Tariffs and Your Portfolio, Unwinding Concentrated Stock, and Knowing When You Can Retire
On this week’s Money Matters, Scott and Pat address concerns about the impact of tariffs on the stock market and offer advice on staying calm. Then, Allworth advisor Mark Shone joins the show to discuss strategies for investors with too much money concentrated in one or a few stocks. Finally, a Georgia sheriff finds out whether he’ll have enough money to hang up his badge and retire at 58.
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Scott: Welcome to Allworth's "Money Matters," Scott Hanson...
Pat: And Pat McClain.
Scott: We are here talking about financial matters, and obviously, we can't do the program without making some mention of, this week, what did Trump call the tariff? Wasn't Freedom Day or something. [inaudible 00:00:38]
Together: Liberation Day.
Scott: ...was what it was.
Pat: Whatever.
Scott: Liberation Day. Yeah, and had this whole list of tariffs, which was, incidentally, they planned the press conference post-market.
Pat: I saw that, yes.
Scott: So, it was after the markets closed on Wednesday, and then of course, Thursday, markets go through a nosedive. And so, we thought we'd spend a little bit of the first part of the program talking about this. And here, it's an...
Pat: And by the way, people are gonna hear what they wanna hear. So, if we say something positive, they're gonna say these guys are all right-wing...
Scott: MAGA...
Pat: ...MAGA, Trump. If we say something negative...
Scott: We're anti-MAGA.
Pat: We're anti...
Scott: Trump derangement syndrome.
Pat: Yeah, left, right?
Scott: So, I think one of the most, more, I'm gonna call it interesting, because this is, this too shall pass.
Pat: This isn't even, at this point in time, Scott, you look at this compared to the beginning of COVID. Eh.
Scott: COVID, what, the markets fell 30 some-odd percent? And it ended up the year on a positive note. Do you realize even the market crash of 1987, the market was down 29% during that month? That year was a positive year for investors. In other words, had you invested in January of 1987, market had a major crash that we all heard about. At the end of the year, you made money, had you just ignored the thing.
Pat: Yes.
Scott: This will pass. But I think what is unique about this one, this downturn, it's the political environment, because, like, just driving in the studio, I was, I don't listen to terrestrial radio much, but I was just flipping, didn't like what I was listening to. I was flipping, turned something on, and it was a conservative commentator and talking about, oh, this is just, this is exactly what's needed. And it's like drinking cough syrup. It doesn't taste good at first, but it's good for you, whatever. That was his take on it. And so, there are some people that are, believe these tariffs are a good idea. They're a minority of people, by the way. But there's some that think this is a great idea. This is gonna be a short-term blip. There's gonna be a restructure, reorder. Companies are gonna turn out better than ever. Five years from now thinks you're gonna be better than ever. And not at all worried. This is just kinda what needs to happen. This'll be good in the long term. I'm excited about all this. Right? Those people that have that conviction. Then there are those other ones that can't stand Trump and everything he stands for. Maybe agree on one or two of his policies, but by and large don't like anything about him, okay, and think that these tariffs are a terrible idea. And so, I think for those investors, it's even more difficult because it's hard to stay invested, because you're emotionally invested. [inaudible 00:03:40] well, not even, I'd say more than emotionally. You've got certain beliefs. It's visceral. Is that...?
Pat: Yeah.
Scott: So, I mean, it's hard to stay invested. Right? And it's hard... Look, if I'm far right, maybe I wanna change my portfolio, and go further in. Maybe I wanna move my equity positions up, significantly, because I believe in Donald Trump.
Pat: So much.
Scott: Well, I mean, you look at...you look at...
Pat: This is hypothetical, by the way.
Scott: I mean, you look at, like, the small cap index, Russell 2000, it's bear market territory. Stocks are 20% off, so...
Pat: Yeah.
Scott: ...someone might say it's a great buy... Someone might say it's a great buying opportunity, this is all gonna pan out so nicely. And they're excited about this. If you're on the, even middle, or maybe you voted for Trump holding your nose, or you can't stand Trump, you don't understand how this, anyone in the country could vote for this man, or worse, you're looking at this thinking this is a complete change. He's going to destroy the country. He's gonna become a dictator. He's gonna run for a third term. And with that man, you don't know, when he talks, is he serious or is he just trying to...?
Pat: Yeah.
Scott: ...trying to cause a...
Pat: So, so, so, the point is, it's hard not to react to this, if you're right or left.
Scott: And let's assume for a minute, let's assume that Trump is crazy. And let's assume that he starts taking us down a path that is totally destructive. If you look what happened Wednesday, there are four Republican senators crossed the aisle, voted with the Democrats, to try to strip away that emergency power for him to do these suddenly input, do these tariffs. Right? They say it's not gonna go anywhere. First of all, they needed veto-proof... But if it got that bad, the Senate and the House could pass legislation to neuter all this.
Pat: Yes. We have no idea where this is going.
Scott: Nobody does. Right? And you could flip around the channel. You could turn on Fox Business, CNBC, you could watch all day, all different commentators. You're gonna get some commentators gonna tell you why this is just a short-term blip, here's how it's gonna be great for things. We're gonna make the markets great again, or whatever.
Pat: Make the market...
Scott: And then you're gonna...
Pat: Wait, wait. Make the market...
Scott: I don't know if that works, but, and then you're gonna get those that are gonna tell you all the reasons that this is gonna lead to global depression, and this is gonna be worse than the '30s.
Pat: And, but, actually... But, look, the belief is, right, I gotta tell you, Scott, I'm just, I like the fact that he laid it out in a formula.
Scott: Whether you agree with the formula or not?
Pat: Well, I question the formula, number one.
Scott: How about some of those islands that even don't...there's no people on them?
Pat: [inaudible 00:06:46] I question the formula, number one. But the mere fact he laid it out in a formula means that if they, the opposing side wants the tariff to drop, then, what do they do? They lower their tariffs. Like, the China. China. Scott, if you looked at the formula they put on China... Now, this, if you're in China, and you're worried about your people, do you increase your quotas to the U.S., or do you lower them?
Scott: Your quotas or your tariffs?
Pat: Oh, I'm sorry, your tariffs.
Scott: Well, you would lower the tariffs.
Pat: That's why we have no idea whether this is... Because the opposing side, right? We don't know how the opposing side is gonna react to this. We don't know if this is a good thing or a bad thing. That's my point. We don't... It wouldn't surprise me if China came back and said, "You know what? You're right. We've been charging too much. We're gonna lower our tariffs on U.S. goods."
Scott: Well, this stings everybody, right? So, this isn't just... This could be bad for the U.S. and good for everybody else.
Pat: But, correct, correct. But my point being is, so, let's say, right, this market falls off, and let's say it falls off for another two weeks.
Scott: Or three weeks.
Pat: Or four weeks, or a month.
Scott: And it goes into a bear market. By the way, historically, the U.S. stock market experiences a 20% correction, defined as a bear market, I mean, a 20% decline, the broad basket of stocks, about every four years. Historically.
Pat: So...
Scott: About every four years, and we haven't had that since COVID time.
Pat: So, it wouldn't be surprising. It's in the course of investing. But my point being is, let's say China's reaction to this is, "You know, we need to keep our people working. And, look, so we'll get rid of...we'll lower our tariffs by a half." And then, because it's a formula that they showed, they gave them a way out. You lower yours, we'll lower ours. Right? And if you're in the, you know, the Chinese government, you say, "You know, we need to keep our people working. We're gonna lower the tariffs on U.S. goods." Well, whether the Trump administration sticks to that formula in the negotiation, anyone's question. But it wouldn't surprise me if half the countries that we actually impose these tariffs on responded in six to eight weeks and said, "You know what? We're gonna lower our tariffs." What does the market, how does the market respond then? If it responded so negatively for the tariffs, how would it respond?
Scott: Well, who knows? But, you would think that it would go up, but it doesn't necessarily mean that's gonna happen, right?
Pat: That's my point. That's my point.
Scott: Well, there's two...
Pat: Which is, no one knows.
Scott: So, one of two things... One of three things. One, and it may be all three, I should... One is these countries are going to react in some fashion. They don't wanna see their economy implode either. Right? So to your point, clearly, some are gonna come to the negotiation table and say, "All right, what do we need to do?"
Pat: How do we fix this?
Scott: "How do we get these tariffs lowered?" Right. Secondly, if you are the CEO of a company, or on the board of directors in a company, and these tariffs are having a major impact,. Or could have a major impact on your business, what are you doing? You're thinking, as a business, where do we need to pivot? How do we pivot to survive this? What do we need to do? And we've already seen companies say we're gonna invest, we're building factories in the United States. We're gonna start building more in the United States.
Pat: We've heard the companies say that, not the administration.
Scott: The companies. Like, this is what...
Pat: Yeah, yeah. But my point being is, it wasn't someone in the administration saying we're gonna invest money, because then it's always questionable. The companies themselves said we're gonna invest money in the US.
Scott: Correct. We're gonna build factories in the U.S., in part to avoid these tariffs. And I think that's really what this administration's betting on. And then the third thing is that these tariffs get reduced, or eliminated. And this is all just a negotiation tactic. And it's probably gonna be all, we'll see all three of these levers.
Pat: Or, they stick where they are, and the consumer changes its behavior. The consumer changes their behavior.
Scott: With, and that's the case, there's gonna be some winners and some losers.
Pat: The used car salespeople? Winners. New car salespeople? Losers.
Scott: If nothing changes.
Pat: If nothing changes.
Scott: Yeah. Well, there's some certain things that...
Pat: Yeah. People don't stay static in price increases. That's just not...
Scott: So, as an investor, Pat, here's...so, as an investor, first of all, if you've listened to this program any length of time, or listened to most other competent financial advisors, they'll talk about, you don't own stocks for short term. Stocks need to be considered longer-term investments. If you need the money within five years, do not put those dollars in stocks, because who knows what the stock's gonna be worth. So, let's assume for a moment that, all of our listeners, that we, and all investors have, our stocks are designed...they're set up in portfolios that are longer-term. It's tempting to say, "I wanna get out, because this is too uncertain. I don't like it. I'm gonna wait until things settle. Then I'm gonna get back in." The hard part... First of all, historically, no one's been able to do that, consistently, and outperform the market of just being fully invested.
Pat: That's correct.
Scott: And you need to be right not just when you get out, but when you get back in. And think back to COVID.
Pat: Do you remember this? This COVID. It, how fast did it fall? Thirty... What, 30...
Scott: Like, 32, 30-some-odd percent in weeks.
Pat: I think it was as high as 37, in weeks. And then, the year finished up.
Scott: And the year finished up.
Pat: Right. The year finished up. So, how did companies... Right? Remember you're, own companies...
Scott: This market can get a whole lot worse before it gets better.
Pat: It wouldn't surprise me if it went one way or the other.
Scott: Yeah, I wouldn't be surprised at all if we had a 20%, 25% decline in stock prices. Doesn't mean I'm selling mine, nor recommending that people sell their stocks. Unless you plan on spending the money. If the money's set aside to...
Pat For the long term...
Scott: If it's for the long term, then it's just...
Pat: I talked to a number of advisors here at Allworth this morning, and they said, look, it the phones are ringing. And the reason is, it's all political. If you hate Trump, you want out. There are people calling...
Scott: Yeah. That's what's so difficult, I think, about this one. And I have a lot of people... Like, I've got some dear friends that are on the very liberal side of things...
Pat: I have children like that.
Scott: ...that hate Trump. Okay, right, yeah. I have family too.
Pat: My dear friends.
Scott: And I have people that I think are a little crazy on how excited they are about everything, right? And all in between.
Pat: But don't let it drive your portfolio. Don't, please don't let it drive your portfolio. Right? I talk... I think I mentioned this. I talked to someone four weeks ago that took all their money out of equities when Biden was elected.
Scott: Did they ever get back in?
Pat: No.
Scott: Well, hope they didn't get back in the beginning of Trump's administration, because that wouldn't have worked out.
Pat: She asked me, "When do I get back in?" I go, "What are you doing out?" Well, Biden was gonna ruin everything. Like, you're preparing for...she's like, "Do you think I have enough money for retirement?" I'm like, "You might have." Don't know now. Not a [crosstalk 00:14:55]
Scott: And now, what kind of rate of return do we plan going forward? You can't plan on a normal market return, because that's...
