The Art of Smart Asset Allocation + Bond Investing Strategies for Today’s Market
On this week’s Best of Simply Money podcast, Bob and Brian break down the true art of asset location—why it’s not just about what you invest in, but where you hold those investments. They walk through real-life scenarios for high-net-worth investors, explaining how to use pre-tax, Roth, and taxable accounts to build smarter, tax-savvy portfolios. Then, Amazon, Alphabet, and Meta are flooding the market with corporate bonds. Why now? And what does that mean for income-focused investors? Plus, career expert Julie Bauke joins the show to unpack the “Executive Dilemma”—when to stay, when to jump, and how to evaluate your next big move. Also: tech-heavy indexes, the rise of private credit, and what to do with a lump sum after selling a rental property.
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Bob: Tonight, in terms of your money, what should go where, and how much? The real art of asset allocation. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
Well, a lot of us know the basics. Stocks go in this account, bonds in that one, but how much? Today or tonight, the strategic way investors should think about how much of each investment type goes into each kind of account for growth, for taxes, and long-term control. In other words, what each account is built to do. And it really is an art. And this is why we are so pleased to have an absolute artisan in this area, Brian James. Brian, talk us through what we're actually talking about here in terms of portfolio construction.
Brian: What we're talking about is tax treatment, right? These different types of accounts get treated differently by the IRS. There are three different types of tax treatment. There is pre-tax, which a lot of people are aware of from their 401(k)s. Everything I put in there, I don't pay taxes on the year that I got it, the year that I received that income, because I chose to do that, but I'll pay taxes on the back end. And then, of course, there's the Roth side, which is the opposite. I do not get a deduction this year, but everything that happens inside that account will grow tax-free. And then when I pull it out, provided I've met some basic limitations, some basic requirements, then it comes out tax-free. And the third part is what's known as after-tax, meaning these are the accounts that are just exposed to tax every year. They'll spit out a 1099. If you want to sell something, you'll be looking at capital gains, and that kind of thing.
So, therefore, different types of assets are better built for different types of accounts. So, traditional IRAs and 401(k)s, this is the pre-tax side. Whenever you hear the word traditional, think pre-tax. These are good for income-generating investments like bonds since ordinary income tax applies anyway. So, a creative idea I've thought of that I'm going to implement for myself is I'm going to carve out, over time, I'm going to carve out a chunk of my Roth IRA so that when I retire, my emergency fund can sit in a 4% or 5% yielding money market fund. But it's tax-free to me, so it won't really matter that that's what it is. This is versus leaving it in a high-yield savings account than paying income taxes on it, giving away a chunk of it. So, I haven't actually done that yet. Check in with me after I retire and we'll see if I follow through. But that's an idea that I had.
Then you've got your taxable brokerage accounts. This is better for tax-efficient assets like exchange traded funds, individual stocks with capital gains, and assets maybe that you're going to donate or gift. So, these are for efficient, growth-oriented-type assets that aren't going to spit out really much in capital gains at all. But if it's also an individual stock and you're sitting on that gain, well, then you don't have to pay anything on that gain until such time as you actually sell it. So, the real magic in all this is the mix. How are you going to combine all these things together? How much of your growth bucket goes on the Roth side tax-free, and how much of your fixed income should be sheltered in IRAs? And more probably, what percent of your taxable income should stay liquid or accessible in case of an emergency?
Bob: All right, and we've got three hypothetical situations to walk through tonight that illustrate the points that Brian just outlined. Let's take scenario 1, the tax-sensitive business seller, somebody that just sold a business. Let's say, his name is John. He's 62. He just sold a business. He's got a $6.5 million net worth, has $3.5 million in taxable funds, $2 million in a rollover IRA, and a million dollars sitting in a Roth. These folks are planning to retire soon, so they want to avoid spikes in taxable income.
So, here's a potential strategy. And just as a disclaimer here, there's no one size fits all strategy to this. The point of this segment tonight is just get us to think about different scenarios, apply it to your own situation, and sit down with your CPA and your advisor and talk about what actually works for you. But here's a hypothetical strategy. In the Roth, let's stick with aggressive growth stocks. Let it grow tax-free. Highest growth assets go there for obvious reasons. You pay nothing in taxes if and when that money ever comes out of the Roth IRA. In the IRA account itself, the regular IRA, well, we want mostly bonds and income-oriented assets. That slows down the aggressive growth of that account and gets those future required minimum distributions under control from a tax standpoint later.
And then in the taxable brokerage account, maybe some municipal bonds, some tax-managed ETFs, some dividend stocks, maybe a direct indexing strategy. These people are also thinking about Roth conversions. So, minimizing taxable income now is key. And oftentimes, after the first couple years after a big taxable event like a business sale, these folks do drop down into a lower tax bracket, and that's a perfect time to consider Roth conversions. Brian, walk us through another scenario.
Brian: Yeah, and real quick, I want to weigh in on just a thought there. It's not easy. This is sort of perfect scenarios. It's not necessarily easy to get to these positions. You still have to take your risk tolerance into account. So, I wouldn't say, well, we're talking 100% of your traditional IRA and bonds and income assets. That's not the point. We're simply trying to, if you're going to optimize, there are different assets that make more sense in different tax treatments, but it'll never be perfect anyway.
So, yeah, moving on to the second scenario here. Now, we've got the aggressive accumulator. This is somebody in their mid-40s. This is where we spend most of our time, most of our working careers, just growing the pile. That's really the goal. So, this fake couple's in their mid-40s. They're high earners. They've already got a net worth of $3.5 million and it's continuing to grow. $1.2 million worth of taxable assets, meaning not in an IRA, not a 401(k), $1.5 million on pre-tax traditional retirement accounts, and about $800,000 in the Roth.
So, here's a good strategy for them. So, in that Roth, like we said, we're going to go 100% aggressive growth because that's the one that comes at the back of the line. Since it's going to come out tax-free, we want to give that the most runway to grow as possible. So, that's the last one we're going to tap into. So, be aggressive with it. Let it fly. Set it up in something that you trust, and ignore it. This is where you're going to be. Your small cap holdings, emerging markets, your longer-term themes, some more aggressive-type positions. On the tax deferred side, this is where our U.S. large caps are going to live and maybe some international stocks to kind of balance that out. So, if you smush those together, you've got a pretty good portfolio. You've got some aggressive stuff and you've got some of the more stable, dividend-paying asset growers, and so forth.
And finally, in a taxable account, exchange traded funds that focus on indexes. Therefore, there's not a whole lot of activity happening on the inside to spit out capital gains. Maybe some private credit positions and a little single stock alpha, which frequently happens with people at this asset level anyway. That's where we want to work around that because if that single stock does take losses, then they could potentially deduct those against other gains and things that they have. But the whole point of this, remember, these are young accumulator-type people. Because they don't need this money for 20 years, they're going to lean into growth and tax efficiency. That's different from the couple we're going to talk about next, Bob?
Bob: Yep. And scenario 3 is the income-focused retiree that is charitably inclined. So, let's take a couple age 70. They're retired. They're worth a little over $5 million. They want income now, and they do have charitable goals. They've got $2 million in a taxable account, $2 million in a traditional IRA, and a little over a million dollars in a Roth IRA. Here's a potential strategy for them. In the IRA, we want to hold a conservative bond ladder for predictable income, and also, predictable required minimum distributions. In the Roth, still some growth, but keep it balanced, intended to leave, hopefully, this account to their heirs and never touch it during their lifetime. And then in the brokerage account, the taxable brokerage account, tax efficient income, maybe some preferred stocks and dividend stocks.
And then layer on a donor-advised fund for some charitable giving to take advantage of maybe doubling up on some year-end charitable gifts with appreciated stocks and a donor-advised fund to get you over and above that standard deduction amount to take full tax advantage of the charitable giving that you're doing. This is a steady income driven strategy with some really smart tax and legacy planning baked in. Again, these are three examples, as Brian says, there's no black box approach to this, but it's worthy of discussion with your advisor and your CPA and putting your money in a place where it can be the most tax efficient for you while still meeting your risk and income and growth goals.
