Bonds, Private Credit, Volatile Markets, Retirement Tips, and a Powerful Comeback Story
On this week's Money Matters, Scott and Pat explore the evolution of fixed income investing—from traditional bonds to the rapidly expanding world of private credit—and what it means for your portfolio. They also offer practical advice on weathering market volatility in retirement and share a powerful conversation with a listener who’s rebuilding his financial life after 20 years of incarceration. It’s a compelling mix of market insights, real-life challenges, and practical strategies to help you secure your financial future.
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.
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Scott: Welcome to Allworth's "Money Matters," Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: Glad you are here with us as we talk about financial matters. Myself and my co-hosts, we're both financial advisors, and have been helping people for decades. I've been doing this program for decades, and glad you are here. It's funny, we have more podcast listeners than terrestrial radio listeners. But I was thinking how many podcasts? It seems like everybody has a podcast these days. Like, there are so many podcasts.
Pat: Like, 1 out of 10 people.
Scott: One out of ten people have a podcast and one out of... I just thought how different it is compared to years ago when the... Go ahead.
Pat: But did you remember like we were meeting with the marketing people, and they're like, "Oh, your podcast is in the top 1% of all podcasts in the U.S. and I started laughing."
Scott: There's 100 million podcasts.
Pat: I know. That's, like, being sort of 15-year-old in the third grade. It doesn't mean anything.
Scott: Anyway, so we appreciate folks listening to the program. We'll take some calls and we've got some good content as well today. Pat, as we get... I want to... Okay. I think there's a transformation...I don't think, there is a transformation that's going on in the fixed income market. The way companies borrow money, the way investors provide the money to those companies, it's changing and so... It's not even the bond market, it's becoming the fixed income market, the fixed income market. And it's going to have implications for all of us as investors. It already has implications.
Pat: All right. Well, let's start with the basics, Scott. That's why I'm going with this. So, if you think, historically, the way companies raise money, the way the government borrows money, it's by issuing bonds. And when... And we're going to be real basic here for a minute. But let's say that the U.S. government goes out, this is what they do all the time, they issue a 10-year bond. And as an investor you think, "I'm comfortable with the interest rate." Rates today are roughly 4.5% on a 10-year treasury, give or take. So, say, "All right, I'm going to buy one of these bonds." And let's say, "I'm going to buy a $100,000 bond from the U.S. government." The government's borrowing money.
Scott: As an investor...
Pat: I'm lending $100,000. And in return, I will receive $4,500 a year in interest for the next 10 years. So, that's 4.5% of the $100,000. And at the end of 10 years, the assumption is that the U.S. government will still be intact and have the ability to pay me back my $100,000.
Scott: So, you get the 100 grand back at the end of 10 years. That's how a bond works. It matures. That's the maturity date. And the reason bond values will fluctuate quite a bit. Let's say in this example that I went out in the market and bought a bond at 4.5%. And I was quite happy with my $4,500 a year in income. And two years later, the market has changed. And Pat goes in the marketplace, and they're now paying 6%. And he, for his $100,000, he's getting 6 grand a year in income. And I'm thinking, "Dang."
Pat: I want that six grand.
Scott: "I want the six grand. I'm only getting 4,500 bucks. Pat, would you buy this bond from me?" And Pat say, "I'll buy it, but I'm not going to give you 100 grand. Because for 100 grand, I can get 6 grand a year in income. Why would I give you 100 grand for something that's only 4.5? I'll give you 82,000."
Pat: Or whatever the number so the math all works out. So that my yield is 6%. My yield, I paid less than what's called face value. My yield is 6%. But at the end of that eight-year period, we still have eight years left on this bond, I will get $100,000 back forward. So, that's all computed into the price.
Scott: Which is why, the longer that bond, right, if the bond is going to mature in two weeks, well, I get my 100 grand in two weeks, whether I'm getting 4.5% or 6% for the next two and a half weeks, not that big of a deal. If it's 30 years, it can be massive.
Pat: Thank you.
Scott: So, they get huge swings, which is why we talk, as investment advisors, about duration. How long of our bond portfolio do we have in our portfolio? And the longer that duration, the longer those bonds are, the more volatility, the more fluctuation you're going to have in the value of your bond portfolio. Now, you might say, "Well, Scott, doesn't matter because I hold mine to maturity." Well, it doesn't matter because they get priced every day. And just because you decide to hold a maturity, doesn't mean that the value is not real. So, this...
Pat: Because it is real.
Scott: It is real. When people talk about a paper loss or paper gain, money is paper. That's why as I look, money is, like, at all it matters. It matters. So, this is historically how the governments raise money and companies. And companies, with the other twist besides the duration, it's the, "How likely is that company going to be able to pay me back," or it's called credit quality, right? So, "Instead of government, $100,000 for a 10-year bond, I'm going to loan Apple $100,000 for the next year." I don't know what the interest rates are in Apple bonds, but let's just assume...
Pat: It's pretty close to government.
Scott: It's pretty... It's going to be a little bit more because there's a little more risk. They can't print dollars
Pat: But it's going to be pretty close. It's going to be pretty close. But what if I was lending the money to, you know, Joe's Crab Shack. That's a small, little organization, has six, and their financials are in a in a mess. And you're like, "I know you're doing fine now, but 10 years out, who knows? What happens if the price of crab doubles and you can't sell anything?
Scott: So, you're going to command a much higher price.
Pat: Because of the risk.
Scott: Because of the rest. So, in that situation, we have still two things we're dealing with, right? The duration, how long that bond is before we get repaid? If Joe's Crab Shack, we know they got money, and they're going to pay us in two weeks, we're probably note their word. Ten years out, we might be concerned. And there's no attack on Joe's Crab Shack?
Pat: Joe's Crab. I'm sure it's fine. We'll call it Jimmy Joe's.
Scott: Jimmy Joe's Crab and Shrimp.
Pat: There we go.
Scott: So, there's that duration. There's also the risk of the ability for these companies to repay. That's the credit risk. And so, this is how a lot of money is raised, historically. What is happening... And let's point out that the bond market is massive
Pat: Is massive, larger than the stock.
Scott: It's massive. The problem is.
Pat: And highly fragmented.
Scott: Yeah. The problem is it's not quoted the same because every bond is a different issue with a different date and different maturity. Some actually are in layers, so they might have more risk than ones that sit just next to them from the same company.
Pat: And every January 1st, there is a composite for the 10 year treasure. And you can track that. But that's about it.
Scott: But it's not like there's an underlying index of... There are underlying index, but they're not quoted like the Dow, the S&P and the Nasdaq, a little harder to track. But what we've seen more of is these private markets. So, companies that historically would have raised money through bonds, they would have been, perhaps, junk bonds because they didn't have... And junk bond, all that means is their credit rating is not as high as... Gosh, I'm saying this, like, I wonder how many of the listeners actually think about junk bonds nowadays.
Pat: Yeah, nowadays.
Scott: Unless they started watching financial movies from the '80s. I kind of grew up in all that stuff. But junk bonds, it just means you don't have the highest credit rating. If it goes below a certain level, you have to pay higher the Jimmy John's Crab and Shrimp Shack example. But what's happening now is they're not going to the bond markets like this, where it's sold through an intermediary, rather, they are borrowing money from these private companies, private equity firm.
Pat: Like, BlackRock.
Scott: They raise capital.
Pat: They raise capital.
Scott: They raise capital, then they go and loan it to companies. And the terms, it's not... One is the maturity date may be very different. Second is the interest rates are typically tied to a current rate. Think of them like an adjustable rate mortgage, and...
Pat: And a floating rate. But part of that is based upon your performance as a company. So, these groups that are buying in have visibility into your financials. And if you start doing poorly, they're allowed to move the interest rate.
Scott: They have all kinds of covenants and restrictions come with these. But from all the private credit market, private credit market. But with that, companies, rather than having a guaranteed fixed rate for the next 10, 20, 30 years, it's a rate that floats based upon where short-term interest rates are and some margin. So, as an investor, one of the things that some investors like about this like, "I know I'd like some money that's in fixed income. I don't like the whole concept of long duration and interest rate at risk," you know, interest rates. So, having rates that adjust with current rates is kind of attractive, because now, you've taken that one piece of risk, that whole duration risk off the table.
Pat:. And you've taken a portion of the business risk off the table because it's based on performance. So, if you don't hit your covenants, they can raise the interest rates on you.
Scott: Well, that's correct. But they still the you might have the inability to repay.
Pat: Well, I'm not discounting that.
Scott: And, like, a lot of leveraged buyouts, this is how a lot of leveraged buyouts are financed, a lot of M&A in... So, your premise is that this is where the industry is going or is gone.
Pat: I think we'll see more and more of this direction.
Scott: But where we are now, the way that's structured is like right now, any individual investor, you can go buy a bond, an individual bond that's in the marketplace. You might pay a little bit of spread or pay a little commission, depending on where you get it. It's not going to be that much. These private markets, they don't have the same kind of market.
