Money Talk with Carl Stuart

Carl Stuart dives into several personal finance questions, including required minimum distributions from retirement accounts, gifting money to adult children, investing in bonds and bond funds, transitioning to retirement, and more.

The full transcript of this episode of Money Talk with Carl Stuart is available on the KUT & KUTX Studio website. The transcript is also available as subtitles or captions on some podcast apps.

KUT Announcer Laurie Galllardo [00:00:01] This is Money Talk with Carl Stuart. Carl Stuart is an investment advisor representative of Stuart Investment Advisors. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl Stuart [00:00:20] Welcome to Money Talk, I’m Carl Stuart and you’re listening to KUT News 90.5 and on the KUT app. Money Talk is a broadcast about the world of financial and investment planning where you always determine our agenda by calling or texting 512-921-5888.

As texts come in you’ll hear them as they bing on the telephone my Rule is I take today’s calls first, and then today’s texts, and then any texts that I have either not answered that I’ve received in the past, or I just feel like I haven’t had an ample opportunity to answer. So I did get a text that came in, and I didn’t have a chance to answer it, so here it is. But before I do that, the number to call or text, five one two, nine two one, five eight, eight eight.

[Text] Hello Carl, I enjoy your broadcast and the information you provide. Thank you. I wonder if you can shed light on how the minimum distribution works at $870,000. 75% of my $400,000 is in a 401k funds remain and the remainder funds are in a Roth IRA. I’m going to be 69 in December. I work part time and receive social security. I have some funds in savings. What method would be the best route to take on minimizing the tax that will be incurred at age 70? What tax rate would be applied as the funds are withdrawn? And what should one do with investing the funds after paying taxes on it? Thank you for your insight.

You’re welcome. Well, I think I have some good news for you, and that is that the date at which you will have to take your required minimum distribution is not 70. For many, many years it was 70 and a half, but now it goes up incrementally. Depending on when you turn the correct age. I believe it’s 74 years old this year. You can Google that and find out. So if you don’t want to take the money before then, the good news is you don’t have to. Let me just see what would be the best route to take on minimizing the tax that will be incurred. There really is no way around paying the tax, because I presume your contributions while you were working were made pre-tax, meaning you didn’t pay tax on your contributions, and you didn’t pay tax as it grew in value, so you’re going to have to pay tax when it comes out, and there’s really no way around that. How it will work in your situation, I suspect, is you’ll take your required minimum distribution, you’ll your Social Security income, and income from your part-time job, add all that up and that will determine what your income tax is. The way in which a required minimum is calculated is each year the government puts out something called the Factor, F-A-C-T-O-R. And on the first day or first business day of January, your custodian, whether it’s an IRA custodial like Vanguard or Schwab or UBS, or wherever it is, you will have to start taking the money out. Now, it is in the 401k, but if you’re no longer working at the 401K, then I have to assume that your former employer has allowed you to stay there. That’s not a bad thing. But at some point you’re gonna wanna do something called an IRA rollover where you take the money from your 401k and you select a custodian. You can do this on your own or you can engage a financial advisor. And the money goes directly from your 401k to your IRA. You may get a check, but if you do, it’s not payable to you. It’s payable your IRA, so it’s pay able to John Doe, let’s just say Fidelity Custodian for the benefit of John Doe. And the money then is not taxable to you, it goes directly into your IRA. Now let’s suppose you hit the age 74 or whatever it is by the time you get to be that age, maybe 75, I don’t know, then what will occur is your custodian will know early in January how much you have to take out and the reason that the custodium will know that is because the amount of your required minimum distribution is based on the value of your account. At the end of the previous year. You then have the entire year to take out the money. You can take it out in a lump sum if you choose. You can’t take it in the form of monthly income. However, you want to do it. Another thing that a lot of people do is when they take their required minimum distribution or for that matter any money from an IRA that’s going to be taxable, they have their custodian withhold some amount, maybe twenty percent of the amount to send on to the government so that when they file their taxes they’ve already paid in a substantial amount and don’t have to pay more. Again, this is not right or wrong. Some people would say, no, I want to have my money during that period of time and I’ll go ahead and pay the taxes when they’re due, but that is an option that you have. Good luck and thanks for your question.

You’re listening to Money Talk on KUT 90.5 and on the KUT app. Call or text 5 1 2 9 2 1 5 8 8-8. Here is a text.

[Text] Okay, hi Carl. My wife and I are in our mid-60s and financially well positioned for retirement.

Terrific. Congratulations.