Brian: Yeah. And then the thing that makes this a little bit hard too is, of course, if you're going to look at this and say, "I want to follow that to the letter of the law," well, you're going to generate a bunch of taxes while you're trying to be tax efficient. And obviously, that's not a very efficient approach either. Not to mention, it can make a lot of sense when you reach a certain time period, as I think we've mentioned once or twice, to start doing Roth conversions when you get into that window where you've got a low income, and therefore, a low bracket. Well, then you may want to purposely create some taxable activity to start to convert some of those pre-tax assets over to the Roth side.
So, again, these types of things should be thought of as a small or a short-term sacrifice in exchange for a longer term benefit. And there's a lot of moving parts to this. You need to make sure it makes sense for you, and also, look at the other side, or look at all of your situation, because everything you do is going to affect your 1040. You need to sit down with your fiduciary advisor and your tax preparer and make sure that everybody's on board with whatever steps you're going to take so that you don't have a nasty surprise in April.
But these are the steps that I think are worth exploring, even if you do nothing but learn about them and decide, "You know what? That's not for me." Because the worst thing that can happen is you feel like you missed an opportunity and you find something you should have done five years ago. I'd rather people learn about it now and shoot it out of the sky as the dumbest idea they've ever heard, because then I can say as an advisor, "Great, you understand it, you understand the pros and cons, and you want nothing to do with it." That's great. I've done my job. But that will help me find the people who didn't understand it, never heard of it, and it's the greatest idea that they've ever had. And so, again, understand the pros and cons of the steps you might take, and understand how it's going to move your situation the right direction.
Bob: Yeah, and Brian, you know, to the excellent point you made a few minutes ago, you don't have to do this in one fell swoop and totally up in your entire portfolio just to get you to these prescribed components in each account like we talked about. These are just examples. And the good thing about working with a proactive advisor is we're helping you look 10, 15, 20 years down the road, you know, to get to a tax-efficient result. You don't have to get there in one day or one month. So, if we know where we want to be two or three years from now, based on your personal objectives, we can ease you into that allocation approach and make sure we don't, you know, create a time bomb from a tax standpoint in year 1 just to say, "Hey, we got there." Well, we might have done more damage than good in the first year, you know, while trying to get to a place 10 years from now. That's no good for anybody. So, it can be a gradual approach, but have the discussion with your advisor, and we can ease into that right kind of allocation over time if needed.
Brian: And if you're thinking about taking some of these steps that are going to cause some taxation, remember, this is the right time to be thinking about it, because over the next 14 months, there are three tax years. So, if you've determined what you want to do, remember, you know, over a month and a half, you can get into two tax years, a little bit now, and a little bit in January, and then a short 12 months after that, you'll be in another tax year. So, as Bob mentioned, you can spread this stuff out. And again, you get 3 years' worth of tax activity over just a 14-month period. So, understand what that impact is and how you should spread that hit out.
Bob: Here's the Allworth advice, you don't just need to know what investments you own, you need to know how much of each kind of investment to put in each type of investment account. That's how you build smarter, tech savvy wealth that actually supports your long-term goals. Coming up next, we're going to explore a portion of a portfolio that most people have, but most or many don't have any understanding of whatsoever. And we're talking about bonds. 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" live every night, subscribe and get our daily podcasts. And if your friends or family could use a little advice, let them know about us as well, including our podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcast. Straight ahead of 6:43, we tackle your biggest money questions, including what to do with a pile of post-business sale cash, whether private credit belongs in your portfolio, and if using an options collar makes any sense whatsoever. All right, Brian, Amazon is selling some bonds. We're used to stock offerings, but Amazon and a lot of these other tech companies have been selling some bonds lately, and they have raised a ton of money to do so. What's going on here?
Brian: Yeah, this is kind of interesting to me because companies selling bonds, that's a very 1950s type of a thing to do. And it's now finally reached the technology industry, which has always been go-go growth and all that. I remember sometime in the last, geez, I don't know, I guess probably even 10, 15 years when Apple started paying a tiny dividend, Apple's not going to be known anytime soon as an income-generating stock, but there is a dividend there because it's a growth company. Their job is to go invent new things, find new markets to sell them to, and those kinds of things, that's what a growth company is. And I would put Amazon in that same class. But now, we've reached a point where this industry has gotten so big and has gotten so much power. They're looking to arrange their finances a little bit differently, and again, kind of going back to some old school methods.
So, Amazon raised about $15 billion. And this is its first US dollar bond offering in about three years. So, not the first time they've done it. But adding to a spree of jumbo debt sales by technology firms, they're all racing to chase artificial intelligence. Everybody's looking for money under every couch cushion to build artificial intelligence competitiveness. So, the proceeds of this, which are about $3 billion, maybe a little more than that, they're going to be doing everything from acquiring artificial intelligence firms, capital expenditures to build those up, and then as well as share buybacks. This is according to people with knowledge of that matter.
Bob: Brian, I've got an opinion of what's going on here. I'd love to know if you agree or disagree.
Brian: You do? Shocker.
Bob: Well, hey, look, we've got an aging baby boom population and people see these tech companies, and I've had more than a few clients come to me and say, "Hey, I'd love to participate in this whole AI thing, but I can't handle 15%, 20% volatility in my portfolio. How can I participate in some of these great up and coming or established companies and not take as much risk?" And I think that's what companies like Google and Amazon are tapping into, let people get some return without owning the stock and the stock volatility in the process. I mean, let's face it, we've got tech earnings coming out every day now, NVIDIA. You know, that stock, people have no idea where that thing's going to go heading into the earnings announcement. So, my point is to get into some investment grade debt in companies that are established with great free cash flow, that's a great opportunity for some of our older, more conservative investors.
Brian: Yeah, I would agree with that. And this isn't... And Amazon's not alone. So, Google parent, Alphabet, right? Remember Alphabet is the owner behind Google. They sold about $25 billion worth of debt in the U.S. and Europe. Meta, the artist formerly known as Facebook, $30 billion for them. And then Oracle, a little older school infrastructure company, they raised about $18 billion back in September. So, again, let's remember real quick what a corporate bond is, right? We're starting to remember what they are because interest rates are now finally respectable again, where people were relying on only stocks for a very long time.
A bond is debt. A company borrows money from you. They will pay you an income stream. Let's say it's maybe 5% or something like that. And then when that debt comes due on the maturity date, you get your money back. What they do with that money, you don't necessarily benefit from. If they invent the next great artificial intelligence tool or something like that, that just means your bond fund, or your bond that they owe you is that much more reliable. They'll be able to pay it off. But if it goes, gangbusters on the growth side, that helps the stock. It doesn't affect the bond other than probably making it a little more reliable, but your return was already set in stone via the interest rate and getting your money back.
Now, these don't always work out. Bonds can fail just like anything else. And probably the biggest example we have of that is Enron back in 2001. This was the company down in Houston that, basically, was trading a lot of energy. And after it was revealed that they had been using some really crazy accounting loopholes, hit billions of dollars' worth of debt, a lot of off-book transactions, little LLCs, and little things spread out all over the place that they weren't actually claiming that they had. But they used that to hide their debt and inflate their earnings. And not only did that take Enron down, it took Arthur Andersen, one of these then big four financial accounting firms, and it cost about 85,000 jobs. WorldCom slightly behind that. Again, an accounting fraud took them down. And then Lehman Brothers is probably the whopper. These are all companies that had bonds out there. And there's risk in these types of things, but that's why you want to have a diversified portfolio of bonds, just like you have a diversified portfolio of stocks.
