Tariffs, Scams & Smart Diversification: How to Stay Financially Sharp
On this week’s Money Matters, Scott and Pat are joined by Apollo Lupescu from Dimensional Fund Advisors to unpack the real-world impact of tariffs and how they influence everything from maple syrup prices to stock market behavior. They also unpack a Wall Street Journal story about U.S. investors getting scammed by sketchy Chinese stocks. Plus, listener Tina returns with a powerful update: how she used Scott and Pat’s advice to offload risky company stock, lower her taxes, and give back in a big way.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
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 83399-WORTH. That's 83399-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Glad you're with us today as we're talking about financial matters. We've got a great program lined up for you. In addition to taking a couple of good calls, Apollo Lupescu is gonna be joining us. He's kind of the master of explaining complicated financial matters in everyday terms. And he'll be talking a little bit about tariffs and the markets.
Pat: Yes. We don't have a lot of guests outside of the organization on the program, but I do like Apollo.
Scott: Certain ones I like.
Pat: I do like Apollo.
Scott: Yeah. So, it'll be a good show. So, don't go anywhere. Or if you're going somewhere, have your AirPods or headphones, whatever your...
Pat: Talking little phone, as my wife calls it. I have to turn it off when she comes to the room. I listen to a lot of podcasts when I'm around the house.
Scott: Well, that's nice to give her your attention. Yeah. I don't like that they like the Apple watches because you're talking to someone and they look at their watch, they're looking at the text message coming out like, "Can you not?" I was just noticing at the gym this morning, almost everybody in the middle of their weight set, they're sitting there on their phone.
Pat: And that's why I don't go to the gym.
Scott: Good.
Pat: It's a bad place.
Scott: Hazardous to your brain.
Pat: It is. It is. Scott, I read this article this last week, two weeks ago, in the "Wall Street Journal," and I had no idea...
Scott: Now you're just showing off, reading the "Wall Street Journal."
Pat: I do like the "Wall Street Journal." Some of my fondest memories are actually reading the "Wall Street Journal" in different locations.
Scott: What? What are your fondest memories?
Pat: We were down in Yosemite with the kids when they were younger, and I...
Scott: What? Hey, there's Yosemite Falls. Say, "Hey, I'm busy reading the Wall Street Journal, kids."
Pat: No, we had been hiking all day, and we brought them down to the little creek. And I brought a lot...
Scott: That's one of your fondest memories, reading the "Wall Street Journal" in Yosemite?
Pat: The way you said it, it does sound pretty strange.
Scott: Oh, it does, Pat. Yeah, beyond strange.
Pat: It was very... I went there...
Scott: Don't you wanna unplug when you're in a place like Yosemite and kind of think that this is life forever and this is, you know?
Pat: Okay. So, I took my lawn chair down there, and the kids and we brought them down to the little creek, and they were swimming around in it and playing in the creek. And I brought two ice-cold beers down there, sat in the lawn chair reading the "Wall Street Journal" where the kids were... It was idyllic. That is...
Scott: Everything except the "Wall Street Journal" sounds idyllic at that point. I like the concept of a hike and the kids swimming and sitting on a lawn chair, drinking a beer at Yosemite.
Pat: Anyway, I was reading the "Wall Street Journal," and an article, "Obscure Chinese Stock Scams Dupe American Investors by the Thousands." And I thought, what a strange world we live in that we allow Chinese companies to list on our exchanges. Oftentimes they have no real...
Scott: Why would you buy some obscure Chinese company? But you're a partner with the Chinese Communist Party.
Pat: Yes.
Scott: All those businesses.
Pat: So, the story of Braden Lindstrom. He was encouraged by someone impersonating a financial advisor to buy shares in a small Chinese company listed on the Nasdaq. A few clicks later, he was on his way of being scammed out of $80,000. Not just $8,000, $80,000. And so, this is... this gets worse. He's a college professor in Utah...
Scott: Hopefully not finance.
Pat: And he bought Jayud Global Logistics, a small Chinese company. And the stock went up and up and up, and then it went close to zero.
Scott: Is it just some pump-and-dump scheme?
Pat: It's an old-fashioned pump and dump. It's an old-fashioned pump and dump. That's all it is.
Scott: You just get some people to pump up the stock, make it look like there's all this demand for the stock, price goes up, investors get excited, they buy. Price goes up, investors get more excited, they buy more. Then the early people cash out.
Pat: Yes.
Scott: And the stock collapses.
Pat: You know what's funny? People look at the price of a stock on these small things, but they should be looking at the volume...
Scott: At the same time.
Pat: ...at the same time.
Scott: Yeah. Why is the price going up?
Pat: Why is the price going up? Because if it's a low volume...
Scott: That's right. There's no volume at all.
Pat: It looks like a pump and dump scheme because someone does a bid and then there's an ask, and those prices are agreed on. And primarily what they're using is social media to get to these. And there are examples after examples in this. And this just reminded me how life is just like a big circle where these were the pump and dump schemes that we... When I entered the industry in the '80s, this was a thing.
Scott: Yeah, yeah. There'd be boiler rooms.
Pat: Boiler rooms. In fact, there was a movie called "Boiler Room."
Scott: I don't know. Were those pump and dump stuff?
Pat: Those were all pump-and-dump schemes, yeah. So, let's just leave it at this...
Scott: What I find even more fascinating, Pat, is not the fact that there's people out there trying to scam other human beings, as sad as that is, that's part of humanity, and we all deal with it on a daily basis with all kinds of different stuff we get thrown our way. But the fact that people actually are fine with having their story listed in the "Wall Street Journal." "Hey, here's how I got scammed." It's quite amazing to me.
Pat: Yes. And Mr. Lindstrom, the college professor, is one of five people interviewed by the "Wall Street Journal" who said they were fooled by advertisements on Facebook or Instagram that told them they should buy Jayud Global Logistics. And many of these went back to Facebook and Instagram, trying to lay blame on them.
Scott: They're advertisers. What are they just... You can't expect these platforms to do due diligence on their advertisers.
Pat: Especially on these sort of where they don't know where a lot of the advertising is coming from. So... I just share that with you because, not only did I find it interesting that we have small Chinese stocks being listed on a NASDAQ, that people are getting scammed. So, stay away. Yeah.
Scott: And we've got a great guest right now, Apollo Lupescu. And we had Apollo on...
Pat: Before the elections, to talk a little bit about the elections and markets and the correlation between Democrats and Republicans versus how the markets...
Scott: Yeah, that's right. And Apollo is one of these guys. He's part of Dimensional Fund Advisors. But he's probably the best I know about taking complex financial matters as it relates to the markets and put it in layman's terms. And I think the real benefit there is helping people stay invested during market cycles when their emotions are telling them something different. So...
Pat: In fact, we had him speak at our national conference, where we bring all our advisors to Dallas. And by the way, Apollo, I have been to, I don't know, hundreds of these things. Your talk about the resilience of American business was...it was great. And it just reminded me that whatever the world throws at American businesses, their job is to overcome.
Scott: Yeah. So, you're gonna share a bit today on tariffs and the markets and that sort of thing, right?
Apollo: Absolutely. Well, first of all, thank you so much for the invitation to be part of this and also for the invitation to the conference. It was great fun for me. And you're absolutely right. I mean, you know, we do live in a country that is built on free markets, and companies are incredibly resilient because people are resilient. And as much as people are pessimistic about what might come next, the reality is that companies have always faced challenges. And over the course of our history, they've been creative, they've been innovating, and sometimes these crises have produced opportunity. So, I'm confident about the future. And that's positivity that I think it's in my genes somehow.
Scott: Well, it's really interesting, Apollo, when you look at Liberation Day, when Trump came out and said he's gonna slap tariffs on everybody and the markets tanked, and essentially, I think we had an intraday bear market on the S&P 500. We had 20% intraday, and then the 5, maybe I'm off, but somewhere close to that, and then everything's recovered. And then we went on to a new heist. But that doesn't seem like the tariff issues resolved itself.
Apollo: No, it's not. And it's a big issue right now. And what I found, too, is that some folks know the term tariff pretty much like a jargon. You know, a while ago I went with my dad to the doctor, and, you know, he found out he has some issues with his pancreas. And, you know, I'm not a doctor, I'm not an expert. I mean, I have some general education, and I know it's in my body somewhere. It does something, and I don't know exactly what, but it was interesting for me because the doctor was very nice at explaining what it does. And for a second, I felt like, should I know this? And then I realized, no, it's not my profession. That's why I go to the doctor. And even though maybe it would be nice if I knew, I'm not required to know. And I find, in the context of tariffs, that this is a word that we understand as advisors, as economists. But I found that, for a lot of folks, it's a bit of a mystery. And a lot of times they get the definition from whatever news outlet they might be listening to or watching or reading. And I'm wondering if it's worth for, like, a couple of minutes just making everybody clear on what exactly is a tariff.
Scott: Yeah.
Apollo: How does it work? Because from there, you kind of get a sense of the impact that it might have on us as consumers and businesses and the market as a whole. Is that a...?
Scott: Yeah, yeah, please. Yes.
Apollo: Yeah. And I'm gonna use something that...
Scott: And by the way, I would be shocked if the definition of tariff is different on MSNBC than it is on Fox News. But anyway, there we go.
Apollo: You think? All right. So, let's make some sense out of tariffs. And what exactly are they? How do they work? And I'm gonna use an example that is near and dear to my heart. I'm not Buddy the Elf, but I do put maple syrup on a lot of things. Maybe not spaghetti, and I had it this morning on my yogurt. So, I love maple syrup. And I bought it at...
Scott: It's hilarious.
Apollo: Yeah, I buy it at Costco. That's where I go get it.
Scott: By the way, Apollo does not look like the kind of guy who loves maple syrup. He looks super fit.
Apollo: Well...
Pat: I actually love the fact that you could work a Buddy the Elf reference into an economic talk.
