- The Paper Wealth Trap 0:00
- Buffered ETFs 101 12:23
- Rent or Buy? 20:11
- Your Money Questions Answered 28:41
- Money and Friendships 36:20
Are You Really Wealthy — or Just Riding the Market?
On this week’s Best of Simply Money podcast, Bob and Brian warn against the “paper wealth trap” — mistaking market highs for lasting financial security. They break down how to turn temporary gains into durable wealth with proper liquidity, diversification, and planning. You’ll also hear why buffered ETFs are drawing billions from investors — and when they actually make sense. Plus, real estate pro Michelle Sloan joins to weigh in on the age-old question: rent or buy? And in ‘Ask the Advisor’ — smart moves for deferred comp plans, protecting company stock, and selling rental properties tax-smartly.
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Bob: Tonight, are you truly well off financially, or just tied to the current market momentum? You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
When the market's hitting record highs like it is now, it feels awfully good. You log into your account, you see the numbers are up, and you think, "Wow, we are doing great, we're rich." But the question is, are you really that well off, and is your long-term financial plan really going to work just because the stock market is up right now and the value of your investment accounts are up? Brian, we see this all the time and we call this the paper wealth trap.
Brian: Yeah, so here's what happens, when that market goes up, your account grows, and you start to feel wealthier... And anybody who didn't panic in 2022 should be sitting on the largest pile of money they've ever seen because the market has continued to grow. We've had some fantastic years including this one. So, the human reaction to that, what do we do? We loosen the belt a little bit. Maybe spend a little more. Maybe stop paying as much attention. Kind of lose sight of the portfolio a little. And we assume we're diversified. I got 10 different mutual funds out there, but all 10 are still tied to the same market. That means that there's nothing that's going to kind of offset any of the bumps and things that we're going to hit.
We saw this. About 25 years ago, I remember, there was a mutual fund company called Janus, and they had four funds that for about two or three years, were the only things that anybody wanted to deal with. And then finally, in 2002, the market kind of hit the skids a little bit, and all four of them collapsed at one time, because they were all invested the exact same way. So, don't assume just because you've got five unique ticker symbols in your portfolio, that you have five unique investments. Got to look under the hood a little bit, don't you, Bob?
Bob: You certainly do. So, that covers the topic of diversification. And what we really want to talk about as well is just this whole mindset shift. And the thing we got to watch out for here is lifestyle creep. Meaning, there is a difference between experiencing a good market in the midst of having a true financial plan where you've looked at your long-term goals. You've actually looked at what you spend every month or every year, and you make sure your plan is intact whether the market is going up, down, or sideways, versus just assuming it's all going to work out, and if you get $200,000, $300,000, $400,000 of gain in a current year, you say, "Wow, the market's up. I can go buy a more expensive car than I can really afford or take two or three cruises that I can't afford or eat out at more expensive restaurants." We're not saying don't enjoy your life and all that, we're saying, do it within the context of a well-constructed financial plan. Don't let the current emotions of the moment run your spending habits, because that can backfire real quickly if you're not really paying attention.
Brian: And it's kind of like looking at Zillow to see what your house is worth knowing that that doesn't really do you any good. It's fun to look at, and it should be, that's probably at an all-time high as well. But that's not money you can touch unless you're going to rent out some of your rooms or carve off a chunk of the house and sell it off to somebody. That's not realistic. It's just paper wealth. It doesn't help you pay your bills.
So, let's talk about what durable wealth looks like. What is this? Durable wealth is the part we're looking for. This is the part of your balance sheet that survives the storm. These are your actual dollars, cash reserves, diversified income sources, real estate, insurance, things that don't move one-for-one and lockstep with the S&P 500. We're very focused on the stock market, but we want to make sure we have some things out there that are not affected by it. So, one big example there, Bob, is liquidity. This is money you can actually get to without selling at a loss. That's the buffer in bad markets. Liquidity is a fancy word for emergency fund. We got to make sure there's some oil in the engine so that if something goes wrong, we need to fix the car, or we need to help a kid with something, we've got dollars that are not impacted by the stock market that we can tap into.
Bob: Yeah. And we're not trying to take growth-oriented investors and saying, "Hey, don't have all your money in the stock market." We're not saying that at all. What we are saying is, we've got to remind folks that the market, on average, corrects, at least, 12% every year. We already have more than that kind of a correction back in early April when we had Liberation Day, and the whole world got introduced to tariffs on steroids, and things recovered. But the point is, if you had to go write a tuition check, or some other major expense, you're trying to redo your kitchen or buy a vehicle, you do not want to have to sell stocks in the down market in order to come up with short-term liquidity.
And so, it's counterintuitive right now, why would I want to have any money parked on the sidelines earning 2%, 3%, 4% in a "safe" savings account or money market account when tech stocks are going gangbusters? Historically, Brian, you know this, I know this, we've experienced this umpteen different times, when we do get these corrections, no one sees it coming. It usually comes as a result of something no one saw coming. And that's why we have to remind folks, the responsible thing to do is make sure you've got money set aside for the time frame in which you plan or want to use it to avoid having to sell when you have to, not when you want to.
Brian: Yeah. And I think now's the time to do that. This is a great thing to do here in Q4. Look at what's coming up over the next 12, maybe 24 months. If you for sure know you're going to pull a chunk out for one of these reasons, got to buy a car or helping kids and whatever, all the things that we've listed, this is a great time to carve that out. That doesn't mean you have to take it out of, let's say, it's an IRA. If this is tax-advantaged money, you can protect those dollars from the market without actually pulling it out of the IRA. Every IRA should have something like a core position or what's called a sweet fund where all liquid cash lands or filling that.
Buy a money market fund. You can buy a money market fund just like you can any other exchange traded fund or mutual fund or whatever. Something that'll spit out a little bit of interest, you might still be able to get 3.5%, 4.5%. It should still be in that range anyway. And you can carve those dollars out with the intention of actually taking them out sometime in the future, but at least, you will have protected them when the market's at an all-time high. So, the point is have a plan, know what you're going to be shooting for over the next couple of years, and figure out, maybe you should take some of the risk off the table so that you can still make those commitments without worrying whatever the market has done. And also, I throw out, do a plan, and make sure you have a stress test, right? So, I think you were just about to go down this path anyway, Bob. Go ahead.
Bob: Yeah. What we're saying, we're saying the same things. But this durable wealth, for most people involves, "Hey, at some point in time, I got to replace my job with an income stream from my portfolio." And people want to know before they head into retirement whether this thing's going to work. And I think a lot of people get emotionally upset at the thought of the market going down 3% or 5%, to say nothing of 15%, 20%, 25%. And for people that don't have a plan and have not stress test their portfolio, fear tends to take over and they tend to be under allocated to the stock market where you need to be long-term in order to outpace inflation.
But to the point, I think, you were starting to go down, there's ways to do this, Brian. There's ways to create different sleeves in your portfolio, whether those are cash equivalents or buffered ETF strategies. There are things where you can mitigate some of this volatility and still keep a long-term wealth/income replacement plan intact to get you the return that you need to get all within the context of a risk tolerance that you can sleep at night with. But you got to have those discussions. You got to stress test it. You got to run some numbers and arrive at a plan that's going to work for you.