Bob: Yeah, and this is why it's good. I think in most cases, and I think most investors understand, when you're looking at credit quality of these bonds, it's good to have a professional taking a look at this stuff to evaluate credit quality, the balance sheet of the companies, the free cash flow of the companies. Because as a bond holder, in order for you to get your interest payment, this company has to have some free cash flow. If they're just selling bonds to just finance this growing and growing pile of debt, all of the companies you mentioned back in the early 2000s, you might be buying into an absolute disaster. And I remember seeing the high-yield credit market just get imploded back in the early 2000s, and again, back in the housing crisis. The saying goes, there ain't no free lunch. So, if somebody is offering a high yield, a really high yield, don't just be enticed by that. You got to look under the hood at what the actual credit quality these companies are so you can get your payments. Now, let's pivot into a more conservative way to invest in bonds, and that's good, old treasury bonds, Brian?
Brian: Yep. Treasury bonds, good, old mom and pop, grandma and grandpa, reliable, issued by the U.S. federal government, considered one of the safest investments you can make on the face of the earth because it's backed by the full faith and credit of the United States. The United States government has never defaulted on its bonds, knock on wood here. And so, that investment is considered low risk compared to everything else you can do. This doesn't mean you can't lose money. Things happen. Bond prices and interest rates move around. And so, when prevailing interest rates rise, bond prices will fall. And we're coming away in the opposite situation right now, but just be aware that things do move.
Bob: Here's the Allworth advice, when choosing bonds for your portfolio, match the duration to your timeline, focus on quality over yield, and make sure your bond allocation compliments your overall investment strategy and financial plan. You've worked your way up the corporate ladder and made great money, but opportunity comes calling in the form of an executive position. Should you move up the ladder, we'll talk about the "executive dilemma" next with our career expert, Julie Bauke. 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. Joined tonight by our career expert, Julie Bauke. Julie, thanks as always for carving out some time for us tonight. We want to talk about something we're going to call the executive dilemma, staying put, versus jumping to the next big thing. Let's say you're in a great role right now. You love your job. You're obviously doing very well at it, but opportunity comes knocking. What's the right move, and how do you evaluate whether to make a move?
Julie: Yeah, I can kind of speak in generality because I've worked with a lot of people in this situation. The first question I would ask is, why would you consider this move? So, in other words, what are the compelling things about this move? And sometimes what I find when people start listing out compelling things, more salary, you know, a higher level title. My next question would be, are you sure that those are the things that really matter to you? Because it's very ingrained in us that jumping for the next big thing, more money, more title, equals more happiness and career satisfaction, but I know for sure, that's not true.
And so, when you look at why did that role appeal to you in the first place? And then ask yourself, are those the things that really matter to me at this point? I always start from a point of what matters most to you right now in your life, and then bring the career conversation into it. And because if you are going to get that bigger title and more money, does it also mean that you have to travel more? Does it mean you have to work weekends? And how do fit into what your priorities are? And so, that's the big question is, why would you? And then take a look at, you know, what is it about where you are now that might be sticking in your gut as to why it even makes sense to look for something else? What are you missing where you are? If you could change some things about your current situation, would that solve that? Would that solve that if you're getting to move on?
So, I think just a really good critical analysis of the whys and the whats, both behind where you are and what the opportunity is in front of you is really, really important. Because we can get super caught up in, "Yeah, but it's a director title. Yeah, but it's a VP title," without really thinking about, what am I giving up to get that? And then how does that work against what my whole life priorities are right now? So, a career decision has to be made on a bigger platform than in a vacuum.
Brian: Julie, I think a lot of people learn the hard way exactly what you just said, because we get this so ingrained in us that I got it. If I'm getting offered this position, well, clearly, I'm fantastic. Obviously, they love me, and I should take advantage of these benefits. But people do tend to learn the hard way that, whoops, maybe I caught my limit. Maybe I don't want that next level because my other things in my life have taken priority. So, how do people unwind? For those people who feel like they may have done that in that position, what are some ways to unwind that?
Julie: Yeah. So, you're saying like, if you've already taken that role?
Brian: Yeah. And it just didn't occur to you that, "You know what? I didn't really want this extra level of work. I just didn't think it through. I just thought it was another accomplishment."
Julie: So, the first thing... It kind of depends on a lot of things. So, let's say, you have a very stable career history. You've worked a long time at one place, and you've jumped to this other place. And you've been there nine months to a year and you say, "This isn't exactly what I thought it was going to be." You can successfully and confidently pivot at that point, versus a person who's had three, two year jobs in a row. Now, you have to, now it starts to be, what story does your career tell? And that's what I would add. Because we do want to picture yourself, you're now interviewing for a new job beyond the one that you took by accident. You've got to explain yourself. You've got to explain your career.
And it's perfectly okay to say, "So, when they contacted me, it sounded like exactly what I wanted. When I got there, I realized that, blah, blah, blah. I've done a lot of thinking, and now, I know exactly what I want, and which is why I applied for this role." And so, that's a good explanation. But if you are somebody who has a history of jumping without really thinking about what I've done, and therefore, you have kind of a checkered history, you probably need to take a breath and build up some capital there where you are so that as you move to the next thing, you've got a better story to tell. So, it's kind of a big, fat, it depends. It's really, what does your whole career story say about you?
Bob: Julie, I want to go back to the situation where somebody's considering a move, they haven't pulled the trigger yet, and they're wondering how to evaluate this. And I'm going to make an assumption here. You correct me if I'm wrong. Oftentimes, people just haven't been coached on how to walk into, you know, the boss's office or the executive suite, and just be clear about what you love about working where you are. A couple of things that you would like to see tweaked. And I think, especially in today's labor market where it is really hard to find good, seasoned, hardworking people, aren't people amazed, you know, if they're coached by someone like you on how to go in and broach that conversation. Oftentimes, you can walk out of that office, you know, if your requests are reasonable, getting exactly what you really need to be truly happy where you are, instead of making a completely new move and complete jump to a new company. Am I on target there at all?
Julie: Yes, very much so. We always say, try to fix it where you are first. Because job search is painful, and transitioning to a new unknown job, as exciting as it may sound on the surface can also be really painful and surprising. And so, getting it, doing that clarity, that looking at everything that's on your plate and really saying, "What do I like about my current role? What are the things that if I had a magic wand and can move them off my plate, I would? What would I like to see more of less of in my role? And how do I then approach that?" Once you get clarity on that, then you have a better, then you have a framework, then you have talking points to go in and say, " I've been in this role as COO for three years. And what I really love is integrating new ideas, new systems, new technologies, and then working across the organization to help implement those and bring those to life. I do get to do some of that in my role, but as I look at my next role, I would love to be more involved in those types of initiatives."
And that's the kind of conversation that you should be having. And we are so afraid to have those conversations because we feel like it's going to make us look less than committed, or that we're going to automatically end up on the layoff list. And you've got to assess your situation. If you have the type of leader who you feel like it really is risky to have those conversations, that might be different than if you feel like you are valued and your leader is looking to retain you. I think it's up to you to go in and begin that conversation about what next might look like for you. Leaders are so busy. And, yes, they should be coming to you and initiating these conversations, but they aren't because they're getting squeezed. And I always say, the career fairy isn't coming. And so, if you want more or different out of your career, start where you are, try to get it where you are, or at least, put a plan together to get it where you are. Especially in a job market like we're in, that's always going to be the place where it's going to be least stressful to move.
Bob: That is great advice, Julie. 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. If you're listening on the iHeart app, simply record your question, and as always, it will come straight to us. All right, Brian, get ready for Colin in Marymount. He says, "We've been passive investors for years, but all the mega tech names dominate the index now. How do you stay diversified when the index itself gets top heavy?" I love this question from Colin. It means he's paying attention. He's on top of things. What do we say to Colin?
Brian: Yeah, congratulations on knowing how indexes work. That's exactly one of the concerns. This wasn't a problem that we... You know, 30 years ago we just didn't have this type of an issue because the indices were a little more balanced out. But the economic growth in this country and this world has been so technology-driven in the past several decades that, yes, this is a real problem. So, the S&P 500 today is the most concentrated it's been since the '70s. The top seven or eight tech giants now make up more than a third of the entire index. Some estimates have it up to 40%. So, you might think you're diversified just because you own that index fund, but you might just be tied to a handful of mega cap stocks.
