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Scott: Welcome to Allworth's "Money Matters." Scott Hanson.

Pat: And Pat McClain. Thanks for joining us.

Scott: That's right. Glad you're here with us as we talk about financial matters. Myself, my co-host, we're both financial advisors, practicing advisors. Actually, I mean, we might have a handful of clients anymore, but...because we've got a lot of other responsibilities as an organization, but we've spent 30 plus years helping people with their financial matters, primarily driven about retirement issues, because for the vast majority of Americans that is their number one financial goal. And it's not that they necessarily want to retire, while some do, it's they want to be in a position so that retirement's a possibility, work is an option, not an obligation. And the reality is, for most of us, there's going to come a time in our life when...

Pat: You can't work.

Scott: ...you can't really work. And maybe the office says, "Maybe it's best you don't come in anymore."

Pat: I have been asked three times in the last month why I haven't retired. I turned 60 this year. Three times in the last month, "Why haven't you retired?" And I said...

Scott: And from a financial standpoint, you could.

Pat: From a financial standpoint, but... And by the way, I don't have a nine-to-five job. There's a lot of flexibility in my schedule. There's a lot of responsibility, and there's a lot of things that fall outside the nine-to-five, like flying to Dallas the last three days, and meetings, and that sort of thing.

Scott: Yes, but you also just...didn't you just go and hang out with gorillas in Uganda with your family?

Pat: Rwanda.

Scott: Rwanda.

Pat: Yes. We'll talk about that a little bit later on about this experience. My daughter was like...I don't know how you get a bucket list when you're 24, but...which I love her dearly. She wanted to see them and we were going...

Scott: Oh, this was her idea?

Pat: Yeah. I wanted to go to safari. And we were over there, and were like, "Okay, we'll add this on." But back to the question of, "Why aren't you retired?" And my question is for me, "And do what?" For me it's not a financial, it's a life.

Scott: Yeah. So, leave this set of responsibilities to...and rewards.

Pat: Correct. Psychological, financial, social.

Scott: All those things.

Pat: Right?

Scott: Yeah. To what?

Pat: To what? Ride my bike four days a week? Follow Jimmy Buffett around on tour, whatever people my age are supposed to do. And that, I think, is why retirement is an individual journey.

Scott: And I think of how many people that we've worked with over the years that have come to us. They've been in a career, in typically a company, it's no longer rewarding anymore. It's no longer fulfilling. They don't have your flexibility.

Pat: The flexibility is a big deal.

Scott: Maybe they're stuck on a plane a lot traveling. I mean, it's like they've got all the stuff, and they're burnt out, and they come to us and they say, "How many more years until I can afford to retire?" Yes, right? "How many more years do I have to keep doing this grind?" And then the spouse, typically the wife, "Yeah, he's really burnt out on this." And so, there's those. But I think of all the people, we've also had those conversation like, "Well, if you weren't doing this, what would you be doing?" And oftentimes, there's other career opportunities. And many people, if you look, the majority of people are working in retirement age. And it's not all because they have to. A lot of them because they want to. And we've seen people that their dream was to do something completely different. We build a plan about them going from making $160,000 a year to making $60,000 a year.

Pat: And [inaudible 00:04:30]

Scott: And instead of retiring at 59, they may be going to retire at 68, or 64, whatever the number is. Right? And just going through that transition. And it's...

Pat: Retirement is more than just the money. In fact, we give a workshop called the Art of Retirement which talks about the soft side of retirement. Because, quite frankly, I have seen people that have done it beautifully. I mean, I have a brother in law that retired from the state of California, and opened a framing business. He has a framing for...

Scott: Framing, like framing houses? out there swinging hammers?

Pat: No, no, no, pictures. He operates his business out of his garage. He has more business than he...

Scott: So, he didn't retire. He switched careers.

Pat: He switched careers.

Scott: One that gave him flexibility, doing something he enjoys.

Pat: Social interaction.

Scott: Probably loves the interaction. "I've got this painting..."

Pat: Listen, if you go and get your picture framed at his house, prepare to spend a good hour talking about exactly what you want out of that picture. Right? Because it's a social thing for him. And he likes it. He feels like he's productive. I have seen that. And I have seen clients that retire that fall into a bottle. And it breaks your heart, right? And it excites you when you watch people do it well. And when you see people do it poorly... So, we'll talk about financial stuff on this show. But if you're approaching that part of your life where you're going to go retire, boy, you better spend some time thinking about what not... By the way, the trip to Hawaii, yeah, you'll get that out of the way. That will all happen in the first...and all the stuff that...deferred maintenance around the house.

Scott: And frankly, if you don't have peace at home, you're not going to peace in Maui either, probably. My guess. Just saying.

Pat: You mean the location doesn't matter?

Scott: As my dad always said, "The problem with it, you've always got to take yourself with you. Wherever you go, there you are."

Pat: That sounds like your dad. All right, anyway, enough of the pontificating.

Scott: No, no, no, it isn't, because...well, obviously, we're not going to spend too much more time on it. But doing some research on...I'll never, forget years, ago a client of mine, she's a CEO of a company with, I don't know, 150, 200 employees. and no kid, never had kids. So, she's not wanting to spend time with grandkids because they're not there. Maybe she had nieces or nephews, but never had any children. And she would come in, and we would always talk about like, "Well, when can I retire?" And so, this was a couple of years ago, I said, "Jill," I'll just call her Jill, mainly because that's her name. No, I'm kidding. So, I said, "Jill, let's pretend..." I said, "Look, we've gone through the numbers. You've got the financial assets."

