Market Jitters, Social Security Uncertainty, Smart ETF Strategies, and the Truth About August Investing Myths
Has the stock market finally hit choppy waters? On this week’s Best of Simply Money podcast, Bob and Brian unpack what the latest jobs report tells us about the economy—and what it means for your portfolio. From resilient job numbers to a rate pause by the Fed, there's a lot to navigate.
Plus, what the future of Social Security means for you and how to use ETFs the smart way.
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Bob: Tonight, has the stock market entered choppy waters? You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Well, for many weeks it's been smooth sailing for the markets then Friday happened, and we're seeing a few white caps. After months of steady jobs data with a few minor cracks, the labor market showed its first real signs of slowing. July, we added just 73,000 jobs, far below expectations. But what really moved the market on Friday was we got adjustments. We got revisions down on the May and June jobs report by a combined 258,000 jobs marking one of the sharpest 2-month payroll downgrades outside of a recession that we've had in decades. Moreover, without the addition of healthcare jobs, a relatively recession proof-sector, the July print would've been flat and the May and June data would've been negative.
So, Brian, you know, what do you make of this jobs report, and more importantly, these revisions for May and June? It seems like we're having a hard time gathering, you know, accurate data in the first place because these revisions are coming out more and more frequently, and they're all over the board and very volatile.
Brian: Well, I mean, we have a president, Bob, that doesn't like bad news. And, you know, the revisions, I don't know if they're coming out more frequently. I mean, this was a big one. This was a significant revision. Let's go over a little bit about, you know, why does this happen in the first place? Why do they ever revise things? Why can't they just get it right, you know, to begin with? So the Bureau of Labor Statistics, what they do is they send out surveys to...they're just asking companies, "How many people did you hire? How many jobs did you create?" That's where this information comes from. There is no, you know, automated type of, you know, something that watches all this stuff.
So, in any case, just like any other survey, sometimes they get answered right away. More often than not, they sit. So companies will respond, you know, two and three months after the fact, you know, to these surveys and rather than ignore that data, because this is extremely important information, the Bureau of Labor Statistics will use that data. So they will present what they have, because again, the sooner we get this information out there, the better, this is what companies are saying about their own activities, but we don't want to ignore the stuff that comes in a little bit later too.
So the big headline was that we had to revise all the way down by 258,000 jobs. That's one cof the biggest two-month payroll downgrades that we've had outside of a recession. We're not in a recession right now. And this is not necessarily an indicator that it's becoming one, but at the same time, we haven't seen these kind of numbers other than in recessions. But we do see them across administration. So in the first Trump administration, the average revision was an increase of 73,000 jobs. Now, that sounds like a big number, but it's really not. In the grand scheme of things, that's a fairly, fairly small revision. But those revisions were mostly upward. And under the Biden administration, the average revision was about 100,000 jobs, that was mixed. The most recent was on the downside. And Obama had a little bit of everything with an average of about 48,000 jobs.
So revisions themselves are not new. It's the scale and the trajectory of this one that really got the president's attention. And, you know, it didn't really have any evidence that it's wrong. He simply didn't like the answer. So therefore, somebody is out of a job and we're going to have somebody appointed who will find a way to spin things a little more positively. So I'm not a huge fan of this, Bob, I'm going to be blunt. I don't like this. For the administration that touts transparency, this is the opposite.
Bob: No, I have to agree. And I spent some time this morning listening to how some of the, you know, economists, people that are respected in the business community reacted to the president's abrupt firing of Bureau of Labor Statistics commissioner. He claimed that she manipulated the numbers for political purposes. And I agree with you, Brian, that's pretty ridiculous. What they did say is that the way the BLS is collecting this data is outdated. And you can blame whoever you want. I think, you know, whether it's underfunding of this government agency or what have you, you know, what these folks were saying is they're still collecting this data by phone and voicemail or even faxes.
And I think the point that a lot of these economists, these are business economists, were trying to make is we got to update the way we collect this data, make it easier for companies to report this data. I mean, there is something called the internet and email out there, for example, that we might be using, but you got to have systems in place to collect the data. I think that's the big story here, not some lady, you know, that should be getting fired for politically manipulating the data because the president doesn't like the answer. I agree with you wholeheartedly, Brian, but...
Brian: My one thought on that is I bet we wouldn't be talking about Mrs. McEntarfer at all if the jobs report had gone up and was positively spun. This one's got under my skin just a little bit here. I don't like the trend here.
Bob: Got to agree. All right. Well, the Fed met last week, but unfortunately, policymakers did not have that Friday jobs report when the meeting concluded on Wednesday. Otherwise, the outcome might have been different. The Fed left rates unchanged in the range of 4.25% to 4.5%. However, two Fed governors dissented in favor of a rate cut. And that was the first time that happened since 1993. So there's a little bit of dissension inside the Federal Reserve. In fact, Fed Governor Adriana Kugler, who, you know, was appointed by President Biden, I believe, announced she will resign this Friday. And that opens up a slot for President Trump to appoint a governor that I guess will align with his desire for rate cuts.
You know, the issue here, the Fed's...you know, we're not going to have a fed meeting in August. So the first time the Fed's going to meet is in September. And we all know a lot can happen in two months' time with tariffs, with economic news, who knows what else. It'll be an interesting 60 days here until we get the Fed back in the room, you know, again, to decide on interest rate policy.
Brian: There is a bit of a shake up happening there. Adriana Kugler did step down. She did not share a lot of detail. It was kind of your typical, you know, spend more time with family, those kinds of things, not really weighing in on the clear decision that she made. But just a little bit of history, she was nominated by President Biden in June of '23, and was confirmed by the Senate in September later that year. First Latina to serve in the Federal Reserve. She is kind of known for being dovish on...She really prefers rate stability and cautious moves. And that's been the majority take of a lot of Fed governors. Nobody likes to stomp on the brakes or stomp on the gas.
But whatever it was within that body, that board of governors there, something made her feel that she could not get the job done. And I would also say that last week there were two Fed governors who came out and said no and completely dissented with Chair Jerome Powell saying, "No, we need to be cutting rates now." Now, it's, of course, a board of governors, the majority rules and the majority still says, "We want to stand patent." Now, we will see in September what the actual outcome of all this is. But looking more and more, if we look at what the market's doing, the market is anticipating that we'll start seeing rate cuts in September.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Brian, back to the Fed, Based on current data, you know, up-to-date data and all this internal Fed turmoil, the market, and that's what we focus on here, has now priced in about a 90% chance of at least a quarter-point rate cut when the Fed meets again on September 16th. So, you know, that that's what's being priced into the markets, you know, right now, a 90% chance of a quarter-point rate cut. And we're seeing economists across the board, you know, estimate maybe two or even three rate cuts between now and the end of the year, depending on what goes on with tariffs, which is always a moving target, and what truly happens here in the labor market. Bring us up to date here a little bit on what's going on in tariff land, Brian.
Brian: So a couple new reciprocal tariffs came out last week. The average U.S. levy is going to be about 15.2%. That's up from 13.3%, far above the 2.3% average just a year ago. So this is going to come down. Remember how this works. We throw numbers out and then we all start arguing and yelling and then eventually something a little lower comes out. So we anticipate that's going to come down a bit. Some countries were given delays. Mexico's got another 90-day delay going on and some others had reciprocal tariffs enforced on them. That includes a 35% tariff on Canada, our friends to the north who may not be our friends much longer. But that excludes stuff that's already covered under the U.S.-Mexico-Canada agreement. So 35% tariff, that's a fat one. President Trump seems to want to take on Canada directly, and so look for more negotiations on that standpoint, but probably a little icy relations between us for a little while there.