Apollo: So, in the good old days, before tariffs, Costco would need to buy maple syrup. So, it would sell it to me. And they would go to the Vermont producers and say, "Can I buy your maple syrup?" And those folks would say, "Sure, I'll sell you the maple syrup." But it turns out there are not that many maple trees in Vermont, or at least not as many as perhaps across the border in Canada. And Costco would also go to the Canadian producers and say, "Hey, friendly Canadian producer, do you mind selling me your maple syrup?" And those producers, they say, "Sure, I'll sell the maple syrup," and just come up with a number. Let's say it's $20 a bucket of maple syrup. Costco would then take it for $20, and then it would add a few dollars for their warehouse, the employees, the electricity, their profit margin, let's say $5 for the sake of the example. So, between the $20 they pay the producer and the 5 bucks that they added, Costco, I would go pick it up for $25. And I'm a happy camper. I love it. Everything's great. But now the president comes along and says, "We're gonna impose 25% tariffs on all products coming from Canada." And let's say maple syrup is included in that category. Well, how does it work now? Well, the legal burden of paying that 25% of the value of what gets brought in the country. So, 25% of $20 in this case is $5. It is on the importing company, in this case, Costco.
So, Costco is legally responsible now to pay $5 to the U.S. government right away as they bring in the $20 worth of maple syrup. Now, where is that five bucks gonna come from? That's the question. Well, one thing that Costco can do is go to those friendly Canadian producers and say, "Listen, would you mind selling me that maple syrup for $15 instead of $20, because, you know, I have to pay the government 5 bucks." But those Canadian producers say, "Wait a second. No, I'm not gonna do that. That's what it costs me to make. I don't make as much money on it. And by the way, where else are you gonna get maple syrup? It's not like you can plant a tree and quickly get maple syrup. No, I'm gonna stick with my 20 bucks." Well, Costco then obviously doesn't have any other place to get it. So, they say, "Fine, I'll pay the 20 bucks. And then they bring it in, and they still have to pay the five bucks. Well, the second option is that they send the government the five bucks that they would keep. But that doesn't make it like a viable business. So, that's not realistic. So, what's the third option? The third option is that Costco would probably need to increase the price and take the additional dollars from us, the consumers, and send that to the government.
So, in this world of tariffs, there are three parties involved. The producer, the importing company, and the consumer. And who pays the tariff is unclear, because even though legally Costco is responsible for paying it, it turns out that it's more complicated because, in some cases, they could go to the producer, and the producer might say, "Well, sure, I'll take a little bit of a... I'll drop my price a little bit." But here's what we found out of the first Trump administration when they imposed a 20% tariff on washing machines. There was an economic report written afterwards, and what they found is that 12% out of the 20% of the tariff was passed on to consumers in the form of a higher price. And the rest were haircuts taken by the producer and the importing company. So, you know, everybody kind of took a hit there. But the bulk of it, in the case of those washing machines, was paid by the consumer. So, it's a form of a tax that it's not collected through the tax forms at the end of the year, but rather it's collected and paid by the importer. But, you know, it is possible that the consumers might bear the burden of this tax if the importing and the producing companies don't take a hit. So, it is, again, interesting because when you hear about inflation perhaps coming back, it is likely that, in some cases, not in every case perhaps, but in many, many cases, when there is not an easy substitute and everything is pretty much made abroad, there's little incentive for the producer to cut their price. Where else are you going to get it? And in that case, we might see higher prices, perhaps fewer selections in stores, and perhaps lower quality because of these tariffs. And again, it depends on product by product. It depends on where they are made.
Pat: Apollo?
Apollo: Yeah.
Pat: So, it's a consumption tax. If I was Costco...
Scott: That's what it is, yes.
Pat: It's a consumption tax. If I was Costco, do I lower my margins, or I keep my margins the same? So therefore, the net profit actually that goes to me as Costco actually goes up.
Apollo: And that's the thing, like Costco is a pretty unique example. And I just happen to know that the margins at Costco are capped at about 12% to 14%.
Pat: Yeah, 12% on products that are not Kirkland brand and 14% on Kirkland brand products.
Apollo: Exactly right. Exactly right. So...
Pat: We get mail... My wife has her own parking spot at Costco.
Apollo: We all do. You know, when you spend $10,000 a month, they remember your name.
Pat: I have a bunch of kids. So, Costco, they would keep the margins the same. So therefore, their net profit would actually go up with the tariff.
Apollo: If they do that. If they do that. And Costco has been, again, it's absolutely possible. And they do that. They also have to realize that there is a price-sensitive consumer out there. And if they keep the price too high, then it's possible that they might lose sales. So, it's a very interesting dynamic. But by and large, what we do find is that these companies, like Costco, for example, or other companies, they're trying to make up that lost revenue in other ways. And we're finding that, for example, if you go online and you buy things, some vendors might not give you the free shipping, and it's a way to make up for the lost revenue or make up the tariff that they have to pay. In the case of the washing machines, what do you buy with a washing machine? A dryer. And dryers were not subject to tariffs, and yet their price goes up. That went up as well. So, it is interesting that companies will try to figure out, perhaps, how to maintain their margins in other ways. But ultimately, what a lot of economists are realizing is that the bulk of this tariff for a majority of products is likely gonna fall on the consumer. And that's what we're hearing this. So, from a company perspective, you see that these folks are trying to negotiate and try to figure out how do I keep my margins. And I'm not saying they're gonna make more money, but they're gonna try to figure out how do I maintain an operating profit. And again, it's gonna... That tariff has to come from somewhere, and it's quite likely that maybe directly or indirectly consumers will pay for it. And that's why you might hear about the potential for inflation.
Scott: So, why didn't we see a bigger inflation bump on this last inflation report?
Apollo: I mean, it's interesting because... I don't wanna get too specific in the economics of it, but a lot of firms have been stocking up in expectation of these tariffs. And there is a, you know, pretty decent, you know, supply that's in warehouses and one that expires. There is a good chance that the much lesser volume of trade, I mean, I think 30% less ships came into the ports in the U.S. That's gonna be reflected at some point because there's no magic. And we saw the same thing in the pandemic. If you don't bring in stuff and people wanna buy it, again, you're gonna have fewer choices, higher prices, and perhaps lower quality.
Now, with that being said, I also wanna touch on this. Like, why would the government wanna take money away from the public? Because that's basically what you're doing. And I have to say there are three reasons. And then people kind of point to, like, why there's gotta be a reason for that. And the first one is revenue. And you go back to 1776, what's fascinating is that, in those days when the country was formed, about 80% of the government's revenue at the federal level came from tariffs. Nothing unusual. I mean, we took 80% of the government revenue from tariffs back in those days. And it wasn't until about the Civil War when we introduced the income tax. And income tax over time became the primary source of government revenue to the point where last year tariffs were only roughly about 2% of the government revenue. So, we went from 80% to 2%. So, the tariffs are not a big part of our budget, and not at all relative to everything else. So, the revenue is one reason that we hear the government saying, but again, this is revenue coming from us, the consumers, which I'm not sure that's necessarily something to be trumpeted.
The second thing is maybe we wanna protect and restrict access so some industries in the U.S. would be able to continue to operate. And it could be for strategic reasons, or it could be to protect jobs. And I've traveled the country, and there's no doubt in my mind there has been devastation in some parts of the country because of trade and maybe jobs being shipped abroad. And there's no doubt that between the Civil War and perhaps World War II, there was a major reason why we saw a lot of these tariffs being put in place. Did they do a good job of protecting jobs and adding? Again, it's a really mixed bag, really hard to say. But what we can say, even if those jobs were kept or created in the U.S., it came at a very big cost to society because we all ended up paying more. And, you know, you might save some jobs in steel, for example, by putting tariffs, but you might lose other jobs down in washing machines because you're less competitive now. So, it's really a mixed bag on that.
And thirdly, is that perhaps there is an idea of reciprocity that if you are, you know, charging me a certain tariff, well, it's only fair that I charge you the same. And that's, again, being invoked these days as well. And it's legitimate in some ways. I think every country has something that they wanna protect. And in other ways, over the past 80 years, after World War II, we've championed a reciprocity that was driving tariffs to zero. What if we have free trade? And that has been sort of the economic regime of the last 80 years. And a lot of companies have built their production lines and supply chains on this idea that we can move goods freely among countries. And this sort of pivot on a very short notice, it's creating really big headaches. You know, again, they're commenting on trying to figure out how to negotiate them. But it is a huge headache if you've had 80 years of a certain regime that's being kind of flipped over overnight, almost, and you're gonna be like, "Well, what I do now? So, it's really creating a lot of disruptions. And...
Scott: Well...
Apollo: I know. Again, I mean...
Pat: Apollo, but some of these... Let's say the tariffs actually work, right?
Scott: And we're in very... Work in what?
Pat: Well, that...
Scott: One of the three.
Pat: Well, we're ignoring a couple of things. One is the regulatory environment in which we work, right? We export a lot of our pollution. I mean, California is the best at it, right? We don't, you know, we don't...
Scott: There's tons of oil here. Yeah. Don't drill here. [crosstalk]
Pat: ...don't buy the products, actually. Oh, and not only that, we're gonna export them to a place that doesn't have any environmental regulations that we have. But..
Apollo: Do you remember the book "The Lorax?"
Pat: Yes.
Apollo: Yeah. I mean, like, I remember reading that to my kids, and that's kind of what I felt like. Absolutely. Like, you know, some other country can make money, and, you know, they might not have Truffula trees, but hey, at least they get some money. But, you know, I think it's even for sure that that's been an issue, but I think it's even more fun.
Pat: Stop for one second. So, all in the same thing. Buddy the Elf and a Dr. Seuss reference. How old are your kids? When he said "Lorax," I thought, "He's not talking about Dr. Seuss." Talking about Dr. Seuss. How old are your children?
Apollo: Well, one of them is 18. The other one is 22, almost. I keep reading them at night. I can read the book.
Pat: But in terms of national security, right? We can't ignore the fact that a large portion of the reason we won World War II was because of our manufacturing prowess and how quickly we were able to actually turn that on. But the stuff...from getting from concept to implementation, is it even possible now after 80 years?
Apollo: That's exactly the question. That's exactly the question. You got it right. I mean, I think that what helped us in those days was, again, it's the ability of companies to be creative. And, you know, you saw companies like Ford and GM where they were not making cars, but they retooled their lines to make tanks and planes. That's just something that we did on the fly because of this ingenuity of the American people. And you saw that in the pandemic. Yeah, we didn't produce that many respirators at home, but all of a sudden, Ford can go and make them. But I think there's a fundamental reality that, you know, we're too far along to be able to put that back in the box. I mean, that ship has sailed, in my opinion.