Pat: "You could have retired a year or two ago."

Scott: I said, "Let's pretend like you retire this Friday. You retire this Friday. What do the next months look like for you?" We talked for a bit. She sent me an email three days later. She says, "Your question haunted me."

Pat: Wow.

Scott: That's the word she used. "Your question haunted me. I realize I have a lot more work to do before I retire." And now she's past the age where she...because we've been working together for 20 years, or whatever, she's past the age where she said she was planning on retiring. And she works. And I look at her life, I'm thinking, "What would she do if she retired right now?"

Pat: And she's still not retired?

Scott: No, she's not retired. And I remember talking... Because she's probably late 60s now. And I remember talking, I said, "Well..." one of the questions like, "You obviously enjoy leading people. You enjoy watching career development. You're good at figuring out what people to put in what roles. Good coach." That's what a good leader is. Right? And a CEO of a company that size. "Where are you going to find that after retirement?"

Pat: Yeah.

Scott: Right?

Pat: So, it's not all financial.

Scott: It's not all financial. Anyway, we like... Anyway, let's...

Pat: That's how you get a little emotional.

Scott: Huh?

Pat: That's how you get a little emotional. After this little conversation, I don't think I can ever retire.

Scott: Pat took it on personally [inaudible 00:08:39] he's listening. You're supposed to be one of the co-hosts here. I was listening to you. Now you're convinced, like, "I'm screwed if I retire."

Pat: Oh, I know. My wife is going to be happy to hear this. "He's never retiring. This is awesome."

Scott: I mean, we've seen a lot of people retire. And as you said, some do it well.

Pat: Some do it awful. In fact, I have had multiple clients that I have asked to go back to work. It had nothing to do with the money.

Scott: I think of the guy that when he rearranged the kitchen. His wife stayed home, raised the kids, never went back to the workplace. Managed the household for 40-plus years or whatever. He retires. The first two weeks, he starts reorganizing the kitchen where it makes more sense.

Pat: Was he an engineer?

Scott: Yes. And you're not going to stay married long if you continue that stuff.

Pat: Funny.

Scott: All right, let's head back to the calls here, because we love taking your calls and questions regarding financial matters. 833-99-WORTH is the number to join our program. Again, 833-99-WORTH. We are talking with John. John, you're with Allworth's "Money Matters."

John: Hello, gentlemen. Thank you for taking my call.

Scott: Hi, John.

Pat: Thanks for waiting, by the way. Appreciate it.

John: No, it's my pleasure. I enjoy listening to your show, especially when I'm on hold. It seems like it's a little bit more fun.

Scott: A little bit more fun. Otherwise, it's pretty dang dry and boring, but you struggled through it.

John: Oh, I didn't say that. I didn't say that. You did. That's all right. Just kidding. I love your show. Huge fan.

Pat: Okay, thanks.

Scott: What can we do for you, John?

Pat: You sound awfully young, by the way.

John: I like to think I am. My son thinks differently, but hey. Actually, I'm 42 years old. I recently started...about a year ago, started a job with a pension. I make about $33,500 a year. And I have $15,000 saved. And I just recently opened a Roth IRA. And after I did, I started to second guess myself because as I was reading about it before, it kind of made sense to pay taxes on it now. But I figure the day before retirement, I'm no doubt going to make a substantial amount more as far as salary. But the day after retirement, does all of that money that I'll have in my pension, and my Roth, and my bank account, might be...would it be too much? I'm not sure which would be better, Roth or traditional?

Pat: Oh, okay. So, you said your income is $33,500 a year. Correct?

John: Yes. I just started this. I'll be up and over that, hopefully in no time.

Pat: Okay. And does your spouse work outside of the home?

John: She does.

Pat: And how much is her income?

John: About $70,000.

Pat: Okay. So, $103,000 for the family. And you mentioned at least one child. How many children do you have?

John: Just the one. And he's out of the home.

Pat: He is. So, he's no longer, like my dad said, "Pat, the only thing you'll ever be to me is a tax deduction."

John: He is no longer the tax deduction.

Pat: My dad never said that. It's a joke.

John: He bought me a dinner every once in a while [crosstalk 00:11:43]

Pat: That's a financial planning joke.

Scott: That's a financial... And a bad one at that. No question, you should do Roth right now.

Pat: Without a... You're young. You stated that you think your income is going to go up substantially, correct?

John: Absolutely.

Pat: Yeah. So, don't worry about what you're going to do next year, or the year after, or the year after that.

Scott: That's right.

Pat: Right? Because you might call the show in three years and say, "My income for the family is $180,000." And we may give you completely different advice than what your income is driving the decision-making today. And the reality is, if you get to retirement...when you get to retirement, you like as many different buckets as you can, right? You want the Roth bucket, which is tax-free income. You want the taxable bucket. You want...

Scott: You mean like an account where it's already been taxed. Maybe you've got some mutual funds or stocks that have appreciated. It's going to be treated differently for tax purposes.

Pat: Under current tax law. Right? So, you have a brokerage. And then you have some IRA account that is fully taxed. And then when the distribution of all those monies comes out...

Scott: You've got flexibility.

Pat: You've got a ton of flexibility. Right? A ton.