Pat: Yeah, you miss part of it.
Scott: ...she reacted [crosstalk 00:15:04] That's what the problem was, when you miss it. Anyway. We don't have the answers. Other than...
Pat: But thanks for listening.
Scott: Don't throw in the towel on your investment thesis.
Pat: Please. Please. And stick to the thesis.
Scott: Yeah. We got a great program. Not only we got some calls, but we're gonna be joined by one... We're gonna really focus on how do we reduce concentrated stock positions. If you work for a company, you end up with the majority of your wealth in one particular company, what are some strategies to get out of that?
Hey, we're joined now by one of our advisors here at Allworth, a partner advisor, Mark Shone. Mark is... Mark, first of all, welcome to the program.
Mark: Thank you.
Scott: You've been an advisor in this financial services industry for, two years? Three years?
Mark: Yeah, two. Twenty...[inaudible 00:15:56] 34.
Scott: Thirty-four years.
Mark: Thirty-four, on this side. Yeah. It's been a [crosstalk 00:16:00]
Pat: We started at around the same time.
Mark: We did.
Pat: You and I did.
Scott: And the reason Mark's joined us is, he has a lot of experience on helping... And he's kind of one of the go-to people at Allworth. When someone has a concentrated position, like, you've worked for Apple for many years, the vast majority of your wealth is in Apple stock, it's done extremely well for you, but you're like, "I'm getting retirement age. Like, I wanna make sure that should Apple go the way of some other companies that have in the past, I wanna make sure I'm diverse..." How do I diversify, without getting clobbered by taxes?
Pat: And we should point out that Mark lives in the San Francisco Bay area, and has lived there for many, many years, and works out of an office...
Scott: Now, he's a Nevada resident.
Pat: He is a Nevada resident.
Scott: Yes. So, the majority of his time is out of California.
Pat: Oh, that's right. But you have an office in... But most of the work you do is...
Mark: Yeah, most is in the Bay Area. Yeah. And I still spend a lot of time in the Walnut Creek office as well. Yeah.
Pat: So, you're familiar with these concentrated stock positions.
Mark: Yeah, yeah. There's a few, and so... I mean, all the names you know, people that I've dealt with.
Scott: These are companies that have done well. So, I'm guessing you're not doing a lot of people with Intel stock right now.
Mark: Not so much.
Scott: Yeah. Companies that have stumbled.
Mark: Not a lot... You know, PG&E, not a lot there.
Scott: Yeah.
Mark: But it's the names you all know. Salesforce, Alphabet, NVIDIA, up in the Seattle or Amazon. Oracle. I mean, it can be all over the place.
Pat: But your specialty is actually so sought-out that you do a lot of this by Zoom now.
Mark: Yeah. Yeah.
Pat: Right? Because, like, someone in our organization... So, we have, I don't know, 160 advisors? I don't know.
Scott: I don't know.
Pat: I don't know.
Mark: It's north of that now. I think it's close, pushing on 200.
Scott: Okay.
Pat: Okay, 200 advisors. So, if someone comes across a concentrated stock position, they go to you, in the organization.
Scott: Well, we have other...
Pat: Well, that's correct. But they're one of the go-tos, that, because that's a specialty of yours.
Mark: Correct.
Pat: All right. So, tell us what you do.
Mark: Yeah. Yeah. So, well, first of all, I think there's...you wanna start with how do these investments feed your lifestyle? Right? So, a lot of times, people start with there's some general rules about concentrated stock. It shouldn't be more than 20% of your portfolio and this. Those things are all very dry, but it's...
Scott: And those aren't hard and fast rules. And there's debate on those.
Mark: There's debate. That's correct. And people, usually when they have these concentrated positions, there's an affection for the position. There's a lot of things to work through, so...
Scott: Well, and typically, the reason they're still have a concentrated position is because that company, and it's usually the companies they've worked for, right?
Mark? Yes.
Scott: It's the companies they worked for. And if you've worked for one of the ones you named...
Mark: Yeah.
Scott: ...that's the best company ever.
Mark: Yep.
Scott: Right? And so part of you doesn't want to diversify. You haven't really yet, because you didn't wanna pay the taxes, and because it's been doing, "doing so well."
Mark: Did well.
Scott: It did well.
Pat: But they say doing well.
Scott: It's doing so well, yeah.
Mark: But the thing is, if you look at it, I would say, when we implement some of these strategies, and you're working from a place that, here's where we wanna be four or five years from now, this is what we wanna be, and all the time, you wanna root like crazy for this stock. So, that's not a problem. But I think it's important to start with why is it important to do this? And I just have a couple of personal experiences with clients that I've worked through, and still have, obviously. But I had a lot of clients that had Silicon Valley Bank. Silicon Valley Bank.
Pat: Really?
Scott: [crosstalk 00:19:44] kinda forget about that now.
Mark: Yeah. Very concentrated position. I mean, the go-to bank in the area.
Scott: Oh, yeah. It was the bank. And it's still fresh on your mind.
Mark: Oh, yeah. Yeah. And so I had clients that had very concentrated positions there. And we...
Scott: What did that stock go to?
Mark: Yeah. It went away.
Scott: Did it go zero?
Mark: Oh, no, I know [inaudible 00:20:03]
Pat: But what did, like, what kind of run-up did it have?
Mark: Oh, it was the go-to. I mean, it was high double-digit returns, year over year.
Pat: For multiple, multiple [crosstalk 00:20:15]
Mark: Multiple, multiple years. Yeah.
Scott: Until it wasn't.
Mark: Until it wasn't. And...
Pat: And these might have been investors in the original Silicon Valley Bank? Or employees?
Mark: Employees. High-level employees. Some who had retired. And a majority... No. We got out. They had the courage to get, like, "We did this." So, when I talk about concentrated, it's not like, hey, this is some fancy portfolio thing. This allows people to stay retired [crosstalk 00:20:39]
Scott: So, you had clients that you helped diversify away from that, as they moved into retirement...
Mark: That's correct.
Scott: ...and it saved their bacon...
Mark: That is correct.
Scott: ...when the company blew up.
Mark: That's correct.
Pat: I imagine those clients are very fond of you.
Mark: Yeah. And they took courage on their part, too, because they'd pay some tax and do this. I mean, it took courage. So let's, you know, we worked together. It was great. I'm glad I had conviction, but they had conviction to be able to take the action.
Scott: And the hard part, the companies you just named, excluding Silicon Valley Bank...
Mark: Yeah.
Scott: ...had someone five years ago said, "I'm gonna diversify away from these," they might, then, the hard part is, if the company stock keeps going up, you're like, "Well, what'd I do that for?"
Mark: It's very, [crosstalk 00:21:17]
Scott: So, it's hard.
Mark: And that's why I always [inaudible 00:21:19] say, we're still gonna root like crazy for the stock. Right? So, that's [crosstalk 00:21:22]
Scott: Because they still have a position in it.
Mark: Oh, yeah. Yeah. You can't get rid of it all, typically.
Scott: And nor do most people want to.
Mark: Right, right. But I'll even, a different story, though, [inaudible 00:21:32] so, I wasn't in the investment business when I was in third grade. But I had a basketball coach from third grade to sixth grade, growing up. A great man. He's still alive. He worked for IBM. And he'd always come to basketball practice in that blue pinstripe suit.
Scott: Yeah. [crosstalk 00:21:52]
Mark: I mean, everybody had it. IBM was the place. This is in the '70s.
Pat: And their red ties?
Mark: Yeah, they had red ties, but it was the blue pinstripe suit was the thing.
Pat: Okay.
Mark: So, he came all the time. He would show up. And then one day he shows up and he's not wearing it. Found out, he's retired from IBM. And a few years later, he's taking a part-time job and doing it, whatever. So, obviously, he had pretty concentrated position in IBM, and IBM went from the thing to not. So, it happens.
Scott: By the way, Mark, you were built to be a financial advisor to recognize that by the sixth grade.
Pat: He's in the third grade.
Scott: How can I...
Pat: [inaudible 00:22:34] the sixth grade...
Mark: Must be a way. Yeah.
Pat: But...
Scott: This kid's trying to figure out how to get to Mars. This kid's trying to figure out how to solve cancer.
Mark: Yeah.
Scott: "There's gotta be a way to protect these assets."
Mark: Yeah, that's right. Now, it's just, those are things that kinda live with you, so that's why I say there's portfolio construction and those things, but this is people's lives, so you have to do the right thing for folks. So, a couple of the strategies, there's really strategies for people who no longer work at the company. There's a lot more leeway on what you can do there. And then there's strategies for people who are still working there.
Scott: Yeah, so give us an example, or maybe a client you worked with that, in one of these top companies, looking at retiring. You've got a plan to diversify the stock.
Mark: Yeah.
Scott: Tell us some of the strategies there.
Pat: And typically, 70% of their net worth? Eighty percent?
Mark: Yeah. I mean, in some of these companies, the stock is so robust, it ends up being 70% or 80%.
Pat: Yes.
Mark: So, the discussions are, one client, the stock just ran away. It was, you know, it's one of the biggest names, a little fruit company that you know about. And started having discussions around...
Pat: A literal fruit company.
Mark: Yeah. Started having discussions about... Most of that compensation comes, it's executive compensation. It's RSUs, employee stock purchase plan. [crosstalk 00:23:50] Yeah. Some ISOs, or incentive stock options, non-qualified [inaudible 00:23:55] you know. So, it's a whole basket of things.
Scott: And they all have a different set of rules around them.
Pat: That's right.
Mark: That's correct. Different taxation rules, liquidity rules, all of those things. So, when somebody is working at a company like that, most of the time, some of the strategies are taken off the table. Like, you can't write options on some of those positions.
Scott: Because you're not allowed to.
Mark: You're not allowed to do it. So, the things that you do there are, as those RSUs vest, you sell all of them, because there's no additional tax burden. That frees up cash that you invest outside of the company, in something like direct indexing, as an example, where you can harvest a ton of capital losses, while the market's going up, by the way. All right. So, direct indexing. Instead of buying an exchange traded fund, you buy the shares individually. If the market, if the S&P 500 goes up, you know, 10% in that period, not all 500 companies go up. Some of them go way up. Some of them go down. You can harvest losses as they go down. So, you're starting to build those losses.
Pat: And Mark, in this direct index, would you carve out technology out of the direct index?
Mark: You can do it. You can do dividend payer...all kinds of indices that you can do.
Pat: So, but if I had a big concentration in this fruit company, right, in Apple, if I did a direct index, I wouldn't wanna...because Apple would be a large part of that direct index.
Mark: Exactly.
Scott: You would exclude that out.
Mark: That's correct.
Pat: So you would exclude that out, and maybe some lookalikes.
Mark: That's correct.
Pat: Right?
Mark: That's correct.
Pat: So that you're not doubling down on your concentration. So, that's one of the values of direct indexing, is that you can...
Scott: Or, there's other strategies you could do.
Mark: There are.
Scott: Single-stock strategies.
Mark: Yeah, yes.
Scott: That's...okay. Do something similar, but...
Mark: Yeah. So, this is a person who's in the company. There's some issues there. So, you build up capital losses. When they retire, those shares come over, and now you have some tax-free room to diversify. And once they leave, you have other strategies. So, it really starts early. While you're working at a company, set the stage for cash flows, how you want the portfolio to look five years down the road, and start to make some of those moves. If you're...
Scott: At what age do you think someone should start diversifying out of their company stock? Because had somebody, let's say you started at Apple, you're, let's say you're 55 today, and you started at Apple when you were 25.
Mark: Yep.
Scott: And you said, "I never wanna have Apple be more than 10% of my portfolio," or something, you're gonna be relatively poor compared to all your [crosstalk 00:26:24] you work with.
Mark: Yeah. There's some envy there. So, I think it's as long as you have assets, if you're building assets outside of that concentrated stock in a significant way, that can support your lifestyle. So, my conversations, some, particularly [crosstalk 00:26:39]
Pat: [crosstalk 00:26:40] almost like it doesn't exist.
Scott: When you're young, you've got, if things don't work out, you've got time to retool your career, whatever you need to do.
Mark: Yes.
Scott: When you're 65, you don't...
Mark: You want a little more certainty.