Bob: Yeah, and I think the icy relations is, you know, the president has used these threats of tariffs to get people to come to the table and negotiate. And it seems to me at least Canada's just kind of calling his bluff at this point, saying, "No, we're not doing this." We have a proverbial Mexican standoff here between Canada and the United States. Stay tuned for how that all gets resolved. All right, Brian...
Brian: Well played. Well played.
Bob: Well, let's get back to corporate earnings, because that's what really moves the stock market, and that's what we all need to remember. What moves the markets, aside from all this political turmoil and stuff and social media, is are companies making more money? And in fact, they are. So far of the 330 S&P 500 companies that have reported earnings so far this season, 82% have topped earnings estimates delivering a year-over-year earnings per share growth of 9.1%, and that's well ahead of the 2.8% growth rate that was forecast at the start of earning season. Meanwhile, sales growth is running at a healthy 5.9%.
So, Brian, as long as we've got corporate earnings growing at 9% or better, and we've got relatively tame inflation, we've got, you know, interest rate policy steady and nothing on the congressional front, I mean, the Senate is in recess for the next month, that bodes pretty well for the stock market as long as things don't get out over their skis here from a valuation standpoint.
Brian: Yeah, we're in good shape. And at the end of the day, like you said, what matters is what falls out the bottom of the spreadsheet. Well, how are we looking with regard to productivity and profitability? And so far right now, things are actually looking really strong. Now, we're just at the beginning of the era where we're starting to see the impact of these tariffs come through clearly because companies, you know, shot their wad in the first quarter, buying up inventory before the tariffs hit, and now they're needing to reload, and they'll be doing that under our new tariff world. So we're going to see the impact of that. We saw the jobs numbers from last week too. So things are never perfect, nor should they ever be, but just be paying attention and stay flexible.
Bob: Here's the Allworth advice, volatility may pick up in the weeks ahead, but the key thing stays the key thing. Stick to your long-term plan and ignore the noise. Coming up next, we've got an update on when Social Security benefits could get cut if Congress doesn't get their act together and act. Details are coming up next. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. What's better for your portfolio, direct indexing or broad-based ETFs? We're going to delve into that topic straight ahead at 6:43. Social Security's Retirement Trust Fund, not a new topic, we're all aware of this, is on a path to insolvency in less than a decade, which would leave retirees facing an automatic 24% cuts to their benefits if the trust fund is completely depleted according to a new analysis. So the problem persists like it has for decades, Brian. We just got some updated data that amplifies the point that hopefully Congress will take notice, get their act together, and get something done here.
Brian: So this isn't new news, right? So this has been a headline as long as I've been in this industry, and that's been since late '90s or so. So it's always been sometime in the mid to early 2030s where the "trust fund" is going to run outta money. Now, the thing I always like to talk, you've heard me talk about this and I'll do it again later, is making sure everybody is clear. The headline is Social Security is going bust. That's the sexy headline that we tend to sink our teeth into. And I will hear it from my clients and their kids and so on and so forth, "Well, I'm not counting on Social Security, it's just not going to be there." You gotta remember that Social Security, the largest part of Social Security payments that people are receiving, that retired beneficiaries are receiving, are coming from paychecks, from people who are working right now, that includes me and Bob, and anybody on their way home from their jobs listening to this broadcast.
Your check on the top half of it has a reference to FICA. As long as there's a FICA line on your paycheck, money will be flowing through the Social Security system. What this refers to though is the fact that just demographically by the early 2030s, we won't have enough workers to keep benefits where they are. But that does not mean benefits are going to zero. If we solely rely at that time on...and no changes are made, and we rely on the income that's flowing through, through those FICA taxes on the top of your pay stub, then we can only cover maybe 70% to 75% of the previously promised benefits. That ain't great, but it also ain't zero. So I always have to kind of make sure people understand the details of it. It's not going away, it just could be reduced unless we decide to either raise taxes, pay for it now, or lower benefits, or more likely some combination of the two. Now, there are thousands of ways we can actually do that, but those are the levers we have to pull to fix the problem.
Bob: And the concern here, Brian, with these updated numbers, I mean, I can remember...you know, and I don't pay attention to every one of these revisions, but the most recent one I can remember said, "Hey, the trust fund's going to run out in 2035." Well, now it's back up to 2032. And to the point you already made, you know, Social Security benefits, they're funded by a combination of payroll taxes and disbursements from this so-called trust fund. And if that trust fund is completely depleted, federal law requires that benefits be cut to match incoming revenues, which means it truly becomes a 100% pay-as-you-go system. Well, this date keeps inching back by a year, two years, what have you.
And, you know, you and I were talking before the show today, I mean, shoot, we're now within seven years of getting to this point and these adjustments, unless they're going to be draconian or drastic, these adjustments that need to be made impact people's lives. So the sooner you get after it and make some adjustments to how Social Security is funded, the less pain this is going to enact on certain people. And let's face it, the certain people we're talking about are the folks that can't afford to have their Social Security benefits cut by 22%, 24%, 25%.
Brian: Yeah, and the other thing I like to highlight to you is just some of the history, where this comes from. So this isn't a recent problem. This was set in motion in the '50s, Bob. So, you know, the thing people like to look at, and what we talk about all the time, when I'm debating on when I take my Social Security, should I take it as soon as possible or later? The pivot point that people are looking at is, "Well, if I don't take it, and I never turn on that spigot, every year that I don't, I get an 8% increase." That 8% increase is really what has gotten us in this situation. That's been there since 1950 or so when they made some amendments to Social Security and how it's calculated. That was in response to, you know, we had had Social Security for a few decades and got used to it, but costs had increased to a point where people were feeling like it wasn't doing its job, and we needed to kind of fund it a little more strongly. So at that time, leadership that was in place put in these 8% fixed increases.
They did that in the face...it was a fairly low interest rate time. Interest rates were...We didn't have the same measures to watch interest rates that we do now. So it doesn't compare exactly, but interest rates were really under 3% in general. But that was fine because the economy was so strong. Remember, this era was when we were coming out of World War II, the United States was basically establishing itself as a world leader. And if you look, there's a lot of businesses that we now know today as the big old Blue Chips came to be in this, you know, as everybody returned from World War II and the United States took its place at the top of the heap. So it was fine, we got away with it for a long time.
But now, fast forward to now, and the math don't math anymore. So this is why we have this problem. This is not a new problem, it's been slowly building for a long time. And I would love for a political leader to step up and fix it. However, since it's all going to involve sacrifice, either somebody's going to see their benefits cut, or somebody's going to see their taxes increased, or more likely both, nobody's going to run in that campaign because they'd be a sitting duck to get thrown out of office next time around. That's why we kick the bucket endlessly on it.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Speaking of "the math don't math," to quote Brian James, data from the Social Security Administration...
Brian: Apologies to my past English teachers.
Bob: No, I love it. Data from the Social Security Administration shows the ratio of covered workers paying taxes to the number of beneficiaries receiving benefits was 8.6 workers, the worker to beneficiary ratio back, as you pointed out, in the mid-'50s, 1955. That ratio has declined to just 2.8 workers per beneficiary as of 2013. And I guess no one's wanted to...I mean, this is 2025. No one's wanted to update that ratio...
