Announcer: 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-WORTH.

Scott: Scott Hanson here. Hey, if you didn't have a chance to hear this show the first time around, we hope you'll enjoy it again. And even if you did listen, there's always something new to learn when you listen again. Pat and myself are off this week, but you're going to enjoy it. By the way, we are doing a special two-hour in-studio call session, where we're going to sit and take your calls Thursday, August 3rd, from 3:00 to 5:00 Pacific p.m. Sign up at questionsatmoneymatters.com. Enjoy the show.

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

Pat: I'm Pat McClain.

Scott: Glad you're joining us today. Myself and my co-host, we're both financial advisors, helping people with their finances. We've been broadcasting this program for 28 years, and glad you are joining us as we talk about the world of finances, money, take calls, all those good things. So, it's going to...

Pat: Yes. Just trying to help you with your financial peace of mind, and hopefully entertain ourselves.

Scott: That's... Actually, let's start in reverse. We've been doing this long enough, number one, let's entertain ourselves, make sure we have a good time. Because if we don't have a good time, it's not [crosstalk 00:01:38.954]

Pat: We're just not going to do it, just flat-out.

Scott: It's not going to happen much longer.

Pat: I've lived with myself for 60 years, I know how I'm going to do this.

Scott: All right, so anyway, we do have a good program tied up.

Pat: We think so.

Scott: Yeah. No, we've got some calls we're going to take...

Pat: Yes.

Scott: ...we've got some good topics. We're also going to be joined by Brian Murphy.

Pat: Brian Murphy, out of our office in Tucson, Arizona.

Scott: On investor biases, which should be interesting, because he's got a lot of...

Pat: Yes. Great information, so...

Scott: Yeah. So hey, before we hit the calls, there's a lot of...I've found a lot of really interesting things the last week or so to discuss...I'm going to start with this not interesting thing. So, the U.S. deficit, not our debt, our debt is the amount we've accumulated, our deficit is how much we are spending of that more than we're taking in.

Pat: It's the equivalent of the family saying, wait, how much did the credit card bill go up by this month?

Scott: How did that happen?

Pat: That is what a deficit is.

Scott: Over the first...

Pat: Who do we owe money to? That's a deficit. We spent it, and didn't have the ability to pay for it. That's a deficit.

Scott: Over the first half of fiscal 2023 for the federal government, which ended in March, six months, the federal budget deficit was $1.1 trillion, more than $3,000 for every man, woman, and child in the United States.

Pat: Annually.

Scott: In the last six months...

Pat: That's not an annualized number.

Scott: No, that was six months. Not an annualized number. Annualized, we're over $2 trillion. What do we have in receipts, $5 trillion or so? Maybe a little less than that. I believe that we're somewhere in that ballpark. So, we're bringing in $5 trillion, spending $7 trillion.

Pat: On an annualized basis. $6,000, $500 a person, for everyone in the country on a monthly basis. That's what that number is.

Scott: For every American.

Pat: $500 for you, $500 for you, $500 for you.

Scott: And part of the increase, one is the net interest that we have to pay. I had a conversation with Ben Bernanke years ago. Remember Ben Bernanke? He was the fed chair. And it was that he was speaking at some...

Pat: Are you dropping names now?

Scott: It's not going to sound very attractive, it's not going to benefit me...

Pat: Normally when people are dropping names, they're celebrities. They're not, like, finance people. But go ahead.

Scott: Ben Bernanke, speaking at this conference. Not a huge conference. And so, he was...shortly after he had stepped down as the fed chair. Wasn't that what he was? Yeah, federal...yeah.

Pat: Yes, he was.

Scott: So I came up to him, it was at a little cocktail hour afterwards or whatever, and you could tell the poor guy, he was clearly doing it for the money. Because he was not enjoying himself.

Pat: [inaudible 00:04:54.519] wait, here's another guy with a sports coat coming up to talk to me. I can hardly wait.

Scott: Some old bald dude in a sport coat...

Pat: In a sport coat.

Scott: Wow, this is going to be an interesting conversation. There's 200 financial advisors...

Pat: Oh, he's like, this will be a blast. I can hardly wait to tell my mother about this conference, my wife about this conference. Okay...

Scott: So I said, hey...

Pat: Benny, what's up? Okay, so what happened?

Scott: I said, look, I said, "What happens when interest rates rise, and the cost of serving our debt, just servicing our debt balloons? Like, what models do you have out there that are going to help us deal with this?" And he says, "Oh, that won't be an issue because you're only going to have high interest rates in a growing economy, so you'll have increased revenues to offset the higher cost of interest," and he turned and walked away. Just like that, turned and walked away. Obviously, he didn't want to have this conversation.

Pat: No response. You said, "Well, Mr. Bernanke, I've built models that say elsewise..."

Scott: Well, here we are. And so, our net interest jumped 41%. We spent $308 billion the last six months just servicing our debt.

Pat: Yes. But so, that's part of the spending.

Scott: It's part of the spending. We have all kinds of... I mean...

Pat: It's part of the spending.

Scott: ...you've seen all the bills that were passed recently.

Pat: Yes, it's part of the spending.

Scott: This can't go on forever.

Pat: It's not good for any of us...

Scott: Any of us.

Pat: ...or our children, or our grandchildren. You cannot manage a household by running a deficit continually, unless the income is rising at the same rate, or faster.