So, you know, just make sure you don't have to abandon passive investing. Just add these guardrails. Consider an equal weight S&P 500 exchange traded fund. Same 500 companies, except it's spread evenly across all 500, versus the bigger the company is, the more of a portion of the capitalization it makes up. And then also, look for some mid cap and small cap index funds. And that'll fill in what that top heavy index is missing. The S&P 500 is never going to have a small and mid-cap. It's literally the 500 largest companies in the United States, which tend to be among the largest in the world, too. So, if you've set at separate mid cap and small cap funds, that's going to spread out some of that risk. And as we've mentioned frequently, add some international stocks to the mix. 2025 has been a very different year as the U.S. has chosen to portray itself differently from a trade standpoint to the rest of the world. International stocks are on the run, and if you don't have any in your portfolio, make sure they're in there. So, great excuse to make sure that you are balanced overall in terms of your asset allocation.
Tom in Cincinnati, Bob, Tom says his CPA has been talking about "harvesting gains" before any potential tax changes. But their advisor, who is a different person, obviously, says to hang on and wait for this step up in cost basis. In other words, "Don't do anything. Just wait until you're dead, and then your kids will inherit capital gains tax free." I'm sure he didn't say it like that, but anytime you're talking about step up, you're not talking about you, you're talking about your heirs. So, he's asking, how do families make these decisions when these rules keep changing? They keep moving the goalpost, Bob?
Bob: Yeah, this is a tough one for me to answer. I don't want to get in the middle of discussions that it sounds like aren't going on between your CPA and your advisor, Tom. That'd be my first thing, is you guys all need to get in the same room and have a financial plan. And the proverbial saying, don't let the tax tail wag the dog, I think applies here. If your CPA is talking about potential tax changes, well, I don't think we're going to get many tax law changes here for the next few years at least. I mean, who knows what happens in the next administration and what have you. So, you've got a window here where we do have a little bit of clarity on tax policy. And to Brian's point, you might be passing up some real opportunities here by just standing pat and waiting until you die, as Brian said.
So, I think number one, I think you guys all need to be in the same room or, at least, on the same Zoom call comparing an actual financial planning strategy. And there might be different reasons for harvesting some gains now to support income or gifting strategies. There might be some charitable giving opportunities that you might be able to take advantage of to just eliminate some of these taxable gains altogether. And there might be a gradual approach of moving out of some of these low-cost basis assets gradually over time through direct indexing strategies or things like that. So, I can understand why you're confused, Tom. If everybody isn't, at least, in the same room or on the same Zoom call, putting an actual strategy together, you're left being confused and getting conflicting advice, and that's really no good for anybody. So, I hope that helps.
Ethan in Covington says, "We're thinking about adding private credit to our portfolio, but the lack of transparency worries me. What's the smartest way for regular investors to evaluate one of these illiquid investment opportunities?" Brian?
Brian: Yeah, here we go with that word private again. These assets are booming. Normally, we associate this with private equity, which is just buying up small companies that aren't publicly traded. But now, we're also talking these days about private credit, which is really the kind of the bond side of the private equity movement. These are just loans and things to businesses that don't have the size, or for whatever reason, don't want to participate in the public market. So, private credit has exploded. It's now over a $2 trillion market. Good reason for this. You can get higher yields out of this, less sensitivity to interest rates. Because they're not publicly traded, so there aren't markets to move them around as much, and access to loans traditional banks aren't willing to make because they've got their rules to follow, too. But for everyday investors, the trade-off is usually illiquidity and less transparency as Ethan's calling out specifically.
So, that doesn't make these bad investments. There are things you should know about them. Know exactly what you're being paid for. Higher yields sound great, but they're compensating you. The reason they exist is because you have a little less liquidity and you're taking a little more credit risk. So, these are compliments to other things that should be in your portfolio. And if you can't articulate where that return comes from, if you can't understand at all leverage and distressed loans, real estate backing, that kind of thing, you might want to reconsider.
Look at the structure of it, not just the sales pitch. Is this a fund that marks its own assets? Are they the ones deciding what the assets are worth? And how often do they do that? And what are the redemption limits? Are these things frozen up? You can't get to it. Oftentimes, they can legally refuse withdrawals during times of stress. And make sure you understand the manager quality, and try to get any kind of history you can get. It may not be possible to go all the way back to 2008. That's getting to be a long time ago now. But if you can get that kind of answer, you should take a look at that. So, just look under every stone for all the information you can get, Ethan.
Really super quick from Alan Lebanon. Bob, he says they got a lot of cash after they just sold a rental property. What do they do with that lump sum without feeling like they're dumping into the market at a wrong time?
Bob: Well, great question, Alan. Here's the answer. Brian talked about this yesterday, this exact same topic, and did a great job. I think first, segregate your long-term capital from your short-term capital needs. And I would say, for longer-term capital, the numbers bear this out based on historical data. Just put it in there, invest it. Yes, you got to take on some maybe short-term volatility, but you're going to come out ahead in the long-run by just putting this money to work and investing it responsibly. By the same token, if you're somebody that cannot handle short-term volatility with your long-term capital, 3%, 4%, 5% pullback, then you might want to stage it in over time. So, it has to do with the economic result over time versus your investment temperament and risk tolerance. And that's a good discussion to have with your advisor prior to pulling the trigger on anything. Hope that helps.
Next, Brian has his bottom line on what's going on in the gig economy these days. You're listening "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. Well, rumor has it, Brian, you've been out there moonlighting as a DJ down in one of your favorite high school haunts in Over the Rhine. Is that true? Are you out there engaging in the gig economy? Tell us what it's like out there.
Brian: I think you're referring to the warehouse from the '90s...
Bob: Yes, I am.
Brian: ...as my high school hangout that I literally went to one time, and you'll never let me forget it. But I am leading the charge. I'm going to revive soft rock down at the warehouse at Over the Rhine. Last night, we had literally six or seven people interested in that. So, anyway, gig economy, right? That's what we're kidding around about here is side jobs. So, not a lot of our clients deal in this kind of thing. But more and more, I'm dealing with clients who come in with questions about their kids and their relatives and their loved ones who are doing this kind of thing. So, some research says that overall, this comes out of Forbes, total compensation rose about 3.8% in '24. Inflation was only 2.9%, and that's leaving only a small margin of additional buying power for people. Households are feeling squeezed and they're trying to find new ways to make money, and hence, enter the whole gig economy. Finding a side job or some kind of little business on the side.
This can be a good thing. You can use your gig income not only for extras, but potentially, you're building or treat it like a project source of income. If you or your loved ones is trying to build up an emergency fund and you just can't carve out enough money on the side from your primary gig, then something on the side can be just for that purpose. I want to build up. I know I need three months, six months, nine months' worth of income so that I can accomplish my emergency fund goal. Then do that. It can be a great way to do it. That income is segregated. It comes out on the side, and then you can carve that out a little more easily than trying to squish it into the regular budget.
Another thought that comes up all the time for my clients worried about their family members is, "My kids got a lot of credit card debt, and we want to swoop in and pay it off, but I also don't want to teach that lesson that we'll always be there to kind of fix it." Well, then again, those kids, those young folks can start looking for a side job to get that tackled and get that paid down and never go that route again because this is the situation that we all get and we want to fix. So, these side gigs can be a little bit bumpy, of course. You never know where the work is going to come from. They often don't come with benefits such as retirement plan health insurance. That's what makes it a side gig, but at the same time, it can be a reliable source of outside income and not the worst idea for somebody who needs that extra little bump. Do you ever run across this, Bob?