Brian: It's too depressing.
Bob: ...to 2013. So who knows what the number is today.
Brian: We want the happy news. We don't want to put research into the depressing news, Bob.
Bob: So, hey, here's a question, should you even plan on having Social Security as part of your financial plan, Brian? What are you talking to your clients about?
Brian: And that's kind of the point I was making earlier. Yes, you should plan for...What I would do, and again, I would recommend this for, you know, almost the emotional standpoint of it. Calculate your plan currently using what your Social Security report says you're going to get, then do all the numbers again and only change the Social Security figure to about 70% of what it was before. That will help you see the guardrails, here's what I could get if it's hunky dory and nothing bad ever happens again, here's what the numbers look like they're going to be, and see what the impact is going to be, rather than just stressing out over the details.
Bob: I think that's great advice. Here's the Allworth advice, make sure you're doing everything you can to ensure your financial freedom so you're not just at the mercy of the government. Coming up next, you've made your money, now what? How to build a personal brand that keeps you relevant after all the success that you've built. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You are listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James, and we're joined right now by our career expert and our good friend, Julie Bauke, who's going to talk to us today about building a personal brand as you start to wind down a very successful career, but you're not quite ready yet to get completely out of the workforce. Julie, I'm sure you are counseling a lot of people in this area right now. Tell us what that looks like out there.
Julie: You know, when we start to get to that point where we have to really think about what's next, we see the end of the road work-wise, the most important thing to do is start building your post-work life while you're still working, because the I'm going 80 miles an hour and then I'm going to throw the brakes on fully is really jarring. It is not the healthiest way to go about it. And it's why, over the years, many people who have poured everything into their careers die soon after retirement because they've lost their sense of purpose. And so you don't wait until the last day to start thinking about your next stage. You think about it before so that you're actually retiring to something instead of just from something.
Bob: You talked about high achievers, and we deal with a lot of those here at Allworth. You know, you're going 80 miles an hour to quote, you know, what you just said. It's very hard to be going 90 miles an hour and then hit stop and come up and say, "Well, now what do I do?" What are some of the biggest challenges you face as you counsel folks when they're trying to, you know, rewire, so to speak, instead of just retire?
Julie: So the people that have the hardest time with this transition are people who solely or mostly identify with their careers. So we see this in Washington with politicians hanging on, on both sides, way too long. And that happens in the private sector as well. And so the more you identify as Joe Blow from the Jones Company as your primary source of your identity, the harder that moving away is going to be. And so, moving into thinking about what do you want to be known as after you retire? So it could be, you could be a thought leader on something, you could have an area of expertise that served you well in your career. So it's switching that mindset from,"I'm the person in charge," to, "I potentially am going to coach and mentor and be an example for those in charge. "
And we overstay our welcome because no one really recognizes. It's like your parent never recognizes themselves when it's time to give up driving, but everybody around you sees it way before you do. And so, you know, it's really important to have those people around you that help you think about, "How can I take what I've accomplished in the last 40 years, pick a piece of that that really, really lights my fire, and then how can I build around that so that I'm not necessarily stopping all work after I retire, but maybe I am drilling down to the stuff I'm best at and I focus on growing that while I'm also doing other things I'm interested in?"
Bob: One of the things that we almost always come up with when helping someone figure out how to retire is we discovered that they've spent almost no time thinking about what life is going to be like...you know, kind of what you were just hinting at, what will life be like when I'm not the big person in the room anymore? And they start to think, you know, a lot of people kind of get distracted by the idea that, "I'm just exhausted, I got nothing left to make the finish line," and they start to think about, you know, "I just want to be done." And then we point out, there's an awful lot of time, you know, that you're going to have to spend doing nothing. And one of the things that they'll start to think is that, "I can work on an arrangement. I'll work less hours doing the same job."
That always seems to end badly, in my opinion. That's why I'd like to hear your opinion, because, you know, the people still dump the same amount of stuff on your desk because you are determined to be that person. You are the person who does the things. And nobody cares that you're only working 20 hours a week nowadays. So my advice is to go somewhere where you can use your skills, but still be the dumbest person in the room in terms of not being that person. Am I giving good advice there or do you ever run across that situation?
Julie: No, you absolutely are giving great advice. We absolutely do not give enough attention to how to make that transition. And everybody I know over 60 says, "This is way harder than I thought it was going to be because I really thought that I was just going to go sit on the porch somewhere." Well, after a few weeks of doing that, at most, you realize that by 7:30, 8:00, you've had your coffee, you've caught up all the things you like to read in the morning, maybe you can play golf a couple days a week, but that's not probably going to be enough. And so, starting to imagine how you're going to spend your weeks and start saying, "You know, maybe I might like to work, I might like to try something new, or I might like to take a section of what I've done in the past and really build maybe a practice around it where I only say yes to the things that I'm absolutely going to love and look forward to."
And I think at this stage of life, there's a really big question. You have to understand the difference between what you can do and what you want to do. And there's a real big difference because you get really caught up in, "Well, I could do this or I could do this." But the truth is, you don't want to do all those things equally. So getting really clear around, "If I'm only going to spend two days a week in active work related to what I did in the past, what would I do during those days? What would I do and what would I avoid? What would I yes to? What would I say no to? Then how am I going to fill the rest of that time?" If you don't actively plan how to fill your time, then you will fall back into what you know.
And it gets to, I said earlier, if you don't have a good relationship with your partner and home is not a place where you want to spend more time, or you don't have anything in the community you're involved in, in any way, if you've been a 100% work person, retirement is going to be very, very painful for you. And so, instead of kicking the can down the road and waiting until the day when it's become obvious to everyone, maybe except you, that it's time for you to go, you have to start thinking about your graceful exit. And then what do you most firmly want to do in this last section of your life? Because really that's what it is. Can I recommend a book? "Wisdom at Work," by Chip Conley is the best book I've read to help you go through that and figure that out, how do you transform yourself into a wise mentor instead of a doer?
Bob: You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station. You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question and it will come straight to us. Is August really the worst month for the stock market? We're going to talk about that here, coming up straight ahead.
In the world of investing, the debate between direct indexing and broad-based exchange-traded funds, commonly known as ETFs, is kind of like arguing whether vinyl sounds better than streaming music. Both have their strengths and neither is inherently wrong. It just depends on your taste, your goals, and honestly your tax bracket. We're going to jump into that topic next. Let's get into it, Brian. Let's define, first of all, what we're talking about here. Talk about the differences between broad-based exchange-traded funds and a more updated strategy from a tax standpoint, direct indexing.
Brian: Quick definitions here. So here's the building blocks of what we're talking about. So you have exchange-traded funds, broad-based ETFs. Now, exchange-traded fund itself, this is a little bit different than a mutual fund, but effectively serves the same purpose. You know, a mutual fund is one thing that owns a bunch of other things underneath it, so is an exchange-traded fund, but it does it in a much more efficient manner since we have the technology to build these things a little more quickly. But anyway, so these broad-based ETFs are very efficient, very low-cost. It's really the cost that I think gets a hold of a lot of people. We switched, you know, to exchange-traded funds away from mutual funds probably two decades ago, I'm guessing a little bit there, but it's been a long time.