Scott: Or faster.

Pat: You can do it for small periods of time, short periods of time. And it's especially harder if you're not actually investing in real infrastructure. And it's hard to tell if, actually, what we've been doing with this green clean energy act is actually real infrastructure, or we're just corporate welfare that the market would have taken care of by itself.

Scott: What do you think?

Pat: Well, there is... Giving money to a corporation to bring chip building home is not the same as building a port or a road or an airport. It is not. You can call it that, but it's not the same.

Scott: And now there's a glut of chips. The irony.

Pat: It's a trend... And now there is a glut of chips.

Scott: Before the money even went to all these companies.

Pat: Yes. Well, I love the idea that we're bringing it home, I just don't know if you have to actually give the corporations money to make them bring it home. I think the...

Scott: It is an interesting time, that the collusion between government and big industry has never been as large as it is today. And I'm going to call it collusion because that's what it feels like to me. Give us these subsidies here...

Pat: Oh, I'm going to step, I'm going to... Look, JP Morgan came in and bailed out the federal government during the Depression. Was there a little collusion between JP Morgan and the federal government?

Scott: Well, it went the other direction, though.

Pat: Okay.

Scott: Anyway, I don't see how this is long term...

Pat: And JP Morgan the person, not the bank. John Pierpont Morgan, who JP Morgan is actually named after.

Scott: I was going to say, didn't he start the bank? I'm pretty sure that's [crosstalk 00:08:42.496] okay. Anyway, so we've got that good news going for us.

All right, let's start off in California, and talk with Janet. Janet, you're with Allworth's Money Matters.

Janet: Hi.

Pat: What can we do to help?

Janet: Well, my husband and I are having a disagreement, and we are currently living together in a house that I am completely done with. And part of my... And I tried something that you guys say once in a while, which is it's not a good idea to love something that can't love you back.

Pat: Yes.

Janet: I haven't gotten anywhere with that with him...

Scott: Okay.

Janet: ...because this is his dream home. But he has had a dream home before, that he had to be pried out of.

Pat: Okay. So, this is his new dream home?

Janet: Yes, the more recent...

Pat: Okay.

Janet: ...his second dream home.

Pat: Okay.

Scott: And how long have you lived there?

Janet: Just since 2012. And it's a much fancier area than we lived in, and I am just done with it. I mean, if we really wanted to belong to a country club, we'd be in great shape here. But we don't.

Pat: Okay. And can you afford to live there?

Janet: Oh, gosh, yes. But my point is we both...

Scott: So, what's your question for us, Janet? This is funny.

Janet: Well, we both work...

Scott: Not to laugh at you, I'm just kind of interested in, like, how we can be of help.

Janet: Well, my point of view is that too much of our net worth is tied up in this house.

Pat: Okay.

Janet: Our net worth is about $2.4 million, and this house would probably sell for $900,000 to $1 million. But it is too big, it's...everything about it is expensive, you know?

Scott: Oh, yeah.

Janet: And I feel like it's wasteful. And it's on almost half an acre, and I want to live someplace where I can walk out the door, and walk to things like restaurants and stores. I actually want to live near a Trader Joe's, you know [crosstalk 00:10:51.623] walkable...

Pat: Isn't that funny? Because my wife has parking, preferred parking at Trader Joe's.

Scott: I like...My wife, we shop at Trader Joe's, too. [crosstalk 00:11:01.438] What's your annual income?

Janet: $120,000.

Scott: And where's the income coming from? Working, retirement, pension, what...?

Janet: Oh, we're retired. My husband has a pension, a good-sized pension, and I have a couple of small pensions, and then we both get social security.

Scott: And are you taking any money out of your savings to live off?

Janet: No, we're saving a lot of money.

Pat: And so, this $2.4 million in net worth, does it include the home, or exclude the home?

Janet: It does, yeah. It does include the home.

Scott: Yeah, but you have a pension. You've got pension, and social security income of over $100,000 a year.

Pat: Yeah.

Scott: If you actually calculated the net present value of that [crosstalk 00:11:38.663]

Pat: It's in the millions. It's in the millions.

Scott: Yeah, it's multiple millions.

Pat: It's in the millions.

Janet: Right. And I understand that.

Scott: So if you called and said, hey, here's our financial situation, we're thinking about buying a million-dollar house, can we do it or not...

Janet: No, we're in it.

Scott: I understand.

Pat: We understand. Understand.

Scott: But the answer would be, if that's what you want to do, yes, you can. But so, you called because you don't want to be in the house, but your husband wants to be in the house.

Janet: Right.

Pat: And are you looking for us to give you reasons for your side of the argument versus your husband's?

Scott: Yes. Yes.

Janet: Well...

Pat: You don't have too much of your net worth tied up in this house. That's the reality.

Scott: And you can afford to live there. But your idea of lifestyle is different. You'd like a smaller house, somewhere you can go walk to restaurants, and your husband wants this big fancy house in the country club area. You have different opinions there.

Pat: So but, when you look at that $900,000 versus.. I can see where you're coming from, you're looking at the $900,000 versus the $2.4 million...

Janet: Right.

Pat: ...and you're saying this is 40% of our net worth in a single asset. But you're kind of right. But if I took that flow of income from the pensions and the social security, which both of them, I assume, have some sort of a guarantee on them, and I did what's called a net present value... How old are you?