Brian: Yep. And that plan, basically, means looking at all of your resources. What are your income streams? That might be Social Security. It could be pensions. It could be part time work. Perhaps, you have the old, deferred compensation plans that are going to kick in. And figuring out what those streams of incomes are. That's what I like to call OPM, other people's money, simply meaning, money that I get on a regular basis that comes from an outside source, not my own internal piles.
Bob: Brian, I earned my Social Security. Don't try to imply that I didn't. But go ahead.
Brian: I'm not implying that at all. I'm just talking about how we have an urge. We all have a human urge to try to fit as many of our bills into money we didn't have at the beginning of the month. I want somebody else to give me money because that's what I've become used to over 40 years.
Bob: Amen to that. You're right about that, yeah.
Brian: So, that's the outside income sources. And then, of course, you have your nest egg, which is going to have different tax treatments. That's a question in and of itself. Do I want to hit my pretax money in my IRAs? Perhaps I have Roth IRA 401(k) in the mix. Or maybe there are after tax investments, meaning simply something that's in a joint or individual account that's exposed to taxes on an annual basis. Each of those three things is going to have its own type of tax treatment. And for whatever needs you have, you need to match up the need with the resource for the most tax efficient manner to get to those dollars.
And that doesn't mean always avoid the highest taxes. That's not always the way to go. Sometimes, we want to hit those pretax dollars if we are in a situation where we're in the lowest bracket we've seen. And this is the window that people hit. Right just after retirement when salaries are no longer part of the mix and maybe they haven't turned on their Social Security spigots yet, therefore they're in their lowest brackets ever. That might be the time to go ahead and hit that pretax money. You're going to pay taxes eventually. The more you push it out, the higher your taxes are going to be probably when you're in your mid-70s and required minimum distributions kick in.
Bob: You've mentioned taxes three or four times in your last comment. And that's an important topic that so many people overlook. And that's just doing proactive tax planning. I mean, let's say, you've got some positions in your portfolio, your non-IRA portfolio with a low cost basis and, potentially, high capital gains. Look at ways and strategies that are out there, like putting collars on those positions, or using a donor advised fund for your charitable giving, or gradually taking a piece off if you could keep your tax rate at a low rate and up to a certain number zero on capital gains right now. There's ways to mitigate the tax burden while getting your portfolio position the way that it needs to be. But you've got to sit down with some people, a good, fiduciary advisor coupled with a good CPA and map out a strategy. The people that run into trouble, Brian, are the people that just set it and forget it and put it on autopilot and bury their head in the sand and say, "There's nothing I can do about it, so let's just hope it all works out." For people that go in and do the planning, oftentimes, they're amazed at the kind of results that could come just by being proactive and getting in a room with some professionals that know how to do this for you.
Brian: And a lot of it has to do with just understanding the tax code for what it is and knowing what the changes are that come every few years as we put new laws and things in place. Most people just operate off the assumptions they had 30 years ago the last time they looked at all these rules. Things change. Make sure you keep up with it and you're taking advantage of what's given to you.
Bob: Here's the Allworth advice, if your sense of security rises and falls with the performance of the stock market, you're not just building wealth, you may not be building permanent wealth at all, you might just be renting it short term. Convert paper gains into durable assets, durable income replacement before the market does it for you. Investors are pouring billions of dollars into "safe" funds that promise to cushion the next market drop. But do they really work? We're going to break that down 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. If you can't listen to "Simply Money" live every night, subscribe to get our daily podcasts. And if you think your friends or family or both could use some financial advice, and let's face it, who couldn't? Tell them about us as well. Just search "Simply Money" on the iHeart app or wherever you find your podcast. Straight ahead at 6:43, how to handle a deferred compensation plan, what to do when your rental properties have skyrocketed in value, and where to put your money once you've maxed out your retirement accounts. We see it all the time, investors are increasingly searching for ways to stay invested in equities or stocks, but they want a built-in shield. They want exposure without that gut punch that invariably comes when the markets go down, and they don't want to be sold products with high commissions and fees. So, what do they do, Brian?
Brian: Well, what we look at is, we look at... We'll start with the data here. What actually happened? So, in 2025 so far, we talked about these from time to time, but buffer-style ETFs, these are exchange traded funds that look to limit downside losses. Well, they've drawn in about $9.7 billion in inflows. The more traditional low volatility or kind of growth index arrangements that we're more comfortable with, those have seen only about $2.5 billion in outflows. So, now, what we're seeing is obviously, more flowing into the buffer side, and it's kind of coming out of the low volatility index stuff.
The reason for this is because of what they do. So, a buffer, or what's called a defined outcome exchange traded fund, these are the types of funds that blend equity exposure, so that's the growth that we all have come to love, with a bit of an options overlay. Meaning that, yes, they are trading options. This is not in an aggressive, speculative manner. This is in a sort of portfolio insurance manner. And they're looking to buffer or reduce those losses over a specific range. So, kind of think of it as a safety net. You're going to give up some of the upside, of course, but that's in exchange for some protection on the downside.
For example, the first 10% of losses might be absorbed. So, if the market drops 8%, that ETF may only decline 2%, depending on the structure, that's the good part. On the flip side, Bob, often, there's a cap on the gain. So, if the market actually goes up 20%, that exchange traded fund might not get any more than 15%. So, you're going to give up some of the upside in exchange for a little bit of protection on the downside over a fixed period of time. And it's usually about a year after which that buffer is going to reset into a new frame or some kind of new time structure.
Bob: All right, Brian, I love these things for the right kind of investor. The folks that know they need to be involved in the market to get that return to hit their long-term financial goals that we talked about all the time as part of a financial plan, but they just can't emotionally stomach the historical volatility of being all in stocks. These are great options for those kind of people. And let's just put the cards on the table here. This strategy, what is it competing with? These indexed annuities that are being sold left and right by non-fiduciary, commission-based people, where huge commissions are involved, the lockup period, surrender charges are huge.
The thing I love about these buffered ETF strategies, and you already said it, you typically, if you're in a good, responsibly-constructed strategy around these things, you can reset it after one year. You can get out at any time. It's liquid. So, you've got a lot of options if your goals and needs change. And as the market changes, the buffers and the changes and the index by which you want to tie these things to can change. You have a lot of flexibility if you're working with a good, fiduciary advisor and an actual strategy, versus just being sold a product by a commission salesperson. How about that for a Thursday morning rant?
Brian: You know how we love your rants, Bob. Rants are a great way to start the day. So, yeah, I think I want to drill into what you just said there. In the right situation, these can make some sense. But at the same time, if you are somebody who you understand market history, and you don't panic when the market wobbles and you know that there's a cycle to things and things come and go, then you might be leaving money on the table just for the exchange of protecting yourself during a period of time. You probably weren't going to panic and sell anyway. So, just recognize there is a bit of a sacrifice involved here. And I think this is important to call out because these things are getting out there. As we said, there's a lot more. The big players out there are launching new, bigger versions of this. It's becoming more popular.