But these are things like the S&P 500 ETF, also known as a spider. Sometimes you'll hear people talking about spiders. They're referring to an exchange-traded fund that follows the S&P 500, which itself is nothing more than the 500 largest companies in the United States. Some of them are good, some of them are bad, it doesn't really matter. It's just the 500 largest companies, any of them is doing anything at any given time. Another one is the Vanguard Total Market Index, the one called VTIs, the symbol there. Hundreds of thousands of stocks in one little place. Instant diversification, I like to think of it as the Kellogg's variety pack of stocks. You get one purchase, but instantly you're in a situation where one company's going to invent the next iPhone, another company's about to go bankrupt, and everybody else is...all the other 498 are in between.
So on the other hand...So that's one nice tight package that owns those 500 companies if you're talking about the S&P 500. Direct indexing is a little bit different. So instead of the Kellogg's variety pack, you have every box of cereal sitting on your shelf at the same time. So this literally means if you're following an index again, such as the S&P 500, the most common one that we do this with, then you literally have shares of those 500 stocks individually. The benefit there is that you are able to treat those individual positions on their own merits versus what happens inside an ETF or a mutual fund. That means tax loss harvesting.
Like I said, any one of those companies at any time might be having a good quarter or a bad quarter or whatever. So you may have positions or lots inside of those positions, commonly referred to as tax lots, where there's a few shares that were purchased at a certain price, and the price since then has come down, therefore, you have a loss. If this is a taxable account rather, meaning not an IRA, not a Roth IRA, 401(k), things like that, then you can harvest that tax loss, meaning sell it, eat the loss, and then you get to deduct that against any gains you might have that year or if you have more losses than gains, then you get to deduct straight up to $3,000 off of your income taxes. You cannot do that with an index because you can't split out the individual holdings if you're using an ETF or a mutual fund. But that's what direct indexing does for you.
Bob: Well, and to take the customization one step further, this is where when we've got folks that have a concentrated position in any one stock, maybe some stock they inherited or some restricted stock that they have had for years with big gains, we can inject that stock into this direct indexing portfolio, and over time use some of those harvested losses to offset the capital gains in that concentrated position and ease the person out of that concentrated stock position over time without blowing up their whole, you know, tax consequences from selling the stock. It's a wonderful strategy, and it's just kind of the, you know, 2025 approach here to being responsible and effective in terms of managing taxes on, again, your non-IRA, non-401(k) taxable stock portfolio. Brian, what are the situations that you're seeing in real life with your clients where this is making sense, transitioning to direct indexing as opposed to just using, you know, broad-based exchange-traded funds?
Brian: So again, a lot of this is about technology. So it can be tough to manage 500 positions. And somebody out there is thinking, "Wait 500 positions, how fat are these statements you're going to be sending me?" And that is the case. You're really creating that much activity in your account. But I would suggest to that person switch to electronic statements and you won't have that problem anymore. Anyway, what I'm seeing where we generally use these is in...You need a decent-sized account for this to be beneficial, right? When you've got, you know, know smaller accounts, you know, $25,000, $50,000, $100,000, you can't do as much in a taxable situation as you could with a larger dollar amount. For those cases, ETFs absolutely make the most sense to define the diversification and all that.
But my favorite thing to do is when somebody has a brand new pile of cash, right, maybe they sold a business, maybe they inherited something, but this is money that is not inside a retirement plan, not an IRA, not a 401(k), not an inherited IRA, not an annuity, that kind of thing, if cash is dropped out of the sky, then I would absolutely, you know, if it's a significant amount, maybe $250,000 and up, that's where I would be looking direct indexing first. Assuming that you're looking at a growth portfolio, or at least an income-generating stock portfolio, something like that, absolutely would look at direct indexing in that case.
By no means, I want to be clear, by no means are we saying ETFs are passe, they're yesterday's news, that kind of thing. I believe ETFs are extremely beneficial, and sometimes they make more sense than than individual positions in an IRA because there's no sense in making it more complicated. There are no tax benefits to direct indexing, tax-loss harvestings, no such thing inside of an IRA retirement plan arrangement because that money's already sheltered anyhow. But outside dollars absolutely should be looking at a more efficient tax structure now. And there are things available now that didn't exist 5, even 10 years ago. So be open-minded and look for new solutions.
Bob: Well, and we're not throwing ETFs under the bus, we're also not throwing mutual funds under the bus. However, it is a good time to point out that this industry has evolved now to the point where if you're sitting on a bunch of mutual funds, it's at least worth sitting down with a good fiduciary advisor to look at the tax, you know, efficiency or lack thereof with your current mutual fund portfolio again, if it's in a non-IRA account, and see if there's not a way to make this thing more tax efficient moving forward. And we find with clients that do that, we can make a big difference, you know, in their overall tax result. Here's the Allworth advice, no matter which direction you go, if you could pay Uncle Sam a little bit less while you keep a little more, that's what we call a win.
Next, we're going to explain why historical averages don't equal smart investing. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station. You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Let's talk about an article that caught a lot of eyeballs this week from MarketWatch, "The stock market's worst month is coming up," meaning August. Should you sell in August, Brian, and move all your money to cash?
Brina: Yes. Next question. No, of course, I'm just kidding. This stuff drives me nuts and it drives all financial advisors nuts, but at the same time, it also puts food on the table because these kinds of headlines do drive people to make bad decisions, right? We all want it to be mechanical, right? These are numbers, financial planning and money is all about dollars and cents and plus, minus, multiply, divide. That's all I need to do. We want it to be mechanical. It is not...
Bob: And there's got to be a black box way to beat the market and win every day, right, Brian?
Brian: Exactly, that's the modern day alchemy. In the middle ages, they try to make gold out of horse manure. Now we try to time the markets and, you know, we look for solutions to do it. We will believe any darn person who says they have their finger on the button. So what this does, of course...and again, what I've learned in my 30 years of doing this is financial planning, Bob, is so much more art than science. The numbers are what they are, right? The numbers are going to be what they are. It is about how we react and how we behave and how we make decisions in the face of stuff we can't control. That's the art part. The science part we can't control it all.
But anyway, so this article is pointing out that August is historically the worst month for the S&P 500. Now, this is technically true. This is the science part. You can see the numbers. Since 1945 it has the average of small decline, but not a big decline. So the article mentions that August has had an average return of negative 0.6%. That's not 6%, that's 0.6%, six-tenths of a percent since 1945. And you're telling me we're going to write a whole article about this and we're going to overhaul portfolios, we're going to get out of the market in August just to avoid a 0.6% decline? I'm not sure that's the right move. What do you think, Bob?
Bob: Well, the problem with this...and thankfully I know our clients don't even pay attention to this stuff because our phones aren't ringing and saying, "Get me the cash, you know, because the calendar has struck August 1st." The point here, making a decision on a historical negative 0.6% average return since 1945, oftentimes if people act on this advice, you're going to pay more in taxes. You know, paying Uncle Sam capital gains taxes than that 0.6% you're supposedly avoiding by getting out of the market. And that's why we're calling this kind of stuff out, you know, this herd mentality based on news headlines is dangerous and this is why, you know, it's...I don't know. These people got to sell ads and everything else.
Brian: Bob, that's the exact point that I wanted to make. Sorry to cut you off.
Bob: All right, make it.
Brian: I'm passionate about this because...
Bob: Do it.
Brian: ...if you click on this article, you read it, your little window is going to be surrounded by ads. And that is what this is all about. There is a reason that those goofy, stupid tabloids have always been sold by the cash register at the grocery store. You are not going to go to the magazines and periodical section for garbage newspapers. However, when you're stuck there waiting your turn at the cash register, you might buy one of those stupid tabloids. That's why they're there. This is the same thing. We just need to grab your eyeballs for enough seconds that we can get some clicks on these ads. And we're hoping you have fat thumbs and you accidentally click the ad anyway, we love that. We make lots of money doing that. Not meaning we, this is not a we thing. I'm talking about the advertising universe and financial publications in general. So anyway, I'm off on a soapbox. Back to you.
