting to smell a
little bit like when we came to the realization that
(02:42):
the original Internet companies weren't necessarily all going to survive,
and there was kind of a reordering of things in
the one two stock market bubble, and then when that burst,
we had we had the survivors and the ones that
didn't quite make it. And that it's starting to smell
a little bit, Bob like, that's what we're headed toward
here with AI.
Speaker 1 (03:01):
Yeah, I think the key point here is valuation. You've
got to look at the valuation of these companies, and
by valuation I mean a price earnings ratio and what
a lot of people are starting to ask, is Yep,
we've spent trillions and trillions of dollars built, building out
or investing in you know, this coming growth in AI
and the infrastructure that goes into it. When are we
(03:21):
going to see actual earnings that justify the cost of
all this infrastructure's infrastructure spending and Brian, you know, you
go through some of those companies that you listed off,
there is a tremendous difference in pe ratio between these
various tech companies, and I think that's what people are
(03:42):
starting to talk about and look at and to say
nothing of the debt structure. You know, you look at
a company like open Ai, you know, the creator of
chat GPT, they continue they they have never had positive earnings, profits,
positive cash flow of kind. They continue to hemorrhage money
(04:02):
and they're they're funding this future on the come growth.
Speaker 2 (04:06):
Based on debt.
Speaker 1 (04:07):
And it's some At some point people are gonna want
to see, you know, a return on investment in the
form of positive earnings and.
Speaker 2 (04:14):
Positive cash flow.
Speaker 1 (04:16):
And I think that's what people are starting to talk
about here heading into twenty twenty six, because there are
going to be some winners and losers and probably some
elevated volatility as we turn flip the calendar to twenty
twenty six.
Speaker 4 (04:31):
That and competition is heating f too. So Alphabet has
a Google. Alphabet is Google, and they've got their own
Gemini model for AI and open ai themselves. They're planning
to spend one point four trillion in the coming years,
and you know, so, so the the concerns.
Speaker 3 (04:47):
There and open Ai is kind of the bellwether.
Speaker 4 (04:49):
That's chat GPT, that's the company behind chat GPT, which
is the most well known name, I think in.
Speaker 3 (04:53):
All of this.
Speaker 4 (04:55):
But they're they're that company expects to burn about one
hundred and fifteen billion dollar dollars over the next four
or five years before generating actual green profits in twenty
twenty thirty, which was that came from a report back
in September. But right now they're generating way less revenue
than their operating costs are coming in. They haven't had
any problem though, getting generating that excitement right. The stock
(05:17):
market does love a bubble. We love something to get
super wound up about. And so they collected more recently
forty billion dollars from an investment group out of Japan
called soft Bank and some other investors earlier this year.
In Vidia, as for their part, they pledged to invest
as much as one hundred billion dollars in September. And
so remember in Nvidia it makes the hardware that open
(05:38):
AI uses to create the artificial intelligence and bring that
to end users. So in Nvidia obviously has invested interest
in this is going well, and they've been throwing money
at the at the companies that are making the bridging
the gap between the end user and the hardware, and
so that there are some concerns that maybe they're throwing
a little bit too much money out there across too
many different players and that could create some circular financing
(06:02):
out there in the industry.
Speaker 2 (06:03):
Though.
Speaker 1 (06:04):
Yeah, I think one thing to look at going into
twenty twenty six is, you know, AI is starting to
become ubiquitous everywhere. You don't have to be in an
AI or chip company to benefit from the whole topic
of AI. What I mean there is you're going to
start to see companies who invested properly and wisely in AI,
(06:27):
and I don't care what sector they're in.
Speaker 2 (06:29):
Hopefully you're going to start to.
Speaker 1 (06:30):
See these companies benefit from that in the way of productivity.
And if you have interest rates continuing to come down,
you know, you're starting to see financial companies benefit, You're
starting to see small cap companies benefit. There's going to
be some profits made from this, and the profits might
come in unsuspecting places in twenty twenty six. And I
(06:51):
think the real message we're trying to send home here,
and Brian, you and I have been talking about this
for weeks now, is make sure you're diversified, make sure
you trim some of these gains when you've had them,
and position yourself accordingly to maybe bring down the overall
valuation of your portfolio, because there will be some good
(07:11):
values here coming in twenty twenty six.
Speaker 2 (07:14):
You know, as we have interest rates.
