Alternative Investments, AI Valuations, and the Risk of Being Overconcentrated
On this week’s episode of Simply Money, Bob and Brian break down the growing role of alternative investments inside retirement plans — and why you should be cautious before diving in. They also tackle whether today’s AI excitement is the new dot-com bubble, the lessons behind a shocking $4 million hospital bill, and what nearly 600,000 new 401(k) millionaires can teach us about long-term discipline. Plus, you’ll hear a personal story about how being overconcentrated in one stock devastated a family financially. And in our listener Q&A, we cover farmland sales, retirement income strategies, umbrella insurance, global diversification, and whether direct indexing beats ETFs.
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Bob: Tonight, we're talking about alternative investments in retirement plans, a real life example of what can happen if you aren't diversified, and more. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
We have some new information on the impact that alternative investments could have on your portfolio. Brian, we've been talking about this topic for a few months now as the industry continues to evolve and update. Share the latest information on alts or alternative investments.
Brian: Yeah, we did say last time that... I think we made a joke about how often we were going to talk about this. That might have been a week and a half ago. And lo and behold, here we are again. So, the reason this is hitting the news again, of course, it will all year long, so the rules are being loosened on what you can invest in inside of your 401(k)s. There's $12 trillion inside retirement plans, company-based, employer-based retirement plans like 401(k)s, 403(b)s, and so forth. And so, the financial services industry would very, very much like to get more products and services available to that $12 trillion because that is how we roll as a country.
So, what we're talking about today is alts, short for alternative. These are things outside of traditional stocks, bonds, and cash. That's normally what's in your 401(k)s in the form of, usually, mutual funds. Mutual funds are one type of investment that owns a bunch of different things underneath it, stocks, bonds, cash. Now, we're moving on to alts which are private equity, hedge funds, real estate, and private credit arrangements. These are often used to diversify a traditional portfolio and can potentially reduce risk and boost returns, but they're also less liquid and a lot more complex. There's a lot more moving parts here that people need to understand before getting into them.
Bob: All right. I'm not anti this stuff at all as I've shared before, but I got to put my skepticism hat on here a little bit, and I'll explain what I mean. BlackRock said one in four retirement plans are considering adding alternative investments over the next year. And as you said, it can impact trillions of dollars. And look, as somebody who used to be an advisor to several large 401(k) plans, I know how this game is played and I know how the cost of retirement plans and plan administration works. And to keep the company from paying out-of-pocket for administration services, what these plan-sponsor companies will do is they'll just put higher fee investment options into the plan. The higher the expense ratio of some of these funds are, that pays the cost of having these plans administered. So, who ends up paying that bill? The plan participants.
And I just say, buyer beware here because this stuff can work out great, better diversification, better returns in some cases, but you're also paying higher fees to have these things. And I'm noticing companies like T. Rowe Price, Goldman Sachs, BlackRock, they're starting to bury these alternative investments into those target date funds. So, if you just buy the target date fund and you're getting 15 or 16 funds in that target date fund, some of these things are going to be these alternative investments. And, yeah, it could work out great, but rest assured, the fee exposure is going up as well. Am I off base here, Brian?
Brian: No, no, for sure. I mean, everybody's going to fixate on the idea that, "Hey, diversify my portfolio, blah, blah, blah," but most people are going to see the possible chance for higher returns. And that's what's going to be attractive. But there's also... You know, remember where the returns are going to be going. There are companies out there, as you just mentioned, who create these things. They make money when you own them. It doesn't matter to them so much whether we are successful with them. And I always use the example of the gold rush at 1849. It wasn't the gold diggers who made the money. It was Levi's and Wells Fargo and these other companies who went to support the great demand that was happening in that environment. So, buyer beware like anything else.
Bob: And I'm not picking on anybody here, but I'm just throwing out a couple of facts here in this recent survey. BlackRock itself, just BlackRock, spent $25 billion on two acquisitions over the past year to grow their presence and exposure in private credit and infrastructure. And in July, the firm said, lo and behold, we're expecting to start offering its own target date funds with these private credit and infrastructure funds baked in. Here's the interesting thing, Brian, BlackRock's own survey found that smaller plans are actually more likely than larger ones to consider adding private assets. Earlier this year, their CFO said large plans typically rely on consultants and take considerable more time before making any major changes. Again, I'm not slamming any of this, but the smaller plans are the ones where they got to find ways to pay for the plan administration expenses. The larger your plans are, there's more scale, the fees tend to be lower, and, yeah, these companies are going to have an advisor or a consultant helping them to make sure that their investors are taken care of.
Brian: Yeah, and I kind of liken it to when the early 2000s, late 1900s and early 2000s during the first internet explosion there, when some 401(k)s began to allow funds that focused purely on technology. And there was a huge rush into them because this was before 2002, before 2008 when we all thought we were invincible and stocks just went to the moon, and there was a massive rush. Any fund that had the word technology in it, didn't matter what was under the hood, if it's got technology in it, if it says so right there in the title, then I'm going to own that fund. So, I have a feeling there's going to be a little bit of that. Again, these are not necessarily bad ideas, but know what you're getting into. Nothing is a panacea. Nothing comes without risk.
Bob: You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, shifting topics here a little bit. Brian, is AI becoming the new dot-com bubble. We're starting to see articles like that cropping up. We've talked about this before. And from time to time, it's worth just checking in to see if anything has changed with regard to how we want to answer that question. And you've got some good information to share on just where valuations stand. Because you've got to look at valuations to make sure we're not overpaying for this stuff. Give us some updated facts and figures around valuation.
Brian: Well, comparisons to 2000 are everywhere. I just kind of made one in a prior subject there. Back when valuation didn't matter and you had all these companies that weren't making a dime, but they had really cool marketing campaigns and really cool visions and all that kind of stuff. So, that's kind of where AI is right now. However, the leaders of this one, these aren't startup firms, right? This is NVIDIA, Microsoft, Apple, and Google. Huge cash flows, real demand for their products and services. AI, of course, is a major, major focus for these giant companies. However, they've got something to fall back on. This isn't startup companies in garages.
So, let's talk to let's talk to it. Let's do some actual comparisons. Valuations are kind of stretched. Things are running a little bit hot. We're talking about valuations, by the way. What we're talking about is that the price to earnings ratio, which is basically, how many dollars of earnings is the current price? What is the ratio between that price to the actual earnings? And back then in the late 1900s... I keep saying that. Sounds like the 1890s when I say it like that. In any case, but around 1999....
Bob: We're getting old, Brian.
Brian: Dating myself, right? But back in 1999, the forward price to earnings ratio of the S&P 500 was over 25. That was an eye popping figure for that time. In other words, $25 of share price for $1 of earnings. That's a big number. Lots of internet stocks had no earnings at all. And you couldn't even use this metric because, again, they were losing money hand over fist. So, there is no P/E ratio. So, compare that to today. Today, the S&P 500 forward P/E ratio is around 21. So, that's up there. Our long-term average is 15 to 16. But we're nowhere near the dot-com boom. And remember, that dot-com boom came when we were all a little bit immature about how the stock market actually worked. At that time, we had had 20 years of, basically, nothing but up. And we all thought that we were invincible and nothing bad could ever happen. And then 2002 taught us differently. But back at that time, P/E ratio around 25, currently around 21. So, not quite as bad as we were back then. It's not as much of a bubble as you might think.