Scott: But when you're in a...if you're in...the way that tax structure works, it's very graduated, very progressive some income is not taxed at all. Little bit is taxed at 10%. Then we've got a 12% tax bracket. Then it jumps from 12% to 22%. Then it goes as high as 37%. And if [inaudible 00:13:22] goes higher, it can go...add on some other taxes on top of that.

Pat: And depending upon the state you're in, it normally has the same graduation.

Scott: But you're right at the point where you're still in a 12% tax bracket. Barely, but you are. So, I would much rather say why...I mean, why take a tax deduction at 12%, when there's a good chance you'll be in a 22% tax bracket in the future? Now, next year, 2023, or 2024, your income might be higher, and it might go to the point where now you're in a higher tax bracket and you think, "Why don't we switch back to a traditional?"

Pat: But you may say, "Hey, I'm actually doing so well in my career that I think I'm going to end up making $150,000," and you'll make that decision then. Right? Either to do the Roth or to not do the Roth. So, the reason you're doing this is because you're at pretty much the lowest tax bracket...well, there's lower, but you're in a low tax bracket, and we expect you to be in a higher tax bracket in the future. Don't worry about what you're going to do next year or the year after. You'll make that decision then.

John: Got you.

Pat: Yeah. And you should be as...

Scott: Aggressive as possible.

Pat: With this pension, you should be as aggressive as possible.

Scott: Even without it, you're 42 years old.

Pat: That's a good point.

John: With the pension or with the Roth?

Scott: With any of your investments, and your 401(k), IRAs, Roth, any retirement investments, you've got 20 plus years.

Pat: Before you start taking distributions. So, you want to go as aggressive as you can.

Scott: And when you say aggressive, it doesn't mean, "I'm going to speculate on one little thing or two." It means...

John: So, no Bitcoin?

Pat: All right.

John: Is that aggressive or just stupid?

Pat: Well, actually, you do Bitcoin, you won't have to worry about what you're paying taxes on this. It's way out. No, you want 100% equity in your portfolio, well-diversified portfolio, 100% equity, and let her go. Just let it go.

Scott: Yeah.

John: So, the S&P, I hear you speak about the S&P a lot. Should I go ahead and deal with that in IRA?

Pat: I would...if you're my younger brother, I say, "John, use the total stock market index."

Scott: That's right.

John: Total stock, okay.

Scott: Make it simple. When you've got $50,000 or so saved up, you can maybe do...but it's not...keep it simple.

Pat: Just go by the VTI.

John: VTI.

Scott: Well, if he's contributing on a monthly basis, it might actually be easier just to use the mutual fund, Vanguard or whatever, I don't care...

Pat: Excellent point.

Scott: ...what fund it is. Total stock market.

Pat: Yeah, excellent point, Scott. Because...

John: I was looking at iShares, ITOT through iShares.

Scott: Look, to me, it's irrelevant. If you're buying a total stock market index, I don't care if it's iShares, State Street, Vanguard, Schwab, Fidelity. I mean, as long as they're all the low-cost options, it's all...

Pat: Yeah, but Scott's point was...

Scott: And I'm not promoting any of those, nor am I saying anything negative about them.

Pat: But Scott's point was, I mentioned an ETF, and Scott's point was the transaction cost might put a drag on it.

Scott: It just might be simpler. You don't have to set up a periodic investment. It might be simpler having it in a mutual fund. You can always move it to an ETF later.

Pat: I'm going to go with Scott on this. So, forget the VTI. Just buy the total market, get a low cost one, mutual fund.

Scott: Or use the iShare, and they set it up so you can set up a monthly basis, do it that way.

Pat: Yeah, but Roth, total market.

Scott: Yeah.

Pat: All righty?

John: Okay. And real quick, if you do have the time, I got a couple of quick ones for you.

Scott: You got me before I hit the button. So, yes.

John: Should I have multiple IRAs?

Scott: No.

John: Or just stay with the one with the pension?

Scott: The one with the pension?

Pat: Oh, no, so you...

John: I mean, separately, of course. Stay with the pension and one IRA? Or stay...

Scott: For now...yeah, yeah, yeah. I think one...you could have a variety of investments inside one account, inside one IRA. So, odds are... I mean, does your company offer a 401(k)?

John: No. It's a district, a special district in California.

Pat: They have a 457.

Scott: So, I mean, you could contribute...you might find yourself in the future contributing to that 457 plan and your Roth IRA. You might... Well, once you want to have some traditional money, you're going to want to use the 457 rather than...

Pat: The IRA.

Scott: ...traditional IRA.

Pat: So, right now, you... And does your wife's employer have...

Scott: You won't get the deduction for the IRA, your income would be to high.

Pat: Right now, is your wife have a 401(k) or 457?

John: Yeah, she does. She has 401(k). Her company offered it about three years ago. And she's 10 years younger than I am, so she's got a lot longer for that to build.

Pat: Yeah, use the Roth option on her 401(k). So, everything you do needs to be the Roth offset [SP].

Scott: For this year.

Pat: For this year.

John: For this year.

Scott: Based upon your income this year, which could change. A recommendation could be different in 2023.

Pat: All righty?

Scott: Okay. One more. I'm sorry. My regular savings account, what I have it in now is just an online savings account. It's only about 1.5% interest, I think it's through...it's markets, it's Goldman Sachs thing. Is that the best way to just have my regular savings is somewhere like that? [crosstalk 00:18:28]

Pat: So, how much money is in the account?

Scott: Right about $6000.

