Money Talk with Carl Stuart

Carl Stuart takes a variety of questions, mainly texts, on how to minimize fees associated with making investments, why you should not see your home as an investment you’ll cash out of one day – because you have to live somewhere, learn about step-ups in value “basis points” when inheriting a property, and more on this week’s show.

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 Gallardo] [00:00:02] 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] [00:00:21] Good afternoon and welcome to Money Talk. I’m Carl Stuart and you’re listening to KUT News 90.5 and on the KUT app. Money Talk, if you’re a first-time listener, is a broadcast about the world of financial and investment planning where you always determine the agenda by calling or texting 512-921-5888. It’s always a terrific idea to call or text early in the broadcast. And give me a chance to do my best to answer your questions.

My, I guess you would say, modus operandi is I take today’s calls first and then today’s texts and then former texts that I have either not answered or I feel like I haven’t answered them fully. One more time, 512-921-5888.

So, what I did was I went back and looked at various texts and I’m just gonna start with this one. This came in last Saturday.

[Text] Hi, Carl. As my savings have accrued over the years, I noticed there are large differences in financial institutions for costs associated with banking, investing, money management, offers available, et cetera. How do you suggest— By the way, when you hear that noise, it means I’m getting a text —How do suggest we evaluate the best options for us so we’re not wasting an unneeded amount of money on costs and fees?

I think what you want to do is break down the various services that you want. For example, if you carry a cash balance that’s above your, say, monthly expenses or anticipated expenses, maybe you’re going to, I don’t know, you have to pay property taxes or insurance premiums, so that may not happen every month, but once you have those covered because you’re going there, you’re really just want daily access to do online payments or to write a check.

Then I think the next place to consider is a money market mutual fund. These are available from the large providers, Charles Schwab, Fidelity, Vanguard, and no doubt others. There are three types of these. There’s what are called prime, government, and treasury. I would recommend the government one. These are priced at a dollar a share. And you have daily liquidity, so that if you, say, had $10,000 in a money market fund and you wanted $2,000, you could sell $2 thousand and the next day the money would be available. I’m not positive about this, but I believe you can even get check writing capabilities with this.

So that would be a place that at least would give you a higher return based on whatever’s occurring in short-term interest rates. So look right now, short-term interest rates are relatively high. So, you could anticipate making more than 4% in that.

Then you also talk about investments. That’s a very different situation. First, you have to decide whether you wanna do this or yourself or you wanna hire someone. I’m gonna answer the do-it-yourself part first so I can get to today’s text. If you decide you have the time and the interest and the desire, the cost to invest have collapsed during my long multi-decade career. And you can invest directly into mutual funds and exchange traded funds.

Once again, not that I never recommend a particular investment or a place to invest, but the household names would include Charles Schwab, Vanguard, and Fidelity. And you can go there to their websites, you can learn the products they offer. And I would suggest that you at least start with something called exchange traded fund. They’re remarkably inexpensive, maybe 0. Point. 0.03 percent, 0.05 percent, quite a fraction of 1 percent and exchange traded funds have a history of being tax efficient. They seldom pay out capital gains and if it’s a stock fund or a bond fund you will get dividends and of course you just reinvest those. So that’s at least a way to get started.

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, let’s just skip this one today. Okay, it’s a long one, let me just see. Pardon me.

[Text] Hi Carl, I like your program, Money Talk.

Thank you.

[Text] Kindly share your advice for financial investment strategy, whether to use financial advisors, or go for index mutual funds, or exchange traded funds? Also, is investing in a house in Austin better or investing in the S&P 500 with a timeline of 15 years?

Boy, that’s a great question. So, I would say this — and this is a common question I’ve gotten over the decades, and it’s common because it’s important—  to me, when it comes to investments, they’re kind of two kinds of people.

So let me just give you a personal experience. Back in the late 80s and the 90s, when everyone agreed that you couldn’t lose money in Central Texas real estate, and all my friends were somehow connected to real estate. They were lawyers who had real estate clients, and they were investing alongside them, or CPAs. Or they were involved in buying and selling real estate. I thought, I have just got to get in on this. So, two friends and I bought a rent house within walking distance of the University of Texas. After all, we were told there’s never gonna be another acre created, and there’s always gonna be 50,000 students. So how could this possibly go wrong?