Bob: Yeah, I think another huge difference is these... You know, we talk about these Magnificent seven companies all the time. I mean, anybody that listens to anything financially oriented in the news media, I mean, the whole mag seven concept, it's ubiquitous. These seven companies, Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, NVIDIA, They make up more than 30% of the entire S&P 500. But, Brian, to your point, they're also making money. They're growing. Their earnings are growing. They're real businesses. They're scaled up to really compete in this new AI era. That is a completely different ball game than back in the late 1990s and early 2000s, where we were talking about companies like pets.com, webvan.com, E-Toys, you know, companies like that that didn't even have any positive earnings. So, I think it's always important to pay attention to these valuations. And any time they get a little ahead of themselves, you know, the market does a great job of self-correcting. And that's why we talk about diversify, diversify, diversify. But I think to compare what's going on today back to the dot-com bubble days is a bit of a stretch, because, again, we're talking about real mature companies that have earnings, and not only earnings, but growing earnings.
Brian: Yeah. And don't let that FOMO get a hold of you, right? Because if you have a diversified portfolio now, you probably have in your 401(k), IRAs, your investments, you probably have something representing the S&P 500, which is just the 500 largest companies in the United States. Remember, the way that those types of funds, S&P 500 Index funds are constructed is they're subject to a weighted average of those individual funds or individual stocks underneath it, meaning it's not divided across 500 companies evenly. The bigger the company, the more of that index it makes up. So, the Magnificent 7, Apple, Microsoft, Alphabet, which is Google, Amazon, Facebook, Tesla, and NVIDIA, those make up 30% of the entire S&P 500. If you own a large cap fund, you are exposed to these companies. Don't feel like you are missing out. You've got it. Your portfolio has probably run up a good bit last couple of years, and you are benefiting. Don't lose sight of that.
Bob: Yeah, this is probably a good time to put a plug in here on private equity, too. Because if you do want a good, diversified, professionally-managed portfolio that gets exposure to private equity, again, private just means non-publicly traded companies, let's face it, there are fewer and fewer publicly traded companies out there right now. So, if you can get a good private equity manager where you are broadly diversified, not buying a lottery ticket, it can make sense to have some of that exposure in your portfolio.
Here's the Allworth advice, don't try to out-guess the AI boom. Diversify your exposure across sectors and avoid going all in on just one single trend. What does a $4 million hospital bill and a record number of 401(k) millionaires have in common? They both reveal the power and risk of long-term financial planning. We'll explain what we're talking about 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. Whether it's taxes on family land, planning a $3 million portfolio, or just protecting rental properties, we're tackling your real-life money challenges that are coming up straight ahead at 6:43. All right, Brian, this is a shocking story. An Ohio woman named Hannah Castle recently, her story went viral after posting her $4 million hospital bill on TikTok. The charges came after she gave birth to quadruplets prematurely with each baby needed an extended stay in a neonatal intensive care facility. Wow, what a bill. What a surprise. This woman's dealing with enough already.
Brian: Yeah, so in order to deal with this, obviously, that's a heart attack when you open that envelope. But she actually quit her job during pregnancy so that she could qualify for Medicaid because it was the only way to get any kind of financial assistance, but still got a $4 million bill out of it. So, yeah, kind of breathtaking that this can actually happen. And so, basically, the way this ended up, Medicaid ultimately did cover most of those costs. But this did trigger a whole debate and it got a lot of people talking about how are we, our family, what are we exposed to with regard to this?
So, the kind of things you're going to want to make sure, understand your coverage in the first place. You know, we're sneaking up here, Bob. It's almost Q4 and we're sneaking up here on benefit season where we all got to pick new plans. Take a little extra time. Remember what happened to this woman, which, yeah, it's an extreme story, but it does happen. Take a little time and read those details. Understand exactly what you're exposed to. Know what you're getting, more importantly, what you're not getting so that if something sneaks up on you, you'll kind of know what to deal with. And also, remember, up to 80% of medical bills can contain errors according to a couple different healthcare communication firms. So, just make sure you are on top of what you actually owe and don't just write the check because you were told you owe it.
Bob: Yeah, I think that's the big thing. Check your coverage, plan ahead if you can. I mean, I understand that pregnancy is not always something you can plan ahead for, but medical benefits are. So, make sure, before you just walk away from company-provided coverage, you know what you're getting into as far as your next medical coverage, and do some of that homework upfront. And then to your point, Brian, check that bill, because there's so many errors out there with medical bills. And my guess is Medicare probably went in there and reviewed that thing. I hope they did, at least, because it's taxpayer money. Review that bill with a fine tooth comb and get rid of some of the fat in there.
Brian: And Medicaid is what stepped in for her. And also...
Bob: Medicaid, Medicaid, sorry.
Brina: That's okay. One of the other things too, if you're in a situation like this, remember the hospital, the healthcare facility itself may offer some kind of charity care or payment plans even if you do have insurance because they understand how it works. There's just red tape you have to get through. You also might consider supplemental policies. You may have something, right? So, a lot of times people come up with these insurance policies they've had for decades and don't know why. Make sure you know what you own. Sometimes there's a critical illness rider or a hospital indemnity policy already in your household. So, make sure you understand what your resources are.
Bob: Yep. All right. We talk about the number of 401(k) millionaires quite often on this show. And here's a headline that jumped out at us this week. According to Fidelity, almost 600,000 people now in this country have, at least, $1 million in their 401(k) plan. And that's the highest number ever recorded. And, no, these aren't Silicon Valley founders or lottery winners. These are most likely people just like you and me, long-term savers, who were disciplined and just stuck to a plan. And it works. It works over time.
Brian: Yep. So, this is a common question I'm asking clients when we're updating financial plans because I'm just sitting here at this table every day talking to people and putting their puzzle pieces together. I see this happen. And we have the big momentous where I get to ask them the question, "Hey, do you feel like a millionaire?" And a husband and a wife will look at each other and they'll be like, "Nope," because it's just a little bit of a different world now. But any case, the real numbers behind this. So, the average 401(k) balance was up over 8% in the second quarter this year. That's around $137,000. Remember, this is the average of everybody. And so, that's largely thanks to the market's performance. So, far, we're up about, the S&P 500 is up about 11%, and most of that came in the second quarter.
But what the really important point of that is that people, for the most part, stayed the course. We had a panic in April when we were first getting used to the idea that tariffs were going to be a thing. And the market dropped as low as 15% at that point, which was a scary event. But at the same time, we recovered and most people seem to have stayed put. My phone didn't ring a whole lot during that time period. So, I think maybe people knock on wood. You tell me what you think. Maybe people are getting used to chaos is the order of the day. I don't know. What do you think, Bob?
Bob: I agree. I mean, there's always going to be market volatility. Wherever the source comes from or the reason for it, market volatility is the price of being in. And you got to stay the course and have a disciplined plan. And those that do can ride these things out. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Let's not forget the savings rate matters here, too. Back to this Fidelity study, the total savings rate, that's employee and employer contributions combined, they held steady at just over 14%. That's a little bit below Fidelity's recommended 15% target. But that's pretty darn good, Brian. And by the way, Gen X and Boomers are increasing their contributions to IRAs, too, up 25% and 37%, respectively, over the last year. So, even older savers are taking advantage of every little bit of tax sheltered growth they can get.
Brian: Yeah, we want to be in a good place. Another interesting bullet from Fidelity, I was talking a minute ago about that, about what happened in April when the market took a dive, Fidelity said that only about 5% of account holders made any changes during the second quarter when we were in that tariff panic. So, basically, what that says is that 95% of investors didn't really react. It might not have been happy, read the headlines, grumbled about it, then went on about their merry way and just kept saving, which puts them in the strong position that they're in right now. So, that's great.
