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

Scott: Welcome to Allworth's "Money Matters," Scott Hanson, and Pat McClain. Glad you are with us. Both myself and my co-host here, we're both financial advisors, certified financial planners, chartered financial consultants, and we spend our weekdays with people like yourself, helping them plan their finances, and we broadcast this program on the weekends, to be your financial advisors on the air, or through your Earpods.

Pat: We put it in a digital format, you consume it any way you want.

Scott: There we go.

Pat: We've got a great program lined up, as usual, because we think...we think...

Scott: We do think, yes. And we'll take some calls, and we've got an interview with the regional director at Allworth to talk about what not to do and what to do during when the markets are down, so you'll want to be part of that. And if you want to join the show, 833-99Worth is our number, 833-99Worth. We'd love to take your call.

Pat: And let's actually just get right to the calls.

Scott: Okay, there we go. We're in California, talking with Susan. Susan, you're with Allworth's "Money Matters."

Susan: Hi, there. Thanks for taking my call.

Scott: Yeah.

Susan: I have a couple of questions, of course. So, we have been working our hardest to accumulate what we need to retire, and we plan to retire, my husband and I, towards the beginning of this next year, 2023, January, February. And so, we're...

Scott: And can I ask you real quick, Susan...

Susan: Sure.

Scott: When you said you've been working hard, was there a time, like as a couple, where you said, okay, now our focus is on saving for retirement, or is this something you've done since you were newlyweds?

Susan: Well, kind of in the middle. We are just about married 30 years now, but it's a second marriage for me, and we both brought a lot of debt to the marriage. So first, you have to, like, work on that, and then we had to get moving because we were, you know, in our late 30s when we got married, so it was time to get it going. That's why.

Scott: Yeah, okay. Just curious.

Susan: Yeah.

Scott: And what do you have saved? First, how old are you?

Susan: I'm 67.

Scott: Okay. And how much do you and your spouse have saved?

Susan: We have saved, in various things, probably...well, I don't look at things when the market is down.

Scott: Okay.

Susan: So we were at about $1.2, so I'm imagining we might be a tad under $1 million. But that's exclusive of our house and whatnot.

Pat: And the home is paid for?

Scott: Now, do you truly not look at it at all?

Susan: Well, every once in a while, if there's a little bit...you know how there's all the oopsies, like, oh, this could be the bottom, oh, his could be the bottom, then I'll go and I'll look and just see, so what does it look like?

Scott: Okay.

Susan: But I'm not, I don't want to...I do nothing to increase my anxiety, and I do believe that we have enough hanging around money that that, you know, if it takes, even though we're going to retire, if it takes six or eight years, we can pull that off.

Scott: Okay. And is your spouse of similar age?

Susan: Yes.

Scott: Okay. All right, and so your question for us is...?

Susan: Well, I have two kind of, because I'm trying to figure out... My questions both revolve around shifting from accrual to, you know...not taking yourself out of the accrual game, but kind of having some protections as we move from working people to non-working people.

Scott: Okay.

Susan: Ready?

Scott: Yep.

Susan: Okay. So, my first one is about EFTs. And I just have been doing those for quite a while, and they've, you know, just because it's been such a good market, they've done well. And so rather than take all our money out, because we are what you guys would probably call pretty aggressive, so I was thinking about using the stop-loss feature so that we could still, if when we get there the market's going up, or even if it's wherever it is, we can just look at our tolerance, put the sell at this time little brackety thingy-ding up, and then just let it convert it to cash, rather than, you know, all of a sudden turn everything into a different way.

Scott: And what's your second question?

Susan: And our second question...well, they're all mine. My husband's awesome, but he just hates all this stuff, so he just says, "Good job, Susan."

Scott: Okay.

Susan: Anyway, but so the second one is that when you do keep a big enough emergency fund that you can weather this market volatility, it just hurts my heart that it doesn't make any money. And I know you've heard this a lot, but my latest idea that I have implemented is because I bonds are making good...relatively good, I mean, not considering inflation, but whatever, every month, we're doing kind of like laddering I bonds so that by the time five years comes, we would have relatively liquid cash, but it would still be making some money, rather than just sitting there looking at me.

Scott: And how much do you have in emergency funds now?

Susan: About $100,000.

Scott: Okay. So let us ask a couple questions here.

Susan: Sure.

Scott: Your home is paid for, correct?

Susan: Yes.

Scott: And will you be, either you or your spouse be receiving pensions?

Susan: Yes.

Scott: And how much will those pensions...?

Susan: They're little. They're small, but mighty. His is from a school district, and he's already taking his. He's a retired annuitant, and he gets about $,500 a month.

Scott: Okay.

Susan: And mine is from being a civil servant way back a long time ago, and mine's about $1,300 a month. But the good part of mine is that he and I both get free medical, dental, and vision for life, except for, obviously, what you pay to Medicare, and all that junk.

Scott: And so it's $1,300 a month, so $15,000, $16,000 a year. And how much will you be receiving in social security, the both of you?

Susan: The both of us will be receiving about $6,700 together.

Scott: Okay. So we're at, what is that, $80,000 a year, round numbers. So we're going to add all those things up, and...