So, BlackRock just launched one called the iShares Large Cap 10% Target Buffer. And the whole point of it, obviously, is it's supposed to protect you against the first 10% of losses against the S&P 500. ARK, ARK that's run by Kathy Wood, her name pops up in financial media all the time, she's got one coming out as well. And investors are throwing money into these things. As we said earlier, there's more flowing onto the buffer side most recently than there is on the more traditional side. So, just understand what you're getting into if you choose to get into these. Understand what they do, and more importantly, understand what they do not do.
Bob: Well, and then there's actual portfolio strategies, you know, where you take a bunch of these different buffered ETFs and pair them together. So, you've got access to a lot of different indices. And you do have an actual manager in the background taking a look at when it's the right time to reset the strategy. Again, just to boil it down real simply, Brian, and you know this, when we sit down with somebody and actually do a financial plan and an asset allocation strategy, it comes down to this, there's an amount of risk you have to take in your portfolio to get the return you need to get to achieve your goals. That's one part of it. And then there's the emotional amount of risk that somebody's willing to take to keep from, you know, waking up in the middle of the night worrying about the stock market.
So, like you said, in situations like this where we've got to have people involved in the market, but we got to buffer that emotional risk by knowing upfront what our downside limitations are, these can work wonderfully. Get people where they need to be in terms of an asset allocation without them feeling like they're just getting thrown to the wolves without any downside protection whatsoever. And it's in those situations where these can work out great. Because the phone call no client ever wants to make and no advisor wants to get is that phone call that says, "Hey, I can't take it anymore. Get me out. Move me to cash. And I'll wait until things are 'better.'" If that situation ever happens, the advisor didn't do his or her job, the client didn't do their job, and it can end up in a disaster. So, that's where these things can really work out, as you said, if they're fitted to the right situation in a truly comprehensive financial plan.
All right, here's the Allworth advice, protect what matters. Don't lock away your upside, though. Use buffered ETF smartly and selectively, always informed of their boundaries and their costs. It's a question many people will ask on the path to financial freedom, should I rent or buy a home? We'll help you answer that question 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, joined tonight by our real estate expert, Michelle Sloan, owner of RE/MAX Time. Michelle, thanks again for spending time with us tonight. And you want to talk about something that's always a fascinating topic to me. And I know Brian loves this as well. Just the conversations that we all get into nowadays on, does it make more sense to rent a home or buy a home? And what are the pros and cons from a financial standpoint and a cost standpoint? I know you've got a lot to offer on this topic. Walk us through it tonight.
Michelle: It would be smart of me as a salesperson to always say, you should buy a home. But after doing this for 20 years, I have to be so realistic when I sit down with clients who are interested in buying a home. Because there is a lot to consider when it comes to buying a home. And maybe, depending on your specific situation, renting is the better move. We'll break it down a little bit with our pros of renting, our cons of renting, the pros of buying, etc. Are you ready?
Bob: Yeah.
Brian: I'm ready. I want to learn.
Michelle: Okay. All right. Well, the first pro of renting is there is a lower upfront cost, the barrier to entry. Basically, you only need likely a security deposit, maybe first month's rent, an application fee of $50, and you can live in a property. That's a good thing. That's a pro for renting. When it comes to buying, certainly, you're going to need a much larger down payment. You're going to need a mortgage of a couple hundred thousand dollars. So, you might need $20,000. And a lot of people don't have that in their bank account. So, that's the first barrier to buying a home, is having some cash on hand. And so, saving is so important when I consult with buyers or want-to-be buyers is, you know what? It takes time to build up the savings that you need to buy a home. So, number one, if you don't have that, renting may be your only option. And that's okay as long as you can try to find a way to start saving. Because in the end, and this is the way sort of the world goes around and around, as you're younger you don't have a lot of savings, and you're not making as much money. As you get a little bit older and your job becomes more stable, then you're thinking about, "Okay, I'm may start a family. Now, it's time to start thinking about buying." And having that nest egg is so very important.
Brian: Well, Michelle, what would you say the average time is if somebody knows they're going to be somewhere for a certain amount of time? When is that sort of break-even point? If you know you're going to stay put for this many years, then it's safe to buy, versus if you may have to move in two or three years, that's a little bit dicey. You might want to consider renting. Do you have a break even for that?
Michelle: Yeah, I do, actually. That's a great question. Because mortgage rates are high and home prices are high, it often takes longer for the benefits of buying to actually catch up with renting. So, for that break-even time, it's anywhere between six and eight years. So, if you're planning on staying in your home for six to eight years, that's when it's definitely time for you to consider buying. If you're going to be bouncing around and you don't know if your job is going to be stable, or if you personally are just not sure you want to live in a particular area and you're going to move within a year or two, guess what? You're likely to lose money on that investment.
And buying a home, although it's very emotional and it's where you live and it's all of the things that go along with buying a home, it is an investment. And it's one of the biggest and most important investments that you're ever going to make. So, when you make it and you're very thoughtful about it, that's so important. So, if you're planning on staying in a home for less than six to eight years, you may consider renting. Now, know you're never going to build equity when you're renting. That's the other con of renting. You're not paying yourself. You're actually paying the person who owns that property, and you're paying for them to build wealth. And so, wealth building is extremely important in the real estate industry, and it's important in your industry too, right? Because you look at those kinds of folks that have homes or multiple properties, and we look at how the increase in value of those properties will continue from year-to-year. And that's part of your portfolio.
Brian: Okay, so following up with a timing question again, do you see people relying on arms on adjustable rate mortgages now that we're in a declining rate environment? Are people kind of taking that risk of needing to refinance in three or five years, or do you see people locking them in for longer term fix?
Michelle: Most of my clients like the stability of either a 15 or a 30 year. The arms, in my opinion, and again, I don't do the mortgage side of things every single day, I think it's an option and an opportunity. But there's a lot of people who they feel like if you do a five-one arm or a seven-one arm or whatever that is, knowing that we don't know what the future looks like in five years, it could be worse than it is today. And if you're doing an interest-only loan, and you're only paying the interest, you're just, again, sort of spinning your wheels. So, you definitely want to talk to an expert in the financing side of it, the mortgage industry, and really see what is best suited for your budget and your personal situation.
Bob: Michelle, I want to go back to your example. And first of all, I want to call out and just say thank you for your transparency and your honesty and be willing to... I'm being sincere because I know the way you operate, you truly operate like a good, fiduciary advisor, not just a real estate salesperson. And that's why we think so highly of you and trust you and love having you on the show. So, I mean that sincerely. The point I want to add to your prior comment is, for those folks that maybe aren't in that 68 year window now, the key thing is to not go through lifestyle creep. And just because you're renting, spend 100% of your discretionary income so you don't build up that emergency fund earmarked for a home down payment. And is that what you talk about to your clients that aren't ready yet, but you know need to be ready in four or five years?
Michelle: A hundred percent. You always want to be planning for your future. So, finding ways to save, even if it's a couple of bucks a month or, you know, $100 here or $150 there, definitely setting that money aside, not only for buying a home, but just life. You never know what's going to happen along the way. And if you are prepared for any... You know, your car breaks down. Okay, if you have no emergency fund, you can't fix your car, you can't get around. So, it's the same thing with the house. And it definitely is starting to put money away is so important. The other thing that I'd like to tell buyers real quick, and I know that we're up against the clock, is checking your credit. Because having good credit will go a long way for getting the best rates when it does come time for you to buy a house.