But one thing I want to pay attention to as well is loans, right? So about 19% of people, according to Fidelity, have loans out against their 401(k)s. That's kind of a red flag. Borrowing against your retirement plans can really create big problems down the road. I really haven't seen a situation where it was the best answer for somebody. Sometimes, yes, there is no other choice. But usually, planning ahead and making sure you have an emergency fund, all of that, having done that work in advance, can put you in a better position where you'll never have to have that type of a discussion. Scary thing about the 401(k) loan, Bob, is if you quit your job or lose your job unexpectedly with a loan in place, that loan will almost always become a taxable, and possibly, penalizable distribution, unless you can pay it off in pretty short order. Most people can't do that. That's why there's a loan in the first place.
Bob: Yeah, that's something you really, really want to avoid. Here's the Allworth advice, becoming a 401(k) millionaire isn't about luck. It's about discipline, consistency, patience, and making savings a long time habit. Do you think you're safe because you own a stock, one particular stock in a great company that might even have fantastic long term returns? We're going to bring you a real life example of how that mindset crushed a family financially. 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. Well, if you're someone who loves big tech stocks, hopefully, you know by now that those big companies often come with a lot of government scrutiny. And depending on the outcome, or how judges and court cases pan out, the result can really impact the stock price. Case in point, Brian, Alphabet's Google does not have to sell its Chrome web browser, but it must share some of its search and other data with competitors according to a federal judge deciding in a landmark case against the search giant. Let's get into some of the details there.
Brian: Yeah, so Judge Amit Mehta ruled last year that Google was taking advantage of its rather dominant position atop the search space and kind of set up an illegal monopoly in making money advertising by paying companies like Apple and Samsung, literally billions of dollars a year to have Google installed as the default search engines on your smartphones. This is where you type in a word into your phone somewhere and it magically now dumps you on Google having done a Google search. So, that's been determined to be a no, no. That decision might have fundamentally reshaped how Google has to do business. That's the big way they make money, by driving traffic into their search engine. So, the Justice Department is proposing some sweeping changes that would include selling off Chrome or even the Android operating system, which is what runs Google phones.
So, on September 2nd, though, he said Google is not going to be required to get rid of Chrome, but the court also won't include a contingent divestiture of the Android operating system either. So, in other words, those two big things are apparently not going to happen. This is not unlike what happened in 1998 when the Department of Justice went after Microsoft. And at that time, the idea was that Microsoft had built Internet Explorer originally when it blew Netscape out of the water. This is ancient Internet history. And it was determined to have set up a monopoly at that time. So, that that had a big impact back then. Didn't it, Bob?
Bob: Yeah, this is back in April 2000. So, I mean, it's hard to tell how much of this stock price moves was due to this court case and how much of it was just tied to the whole tech bubble where the Nasdaq went down almost 80%. But Judge Thomas Penfield Jackson ruled that Microsoft had violated antitrust laws, and that stock just plummeted over a short period of time back into the '20s. Now, obviously, Microsoft is doing more than fine today. But the point of these stories is just, any time you are overly concentrated in any one company, any one sector, no matter how good it all looks, things can and do happen. And to just to illustrate that point today, we want to give you a real life story on how over concentrated in one stock can really impact a family negatively. And our own producer here at Allworth, Jason Scott, is here to talk about how a situation like this really impacted his family and not in a good way.
Jason: Hey, guys.
Brian: Jason, thanks for joining us. I'd love to hear what this... Real world stories are great. So, yeah, please tell us what happened to your family.
Jason: Yeah, you know, we do the show daily, and we always talk about, don't be under diversified. But I did. You know, I felt it very important. You know, what is an example? Like, what does that look like? So, my mother's second husband back in, like, 1998 or so, had a lot of their portfolio directed in Microsoft. I don't know how much, but it was way, you know, too much, as we would like to say. And when that antitrust case started, and you guys talked about how the stock had plummeted, initially, you know, he didn't do anything about it. He just figured it'll come back. It'll come back. But what happened is it was kind of like a slow burn with the stock, in which it kind of slowly over almost like a decade, I believe. It just kept kind of staying where it was and it kept going lower and lower. And there were just... He would not get out of it. Again, he was not diversified and he wouldn't get out. He wouldn't get out, he wouldn't get out, he wouldn't get out, thinking it would come back.
Well, what ultimately happened is, after about three years of this, he got Parkinson's disease and dementia, basically, simultaneously. And they wound up, my mother and him wound up in a situation where they ultimately had to sell it. They needed the money, but they sold it. Again, it was so much of their portfolio that, basically, it killed them financially. And to extrapolate forward to now, just that one thing has impacted our family to the point of, you know, like, we're talking about Medicaid now and nursing homes and all these kinds of horrible things that you can only imagine. But a lot of it had to do with a simple portfolio that had too much money in one thing.
Brian: Yeah, I'm looking at Microsoft right now, and I can see, I see the time frame you're talking about. Microsoft, basically, was dead in the water from a little after 2000 to about 2013. It has since gone off like a rocket to the moon. But, yeah, that can be... And that wasn't the worst time period either. There were ups and downs during that time frame. But a diversified portfolio would have would have helped a lot. It's a shame your mother had to go through that. So, what advice would you give, you know, as a family member. You don't need to be a financial advisor to recognize these types of situations. What advice would you give to some innocent bystander who sees a loved one kind of going through this?
Jason: Yeah, well, and that's the other part of this. It's funny. We talk about so many concepts and they were all at play here. So, when they got remarried, he wouldn't let my mom know much about what was going on with the money. And so, she just wanted to be taken care of, so she just kind of turned a blind eye to it. So, there's that component of it, a lack of communication. Then again, you know, when you own indexes, you already own Microsoft, you already own NVIDIA, and you ultimately may own the next NVIDIA and the next Microsoft and that sort of thing. You know, as a family member, all my experience is just, you know, you have to ask questions. You know, if you're going into a relationship, you know, there have to be sort of, "You have to tell me what's going on or this isn't going to happen."
Bob: Jason, was your mother and father working with a financial advisor in any way, shape, or form with their whole financial plan? Did they have a financial plan?
Jason: So, this was her second husband. This was not my father.
Brian: Oh, sorry.
Jason: That's all right. I don't know what kind of a financial plan they had. I am sure they did have some sort of a plan. Unfortunately, I don't have the answer to that because my mom didn't have the answer to that. And, you know, at the time, I mean, this was 25 years ago, I was, you know, doing my own thing. I wasn't so worried about what was happening because they seemed...everything was fine. They lived in a big, beautiful home, and there was no need at the time, I thought, to have to get involved.
Bob: All right. Well, Jason, thank you for coming on tonight. And I know that's a difficult story to tell. And really appreciate your transparency, especially sharing personal, family information. And hopefully, that'll help a lot of folks out there. Here's the Allworth advice. If one stock is carrying too much of your future, you don't actually have a plan, you have a gamble. All right. From farmland sales to retirement, insurance gaps, and even direct indexing, we answer your biggest money questions coming up next. You're listening to "Simply Money", presented by Allworth Financial on 55 KRC, The Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question and it will come straight to us. All right, Brian, Tom in Milford leads us off tonight. He says, "We just sold some farmland that's been in our family for decades. Is there a way to use those proceeds for income while also reducing the tax hit?"
Brian: Well, yeah, so let's talk a little bit about that tax hit to begin with. So, if you've been holding on to family land...
Bob: Why do these people always come to us after they've done something? Notice a pattern here?
