Should You Bail on the Market During Global Chaos?
From wars and terror attacks to political strife, global events can shake our nerves—but should they shake our investments too? On this week’s Best of Simply Money podcast, Bob and Brian explore how markets have historically responded to geopolitical turmoil, and why staying the course with a solid financial plan could be your smartest move.
Plus, a deep dive into the boom in annuity sales and the real costs of those "guarantees," and an important warning about using AI for your online purchases.
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Bob: Tonight, the world could seem like a scary place out there. Is it time to bail from the market? You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. From wars to terror attacks to political bickering, it seems like every time the world shakes a little bit, some investors get spooked. But does history say you should pull all your money out of the market? Let's look at the current situation, for example, in the Middle East. The markets have been pretty darn calm since this whole conflict unfolded. But there are some out there who wonder, is this turbulence just a mirage, and is the bottom about to fall out? Brian, let's look back at some actual history to give us some perspective on what typically happens during situations like what a lot of folks are worried about.
Brian: Bob, I think this is so important for people to understand. Market history and ups and downs are really... That's up there with having an emergency fund in terms of getting started with your financial plan. People will wander around for 10, 15 years trying to figure out how to protect themselves from the ups and downs of the market. And it really just doesn't matter as long as you understand the history. The way to get around this is to know how the market reacts to certain things and understand the whole cycle. So yeah, let's go through some details.
In 2023, Hamas attacked Israel, right? It was sort of similar to what's going on, except in the opposite. So after this happened, the markets, of course, dipped. Energy spiked. That always happens whenever something happens in the Middle East, oil goes up because the assumption is that the oil supply is going to be cut off for at least some time period, and everybody's going to be in a snip for a while.
By the end of that year, though, the S&P 500 was up 24%. And that's not only because that conflict at that time was resolved. There is other stuff that happens in the world. That's when AI, artificial intelligence, became the buzzword, and that drove that rally.
But the point is the world keeps revolving even though there are conflicts out there. So even in a war, markets will still move forward. And you can even look at World War II for that, right? Most of the years of World War II, the stock markets were positive. The whole stretch was stressful, of course. We don't ever want to go through that again. But it's not like the market goes to zero. Everybody stops doing business until the war is over. That does not happen.
It ends up being a catalyst. General Motors and all these companies, we all remember these stories, all switched to wartime footing, where they started producing tanks, and we started pulling in rubber to send to the military, and all that kind of stuff. Those are still businesses doing what they do. They just change what their approach is. So we need to separate our concerns with what's going on in the world with the overall concerns about our finances.
Bob: Well, let's look back at 2022. I mean, that was a rough year for a whole bunch of reasons. The Fed raised interest rates seven times, as we all remember. But that was also the year Russia invaded Ukraine. Very similar situation to what you just talked about, you know, tanks rolled into Ukraine, oil prices shoot up, global supply chain takes a hit. And the NASDAQ actually entered bear market territory.
But for investors who stayed disciplined, they saw major rebounds. From October of 2022 through July of 2023, the S&P 500 gained 26%. But if you panicked in early of 2022 and sat out and said, "Well, I'm going to just sit this one out and wait until the world seems more settled," you missed it. You missed that nice rally.
And then 2020, we all remember the COVID-19 pandemic, the fastest bear market in history. The S&P 500 dropped 34% in 33 days. That was real fear. But here's the twist. By August of the same year, the market had recovered everything in the full year return for the S&P 500, plus 18.4%, Brian.
Brian: Yeah, I want to go back to 2022 for a second, because I think that was a fascinating year. Don't get me wrong, it was a pain. I don't want to go through it again. It wasn't any fun. But having done this for close to 30 years, you know, stuff happens, we move on.
I just had a meeting yesterday with some young people who are friends of one of my favorite clients. We can't do anything directly for them because they're just getting started. But we focused for about an hour on just what is market history. How do I do this? Why does my 401(k) move up and down, and all this stuff? And I have a chart that I use for people to help them understand the overall market history. And we all know nothing makes for better radio than describing a chart, so that's what I'm going to do right now.
Anyway, this is what it does. I have a chart that was made by Andy Stout, our chief investment officer, and it basically just lays out every year going back to 1938, how bad was it to how good was it. The five worst market years since 1938 were 2008, 1937, 1974, 2002, and, believe it or not, 2022. Four of those, I can shout out a year, and people will instantly remember, "Oh, that's when such and such happened."
2002 "Well, that must have been a reaction to 9/11." Yes, it was. And there were some other things too, tech bubble burst, and so forth.
1974 "Oh, we had just impeached the president. We had a lot of social unrest. There was stagflation."
1937 "Obviously was the Great Depression."
2008 "That was the Great Recession. That was the financial crisis."
People who are not financial professionals can recognize those years and remember historically what happened.
But when I say 2022, people go, "Oh, the market sucked that year? Really? What happened?" And there was no catalyst. It was really just the unwinding of things. There is an event. It doesn't have a name like the other four, but it was one of the five worst market years.
So if you think about it, the last five years, Bob, have been a perfect sort of a micro environment of what the market does, the best and the worst. 2022 is one of the worst years we've ever had. '23 and '24 were among the best. So if you survived those without panicking, then you kind of get it. Historically speaking, we saw all of it in the last five years. Just buckle up and be ready for it. And if you get used to that, you won't need to panic when we see these moves.
Bob: Yeah. I think the point you're making here, and I put that same chart in front of clients when I talk to folks who are nervous and want to pull out, and I don't know about you, but I've had, you know, every year, I've got two or three clients and they're different ones, depending on who's in the White House and what their biases are.
They come in and say, "Hey, why don't we just sit things out for a while and think until things calm down?" And you put that same chart that you just referenced in front of them and say, "All right, go back to 1938. You look at that chart and put your finger on the day when the coast looks clear, when everything's safe, nothing could possibly go wrong in the world. Put your finger on that chart and tell me when it's time to get back in." And obviously, the response is kind of deer in the headlights, "I don't know."
And that's kind of the whole point. Nobody knows. But lo and behold, you look up and the market keeps averaging 9%, 10% a year, and you've got to stay invested, but stay invested with a plan.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, let's pivot now to what smart investors did during these historical periods of volatility and what should folks be doing right now in terms of responsible financial planning and asset allocation.
Brian: Well, smart investor, if they were already in the right position before whatever the event was happened, they stayed diversified. Most of these indexes, the major indexes in the U.S., they quickly shrug off these conflicts. Stuff happens. And you write about the headlines.
Here's another fun trick you can do. Go to Google and type in, show me the headlines from March 9th of 2009. That was the bottom of the 2008 financial crisis. The market hit bottom on March 9th, 2009. If you look at a chart, that's the bottom point of the downturn that you'll see. The market turned, and by the summer, we had back a good chunk of what had been lost. But if you look at the headlines from March 9th and even in the days, weeks, and then the months following, nothing was positive. The market tries to anticipate, and it's usually wrong, but eventually, it's right. That's why we have the bouncing up and down. But the headlines didn't turn positive, and then the market went up. The market anticipated that the headlines were going to improve at some point in the future, and it anticipated and bounced back up.
So if you are a long-term investor and you have structured your financial plan the right way, then none of these swings should really cause you to change your approach. At the end of the day, the stock market is full of companies that are simply trying to make more money than they spend. They're trying to make a profit, and they will find creative ways to do it again and again and again. There are centuries worth of history that prove this is the case.
Bob: And another good point, I think, that's worth calling out here, trying to time the market during periods of either real or perceived volatility is one of the costliest mistakes an investor can make. And I'll just cite some data from our very own chief investment officer here at Allworth, Andy Stout. He said, "Just missing the 10 best days over the last 20 years, assuming you're taking a $1 million position in just the S&P 500, if you missed the 10 best market days over a 20-year period of time, you missed out on $3 million of lost earnings." That's a ton of money, Brian, just by trying to get cute and time the market.