Bob: Great point and very important point. Thanks as always so much, Michelle. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question and it will come straight to us. Brian, Jason, or John, excuse me, in Mason leads us off tonight. He says, "We've been building cash reserves waiting for a market pullback, but it never seems to come. How do we decide when to put that money back to work without guessing wrong?"
Brian: Well, I hope you haven't set aside too much because this is kind of the...what we're living through right now, the reason that we don't want to do those kinds of things. At the end of the day, what you're trying to do is time the market. Whether that's done out of fear or greed, it's still timing and it's not something we can control. You can be right 9 times in a row and that 10th time comes back around to get you. So, even with money paying 4% or 5% on money markets, inflation is still eating away your purchasing power over time. So, missing just the 10 best days in the market over 20 years can cut that return in half.
So, what should you do now? I'd say, stop paying attention to the market. Maybe do a little quick math and figure out exactly how much has been left on the table over whatever this time period is that you've been sitting in cash. Just so you can be reminded not to try to pull the strategy too many times. But if you're nervous about putting it all in at once because you feel like the train has left the station, spread it out over time. Maybe divide it by six a little bit over the next six months and then let it go. Let it do its job. Don't be surprised when the market pulls back. That's a guarantee I can give you. It's going to happen. But I hate to see people thinking they're making responsible financial decisions, then they wind up throwing the money in and the market does take a downturn. And then those people tend to decide that the market has targeted them for failure. The market could care less about you or your goals or your money. It's going to do what it does. You have to learn how to ride it and not try to tap dance in and out of it.
Let's move on to Greg in Westchester. Greg's got a slug of company stock in his retirement plan. He's concerned that it's become a pretty big part of his portfolio. And he's asking, Bob, are those option strategies like collars, protective puts, is that realistic for an individual investor, or is that better left to the institutions?
Bob: I think they're absolutely appropriate for individual investors. And I wish more individual investors knew about them and actually used them. That being said, they're awfully helpful if you're working with a good, fiduciary advisor that even knows what these things are and how to deploy them. So, let's get into that a little bit. A protective put, sometimes our industry does a great job of making this stuff seem way more complicated than it is. Think about if you've got a million-dollar home, you would not sit out there with that home and have no insurance on the house, right? If it burns down or a flood comes through or whatever and wipes it out, you're eliminating a big chunk of your net worth. Same thing with the stock. All the protective put is, is I am buying an option to sell that stock at this price by this set date, and you got to pay a premium to do that. Just treat it like an insurance premium.
If the stock keeps going up and you hold that put to expiration, it goes away, and that's a lost cost to insure that stock, just like premiums you pay on your home. If the stock starts to go down, you don't have to hold the put to expiration, you can sell it. If you get that 8%, 10% pullback, what have you, you can always sell the put for a profit. But you got the protection, and if you were right and the stock went down, you were protected and made a little money with your downside protection. All a caller is, is an attempt to help get some of that insurance paid for, meaning you sell a call option, meaning you are willing to sell your stock by a certain date at a certain price and you receive a premium in return for selling that call option, and that helps pay for the put protection. So, in a caller strategy, you want to spread these things apart a little bit. And that way, you have a little bit more upside left. Things continue to go up, but you're helping pay for some downside protection. It's a wonderful strategy. Unfortunately, a lot of people have no idea what I'm talking about, including advisors and don't know how to put this into a responsible financial plan. Hope that helps, Greg.
Michael in Hyde Park says, "I'm being offered a deferred compensation plan, but I'm worried about company solvency. How do you evaluate that kind of risk before committing to even get involved in the deferred comp plan?"
Brian: So, yeah, Michael, congratulations. Obviously, you're working for an employer that has put together some great benefit plans for their employees. For those who might not know, a deferred compensation plan, this is not a 401(k). This is something in addition to a 401(k). 401(k), of course, has its own limitations of how much money can go in, somewhere between $23,000 and $30,000 depending on your age. That is available to everybody out there. A deferred comp plan is different. It's not made available to absolutely everybody. It's usually an executive type of a plan, something for higher income earners, generally speaking.
But also, the big risk, and Michael's already clued into this, these are assets of the company. What that means is that a deferred comp plan, it could be acclaimed by a creditor if that company ever gets sued by somebody or goes bankrupt or whatever. That basically means that these assets are exposed. Your 401(k), that is not. That is very clearly walled off. Nobody can touch it. So, what do you have to do? You have to treat this like any other company. Forget the fact that you work there. Make sure you understand your own company's credit ratings. If it's publicly traded, what is their debt load? What do their financial statements look like? Look at trends in cash flow, profit margins, have they made layoffs recently. And you can even ask HR for plan documents. They should be shoving them in your face anyway if you've got this as an option. But make sure you understand exactly where that goes. So, yes, you're right to identify some risk. There could be a good opportunity here, but it could also be risky as well. So, just make sure you understand what you're getting into. But otherwise, those can be really beneficial programs.
So, one more quick one, Allison in Loveland's got some rental properties. They've gone up, but the maintenance is wearing them out. She asks, Bob, what are their best exit strategies? How can they get out without triggering these massive capital gains of real estate?
Bob: Well, I got to move quick here, Allison. The most popular option is to use, if you don't want to have maintenance headaches and be a landlord anymore, a Delaware Statutory Trust, better known as a passive 1031 alternative. So, you basically put your property in there, it gets sold, and you get diversified into a professionally-managed portfolio of real estate. You defer the capital gains and you convert this to an income stream. The only thing is they're typically a little bit illiquid. You got to be willing to hold them for 5 or 10 years, but it can be a good strategy to defer and spread out that capital gains headache, and also, get yourself out of the landlord and, you know, maintenance business, which a lot of people want to do as they head toward retirement. All right. Coming up next, some advice on keeping money from wrecking your relationships. 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. Did you know that more than one in three Americans say they have lost a friendship because of money? According to a new survey from LendingTree, they say financial stress, disputes, or mismatch spending expectations have driven a wedge between people they once called friends. Brian, this is a shame. Walk us through it.
Brian: Well, Bob, we got a survey here showing 4 out of 10 admit having had disagreements with friends over money, and about a third of them feel pressured to match their friends spending. And about one in three, Bob, have lied about how well they're doing financially. Well, this shows us that money can be a bit of a minefield. This is one of the last domains where we actually reveal our vulnerabilities because people can see what we spend money on. Income debt, our fears, aspirations, when all of our friends are at different stages or just have different attitudes for how this is working for them, these differences can really magnify between people and it can drive a wedge between people who otherwise were good family members and friends.
Bob: Well, Brian, what this comes down to me is just, I'll just say it, insecurity. You know, you've got people that have a lot of money, where their whole identity is tied up in their wealth or their income, and they like to load it over people. They talk about their country club membership or their expensive vacation. You know, they want to make everybody know that they've made it and they're doing great. If you're around people like that, you got to question whether they are truly your friend. Because if they're going to hang that over your head and make you feel like less of a person, I would say, that's not really a friend. On the flip side, if you've got people that hang out with folks that have some money and you've got less money and you're expecting that person to pay for your stuff, pay for your dinner, you know, all that kind of stuff, you know, that's not good either.