Brian: Yeah, we're seeing a lot of these questions.
Bob: I created this mess. Brian, please clean it up for me after the fact.
Brian: Yeah. So, the problem, what Bob's referring to there is the past tense nature of Tom's question. And, Tom, we're not making fun of you, but there could be some challenges because the farmland has already been sold. But so, one of the things that happened, I would ask, do you know what the cost basis is in the first place? Meaning, what is the tax hit? Did you inherit it from your forebears, or was it given to you during their lives? Because if you inherited it, that should have come with a step up in cost basis. So, therefore, there might be less tax. Hopefully, for you, there's less tax than you might be thinking.
Now, if you had had maybe a chance to prepare a little bit, depending on what you ultimately were going to do with these dollars, you could have maybe used what's called a 1031 exchange if you were going to reinvest these dollars in other similar real estate. But if the cash has already been received, that's not a thing. If the sale is not completely finalized, then maybe you can rearrange it to do an installment sale, of course, that's sort of like seller financing, basically, you'll allow the seller, or the buyer rather, to make payments to you over time. That means you can spread them into different years. You can use the proceeds to fund a different portfolio, and then look for losses elsewhere to possibly set off some of the gains.
Now, this is something that could potentially help you if you've got a bit of a gain. If you are charitably inclined, then this would maybe a good year to use, like, a donor advised fund or maybe a charitable remainder trust to make a sizable donation to a charity that you were already supporting anyway, effectively pulling a bunch of years' worth of donations into one tax year to gain that tax deduction. That could help you now. But the 1031, that kind of stuff, unfortunately, that ship has sailed because you already sold property. Okay, let's move on. Michael in Loveland is 60 years old, and he's ready to hang it up. And he's asking, "With Social Security pensions and investments, what's the best order to draw from so I don't run into any tax surprises?" Bob?
Bob: Well, Michael, you know, when you say Social Security pensions and investments, we don't know how those investments are structured. Are they 401(k)s? Are they IRAs? Are they Roth IRAs? Or are they after tax brokerage accounts? So, it's important to take a look at all your sources of income and all your potential sources of income, meaning investments, and then run some numbers to say, what is the best way to construct an income strategy in the most tax efficient way possible? So, it doesn't mean that you've got to start with one source and drain all that down before you tap another one. Oftentimes, I would say, most times, you're going to end up with a blend of all this stuff working together. And again, sit down with a good fiduciary advisor, paired up with a good CPA. And together, you could put together an income plan that gives you the income you need and want every year, but do it in the most tax efficient manner. That'd be my answer. All right. Samantha in Florence. Brian, she says she's already has umbrella insurance, but they also have a vacation home and a boat. So, they're living large out on the lake, having a whole lot of fun, maybe too much fun, because she says, do we need a whole different level of liability coverage?
Brian: I don't know what you're out there doing on that boat, but you're just thinking ahead. And that's not a bad thing at all. So, umbrella liability is designed to protect and over and above the standard things that auto home and boat policies offer. But all underlying policies have to have a required minimum. That's usually a $250,000 to $500,000 liability. That's what's built into what you probably already own. Umbrella is on top of that. So, if you've got extra assets such as this vacation property in a boat, the umbrella limits should come up, yes, to match that net worth exposure. A lot of advisors suggest in the $5 million range, if you've got a multimillion dollar household out there. So, we don't know how big of an asset we're talking about here, but good numbers to work with.
That does sound like an awful lot. But remember, umbrella policies are geared to cover things that aren't very likely to happen, but if they do happen, they can be life ruiners. So, the cost of this coverage isn't that much. You're not talking tens of thousands of dollars. So, it's very well worth it. And make sure that your umbrella covers watercraft liability. Sometimes, they need a whole separate boat liability rider in addition. So, lots of moving parts there. But you're right to be thinking this far ahead. That's a good idea. Tom in Westchester, he's got a pile of money he's worried about. He's got about $3 million. And then he realizes that almost all of it is in U.S. stocks. Bob, should he have any global exposure, or can we just keep it simple and throw it all in the S&P 500? What say you?
Bob: Well, Tom's worried about over complicating things. So, I mean, my off the cuff answer is, you know, do you have a huge emergency here because you don't own any global or international stocks? By all means, no. All right. That being said, over time, when you run the numbers on combining risk and return, it does make sense. Back to that whole efficient frontier studies that we've seen over time. They have a little bit of exposure to global and international stocks, somewhere between 0% and 20%. Now, do you have to do that today? No. But I think, as you do your normal rebalancing, keeping in mind that we don't want to have the, you know, tax tail wag the dog here, meaning don't expose yourself to a bunch of tax liability just to move some money into international stocks, it might make sense to take a look at it over time as you do your normal rebalancing. Get a little sliver into international stocks. Just as a reminder, international stocks are doing wonderfully well this year after three, four years where people didn't want to invest in them at all. And hence the point, it makes sense to have a little slice of that in a truly diversified portfolio. But you could do it gradually over time and don't feel like you got to go out and buy that stuff in bulk today. Hope that makes sense. All right, Chris and Fort Thomas is evaluating direct indexing versus ETFs. Brian, you got about 25 seconds. At what level is the complexity worth it to save on taxes?
Brian: Yeah, so it can really be worth it to move to a direct indexing plan. You mean you own individual stocks as opposed to ETFs, mutual funds. I'd say a million dollars and up in taxable accounts. You've got high income. Maybe you're in a high marginal tax bracket. I think that's when it's most efficient to start looking at more specific strategies.
Bob: That was well done, sir. All right, coming up next, I've got my two cents on managing short term debt. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, Brian, I want to talk a little bit. You know, I sometimes am surprised when I have client review meetings. The number of people that walk in and they have a great financial plan, and then all of a sudden, they tell me, "Hey, we still have debt out here. We've got a car loan at 7.9%," or, "I took a home equity line of credit out to pay for a cruise." And my point here is, when people are sitting on these small loans, sometimes bigger loans, but medium-sized loans at above 7% interest rates, I'd like to know what you think, but I want these things paid off. Sitting out there, I know the markets have been doing great, diversified, even 60, 40 portfolios have done in the mid-teens for the last few years. And it's real easy to just go to sleep and say, "Well, my investments are always going to outperform the cost of my debt," but that is not guaranteed. And so, when you get this debt on your balance sheet at over 7%, I want to make that stuff disappear. And I've been having more conversations than I care to want to have about that here in recent months. You running into the same thing?
Brian: Yeah, because like you said, the market is at a peak, and people will kind of lean on the idea that I should leave it all alone, and I'll let these little credit cards go for a while. Because they're not hurting anything, no big deal. And now, we've got four credit cards with $3,000 or $4,000 on them that have all run up to the 25% and 30% bracket. And people will say, "But I never looked at it. Didn't know the interest rate was that high." Well, then that's what they're hoping for. You're playing right into their hands, of these big banks and financial institutions. So, a common conversation I'm having right now, Bob, is look, you've been looking at these little piles of debt for a while and just not doing anything about them. And I'll ask the question, "What if somebody dropped money out of the sky? What if cash just appeared in your checking account? What would you go do?" And they all say, "Well, I'd pay off those debts, of course." Well, great, because I'm going to send money from your investment account to your bank account because we're going to pay these debts off with money you didn't have a month ago because we're going to take advantage of the market where it is. Things are at an all-time high. That's a great time to blow up some of these little debts and clean up some of the clutter on your balance sheet.