Pat: Okay, so if you go to markets, there's two accounts, right? There's a money market account, and then there's a savings account. Sometimes there's a difference of two tenths or three tenths of a percent between the two. You could put it in the highest yielding one.

Scott: The differential on $6000 is not going to be...

Pat: I mean, that's out of question.

Scott: It won't cover your time taken when making the changes on it. I'm just...

Pat: Your point is, well, take it.

Scott: De minimis. It's beyond de minimis.

Pat: But for the rest of the listeners, if you have an online savings account, there's normally two components. One is a complete liquid account. One actually will be a money market, or they might call it a savings account. One typically pays a little bit higher than the other. Keep it in the highest yielding one. When you need to get to that cash, you actually go online, transfer to the other account, and take the withdrawal. That's how it works. I don't know for $6000 if I'd go through that exercise. Just skip a cup of coffee...

Scott: If you run the number...

Pat: Skip a cup of coffee this year and you'll get to the same place.

Scott: Get the tall instead of the venti.

Pat: There we go.

Scott: All right, John.

Pat: Appreciate it, John.

Scott: Glad you called.

John: Much appreciate it, gentlemen. Thank you very much, and keep up the good work.

Pat: Thanks, sir.

Scott: Oh, thank you. It's interesting, as we were talking, Pat, when...just talking about how this is the decision this year. Next year might be different. And financial planning is a very fluid process. So, it's really built upon the information we know today, given the financial markets where they are today, given your goals, your life, all these things that we're accomplishing today, this is what we should be doing right now.

Pat: Yes.

Scott: But next year, that could be different. And the year after that could be different. And maybe I...did I hear...maybe it was one of those promotional financial shows that was talking about a written financial plan, a written financial plan. And we used to print out big financial plans. Now they're all done and it's left digitally. Right? And they're fluid.

Pat: It's in real time.

Scott: So, it's there. If you want to print it out, we can print it out. But I mean...

Pat: But by the time the financial plan is done, it may be out of date.

Scott: It's there. You can click on it any time, look at it. But the nice thing about it is you can update it as things are going on in your life, some of the changes happening, or whatnot, you can make some changes to that.

Pat: Someone at the gym this morning said to me, "Well, my husband is thinking of retiring, but our financial plan said we can't retire for another three years." And I said, "Well, when was the last time you updated your financial plan?" She said, "I don't know, four or five years ago." I said, "Well..."

Scott: This morning, literally?

Pat: Yeah. "Why don't you get your financial advisor to redo the financial plan to see what it would look like if you retired today?"

Scott: My guess is their salaries haven't been exactly the same those last four or five years. Their spending probably hasn't been exactly the same in those four.

Pat: Things change.

Scott: Who knows their age of their kids, and what's happened there, and what cash they need, or didn't need during those times, etc., etc.

Pat: Yeah, things change. Things change. Hey, Scott, we always talk about the fad, the investment fad of du jour, investment fad du jour. Right? And we've seen this thing with cryptocurrencies and the Bitcoin. And my gosh, this...

Scott: Someone asked me the other day, "What was the strangest investment that someone pitched to you?"

Pat: I'll tell you what mine was.

Scott: What was yours?

Pat: A client came into the office and had invested money in payphones.

Scott: That was the answer I thought of when I thought of this.

Pat: Did you?

Scott: It was when payphones were already in their decline.

Pat: Yes. Yes. And...

Scott: That's funny. I remember, that stuck with me. Then I started thinking more about it. I thought...I mean, there's all kinds of crazy...

Pat: Yeah. I mean, half the population have cell phones.

Scott: The Iraqi currency, it was supposed to be...

Pat: Oh, the dinar. I forgot about the dinar. I forgot about my Uber driver asking me what he should do with his money once he gets it out of the dinar. I'm like, "Well, wait. Let's wait till you get the money."

Scott: And it wasn't Iraqi who had immigrated here, who had some money in an account.

Pat: No.

Scott: It was someone who responded to some email, some phishing expedition.

Pat: Yes, yes. But strangest was these phones. And as I asked him, he told me he invested. I said, "Where's your cell phone?" And he's like, "Right here." And I'm like, "Okay, let's think about..." We ended up chasing it down. It was a scam. But this one is not a scam. It's called the Night Effect. And this was an exchange...

Scott: The Knight, K-N-I...

Pat: N-I-G...

Scott: Like nighttime?

Pat: Like nighttime.

Scott: Not like a British knight.

Pat: And this was a company called NightShares launched an exchange traded fund in June that mimics the S&P 500's nocturnal return. Nocturnal return.

Scott: I didn't know it slept.

Pat: [inaudible 00:23:28] I found this really curious. And the ticker symbol is NSPI, which is nocturnal S&P 500, so the ticker symbol...one of the ticker symbols for the S&P 500 can be and is the SPI for the S&P 500. So, their theory was this, this is their theory, the Night Effect essentially puts forth this theory that most of the returns in the U.S. stock market returns are when the markets are closed.

Scott: What?

Pat: This is the theory. And they said as stocks tend to open higher the next day, and dividends are also paid after the close. So, their theory is, look, it closes at a $1 and it opens at $1.20.

Scott: I hear you. Okay.

Pat: And so, you should actually buy it at the close, and sell it minutes after the open. So, this bespoke investment group, man, they have put some real names into it.

Scott: Bespoke.