Bob: Well, occasionally. But one idea popped into my head, and I know you love my random ideas, so I'll lay it on you. Hey, occasionally, we run into people, you know, especially young folks that say, "Hey, I'm in a job right now where I'm making pretty good money. It's paying the bills, but this is not my long-term thing that I want to be doing forever." Going out and finding one of these side gigs, if you do it strategically, it's a way to try on a different job or different career path and see how you really like it if you do it for 4 or 10 hours a week instead of quitting your current job. It might be that entree to the next step in your career path. Just a thought out there.
Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
Well, a lot of us know the basics. Stocks go in this account, bonds in that one, but how much? Today or tonight, the strategic way investors should think about how much of each investment type goes into each kind of account for growth, for taxes, and long-term control. In other words, what each account is built to do. And it really is an art. And this is why we are so pleased to have an absolute artisan in this area, Brian James. Brian, talk us through what we're actually talking about here in terms of portfolio construction.
Brian: What we're talking about is tax treatment, right? These different types of accounts get treated differently by the IRS. There are three different types of tax treatment. There is pre-tax, which a lot of people are aware of from their 401(k)s. Everything I put in there, I don't pay taxes on the year that I got it, the year that I received that income, because I chose to do that, but I'll pay taxes on the back end. And then, of course, there's the Roth side, which is the opposite. I do not get a deduction this year, but everything that happens inside that account will grow tax-free. And then when I pull it out, provided I've met some basic limitations, some basic requirements, then it comes out tax-free. And the third part is what's known as after-tax, meaning these are the accounts that are just exposed to tax every year. They'll spit out a 1099. If you want to sell something, you'll be looking at capital gains, and that kind of thing.
So, therefore, different types of assets are better built for different types of accounts. So, traditional IRAs and 401(k)s, this is the pre-tax side. Whenever you hear the word traditional, think pre-tax. These are good for income-generating investments like bonds since ordinary income tax applies anyway. So, a creative idea I've thought of that I'm going to implement for myself is I'm going to carve out, over time, I'm going to carve out a chunk of my Roth IRA so that when I retire, my emergency fund can sit in a 4% or 5% yielding money market fund. But it's tax-free to me, so it won't really matter that that's what it is. This is versus leaving it in a high-yield savings account than paying income taxes on it, giving away a chunk of it. So, I haven't actually done that yet. Check in with me after I retire and we'll see if I follow through. But that's an idea that I had.
Then you've got your taxable brokerage accounts. This is better for tax-efficient assets like exchange traded funds, individual stocks with capital gains, and assets maybe that you're going to donate or gift. So, these are for efficient, growth-oriented-type assets that aren't going to spit out really much in capital gains at all. But if it's also an individual stock and you're sitting on that gain, well, then you don't have to pay anything on that gain until such time as you actually sell it. So, the real magic in all this is the mix. How are you going to combine all these things together? How much of your growth bucket goes on the Roth side tax-free, and how much of your fixed income should be sheltered in IRAs? And more probably, what percent of your taxable income should stay liquid or accessible in case of an emergency?
Bob: All right, and we've got three hypothetical situations to walk through tonight that illustrate the points that Brian just outlined. Let's take scenario 1, the tax-sensitive business seller, somebody that just sold a business. Let's say, his name is John. He's 62. He just sold a business. He's got a $6.5 million net worth, has $3.5 million in taxable funds, $2 million in a rollover IRA, and a million dollars sitting in a Roth. These folks are planning to retire soon, so they want to avoid spikes in taxable income.
So, here's a potential strategy. And just as a disclaimer here, there's no one size fits all strategy to this. The point of this segment tonight is just get us to think about different scenarios, apply it to your own situation, and sit down with your CPA and your advisor and talk about what actually works for you. But here's a hypothetical strategy. In the Roth, let's stick with aggressive growth stocks. Let it grow tax-free. Highest growth assets go there for obvious reasons. You pay nothing in taxes if and when that money ever comes out of the Roth IRA. In the IRA account itself, the regular IRA, well, we want mostly bonds and income-oriented assets. That slows down the aggressive growth of that account and gets those future required minimum distributions under control from a tax standpoint later.
And then in the taxable brokerage account, maybe some municipal bonds, some tax-managed ETFs, some dividend stocks, maybe a direct indexing strategy. These people are also thinking about Roth conversions. So, minimizing taxable income now is key. And oftentimes, after the first couple years after a big taxable event like a business sale, these folks do drop down into a lower tax bracket, and that's a perfect time to consider Roth conversions. Brian, walk us through another scenario.
Brian: Yeah, and real quick, I want to weigh in on just a thought there. It's not easy. This is sort of perfect scenarios. It's not necessarily easy to get to these positions. You still have to take your risk tolerance into account. So, I wouldn't say, well, we're talking 100% of your traditional IRA and bonds and income assets. That's not the point. We're simply trying to, if you're going to optimize, there are different assets that make more sense in different tax treatments, but it'll never be perfect anyway.
So, yeah, moving on to the second scenario here. Now, we've got the aggressive accumulator. This is somebody in their mid-40s. This is where we spend most of our time, most of our working careers, just growing the pile. That's really the goal. So, this fake couple's in their mid-40s. They're high earners. They've already got a net worth of $3.5 million and it's continuing to grow. $1.2 million worth of taxable assets, meaning not in an IRA, not a 401(k), $1.5 million on pre-tax traditional retirement accounts, and about $800,000 in the Roth.
So, here's a good strategy for them. So, in that Roth, like we said, we're going to go 100% aggressive growth because that's the one that comes at the back of the line. Since it's going to come out tax-free, we want to give that the most runway to grow as possible. So, that's the last one we're going to tap into. So, be aggressive with it. Let it fly. Set it up in something that you trust, and ignore it. This is where you're going to be. Your small cap holdings, emerging markets, your longer-term themes, some more aggressive-type positions. On the tax deferred side, this is where our U.S. large caps are going to live and maybe some international stocks to kind of balance that out. So, if you smush those together, you've got a pretty good portfolio. You've got some aggressive stuff and you've got some of the more stable, dividend-paying asset growers, and so forth.
And finally, in a taxable account, exchange traded funds that focus on indexes. Therefore, there's not a whole lot of activity happening on the inside to spit out capital gains. Maybe some private credit positions and a little single stock alpha, which frequently happens with people at this asset level anyway. That's where we want to work around that because if that single stock does take losses, then they could potentially deduct those against other gains and things that they have. But the whole point of this, remember, these are young accumulator-type people. Because they don't need this money for 20 years, they're going to lean into growth and tax efficiency. That's different from the couple we're going to talk about next, Bob?
Bob: Yep. And scenario 3 is the income-focused retiree that is charitably inclined. So, let's take a couple age 70. They're retired. They're worth a little over $5 million. They want income now, and they do have charitable goals. They've got $2 million in a taxable account, $2 million in a traditional IRA, and a little over a million dollars in a Roth IRA. Here's a potential strategy for them. In the IRA, we want to hold a conservative bond ladder for predictable income, and also, predictable required minimum distributions. In the Roth, still some growth, but keep it balanced, intended to leave, hopefully, this account to their heirs and never touch it during their lifetime. And then in the brokerage account, the taxable brokerage account, tax efficient income, maybe some preferred stocks and dividend stocks.
And then layer on a donor-advised fund for some charitable giving to take advantage of maybe doubling up on some year-end charitable gifts with appreciated stocks and a donor-advised fund to get you over and above that standard deduction amount to take full tax advantage of the charitable giving that you're doing. This is a steady income driven strategy with some really smart tax and legacy planning baked in. Again, these are three examples, as Brian says, there's no black box approach to this, but it's worthy of discussion with your advisor and your CPA and putting your money in a place where it can be the most tax efficient for you while still meeting your risk and income and growth goals.