Pat: And you're waiting 'til age 70 for that social security?

Susan: No, actually, I went to your thing, your social security thing you just had, and I did that thing where you make the things cross, and it looked like if we waited, we weren't going to get that much more.

Scott: Oh, okay.

Susan: So, that pulled up our retirement. We were going to wait, but no, we're on now.

Scott: So you have $114,000 a year in income. How much are you going to need to live on?

Susan: Well, I just am looking at...I mean, we could do it on a lot less, but I'm going to guess we're going to be at about $90,000, because...or maybe $80,000. Because we've been putting in $26,000, or I have, in my workplace and all that kind of stuff, so that goes away, anyway.

Scott: Okay. So between your pensions and your social security, it's going to meet all your retirement income needs. Is that right?

Susan: Yes.

Pat: Okay. So, let's step back for a second.

Susan: Okay.

Pat: Your portfolio may not be too aggressive. And by the way, emergency funds are for people that are accumulating. There's no such thing as an emergency fund, all your money is now an emergency fund. Because it's all 100% liquid, you can get at it, you're over age 59-and-a-half. I would make the argument...

Scott: You mean the point of an emergency fund is something happens, and your paycheck...the idea behind it is you have some money in case the paycheck's not coming in. You're sick, your family is member sick, something happens.

Pat: You've got big expenses, you can't afford...

Scott: Unemployed...

Pat: Yeah. So, you no longer have emergency money, much like you no longer go on vacations or trips, because you can only go on vacation when you're vacating from somewhere else, you now go on trips. That's actually when clients, you really know that they've adopted the lifestyle of a retiree, is when they stop referring to their trips as vacations.

So your portfolio, you're right, you shouldn't be looking at it, if you're comfortable with the allocation. You obviously should be looking at it to understand the allocations. I mean, we run our portfolios through a screen on a weekly basis to make sure that they're in tolerance of what the objectives are. Here's...I think the stop-loss...

Scott: Yeah, let's...

Pat: So, the answer to your two questions was, you said stop-loss, and emergency fund...

Scott: So, here's how the stop-losses work. They don't guarantee a sales price, right? So let's say you have a security that's priced at $50 a share, and you put a stop-loss at $40 a share. What this means is that there's a trigger point. If the security falls to $40, or below that, it triggers an open market order, which means it's going to be one of the next orders filled at whatever the market price might.

Pat: So let's say it drops to...you put your stop-loss at 40, and it's screaming down, and it hits that trigger that says 40, let's trade, and the next trade is at 30, what is your trade at? 30.

Scott: 30. So, it doesn't guarantee you that, number one. Number two, the challenge with a strategy of stop-losses is, okay, that might be a trigger for you to get out when things are declining, but what's the trigger to get back in?

Pat: And what happens if you blow through that stop-loss, and then come back up the same day?

Scott: Some sort of flash crash.

Pat: And it's happened, it's happened quite a bit. So the difference between, for the rest of the...

Scott: Particularly if you have an ETF of maybe a smaller issuer, and someone does a big block trade, and something goes haywire and...

Pat: Yeah, so let's...which has happened. So, an exchange-traded fund and a mutual fund are almost identical, other than the fact that one prices at the end of the day...well, not all of them. Now they can price inter-day. And an exchange-traded fund, you could trade it like a stock. Other than that...

Scott: For all intents and purposes, they're about the same.

Pat: They're about the same.

Scott: Most ETFs are passive, they're index funds.

Pat: Yes, but there are active ETFs as well. So, the idea of using the stop-losses, it's a bad idea.

Susan: Okay.

Scott: A better approach might be to say, what income or what assets might you need over the next, say, five years for whether it's for trips, or a new vehicle, or whatever, and make sure those dollars aren't tied to the stock market at all? And then anything beyond five years, say, oh, that's my long-term money. Even though I'm 67, this is my 77-year or 87-year-old money, right, and so have that long-term perspective on those dollars.

Pat: So in your situation, look, you say you're not that sophisticated, you're a pretty sophisticated investor, by understanding your own reaction to your portfolio, which is you said I don't want to cause any undue stress. If you had your portfolio 70/30, I think that would be appropriate.

Scott: Or even 80/20.

Pat: I would think that would be appropriate as well, including the cash in that.

Scott: Yeah.

Pat: And I don't know why you're messing around with these I bonds, just go out and buy, like, just go out and buy one-year treasuries, or two-year treasuries, or TIPs, right? You don't have to...this monthly thing, you don't need it. I mean, you're creating more work than you need to do.

Scott: A lot of work.

Pat: So leave $20,000 in a high yield money market account, take the other $80, invest it in one of the three things we just talked about, and then make sure the portfolio is either 70/30 or 80/20, depending upon, you know, your risk tolerance. And I would look at the coming years, next year to see whether you should use Roth conversions or not. That's the financial planning aspect I would take on there. But I think you're fine. You've got more than enough money to... And I would spend every dollar that came in off those pensions and social security.

Scott: Yeah, don't save any of it.

Pat: Don't save any of that money. You're going to want to save it...