Pat: You don't know what it is.
Scott: Instead, as an investor, you say, "Well, I'm going to give my money to some company."
Pat: You mentioned a few there.
Scott: "I'm going to give my money to some company. I'm going to tie my money up for some period of time. They're going to then go out and loan to these various companies." And so, we are seeing the emergence of products designed for the everyday investor to invest in these private credit markets, but they're not quite like buying a bond fund. Because you can buy a bond fund one day and sell it the next day. These, typically, your money is tied up for a period of time. Sometimes they're called interval funds, where your money is going to be tied up. And maybe you can only redeem or sell some of your shares on a quarterly basis. And it might be highly restricted to how many people.
Pat: Where we only let 5% of the people...
Scott: it prevents a run on the bank, essentially.
Pat: That's right. Do you think this has anything to do with the lack of confidence in the bond rating firms?
Scott: Well, the bond rating firms are rating these same private companies.
Pat: Understand.
Scott: It's a big business for them.
Pat: I understand. But they're not rating the individual holdings inside of those, they're rating the overall portfolio. That the investor had had lost confidence in a bond rating company for that piece.
Scott: I don't know. I mean, the conflicts of the bond rating companies.
Pat: Oh, I mean, we saw that during the mortgage crisis.
Scott: It still exists. You want to get a rating, you want one of the big firms to give you a rating, you have to pay. You pay them and they will give you a rating.
Pat: Yeah. Yeah. I mean...
Scott: How bad a rating they're going to give you, though? We just got $130,000 from this company. They want a rating on this. And they go into a backroom.
Pat: Is that...
Scott: There's this wheel and they spin it. That's not quite how it works, but...
Pat: But there's some... Also, because they're private credit, you're not underwriting a bond issue. Smaller companies can go to market and borrow money more easily than they were previously because they're not doing big bond issues. The private credit companies will...
Scott: Private markets. For those companies, it's much easier.
Pat: Much smaller. Much smaller, much easier. Yeah, the access...
Scott: And they've actually displaced where the banks used to be the lenders. Because now, you don't go to bank, you work with one of these third party companies that are structured similar to, say, a private equity fund would be.
Pat: So, it's good, it can be, and it can be bad. I mean, look, maybe it obfuscates risk because of the fact you can't run on it.
Scott: Well, that's clearly the part of the discussion of that, right? But with any sort of investment product, just be careful.
Pat: Well, these don't.
Scott: Don't overweight your portfolio in any particular area. Make sure that if you invest in one of these, like, understand what your limitations are.
Pat: I think...
Scott: Like, what the....
Pat: But, Scott, these have been around for 30 years. The problem was... I remember these guys calling on us 25, 30 years ago, and telling us about these interval funds. And you could get to 10% of it. And it opened up every quarter and this and this. There wasn't enough visibility into them for us as advisors to feel comfortable with.
Scott: That's it. Well, and the markets were much smaller.
Pat: Part of that was, is that there were other places for these companies, more established companies. But as the market grows for private credit, it brings in more borrowers that are higher quality, not lower quality.
Scott: But they can get very expensive too. The way these are structured, particularly if you're a smaller investor and you're buying into a fund, the fund then it goes out, invest in these different private equity companies that are the lenders here. It creates additional layers and there's additional costs associated. So, just be really clear minded, understand what it is you are buying, or understand what it is you're being sold, in many situations, so...
Pat: Or pitched.
Scott: Yeah. Anyway, let's go to the calls. If you want to join us, questions@moneymatters.com. We'll get you on the show. Again, that's questions@moneymatters.com. Let's talk now with, Sue. Sue, you're with Allworth's "Money Matters." Hi, Sue.
Sue: Hi, how are you doing?
Scott: Fantastic. What can we do to help?
Sue: I just have a quick question. Right now, I'm sure I'm like a lot of other people where my husband and I have been retired about 10 years. We have our investments pretty well evenly distributed between stocks and bonds, and then, about 10% in cash.
Scott: When you say evenly, like, you're roughly 45% stocks, 45% bonds, 10% cash.
Sue: Correct.
Scott: Okay.
Sue: Correct, yes. And the question I have is, in these volatile times, what can we do to protect against all of these ups and downs?
Pat: And how old are you guys?
Sue: Late 60s, early 70s.
Pat: Okay. And did this money, did you save this up over a period of years through your employer 401(k), or...?
Sue: That's correct, yes.
Pat: And as a percentage, how big of a distribution are you taking?
Sue: Right now, RMD on my husband, who's a bit older.
Pat: Okay, and nothing on yours?
Sue: No.
Pat: How are you surviving in cash-flow wise? You have pensions or Social Security.
Sue: That is correct, yes.
Pat: And the reason I ask these questions is because I want you to think back about how you accumulated these dollars, right? You've been working, presumably, the last 40 to 50 years, and you've been saving a little bit the whole time. Is that correct?
Sue: Yes.
Scott: Through volatile markets.
Pat: Through volatile markets. Had you ever changed your portfolio before based on what you thought you saw in the environment that was going to change for you? Like, have you ever gone to all cash, or all stock, or..?
Sue: No, my husband was smarter than I was. And before 2008, he made some changes, so he didn't lose as much as I did.
Pat: Okay.
Scott: Well, you only lost in 2008 if you sold.
Pat: Yes, yes. So, if...
Scott: I mean, if you just held the broad markets through, you were further ahead than he was.
Sue: Yes.
Scott: Most likely today.
Pat: Yeah, today, today.
Scott: I mean, so in... There's all kinds of rules, the thumbs up, but every situation is unique. And here's what I see... And we haven't talked about your heirs, yet, but your situation, your late 60s, you aren't reliant upon your life savings for your income. You've got income from other sources.
Pat: We know that part.
Scott: Because you're just taking RMD. So, if you called and said, "We're taking an 8% distribution, and we have 80% in stocks, we'd probably be like, "Whoa, whoa." But you're in a situation where you've got the luxury. Frankly, you've got the luxury of doing whatever you want with these dollars. You can stick them all in cash and say, "I'm just gonna not worry about it anymore." You can you can put it all in stocks if you want, say, "We're only living on the requirement of distribution."
Pat: You could put them all in small cap growth stock.
Sott: You could pick one particular company if you want. And the reason we say that is you're not reliant upon this for income. So the question is, what's the what is your intended purpose of your saved assets that you're not using for your income?
Sue: Well, I figure that inflation is going up faster than our income. So, at some point, we will be relying on it.
Pat: Okay, well, then...
Scott: I like the way you're thinking. I'm gonna agree with you.
Pat: And then, your portfolio is perfectly balanced for that. But the question you had was, "Should we change because of the current?"
Scott: I mean, there are some strategies you could employ. They are not going to increase your return whatsoever. They will reduce your return over time. So, whether it's using some sort of options to give you some downside protection, there's a cost for those things.
Pat: But you've lived through recession after recession after recession.
Scott: If you were taking a large distribution on this, I'd be, well, a little more empathetic. I don't think I would recommend any changes. You've got a relatively small allocation. You're less than 50% in equities. And if you look at a couple, a married couple, age 65 today, there's a 50% chance that, at least, one will still be alive at age 90, right? So, odds are, at least, one of you is going to be around 20 years now.
Pat: So, you're going to need that for inflation. I like the way you're thinking. I wouldn't pay, this is hard to say because it's hard to do, any attention to what's going on in the economic environment? I was thinking, last time we did the show, Scott, you talked about AI, artificial intelligence.
Scott: Briefly. Just being a complete tailwind to the economy.
Pat: To the economy, right? So, we might be going to a recession. We might be going into a hyper-growth area of the economy as well. We might be doing a combination of the two of the things. In some industries will be in recession, in others, there will be hyper growth. But the reality is, we get clouded by this political environment in which we live. But businesses have operated in political environments since the beginning of time.
Scott: With all kinds of crazy stuff have to navigate through.
Pat: Look how well companies navigated through COVID. Look at how well companies navigated through World War II.
Scott: Ingenuity is amazing.
Pat: And so, that's kind of what you're betting on over the long term. When you're buying stocks or mutual fund or broad indexed, you're betting that American or ingenuity in general is going to provide you with some balance. And the reason we do balance portfolios widely diversified is because we know some of them are going to be wrong. It's flat out. But I think your portfolio is perfect.
Sue: Okay, well, that's really good to hear. Scott...
Pat: I wouldn't worry about it at all. Correct, not even a little.
Scott: And look, historically, stocks... Like, we hear the term bear market. It's typically defined as a decline of 20%, or more in the stock market, which is a lot, 20% decline. Historically, that happens about once every four years, a little less than that, about once every four years. Actually, we just went through it on an intraday basis last month.
Pat: Yes. And it was over pretty quick.