Pat: Bespoke investment group. Not the ordinary investment group, the bespoke investment group. They were like, "This is an almost unbelievable phenomenon. We don't understand why anyone has done this." So, they calculated that owning the S&P index since 1993 would have earned you 600% when the markets were closed between 4:00 p.m. Eastern and 9:30 a.m. the next trading day. So, they put this thing together in May, and they launch it.

Scott: How much money's been raised?

Pat: It actually...this article didn't say, but here is the returns to date on their numbers since launch. Their return has been -2.2% through close of market Wednesday.

Scott: And what was the market up during that time?

Pat: 10.2%.

Scott: -2% to 10.2%. Twelve percent differential.

Pat: On this new thesis. Stay away from the bright and shiny new ideas.

Scott: It's an ETF, come on. You're going to put a financial product on that piece of garbage?

Pat: When the ducks quack, feed them. That's an old saying on Wall Street.

Scott: Yes. We're not on Wall Street, by the way. We're taking a short break. Stick around for more Allworth's "Money Matters." We'll be right back.

Commercial: Would you like an opinion on a financial matter you're dealing with, whether it's about retirement, investments, taxes, or 401(k)? Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.

Scott: Welcome back to Allworth's "Money Matters." Scott Hanson.

Pat: Pat McClain. Thanks for sticking with us through the second half of this exciting, exciting show.

Scott: Is that right?

Pat: I don't know. If I say it, does it make it so?

Scott: No. You're excited about it.

Pat: I know. Well, you judge. And if you judge well, go to our...wherever you're listening to this podcast.

Scott: Judge us favorably, you mean. They could judge well, and find the show...

Pat: Unfavorable.

Scott: Remedial. Too much off topic. I've been accused of those things.

Pat: Boring.

Scott: I don't [inaudible 00:26:58]

Pat: Lacking substance. But if...

Scott: Egotistical. Bourgeois.

Pat: Oh, no question. No question. Actually, there are degrees. I had this conversation with someone the other day about business owners, and they're like...she was telling me, "Well, this guy's got a big ego," and I'm like, "Yeah." She was telling me about someone else that had ran a successful business. She said, "He's got a really big ego." And I said, "Yeah."

Scott: That of his ego...

Pat: Confidence.

Scott: There's a leader in our organization. She was telling me this story. She's, I don't know, 50-ish or something. Senior leader. And she tells the story that she grew up on a farm. Her family did not want her to go to college. Her dad did not want her to go to college because she supposed to stay on the farm, or whatever. So, when she went to college, she took the Greyhound bus from her farm town to her college town.

Pat: No, mom and dad driving, dropping off, crying, no tears, none of that stuff?

Scott: No, "Let's go in down to Target, and getting the stuff for the dorm room," and all that other things that happen, right? None of that. She gets dropped off at the Greyhound bus depot. It's two miles to her college dorm room.

Pat: No Uber. No taxi.

Scott: She has three bags and realizes she cannot carry all three bags. She's going to have to leave one bag behind. I know this isn't "Sophie's Choice," right? But still, an 18-year-old woman with that kind of gumption. She decided which third of her life possessions she's going to leave behind, trenches through, goes to school, finishes the school, builds a nice career for herself. I mean, is she...does she have a big ego?

Pat: She's got ego. She probably has more confidence in herself than ego. Right?

Scott: Yes. Not afraid of much.

Pat: Yeah. Yeah.

Scott: Not afraid of much.

Pat: That's what you like. So, I don't know where we started with this. So, people...

Scott: I don't know.

Pat: We can use the word "ego."

Scott: That's because we have a...we're about to bring on a behavioral decision-making professor, expert.

Pat: Yeah. That is a fact.

Scott: Who is one who helps people go through their future self.

Pat: Well, we started with the conversation, if you like this show, give us a review. That's a circle back. Thank you for listening. Circle back. If you like the show, please go to wherever you listen to the show and give us a review. And if you don't like the show, I'd prefer you not leave a review.

Scott: And don't... Why are you listening?

Pat: That's a good point.

Scott: How many podcasts are there today? Everyone has one.

Pat: We're not like one of four. There are thousands of podcasts. If you don't like ours...

Scott: Tens of thousands, hundreds of thousands. I heard advertising now, there's companies that will help you do your own podcast. I don't know how you're going to make any money, but anyway.

Pat: Well, someone will. But let's go to our guest.

Scott: Hal Hershfield. We had Hal on a few months back. I don't remember when that was. But Hal is professor of marketing and behavioral decision making at UCLA's Anderson School of Management. And we enjoyed him last time. And so, we thought we'd ask him to come on again. So, Hal, welcome to Allworth's "Money Matters."

Dr. Hershfield: Hey, guys. Thanks for having me again. I'm happy to be here.

Scott: Yeah. So, last time we talked about how you...people make poor choices on the short term, and if they could identify their future self, go through kind of a journey of that, they'll make better choices today. Is that kind of sum, is that right at all?

Dr. Hershfield: Yeah, that's right. I think you hit the nail on the head there. And basically, a part of the problem is that we have a hard time sort of empathizing with and identifying with who will be down the road. And if we can do a little more of that, it might help us put the brakes on some of the decisions we make right now that we end up regretting later on.

Scott: Yeah. So, even in kind of the...what kind of poor decisions are people making in the last several months in this current...

Pat: You're laughing. The behavior psychologist starts laughing. We ask a serious question.

Scott: I hope my...I was talking to my counselor, she burst out laughing when I tell her something.

Pat: Well, you got to remember, Scott, he's only got a PhD from Stanford University.