[Text] We would like to give our adult children some of their inheritance early so they can upgrade their houses. The obvious way to do that in our case would be to sell some exchange traded funds in our taxable brokerage account, but obviously there are some tax consequences. Are there other alternatives we should consider? A home equity loan, a loan against our securities, co-signing their loan, et cetera, rather than selling some of our funds. And thank you for your show.

You’re welcome. Well, let’s go through those options. One thing you could do is you could give your children the amount that you want to give them, but do it in securities. So, they would open it, if they didn’t have a securities account someplace, they would an account. If they didn’t have one, maybe where you have yours. Uh… And then you would you if it’s you own it in a joint account you and your spouse would uh… Sign something called a letter of authorization and those shares would then be transferred to your kids then when the children sell the shares that tax liability is theirs and not yours so that’s for you and your spouse that’s the most tax-efficient way to do it I’m reluctant to suggest that you take on that.

Even though you’re financially well-suited, I’m a big fan when people move into their sixties seventies beyond I’m not having any debt mortgage debt auto debt credit card debt and since you’re since you are generously inclined to help your kids then i would transfer the securities let them sell it and pay the taxes at their rate the other thing i would tell you is that you can give them more than the seventeen thousand dollars because we’re walking around with something called a Unified Credit. This year per person is $13,990,000. So, a couple could actually have about 14 times two or $28 million in assets before they’re subbed to the estate tax. And that goes up to $15 million per person in 2026. So what happens is you give them the securities that just reduces your lifetime exemption by that amount. So, unless you have a huge estate, Reducing You’re safe from $14 million and you give them $100,000, that’s just not gonna make a dent in your unified exemption, lifetime exemption. So that’s what I think I would do if I were in your shoes. Thanks for the question.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512- 921-5888. I think we have a call coming in. I don’t want to get into a serious bloviation here and then have to stop, but I will if I have a chance this afternoon to talk about this controversy about whether the Federal Reserve should lower interest rates or keep rates where they are and what it really means for you and me. In the meantime, Call or text 512-921-5888. So, here’s the deal. The Federal Reserve controls short-term interest rates. They set something called the Fed funds rate. It’s the rate that banks are paid overnight for depositing money at the Fed. So they can raise or lower that. The Federal reserve has what’s called a dual mandate, and that’s been set by Congress. One is just stable inflation. They’ve chosen their target is 2%. And the other one is to have full employment. And right now, it just seems like… Okay, I’ve got another, got a call here. I’m gonna take that. Here we go. David, you’re on the air. How may I help?

David [00:09:41] Okay, I turned my radio off. Carl, I’m the guy about two Saturdays ago, told you about an energy stock I had that was hemorrhaging real bad, and you said, if I were you, I’d get up on Monday morning and sell that sucker. You know, my dad said, hang on to it if you don’t need the money right now. I waited a couple more days, Carl. The moral of that story, and then I got a question after that. Moral of the story is do what Carl says. In the time I waited, Carl, I lost another two dollars per share. I’m so sorry. Yeah, well, you were spot on with your advice, though. You know I should have done what you said. Now my question is my custodian vanguard and I meet with them on Monday morning is saying that I can use that money So that money is sitting in my checking account right now I just transferred to vanguard yet because I’m worried about what the government says Oh, well, you got a you got to disbursement here or something like that It’s just a sale of stock. But also I had such a huge amount of loss on this Can I write those capital losses as we might say versus capital gain? Against my social security taxes going forward and how will that work and I’ll hang up so I can listen to you on the air.

Carl Stuart [00:10:38] Okay, great. Thanks for calling. So here’s the deal regarding capital gains and capital losses. At the end of your taxable year, you get 1099 from your custodian in your case from Vanguard or if you have interest on your money at the bank from your bank. That 1099 denotes all the interest you were paid in that taxable year, any dividends you received and any capital gains from the sale of securities. So, if you add up the capital gains and your capital losses, which is not your case, and you have net capital gains, that’s what you pay a tax on. Assets held for less than one year, you pay tax on those gains as ordinary income, and assets held for longer than a year, you pay lower capital gains rate, and that rate is determined by your total taxable income. Now, in your situation, if all you have is a loss… You can offset your ordinary income, which would include the way you talk about Social Security, you can offset you ordinary income up to $3,000, and you can carry forward into the future what’s remaining. So let’s suppose you had a $12,000 loss, and you never had another gain. You could take $3000 against your taxable income, in my example, for four years. So if you go ahead and invest some money with Vanguard, and you ultimately have capital gains because of those investments. And you haven’t used up all of your capital loss from the sale of this energy stock, you’ll be able to use those remaining losses against your Vanguard gains, and that’s how it works.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. You can hear the text coming in. Call or text 512-921-5888. Here is the text. Okay, please, oops.

