Volatility, Opportunity, and Strategy: Guiding Investors Through Uncertainty
On this week’s Money Matters, Scott and Victoria Bogner, Allworth's Head of Wealth Planning, break down the current market volatility and its implications for investors. They explore the rise of algorithmic trading, the unpredictability of today’s markets, and how to maintain a long-term investment strategy when short-term turbulence strikes. Victoria shares actionable insights on seizing opportunities during downturns, like Roth conversions and tax-loss harvesting as smart tactics for proactive investors. Scott and Victoria also unpack what’s happening in bonds and equities, why buffered ETFs matter right now, and how political and technological forces are shaping the economic landscape.
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Scott: Welcome to All Worth's Money Matters. Scott Hanson here. Pat McClain is not going to be joining today. I've done this program with Pat on a weekly basis for, it'll be 30 years this summer. I think we're trying to figure out the exact date of that. In that three decades, this is the first time that he has ever called in sick. That's all right. We've got a great program. For one, Vicki Bogner is going to be joining us for a good portion of the program. She's our head of wealth planning. She's been a guest here on the show in the past. I think if you've been a listener for any length of time, you'll know how sharp she is and how good she is. So, it'll be a great program. Watching the markets this week, it's been all over the map. If we look at Wednesday, with Wednesday, the markets shot almost 3,000 points on the Dow. The buying started happening as soon as the pause was put in place on the tariffs. Then Thursday, you wake up and the markets start heading back south at a pretty rapid clip again. It's just quite a mess right now. Obviously, this is all temporary like everything in life is. This will pass and we will move on. This volatility might continue for some time. It might be, who knows, by the time we get some more clarity on what's going to be happening with the tariffs. Anyway, Vicki Bogner is joining us to help talk through some of the stuff, maybe make some sense of things. Vicki is Allworth's head of wealth planning. Vicki, thanks for taking some time.
Vicki: Absolutely. Happy to be here.
Scott: You are? Well, that's good.
Vicki: It's a beautiful day outside. The sun is shining. Nothing wrong with today.
Scott: Yes. What is your take on what the market's doing right now? Number one. Then, how should we think about this from an investor's standpoint?
Vicki: Great question. I've been doing this for 20 years. I remember 2007 and 2008. I was pretty wet behind the ears.
Scott: You were pretty new in the industry at that time.
Vicki: I was pretty new.
Scott: It's a good way to start.
Vicki: Yeah. I feel like I got my black belt back then, trying to talk 65-year-olds down off of their panic, and here I am 26 years old. Okay, sure. You weren't alive back when we were experiencing all this. 1987, I was 5. Okay, sorry. Everybody remembers Black Friday. First of all, what I like to tell people is that the markets of today are not the same markets of even 10 years ago. We have so many interconnected things at play when you're looking at what's happening in the marketplace. And also, the majority of trading that's even going on, it's all computer driven, right? So 10 years ago, human beings were the ones making the trades. Today, 80% of all volume in the market is happening by computer algorithm. And AI is just taking this to a whole new level. So that's what's creating this.
Scott: It's 80% because I remember even back in '87, the market crash of '87, though, one day was down 22%, which is...one thing about '87, people like to point back to 1987, the market crash. Had you invested in January 1st of that year, at the end of the year you were actually positive.
Vicki: The market was up. If you just would have gone to sleep, hibernated, and woken up, none would have been the wiser, right.
Scott: Even back then computerized trading was one of the culprits, at least, that was to be blamed. But today, it's literally 80%.
Vicki: It's 80%. I just looked it up. It's 80% of all volume, and it's just getting worse. And here's the thing. For people that think that we should have been able to see this coming, or we should be able to predict what the market's going to do, with that kind of algorithmic trading and how many pieces of information are being taken into account, these programs have made trades before you've even finished reading the headline of the news that has come out. And what that means is, if you think back to 2008, that was an 18-month long drawdown. Top of the market was October 9th of '07, and the bottom was March 9th of '09. It was painful, 18 months of watching the market deteriorate until the bottom fell out. Then, now you look back even to COVID, and these drawdowns are so much faster. The volatility and the bounce back happened in such a shorter amount of time, because we're talking about this algorithmic trading. So, trying to predict what the market can do. Look at what happened on April 9th. It's impossible. So, trying to make short-term decisions and plan your finances around that, it's a fool's errand.
Scott: Well, and if you look back before the Great Recession, if you look back to the dot-com bubble, we had a peak in March of 2000, and we didn't bottom out until November of 2002. It was...
Vicki: Right.
Scott: I believe those were the months.
Vicki: Two and a half years.
Scott: That was a brutal bear market.
Vicki: Yeah. And that's just my opinion, and people might disagree, but we're not in that same kind of stock market anymore, where we have these prolonged periods of slow deterioration. These declines happen much more swiftly, and what we've seen is that the recoveries also happen much more swiftly. So, it's not a good idea to base your financial plan around what's happening over the next six months. We need to keep that long-term focus. But that's not to say that there aren't levers you can pull that are within your control. There are great opportunities to be had when the market is down.
Scott: That's what Trump said this week. It's a great buy... That's what he tweeted out.
Vicki: It's a great time to buy.
Scott: It must be. Yeah.
Vicki: Especially if you're a young investor. I mean, this is the best news ever. I mean, this is when you want to start buying. Absolutely. When you have 20 years to invest, 20, 30 years. But also, I mean, now's a great time to do Roth conversions, if that was in the cards. Typically, we don't do those until the back half of the year, but absolutely, you want to take advantage of when the market's down. When your IRA is down, you want to move that money to a Roth IRA and experience the recovery in a tax-free account. Right? Also, tax loss harvesting. Now's a great time to look at your portfolio and see, are there some moves I can make that before maybe I was a little bit more reticent to make because I had some capital gains. Now that's not so much of a problem. I think this is a great opportunity to reassess that.
Scott: I think to put things in perspective though as well, if we look at the previous two calendar years, so 2023, 2024, over those two-year period of times, the S&P was up 52%. We just came off two years of phenomenal increase. Obviously, it's not going to continue like that for the next two years. We've got a bit of a pullback. There was an intraday, it brought us back to where values were about a year ago. But you're still thinking, this is not such a bad return.
Vicki: No, not at all. When you're thinking about what happened in '08, where market was down almost 57% from tip to tail, 2022, down 24%. But then when you look at the following 12 months after having these drawdowns, the returns were phenomenal. It's got the S&P up 68% after that low of March 9th of '09. After what happened in COVID, that short period of time, that drawdown was 34%. The next year, the S&P was up 77%. This too shall pass. I know that it's tough to hear that when you're going through it, and feelings are valid around this. This is unprecedented. It is confusing.
Scott: It is confusing. I'm confused. I think the White House is confused.
Vicki: Yeah, I'm also confused. The thing about it though...
Scott: What is the end objective here?
Vicki: Yes. Trying to predict that or walk through that is completely impossible. So, focusing on what we can control. Also, the other thing to note is that when we're experiencing these short-term drawdowns, I really encourage you, if you have an Allworth advisor, you have a financial plan. Reach out to them and say, how is this affecting my particular situation? That's really what people are worried about. What we're seeing is that with this drawdown we're experiencing, and even when we put your plan through a bear market stress test, which we do for our plans, all of your needs are met. For the most part, these kinds of volatility, these events are built into your plan. We don't just run your plan based on rose-colored glasses and you're going to make 6% or 7% year in and year out. We're stress testing them all the time. Your plan is built to withstand these kinds of markets because these kind of markets are inevitable.
Scott: Yeah. And you know, it's also really interesting this last week, Vicki, not just the stock market which was volatile, but I think an equally large story is the bond market. We saw a tremendous sell-off Tuesday and Wednesday. When people sell bonds, it pushes up the interest rates. That's actually how interest rates on longer-term bonds are set. Government doesn't set it. It's the market. As people buy more bonds, it pushes down interest rates, and as they sell off the bonds, it pushes up interest rates. It's just your classic supply-demand, essentially. It was remarkable to see how quickly that 10-year treasury shot up.
Vicki: Yes. And bonds have been the bright spot in here. Whereas in 2022, bonds were going down right along with equities, so they didn't really insulate against risk. Here in this recent volatility, we've seen bonds actually provide some protection. Most investors, especially if you're close to retirement, you're not fully invested in equities. You have quite a bit of bonds in there as well. When you're looking at the S&P or CNBC and seeing it going down 5% in a day, that's not your experience. That's not what your accounts are doing. That's just what the S&P 500 is doing.
Scott: Not only that, most people's bond, the fixed-income portion of their portfolio is not in long-term bonds.
Vicki: That's right. Yes, and that's what's great about having this amazing investment team that we have here at Allworth. They're paying attention to all of these pressures.
Scott: All right, Vicki. You don't need to keep selling Allworth. You already talked about it. I do appreciate that. You've been a big proponent of, what are they called? Factor? What are those? The name just...
Vicki: The buffer ETFs?
Scott: Yes, the buffered ETFs. Can you explain again how these work and what they might have done in the last couple weeks?
Vicki: Sure. What is interesting about buffer...?
Scott: We're seeing a pretty big increase in the use of these today versus five years ago.
Vicki: Yes. And this is something that we've used in client portfolios ever since really they became available. What really helps is that if you know that, okay, I have some of my investments in these buffer ETFs, and what they're designed to do is that over a 12-month period, they insulate against a certain amount of downside. We target 15% downside. For instance, if you're invested in a buffer ETF that typically they're looking out over a 12-month period. If from the beginning of that period to the end of that period, the stock market is down 15%, then that buffer ETF is just going to be break-even because it's designed to soak up 15% of loss. But if the market does really well and goes up, it's designed to participate in that upside point for point up to a cap. What's great about these is it helps keep people invested because they know as long as they don't...
Scott: And the lower the drawdown before you start having some losses, the lower the cap, right?