Dr. Hershfield: I mean, but this is...a part of the reason I laugh is because, of course, on the one hand, you could say, "Where do I start?" On the other hand, I mean, we can forgive people, right? I mean, could there be more of a sense of uncertainty around the decisions that we make, right? And so, from my perspective, it's difficult to say, "Well, here's the number one poor decision that people have made." But I think one of the ones that we come back to, and it's nothing new, is the sort of emotionally-driven decisions that happen when the market starts to get really volatile. And I have talked to a journalist a couple of months ago who said, "I've written this same article 20 times in my career, and it's the same...it's always the same thing. When the market starts to get shaked up and volatile, before you start pulling your money out, before you start make any rash decisions," and then you can probably fill in the rest there. Right? But this is where one of the sort of big issues arises, I think, is that sort of reaction to volatility.

Scott: It's interesting, Hal, because we've both been doing this three plus decades. So, we've seen a lot of downturns. But it's the same 5% or 10% of clients that panic and call. Like, our advisors know which ones are going to be freaking out. And part of our role is keeping people from making mistakes from which they cannot overcome.

Pat: So, Hal, I have a question for you that's a little bit off topic. Does someone...

Scott: That's weird. Can have off-topic.

Pat: How much does someone's political belief sway...

Scott: What?

Pat: Well, any time that there's a change from Republican, R to D in the president, there is a group of...

Scott: The next day, people go, "I want out. I want..." whatever.

Pat: "I got to get out. I got to get in." How much does that...do you think that is a driver in how people emotionally view their investments? Whether there's...if I'm R, and R's in...the Republicans are controlling the situation, I obviously feel better. How much...is that a big factor?

Dr. Hershfield: Yeah. That's a great question. I'm less familiar with work that's been done on...

Scott: I was going to say...

Dr. Hershfield: [crosstalk 00:33:39] the link between political beliefs and those investments, but I would say it's actually a proxy for something else, which is this confidence in the market, and confidence in the direction that things are going in. And one of the things we know from the research out there is that I'm more likely to make slightly riskier investments if I think that the markets are going to continue to do well, and that I can somehow control it. But if I feel as if I've been...I'm coming off of a period of volatility, or if things seem less certain, then I may be more willing to go into a less riskier investment, call it an index fund, or even having more passive management. So, my guess is, and this is just speculation, right? But my guess is that sort of political affiliation is going to be almost like a proxy for confidence in the way things are going, based on whether my party's in power or not.

Pat: That makes perfect sense to me. That, I have never heard it... So, it's like, we're in charge, so we're going to make better decisions for my portfolio over the long term, or at least the short term than the other party, because obviously, my party's the best party, and your party's not. Right?

Dr. Hershfield: Yeah, exactly. And this also depends on your belief that the government can do anything, depending on who is in power. But that's maybe a separate precaution.

Scott: Or, if what they do is actually positive or negative, right? I mean...

Pat: Yes.

Dr. Hershfield: Yeah. Exactly.

Scott: Why is it that people have this tendency that they need to be doing something? And even as advisors, I'll be totally transparent, there are times over the years that I've made minor tweaks to a portfolio that really haven't changed anything. And I've only done it... It's almost a placebo effect. I've done it because they felt they needed to do something. I placated their desires. Still continue with their portfolio. But what is it about us that makes us feel like we have to do something?

Dr. Hershfield: Listen, you brought up the term, so I'll rip off of that. I'm not sure if you've ever heard of the medication Obecalp that some doctors prescribe to patients. But it's a medication that's quite effective at solving a variety of ailments, many of which may not really have any root causes. Well, if you spell that prescription backwards, you'll know Obecalp is just placebo. But doctors will write a prescription for it. Why do they do it is...

Scott: Do they really? I mean, in all seriousness.

Dr. Hershfield: Oh, yeah. [crosstalk 00:36:30]

Scott: This last week, some doctor in the United States wrote this prescription?

Pat: And what's it spelled backwards? Placebo?

Dr. Hershfield: Obecalp. Placebo. And this is a real thing. And the thinking there, of course, is it gives somebody a sense of agency and a sense of control over their situation. I think it's both in the medical space and the financial space, it's fear inducing. It's scary to think that things are happening without my control, and I have nothing I can do about it. But like you said, sometimes you give people some action they can do because it just feels like they're taking care of something. Now, we fundamentally have a motivation to have agency, to have control over our environments. And I think this rears its... I'm sorry, my dog's in the background. This rears its head especially when our contexts are more uncertain and more volatile. In fact, there's some research showing that people are more likely to try to see patterns, and sort of force patterns on random stimuli when they're facing uncertainty, when they're lacking control, because it's really scary to have a feeling that we can't impact our environments.

Scott: Is that why we saw the response that we did to COVID, you think? Because, I mean...

Dr. Hershfield: Yeah. When you say the response to COVID, which response is that?

Scott: Well, okay. You know what, I don't want to go. That's like a third rail. But yes. As time goes on, it'll be less of a third rail. But I think it's a bit of a third rail.

Pat: No, no. There was an emotional response in the marketplaces to it, based on the...

Scott: There was an emotional response with... Anyway [crosstalk 00:38:25]

Pat: A lot of it. Anyway, so I had a question about social media. And this was fascinating. So, we saw the meme stocks actually bring down...was the hedge fund Citadel? Did they bring down...one of the big heads, was it Citadel?