Brian: Over that 20 years, that's 7,300 days, and Andy is highlighting 10 of them. That's how risky it is to try to time the market. If you missed those great days, and we've had some of those types of days here very recently, as the market has kind of recovered from things, that's the way it always worked.
Most of the time, the market just wanders up and down. It goes up a little bit, down a little bit, day after day after day. But eventually, we'll have a huge spike. And if you were waiting for the bus or sitting on the sidelines, not participating in it, then yeah, you missed out.
And at some point, we have to learn from this history and just move on. It's not about trying to tap dance through it and avoid all the risk. It's about being able to be flexible and making sure your financial plan allows you to take that risk in the first place. And we do that by making sure that the money we need in the short term, right, I'm going to buy a house, therefore I need a down payment. Or we know sometime this year we're going to put $100,000 into improving, adding a room, or I don't know, improving the kitchen, bathroom, whatever. That money shouldn't be exposed because we know we're going to expend it. So if you are in that situation right now, I'm telling you, the market is basically back at an all-time high, close enough. Go ahead and pull those dollars out if you know that you're going to be spending them.
Bob: Yeah, just one more point on market timing. And Brian, I just took a look at this earlier this morning. I looked at the price of oil, and you cited some of this historical data with some of the geopolitical events that have happened and the potential oil shocks. Believe it or not, over the last week, the price of oil is down 12.5%. So, for those who want to load up on defense stocks, thinking we're going to buy more bombs here over the next 30 days, or get cute by piling into oil, you can get whipsawed around pretty darn quickly if you try to get cute here with market timing.
Here's the Allworth advice. If your financial plan is solid, the best move during geopolitical chaos is usually nothing at all.
Coming up next, Americans are moving billions of dollars into a single retirement vehicle. Find out why and find out whether you should join the crowd. 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 can't listen to "Simply Money" every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcasts. Straight ahead at 6:43, we are opening the inbox and answering your questions, the real actual questions that real families are asking right now about retirement, taxes, investing, and more.
All right, Brian, annuity sales just crossed the $100 billion mark again in the first quarter of 2025, this time north of $105 billion, keeping the streak alive for a sixth consecutive quarter. It's a sign that investors are hungry for income guarantees and protection amid economic uncertainty. But are annuities the right move for your family or just the trendy thing to buy? Lot to talk about here, Brian, what say you?
Brian: Well, Bob, I'm not a huge fan of annuities. I don't think they're all evil. They are a tool, just like anything else. If I have a hammer, I can build a birdhouse, or I can hit myself in the head with it. It just depends on what I'm trying to do. What am I trying to get done with this tool that I'm holding in my hand?
So annuities, I think, in the right situation, where we have got to have guaranteed income, or perhaps there's somebody we're trying to support who maybe can't make their own decisions or something like that, just needs some predictability. I think, though, of this $100 billion. Granted...let's bear in mind the time frame we're in here. We're talking about the first quarter of 2025, which was one of the more volatile, scary quarters when it came to headlines and just a reordering of the world order kind of thing. That's scary stuff.
So I'm going to go ahead and guess that this $100 billion is not people being fiduciaries for the disabled or anything like that. It's people convincing themselves that they have got to have some kind of guarantee. And first of all, honestly, that these guarantees exist in the first place.
I think people buy these things sometimes because we want to convince ourselves that it says the word guarantee on it. That way, that means if the entire economy collapses and we're living in caves, I'll still have this annuity insurance company paying me money. So we sort of plan for these extremes, and I don't even know how likely they are, but anyway.
So the kind of annuities that people are looking into are called registered index-linked annuities. They're up 20% to 21% in terms of sales, to about $17.4 billion. And that's new people who never owned one before, people who want downside cushioning.
And a lot of these annuities, of course, have different riders and things that they'll tack on. There are income riders out there, Bob. You know, you see them all the time, too. Income riders out there that will promise to pay you, you know, 6% guaranteed or something like that, from the day that you start pulling money out until you die.
But there are caps to how much you can pull out, and they limit what you can invest in. I would love, Bob, for somebody to tell me, has one of these income riders ever paid off in terms of the...you have to spend your own money first, right? Your own money has to go to zero. Then the insurance company picks up. I don't think that has ever happened in history, where an annuity has actually paid from the insurance company's pocket rather than the client's.
Bob: Yeah. I've got thoughts on this. And, you know, I started off in this industry back in 1991 with an insurance-based broker-dealer. So, you know, needless to say, we were incentivized, we were paid well to sell insurance and annuity products. And a lot of times, these people out there, I'll just say most of the time, annuities are sold rather than bought. Meaning, somebody is getting paid very well to convince someone and point out all the benefits of buying one of these things. And, you know, that's why I'm doing what I'm doing now, being an actual fiduciary advisor.
Here's what I mean. A lot of times, these caps, I mean, when you look at what the insurance companies can do, and by caps, I mean, there's a participation rate on these products. If we're talking about indices, they'll give you a percentage. Here's the percentage of the S&P upside you can participate in, but there's a cap, a percentage of that cap.
And what a lot of times does not get disclosed or explained in a manner that somebody can understand it is the insurance company reserves the right to move that cap based on the experience that they've got and what the market does. And by the time you start letting the insurance company monkey around with these cap rates, all in return for paying a high fee to get some type of protection on the downside, you might as well, at the end of the day, have just bought a Treasury bond or regular old bond fund, with about 25% of the fees and a lot more flexibility, Brian.
That's the concern I've got with these things, among others. Do you ever run into similar situations with your clients?
Brian: Oh, absolutely. And people will see these things, and they look attractive. I understand the attraction. It looks like it's going to make things predictable. We spend all of our lives trying to make the financial markets make A plus B equals C, make it predictable, like other things. We just want control over it. It's something that we simply can't control.
But that's why we're attracted to these things that purport to have guarantees. People will come in with a phone book, that is, the prospectus of this annuity that they're looking at. And there's a reason that that phone book is so thick, because of all the things you just mentioned.
So yes, the insurance companies can move those cap rates around. And by the way, what that means, if it kind of flew by too fast, for example, if the S&P 500 goes up 10%, you might have a cap rate of 70% of the upside. That means you're only going to get 7% of that 10% gain. So that's obviously how...the insurance company is going to keep the difference. That's one of the ways that they make money. Rest assured, the insurance company is going to be concerned about their profit margin first, the clients and policy owners come second. That's absolutely how this is going to work.
Obviously, every business in the United States wants to make a profit. There's nothing wrong with that. That's how it works. Some of it is regulatory-driven. They must maintain, if they're going to have all these guarantees. The government does regulate how they can do it, how they can calculate it. So they do have to have a certain profit margin. They can't put themselves at risk because that can put everybody systemically at risk when it's a big insurance company. So it's not as simple as just saying, "Hey, they're greedy." There are more moving parts to that.
But some of the other things you'll run into with these things is a surrender period. You might be sitting in a scary period right now. Like these people who just did this in the first quarter of this year because the market and the world looked kind of scary, well, they just signed them up for 7- to 10-year surrender periods.
Not always. There's some out there that don't have these. But a lot of the ones that are being sold, especially the ones that pay fat commissions to the "advisor," those are the ones that are going to tie that money up for a decade, sometimes even more.
And we are going to go through so many ups and downs, Bob, over a decade. That guarantee is going to feel good, and then, eventually, it's going to feel like an anchor, because you see the market is doing great, and your annuity is underperforming. And that's because of that cap rate, all in exchange for a relatively brief period of chaos, which the world sees from time to time.
Bob: Yeah. And as you talk about the surrender periods and lockups, I can't help but go back to an example that I saw earlier this year with one of our colleagues and her client in the office, where somebody had taken this woman, who just retired from the city of Cincinnati, worked her whole life. She's 70-something years old and was ready to retire.