Scott: Because that's your nature, that's why you have these dollars saved.

Pat: But...and you were in debt. Your story was like, I was in debt, we fixed our debt, and then we built ourselves up. And now you're going to have a hard time transitioning from the accumulation phase to the distribution phase. I'm just telling you that right now.

Susan: Well, maybe. Yeah, I think that's probably true. But also, we both kind of...we've been titrating down on our work, you know? I don't work full time anymore, and as I said, my husband retired from the school district, and he's been going back and working as a retired annuitant. But you know, that, there's a cap on how much money you can earn when you go back like that. And so, I'm fully pulling the plug coming up here. And you know, but we take...but everywhere I work right now, like, we take super, you know, five weeks here, so many weeks there, so definitely that whole trip thing is [crosstalk 00:14:16.290]

Scott: So, why are you planning on stopping that in 2023?

Pat: Yeah, why are you stopping work completely?

Susan: Because I am becoming quite aware that all the things that you want to do, or that I would like to do, because, you know, like I said, we married later, we already had children, we did all that, you know, I've been, since I was 20, doing kids and blah, blah. And you know, in terms of just having time to explore and immerse and all that kind of thing, whenever you take on work projects, you know, if you're like us, you just flip that switch, you know? And I don't want to necessarily flip that switch anymore.

Pat: I'm with you. Are you in medical at all, in the medical field?

Susan: Well, kind of. Medical adjacent, we'll say. I am a psychologist.

Pat: Okay. Because you use the word titration, which very rarely comes up in...

Scott: I don't even know that word.

Susan: Well, it has to do with psychotropic medication, so yes, you're correct.

Pat: That's right. That's right, and I'm like...

Susan: I looked at you like, where did you get this from?

Pat: Yeah. So, you very rarely use the word...I can't remember the last time I heard the word titration in a conversation. So, I like where you're going with this. I like where you're going with this. Just, you know, and you may want to decide to actually hire a financial advisor to manage your portfolio, just so that you have the confidence that it's doing what you need it to do. And then next year, look at the Roths, and spend every dime that comes through that doorway from your social security and your pensions. And the 401k, just 70/30 or 80/20, and you'll be fine. You've done a great job of saving. You and your husband should be proud of yourselves.

Susan: Oh, well, I appreciate that. That's kind.

Scott: It's never easy.

Pat: It isn't. It isn't. I mean, and as you tell the story, you kind of rebuilt, and you know, that's...you know, we all write our own story.

Scott: Yeah. wish you well, Susan.

Susan: Well, and that's the thing that's wonderful, is going, being able to...it doesn't matter when you start rewriting, either. I mean, I know you have to save and all that, but you know, there's always a method to rewrite your story in a positive and supportive...

Pat: I mean, is it...

Scott: Coming from a good psychologist.

Pat: I mean, look, I was talking to a...I appreciate this story, and appreciate the call. I was talking to a friend of mine, he was...well, a friend, I knew him in high school, and...

Scott: Were you friends in high school?

Pat: Yeah, we knew each other, but you know, I never went to his house, and...

Scott: Okay.

Pat: But he had called me and said, you know, I own this business, and you know, we have some friends in common, and they...and I'm going through a couple of challenges in business, and you know, can you [crosstalk 00:17:07.219]

Susan: So, he called for some advice.

Pat: He called for some advice. So I said, okay, what's...you know, give me the story, how did you start this? And he says, well, when I came out of prison... I said, well, all right, you kind of got my attention here.

Scott: You didn't know this about your high school friend...

Pat: I did...I had heard that he had some issues. He said, when I came out of prison, I...he said I had gotten involved in drugs, and I was a drug dealer, and I went to prison for many, many years.

Scott: Wow.

Pat: And when I came out of prison, I worked for a company re-building trucks, garbage trucks. And he said, I've kind of figured it out, and I started my own company, and now I buy old garbage trucks from large places like [inaudible 00:17:50.016] and I refurbish them down to the engines, the whole thing, and then I sell them to small municipalities, they're small garbage trucks. And he said, I've got 15 employees, and he says it's dirty work, but I really couldn't get a job doing anything else because... And then he talked about his sales and marketing, and I said, my gosh, talk about rewriting the story. America loves a redemption story.

Scott: Yes, clearly.

Pat: Everyone...well, actually, I don't even think it's America, I think it's universal, loves redemption stories. And I was just like, you...

Scott: Well, we all have things we need to rewrite.

Pat: Right? Some of them are more challenging than others. So I just thought, what a...you know, at the age of 50, the guy rewrites his story, and what a great story it was. So...

Scott: And what advice did he want from you, how to set up his 401k...?

Pat: He did ask...well, he wanted questions about... And you know, what I told him to do is to go find a...he lives in a different city, I said, you need to find, like, a retired businessman's group, and find yourself two good senior mentors that have run small businesses, that you could bounce things off on a weekly basis. A mentor.

Scott: There's plenty of those guys out there. And gals out there.

Pat: There are. Oh, and they will give it your all.

Scott: Yeah. All right, let's continue on with calls. We're talking now with Charles. Charles you with Allworth's "Money Matters."