[Text] Please explain what you said to a caller last weekend when he said he was disappointed in a three and a half percent return on a bond fund. I thought you said that the three and half interest plus the three-and-a-half dividend would be seven percent, which is good. I was not aware that bond funds pay dividends. Please clarify, sure. So, bond funds, whether they’re exchange-traded funds or open-end mutual funds, the money is invested in bonds, and the bonds in the fund pay interest. And you as a shareholder can take that interest out in the form of what’s called dividends, or you can tell the bond fund company to reinvest and buy you more shares at no cost. You still have that income. If it’s a taxable bond fund, you’ll be reported on your 1099. So in that example that you cite, if the bond funds share price was up over a year at three and a half percent. And if your dividend income from the bond fund was three and a half percent then you have what we call total return of seven percent total return is defined as any gains in value plus any income obviously can be the other way around you might have gotten a three and half percent dividend but it could have gone down four percent your total return would be a minus one half a percent so that’s how that works. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. It’s time for me to take a break, a perfect time for you to call or text 512-921-5888. I’ll be back.

KUT Announcer Jimmy Maas [00:14:15] Money Talk airs every Saturday at five o’clock on KUT News 90.5 FM on the KUT app and at KUT.org. This podcast is produced by KUT and KUTx Studios as part of KUT Public Media, home of Austin’s NPR station and the Austin Music Experience. We are a non-profit media organization. If you feel like this is something worth supporting, set an amount that’s right for you and make a donation at supportthispodcast.org

KUT Announcer Laurie Galllardo [00:14:51] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl Stuart [00:15:05] Welcome back. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. When you have a financial or investment plan in question, give me a call at 512-921-5888. Here’s the text.

[Text] Hi Carl. Can you give your thoughts on when you would start reducing your bond allocation? What level of yield would you no longer consider bonds attract?

Well, that’s obviously a judgment call, and so we’re gonna give you my judgment for better or worse. I can give you a really good example. So, in my portfolio and my daughter’s portfolio, my colleague, Lindsay, we had a 20% bond allocation. And when bonds kept going up in price and rates kept coming down. And the 10-year treasury just kept coming down and got down to I think 2% or less, we took, we reduced our bond allocation. We took the benefit of the capital gains and they were reduced because we had been reinvesting the dividends and we moved that to another strategy. Now, after we had the super high inflation, a print of over 9% and the Fed went into aggressive rate increases and the 10-year treasury. Got above 4% and a solid intermediate-term investment-grade corporate bond fund could give a dividend yield of that or better. We went back in. Now, I will tell you, as I’ve said, if you’ve been listening, I like active management in bonds as opposed to passive. And so, we, in our portfolio, we have three. We have a short-term investment grade bond fund, what we call a core. Which pretty much aligns with the Bloomberg aggregate, and then we have a multi-sector bond fund. These are designations of Morningstar. I’m not saying Morningstar somehow knows better than anybody else, but it’s a way to categorize your ownership. So that’s the real-life experience that we had. Thanks for your text.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512. 921-5888.

[text] I’m 68 and my wife is 7 years younger. We have over $1 million in 401k and IRA vehicles. I plan to work another couple of years. Should I continue to fund these vehicles or build savings in a bank to hedge against a market downturn?

