Man: Would you like an opinion on a financial matter you're dealing with, whether it's about retirement, investments, taxes, or 401(k)s? 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-W-O-R-T-H.

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

Pat: I'm Pat McClain. Thanks for joining us.

Scott: Yeah. Glad we're...

Pat: Glad you're listening.

Scott: Yeah. Glad to be in the studio with my long-time business partner and financial advisor, Pat McClain. As you know, we've both been advisors for three decades or so...

Pat: Long time.

Scott: ...doing this program, almost three decades. And it's always a pleasure to be with you and help you as you navigate your finances. And it's funny because we've always said this is an apolitical show, but there's been so much in the world of politics the last couple weeks.

Pat: It's unbelievable.

Scott: And, of course, last Saturday, with the attempted assassination and stuff, it's just an interesting time. And then so you look at last week, and I was kind of curious what was gonna happen with the markets.

Pat: And...

Scott: They were on fire.

Pat: You know, when the Gaza Strip in Israel... Right. We talked about this when it happened, and I thought the markets would just completely tank, and it was like, it runs in its own little bubble.

Scott: The market, it feels like it's been on a melt-up.

Pat: Oh, the news reports. Oh, all-new highs, you think? Well, the market's, that's how it works.

Scott: Of course, that's why you invest for an all-new high.

Pat: The market goes up.

Scott: I think...

Pat: The market goes up 53% of the time, which means it either goes down 47% or stays the same.

Scott: On each day, yeah.

Pat: On each day.

Scott: In a typical day. That's exactly right. It's pretty much a coin toss.

Pat: Except for that 3 percentage point.

Scott: And on an annual basis about one out of three years is negative. But if you look at the last 12 months...

Pat: Holy smokes.

Scott: Yeah. And it's hard. My wife the other day, I said, "Oh, my gosh." And I looked at my phone, she's like, "What?" I said, "The markets are just up so much." She's like, "Well, what's..." Was it my wife or my daughter? They seem concerned about this, "This isn't a good thing?" I'm like, "Yes, I like things going up. I love earnings going up for companies. I love the economy growing. The stock market will follow." But when you have day after day after day, oh, we have a little bit of days here and there, but all in all, the last 12 months, the market has just been...it's just crazy, crazy.

Pat: What really seems...

Scott: It's normal. This is how the markets work.

Pat: That's right, right?

Scott: You could have two years of a growing economy...

Pat: And nothing in the market.

Scott: And nothing in the markets.

Pat: Or you could have a shrinking economy...

Scott: And the market's going up.

Pat: At the beginning of the COVID, right? The very beginning of the COVID. But, Scott, what's really interesting, I mean, is the difference between the Dow and the Nasdaq?

Scott: Huge divergence. It's almost like the Dow is irrelevant anymore.

Pat: At one point, this week, it was 3-percentage points difference. The Nasdaq was down 2.69%, and the Dow was up almost 3/10ths of a point. And I thought, "Wow, this is a pretty big swing." Right? It's a 3-percentage point difference.

Scott: And the last time we had that big of a difference was 25 years ago, 1999. Yes. It's interesting. Yeah. That what it tells us.

Pat: Well, in small caps, right? Midsize companies, small caps seem, you know, they're more volatile than... But the total market, it screams diversification, doesn't it?

Scott: Well, and also, just a reminder that you can't time these mark-... I don't even know how you would try based upon, what? I mean, this week, look at it, the Fed comes out and says something, "Well, it looks like we might lower interest rates soon." And the market just goes on a tear. And then two days later, it's like, everyone forgot that. The market, it's crazy. But this is how the markets work.

Pat: It is how the market works.

Scott: And so if the proper allocation for you is to have, let's say, 60% of your assets in growth companies, in equities, in stocks, that should be true now, as it was true a year ago, and as it should be true a year from now.

Pat: Which means...

Scott: Had you been sitting on the sidelines waiting for the right time, you really have a lot of angst now because you've just missed out on this. But you still shouldn't be waiting for it to come down.

Pat: But we should talk about rebalancing the portfolio. If not this week, Scott, you and I, we should talk about how important rebalancing a portfolio is.

Scott: And how fun it can be.

Pat: It's really difficult to rebalance a portfolio.

Scott: Emotionally.

Pat: Emotionally, it's difficult.

Scott: Why would you wanna sell Nvidia today?

Pat: Yeah. Why would you sell something that has done so well? Right? So, when you rebalance a portfolio by its very nature, you're selling those things that have done well and buying those things that have...

Scott: That's exactly right.

Pat: ...done less well.

Scott: Or have fallen in value.

Pat: That's right. Which is really difficult thing to do emotionally, which... And look, we're practicing advisors. I've been doing this for 35 years. When I have the discussion with clients about why we rebalance a portfolio, it is not an easy discussion. They're like, "Why would...?" Pat, that mutual fund, that...

