- Hidden risks of wealth 0:00
- Historic predictions that failed 12:20
- Career crossroads: pivot or exit? 20:00
- Ask the advisor 29:00
- The power of diversification 34:35
The hidden risks for high-net-worth investors, historic predictions that failed, and the power of diversification.
On this week’s Best of Simply Money podcast, Amy and Bob address the pitfalls of lifestyle creep among high-income earners who often neglect long-term financial planning in favor of immediate gratification. They hit on the often-overlooked impact of taxes on retirement savings, and the importance of a proactive approach to financial planning.
Plus, Amy and Bob answer listener questions on structuring portfolios to balance risk and reward, considering alternative investments like private equity and hedge funds, and the timeless debate of stocks versus diversification.
Download and rate our podcast here.
Amy: Tonight, the hidden risks of how do you get yourself to be maybe that middle class millionaire. You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner along with Bob Sponseller. Bob, I think at some point we've all come across that person who maybe you don't know much about their job. You know, you know they've been working really hard for years. They drive an older model car. Maybe they're still living in the first home that they bought two, three decades ago when they first got married. And all of a sudden, they kind of drop something into the conversation about, I don't know how much is in their 401(k) or how much and you're like, what? You have how much money? And I think we're probably all living in the midst of people like that, right? And we've got a lot of clients who are exactly like this. They are savers. They've made a lot of smart decisions. They've also avoided a number of risks along the way, potential potholes that could have really derailed that. And so if you're someone who would like to be on this path yourself, I think we can get into tonight some of the things we would say, hey, this is a risk. You need to be aware of it.
Bob: Yeah. What we're going to talk about are not the folks that you just mentioned. We're talking about the folks that maybe have very high incomes, maybe in a lot of cases two income earner high earners where they're busy. You know, they're running businesses. They're high-end corporate executives. They're busy. They're working. They're achieving. They're making a lot of money. They're spending a lot of money along the way with vacations, eating out, maybe expensive cars, vacation homes. And sometimes, and I've mentioned this before, Amy, I'm often surprised at how many of these type of folks don't even think about how much money they're actually going to spend or plan to spend after they stop working. So this hidden risk number one, I guess that we'll talk about is just lifestyle creep and overconfidence, just assuming that, hey, the money's always going to be there because we've always had a high income. We've saved in our 401(k). We've always had enough left over to do whatever we want. And we just assume that that's all going to continue to happen for the rest of our life.
Amy: For those that fall into this lifestyle creep trap, I think it's because you are so focused on the here and now, the next vacation, the car that you want, the house, the next big house that you want to buy or build or whatever. What you don't think about is your future self in retirement. When that paycheck is no longer coming in, have you saved enough to continue the lifestyle that you're living now in retirement? I've got clients. I know people. And these are tough conversations that we're having. I can say, look, I'm looking at your W-2s. I know you make a lot of money. Great. You're also spending so much money that it's not sustainable. So if you are hoping that at some point, you can tell your boss to take this job and shove it, that you can make the transition into retirement and not worry about if you're going to have enough, you need to avoid lifestyle creep. And now listen, I don't live the same way that I did when I was 22 years old and I started working, but I also pay myself first. I save first. And then what's left over, I can do the nicer things with. But I think you have to prioritize the saving and the investing for your future.
Bob: Yeah. And we'll just get to the punchline right away here as we go through some of these other risks. It all comes down to being proactive and doing a comprehensive financial plan with spending assumptions built in that change and evolve as you approach and move into retirement. Another risk is, I think, the silent wealth killer, and that's taxes, particularly, for folks that have accumulated large amounts in their retirement plans and IRAs and all those type of wonderful tax deferred savings vehicles. You got to factor in the point that at some point, when you convert this into spendable money, you do have to pay taxes on that. And sometimes people underestimate the impact that's going to have on their nest egg.
Amy: I kind of say that my generation, the ones who do not have pensions, are kind of the guinea pigs when it comes to 401(k)s. We're figuring this out and it's the number one way that we're going to retire. And I had a lot of people come through my office who are like, if I had only known years ago that I could be putting money into a Roth within my 401(k), pay taxes at the time and then take advantage of that tax free growth, I would have. Now though, I have significant dollars that are tax deferred. And listen, there are things we can do. We can do Roth conversions. We can do some qualified charitable donations as we're pulling things out of those IRAs, getting ready to take required minimum distributions. But in a perfect world from the get go, their eye was not only on saving and investing that money, but also how can they be as tax efficient as possible? If you have a million dollars in your 401(k), fantastic. How much of that do you owe to Uncle Sam? And are you really thinking through that?
Bob: Yeah. And this is a reason to start to meet with a fiduciary financial advisor when you're in your 30s, not when you're in your mid-50s. And I'm thinking about the client you've talked about a couple of times, Amy, that did do that. And they wanted to retire in their late 50s. And you were able to help them create a strategy to get there. And when you wait until two, three years before retirement, oftentimes, it's too late to do a lot of these strategies that can make a big difference down the road.
Amy: You're listening to "Simply Money" presented by Allworth Financial. I'm, Amy Wagner, along with Bob Sponseller. Do you know someone, right? The middle class millionaire next door? I think we all do. And you look at them and you're like, if I had been paying closer attention, I would have realized they drive a later model car. They're probably not as susceptible to lifestyle creep as maybe me trying to keep up with the people I went to college with on Facebook. You know, they keep an eye on the future and they're making smart decisions about their money. I think one thing that you got to go in to retirement eyes wide open and be planning for it, even when you're in your 30s, is longevity and health care costs in retirement. I come across a lot of people who want to bet against themselves. Oh, I'm not going to make it much past 70. So I'm not really going to worry. But what if you do? Right? What if you do live to 95? Are your dollars going to be there? Are your dollars going to outlast you?
Bob: Yeah, and I'm seeing this, Amy. You know, a lot of the clients I've worked with for over 30 years, they're now in their mid to late 80s. And if I had asked them 25, 30 years ago, did you think you'd ever see age 86? Most of them would say no. And you know, I'll just say anecdotally, I'm not a doctor. I'm not a scientist. But it's normal unless you've got some type of chronic disease or some, you know, significant health issue. If you take care of yourself, living to your mid to late 80s should be considered the norm now. And that's why we run all of our plans to look at what are things look like if you get into your early to mid-90s, because that is probably reality for the majority of the people that are in their late 50s to 60 right now. You have to plan to live to be 90, 92, 94. That is going to become the new normal.
Amy: But when you talk about right living, the new norm being living until your mid, late 80s, early 90s, there are health care costs associated with that. Right? Typically, there's several specialists, there's prescriptions, things like that. I love to bring up health savings accounts, but man, to my clients, to your point, who are in their 30s, this is how we're preparing for health care costs in the future. We're saying does a high deductible health care plan make sense? If that box is checked, yes. Okay, can we build up enough cash reserves that we're paying for medical expenses out of pocket? Let's get that money in the HSA invested and let's let it grow for retirement. Triple tax advantage. Nothing like it. It makes so much sense, Bob. It is like music to my ears when someone will come in my office and they'll say, yes, I have an HSA. I know. I've been listening to you talk about it. And it's like, it's just such a great tool for saving for retirement when it comes to these health care expenses.