So, we bought the house, and of course, that meant that we had upkeep. We had renters and some— Thomas Friedman once said no one ever watched a rented car—  so they didn’t necessarily take care of it things would break down. We did not hire a property manager, which would have been another expense. And then the real estate market collapsed and our rents went from $1,600 a month to $800 a month. But I noticed that the mortgage didn’t drop by a commensurate amount, or the property taxes, or the insurance costs, or the upkeep. And I learned an important lesson for me — not that investing in real estate’s a bad deal, because it’s not. But I’m not the kind of person that wants that hands-on experience.

Another example was many decades ago, I was doing my own taxes and I got an audit by the IRS and I thought, you know, I’m a not a tax expert. I’m gonna hire a CPA. And I know the marketplace is gonna drive whatever her fee is. I’m not a do-it-yourself person. I have friends who do their own taxes and very happy to do that. I have friend who invested in income real estate around central Texas and they really enjoy it.

So that’s what you have to decide. If you are a do it yourself investor then you can go to the Fidelity Schwab, Vanguard and many other places and invest directly in mutual funds and exchange traded funds with virtually no transaction costs or you need to hire somebody.

Now again, the marketplace drives what those costs are going to be, right? Merrill Lynch can’t charge more than UBS, which can’t change more than Morgan Stanley, and so it’s a good place to start by asking friends, people in your social circle, who you understand to be thoughtful people and similarly situated to you, who they use, but that’s just a starting point.

You can do your online shopping as well by just Googling various investment advisors and their websites. But the first thing you wanna do is you want to have, if you can, a face-to-face visit or at least a Zoom visit because you really wanna get a sense of the individual. And he or she ought to be able to answer three critical questions. What is number one? What is their investment philosophy? How is it that they invest money? Because if they can’t articulate that or what they say doesn’t make sense to you, you need to keep looking. Secondly, what is a happy, healthy client relationship? What does that look like?

There’s a lot of information that when people are unhappy with their service professionals, it’s not because the professional’s incompetent, it’s because there’s a lack of agreement or understanding at the beginning of the relationship about who’s gonna do what. So why does a happy, healthy client relationship look like? And third, how are they compensated?

Now, there’s two ways for compensation. There’s the transaction-based, which has been around forever, I suppose. Where the advisor earns a sales charge or a commission when you make a purchase or perhaps a sale, or there’s the advisory fee-based. The second kind is a little more tricky to understand where they charge a fee based on the value of your assets.

Typically, every quarter, perhaps in advance, but I like it was called in arrears at the end of the quarter if I get to choose. And these people should then have the ability to have the broadest options in terms of. Mutual funds, exchange traded funds, and they are typically fiduciaries, which means they have to put your interest above theirs. They have what the law calls a duty of care, and they may not receive transaction-based compensation. And I would say, what is the drawback? There is no drawback other than I believe that there is a minimum, because the fee tends to be. Around one percent maybe more maybe less but not two three four five percent on an annual basis and frankly if you have say $10,000 to invest, good for you, you need to get started, but they’re not going to be able to make a living charging one or one and a half percent on ten thousand. So you need understand that there’s a minimum as well.

You’re listening Money Talk on KUT News 90.5 and on the KUT app. And here’s the other part of your question. One more question.

[Text] Is it safe to be invested in the stock market? High growth USA stocks like semiconductors and tech stocks amidst tariff uncertainty.

Personally, I would not focus just on one industry. There are mutual funds that do that and they have the volatility and the risk of stocks. I think you’re better off to have a more broad approach. That’s what I would suggest.

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

[Text] Carl, I’m curious if you think the U.S. Equity market is currently overvalued based on earnings. I saw where the current price-to-earnings (PTE) ratio for the S&P 500 is nearly 28, which seems quite high. Is there any consensus on the level at which it would be considered fairly valued?

That is a very thoughtful and sophisticated question. And I would tell you this, if you look at the history of valuations of U.S. Stocks, and for people who don’t follow all this, one of the valuations, and you’re referring to this, is what you do is you take the price of the stock and you take earnings of the company, could be the last 12 months earnings, or if you choose, future earnings, but that’s a riskier deal. And you compare that.