If I were in your shoes since the bulk of your money is in tax-deferred accounts, I would stop funding those vehicles. However, one of the great things about the way in which you funded them, and you’ve had this experience, you probably wouldn’t have a million dollars, is that the beauty of participating in a 401k, for example, is the money comes out every pay period and it’s invested. And you’ve been invested during the global financial crisis, when everything went to heck in a handbasket. You were investing in 2022 when everything was in a ditch. You were invested when COVID hit. And what happened? It passed. And you had good returns, but what you purchased during those down drafts were really attractive valuations compared to where we are today. So since if I were in your shoes, I would not put it in the savings in the bank and hedge against a market downturn. I would continue to do that dollar cost averaging. Is there gonna be a market down turn? Of course there is. When’s it gonna occur? I have no idea. But if you start investing in mutual funds or exchange traded funds, for you and your wife, and you just put a bit in like the same amount you’ve been contributing to your 401k, I think you’re going to look back and be glad you did that by the time, probably by the you retire. The other thing is, one of the challenges you’re gonna have in retirement, that I encounter a lot, is that you may not move into a lower tax bracket, and the reason is, you’re to be taking income from your IRA vehicles and 401ks, that’s subject to tax. Probably your Social Security is subject to income tax. In this other pool of capital that you’ve been building up, it’s not gonna be subject to income tax if you sell it. It even gets better than that. In the inevitable situation, and you say your wife, so you’re a male, and your wife is seven years younger, so you are gonna pre-decease her under more normal circumstances. So you’ve building up this joint account and not making contributions to your 401K. You’ve been building up the joint account, and you have a nice gain in it. You live to be 85, you pass away. It’s been gaining over 17 years, and now your wife has that. If she wants to, she could sell things. What would be the taxes? Virtually zero, because the value, the cost basis, regardless of what you pay for those securities, the cost base is when you pass way, is stepped up in time, stepped up in basis to the value of your death, and she has a new cost basis. And what happens if she doesn’t spend at all because they require minimum distributions from your IRA and your 401K and Social Security, give her plenty of income? Well, if you have heirs, kids or grandkids, when she passes away, they can get those securities and guess what? There’s a second step up in basis. So if I were you, I would use this money that’s been going into your retirement vehicles and I would take it and open a joint account and put it in equities, just ones. The funds are similar to the ones that have caused you to get a million dollars. Thanks for the text.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Let’s see, that one’s texted thank you, so let me go to the next one. Here we go.

[Text] Hi Carl, I have been thinking about how I will transition to retirement, how to it, etc. Friends who use financial planners tell me that they will run many calculations on how likely you can safely retire. What does a first visit to a financial planner look like when you’re 60? What materials are they looking for me to bring in? Thanks, Cathy in Austin.

Well Cathy, we’re going to talk about the financial part of retirement because that’s the nature of your question and the nature money talk, but you’re right. Financial planners have access to software. And they can plug in a lot of information. What I particularly like, certain ones, I think of, the one that I’m thinking of called Goal Planning and Monitoring allows you to put in there, when I’m 65, I want to take a six-week trip to Europe. I want to take a grandchild on a cruise to Alaska. I’m just making these things up. Or I’m going to have to buy a new car in the next five years. And you can plug in numbers for that. It will also tell you what your expected life expectancy is. And you could plug in what you and the planner believe will be the rate of inflation. And then you will talk about how your money’s invested. That’s really the secret sauce. That’s what we call the asset allocation. And then, so let’s just, I’m not recommending this.

Let’s just suppose, to keep it simple, that you decide, or you and your planner decide, that you’re gonna have 60% stocks and 40% bonds. Then the software that I’ve seen will run 1,000 simulations, interesting name, Monte Carlo simulations. I’m told, as we recently came, not from Monte Carlo, from Blackjack, but for weather predictions. Nevertheless, it will take 1,000 iterations of various market scenarios that have happened in the past and out will spit a percentage of the likelihood of you accomplishing your objective. So the more information you bring, a list of your assets, a list your liabilities, the interest rate on your liibilities. If you have anything that would suggest that you’re going to have a life-shortening illness because you’ve been diagnosed with something or you have a family history of something and you put all that information in, obviously the quality of this experience is going to be a function of how much you put in. And so that’s what I would do if I were you.

Now, I’m answering your question as you answered it, as you asked it. Some people who listen to Money Talk are hands-on do-it-yourselfers. Congratulations if that’s who you are. And you can go look for the software and do it yourself. So I just want to be clear that you can do it either way. So that’s a great question and I wish you the best of luck.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888.

So while I wait for a text or a call. There’s a big argument that the President wants the Fed to lower interest rates. The Fed says, well, we’re not sure. We’re going to be, as Chairman Powell says, data dependent. Here’s the part that I think most people don’t understand, or at least it’s not covered in the news, and that is the Federal Reserve coverage, as I was saying at the beginning of the broadcast, can determine the level of short-term interest rates, fine. But your mortgage, and your car note, and credit card is not determined by the overnight rate, the Fed funds rate. It’s longer-term interest rates that determine that. Who decides what the 10-year treasury rate is? The answer is global investors, because the treasury has to have somebody buy their bonds and their notes and their bills, and the world determines that. So, let’s say that the president prevails and that the Fed lowers interest rates. The president wants it to lower them a lot. Let’s just pretend that the Fed goes from over four and a quarter, four and half, all the way down to two percent. What does that mean? That interest rates on five-year notes, ten-year notes, 15-year bonds, 20-year bonds will also go down a commensurate amount? No, it does not. That’s the part that I don’t see it being covered in the news.