Dr. Hershfield: I think that sounds about right. Yeah, but I can't remember for sure.

Pat: And if I misspoke, it was one of the big hedge funds lost billions and billions of dollars overnight. And this had to do with the social media. How much do you think, like this Bitcoin, what's happening, how social media is affecting investments as a whole?

Dr. Hershfield: Yeah. It's a great question. It's actually one that I'm starting investigating now with two collaborators, because our suspicion is that part of what social media is doing is it's almost injecting the experience of FOMO with steroids. You know FOMO, fear of missing out. And of course, this has always been an emotion that's prevalent in investing. Right? If I were to go to the deli and have my butcher tell me about some stock I don't want to miss out on, that's...my main desire to then go call my broker and invest in it. This is old school. That's driven by FOMO, right? I don't want to miss out on something sort of rocket shipping up, and me not being on that ride. But my suspicion about social media is that now you're seeing it...whether it's on Reddit, or Twitter, or Facebook, Instagram, whatever it may be, now I'm seeing it play out in a much greater magnitude. And I can see just how many people have gotten in on this investment. Now, the irony, of course, is that by the time some investment that's done well has made it to social media, and I see more people talking about it...

Scott: It's too late.

Dr. Hershfield: ...it may ironically be too late...

Scott: Of course.

Dr. Hershfield: ...to get in on that.

Pat: And anecdotally, I mean, when my 78-year-old client comes into the office to review the portfolio, and says, "Hey, Pat, I think I should buy some Bitcoin." That didn't come from the butcher down the street. That came from social media, right?

Dr. Hershfield: Of course. Of course.

Scott: Or the kids, or news.

Pat: All right.

Scott: I do find that...one thing I find ironic, and I remember saying this back when the dot-com thing blew apart, we're in information age where you can get anything you want 24/7, at the tip of your finger. And yet it doesn't seem to make us any more wise. Volatility... Two of the worst downturns in the stock market since the Great Depression occurred in the last 20 years. The age of the information age. I find that there's irony there.

Dr. Hershfield: There's so much irony because you think...in fact, part of what this prevalence of information is doing is democratizing investing, and it's increasing so much transparency between consumers and firms. And made investing available to consumers who otherwise would have been left out. And yet at the same time, like you said, we've got two of the worst downturns. And I mean, there's...to be able to say, "Oh, it's because of this one thing," would, of course, be an oversimplification. But I'm sure part of what's happening there is that you're getting more and more people into the market because they fear that they may be missing out when, in fact, they may have been better served going with the less risky investment.

Scott: And I mean, that is what we just saw with crypto, right?

Dr. Hershfield: Absolutely.

Scott: Assuming that these companies that are now at bankrupt are going to somehow...they don't reemerge. And let's assume that the party that happened is probably not going to return.

Dr. Hershfield: That's right.

Scott: Most of people got in late, never had any positive returns, and have just suffered losses, whether it's through these digital banks, so-called banks.

Dr. Hershfield: I think you're right.

Scott: So, let's move off this investing for a minute, because there's a difference between investing and savings. Savings is taking part of your money and putting it away for the future. And what you do with that, either the bank account, or well-diversified portfolio, or whatever speculative or non-speculative investment. What causes certain people to be better at savings? I come from a family of five kids. And we all have a...we grew up in the same place with the same parents and the same education.

Pat: You've got four adult children that are all different.

Scott: Yes, yes, yes, yes. So, if we all come from the same environment, why are some...to have a different view of savings or their future self than others?

Dr. Hershfield: I think this is a great question because, as you said, it's not like...well, you have the same household, right? So, you've almost got the nurture component checked off the box there. It's all the same. But then I think this is partly where you see that interaction between the classic case of nature and nurture, where how I grew up may be constant across kids in a family. But my own sort of individual make-up may be different. But let me just add one thing to that, though, because I'm not sure it's so clear cut that just because I grew up in the same household, I have the same exposure to savings, because it may be that my parents are the same, and generationally speaking, I saw their habits.

But depending on a variety of factors, my experience with money early on may be different from my siblings' experience. When I was sort of in my formative ages, when I was growing up and seeing how my parents spent money, their finances may have been different, the market may have been different than my older sibling or my younger sibling. And we actually know from some research...

Scott: That's interesting.

Dr. Hershfield: ...that the way that we...our childhood experiences with money do actually have an impact on the way that we save, and the way that we spend, and even how impulsive we are with spending later on. But that these differences actually tend to really emerge when the waters get choppy. When we're in context later on in our adult years where we're somehow constrained, be it on some sort of macroeconomic level or micro. And so, in other words, those earlier childhood experiences tend to really impact us when things are more unstable, more uncertain when we're when we're older.

Scott: Got it.

Pat: Got it. It's interesting. They're in the minority, but we have clients that have so much money, we cannot get them to spend it.

Dr. Hershfield: Yep. That's right.

Scott: And we like to joke, and be...they're our favorite kind of clients. Because all they do is put in money, never take it out.

Pat: I mean, I have clients that I insist on...

Scott: We joke, but that's...

Pat: "I'm going to send you this much money a month, and you cannot return it to me," trying to force this. And what I realized is, over the years, I'm making them uncomfortable, and now I don't even try that much anymore. I'm like, "Just take out whatever you want." So, these things are ingrained for years, and years, and years, and years. You can't change it, or can you?