Scott: Right. If you're on a long vacation, you would have missed the whole thing. But look, there's been longer ones, too, right? So, the financial crisis was a horrible time to live through. But I think it comes down to like, what is your approach to investing? Because it's so tempting to say, let's get invested when things are going to be good, and let's get out when things are going to be poor. But there's no way to tell these things. And if you look historically, there's been nobody, the best experts with the most brilliant minds of the best mathematicians on the planet working for teams cannot outsmart the markets.
Pat: Yeah, yes. Remember the big word, the quads were going to own the market. This is my quant. Remember that? Long term capital?
Scott: Yeah, yeah, that was, well, a long time ago.
Pat: That was a long time ago. You're great.
Scott: '98, I think.
Pat: You're great. You're a good saver. You're relatively... It sounds like, you know, you don't overspend. You're great.
Scott: Yeah, I wouldn't worry.
Pat: And when it goes down... Look, the way you get returns higher than cash and bonds is through those ups and downs. So, next time it goes down, you think, "Ah, stocks, historically, have done about 10% a year, about 7% points above that of inflation. That's what your concern was. They have done 6% or 7% points above that inflation over the last 100 years, not every year, obviously, but... So, when it goes down, and a big day in the news makes it sound like it's different this time, like just remember, "Oh, wait a minute. This is this is what I have to go through to get those excess returns."
Scott: It's called a risk premium. Your premium that you're paying is the added volatility risk above that of the short-term treasury. How it works. So, I appreciate the call. Yeah, wish you well, Sue. You know, essentially, Pat, I was...
Sue: Thank you.
Scott: Yeah, thank you. I was at a conference a bit yesterday, and the presenter, he talked a few different times about... he's one of these guys that I could just tell, he thinks he's out to smart at the market. And he mentioned Warren Buffett a few times throughout the day and what Buffett has done. I'm thinking, "Well, what Buffett did to build his wealth 30, 40 years ago is different than the world today, number one". But one of the things he said to me, he says about interest rates, and he made a case why interest rates are going up, and made a prediction on what the next couple of years are going to be like in the market.
Pat: That's bold.
Scott: Right. And here's the federal deficit and where the deficit is and the downgrade, recent downgrade we had, we were already downgraded by the other agencies and one more agency decided to throw in the towel. Look, I'm thinking, how in the world does anybody know where interest rates are going? Because the interest rate today... You look at the 10-year treasury, Pat, a 10 year bond, right?
Pat: You're loaning money for 10 years.
Scott: The price is set by what you believe is going to happen over the next 10 years. And so, if today people are saying, the average investor saying, "We believe the rates are going to be 4.5%. We're willing to accept 4.5% return over the next decade," which is give or take where the rates are. Why are you clairvoyant? Why do you have the ability to say, "No, rates are going to be 7%, or rates are going to be 3%?" Because the market is already taking all the information that's out there and price them in.
Pat: Correct. It's collective. But I'm always... You've worked with me a long time, a little 35 years. I can be cynical. In fact, I think a good investor is cynical, which, therefore, I'm a good investor. But sometimes, I think these people actually talk more about that garbage just to draw an audience than they do actually believe it themselves.
Scott: That's not this guy, really. Now, he was making a whole business case, why the next couple of years going to be good, and then, it's not going to be good after that.
Pat: Oh, he actually could tell you when the cycles are going to happen?
Scott: He had it written. He had it written for the next four years.
Pat: No, that's awesome.
Scott: And then, he talked about what the... What are the next election cycle called? The...
Pat: The Midterms.
Scott: Midterms. So, I was going to say interim, but it's not interim, midterms. And I'm like, well, then the midterms, because the Democrats are going to win back the house, and so, what this is going to mean. And then he drew on the graph, the economy going down. And I'm watching this thing, wow.
Pat: Wow. That is something. That is something. Did you stay? Did you sit there...
Scott: Oh, it's a long story. I'll tell you another time.
Pat: Oh, yeah, you got to tell me. Did you sit...? You sat through it. I'm sorry you had to sit through that. I'm sorry you had to sit through that. That's hard to watch.
Scott: The rest of the material was actually really good. It was just the one going off in these tangents of predicting the future.
Pat: Oh, you mean, his source material was educational.
Scott: Yes.
Pat: The opinion...
Scott: It was when he went off script and started doing this sort of stuff.
Pat: And his opinions were bad.
Scott: Well, they might be perfect. We don't know. Maybe it's 100% percent right. Maybe I should have taken some pictures of the graph and made...
Pat: Midterms. Actually, I think you could make more money on betting on the midterms as far in advance than you could on the economy.
Scott: I don't know.
Pat: Well, I think if you could call the midterms exactly for each house, see...
Scott: I mean, historically, the other party wins back the house in the midterm.
Pat: I understand, but there's a huge market of betting on...
Scott: Oh, I know.
Pat: ...you could bet on.
Scott: It's probably more fun than trying to pick the best stock over the next couple of years. Anyway. we're talking now with Tim. Tim, you're with Allworth's "Money Matters."
Tim: Hey, how you doing?
Scott: Hi, Tim. What can we do to help?
Tim: Well, I guess, I could say I need a lot of help. I'm not like the usual individuals that will call in and, you know, it seems to be, like, they're pretty set and secure in life. First of all, it's, like, this is really hard just to be able to talk to you. You know, my dad would be very happy. He listens to you every Saturday, the both of you. And he taught me a lot, so I wouldn't be where I am without him. And he's definitely got that information from the both of you.
Pat: Oh, I appreciate that. So, when you say you're just starting out, right? We all start somewhere. Let's go with that premise. Tell us where you're at and tell us where you're trying to go.
Tim: Well, let's say, I guess, it's trying to make a long story short, but I'm in my mid-40s, which is hard to believe. Looking in the mirror, there is a little more gray. But I've actually been... I was incarcerated for over 20 years since I was a teenager. And I'm re-entering this world really, like, left behind and without anything. It's like I said, initially, I didn't have the IRA or the job with the sense of security, or even establishing a home and credit. Having to start life over or begin life at 44... You know, I've been in a blessed position with my family, and not everybody has that opportunity. But I want to be able to take everything that I'm learning and give it to people that don't know.
Tim: Is it? Okay, keep talking.
Tim: So, I do have a job. I have a wonderful job. It's paying up quite well at the moment. So I've just initially...
Scott: What kind of what kind of work is it? Just out of curiosity.
Tim: It's a nonprofit, nonprofit in the Bay Area, assisting vulnerable populations, homeless, hospice, formerly incarcerated, working with corrections, working with...
Scott: So, you say you're starting out, but in reality, you're using your experiences over the last 20 years to serve others. Would that be fair to say?
Tim: Yeah.
Scott: Yeah. And so now, you're worried about your financial side of things and saying, "How do I get this part of my house in order?
Tim: Yes. It's expensive. As the world is expensive. Burgers aren't $2 anymore. They're $14. And so, I just want to kind of set a plan in place, a plan in motion. And it's hard for me to be able to, I don't want to say, trust others, but relinquish the things that I've built and give the others to control it, would you say? So...
Pat: Yeah. So, when you... So, obviously, it starts with a base. And the base is your income from now, right? And whether you're 20, 30, 40, 50, that's how it starts, right? You know, you have a great attitude about it. How much money do you make? And how much do you think you could save on a regular basis?
Tim: So, like, I'm in a blessed position. I don't have my own place. I'm not renting. Actually, I'm living with family. I'm doing what I can to... So, I make about $70,000 a year. I have a 403(b) with our organization. There is no matching, so it's all me.
Scott: Are you contributing to that? Are you contributing to the 403(b)?
Tim: I am.
Scott: How much you putting in as a percentage?
Tim: $200 a month.
Scott: Okay.
Tim: But I'm also opened up my brokerage with Charles Schwab. I have my, that I'm kind of playing with, but I also set up a Roth IRA. So, last year I put in $7,000 this year. I'm going to put in $7,000 for that. I'm going to put a $700 a month rather than one lump sum.
Pat: Into your Roth IRA?
Tim: Yeah.
Pat: It's above the limits.
Tim: I also...
Pat: Yeah, $7,000 this year. $700 a month, which would be $8,400 a year.
Tim: Well, I want to max out at 7,000.
Scott: Got it.
Pat: Okay. Well, okay. But you said $700 a month. So, the quick math. It was above the limit.
Scott: It sounds like you've got things rolling pretty well. So, how could we be of help?
Tim: I mean, I listen, I listen and I try to gauge and understand. I just don't know if I'm doing the right thing.
Scott: No, you're doing great. You're doing great. Look, the reality is you've started late, right? But what you did yesterday, it doesn't define you, the rest of your life. And so, you're doing everything you can do. You're saving. Just save as much as you possibly can. I mean, that gets down to if you could increase your 403(b) contribution a little bit, that would be great. But just save as much as can.