Charles: Hey, gentlemen. I just have a quick question. Do you think it makes more sense to spend the money to remodel your current house that we're living in, to increase square footage, add a couple features we want, or does it make more sense just to sell our house and buy one that already has the specs we're looking for?

Pat: Oh...

Scott: Or is there a plan C, do none of the above? None of the above, from a financial standpoint, is your best option.

Pat: Well, actually, which one is the one you're most likely to stay married through? That's the one we would do.

Charles: Right.

Scott: Some people call it a remodel, I always call it a marriage test.

Charles: My wife wants to remodel, because she really likes her location. I just don't want to go through the big headache of doing that. And also, I wouldn't mind buying another house a little closer to work anyway. So, I would just rather buy another house. But she is right, we have a great interest rate, and...

Scott: Well, that's a big factor.

Charles: ...I imagine our taxes would go up with a more expensive house.

Scott: That's a factor as well.

Pat: Yes.

Scott: How old are you, Charles?

Charles: 38.

Pat: How old is the home that you're remodeling?

Charles: It was built in 2000.

Pat: Okay.

Scott: And what's the value of the house?

Charles: About $900,000.

Scott: And what do you owe on it?

Charles: $400,000.

Scott: And what, if you bought a... Well, how much is a remodel going to cost you, realistically?

Charles: Realistically, my neighbor just remodeled... We have the same style house as our neighbor. We have a daylight basement, because we live on a foothill underneath us, and he added, like, a whole second house underneath. So he spent about a quarter million to remodel, but I hope to keep it under $200,000, maybe $150,000 to $200,000. But prices are all over the place right now, so it's hard to know...

Scott: I know. And then what would, if you were to sell this and go to a house you wanted closer to your work, what would that cost you?

Charles: About $1.2, $1.1.

Pat: That's a push.

Scott: And what's the interest rate on your mortgage?

Charles: 2.3%.

Pat: Yeah.

Scott: Oh, yeah. Yeah.

Pat: Would you finance, would you take a...

Scott: Look, this is why the housing market is going to...this is why things are slowing down. It was just announced a couple weeks ago it was the fifth month in a row of declining home sales, because of situations like this, Charles. Like, one big factor is he's got this phenomenal mortgage, 2.3%.

Pat: Yeah, and he'd have to refinance into something significantly higher.

Scott: 5%, or whatever.

Pat: And how would you pay for this remodel? With a second mortgage?

Charles: You know, that's a great question. My neighbor did a construction loan. He's a physician, he got a special doctor's loan that he had access to. And that's another thing, is exploring financing. I don't know if you have any recommendations, whether it's better to go with a HELOC, or...?

Pat: Well, you don't need a construction loan, you've got enough equity in your house that you would do a second...

Scott: I would do a HELOC.

Pat: Or a HELOC.

Scott: Or a second.

Pat: Or a second. They both act as...

Charles: Because your mortgage, your first is just too good.

Pat: Yeah, yeah. So, you don't... And by the way, I don't know, I've never heard of a physician's special construction loan. It sounds like a marketing ploy, if you ask me. So, what you want to do is leave that first mortgage alone. You don't need a construction loan. Either a HELOC that you convert into a second, or just a full on second that you can prepay.

Scott: So, the only way it would make more sense economically for you to move, purely economics, is if the home price appreciation in the future is greater in the neighborhood you move into than the neighborhood you're in. So let's assume that the neighborhood you're in is tired and going downhill for whatever reason, and the neighborhood you want to move into is...I don't know. I mean, just [crosstalk 00:22:53.235]

Pat: And is there a hurry to get this done?

Charles: No. No.

Pat: Oh, I think you're...I'd stay. And...I'd stay. How much money do you have in cash?

Charles: About $110,000 is what we've saved up so far.

Pat: This story gets...better and better. Your story gets better and better. Continue to save up as much money as you can.

Scott: And do you have kids?

Charles: Yes, we have a 6, and an 11-year-old.

Scott: So like, we remodeled a couple years ago. I wanted to move, my wife did not want to move. Actually, the story got a little more complicated, I'm not going to tell the whole story, okay?

Pat: Because it's only an hour show, and Dr. Laura is not here to go to counsel us.

Scott: But we moved out for, like, four months. It just made it that much easier. And just factored it as part of the cost.

Pat: Yeah, and I've done this twice, remodeled houses twice, and both times I went through exactly the same exercise that you went through. I actually went and looked at new houses in the neighborhood that we would live in, and then looked at the cost there, looked at the cost of the remodel, looked at the neighborhood I was in versus the neighborhood I was going to go to. And both times, I landed on the remodel partially because I didn't...I like the neighborhood I live in, and I didn't want to meet any new people. I just, I've got enough friends, I don't want to meet anyone new.

So in your situation, because you have so much cash, because you don't have to refinance that, the first, you're better off doing a remodel. And quite frankly, I wouldn't be in a hurry. I would slow play this.

Scott: Like, this supply chain, like...

Pat: It's fixing itself.