They took 80% of this lady's retirement plan and put it into one of these annuities loaded with surrender charges. All this woman wanted to do was spend $10,000 to $15,000 to remodel her kitchen. And she couldn't get to her own money without paying a 10% to 12% surrender charge. It was ridiculous. And I would say financial malpractice.
All right. Here's the Allworth advice. Just because everyone else seems like they're buying annuities, it doesn't mean that you should. Choose investments built for your goals, not for a salesman's pocketbook or commission.
Coming up next, should you be using AI to help you buy stuff online? Our cybersecurity expert is in to discuss this 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 Sponseler, along with Brian James, joined today by our tech, and AI, and cybersecurity guru, Mr. Dave Hatter. Dave, I can't wait to get your thoughts on this topic.
We came across an article recently where these AI tools, now you can tell them, for example, "Go out and find me the best pair of gym shoes for under $100. Find the best quality pair of gym shoes, find it, buy it, ship it to us, put it on my Visa card."
Dave, I'll tell you right now, there's no way in hell I'm going to let some computer do that for me. What say you, and what could possibly go wrong with this kind of "new and exciting technology" out there?
Dave: Well, guys, as always, thanks for having me on. And I'm glad you guys came up with this as a topic to discuss because it touches on a couple of things.
There's this whole sort of new-ish field in AI called agentic AI or AI agentics. You'll hear people say it both ways. And this goes beyond things like ChatGPT or Grok or other chatbot-type systems, where you sit down and type in a prompt. The idea of agentic AI is it essentially can act like a human being and take action on tasks. It has agency, hence the name agentic. And this is sort of all the rage in the business now.
When you hear people talk about how AI is going to put people out of work and so forth, and when they're not talking about super intelligence and artificial general intelligence, they're generally talking about agentic AI. That these things are going to be set up, and this AI will talk to that AI, and it'll do all of this stuff and work, and we won't need people anymore.
Now, will we get there eventually? Maybe. I'm calling BS on it at the moment.
And to answer your question specifically, Bob, no. There is absolutely not a chance in hell I would give any sort of AI agent access to my bank accounts or any financial system and then let it act on my behalf, and I'll tell you why. So, guys, I spent 25 years in this business before I sort of transitioned into cybersecurity as a software engineer. I wrote millions of lines of code, built every kind of thing you could imagine.
And how many times do you think I created a bug in software, and there were unintended consequences? The answer is a lot. I don't know how many.
How many times do you think I did that on purpose? Well, the answer is never. But I'm a human being. I make mistakes.
And one of the key problems with AI to date is you have this idea of hallucinations or confabulations, where they just make things up. So the idea that I'm going to trust some AI, that's a black box, I can't know what it does or why it does it, to control my money and take actions on my behalf that involve my finances? As far as I'm concerned, completely insane, and there is no chance I would do that.
Bob: Kind of like asking Brian how many times he's taken a client's money and put it in the stock market and implied that there's no way you could lose money, and then the stock market goes down 8%. Is that kind of what you're talking about?
Dave: Well, I don't know if I'd put Brian on the spot like that, but yeah.
Brian: Be right back. I've got to cancel a lot of calls here.
Dave: I'm not saying there may not come a time in the future where I might trust something like this, although I'm super skeptical. And again, it's been 25 years writing software, right? Now, not AI software, but writing software. And in many cases, despite extensive testing, there were still things that didn't work quite right. Just missed something over here, or someone used the software in a way I did not anticipate, and thus, it didn't do what I expected, and something bad happened. So the idea that I'm going to have a black box where I can't really know how it works and it has known faults, right?
So, from this article, it came from MarketWatch, I encourage people, they should go read this for themselves if they're thinking this is a good idea. They do a really good job of touching on many of the problems I would see with something like this, but I just want to read this to you.
"The tendency for AI to make seemingly confident but potentially wrong assumptions is getting worse. And this is the idea of hallucination or confabulation, that they just make things up. Recent analysis by the New York Times reveals a troubling paradox. The most advanced AI systems are becoming more convincing, yet are still more prone to hallucination. Open AI's newest 'reasoning models' invent facts 51% to 79% of the time compared with 44% for older versions, while Google engineers report that reducing hallucination is now the 'fundamental blocker' to wider AI deployment."
So when you know this going into it, and you know that often, this is all well-documented, guys, it will not only hallucinate, but then work hard to convince you what it's telling you, which is patently false, is correct. That is a problem.
Not to mention the privacy issues of this, the issues with these things being hacked, the idea that if a hacker could somehow get into your account, whether they hack the back end of the agentic AI or they just take over your account, that suddenly you could have an avalanche of spending.
You know, are these things really making the best decisions on your behalf? Or are there bias in the models, where they're actually picking more expensive things rather than buying the thing that would be the best fit for you? Hard to say. Those are all risks.
And again, guys, I'm just telling you. Now, everyone that knows me knows I'm the tinfoil hat guy. I'm always the doom guy, because I know how this stuff works to a large extent. I've been doing this for a long time.
Again, at some point in the future, would there come a time where I might trust something like this? Maybe. But we are still barely in the infancy of this. And there is absolutely zero chance I would let any sort of AI agent act on my behalf with anything financial.
Brian: So, first thing I want to say is, I do use AI. I use ChatGPT. We use Copilot sometimes. It really is a wonderful tool for... like Google on steroids. If I'm trying to put a puzzle together for somebody or answer questions about how something works, whatever, it is a fantastic tool for that. However, can you imagine choosing a surgeon or some kind of medical advisor whose stated goal in the short term is to reduce the hallucinations? That really seems like not the greatest idea.
But I want to take this in a slightly different direction. So, Dave, you've expressed your concerns from the technological standpoint. That makes a heck of a lot of sense. We appreciate you're on this side with us to help us understand that part.
My brain goes to the regulatory stuff. So I am not permitted to send out an email to all of my clients without having it being reviewed by a lot of compliance departments and legal people, who help us protect ourselves and our clients and so forth. There are good processes in place for that.
I have to get continuing education to keep up on my Certified Financial Planner degree and all these other things. Some people are licensed, and there are lots of requirements there.
At some point, one regulatory body, and there are many of them, the SEC or FINRA or whoever, is going to have to say, "Hey, wait a minute. These robots are providing advice, and people are apparently listening to it. We probably got to have eyeballs on that."
And then they're going to look under the hood to figure out what is the motivation. So I'm looking at this part of this article that refers to sponsored results, meaning, what stops somebody from throwing a language model out there that will gear somebody towards certain products? That's illegal for a fiduciary advisor to do. But what stops a computer?
The regulators are going to have to step in on this. Have you heard anything on the regulatory side of that kind of thing?
Dave: Not specifically, but I'll answer that in a second. You brought up a really good point. I use this stuff myself. I prefer Grok in general. Copilot's built into the Microsoft platform. And I would tell folks, from a chatbot perspective, again, forget these automated agents, if you understand the risks of your data being exposed through the model to someone else, of getting false answers and things like that, they can be like rocket fuel for you from a productivity standpoint.
So I'm not suggesting to people there's no value in this or that they should avoid AI in general. In fact, I encourage everyone, check it out for themselves so that you'll have a better understanding of where this stuff is at.
But this agentic AI, again, this black box thing that's going to act on your behalf. And then to your point, Brian, about the fiduciary angle of this. Yeah, I mean, this whole agentic thing is still new. I've not heard any sort of rumblings about the fiduciary aspect and regulation around the financial interface of this. I mean, for the most part, all this stuff is still the Wild Wild West. We're kind of in a race with other adversarial nations, like China, to try to be first on some of this stuff, so that it doesn't become a strategic advantage and potentially a military advantage.