Vicki: Right.
Scott: It's like the second chance.
Vicki: So, they make waivers that have 100% downside protection. But your upside cap is going to be 6%, 7%.
Scott: It's about the same as treasuries.
Vicki: Right, exactly. But with the 15% downside, our caps are anywhere from 12%, 14%, 15%. And that's looking pretty attractive over a 12-month period, especially when we look at typically the market isn't down more than 15% in a 12-month period.
Scott: Yeah. And when you're looking at something like that, a buffered ETF, you're not recommending someone put all their...you know, that's their whole portfolio, right?
Vicki: Oh, no, not at all. Not at all. 20%, maybe 30% just to help insulate against that risk and diversify a little bit.
Scott: And with that, does it enable somebody to have greater equity exposure? Let's say somebody is...they typically would have a 50% allocation or 70% allocation towards equities. By using a strategy like this because of that downside protection, does it enable you to have greater equity participation?
Vicki: It does because it's completely correlated to equities because that's what it's buffering against, and it participates in that upside one for one until the cap. But you know that you have that downside protection if things go sideways or go down in this case. So yes, it allows you to take a little bit more equity exposure without increasing your risk.
Scott: And when you look at like the example you give, this buffered ETF that up until 15% decline, you're break-even, when it goes below 15%, you start having some loss. So, if someone put in $100,000 on January 1st and the market had declined 14%, is it basically still the value of $100,000? What kind of volatility do you experience until it goes out of those caps or the downside protections?
Vicki: Great question. Within that short-long period...
Scott: Because the reality is people look at their portfolio values on a daily basis. They don't always, but sometimes they do. They look at the monthly statement or the quarterly statement or whatever, and if there's ups and downs...
Vicki: They react to that.
Scott: ...they tend to think about how much labor it took them to...whatever the number is, $400,000, my gosh, I was making $100,000 a year. That's 4 years' worth of my labor or whatever it is.
Vicki: Right. And so, something that's interesting to note is that pretty much everything you own fluctuates in value every day. You just don't have access to what it's worth on every particular day. If you own a CD at a bank, it fluctuates in value on a daily basis. You just can't see it. You're just assuming, I'm going to hold this thing until it matures and I know what I'm going to get at the end of that maturity. Same kind of thing with a buffer ETF, except that now you can see how it moves every single day. So yeah, within that 12-month period, it's going to go up and down along with the market. But if you hold it to the end of that outcome period, then it's going to soak up that 15% of downside. So that's why I tell my clients the intent is to hold this for 12 months. Now, you can sell it early, and frequently we do. If the market's doing really well and that buffer ETF is close to its cap and it's only six months in, well, it makes sense to sell that and go into a fresh buffer ETF. But in periods where the market's volatile, you know that if worse comes to worse and 12 months from now, the market's still down 15%, then these buffer ETFs are going to soak up that loss.
Scott: Yeah. And I wouldn't really recommend that someone reallocate towards these right now just to minimize some losses and maybe some small portion if they're very nervous. Because the downside, of course, is the limits you have on the upside. And markets move really quickly, right?
Vicki: Yeah, as we saw.
Scott: And you just talked about the year after the COVID low and how much the market's moved up and you don't want to participate in the downswing and then not participate in the recovery.
Vicki: That's right. It's good to add these to your portfolio before the market is down 15% because you want to participate fully in that recovery. You're absolutely right.
Scott: Yeah, and there's no such thing as a free lunch. So anytime you do make some moves to reduce some volatility, you know, right now you hear the ads for gold more than ever. Gold's hit a new all-time high. Of course, gold's worth over $3,000 an ounce. Gold was $900 an ounce in 1980, 1981. I mean, it's been about the...you probably would have done better in treasuries or CDs.
Vicki: I think that's true.
Scott: Yeah, over that period of time. And it goes to these wild swings. And for those that are thinking, well, maybe now's a good time to be buying gold, I'm thinking, it is at an all-time high. You want to buy it when no one wants it, not when everyone wants it.
Vicki: I actually had a client in 2008, and I expressly told them, do not do this. But at the bottom of the financial crisis, I think it was October of 2008. So we weren't at the ultimate low, but we were close. He was so convinced that this was just the end of democracy as we know it, that he cashed out all of his 401(k)s, all of his IRAs. He took the tax hit and he went and he bought physical gold bars. Sometimes I think of that client, because I...
Scott: Yeah, that's a good reminder. Do you remember what the value was back then?
Vicki: He had about a million dollars and he just thought continuing to go down and he just couldn't take it anymore. And I thought, you know, clients like that, they're really good at marking the bottom.
Scott: And that million bucks would have been worth about $4 million today, if not more, depending on when he sold out.
Vicki: Oh yeah. I think about him and his gold bars in his basement, you know, back when, I don't know, what was the Dow back in October of '08? I know it's probably gone up.
Scott: It hit $6,000 something, and it was '09 anyway, March. I had a client, Vicki, this was same time. He had been a client for a decade prior. He had recently retired and he'd always been highly, maybe 70% or so in equities. He had a pretty good understanding. But once he retired, his feelings had changed a bit. And as we're going into the downturn, he called about every month or so and like, Scott, what do we do? And I would kind of explain, let's look at history, let's look at how diversified you are. You can continue to have your monthly income for seven years before we're forced to even look at selling any stocks. You've got a long time ahead of you, and had these conversations. And finally, he called one day, this was early March of 2009, about a week before the bottom, literally. And he called and he said, I don't want to talk to Scott. I want to talk to someone. I want to talk to someone. I just want to place a trade. I don't want to talk to Scott. And he called and he liquidated his stock positions and the markets recovered. And I think about him a lot because it's not just a number on a paper because what happened, he reset his financial future, not for the better. And the markets recovered. He didn't participate. A few months later, he's like, should we get back in now, Scott? And I said, I don't know. You tell me. You didn't take my advice before, so I don't feel I'm in a position to give it now because I'm thinking, I tell you to get back in. We have two bad weeks. You get out, and now you're worse off. Once you get out, it's like, how do you get back in? He eventually increased his stock positions, but he had to reduce his income quite a bit. He took a reverse mortgage on his house and he was in good shape before, in order to maintain some semblance of his lifestyle. But his future changed dramatically and it was based upon an emotional reaction.
Vicki: Absolutely. And not just the factual information that I'm telling you, your plan is going to be fine as long as you don't make these damaging permanent decisions. Like you said, that altered his financial plan for the rest of his life. And when you think about it, when somebody says, okay, I want to move to cash or I want to get out, well, let's talk about when you're going to get back in. Let's say you're right and the market falls another 15% from here. Are you going to get back in then? What if it falls in... Are you going to get back in when it's lower or are you just going to keep telling yourself that it's going to go down more? And so, you keep sitting in cash and the only way you're going to feel better about getting back in is once it's recovered. So, there's no winning that situation. There's no logic behind getting out now and you really think you're going to have the steel stomach to get back in when it's 15% lower. It's not going to happen.
Scott: Not only that, if you get out and the markets go higher, that pain may be worse than the pain of... Years ago, this was in the early '90s, Pat and I, we were using a portfolio management system that was quite contrarian and they had all the reasons why this made a lot of sense. But the challenge was...which it didn't, we were young as well, but it didn't make a lot of sense. And so, we fired those guys and had more traditional approach since that time. But the challenge when you're taking some sort of contrarian approach is when all your neighbors are making money and you're not, that's pretty hard to deal with. But when all your neighbors are experiencing losses in their portfolio and you're right there with them, that's not that difficult to deal with. And studies show that it's impossible for the average individual investor to somehow outsmart these markets.
Vicki: Exactly. You're never going to be able to do it. If you do it, it's going to be luck only. And we have to remember how resilient our economy is. When you're looking at the face of challenge, how many times have companies figured out a way to be able to get around tariffs? I think actually you told this story, Scott, once of Ford back in the day when there were tariffs on vehicles that in their cargo vans, they put seats, another row of seats in the cargo vans as they were shipping them over to say that they were passenger vehicles to get around the tariff. And then when they got to U.S. soil, they just took the seats out.
Scott: Well, remember the little Subaru BRAT, those little Subarus that had the seats in the back? It was a mini pickup truck and they had two seats. This is the back in the day when you could still sit in the back of a pickup truck like I did as a kid. But it was designed to escape a tariff because there was a tariff on trucks. We're like, no, this isn't a truck, it's a passenger car.
Vicki: Yeah. Even back in 2019, Apple, Tim Cook went to Trump and said, hey, I want an exemption to these tariffs for China. And he granted it. They got exceptions for their iPad mini pros or whatever. So, there are always ways the companies are looking to sustain a profit. And that's just the ingenuity and the resilience of the U.S. economy. And you can't bet against that.
Scott: Yeah, you're a leadership team of a company. Well, almost every industry right now is impacted. And the uncertainty...I don't know of any industry that's not impacted right now. Because even if you're...let's say you're a U.S. publicity firm, well, you work for companies that have products and services that they import from overseas. And they're concerned about what's happening to their revenue and their bottom line. And they're looking at where they may need to cut some expenses. And I think that's the concern here. There's so much uncertainty, not just for investors, there's uncertainty for these companies and the leadership team. They're making strategic decisions about their future. And like, well, we were planning on using that firm in China, do we move to Vietnam instead? What happens if Vietnam has a different...? That's the uncertainty. If you look at why many economists now are predicting a recession, I think that's the reason behind it. It's this uncertainty. And it's kind of, people don't know how to make a decision.
Vicki: In the short term, it's going to be tough. And we're going to see that come out with the earnings reports here shortly. We're heading into earnings season. It's going to be tough for companies to prognosticate about their earnings moving forward. But also, I mean, in the grand scheme of things, President Trump, you know, these tariffs are enacted for the next, what, three, three and a half years. The next person comes into office, the most likely path is that executive reversal. They'll repeal or modify the tariffs. And yeah, that's painful for a lot of companies. But again, companies are extremely resilient and we will come through the other side of this and we're going to see record market gains just as we have in the past. And you can't try to predict when that's going to happen.