Janet: 74 and 76.

Pat: Okay, so if I did a net present value of that stream of income of just the pensions, it would add $1.5 million maybe to that lump sum. So, then it would... So, I could argue both sides of this, right? It would say, well, then a $900,000 house, you know, for $1 million net worth, is that too much? No, it's not.

Janet: Right.

Pat: You don't have too much money tied up in a single asset, just based on that sum...

Scott: Well, and that's just academics anyway, that kind of exercise.

Pat: That's right.

Scott: The question... You've got income coming in that's through pension and social security, you're not even spending all that, and you've got another, outside of your house, you've got another $1.5 million saved up.

Pat: Yeah. You're fine.

Scott: So from a financial standpoint, you can't making an argument that you shouldn't be there. So, one of you are going to have to yield to the other. That's all, I mean... Or...

Janet: Well, that... And he certainly finds that a very unacceptable idea.

Pat: You know, I have another idea. Call Trader Joe's and see if you can get one moved closer to your house.

Janet: Actually, I'm going to...actually, we're going to rent a place that I'm going to live in for three months.

Pat: Oh...

Janet: And he can see how it is for him. He can visit me.

Pat: Oh. You know, I've got to tell you, my wife and I had a place in downtown Sacramento, near downtown Sacramento for a number of years, when we had lots and lots of activity down there, and we were living... You know, I live an hour, 45 minutes to an hour away. It's going to sound elitist, but that's where we could afford it, and we wanted to do it. And we enjoyed that lifestyle for a little while. And we would spend...

Scott: It was like a condo you had. It's wasn't like a big, fancy house.

Pat: It was just... No, no, no, no, no, it was an inexpensive condo, that was easy to take care of, and that was fine. And living in the suburbs is fine, too. But if you can afford to do that experiment, and see how he likes it, I think that's a great solution.

Janet: Well, we lived there for 20 years happily, so I think we could do it again.

Pat: I know.

Scott: Good luck.

Pat: Good luck.

Janet: [crosstalk 00:15:35.376]

Scott: And by the way, I'm not living in the house I want to live in, but my wife is...she's a stronger personality than I am [crosstalk 00:15:41.940] She cares more. I really don't care.

Janet: Well, I enjoy you guys, and I do see the foolishness of calling two guys to get help.

Pat: Okay. Well, this is...

Janet: But your numbers make sense [crosstalk 00:15:55.197]

Pat: There is...yes.

Scott: Yeah.

Pat: Look, if we didn't... You know, you called us for an opinion, and we gave it to you, and financially you can afford there, and if you... So, this house you're going to move back into, do you own that house now?

Janet: No, no.

Pat: Oh, you're just going to rent a place to see what it's like?

Janet: Yeah. Yeah.

Pat: Perfect. Give it a shot. Just don't sign a 12-month lease.

Janet: No, no, three months.

Scott: Perfect.

Pat: Yeah, perfect. Give it a shot, see how it works.

Janet: Okay. Thank you so much.

Pat: Appreciate the call.

Scott: All right, thanks, Janet.

Pat: That's interesting.

Scott: That was an interesting call, yeah.

Pat: That was interesting. Well, I can see...but they can afford it. It makes a difference. They're not stretching to do it.

Scott: Let's head to Kentucky, and talk with Dan. Dan, you're with Allworth's Money Matters.

Dan: I have a couple of retirement questions for you.

Pat: All righty.

Dan: I'm wanting to convert some of my 401(k) to a Roth IRA, and I was wondering how much percentage I could take out each calendar year without affecting my taxes too much.

Pat: Okay. And then you said a couple questions. Let's ask the second one at the same time, and see if they actually tie into each other.

Dan: Okay. Where I work, we had the old-fashioned fixed pension for calendar years of service.

Pat: Yep, yep.

Dan: Well, a new company bought us out, and they're offering us a buyout in cash dollars.

Pat: Okay.

Dan: And my question is, would it be better to go with a fixed annuity with this money, or a rollover IRA that was in conservative mode?

Pat: All right, and...

Scott: Let's...

Pat: Okay, so let's unpack this, because they both tie into each other.

Dan: Okay.

Pat: Are you employed now?

Dan: Yeah, I've got two more months.

Pat: And how old are you?

Dan: Seventy.

Pat: And what's your income?

Dan: It's roughly around $70,000.

Pat: Are you married?

Dan: Yes.

Pat: And does your spouse have an income?

Dan: She's retired.

Pat: Okay.

Dan: She gets around $26,000.

Pat: Twenty-six what?

Dan: $26,000.

Pat: A year, okay.

Scott: From social security, I'm presuming?

Dan: Yeah, and a little from Kellogg's.

Pat: Okay. Have you started social security yet?

Dan: Yes, I have.

Pat: And how much are you receiving?

Dan: Just a little over $2,000 a month.

Pat: How much money do you have in your 401(k) or IRAs?

Dan: $460,000.

Pat: Is your home paid for?

Dan: No.

Pat: How much do you owe on your house?

Dan: About $40,000.

Pat: And what's the value?

Dan: About $290,000.

Pat: And do you have any money in brokerage accounts, or savings or anything like that?

Dan: Yeah, I've got a Roth IRA separate from the work one.

Pat: How much is in there?

Dan: It's about $80,000.