But there's really almost no regulation around any of this. And I think you make a really good point. The whole idea in that article, they call it sponsored results risk. Yeah, again, these things are a black box.
And even if you didn't have algorithmic bias in the agent, there might be bias in the training data or someone behind the scenes, because it would be very difficult to figure out. I mean, that's one of the risks they point out, and I think a legitimate one. And another reason why I would never use anything like this in the near future.
Bob: As always, from our tech expert, Dave Hatter, thanks as always for joining us. 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.
Do 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. Speaking of questions, we've got one from Rich in Westchester.
Rich: Should we adjust our international holdings given a geopolitical tension in the Middle East?
Brian: Yeah, great. And very common question, Rich. Thanks for hitting that red button with it. Yeah, so most portfolios, unless you proactively made a decision to weight it heavily in the Middle East, then there's probably not a lot of exposure there. Because we all know what comes out of the Middle East, obviously, the largest oil producers on the face of the earth. But it's not like there are major technology companies, or consumer goods companies, or anything like that.
So, by default, if you have a standard diversified portfolio, there's probably not a lot of exposure there. Where you do get your exposure is in companies that you might happen to own via the indexes, the large oil companies here in the United States. They themselves know how to deal with oil price fluctuations and craziness.
So, I mean, I think the quick answer is, unless you consciously made a decision to invest there, you probably aren't as exposed as you might think. But let's start with figuring out what that looks like in the first place. Look under the hood of your portfolio and see if it looks out of balance in any case. And if you need help with that, that's what a professional advisor can help you do.
Bob: So let's move on to David, who has a question out of Mason.
David: Would bunching donations this year provide a bigger tax bank for our buck if itemizing disappears or becomes less valuable later?
Brian: Well, David, I like the way you're thinking here. And the answer is possibly. And this is where you need to look at what your deductions are, what your plans are from a tax standpoint. And yet, we see that happen a lot of times with our clients with this higher standard deduction, especially for married couples. So sometimes, yes, if you've got charitable giving that you want to do, and you want to bunch those, this is a great opportunity to use something like a donor-advised fund, where you can bunch some donations into one year, get the tax deduction, avoid the capital gains on appreciated stocks and mutual fund positions, and kind of warehouse those donations and get the tax benefits now. And then you can dole them out to chosen charities over a period of time. It's a great strategy where it makes sense, you know, for a given client situation. So again, I like the way you're thinking here. Have someone sit down with you and figure out whether it makes sense for you in your situation.
Bob: All right, Candy in Fort Wright has another question about taxes.
Candy: Is there a way to lower taxes without just giving everything to charity?
Brian: Candy, first off, I want to thank you for being in Fort Wright and defending us from the Mongol hordes that occasionally invade from Florence, Kentucky, along with Fort Mitchell and Fort Thomas. Love those forts down there.
Yeah, lowering taxes without just giving everything to charity really depends on your situation. The way things changed was due to the Tax Cuts and Jobs Act of 2017. For a lot of people, we didn't really lose a deduction. The standard deduction went up.
With standard deduction, it simply means you don't have to do anything, and you're going to get a bigger deduction. So we didn't really, again, lose a deduction for donating it to charity the way you might be perceiving. It just means that you've got to give a lot more to go over and above the deduction that you're getting handed from the IRS anyway. So, not a ton for the average individual to do, other than, you know, make sure you're maxing out. If deductions are important, you make sure you're maxing out your pre-tax 401(k). You may be able to do a traditional IRA on top of that. There are income limitations there.
And also, there's another question of is pre-tax the right option for you? It could be Roth as well. So it's not always about reducing your taxes now. It could be about reducing taxes in the future.
So yeah, there are a few ways, but what you're running into is the fact that the standard deduction went up a good chunk. So that just makes the hurdle a little bit higher to get to deductible types of contributions.
Bob: Let's move on to the fantastically named Brian, who lives downtown.
Brian: Do we need umbrella insurance if we have $2 million saved?
Brian: Brian, yes, you do. And I'd say the more money you have saved, the more you need umbrella insurance. And here's why. The whole reason primarily for umbrella insurance is to make sure you're protected if you get sued. And the good news, if you bundle your home and auto insurance, and this is a good time to talk to your property and casualty insurance agent about this, remarkably, this umbrella insurance is not terribly expensive. I mean, just for $300, $400 extra per year per million dollars of umbrella coverage, you can add a nice umbrella policy to your situation and protect yourself over and above what liability coverage you have inherent, you know, already embedded in your auto policy. So yes, umbrella insurance is something you want to have the more money you have saved, just to protect what you've worked so hard to build.
Bob: All right, we've got one final question from Ed and Sandra in Hyde Park.
Ed: We both have long-term care policies from years ago. Should we keep them?
Brian: So this is sometimes one of my favorite things to talk to clients about. People who bought long-term care policies a long time ago, obviously, the risk is still there, just like with any insurance. If the risk is there, you might need insurance. Risk for long-term care is there until we're in the ground. So we know that's there. I would say if the premiums are not really impacting your cash flow, then those can be really valuable things to have because sometimes, they were locked in in terms of the benefits they provide, and it might be the cheapest coverage you're ever going to get. So I would look long and hard at that before you let it go.
In addition, what I would throw in there is you may have a traditional life insurance policy that has cash value. A lot of times we make it to the, you know, the kids are up and out, the mortgage is paid off, we don't really need it anymore. If you've got a cash value life insurance policy, that can be converted without paying any taxes, without really moving anything around at all, at least the way it will feel, to something that will pay long-term care instead of a death benefit or in addition to a death benefit. That can be a good thing to look at. But look closely at those old policies. They may be the best thing going before you let it go.
Bob: Coming up next, I've got my two cents, and I guess it's going to be a mini rant, an additional rant about these variable annuities. 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.
All right, Brian, we ran out of time in our prior segment on annuities to cover this topic, but I think it's an important one, so I want to spend a couple of minutes on it here. It's just the flexibility you give up from a tax planning standpoint by having too much of your money tied up in these variable annuities. And here's what I mean. I don't care what kind of riders, what kind of protection, what bells and whistles you've got on these things, the thing to remember about any kind of annuity is any gain you've gotten in this thing is always, always, always, always going to be taxed at ordinary income rates. And that takes away a ton of flexibility.
And that's why I'd say the more, the higher net worth you are and the higher your asset base is, the more you should really think twice about getting involved with these things. Because when you look at all the other opportunities available to us outside the annuity world, you know, things like tax-free municipal bonds, or separating qualified dividends from ordinary dividends, or tax-loss harvesting within a well-diversified stock portfolio, there's a lot of things we can do on the tax side of things that you completely forfeit and give away when you suck too much money into one of these variable annuities.
Brian: Yeah, Bob, one of the scary things that I see, when people are most disappointed, is when I explain to them, "Yeah, this annuity you bought 15, 20 years ago, it has grown an awful lot. But this was non-qualified money, meaning not an IRA, not a 401(k), just plain old "taxable money." And there is no step-up in cost basis.
So, you invested in something, in these cases, where you were investing in the growth of the market. There are index funds available inside of annuities. They can be very similar to the stuff you'd invest in outside of an annuity. Outside of an annuity, when you pass, it's as if your children, your heirs, bought those assets the day you died, in terms of price. That's the step-up in cost basis. In other words, all the gain is wiped away. They will not pay taxes.
If it's inside of an annuity, there is no such thing. They will pay income taxes when that annuity is distributed, and it's going to be a fat chunk. So a lot of times, what we do is we convert unintentionally, we convert capital gains taxable assets into ordinary income taxable assets, going from the more favorable taxation to the least, our least favorite kind of tax at all.
Bob: Well, and I'll give you an example of what I'm talking about here. I'm dealing with a couple right now. This gentleman's about to retire at the end of the month. And we've done all the planning. We've set aside this three-month buffer, you know, using assets in a variable annuity contract with which to protect us from downside risk.