So, if a stock is selling for $20, and the last 12 months is earnings per share or a dollar, that’s selling at 20 times earnings or a price-earnings ratio of 20. Most academics would suggest that fair value over time is somewhere between 15 and 17 price earnings ratio or 15 and 70 times earnings. So, today’s… Great, and let’s just take your assertion that that’s 28. Are they expensive? Well, they certainly are a lot more expensive than the historical valuation. Having said that, we can go through periods of time where high valuations last for a long time. It certainly happened in the 1990s with the growth stocks. It’s happened in ’23 and ’24 with S&P 500 up more than 20% in each year.

So, when I say they’re overvalued, I would say they are expensive. And I would be cautious about overloading them. And I particularly feel that way when you compare them to international stocks, which as a group are in lower valuations, so I think that that’s something that you should consider as well.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. I’m gonna take a break. I’ll be back.

[KUT Announcer Jimmy Maas] [00:13:26] 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 nonprofit 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 Gallardo] [00:13:55] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

[Carl] [00:14:09] Welcome back to Money Talk, I’m Carl Stuart and you’re listening to KUT News 90.5 and on the KUT app. And by the way, you can listen to past shows at KUT.org slash Money Talk. When you have a question, call or text 512-921-5888. Here’s a text.

[Text] Hello, Carl. I had asked this a couple of weeks ago. But was late in asking and then last week wasn’t able to tune in.

Well, I’m glad you asked again.

[Text] So, here’s my question. My elderly father inherited a couple of acres of property when his mother died. After a couple months, he sold the property and provided the proceeds to his children as inheritance from our grandmother. Does my elderly father now owe federal taxes on the gain from the sale, even though it was inherited property and he gave the proceeds to his children?

So, here’s the deal, and of course I’m not a CPA, but when you receive a capital asset that’s not in a retirement plan, so if you inherit at the donor’s death, the donor, this is key, at the donors death, if you receive, inherit if you will, mutual funds, stocks, bonds, real estate, the cost basis changed, we call it step up— it could be step down—  is stepped up to the value at the date of the person’s demise. That’s easy to do and calculate when they’re financial assets because the custodian who holds the securities should update the cost basis and then when your father sold it, unless there was something very unusual since he held it for such short period of time. Probably little or no in the way of taxation. Because it was a piece of property, this may take some time, but you want to understand what the property was worth when your grandmother passed away, because that would be your father’s cost basis.

He probably then sold it at approximately the same price, and in those circumstances, there would not be a tax or a significant tax liability to you. So that’s called a step up in basis.

And frankly, as I tell people, it’s about the only good tax law there is. And so when you have investments and you realize you’re not going to, let’s just say you have financial assets and you have money in your individual or if you’re married, joint account, and then you also have money in say a retirement account, an IRA or an SEP IRA. And you’re thinking about taking money out to live on or for some other major purchase, you really need to think through where the money’s coming from because you can take it from your joint or individual account that’s not a retirement account and if you have gains, you’ll pay taxes on that at a more favorable long-term capital gain rate if you’ve held the asset for longer than a year. And that will be at either 0, 15, 20, or 23.8 percent, depending on all of your income, including the sale. But if you took the money out of your IRA and paid the income tax on it, because you wanted to leave a larger legacy, you would not touch your taxable account if you choose. Then upon your demise, your heirs would get that and could sell it or could hold those securities and get a new higher basis.

If you’re married, the first person passes away, the surviving spouse gets a step up in basis. And let’s suppose that’s a male since men die sooner than women, then the spouse, the surviving wife gets a stop up in the basis. And if she doesn’t sell it, and if the portfolio grows over time and she lives another six, seven or eight years, she can then pass that on to her kids or grandkids or to whomever she wants. With another step up in basis. So that’s a, in my view, a really tax efficient way to do that.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. We haven’t gotten any calls today. The number to call or text is 512-921-5888.

I got a question— I think it was last week, it was pretty complicated and I got an answer. From a listener, which is one of the great things I like about Money Talk is we have such well-informed and experienced and smart listeners.