Pat: All righty. And how is your health?

Dan: Good.

Pat: How is your spouse's health?

Dan: Pretty good. She has a couple issues.

Pat: Okay.

Dan: But nothing drastic.

Pat: So, they're offering you a pension or a lump sum?

Dan: A lump sum cash out.

Pat: Yeah. How much would the pension be, and how much is the lump sum?

Dan: The lump sum money is $125,000.

Pat: And how much would the pension be?

Dan: That was going to be like $500 a month for life.

Pat: Single life only.

Scott: $500 a month?

Dan: Yeah. Yeah.

Pat: Versus $120,000 lump sum.

Dan: Right.

Pat: So, what... Scott is actually on his calculator, he's doing what's called a net present value calculation.

Scott: I actually didn't, because I don't have a... Oh, here's the life expectancy table.

Pat: We're doing a net present value calculation based upon your life expectancy, in order to determine...

Scott: Yeah, I don't... At 70, so, here's the challenge, and we can run the net present... The challenge is you're going to have a more challenging time... Well, would you take a single life on this, just you, or would you take a reduced amount protected for your spouse?

Dan: [crosstalk 00:20:24.942]

Pat: So, they offered that to you, right?

Dan: Yes, they did.

Pat: And what were those offers? Was it 90%, 50%, was it 80%...

Dan: 75%, 50%?

Pat: 75%, 50%?

Scott: No, it's probably...

Dan: 75%, and 50% [crosstalk 00:20:42.952]

Scott: Yeah, those are the options [crosstalk 00:20:43.363]

Pat: Okay.

Scott: So let's assume you took instead of $500, it was $450 a month you said I'm going to make sure that's around for my wife, that's $5,400 a year out of $125,000. I'm not doing a net present value, I'm just seeing how much...

Pat: Yeah, what the hurdle rate would be.

Scott: It's 4.3%. So if you're confident you can earn greater than 4.3%, take the lump sum, and then you still have your... Matter of fact, you could buy a commercial annuity at a higher rate than that.

Pat: Yeah, you could...yeah. You could actually...yes. So, the answer to this question... And if you're listening to this program, and you think, oh, I should always take the lump sum...

Scott: No, it always depends.

Pat: It always depends. And oftentimes, the calculations from company to company are different in how they calculate the pension versus the lump sum. But I almost wonder if this used an interest rate that's middle of next year. Are you confident... You mean an old interest rate? Like, when did they present this to you?

Dan: This year.

Scott: In 2023?

Dan: Yeah.

Scott: It could be that his pension plan uses an interest rate July 1st of each year. Because you would think that in this environment that...

Pat: I would have thought it would be much lower lump sum, though.

Scott: Correct, relative to the income. If these numbers are accurate, and you're my older brother, I'd say take the lump sum.

Pat: Take the lump sum.

Dan: Now, would it go to a fixed annuity, or an IRA rollover?

Scott: I would... Well, how is your 401(k) allocated now?

Dan: It's balanced. I'm in lots of different categories.

Scott: Yeah, so I mean, probably best if it's...even if it's 60% fixed income, 40% stocks, I think...

Pat: Yeah, you'd be fine. And have you reacted... Obviously, you're a good saver. You've made $70,000 a year at your job, and you've save $460,000. You're a good saver.

Scott: Plus his Roth.

Pat: Plus your Roth. So, you're a good saver. Have you reacted to the markets over the last few years, 10 years, 20 years, and moving your portfolio in and out of the market?

Dan: No.

Pat: Okay.

Dan: I've kind of just left it stable after 2008, when it crashed.

Pat: Perfect.

Dan: And I let it go.

Pat: Yep. I would put this thing in a 50/50 portfolio. Scott said not even that aggressive, but that's fine. And take the lump sum...

Scott: You'll have a very high probability of earning greater than the monthly annuity, and you've got your principal to boot.

Pat: That's right, which is even better than a net present value. I mean, the calculation...

Scott: Correct.

Pat: ...that number there. So you want to take the lump sum, move it in with the IRA, and then I would take out... So we take a look there, you've got $580,000, and then I would start taking income off of it of 4%.

Dan: Okay, and that's what I want for my last draw on my retirement.

Scott: Yeah.

Dan: So, I'm kind of leaving that one there like an ace in the hole.

Scott: Okay.

Pat: For the Roth IRA?

Dan: Yeah.

Pat: Yeah. And then, the question about whether you could convert to an IRA, or not to an IRA, I wouldn't bother.

Scott: I wouldn't do it.

Pat: I wouldn't bother.

Scott: I wouldn't convert it.

Pat: I wouldn't. I'd start taking the 4% distributions tomorrow, and wouldn't bother converting.

Dan: [crosstalk 00:24:01.943]

Scott: The only time I would recommend it in this situation, if you said you and your wife were going to do a Thelma and Louise, and your kids were going to inherit it, and your kids were in a high tax bracket. That's like, the only situation I could think of that would make sense in your situation to convert.

Pat: Yes. So no, those questions did tie in together, but you... Yep, just roll it over into the IRA, make sure the IRA's 50/50 equity versus fixed income, and I'd be comfortable taking 5% out, even. At your age, 70?

Dan: Right.

Pat: Yep, perfect. How much money do you have in the bank?

Dan: $10,000.