Bob: No, that's good. And that highlights the two points I really want to make here. Number one, don't go to sleep here just because the market's been doing well and it's at all-time highs. And then second, where possible, plan ahead for some of these lump sum expenditures. Build up some cash in advance so you don't have to go out and borrow money to make those purchases. I know sometimes it's easier said than done, but it's just good, sound financial planning. All right, thanks for listening tonight. Tune in tomorrow. We'll talk about the smart way to avoid a tax bomb. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
We have some new information on the impact that alternative investments could have on your portfolio. Brian, we've been talking about this topic for a few months now as the industry continues to evolve and update. Share the latest information on alts or alternative investments.
Brian: Yeah, we did say last time that... I think we made a joke about how often we were going to talk about this. That might have been a week and a half ago. And lo and behold, here we are again. So, the reason this is hitting the news again, of course, it will all year long, so the rules are being loosened on what you can invest in inside of your 401(k)s. There's $12 trillion inside retirement plans, company-based, employer-based retirement plans like 401(k)s, 403(b)s, and so forth. And so, the financial services industry would very, very much like to get more products and services available to that $12 trillion because that is how we roll as a country.
So, what we're talking about today is alts, short for alternative. These are things outside of traditional stocks, bonds, and cash. That's normally what's in your 401(k)s in the form of, usually, mutual funds. Mutual funds are one type of investment that owns a bunch of different things underneath it, stocks, bonds, cash. Now, we're moving on to alts which are private equity, hedge funds, real estate, and private credit arrangements. These are often used to diversify a traditional portfolio and can potentially reduce risk and boost returns, but they're also less liquid and a lot more complex. There's a lot more moving parts here that people need to understand before getting into them.
Bob: All right. I'm not anti this stuff at all as I've shared before, but I got to put my skepticism hat on here a little bit, and I'll explain what I mean. BlackRock said one in four retirement plans are considering adding alternative investments over the next year. And as you said, it can impact trillions of dollars. And look, as somebody who used to be an advisor to several large 401(k) plans, I know how this game is played and I know how the cost of retirement plans and plan administration works. And to keep the company from paying out-of-pocket for administration services, what these plan-sponsor companies will do is they'll just put higher fee investment options into the plan. The higher the expense ratio of some of these funds are, that pays the cost of having these plans administered. So, who ends up paying that bill? The plan participants.
And I just say, buyer beware here because this stuff can work out great, better diversification, better returns in some cases, but you're also paying higher fees to have these things. And I'm noticing companies like T. Rowe Price, Goldman Sachs, BlackRock, they're starting to bury these alternative investments into those target date funds. So, if you just buy the target date fund and you're getting 15 or 16 funds in that target date fund, some of these things are going to be these alternative investments. And, yeah, it could work out great, but rest assured, the fee exposure is going up as well. Am I off base here, Brian?
Brian: No, no, for sure. I mean, everybody's going to fixate on the idea that, "Hey, diversify my portfolio, blah, blah, blah," but most people are going to see the possible chance for higher returns. And that's what's going to be attractive. But there's also... You know, remember where the returns are going to be going. There are companies out there, as you just mentioned, who create these things. They make money when you own them. It doesn't matter to them so much whether we are successful with them. And I always use the example of the gold rush at 1849. It wasn't the gold diggers who made the money. It was Levi's and Wells Fargo and these other companies who went to support the great demand that was happening in that environment. So, buyer beware like anything else.
Bob: And I'm not picking on anybody here, but I'm just throwing out a couple of facts here in this recent survey. BlackRock itself, just BlackRock, spent $25 billion on two acquisitions over the past year to grow their presence and exposure in private credit and infrastructure. And in July, the firm said, lo and behold, we're expecting to start offering its own target date funds with these private credit and infrastructure funds baked in. Here's the interesting thing, Brian, BlackRock's own survey found that smaller plans are actually more likely than larger ones to consider adding private assets. Earlier this year, their CFO said large plans typically rely on consultants and take considerable more time before making any major changes. Again, I'm not slamming any of this, but the smaller plans are the ones where they got to find ways to pay for the plan administration expenses. The larger your plans are, there's more scale, the fees tend to be lower, and, yeah, these companies are going to have an advisor or a consultant helping them to make sure that their investors are taken care of.
Brian: Yeah, and I kind of liken it to when the early 2000s, late 1900s and early 2000s during the first internet explosion there, when some 401(k)s began to allow funds that focused purely on technology. And there was a huge rush into them because this was before 2002, before 2008 when we all thought we were invincible and stocks just went to the moon, and there was a massive rush. Any fund that had the word technology in it, didn't matter what was under the hood, if it's got technology in it, if it says so right there in the title, then I'm going to own that fund. So, I have a feeling there's going to be a little bit of that. Again, these are not necessarily bad ideas, but know what you're getting into. Nothing is a panacea. Nothing comes without risk.
Bob: You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, shifting topics here a little bit. Brian, is AI becoming the new dot-com bubble. We're starting to see articles like that cropping up. We've talked about this before. And from time to time, it's worth just checking in to see if anything has changed with regard to how we want to answer that question. And you've got some good information to share on just where valuations stand. Because you've got to look at valuations to make sure we're not overpaying for this stuff. Give us some updated facts and figures around valuation.
Brian: Well, comparisons to 2000 are everywhere. I just kind of made one in a prior subject there. Back when valuation didn't matter and you had all these companies that weren't making a dime, but they had really cool marketing campaigns and really cool visions and all that kind of stuff. So, that's kind of where AI is right now. However, the leaders of this one, these aren't startup firms, right? This is NVIDIA, Microsoft, Apple, and Google. Huge cash flows, real demand for their products and services. AI, of course, is a major, major focus for these giant companies. However, they've got something to fall back on. This isn't startup companies in garages.
So, let's talk to let's talk to it. Let's do some actual comparisons. Valuations are kind of stretched. Things are running a little bit hot. We're talking about valuations, by the way. What we're talking about is that the price to earnings ratio, which is basically, how many dollars of earnings is the current price? What is the ratio between that price to the actual earnings? And back then in the late 1900s... I keep saying that. Sounds like the 1890s when I say it like that. In any case, but around 1999....
Bob: We're getting old, Brian.
Brian: Dating myself, right? But back in 1999, the forward price to earnings ratio of the S&P 500 was over 25. That was an eye popping figure for that time. In other words, $25 of share price for $1 of earnings. That's a big number. Lots of internet stocks had no earnings at all. And you couldn't even use this metric because, again, they were losing money hand over fist. So, there is no P/E ratio. So, compare that to today. Today, the S&P 500 forward P/E ratio is around 21. So, that's up there. Our long-term average is 15 to 16. But we're nowhere near the dot-com boom. And remember, that dot-com boom came when we were all a little bit immature about how the stock market actually worked. At that time, we had had 20 years of, basically, nothing but up. And we all thought that we were invincible and nothing bad could ever happen. And then 2002 taught us differently. But back at that time, P/E ratio around 25, currently around 21. So, not quite as bad as we were back then. It's not as much of a bubble as you might think.
Bob: Yeah, I think another huge difference is these... You know, we talk about these Magnificent seven companies all the time. I mean, anybody that listens to anything financially oriented in the news media, I mean, the whole mag seven concept, it's ubiquitous. These seven companies, Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, NVIDIA, They make up more than 30% of the entire S&P 500. But, Brian, to your point, they're also making money. They're growing. Their earnings are growing. They're real businesses. They're scaled up to really compete in this new AI era. That is a completely different ball game than back in the late 1990s and early 2000s, where we were talking about companies like pets.com, webvan.com, E-Toys, you know, companies like that that didn't even have any positive earnings. So, I think it's always important to pay attention to these valuations. And any time they get a little ahead of themselves, you know, the market does a great job of self-correcting. And that's why we talk about diversify, diversify, diversify. But I think to compare what's going on today back to the dot-com bubble days is a bit of a stretch, because, again, we're talking about real mature companies that have earnings, and not only earnings, but growing earnings.