And I'll give you a quick example. Nvidia is an amazing company that designs chips, and it's the poster child of American success in artificial intelligence. Great. But what they do is basically design the chips. So, they're like some chef, some pastry chef, who developed the recipe for the best cookies in the world. So, they know that they have the recipe for the best cookies in the world. The thing is, they don't have a kitchen. Nvidia doesn't have any manufacturing facilities. And what gets even more interesting is that to produce their most advanced chips, there's only one single company in the world that, over decades, had developed a system to be able to do this thing called lithography and process these chips. Nobody else in the world has been doing it. They have this amazing engineering base that, again, over decades. And that company happens to be in Taiwan. Taiwan Semiconductor Manufacturing Corporation. It's the only kitchen where Nvidia can bake their cookies. And what's even more interesting, in that kitchen, you need to have an incredibly specialized oven. And that oven is that machine that TSMC uses. It's a science fiction machine.
Scott, if you shoot a laser from your house to the moon, it would hit a ping pong ball. It's incredible. Like, it prints transistors the size of, 10,000 times smaller than the human hair. Not you and I, but people who have hair. And it's science fiction. And it's a global supply chain. And in the world, there's only one company that, over decades, has been able to produce that machine. Nobody else can even get closer. And that company is based in the Netherlands. It's called ASML.
Pat: Yes. And those machines are hundreds and hundreds of millions of dollars.
Apollo: Oh, yeah, they're, like, a quarter of a billion.
Scott: On a complete side note, if you own Nvidia, and this is news to you, maybe you should not own Nvidia. Anyway, continue on.
Apollo: Well, I mean, as long as there's a global supply chain and global trade, a global value in that respect, AI to function the way we know it. In order for Nvidia to be this incredible success story, well, we do need these partners. And is it realistic to say that somehow TSMC is gonna pack their bags and move all their Taiwanese engineers and their families to Arizona or Nevada? Is it realistic to say that ASML is gonna pack their bags in the Netherlands and move everything to the U.S., and then those supplies, those parts that these companies use, they're all gonna somehow be based in the U.S.? I think, to me, it's just unrealistic. I cannot imagine that happening anywhere anytime soon or anywhere close to the same level of quality.
So, to me, what are we trying to do? It's a big question that I'm not sure that most people that I've talked to, most economists, have a good answer. Perhaps there's a greater wisdom, and at some point, it'll be revealed to us. But I'm not here to make political statements. I'm a proponent. And I think a lot of us on this call are proponents of free markets. What has gotten this country so far is the ability of companies to operate freely. And I think that the less government intervention, the better. I mean, we've always kind of seen that, that free markets do a good job, and there's gotta be some tinkering and regulation. But ultimately, it just feels like this is interfering with free markets in some way.
Pat: Apollo, but was not the CHIPS Act of giving money to Intel kind of foolish thinking that they would become with...
Scott: Hilarious.
Pat: ...the next...
Apollo: They tried. They tried.
Pat: Yeah. So...
Scott: I'm a big proponent of government, get out of the way. Let the markets do their thing.
Pat: So, will these tariffs stick, or is a lot of this bluff or mostly reciprocal?
Apollo: Yeah, and I think that's the question because, again, I mean, I don't know enough about the inner workings of the politics in D.C. It doesn't seem like... If you talk to most economists, I think that economically people would say that we are better off kind of resuming free trade. And if we do wanna help those constituents who got hurt by global trade, there are much better ways than perhaps we've gone so far. But harming everybody else in the process, families who maybe are living on the edge, it's not necessarily the cleverest. So, will they stick? I think, to a large degree, folks, here's what I think about it. I think that what gives me optimism is that, as much as some people might disagree, I think that we have incredibly strong institutions in the country. And if these policies work, if tariffs work, and we all want it to work because it means that the society is getting better, we all have a better life. And if these policies work, then, you know, less than a year and a half from now, we're gonna reelect or elect the people who champion these policies. And if it doesn't work, and if that turns out to be a disaster, well, again, in a year and a half, the country has a chance to, you know, kind of tell us how they feel. And we had that free election, you know, six months ago or nine months ago. So, that institution is still incredibly valid. As long as institutions hold, I think there's a great degree of optimism to be had because if they don't work, this is not something like the pandemic, that we don't know what's causing it and how to deal with this. In this case, we've gotta know it's a policy. And we've seen something like this in the past. And if things don't work out, you know, we'll just go ahead and choose a different direction of the country in less than a year and a half from now.
Scott: So, I think if you're a long-term investor, you can either focus on the immediate and think, "Oh my gosh, like, what happens if this or that?" or you can say, to your point, like...
Pat: It will change if it doesn't work. In my mind, that's brilliant, right? As long as the institution is intact.
Apollo: Absolutely. And...
Pat: And depending upon what side of the aisle you're on, you may believe that the institution, in fact, is not intact.
Apollo: Well, and that's the thing. But people will vote with their pockets and their wallets. There's no doubt in my mind, because we've seen this every election. And Democrats who are not happy about the economy, they might vote Republican. Republicans who are not happy about the economy, they might vote Democratic. So, I don't think that there is such a strong affinity towards the party, irrespective of the economic impact on my life. No, I think that people will vote based on the economy. But I do wanna touch on one other thing that is really important for this conversation. So far, we discussed on the impact on businesses and consumers, but the markets, and this is where it gets so interesting, is the markets reacted to tariffs because of the unexpected magnitude and breadth of tariffs. So, the market was a little bit... you know, the market expectation was different, and when the expectation got readjusted, we saw the big drop.
But I do have to make two quick comments on this. Number one is that markets tend to price expected changes in policy before they happen. If they're surprised, you're going to see big market moves. Otherwise, if the expectation is in line with the new policy, the market won't move because it's already priced in that expectation. But the second big one, guys, it's really important. Tariffs are not the primary driver of market returns, particularly over the long term. And to see this, look at the first Trump administration, we had four years of talk of tariffs, trade wars, blah, blah, blah, all the things that we're kind of dealing with right now.
And if you look at those four years, a dollar invested in the S&P 500, the measure of the U.S. market, for the time that President Trump was in the White House for those four years, it actually went up by about 80%. So, a dollar would have turned into $1.80. So, which is a really nice growth over four years. Well, here's where it gets interesting is that the country that we targeted, the country that we imposed the tariffs against, and really picked this economic fight, if you wanna call it that way, was China. And over the exact same four years, the Chinese stock market did not go up 80%. It actually went up 100%. It outperformed the U.S. market and doubled in value. And if tariffs were truly the primary driver of market performance, neither the U.S. but particularly not the Chinese market, would have done so well. So, this is one of the many, many, many, many variables that impact the performance of the market, but not a primary one, particularly as you extend that from a day to a month to a year and to four years.
And this year, what's the day to days like? It's around mid-June or so, and the U.S. market's relatively flat. So, it might be up or down a little bit, not that much at all. But here's what's fascinating. If you look at the countries that we are kind of targeting, a lot of folks are saying, "Well, they're gonna suffer because we're going to impose tariffs on them. And we already have imposed tariffs on them. And you take, for example, Germany. Well, Germany year-to-date, if you look at the MSCI index, is up about 30%. You look at Canada, how Canada, our friends to the north, you know, they're up about 14% or so. You look at China, up about 17%. You look at Mexico, 30%.
Scott: That's hilarious. Which means...
Apollo: Yeah. I mean, if you think that tariffs would be so devastating to their economies, why are all the crushing...?
Pat: So, all this information you gave me, I have nothing to do with it other than just stay my current investments.
Apollo: That's the key insight, stay the course because all successful investors work with an advisor who helps them kind of figure out what their financial goals are, create a nice little allocation for them. And that allocation might not have known that tariffs are coming, but they knew at some point something might happen to the market. And I think the folks who tend to have good outcomes in investing are the ones who stick to that plan, and they make adjustments, not because of what happens in the market, but more because of life situations. But they stick to the plan, and they talk to their advisor about this. And I think advisors, at this point in time, they have an amazing value that they can bring to the table. Because I keep thinking of advisors being like firefighters. When things are looking good, not a big deal, like you get [inaudible 00:36:04.345], you know, clean the equipment, and all this stuff, but you really earn your keep when there's a fire. And, you know, we had fires in Los Angeles over and over, and people, you know, are saved by these firefighters who jumped in the burning home and saved their lives. I think that advisors are like this. They're like firefighters for somebody's wealth.
Pat: Apollo, that's... I don't know if I 100% agree with the firefighter analogy with the advisor. It might be an overstatement.
Apollo: [crosstalk]...as good-looking as a firefighter.
Pat: Okay. Most advisors I know have no mustaches. So, anyway, we wanna thank you...
Scott: And Apollo Lupescu, do you have a website if people wanna learn more about what you're doing? Is there a way to...? How do people follow you?
Apollo: Always. I mean, I just follow you also, by the way, because we stay in touch a lot. But I know I don't have my own website. I do work for an investment management company, and it's been a privilege to actually work with Allworth as part of that organization. But again, I mean, I don't personally have. But I would just say Allworth advisors have a way to reach me. So...
Pat: We appreciate you. Thanks for being on the show.
Scott: And I had no idea you liked maple syrup that much. I mean, if you look at Apollo, he's, like... I think he swims or plays water polo or something, super fit looking. Does not look like the kind of guy who drinks maple syrup.
Pat: Buddy the Elf when he put it on the spaghetti.
Scott: Yeah. Anyway, so it was great having him on the program.
Pat: We're gonna do one of my favorite segments called "House Calls." And this is where we actually visit with someone that we apparently gave some excellent advice to previously.
Scott: We don't know if we did or not, but...
Pat: And we just follow up with them to see whether the advice was good, bad, taken, not taken, how it turned out.
Scott: Yeah. So, just this past April, we spoke to a woman named Tina, a podcast listener. She's not an Allworth client. I think we have to say that for disclosure purposes because if she is, then it could be considered a testimonial and then all the kinds of regulation stuff. Anyway, she wanted to know how much of her net worth should be in company stock, her employer's stock. So, here's a clip for that call, and then we're gonna talk to Tina.
Tina: My husband and I are later in our careers, and we've been pretty focused and intentional savers, leveraging our company 401(k)s and other savings opportunities, etc. So, we have about... We can retire, and we think, you know, our financial advisor says, live to well beyond 100 and not worry about it. And, you know...
Pat: You're at that point today?
Tina: She says yes. But we're prepared to work for another year or two before we go.
Pat: And what's the dollar amount?
Tina: The amount in this...?