So, a situation where a married couple, the gentleman worked for, I believe it was the state, but it could have been teacher’s retirement system, it could’ve been any other type of entity where he had social security and pension.

I’m going to go ahead and turn it off. Let’s go ahead.

His wife had been a school teacher and she retired and her school district did not— her school district did not contribute to Social Security and so as a result of that when she retired she got the teachers retirement system income, but not Social Security. And the person asked upon his demise would her Social Security be reduced as a result of that? And the answer is no.

The good news is, according to this person (another listener), and I don’t know what these acronyms stand for, “Hi, Carl, WEP and GPO provisions were revoked by the Biden administration last year. So, receiving an uncovered pension no longer impacts social security benefits. It’s important to note for those folks who were previously impacted by those two provisions.”

So thank you very much. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. BJ, you’re on the air. How may I help?

[BJ] [00:20:32] Uh… Carl i’ve heard that you mentioned some mutual funds that you recommend uh… Active management and then you recommend passive management and i’m that’s correct having trouble remembering which is which is wondering about small-cap mutual funds which you recommend

[Carl] [00:20:49] Sure, great question. So, let me just start from the very beginning, and let’s just start with what the word CAP, C-A-P means, because there’s a lot of jargon, and one of my goals and objectives on Money Talk is to speak in plain English. So, every public common stock has a market capitalization. It may or may not be related to the size of the company or the revenues of the It is the price of the common stock times the number of shares outstanding.

So as the stock goes up, so does its market capitalization. So you take a stock like Nvidia, which has done terrific, that’s a large cap stock. For all I know, at some moment in its early public history, it might have been a small cap stock, same company, but the price of the shares times the number of share outstanding gave a smaller number than it does today.

I’m sure the same is true with Microsoft, or Alphabet, or anything else.

So this really started early in my career when Morningstar came out and started dividing stock mutual funds into categories of large, mid, and small cap. And it’s an arbitrary thing. And so that’s the first part.

Second part is passive versus active. There’s been a huge change over the 46-plus years that I’ve been around this world of investments. And that is in the early days, the vast majority of money invested in mutual funds were actively managed by portfolio managers, whether it was one person or several people, a team.

I remember back in the day when there was a man at Fidelity named Peter Lynch, who ran a mutual fund called the Fidelity Contra Fund. He had a huge track record, money flowed in, and people could arguably say, boy, active management worked. Then there was a fellow, John Bogle, Jack Bogle people called him, who was at Wellington in asset management in Boston, and he came up with the idea of let’s create a fund that just mirrors the standard and poor 500 index. We’re not gonna try to pick stocks, we’re just gonna make sure that it has the same proportion based on market capitalization as the S&P 500.

The benefit of that is we’re not gonna trade them so there’s gonna be little or no capital gain distributions, and we’re gonna pay a bunch of smart people a lot of money to manage these, we’re just gonna mirror the index. And that was the beginning of passive investing. And it grew rapidly and continues to grow rapidly.

And in recent years, a lot these index funds are now available in exchange traded funds where they’re even less expensive, which means you keep more of the gain. And they’re also tax efficient.

I also, I like those, and I think the majority of your stock or equity allocation belongs there. But what I have learned over my careers, there are some managers who will outperform when the stock market does well, and some who will perform when the market does poorly. I’m not gonna find one who does both. And the reason is active managers, the one you wanna look for, are not trying to act like small cap index. They’re not trying to look like and perform like the S&P 500.

They want to run a smaller portfolio, they want to take what’s called active bets. Maybe they’ll have 30 or 40 or 50 or 60 names in the portfolio. They can be large cap or mid cap or small cap. And what I’ve learned is that you can find small cap managers and you have to decide which characteristic are you looking for. Because if you want them to outperform in a good market, typically, you’re going to look at those years when that index, and at this small cap, I would suggest you use something called the Russell 2000, look at how they did during years when the Russell 2000 did well, and if they did better, that’s worth your looking at. Then look at years when the Russell 2000 did very badly, and see if they went down less, because then you get to decide, the style that you want.