Speaker 1 (07:16):
Come down, regulation come down, that can all be a
great environment for stocks as long as you don't pay
up too much for earnings. And that's really the message
of this segment is some of these things have gotten
way out of whack in terms of you know, forward
looking pe and diversification needs to take place here. If
(07:37):
you haven't done it already or don't have a good
fiduciary financial advisor that's doing this on an ongoing basis,
you know, just rebalancing and looking for value and good
places to invest moving forward.
Speaker 4 (07:50):
Yeah, and I think we're starting to see that that
happening at the business level of this industry as well.
So the reason Oracle is in the position that's been
in is because there behind they made a huge pivot
to cloud computing kind of seeing this coming. What their
goal was was to rely on the infrastructure that they
had already built over decades and build these cloud computing
services because AI, of course, this isn't something that lives
(08:12):
inside your laptop you've got on your desk. It lives elsewhere,
and that's where the data processing happens. So Oracle is
building up that sort of infrastructure to do that out there,
and so of course they need to build a lot
more data centers. That's going to require a lot of money.
That then Oracle is financing that by selling bonds. Selling
a bond is debt if you're a company that's basically
(08:33):
borrowing money from investors. So that's going to put pressure
on any company because now the bondholders have to be
paid interest on a schedule, unlike equity investors who basically
throw hope to throw a bunch of money in on
the ground floor and then get back out, you know,
get out of the elevator when it's on the hundredth
floor or something like that, versus debt, which will require
cash flow to pay the interest on. So that part
(08:55):
of that is the reason that Oracle stock took a
hit last week after they reported significantly higher capital expenditures
than we're expected because of these types of investments.
Speaker 3 (09:04):
So Oracle is making a big bet on AI.
Speaker 4 (09:07):
They think that's where everything's going to be, but they
are doing in a way that's going to require their
customers to be gendered to be cash flow positive a
lot sooner than we were really anticipating.
Speaker 1 (09:17):
Yeah, and we want to reiterate here, this is not
the same thing as the dot com bubble we saw
back in the late nineties early two thousands. I mean,
even today big tech valuations they're high, but the magnitude
of these gains from AI are nothing like what happened
during the development of the Internet. Case in point, if
you take a look at the tech heavy Nasdaq one
(09:39):
hundred index right now, it's priced at about twenty six
times projected profits. According to the last research and data
we looked at.
Speaker 2 (09:48):
From Bloomberg.
Speaker 1 (09:51):
Going back to the early two thousands, we got to
an eighty times pe multiple of the Nasdaq one hundred
before the whole thing came crashing down during the dot
com bubble. So we're speaking in broad brushes here overall.
You know, if you look at it, I don't think
this market is really super inflated.
Speaker 2 (10:10):
I think you just got to be choosing in what
you look at.
Speaker 1 (10:12):
For example, you look at a company like Palanteer Technologies,
this thing is trading at one hundred and eighty times
estimated profits right now. You can find much better value elsewhere.
You know, even Navidia, Alphabet, Microsoft companies that you've already
talked about in this segment, Brian, they're all trading at
multiples below thirty times earnings.
Speaker 2 (10:34):
That's not cheap, but it's not nearly.
Speaker 1 (10:36):
At bubble type you know, valuations that we saw back
before the tech bubble in the early two thousands.
Speaker 2 (10:44):
So again it's just you.
Speaker 1 (10:45):
Got you gotta kind of do some stock picking here,
and that's what you rely on good managers to do.
Speaker 2 (10:51):
Uh, we're just calling out here, you know.
Speaker 1 (10:53):
As overall reallocation, don't get don't let your portfolio get
hits to these wagons that have been going straight up
in twenty twenty five, and assume that's going to go
on forever, because you might be in for a rude
awakening if and when we get a little pullback here
in the overall market.
Speaker 2 (11:12):
Yeah.
Speaker 4 (11:12):
I think the other interesting thing that's happening is these
countries companies are investing in infrastructure. You also have the
rising depreciation expenses, so you build these data centers, and
of course they did everything depreciates and that does result
in an expense that ultimately does hit the income statement.
So put some numbers behind that, Google, Microsoft, and Meta,
which is Facebook. They combined for about ten billion dollars
(11:35):
in depreciation costs in the final quarter of twenty twenty three,
and then that went to twenty two billion dollars in
the quarter that just ended here in this past september.