Pat: Yeah, in the 401(k)s, IRAs, the overall. If you put it all in a suitcase, how big would this suitcase be?
Tina: Yeah, about $3 million in qualified funds. Another, you know, $2 in non-qualified after tax. And then I'd say another 25% of our total in this stock. And it's a private company, and it's done exceptionally well. It has a great trajectory, but it makes me very nervous to think I...
Pat: Do you have any liquidity option in the company? I mean, in private companies, you don't always have an opportunity to sell it.
Tina: Yeah, about twice a year they make an offer to buy back.
Pat: Okay. So, the 25...
Scott: And what industry is that in?
Tina: Aerospace.
Pat: Okay. So, of the $5 million, $1.25 million is in your company stock, is that correct?
Tina: No, it's an additional 25.
Pat: Okay. Thank you. Thank you. Oh, thank you, thank you, thank you.
Tina: Yeah. So, it's a big number.
Pat: And is any of it held in an ESOP, or is it all individually held?
Tina: The majority of it is just individually held. It's not in any, like, tax-favored status.
Scott: And there's not that... Okay.
Pat: And how close are you to retirement?
Tina: Let's just say a year and a half.
Scott: Lemme ask you this question, if the stock went to zero, would you still be able to retire in a year or two?
Tina: I think we might put it out for another couple of years.
Pat: Do you want to?
Tina: I think we could. No.
Pat: See, I mean the whole...the concept behind diversification, it's not designed to get wealthier. It's designed to protect where you're at, right? So, when we're young, working for a growing company, like, yeah, maybe I've got more in there than is prudent, but I'm taking a chance on it. If it works out, great. If it doesn't work out, that's all right. I'm still young. When we get to retirement age, particularly when retirement's right around the corner, for most people, they're more concerned about maintaining their lifestyle than they are about becoming wealthier. They don't wanna be poor, right?
Tina: Right.
Pat: That's when diversification comes into play. What's the family income?
Tina: Right now, with both of us working, let's just say in 400K, 500K a year.
Pat: And so, all of this is gain in this. So, how old are you guys?
Tina: I just had my 59-and-a-half birthday. My husband's about six months older than me.
Pat: So, here's the thing that I look at too is the tax ramifications. So, if you wait until after you retire and you start liquidating these, right, dollars... Is there any pension income anywhere?
Tina: No. We have IRAs and 401(k)s, but not in...
Scott: In your non-qualified, are there any stocks that you could sell at a loss? Anything that can trigger a loss there?
Tina: We do that when there is opportunity. We don't have anything right now.
Scott: Yeah, and you don't have any loss carryforward. It's a tough one.
Pat: Oftentimes, if you don't know what to do, you just split the difference, and then you're right either way. But this one, because of the taxes and retirement so close...
Scott: If you were retiring in December of this year, I would say, "Okay. The next couple of years, we're gonna have a strategy of reducing your exposure to this stock, and we're not gonna take any income from your 401(k)s or IRAs. We're gonna make sure your non-qualified tax is managed in a tax-efficient manner so we can pay a very low capital gains tax on this.
Pat: Yeah. And if your income wasn't as high as it was today, I'd be inclined to... What's your family income today? Four to 5. So, I'd be inclined to hold it. So, when you said it's 25% more, right? So, you've got almost a million and a half. Yeah. You got a million and a half in it.
Tina: Times two.
Together: Oh.
Tina: Yeah, it's a lot.
Pat: Oh. I'd start paring it down.
Scott: And how's the value today versus six months ago, a year ago, three years ago, eight years ago?
Tina: Like a rocket ship.
Pat: I'd start paring it down.
Tina: It just keeps on going up.
Pat: I'd start paring it down. Either that...
Scott: Because nothing goes straight up forever, right?
Pat: Either that or I would actually pick a similarly publicly traded stock and put options on it to give myself some downside protection.
Scott: Which is essentially, yeah, put options. You're paying a premium that...
Pat: That if it goes down in price, you get paid. And what you're doing is you're trying to identify companies that are in the same industry that do the same thing that actually will help you. So, you're getting a sibling stock, if you will. So, you're using financial instruments that give you some downside protection, and you're paying that premium so that you can take advantage of the tax ramifications a year from now. And your advisor may or may not...
Scott: Is this aerospace company affiliated with a billionaire who has other companies?
Pat: Put option using what?
Scott: A similar stock.
Pat: There's no similarity to that company.
Scott: Just because of the guy that runs it.
Pat: Yes. Who's brilliant.
Scott: Which is... Listen, what makes you good makes you bad. Yes. I'd pare it down. Tina, thank you for joining us again. As you can tell, listening to the call, it's like there's no equal. You're less than a year from retirement. What steps did you or did you not make this last several months?
Tina: Well, this is a story of the value of financial advice. So, this is a plug for what you guys do. And I'm appreciative of the help. But here's basically... I think I mentioned that there are probably twice a year the company makes an offer to buy employee stock and reevaluates the stock every time they do that. So, just the timing, and I think it was around August we put in to sell a portion, about 30%. We got about 25% of it liquidated. And that was kind of in the mid-high six figures. All of it basically taxable because the basis was so low. So, we worked with a team of financial advisor, accountant, lawyer to determine a tax strategy. And ultimately, we set up a CRUT and put... There was no transfer in kind. We actually had to liquidate it and take that whole hit. So, we decided to take a couple other stock holdings that we've had for 15-plus years, similarly situated from the tax buildup, do a transfer in kind to the CRUT as well as the proceeds from the company stock to set up our legacy giving and to create a little additional source of income in retirement.
Scott: I love it.
Pat: Beautiful. Beautiful. Beautiful.
Scott: And CRUT is a charitable remainder unit trust. And did you have a particular cause or charity already in mind ahead of time, something that was near and dear to your heart and this was an easy one, or did you kind of have to think like, where do we want to have these dollars go ultimately?
Tina: Yeah. Well, we've been on, I'll say, a journey of generosity, which is really wanting to share. You know, we feel super blessed by what we've been able to do in our careers. And we...
Pat: Are you part of Generous Giving? Is that where you get the terminology?
Tina: Mm-hmm.
Pat: Yeah. I've been to their conferences, and...
Tina: Yeah, yeah. So, it was our financial advisor who said, you know, "You should think about giving from your wealth, not just from your income." And that kind of blew my mind. And here we are. And it's been a journey.
Pat: So, let's walk through the mechanics, Scott, of what Tina did for the rest of the listeners. Because you couldn't take this SpaceX stock and actually move that into the trust because of how it was actually positioned...
Scott: It's not a publicly traded company.
Pat: What you did is you took something that you had a lot of appreciation, and you did the same. Therefore, you've got a tax write-off to offset some of the gain that you actually recognize in the SpaceX stocks.
Scott: If not maybe all the way she structured this.
Pat: Yeah. Yes. And then in the same calendar year. And then in doing that, you also provided a little bit of a stream of income. You still have to have a charitable intent. Don't think that that...
Scott: Otherwise, it doesn't work.
Pat: It doesn't work. So, people come in all the time like, "Oh, my friend did this, and they got all this money, and they avoided all these taxes." And I'm like, if you don't have a charitable intent, it doesn't...
Scott: And not everyone has charitable intents.
Pat: Yes. But what you did is you used the tax code to your advantage and fulfilled... You and your husband had to feel great about this, I gotta believe, right?
Tina: Yes, yes. I would have never imagined that this would be something that we could do. And we're so excited about it.
Pat: I'm so happy for you.
Tina: And so are our kids. Our kids are, you know, completely on board. So...
Pat: Have you involved your children in the giving at all, in selecting the charities?
Tina: So, ultimately, they will have some say after we're gone in terms of where it goes. We have it kind of categorized, but there's some flexibility in terms of specific charities that they may wanna give to. But we raised them with the concept of a tithe and that, you know, you've been blessed with much, you bless others by giving back.
Pat: You know, so I'm gonna share something with you, Tina, that... Scott and I have been doing this for quite some time. What you just did 20 years ago, that was for the wealthy, wealthy, like the really rich, to have access to attorneys and accountants and a financial advisor that would have structured that. You're wealthy, but you're not super wealthy, right?
Tina: Right.
Scott: Well, there's always someone with more. You talk to someone with $100 million, they don't feel wealthy.
Pat: Well, it's like driving on the freeway. There's always someone in front of you. But what you said is you brought the accountant together, the financial advisor together, and the estate planning attorney together in order to structure this, right? And I'm guessing that the financial advisor was probably the quarterback of this.
Tina: Yes. Yeah.
Scott: Right? You got a good advisor.
Pat: And you've got a great advisor, right? And firms like ours, that's why we bring tax and estate planning when appropriate in-house and when it's appropriate...
Scott: And a good advisor is someone who helps somebody get clarity on what's important to them and design the finances around that, which is different for everybody, right? For Tina and her husband, they wanted to be as generous as possible with this. More assets than they ever thought they were gonna have or need. And so, this is the perfect solution for it.
Pat: And what is the generosity project, Scott? You both mentioned it, Tina and yourself.
Scott: It's really fascinating. Afoundation funded this organization, Generous Giving, to help people give, essentially, both to understand the philosophical reasons behind it, the spiritual reasons behind that, and the economic reasons behind it. And so, this organization is completely funded through this foundation. So, all the tools they put out in conferences and stuff, they want people to give more, but not to them. So, it's really different because usually someone's talking about here's how to give, and they've got their own intent. Why don't you talk to our estate attorneys? Right? Because they wanna raise their own money. This organization, they don't wanna raise anything from anybody. They just want people grow in their generosity.
Pat: And Tina, had you attended one of these conferences?
Tina: I attended a small group journey of generosity.
Scott: Yes. They do it over a 24-hour period.
Pat: Very nice. You know, we didn't solve the problem, right? We just talked around it, right? But this is one of the things that a good advisor would recognize. If you were sitting in any of our offices across the U.S., this conversation would have taken... It's hard to do over... First of all, it's hard to ask someone if they are generous.
Scott: You can look at the tax return.
Pat: You can look at the tax return.
Scott: Someone's been making 250 a year, and they've nothing listed on their tax return. It's a little more complicated now because most people do standard deductions. So, it's not...
Pat: But it's hard to ask someone if they're generous because I've never had anyone say no.
Scott: They might feel they're generous in other areas of their life, but maybe not to finance.
Pat: That's right, not finances. Yeah. People ask me if I'm nice, and I always tell them yes.