Brian: Yeah. And don't let that FOMO get a hold of you, right? Because if you have a diversified portfolio now, you probably have in your 401(k), IRAs, your investments, you probably have something representing the S&P 500, which is just the 500 largest companies in the United States. Remember, the way that those types of funds, S&P 500 Index funds are constructed is they're subject to a weighted average of those individual funds or individual stocks underneath it, meaning it's not divided across 500 companies evenly. The bigger the company, the more of that index it makes up. So, the Magnificent 7, Apple, Microsoft, Alphabet, which is Google, Amazon, Facebook, Tesla, and NVIDIA, those make up 30% of the entire S&P 500. If you own a large cap fund, you are exposed to these companies. Don't feel like you are missing out. You've got it. Your portfolio has probably run up a good bit last couple of years, and you are benefiting. Don't lose sight of that.
Bob: Yeah, this is probably a good time to put a plug in here on private equity, too. Because if you do want a good, diversified, professionally-managed portfolio that gets exposure to private equity, again, private just means non-publicly traded companies, let's face it, there are fewer and fewer publicly traded companies out there right now. So, if you can get a good private equity manager where you are broadly diversified, not buying a lottery ticket, it can make sense to have some of that exposure in your portfolio.
Here's the Allworth advice, don't try to out-guess the AI boom. Diversify your exposure across sectors and avoid going all in on just one single trend. What does a $4 million hospital bill and a record number of 401(k) millionaires have in common? They both reveal the power and risk of long-term financial planning. We'll explain what we're talking about 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. Whether it's taxes on family land, planning a $3 million portfolio, or just protecting rental properties, we're tackling your real-life money challenges that are coming up straight ahead at 6:43. All right, Brian, this is a shocking story. An Ohio woman named Hannah Castle recently, her story went viral after posting her $4 million hospital bill on TikTok. The charges came after she gave birth to quadruplets prematurely with each baby needed an extended stay in a neonatal intensive care facility. Wow, what a bill. What a surprise. This woman's dealing with enough already.
Brian: Yeah, so in order to deal with this, obviously, that's a heart attack when you open that envelope. But she actually quit her job during pregnancy so that she could qualify for Medicaid because it was the only way to get any kind of financial assistance, but still got a $4 million bill out of it. So, yeah, kind of breathtaking that this can actually happen. And so, basically, the way this ended up, Medicaid ultimately did cover most of those costs. But this did trigger a whole debate and it got a lot of people talking about how are we, our family, what are we exposed to with regard to this?
So, the kind of things you're going to want to make sure, understand your coverage in the first place. You know, we're sneaking up here, Bob. It's almost Q4 and we're sneaking up here on benefit season where we all got to pick new plans. Take a little extra time. Remember what happened to this woman, which, yeah, it's an extreme story, but it does happen. Take a little time and read those details. Understand exactly what you're exposed to. Know what you're getting, more importantly, what you're not getting so that if something sneaks up on you, you'll kind of know what to deal with. And also, remember, up to 80% of medical bills can contain errors according to a couple different healthcare communication firms. So, just make sure you are on top of what you actually owe and don't just write the check because you were told you owe it.
Bob: Yeah, I think that's the big thing. Check your coverage, plan ahead if you can. I mean, I understand that pregnancy is not always something you can plan ahead for, but medical benefits are. So, make sure, before you just walk away from company-provided coverage, you know what you're getting into as far as your next medical coverage, and do some of that homework upfront. And then to your point, Brian, check that bill, because there's so many errors out there with medical bills. And my guess is Medicare probably went in there and reviewed that thing. I hope they did, at least, because it's taxpayer money. Review that bill with a fine tooth comb and get rid of some of the fat in there.
Brian: And Medicaid is what stepped in for her. And also...
Bob: Medicaid, Medicaid, sorry.
Brina: That's okay. One of the other things too, if you're in a situation like this, remember the hospital, the healthcare facility itself may offer some kind of charity care or payment plans even if you do have insurance because they understand how it works. There's just red tape you have to get through. You also might consider supplemental policies. You may have something, right? So, a lot of times people come up with these insurance policies they've had for decades and don't know why. Make sure you know what you own. Sometimes there's a critical illness rider or a hospital indemnity policy already in your household. So, make sure you understand what your resources are.
Bob: Yep. All right. We talk about the number of 401(k) millionaires quite often on this show. And here's a headline that jumped out at us this week. According to Fidelity, almost 600,000 people now in this country have, at least, $1 million in their 401(k) plan. And that's the highest number ever recorded. And, no, these aren't Silicon Valley founders or lottery winners. These are most likely people just like you and me, long-term savers, who were disciplined and just stuck to a plan. And it works. It works over time.
Brian: Yep. So, this is a common question I'm asking clients when we're updating financial plans because I'm just sitting here at this table every day talking to people and putting their puzzle pieces together. I see this happen. And we have the big momentous where I get to ask them the question, "Hey, do you feel like a millionaire?" And a husband and a wife will look at each other and they'll be like, "Nope," because it's just a little bit of a different world now. But any case, the real numbers behind this. So, the average 401(k) balance was up over 8% in the second quarter this year. That's around $137,000. Remember, this is the average of everybody. And so, that's largely thanks to the market's performance. So, far, we're up about, the S&P 500 is up about 11%, and most of that came in the second quarter.
But what the really important point of that is that people, for the most part, stayed the course. We had a panic in April when we were first getting used to the idea that tariffs were going to be a thing. And the market dropped as low as 15% at that point, which was a scary event. But at the same time, we recovered and most people seem to have stayed put. My phone didn't ring a whole lot during that time period. So, I think maybe people knock on wood. You tell me what you think. Maybe people are getting used to chaos is the order of the day. I don't know. What do you think, Bob?
Bob: I agree. I mean, there's always going to be market volatility. Wherever the source comes from or the reason for it, market volatility is the price of being in. And you got to stay the course and have a disciplined plan. And those that do can ride these things out. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Let's not forget the savings rate matters here, too. Back to this Fidelity study, the total savings rate, that's employee and employer contributions combined, they held steady at just over 14%. That's a little bit below Fidelity's recommended 15% target. But that's pretty darn good, Brian. And by the way, Gen X and Boomers are increasing their contributions to IRAs, too, up 25% and 37%, respectively, over the last year. So, even older savers are taking advantage of every little bit of tax sheltered growth they can get.
Brian: Yeah, we want to be in a good place. Another interesting bullet from Fidelity, I was talking a minute ago about that, about what happened in April when the market took a dive, Fidelity said that only about 5% of account holders made any changes during the second quarter when we were in that tariff panic. So, basically, what that says is that 95% of investors didn't really react. It might not have been happy, read the headlines, grumbled about it, then went on about their merry way and just kept saving, which puts them in the strong position that they're in right now. So, that's great.