Bob: Yeah, and also modeling out the risk of a potential long-term care event. And that's another thing that a lot of people don't even want to talk about because it's not a pleasant topic to discuss. But for most couples, the vast majority of couples are going to see, at least, one spouse needs some type of long-term care help either in the home or in a health nursing home facility. And you have to factor in that cost and model that. And again, that's a reason to have that bucket of money set aside and have that modeled out in your long-term retirement plan to make sure it's accounted for.
Amy: What if you have saved and saved and saved for years for retirement and all of a sudden you get there and markets head south, right, to the tune of 20% pullback? I have known people that this has happened to and it can be incredibly stressful if, if you are not well prepared for this.
Bob: Yeah, and a good a good way to approach that, Amy, and I know you do this with your clients, is if you set aside the one to three years' worth of living expenses in a non-risky account, short-term bonds, cash, something that is non volatile, you can usually withstand any kind of severe market volatility that's going to come down the pike and allow your longer term growth assets to stay in place and recover and grow for the longer term. But again, it comes down to telling your money what it's going to do in advance and having buckets of money set aside for each purpose that you have in your retirement plan.
Amy: A couple of other things I think are worth throwing out because I've seen these majorly derail people's plans for their money. One is having too much wealth in one asset. And I want to get into this a little bit more later in the show, but you got to be properly diversified. And then the other one, and this is a biggie. I have this conversation up front with everyone that comes into my office and I say this, is the bank of mom and dad still open? If you have adult children, you would be shocked, some of you, by how much money is coming in to the parents' coffers and going right back out in the parent ATM of I need help with my insurance. I mean, just parents that are covering so much. The problem is it's to their own detriment and they are not having the conversations with their kids, the hard ones of we cannot sustain this long term. How are we going to get you on your own two feet? Which I think is also Bob, it's a gift to the kids, right? They need to figure out how they can support their own lifestyle. Here's the Allworth advice. Having a good amount of money isn't the same as having a solid financial strategy. Sometimes you need to partner with a fiduciary advisor that can help you kind of proactively plan for these risks so that you're not falling into these possible pitfalls. Coming up next, the most ridiculous financial headlines, just plain wrong. We've got some great historical perspective for you. You're listening to "Simply Money" presented by Allworth Financial here on 55KRC, THE Talk station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner along with Bob Sponseller. If you can't listen to our show every night, you don't have to miss a thing we talk about. We have a daily podcast for you. Just search "Simply Money." It's on the iHeart app or wherever you get your podcast. Coming up at 6:43, you've got a lot of great questions about estate planning strategies and a lot more in our Ask the Advisor segment. We'll get to all that in just a few minutes.
One of the things, Bob, that we do on the show, I think that it's different from where you get elsewhere is we rip apart some headlines that you might come across that might give you pause, freak you out, give you major anxiety if you don't have some historical perspective. But I think, what we're going to do now is even more of a treat because it's not just, hey, here's some recent headlines. It is going back decades. In talking about some of the headlines that people actually came across, they could have totally derailed their money. And I think this perspective might help you kind of the next time you come across one of these things and it gives you a little heartburn.
Bob: It's a great reminder, Amy, that so much of the media is built to instill fear and greed in people so that we click on the articles and we get emotionally charged up by them. Here's a good one back from 1929 in "The New York Times." "Stocks have reached a permanently high plateau." A pretty bold statement about how the stock market would continue to rise forever. And we all know what happened shortly thereafter in 1929.
Amy: What could possibly go wrong?
Bob: What could possibly go wrong? Yeah.
Amy: Meanwhile, what we know now is there was so many factors behind the scenes, people being overleveraged, all kinds of things that were slowly, silently behind the headlines, leading everything to what set our country back financially for over a decade. Right? When I come across people who lived through the Great Depression, their approach to money is entirely different from everyone else's because these are formative years and it shook them to their core. Standing in line to wait for bread and food. This was a devastating time financially. And again, 1929, right? Just on the cusp of this, everyone thought it was smooth sailing.
Bob: Well, and that's why you have a lot of people in their 80s who are living in small Cape Cod paid off houses that are worth $6 million, $7 million driving a 15-year-old sedan. They remember the Great Depression and they adjusted their life accordingly. Here's another headline back from 1966. "The Dow hits 1000. This is the end of the line."
Amy: So many times, people refer to the Dow and they'll talk about how many points up or down it is. Right? And it can sound scary. And the reminder we always give you is, hey, what's the percentage? What's the percentage that it's up or down at any given point? That's what you need to focus on. The Dow hitting 1000 back in 1966. This is the end of the line. It can't possibly go further? We all know how that has played out and continues to play out. Right? And so I think, you know, the reminder here is you've got to focus on what's really important. It's not points. It's the percentage that it's up or down. And listen, on any given day, it's going to be up. It's going to be down. One never knows. But over time, what you have to count on is more up days in the market than down days. And that's how you slowly build wealth. Right? Time in the market, not timing the market.
Bob: Yeah, I mean, the market should be hitting all-time highs on a fairly regular basis. That means we have a growing economy. That's how it's supposed to work. Yep, there are going to be ebbs and flows in between but calling an all-time market high is ridiculous. How about this one, Amy, in 2000 "The Wall Street Journal" declares the tech boom is over. You know, all tech stocks are nothing but a fad. The whole thing's going to blow up. Obviously, the market did blow up. This was the first big bear market I experienced as an advisor. And it was severe and it certainly had people nervous, not making light of that at all. But to declare technology a fad was, you know, obviously overstated.
Amy: Somewhat short-sighted. I think you've got to remember kind of the thought process during that time. You could do amyandbob.com and we could have zero financial plan whatsoever. And people were going to invest because there was dot com at the end of that company name. And many of these companies were just not fundamentally sound. It was a bit of a house of cards. And that house of cards fell down. Does that mean that there was no future for technology? Well, we all know how this played out. Fast forward to Apple, to Amazon, to Meta. I mean, these are these large companies that have moved the markets over the past couple of years. You know, I think maybe technology got a little bit ahead of itself when it came to during that time. Do I still think that these big, large companies will continue to innovate? Yes. Yeah, I do. I do. Am I going to go all in on the tech sector? Absolutely not. Right? We've learned this lesson.
Bob: Well, the same thing could be said about AI stocks today. I mean, it's an emerging new technology. It's going to impact the economy, we hope, in a very positive way. But there's going to be winners and losers in this space. And you can't just say, hey, I'm going to buy anything with AI next to its name, because to your last point, some of these companies have earnings and growing earnings and some of them have no earnings and no prospect of ever having any earnings and a depleting balance sheet at the same time. So with new innovation and new companies comes opportunity, but also comes a lot of potential short-term volatility.