Scott: Yeah.
Mark: Because you don't have time to make it up and do that kind of thing. So, that's why I say it is, you do wanna run retirement [inaudible 00:26:59] but it's not, you know, "Hard and fast rule, you don't want more than 10%." I mean, that's silly. And some of these stocks, I don't care what you do, you can't avoid that, because they ran away for such a long period of time.
Scott: And they don't...nothing grows forever.
Mark: Nothing grows forever. So, but the things that you do while you're working there, there are some other strategies as well, that you can diversify, if the shares are free and clear. Depends if the company allows lending [inaudible 00:27:26] So, there's some things that you can do there. But when you retire, you're in a much better tax position. Now you can do that, and shelter a lot of capital gains tax, because you've done direct indexing, or done portfolio management outside, and your tax bracket's gone way down. So, it really gives you a lot more leverage to [crosstalk 00:27:51]
Scott: And typically, once these people leave their employer, can they then use some sort of options to protect their positions?
Mark: Yes. Yeah.
Scott: So, they could collar...
Mark: Yeah. World's your oyster there, so you're in pretty good shape. But it's not only people who work there. So, there are, if you think about how people get to concentrated positions, they either, you know, they sold a business, inherited some money, and, you know, bought some of these stocks, and they have huge gains, and they think, "Hey, I'm stuck." Well, you're not. You're not stuck. And particularly if you don't work at the company, you're not stuck. So, you can... One of the strategies... Well, there's three things you can do, right? You can sell the stock and pay a bunch of tax. Most people don't wanna do that. You can do something, historically, there's something called an exchange fund. You exchange your shares into a basket of other like people that work with different companies, and you create a diversified portfolio. These are sponsored by a number of companies.
Scott: It's a little tougher for these, the magnificent sevens because they're the...
Mark: You can't. They're not accepting Apple or Nvidia
Scott: Yeah [crosstalk 00:28:50] anymore.
Mark: No, [crosstalk 00:28:51]
Scott: Because you have, they're trying... You think of it like building a mutual fund, right? Where, rather than collecting cash from a bunch of people, you collect shares.
Mark: Yes.
Scott: Well, the people... If your company's been a loser, that's not one you're looking...
Mark: Right.
Scott: You can sell it and take a loss. You're not gonna be trying to put it in exchange funds, so it's a little challenging.
Mark: Correct. Yeah. And there's, I mean, there's lockups, there's all kinds of things.
Scott: Yeah.
Mark: So, it's that, exchange fund, not seeing that as much, particularly with, you know, tech companies. And the third thing is, you can do exchange replication, which is, that's utilizing options and colors and things. And you can exchange up to 70% of the risk of, you know, Alphabet, or Amazon, or any of them, 70% of the risk to an index, S&P 500, a small company index, international index. So, you can exchange that risk, without taxation. So, you still hold the shares, and then you put options strategies around, that synthetically give you that risk. And you're exchanging the risk of the single concentration for a broader base.
Scott: Yeah, the market [crosstalk 00:29:58]
Pat: You're paying in a premium, you're paying a premium, essentially...
Scott: Sure, it's a premium, essentially, right?
Pat: ...to put a downside, and then you're buying options in a different market.
Mark: But it's also neutral, because you're doing options on the shares themselves...
Pat: Yes.
Mark: ...and, like, the S&P, as an example. So, you're usually net neutral on the premium. You're just gaining the exposure.
Scott: It's just a form of collar.
Mark: Yes. That's correct. But...
Scott: Well, and we should explain, can you explain to the listeners what a collar is?
Mark: Yeah, a collar essentially is you're putting a, in very layman's terms, you're putting a cap on the upside participation of a stock, and a cap on the downside participation.
Scott: So, you're receiving a premium from someone, because you've exchanged some upside, and then you're paying a premium to someone else, and those neutralize each other.
Mark: That's correct. That's correct.
Scott: That's what a collar is.
Mark: Yeah. But then there's other strategies around, you know, if you're doing something, people [inaudible 00:30:48] covered calls, right? So, you can use the premium of selling those covered calls to pay your tax bill, to get out of the stock over two or three years. The point is, there are strategies to eliminate this single-stock risk, but it depends on a lot of things individually. What's the outside portfolio look like? What income sources, what bracket are you in? So, those are all the kinda things you could be doing.
Scott: And, where do you do the options? Do you do them on the brokerage account? Do you do them in a retirement account? There's those...
Mark: Yeah, you [inaudible 00:31:17] segment, segregate out that stock, into a separate account. And then you have the options right there.
Scott: Oh, is that right?
Mark: Yeah.
Scott: It's just easier?
Mark: It's, well, you know, it's easier to view. So, people, for a while, they'll be like, Apple, hey, how's this strategy working? So, fourth quarter last year. I said, it's very effective right now, but it's not efficient, because Apple stock outperformed the S&P. I said, doing what it's supposed to do, but...
Scott: That was last year.
Mark: That was last year.
Scott: Today?
Mark: Today? A little different. Little different ball game. So, you are, you can put some certainty around what expectations are, but it's really a single-concentration risk reduction.
Pat: You know what? This is so interesting to me, Scott, and Mark, is, when people are listening to this, they're thinking of people with tens of millions of dollars.
Scott: These are middle...
Pat: But they're not.
Mark: Mm-mm. I put it on folks have a million-dollar position in Amazon.
Pat: Right? They're not... And the reality is, look, is, not only the financial planning industry progresses, and becomes more efficient, it actually will filter down, much like 10 years ago, you couldn't find a firm that actually provided tax and estate planning.
Scott: And it's even more important if you've got, let's say, a million or $2 million.
Mark: That's right.
Scott: Because you're gonna be dependent on those dollars for your retirement income.
Mark: Oh, it's a million out of 1.8.
Pat: Yeah.
Scott: Yes.
Pat: If Jeff Bezos' portfolio goes down by 50%...
Scott: He's fine.
Pat: He's fine.
Mark: Right.
Scott: His girlfriend might leave him, because she looks like that type.
Pat: Oh, she looks like that type. Scott, you can't say that.
Scott: I kinda can. [crosstalk 00:33:01] She's super, she [inaudible 00:33:04] really sweet.
Mark: I'm sure she's a really nice woman.
Pat: Scott, you cannot say that.
Scott: Okay. Pretend I didn't say it.
Mark: But this goes to say, listen, if you have...
Scott: I was kidding. I was totally kidding.
Mark: Yeah. [crosstalk 00:33:16] gonna read a disclaimer, but [crosstalk 00:33:18]
Scott: [crosstalk 00:33:19] Kidding. She's a wonderful lady.
Mark: If it's, if you're relying on that money to provide cashflow in retirement, it's way more important, so that's why I say there's no hard and fast rule.
Scott: That's right.
Mark: If you got $5 million bucks in Apple...
Scott: Or $50 million.
Mark: ...and you got $5 million outside of Apple, and you spend X or whatever, and, like, and the $5 million will cover, all right, not as much of a problem. You should probably do something. And we do.
Scott: And it's because no company lasts forever, does it?
Pat: Yeah. But, let's say I own some PG&E stock for 50 years. Right?
Mark: Yep.
Pat: I've got embedded gain in there.
Mark: Right.
Pat: I would do the same there.
Mark: Yeah. Yeah.
Scott: Right.
Pat: And the reality is, as trading costs in, have come down over the years, it's much, much less expensive than it was...
Scott: Yeah, yeah, yeah.
Pat: ...even four or five years ago.
Scott: And if you're a charitably inclined, of course, you can donate some shares to [crosstalk 00:34:14]
Mark: There's all kinds of tax things that you can do.
Scott: Charitable remainder...
Pat: Charitable remainder trust.
Mark: Yep. Yeah. Yeah. So, I think it's, inside, working inside a company with a large concentrated position, sometimes there are restrictions. There are things that you can do to reduce it. Outside, you really have a pretty...
Scott: The world is your oyster.
Mark: It is. It is. And you structure when you take gains over periods of time. I mean, some people that, their income goes to zero, and if you're managing the portfolio effectively, capital gains exposure, you know, you can get some out at zero capital gains.
Scott: That's so awesome.
Mark: Which is crazy.
Scott: That's so awesome.
Pat: For rich people.
Mark: Yeah. Well, and [crosstalk 00:34:58]
Scott: And go on Obamacare at the same time.
Pat: Oh, isn't that crazy?
Mark: Yeah. But here's the hard part. Like, when you're doing this pre-planning work, say someone has five more years at a company. When are we gonna do some tax planning? [inaudible 00:35:12] And I say, listen, right now you are what's known as a tax taker. There is not a lot, right? You've got RSUs coming, and your income and your bonuses. Like, you are a tax taker.
Scott: Maxing out your 401(k), that's about all you can do.
Pat: There's not a lot you can do then.
Mark: But what you can do is you can do things outside of those company assets, in your private assets, to tee yourself up for later, so that you can have lower tax rates. And it's, those are some of the most enjoyable meeting... We have that first meeting, and we run it through our, you know, tax analysis, and say, "Yeah, this year, your tax rate is 7% federal." You know? They've been at 37% for years.
Scott: Yeah.
Mark: And you're like, oh.
Scott: So, after they retire.
Mark: Yeah.
Pat: But this is, you know, I spent last week with a gentleman who works for a large wire house. Old brokerage firm. Old brokerage firm, right? They play around the taxing a little bit. Right? But, I mean...
Scott: Well, most of those large firms say, "We do not provide tax advice. They explicitly state, "We do not provide tax advice."
Pat: But this is value that's... Because it's...
Scott: Well, it shows those stats. That's why those studies come out and say, working with an advisor...
Pat: A good advisor.
Scott: ...a good advisor, you can earn, one study says up to 4% more.
Mark: Oh, yeah.
Pat: Yeah.
Mark: Yeah. Yeah. And you model out, you know, I model out with a client, you know, taxes over five years. I take a look forward and say, here's what retirement looks like, and here's why we're doing what we're doing.
Scott: Yeah.
Mark: I mean, I'm talking about Roth conversions, when they're five years away from retirement, they're not gonna do it, because I want them to see, here's the look-forward. Here's why we're doing this stuff.
Scott: Yeah.
Pat: Well, good. Mark, how long have you...? So, I've known you for 35 years.
Mark: Yeah. I think so, yeah. That's 34, 35, something like that.
Pat: Yeah. Somewhere in there. How long ago did your firm integrate with Allworth? Was it three or four years?
Mark: It'll be four years May 1st. Time flies. Yeah.
Pat: Well, thank you for doing it. [crosstalk 00:37:15]
Scott: Yeah, I'm glad you're [crosstalk 00:37:15]
Pat: You've been a great partner to Allworth. It's been great.
Pat: And the young advisors love you, because you actually stand in front of them and go, "Do this. Do, do, do, do. Do this." If you can't tell, Mark is a drummer in a band, and, because he's got that kinda energy. You...
Scott: Well, I think one of the unique things about our model is we are actually a team, right? You have your own smaller team.
Mark: Yeah.
Scott: But, as far as an organization, we are very collaborative. I mean, when we rebranded from Hanson McClain to Allworth, part of the reason we chose that name is, like, we are all working together to serve our clients' issues.
Pat: Around all your worth.
Scott: Yeah. So, as opposed to where you've got one person in an office competing with the person next to them, they don't wanna share any ideas at all, they're afraid they're gonna steal each other's clients, that's not the atmosphere we have [crosstalk 00:38:00]
Mark: I lean on people in this firm. Old, young, everywhere in between, different areas of expertise.
Scott: We got lots of different experts.
Mark: I mean, you can always learn something, so...
Pat: Yeah, yeah. And our tax team is...
Mark: Spectacular.
Pat: It really is.
Mark: Yeah.
Pat: Versus four or five years ago, it is night and day. Anyway, we're promoting our firm right here [crosstalk 00:38:19]
Mark: [crosstalk 00:38:19] so, it's coming up on the four-year anniversary, so you reflect on these things, and for clients, for me personally, for staff in our Walnut Creek office, it's been spectacular.
Pat: Well, thank you.
Mark: It's been a great...it was a great decision.
Pat: I wish it didn't take me three years to talk you into it. [crosstalk 00:38:39]
Scott: Yeah. So, Mark, thanks for taking some time.