But one thing I want to pay attention to as well is loans, right? So about 19% of people, according to Fidelity, have loans out against their 401(k)s. That's kind of a red flag. Borrowing against your retirement plans can really create big problems down the road. I really haven't seen a situation where it was the best answer for somebody. Sometimes, yes, there is no other choice. But usually, planning ahead and making sure you have an emergency fund, all of that, having done that work in advance, can put you in a better position where you'll never have to have that type of a discussion. Scary thing about the 401(k) loan, Bob, is if you quit your job or lose your job unexpectedly with a loan in place, that loan will almost always become a taxable, and possibly, penalizable distribution, unless you can pay it off in pretty short order. Most people can't do that. That's why there's a loan in the first place.
Bob: Yeah, that's something you really, really want to avoid. Here's the Allworth advice, becoming a 401(k) millionaire isn't about luck. It's about discipline, consistency, patience, and making savings a long time habit. Do you think you're safe because you own a stock, one particular stock in a great company that might even have fantastic long term returns? We're going to bring you a real life example of how that mindset crushed a family financially. 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. Well, if you're someone who loves big tech stocks, hopefully, you know by now that those big companies often come with a lot of government scrutiny. And depending on the outcome, or how judges and court cases pan out, the result can really impact the stock price. Case in point, Brian, Alphabet's Google does not have to sell its Chrome web browser, but it must share some of its search and other data with competitors according to a federal judge deciding in a landmark case against the search giant. Let's get into some of the details there.
Brian: Yeah, so Judge Amit Mehta ruled last year that Google was taking advantage of its rather dominant position atop the search space and kind of set up an illegal monopoly in making money advertising by paying companies like Apple and Samsung, literally billions of dollars a year to have Google installed as the default search engines on your smartphones. This is where you type in a word into your phone somewhere and it magically now dumps you on Google having done a Google search. So, that's been determined to be a no, no. That decision might have fundamentally reshaped how Google has to do business. That's the big way they make money, by driving traffic into their search engine. So, the Justice Department is proposing some sweeping changes that would include selling off Chrome or even the Android operating system, which is what runs Google phones.
So, on September 2nd, though, he said Google is not going to be required to get rid of Chrome, but the court also won't include a contingent divestiture of the Android operating system either. So, in other words, those two big things are apparently not going to happen. This is not unlike what happened in 1998 when the Department of Justice went after Microsoft. And at that time, the idea was that Microsoft had built Internet Explorer originally when it blew Netscape out of the water. This is ancient Internet history. And it was determined to have set up a monopoly at that time. So, that that had a big impact back then. Didn't it, Bob?
Bob: Yeah, this is back in April 2000. So, I mean, it's hard to tell how much of this stock price moves was due to this court case and how much of it was just tied to the whole tech bubble where the Nasdaq went down almost 80%. But Judge Thomas Penfield Jackson ruled that Microsoft had violated antitrust laws, and that stock just plummeted over a short period of time back into the '20s. Now, obviously, Microsoft is doing more than fine today. But the point of these stories is just, any time you are overly concentrated in any one company, any one sector, no matter how good it all looks, things can and do happen. And to just to illustrate that point today, we want to give you a real life story on how over concentrated in one stock can really impact a family negatively. And our own producer here at Allworth, Jason Scott, is here to talk about how a situation like this really impacted his family and not in a good way.
Jason: Hey, guys.
Brian: Jason, thanks for joining us. I'd love to hear what this... Real world stories are great. So, yeah, please tell us what happened to your family.
Jason: Yeah, you know, we do the show daily, and we always talk about, don't be under diversified. But I did. You know, I felt it very important. You know, what is an example? Like, what does that look like? So, my mother's second husband back in, like, 1998 or so, had a lot of their portfolio directed in Microsoft. I don't know how much, but it was way, you know, too much, as we would like to say. And when that antitrust case started, and you guys talked about how the stock had plummeted, initially, you know, he didn't do anything about it. He just figured it'll come back. It'll come back. But what happened is it was kind of like a slow burn with the stock, in which it kind of slowly over almost like a decade, I believe. It just kept kind of staying where it was and it kept going lower and lower. And there were just... He would not get out of it. Again, he was not diversified and he wouldn't get out. He wouldn't get out, he wouldn't get out, he wouldn't get out, thinking it would come back.
Well, what ultimately happened is, after about three years of this, he got Parkinson's disease and dementia, basically, simultaneously. And they wound up, my mother and him wound up in a situation where they ultimately had to sell it. They needed the money, but they sold it. Again, it was so much of their portfolio that, basically, it killed them financially. And to extrapolate forward to now, just that one thing has impacted our family to the point of, you know, like, we're talking about Medicaid now and nursing homes and all these kinds of horrible things that you can only imagine. But a lot of it had to do with a simple portfolio that had too much money in one thing.
Brian: Yeah, I'm looking at Microsoft right now, and I can see, I see the time frame you're talking about. Microsoft, basically, was dead in the water from a little after 2000 to about 2013. It has since gone off like a rocket to the moon. But, yeah, that can be... And that wasn't the worst time period either. There were ups and downs during that time frame. But a diversified portfolio would have would have helped a lot. It's a shame your mother had to go through that. So, what advice would you give, you know, as a family member. You don't need to be a financial advisor to recognize these types of situations. What advice would you give to some innocent bystander who sees a loved one kind of going through this?
Jason: Yeah, well, and that's the other part of this. It's funny. We talk about so many concepts and they were all at play here. So, when they got remarried, he wouldn't let my mom know much about what was going on with the money. And so, she just wanted to be taken care of, so she just kind of turned a blind eye to it. So, there's that component of it, a lack of communication. Then again, you know, when you own indexes, you already own Microsoft, you already own NVIDIA, and you ultimately may own the next NVIDIA and the next Microsoft and that sort of thing. You know, as a family member, all my experience is just, you know, you have to ask questions. You know, if you're going into a relationship, you know, there have to be sort of, "You have to tell me what's going on or this isn't going to happen."
Bob: Jason, was your mother and father working with a financial advisor in any way, shape, or form with their whole financial plan? Did they have a financial plan?
Jason: So, this was her second husband. This was not my father.
Brian: Oh, sorry.
Jason: That's all right. I don't know what kind of a financial plan they had. I am sure they did have some sort of a plan. Unfortunately, I don't have the answer to that because my mom didn't have the answer to that. And, you know, at the time, I mean, this was 25 years ago, I was, you know, doing my own thing. I wasn't so worried about what was happening because they seemed...everything was fine. They lived in a big, beautiful home, and there was no need at the time, I thought, to have to get involved.
Bob: All right. Well, Jason, thank you for coming on tonight. And I know that's a difficult story to tell. And really appreciate your transparency, especially sharing personal, family information. And hopefully, that'll help a lot of folks out there. Here's the Allworth advice. If one stock is carrying too much of your future, you don't actually have a plan, you have a gamble. All right. From farmland sales to retirement, insurance gaps, and even direct indexing, we answer your biggest money questions coming up next. You're listening to "Simply Money", presented by Allworth Financial on 55 KRC, The Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question and it will come straight to us. All right, Brian, Tom in Milford leads us off tonight. He says, "We just sold some farmland that's been in our family for decades. Is there a way to use those proceeds for income while also reducing the tax hit?"
Brian: Well, yeah, so let's talk a little bit about that tax hit to begin with. So, if you've been holding on to family land...
Bob: Why do these people always come to us after they've done something? Notice a pattern here?
Brian: Yeah, we're seeing a lot of these questions.
Bob: I created this mess. Brian, please clean it up for me after the fact.