Amy: Yeah. Here's another great headline from 1995, "The end of the Internet. It's just a fad." I was recently telling my daughter in 1995, I was a freshman at the University of Kentucky. We had to leave our dorm and go to the Chem Phys building on UK's campus to check our email. Do you realize how crazy that sounds to our children now who are picking their phones out of their pockets and they've got email and text messages? You know, we will...these companies will continue to evolve and to innovate. I think calling anything just a fad doesn't make sense. I think the key here is to proper diversify yourself.
Bob: Amy, I'm going to date myself a bit here. You might get a chuckle out of this, but I got in this business in 1991 and it was literally, that year where they started to put personal computers on people's desks, hooked up to the internet. I used to just stare at that screen at all the scrolling advertisements and I'm like, this is awesome. You know, just to have that on my desktop. I'm one of those old people that got introduced to the internet.
Amy: Here's the Allworth advice. Next time you see a headline just screaming at you about what it thinks is going to happen in the future of the market, take it with a grain of salt. Coming up next, how's your career going? Is it time to pivot, exit or double down? We're going to get into that next. You're listening to "Simply Money" presented by Allworth Financial here in 55KRC, THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner, along with Bob Sponseller. Do you feel like maybe you're at a career crossroads right now? Like, do you keep on the path that you've always been? Can you pivot? What are your options? Joining us tonight is our expert in everything to do with your job. Julie on the Job, Julie Bauke. You know, I think the options when you get to a career crossroads are, you know, do you pivot? Do you exit? Do you double down? And how do you even know?
Julie: So the first thing let's do, let's normalize that you will have multiple career crossroads in your career. And versus you pick one job when you're 22 and hang on for dear life for 40 plus years. You know, it is healthy and normal to come to those moments where you say, am I doing what I want to do? Do I want to do something completely different? Do I just want to make a slight pivot? And I call that different chapters of your career. So we're very comfortable using the words the different chapters of life. But I'm just such a fan of your career should be lived in chapters as well. And so any time you start to have those feelings, it's really, really...don't stuff them down. It's really worth examining, why am I feeling this way? What's working? What isn't? Blah, blah, blah. And then what do I do about it? And the trick here is you've got to be willing to do something about it.
Bob: Amy, as you talk about that, I think of some of the articles I read that predict, you know, the average person is going to have 9 to 12 job changes throughout their career, you know, people that are young right now. And then I compare that to people in their 70s and 80s, the people that worked at one company for 35, 40 years, got the gold watch, got the pension. Is somewhere in the middle what reality should be? You know, meaning if you're changing jobs and careers 9 to 12 times, are you maybe a little impatient or is that just the way things have evolved, you know, in the economy these days?
Julie: So let's say the number's nine. It's reasonable to think that, at least, half of that number will be involuntary changes. So companies having layoffs, companies maybe outsourcing what your department does. And so when you look at how many times people will get laid off in their career if they start in the workforce today, if I had to, let's just say, laid off or let go for some reason, for any reason. If I just had to pick a number out of the sky, it'd probably be, I'd say, in a four, you know, probably four to five times. You're going to be presented with the opportunity to find your life's work elsewhere. And then there are going to be those times when it becomes evident to you that it's time for you to initiate that. And so it's going to be that combination. But so instead of just hoping it doesn't happen to you and we need to learn the skills of self-reflection, of discernment, of getting into action and changing jobs. Because believe me, it's a lot more pleasant when you make that choice actively instead of having it done to you.
Bob: So we need to doge proof our career and resume. Is that what you're saying?
Julie: Well, you know, I don't know if that's even possible. You can, as I think a lot of our friends in the Washington area would tell us, you can be doing a great job and you can be at risk for a variety of reasons. And it could feel very arbitrary or it could be very, look, what this team does, we are outsourcing it to a team in India. So now you need to go find something else. And so the ability to be resilient in your career and to reskill or upskill or decide to do something else, you have to learn to invest in and take a chance on yourself instead of waiting for an employer to really be the one that controls your career.
Amy: So pivot, exit or double down, right? Julie Bauke, Julie on the Job joining us tonight to help us figure this out. You know, Julie, you make an excellent point. Of course, sometimes we don't have a choice in this and we're shoved into this change. But if you are someone who maybe just started to feel an itch or you used to love what you did and it's just not as enjoyable anymore, how do you think through, does it make sense to change and where would you even start looking? I think it can be overwhelming for a lot of people to think about making a change proactively mid-career because that can be really scary.
Julie: Yeah. And so the first thing you have to do is look inward and assess, why am I feeling this way? Am I feeling this way because I'm bored? Maybe I've been doing it for a long time and it's fine. But, you know, I believe I could, you know, I could do something else or use my talents and skills differently. Or is it because something has changed at work? Maybe you have a new leader that you don't quite get along with. Or maybe it's something you're dealing with at home that really is rippling into work. So you've got to be really good at pinning those things down. What is it? Is it the job itself? Is it, you know, do you not like it anymore or you burn out? Or have you been put in a role that you don't feel competent and qualified for? Or is it it's a return to the office thing and that has really upended your life and you can't do that? Or is it a leadership or culture issue? So you've got to look at what's the primary reason why I'm feeling this way. And then the next question is, is this something that's under my control? And if it's a leadership change and your report and you work in a really small company and you don't have the opportunity to move into a different department, then you've got to figure out it may be time to leave. If it's that you really like the company you work for and you really like the leadership and you believe in the mission, but you're getting bored in your job, that might be something you could have a conversation about. So you've got to diagnose the problem before you can figure out if it's in your control. And if it isn't, if you try everything and say, you know what, it's just time for me to move on for whatever reason. Then the next step is figuring out like getting in your car and opening up Google Maps and putting the destination in. You have to start figuring out, given what's unsatisfactory about where you are now, what does satisfactory look like? What, in other words, what do I want to move toward? More of this, less of this, etc. And it's really, really, and this is why we exist. It's hard to do it for yourself because we don't...I find that normally, we don't give ourselves enough credit for all the things we're good at. We are, most of us, are instead of being...having a self and...having an overinflated sense of what we're capable of, it's generally underinflated. And that's, I mean, that's what we do. We help people figure that out and then put a plan together to go get it. But if you're stuck in the who else would hire me, this is all I know. I'm over 50. I'm too old. If you start any of that thinking, then you're really relegating yourself to just several more years of being miserable. And frankly, when you're miserable at work, it's very, very hard to be pleasant in other areas of your life because the line between work and home is gone at this point.
Amy: Julie, quickly, we have about a minute left. You know, for someone who is in this place, you kind of referred to this, but you and I have done this together in the past making lists. What do I want to do more of? What do I want to do less of? And I think putting it on paper can be incredibly eye opening of, oh, maybe here's the solution and maybe it's already within the company that I'm working. It's just a slight pivot.
Julie: Right. Exactly. That's right. Once you figure out. So the process we walk people through is we'll say, okay, what's not working and what do you want? So we help people figure out, you pull yourself away from your employer and say, okay, what do I really want? The next question, then, is, can I get it where I am? And if the answer is yes, then you start to have conversations where you're very clear about what you want more of, less of, etc. But sometimes the answer is no. And so at that point, you are at a crossroads where you say, well, I either need to...I believe everybody deserves to be happy at work.