Scott: Like, the chip manufacturing, which is a big issue for electronics of all sorts, right, appliances...I mean, that was already starting to take care of itself before Congress just threw billions of dollars, they're going to just throw money at these chip manufacturers. But even in construction [crosstalk 00:24:57.021]

Pat: ...supply chain, because of the fact that you're not competing against new homes anymore, the supply chains are opening up, prices will drop. I mean, it's a supply and demand market. You'll find that labor will be much more affordable six months from now, in my opinion. Obviously anything can change, but labor will be much more affordable, contractors... You know when you'll tell whether you're going to get a good bid is if you ask three contractors to show up, and they show up on time, you know it's the right time...it's the right time to remodel. I wouldn't be in a hurry. You've waited this long... I would save up as much cash as you possibly can, that way you're not refinancing at a higher rate... I would remodel.

Scott: I would as well.

Charles: Yeah, we're looking to pull the trigger in June of next year, is about our timeframe.

Pat: Perfect. Perfect, perfect, perfect. Perfect. I like it. I like it.

Charles: [crosstalk 00:25:48.679]

Pat: And you don't have to move the kids to a new school or any of that, you personally don't have to meet any new neighbors...it's perfect.

Scott: We've lived in the same town for almost 30 years. Yes. And I ran into her at dinner, I ran into this woman, a couple, and when we moved in, 1995 we moved into the town we're in, and she lived a few doors down, and brought over some flowers and a bottle of champagne, Liz Davis.

Pat: Oh, I remember Liz.

Scott: Back in 1995. Ran into her and her husband, and I thought, I just, I said...whenever I see her, I think how sweet that was, and I'm like, we've been in the same neighborhood a long time. And frankly, I kind of like having been in the same town. That's...anyway.

There's been...electric vehicles have been, and are, like, in the news all the time. I mean, there's so many electric vehicles, new companies that have popped up...I see these cars, like, what's the name? Like, my wife says to me, what is that? I forget which one it was, but she had never even heard of the company before, it was here's this new car... Like, you wonder, first of all, how many of them are going to survive the next 5 or 10 years, 20 years? Tesla obviously will, but some of these other new startups, who knows? And we've talked about this on the program before...

Pat: Well, wait, can you stop for a second? Why did you say Tesla obviously will? Why is it obvious, that Tesla will survive?

Scott: Just the market share they already have when it comes to electric vehicles.

Pat: I understand, but... And maybe it's their distribution system that takes them down,

Scott: And their distribution. Well, their lack thereof. I mean, it's a challenge for them, right?

Pat: It's the lack thereof, and the service behind it. And the incumbents that are in the industry already, that have moved into it, that have...I'm just saying that [crosstalk 00:27:46.094]

Scott: Yeah, yeah, yeah. All right, fair enough.

Pat: You used the word obvious...

Scott: Fair enough, it's not obvious.

Pat: It isn't obvious.

Scott: Highly probable.

Pat: I guess. I'll give you that.

Scott: Okay. But it might not be in existence 100 years from now. As most publicly traded companies today.

Pat: That's right. And if the stock craters at any one point in time below a certain value, then you could see a hostile move from someone like Mercedes or Volkswagen, Ford or Chevrolet actually move in, and...okay, now we got off the subject, but...

Scott: Yes, because I was trying to make a segue, building it up here.

Pat: Okay.

Scott: The truck company, Nikola, electric trucks, and this was a big story a couple of years ago, the stock price...well, the company valuation was, what, $30, $40 billion, something like that, massive for trucks that hadn't even been sold yet. And this was the truck company where they made a commercial with the truck moving, going down the highway, but the truck wasn't even operational. This is a semi truck, this isn't...this is, like, a big product they're trying to promote.

Pat: This isn't a pickup truck. This isn't a Toyota Tacoma.

Scott: Or a toy.

Pat: Yeah, this is a semi.

Scott: Yes. So they bring it to this hill, they brought it to a hill, had it roll down, and then film it and made it seemed like the truck's cruising down the highway.

Pat: It was cruising down the highway, it just wasn't under its own power.

Scott: That's correct. It was...yeah.

Pat: It was using that power that we all know of called gravity.

Scott: Alternative energy of gravity.

Pat: Of gravity...that's now our new alternative energy.

Scott: It is...you get the...that is the concept between hydroelectric, right, it's all gravity.

Pat: It is gravity.

Scott: And I've been told that sometimes they'll pump the water back up during the non-peak times...

Pat: That's right, right in the middle of the night. In the middle of the night. It acts like a giant battery.

Scott: Like a giant...okay. All right, gravity is an alternative form of... Anyway, so this, they had these ads out for that. Well, Trevor Milton, the founder, one of the founders of the company, he resigned in disgrace after the report came out, and now he is being prosecuted.

Pat: A maximum sentence of 25 years, although they don't expect that he will get that much. It's amazing things, like this. It's like...

Scott: Theranos. Theranos, yes.

Pat: Theranos, Theranos, Theranos...Elizabeth Holmes.

Scott: Elizabeth Holmes, who's going for a second trial now.

Pat: Yeah. What a fascinating book that was, called Bad Blood."

Scott: I read the book as well. I liked it.