Pat: Okay, you're great. You're a hard worker, congratulations on the retirement. Is it being driven at all because the company was purchased, or were you planning on retiring?

Dan: Yeah, 70 was my target age, and the company taking over, liquidizing the pensions, you know, that influenced it, too.

Pat: Yep, yep. Well, and actually, it's pretty normal. That's pretty normal.

Dan: Yeah.

Pat: But hey, congratulations on the retirement. Congratulations on being such a great saver. Appreciate the call.

Dan: Okay, thanks for your input, guys. I appreciate it.

Pat: All right. Thanks, Dan.

Scott: All right, Dan. Wish you well.

Dan: Thank you. Have a good one.

Scott: All right, we're going to take a quick break. When we come back, we're going to be joined with Brian Murphy, and hear his... I think it will be interesting, because he's talking about investor bias. But we also want to talk a little bit about these new bonds... Well, they were new, and I don't think we see them anymore...

Pat: Yeah. And actually, how they have hurt many of the Asian...not...rich people in Asia. Rich people in Asia, these bonds, which were a big buyer of some of these Credit Suisse bonds.

Scott: Yeah.

Pat: And we'll talk a little bit about that, and if that doesn't make you want to stay 'til the second half of the show, I don't know what will.

Scott: We'll be right back.

Announcer: Can't get enough of Allworth's Money Matters? Visit allworthfinancial.com/radio to listen to the Money Matters podcast.

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

Pat: Pat McClain.

Scott: We've got what I consider a special guest. I've known...I've met thousands of financial advisors over the years, Pat, as you would have as well.

Pat: Quit bragging.

Scott: Maybe more... Bragging? First, I could hang out with Ben Bernanke...

Pat: No, you're just naming them...

Scott: I've got a whole bunch of financial advisors I hang out with.

Pat: Oh, love it. My wife came to a conference one time with me.

Scott: Mine too, once.

Pat: Once. Once.

Scott: We were at this dinner, and this guy would not shut up about his Ferrari...or whatever kind of car, he had some fancy car, his wine collection, and his big house in Florida, just for the whole...he was dominating the conversation. And I turned to my wife, and I said, I promise I will never bring you to one of these again.

Pat: I never even got that far.

Scott: She left?

Pat: My wife's like, why am I here?

Scott: So, our industry is full of...

Pat: This is supposed to be fun for me?

Scott: There are some...clearly some people that are really...they're doing it really just for the money. Like, the money.

Pat: It is...yeah, it is a money industry.

Scott: And there are some that the money is a nice byproduct, but they really do it because they care about their clients, and they want to make an impact in people's lives, and this is the path that they've chosen to make that impact.

Pat: Yes.

Scott: Brian Murphy...

Pat: And speaking of that, we have Mr. Brian Murphy with us.

Scott: Brian Murphy is one of those who truly cares about his clients. So, Brian, thanks for joining us today.

Brian: Thank you, Scott, and thank you, Pat. You know, needless to say, I'm a big fan of the show, and you guys dispense a lot of great advice, and happy to be a part of it.

Scott: Well, good.

Pat: Okay, and... Thank you, Brian. And just for the rest of the listeners, Brian is an employee of Allworth Financial.

Scott: And partner.

Pat: I'm sorry, partner and employee, as I am, a partner and employee of Allworth Financial. And he joined us, what, two and a half years ago, three years ago?

Brian: Yeah. Yeah, believe it or not, it was December of '20, so I mean, it's been a while.

Pat: Yeah.

Scott: And you started in the business what year?

Brian: Or actually, it was December of '19, so January of '20 was my first year. I started in the business in 1985, at...let's just say a large Wall Street brokerage firm based in New York. And you know, I was on my own, and did my own thing beginning in 1998 was when I started the firm that ultimately became part of Allworth. But I began in the business, I got my Series 7 license in October of 85.

Scott: Okay. Well, you're also a student of behavioral finance, right? And that's what we want to talk with you about today.

Brian: Long time. And you know, I guess the one constant in investing is human behavior, and that's probably one of the more predictable elements. And so, I've read lots of books, attended a number of classes, and always look for it when I go to a conference, just fascinated by how human beings all seem to behave the same way at times.

Scott: It's really...it's so interesting, Brian, because those studies, I think DALBAR or one of those will put them out, and it'll show here's what the markets have returned in the last 20 years, here's what the average investor has returned.

Pat: Actually, it goes back to what I've said for years and years, which is everything works perfectly until you involve people. On paper, it was brilliant, right?

Brian: Yeah, exactly.

Pat: So, tell us what, like, the study of behavioral finance actually means. What do you hope to learn out of studying this?

Brian: Well, I think, you know, the academic definition, obviously, is it's the merge of economics and psychology, right? So you have investing and people, and there are some, you know, very famous people out there, noteworthy university professors, Danny Kahneman probably being one of the most noteworthy lately, who have spent their entire life studying why people behave in a certain way around money. And ironically, as you two both know very well, that behavior is often irrational. And so, studying, you know, why that herd mentality that we all used for survival, you know, whatever millions of years ago, or thousands of years ago on the plains of Africa, it may have allowed you to survive as a tribal member, but it doesn't serve you well as an investor.

So my goal of, you know, being a student of behavioral finance is to help my clients avoid those foibles that inevitably lead to failure when investing.