Scott: We appreciate the call. And that's all the time we have in today's program. It's been great being with you. And again, if this was helpful to you, forward it to a friend and give us a review.
Pat: And hit the "follow" button.
Scott: We'll see you next week. This has been Scott Hanson, Pat McClain of 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.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Glad you're with us today as we're talking about financial matters. We've got a great program lined up for you. In addition to taking a couple of good calls, Apollo Lupescu is gonna be joining us. He's kind of the master of explaining complicated financial matters in everyday terms. And he'll be talking a little bit about tariffs and the markets.
Pat: Yes. We don't have a lot of guests outside of the organization on the program, but I do like Apollo.
Scott: Certain ones I like.
Pat: I do like Apollo.
Scott: Yeah. So, it'll be a good show. So, don't go anywhere. Or if you're going somewhere, have your AirPods or headphones, whatever your...
Pat: Talking little phone, as my wife calls it. I have to turn it off when she comes to the room. I listen to a lot of podcasts when I'm around the house.
Scott: Well, that's nice to give her your attention. Yeah. I don't like that they like the Apple watches because you're talking to someone and they look at their watch, they're looking at the text message coming out like, "Can you not?" I was just noticing at the gym this morning, almost everybody in the middle of their weight set, they're sitting there on their phone.
Pat: And that's why I don't go to the gym.
Scott: Good.
Pat: It's a bad place.
Scott: Hazardous to your brain.
Pat: It is. It is. Scott, I read this article this last week, two weeks ago, in the "Wall Street Journal," and I had no idea...
Scott: Now you're just showing off, reading the "Wall Street Journal."
Pat: I do like the "Wall Street Journal." Some of my fondest memories are actually reading the "Wall Street Journal" in different locations.
Scott: What? What are your fondest memories?
Pat: We were down in Yosemite with the kids when they were younger, and I...
Scott: What? Hey, there's Yosemite Falls. Say, "Hey, I'm busy reading the Wall Street Journal, kids."
Pat: No, we had been hiking all day, and we brought them down to the little creek. And I brought a lot...
Scott: That's one of your fondest memories, reading the "Wall Street Journal" in Yosemite?
Pat: The way you said it, it does sound pretty strange.
Scott: Oh, it does, Pat. Yeah, beyond strange.
Pat: It was very... I went there...
Scott: Don't you wanna unplug when you're in a place like Yosemite and kind of think that this is life forever and this is, you know?
Pat: Okay. So, I took my lawn chair down there, and the kids and we brought them down to the little creek, and they were swimming around in it and playing in the creek. And I brought two ice-cold beers down there, sat in the lawn chair reading the "Wall Street Journal" where the kids were... It was idyllic. That is...
Scott: Everything except the "Wall Street Journal" sounds idyllic at that point. I like the concept of a hike and the kids swimming and sitting on a lawn chair, drinking a beer at Yosemite.
Pat: Anyway, I was reading the "Wall Street Journal," and an article, "Obscure Chinese Stock Scams Dupe American Investors by the Thousands." And I thought, what a strange world we live in that we allow Chinese companies to list on our exchanges. Oftentimes they have no real...
Scott: Why would you buy some obscure Chinese company? But you're a partner with the Chinese Communist Party.
Pat: Yes.
Scott: All those businesses.
Pat: So, the story of Braden Lindstrom. He was encouraged by someone impersonating a financial advisor to buy shares in a small Chinese company listed on the Nasdaq. A few clicks later, he was on his way of being scammed out of $80,000. Not just $8,000, $80,000. And so, this is... this gets worse. He's a college professor in Utah...
Scott: Hopefully not finance.
Pat: And he bought Jayud Global Logistics, a small Chinese company. And the stock went up and up and up, and then it went close to zero.
Scott: Is it just some pump-and-dump scheme?
Pat: It's an old-fashioned pump and dump. It's an old-fashioned pump and dump. That's all it is.
Scott: You just get some people to pump up the stock, make it look like there's all this demand for the stock, price goes up, investors get excited, they buy. Price goes up, investors get more excited, they buy more. Then the early people cash out.
Pat: Yes.
Scott: And the stock collapses.
Pat: You know what's funny? People look at the price of a stock on these small things, but they should be looking at the volume...
Scott: At the same time.
Pat: ...at the same time.
Scott: Yeah. Why is the price going up?
Pat: Why is the price going up? Because if it's a low volume...
Scott: That's right. There's no volume at all.
Pat: It looks like a pump and dump scheme because someone does a bid and then there's an ask, and those prices are agreed on. And primarily what they're using is social media to get to these. And there are examples after examples in this. And this just reminded me how life is just like a big circle where these were the pump and dump schemes that we... When I entered the industry in the '80s, this was a thing.
Scott: Yeah, yeah. There'd be boiler rooms.
Pat: Boiler rooms. In fact, there was a movie called "Boiler Room."
Scott: I don't know. Were those pump and dump stuff?
Pat: Those were all pump-and-dump schemes, yeah. So, let's just leave it at this...
Scott: What I find even more fascinating, Pat, is not the fact that there's people out there trying to scam other human beings, as sad as that is, that's part of humanity, and we all deal with it on a daily basis with all kinds of different stuff we get thrown our way. But the fact that people actually are fine with having their story listed in the "Wall Street Journal." "Hey, here's how I got scammed." It's quite amazing to me.
Pat: Yes. And Mr. Lindstrom, the college professor, is one of five people interviewed by the "Wall Street Journal" who said they were fooled by advertisements on Facebook or Instagram that told them they should buy Jayud Global Logistics. And many of these went back to Facebook and Instagram, trying to lay blame on them.
Scott: They're advertisers. What are they just... You can't expect these platforms to do due diligence on their advertisers.
Pat: Especially on these sort of where they don't know where a lot of the advertising is coming from. So... I just share that with you because, not only did I find it interesting that we have small Chinese stocks being listed on a NASDAQ, that people are getting scammed. So, stay away. Yeah.
Scott: And we've got a great guest right now, Apollo Lupescu. And we had Apollo on...
Pat: Before the elections, to talk a little bit about the elections and markets and the correlation between Democrats and Republicans versus how the markets...
Scott: Yeah, that's right. And Apollo is one of these guys. He's part of Dimensional Fund Advisors. But he's probably the best I know about taking complex financial matters as it relates to the markets and put it in layman's terms. And I think the real benefit there is helping people stay invested during market cycles when their emotions are telling them something different. So...
Pat: In fact, we had him speak at our national conference, where we bring all our advisors to Dallas. And by the way, Apollo, I have been to, I don't know, hundreds of these things. Your talk about the resilience of American business was...it was great. And it just reminded me that whatever the world throws at American businesses, their job is to overcome.
Scott: Yeah. So, you're gonna share a bit today on tariffs and the markets and that sort of thing, right?
Apollo: Absolutely. Well, first of all, thank you so much for the invitation to be part of this and also for the invitation to the conference. It was great fun for me. And you're absolutely right. I mean, you know, we do live in a country that is built on free markets, and companies are incredibly resilient because people are resilient. And as much as people are pessimistic about what might come next, the reality is that companies have always faced challenges. And over the course of our history, they've been creative, they've been innovating, and sometimes these crises have produced opportunity. So, I'm confident about the future. And that's positivity that I think it's in my genes somehow.
Scott: Well, it's really interesting, Apollo, when you look at Liberation Day, when Trump came out and said he's gonna slap tariffs on everybody and the markets tanked, and essentially, I think we had an intraday bear market on the S&P 500. We had 20% intraday, and then the 5, maybe I'm off, but somewhere close to that, and then everything's recovered. And then we went on to a new heist. But that doesn't seem like the tariff issues resolved itself.
Apollo: No, it's not. And it's a big issue right now. And what I found, too, is that some folks know the term tariff pretty much like a jargon. You know, a while ago I went with my dad to the doctor, and, you know, he found out he has some issues with his pancreas. And, you know, I'm not a doctor, I'm not an expert. I mean, I have some general education, and I know it's in my body somewhere. It does something, and I don't know exactly what, but it was interesting for me because the doctor was very nice at explaining what it does. And for a second, I felt like, should I know this? And then I realized, no, it's not my profession. That's why I go to the doctor. And even though maybe it would be nice if I knew, I'm not required to know. And I find, in the context of tariffs, that this is a word that we understand as advisors, as economists. But I found that, for a lot of folks, it's a bit of a mystery. And a lot of times they get the definition from whatever news outlet they might be listening to or watching or reading. And I'm wondering if it's worth for, like, a couple of minutes just making everybody clear on what exactly is a tariff.
Scott: Yeah.
Apollo: How does it work? Because from there, you kind of get a sense of the impact that it might have on us as consumers and businesses and the market as a whole. Is that a...?
Scott: Yeah, yeah, please. Yes.
Apollo: Yeah. And I'm gonna use something that...
Scott: And by the way, I would be shocked if the definition of tariff is different on MSNBC than it is on Fox News. But anyway, there we go.
Apollo: You think? All right. So, let's make some sense out of tariffs. And what exactly are they? How do they work? And I'm gonna use an example that is near and dear to my heart. I'm not Buddy the Elf, but I do put maple syrup on a lot of things. Maybe not spaghetti, and I had it this morning on my yogurt. So, I love maple syrup. And I bought it at...
Scott: It's hilarious.
Apollo: Yeah, I buy it at Costco. That's where I go get it.
Scott: By the way, Apollo does not look like the kind of guy who loves maple syrup. He looks super fit.
Apollo: Well...
Pat: I actually love the fact that you could work a Buddy the Elf reference into an economic talk.
Apollo: So, in the good old days, before tariffs, Costco would need to buy maple syrup. So, it would sell it to me. And they would go to the Vermont producers and say, "Can I buy your maple syrup?" And those folks would say, "Sure, I'll sell you the maple syrup." But it turns out there are not that many maple trees in Vermont, or at least not as many as perhaps across the border in Canada. And Costco would also go to the Canadian producers and say, "Hey, friendly Canadian producer, do you mind selling me your maple syrup?" And those producers, they say, "Sure, I'll sell the maple syrup," and just come up with a number. Let's say it's $20 a bucket of maple syrup. Costco would then take it for $20, and then it would add a few dollars for their warehouse, the employees, the electricity, their profit margin, let's say $5 for the sake of the example. So, between the $20 they pay the producer and the 5 bucks that they added, Costco, I would go pick it up for $25. And I'm a happy camper. I love it. Everything's great. But now the president comes along and says, "We're gonna impose 25% tariffs on all products coming from Canada." And let's say maple syrup is included in that category. Well, how does it work now? Well, the legal burden of paying that 25% of the value of what gets brought in the country. So, 25% of $20 in this case is $5. It is on the importing company, in this case, Costco.