Mark: Good to see you both.
Pat: And what's the name of your band you're in?
Mark: Stage Fright.
Pat: If I went to YouTube, could I see it?
Mark: Yeah, you can see it. But it's a spell fancy band way. It's F-R-I-T-E at the end, so you don't wanna just do [crosstalk 00:38:57] Yeah. S-T-A-G-E-F-R-I-T-E.
Scott: I don't want people judging Mark based upon his band clips.
Mark: Yeah, I know. I know. Yeah. Yeah, please don't. They're probably old. We're not [crosstalk 00:39:08]
Pat: I've never seen it. I'm gonna go home and watch Stage Frite, F-R-I-T-E.
Mark: Yeah. We will video this Saturday. We have a gig Saturday, so.
Pat: Okay.
Mark: [crosstalk 00:39:17] video.
Scott: All right.
Pat: All right. Thanks, Mark.
Mark: On that note...
Scott: Yeah, thanks.
Mark: ...thanks, guys.
Scott: To join the program, 833-99-WORTH is our number. 833-99-Worth. Or you can send us an email at questions@moneymatters.com. We're in Georgia now, talking to Kos. Kos, you're with Allworth's Money Matters.
Pat: Hey, Kos, how can we help?
Kos: Yeah. I was calling. I'm a lifelong government employee. I started in the law enforcement at 21, and I'm 51 now. And I just wanted to find out where, if you think I'm on track to retire. I can retire as early as 58. I would like to, but my wife's biggest concern is will we have enough, and how are we gonna handle it? And so, I just wanted to run it by y'all and let y'all tell me what you think.
Pat: How old are you now?
Kos: I'm 51.
Pat: And how old is your wife?
Kos: She's 49.
Pat: And how many children?
Kos: We have four kids, two adult children who are out of the house and self-sufficient, and then two younger kids who are, one's a freshman, one's a sophomore in high school.
Pat: And how much money do you make a year?
Kos: I'm a salary at 150.
Scott: You say salary. Do you have much overtime as well?
Kos: No, I'm an appointed position, so I'm a salary position.
Scott: Okay. All right. So it's not like you've got, working a much of overtime and making more money that we need to account for, so...
Pat: And, do you have money in a 401(k) or a 457, or...?
Kos: Yeah, I have a city 457 plan. I've got about $900,000 in that.
Pat: And how much are you putting in?
Kos: I was contributing the max. The last three years, I had to drop down to only putting in 10%, because my mother fell ill and had to move in with us, and I had to build a room onto the house. So, she recently passed, so I'm actually about ready to move that back up, back to the maximum.
Pat: What's the value of the home today?
Kos: About 385.
Pat: And how much do you owe on it?
Kos: A hundred and ten. Got 10 years left on a 15-year that I refi-ed at 3.25%.
Pat: And do you plan on staying in the home when you retire?
Kos: Yes.
Pat: Okay.
Scott: So, how early can you retire?
Kos: So, the earliest I'm pension-eligible is at 58. And that would be $92,000 a year. The pension's based on years of service, so it doesn't have a cap. So if I work till 60, it's $103,000, and if I work till 62, it's $113,000.
Scott: And if you... Let's assume you retired, you left your employer at 58. Do you think you'd continue in some sort of work at all?
Kos: I might do some consulting or something, but it would have to be part-time.
Scott: Is that something you think you want to do?
Kos: But my daughter's got...we have a grandchild now, so that's really changing your focus. Makes you wanna spend more times with the kids and your grandkids.
Pat: So, we'll give you a kind of a rough outline, but you probably should sit down with an advisor. And how much was in the, you said it was in the 457?
Scott: $900,000.
Kos: $900,000.
Scott: So...
Kos: And I didn't know about an advisor. Like, I don't have any assets that can be managed. It's all in the 457. I didn't know which way to go to get an advisor.
Pat: Well, actually, so, there's a couple things, right? There's a couple things. One is you can actually just pay for a financial plan. And the other is that many of these 457, 401(k)s allow third-party investment advice on them, where they're actually, the advisor can actually manage the money inside of the 401(k) without rolling it into an IRA. And then that's how they could change it. But how is the 401, or the 457 allocated?
Kos: I'm 72% U.S. stock, 12% international, 9% bonds and 8% REITs.
Scott: Sounds great, actually.
Pat: Yeah.
Scott: That's good. So, let's assume that you are 58 today, right?
Kos: Okay.
Scott: You'd have a pension of $92,000. Your 457, some talk about the 4% withdrawal rule, which means you can take 4% out of your principal each year, increase that with inflation. Does your pension have a cost of living adjustment?
Kos: It does not.
Scott: Okay. So, I think one kind of longer-term risk for retirement for you, that we would need to consider, is inflation on that, and making sure we have assets... Do you have, will you be eligible for social security?
Kos: I will. Right now, but I have a SSA login already, surprising. And I think I'm at $2100 a month at 62 right now.
Pat: So...
Scott: If you work till 62, you could replace your income without touching your 457. But let's assume for a second you're 58 right now, and you've got $900,000 in your 457. I might say, let's pull, say, let's call 3% a year. $27,000 a year could come out it. But, you're not 58 today. You're 51. So we've got seven more years of contributions and earnings. There's a good chance it'll double in that seven years.
Pat: [inaudible 00:44:33] call it 1.8, and then 3% off of that.
Scott: It's $56,000.
Pat: $54,000 a year.
Scott: So, at 58, you got $92,000 pension, another $54,000...
Pat: And then you might even take a little bit more out until social security kicks in, the social security bridge.
Scott: You'd have more at 58, because right now, you're contributing to your 457. And you're paying into FICA taxes.
Pat: Yes.
Scott: Those are the two expenses you won't [crosstalk 00:44:59]
Pat: And then your home mortgage will be close to done. You might actually just wanna pay that off at that point in time. You're fine.
Scott: You're on track for retiring at 58.
Pat: Now, mostly because of that pension.
Scott: Whether you choose to retire, of course.
Kos: Right.
Scott: Of course, most of the...
Pat: You know, if you looked at how much money you would have to set aside to provide that pension...
Scott: Couple million bucks.
Pat: Yeah, a couple million dollars.
Kos: Right.
Scott: That's what that's worth.
Kos: One other question I had is, with my mom's passing, I'm gonna get a little money, like, $100,000. The only loan I have other than the home right now is a car. Unfortunately, our car blew a motor a few months back, and we had to buy a car outright. So, I got $36,000 on a car note. Would you recommend just paying that out, or what should I use...?
Pat: What's the interest rate?
Kos: Oh, 7.75%
Scott: Yes.
Pat: Yes. As long as there's no prepayment penalty, with a rule of...what did they call it? It's got the rule of...
Scott: Rule of 78, computed interest versus simple interest.
Pat: That's right. The rule of 78. Which is how I bought my first car at the age of...how old was I? Twenty? Tells you that ignorance is expensive.
Scott: I had the same thing. Well, I caught it within a few... You might have told me. I don't remember. That was 30-some years ago, 30, I don't know how many years ago.
Pat: Yeah. Anyway, the ignorance is expensive. So no, you're on track. You're absolutely on track. And you may wanna actually, you know, to get more confidence behind this, you may wanna actually just go visit an advisor. This isn't complicated. The thing that I would actually make sure is that you actually have a will or trust that's up-to-date. I assume you do.
Kos: Okay.
Pat: Right?
Kos: I do have a will. Actually, I do need to update it, my youngest two, with my youngest two on it.
Pat: Oh. The youngest two aren't named in it?
Kos: No. It's been 10 years since we did our, or 15 years since we did our will...
Pat: Okay. Yeah, yep.
Kos: ...and the youngest two aren't on it.
Pat: Okay. That's a new issue. That's a big issue. Right? So, you wanna update the will or trust.
Scott: And by the way, on this, don't boil the ocean here. Like, don't shoot for the perfect estate plan. Your biggest issue is, you guys, something happens today, the biggest issue is who's got the kids? Whoever has the kids, how are they gonna fund the expenses?
Pat: That's right.
Scott: And then, these dollars, when do the kids get it? And if they don't get it all on their 18th birthday, which we would recommend not, who's responsible for making sure it's doled out correctly, so it's a benefit to them and not a detriment?
Pat: And dole it out over time, right?
Kos: Yeah.
Pat: And then the last thing is that you might need some term life insurance. I'm sure you can purchase it through your employer, to bridge your wife to that pension.
Kos: Yeah, I've got some now, but I probably do need to [crosstalk 00:47:52]
Pat: How much?
Kos: I've only got $250,000.
Pat: Oh, you need, my guess is, unless that pension accelerates in terms of its payout with an early death, you probably need over a million dollars.
Scott: Yeah.
Kos: Okay.
Scott: Yeah. In fact, I would use some of that inherited money to pay for your insurance. Until, it's really until you retire. You don't need...
Pat: That's right.
Scott: ...a whole life policy. You just need a term until you retire and have that pension. And then I'd look in to see what happens, if you died today, what happens to that pension? Is your wife vested for, how much, if any?
Pat: Yes.
Kos: Right. Oh, like if something happens before I actually [crosstalk 00:48:26]
Pat: Yeah, you die. Yeah. So, there's...
Scott: It sounds like you're driving right now and talking on the cell phone, which sounds very dangerous.
Kos: No, no, no, no. I actually stepped out.
Scott: I'm just teasing you. I'm teasing you.
Kos: I'm not driving [inaudible 00:48:36]
Pat: So, you wanna figure out how that works, because many pensions have these cliffs, where, look, if you [crosstalk 00:48:45]
Scott: 58's a cliff. If he left at 57 and 11 months, the pension, he would have some deferred vested pension.
Pat: Or died.
Kos: Okay.
Scott: The question is, what happens if you die?
Pat: That's right.
Scott: And different municipalities treat it differently.
Pat: Is your job ever, you said it's a law enforcement appointed position?
Kos: Yeah.
Pat: Is your job ever at risk?
Kos: I mean, yeah. I still get out there sometimes. My wife doesn't like that part [crosstalk 00:49:10]
Pat: No, no. The job at risk, not you at risk from criminal activity.
Kos: Oh. Yes. Yeah, I'm appointed by city council, so I can be unappointed at any time with a vote, so...
Scott: But you still have a job within the...
Kos: No. If they just... I'm at will. If they choose to let me go, I would just have to go find another position somewhere else.
Scott: Within the same municipality, obviously, to maintain that pension.
Pat: Yes.
Kos: No, I probably wouldn't, because I'm the chief right now, so if I get cut, I'm...
Scott: Well, don't lose your job. Don't lose your job. Play nice.
Pat: Be nice. Be nice. Play nice in the sandbox.
Scott: Don't be too principled.
Pat: Very bipartisan. Very, very bipartisan. You like everybody. That's gotta be a tough position. But you should really consider just paying a thousand or $1,500 to a financial advisor. It might even be as much as $2,000, to map this out for you, to give you confidence in where you're going. And it would be well worth the time and money to do it. And by the way, the mere fact that you're 51 and you're calling us, asking us, "Do I have enough?" tells us that you...
Scott: Probably on track.
Pat: You probably...
Scott: Not always, because you get people that have not saved a dime.
Pat: Yeah, but... And that money that you're inheriting from your mother, I would just put it, actually, in a high-yield savings account, is what I would do with it. And I would use it just to supplement whatever the kids need for college.
Scott: I would fund Roth IRAs for both you and your wife.
Kos: Okay.
Pat: Oh. All right. Yeah, there's, yeah, because it's completely liquid, and yeah.
Scott: Yeah.
Pat: It's a good idea.
Scott: I'd fund Roth IRAs.
Pat: Yeah.
Kos: Okay.
Pat: And what's your... The income was $150,000
Scott: $150,000, yeah. So he can do a Roth.
Pat: Yes, yes, yeah. Good idea, Scott. In fact, you could do... Is the money here now?
Kos: Say again?
Pat: The money you inherited, do you have it now?
Kos: Yes. It just came over.
Pat: Okay. Well, then you could fund for last year.
Scott: Well, it's done by April 15th, which isn't a lot of time.
Kos: Oh, yeah.
Scott: At all, so...
Pat: Yeah. All righty?
Kos: Okay.
Scott: All right. Wish you well.