Bob: All right, thanks for listening. Tune in tomorrow, we're going to take a deep dive into paying for healthcare later in life. You've been listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
So, Brian, you know, what do you make of this jobs report, and more importantly, these revisions for May and June? It seems like we're having a hard time gathering, you know, accurate data in the first place because these revisions are coming out more and more frequently, and they're all over the board and very volatile.
Brian: Well, I mean, we have a president, Bob, that doesn't like bad news. And, you know, the revisions, I don't know if they're coming out more frequently. I mean, this was a big one. This was a significant revision. Let's go over a little bit about, you know, why does this happen in the first place? Why do they ever revise things? Why can't they just get it right, you know, to begin with? So the Bureau of Labor Statistics, what they do is they send out surveys to...they're just asking companies, "How many people did you hire? How many jobs did you create?" That's where this information comes from. There is no, you know, automated type of, you know, something that watches all this stuff.
So, in any case, just like any other survey, sometimes they get answered right away. More often than not, they sit. So companies will respond, you know, two and three months after the fact, you know, to these surveys and rather than ignore that data, because this is extremely important information, the Bureau of Labor Statistics will use that data. So they will present what they have, because again, the sooner we get this information out there, the better, this is what companies are saying about their own activities, but we don't want to ignore the stuff that comes in a little bit later too.
So the big headline was that we had to revise all the way down by 258,000 jobs. That's one cof the biggest two-month payroll downgrades that we've had outside of a recession. We're not in a recession right now. And this is not necessarily an indicator that it's becoming one, but at the same time, we haven't seen these kind of numbers other than in recessions. But we do see them across administration. So in the first Trump administration, the average revision was an increase of 73,000 jobs. Now, that sounds like a big number, but it's really not. In the grand scheme of things, that's a fairly, fairly small revision. But those revisions were mostly upward. And under the Biden administration, the average revision was about 100,000 jobs, that was mixed. The most recent was on the downside. And Obama had a little bit of everything with an average of about 48,000 jobs.
So revisions themselves are not new. It's the scale and the trajectory of this one that really got the president's attention. And, you know, it didn't really have any evidence that it's wrong. He simply didn't like the answer. So therefore, somebody is out of a job and we're going to have somebody appointed who will find a way to spin things a little more positively. So I'm not a huge fan of this, Bob, I'm going to be blunt. I don't like this. For the administration that touts transparency, this is the opposite.
Bob: No, I have to agree. And I spent some time this morning listening to how some of the, you know, economists, people that are respected in the business community reacted to the president's abrupt firing of Bureau of Labor Statistics commissioner. He claimed that she manipulated the numbers for political purposes. And I agree with you, Brian, that's pretty ridiculous. What they did say is that the way the BLS is collecting this data is outdated. And you can blame whoever you want. I think, you know, whether it's underfunding of this government agency or what have you, you know, what these folks were saying is they're still collecting this data by phone and voicemail or even faxes.
And I think the point that a lot of these economists, these are business economists, were trying to make is we got to update the way we collect this data, make it easier for companies to report this data. I mean, there is something called the internet and email out there, for example, that we might be using, but you got to have systems in place to collect the data. I think that's the big story here, not some lady, you know, that should be getting fired for politically manipulating the data because the president doesn't like the answer. I agree with you wholeheartedly, Brian, but...
Brian: My one thought on that is I bet we wouldn't be talking about Mrs. McEntarfer at all if the jobs report had gone up and was positively spun. This one's got under my skin just a little bit here. I don't like the trend here.
Bob: Got to agree. All right. Well, the Fed met last week, but unfortunately, policymakers did not have that Friday jobs report when the meeting concluded on Wednesday. Otherwise, the outcome might have been different. The Fed left rates unchanged in the range of 4.25% to 4.5%. However, two Fed governors dissented in favor of a rate cut. And that was the first time that happened since 1993. So there's a little bit of dissension inside the Federal Reserve. In fact, Fed Governor Adriana Kugler, who, you know, was appointed by President Biden, I believe, announced she will resign this Friday. And that opens up a slot for President Trump to appoint a governor that I guess will align with his desire for rate cuts.
You know, the issue here, the Fed's...you know, we're not going to have a fed meeting in August. So the first time the Fed's going to meet is in September. And we all know a lot can happen in two months' time with tariffs, with economic news, who knows what else. It'll be an interesting 60 days here until we get the Fed back in the room, you know, again, to decide on interest rate policy.
Brian: There is a bit of a shake up happening there. Adriana Kugler did step down. She did not share a lot of detail. It was kind of your typical, you know, spend more time with family, those kinds of things, not really weighing in on the clear decision that she made. But just a little bit of history, she was nominated by President Biden in June of '23, and was confirmed by the Senate in September later that year. First Latina to serve in the Federal Reserve. She is kind of known for being dovish on...She really prefers rate stability and cautious moves. And that's been the majority take of a lot of Fed governors. Nobody likes to stomp on the brakes or stomp on the gas.
But whatever it was within that body, that board of governors there, something made her feel that she could not get the job done. And I would also say that last week there were two Fed governors who came out and said no and completely dissented with Chair Jerome Powell saying, "No, we need to be cutting rates now." Now, it's, of course, a board of governors, the majority rules and the majority still says, "We want to stand patent." Now, we will see in September what the actual outcome of all this is. But looking more and more, if we look at what the market's doing, the market is anticipating that we'll start seeing rate cuts in September.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Brian, back to the Fed, Based on current data, you know, up-to-date data and all this internal Fed turmoil, the market, and that's what we focus on here, has now priced in about a 90% chance of at least a quarter-point rate cut when the Fed meets again on September 16th. So, you know, that that's what's being priced into the markets, you know, right now, a 90% chance of a quarter-point rate cut. And we're seeing economists across the board, you know, estimate maybe two or even three rate cuts between now and the end of the year, depending on what goes on with tariffs, which is always a moving target, and what truly happens here in the labor market. Bring us up to date here a little bit on what's going on in tariff land, Brian.
Brian: So a couple new reciprocal tariffs came out last week. The average U.S. levy is going to be about 15.2%. That's up from 13.3%, far above the 2.3% average just a year ago. So this is going to come down. Remember how this works. We throw numbers out and then we all start arguing and yelling and then eventually something a little lower comes out. So we anticipate that's going to come down a bit. Some countries were given delays. Mexico's got another 90-day delay going on and some others had reciprocal tariffs enforced on them. That includes a 35% tariff on Canada, our friends to the north who may not be our friends much longer. But that excludes stuff that's already covered under the U.S.-Mexico-Canada agreement. So 35% tariff, that's a fat one. President Trump seems to want to take on Canada directly, and so look for more negotiations on that standpoint, but probably a little icy relations between us for a little while there.
Bob: Yeah, and I think the icy relations is, you know, the president has used these threats of tariffs to get people to come to the table and negotiate. And it seems to me at least Canada's just kind of calling his bluff at this point, saying, "No, we're not doing this." We have a proverbial Mexican standoff here between Canada and the United States. Stay tuned for how that all gets resolved. All right, Brian...
Brian: Well played. Well played.