It turns out that short-term interest rates are sharply reduced, but global investors think that because of tariffs or some other factors we’re going to have inflation, then they’re not going to be willing to buy a 10-year note at 3% or 4% or maybe 5%. So, the risk, and this is what the Fed’s thinking about in my view, the risk of lowering short-term interest rates. At a time of rising tariffs is that we reignite inflation. And if we reignite inflation, longer term rates go up and bond prices come down and that we have something called the yield curve, this is really digging in the weeds, where you just chart the level of interest from basically one month out to 30 years, in this example, treasury securities, and it’s relatively flat. You don’t get a lot of pickup and yield. If you buy a 15-year bond versus a 10-year note. But if the world, the global investors, whether the central banks, institutions, individuals, if they believe that we’re going into a regime of higher interest rates, then that longer end of the yield curve is gonna go up no matter whether the short end comes down or not. So we all have to recognize that short-term interest rates are very, very important, but they’re only part of the picture.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. All right.

So, we had a bad week in the stock market, but we still see this outperformance of international versus domestic. And if you look at your 401k plan or your own investments, you’re going to notice a huge dispersion in returns. Regular listeners know that every Saturday before I come on the air, I look at various indexes that you and I can invest in, meaning that I’m not advertising for values. I look a Vanguard and I look the Spyder and I looked at the Fidelity NASDAQ. And everything’s down about 2% year to date from where it was last Saturday. But here’s the interesting thing. So I look to the Vanguard total stock market. The year to day returns plus 6.19%. I look at the Spider S&P 500 exchange trading fund, almost the same, 6.72%. And then I look the Fidelity ONEQ, which is the NASDAQ. So, I’m spreading the wealth between State Street, Vanguard, and Fidelity. And NASDAq’s up 7.06. So everything’s pretty well closely matched together, right? And then, I look, I use the Vanguard XUS as a proxy for international stocks, VXUS, 17 percent. 16.99%. Really? That’s a 10% outperformance of the S&P 500. So you wonder why that is. Of course, nobody knows for sure, but there are certainly two, what I would call strong, how should we say it, candidates. One is valuation. We’ve had two terrific years in the stock market, and depending on who you read, the U.S. Stock market selling Standard port 500. At about 21, 22 times earnings. And if you go abroad, those stocks are selling at lower valuations. So one of the reasons we may be seeing this is simply valuation.

Let’s just see. Okay, that is a text, but it doesn’t have any verbiage to it. So, oh, it says typing. How about this? Okay, 512-921-5888. Here we go, I hear it again, so did you. Okay…

[Text] how can I double 10,000 in one or two years? Go to Las Vegas, I’m not being totally facetious. There is no such thing as an investment that will allow you to double it. That’s not an investment. By definition, at least by my definition, that’s what I call a speculation. And you have to be really careful because any time you see something where the advertisement or whatever it is that says, we can make you 15%, 20%. Run as fast as you can in the opposite direction because there is an inevitable and always correlation between risk and return. And you take the $10,000 and you put it in and it goes to $5,000, you have to make 100% on your investment to come back to $10 to $10000. There simply is no easy way to do that. So sorry for the answer, but that’s my 47-year experience.

It’s a good time for me to take a break and a better time for you to call or text 512-921-5888. I’ll be back.

KUT Announcer Laurie Galllardo [00:30:56] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl Stuart [00:31:10] Welcome back to Money Talk. I’m Carl Stuart and you’re listening to KUT News 90.5 on the KUT app. When you have a question, call or text 512-921-5888.

[Text] Carl, I have a hypothetical scenario for you. How would you invest $100,000 for the long term? Great question, and one I think about all the time.