Pat: So, he took a lot of money out of the company, he got rich off of it, and now he is saying that the things he did and said, people didn't quite understand, that he didn't, that he was, that he...

Scott: So, wait a minute...

Pat: The client acted in good faith. His lawyers say, hey, the client acted in good faith, and didn't intend to defraud anyone. Mr. Milton might have used terms like prototype, functional, showcar differently than some investors understood them.

Scott: What?

Pat: So, he potentially...

Scott: So prototype, yeah, there's actually, there's no motor under the hood, we're just rolling it down the highway, because it's a prototype.

Pat: Functional, meaning...

Scott: It's functional. It's got wheels, it's going...yeah. There's a driver in there steering...

Pat: Showcar, looks good...

Scott: Right?

Pat: We can pitch it. So he used these terms in ways that some investors understood them differently than some investors understood them. So, was this a SPAC, a special purpose acquisition company, Scott? Was it a SPAC? I think it was.

Scott: Yeah, because it went public in 2020. He became a multi-billionaire, bought a $32 million ranch, which was the most expensive home in Utah at the time, and a Gulfstream jet.

Pat: So, we talked about this when these were coming out, they were hot, all the rage, this special purpose acquisition company, in which people put money in them without actually knowing what the intention was, and then that company would then go out and acquire...companies. So you put money into a blind trust, basically, and said to the people starting this...

Scott: Go find something to invest.

Pat: ...go find something to invest.

Scott: I'm betting on the investors here.

Pat: Not on the particular company themselves. But the investors themselves...were conflicted.

Scott: [crosstalk 00:32:28.896] are dead.

Pat: Yeah, they were conflicted.

Scott: Most of these...you don't even read about the SPACs much anymore.

Pat: They're...yeah.

Scott: There was a couple of weeks ago, Donald Trump's SPAC had...they threw more cash in it to delay the time on it.

Pat: Yes. So, the reason we bring this up is fad, fad, fad, fad.

Scott: Right.

Pat: There will be another fad in three years, and it will all be around a certain...

Scott: And you might have friends, neighbors that are getting rich off it, they're telling you you're crazy not to invest in this...

Pat: Yes. Yeah. And by the way, look, if you want to invest in electric vehicles, you could buy any, pretty much, auto company right now, and the bulk of their R&D money is actually going into electric.

Scott: I've got to tell you, the irony right now is living in Northern California, which I've spent my whole life in California, I grew up in Southern California, mandating no gas-powered cars in 2035...

Pat: Mm-hmm, yes.

Scott: But there's not enough energy now...

Pat: You mean and a week later...?

Scott: It was the same... Yeah, so a week later, they're telling you please don't charge your car between 4:00 and 9:00pm, or whatever it was.

Pat: And that bothered you. Just imagine your business partner, Pat McClain, having dinner with a bunch of business people in Dallas, Texas...

Scott: That was happening that day that happened.

Pat: ...the day they came and said don't charge your car.

Scott: And [inaudible 00:34:06.641] has a field day with you for it.

Pat: For a good 10 minutes. Like, explain to me how this works, Pat...you know? And we're sitting there at the obligatory financial services steak house, which I don't understand at all why I have to eat at a dang steak house just because I'm in the financial services industry, but that's where they have the meetings, and they rip on me for 10 minutes about, you know, tell us how you can buy an electric car, but then you're not allowed to charge one, so...

Scott: Yeah. Anyway...anyway, enough about that.

Pat: Did I sound like a fat cat, complaining about eating in a steak house? Was that...? Probably, huh?

Scott: You know life's pretty good...

Pat: when you're complaining... I'm not that guy, though. I'd much rather go to pizza. I would much rather, if you said to me let's go eat at Morton's, or let's go eat at Dominos, like...

Scott: I had, a few months ago, a large financial services firm, one of the executives was out, and I'm thinking, we're going to go to some fancy dinner, right? And so I'm talking about where we might want to eat that night, and he said, I really like local beers, I said, perfect. So we went to just a little pub, a brewery, a local brewery, and had burgers and fries and beer. I much more enjoyed that than...

Pat: Yes.

Scott: Anyway, but my point is, life is pretty good when my family, the discussion about dinner is not are we going to be able to eat a full meal tonight, do we need to ration some for tomorrow, it's where are we going to eat, or what should we cook, or...?

Pat: Yes. Like, in the history of the world, regardless of how bad it gets in America, we are still, you know, for a population, still...most of the developed countries in the world, as relative to the history of the world, you can't get much better, regardless of what everyone thinks their problems are. As a population.

Scott: Yes. Most of the problems are between our two ears, though, are they not?

Pat: As a population. So...

Scott: So anyway, in times like this, with extreme volatility in the markets, you look at flows, which is always fascinating, just...

Pat: What are flows?

Scott: It's the money that leaves one financial product, and goes to another financial product. So we saw this year, when the market started to decline, money started coming out of stock funds, going into savings accounts. When things started, when we had a bit of a...things pop back up in the middle of the year, money started moving back into those stock funds, prices come back down, they go out... It's just like this forever cycle. So, we had asked Brian James to join us. Brian is a regional manager with Allworth, out of our Cincinnati market, and he was kind enough to join us. So Brian, thanks for taking a little bit of time here. And we want to find out what to do and what not to do during down markets.