The other thing you can consider, this gets confusing now, but Morningstar also after things blew up in 2000, realized that some, I remember one large growth fund that was up 40% in 1999 and the large fund was up 2%. And people said, well, that’s a horrible fund. But the reason it was up two percent was it would only buy companies that pay dividends. And back during that period, paying a dividend was like, really? Why don’t you grow the company? And that was the heyday of Cisco Systems and Dell Computer and others. Those are growth funds, so you can buy a small cap growth fund, or you can by a small-cap value fund. And that’s also something you could look at at Morningstar.

Now finally, I will answer this as well. It has been years since small-capped companies have outperformed large-cap companies. So, you have to be patient. Having said that, you know, Warren Buffett said, He likes to buy, I like to be greedy when others are fearful and fearful when others were greedy. And people who just buy mutual funds based on the last three, four, five years of performance without understanding the environment of the last 3 or 4 or 5 years could really run into a lot of problems.

So, if you want to buy things when they’re out of favor, if you wanna buy, shall we say, you know, you wanna by inexpensive, good companies, you’re going to find more of those in small cap world. So, you can either do a small cap index fund, you can do just the whole index, the Russell 2000, you can lean into growth, the Russel 2000 Growth, you can lead into value, the Russell 2000 Value, or you can actively manage funds. So that’s a long-winded answer, but that’s how I would approach it if I were in your shoes, BJ.

[BJ] [00:27:01] I love your answer. Do you have time for another question before your break?

[Carl] I actually do. Please go ahead. Yeah, I probably should rather talk to my therapist about this.

[Carl] [00:27:16] (laughter) I’M CHEAPER!

[BJ] [00:27:18] You mentioned being greedy when others are fearful. When the market’s down, I’m not tempted to sell and go into cash, never, not at all. What I really have a hard time doing is those funds that go down rebalancing into them. You know, it kind of feels to me like putting good money into bad.

[Carl] [00:27:46] I get it. Yeah. Yeah, I mean, yeah, I get I get that. I have the same problem. I will tell you that we’re emotional beings. And that’s why there’s a whole area of study called behavioral finance.

I will show you that the data are there, that what B.J. And I are talking about is let’s suppose that you had a 60 percent stock, 40 percent bond allocation and you had two good years, 23 and 24. And now you have 66% stocks, and by definition, 34% bonds, that the, I’m gonna call it a theory, but it’s actually a strategy. You sell your stocks back to 60, and you build your bonds back up to 40.

Obviously, what you’re doing is you’re taking advantage of gains to turn around and buy those things that are underperforming. Does that make sense? It absolutely makes sense. That’s what the pros do. Uh… My colleague Lindsey and i were in New York this week visiting portfolio managers we were at the small cap value managers been doing it for over a half a century and his performance is terrible, terrible, because he’s way out of favor.

He said I’ve got cash but i can’t find anything that meet my selection criteria. You have that’s what that in my view is the genius of Warren Buffett. Is that he’s prepared to go against the tide and he’s preparing to be very patient. So you gotta go talk to your therapist.

[BJ] [00:29:21] Got me making a point right now, Carl. Thank you.

[Carl] [00:29:24] Okay, thanks for calling. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888.

[Text] Hi, Carl. Thoughts on your friend, Warren Buffett.

Well, guess what, I just talked about it. He, and he would say, because he has said this publicly, that he felt that Charlie Munger was a better investor than he was. He and Charlie were partners for decades and decades, and sadly, Charlie passed away. I actually went to the Berkshire Hathaway meeting in 2018 and saw both of them. It was a real thrill for someone like me. I think his retirement is prudent. I think he’d have made a mistake if he didn’t retire because I think if he had, say, had a heart attack and passed away, I think it’d have put real pressure on the stock. I think the fact that he can publicly sit there and say that Mr. Abel, great name for your successor, Abel. That Mr. Able, he has watched him for decades and he is terrific and he’s got years left in this investment. Career and Warren doesn’t. So I think the idea that he retired and did it publicly and I think it was really cool that he did it and surprised everybody including Mr. Abel according to my reading at the meeting. So I exactly he did the right thing. Thanks for that.

It’s gonna be time for me to take a break. It’s a good time for you to call or text 512-921-5888.