So, I think it comes down to not tying your identity to money. True friendships can put all that kind of stuff aside, have a little bit of a feel for where your friend really is financially, and treat one another with mutual respect and dignity and keep from getting into all these kind of messes. I hate to see relationships end because of money. Here's the Allworth advice, prevent money from becoming that silent wedge. Define your terms. Talk early. Protect both your financial peace and your friendships. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
When the market's hitting record highs like it is now, it feels awfully good. You log into your account, you see the numbers are up, and you think, "Wow, we are doing great, we're rich." But the question is, are you really that well off, and is your long-term financial plan really going to work just because the stock market is up right now and the value of your investment accounts are up? Brian, we see this all the time and we call this the paper wealth trap.
Brian: Yeah, so here's what happens, when that market goes up, your account grows, and you start to feel wealthier... And anybody who didn't panic in 2022 should be sitting on the largest pile of money they've ever seen because the market has continued to grow. We've had some fantastic years including this one. So, the human reaction to that, what do we do? We loosen the belt a little bit. Maybe spend a little more. Maybe stop paying as much attention. Kind of lose sight of the portfolio a little. And we assume we're diversified. I got 10 different mutual funds out there, but all 10 are still tied to the same market. That means that there's nothing that's going to kind of offset any of the bumps and things that we're going to hit.
We saw this. About 25 years ago, I remember, there was a mutual fund company called Janus, and they had four funds that for about two or three years, were the only things that anybody wanted to deal with. And then finally, in 2002, the market kind of hit the skids a little bit, and all four of them collapsed at one time, because they were all invested the exact same way. So, don't assume just because you've got five unique ticker symbols in your portfolio, that you have five unique investments. Got to look under the hood a little bit, don't you, Bob?
Bob: You certainly do. So, that covers the topic of diversification. And what we really want to talk about as well is just this whole mindset shift. And the thing we got to watch out for here is lifestyle creep. Meaning, there is a difference between experiencing a good market in the midst of having a true financial plan where you've looked at your long-term goals. You've actually looked at what you spend every month or every year, and you make sure your plan is intact whether the market is going up, down, or sideways, versus just assuming it's all going to work out, and if you get $200,000, $300,000, $400,000 of gain in a current year, you say, "Wow, the market's up. I can go buy a more expensive car than I can really afford or take two or three cruises that I can't afford or eat out at more expensive restaurants." We're not saying don't enjoy your life and all that, we're saying, do it within the context of a well-constructed financial plan. Don't let the current emotions of the moment run your spending habits, because that can backfire real quickly if you're not really paying attention.
Brian: And it's kind of like looking at Zillow to see what your house is worth knowing that that doesn't really do you any good. It's fun to look at, and it should be, that's probably at an all-time high as well. But that's not money you can touch unless you're going to rent out some of your rooms or carve off a chunk of the house and sell it off to somebody. That's not realistic. It's just paper wealth. It doesn't help you pay your bills.
So, let's talk about what durable wealth looks like. What is this? Durable wealth is the part we're looking for. This is the part of your balance sheet that survives the storm. These are your actual dollars, cash reserves, diversified income sources, real estate, insurance, things that don't move one-for-one and lockstep with the S&P 500. We're very focused on the stock market, but we want to make sure we have some things out there that are not affected by it. So, one big example there, Bob, is liquidity. This is money you can actually get to without selling at a loss. That's the buffer in bad markets. Liquidity is a fancy word for emergency fund. We got to make sure there's some oil in the engine so that if something goes wrong, we need to fix the car, or we need to help a kid with something, we've got dollars that are not impacted by the stock market that we can tap into.
Bob: Yeah. And we're not trying to take growth-oriented investors and saying, "Hey, don't have all your money in the stock market." We're not saying that at all. What we are saying is, we've got to remind folks that the market, on average, corrects, at least, 12% every year. We already have more than that kind of a correction back in early April when we had Liberation Day, and the whole world got introduced to tariffs on steroids, and things recovered. But the point is, if you had to go write a tuition check, or some other major expense, you're trying to redo your kitchen or buy a vehicle, you do not want to have to sell stocks in the down market in order to come up with short-term liquidity.
And so, it's counterintuitive right now, why would I want to have any money parked on the sidelines earning 2%, 3%, 4% in a "safe" savings account or money market account when tech stocks are going gangbusters? Historically, Brian, you know this, I know this, we've experienced this umpteen different times, when we do get these corrections, no one sees it coming. It usually comes as a result of something no one saw coming. And that's why we have to remind folks, the responsible thing to do is make sure you've got money set aside for the time frame in which you plan or want to use it to avoid having to sell when you have to, not when you want to.
Brian: Yeah. And I think now's the time to do that. This is a great thing to do here in Q4. Look at what's coming up over the next 12, maybe 24 months. If you for sure know you're going to pull a chunk out for one of these reasons, got to buy a car or helping kids and whatever, all the things that we've listed, this is a great time to carve that out. That doesn't mean you have to take it out of, let's say, it's an IRA. If this is tax-advantaged money, you can protect those dollars from the market without actually pulling it out of the IRA. Every IRA should have something like a core position or what's called a sweet fund where all liquid cash lands or filling that.
Buy a money market fund. You can buy a money market fund just like you can any other exchange traded fund or mutual fund or whatever. Something that'll spit out a little bit of interest, you might still be able to get 3.5%, 4.5%. It should still be in that range anyway. And you can carve those dollars out with the intention of actually taking them out sometime in the future, but at least, you will have protected them when the market's at an all-time high. So, the point is have a plan, know what you're going to be shooting for over the next couple of years, and figure out, maybe you should take some of the risk off the table so that you can still make those commitments without worrying whatever the market has done. And also, I throw out, do a plan, and make sure you have a stress test, right? So, I think you were just about to go down this path anyway, Bob. Go ahead.
Bob: Yeah. What we're saying, we're saying the same things. But this durable wealth, for most people involves, "Hey, at some point in time, I got to replace my job with an income stream from my portfolio." And people want to know before they head into retirement whether this thing's going to work. And I think a lot of people get emotionally upset at the thought of the market going down 3% or 5%, to say nothing of 15%, 20%, 25%. And for people that don't have a plan and have not stress test their portfolio, fear tends to take over and they tend to be under allocated to the stock market where you need to be long-term in order to outpace inflation.
But to the point, I think, you were starting to go down, there's ways to do this, Brian. There's ways to create different sleeves in your portfolio, whether those are cash equivalents or buffered ETF strategies. There are things where you can mitigate some of this volatility and still keep a long-term wealth/income replacement plan intact to get you the return that you need to get all within the context of a risk tolerance that you can sleep at night with. But you got to have those discussions. You got to stress test it. You got to run some numbers and arrive at a plan that's going to work for you.
Brian: Yep. And that plan, basically, means looking at all of your resources. What are your income streams? That might be Social Security. It could be pensions. It could be part time work. Perhaps, you have the old, deferred compensation plans that are going to kick in. And figuring out what those streams of incomes are. That's what I like to call OPM, other people's money, simply meaning, money that I get on a regular basis that comes from an outside source, not my own internal piles.