So, Costco is legally responsible now to pay $5 to the U.S. government right away as they bring in the $20 worth of maple syrup. Now, where is that five bucks gonna come from? That's the question. Well, one thing that Costco can do is go to those friendly Canadian producers and say, "Listen, would you mind selling me that maple syrup for $15 instead of $20, because, you know, I have to pay the government 5 bucks." But those Canadian producers say, "Wait a second. No, I'm not gonna do that. That's what it costs me to make. I don't make as much money on it. And by the way, where else are you gonna get maple syrup? It's not like you can plant a tree and quickly get maple syrup. No, I'm gonna stick with my 20 bucks." Well, Costco then obviously doesn't have any other place to get it. So, they say, "Fine, I'll pay the 20 bucks. And then they bring it in, and they still have to pay the five bucks. Well, the second option is that they send the government the five bucks that they would keep. But that doesn't make it like a viable business. So, that's not realistic. So, what's the third option? The third option is that Costco would probably need to increase the price and take the additional dollars from us, the consumers, and send that to the government.
So, in this world of tariffs, there are three parties involved. The producer, the importing company, and the consumer. And who pays the tariff is unclear, because even though legally Costco is responsible for paying it, it turns out that it's more complicated because, in some cases, they could go to the producer, and the producer might say, "Well, sure, I'll take a little bit of a... I'll drop my price a little bit." But here's what we found out of the first Trump administration when they imposed a 20% tariff on washing machines. There was an economic report written afterwards, and what they found is that 12% out of the 20% of the tariff was passed on to consumers in the form of a higher price. And the rest were haircuts taken by the producer and the importing company. So, you know, everybody kind of took a hit there. But the bulk of it, in the case of those washing machines, was paid by the consumer. So, it's a form of a tax that it's not collected through the tax forms at the end of the year, but rather it's collected and paid by the importer. But, you know, it is possible that the consumers might bear the burden of this tax if the importing and the producing companies don't take a hit. So, it is, again, interesting because when you hear about inflation perhaps coming back, it is likely that, in some cases, not in every case perhaps, but in many, many cases, when there is not an easy substitute and everything is pretty much made abroad, there's little incentive for the producer to cut their price. Where else are you going to get it? And in that case, we might see higher prices, perhaps fewer selections in stores, and perhaps lower quality because of these tariffs. And again, it depends on product by product. It depends on where they are made.
Pat: Apollo?
Apollo: Yeah.
Pat: So, it's a consumption tax. If I was Costco...
Scott: That's what it is, yes.
Pat: It's a consumption tax. If I was Costco, do I lower my margins, or I keep my margins the same? So therefore, the net profit actually that goes to me as Costco actually goes up.
Apollo: And that's the thing, like Costco is a pretty unique example. And I just happen to know that the margins at Costco are capped at about 12% to 14%.
Pat: Yeah, 12% on products that are not Kirkland brand and 14% on Kirkland brand products.
Apollo: Exactly right. Exactly right. So...
Pat: We get mail... My wife has her own parking spot at Costco.
Apollo: We all do. You know, when you spend $10,000 a month, they remember your name.
Pat: I have a bunch of kids. So, Costco, they would keep the margins the same. So therefore, their net profit would actually go up with the tariff.
Apollo: If they do that. If they do that. And Costco has been, again, it's absolutely possible. And they do that. They also have to realize that there is a price-sensitive consumer out there. And if they keep the price too high, then it's possible that they might lose sales. So, it's a very interesting dynamic. But by and large, what we do find is that these companies, like Costco, for example, or other companies, they're trying to make up that lost revenue in other ways. And we're finding that, for example, if you go online and you buy things, some vendors might not give you the free shipping, and it's a way to make up for the lost revenue or make up the tariff that they have to pay. In the case of the washing machines, what do you buy with a washing machine? A dryer. And dryers were not subject to tariffs, and yet their price goes up. That went up as well. So, it is interesting that companies will try to figure out, perhaps, how to maintain their margins in other ways. But ultimately, what a lot of economists are realizing is that the bulk of this tariff for a majority of products is likely gonna fall on the consumer. And that's what we're hearing this. So, from a company perspective, you see that these folks are trying to negotiate and try to figure out how do I keep my margins. And I'm not saying they're gonna make more money, but they're gonna try to figure out how do I maintain an operating profit. And again, it's gonna... That tariff has to come from somewhere, and it's quite likely that maybe directly or indirectly consumers will pay for it. And that's why you might hear about the potential for inflation.
Scott: So, why didn't we see a bigger inflation bump on this last inflation report?
Apollo: I mean, it's interesting because... I don't wanna get too specific in the economics of it, but a lot of firms have been stocking up in expectation of these tariffs. And there is a, you know, pretty decent, you know, supply that's in warehouses and one that expires. There is a good chance that the much lesser volume of trade, I mean, I think 30% less ships came into the ports in the U.S. That's gonna be reflected at some point because there's no magic. And we saw the same thing in the pandemic. If you don't bring in stuff and people wanna buy it, again, you're gonna have fewer choices, higher prices, and perhaps lower quality.
Now, with that being said, I also wanna touch on this. Like, why would the government wanna take money away from the public? Because that's basically what you're doing. And I have to say there are three reasons. And then people kind of point to, like, why there's gotta be a reason for that. And the first one is revenue. And you go back to 1776, what's fascinating is that, in those days when the country was formed, about 80% of the government's revenue at the federal level came from tariffs. Nothing unusual. I mean, we took 80% of the government revenue from tariffs back in those days. And it wasn't until about the Civil War when we introduced the income tax. And income tax over time became the primary source of government revenue to the point where last year tariffs were only roughly about 2% of the government revenue. So, we went from 80% to 2%. So, the tariffs are not a big part of our budget, and not at all relative to everything else. So, the revenue is one reason that we hear the government saying, but again, this is revenue coming from us, the consumers, which I'm not sure that's necessarily something to be trumpeted.
The second thing is maybe we wanna protect and restrict access so some industries in the U.S. would be able to continue to operate. And it could be for strategic reasons, or it could be to protect jobs. And I've traveled the country, and there's no doubt in my mind there has been devastation in some parts of the country because of trade and maybe jobs being shipped abroad. And there's no doubt that between the Civil War and perhaps World War II, there was a major reason why we saw a lot of these tariffs being put in place. Did they do a good job of protecting jobs and adding? Again, it's a really mixed bag, really hard to say. But what we can say, even if those jobs were kept or created in the U.S., it came at a very big cost to society because we all ended up paying more. And, you know, you might save some jobs in steel, for example, by putting tariffs, but you might lose other jobs down in washing machines because you're less competitive now. So, it's really a mixed bag on that.
And thirdly, is that perhaps there is an idea of reciprocity that if you are, you know, charging me a certain tariff, well, it's only fair that I charge you the same. And that's, again, being invoked these days as well. And it's legitimate in some ways. I think every country has something that they wanna protect. And in other ways, over the past 80 years, after World War II, we've championed a reciprocity that was driving tariffs to zero. What if we have free trade? And that has been sort of the economic regime of the last 80 years. And a lot of companies have built their production lines and supply chains on this idea that we can move goods freely among countries. And this sort of pivot on a very short notice, it's creating really big headaches. You know, again, they're commenting on trying to figure out how to negotiate them. But it is a huge headache if you've had 80 years of a certain regime that's being kind of flipped over overnight, almost, and you're gonna be like, "Well, what I do now? So, it's really creating a lot of disruptions. And...
Scott: Well...
Apollo: I know. Again, I mean...
Pat: Apollo, but some of these... Let's say the tariffs actually work, right?
Scott: And we're in very... Work in what?
Pat: Well, that...
Scott: One of the three.
Pat: Well, we're ignoring a couple of things. One is the regulatory environment in which we work, right? We export a lot of our pollution. I mean, California is the best at it, right? We don't, you know, we don't...
Scott: There's tons of oil here. Yeah. Don't drill here. [crosstalk]
Pat: ...don't buy the products, actually. Oh, and not only that, we're gonna export them to a place that doesn't have any environmental regulations that we have. But..
Apollo: Do you remember the book "The Lorax?"
Pat: Yes.
Apollo: Yeah. I mean, like, I remember reading that to my kids, and that's kind of what I felt like. Absolutely. Like, you know, some other country can make money, and, you know, they might not have Truffula trees, but hey, at least they get some money. But, you know, I think it's even for sure that that's been an issue, but I think it's even more fun.
Pat: Stop for one second. So, all in the same thing. Buddy the Elf and a Dr. Seuss reference. How old are your kids? When he said "Lorax," I thought, "He's not talking about Dr. Seuss." Talking about Dr. Seuss. How old are your children?
Apollo: Well, one of them is 18. The other one is 22, almost. I keep reading them at night. I can read the book.
Pat: But in terms of national security, right? We can't ignore the fact that a large portion of the reason we won World War II was because of our manufacturing prowess and how quickly we were able to actually turn that on. But the stuff...from getting from concept to implementation, is it even possible now after 80 years?
Apollo: That's exactly the question. That's exactly the question. You got it right. I mean, I think that what helped us in those days was, again, it's the ability of companies to be creative. And, you know, you saw companies like Ford and GM where they were not making cars, but they retooled their lines to make tanks and planes. That's just something that we did on the fly because of this ingenuity of the American people. And you saw that in the pandemic. Yeah, we didn't produce that many respirators at home, but all of a sudden, Ford can go and make them. But I think there's a fundamental reality that, you know, we're too far along to be able to put that back in the box. I mean, that ship has sailed, in my opinion.
And I'll give you a quick example. Nvidia is an amazing company that designs chips, and it's the poster child of American success in artificial intelligence. Great. But what they do is basically design the chips. So, they're like some chef, some pastry chef, who developed the recipe for the best cookies in the world. So, they know that they have the recipe for the best cookies in the world. The thing is, they don't have a kitchen. Nvidia doesn't have any manufacturing facilities. And what gets even more interesting is that to produce their most advanced chips, there's only one single company in the world that, over decades, had developed a system to be able to do this thing called lithography and process these chips. Nobody else in the world has been doing it. They have this amazing engineering base that, again, over decades. And that company happens to be in Taiwan. Taiwan Semiconductor Manufacturing Corporation. It's the only kitchen where Nvidia can bake their cookies. And what's even more interesting, in that kitchen, you need to have an incredibly specialized oven. And that oven is that machine that TSMC uses. It's a science fiction machine.