Scott: One of the challenging, I think, and more interesting times of this pullback, it's so politically charged, right? Because you've...I've talked to some diehard MAGAs and they're like, oh, this is great.
Vicki: This is fantastic. Yeah.
Scott: Right? And you look at them, well, okay. Then, I've talked to others that truly believe that Trump is a great threat to democracy. I believe he's going to be this authoritarian fascist leader. And for those folks, it's even harder, I think, to stay invested because they really believe that there could be a great shift and a great change in the structure of our society. And so, I think that's what makes it a little more difficult. I think it's so important just to pull back and think, we got to think about this long term. Think about the ingenuity of our companies, these businesses, to pivot, make changes when they need to. The system of economics and business is not going to change.
Vicki: That's right.
Scott: We will get through this again.
Vicki: That's right. We will. And every prior economic event, black swan, whatever you want to call it, has always been unprecedented.
Scott: That's right.
Vicki: This is unprecedented. COVID was unprecedented. The financial crisis was unprecedented. Every single one is a flavor of something new that we've never experienced before. And this won't be the last one either. So, yes, it's very confusing and it can be really anxiety inducing. But that's why it's so important to keep your head above all of the noise so that you're not accidentally, you know, cutting off your nose to spite your face, that you stay on track with what you absolutely can control, and don't get so wrapped up in what you cannot control. We cannot control how the markets are going to move, but you can control your spending. You can control how much you're investing. Just concentrate on those things. And then, remember to look at how this is going to impact your plan in the long term with eyes wide open. And if you have an advisor and a financial plan, they can walk you through, let's say you do want to move to cash. Okay, well, let's model that out. Well, it looks like your plan crashes and burns in 20 years if you do that. So, if you make those decisions, you need to know the consequences. It's not a riskless decision to pivot based on emotion and what's happening in the short term.
Scott: I think that's a good thing to remind people. It's not a riskless decision. When you're moving to cash, you have fundamentally changed your investment strategy. And so now what do we base the future returns off of?
Vicki: That's right.
Scott: How do we assume you're going to earn any money on your portfolio going forward? Maybe it's just cash now forever.
Vicki: Yeah. And we know that's not going to work.
Scott: Or worse, you get back in at the wrong time after things have gone up.
Vicki: Because that's when people are most comfortable getting back in when things have recovered. So, you're almost guaranteeing you're going to get back in higher than you got out.
Scott: Yeah. All right, Vicki. Well, thanks for taking some time to join us. We should have you on when we're hitting new highs.
Vicki: Yeah. Absolutely, happy to. And next time we talk, it'll be under even more interesting circumstances, I'm sure.
Scott: Whatever that means, right? I mean, so we're recording this midday on Thursday. Wednesday, of course, the market was up almost 3000 points on Wednesday. Phenomenal. And then as of this recording, we're down 1300 on the Dow. So anyway, thanks for taking some time. Appreciate it, Vicki.
Vicki: Absolutely. Good to talk.
Scott: Yeah, likewise. And I want to let everyone know, now that Vicki has signed off, we will take some calls here in just a moment. Vicki is going to be hosting a webinar along with Simone Devenny. Simone is Allworth's head of private wealth strategy. And the webinar is high-net-worth planning. And it's really designed for investors who have $2 million or more of investable assets. And during this time, they're going to talk about the implication of interest rates and what it could do to your portfolio. Look at some bond laddering tactics, how that can sometimes help. Look at what are the 2025 tax and deduction changes that are already in place. Also talk about some wealth transfer strategies and more. So, again, for those with $2 million or more of investable assets, they're going to talk about topics that are a little germane to those folks. Wednesday, April 23rd at 10 a.m. Pacific, Thursday, April 24th at noon Pacific, Saturday, April 26th at 9 a.m. Pacific. And for more information or to register, go to allworthfinancial.com/workshops. And you'll be able to participate in the webinar with both Vicki and Simone. I think someone's been a guest on here in the past. Both these women have some phenomenal strategies and had a lot of experience working with high-net-worth folks with some more complex matters. So, I think you'll learn something, and glad you can. By the way, you want to join, it's 833-99-WORTH. It's again, 833-99-WORTH, or you can send us an email at questions@moneymatters.com.
We're in California talking with Flo. Flo, you're with Allworth's Money Matters.
Flo: So my wife and I are both W-2 salary employees. We have two kids, 5 and 9. And my high-level question is, when it comes to RSUs and bonuses that come in throughout the year, how do I determine the most effective way to allocate those dollars? And so, you know, there's three main things that I've been looking at. But I want to give you kind of my financial numbers there.
Scott: Yeah, perfect.
Flo: But that's the high-level question. So, high level, I'm 41, my wife's 39. Our annual gross is 532K. My wife and I each make about 170K a year. And then that remaining 192K is essentially RSUs that vest throughout the year that I just sell upon vesting and bonuses. And then in joint brokerages, we have 456K. My wife's 401(k) is 600K.
Scott: Hold on, you're going a little fast. $450,000 in a brokerage account. How much in your retirement accounts?
Flo: My wife has 600K, I have 545K. And then in IRAs, we have about 248K. And that's a combination of traditional and rollover and Roths.
Scott: And did you say you have children?
Flo: We have two children, 5 and 9.
Scott: And so, what have you been doing in the past?
Flo: Yeah. So right now, what I do is we have about 120K in savings. Right. And I feel like my emergency fund is probably where it should be. If not, I'm maybe too much there. And so, what I've done is every month, I invest about $3000 in VTI, or a combination of that. Right. So, Vanguard ETFs. We max out HSAs, 401(k)s, 529s. And then we save about $1000 each month as well, just for savings. We don't have any debt aside from our home. Our mortgage is about 420K. The house is worth about $1.2 million. And then we have a 30-year 2.75 interest rate. So that's what we've been doing is just, you know, [crosstalk 00:34:44] every two weeks.
Scott: Do you still have quite a bit in stock in your employer?
Flo: No. So, I work for Amazon and I just...essentially, when those RSUs vest, I just sell them immediately.
Scott: And have you done any direct indexing with your portfolio?
Flo: I have not. I've looked at it. I've looked at some of the pros and cons. It felt a little intimidating, but I haven't. I know you mentioned it, but I haven't looked at it too closely.
Scott: Because I think, for you, particularly, triggering some tax losses strategically could be beneficial to you because of particularly the high income you've got. And neither you or your wife... Do you guys both work for Amazon?
Flo: No, no, she works for General Mills.
Scott: Okay, very different kind of companies. Yeah.
Flo: Yeah. She's actually got a pension, which they closed it after 12 years. So, she'll get some, between 3K or 4K is the projections, when she retires.
Scott: Really? When did they close it? That's amazing.
Flo: Oh, yeah, they closed it probably, you want to say, at least five years ago.
Scott: I know. But usually most of these companies closed them in the '90s.
Flo: Oh, yeah. Oh, no, no, we were very lucky in that sense. Yeah, it's not that long ago. But there was enough where she got, you know, at least 10 years of work there before she was shut off, and said, hey, you can't accrue anymore.
Scott: Your brokerage account, how is that allocated?
Flo: So I think it's...I want to say it's about... It's pretty aggressive. I'm like at, I would say like 90% large cap and then another 10% international. I don't have the numbers off the top of my head. I'm getting my screen to load here, but it's fairly aggressive, just because I figured I have time.
Scott: And all index funds.
Flo: Yes. Yeah, all index funds. Yeah.
Scott: And how much do you have in your 529 plans?
Flo: Right now, we have 20K and 50K. So 20K for the younger 5-year-old and then 50K for the 9-year-old.
Scott: Yeah, I'd recommend rather than continue to add to your S&P 500 index fund, or is VTI, is that total stock market? I forget the symbols and everything.
Flo: Yeah.
Scott: It's total stock market, right? Rather than to continue, I would use a direct indexing strategy. Because there...right now... I mean, it used to be. It's just a few years ago, there was transaction costs on buying individual securities. You made it almost impossible, particularly for small amounts. Today, there's no transaction costs. You can get technology that will do this pretty inexpensively. And it's a way for you to help manage your overall tax burden.
Flo: And if I were to do that moving forward...
Scott: And by the way, you can dial in how aggressive or conservative you want to be on any sort of tax loss. Because as you do some tax loss harvesting, over time, your portfolio ends up with a lower and lower cost basis for the same portfolio. So, like eventually you're kicking the can down the road. The same kind of concept, you're kicking the can down the road with your 401(k) as well. Like the longer we can defer some of this stuff, the better.
Flo: Got it. Yeah, because right now my challenge is just like, yeah, there's no...like for taxes or tax strategy, I really haven't been able to do much.
Scott: Yeah, you can't do much.
Flo: And my concern with direct indexing is...or the part that I don't know enough about is that like, do I direct index like a new set of dollars? Or would you say, hey, it's direct indexing all my brokerage figures. The question is how I keep track of that.
Scott: No, well, the problem is you trigger some tax gain. So, it wouldn't make sense. Probably the majority of your current brokerage account, you're going to have to maintain where it is. There might be some...I mean, if you've been investing on a monthly basis, you might be able to take some losses, even on some contributions you made in the last six months or whatnot.
Flo: Got it. So, the idea is I essentially open up a new account with one of these new firms. I guess some of the folks are doing this now.
Scott: Almost everybody.
Flo: Essentially, the new dollars going in... So like, for example, I have, you know, 40K that are vesting in RSUs. I can dump those into a new account and those 40K moving forward would be direct index, however I please. Is that the idea there?
Scott: Yeah.
Flo: And keep the rest.
Scott: And there might be some minimums that could be higher than 40,000, depending on the firm. So, I'm not sure.