Dr. Hershfield: No, I think that's...there's a couple of things there. So, one is, sure, those things are ingrained. Like so many of our other experiences, the way that we've sort of...we build habits of sorts, right? I think that's the better way. And it's particularly tough when you've developed a habit of saving, and you're saving, and saving, and saving, and then, all of a sudden, you're trying to get somebody to say, "Let's shift gears now," especially when you're in your 70s and 80s, "and start spending." So, it is a tricky thing. I would say, though, that [crosstalk 00:46:36]

Scott: My mother is 83 and she still saves.

Dr. Hershfield: Well, there you go. I mean, I think that's a great example.

Scott: Every month, she saves. She's 83.

Dr. Hershfield: My grandmother, who's almost 99, she saves a little butter patch from restaurants and puts it in the freezer. [inaudible 00:46:55]

Scott: She remembers it from the war. The butter rations might come back.

Dr. Hershfield: Exactly. You never know.

Scott: I'm guessing you don't have toast at her house.

Dr. Hershfield: No, exactly not.

Scott: That's like, "Grandma, I'll pass on the toast." That's funny.

Dr. Hershfield: I was going to say, if you think about solutions there, one thought that I've been considering over the years is saving oftentimes is really abstract. You're saving for the future. You're saving for a rainy day. There's no specific sort of...sometimes we have specific focus for saving, especially for short or medium-term goal. We want to save up for a mortgage, etc. But oftentimes, especially when you get into these habits of saving, you're saving for the sake of saving. And I do wonder, especially with those clients whose perspective you want to shift, if it makes some sense to start reframing their interactions with money in more sort of specific value-based ways. So, not, "Here is money to spend," but, "Let's think a little bit more deeply on how we're going to spend that money." Is it on their grandkids, great-grandkids? Is it on causes that are close to their heart? These sorts of things. And that then shifts it from, "I just need to pile up this money to have it," to, "I need to start spending this."

Pat: How it is...I have...specifically think of this client who was saying to me that she's not seeing her grandchildren enough. And I said, "You want to see them all in one place?" And she said, "Yes." And I said, "You're going to rent a house in Hawaii for a week. It's going to cost you a lot of money. Every one of them is going to show up." And she does it every year now.

Scott: Does she?

Pat: Yeah.

Dr. Hershfield: I love that.

Pat: In someplace different in the country. And it's like...

Dr. Hershfield: I love that.

Scott: And she probably had all the money because she was always concerned about the future and was like, "Let's save it."

Pat: Correct. And I'm like, "Now the experience is more important than the money." So, before you go, tell us about two little bits of research that...or one bit of research that you're working on.

Scott: That you're excited about.

Pat: That you're excited about.

Dr. Hershfield: Oh, that's a great question. All right. Yeah, I love it. Okay. So, I'm doing some stuff right now trying to better understand why more retirees don't purchase annuities when it makes sense for them to do that. And we don't have the answers yet. But I'm really excited at the process of understanding why certain consumers bristle at annuities, and why some of them don't, and how for the consumers for whom it makes sense to buy those, how can you help them overcome some of those barriers? I'd say that's one of the ones I'm excited about. Although I recognize that if you say annuities to people when they ask you, "What you're excited about," it doesn't make you sound like a very exciting person.

Scott: Yeah. Nor is the person who says...yeah. "What are you super excited about?" "Oh, I'm studying annuity purchasing behavior." They're going to get invited to all kinds of cocktail parties.

Pat: And, Doctor, I mean, there are...look, we have a view of annuities that is neither negative or positive. The problem is that the...

Scott: They're so mis-sold.

Pat: ...they're so mis-sold, and there's so many different kinds that the average consumer can't tell the difference between good and bad.

Dr. Hershfield: That's right. That's one of the big things. [crosstalk 00:50:26]

Scott: Hal, we so much appreciate...we appreciate you being on. And if people want to learn more about the work you're doing, they find you how?

Dr. Hershfield: Yeah, you can go to my website, halhershfield.com. But guys, I really appreciate you having me. Thanks.

Scott: Thanks. It's always fun.

Pat: It's always a pleasure.

Scott: Yeah. Appreciate it, Hal. And unfortunately, Pat, we are almost out of time here with the program. Hey, want to remind people that we've got Social Security workshops, Five Steps to Managing Your Social Security, August 24th, 25th, and 27th in Sacramento. August 25th and 27th in Cincinnati. August 25th and 27th in Denver. So, essentially, this coming week, Sacramento, Cincinnati, and Denver, there are live workshops where we're talking about Social Security. It's really designed...this workshops designed...if you saved pretty well, you got half a million or more saved for retirement, you're within five years of retirement, it makes sense for you to go to it. There's no cost for it. To sign up for it, 855-918-2181. Again, 855-918-2181. Or allworthfinancial.com/workshop. And unfortunately, Pat, we're getting close on the time here, because you said you were going to talk about...

Pat: Oh, Rwanda. My family and I went to Rwanda. Hiked in to sit with the gorillas, family of 29 gorillas one day, and 19 the other.

Scott: Wow.

Pat: Three feet away. Life experience. Energy in versus output, don't do it.

Scott: What do you mean?

Pat: It was hard to get there. It was a life experience. It was hard to get there. It took many days, cost some money.

Scott: I was trying to picture Pat sitting patiently, quietly for hours waiting for the gorillas. I've never seen you sit more than three minutes for anything.

Pat: Anyway. Go to the zoo. Pretend there's no glass. You'll get 90% of the experience.

Scott: Thanks for joining Allworth's "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.