Scott: ETF, that whatever, that's...

Pat: ...is up 30% this year, why would we sell any of that? Why would you do that?

Scott: And during the same conversation, why do we have this holding in here? This thing lost 8% last year. Aren't you paying attention to my portfolio?

Pat: Have you heard that before?

Scott: You know, it's funny. So, I'm moving into this [inaudible 00:06:26]. Years ago, there were a number of years where we did not post the percentage returns of particular holdings because we said, "Look, there's no benefit to this because people are not gonna make wise choices based upon what percentage." Just like on 401(k) statements, typically, here's how it did the last quarter. And so for many years, we did not have that on a reporting. We did and it just, you can get all kinds of information and it's all customized reporting now but... Which I don't know if it's helpful because...

Pat: It causes people to make emotional decisions and leave... What happens is, it destroys, it can destroy an investment thesis. And an investment thesis, everyone should have an investment thesis. Like, why do I own this? And what am I trying to achieve? What's my thesis?

Scott: What are you trying to accomplish? And how are you gonna go about that?

Pat: Yeah. What's my thesis? And then you have to... Once you develop that investment thesis, you stick with that investment thesis unless there's been life changes. You win the lottery and all of a sudden you're worth $10 million, or you inherit a bunch of money. Or you develop a terminal illness, or, or, or. But you can't change investment thesis just because the portfolio's acted in a manner that, all of a sudden you think, "Well, this is doing really, really well. I'm just gonna keep it." So, I was thinking about this today, yesterday, actually, this one client, she called me. It was in 1990. Do we have any of that music?

Scott: Do you remember this?

Pat: I do remember this. She called me, and she said, "Pat, I have this stock." And it was a tech stock. It was 1998. And she said, "This is how many shares I have." And I said, "You know, that's worth $1.3 million." I said, "Who gave you this stock?" And she said, "How do you know someone gave it to me?" I said, "Because I know you pretty well. We've worked together for a number of years. You wouldn't have bought this stock because it's not really on your radar and you're not that involved." And she said, "Well, that's interesting. My brother was the CEO of the company, and he gave it to me."

Scott: This is the late '90s some dot-com thing?

Pat: It was a dot-com.

Scott: It was worth $1.3 million at the time?

Pat: Yes. And rest of her portfolio was probably worth a million dollars. And I said to her, "Let's..."

Scott: So, this could be life-changing to her?

Pat: Oh, I said to her, I said, "This is retirement money right now." I said, "You've talked about, you and your husband retiring." I said, "This is retirement money. This will get you over the hump." I said, "If we..."

Scott: You went from $1 million to $2.3 million?

Pat: In a matter of months. And I said, "Let's just sell half of it." I said, "Let's sell all of it and rebalance it and something that's more appropriate for you." And she said, "Well, I'm not. I'm gonna wait for it to double one more time." I said, "I think that's a bad idea." So, I said, "Let's just sell at least half." "Nope. Pat, we're not selling any of it." Four years later, we sold that whole thing for less than $60,000. Less than $60,000. And I think about that. I think, you know, this thing fell on you and you didn't follow an investment thesis about what you were trying to achieve because through... No. I didn't help them achieve... It was the markets overvaluing these dot-coms at the time, which is... I don't know if you've listened to the show any period of time. Stuff like that kind of scares us a little bit.

Scott: Well, I think people get confused on their objective, right? So, they suddenly saw this holding that was worth nothing, worth $1.3 million. And they're thinking, "Hmm, if we let this thing continue to run, it's doing so well. Like, it should just continue to do well, this is such a growth area in the marketplace. This new internet thing. The dot-com's gonna do great." And your objective is like, "Hold on. We now have enough money for you to live the lifestyle you've become accustomed to, maybe even better than the lifestyle you've become accustomed to..."

Pat: Forever.

Scott: Correct. The rest of your life. And not have to worry about your finances anymore. You've now have financial freedom.

Pat: And for them, it went to, "Okay, let's get rich. Let's get rich."

Scott: By rebalancing like that, and diversifying is not the way to get rich.

Pat: Not at... But it's...

Scott: It's the way to protect where you're at, for sure.

Pat: Yeah. It's a good way of not being poor.

Scott: Yeah, it's true.

Pat: People get confused. People sometimes think they're interested in getting rich, but really what most people are interested in is not being poor.

Scott: Those are subjective terms though.

Pat: Relative. That's right. Well, since '70...

Scott: I think it's, people, they don't wanna go backwards on their lifestyle.

Pat: That's right. That's right.

Scott: And I'm not talking, like, a typical middle-class lifestyle.

Pat: Yeah. These people, by no means, are driving 6, 7, 8, 10-year-old cars, you know, working for the man, whatever, the man, the woman, they, but it's interesting. For whatever reason, when I was looking at Nvidia stock, I was thinking about that. I was thinking...