Pat: All right. Take care.
Kos: Thanks so much.
Scott: Thanks.
Kos: All right. Byte.
Scott: That's all the time we have. It's been great being with you. This has been Scott Hanson and Pat McClain, Allworth "Money Matters."
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 Allworth's "Money Matters," Scott Hanson...
Pat: And Pat McClain.
Scott: We are here talking about financial matters, and obviously, we can't do the program without making some mention of, this week, what did Trump call the tariff? Wasn't Freedom Day or something. [inaudible 00:00:38]
Together: Liberation Day.
Scott: ...was what it was.
Pat: Whatever.
Scott: Liberation Day. Yeah, and had this whole list of tariffs, which was, incidentally, they planned the press conference post-market.
Pat: I saw that, yes.
Scott: So, it was after the markets closed on Wednesday, and then of course, Thursday, markets go through a nosedive. And so, we thought we'd spend a little bit of the first part of the program talking about this. And here, it's an...
Pat: And by the way, people are gonna hear what they wanna hear. So, if we say something positive, they're gonna say these guys are all right-wing...
Scott: MAGA...
Pat: ...MAGA, Trump. If we say something negative...
Scott: We're anti-MAGA.
Pat: We're anti...
Scott: Trump derangement syndrome.
Pat: Yeah, left, right?
Scott: So, I think one of the most, more, I'm gonna call it interesting, because this is, this too shall pass.
Pat: This isn't even, at this point in time, Scott, you look at this compared to the beginning of COVID. Eh.
Scott: COVID, what, the markets fell 30 some-odd percent? And it ended up the year on a positive note. Do you realize even the market crash of 1987, the market was down 29% during that month? That year was a positive year for investors. In other words, had you invested in January of 1987, market had a major crash that we all heard about. At the end of the year, you made money, had you just ignored the thing.
Pat: Yes.
Scott: This will pass. But I think what is unique about this one, this downturn, it's the political environment, because, like, just driving in the studio, I was, I don't listen to terrestrial radio much, but I was just flipping, didn't like what I was listening to. I was flipping, turned something on, and it was a conservative commentator and talking about, oh, this is just, this is exactly what's needed. And it's like drinking cough syrup. It doesn't taste good at first, but it's good for you, whatever. That was his take on it. And so, there are some people that are, believe these tariffs are a good idea. They're a minority of people, by the way. But there's some that think this is a great idea. This is gonna be a short-term blip. There's gonna be a restructure, reorder. Companies are gonna turn out better than ever. Five years from now thinks you're gonna be better than ever. And not at all worried. This is just kinda what needs to happen. This'll be good in the long term. I'm excited about all this. Right? Those people that have that conviction. Then there are those other ones that can't stand Trump and everything he stands for. Maybe agree on one or two of his policies, but by and large don't like anything about him, okay, and think that these tariffs are a terrible idea. And so, I think for those investors, it's even more difficult because it's hard to stay invested, because you're emotionally invested. [inaudible 00:03:40] well, not even, I'd say more than emotionally. You've got certain beliefs. It's visceral. Is that...?
Pat: Yeah.
Scott: So, I mean, it's hard to stay invested. Right? And it's hard... Look, if I'm far right, maybe I wanna change my portfolio, and go further in. Maybe I wanna move my equity positions up, significantly, because I believe in Donald Trump.
Pat: So much.
Scott: Well, I mean, you look at...you look at...
Pat: This is hypothetical, by the way.
Scott: I mean, you look at, like, the small cap index, Russell 2000, it's bear market territory. Stocks are 20% off, so...
Pat: Yeah.
Scott: ...someone might say it's a great buy... Someone might say it's a great buying opportunity, this is all gonna pan out so nicely. And they're excited about this. If you're on the, even middle, or maybe you voted for Trump holding your nose, or you can't stand Trump, you don't understand how this, anyone in the country could vote for this man, or worse, you're looking at this thinking this is a complete change. He's going to destroy the country. He's gonna become a dictator. He's gonna run for a third term. And with that man, you don't know, when he talks, is he serious or is he just trying to...?
Pat: Yeah.
Scott: ...trying to cause a...
Pat: So, so, so, the point is, it's hard not to react to this, if you're right or left.
Scott: And let's assume for a minute, let's assume that Trump is crazy. And let's assume that he starts taking us down a path that is totally destructive. If you look what happened Wednesday, there are four Republican senators crossed the aisle, voted with the Democrats, to try to strip away that emergency power for him to do these suddenly input, do these tariffs. Right? They say it's not gonna go anywhere. First of all, they needed veto-proof... But if it got that bad, the Senate and the House could pass legislation to neuter all this.
Pat: Yes. We have no idea where this is going.
Scott: Nobody does. Right? And you could flip around the channel. You could turn on Fox Business, CNBC, you could watch all day, all different commentators. You're gonna get some commentators gonna tell you why this is just a short-term blip, here's how it's gonna be great for things. We're gonna make the markets great again, or whatever.
Pat: Make the market...
Scott: And then you're gonna...
Pat: Wait, wait. Make the market...
Scott: I don't know if that works, but, and then you're gonna get those that are gonna tell you all the reasons that this is gonna lead to global depression, and this is gonna be worse than the '30s.
Pat: And, but, actually... But, look, the belief is, right, I gotta tell you, Scott, I'm just, I like the fact that he laid it out in a formula.
Scott: Whether you agree with the formula or not?
Pat: Well, I question the formula, number one.
Scott: How about some of those islands that even don't...there's no people on them?
Pat: [inaudible 00:06:46] I question the formula, number one. But the mere fact he laid it out in a formula means that if they, the opposing side wants the tariff to drop, then, what do they do? They lower their tariffs. Like, the China. China. Scott, if you looked at the formula they put on China... Now, this, if you're in China, and you're worried about your people, do you increase your quotas to the U.S., or do you lower them?
Scott: Your quotas or your tariffs?
Pat: Oh, I'm sorry, your tariffs.
Scott: Well, you would lower the tariffs.
Pat: That's why we have no idea whether this is... Because the opposing side, right? We don't know how the opposing side is gonna react to this. We don't know if this is a good thing or a bad thing. That's my point. We don't... It wouldn't surprise me if China came back and said, "You know what? You're right. We've been charging too much. We're gonna lower our tariffs on U.S. goods."
Scott: Well, this stings everybody, right? So, this isn't just... This could be bad for the U.S. and good for everybody else.
Pat: But, correct, correct. But my point being is, so, let's say, right, this market falls off, and let's say it falls off for another two weeks.
Scott: Or three weeks.
Pat: Or four weeks, or a month.
Scott: And it goes into a bear market. By the way, historically, the U.S. stock market experiences a 20% correction, defined as a bear market, I mean, a 20% decline, the broad basket of stocks, about every four years. Historically.
Pat: So...
Scott: About every four years, and we haven't had that since COVID time.
Pat: So, it wouldn't be surprising. It's in the course of investing. But my point being is, let's say China's reaction to this is, "You know, we need to keep our people working. And, look, so we'll get rid of...we'll lower our tariffs by a half." And then, because it's a formula that they showed, they gave them a way out. You lower yours, we'll lower ours. Right? And if you're in the, you know, the Chinese government, you say, "You know, we need to keep our people working. We're gonna lower the tariffs on U.S. goods." Well, whether the Trump administration sticks to that formula in the negotiation, anyone's question. But it wouldn't surprise me if half the countries that we actually impose these tariffs on responded in six to eight weeks and said, "You know what? We're gonna lower our tariffs." What does the market, how does the market respond then? If it responded so negatively for the tariffs, how would it respond?
Scott: Well, who knows? But, you would think that it would go up, but it doesn't necessarily mean that's gonna happen, right?
Pat: That's my point. That's my point.
Scott: Well, there's two...
Pat: Which is, no one knows.
Scott: So, one of two things... One of three things. One, and it may be all three, I should... One is these countries are going to react in some fashion. They don't wanna see their economy implode either. Right? So to your point, clearly, some are gonna come to the negotiation table and say, "All right, what do we need to do?"
Pat: How do we fix this?
Scott: "How do we get these tariffs lowered?" Right. Secondly, if you are the CEO of a company, or on the board of directors in a company, and these tariffs are having a major impact,. Or could have a major impact on your business, what are you doing? You're thinking, as a business, where do we need to pivot? How do we pivot to survive this? What do we need to do? And we've already seen companies say we're gonna invest, we're building factories in the United States. We're gonna start building more in the United States.
Pat: We've heard the companies say that, not the administration.
Scott: The companies. Like, this is what...
Pat: Yeah, yeah. But my point being is, it wasn't someone in the administration saying we're gonna invest money, because then it's always questionable. The companies themselves said we're gonna invest money in the US.
Scott: Correct. We're gonna build factories in the U.S., in part to avoid these tariffs. And I think that's really what this administration's betting on. And then the third thing is that these tariffs get reduced, or eliminated. And this is all just a negotiation tactic. And it's probably gonna be all, we'll see all three of these levers.
Pat: Or, they stick where they are, and the consumer changes its behavior. The consumer changes their behavior.
Scott: With, and that's the case, there's gonna be some winners and some losers.
Pat: The used car salespeople? Winners. New car salespeople? Losers.
Scott: If nothing changes.
Pat: If nothing changes.
Scott: Yeah. Well, there's some certain things that...
Pat: Yeah. People don't stay static in price increases. That's just not...
Scott: So, as an investor, Pat, here's...so, as an investor, first of all, if you've listened to this program any length of time, or listened to most other competent financial advisors, they'll talk about, you don't own stocks for short term. Stocks need to be considered longer-term investments. If you need the money within five years, do not put those dollars in stocks, because who knows what the stock's gonna be worth. So, let's assume for a moment that, all of our listeners, that we, and all investors have, our stocks are designed...they're set up in portfolios that are longer-term. It's tempting to say, "I wanna get out, because this is too uncertain. I don't like it. I'm gonna wait until things settle. Then I'm gonna get back in." The hard part... First of all, historically, no one's been able to do that, consistently, and outperform the market of just being fully invested.
Pat: That's correct.
Scott: And you need to be right not just when you get out, but when you get back in. And think back to COVID.
Pat: Do you remember this? This COVID. It, how fast did it fall? Thirty... What, 30...
Scott: Like, 32, 30-some-odd percent in weeks.
Pat: I think it was as high as 37, in weeks. And then, the year finished up.
Scott: And the year finished up.
Pat: Right. The year finished up. So, how did companies... Right? Remember you're, own companies...
Scott: This market can get a whole lot worse before it gets better.
Pat: It wouldn't surprise me if it went one way or the other.
Scott: Yeah, I wouldn't be surprised at all if we had a 20%, 25% decline in stock prices. Doesn't mean I'm selling mine, nor recommending that people sell their stocks. Unless you plan on spending the money. If the money's set aside to...
Pat For the long term...
Scott: If it's for the long term, then it's just...
Pat: I talked to a number of advisors here at Allworth this morning, and they said, look, it the phones are ringing. And the reason is, it's all political. If you hate Trump, you want out. There are people calling...
Scott: Yeah. That's what's so difficult, I think, about this one. And I have a lot of people... Like, I've got some dear friends that are on the very liberal side of things...
Pat: I have children like that.
Scott: ...that hate Trump. Okay, right, yeah. I have family too.
Pat: My dear friends.
Scott: And I have people that I think are a little crazy on how excited they are about everything, right? And all in between.
Pat: But don't let it drive your portfolio. Don't, please don't let it drive your portfolio. Right? I talk... I think I mentioned this. I talked to someone four weeks ago that took all their money out of equities when Biden was elected.
Scott: Did they ever get back in?
Pat: No.
Scott: Well, hope they didn't get back in the beginning of Trump's administration, because that wouldn't have worked out.
Pat: She asked me, "When do I get back in?" I go, "What are you doing out?" Well, Biden was gonna ruin everything. Like, you're preparing for...she's like, "Do you think I have enough money for retirement?" I'm like, "You might have." Don't know now. Not a [crosstalk 00:14:55]
Scott: And now, what kind of rate of return do we plan going forward? You can't plan on a normal market return, because that's...
Pat: Yeah, you miss part of it.
Scott: ...she reacted [crosstalk 00:15:04] That's what the problem was, when you miss it. Anyway. We don't have the answers. Other than...