That's expected to be about thirty billion by this time
next year. And so what happens the end result of
all of that is that puts pressure on buybacks and
dividends because the stockholders are going to want to want
their cash back to reflect that reality. So in twenty
(11:56):
twenty six, both Facebook and Microsoft are expected to have
negative cash for negative free cash flow once they've accounted
for their shareholder returns at Google might break even on this,
but regardless, that could be a little bit of a
breather for all of this based on the.
Speaker 3 (12:11):
Growth we've seen in the last ten years.
Speaker 2 (12:13):
Here's the all Worth advice.
Speaker 1 (12:15):
AI isn't going anywhere but heading into twenty twenty six,
make sure your portfolio is nice and diversified so it
can capitalize on that future growth and be protected from
any potential downturn. Coming up next, why worldwide portfolio growth
might be hiding some risks and why now's the time
(12:36):
to check in on your personal financial plan. You're listening
to Simply Money presented by all Worth Financial on fifty
five KRC the talk station.
Speaker 2 (12:50):
You're listening to Simply.
Speaker 1 (12:51):
Money presented by all Worth Financial on Bob's sponseller along
with Brian James. From emotions clouding, downsizing decisions to high
income investors, hying tax efficiency to cash flow rental properties
in Northern Kentucky, We're going to try to tackle all
of that and more straight ahead at six forty three.
There's a stat that caught our eye here recently, global
(13:14):
assets under management. That's all the money managed by investment
firms has hit a record high of one hundred and
forty seven trillion dollars, and that's trillion with a T, Brian,
It stands to reason to me, at least, you know,
the market's at all time highs, so maybe assets under
managed management should be at all time highs as well.
Speaker 2 (13:35):
Is there anything to worry about here, Brian?
Speaker 4 (13:38):
Well, there's always another side to every story we look at,
right So on the surface, that looks like a win
for everybody. That means portfolios are up, our four O
and k's are growing markets basically at an all time high.
The AI fuel tech rally has lifted a lot of boats.
But here's the other side of this, the surge and
assets under management. That's not really just about the market performance.
It also reflects how much money is chasing returns right now.
Speaker 2 (13:59):
We see this.
Speaker 4 (13:59):
Every time the market does hit a new high, people
assume that it's going to continue on forever. And you
know they were that was right two years ago, it
was right one year ago, which means to be seen
what will happen now? But that is a human reaction.
We do see how much we do see more money
flowing in it sort of uh becomes a self fulfilling prophecy,
but that introduces risk, especially if you're not regularly rebalancing
(14:21):
or revisiting that financial plan.
Speaker 2 (14:24):
I'm always you know, going off popic here a little bit.
Speaker 1 (14:27):
I'm always interested in how this quote unquote assets under
management number is even calculated. Case in point, if you've
got a you know, fiduciary financial advisor that manages client assets,
they're going to count up the assets they manage. Well,
they put those assets into ETFs or mutual funds or
annuity sub accounts, and those firms all count those assets
(14:50):
as assets under management. So, Brian, don't you think this
one hundred and forty seven trillion dollars represents assets that
are maybe double or triple counted Because everyone wants to
talk about how much money they manage or assets under management.
Everybody wants to rack up that number and talk about
how big it is.
Speaker 2 (15:08):
Am I am I off base there?
Speaker 3 (15:10):
Now that's a great point.
Speaker 4 (15:11):
Yeah, Because we manage assets for people, we sometimes use
exchange traded funds.
Speaker 3 (15:16):
And those are run by asset managers.
Speaker 4 (15:18):
So yeah, it's potentially could be double counting some things
out there.
Speaker 3 (15:21):
I hadn't thought about it that way.
Speaker 4 (15:22):
I think that's a great thought worth poking around at.
But I think I think that the larger point remains
the same, which is we know that that that when
the market hits an all time high several years in
a row, more and more money just tends to flow
into it right up until there's it's time to take
a step back. And you know, we don't see anything,
you know, on the horizon imminent. But at the same time,
the whole point is we never really see it on
(15:43):
the horizon.
Speaker 3 (15:44):
That doesn't work that way.
Speaker 4 (15:45):
We have to be prepared for what the market's going
to give us when it decides it wants to take
a pullback, and that does not entail let's try to
dodge the oncoming train.
Speaker 3 (15:53):
Things don't work that way.
Speaker 1 (15:54):
Yeah, let's get back to some practical advice here. What
we're really talking about is rev it your financial plan.