Bob: Brian, I earned my Social Security. Don't try to imply that I didn't. But go ahead.
Brian: I'm not implying that at all. I'm just talking about how we have an urge. We all have a human urge to try to fit as many of our bills into money we didn't have at the beginning of the month. I want somebody else to give me money because that's what I've become used to over 40 years.
Bob: Amen to that. You're right about that, yeah.
Brian: So, that's the outside income sources. And then, of course, you have your nest egg, which is going to have different tax treatments. That's a question in and of itself. Do I want to hit my pretax money in my IRAs? Perhaps I have Roth IRA 401(k) in the mix. Or maybe there are after tax investments, meaning simply something that's in a joint or individual account that's exposed to taxes on an annual basis. Each of those three things is going to have its own type of tax treatment. And for whatever needs you have, you need to match up the need with the resource for the most tax efficient manner to get to those dollars.
And that doesn't mean always avoid the highest taxes. That's not always the way to go. Sometimes, we want to hit those pretax dollars if we are in a situation where we're in the lowest bracket we've seen. And this is the window that people hit. Right just after retirement when salaries are no longer part of the mix and maybe they haven't turned on their Social Security spigots yet, therefore they're in their lowest brackets ever. That might be the time to go ahead and hit that pretax money. You're going to pay taxes eventually. The more you push it out, the higher your taxes are going to be probably when you're in your mid-70s and required minimum distributions kick in.
Bob: You've mentioned taxes three or four times in your last comment. And that's an important topic that so many people overlook. And that's just doing proactive tax planning. I mean, let's say, you've got some positions in your portfolio, your non-IRA portfolio with a low cost basis and, potentially, high capital gains. Look at ways and strategies that are out there, like putting collars on those positions, or using a donor advised fund for your charitable giving, or gradually taking a piece off if you could keep your tax rate at a low rate and up to a certain number zero on capital gains right now. There's ways to mitigate the tax burden while getting your portfolio position the way that it needs to be. But you've got to sit down with some people, a good, fiduciary advisor coupled with a good CPA and map out a strategy. The people that run into trouble, Brian, are the people that just set it and forget it and put it on autopilot and bury their head in the sand and say, "There's nothing I can do about it, so let's just hope it all works out." For people that go in and do the planning, oftentimes, they're amazed at the kind of results that could come just by being proactive and getting in a room with some professionals that know how to do this for you.
Brian: And a lot of it has to do with just understanding the tax code for what it is and knowing what the changes are that come every few years as we put new laws and things in place. Most people just operate off the assumptions they had 30 years ago the last time they looked at all these rules. Things change. Make sure you keep up with it and you're taking advantage of what's given to you.
Bob: Here's the Allworth advice, if your sense of security rises and falls with the performance of the stock market, you're not just building wealth, you may not be building permanent wealth at all, you might just be renting it short term. Convert paper gains into durable assets, durable income replacement before the market does it for you. Investors are pouring billions of dollars into "safe" funds that promise to cushion the next market drop. But do they really work? We're going to break that down 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. If you can't listen to "Simply Money" live every night, subscribe to get our daily podcasts. And if you think your friends or family or both could use some financial advice, and let's face it, who couldn't? Tell them about us as well. Just search "Simply Money" on the iHeart app or wherever you find your podcast. Straight ahead at 6:43, how to handle a deferred compensation plan, what to do when your rental properties have skyrocketed in value, and where to put your money once you've maxed out your retirement accounts. We see it all the time, investors are increasingly searching for ways to stay invested in equities or stocks, but they want a built-in shield. They want exposure without that gut punch that invariably comes when the markets go down, and they don't want to be sold products with high commissions and fees. So, what do they do, Brian?
Brian: Well, what we look at is, we look at... We'll start with the data here. What actually happened? So, in 2025 so far, we talked about these from time to time, but buffer-style ETFs, these are exchange traded funds that look to limit downside losses. Well, they've drawn in about $9.7 billion in inflows. The more traditional low volatility or kind of growth index arrangements that we're more comfortable with, those have seen only about $2.5 billion in outflows. So, now, what we're seeing is obviously, more flowing into the buffer side, and it's kind of coming out of the low volatility index stuff.
The reason for this is because of what they do. So, a buffer, or what's called a defined outcome exchange traded fund, these are the types of funds that blend equity exposure, so that's the growth that we all have come to love, with a bit of an options overlay. Meaning that, yes, they are trading options. This is not in an aggressive, speculative manner. This is in a sort of portfolio insurance manner. And they're looking to buffer or reduce those losses over a specific range. So, kind of think of it as a safety net. You're going to give up some of the upside, of course, but that's in exchange for some protection on the downside.
For example, the first 10% of losses might be absorbed. So, if the market drops 8%, that ETF may only decline 2%, depending on the structure, that's the good part. On the flip side, Bob, often, there's a cap on the gain. So, if the market actually goes up 20%, that exchange traded fund might not get any more than 15%. So, you're going to give up some of the upside in exchange for a little bit of protection on the downside over a fixed period of time. And it's usually about a year after which that buffer is going to reset into a new frame or some kind of new time structure.
Bob: All right, Brian, I love these things for the right kind of investor. The folks that know they need to be involved in the market to get that return to hit their long-term financial goals that we talked about all the time as part of a financial plan, but they just can't emotionally stomach the historical volatility of being all in stocks. These are great options for those kind of people. And let's just put the cards on the table here. This strategy, what is it competing with? These indexed annuities that are being sold left and right by non-fiduciary, commission-based people, where huge commissions are involved, the lockup period, surrender charges are huge.
The thing I love about these buffered ETF strategies, and you already said it, you typically, if you're in a good, responsibly-constructed strategy around these things, you can reset it after one year. You can get out at any time. It's liquid. So, you've got a lot of options if your goals and needs change. And as the market changes, the buffers and the changes and the index by which you want to tie these things to can change. You have a lot of flexibility if you're working with a good, fiduciary advisor and an actual strategy, versus just being sold a product by a commission salesperson. How about that for a Thursday morning rant?
Brian: You know how we love your rants, Bob. Rants are a great way to start the day. So, yeah, I think I want to drill into what you just said there. In the right situation, these can make some sense. But at the same time, if you are somebody who you understand market history, and you don't panic when the market wobbles and you know that there's a cycle to things and things come and go, then you might be leaving money on the table just for the exchange of protecting yourself during a period of time. You probably weren't going to panic and sell anyway. So, just recognize there is a bit of a sacrifice involved here. And I think this is important to call out because these things are getting out there. As we said, there's a lot more. The big players out there are launching new, bigger versions of this. It's becoming more popular.
So, BlackRock just launched one called the iShares Large Cap 10% Target Buffer. And the whole point of it, obviously, is it's supposed to protect you against the first 10% of losses against the S&P 500. ARK, ARK that's run by Kathy Wood, her name pops up in financial media all the time, she's got one coming out as well. And investors are throwing money into these things. As we said earlier, there's more flowing onto the buffer side most recently than there is on the more traditional side. So, just understand what you're getting into if you choose to get into these. Understand what they do, and more importantly, understand what they do not do.