So, I think— when I’m thinking about the long-term, generally, my kind of rule of thumb is, I wouldn’t invest in the stock market for less than a three-year period. I like the three-to-five- year period even better. And that’s not because I can see the future. It’s just if you take, let’s just use the standard and poor 500 as a proxy for the US stock market. And you know, that’s a flawed concept because it’s only a small number of companies, but it’s the largest market capitalization. And you look and say, okay, let’s take a long period, like 50 years. If I had held that for one year, or three years, or five years, or 10 years, or 15 years, what would have been my odds of a positive return? It’s pretty remarkable. At one year it’s probably not much better than 50-50. But it really starts to move up quickly when you get to that three years, and five years. And then it’s very unusual, not impossible, the 1970s were terrible, but it’s just very unusual over a 10-year period to have a negative return. Then if you ask yourself a second question, what is it I’m trying to accomplish? And this is the tough part, because some people confuse safety with, shall we say, keeping the money. It looks the same. It’s in my CD, it’s safe. But the fact of the matter is we’re gonna have inflation. And so what’s going to happen is that’s gonna eat away at the safety of that CD, for example. And if you own it in your own name, you’re gonna to have to pay taxes on the interest. So what I like to say is, if I were in your shoes, I want the money to grow. I want it to grow faster than the rate of inflation. But I don’t want to take all the risk of the stock market. Because periodically, the stock market goes to heck in a hand basket. In 2022, so three years ago, the S&P 500 was down 19%. The Nasdaq was down 33%. That’s probably not, but for many people listening, that’s not an acceptable level of risk. Excuse me, it’s not acceptable risk for me, frankly. And so you wanna put together a portfolio that has a number of different assets. This is where it gets both really interesting and really challenging. And that is this.

My experience is that a lot of investors presume that diversification is the only answer. So I’m gonna have stocks, and I’m going to have bonds, and then I’m gonna have cash. Three major asset classes. Okay, but periodically that doesn’t work. I mentioned the 1970s where we had rising inflation and a declining economy, something called stagflation. Stocks declined in value and so did bonds. In 2022 the bond index was down between 13 and 14 percent. Now I recognize it’s an outlier, but it proves what can happen. So when you start doing this yourself, or if you’re working with an advisor. One key question to ask is, how is this asset that I’m considering adding to my portfolio? How is it correlated with the other asset? In other words, how do they match each other? Now, if you are a do-it-yourselfer, one of the things you can do, because it’s a publicly available website, is that J.P. Morgan Investments has a thing called Guide to the Markets. It’s open and free to everybody. And they update it all the time, and it’s like 60 different slides. And one of those slides has what’s called a correlation table. Highly recommend you look at it. Because here’s some interesting, I’ll give you an interesting example. So, when interest rates were really low, a lot of investors, based on where they were putting their money, according to public records, were stretching for yield by buying high yield bonds. By the very nature, high yield bond pay should pay more. Than investment-grade bonds. If you look at that chart that I just alluded to, the correlation, if two things are exactly correlated, they have a correlation of 1.0. They go up the same time, they go down the same.

The correlation of high-yield bonds to large company stocks, the S&P 500, is 0.84. They’re really, really correlated. And the reason, probably, is because the stock market does better when the economy is growing. And when the economy is shrinking, it does worse. Well, high-yield bonds are of companies below investment grade. And if we’re in a recession, they have greater risk of not being able to pay the interest. So they’re very, very much correlated. So you want to not only have different types of assets, but you also want to have ones that are not exactly, that are highly correlated one to the other. Then think about your stock allocation is the accelerator, your bonds is the brakes.

And then there are other assets, I’m getting detailed here, but I should tell you, by the way, call or text 512-921-5888.

So then, you look at these other assets by yourself or with your advisor, and look at how they respond one to the other. That’s really critical, and I think that’s important. If I were investing for the long term, then I would say to myself, okay, how will my portfolio, how it will perform? If there’s a 20% decline in the stock market. Well, if I have 60% of my money in the stock market and I have 40% in this other stuff, and let’s just say the other stuff doesn’t go up, let’s say it holds value, that would cause it to be not correlated highly to the stock market, then 60% on my asset goes down 20%, the other 40% is flat, then I’ve got a 12% decline. So now I’m down to $88,000. I think converting the percentage. To the dollars allows you to think through what that experience would be like, because I think that experience over the long term is inevitable. It could go down 30% in that example. The portfolio would be down 18%. I’d have $72,000. So stress test the asset allocation, recognizing that the less money you put in stocks, the lower the return, I’m talking a lot about risk here, with a lower return. And so you have to keep that in mind as well. Thanks for the question. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call with your questions or text me at 512-921-5888. Hello, I have a 401k with a company match and a Vanguard target date fund. I’m only 35 and I’m wondering if I should make my 401k more aggressive. And invested in a NASDAQ index fund that focuses on tech stocks. Thanks. Okay, good question. So these target date funds were basically invented because some bad things happened to people in 401K plans. I remember reading a horrible story when Enron, this is before, I don’t know how long ago it was, but you were a child, we had this major company based in Houston and it turned out that they were frauds, fraudulent in their behavior and the company went away. And there were a number of, because the stock had been a really terrific performer, there were in a number employees who had all their money in the company stock and their retirement was wiped out. And so in other cases, the Department of Labor would look at where people were putting their money in their 401k plans. And a lot of people just sat in cash and the DOL thought maybe they’re just so intimidated because they don’t know anything about finances and financial investing.