Brian: Sure. So, the first thing we need to do is exhale, and then inhale again before we make any rash decisions. But yeah, these kinds of markets that we're going through right now, this is no fun. We've seen it before, but that doesn't mean that it becomes fun the next time it happens, when the markets do these kinds of things. Three steps forward, two steps back, that's how life works, and we need to resist the temptation to try to change things.

So, one of the things people should not do, the worst thing you can do is draw a line under some imaginary dollar amount of your financial assets, and declare that any deviation below that line has somehow become a failure. We all tend to do this, but that's like saying, well, I'm going to go ahead and brick up my house, my windows on my house today because it's raining, and therefore the sun will never shine again. That's naive to think...yeah.

Scott: Well, okay, but...so, but taking a counterpoint, so I'll recall years ago, I had a client had a small business, it was a new business, it kept bleeding cash, every quarter kept bleeding more cash, and I remember telling the guy, you are going to have to get to a point where you're going to quit. Like, you're continuing to throw good money after bad here, and if you don't, if at some point, if you don't draw that line in the sand, you're going to find yourself bankrupt, and you're going to blow through your entire retirement savings.

Pat: All right, so Brian, I've never heard that, what you've said there. So I would expand that to just say...

Scott: But it's different...

Pat: ...on a. Well-diversified investment portfolio...

Scott: Well, it's different here. Because we're not talking about throwing money in a losing business proposition.

Brian: Exactly. So Scott, what you're referring to is a non-diversified portfolio. That gentleman had most, if not all of his net worth tied up in one business. If we're talking about...

Scott: Well, he was taking his diversified portfolio, which over time would have done well...yes.

Brian: [crosstalk 00:39:01.116] yeah. To live off of, yeah.

Scott: Okay, so as long as you have a well-diversified portfolio, say it again, this line in the sand that, what, we pick a number?

Brian: Yeah, if you're talking about a well-diversified portfolio, you've got stocks, bonds, you've got large cap value, you've got small cap growth, everything in between, a little bit of everything, then the worst thing you can do is draw a line under your portfolio and say if it declines by 10% or 12%, then I'm going to get out and I'm going to wait on the sidelines, because there are ample examples throughout history, throughout a couple centuries of history of that being a bad idea. The market goes up, not down over time. It was only eight, nine months ago that we were at an all-time high, right? That was back in December. People will look at that, and they'll say, oh, my gosh, we're at an all-time high, that means it's got to come down. Well, eventually, yes, but that's part of the process. But remember, since the market goes up, not down, it spends most of its time at an all-time high. That should not be all that scary of a proposition. And it can continue to go higher from there.

But anyway, you know, the point is don't look at it and say I must fix it if something drops. Anticipate the drop, you know it's coming.

Scott: So Brian, you know, so here's what's... So I can picture these clients right in my mind right now, both their faces, this was during the financial crisis, '08, he would call every few months, like Scott, should we get out? I'm like, no, we should not get out. And he was diversified, and had...I don't know what percentage outside of the stock market, 35%, 40% maybe, it wasn't even tied to stocks, right?

Pat: And this is in '08?

Scott: '08, and he'd call every couple of months. And finally, it was in March, early March of 2009, right before we hit the bottom, like within days, and here's what he said. He said, my wife and I, we went and calculated where we're at, and he said, based on where my portfolio is right now, we can manage to live the rest of our lives, but if it goes any lower, we cannot, to your point, the line in the sand. And so he said, I want to have it out of stocks completely. This is right days before the bottom, missed the entire...

Brian: And did you ask him if he took inflation into account in his calculations? [crosstalk 00:41:09.511]

Scott: Yeah, well, but you don't...it was an emotional decision at that point.

Brian: Of course.

Pat: Correct.

Scott: And he had already beat me up for the three times before when he'd asked to get out, and I somehow convinced him to stay in, and...right?

Pat: But Scott, so I ask you the question, so as an advisor, did you make a mistake in not trying to... You tried to use logic, as Brian is, in order to argue against it. Would it not have been better to lower his equity exposure a little bit? Or do you think it would have mattered?

Scott: I think we probably already did, I don't recall. That's typically... I mean, look, one of the things advisors often do is do a little bit to placate somebody so they feel good. The same way a doctor will give a prescription even though he might not think, or she might not think it's necessary at the time, but it's like it's a bit of a placebo, so you're going to... And look, some of the times that's necessary, a small tweak here, or a small tweak there. But not 100% of clients follow advisors' advice 100% of the time either, right?

Pat: Got it.

Brian: Right. And for the last 15 years, we've been in a situation where mostly the market has gone up, and there hasn't been much to talk about. So as an advisor, your client interactions are mainly about hey, your portfolio is at an all-time high, what are you doing this weekend, what cool vacations do you have coming up, and all that. We earn our money during times like this, where it's time to remind people that, remember all those times we talked about and we both acknowledged that if things fall down, and eventually we'll have a pullback? Well, this is one of those times. This is what it feels like. I didn't like eating my vegetables when I was 10 years old, but now, as a 48-year-old, I know it was a pretty darn good idea. It doesn't mean I did it, though. But at the same time, this is the same thing as eating your vegetables. This is eating your vegetables for adults. It's time to ride these things out so that you will have a plan that will succeed not just in the next couple of months, but for the rest of your life.