Bob: Well, and then there's actual portfolio strategies, you know, where you take a bunch of these different buffered ETFs and pair them together. So, you've got access to a lot of different indices. And you do have an actual manager in the background taking a look at when it's the right time to reset the strategy. Again, just to boil it down real simply, Brian, and you know this, when we sit down with somebody and actually do a financial plan and an asset allocation strategy, it comes down to this, there's an amount of risk you have to take in your portfolio to get the return you need to get to achieve your goals. That's one part of it. And then there's the emotional amount of risk that somebody's willing to take to keep from, you know, waking up in the middle of the night worrying about the stock market.
So, like you said, in situations like this where we've got to have people involved in the market, but we got to buffer that emotional risk by knowing upfront what our downside limitations are, these can work wonderfully. Get people where they need to be in terms of an asset allocation without them feeling like they're just getting thrown to the wolves without any downside protection whatsoever. And it's in those situations where these can work out great. Because the phone call no client ever wants to make and no advisor wants to get is that phone call that says, "Hey, I can't take it anymore. Get me out. Move me to cash. And I'll wait until things are 'better.'" If that situation ever happens, the advisor didn't do his or her job, the client didn't do their job, and it can end up in a disaster. So, that's where these things can really work out, as you said, if they're fitted to the right situation in a truly comprehensive financial plan.
All right, here's the Allworth advice, protect what matters. Don't lock away your upside, though. Use buffered ETF smartly and selectively, always informed of their boundaries and their costs. It's a question many people will ask on the path to financial freedom, should I rent or buy a home? We'll help you answer that question 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, joined tonight by our real estate expert, Michelle Sloan, owner of RE/MAX Time. Michelle, thanks again for spending time with us tonight. And you want to talk about something that's always a fascinating topic to me. And I know Brian loves this as well. Just the conversations that we all get into nowadays on, does it make more sense to rent a home or buy a home? And what are the pros and cons from a financial standpoint and a cost standpoint? I know you've got a lot to offer on this topic. Walk us through it tonight.
Michelle: It would be smart of me as a salesperson to always say, you should buy a home. But after doing this for 20 years, I have to be so realistic when I sit down with clients who are interested in buying a home. Because there is a lot to consider when it comes to buying a home. And maybe, depending on your specific situation, renting is the better move. We'll break it down a little bit with our pros of renting, our cons of renting, the pros of buying, etc. Are you ready?
Bob: Yeah.
Brian: I'm ready. I want to learn.
Michelle: Okay. All right. Well, the first pro of renting is there is a lower upfront cost, the barrier to entry. Basically, you only need likely a security deposit, maybe first month's rent, an application fee of $50, and you can live in a property. That's a good thing. That's a pro for renting. When it comes to buying, certainly, you're going to need a much larger down payment. You're going to need a mortgage of a couple hundred thousand dollars. So, you might need $20,000. And a lot of people don't have that in their bank account. So, that's the first barrier to buying a home, is having some cash on hand. And so, saving is so important when I consult with buyers or want-to-be buyers is, you know what? It takes time to build up the savings that you need to buy a home. So, number one, if you don't have that, renting may be your only option. And that's okay as long as you can try to find a way to start saving. Because in the end, and this is the way sort of the world goes around and around, as you're younger you don't have a lot of savings, and you're not making as much money. As you get a little bit older and your job becomes more stable, then you're thinking about, "Okay, I'm may start a family. Now, it's time to start thinking about buying." And having that nest egg is so very important.
Brian: Well, Michelle, what would you say the average time is if somebody knows they're going to be somewhere for a certain amount of time? When is that sort of break-even point? If you know you're going to stay put for this many years, then it's safe to buy, versus if you may have to move in two or three years, that's a little bit dicey. You might want to consider renting. Do you have a break even for that?
Michelle: Yeah, I do, actually. That's a great question. Because mortgage rates are high and home prices are high, it often takes longer for the benefits of buying to actually catch up with renting. So, for that break-even time, it's anywhere between six and eight years. So, if you're planning on staying in your home for six to eight years, that's when it's definitely time for you to consider buying. If you're going to be bouncing around and you don't know if your job is going to be stable, or if you personally are just not sure you want to live in a particular area and you're going to move within a year or two, guess what? You're likely to lose money on that investment.
And buying a home, although it's very emotional and it's where you live and it's all of the things that go along with buying a home, it is an investment. And it's one of the biggest and most important investments that you're ever going to make. So, when you make it and you're very thoughtful about it, that's so important. So, if you're planning on staying in a home for less than six to eight years, you may consider renting. Now, know you're never going to build equity when you're renting. That's the other con of renting. You're not paying yourself. You're actually paying the person who owns that property, and you're paying for them to build wealth. And so, wealth building is extremely important in the real estate industry, and it's important in your industry too, right? Because you look at those kinds of folks that have homes or multiple properties, and we look at how the increase in value of those properties will continue from year-to-year. And that's part of your portfolio.
Brian: Okay, so following up with a timing question again, do you see people relying on arms on adjustable rate mortgages now that we're in a declining rate environment? Are people kind of taking that risk of needing to refinance in three or five years, or do you see people locking them in for longer term fix?
Michelle: Most of my clients like the stability of either a 15 or a 30 year. The arms, in my opinion, and again, I don't do the mortgage side of things every single day, I think it's an option and an opportunity. But there's a lot of people who they feel like if you do a five-one arm or a seven-one arm or whatever that is, knowing that we don't know what the future looks like in five years, it could be worse than it is today. And if you're doing an interest-only loan, and you're only paying the interest, you're just, again, sort of spinning your wheels. So, you definitely want to talk to an expert in the financing side of it, the mortgage industry, and really see what is best suited for your budget and your personal situation.
Bob: Michelle, I want to go back to your example. And first of all, I want to call out and just say thank you for your transparency and your honesty and be willing to... I'm being sincere because I know the way you operate, you truly operate like a good, fiduciary advisor, not just a real estate salesperson. And that's why we think so highly of you and trust you and love having you on the show. So, I mean that sincerely. The point I want to add to your prior comment is, for those folks that maybe aren't in that 68 year window now, the key thing is to not go through lifestyle creep. And just because you're renting, spend 100% of your discretionary income so you don't build up that emergency fund earmarked for a home down payment. And is that what you talk about to your clients that aren't ready yet, but you know need to be ready in four or five years?
Michelle: A hundred percent. You always want to be planning for your future. So, finding ways to save, even if it's a couple of bucks a month or, you know, $100 here or $150 there, definitely setting that money aside, not only for buying a home, but just life. You never know what's going to happen along the way. And if you are prepared for any... You know, your car breaks down. Okay, if you have no emergency fund, you can't fix your car, you can't get around. So, it's the same thing with the house. And it definitely is starting to put money away is so important. The other thing that I'd like to tell buyers real quick, and I know that we're up against the clock, is checking your credit. Because having good credit will go a long way for getting the best rates when it does come time for you to buy a house.
Bob: Great point and very important point. Thanks as always so much, Michelle. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question and it will come straight to us. Brian, Jason, or John, excuse me, in Mason leads us off tonight. He says, "We've been building cash reserves waiting for a market pullback, but it never seems to come. How do we decide when to put that money back to work without guessing wrong?"