Look at what your cash flow needs and wants are,
what your money needs to do for you and when,
and just make sure you have a strategy heading into
twenty twenty six that accomplishes that even if and when
we get a little bit of portfolio volatility. Let's talk
(16:17):
about some ways to do that. Brian, what are some
practical steps here heading into the new year to make
sure our financial plan is up to date regardless of
what happens in the short term with market volatility.
Speaker 4 (16:29):
Well, rebalancing, that's what it's like a drum beat around here.
Speaker 3 (16:32):
We say this all the time.
Speaker 4 (16:34):
But when that market gave you gives you gains, that
smart move is to rebalance. Treat that as a non
optional thing.
Speaker 3 (16:40):
You have to do.
Speaker 4 (16:41):
And so the whole point of that is trimming back
what has grown too fast and then taking those dollars
and putting them into areas that haven't grown as much.
That so basically what you're literally doing there is you're
selling at the high and buying at the low, moving
across those different assets lids.
Speaker 3 (16:55):
It's really all a rebalance is.
Speaker 4 (16:57):
But if you don't do it, then you're you're just
simply allowing your portfolio to run itself. Your portfolio maybe
three or four years ago might have been sixty forty,
but there's a sixty percent stocks and forty percent punds.
There's a good chance with this rally that you might
be more like seventy five twenty five.
Speaker 3 (17:12):
Now, you didn't choose to make your portfolio more aggressive.
Speaker 4 (17:14):
But that's the way the asset allocation drove it, and
so that might not be the That might be too
much of a roller coaster for you. And if you're
the thought against that sometimes as well, this is winning
and I don't want to sell what's winning.
Speaker 3 (17:26):
And that makes sense.
Speaker 4 (17:26):
But now you're talking, you're thinking with emotion, you're not
planning for things. The one guarantee that we can give,
one of the very few guarantees that we get to give, ever,
is that the market is going to step back. We
will will will will lose money at some point. That's
going to happen, and it's going to hurt a lot
more if you if you felt like if you felt
like we had somehow exited the risk of that and
(17:47):
that wasn't a problem anymore, versus anticipating it and being
ready to pivot when that when, when that happens. So
now is the time to go ahead and take some
of the risk off the table, to take it out
while it's there, right where the market is at an
all time high.
Speaker 3 (18:00):
This is the time to rebalance. If you have not
done so recently.
Speaker 1 (18:04):
Yeah, let's face it, behavior here still matters, and recency.
Speaker 2 (18:08):
Bias is a real thing.
Speaker 1 (18:10):
In other words, people look at their statements heading into
the end of the year and maybe things that they've
owned to your point in the prior segment, going back
to you know, twenty twenty two, we've had a heck
of a run in a lot of these companies, and
people are very reticent to make any change, and they
just assume that what has worked over the last three
years is just going to keep on humming along unabated.
(18:32):
And that's really what we're calling about calling out here.
It never works that way, Brian. There's always kind of
a reversion to the mean, and that's why you might
want to not only rebalance, but maybe look at some
asset classes that you had not considered in the past.
A good example of that is international stocks. Nobody wanted
to talk about that, you know, for probably five years
(18:55):
heading into twenty twenty five.
Speaker 2 (18:56):
Lo and behold, it's been the best performing asset class
this year.
Speaker 1 (19:00):
Some other things that you know, we talk to folks about,
maybe consider some private equity, some private credit, some buffered strategies,
things like that that are kind of not front and
center here and haven't been talked about in the financial media,
but can make an awful lot of sense to building
a truly diversified and protected portfolio heading into the new year.
Speaker 3 (19:22):
Yeah, I couldn't agree more. I think this is really
a great time of year to.
Speaker 4 (19:26):
Take stock of all these different things and make sure
that you're doing what you need to do.
Speaker 1 (19:30):
Here's the all Worth advice. A rising portfolio can create
hidden risks. Smart planning keeps your goals ahead of the
headlines coming up next. Why just rebalancing could be holding
your portfolio back. You're listening to Simply Money presented by
all Worth Financial on fifty five KRC, the talk station.
(19:55):
You're listening to Simply Money presented by all Worth Financial
on Bob Sponseller along with Brian James.
Speaker 2 (20:00):
Well, you've probably heard it before. In fact, we just
talked about it a few minutes ago.
Speaker 1 (20:05):
Make sure you rebalance your portfolio once or twice a
year and you'll be fine.