Scott: You know, what I was thinking this morning was driving into the studio. I remember back in the dot-com boom, and I remember thinking, "It's clearly not sustainable. The question is, is this gonna take down the rest of the market with us, or is this just a one-time thing?" But back then, most of those companies didn't have any revenue, or if they had any, it was very small.

Pat: Not earnings, revenue.

Scott: Just revenue. I'm not even talking about earnings. The difference now is some of these, like Nvidia, these chip manufacturers, they clearly have both revenue and earnings. The question in my mind is, is this AI boom, is it going to truly materialize? Are the companies that are investing in this, are they gonna get the returns out of this that they were hoping? And are they gonna continue to invest in this area? Or are we seeing a bit of a bubble in the investment in these chips?

Pat: Oh, in the chips?

Scott: Yeah. I mean, I just...

Pat: Yeah, yeah, in the chips.

Scott: Because the bet is that this is gonna be transformational. All companies need to get on the bandwagon of AI. If you're not, then you're gonna be left behind. So, if you're not investing now... I mean, how many times have you been asked, what are you guys doing for AI?

Pat: But AI, it reminds me of the dot-com where... I mean, I remember a guy coming to... He says, "My company's worth $8 million or $12 million." A little investment advisory firm, just super, super small. And I'm like, "How could it be there?" And he had changed the name to wealthmanagement.com or some...
Good for him.

Scott: Right.

Pat: After the blowup, it wasn't worth anything. But these companies are not immune to how the markets work and what people are willing to buy, so they're putting AI on everything. Everyone's story is now AI, AI, regardless of the business.

Scott: That's right. That's right.

Pat: Regardless of the business. I find it... It's fascinating. Just remember this, when pets.com finally blew up, the biggest asset in the liquidation was the talking hand puppet.

Scott: What happened to the chock [SP], is it still around?

Pat: In liquidation.

Scott: But Chewy, isn't Chewy... Chewy's a big brand now, right? Chewy.com.

Pat: Yes, but it wasn't pets.com.

Scott: I know, but it's funny, just because you have a good domain doesn't mean you know how to execute a business plan well, either.

Pat: I find the Chewy thing quite interesting.

Scott: Chewy?

Pat: Yes.

Scott: Why? What do you mean?

Pat: I know people that subscribe to it and they get a box of, you know, magical things for their dogs or cats once a month.

Scott: No, I get food. I get dog and cat food delivered. Apparently... Wait, wait. They don't sell it in-store. Apparently, the dog food that they sell at Kroger's, or Ray's, or whatever isn't good enough for our dog, I guess. I'm not the one who buys the dog food, but I think it's this special...

Pat: You need to fight this.

Scott: No. Fight it?

Pat: But I know people that get a surprise box once a month.

Scott: No, we don't get a surprise box.

Pat: You get dog food. It is really difficult to go to a store and buy dog food.

Scott: Hey, I know people that buy all kinds of special raw foods and stuff for their animals. At least my wife's fine with just dry kibble from Chewy. Yeah, it's Chewy. Yeah, it's Chewy delivers the cat food and the dog food.

Pat: That's nice.

Scott: Because they're special formulas. Just [inaudible 00:15:50].

Pat: All right. Let's get some emails now.

Scott: Oh, yeah. No one... I mean, people love their pets.

Pat: Yes.

Scott: I love my little dog. You haven't had a... It's funny, Pat, when I first met you, you had two border collies before you had kids, and then once you had kids, you never had dogs again.

Pat: That's right.

Scott: I thought for sure you guys would get dogs again. You never have got dogs.

Pat: We got rid of all the living plants inside my house as well. They're all plastic now. True story. I used to have 30, and I said to my wife, "Let's just turn it into something else we need to take care of." So, let's replace.

Scott: Yeah. Kind of get...

Pat: Get rid of them, or it's a plastic.

Scott: I have, by the way. And then we're gonna get to the calls. We've lived in the same neighborhood, same house, 19 years. And both Pat and I, myself, we live in the foothills of the Sierras. And so there's wild animals, there's lots of deer and...

Pat: My neighborhood, there's mountain lions.

Scott: Yeah. And for 18 of the 19 years, the deer did not touch my roses. And we have, in the front of my house, like a courtyard with like, these beautiful roses all around, with probably 25 different rose bushes, different colors. It's fantastic. Eighteen years, they haven't touched them. Now they're all gone. I was outta town, my wife sends me a picture, a video of this buck, 10-point buck, maybe 12. This thing was...I don't know how old he was. He was just hanging out, laying down. It was a hot day, laying down on the grass after he enjoyed all of our roses.

Pat: Did you hit the deer repellent, spray it on them?

Scott: No. I don't [inaudible 00:17:33]. But to your point, I'm not gonna put plastic roses. But I told my wife, maybe we should just put some other plants in there because I don't how much time I gonna spend on.

Pat: After the show, I'll tell you what I use.