Amy: Yeah. So maybe it's making a jump, right?
Julie: Yeah, making a jump. That's right. It takes courage.
Amy: That could be the best thing. But you've got to ask yourself, you've got to ask yourself the questions first. Yeah. Julie Bauke, Julie on the Job. Thank you so much. Great insights.
Julie: You're welcome.
Amy: You're listening to "Simply Money" presented by Allworth Financial here on 55KRC, THE Talk station. You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner along with Bob Sponseller. Do you have a financial question you need a little help with? There's a red button you can click on while you're listening to the show right there on the iHeart app. Record your question. It's coming straight to us and it is time to ask the advisor some of your questions. First one is from Chris and Mason.
Chris: Should I invest 100% in stocks if I plan on handing my portfolio over to my children? I don't need the money.
Bob: Well, Chris, you know, just going off the question and I'm a literal kind of guy, so I'm just reading the question. If this is truly money that you never intend to spend and it's a long-term time horizon and you're going to live another 15, 20, 30 years and then hand these stock...the portfolio over to your children by all means. Take advantage of capital gains, growth in the market, stepped up cost basis at death. It's a wonderful way to leave assets to your children and grow them while you're still alive. I say go for it, but be diversified. Be diversified. Don't put it all in DeepSeek.
Amy: One of the number one conversations or first conversations I have when I'm working with someone is what's your goal for your money? Do you want your last check to bounce or do you want your kids to get this money? If the goal is, hey, we've got enough that we're not going to need a lot of this and the kids are going to get it, I think it does make sense to be more aggressive. I think the one caveat I would throw in here is, hey, if you're 100% in the stock market, hopefully you realize the price of admission is going to be some volatility. Are you going to wake up one day and see that that portfolio could, potentially, be down 20%? And are you still going to be able to sleep at night knowing that it's likely going to rebound to a new high, hopefully, before your kids inherit that money? So a lot of this is just understanding your own risk tolerance here. Let's get to Mark now in Madeira.
Mark: My wife and I are both 51 years old and have no children. We are in great shape financially. Should we be investing in private equity, hedge funds or alternative investments?
Bob: Well, Mark, I think investing in these different asset classes has very little to do with how old you are and how many children you have and what shape you're in financially. It just has to do with how much growth do you want or potential growth do you want in your portfolio and how much risk mitigation do you want? A lot of times the reason people use alternative investments is to have a non-correlated asset class in their portfolio, meaning something that will go down when the broad stock market goes up and vice versa. With private equity, you know, you're getting privately held companies that have oftentimes, a lot more growth potential, but you need to be aware that there's higher fees usually involved with these type of investments and your money can be locked up for a period of time. And then hedge funds is kind of, to me, very similar to alternative investments, just another non-correlated asset class. So I think the key here is just to understand how each of these different types of investments work and then decide, is this a good fit for me and my personal financial plan?
Amy: Yeah, and I think you got to look at, okay, what are we really going to need in retirement? Right? What are our expenses going to be? I would say dollars that you know you're going to need to live off of retirement maybe don't belong in some of these asset classes because there's just going to be more volatility, potentially, associated with these. If you have checked the box and you know you're good for retirement and you want to diversify beyond there, this could be a great thing to look at. But I think, Bob, I love your point about, hey, do your research first. Just because other people are talking about it doesn't mean you go all in on any of these potential investments. Things like this can sound incredibly sexy, but I think you have to figure out does this truly make sense for us. All right. Let's get to Robert now in Amberley Village.
Robert: How can I structure my portfolio to minimize exposure to a potential recession while maintaining upside potential?
Bob: I think this comes down to how your portfolio is allocated risk wise between different asset classes, broadly speaking, stocks, bonds and cash. And then, you know, Robert, there is going to be a recession at some point. It's not a matter of if, it's a matter of when. So, again, it comes down to planning your cash flow and having some short-term money, money that you're going to need within one to three years set aside in something that's safe, high-yield savings accounts, short-term bonds, things like that, that will dramatically minimize your exposure to a potential recession.
Amy: Yeah, I think you've got to build up cash reserves, right, that you could potentially, draw from when markets are down so that you're not locking in losses, right, by pulling distributions out of your investments. I'm going to throw out another option here. It's called a buffered ETF. And this could be something that might make sense for your assets, a portion of your assets. And essentially, it can protect you from...give you some downside protection while also taking advantage of potential upside, too. You know, and I think you just have to think through, is this something that makes sense for you? Our buffered ETF here at Allworth, we say to fully participate in the advantages of this, you need your probably money locked up in it for about a year. It's not ever locked up. It's not like an annuity or anything else. But to truly participate in it, you know, that's something that you need to think through, right? Is this money I'm going to need in the next year or so? So I think there are options here, and I also think it's really smart to be thinking through the closer you get to retirement, not only growth, but also protection. All right. Coming up next, a little dose of Wagner wisdom for you. You're listening to "Simply Money" presented by Allworth Financial here on 55KRC, THE Talk station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner along with Bob Sponseller. That music can only mean one thing. It is time for some Wagner wisdom for you. Bob, I'm going to ask you to stick with me on this one. I was listening to a podcast this week and they were sharing this story. I don't know how many years it goes back, but back to the day where, like, people would go to local festivals all the time, things like that. And there was a competition at a festival where you could go and you could guess how much the prize steer weighs. Right? It's the competition. So all these people were going and they were all putting in guesses. And one lucky person...
Bob: Now, is the prize steer an animal or a human being?
Amy: I think it's an animal. As I was following along, prize steer is the animal. And everyone is, you know, making their bets on what's the winning thing here. One person comes within 10 pounds. Interestingly, someone who was there that day said to the people who were doing this festival, can I get all the guesses? And they're like, sure, sure, you can get all the guesses. We don't need them. So this person went home and averaged together everybody's guesses. Interestingly, they were within 2 pounds. When you put the collective together, they were within 2 pounds of what the actual weight was. And that got me thinking as I was listening to this about being broadly diversified. Right? One person won that day. One person, one thing came out ahead. But the collective, right, everyone's collective energy in smarts actually got much closer to the reality. And so I think there's so many people who want to go all in on whatever it is. Pick your company, pick your asset class, pick an alt investment and think this is it. And I fully, fully believe a broadly diversified portfolio built on indexes where we're relying on the brainpower of a lot of really smart people running these companies is truly what's going to get you out ahead.
Bob: Well, and you're...you know, a lot of people are wrong, just like you're going to have a lot of big winners and big losers in a broad index. But the broad market, highly diversified is always right, I think, is the point that you're making. And I guess I was going to ask, too, is this person that you're referring to named Andy Stout? Is this how Andy grew up? Our chief investment officer at all? This sounds like something Andy would have done.
Amy: It is probably how his brain works, which is why I'm so glad he is in the position that he's in. But it just, it was so interesting. As I was listening to this story, I was thinking I would have never thought, first of all, hey, what did everyone collectively come up with? But how much closer it was to any person's individual guess, you know, there's people that I come into contact with all the time. What about crypto? What about this? What about that? And I'm like, what about the S&P 500? What about these big companies?