Scott: Yeah. And it is funny, Brian, because the longer I've been doing this, the more I see the greatest value that I believe I've provided as a financial advisor is keeping people from making mistakes from which they cannot recover. It's those decisions, or lack of decisions that can derail someone's financial plans, and their lives, oftentimes.

Brian: There's no question that you're right about that. And you know, way back in the day, I used to liken it to, you know, pushing the red button, you know, the ejector button that just says, okay, I'm getting out now, I can't stand the pain anymore, and you know, that creates very often harm that you can't recover from. I mean, you know, if you did it at the bottom in '08, '09, and when markets were down, you know, close to 50%, and you spent a couple of years deciding when to get back in, you did irreparable harm to your retirement.

Pat: That's right. So I always, in my simplistic terms, I always think of there's three of me when it comes to investing. There's three of me. There's me in the middle, which is the one that I believe is the most rational part of it, and then there's, on my right is this greed guy, the greed investor in me, and on my left is the fear investor in me. And that there's this balance between the fear and the greed, and what's really rational. So...

Scott: And I might argue that it's not greed, it might even be a fear there. You still, you don't quite... If you had a little bit more, it would bring financial security, right? It's I thought I'd be secure at this point, but I'm not. If I had a little bit more, if I could just get this a little higher, then I would be secure.

Pat: Okay, so that may be correct. It's not pure out greed, like I have to get everything, I just want a little... So, how does that equate to investor behavior, and how do you actually take your clients, and stop them go from helping them stop themselves go from too far in one direction and/or the other? And do they look for things like confirmation bias on either way they're doing? Do you see this a lot, which is I can cite...I want to invest more in the market, and I'll cite 20 places that tell me why I'm right, but I want to take money out of the market, and I therefore too can cite 20 places why I should not be in the market, the market being the equities market [crosstalk 00:33:51.429]

Scott: Or I should wear a mask, or I should not wear a mask. Same thing.

Pat: Okay, well, we can't go there, Scott.

Scott: But I'm just saying, you can get a gazillion articles...

Pat: That's right, right? We see tons of confirmation bias in the political arena in which we live today.

Scott: And in the whole COVID thing.

Pat: Okay...

Scott: Confirmation bias...

Pat: So Brian, take it away.

Brian: Well, the basis of your question is, you know, how do I deal with clients, and how do I apply it, you know, face to face with people? And I usually start out, and I like to use an analogy that has nothing to do with investing. And what I'll say to people, and you know, very often, as you guys know, it's a husband and a wife that are sitting across the table, and you know, we're getting ready to talk about investing and financial planning and so on and so forth, and you know, I'll look at them and I'll say, so before we dive in, just tell me, you know, Bob or Bill, or Mary or Sue, or whatever their names are, you know, Bob, what kind of a driver are you? Are you an average driver, below average, above average, you know? Tell me about your driving abilities. And invariably Bob says, oh, I'm a really good driver. I'm definitely above average. Now, often his wife will disagree with that assessment. But you know, he'll say he's, you know, he's better than average.

Well, in terms of behavioral finance, you go back and you look at many of the studies that have been done, there was a big one that was done in the early 2000s, and they interviewed 10,000 drivers in the state of New York, and they asked them all, are you average, below average, or above average with your driving skills? And 94% of all the people who were polled responded that they were above average drivers.

Scott: Above average.

Brian: Well, that's just impossible.

Pat: Yeah, I know.

Scott: Of course, yeah.

Brian: So, if you think about...if you take that to investing, you know, 90% of all people think that they're above average investors. And the answer to your question that you posed a few...or maybe the insight that you shared a few minutes ago about, you know, people that are out there doing it on their own, and that when Vanguard did their study called the advisor alpha study, they found that on average, advisors add three full percentage points over a long cycle above and beyond what the do-it-yourselfer is getting. And there's got to be a reason for that, and part of the reason is people think that they're better at investing than they are.

And I don't have to tell you guys, but you know, to share with your listeners, there's a database out there monitored and maintained by the Standard & Poor's group, and everybody has heard of the S&P 500, but it's called the SPIVA database, Standard & Poor's Indices Versus Active. And when you start a mutual fund, you get a phone call eventually from the folks at S&P, and they say, well, what index of ours would you like us to track your performance against? And so, the manager of the fund will say, well, you know, small cap or large cap, or you know, S&P 500, whatever, and check our index. Well, when you look at the numbers over a 10-year time frame, and it's even worse over a 15 or 20-year time frame, over 90% of all active managers managing mutual funds fail to beat their own stated benchmark. So if the professionals can't do it, then why would you, Mr. Jones or Mrs. Smith, whatever, think that you're able to do it, you know?

And then, the further proof of the pudding, which we already talked about, which is the Vanguard study, which has been redone a couple of times by Vanguard, where they compare the results of their clients that are doing it on their own versus those who use advisors, and you can clearly see in the numbers that people are not very good at doing it on their own. And my answer to that to my clients is because you have these cognitive biases, and you have these emotional reasons that you either take action, or fail to take action. And with a third party involved, namely a financial advisor, or me, you run a much better risk of outperforming, or at least performing in line with what markets are doing, and what your expectations are than you would if you were sitting on your own, watching CNBC and listening to Kramer scream that, you know, it's time to sell, or buy, buy, buy. Those are not really rational reasons to take action.