But he's got to pay taxes on pulling this money out to convert this to cash flow next year. And we've got to do some careful planning here to make sure he doesn't jump tax brackets during the rest of this year and next year. And that could have all been avoided if he had never been in this darn annuity in the first place.
Thanks for listening. Tune in tomorrow, and we're going to talk about a big change that could cost some retirement savers a key tax break. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
Brian: Bob, I think this is so important for people to understand. Market history and ups and downs are really... That's up there with having an emergency fund in terms of getting started with your financial plan. People will wander around for 10, 15 years trying to figure out how to protect themselves from the ups and downs of the market. And it really just doesn't matter as long as you understand the history. The way to get around this is to know how the market reacts to certain things and understand the whole cycle. So yeah, let's go through some details.
In 2023, Hamas attacked Israel, right? It was sort of similar to what's going on, except in the opposite. So after this happened, the markets, of course, dipped. Energy spiked. That always happens whenever something happens in the Middle East, oil goes up because the assumption is that the oil supply is going to be cut off for at least some time period, and everybody's going to be in a snip for a while.
By the end of that year, though, the S&P 500 was up 24%. And that's not only because that conflict at that time was resolved. There is other stuff that happens in the world. That's when AI, artificial intelligence, became the buzzword, and that drove that rally.
But the point is the world keeps revolving even though there are conflicts out there. So even in a war, markets will still move forward. And you can even look at World War II for that, right? Most of the years of World War II, the stock markets were positive. The whole stretch was stressful, of course. We don't ever want to go through that again. But it's not like the market goes to zero. Everybody stops doing business until the war is over. That does not happen.
It ends up being a catalyst. General Motors and all these companies, we all remember these stories, all switched to wartime footing, where they started producing tanks, and we started pulling in rubber to send to the military, and all that kind of stuff. Those are still businesses doing what they do. They just change what their approach is. So we need to separate our concerns with what's going on in the world with the overall concerns about our finances.
Bob: Well, let's look back at 2022. I mean, that was a rough year for a whole bunch of reasons. The Fed raised interest rates seven times, as we all remember. But that was also the year Russia invaded Ukraine. Very similar situation to what you just talked about, you know, tanks rolled into Ukraine, oil prices shoot up, global supply chain takes a hit. And the NASDAQ actually entered bear market territory.
But for investors who stayed disciplined, they saw major rebounds. From October of 2022 through July of 2023, the S&P 500 gained 26%. But if you panicked in early of 2022 and sat out and said, "Well, I'm going to just sit this one out and wait until the world seems more settled," you missed it. You missed that nice rally.
And then 2020, we all remember the COVID-19 pandemic, the fastest bear market in history. The S&P 500 dropped 34% in 33 days. That was real fear. But here's the twist. By August of the same year, the market had recovered everything in the full year return for the S&P 500, plus 18.4%, Brian.
Brian: Yeah, I want to go back to 2022 for a second, because I think that was a fascinating year. Don't get me wrong, it was a pain. I don't want to go through it again. It wasn't any fun. But having done this for close to 30 years, you know, stuff happens, we move on.
I just had a meeting yesterday with some young people who are friends of one of my favorite clients. We can't do anything directly for them because they're just getting started. But we focused for about an hour on just what is market history. How do I do this? Why does my 401(k) move up and down, and all this stuff? And I have a chart that I use for people to help them understand the overall market history. And we all know nothing makes for better radio than describing a chart, so that's what I'm going to do right now.
Anyway, this is what it does. I have a chart that was made by Andy Stout, our chief investment officer, and it basically just lays out every year going back to 1938, how bad was it to how good was it. The five worst market years since 1938 were 2008, 1937, 1974, 2002, and, believe it or not, 2022. Four of those, I can shout out a year, and people will instantly remember, "Oh, that's when such and such happened."
2002 "Well, that must have been a reaction to 9/11." Yes, it was. And there were some other things too, tech bubble burst, and so forth.
1974 "Oh, we had just impeached the president. We had a lot of social unrest. There was stagflation."
1937 "Obviously was the Great Depression."
2008 "That was the Great Recession. That was the financial crisis."
People who are not financial professionals can recognize those years and remember historically what happened.
But when I say 2022, people go, "Oh, the market sucked that year? Really? What happened?" And there was no catalyst. It was really just the unwinding of things. There is an event. It doesn't have a name like the other four, but it was one of the five worst market years.
So if you think about it, the last five years, Bob, have been a perfect sort of a micro environment of what the market does, the best and the worst. 2022 is one of the worst years we've ever had. '23 and '24 were among the best. So if you survived those without panicking, then you kind of get it. Historically speaking, we saw all of it in the last five years. Just buckle up and be ready for it. And if you get used to that, you won't need to panic when we see these moves.
Bob: Yeah. I think the point you're making here, and I put that same chart in front of clients when I talk to folks who are nervous and want to pull out, and I don't know about you, but I've had, you know, every year, I've got two or three clients and they're different ones, depending on who's in the White House and what their biases are.
They come in and say, "Hey, why don't we just sit things out for a while and think until things calm down?" And you put that same chart that you just referenced in front of them and say, "All right, go back to 1938. You look at that chart and put your finger on the day when the coast looks clear, when everything's safe, nothing could possibly go wrong in the world. Put your finger on that chart and tell me when it's time to get back in." And obviously, the response is kind of deer in the headlights, "I don't know."
And that's kind of the whole point. Nobody knows. But lo and behold, you look up and the market keeps averaging 9%, 10% a year, and you've got to stay invested, but stay invested with a plan.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, let's pivot now to what smart investors did during these historical periods of volatility and what should folks be doing right now in terms of responsible financial planning and asset allocation.
Brian: Well, smart investor, if they were already in the right position before whatever the event was happened, they stayed diversified. Most of these indexes, the major indexes in the U.S., they quickly shrug off these conflicts. Stuff happens. And you write about the headlines.
Here's another fun trick you can do. Go to Google and type in, show me the headlines from March 9th of 2009. That was the bottom of the 2008 financial crisis. The market hit bottom on March 9th, 2009. If you look at a chart, that's the bottom point of the downturn that you'll see. The market turned, and by the summer, we had back a good chunk of what had been lost. But if you look at the headlines from March 9th and even in the days, weeks, and then the months following, nothing was positive. The market tries to anticipate, and it's usually wrong, but eventually, it's right. That's why we have the bouncing up and down. But the headlines didn't turn positive, and then the market went up. The market anticipated that the headlines were going to improve at some point in the future, and it anticipated and bounced back up.
So if you are a long-term investor and you have structured your financial plan the right way, then none of these swings should really cause you to change your approach. At the end of the day, the stock market is full of companies that are simply trying to make more money than they spend. They're trying to make a profit, and they will find creative ways to do it again and again and again. There are centuries worth of history that prove this is the case.
Bob: And another good point, I think, that's worth calling out here, trying to time the market during periods of either real or perceived volatility is one of the costliest mistakes an investor can make. And I'll just cite some data from our very own chief investment officer here at Allworth, Andy Stout. He said, "Just missing the 10 best days over the last 20 years, assuming you're taking a $1 million position in just the S&P 500, if you missed the 10 best market days over a 20-year period of time, you missed out on $3 million of lost earnings." That's a ton of money, Brian, just by trying to get cute and time the market.
Brian: Over that 20 years, that's 7,300 days, and Andy is highlighting 10 of them. That's how risky it is to try to time the market. If you missed those great days, and we've had some of those types of days here very recently, as the market has kind of recovered from things, that's the way it always worked.
Most of the time, the market just wanders up and down. It goes up a little bit, down a little bit, day after day after day. But eventually, we'll have a huge spike. And if you were waiting for the bus or sitting on the sidelines, not participating in it, then yeah, you missed out.