Flo: Got it. Sure.
Scott: Just about any major brokerage firm or investment house is going to have a direct indexing strategy. And there's a number of different technologies out there that essentially do the same thing. And whatever the cost is now has come down considerably from even a couple years ago. And I think it'll keep getting lower. It's a commodity now, right?
Flo: Yeah. Yeah. And just the final kind of thought here, I do have a mega backdoor option available to me, but I don't know if that would ever make sense for me at this point.
Scott: Why wouldn't it?
Flo: I'm just wondering, so like it's available, they auto convert it. It's very painless...
Scott: Yeah. I would do that before I did the direct indexing.
Flo: Okay. Yeah, because that's the other thing that my...Fidelity is our provider. And they're like, hey, Beth, by the way, it's here. You click this box and we all transfer it. You don't do anything.
Scott: Yeah, so you end up...
Flo: So it's very painless.
Scott: Yeah. So, what ends up happening throughout the year, you're contributing on the before tax basis to the maximum. And then you go above that on an after-tax basis. Right. And then at the end of each year or whatever, the different 401(k) providers...actually, it's the company plan that specifies this, it gives you an opportunity to take those after-tax dollars and convert them to a Roth.
Flo: Right. Exactly. So that's available as well. I just hadn't been doing that because I just wasn't sure if that was the [crosstalk 00:40:25].
Scott: I'd rather you do that before you do the direct indexing, because the Roth, that's all tax free down the road.
Flo: Okay.
Scott: And you can always have access to your contribution. So those after-tax dollars that you would contribute before you did the background, those dollars are always free to you without any penalties. It's only the earnings and growth that you got to wait to retirement. Absolutely, I'd take it. Does General Mills have that? I doubt that. It's probably just Amazon.
Flo: They don't. No. Correct. Correct. Yeah. Okay, great. So I think I'll look at both of these. I think the direct indexing, I've been eyeing just because you mentioned it a few times, but I'll start with the mega here and then go from there.
Scott: Yeah. Quick question for you.
Flo: It allows quite a bit.
Scott: Quick question for you. You work for Amazon. It's like, how quick are they trying to get deliveries? Because, it's amazing how many products come that day.
Flo: You know, the idea is it's ready before you actually need it. Right. Because we know you want it. I mean, that's the idea. I don't work in that division. But the idea is like there's a history on what you've ordered. How can we have it ready in the location that you need it? Right. So now it's like pharmacy, right? It's same day pharmacy. Right. So, it's pretty amazing.
Scott: It is amazing. It is really amazing.
Flo: Thank you so much. I appreciate the help.
Scott: Yeah, appreciate the call. Yeah. Thanks.
We're talking now with Naomi. Naomi, you're with Allworth's Money Matters.
Naomi: Oh, hi. Hi. How are you doing?
Scott: Fantastic. How are you doing, Naomi?
Naomi: Pretty, pretty good. Thank you for helping me out with the question about what to do with a home following a divorce.
Scott: Sorry about that.
Naomi: Yeah, yeah. So, basically what I'm just...and there's obviously extraneous kind of personal issues aside, but just from a financial perspective, we own a home in a very good market, nice town, good schools in California. And we have a property that we bought about 10 years ago for $975,000, and it's probably worth about, I would say, $2 million based on comps at this point.
Scott: I'm sorry, is that in addition to your home or that is the home?
Naomi: No, that is the home. Yeah, sorry.
Scott: Got it. Okay.
Naomi: That is the home.
Scott: No. Good. Okay.
Naomi: Yeah. And we owe about $530,000 on the mortgage. We refinanced about four or five years ago. We refinanced a 30-year fixed at 2.9%. So, basically the crux of my question is, the obvious presumption is that you sell the house and you split it 50-50, and you go your separate ways and invest...do whatever you want with it. But I'm just wondering if it makes sense for us to somehow hold on to it, and build up our equity, but also ride the wave of increasing house prices, which seems like a pretty reliable bet in California, as opposed to, say, investing it in the stock market, just having some diversity there. You know, rent it out, collect the rents, which I think there aren't that many comps in our area, but it looks like we could probably rent it for about $6,000 a month.
Scott: And how old are you, Naomi?
Naomi: I'm 57.
Scott: And the kids grown and out of the house, or are they still living with you?
Naomi: Yeah, yeah, yeah. They're adulting. They're adulting. Well, I'm very proud to say.
Scott: Good. And how many years have you guys been married?
Naomi: 28.
Scott: And will you receive spousal support?
Naomi: I would not, if anything... And again, this is just a recent development. So, we really haven't, you know...I'm just trying to, yeah, get all...you know, just evaluate everything. So, yeah.
Scott: Yeah. I mean, my one caution to you is be really careful on your spending during times like this, because I just...
Naomi: Yeah.
Scott: There's so many emotions that go on.
Naomi: Yeah. Oh, no. I mean, we're very devoted savers. I don't have as many assets as your last caller, but, you know, I've got a 401(k). I have a family property that is a rental property. So that would be available to me for passive income. Oh, regarding your question, alimony, I don't think so, I out-earn him. That would be possibly a concern, yeah.
Scott: What's your annual salary?
Naomi: My annual salary is $165,000, give or take.
Scott: And what do you guys have in retirement accounts?
Naomi: You know, I can't really speak to his. I can't really recall. I have a brokerage account with some inheritance money that's... Well, I haven't looked recently. I'm afraid to look, so I'm not really sure how much it's worth. But before everything, you know, with the economy tanked, it was $500,000. And then I have a Roth IRA that's worth about $128,000, and a 401(k) that again was worth $180,000. And then I have a small amount in another country that would be worth about $100,000. So, I'm definitely kind of catching up. And I plan on working for the next 10 years. And I'm in my highest earning bracket right now. I mean, I'm making the most that I have ever. And I maximize my 401(k). I maximize the Roth. Yeah. So, this is our biggest asset. So that's why I'm trying to really...I don't want to just rashly just sell it as if that's the only option. Holding on to it actually benefit both of us. I mean, it's not just me, you know. Does it make more sense...
Scott: Would your thought to be to move out and then that becomes a rental property?
Naomi: Yes. Yes. That we would both move out and find kind of lesser, you know, apartments that would... Oh, by the way, so our mortgage is $2400 right now. And our property tax is $13,000 a year. You know, insurance is maybe $300 a month. So, yeah, the idea would be that we move out and have less spending. You know, if we rent, we're not paying property tax. We're not paying insurance, you know, downgrade.
Scott: Yeah. So, there's a couple challenges with this. And I think if you talk to most people, they'd say, sell the house and move on. And here's a couple of the reasons why. First of all, as a primary residence, you can exclude...a married couple can exclude up to $500,000 of capital gain from taxes. So, you've got about a million dollars in gain. If you sell it as your primary residence, you can exclude $500,000. If you convert it to a rental and sell it down the road, you're going to have to incur...you'll lose that $500,000 exemption from capital gain taxes.
Naomi: That's $500,000 between the two of us.
Scott: That's correct, $250,000 each.
Naomi: That doesn't seem like very much. You know, I feel like we sold a property 30 years ago and it was the same exemption. Why hasn't that gone up more for California? No, seriously, like it just seems... Doesn't that seem ridiculous with the price of things, that threshold?
Scott: Yeah. That came into being about 25 years ago, something like that, but in a sense, a long time.
Naomi: And it hasn't changed since.
Scott: That's correct. It's not adjusted for inflation.
Naomi: I mean, anyway, that's an aside.
Scott: Yeah. Well, you can talk about logic or fairness. The tax code, it's irrelevant. Like it is what it is.
Naomi: Yeah. Okay.
Scott: And then, secondly, like if you had $2 million and said, what's the best place to invest this? We probably wouldn't pick this individual house and say, let's buy this house...actually, if we had $1.5 million is what it is, let's buy this house and take $500,000 mortgage on it so we can rent it for $6,000 a month. It doesn't net that much.
Naomi: I agree.
Scott: You've got $1.5 million, that's not going to net that. And then the more complicated is then you and your, what will be your ex-husband are now still business partners on this.
Naomi: Mm-hmm.
Scott: And what happens when the roof leaks and the dishwasher blows up and all those issues.
Naomi: Yeah. It's a big hassle.
Scott: I just think you'd be borrowing trouble. I really do.
Naomi: Okay. That's great. I just wanted to make sure we weren't missing...you know, making... Because I talk to acquaintances and people and they always say, I sold that house, you know, 20 years ago, I wish we'd hold on to it. So, I didn't want to make a big financial mistake. Okay.
Scott: I think you'd have a hard time for swinging the finances long term to really make...
Naomi: I understand.
Scott: I mean, I think it's going to be an important time for you to say, all right, where's the dust settle? I'm 57. I'm at the peak of my career. I've got another 10 years to run. How do I prepare myself, so I've got great financial security 10 years out?
Naomi: Mm-hmm. Okay.
Scott: And that's a new chapter for you that you weren't expecting. I'm sorry you're here too, I really...
Naomi: Mm-hmm. Okay. Do you have any advice on what to do with the proceeds of the property if we sell it? Buy another property?
Scott: Yeah. Probably buy yourself another house somewhere, or townhouse, or something?
Naomi: Okay.
Scott: What city do you live in?
Naomi: San Diego.
Scott: Oh, San Diego. Yeah, I would try to find something else in San Diego.
Naomi: I see.
Scott: I mean, if you plan on staying there, where are your kids?
Naomi: They're in California. Yeah. One is in the L.A. area. They're more up north. So I might consider... And my family property is up-up north in the Los Angeles area. And that's going to be a whole other conversation in terms of fixing it up and things like that. So, I probably do go to Los Angeles area as much as I love it here.