Brian: Yeah. And then the thing that makes this a little bit hard too is, of course, if you're going to look at this and say, "I want to follow that to the letter of the law," well, you're going to generate a bunch of taxes while you're trying to be tax efficient. And obviously, that's not a very efficient approach either. Not to mention, it can make a lot of sense when you reach a certain time period, as I think we've mentioned once or twice, to start doing Roth conversions when you get into that window where you've got a low income, and therefore, a low bracket. Well, then you may want to purposely create some taxable activity to start to convert some of those pre-tax assets over to the Roth side.
So, again, these types of things should be thought of as a small or a short-term sacrifice in exchange for a longer term benefit. And there's a lot of moving parts to this. You need to make sure it makes sense for you, and also, look at the other side, or look at all of your situation, because everything you do is going to affect your 1040. You need to sit down with your fiduciary advisor and your tax preparer and make sure that everybody's on board with whatever steps you're going to take so that you don't have a nasty surprise in April.
But these are the steps that I think are worth exploring, even if you do nothing but learn about them and decide, "You know what? That's not for me." Because the worst thing that can happen is you feel like you missed an opportunity and you find something you should have done five years ago. I'd rather people learn about it now and shoot it out of the sky as the dumbest idea they've ever heard, because then I can say as an advisor, "Great, you understand it, you understand the pros and cons, and you want nothing to do with it." That's great. I've done my job. But that will help me find the people who didn't understand it, never heard of it, and it's the greatest idea that they've ever had. And so, again, understand the pros and cons of the steps you might take, and understand how it's going to move your situation the right direction.
Bob: Yeah, and Brian, you know, to the excellent point you made a few minutes ago, you don't have to do this in one fell swoop and totally up in your entire portfolio just to get you to these prescribed components in each account like we talked about. These are just examples. And the good thing about working with a proactive advisor is we're helping you look 10, 15, 20 years down the road, you know, to get to a tax-efficient result. You don't have to get there in one day or one month. So, if we know where we want to be two or three years from now, based on your personal objectives, we can ease you into that allocation approach and make sure we don't, you know, create a time bomb from a tax standpoint in year 1 just to say, "Hey, we got there." Well, we might have done more damage than good in the first year, you know, while trying to get to a place 10 years from now. That's no good for anybody. So, it can be a gradual approach, but have the discussion with your advisor, and we can ease into that right kind of allocation over time if needed.
Brian: And if you're thinking about taking some of these steps that are going to cause some taxation, remember, this is the right time to be thinking about it, because over the next 14 months, there are three tax years. So, if you've determined what you want to do, remember, you know, over a month and a half, you can get into two tax years, a little bit now, and a little bit in January, and then a short 12 months after that, you'll be in another tax year. So, as Bob mentioned, you can spread this stuff out. And again, you get 3 years' worth of tax activity over just a 14-month period. So, understand what that impact is and how you should spread that hit out.
Bob: Here's the Allworth advice, you don't just need to know what investments you own, you need to know how much of each kind of investment to put in each type of investment account. That's how you build smarter, tech savvy wealth that actually supports your long-term goals. Coming up next, we're going to explore a portion of a portfolio that most people have, but most or many don't have any understanding of whatsoever. And we're talking about bonds. 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" live every night, subscribe and get our daily podcasts. And if your friends or family could use a little advice, let them know about us as well, including our podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcast. Straight ahead of 6:43, we tackle your biggest money questions, including what to do with a pile of post-business sale cash, whether private credit belongs in your portfolio, and if using an options collar makes any sense whatsoever. All right, Brian, Amazon is selling some bonds. We're used to stock offerings, but Amazon and a lot of these other tech companies have been selling some bonds lately, and they have raised a ton of money to do so. What's going on here?
Brian: Yeah, this is kind of interesting to me because companies selling bonds, that's a very 1950s type of a thing to do. And it's now finally reached the technology industry, which has always been go-go growth and all that. I remember sometime in the last, geez, I don't know, I guess probably even 10, 15 years when Apple started paying a tiny dividend, Apple's not going to be known anytime soon as an income-generating stock, but there is a dividend there because it's a growth company. Their job is to go invent new things, find new markets to sell them to, and those kinds of things, that's what a growth company is. And I would put Amazon in that same class. But now, we've reached a point where this industry has gotten so big and has gotten so much power. They're looking to arrange their finances a little bit differently, and again, kind of going back to some old school methods.
So, Amazon raised about $15 billion. And this is its first US dollar bond offering in about three years. So, not the first time they've done it. But adding to a spree of jumbo debt sales by technology firms, they're all racing to chase artificial intelligence. Everybody's looking for money under every couch cushion to build artificial intelligence competitiveness. So, the proceeds of this, which are about $3 billion, maybe a little more than that, they're going to be doing everything from acquiring artificial intelligence firms, capital expenditures to build those up, and then as well as share buybacks. This is according to people with knowledge of that matter.
Bob: Brian, I've got an opinion of what's going on here. I'd love to know if you agree or disagree.
Brian: You do? Shocker.
Bob: Well, hey, look, we've got an aging baby boom population and people see these tech companies, and I've had more than a few clients come to me and say, "Hey, I'd love to participate in this whole AI thing, but I can't handle 15%, 20% volatility in my portfolio. How can I participate in some of these great up and coming or established companies and not take as much risk?" And I think that's what companies like Google and Amazon are tapping into, let people get some return without owning the stock and the stock volatility in the process. I mean, let's face it, we've got tech earnings coming out every day now, NVIDIA. You know, that stock, people have no idea where that thing's going to go heading into the earnings announcement. So, my point is to get into some investment grade debt in companies that are established with great free cash flow, that's a great opportunity for some of our older, more conservative investors.
Brian: Yeah, I would agree with that. And this isn't... And Amazon's not alone. So, Google parent, Alphabet, right? Remember Alphabet is the owner behind Google. They sold about $25 billion worth of debt in the U.S. and Europe. Meta, the artist formerly known as Facebook, $30 billion for them. And then Oracle, a little older school infrastructure company, they raised about $18 billion back in September. So, again, let's remember real quick what a corporate bond is, right? We're starting to remember what they are because interest rates are now finally respectable again, where people were relying on only stocks for a very long time.
A bond is debt. A company borrows money from you. They will pay you an income stream. Let's say it's maybe 5% or something like that. And then when that debt comes due on the maturity date, you get your money back. What they do with that money, you don't necessarily benefit from. If they invent the next great artificial intelligence tool or something like that, that just means your bond fund, or your bond that they owe you is that much more reliable. They'll be able to pay it off. But if it goes, gangbusters on the growth side, that helps the stock. It doesn't affect the bond other than probably making it a little more reliable, but your return was already set in stone via the interest rate and getting your money back.
Now, these don't always work out. Bonds can fail just like anything else. And probably the biggest example we have of that is Enron back in 2001. This was the company down in Houston that, basically, was trading a lot of energy. And after it was revealed that they had been using some really crazy accounting loopholes, hit billions of dollars' worth of debt, a lot of off-book transactions, little LLCs, and little things spread out all over the place that they weren't actually claiming that they had. But they used that to hide their debt and inflate their earnings. And not only did that take Enron down, it took Arthur Andersen, one of these then big four financial accounting firms, and it cost about 85,000 jobs. WorldCom slightly behind that. Again, an accounting fraud took them down. And then Lehman Brothers is probably the whopper. These are all companies that had bonds out there. And there's risk in these types of things, but that's why you want to have a diversified portfolio of bonds, just like you have a diversified portfolio of stocks.
Bob: Yeah, and this is why it's good. I think in most cases, and I think most investors understand, when you're looking at credit quality of these bonds, it's good to have a professional taking a look at this stuff to evaluate credit quality, the balance sheet of the companies, the free cash flow of the companies. Because as a bond holder, in order for you to get your interest payment, this company has to have some free cash flow. If they're just selling bonds to just finance this growing and growing pile of debt, all of the companies you mentioned back in the early 2000s, you might be buying into an absolute disaster. And I remember seeing the high-yield credit market just get imploded back in the early 2000s, and again, back in the housing crisis. The saying goes, there ain't no free lunch. So, if somebody is offering a high yield, a really high yield, don't just be enticed by that. You got to look under the hood at what the actual credit quality these companies are so you can get your payments. Now, let's pivot into a more conservative way to invest in bonds, and that's good, old treasury bonds, Brian?