Scott: Okay. Salt pellets.

Pat: No.

Scott: You sit out there with a rifle.

Pat: No, no.

Scott: I'm tempted to.

Pat: Let's go. Let's get the calls.

Scott: All right. If you wanna be part of Allworth's "Money Matters" and talk to Scott Hanson and Pat McClain, a couple ways to do it. One is send us an email questions@moneymatters.com. You could let us know what your question is. We'll schedule a time to get you on the program, or you can call 833-99-WORTH and join us that way. We are talking with Ray in California. Ray, you're with Allworth's "Money Matters."

Ray: Hey, guys. How are you doing?

Scott: Good. How are you doing, Ray?

Ray: I'm doing great. So, I got a question for you. I have to say I have financial freedom. I don't wanna get rich. I just wanna maintain my lifestyle. And right now, I have a pension and I'm doing fine. I'm married. I just retired a year ago, and I'm 62. My question for you is, from my ex-employer, I have about $140,000 in a 401(k). And my question is, how do I know that this is low-risk? Because my goal for this money is just play money. And my thought is, I just wanna peel off about $10 grand a year and just use that for traveling or whatever.

Pat: And how much is your pension a month?

Ray: I take home about $7,000 a month.

Scott: Okay, just in pension?

Ray: Yeah, just in pension.

Pat: And does your spouse receive a pension as well?

Ray: She does not, no.

Scott: And do you have any cost-of-living adjustment on your pension as inflation goes up?

Ray: I do. Yeah, I do. It's probably 2.5%, something like that.

Pat: Okay. And are you taking Social Security?

Ray: I am not. I haven't taken it yet. Nope. But I paid into it.

Pat: And will your spouse receive Social Security as well?

Ray: She does not have enough credits or quarters.

Pat: Yeah, quarters. And are you living comfortably on the net of 7,000? Well, let me ask this question.

Scott: He wants another $10 grand.

Pat: Yeah. But you're living comfortably on that $7,000 a month?

Ray: Yeah, I'm living comfortably. My wife works part-time and she teaches piano, so she has money coming in too.

Scott: And when you say safe, what do you mean by safe? Safe from what?

Ray: Okay. So, in case the market crashes, am I gonna have anything left? So, when I look at my 401(k), it looks like most of it it's in blended, says blended investments. Blended fund investments, I got like 89% in that, and then 8% in stock, and 2% in bonds. I mean, is that low-risk?

Scott: Well, I don't know what the blended is.

Pat: Well, I'm gonna guess it's...

Scott: Balanced fund?

Pat: ...balanced fund, so 50%, 60%.

Scott: Well, it depends how you define risk. So, here's how I look at risk...

Ray: Okay. Let me ask you this. Okay, go ahead. Sorry.

Scott: Here's how I look at risk, as the years go on, you've got a pension that has some cost-of-living adjustment, but inflation's going to, over time, erode the purchasing power of that. So, I think, "Hmm, is there a chance we can have that 401(k) set up in a way to have some growth on it to help offset that inflation as the years go on?" Or...

Pat: You could look at risk as fluctuations in the stock market.

Scott: Yeah. Like, the 140 drops to 135 tomorrow.

Pat: Or a 100.

Scott: Or 70.

Ray: Right.

Pat: Right. So, what is risk to you?

Ray: Yeah. So, risk to me is I don't lose it all if the market crashed. And if I could get 5% on this money and let it grow and then, you know, peel off $10 grand every year or something and, you know, whatever. For me, it's just play money. But I just don't wanna lose it. I don't wanna lose like, 40% or 50%, you know, if the stock market crashes.

Pat: Look, I'm in camp with Scott, which is, when we talk about safe, there's two types of safe, right? There's safe that there's no principal fluctuation. And if that's the case, then you could roll it out and put it in an IRA and buy U.S. government bonds and you'll be okay. It will still have market fluctuations because bonds go up and down in value.

Scott: Or you buy CDs.

Pat: Or you buy bank CDs.

Ray: Yeah. Okay.

Pat: But the danger there is, in an inflationary environment, you will get eaten alive. And so your purchasing power will go down.

Scott: I mean, you've got a great pension. So, one can make an argument saying, "You've got such a large pension, let's consider that fixed income." If we actually calculated what the current value of that, what would it cost us in today's purchasing pow-...

Pat: Oh, couple million dollars.

Scott: ...to get $7 grand? Yes. So, we got all this and guaranteed, we have this little tiny amount relative to the value of that pension. Why don't we have that designed for growth? And when we talk about a stock market crash, you're not gonna go to zero. I mean, if Apple goes to zero, and Microsoft goes to zero, and Chevron goes to zero...

Pat: Your pension will go away.

Scott: ...and McKesson goes to...

Pat: Your pension goes away because your pension...

Scott: Our life goes...

Pat: Your pension is backed by about 60%...

Scott: That's right.