Bob: Yeah. And to your point, Amy, and all joking, stupid jokes aside, that's an excellent illustration. It really is. And it's a good lesson to learn for all of us.
Amy: Yeah. So the next time you're at a party, someone's talking about how much they made. Some crazy return on some individual asset. And you're starting to think either I need to get into that or I need to figure out what my own lottery ticket is. No, I mean, it's the tortoise versus the hare here. Being broadly diversified. It's not one sexy stock that's going to change everything for you. It's being smart and well diversified through the years. Thanks for listening. You've been listening to "Simply Money" presented by Allworth Financial here on 55KRC, THE Talk station.
Bob: Yeah. What we're going to talk about are not the folks that you just mentioned. We're talking about the folks that maybe have very high incomes, maybe in a lot of cases two income earner high earners where they're busy. You know, they're running businesses. They're high-end corporate executives. They're busy. They're working. They're achieving. They're making a lot of money. They're spending a lot of money along the way with vacations, eating out, maybe expensive cars, vacation homes. And sometimes, and I've mentioned this before, Amy, I'm often surprised at how many of these type of folks don't even think about how much money they're actually going to spend or plan to spend after they stop working. So this hidden risk number one, I guess that we'll talk about is just lifestyle creep and overconfidence, just assuming that, hey, the money's always going to be there because we've always had a high income. We've saved in our 401(k). We've always had enough left over to do whatever we want. And we just assume that that's all going to continue to happen for the rest of our life.
Amy: For those that fall into this lifestyle creep trap, I think it's because you are so focused on the here and now, the next vacation, the car that you want, the house, the next big house that you want to buy or build or whatever. What you don't think about is your future self in retirement. When that paycheck is no longer coming in, have you saved enough to continue the lifestyle that you're living now in retirement? I've got clients. I know people. And these are tough conversations that we're having. I can say, look, I'm looking at your W-2s. I know you make a lot of money. Great. You're also spending so much money that it's not sustainable. So if you are hoping that at some point, you can tell your boss to take this job and shove it, that you can make the transition into retirement and not worry about if you're going to have enough, you need to avoid lifestyle creep. And now listen, I don't live the same way that I did when I was 22 years old and I started working, but I also pay myself first. I save first. And then what's left over, I can do the nicer things with. But I think you have to prioritize the saving and the investing for your future.
Bob: Yeah. And we'll just get to the punchline right away here as we go through some of these other risks. It all comes down to being proactive and doing a comprehensive financial plan with spending assumptions built in that change and evolve as you approach and move into retirement. Another risk is, I think, the silent wealth killer, and that's taxes, particularly, for folks that have accumulated large amounts in their retirement plans and IRAs and all those type of wonderful tax deferred savings vehicles. You got to factor in the point that at some point, when you convert this into spendable money, you do have to pay taxes on that. And sometimes people underestimate the impact that's going to have on their nest egg.
Amy: I kind of say that my generation, the ones who do not have pensions, are kind of the guinea pigs when it comes to 401(k)s. We're figuring this out and it's the number one way that we're going to retire. And I had a lot of people come through my office who are like, if I had only known years ago that I could be putting money into a Roth within my 401(k), pay taxes at the time and then take advantage of that tax free growth, I would have. Now though, I have significant dollars that are tax deferred. And listen, there are things we can do. We can do Roth conversions. We can do some qualified charitable donations as we're pulling things out of those IRAs, getting ready to take required minimum distributions. But in a perfect world from the get go, their eye was not only on saving and investing that money, but also how can they be as tax efficient as possible? If you have a million dollars in your 401(k), fantastic. How much of that do you owe to Uncle Sam? And are you really thinking through that?
Bob: Yeah. And this is a reason to start to meet with a fiduciary financial advisor when you're in your 30s, not when you're in your mid-50s. And I'm thinking about the client you've talked about a couple of times, Amy, that did do that. And they wanted to retire in their late 50s. And you were able to help them create a strategy to get there. And when you wait until two, three years before retirement, oftentimes, it's too late to do a lot of these strategies that can make a big difference down the road.
Amy: You're listening to "Simply Money" presented by Allworth Financial. I'm, Amy Wagner, along with Bob Sponseller. Do you know someone, right? The middle class millionaire next door? I think we all do. And you look at them and you're like, if I had been paying closer attention, I would have realized they drive a later model car. They're probably not as susceptible to lifestyle creep as maybe me trying to keep up with the people I went to college with on Facebook. You know, they keep an eye on the future and they're making smart decisions about their money. I think one thing that you got to go in to retirement eyes wide open and be planning for it, even when you're in your 30s, is longevity and health care costs in retirement. I come across a lot of people who want to bet against themselves. Oh, I'm not going to make it much past 70. So I'm not really going to worry. But what if you do? Right? What if you do live to 95? Are your dollars going to be there? Are your dollars going to outlast you?
Bob: Yeah, and I'm seeing this, Amy. You know, a lot of the clients I've worked with for over 30 years, they're now in their mid to late 80s. And if I had asked them 25, 30 years ago, did you think you'd ever see age 86? Most of them would say no. And you know, I'll just say anecdotally, I'm not a doctor. I'm not a scientist. But it's normal unless you've got some type of chronic disease or some, you know, significant health issue. If you take care of yourself, living to your mid to late 80s should be considered the norm now. And that's why we run all of our plans to look at what are things look like if you get into your early to mid-90s, because that is probably reality for the majority of the people that are in their late 50s to 60 right now. You have to plan to live to be 90, 92, 94. That is going to become the new normal.
Amy: But when you talk about right living, the new norm being living until your mid, late 80s, early 90s, there are health care costs associated with that. Right? Typically, there's several specialists, there's prescriptions, things like that. I love to bring up health savings accounts, but man, to my clients, to your point, who are in their 30s, this is how we're preparing for health care costs in the future. We're saying does a high deductible health care plan make sense? If that box is checked, yes. Okay, can we build up enough cash reserves that we're paying for medical expenses out of pocket? Let's get that money in the HSA invested and let's let it grow for retirement. Triple tax advantage. Nothing like it. It makes so much sense, Bob. It is like music to my ears when someone will come in my office and they'll say, yes, I have an HSA. I know. I've been listening to you talk about it. And it's like, it's just such a great tool for saving for retirement when it comes to these health care expenses.
Bob: Yeah, and also modeling out the risk of a potential long-term care event. And that's another thing that a lot of people don't even want to talk about because it's not a pleasant topic to discuss. But for most couples, the vast majority of couples are going to see, at least, one spouse needs some type of long-term care help either in the home or in a health nursing home facility. And you have to factor in that cost and model that. And again, that's a reason to have that bucket of money set aside and have that modeled out in your long-term retirement plan to make sure it's accounted for.
Amy: What if you have saved and saved and saved for years for retirement and all of a sudden you get there and markets head south, right, to the tune of 20% pullback? I have known people that this has happened to and it can be incredibly stressful if, if you are not well prepared for this.