Brian: Yeah. So, the problem, what Bob's referring to there is the past tense nature of Tom's question. And, Tom, we're not making fun of you, but there could be some challenges because the farmland has already been sold. But so, one of the things that happened, I would ask, do you know what the cost basis is in the first place? Meaning, what is the tax hit? Did you inherit it from your forebears, or was it given to you during their lives? Because if you inherited it, that should have come with a step up in cost basis. So, therefore, there might be less tax. Hopefully, for you, there's less tax than you might be thinking.
Now, if you had had maybe a chance to prepare a little bit, depending on what you ultimately were going to do with these dollars, you could have maybe used what's called a 1031 exchange if you were going to reinvest these dollars in other similar real estate. But if the cash has already been received, that's not a thing. If the sale is not completely finalized, then maybe you can rearrange it to do an installment sale, of course, that's sort of like seller financing, basically, you'll allow the seller, or the buyer rather, to make payments to you over time. That means you can spread them into different years. You can use the proceeds to fund a different portfolio, and then look for losses elsewhere to possibly set off some of the gains.
Now, this is something that could potentially help you if you've got a bit of a gain. If you are charitably inclined, then this would maybe a good year to use, like, a donor advised fund or maybe a charitable remainder trust to make a sizable donation to a charity that you were already supporting anyway, effectively pulling a bunch of years' worth of donations into one tax year to gain that tax deduction. That could help you now. But the 1031, that kind of stuff, unfortunately, that ship has sailed because you already sold property. Okay, let's move on. Michael in Loveland is 60 years old, and he's ready to hang it up. And he's asking, "With Social Security pensions and investments, what's the best order to draw from so I don't run into any tax surprises?" Bob?
Bob: Well, Michael, you know, when you say Social Security pensions and investments, we don't know how those investments are structured. Are they 401(k)s? Are they IRAs? Are they Roth IRAs? Or are they after tax brokerage accounts? So, it's important to take a look at all your sources of income and all your potential sources of income, meaning investments, and then run some numbers to say, what is the best way to construct an income strategy in the most tax efficient way possible? So, it doesn't mean that you've got to start with one source and drain all that down before you tap another one. Oftentimes, I would say, most times, you're going to end up with a blend of all this stuff working together. And again, sit down with a good fiduciary advisor, paired up with a good CPA. And together, you could put together an income plan that gives you the income you need and want every year, but do it in the most tax efficient manner. That'd be my answer. All right. Samantha in Florence. Brian, she says she's already has umbrella insurance, but they also have a vacation home and a boat. So, they're living large out on the lake, having a whole lot of fun, maybe too much fun, because she says, do we need a whole different level of liability coverage?
Brian: I don't know what you're out there doing on that boat, but you're just thinking ahead. And that's not a bad thing at all. So, umbrella liability is designed to protect and over and above the standard things that auto home and boat policies offer. But all underlying policies have to have a required minimum. That's usually a $250,000 to $500,000 liability. That's what's built into what you probably already own. Umbrella is on top of that. So, if you've got extra assets such as this vacation property in a boat, the umbrella limits should come up, yes, to match that net worth exposure. A lot of advisors suggest in the $5 million range, if you've got a multimillion dollar household out there. So, we don't know how big of an asset we're talking about here, but good numbers to work with.
That does sound like an awful lot. But remember, umbrella policies are geared to cover things that aren't very likely to happen, but if they do happen, they can be life ruiners. So, the cost of this coverage isn't that much. You're not talking tens of thousands of dollars. So, it's very well worth it. And make sure that your umbrella covers watercraft liability. Sometimes, they need a whole separate boat liability rider in addition. So, lots of moving parts there. But you're right to be thinking this far ahead. That's a good idea. Tom in Westchester, he's got a pile of money he's worried about. He's got about $3 million. And then he realizes that almost all of it is in U.S. stocks. Bob, should he have any global exposure, or can we just keep it simple and throw it all in the S&P 500? What say you?
Bob: Well, Tom's worried about over complicating things. So, I mean, my off the cuff answer is, you know, do you have a huge emergency here because you don't own any global or international stocks? By all means, no. All right. That being said, over time, when you run the numbers on combining risk and return, it does make sense. Back to that whole efficient frontier studies that we've seen over time. They have a little bit of exposure to global and international stocks, somewhere between 0% and 20%. Now, do you have to do that today? No. But I think, as you do your normal rebalancing, keeping in mind that we don't want to have the, you know, tax tail wag the dog here, meaning don't expose yourself to a bunch of tax liability just to move some money into international stocks, it might make sense to take a look at it over time as you do your normal rebalancing. Get a little sliver into international stocks. Just as a reminder, international stocks are doing wonderfully well this year after three, four years where people didn't want to invest in them at all. And hence the point, it makes sense to have a little slice of that in a truly diversified portfolio. But you could do it gradually over time and don't feel like you got to go out and buy that stuff in bulk today. Hope that makes sense. All right, Chris and Fort Thomas is evaluating direct indexing versus ETFs. Brian, you got about 25 seconds. At what level is the complexity worth it to save on taxes?
Brian: Yeah, so it can really be worth it to move to a direct indexing plan. You mean you own individual stocks as opposed to ETFs, mutual funds. I'd say a million dollars and up in taxable accounts. You've got high income. Maybe you're in a high marginal tax bracket. I think that's when it's most efficient to start looking at more specific strategies.
Bob: That was well done, sir. All right, coming up next, I've got my two cents on managing short term debt. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, Brian, I want to talk a little bit. You know, I sometimes am surprised when I have client review meetings. The number of people that walk in and they have a great financial plan, and then all of a sudden, they tell me, "Hey, we still have debt out here. We've got a car loan at 7.9%," or, "I took a home equity line of credit out to pay for a cruise." And my point here is, when people are sitting on these small loans, sometimes bigger loans, but medium-sized loans at above 7% interest rates, I'd like to know what you think, but I want these things paid off. Sitting out there, I know the markets have been doing great, diversified, even 60, 40 portfolios have done in the mid-teens for the last few years. And it's real easy to just go to sleep and say, "Well, my investments are always going to outperform the cost of my debt," but that is not guaranteed. And so, when you get this debt on your balance sheet at over 7%, I want to make that stuff disappear. And I've been having more conversations than I care to want to have about that here in recent months. You running into the same thing?
Brian: Yeah, because like you said, the market is at a peak, and people will kind of lean on the idea that I should leave it all alone, and I'll let these little credit cards go for a while. Because they're not hurting anything, no big deal. And now, we've got four credit cards with $3,000 or $4,000 on them that have all run up to the 25% and 30% bracket. And people will say, "But I never looked at it. Didn't know the interest rate was that high." Well, then that's what they're hoping for. You're playing right into their hands, of these big banks and financial institutions. So, a common conversation I'm having right now, Bob, is look, you've been looking at these little piles of debt for a while and just not doing anything about them. And I'll ask the question, "What if somebody dropped money out of the sky? What if cash just appeared in your checking account? What would you go do?" And they all say, "Well, I'd pay off those debts, of course." Well, great, because I'm going to send money from your investment account to your bank account because we're going to pay these debts off with money you didn't have a month ago because we're going to take advantage of the market where it is. Things are at an all-time high. That's a great time to blow up some of these little debts and clean up some of the clutter on your balance sheet.
Bob: No, that's good. And that highlights the two points I really want to make here. Number one, don't go to sleep here just because the market's been doing well and it's at all-time highs. And then second, where possible, plan ahead for some of these lump sum expenditures. Build up some cash in advance so you don't have to go out and borrow money to make those purchases. I know sometimes it's easier said than done, but it's just good, sound financial planning. All right, thanks for listening tonight. Tune in tomorrow. We'll talk about the smart way to avoid a tax bomb. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.