Pat: ...in equities. Your pension and your 401(k), if we peeled them back and looked at the allocations, they will look pretty similar. They will look very, very similar. Because that pension, although it's disguised to you, it's allocated. Most institutional pensions have anywhere between 60% and 70% in equities.

Scott: Some private equity.

Pat: Some private equity.

Scott: More private equity.

Pat: Some private real estate.

Scott: So, there's two ways you can go about this, my opinion. So, I'm just thinking, you're my brother. I'd say look, Ray, here's two options. I'm just throwing that to you. There's more than two options. One option is to say, "Okay, let's keep this. Let's keep you happy, not have this thing fluctuate. Put it in CDs, draw your $10 grand a year out, defer Social Security until age 70." So, let's plan on actually you drawing your 401(k) down, or at least pulling out the interest and letting the thing not have any growth. And then when at age 70, kick in Social Security.

Pat: Then you have a hedge against inflation, at least for time being.

Scott: Another option is, say, let's invest this on a... If you're gonna pull out $10 grand a year, let's invest it the way other pension plans invest it. Let's have a diversified portfolio, maybe 50% in equities, maybe 60% in equities, have some bonds in there and some other parts of the portfolio designed to giving you the highest probability that it can continue to kick off income 5 years, 10 years, 15, 20 years from now and with the shooting for a return north of 5%.

Pat: But actually, I think your portfolio is, you know, from the little that we can have this conversation without, actually, looking at the portfolio itself, you've got most of it, my guess is it's between 50% and 65% inequities.

Scott: Let me throw out a third option. As you say, carve this into two different accounts. Have one that you put in CDs, you put the exact dollar amount you need to pull out the $10 grand a year, whatever that number is for the next 8 years until Social Security kicks in. You take the second half of it and you put it in growth investments, realizing that when your Social Security kicks in, you're not gonna need that extra $10 grand a month because Social Security's gonna make up for that. And then it gives you a chance to have that other portion of your 401(k) to have some good growth on it.

Pat: And he's just playing mind games with himself at that point in time.

Scott: One hundred percent.

Pat: Right. You're just playing mind games. That's what you just did, Scott. No, no.

Scott: It's behavioral finance.

Pat: That's right.

Scott: It's setting this thing up that's gonna work for Ray.

Pat: And I have done that with clients, I can't tell you how many times.

Scott: If you wanna call mind games, I'm just...

Pat: It is. But quite frankly, your portfolio is fine.

Ray: Yeah. Yeah. I look at my rate of return, year to date is 9% and...

Pat: I know, but why?

Ray: ...for the one year is 13%.

Pat: But why?

Ray: Well, because it's somewhat diversified.

Pat: No, no. But why are you looking at the rate of return?

Ray: I was just looking at that just for the hell of it to see how my investments are doing for a 401(k).

Pat: Okay. But this is designed for your lifetime?

Ray: Yeah. [crosstalk 00:26:22]

Scott: I mean, in a perfect world, Ray, you step back and you make sure you're invested properly and then the returns are gonna do what the returns are gonna do on a short-term basis. Like, who knows if it's gonna be up, gonna be down. What we do know is if you go over a long enough period of time, stocks, historically, have done about 7-percentage points above that of the rate of inflation. Bonds have done about 2-percentage points above that rate of inflation, and cash has done up .5-percentage point above the rate of inflation, historically. The last 100 years, some even say 200 years, depending on how much you wanna believe data that far back. But assuming that we're gonna have something similar over the next 20, 30 years, you could have the approach saying, "I'm gonna be diversified. I'm not gonna worry about the ups and downs. I'm gonna have bad quarters." But that also takes some mind games.

Pat: Yeah. But if you looked at the net present value of that stream of income from that pension, that's fixed income. I would make the argument that maybe this should be 100% equities.

Scott: But he is taking some money out.

Pat: But he is taking money out.

Scott: So, you could carve it off saying what money you're gonna be... Because once you take Social Security, you're not gonna need these same additional dollars.

Pat: If it makes you feel better, do what Scott said, but this portfolio's fine.

Ray: Okay.

Pat: You're fine.

Ray: Well, that's great. I appreciate your time, guys.

Scott: Bye, Ray.

Pat: And remember this, remember this conversation because in the next three years...

Scott: There'll be a bad time.

Pat: ...and your portfolio will be down 25% in the next 3, 5, 7 years. I don't know when, and you're gonna say, "Well, that was really bad advice from Scott and Pat." But look, it's called a risk premium, which is, you get above the rate-of-inflation returns for putting up with that volatility in a well-diversified portion.

Scott: And I think Ray's question is, why do I bother to put up with any of that? Right? Why don't I just take the 5% and...

Pat: Inflation.

Scott: Inflation, that would be our argument.

Pat: Inflation.

Scott: Yeah. Appreciate the call, Ray. You know, it's funny, but investing, it's tricky because it's not just the right investments. You need the right discipline behind it.