The biggest thing, I don’t wanna take the risk. Both those are obviously mistakes. And so, they came out with target date funds, whether it was Vanguard or T. Rowe Price or J.P. Morgan or Fidelity or American funds. The idea is you pick a date that you’re gonna retire or not, you can pick a day further out if you wanna be more aggressive or closer to now to be less aggressive, and they will manage it. They will mix up their various fund offerings, domestic stocks and foreign stocks. Bonds, probably foreign bonds as well, emerging markets perhaps, and they will manage that based on what they think it should look like when you hit that target date. Frankly, I think they’re a heck of a lot better than sitting in cash or company stock, but I’m not terribly fond of them for someone who has the time and the interest and the desire or is working with an advisor to do something else. So I think because you are 35, I think you ought to have an equity allocation. I do not think you have to have only the NASDAQ. I will tell you if you ask me the question, where are the most expensive stocks in the U.S. Stock market? They’re in the NASDAC. There will be a reversion to the mean, and we had five years where the U. S. Stock market was up over 20 percent a year. The NASDAQ peaked in March of 2000. And it dropped and did not come back to its March of 2000 value for 15 years. That’s, you heard me correctly, 15 years, do not do that. If you want to have some NASDAQ, I’m fine with that. Have 25% international, that means a fund, whether it’s passive or actively managed, that has no U.S. Stocks. You want that because you want the currency risk and because valuations are cheaper abroad. And then you want have the S&P 500 to capture the vast market capitalization. And if you want to have the NASDAQ, that’s great. You can also slice the market. You can buy small cap stocks, either value or growth, the Russell 2000 value, Russell 2000 growth. You can by mid caps or large caps. So there are lots of indexes out there that are very inexpensive that will allow you to, if you will, slice and dice the U.S. Equity market. But I would not concentrate on any one of them. And given the high valuations that we see in the NASDAC. That’s a place where I would not want to put a lot of my money.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888.

[Text] I’m new to investing and I currently invest $100 into my 401k paycheck bi-weekly. I currently have holdings in the VTI, which is the Vanguard Total Stock Market, QQQ, which I think is the NASDAQ 100, and a couple of tech stocks. My employer matches and I’m due to hit the 100% match for being employed with my company for five years. I want to expand and learn more to diversify my portfolio. Any recommendations on books, podcasts, bonds, etc. Well, first of all, you’re doing the best thing.

You’re listening to Money Talk on KUT. And you listen to this, you’re gonna get an education. There’s people called with stuff that’s really important to them. Because you’re getting started, I’m gonna disappoint you. I would tell you that when I got involved in this investment world, I didn’t know a stock from a bond from mutual fund. And I took a subscription to the Wall Street Journal. And I will tell you, if you will spend 30 minutes every day with the Wall Street Journal. You don’t read every article. First of all, when you read a well-written piece, the first paragraph tells you what it’s all about, and then you can determine if you want to go further. But if you read that journal, and I will tell you this, in six months you will be shocked at how much you know about the economy, about interest rates, about investing. You’ll become remarkably well-educated. There are plenty of books out there that focus on financial planning, but that’s not what we’re talking about We’re talking that investment planning the one thing I would tell you is I would avoid is any book that Suggests a way to do something because that that book is selling you a way. To invest. I think you’re much better off Learning yourself and becoming educated and then doing a bit by bit right now You’re concentrated in what you’re doing right now, frankly is to some degree, you’re being a momentum investor. You’re buying what’s working. I will tell you that a man named Benjamin Graham, who was the mentor to Warren Buffett said, I wanna be greedy when others are fearful and I wanna to be fearful when others were greedy. And the NASDAQ 100 is a greedy place right now. So you wanna have some elsewhere, right? That’s what you wanna do is get educated. And I think then that six months from now, if you’ve been listening to Money Talk. Do what I say, I think you’re going to be really pleased at the level of your education.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app, 512-921-5888.

[Text] Hi Carl, you’ve talked about how buying a house as a lifestyle decision is usually not a wise investment decision. I want to learn from your extensive life experience. If you were 35 years old again, would you buy a house or just invest some money and continue renting.