Speaker 2 (20:10):
And for the average investor, that's usually decent advice.
Speaker 1 (20:14):
But if you've got a little bit more money here,
and you've got specific tax plans or liquidity needs or
what have you coming up in twenty twenty six, rebalancing
is just maintenance. It might not be the optimal strategy.
And while it keeps your portfolio aligned to your risk
target allocation, it doesn't help you adapt to new tools,
(20:37):
new risks, new ways to be more tax efficient. And
that's what we want to get into you here, Brian,
the nuances on how.
Speaker 2 (20:45):
To rebalance, how to restructure your portfolio.
Speaker 4 (20:48):
Let's talk about what rebalancing does and doesn't do. But
so first we got to give it some credit. So
re rebalancing does prevent you from taking on way too
much risk when the market runs, because when stocks go
way up, it dudges you back towards that original mix
as you're taking profits out of one area and putting
it into areas that haven't done as well. That's just
good discipline, but it's also reactive. It's based on what
already happened. You're looking at the past and saying this
(21:10):
thing has grown too big and this thing is not enough.
So what it doesn't do is help you take advantage
of today's landscape or plan for what's coming next. So
let's talk about the tools. What can we do about this?
What resources do we have now that maybe we didn't
have in the past. So the portfolio has evolved, there
are new options out there. If all you're really doing
is rebalancing a sixty forty portfolio with the goal of
(21:32):
reducing the level of risk and reducing the volatility to
something you're more comfortable with, then perhaps buffer ETFs could
be a better example for you. These are things that
are designed to let you participate in equity growth but
have some built in a downside protection in terms of
mitigating some of the roller coaster ride that the stock
market can be, or better yet with One of my
(21:52):
favorite things to think about is direct indexing. That's huge
right now for high net worth investors. So instead of
buying a single exchange traded funder mutual fund, you literally
hold hundreds of individual stocks that represent whatever index a
given fund or ETF might be following as well. So
this gives you the ability to harvest tax losses at
the individual security level. Because you literally have all these
(22:14):
individual securities in your account, you can customize the exposure
and you can be a lot more strategic about the holdings.
Speaker 3 (22:20):
This used to be very labor.
Speaker 4 (22:22):
Intensive, and there's nothing magical that wasn't happening before, but
it's something that can be delivered at scale now nowadays,
as opposed to in the past when it was a
lot more work and just way too expensive for any
company to kind of keep track of all the different
accounts with that many positions sitting in there.
Speaker 1 (22:39):
Yeah, Brian, let's dig into that a little further here,
because this literally, literally is an.
Speaker 2 (22:44):
Evolution in the asset management business.
Speaker 1 (22:47):
You know, over the last several years, you know, gone
to the days where we just rebalance a sixty forty
mutual fund portfolio because you you know, and we talk
about this all the time, you lose a lot of
tax control by just sitting there in a mutual fund portfolio,
even if you do rebalance. The name of the game
here is to have some tax lost harvesting going on,
(23:09):
you know, behind the scenes in your taxable accounts. Using
an ETF portfolio is one way to do that. But
you know, to your the point you just made, if
you get into a direct indexing situation, you can do
tax loss harvesting literally on steroids by owning the individual
stock positions in that portfolio and those you know, by
(23:30):
having all those things going on in the background, it
can it can add something we call tax alpha to
a portfolio that has nothing to do with the actual
return of the stock market or the individual stocks in
the portfolio. It's just taking advantage of the tax code
in a very proactive way. And that that is a
huge evolution from just setting a calendar based, you know,
(23:53):
quarterly or semi annual rebalancing situation on your old mutual
fund account that you've owned for four years.
Speaker 4 (24:01):
So let's take a take a real life example through this.
So let's picture somebody worth maybe about six million dollars
rebalancing like clockwork every six months, just staying disciplined and
doing what they were taught to do over the years.
But that but they feel like that wasn't helping them
reduce volatility or increase income in retirement. Not to mention,
the tax burden kept going up as well, obviously not
not really having the impact that they want. So what
(24:22):
they could do there is use that custom index portfolio
to generate the tax losses to off offset gains they're
having elsewhere. That would help with the tax burden and
reallocating to those buffer dtfs could protect them better when
the market ultimately turns down eventually. That's not just rebalancing,
that's a conscious, educated decision to put a strategy in place.