Pat: Yes. You gotta get it.

Scott: I have [inaudible 00:28:40], Pat, on you as well. I've had clients that have multimillions that say, "I've got way more money than I need that I'm gonna spend in my lifetime. I might as well be invested for growth. I've got kids and I've got some charities that I care about when I die. Like, let's just invest this thing for growth. I'd rather take on quite a bit of risk because, heck, if the thing falls in half, when we go to the next bear market, it's not gonna impact me." I've had other people with several millions that said, "Scott, I've got way more money than I need. I'm never gonna spend this my lifetime. Why take any risk whatsoever?"

Pat: And they're both right.

Scott: And they're both right. Or as long as people understand the implications of...

Pat: Or sometimes you just go right up the middle. You just go right up the middle. And I've done it where I've actually separated the accounts like, "Look, you're not gonna spend this money. How old are your children? They're gonna inherit this money. Let's invest it for their timeline."

Scott: Well that's just like, when I was talking with Ray, saying, "Let's take whatever you're gonna need between now and Social Security kicking in. Let's figure how much that is on an annual basis, plus whatever interest you'd earn." So, you wanted $10 grand for 8 years, maybe he needs $60,000 in the account or whatnot. And then have one account, that's the whole thing that's designed to do.

Pat: And then the other 100% equities and you just kind of ignore it.

Scott: Yeah. Like, I don't care what it's worth today. I care what it's worth 10 years from now. But that's easier said than done sometimes. That's what makes all this stuff, I think pretty interesting.

Pat: I'm glad you actually like your job.

Scott: Look, I have the same struggles emotionally. I mean, it's easy when the markets are going up because you kind of forget how painful it could be when they're going really far south.

Pat: Actually, someone asked me that. They're like, "How do your portfolios do?" I said, "The portfolios do what the portfolios do." It's how the clients react to the portfolios which makes the job difficult.

Scott: Completely. And if we're really transparent here, there's some percentage of clients, I don't know, is it 5%, 10%, 15%? That tend to be the more challenging because they're the ones who really struggle staying invested through the market cycles.

Pat: They want a time.

Scott: Well, yes. They want another solution other than going through ups and downs. They're looking for some other solution.

Pat: Like, get us out at this point, and then tell us when.

Scott: That's right.

Pat: But, Scott, look, there is, on my feeds, right, the news things, there are people that market to that class of clients. But the story is...

Scott: Oh, for sure.

Pat: ...we know when to get in and when to get out.

Scott: Yeah, of course. It's a good story and sounds good.

Pat: You know when to get in, when to get out.

Scott: Yeah. This is a good story. It works pretty good. We're gonna get you. Anyway. All right. Let's continue on here. We are in North Carolina talking with Lee. Hi, Lee. You're with Allworth's "Money Matters."

Lee: Hey, how are you doing? Yeah. My name is Lee Johnson, and my question is, I have about $240,000 in 401(k) and I didn't know it was best to take it out and pay off my mortgage, so a 100,000 and invest the rest. Or what is the best way to go?

Scott: How old are you?

Lee: I'll be 70 in October.

Scott: What's the interest rate on your mortgage?

Lee: I knew you were going to ask that. I think it's less than 5%.

Scott: Have you refinanced the mortgage in the last five years?

Lee: No.

Scott: Okay. So, a few years ago when someone had cash invested and they wanted to pay off the mortgage, it made sense from an economic standpoint to pay the mortgage off. Today, for most people, if you've had a mortgage for any length of time, you can earn more, even investing in a CD, something very conservative, have a higher rate of return than what you're paying on your mortgage.

Pat: With no additional risk.

Scott: Yes. No risk whatsoever. You've got something that's government-backed.

Pat: What are you living on? What income do you have coming in?

Lee: I got pension about $2,600, and Social Security about the same.

Scott: And are you married?

Lee: Yes.

Scott: And are you taking any income from the 401(k)?

Lee: Oh, no. I actually just put it in a fixed place where wouldn't be affected so badly, just to protect it. And that's been in there for a while. And I should have had it in a CD, but...

Scott: Well, actually you were on hold. I don't know when you went on hold, but you could hear our other caller?

Lee: Okay.

Pat: I want you to go back and listen to that. Listen to that podcast. Our last caller and you have almost the same identical question. So, the answer to your question is no, you should not take it out and pay off your mortgage.

Scott: You're approaching 70. You've got $240,000 in your 401(k), you're gonna have required minimum distributions coming up here in a few years. Like, one idea is just maybe you take what the mortgage amount is and have that taken out of your 401(k) each month to pay the mortgage.

Pat: So, you're basically transferring the money slowly out of your 401(k) against that mortgage and you're doing it in a very tax-efficient manner.

Lee: Oh, I didn't know you could do that.