Pat: But thanks for listening.
Scott: Don't throw in the towel on your investment thesis.
Pat: Please. Please. And stick to the thesis.
Scott: Yeah. We got a great program. Not only we got some calls, but we're gonna be joined by one... We're gonna really focus on how do we reduce concentrated stock positions. If you work for a company, you end up with the majority of your wealth in one particular company, what are some strategies to get out of that?
Hey, we're joined now by one of our advisors here at Allworth, a partner advisor, Mark Shone. Mark is... Mark, first of all, welcome to the program.
Mark: Thank you.
Scott: You've been an advisor in this financial services industry for, two years? Three years?
Mark: Yeah, two. Twenty...[inaudible 00:15:56] 34.
Scott: Thirty-four years.
Mark: Thirty-four, on this side. Yeah. It's been a [crosstalk 00:16:00]
Pat: We started at around the same time.
Mark: We did.
Pat: You and I did.
Scott: And the reason Mark's joined us is, he has a lot of experience on helping... And he's kind of one of the go-to people at Allworth. When someone has a concentrated position, like, you've worked for Apple for many years, the vast majority of your wealth is in Apple stock, it's done extremely well for you, but you're like, "I'm getting retirement age. Like, I wanna make sure that should Apple go the way of some other companies that have in the past, I wanna make sure I'm diverse..." How do I diversify, without getting clobbered by taxes?
Pat: And we should point out that Mark lives in the San Francisco Bay area, and has lived there for many, many years, and works out of an office...
Scott: Now, he's a Nevada resident.
Pat: He is a Nevada resident.
Scott: Yes. So, the majority of his time is out of California.
Pat: Oh, that's right. But you have an office in... But most of the work you do is...
Mark: Yeah, most is in the Bay Area. Yeah. And I still spend a lot of time in the Walnut Creek office as well. Yeah.
Pat: So, you're familiar with these concentrated stock positions.
Mark: Yeah, yeah. There's a few, and so... I mean, all the names you know, people that I've dealt with.
Scott: These are companies that have done well. So, I'm guessing you're not doing a lot of people with Intel stock right now.
Mark: Not so much.
Scott: Yeah. Companies that have stumbled.
Mark: Not a lot... You know, PG&E, not a lot there.
Scott: Yeah.
Mark: But it's the names you all know. Salesforce, Alphabet, NVIDIA, up in the Seattle or Amazon. Oracle. I mean, it can be all over the place.
Pat: But your specialty is actually so sought-out that you do a lot of this by Zoom now.
Mark: Yeah. Yeah.
Pat: Right? Because, like, someone in our organization... So, we have, I don't know, 160 advisors? I don't know.
Scott: I don't know.
Pat: I don't know.
Mark: It's north of that now. I think it's close, pushing on 200.
Scott: Okay.
Pat: Okay, 200 advisors. So, if someone comes across a concentrated stock position, they go to you, in the organization.
Scott: Well, we have other...
Pat: Well, that's correct. But they're one of the go-tos, that, because that's a specialty of yours.
Mark: Correct.
Pat: All right. So, tell us what you do.
Mark: Yeah. Yeah. So, well, first of all, I think there's...you wanna start with how do these investments feed your lifestyle? Right? So, a lot of times, people start with there's some general rules about concentrated stock. It shouldn't be more than 20% of your portfolio and this. Those things are all very dry, but it's...
Scott: And those aren't hard and fast rules. And there's debate on those.
Mark: There's debate. That's correct. And people, usually when they have these concentrated positions, there's an affection for the position. There's a lot of things to work through, so...
Scott: Well, and typically, the reason they're still have a concentrated position is because that company, and it's usually the companies they've worked for, right?
Mark? Yes.
Scott: It's the companies they worked for. And if you've worked for one of the ones you named...
Mark: Yeah.
Scott: ...that's the best company ever.
Mark: Yep.
Scott: Right? And so part of you doesn't want to diversify. You haven't really yet, because you didn't wanna pay the taxes, and because it's been doing, "doing so well."
Mark: Did well.
Scott: It did well.
Pat: But they say doing well.
Scott: It's doing so well, yeah.
Mark: But the thing is, if you look at it, I would say, when we implement some of these strategies, and you're working from a place that, here's where we wanna be four or five years from now, this is what we wanna be, and all the time, you wanna root like crazy for this stock. So, that's not a problem. But I think it's important to start with why is it important to do this? And I just have a couple of personal experiences with clients that I've worked through, and still have, obviously. But I had a lot of clients that had Silicon Valley Bank. Silicon Valley Bank.
Pat: Really?
Scott: [crosstalk 00:19:44] kinda forget about that now.
Mark: Yeah. Very concentrated position. I mean, the go-to bank in the area.
Scott: Oh, yeah. It was the bank. And it's still fresh on your mind.
Mark: Oh, yeah. Yeah. And so I had clients that had very concentrated positions there. And we...
Scott: What did that stock go to?
Mark: Yeah. It went away.
Scott: Did it go zero?
Mark: Oh, no, I know [inaudible 00:20:03]
Pat: But what did, like, what kind of run-up did it have?
Mark: Oh, it was the go-to. I mean, it was high double-digit returns, year over year.
Pat: For multiple, multiple [crosstalk 00:20:15]
Mark: Multiple, multiple years. Yeah.
Scott: Until it wasn't.
Mark: Until it wasn't. And...
Pat: And these might have been investors in the original Silicon Valley Bank? Or employees?
Mark: Employees. High-level employees. Some who had retired. And a majority... No. We got out. They had the courage to get, like, "We did this." So, when I talk about concentrated, it's not like, hey, this is some fancy portfolio thing. This allows people to stay retired [crosstalk 00:20:39]
Scott: So, you had clients that you helped diversify away from that, as they moved into retirement...
Mark: That's correct.
Scott: ...and it saved their bacon...
Mark: That is correct.
Scott: ...when the company blew up.
Mark: That's correct.
Pat: I imagine those clients are very fond of you.
Mark: Yeah. And they took courage on their part, too, because they'd pay some tax and do this. I mean, it took courage. So let's, you know, we worked together. It was great. I'm glad I had conviction, but they had conviction to be able to take the action.
Scott: And the hard part, the companies you just named, excluding Silicon Valley Bank...
Mark: Yeah.
Scott: ...had someone five years ago said, "I'm gonna diversify away from these," they might, then, the hard part is, if the company stock keeps going up, you're like, "Well, what'd I do that for?"
Mark: It's very, [crosstalk 00:21:17]
Scott: So, it's hard.
Mark: And that's why I always [inaudible 00:21:19] say, we're still gonna root like crazy for the stock. Right? So, that's [crosstalk 00:21:22]
Scott: Because they still have a position in it.
Mark: Oh, yeah. Yeah. You can't get rid of it all, typically.
Scott: And nor do most people want to.
Mark: Right, right. But I'll even, a different story, though, [inaudible 00:21:32] so, I wasn't in the investment business when I was in third grade. But I had a basketball coach from third grade to sixth grade, growing up. A great man. He's still alive. He worked for IBM. And he'd always come to basketball practice in that blue pinstripe suit.
Scott: Yeah. [crosstalk 00:21:52]
Mark: I mean, everybody had it. IBM was the place. This is in the '70s.
Pat: And their red ties?
Mark: Yeah, they had red ties, but it was the blue pinstripe suit was the thing.
Pat: Okay.
Mark: So, he came all the time. He would show up. And then one day he shows up and he's not wearing it. Found out, he's retired from IBM. And a few years later, he's taking a part-time job and doing it, whatever. So, obviously, he had pretty concentrated position in IBM, and IBM went from the thing to not. So, it happens.
Scott: By the way, Mark, you were built to be a financial advisor to recognize that by the sixth grade.
Pat: He's in the third grade.
Scott: How can I...
Pat: [inaudible 00:22:34] the sixth grade...
Mark: Must be a way. Yeah.
Pat: But...
Scott: This kid's trying to figure out how to get to Mars. This kid's trying to figure out how to solve cancer.
Mark: Yeah.
Scott: "There's gotta be a way to protect these assets."
Mark: Yeah, that's right. Now, it's just, those are things that kinda live with you, so that's why I say there's portfolio construction and those things, but this is people's lives, so you have to do the right thing for folks. So, a couple of the strategies, there's really strategies for people who no longer work at the company. There's a lot more leeway on what you can do there. And then there's strategies for people who are still working there.
Scott: Yeah, so give us an example, or maybe a client you worked with that, in one of these top companies, looking at retiring. You've got a plan to diversify the stock.
Mark: Yeah.
Scott: Tell us some of the strategies there.
Pat: And typically, 70% of their net worth? Eighty percent?
Mark: Yeah. I mean, in some of these companies, the stock is so robust, it ends up being 70% or 80%.
Pat: Yes.
Mark: So, the discussions are, one client, the stock just ran away. It was, you know, it's one of the biggest names, a little fruit company that you know about. And started having discussions around...
Pat: A literal fruit company.
Mark: Yeah. Started having discussions about... Most of that compensation comes, it's executive compensation. It's RSUs, employee stock purchase plan. [crosstalk 00:23:50] Yeah. Some ISOs, or incentive stock options, non-qualified [inaudible 00:23:55] you know. So, it's a whole basket of things.
Scott: And they all have a different set of rules around them.
Pat: That's right.
Mark: That's correct. Different taxation rules, liquidity rules, all of those things. So, when somebody is working at a company like that, most of the time, some of the strategies are taken off the table. Like, you can't write options on some of those positions.
Scott: Because you're not allowed to.
Mark: You're not allowed to do it. So, the things that you do there are, as those RSUs vest, you sell all of them, because there's no additional tax burden. That frees up cash that you invest outside of the company, in something like direct indexing, as an example, where you can harvest a ton of capital losses, while the market's going up, by the way. All right. So, direct indexing. Instead of buying an exchange traded fund, you buy the shares individually. If the market, if the S&P 500 goes up, you know, 10% in that period, not all 500 companies go up. Some of them go way up. Some of them go down. You can harvest losses as they go down. So, you're starting to build those losses.
Pat: And Mark, in this direct index, would you carve out technology out of the direct index?
Mark: You can do it. You can do dividend payer...all kinds of indices that you can do.
Pat: So, but if I had a big concentration in this fruit company, right, in Apple, if I did a direct index, I wouldn't wanna...because Apple would be a large part of that direct index.
Mark: Exactly.
Scott: You would exclude that out.
Mark: That's correct.
Pat: So you would exclude that out, and maybe some lookalikes.
Mark: That's correct.
Pat: Right?
Mark: That's correct.
Pat: So that you're not doubling down on your concentration. So, that's one of the values of direct indexing, is that you can...
Scott: Or, there's other strategies you could do.
Mark: There are.
Scott: Single-stock strategies.
Mark: Yeah, yes.
Scott: That's...okay. Do something similar, but...
Mark: Yeah. So, this is a person who's in the company. There's some issues there. So, you build up capital losses. When they retire, those shares come over, and now you have some tax-free room to diversify. And once they leave, you have other strategies. So, it really starts early. While you're working at a company, set the stage for cash flows, how you want the portfolio to look five years down the road, and start to make some of those moves. If you're...
Scott: At what age do you think someone should start diversifying out of their company stock? Because had somebody, let's say you started at Apple, you're, let's say you're 55 today, and you started at Apple when you were 25.
Mark: Yep.
Scott: And you said, "I never wanna have Apple be more than 10% of my portfolio," or something, you're gonna be relatively poor compared to all your [crosstalk 00:26:24] you work with.
Mark: Yeah. There's some envy there. So, I think it's as long as you have assets, if you're building assets outside of that concentrated stock in a significant way, that can support your lifestyle. So, my conversations, some, particularly [crosstalk 00:26:39]
Pat: [crosstalk 00:26:40] almost like it doesn't exist.
Scott: When you're young, you've got, if things don't work out, you've got time to retool your career, whatever you need to do.
Mark: Yes.
Scott: When you're 65, you don't...
Mark: You want a little more certainty.
Scott: Yeah.
Mark: Because you don't have time to make it up and do that kind of thing. So, that's why I say it is, you do wanna run retirement [inaudible 00:26:59] but it's not, you know, "Hard and fast rule, you don't want more than 10%." I mean, that's silly. And some of these stocks, I don't care what you do, you can't avoid that, because they ran away for such a long period of time.