Brian: Yep. Treasury bonds, good, old mom and pop, grandma and grandpa, reliable, issued by the U.S. federal government, considered one of the safest investments you can make on the face of the earth because it's backed by the full faith and credit of the United States. The United States government has never defaulted on its bonds, knock on wood here. And so, that investment is considered low risk compared to everything else you can do. This doesn't mean you can't lose money. Things happen. Bond prices and interest rates move around. And so, when prevailing interest rates rise, bond prices will fall. And we're coming away in the opposite situation right now, but just be aware that things do move.
Bob: Here's the Allworth advice, when choosing bonds for your portfolio, match the duration to your timeline, focus on quality over yield, and make sure your bond allocation compliments your overall investment strategy and financial plan. You've worked your way up the corporate ladder and made great money, but opportunity comes calling in the form of an executive position. Should you move up the ladder, we'll talk about the "executive dilemma" next with our career expert, Julie Bauke. 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. Joined tonight by our career expert, Julie Bauke. Julie, thanks as always for carving out some time for us tonight. We want to talk about something we're going to call the executive dilemma, staying put, versus jumping to the next big thing. Let's say you're in a great role right now. You love your job. You're obviously doing very well at it, but opportunity comes knocking. What's the right move, and how do you evaluate whether to make a move?
Julie: Yeah, I can kind of speak in generality because I've worked with a lot of people in this situation. The first question I would ask is, why would you consider this move? So, in other words, what are the compelling things about this move? And sometimes what I find when people start listing out compelling things, more salary, you know, a higher level title. My next question would be, are you sure that those are the things that really matter to you? Because it's very ingrained in us that jumping for the next big thing, more money, more title, equals more happiness and career satisfaction, but I know for sure, that's not true.
And so, when you look at why did that role appeal to you in the first place? And then ask yourself, are those the things that really matter to me at this point? I always start from a point of what matters most to you right now in your life, and then bring the career conversation into it. And because if you are going to get that bigger title and more money, does it also mean that you have to travel more? Does it mean you have to work weekends? And how do fit into what your priorities are? And so, that's the big question is, why would you? And then take a look at, you know, what is it about where you are now that might be sticking in your gut as to why it even makes sense to look for something else? What are you missing where you are? If you could change some things about your current situation, would that solve that? Would that solve that if you're getting to move on?
So, I think just a really good critical analysis of the whys and the whats, both behind where you are and what the opportunity is in front of you is really, really important. Because we can get super caught up in, "Yeah, but it's a director title. Yeah, but it's a VP title," without really thinking about, what am I giving up to get that? And then how does that work against what my whole life priorities are right now? So, a career decision has to be made on a bigger platform than in a vacuum.
Brian: Julie, I think a lot of people learn the hard way exactly what you just said, because we get this so ingrained in us that I got it. If I'm getting offered this position, well, clearly, I'm fantastic. Obviously, they love me, and I should take advantage of these benefits. But people do tend to learn the hard way that, whoops, maybe I caught my limit. Maybe I don't want that next level because my other things in my life have taken priority. So, how do people unwind? For those people who feel like they may have done that in that position, what are some ways to unwind that?
Julie: Yeah. So, you're saying like, if you've already taken that role?
Brian: Yeah. And it just didn't occur to you that, "You know what? I didn't really want this extra level of work. I just didn't think it through. I just thought it was another accomplishment."
Julie: So, the first thing... It kind of depends on a lot of things. So, let's say, you have a very stable career history. You've worked a long time at one place, and you've jumped to this other place. And you've been there nine months to a year and you say, "This isn't exactly what I thought it was going to be." You can successfully and confidently pivot at that point, versus a person who's had three, two year jobs in a row. Now, you have to, now it starts to be, what story does your career tell? And that's what I would add. Because we do want to picture yourself, you're now interviewing for a new job beyond the one that you took by accident. You've got to explain yourself. You've got to explain your career.
And it's perfectly okay to say, "So, when they contacted me, it sounded like exactly what I wanted. When I got there, I realized that, blah, blah, blah. I've done a lot of thinking, and now, I know exactly what I want, and which is why I applied for this role." And so, that's a good explanation. But if you are somebody who has a history of jumping without really thinking about what I've done, and therefore, you have kind of a checkered history, you probably need to take a breath and build up some capital there where you are so that as you move to the next thing, you've got a better story to tell. So, it's kind of a big, fat, it depends. It's really, what does your whole career story say about you?
Bob: Julie, I want to go back to the situation where somebody's considering a move, they haven't pulled the trigger yet, and they're wondering how to evaluate this. And I'm going to make an assumption here. You correct me if I'm wrong. Oftentimes, people just haven't been coached on how to walk into, you know, the boss's office or the executive suite, and just be clear about what you love about working where you are. A couple of things that you would like to see tweaked. And I think, especially in today's labor market where it is really hard to find good, seasoned, hardworking people, aren't people amazed, you know, if they're coached by someone like you on how to go in and broach that conversation. Oftentimes, you can walk out of that office, you know, if your requests are reasonable, getting exactly what you really need to be truly happy where you are, instead of making a completely new move and complete jump to a new company. Am I on target there at all?
Julie: Yes, very much so. We always say, try to fix it where you are first. Because job search is painful, and transitioning to a new unknown job, as exciting as it may sound on the surface can also be really painful and surprising. And so, getting it, doing that clarity, that looking at everything that's on your plate and really saying, "What do I like about my current role? What are the things that if I had a magic wand and can move them off my plate, I would? What would I like to see more of less of in my role? And how do I then approach that?" Once you get clarity on that, then you have a better, then you have a framework, then you have talking points to go in and say, " I've been in this role as COO for three years. And what I really love is integrating new ideas, new systems, new technologies, and then working across the organization to help implement those and bring those to life. I do get to do some of that in my role, but as I look at my next role, I would love to be more involved in those types of initiatives."
And that's the kind of conversation that you should be having. And we are so afraid to have those conversations because we feel like it's going to make us look less than committed, or that we're going to automatically end up on the layoff list. And you've got to assess your situation. If you have the type of leader who you feel like it really is risky to have those conversations, that might be different than if you feel like you are valued and your leader is looking to retain you. I think it's up to you to go in and begin that conversation about what next might look like for you. Leaders are so busy. And, yes, they should be coming to you and initiating these conversations, but they aren't because they're getting squeezed. And I always say, the career fairy isn't coming. And so, if you want more or different out of your career, start where you are, try to get it where you are, or at least, put a plan together to get it where you are. Especially in a job market like we're in, that's always going to be the place where it's going to be least stressful to move.
Bob: That is great advice, Julie. 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. If you're listening on the iHeart app, simply record your question, and as always, it will come straight to us. All right, Brian, get ready for Colin in Marymount. He says, "We've been passive investors for years, but all the mega tech names dominate the index now. How do you stay diversified when the index itself gets top heavy?" I love this question from Colin. It means he's paying attention. He's on top of things. What do we say to Colin?
Brian: Yeah, congratulations on knowing how indexes work. That's exactly one of the concerns. This wasn't a problem that we... You know, 30 years ago we just didn't have this type of an issue because the indices were a little more balanced out. But the economic growth in this country and this world has been so technology-driven in the past several decades that, yes, this is a real problem. So, the S&P 500 today is the most concentrated it's been since the '70s. The top seven or eight tech giants now make up more than a third of the entire index. Some estimates have it up to 40%. So, you might think you're diversified just because you own that index fund, but you might just be tied to a handful of mega cap stocks.