Bob: Well, let's get back to corporate earnings, because that's what really moves the stock market, and that's what we all need to remember. What moves the markets, aside from all this political turmoil and stuff and social media, is are companies making more money? And in fact, they are. So far of the 330 S&P 500 companies that have reported earnings so far this season, 82% have topped earnings estimates delivering a year-over-year earnings per share growth of 9.1%, and that's well ahead of the 2.8% growth rate that was forecast at the start of earning season. Meanwhile, sales growth is running at a healthy 5.9%.
So, Brian, as long as we've got corporate earnings growing at 9% or better, and we've got relatively tame inflation, we've got, you know, interest rate policy steady and nothing on the congressional front, I mean, the Senate is in recess for the next month, that bodes pretty well for the stock market as long as things don't get out over their skis here from a valuation standpoint.
Brian: Yeah, we're in good shape. And at the end of the day, like you said, what matters is what falls out the bottom of the spreadsheet. Well, how are we looking with regard to productivity and profitability? And so far right now, things are actually looking really strong. Now, we're just at the beginning of the era where we're starting to see the impact of these tariffs come through clearly because companies, you know, shot their wad in the first quarter, buying up inventory before the tariffs hit, and now they're needing to reload, and they'll be doing that under our new tariff world. So we're going to see the impact of that. We saw the jobs numbers from last week too. So things are never perfect, nor should they ever be, but just be paying attention and stay flexible.
Bob: Here's the Allworth advice, volatility may pick up in the weeks ahead, but the key thing stays the key thing. Stick to your long-term plan and ignore the noise. Coming up next, we've got an update on when Social Security benefits could get cut if Congress doesn't get their act together and act. Details are coming up next. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. What's better for your portfolio, direct indexing or broad-based ETFs? We're going to delve into that topic straight ahead at 6:43. Social Security's Retirement Trust Fund, not a new topic, we're all aware of this, is on a path to insolvency in less than a decade, which would leave retirees facing an automatic 24% cuts to their benefits if the trust fund is completely depleted according to a new analysis. So the problem persists like it has for decades, Brian. We just got some updated data that amplifies the point that hopefully Congress will take notice, get their act together, and get something done here.
Brian: So this isn't new news, right? So this has been a headline as long as I've been in this industry, and that's been since late '90s or so. So it's always been sometime in the mid to early 2030s where the "trust fund" is going to run outta money. Now, the thing I always like to talk, you've heard me talk about this and I'll do it again later, is making sure everybody is clear. The headline is Social Security is going bust. That's the sexy headline that we tend to sink our teeth into. And I will hear it from my clients and their kids and so on and so forth, "Well, I'm not counting on Social Security, it's just not going to be there." You gotta remember that Social Security, the largest part of Social Security payments that people are receiving, that retired beneficiaries are receiving, are coming from paychecks, from people who are working right now, that includes me and Bob, and anybody on their way home from their jobs listening to this broadcast.
Your check on the top half of it has a reference to FICA. As long as there's a FICA line on your paycheck, money will be flowing through the Social Security system. What this refers to though is the fact that just demographically by the early 2030s, we won't have enough workers to keep benefits where they are. But that does not mean benefits are going to zero. If we solely rely at that time on...and no changes are made, and we rely on the income that's flowing through, through those FICA taxes on the top of your pay stub, then we can only cover maybe 70% to 75% of the previously promised benefits. That ain't great, but it also ain't zero. So I always have to kind of make sure people understand the details of it. It's not going away, it just could be reduced unless we decide to either raise taxes, pay for it now, or lower benefits, or more likely some combination of the two. Now, there are thousands of ways we can actually do that, but those are the levers we have to pull to fix the problem.
Bob: And the concern here, Brian, with these updated numbers, I mean, I can remember...you know, and I don't pay attention to every one of these revisions, but the most recent one I can remember said, "Hey, the trust fund's going to run out in 2035." Well, now it's back up to 2032. And to the point you already made, you know, Social Security benefits, they're funded by a combination of payroll taxes and disbursements from this so-called trust fund. And if that trust fund is completely depleted, federal law requires that benefits be cut to match incoming revenues, which means it truly becomes a 100% pay-as-you-go system. Well, this date keeps inching back by a year, two years, what have you.
And, you know, you and I were talking before the show today, I mean, shoot, we're now within seven years of getting to this point and these adjustments, unless they're going to be draconian or drastic, these adjustments that need to be made impact people's lives. So the sooner you get after it and make some adjustments to how Social Security is funded, the less pain this is going to enact on certain people. And let's face it, the certain people we're talking about are the folks that can't afford to have their Social Security benefits cut by 22%, 24%, 25%.
Brian: Yeah, and the other thing I like to highlight to you is just some of the history, where this comes from. So this isn't a recent problem. This was set in motion in the '50s, Bob. So, you know, the thing people like to look at, and what we talk about all the time, when I'm debating on when I take my Social Security, should I take it as soon as possible or later? The pivot point that people are looking at is, "Well, if I don't take it, and I never turn on that spigot, every year that I don't, I get an 8% increase." That 8% increase is really what has gotten us in this situation. That's been there since 1950 or so when they made some amendments to Social Security and how it's calculated. That was in response to, you know, we had had Social Security for a few decades and got used to it, but costs had increased to a point where people were feeling like it wasn't doing its job, and we needed to kind of fund it a little more strongly. So at that time, leadership that was in place put in these 8% fixed increases.
They did that in the face...it was a fairly low interest rate time. Interest rates were...We didn't have the same measures to watch interest rates that we do now. So it doesn't compare exactly, but interest rates were really under 3% in general. But that was fine because the economy was so strong. Remember, this era was when we were coming out of World War II, the United States was basically establishing itself as a world leader. And if you look, there's a lot of businesses that we now know today as the big old Blue Chips came to be in this, you know, as everybody returned from World War II and the United States took its place at the top of the heap. So it was fine, we got away with it for a long time.
But now, fast forward to now, and the math don't math anymore. So this is why we have this problem. This is not a new problem, it's been slowly building for a long time. And I would love for a political leader to step up and fix it. However, since it's all going to involve sacrifice, either somebody's going to see their benefits cut, or somebody's going to see their taxes increased, or more likely both, nobody's going to run in that campaign because they'd be a sitting duck to get thrown out of office next time around. That's why we kick the bucket endlessly on it.
Bob: You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Speaking of "the math don't math," to quote Brian James, data from the Social Security Administration...
Brian: Apologies to my past English teachers.
Bob: No, I love it. Data from the Social Security Administration shows the ratio of covered workers paying taxes to the number of beneficiaries receiving benefits was 8.6 workers, the worker to beneficiary ratio back, as you pointed out, in the mid-'50s, 1955. That ratio has declined to just 2.8 workers per beneficiary as of 2013. And I guess no one's wanted to...I mean, this is 2025. No one's wanted to update that ratio...
Brian: It's too depressing.
Bob: ...to 2013. So who knows what the number is today.
Brian: We want the happy news. We don't want to put research into the depressing news, Bob.
Bob: So, hey, here's a question, should you even plan on having Social Security as part of your financial plan, Brian? What are you talking to your clients about?
Brian: And that's kind of the point I was making earlier. Yes, you should plan for...What I would do, and again, I would recommend this for, you know, almost the emotional standpoint of it. Calculate your plan currently using what your Social Security report says you're going to get, then do all the numbers again and only change the Social Security figure to about 70% of what it was before. That will help you see the guardrails, here's what I could get if it's hunky dory and nothing bad ever happens again, here's what the numbers look like they're going to be, and see what the impact is going to be, rather than just stressing out over the details.