And at some point, we have to learn from this history and just move on. It's not about trying to tap dance through it and avoid all the risk. It's about being able to be flexible and making sure your financial plan allows you to take that risk in the first place. And we do that by making sure that the money we need in the short term, right, I'm going to buy a house, therefore I need a down payment. Or we know sometime this year we're going to put $100,000 into improving, adding a room, or I don't know, improving the kitchen, bathroom, whatever. That money shouldn't be exposed because we know we're going to expend it. So if you are in that situation right now, I'm telling you, the market is basically back at an all-time high, close enough. Go ahead and pull those dollars out if you know that you're going to be spending them.
Bob: Yeah, just one more point on market timing. And Brian, I just took a look at this earlier this morning. I looked at the price of oil, and you cited some of this historical data with some of the geopolitical events that have happened and the potential oil shocks. Believe it or not, over the last week, the price of oil is down 12.5%. So, for those who want to load up on defense stocks, thinking we're going to buy more bombs here over the next 30 days, or get cute by piling into oil, you can get whipsawed around pretty darn quickly if you try to get cute here with market timing.
Here's the Allworth advice. If your financial plan is solid, the best move during geopolitical chaos is usually nothing at all.
Coming up next, Americans are moving billions of dollars into a single retirement vehicle. Find out why and find out whether you should join the crowd. 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 can't listen to "Simply Money" every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcasts. Straight ahead at 6:43, we are opening the inbox and answering your questions, the real actual questions that real families are asking right now about retirement, taxes, investing, and more.
All right, Brian, annuity sales just crossed the $100 billion mark again in the first quarter of 2025, this time north of $105 billion, keeping the streak alive for a sixth consecutive quarter. It's a sign that investors are hungry for income guarantees and protection amid economic uncertainty. But are annuities the right move for your family or just the trendy thing to buy? Lot to talk about here, Brian, what say you?
Brian: Well, Bob, I'm not a huge fan of annuities. I don't think they're all evil. They are a tool, just like anything else. If I have a hammer, I can build a birdhouse, or I can hit myself in the head with it. It just depends on what I'm trying to do. What am I trying to get done with this tool that I'm holding in my hand?
So annuities, I think, in the right situation, where we have got to have guaranteed income, or perhaps there's somebody we're trying to support who maybe can't make their own decisions or something like that, just needs some predictability. I think, though, of this $100 billion. Granted...let's bear in mind the time frame we're in here. We're talking about the first quarter of 2025, which was one of the more volatile, scary quarters when it came to headlines and just a reordering of the world order kind of thing. That's scary stuff.
So I'm going to go ahead and guess that this $100 billion is not people being fiduciaries for the disabled or anything like that. It's people convincing themselves that they have got to have some kind of guarantee. And first of all, honestly, that these guarantees exist in the first place.
I think people buy these things sometimes because we want to convince ourselves that it says the word guarantee on it. That way, that means if the entire economy collapses and we're living in caves, I'll still have this annuity insurance company paying me money. So we sort of plan for these extremes, and I don't even know how likely they are, but anyway.
So the kind of annuities that people are looking into are called registered index-linked annuities. They're up 20% to 21% in terms of sales, to about $17.4 billion. And that's new people who never owned one before, people who want downside cushioning.
And a lot of these annuities, of course, have different riders and things that they'll tack on. There are income riders out there, Bob. You know, you see them all the time, too. Income riders out there that will promise to pay you, you know, 6% guaranteed or something like that, from the day that you start pulling money out until you die.
But there are caps to how much you can pull out, and they limit what you can invest in. I would love, Bob, for somebody to tell me, has one of these income riders ever paid off in terms of the...you have to spend your own money first, right? Your own money has to go to zero. Then the insurance company picks up. I don't think that has ever happened in history, where an annuity has actually paid from the insurance company's pocket rather than the client's.
Bob: Yeah. I've got thoughts on this. And, you know, I started off in this industry back in 1991 with an insurance-based broker-dealer. So, you know, needless to say, we were incentivized, we were paid well to sell insurance and annuity products. And a lot of times, these people out there, I'll just say most of the time, annuities are sold rather than bought. Meaning, somebody is getting paid very well to convince someone and point out all the benefits of buying one of these things. And, you know, that's why I'm doing what I'm doing now, being an actual fiduciary advisor.
Here's what I mean. A lot of times, these caps, I mean, when you look at what the insurance companies can do, and by caps, I mean, there's a participation rate on these products. If we're talking about indices, they'll give you a percentage. Here's the percentage of the S&P upside you can participate in, but there's a cap, a percentage of that cap.
And what a lot of times does not get disclosed or explained in a manner that somebody can understand it is the insurance company reserves the right to move that cap based on the experience that they've got and what the market does. And by the time you start letting the insurance company monkey around with these cap rates, all in return for paying a high fee to get some type of protection on the downside, you might as well, at the end of the day, have just bought a Treasury bond or regular old bond fund, with about 25% of the fees and a lot more flexibility, Brian.
That's the concern I've got with these things, among others. Do you ever run into similar situations with your clients?
Brian: Oh, absolutely. And people will see these things, and they look attractive. I understand the attraction. It looks like it's going to make things predictable. We spend all of our lives trying to make the financial markets make A plus B equals C, make it predictable, like other things. We just want control over it. It's something that we simply can't control.
But that's why we're attracted to these things that purport to have guarantees. People will come in with a phone book, that is, the prospectus of this annuity that they're looking at. And there's a reason that that phone book is so thick, because of all the things you just mentioned.
So yes, the insurance companies can move those cap rates around. And by the way, what that means, if it kind of flew by too fast, for example, if the S&P 500 goes up 10%, you might have a cap rate of 70% of the upside. That means you're only going to get 7% of that 10% gain. So that's obviously how...the insurance company is going to keep the difference. That's one of the ways that they make money. Rest assured, the insurance company is going to be concerned about their profit margin first, the clients and policy owners come second. That's absolutely how this is going to work.
Obviously, every business in the United States wants to make a profit. There's nothing wrong with that. That's how it works. Some of it is regulatory-driven. They must maintain, if they're going to have all these guarantees. The government does regulate how they can do it, how they can calculate it. So they do have to have a certain profit margin. They can't put themselves at risk because that can put everybody systemically at risk when it's a big insurance company. So it's not as simple as just saying, "Hey, they're greedy." There are more moving parts to that.
But some of the other things you'll run into with these things is a surrender period. You might be sitting in a scary period right now. Like these people who just did this in the first quarter of this year because the market and the world looked kind of scary, well, they just signed them up for 7- to 10-year surrender periods.
Not always. There's some out there that don't have these. But a lot of the ones that are being sold, especially the ones that pay fat commissions to the "advisor," those are the ones that are going to tie that money up for a decade, sometimes even more.
And we are going to go through so many ups and downs, Bob, over a decade. That guarantee is going to feel good, and then, eventually, it's going to feel like an anchor, because you see the market is doing great, and your annuity is underperforming. And that's because of that cap rate, all in exchange for a relatively brief period of chaos, which the world sees from time to time.
Bob: Yeah. And as you talk about the surrender periods and lockups, I can't help but go back to an example that I saw earlier this year with one of our colleagues and her client in the office, where somebody had taken this woman, who just retired from the city of Cincinnati, worked her whole life. She's 70-something years old and was ready to retire.
They took 80% of this lady's retirement plan and put it into one of these annuities loaded with surrender charges. All this woman wanted to do was spend $10,000 to $15,000 to remodel her kitchen. And she couldn't get to her own money without paying a 10% to 12% surrender charge. It was ridiculous. And I would say financial malpractice.