Pat: The thing we like about 403(b) or three big, it's sucked out of your paycheck before you have a chance to spend it. And then you talked about trusting others. You're calling the shots on these, these things, right? And it's... Look, you're in accumulation phase. You just want to be as absolutely as aggressive as you possibly can be in terms of equities. And don't get sucked into the fancy stuff. That's where people actually screw it up. I mean, look, I was...
Scott: Yeah. Or they think they're gonna catch up by, "I better catch up, so I'm going to invest in this particular stock or.." And by the time you know about the stock, it's already a ramping price.
Pat: Scott, I saw an ad yesterday. I saw an ad yesterday from a financial advisory firm, you know, when you click through. And their premise was, this person retired with $750,000, and they were able to increase their income because of their investments an extra, not the amount, an extra $7,000 a month.
Scott: Oh, come on.
Pat: That's what it said. And so, you're like, "Okay, let's assume they're taking a 4% distribution and another 7,000." You're thinking, "This is just crazy. This is nuts."
Scott: They're not a real investment advisory firm. Because there's laws around that. So, they probably, they're probably not even securities licensed or registered investment.
Pat: Exactly. And then, my point being is don't get suck into the quick and easy where people really do blow it. And I've seen them blow. I just think so often about the run up to 2008 when real estate was on fire and you couldn't go wrong and they'd lend money to a donkey. They didn't care. And I had so many clients take all their investments and say that, "I did not understand that real estate in Florida was the place to be, Pat, because..." And I just...
Scott: it's all those things. And, look, you're going to build.... Yeah, I mean, you've got 30 years, 25 years... I mean, in a perfect world, you've got a job where you're not dying to retire, right? You're like, you continue to enjoy what you're doing, but they'll come a time in life when you're going to need to start slowing down. So, if you can save as much as you can for your retirement.
And then, you know, wealth is really built upon a couple of things. One is how much you save. But secondly, it's based upon your career and what you earn. So, the reality is, like, you might have the best job in the world. You might love what you're doing. Maybe this is exactly where God's called you. This is exactly where you're supposed to be. But you're not going to get rich there, right? And so, everything in life, there's trade-offs in everything in life. And so, by choosing... The career you've got, you've got a decent income, but living in the Bay Area, it doesn't go very far, right? Like, it cost you 8 bucks to drive across the bridge. So, I mean, it just doesn't go that far.
Pat: Yeah. But if you move to somewhere out of the Bay Area, small town in Colorado, right, and had an executive-level position in a similar nonprofit, it would move you incredibly through. So, the other thing is invest in yourself. In fact, you know, when young people come to Scott and myself, which happens because we have kids that are anywhere between the ages.
Scott: Yeah, that's right.
Pat: And their friends of often times, and they're like, "What's the best investment?" And what's your answer, Scott?
Scott: Yourself.
Pat: Yourself, not X, Y, Z stock, no.
Scott: It's yourself.
Pat: It's yourself.
Tim: I mean, I don't want to lose my soul in the process believing that, you know, money is...
Scott: That's right.
Tim: ...the priority in life and it's not. I just want to be able to have this sense of security and live way beneath my means, and then, have that everyday security. Like, I know I'm going to have food. I know I'll be able to help other people. I know I'll be able to donate. So, I guess, that was, like, another question. So, on this last two years, I've been able to save $100,000.
Pat: Holy [crosstalk 00:38:20.148] smokes, wait, stop. Mic drop. We're done. You're fine. How in the world did you save $100,000?
Tim: Well, living at home.
Pat: Okay. Well, that is what it is.
Scott: I know, but still...
Pat: But still that's a lot.
Scott: Phenomenal.
Pat: It's $70,000 a year income.
Scott: Holy crap.
Pat: That's amazing.
Scott: Okay, so keep going.
Pat: Tim, you're doing really well.
Tim: So, I guess, another question is, I don't want it to sit in the bank and accumulate nothing and give me pennies in a Wells Fargo savings account, when I should have made a different decision and made...
Scott: Shoulda woulda. It doesn't matter. We're here today.
Pat: Yeah. But we go the right direction now.
Scott: I would put the maximum you can in your 403(b) 100%.
Pat: I would maximize your 403(b). If you're saving enough money...
Scott: And if you have to start spending down your savings to make up for it, then fine. I would put it...
Tim: So, what about, like, a high-yield savings account.
Scott: Well, that's easy. I mean, that's easy.
Pat: Yeah, you should do that. Yeah, that's easy.
Scott: As well.
Pat: Yeah, you should do that, but you should maximize your 403(b). If you're saving that much money on an annual basis, maximize your 403(b), maximize...
Scott: Your 403(b) and you're Roth.
Pat: ...IRA. And then, after that, just allocate money to a tax-efficient account as well. And then, you know...
Scott: Like a broad stock market index, the total stock market. You could put some in a total stock market. But it's got to be there for... Anytime you put money in something like stocks, it's 20-year money, it's Tim's retirement, old-age money, right?
Tim: Like, 59 and a half, right?
Scott: Well, that's the earliest. But I mean, the reality is you're 44, and you're probably not going to be retiring at 59 and a half.
Pat: Yes, yeah. You're going to work probably until you're, at least, 70, but this is saving...
Scott: I'm 58 and a half, and I don't like the concept of retirement at 59 and a half.
Pat: These, your saving rates, you're doing phenomenal.
Tim: Yeah. Well, I mean, it's not going to be forever. And I imagine it's going to end next year, so I wanted to see, what money I'm I need to be in liquid in order to maybe purchase a condo.
Pat: Okay. Well, that's something completely different, right? So, if you said, "I want to purchase a condo in the next three to four years," I'm going to say, "Well, you know, not in the Bay Area, not on $70,000 a year," right? But you've got it together. You're doing great. You should be proud of yourself. You really should.
Scott: No kidding. My guess is... I mean, not my get, you are a complete outlier.
Pat: Well, there is that big organization down that works with previous...in San Francisco that has the restaurant and the auto repair shop, are you involved in that group? What's it called?
Scott: I don't know. No idea.
Pat: I think the Delancey...
Tim: Is it the Delancey Street?
Pat: The Delancey Street, yeah. Are you involved with them?
Tim: No, no, I'm not.
Pat: Okay. Anyway, you're doing great.
Tim: Yeah. But it's just, you know, other than my dad and, you know, listening to you guys, there's no sense of a real education out there, you know, for somebody like myself.
Pat: No, wait, you're more...
Scott: What do you mean education.
Pat: You're serious. Look, look, look, you're in the top 20%. Most people, most Americans... Listen to this, half Americans don't have a dime saved, and they haven't spent any time in prison. You're in the...
Scott: Always, there's the part of America that we look at and say, "Wow, they've got lots of assets, lots of capital, lots of saving," but there's a whole...half of America doesn't have anything saved.
Pat: Yeah. You should be proud of...
Scott: People work their whole lives, getting on with life, and they're dead broke.
Pat: We're not ones for false praise. Yeah, you're doing great.
Scott: You should feel good about yourself, truly, truly, truly. So, I appreciate the call.
Tim: I mean, no, yeah, just always want to be challenged, and...
Scott: Yeah, well, you're doing great.
Tim: ...ready to learn and being able to pass it down.
Scott: And talk to other people like us and listen to podcasts and you'll learn more than you need. So, glad you called in, Tim. And we're getting near the end of our program. And I'm going to let... Yeah, Pat, you're sticking it in my face. Where did the phone go?
Pat: Well, no. I might have it. You've got my little sheeter. Yes. We can both talk about this.
Scott: Okay. Our June webinar. We do a lot of education. Look, we've been an education-focused firm really since day one. Pat and I started doing this program, radio program, back in 1995, 30 years. And we've done thousands, probably, of live events and...
Pat: A fair amount.
Scott: ...webinars and everything else. And a lot of it, we believe that the more one understands this situation and their options, the more informed they are, the better decisions they will make, and the better financial life they're going to have, which is really what our objective is. So, this is a June webinar. It's for legacy planning for high-net-worth households and whatever that means. But for this particular, if you've got $2 million or more of investable assets, and you're wondering about, how do you make sure that this is structured in such a manner so that it's the most effective way to transfer what's left upon your death, because you probably have been more than you're going to spend your lifetime, you want to leave something, it's effective strategies for that.
And we have two presenters, both excellent, Simone Daveny, who's Allworth's head of private wealth strategies and Richard Del Monte, advisor partner in a Bay Area, Walnut Creek office. They both been guests on this program. They're going to do in the presenting. And these webinars are Wednesday, June 11th, at 10 a.m. Pacific, Thursday, June 12th, at noon Pacific, Saturday, June 14th, at 9 a.m. Pacific. And to register and more information, just go to allworthfinancial.com/workshops.
Pat: I'd take it one step further, for those people that have $2 million, why do you think they're going to have it in the next couple of years. Fair enough, right, truly.
Scott: Or if you've got $20 million.