Bob: Yeah, and a good a good way to approach that, Amy, and I know you do this with your clients, is if you set aside the one to three years' worth of living expenses in a non-risky account, short-term bonds, cash, something that is non volatile, you can usually withstand any kind of severe market volatility that's going to come down the pike and allow your longer term growth assets to stay in place and recover and grow for the longer term. But again, it comes down to telling your money what it's going to do in advance and having buckets of money set aside for each purpose that you have in your retirement plan.
Amy: A couple of other things I think are worth throwing out because I've seen these majorly derail people's plans for their money. One is having too much wealth in one asset. And I want to get into this a little bit more later in the show, but you got to be properly diversified. And then the other one, and this is a biggie. I have this conversation up front with everyone that comes into my office and I say this, is the bank of mom and dad still open? If you have adult children, you would be shocked, some of you, by how much money is coming in to the parents' coffers and going right back out in the parent ATM of I need help with my insurance. I mean, just parents that are covering so much. The problem is it's to their own detriment and they are not having the conversations with their kids, the hard ones of we cannot sustain this long term. How are we going to get you on your own two feet? Which I think is also Bob, it's a gift to the kids, right? They need to figure out how they can support their own lifestyle. Here's the Allworth advice. Having a good amount of money isn't the same as having a solid financial strategy. Sometimes you need to partner with a fiduciary advisor that can help you kind of proactively plan for these risks so that you're not falling into these possible pitfalls. Coming up next, the most ridiculous financial headlines, just plain wrong. We've got some great historical perspective for you. You're listening to "Simply Money" presented by Allworth Financial here on 55KRC, THE Talk station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner along with Bob Sponseller. If you can't listen to our show every night, you don't have to miss a thing we talk about. We have a daily podcast for you. Just search "Simply Money." It's on the iHeart app or wherever you get your podcast. Coming up at 6:43, you've got a lot of great questions about estate planning strategies and a lot more in our Ask the Advisor segment. We'll get to all that in just a few minutes.
One of the things, Bob, that we do on the show, I think that it's different from where you get elsewhere is we rip apart some headlines that you might come across that might give you pause, freak you out, give you major anxiety if you don't have some historical perspective. But I think, what we're going to do now is even more of a treat because it's not just, hey, here's some recent headlines. It is going back decades. In talking about some of the headlines that people actually came across, they could have totally derailed their money. And I think this perspective might help you kind of the next time you come across one of these things and it gives you a little heartburn.
Bob: It's a great reminder, Amy, that so much of the media is built to instill fear and greed in people so that we click on the articles and we get emotionally charged up by them. Here's a good one back from 1929 in "The New York Times." "Stocks have reached a permanently high plateau." A pretty bold statement about how the stock market would continue to rise forever. And we all know what happened shortly thereafter in 1929.
Amy: What could possibly go wrong?
Bob: What could possibly go wrong? Yeah.
Amy: Meanwhile, what we know now is there was so many factors behind the scenes, people being overleveraged, all kinds of things that were slowly, silently behind the headlines, leading everything to what set our country back financially for over a decade. Right? When I come across people who lived through the Great Depression, their approach to money is entirely different from everyone else's because these are formative years and it shook them to their core. Standing in line to wait for bread and food. This was a devastating time financially. And again, 1929, right? Just on the cusp of this, everyone thought it was smooth sailing.
Bob: Well, and that's why you have a lot of people in their 80s who are living in small Cape Cod paid off houses that are worth $6 million, $7 million driving a 15-year-old sedan. They remember the Great Depression and they adjusted their life accordingly. Here's another headline back from 1966. "The Dow hits 1000. This is the end of the line."
Amy: So many times, people refer to the Dow and they'll talk about how many points up or down it is. Right? And it can sound scary. And the reminder we always give you is, hey, what's the percentage? What's the percentage that it's up or down at any given point? That's what you need to focus on. The Dow hitting 1000 back in 1966. This is the end of the line. It can't possibly go further? We all know how that has played out and continues to play out. Right? And so I think, you know, the reminder here is you've got to focus on what's really important. It's not points. It's the percentage that it's up or down. And listen, on any given day, it's going to be up. It's going to be down. One never knows. But over time, what you have to count on is more up days in the market than down days. And that's how you slowly build wealth. Right? Time in the market, not timing the market.
Bob: Yeah, I mean, the market should be hitting all-time highs on a fairly regular basis. That means we have a growing economy. That's how it's supposed to work. Yep, there are going to be ebbs and flows in between but calling an all-time market high is ridiculous. How about this one, Amy, in 2000 "The Wall Street Journal" declares the tech boom is over. You know, all tech stocks are nothing but a fad. The whole thing's going to blow up. Obviously, the market did blow up. This was the first big bear market I experienced as an advisor. And it was severe and it certainly had people nervous, not making light of that at all. But to declare technology a fad was, you know, obviously overstated.
Amy: Somewhat short-sighted. I think you've got to remember kind of the thought process during that time. You could do amyandbob.com and we could have zero financial plan whatsoever. And people were going to invest because there was dot com at the end of that company name. And many of these companies were just not fundamentally sound. It was a bit of a house of cards. And that house of cards fell down. Does that mean that there was no future for technology? Well, we all know how this played out. Fast forward to Apple, to Amazon, to Meta. I mean, these are these large companies that have moved the markets over the past couple of years. You know, I think maybe technology got a little bit ahead of itself when it came to during that time. Do I still think that these big, large companies will continue to innovate? Yes. Yeah, I do. I do. Am I going to go all in on the tech sector? Absolutely not. Right? We've learned this lesson.
Bob: Well, the same thing could be said about AI stocks today. I mean, it's an emerging new technology. It's going to impact the economy, we hope, in a very positive way. But there's going to be winners and losers in this space. And you can't just say, hey, I'm going to buy anything with AI next to its name, because to your last point, some of these companies have earnings and growing earnings and some of them have no earnings and no prospect of ever having any earnings and a depleting balance sheet at the same time. So with new innovation and new companies comes opportunity, but also comes a lot of potential short-term volatility.
Amy: Yeah. Here's another great headline from 1995, "The end of the Internet. It's just a fad." I was recently telling my daughter in 1995, I was a freshman at the University of Kentucky. We had to leave our dorm and go to the Chem Phys building on UK's campus to check our email. Do you realize how crazy that sounds to our children now who are picking their phones out of their pockets and they've got email and text messages? You know, we will...these companies will continue to evolve and to innovate. I think calling anything just a fad doesn't make sense. I think the key here is to proper diversify yourself.
Bob: Amy, I'm going to date myself a bit here. You might get a chuckle out of this, but I got in this business in 1991 and it was literally, that year where they started to put personal computers on people's desks, hooked up to the internet. I used to just stare at that screen at all the scrolling advertisements and I'm like, this is awesome. You know, just to have that on my desktop. I'm one of those old people that got introduced to the internet.