Well, because I got married and because we had three children and I had some optimism about what my future income was going to be, I bought a house. And I bought house in 1978 in Austin, Texas, and I sold it in 20, I think it was either 2000 I think it was, or 2002. I calculated the return. The nominal return was three and a half percent a year. That was the nominal return. That wasn’t the real return. That was just price comparison. They didn’t take into account all the interest I paid on the mortgage, or all the property taxes I paid, or all the grass I mowed. That’s why I say what I say. And I lived through the real estate collapse in the Southwest. And so, I saw people lose their houses. I saw that people go bankrupt. I’m a big fan of home ownership and it was my lifestyle choice. But I have friends who live in big cities, live in Boston, live in New York City and have rented all their lives and they’re perfectly happy to do that. And that’s why say that. I think that’s what I call it a lifestyle decision. It really does depend. What’s going on in your life that’s a kind of a i hope i’m not a weasel answer that’s just my experience five one two nine two one five eight eight eight hi carl i am 65 and still working and plan to work until i’m 70 good for you oops that’s the wrong one here we go i am currently putting 11 into my 401k and five and a half percent is matched i am quite undersaved from my retirement and cannot afford to lose anything. Please think, advise. Well, I’m going to tell you, since you’ve undersaved, this is a dilemma because you’ve got to take risk if you want to get to your target. And so I would just say to you, you can afford to lose over the short term because you’re clearly in good health if you’re going to work to 70. And you’ve gotta plan on living to be 85 to 90, not because you know you will. But you don’t want to be 82 and broke. Not a good thing in the United States of America. So I would tell you this, continue to put the money in the 401k. I’m glad you’re doing 11%. I think that’s really wise. If you had a lot more money, I’d tell you to put some in the 401k and make similar investments on your own. So you would have two, if you will, legs to the stool, the 401K, and investing on your on. But if the 11% is all that you can comfortably do… Then putting it into the 401K is a perfectly good thing to do. But please, please, you’ve got more than five years. You’re going to retire in five years, but you’re a 20-year investor. And if you put it in cash, CDs, short-term bonds, you are not going to grow the money. And because you’re behind the eight ball, so to speak, you really do need to grow money. So I would say, I mean, obviously, we’re just talking here on the radio. I don’t know you. I would say at least 60% because you’re behind, and you’re investing in human ingenuity when you invest in equities, and because you are putting money in every pay period. We have a bear market coming up, I don’t know when it is, and when the stock market goes down, you’re still investing, and you are buying more shares with each pay period, and so a market decline, this may sound weird to you, but a market a decline, frankly, is your friend because you can buy more shares when prices are down and when they recover you’ll have fewer shares but your average cost will be lower so i really think that you have to you just have to do that the risk there’s something called opportunity cost is what would happen if i didn’t do this the opportunity cost you could keep it safe in your seventy and you retire and you have social security and you have to be able to draw down. On your 401k, you probably do an IRA rollover, and you run the risk of outliving your money. That’s the real risk here. And so what you wanna do is grow that money faster than inflation. 512-921-5888. I’ve had a couple of questions about the NASDAQ QQQ, whoops, there goes the text, okay, here we go. What do you think about Bitcoin? I think it’s a speculation. I don’t think it’s an investment. There’s no question people have made vast sums of money. There’s also no question that people have lost vast sums of money, I think it’s gone from being a shady investment to being a shitty investment that’s also caught the interest of Wall Street that the thing is it’s not money, it’s a not a reserve currency and it really lends itself to criminals because it’s off the book so to speak. I think over the next one, two, three years We’re going to see things like stable coins, which are backed by U.S. Treasuries, and I think we’re going to see Bitcoin and cryptocurrency move more into the mainstream. But I do not see it as an investment. Anything that can go up and down like that, in my view, is not a worthy investment. You’re listening to Money Talk, and here we go. Oh, I see someone thanking me for my advice. You’re very welcome. We’re very welcoming. Let’s see. Now we’re getting text at the end of the show. Let’s see if I can find out what this one is. Well, I can’t. There’s the music, so I’ll have to answer that one next week. Thanks for listening. I’m going to thank Mark for doing his usual great job. It reminds you that next Saturday, after the NPR All Things Is Considered news, listen to Money Talk.

KUT Announcer Laurie Galllardo [00:50:57] You’ve been listening to Money Talk with Carl Stuart. Carl Stuart is an Investment Advisor representative of Stuart Investment Advisors. And this is KUT and KUT HD1 Austin.

This transcript was transcribed by AI, and lightly edited by a human. Accuracy may vary. This text may be revised in the future.