Pat: Yeah. Or $20 million, or $30 million, whatever the number is, but... Or you're just overall interested in this stuff.
Scott: Anyway, that's all the time we have. We'll see you next week. This has been Scott Hanson, Pat McClain of Allworth's "Money Matters."
Automated Voice: 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 a state-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 are here with us as we talk about financial matters. Myself and my co-hosts, we're both financial advisors, and have been helping people for decades. I've been doing this program for decades, and glad you are here. It's funny, we have more podcast listeners than terrestrial radio listeners. But I was thinking how many podcasts? It seems like everybody has a podcast these days. Like, there are so many podcasts.
Pat: Like, 1 out of 10 people.
Scott: One out of ten people have a podcast and one out of... I just thought how different it is compared to years ago when the... Go ahead.
Pat: But did you remember like we were meeting with the marketing people, and they're like, "Oh, your podcast is in the top 1% of all podcasts in the U.S. and I started laughing."
Scott: There's 100 million podcasts.
Pat: I know. That's, like, being sort of 15-year-old in the third grade. It doesn't mean anything.
Scott: Anyway, so we appreciate folks listening to the program. We'll take some calls and we've got some good content as well today. Pat, as we get... I want to... Okay. I think there's a transformation...I don't think, there is a transformation that's going on in the fixed income market. The way companies borrow money, the way investors provide the money to those companies, it's changing and so... It's not even the bond market, it's becoming the fixed income market, the fixed income market. And it's going to have implications for all of us as investors. It already has implications.
Pat: All right. Well, let's start with the basics, Scott. That's why I'm going with this. So, if you think, historically, the way companies raise money, the way the government borrows money, it's by issuing bonds. And when... And we're going to be real basic here for a minute. But let's say that the U.S. government goes out, this is what they do all the time, they issue a 10-year bond. And as an investor you think, "I'm comfortable with the interest rate." Rates today are roughly 4.5% on a 10-year treasury, give or take. So, say, "All right, I'm going to buy one of these bonds." And let's say, "I'm going to buy a $100,000 bond from the U.S. government." The government's borrowing money.
Scott: As an investor...
Pat: I'm lending $100,000. And in return, I will receive $4,500 a year in interest for the next 10 years. So, that's 4.5% of the $100,000. And at the end of 10 years, the assumption is that the U.S. government will still be intact and have the ability to pay me back my $100,000.
Scott: So, you get the 100 grand back at the end of 10 years. That's how a bond works. It matures. That's the maturity date. And the reason bond values will fluctuate quite a bit. Let's say in this example that I went out in the market and bought a bond at 4.5%. And I was quite happy with my $4,500 a year in income. And two years later, the market has changed. And Pat goes in the marketplace, and they're now paying 6%. And he, for his $100,000, he's getting 6 grand a year in income. And I'm thinking, "Dang."
Pat: I want that six grand.
Scott: "I want the six grand. I'm only getting 4,500 bucks. Pat, would you buy this bond from me?" And Pat say, "I'll buy it, but I'm not going to give you 100 grand. Because for 100 grand, I can get 6 grand a year in income. Why would I give you 100 grand for something that's only 4.5? I'll give you 82,000."
Pat: Or whatever the number so the math all works out. So that my yield is 6%. My yield, I paid less than what's called face value. My yield is 6%. But at the end of that eight-year period, we still have eight years left on this bond, I will get $100,000 back forward. So, that's all computed into the price.
Scott: Which is why, the longer that bond, right, if the bond is going to mature in two weeks, well, I get my 100 grand in two weeks, whether I'm getting 4.5% or 6% for the next two and a half weeks, not that big of a deal. If it's 30 years, it can be massive.
Pat: Thank you.
Scott: So, they get huge swings, which is why we talk, as investment advisors, about duration. How long of our bond portfolio do we have in our portfolio? And the longer that duration, the longer those bonds are, the more volatility, the more fluctuation you're going to have in the value of your bond portfolio. Now, you might say, "Well, Scott, doesn't matter because I hold mine to maturity." Well, it doesn't matter because they get priced every day. And just because you decide to hold a maturity, doesn't mean that the value is not real. So, this...
Pat: Because it is real.
Scott: It is real. When people talk about a paper loss or paper gain, money is paper. That's why as I look, money is, like, at all it matters. It matters. So, this is historically how the governments raise money and companies. And companies, with the other twist besides the duration, it's the, "How likely is that company going to be able to pay me back," or it's called credit quality, right? So, "Instead of government, $100,000 for a 10-year bond, I'm going to loan Apple $100,000 for the next year." I don't know what the interest rates are in Apple bonds, but let's just assume...
Pat: It's pretty close to government.
Scott: It's pretty... It's going to be a little bit more because there's a little more risk. They can't print dollars
Pat: But it's going to be pretty close. It's going to be pretty close. But what if I was lending the money to, you know, Joe's Crab Shack. That's a small, little organization, has six, and their financials are in a in a mess. And you're like, "I know you're doing fine now, but 10 years out, who knows? What happens if the price of crab doubles and you can't sell anything?
Scott: So, you're going to command a much higher price.
Pat: Because of the risk.
Scott: Because of the rest. So, in that situation, we have still two things we're dealing with, right? The duration, how long that bond is before we get repaid? If Joe's Crab Shack, we know they got money, and they're going to pay us in two weeks, we're probably note their word. Ten years out, we might be concerned. And there's no attack on Joe's Crab Shack?
Pat: Joe's Crab. I'm sure it's fine. We'll call it Jimmy Joe's.
Scott: Jimmy Joe's Crab and Shrimp.
Pat: There we go.
Scott: So, there's that duration. There's also the risk of the ability for these companies to repay. That's the credit risk. And so, this is how a lot of money is raised, historically. What is happening... And let's point out that the bond market is massive
Pat: Is massive, larger than the stock.
Scott: It's massive. The problem is.
Pat: And highly fragmented.
Scott: Yeah. The problem is it's not quoted the same because every bond is a different issue with a different date and different maturity. Some actually are in layers, so they might have more risk than ones that sit just next to them from the same company.
Pat: And every January 1st, there is a composite for the 10 year treasure. And you can track that. But that's about it.
Scott: But it's not like there's an underlying index of... There are underlying index, but they're not quoted like the Dow, the S&P and the Nasdaq, a little harder to track. But what we've seen more of is these private markets. So, companies that historically would have raised money through bonds, they would have been, perhaps, junk bonds because they didn't have... And junk bond, all that means is their credit rating is not as high as... Gosh, I'm saying this, like, I wonder how many of the listeners actually think about junk bonds nowadays.
Pat: Yeah, nowadays.
Scott: Unless they started watching financial movies from the '80s. I kind of grew up in all that stuff. But junk bonds, it just means you don't have the highest credit rating. If it goes below a certain level, you have to pay higher the Jimmy John's Crab and Shrimp Shack example. But what's happening now is they're not going to the bond markets like this, where it's sold through an intermediary, rather, they are borrowing money from these private companies, private equity firm.
Pat: Like, BlackRock.
Scott: They raise capital.
Pat: They raise capital.
Scott: They raise capital, then they go and loan it to companies. And the terms, it's not... One is the maturity date may be very different. Second is the interest rates are typically tied to a current rate. Think of them like an adjustable rate mortgage, and...
Pat: And a floating rate. But part of that is based upon your performance as a company. So, these groups that are buying in have visibility into your financials. And if you start doing poorly, they're allowed to move the interest rate.
Scott: They have all kinds of covenants and restrictions come with these. But from all the private credit market, private credit market. But with that, companies, rather than having a guaranteed fixed rate for the next 10, 20, 30 years, it's a rate that floats based upon where short-term interest rates are and some margin. So, as an investor, one of the things that some investors like about this like, "I know I'd like some money that's in fixed income. I don't like the whole concept of long duration and interest rate at risk," you know, interest rates. So, having rates that adjust with current rates is kind of attractive, because now, you've taken that one piece of risk, that whole duration risk off the table.
Pat:. And you've taken a portion of the business risk off the table because it's based on performance. So, if you don't hit your covenants, they can raise the interest rates on you.
Scott: Well, that's correct. But they still the you might have the inability to repay.
Pat: Well, I'm not discounting that.
Scott: And, like, a lot of leveraged buyouts, this is how a lot of leveraged buyouts are financed, a lot of M&A in... So, your premise is that this is where the industry is going or is gone.
Pat: I think we'll see more and more of this direction.
Scott: But where we are now, the way that's structured is like right now, any individual investor, you can go buy a bond, an individual bond that's in the marketplace. You might pay a little bit of spread or pay a little commission, depending on where you get it. It's not going to be that much. These private markets, they don't have the same kind of market.
Pat: You don't know what it is.
Scott: Instead, as an investor, you say, "Well, I'm going to give my money to some company."
Pat: You mentioned a few there.