Bob: I think that's great advice. Here's the Allworth advice, make sure you're doing everything you can to ensure your financial freedom so you're not just at the mercy of the government. Coming up next, you've made your money, now what? How to build a personal brand that keeps you relevant after all the success that you've built. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.
You are listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James, and we're joined right now by our career expert and our good friend, Julie Bauke, who's going to talk to us today about building a personal brand as you start to wind down a very successful career, but you're not quite ready yet to get completely out of the workforce. Julie, I'm sure you are counseling a lot of people in this area right now. Tell us what that looks like out there.
Julie: You know, when we start to get to that point where we have to really think about what's next, we see the end of the road work-wise, the most important thing to do is start building your post-work life while you're still working, because the I'm going 80 miles an hour and then I'm going to throw the brakes on fully is really jarring. It is not the healthiest way to go about it. And it's why, over the years, many people who have poured everything into their careers die soon after retirement because they've lost their sense of purpose. And so you don't wait until the last day to start thinking about your next stage. You think about it before so that you're actually retiring to something instead of just from something.
Bob: You talked about high achievers, and we deal with a lot of those here at Allworth. You know, you're going 80 miles an hour to quote, you know, what you just said. It's very hard to be going 90 miles an hour and then hit stop and come up and say, "Well, now what do I do?" What are some of the biggest challenges you face as you counsel folks when they're trying to, you know, rewire, so to speak, instead of just retire?
Julie: So the people that have the hardest time with this transition are people who solely or mostly identify with their careers. So we see this in Washington with politicians hanging on, on both sides, way too long. And that happens in the private sector as well. And so the more you identify as Joe Blow from the Jones Company as your primary source of your identity, the harder that moving away is going to be. And so, moving into thinking about what do you want to be known as after you retire? So it could be, you could be a thought leader on something, you could have an area of expertise that served you well in your career. So it's switching that mindset from,"I'm the person in charge," to, "I potentially am going to coach and mentor and be an example for those in charge. "
And we overstay our welcome because no one really recognizes. It's like your parent never recognizes themselves when it's time to give up driving, but everybody around you sees it way before you do. And so, you know, it's really important to have those people around you that help you think about, "How can I take what I've accomplished in the last 40 years, pick a piece of that that really, really lights my fire, and then how can I build around that so that I'm not necessarily stopping all work after I retire, but maybe I am drilling down to the stuff I'm best at and I focus on growing that while I'm also doing other things I'm interested in?"
Bob: One of the things that we almost always come up with when helping someone figure out how to retire is we discovered that they've spent almost no time thinking about what life is going to be like...you know, kind of what you were just hinting at, what will life be like when I'm not the big person in the room anymore? And they start to think, you know, a lot of people kind of get distracted by the idea that, "I'm just exhausted, I got nothing left to make the finish line," and they start to think about, you know, "I just want to be done." And then we point out, there's an awful lot of time, you know, that you're going to have to spend doing nothing. And one of the things that they'll start to think is that, "I can work on an arrangement. I'll work less hours doing the same job."
That always seems to end badly, in my opinion. That's why I'd like to hear your opinion, because, you know, the people still dump the same amount of stuff on your desk because you are determined to be that person. You are the person who does the things. And nobody cares that you're only working 20 hours a week nowadays. So my advice is to go somewhere where you can use your skills, but still be the dumbest person in the room in terms of not being that person. Am I giving good advice there or do you ever run across that situation?
Julie: No, you absolutely are giving great advice. We absolutely do not give enough attention to how to make that transition. And everybody I know over 60 says, "This is way harder than I thought it was going to be because I really thought that I was just going to go sit on the porch somewhere." Well, after a few weeks of doing that, at most, you realize that by 7:30, 8:00, you've had your coffee, you've caught up all the things you like to read in the morning, maybe you can play golf a couple days a week, but that's not probably going to be enough. And so, starting to imagine how you're going to spend your weeks and start saying, "You know, maybe I might like to work, I might like to try something new, or I might like to take a section of what I've done in the past and really build maybe a practice around it where I only say yes to the things that I'm absolutely going to love and look forward to."
And I think at this stage of life, there's a really big question. You have to understand the difference between what you can do and what you want to do. And there's a real big difference because you get really caught up in, "Well, I could do this or I could do this." But the truth is, you don't want to do all those things equally. So getting really clear around, "If I'm only going to spend two days a week in active work related to what I did in the past, what would I do during those days? What would I do and what would I avoid? What would I yes to? What would I say no to? Then how am I going to fill the rest of that time?" If you don't actively plan how to fill your time, then you will fall back into what you know.
And it gets to, I said earlier, if you don't have a good relationship with your partner and home is not a place where you want to spend more time, or you don't have anything in the community you're involved in, in any way, if you've been a 100% work person, retirement is going to be very, very painful for you. And so, instead of kicking the can down the road and waiting until the day when it's become obvious to everyone, maybe except you, that it's time for you to go, you have to start thinking about your graceful exit. And then what do you most firmly want to do in this last section of your life? Because really that's what it is. Can I recommend a book? "Wisdom at Work," by Chip Conley is the best book I've read to help you go through that and figure that out, how do you transform yourself into a wise mentor instead of a doer?
Bob: You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station. You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question and it will come straight to us. Is August really the worst month for the stock market? We're going to talk about that here, coming up straight ahead.
In the world of investing, the debate between direct indexing and broad-based exchange-traded funds, commonly known as ETFs, is kind of like arguing whether vinyl sounds better than streaming music. Both have their strengths and neither is inherently wrong. It just depends on your taste, your goals, and honestly your tax bracket. We're going to jump into that topic next. Let's get into it, Brian. Let's define, first of all, what we're talking about here. Talk about the differences between broad-based exchange-traded funds and a more updated strategy from a tax standpoint, direct indexing.
Brian: Quick definitions here. So here's the building blocks of what we're talking about. So you have exchange-traded funds, broad-based ETFs. Now, exchange-traded fund itself, this is a little bit different than a mutual fund, but effectively serves the same purpose. You know, a mutual fund is one thing that owns a bunch of other things underneath it, so is an exchange-traded fund, but it does it in a much more efficient manner since we have the technology to build these things a little more quickly. But anyway, so these broad-based ETFs are very efficient, very low-cost. It's really the cost that I think gets a hold of a lot of people. We switched, you know, to exchange-traded funds away from mutual funds probably two decades ago, I'm guessing a little bit there, but it's been a long time.
But these are things like the S&P 500 ETF, also known as a spider. Sometimes you'll hear people talking about spiders. They're referring to an exchange-traded fund that follows the S&P 500, which itself is nothing more than the 500 largest companies in the United States. Some of them are good, some of them are bad, it doesn't really matter. It's just the 500 largest companies, any of them is doing anything at any given time. Another one is the Vanguard Total Market Index, the one called VTIs, the symbol there. Hundreds of thousands of stocks in one little place. Instant diversification, I like to think of it as the Kellogg's variety pack of stocks. You get one purchase, but instantly you're in a situation where one company's going to invent the next iPhone, another company's about to go bankrupt, and everybody else is...all the other 498 are in between.