In fact, you said it yourself, you know, confirmation bias. I mean, yeah, I mean, I can go out and collect evidence on buying or selling on CNBC that is directly contradictory all day long, 50 times a day, 50 guests, you know, saying buy, and 50 saying sell, and I just pick which one I like, and that becomes one of the key biases, which is, you know, collecting evidence that confirms our conclusion before we go out there and truly evaluate that evidence. So, I just see it as a way to help clients. That's my answer.

Pat: And so the cognitive bias, right, so the cognitive bias that is not only confirmation bias, but it is, you know, political bias, which is a cognitive bias, it is how I...

Scott: It's what you want to believe.

Pat: Yeah, it's how I feel about the environment, it's how I feel about any sort of, you know, religious or moral...right? I could work that as a cognitive bias in my decision making.

Brian: Sure.

Pat: Right? It... And quite frankly, you could look at it today, and you could...you could look at this, and you could use nothing but cognitive bias to decide whether you should buy Disney stock or not. You want to talk about a company that's been tied up in all sorts of political things, that have...

Scott: I don't know...

Pat: ...maybe little or nothing to do with the value of the stock, but it's driving the value of the stock based upon these biases that people are bringing to the marketplace. But that's a...

Brian: Yeah, there's no question that those, you know, highly personal biases lead to conclusions that may be entirely false when evaluating Disney. Because honestly, you and I both know the reason to buy Disney is because you think it's going to go up. And you can evaluate the financial condition of Disney, you can evaluate its value relative to its peers, you can do a lot of objective evaluations, but you're right, many people are either buying or selling Disney based on those embedded biases. And which really brings emotion into the conversation, because now, you know, you're a very strong advocate for, you know, rights in one community versus another, and Disney seems to support that, so I'm going to go buy Disney. That's not a reason to invest, that's an emotional choice to support something that you're in favor of, or vice versa, something that you might be against.

So, I think it's really important to have the game plan, which you guys talk about all the time, you know? There's a solution for all these biases that are embedded in our psyche, and I think, you know, one of the big ones is any investor who has experience, and I label experience as that's what you get when you get what you don't want. but any investor with any amount of experience has sold a stock or a fund, or a bond or whatever for a loss. And all the research tells us that as individuals, we feel losses, and they attempt to quantify this, but six times more poignantly than we feel gains. So for every dollar you lose, that feels like $6, and for every dollar you make, that only feels like $1. Well, people that have experienced, say, the financial crisis in, you know, '08, '09, they come with a very strong bias that, you know, this happened to me once before, and I'm not going to let it happen to me again.

I had a conversation late last year, in 2022, with a guy who had been...who was a former stockbroker, had been out of the market since 2009 because he just felt like it was going to happen again.

Scott: Well, he was right.

Brian: Yeah, because it always happens again.

Scott: It always goes down.

Pat: But he was right, because the markets do go down, but it doesn't... If you're investing for long periods of time... Well listen, Brian, we've got to run, but I find this fascinating, and you're right. And when you're talking like this, I think about how marketers and salespeople prey on these things, like selling... On the way into the studio today, I was hearing the thing about don't be caught up in the downturn in the markets, like the Great Recession before, get into physical gold.

Brian: Yes.

Pat: And like, okay, well... They never talked about the time that the gold had a bear market, only when the equities had a bear market...

Brian: That's true.

Scott: Or how gold has performed over the last 100 years, 200 years [crosstalk 00:43:11.118]

Pat: Right, we're not going to talk about that. Or why you should own an index annuity because you've got downside protection in the market. Forget the fact that the cost of the downside protection, relative to the cap on the upside is...you would never make that equation, if you understood it.

Scott: Let me ask you this question, Brian. So, think of a client that...someone who really likes to be in control, right? We all have those clients, and we have people like that in our life.

Brian: Yeah.

Scott: They always want to control. And the markets are in a crazy period, they come in and talk with you because they're there to do something. How do you guide the client like that?

Brian: Well, I think the best defense is always evidence. And you know, I'm sure clients get sick of us saying, well, okay, here's the chart going back the last 100 years, here's the number of recessions that we've seen, here's the number of bear markets that we've seen, and here are the recoveries. What I like to do is, again, and I said this earlier, you know, I like using analogies. You know, when I got into the business, the Dow Jones industrial average was bouncing around between 1,000 and 1,500. Do you have any idea where it is today? And when they answer that question, oh, I don't know, you know, 32,000, 33,000, you know, something like that, okay, and let's think about some of the bad things that happened. Do you remember the financial crisis? Yes. Do you remember 911, when the buildings in New York were falling down? Yes. Do you remember President Reagan getting shot? Yes. I mean, and so on...Do you remember when you woke up one morning, and we invaded, you know, in the Middle East? And yes.

Okay, all of those things have happened, yet the Dow Jones, since I got in the market, you know, in the business in '85 until today, has gone up, gone from 1,000 to 33,000. If you sell today, you're taking all those possibilities away from your future. And I like to make it personal, and tell them my experience, and then let them tell me all the bad things that happened between 1985 and today.

Scott: Mm, that's good.

Pat: Perfect. Perfect. Well, as always...

Scott: Thank you, Brian.

Pat: ...thanks for being a part of the show. Thanks for being part of the Allworth team.

Scott: Allworth, yeah, even more so.