Scott: "I'm going to give my money to some company. I'm going to tie my money up for some period of time. They're going to then go out and loan to these various companies." And so, we are seeing the emergence of products designed for the everyday investor to invest in these private credit markets, but they're not quite like buying a bond fund. Because you can buy a bond fund one day and sell it the next day. These, typically, your money is tied up for a period of time. Sometimes they're called interval funds, where your money is going to be tied up. And maybe you can only redeem or sell some of your shares on a quarterly basis. And it might be highly restricted to how many people.
Pat: Where we only let 5% of the people...
Scott: it prevents a run on the bank, essentially.
Pat: That's right. Do you think this has anything to do with the lack of confidence in the bond rating firms?
Scott: Well, the bond rating firms are rating these same private companies.
Pat: Understand.
Scott: It's a big business for them.
Pat: I understand. But they're not rating the individual holdings inside of those, they're rating the overall portfolio. That the investor had had lost confidence in a bond rating company for that piece.
Scott: I don't know. I mean, the conflicts of the bond rating companies.
Pat: Oh, I mean, we saw that during the mortgage crisis.
Scott: It still exists. You want to get a rating, you want one of the big firms to give you a rating, you have to pay. You pay them and they will give you a rating.
Pat: Yeah. Yeah. I mean...
Scott: How bad a rating they're going to give you, though? We just got $130,000 from this company. They want a rating on this. And they go into a backroom.
Pat: Is that...
Scott: There's this wheel and they spin it. That's not quite how it works, but...
Pat: But there's some... Also, because they're private credit, you're not underwriting a bond issue. Smaller companies can go to market and borrow money more easily than they were previously because they're not doing big bond issues. The private credit companies will...
Scott: Private markets. For those companies, it's much easier.
Pat: Much smaller. Much smaller, much easier. Yeah, the access...
Scott: And they've actually displaced where the banks used to be the lenders. Because now, you don't go to bank, you work with one of these third party companies that are structured similar to, say, a private equity fund would be.
Pat: So, it's good, it can be, and it can be bad. I mean, look, maybe it obfuscates risk because of the fact you can't run on it.
Scott: Well, that's clearly the part of the discussion of that, right? But with any sort of investment product, just be careful.
Pat: Well, these don't.
Scott: Don't overweight your portfolio in any particular area. Make sure that if you invest in one of these, like, understand what your limitations are.
Pat: I think...
Scott: Like, what the....
Pat: But, Scott, these have been around for 30 years. The problem was... I remember these guys calling on us 25, 30 years ago, and telling us about these interval funds. And you could get to 10% of it. And it opened up every quarter and this and this. There wasn't enough visibility into them for us as advisors to feel comfortable with.
Scott: That's it. Well, and the markets were much smaller.
Pat: Part of that was, is that there were other places for these companies, more established companies. But as the market grows for private credit, it brings in more borrowers that are higher quality, not lower quality.
Scott: But they can get very expensive too. The way these are structured, particularly if you're a smaller investor and you're buying into a fund, the fund then it goes out, invest in these different private equity companies that are the lenders here. It creates additional layers and there's additional costs associated. So, just be really clear minded, understand what it is you are buying, or understand what it is you're being sold, in many situations, so...
Pat: Or pitched.
Scott: Yeah. Anyway, let's go to the calls. If you want to join us, questions@moneymatters.com. We'll get you on the show. Again, that's questions@moneymatters.com. Let's talk now with, Sue. Sue, you're with Allworth's "Money Matters." Hi, Sue.
Sue: Hi, how are you doing?
Scott: Fantastic. What can we do to help?
Sue: I just have a quick question. Right now, I'm sure I'm like a lot of other people where my husband and I have been retired about 10 years. We have our investments pretty well evenly distributed between stocks and bonds, and then, about 10% in cash.
Scott: When you say evenly, like, you're roughly 45% stocks, 45% bonds, 10% cash.
Sue: Correct.
Scott: Okay.
Sue: Correct, yes. And the question I have is, in these volatile times, what can we do to protect against all of these ups and downs?
Pat: And how old are you guys?
Sue: Late 60s, early 70s.
Pat: Okay. And did this money, did you save this up over a period of years through your employer 401(k), or...?
Sue: That's correct, yes.
Pat: And as a percentage, how big of a distribution are you taking?
Sue: Right now, RMD on my husband, who's a bit older.
Pat: Okay, and nothing on yours?
Sue: No.
Pat: How are you surviving in cash-flow wise? You have pensions or Social Security.
Sue: That is correct, yes.
Pat: And the reason I ask these questions is because I want you to think back about how you accumulated these dollars, right? You've been working, presumably, the last 40 to 50 years, and you've been saving a little bit the whole time. Is that correct?
Sue: Yes.
Scott: Through volatile markets.
Pat: Through volatile markets. Had you ever changed your portfolio before based on what you thought you saw in the environment that was going to change for you? Like, have you ever gone to all cash, or all stock, or..?
Sue: No, my husband was smarter than I was. And before 2008, he made some changes, so he didn't lose as much as I did.
Pat: Okay.
Scott: Well, you only lost in 2008 if you sold.
Pat: Yes, yes. So, if...
Scott: I mean, if you just held the broad markets through, you were further ahead than he was.
Sue: Yes.
Scott: Most likely today.
Pat: Yeah, today, today.
Scott: I mean, so in... There's all kinds of rules, the thumbs up, but every situation is unique. And here's what I see... And we haven't talked about your heirs, yet, but your situation, your late 60s, you aren't reliant upon your life savings for your income. You've got income from other sources.
Pat: We know that part.
Scott: Because you're just taking RMD. So, if you called and said, "We're taking an 8% distribution, and we have 80% in stocks, we'd probably be like, "Whoa, whoa." But you're in a situation where you've got the luxury. Frankly, you've got the luxury of doing whatever you want with these dollars. You can stick them all in cash and say, "I'm just gonna not worry about it anymore." You can you can put it all in stocks if you want, say, "We're only living on the requirement of distribution."
Pat: You could put them all in small cap growth stock.
Sott: You could pick one particular company if you want. And the reason we say that is you're not reliant upon this for income. So the question is, what's the what is your intended purpose of your saved assets that you're not using for your income?
Sue: Well, I figure that inflation is going up faster than our income. So, at some point, we will be relying on it.
Pat: Okay, well, then...
Scott: I like the way you're thinking. I'm gonna agree with you.
Pat: And then, your portfolio is perfectly balanced for that. But the question you had was, "Should we change because of the current?"
Scott: I mean, there are some strategies you could employ. They are not going to increase your return whatsoever. They will reduce your return over time. So, whether it's using some sort of options to give you some downside protection, there's a cost for those things.
Pat: But you've lived through recession after recession after recession.
Scott: If you were taking a large distribution on this, I'd be, well, a little more empathetic. I don't think I would recommend any changes. You've got a relatively small allocation. You're less than 50% in equities. And if you look at a couple, a married couple, age 65 today, there's a 50% chance that, at least, one will still be alive at age 90, right? So, odds are, at least, one of you is going to be around 20 years now.
Pat: So, you're going to need that for inflation. I like the way you're thinking. I wouldn't pay, this is hard to say because it's hard to do, any attention to what's going on in the economic environment? I was thinking, last time we did the show, Scott, you talked about AI, artificial intelligence.
Scott: Briefly. Just being a complete tailwind to the economy.
Pat: To the economy, right? So, we might be going to a recession. We might be going into a hyper-growth area of the economy as well. We might be doing a combination of the two of the things. In some industries will be in recession, in others, there will be hyper growth. But the reality is, we get clouded by this political environment in which we live. But businesses have operated in political environments since the beginning of time.
Scott: With all kinds of crazy stuff have to navigate through.
Pat: Look how well companies navigated through COVID. Look at how well companies navigated through World War II.
Scott: Ingenuity is amazing.
Pat: And so, that's kind of what you're betting on over the long term. When you're buying stocks or mutual fund or broad indexed, you're betting that American or ingenuity in general is going to provide you with some balance. And the reason we do balance portfolios widely diversified is because we know some of them are going to be wrong. It's flat out. But I think your portfolio is perfect.
Sue: Okay, well, that's really good to hear. Scott...
Pat: I wouldn't worry about it at all. Correct, not even a little.
Scott: And look, historically, stocks... Like, we hear the term bear market. It's typically defined as a decline of 20%, or more in the stock market, which is a lot, 20% decline. Historically, that happens about once every four years, a little less than that, about once every four years. Actually, we just went through it on an intraday basis last month.
Pat: Yes. And it was over pretty quick.
Scott: Right. If you're on a long vacation, you would have missed the whole thing. But look, there's been longer ones, too, right? So, the financial crisis was a horrible time to live through. But I think it comes down to like, what is your approach to investing? Because it's so tempting to say, let's get invested when things are going to be good, and let's get out when things are going to be poor. But there's no way to tell these things. And if you look historically, there's been nobody, the best experts with the most brilliant minds of the best mathematicians on the planet working for teams cannot outsmart the markets.