Scott: Yeah. I mean, let's assume that your house was sold in the next whatever months, I'd probably say, just go rent something for a while. Put the money in treasuries or CDs, like be real conservative with it, until you can figure out exactly where you might want to locate and then buy something. But I'd keep these dollars really conserv... They're going to go back into a residence for you.
That's all the time we have today. I've missed having McClain here, but somehow, we survived. Anyway, this has been Allworth's Money Matters. We'll see you again next week.
Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
Scott: Welcome to All Worth's Money Matters. Scott Hanson here. Pat McClain is not going to be joining today. I've done this program with Pat on a weekly basis for, it'll be 30 years this summer. I think we're trying to figure out the exact date of that. In that three decades, this is the first time that he has ever called in sick. That's all right. We've got a great program. For one, Vicki Bogner is going to be joining us for a good portion of the program. She's our head of wealth planning. She's been a guest here on the show in the past. I think if you've been a listener for any length of time, you'll know how sharp she is and how good she is. So, it'll be a great program. Watching the markets this week, it's been all over the map. If we look at Wednesday, with Wednesday, the markets shot almost 3,000 points on the Dow. The buying started happening as soon as the pause was put in place on the tariffs. Then Thursday, you wake up and the markets start heading back south at a pretty rapid clip again. It's just quite a mess right now. Obviously, this is all temporary like everything in life is. This will pass and we will move on. This volatility might continue for some time. It might be, who knows, by the time we get some more clarity on what's going to be happening with the tariffs. Anyway, Vicki Bogner is joining us to help talk through some of the stuff, maybe make some sense of things. Vicki is Allworth's head of wealth planning. Vicki, thanks for taking some time.
Vicki: Absolutely. Happy to be here.
Scott: You are? Well, that's good.
Vicki: It's a beautiful day outside. The sun is shining. Nothing wrong with today.
Scott: Yes. What is your take on what the market's doing right now? Number one. Then, how should we think about this from an investor's standpoint?
Vicki: Great question. I've been doing this for 20 years. I remember 2007 and 2008. I was pretty wet behind the ears.
Scott: You were pretty new in the industry at that time.
Vicki: I was pretty new.
Scott: It's a good way to start.
Vicki: Yeah. I feel like I got my black belt back then, trying to talk 65-year-olds down off of their panic, and here I am 26 years old. Okay, sure. You weren't alive back when we were experiencing all this. 1987, I was 5. Okay, sorry. Everybody remembers Black Friday. First of all, what I like to tell people is that the markets of today are not the same markets of even 10 years ago. We have so many interconnected things at play when you're looking at what's happening in the marketplace. And also, the majority of trading that's even going on, it's all computer driven, right? So 10 years ago, human beings were the ones making the trades. Today, 80% of all volume in the market is happening by computer algorithm. And AI is just taking this to a whole new level. So that's what's creating this.
Scott: It's 80% because I remember even back in '87, the market crash of '87, though, one day was down 22%, which is...one thing about '87, people like to point back to 1987, the market crash. Had you invested in January 1st of that year, at the end of the year you were actually positive.
Vicki: The market was up. If you just would have gone to sleep, hibernated, and woken up, none would have been the wiser, right.
Scott: Even back then computerized trading was one of the culprits, at least, that was to be blamed. But today, it's literally 80%.
Vicki: It's 80%. I just looked it up. It's 80% of all volume, and it's just getting worse. And here's the thing. For people that think that we should have been able to see this coming, or we should be able to predict what the market's going to do, with that kind of algorithmic trading and how many pieces of information are being taken into account, these programs have made trades before you've even finished reading the headline of the news that has come out. And what that means is, if you think back to 2008, that was an 18-month long drawdown. Top of the market was October 9th of '07, and the bottom was March 9th of '09. It was painful, 18 months of watching the market deteriorate until the bottom fell out. Then, now you look back even to COVID, and these drawdowns are so much faster. The volatility and the bounce back happened in such a shorter amount of time, because we're talking about this algorithmic trading. So, trying to predict what the market can do. Look at what happened on April 9th. It's impossible. So, trying to make short-term decisions and plan your finances around that, it's a fool's errand.
Scott: Well, and if you look back before the Great Recession, if you look back to the dot-com bubble, we had a peak in March of 2000, and we didn't bottom out until November of 2002. It was...
Vicki: Right.
Scott: I believe those were the months.
Vicki: Two and a half years.
Scott: That was a brutal bear market.
Vicki: Yeah. And that's just my opinion, and people might disagree, but we're not in that same kind of stock market anymore, where we have these prolonged periods of slow deterioration. These declines happen much more swiftly, and what we've seen is that the recoveries also happen much more swiftly. So, it's not a good idea to base your financial plan around what's happening over the next six months. We need to keep that long-term focus. But that's not to say that there aren't levers you can pull that are within your control. There are great opportunities to be had when the market is down.
Scott: That's what Trump said this week. It's a great buy... That's what he tweeted out.
Vicki: It's a great time to buy.
Scott: It must be. Yeah.
Vicki: Especially if you're a young investor. I mean, this is the best news ever. I mean, this is when you want to start buying. Absolutely. When you have 20 years to invest, 20, 30 years. But also, I mean, now's a great time to do Roth conversions, if that was in the cards. Typically, we don't do those until the back half of the year, but absolutely, you want to take advantage of when the market's down. When your IRA is down, you want to move that money to a Roth IRA and experience the recovery in a tax-free account. Right? Also, tax loss harvesting. Now's a great time to look at your portfolio and see, are there some moves I can make that before maybe I was a little bit more reticent to make because I had some capital gains. Now that's not so much of a problem. I think this is a great opportunity to reassess that.
Scott: I think to put things in perspective though as well, if we look at the previous two calendar years, so 2023, 2024, over those two-year period of times, the S&P was up 52%. We just came off two years of phenomenal increase. Obviously, it's not going to continue like that for the next two years. We've got a bit of a pullback. There was an intraday, it brought us back to where values were about a year ago. But you're still thinking, this is not such a bad return.
Vicki: No, not at all. When you're thinking about what happened in '08, where market was down almost 57% from tip to tail, 2022, down 24%. But then when you look at the following 12 months after having these drawdowns, the returns were phenomenal. It's got the S&P up 68% after that low of March 9th of '09. After what happened in COVID, that short period of time, that drawdown was 34%. The next year, the S&P was up 77%. This too shall pass. I know that it's tough to hear that when you're going through it, and feelings are valid around this. This is unprecedented. It is confusing.
Scott: It is confusing. I'm confused. I think the White House is confused.
Vicki: Yeah, I'm also confused. The thing about it though...
Scott: What is the end objective here?
Vicki: Yes. Trying to predict that or walk through that is completely impossible. So, focusing on what we can control. Also, the other thing to note is that when we're experiencing these short-term drawdowns, I really encourage you, if you have an Allworth advisor, you have a financial plan. Reach out to them and say, how is this affecting my particular situation? That's really what people are worried about. What we're seeing is that with this drawdown we're experiencing, and even when we put your plan through a bear market stress test, which we do for our plans, all of your needs are met. For the most part, these kinds of volatility, these events are built into your plan. We don't just run your plan based on rose-colored glasses and you're going to make 6% or 7% year in and year out. We're stress testing them all the time. Your plan is built to withstand these kinds of markets because these kind of markets are inevitable.
Scott: Yeah. And you know, it's also really interesting this last week, Vicki, not just the stock market which was volatile, but I think an equally large story is the bond market. We saw a tremendous sell-off Tuesday and Wednesday. When people sell bonds, it pushes up the interest rates. That's actually how interest rates on longer-term bonds are set. Government doesn't set it. It's the market. As people buy more bonds, it pushes down interest rates, and as they sell off the bonds, it pushes up interest rates. It's just your classic supply-demand, essentially. It was remarkable to see how quickly that 10-year treasury shot up.
Vicki: Yes. And bonds have been the bright spot in here. Whereas in 2022, bonds were going down right along with equities, so they didn't really insulate against risk. Here in this recent volatility, we've seen bonds actually provide some protection. Most investors, especially if you're close to retirement, you're not fully invested in equities. You have quite a bit of bonds in there as well. When you're looking at the S&P or CNBC and seeing it going down 5% in a day, that's not your experience. That's not what your accounts are doing. That's just what the S&P 500 is doing.
Scott: Not only that, most people's bond, the fixed-income portion of their portfolio is not in long-term bonds.
Vicki: That's right. Yes, and that's what's great about having this amazing investment team that we have here at Allworth. They're paying attention to all of these pressures.
Scott: All right, Vicki. You don't need to keep selling Allworth. You already talked about it. I do appreciate that. You've been a big proponent of, what are they called? Factor? What are those? The name just...
Vicki: The buffer ETFs?
Scott: Yes, the buffered ETFs. Can you explain again how these work and what they might have done in the last couple weeks?
Vicki: Sure. What is interesting about buffer...?
Scott: We're seeing a pretty big increase in the use of these today versus five years ago.
Vicki: Yes. And this is something that we've used in client portfolios ever since really they became available. What really helps is that if you know that, okay, I have some of my investments in these buffer ETFs, and what they're designed to do is that over a 12-month period, they insulate against a certain amount of downside. We target 15% downside. For instance, if you're invested in a buffer ETF that typically they're looking out over a 12-month period. If from the beginning of that period to the end of that period, the stock market is down 15%, then that buffer ETF is just going to be break-even because it's designed to soak up 15% of loss. But if the market does really well and goes up, it's designed to participate in that upside point for point up to a cap. What's great about these is it helps keep people invested because they know as long as they don't...
Scott: And the lower the drawdown before you start having some losses, the lower the cap, right?
Vicki: Right.
Scott: It's like the second chance.
Vicki: So, they make waivers that have 100% downside protection. But your upside cap is going to be 6%, 7%.
Scott: It's about the same as treasuries.