Scott: Let's say your mortgage payment's 600 bucks a month or whatever. You say, "All right. I'm gonna have $800 a month withdrawn, take the 20%, have it go to taxes or whatever the tax needs to be for you." And then you...

Pat: Automatically goes to your checking account and then your mortgage automatically comes out of your checking account. So you got the money coming in on Monday and the money going out on Tuesday to pay the mortgage.

Lee: Right. Right. But if...

Pat: And then effectively, you're paying the mortgage using your 401(k). I like that idea. I like it a lot. And I think you should have more equities in that portfolio. You should be at least 50% stock.

Lee: Okay. So, I need to change that, get it out of [inaudible 00:35:00] and put it in like, something on the market.

Pat: Yes. Look, you need more equity in the portfolio. Scott, you're giving me a look. It's the investor...

Scott: Yes. My concern is, we say, "Hey, Lee, you should have some in equities." He moves out a fixed that goes into equities. We have a 10% correction, which typically occurs about every 9 months, which we haven't had in a while. Doesn't mean we're gonna have one of them tomorrow, but at some point in time. And he is like, "What the heck? I called these two dummies."

Pat: Scott, he's relying on the advice of two advisors that are on a podcast. And his ability to stay invested over that down market will be dependent upon how good he thinks this advice is.

Scott: That's right.

Pat: How good do you think this advice is, Lee?

Lee: So leave it just like it is and just have the house payment made out of the 401 coming to me. I'd still be all right.

Pat: Yeah, you could do that. I still want some equity in there. Take $50,000 and put it in the total market.

Lee: Okay. I gotcha.

Pat: Scott?

Scott: I don't know.

Pat: Take $50 grand, put it in the total market, and then pretend that $50,000 is not...

Scott: I mean, clearly, your high probability of having growth in this portfolio is not keeping it in fixed, like it is right now.

Lee: Right. Right.

Scott: From a statistical standpoint, you have a much higher probability of having a growth in this portfolio by getting at least some out of that fixed and have it in areas that are gonna grow.

Pat: And it should be half of it. But just put a quarter in, just put a quarter of it, $50,000 to $60,000 in the total market, and don't touch it. Just let that thing go.

Lee: Right. Right.

Pat: And when you're 85, you will call me back and you will say, "Hey, Pat, that was brilliant," and I'll forget who you were and forgot I had a podcast.

Lee: Sounds good.

Scott: All right, Lee.

Pat: I appreciate the call.

Lee: Thank you.

Scott: It's interesting, Pat, as an investment advisor, one of the most challenging types of clients... Actually, I don't think I've ever worked with one. Well, I've clearly worked with people that had sudden money, like a lottery winner, someone who has never invested before and they have a large inheritance. They've never really learned how to live with themselves through the ups and downs in the market, right? So you get somebody to say, "All right. Let's take you out of this nice safe spot where the money is, whether it's in a fixed-income account in a 401(k), or it's sitting in cash, or it's a life insurance proceeds that's in a money market account and having someone get it out of there that's very stable, that makes money every day and moving it to an area that's gonna fluctuate in value." That's why when I think it's so important for younger people to have experience as an investor because they learn through personal experience, it's much more powerful than just reading something. Because we've both had it where we've had somebody, it's kind of new money. They invested based upon our recommendation.

Pat: It goes up by 20%. They get super excited, and you're like, "Just relax. Just relax."

Scott: It goes down. They're calling you six weeks later. Why is this thing falling? What's going on? I trusted you.

Pat: So, when it goes up, they're like, "This is the greatest." And the good advisor will tell you, don't get too excited about it because it will go down. I promise you it will go down. Will it go down to less than you started with? Yeah, there's a chance. There's a chance for a period of time, but it goes up and down.

Scott: When I was a...

Pat: But what you do is when you sell, you lock in those losses permanently.

Scott: You take what's a temporary decline and make it permanent.

Pat: That's right.

Scott: I remember as a younger man in this industry, been doing a long time, when someone would invest with us... I mean, Pat and I's job, we were both in our 20s, young.

Pat: They called us, the boys.

Scott: Yeah. Looking back, I'm amazed anyone trusted us, but we're grateful. And those clients that are still with us, we have many clients over 30 years and...

Pat: That's right.

Scott: ...very grateful for those people, for trusting us. But I remember early on, my kind of standard line was... And part of it it's an education process, just like we do in this program. The more you can understand how markets work, the better choices you're gonna make, not only on your original investment but sticking through the markets and sticking with that investment. And I tell people, I say, "Look, here's the deal. I'm highly confident over the next 20 years, this portfolio is gonna work out just as we had planned. It's gonna provide that income needs that we've designed here for you." I said, "But, and there's gonna be some years, it's gonna grow so much, you're gonna think, I'm God sent and you're going wanna adopt me as your own child. You're gonna be so tickled pink with how things are doing. And there's gonna be some other years that you're gonna be so frustrated and angry, you'll be tempted to drive by my office and throw a brick through the window. Unfortunately, I have no idea what the first year's gonna be. It might be one where you love me and think I walk on water. Or it might be one, you think I'm an idiot because your account has declined so much in value. I have no idea what's the first year's gonna be, but we will have those years." That's the kind of conversation I would have when someone invests. And a part of it's just getting them to have the right mindset of what to expect.