So on the other hand...So that's one nice tight package that owns those 500 companies if you're talking about the S&P 500. Direct indexing is a little bit different. So instead of the Kellogg's variety pack, you have every box of cereal sitting on your shelf at the same time. So this literally means if you're following an index again, such as the S&P 500, the most common one that we do this with, then you literally have shares of those 500 stocks individually. The benefit there is that you are able to treat those individual positions on their own merits versus what happens inside an ETF or a mutual fund. That means tax loss harvesting.
Like I said, any one of those companies at any time might be having a good quarter or a bad quarter or whatever. So you may have positions or lots inside of those positions, commonly referred to as tax lots, where there's a few shares that were purchased at a certain price, and the price since then has come down, therefore, you have a loss. If this is a taxable account rather, meaning not an IRA, not a Roth IRA, 401(k), things like that, then you can harvest that tax loss, meaning sell it, eat the loss, and then you get to deduct that against any gains you might have that year or if you have more losses than gains, then you get to deduct straight up to $3,000 off of your income taxes. You cannot do that with an index because you can't split out the individual holdings if you're using an ETF or a mutual fund. But that's what direct indexing does for you.
Bob: Well, and to take the customization one step further, this is where when we've got folks that have a concentrated position in any one stock, maybe some stock they inherited or some restricted stock that they have had for years with big gains, we can inject that stock into this direct indexing portfolio, and over time use some of those harvested losses to offset the capital gains in that concentrated position and ease the person out of that concentrated stock position over time without blowing up their whole, you know, tax consequences from selling the stock. It's a wonderful strategy, and it's just kind of the, you know, 2025 approach here to being responsible and effective in terms of managing taxes on, again, your non-IRA, non-401(k) taxable stock portfolio. Brian, what are the situations that you're seeing in real life with your clients where this is making sense, transitioning to direct indexing as opposed to just using, you know, broad-based exchange-traded funds?
Brian: So again, a lot of this is about technology. So it can be tough to manage 500 positions. And somebody out there is thinking, "Wait 500 positions, how fat are these statements you're going to be sending me?" And that is the case. You're really creating that much activity in your account. But I would suggest to that person switch to electronic statements and you won't have that problem anymore. Anyway, what I'm seeing where we generally use these is in...You need a decent-sized account for this to be beneficial, right? When you've got, you know, know smaller accounts, you know, $25,000, $50,000, $100,000, you can't do as much in a taxable situation as you could with a larger dollar amount. For those cases, ETFs absolutely make the most sense to define the diversification and all that.
But my favorite thing to do is when somebody has a brand new pile of cash, right, maybe they sold a business, maybe they inherited something, but this is money that is not inside a retirement plan, not an IRA, not a 401(k), not an inherited IRA, not an annuity, that kind of thing, if cash is dropped out of the sky, then I would absolutely, you know, if it's a significant amount, maybe $250,000 and up, that's where I would be looking direct indexing first. Assuming that you're looking at a growth portfolio, or at least an income-generating stock portfolio, something like that, absolutely would look at direct indexing in that case.
By no means, I want to be clear, by no means are we saying ETFs are passe, they're yesterday's news, that kind of thing. I believe ETFs are extremely beneficial, and sometimes they make more sense than than individual positions in an IRA because there's no sense in making it more complicated. There are no tax benefits to direct indexing, tax-loss harvestings, no such thing inside of an IRA retirement plan arrangement because that money's already sheltered anyhow. But outside dollars absolutely should be looking at a more efficient tax structure now. And there are things available now that didn't exist 5, even 10 years ago. So be open-minded and look for new solutions.
Bob: Well, and we're not throwing ETFs under the bus, we're also not throwing mutual funds under the bus. However, it is a good time to point out that this industry has evolved now to the point where if you're sitting on a bunch of mutual funds, it's at least worth sitting down with a good fiduciary advisor to look at the tax, you know, efficiency or lack thereof with your current mutual fund portfolio again, if it's in a non-IRA account, and see if there's not a way to make this thing more tax efficient moving forward. And we find with clients that do that, we can make a big difference, you know, in their overall tax result. Here's the Allworth advice, no matter which direction you go, if you could pay Uncle Sam a little bit less while you keep a little more, that's what we call a win.
Next, we're going to explain why historical averages don't equal smart investing. You're listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station. You're listening to "Simply Money" presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Let's talk about an article that caught a lot of eyeballs this week from MarketWatch, "The stock market's worst month is coming up," meaning August. Should you sell in August, Brian, and move all your money to cash?
Brina: Yes. Next question. No, of course, I'm just kidding. This stuff drives me nuts and it drives all financial advisors nuts, but at the same time, it also puts food on the table because these kinds of headlines do drive people to make bad decisions, right? We all want it to be mechanical, right? These are numbers, financial planning and money is all about dollars and cents and plus, minus, multiply, divide. That's all I need to do. We want it to be mechanical. It is not...
Bob: And there's got to be a black box way to beat the market and win every day, right, Brian?
Brian: Exactly, that's the modern day alchemy. In the middle ages, they try to make gold out of horse manure. Now we try to time the markets and, you know, we look for solutions to do it. We will believe any darn person who says they have their finger on the button. So what this does, of course...and again, what I've learned in my 30 years of doing this is financial planning, Bob, is so much more art than science. The numbers are what they are, right? The numbers are going to be what they are. It is about how we react and how we behave and how we make decisions in the face of stuff we can't control. That's the art part. The science part we can't control it all.
But anyway, so this article is pointing out that August is historically the worst month for the S&P 500. Now, this is technically true. This is the science part. You can see the numbers. Since 1945 it has the average of small decline, but not a big decline. So the article mentions that August has had an average return of negative 0.6%. That's not 6%, that's 0.6%, six-tenths of a percent since 1945. And you're telling me we're going to write a whole article about this and we're going to overhaul portfolios, we're going to get out of the market in August just to avoid a 0.6% decline? I'm not sure that's the right move. What do you think, Bob?
Bob: Well, the problem with this...and thankfully I know our clients don't even pay attention to this stuff because our phones aren't ringing and saying, "Get me the cash, you know, because the calendar has struck August 1st." The point here, making a decision on a historical negative 0.6% average return since 1945, oftentimes if people act on this advice, you're going to pay more in taxes. You know, paying Uncle Sam capital gains taxes than that 0.6% you're supposedly avoiding by getting out of the market. And that's why we're calling this kind of stuff out, you know, this herd mentality based on news headlines is dangerous and this is why, you know, it's...I don't know. These people got to sell ads and everything else.
Brian: Bob, that's the exact point that I wanted to make. Sorry to cut you off.
Bob: All right, make it.
Brian: I'm passionate about this because...
Bob: Do it.
Brian: ...if you click on this article, you read it, your little window is going to be surrounded by ads. And that is what this is all about. There is a reason that those goofy, stupid tabloids have always been sold by the cash register at the grocery store. You are not going to go to the magazines and periodical section for garbage newspapers. However, when you're stuck there waiting your turn at the cash register, you might buy one of those stupid tabloids. That's why they're there. This is the same thing. We just need to grab your eyeballs for enough seconds that we can get some clicks on these ads. And we're hoping you have fat thumbs and you accidentally click the ad anyway, we love that. We make lots of money doing that. Not meaning we, this is not a we thing. I'm talking about the advertising universe and financial publications in general. So anyway, I'm off on a soapbox. Back to you.
Bob: All right, thanks for listening. Tune in tomorrow, we're going to take a deep dive into paying for healthcare later in life. You've been listening to "Simply Money" presented by Allworth Financial on 55KRC THE Talk Station.