Vicki: Right, exactly. But with the 15% downside, our caps are anywhere from 12%, 14%, 15%. And that's looking pretty attractive over a 12-month period, especially when we look at typically the market isn't down more than 15% in a 12-month period.
Scott: Yeah. And when you're looking at something like that, a buffered ETF, you're not recommending someone put all their...you know, that's their whole portfolio, right?
Vicki: Oh, no, not at all. Not at all. 20%, maybe 30% just to help insulate against that risk and diversify a little bit.
Scott: And with that, does it enable somebody to have greater equity exposure? Let's say somebody is...they typically would have a 50% allocation or 70% allocation towards equities. By using a strategy like this because of that downside protection, does it enable you to have greater equity participation?
Vicki: It does because it's completely correlated to equities because that's what it's buffering against, and it participates in that upside one for one until the cap. But you know that you have that downside protection if things go sideways or go down in this case. So yes, it allows you to take a little bit more equity exposure without increasing your risk.
Scott: And when you look at like the example you give, this buffered ETF that up until 15% decline, you're break-even, when it goes below 15%, you start having some loss. So, if someone put in $100,000 on January 1st and the market had declined 14%, is it basically still the value of $100,000? What kind of volatility do you experience until it goes out of those caps or the downside protections?
Vicki: Great question. Within that short-long period...
Scott: Because the reality is people look at their portfolio values on a daily basis. They don't always, but sometimes they do. They look at the monthly statement or the quarterly statement or whatever, and if there's ups and downs...
Vicki: They react to that.
Scott: ...they tend to think about how much labor it took them to...whatever the number is, $400,000, my gosh, I was making $100,000 a year. That's 4 years' worth of my labor or whatever it is.
Vicki: Right. And so, something that's interesting to note is that pretty much everything you own fluctuates in value every day. You just don't have access to what it's worth on every particular day. If you own a CD at a bank, it fluctuates in value on a daily basis. You just can't see it. You're just assuming, I'm going to hold this thing until it matures and I know what I'm going to get at the end of that maturity. Same kind of thing with a buffer ETF, except that now you can see how it moves every single day. So yeah, within that 12-month period, it's going to go up and down along with the market. But if you hold it to the end of that outcome period, then it's going to soak up that 15% of downside. So that's why I tell my clients the intent is to hold this for 12 months. Now, you can sell it early, and frequently we do. If the market's doing really well and that buffer ETF is close to its cap and it's only six months in, well, it makes sense to sell that and go into a fresh buffer ETF. But in periods where the market's volatile, you know that if worse comes to worse and 12 months from now, the market's still down 15%, then these buffer ETFs are going to soak up that loss.
Scott: Yeah. And I wouldn't really recommend that someone reallocate towards these right now just to minimize some losses and maybe some small portion if they're very nervous. Because the downside, of course, is the limits you have on the upside. And markets move really quickly, right?
Vicki: Yeah, as we saw.
Scott: And you just talked about the year after the COVID low and how much the market's moved up and you don't want to participate in the downswing and then not participate in the recovery.
Vicki: That's right. It's good to add these to your portfolio before the market is down 15% because you want to participate fully in that recovery. You're absolutely right.
Scott: Yeah, and there's no such thing as a free lunch. So anytime you do make some moves to reduce some volatility, you know, right now you hear the ads for gold more than ever. Gold's hit a new all-time high. Of course, gold's worth over $3,000 an ounce. Gold was $900 an ounce in 1980, 1981. I mean, it's been about the...you probably would have done better in treasuries or CDs.
Vicki: I think that's true.
Scott: Yeah, over that period of time. And it goes to these wild swings. And for those that are thinking, well, maybe now's a good time to be buying gold, I'm thinking, it is at an all-time high. You want to buy it when no one wants it, not when everyone wants it.
Vicki: I actually had a client in 2008, and I expressly told them, do not do this. But at the bottom of the financial crisis, I think it was October of 2008. So we weren't at the ultimate low, but we were close. He was so convinced that this was just the end of democracy as we know it, that he cashed out all of his 401(k)s, all of his IRAs. He took the tax hit and he went and he bought physical gold bars. Sometimes I think of that client, because I...
Scott: Yeah, that's a good reminder. Do you remember what the value was back then?
Vicki: He had about a million dollars and he just thought continuing to go down and he just couldn't take it anymore. And I thought, you know, clients like that, they're really good at marking the bottom.
Scott: And that million bucks would have been worth about $4 million today, if not more, depending on when he sold out.
Vicki: Oh yeah. I think about him and his gold bars in his basement, you know, back when, I don't know, what was the Dow back in October of '08? I know it's probably gone up.
Scott: It hit $6,000 something, and it was '09 anyway, March. I had a client, Vicki, this was same time. He had been a client for a decade prior. He had recently retired and he'd always been highly, maybe 70% or so in equities. He had a pretty good understanding. But once he retired, his feelings had changed a bit. And as we're going into the downturn, he called about every month or so and like, Scott, what do we do? And I would kind of explain, let's look at history, let's look at how diversified you are. You can continue to have your monthly income for seven years before we're forced to even look at selling any stocks. You've got a long time ahead of you, and had these conversations. And finally, he called one day, this was early March of 2009, about a week before the bottom, literally. And he called and he said, I don't want to talk to Scott. I want to talk to someone. I want to talk to someone. I just want to place a trade. I don't want to talk to Scott. And he called and he liquidated his stock positions and the markets recovered. And I think about him a lot because it's not just a number on a paper because what happened, he reset his financial future, not for the better. And the markets recovered. He didn't participate. A few months later, he's like, should we get back in now, Scott? And I said, I don't know. You tell me. You didn't take my advice before, so I don't feel I'm in a position to give it now because I'm thinking, I tell you to get back in. We have two bad weeks. You get out, and now you're worse off. Once you get out, it's like, how do you get back in? He eventually increased his stock positions, but he had to reduce his income quite a bit. He took a reverse mortgage on his house and he was in good shape before, in order to maintain some semblance of his lifestyle. But his future changed dramatically and it was based upon an emotional reaction.
Vicki: Absolutely. And not just the factual information that I'm telling you, your plan is going to be fine as long as you don't make these damaging permanent decisions. Like you said, that altered his financial plan for the rest of his life. And when you think about it, when somebody says, okay, I want to move to cash or I want to get out, well, let's talk about when you're going to get back in. Let's say you're right and the market falls another 15% from here. Are you going to get back in then? What if it falls in... Are you going to get back in when it's lower or are you just going to keep telling yourself that it's going to go down more? And so, you keep sitting in cash and the only way you're going to feel better about getting back in is once it's recovered. So, there's no winning that situation. There's no logic behind getting out now and you really think you're going to have the steel stomach to get back in when it's 15% lower. It's not going to happen.
Scott: Not only that, if you get out and the markets go higher, that pain may be worse than the pain of... Years ago, this was in the early '90s, Pat and I, we were using a portfolio management system that was quite contrarian and they had all the reasons why this made a lot of sense. But the challenge was...which it didn't, we were young as well, but it didn't make a lot of sense. And so, we fired those guys and had more traditional approach since that time. But the challenge when you're taking some sort of contrarian approach is when all your neighbors are making money and you're not, that's pretty hard to deal with. But when all your neighbors are experiencing losses in their portfolio and you're right there with them, that's not that difficult to deal with. And studies show that it's impossible for the average individual investor to somehow outsmart these markets.
Vicki: Exactly. You're never going to be able to do it. If you do it, it's going to be luck only. And we have to remember how resilient our economy is. When you're looking at the face of challenge, how many times have companies figured out a way to be able to get around tariffs? I think actually you told this story, Scott, once of Ford back in the day when there were tariffs on vehicles that in their cargo vans, they put seats, another row of seats in the cargo vans as they were shipping them over to say that they were passenger vehicles to get around the tariff. And then when they got to U.S. soil, they just took the seats out.
Scott: Well, remember the little Subaru BRAT, those little Subarus that had the seats in the back? It was a mini pickup truck and they had two seats. This is the back in the day when you could still sit in the back of a pickup truck like I did as a kid. But it was designed to escape a tariff because there was a tariff on trucks. We're like, no, this isn't a truck, it's a passenger car.
Vicki: Yeah. Even back in 2019, Apple, Tim Cook went to Trump and said, hey, I want an exemption to these tariffs for China. And he granted it. They got exceptions for their iPad mini pros or whatever. So, there are always ways the companies are looking to sustain a profit. And that's just the ingenuity and the resilience of the U.S. economy. And you can't bet against that.
Scott: Yeah, you're a leadership team of a company. Well, almost every industry right now is impacted. And the uncertainty...I don't know of any industry that's not impacted right now. Because even if you're...let's say you're a U.S. publicity firm, well, you work for companies that have products and services that they import from overseas. And they're concerned about what's happening to their revenue and their bottom line. And they're looking at where they may need to cut some expenses. And I think that's the concern here. There's so much uncertainty, not just for investors, there's uncertainty for these companies and the leadership team. They're making strategic decisions about their future. And like, well, we were planning on using that firm in China, do we move to Vietnam instead? What happens if Vietnam has a different...? That's the uncertainty. If you look at why many economists now are predicting a recession, I think that's the reason behind it. It's this uncertainty. And it's kind of, people don't know how to make a decision.
Vicki: In the short term, it's going to be tough. And we're going to see that come out with the earnings reports here shortly. We're heading into earnings season. It's going to be tough for companies to prognosticate about their earnings moving forward. But also, I mean, in the grand scheme of things, President Trump, you know, these tariffs are enacted for the next, what, three, three and a half years. The next person comes into office, the most likely path is that executive reversal. They'll repeal or modify the tariffs. And yeah, that's painful for a lot of companies. But again, companies are extremely resilient and we will come through the other side of this and we're going to see record market gains just as we have in the past. And you can't try to predict when that's going to happen.
Scott: One of the challenging, I think, and more interesting times of this pullback, it's so politically charged, right? Because you've...I've talked to some diehard MAGAs and they're like, oh, this is great.