[KUT Announcer Laurie Gallardo] [00:31:20] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

[Carl] [00:31:34] Welcome back and my regular Saturday afternoon shout out to the Money Talk theme music for Fedora Wearing Dudes, which was written, performed and produced by KUT’s Music for Fedora Wearing Dude band. Haha, that is a mouthful for the name of a band.

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

[Text] Hi Carl, I love your segment, thank you. I opened a 529 account for my five-year-old son and there’s a small amount in there now. I’m now rethinking this decision and wondering what other options you might recommend that would be better. Would I be able to roll over that amount to another account?

Okay, as I probably said in a previous broadcast, I get why 529 plans came out. After all, a university education, a post-secondary education, is expensive. And a lot of people are showing up with not enough money and having to borrow lots of money. And starting out your career with owing a lot of money is not a good thing. But getting a degree is better than not getting a good degree based on the data and not everybody should go do that, all right?

And so the government said let’s create an account to give people some benefits and incentive. So, you pick a state-sponsored plan, you put the money in, they give you a range of choices, and you put money in. And when the money grows, you don’t pay any taxes on that. And, when you take the money out for a list of education purposes— and while I talked about college, it can be, frankly, if you want to send them to a tutor when they’re in medical school, no, in middle school. Or an independent school, they’ve really opened up the options for you to put that money where you want. So there was a lot of enthusiasm when this came out, and there still is. But my position, as our elected officials say, has evolved because of the lack of freedom. You’ve gotta pick a plan.

My understanding is you can make one change within the plan per year. And I like the idea of having the maximum freedom so that you can build the portfolio or you and your advisor can build a portfolio that you want. And if you do that, and you can even open up a separate account, you can just call it an education account. It’s yours, your social security number. And if your invest in passive and active tax, not tax exempt, but I shall say tax-efficient funds, and they are out there. You’re going to pay very little in the way of taxes over the years.

You don’t know with a five-year-old child whether the child is going to go to college. You certainly probably hope so or you wouldn’t have done this, or if they’re going be a star tuba player or a star soccer player and get a scholarship and not need the money.

Whereas if you keep it in this account, you have total flexibility to do what you want, and if the child doesn’t need the money, it’s your money. And when you sell things to either help the education expense or yourself, you’re taxed at the favorable long-term capital gains rate.

So frankly, I’m less enthusiastic. If you’ve got the discipline and the cash flow to invest, I would say to you that, in my view, I would probably go ahead and consider doing that. Now, can you roll that over to another account? The answer is no. I’m glad you put a modest amount in there. I’d leave it in there and what I would do is then I would suggest you consider doing what I just said. Thanks for the text.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. And you can listen to past shows at www.kut.org/moneytalk five one two nine two one five eight eight eight

[Text] Okay. Hi, Carl. Your show has helped our family so much thank you thank you i am so thank you.

You’re welcome.

[Text] I am surprised my short-term bond fund is experiencing so much volatility thought on bonds not feeling as confident with this 20 percent of the portfolio. Well, i use a fund that’s an ultra-short bond and through yesterday, it’s up 2% on a year-to-date basis, 2.19, and according to Morningstar, it’s what they call the trailing 12-month yield is 4.9%.

So, let me make sure I’m reading that right, yep. And I was wrong, it said 1.97%, and the trailling 12- month yields 4.90% based on yesterday’s price.

I think that’s pretty good. I think you’re going to have volatility because of what’s going on in the economy. When people think that we’re going to have higher inflation because of tariffs, then they believe the Federal Reserve is either going to maintain interest rates where they are or raise them. That can put downward pressure on bonds. On the other hand, if the higher tariffs cause a recession, based on history, I can’t see the future better than anyone else, then that’s likely to lead to the Federal Reserve lowering interest rates and your bonds will appreciate. So that 20%, as I’ve said before, I would have it divided into three categories using Morningstar’s categories.

I would use their, what they call their ultra-short- or short-term bond fund, and I also would use a core bond fund which goes with the index, the Bloomberg AG, and then I would use what’s called a multi-sector fund that gives the manager the broadest places to go anywhere. You can do some of that, not multi-sector passively probably, but if you wanna keep your costs down, you can look for exchange-traded funds, and I’m not recommending any, but the largest passive bond fund, I’m sorry, the largest bond fund that is passive. Is Vanguard’s total bond market, BND, but that’s gonna be a longer maturity, just like the Bloomberg Ag, that’s also available in an ETF fashion, AGG.