Scott, if you shoot a laser from your house to the moon, it would hit a ping pong ball. It's incredible. Like, it prints transistors the size of, 10,000 times smaller than the human hair. Not you and I, but people who have hair. And it's science fiction. And it's a global supply chain. And in the world, there's only one company that, over decades, has been able to produce that machine. Nobody else can even get closer. And that company is based in the Netherlands. It's called ASML.
Pat: Yes. And those machines are hundreds and hundreds of millions of dollars.
Apollo: Oh, yeah, they're, like, a quarter of a billion.
Scott: On a complete side note, if you own Nvidia, and this is news to you, maybe you should not own Nvidia. Anyway, continue on.
Apollo: Well, I mean, as long as there's a global supply chain and global trade, a global value in that respect, AI to function the way we know it. In order for Nvidia to be this incredible success story, well, we do need these partners. And is it realistic to say that somehow TSMC is gonna pack their bags and move all their Taiwanese engineers and their families to Arizona or Nevada? Is it realistic to say that ASML is gonna pack their bags in the Netherlands and move everything to the U.S., and then those supplies, those parts that these companies use, they're all gonna somehow be based in the U.S.? I think, to me, it's just unrealistic. I cannot imagine that happening anywhere anytime soon or anywhere close to the same level of quality.
So, to me, what are we trying to do? It's a big question that I'm not sure that most people that I've talked to, most economists, have a good answer. Perhaps there's a greater wisdom, and at some point, it'll be revealed to us. But I'm not here to make political statements. I'm a proponent. And I think a lot of us on this call are proponents of free markets. What has gotten this country so far is the ability of companies to operate freely. And I think that the less government intervention, the better. I mean, we've always kind of seen that, that free markets do a good job, and there's gotta be some tinkering and regulation. But ultimately, it just feels like this is interfering with free markets in some way.
Pat: Apollo, but was not the CHIPS Act of giving money to Intel kind of foolish thinking that they would become with...
Scott: Hilarious.
Pat: ...the next...
Apollo: They tried. They tried.
Pat: Yeah. So...
Scott: I'm a big proponent of government, get out of the way. Let the markets do their thing.
Pat: So, will these tariffs stick, or is a lot of this bluff or mostly reciprocal?
Apollo: Yeah, and I think that's the question because, again, I mean, I don't know enough about the inner workings of the politics in D.C. It doesn't seem like... If you talk to most economists, I think that economically people would say that we are better off kind of resuming free trade. And if we do wanna help those constituents who got hurt by global trade, there are much better ways than perhaps we've gone so far. But harming everybody else in the process, families who maybe are living on the edge, it's not necessarily the cleverest. So, will they stick? I think, to a large degree, folks, here's what I think about it. I think that what gives me optimism is that, as much as some people might disagree, I think that we have incredibly strong institutions in the country. And if these policies work, if tariffs work, and we all want it to work because it means that the society is getting better, we all have a better life. And if these policies work, then, you know, less than a year and a half from now, we're gonna reelect or elect the people who champion these policies. And if it doesn't work, and if that turns out to be a disaster, well, again, in a year and a half, the country has a chance to, you know, kind of tell us how they feel. And we had that free election, you know, six months ago or nine months ago. So, that institution is still incredibly valid. As long as institutions hold, I think there's a great degree of optimism to be had because if they don't work, this is not something like the pandemic, that we don't know what's causing it and how to deal with this. In this case, we've gotta know it's a policy. And we've seen something like this in the past. And if things don't work out, you know, we'll just go ahead and choose a different direction of the country in less than a year and a half from now.
Scott: So, I think if you're a long-term investor, you can either focus on the immediate and think, "Oh my gosh, like, what happens if this or that?" or you can say, to your point, like...
Pat: It will change if it doesn't work. In my mind, that's brilliant, right? As long as the institution is intact.
Apollo: Absolutely. And...
Pat: And depending upon what side of the aisle you're on, you may believe that the institution, in fact, is not intact.
Apollo: Well, and that's the thing. But people will vote with their pockets and their wallets. There's no doubt in my mind, because we've seen this every election. And Democrats who are not happy about the economy, they might vote Republican. Republicans who are not happy about the economy, they might vote Democratic. So, I don't think that there is such a strong affinity towards the party, irrespective of the economic impact on my life. No, I think that people will vote based on the economy. But I do wanna touch on one other thing that is really important for this conversation. So far, we discussed on the impact on businesses and consumers, but the markets, and this is where it gets so interesting, is the markets reacted to tariffs because of the unexpected magnitude and breadth of tariffs. So, the market was a little bit... you know, the market expectation was different, and when the expectation got readjusted, we saw the big drop.
But I do have to make two quick comments on this. Number one is that markets tend to price expected changes in policy before they happen. If they're surprised, you're going to see big market moves. Otherwise, if the expectation is in line with the new policy, the market won't move because it's already priced in that expectation. But the second big one, guys, it's really important. Tariffs are not the primary driver of market returns, particularly over the long term. And to see this, look at the first Trump administration, we had four years of talk of tariffs, trade wars, blah, blah, blah, all the things that we're kind of dealing with right now.
And if you look at those four years, a dollar invested in the S&P 500, the measure of the U.S. market, for the time that President Trump was in the White House for those four years, it actually went up by about 80%. So, a dollar would have turned into $1.80. So, which is a really nice growth over four years. Well, here's where it gets interesting is that the country that we targeted, the country that we imposed the tariffs against, and really picked this economic fight, if you wanna call it that way, was China. And over the exact same four years, the Chinese stock market did not go up 80%. It actually went up 100%. It outperformed the U.S. market and doubled in value. And if tariffs were truly the primary driver of market performance, neither the U.S. but particularly not the Chinese market, would have done so well. So, this is one of the many, many, many, many variables that impact the performance of the market, but not a primary one, particularly as you extend that from a day to a month to a year and to four years.
And this year, what's the day to days like? It's around mid-June or so, and the U.S. market's relatively flat. So, it might be up or down a little bit, not that much at all. But here's what's fascinating. If you look at the countries that we are kind of targeting, a lot of folks are saying, "Well, they're gonna suffer because we're going to impose tariffs on them. And we already have imposed tariffs on them. And you take, for example, Germany. Well, Germany year-to-date, if you look at the MSCI index, is up about 30%. You look at Canada, how Canada, our friends to the north, you know, they're up about 14% or so. You look at China, up about 17%. You look at Mexico, 30%.
Scott: That's hilarious. Which means...
Apollo: Yeah. I mean, if you think that tariffs would be so devastating to their economies, why are all the crushing...?
Pat: So, all this information you gave me, I have nothing to do with it other than just stay my current investments.
Apollo: That's the key insight, stay the course because all successful investors work with an advisor who helps them kind of figure out what their financial goals are, create a nice little allocation for them. And that allocation might not have known that tariffs are coming, but they knew at some point something might happen to the market. And I think the folks who tend to have good outcomes in investing are the ones who stick to that plan, and they make adjustments, not because of what happens in the market, but more because of life situations. But they stick to the plan, and they talk to their advisor about this. And I think advisors, at this point in time, they have an amazing value that they can bring to the table. Because I keep thinking of advisors being like firefighters. When things are looking good, not a big deal, like you get [inaudible 00:36:04.345], you know, clean the equipment, and all this stuff, but you really earn your keep when there's a fire. And, you know, we had fires in Los Angeles over and over, and people, you know, are saved by these firefighters who jumped in the burning home and saved their lives. I think that advisors are like this. They're like firefighters for somebody's wealth.
Pat: Apollo, that's... I don't know if I 100% agree with the firefighter analogy with the advisor. It might be an overstatement.
Apollo: [crosstalk]...as good-looking as a firefighter.
Pat: Okay. Most advisors I know have no mustaches. So, anyway, we wanna thank you...
Scott: And Apollo Lupescu, do you have a website if people wanna learn more about what you're doing? Is there a way to...? How do people follow you?
Apollo: Always. I mean, I just follow you also, by the way, because we stay in touch a lot. But I know I don't have my own website. I do work for an investment management company, and it's been a privilege to actually work with Allworth as part of that organization. But again, I mean, I don't personally have. But I would just say Allworth advisors have a way to reach me. So...
Pat: We appreciate you. Thanks for being on the show.
Scott: And I had no idea you liked maple syrup that much. I mean, if you look at Apollo, he's, like... I think he swims or plays water polo or something, super fit looking. Does not look like the kind of guy who drinks maple syrup.
Pat: Buddy the Elf when he put it on the spaghetti.
Scott: Yeah. Anyway, so it was great having him on the program.
Pat: We're gonna do one of my favorite segments called "House Calls." And this is where we actually visit with someone that we apparently gave some excellent advice to previously.
Scott: We don't know if we did or not, but...
Pat: And we just follow up with them to see whether the advice was good, bad, taken, not taken, how it turned out.
Scott: Yeah. So, just this past April, we spoke to a woman named Tina, a podcast listener. She's not an Allworth client. I think we have to say that for disclosure purposes because if she is, then it could be considered a testimonial and then all the kinds of regulation stuff. Anyway, she wanted to know how much of her net worth should be in company stock, her employer's stock. So, here's a clip for that call, and then we're gonna talk to Tina.
Tina: My husband and I are later in our careers, and we've been pretty focused and intentional savers, leveraging our company 401(k)s and other savings opportunities, etc. So, we have about... We can retire, and we think, you know, our financial advisor says, live to well beyond 100 and not worry about it. And, you know...
Pat: You're at that point today?
Tina: She says yes. But we're prepared to work for another year or two before we go.
Pat: And what's the dollar amount?
Tina: The amount in this...?
Pat: Yeah, in the 401(k)s, IRAs, the overall. If you put it all in a suitcase, how big would this suitcase be?
Tina: Yeah, about $3 million in qualified funds. Another, you know, $2 in non-qualified after tax. And then I'd say another 25% of our total in this stock. And it's a private company, and it's done exceptionally well. It has a great trajectory, but it makes me very nervous to think I...