Vicki: This is fantastic. Yeah.
Scott: Right? And you look at them, well, okay. Then, I've talked to others that truly believe that Trump is a great threat to democracy. I believe he's going to be this authoritarian fascist leader. And for those folks, it's even harder, I think, to stay invested because they really believe that there could be a great shift and a great change in the structure of our society. And so, I think that's what makes it a little more difficult. I think it's so important just to pull back and think, we got to think about this long term. Think about the ingenuity of our companies, these businesses, to pivot, make changes when they need to. The system of economics and business is not going to change.
Vicki: That's right.
Scott: We will get through this again.
Vicki: That's right. We will. And every prior economic event, black swan, whatever you want to call it, has always been unprecedented.
Scott: That's right.
Vicki: This is unprecedented. COVID was unprecedented. The financial crisis was unprecedented. Every single one is a flavor of something new that we've never experienced before. And this won't be the last one either. So, yes, it's very confusing and it can be really anxiety inducing. But that's why it's so important to keep your head above all of the noise so that you're not accidentally, you know, cutting off your nose to spite your face, that you stay on track with what you absolutely can control, and don't get so wrapped up in what you cannot control. We cannot control how the markets are going to move, but you can control your spending. You can control how much you're investing. Just concentrate on those things. And then, remember to look at how this is going to impact your plan in the long term with eyes wide open. And if you have an advisor and a financial plan, they can walk you through, let's say you do want to move to cash. Okay, well, let's model that out. Well, it looks like your plan crashes and burns in 20 years if you do that. So, if you make those decisions, you need to know the consequences. It's not a riskless decision to pivot based on emotion and what's happening in the short term.
Scott: I think that's a good thing to remind people. It's not a riskless decision. When you're moving to cash, you have fundamentally changed your investment strategy. And so now what do we base the future returns off of?
Vicki: That's right.
Scott: How do we assume you're going to earn any money on your portfolio going forward? Maybe it's just cash now forever.
Vicki: Yeah. And we know that's not going to work.
Scott: Or worse, you get back in at the wrong time after things have gone up.
Vicki: Because that's when people are most comfortable getting back in when things have recovered. So, you're almost guaranteeing you're going to get back in higher than you got out.
Scott: Yeah. All right, Vicki. Well, thanks for taking some time to join us. We should have you on when we're hitting new highs.
Vicki: Yeah. Absolutely, happy to. And next time we talk, it'll be under even more interesting circumstances, I'm sure.
Scott: Whatever that means, right? I mean, so we're recording this midday on Thursday. Wednesday, of course, the market was up almost 3000 points on Wednesday. Phenomenal. And then as of this recording, we're down 1300 on the Dow. So anyway, thanks for taking some time. Appreciate it, Vicki.
Vicki: Absolutely. Good to talk.
Scott: Yeah, likewise. And I want to let everyone know, now that Vicki has signed off, we will take some calls here in just a moment. Vicki is going to be hosting a webinar along with Simone Devenny. Simone is Allworth's head of private wealth strategy. And the webinar is high-net-worth planning. And it's really designed for investors who have $2 million or more of investable assets. And during this time, they're going to talk about the implication of interest rates and what it could do to your portfolio. Look at some bond laddering tactics, how that can sometimes help. Look at what are the 2025 tax and deduction changes that are already in place. Also talk about some wealth transfer strategies and more. So, again, for those with $2 million or more of investable assets, they're going to talk about topics that are a little germane to those folks. Wednesday, April 23rd at 10 a.m. Pacific, Thursday, April 24th at noon Pacific, Saturday, April 26th at 9 a.m. Pacific. And for more information or to register, go to allworthfinancial.com/workshops. And you'll be able to participate in the webinar with both Vicki and Simone. I think someone's been a guest on here in the past. Both these women have some phenomenal strategies and had a lot of experience working with high-net-worth folks with some more complex matters. So, I think you'll learn something, and glad you can. By the way, you want to join, it's 833-99-WORTH. It's again, 833-99-WORTH, or you can send us an email at questions@moneymatters.com.
We're in California talking with Flo. Flo, you're with Allworth's Money Matters.
Flo: So my wife and I are both W-2 salary employees. We have two kids, 5 and 9. And my high-level question is, when it comes to RSUs and bonuses that come in throughout the year, how do I determine the most effective way to allocate those dollars? And so, you know, there's three main things that I've been looking at. But I want to give you kind of my financial numbers there.
Scott: Yeah, perfect.
Flo: But that's the high-level question. So, high level, I'm 41, my wife's 39. Our annual gross is 532K. My wife and I each make about 170K a year. And then that remaining 192K is essentially RSUs that vest throughout the year that I just sell upon vesting and bonuses. And then in joint brokerages, we have 456K. My wife's 401(k) is 600K.
Scott: Hold on, you're going a little fast. $450,000 in a brokerage account. How much in your retirement accounts?
Flo: My wife has 600K, I have 545K. And then in IRAs, we have about 248K. And that's a combination of traditional and rollover and Roths.
Scott: And did you say you have children?
Flo: We have two children, 5 and 9.
Scott: And so, what have you been doing in the past?
Flo: Yeah. So right now, what I do is we have about 120K in savings. Right. And I feel like my emergency fund is probably where it should be. If not, I'm maybe too much there. And so, what I've done is every month, I invest about $3000 in VTI, or a combination of that. Right. So, Vanguard ETFs. We max out HSAs, 401(k)s, 529s. And then we save about $1000 each month as well, just for savings. We don't have any debt aside from our home. Our mortgage is about 420K. The house is worth about $1.2 million. And then we have a 30-year 2.75 interest rate. So that's what we've been doing is just, you know, [crosstalk 00:34:44] every two weeks.
Scott: Do you still have quite a bit in stock in your employer?
Flo: No. So, I work for Amazon and I just...essentially, when those RSUs vest, I just sell them immediately.
Scott: And have you done any direct indexing with your portfolio?
Flo: I have not. I've looked at it. I've looked at some of the pros and cons. It felt a little intimidating, but I haven't. I know you mentioned it, but I haven't looked at it too closely.
Scott: Because I think, for you, particularly, triggering some tax losses strategically could be beneficial to you because of particularly the high income you've got. And neither you or your wife... Do you guys both work for Amazon?
Flo: No, no, she works for General Mills.
Scott: Okay, very different kind of companies. Yeah.
Flo: Yeah. She's actually got a pension, which they closed it after 12 years. So, she'll get some, between 3K or 4K is the projections, when she retires.
Scott: Really? When did they close it? That's amazing.
Flo: Oh, yeah, they closed it probably, you want to say, at least five years ago.
Scott: I know. But usually most of these companies closed them in the '90s.
Flo: Oh, yeah. Oh, no, no, we were very lucky in that sense. Yeah, it's not that long ago. But there was enough where she got, you know, at least 10 years of work there before she was shut off, and said, hey, you can't accrue anymore.
Scott: Your brokerage account, how is that allocated?
Flo: So I think it's...I want to say it's about... It's pretty aggressive. I'm like at, I would say like 90% large cap and then another 10% international. I don't have the numbers off the top of my head. I'm getting my screen to load here, but it's fairly aggressive, just because I figured I have time.
Scott: And all index funds.
Flo: Yes. Yeah, all index funds. Yeah.
Scott: And how much do you have in your 529 plans?
Flo: Right now, we have 20K and 50K. So 20K for the younger 5-year-old and then 50K for the 9-year-old.
Scott: Yeah, I'd recommend rather than continue to add to your S&P 500 index fund, or is VTI, is that total stock market? I forget the symbols and everything.
Flo: Yeah.
Scott: It's total stock market, right? Rather than to continue, I would use a direct indexing strategy. Because there...right now... I mean, it used to be. It's just a few years ago, there was transaction costs on buying individual securities. You made it almost impossible, particularly for small amounts. Today, there's no transaction costs. You can get technology that will do this pretty inexpensively. And it's a way for you to help manage your overall tax burden.
Flo: And if I were to do that moving forward...
Scott: And by the way, you can dial in how aggressive or conservative you want to be on any sort of tax loss. Because as you do some tax loss harvesting, over time, your portfolio ends up with a lower and lower cost basis for the same portfolio. So, like eventually you're kicking the can down the road. The same kind of concept, you're kicking the can down the road with your 401(k) as well. Like the longer we can defer some of this stuff, the better.
Flo: Got it. Yeah, because right now my challenge is just like, yeah, there's no...like for taxes or tax strategy, I really haven't been able to do much.
Scott: Yeah, you can't do much.
Flo: And my concern with direct indexing is...or the part that I don't know enough about is that like, do I direct index like a new set of dollars? Or would you say, hey, it's direct indexing all my brokerage figures. The question is how I keep track of that.
Scott: No, well, the problem is you trigger some tax gain. So, it wouldn't make sense. Probably the majority of your current brokerage account, you're going to have to maintain where it is. There might be some...I mean, if you've been investing on a monthly basis, you might be able to take some losses, even on some contributions you made in the last six months or whatnot.
Flo: Got it. So, the idea is I essentially open up a new account with one of these new firms. I guess some of the folks are doing this now.
Scott: Almost everybody.
Flo: Essentially, the new dollars going in... So like, for example, I have, you know, 40K that are vesting in RSUs. I can dump those into a new account and those 40K moving forward would be direct index, however I please. Is that the idea there?
Scott: Yeah.
Flo: And keep the rest.
Scott: And there might be some minimums that could be higher than 40,000, depending on the firm. So, I'm not sure.
Flo: Got it. Sure.
Scott: Just about any major brokerage firm or investment house is going to have a direct indexing strategy. And there's a number of different technologies out there that essentially do the same thing. And whatever the cost is now has come down considerably from even a couple years ago. And I think it'll keep getting lower. It's a commodity now, right?