So, I like active management in bonds. I think the bond market’s less efficient than the stock market, and so I happen to use in those categories, active managers. But if rates go up, that short-term fund’s gonna hold value while the core fund’s going to go down a bit. And the multi-sector may not go down as much because it can go around the world. So that’s how I think about that.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Hello, Carl. This is my first time to listen to you live on Kut.

[Text] I am a long time listener over the years.

Well, thank you.

[Text] I contributed to my IRAs over the last seven years or so. I never took advantage of the backdoor Roth conversion. I also made the mistake of co-mingling the money in a rollover IRA account. Ouch. Can I simply move my before tax IRA contributions back to my active 401k and convert the remaining after tax IRA contributions to a Roth?

Holy moly. I don’t think so. I think that was probably… an irrevocable decision, I will tell you this, in 30 plus years, I’ve never been asked that question.

I doubt, because it is now commingled, that the backdoor Roth conversion may not be possible. What we’re talking about here is this. If you put money into an IRA, okay, and you make too much money to make that contribution tax deductible, then. You can take it out of that IRA and put it into a Roth IRA because you can’t put money into or new money into a roth IRA if you make above a certain amount. However, it’s just not that simple. If you have contributed to your IRAs over the last seven years, like you have, and if those contributions were pre-tax, then when you take money out of there to put into a Roth, even though some of it was after tax. It will be done on a prorated basis.

So, if you had, I’m gonna use the simple numbers because I can’t do the math in my head. If you had $70,000 in an IRA and you had put in $7,000 of after-tax and pre-taxe, then when you come out, that some of that is gonna be taxable. You just can’t assume that everything you take out of an IRA. Is going to be non-taxable if it is going to be subject to the backdoor Roth. If you have pre-taxe contributions, you need to study up on that because you can make a mistake really easily.

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

[Text] Hi Carl, my husband and I have a few IRA and SEP IRA accounts, although the company we have been with had a poor performance, so the money didn’t grow much. Now they are offering a forever account until we’re alive, sine. There is a penalty if we want to withdraw. My husband is getting close to the retirement age to get Social Security check. We are not sure what is the best, to withdraw and handle the money on our own, which we are capable, or do the forever account until either of us— either of us, I think you mean— is alive. Hope you can help with any feedback, please.

Thanks, Ellie.

Anytime I hear about forever kinds of benefits, that really makes me skeptical because the only way that that can occur is that you’re buying some form of an insurance product. And the way insurance companies work, and if you need life insurance, by golly, I’m all for it, but the way insurance companies work is They know how many people are gonna die. They even know them by gender. They just don’t know them my name. And so, they’re gonna price that based on you and your husband’s actuarial life expectancy. And then they’re going to provide a certain return based on that and what they can make on the money. And a certain percentage of the people are gonna to die sooner. And that will be more profitable to the company. And a certain number of people are gonna die later than that and it will be less or not profitable. Generally speaking, when I have encountered this and advisors have sold these, that is they’re selling a life insurance product and, in my experience, because I don’t know anything about this one, they tend to have high fees, many times not fully exposed, if you will, not fully disclosed is a better term and it’s even possible, this person, if you purchase is acting as what’s called an agent. She or he may say, well, there’s no commission in this. That’s simply not true. What’s happening is you don’t see it come out of your money, but the insurance company’s paying the agent. Just on the face of it, I don’t like these things.