Brian: Well, thank you guys, and keep up the great work, and you know, we'll keep sending people your way to listen, because they walk away smarter than they show up, for sure.

Scott: Oh, thank you, Brian. We'll make sure that bonus check is a little larger.

Brian: Yeah. There you go.

Pat: When are we handing out the bonus checks? Why did I not hear about the bonus checks? We appreciate it, Brian.

Scott: Yeah, what a good guy. He's a good guy.

Pat, before, you know, we had talked about this on the program, these new...earlier in the show, these newer bonds that are called additional Tier 1 securities. These were a special type of bond that Credit Suisse had issued that paid an interest rate of 9.75% when they first sold the bond, back... They just went to the market with $1.6 billion in June of 2022, less than a year ago. Credit Suisse raised through a debt offering $1.65 billion at an interest rate, this is a bank, at an interest rate of 9.75%.

Pat: Which at that interest rate should tell us that there's inherent risk in these bonds.

Scott: You think?

Pat: Because if...just points. All the time we'll say, well, this is yielding X amount versus the thing you're talking about, Pat, and like, you can't compare those two. The yield is almost always, almost always, I would say 99% of the time the yield is the equivalent to the risk that you're taking. The higher the yield...

Scott: On a yield, for sure.

Pat: ...on a yield, not a dividend, a yield on a bond, a yield on anything, the risk and the difference between this is, look, government bonds of the same maturity or the same risk, CDs, FDIC, insurance, they should be equivalent. But if you've got a Credit Suisse bond that's at 9.75%, and you've got an equivalent Bank of America bond at 6%, I'm like, well, why... rather than get excited about the higher yield, I should be asking myself, why do they have to pay so much more? What am I not seeing here?

Scott: Well...typically, bondholders are first in line when the company goes bust. Company goes into receivership, bankruptcy and whatnot, it's typically the bondholders, all debts are paid first. If there's any money left over...

Pat: Well, attorneys are paid first.

Scott: Okay, thank you. Then all the expenses are paid, the debts are repaid. If there's anything left, then the owners get it, the equity owners. The owners get... But that's not...

Pat: The stockholders. The stockholders.

Scott: Yeah, we're the owners.

Pat: So, this is the ladder in which if there is a bankruptcy, you will get paid back.

Scott: Unless you own ATI bonds. I'm sorry, AT1 bonds. Because they came in back of the line.

Pat: They came behind the owners.

Scott: So when Credit Suisse was in trouble, and a deal was brokered by the Swiss government for them to be taken over, the bondholders were wiped out.

Pat: Of these bonds.

Scott: Of these bonds.

Pat: Done. Zero. Nothing.

Scott: $1.65 billion was raised for investors less than a year ago.

Pat: June of 2022.

Scott: And these bonds, here's... It's these sort of things, Pat, that's why I think it's so important to work with a fiduciary independent advisor, because these banks...

Pat: Were selling them to their own clients.

Scott: That's exactly right. They manufacture these products, which is what this is, or they're helping a company raise some capital, and they go and sell them to their clients.

Pat: And this comes from an article I'm reading from, was this "The Wall Street Journal?" I believe it's the Journal...

Scott: Yes.

Pat: So this is quote, "Many private bankers in Asia pushed AT1 bonds for various banks to their clients in recent years." So, this was Jessica Cutrera, Hong Kong-based president, independent wealth advisors, Leo Wealth. So she comes right out and says, look, these banks, they were recommending them. These AT1 bonds were sold, not bought. There's a difference between the two. It means someone brought them to the marketplace and said this is why you really need to buy this. It wasn't a... It was a problem looking for a solution. The bank needed to actually get rid of these, needed to raise these monies. It was really a yield play. We never liked them, but I know a lot of people who did. So she said, look, we sold them anyway, but we were just selling yield. We were just selling... Look, they're 9.75%...

Scott: You know what this reminds me of? So this was years ago, 20 years ago or so, a friend of mine I knew from the gym came up to me and he asked me, hey, what do I think about this particular financial broker, who is with one of the big Wall Street firms. And I knew that financial advisor guy, and I said I think he's a good guy. I've heard he's got a good reputation. He says, yeah, I'm thinking about investing with him. And I said to him...and I don't solicit people to gym, so I didn't go, well, here's my card, come see me. I just said, well, if you do, just be careful. Don't buy any of the products that that firm manufactures. That's all I said to him, just don't buy any of the stuff that they...the stuff they manufacture.

Well, right in the financial crisis, there was a...they created this, supposedly it was a cash alternative that was supposed to be yielding about 7%. Everything worked fine until it didn't, then it was trading at .13 cents on the dollar. These were cash reserves that he'd put in this thing...

Pat: Which was supposed to be a safe money, liquid money.

Scott: And I remember, all I thought to myself is either he ignored my advice after he asked it, or he just...he'd forgotten about it.

Pat: Or he didn't understand it.

Scott: Or he didn't understand. So if you're advisor is with one of those big firms, I would suggest don't buy the stuff that that company is underwriting themselves. If they're out there raising capital for companies either through stock sales or through bond sales, don't buy that stuff. They're conflicted. They cannot give you rational advice, they're conflicted.

Pat: Yeah. Correct. Or special opportunity acquisition companies...

Scott: Oh, gosh, there's all kinds of stuff.

Anyway, we're out of time. It's been fun being with you, and we'll see you next week. This has been 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.