So, you know, just make sure you don't have to abandon passive investing. Just add these guardrails. Consider an equal weight S&P 500 exchange traded fund. Same 500 companies, except it's spread evenly across all 500, versus the bigger the company is, the more of a portion of the capitalization it makes up. And then also, look for some mid cap and small cap index funds. And that'll fill in what that top heavy index is missing. The S&P 500 is never going to have a small and mid-cap. It's literally the 500 largest companies in the United States, which tend to be among the largest in the world, too. So, if you've set at separate mid cap and small cap funds, that's going to spread out some of that risk. And as we've mentioned frequently, add some international stocks to the mix. 2025 has been a very different year as the U.S. has chosen to portray itself differently from a trade standpoint to the rest of the world. International stocks are on the run, and if you don't have any in your portfolio, make sure they're in there. So, great excuse to make sure that you are balanced overall in terms of your asset allocation.
Tom in Cincinnati, Bob, Tom says his CPA has been talking about "harvesting gains" before any potential tax changes. But their advisor, who is a different person, obviously, says to hang on and wait for this step up in cost basis. In other words, "Don't do anything. Just wait until you're dead, and then your kids will inherit capital gains tax free." I'm sure he didn't say it like that, but anytime you're talking about step up, you're not talking about you, you're talking about your heirs. So, he's asking, how do families make these decisions when these rules keep changing? They keep moving the goalpost, Bob?
Bob: Yeah, this is a tough one for me to answer. I don't want to get in the middle of discussions that it sounds like aren't going on between your CPA and your advisor, Tom. That'd be my first thing, is you guys all need to get in the same room and have a financial plan. And the proverbial saying, don't let the tax tail wag the dog, I think applies here. If your CPA is talking about potential tax changes, well, I don't think we're going to get many tax law changes here for the next few years at least. I mean, who knows what happens in the next administration and what have you. So, you've got a window here where we do have a little bit of clarity on tax policy. And to Brian's point, you might be passing up some real opportunities here by just standing pat and waiting until you die, as Brian said.
So, I think number one, I think you guys all need to be in the same room or, at least, on the same Zoom call comparing an actual financial planning strategy. And there might be different reasons for harvesting some gains now to support income or gifting strategies. There might be some charitable giving opportunities that you might be able to take advantage of to just eliminate some of these taxable gains altogether. And there might be a gradual approach of moving out of some of these low-cost basis assets gradually over time through direct indexing strategies or things like that. So, I can understand why you're confused, Tom. If everybody isn't, at least, in the same room or on the same Zoom call, putting an actual strategy together, you're left being confused and getting conflicting advice, and that's really no good for anybody. So, I hope that helps.
Ethan in Covington says, "We're thinking about adding private credit to our portfolio, but the lack of transparency worries me. What's the smartest way for regular investors to evaluate one of these illiquid investment opportunities?" Brian?
Brian: Yeah, here we go with that word private again. These assets are booming. Normally, we associate this with private equity, which is just buying up small companies that aren't publicly traded. But now, we're also talking these days about private credit, which is really the kind of the bond side of the private equity movement. These are just loans and things to businesses that don't have the size, or for whatever reason, don't want to participate in the public market. So, private credit has exploded. It's now over a $2 trillion market. Good reason for this. You can get higher yields out of this, less sensitivity to interest rates. Because they're not publicly traded, so there aren't markets to move them around as much, and access to loans traditional banks aren't willing to make because they've got their rules to follow, too. But for everyday investors, the trade-off is usually illiquidity and less transparency as Ethan's calling out specifically.
So, that doesn't make these bad investments. There are things you should know about them. Know exactly what you're being paid for. Higher yields sound great, but they're compensating you. The reason they exist is because you have a little less liquidity and you're taking a little more credit risk. So, these are compliments to other things that should be in your portfolio. And if you can't articulate where that return comes from, if you can't understand at all leverage and distressed loans, real estate backing, that kind of thing, you might want to reconsider.
Look at the structure of it, not just the sales pitch. Is this a fund that marks its own assets? Are they the ones deciding what the assets are worth? And how often do they do that? And what are the redemption limits? Are these things frozen up? You can't get to it. Oftentimes, they can legally refuse withdrawals during times of stress. And make sure you understand the manager quality, and try to get any kind of history you can get. It may not be possible to go all the way back to 2008. That's getting to be a long time ago now. But if you can get that kind of answer, you should take a look at that. So, just look under every stone for all the information you can get, Ethan.
Really super quick from Alan Lebanon. Bob, he says they got a lot of cash after they just sold a rental property. What do they do with that lump sum without feeling like they're dumping into the market at a wrong time?
Bob: Well, great question, Alan. Here's the answer. Brian talked about this yesterday, this exact same topic, and did a great job. I think first, segregate your long-term capital from your short-term capital needs. And I would say, for longer-term capital, the numbers bear this out based on historical data. Just put it in there, invest it. Yes, you got to take on some maybe short-term volatility, but you're going to come out ahead in the long-run by just putting this money to work and investing it responsibly. By the same token, if you're somebody that cannot handle short-term volatility with your long-term capital, 3%, 4%, 5% pullback, then you might want to stage it in over time. So, it has to do with the economic result over time versus your investment temperament and risk tolerance. And that's a good discussion to have with your advisor prior to pulling the trigger on anything. Hope that helps.
Next, Brian has his bottom line on what's going on in the gig economy these days. You're listening "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. Well, rumor has it, Brian, you've been out there moonlighting as a DJ down in one of your favorite high school haunts in Over the Rhine. Is that true? Are you out there engaging in the gig economy? Tell us what it's like out there.
Brian: I think you're referring to the warehouse from the '90s...
Bob: Yes, I am.
Brian: ...as my high school hangout that I literally went to one time, and you'll never let me forget it. But I am leading the charge. I'm going to revive soft rock down at the warehouse at Over the Rhine. Last night, we had literally six or seven people interested in that. So, anyway, gig economy, right? That's what we're kidding around about here is side jobs. So, not a lot of our clients deal in this kind of thing. But more and more, I'm dealing with clients who come in with questions about their kids and their relatives and their loved ones who are doing this kind of thing. So, some research says that overall, this comes out of Forbes, total compensation rose about 3.8% in '24. Inflation was only 2.9%, and that's leaving only a small margin of additional buying power for people. Households are feeling squeezed and they're trying to find new ways to make money, and hence, enter the whole gig economy. Finding a side job or some kind of little business on the side.
This can be a good thing. You can use your gig income not only for extras, but potentially, you're building or treat it like a project source of income. If you or your loved ones is trying to build up an emergency fund and you just can't carve out enough money on the side from your primary gig, then something on the side can be just for that purpose. I want to build up. I know I need three months, six months, nine months' worth of income so that I can accomplish my emergency fund goal. Then do that. It can be a great way to do it. That income is segregated. It comes out on the side, and then you can carve that out a little more easily than trying to squish it into the regular budget.
Another thought that comes up all the time for my clients worried about their family members is, "My kids got a lot of credit card debt, and we want to swoop in and pay it off, but I also don't want to teach that lesson that we'll always be there to kind of fix it." Well, then again, those kids, those young folks can start looking for a side job to get that tackled and get that paid down and never go that route again because this is the situation that we all get and we want to fix. So, these side gigs can be a little bit bumpy, of course. You never know where the work is going to come from. They often don't come with benefits such as retirement plan health insurance. That's what makes it a side gig, but at the same time, it can be a reliable source of outside income and not the worst idea for somebody who needs that extra little bump. Do you ever run across this, Bob?
Bob: Well, occasionally. But one idea popped into my head, and I know you love my random ideas, so I'll lay it on you. Hey, occasionally, we run into people, you know, especially young folks that say, "Hey, I'm in a job right now where I'm making pretty good money. It's paying the bills, but this is not my long-term thing that I want to be doing forever." Going out and finding one of these side gigs, if you do it strategically, it's a way to try on a different job or different career path and see how you really like it if you do it for 4 or 10 hours a week instead of quitting your current job. It might be that entree to the next step in your career path. Just a thought out there.
Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.