Scott: And they don't...nothing grows forever.
Mark: Nothing grows forever. So, but the things that you do while you're working there, there are some other strategies as well, that you can diversify, if the shares are free and clear. Depends if the company allows lending [inaudible 00:27:26] So, there's some things that you can do there. But when you retire, you're in a much better tax position. Now you can do that, and shelter a lot of capital gains tax, because you've done direct indexing, or done portfolio management outside, and your tax bracket's gone way down. So, it really gives you a lot more leverage to [crosstalk 00:27:51]
Scott: And typically, once these people leave their employer, can they then use some sort of options to protect their positions?
Mark: Yes. Yeah.
Scott: So, they could collar...
Mark: Yeah. World's your oyster there, so you're in pretty good shape. But it's not only people who work there. So, there are, if you think about how people get to concentrated positions, they either, you know, they sold a business, inherited some money, and, you know, bought some of these stocks, and they have huge gains, and they think, "Hey, I'm stuck." Well, you're not. You're not stuck. And particularly if you don't work at the company, you're not stuck. So, you can... One of the strategies... Well, there's three things you can do, right? You can sell the stock and pay a bunch of tax. Most people don't wanna do that. You can do something, historically, there's something called an exchange fund. You exchange your shares into a basket of other like people that work with different companies, and you create a diversified portfolio. These are sponsored by a number of companies.
Scott: It's a little tougher for these, the magnificent sevens because they're the...
Mark: You can't. They're not accepting Apple or Nvidia
Scott: Yeah [crosstalk 00:28:50] anymore.
Mark: No, [crosstalk 00:28:51]
Scott: Because you have, they're trying... You think of it like building a mutual fund, right? Where, rather than collecting cash from a bunch of people, you collect shares.
Mark: Yes.
Scott: Well, the people... If your company's been a loser, that's not one you're looking...
Mark: Right.
Scott: You can sell it and take a loss. You're not gonna be trying to put it in exchange funds, so it's a little challenging.
Mark: Correct. Yeah. And there's, I mean, there's lockups, there's all kinds of things.
Scott: Yeah.
Mark: So, it's that, exchange fund, not seeing that as much, particularly with, you know, tech companies. And the third thing is, you can do exchange replication, which is, that's utilizing options and colors and things. And you can exchange up to 70% of the risk of, you know, Alphabet, or Amazon, or any of them, 70% of the risk to an index, S&P 500, a small company index, international index. So, you can exchange that risk, without taxation. So, you still hold the shares, and then you put options strategies around, that synthetically give you that risk. And you're exchanging the risk of the single concentration for a broader base.
Scott: Yeah, the market [crosstalk 00:29:58]
Pat: You're paying in a premium, you're paying a premium, essentially...
Scott: Sure, it's a premium, essentially, right?
Pat: ...to put a downside, and then you're buying options in a different market.
Mark: But it's also neutral, because you're doing options on the shares themselves...
Pat: Yes.
Mark: ...and, like, the S&P, as an example. So, you're usually net neutral on the premium. You're just gaining the exposure.
Scott: It's just a form of collar.
Mark: Yes. That's correct. But...
Scott: Well, and we should explain, can you explain to the listeners what a collar is?
Mark: Yeah, a collar essentially is you're putting a, in very layman's terms, you're putting a cap on the upside participation of a stock, and a cap on the downside participation.
Scott: So, you're receiving a premium from someone, because you've exchanged some upside, and then you're paying a premium to someone else, and those neutralize each other.
Mark: That's correct. That's correct.
Scott: That's what a collar is.
Mark: Yeah. But then there's other strategies around, you know, if you're doing something, people [inaudible 00:30:48] covered calls, right? So, you can use the premium of selling those covered calls to pay your tax bill, to get out of the stock over two or three years. The point is, there are strategies to eliminate this single-stock risk, but it depends on a lot of things individually. What's the outside portfolio look like? What income sources, what bracket are you in? So, those are all the kinda things you could be doing.
Scott: And, where do you do the options? Do you do them on the brokerage account? Do you do them in a retirement account? There's those...
Mark: Yeah, you [inaudible 00:31:17] segment, segregate out that stock, into a separate account. And then you have the options right there.
Scott: Oh, is that right?
Mark: Yeah.
Scott: It's just easier?
Mark: It's, well, you know, it's easier to view. So, people, for a while, they'll be like, Apple, hey, how's this strategy working? So, fourth quarter last year. I said, it's very effective right now, but it's not efficient, because Apple stock outperformed the S&P. I said, doing what it's supposed to do, but...
Scott: That was last year.
Mark: That was last year.
Scott: Today?
Mark: Today? A little different. Little different ball game. So, you are, you can put some certainty around what expectations are, but it's really a single-concentration risk reduction.
Pat: You know what? This is so interesting to me, Scott, and Mark, is, when people are listening to this, they're thinking of people with tens of millions of dollars.
Scott: These are middle...
Pat: But they're not.
Mark: Mm-mm. I put it on folks have a million-dollar position in Amazon.
Pat: Right? They're not... And the reality is, look, is, not only the financial planning industry progresses, and becomes more efficient, it actually will filter down, much like 10 years ago, you couldn't find a firm that actually provided tax and estate planning.
Scott: And it's even more important if you've got, let's say, a million or $2 million.
Mark: That's right.
Scott: Because you're gonna be dependent on those dollars for your retirement income.
Mark: Oh, it's a million out of 1.8.
Pat: Yeah.
Scott: Yes.
Pat: If Jeff Bezos' portfolio goes down by 50%...
Scott: He's fine.
Pat: He's fine.
Mark: Right.
Scott: His girlfriend might leave him, because she looks like that type.
Pat: Oh, she looks like that type. Scott, you can't say that.
Scott: I kinda can. [crosstalk 00:33:01] She's super, she [inaudible 00:33:04] really sweet.
Mark: I'm sure she's a really nice woman.
Pat: Scott, you cannot say that.
Scott: Okay. Pretend I didn't say it.
Mark: But this goes to say, listen, if you have...
Scott: I was kidding. I was totally kidding.
Mark: Yeah. [crosstalk 00:33:16] gonna read a disclaimer, but [crosstalk 00:33:18]
Scott: [crosstalk 00:33:19] Kidding. She's a wonderful lady.
Mark: If it's, if you're relying on that money to provide cashflow in retirement, it's way more important, so that's why I say there's no hard and fast rule.
Scott: That's right.
Mark: If you got $5 million bucks in Apple...
Scott: Or $50 million.
Mark: ...and you got $5 million outside of Apple, and you spend X or whatever, and, like, and the $5 million will cover, all right, not as much of a problem. You should probably do something. And we do.
Scott: And it's because no company lasts forever, does it?
Pat: Yeah. But, let's say I own some PG&E stock for 50 years. Right?
Mark: Yep.
Pat: I've got embedded gain in there.
Mark: Right.
Pat: I would do the same there.
Mark: Yeah. Yeah.
Scott: Right.
Pat: And the reality is, as trading costs in, have come down over the years, it's much, much less expensive than it was...
Scott: Yeah, yeah, yeah.
Pat: ...even four or five years ago.
Scott: And if you're a charitably inclined, of course, you can donate some shares to [crosstalk 00:34:14]
Mark: There's all kinds of tax things that you can do.
Scott: Charitable remainder...
Pat: Charitable remainder trust.
Mark: Yep. Yeah. Yeah. So, I think it's, inside, working inside a company with a large concentrated position, sometimes there are restrictions. There are things that you can do to reduce it. Outside, you really have a pretty...
Scott: The world is your oyster.
Mark: It is. It is. And you structure when you take gains over periods of time. I mean, some people that, their income goes to zero, and if you're managing the portfolio effectively, capital gains exposure, you know, you can get some out at zero capital gains.
Scott: That's so awesome.
Mark: Which is crazy.
Scott: That's so awesome.
Pat: For rich people.
Mark: Yeah. Well, and [crosstalk 00:34:58]
Scott: And go on Obamacare at the same time.
Pat: Oh, isn't that crazy?
Mark: Yeah. But here's the hard part. Like, when you're doing this pre-planning work, say someone has five more years at a company. When are we gonna do some tax planning? [inaudible 00:35:12] And I say, listen, right now you are what's known as a tax taker. There is not a lot, right? You've got RSUs coming, and your income and your bonuses. Like, you are a tax taker.
Scott: Maxing out your 401(k), that's about all you can do.
Pat: There's not a lot you can do then.
Mark: But what you can do is you can do things outside of those company assets, in your private assets, to tee yourself up for later, so that you can have lower tax rates. And it's, those are some of the most enjoyable meeting... We have that first meeting, and we run it through our, you know, tax analysis, and say, "Yeah, this year, your tax rate is 7% federal." You know? They've been at 37% for years.
Scott: Yeah.
Mark: And you're like, oh.
Scott: So, after they retire.
Mark: Yeah.
Pat: But this is, you know, I spent last week with a gentleman who works for a large wire house. Old brokerage firm. Old brokerage firm, right? They play around the taxing a little bit. Right? But, I mean...
Scott: Well, most of those large firms say, "We do not provide tax advice. They explicitly state, "We do not provide tax advice."
Pat: But this is value that's... Because it's...
Scott: Well, it shows those stats. That's why those studies come out and say, working with an advisor...
Pat: A good advisor.
Scott: ...a good advisor, you can earn, one study says up to 4% more.
Mark: Oh, yeah.
Pat: Yeah.
Mark: Yeah. Yeah. And you model out, you know, I model out with a client, you know, taxes over five years. I take a look forward and say, here's what retirement looks like, and here's why we're doing what we're doing.
Scott: Yeah.
Mark: I mean, I'm talking about Roth conversions, when they're five years away from retirement, they're not gonna do it, because I want them to see, here's the look-forward. Here's why we're doing this stuff.
Scott: Yeah.
Pat: Well, good. Mark, how long have you...? So, I've known you for 35 years.
Mark: Yeah. I think so, yeah. That's 34, 35, something like that.
Pat: Yeah. Somewhere in there. How long ago did your firm integrate with Allworth? Was it three or four years?
Mark: It'll be four years May 1st. Time flies. Yeah.
Pat: Well, thank you for doing it. [crosstalk 00:37:15]
Scott: Yeah, I'm glad you're [crosstalk 00:37:15]
Pat: You've been a great partner to Allworth. It's been great.
Pat: And the young advisors love you, because you actually stand in front of them and go, "Do this. Do, do, do, do. Do this." If you can't tell, Mark is a drummer in a band, and, because he's got that kinda energy. You...
Scott: Well, I think one of the unique things about our model is we are actually a team, right? You have your own smaller team.
Mark: Yeah.
Scott: But, as far as an organization, we are very collaborative. I mean, when we rebranded from Hanson McClain to Allworth, part of the reason we chose that name is, like, we are all working together to serve our clients' issues.
Pat: Around all your worth.
Scott: Yeah. So, as opposed to where you've got one person in an office competing with the person next to them, they don't wanna share any ideas at all, they're afraid they're gonna steal each other's clients, that's not the atmosphere we have [crosstalk 00:38:00]
Mark: I lean on people in this firm. Old, young, everywhere in between, different areas of expertise.
Scott: We got lots of different experts.
Mark: I mean, you can always learn something, so...
Pat: Yeah, yeah. And our tax team is...
Mark: Spectacular.
Pat: It really is.
Mark: Yeah.
Pat: Versus four or five years ago, it is night and day. Anyway, we're promoting our firm right here [crosstalk 00:38:19]
Mark: [crosstalk 00:38:19] so, it's coming up on the four-year anniversary, so you reflect on these things, and for clients, for me personally, for staff in our Walnut Creek office, it's been spectacular.
Pat: Well, thank you.
Mark: It's been a great...it was a great decision.
Pat: I wish it didn't take me three years to talk you into it. [crosstalk 00:38:39]
Scott: Yeah. So, Mark, thanks for taking some time.
Mark: Good to see you both.
Pat: And what's the name of your band you're in?
Mark: Stage Fright.
Pat: If I went to YouTube, could I see it?