Scott: All right.

Pat: I'm with you. So, are you... You know, I was at the gym, it's hard to believe, but yes, most people thought my gym burned down. But I was at the gym the other day, and a gentleman walked up to me and said, you know, is the phone ringing off the hook? And I said not my clients, not me personally. What are you hearing from the clients, Brian?

Brian: Yeah, sure. What we're hearing...and the phone is not ringing off the hook, but people will call in and they'll question, and they'll say should we be doing anything, and the answer is well, we've already been doing things all along. You and I, Mister and Missus Client, talked about your financial plan, here's what we're going to build now in the good times, and here's what it's going to look like when we have the inevitable bad times. We know they're coming, we just don't know when. Well, it turns out that was the first half so far of 2022. So here, Mister and Missus Client, here's what we illustrated a few years ago. We decided, the three of us agreed that yes, you'll be fine through this time period. Well, now here it is appearing in your financial statements, and guess what? You are still fine. Not because we predicted the future, but because we simply took into account that it might happen, and you saw it before, now you're living it.

So really, the phone is not ringing off the hook. I agree with that comment there completely. We're simply reminding people this is what you saw. And because we've already talked about it, most of our clients are...they're not happy, but they're fairly calm about it.

Pat: It's the cost of excess return over a risk-free asset. So, appreciate...

Scott: That's how you explain it.

Pat: What's that?

Scott: The cost...what, what did you just say?

Pat: I said, this volatility in the market is the cost of a return over a risk-free asset.

Scott: The price that we have to pay.

Pat: That's the price.

Scott: There's no such thing as a free lunch, the price we pay for returns greater than what the bank pays...

Pat: Is over a risk-free asset, which would be a bank, or, you know, U.S. Treasuries, short, short, short U.S. Treasuries, is volatility. That is one of the major components. So, appreciate...

Brian: And that price is calculated in dollars, as well as stress.

Pat: That's right. That's right. So, I appreciate you being part of the team, Brian, and appreciate your insight.

Scott: Yeah, appreciate it, Brian. Thanks for being here.

Brian: All right. Thank you both.

Scott: It is a really interesting... It's hard to be a good investor.

Pat: It is.

Scott: Because when things are going up and up, it doesn't feel like we need to be...like, why do we have this stuff in here that's not doing well? Like, this... And when things are going down, our natural tendency is to, like, oh, we need to protect, we need to run from danger, we've got to protect ourselves.

Pat: Yes.

Scott: We're designed that way, as humans.

Pat: Yes, that's how...

Scott: We've survived...however many years we've been on the Earth. Yeah, but it's not easy. For sure it's not easy. And I think one thing, you know, any good advisor reminds themselves, it's like, these are individuals and family's lives that are at stake from making decisions. And I mentioned that client of mine back in the financial crisis, like, they came back a couple of years later, or a year or so later, wanting to know if we should add some more stocks to the portfolio. And at this point, I'm like...I don't know. If the thing turns south again next week, now it's...

Pat: Yeah. And I imagine you had them in a pretty moderate or conservative portfolio to begin with, so...

Scott: All right. Well, it's been good having everyone with us. If you liked this podcast, please give us a review on it, wherever you get your podcasts. Where do you listen to your podcasts?

Pat: Mostly Spotify.

Scott: Yeah, me too, Spotify. My music is all Spotify, too.

Pat: Yeah, mine is as well.

Scott: And you know what I like about it, is I'll listen to a band, I'll listen to the radio of that band, find another band that's similar, listen to that for while...

Pat: Oh, that... It's almost like they use some sort of algorithm that just kind of...

Scott: Yeah, it's weird.

Pat: Actually [crosstalk 00:46:50.073]

Scott: But I found my music taste has broadened quite a bit since...

Pat: And I walk around the house with...oftentimes I'll be out in the garden, and I'll keep my phone in my pocket, and my wife's like, could you turn that pocket noise off while we have a conversation? I walk into the house, and I will be listening to a podcast, and she's like...she calls it pocket noise.

Scott: And you say, this is much more interesting than you are, my dear.

Pat: No, I turn it...I try to remember to turn it off before she asks me [crosstalk 00:47:17.607]

Scott: My wife's got the watch that her texts come up on.

Pat: Oh...

Scott: And so, you'll have a conversation with her, and then you see her looking at her watch, and I'm always thinking, what...is it, like, urgent? I mean, somehow we survived for millennia without something on our wrist.

Pat: That surprises me about Valerie, that she has one of those. It really does. I would think that she wouldn't, like, care to return a text. I guess that's...Apple rewiring our brains.

Scott: I don't know. Anyway, I've got a lovely wife, by the way.

Pat: Let's wrap her up. So thanks for joining us, and we will see you next week.

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.