Flo: Yeah. Yeah. And just the final kind of thought here, I do have a mega backdoor option available to me, but I don't know if that would ever make sense for me at this point.
Scott: Why wouldn't it?
Flo: I'm just wondering, so like it's available, they auto convert it. It's very painless...
Scott: Yeah. I would do that before I did the direct indexing.
Flo: Okay. Yeah, because that's the other thing that my...Fidelity is our provider. And they're like, hey, Beth, by the way, it's here. You click this box and we all transfer it. You don't do anything.
Scott: Yeah, so you end up...
Flo: So it's very painless.
Scott: Yeah. So, what ends up happening throughout the year, you're contributing on the before tax basis to the maximum. And then you go above that on an after-tax basis. Right. And then at the end of each year or whatever, the different 401(k) providers...actually, it's the company plan that specifies this, it gives you an opportunity to take those after-tax dollars and convert them to a Roth.
Flo: Right. Exactly. So that's available as well. I just hadn't been doing that because I just wasn't sure if that was the [crosstalk 00:40:25].
Scott: I'd rather you do that before you do the direct indexing, because the Roth, that's all tax free down the road.
Flo: Okay.
Scott: And you can always have access to your contribution. So those after-tax dollars that you would contribute before you did the background, those dollars are always free to you without any penalties. It's only the earnings and growth that you got to wait to retirement. Absolutely, I'd take it. Does General Mills have that? I doubt that. It's probably just Amazon.
Flo: They don't. No. Correct. Correct. Yeah. Okay, great. So I think I'll look at both of these. I think the direct indexing, I've been eyeing just because you mentioned it a few times, but I'll start with the mega here and then go from there.
Scott: Yeah. Quick question for you.
Flo: It allows quite a bit.
Scott: Quick question for you. You work for Amazon. It's like, how quick are they trying to get deliveries? Because, it's amazing how many products come that day.
Flo: You know, the idea is it's ready before you actually need it. Right. Because we know you want it. I mean, that's the idea. I don't work in that division. But the idea is like there's a history on what you've ordered. How can we have it ready in the location that you need it? Right. So now it's like pharmacy, right? It's same day pharmacy. Right. So, it's pretty amazing.
Scott: It is amazing. It is really amazing.
Flo: Thank you so much. I appreciate the help.
Scott: Yeah, appreciate the call. Yeah. Thanks.
We're talking now with Naomi. Naomi, you're with Allworth's Money Matters.
Naomi: Oh, hi. Hi. How are you doing?
Scott: Fantastic. How are you doing, Naomi?
Naomi: Pretty, pretty good. Thank you for helping me out with the question about what to do with a home following a divorce.
Scott: Sorry about that.
Naomi: Yeah, yeah. So, basically what I'm just...and there's obviously extraneous kind of personal issues aside, but just from a financial perspective, we own a home in a very good market, nice town, good schools in California. And we have a property that we bought about 10 years ago for $975,000, and it's probably worth about, I would say, $2 million based on comps at this point.
Scott: I'm sorry, is that in addition to your home or that is the home?
Naomi: No, that is the home. Yeah, sorry.
Scott: Got it. Okay.
Naomi: That is the home.
Scott: No. Good. Okay.
Naomi: Yeah. And we owe about $530,000 on the mortgage. We refinanced about four or five years ago. We refinanced a 30-year fixed at 2.9%. So, basically the crux of my question is, the obvious presumption is that you sell the house and you split it 50-50, and you go your separate ways and invest...do whatever you want with it. But I'm just wondering if it makes sense for us to somehow hold on to it, and build up our equity, but also ride the wave of increasing house prices, which seems like a pretty reliable bet in California, as opposed to, say, investing it in the stock market, just having some diversity there. You know, rent it out, collect the rents, which I think there aren't that many comps in our area, but it looks like we could probably rent it for about $6,000 a month.
Scott: And how old are you, Naomi?
Naomi: I'm 57.
Scott: And the kids grown and out of the house, or are they still living with you?
Naomi: Yeah, yeah, yeah. They're adulting. They're adulting. Well, I'm very proud to say.
Scott: Good. And how many years have you guys been married?
Naomi: 28.
Scott: And will you receive spousal support?
Naomi: I would not, if anything... And again, this is just a recent development. So, we really haven't, you know...I'm just trying to, yeah, get all...you know, just evaluate everything. So, yeah.
Scott: Yeah. I mean, my one caution to you is be really careful on your spending during times like this, because I just...
Naomi: Yeah.
Scott: There's so many emotions that go on.
Naomi: Yeah. Oh, no. I mean, we're very devoted savers. I don't have as many assets as your last caller, but, you know, I've got a 401(k). I have a family property that is a rental property. So that would be available to me for passive income. Oh, regarding your question, alimony, I don't think so, I out-earn him. That would be possibly a concern, yeah.
Scott: What's your annual salary?
Naomi: My annual salary is $165,000, give or take.
Scott: And what do you guys have in retirement accounts?
Naomi: You know, I can't really speak to his. I can't really recall. I have a brokerage account with some inheritance money that's... Well, I haven't looked recently. I'm afraid to look, so I'm not really sure how much it's worth. But before everything, you know, with the economy tanked, it was $500,000. And then I have a Roth IRA that's worth about $128,000, and a 401(k) that again was worth $180,000. And then I have a small amount in another country that would be worth about $100,000. So, I'm definitely kind of catching up. And I plan on working for the next 10 years. And I'm in my highest earning bracket right now. I mean, I'm making the most that I have ever. And I maximize my 401(k). I maximize the Roth. Yeah. So, this is our biggest asset. So that's why I'm trying to really...I don't want to just rashly just sell it as if that's the only option. Holding on to it actually benefit both of us. I mean, it's not just me, you know. Does it make more sense...
Scott: Would your thought to be to move out and then that becomes a rental property?
Naomi: Yes. Yes. That we would both move out and find kind of lesser, you know, apartments that would... Oh, by the way, so our mortgage is $2400 right now. And our property tax is $13,000 a year. You know, insurance is maybe $300 a month. So, yeah, the idea would be that we move out and have less spending. You know, if we rent, we're not paying property tax. We're not paying insurance, you know, downgrade.
Scott: Yeah. So, there's a couple challenges with this. And I think if you talk to most people, they'd say, sell the house and move on. And here's a couple of the reasons why. First of all, as a primary residence, you can exclude...a married couple can exclude up to $500,000 of capital gain from taxes. So, you've got about a million dollars in gain. If you sell it as your primary residence, you can exclude $500,000. If you convert it to a rental and sell it down the road, you're going to have to incur...you'll lose that $500,000 exemption from capital gain taxes.
Naomi: That's $500,000 between the two of us.
Scott: That's correct, $250,000 each.
Naomi: That doesn't seem like very much. You know, I feel like we sold a property 30 years ago and it was the same exemption. Why hasn't that gone up more for California? No, seriously, like it just seems... Doesn't that seem ridiculous with the price of things, that threshold?
Scott: Yeah. That came into being about 25 years ago, something like that, but in a sense, a long time.
Naomi: And it hasn't changed since.
Scott: That's correct. It's not adjusted for inflation.
Naomi: I mean, anyway, that's an aside.
Scott: Yeah. Well, you can talk about logic or fairness. The tax code, it's irrelevant. Like it is what it is.
Naomi: Yeah. Okay.
Scott: And then, secondly, like if you had $2 million and said, what's the best place to invest this? We probably wouldn't pick this individual house and say, let's buy this house...actually, if we had $1.5 million is what it is, let's buy this house and take $500,000 mortgage on it so we can rent it for $6,000 a month. It doesn't net that much.
Naomi: I agree.
Scott: You've got $1.5 million, that's not going to net that. And then the more complicated is then you and your, what will be your ex-husband are now still business partners on this.
Naomi: Mm-hmm.
Scott: And what happens when the roof leaks and the dishwasher blows up and all those issues.
Naomi: Yeah. It's a big hassle.
Scott: I just think you'd be borrowing trouble. I really do.
Naomi: Okay. That's great. I just wanted to make sure we weren't missing...you know, making... Because I talk to acquaintances and people and they always say, I sold that house, you know, 20 years ago, I wish we'd hold on to it. So, I didn't want to make a big financial mistake. Okay.
Scott: I think you'd have a hard time for swinging the finances long term to really make...
Naomi: I understand.
Scott: I mean, I think it's going to be an important time for you to say, all right, where's the dust settle? I'm 57. I'm at the peak of my career. I've got another 10 years to run. How do I prepare myself, so I've got great financial security 10 years out?
Naomi: Mm-hmm. Okay.
Scott: And that's a new chapter for you that you weren't expecting. I'm sorry you're here too, I really...
Naomi: Mm-hmm. Okay. Do you have any advice on what to do with the proceeds of the property if we sell it? Buy another property?
Scott: Yeah. Probably buy yourself another house somewhere, or townhouse, or something?
Naomi: Okay.
Scott: What city do you live in?
Naomi: San Diego.
Scott: Oh, San Diego. Yeah, I would try to find something else in San Diego.
Naomi: I see.
Scott: I mean, if you plan on staying there, where are your kids?
Naomi: They're in California. Yeah. One is in the L.A. area. They're more up north. So I might consider... And my family property is up-up north in the Los Angeles area. And that's going to be a whole other conversation in terms of fixing it up and things like that. So, I probably do go to Los Angeles area as much as I love it here.
Scott: Yeah. I mean, let's assume that your house was sold in the next whatever months, I'd probably say, just go rent something for a while. Put the money in treasuries or CDs, like be real conservative with it, until you can figure out exactly where you might want to locate and then buy something. But I'd keep these dollars really conserv... They're going to go back into a residence for you.
That's all the time we have today. I've missed having McClain here, but somehow, we survived. Anyway, this has been Allworth's Money Matters. We'll see you again next week.
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