Mark: Yeah, you can see it. But it's a spell fancy band way. It's F-R-I-T-E at the end, so you don't wanna just do [crosstalk 00:38:57] Yeah. S-T-A-G-E-F-R-I-T-E.
Scott: I don't want people judging Mark based upon his band clips.
Mark: Yeah, I know. I know. Yeah. Yeah, please don't. They're probably old. We're not [crosstalk 00:39:08]
Pat: I've never seen it. I'm gonna go home and watch Stage Frite, F-R-I-T-E.
Mark: Yeah. We will video this Saturday. We have a gig Saturday, so.
Pat: Okay.
Mark: [crosstalk 00:39:17] video.
Scott: All right.
Pat: All right. Thanks, Mark.
Mark: On that note...
Scott: Yeah, thanks.
Mark: ...thanks, guys.
Scott: To join the program, 833-99-WORTH is our number. 833-99-Worth. Or you can send us an email at questions@moneymatters.com. We're in Georgia now, talking to Kos. Kos, you're with Allworth's Money Matters.
Pat: Hey, Kos, how can we help?
Kos: Yeah. I was calling. I'm a lifelong government employee. I started in the law enforcement at 21, and I'm 51 now. And I just wanted to find out where, if you think I'm on track to retire. I can retire as early as 58. I would like to, but my wife's biggest concern is will we have enough, and how are we gonna handle it? And so, I just wanted to run it by y'all and let y'all tell me what you think.
Pat: How old are you now?
Kos: I'm 51.
Pat: And how old is your wife?
Kos: She's 49.
Pat: And how many children?
Kos: We have four kids, two adult children who are out of the house and self-sufficient, and then two younger kids who are, one's a freshman, one's a sophomore in high school.
Pat: And how much money do you make a year?
Kos: I'm a salary at 150.
Scott: You say salary. Do you have much overtime as well?
Kos: No, I'm an appointed position, so I'm a salary position.
Scott: Okay. All right. So it's not like you've got, working a much of overtime and making more money that we need to account for, so...
Pat: And, do you have money in a 401(k) or a 457, or...?
Kos: Yeah, I have a city 457 plan. I've got about $900,000 in that.
Pat: And how much are you putting in?
Kos: I was contributing the max. The last three years, I had to drop down to only putting in 10%, because my mother fell ill and had to move in with us, and I had to build a room onto the house. So, she recently passed, so I'm actually about ready to move that back up, back to the maximum.
Pat: What's the value of the home today?
Kos: About 385.
Pat: And how much do you owe on it?
Kos: A hundred and ten. Got 10 years left on a 15-year that I refi-ed at 3.25%.
Pat: And do you plan on staying in the home when you retire?
Kos: Yes.
Pat: Okay.
Scott: So, how early can you retire?
Kos: So, the earliest I'm pension-eligible is at 58. And that would be $92,000 a year. The pension's based on years of service, so it doesn't have a cap. So if I work till 60, it's $103,000, and if I work till 62, it's $113,000.
Scott: And if you... Let's assume you retired, you left your employer at 58. Do you think you'd continue in some sort of work at all?
Kos: I might do some consulting or something, but it would have to be part-time.
Scott: Is that something you think you want to do?
Kos: But my daughter's got...we have a grandchild now, so that's really changing your focus. Makes you wanna spend more times with the kids and your grandkids.
Pat: So, we'll give you a kind of a rough outline, but you probably should sit down with an advisor. And how much was in the, you said it was in the 457?
Scott: $900,000.
Kos: $900,000.
Scott: So...
Kos: And I didn't know about an advisor. Like, I don't have any assets that can be managed. It's all in the 457. I didn't know which way to go to get an advisor.
Pat: Well, actually, so, there's a couple things, right? There's a couple things. One is you can actually just pay for a financial plan. And the other is that many of these 457, 401(k)s allow third-party investment advice on them, where they're actually, the advisor can actually manage the money inside of the 401(k) without rolling it into an IRA. And then that's how they could change it. But how is the 401, or the 457 allocated?
Kos: I'm 72% U.S. stock, 12% international, 9% bonds and 8% REITs.
Scott: Sounds great, actually.
Pat: Yeah.
Scott: That's good. So, let's assume that you are 58 today, right?
Kos: Okay.
Scott: You'd have a pension of $92,000. Your 457, some talk about the 4% withdrawal rule, which means you can take 4% out of your principal each year, increase that with inflation. Does your pension have a cost of living adjustment?
Kos: It does not.
Scott: Okay. So, I think one kind of longer-term risk for retirement for you, that we would need to consider, is inflation on that, and making sure we have assets... Do you have, will you be eligible for social security?
Kos: I will. Right now, but I have a SSA login already, surprising. And I think I'm at $2100 a month at 62 right now.
Pat: So...
Scott: If you work till 62, you could replace your income without touching your 457. But let's assume for a second you're 58 right now, and you've got $900,000 in your 457. I might say, let's pull, say, let's call 3% a year. $27,000 a year could come out it. But, you're not 58 today. You're 51. So we've got seven more years of contributions and earnings. There's a good chance it'll double in that seven years.
Pat: [inaudible 00:44:33] call it 1.8, and then 3% off of that.
Scott: It's $56,000.
Pat: $54,000 a year.
Scott: So, at 58, you got $92,000 pension, another $54,000...
Pat: And then you might even take a little bit more out until social security kicks in, the social security bridge.
Scott: You'd have more at 58, because right now, you're contributing to your 457. And you're paying into FICA taxes.
Pat: Yes.
Scott: Those are the two expenses you won't [crosstalk 00:44:59]
Pat: And then your home mortgage will be close to done. You might actually just wanna pay that off at that point in time. You're fine.
Scott: You're on track for retiring at 58.
Pat: Now, mostly because of that pension.
Scott: Whether you choose to retire, of course.
Kos: Right.
Scott: Of course, most of the...
Pat: You know, if you looked at how much money you would have to set aside to provide that pension...
Scott: Couple million bucks.
Pat: Yeah, a couple million dollars.
Kos: Right.
Scott: That's what that's worth.
Kos: One other question I had is, with my mom's passing, I'm gonna get a little money, like, $100,000. The only loan I have other than the home right now is a car. Unfortunately, our car blew a motor a few months back, and we had to buy a car outright. So, I got $36,000 on a car note. Would you recommend just paying that out, or what should I use...?
Pat: What's the interest rate?
Kos: Oh, 7.75%
Scott: Yes.
Pat: Yes. As long as there's no prepayment penalty, with a rule of...what did they call it? It's got the rule of...
Scott: Rule of 78, computed interest versus simple interest.
Pat: That's right. The rule of 78. Which is how I bought my first car at the age of...how old was I? Twenty? Tells you that ignorance is expensive.
Scott: I had the same thing. Well, I caught it within a few... You might have told me. I don't remember. That was 30-some years ago, 30, I don't know how many years ago.
Pat: Yeah. Anyway, the ignorance is expensive. So no, you're on track. You're absolutely on track. And you may wanna actually, you know, to get more confidence behind this, you may wanna actually just go visit an advisor. This isn't complicated. The thing that I would actually make sure is that you actually have a will or trust that's up-to-date. I assume you do.
Kos: Okay.
Pat: Right?
Kos: I do have a will. Actually, I do need to update it, my youngest two, with my youngest two on it.
Pat: Oh. The youngest two aren't named in it?
Kos: No. It's been 10 years since we did our, or 15 years since we did our will...
Pat: Okay. Yeah, yep.
Kos: ...and the youngest two aren't on it.
Pat: Okay. That's a new issue. That's a big issue. Right? So, you wanna update the will or trust.
Scott: And by the way, on this, don't boil the ocean here. Like, don't shoot for the perfect estate plan. Your biggest issue is, you guys, something happens today, the biggest issue is who's got the kids? Whoever has the kids, how are they gonna fund the expenses?
Pat: That's right.
Scott: And then, these dollars, when do the kids get it? And if they don't get it all on their 18th birthday, which we would recommend not, who's responsible for making sure it's doled out correctly, so it's a benefit to them and not a detriment?
Pat: And dole it out over time, right?
Kos: Yeah.
Pat: And then the last thing is that you might need some term life insurance. I'm sure you can purchase it through your employer, to bridge your wife to that pension.
Kos: Yeah, I've got some now, but I probably do need to [crosstalk 00:47:52]
Pat: How much?
Kos: I've only got $250,000.
Pat: Oh, you need, my guess is, unless that pension accelerates in terms of its payout with an early death, you probably need over a million dollars.
Scott: Yeah.
Kos: Okay.
Scott: Yeah. In fact, I would use some of that inherited money to pay for your insurance. Until, it's really until you retire. You don't need...
Pat: That's right.
Scott: ...a whole life policy. You just need a term until you retire and have that pension. And then I'd look in to see what happens, if you died today, what happens to that pension? Is your wife vested for, how much, if any?
Pat: Yes.
Kos: Right. Oh, like if something happens before I actually [crosstalk 00:48:26]
Pat: Yeah, you die. Yeah. So, there's...
Scott: It sounds like you're driving right now and talking on the cell phone, which sounds very dangerous.
Kos: No, no, no, no. I actually stepped out.
Scott: I'm just teasing you. I'm teasing you.
Kos: I'm not driving [inaudible 00:48:36]
Pat: So, you wanna figure out how that works, because many pensions have these cliffs, where, look, if you [crosstalk 00:48:45]
Scott: 58's a cliff. If he left at 57 and 11 months, the pension, he would have some deferred vested pension.
Pat: Or died.
Kos: Okay.
Scott: The question is, what happens if you die?
Pat: That's right.
Scott: And different municipalities treat it differently.
Pat: Is your job ever, you said it's a law enforcement appointed position?
Kos: Yeah.
Pat: Is your job ever at risk?
Kos: I mean, yeah. I still get out there sometimes. My wife doesn't like that part [crosstalk 00:49:10]
Pat: No, no. The job at risk, not you at risk from criminal activity.
Kos: Oh. Yes. Yeah, I'm appointed by city council, so I can be unappointed at any time with a vote, so...
Scott: But you still have a job within the...
Kos: No. If they just... I'm at will. If they choose to let me go, I would just have to go find another position somewhere else.
Scott: Within the same municipality, obviously, to maintain that pension.
Pat: Yes.
Kos: No, I probably wouldn't, because I'm the chief right now, so if I get cut, I'm...
Scott: Well, don't lose your job. Don't lose your job. Play nice.
Pat: Be nice. Be nice. Play nice in the sandbox.
Scott: Don't be too principled.
Pat: Very bipartisan. Very, very bipartisan. You like everybody. That's gotta be a tough position. But you should really consider just paying a thousand or $1,500 to a financial advisor. It might even be as much as $2,000, to map this out for you, to give you confidence in where you're going. And it would be well worth the time and money to do it. And by the way, the mere fact that you're 51 and you're calling us, asking us, "Do I have enough?" tells us that you...
Scott: Probably on track.
Pat: You probably...
Scott: Not always, because you get people that have not saved a dime.
Pat: Yeah, but... And that money that you're inheriting from your mother, I would just put it, actually, in a high-yield savings account, is what I would do with it. And I would use it just to supplement whatever the kids need for college.
Scott: I would fund Roth IRAs for both you and your wife.
Kos: Okay.
Pat: Oh. All right. Yeah, there's, yeah, because it's completely liquid, and yeah.
Scott: Yeah.
Pat: It's a good idea.
Scott: I'd fund Roth IRAs.
Pat: Yeah.
Kos: Okay.
Pat: And what's your... The income was $150,000
Scott: $150,000, yeah. So he can do a Roth.
Pat: Yes, yes, yeah. Good idea, Scott. In fact, you could do... Is the money here now?
Kos: Say again?
Pat: The money you inherited, do you have it now?
Kos: Yes. It just came over.
Pat: Okay. Well, then you could fund for last year.
Scott: Well, it's done by April 15th, which isn't a lot of time.
Kos: Oh, yeah.
Scott: At all, so...
Pat: Yeah. All righty?
Kos: Okay.
Scott: All right. Wish you well.
Pat: All right. Take care.
Kos: Thanks so much.
Scott: Thanks.
Kos: All right. Byte.
Scott: That's all the time we have. It's been great being with you. This has been Scott Hanson and Pat McClain, Allworth "Money Matters."
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.