Pat: Do you have any liquidity option in the company? I mean, in private companies, you don't always have an opportunity to sell it.
Tina: Yeah, about twice a year they make an offer to buy back.
Pat: Okay. So, the 25...
Scott: And what industry is that in?
Tina: Aerospace.
Pat: Okay. So, of the $5 million, $1.25 million is in your company stock, is that correct?
Tina: No, it's an additional 25.
Pat: Okay. Thank you. Thank you. Oh, thank you, thank you, thank you.
Tina: Yeah. So, it's a big number.
Pat: And is any of it held in an ESOP, or is it all individually held?
Tina: The majority of it is just individually held. It's not in any, like, tax-favored status.
Scott: And there's not that... Okay.
Pat: And how close are you to retirement?
Tina: Let's just say a year and a half.
Scott: Lemme ask you this question, if the stock went to zero, would you still be able to retire in a year or two?
Tina: I think we might put it out for another couple of years.
Pat: Do you want to?
Tina: I think we could. No.
Pat: See, I mean the whole...the concept behind diversification, it's not designed to get wealthier. It's designed to protect where you're at, right? So, when we're young, working for a growing company, like, yeah, maybe I've got more in there than is prudent, but I'm taking a chance on it. If it works out, great. If it doesn't work out, that's all right. I'm still young. When we get to retirement age, particularly when retirement's right around the corner, for most people, they're more concerned about maintaining their lifestyle than they are about becoming wealthier. They don't wanna be poor, right?
Tina: Right.
Pat: That's when diversification comes into play. What's the family income?
Tina: Right now, with both of us working, let's just say in 400K, 500K a year.
Pat: And so, all of this is gain in this. So, how old are you guys?
Tina: I just had my 59-and-a-half birthday. My husband's about six months older than me.
Pat: So, here's the thing that I look at too is the tax ramifications. So, if you wait until after you retire and you start liquidating these, right, dollars... Is there any pension income anywhere?
Tina: No. We have IRAs and 401(k)s, but not in...
Scott: In your non-qualified, are there any stocks that you could sell at a loss? Anything that can trigger a loss there?
Tina: We do that when there is opportunity. We don't have anything right now.
Scott: Yeah, and you don't have any loss carryforward. It's a tough one.
Pat: Oftentimes, if you don't know what to do, you just split the difference, and then you're right either way. But this one, because of the taxes and retirement so close...
Scott: If you were retiring in December of this year, I would say, "Okay. The next couple of years, we're gonna have a strategy of reducing your exposure to this stock, and we're not gonna take any income from your 401(k)s or IRAs. We're gonna make sure your non-qualified tax is managed in a tax-efficient manner so we can pay a very low capital gains tax on this.
Pat: Yeah. And if your income wasn't as high as it was today, I'd be inclined to... What's your family income today? Four to 5. So, I'd be inclined to hold it. So, when you said it's 25% more, right? So, you've got almost a million and a half. Yeah. You got a million and a half in it.
Tina: Times two.
Together: Oh.
Tina: Yeah, it's a lot.
Pat: Oh. I'd start paring it down.
Scott: And how's the value today versus six months ago, a year ago, three years ago, eight years ago?
Tina: Like a rocket ship.
Pat: I'd start paring it down.
Tina: It just keeps on going up.
Pat: I'd start paring it down. Either that...
Scott: Because nothing goes straight up forever, right?
Pat: Either that or I would actually pick a similarly publicly traded stock and put options on it to give myself some downside protection.
Scott: Which is essentially, yeah, put options. You're paying a premium that...
Pat: That if it goes down in price, you get paid. And what you're doing is you're trying to identify companies that are in the same industry that do the same thing that actually will help you. So, you're getting a sibling stock, if you will. So, you're using financial instruments that give you some downside protection, and you're paying that premium so that you can take advantage of the tax ramifications a year from now. And your advisor may or may not...
Scott: Is this aerospace company affiliated with a billionaire who has other companies?
Pat: Put option using what?
Scott: A similar stock.
Pat: There's no similarity to that company.
Scott: Just because of the guy that runs it.
Pat: Yes. Who's brilliant.
Scott: Which is... Listen, what makes you good makes you bad. Yes. I'd pare it down. Tina, thank you for joining us again. As you can tell, listening to the call, it's like there's no equal. You're less than a year from retirement. What steps did you or did you not make this last several months?
Tina: Well, this is a story of the value of financial advice. So, this is a plug for what you guys do. And I'm appreciative of the help. But here's basically... I think I mentioned that there are probably twice a year the company makes an offer to buy employee stock and reevaluates the stock every time they do that. So, just the timing, and I think it was around August we put in to sell a portion, about 30%. We got about 25% of it liquidated. And that was kind of in the mid-high six figures. All of it basically taxable because the basis was so low. So, we worked with a team of financial advisor, accountant, lawyer to determine a tax strategy. And ultimately, we set up a CRUT and put... There was no transfer in kind. We actually had to liquidate it and take that whole hit. So, we decided to take a couple other stock holdings that we've had for 15-plus years, similarly situated from the tax buildup, do a transfer in kind to the CRUT as well as the proceeds from the company stock to set up our legacy giving and to create a little additional source of income in retirement.
Scott: I love it.
Pat: Beautiful. Beautiful. Beautiful.
Scott: And CRUT is a charitable remainder unit trust. And did you have a particular cause or charity already in mind ahead of time, something that was near and dear to your heart and this was an easy one, or did you kind of have to think like, where do we want to have these dollars go ultimately?
Tina: Yeah. Well, we've been on, I'll say, a journey of generosity, which is really wanting to share. You know, we feel super blessed by what we've been able to do in our careers. And we...
Pat: Are you part of Generous Giving? Is that where you get the terminology?
Tina: Mm-hmm.
Pat: Yeah. I've been to their conferences, and...
Tina: Yeah, yeah. So, it was our financial advisor who said, you know, "You should think about giving from your wealth, not just from your income." And that kind of blew my mind. And here we are. And it's been a journey.
Pat: So, let's walk through the mechanics, Scott, of what Tina did for the rest of the listeners. Because you couldn't take this SpaceX stock and actually move that into the trust because of how it was actually positioned...
Scott: It's not a publicly traded company.
Pat: What you did is you took something that you had a lot of appreciation, and you did the same. Therefore, you've got a tax write-off to offset some of the gain that you actually recognize in the SpaceX stocks.
Scott: If not maybe all the way she structured this.
Pat: Yeah. Yes. And then in the same calendar year. And then in doing that, you also provided a little bit of a stream of income. You still have to have a charitable intent. Don't think that that...
Scott: Otherwise, it doesn't work.
Pat: It doesn't work. So, people come in all the time like, "Oh, my friend did this, and they got all this money, and they avoided all these taxes." And I'm like, if you don't have a charitable intent, it doesn't...
Scott: And not everyone has charitable intents.
Pat: Yes. But what you did is you used the tax code to your advantage and fulfilled... You and your husband had to feel great about this, I gotta believe, right?
Tina: Yes, yes. I would have never imagined that this would be something that we could do. And we're so excited about it.
Pat: I'm so happy for you.
Tina: And so are our kids. Our kids are, you know, completely on board. So...
Pat: Have you involved your children in the giving at all, in selecting the charities?
Tina: So, ultimately, they will have some say after we're gone in terms of where it goes. We have it kind of categorized, but there's some flexibility in terms of specific charities that they may wanna give to. But we raised them with the concept of a tithe and that, you know, you've been blessed with much, you bless others by giving back.
Pat: You know, so I'm gonna share something with you, Tina, that... Scott and I have been doing this for quite some time. What you just did 20 years ago, that was for the wealthy, wealthy, like the really rich, to have access to attorneys and accountants and a financial advisor that would have structured that. You're wealthy, but you're not super wealthy, right?
Tina: Right.
Scott: Well, there's always someone with more. You talk to someone with $100 million, they don't feel wealthy.
Pat: Well, it's like driving on the freeway. There's always someone in front of you. But what you said is you brought the accountant together, the financial advisor together, and the estate planning attorney together in order to structure this, right? And I'm guessing that the financial advisor was probably the quarterback of this.
Tina: Yes. Yeah.
Scott: Right? You got a good advisor.
Pat: And you've got a great advisor, right? And firms like ours, that's why we bring tax and estate planning when appropriate in-house and when it's appropriate...
Scott: And a good advisor is someone who helps somebody get clarity on what's important to them and design the finances around that, which is different for everybody, right? For Tina and her husband, they wanted to be as generous as possible with this. More assets than they ever thought they were gonna have or need. And so, this is the perfect solution for it.
Pat: And what is the generosity project, Scott? You both mentioned it, Tina and yourself.
Scott: It's really fascinating. Afoundation funded this organization, Generous Giving, to help people give, essentially, both to understand the philosophical reasons behind it, the spiritual reasons behind that, and the economic reasons behind it. And so, this organization is completely funded through this foundation. So, all the tools they put out in conferences and stuff, they want people to give more, but not to them. So, it's really different because usually someone's talking about here's how to give, and they've got their own intent. Why don't you talk to our estate attorneys? Right? Because they wanna raise their own money. This organization, they don't wanna raise anything from anybody. They just want people grow in their generosity.
Pat: And Tina, had you attended one of these conferences?
Tina: I attended a small group journey of generosity.
Scott: Yes. They do it over a 24-hour period.
Pat: Very nice. You know, we didn't solve the problem, right? We just talked around it, right? But this is one of the things that a good advisor would recognize. If you were sitting in any of our offices across the U.S., this conversation would have taken... It's hard to do over... First of all, it's hard to ask someone if they are generous.
Scott: You can look at the tax return.
Pat: You can look at the tax return.
Scott: Someone's been making 250 a year, and they've nothing listed on their tax return. It's a little more complicated now because most people do standard deductions. So, it's not...
Pat: But it's hard to ask someone if they're generous because I've never had anyone say no.
Scott: They might feel they're generous in other areas of their life, but maybe not to finance.
Pat: That's right, not finances. Yeah. People ask me if I'm nice, and I always tell them yes.
Scott: We appreciate the call. And that's all the time we have in today's program. It's been great being with you. And again, if this was helpful to you, forward it to a friend and give us a review.
Pat: And hit the "follow" button.
Scott: We'll see you next week. This has been Scott Hanson, Pat McClain of 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.