That will directly address some of the bigger concerns that
(24:44):
they've had. So let's talk about when when can rebalancing
work against us? Well, let's not forget rebalancing. Of course,
what we're doing is we're selling something that has done
well well. Guess what if it's a taxable account, that
means we're gonna pay a little bit of taxes. So
that's why we need to be smart about how and
when we do this. You know, so time matters, and
you can combine different goals. For example, if you are
planning a large charitable gift or maybe a donor advised contribution,
(25:07):
that might be a better time to pair that with
a sale of some of these appreciated positions. If you
don't donate the appreciated positions themselves outright, rebalancing before that
and not having an offsetting tax type of a transaction
may cost you a lot of money unnecessarily. So make
sure you understand how all these different strategies work together,
charitable donations and portfolio rebalancing, and you can do it
(25:29):
almost for.
Speaker 3 (25:29):
Free with the right type of situation.
Speaker 1 (25:32):
No great point. Here's the all worth advice. Rebalancing keeps
you honest. Rebalancing with an actual strategy keeps you ahead
of the game.
Speaker 2 (25:41):
Coming up next, are ever popular? Ask the advisor segment.
Speaker 1 (25:45):
You're listening to Simply Money presented by all Worth Financial
on fifty five KRC the talk station. You're listening to
Simply Money presided by all Worth Financial on Bob'sponseller with
Brian James. You have a financial question you'd like for
us to answer. There is a red button you can
(26:05):
click if you're listening to the show on the iHeart app.
Simply record your question and it will come straight to us.
All right, Brian. Leading us off tonight is Tom from Marymont.
He says, our advisor said, we have quote unquote embedded
risk in funds that look diversified. How do you uncover
those risks that don't show up until the market drops?
Speaker 2 (26:28):
Great question from Tom.
Speaker 4 (26:30):
Yeah, So when an advisor says there is embedded risk
in a portfolio, they're referring to something that looks diversified
on paper but behaves very differently when markets fall. And
so here's how you can spot that these risks that
only show up during the bad times under stress. So
first off, look at factor exposure, not just tickers these
two funds with different names may may both load up
heavily on the same risk factors.
Speaker 3 (26:51):
They could be all.
Speaker 4 (26:52):
Growth, all tech, or all small cap or something like that.
And twenty twenty two, for example, investors learns that a
lot of quote unquote diversified growth funds were a e
actively the same trade, and if you looked at the
factors underneath them, you would have seen that these funds
would really move basically in the in the in the
same direction. So you look at the correlations and down
markets too, not just average correlations. Things that seem uncorrelated
(27:14):
in normal times often snap together and all move the
same direction whenever the panic hits. So these I would
look at historical stress tests using periods like two thousand
to two thousand and two that was the Internet bubble
eight and then March of twenty twenty and just understand
what that portfolio had did did in those types of timeframes,
and that'll give you a much better feel for whether
it's really going to provide you the diversification that you're
(27:36):
that you're seeking. There, all right, so let's move on
to a Brian and for Thomas Brian says, we finally
added bonds back to our portfolio after a long I
guess a long period of sitting out on the sidelines there.
But he's concerned about credit risk versus interest rate risk, Bob,
how do you balance the two without guessing at.
Speaker 1 (27:52):
That, well, two totally different things, and let's get into it,
you know, because a lot of folks continue to be
confused about how bonds work. So credit risk, Brian, is
basically just the the risk that the company or the
government entity is not going to be able to make.
Speaker 2 (28:10):
Their interest payment.
Speaker 1 (28:11):
So you do want to look at credit quality of
the underlying bonds in your portfolio. Hopefully you have a
good fiduciary advisor helping you do that. That's really what
credit risk is. And if you if you get attracted
too much to the yield on these corporate bonds and
don't look at the underlying credit rating, you know, you
couldn't could be in for a surprise, you know, because
(28:32):
sometimes these high yield bonds can can act more like
stocks than bonds, and the in the more uh less
volatile asset class that I think you're seeking. You know,
people tend to go into bonds because they want less
volatility and they like that yield on that regular interest
interest payment. So that's what we're talking about with credit risk,
(28:53):
the interest rate risk that is a function of the
movement up or down of interest rates, which all all
of us have far less control over. So my advice
there is to you know, this is where you'll hear
the term laddering a bond portfolio. Don't put all your
eggs in one basket and guess which way interest rates
are going to move in the short term, because as
(29:15):
a reminder, the price of bonds moves inversely to the
movement of interest rates, and that's why people like to
use a laddered bond approach. Spread out your interest rate
risk over time. Have a little short term, have a
little intermediate term, have a little longer term debt, and
the yield will change a little bit with you know,
(29:36):
how you position that bond portfolio, and then you've kind
of kind of revolving maturity of those bonds over time,
and that helps spread out that interest rate risk and
hopefully that helps define the terms here that we're dealing with.