And so unless you are in a dire situation, then I would not consider it. There is something called an immediate annuity for people who don’t have enough money to live through retirement. They can take the money they have and give it to an insurance company and the insurance company guarantees them lifetime income and upon their demise, then it goes away. And there’s some fancy writers you can add to that. And that’s a whole different thing than what we’re talking about here. If you’re unhappy with the investment returns that you had, then you have a pretty straightforward choice. You can take your time and go out and visit with other advisors. I’ve already said earlier today, the three, maybe 20 questions, but the three I would want answered is what’s your investment strategy? If we engage your services, what does a happy, healthy client relationship look like? And how are you compensated? If you have a choice, I’d prefer the advisory fee model where the person is a fiduciary and has to put your interest first. But if you and your spouse want to do this, that’s fine with me. Then you eliminate the advisory fees. That person’s not gonna work for free. And you make your own investment decisions and you can go to any of the big providers. I always use Fidelity Schwab and Vanguard, not because I think they’re somehow the best, they’re just big and household names, but there are other mutual fund companies without sales charges as well. So that’s how I would think about that.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Running out of time, let’s see, it’s 5.54. If you’re gonna call, you better do it now. I do maybe have a chance to answer your text at 512-921-5888.

[Text] Hi, Carl. I am retired and currently living on Teacher’s Retirement System and a distribution from my various retirement accounts. I held off on taking my Social Security and initially thought I would take it at 70. I will be 68 in December. And looking at what I would receive from Social Security at 68, the amount is slightly more than what I have been taking from my retirement accounts. I would not need to pull from my retirement account only in emergencies. Does it benefit me to hold off on taking my Social Security? Thanks for your input and glad I found your show.

Great. Well, this is a really not simple answer. It really depends on your personal situation.

If you have If you’re married and if you predecease your spouse and your social security benefit is greater than his or hers, then postponing it till 70 gives them even the potential for a larger benefit. On the other hand, leaving your retirement accounts alone, you could say, well, we’ll let them grow. But what you have to think about is the return. The growth rate on your Social Security benefit between full retirement age and 70 is a remarkable 8%. That’s pretty good. And the odds that guaranteed, you’re gonna make 8% a year is frankly very, very low. And so, I would say to you, I’d leave the Social Security alone because that’s a guaranteed return of that 8%. And I don’t think I’m gonna be able to guarantee I can make 8% of my retirement account, so I think I would probably postpone the Social Security till 70 if I were in your shoes. Thanks for the text.

Here’s a text I got back a long time ago, May the 24th, but I thought it was really a good one.

[Text] Hi Carl, I’ve been fortunate to have a little extra disposal income. How can I figure out if I should use it to pay down my mortgage or put the money into my retirement accounts? Thanks.

Long-term listeners know that I say this and it may be controversial. I don’t think it is. I think a home is a great thing, but it’s not an investment because you got to live somewhere and— So you’re not going to sell your house and live in your car.

So it’s good to have several pillars for your financial security So paying your mortgage and putting money in your retirement account are two very good things to do And so you don’t have a choice on the mortgage but you pay down on the mortgage, whatever you’re saving in interest, that’s the return you’re getting on your money. But unless you want to sell your house, and I don’t know, really, really downsize, so you have some capital to draw down, if I were in your shoes, I would not pay down the mortgage. And I would put the money in your retirement account.

Because if you think about it, and this may not be everybody’s case, because we’ve had a great housing market until recently in Central Texas, but historically, nationally, the two asset classes that outpace inflation are not residential real estate, but rather investment real estate. Income producing real estate you’re paying in. This is a real estate that after expenses pays you. Rental real estate and common stocks. And rental real estate over time has good returns because rents go up because of the rising inflation. And if you and your return on your investment is then appreciating. And stocks go up over time because companies invest in the future, you’re investing in human ingenuity.

Both of them are gonna have big cycles, right? When real estate goes up for years and years and years, and then it goes down for years and years, just ask people who are around Central Texas in the late 80s and early 90s, or people who were in California and lost their houses because that mortgage was worth more than their house during the global financial crisis. Or talk about the stock market, which was down 20 to 30% in 2022. Both of those require long-term perspectives. Because it real estate’s illiquid and because we can’t look online and see the value of our house every day, we tend to not be worried about the day-to-day and year-to year fluctuations and we can get all worked up about our retirement account. But having said that, I think you ought to have two pillars.

You ought have your retirement account where if it’s tax deductible, that’s a break. And you don’t pay any taxes on the growth until you take it out. That’s a very good question.

Well, it’s time for me to go. I want to thank Mark for doing his usual great job. Thank you for listening and remind you that next Saturday after the news at five, be sure and tune in to Money Talk.

[KUT Announcer Laurie Gallardo] [00:50:49] 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.