Brian: Well, I hope you haven't set aside too much because this is kind of the...what we're living through right now, the reason that we don't want to do those kinds of things. At the end of the day, what you're trying to do is time the market. Whether that's done out of fear or greed, it's still timing and it's not something we can control. You can be right 9 times in a row and that 10th time comes back around to get you. So, even with money paying 4% or 5% on money markets, inflation is still eating away your purchasing power over time. So, missing just the 10 best days in the market over 20 years can cut that return in half.
So, what should you do now? I'd say, stop paying attention to the market. Maybe do a little quick math and figure out exactly how much has been left on the table over whatever this time period is that you've been sitting in cash. Just so you can be reminded not to try to pull the strategy too many times. But if you're nervous about putting it all in at once because you feel like the train has left the station, spread it out over time. Maybe divide it by six a little bit over the next six months and then let it go. Let it do its job. Don't be surprised when the market pulls back. That's a guarantee I can give you. It's going to happen. But I hate to see people thinking they're making responsible financial decisions, then they wind up throwing the money in and the market does take a downturn. And then those people tend to decide that the market has targeted them for failure. The market could care less about you or your goals or your money. It's going to do what it does. You have to learn how to ride it and not try to tap dance in and out of it.
Let's move on to Greg in Westchester. Greg's got a slug of company stock in his retirement plan. He's concerned that it's become a pretty big part of his portfolio. And he's asking, Bob, are those option strategies like collars, protective puts, is that realistic for an individual investor, or is that better left to the institutions?
Bob: I think they're absolutely appropriate for individual investors. And I wish more individual investors knew about them and actually used them. That being said, they're awfully helpful if you're working with a good, fiduciary advisor that even knows what these things are and how to deploy them. So, let's get into that a little bit. A protective put, sometimes our industry does a great job of making this stuff seem way more complicated than it is. Think about if you've got a million-dollar home, you would not sit out there with that home and have no insurance on the house, right? If it burns down or a flood comes through or whatever and wipes it out, you're eliminating a big chunk of your net worth. Same thing with the stock. All the protective put is, is I am buying an option to sell that stock at this price by this set date, and you got to pay a premium to do that. Just treat it like an insurance premium.
If the stock keeps going up and you hold that put to expiration, it goes away, and that's a lost cost to insure that stock, just like premiums you pay on your home. If the stock starts to go down, you don't have to hold the put to expiration, you can sell it. If you get that 8%, 10% pullback, what have you, you can always sell the put for a profit. But you got the protection, and if you were right and the stock went down, you were protected and made a little money with your downside protection. All a caller is, is an attempt to help get some of that insurance paid for, meaning you sell a call option, meaning you are willing to sell your stock by a certain date at a certain price and you receive a premium in return for selling that call option, and that helps pay for the put protection. So, in a caller strategy, you want to spread these things apart a little bit. And that way, you have a little bit more upside left. Things continue to go up, but you're helping pay for some downside protection. It's a wonderful strategy. Unfortunately, a lot of people have no idea what I'm talking about, including advisors and don't know how to put this into a responsible financial plan. Hope that helps, Greg.
Michael in Hyde Park says, "I'm being offered a deferred compensation plan, but I'm worried about company solvency. How do you evaluate that kind of risk before committing to even get involved in the deferred comp plan?"
Brian: So, yeah, Michael, congratulations. Obviously, you're working for an employer that has put together some great benefit plans for their employees. For those who might not know, a deferred compensation plan, this is not a 401(k). This is something in addition to a 401(k). 401(k), of course, has its own limitations of how much money can go in, somewhere between $23,000 and $30,000 depending on your age. That is available to everybody out there. A deferred comp plan is different. It's not made available to absolutely everybody. It's usually an executive type of a plan, something for higher income earners, generally speaking.
But also, the big risk, and Michael's already clued into this, these are assets of the company. What that means is that a deferred comp plan, it could be acclaimed by a creditor if that company ever gets sued by somebody or goes bankrupt or whatever. That basically means that these assets are exposed. Your 401(k), that is not. That is very clearly walled off. Nobody can touch it. So, what do you have to do? You have to treat this like any other company. Forget the fact that you work there. Make sure you understand your own company's credit ratings. If it's publicly traded, what is their debt load? What do their financial statements look like? Look at trends in cash flow, profit margins, have they made layoffs recently. And you can even ask HR for plan documents. They should be shoving them in your face anyway if you've got this as an option. But make sure you understand exactly where that goes. So, yes, you're right to identify some risk. There could be a good opportunity here, but it could also be risky as well. So, just make sure you understand what you're getting into. But otherwise, those can be really beneficial programs.
So, one more quick one, Allison in Loveland's got some rental properties. They've gone up, but the maintenance is wearing them out. She asks, Bob, what are their best exit strategies? How can they get out without triggering these massive capital gains of real estate?
Bob: Well, I got to move quick here, Allison. The most popular option is to use, if you don't want to have maintenance headaches and be a landlord anymore, a Delaware Statutory Trust, better known as a passive 1031 alternative. So, you basically put your property in there, it gets sold, and you get diversified into a professionally-managed portfolio of real estate. You defer the capital gains and you convert this to an income stream. The only thing is they're typically a little bit illiquid. You got to be willing to hold them for 5 or 10 years, but it can be a good strategy to defer and spread out that capital gains headache, and also, get yourself out of the landlord and, you know, maintenance business, which a lot of people want to do as they head toward retirement. All right. Coming up next, some advice on keeping money from wrecking your relationships. 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. Did you know that more than one in three Americans say they have lost a friendship because of money? According to a new survey from LendingTree, they say financial stress, disputes, or mismatch spending expectations have driven a wedge between people they once called friends. Brian, this is a shame. Walk us through it.
Brian: Well, Bob, we got a survey here showing 4 out of 10 admit having had disagreements with friends over money, and about a third of them feel pressured to match their friends spending. And about one in three, Bob, have lied about how well they're doing financially. Well, this shows us that money can be a bit of a minefield. This is one of the last domains where we actually reveal our vulnerabilities because people can see what we spend money on. Income debt, our fears, aspirations, when all of our friends are at different stages or just have different attitudes for how this is working for them, these differences can really magnify between people and it can drive a wedge between people who otherwise were good family members and friends.
Bob: Well, Brian, what this comes down to me is just, I'll just say it, insecurity. You know, you've got people that have a lot of money, where their whole identity is tied up in their wealth or their income, and they like to load it over people. They talk about their country club membership or their expensive vacation. You know, they want to make everybody know that they've made it and they're doing great. If you're around people like that, you got to question whether they are truly your friend. Because if they're going to hang that over your head and make you feel like less of a person, I would say, that's not really a friend. On the flip side, if you've got people that hang out with folks that have some money and you've got less money and you're expecting that person to pay for your stuff, pay for your dinner, you know, all that kind of stuff, you know, that's not good either.
So, I think it comes down to not tying your identity to money. True friendships can put all that kind of stuff aside, have a little bit of a feel for where your friend really is financially, and treat one another with mutual respect and dignity and keep from getting into all these kind of messes. I hate to see relationships end because of money. Here's the Allworth advice, prevent money from becoming that silent wedge. Define your terms. Talk early. Protect both your financial peace and your friendships. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.