And again, bond portfolios, if you get into bonds, make
sure you have somebody helping you here so you don't
(29:57):
get whipsawed around and buy something or too more such
of one thing that might create, you know, more volatility,
which is what most people are trying to avoid in
the first place by venturing into bonds. Hope that helps,
all right, David and Hamilton Brian. He says, we're thinking
of downsizing, but the emotional attachment to our home is
(30:17):
very strong. How do you waive a lifestyle shift against
the financial benefit of downsizing.
Speaker 4 (30:24):
Well, yeah, that's a that's a great question. I think
all of us will go through this at some point. So, yeah,
what you're running into is, I think a lot of
us function from, you know, without stopping to think, uh
that that we operate from the assumption that, well, I
could save a little money if we downsize the house,
and that is almost never ever true. So uh but
that but regardless, Uh, you know, here's the components that
go into this decision. Having walked a lot of people
(30:46):
through it and really just kind of listened as they
talk themselves through it, that that's rarely about square footage,
and a lot of it can be about identity, the routine,
the memories you have. So it's it can be challenging
to separate the emotional value from the economic value that move.
So having a structured approach really helps with it. Figure
out what what do you want? What do you want
your lifestyle to be like? But a lot of times
(31:07):
that starts with what is my lifestyle like now? And
then figure out what the next ten and fifteen years
look like?
Speaker 3 (31:12):
Mobility.
Speaker 4 (31:12):
Do you need to be close to family, What are
your travel plans going to be? How much tolerance do
you have for mowing the lawn and fixing stuff around
the house, and so forth. You know, because a house
that once fit a family lifestyle may not match that
next chapter you've got coming up.
Speaker 3 (31:25):
So the second, now that.
Speaker 4 (31:26):
You know what you're shooting for, quantify the true cost
of living that way in this same house that you're in.
So you're talking about property taxes, insurance, maintenance, utilities, and
all that kind of stuff. The capital you've got tied
up in the house. A lot of owners underestimate how
much liquidity and annual cash flow are locked in those
four walls of that house. Turning a six to eight
hundred thousand dollars house into investable capital vestable capital sometimes
(31:49):
can be a good move if you can truly find
a way to maintain the lifestyle that you want and
have less invested in the home that you're living in,
and then finally run that sostet spending sustainability tests figure
out two scenarios staying in my current home versus unlocking
that equity, lowering the ongoing expenses, and so forth, because
in a lot of cases, downsiding downsizing can extend your
(32:11):
portfolio longevity by many years, but particularly when future healthcare
or long term care costs are included. So lots of
things to think about. But that's a challenging question for
that many of us are going to run across Paul
and Anderson. Paul says they're in a high tax bracket
and their investments are generating more income than they thought
it would. So how do you build a strategy that
(32:31):
keeps those returns high but those taxes low.
Speaker 1 (32:34):
Bob Well, Paul, First of all, if your investments are
generating more income than you expected, that's on the surface
a good thing. It means you're making money, and we
should never complain about making money. But I think giving
into the whole tax efficiency topic, you know, it's hard
to tell from your question where the income is coming from.
It could be coming from you know, require minimum distributions.
(32:57):
It could be coming from taxable bonds. It could be
coming from capital gain distributions from mutual funds that we
you know, can't always control or rarely control. So I
think we got to identify where that income is coming
from first and then make some gradual adjustments to you know,
increase the after tax.
Speaker 2 (33:17):
Return of your portfolio.
Speaker 1 (33:19):
And like I said, it could be coming from a
lot of different ways. If it is an R and
D issue, you know, consider if you are charitably inclined
and give money to charities every year, you use some
of those rm ds to give money directly to the charities,
and that could lower your tax bill. If it's a
bond situation, you know, evaluate the after tax return of
(33:40):
taxable bonds versus municipal bonds. And if it is capital
gains from mutual funds, look at gradually adjusting that taxable
portfolio into more tax efficient ETFs or direct indexing strategies
like ones we've talked about earlier in the show today.