Pat: Yeah, yes. Remember the big word, the quads were going to own the market. This is my quant. Remember that? Long term capital?
Scott: Yeah, yeah, that was, well, a long time ago.
Pat: That was a long time ago. You're great.
Scott: '98, I think.
Pat: You're great. You're a good saver. You're relatively... It sounds like, you know, you don't overspend. You're great.
Scott: Yeah, I wouldn't worry.
Pat: And when it goes down... Look, the way you get returns higher than cash and bonds is through those ups and downs. So, next time it goes down, you think, "Ah, stocks, historically, have done about 10% a year, about 7% points above that of inflation. That's what your concern was. They have done 6% or 7% points above that inflation over the last 100 years, not every year, obviously, but... So, when it goes down, and a big day in the news makes it sound like it's different this time, like just remember, "Oh, wait a minute. This is this is what I have to go through to get those excess returns."
Scott: It's called a risk premium. Your premium that you're paying is the added volatility risk above that of the short-term treasury. How it works. So, I appreciate the call. Yeah, wish you well, Sue. You know, essentially, Pat, I was...
Sue: Thank you.
Scott: Yeah, thank you. I was at a conference a bit yesterday, and the presenter, he talked a few different times about... he's one of these guys that I could just tell, he thinks he's out to smart at the market. And he mentioned Warren Buffett a few times throughout the day and what Buffett has done. I'm thinking, "Well, what Buffett did to build his wealth 30, 40 years ago is different than the world today, number one". But one of the things he said to me, he says about interest rates, and he made a case why interest rates are going up, and made a prediction on what the next couple of years are going to be like in the market.
Pat: That's bold.
Scott: Right. And here's the federal deficit and where the deficit is and the downgrade, recent downgrade we had, we were already downgraded by the other agencies and one more agency decided to throw in the towel. Look, I'm thinking, how in the world does anybody know where interest rates are going? Because the interest rate today... You look at the 10-year treasury, Pat, a 10 year bond, right?
Pat: You're loaning money for 10 years.
Scott: The price is set by what you believe is going to happen over the next 10 years. And so, if today people are saying, the average investor saying, "We believe the rates are going to be 4.5%. We're willing to accept 4.5% return over the next decade," which is give or take where the rates are. Why are you clairvoyant? Why do you have the ability to say, "No, rates are going to be 7%, or rates are going to be 3%?" Because the market is already taking all the information that's out there and price them in.
Pat: Correct. It's collective. But I'm always... You've worked with me a long time, a little 35 years. I can be cynical. In fact, I think a good investor is cynical, which, therefore, I'm a good investor. But sometimes, I think these people actually talk more about that garbage just to draw an audience than they do actually believe it themselves.
Scott: That's not this guy, really. Now, he was making a whole business case, why the next couple of years going to be good, and then, it's not going to be good after that.
Pat: Oh, he actually could tell you when the cycles are going to happen?
Scott: He had it written. He had it written for the next four years.
Pat: No, that's awesome.
Scott: And then, he talked about what the... What are the next election cycle called? The...
Pat: The Midterms.
Scott: Midterms. So, I was going to say interim, but it's not interim, midterms. And I'm like, well, then the midterms, because the Democrats are going to win back the house, and so, what this is going to mean. And then he drew on the graph, the economy going down. And I'm watching this thing, wow.
Pat: Wow. That is something. That is something. Did you stay? Did you sit there...
Scott: Oh, it's a long story. I'll tell you another time.
Pat: Oh, yeah, you got to tell me. Did you sit...? You sat through it. I'm sorry you had to sit through that. I'm sorry you had to sit through that. That's hard to watch.
Scott: The rest of the material was actually really good. It was just the one going off in these tangents of predicting the future.
Pat: Oh, you mean, his source material was educational.
Scott: Yes.
Pat: The opinion...
Scott: It was when he went off script and started doing this sort of stuff.
Pat: And his opinions were bad.
Scott: Well, they might be perfect. We don't know. Maybe it's 100% percent right. Maybe I should have taken some pictures of the graph and made...
Pat: Midterms. Actually, I think you could make more money on betting on the midterms as far in advance than you could on the economy.
Scott: I don't know.
Pat: Well, I think if you could call the midterms exactly for each house, see...
Scott: I mean, historically, the other party wins back the house in the midterm.
Pat: I understand, but there's a huge market of betting on...
Scott: Oh, I know.
Pat: ...you could bet on.
Scott: It's probably more fun than trying to pick the best stock over the next couple of years. Anyway. we're talking now with Tim. Tim, you're with Allworth's "Money Matters."
Tim: Hey, how you doing?
Scott: Hi, Tim. What can we do to help?
Tim: Well, I guess, I could say I need a lot of help. I'm not like the usual individuals that will call in and, you know, it seems to be, like, they're pretty set and secure in life. First of all, it's, like, this is really hard just to be able to talk to you. You know, my dad would be very happy. He listens to you every Saturday, the both of you. And he taught me a lot, so I wouldn't be where I am without him. And he's definitely got that information from the both of you.
Pat: Oh, I appreciate that. So, when you say you're just starting out, right? We all start somewhere. Let's go with that premise. Tell us where you're at and tell us where you're trying to go.
Tim: Well, let's say, I guess, it's trying to make a long story short, but I'm in my mid-40s, which is hard to believe. Looking in the mirror, there is a little more gray. But I've actually been... I was incarcerated for over 20 years since I was a teenager. And I'm re-entering this world really, like, left behind and without anything. It's like I said, initially, I didn't have the IRA or the job with the sense of security, or even establishing a home and credit. Having to start life over or begin life at 44... You know, I've been in a blessed position with my family, and not everybody has that opportunity. But I want to be able to take everything that I'm learning and give it to people that don't know.
Tim: Is it? Okay, keep talking.
Tim: So, I do have a job. I have a wonderful job. It's paying up quite well at the moment. So I've just initially...
Scott: What kind of what kind of work is it? Just out of curiosity.
Tim: It's a nonprofit, nonprofit in the Bay Area, assisting vulnerable populations, homeless, hospice, formerly incarcerated, working with corrections, working with...
Scott: So, you say you're starting out, but in reality, you're using your experiences over the last 20 years to serve others. Would that be fair to say?
Tim: Yeah.
Scott: Yeah. And so now, you're worried about your financial side of things and saying, "How do I get this part of my house in order?
Tim: Yes. It's expensive. As the world is expensive. Burgers aren't $2 anymore. They're $14. And so, I just want to kind of set a plan in place, a plan in motion. And it's hard for me to be able to, I don't want to say, trust others, but relinquish the things that I've built and give the others to control it, would you say? So...
Pat: Yeah. So, when you... So, obviously, it starts with a base. And the base is your income from now, right? And whether you're 20, 30, 40, 50, that's how it starts, right? You know, you have a great attitude about it. How much money do you make? And how much do you think you could save on a regular basis?
Tim: So, like, I'm in a blessed position. I don't have my own place. I'm not renting. Actually, I'm living with family. I'm doing what I can to... So, I make about $70,000 a year. I have a 403(b) with our organization. There is no matching, so it's all me.
Scott: Are you contributing to that? Are you contributing to the 403(b)?
Tim: I am.
Scott: How much you putting in as a percentage?
Tim: $200 a month.
Scott: Okay.
Tim: But I'm also opened up my brokerage with Charles Schwab. I have my, that I'm kind of playing with, but I also set up a Roth IRA. So, last year I put in $7,000 this year. I'm going to put in $7,000 for that. I'm going to put a $700 a month rather than one lump sum.
Pat: Into your Roth IRA?
Tim: Yeah.
Pat: It's above the limits.
Tim: I also...
Pat: Yeah, $7,000 this year. $700 a month, which would be $8,400 a year.
Tim: Well, I want to max out at 7,000.
Scott: Got it.
Pat: Okay. Well, okay. But you said $700 a month. So, the quick math. It was above the limit.
Scott: It sounds like you've got things rolling pretty well. So, how could we be of help?
Tim: I mean, I listen, I listen and I try to gauge and understand. I just don't know if I'm doing the right thing.
Scott: No, you're doing great. You're doing great. Look, the reality is you've started late, right? But what you did yesterday, it doesn't define you, the rest of your life. And so, you're doing everything you can do. You're saving. Just save as much as you possibly can. I mean, that gets down to if you could increase your 403(b) contribution a little bit, that would be great. But just save as much as can.
Pat: The thing we like about 403(b) or three big, it's sucked out of your paycheck before you have a chance to spend it. And then you talked about trusting others. You're calling the shots on these, these things, right? And it's... Look, you're in accumulation phase. You just want to be as absolutely as aggressive as you possibly can be in terms of equities. And don't get sucked into the fancy stuff. That's where people actually screw it up. I mean, look, I was...