Pat: Which is hard. Which is hard. So, we've got long-time listeners that are saying, "Why are they spending so much time on this remedial stuff talking about this? Everyone knows this." Look, it is a great reminder. It is a great reminder that this will happen. And the best time to talk about it is when things are going well. Because when it goes poorly... Right? Scott, so you used to run these ultra-marathons, these a 100-mile runs, right?

Scott: I did. I ran a 50K with my daughter 6 weeks ago.

Pat: So, 50K...

Scott: On my birthday, in September, I'm planning on running the Grand Canyon, rim to rim to rim, which is almost 50 miles. I'm back, Pat.

Pat: You [inaudible 00:41:54] limping through the office.

Scott: My oldest daughter's gotten into them. And so it gives me an excuse to...

Pat: So, the point being, when you run these ultra-marathons, when you say at 50K, that's 30-some odd miles?

Scott: Yeah, 31 miles.

Pat: Okay. When you run them, at the beginning of the race, do you have a mindset like, "Okay. This is gonna be painful at points in time, or this is gonna be a breeze?"

Scott: So, it's funny. So last...

Pat: I mean, it's a mind... Tell us what your daughter does for a living.

Scott: She's a sports psychologist.

Pat: Which is what?

Scott: Helps people with their mindset. And she works a lot with college athletes or top high-school athletes that are trying to get in the best D1 schools in the country.

Pat: And she gets paid for this, she makes a living doing this?

Scott: Oh, yeah. Yes. She's created a little business for herself.

Pat: Just helping people have a mindset.

Scott: It's all mindset.

Pat: Well, there's physical stuff.

Scott: Well, fair enough.

Pat: But at that level...

Scott: At that level.

Pat: ...there's a lot of mindset?

Scott: Yes.

Pat: Okay. So when you, because I've never... Listen, I ran a 10K once, pretty proud of myself. I did it in 59 minutes.

Scott: Well, we talk about it's life in miniature because you go through these really... It's a strange thing. And when you've done enough endurance stuff, you learn that your body just goes through these. And you'll go through these segments, maybe it's 20 minutes, maybe it's 2 hours where you just feel horrible. Nothing's going well.

Pat: And you're running, you're not sitting by the side of the road.

Scott: Not sitting. You're moving. You might be walking or something, but you're moving.

Pat: But you're still moving?

Scott: Yeah. And these really lows. And then it could be followed by a period of euphoria where you have no pain, you feel more alive than you could ever imagine. And you could have these things within the same hour,...

Pat: Emotionally...

Scott: ...these highs and lows. And so it's kind of like... And it's the same thing with life. You have life. You've got these horrible... We all have tragedy that happens and whatnot. And you go through these horrible times in life and then you go through other times in life when it just seems like everything's so fantastic.

Pat: And this too shall pass.

Scott: Why did you bring this up?

Pat: No. Because I think that investing is very similar to that, which is, I remember when you did that...

Scott: There's no question.

Pat: ...100-mile run or something,...

Scott: Yes. Western States 100.

Pat: ...it took you like, 23 hours or something.

Scott: Twenty-three hours and 53 minutes, I think it was. Because if you make it under 24 hours, you get a belt buckle.

Pat: Which I've never seen.

Scott: It sits in my drawer.

Pat: I've never seen it. But the point being is going into each one of the races, you have an expectation of, "This is how I'm going to feel." So, when you start feeling that way, you're like, "Oh, I'm supposed to feel this way."

Scott: Well, it's interesting, Pat, because particularly on ultra marathon stuff, and I don't do that much anymore, older people tend to do better than young people because they've had that experience, the personal experience. Same thing with marathons. Like, you see people at the wall, they talk about the wall. I've always thought, "What if we just lied to people?" And when they were at 26 miles, we said, "We're at mile 20." They would never hit the wall, right? It's like, it's so much... But if you...

Pat: Why don't we just lie to the runners?

Scott: Just like, all of our elites have been doing for the last three years, our governments and whatever. Gaslight everybody. But it's having those personal experiences and knowing that just because you're in pain doesn't mean you're gonna be in pain forever. This will pass. And it's realizing that you will get through this stage, but it takes...

Pat: That's why I asked the question, because it's very similar to investing, which is... And the more we could talk about what you should expect, the better the investor you'll be.

Scott: Yeah. Well, hey, it's been fun being with you guys today. Hope everyone enjoys the rest of their week. I'm Scott Hanson.

Pat: Pat McClain. Thanks for joining us.

Man: 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.