All right. Here's the Allworth advice. Just because everyone else seems like they're buying annuities, it doesn't mean that you should. Choose investments built for your goals, not for a salesman's pocketbook or commission.
Coming up next, should you be using AI to help you buy stuff online? Our cybersecurity expert is in to discuss this 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 Sponseler, along with Brian James, joined today by our tech, and AI, and cybersecurity guru, Mr. Dave Hatter. Dave, I can't wait to get your thoughts on this topic.
We came across an article recently where these AI tools, now you can tell them, for example, "Go out and find me the best pair of gym shoes for under $100. Find the best quality pair of gym shoes, find it, buy it, ship it to us, put it on my Visa card."
Dave, I'll tell you right now, there's no way in hell I'm going to let some computer do that for me. What say you, and what could possibly go wrong with this kind of "new and exciting technology" out there?
Dave: Well, guys, as always, thanks for having me on. And I'm glad you guys came up with this as a topic to discuss because it touches on a couple of things.
There's this whole sort of new-ish field in AI called agentic AI or AI agentics. You'll hear people say it both ways. And this goes beyond things like ChatGPT or Grok or other chatbot-type systems, where you sit down and type in a prompt. The idea of agentic AI is it essentially can act like a human being and take action on tasks. It has agency, hence the name agentic. And this is sort of all the rage in the business now.
When you hear people talk about how AI is going to put people out of work and so forth, and when they're not talking about super intelligence and artificial general intelligence, they're generally talking about agentic AI. That these things are going to be set up, and this AI will talk to that AI, and it'll do all of this stuff and work, and we won't need people anymore.
Now, will we get there eventually? Maybe. I'm calling BS on it at the moment.
And to answer your question specifically, Bob, no. There is absolutely not a chance in hell I would give any sort of AI agent access to my bank accounts or any financial system and then let it act on my behalf, and I'll tell you why. So, guys, I spent 25 years in this business before I sort of transitioned into cybersecurity as a software engineer. I wrote millions of lines of code, built every kind of thing you could imagine.
And how many times do you think I created a bug in software, and there were unintended consequences? The answer is a lot. I don't know how many.
How many times do you think I did that on purpose? Well, the answer is never. But I'm a human being. I make mistakes.
And one of the key problems with AI to date is you have this idea of hallucinations or confabulations, where they just make things up. So the idea that I'm going to trust some AI, that's a black box, I can't know what it does or why it does it, to control my money and take actions on my behalf that involve my finances? As far as I'm concerned, completely insane, and there is no chance I would do that.
Bob: Kind of like asking Brian how many times he's taken a client's money and put it in the stock market and implied that there's no way you could lose money, and then the stock market goes down 8%. Is that kind of what you're talking about?
Dave: Well, I don't know if I'd put Brian on the spot like that, but yeah.
Brian: Be right back. I've got to cancel a lot of calls here.
Dave: I'm not saying there may not come a time in the future where I might trust something like this, although I'm super skeptical. And again, it's been 25 years writing software, right? Now, not AI software, but writing software. And in many cases, despite extensive testing, there were still things that didn't work quite right. Just missed something over here, or someone used the software in a way I did not anticipate, and thus, it didn't do what I expected, and something bad happened. So the idea that I'm going to have a black box where I can't really know how it works and it has known faults, right?
So, from this article, it came from MarketWatch, I encourage people, they should go read this for themselves if they're thinking this is a good idea. They do a really good job of touching on many of the problems I would see with something like this, but I just want to read this to you.
"The tendency for AI to make seemingly confident but potentially wrong assumptions is getting worse. And this is the idea of hallucination or confabulation, that they just make things up. Recent analysis by the New York Times reveals a troubling paradox. The most advanced AI systems are becoming more convincing, yet are still more prone to hallucination. Open AI's newest 'reasoning models' invent facts 51% to 79% of the time compared with 44% for older versions, while Google engineers report that reducing hallucination is now the 'fundamental blocker' to wider AI deployment."
So when you know this going into it, and you know that often, this is all well-documented, guys, it will not only hallucinate, but then work hard to convince you what it's telling you, which is patently false, is correct. That is a problem.
Not to mention the privacy issues of this, the issues with these things being hacked, the idea that if a hacker could somehow get into your account, whether they hack the back end of the agentic AI or they just take over your account, that suddenly you could have an avalanche of spending.
You know, are these things really making the best decisions on your behalf? Or are there bias in the models, where they're actually picking more expensive things rather than buying the thing that would be the best fit for you? Hard to say. Those are all risks.
And again, guys, I'm just telling you. Now, everyone that knows me knows I'm the tinfoil hat guy. I'm always the doom guy, because I know how this stuff works to a large extent. I've been doing this for a long time.
Again, at some point in the future, would there come a time where I might trust something like this? Maybe. But we are still barely in the infancy of this. And there is absolutely zero chance I would let any sort of AI agent act on my behalf with anything financial.
Brian: So, first thing I want to say is, I do use AI. I use ChatGPT. We use Copilot sometimes. It really is a wonderful tool for... like Google on steroids. If I'm trying to put a puzzle together for somebody or answer questions about how something works, whatever, it is a fantastic tool for that. However, can you imagine choosing a surgeon or some kind of medical advisor whose stated goal in the short term is to reduce the hallucinations? That really seems like not the greatest idea.
But I want to take this in a slightly different direction. So, Dave, you've expressed your concerns from the technological standpoint. That makes a heck of a lot of sense. We appreciate you're on this side with us to help us understand that part.
My brain goes to the regulatory stuff. So I am not permitted to send out an email to all of my clients without having it being reviewed by a lot of compliance departments and legal people, who help us protect ourselves and our clients and so forth. There are good processes in place for that.
I have to get continuing education to keep up on my Certified Financial Planner degree and all these other things. Some people are licensed, and there are lots of requirements there.
At some point, one regulatory body, and there are many of them, the SEC or FINRA or whoever, is going to have to say, "Hey, wait a minute. These robots are providing advice, and people are apparently listening to it. We probably got to have eyeballs on that."
And then they're going to look under the hood to figure out what is the motivation. So I'm looking at this part of this article that refers to sponsored results, meaning, what stops somebody from throwing a language model out there that will gear somebody towards certain products? That's illegal for a fiduciary advisor to do. But what stops a computer?
The regulators are going to have to step in on this. Have you heard anything on the regulatory side of that kind of thing?
Dave: Not specifically, but I'll answer that in a second. You brought up a really good point. I use this stuff myself. I prefer Grok in general. Copilot's built into the Microsoft platform. And I would tell folks, from a chatbot perspective, again, forget these automated agents, if you understand the risks of your data being exposed through the model to someone else, of getting false answers and things like that, they can be like rocket fuel for you from a productivity standpoint.
So I'm not suggesting to people there's no value in this or that they should avoid AI in general. In fact, I encourage everyone, check it out for themselves so that you'll have a better understanding of where this stuff is at.
But this agentic AI, again, this black box thing that's going to act on your behalf. And then to your point, Brian, about the fiduciary angle of this. Yeah, I mean, this whole agentic thing is still new. I've not heard any sort of rumblings about the fiduciary aspect and regulation around the financial interface of this. I mean, for the most part, all this stuff is still the Wild Wild West. We're kind of in a race with other adversarial nations, like China, to try to be first on some of this stuff, so that it doesn't become a strategic advantage and potentially a military advantage.
But there's really almost no regulation around any of this. And I think you make a really good point. The whole idea in that article, they call it sponsored results risk. Yeah, again, these things are a black box.
And even if you didn't have algorithmic bias in the agent, there might be bias in the training data or someone behind the scenes, because it would be very difficult to figure out. I mean, that's one of the risks they point out, and I think a legitimate one. And another reason why I would never use anything like this in the near future.
Bob: As always, from our tech expert, Dave Hatter, thanks as always for joining us. 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.