Amy: Here's the Allworth advice. Next time you see a headline just screaming at you about what it thinks is going to happen in the future of the market, take it with a grain of salt. Coming up next, how's your career going? Is it time to pivot, exit or double down? We're going to get into that next. You're listening to "Simply Money" presented by Allworth Financial here in 55KRC, THE Talk Station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner, along with Bob Sponseller. Do you feel like maybe you're at a career crossroads right now? Like, do you keep on the path that you've always been? Can you pivot? What are your options? Joining us tonight is our expert in everything to do with your job. Julie on the Job, Julie Bauke. You know, I think the options when you get to a career crossroads are, you know, do you pivot? Do you exit? Do you double down? And how do you even know?
Julie: So the first thing let's do, let's normalize that you will have multiple career crossroads in your career. And versus you pick one job when you're 22 and hang on for dear life for 40 plus years. You know, it is healthy and normal to come to those moments where you say, am I doing what I want to do? Do I want to do something completely different? Do I just want to make a slight pivot? And I call that different chapters of your career. So we're very comfortable using the words the different chapters of life. But I'm just such a fan of your career should be lived in chapters as well. And so any time you start to have those feelings, it's really, really...don't stuff them down. It's really worth examining, why am I feeling this way? What's working? What isn't? Blah, blah, blah. And then what do I do about it? And the trick here is you've got to be willing to do something about it.
Bob: Amy, as you talk about that, I think of some of the articles I read that predict, you know, the average person is going to have 9 to 12 job changes throughout their career, you know, people that are young right now. And then I compare that to people in their 70s and 80s, the people that worked at one company for 35, 40 years, got the gold watch, got the pension. Is somewhere in the middle what reality should be? You know, meaning if you're changing jobs and careers 9 to 12 times, are you maybe a little impatient or is that just the way things have evolved, you know, in the economy these days?
Julie: So let's say the number's nine. It's reasonable to think that, at least, half of that number will be involuntary changes. So companies having layoffs, companies maybe outsourcing what your department does. And so when you look at how many times people will get laid off in their career if they start in the workforce today, if I had to, let's just say, laid off or let go for some reason, for any reason. If I just had to pick a number out of the sky, it'd probably be, I'd say, in a four, you know, probably four to five times. You're going to be presented with the opportunity to find your life's work elsewhere. And then there are going to be those times when it becomes evident to you that it's time for you to initiate that. And so it's going to be that combination. But so instead of just hoping it doesn't happen to you and we need to learn the skills of self-reflection, of discernment, of getting into action and changing jobs. Because believe me, it's a lot more pleasant when you make that choice actively instead of having it done to you.
Bob: So we need to doge proof our career and resume. Is that what you're saying?
Julie: Well, you know, I don't know if that's even possible. You can, as I think a lot of our friends in the Washington area would tell us, you can be doing a great job and you can be at risk for a variety of reasons. And it could feel very arbitrary or it could be very, look, what this team does, we are outsourcing it to a team in India. So now you need to go find something else. And so the ability to be resilient in your career and to reskill or upskill or decide to do something else, you have to learn to invest in and take a chance on yourself instead of waiting for an employer to really be the one that controls your career.
Amy: So pivot, exit or double down, right? Julie Bauke, Julie on the Job joining us tonight to help us figure this out. You know, Julie, you make an excellent point. Of course, sometimes we don't have a choice in this and we're shoved into this change. But if you are someone who maybe just started to feel an itch or you used to love what you did and it's just not as enjoyable anymore, how do you think through, does it make sense to change and where would you even start looking? I think it can be overwhelming for a lot of people to think about making a change proactively mid-career because that can be really scary.
Julie: Yeah. And so the first thing you have to do is look inward and assess, why am I feeling this way? Am I feeling this way because I'm bored? Maybe I've been doing it for a long time and it's fine. But, you know, I believe I could, you know, I could do something else or use my talents and skills differently. Or is it because something has changed at work? Maybe you have a new leader that you don't quite get along with. Or maybe it's something you're dealing with at home that really is rippling into work. So you've got to be really good at pinning those things down. What is it? Is it the job itself? Is it, you know, do you not like it anymore or you burn out? Or have you been put in a role that you don't feel competent and qualified for? Or is it it's a return to the office thing and that has really upended your life and you can't do that? Or is it a leadership or culture issue? So you've got to look at what's the primary reason why I'm feeling this way. And then the next question is, is this something that's under my control? And if it's a leadership change and your report and you work in a really small company and you don't have the opportunity to move into a different department, then you've got to figure out it may be time to leave. If it's that you really like the company you work for and you really like the leadership and you believe in the mission, but you're getting bored in your job, that might be something you could have a conversation about. So you've got to diagnose the problem before you can figure out if it's in your control. And if it isn't, if you try everything and say, you know what, it's just time for me to move on for whatever reason. Then the next step is figuring out like getting in your car and opening up Google Maps and putting the destination in. You have to start figuring out, given what's unsatisfactory about where you are now, what does satisfactory look like? What, in other words, what do I want to move toward? More of this, less of this, etc. And it's really, really, and this is why we exist. It's hard to do it for yourself because we don't...I find that normally, we don't give ourselves enough credit for all the things we're good at. We are, most of us, are instead of being...having a self and...having an overinflated sense of what we're capable of, it's generally underinflated. And that's, I mean, that's what we do. We help people figure that out and then put a plan together to go get it. But if you're stuck in the who else would hire me, this is all I know. I'm over 50. I'm too old. If you start any of that thinking, then you're really relegating yourself to just several more years of being miserable. And frankly, when you're miserable at work, it's very, very hard to be pleasant in other areas of your life because the line between work and home is gone at this point.
Amy: Julie, quickly, we have about a minute left. You know, for someone who is in this place, you kind of referred to this, but you and I have done this together in the past making lists. What do I want to do more of? What do I want to do less of? And I think putting it on paper can be incredibly eye opening of, oh, maybe here's the solution and maybe it's already within the company that I'm working. It's just a slight pivot.
Julie: Right. Exactly. That's right. Once you figure out. So the process we walk people through is we'll say, okay, what's not working and what do you want? So we help people figure out, you pull yourself away from your employer and say, okay, what do I really want? The next question, then, is, can I get it where I am? And if the answer is yes, then you start to have conversations where you're very clear about what you want more of, less of, etc. But sometimes the answer is no. And so at that point, you are at a crossroads where you say, well, I either need to...I believe everybody deserves to be happy at work.
Amy: Yeah. So maybe it's making a jump, right?
Julie: Yeah, making a jump. That's right. It takes courage.
Amy: That could be the best thing. But you've got to ask yourself, you've got to ask yourself the questions first. Yeah. Julie Bauke, Julie on the Job. Thank you so much. Great insights.
Julie: You're welcome.
Amy: You're listening to "Simply Money" presented by Allworth Financial here on 55KRC, THE Talk station. You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner along with Bob Sponseller. Do you have a financial question you need a little help with? There's a red button you can click on while you're listening to the show right there on the iHeart app. Record your question. It's coming straight to us and it is time to ask the advisor some of your questions. First one is from Chris and Mason.
Chris: Should I invest 100% in stocks if I plan on handing my portfolio over to my children? I don't need the money.