Scott: Yeah. Or they think they're gonna catch up by, "I better catch up, so I'm going to invest in this particular stock or.." And by the time you know about the stock, it's already a ramping price.
Pat: Scott, I saw an ad yesterday. I saw an ad yesterday from a financial advisory firm, you know, when you click through. And their premise was, this person retired with $750,000, and they were able to increase their income because of their investments an extra, not the amount, an extra $7,000 a month.
Scott: Oh, come on.
Pat: That's what it said. And so, you're like, "Okay, let's assume they're taking a 4% distribution and another 7,000." You're thinking, "This is just crazy. This is nuts."
Scott: They're not a real investment advisory firm. Because there's laws around that. So, they probably, they're probably not even securities licensed or registered investment.
Pat: Exactly. And then, my point being is don't get suck into the quick and easy where people really do blow it. And I've seen them blow. I just think so often about the run up to 2008 when real estate was on fire and you couldn't go wrong and they'd lend money to a donkey. They didn't care. And I had so many clients take all their investments and say that, "I did not understand that real estate in Florida was the place to be, Pat, because..." And I just...
Scott: it's all those things. And, look, you're going to build.... Yeah, I mean, you've got 30 years, 25 years... I mean, in a perfect world, you've got a job where you're not dying to retire, right? You're like, you continue to enjoy what you're doing, but they'll come a time in life when you're going to need to start slowing down. So, if you can save as much as you can for your retirement.
And then, you know, wealth is really built upon a couple of things. One is how much you save. But secondly, it's based upon your career and what you earn. So, the reality is, like, you might have the best job in the world. You might love what you're doing. Maybe this is exactly where God's called you. This is exactly where you're supposed to be. But you're not going to get rich there, right? And so, everything in life, there's trade-offs in everything in life. And so, by choosing... The career you've got, you've got a decent income, but living in the Bay Area, it doesn't go very far, right? Like, it cost you 8 bucks to drive across the bridge. So, I mean, it just doesn't go that far.
Pat: Yeah. But if you move to somewhere out of the Bay Area, small town in Colorado, right, and had an executive-level position in a similar nonprofit, it would move you incredibly through. So, the other thing is invest in yourself. In fact, you know, when young people come to Scott and myself, which happens because we have kids that are anywhere between the ages.
Scott: Yeah, that's right.
Pat: And their friends of often times, and they're like, "What's the best investment?" And what's your answer, Scott?
Scott: Yourself.
Pat: Yourself, not X, Y, Z stock, no.
Scott: It's yourself.
Pat: It's yourself.
Tim: I mean, I don't want to lose my soul in the process believing that, you know, money is...
Scott: That's right.
Tim: ...the priority in life and it's not. I just want to be able to have this sense of security and live way beneath my means, and then, have that everyday security. Like, I know I'm going to have food. I know I'll be able to help other people. I know I'll be able to donate. So, I guess, that was, like, another question. So, on this last two years, I've been able to save $100,000.
Pat: Holy [crosstalk 00:38:20.148] smokes, wait, stop. Mic drop. We're done. You're fine. How in the world did you save $100,000?
Tim: Well, living at home.
Pat: Okay. Well, that is what it is.
Scott: I know, but still...
Pat: But still that's a lot.
Scott: Phenomenal.
Pat: It's $70,000 a year income.
Scott: Holy crap.
Pat: That's amazing.
Scott: Okay, so keep going.
Pat: Tim, you're doing really well.
Tim: So, I guess, another question is, I don't want it to sit in the bank and accumulate nothing and give me pennies in a Wells Fargo savings account, when I should have made a different decision and made...
Scott: Shoulda woulda. It doesn't matter. We're here today.
Pat: Yeah. But we go the right direction now.
Scott: I would put the maximum you can in your 403(b) 100%.
Pat: I would maximize your 403(b). If you're saving enough money...
Scott: And if you have to start spending down your savings to make up for it, then fine. I would put it...
Tim: So, what about, like, a high-yield savings account.
Scott: Well, that's easy. I mean, that's easy.
Pat: Yeah, you should do that. Yeah, that's easy.
Scott: As well.
Pat: Yeah, you should do that, but you should maximize your 403(b). If you're saving that much money on an annual basis, maximize your 403(b), maximize...
Scott: Your 403(b) and you're Roth.
Pat: ...IRA. And then, after that, just allocate money to a tax-efficient account as well. And then, you know...
Scott: Like a broad stock market index, the total stock market. You could put some in a total stock market. But it's got to be there for... Anytime you put money in something like stocks, it's 20-year money, it's Tim's retirement, old-age money, right?
Tim: Like, 59 and a half, right?
Scott: Well, that's the earliest. But I mean, the reality is you're 44, and you're probably not going to be retiring at 59 and a half.
Pat: Yes, yeah. You're going to work probably until you're, at least, 70, but this is saving...
Scott: I'm 58 and a half, and I don't like the concept of retirement at 59 and a half.
Pat: These, your saving rates, you're doing phenomenal.
Tim: Yeah. Well, I mean, it's not going to be forever. And I imagine it's going to end next year, so I wanted to see, what money I'm I need to be in liquid in order to maybe purchase a condo.
Pat: Okay. Well, that's something completely different, right? So, if you said, "I want to purchase a condo in the next three to four years," I'm going to say, "Well, you know, not in the Bay Area, not on $70,000 a year," right? But you've got it together. You're doing great. You should be proud of yourself. You really should.
Scott: No kidding. My guess is... I mean, not my get, you are a complete outlier.
Pat: Well, there is that big organization down that works with previous...in San Francisco that has the restaurant and the auto repair shop, are you involved in that group? What's it called?
Scott: I don't know. No idea.
Pat: I think the Delancey...
Tim: Is it the Delancey Street?
Pat: The Delancey Street, yeah. Are you involved with them?
Tim: No, no, I'm not.
Pat: Okay. Anyway, you're doing great.
Tim: Yeah. But it's just, you know, other than my dad and, you know, listening to you guys, there's no sense of a real education out there, you know, for somebody like myself.
Pat: No, wait, you're more...
Scott: What do you mean education.
Pat: You're serious. Look, look, look, you're in the top 20%. Most people, most Americans... Listen to this, half Americans don't have a dime saved, and they haven't spent any time in prison. You're in the...
Scott: Always, there's the part of America that we look at and say, "Wow, they've got lots of assets, lots of capital, lots of saving," but there's a whole...half of America doesn't have anything saved.
Pat: Yeah. You should be proud of...
Scott: People work their whole lives, getting on with life, and they're dead broke.
Pat: We're not ones for false praise. Yeah, you're doing great.
Scott: You should feel good about yourself, truly, truly, truly. So, I appreciate the call.
Tim: I mean, no, yeah, just always want to be challenged, and...
Scott: Yeah, well, you're doing great.
Tim: ...ready to learn and being able to pass it down.
Scott: And talk to other people like us and listen to podcasts and you'll learn more than you need. So, glad you called in, Tim. And we're getting near the end of our program. And I'm going to let... Yeah, Pat, you're sticking it in my face. Where did the phone go?
Pat: Well, no. I might have it. You've got my little sheeter. Yes. We can both talk about this.
Scott: Okay. Our June webinar. We do a lot of education. Look, we've been an education-focused firm really since day one. Pat and I started doing this program, radio program, back in 1995, 30 years. And we've done thousands, probably, of live events and...
Pat: A fair amount.
Scott: ...webinars and everything else. And a lot of it, we believe that the more one understands this situation and their options, the more informed they are, the better decisions they will make, and the better financial life they're going to have, which is really what our objective is. So, this is a June webinar. It's for legacy planning for high-net-worth households and whatever that means. But for this particular, if you've got $2 million or more of investable assets, and you're wondering about, how do you make sure that this is structured in such a manner so that it's the most effective way to transfer what's left upon your death, because you probably have been more than you're going to spend your lifetime, you want to leave something, it's effective strategies for that.
And we have two presenters, both excellent, Simone Daveny, who's Allworth's head of private wealth strategies and Richard Del Monte, advisor partner in a Bay Area, Walnut Creek office. They both been guests on this program. They're going to do in the presenting. And these webinars are Wednesday, June 11th, at 10 a.m. Pacific, Thursday, June 12th, at noon Pacific, Saturday, June 14th, at 9 a.m. Pacific. And to register and more information, just go to allworthfinancial.com/workshops.
Pat: I'd take it one step further, for those people that have $2 million, why do you think they're going to have it in the next couple of years. Fair enough, right, truly.
Scott: Or if you've got $20 million.
Pat: Yeah. Or $20 million, or $30 million, whatever the number is, but... Or you're just overall interested in this stuff.
Scott: Anyway, that's all the time we have. We'll see you next week. This has been Scott Hanson, Pat McClain of Allworth's "Money Matters."
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