Do 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. Speaking of questions, we've got one from Rich in Westchester.
Rich: Should we adjust our international holdings given a geopolitical tension in the Middle East?
Brian: Yeah, great. And very common question, Rich. Thanks for hitting that red button with it. Yeah, so most portfolios, unless you proactively made a decision to weight it heavily in the Middle East, then there's probably not a lot of exposure there. Because we all know what comes out of the Middle East, obviously, the largest oil producers on the face of the earth. But it's not like there are major technology companies, or consumer goods companies, or anything like that.
So, by default, if you have a standard diversified portfolio, there's probably not a lot of exposure there. Where you do get your exposure is in companies that you might happen to own via the indexes, the large oil companies here in the United States. They themselves know how to deal with oil price fluctuations and craziness.
So, I mean, I think the quick answer is, unless you consciously made a decision to invest there, you probably aren't as exposed as you might think. But let's start with figuring out what that looks like in the first place. Look under the hood of your portfolio and see if it looks out of balance in any case. And if you need help with that, that's what a professional advisor can help you do.
Bob: So let's move on to David, who has a question out of Mason.
David: Would bunching donations this year provide a bigger tax bank for our buck if itemizing disappears or becomes less valuable later?
Brian: Well, David, I like the way you're thinking here. And the answer is possibly. And this is where you need to look at what your deductions are, what your plans are from a tax standpoint. And yet, we see that happen a lot of times with our clients with this higher standard deduction, especially for married couples. So sometimes, yes, if you've got charitable giving that you want to do, and you want to bunch those, this is a great opportunity to use something like a donor-advised fund, where you can bunch some donations into one year, get the tax deduction, avoid the capital gains on appreciated stocks and mutual fund positions, and kind of warehouse those donations and get the tax benefits now. And then you can dole them out to chosen charities over a period of time. It's a great strategy where it makes sense, you know, for a given client situation. So again, I like the way you're thinking here. Have someone sit down with you and figure out whether it makes sense for you in your situation.
Bob: All right, Candy in Fort Wright has another question about taxes.
Candy: Is there a way to lower taxes without just giving everything to charity?
Brian: Candy, first off, I want to thank you for being in Fort Wright and defending us from the Mongol hordes that occasionally invade from Florence, Kentucky, along with Fort Mitchell and Fort Thomas. Love those forts down there.
Yeah, lowering taxes without just giving everything to charity really depends on your situation. The way things changed was due to the Tax Cuts and Jobs Act of 2017. For a lot of people, we didn't really lose a deduction. The standard deduction went up.
With standard deduction, it simply means you don't have to do anything, and you're going to get a bigger deduction. So we didn't really, again, lose a deduction for donating it to charity the way you might be perceiving. It just means that you've got to give a lot more to go over and above the deduction that you're getting handed from the IRS anyway. So, not a ton for the average individual to do, other than, you know, make sure you're maxing out. If deductions are important, you make sure you're maxing out your pre-tax 401(k). You may be able to do a traditional IRA on top of that. There are income limitations there.
And also, there's another question of is pre-tax the right option for you? It could be Roth as well. So it's not always about reducing your taxes now. It could be about reducing taxes in the future.
So yeah, there are a few ways, but what you're running into is the fact that the standard deduction went up a good chunk. So that just makes the hurdle a little bit higher to get to deductible types of contributions.
Bob: Let's move on to the fantastically named Brian, who lives downtown.
Brian: Do we need umbrella insurance if we have $2 million saved?
Brian: Brian, yes, you do. And I'd say the more money you have saved, the more you need umbrella insurance. And here's why. The whole reason primarily for umbrella insurance is to make sure you're protected if you get sued. And the good news, if you bundle your home and auto insurance, and this is a good time to talk to your property and casualty insurance agent about this, remarkably, this umbrella insurance is not terribly expensive. I mean, just for $300, $400 extra per year per million dollars of umbrella coverage, you can add a nice umbrella policy to your situation and protect yourself over and above what liability coverage you have inherent, you know, already embedded in your auto policy. So yes, umbrella insurance is something you want to have the more money you have saved, just to protect what you've worked so hard to build.
Bob: All right, we've got one final question from Ed and Sandra in Hyde Park.
Ed: We both have long-term care policies from years ago. Should we keep them?
Brian: So this is sometimes one of my favorite things to talk to clients about. People who bought long-term care policies a long time ago, obviously, the risk is still there, just like with any insurance. If the risk is there, you might need insurance. Risk for long-term care is there until we're in the ground. So we know that's there. I would say if the premiums are not really impacting your cash flow, then those can be really valuable things to have because sometimes, they were locked in in terms of the benefits they provide, and it might be the cheapest coverage you're ever going to get. So I would look long and hard at that before you let it go.
In addition, what I would throw in there is you may have a traditional life insurance policy that has cash value. A lot of times we make it to the, you know, the kids are up and out, the mortgage is paid off, we don't really need it anymore. If you've got a cash value life insurance policy, that can be converted without paying any taxes, without really moving anything around at all, at least the way it will feel, to something that will pay long-term care instead of a death benefit or in addition to a death benefit. That can be a good thing to look at. But look closely at those old policies. They may be the best thing going before you let it go.
Bob: Coming up next, I've got my two cents, and I guess it's going to be a mini rant, an additional rant about these variable annuities. 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.
All right, Brian, we ran out of time in our prior segment on annuities to cover this topic, but I think it's an important one, so I want to spend a couple of minutes on it here. It's just the flexibility you give up from a tax planning standpoint by having too much of your money tied up in these variable annuities. And here's what I mean. I don't care what kind of riders, what kind of protection, what bells and whistles you've got on these things, the thing to remember about any kind of annuity is any gain you've gotten in this thing is always, always, always, always going to be taxed at ordinary income rates. And that takes away a ton of flexibility.
And that's why I'd say the more, the higher net worth you are and the higher your asset base is, the more you should really think twice about getting involved with these things. Because when you look at all the other opportunities available to us outside the annuity world, you know, things like tax-free municipal bonds, or separating qualified dividends from ordinary dividends, or tax-loss harvesting within a well-diversified stock portfolio, there's a lot of things we can do on the tax side of things that you completely forfeit and give away when you suck too much money into one of these variable annuities.
Brian: Yeah, Bob, one of the scary things that I see, when people are most disappointed, is when I explain to them, "Yeah, this annuity you bought 15, 20 years ago, it has grown an awful lot. But this was non-qualified money, meaning not an IRA, not a 401(k), just plain old "taxable money." And there is no step-up in cost basis.
So, you invested in something, in these cases, where you were investing in the growth of the market. There are index funds available inside of annuities. They can be very similar to the stuff you'd invest in outside of an annuity. Outside of an annuity, when you pass, it's as if your children, your heirs, bought those assets the day you died, in terms of price. That's the step-up in cost basis. In other words, all the gain is wiped away. They will not pay taxes.
If it's inside of an annuity, there is no such thing. They will pay income taxes when that annuity is distributed, and it's going to be a fat chunk. So a lot of times, what we do is we convert unintentionally, we convert capital gains taxable assets into ordinary income taxable assets, going from the more favorable taxation to the least, our least favorite kind of tax at all.
Bob: Well, and I'll give you an example of what I'm talking about here. I'm dealing with a couple right now. This gentleman's about to retire at the end of the month. And we've done all the planning. We've set aside this three-month buffer, you know, using assets in a variable annuity contract with which to protect us from downside risk.
But he's got to pay taxes on pulling this money out to convert this to cash flow next year. And we've got to do some careful planning here to make sure he doesn't jump tax brackets during the rest of this year and next year. And that could have all been avoided if he had never been in this darn annuity in the first place.
Thanks for listening. Tune in tomorrow, and we're going to talk about a big change that could cost some retirement savers a key tax break. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.