Bob: Well, Chris, you know, just going off the question and I'm a literal kind of guy, so I'm just reading the question. If this is truly money that you never intend to spend and it's a long-term time horizon and you're going to live another 15, 20, 30 years and then hand these stock...the portfolio over to your children by all means. Take advantage of capital gains, growth in the market, stepped up cost basis at death. It's a wonderful way to leave assets to your children and grow them while you're still alive. I say go for it, but be diversified. Be diversified. Don't put it all in DeepSeek.
Amy: One of the number one conversations or first conversations I have when I'm working with someone is what's your goal for your money? Do you want your last check to bounce or do you want your kids to get this money? If the goal is, hey, we've got enough that we're not going to need a lot of this and the kids are going to get it, I think it does make sense to be more aggressive. I think the one caveat I would throw in here is, hey, if you're 100% in the stock market, hopefully you realize the price of admission is going to be some volatility. Are you going to wake up one day and see that that portfolio could, potentially, be down 20%? And are you still going to be able to sleep at night knowing that it's likely going to rebound to a new high, hopefully, before your kids inherit that money? So a lot of this is just understanding your own risk tolerance here. Let's get to Mark now in Madeira.
Mark: My wife and I are both 51 years old and have no children. We are in great shape financially. Should we be investing in private equity, hedge funds or alternative investments?
Bob: Well, Mark, I think investing in these different asset classes has very little to do with how old you are and how many children you have and what shape you're in financially. It just has to do with how much growth do you want or potential growth do you want in your portfolio and how much risk mitigation do you want? A lot of times the reason people use alternative investments is to have a non-correlated asset class in their portfolio, meaning something that will go down when the broad stock market goes up and vice versa. With private equity, you know, you're getting privately held companies that have oftentimes, a lot more growth potential, but you need to be aware that there's higher fees usually involved with these type of investments and your money can be locked up for a period of time. And then hedge funds is kind of, to me, very similar to alternative investments, just another non-correlated asset class. So I think the key here is just to understand how each of these different types of investments work and then decide, is this a good fit for me and my personal financial plan?
Amy: Yeah, and I think you got to look at, okay, what are we really going to need in retirement? Right? What are our expenses going to be? I would say dollars that you know you're going to need to live off of retirement maybe don't belong in some of these asset classes because there's just going to be more volatility, potentially, associated with these. If you have checked the box and you know you're good for retirement and you want to diversify beyond there, this could be a great thing to look at. But I think, Bob, I love your point about, hey, do your research first. Just because other people are talking about it doesn't mean you go all in on any of these potential investments. Things like this can sound incredibly sexy, but I think you have to figure out does this truly make sense for us. All right. Let's get to Robert now in Amberley Village.
Robert: How can I structure my portfolio to minimize exposure to a potential recession while maintaining upside potential?
Bob: I think this comes down to how your portfolio is allocated risk wise between different asset classes, broadly speaking, stocks, bonds and cash. And then, you know, Robert, there is going to be a recession at some point. It's not a matter of if, it's a matter of when. So, again, it comes down to planning your cash flow and having some short-term money, money that you're going to need within one to three years set aside in something that's safe, high-yield savings accounts, short-term bonds, things like that, that will dramatically minimize your exposure to a potential recession.
Amy: Yeah, I think you've got to build up cash reserves, right, that you could potentially, draw from when markets are down so that you're not locking in losses, right, by pulling distributions out of your investments. I'm going to throw out another option here. It's called a buffered ETF. And this could be something that might make sense for your assets, a portion of your assets. And essentially, it can protect you from...give you some downside protection while also taking advantage of potential upside, too. You know, and I think you just have to think through, is this something that makes sense for you? Our buffered ETF here at Allworth, we say to fully participate in the advantages of this, you need your probably money locked up in it for about a year. It's not ever locked up. It's not like an annuity or anything else. But to truly participate in it, you know, that's something that you need to think through, right? Is this money I'm going to need in the next year or so? So I think there are options here, and I also think it's really smart to be thinking through the closer you get to retirement, not only growth, but also protection. All right. Coming up next, a little dose of Wagner wisdom for you. You're listening to "Simply Money" presented by Allworth Financial here on 55KRC, THE Talk station.
You're listening to "Simply Money" presented by Allworth Financial. I'm Amy Wagner along with Bob Sponseller. That music can only mean one thing. It is time for some Wagner wisdom for you. Bob, I'm going to ask you to stick with me on this one. I was listening to a podcast this week and they were sharing this story. I don't know how many years it goes back, but back to the day where, like, people would go to local festivals all the time, things like that. And there was a competition at a festival where you could go and you could guess how much the prize steer weighs. Right? It's the competition. So all these people were going and they were all putting in guesses. And one lucky person...
Bob: Now, is the prize steer an animal or a human being?
Amy: I think it's an animal. As I was following along, prize steer is the animal. And everyone is, you know, making their bets on what's the winning thing here. One person comes within 10 pounds. Interestingly, someone who was there that day said to the people who were doing this festival, can I get all the guesses? And they're like, sure, sure, you can get all the guesses. We don't need them. So this person went home and averaged together everybody's guesses. Interestingly, they were within 2 pounds. When you put the collective together, they were within 2 pounds of what the actual weight was. And that got me thinking as I was listening to this about being broadly diversified. Right? One person won that day. One person, one thing came out ahead. But the collective, right, everyone's collective energy in smarts actually got much closer to the reality. And so I think there's so many people who want to go all in on whatever it is. Pick your company, pick your asset class, pick an alt investment and think this is it. And I fully, fully believe a broadly diversified portfolio built on indexes where we're relying on the brainpower of a lot of really smart people running these companies is truly what's going to get you out ahead.
Bob: Well, and you're...you know, a lot of people are wrong, just like you're going to have a lot of big winners and big losers in a broad index. But the broad market, highly diversified is always right, I think, is the point that you're making. And I guess I was going to ask, too, is this person that you're referring to named Andy Stout? Is this how Andy grew up? Our chief investment officer at all? This sounds like something Andy would have done.
Amy: It is probably how his brain works, which is why I'm so glad he is in the position that he's in. But it just, it was so interesting. As I was listening to this story, I was thinking I would have never thought, first of all, hey, what did everyone collectively come up with? But how much closer it was to any person's individual guess, you know, there's people that I come into contact with all the time. What about crypto? What about this? What about that? And I'm like, what about the S&P 500? What about these big companies?
Bob: Yeah. And to your point, Amy, and all joking, stupid jokes aside, that's an excellent illustration. It really is. And it's a good lesson to learn for all of us.
Amy: Yeah. So the next time you're at a party, someone's talking about how much they made. Some crazy return on some individual asset. And you're starting to think either I need to get into that or I need to figure out what my own lottery ticket is. No, I mean, it's the tortoise versus the hare here. Being broadly diversified. It's not one sexy stock that's going to change everything for you. It's being smart and well diversified through the years. Thanks for listening. You've been listening to "Simply Money" presented by Allworth Financial here on 55KRC, THE Talk station.