Speaker 2 (33:58):
Hope that helps.
Speaker 1 (33:59):
If if something happened to you tomorrow, would your family
know exactly what to do with your state planning documents?
This is an important topic that we're going to talk
about next because some families have all the right stuff
in place, but their airs don't know where to find
the documents that they had prepared.
Speaker 2 (34:17):
We're going to cover all that next.
Speaker 1 (34:19):
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 mob Sponseller
along with Brian James. Now, as we wrap up tonight,
just a reminder sometimes the smallest details in your financial
life are the ones that create the biggest headaches, especially
(34:43):
for those you love. Tonight's overlooked detail, do your adult
children actually know how to access your estate planning documents
if something were to happen to you, Brian, We try
to have this conversation with folks all the time. Some
people listen, some people just put it off or don't
listen at all, but it really is a thing out there.
(35:05):
You've got to make sure that people know where to
find your stuff when the day comes where the estate
actually has to be settled and assets need to be
distributed to airs. It's a very important topic to cover,
and with the holidays coming up and families getting together
here over the holidays, now is a great time to
(35:27):
make sure you have this topic covered with your family.
Speaker 4 (35:30):
Yeah, so at the end of the day, you know,
a lot of people are really worried about I want
to make sure I get my estate plan set up,
get all my documents, my will, my trust, my power returney,
all that kind of stuff when we get that in place.
But tend to forget the idea that these are just
pieces of paper. So you need to know where these
things live because somebody is going to have to go
track down that information so that they can sell your
(35:51):
state and take care of the things that the way
that you wanted them.
Speaker 3 (35:54):
So so what do we do here?
Speaker 4 (35:57):
So let's here's a quick example, real story from somebody
that we know. This client passed away very suddenly, had
everything all buttoned up legally like I just described, but
the kids didn't know the name of the law firm
that was sitting on the on the paperwork, and it
took about six months to sort out who the what
the basic access was because the law firm did not
was not aware that this person had passed away.
Speaker 3 (36:14):
It wasn't a bad plan, but no one had talked
about it.
Speaker 4 (36:17):
There wasn't a folder that says, call the ABC law
firm because they will be the ones to act as
the as the go between between the documentation in those
in those airs. But another case we had where an
executor knew exactly where the documents were, which is a
good thing, but didn't know the passwords to the financial accounts,
so tens of thousands of assets just sitting there kind
(36:39):
of locked up. Well, probate played out and because of
some things that weren't retitled, had to go through probate,
which means the bank won't talk to you know, the
the heirs until the probate process has approved who gets what?
Speaker 2 (36:51):
So how do we avoid this?
Speaker 3 (36:53):
Well, here here's the next movie. You should make.
Speaker 4 (36:55):
Set of meeting or maybe even just a casual conversation
with your adult children who are sp actually whoever your
executor is, because they're the ones who will be communicating
anyway on your behalf. Let them know where things are,
who the key contacts are, and what you want them
to understand, even putting together a letter of instruction that
lays all this stuff out. The documents are here in
this safe deposit box, or they're in this firebox in
(37:17):
the basement or whatever where the financial accounts are the
names of the professionals and organizations that you're working with.
Speaker 3 (37:23):
CPAs financial advisors and so forth.
Speaker 4 (37:26):
All that can be much more helpful than the trust
document itself, because more often than not, at least one
of those people has a copy of the document as well,
so that can be enormously helpful to getting things settled
when that time comes.
Speaker 2 (37:39):
Yeah, Brian, and you know this well.
Speaker 1 (37:40):
I mean, for a lot of our clients that we
work with, they have us manage a lot of their assets,
but some people manage some assets themselves.
Speaker 2 (37:48):
They've got some accounts, you know, they're set up with.
Speaker 1 (37:50):
Online brokerage firms or mutual fund firms that they've owned,
you know, forever, and there's passwords that are necessary to
get into those documents. We don't have those pass we're
not allowed to have them, but you better make sure
your family has them so as to your point that
you just made, those assets don't just sit there for
months and months while people figure out how to find
(38:12):
access to the accounts so they can be properly administered.
Here's the all Worth advice. Your legacy depends on more
than just your money. It depends on your proactive communication.
Speaker 2 (38:24):
Thanks for listening tonight.
Speaker 1 (38:25):
You've been listening to Simply Money, presented by all Worth
Financial on fifty five KRC, the talk station
Simply Money News
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